MBIA, the world’s largest bond insurer, came a step closer to losing its key AAA credit rating yesterday as the prospect of a surge in claims on the securities that it underwrites pushed the group to its biggest quarterly loss to date.
Standard & Poor’s put MBIA’s credit rating on review for a down-grade after the markets closed last night, despite strenuous assurances earlier in the day from Gary Dunton, the chief executive of the group, that it had more than enough capital to maintain its top rating.
The markets, which have grown increasingly nervous about MBIA’s ability to meet an expected surge in insurance claims, were soothed by Mr Dunton’s assurances, helping the Dow Jones index to rise by 208 points, or 1.7 per cent, to 12,650.40. That relief may prove to be short-lived, however, as investors digest S&P’s decision to step up its scrutiny of MBIA.
The insurer, which guarantees the interest and principal payments on the securities it underwrites in the event of a default by the issuer, reported a $2.3 billion (£1.1 billion) loss for the fourth quarter, compared with a $181 million profit the year before. The loss is derived from an estimated $3.4 billion fourth-quarter decline in the value of the loans and securities that MBIA insures.
Like Ambac, Financial Guaranty and Security Capital Assurance, which have recently lost their AAA ratings, MBIA faces a huge jump in insurance claims as defaults surge on sub-prime mortgages that back many of the securities that they underwrite. As a result, the insurers are scrabbling to raise new capital. AAA credit ratings are vital to an insurer’s ability to attract new underwriting business and to survive in the longer term.
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MBIA’s losses came only a day after William Ackman, of the Pershing Square hedge fund, calculated that the sub-prime crisis eventually would cost the group $11.6 billion – a calculation that Mr Dunton dismissed yesterday.
The shares fell 8 per cent to $12.85 in early trading, taking the decline for the year to 80 per cent. They closed at $14.88 after Mr Dunton’s comments.
New figures yesterday showed that defaults on privately insured US mortgages rose by 37 per cent in December from the year before.