MBIA Inc. — FY 2015 Form 10-K
Business context and reporting period. This annual report covers the year ended December 31, 2015. MBIA’s principal active business is U.S. municipal financial-guarantee insurance through National Public Finance Guarantee Corporation. MBIA Corp. manages legacy international and structured-finance exposures and does not expect to write meaningful new business. MBIA sold Cutwater, its asset-management advisory business, effective January 1, 2015; its conduit business had been wound down in 2014. Amounts below are U.S. dollars.
Financial performance and condition
| Metric | FY 2015 / Dec. 31, 2015 | Comparable period |
|---|---|---|
| Total revenue | $853 million | $1.270 billion in 2014 |
| Income before taxes | $289 million | $641 million in 2014 |
| Net income | $180 million; diluted EPS $1.06 | $569 million; diluted EPS $2.76 in 2014 |
| Combined operating income (non-GAAP) | $87 million; $0.52 per diluted share | $185 million; $0.97 per diluted share in 2014 |
| Premiums earned | $372 million | $397 million in 2014 |
| Net investment income | $152 million | $179 million in 2014 |
| Losses and loss-adjustment expense | $123 million | $133 million in 2014 |
| Net change in fair value of insured derivatives | $129 million gain | $459 million gain in 2014 |
| Operating cash flow | $(55) million | $(333) million in 2014 |
| Investing / financing cash flow | $817 million provided / $1.014 billion used | $812 million provided / $892 million used in 2014 |
| Cash and cash equivalents, year-end | $522 million | $782 million in 2014 |
| Total assets / shareholders’ equity | $14.855 billion / $3.729 billion | $16.284 billion / $3.929 billion in 2014 |
The filing does not present a consolidated operating-margin measure; a margin comparison is not provided. Reported revenue and earnings include material mark-to-market and other non-core effects, so GAAP results should be read alongside the company’s non-GAAP operating-income reconciliation.
Debt and liquidity. At year-end, consolidated long-term debt was $1.908 billion, medium-term notes were $1.016 billion, and investment-agreement liabilities were $462 million. These figures exclude $5.051 billion of notes issued by consolidated variable-interest entities, which are collateralized by VIE assets and generally do not give investors recourse to MBIA’s general assets beyond its insurance obligations. MBIA Inc.’s general-purpose liquidity position was $416 million, excluding tax escrow funds, versus $498 million in 2014. National held $378 million of cash and short-term investments, including $336 million described as highly liquid. MBIA Corp. held $997 million of cash and investments, of which $264 million was immediately available to MBIA Insurance Corporation.
National reported $3.388 billion of statutory capital and $4.699 billion of claims-paying resources, compared with $3.266 billion and $4.950 billion, respectively, in 2014. MBIA Insurance Corporation reported $885 million of statutory capital. Its $953 million surplus notes had $386 million of accrued interest at year-end; scheduled interest payments have not been approved by the New York regulator since January 2013.
Material changes versus prior periods
- Net income fell to $180 million from $569 million, while revenue declined to $853 million from $1.270 billion. The principal earnings driver was the smaller insured-derivative fair-value gain: $129 million versus $459 million in 2014. The filing attributes 2015 gains mainly to refinement of underlying collateral ratings, partly offset by claim payments; 2014 gains chiefly reflected commutations below fair value.
- Premiums earned declined 6%, mainly reflecting runoff and lower scheduled premiums, partly offset by refunded-premium earnings. Net investment income declined 15%.
- Loss and LAE expense decreased to $123 million from $133 million, primarily due to reduced losses on certain first-lien RMBS exposures, partly offset by increased U.S. public-finance losses.
- National’s new writings increased to $597 million of gross par across 59 policies, from $343 million across eight policies in 2014. Management said low rates, narrow insured/uninsured spreads, and competition continued to constrain attractive new business.
- MBIA repurchased 39.9 million shares for $303 million in 2015, versus 3.3 million shares for $35 million in 2014. National also repurchased eight million shares for $70 million. Buybacks reduced the share count; book value per share rose to $24.61 from $20.47, while adjusted book value per share, a non-GAAP measure, rose to $29.69 from $24.87.
