MBIA posts huge loss on credit derivatives

By Dan Wilchins

NEW YORK (Reuters) - MBIA Inc (MBI.N), the world's largest bond insurer, posted a quarterly loss of $2.4 billion on Monday as it took charges on billions of dollars of exposure to bonds linked to subprime mortgages.

But MBIA's beaten-down shares rose more than 4 percent as adjusted results beat expectations and the company said new business volumes appear to be rising from the first quarter.

MBIA is suffering as the U.S. housing market deteriorates, lifting expected payouts on repackaged subprime mortgage bonds that the company insures.

The insurer expects the housing market to get worse before it gets better, but it has enough capital to withstand the market getting much worse.

U.S. housing prices have dropped by more than 15 percent from their peaks in June by some measures and mortgage portfolios are performing much worse than expected.

"I don't know what's happening in the mortgage market and that's why we're taking a very cautious approach to the bond insurers," said Jim Ryan, an analyst at Morningstar in Chicago.

Earlier this year, the U.S. stock market tumbled amid concerns the bond bond insurers would suffer big losses and be stripped of their top credit ratings.

Standard & Poor's and Moody's Investors Service affirmed the top ratings at MBIA's main insurance unit in February and although the agencies said the outlook for those ratings is negative, the market's concerns about bond insurers seem to have abated. Standard & Poor's said on Monday it was not taking any action on MBIA after the results.

The charges announced Monday wiped out 40 percent of MBIA's net worth, but MBIA said most of the changes it recorded in the value of its exposure will not translate to actual payouts on insurance.

The first-quarter loss amounted to $13.03 per share, compared with a profit of $199 million, or $1.46 per share, in the same quarter last year.

Excluding unrealized losses and other items, MBIA earned 16 cents per share, compared with analysts' average forecast of a 95 cent per share loss, according to Reuters Estimates.

First quarter results include pre-tax unrealized losses on insured derivatives, such as credit default swaps, of $3.58 billion.

The company recognized a total of $1.34 billion of pre-tax impairments and loss reserves linked to insured securities with housing exposure. Those impairments and loss reserves are expected to be paid out over four years in some cases and over 40 years for others.

MBIA has long been targeted by short sellers such as Pershing Square's William Ackman, who say the bond insurer does not have enough money to cover the payouts it will have to make for collateralized debt obligations and bonds it insured that have exposure to subprime mortgages.

MBIA has raised $2.6 billion this year, including selling $1.1 billion of common shares, $1 billion of surplus notes and a $500 million investment from private equity firm Warburg Pincus, which also bought some common shares in the offering. The insurer has also taken steps including writing less new business and cutting its dividend to boost capital.