Ambac Financial Group, Inc. (NYSE: ABK) (Ambac) today
announced fourth quarter 2009 net income of $558.1 million, or net
income of $1.93 per diluted share. This compares to a fourth
quarter 2008 net loss of $2,340.8 million, or net loss of $8.14 per
share. The fourth quarter 2009 results reflect a tax benefit
recorded during the period, reduced loss and loss expenses recorded
relative to fourth quarter 2008, and unrealized mark-to-market
gains in the credit derivatives portfolio. In 2008, Ambac’s fourth
quarter results reflected a significant negative net change in fair
value of credit derivatives, higher loss and loss adjustment
expenses and a large increase in the deferred tax asset valuation
allowance.
Quarter Summary
Net change in fair value of credit derivatives was positive
$133.2 million, driven primarily by price improvement in certain
reference obligations, partially offset by a narrowing of Ambac’s
short-term credit spreads (ASC Topic 820 adjustment) during the
quarter.
Net loss and loss expenses incurred amounted to $385.4 million
for the current quarter, primarily related to deterioration in the
first-lien residential mortgage-backed securities (RMBS) portfolio,
partially offset by reserve reductions in non-consumer asset-backed
securities transactions.
In the financial services segment, the results for the
derivative products business improved by $105.8 million compared to
the fourth quarter 2008.
A tax benefit of $472.0 million was recorded primarily as a
result of legislation that passed during the quarter that allows
Ambac to carry back 2008 and 2009 operating losses as far back as
2003. Ambac Assurance Corporation (AAC), Ambac’s principal
operating subsidiary, received the tax refund amounting to $443.9
million in February 2010.
Financial
Results
Net Premiums Earned
Net premiums earned for the fourth quarter of 2009 were $184.4
million, down 19% from $228.1 million earned in the fourth quarter
of 2008. Normal net premiums earned were $139.6 million in the
fourth quarter of 2009, and $146.9 million in the fourth quarter of
2008. Normal net premiums earned exclude accelerated premiums. ASC
Topic 944 (formerly known as FAS 163) was implemented effective
January 1, 2009. Due to changes in calculations of normal net
premiums earned, as prescribed by ASC Topic 944, normal net earned
premium amounts reported in 2009 are not comparable to amounts that
were reported in 2008.
Net premiums earned include accelerated premiums, which result
from calls, terminations and other accelerations recognized during
the quarter. Accelerated premiums were $44.8 million in the fourth
quarter of 2009, down 45% from $81.2 million in the fourth quarter
2008. In 2008, a lack of liquidity in the auction rate and variable
rate bond markets had resulted in significant refinancing activity
in the municipal sector which caused an increase in accelerated
premiums in 2008.
Net Investment Income
Net investment income excluding variable interest entities for
the fourth quarter of 2009 was $118.7 million, representing an
increase of 8% from $109.5 in the fourth quarter of 2008. The
increase was primarily due to an increase in the average yield of
the portfolio as the mix of securities has shifted from primarily
tax-exempt to a greater percentage of taxable securities. The
rising yields on taxable securities include the impact from
accretion of bond discounts on AAC-insured securities and RMBS
securities previously written down to fair value as
other-than-temporary impairments in earlier periods. The impact
from increasing yields was partially offset by an overall decrease
in the asset base as claim payments on insured RMBS transactions
and commutations and settlements of collateralized debt obligations
of asset-backed securities (CDO of ABS) transactions were greater
than the cash inflows resulting from collections of financial
guarantee premiums, fees, tax refunds and coupon receipts on
invested assets.
Other-Than-Temporary Impairment Losses
Other-than-temporary impairment losses in the financial
guarantee investment portfolio were $118.1 million in the fourth
quarter of 2009, compared to other-than-temporary impairment losses
of $66.0 million in the fourth quarter of 2008. During the fourth
quarter of 2009, Ambac incurred $98.7 million in credit losses on
securities that are guaranteed by AAC as a result of those policies
being placed in the Segregated Account, as discussed below in
“Regulatory Update.” Accordingly, estimated cash flows on such
securities have been adversely impacted, resulting in credit losses
as of December 31, 2009.
