Friday, February 26, 2010

MBIA Inc. (NYSE: MBI): Q4 Earnings Preview 2009

MBIA Inc. (NYSE: MBI) is scheduled to release its fiscal fourth-quarter 2009 financial results after the market close on Monday, March 1, 2010. Analysts, on average, expect the company to report a loss of $1.11 a share on revenue of $236.96 million. In the year ago period, the company posted a loss of $5.30 per share on a negative revenue of $1.59 billion.

MBIA Inc. provides financial guarantee insurance and credit protection products, as well as investment management services to public finance and structured finance issuers, investors, and capital market participants worldwide. The company operates in two segments, Insurance and Investment Management Services.

In the preceding fiscal-third quarter, the Armonk, New York-based MBIA's net loss to common shareholders was $727.8 million or $3.50 per share for the third quarter of 2009, compared with a net loss of $806.48 million or $3.42 per share a year ago. MBIA said the net loss for the quarter under review was driven by an $810.2 million pre-tax unrealized loss on insured credit derivatives, $238.8 million in pre-tax loss and loss adjustment expenses primarily related to its insured exposures to second-lien mortgage loan securitizations, and $171.4 million in pre-tax realized losses and other-than-temporary impairments on investments. For the quarter, MBIA recorded consolidated negative revenues of $620.16 million, compared to revenues of $319.76 million in the prior year quarter.

As of September 30, 2009, MBIA's adjusted book value or ABV was $39.05 per share, compared to $40.06 per share at December 31, 2008. ABV is a non-GAAP measure that excludes the impact of changes in the fair value of insured credit derivatives and temporary asset impairments but includes the present value of future expected loss payments on insured credit derivatives, net of recoveries (credit impairments).

It appears that macroeconomic conditions have continued to contribute to losses on the group’s structured finance products. MBIA also has an indirect exposure to subprime mortgages that are included in collateralized debt obligations (CDOs), in which the company 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 and in 2009, reflected by delinquencies and losses, particularly related to subprime mortgage loans originated during 2005 to 2007. The increase in delinquencies has been negatively affecting the company’s results. A reversal in the trend is not expected until the second half of 2010.

Meanwhile, the adverse rating actions by the major agencies throughout 2009 have hurt MBIA Corp’s ability to attract new financial guarantee business. The company’s market share decreased to approximately 2.2% in 2008, compared to approximately 23.0% in 2007. Additionally, MBIA Corp. did not underwrite any non-U.S. public finance transactions in 2009 due to its previously announced decision to suspend the writing of all new structured finance. The structured finance industry offers very little new business opportunity; it is still quite uncertain when or how MBIA Corp may re-engage in this market.

MBIA has been facing rating downgrades for quite some time. Once the strongest of the bond insurers, the company has been downgraded by the rating agency Standard & Poor's, to BB- from BB. The company’s principal bond insurance unit, MBIA Insurance Corp., was downgraded to BB+ from BBB, which is considered non-investment or junk status. The ratings carry a negative outlook. The rating agency is of the opinion that losses on residential mortgage-backed securities and collateralized debt obligations that MBIA guaranteed from 2005 to 2007 could be higher than expected.

Early in February, MBIA Inc. announced that it has restructured its fixed-income asset management subsidiary. The firm, now known as Cutwater Asset Management, will operate under the MBIA corporate umbrella as a separate operating company focused on fixed-income asset management. The move is seen as part of the company's overall transformation effort to create a traditional holding company structure in which its individual business units operate as separate entities. The firm, now known as Cutwater Asset Management, will operate under the MBIA corporate umbrella as a separate operating company focused on fixed-income asset management.

Recently, MBIA Inc. lost a bid to dismiss a lawsuit that accuses it of splitting up its guarantee business to illegally cut the odds that it would have to pay off on bond insurance policies. The suit was brought by Bank of America Corp., JPMorgan Chase & Co., UBS AG and about 15 more of the world’s largest financial companies against MBIA, which said in February 2009 that it would divy its insurance business into two companies after losing top credit ratings following record losses in the mortgage market. The 18 financial institutions filed suit in May 2009 to overturn the split, arguing that MBIA had inappropriately stripped assets from the MBIA Insurance Corporation, making it insolvent.

The company is facing several other suits filed by funds that claim they’ve been hurt by the split as owners of bonds insured by MBIA.

In terms of stock performance, MBIA shares have gained nearly 62% over the past year.

Full Disclosure: None.
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