MBIA Surprises with Gains

MBIA Inc.’s (MBI - Analyst Report) second quarter operating earnings came in at $4.30 per share compared to $7.14 in the year-ago quarter. Results were substantially ahead of the Zacks Consensus Estimate of negative 51 cents.

The company reported a net income of $894.7 million or $4.30 per share during the quarter compared to $1.7 billion or $7.14 per share in the prior-year quarter.
 
The upside was mainly attributable to strong performance in the Advisory Services business and a net decrease in loss reserves, as a $353.7 million increase to incurred losses on insured second-lien residential mortgage backed securities (RMBS) was more than offset by $1.1 billion in estimated recoveries recorded in certain second-lien residential mortgage loan securitizations.

The company also recorded $423.8 million in unrealized gains on insured credit derivatives and $116.3 million in gains on the extinguishment of debt, offset by $113.7 million in pre-tax other-than-temporary impairments.
 
MBIA’s book value per share increased 178.2% to $13.30 as of June 30, 2009 from $4.78 as on December 31, 2008, mainly due to a decline in cumulative unrealized losses on insured credit derivatives. Per share adjusted book value (ABV - which adds back the present value of installment premiums, among other items) on June 30, 2009 remained flat at $40.01 per share, compared to $40.06 per share on December 31, 2008.
 
Premium earned was $177.9 million in the quarter compared to $233.4 million in the prior-year quarter.
 
U.S. Public Finance Insurance

Book value and adjusted book value per share were $11.84 and $19.81, respectively, on June 30, 2009, compared to $10.97 and $18.95, respectively, on December 31, 2008. Premium earned was $133.0 million in the quarter compared to $241.6 million in the prior-year quarter.
 
Structured Finance and International Insurance

Book value and adjusted book value per share were $11.67 and $24.85, respectively, on June 30, 2009, compared to $5.16 and $25.17, respectively, on December 31, 2008.
 
Investment Management Services

Book value and adjusted book value per share were -$9.28 and -$3.72, respectively, on June 30, 2009, compared to -$10.53 and -$3.26, respectively, on December 31, 2008. Pre-tax income was $115.4 million in the quarter compared to $38.8 million in the prior-year quarter.

Despite better-than-expected second quarter results, we have yet to see any positive fundamental improvement and don’t expect it to occur near term. Rating issuers recently downgraded MBIA and its subsidiaries, and a group of financial institutions are challenging the company’s recent restructuring efforts. Deteriorating insured portfolio and turbulent financial market only magnify these issues.
 
As such, we maintain our Sell recommendation for MBIA, seeing no sign of relief in the medium term.