MBIA INC quarterly report, Q3 FY2017

MBIA Inc. — Form 10-Q Summary

Reporting period: Three and nine months ended September 30, 2017. The unaudited filing covers MBIA’s U.S. public finance insurance, corporate, and international and structured finance insurance segments. Amounts are in millions of dollars unless stated otherwise.

Financial results and position

Metric	Q3 2017	Q3 2016	Nine months 2017	Nine months 2016
Total revenues	$33	$203	$182	$353
Losses and loss adjustment expenses	$205	$50	$469	$149
Income (loss) before taxes	$(273)	$55	$(603)	$(101)
Income tax provision (benefit)	$(6)	$24	$965	$(28)
Net income (loss)	$(267)	$31	$(1,568)	$(73)
Combined operating income (loss), non-GAAP	$(113)	$5	$(243)	$36

Q3 net loss per diluted share was $(2.17), versus earnings of $0.23 a year earlier; nine-month loss per diluted share was $(12.38), versus $(0.55).
Premiums earned were $53 in Q3 and $146 year to date, down from $77 and $225, respectively, in 2016. Declines reflected portfolio runoff, prior-period refunding activity and, for international business, the sale of MBIA UK.
The $965 nine-month tax provision primarily reflects a $1.2 billion valuation allowance against the net deferred tax asset. This noncash accounting charge was recorded after the company concluded it lacked sufficient positive evidence to support realization of the asset.
Net investment losses from other-than-temporary impairments were $71 in Q3 and $84 year to date. Net losses and LAE rose materially, mainly from Puerto Rico exposure changes and RMBS recovery assumptions.
For the nine months, operating cash outflow was $673, compared with $128 in 2016; investing cash inflow was $826, compared with $2,236; financing cash outflow was $204, compared with $2,413. Cash and cash equivalents at period end were $136 including consolidated VIE cash ($116 on the balance sheet outside VIEs).
At September 30, total assets were $9.544 billion, liabilities $7.824 billion and total equity $1.720 billion; MBIA Inc. shareholders’ equity was $1.708 billion. Total assets declined from $11.137 billion at year-end 2016, while shareholders’ equity fell from $3.227 billion.
Reported balances included long-term debt of $2.093 billion, medium-term notes of $898 million, investment agreements of $350 million and consolidated VIE notes of $2.352 billion. The filing does not provide a single consolidated “total debt” figure covering these categories.
Consolidated loss and LAE reserves were $818 and insurance loss recoverable was $611 at quarter-end. Total capital resources were $3.5 billion, down from $4.7 billion at year-end 2016.

Material changes and business developments

National’s S&P financial strength rating was downgraded from AA- to A in June. MBIA said the rating impaired National’s competitiveness and it ceased actively pursuing new financial guarantee business; it also reduced headcount by approximately 20%.
MBIA gave notice in September terminating its Moody’s rating agreements for MBIA Inc., National and MBIA Corp., and National’s Kroll rating agreement; the terminations took effect in October.
MBIA UK was sold to Assured Guaranty on January 10, 2017. In connection with the transaction and financing, MBIA Corp. paid a $770 million Zohar II insurance claim in January. The company reported a $5 million gain related to the sale adjustment.
MBIA Corp.’s financing facility initially provided $325 million of senior financing and $38 million of subordinated financing. Consolidated outstanding facility balance was $322 million at September 30; the facility bears 14% interest and matures in January 2020. MBIA Inc. committed a further $50 million of subordinated financing if needed.
MBIA repurchased 11.7 million shares for approximately $100 million during the first nine months, at an average price of $8.58. After quarter-end it repurchased a further 31.3 million shares at an average $7.17, exhausted the then-current authorization, and the board approved a new $250 million authorization.
CEO William C. Fallon took office September 15, succeeding Jay Brown.

Outlook, risks and contingencies

Puerto Rico: National had $3.405 billion of gross par exposure, or $3.870 billion including accreted interest on capital appreciation bonds; scheduled debt service outstanding was $8.192 billion. Following January and July defaults, National paid $242 million of gross claims. Hurricane Maria caused extensive infrastructure damage, adding uncertainty to Puerto Rico’s recovery and debt restructuring. Management warned that losses on selected exposures could increase materially.
Claims-paying resources: National reported $4.498 billion of statutory claims-paying resources, down from $4.607 billion at year-end. MBIA Corp. reported $1.521 billion, down from $1.945 billion. These are non-GAAP/statutory measures and are not directly comparable to GAAP equity.
Liquidity: Parent-company cash and liquid assets for general corporate purposes were $294 million at September 30, excluding tax escrow. Management expected sufficient cash for debt service and general corporate needs, relying on subsidiary dividends and tax-sharing releases, but noted risks from subsidiary deterioration, reduced distributions, collateral calls and impaired capital-market access. National held $3.9 billion in cash and investments, including $426 million of highly liquid assets. MBIA Corp. held $217 million in cash and investments, including $93 million immediately available.
After quarter-end National paid MBIA Inc. a $118 million dividend. It also purchased $129 million par of MBIA Inc. 5.700% notes due 2034 for approximately 99% of par, increasing parent liquidity by about $130 million without changing consolidated debt outstanding.
MBIA Corp.: Recovery of Zohar I and II assets is uncertain; insufficient recoveries could impair the insurer’s ability to meet other claims. The NYSDFS could place MBIA Insurance Corporation into rehabilitation or liquidation if it determined the company could not pay policyholder claims. The regulator had not approved surplus-note interest payments since 2013; unpaid interest was $600 million as of October 15, 2017. The insurer also reported several statutory asset and risk-limit deficiencies described in the filing.
Other exposures and litigation: MBIA’s expected RMBS excess-spread and Credit Suisse put-back recoveries are uncertain. The company reported $435 million of incurred losses through September 30 related to its remaining Credit Suisse put-back claim and said litigation outcome and timing could materially affect recoveries. Puerto Rico-related proceedings include disputes over COFINA, PREPA and PRHTA; the company said loss amounts for litigation could not be estimated. Other disclosed lawsuits include Credit Suisse, Ambac coverage cases and claims by Lynn Tilton and Patriarch Partners.
Management cited a generally improving U.S. economy but emphasized that stressed municipal credits, hurricane impacts, investment values, interest rates, credit spreads, foreign exchange, reserve estimates and regulatory or legal developments could cause actual results to differ materially. No earnings guidance was provided; results for the interim periods may not indicate full-year results.

Important facts for investors to verify

How Puerto Rico’s post-hurricane fiscal plans, Title III proceedings and recovery prospects affect National’s claim estimates, recoveries and liquidity.
Whether the $1.2 billion deferred-tax-asset valuation allowance changes in subsequent quarters, and the assumptions supporting any potential reversal.
Actual timing and collectability of Zohar, RMBS excess-spread and Credit Suisse put-back recoveries, including developments in Credit Suisse litigation.
National’s ability to sustain capital and claims-paying resources after stopping new-business efforts, paying dividends and continuing share repurchases.
MBIA Corp.’s available liquidity, facility repayment capacity, statutory compliance and the NYSDFS’s position on surplus-note payments.
Parent liquidity after subsequent dividend, note purchase and share repurchases, and the availability of future subsidiary distributions and tax-escrow releases.