MBIA INC quarterly report, Q1 FY2012

MBIA Inc. 2012 First-Quarter 10-Q Summary

Reporting period: Three months ended March 31, 2012. Unaudited consolidated financial statements; dollar amounts below are in millions unless noted. MBIA operates U.S. public finance insurance, structured finance and international insurance, advisory services, and wind-down asset/liability and conduit businesses. The filing was signed May 10, 2012.

Financial performance and position

Metric	Q1 2012	Q1 2011 / prior year-end
Total revenues	$383	$(1,607)
Pre-tax income (loss)	$21	$(1,763)
Net income (loss)	$10; $0.05 per diluted share	$(1,274); $(6.37) per diluted share
Adjusted pre-tax income (loss), non-GAAP	$(548)	$25
Operating cash flow	$(233)	$(546)
Investing cash flow	$1,210	$1,009
Financing cash flow	$(755)	$(606)
MBIA Inc. shareholders’ equity	$1,858; book value per share $9.59	$1,700 at Dec. 31, 2011; $8.80 per share

• Premiums earned were $137 in both periods. Net investment income was $62 versus $114; net investment losses from other-than-temporary impairments were $94 versus $13.
• Q1 2012 included a $299 net gain on insured derivatives, versus a $1,776 loss in Q1 2011. These fair-value movements were the dominant driver of the GAAP earnings comparison. The company says such marks can be volatile and do not necessarily reflect underlying economics.
• Management’s non-GAAP adjusted pre-tax loss of $548 reflects underlying losses after adjustments for insured-derivative marks and consolidated VIE effects. Adjusted book value per share was $32.00, down from $34.50 at year-end, despite the increase in GAAP book value per share.
• Total assets were $26,126 and total liabilities $24,245 at March 31, versus $26,873 and $25,150 at year-end. These totals include consolidated VIEs. The balance sheet reported $711 cash and equivalents outside VIEs and $144 within VIEs; the cash-flow statement’s ending total was $855.
• Reported debt and funding liabilities included $1,839 long-term debt, $1,692 medium-term notes, $1,576 investment agreements, and $8,704 VIE notes. These categories are not directly comparable in character or recourse.

Material changes and business developments

• MBIA has written no meaningful new insurance business since 2008 and does not expect significant new writings before ratings improve. At March 31, National was rated BBB with a developing outlook by S&P and Baa2 with a negative outlook by Moody’s; MBIA Insurance Corporation was rated B with a negative outlook by S&P and B3 under review for possible downgrade by Moody’s.
• MBIA Corp. paid $211 million in gross claims during the quarter and commuted $4.3 billion of gross insured exposure. After quarter-end it agreed to additional commutations totaling $7.2 billion of gross exposure. Commutations reduce exposure but consume liquidity.
• Expected recoveries on disputed second-lien RMBS put-back claims were $3.2 billion at March 31, including $2.1 billion recorded as insurance loss recoverable and $1.1 billion in consolidated VIE assets. The company had incurred $4.8 billion of related losses and reported no material cash collections to date.
• MBIA Corp. estimated $295 million of additional Q1 credit impairments and LAE on structured CMBS pools, CRE CDOs and CRE loan pools; cumulative impairments were estimated at $3.1 billion. The company also reported $281 million of additional credit impairments on insured derivatives across 18 CDO issues.
• Investment losses, legal expenses and weaker investment income weighed on adjusted results. Total investment income including VIEs was $79 versus $131; net realized investment losses were $131 versus net realized gains of $23. Operating expenses rose significantly, principally because of legal and litigation-related costs.
• Consolidated VIE assets and liabilities were $10.5 billion and $9.5 billion, respectively, at March 31. VIE assets generally support VIE obligations and are not available to meet MBIA’s general obligations.

Liquidity, capital, outlook and risks

• MBIA Inc.’s reported liquidity position was $482: $251 available for general corporate purposes, excluding tax-sharing escrow, and $231 not directly pledged as collateral. Management said this was sufficient for expected obligations at least through the next 12 months, while warning that asset sales, collateral needs or acceleration of obligations could create a shortfall.
• MBIA Corp. had $329 of cash and highly liquid assets, down from $534 at year-end; cash and available-for-sale investments totaled $1.3 billion. National held $780 of cash and short-term investments, including $690 highly liquid. Management described National’s ordinary-course liquidity as sufficient and MBIA Corp.’s liquidity as adequate for expected claims, subject to recovery and market risks.
• The asset/liability products business had a $783 adjusted book-value deficit, up from $591 at year-end, and management expected it could continue to increase. The company cited asset sales, swap settlements and subsidiary advances as possible mitigations, but gave no assurance these would be sufficient.
• National’s statutory capital was $2.9 billion, up from $2.8 billion at year-end. MBIA Insurance Corporation’s statutory capital fell to $1.9 billion from $2.3 billion, including a $510 statutory net loss for the quarter. MBIA Corp.’s claims-paying resources were $5.9 billion versus $6.1 billion at year-end; National’s were $5.7 billion, broadly flat.
• National lent MBIA Corp. $1.1 billion under a secured loan bearing 7% and maturing in December 2016; MBIA Corp. deferred interest. After quarter-end it borrowed a further $443 million with regulatory approval. The collateral includes future put-back recoveries and premiums, linking repayment to uncertain collections. A separate $300 million MBIA Corp. loan to MBIA Inc. was repaid in May 2012; the regulator approved a facility extension to May 2013, subject to draw approval.
• Key risks include delayed or reduced mortgage put-back recoveries, potential bankruptcy of certain mortgage counterparties, further RMBS/CMBS/CRE losses, claim-payment timing and liquidity pressure, credit-spread and fair-value volatility, deferred tax asset realizability, and regulatory approval constraints on intercompany support and dividends. The $1.6 billion net deferred tax asset was after a $277 million valuation allowance.
• Management characterized the U.S. recovery as positive but restrained, with housing and employment weakness, European uncertainty and other market risks. It provided no quantified earnings or financial guidance. Significant new insurance writings and any ratings upgrade remain uncertain.
• Legal matters include mortgage put-back litigation, disputes related to National’s formation and other proceedings. The Countrywide case had favorable procedural rulings for MBIA, but outcomes and recoveries remain uncertain. The Aurelius transformation case was dismissed by stipulation in April 2012; other litigation developments and commutations after March 31 are described in the filing.

Most important facts for investors to verify

• Whether the $3.2 billion of expected mortgage recoveries can be collected, when collections will occur, and how counterparty creditworthiness or litigation outcomes may change recorded values.
• Whether MBIA Inc. and MBIA Corp. can meet obligations and collateral calls without further asset sales, regulatory approvals or support from affiliates; verify liquidity by legal entity, not just consolidated cash.
• How much of GAAP earnings and book value reflects fair-value movements, and whether the non-GAAP adjusted pre-tax loss and adjusted book value assumptions are appropriate.
• Whether CMBS, CRE and RMBS losses exceed current reserves, and whether claims, commutations and recovery delays further reduce MBIA Corp.’s liquidity and statutory capital.
• Whether National can obtain stronger, stable ratings and resume meaningful municipal bond insurance, and whether restrictions on dividends and intercompany lending change.
• Whether the deferred tax asset remains realizable and whether the valuation allowance needs to increase.