MBIA Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Amounts are in millions of dollars unless otherwise noted. The filing is unaudited.
Business context
MBIA operates U.S. public finance insurance, corporate activities, and international and structured finance insurance. National primarily runs U.S. public finance; MBIA Insurance Corporation (“MBIA Corp.”) primarily runs international and structured finance. MBIA Corp. is in runoff and the company does not expect it to write new business for the foreseeable future.
Financial results and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $203 | $92 | $353 | $556 |
| Expenses | $148 | $147 | $454 | $406 |
| Income (loss) before tax | $55 | $(55) | $(101) | $150 |
| Net income (loss) | $31 | $(35) | $(73) | $98 |
| Diluted earnings (loss) per share | $0.23 | $(0.23) | $(0.55) | $0.55 |
| Combined operating income, non-GAAP | $5 | $24 | $36 | $77 |
- Q3 revenue rose chiefly on favorable fair-value changes in interest-rate swaps and other instruments, investment-sale gains, higher fees and reimbursements, and insured-derivative gains. These items are volatile and do not indicate equivalent recurring operating growth.
- Nine-month revenue fell as insured-derivative results shifted to losses, 2015 included derivative-termination gains, foreign exchange was unfavorable, and earned premiums declined. Loss and loss-adjustment expense was $149 versus $79, mainly reflecting Puerto Rico and RMBS exposures.
- Net premiums earned were $77 in Q3 versus $84 and $225 for nine months versus $276. Net investment income was $39 and $115, respectively.
- Nine-month operating cash flow was $(129), compared with $42 in 2015. Investing cash flow was $2,236 and financing cash flow $(2,412), substantially affected by VIE asset and note runoff/deconsolidation. Consolidated cash and cash equivalents ended at $216, versus $492 at the prior-year period end; balance-sheet cash outside the VIE presentation was $191.
- MBIA Inc.’s stated general-purpose liquidity position was $237 at September 30, down from $416 at December 31, 2015. Management expects sufficient holding-company cash for debt service and general corporate needs, relying on subsidiary dividends and tax-related receipts.
- At September 30, total assets were $11,787, total liabilities $8,117, and total equity $3,670. Long-term debt was $1,975, medium-term notes $932, and investment agreements $418. Consolidated VIE notes of $2,323 are separately reported and should not be treated as ordinary holding-company debt.
- Book value per share was $26.95; adjusted book value per share, a non-GAAP measure, was $32.39. Shareholders’ equity was $3,658. MBIA repurchased $105 of shares during the first nine months, and reported $16.6 million shares repurchased in that period.
Material changes and portfolio developments
- National’s insured gross par was $125.0 billion at September 30. It wrote $706 of gross par in the first nine months. Its ratings were AA+ stable from Kroll, AA- stable from S&P, and A3 negative from Moody’s.
- Puerto Rico remains a major exposure: National had $3.6 billion gross par outstanding, or $4.0 billion including accreted interest on capital-appreciation bonds. After Puerto Rico missed scheduled payments on July 1, National paid $173 in gross claims. Management believes insured Puerto Rico debt will ultimately be substantially repaid, but acknowledges significant uncertainty and ongoing restructuring and legal challenges.
- MBIA Corp.’s insured gross par was $32.9 billion, down from $41.6 billion at year-end 2015. Its CDO portfolio declined to $2.9 billion from $6.0 billion; direct RMBS par declined to $5.1 billion from $6.0 billion.
- Consolidated loss and LAE reserves were $513 and insurance loss recoverable was $528. MBIA Corp.’s segment loss and LAE reserves, net of expected recoveries, were $441, down from $471 at year-end. The company cautions that reserve estimates and projected recoveries depend on assumptions and may change.
- MBIA Inc. shareholders’ equity decreased to $3,658 from $3,729 at year-end, while book value per share increased, helped by share repurchases. Total assets and liabilities declined substantially, in part as consolidated VIE balances ran off or were deconsolidated.
Outlook, risks, contingencies and unusual items
- Zohar II liquidity is a critical near-term risk. The insured notes, with $770 of gross par outstanding, mature January 20, 2017. MBIA Insurance Corporation expects a claim and says it lacks sufficient liquidity to pay it without third-party financing. Financing is constrained and may require NYSDFS approval; failure to resolve the issue could lead to regulatory rehabilitation or liquidation.
- MBIA Corp. agreed to sell MBIA UK to Assured Guaranty in a transaction involving approximately $347 of Zohar II notes transferred to MBIA Corp. and a $23 cash payment to Assured. The agreement remained conditional on regulatory approvals and other closing conditions; completion was uncertain. Management targeted early January 2017 if conditions were resolved.
- MBIA Corp. had $944 of cash and investments, but only $238 was cash and highly liquid assets immediately available to MBIA Insurance Corporation; $599 was held by subsidiaries. MBIA Corp.’s statutory capital was $674, down from $885, and it reported a $144 statutory net loss for the nine months. NYSDFS had not approved surplus-note interest payments since January 2013; unpaid interest was $482 as of October 15, 2016.
- National’s statutory capital was $3,542 and claims-paying resources were $4,731. National paid MBIA Inc. a $118 dividend after quarter-end. Management expects future dividends to be limited and notes there is no assurance about their amount or timing.
- MBIA Corp. had paid a $149 claim on matured Zohar I notes and was pursuing recovery through an asset auction, with bids due by November 29, 2016. Recovery of the Zohar I and II claims is uncertain. A separate Credit Suisse put-back recovery remained in litigation; the company reported $432 of incurred losses through September 30 and noted the eventual recovery could differ materially from its estimate.
- Legal and credit risks include Puerto Rico’s fiscal crisis, PROMESA-related proceedings, challenges to COFINA’s sales-tax structure, PREPA restructuring litigation, potential municipal defaults, and RMBS performance and recovery uncertainty. The filing states damages in relevant litigation could not be estimated clearly.
- Other sensitivities include interest rates, credit spreads, foreign exchange and collateral-posting needs. Fair-value measurements include significant Level 3 inputs; changes in estimates or market conditions can materially affect earnings.
- The company gave no numerical earnings guidance. It described modest U.S. economic growth, but cited Brexit, global economic uncertainty, low interest rates and competitive conditions as factors affecting new municipal insurance opportunities. National’s new business and pricing prospects depend partly on ratings, market spreads and investor demand.
Most important facts for investors to verify
- Whether MBIA Corp. secured acceptable, regulator-approved financing and met the January 2017 Zohar II payment obligation; whether the MBIA UK sale closed on the disclosed terms.
- National’s Puerto Rico claim payments, recoveries, restructuring outcomes and any changes to insured exposure or reserves.
- Actual realization and timing of MBIA Corp.’s RMBS excess-spread and Credit Suisse put-back recoveries, and any revisions to loss reserves.
- MBIA Inc.’s liquidity, subsidiary dividend and tax-escrow receipts, collateral requirements, and debt maturities; distinguish holding-company liquidity from MBIA Corp. resources and VIE assets.
- Any NYSDFS action concerning MBIA Insurance Corporation, surplus-note payments, statutory capital, or potential rehabilitation or liquidation.
- Subsequent developments in material litigation, National’s ratings, share repurchases, and the company’s non-GAAP operating income and adjusted book value calculations.