MBIA Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; filed August 2, 2023. MBIA operates legacy financial-guarantee businesses through National (U.S. public finance), MBIA Corp. (international and structured finance), and a corporate segment. The statements are unaudited.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $28 million | $40 million | $30 million | $80 million |
| Expenses | $106 million | $76 million | $191 million | $189 million |
| Continuing-operations loss | $78 million | $36 million | $161 million | $109 million |
| Net loss attributable to MBIA | $74 million | $36 million | $167 million | $109 million |
| GAAP loss per share | $1.46 | $0.72 | $3.51 | $2.20 |
| Adjusted net loss (non-GAAP) | $22 million | $47 million | $23 million | $143 million |
| Adjusted loss per diluted share (non-GAAP) | $0.45 | $0.93 | $0.47 | $2.87 |
- Balance sheet at June 30: Assets were $3.257 billion and liabilities $4.245 billion; MBIA Inc. shareholders’ equity was negative $1.000 billion, versus negative $882 million at year-end 2022.
- Debt and obligations: Long-term debt was $2.505 billion, medium-term notes $494 million, investment agreements $236 million, and consolidated VIE debt $186 million. The company reported total capital resources of $0.2 billion, versus $0.3 billion at December 31, 2022.
- Cash and liquidity: Balance-sheet cash and cash equivalents were $208 million, with another $7 million in consolidated VIEs. MBIA Inc.’s stated liquidity position was $197 million; National held $2.1 billion of cash and investments, including $423 million in cash and short-term investments. Management expects MBIA Inc. to meet debt service and general corporate needs based on projected National dividends and other inflows, but notes that dividends are not assured.
- Cash flow, first half: Operating cash used was $78 million, compared with $232 million provided in 2022; investing cash provided was $314 million versus $12 million used; financing cash used was $88 million versus $172 million. Total cash and cash equivalents on the cash-flow statement ended at $226 million.
- Insurance reserves: Loss and loss-adjustment reserves declined to $361 million from $439 million; insurance loss recoverables fell to $100 million from $137 million. The reserve decrease primarily reflected termination of an RMBS transaction and claim payments, partly offset by accretion. Reserve estimates use probability-weighted scenarios and discounting; the weighted-average risk-free discount rate was 4.17%.
- Margins: The filing does not present a conventional operating-margin measure; revenues and expenses include material fair-value and insurance-reserve effects.
Material changes and drivers
- Second-quarter revenue fell 30% year over year, while expenses rose 39%, widening the quarterly continuing-operations loss. First-half revenue fell to $30 million from $80 million, while expenses were broadly flat.
- Investment income increased, reflecting higher yields and accretion on discounted investments. This was outweighed by volatile VIE fair-value and credit-risk reclassifications, among other factors. First-half consolidated VIE revenue was a $42 million loss versus a $20 million gain in 2022; interest-rate swap gains also declined materially year over year.
- First-half losses and LAE were $35 million versus $69 million in 2022, mainly reflecting favorable Puerto Rico credit changes, partly offset by less favorable first-lien RMBS experience. In Q2, losses and LAE increased to $28 million from $20 million, primarily due to RMBS exposure.
- MBIA repurchased 2.9 million shares through National during the first half at an average $8.06 per share. A May 2023 authorization permits up to $100 million of repurchases; $77 million remained at June 30.
- MBIA suspended its strategic-alternatives process in May, citing prevailing market conditions and feedback. The company does not expect National or MBIA Corp. to write significant new business.
Outlook, risks and unusual items
- Puerto Rico / PREPA: PREPA defaulted on January 1, 2023, prompting National to pay $18 million of gross claims. As of June 30, National had $1.0 billion of Puerto Rico debt service outstanding, including $926 million related to PREPA. A further PREPA default on July 1 led to $119 million in gross claims paid after quarter-end.
- National’s PREPA Plan Support Agreement provides for new secured revenue bonds, fees and expense reimbursements, and potential additional consideration in exchange for certain claims. It remains subject to court approval and confirmation and effectiveness of a plan. The court reduced bondholders’ allowed net unsecured claims to $2.388 billion from approximately $7.6 billion. A materially different plan or delayed settlement could adversely affect reserves and recoveries. National’s PREPA assumptions were revised for later settlement timing and potentially lower claim reimbursement, partly offset by higher expected bond and contingent-value-instrument values.
- Capital and regulation: National had statutory capital of $1.9 billion and total claims-paying resources of $2.392 billion. It was not in compliance with certain single-risk limits, and regulators could restrict new business. MBIA Insurance Corporation had statutory capital of $148 million, negative unassigned surplus of $1.9 billion, and claims-paying resources of $561 million; its liquidity and recovery timing remain concerns. The NYSDFS has not approved surplus-note interest payments since 2013. At July 15, unpaid interest was $1.3 billion on $953 million principal; future payment requires regulatory approval.
- Recoveries and valuation: Zohar assets distributed to MBIA Corp. include loans, equity interests and litigation claims; realizable values and timing remain uncertain. Fair-value estimates, insurance-loss reserves and recoveries are significant judgments and may change as performance and case information evolve.
- Other exposures: Risks include stressed municipal obligors, higher-than-expected claims, delayed recoveries, market and interest-rate volatility, collateral-posting needs, and potentially inadequate MBIA Corp. liquidity. A rehabilitation or liquidation proceeding for MBIA Insurance Corporation could materially harm that entity; management says it does not expect a significant liquidity impact on MBIA Inc.
- The company recorded no income-tax provision despite losses, citing a full valuation allowance of $1.2 billion against its net deferred tax asset. It reported a $3.9 billion tax NOL. No quantitative earnings guidance was provided; management cautions that interim results may not indicate full-year results.
- In Q1 2023, MBIA recorded an $18 million discontinued-operations income adjustment to correct an overstated prior-quarter disposal-group loss and an $8 million adjustment related to noncontrolling interests; management concluded the errors were immaterial to current and prior periods.
Key facts for investors to verify
- Progress, court rulings and final terms for the PREPA plan, including settlement timing, bond/CVI values, regulatory approvals and any further claims payments.
- Whether realized recoveries from PREPA, RMBS and Zohar assets match assumptions embedded in reserves and liquidity forecasts.
- National’s dividend capacity and actual distributions to MBIA Inc., alongside corporate liquidity, collateral needs and debt-service requirements.
- MBIA Insurance Corporation’s claims-paying liquidity, NYSDFS treatment of surplus-note payments, and statutory capital trajectory.
- Subsequent results and cash movements, particularly the July 1 PREPA claim payment, share repurchases, and changes in reserves and fair-value marks.