MBIA Inc.'s operating income in the fourth-quarter and 2015 fell by more than 50%, as the bond insurer reduced its Puerto Rico exposure and created shareholder value through buy backs.
National Public Finance Guarantee, the muni only arm of MBIA, gained steam as it increased the number of transactions wrapped in each successive quarter.
"There are always a lot of moving parts in any given quarter, but the declines translate into an increase in reserves and in this case, regards to their Puerto Rico exposure," said Mark Palmer, analyst at BTIG LLC. "The small declines are not going to the move the needle."
Combined income for the fourth quarter fell to $10 million or $0.07 a share from $22 million or $0.12 a share a year earlier, , according to a Feb. 29 press release. It fell to $87 million or $0.52 a share for the year ended Dec. 31, from $185 million or $0.97 a share for the year ended Dec. 31, 2014.
"We remain confident in the financial stability of National and the holding company, notwithstanding our disappointment with the decline in combined operating income for this quarter," said Chuck Chaplin, president and chief financial officer of MBIA. "National is well-positioned for future growth. In addition, the significant reduction in our common shares outstanding that has resulted from our buyback activities will magnify the effects of future growth for MBIA's shareholders."
The company said the declines were driven primarily by the release of a $61 million tax reserve and the receipt of an $18 million recovery on an errors and omissions insurance policy that both occurred in 2014 and a $15 million unfavorable variance in losses and loss adjustment expenses. The loss for the fourth quarter was driven primarily by the $15 million unfavorable variance in losses and loss adjustment expenses, according to the company.
The decline in combined operating income for 2015 compared to 2014 was driven primarily by the release of a $61 million tax reserve and the receipt of an $18 million recovery on an errors and omissions insurance policy that both occurred in 2014 and a $15 million unfavorable variance in losses and loss adjustment expenses.
Net income rose to $82 million, or $0.54 a share, in the fourth quarter, from $20 million, or $0.10 a share a year earlier. Net income for fiscal 2015 slipped to $180 million or $1.06 a share from $569 million or $2.94 a share for fiscal 2015.
"On the new business front, we've continued to build momentum," said National's chief executive officer Bill Fallon in the release. "Our fourth quarter policies and premiums written both improved over the prior quarter."
National's net income fell to $51 million for the quarter from $63 million a year earlier, while its operating income dropped to $44 million for the quarter in 2015 from $56 million the previous year.
"The decline in GAAP net income was primarily due to an unfavorable variance of $15 million for losses and loss adjustment expenses," said the release.
National insured $158 million of par value in the primary and secondary markets, combined, during the fourth quarter of 2015 and almost $600 million of par value for the year. The company attributed low interest rates, narrow credit spreads and competitive insurance pricing to the declines.
"These will continue to adversely impact our opportunity to insure significantly greater amounts of new business at attractive returns," the release stated.
National did gain momentum as far as number of transactions per quarter during 2015. It wrapped five transactions in the first quarter, nine in the second, 19 in the third and closed the year with 26.
"We do have positive momentum and in December of 2015, we reached a milestone when we reached the $1 billion mark for new business written," said Fallon during the conference call for investors on March 1. "We need to maintain underwriting discipline but we see steady positive growth for the industry over the next few years and we will continue to strengthen the balance sheet, relative to our exposure."
On the remediation front, National continues to devote significant resources to resolving its Puerto Rico exposures, said Fallon.
"We've reached an important agreement with [Puerto Rico Electric Power Authority] which remains subject to certain conditions before it can be implemented and we continue to work with our other Puerto Rico credits in an effort to address their financial and liquidity challenges."
Palmer's biggest takeaway concerning National was the increase in policies written in each quarter
"They are moving in the right direction. They took a different approach when they first started writing new business by being selective on deals and now they are doing deals in the $10-$25 million range and they are finding new business," Palmer said.
For MBIA the highlight was reduced exposure to the Puerto Rico and its aggressive buyback plan, Palmer said.
"If you do the math on MBIA's exposure to Puerto Rico - subtracting $1.4 billion of PREPA out of$ 3.8 billion, MBIA could take a decent hit and still keep going," he said. "It is getting down to the point where they have significantly reduced their exposure and the math is looking more constructive. MBIA has also opportunistically bought back its shares and created shareholder value in the process."
