MBIA INC quarterly report, Q2 FY2013

MBIA Inc. — Q2 2013 Form 10-Q

Reporting period: Three and six months ended June 30, 2013. Unaudited consolidated results; amounts are in millions unless noted. MBIA operates public finance and structured finance insurance, advisory services, and wind-down financing businesses.

Financial performance and position

Metric	Q2 2013	First half 2013	Comparable 2012 period
Revenue	$112	$331	$1,039 Q2; $1,422 first half
Pre-tax income (loss)	$(264)	$(49)	$795 Q2; $816 first half
Net income (loss)	$(178)	$(14)	$581 Q2; $591 first half
Diluted EPS	$(0.92)	$(0.07)	$2.98 Q2; $3.03 first half
Operating cash flow	Not presented separately	$1,171	$(790) first half

Reported earnings were highly affected by mark-to-market accounting for insured derivatives. Net change in insured derivative fair value was a loss of $182 in Q2 and $243 in the first half, versus gains of $775 and $1,074 in 2012.
Q2 losses and loss adjustment expense were $188, compared with $62 in Q2 2012. First-half reported loss and LAE was a $6 benefit versus $159 expense in 2012. Changes in recoveries and derivative accounting make these figures volatile.
Premiums earned were $124 in Q2 and $244 in the first half, down from $171 and $309, respectively. Net investment income was $38 and $76, versus $60 and $122.
First-half operating cash flow benefited materially from $1,781 of recoveries and reinsurance proceeds, including the Bank of America settlement cash. Investing cash flow was $(253) and financing cash flow $(902); cash increased by $16. Cash-flow statement ending cash of $1,006 includes $78 held by consolidated VIEs; the balance sheet separately reports $928 of cash and cash equivalents.
At June 30, total assets were $18,122, total liabilities $15,085 and total equity $3,037. MBIA Inc. shareholders’ equity was $3,016, down from $3,173 at year-end 2012; the decline primarily reflected unrealized losses on available-for-sale securities. Consolidated investments were $6,526 and insurance loss recoverable was $907, down from $3,648 at year-end.
Balance-sheet debt and financing included $1,524 long-term debt, $1,561 medium-term notes, $775 investment agreements and $5,707 of VIE notes. These include different entities and VIE obligations; they should not be treated as equivalent to parent-company net debt. Management reported MBIA Inc. net debt of $1.3 billion and total capital resources of $4.5 billion.
MBIA Inc.’s available liquidity was $327, versus $239 at December 31. MBIA Corp. had $92 of cash and highly liquid assets, down from $345, and an undrawn secured revolving facility of up to $500. National held $1.9 billion of cash and short-term investments.

Material changes and significant transactions

Bank of America settlement: MBIA Corp. received approximately $1.7 billion, consisting of $1.6 billion cash and $136 of MBIA Inc. senior notes. It commuted approximately $7.4 billion of insured policies and used the proceeds to repay the National Secured Loan. The agreement also resolved or addressed several disputes; certain dismissals were initially without prejudice, with conversion to with prejudice dependent on conditions over the following year.
Societe Generale: MBIA commuted $4.2 billion of gross insured exposure. The filing says the consideration was consistent with reserves but does not give a clear payment amount.
Commutations and recoveries: MBIA Corp. commuted $19.9 billion of gross insured exposure in the first half. MBIA recorded $1.1 billion of estimated recoveries related to ineligible mortgage loans; the after-tax estimate was $736, equal to 24% of MBIA Inc. shareholders’ equity. Recoveries depend on counterparties, litigation and bankruptcy outcomes.
ResCap plan: A proposed $796 million settlement for MBIA was included in a bankruptcy plan support agreement. Bankruptcy court approval and creditor voting remained outstanding; an initial distribution was anticipated in late 2013, subject to the confirmation process.
Debt and capital: National’s $1.7 billion secured loan to MBIA Corp. was repaid. MBIA Corp. entered into the $500 million, three-year Blue Ridge facility, secured by specified recoveries, premiums and other collateral. The facility had not been drawn at quarter-end. MBIA redeemed $336 million par value of conduit medium-term notes in the first half and repurchased about $38 million par value of GFL notes.

Outlook, management commentary and risks

No formal consolidated earnings or revenue guidance was provided. Management was evaluating a return to the U.S. public finance insurance market. National was rated A/stable by S&P and Baa1/positive by Moody’s at quarter-end; management sought further upgrades, but timing and market acceptance were uncertain. MBIA Corp. was rated B/stable by S&P and B3/positive by Moody’s.
Management said MBIA Inc. expected to meet operating needs for the foreseeable future, relying in part on existing liquidity, subsidiary dividends and potential tax-escrow releases. It said MBIA Corp. expected resources, future inflows and the Blue Ridge facility to cover expected claims, while warning that higher claims or delayed recoveries could undermine that outlook.
MBIA Corp. reported $1.175 billion of statutory capital, including $750 of policyholders’ surplus. It was not in compliance with the New York contingency-reserve qualifying-asset requirement: the reported deficit was $322, and NYSDFS denied requests to release contingency reserves. The company also reported an overage against single-risk limits. Regulatory restrictions or further remedial action could constrain commutations or other payments.
MBIA Corp. surplus-note interest payments scheduled for January, April and July 2013 were not approved by NYSDFS. Accrued interest was $117; deferred interest becomes payable only upon approval, and the filing says no interest accrues on the deferred amount.
Key exposure risks include remaining CMBS/CRE, second-lien RMBS, ABS CDO and municipal credits. MBIA reported $4.0 billion of cumulative credit impairments and LAE on structured CMBS pools, CRE CDOs and CRE loan pools through June 30, including $399 of additional first-half impairments. A CMBS pool transaction exhausted its remaining deductible in Q2. Actual losses, claim timing and recovery collections could differ materially from estimates.
Fair-value estimates for insured derivatives rely substantially on models and unobservable inputs; changes in MBIA’s own credit spreads can materially affect reported earnings. Level 3 liabilities were 59% of liabilities measured at fair value at June 30.
In July, after quarter-end, MBIA initiated cost reductions, including a workforce reduction of approximately 15% from the June 30 level. Most severance and related costs were expected to be recorded in Q3.
Management described modest U.S. economic improvement but continued European recession and uncertainty. It also highlighted municipal fiscal stress and Chapter 9 proceedings, including Jefferson County, San Bernardino, Stockton and Detroit.

Most important facts for investors to verify

Whether the ResCap plan was confirmed and whether MBIA received the expected distributions; the status and value of remaining Credit Suisse put-back recoveries.
MBIA Corp.’s liquidity, statutory capital and qualifying-asset compliance, including any NYSDFS restrictions and the availability and conditions of the Blue Ridge facility.
Actual claim development and commutation activity in CMBS/CRE and second-lien RMBS, and how those results compare with reserve and recovery assumptions.
Whether National achieved further ratings upgrades, resumed meaningful new business, or paid the anticipated dividend, and the regulatory conditions attached.
Reconcile management’s adjusted book value per share: the narrative reports $29.42 at June 30, while the detailed reconciliation reports $29.28. The filing text does not provide a clear single value.
Assess the impact of market-driven derivative marks separately from underlying claims and cash flows; reported GAAP earnings are unusually volatile and do not by themselves indicate cash performance.