Following the positive earnings released Tuesday by surety provider MBIA, some remain skeptical over the firm's CDO exposure. In its most recent daily, unsecured debt research firm Gimme Credit states that it doesn't "view MBIA (Aa2/AA/AA) as currently attractive." Yesterday MBIA reported $223 million in earnings, up from $152 million in 1Q02.

Specifically, analyst Kathy Shanley points out the $60 million gain in its CDO portfolio, which is up from a $82 million loss in the entire year 2002. The gain is primarily attributed to a change in its valuation method and the addition of a new data vendor, Shanley notes. "Although the mark-to-market this period was positive, the adjustment raises questions about future earnings volatility," she writes. Tighter spreads in the CDO market were also credited for the gain.

Shanley also expresses concern over the insurer's loss assumptions, noting that MBIA's policy of not immediately paying off its insurance obligations, in light of the relatively long life of insured assets, skews current loss expectations. From 1974 through Dec. 31, 2002, MBIA's total incurred losses stood at $401 million, of which $156 million had been paid and $245 million in case loss reserves — which shanley speculates may not be enough given MBIA's exposure to other troubled sectors of structured finance markets, airlines for example.

Amid these questions, however, MBIA's triple-A rating is not threatened, in part because Shanley sees the rating agencies as having a symbiotic relationship with ABS, MBS and CDO bond insurers. "Based on its track record to date, we don't have a basis for rating MBIA lower than the rating agency assessments, but we believe the relationship between the agencies and MBIA is semi-incestuous since all benefit from the growth and stability of the structured finance sector," she writes.

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