MBIA, 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 as much as 12 percent as the potential for charges had been telegraphed well in advance and the company said its new business volumes appear to be rising in the current quarter.
The charges wiped out 40 percent of MBIA's net worth, but the company said most of the charges did not represent actual expected losses, and the insurer is well capitalized.
The first-quarter loss amounted to $13.03 per share, versus a profit of $199 million, or $1.46 per share, a year earlier.
The latest 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.
MBIA has long been targeted by short sellers that 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.
Rating agencies Standard & Poor's and Moody's Investors Service in January said they might cut the top credit ratings at MBIA's main insurance unit, MBIA Insurance Corp, in part because of questions about the insurer's capital. Fears the insurer would lose top ratings cratered both the broader stock market and MBIA shares, which have fallen more than 80 percent since October.
But 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.
In February, S&P and Moody's affirmed MBIA Insurance's triple-A ratings, which are crucial to winning new business.
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.
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," Chief Executive Jay 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.
Analysts polled by Reuters Estimates had expected a first-quarter loss of 95 cents per share, according to Reuters Estimates.
Excluding unrealized losses, Reuters Estimates said MBIA earned 16 cents per share. It was not immediately clear how closely that figure matched up with analysts' forecast.
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."
Brown also said that although market inputs are used to determine the value of MBIA's credit derivatives, there is no real market for the insurer's positions, and the valuations do not reflect expected actual payouts.
MBIA recorded losses of $3.7 billion from the change in credit derivatives' value in all of 2007, which resulted in net losses for the year of $1.9 billion.
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.