We are upgrading our recommendation on the shares of MBIA Inc. (MBI) from “Underperform” to “Neutral” on the back of an expected favorable outcome from its business restructuring measures and a strong holding company liquidity.
After suffering steep losses from its structured finance business, MBIA undertook some heavy duty business reorientation. As a result of this, during February 2008, the company capitalized National Financial Guarantee Corp. as a wholly owned subsidiary focusing on writing traditional bond insurance by transferring MBIA Insurance Corp’s profitable public finance insurance business, along with $5.4 billion of assets, to a new entity.
But National is facing lawsuits filed against it by investors, who opine that the transfer of capital by MBIA Insurance Corp. would render it incapable of paying claims to the policyholders. While both S&P and Moody’s (MCO) have acknowledged the “AA” and “Aaa” capital levels of National, the rating agencies have taken a wait-and-see approach on the subsidiary’s financial strength ratings, which are awaiting the litigation outcome. Though we think that the ruling will be in its favor, an appropriate rating − which is the key to writing bond insurance − is deterring the company.
The second major step in MBIA’s business reorganization program was renaming its investment advisory companies as “Cutwater”. The company expects a growth in third-party assets under management fueled by strong demand for advisory services resulting from recent fixed-income market volatility and secular growth in fixed-income asset classes due to demographics and product innovation. Currently, the majority of assets under management are from third-party clients, which is anticipated to increase over time.
MBIA has emphasized that it is not denying claims, although the company is actively seeking to recover claims which are deemed fraudulent. The company has in fact filed its own lawsuits against mortgage sellers and servicers (counterparties). MBIA alleges that these firms improperly originated and serviced home loans that ended up in securities guaranteed by the company. These suits could result in substantial recoveries that could exceed $4 billion to $5 billion, stated management. We believe that these litigations will have a profound effect on MBIA as matters get resolved positively, impacting the adjusted book value.
Moreover, MBIA has adequate liquidity at the holding company level, with the Corporate segment having $321 million in cash and short term investments as of Mar 31, 2010. This along with a tax refund of $137 million for the 2009 tax year will place the company in position to meet its payment obligations through 2015 even if no dividends are received from its insurance asset management or advisory business subsidiaries.
A potential risk to our rating, however, includes an unfavorable litigation outcome against National, and increased delinquencies causing more losses in credit derivatives.
(We are reissuing this article to correct a mistake. The original article, issued June 10, 2010, should no longer be relied upon.)
Read the full analyst report on “MBI”
Read the full analyst report on “MCO”
Zacks Investment Research
