MBIA Inc.'s Loss Narrows - Analyst Blog

MBIA Inc.’s (MBI) fourth quarter operating loss of $1.16 per share was a penny more than the Zacks Consensus Estimate of a loss of $1.15. The company had reported a loss of $5.21 per share in the prior-year quarter. Results were dragged down by losses on MBIA's coverage of mortgage-related securities and complex investments, which weighed down income from investments and premiums.

Revenue rose to $742.1 million, up from negative $1.57 billion in the prior-year period. Revenue components such as premiums earned and net investment income during the quarter totaled $158.4 million and $130.5 million, both down 30% and 51% year-over-year, respectively.

With ratings cut to junk status, MBIA has also lost major market share. However, revenues were helped by lower other-than-temporary impairments and an improvement in the value of insured derivatives.
   
For full year 2009, earnings came in at $2.99 per share, substantially improved from $12.11 in 2008, on the back of total revenues of $3.0 billion, compared to negative revenues of $857 million in 2008.

MBIA insures mortgage-backed securities backed by subprime mortgages directly through residential mortgage-backed securities securitizations. MBIA also has indirect exposure to subprime mortgages that are included in collateralized debt obligations (CDOs), in which MBIA has guaranteed the senior most tranche of such transactions.

There has been considerable stress and continued deterioration in the subprime mortgage market since early 2008 continuing in 2009, reflected by delinquencies and losses, particularly related to subprime mortgage loans originated during 2005, 2006 and 2007. In connection to these exposures, the company paid a total of $2.5 billion in net claims during 2009.

MBIA’s book value per share decreased to $12.66 as of Dec 31, 2009, from $4.78 as of Dec 31, 2008, mainly due to a decline in cumulative unrealized losses on insured credit derivatives. On Dec 31, 2009, adjusted book value (ABV) − which adds back the present value of installment premiums, among other items − declined to $36.35 per share, compared to $40.06 as on December 31, 2008. The decline was brought about by increased credit impairments on insured credit derivatives, other-than-temporary impairments of invested assets and insurance incurred losses.

Segmental Performance

U.S. Public Finance Insurance:

While National Public Finance virtually wrote no new business, the existing book of business earned scheduled premiums of $95.1 million, down 1.3% sequentially. Net investment income amounted to $65.0 million. Pre-tax income of $185.7 million was driven primarily by $137.0 million in scheduled and refunding premiums earned from its embedded book of business and $65.1 million in net investment income.

Structured Finance and International Insurance:

While no new business was written in this segment, the existing book of business generated $49.3 million in scheduled premiums earned during the quarter, down 34% sequentially. Net investment income declined 68% year-over-year to $31.9 million. The segment’s pre-tax loss of $429.8 million was primarily attributable to $658.8 million in pre-tax loss and loss adjustment expenses and $200.2 million in realized losses and other settlements on insured derivatives.

Investment Management Services:

Net investment income from the segment amounted to $46.4 million. Pre-tax income of $5.6 million from the segment was negatively affected by negative interest spread.

Even with no new business, MBIA has a steady stream of scheduled premium earnings with respect to its existing insured portfolio, due to the long-tailed nature of the financial guarantee business. The company has undertaken business restructuring by capitalizing National Public Finance Guarantee Corporation in order to separate its riskier business of insuring structured financial obligations from the traditional bond insurance.

However, the company’s huge exposure to credit derivatives poses a risk to its profitability in the near future.

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