MBIA Inc. turned a profit in the second quarter as the bond insurer assumed it will not have to cover losses on mortgages it considers ineligible for insurance.
The Armonk, N.Y.-based company on Wednesday reported net income of $894.7 million, or $4.30 per share, during the quarter, compared with $1.7 billion, or $7.14 per share, in the second quarter of 2008.
The primary driver of the profit in the quarter was the liberation of money previously reserved to pay claims. Like any bond insurer, MBIA has to estimate the claims it is likely to face and set money aside to cover them.
Thanks to "continued deterioration" in the company's book of insured mortgage debt, MBIA socked away an additional $353.7 million to reserves.
"The performance of insured residential mortgage-backed securities continued to deteriorate in the second quarter, and we expect continued high levels of claims payments for the balance of 2009," chief financial officer Chuck Chaplin said in a statement.
However, this was more than offset by the company's assertion that it is not responsible for some mortgages in the bonds it insures. Under the agreement to insure these bonds, MBIA claims sellers or servicers are obligated to strip or replace certain kinds of mortgages from the deal.
The company "recovered" $1.1 billion it had previously set aside to cover losses on these ineligible mortgages. That led to a $729.3 million decrease to the loss reserve. A decrease to a loss reserve adds to assets, and is thus profit.
MBIA wrote "virtually" no new policies in municipal bond insurance during the quarter. MBIA insures more than $750 billion of debt, including $544.59 billion of municipal bonds. The public finance segment earned $60 million before taxes.
MBIA reported policyholders' surplus - or assets in excess of liabilities - of $2.9 billion at the end of the quarter.
