Business context and reporting period
MBIA Inc.’s Form 10-K covers the fiscal year ended December 31, 2010, with comparative results for 2009 and 2008. MBIA provides financial-guarantee insurance and asset-management advisory services. Its insurance businesses are divided between National Public Finance Guarantee Corporation (U.S. public finance) and MBIA Insurance Corporation and subsidiaries (structured finance and international); asset/liability products and conduit operations are being wound down.
The business remained severely constrained by prior credit-rating downgrades and litigation over the 2009 separation of National from MBIA Corp. MBIA reported virtually no meaningful new insurance writings in 2010.
Key financial metrics
| Metric | 2010 | 2009 | Context |
|---|---|---|---|
| Total revenue | $894 million | $2.954 billion | Decline largely reflected a $769 million loss on insured derivatives, versus a $1.484 billion gain in 2009. |
| Pre-tax income (loss) | ($95) million | $1.217 billion | Highly affected by derivative fair-value movements and VIE accounting. |
| Net income available to common shareholders | $53 million; $0.26 per share | $623 million; $2.99 per share | 2010 included a $148 million income-tax benefit. |
| Adjusted pre-tax income (loss), non-GAAP | ($377) million | ($877) million | Management’s measure excludes specified VIE and derivative fair-value effects and includes derivative impairment estimates. |
| Premiums earned | $594 million | $746 million | Lower as insured policies matured or terminated and new writings remained limited. |
| Losses and loss-adjustment expenses | $232 million | $864 million | Lower year over year; structured-finance and international segment losses were $159 million. |
| Operating cash flow | ($1.257) billion | ($2.192) billion | Cash use was driven mainly by claims, commutations and related insurance activity. |
| Investing / financing cash flow | $5.011 billion / ($3.428) billion | $4.977 billion / ($4.261) billion | Investing inflows principally reflected asset sales and maturities; financing outflows included liability withdrawals and debt repayments. |
| Total assets / shareholders’ equity | $32.279 billion / $2.832 billion | $25.701 billion / $2.590 billion | Assets include consolidated VIEs; 2010 adoption of revised VIE accounting materially changed reported balances. |
| Long-term debt / short-term debt | $1.851 billion / $65 million | $2.224 billion / $18 million | Also outstanding: $2.005 billion of investment agreements, $1.740 billion of MTNs and $10.590 billion of VIE notes. |
At year-end, consolidated cash and cash equivalents were $366 million, excluding $764 million held by consolidated VIEs. Available-for-sale investments were $11.9 billion. Reported liquidity included $355 million of cash and short-term investments at National, $907 million at MBIA Corp. (with total liquid resources of $1.3 billion), and $781 million in wind-down operations. These resources are held across separate entities and are not necessarily freely transferable.
For the fourth quarter of 2010, MBIA reported revenue of $864 million, pre-tax income of $552 million and net income available to common shareholders of $451 million, or $2.25 per share. The quarter included a $494 million net gain in fair value of insured derivatives.
Material changes versus the prior comparable period
- Annual net income fell to $53 million from $623 million, principally as the insured-derivative fair-value result shifted from a large gain to a loss. Quarterly results were correspondingly volatile.
- Gross loss and LAE expense declined to $232 million from $864 million. However, MBIA Corp. recorded $1.1 billion of estimated impairments on structured CMBS pools in 2010, and $35 million on CRE CDOs.
- Insurance in force fell to $1.025 trillion from $1.166 trillion; combined gross par outstanding fell to approximately $672.9 billion from $767.2 billion.
- MBIA Corp.’s statutory capital declined to $2.7 billion from $3.3 billion, while National’s rose to $2.4 billion from $2.0 billion. Claims-paying resources were $5.2 billion at MBIA Corp. and $5.6 billion at National.
- Common book value per share increased to $14.18 from $12.66, while management’s non-GAAP adjusted book value per share declined to $36.81 from $38.94, mainly due to increased insured-derivative impairments.
- Cash and short-term investments in the wind-down asset/liability products segment were $781 million; the segment reported an approximately $330 million deficit in liquid assets at amortized cost relative to debt at amortized cost.
Outlook, risks, contingencies and unusual items
- Business outlook: Management did not provide numerical earnings guidance. It did not expect material new insurance business before ratings improve; timing and the ability to achieve higher ratings remain uncertain. S&P proposed rating-methodology changes in January 2011 that could increase required capital.
- Mortgage recovery assumptions: MBIA recorded $2.5 billion of estimated RMBS loan put-back recoveries, gross of tax; the estimated amount net of reinsurance and tax was $1.6 billion. Most claims are disputed and in litigation, and timing, collectability and ultimate recovery are uncertain. Failure to realize the estimates could increase losses and weaken capital and liquidity.
- Credit and liquidity exposure: RMBS, CDO and commercial-real-estate performance could worsen. MBIA Corp. had paid $5.5 billion of gross claims on second-lien RMBS since the fourth quarter of 2007; continued or increased claims, asset impairment, or delayed recoveries could put further pressure on liquidity.
- Capital access and structural constraints: MBIA Corp. was unable to pay dividends due to an earned-surplus deficit. National had $91 million of dividend capacity but management did not intend to declare dividends; litigation challenges the approval of its surplus reset. Corporate liquidity depends partly on subsidiaries, while regulatory restrictions limit transfers between entities.
- Litigation: Transformation litigation could undermine the separation of National and MBIA Corp. A New York appellate court dismissed one plenary challenge in January 2011, but plaintiffs appealed and other proceedings remained pending. MBIA’s recovery lawsuits against mortgage sellers and servicers may take years; an adverse Merrill Lynch appellate ruling was also subject to a planned appeal.
- Wind-down and accounting matters: Negative asset-liability spreads, collateral needs and potential liability acceleration remain risks. Insured derivatives are valued using significant unobservable inputs; the $4.4 billion net insured-derivative liability and earnings can be highly sensitive to spreads, recoveries, collateral values and MBIA’s own credit risk. Consolidation of VIEs increased reported assets and liabilities and affects period comparability.
- Unusual items: The Channel Re commutation and liquidation increased MBIA Corp.’s statutory capital by $132 million and liquidity by $595 million, but produced a $61 million GAAP loss. The company also received a $391 million tax refund in 2010 from a prior-year NOL carryback; a further approximately $41 million refund was received in January 2011.
Most important facts for investors to verify
- Whether the $2.5 billion gross RMBS put-back recovery estimate is realized, on what timeline, and whether counterparties can pay.
- Updated claims, impairments and stress-case liquidity needs for RMBS, CMBS, CRE CDOs and other insured derivatives.
- National and MBIA Corp. statutory capital, claims-paying resources, regulatory risk-limit status, and the legal and practical availability of subsidiary dividends.
- Progress and outcomes in Transformation litigation, mortgage recovery suits and other material legal proceedings.
- Ratings-agency actions and any revised capital requirements, alongside actual new-business production and premiums.
- Wind-down asset values, liability maturities, collateral requirements and any acceleration triggers; also distinguish MBIA’s own liquidity from cash and assets held in consolidated VIEs.