MBIA INC quarterly report, Q3 FY2020

MBIA Inc. — Q3 2020 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2020. Dollar amounts are in millions unless stated otherwise. MBIA operates U.S. public finance insurance through National, a corporate segment, and international and structured finance insurance principally through MBIA Corp. It does not expect National or MBIA Corp. to write significant new business.

Financial results and condition

Metric	Q3 2020	Q3 2019	Nine months 2020	Nine months 2019
Total revenue	$71	$172	$179	$252
Losses and loss adjustment expense	$48	$(13) benefit	$427	$89
Net income (loss)	$(58)	$83	$(497)	$(145)
Diluted EPS	$(1.11)	$1.00	$(7.97)	$(1.75)
Adjusted net income (loss), non-GAAP	$(18)	$115	$(137)	$78

Revenue and earnings: Revenue declined year over year in both periods. For Q3, lower gains on consolidated variable interest entities (VIEs) and fair-value instruments were principal factors. For the nine-month period, weaker fair-value gains and lower investment income were partly offset by more favorable investment credit-loss comparisons.
Insurance losses: The nine-month loss expense increase reflected lower expected CDO salvage recoveries, higher expected Puerto Rico payments, and first-lien RMBS losses. At September 30, loss and LAE reserves were $991, versus $901 at year-end 2019; insurance loss recoverables were $1,798, versus $1,694.
Cash flow: Nine-month operating cash outflow was $388, compared with $415 in 2019; investing cash inflow was $968, and financing cash outflow was $552. Cash and cash equivalents were $107 on the balance sheet; the cash-flow statement reports $111 at period-end, including cash presentation differences associated with consolidated VIEs.
Assets, liabilities and equity: Total assets were $6,551 and total liabilities $6,308. Long-term debt was $2,318; medium-term notes $686; investment agreements $293; and consolidated VIE notes $1,187. Total equity was $243, including $13 of subsidiary preferred stock; MBIA Inc. shareholders’ equity was $230, down from $826 at December 31, 2019.
Liquidity and statutory resources: MBIA Inc. reported liquidity of $335; National held $2.2 billion of cash and investments, and MBIA Corp. held $240. National’s statutory capital was $2.010 billion and claims-paying resources (CPR) $3.181 billion. MBIA Corp.’s statutory capital was $328 and CPR $1.030 billion.
Other metrics: National insured gross par outstanding was $43.9 billion. MBIA Corp. insured gross par was $9.0 billion. National’s AFS fixed-maturity portfolio was 97% investment grade with an average rating of Aa. The company repurchased 26.4 million shares for $198 during the nine months; the stated average repurchase price was $7.50 per share.

Material changes and notable items

National paid $391 in gross claims on Puerto Rico insured bonds following defaults on January 1 and July 1, 2020. Puerto Rico debt service outstanding under National’s guarantees was $2.9 billion at quarter-end.
Reserves increased amid higher expected Puerto Rico payments and RMBS losses. The company said lower risk-free rates increased the present value of both expected claims and certain recoveries.
Shareholders’ equity fell substantially, reflecting the nine-month net loss and share repurchases, among other changes. Share repurchases totaled $198 in cash outflows.
Effective January 1, 2020, MBIA adopted the expected-credit-loss standard (ASU 2016-13); the transition adjustment reduced retained earnings by $42, net of tax. The company recorded a full $948 valuation allowance against its net deferred tax asset at September 30.
The 2019 comparison periods reflect revised income-tax accounting. Q3 2019 net income was revised to $83 from $71; nine-month 2019 net loss was revised to $145 from $116.

Outlook, risks and contingencies

COVID-19: Management said the pandemic’s duration and credit impact remained difficult to quantify. Recession, unemployment, municipal revenue pressure, mortgage delinquencies, payment forbearance and servicing issues could increase claims, impair recoveries, or reduce investment income.
Liquidity: Management monitors cash forecasts and stress scenarios. It expects MBIA Inc. to have sufficient resources for corporate debt service and general needs based on projected National dividends and other inflows, but noted risks from reduced dividends, asset deterioration, collateral calls and restricted capital-market access. Collateral requirements could force asset sales at losses.
Puerto Rico and PREPA: The proposed PREPA restructuring support agreement remained subject to court approval and multiple legal, regulatory and legislative conditions; its hearing was postponed. Puerto Rico plan proceedings were also delayed. Outcomes, recoveries and timing remain uncertain.
MBIA Corp.: Expected recoveries from Zohar asset monetization, RMBS excess spread and Credit Suisse loan put-back litigation are uncertain. One Zohar portfolio company was in bankruptcy, and monetization of another was delayed pending investigation of financial-statement issues. Failure to realize recoveries could affect MBIA Corp.’s ability to pay claims. The NYSDFS controls whether MBIA Insurance Corporation enters rehabilitation or liquidation.
Regulatory and capital constraints: National and MBIA Corp. met minimum policyholders’ surplus requirements but were not compliant with certain single-risk limits. MBIA Corp. lacked sufficient qualifying assets for certain statutory reserve requirements. The NYSDFS had not approved surplus-note interest payments since January 2013; unpaid interest was $976 as of October 15, 2020. The NYSDFS also denied MBIA Corp.’s request to prepay approximately $26 of its refinancing facility.
Litigation: Significant Puerto Rico-related disputes and other cases remain pending. The company said it cannot estimate a loss or range of loss for the described litigation. Adverse rulings could materially affect business, results, cash flows or financial condition.
Management outlook: No specific earnings or financial guidance was provided. Management said it expects no significant new insurance business and expects National to be MBIA Inc.’s primary source of payments for the foreseeable future; timing and amount of dividends are not assured.

Important facts for investors to verify

How Puerto Rico defaults, the PREPA restructuring process and related court rulings affect National’s claims, recoveries and statutory capital.
Whether recorded reserves and expected recoveries—particularly for Puerto Rico, CDOs, RMBS, Zohar and Credit Suisse claims—prove adequate and collectible.
MBIA Corp.’s ability to meet claim and facility obligations, its liquidity and statutory requirements, and any further NYSDFS action on surplus-note payments.
Whether parent-company liquidity remains sufficient if National dividends, collateral availability or access to capital markets deteriorate.
The drivers of the large nine-month loss and equity decline, and the distinction between GAAP results and management’s non-GAAP adjusted results.