MBIA Inc. chief executive officer Jay Brown told investors Tuesday that the past two and a half years have proven the durability of his company’s balance sheet. Ambac Financial Group, by contrast, continued to warn that it may seek bankruptcy protection as early as 2011.
The two insurance holding companies, which reported second-quarter earnings Monday, were the largest municipal bond insurers before the financial crisis. Each suffered near-fatal losses when mortgage-related products they insured defaulted, causing each to pay out billions of dollars.
Neither company has written new policies since 2008, but while MBIA anticipates re-entering the bond insurance market, Ambac Financial exists only to manage the run-off of its portfolio.
Second-quarter earnings were consistent with those ends. MBIA reported net income of $1.3 billion, while Ambac Financial posted a net loss of $57.6 million.
MBIA’s share value advanced 4.5% Tuesday to $9.60, while Ambac Financial’s plummeted 22.5% to $0.70.
MBIA’s huge quarterly gain reflects volatile mark-to-market gains on insured credit derivatives rather than new business. Even when excluding such items, pre-tax income was positive with $14 million earned in the quarter.
Despite the financial turmoil of recent years and a lack of new business, Brown said MBIA and its insurer subsidiaries have managed to honor all claims — including nearly $5 billion on residential mortgage-backed securities — and it expects to resume writing new policies once ongoing litigation is resolved and credit ratings are boosted.
Ambac Financial, which has been warning since November that it may face bankruptcy as early as 2011, blamed its quarterly decline primarily on deterioration within its structured finance portfolio.
In Monday’s earning statement, Ambac Financial reiterated that it has “insufficient capital to finance its debt service and operating expense requirements beyond the second quarter of 2011.”
Its deficit to shareholders was $2.1 billion at the end of the second quarter, the statement shows. Cash, short-term securities, and bonds at the holding company amounted to $76 million at the end of the second quarter, compared with annual debt service costs of about $87 million.
Moody’s Investors Service wrote in June that the possible bankruptcy of Ambac Financial is unlikely to affect policyholders of Ambac Assurance Corp., its bond insurer subsidiary.
Ambac Assurance increased its statutory surplus to $1.5 billion in the second quarter, up from $160 million at the end of March, according to Monday’s earnings statement.
The major jump results from a June settlement involving credit default swaps. The agreement entailed Ambac Assurance paying financial institution counterparties $2.6 billion in cash and $2 billion in surplus notes to terminate claims on complex mortgage assets with a face value of more than $16 billion.
The settlement was completed at the behest of Ambac Assurance’s regulator, the Wisconsin Office of the Commissioner of Insurance. The regulator in March took $67 billion of the insurer’s more toxic holdings and placed them into a segregated account that it now administers to facilitate an orderly runoff.
Ambac Assurance holds the third largest insured public finance portfolio in the industry with $213 billion outstanding. Its total claims-paying resources amounted to $8.5 billion as of June 30, down from $10.8 billion in the previous quarter as a result of net cash outflows.
While Ambac Financial struggles to meet debt payments, MBIA said its balance sheet is adequate to continue paying all anticipated claims, and it was optimistic it would win lawsuits that would bolster its capital base and credit rating.
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 which have prevented both from writing new policies.
Brown told investors Tuesday in a post-earnings conference call that the litigation, which contests a transfer of capital and resources from MBIA Insurance to National, has taken longer than hoped or anticipated. But he was confident the courts would allow the restructuring, which was approved by the New York Insurance Department.
Ambac Financial did not hold a similar conference call.
In addition to the suits against it, MBIA has been involved for more than a year in a series of battles 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.
Signaling optimism that it will win at least some portion of the money it paid out over the past few years, MBIA on Monday increased its expected recoveries from these lawsuits to $2.1 billion from the $1.9 billion expected at the end of the previous quarter.
“To say that there was a fair amount of market skepticism regarding the validity of our claims in the fall of 2008 would be a significant understatement,” Brown said to investors.
Since MBIA took legal action against counterparties, similar cases have been filed by “no less than” Fannie Mae, Freddie Mac, the Federal Home Loan Banks, and the Federal Reserve, Brown said.
“With favorable legal developments, increased recognition of the issue in the media, [and] growing provisions for loan repurchases by mortgage originators,” he added, “it’s no longer a question of whether we will realize our contractual recoveries, the question is, when and how much?”
Indeed, shortly after the second quarter ended, MBIA Insurance paid $72 million to commute, or tear up, $4.4 billion of risky insured exposures held by an unnamed counterparty.
In addition, it entered into a settlement with unnamed sponsors of mortgage loan securitizations in which it received an undisclosed amount of money for resolving a dispute “relating to its representation and warranty claims against the sponsor.”
Despite numerous questions Tuesday in a question-and-answer session with investors, MBIA wouldn’t comment on the details of either transaction.
In Monday’s earnings report, chief financial officer Chuck Chaplin said: “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.”
While MBIA reported positive results for income in the second quarter, the company’s adjusted book value fell to $35.76 per share from $36.01 during the three-month period.
Adjusted book value is a measure of accounting that does not adhere to generally accepted accounting principles but instead attempts to capture future income earnings minus future liabilities.
Chaplin characterized the quarter as turning out “reasonably well” considering the circumstances.
“Earnings were about break-even, liquidity was somewhat improved,” he told investors Tuesday. “It’s too soon to deem the credit crisis is over, but here on what I see as its third anniversary, the adverse volatility in our book appears to be subsiding and the company’s balance sheet has proven to be as resilient as we previously thought it would be.”
Elsewhere in the earnings statement, National’s half-trillion dollar 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 maintains the largest insured bond portfolio in the industry — had statutory capital of $2.2 billion and claims-paying resources of $5.5 billion.
Brown said that capital base is consistent with double-A or higher standards from Moody’s Investors Service and Standard & Poor’s, but that the uncertainty caused by litigation contesting National’s creation has prevented it from attaining those ratings.
Once that uncertainty is removed, Brown said he believes the insurer’s credit ratings will rise.
