Executive Summary / Key Takeaways

• The PREPA Overhang Dominates Everything: MBIA's path to maximizing shareholder value—likely through a sale of its National subsidiary—remains blocked by $425 million of gross par exposure to Puerto Rico's bankrupt electric utility, where legal and political uncertainty has dragged on for eight years and counting.

• National Shows Life While MBIA Corp Drags: The U.S. Public Finance Insurance segment generated $65 million of pre-tax income in Q3 2025, a dramatic turnaround from a $14 million prior-year profit, driven by a $54 million benefit from selling PREPA claims above prior estimates. Meanwhile, MBIA Corp's structured finance runoff continues to bleed, posting a $60 million quarterly loss and eroding statutory capital to just $79 million.

• Trapped Value at the Holding Company: MBIA Inc. holds $354 million in unencumbered cash and retains $71 million in share repurchase authorization, but cannot access National's $994 million in statutory capital without regulatory approval. Management has explicitly tied future special dividends and a potential company sale to "substantially reducing" PREPA uncertainty.

• Valuation Reflects Binary Outcomes: At $7.67 per share, MBIA trades at 4.35x sales and 7.59x operating cash flow, but negative book value per share of -$43.17 masks the economic reality. Management's adjusted book value calculation suggests the market is pricing in either a catastrophic PREPA outcome or indefinite delay, creating potential asymmetry for investors if resolution emerges.

• Two Critical Levers for 2026: The investment thesis hinges on (1) whether the newly reconstituted Puerto Rico Oversight Board can reach a consensual PREPA plan that validates National's remaining reserves, and (2) whether NYSDFS allows National to upstream capital through special dividends or strategic alternatives before MBIA Corp's liquidity constraints intensify.

Setting the Scene: A Financial Guarantor in Runoff Mode

MBIA Inc., founded in 1973 and headquartered in Purchase, New York, operates as a shadow of its former self in the financial guarantee insurance industry. The company makes money by providing unconditional and irrevocable guarantees of principal and interest payments on municipal bonds and structured finance obligations. When an insured issuer defaults, MBIA pays bondholders and seeks recovery through subrogation. This business model generated enormous profits before 2008 but collapsed during the financial crisis, leaving MBIA with a bifurcated structure: a viable U.S. public finance insurer (National Public Finance Guarantee Corporation) and a distressed structured finance runoff vehicle (MBIA Insurance Corporation).

The industry structure highlights the significance of this. Financial guarantee insurance is now a concentrated oligopoly dominated by Assured Guaranty , which captures the majority of new municipal bond insurance with AAA-rated subsidiaries and generates mid-teens ROE. MBIA and Ambac survive as legacy players managing runoff portfolios, with no meaningful new business since 2008. This creates a fundamental strategic divergence: while AGO grows through new premiums, MBIA's only value creation comes from minimizing losses on old policies and efficiently deploying excess capital. The problem is that MBIA Corp's $2.1 billion of remaining insured gross par and $326 million in claims-paying resources represent a potential liability that constrains the entire enterprise.

MBIA's place in the value chain is precarious. Issuers no longer need guarantors like they did pre-crisis; municipal credit quality has improved, and alternative credit enhancement (bank letters of credit, direct bank lending) has displaced traditional bond insurance. Penetration rates have fallen below 5% of new issuance, meaning MBIA's expertise in complex legacy exposures—particularly Puerto Rico—is its only remaining competitive moat. This moat, however, has become a prison.

The PREPA Overhang: Why $425 Million Paralyzes a $387 Million Company

The Puerto Rico Electric Power Authority (PREPA) exposure is not just another legacy asset; it is the singular factor determining MBIA's strategic options. When PREPA entered Title III bankruptcy proceedings, National held roughly $1.3 billion of gross par exposure. Through claim payments, subrogation, and the July/August 2025 sale of $374 million face amount of bankruptcy claims, National has reduced this to $425 million. The sale price exceeded prior estimates, triggering a $54 million loss and LAE benefit in Q3 2025 that transformed National's profitability.

Why does this detail matter? Because management has explicitly stated that "substantially reducing the uncertainty regarding PREPA" is "likely required" to sell the company and maximize shareholder value. The market has internalized this message, pricing MBIA's stock as a binary option on PREPA resolution rather than a going concern. The $374 million claim sale was significant not just for risk reduction but for price discovery: it revealed that third-party investors value these claims more highly than MBIA's own loss reserves had assumed, suggesting potential upside to remaining reserves.

The legal landscape remains treacherous. The First Circuit affirmed bondholder liens in November 2024, strengthening National's position. However, the Financial Oversight and Management Board (FOMB) faces a quorum crisis: only four members currently serve, but five are required to approve a confirmation plan. President Trump's dismissal of six board members in August 2025, followed by a preliminary injunction reinstating three, has created paralysis. As CEO William Fallon noted, "the path and timing of that resolution remains largely uncertain," and the Oversight Board is "currently shorthanded."

