MBIA (US:MBI)2021-08-04 21:04PART I FINANCIAL INFORMATION Financial Statements This section presents MBIA Inc.'s unaudited consolidated financial statements for the quarter ended June 30, 2021, highlighting a $61 million net loss and a decrease in total assets to $5.3 billion Consolidated Balance Sheets MBIA Inc.'s balance sheet as of June 30, 2021, shows total assets decreased to $5.25 billion, total liabilities to $5.28 billion, and shareholders' equity shifted to a $36 million deficit Consolidated Balance Sheet Highlights (in millions) | Metric | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total Assets | $5,252 | $5,751 | | Total Liabilities | $5,275 | $5,602 | | Total Shareholders' Equity of MBIA Inc. | $(36) | $136 | | Cash and cash equivalents | $342 | $158 | | Total investments | $2,797 | $2,736 | | Loss and loss adjustment expense reserves | $954 | $990 | | Long-term debt | $2,283 | $2,229 | - A significant change in assets was the settlement of 'Loan repurchase commitments', which were valued at $604 million as of December 31, 2020, and are zero as of June 30, 202112 Consolidated Statements of Operations MBIA reported a net loss of $61 million for Q2 2021, an improvement from a $106 million loss in Q2 2020, primarily due to significantly lower loss adjustment expenses Statement of Operations Highlights (in millions, except per share data) | Metric | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $18 | $114 | $90 | $108 | | Losses and loss adjustment | $9 | $136 | $107 | $379 | | Total Expenses | $79 | $220 | $257 | $547 | | Net Income (Loss) | $(61) | $(106) | $(167) | $(439) | | Diluted EPS | $(1.23) | $(1.69) | $(3.38) | $(6.51) | Consolidated Statements of Comprehensive Income (Loss) The company reported comprehensive income of $3 million for Q2 2021, a significant turnaround from a $68 million comprehensive loss in Q2 2020, driven by unrealized gains on available-for-sale securities Comprehensive Income (Loss) Summary (in millions) | Metric | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 | | :--- | :--- | :--- | :--- | :--- | | Net income (loss) | $(61) | $(106) | $(167) | $(439) | | Total other comprehensive income (loss) | $64 | $38 | $(12) | $131 | | Comprehensive income (loss) | $3 | $(68) | $(179) | $(308) | Consolidated Statement of Changes in Shareholders' Equity MBIA Inc.'s total shareholders' equity decreased by $172 million to a $36 million deficit for the six months ended June 30, 2021, primarily due to a net loss and accumulated other comprehensive income losses - Total shareholders' equity of MBIA Inc. declined from $136 million at the beginning of the period to a deficit of $(36) million at the end of the six months ended June 30, 202121 - The company did not repurchase any shares under its share repurchase program in the first six months of 2021, compared to acquiring 17.8 million shares for $136 million in the same period of 202021 Consolidated Statements of Cash Flows Net cash provided by operating activities significantly improved to $545 million for H1 2021, driven by $600 million from loan repurchase commitments, while investing and financing cash flows saw notable shifts Cash Flow Summary (in millions) | Cash Flow Activity | H1 2021 | H1 2020 | | :--- | :--- | :--- | | Net cash provided (used) by operating activities | $545 | $(89) | | Net cash provided (used) by investing activities | $(110) | $941 | | Net cash provided (used) by financing activities | $(255) | $(481) | | Net increase (decrease) in cash | $180 | $371 | - A key driver for the positive operating cash flow in H1 2021 was the receipt of $600 million from the settlement of loan repurchase commitments24 Notes to Consolidated Financial Statements These notes provide detailed explanations of the company's financial position and performance, covering business developments, litigation settlements, COVID-19 risks, loss reserves, fair value measurements, and segment performance Note 1: Business Developments and Risks and Uncertainties This note details significant business events and risks, including Puerto Rico debt restructuring, a $600 million Credit Suisse litigation settlement, and ongoing uncertainties from the COVID-19 pandemic - National paid aggregate gross claims of $277 million in H1 