MBIA Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022; unaudited consolidated results. MBIA operates U.S. public finance insurance through National, corporate activities, and international and structured finance insurance primarily through MBIA Corp. The company does not expect either insurer to write significant new business.
Key financial results
| Metric ($ millions, except per-share data) | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | 40 | 18 | 80 | 90 |
| Losses and loss adjustment expense | 20 | 9 | 69 | 107 |
| Net loss | (36) | (61) | (109) | (167) |
| Loss per diluted share | (0.72) | (1.23) | (2.20) | (3.38) |
| Adjusted net income (loss), non-GAAP | (47) | 37 | (143) | (79) |
| Adjusted loss per diluted share, non-GAAP | (0.93) | 0.76 | (2.87) | (1.60) |
Quarterly revenue increased from the prior year, mainly reflecting interest-rate swap and foreign-exchange gains, consolidated VIE gains, and higher investment income. Six-month revenue declined, primarily due to investment fair-value and realized losses. Lower six-month claims expense versus 2021 partly offset these losses. Insurance premiums earned were $11 million in Q2 and $26 million year to date, versus $14 million and $34 million, respectively, in 2021. Profit margins are not particularly informative for this financial-guarantee and investment-driven business.
Financial position, liquidity and cash flow
- At June 30, total assets were $4.067 billion and total liabilities were $4.802 billion. MBIA Inc. shareholders’ equity was negative $748 million; total equity was negative $735 million.
- Cash and cash equivalents were $202 million on the balance sheet, plus $5 million held by consolidated VIEs. Cash-flow statement ending cash was $207 million. Consolidated long-term debt was $2.359 billion; medium-term notes were $493 million and investment agreements were $277 million. VIE notes of $217 million are separately reported.
- Six-month operating cash flow was $232 million, down from $545 million in 2021. The comparison includes $600 million of loan-repurchase proceeds received in 2021; 2022 operating cash flow benefited from insurance recoveries, including GO settlement proceeds and PREPA claim sales. Investing cash use was $12 million; financing cash use was $172 million.
- Management reported MBIA Inc. liquidity of $188 million, down from $239 million at year-end 2021. National held $2.5 billion of cash and investments, including $520 million in cash and short-term investments. MBIA Corp. held $368 million of cash and investments, of which $78 million was cash or liquid investments immediately available to it.
- Available-for-sale investment unrealized losses increased materially amid higher rates and wider credit spreads; AOCI moved from positive $100 million at year-end to negative $231 million. Comprehensive loss was $185 million for Q2 and $440 million for the first half.
Material changes and business developments
- Puerto Rico: National reported $2.1 billion of debt service outstanding at June 30. The Commonwealth and certain instrumentalities defaulted on January 1, and National paid $47 million in gross claims. A further $142 million of gross claims was paid after a July 1 default. The reported Puerto Rico exposure includes PREPA, HTA, and other insured obligations.
- GO/PBA settlement: The plan took effect in March. National received cash, bonds, and a contingent value instrument (CVI) totaling approximately $1.0 billion, then made $277 million of acceleration and commutation payments. Its GO/PBA gross par and debt service outstanding fell to zero.
- HTA and PREPA: The PREPA restructuring support agreement was terminated in March, and mediation was underway with an August 15, 2022 deadline. National had sold about 35% of its PREPA bankruptcy claims. In July, National received $33 million cash and $358 million face amount of HTA CVI; further HTA consideration depended on the plan becoming effective. The filing states HTA confirmation was scheduled for August 17–18.
- Consolidated loss reserves rose to $965 million from $894 million at year-end, primarily reflecting reduced expected PREPA recoveries on unpaid claims and a longer expected settlement timeline. Insurance loss recoverable fell to $443 million from $1.296 billion, largely due to GO settlement recoveries and PREPA claim sales.
- National’s insured gross par outstanding was $34.6 billion, down from $36.5 billion at year-end. Its share rated below investment grade declined to 8.2% from 9.0%.
Outlook, risks and unusual items
- Management expects MBIA Inc. to have sufficient resources for debt service and general corporate needs based on projected National dividends and other inflows, but emphasizes that dividend amounts and timing are uncertain. Corporate liquidity is exposed to reduced National dividends, weaker asset performance, constrained capital-market access, and collateral requirements.
- National was compliant with aggregate statutory risk limits but not certain single-risk limits; regulators could restrict it from writing new business. MBIA Insurance Corporation met its minimum policyholders’ surplus requirement but lacked sufficient qualifying assets for certain statutory reserve requirements and also exceeded certain single-risk limits.
- MBIA Insurance Corporation had $1.2 billion of unpaid surplus-note interest as of July 15, 2022; the NYSDFS had not approved interest payments since 2013. Payment requires regulatory approval, and the company reported $95 million of “free and divisible surplus” at June 30. No interest accrues on deferred interest.
- MBIA Corp.’s ability to pay claims depends partly on uncertain RMBS and Zohar recoveries. The Zohar liquidation plan became effective August 2, 2022, with remaining recovery rights transferred to asset recovery entities; their realizable value remains uncertain. A shortfall could materially affect MBIA Corp.’s liquidity and statutory capital. Management says a proceeding against MBIA Corp. would not be expected to have a significant liquidity impact on MBIA Inc., given their legal separation.
- Q2 included $19 million of investment impairment losses on securities MBIA intended to sell before recovery of cost, as well as $21 million of realized investment losses. The first half also included $53 million of fair-value investment losses. Results are sensitive to interest rates, credit spreads, foreign exchange, reserve estimates, and recoveries. The company recorded no income-tax provision and maintained a full valuation allowance against a $1.1 billion net deferred tax asset.
- No quantified earnings guidance was provided. Management noted economic and inflation uncertainty, elevated energy prices, and the potential effects of interest rates and market conditions. It reported no material adverse business impact from COVID-19 to date and no sovereign or sub-sovereign debt exposure to Russia or Ukraine, while noting immaterial direct or indirect investment holdings and related credit and unrealized losses.
Important facts for investors to verify
- Progress and final recoveries under the HTA plan, and developments in PREPA mediation, litigation, and National’s remaining recoveries.
- Whether Puerto Rico claims, reserve assumptions, and expected recovery values change materially, particularly for PREPA and HTA.
- National’s dividend capacity and MBIA Inc.’s liquidity, including collateral needs and access to cash held within separately regulated entities.
- MBIA Insurance Corporation’s statutory asset and capital position, NYSDFS approvals, and the value and timing of Zohar and RMBS recoveries.
- The size and persistence of investment losses, AOCI changes, and the company’s non-GAAP adjusted results relative to GAAP results.