Earnings: MBIA Completes the Bond-Insurer Trifecta

We have Ambac (ABK), Assured Guarantee (AGO) and now MBIA (MBI) handily beating estimates.

MBIA (MBI), the holding company for MBIA Insurance Corporation, today reported a net loss of $706.4 million, or $3.37 per share, for the first half of 2008, compared with net income of $410.4 million, or $3.07 per share, during the same period in 2007. For the second quarter, net income was $1.7 billion, or $7.14 per share, compared with $211.8 million, or $1.61 per share, for the same period of 2007. Net income in the quarter was driven primarily by unrealized gains on insured credit derivatives, which totaled $3.3 billion on a pre-tax basis. The majority of the unrealized gain was the result of a substantial widening of credit default swap spreads on MBIA Insurance Corporation during the second quarter. The Company did not materially alter its projection of ultimate loss on mortgage-related exposures. As a result, loss reserves had an insignificant impact on net income.

Net income was also affected by $742 million of pre-tax realized losses resulting from the rebalancing of the asset/liability portfolio in the Company’s Asset/Liability Management (ALM) business. The $742 million in realized losses consisted of $306 million on asset sales related to the rating downgrades of MBIA Insurance Corporation during the second quarter and $436 million of impairments on assets sold or that are expected to be sold in the third quarter to further enhance liquidity in the ALM business.

After-tax operating loss, a non-GAAP measure that excludes the effects of timing-related gains and losses (all non-GAAP measures used herein are defined in the attached Explanation of Non-GAAP Financial Measures), for the first half of 2008 was $339.4 million, or $1.62 per share, compared with after-tax operating income of $408.1 million, or $3.05 per share, for the first half of 2007. After-tax operating income for the second quarter of 2008 was $228.9 million, or $0.96 per share, compared with after-tax operating income of $206.9 million, or $1.57 per share in the same period of 2007.

Memo to MBIA: Don't Get Carried Away

MBIA (MBI) is considering suing Pershing Square and Bill Ackman. I think the last thing MBIA want to so is get into a "whose statements were more truthful" pissing contest with Ackman.

Bloomberg Reports

MBIA Inc. said it may sue Bill Ackman, striking back against the hedge fund manager who waged a six-year campaign against the bond insurer and said this year that the company may be insolvent.

MBIA is 'assessing all our options, including litigation' against Ackman's Pershing Square Capital Management LP, Chief Executive Officer Jay Brown said on a conference call today after the Armonk, New York-based company reported a $1.7 billion profit. Ackman, in an e-mail, said he stands by his comments.

Brown's decision to consider legal action escalates a feud that began when Ackman wrote a 2002 report criticizing MBIA's use of credit-default swaps to guarantee debt. Ackman has appeared before Congress and written letters to the U.S. Securities and Exchange Commission, at the same time betting against the stock.

The article said "Ackman, 42, said in his e-mail that 'we continue to believe that MBIA is insolvent' under one of two tests in state insurance law. The test relies on whether an insurer can afford to reinsure its liabilities in the current market. MBIA appears solvent under the other test, Ackman wrote, based on statutory filings which rely on management predictions of future losses, though he called those estimates 'understated'."

Here is the thing. It looks as though MBIA and Ambac (ABK) have avoided BK for the near future. It was done in no small part from help from NY Insurance Commissioner Eric Dinallo's constant assurances on TV the insurers were in fact solvent and his work behind the scenes. Does anyone really think that if Ackman is sued he will not call for all conversations and emails between the bond insurers and the Commissioners office to be made public?

Do we really think Dinallo wants that to happen?

Ackman has been right on MBIA up until this point. It appears MBIA may have escaped the worst, perhaps because folks grew tired of the story and moved on the bigger fish [Fannie (FNM) and Freddie(FRE)].

One would think that the last things either insurer want is a court of law going over their books line by line and forcing them to disclose everything to the world. They can't want that, and I get the feeling Ackman would welcome the chance.

Sun Tzu in the "Art of War" said that many times it is better to "retreat in order to survive to do battle another day" (paraphrase).

This is one of those times....

Disclosure: No position

Comments

[Tom Armistead:]

I see Ackman's email reponse in the same light I see his release of the Open Source document, as after the fact cover to support his claim that he actually believed his own exaggerated estimates of ABK's and MBI's difficulties.

He is too intelligent to believe that nonsense. After Gotham went down he would have done better to accept his own part in that fiasco rather than develop a personal vendetta against MBI.

I wrote to Dinallo early in this whole debacle, complaining of Ackman's conduct and reminding him of his duty to enforce the law. Recently he published a warning to rumour mongers, noting the illegality of their actions. If it develops that Ackman has broken the law, MBI shareholders who were injured by his actions will be entitled to recovery.

I also wrote to the SEC, suggesting that Ackman's actions be investigated for possible breach of the securities laws. Again, if is shown that Ackman broke the law, those injured will be entitled to recommpense.

When I have reason to believe that the law has been broken, I complain in writing to the authorities having jurisdiction.

2008 Aug 08 04:30 PM

[glassbox:]

Good Tom for doing all that. Shareholders should start doing something for the stocks that they own. What have non-shareholders got to do with stocks that they don't own? They are just poking their nose into business that is not theirs and always in the name of 'creating liquidity'.

2008 Aug 09 01:51 AM