MBIA Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless noted. The filing is unaudited.
Business context and reporting period
MBIA operates financial-guarantee insurance businesses through National Public Finance Guarantee (U.S. public finance) and MBIA Insurance Corporation (international and structured finance), alongside a corporate segment. Management does not expect either insurer to write significant new business. The quarter was marked by COVID-19-related uncertainty, Puerto Rico defaults and restructuring proceedings, and volatile financial markets.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenues | $114 | $30 | $108 | $80 |
| Losses and loss adjustment expenses | $136 | $140 | $379 | $102 |
| Net loss | $(106) | $(207) | $(439) | $(228) |
| Net loss per diluted share | $(1.69) | $(2.45) | $(6.51) | $(2.68) |
| Adjusted net loss (non-GAAP) | $(72) | $(76) | $(119) | $(37) |
- Q2 revenue included gains on interest-rate swaps and favorable consolidated VIE results, including gains and reversals of credit-loss allowances. Six-month losses reflected weaker expected CDO recoveries, higher Puerto Rico losses, and lower discount rates that increased the present value of certain reserves.
- Cash flow, first six months: operating cash use was $89, investing cash provided was $941, and financing cash use was $481. Consolidated cash and cash equivalents were $454 at period-end in the cash flow statement; the balance sheet reports $446 outside consolidated VIEs and $8 within them.
- Balance sheet, June 30: total assets were $6.613 billion, total liabilities $6.253 billion, and total equity $360 million, including $347 million of MBIA Inc. shareholders’ equity. Shareholders’ equity was $826 million at December 31, 2019.
- Debt and related obligations: long-term debt was $2.289 billion; medium-term notes, $668 million; investment agreements, $289 million; and consolidated VIE notes, $1.178 billion. These categories have different obligors and structures.
- Liquidity: MBIA Inc.’s liquidity position was $325 million, versus $375 million at year-end. National held $2.5 billion of cash and investments, including $558 million in cash and short-term investments. MBIA Corp. held $231 million of cash and investments, including $123 million described as immediately available liquid assets.
- National’s statutory capital was $2.034 billion and claims-paying resources (CPR) were $3.321 billion, down from $2.376 billion and $3.546 billion, respectively, at year-end. MBIA Corp.’s statutory capital was $360 million and CPR was $1.055 billion, down from $476 million and $1.239 billion.
- National’s U.S. public finance insured gross par outstanding was $45.8 billion; MBIA Corp.’s total insured gross par outstanding was $9.0 billion. These are insurance exposures, not recorded debt.
- The company repurchased 17.8 million shares for $136 million during the first half, at an average $7.62 per share. National purchased a further 4.8 million shares after quarter-end through July 29.
Material changes versus the prior comparable period
- Q2 net loss narrowed to $106 million from $207 million, while revenue rose to $114 million from $30 million. The revenue comparison was substantially influenced by fair-value movements and VIE results, rather than a broad increase in recurring insurance revenue.
- For the first half, net loss widened to $439 million from $228 million, primarily as losses and loss adjustment expenses rose to $379 million from $102 million.
- Retained earnings and shareholders’ equity declined substantially from year-end, reflecting the first-half net loss, share repurchases, and other equity movements. A $42 million after-tax adoption adjustment for the expected-credit-loss standard also reduced opening 2020 retained earnings.
- National’s insured gross par declined to $45.8 billion from $48.9 billion at year-end. MBIA Corp.’s direct RMBS gross par declined 9% to $1.609 billion from $1.776 billion.
Outlook, risks, contingencies and unusual items
- COVID-19: Management said it could not yet quantify the pandemic’s full impact on insured credits, investment portfolios, or liquidity. Recession, municipal revenue pressure, borrower delinquencies, mortgage enforcement delays, and weaker asset values could increase claims, impair recoveries, or require additional collateral. Management reported continued operations and remote work, with ongoing portfolio surveillance and liquidity stress testing.
- Puerto Rico: As of June 30, National had $3.3 billion of debt service outstanding related to Puerto Rico and had paid approximately $1.1 billion of gross claims through that date. The filing also reports defaults on January 1 and July 1, 2020 and aggregate gross claims of $391 million; the July default and related $333 million payment occurred after quarter-end. Restructuring plans remain uncertain, and court proceedings were delayed amid the pandemic.
- MBIA Corp. recoveries and solvency: Recoveries from Zohar assets, RMBS excess spread, and Credit Suisse loan-repurchase litigation are uncertain in amount and timing. Failure to realize expected recoveries could impair MBIA Corp.’s liquidity and ability to pay claims. The NYSDFS could place the insurer into rehabilitation or liquidation if it concludes claims cannot be paid. MBIA Corp. had not received NYSDFS approval for surplus-note interest payments since 2013; unpaid interest was $948 million as of July 15, 2020.
- Regulatory capital: National and MBIA Insurance Corporation met stated minimum policyholder-surplus requirements but were out of compliance with certain single-risk limits. MBIA Insurance Corporation also lacked qualifying assets to support specified contingency and loss/unearned-premium reserves, as described in the filing.
- Parent liquidity: Management expected MBIA Inc. to have sufficient cash for debt service and corporate needs, based on projected National dividends and other inflows, but said there is no assurance as to the amount or timing. National dividends are constrained by insurance-law limits; management does not expect distributions from MBIA Corp.
- Puerto Rico litigation: A court ruled that National and other insurers had not shown a colorable lien claim in a PRHTA proceeding. Other disputes challenge creditor liens and restructuring terms. The company is defending actions and expects to prevail, but says adverse rulings could materially affect its business and it cannot estimate potential losses or ranges for the described litigation.
- Accounting and market items: Adoption of the expected-credit-loss standard reduced retained earnings by $42 million, net of tax. A full $937 million valuation allowance remained against the net deferred tax asset. Fair-value gains and losses, reserve discount-rate changes, and VIE accounting materially affected reported results.
- Guidance: The filing provides no numerical earnings or financial guidance. Management cautions that first-half results may not indicate full-year results.
Important facts for investors to verify
- Updated Puerto Rico claim payments, debt-service exposure, and progress or changes in PREPA, GO, and other restructuring plans.
- Whether COVID-19-driven stress changes National’s municipal claims and MBIA Corp.’s RMBS/CDO losses or recovery estimates.
- Realization, timing, and legal outcomes of Zohar, Credit Suisse, and other expected recoveries, and their implications for MBIA Corp.’s claims-paying liquidity.
- National dividend capacity and actual cash available to MBIA Inc. after collateral requirements and debt service.
- Insurance statutory capital, CPR, regulatory compliance, and any NYSDFS action affecting MBIA Insurance Corporation.
- Cash flow and equity impact of continued share repurchases, alongside the drivers of reported GAAP versus adjusted losses.