Nov. 5 (Bloomberg) -- MBIA Inc. posted a wider loss than analysts anticipated as slumping credit markets forced the bond insurer to take more reserves against potential claims.

The third-quarter net loss widened to $806.5 million, or $3.48 a share, the Armonk, New York-based company said in a statement today. Excluding changes in the value of securities it holds and insures, MBIA had a loss of $2.22 a share, compared with the average analyst estimate in a Bloomberg survey for a loss of $1.04. Bond insurer Ambac Financial Group Inc. also reported a wider loss today.

As the credit seizure deepened, the likelihood that MBIA will need to pay claims on its guarantees increased. The company said it expects to pay additional claims on bonds backed by home equity of $961 million. MBIA has insured no new deals in the municipal bond market since early July after being stripped of its last Aaa credit rating by Moody's Investors Service, according to Thomson Reuters data. MBIA, Ambac and other bond insurers are seeking to revive their business by participating in a Treasury program to stabilize the financial system.

``This may be the last, best hope, that the Feds come through,'' said Matt Fabian, an analyst and managing director at Concord, Massachusetts-based Municipal Market Advisors. ``There just is no demand for their product.''

Government Aid

A government plan to buy back securities and take equity stakes in financial firms is the most effective way to restore confidence in financial markets, MBIA Chief Executive Officer Jay Brown said in an Oct. 28 letter to Treasury Secretary Henry Paulson. MBIA and the rest of the industry have posted record losses after expanding from guarantees on municipal bonds that rarely default to insuring securities tied to mortgages that are now going delinquent.

MBIA's net loss widened from $36.6 million, or 29 cents, a year earlier.

Brown said he had reservations about the Troubled Asset Relief Program's that would let the federal government guarantee securities on the balance sheets of financial firms rather than purchase them directly. Ambac said in a separate letter to the Treasury that it would support a plan under which the government provided a backstop to the bond insurers' guarantees.

MBIA's stock market value has fallen to about $2.9 billion from almost $10 billion at the start of 2007 just before the subprime mortgage market began to unravel. MBIA rose $1.37 yesterday to $10.46 in New York Stock Exchange composite trading.

Buffett Competition

As Ambac and MBIA flounder Assured Guaranty Ltd. and Warren Buffett's Berkshire Hathaway Assurance grabbed up almost 90 percent of the market. Berkshire backed 44 percent of all new bonds insured by cities and states in the third quarter, and Assured guaranteed 45 percent, according to Thomson Reuters data.

MBIA in September won approval from regulators to reinsure $184 billion of municipal bonds backed by a FGIC Corp. unit. MBIA will receive about 80 percent of the unearned premiums and return 20 percent to FGIC as a ceding premium, according to a Sept. 26 document from the New York State Insurance Department

The $639 million of premiums MBIA obtains as part of the transaction will be placed in a trust until its credit ratings are removed from review or nine months from the closing date, as required by the state, MBIA said in an Oct. 1 statement.

Moody's placed MBIA's credit rating under review for a possible downgrade last month after increasing its forecast for losses on bonds backed by subprime mortgages. Moody's said MBIA was ``meaningfully exposed to the risk of U.S. subprime mortgages and other residential mortgage products.''

Downgrades

Ratings companies downgraded about $118 billion of prime- jumbo and Alt-A bonds in September following a record $200 billion of downgrades in August, according to an Oct. 3 report from JPMorgan Chase & Co.

MBIA is also seeking to recoup some of its losses on mortgage-backed securities by suing loan originators, including GMAC LLC's Residential Funding Co. and Bank of America Corp.'s Countrywide Financial unit.

MBIA said it had paid $459 million to cover losses on bonds backed by Countrywide loans after the lender falsely represented that it maintained strict underwriting guidelines.

In addition to hobbling their guarantee business, Moody's downgrade of MBIA's insurance unit by five levels to A2 in June, required the company's asset management business to post collateral against investment contracts and terminate others.

MBIA has $18.1 billion in outstanding liabilities related to its asset management business, of which $7.9 billion are guaranteed investment contracts that may be terminated in the event of further downgrades, the company said Sept. 22.

MBIA said it had enough cash to meet the obligations and would continue to sell securities during the third quarter to raise cash in anticipation of any further downgrades.

To contact the reporter on this story: Christine Richard in New York at crichard5@bloomberg.net

Last Updated: November 5, 2008 06:43 EST