MBIA Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Unaudited consolidated financial statements; dollar amounts are in millions except per-share data. MBIA operates U.S. public finance insurance through National, international and structured finance insurance through MBIA Corp., and a corporate segment. The Cutwater advisory business was sold effective January 1, 2015; the conduit business had been wound down in 2014.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $245 | $187 | $464 | $764 |
| Net premiums earned | $91 | $89 | $192 | $177 |
| Net income | $64 | $120 | $133 | $376 |
| Diluted EPS | $0.36 | $0.45 | $0.72 | $1.83 |
| Non-GAAP combined operating income | $19 | $2 | $53 | $42 |
| Net cash from operating activities | Not reported by quarter | $34 | $(396) |
- Revenue and earnings are affected materially by fair-value movements and settlements on insured derivatives. Net gains on insured derivatives were $60 in Q2 2015 versus losses of $47 in Q2 2014; six-month gains were $88 versus $422. This volatility largely explains why reported net income fell despite higher premiums and improved operating income.
- Q2 loss and loss-adjustment expense was $46 versus $12 a year earlier; six-month expense was $40 versus $62. Second-lien RMBS and CDO losses were key Q2 pressures, partly offset by lower first-lien RMBS losses.
- At June 30, total assets were $15,510, total liabilities $11,669, and MBIA Inc. shareholders’ equity $3,829. Cash and cash equivalents on the balance sheet were $501; consolidated cash at period-end was $567 including $66 held by consolidated VIEs.
- Reported debt and funding liabilities included $1,854 long-term debt, $1,079 medium-term notes, $513 investment agreements, and $5,305 of consolidated VIE notes. These categories include different entities and VIE obligations; they should not be treated as equivalent to parent-company debt. Management reported MBIA Inc. net debt of $775, up from $740 at year-end 2014.
- Loss and LAE reserves were $500 and insurance loss recoverable was $483. Companywide corporate-segment liquidity for general purposes was $497, approximately unchanged from year-end. National held $473 in cash and short-term investments, including $429 considered highly liquid. MBIA Corp. held $1.2 billion of cash and investments, of which $412 was cash and highly liquid assets immediately available.
Material changes versus comparable periods
- Six-month GAAP revenue and net income declined substantially from 2014, when insured-derivative gains were unusually high; 2015 six-month derivative gains were $88 versus $422.
- Premiums earned rose to $192 from $177 for the first half, mainly due to increased refunding premiums, while scheduled premiums declined as insured bonds refunded or matured.
- Operating income, a company-defined non-GAAP measure, increased to $53 from $42 for the first half. The measure excludes non-core segments and specified market-driven and other items; it is not a substitute for GAAP net income.
- MBIA repurchased 20.2 million shares for approximately $177 during the first half. Outstanding shares declined; reported adjusted book value per share, a non-GAAP measure, rose to $27.00 from $24.87 at year-end, while GAAP book value per share rose to $22.26 from $20.47.
- Cutwater’s sale generated a gain of approximately $24; the Armonk facility sale included a $4 impairment charge. The company adopted consolidation guidance in Q2 and deconsolidated a VIE; the reported impact was not material.
Outlook, management commentary, risks and contingencies
- National: Ratings were affirmed at AA+ with stable outlook by KBRA, AA- with stable outlook by S&P, and A3 with negative outlook by Moody’s. Management seeks new municipal-guarantee business, particularly general obligation, tax-backed and revenue bonds, but said low rates, narrow insured/uninsured spreads and competition constrain demand and pricing. It expects more favorable opportunities if interest rates rise.
- MBIA Corp.: The company does not expect meaningful new international or structured-finance insurance business in the foreseeable future. Management’s strategy is to reduce risk, preserve value, collect excess spread and put-back recoveries, and consider commutations. Management said projected liquidity was adequate for expected claims, but warned that higher claims or delayed/shortfalls in recoveries could create a liquidity deficit and potential NYSDFS rehabilitation or liquidation proceedings.
- RMBS recoveries and reserves: Recorded Credit Suisse put-back recoveries were $388, and the claims remain in litigation with no assurance of success. Excess-spread recoveries depend on loan performance, prepayments, interest-rate spreads and other assumptions. Management estimated that six months of RMBS performance remaining at then-current levels could add approximately $29 to second-lien RMBS reserves.
- Puerto Rico: National had $4.5 billion of gross par exposure at June 30. Debt service due July 1 was paid in full, reducing gross par exposure by $250. National subsequently committed $45 of a $128 short-term financing package for PREPA. Puerto Rico’s fiscal stress, debt burden, and the status of proposed reforms remain material risks.
- Capital and liquidity constraints: National reported $3.3 billion statutory capital and $4.9 billion in claims-paying resources. MBIA Corp. reported $805 statutory capital and $2.5 billion in claims-paying resources, but had negative unassigned surplus, lacked sufficient qualifying assets for contingency reserves, and could not pay dividends. NYSDFS had not approved surplus-note interest payments since January 2013; $341 of interest was unpaid as of July 15, 2015. Parent liquidity depends in part on subsidiary distributions and tax-sharing releases; management expects adequate resources but gives no assurance.
- Legal and market risks: The Credit Suisse mortgage litigation and other disclosed cases could adversely affect results; the company could not estimate a loss range for the described litigation. Loss estimates, Level 3 valuations, deferred-tax-asset realization, collateral posting, interest rates, credit spreads and foreign exchange are significant uncertainties. Management noted that actual results may differ from estimates and the interim results may not indicate full-year performance.
- Guidance: The filing provides no numerical earnings or revenue guidance. Management expects sufficient parent cash for debt service and general needs over time, subject to subsidiary distributions, tax-sharing releases, asset performance and capital-market access.
Important facts for investors to verify
- Whether Credit Suisse put-back claims and expected excess-spread recoveries are ultimately collected, and how changes affect reserves, fair values and MBIA Corp. liquidity.
- National’s Puerto Rico exposures, PREPA financing and forbearance milestones, and any subsequent payment or restructuring developments.
- Entity-specific liquidity, statutory-capital and claims-paying-resource trends, including the restrictions on MBIA Corp. dividends and surplus-note payments.
- The assumptions behind derivative fair values and loss reserves, particularly significant unobservable Level 3 inputs and potential sensitivity to collateral performance.
- Parent-company cash needs and the timing and availability of subsidiary dividends and tax-sharing releases, alongside debt maturities, collateral requirements and share repurchases.
- Developments in the disclosed litigation, and whether any subsequent event changes the filing’s risk assessment.