MBIA INC annual report, FY2013

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MBIA Inc. 2013 Form 10-K Summary

Business context and reporting period

MBIA Inc. reported for the fiscal year ended December 31, 2013; the filing also presents unaudited fourth-quarter results. Its businesses comprise U.S. public finance insurance through National, structured finance and international insurance through MBIA Corp., asset management through Cutwater, and wind-down asset/liability and conduit operations. New insurance writing remained minimal; management expects future business to be concentrated in U.S. public finance.

Financial performance and key metrics

  • Full-year results: Revenue was $1.209 billion, down from $2.435 billion in 2012. Net income was $250 million ($1.29 diluted EPS), versus $1.234 billion ($6.33 diluted EPS). Adjusted pre-tax loss, a non-GAAP measure, narrowed to $452 million from $708 million.
  • Drivers and earnings quality: The 2013 result included $232 million of net gains from insured derivatives, compared with $1.464 billion in 2012. These fair-value results are market-sensitive and volatile. Losses and loss adjustment expenses rose to $117 million from $50 million. Approximately $97 million of settlement, consulting and legal costs were recorded in 2013.
  • Fourth quarter: Revenue was $458 million, pre-tax income $294 million, and net income $132 million (diluted EPS $0.68). The filing does not provide a clear standalone fourth-quarter cash-flow value.
  • Balance sheet: Total assets were $16.953 billion versus $21.724 billion; total equity was $3.299 billion versus $3.194 billion. GAAP book value per share was $17.05, up from $16.22, while adjusted book value per share fell to $27.78 from $30.68.
  • Cash flow and liquidity: Operating cash flow was positive $1.829 billion versus negative $1.027 billion in 2012, largely reflecting $2.621 billion of recoveries and reinsurance proceeds, including settlement-related cash. Cash and cash equivalents ended at $1.258 billion. MBIA Inc.’s separate liquidity position was $359 million, including $307 million available for general corporate purposes and $52 million not directly pledged; management said it expected this to cover obligations for at least 12 months.
  • Debt: Combined net debt of the corporate and asset/liability segments was $1.1 billion, down from $1.2 billion. The company reported $1.702 billion of long-term debt, $1.427 billion of medium-term notes and $700 million of investment agreements on its consolidated balance sheet. It received or repurchased $328 million of MBIA Inc./GFL debt and redeemed $506 million of Meridian debt during 2013.
  • Insurance capital: National statutory capital was $3.258 billion, and its claims-paying resources were $5.252 billion (down from $5.659 billion). MBIA Corp. statutory capital fell to $825 million from $1.458 billion; its claims-paying resources declined to $3.461 billion from $5.273 billion.

Material changes versus the prior comparable period

  • National’s U.S. public finance gross par outstanding declined to $276.8 billion from $337.1 billion. MBIA Corp.’s structured finance and international gross par outstanding fell to $80.4 billion from $112.4 billion.
  • MBIA Corp. commuted $20.0 billion of gross insured exposure in 2013. A further $3.0 billion CMBS commutation occurred after year-end. Its insured portfolio had contracted from $331.2 billion at year-end 2007 to $80.4 billion at year-end 2013.
  • MBIA Inc. received a $214 million National dividend. Tax escrow releases provided $115 million in 2013, with a further $160 million released in January 2014.
  • Cutwater’s assets under management fell to $23.9 billion from $29.8 billion; third-party assets declined to $12.7 billion from $17.6 billion. The segment recorded a $17 million pre-tax loss.

Outlook, commentary, risks and unusual items

  • Outlook: No specific earnings or revenue guidance was provided. Management sees potential municipal insurance opportunities if National achieves higher ratings, interest rates rise and municipal issuance remains consistent. National was rated A/Stable by S&P and Baa1/Positive by Moody’s; further upgrades and market acceptance are uncertain. MBIA Corp.’s low ratings continue to constrain new business.
  • Risk mitigation and settlements: The Bank of America settlement provided MBIA Corp. approximately $1.7 billion ($1.6 billion cash and $136 million principal amount of MBIA notes), resolved substantial litigation and commuted $7.4 billion of exposure. MBIA also settled with Societe Generale and sold its ResCap bankruptcy claims. Credit Suisse-related mortgage put-back claims remain in litigation.
  • Claims and recoveries: At year-end, the company recognized $681 million of expected second-lien RMBS excess-spread recoveries and $359 million related to remaining loan repurchase commitments. Collection amounts and timing are uncertain. Management warned that higher claims or delayed recoveries could leave MBIA Corp. unable to pay claims and potentially subject it to rehabilitation or liquidation.
  • Public finance exposures: National had $5.031 billion of Puerto Rico-related gross par exposure. Obligations were current at year-end, and management did not then expect a default, while noting Puerto Rico’s fiscal stress. Detroit’s Chapter 9 case creates uncertainty regarding treatment of insured general-obligation bonds.
  • Cost actions and unusual items: 2013 reductions cut worldwide headcount by about 21%; management estimated approximately $24 million in annualized savings. The company recorded $18 million of severance costs and a $29 million impairment on its Armonk headquarters, which it planned to sell. Management also expects reported results to remain volatile due to derivative fair-value changes.
  • Other exposures: The company’s $1.109 billion net deferred tax asset depends on future taxable income. MBIA Corp. had $827 million of immediately available cash and highly liquid assets within $1.6 billion of cash and available-for-sale investments; $693 million was held by subsidiaries and not then available to MBIA Insurance Corporation. The NYSDFS had denied approval for surplus-note interest payments, and MBIA Corp. exceeded its statutory aggregate risk limit by $233 million.

Important facts for investors to verify

  • Whether National obtains rating upgrades and translates them into profitable new municipal insurance business.
  • Actual cash collections from excess spread and remaining mortgage put-back claims, especially the Credit Suisse litigation.
  • MBIA Corp.’s claims, liquidity and statutory capital trajectory, including the effects of commutations and CMBS performance.
  • National’s ability to sustain dividends to MBIA Inc. and the timing and availability of remaining tax escrow releases.
  • The assumptions behind derivative fair values, loss reserves and the $1.109 billion deferred tax asset.
  • Potential developments in Puerto Rico, Detroit bankruptcy litigation, regulatory risk limits and surplus-note payment approvals.

PricewaterhouseCoopers issued an unqualified audit opinion and reported effective internal control over financial reporting as of December 31, 2013.