MBIA Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Unaudited consolidated results; amounts are in millions of dollars except per-share data. MBIA operates U.S. public finance insurance through National, international and structured finance insurance through MBIA Corp., and a corporate segment. It sold Cutwater effective January 1, 2015 and had already exited its conduit business.
Financial performance
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Total revenues | $92 | $291 | $556 | $1,055 |
| Total expenses | $147 | $143 | $406 | $448 |
| Income (loss) before taxes | $(55) | $148 | $150 | $607 |
| Net income (loss) | $(35) | $173 | $98 | $549 |
| Diluted EPS | $(0.23) | $0.80 | $0.55 | $2.62 |
| Operating income (loss), non-GAAP | $24 | $120 | $77 | $163 |
- Revenue and earnings fell sharply year over year. Q3 included a $55 net loss on financial instruments at fair value and foreign exchange, versus a $57 gain in Q3 2014, principally reflecting interest-rate-swap mark-to-market movements. Nine-month net gains on insured derivatives were $91, compared with $446 in 2014; 2014 benefited substantially from derivative commutations.
- Premiums earned were $84 in Q3 versus $116, and $276 for nine months versus $293. Net investment income was $38 and $112, respectively, versus $44 and $136 in the comparable periods.
- Insurance losses and loss-adjustment expense were $39 in Q3 versus $20; for nine months they were $79 versus $82. Q3 deterioration mainly reflected first-lien RMBS and CDO losses. Nine-month results included lower RMBS losses partly offset by increased CDO losses.
- No conventional operating-margin measure is highlighted in the filing; reported results are materially affected by fair-value changes, claims estimates and insurance recoveries.
Cash flow, balance sheet and capital
- For the first nine months, operating cash flow was $42, compared with $(350) in 2014; investing cash flow was $543 versus $457; financing cash flow was $(886) versus $(754). Financing outflows included $300 of treasury-stock purchases.
- Consolidated cash and cash equivalents ended the period at $492, down from $782 at the start of the year. This includes $30 of cash held by consolidated VIEs; the balance sheet separately reports $462 of cash and cash equivalents outside VIEs.
- At September 30, total assets were $15,051, total liabilities $11,337, and MBIA Inc. shareholders’ equity $3,702, down from $3,929 at December 31, 2014. Long-term debt was $1,882, medium-term notes $1,033, investment agreements $485, and VIE notes $5,166. VIE obligations are associated with consolidated entities and should not be equated automatically with parent-level debt.
- MBIA Inc.’s reported general-purpose liquidity position was $306, down from $498 at year-end. Management expected sufficient resources for corporate debt service and general needs, relying on subsidiary dividends, tax-sharing receipts and other cash inflows; it cautioned that these sources and market access are not assured. National paid a $114 dividend to MBIA Inc. after quarter-end.
- National reported $3.4 billion of statutory capital and $4.8 billion of claims-paying resources at September 30. MBIA Corp. reported $813 of statutory capital and $2.4 billion of claims-paying resources, versus $2.7 billion at year-end. MBIA Corp. had $1.1 billion of cash and investments, including $399 of cash and highly liquid assets immediately available. Its statutory net loss for nine months was $55.
- MBIA Inc. repurchased 38.9 million shares for approximately $297–$300 during the first nine months. Shares outstanding fell substantially; book value per share was $24.20 and adjusted book value per share, a non-GAAP measure, was $29.55.
Material changes and business developments
- National’s insured gross par was $177.4 billion, down from $222.3 billion at year-end. National insured $439 of gross par during the first nine months, but low rates, narrow spreads and competition constrained new business; management reported $3 of net premiums written.
- National’s ratings were AA+ stable at Kroll, AA- stable at S&P, and A3 negative at Moody’s. Management said ratings are important to new-business capacity and pricing.
- MBIA Corp.’s total insured gross par was $44.3 billion, down from $55.2 billion at year-end and approximately 87% below its 2007 level. It wrote no new international and structured finance insurance and did not expect meaningful new writings in the foreseeable future.
- Warburg Pincus-affiliated funds sold all 45.7 million MBIA shares they held. National and MBIA Inc. repurchased 8.0 million and 7.6 million shares, respectively, in connection with the sale. The board authorized a new $100 million repurchase program on October 28, after the prior authorization was exhausted.
- The Cutwater sale was completed January 1, 2015, generating an approximately $24 gain. MBIA also sold its Armonk facility and recorded a $4 impairment charge.
Outlook, risks and contingencies
- Management described the U.S. public finance portfolio as performing satisfactorily overall, while warning that stressed state, local and territorial issuers could produce more defaults and losses. National had $4.3 billion of gross par exposure to Puerto Rico, or $4.7 billion including accreted capital-appreciation-bond interest, with $9.6 billion of scheduled debt service outstanding.
- Puerto Rico’s fiscal plan projected a $27.8 billion cumulative deficit for fiscal 2016–2020 absent reforms and a $14.0 billion deficit even with proposed measures; it projected liquidity exhaustion for the Commonwealth in November 2015 and for the Government Development Bank before December. National guaranteed $273 of GDB debt service due December 1, 2015. PREPA restructuring and liquidity discussions remained unresolved; National had provided $45 of a $128 short-term financing package to PREPA.
- MBIA Corp.’s liquidity and reserves depend significantly on excess-spread collections from second-lien RMBS and recoveries on mortgage put-back claims. It recorded $411 of excess-spread recoveries (after VIE eliminations) and a $394 loan-repurchase commitment asset related to Credit Suisse claims. The Credit Suisse litigation outcome and timing of recoveries are uncertain. Management estimated that six more months of second-lien RMBS performance at then-current levels could require approximately $32 of additional reserves.
- Management warned that higher-than-expected claims or delayed/failed recoveries could leave MBIA Corp. unable to pay claims, potentially prompting NYSDFS rehabilitation or liquidation proceedings. MBIA Corp. has no current dividend capacity; NYSDFS had not approved surplus-note interest payments since July 2012. Unpaid surplus-note interest was $369 as of October 15, 2015.
- Other risks include volatile fair values and Level 3 valuations, collateral calls, investment losses, subsidiary-dividend interruptions, regulatory constraints, and uncertain recovery assumptions. The filing identifies ongoing Credit Suisse and J.P. Morgan litigation and a November 2, 2015 lawsuit by Lynn Tilton and Patriarch Partners; MBIA said it expects to prevail but cannot estimate potential losses in the cited cases.
- No specific earnings guidance was provided. The filing cautions that interim results may not indicate full-year results. Management expected National to remain the primary source of parent-company dividends and tax-sharing payments, but noted that dividend amounts could be lower and that future liquidity is not assured.
Most important facts for investors to verify
- Whether Puerto Rico and PREPA/GDB obligations are paid or restructured, particularly the $273 GDB payment due December 1, 2015, and the resulting claims on National.
- Actual collections and revised assumptions for second-lien RMBS excess spread and Credit Suisse put-back litigation, including the recoverability and timing of recorded assets.
- MBIA Corp.’s available liquidity, claims trajectory, regulatory status, and NYSDFS decisions on surplus-note payments.
- National’s ratings, new-business volume and pricing, statutory capital, dividend capacity, and exposure to single-risk-limit restrictions.
- Parent-company liquidity and collateral requirements, including the sustainability of subsidiary and tax-sharing cash inflows and the impact of further share repurchases.
- Fair-value and reserve sensitivity, including the proportion of Level 3 measurements and potential changes in credit spreads, recoveries, defaults and discount assumptions.