Net Change in Fair Value of Credit Derivatives
The net change in fair value of credit derivatives, which
comprises realized gains/(losses) and other settlements from credit
derivatives and unrealized gains/(losses) on credit derivatives,
was a gain of $133.2 million for the fourth quarter of 2009,
compared to a loss of ($594.4) million for the fourth quarter of
2008.
Realized gains/(losses) and other settlements from credit
derivative contracts represent the normal accretion into income of
fees received for transactions executed in credit derivative
format, offset by loss and settlement payments on such
transactions. Net realized gains/(losses) and other settlements
from credit derivative contracts in the fourth quarter of 2009 and
2008 amounted to ($648.4) million and ($988.5) million,
respectively. Fees received in the fourth quarter of 2009 of $10.5
million were offset by commutations and other claims paid of $658.9
million, while fees received in the fourth quarter of 2008 of $13.7
million were offset by commutations and other claims paid of
$1,002.2 million.
Net unrealized gains on credit derivative contracts were $781.7
million in the fourth quarter of 2009, compared to net unrealized
gains amounting to $394.1 million in the fourth quarter 2008. The
net gain during the fourth quarter of 2009 is primarily the result
of the net decrease in mark-to-market liabilities due to
improvement in the average values of reference obligations other
than CDOs of ABS, reclassification of $658.9 million to realized
losses related to commutations and interest claims paid during the
quarter, and, to a lesser extent, amortization of exposure in the
portfolio. The positive effects were partially offset by narrowing
of AAC’s short-term credit spreads (ASC Topic 820 adjustment)
during the quarter, the impact of the proposed settlement of CDO of
ABS transactions (see Regulatory Update, below), and declines in
reference obligation values related to CDO of ABS transactions. The
net unrealized gains during the fourth quarter of 2008 resulted
primarily from reclassification of $1.0 billion to realized losses
in connection with CDO commutation settlements and the discounting
effect of wider AAC credit spreads.
Financial Guarantee Loss Reserves
Total net loss and loss expenses were $385.4 million in the
fourth quarter of 2009, compared to $916.4 million in the fourth
quarter of 2008. Losses and loss expenses in the fourth quarter of
2009 were primarily related to further credit deterioration in the
first-lien segment of the insured RMBS portfolio, and to a lesser
degree, credit deterioration in certain student loan transactions,
partially offset by net reserve reductions in certain insured
non-consumer asset-backed securities.
In accordance with the provisions of ASC Topic 944, for 2009
Ambac used a discount rate equal to the weighted average estimated
risk-free rate of approximately 2.9% to determine the loss
reserves. That compares to 4.5% used in 2008.
Total net claims paid in the fourth quarter of 2009 were $489.5
million, related primarily to RMBS transactions, but also included
claims paid on other asset-backed securities. Total net claims paid
in the fourth quarter 2008 were $287.7 million, primarily related
to RMBS transactions.
Loss and loss expense reserves for all RMBS insurance exposures
as of December 31, 2009, were $2,843.1 million. RMBS reserves are
net of $2,026.3 million of estimated remediation recoveries. The
estimate of remediation recoveries related to material
representation and warranty breaches increased from $1,902.8
million as of September 30, 2009, primarily as a result of breaches
identified during the re-underwriting of additional
transactions.
Reinsurance Cancellations
During the fourth quarter of 2009, Ambac and Financial Security
Assurance Inc. agreed upon a net reinsurance settlement as both
companies mutually agreed to cancel reinsurance with the other.
Ambac recaptured approximately $800 million of par outstanding and
returned approximately $1.1 billion during the quarter. The net
income impact of the cancellation amounted to approximately $6.6
million in the fourth quarter of 2009.