What does this imply for risk/reward? The delay extends the holding period for investors, during which MBIA must service corporate debt and fund operations without access to National's capital. However, it also preserves optionality: if a favorable plan emerges, the stock could re-rate dramatically as the path to monetization clears. The downside risk is that prolonged litigation or an adverse plan could force National to increase reserves, eroding its $994 million statutory capital base.

Financial Performance: National's Turnaround vs. MBIA Corp's Decay

National's Q3 2025 results demonstrate the earnings power trapped behind PREPA uncertainty. The segment generated $65 million of pre-tax income on just $15 million of revenue, a 433% margin that reflects the runoff nature of the business. The $54 million LAE benefit from PREPA claim sales drove the swing from a $14 million prior-year profit, but even excluding this, core operations improved as the insured portfolio amortized. Gross par outstanding declined $2.1 billion to $23.2 billion, reducing risk, while statutory capital increased $82 million to $994 million.

This implies National is a self-fortifying asset. As claims are resolved and the portfolio runs off, capital is released and can be upstreamed to MBIA Inc. or returned to shareholders. The leverage ratio improved from 28:1 to 23:1, indicating a stronger capital cushion. However, this strength is unusable until regulators are satisfied that PREPA is resolved. Management's commentary that they "probably would want more certainty around PREPA, before we went for a special dividend" reveals the regulatory constraint.

MBIA Corp tells the opposite story. The structured finance segment posted a $60 million pre-tax loss in Q3, driven by fair value losses on investments and a $25 million statutory loss due to reduced Zohar CDO recoveries. Statutory capital fell $9 million to just $79 million, while claims-paying resources declined $30 million to $326 million. This matters because MBIA Corp has not had statutory capacity to pay dividends since 2009, and the NYSDFS has not approved interest payments on its $953 million of surplus notes since 2013, with $1.7 billion of unpaid interest accrued as of October 2025.

The asymmetry is stark: National is a valuable franchise that could be worth hundreds of millions in a sale, while MBIA Corp is a potential liability that consumes holding company resources. The corporate segment's $13 million quarterly profit is illusory, driven by $5 million of fair value gains that could reverse. With $354 million of unencumbered cash declining from $380 million due to debt service, the holding company faces a slow-burn liquidity drain.

Capital Management: The Waiting Game Gets Expensive

MBIA's capital strategy reflects the PREPA-induced paralysis. In 2023, the company pushed $550 million from National to shareholders via a special dividend, demonstrating the value that could be released. In 2024, MBIA Inc. spent $78 million repurchasing GFL euro-denominated notes and senior debt, reducing leverage. National paid a $69 million as-of-right dividend in December 2024. Yet as of October 2025, $71 million of share repurchase authorization remains unused.

Why the hesitation? Management learned from a failed sale process three years ago that "getting money from National and off the holding company was probably better done before we sell the company." The PREPA claim sale was timed to increase marketability—creating tradeable custodial receipts with CUSIP numbers —so that "if we found attractive prices to transact at," MBIA could accelerate risk reduction. This reveals a deliberate strategy: reduce PREPA exposure piecemeal while awaiting a catalytic resolution.

The cost of waiting is measurable. MBIA Inc.'s unencumbered cash declined $26 million in nine months due to debt payments. At this pace, the holding company has roughly 10 years of runway before exhausting its liquidity, but this ignores potential MBIA Corp capital calls or adverse PREPA developments. More importantly, the opportunity cost is substantial: National's $994 million of statutory capital could support a sale price well above MBIA's $387 million market cap, but buyers won't engage while PREPA uncertainty persists.

Competitive Context: Why National Is Worth More as a Standalone

Comparing MBIA to Assured Guaranty (AGO) and Ambac (AMBC) clarifies the valuation gap. AGO trades at 4.56x enterprise value to revenue with 44% profit margins, 7.41% ROE, and a 1.51% dividend yield. It dominates new issuance with AAA ratings and generates consistent profits. AMBC, more comparable to MBIA, trades at 0.96x EV/revenue with breakeven margins and -5.76% ROE, reflecting its own legacy struggles.

MBIA trades at 4.35x price-to-sales and 7.59x price-to-operating-cash-flow, suggesting the market values it more like AGO than AMBC. This is illogical given its runoff status and negative GAAP equity. The explanation lies in the adjusted book value calculation: management removes MBIA Corp's -$52.64 per share negative book value and AOCI adjustments to present a more favorable picture. While this is legitimate for economic analysis, it highlights the binary nature of the investment.

National's competitive position is stronger than AMBC's but weaker than AGO's. Its A2 Moody's rating and 23:1 leverage ratio are adequate for runoff but insufficient for new business. The $1.5 billion in claims-paying resources provides a substantial cushion against PREPA losses, but the single risk limit non-compliance under New York Insurance Law prevents any new financial guarantee business. This regulatory constraint eliminates growth optionality, making National a pure runoff asset.

