Thursday, January 31, 2008

MBIA posts $2.3 billion Q4 loss

(Naked Capitalism) Why MBIA issued its earnings press release at such a weird hour is beyond me. The related news stories are time stamped 0:56 AM at Bloomberg and 1:08 AM at the Wall Street Journal. Saving bad news till the middle of the night is not going to alleviate the reaction.

Or perhaps MBIA has an astrologer? President Reagan was inaugurated at a very odd hour based on a seer's advice, and it seemed to work well for him. With news like this, MBIA needs all the help it can muster.

The bond insurer announced $2.3 billion of losses for the fourth quarter which included $3.4 billion of writedowns ($3.5 billion according to the Wall Street Journal). Premiums also fell, indicating new business is falling off, not surprising given the doubts about the AAA rating. The press release also stated that Warburg Pincus nevertheless closed on its $500 million investment in the firm. I anticipate that this will become a textbook example of a bad deal.

The press release also said that the company's capital raising efforts would offset the losses the firm expected to take. If true, that would be a testament as to how lax the accounting rules in the insurance industry are. In his letter to regulators yesterday, Pershing Square's Bill Ackman said:
The critical importance for the capital markets of ascertaining the amount of these losses is self evident. Perhaps most importantly for policyholders, the accuracy of management’s judgment in estimating losses is critical because it determines how much capital can be extracted from an insurance subsidiary for the benefit of holding company debt and equity holders. It is also essential for determining GAAP book value and earnings for analysts and investors. By using their own estimates for losses, rather than a market-based measure as required by FAS 133 and FAS 157, without appropriate regulatory intervention, the bond insurers effectively can determine the amount of their statutory capital and policyholder surplus for the purpose of calculating amounts available for holding company dividends....

Because a bond insurer’s calculation of statutory capital is effectively a self-graded exam, one would expect management to estimate losses at a level which allows the insurance subsidiary to pay holding company dividends. Rarely is a man willing to sign his own death warrant.

Further details from the Wall Street Journal:
MBIA's fourth quarter derivatives write-down is more than 10 times as large as the $352.4 million write-down it reported in the third quarter, an indication of the rapidly worsening U.S. housing market and its effect on securities backed by loans made to credit-challenged customers.

Of the $3.5 billion charge, MBIA estimated it would realize $200 million of credit impairment or actual claims payments on the portfolio. In addition to the credit impairment on its derivatives portfolio, MBIA also set aside $713.5 million of pretax loss and loss-adjustment expense due to an expected loss of $613.5 million on its guarantees, and a special addition of $100 million to the unallocated loss reserve for MBIA's prime, second-lien mortgage exposure.

Second lien, or home-equity loans, have shown rising losses as home values plunge in some parts of the country.

MBIA, the nation's largest bond insurer, reported a fourth quarter after-tax operating loss of $407.8 million or an operating loss per share of $3.30. Operating earnings or losses don't take into account unrealized mark-to-market losses or investment gains or losses.

The mean per-share loss estimate of analysts polled by Thomson Financial was $2.97 on revenue of $778 million...

MBIA's adjusted direct premiums fell 38% to $262.4 million, on a 98% drop in global public finance and big drops in structured finance worldwide.

MBIA also wrote down the value of its carrying interest in reinsurance unit ChannelRe from $85.7 million to zero....

MBIA's shares were at $13.50, down 3.3%, in after-hours trading.

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