Financial Services
The financial services segment comprises the investment
agreement business and the derivative products business. Gross
interest income less gross interest expense from investment and
payment agreements, plus results from the derivative products
business, excluding net realized investment gains and losses and
unrealized gains and losses on total return swaps and non-trading
derivative contracts, was $79.5 million for the fourth quarter of
2009, up from ($19.7) million for the fourth quarter of 2008. The
increase was driven by derivative products results which improved
by $105.8 million, quarter on quarter, primarily due to
mark-to-market gains in the interest rate derivative portfolio.
Beginning in the third quarter of 2009, Ambac’s financial services
segment has retained positive mark-to-market sensitivity to
interest rate increases as a hedge against the floating rate
exposure in the financial guarantee segment. This additional
interest rate sensitivity resulted in gains of $82.5 million to
derivative product results for the fourth quarter of 2009.
Additionally, the fourth quarter of 2009 results included lower
swap termination losses than the comparable 2008 period.
The interest rate swap and investment agreement businesses are
in run-off. The investment and payment agreement portfolio has been
reduced by approximately $1.5 billion during 2009 to approximately
$1.2 billion at December 31, 2009, through negotiated terminations,
contractual terminations triggered by rating downgrades of AAC, and
scheduled amortization.
Balance Sheet and
Liquidity
Total assets increased by approximately $787 million during the
fourth quarter of 2009, primarily due to recording the tax
recoverable related to the new tax legislation that passed during
the fourth quarter of 2009, and the consolidation of certain trusts
that AAC has insured and consolidated under accounting
pronouncement ASU 2009-17 (formerly known as FIN 46R), partially
offset by commutations of CDO of ABS transactions and RMBS and
other claim payments made during the quarter.
The fair value of the consolidated investment portfolio
decreased from $9.8 billion (amortized cost of $9.9 billion) as of
September 30, 2009 to $9.2 billion (amortized cost of $9.3 billion)
as of December 31, 2009. The decrease in value was primarily due to
commutation and loss payments made during the quarter.
The financial guarantee investment portfolio had a fair value of
$7.7 billion (amortized cost of $7.7 billion) as of December 31,
2009, and includes $840 million of short-term securities. The
portfolio consists of high quality municipal bonds, Treasuries,
U.S. Agencies and Agency MBS as well as mortgage and asset-backed
securities.
Cash, short-term securities and bonds at the holding company
amounted to $136.5 million as of December 31, 2009. Ambac’s annual
debt service costs amount to approximately $89.0 million. As a
result of the actions described below in Regulatory Update, it is
highly unlikely that AAC will be able to make dividend payments to
Ambac for the foreseeable future.
Overview of AAC Statutory
Results
AAC filed its statutory Annual Statement on March 1, 2010. As of
December 31, 2009, AAC reported consolidated statutory capital and
surplus of $801.9 million, down from $855.6 million as of September
30, 2009. AAC statutory capital and surplus was negatively impacted
by the net statutory loss recorded during the quarter. The primary
drivers of the statutory net loss were (i) statutory impairment
losses related to AAC’s insured portfolio of CDOs of ABS, driven
primarily by rising forward LIBOR rates and deterioration of the
underlying RMBS collateral within the CDO of ABS transactions; and
(ii) statutory loss and loss expenses related primarily to
deterioration in AAC’s first-lien mortgage-backed securities
financial guarantee portfolios. These negative drivers were
partially offset by: (i) the positive impact on loss reserves and
credit derivative impairments of changing the discount rate from
4.5% in earlier periods to 5.10% as of December 31, 2009, as
prescribed by the Office of the Commissioner of Insurance of the
State of Wisconsin (OCI); and (ii) the recording of tax recovery
due to legislative changes, as discussed above. A tax refund
amounting to $443.9 million was received by AAC in February 2010.
The consolidated statutory capital and surplus reported in the
Annual Statement filed on March 1, 2010, will be further reduced by
the impact of the credit losses on securities within the investment
portfolio that are guaranteed by AAC as a result of those policies
being placed in the Segregated Account (see Regulatory Update,
below).
