MBIA Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are to December 31, 2016. Financial statements are unaudited. MBIA operates U.S. public finance insurance, corporate, and international and structured finance insurance businesses. The latter is primarily managed through MBIA Corp.; MBIA does not expect to write new business in that segment.
Financial performance and position
| Metric | Q1 2017 / March 31, 2017 | Prior comparable / year-end |
|---|---|---|
| Total revenue | $77 million | $32 million in Q1 2016 |
| Net premiums earned | $49 million | $75 million in Q1 2016 |
| Net investment income | $52 million | $39 million in Q1 2016 |
| Loss and loss adjustment expense | $94 million | $22 million in Q1 2016 |
| Net loss; diluted loss per share | $(72) million; $(0.55) | $(78) million; $(0.58) in Q1 2016 |
| Combined operating income, non-GAAP | $9 million; $0.07 per diluted share | $16 million; $0.12 in Q1 2016 |
| Operating cash flow | $(471) million | $40 million in Q1 2016 |
| Cash and cash equivalents | $112 million on balance sheet; $152 million including consolidated VIE cash | $163 million on balance sheet at Dec. 31, 2016 |
| Total assets; total liabilities | $11.017 billion; $7.791 billion | $11.137 billion; $7.898 billion at Dec. 31, 2016 |
| MBIA Inc. shareholders’ equity | $3.214 billion; book value per share $24.73 | $3.227 billion; $23.87 at Dec. 31, 2016 |
| Debt and related obligations | $2.034 billion long-term debt; $830 million medium-term notes; $390 million investment agreements. Consolidated VIE notes: $2.517 billion. | At Dec. 31, 2016: $1.986 billion, $895 million, $399 million and $2.241 billion, respectively. |
Conventional operating margins are not presented. Revenue rose year over year, but expenses rose more sharply, chiefly because of higher insurance losses. A $48 million income-tax benefit reduced the reported net loss. Net investment income and fair-value movements contributed to revenue; the $77 million total includes consolidated VIE activity.
Changes and notable events
- MBIA UK sale: Completed January 10, 2017. MBIA UK Holdings transferred MBIA UK to Assured Guaranty and received Zohar II notes with $347 million outstanding principal, while paying $23 million. MBIA recorded a $5 million gain related to the sale.
- Zohar II claim and financing: MBIA Corp. paid a $770 million claim on January 20. It used approximately $60 million of its own resources, proceeds from the sale transaction, and a financing facility. The facility initially comprised $325 million senior financing and $38 million subordinated financing; consolidated outstanding balance was $321 million at March 31. It bears 14% interest and matures January 20, 2020. MBIA Inc. committed an additional $50 million subordinated financing if needed.
- Losses and reserves: Q1 loss and LAE expense increased to $94 million, primarily from higher expected payments and lower projected excess-spread collections on insured RMBS. Consolidated loss and LAE reserves were $559 million, versus $541 million at year-end; insurance loss recoverable was $486 million, versus $504 million.
- Cash flow: Operating cash use included $469 million of financial-guarantee claims and LAE paid, versus $17 million in Q1 2016. The company cited the claim payment as the main reason operating cash flow deteriorated.
- Share repurchases: Repurchased 4.8 million shares under the program for $40 million, average $8.31 per share. Through May 4, a further 521,734 shares were repurchased at an average $8.01. Remaining authorization at March 31 was $48 million.
Outlook, risks and contingencies
- Management expects MBIA Inc. to have sufficient cash for debt service and general corporate needs, based on anticipated National dividends, tax-sharing releases and other inflows, but highlights risks from reduced subsidiary distributions, asset deterioration, collateral calls and limited capital-market access. Parent-company cash and liquid assets for general corporate purposes were $340 million at March 31, excluding tax escrow.
- Management described National’s insured portfolio as performing satisfactorily overall, while noting continuing stress among some municipal and territorial obligors. National insured $102.2 billion of gross par outstanding. Ratings at March 31 were AA+ stable from Kroll, AA- stable from S&P and A3 negative from Moody’s. Management said higher rates and wider spreads could improve demand for bond insurance; no formal earnings guidance was provided.
- Puerto Rico: National had $3.606 billion gross par outstanding, or $4.075 billion including accreted interest on capital appreciation bonds, and $8.513 billion of scheduled debt service outstanding. Puerto Rico defaulted on certain insured debt service; National paid $24 million in Q1. Puerto Rico filed a Title III petition under PROMESA on May 3, 2017. Restructuring, payment priorities, pledged revenues and litigation outcomes remain uncertain.
- MBIA Corp. recovery and liquidity risk: Recovery of amounts paid on Zohar I and Zohar II depends on monetization of underlying assets; the filing cautions that recoveries may be insufficient or delayed. MBIA Corp. had $233 million in cash and investments, including $111 million immediately available and highly liquid. It also faces potential claims and dependence on uncertain RMBS and litigation recoveries.
- Credit Suisse litigation: MBIA’s put-back claim concerns $440 million of incurred losses through March 31. The court partly granted and partly denied MBIA’s summary judgment motion on March 31; both sides appealed. Recovery estimates remain uncertain.
- Regulatory and surplus-note constraints: MBIA Insurance Corporation met the minimum policyholders’ surplus requirement but lacked sufficient qualifying assets for certain statutory reserve requirements and was out of compliance with certain single-risk limits. NYSDFS had not approved surplus-note interest payments since 2013; unpaid interest was $540 million as of April 15, 2017. The insurer reported negative free and divisible surplus of $5 million at March 31.
- Other risks include adequacy of loss reserves, volatile fair-value estimates, interest-rate, foreign-exchange and credit-spread movements, and the possibility of collateral requirements. The filing reports no material change in market risk since year-end and says disclosure controls were effective.
Important facts for investors to verify
- Whether Puerto Rico’s Title III process, fiscal plans and related court decisions change National’s expected claims, recoveries or liquidity requirements.
- Actual timing and value of Zohar I/II asset recoveries relative to the $770 million claim and the 14% financing facility.
- Development of RMBS claims, excess-spread collections and the $440 million Credit Suisse put-back litigation recovery estimate.
- MBIA Corp.’s available statutory resources, regulatory compliance, NYSDFS approval of surplus-note payments and ability to meet policyholder claims.
- Parent liquidity, National dividend and tax-escrow release assumptions, collateral needs, and the pace and price of additional share repurchases.