- Consolidated operating expenses were reported down 28% from 2014. The Cutwater sale generated an approximately $24 million gain; management characterized the sale’s overall impact as immaterial to financial position and results.
Outlook, risks, contingencies, and unusual items
- Outlook: Management expects virtually all new insurance business, if written, to be through National in U.S. public finance. It does not expect new MBIA Corp. international or structured-finance business in the foreseeable future. Management expects MBIA Inc. to meet debt service and general corporate needs over time through National dividends, tax-sharing receipts, investment income, and potentially capital-market access, but cautions that these sources are not assured. No quantified earnings or revenue guidance is provided.
- Puerto Rico: National had $3.866 billion of gross par exposure, or $4.278 billion including accreted capital-appreciation-bond interest, and $8.989 billion of scheduled debt service outstanding. PREPA restructuring-support arrangements covered approximately $1.4 billion of National-insured bonds, subject to conditions. Puerto Rico’s fiscal stress, potential restructuring or bankruptcy proceedings, and related litigation could delay or impair recoveries and require material claims.
- MBIA Corp. claims and recoveries: MBIA Corp. paid approximately $149 million on Zohar I notes at maturity in November 2015. It insured $776 million gross par of Zohar II notes maturing in January 2017; a significant claim could strain liquidity. The company reported expected second-lien RMBS excess-spread recoveries of $499 million including VIE-related amounts, and a $396 million estimated Credit Suisse put-back recovery subject to litigation. Timing and ultimate collection are uncertain; management’s reserve and liquidity estimates depend on assumptions and models.
- Capital and regulatory exposure: MBIA Corp. has significant negative earned surplus, cannot pay dividends without regulatory approval, and may not have sufficient resources for all claims under adverse outcomes. The NYSDFS could restrict claims payments or place the insurer into rehabilitation or liquidation. Such a proceeding could also accelerate certain affiliate obligations or trigger CDS termination claims. National paid MBIA Inc. a $114 million dividend in 2015; future dividends remain subject to statutory and regulatory limits.
- Other risks: The filing highlights municipal credit deterioration, including Puerto Rico; reserve-estimation and model uncertainty; delayed or failed recoveries; interest-rate, credit-spread and foreign-exchange movements; collateral-posting demands; competition and ratings risk; deferred-tax-asset recoverability; and litigation. MBIA Corp.’s financial-strength ratings were B from S&P and B3 from Moody’s, with Moody’s review for possible downgrade. National was rated AA+ by Kroll, AA- by S&P, and A3 with a negative outlook by Moody’s.
- Unusual accounting item: In the fourth quarter, MBIA corrected errors relating primarily to premiums due on behalf of certain consolidated VIEs. The correction increased 2015 net income by $17 million; management concluded the errors were immaterial to 2015 and prior periods.
- Quarterly context: Fourth-quarter 2015 net income was $82 million, or $0.54 per share, versus $20 million, or $0.10 per share, in fourth-quarter 2014. Fourth-quarter 2015 revenue was $297 million and pretax income was $139 million.
Important facts for investors to verify
- Whether Puerto Rico and PREPA restructuring developments change National’s insured losses, exposure, recoveries, or claim timing.
- Whether the $776 million Zohar II exposure is restructured, paid at maturity, or produces a claim, and the effect on MBIA Corp.’s immediately available liquidity.
- Actual collections versus estimates for the Credit Suisse put-back claim and second-lien RMBS excess spread; review the assumptions supporting the recorded recoverables and loss reserves.
- National’s rating outlooks, new-business economics, statutory dividend capacity, and ability to sustain dividends to MBIA Inc.
- MBIA Inc.’s liquidity after share repurchases, the timing and release conditions for tax escrow funds, and debt maturities and collateral requirements.
- MBIA Corp.’s regulatory capital and liquidity, surplus-note payment approvals, and potential consequences of rehabilitation or CDS termination claims.
- The quality and sensitivity of reported earnings: derivative fair-value movements, the $17 million VIE-premium correction, and distinctions between GAAP results and non-GAAP operating income.
PricewaterhouseCoopers issued an unqualified audit opinion and reported effective internal control over financial reporting as of December 31, 2015.