MBIA Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. The financial statements are unaudited. Amounts are in millions of dollars unless noted.
Business context
MBIA provides financial guarantee insurance and asset-management services through U.S. public finance insurance (National), structured finance and international insurance (MBIA Insurance Corporation, or MBIA Corp.), and advisory services (Cutwater). Asset/liability products and conduit activities are in wind-down. The company reported that it had written no meaningful new insurance business since 2008 and did not expect significant new business before insurance-subsidiary rating upgrades.
Key financial results and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenues (losses) | $281 | $1,120 | $1,703 | $(390) |
| Net income (loss) | $7 | $444 | $598 | $(693) |
| Diluted earnings (loss) per share | $0.04 | $2.26 | $3.07 | $(3.50) |
| Losses and loss-adjustment expenses | $171 | $190 | $330 | $204 |
- At September 30, total assets were $22.1 billion, total liabilities $19.5 billion, and total equity $2.6 billion; MBIA Inc. shareholders’ equity was $2.565 billion. Total assets declined from $26.9 billion at December 31, 2011.
- Reported premiums earned were $155 million for Q3 and $464 million for nine months. Net investment income was $50 million and $172 million, respectively.
- Nine-month operating cash flow was negative $955 million, investing cash flow positive $3.106 billion, and financing cash flow negative $2.343 billion. Cash and cash equivalents were $298 million on the balance sheet, including $143 million held by consolidated VIEs.
- Reported debt and funding balances included $1.836 billion of long-term debt, $1.606 billion of medium-term notes and $993 million of investment agreements. Consolidated VIE notes were a further $7.094 billion.
- MBIA Inc. reported $432 million of liquidity: $335 million available for general corporate purposes (excluding tax-sharing escrow) and $97 million not directly pledged for asset/liability activities. Management said this was sufficient for expected obligations for at least 12 months.
- Statutory capital was $3.1 billion at National and $1.5 billion at MBIA Corp. MBIA Corp.’s statutory capital fell from $2.3 billion at year-end 2011; National’s rose from $2.8 billion.
Changes, outlook, risks, and unusual items
- Results were highly affected by fair-value changes in insured derivatives. For nine months, the reported net change in fair value of insured derivatives was a gain of $1.053 billion, versus a loss of $1.130 billion in 2011. Management cautioned that these mark-to-market results are volatile and do not necessarily reflect expected claim payments.
- Q3 net income fell sharply year over year, while nine-month net income turned positive from a loss. The change chiefly reflected derivative valuation movements; adjusted pre-tax loss, a company-defined non-GAAP measure, was $118 million for Q3 and $818 million for nine months, compared with losses of $430 million and $244 million, respectively, in 2011.
- MBIA Corp. recorded $3.2 billion of expected recoveries related to alleged ineligible mortgage loans, against $5.0 billion of cumulative incurred losses. The recoveries are disputed, uncertain, and have produced no material cash collections. ResCap, RFC and GMAC entered Chapter 11 in May 2012, affecting related claims.
- MBIA Corp. made $1.0 billion in gross claim payments and commuted $13.0 billion of gross insured exposure during the first nine months. It borrowed an additional $443 million under the National Secured Loan; outstanding principal was $1.6 billion, with interest deferred. The loan is secured primarily by future recoveries and premiums.
- Management identified heightened liquidity risk at MBIA Corp. from claims, commutation payments and delayed recoveries. Remaining CMBS exposures concentrated at Bank of America/Merrill Lynch could generate substantial claims; management’s liquidity outlook assumes CMBS exposures will be settled without cash payments.
- MBIA Corp. had a $97 million shortfall in qualifying assets supporting contingency reserves and a $47 million excess over aggregate risk limits. Regulatory approval for a requested $97 million reserve release had not been received. Dividend and intercompany funding actions are subject to regulatory limits or approvals.
- On the filing date, MBIA launched a consent solicitation to amend senior-note indentures so a rehabilitation or liquidation proceeding involving MBIA Corp. would not trigger cross-default acceleration. The company warned that, without the amendment, accelerated senior notes could exceed MBIA Inc.’s available liquidity and could lead to restructuring or bankruptcy.
- Other notable exposures include $15.7 billion of MBIA Corp. structured CMBS pool par, $2.2 billion of CRE CDO par, and $4.4 billion of ABS CDO par. Management cited uncertain loss estimates, litigation outcomes, economic conditions, ratings, collateral values and potential tax-asset valuation changes as key risks.
- No formal earnings guidance was provided. Management described a cautious, uncertain economic outlook and said significant new insurance business depended on ratings upgrades and litigation developments. The next MBIA Corp. surplus-note interest payment, scheduled for January 15, 2013, required NYSDFS approval; approval timing and outcome were uncertain.
Most important facts for investors to verify
- Progress and cash realization of the $3.2 billion mortgage put-back recoveries, particularly against Bank of America/Countrywide and the bankrupt ResCap entities.
- MBIA Corp.’s claims, cash liquidity, statutory capital, qualifying-asset shortfall and ability to manage remaining CMBS exposure without substantial cash settlements.
- Outcome of the senior-note consent solicitation and the consequences of any MBIA Corp. rehabilitation or liquidation for MBIA Inc. debt and liquidity.
- Regulatory approvals affecting reserve releases, dividend restrictions, intercompany lending and the January 2013 surplus-note interest payment.
- Sensitivity of reported earnings and equity to insured-derivative fair values, nonperformance-risk assumptions, loss reserves and deferred-tax-asset recoverability.