MBIA Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; unaudited. Amounts are in U.S. dollars, generally millions unless noted.
Business context
MBIA operates financial-guarantee businesses through National (U.S. public finance), MBIA Corp. (international and structured finance), and a corporate segment. The company said it does not expect National or MBIA Corp. to write meaningful new business. Its focus is managing insured portfolios, claims, recoveries, liquidity and debt.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $172 | $105 | $252 | $190 |
| Total expenses | $83 | $150 | $389 | $477 |
| Income (loss) before tax | $89 | $(45) | $(137) | $(287) |
| Net income (loss) | $71 | $(45) | $(116) | $(289) |
| Diluted EPS | $0.86 | $(0.50) | $(1.40) | $(3.24) |
| Adjusted net income (loss), non-GAAP | $115 | $(32) | $78 | $(144) |
- Q3 results included $44 of gains on financial instruments and foreign exchange, including realized gains from sales of uninsured PREPA bonds, and $82 of revenue from consolidated VIEs. Losses and loss adjustment expenses were a $13 benefit, compared with $46 expense a year earlier.
- For the first nine months, insurance losses and LAE were $89, down from $177. The improvement primarily reflected lower losses on certain Puerto Rico exposures, partly offset by higher losses on first-lien RMBS and CDOs.
- Net premiums earned fell to $20 in Q3 from $62 and to $65 for nine months from $138, reflecting prior-period premium acceleration, maturities and settlements, and little new insurance business.
- Management’s adjusted net income is a non-GAAP measure that excludes, among other items, MBIA Corp., selected fair-value movements, investment-sale gains/losses and OTTI. Q3 adjusted results therefore differ substantially from GAAP results.
Balance sheet, cash flow and capital
- At September 30, total assets were $7.606 billion, total liabilities $6.558 billion and total equity $1.048 billion. Investments were $3.495 billion, down from $4.072 billion at year-end 2018; reported cash and cash equivalents were $76, plus $5 held by consolidated VIEs.
- Loss and LAE reserves were $859; insurance loss recoverable was $1.843 billion. Management attributed the reserve decrease from year-end partly to Puerto Rico claim payments and COFINA VIE consolidation; the increase in recoverables reflected expected Puerto Rico and RMBS recoveries, among other factors.
- Reported debt and funding balances included $2.199 billion of long-term debt, $670 of medium-term notes, $310 of investment agreements and $1.632 billion of consolidated VIE notes. MBIA redeemed $150 of its 6.4% senior notes due 2022 during the nine-month period.
- Nine-month operating cash flow was $(415), investing cash flow was $1.204 billion and financing cash flow was $(988). Cash and cash equivalents ended at $81, versus $179 at September 30, 2018. Operating cash use reflected, among other items, $477 of financial-guarantee claims and LAE paid, partly offset by $117 of recoveries and reinsurance proceeds.
- At quarter-end, MBIA Inc.’s reported liquidity position was $232; National held $2.8 billion of cash and investments, including $639 of cash and short-term investments. MBIA Corp. held $222 of cash and investments, of which $115 was immediately available liquid investments. National subsequently declared and paid a $110 dividend to MBIA Inc.
- National’s statutory capital was $2.507 billion and claims-paying resources were $3.738 billion. MBIA Insurance Corporation’s statutory capital was $533 and claims-paying resources were $1.341 billion. MBIA Corp. reported a statutory net loss of $68 for the nine months.
- MBIA repurchased 10.3 million shares for approximately $94 during the first nine months, at an average $9.11 per share; $108 remained authorized at September 30. GAAP book value per share was $12.86.
Material changes, outlook and risks
- Puerto Rico: National paid $393 of gross claims following January and July defaults; cumulative Puerto Rico claims paid were approximately $1.1 billion through September 30. National’s Puerto Rico gross insured par was $2.36 billion, including $968 for PREPA. Recovery amounts and timing remain uncertain.
- PREPA restructuring: National joined an amended restructuring support agreement in September. It contemplates exchanging legacy bonds for new securitization bonds and customer-bill-funded settlement payments. Court approval, creditor support, plan confirmation and other conditions remained outstanding. The filing identifies a January 2020 court hearing and a contemplated plan filing by March 31, 2020.
- COFINA: The plan of adjustment became effective in February. National sold all uninsured COFINA bonds held in the custodial trusts; the associated restructuring and sales reduced its reported COFINA exposure.
- MBIA Corp. financing and recoveries: The July refinancing created $278 of senior notes and $54 of subordinated notes, bearing 12% interest and maturing January 2022, secured by rights to Zohar-related recoveries. Recovery sufficiency is uncertain. A Zohar-related portfolio company, Dura Automotive, filed for bankruptcy protection after quarter-end.
- Other material contingencies: MBIA Corp.’s Credit Suisse RMBS put-back trial concluded in August, with post-trial briefing continuing. Puerto Rico proceedings challenge bond liens and payment priorities; outcomes and potential losses were not estimable in the filing. MBIA Corp. had $178 of expected RMBS excess-spread recoveries, and collected $90 during the first nine months.
- Liquidity and regulatory risk: MBIA Inc. expects to meet corporate debt service and general needs based on projected subsidiary dividends and tax-account releases, but notes that interruption of these sources, collateral requirements or market access could create liquidity pressure. MBIA Corp. depends on recoveries to meet obligations; the NYSDFS could place it into rehabilitation or liquidation if it cannot pay policyholder claims. The NYSDFS had not approved surplus-note interest payments since 2013; unpaid interest was $856 as of October 15, 2019.
- Accounting and controls: Management identified a material weakness in controls over MBIA Corp. RMBS loss-reserve and recovery estimates. Remediation controls had been modified or added and were undergoing effectiveness testing; management expected remediation before year-end 2019. The filing reported no identified material misstatement from the weakness. A change in first-lien RMBS balance-sheet presentation increased both recoverables and reserves by $31 at year-end 2018, without changing equity, earnings or cash flows.
- No specific earnings guidance was provided. Management noted that results for the nine months may not indicate full-year results. It described the U.S. economy as healthy but cited global uncertainty, trade concerns and slower business investment; lower interest rates also contributed to unfavorable fair-value movements on certain corporate interest-rate swaps.
Most important facts for investors to verify
- Progress, court approval and final economics of the PREPA restructuring, including bondholder recoveries and treatment of National’s insured exposure.
- Whether Puerto Rico claim recoveries—and especially COFINA, PREPA and other disputed lien recoveries—match recorded estimates and arrive on the expected schedule.
- Value and collectability of Zohar collateral after the Dura bankruptcy, and MBIA Corp.’s ability to repay the 12% refinancing facility by its 2022 maturity.
- Outcome of the Credit Suisse RMBS litigation and the assumptions underlying RMBS, CDO and other reserve and recovery estimates.
- Whether the RMBS controls material weakness is remediated, and the adequacy of MBIA Corp.’s liquidity, statutory capital and regulator-approved payment capacity.
- Sustainability of National dividends and MBIA Inc.’s liquidity after share repurchases, debt service and collateral needs.