MBIA Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; filed August 8, 2012. MBIA provides financial guarantee insurance and asset-management services. Insurance operations are largely in run-off, and the company reported that it had not written meaningful new insurance business since 2008.
Key financial results
| Metric | Q2 2012 | Six months 2012 | Comparable 2011 |
|---|---|---|---|
| Total revenue | $1.039 billion | $1.422 billion | Q2: $98 million; six months: $(1.510) billion |
| Net income (loss) | $581 million | $591 million | Q2: $137 million; six months: $(1.138) billion |
| Diluted EPS | $2.98 | $3.03 | Q2: $0.68; six months: $(5.70) |
| Adjusted pre-tax income (loss), non-GAAP | $(152) million | $(700) million | Q2: $161 million; six months: $185 million |
| Operating cash flow | $(790) million for six months | $(681) million | |
| Investing cash flow | $2.445 billion for six months | $2.241 billion | |
| Financing cash flow | $(1.874) billion for six months | $(1.329) billion |
Reported earnings were substantially affected by volatile fair-value movements in insured derivatives. The six-month $1.074 billion net gain on insured derivatives included $1.506 billion of unrealized gains, partly offset by $432 million of realized losses and settlements. Management attributed gains in part to commutations below fair value, the effect of MBIA’s own credit spreads and recovery-rate assumptions, and favorable collateral pricing. Adjusted pre-tax results remained losses; the filing does not provide a meaningful conventional operating margin for this insurance business.
Balance sheet, debt and liquidity
- At June 30, total assets were $22.295 billion, liabilities $19.770 billion, and total equity $2.525 billion; MBIA Inc. shareholders’ equity was $2.503 billion. At December 31, 2011, assets were $26.873 billion and liabilities $25.150 billion. The decline largely reflects run-off and reductions in consolidated variable-interest-entity balances.
- Cash and cash equivalents on the balance sheet were $269 million, excluding $145 million held by consolidated VIEs. The cash-flow statement reports $414 million at period-end, including VIE cash. Investments totaled $7.104 billion.
- Debt and funding liabilities included $1.837 billion of long-term debt, $1.566 billion of medium-term notes, $1.171 billion of investment agreements, and $7.227 billion of VIE notes. Repurchase-agreement balances fell from $287 million at year-end to zero.
- MBIA Inc. reported liquidity of $336 million: $290 million available for general corporate purposes and $46 million not directly pledged for asset/liability products. Management believed this was sufficient for expected obligations for at least 12 months, while warning of material liquidity risks.
- MBIA Corp. had $534 million of cash and highly liquid assets; National had $352 million of highly liquid assets. These resources are held in separate regulated entities and are not freely interchangeable.
- MBIA Inc.’s asset/liability products deficit of invested assets to liabilities was $802 million, up from $591 million at year-end. The non-GAAP measure excludes certain balance-sheet items and is not equivalent to the segment’s GAAP book-value deficit.
Changes, outlook and material risks
- Results versus 2011: The move to six-month GAAP net income from a large loss primarily reflects the swing in derivative fair-value results. Meanwhile, adjusted pre-tax loss worsened to $700 million from $185 million of income, as management cited higher insurance and derivative losses, litigation costs, and lower investment income.
- Claims and recoveries: MBIA Corp. paid $834 million in gross claims during the first half and commuted $12.8 billion of gross insured exposure. It recorded $3.2 billion of expected recoveries for ineligible mortgage loans, but had collected no material cash on these claims. The company’s $4.9 billion cumulative incurred losses related to ineligible loans exceed the recorded recovery estimate.
- Recovery uncertainty: ResCap, RFC and GMAC filed for Chapter 11 on May 14, 2012, staying related litigation. The put-back estimates depend on disputed contractual claims, litigation outcomes, timing and counterparties’ ability to pay. Management said ResCap-related expected recoveries had been reduced 8% from year-end.
- Credit exposures: MBIA Corp. had $15.7 billion of CMBS-pool and $2.5 billion of CRE CDO insured par exposure, plus approximately $2.9 billion of CRE loan pools. The filing highlights deteriorating exposures concentrated in transactions associated with Bank of America/Merrill Lynch and warns that claims could be substantial. Six-month estimated credit impairments and LAE on structured CMBS, CRE CDO and CRE loan pools increased by $454 million; cumulative estimated impairments were $3.2 billion.
- Ratings and new business: National was rated BBB with a developing outlook by S&P and Baa2 with a negative outlook by Moody’s. MBIA Insurance Corporation was rated B with a negative outlook by S&P and B3 under review for possible downgrade by Moody’s. The company did not expect significant new insurance business before ratings upgrades; timing and upgrades are uncertain.
- Capital and regulatory constraints: Statutory capital was $3.0 billion at National and $1.7 billion at MBIA Insurance Corporation. MBIA Corp.’s statutory capital fell from $2.3 billion at year-end, reflecting a $660 million statutory net loss. Intercompany support, dividends and reserve releases can require NYSDFS approval. National’s claims-paying resources were $5.7 billion; MBIA Corp.’s were $5.2 billion.
- Other unusual items: MBIA Corp. elected to defer interest on the $1.6 billion National Secured Loan, which carries a 7% rate and matures in December 2016. NYSDFS approval for MBIA Corp.’s July 2012 surplus-note interest payment arrived after the required notice date; approval of the January 2013 payment and its timing were not assured. MBIA reported a $1.4 billion net deferred tax asset, subject to realization estimates and a $194 million valuation allowance.
- Management outlook: Management described the U.S. recovery as losing momentum and expected reported results to remain volatile through the rest of 2012. It stated that MBIA Inc. expected liquidity to cover obligations for at least 12 months, but warned that stressed markets, collateral calls, asset sales at losses, delayed recoveries, or additional claims could undermine liquidity. No specific earnings or revenue guidance was provided.
- Legal matters: Litigation includes mortgage-loan recovery actions, the National transformation litigation, and other claims. The company said adverse rulings could materially affect its strategy and financial condition, and it could not estimate potential losses for certain cases. The Transformation Litigation’s Aurelius action was dismissed; another related proceeding had a decision pending.
Investor verification priorities
- Reconcile GAAP profit with the derivative mark-to-market effects and the company’s non-GAAP adjusted pre-tax loss.
- Track actual cash collections, court developments and counterparty capacity against the $3.2 billion recorded mortgage put-back recoveries, particularly after the ResCap bankruptcy.
- Review MBIA Inc., MBIA Corp. and National liquidity separately, including the $802 million asset/liability deficit, pledged assets, collateral requirements and regulatory limits on intercompany transfers.
- Monitor CMBS/CRE deterioration, especially Bank of America/Merrill Lynch exposures, claim payments, commutation activity and impairment assumptions.
- Verify statutory capital, ratings and NYSDFS approvals, including surplus-note payments and any further reserve releases or intercompany lending.
- Assess the assumptions supporting the $1.4 billion deferred tax asset and the timing and recovery of investment losses.