MBIA Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; balance-sheet comparisons are to December 31, 2013. Financial amounts are in millions of dollars unless otherwise stated. The statements are unaudited.
Business context
MBIA operates U.S. public finance insurance, structured finance and international insurance, and advisory services. National conducts most U.S. public finance insurance; MBIA Corp. conducts most structured finance and international insurance. Asset/liability products and conduit operations are in wind-down. Neither insurance segment wrote meaningful new business during the quarter.
Key financial results
| Metric | Q1 2014 | Q1 2013 / prior date |
|---|---|---|
| Total revenue | $577 | $219 |
| Pre-tax income | $404 | $215 |
| Income tax provision; effective tax rate | $148; 36.6% | $51; 23.7% |
| Net income; diluted EPS | $256; $1.32 | $164; $0.84 |
| Adjusted pre-tax result (non-GAAP) | Loss of $99 | Loss of $20 |
| Net cash used in operating activities | $(424) | $(78) |
| Net cash provided by investing activities | $210 | $323 |
| Net cash used in financing activities | $(312) | $(301) |
- Revenue and earnings growth were driven principally by a $469 net gain from changes in fair value of insured derivatives, versus a $61 loss in Q1 2013. The 2014 figure included $838 of unrealized gains, partly offset by $369 of realized losses and settlements. Results are highly sensitive to valuation assumptions and market perceptions of MBIA Corp.’s credit risk.
- Premiums earned fell to $88 from $120, including refunding premiums of $19 versus $41. Net investment income rose to $50 from $38. Losses and loss adjustment expense were $50, compared with a $194 benefit in the prior-year quarter.
- Consolidated shareholders’ equity increased to $3.604 billion from $3.278 billion; book value per share rose to $18.46 from $17.05. Adjusted book value per share, a non-GAAP measure, declined to $26.64 from $27.78.
Financial position, debt and liquidity
- Total assets were $16.087 billion and total liabilities $12.462 billion at March 31, 2014. Total investments were $7.025 billion. Cash and cash equivalents were $679; consolidated VIEs held a further $54, for $733 in the cash-flow statement.
- Reported debt included $1.731 billion of long-term debt and $1.418 billion of medium-term notes; investment agreements were $689. Consolidated VIE notes were $5.012 billion and are associated with VIE assets and obligations. Management reported MBIA Inc. net debt of $1.1 billion.
- MBIA Inc.’s stated liquidity position improved to $499 from $359, including $443 available for general liquidity and $56 not directly pledged for asset/liability products. The improvement included a $173 release from the tax escrow account. Management expects subsidiary distributions and further escrow releases to support obligations, but cautioned that cash generation is not assured.
- Operating cash outflow included $343 for insured derivative commutations and losses. Cash and cash equivalents declined from $1.258 billion at the start of the quarter to $733 at quarter-end.
- National statutory capital was $3.333 billion and claims-paying resources were $5.235 billion. MBIA Corp. statutory capital fell to $787 from $825, while its claims-paying resources declined to $2.990 billion from $3.461 billion. These statutory measures are not GAAP measures.
- MBIA Corp. held $1.3 billion in cash and available-for-sale investments, of which $423 was cash and highly liquid assets immediately available. Management said liquidity was adequate but dependent in part on expected recoveries and claim experience.
Material changes and operating developments
- S&P upgraded National to AA- with a stable outlook; Moody’s reaffirmed Baa1 with a positive outlook. Moody’s placed MBIA Corp.’s B3 rating, then carrying a positive outlook, on review for upgrade after commutations.
- MBIA Corp. commuted $3.8 billion of gross par exposure during the quarter, primarily structured CMBS, CRE CDO and first-lien RMBS risks. Insured credit-default-swap notional declined to $16.7 billion from $24.0 billion at year-end, mainly from terminations, amortization and maturities.
- National’s insured public-finance gross par declined to $267.5 billion from $276.8 billion. Below-investment-grade exposure increased to 2.7% from 1.7%. U.S. public finance pre-tax income was $92, down from $142, reflecting lower premiums and investment income, partly offset by a loss-reserve benefit.