AAC’s claims-paying resources amount to approximately $10.8
billion as of December 31, 2009, down from $11.4 billion as of
September 30, 2009, as net cash outflows driven by CDO of ABS
commutations settled during the quarter and RMBS claims paid were
only partially offset by ongoing cash inflows from operations.
Regulatory
Update
As announced in the press release dated March 25, 2010, OCI
commenced the Segregated Account Rehabilitation Proceedings in
order to permit the OCI to facilitate an orderly run-off and/or
settlement of the liabilities allocated to the Segregated Account.
As a result of the actions taken by OCI, financial guarantee
payments on securities guaranteed by AAC which have been placed in
the Segregated Account are no longer under the control of Ambac
management. In addition, Ambac announced that it has reached a
non-binding agreement on the terms of a proposed settlement
agreement with several counterparties to commute substantially all
of its remaining CDOs of ABS. For further information regarding
this regulatory update, please refer to the Form 8-K filed with
Securities Exchange Commission on March 25, 2010 and/or refer to
the website established by OCI for policyholders at
www.ambacpolicyholders.com. See also Ambac’s Annual Report on Form
10-K for the year ended December 31, 2009, once it has been filed
with the Securities and Exchange Commission.
Annual Meeting of
Stockholders
The Board of Directors has set the 2010 Annual Meeting of
Stockholders for Monday, June 14, 2010, at 1:00 p.m. in New York
City. The record date for determining stockholders entitled to
notice of, and to vote at, the annual meeting will be the close of
business, April 20, 2010.
About Ambac
Ambac Financial Group, Inc., headquartered in New York City, is
a holding company whose affiliates provided 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 Caa2 rating under review for
possible upgrade from Moody's Investors Service, Inc. and an R
(regulatory intervention) financial strength rating 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 incorrect and are based on
Ambac management’s 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) Ambac has insufficient capital to finance its
debt service and operating expense requirements beyond the second
quarter of 2011 and may need to seek bankruptcy protection; (2) the
unlikely ability of Ambac Assurance to pay dividends to Ambac in
the near term; (3) the risk that holders of debt securities or
counterparties on credit default swaps or other similar agreements
bring claims alleging that the rehabilitation of the Segregated
Account constitutes an event of default under the applicable debt
indenture or an event of default under the applicable ISDA
contract; (4) adverse events arising from the Segregated Account
Rehabilitation Proceedings, including the injunctions issued by the
Wisconsin rehabilitation court to enjoin certain adverse actions
related to the Segregated Account being successfully challenged as
not enforceable; (5) litigation arising from the Segregated Account
Rehabilitation Proceedings; (6) any changes to the Proposed
Settlement, or the failure to consummate the Proposed Settlement;
(7) decisions made by the rehabilitator for the benefit of
policyholders may result in material adverse consequences for
Ambac’s security holders; (8) potential of rehabilitation
proceedings against Ambac Assurance, with resulting adverse
impacts; (9) the risk that reinsurers may dispute amounts owed
us under our reinsurance agreements; (10) possible delisting of
Ambac’s common shares from the NYSE; (11) 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; (12) risks which
impact assets in Ambac Assurance’s investment portfolio; (13) risks
relating to determination of amount of impairments taken on
investments; (14) credit and liquidity risks due to
unscheduled and unanticipated withdrawals on investment agreements;
(15) market spreads and pricing on insured CDOs and other
