MBIA Inc., parent of the municipal market’s largest bond insurer, yesterday reported a net loss of $2.3 billion for the fourth quarter, based on mark-to-market losses to the company’s insured derivatives portfolio and additional capital reserving.
For the year, MBIA reported a net loss of $1.9 billion, compared to net income of $819.3 million the year before.
MBIA said widening spreads and recent rating agency downgrades of subprime mortgage-backed securities led to the reported losses in the credit derivatives portfolio. MBIA said it set aside $713.5 million of loss reserves, including $613.5 million of case loss activity that reflects MBIA’s best estimate of losses, $100 million related to second-lien mortgage exposure, and a credit impairment of $200 million related to three transactions, called CDO-squareds.
“We are disappointed in our operating results for the year, as the performance of our insured prime, second-lien mortgage portfolio and three insured CDO-squared transactions led to unprecedented loss reserving and impairment activity,” said Gary Dunton, MBIA’s chief executive officer, in the release.
The company also said it closed Wednesday on a $500 million equity transaction with Warburg Pincus LP, intended to address a $2 billion capital shortfall it needed to make up in order to keep its vaunted triple-A rating. Warburg is also expected to “backstop” an additional $500 million equity rights offering. MBIA also raised $1 billion in a surplus note sale.
Dunton said in the release that the capital-raising efforts will more than offset the announced losses.
“We believe that these steps, along with reduced capital requirements resulting from slower business growth, will result in our capital position surpassing rating agency triple-A requirements as currently articulated,” Dunton said.
In MBIA’s municipal finance business, new production totaled $147.6 million during the quarter, a 13% increase from the fourth quarter of 2006.
The company measures new business production though adjusted direct premium, or ADP, which it calculates by combining up-front premiums from new deals with the present value of what it expects to earn from those deals in the future. The measure excludes premiums from assumed or ceded credits.
However, as the quarter went along and problems with the bond insurance industry began to take center stage, new business volume decreased. Business increased 43% in October, then fell 31% in November and 41% in December, compared to the same quarter in 2006, the company said.
Insurance penetration in the larger municipal market fell to 29.5% in December from 49.4% in October, according to Thomson Financial. MBIA’s market share of all insured issues went to 22.3% in December from 31.1% in October. In January it has fallen to 2.3%, according to Thomson.
MBIA also said it wrote down its 17.4% equity ownership to zero from $85.7 million in reinsurance firm Channel Re because of mark-to-market losses on insured credit derivatives reinsured for MBIA by Channel Re.
The loss for the fourth quarter came as little surprise, as market participants were warned by the company in December that it expected fourth-quarter losses to be “significantly greater” than they were in the third quarter. At the time, MBIA said it was setting aside as much as $800 million for loss reserves on deteriorating mortgage-backed securities it insures.
Earlier this week, William Ackman of Pershing Square Capital Management LP said MBIA may lose as much as $11.6 billion, based on its exposure to collateralized debt obligations and other asset-backed debt securities the insurer has guaranteed. Ackman has for years sold short shares in MBIA, and competitor Ambac Financial Group Inc.
Ackman explained his findings regarding the insurers in a letter he sent Wednesday to insurance regulators and Securities and Exchange Commission officials, and made the calculations and tables available in an open source document on the Internet.
Ackman’s effort is the latest attempt to estimate the amount of exposure the monolines have to subprime mortgage-related securities. Losses have eaten into the financial guarantors’ reserve capital, and caused rating agencies to review the bond insurer’s ratings.
Fitch Ratings assigns a stable triple-A rating to MBIA Insurance Corp., the bond insurer, while Moody’s Investors Service assigns a rating of Aaa, on watch for possible downgrade. Standard & Poor’s assigns a AAA and has the bond insurer on credit watch with negative implications.