- MBIA Corp.’s insured gross par was $70.3 billion. Its segment reported $392 pre-tax income versus $136, primarily reflecting derivative fair-value movements; adjusted pre-tax loss widened to $110 from $97.
- Advisory-services assets under management declined 21% year over year to $23.241 billion, and the company exited its EU advisory and asset-management business as of March 31.
Outlook, risks, contingencies and unusual items
- No quantified company earnings guidance is provided. Management expects National to pursue municipal new-issue and secondary-market opportunities, but notes that competition, low interest rates and issuer economics may constrain demand and pricing. MBIA does not expect material new structured-finance and international insurance business in the near term.
- Management said MBIA Corp. had forecast resources to pay expected claims, but warned that higher claims or lower, delayed or unsuccessful excess-spread and put-back recoveries could impair liquidity and capital and potentially lead to NYSDFS rehabilitation or liquidation. The filing identifies this as a risk, not an expected outcome.
- MBIA Corp.’s recorded second-lien RMBS excess-spread recoveries were $651; estimates are sensitive to delinquencies, loss trends, interest-rate spreads and prepayments. Estimated Credit Suisse put-back recoveries were $364, while the related dispute remained in litigation; the company’s estimated incurred losses on the claims were $423. Recovery timing and amount are uncertain.
- Management estimated that six additional months of peak second-lien RMBS performance, compared with its probability-weighted assumption, could add about $70 to case-basis reserves. It also reported $4.2 billion of cumulative statutory credit impairments and LAE on insured CMBS pools, CRE CDOs and CRE loan pools.
- Municipal stress includes Detroit and Puerto Rico exposures. A Detroit UTGO settlement reached in April 2014 remained subject to bankruptcy-court approval. The filing states that National insured $1.0 billion of Detroit Water bonds and $1.2 billion of Detroit Sewage Disposal bonds; a proposed Detroit plan could impair those bonds, although management disputed its validity. National had $4.833 billion of Puerto Rico-related gross par outstanding; management did not expect a default at the time, while continuing close surveillance.
- MBIA Corp. exceeded statutory aggregate risk limits by $122 and had submitted a compliance plan. It had no expected near-term dividend capacity. NYSDFS had not approved surplus-note interest payments since January 2013; $204 of interest was accrued and unpaid as of April 15, 2014, with payment requiring regulatory approval.
- Other subsequent legal developments included a May 2014 summary judgment ruling for J.P. Morgan, with MBIA given leave to seek amendment; dismissal with prejudice of the CQS litigation after an immaterial settlement payment; and reversal of a trial-court dismissal of National’s Harris County-Houston Sports Authority case. The company said it expects to prevail in actions where it is a defendant, but could not estimate potential losses.
- The company signed a new headquarters lease with $42 of minimum payments over the initial term through 2030, subject to a 2025 termination option; a $6 lease incentive is expected. Operating rent expense was to begin in Q2 2014.
- The filing highlights substantial fair-value estimation uncertainty: about 48% of liabilities measured at fair value were Level 3 at quarter-end. Management also cautioned that GAAP results may remain volatile and that the quarter’s results may not indicate full-year performance.
Most important facts for investors to verify
- How much of the $256 net income and $469 derivative gain reflects noncash fair-value changes, and how the $99 adjusted pre-tax loss is reconciled and interpreted.
- Whether MBIA Corp. collects the projected excess-spread and Credit Suisse recoveries, and how actual RMBS, CMBS and CRE claims compare with reserve assumptions.
- MBIA Corp.’s available liquidity, claim-payment capacity, statutory capital and risk-limit compliance, including NYSDFS decisions on surplus-note payments.
- National’s rating trajectory, new-business production and pricing, and changes in municipal exposures, particularly Detroit and Puerto Rico.
- Cash availability at the holding company: releases from tax escrow, subsidiary dividends, collateral requirements and upcoming debt or investment-agreement obligations.
- Developments in the Detroit bankruptcy settlement and the disclosed litigation, including any rulings, settlements or changes in potential exposure.