MBIA posts huge loss on credit derivatives

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.

MBIA said it generated $43.5 million of adjusted direct premium, a measure of the value of premium from new business earned in the quarter and expected from that new business in future quarters. The first-quarter figure was down 84 percent from a year earlier, but new business volume increased during the quarter, a trend that has continued in the second quarter, MBIA said.

Still, MBIA's new business volume is likely to remain well below historical levels until the outlook on the bond insurer's rating is "stable," rather than "negative," Chief Executive Jay Brown said on a conference call.

ENOUGH CAPITAL?

Short sellers still believe MBIA needs a good deal more capital, but the company says it is rock-solid.

"MBIA continues to be a sound financial institution," Brown said in a statement, adding that the company's balance sheet can withstand credit stress levels much worse than it is experiencing now. The company said it has no plans to issue common equity as part of its current capital plan.

MBIA said it believes it is about $1.3 billion below Moody's ideal capital level, even if it meets Moody's minimum capital requirement.

The insurer plans to buy more reinsurance to boost capital, and to write new business that either does not affect capital or boosts it. MBIA expects to be in line with Moody's requirements within two quarters.

In February, MBIA warned investors it might have to mark down the value of credit derivatives in the first quarter, given weakness in the credit market.

And in a letter to shareholders last week, CEO Brown wrote that he suspected the declining market value of credit derivatives "will again be incorrectly described by the media as either new subprime losses or asset write-offs and will dominate the news coverage of MBIA."

Monday's results left MBIA's shareholder equity, or the accounting value of assets minus liabilities, at $2.06 billion, down from $3.66 billion in the fourth quarter of 2007.

The company's shares rose 42 cents to close at $9.85.

(Editing by John Wallace and Andre Grenon)