MBIA (MBI) - 2019 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION This section presents the company's consolidated financial statements, management's discussion and analysis, market risk disclosures, and controls and procedures Item 1. Financial Statements The unaudited consolidated financial statements report a net loss of $170 million for Q2 2019, with total assets increasing to $8.65 billion and shareholders' equity decreasing to $1.04 billion Note 1: Business Developments and Risks and Uncertainties This note details business segments, key developments like Puerto Rico defaults and COFINA Plan, and risks including liquidity and Zohar CDO recoveries - On January 1 and July 1, 2019, Puerto Rico defaulted on scheduled debt service for National insured bonds, resulting in National paying aggregate gross claims of $393 million[21] - In February 2019, the COFINA Plan of Adjustment was confirmed, leading to the creation of National Custodial Trusts which were consolidated as VIEs in Q1 2019[22] - MBIA Corp.'s ability to meet its obligations is limited by available liquidity. There is a risk that the NYSDFS could place MBIA Insurance Corporation into a rehabilitation or liquidation proceeding if it concludes the company cannot pay its policyholder claims[28][32] - The company faces uncertainty in recovering payments made on Zohar I and Zohar II notes, with primary recovery expected from the monetization of Zohar Assets through a bankruptcy settlement process[29] Note 4: Variable Interest Entities The company consolidates VIEs where it is the primary beneficiary, with $2.3 billion in consolidated VIE assets and liabilities and $6.2 billion maximum exposure for nonconsolidated VIEs - In Q1 2019, the company consolidated seven VIEs related to the COFINA Custodial Trusts, recording a loss of $42 million on initial consolidation[52] Consolidated VIE Assets and Liabilities (in billions) | Date | Carrying Amount of Assets & Liabilities (in billions) | | :--- | :--- | | June 30, 2019 | $2.3 | | December 31, 2018 | $1.7 | Maximum Exposure to Loss for Nonconsolidated VIEs (in millions) | Date | Maximum Exposure to Loss (Insurance in Force, in millions) | | :--- | :--- | | June 30, 2019 | $6,189 | | December 31, 2018 | $7,284 | Note 5: Loss and Loss Adjustment Expense Reserves Loss and LAE reserves increased to $998 million, driven by Puerto Rico and RMBS exposures, with insurance loss recoverable at $1.62 billion Summary of Loss Reserves and Recoveries (in millions) | Category | June 30, 2019 (in millions) | December 31, 2018 (in millions) | | :--- | :--- | :--- | | Insurance loss recoverable | $1,623 | $1,595 | | U.S. Public Finance | $659 | $571 | | International & Structured Finance | $964 | $1,024 | | Loss and LAE reserves | $998 | $965 | | U.S. Public Finance | $528 | $551 | | International & Structured Finance | $470 | $414 | - For the six months ended June 30, 2019, loss and LAE reserves increased by a net $33 million, driven by a $135 million increase from changes in assumptions, partially offset by $92 million in loss payments[75] - Insurance loss recoverable increased by a net $28 million in the first six months of 2019, primarily due to anticipated recoveries on claims paid for certain Puerto Rico credits and additional recoveries on insured RMBS transactions[78] Note 11: Business Segments The company operates in U.S. Public Finance, Corporate, and International/Structured Finance segments, reporting a consolidated pre-tax loss of $207 million for Q2 2019 - The U.S. Public Finance Insurance segment is operated through National Public Finance Guarantee Corporation[202] - The International and Structured Finance Insurance segment is operated through MBIA Insurance Corporation and has not written any meaningful new business since 2008[206][207] Segment Income (Loss) Before Income Taxes (in millions) | Segment | Three Months Ended June 30, 2019 (in millions) | Six Months Ended June 30, 2019 (in millions) | | :--- | :--- | :--- | | U.S. Public Finance Insurance | $(46) | $31 | | Corporate | $(52) | $(92) | | International and Structured Finance Insurance | $(109) | $(165) | | Consolidated Total | $(207) | $(226) | Consolidated Balance Sheet Highlights (in millions) | Account | June 30, 2019 (in millions) | December 31, 2018 (in millions) | | :--- | :--- | :--- | | Total Assets | $8,647 | $8,107 | | Total Investments | $3,825 | $4,072 | | Assets of consolidated VIEs | $2,292 | $1,627 | | Total Liabilities | $7,594 | $6,975 | | Long-term debt | $2,315 | $2,249 | | Liabilities of consolidated VIEs | $2,340 | $1,744 | | Total Shareholders' Equity | $1,040 | $1,119 | Consolidated Statement of Operations Highlights (in millions, except per share data) | Metric | Three Months Ended June 30, 2019 (in millions) | Three Months Ended June 30, 2018 (in millions) | Six Months Ended June 30, 2019 (in millions) | Six Months Ended June 30, 2018 (in millions) | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $30 | $12 | $80 | $85 | | Total Expenses | $237 | $158 | $306 | $327 | | Losses and loss adjustment | $140 | $59 | $102 | $131 | | Net Income (Loss) | $(170) | $(146) | $(187) | $(244) | | Diluted EPS | $(2.02) | $(1.64) | $(2.20) | $(2.75) | Consolidated Statement of Cash Flows Highlights (in millions) | Cash Flow Activity | Six Months Ended June 30, 2019 (in millions) | Six Months Ended June 30, 2018 (in millions) | | :--- | :--- | :--- | | Net cash provided (used) by operating activities | $(57) | $(126) | | Net cash provided (used) by investing activities | $683 | $351 | | Net cash provided (used) by financing activities | $(428) | $(174) | | Net increase (decrease) in cash | $198 | $51 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses a Q2 2019 consolidated net loss of $170 million, driven by higher insurance losses, particularly from Puerto Rico and RMBS exposures Financial Highlights (in millions, except per share data) | Metric | Three Months Ended June 30, 2019 (in millions) | Three Months Ended June 30, 2018 (in millions) | | :--- | :--- | :--- | | Net income (loss) | $(170) | $(146) | | Net income (loss) per diluted share | $(2.02) | $(1.64) | | Adjusted net income (loss) (Non-GAAP) | $(76) | $(51) | | Adjusted net income (loss) per diluted share (Non-GAAP) | $(0.90) | $(0.58) | - In H1 2019, National paid gross claims of $393 million due to defaults by Puerto Rico and its instrumentalities[244] - The company's GAAP book value per share was $12.26 as of June 30, 2019, down from $12.46 at year-end 2018[267] U.S. Public Finance Insurance The U.S. Public Finance segment reported a $46 million pre-tax loss in Q2 2019, driven by increased Puerto Rico-related loss expenses, with $3.0 billion gross par exposure - Loss and loss adjustment expenses increased to $106 million in Q2 2019 from $59 million in Q2 2018, mainly due to certain Puerto Rico credits[272][278] - As of June 30, 2019, National had $3.0 billion of gross insured par outstanding related to Puerto Rico[291][440] - Through June 30, 2019, National has paid aggregate gross claims of $756 million related to Puerto Rico defaults. An additional $328 million was paid on July 1, 2019[296] International and Structured Finance Insurance The International and Structured Finance segment reported a $109 million pre-tax loss in Q2 2019, primarily due to RMBS loss expenses and reduced net premiums earned - Loss and loss adjustment expenses were $34 million in Q2 2019, primarily from increases in losses on insured first-lien RMBS transactions[335][346] - Net premiums earned decreased 71% to $6 million in Q2 2019 from $21 million in Q2 2018, mainly due to the acceleration of premium earnings in 2018 from a policy termination[335][338] Direct RMBS Insured Exposure (Gross Par Outstanding, in millions) | Collateral Type | June 30, 2019 (in millions) | December 31, 2018 (in millions) | | :--- | :--- | :--- | | HELOC Second-lien | $441 | $511 | | CES Second-lien | $153 | $591 | | Alt-A First-lien | $941 | $983 | | Subprime First-lien | $390 | $439 | | Total | $1,938 | $2,539 | Capital Resources Total capital resources were $2.9 billion, with National's statutory capital at $2.4 billion and MBIA Corp.'s at $499 million, alongside share repurchases and unpaid surplus note interest - During the first six months of 2019, the company repurchased 5.9 million common shares at an average price of $9.10 per share[371][442] Statutory Capital and Claims-Paying Resources (CPR) as of June 30, 2019 (in millions) | Entity | Statutory Capital (in millions) | Total CPR (in millions) | | :--- | :--- | :--- | | National | $2,445 | $3,847 | | MBIA Insurance Corp. | $499 | $1,323 | - As of July 15, 2019, there was $824 million of unpaid interest on MBIA Insurance Corporation's surplus notes due to