MBIA Inc. (MBI) reported second quarter 2011 net income of 68 cents per share, way behind $6.32 per share recorded in the prior-year quarter. The year-over-year deterioration was brought about by a massive decline in gain in insured credit derivatives.
Total revenue of $98 million plummeted 95% year over year. The significant drop in consolidated revenues principally reflected $75 million of insured credit losses in contrast with $1.5 billion of insured credit gain in the year-ago period.
Premiums earned during the quarter declined 4.5% year over year to $149.0 million, while net investment income fell 11% to $95 million.
Segmental Performance
U.S. Public Finance Insurance is carried out by its subsidiary National Public Finance, which was set up18 months ago to write only U.S. public finance. However, the unit is facing legal action, the outcome of which has prevented rating agencies (S&P and Moody’s) to confer strong ratings on the company. Healthy ratings are considered vital for the bond insurance business. Therefore, National virtually wrote no new business, and net premiums earned by the unit were $75.2 million, down 13% year over year. Adjusted pretax income was $144 million, up 12.5% year over year, led by an improvement in loss and loss adjustment expenses. Investment income was $54 million, 3% lower year over year, led by lower average yields. Since the second quarter of 2010, National’s investment portfolio has increased in size by 1%, to $5.4 billion at June 30, 2011.
The Structured Finance and International Insurance business, carried out by MBIA Corp, witnessed no new business written. However, the existing book of business generated $54.9 million in scheduled premiums earned during the quarter, which was down 15% year over year. The unit suffered an additional $193 million of losses on its insured exposures.
During the second quarter of 2011, MBIA Corp.continued to reduce both the absolute amount and the volatility of its liabilities and potential liabilities through repurchases of securities and commutations of insurance policies. In the first six months of 2011, MBIA Corp. commuted $3.7 billion of gross insured exposure comprising the commercial mortgage-backed securities (“CMBS”) pools, investment grade corporate collateralized debt obligations (“CDOs”), a government supported entity, and a municipal gas facility. In the reported quarter, MBIA Corp. reached an agreement for the commutation of an additional $2.7 billion of gross insured exposure comprising asset-backed collateralized debt obligations (“ABS CDOs”), which have been settled in the third quarter of 2011. Additionally, in the third quarter of 2011, MBIA Corp. has reached agreements in principle to commute $5.6 billion of gross insured exposure comprising ABS CDOs and investment grade corporate CDOs. The company’s efforts to commute a number of CDO transactions will help reduce future volatility, thereby protecting capital.
Advisory Services are carried out by Cutwater Asset Management. This segment earned fees and reimbursements of $17.0 million, down 3.4% year over year. The assets under management totaled $39.8 million at the end of June 30, 2011, down 3% sequentially. However, the segment recorded a pre-tax loss of $3.0 million compared with breakeven performance in the comparable period last year. The loss was driven by expenses associated with the positioning of the unit for future growth.
The Corporate segment registered a pretax loss of $2 million in the quarter compared with a loss of $9 million in the year-ago quarter.
The Wind down operations recorded a pretax loss of $168 million, driven by losses on financial instruments at fair value.
Adjusted book value (a non-GAAP measure) improved to $37.22 per share as of June 30, 2011, from $35.57 as of June 30, 2010.
MBIA's business model is largely dependent upon its overall credit rating. Credit ratings provide objective judgments about the insurer’s ability to pay insured parties when necessary, and a decline in the credit quality of the company shrinks its potential customer pool. MBIA receives insurance premiums by guaranteeing the coupon and principal of bonds. This premium is almost entirely based on MBIA's financial strength. Since April 2008, when MBIA first lost its AAA rating, its credit rating has been downgraded to B3, which is below the investment grade. Thus, MBIA has not written any new business since then.
MBI is currently caught up in a maze of legal suits. It is also actively seeking commutations of insurance exposure to lessen future volatility. We expect the company to experience operating losses for the foreseeable future as the operating environment in the mortgage insurance industry remains highly uncertain, particularly in light of the continued weakness in the housing sector and the recent regulatory proposals dealing with housing reform
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