MBIA INC quarterly report, Q3 FY2014

MBIA Inc. 10-Q Summary

Business context and reporting period

MBIA filed this unaudited quarterly report for the three and nine months ended September 30, 2014. The company operates U.S. public finance insurance, structured finance and international insurance, and advisory services, alongside corporate and wind-down activities. Amounts below are in millions of dollars unless noted.

Financial performance and position

Metric	Q3 2014	Q3 2013	Nine months 2014	Nine months 2013
Total revenues	$291	$420	$1,055	$751
Total expenses	$143	$249	$448	$629
Pre-tax income	$148	$171	$607	$122
Income tax provision (benefit)	$(25)	$39	$58	$4
Net income	$173	$132	$549	$118
Diluted earnings per share	$0.80	$0.52	$2.62	$0.57

Results were highly affected by fair-value movements in insured derivatives. Net gains on insured derivatives were $24 in Q3 2014 versus $257 in Q3 2013, and $446 for the first nine months of 2014 versus $14 in 2013. The 2014 nine-month figure included $863 of unrealized gains and $417 of realized losses and settlements.
Management’s non-GAAP adjusted pre-tax income was $95 for Q3 2014 versus a loss of $188 a year earlier; for the nine-month periods it was $34 versus a loss of $368. Management said the improvement reflected lower derivative impairments, lower insurance losses and expenses, and recoveries, partly offset by reduced premiums and other items.
Net premiums earned were $116 in Q3 and $293 year to date, versus $104 and $348 in the comparable 2013 periods. Nine-month net investment income was $136 versus $118.
Operating cash flow was negative $350 for the first nine months, compared with positive $1,033 in 2013; investing cash flow was positive $457 and financing cash flow negative $754. Management attributed the operating cash-flow comparison chiefly to $1.7 billion less in recovery and reinsurance proceeds. Cash and cash equivalents were $606 at period-end on the cash-flow statement, including consolidated VIE cash; the balance sheet separately reports $550 of cash outside VIE assets and $56 of VIE cash.
At September 30, total assets were $16.2 billion, total liabilities $12.3 billion, and total equity $3.9 billion, versus $17.0 billion, $13.7 billion, and $3.3 billion at December 31, 2013. MBIA Inc. shareholder equity was $3.881 billion; book value per share was $20.09 versus $17.05. Adjusted book value per share, a non-GAAP measure, was $27.39 versus $27.78.
Balance-sheet debt included $1.784 billion of long-term debt and $1.229 billion of medium-term notes; investment agreements were $659 and consolidated VIE notes were $5.235 billion. MBIA Inc.’s disclosed net debt was $1.0 billion. Corporate and asset/liability segment liquidity was $348, including $297 available for general corporate purposes and $51 not pledged directly as collateral.

Material changes versus comparable periods

Q3 revenue declined $129 year over year, largely reflecting lower insured-derivative fair-value gains; nine-month revenue rose $304, chiefly because of larger nine-month derivative gains.
Nine-month net income increased to $549 from $118, but the increase was not a straightforward improvement in recurring operating performance: reported earnings included substantial derivative fair-value effects and a lower tax burden. Q3 tax benefit was $25, while the nine-month effective tax rate was 9.6%.
Consolidated loss and LAE reserves fell to $517 from $641 at year-end; insurance loss recoverable declined to $575 from $694, primarily due to lower projected second-lien RMBS excess-spread collections. Management estimated that keeping current second-lien RMBS loss trends elevated for six additional months could add about $50 to case reserves.
MBIA Corp. commuted $6.5 billion of gross par exposure during the nine months, primarily structured CMBS, corporate CDOs, CRE CDOs and ABS. Gross par insured on its credit derivatives declined to $11.3 billion from $24.0 billion at year-end.
National’s U.S. public finance gross par insured declined to $237.7 billion from $276.8 billion at year-end. The below-investment-grade share increased to 2.8% from 1.7%.

Outlook, commentary, risks and unusual items

No numerical earnings or revenue guidance was provided. Management expected MBIA Inc. to meet corporate needs over time from subsidiary distributions, tax-sharing releases and investment income, but cautioned that these sources might be insufficient. National paid MBIA Inc. a $220 dividend after quarter-end; $398 remained in the tax escrow account at September 30, with management expecting up to $228 to be released in 2015, subject to conditions.
National was rated AA+ (stable) by Kroll, AA- (stable) by S&P, and A3 (negative) by Moody’s. Management cited intense competition, low interest rates and narrow insured/uninsured spreads as constraints on new business. National wrote about $300 of Detroit water and sewer bond insurance in Q3.
Puerto Rico is a significant risk: National had $4.5 billion of gross insured exposure. PREPA’s liquidity difficulties led to a forbearance through March 31, 2015, subject to specified termination rights. The constitutionality of Puerto Rico’s Recovery Act was being challenged. Detroit settlement and bond resolutions remained subject to bankruptcy court approval.
MBIA Corp.’s liquidity depends materially on collecting second-lien RMBS excess spread and recoveries on ineligible mortgage loans, including disputed Credit Suisse claims. Excess-spread recoveries recorded were $676, while estimated Credit Suisse put-back recoveries were $365; outcomes and timing are uncertain. Higher claims or delayed/failed recoveries could create liquidity pressure and regulatory rehabilitation or liquidation risk.
MBIA Corp. reported statutory capital of $862 and claims-paying resources of $2.808 billion, but had negative unassigned surplus, no near-term dividend capacity, and was not meeting its specified qualifying-asset requirement at September 30. It expected to address the asset shortfall in Q4. The NYSDFS had not approved surplus-note interest payments since January 2013; accrued unpaid interest was $259 as of October 15, 2014.
Other notable items: a $14 net other-than-temporary impairment charge related to a corporate security; retirement of Meridian’s remaining $129 of notes and dissolution of that conduit; an October agreement to sell Cutwater, expected to close in early 2015 with an immaterial positive financial impact; and a reported potential unauthorized access incident involving client information at a subsidiary, still under investigation, with no suspicious transactions identified to date.
Management identified risks including stressed municipal credits, RMBS/CMBS and CDO losses, reserve-estimation uncertainty, investment and collateral-value swings, subsidiary dividend restrictions, litigation, and regulatory or market changes. It stated that it believed the company had sufficient capital and liquidity for expected obligations, while acknowledging adverse outcomes could materially harm results and statutory capital. The filing also cautions that interim results may not indicate full-year results.

Important facts for investors to verify

Whether the reported derivative gains, adjusted pre-tax results and book-value changes are sustainable, and how non-GAAP adjustments reconcile to GAAP results.
Assumptions, sensitivities and subsequent collections supporting the $676 excess-spread recovery and $365 Credit Suisse put-back recovery, as well as adequacy of RMBS and other loss reserves.
MBIA Inc.’s liquidity after the post-quarter $220 National dividend, future tax-escrow releases, collateral requirements and debt maturities.
National’s and MBIA Corp.’s statutory capital, qualifying-asset compliance, dividend restrictions, ratings and ability to pay claims under stressed scenarios.
Developments in Puerto Rico, Detroit and Credit Suisse litigation, including court rulings, payment performance, settlement approvals and effects on insured exposures.
Completion terms and timing of the Cutwater sale, and any material findings or consequences from the client-information access investigation.