Risk Management

MBIA on $2.4B Loss: Fair Value Isn’t Fair

Marking a $3.6 billion credit derivatives loss to market is different for an insurer than it is for a bank, the company complains.
Stephen TaubMay 12, 2008

MBIA Inc., the the holding company of struggling municipal bond insurer MBIA Insurance Corp., posted a loss of $2.4 billion for the first quarter that it says stems largely from the need to mark a pre-tax $3.6 billion unrealized loss on insured credit derivatives to market.

On Monday, the company reported the $3.6 billion, first-quarter, pre-tax unrealized loss on credit derivatives that it insured, which reflects the net present-value basis of the losses it expects to pay. That figure included $800 million of credit impairments.

The company claimed, however, that fair-value accounting losses aren’t as serious for an insurer as they are for other kinds of financial-services companies. “While attention-getting, the mark-to-market loss,” the company said in a press release, “does not accurately indicate actual or expected losses. In addition, mark-to-market losses, except for the impairment, do not affect the insurance company’s statutory capital or rating agency capital requirements.”

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In contrast to banks’ “tradable, liquid portfolios of derivative assets and liabilities,” contingent insurance liabilities aren’t usually tradable. “Fair value accounting, however, results in some inappropriate comparisons of MBIA’s position to those of other financial institutions who must transact or collateralize at current market values or who could be subject to accelerated payments,” said, noting that those two conditions are ones that insurance companies don’t normally face.

That situation spawns confusion about the real effect of fair-value losses on the company’s current, according to the insurer. MBIA “does not expect the full amount of cumulative mark-to-market losses to be realized, except to the extent of the $1.0 billion in impairments estimated to date,” the company stated.

The company also said that it raised $2.6 billion in the quarter to support its Triple-A ratings, which it claims “the most raised by any monoline insurer in the current troubled capital market.”