Ambac Financial Group, Inc. (NYSE: ABK) (Ambac) today
announced first quarter 2010 net loss of $690.1 million, or net
loss of $2.39 per share. This compares to a first quarter 2009 net
loss of $392.2 million, or net loss of $1.36 per share. The first
quarter 2010 results reflect a loss reported as a result of a new
consolidations accounting standard. In 2009, Ambac’s first quarter
results reflected a large positive change in fair value of credit
derivatives offset by loss and loss adjustment expenses primarily
related to residential mortgage-backed securities (RMBS) exposure,
other than temporary impairment write downs of RMBS securities in
the investment portfolios and a $600 million increase in the
deferred tax asset valuation allowance.
First Quarter 2010
Summary
- Recorded a $495.1 million loss
related to the new consolidations accounting standard as described
under “Implementation of New Accounting Standards,” below. The loss
is considered to be non-recurring as it results from the
deconsolidation of a number of variable interest entities.
Excluding the effect of this non-recurring item, Ambac would have
reported a net loss of $195.0 million, or net loss of $0.68 per
share.
- Net change in fair value of
credit derivatives was negative $167.1 million.
- Net loss and loss expenses
incurred amounted to $89.2 million for the current quarter, down
considerably from the first quarter of 2009.
- Statutory surplus of Ambac
Assurance Corporation (“AAC”) was reduced to approximately $160
million at March 31, 2010 from $801.9 million at December 31,
2009.
Financial
Results
Implementation of New Accounting Standards
Effective January 1, 2010, Ambac adopted Accounting Standards
Update No. (“ASU”) 2009-17, “Consolidations (Topic 810):
Improvements to Financial Reporting by Enterprises Involved with
Variable Interest Entities”.
ASU 2009-17 requires Ambac to consolidate certain enterprises
known as variable interest entities (“VIEs”) primarily when Ambac’s
insurance policies or written credit derivatives (“financial
guarantees”) give it a controlling financial interest in those
entities. The standard requires Ambac to perform ongoing analysis
to determine whether Ambac’s variable interests (by virtue of its
financial guarantees) give it a controlling financial interest in
the VIE and to consolidate the VIE if so determined. The net impact
of implementing ASU 2009-17 on January 1, 2010, was to require
Ambac to consolidate 83 additional VIEs resulting in an increase to
shareholders' equity of $705.0 million. This adoption gain resulted
from the initial recognition of all assets and liabilities of the
newly consolidated VIEs at fair value in Ambac’s financial
statements, while eliminating from its financial statements the
related net insurance liabilities which are generally calculated
using estimated future cash flows discounted at risk free interest
rates.
On March 24, 2010, Ambac acquiesced to the Office of the
Commissioner of Insurance of the State of Wisconsin’s (“OCI’s”)
request to establish a segregated account pursuant to Wisconsin
statutes (the “Segregated Account”) for purposes of initiation of
the rehabilitation of the Segregated Account. AAC has allocated
certain policies to the Segregated Account. The rehabilitation
resulted in Ambac no longer having the unilateral power to direct
the activities of 49 VIEs whose insurance policies were allocated
to the Segregated Account, and therefore those VIEs were
de-consolidated as of March 24, 2010. The de-consolidation resulted
in Ambac reversing the ASU 2009-17 transition effect for those
specific transactions with the charge to Ambac’s Consolidated
Statement of Operations for the period amounting to $495.1
million.
As of March 31, 2010, the Company's balance sheet included 41
consolidated VIEs (remaining after the de-consolidation as of March
24th) with $20.6 billion of assets and $20.2 billion of
liabilities.
Net Premiums Earned
Net premiums earned for the first quarter of 2010 were $125.2
million, down 36% from $196.8 million earned in the first quarter
of 2009. Net premiums earned include accelerated premiums, which
result from calls, terminations and other accelerations recognized
during the quarter. Accelerated premiums were $12.1 million in the
first quarter of 2010, down 70% from $41.0 million in the first
quarter 2009. Normal net premiums earned, which exclude accelerated
premiums, were $113.1 million in the first quarter of 2010, down
27% from $155.8 million in the first quarter of 2009. Normal net
premiums earned for the period have been negatively impacted by no
new business written and the high level of refundings and
terminations over the past two years, as well as non-recognition of
premiums earned on VIEs that have been consolidated as a result of
implementation of ASU 2009-17 effective January 1, 2010.
