MBIA Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; financial statements are unaudited. MBIA provides financial-guarantee insurance and asset-management services. Its insurance and asset/liability businesses were largely in runoff, and management said it did not expect significant new insurance business before ratings improved.
Financial results and position
Unless otherwise stated, amounts are U.S. dollars. Figures below are consolidated and include variable interest entities (VIEs), whose assets and obligations may not be available to meet MBIA’s general obligations.
| Metric | Q1 2011 / March 31, 2011 | Comparable period / prior year-end |
|---|---|---|
| Total revenue | $(1.400) billion | $(1.856) billion in Q1 2010 |
| Net loss; diluted loss per share | $(1.137) billion; $(5.68) | $(1.480) billion; $(7.22) in Q1 2010 |
| Adjusted pre-tax income (non-GAAP) | $25 million | $(90) million in Q1 2010 |
| Net premiums earned | $137 million | $157 million in Q1 2010 |
| Net investment income | $114 million | $122 million in Q1 2010 |
| Fees and reimbursements | $14 million | $122 million in Q1 2010 |
| Total expenses | $156 million | $403 million in Q1 2010 |
| Operating cash flow | $(546) million | $(297) million in Q1 2010 |
| Cash and cash equivalents, cash-flow statement | $987 million at quarter-end | $1.229 billion at Q1 2010 end |
| Total assets; total liabilities | $32.173 billion; $30.400 billion | $32.279 billion; $29.433 billion at Dec. 31, 2010 |
| MBIA Inc. shareholders’ equity; book value per share | $1.759 billion; $8.81 | $2.832 billion; $14.18 at Dec. 31, 2010 |
| Adjusted book value per share (non-GAAP) | $35.57 | $36.81 at Dec. 31, 2010 |
The cash-flow statement’s $987 million includes VIE cash; the balance sheet separately reports $277 million of cash and cash equivalents outside the VIE asset line. Operating cash use reflected commutations and insurance claims. Investing activities provided $1.030 billion and financing activities used $626 million. The filing does not present a meaningful consolidated operating margin given the large fair-value derivative losses.
Q1 2011 included a $1.677 billion net loss from changes in fair value and settlements of insured derivatives, versus $2.246 billion in Q1 2010. Management attributed much of the mark-to-market volatility to changes in MBIA Corp.’s own credit spreads and nonperformance-risk assumptions, which can make reported results diverge from expected claim economics. Insurance losses and loss-adjustment expenses were a net gain of $36 million, versus $214 million of expense in Q1 2010.
Reported debt and funding obligations included $1.844 billion of long-term debt, $1.704 billion of medium-term notes, $1.911 billion of investment agreements and $470 million of repurchase-agreement liabilities. Consolidated VIEs also reported $10.899 billion of notes and $360 million of long-term debt; these VIE obligations should be assessed separately from recourse corporate debt.
Material changes and business developments
- GAAP net loss narrowed year over year, primarily reflecting smaller insured-derivative mark-to-market losses and lower insurance expenses. Adjusted pre-tax results improved to $25 million, mainly from lower insurance losses, partly offset by reduced fees and premiums.
- Fees and reimbursements fell sharply because Q1 2010 included a large reinsurance-commutation-related receipt. The company also reported debt-extinguishment gains in Q1 2011.
- MBIA Inc. shareholders’ equity declined by approximately $1.073 billion from year-end, largely due to the quarterly net loss; adjusted book value per share fell 3%.
- Gross insured par outstanding in structured finance and international insurance declined to $185.3 billion from $222.8 billion a year earlier; the below-investment-grade share rose to 21.3% from 17.8%. U.S. public-finance gross par was $474.7 billion, down from $522.8 billion a year earlier.
- MBIA Corp. commuted $3.3 billion of gross insured exposure during Q1, including structured CMBS pools and an investment-grade corporate CDO. The company said the payment was within aggregate statutory loss reserves for those transactions.
