Jan. 31 (Bloomberg) -- MBIA Inc., the world's largest bond insurer, posted its biggest-ever quarterly loss and may raise more capital to offset a slump in the value of subprime-mortgage securities.

The fourth-quarter net loss was $2.3 billion, or $18.61 a share, prompting concern that the Armonk, New York-based company will lose its top credit rating. MBIA reported a day after FGIC Corp.'s insurance unit became the third financial guarantor lost its AAA grade by Fitch Ratings.

MBIA Chief Executive Officer Gary Dunton is trying to shore up capital and retain a AAA rating for the company's insurance unit by selling stock and bonds. Without the AAA stamp, MBIA's business would be crippled and ratings on $652 billion of securities would be thrown into doubt. That threat prompted New York State insurance regulators to call a meeting of banks last week to discuss a rescue.

``In the absence of a credible bailout plan, I think investors and issuers need to assume that MBIA, along with all of the other companies, will face continuing, worsening downgrade pressure all year,'' Matt Fabian, a managing director at Concord, Massachusetts-based consulting firm Municipal Market Advisors, said in a telephone interview.

Excluding writedowns and other items, the loss was $407.8 million, or $3.30 a share, MBIA said in a statement. The average analyst estimate from a Bloomberg survey was for a loss of $2.98.

``We're paying for those mistakes and I don't just mean MBIA, I mean all the monolines,'' Dunton said on a conference call with investors today. MBIA isn't taking live questions on the call and will answer only written questions submitted by participants.

Shares Drop

MBIA's loss compared with profit of $181 million, or $1.32 a share, a year earlier. The results led to a full-year net loss of $1.9 billion, or $15.22 a share, snapping a streak of annual profitability dating back to at least 1991.

MBIA rose $1.54, or 11 percent, to $15.50 today in New York Stock Exchange composite trading, and is down 78 percent in the past year. The stock is being hurt by fear mongering and distortion and ``nothing justifies'' the drop, Dunton said on the call today.

Bond insurers guarantee $2.4 trillion of debt and are sitting on losses of as much as $41 billion, according to JPMorgan Chase & Co. analysts. Their downgrades could force banks to write down $70 billion, Oppenheimer & Co. analyst Meredith Whitney said yesterday in a report.

CDO Downgrades

Credit-default swaps on MBIA rose to 18.5 percent upfront and 5 percent a year from 18 percent upfront and 5 percent a year yesterday, according to CMA Datavision. That means the cost to protect $10 million in debt against default for five years rose to $1.85 million initially and $500,000 a year. The contracts trade upfront when investors see a risk of imminent default.

MBIA, started as the Municipal Bond Insurance Association in 1974, is reeling from an expansion into guaranteeing collateralized debt obligations, which repackage assets such as mortgage bonds and buyout loans into new securities with varying risk. As the value of some CDOs plummet, ratings companies are pressing the insurers to add more capital.

Standard & Poor's yesterday said it cut or may reduce ratings on $270.1 billion of subprime-mortgage securities and 572 CDOs valued at $263.9 billion that could extend bank losses and have a ``ripple impact'' on the broader financial markets.

Moody's today raised its loss expectations for subprime mortgages packaged into bonds in 2006 to 14 percent to 18 percent, indicating more downgrades may come.

Hedge Fund Pressure

Hedge fund manager William Ackman has also stepped up pressure on the companies. Ackman, a managing partner of Pershing Square Capital Management LP, released a letter to regulators yesterday estimating MBIA's CDO losses would reach $11.6 billion. Ackman has trades set up that would profit from a decline in the price of the shares and bonds of MBIA and Ambac Financial Group Inc., the second largest insurer.

MBIA posted $3.4 billion of losses from marking down the value of residential and commercial mortgages as well as CDOs that it guarantees, according to the statement. MBIA also wrote off its $85.7 million investment in Channel Reinsurance Ltd., which reinsures securities guaranteed by MBIA. Moody's said Jan. 23 it may cut Channel Re's Aaa rating.

Adjusted direct premiums, a measure of new business written that doesn't adhere to generally accepted accounting principles, fell 38 percent to $262.4 million in the quarter, MBIA said.

Surpassing Requirements

MBIA yesterday said New York-based private-equity firm Warburg Pincus LLC completed its purchase of $500 million of new shares, sticking to an agreement reached last month to buy the stock at $31 a share. MBIA sliced its dividend 62 percent and later sold $1 billion of notes.

Warburg Pincus' agreed to backstop a future share sale to help MBIA restore capital. MBIA said today it is considering this and other stock raising plans.

``We believe that these steps, along with reduced capital requirements resulting from slower business growth, will result in our capital position surpassing rating agency Triple-A requirements,'' the company said in the statement.

MBIA needs between $1 billion and $2 billion to cover growing losses on mortgage-linked securities, according to Andrea Cicione, a credit strategist at BNP Paribas SA in London.

``Today's announcement is hardly good news,'' Cicione said. ``MBIA said it's pursuing plans to raise capital, which will be supportive for its ratings but it may not be enough.''

Ambac Loss

Ambac reported a fourth-quarter net loss of $3.26 billion, or $31.85 a share, on Jan. 22, after writing down the value of credit-derivatives tied to subprime loans by $5.21 billion. Fitch cut the New York-based company's AAA rating to AA this month, and Ackman yesterday predicted Ambac may see $11.6 billion in losses.

As well as Ambac and FGIC's Financial Guaranty Insurance Co., Fitch earlier this month downgraded Hamilton, Bermuda-based Security Capital Assurance Ltd.'s XL Capital Assurance and XL Financial Assurance five steps to A.

New York's insurance regulator said this week it hired investment bank Perella Weinberg Partners for advice on the financial stability of bond insurers and how to protect their customers. Any rescue plan will ``take some time'' to complete, New York Insurance Superintendent Eric Dinallo has said.

``MBIA can raise more capital, but will probably need to sell the attractive parts of its business to do so,'' said Toby Nangle, who helps oversee $37 billion as head of global aggregate business at Baring Asset Management in London. ``They're a long way from being out of the woods. A downgrade is still a real possibility.''

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

Last Updated: January 31, 2008 16:41 EST