MBIA INC quarterly report, Q2 FY2021

MBIA Inc. — Q2 2021 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2021; unaudited. MBIA operates U.S. public finance insurance through National, a corporate segment, and international and structured finance insurance primarily through MBIA Corp. The company does not expect National or MBIA Corp. to write significant new business.

Financial results and position

Metric	Q2 2021	Q2 2020	Six months 2021	Six months 2020
Total revenue	$18 million	$114 million	$90 million	$108 million
Net loss	$61 million	$106 million	$167 million	$439 million
Diluted loss per share	$1.23	$1.69	$3.38	$6.51
Adjusted net income (loss), non-GAAP	$37 million	$(72) million	$(79) million	$(119) million

Q2 revenue included a $20 million net loss on fair-value financial instruments and foreign exchange, partly offset by a $14 million gain on debt extinguishment. Q2 2020 included substantial consolidated VIE gains that did not recur.
Six-month insurance losses and loss-adjustment expense were $107 million, down from $379 million. Q2 expense was $9 million versus $136 million. Changes reflected Puerto Rico exposures, CDO recoveries, RMBS estimates, and discount rates.
Net investment income was $14 million in Q2 and $29 million for the half, down from $20 million and $43 million, respectively.
Six-month operating cash flow was $545 million, versus cash used of $89 million in 2020; it included $600 million received from settlement of Credit Suisse loan repurchase claims. Investing cash flow was negative $110 million and financing cash flow negative $255 million. Cash and cash equivalents ended at $347 million, including consolidated VIE cash.
At June 30, total assets were $5.252 billion and total liabilities $5.275 billion. MBIA Inc. shareholders’ equity was negative $36 million; total equity was negative $23 million. Long-term debt was $2.283 billion; medium-term notes $638 million; investment agreements $269 million; and consolidated VIE notes $450 million.
National held $2.1 billion of cash and investments, including $396 million of cash and short-term investments. MBIA Inc. reported $238 million of liquidity. MBIA Corp. held $664 million of cash and investments, including $461 million of immediately available cash and liquid investments.
National statutory capital was $1.962 billion and total claims-paying resources (CPR) $3.106 billion. MBIA Corp. statutory capital was $160 million and CPR $786 million. These statutory measures are not GAAP measures.

Material changes and notable developments

Credit Suisse paid MBIA Corp. $600 million in February 2021 to settle litigation over mortgage-loan representations; the court had found approximately $604 million in damages. The proceeds drove the major operating cash-flow increase and were reflected in loan repurchase commitments.
National’s insured gross par outstanding declined to $39.5 billion from $41.9 billion at year-end 2020. Its below-investment-grade share rose to 8.9% from 8.5%.
National’s Puerto Rico exposure totaled $2.045 billion gross par and $2.871 billion scheduled debt service outstanding at June 30. The filing reports $277 million of gross claims paid in connection with 2021 defaults, including a July 1 default occurring after quarter-end; it also reports $1.8 billion of cumulative Puerto Rico gross claims paid through June 30.
National joined Puerto Rico General Obligation/PBA and HTA plan-support agreements. The Commonwealth plan contemplated effectiveness by December 15, 2021, and an HTA plan filing by January 31, 2022. Both outcomes, timing, and recoveries remain uncertain. PREPA’s restructuring-support agreement hearing remained adjourned.
MBIA Corp. prepaid $150 million of its financing facility and MBIA repurchased $63 million par value of 2024 GFL notes at a weighted average cost of about 78% of par, contributing to the $14 million debt-extinguishment gain. No board authorization for share repurchases was in place.
Two structured-finance VIEs were deconsolidated in Q2 after their notes were prepaid, generating $5 million of losses. Consolidated VIE assets declined to $218 million from $830 million at year-end.

Outlook, risks, and contingencies

No formal earnings or revenue guidance is provided. Management expects MBIA Inc. to have sufficient cash for debt service and general corporate needs based on projected National dividends and other inflows, but notes that interruptions or reductions in dividends, asset deterioration, or limited capital-market access could impair liquidity.
Management cites pandemic-related uncertainty, municipal fiscal stress, potential insured-credit defaults, collateral-posting requirements, volatile asset values, and reduced investment yields as risks. It says it is monitoring liquidity through cash forecasting and stress scenarios.
Puerto Rico restructuring outcomes are subject to court approval, definitive documentation, legislation, regulatory approval, and creditor disputes. Adverse rulings could materially affect National’s recoveries and results.
MBIA Corp.’s recoveries on CDO/Zohar and RMBS exposures are uncertain. The company warns that insufficient recoveries or higher-than-expected claims could constrain MBIA Corp.’s ability to pay claims and could prompt NYSDFS rehabilitation or liquidation proceedings.
MBIA Corp. had $1.1 billion of unpaid interest on $953 million principal of surplus notes as of July 15, 2021. NYSDFS approval is required for payments; no interest accrues on deferred interest. The company also disclosed noncompliance with certain single-risk limits at both National and MBIA Corp.; regulators may restrict new insurance business.
Litigation remains pending, including Tilton-related cases and Puerto Rico proceedings. The company cannot estimate potential losses for the described Puerto Rico litigation and provides no assurance of prevailing.
The company recorded no income-tax provision or benefit, citing a full valuation allowance against its net deferred tax asset. The allowance was $988 million at June 30, 2021.

Investor verification priorities

Reconcile the timing and totals of Puerto Rico claims paid, including the $277 million figure covering 2021 defaults and the $1.8 billion cumulative paid through June 30.
Track court and regulatory milestones for the Commonwealth, HTA, and PREPA plans, and assess the recoveries ultimately distributed to National.
Evaluate the collectability and assumptions underlying the $1.561 billion insurance loss recoverable and $954 million loss and LAE reserves, particularly CDO, Zohar, RMBS, and Puerto Rico estimates.
Monitor MBIA Corp.’s liquidity, statutory capital, surplus-note payment approvals, and risk of NYSDFS intervention; distinguish insurer resources from MBIA Inc. liquidity.
Separate recurring operating performance from fair-value movements, VIE consolidation effects, debt-repurchase gains, and the one-time $600 million Credit Suisse settlement when assessing cash flow and adjusted results.