MBIA Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. MBIA provides financial guarantee insurance through National (U.S. public finance) and MBIA Corp. (international and structured finance), alongside corporate activities. The company sold its Cutwater advisory business effective January 1, 2015.
Financial results and position
| Metric | Q1 2015 | Q1 2014 or comparison |
|---|---|---|
| Total revenue | $219 million | $577 million |
| Net income | $69 million; $0.37 diluted EPS | $256 million; $1.32 diluted EPS |
| Operating income, non-GAAP | $34 million; $0.18 per diluted share | $40 million; $0.21 per diluted share |
| Net cash from operating activities | $(9) million | $(424) million |
| Cash and cash equivalents, balance sheet | $596 million | $729 million at December 31, 2014 |
| Total assets / total liabilities | $15.915 billion / $11.975 billion | $16.284 billion / $12.334 billion at December 31, 2014 |
| MBIA Inc. shareholders’ equity | $3.919 billion | $3.929 billion at December 31, 2014 |
Reported revenue includes substantial fair-value movements. Net gains on insured derivatives were $28 million, versus $469 million in Q1 2014; these gains primarily reflected the market’s perception of MBIA Corp.’s nonperformance risk, partly offset by claim payments. The prior-year comparison also included unusually large derivative-related gains. Net premiums earned increased to $101 million from $88 million, while net investment income declined to $37 million from $50 million. Losses and loss adjustment expenses were a $6 million benefit, compared with $50 million of expense.
Consolidated cash flow from investing activities was $120 million and from financing activities was $(256) million; financing included $75 million of treasury stock purchases. Cash and cash equivalents at period-end were $627 million in the cash-flow statement, including consolidated VIE cash; the balance sheet reports $596 million outside VIEs. No conventional consolidated margin guidance is provided.
Material changes and capital
- Net income fell by $187 million year over year, largely reflecting the much smaller derivative fair-value gain. Non-GAAP operating income also declined, from $40 million to $34 million.
- Cutwater’s sale generated an approximately $24 million gain in Q1; the company recorded a separate $4 million impairment on its Armonk facility, sold in May 2015. The sale of Cutwater and the resulting segment changes affect comparability with 2014.
- MBIA repurchased 8.57 million shares in Q1 for approximately $75 million, at an average $8.83 per share. It reported $95 million remaining under the program as of May 5, 2015. It also repurchased approximately $36 million par value of debt.
- Adjusted book value per share, a non-GAAP measure, increased to $25.78 from $24.87 at year-end, primarily due to share repurchases. GAAP book value per share was $21.35.
- National statutory capital was $3.329 billion and claims-paying resources were $4.919 billion. MBIA Corp. statutory capital was $857 million and claims-paying resources were $2.573 billion.
- Corporate-segment liquidity for general purposes was $567 million, excluding tax escrow, versus $498 million at year-end. MBIA received $228 million from the tax escrow during Q1. MBIA Inc.’s net debt was $643 million, down from $740 million.
- Debt and related obligations include $1.108 billion of medium-term notes, $1.828 billion of long-term debt and $538 million of investment agreements on the consolidated balance sheet. The filing presents scheduled principal payments totaling $8.892 billion, including VIE notes; these categories are not directly equivalent.
Outlook, risks and contingencies
- National: Management expects to pursue municipal bond opportunities, but says low rates, narrow spreads and competition constrain demand and risk-adjusted pricing. National’s ratings were AA+ stable from KBRA, AA- stable from S&P, and A3 negative from Moody’s. Management cited generally satisfactory portfolio performance alongside continuing fiscal stress among some public obligors.
- Puerto Rico: National had $4.541 billion gross par exposure. The PREPA forbearance was scheduled to expire June 4, 2015, and remaining debt-service reserves were insufficient to cover PREPA’s full July 1, 2015 payment. Puerto Rico’s Recovery Act had been ruled unconstitutional, with an appeal pending. These exposures and related developments remain material uncertainties.
- MBIA Corp.: The company expects no meaningful new international and structured-finance insurance business in the foreseeable future. Management says projected liquidity is adequate for anticipated claims, but warns that higher claims or delayed/insufficient excess-spread and Credit Suisse recoveries could cause a shortfall and potentially lead to NYSDFS rehabilitation or liquidation proceedings. MBIA Corp. had $415 million of immediately available cash and highly liquid assets within $1.2 billion of total cash and investments.
- MBIA Corp.’s estimated recoveries include $502 million for second-lien RMBS excess spread and $385 million for Credit Suisse loan put-back claims. The Credit Suisse litigation is unresolved; recovery estimates depend on uncertain litigation outcomes, timing and counterparty performance. Management’s estimate that it will prevail is not assured.
- Second-lien RMBS reserves could increase by approximately $40 million if actual performance remains at current levels for six additional months versus the probability-weighted assumptions used. Management notes that modest changes in delinquencies, prepayments and other assumptions can materially affect recoveries and reserves.
- MBIA Corp.’s $953 million surplus notes remain subject to regulatory payment approval. NYSDFS had not approved interest payments since January 2013; unpaid interest was $314 million as of April 15, 2015. MBIA Corp. has no expected dividend capacity in the foreseeable future.
- Other risks include stressed municipal credits, collateral and liquidity demands, foreign exchange and interest-rate movements, and material estimation uncertainty in reserves, Level 3 fair values and the $1.0 billion net deferred tax asset. Management stated that MBIA Inc. expects sufficient cash for corporate needs, but relies on subsidiary distributions and tax-sharing releases that are not assured.
- Pending matters include Credit Suisse and J.P. Morgan litigation and California bond-insurer coverage litigation. The company expects to prevail but cannot estimate a loss range; adverse rulings could materially affect business, results, liquidity or financial condition.
Most important facts to verify
- How much of reported earnings and book-value movement reflects recurring insurance economics versus derivative marks, foreign exchange, the Cutwater sale and share repurchases?
- Whether MBIA Corp. realizes its projected excess-spread and Credit Suisse recoveries on the expected amounts and timetable, and whether claim liquidity remains adequate.
- Developments in Puerto Rico, particularly PREPA’s payment capacity, forbearance and restructuring status, and the resulting impact on National’s exposure and reserves.
- National’s future ratings, new-business volume and ability to price guarantees at attractive risk-adjusted returns.
- Regulatory decisions on MBIA Corp. surplus-note payments and the timing and availability of tax-escrow releases, subsidiary dividends and other corporate liquidity sources.
- Whether reserve assumptions, Level 3 valuations, and the deferred tax asset remain supportable as credit, market and litigation conditions change.