MBIA Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are with December 31, 2019. Financial statements are unaudited. MBIA operates through U.S. public finance insurance (National), corporate activities, and international and structured finance insurance (primarily MBIA Corp.). The company does not expect either insurer to write significant new business.
Financial results and position
| Metric | Q1 2020 / March 31, 2020 | Prior comparable / December 31, 2019 |
|---|---|---|
| Total revenue | $(6) million | $50 million in Q1 2019 |
| Losses and loss adjustment expenses | $243 million expense | $38 million benefit in Q1 2019 |
| Net loss | $(333) million; $(4.62) per diluted share | $(21) million; $(0.24) per diluted share in Q1 2019 |
| Adjusted net loss, non-GAAP | $(47) million; $(0.65) per diluted share | $39 million; $0.45 per diluted share in Q1 2019 |
| Operating cash flow | $(82) million | $(70) million in Q1 2019 |
| Cash and cash equivalents | $217 million, including $5 million held by consolidated VIEs | $163 million at Q1 2019 quarter-end |
| Total assets / total liabilities | $6.632 billion / $6.135 billion | $7.284 billion / $6.445 billion |
| MBIA Inc. shareholders’ equity | $484 million | $826 million |
| Long-term debt / medium-term notes / investment agreements | $2.261 billion / $663 million / $295 million | $2.228 billion / $680 million / $304 million |
Revenue and profit margins are not presented as standard operating measures in the filing; the filing does not provide a clear margin figure. Revenue includes material fair-value and other market-sensitive items, so the reported negative total should not be read as a simple measure of premium-generating activity.
Material changes and segment developments
- Q1 net loss widened substantially from the prior-year quarter. Loss and LAE shifted from a $38 million benefit to a $243 million expense, primarily reflecting Puerto Rico exposures, CDO recoveries, and first-lien RMBS reserve effects.
- Net losses on financial instruments at fair value and foreign exchange were $63 million, versus $22 million of gains in Q1 2019. Management cited wider credit spreads and lower interest rates, including losses on floating-rate interest-rate swaps.
- National reported a $45 million pretax loss, versus $77 million pretax income in Q1 2019. Its gross insured par outstanding was $47.4 billion. Puerto Rico debt service outstanding was $3.3 billion; National paid $59 million of gross claims following a January 1 default.
- MBIA Corp. reported a $220 million pretax loss, versus $56 million in Q1 2019. Loss and LAE reserves were $515 million and insurance loss recoverables were $653 million for the segment, after VIE eliminations.
- National statutory capital fell to $2.099 billion from $2.376 billion; its total claims-paying resources were $3.333 billion. MBIA Insurance Corporation statutory capital fell to $382 million from $476 million; its claims-paying resources were $1.091 billion.
- Consolidated investments declined 9% to $3.153 billion. Available-for-sale investment fair value was $2.931 billion; the portfolio had $63 million of gross unrealized losses at quarter-end, up from $11 million at year-end.
- MBIA repurchased 8.1 million shares in Q1 at an average price of about $7.99, for approximately $65 million. A further 4.5 million shares were repurchased through May 4 at an average $7.51. On May 5, the board authorized a new $100 million repurchase program.
Cash flow, liquidity, and capital
- Operating cash use was $82 million. Investing activities provided $610 million, mainly reflecting investment proceeds and $315 million of held-to-maturity investment repayments; financing activities used $394 million, including $323 million of VIE-note repayments and $62 million of treasury-stock purchases.
- At March 31, MBIA Inc. reported corporate liquidity of $314 million, National held $2.5 billion of cash and investments (including $399 million in cash and short-term investments), and MBIA Corp. held $221 million of cash and investments (including $120 million in immediately available cash and liquid investments). These are distinct entity-level resources and are not freely interchangeable.
- Management expected MBIA Inc. to have sufficient resources for debt service and general corporate needs based on projected subsidiary dividends and other inflows, while warning that dividends, tax-sharing releases, asset values, collateral calls, and capital-market access could affect liquidity. No assurance was given.
- MBIA Corp. had $953 million of surplus-note principal outstanding and $919 million of unpaid interest as of April 15, 2020. The NYSDFS had not approved interest payments since January 2013. It also denied MBIA Corp.’s request to prepay approximately $26 million of its Refinanced Facility during the quarter.
- MBIA Corp. met the minimum policyholders’ surplus requirement but lacked sufficient qualifying assets to support certain contingency and loss-reserve requirements and was not compliant with certain single-risk limits. It had negative unassigned surplus of $1.8 billion and no expected dividend capacity.
Outlook, risks, contingencies, and unusual items
- COVID-19: Management said the effect on insured portfolios and future liquidity could not yet be comprehensively quantified. Recession, unemployment, municipal revenue declines, mortgage delinquencies, foreclosure restrictions, lower investment yields, market volatility, and collateral calls could increase losses or weaken liquidity. Employees were working remotely; the company said its business-continuity plans were operating.
- Puerto Rico and PREPA: The PREPA restructuring support agreement’s approval hearing was adjourned due to COVID-19. A restructuring depends on court approval, definitive documents, Puerto Rico legislation, and regulatory approval, all uncertain. Numerous Puerto Rico debt, lien, and restructuring disputes remain pending or stayed.
- MBIA Corp. recoveries: Recovery estimates, including Zohar asset monetization, RMBS excess spread, and Credit Suisse loan put-back claims, are uncertain in both amount and timing. Failure to realize recoveries could impair MBIA Corp.’s ability to pay claims and could prompt NYSDFS rehabilitation or liquidation action. Management stated that such a proceeding would not be expected to have a significant liquidity impact on MBIA Inc., given the entities’ separation.
- Other litigation: The Credit Suisse repurchase dispute was under submission after trial. Puerto Rico-related and other litigation could adversely affect results, strategy, cash flows, or financial condition; the company said it could not estimate a loss or range of loss for the described proceedings.
- Accounting and tax: Adoption of the expected-credit-loss standard (ASU 2016-13) reduced retained earnings by $42 million on January 1, 2020; a $46 million allowance for credit losses was recorded on consolidated-VIE held-to-maturity investments by quarter-end. A full valuation allowance remained against a $923 million net deferred tax asset. The CARES Act was expected to provide a 2020 cash refund of remaining AMT credits.
- No formal earnings guidance: The filing provides no numerical earnings or revenue forecast. Management emphasized uncertainty around COVID-19, insured losses, recoveries, and liquidity. Contractual obligations were reported as having no material change since year-end 2019.
Important facts for investors to verify
- How much of the $243 million Q1 loss and reserve movement reflects enduring credit deterioration versus discount-rate, market-valuation, and recovery-estimate changes.
- Developments in Puerto Rico and PREPA restructuring proceedings, including the treatment and recoverability of National’s $3.3 billion debt-service exposure.
- Whether MBIA Corp. can realize expected Zohar, RMBS, and Credit Suisse recoveries on the assumptions and timing used in its reserve estimates.
- Entity-specific liquidity, collateral requirements, National dividend capacity, and MBIA Corp.’s regulatory capital and qualifying-asset compliance.
- The company’s share repurchases after quarter-end and the effect of continued repurchases on holding-company liquidity and share count.