Net Investment Income
Net investment income for the first quarter of 2010 was $117.6
million, representing an increase of 17% from $100.9 million in the
first quarter of 2009. 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 a result of 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 over the past twelve months 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 (“OTTI”) losses in the financial
guarantee investment portfolio were ($31.3) million in the first
quarter of 2010, compared to OTTI losses of ($744.7) million in the
first quarter of 2009. The first quarter 2010 OTTI loss was driven
primarily by impairment write downs on Ambac-wrapped RMBS
securities within its investment portfolio as well as student loan
securities that management identified for sale as of March 31,
2010. The first quarter 2009 OTTI impairment loss was driven by
write-downs during the quarter of certain Alt-A RMBS securities
within the investment portfolio that management believed to be
credit impaired.
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 loss of ($167.1) million for the first quarter of 2010,
compared to a gain of $1,545.9 million for the first quarter of
2009.
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 first quarter of 2010 and
2009 amounted to $9.9 million and $6.6 million, respectively.
Net unrealized gains/(losses) on credit derivative contracts
were ($177.1) million in the first quarter of 2010, compared to net
unrealized gains amounting to $1,539.2 million in the first quarter
2009. The net loss during the first quarter of 2010 is primarily
the result of the impact of changes in AAC credit spreads since
December 31, 2009 on the fair value of CDO of ABS transactions (ASC
Topic 820 adjustment), partially offset by the net decrease in
mark-to-market liabilities of other credit derivative transactions
due to improvements in the average values of reference obligations.
As of March 31, 2010, the fair value of CDO transactions named in
the non-binding proposed settlement agreement entered into on March
24, 2010, approximates their expected settlement value. The net
unrealized gains reported during the first quarter of 2009 resulted
primarily from the effect of widening AAC credit spreads on the
measurement of fair value of credit derivative liabilities during
that period.
Financial Guarantee Loss Reserves
Total net loss and loss expenses were $89.2 million in the first
quarter of 2010, compared to $739.8 million in the first quarter of
2009. Losses and loss expenses in the first quarter of 2010 were
primarily related to credit deterioration in the second-lien
segment of the insured RMBS portfolio and student loan
transactions, partially offset by net improvement in certain
first-lien RMBS transactions. First quarter of 2009 loss and loss
expenses were driven by continued deterioration in the performance
of the RMBS portfolio, most prominently in the first-lien
product.
Total net insurance claims paid in the first quarter of 2010
were $231.7 million, related primarily to RMBS transactions.
Excluded from claims paid are amounts that were unpaid in late
March as a result of the moratorium imposed by the OCI on March 24,
2010, amounting to $130.1 million. Total insurance claims paid and
unpaid (due to the OCI moratorium) total to $361.8 million. Total
net claims paid in the first quarter of 2009 were $312.3 million,
primarily related to second-lien RMBS transactions.
Loss and loss expense reserves for all RMBS insurance exposures
as of March 31, 2010, were $2,616.8 million. RMBS reserves are net
of $2,069.2 million of estimated remediation recoveries. The
estimate of remediation recoveries related to material
representation and warranty breaches increased from $2,026.3
million as of December 31, 2009, primarily as a result of breaches
identified during the re-underwriting of an additional transaction.
Ambac has initiated and may continue to initiate lawsuits seeking
compliance with the repurchase obligations in the securitization
documents with respect to sponsors who disregard their obligations
to repurchase. Additionally, Ambac is in the process of
re-underwriting additional transactions that have drastically
underperformed expectations and the forensic results of those
transactions will be available over the next few quarters.
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 was ($54.4) million for the first quarter of 2010, down
from ($6.1) million for the first quarter of 2009. The decrease was
primarily driven by losses on terminations of swaps within the
derivative products business. The interest rate swap and investment
agreement businesses are in run-off.
Balance Sheet and
Liquidity
Total assets increased by approximately $16,929.3 million during
the first quarter of 2010, primarily due to the consolidation of
certain trusts that AAC has insured and consolidated under
accounting pronouncement ASU 2009-17 (described above).
