MBIA posts 4Q loss of $2.3 billion on derivatives write-down, growing loss reserves
NEW YORK (AP) – MBIA Inc. reported a $2.3 billion fourth-quarter loss Thursday, but the bond insurer’s executives struck a defiant tone in telling investors its business is fortified against turbulence on the credit markets and worthy of a top-notch rating. “Our own conclusion is that the market has overreacted to the real and obvious problems that we’ve had, as well as to the fear-mongering and intentional distortions of facts about our business that have been pumped into the market,” Chief Executive Gary Dunton said in a conference call.
Dunton and his lieutenants gave a detailed presentation on the company’s financials and answered scores of analyst questions, making it clear they were on a public relations campaign during the four-hour call.
Investors responded, sending MBIA shares 7 percent higher to $14.94, reversing losses that saw the stock as low as $11.80 earlier in the session.
“A lot of people (listened) carefully to that call,” said Donald Light, a senior analyst at Celent LLC. “The executives (painted) a very confident picture. Whether that confidence is justified is uncertain, but the confidence is a plus.”
Late Thursday, Standard & Poor’s Ratings Services placed MBIA ratings on a watch list “with negative implications,” which means there is a 50 percent chance the agency will drop the rating at least a notch within the next 90 days. Such a move would severely undermine the insurer’s ability to win new business.
Bond insures have come under pressure recently as the quality of the assets underlying the bonds they insure has deteriorated. MBIA lost $2.3 billion, or $18.61 per share, in the fourth quarter, far more than the average loss of $2.97 per share forecast by analysts polled by Thomson Financial. That compares with earnings of $181 million, or $1.32 per share, in the same period the previous year.
During the quarter, MBIA reduced the value of its credit portfolios by $3.5 billion, cutting earnings by $18.04 per share. The losses were primarily tied to the reduced value of collateralized debt obligations in its insured portfolio. So-called CDOs are complex financial instruments that combine various forms of debt.
MBIA also took a $713.5 million pretax loss on its exposure to rising delinquencies and defaults among home equity products. Of that figure, $100 million was placed in reserve to cover potential future losses.
The beleaguered bond insurer also reduced the value of its 17.4 percent stake in reinsurer Channel Re to zero from $85.7 million.
Dunton said in a statement that the effect of the charges “will be more than offset by the successful completion of our capital plan, which will increase our capital position by well over $2 billion.” MBIA said it is considering new options to raise capital.
“We’re going to work to capitalize the company to the point where there are no questions in the market from serious analysts, investors or customers about our capital position or our intent,” Chief Financial Officer Chuck Chaplin said.
MBIA raised more than $1.5 billion in recent months to try to maintain its critical “AAA” rating. The company raised $1 billion through the offering of surplus notes and $500 million through a direct investment by private equity firm Warburg Pincus, which closed Wednesday. Warburg Pincus has also pledged to buy any unsold shares in an additional $500 million rights offering.
The bond insurance market is in the midst of a major upheaval after ratings agencies began reviewing their operations during the fourth quarter. Due to rising delinquencies and defaults on mortgages, ratings agencies believe bonds and securities backed by those troubled loans will increasingly default as well, forcing bond insurers to pay out claims.
Bond insurers make principal and interest payments when issuers default. Under extreme loss scenarios, ratings agencies believe many bond insurers do not have enough cash available to pay out claims, which has forced the companies to either raise new capital or face a downgrade from the “AAA” financial strength rating.
Bond insurers essentially need “AAA” ratings to book new business.
Fitch Ratings already downgraded Ambac Financial Group Inc., Security Capital Assurance Ltd. and most recently Financial Guaranty Insurance Co. Both Moody’s Investors Service and Standard & Poor’s said they are reviewing ratings on bond insurers, including MBIA.
S&P cut FGIC’s ratings to “AA” from “AAA” on Thursday, a day after Fitch took the same step. FGIC is the third-largest bond insurer with about $300 billion in coverage. MBIA is first with close to $700 billion, while Ambac insures about $530 billion.
The write-downs exacerbated concerns that rising costs could squeeze local governments as well as slow any recovery for big banks. These financial institutions have reduced their portfolio values by more $140 billion during the second half of 2007 in a deteriorating mortgage market. They could be forced to take further write-downs tied to bonds insured by companies like MBIA.
Oppenheimer & Co. analyst Meredith Whitney said banks could take up to $70 billion in additional write-downs tied to bonds insured by companies such as MBIA.
Struggles at bond insurers could also make it prohibitively expensive for municipalities to raise money for everything from street repairs to playgrounds.
For the full year, MBIA lost $1.9 billion, or $15.22 per share, compared with earnings of $819.3 million, or $5.99 per share, in 2006.
AP-ES-01-31-08 1617EST