MBIA Inc. (NYSE:MBI) the olde Municipal Bond Insurance is about to release earnings. Ponder this Bear Case Scenario:
The trick to insurance is to charge enough premium and earn enough investment income to cover the inevitable losses on the policies you have written. Many American Cities are burdened with declining tax bases and huge retirement obligations. The arithmetic does not work. A few large cities have gone bankrupt such as Detroit just to prove that the underlying risks are probably under-priced which is the first fatal flaw of insurance.
Will investment income continue to create sufficient returns. Long bonds are suspect because of interest rate risk. Equities have been on quite a tear and cannot be expected to continue providing the same returns.
The business model is difficult to accept. This asset category historically has done very well. but eventually everything reverts to a mean. Risk has come home and wants to crawl into your warm bed.
George Gutowski writes from a caveat emptor perspective.