May 12, 2008

MBIA slides to huge 1Q loss on hefty charges

By STEPHEN BERNARD

The Associated Press

MBIA Inc. swung to a $2.41 billion loss during the first quarter as the bond insurer faced ongoing deterioration in the credit markets and recorded billions in write-downs.

The loss equated to $13.03 per share during the quarter ending March 31, compared with year-ago profits of $198.6 million, or $1.46 per share.

Shares tumbled 7 percent, or 67 cents, to $8.76 in premarket trading.

MBIA was forced to reduce the value of its insured derivatives holdings by $3.58 billion, leading to $2.96 billion in total lost revenue, compared with revenue of $729.9 million a year ago. Net premiums written tumbled to $97.3 million from $171.3 million last year.

Unlike traditional insurance on corporate or municipal bonds, the value of derivatives holdings _ called credit default swaps _ must be priced at the end of each quarter at current market value. Because the value of such products has tumbled in recent months, MBIA was forced to cut the value of its holdings, thus recording what in accounting terms is called an unrealized loss. Actual losses would only occur if MBIA sold the derivatives at less than the original cost.

The derivatives losses were not the only problems plaguing bond insurers in recent months. They have also been hit hard by the deterioration in the mortgage markets that began in late 2007.

Initially, bond insurers only provided insurance to municipalities. But in recent years business was expanded to insure other debt, such as bonds backed by mortgages and consumer loans. As the mortgage market soured and mortgage defaults spiked in 2007, investors and ratings agencies began to worry bonds backed by those troubled loans would default as well. That in turn would lead to a spike in claims payments.

Both investors and credit ratings agencies worried the insurers would not have enough spare cash to both handle a potential increase in claims and maintain reserves warranting top-notch 'AAA' financial strength ratings.

The 'AAA' rating is essential to ensure bond insurers can book new business. Worries that insurers like MBIA could face ratings cuts cost the company some new business _ one reason why written premiums declined during the first quarter.

Throughout the quarter, MBIA raised about $2.6 billion in new capital through the issuance of common stock and other investments. That included investments by private equity firm Warburg Pincus in an effort to maintain MBIA's 'AAA' ratings and demonstrate it would have enough cash to cover a spike in claims.

Despite the capital raising efforts, Fitch Ratings cut MBIA's financial strength rating to 'AA' from 'AAA' in early April. MBIA's reserves range between $3.4 billion and $3.8 billion short of what is needed for Fitch to consider the bond insurer worthy of being rated 'AAA,' Fitch said then.

Both Moody's Investors Service and Standard & Poor's rate MBIA 'AAA,' but all three ratings agencies have a long-term negative outlook on the bond insurer.

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AP Business Writer Jennifer Malloy in New York contributed to this report.