2021 related to defaults on its insured Puerto Rico bonds28 - As of June 30, 2021, National had $2.9 billion of debt service outstanding related to Puerto Rico28 - In February 2021, MBIA Corp. received a $600 million settlement payment from Credit Suisse, resolving litigation over ineligible loans in an RMBS transaction34 - The company continues to assess the financial impact of the COVID-19 pandemic, noting that adverse macroeconomic factors could materially affect the performance of its insured portfolios, particularly those sensitive to economic slowdowns38 Note 4: Variable Interest Entities This note details the company's involvement with Variable Interest Entities (VIEs), reporting consolidated VIE assets of $218 million and liabilities of $450 million, with a maximum exposure to loss of $3.2 billion for nonconsolidated VIEs Consolidated VIEs (in millions) | Metric | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Assets of consolidated VIEs | $218 | $830 | | Liabilities of consolidated VIEs | $450 | $623 | - The company's maximum exposure to loss for nonconsolidated VIEs was $3.2 billion as of June 30, 2021, down from $4.3 billion at year-end 20206567 - This exposure is primarily related to financial guarantees on global structured finance obligations6567 Note 5: Loss and Loss Adjustment Expense Reserves This note details the methodology for estimating loss reserves, which decreased to $954 million, and insurance loss recoverable, which decreased to $1.56 billion, influenced by Puerto Rico and structured finance exposures Loss and LAE Reserves and Recoveries (in millions) | Metric | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Loss and LAE reserves | $954 | $990 | | U.S. Public Finance | $484 | $469 | | International & Structured Finance | $470 | $521 | | Insurance loss recoverable | $1,561 | $1,677 | | U.S. Public Finance | $1,226 | $1,220 | | International & Structured Finance | $335 | $457 | - For the six months ended June 30, 2021, loss and LAE reserves declined primarily due to payments on Puerto Rico exposures and the impact of higher risk-free rates on RMBS reserves, partially offset by unfavorable changes in recovery assumptions for Puerto Rico89 - The 'Classified List' surveillance category contains the vast majority of risk, with $4.3 billion in gross insured contractual payments outstanding and a gross claim liability of $983 million as of June 30, 202199 Note 6: Fair Value of Financial Instruments This note details the fair value measurement of financial instruments, with total assets at $3.36 billion and liabilities at $566 million as of June 30, 2021, including significant Level 3 valuations Fair Value Hierarchy Summary as of June 30, 2021 (in millions) | Category | Level 1 | Level 2 | Level 3 | Total | | :--- | :--- | :--- | :--- | :--- | | Total Assets at Fair Value | $1,198 | $2,010 | $150 | $3,358 | | Total Liabilities at Fair Value | $0 | $171 | $395 | $566 | - Level 3 assets decreased significantly from $744 million at year-end 2020 to $150 million at June 30, 2021, primarily due to the settlement of 'Loan repurchase commitments' which were valued at $604 million140154 - The company elected the fair value option for certain financial instruments, including VIE loans and notes, resulting in a net loss of $1 million from these instruments for Q2 2021165168 Note 7: Investments This note details the company's investment portfolio, primarily available-for-sale fixed-maturity securities, with a fair value of $2.47 billion as of June 30, 2021, and no allowance for credit losses established Available-for-Sale (AFS) Investments as of June 30, 2021 (in millions) | Metric | Amount | | :--- | :--- | | Amortized Cost | $2,335 | | Gross Unrealized Gains | $146 | | Gross Unrealized Losses | $(8) | | Fair Value | $2,473 | - As of June 30, 2021, 35 securities were in an unrealized loss position for twelve months or longer183 - The company concluded it does not have the intent to sell these securities and it is more likely than not that it would not have to sell them before recovery184 - The company did not establish an allowance for credit losses for AFS securities as of June 30, 2021, nor did it purchase any credit-deteriorated assets during the first half of the year188 Note 8: Derivative Instruments The company uses derivative instruments, primarily interest rate swaps and insured credit derivatives, with a total notional amount of $2.44 billion and a net liability fair value of $140 million as of June 30, 2021 Derivative Instruments Outstanding as of June 30, 2021 (in millions) | Instrument Type | Notional Amount | Fair Value Asset | Fair Value Liability | | :--- | :--- | :--- | :--- | | Insured swaps | $1,719 | $0 | $(1) | | Interest rate swaps | $427 | $1 | $(139) | | Interest rate swaps-embedded | $243 | $0 | $(9) | | Currency swaps-VIE | $51 | $8 | $0 | | Total | $2,440 | $9 | $(149) | - As of June 30, 2021, the company had posted securities with a fair value of $166 million as collateral to derivative counterparties207 Note 10: Business Segments MBIA operates in U.S. Public Finance, Corporate, and International/Structured Finance segments, with Q2 2021 showing U.S. Public Finance income of $57 million and losses in Corporate and International segments Segment Income (Loss) Before Income Taxes for Q2 2021 (in millions) | Segment | Q2 2021 | Q2 2020 | | :--- | :--- | :--- | | U.S. Public Finance Insurance | $57 | $(27) | | Corporate | $(19) | $(19) | | International and Structured Finance Insurance | $(97) | $(60) | | Eliminations | $(2) | $0 | | Consolidated | $(61) | $(106) | - The U.S. Public Finance segment's profitability in Q2 2021 was driven by a significant benefit from 'Losses and loss adjustment' of $(42) million, compared to an expense of $72 million in Q2 2020237239 Note 13: Commitments and Contingencies This note updates significant legal matters, including a $600 million Credit Suisse settlement, ongoing lawsuits related to Lynn Tilton, and complex legal proceedings concerning Puerto Rico's debt restructuring - The litigation MBIA Insurance Corp. v. Credit Suisse was settled in February 2021, with Credit Suisse paying MBIA Corp. $600 million255 - Multiple legal proceedings involving Lynn Tilton and the Zohar Funds remain active, including claims of fraudulent inducement and equitable subordination256257258259 - The company is deeply involved in litigation related to the Puerto Rico debt crisis, with active cases concerning PREPA, PBA, HTA, and GO bonds260266267271 - Many of these are stayed pending restructuring negotiations and court approvals260266267271 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition and results, covering COVID-19 impacts, Puerto Rico restructurings, the Credit Suisse settlement, non-GAAP measures, segment performance, capital resources, and liquidity management Executive Overview The executive overview highlights continued COVID-19 uncertainty, key business developments including $277 million in Puerto Rico claims and a $600 million Credit Suisse settlement, and a Q2 2021 GAAP net loss of $61 million - National paid $277 million in gross claims on defaulted Puerto Rico bonds during the first half of 2021289 - MBIA Corp. received a $600 million settlement from Credit Suisse in February 2021293 Financial Highlights (in millions) | Metric | Q2 2021 | Q2 2020 | | :--- | :--- | :--- | | Net income (loss) | $(61) | $(106) | | Adjusted net income (loss) (Non-GAAP) | $37 | $(72) | Results of Operations This section details financial results, showing an improved Q2 2021 consolidated net loss of $61 million due to lower insurance loss expenses, and introduces non-GAAP measures like Adjusted Net Income and Adjusted Book Value - The decrease in consolidated total expenses for Q2 2021 was driven by a significant reduction in net insurance loss and LAE, which were $9 million compared to $136 million in Q2 2020310 - The company uses non-GAAP Adjusted Net Income (ANI) which removes the results of the international segment and certain mark-to-market items317 - For Q2 2021, ANI was $37 million versus a GAAP net loss of $61 million318 - Management also uses Adjusted Book Value (ABV) per share, which adjusts GAAP book value for items like the negative book value of MBIA Corp and unrealized gains/losses321 - GAAP book value per share was $(0.66) as of June 30, 2021324 Capital Resources The company's total capital resources were $1.3 billion as of June 30, 2021, with National's statutory capital stable at $2.0 billion and MBIA Insurance Corporation's