MBIA's Loss Saga Continues (revised)

Bond insurer MBIA Inc. (MBI) reported an adjusted first-quarter pre-tax loss of $548 million or $3.23 per share, in stark contrast to adjusted pre-tax income of $25 million in the prior-year quarter. The loss during the quarter resulted from losses on insured exposures, realized losses from sales and impairments of investments, and legal and litigation-related costs and expenses.

Net income came in at $10 million, or 5 cents per share, compared with a net loss of $1.3 billion, or $6.37 per share, for the first quarter of 2011.

First quarter total revenue was $383 million, contrary to a revenue loss of $1.6 billion in the year-ago quarter.

Premiums earned during the quarter remained unchanged year over year at $137 million and net investment income also declined 45% to $62 million.

Segmental Performance

The U.S. Public Finance Insurance segment is managed by its subsidiary, National Public Finance, and was set up in February 2009. However, the legal action faced by the company and the uncertainties surrounding it have prevented rating agencies (S&P and Moody’s) to assign a strong rating to the company.

Therefore, National virtually wrote no new business. Total premiums earned were $106 million, up 19% year over year. An increase in refunding premiums earned was partly offset by a decrease in scheduled premiums earned.

Adjusted pretax income decreased 51% year over year to $55 million, due to an increase in legal and litigation related costs and higher loss expenses, partly offset by higher premiums earned.

The Structured Finance and International Insurance business operations are managed by MBIA Corp. While no new business was written in this segment, the existing business generates the scheduled premiums earned. The segment suffered an adjusted pre-tax loss of $446 million compared with an adjusted pre-tax loss of $20 million in the prior-year quarter.

Premiums earned, net investment income, fee and reimbursements, and premiums and fees on insured derivatives totaled $114 million in the first quarter of 2012.

The Advisory Services are managed by Cutwater Asset Management. This segment suffered a pre-tax loss of $4 million compared with a pre-tax loss of $1 million in the prior-year quarter, due to decreased advisory performance fee and lower compensation expenses. The assets under management were worth $21.0 billion as of March 31, 2012, down 9% sequentially.

Adjusted book value per share (a non-GAAP measure) declined to $32.00 per share as of March 31, 2012 from $34.50 as of December 31, 2011.

Our Take

MBIA is keen on recovering from the mortgage mess. The company has been commuting volatile insured exposures to reduce future economic losses.

In 2011, the company commuted $32.4 billion of gross insured exposure primarily comprising commercial mortgage backed securities (“CMBS”) pools, investment grade corporate collateralized debt obligations (“CDOs”) and multisector CDOs, among other types of exposures. During the reported quarter, the company commuted further $4.3 billion of its insured exposure.

MBIA’s strategic business transformation move to create a separate unit, National Public Finance Corp., to write government bond insurance faces a challenge under Article 78. The company is currently involved in two lawsuits with groups of plaintiffs challenging the transformation, both under Article 78 of New York’s Civil Practice Law & Rules and in a plenary suit.

Discovery and depositions in the Article 78 case began in 2010 and are now complete. Since the case was filed, 16 of the original 18 plaintiffs have withdrawn their claims. The trial under Article 78 is nearing completion with hearing expected to commence next week.

National will not be able to underwrite new business until the litigation charges leveled against the company are resolved. We expect that the process will take some time and continue through the end of 2012. Hence, it will not be immediately accretive to its earnings.

MBIA retains a Zacks #2 Rank, which translates into a short-term Buy rating. We maintain a long-term Neutral recommendation on the shares.

MBIA’s peer, Assured Guaranty Ltd. (AGO - Snapshot Report), reported an operating income of 38 cents per share on the same day. The gain was, however, significantly lower than $1.32 per share reported in the prior-year quarter.

(NOTE: We are reissuing this article to correct several mistakes. The earlier version should no longer be relied upon.)