non-approval from the NYSDFS[386] Liquidity MBIA Inc. had $407 million in liquidity, with National holding $3.3 billion in cash and investments, and a net cash increase of $198 million in H1 2019 Liquidity Positions as of June 30, 2019 (in millions) | Entity | Cash and Investments (in millions) | | :--- | :--- | | MBIA Inc. (Corporate) | $407 | | National | $3,300 | | MBIA Corp. | $239 | - In July 2019, MBIA Corp. consummated a refinanced facility, with new senior notes of $278 million and amended subordinated notes of $54 million, maturing in January 2022[406] Consolidated Cash Flow Summary - H1 2019 (in millions) | Category | Cash Flow (in millions) | | :--- | :--- | | Operating Activities | $(57) | | Investing Activities | $683 | | Financing Activities | $(428) | | Net Increase in Cash | $198 | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rates and credit spreads, with a 100 bps interest rate increase estimated to cause a $33 million pre-tax fair value loss Interest Rate Sensitivity Analysis (Pre-tax change in fair value, in millions) | Rate Shift | Estimated Change in Fair Value (in millions) | | :--- | :--- | | +300 bps | $(75) | | +200 bps | $(57) | | +100 bps | $(33) | | -100 bps | $44 | | -200 bps | $104 | | -300 bps | $186 | Credit Spread Sensitivity Analysis (Pre-tax change in fair value, in millions) | Spread Shift | Estimated Change in Fair Value (in millions) | | :--- | :--- | | +200 bps | $(59) | | +50 bps | $(15) | | -50 bps | $14 | Item 4. Controls and Procedures Disclosure controls were ineffective due to a material weakness in RMBS loss reserve estimation, with remediation efforts underway and expected completion by year-end 2019 - Disclosure controls and procedures were concluded to be not effective due to a material weakness in internal control over financial reporting[430] - The material weakness relates to the process for estimating loss reserves and recoveries for RMBS insured by MBIA Insurance Corporation[430] - A remediation plan is underway, with new and modified controls implemented in Q2 2019. Management expects the weakness to be remediated by year-end 2019[431] PART II - OTHER INFORMATION This section covers legal proceedings, risk factors, equity security sales, other information, and a list of exhibits Item 1. Legal Proceedings This section directs readers to Note 14 for detailed litigation information, with selected documents available on the company's website - For a detailed discussion of the Company's litigation, readers are directed to Note 14 in the Notes to Consolidated Financial Statements[433] Item 1A. Risk Factors Primary risk factors include fiscal stress of public finance issuers, particularly Puerto Rico's crisis and PROMESA proceedings, posing significant credit loss potential for National's $3.0 billion exposure - A primary risk is the fiscal stress of public finance issuers, which could lead to increased credit losses or impairments on insured obligations[435] - The Commonwealth of Puerto Rico's fiscal crisis and its Title III proceedings under PROMESA pose a significant risk, with National having $3.0 billion of gross insured par outstanding as of June 30, 2019[436][440] - Heightened political risk related to federal aid and the Oversight Board's actions in Puerto Rico could lead to greater concessions from creditors, potentially increasing National's losses[439] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 5.9 million common shares for $54 million in H1 2019, with $148 million remaining under the authorization Share Repurchases in Q2 2019 | Month | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | April | 117 | $9.50 | | May | 2,317,283 | $9.04 | | June | 3,128,015 | $9.17 | | Total Q2 | 5,445,415 | $9.12 | - As of June 30, 2019, $148 million remained authorized for future share repurchases[444] Item 5. Other Information Francis Y. Chin resigned from the Board of Directors on July 31, 2019, reducing the board size from seven to six members - Francis Y. Chin resigned from the Board of Directors effective July 31, 2019, reducing the board size to six members[443] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including financing agreements, CEO/CFO certifications, and interactive data files - Lists various legal and financial documents filed with the report, including agreements for MZ Funding, CEO/CFO certifications, and interactive data files[445]