MBIA Inc. reported Adjusted Book Value (ABV) per share (a non- GAAP measure defined in the attached Explanation of Non-GAAP Financial Measures) of $31.23 per share at June 30, compared with $32.00 per share at March 31.
Book value per share was $12.92 as of June 30.
In a release on August 8, MBIA reported that its adjusted pre- tax loss (a non-GAAP measure defined in the attached Explanation of Non-GAAP Financial Measures) for the second quarter of 2012 was $152 million compared with adjusted pre-tax income of $161 million for the second quarter of 2011. The reduction in ABV and the adjusted pre-tax loss for the three months ended June 30, were driven primarily by losses on insured exposures. ABV and adjusted pre-tax income provide investors with additional views of the Company's operating results that management finds useful in measuring financial performance.
Net income available to common shareholders for the second quarter of 2012 was $581 million, or $2.98 per share, compared with net income of $137 million, or $0.68 per share, for the second quarter of 2011. The Company's results for the second quarter of 2012 were driven by $1.2 billion in pre-tax unrealized gains on insured credit derivatives. The unrealized gains on insured credit derivatives resulted from a combination of gains associated with commutations of insured exposures and the impact of a worsened market perception of MBIA Corp.'s credit quality. The Company is required to adjust the values of its derivative liabilities for the market's perception of its non-performance risk. The decrease in the value of the derivative liabilities attributable to the change in non-performance risk is reflected as a pre-tax unrealized gain on the income statement.
"In the second quarter, we continued to see reductions in potential risks and sources of volatility in our business," said MBIA Inc. President and Chief Financial Officer Chuck Chaplin. "As a result of commutation activity, our exposures to the riskiest CMBS pools and ABS CDOs have been reduced substantially. At this point, the CMBS exposures with the most significant potential future claims are with a single counterparty - a Bank of America subsidiary - whose affiliate, Countrywide, is currently in default of its contractual obligations to repurchase billions of dollars of ineligible mortgages from securitizations insured by MBIA Corp.
"Beyond these issues, the insured portfolio in MBIA Corp. is approaching stability and National's is performing in line with our expectations. The most significant litigation over the formation of National, the Article 78 proceeding, concluded in June and we are awaiting a decision from the Court. In the meantime, our fraud and breach of contract case against Bank of America and Countrywide is moving towards a 2013 trial," Chaplin continued. "Insured claims on second- lien RMBS resumed their decline in the quarter, and an asset sale initiative at the holding company level bolstered its liquidity position."
Net income available to common shareholders for the six months ended June 30, was $591 million, or $3.03 per share, compared with a net loss of $1.1 billion, or $5.70 per share, for the six months ended June 30, 2011. Net income for the six months ended June 30, and the net loss for the six months ended June 30, 2011 were, in each case, driven primarily by pre-tax unrealized changes to the fair value of insured derivatives. In the first six months of 2012, the Company recorded a $1.5 billion unrealized gain on insured credit derivatives compared with an unrealized loss of $1.3 billion in the first half of 2011.
The adjusted pre-tax loss for the six months ended June 30, was $700 million compared with adjusted pre-tax income of $185 million in the comparable period of 2011. The unfavorable change for the six months ended June 30, was primarily due to increased reserves and impairments on insured exposures, an increase in operating expenses due to a significant increase in legal and litigation-related costs, lower net investment income and an increase in net investment losses related to other-than-temporary impairments.
Second Quarter 2012 Adjusted Pre-Tax Income
The following is a summary of adjusted pre-tax income for the second quarter of 2012 where such results differ from pre-tax income calculated in accordance with GAAP. Adjusted pre-tax income is equal to GAAP pre-tax income for the U.S. Public Finance, Advisory Services, Corporate and Wind-down segments.
U.S. Public Finance Insurance Results
The Company's U.S. public finance insurance business is primarily conducted through its National Public Finance Guarantee Corp. (National) subsidiary.
The U.S. public finance insurance segment recorded $148 million of pre-tax income in the second quarter of 2012 compared with $144 million of pre-tax income in the second quarter of 2011. The modest improvement in pre-tax income in the second quarter of 2012 resulted from an increase in total premiums earned driven by higher refunding volume, partially offset by an increase in legal and litigation- related costs and expenses and a reduced benefit from loss and loss adjustment expenses.
Total premiums earned in the U.S. public finance insurance segment were $130 million in the second quarter of 2012, up 23 percent from $106 million of total premiums earned in the second quarter of 2011, as a decrease in scheduled premiums earned was more than offset by an increase in refunding premiums earned.
Net investment income for the U.S. public finance insurance segment increased 4 percent to $56 million in the second quarter of 2012 from $54 million in the comparable period of 2011, primarily due to a higher yield on the $1.6 billion secured loan with MBIA Corp. relative to the previously invested assets.
The U.S. public finance insurance segment's loss and loss adjustment expenses were a benefit of $3 million in the second quarter of 2012 compared with a benefit of $9 million in the second quarter of 2011.
Expenses associated with the amortization of deferred acquisition costs totaled $26 million in the second quarter of 2012, up 13 percent from $23 million in the second quarter of 2011 and in line with insured portfolio amortization.
Operating expenses were $28 million in the second quarter of 2012, compared with $19 million in the comparable period of 2011. The increase in operating expenses was driven by higher legal and litigation-related costs and expenses.
As of June 30, National's statutory capital was $3.0 billion and its claims-paying resources (as described in the attached Explanation of Non-GAAP Financial Measures) totaled $5.7 billion.
Structured Finance and International Insurance Results
The structured finance and international insurance business is primarily conducted through MBIA Corp. and its subsidiaries.
