2007
Letter to Shareholders
Dear Owners:
I have tried to think
about all the things I
could say about 2007……
It
was not a good year for
your company!
The collapse in the mortgage
markets in the third quarter
and its resulting
effect on MBIA led to
the largest losses in
our history. That said,
we need to
look forward and take
what we have learned to
rebuild our bruised but
not
broken reputation, as
we re-tool our risk assessment
processes during our
self-imposed six-month
sabbatical from the structured
finance business. The
three most obvious changes
as I set out on February
25th in the Principles
and
Decisions Guiding MBIA’s
Transformation are:
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We
will have separate
legal operating entities
for MBIA’s public,
structured
and asset management
businesses as soon
as feasible, but no
later than
five years.
We will not
insure new credit
derivative transactions.
We will either
level the playing
field in the U.S.
or optimize our
legal
structure to take
advantage of the
current U.S. tax
code for affiliate
reinsurance. |
Our re-tooling will narrow
the types of credit risks
we will assume and
reduce the amount of single
risk, sector and correlated
risk exposure to
minimize portfolio vulnerability
to future major stress
in global credit
conditions. In addition,
we will expand our macro-assessment
of global risk
cycles to supplement our
transaction-level skill
base. These changes will
be
applied across both public
and structured finance
insurance as well as asset
management. In looking
back at the last six months,
we certainly had the
capital base to handle
the $1.1 billion in credit
losses we recorded in
2007.
What we didn’t have
was both the capital base
needed to handle the stress
and
the legal structure to
access the capital markets
efficiently so that we
could
ride through the storm
while also taking advantage
of today’s attractive
credit
enhancement environment.
My goal is simply to have
us better prepared for
years in the future if
and when a similar but
different credit crunch
hits.
The biggest decision
your board made last year
was to evaluate our position
in the market, assess
future business opportunities
and determine the cost
of
raising additional capital.
Their decision to access
both the private and public
capital markets rather
than de-leverage the company
and gradually return
your capital to you was
based on their business
judgment that the benefits
of
credit enhancement will
be even more valuable
in the future, when holders
of uninsured credit securities
endure hundreds of billions
of dollars in credit
losses. In simple terms,
the cost of raising dilutive
capital will be justified
when the credit markets
finally recognize that
the cost of credit enhancement
insurance is actually
extremely cheap, when
the security you own fails
to perform.
The next year or so will
be very much focused on
the balance sheet: we
will
be sorting through a wide
variety of solutions to
remediate the portions
of
our portfolio most affected
by the U.S. real estate
meltdown, both direct
and indirect exposures.
Given the huge variation
in forecasts for U.S.
real
estate related losses,
it will be at least a
year or two before our
loss estimates
stabilize so you can expect
volatility in both our
reported loss estimates
and
the mark to market accounting
estimates on our derivative
business. As we
move through this period,
however, volatility in
our estimates will ultimately
be reduced as the portfolio
ages and the full extent
of damage from the 2006
and 2007 vintages becomes
clearer.
I fully expect our new
business production will
move from a virtual standstill
for the first two months
of 2008 to a very reasonable
rate by year-end. I will
update you quarterly on
our progress, and in the
meantime, you can find
my
previous owners’
updates on our Web site,
www.mbia.com.
To our policyholders,
our objective remains
the same: “promises
made,
promises kept.”
Jay Brown
Chairman & CEO
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