MBIA Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet figures are compared with December 31, 2015. Financial statements are unaudited. MBIA operates U.S. public finance insurance, corporate activities and international and structured finance insurance. It sold its advisory business effective January 1, 2015.
Key financial results
| Metric | Q1 2016 | Q1 2015 or prior year-end |
|---|---|---|
| Total revenue | $32 million | $219 million |
| Net premiums earned | $75 million | $101 million |
| Total expenses | $133 million | $106 million |
| Net income (loss) | $(78) million; $(0.58) per diluted share | $69 million; $0.37 per diluted share |
| Combined operating income, non-GAAP | $16 million; $0.12 per diluted share | $34 million; $0.18 per diluted share |
| Operating cash flow | $39 million | $(9) million |
| Investing / financing cash flow | $1.814 billion / $(2.046) billion | $120 million / $(256) million |
| Cash and cash equivalents, consolidated | $332 million at quarter-end | $522 million at 2015 year-end |
| MBIA Inc. liquidity position | $371 million | $416 million at 2015 year-end |
| Total assets / total liabilities | $12.751 billion / $9.112 billion | $14.836 billion / $11.095 billion |
| MBIA Inc. shareholders’ equity | $3.627 billion | $3.729 billion at 2015 year-end |
Consolidated cash includes $47 million held by consolidated VIEs; balance-sheet cash outside VIEs was $285 million. MBIA reported no conventional operating-margin measure. The period’s revenue and earnings include substantial fair-value and foreign-exchange movements, so reported results are not a straightforward measure of underlying insurance performance.
Material changes and segment developments
- Revenue fell sharply year over year, primarily because of foreign-exchange losses, losses on insured derivatives and changes in interest-rate swaps; Q1 2015 included gains in these areas. Q1 2016 also included a $69 million net loss on financial instruments at fair value and foreign exchange and a $28 million net loss from insured derivatives.
- Loss and loss adjustment expense was $22 million, versus a $6 million benefit in Q1 2015. Higher expected payments on certain municipal and RMBS exposures were partly offset by lower expected CDO payments. Total loss and LAE reserves were $525 million, up from $516 million at year-end; insurance loss recoverables fell to $409 million from $577 million.
- U.S. public finance segment net income was $41 million, down from $57 million. National earned $58 million of net premiums versus $85 million, and insured $158 million of gross par in Q1. Its ratings were AA+ stable (Kroll), AA- stable (S&P) and A3 negative (Moody’s).
- International and structured finance segment net loss widened to $31 million from $2 million. MBIA Corp. had $38.5 billion of insured gross par outstanding and wrote no new business in the quarter; management does not expect new business in this segment for the foreseeable future.
- MBIA repurchased 14.9 million shares for $94 million at an average $6.30 per share, exhausting the previous authorization. A new $100 million authorization was approved in February; no shares had been repurchased under it by May 5. Book value per share rose to $26.42 from $24.61 at year-end, while adjusted book value per share rose to $31.74 from $29.69; management attributed the adjusted increase primarily to fewer shares outstanding.
Liquidity, outlook and principal risks
- Management expects MBIA Inc. to meet debt service and general corporate needs based on projected subsidiary dividends, tax-sharing receipts and other inflows, but cautions that subsidiary payments, market access and collateral needs may change. It received $105 million from the tax escrow account during Q1; $218 million remained in escrow at March 31.
- MBIA Corp. held $1.0 billion of cash and investments, including $278 million of cash and highly liquid assets immediately available to MBIA Insurance Corporation. Its statutory capital was $844 million, down from $885 million; it recorded a $55 million statutory net loss and has no current dividend capacity. Surplus-note payments remain subject to NYSDFS approval, which had not been granted for interest payments since 2012.
- MBIA Corp. insures $776 million of Zohar II notes maturing in January 2017. If the transaction cannot pay a substantial amount at maturity and MBIA Corp. cannot restructure or obtain liquidity, the insurer may lack resources to meet claims; NYSDFS could place it into rehabilitation or liquidation. Management believes such a proceeding would not have a significant long-term liquidity impact on MBIA Inc., but the outcome is uncertain.
- National had $3.86 billion of Puerto Rico gross par exposure ($4.287 billion including accreted CAB interest) and $8.903 billion of scheduled debt service outstanding. Puerto Rico’s fiscal crisis, missed payments, proposed debt restructuring and changing legislation create material uncertainty. Management believes insured Puerto Rico debt will ultimately be substantially repaid, but this is not assured.
- MBIA recorded $399 million for Credit Suisse mortgage put-back commitments; $427 million of related losses had been incurred. Litigation remains unresolved, and the company’s estimated recoveries depend on uncertain legal outcomes, timing and counterparty ability to pay. Estimated second-lien RMBS excess-spread recoveries were $465 million. The filing notes that six months of performance materially worse than the current assumption could require an approximately $29 million reserve increase.
- Other risks include stressed municipal obligors, potentially inadequate loss reserves, volatile fair-value estimates, collateral posting and asset liquidity, and adverse litigation outcomes. The filing provides no formal earnings guidance. Management says results for the quarter may not indicate full-year results. Disclosure controls were reported effective; no material change in internal control over financial reporting was reported.
Most important facts for investors to verify
- Whether Puerto Rico developments, particularly PREPA restructuring and payment decisions, change National’s expected claims, recoveries or reserve needs.
- Whether Zohar II can meet its January 2017 maturity or be restructured, and how much liquidity MBIA Corp. can actually access.
- Progress and recoverability of the Credit Suisse put-back claim and excess-spread collections, including the assumptions underlying the recorded assets.
- Whether MBIA Inc.’s $371 million liquidity position and expected National dividends and tax-sharing receipts remain sufficient amid collateral demands and debt service.
- How much of the GAAP loss reflects volatile fair-value and currency movements versus changes in expected insurance cash claims; also review the non-GAAP operating-income reconciliation.