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Ambac Financial Group, Inc. Announces Fourth Quarter 2010 Results

^{Published on 2011-03-16 06:41:20 - Market Wire}
 

NEW YORK--([ BUSINESS WIRE ])--Ambac Financial Group, Inc. (OTC: ABKFQ) (Ambac) today announced a fourth quarter 2010 net loss of $81.6 million, or $0.27 per share. This compares to fourth quarter 2009 net income of $558.1 million, or $1.93 per diluted share. Relative to the fourth quarter 2009 results, the fourth quarter 2010 results reflect a reduction in net premiums earned, net investment income, net change in the fair value of credit derivatives, realized investment gains and higher VIE losses, partially offset by a reduction in loss and loss expenses and other-than-temporary impairment losses in its investment portfolio.

"Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities"

As previously announced, on November 8, 2010, Ambac filed for a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code (aBankruptcy Codea) in the United States Bankruptcy Court for the Southern District of New York (aBankruptcy Courta) and will continue to operate in the ordinary course of business as adebtor-in-possessiona in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court.

Fourth Quarter 2010 Summary

Net loss and loss expenses incurred amounted to $141.5 million for the current quarter, down from $385.4 million in the fourth quarter of 2009.

Net change in fair value of credit derivatives was positive $15.7 million in the current quarter, down from positive $133.2 million in the fourth quarter 2009.

The financial services segment recorded $101.9 million of operating income, up from $77.7 million for the fourth quarter of 2009, primarily relating to the impact of rising interest rates on the derivative products business.

Certain liabilities and expenses have been reclassified in accordance with Financial Accounting Standard Board Accounting Standards Codification Topic 852, aReorganizationsa (aASC Topic 852a), contributing to a charge of $32.0 million.

Statutory surplus of Ambac Assurance Corporation (aAACa) totaled approximately $1,027 million at December 31, 2010, up from $912 million at September 30, 2010, driven primarily by net income for the quarter. Statutory net income was positive for the quarter as a result of premiums earned and investment results, partially offset by losses incurred.

Cash, short-term securities and bonds at the holding company (Ambac Financial Group, Inc.) amounted to $66.0 million as of December 31, 2010. This amount includes $2.5 million of restricted cash.

Financial Results

Net Premiums Earned

Net premiums earned for the fourth quarter of 2010 were $110.7 million, down 40% from $184.4 million earned in the fourth quarter of 2009. Net premiums earned include accelerated premiums, which result from calls, terminations and other accelerations recognized during the quarter. Accelerated premiums were $8.7 million in the fourth quarter of 2010, down 81% from $44.8 million in the fourth quarter 2009, primarily driven by a decline in public finance refunding in 2010 relative to the prior year. Normal net premiums earned, which exclude accelerated premiums, were $102.0 million in the fourth quarter of 2010, down 27% from $139.6 million in the fourth quarter of 2009. Normal net premiums earned for the period have been negatively impacted by the lack of new business written and the high level of refundings and terminations over the past three 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 fourth quarter of 2010 was $67.6 million, representing a decrease of 43% from $118.7 million in the fourth quarter of 2009. The decrease was primarily driven by three factors: (i) a decrease in the invested asset base resulting from the second quarter 2010 commutation settlement on CDO of ABS transactions; (ii) a decrease in the average yield on the portfolio as a result of the sale of high yielding assets to fund the CDO commutation; and (iii) a reduction in interest income related to the impact of other-than-temporary impairments primarily on AAC guaranteed securities that were allocated to the Segregated Account. Such AAC guaranteed securities are subject to the payment moratorium ordered by the Office of the Commissioner of Insurance of the State of Wisconsin (aOCIa) in connection with the rehabilitation plan for the Segregated Account of AAC.

Net Change in Fair Value of Credit Derivatives

The net change in fair value of credit derivatives, which comprises realized and unrealized gains/(losses) and other settlements on credit derivatives, was a gain of $15.7 million for the fourth quarter of 2010, compared to a gain of $133.2 million for the fourth quarter of 2009. The net change in fair value during the fourth quarter of 2010 reflects amortization of the notional amount of the remaining portfolio of CDOs, modest improvement in certain underlying reference obligations and CDS fees earned of $4.9 million. Fourth quarter of 2009 results included the impact of fair value changes to the CDO of ABS portfolio, which was fully commuted in June 2010.

Variable Interest Entities

Effective January 1, 2010, Ambac adopted Accounting Standards Update No. (aASUa) 2009-17, aConsolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entitiesa. During the fourth quarter of 2010, Ambac recorded losses on variable interest entities (aVIEsa) amounting to $111.8 million, primarily as a result of deconsolidating certain transactions during the quarter. Those losses primarily represent the re-establishment of loss reserves related to those transactions as of the date of the deconsolidation. As of December 31, 2010, the Company's balance sheet included 19 consolidated VIEs with $17.9 billion of assets and $17.7 billion of liabilities.

Financial Guarantee Loss Reserves

Total net loss and loss expenses were down 63% to $141.5 million in the fourth quarter of 2010, as compared to $385.4 million in the fourth quarter of 2009. Losses and loss expenses in the fourth quarter of 2010 primarily relate to credit deterioration in certain RMBS and student loan transactions, partially offset by a reduction of reserves for a public finance transportation transaction that Ambac agreed to commute.

