MBIA INC quarterly report, Q3 FY2011

MBIA Inc. — Form 10-Q Summary

Reporting period: Quarter and nine months ended September 30, 2011. Financial statements are unaudited. MBIA provides financial guarantee insurance and asset-management services; its insurance businesses have written little new business since 2008, and wind-down operations are being run off.

Financial results and position

Metric	Q3 2011	Q3 2010	Nine months 2011	Nine months 2010
Total revenue (loss)	$1.120 billion	$(191) million	$(390) million	$30 million
Net income (loss)	$444 million	$(213) million	$(693) million	$(398) million
Diluted earnings (loss) per share	$2.26	$(1.06)	$(3.50)	$(1.96)
Adjusted pre-tax income (loss), non-GAAP	$(430) million	$(24) million	$(244) million	$(66) million

Quarterly GAAP profit was driven chiefly by a $723 million net gain in the fair value of insured derivatives, compared with a $492 million loss in Q3 2010. Nine-month insured-derivative fair-value changes were a $1.130 billion loss. Management cautions that these marks are highly volatile and do not necessarily reflect expected claim payments.

Premiums: earned premiums were $176 million in Q3 2011 versus $137 million; $462 million for nine months versus $450 million. Net investment income was $92 million and $299 million, respectively, down from $113 million and $342 million in the comparable periods.
Losses: losses and loss-adjustment expense were $190 million in Q3 and $204 million for nine months, versus a $20 million benefit and $122 million of expense in the corresponding 2010 periods.
Cash flow: operating activities used $1.2 billion for the first nine months, versus $422 million used in 2010. Investing activities provided $2.791 billion and financing activities used $1.482 billion. Cash and cash equivalents, including consolidated VIE cash, ended at $1.239 billion; the balance sheet separately reports $659 million of company cash and $580 million of VIE cash.
Balance sheet: total assets were $29.370 billion, down from $32.279 billion at December 31, 2010; total equity was $2.375 billion and MBIA Inc. shareholders’ equity was $2.352 billion. GAAP book value was $12.17 per share, down from $14.18.
Debt and obligations: reported balances included $1.841 billion of long-term debt, $1.636 billion of medium-term notes, $1.635 billion of investment agreements, and $387 million of repurchase-agreement liabilities. Consolidated VIEs also reported $9.033 billion of notes and $360 million of long-term debt; these VIE obligations should be considered separately from parent-company debt.
Statutory capital and liquidity: National reported $2.609 billion of statutory capital and $5.488 billion of claims-paying resources. MBIA Insurance Corporation reported $2.649 billion of statutory capital and $3.852 billion of claims-paying resources, down from $5.244 billion at year-end 2010. Its cash and highly liquid assets were $824 million, versus $1.2 billion at year-end.
Asset/liability products: the segment had a $610 million deficit of invested assets at amortized cost relative to third-party and affiliate debt at amortized cost. Management reported Q3 deterioration in asset values and increased collateral requirements.

Material changes versus comparable periods

Q3 swung to GAAP profit from a loss, primarily because insured-derivative fair-value movements reversed from a large loss to a gain; the nine-month net loss widened to $693 million from $398 million.
Adjusted pre-tax losses worsened in both the quarter and nine-month period. Management attributed this mainly to lower insurance premiums and fees and increased insurance losses or derivative impairments, with period-specific effects from settlements.
MBIA Corp. commuted $12.2 billion of gross insured exposure during the first nine months. After September 30, it agreed to additional commutations totaling $10.6 billion, primarily commercial real estate; the filing says the agreed payments were within aggregate statutory reserves for those transactions.
Insurance loss reserves fell to $932 million from $1.129 billion at year-end, while the insurance loss recoverable rose to $2.770 billion from $2.531 billion. The recorded $2.8 billion of estimated recoveries on ineligible second-lien mortgage loans is disputed and litigation-dependent.
Total claims-paying resources at MBIA Insurance Corporation declined materially, while National’s statutory capital increased to $2.609 billion from $2.381 billion.
Common shares repurchased during the first nine months totaled 6.5 million for $50 million. The company also repurchased $122 million par value of GFL medium-term notes at about 80% of par.

Outlook, risks, contingencies and unusual items

Business outlook: management described the recovery as restrained and expected sluggish U.S. employment, housing and financial-sector conditions. It did not expect significant new insurance business before ratings upgrades; timing and ability to obtain upgrades are uncertain. S&P had announced revised insurer rating guidelines and expected to publish any rating changes by November 30, 2011.
Credit and liquidity risks: key exposures include commercial mortgage-backed securities and commercial real estate CDOs, residential mortgage-backed securities, and asset-backed CDOs. A weaker economy, declining property values, higher defaults or liquidations, or lower recoveries could increase losses and liquidity demands. Management says it believes resources are sufficient for expected obligations but warns adverse outcomes could materially affect capital, results and cash flows.
RMBS recoveries and litigation: the $2.8 billion of estimated put-back recoveries depends on successful claims against mortgage sellers and servicers, their ability to pay, and the timing and outcome of litigation. The company had incurred $4.6 billion of cumulative losses related to the ineligible loans and said actual recoveries could be materially lower or delayed.
CMBS estimates: statutory credit impairments for structured CMBS pools and CRE CDOs totaled an estimated $2.0 billion through September 30; additional impairments estimated for the first nine months were $858 million. Management noted uncertainty around ultimate losses and potential further deterioration.
Asset/liability support: after quarter-end, the NYDFS approved an extension of an intercompany secured loan’s maturity to May 2012, subject to a stated maximum outstanding amount of $450 million; the filing also reports a $600 million balance at September 30. The corporate segment subsequently contributed $50 million to the asset/liability products segment. The segment may need additional support, asset sales, or capital, and MBIA Corp. could be called upon under guarantees if liquidity proves insufficient.
Taxes: the company reported a $1.3 billion net deferred tax asset, net of a $342 million valuation allowance. Management cited volatility in financial results and uncertainty over tax treatment of credit-derivative losses as risks to realization.
Legal matters: major matters include litigation challenging National’s formation and the corporate transformation, mortgage put-back recovery suits, and other insurance, securities and antitrust cases. The filing says adverse rulings could materially affect the company; outcomes are uncertain. A proposed $68 million securities-litigation settlement was covered in full by D&O insurers, subject to final court approval.
Other notable items: NYDFS approval allowed MBIA Insurance Corporation to release $318 million of contingency reserves to surplus; without approval, the company says it would have lacked qualifying assets supporting those reserves. Controls and procedures were reported effective, with no material quarterly change in internal control over financial reporting.

Most important facts for investors to verify

Whether MBIA can collect the $2.8 billion of estimated RMBS recoveries, and how litigation outcomes, timing and counterparties’ ability to pay affect the recorded amount.
Whether MBIA Corp.’s statutory capital, liquidity and claims-paying resources can withstand further mortgage, CMBS and CRE losses and commutations.
The asset/liability products segment’s collateral needs, $610 million asset deficit, access to intercompany support and the post-quarter secured-loan extension terms and outstanding balance.
How much quarterly and future earnings depend on volatile Level 3 derivative valuations, including assumptions about MBIA’s own nonperformance risk and underlying collateral.
The effect of S&P’s revised methodology, insurer ratings and National-related litigation on new-business prospects, premium income and dividend capacity.
Whether deferred tax assets are realizable and whether any change in tax treatment or valuation allowance would materially affect equity.