Thursday, May 23, 2013

Time for MBIA Management to Take a Bow: Over $3.5 Billion of the $3.8 Billion Insurance Receivable Will Be Recovered in 2013

Just a few months ago, MBIA showed an asset on its balance sheet that MBIA skeptics and bears would sneer at: a $3.8 billion insurance receivable that MBIA expected to recover in its representation and warranty (R&W) actions.

As an MBIA long with a keen interest in these R&W actions, I thought MBIA management had a fighting chance to collect at least the major portion of this receivable over the medium term.  But I could not dispel the criticism that bears brought to MBIA other than to blog here about what I perceived to be the strengths of MBIA's legal position.  Indeed looking back and assessing what my investment posture really was ex ante any insurance receivable recoveries, I have concluded that I was more speculator than investor

With today's filing of the ResCap plan support agreement among ResCap, Ally and ResCap's major creditors, it appears that MBIA will recover between $700 million and $800 million before the end of this year in respect of the ResCap portion of the insurance receivable.  When you add this recovery to the $2.7 billion settlement with BAC (I credit the value of the commutation of BAC's cds policies at $1 billion), and the $110 million settlement with Flagstar,  it appears that MBIA will have recovered about 90% of its insurance recovery receivable at its booked amount.  The remaining recoveries lie with Credit Suisse and J. P. Morgan, wherein an aggregate recovery of $300 million to recover the remainder of the booked insurance receivable no longer seems heroic in light of this recent track record.

Note to MBIA management:  Take Credit Suisse and J. P. Morgan to trial!  You have the financial breathing space (finally), so make them pay!

I believe the investment implications of this remarkable track record of realization on the insurance receivable cannot be overstated.  MBIA's share price still trades at a significant discount to book value (currently less than 50% of adjusted book value).  Yet, what many MBIA bears thought was the frothiest asset recorded on the MBIA balance sheet (and comprising 18% of MBIA's total assets) turns out to have been dead on right.

This is really a remarkable financial achievement by a resourceful MBIA management team.  I believe MBIA is overdue in receiving proper respect by means of a higher share valuation.  If a 50% discount of the share price to book value was premised on the risk of not recovering this $3.8 billion insurance receivable, given this recent track record, isn't it time to start reversing this discount?

NB:  this blog is not intended to be investment advice, and should not be relied upon by anyone to constitute investment advice.  Investing is a tough game, and everyone must do and "own" their own work, because you will certainly own your investments.

Disclosure: long MBI; AMBC.  Follow me on twitter.

1 comment:

  1. and you should take a bow for analyzing it corruptly