How does a bond insurer get its stock to rise these days? Easy: Just report a terrible quarter. It worked for MBIA (NYSE: MBI ) , anyway.
Reporting first-quarter earnings before the market opened on Monday, the world's largest bond insurer announced a $2.41 billion loss, or an eye-popping $13.03 per share, versus a gain of $198.6 million, or $1.46 per share in the same quarter last year. The loss accounts for a whopping 40% of MBIA's net worth. Ouch!
MBIA lost what?
Keep in mind that most of the loss was caused by a $3.58 billion markdown of derivatives holdings linked to subprime mortgages. According to accounting rules, MBIA's credit default swaps must be valued at the end of every quarter at the current market value. Given today's credit crisis and ensuing lack of appetite for such securities, current market values are probably overly depressed. The loss is unrealized; it becomes realized only if the securities are actually sold. The same kind of market-value adjustments have also contributed to massive writedowns at other large financial companies, including Citigroup (NYSE: C ) , Merrill Lynch (NYSE: MER ) , and Wachovia (NYSE: WB ) .
So maybe the rules and the current market values are a bit harsh. Perhaps the market value of these derivatives will improve when the credit crisis wanes. That's what MBIA claimed in a statement yesterday, anyway. The company emphasized that it doesn't expect to ever realize all of this quarter's losses.
Fair enough. So how was the quarter otherwise? Well, the amount of net premiums written for the quarter fell to $97.3 million from $171.3 million in this quarter last year. Revenue before losses came in slightly lower, at $711.4 million, versus last year's first quarter of $741.7 million. The quarter was, in a word, underwhelming.
Why did the stock rise?
So why in the world did the stock rally by more than 4% for the day? For one thing, it's been pounded this year, and it's still selling around 85% off its 52-week high. Municipal bond insurance rival Ambac Financial Group (NYSE: ABK ) has had similar problems and has performed even worse. In addition, the stock had already sold off this past week, most likely in anticipation of a bad quarter. MBIA had been down more than 15% just since last Tuesday's close, and yesterday's gain retrieved only a fraction of those losses.
It's a good bet that the rally mostly represents relief that the terrible quarter is officially reported, and that things weren't even worse. Bond insurers PMI Group (NYSE: PMI ) and Radian Group (NYSE: RDN ) also rose Monday after reporting less-than-stellar first-quarter results.
Was there any good news?
The company did report that new business picked up throughout the quarter and continued into the second quarter. Moody's and Standard & Poor's also reiterated their AAA ratings of MBIA in late February, to end near-term speculation of downgrades and the consequential loss of new business. In addition, the company raised $2.6 billion in new capital this quarter, and Chief Executive Jay Brown maintained that the current capital position is sufficient to endure worse than today's stress levels.
Will the stock have a strong enough capital position to handle its losses and meet the increased insurance claims on bonds exposed to the housing market? In this Fool's opinion, buying the stock now is mostly a bet that the company can keep a strong enough capital position to maintain its current AAA ratings for the remainder of the credit crisis. If so, it will continue to write new business and most likely emerge from this crisis as a solid company selling at bargain-basement prices. If that doesn't happen, MBIA may not even survive.