The fair value of the consolidated non-VIE investment portfolio
increased from $8.7 billion (amortized cost of $8.7 billion) as of
December 31, 2009 to $9.7 billion (amortized cost of $9.6 billion)
as of March 31, 2010. The increase was driven by the receipt
of a $440 million tax refund during the quarter, approximately $400
million of securities purchased at quarter end, not yet paid
(offset to “Payable for securities purchased” in Liabilities
portion of balance sheet), and to a lesser extent, generally
increased market values of securities in the financial guarantee
investment portfolio.
The financial guarantee non-VIE investment portfolio had a fair
value of $8.2 billion (amortized cost of $8.0 billion) as of March
31, 2010, and included $2.4 billion 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 $107.3 million as of March 31, 2010. Ambac’s annual
debt service costs amount to approximately $89.0 million. As a
result of the recent actions taken by OCI (as discussed in our
press release dated March 25, 2010 and in our 10-K filed with
Securities Exchange Commission on April 9, 2010), management
believes that it is highly unlikely that AAC will be able to make
dividend payments to Ambac for the foreseeable future.
Overview of AAC Statutory
Results
As of March 31, 2010, AAC reported statutory capital and surplus
of approximately $160 million, down from $801.9 million as of
December 31, 2009. AAC’s statutory financial statements include the
results of AAC’s general account, the Segregated Account which was
formed on March 24, 2010, Ambac Assurance UK Ltd. and Everspan
Financial Guarantee Corporation. Statutory capital and surplus was
negatively impacted by the statutory net 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
CDO of ABS transactions, driven by 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 RMBS financial guarantee portfolio. These negative drivers
were partially offset by: (i) revenues (primarily premiums earned
and investment income) generated during the quarter; and (ii)
unrealized gains on subsidiaries - Ambac Assurance UK Ltd. and
Everspan Financial Guarantee Corporation.
AAC’s consolidated claims-paying resources amount to
approximately $10.8 billion as of March 31, 2010, flat to December
31, 2009, as net cash inflows driven primarily by a tax refund
received during the quarter and ongoing cash inflows from
operations were offset by RMBS claims paid.
Annual Meeting of
Stockholders
As previously announced, 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 was 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 securityholders; (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 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 Statements of Operations (Unaudited)
For the Three Months Ended March 31, 2010 and 2009
(Dollars in Thousands Except Share Data)
Three Months Ended March 31,
2010 2009 Revenues: Financial
Guarantee: Net premiums earned $125,231
$196,812 Net investment income 117,570
100,875 Other-than-temporary impairment losses:
Total other-than-temporary impairment losses (33,468
) (744,741 ) Portion of loss recognized in
other comprehensive income 2,119 -
Net other-than temporary impairment losses recognized in
earnings (31,349 ) (744,741 )
Net realized investment gains (losses) 55,139
(1,551 ) Change in fair value of credit
derivatives: Realized gains and (losses) and other
settlements 9,924 6,623 Unrealized (losses)
gains (177,063 ) 1,539,227 Net
change in fair value of credit derivatives (167,139
) 1,545,850 Other (loss) income
(55,903 ) 1,723 (Loss) income on variable
interest entities (492,704 ) 11
Financial Services: Investment income 9,268
20,884 Derivative products (58,227 )
(14,199 ) Other-than-temporary impairment
losses: Total other-than-temporary impairment losses
- (85,490 ) Portion of loss recognized in
other comprehensive income - -
Net other-than temporary impairment losses recognized in
earnings - (85,490 ) Net
realized investment gains 1,410 116,546 Net
change in fair value of total return swaps -
(10,381 ) Net mark-to-market (losses) gains on
non-trading derivatives (2,739 ) 161
Corporate and Other: Other income 304
216 Net realized investment gains -
33 Total revenues (499,139
) 1,126,749 Expenses:
Financial Guarantee: Loss and loss expenses
89,152 739,830 Underwriting and operating
expenses 50,496 56,612 Financial Services:
Interest on investment and payment agreements 5,434
12,789 Other expenses 3,627 3,951
Corporate and Other: Interest 30,159
29,846 Other expenses 11,948
4,021 Total expenses 190,816
847,049 Pre-tax (loss) income from
continuing operations (689,955 ) 279,700
Provision for income taxes 107 671,900
Net loss (690,062 )
(392,200 ) Less loss attributable to
noncontrolling interest (11 ) (13 )
Net loss attributable to Ambac Financial Group, Inc.
