Third Avenue: Why MBIA Is a Good Buy

Despite recent troubles in the monoline industry, Third Avenue Value Fund increased its holding in MBIA (MBI) Common stock in February to 10% of the issue outstanding. Furthermore, of the $2.6 billion of new capital that the bond insurer has raised since December 2007, Third Avenue Value Fund [TAVF] supplied almost $326 million.

In the fund's recent letter to shareholders [.pdf], Martin Whitman expounds on the trials and tribulations facing the industry in general, and MBIA in particular. He argues in favor of MBIA's maintaining its AAA-Stable credit rating (though suggest why this may be compromised), attacks William Ackman's "victimization" of the company, and concludes with why he feels comfortable with this investment. The following are excerpts from the letter:

The common stocks of all companies affected directly or indirectly with the current mortgage meltdown cratered in price during the quarter... Ambac Common, MBIA Common, MGIC Common and Radian Common, have been selling at discounts of around 70% from tangible book value, or NAV. In Management’s opinion, there is much profit to be made in these issues at these prices whether the companies continue as going concerns, or enter into a period when the companies run-off their books of business in whole, or in part...

MBIA has made mistakes. The Company will take losses that seem easily met out of MBIA’s approximately $17 billion claims paying ability... The base case seems to be that losses will not be so great as to jeopardize MBIA’s AAA rating. But even if MBIA is downgraded, the common stock, at current prices of around $13 to $14 per share, ought to fare reasonably well, even in a run off scenario. Adjusted book value currently is probably in a range of $38 - $40 per share...

One of the reasons for feeling comfortable with the MBIA investment is the relative “ease of exit” from the industry. If MBIA does not ultimately receive AAA-Stable Ratings, it will be hard to write profitable new business...

Obviously, I feel good about TAVF’s investment in MBIA. The Fund ought to do well under almost any scenario. By any objective standard, the MBIA investments are attractive ones with the insurance subsidiaries deserving of an AAA-Stable rating. Yet, there exists a sense of discomfort due to the dangers of Rating Agency subjective considerations and capricious regulators.

Comments

[ct_programmer]

I've read estimates closer to $13-15 for a run-off amount, and $30 if they make it out of the abyss.

[beachtango]

It is always refreshing to read about Mr. Whitmans perspective on undervalued value companies. His thoughts are expressed "without" sarcasm and rhetoric, and contain sound, original analysis.
For the record I am long ABK and MBI. I began buying ABK and MBI after reading several articles on aforementioned companies in Barron's, Wall Street, adn IBD, as well as noting how large funds(Davis Select, Third Avenue), and other investment firms ( Warburg) with much more knowledge than I, stated how undervalued for the "long term" these companies were [are]...

[Stockoptions]

Why would anyone invest in a company about to be flooded with claims that will surely significantly erode its capital base. MBIA may be undervalued for the long term but the big question that remains is will it last that long?? Even in a run off scenario the muni business is also becoming less promising as states are deciding that they no longer need muni insurance. Another point that seems to evade many is that every time a monoline raises more capital they may be buying more time but eroding shareholder equity. I question the political motivations of rating agencies and the Funds investing in MBIA......they are just trying to buy more time for banks to restructure their liabilities!! If house prices drop another 10 - 20% MBIA will be like a glass of lemonade on a hot day......Empty looking for another refill!