MBIA Incorporated’s (MBI) third quarter operating loss of $3.50 per share substantially missed the Zacks Consensus Estimate of a loss of 99 cents per share. Last year, the company had reported a loss of $3.42 per share. Results were negatively affected by a continued deterioration in the performance of the company’s insured second-lien residential mortgage loan securitization exposures and increase in case loss reserves reflecting expectations for additional claim payments to policyholders. 

Net loss was $727.8 million during the quarter, compared to $806.5 million in the prior-year quarter. Premiums earned during the quarter totaled $181.2 million, down 23% from $234.7 million in the third quarter of last year. Net investment income dropped 56% to $156.8 million. During the quarter, the company recorded a $238.8 million pretax loss related to its insurance of mortgage-backed securities

It also posted an $810.2 million pretax unrealized loss on its insurance of credit derivatives and a pretax loss of $171.4 million on investments. During the quarter, the company paid a total of $638.4 million in net claims primarily in connection with its second-lien residential mortgage exposures. MBIA’s book value per share increased to $13.16 as of Sep 30, 2009, from $4.78 as on Dec 31, 2008, mainly due to a decline in cumulative unrealized losses on insured credit derivatives. 

On Sep 30, 2009, adjusted book value (ABV) – which adds back the present value of installment premiums, among other items – declined to $39.05 per share, compared to $40.06 per share on Dec 31, 2008. The decline was brought about by increased credit impairments on insured credit derivatives, other-than-temporary impairments of invested assets and insurance incurred losses. 

Segmental Performance 

U.S. Public Finance Insurance  

This segment is conducted by the subsidiary, National Public Finance Guarantee Corp. Book value and adjusted book value per share were $13.02 and $20.05, respectively, on Sep 30, 2009, compared to $10.97 and $18.95, respectively, on Dec 31, 2008. The increase in both book value and ABV per share is the result of net income for the segment. While National wrote virtually no new business the existing book of business earned scheduled premiums of $96.4 million up 69% year-over-year. 

Structured Finance and International Insurance 

This segment reported a Book value and adjusted book value per share of $8.81 and $23.18, respectively, on Sep 30, 2009, compared to $5.16 and $25.17, respectively, on Dec 31, 2008. The reduction in ABV per share reflects the impact of impairments on insured credit derivatives and incurred losses on insured second-lien mortgage loan transactions, partially offset by earnings from premiums and investment income. 

The increase in book value per share reflects net income for the segment, driven by unrealized net gains (mark-to-market) on insured credit derivatives. While there was no new business written in the segment in the first nine months of 2009, the existing book of business generated $74.8 million in scheduled premiums earned during the quarter. 

Investment Management Services 

This segment reported a book value and adjusted book value per share of -$8.84 and -$4.35, respectively, on Sep 30, 2009, compared to -$10.53 and -$3.26, respectively, on Dec 31, 2008. Though the ABV declined due to asset impairments, an improvement in book value was bought by a reduction in unrealized losses in other comprehensive income. 

We are yet to see any positive fundamental improvement and don’t expect any in the near term. MBIA’s launch of National Public Finance Guarantee Corp earlier this year was an effort to split its traditional municipal bond insurance operations from the units that provide guarantees on riskier products in an effort to boost business. But the effort has been hampered by litigation. 

Rating issuers have downgraded MBIA and its subsidiaries, and are challenging the company’s recent restructuring efforts. A deteriorating insured portfolio and a turbulent financial market only magnify these issues. We maintain a Neutral rating on the shares.
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