Monoline bond insurer MBIA, Inc. (MBI)
posted a surprise profit for shareholders in Q109, despite ongoing issues in its structured finance portfolio. Analysts had largely expected a loss. The firm said it earned $696.7m, or $3.34 per share, during the first quarter, compared with a net loss of $2.4bn, or $12.92 per share, in the year-ago period.
Net income in Q109 was primarily driven by $1.6bn in pre-tax unrealized net gains on insured credit derivatives. MBIA also announced that it wrote no new structured finance business this quarter, but said that it is receiving turnover from existing platforms. The existing book of SF business generated $119m in scheduled premiums earned, an increase of $25m from $94m one quarter earlier.
The company warned the trend isn't likely to continue, however, as elevated mortgage defaults will take their toll later this year due to "a combination of high levels of ineligible loans in the mortgage pools, the overall weakening in the economic environment, servicer performance-related issues and relatively few successful loan modifications by the loan servicers."
Bond insurers like MBIA provided the top-rated portions of RMBS and related CDO deals with a guarantee that essentially was designed to serve as a private-party proxy for the implicit and explicit government guarantees that exist on Fannie/Freddie/Ginnie mortgage bond issues. But the strength of any such guarantee is only as good as the credit rating of the firm that provides it, which means that increasing MBS losses have led to downgrades affecting both the securities in question, as well as the insurers that guaranteed principal and interest payments to investors.
Of MBIA's $224.8bn insured portfolio, 30% is tied to U.S. commercial and residential mortgage-backed securities, with another 12% in so-called multi-sector CDO deals. (Many such CDO deals involved tranches from subprime RMBS.) Of its $29.7bn in U.S. RMBS exposure, $7.3bn in net par outstanding lies in subprime and Alt-A first liens, with another $15bn in HELOCs and closed-end second liens, MBIA reported.
Overall, the company's structured finance operations incurred a $636m loss for the quarter; the firm said much of the loss was tied to its exposure in its quickly-souring second liens, as home values continue to descend. Second-lien RMBS deals saw an increase in early stage delinquencies late last year and early this year, MBIA said, which ultimately resulted in a greater-than-expected level of losses being realized.
Like many monolines, MBIA signaled it will look to deny claims payments for losses on deals it wrapped on the grounds that the quality of the underlying collateral was materially misrepresented to the insurer at the time of underwriting. MBIA is currently litigating against both Countrywide
as Residential Capital LLC
on just such grounds. The company hopes to be able to recover what it called a "substantial" portion of existing loss reserves incurred during Q1, as a result, although it did not speculate on the amount of any expected recoveries. Potential future recoveries notwithstanding, however, gross loss payments for the quarter totaled $750m -- $614m of which was tied to second-lien RMBS, MBIA said.
The firm is expecting total loss payments for the year to fall just short of $1.9bn, according to an investor presentation.
Write to Jacob Gaffney