Sell Side

Mixed Results as MBIA, Radian Report Earnings

Earnings season continued yesterday, with the parent companies of two bond insurers reporting first-quarter results heavily dependant on the values of credit derivatives. MBIA Inc. reported a net loss of $2.4 billion and said it would contribute $900 million to its financial guaranty subsidiary, while Radian Group Inc. reported a net gain of $195.6 million.

The loss for MBIA, the parent of financial guarantor MBIA Insurance Corp., reflected a $3.6 billion unrealized mark-to-market fall in value on the credit default swaps used by the company to insure structured finance credits. The total also included $827 million in actual impairments on nine collateralized debt obligation transactions, the company said, which it expects to pay out over the next four to 40 years.

The first-quarter loss compares to the $198.6 million gain the company reported in the first quarter of 2007. However, MBIA said total revenue for the quarter was down just 4%, to $711.4 million, from $741.7 million in the first quarter of 2007.

In terms of U. S. public finance, MBIA Insurance did little new business until Standard & Poor's and Moody's Investors Service affirmed its triple-A insurer financial strength ratings, with negative outlooks, in late February. Fitch Ratings assigns a AA rating, with a negative outlook, to the bond insurer.

In the month of March, the insurer backed 24 issues in the primary market, for $9.1 million in adjusted direct premiums, and wrote guarantees on 222 bonds in the secondary market, for a total of $17.9 million of ADP, a non-GAAP measure that combines up-front premiums from new deals with the present value of what they expect to earn from those deals in the future. The measure compares to public finance ADP for the entire quarter of $21.9 million, and excludes premiums from assumed or ceded credits.

"It was a very challenging first quarter," said Jay Brown, MBIA's chief executive officer, in the earnings call. "But we have seen the beginnings of new business coming back in the public finance arena."

Overall, MBIA's ADP declined 84% to $43.5 million, from $272.9 million in last year's first quarter. About $23.5 million of those, in both public and structured finance, were in the pipeline prior to the start of the year. The total includes two structured finance transactions that were already planned, despite the company's decision to cease writing any structured finance business for six months.

MBIA also said it would contribute $900 million to the bond insurer in the next 10 to 30 days, using a portion of the remaining $1.1 billion in proceeds from the company's February equity offering. The decision to provide the additional funds to MBIA Insurance, for which the equity offering was originally intended, is being done after consultation with the New York State Insurance Department, MBIA said in the release.

"After discussing this with rating agencies and the insurance department, we made the decision to move $900 million down," Brown said.

The news was clearly disappointing for MBIA, which has been trying to convince the market of its recovery. But MBIA said it will not raise additional capital through an equity sale, because it believes it already has enough to maintain an triple-A rating.

In the first quarter, MBIA Insurance Corp. insured 13 deals for a total of $300 million of par value, according to data provided by Thomson Reuters. The bond insurer ranked third among all financial guarantors, with a market share of 2.1%. About 66% of MBIA's outstanding insured portfolio, or $440.9 billion, is in public finance exposure, the company said. In comparison, about 10% of the portfolio, or $66.8 billion, is in residential mortgage-backed securities or multi-sector CDO exposures.

Analysts, meanwhile, were not overly concerned about the bond insurer's first quarter losses, which fell within expected ranges.

"While we view MBIA as one of the likely survivors of the current market shake up, our recent conversation with [Berkshire Hathaway Assurance Corp.] highlighted the difficulty MBIA is going to have as it attempts to re-establish its position in the market," Rob Haines, senior analyst at CreditSights, wrote in a recent report.

And the rating agencies did not take any action. Standard & Poor's said it does not base ratings on mark-to-market adjustments, and that the actual credit impairments remained within the stress case losses. MBIA's results are similar to the $1.7 billion in first-quarter losses reported in late April by competitor Ambac Financial Group, the agency said.

"The credit impairment that each company reported was much lower than Standard & Poor's most recent subprime stress test losses," the rating agency said. "Given the unprecedented level of mortgage market deterioration that has occurred, we remain circumspect about assigning stable outlooks to insurers even if they have sufficient capital when measured against our projected stress case losses."

Meantime, Radian Group Inc., parent of the bond insurer, Radian Asset Assurance Inc., this morning reported first-quarter profits of $195.6 million, based on $410.8 in unrealized gains on credit derivatives and hybrid securities. Excluding these gains, the company reported a net operating loss of $215.2 million for the quarter.

While spreads widened on credit derivatives and losses mounted, they were offset by a change in Radian's valuation methodology - adopted by the financial guarantor in the first quarter - which now incorporates the market perception of Radian's non-performance risk, required under SFAS No. 157, the company said. The reduction in the value of Radian's liabilities accounted for the net gain.

Like MBIA, Radian Asset Assurance suffered from the loss of confidence in bond insurance in the quarter, with net premiums written falling 21% to $33.1 million, from $42 million written in the first quarter of 2007. Net premiums written is the company's measure of new business production.

In U. S. public finance, Radian Asset reported $5.6 million in net premiums written, the company's measure of new business production. It was a 56% decline over last year's first quarter total of $12.8 million. Radian's reinsurance business remained stable, with the company reporting $17.5 million in net premiums written, a 3% drop from last year's first-quarter total of $18.2 million.

In the first quarter, Radian Asset guaranteed 24 deals for par value of $130.8 million, according to Thomson Reuters. It was the fifth-busiest insurer, capturing 0.5% of the market share.

Radian Group said in early April that it was considering a sale of Radian Asset in an effort to boost capital in its mortgage business. Though nothing further has been announced, S. A. Ibrahim, Radian's chief executive officer, said in today's release that the company was still considering the option.

Shares of MBIA Inc. closed up 42 cents, or 4.5%, to $9.85 in trading on the New York Stock Exchange yesterday, while Radian Group shares closed up 12 cents, or 2.2%, to $5.55 in trading on the NYSE.



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