Our investment in MBIA Inc. dates back to 2012, with an initial cost at about US$6.00 per share. It is one of the most interesting investments in a long time, and we have watched the company’s development with great attention over the years. To use a baseball analogy, we believe that we are somewhere in the sixth or seventh inning of the game. We are much closer to a more definitive resolution on the company’s various lawsuits with regards to the ongoing bankruptcy proceedings in restructuring the Puerto Rico bonds.
To understand the parent company MBIA Inc., one has to separate out its two principal subsidiaries – the “Good One” called National Public Finance Guarantee Corporation (“National”) and the “Bad One” called MBIA Insurance Corporation (“MBIA Corp.”). As far as our analysis shows, the parent company and National have been ring-fenced from the operations of MBIA Corp. since 2014. In the latest 10-K of MBIA Inc., the company stated that:
“Given the separation of MBIA Inc. and MBIA Corp. as distinct legal entities, the absence of any cross defaults between the entities, and the lack of reliance by MBIA Inc. on MBIA Corp. for the receipt of dividends, we do not believe that a rehabilitation or liquidation proceeding of MBIA Insurance Corporation by the NYSDFS would have any material economic impact on MBIA Inc.”
National’s primary business has been to provide financial guarantee insurance to the United States’ public finance markets, their financial guarantee insurance policies provide investors with unconditional and irrevocable guarantees of the payment of the principal, interest or other amounts owing on insured obligations when due. National has ceased pursuing the writing of new financial guarantee policies, and its primary activity today is to provide ongoing
surveillance, including remediation activity where warranted, of its existing insured portfolio of US$41.9 billion gross par outstanding as of December 31, 2020. This is the side of the business with exposure to the Puerto Rico bonds.
We won’t go into details of the “Bad One” MBIA Corp., but simply to highlight that its book value is negative US$31.97 per share as of year-end 2020.
We would like you to forget the operations of the companies for a second and concentrate on the following: the ferocity of the company’s share buybacks, the change in adjusted book value per share (“adjusted BVPS”) and the change in GAAP book value per share (“GAAP BVPS”) over the years.
| 2020 | 2019 | 2018 | 2017 | 2016 | 2015 | 2014 | |
| Shares Outstanding (Mils) | 53.7 | 79.4 | 89.8 | 91.5 | 135.2 | 151.5 | 191.9 |
| GAAP BVPS | $2.53 | $10.40 | $12.46 | $15.44 | $23.87 | $24.61 | $20.47 |
| Adjusted BVPS | $35.95 | $31.96 | $27.38 | $29.32 | $31.88 | $28.98 | $24.21 |
| Price Paid on Buybacks | $7.50 | $9.10 | $8.28 | $7.56 | $6.33 | $7.30 | $9.44 |
Source: Capital IQ and company filings, all currencies in USD.
As seen from the chart above, the number of shares outstanding were reduced significantly from 191.9 million shares to 53.7 million shares from 2014 to 2020. Also, notice the increase of adjusted BVPS from US$24.21 in 2014 to US$35.95 in 2020 and a decrease in GAAP BVPS from US$20.47 to US$2.53 over the same period.
We want to pay special attention to the adjusted BVPS because the financial impact of the “Bad One” is subtracted from the calculation. In our view, it should more closely represent the intrinsic value of the company. The GAAP BVPS of the combined company has decreased due to the decrease of the GAAP BVPS of the “Bad One” over the years. It is interesting to note how management has shifted its focus from highlighting how high the adjusted BVPS was up until 2018, to showcasing how low the GAAP BVPS was from 2019 onwards.
While the company explained it as an accounting change, the timing conveniently suits their purposes. Compare the company’s presentation of its financials in the 10-K before and after 2018:
To see charts, go here.
Although the parent company has used up the authorization to buy back shares, it still has another US$300 million at National that can be used for share buybacks. Assuming that management gets new authorization for more share buybacks at US$10 per share, the adjusted BVPS could then jump to a whopping US$68.80 per share. Such is the power of the buy backs when it is bought at such a low price relative to adjusted book value per share. What
management is doing with the amount of buybacks and the significant discount to adjusted BVPS is unprecedented in corporate history.
As for National’s business, it is an asset play that is in runoff. We believe the assets as presented by management are solid, and that there are potential tailwinds from the restructuring of the Puerto Rico bonds and the various lawsuits related to that.
In 2008, when MBIA Inc. got into trouble with its misadventures in toxic securities, MBIA was nicknamed “Management Brain Injury Association”. In a few years, that nickname will be buried forever.
From Francis Chou (Trades, Portfolio)'s Chou Associates Fund 2021 semiannual letter.
