MBIA's 3Q loss widens on reserve buildup

ARMONK, N.Y. - Bond insurer MBIA Inc. said Wednesday its third-quarter loss widened sharply as it increased loss reserves for its home equity mortgage exposures and continued to rebalance a portfolio.

MBIA lost $806.5 million, or $3.48 per share, during the quarter ended Sept. 30, compared with a loss of $36.6 million, or 30 cents per share, during the same quarter last year.

The company's operating loss, which excludes unrealized net losses on investments, was $514.8 million, or $2.22 per share. MBIA recorded $405 million in unrealized net losses during the third quarter as it reduced the value of certain derivatives and financial instruments it holds.

Analysts polled by Thomson Reuters, on average, forecast a loss of 14 cents per share for the quarter. Analysts do not always include special gains and charges in their estimates.

MBIA's quarterly loss ballooned as it incurred a $961 million pretax loss and expense as it set aside more cash to cover potential losses on residential mortgage-backed securities. Many bond insurers are dealing with the expectation of mounting losses on exposure to insuring troubled mortgage-backed securities.

As mortgages have increasingly defaulted since the middle of 2007, expectations for defaults on bonds backed by pools of the troubled loans has grown. Because of those expected losses, bond insurers like MBIA have set aside increasing amounts of cash to cover potential future losses.

MBIA said it observed increases in delinquencies and greater-than-expected losses in the residential mortgage-backed securities during the third quarter after two consecutive quarters of relatively flat delinquencies. Because of the unexpected jump, the company adjusted modeling assumptions for the transactions and factored in an overall weakening economy into its loss forecast.

MBIA has filed lawsuits against certain loan sellers and servicers regarding some of the second mortgages in those securities. MBIA claims a portion of the defaulted loans in the securities it took reserves against were in breach of the originators representations and warranties and should be excluded from the securities. Successful lawsuits could allow MBIA to reverse some of those reserve charges taken against the securities.

The company took an additional $66 million in impairment charges on the company's collateralized debt obligation exposure. So-called CDOs are complex financial instruments that combine various slices of debt, and often include portions of mortgage-backed securities. The $66 million charge is an estimate of what MBIA expects to pay in claims on the CDOs.

MBIA also recorded a $155.7 million pretax loss as it rebalanced and took impairment charges on its investment portfolio in the company's asset liability management company. MBIA began rebalancing the portfolio in the second quarter to improve liquidity to meet worst-case collateral posting and termination payment scenarios that would occur if the insurer's ratings were downgraded.

Throughout much of 2008, bond insurers have faced concerns about ratings downgrades as ratings agencies worried about the companies' extent of mortgage-related losses. Most bond insurers saw their ratings downgraded at some point during the year, including MBIA.

Downgrades can force MBIA to increase collateral or make termination payments in its asset liability management company, which is separate from the bond insurance business.

During the third quarter, MBIA's net premiums written skyrocketed as it completed a reinsurance contract with bond insurer Financial Guaranty Insurance Co. at the end of the quarter. MBIA's net premiums written totaled $928 million during the third quarter, compared with $229 million during the year-ago period.

Of the $928 million, $812 million was due to the reinsurance contract.

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