capital decreasing to $160 million, alongside $1.1 billion in unpaid surplus note interest - The company's Board of Directors has no current authorization for share repurchases413 - No shares were repurchased under the program in H1 2021414 Statutory Claims-Paying Resources (CPR) (in millions) | Entity | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | National | $3,106 | $3,115 | | MBIA Insurance Corporation | $786 | $992 | - As of July 15, 2021, there was $1.1 billion of unpaid interest on MBIA Insurance Corporation's Surplus Notes due to non-approval from the NYSDFS430 Liquidity The company manages liquidity on a legal-entity basis, with National holding $2.1 billion in cash and investments, MBIA Inc. at $238 million, and MBIA Corp.'s liquidity increasing to $664 million due to the Credit Suisse settlement Liquidity Position by Entity (in millions) | Entity | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | National (Cash & Investments) | $2,100 | Not Stated | | MBIA Inc. (Holding Co.) | $238 | $294 | | MBIA Corp. (Cash & Investments) | $664 | $243 | - Consolidated net cash provided by operating activities was $545 million for H1 2021, primarily due to the $600 million received from the Credit Suisse litigation settlement451 - MBIA Inc. expects National to be its primary source of payments, but dividends are limited442 - MBIA Inc. does not expect to receive dividends from MBIA Corp442 Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks include interest rate, foreign exchange, and credit spread exposures, with no material changes reported since December 31, 2020 - The company's main market risks are interest rate, foreign exchange, and credit spread risks462 - There were no material changes in market risk exposure since the year-end 2020 report462 Controls and Procedures The company concluded its disclosure controls and procedures were effective as of June 30, 2021, with no material changes to internal control over financial reporting during the quarter - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period463 - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are likely to materially affect, these controls463 PART II OTHER INFORMATION Legal Proceedings This section refers to Note 13 for detailed discussion of the company's legal proceedings and related matters, with selected information available on the company's website - For details on legal proceedings, the report directs readers to Note 13 of the financial statements465 Risk Factors This section supplements risk factors, emphasizing ongoing fiscal stress for public finance issuers and significant risks from Puerto Rico exposures, including debt restructuring uncertainties - A key risk is the fiscal stress experienced by public finance issuers, which could lead to increased credit losses467 - This is particularly acute for jurisdictions with underfunded pension liabilities468 - The company highlights significant risk from its Puerto Rico exposure, where National had $2.9 billion of debt service outstanding as of June 30, 2021471 - The company paid $277 million in claims on Puerto Rico bonds in H1 2021471 - Uncertainty surrounds the effectiveness and timing of restructuring agreements for Puerto Rico's GO, PBA, HTA, and PREPA debt, which could materially impact National's losses473474 Unregistered Sales of Equity Securities and Use of Proceeds During Q2 2021, the company repurchased a small number of shares in open market transactions related to its non-qualified deferred compensation plan, not as part of a publicly announced repurchase program Share Purchases in Q2 2021 | Month | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | April | 86 | $10.00 | | May | 97 | $9.46 | | June | 86 | $10.51 | | Total | 269 | $9.97 | - The shares purchased were related to the company's non-qualified deferred compensation plan and not part of a publicly announced share repurchase program477 Exhibits This section lists exhibits filed with the Form 10-Q, including CEO and CFO certifications and XBRL interactive data files - The exhibits include certifications from the Chief Executive Officer and Chief Financial Officer as required by the Sarbanes-Oxley Act478479480 - Interactive Data Files (XBRL) are also included as part of the filing480