MBIA INC quarterly report, Q1 FY2013

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MBIA Inc. — Q1 2013 Form 10-Q

Reporting period: Three months ended March 31, 2013; balance-sheet comparisons are with December 31, 2012. The unaudited filing covers a financial-guarantee insurer and asset-management adviser. Its insurance businesses were largely in runoff, with no meaningful new insurance production.

Financial performance and position

  • Results: Revenue was $219 million, down from $383 million. Pre-tax income was $215 million and net income was $164 million ($0.84 per diluted share), versus $21 million and $10 million ($0.05 per share), respectively, in Q1 2012. The 2013 result included a $194 million insurance loss and loss-adjustment expense benefit, compared with a $97 million expense in 2012; reported expenses netted to $4 million.
  • Key drivers: Net change in fair value of insured derivatives was a $61 million loss, versus a $299 million gain in 2012. Premiums earned fell to $120 million from $137 million, and net investment income declined to $38 million from $62 million. No conventional operating margin is presented; reported earnings are materially affected by fair-value movements and reserve changes.
  • Management’s non-GAAP measure: Adjusted pre-tax loss was $20 million, compared with a $548 million loss in Q1 2012. This measure excludes specified VIE consolidation and derivative fair-value effects and includes statutory-basis credit impairments; it is not a substitute for GAAP results.
  • Cash flow: Operating cash use was $78 million, compared with $233 million used in Q1 2012; investing activities provided $323 million, and financing activities used $301 million. Cash and cash equivalents were $862 million on the balance sheet, plus $72 million held in consolidated VIEs; the cash-flow statement reports $934 million at quarter-end.
  • Liquidity: MBIA Inc. reported $373 million of liquidity, up from $239 million at year-end, including $317 million available for general corporate purposes. National reported $440 million of liquidity. MBIA Corp. had $258 million of cash and liquid assets, down from $345 million.
  • Balance sheet and debt: Total assets were $21.6 billion, liabilities $18.3 billion, and total equity $3.3 billion. Reported obligations included $1.6 billion of medium-term notes, $1.7 billion of long-term debt, $915 million of investment agreements, and $7.0 billion of VIE notes. These categories have different obligors and collateral; VIE liabilities should not be treated as ordinary parent-company debt.
  • Capital and reserves: GAAP shareholders’ equity was $3.288 billion, up from $3.173 billion; GAAP book value per share was $17.04. Adjusted book value per share, a non-GAAP measure, was $30.56, down from $30.68. Consolidated loss and LAE reserves were $785 million, while insurance loss recoverable was $3.877 billion.

Material changes and significant developments

  • In May 2013, after quarter-end, MBIA reached a Bank of America settlement: MBIA Corp. received approximately $1.7 billion ($1.6 billion cash and $136 million principal amount of MBIA Inc. notes), and commuted policies with approximately $7.4 billion of notional exposure. The payment repaid the remaining National secured loan. The agreement also included a $500 million, three-year secured revolving facility for MBIA Corp., subject to conditions, restrictions and covenants, including a $750 million minimum statutory-capital requirement.
  • The Bank of America agreement provided for a five-year warrant to purchase 9.94 million MBIA shares at $9.59 per share. Countrywide RMBS policies remain in force; the settlement did not eliminate MBIA Corp.’s obligations under those policies.
  • Also in May, MBIA agreed to commute $4.2 billion of gross exposure with Société Générale. The company reported that the Bank of America and Société Générale settlements resolved litigation brought by the original group of 18 financial institutions concerning National’s establishment.
  • The filing says certain settlement agreements were reflected in March 31 GAAP estimates, while certain other aspects would be accounted for in Q2 at settlement. It reports that subsequent commutations would reduce MBIA Corp.’s statutory case reserves by $1.5 billion and Bank of America/Flagstar put-back recoverables by $2.9 billion; the net statutory-capital effect was described as immaterial.
  • MBIA Corp. commuted $2.1 billion of gross exposure during Q1 and agreed to commute a further $13.4 billion after quarter-end, including the Bank of America and Société Générale exposures. The company reported a $110 million Flagstar settlement after quarter-end.
  • May rating actions included an S&P upgrade of National to BBB with a positive credit watch, MBIA Inc. to B- with a positive credit watch, and MBIA Insurance Corporation to B with a stable outlook. At March 31, National was rated BB by S&P and Baa2 by Moody’s, under review for downgrade.

Outlook, commentary and principal risks

  • Management said it expected MBIA Corp. to have adequate resources for expected claims, with liquidity and capital risk substantially improved by the Bank of America settlement. The filing provides no numerical full-year earnings or revenue guidance. Management did not expect significant new insurance business before rating upgrades and market acceptance of stable ratings.
  • Recovery estimates are a major uncertainty: MBIA recorded approximately $4.0 billion of gross put-back recoveries on ineligible second-lien mortgage loans, with little material cash collected as of March 31. Collection depends on litigation, counterparties’ ability to pay and the timing and outcome of the ResCap bankruptcy. Management’s estimates may differ materially from realized recoveries.
  • Structured commercial real estate exposure remains volatile. The company recorded approximately $290 million of additional statutory-basis credit impairments and LAE on insured CMBS/CRE exposures in Q1 and reported that a CMBS transaction exhausted its deductible after quarter-end, prompting a claim. Further deterioration or claims could pressure MBIA Corp.’s liquidity and capital.
  • MBIA Insurance Corporation was not meeting the statutory qualifying-assets requirement for its contingency reserves: the reported deficit was $209 million. It also exceeded aggregate risk limits by $174 million. The company had requested regulatory approval to release contingency reserves but had not received it by the filing date; the NYSDFS could restrict payments or impose other remedies.
  • Other risks include potential higher-than-estimated RMBS, CMBS, CDO and municipal losses; delays or shortfalls in recoveries; limited access to commutation funding; collateral and market-value pressure; and possible rehabilitation or liquidation proceedings for MBIA Corp. The filing also notes that MBIA Corp.’s scheduled surplus-note interest payments in January and April 2013 were not made because NYSDFS approval was denied.
  • Reported earnings remain highly sensitive to fair-value assumptions, especially insured-derivative valuations and MBIA’s own nonperformance risk. The company reported a $3.0 billion net insured-derivative liability, predominantly valued using Level 3 inputs.

Important facts for investors to verify

  • Cash actually received, accounting recognition and statutory-capital effects of the Bank of America, Flagstar and Société Générale settlements and subsequent commutations.
  • Whether MBIA Corp. can meet the BofA facility’s draw conditions and covenants, including the $750 million capital floor, and how collateral and mandatory-prepayment terms affect usable liquidity.
  • Cash collections versus the $4.0 billion put-back recovery estimate, including ResCap bankruptcy distributions and remaining seller/servicer litigation outcomes.
  • New claims, deductible erosion and reserve changes in the remaining CMBS/CRE portfolio, particularly after the reported post-quarter-end claim.
  • Regulatory status of MBIA Insurance Corporation’s contingency-reserve qualifying-asset deficit and aggregate risk-limit overage, plus any NYSDFS restrictions or approvals.
  • Underlying liquidity by legal entity and the distinction between parent cash, insurer resources, pledged assets and cash or assets held in consolidated VIEs.