derivative products insured or issued by Ambac;
(16) inadequacy of reserves established for losses and loss
expenses, including our inability to realize the remediation
recoveries included in our reserves; (17) Ambac’s financial
position and the Segregated Account Rehabilitation Proceedings may
prompt departures of key employees; (18) 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; (19) 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; (20) the actions of
the U. S. Government, Federal Reserve and other government and
regulatory bodies to stabilize the financial markets; (21) likely
unavailability of adequate capital support and liquidity;
(22) 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; (23) default by one or more of Ambac
Assurance’s portfolio investments, insured issuers,
counterparties or reinsurers; (24) the risk that our risk
management policies and practices do not anticipate certain risks
and/or the magnitude of potential for loss as a result of
unforeseen risks; (25) factors that may influence the amount of
installment premiums paid to Ambac, including the imposition of the
payment moratorium with respect to claims payments as a result of
Segregated Account Rehabilitation Proceedings; (26) changes in
prevailing interest rates; (27) the risk of volatility in
income and earnings, including volatility due to the application of
fair value accounting, required under the relevant derivative
accounting guidance, to the portion of our credit enhancement
business which is executed in credit derivative form, and due to
the adoption of the new financial guarantee insurance accounting
standard effective January 1, 2009, which, among other things,
introduces volatility in the recognition of premium earnings and
losses; (28) changes in accounting principles or practices
that may impact Ambac’s reported financial results;
(29) legislative and regulatory developments;
(30) operational risks, including with respect to internal
processes, risk models, systems and employees; (31) changes in tax
laws and other tax-related risks; (32) other factors described in
the Risk Factors section in Part I, Item 1A of Ambac’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2009 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 (33) 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.
Ambac Financial Group, Inc. and Subsidiaries
Consolidated Balance Sheets December 31, 2009 and
December 31, 2008 (Dollars in Thousands Except Share
Data) December 31,
2009 December 31, 2008
(unaudited)
Assets
Investments: Fixed income securities, at fair
value (amortized cost of $8,131,512 in 2009 and $11,080,723
in 2008) $ 8,098,517 $ 8,537,676
Fixed income securities pledged as collateral, at fair value
(amortized cost of $164,356 in 2009 and $277,291 in 2008)
167,366 286,853 Short-term investments (amortized
cost of $962,007 in 2009 and $1,454,229 in 2008) 962,007
1,454,229 Other (cost of $1,278 in 2009 and $13,956 in
2008) 1,278 14,059
Total investments 9,229,168 10,292,817
Cash and cash equivalents 113,230 107,811
Receivable for securities sold 3,106 15,483
Investment income due and accrued 77,195
116,769 Premium receivables 3,718,158
28,895 Reinsurance recoverable on paid and unpaid
losses 78,115 157,627 Deferred ceded
premium 500,804 292,837 Subrogation
recoverable 902,612 10,088 Deferred taxes
11,250 2,127,499 Current income taxes
421,438 192,669 Deferred acquisition costs
279,704 207,229 Loans 2,716,371
798,848 Derivative assets 605,905
2,187,214 Other assets 229,311
723,887 Total assets $
18,886,367 $ 17,259,673
Liabilities and Stockholders'
Equity
Liabilities: Unearned premiums $
5,687,114 $ 2,382,152 Loss and loss expense
reserve 4,771,684 2,275,948 Ceded premiums
payable 291,843 15,597 Obligations under
investment and payment agreements 1,177,406
3,244,098 Obligations under investment repurchase
agreements 113,527 113,737 Long-term debt
4,640,184 1,868,690 Accrued interest payable
50,607 68,806 Derivative liabilities
3,536,858 10,089,895 Other liabilities
