MBIA Inc. — First-Quarter 2018 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2018, compared with the first quarter of 2017; balance-sheet comparisons are with December 31, 2017. MBIA operates U.S. public finance insurance through National, international and structured finance insurance through MBIA Corp., and a corporate segment. Management said it does not expect National or MBIA Corp. to write new business; the focus is managing existing exposures, claims and recoveries.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 or prior date |
|---|---|---|
| Total revenue | $73 million | $77 million |
| Total expenses | $169 million | $197 million |
| Loss before income taxes | $(96) million | $(120) million |
| Income tax provision (benefit) | $2 million | $(48) million |
| Net loss / diluted loss per share | $(98) million / $(1.12) | $(72) million / $(0.55) |
| Adjusted net loss (non-GAAP) | $(61) million | Adjusted net income of $9 million |
| Operating cash flow | $(101) million | $(486) million |
| Cash and cash equivalents, consolidated cash flow statement | $141 million | $152 million |
| Total assets / total liabilities | $8.893 billion / $7.633 billion | $9.095 billion / $7.670 billion at year-end 2017 |
| MBIA Inc. shareholders’ equity | $1.248 billion | $1.413 billion at year-end 2017 |
Unless indicated otherwise, financial statement amounts are in millions. The balance sheet reports $120 million of cash and cash equivalents outside consolidated VIEs; the cash flow statement’s $141 million ending cash includes VIE cash. Balance-sheet debt included $2.154 billion of long-term debt, $790 million of medium-term notes and $330 million of investment agreements; consolidated VIE notes were a further $2.260 billion. These categories have different legal-entity and recourse characteristics.
Liquidity and capital. MBIA Inc. reported $419 million of cash and liquid investments available for general corporate purposes, excluding tax escrow assets. Management expects sufficient cash for debt service and corporate needs, relying in part on National dividends and tax-sharing releases, but cautioned that timing and amounts are uncertain. National held $3.5 billion of cash and investments, including $343 million of cash and short-term investments. MBIA Corp. held $252 million of cash and investments, of which $130 million was immediately available. Total capital resources were $3.1 billion. National’s statutory claims-paying resources were $4.080 billion; MBIA Corp.’s were $1.464 billion.
Material changes and management commentary
- Revenue fell 5% year over year, reflecting lower investment income, premiums, and fair-value results on warrants and other instruments, partly offset by less adverse insured-derivative fair-value changes. Expenses declined 14%, primarily due to lower insurance losses and operating costs. Net loss nevertheless widened, in part because Q1 2017 included a $48 million tax benefit.
- Net insurance loss and loss-adjustment expense was $72 million versus $94 million. U.S. public finance loss expense rose to $77 million from $11 million, mainly from Puerto Rico; international and structured finance recorded a $5 million benefit versus $83 million of expense, mainly reflecting lower RMBS losses.
- Puerto Rico defaulted on scheduled debt service on January 1, 2018, resulting in $69 million of National gross claims. National’s Puerto Rico gross insured par was $3.4 billion ($3.9 billion including accreted interest on capital-appreciation bonds), with $8.118 billion of debt service outstanding. Management emphasized uncertainty around Puerto Rico’s recovery, restructuring and post-hurricane fiscal outlook.
- Gross loss and LAE reserves rose to $1.006 billion from $979 million at year-end; the filing attributes the increase primarily to revised assumptions on certain Puerto Rico exposures. Insurance loss recoverables were $530 million versus $511 million.
- MBIA Corp.’s recovery prospects remain material: expected RMBS excess-spread recoveries were $220 million, and it recorded statutory recoveries of $407 million for Credit Suisse put-back claims and $197 million for RMBS excess spread, net of reinsurance. The Credit Suisse litigation and collection timing remain uncertain.
- Zohar I and II entered voluntary bankruptcy proceedings in March 2018. A settlement motion filed after quarter-end proposed a process to monetize assets and repay creditors, but MBIA Corp. cautioned that recoveries may not cover its prior payments.
- Moody’s downgraded National to Baa2 and MBIA Inc. to Ba3 in January 2018; MBIA Corp. remained rated Caa1. S&P and Kroll had withdrawn their ratings after the company ended rating-agency agreements. National had stopped actively pursuing new financial-guarantee business following its 2017 S&P downgrade.
Outlook, risks and unusual items
No specific earnings or financial guidance was provided. Management said it expects MBIA Inc. to meet corporate debt service and general needs, but identified dependence on subsidiary cash flows, tax-sharing releases, market access and collateral requirements as liquidity risks. MBIA Corp. faces additional risk if recoveries are delayed or insufficient to fund claims; the New York regulator could place it into rehabilitation or liquidation if it cannot pay policyholder claims.
MBIA Corp. reported $455 million of statutory capital and met the $65 million minimum policyholders’ surplus requirement. However, it lacked sufficient qualifying assets to support certain statutory reserves, was out of compliance with certain single-risk limits, and its admitted assets did not exceed liabilities and capital stock. The New York regulator had not approved surplus-note interest payments since 2013; unpaid interest was $661 million as of April 15, 2018. No interest accrues on that deferred amount.
Other notable items: the company repurchased approximately 2.0 million shares for $14 million during the quarter; AOCI declined to $(241) million, including a $162 million transition reclassification related to accounting for instrument-specific credit risk, rather than solely current-period operating performance. The company recorded a full valuation allowance against its $809 million net deferred tax asset. Management identified loss reserves, fair value measurements and taxes as critical estimates. The quarter’s results may not indicate full-year results.
Important facts for investors to verify
- Whether Puerto Rico restructuring outcomes, disaster recovery and further claims alter National’s expected losses, recoveries or liquidity needs.
- Progress and realized amounts from the Credit Suisse put-back litigation, RMBS excess spread and Zohar asset monetization; these estimates are uncertain and material to MBIA Corp.
- MBIA Corp.’s ability to meet claims and maintain regulatory compliance, including the regulator’s stance on surplus-note payments and potential rehabilitation actions.
- Whether National dividends and tax-sharing releases support MBIA Inc.’s projected liquidity, and how collateral calls or asset sales could affect available cash.
- Underlying drivers of the GAAP-to-adjusted loss difference, the tax valuation allowance, and fair-value/AOCI movements; adjusted results and claims-paying resources are non-GAAP or statutory measures.