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MBIA Reports $213 Million Third-Quarter Net Loss on Derivatives Contracts

MBIA Inc., the bond insurer seeking to jumpstart its business of guaranteeing municipal debt, reported a $213 million net loss in the third quarter on a change in the value of derivatives contracts that reduced an accounting benefit.

The loss of $1.06 a share in the three months ended in September narrowed from $728 million, or $3.50 a share a year earlier, according to a statement today. Excluding the change in the value of derivatives, the company had an adjusted pretax loss of $68 million as the company increased its expectations for losses on guarantees of collateralized debt obligations and commercial-mortgage securities.

Armonk, New York-based MBIA was shut out of the bond guarantee business after being stripped of its top insurance ratings in June 2008 because of losses on mortgage-linked debt it insured. Chief Executive Officer Jay Brown is seeking to start insuring city and state debt again by separating the company’s municipal and structured-finance businesses. While approved by New York state regulators, banks and investors are challenging that move in courts.

“The litigation that constrains our re-entry into the U.S. public finance insurance business continues, but our belief that the New York State Insurance Department made the right decision in February 2009 is borne out by the fact that we continue to pay all claims and obligations as they come due,” MBIA Chief Financial Officer Chuck Chaplin said in the statement.

Ambac Bankruptcy

MBIA reported the loss a day after Ambac Financial Group Inc., once its biggest competitor, filed for bankruptcy protection after failing to raise capital as it grappled with losses from mortgage debt. Ambac, which today sued the U.S. to protect $700 million in tax refunds, said in a statement that its third-quarter net income plunged 97 percent to $76 million, or 25 cents a share.

MBIA’s net loss includes declines related to the value of credit derivatives contracts tied to its own creditworthiness. Under accounting rules, an improvement in the contracts increases the company’s liabilities.

Expectations for losses on bonds backed by commercial mortgages jumped by $172.3 million and anticipated losses on asset-backed collateralized debt obligations increased $163.2 million, the company said.

The insurer increased its expectations on future losses linked to residential mortgages because of slower declines in expected delinquencies. The increase was more than offset by recoveries it anticipates from efforts to force mortgage originators to buy back loans it says were marketed for sale using faulty information.

Net Claims

The insurer said it paid $329 million in net claims connected with second-lien mortgage debt, down from $421 million in the second quarter. Claims on insured mortgage securities peaked at $636 million in the second quarter of 2009.

MBIA fell 81 cents, or 6.7 percent, to $11.29 as of 4:15 p.m. in New York Stock Exchange composite trading. The shares have almost tripled this year from $3.98 at the end of 2009.

MBIA created National Public Finance Guarantee Corp. to jumpstart its municipal bond business, assuming $5.4 billion of MBIA Insurance Corp.’s assets and its public-finance obligations. MBIA’s structured-finance guarantees, including those related to mortgage securities, remain the obligation of MBIA Insurance Corp.

Dinallo Approves

The split, approved by then-New York State Insurance Superintendent Eric Dinallo, is being challenged by banks including JPMorgan Chase & Co., UBS AG and Citigroup Inc. that say it unlawfully strips away assets, leaving MBIA Insurance Corp. insolvent.

Hedge funds managed by firms including Aurelius Capital Management and Fir Tree Partners also have sued the company over the split, saying in a complaint that it leaves policyholders “stranded in a denuded insurer that will be unable to meet its obligations as they come due.”

Brown said in an August conference call that the uncertainty caused by the litigation has “prevented National from receiving high enough ratings” from Standard & Poor’s and Moody’s Investors Service and that the company had been “unable to write any new business.”

National Public Finance is rated Baa1 by Moody’s, three levels above speculative grade, and A by S&P, or five levels above.

To contact the reporter on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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