- MBIA Corp.’s estimated credit impairment for structured CMBS pools and CRE CDOs was $1.3 billion at quarter-end, including an estimated $130 million of additional impairment in Q1. The company noted that loan liquidations, collateral performance and ultimate loss rates remained uncertain.
Liquidity, capital, outlook and risks
- Management said it continued to meet payment obligations and believed resources were adequate for ongoing liquidity needs, while warning that higher claims, delayed recoveries, adverse markets, forced asset sales, accelerated liabilities or impaired capital-market access could create substantial pressure.
- National reported statutory capital of $2.459 billion and claims-paying resources of $5.627 billion at March 31, 2011. MBIA Corp. reported statutory capital of $2.687 billion and claims-paying resources of $4.733 billion, down from $5.244 billion at year-end. These are statutory, non-GAAP measures, not directly comparable with consolidated GAAP equity.
- National held $540 million of cash and short-term investments. MBIA Corp. reported $891 million of cash and short-term investments and $927 million of liquid assets including securities with quoted prices in active markets. Management also reported $2.0 billion of unencumbered cash and available-for-sale investments at MBIA Corp.; liquidity figures have different scopes and should not be added together without checking definitions.
- The asset/liability products segment had an estimated $387 million deficit of liquid assets at amortized cost relative to debt at amortized cost. Management expected positive cash flows through 2012 and said it was managing the deficit, including through higher-yielding assets and discounted liability repurchases; additional measures, potentially including capital raising, might be needed.
- At March 31, National was rated BBB/developing by S&P and Baa1/developing by Moody’s; MBIA Corp. was rated B/negative and B3/negative, respectively. Management did not expect significant new insurance business before an upgrade. Proposed changes to S&P’s guarantor-rating methodology could increase required capital and impede future upgrades.
- Key credit exposures include approximately $33.5 billion of insured CMBS pools, $7.3 billion of CRE CDOs and roughly $4.0 billion of CRE loan pools, primarily European assets. MBIA identified possible further losses if economic or property-market conditions worsen.
- MBIA recorded $2.7 billion of estimated recoveries related to claims on allegedly ineligible RMBS loans, against $4.6 billion of cumulative incurred losses. The recoveries depend substantially on disputed seller/servicer obligations and litigation; the company acknowledged that actual collections may be lower or delayed. Estimated after-tax recoveries were $1.7 billion, nearly equal to MBIA Inc. shareholders’ equity.
- Fair values of insured derivatives rely on models and significant unobservable inputs: Level 3 liabilities were $12.1 billion, approximately 81% of liabilities measured at fair value. Changes in assumptions, including MBIA’s own credit risk, can materially affect reported earnings.
- Material legal matters include RMBS put-back litigation, lawsuits challenging the insurance-company restructuring and National’s formation, and municipal bond-insurance and derivatives-related claims. In the ABN AMRO restructuring litigation, an appellate court dismissed the plenary complaint, but plaintiffs appealed; other related proceedings remained pending. Management expected to prevail but cautioned that adverse outcomes could materially affect the business and financial condition.
- No quantified full-year earnings guidance was provided. Management expected reported results to remain volatile and uncertain for the rest of 2011. It cited restrained economic recovery, sluggish housing and employment conditions, and the continuing effects of ratings and litigation.
Most important facts for investors to verify
- Whether the $2.7 billion RMBS-related recovery estimate is collectible, when collections may occur, and how litigation and counterparty capacity affect its valuation.
- How MBIA’s insured-derivative fair values and $1.3 billion CMBS/CRE impairment estimate respond to changes in credit spreads, collateral performance, loss assumptions and MBIA’s own nonperformance risk.
- Whether legal-entity liquidity and statutory capital remain adequate under higher claim-payment or delayed-recovery scenarios, particularly at MBIA Corp. and the asset/liability products segment.
- The distinction between GAAP consolidated results, management’s non-GAAP adjusted results, statutory capital measures and VIE assets and liabilities, including restrictions on VIE cash.
- Developments in ratings, S&P methodology, National-related litigation, restructuring challenges and the company’s ability to resume meaningful new insurance writing.