Business context and reporting period
MBIA Inc. filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2023. The company operates U.S. public finance insurance through National, corporate activities, and international and structured finance insurance principally through MBIA Corp. Neither National nor MBIA Corp. is expected to write significant new business. In May 2023, MBIA suspended its exploration of strategic alternatives, citing market conditions and feedback.
Financial results and position
Amounts below are in millions except per-share data. Results were affected substantially by insurance loss estimates, investment and derivative fair-value changes, and consolidated variable-interest entities (VIEs).
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenues | $8 | $17 | $38 | $97 |
| Losses and loss adjustment expense | $123 | $(12) benefit | $158 | $57 |
| Net loss attributable to MBIA Inc. | $(185) | $(34) | $(353) | $(143) |
| GAAP loss per share | $(3.94) | $(0.67) | $(7.25) | $(2.87) |
| Adjusted net loss, non-GAAP | $(138) | $(17) | $(161) | $(160) |
| Net cash from operating activities | Not provided quarterly | Not provided quarterly | $(193) | $140 |
- Net investment income was $26 million in Q3 and $89 million for the nine months, versus $24 million and $67 million, respectively, in 2022, primarily reflecting higher yields.
- For the nine-month period, interest expense rose to $157 million from $130 million, primarily due to higher rates on MBIA Corp. surplus notes. VIE fair-value and foreign-exchange revenues were a net loss of $72 million, compared with a net loss of $11 million in 2022.
- At September 30, total assets were $2.99 billion, total liabilities $4.218 billion, and total equity negative $1.228 billion. MBIA Inc. shareholders’ equity was negative $1.239 billion. Long-term debt was $2.546 billion; medium-term notes were $495 million.
- Cash and cash equivalents on the balance sheet were $70 million, with $4 million in consolidated VIEs. Cash and cash equivalents at the end of the nine-month cash-flow period were $75 million. Parent-company liquidity was $194 million, compared with $230 million at year-end 2022.
- National held $1.9 billion of cash and investments, including $325 million in cash and short-term investments. MBIA Corp. held $322 million of cash and investments, including $40 million immediately available in cash and liquid investments.
- Gross loss and LAE reserves were $450 million and insurance loss recoverables were $177 million at September 30, compared with $439 million and $137 million at year-end 2022. National’s claims-paying resources were $2.34 billion, down from $2.44 billion.
Material changes versus the prior comparable period
- Q3 loss expense shifted from a $12 million benefit in 2022 to $123 million of expense in 2023, primarily because updated PREPA scenarios reflected the amended support agreement and lower expected net recoveries.
- For the first nine months, operating cash flow changed from $140 million provided to $193 million used. Recoveries and reinsurance proceeds fell to $11 million from $647 million, largely because 2022 included Puerto Rico settlement and claim-sale proceeds. Lower claim payments partly offset the decrease.
- Revenue declined year over year, including from reduced interest-rate swap gains, less favorable foreign-exchange results, and larger VIE losses. Higher investment income and lower losses on fair-valued investments provided offsets.
- National’s insured gross par outstanding declined to $29.1 billion from $31.7 billion at December 31, 2022. Its portfolio share rated below investment grade rose to 8.0% from 6.5%; the BBB share fell to 8.5% from 16.0%.
- AFS securities had $257 million of gross unrealized losses at September 30, versus $243 million at year-end 2022, primarily reflecting higher interest rates. The company stated it did not intend, and was more likely than not would not need, to sell those securities before recovery.
Outlook, commentary, risks and unusual items
- PREPA: PREPA defaulted on National-insured debt service on January 1 and July 1, 2023; National paid gross claims of $18 million and $119 million, respectively. National had $808 million of PREPA debt service outstanding at quarter-end. The amended plan provides for cash and fees plus contingent-value instruments, but the value of the instruments is uncertain. Court approval and plan confirmation remain conditions; confirmation was scheduled to begin March 4, 2024. A materially different confirmed plan could adversely affect reserves and recoveries.
- MBIA Corp. liquidity and regulation: The company warns that delayed or insufficient recoveries or higher claims could impair MBIA Corp.’s ability to pay obligations and could prompt NYSDFS rehabilitation or liquidation proceedings. NYSDFS had not approved surplus-note interest payments since 2013; unpaid interest was $1.4 billion as of October 15, 2023 on $953 million of principal. MBIA Corp. had $123 million of “free and divisible surplus” at September 30, but approval of future payments is not assured. It maintained minimum policyholders’ surplus but lacked sufficient qualifying assets for certain reserve requirements and was outside certain single-risk limits.
- Parent liquidity: Management expects MBIA Inc. to have sufficient resources for debt service and general needs based on projected National dividends and other inflows, but says there is no assurance as to the amount or timing of dividends. Pledged assets, collateral requirements, investment performance, and access to capital markets are risks.
- Other exposures: Zohar-related recoveries remain uncertain. MBIA Corp.’s RMBS loss estimates depend on loan performance, recoveries, and discount rates; the company cautions actual losses could exceed estimates. The portfolio is exposed to interest rates, credit spreads, foreign exchange, and market liquidity.
- Taxes and accounting: No income-tax provision or benefit was recorded; a full $1.2 billion valuation allowance remains against the net deferred tax asset. The company reported immaterial corrections to prior-period discontinued-operation and noncontrolling-interest estimates. It also recorded $8 million of investment impairment in Q3 related to securities it intended to sell before recovering cost.
- Capital actions: A $100 million share-repurchase authorization was approved in May. 3.6 million shares were purchased or repurchased in the first nine months at an average $8.12 per share; $71 million remained authorized at September 30. The company repurchased $11 million par value of MTNs during the period.
- No quantitative earnings or revenue guidance is provided in the supplied filing text. Management describes modest U.S. economic growth, elevated inflation, and a federal-funds target range of 5.25%–5.50%; higher rates can support investment income and reduce the present value of reserves, but pressure investment values.
Most important facts for investors to verify
- Progress and court outcomes for the PREPA amended plan, including expected cash recoveries, contingent-value instruments, and the timing of the effective date.
- Whether National’s claims payments and reserve assumptions for PREPA and other stressed public-finance credits change, and the effect on claims-paying resources and potential dividends.
- MBIA Corp.’s available liquidity, recovery collections, NYSDFS regulatory position, and status of the unpaid surplus-note interest.
- Parent-company liquidity and collateral needs, operating cash flow, debt-service capacity, and dependence on National distributions.
- Changes in RMBS and Zohar recovery estimates, investment impairments and unrealized losses, and sensitivity of reported results to interest rates, credit spreads, and foreign exchange.