Runoff Portfolio And PREPA Resolution Will Shape Future Earnings Trajectory

Catalysts

About MBIA

MBIA provides financial guarantee insurance and related services on public finance and structured finance obligations.

What are the underlying business or industry changes driving this perspective?

• The runoff of National's insured portfolio, with gross par declining to about $23.2 billion and leverage already at 23 to 1, limits opportunities to grow new premium volume and is expected to cap future revenue expansion even as legacy risks normalize.
• Continued uncertainty and legal complexity around PREPA, including shifting bondholder coalitions and Board governance disputes, prolong the resolution timeline and keep capital tied up, which can suppress net margins through elevated legal and operating costs.
• Pressure on recoveries from structured finance exposures such as the Zohar CDOs, evidenced by lower expected recoveries and related losses, suggests ongoing volatility in realized gains and losses that could weigh on earnings quality and book value per share.
• Regulatory oversight from the Department of Financial Services on special dividends and capital movements from National to the holding company may delay or limit capital returns, constraining the pace at which earnings can translate into distributable equity for shareholders.
• The shrinking scale of MBIA Insurance Corp., with declining gross par and reduced claims paying resources, reduces diversification and operating leverage, which can raise unit costs and pressure consolidated net margins as the franchise winds down.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming MBIA's revenue will remain fairly flat over the next 3 years.
• Analysts assume that profit margins will increase from -188.2% today to 64.6% in 3 years time.
• Analysts expect earnings to reach $58.3 million (and earnings per share of $-3.49) by about December 2028, up from $-175.0 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 9.3x on those 2028 earnings, up from -2.1x today. This future PE is lower than the current PE for the US Insurance industry at 12.8x.
• Analysts expect the number of shares outstanding to decline by 0.94% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.5%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• A faster than expected resolution of PREPA, combined with higher than currently reserved recoveries, could unlock capital tied up at National and materially improve earnings and net margins, leading to upside in the share price.
• Regulatory approval for additional special dividends from National to the holding company, on top of the as of right dividends, could accelerate capital returns and make the equity more attractive, supporting a higher valuation and stronger total shareholder return.
• A renewed or more formal strategic sale process, now with substantially reduced Puerto Rico exposure and a clearer PREPA outlook, could result in a takeover premium and re rate MBIA above its current book value and earnings multiple.
• Management’s willingness and capacity to deploy the remaining 71 million share repurchase authorization if the stock trades below intrinsic value could shrink the float, boost earnings per share and support a higher share price over time.
• Continued runoff of weaker blocks at MBIA Insurance Corp. while maintaining statutory surplus above regulatory thresholds could reduce perceived tail risk, improve confidence in long term claims paying resources and support a higher price to book and price to earnings multiple.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $7.75 for MBIA based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $90.4 million, earnings will come to $58.3 million, and it would be trading on a PE ratio of 9.3x, assuming you use a discount rate of 12.5%.
  
• Given the current share price of $7.36, the analyst price target of $7.75 is 5.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.