MBIA loses $2.4 billion after major write-downs; shares gain

May.12, 2008 in Market Outlook

MBIA loses $2.4 billion on write-downs; shares gain

Insurer has $800 mln of actual losses, funnels $900 mln to bond insurance unit

By Alistair Barr, MarketWatch

Last Update: 4:16 PM ET May 12, 2008

SAN FRANCISCO (MarketWatch) — MBIA Inc. reported a $2.4 billion first-quarter
net loss on Monday and said it will pump $900 million into its main bond
insurance unit as the company begins paying out on big claims from guarantees it
sold on complex mortgage-related securities.

MBIA shares rallied 6% to $9.98 during afternoon trading. The company has lost
more than 85% of its market value in the past year.

The company’s first-quarter net loss was $2.41 billion, or $13.03 a share. MBIA
earned $198.6 million, or $1.46 a share, in the year-earlier period.

The insurer recorded a $3.6 billion unrealized loss on derivative-based
guarantees it sold on complex mortgage-related securities including
collateralized debt obligations (CDOs).

MBIA said its operating loss, which excludes these market-value adjustments, was
$3.01 a share. The company had been expected to lose $1.45 a share, according to
a survey of seven analysts by FactSet Research.

MBIA stressed that most of the $3.6 billion in unrealized losses don’t reflect
actual losses or claims. However, the insurer did note that $800 million of that
hit was from credit impairments, which are actual losses.

MBIA reported a total of $1.34 billion of impairments and loss reserves during
the first quarter. The company has been hit by $2.15 billion of actual losses
from housing-related exposures during the past two quarters.

Bond insurers like MBIA (MBI) and Ambac Financial (ABK) agree to pay interest and
principal on debt in a timely manner in the event of default. The $2.4 trillion
business relies on AAA ratings to win new business.

The industry paid very few claims for decades by only guaranteeing municipal
bonds. But many bond insurers expanded into riskier CDOs and mortgage-backed
securities and are now paying the price.

That put the AAA ratings of MBIA and Ambac in jeopardy earlier this year. The two
companies raised new capital to keep those top ratings, but they aren’t in the
clear yet, analysts said on Monday.

“We remain concerned that MBIA may not retain its top-tier financial strength,
and we would sell the shares,” Catherine Seifert, an insurance analyst at
Standard & Poor’s Equity Research, wrote in a note to clients on Monday.

Rating agencies require bond insurers to hold enough capital to pay claims in
worst-case scenarios. MBIA is still $1.7 billion short of the capital it needs to
meet such a requirement imposed by Moody’s Investors Service, Tamara Kravec, an
analyst at Banc of America Securities, noted.

“A ratings downgrade is still a concern,” Kravec wrote in a note to investors.

One worry was that while MBIA had raised $2.6 billion in new capital earlier this
year the company hadn’t funneled much fresh money to its main bond insurance
subsidiary.

However, on Monday MBIA Chief Executive Jay Brown said the company will send $900
million down to the unit in the next 30 days.

“MBIA continues to be a sound financial institution,” he said in a statement. “We
have ample liquidity, our balance sheet is built to withstand credit stress
levels many multiples of what we’re experiencing now, and our business model is
proving that we are adequately capitalized to satisfy any potential claims on our
insured portfolio.”

Bond insurers are important because they guarantee more than $1 trillion of
securities. If leading companies in the business get downgraded then, in theory,
all the securities they’ve backed get downgraded too.

When MBIA reported a $2.3 billion net loss for the fourth quarter in late
January, markets were hit hard during the following month on concern the company
and rival Ambac might lose their top ratings.

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