Capital Markets

Insurer Slashes Dividend to Shore up Rating

MBIA seeks an $80 million savings from a huge cut in shareholder outlays.
David KatzJanuary 9, 2008

Holding on for dear life to a Triple-A financial strength rating, MBIA Inc. reported Wednesday that it was cutting its shareholder dividend to 13 cents per share from 34 cents per share. The company, which calls itself the world’s biggest bond insurer, expects the cut to save it about $80 million per year.

MBIA CFO Chuck Chaplin said that the dividend cut “significantly enhances our financial flexibility.” The company which has been plagued by the subprime real estate crisis, will pull back the dividends as part of a “Capital Strengthening Plan,” under which it would also issue $1 billion of debt. Following talks with rating agencies and a look at their commentary, the insurer said in a press release that it believes that “the successful implementation of this capital plan will result in a robust capital position that will lead to stable ratings.”

On December 20, Fitch Ratings placed MBIA Inc.’s Triple A insurer financial strength rating on “Rating Watch Negative” after the rating agency assessed the company’s exposure to certain collateralized debt obligations backed partly by subprime mortgages, as well as its exposure to residential mortgage-backed securities. In response to the introduction of the capital plan, Fitch dropped the threat and rated the new MBIA debt “AA,” the third-highest grade, according to Reuters.

A financial strength rating is an agency’s opinion of an insurance company’s ability to pay under the terms of policies and contracts. MBIA Inc.’s main operating arm, MBIA Insurance Corp., has Triple-A financial strength ratings from Moody’s Investors Service, Standard & Poor’s Ratings Services, and Rating and Investment Information, Inc. The company expects rating agencies to treat the $1 billion as capital of the insurance company. The expects to release $300 million to $500 million of capital to support amortizing and maturing transactions in the fourth quarter of 2007.

Besides the debt issuance and the dividend cut, MBIA’s capital strengthening plan includes a previously announced purchase by Warburg Pincus, a private equity firm, of $500 million in common stock at $31 per share and a commitment to backstop a $500 million rights offering to the company’s existing shareholders. The company also expects to buy reinsurance covering “a diversified portion of MBIA’s portfolio” that it expects to cut the insurer’s capital requirements by $50 million to $150 million.