Despite ongoing litigation, less than stellar ratings and continued losses on structured finance products, MBIA Inc. managed to post positive net income last year.

The bond insurer holding company recorded net income to shareholders of $632.2 million for 2009, versus a net loss of $2.7 billion in 2008.

However, the gains came from volatile insured credit derivatives, and MBIA executives were quick to point out the gains could quickly reverse course.

“The biggest driver of our pre-tax income was a reduction in the fair value of derivatives liabilities of $1.6 billion pre-tax,” Edward Chaplin, president and chief financial officer, told investors in a conference call yesterday. “As we’ve reported for many quarters now, this gain is no cause for celebration, and when that same item swings to loss there will be no cause for alarm.”

To avoid that volatility, the company prefers to use a non-generally accepted accounting principles measure called adjusted book value, which takes the GAAP value, excludes the affects of unrealized gains and losses, and includes the impact of expected cash losses on insured derivatives.

By that measure MBIA’s value declined by $3.71 per share in the year to $36.35. That equates to a 9% annual loss. But as Chaplin pointed out, even that is a far better performance than in 2008, when the adjusted book value fell by almost half, from $77.89 to $40.06.

MBIA’s two principal subsidiary insurers are the newly created muni-only National Public Finance Guarantee Corp. and the long-standing MBIA Insurance Corp., which writes structured finance and non-U.S. public finance guarantees. Neither company was materially active last year due to low ratings and ongoing litigation.

National was launched in February 2009 as the result of a major restructuring which involved MBIA Inc. splitting its books between municipal insurance and structured finance guarantees. The split resulted in a series of lawsuits.

In one case a number of financial firms have claimed the restructuring “was a massive fraudulent conveyance designed to ...  evade its finance guarantee coverage obligations to them,” according to recent court documents in which MBIA’s motion to dismiss that case was denied.

Despite the lack of new business, National’s adjusted book value increased in the year from $18.95 to $20.70 per share, primarily as a result of scheduled premiums that earned the company $409.1 million, a 50% gain from 2008.

At year-end, National’s insured public finance portfolio was the largest in the industry at $508.0 billion.

Assured Guaranty Ltd., the only active guarantor in the primary municipal market, reported last week that its insured portfolio was $423.1 billion at year-end. Fourth-quarter results from Ambac Assurance Corp. are not yet available, but at the end of the third quarter its insured portfolio was valued at $230.4 billion, according to the company’s 10-K filing.

Almost half of the municipal credits backed by National are rated double-A or higher, while 40% are rated single-A, according to the company’s 10-K filing yesterday. Only 9.3% are rated triple-B and the remaining 0.5% are below investment grade.

By sector, 38% of the insured portfolio is general obligation debt, while 18% is in utilities, 12% is tax-backed debt, and 10% is in transportation bonds.

National’s statutory capital was $2 billion at the end of last year. The guarantor’s claims-paying resources were $5.5 billion, while cash and short-term investments were valued at $233.8 million.

Its investment portfolio “remains highly liquid, averaging double-A credit quality and totaling $5.3 billion” as of Dec. 31, 2009, an earnings statement from Monday said.

Tax-exempts make up 49% of the investment portfolio, while 45% is taxable, including mortgage-backed securities, corporate bonds, money market funds, and Treasuries. The remaining 6% is short-term debt.

Meanwhile, MBIA Insurance Corp. remained the largest contributor to the parent company’s adjusted book value, though during the year its value fell from $25.17 to $20.79 per share.

“Conserving that value is among our highest priorities,” Chaplin said. “And we were not able to do so in 2009.”

Since the fourth quarter of 2007, MBIA Insurance Corp. has incurred losses of $2.7 billion on its exposure to direct residential mortgage-backed securities. It said it has made payments totaling $3.8 billion net of reinsurance on these exposures.

MBIA Insurance ended the year with $3.5 billion in statutory capital and claims-paying resources totaling $6.5 billion. Its structured finance portfolio incurred $770.2 million in losses during 2009, comprising $2.8 billion of paid and expected future losses, net of expected reimbursements of $2.0 billion.