MBIA INC annual report, FY2012

MBIA Inc. 2012 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2012; filed February 27, 2013. This is an annual report, not a standalone fourth-quarter filing. MBIA provides financial guarantee insurance and asset management advisory services. Its principal insurance businesses are U.S. public finance through National and structured finance/international through MBIA Insurance Corporation (MBIA Corp.); its asset/liability and conduit activities are winding down.

Financial performance and position

Metric	2012	2011
Total revenue	$2.435 billion	$(1.557) billion
Net income (loss)	$1.234 billion; $6.33 diluted EPS	$(1.319) billion; $(6.69) diluted EPS
Adjusted pre-tax income (loss), non-GAAP	$(708) million	$(497) million
Net premiums earned	$605 million	$605 million
Net investment income	$214 million	$383 million
Losses and loss adjustment expenses	$50 million expense	$80 million benefit
Total assets / total equity	$21.724 billion / $3.194 billion	$26.873 billion / $1.723 billion

• The swing to GAAP net income was principally driven by a $1.464 billion gain in the fair value of insured derivatives, including a $1.870 billion unrealized gain, rather than stronger underlying underwriting results. Management said derivative fair-value volatility does not reflect the business’s underlying economics and expected results to remain volatile in 2013.
• Adjusted pre-tax loss widened by $211 million, reflecting higher insurance losses, lower investment income and increased legal costs, partly offset by lower derivative impairments. Conventional operating margins are not a clear or useful measure in this filing given the mix of insurance and large derivative fair-value movements.
• Consolidated cash flow was $(1.027) billion from operations, $4.195 billion provided by investing activities and $(2.811) billion used in financing activities. Cash and cash equivalents ended at $990 million including $176 million held by consolidated VIEs; the balance sheet reports $814 million excluding VIE cash.
• At year-end, MBIA Inc. reported $239 million of liquidity for its corporate and asset/liability activities; MBIA Corp. reported $345 million of cash and highly liquid assets; and National reported $419 million of total liquidity. These are distinct entity-level measures and are not freely interchangeable.
• Consolidated long-term debt was $1.662 billion, medium-term notes $1.598 billion, investment agreements $944 million and derivative liabilities $2.934 billion. The company reported $1.2 billion of combined net debt for its corporate and asset/liability segments.
• National’s statutory capital rose to $3.248 billion from $2.809 billion. MBIA Corp.’s fell to $1.458 billion from $2.303 billion; its 2012 statutory net loss was $843 million. Total claims-paying resources were $5.659 billion at National and $5.273 billion at MBIA Corp.

Material changes and business developments

• Gross insured par outstanding fell to $449.5 billion from $551.7 billion. National’s U.S. public finance gross par was $337.1 billion; MBIA Corp.’s structured finance and international gross par was $112.4 billion.
• MBIA Corp. commuted $13.4 billion of gross insured exposure during 2012, primarily structured CMBS, CRE CDO, corporate CDO, ABS CDO and subprime RMBS exposures. Further commutations depend on liquidity and regulatory approval.
• Third-party advisory assets under management declined 21% to $17.6 billion; total advisory assets under management declined 14% to $29.8 billion. The segment reported a $5 million pre-tax loss.
• Investment assets contracted: consolidated available-for-sale investments at fair value were $5.596 billion, down from $8.378 billion. The asset/liability and conduit businesses continued to run off; Triple-A One was liquidated during 2012.
• Consolidated shareholders’ equity increased to $3.173 billion from $1.700 billion, largely due to derivative fair-value effects. Adjusted book value per share, a non-GAAP measure, declined to $30.68 from $34.50.

Outlook, risks and unusual items

• Management’s 2013 liquidity and capital forecast for MBIA Corp. assumed a timely Bank of America settlement that would include commutation of CMBS exposure and collection of a substantial portion of RMBS put-back recoveries. Management said failure or delay could leave MBIA Corp. unable to meet claims and could lead the New York regulator to commence rehabilitation or liquidation proceedings.
• MBIA recorded $3.6 billion of estimated recoveries related to allegedly ineligible mortgage loans; the estimated amount after reinsurance and tax was $2.3 billion. These claims are substantially disputed and in litigation, and the company had collected no material cash from these recoveries. Related ResCap claims are subject to Chapter 11 proceedings.
• Structured finance remains a major risk. The company reported $6.7 billion of gross second-lien RMBS claim payments since late 2007 and $3.6 billion of cumulative impairments and LAE on CMBS and CRE exposures through 2012. It recorded $898 million of aggregate 2012 losses and LAE on CMBS in its disclosed analysis. No material claims had yet been made on the identified Bank of America/Merrill Lynch CMBS exposure, but MBIA expected a claim could be made in the near term.
• MBIA Corp. had a $140 million shortfall in qualifying assets supporting contingency reserves and exceeded aggregate statutory risk limits by $56 million at year-end. It had sought regulatory relief; approval had not been received. National’s dividends were restricted by litigation and regulatory conditions, and MBIA Corp. lacked statutory dividend capacity.
• After year-end, the NYSDFS denied MBIA Corp.’s requests to draw on the National Secured Loan or use an alternative financing structure for a proposed commutation. The regulator also denied approval for MBIA Corp.’s January 2013 surplus-note interest payment; the payment was deferred without interest accruing on the deferred amount.
• MBIA completed a senior-note consent solicitation intended to prevent an MBIA Corp. rehabilitation or liquidation from triggering acceleration under specified indentures. Bank of America challenged the amendments and alleged tortious interference. A purported notice of default concerning the 2004 notes was contested; the company reported no acceleration as of the filing date. Any acceleration could create cross-default and severe holding-company liquidity consequences.
• National was rated BBB with a developing outlook by S&P and Baa2 with a negative outlook by Moody’s; MBIA Corp. was rated B/Negative by S&P and Caa2/Developing by Moody’s. The ratings constrained new business. Management did not expect material new insurance writings before rating improvement; timing and achievement were uncertain.
• Other notable items: a $60 million net tax benefit from an out-of-period tax adjustment; $1.234 billion of consolidated net income versus a $708 million adjusted pre-tax loss; and $445 million of tax-sharing funds in escrow at year-end, of which $115 million was released to MBIA Inc. in first-quarter 2013.

Most important facts for investors to verify

• Whether Bank of America/Countrywide put-back claims produce cash recoveries, when they are received, and whether recorded recoveries remain supportable.
• Whether MBIA Corp. faces claims on the Bank of America/Merrill Lynch CMBS portfolio, and the resulting loss, liquidity and statutory-capital impact.
• Whether regulators permit additional intercompany financing, commutations, reserve releases or dividends—and whether MBIA Corp. remedies its qualifying-asset and risk-limit deficiencies.
• Whether the Transformation and consent-solicitation litigation changes National’s legal separation, MBIA Inc.’s debt-default exposure or National’s ability to pursue ratings upgrades.
• How much of reported earnings and equity reflects reversible, model-sensitive derivative fair-value changes versus realized cash results; also review the assumptions behind adjusted pre-tax loss and adjusted book value.
• Whether MBIA Inc.’s entity-level liquidity, pledged collateral and debt obligations support management’s forecast; consolidated cash includes VIE funds that are not generally available for MBIA’s obligations.

Audit note: PricewaterhouseCoopers issued an unqualified opinion on the consolidated financial statements and reported effective internal control over financial reporting as of December 31, 2012. The auditor highlighted the company’s ratings downgrades, near cessation of new insurance business and increasing liquidity pressure as significant risks and uncertainties.