MBIA Inc. 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017; the filing also reports unaudited fourth-quarter results. Amounts are in U.S. dollars unless noted.
Business context and reporting period
MBIA is a financial-guarantee holding company with U.S. public finance insurance (National), corporate activities, and international and structured finance insurance (MBIA Corp.). After National’s June 2017 downgrade, MBIA stopped actively pursuing new financial-guarantee business. Neither National nor MBIA Corp. is expected to write meaningful new business; the focus is managing existing exposures, paying claims, pursuing recoveries, and maintaining holding-company liquidity. MBIA sold MBIA UK in January 2017.
Financial performance and position
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $433 million | $294 million |
| Losses and loss adjustment expense | $683 million | $220 million |
| Income (loss) before tax | $(661) million | $(339) million |
| Income tax provision (benefit) | $944 million | $(1) million |
| Net income (loss) | $(1.605) billion | $(338) million |
| Diluted loss per share | $(13.50) | $(2.54) |
| Adjusted net income (loss), non-GAAP | $(410) million | $30 million |
| Operating cash flow | $(630) million | $(140) million |
| Cash and cash equivalents, year-end | $146 million | $187 million |
| Total assets / total liabilities | $9.095 billion / $7.670 billion | $11.137 billion / $7.898 billion |
| Total equity | $1.425 billion | $3.239 billion |
Fourth-quarter 2017 revenue was $251 million, expenses were $309 million, pretax loss was $58 million, and net loss was $37 million. The quarter included $135 million of consolidated VIE revenue.
Premiums earned fell to $201 million from $300 million, primarily as insured policies matured or refunded and the portfolio ran off. Losses and LAE rose sharply, principally from Puerto Rico exposures and insured first-lien RMBS. The $944 million tax provision was primarily associated with establishing a full valuation allowance on deferred tax assets; the year-end allowance was $770 million, and the reported net deferred tax asset fell from $970 million to zero. The filing states the allowance is not a forecast of cash tax payments.
Consolidated investments and cash totaled $4.777 billion, down from $5.796 billion. Consolidated cash alone was $146 million; companywide investment balances include assets of consolidated VIEs that are not generally available for MBIA’s obligations. Corporate liquidity for general purposes was $419 million, excluding tax-escrow funds. Management expected holding-company resources, including National dividends and tax-sharing cash flows, to cover debt service and operating needs over the next several years, but cautioned that future subsidiary distributions are not assured.
At year-end, reported liabilities included $2.121 billion of long-term debt, $765 million of medium-term notes, and $337 million of investment agreements. MBIA Inc. separately reported $765 million of MTN liabilities and $576 million of senior-note liabilities in its risk disclosure. National paid MBIA Inc. a $118 million dividend. MBIA and National repurchased 43 million shares for $325 million during 2017. No cash dividend was paid on MBIA common stock.
Material changes versus prior comparable period
- Net loss widened to $1.605 billion from $338 million, reflecting higher insurance losses and the large tax provision related to the deferred-tax valuation allowance.
- Losses and LAE increased to $683 million from $220 million. National’s U.S. public finance segment recorded $499 million of losses and LAE, versus $74 million in 2016; MBIA Corp.’s segment recorded $184 million, versus $146 million.
- National’s insured gross par declined to $71.9 billion from $110.4 billion. MBIA Corp.’s insured gross par was $15.1 billion, down substantially over the longer term.
- National’s statutory capital fell to $2.760 billion from $3.476 billion, and its claims-paying resources declined to $4.123 billion from $4.607 billion. MBIA Corp.’s statutory capital was $464 million, versus $492 million.
- Operating cash outflow increased to $630 million from $140 million, largely reflecting higher claim payments. Cash and cash equivalents fell to $146 million from $187 million.
- MBIA UK’s sale closed in January 2017. The 2016 results had included a $278 million loss associated with its sale classification.
Outlook, commentary, risks and unusual items
- Puerto Rico: National had $3.4 billion of gross insured par outstanding, or $3.9 billion including accreted interest on capital-appreciation bonds. Puerto Rico and several instrumentalities entered Title III restructuring proceedings under PROMESA. National paid $242 million of gross claims in 2017 and a further $69 million on January 1, 2018. Hurricane Maria and the uncertain restructuring, fiscal plans, recovery funding, and legal priority disputes could increase losses; mediation outcomes are uncertain.
- MBIA Corp. and Zohar: MBIA Corp. paid a $770 million Zohar II claim in January 2017, funded through its own resources, the sale of MBIA UK for Zohar II notes, and a financing facility. The facility had $330 million outstanding at year-end, bears 14% interest, matures January 2020, and is secured by Zohar recoveries. Recovery values and timing remain uncertain. MBIA Corp. also faces RMBS, CMBS, CDO, and Credit Suisse litigation/recovery risks; its estimated Credit Suisse put-back claims totaled $436 million at year-end.
- Regulatory and capital constraints: MBIA Corp. had $629 million of unpaid surplus-note interest as of January 15, 2018; NYSDFS approval is required for payment, and no interest accrues on deferred interest. At year-end, MBIA Corp. lacked sufficient qualifying assets for certain statutory reserve requirements, did not meet its admitted-assets test, and was over certain single-risk limits, although it met aggregate risk limits and the minimum policyholders’ surplus requirement. The NYSDFS could restrict operations or place the insurer into rehabilitation or liquidation.
- Ratings and strategy: S&P downgraded National to A in June 2017; rating-agency agreements were subsequently terminated or ratings withdrawn. Moody’s downgraded National to Baa2 and MBIA Inc. to Ba3 in January 2018. National’s ability to pay claims and generate dividends, and the value of its existing portfolio, are key to the holding company.
- Other risks and estimates: Claim reserves and recoveries rely on models and assumptions, and actual losses or recovery timing may differ materially. Liquidity also depends on collateral requirements, asset values, access to capital, and subsidiary cash flows. Puerto Rico litigation, Credit Suisse and other legal matters, interest rates, foreign exchange, and investment impairments remain material uncertainties.
- Unusual accounting and market items: MBIA recorded $106 million of investment losses related to other-than-temporary impairments, primarily in National’s portfolio. The company also reported $185 million of consolidated VIE revenue, including fair-value changes; these VIE amounts may be volatile and do not necessarily represent unrestricted corporate resources.
No specific earnings or revenue guidance was provided. Management described a focus on liquidity, portfolio surveillance, claim mitigation, and recoveries; its liquidity expectations are forward-looking and subject to the risks above.
Important facts for investors to verify
- Reconcile the $944 million tax provision, $770 million deferred-tax valuation allowance, and the resulting reported net loss; distinguish these accounting effects from cash taxes.
- Track Puerto Rico Title III developments, claims paid and expected, recoveries, and changes to National’s reserves and statutory claims-paying resources.
- Assess the realizable value and timing of Zohar collateral recoveries against the 14% financing facility and MBIA Corp.’s liquidity needs.
- Review National’s dividend capacity and actual cash transfers to MBIA Inc., including tax-escrow releases, collateral obligations, and holding-company debt maturities.
- Monitor MBIA Corp.’s regulatory compliance, surplus-note interest approvals, and the status of Credit Suisse and other material litigation.
- Separate consolidated VIE assets and liabilities from resources available to MBIA Inc.; examine non-GAAP adjusted net income alongside GAAP results and its stated adjustments.