MBIA Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. MBIA operates U.S. public finance insurance through National, a corporate segment, and international and structured finance insurance primarily through MBIA Corp. Management does not expect National or MBIA Corp. to write new business.
Financial performance and position
| Metric | Q1 2019 / March 31, 2019 | Comparable / prior period |
|---|---|---|
| Total revenue | $50 million | $73 million in Q1 2018 |
| Net income (loss) | $(17) million; $(0.20) per diluted share | $(98) million; $(1.12) per diluted share in Q1 2018 |
| Adjusted net income (non-GAAP) | $39 million; $0.45 per diluted share | $(61) million; $(0.69) per diluted share in Q1 2018 |
| Operating cash flow | $(70) million | $(101) million in Q1 2018 |
| Cash and cash equivalents, cash-flow statement | $163 million at quarter-end | $141 million at March 31, 2018 |
| Total assets / total liabilities | $8.778 billion / $7.577 billion | $8.076 billion / $6.944 billion at December 31, 2018 |
| Total equity | $1.201 billion | $1.132 billion at December 31, 2018 |
| Consolidated investments | $4.100 billion | $4.072 billion at December 31, 2018 |
| MBIA Inc. corporate liquidity | $486 million | $457 million at December 31, 2018 |
Revenue included $23 million of premiums earned (versus $40 million), $32 million of net investment income (versus $31 million), and a $28 million charge for other-than-temporary investment impairments. Losses and loss adjustment expense were a $38 million benefit, compared with $72 million of expense in Q1 2018. Interest expense was $52 million, versus $51 million. The company reported no conventional operating margin measure.
Net cash used in financing was $175 million, including $168 million of principal paydowns on consolidated VIE notes and $10 million of treasury-stock purchases. Investing activities provided $128 million. Consolidated cash includes variable-interest-entity (VIE) cash; MBIA reports corporate liquidity separately. At March 31, National held $3.2 billion of cash and investments, while MBIA Corp. held $266 million.
Reported debt and debt-like balances included $2.284 billion of long-term debt, $721 million of medium-term notes, $313 million of investment agreements, and $2.558 billion of consolidated VIE notes. These balances have different obligors and include consolidated VIE obligations; they should not be treated as equivalent parent-company debt.
Material changes and notable items
- Net loss narrowed year over year, largely as the loss-and-LAE line moved from expense to benefit. Management attributed the change principally to lower losses on certain Puerto Rico exposures, partly offset by increased losses on insured first-lien RMBS.
- Premiums earned fell, mainly because refunding premiums declined by $12 million and scheduled premiums by $2 million; prior-year refunding activity had accelerated premium recognition.
- Q1 included consolidation of seven COFINA-related trusts as VIEs after the plan of adjustment became effective. Initial consolidation produced a $42 million loss in consolidated VIE revenues. Consolidation also changes reported assets, liabilities, revenues and expenses.
- National’s Puerto Rico gross insured par was $3.1 billion, or $3.4 billion including accreted interest on capital appreciation bonds. It paid $65 million of claims after the January 1, 2019 default. Total Puerto Rico claims paid, including prior claims and COFINA-related amounts, were $769 million.
- MBIA Inc. repurchased approximately 0.5 million shares under its program for about $4 million at an average $8.94 per share; $198 million remained authorized at quarter-end.
- GAAP book value per share was $13.16, versus $12.46 at year-end 2018. Management stopped publicly reporting its internal adjusted book-value measure, but disclosed individual adjustments used in that internal analysis.
Outlook, risks and contingencies
- Liquidity: Management expects MBIA Inc. to have sufficient cash for debt service and general corporate needs, based on projected National dividends, tax-sharing releases and other inflows. It cautioned that interruptions in subsidiary dividends or tax payments, weaker invested-asset performance, collateral needs or impaired capital-market access could create liquidity risk. A significant portion of parent cash and securities is pledged.
- National capital: Statutory capital was $2.587 billion and claims-paying resources were $3.836 billion at March 31. Dividends remain subject to statutory limits and regulatory approval where applicable; management expects ordinary dividends to be limited to prior-year net investment income for the foreseeable future.
- MBIA Corp.: Statutory capital was $575 million and claims-paying resources were $1.349 billion. Its ability to meet claims depends partly on recoveries, including RMBS excess spread, Credit Suisse put-back claims and Zohar asset monetization. New York regulators had not approved surplus-note interest payments since January 2013; unpaid interest was $791 million as of April 15, 2019. The filing warns that a rehabilitation or liquidation proceeding is possible if regulators conclude the insurer cannot meet policyholder claims.
- Puerto Rico and litigation: Fiscal distress, restructurings, claim recoveries and legal outcomes remain uncertain. A March 2019 First Circuit ruling held that special-revenue liens remain in place but did not require continued turnover or payment during the PRHTA Title III case. A PREPA restructuring support agreement signed May 3, 2019 did not include National and could affect its receiver motion and lien position. The Credit Suisse RMBS litigation was scheduled for trial beginning July 22, 2019; ultimate recoveries are uncertain.
- Reserves and markets: Reserve estimates and fair values require significant judgment and may change with credit performance, recoveries, interest rates, credit spreads, foreign exchange and litigation. National’s gross Puerto Rico insured contractual debt service outstanding was $6.525 billion, including $5.046 billion due thereafter.
- Controls: Disclosure controls were deemed ineffective because of a previously reported material weakness in the process for estimating MBIA Corp. RMBS losses and recoveries. Management reported no resulting material misstatement and expected remediation before year-end 2019; remediation was not yet complete.
- Other: The company recorded a full valuation allowance of $818 million against its net deferred tax asset. No formal earnings guidance was provided in the supplied filing text. Management noted a relatively stable U.S. economy but slower activity than in late 2018; economic deterioration could pressure insured credits and investment values.
Most important facts for investors to verify
- Whether Puerto Rico and PREPA restructuring developments change National’s insured claims, lien rights or recovery assumptions.
- Whether National and MBIA Corp. can collect expected recoveries, particularly on RMBS, Credit Suisse and Zohar exposures, and the timing of those collections.
- Whether the RMBS reserve-estimation control weakness is remediated and whether reserve assumptions or reported estimates change.
- Whether parent liquidity projections remain achievable given pledged collateral, limited subsidiary dividend capacity and dependence on National and tax-sharing flows.
- How COFINA VIE consolidation and other fair-value movements affect reported results, and how non-GAAP adjusted earnings reconcile to GAAP results.