($690,051 ) ($392,187 )
Net loss per share attributable to Ambac Financial Group, Inc.
common shareholders ($2.39 ) ($1.36
) Net loss per diluted share attributable to Ambac
Financial Group, Inc. common shareholders ($2.39
) ($1.36 ) Weighted average
number of common shares outstanding: Basic
288,244,846 287,565,182
Diluted 288,244,846 287,565,182
Ambac Financial Group, Inc. and Subsidiaries
Consolidated Balance Sheets March 31, 2010 and December
31, 2009 (Dollars in Thousands Except Share Data)
March 31, 2010
December 31, 2009 (unaudited)
Assets
Investments: Fixed income securities, at fair
value (amortized cost of $6,856,400 in 2010 and $7,605,565
in 2009) $7,009,095 $7,572,570 Fixed income
securities pledged as collateral, at fair value (amortized
cost of $102,361 in 2010 and $164,356 in 2009) 103,400
167,366 Short-term investments (amortized cost of
$2,602,585 in 2010 and $962,007 in 2009) 2,602,585
962,007 Other (cost of $1,278 in 2010 and $1,278 in
2009) 1,278 1,278 Total
investments 9,716,358 8,703,221 Cash
and cash equivalents 114,808 112,079
Receivable for securities sold 41,995 3,106
Investment income due and accrued 46,575
73,062 Premium receivables 2,941,546
3,718,158 Reinsurance recoverable on paid and unpaid
losses 89,627 78,115 Deferred ceded
premium 395,517 500,804 Subrogation
recoverable 877,908 902,612 Deferred taxes
- 11,250 Current taxes - 421,438
Deferred acquisition costs 273,405 279,704
Loans 71,090 80,410 Derivative assets
433,688 496,494 Other assets 224,776
229,299 Variable interest entity assets: Fixed
income securities, at fair value 4,125,851
525,947 Restricted cash 100,941 1,151
Investment income due and accrued 1,331 4,133
Loans (includes $16,141,419 and $2,428,352 at fair value)
16,355,816 2,635,961 Derivative assets
4,437 109,411 Other assets 8
12 Total assets $35,815,677
$18,886,367
Liabilities and Stockholders' (Deficit)
Equity
Liabilities: Unearned premiums
$4,926,807 $5,687,114 Loss and loss expense
reserve 4,680,633 4,771,684 Ceded premiums
payable 223,747 291,843 Obligations under
investment and payment agreements 1,150,220
1,177,406 Obligations under investment repurchase
agreements 113,296 113,527 Current taxes
22,506 -
Long-term debt
1,633,400 1,631,556 Accrued interest payable
47,070 47,125 Derivative liabilities
3,636,091 3,536,858 Other liabilities
226,236 248,655 Payable for securities
purchased 399,959 2,074 Variable interest
entity liabilities: Accrued interest payable 750
3,482
Long-term debt (includes
$18,999,183 and $2,789,556 at fair value)
19,225,145 3,008,628 Derivative liabilities
1,006,534 - Other liabilities 68
60 Total liabilities 37,292,462
20,520,012 Stockholders' (deficit)
equity:
Ambac Financial Group,
Inc.:
Preferred stock - - Common stock
2,944 2,944 Additional paid-in capital
2,174,247 2,172,656 Accumulated other
comprehensive income (loss) 119,660 (24,827
) Accumulated deficit (3,972,754 )
(3,878,015 ) Common stock held in treasury at
cost (454,942 ) (560,543 ) Total
Ambac Financial Group, Inc. stockholders' deficit
(2,130,845 ) (2,287,785 )
Non-controlling interest: 654,060
654,140 Total stockholders' deficit
(1,476,785 ) (1,633,645 ) Total
liabilities and stockholders' deficit $35,815,677
$18,886,367 Number of shares outstanding
(net of treasury shares) 288,380,178
287,598,189 Book value per share ($7.39
) ($7.95 )
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