248,715 279,616 Payable for securities
purchased 2,074 10,256
Total liabilities 20,520,012
20,348,795 Stockholders' equity:
Ambac Financial Group, Inc.: Preferred stock -
- Common stock 2,944 2,944
Additional paid-in capital 2,172,656 2,030,031
Accumulated other comprehensive loss (24,827 )
(1,670,198 ) Accumulated deficit
(3,878,015 ) (3,550,768 ) Common
stock held in treasury at cost (560,543 )
(594,318 ) Total Ambac Financial Group,
Inc. stockholders' deficit (2,287,785 )
(3,782,309 ) Non-controlling interest:
654,140 693,187 Total
stockholders' deficit (1,633,645 )
(3,089,122 ) Total liabilities and stockholders'
deficit $ 18,886,367 $
17,259,673 Number of shares outstanding
(net of treasury shares) 287,598,189
287,239,482 Book value per share
($7.95 ) ($13.17 )
Ambac Financial Group, Inc. and Subsidiaries Consolidated
Statements of Operations For the Three Months and Years
Ended December 31, 2009 and 2008 (Dollars in Thousands
Except Share Data)
Three Months Ended
Years Ended December 31, December 31,
2009 2008 2009 2008
(unaudited) (unaudited) (unaudited)
Revenues: Financial Guarantee: Net premiums
earned $ 184,415 $ 228,094 $
797,360 $ 1,022,757 Net investment
income 121,551 112,918 493,537
494,060 Other-than-temporary impairment losses:
Total other-than-temporary impairment losses (135,330
) (66,011 ) (1,587,994 )
(70,931 ) Portion of loss recognized in other
comprehensive income 17,276
- 17,276 -
Net other-than temporary impairment losses recognized in
earnings (118,054 ) (66,011
) (1,570,718 ) (70,931
) Net realized investment gains 38,585
4,555 131,660 79,938 Change in fair
value of credit derivatives: Realized (losses) and gains and
other settlements (648,449 ) (988,507
) (1,379,736 ) (1,794,428 )
Unrealized gains (losses) 781,659
394,148 5,192,663
(2,236,694 ) Net change in fair value of credit
derivatives 133,210 (594,359 )
3,812,927 (4,031,122 ) Other
income 67,422 726 418,288 8,523
Financial Services: Investment income 12,404
50,427 70,746 255,885 Derivative
products 73,658 (32,141 ) (207,210
) (134,198 ) Other-than-temporary
impairment losses: Total other-than-temporary impairment
losses - - (283,858 )
(451,932 ) Portion of loss recognized in other
comprehensive income - -
- - Net
other-than temporary impairment losses recognized in earnings
0 -
(283,858 ) (451,932 ) Net
realized investment gains 42,129 160,409
184,474 215,582 Net change in fair value of total
return swaps - (56,588 ) 18,573
(129,565 ) Net mark-to-market gains (losses) on
non-trading derivatives 10,485 (10,824 )
11,268 (15,792 ) Corporate and Other:
Other income 796 558 34,121
3,309 Net realized investment gains -
- 33
- Total revenues 566,601
(202,236 ) 3,911,201
(2,753,486 ) Expenses:
Financial Guarantee: Loss and loss expenses
385,423 916,414 2,815,313 2,227,583
Underwriting and operating expenses 42,273
58,175 175,810 216,084 Interest expense on
variable interest entity notes 2,833 3,185
10,668 13,488 Financial Services: Interest
on investment and payment agreements 6,598 38,012
34,131 234,977 Operating expenses 1,780
2,595 12,588 12,747 Corporate and
Other: Interest 30,025 29,804
119,626 114,226 Other expenses
11,501 12,536
18,160 45,752 Total
expenses 480,433 1,060,721
3,186,296 2,864,857
Income (loss) before income taxes
86,168 (1,262,957 ) 724,905
(5,618,343 ) (Benefit) provision for income
taxes (471,956 ) 1,077,670
739,521 (9,207 )
Net income (loss) 558,124 (2,340,627
) (14,616 ) (5,609,136 )
Less: net loss attributable to noncontrolling interest
13 190 (3
) 112 Net income (loss)
attributable to Ambac Financial Group, Inc. $
558,111 ($2,340,817 )
($14,613 ) ($5,609,248 )
Net income (loss) per share $ 1.93
($8.14 ) ($0.05 )
($22.31 ) Net income (loss) per
diluted share $ 1.93 ($8.14
) ($0.05 ) ($22.31
) Weighted average number of common shares
outstanding: Basic 288,745,342
287,506,329 287,671,222
251,391,680 Diluted
288,745,342 287,506,329
287,671,222 251,391,680
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