Ambac Financial Group, Inc. (NYSE: ABK) (Ambac) today
announced that Ambac Assurance Corporation (AAC), its principal
operating subsidiary, expects to report that estimated statutory
impairment losses on credit derivatives increased by approximately
$1.6 billion in the second quarter to approximately $4.9 billion at
June 30, 2009. Additionally, AAC expects to report statutory loss
and loss expenses incurred amounting to approximately $800 million
for the quarter ended June 30, 2009. The increase in impairment
losses, which relate to AAC’s insured portfolio of collateralized
debt obligations of asset-backed securities transactions (CDOs of
ABS), was driven by rising forward LIBOR rates, which increase
estimated future cash outflows, and further deterioration of the
underlying collateral within the CDO of ABS transactions. The
statutory loss and loss expenses relate primarily to deterioration
in AAC’s second-lien and Alt-A mortgage-backed securities financial
guarantee portfolios.
The increase in the estimated impairment losses in the second
quarter is net of the impact of a settlement that reduced a
significant portion of exposure under a CDO of ABS transaction that
closed in July and a commutation of all of the exposure under a
different CDO of ABS transaction that we expect will close by the
end of July. The two transactions, with an aggregate of
approximately $2.8 billion net notional outstanding at March 31,
2009, are expected to be settled with counterparties for a total
cash payment of approximately $750 million.
Estimated impairment losses on credit derivatives is a statutory
accounting measurement reported in AAC’s statutory filings as
“Estimated impairment losses on subsidiary guarantees and
commitments.” An increase in estimated impairment losses is
recorded as a reduction to statutory income and therefore reduces
statutory surplus. At March 31, 2009, AAC reported statutory
capital and surplus of $372.8 million and contingency reserves of
$1,946.6 million. AAC has requested the approval of the Office of
the Commissioner of Insurance of the State of Wisconsin (OCI) to
release a substantial portion of its contingency reserves, however,
there can be no assurance that the OCI will approve such release.
The amount of contingency reserves released, if any, will increase
AAC’s statutory capital and surplus by such amount.
At March 31, 2009, AAC reported total claims-paying resources of
approximately $11.9 billion. Total claims-paying resources will be
reduced by commutation and settlement payments related to the CDO
of ABS portfolio, including the two transactions referred to
above, and claims paid related to the direct financial
guarantee portfolio since March 31, 2009. Total claims-paying
resources is a term used by rating agencies and other analysts to
quantify total resources available to pay claims in stress case
scenarios and represents an aggregate of contingency reserves,
capital and surplus, unearned premiums, losses and loss adjustment
expenses, estimated impairment losses on credit derivatives and the
present value of future installment premiums. Except for the
present value of future installment premiums, each item is a
statutory accounting measurement.
Under U.S. generally accepted accounting principles (GAAP),
Ambac reports unrealized gains (losses) on credit derivative
contracts which is impacted by market valuations of the CDO
exposures and includes the effect of AAC’s own credit default swap
spreads in the measurement. This mark-to-market valuation often
differs significantly from the statutory measure of impairment
discussed above. For the second quarter of 2009, Ambac expects to
report a net unrealized gain of approximately $34 million for GAAP
reporting purposes. Ambac also expects to report total net loss and
loss expenses of approximately $1.3 billion for the second quarter
of 2009 for GAAP reporting purposes.
Ambac also announced that, in order to preserve cash at Ambac
Financial Group, Inc., it will discontinue paying the semi-annual
interest on its directly-issued subordinated capital securities
(DISCs) beginning August 1, 2009. Additionally, to preserve cash
and surplus at AAC, it will discontinue paying the monthly dividend
on AAC’s outstanding auction market preferred shares beginning
August 1, 2009.
Ambac is providing this preliminary information about its second
quarter results prior to the scheduled earnings announcement date
in light of market events of recent months. Investors should not
expect Ambac to provide information about the results of future
quarters in advance of scheduled quarterly earnings announcement
dates. In addition, investors should not expect Ambac to update the
information provided in this release in advance of the scheduled
announcement date for its second quarter financial results.
Second Quarter Earnings
Release and Conference Call
Ambac will host a conference call on August 5, 2009 at 11:00
a.m. Eastern time to discuss second quarter 2009 earnings, which
are scheduled to be released at 8:30 a.m. Eastern time on that day.
The dial in number for the call is 877-407-9210 (U.S.) and
201-689-8049 (outside the U.S.).
The conference call will also be broadcast live on Ambac’s web
site at www.ambac.com.
Beginning at 2:00 p.m. Eastern time on August 5 through August
14, the conference call will be available in replay. The replay
numbers are 877-660-6853 (U.S.) and 201-612-7415 (outside the
U.S.). The account and confirmation numbers for the replay are 286
and 327951, respectively. A recording will also be available on
Ambac’s web site approximately one hour after the end of the
conference call.
