Insurance holding company MBIA Inc. on Monday reported net income of $1.3 billion in the second quarter, but the huge advance reflects mark-to-market gains on insured credit derivatives rather than new business.

An accounting quirk explains most of the second-quarter gain: contracts with MBIA insurance are worth less because MBIA’s own credit is worse; therefore, the value of its liabilities decreases, which in turn increases the value of its assets relative to liabilities.

Reflecting on a similar gain for the fourth quarter of last year, MBIA president and chief financial officer Chuck Chaplin in March said: “As we’ve reported for many quarters now, this gain is no cause for celebration, and when that same item swings to loss there will be no cause for alarm.”

Excluding the gain from derivatives and similar products, pre-tax income was $14 million, the second-quarter statement said. MBIA said that measure “presents an additional view” of its quarterly performance.

Total premiums earned in the quarter, including scheduled and refunding premiums, were $156 million.

MBIA is the parent of municipal bond insurer National Public Finance Guarantee Corp. and structured finance insurer MBIA Insurance Corp. The company’s February 2009 decision to segregate those two portfolios resulted in a series of lawsuits. Neither subsidiary has written new policies since 2008, and business is unlikely to resume until the ongoing litigation is resolved.

National’s public finance portfolio earned $119 million in the quarter, a 10% decline from the revenue earned in the same period in 2009. The investment-grade insurer — which continues to maintain the largest insured bond portfolio in the industry — had statutory capital of $2.2 billion and claims-paying resources of $5.5 billion, the second-quarter earning statement shows.

MBIA Insurance, which posted pre-tax income totaling $1.8 billion in the quarter, paid $421 million in net claims on second-lien residential mortgage exposures from April to June. The company noted that such claims “have been trending downwards each quarter since peaking at $636 million in the second quarter of 2009.”

The structured finance insurer held statutory capital of $3.3 billion and claims-paying resources of $5.5 billion, figures the parent company said would be adequate to pay anticipated claims.

In addition to the suits against it, MBIA has been involved for more than a year in a series of lawsuits to recover billions of dollars from a number of financial institutions that allegedly misled the insurer into guaranteeing assets that turned toxic.

MBIA believes the “ineligible” loans must be repurchased or replaced. In Monday’s earnings statement, it increased its expected recoveries from these lawsuits to $2.1 billion from the $1.9 billion expected at the end of the previous quarter.

“More market participants are recognizing that many of the loans in these securitizations should never have been in them in the first place, and that the seller/servicers must repurchase them,” Chaplin said in the earnings statement.

MBIA also announced that after the second quarter ended, its structured finance insurer paid $72 million to commute, or tear up, $4.4 billion of risky insured exposures held by an unnamed counterparty.

In addition, the structured finance insurer entered into a settlement with unnamed sponsors of mortgage loan securitizations. Under the agreement, it received an undisclosed amount of money for resolving a dispute “relating to its representation and warranty claims against the sponsor.”

Chaplin noted the company’s exposure to complex, synthetic products known as collateralized debt obligations squared were reduced by about 50% in the quarter.

“The net incurred loss on insured exposures demonstrates that credit stress continues to be a reality, but the volatility of losses appears to be declining,” Chaplin said.

Company stock closed Monday at $9.20, up 3.72% on the day. In light of the earnings statement, after-hours trading lifted that price another 8%.

In the month before the release, stock jumped almost 40%, in part due to the July 12 disclosure that Morningstar’s fund manager of the decade, Bruce Berkowitz, had purchased an 11.1% stake in the company.

A conference call for investors will be held Tuesday morning at 8:00 a.m. Eastern Daylight Time.

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