MBIA Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017; unaudited consolidated results. MBIA operates U.S. public finance insurance, corporate, and international and structured finance insurance businesses.
Financial results and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $72 million | $118 million | $149 million | $150 million |
| Losses and loss adjustment expense | $170 million | $77 million | $264 million | $99 million |
| Loss before income taxes | $(210) million | $(55) million | $(330) million | $(156) million |
| Income tax expense (benefit) | $1,019 million | $(28) million | $971 million | $(51) million |
| Net loss | $(1,229) million | $(27) million | $(1,301) million | $(105) million |
| Diluted loss per share | $(9.78) | $(0.20) | $(10.13) | $(0.78) |
| Operating cash flow | — | $(440) million | $65 million |
- Q2 loss included a $1.1 billion tax charge from establishing a full valuation allowance on deferred tax assets. The allowance was $1.157 billion at June 30; net deferred tax assets were reported as zero. Management said it may ultimately use much of the tax asset but gave no assurance it would reverse the allowance.
- Management’s non-GAAP combined operating loss was $139 million for Q2 and $130 million for the first half, compared with operating income of $15 million and $31 million in the respective 2016 periods.
- At June 30, total assets were $9.767 billion, total liabilities $7.811 billion, and total equity $1.956 billion; MBIA Inc. shareholders’ equity was $1.944 billion, down from $3.227 billion at year-end. Cash and cash equivalents on the balance sheet were $143 million, plus $21 million held by consolidated VIEs. The cash-flow statement reports $164 million ending cash including VIE cash.
- Investments totaled $5.272 billion, down from $5.633 billion at year-end. Long-term debt was $2.061 billion; medium-term notes were $876 million, investment agreements $365 million, and consolidated VIE notes $2.466 billion.
- Six-month cash used in operations was $440 million, reflecting $497 million of financial-guarantee claims paid and $91 million of recoveries and reinsurance proceeds. Investing activities provided $457 million and financing activities used $40 million.
Material changes and business developments
- S&P downgraded National’s financial strength rating from AA- to A on June 26, 2017, retaining a stable outlook. MBIA said National stopped actively pursuing new financial guarantee business because the rating limited its competitiveness. National continued portfolio surveillance and remediation. The company reduced headcount by approximately 20%; Q2 operating expenses included $8 million of related costs.
- Puerto Rico and certain instrumentalities defaulted on scheduled debt service in January and July 2017. National paid $242 million of gross claims in aggregate. At June 30, National’s Puerto Rico exposure was $3.544 billion gross par, or $4.026 billion including accreted interest on capital-appreciation bonds; scheduled insured debt service was $8.438 billion. Puerto Rico’s Title III debt-adjustment proceedings and disputes over pledged revenues create substantial uncertainty.
- Higher Q2 losses were primarily associated with Puerto Rico; first-half losses also reflected insured RMBS and CDO exposures. Consolidated loss and LAE reserves rose to $714 million from $541 million at year-end. Management noted reserve estimates and recoveries depend on assumptions and may change.
- MBIA UK was sold to Assured Guaranty on January 10, 2017. MBIA UK Holdings transferred $23 million cash and received Zohar II notes with $347 million outstanding principal; MBIA recorded a $5 million gain for the first half related to the sale.
- MBIA Corp. satisfied a $770 million Zohar II insurance claim in January using its own funds, sale-related consideration, and a financing facility. At June 30, consolidated facility debt was $315 million; it bears 14% interest and matures January 2020. MBIA Inc. committed up to an additional $50 million of subordinated financing under specified circumstances.
- MBIA repurchased 9.0 million shares for $75 million during the first half. The board authorized a new repurchase program of up to $250 million on June 27, replacing the prior authorization.
Outlook, liquidity, risks, and contingencies
- Management expects MBIA Inc. to have sufficient cash for debt service and general corporate needs, primarily relying on National dividends, tax-sharing releases, investment receipts, and other inflows. It cautioned that subsidiary distributions, escrow releases, and capital-market access are uncertain. Parent liquidity for general corporate purposes, excluding tax escrow, was $287 million at June 30, versus $403 million at year-end.
- National held $4.2 billion in cash and investments, including $689 million described as highly liquid. MBIA Corp. held $240 million in cash and investments, of which $115 million was immediately available and highly liquid. MBIA Corp.’s liquidity depends in part on collecting recoveries; management warned there is no assurance of timely or sufficient collections.
- Management does not expect new international and structured finance business. MBIA Corp.’s objective remains paying policyholder claims and pursuing recoveries. Potential recoveries on Zohar assets and RMBS excess spread, as well as the Credit Suisse mortgage put-back litigation, remain uncertain. MBIA’s recorded Credit Suisse-related incurred losses were $437 million through June 30; the company believes it will prevail, but acknowledges the outcome and recoverable amount are uncertain.
- MBIA Corp. statutory capital was $548 million; its claims-paying resources were $1.591 billion, down from $1.945 billion at year-end. The New York insurance regulator had not approved interest payments on its surplus notes since January 2013; unpaid interest was $570 million as of July 15, 2017. MBIA Corp. reported $11 million of “free and divisible surplus,” and noted it lacked sufficient qualifying assets to support certain statutory reserve requirements and was not compliant with certain single-risk limits.
- Other risks include stressed municipal issuers, adequacy of loss reserves, asset values and collateral requirements, legal and regulatory outcomes, and the possibility that MBIA Corp. could be placed into rehabilitation or liquidation if it cannot meet policyholder obligations. Material lawsuits include disputes involving Credit Suisse, Puerto Rico and its instrumentalities, and other parties. The filing says damages in certain matters cannot currently be estimated.
- The filing provides no quantitative earnings or revenue guidance. Management described a generally improving U.S. economy but emphasized continued fiscal stress among some municipal issuers and uncertainty around Puerto Rico.
Important facts for investors to verify
- Whether the deferred-tax valuation allowance is maintained, reduced, or reversed, and what evidence supports future tax-asset utilization.
- Actual Puerto Rico claim payments, reserve changes, recoveries, and court or mediation developments affecting pledged revenues and insured debt.
- MBIA Corp.’s liquidity, statutory compliance, surplus-note payment approvals, and ability to repay the 14% financing facility by its 2020 maturity.
- Realized collections versus recorded estimates for Zohar, RMBS excess spread, and Credit Suisse put-back claims; review the sensitivity of reserves and fair values to assumptions.
- National’s capital, claims-paying resources, dividend capacity, and the consequences of pausing active new-business efforts after the S&P downgrade.
- Parent liquidity and cash-flow needs, including collateral calls, tax-escrow releases, debt maturities, and the scale and funding of further share repurchases.