MBIA INC annual report, FY2011

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MBIA Inc. — 2011 Form 10-K Summary

Business context and reporting period

Annual report for the fiscal year ended December 31, 2011; amounts are U.S. dollars. MBIA provides financial guarantee insurance and investment advisory services. Its principal operations are U.S. public finance insurance through National, structured finance and international insurance through MBIA Corp., and advisory services through Cutwater. Asset/liability products and conduit operations are being wound down.

Financial performance and position

  • Results: GAAP revenue was a loss of $1.557 billion, versus revenue of $894 million in 2010. The company reported a net loss of $1.319 billion, or $6.69 per diluted share, compared with net income of $53 million, or $0.26 per share, in 2010.
  • Main earnings driver: Insured-derivative fair-value changes were a loss of $2.812 billion, versus a $769 million loss in 2010. These marks are highly sensitive to MBIA’s own credit spreads and assumptions about collateral; management cautions that they can make GAAP results volatile and may not reflect underlying economics.
  • Underlying measure: Management’s non-GAAP adjusted pre-tax loss was $497 million, compared with $377 million in 2010. The deterioration mainly reflected lower derivative premiums following commutations and settlements, weaker wind-down investment results, and lower fees, partly offset by lower insurance losses.
  • Cash flow: Operating cash use was $2.976 billion, versus $1.256 billion in 2010, mainly reflecting insurance claims and derivative commutation payments. Investing activities provided $4.295 billion and financing activities used $1.816 billion. Cash and cash equivalents were $473 million on the balance sheet; an additional $160 million was held in consolidated VIEs and was not available for MBIA’s general obligations.
  • Assets, equity and investments: Total assets were $26.873 billion, down from $32.279 billion. MBIA Inc. shareholders’ equity was $1.700 billion, down from $2.832 billion; book value per share fell to $8.80 from $14.18. Adjusted book value per share, a non-GAAP measure, was $34.50 versus $36.81. Investments at carrying value were $8.693 billion, down from $11.927 billion.
  • Debt and liabilities: Long-term debt was $1.840 billion; investment agreements were $1.578 billion and medium-term notes were $1.656 billion. Derivative liabilities totaled $5.164 billion. The $8.697 billion of VIE notes is associated with consolidated VIEs and should be distinguished from MBIA’s direct corporate debt.
  • Liquidity: At year-end, National and MBIA Corp. reported $703 million and $534 million, respectively, of total liquidity. MBIA Inc. reported $226 million of cash and highly liquid assets for general corporate purposes, excluding escrowed tax-sharing funds, plus $160 million of unpledged liquid assets in its asset/liability business. Management said it expected resources to meet obligations through 2012, while warning that market stress could create a shortfall.
  • Statutory capital: National’s statutory capital was $2.809 billion, up from $2.381 billion. MBIA Corp.’s was $2.303 billion, down from $2.731 billion. Their claims-paying resources were reported at $5.691 billion and $6.119 billion, respectively; these are management-defined, non-GAAP/statutory measures.

Material changes versus the prior comparable period

  • Net income swung from a $53 million profit in 2010 to a $1.319 billion loss in 2011, largely because insured-derivative fair-value losses increased substantially.
  • Gross insurance par outstanding declined to $551.7 billion from $672.9 billion, reflecting runoff, maturities, settlements and commutations; meaningful new insurance business remained near zero.
  • MBIA Corp.’s liquid assets declined from $1.2 billion at the end of 2010 to $534 million at the end of 2011, after claims and commutation payments. Its claims-paying resources also fell, while National’s statutory capital increased.
  • The asset/liability products deficit of invested assets to liabilities grew to $591 million from $329 million. Advisory assets under management declined 15% to $34.46 billion; third-party assets fell to $22.28 billion from $25.32 billion.
  • Consolidated VIE assets declined to $10.893 billion from $14.138 billion. VIE consolidation and deconsolidation can materially affect reported revenue, assets and liabilities.

Outlook, commentary, risks and unusual items

  • Outlook: Management expected sluggish economic, housing and employment conditions and volatile reported results in 2012. It did not expect significant new financial guarantee business before rating upgrades; timing and achievement of upgrades were uncertain. National’s return to public finance writing depended in part on Transformation litigation and repayment of its loan to MBIA Corp.
  • Mortgage recoveries and litigation: MBIA recorded $3.1 billion of expected put-back recoveries related to allegedly ineligible RMBS loans; the after-tax, net-of-reinsurance estimate was $2.0 billion. These amounts are estimates, not cash collected. Most claims were disputed and subject to litigation, and the company warned that recoveries could be delayed or lower than recorded.
  • Claims and commutations: MBIA Corp. reported $6.2 billion of second-lien RMBS claims paid since the fourth quarter of 2007, before reinsurance and collections. In 2011 it commuted or agreed to commute $32.4 billion of gross insured exposure, with payments approximately $500 million above aggregate statutory reserves for the transactions. After year-end, it agreed to further commutations totaling $3.7 billion.
  • Commercial real estate: The company estimated $1.6 billion of additional 2011 impairments and LAE on CMBS and CRE exposures; cumulative impairments and LAE reached $2.8 billion. Further deterioration, defaults or higher liquidation severities could increase losses and liquidity needs.
  • Intercompany loan and dividend restrictions: National lent MBIA Corp. $1.1 billion in December 2011 at 7%, secured and due December 2016. Repayment depends substantially on MBIA Corp.’s ability to collect recoveries. MBIA Corp. could not pay dividends without regulatory approval; National agreed not to pay dividends without prior approval through July 19, 2013.
  • Ratings: At year-end, S&P rated National BBB with a developing outlook, MBIA Corp. B with a negative outlook, and MBIA Inc. B- with a negative outlook. Moody’s rated National Baa2 with a negative outlook, MBIA Corp. B3 under review for possible downgrade, and MBIA Inc. B2 with a negative outlook. S&P’s 2011 methodology changes raised capital requirements for the highest ratings.
  • Legal and regulatory contingencies: Litigation challenging the 2009 Transformation remained unresolved; an Article 78 trial was expected in Q2 2012. The company also faced RMBS recovery suits and other securities, municipal and antitrust litigation. Management could not estimate potential losses for certain litigation. Regulatory approvals may be needed for liquidity transfers, commutations and dividends.
  • Unusual reporting item: A model-input error identified in Q2 2011 understated Q1 pre-tax mark-to-market losses on certain insured derivatives by $207 million. The first-quarter figures were revised; the filing states prior consolidated financial statements were not affected.

Most important facts for investors to verify

  • Whether RMBS put-back recoveries are ultimately collected, when they are collected, and how actual proceeds compare with the $3.1 billion recorded estimate.
  • MBIA Corp.’s claims, commutation payments, cash resources and ability to repay the $1.1 billion National secured loan without impairing National’s capital or ratings prospects.
  • Whether CMBS/CRE losses and other insurance claims exceed current reserves, and how much additional liquidity is needed under stress scenarios.
  • MBIA Inc.’s ability to address the $591 million asset/liability deficit, meet collateral and debt obligations, and obtain required regulatory approvals or external capital.
  • Developments in Transformation litigation, dividend restrictions, regulatory capital requirements and rating-agency decisions that could affect new business and the separation of insurance entities.
  • The assumptions and sensitivity of derivative fair values, deferred tax assets, VIE accounting and management’s non-GAAP adjusted pre-tax loss and adjusted book value measures.