Bond insurer MBIA Inc. (NYSE:MBI) reported more large losses as the company continues to take write-downs. The struggling company is still seeing ongoing deterioration of its credit portfolios and the bonds that it backs. Despite, affirmations of MBIA's debt from some of the biggest ratings agencies, things continue to look bad for the insurer and its stock. (For a quick overview of the industry's problems, read Fatal Seduction Of The Municipal Bond Insurers.)
Investors Should Have Insured Their Shares
On Monday, MBIA reported that it lost $2.41 billion ($13.03 per share) for its first quarter, compared with profits of $198.6 million ($1.46 per share) during the same period of 2007. Operating losses, a non-GAAP measure, was reported at $3.01 per share, a large swing from the operating income of $1.48 per share reported a year earlier. This news must have taken many of the stock's analysts by surprise, as the consensus Wall Street estimates called for a loss of $1.45 per share excluding special items according to a FactSet Research survey.
The bulk of the loss came through the unrealized pretax loss of $3.6 billion on the company's credit derivatives portfolio and collateralized debt obligations (CDOs), which included approximately $800 million of credit impairments. MBIA will realize the losses as products mature or are sold, but the company likely would not take such a big ax to the numbers if there were not real problems. MBIA reiterated that it is on sound financial ground, and that those losses are not real. This helped the stock rise by 5% after trading began on Monday to close at $9.85, but I am not buying it. The news highlights tremendous weakness in the insurer's portfolio, and shows a company that is seeing its books deteriorate faster than most were expecting. (To learn more about the murky world of structured products, see CDOs And The Mortgage Market and Understanding Structured Products.)
Where's The Business?
MBIA also saw net premiums written drop sharply to $97.3 million from $171.3 million last year, showing that it is having trouble getting the business it used to. MBIA backs the payments of other bonds, and it agrees to pay back principle and interest to investors on bonds that it insures. Along with competitor Ambac Financial (NYSE:ABK), both companies had a steady little business of insuring municipal bonds, which are nearly default free to begin with, and collecting premiums. The companies have suffered in the recent market turbulence, as management sought to grow the businesses by insuring higher risk instruments. MBIA and Ambac have also recently received an uptick in competition as Warren Buffett's Berkshire Hathaway (NYSE:BRK.A, BRK.B) has entered into the bond insurance game.
MBIA relies heavily on its 'AAA' bond rating to attract new business, and the company raised $2.6 billion to maintain its ratings with Moody's (NYSE:MCO) and Standard and Poor's, a division of McGraw Hill (NYSE:MHP). Both rating agencies still have MBIA rated 'AAA', but have a long-term negative outlook on the company's credit. In MBIA's press release, the company discusses its steps to maintain its credit ratings with those two agencies, but does not mention Fitch Ratings, which dropped MBIA's financial strength rating to 'AA' from 'AAA' in April. Fitch also has a long term negative view on the company's credit quality. (For further insight, see What Is A Corporate Credit Rating? and The Debt Rating Debate.)
It seems odd that the ratings have not been cut by the others, but if things stay on the same track at MBIA, it will eventually happen. If it doesn't, the company will likely have to keep raising capital to hold it up, and will further dilute shareholder value. The shares were down in premarket trading from Friday's close at $9.43, but, after regular trading started, actually turned positive on the comments from the company about its financial strength. I think MBIA continues to look weak, and would recommend steering clear of the shares.
The Bottom Line
MBIA released a far worse-than-expected quarter, with massive write downs from its deteriorating credit portfolio. The company claims it is still on solid financial ground, but for it to stay that way with all of the big losses, we may see more capital raising and further harm to the company's value. I think MBIA will continue to face trouble, and do not think it is a wise investment.
