MBIA INC quarterly report, Q3 FY2013

MBIA Inc. — Q3 2013 Form 10-Q

Reporting period: Three and nine months ended September 30, 2013. The interim consolidated financial statements are unaudited. MBIA provides financial-guarantee insurance and asset-management services; its funding and conduit businesses are in runoff.

Financial results and position

Metric	Q3 2013	Q3 2012	Nine months 2013	Nine months 2012
Total revenue	$420 million	$281 million	$751 million	$1.703 billion
Pre-tax income (loss)	$171 million	$(57) million	$122 million	$759 million
Net income	$132 million	$7 million	$118 million	$598 million
Diluted earnings per share	$0.67	$0.04	$0.60	$3.07

• Q3 revenue included a $257 million gain from changes in the fair value of insured derivatives; nine-month derivative fair-value gains were $14 million, versus $1.053 billion in 2012. Results are therefore highly sensitive to valuation assumptions and market conditions.
• Net premiums earned were $104 million in Q3 and $348 million for nine months, down from $155 million and $464 million in the comparable 2012 periods. Net investment income was $42 million and $118 million, versus $50 million and $172 million.
• Loss and loss-adjustment expense was $98 million in Q3 and $92 million for nine months, compared with $171 million and $330 million, respectively.
• Net cash from operating activities was $1.033 billion for nine months, versus cash used of $955 million in 2012. The 2013 figure included substantial insurance recoveries, including the Bank of America settlement. Investing activities provided $297 million; financing activities used $1.224 billion. Cash and cash equivalents were $1.057 billion on the balance sheet; the cash-flow statement reports $1.103 billion at period end, including consolidated VIE cash.
• At September 30, total assets were $17.633 billion, total liabilities $14.432 billion, and shareholders’ equity $3.180 billion. Book value was $16.54 per share; management’s non-GAAP adjusted book value was $28.68 per share, down from $30.68 at year-end 2012.
• Reported liabilities included $1.554 billion of medium-term notes, $1.677 billion of long-term debt, and $760 million of investment agreements. These amounts do not include the separately presented liabilities of consolidated VIEs.

Changes, settlements, and operating developments

• Compared with Q3 2012, net income improved, largely reflecting the swing in insured-derivative fair value and lower insurance losses. For the nine-month comparison, net income fell substantially, principally as 2012 included much larger derivative gains. Management’s non-GAAP adjusted pre-tax loss was $188 million for Q3 (versus $118 million) and $368 million for nine months (versus $818 million).
• The May Bank of America settlement provided MBIA Corp. approximately $1.6 billion cash and $136 million principal amount of MBIA senior notes. It commuted approximately $7.4 billion of insured exposure, including $6.1 billion of CDS exposure, and enabled repayment of the National Secured Loan. Countrywide-related RMBS policies remain in force. Dismissals were initially without prejudice, subject to later refiling with prejudice under the agreement’s conditions.
• MBIA commuted $4.2 billion of gross insured exposure with Societe Generale. During the first nine months, MBIA Corp. commuted $19.9 billion of gross insured exposure overall, reducing exposure but using liquidity.
• The ResCap plan contemplated an approximately $828 million recovery for MBIA; bankruptcy-court confirmation remained pending at the filing date. MBIA anticipated an initial distribution in late 2013 or early 2014, subject to approval and possible delay.
• MBIA began cost-reduction measures, including staff reductions of approximately 21% of June 2013 headcount. It recorded $18 million of severance-related costs and estimated annualized savings of approximately $24 million. A potential office sale led to a $29 million impairment charge. Nine-month operating expenses also included approximately $89 million of settlement, consulting, and legal costs.
• National was rated A with a stable outlook by S&P and Baa1 with a positive outlook by Moody’s. MBIA Corp. was rated B by S&P and B3 by Moody’s, each with positive outlooks noted by Moody’s and stable outlooks from S&P as reported. Management was considering further ratings and evaluating re-entry into U.S. public finance; no assurance or timetable for ratings upgrades or material new business was provided.

Liquidity, capital, risks, and outlook

• MBIA Inc.’s liquidity was $282 million at September 30, 2013, versus $239 million at year-end 2012. Management said it expected to meet holding-company needs for the foreseeable future, relying in part on subsidiary dividends and potential tax-escrow releases. National paid a $214 million dividend to MBIA Inc. after quarter-end. The timing and availability of future subsidiary distributions and escrow releases remain uncertain.
• MBIA Corp. had $97 million of immediately available cash and liquid assets, down from $345 million at year-end 2012. It had a $500 million Blue Ridge secured revolving facility, had borrowed $50 million, and had $450 million remaining available at September 30, subject to facility conditions. The loan bears a high variable rate; its collateral included put-back recoveries and other assets.
• National reported $3.365 billion of statutory capital and $5.448 billion of claims-paying resources. MBIA Corp. reported $1.040 billion of statutory capital and $3.530 billion of claims-paying resources, down from $5.273 billion at year-end. MBIA Corp. reported a $321 million shortfall in qualifying assets supporting contingency reserves, an aggregate risk-limit overage, and single-risk-limit overages; it reported the reserve deficit to regulators and planned to submit a compliance plan. Regulatory action is possible.
• MBIA Corp.’s scheduled surplus-note interest payments had not been approved by the New York regulator since January 2013; deferred interest does not accrue additional interest under the disclosed terms. A later S&P criteria change resulted in surplus-note and preferred-stock ratings being lowered to D after quarter-end.
• Key uncertainties include second-lien and first-lien RMBS performance, remaining CMBS and CRE exposures, ABS CDOs, excess-spread collections, Credit Suisse put-back litigation, ResCap plan confirmation and collection timing, and the ability to fund further commutations. Management warned that higher-than-expected claims or delayed recoveries could pressure MBIA Corp.’s liquidity and capital and potentially lead to rehabilitation or liquidation proceedings.
• Fair-value changes in insured derivatives can materially swing reported earnings and rely substantially on Level 3 models and unobservable inputs. The filing states that a further six months of peak second-lien RMBS performance, versus the probability-weighted assumptions, could increase case reserves by approximately $85 million.
• Management described modest U.S. economic improvement but continuing uncertainty in interest rates, fiscal policy, European growth, municipal finances, and credit markets. No specific earnings guidance was provided; management cautioned that 2013 results may not indicate full-year results and expected continued volatility.
• Other material exposures include $8.0 billion of indirect European sovereign-related and sub-sovereign insured par, and municipal distress including Detroit and Puerto Rico. National’s planned public-finance growth depends on stronger ratings, market acceptance, and competition.

Most important facts for investors to verify

• Whether the ResCap plan was confirmed and MBIA received the expected recovery, and the status and potential outcome of the remaining Credit Suisse put-back litigation.
• MBIA Corp.’s available liquidity, Blue Ridge facility availability and covenants, claim payments, and recovery collections; distinguish immediately available parent-company and insurer liquidity from consolidated cash.
• Regulatory remediation of MBIA Corp.’s contingency-reserve asset deficit and risk-limit overages, and any consequences for its license, capital, or ability to commute exposures.
• Changes in CMBS/CRE and RMBS impairments, reserve assumptions, excess-spread estimates, and Level 3 fair-value inputs; compare statutory credit impairments with GAAP derivative fair values.
• National’s ratings, dividend capacity, actual progress toward re-entering the public-finance market, and the effect of the post-quarter $214 million dividend on its statutory resources.
• Confirm reported debt and liquidity measures on the basis used: holding-company versus insurance-subsidiary obligations, consolidated VIE balances, and cash-flow effects of large settlement and recovery receipts.