MBIA Insurance Corp. could run out of capital by 2014 if deterioration of its portfolio continues at average market trends, according to an independent analysis by CreditSights published Friday.
In a worst-case scenario should MBIA lose a series of lawsuits, the company could be illiquid even sooner.
MBIA Insurance is a guarantor of global structured finance products and non-U.S. public finance guarantees. Its domestic public finance portfolio was ceded to a new entity — National Public Finance Guarantee Corp. — in a contentious company restructuring in February 2009.
That reduced its claims-paying resources from $15.0 billion to $8.8 billion, an amount the New York Insurance Department believed sufficient to pay any expected claims. But while the company continues in run-off, its claims-paying resources were reduced to $6.5 billion by year-end, according to parent MBIA annual 10K filing with the Securities and Exchange Commission.
CreditSights, projecting continued losses based on the types of assets guaranteed by MBIA Insurance — but not on specific exposures — ran solvency tests to determine when the company might run short of cash.
It projects losses of $3.0 billion in the current year, $2.4 billion for each of the next two years, and $1.7 billion in 2013. In sum, the next four years should see $9.5 billion of claims-paying losses, not including offsetting factors such as investment income or expected premium earnings.
Chuck Chaplin, chief financial officer of MBIA, questioned the validity of those projections in an e-mailed statement.
“CreditSights acknowledges significant limitations to their analysis which in our opinion reduces the usefulness of their conclusions,” he wrote. “Based upon current performance trends and a detailed analysis of each transaction in our insured portfolio, we continue to believe that MBIA Insurance Corp. has adequate resources to meet all of its anticipated obligations as they come due.”
Aside from ongoing losses, the future of the company could be determined by whether it receives any money from multiple financial counterparties that allegedly misrepresented certain products and caused the insurer to suffer heavy losses.
As MBIA wrote in its 10K: “While we believe that the originators are contractually obligated to cure, purchase or replace the ineligible loans, if we fail to realize these expected recoveries our loss reserve estimates may not be adequate to cover potential claims.”
CreditSights tried to account for the uncertainty around the ongoing litigation by running stress tests on multiple outcomes.
In the worst-case scenario, assuming that litigation is resolved this year and that MBIA receives none of the “contractual putbacks” it seeks, CreditSights said the insurer could be insolvent before 2011. If the insurer receives 100% of putbacks, which CreditSights estimated to be $7 billion, the company would still be insolvent by 2014.
“The overall takeaway from our analysis is that even successful recovery of the full amount that MBIA currently expects will only buy the company an additional two years before breaching New York State regulatory capital minimums,” the analysts wrote.
In response, Chaplin said MBIA’s projected putbacks “already reflects a substantial discount from the amounts contractually due from the seller servicers.”
He concluded: “We believe CreditSights is significantly overstating future losses and understating the liabilities of the sponsors of the underperforming transactions.”