For investors, this means National's value is best realized through sale or liquidation, not continued operation. AGO would never acquire MBIA Corp's liabilities, but it might pay for National's clean municipal portfolio and surveillance infrastructure. The $374 million PREPA claim sale price—above prior estimates—suggests strategic buyers see value that the stock market doesn't, likely due to the timeline uncertainty.

Risks and Asymmetries: Where the Thesis Breaks

The primary risk is PREPA resolution adverse to bondholders. If the Oversight Board proposes a plan that subordinates National's liens or extends recovery timelines, the company could face reserve increases that erode statutory capital. Management acknowledges that "in the event of a substantially different confirmed plan for PREPA, National's PREPA loss reserves and recoveries could be materially adversely affected." Given that 90% of bondholders oppose the current plan, the probability of a subordinating plan appears low, but political pressure from Puerto Rico's governor and the Trump administration creates uncertainty.

Regulatory risk is equally material. The NYSDFS could conclude that MBIA Insurance Corporation cannot pay policyholder claims, initiating rehabilitation or liquidation proceedings. This would trigger termination of derivative contracts, acceleration of debt, and loss of control for MBIA Corp. While MBIA Inc. is legally separate, the reputational and potential financial contagion could impair National's value. The fact that MBIA Corp lacks sufficient qualifying assets to support its contingency reserves under NYIL increases this risk.

The Oversight Board's quorum issues create timeline risk. With only four members and a lawsuit pending, the bankruptcy court cannot confirm a plan. Fallon noted that "it looked as though there was low probability right now that we would reach a consensual deal in the near term." Every month of delay costs MBIA approximately $3 million in holding company expenses and foregone investment income on trapped capital.

The asymmetry favors patient investors. Upside scenarios include: (1) a favorable PREPA plan that validates reserves and triggers a National sale at 0.5x-0.7x claims-paying resources ($750M-$1B value), (2) continued claim sales at premiums to book value, or (3) regulatory approval for a large special dividend. Downside scenarios involve adverse PREPA developments ($100M+ reserve hit) or NYSDFS action on MBIA Corp, either of which could impair the stock by 30-50%.

Valuation Context: Pricing a Binary Outcome

At $7.67 per share, MBIA's $387 million market capitalization sits below the $354 million of unencumbered cash at the holding company, effectively valuing National and MBIA Corp at just $33 million. This makes no sense unless the market assigns high probability to a catastrophic outcome.

National's $994 million of statutory capital and $1.5 billion in claims-paying resources provide a floor. In a runoff scenario, these resources will be released over time as insured bonds mature without default. If we assume a 10-year runoff and a 5% discount rate, the present value of National's capital is roughly $600-800 million. The $374 million PREPA claim sale, executed at a premium to book, validates that these assets have realizable value.

The valuation disconnect arises from three factors: (1) MBIA Corp's negative book value of -$52.64 per share creates GAAP insolvency, (2) regulatory constraints prevent capital upstreaming, and (3) PREPA uncertainty scares away strategic buyers. Management's adjusted book value calculation—removing MBIA Corp's negative value and AOCI—attempts to show economic reality, but the stock market prices the regulatory risk.

Comparing multiples is instructive. AGO trades at 16.08x price-to-operating-cash-flow with positive margins; MBIA trades at 7.59x despite losses, suggesting the market sees through GAAP to cash generation potential. The enterprise value of $3.34 billion is 2.2x National's claims-paying resources, a reasonable multiple for a runoff insurer if PREPA is resolved. AMBC trades at 0.96x EV/revenue with worse margins, making MBIA's 37.58x EV/revenue appear inflated—until you realize revenue is nearly irrelevant compared to capital release.

Conclusion: A Option on Puerto Rico's Political Will

MBIA is not a normal insurance company; it is a litigation-linked option on the resolution of Puerto Rico's bankruptcy and the regulatory treatment of legacy structured finance. The $7.67 stock price reflects a market assumption that PREPA uncertainty will persist indefinitely or resolve adversely. This assumption may prove wrong.

National's Q3 2025 performance demonstrates that the core franchise can generate substantial profits when legacy claims are resolved. The $54 million benefit from PREPA claim sales proves that third-party buyers see value where GAAP accounting shows uncertainty. The $994 million of statutory capital is real, tangible, and potentially accessible if regulators gain comfort with PREPA's outcome.

The investment thesis is simple but not easy: buy a dollar of runoff assets for less than the value of the holding company cash, and wait for Puerto Rico's political process to catch up to its legal reality. The upside is a National sale or dividend that returns 2-3x the current stock price. The downside is a PREPA plan that impairs capital or a regulatory seizure of MBIA Corp that traps value indefinitely.

The critical variables to monitor are the Oversight Board's composition and the Title III court's handling of administrative expense claims. If the three reinstated members regain full authority, a bondholder-friendly plan becomes more likely. If not, the timeline extends and the stock will continue to trade at a discount to liquidation value. For investors willing to underwrite political risk in Puerto Rico, MBIA offers a uniquely asymmetric payoff in a market starved for true value.