MBIA announced it will raise $1 billion in new capital, cut its annual dividend by about 62%, to 52 cents a share, and also plans to do an insurance deal that will effectively free up additional money for the firm.
Financial woes in the arcane world of bond insurance have far-reaching consequences: Weakness at insurers can translate directly into falling prices on the billions of dollars in bonds they insure.
Investors were already deeply anxious about MBIA and other bond insurers, worried that they would be downgraded by rating services, which could put their business at risk.
MBIA made its announcement before the market opened Wednesday. Its shares were hit hard on Tuesday, falling nearly 21% after a Morgan Stanley analyst said the insurer's future profits would be worse than expected, in part because it would likely issue additional debt.
Shares of rival bond insurer Ambac Financial Group Inc. were down about 17% on the report.
The dividend cut announced today will save the company an estimated $80 million a year. The $1 billion in new capital will be raised by issuing a kind of debt known as surplus notes.
It's MBIA's second effort in the past month or so to infuse itself with new capital. On December 10, it announced a previous capital-boosting deal in which investment firm Warburg Pincus LLC agreed to commit up to $1 billion to the company.
MBIA, like some other bond insurers, is trying to protect its triple-A rating -- the highest rating possible -- amid the housing downturn. The risk to the bond-insurance business is the housing-market problems will lead to higher claims on the insurance policies the bond insurers have sold to protect securities that were backed by residential mortgages.
Maintaining a triple-A rating is critical to the value of bonds insurers like MBIA have already insured: A downgrade of an insurer's rating can cause the bonds it has insured to drop in value. The triple-A rating is also key to MBIA's ability to insure future bond issues as in the past, since many bond issuers insist that an insurer provide top-rated protection.
Ratings services have made it clear that some insurers need to bolster their position in order to retain their ratings. Shortly after the Warburg announcement last month, Moody's Investor's Service affirmed MBIA's triple-A rating, but shifted its outlook from "stable" to "negative."
At the time, Moody's took note of the Warburg deal and said that if MBIA "fully executes an overall recapitalization plan that re-establishes a robust capital position," it would expect the rating to revert to a "stable" outlook. "However, MBIA's ratings could be reviewed for possible downgrade if this expectation is unmet," Moody's said then.
In its announcement, MBIA said, "Upon successful completion of its capital management plan, the Company expects to meet or exceed the rating agencies' current capital requirements for MBIA to retain its Triple-A ratings."
MBIA also updated information about its reserves for losses that it had provided in December. At the time, MBIA said that it would boost reserves for expected losses by $500 to $800 million. Now it says the figure is $614 million.
MBIA also said it would put $100 million into a pool for anticipated losses it can't yet link to a specific policy or policies.
MBIA also said that the fair value of its portfolio of insured collateralized debt obligations fell by $3.3 billion between Sept. 30 and Dec. 31. Of that total, MBIA said, about $200 million is linked to claims it expects to incur, as opposed to changes in the current market value.
The added moves to boost capital aren't a surprise. When MBIA got the $1 billio