MBIA INC quarterly report, Q3 FY2021

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MBIA Inc. — Q3 2021 Form 10-Q

Reporting period: Three and nine months ended September 30, 2021; balance-sheet comparisons are against December 31, 2020. MBIA operates legacy financial-guarantee businesses through National (U.S. public finance), MBIA Corp. (international and structured finance), and a corporate segment. The company does not expect significant new insurance business.

Financial results and position

  • Q3 revenue and earnings: Revenue was $72 million, versus $71 million in Q3 2020. Net loss was $123 million, versus $58 million; diluted loss per share was $2.49, versus $1.11. Loss and loss-adjustment expense rose to $125 million from $48 million, primarily reflecting revised Puerto Rico GO and PREPA recovery assumptions and lower expected CDO recoveries.
  • Nine-month results: Revenue was $162 million, versus $179 million; net loss was $290 million, versus $497 million. Diluted loss per share was $5.87, versus $7.97. Loss and loss-adjustment expense was $232 million, down from $427 million, principally reflecting less adverse CDO salvage changes and a benefit from higher discount rates on first-lien RMBS reserves.
  • Adjusted results: Non-GAAP adjusted net loss was $76 million for Q3, versus $18 million, and $155 million for the first nine months, versus $137 million. Management’s measure excludes MBIA Corp. results and specified market-value, foreign-exchange, investment-sale and debt-extinguishment items; it is not a substitute for GAAP results.
  • Cash flow: Operating cash flow was positive $359 million for the first nine months, compared with negative $388 million in 2020. It included $600 million received on settled loan repurchase commitments associated with the Credit Suisse settlement. Investing cash flow was positive $37 million, versus $968 million; financing cash flow was negative $451 million, versus negative $552 million. Cash and cash equivalents at September 30 were $108 million on the balance sheet; the cash-flow statement reports $112 million at period-end, including consolidated VIE cash.
  • Balance sheet and debt: Total assets were $4.816 billion and total liabilities $4.973 billion. MBIA Inc. shareholders’ equity was negative $170 million, down from positive $136 million at year-end 2020. Long-term debt was $2.308 billion; medium-term notes were $592 million and VIE notes $292 million. During the period MBIA Corp. repaid the remaining Refinanced Facility, and the company repurchased $106 million par value of MTNs for about 72% of par.
  • Investment and liquidity resources: Investments totaled $2.710 billion. Management reported MBIA Inc. liquidity of $210 million, National cash and investments of $1.9 billion, and MBIA Corp. cash and investments of $573 million at September 30. MBIA Corp. liquidity included $341 million in cash and liquid investments immediately available to the insurer.
  • Insurance capital: National statutory capital was $2.025 billion and claims-paying resources (CPR) $3.019 billion. MBIA Insurance Corporation statutory capital was $143 million and CPR $728 million, down from $992 million at year-end. CPR is a non-GAAP/statutory measure without a directly comparable GAAP measure.
  • Tax: No income tax provision or benefit was recorded. The company maintained a full valuation allowance against a $1.0 billion net deferred tax asset.

Material changes and developments

  • Puerto Rico defaulted on scheduled insured debt service in January and July 2021; National paid $277 million in gross claims during the year and had $2.6 billion of Puerto Rico debt service outstanding at quarter-end. National’s total gross par insured portfolio was $37.7 billion.
  • National joined Puerto Rico GO and HTA restructuring support agreements. Under the GO plan described in the filing, bondholders could commute their policies or receive accelerated payment of par and accrued interest; about 27% elected commutation. National expected the process, subject to plan effectiveness, to reduce its insured GO exposure to zero. National also sold $199 million face amount of PREPA bankruptcy claims in October 2021 at a discount to carrying value; about $230 million of additional matured par claims remained potentially saleable.
  • Credit Suisse paid MBIA Corp. $600 million in February 2021 to settle litigation over ineligible loans in an insured RMBS transaction. The settlement is reflected in the period’s cash flows and the settlement of loan repurchase commitments.
  • National’s loss-reserve scenarios were revised in Q3 to reflect the expected value and timing of GO plan consideration and market information from the planned PREPA claims sale. These changes reduced expected recoveries and contributed to Q3 incurred losses. Consolidated loss and LAE reserves declined to $850 million from $990 million at year-end; insurance loss recoverable declined to $1.537 billion from $1.677 billion.

Outlook, commentary and risks

  • No company earnings or revenue guidance is provided. Management said it expects MBIA Inc. to have sufficient resources for debt service and general corporate needs, based on projected National dividends and other cash inflows, but cautioned that timing and amounts are uncertain.
  • Management described the U.S. economy as improving, while noting uncertainty from COVID-19 variants, inflation, and uneven recovery. Stress among municipal issuers, lower investment yields, market volatility, and collateral calls could affect claims, investment income, asset values and liquidity.
  • Puerto Rico plan outcomes and timing remain contingent on confirmation, documentation, legislation and other approvals. PREPA restructuring remains uncertain and subject to opposition and litigation.
  • MBIA Corp.’s ability to pay claims depends partly on collecting expected recoveries, including Zohar asset monetizations, RMBS excess spread and CDO salvage. Shortfalls or delays could pressure its capital and liquidity; the NYSDFS could place it into rehabilitation or liquidation if it determines claims-paying ability is inadequate. The filing says MBIA Inc. does not expect a significant liquidity impact from such a proceeding, citing the entities’ separation and lack of reliance on MBIA Corp. dividends.
  • MBIA Insurance Corporation had $1.1 billion of unpaid interest on $953 million principal of surplus notes as of October 15, 2021. Interest payments require NYSDFS approval; no assurance of approval is given. The company reports $88 million of free and divisible surplus at September 30.
  • Other material uncertainties include adequacy of loss reserves, litigation outcomes, asset valuation and collateral eligibility, and the possibility that stressed credits or mortgage-related exposures deteriorate further. The filing says disclosure controls were effective and reports no material change in internal control over financial reporting.

Important facts for investors to verify

  • Progress and final economics of Puerto Rico GO, HTA and PREPA plans, including the amount and value of National’s recoveries and the timing of any policy acceleration or commutation.
  • Whether the PREPA claims sale price and remaining potential sales support recorded salvage estimates, and whether expected recoveries are collected as projected.
  • MBIA Corp.’s liquidity, statutory capital and ability to realize Zohar, CDO and RMBS recoveries; also monitor NYSDFS decisions on surplus-note interest payments.
  • Reconciliation of negative parent shareholders’ equity and reported liquidity resources to debt-service and collateral-posting needs; distinguish parent, insurance-subsidiary and consolidated-VIE resources.
  • Key assumptions behind loss reserves and fair values, including discount rates, Puerto Rico recovery scenarios, RMBS performance and CDO salvage values.