About Ambac
Ambac Financial Group, Inc., headquartered in New York City, is
a holding company whose affiliates provide financial guarantees and
financial services to clients in both the public and private
sectors around the world. Ambac's principal operating subsidiary,
Ambac Assurance Corporation, a guarantor of public finance and
structured finance obligations, has a Ba3 rating (developing
outlook) from Moody's Investors Service, Inc. and a BBB rating
(CreditWatch negative) from Standard & Poor's Ratings Services.
Ambac Financial Group, Inc. common stock is listed on the New York
Stock Exchange (ticker symbol ABK).
Forward-Looking
Statements
This release contains statements that may constitute
"forward-looking statements" within the meaning of the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Any or all of management’s forward-looking statements here or in
other publications may turn out to be wrong and are based on
Ambac’s management current belief or opinions. Ambac’s actual
results may vary materially, and there are no guarantees about the
performance of Ambac’s securities. Among events, risks,
uncertainties or factors that could cause actual results to differ
materially are: (1) difficult economic conditions, which may
not improve in the near future, and adverse changes in the
economic, credit, foreign currency or interest rate environment in
the United States and abroad; (2) the actions of the U. S.
Government, Federal Reserve and other government and regulatory
bodies to stabilize the financial markets; (3) the risk that
market risks impact assets in our investment portfolio or the value
of our assets posted as collateral in respect of investment
agreements and interest rate swap and currency swap transactions;
(4) changes in Ambac’s and/or Ambac Assurance’s credit or
financial strength ratings; (5) risks relating to the
re-launch of Connie Lee as Everspan Financial Guarantee Corp.;
(6) competitive conditions, pricing levels and reduction in
demand for financial guarantee products; (7) credit and
liquidity risks due to unscheduled and unanticipated withdrawals on
investment agreements; (8) inadequacy of reserves established
for losses and loss expenses; (9) changes in capital
requirements whether resulting from downgrades in our insured
portfolio or changes in rating agencies’ rating criteria or other
reasons; (10) the risk that we may be required to raise
additional capital, which could have a dilutive effect on our
outstanding equity capital and/or future earnings; (11) our
ability or inability to raise additional capital, including the
risks that regulatory or other approvals for any plan to raise
capital are not obtained, or that various conditions to such a
plan, either imposed by third parties or imposed by Ambac or its
Board of Directors, are not satisfied and thus potentially
necessary capital raising transactions do not occur, or the risk
that for other reasons the Company cannot accomplish any
potentially necessary capital raising transactions;
(12) credit risk throughout our business, including credit
risk related to residential mortgage-backed securities and
collateralized debt obligations (“CDOs”) and large single exposures
to reinsurers; (13) market spreads and pricing on insured CDOs
and other derivative products insured or issued by Ambac;
(14) the risk that holders of debt securities or
counterparties on credit default swaps or other similar agreements
seek to declare events of default or seek judicial relief or bring
claims alleging violation or breach of covenants by Ambac or one of
its subsidiaries; (15) default by one or more of Ambac
Assurance’s portfolio investments, insured issuers,
counterparties or reinsurers; (16) Ambac’s financial position
and lack of financial flexibility, resulting principally from the
uncertainty of Ambac Assurance’s ability to pay dividends to Ambac
without the consent of the office of the Commissioner of Insurance
of the State of Wisconsin; (17) legislative and regulatory
developments, including the Troubled Asset Relief Program and other
programs under the Emergency Economic Stabilization Act and other
similar programs; (18) changes in accounting principles or
practices relating to the financial guarantee industry or that may
impact Ambac’s reported financial results; (19) changes in
expectations regarding future realization of gross deferred tax
assets; (20) the risk of volatility in income and earnings,
including volatility due to the application of fair value
accounting, required under SFAS 133, to the portion of our credit
enhancement business which is executed in credit derivative form;
(21) the risk that our underwriting and risk management
policies and practices do not anticipate certain risks and/or the
magnitude of potential for loss as a result of unforeseen risks;
(22) operational risks, including with respect to internal
processes, risk models, systems and employees; (23) factors
that may influence the amount of installment premiums paid to
Ambac; (24) the risk of litigation and regulatory inquiries or
investigations, and the risk of adverse outcomes in connection
therewith, which could have a material adverse effect on our
business, operations, financial position, profitability or cash
flows; (25) changes in tax laws; (26) other factors
described in the Risk Factors section in Part I, Item 1A of
our Annual Report on Form 10-K for the fiscal year ended
December 31, 2008 and also disclosed from time to time by
Ambac in its subsequent reports on Form 10-Q and Form 8-K, which
are or will be available on the Ambac website at www.ambac.com and
at the SEC’s website, www.sec.gov; and (27) other risks and
uncertainties that have not been identified at this time. Readers
are cautioned that forward-looking statements speak only as of the
date they are made and that Ambac does not undertake to update
forward-looking statements to reflect circumstances or events that
arise after the date the statements are made. You are therefore
advised to consult any further disclosures we make on related
subjects in Ambac’s reports to the SEC.
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