MBIA Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. MBIA operates financial-guarantee businesses through National (U.S. public finance), MBIA Corp. (international and structured finance), and a corporate segment. The business is in runoff; management does not expect National or MBIA Corp. to write meaningful new business.
Financial results and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $30 million | $12 million | $80 million | $85 million |
| Total expenses | $237 million | $158 million | $306 million | $327 million |
| Net loss | $170 million | $146 million | $187 million | $244 million |
| Loss per diluted share | $2.02 | $1.64 | $2.20 | $2.75 |
| Adjusted net loss (non-GAAP) | $76 million | $51 million | $37 million | $112 million |
- Q2 revenue improved year over year, largely because consolidated VIE results were less adverse and insured-derivative losses declined. The Q2 net loss nevertheless widened, primarily as insurance losses and loss-adjustment expenses rose to $140 million from $59 million, reflecting Puerto Rico and first-lien RMBS exposures.
- First-half net loss narrowed, despite lower revenue, as loss and LAE expense declined to $102 million from $131 million and other VIE-related losses decreased. First-half revenue included $37 million of investment impairment losses, versus $2 million a year earlier.
- Premiums earned were $22 million in Q2 and $45 million in the first half, down from $36 million and $76 million, respectively. The runoff portfolio, maturities and settlements, and a prior-year premium acceleration contributed to the declines.
- Cash from operating activities was negative $57 million in the first half, compared with negative $126 million in 2018. Investing activities provided $683 million; financing activities used $428 million. Consolidated cash and equivalents ended at $478 million, including $69 million held by consolidated VIEs.
- At June 30, total assets were $8.647 billion, total liabilities $7.594 billion, and total equity $1.053 billion. MBIA Inc. shareholders’ equity was $1.040 billion. Long-term debt was $2.315 billion; medium-term notes were $679 million, investment agreements $305 million, and VIE notes $2.340 billion. These figures include obligations of consolidated VIEs.
- Investments totaled $3.825 billion, down from $4.072 billion at year-end 2018. Loss and LAE reserves were $998 million and insurance loss recoverables $1.623 billion. The company changed first-lien RMBS balance-sheet presentation in Q2; the comparative reclassification had no effect on earnings, equity, or cash flows.
- National’s statutory capital was $2.445 billion and claims-paying resources were $3.847 billion. MBIA Insurance Corporation’s statutory capital was $499 million and claims-paying resources were $1.323 billion; both were lower than at year-end 2018.
- MBIA Inc.’s reported liquidity position was $407 million, versus $457 million at year-end. Management expects corporate cash to cover debt service and general needs, relying in part on National dividends and tax-escrow releases; future amounts and timing are not assured.
Material changes, outlook, and risks
- Puerto Rico: National had $2.990 billion gross par insured outstanding at June 30 ($3.326 billion including accreted CAB interest) and $6.158 billion of scheduled debt service outstanding. National reported $756 million of gross claims paid through June 30; after July 1 payments and related COFINA amounts, the filing reports approximately $1.1 billion in aggregate Puerto Rico gross claims. Recoveries and ultimate losses remain uncertain.
- COFINA: The plan of adjustment became effective February 12, 2019. Trust structures were consolidated as VIEs; the initial consolidation generated a $42 million loss. National’s COFINA exposure declined through bond exchanges, trust distributions and sales, with additional taxable-bond sales completed in July.
- PREPA and legal proceedings: National was not a party to PREPA’s restructuring support agreement and said it expected to object unless terms were amended. Litigation includes challenges to Puerto Rico bond liens and National’s recovery rights. The Credit Suisse RMBS put-back trial concluded August 2, 2019; the filing provides no clear estimate of potential litigation loss.
- MBIA Corp. liquidity and recoveries: MBIA Corp. held $239 million in cash and investments, including $135 million of cash and liquid investments. Recoveries from Zohar assets, RMBS excess spread and Credit Suisse claims are important but uncertain; failure or delay could impair its ability to pay claims. NYSDFS could place MBIA Insurance Corporation into rehabilitation or liquidation if it determines claims cannot be paid.
- Financing facility: In July 2019, MBIA Corp. refinanced the MZ Funding facility. New notes totaling about $332 million mature January 2022 and bear 12% interest; the facility is secured by rights to Zohar recoveries and guaranteed by MBIA Corp. policies.
- Capital actions: MBIA repurchased 5.9 million shares in the first half at an average $9.10 per share, spending $54 million in the cash-flow statement. After quarter-end, it announced an intended $150 million redemption of 6.400% senior notes due 2022.
- Tax and accounting: The company maintained a full valuation allowance against its $839 million net deferred tax asset. It adopted lease accounting, recording a $23 million right-of-use asset and liability. Management was evaluating the expected-credit-loss accounting standard effective in 2020.
- Controls: Disclosure controls were deemed ineffective because of a material weakness in estimating MBIA Corp. RMBS reserves and recoveries. Management reported no identified financial-statement misstatement and expected remediation before year-end 2019, subject to testing.
- Outlook and sensitivities: No specific earnings guidance was provided. Management cited a healthy U.S. economy as supportive of municipal credit quality, while warning that Puerto Rico stress, uncertain recoveries, reserve-estimation risk, market movements, collateral requirements, and limited access to capital could materially affect results and liquidity.
Important facts for investors to verify
- Progress and outcome of Puerto Rico restructurings, including PREPA terms, lien challenges, claims paid, and recoveries.
- Whether MBIA Corp. realizes projected Zohar, RMBS excess-spread, and Credit Suisse recoveries, and whether its liquidity remains adequate.
- Changes in RMBS and Puerto Rico loss reserves, key assumptions, and remediation of the disclosed material weakness.
- Availability and timing of National dividends and tax-escrow releases supporting MBIA Inc.’s liquidity, alongside debt maturities and collateral needs.
- Effects of the July MZ Funding refinancing, including 12% interest costs and the priority and value of collateral recoveries.
- Interpretation of reported cash and debt figures: consolidated totals include VIE balances, which are not generally available to settle MBIA’s other obligations.