MBIA Inc. swung to a $2.41 billion loss during the first quarter as the bond insurer faced ongoing deterioration in the credit markets and recorded billions in write-downs.

The loss equated to $13.03 per share during the quarter ending March 31, compared with year-ago profits of $198.6 million, or $1.46 per share.

MBIA was forced to reduce the value of its insured derivatives holdings by $3.58 billion, leading to $2.96 billion in total lost revenue, compared with revenue of $729.9 million a year ago. Net premiums written tumbled to $97.3 million from $171.3 million last year.

Unlike traditional insurance on corporate or municipal bonds, the value of derivatives holdings _ called credit default swaps _ must be priced at the end of each quarter at current market value. Because the value of such products has tumbled in recent months, MBIA was forced to cut the value of its holdings, thus recording what in accounting terms is called an unrealized loss. Actual losses would only occur if MBIA sold the derivatives at less than the original cost.

MBIA does not project actual losses on those holdings to ever reach the amount equal to the write-downs it took during the quarter, it said in a statement.

Shares rose more than 4 percent, or 41 cents, to $9.84 at the open of trade.

The derivatives losses were not the only problems plaguing bond insurers in recent months. They have also been hit hard by the deterioration in the mortgage markets that began in late 2007.

Initially, bond insurers only provided insurance to municipalities. But in recent years business was expanded to insure other debt, such as bonds backed by mortgages and consumer loans. As the mortgage market soured and mortgage defaults spiked in 2007, investors and ratings agencies began to worry bonds backed by those troubled loans would default as well. That in turn would lead to a spike in claims payments.

Both investors and credit ratings agencies worried the insurers would not have enough spare cash to both handle a potential increase in claims and maintain reserves warranting top-notch "AAA" financial strength ratings.

The "AAA" rating is essential to ensure bond insurers can book new business. Worries that insurers like MBIA could face ratings cuts cost the company some new business _ one reason why written premiums declined during the first quarter.

Downgrades to bond insurers can make it more expensive for municipalities and other institutions to borrow money for an array of projects ranging from the construction of new schools to sewer systems. Bond insurers essentially back a bond by agreeing to pay principal and interest if the bond issuer misses payments. In return for the insurance, a municipality typically will be able to use the insurer's "AAA" rating to get a lower interest rate and thus save money. Continued...