The structured finance and international insurance segment had an adjusted pre-tax loss of $300 million for the second quarter of 2012 compared with adjusted pre-tax income of $188 million for the second quarter of 2011. Premiums earned, net investment income, fees and reimbursements, and premiums and fees on insured derivatives totaled $138 million in the second quarter of 2012. All other line items in the aggregate, except losses and credit impairments (a non-GAAP measure defined in the attached Explanation of Non-GAAP Financial Measures), had a net $132 million negative impact on the adjusted pre-tax loss. Losses, credit impairments and loss-related expenses on insured exposures totaled $306 million in the second quarter of 2012, compared with a benefit of $150 million in the second quarter of 2011.
The following is a summary of MBIA Corp.'s insured portfolio economic loss activity in the second quarter. Economic losses for a reporting period represent the change in the Company's estimate of the present value of expected net future claims payments without regard to the manner in which they are presented in the Company's financial statements.
In the second quarter, the Company increased its expectations of future payments on second-lien RMBS exposures by $41 million reflecting slower than expected declines in early stage delinquencies within these transactions. Expected salvage declined by $26 million reflecting a reduction in anticipated recoveries on certain insured transactions sponsored by GMAC Mortgage, LLC and Residential Funding Company, LLC following their bankruptcy filings and a decrease in expected recoveries from excess spread due to faster principal repayment on the underlying loans, partially offset by an increase in expected recoveries from contractual claims related to ineligible mortgage loans improperly included in the insured securitizations. The Company's estimates for expected recoveries related to "put-backs" of ineligible mortgage loans totaled $3.2 billion as of June 30. However, based on its assessment of the strength of its contract claims, the Company continues to believe it is entitled to collect the full amount of its cumulative incurred losses on these transactions, which totaled $4.9 billion as of June 30.
In the second quarter of 2012, the Company estimated $171 million of incremental economic losses on certain insured transactions backed by pools of CMBS. The increase reflects additional deterioration within some insured transactions.
Included in the $68 million of "Other" economic loss activity was approximately $57 million of losses on insured first-lien mortgage loan securitizations where recoveries of advances by the servicers of the underlying loans led to higher than expected loss severities.
Portions of the $306 million of total economic losses are on policies subject to insurance accounting while other amounts relate to losses on insured VIEs or insured credit derivatives for which GAAP specifies different accounting.
Claims payments on insured second-lien RMBS exposures totaled $139 million in the second quarter of 2012 compared with $169 million in the first quarter of 2012 and $213 million in the second quarter of 2011.
As of June 30, MBIA Corp.'s statutory balance sheet reflected $1.3 billion in cash and invested assets including $534 million of cash, short-term investments and other highly liquid investments available to meet liquidity demands, and excluding amounts held by subsidiaries. The payments made to counterparties in connection with commutations of insured exposures since the end of 2011 were primarily funded through increases to the outstanding balance of a secured loan from National to MBIA Corp., which currently totals $1.6 billion. The Company believes that MBIA Corp.'s liquidity resources, including expected cash inflows, will adequately provide for anticipated cash outflows.
MBIA Corp. had statutory capital of $1.7 billion and claims- paying resources totaling $5.2 billion at June 30.
The Company's Advisory Services business is primarily conducted in its Cutwater Asset Management subsidiaries. Cutwater recorded pre- tax income of $299 thousand in the second quarter of 2012 compared with a pre-tax loss of $3 million in the second quarter of 2011. The improvement in pre-tax income in the second quarter of 2012 compared with the second quarter of 2011 was primarily the result of a $4 million non-recurring fee from a non-insurance affiliate.
Cutwater's third-party average assets under management in the second quarter totaled $20.0 billion, down 5 percent from $21.0 billion in the first quarter of 2012.
The Corporate segment comprises MBIA Inc.'s holding company activities and certain subsidiaries, including Optinuity Alliance Resources Corp. The Corporate segment recorded pre-tax income of $28 million in the second quarter of 2012 compared with a pre-tax loss of $1 million in the second quarter of 2011. The improvement in the Corporate segment's pre-tax income was driven by a $35 million fee paid by the Company's conduit segment in the second quarter of 2012 for administrative and other services. The fees for these services may vary significantly from period to period.
As of June 30, the corporate activities of MBIA Inc. had $290 million of cash and highly liquid assets available for general corporate liquidity purposes.
The Company's wind-down operations comprise its ALM and Conduit businesses, both of which are in run-off.
The Company's wind-down operations recorded a pre-tax loss of $81 million in the second quarter of 2012 compared with a pre-tax loss of $167 million in the second quarter of 2011. The pre-tax loss in the second quarter of 2012 was driven by a $59 million net loss on financial instruments at fair value and foreign exchange resulting primarily from losses on asset sales to the Corporate segment and $35 million in VIE operating expenses resulting from a fee paid to a non-insurance affiliate for administrative and other services, partially offset by $33 million in net gains on the extinguishment of debt. The losses on asset sales to the Corporate segment are not reflected in the Company's consolidated financial statements due to intercompany eliminations. The pre-tax loss in the second quarter of 2011 was driven by a $133 million net loss on financial instruments at fair value and foreign exchange, primarily from mark-to-market losses resulting from a combination of an improved market perception of MBIA Corp.'s credit quality as well as adverse movements in interest rates and currency exchange rates.
Ongoing negative net interest spread in the ALM business, a portion of which is included in the $59 million net loss on financial instruments at fair value and foreign exchange, totaled approximately $32 million in the quarter.
As of June 30, the ALM business had cash and short-term investments of $330 million, of which $46 million was not pledged directly as collateral. An additional $327 million of cash and short- term investments as of June 30, was pledged to a swap counterparty and netted against the derivative liability in the Company's financial statements.
MBIA is a holding company whose subsidiaries provide financial guarantee insurance, as well as related reinsurance, advisory and portfolio services, for the public and structured finance markets, and asset management advisory services.
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