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MBIA Loses on Credit Derivatives

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Insurer MBIA Inc. reported fourth-quarter net loss of $626 million or $3.23 per share, in stark contrast to a net income of $451 million or $2.24 per share in the prior-year quarter.

The sharp year-over-year decline was primarily due to $1.7 billion of pre-tax losses on insured credit derivatives. This loss was, however, partially offset by a $448 million income tax benefit, a $285 million benefit to loss and loss adjustment expenses related to an increase in expected recoveries from “put-backs” of ineligible mortgage loans, and a $255 million net realized gain related to the deconsolidation of certain variable interest entities.

MBIA Inc.’s adjusted pre-tax loss (a non-GAAP measure) for the fourth quarter of 2011 was $252 million compared with an adjusted pre-tax loss of $311 million for the fourth quarter of 2010.

The net loss to common shareholders for the full year 2011 was $1.3 billion, or $6.69 per share, compared with a net income of $53 million, or $0.26 per share, for the full year 2010. The net loss for 2011 was primarily due to $2.8 billion of pre-tax losses on the fair value of insured derivatives.

The adjusted pre-tax loss for the full year 2011 was $497 million compared with an adjusted pre-tax loss of $377 million in 2010. The adjusted pre-tax losses in both 2011 and 2010 were the result of increased reserves and impairments on insured exposures.

Fourth quarter total revenue loss of $1.2 billion, contrary to a revenue gain of $864 million in the year-ago quarter. The decline was mainly the result of a negative adjustment in the value of derivatives.

Premiumsearned during the quarter recorded a 14% dip year over year to $102 million and net investment income also declined 27% to $84 million.

Segmental Performance

The U.S. Public Finance Insurance is managed by its subsidiary, National Public Finance,  and was set up 18 months ago to underwrite U.S. public finance. 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 $113 million, almost unchanged year over year. A decrease in scheduled premiums earned was offset by an increase in refunding premiums earned.

Adjusted pretax income increased 58% year over year to $163 million, led by higher net gains on sales of securities and lower loss and loss adjustment expenses, partially offset by a realized loss associated with the write-off of $31 million of goodwill.

TheStructured Finance and International Insurance business operations are managed by MBIA Corp. While no new business was written in this segment, the existing book of business generates the scheduled premiums earned. The segment had an adjusted pre-tax loss of $300 million compared with an adjusted pre-tax loss of $487 million in the prior-year quarter.

Premiums earned, net investment income, fee and reimbursements, and premiums and fees on insured derivatives totaled $128 million in the fourth quarter of 2011.

The Advisory Services are managed by Cutwater Asset Management. This segment earned pre-tax income of $9 million in contrast to a pre-tax loss of $3 million in the prior-year quarter. The improvement was driven by increased advisory performance fee and lower compensation expenses. The assets under management were worth $35.4 million as of December 31, 2011, down 8% sequentially.

Adjustedbook value per share (a non-GAAP measure) declined to $34.50 as of December 31, 2011 from $36.81 as of December 31, 2010.

Our Take

 MBIA is keenly making efforts to get out of 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. Subsequent to December 31, 2011 MBIA Corp. agreed to commute transactions with additional counterparties.

MBIA’s strategic business transformation move to create a separate unit named National Public Finance Corp., to write government bond insurance, faces a challenge under Article 78. The Company is currently involved in several lawsuits with groups of plaintiffs challenging the transformation, both under Article 78 of New York’s Civil Practice Law & Rules and in plenary suits. Discovery and depositions in the Article 78 case began in 2010 and are nearly complete. Since the case was filed, 14 of the original 18 plaintiffs have withdrawn their claims. The trial for the Article 78 proceeding is expected to commence in the second quarter of 2012.

National will not be able to underwrite new business, until it comes clean on the charges leveled against it. We expect that the process will take some time and continue till the end of 2012. Hence, it will not be immediately accretive to its earnings.

MBIA’s peer, Assured Guaranty Ltd. , also reported a net loss of 46 cents per share. The loss was, however, narrower than $1.0 per share loss reported in the prior year quarter.

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