MBIA Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; unaudited. MBIA operates U.S. public finance insurance, corporate, and international and structured finance insurance businesses. National primarily conducts U.S. public finance insurance; MBIA Insurance Corporation and subsidiaries conduct most international and structured finance insurance.
Key financial metrics
| Metric | Q2 2016 / June 30, 2016 | Comparable period / prior date |
|---|---|---|
| Total revenue | $118 million | $245 million in Q2 2015 |
| Net income (loss) | $(27) million; $(0.20) per diluted share | $64 million; $0.36 per diluted share in Q2 2015 |
| Six-month net income (loss) | $(105) million; $(0.78) per diluted share | $133 million; $0.72 per diluted share in H1 2015 |
| Combined operating income (non-GAAP) | $15 million in Q2; $31 million in H1 | $19 million in Q2 2015; $53 million in H1 2015 |
| Operating cash flow | $64 million for H1 | $34 million for H1 2015 |
| Cash and cash equivalents | $568 million on the balance sheet; $605 million including consolidated VIE cash | $464 million on the balance sheet at Dec. 31, 2015 |
| Total assets / total liabilities | $12.064 billion / $8.406 billion | $14.836 billion / $11.095 billion at Dec. 31, 2015 |
| MBIA Inc. shareholders’ equity | $3.646 billion; book value $26.88 per share | $3.729 billion; $24.61 per share at Dec. 31, 2015 |
| Corporate liquidity position | $295 million | $416 million at Dec. 31, 2015 |
| Debt and related obligations | $1.945 billion long-term debt, $991 million medium-term notes, and $424 million investment agreements; VIE notes $2.393 billion | At Dec. 31, 2015: $1.889 billion, $1.016 billion, $462 million, and $5.051 billion, respectively |
Premiums earned were $73 million in Q2 2016 versus $91 million in Q2 2015, and $148 million for H1 versus $192 million. Q2 loss and loss-adjustment expense was $77 million versus $46 million; H1 was $99 million versus $40 million. The filing does not present a conventional operating-margin measure.
Material changes versus comparable periods
- GAAP results swung to losses, principally reflecting lower premiums, adverse changes in fair-value and foreign-exchange items, and higher insurance losses. Q2 revenue included an $8 million net loss from insured derivatives, compared with a $60 million gain in Q2 2015; H1 had a $36 million loss versus an $88 million gain.
- H1 loss expense rose primarily from first-lien RMBS and Puerto Rico-related exposures. Consolidated loss reserves increased to $546 million from $516 million; insurance loss recoverables decreased to $365 million from $577 million.
- Consolidated assets and liabilities fell substantially, mainly as consolidated VIE assets and notes ran off or were deconsolidated. H1 investing cash flow included $1.8 billion of proceeds from VIE held-to-maturity investment maturities; financing included $2.034 billion of VIE note repayments.
- MBIA repurchased 16.6 million shares for approximately $105 million during H1. Shares outstanding were lower, contributing to adjusted book value per share rising to $32.42 from $29.69, although total shareholders’ equity declined.
Outlook, commentary, risks and unusual items
- Puerto Rico: National had $3.9 billion gross par exposure ($4.3 billion including accreted CAB interest) as of June 30. Puerto Rico defaulted on scheduled debt service July 1, after the quarter, and National paid $173 million in claims. Management believes insured Puerto Rico debt will ultimately be substantially repaid, but recovery and restructuring outcomes remain uncertain. PROMESA established an oversight board and debt restructuring framework; National challenged Puerto Rico’s Moratorium Act in court.
- MBIA Corp. liquidity / Zohar II: Zohar II had $772 million gross par outstanding and matured in January 2017. MBIA Corp. expected insufficient cash flow to repay a substantial amount at maturity and warned it might lack liquid assets to meet a resulting claim. It pursued restructuring and liquidity strategies, including a potential sale of MBIA UK; success was not assured. The NYSDFS could place MBIA Insurance Corporation into rehabilitation or liquidation or restrict claim payments if it judged liquidity or recoveries inadequate.
- Recoveries and reserves: Second-lien RMBS excess-spread recoveries were estimated at $408 million; their timing and amount depend on loan performance, interest-rate spreads and prepayments. The $401 million estimated Credit Suisse put-back recovery is subject to litigation and uncertainty. Management estimated that six more months of second-lien RMBS performance at then-current levels could add approximately $26 million to reserves.
- Capital, ratings and business: National’s ratings were affirmed at AA+ (Kroll, stable), AA- (S&P, stable) and A3 (Moody’s, negative). Management said low interest rates and competition constrained new business opportunities. MBIA Corp. was not expected to write new business for the foreseeable future.
- Statutory position: National reported $3.497 billion statutory capital and $4.737 billion claims-paying resources. MBIA Insurance Corporation reported $755 million statutory capital and $2.247 billion claims-paying resources, but a $104 million statutory net loss for H1 and negative unassigned surplus. NYSDFS had not approved surplus-note interest payments since January 2013; $453 million of interest was unpaid as of July 15, 2016.
- Other risks and items: Fair-value results are sensitive to rates, spreads, foreign exchange and assumptions, with significant Level 3 valuations. The filing discusses pending Credit Suisse, J.P. Morgan, Tilton/Patriarch and other litigation; management could not estimate potential losses for the described proceedings. No specific earnings guidance was provided. Management stated it expected MBIA Inc. to meet debt service and general corporate needs, subject to subsidiary cash flows, collateral demands and market access.
Important facts for investors to verify
- Progress and actual cash sources for resolving Zohar II, and MBIA Corp.’s liquid resources available for claims.
- Puerto Rico claim payments, National’s remaining exposure, restructuring developments and the outcome of National’s legal challenge.
- Realization, timing and valuation of RMBS excess-spread and Credit Suisse put-back recoveries; resulting reserve changes.
- National dividend and tax-sharing cash flows, MBIA Inc.’s declining liquidity position, and any collateral or financing requirements.
- Regulatory decisions on MBIA Insurance Corporation surplus-note payments, statutory capital and any rehabilitation-related action.
- Whether new-business production and ratings at National can support the company’s stated strategy, and how much reported performance reflects volatile fair-value items rather than operating results.