MBIA, Ambac, Montpelier Re: Insurance & Financials Grind It Out

Today, we search for information on insurance and financial companies by speaking with Zacks senior analyst Eric Rothmann. We’d like to say we came up with something positive to point ahead to, but at this point we’ll settle for anything.

Have you posted any noteworthy Buy or Sell reports lately?

Recently, MBIA (MBI) reported first quarter earnings, which were substantially worse than our estimate for a loss of $0.30 per share [-$3.01 per share]. The bulk of the loss came through the unrealized pretax loss of $3.6 billion on the company’s credit derivative portfolio and CDO.

The dreaded CDO claims another victim, right?

Well, but the company also experienced a 43.1% drop in net premium written, and the entry of Berkshire Hathaway (BRK.A) will further intensify the competition. Though the company has managed to hold on to its AAA credit rating with a negative outlook, we remain concerned for further rating downgrade. Also, continued concerns for further deterioration in the mortgage markets should not bode well for results over the next several quarters. Therefore, given the continued uncertainty for the group, we maintain a Sell rating.

What was the latest insurer you issued a report on?

That would be Ambac (ABK). 1Q08 operating results were a negative $6.93 per share, due to non-cash, mark-to-market losses on its credit derivative exposures of $1.7 billion pretax. The company has taken steps to rectify its issues, which included raising capital, business restructuring and further reduction of dividend, to support the balance sheet and regain its AAA rating.

However, given the rating agency’s negative outlook (further downgrades possible), the capital raised dilutive effect on the shareholders equity and earnings, economic pressures enhancement of the housing market woes (potential for additional writedowns), and competitive challenges from writing new business during the quarter, have and should continue to weigh on ABK’s ability to generate revenue and EPS over the near turn.

So you have a Sell on Ambac, as well?

Considering all this, as well as our view that the future dividend payment as being less secure, and a lack of a trough in the housing market, we maintain a Sell rating on the shares.

Any good news among insurers under your coverage?

We reiterated our Buy rating on Montpelier Re (MRH). Though first quarter results missed our expectations, primarily based on losses in its direct and facultative property accounts, and concern remains with respect to the general softening in the reinsurance industry and increased competition, the company has begun to experience benefits from its new initiatives – premium declines from Bermuda have been has been replaced by premiums generated by the new Lloyds and U.S. platforms.

The company remains focused on the future and, as such, revenues should grow from additional acquisitions and office expansions and recent initiatives during the ensuing years. Thus, we still like the stock, though we have taken its six-month price target down somewhat over the past three months.

Eric Rothmann is a senior analyst covering the insurance and financial industries for Zacks Equity Research.