Loss and loss expenses paid during the fourth quarter 2010, net of recoveries from all policies, amounted to a net recovery of $9.6 million. Additionally, during the fourth quarter of 2010, $327.6 million of RMBS claims were presented to AAC and unpaid, as a result of the claim moratorium imposed on March 24, 2010 by the OCI on all policies allocated to the Segregated Account. Total net claims paid in the fourth quarter of 2009 were $489.5 million, of which $340.8 million related to RMBS.

Loss and loss expense reserves for all RMBS insurance exposures as of December 31, 2010, were $3,047.0 million including $1,401.8 million relating to RMBS exposures that have been presented since March 24, 2010 and unpaid as a result of the claims moratorium. RMBS reserves as of December 31, 2010, are net of $2,391.3 million of estimated net remediation recoveries. The estimate of net remediation recoveries related to material representation and warranty breaches is essentially flat to the amount reported as of September 30, 2010. 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.

Financial Guarantee Interest Expense

Financial guarantee interest expense for the fourth quarter of 2010 amounted to $27.8 million. This interest charge results from the accrual of interest plus the accretion of discount on all surplus notes issued by Ambac Assurance Corporation in 2010. No such surplus notes were outstanding in 2009.

Corporate Interest Expense

Corporate interest expense was $12.6 million, which represents a decrease of 58% from $30.0 million in the fourth quarter of 2009. This decrease was principally attributable to Ambaca™s Chapter 11 bankruptcy filing on November 8, 2010, after which interest on outstanding debt was no longer accrued.

Other Income

Other income for the fourth quarter of 2010 was $5.3 million, representing a decrease of 95% from $101.1 million in the fourth quarter of 2009. The decline in other income was driven by the impact of the movement in the British Pound to US Dollar exchange rate upon premium receivables, resulting in a gain of approximately $81.0 million in the fourth quarter of 2009.

Financial Services

The financial services segment comprises the investment agreement business and the derivative products business, both of which are in run-off. Gross interest income less gross interest expense and operating expenses from investment and payment agreements, plus operating results from the derivative products business was $101.9 million for the fourth quarter of 2010, up from $77.7 million for the fourth quarter of 2009. The financial services segment has been positioned to record gains in a rising interest rate environment in order to provide a hedge against certain exposures within the financial guarantee segment. The fourth quarter 2010 result was positively impacted by increasing interest rates during the period. The fourth quarter 2009 result was also driven primarily by mark-to-market gains in the interest rate derivative portfolio caused by rising interest rates during that period.

Reorganization Items, Net

For purposes of presenting an entitya™s financial evolution during a Chapter 11 reorganization, the financial statements for periods including and after filing the Chapter 11 petition distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Such items include adjustments to carrying amounts of liabilities based on estimated allowable claims, interest income on cash preserved due to bankruptcy and reorganizations fees and expenses. Reorganization items in the fourth quarter of 2010 amounted to $32.0 million net, and represent valuation adjustments to carrying amounts of our long-term debt amounting to $26.4 million, and reorganization expenses (including professional advisory fees and legal expenses) incurred since Ambac filed the Chapter 11 petition on November 8, 2010, amounting to $5.5 million. The debt valuation adjustments represent one-time charges.

Balance Sheet and Liquidity

Total assets decreased during the fourth quarter of 2010, from $31.3 billion at September 30, 2010 to $29.0 billion at December 31, 2010, primarily due to the decrease in VIE assets by approximately $1.2 billion, resulting from deconsolidation of certain transactions during the quarter.

The fair value of the consolidated non-VIE investment portfolio increased from $6.8 billion (amortized cost of $6.4 billion) as of September 30, 2010 to $6.9 billion (amortized cost of $6.5 billion) as of December 31, 2010.The increase was primarily driven by net cash inflow resulting from premium collections and net investment income and the claim moratorium imposed by the OCI.

The financial guarantee non-VIE investment portfolio had a fair value of $5.7 billion (amortized cost of $5.4 billion) as of December 31, 2010. The portfolio consists of high quality municipal bonds, corporate bonds, Treasuries, U.S. Agencies and Agency MBS as well as mortgage and other asset-backed securities.

Liabilities subject to compromise totaled $1.7 billion at December 31, 2010. As required by ASC Topic 852, the amount of Liabilities subject to compromise represents Ambaca™s estimate of known or potential pre-petition claims to be addressed in connection with the Chapter 11 filing. Such claims are subject to future adjustments potentially resulting from, among other things, negotiations with creditors, rejection of executor contracts and unexpired leases and orders of the bankruptcy court. Liabilities subject to compromise consist of the following as of December 31, 2010:

Overview of AAC Statutory Results

As of December 31, 2010, AAC reported statutory capital and surplus of approximately $1,027 million, up from $912 million as of September 30, 2010. AACa™s statutory financial statements include the results of AACa™s general account and the Segregated Account (formed on March 24, 2010). Statutory capital and surplus was impacted by approximately $209 million in statutory net income recorded during the fourth quarter 2010.

AACa™s consolidated claims-paying resources amounts to approximately $8.0 billion as of December 31, 2010. This includes Ambac UKa™s claims-paying resources of approximately $0.9 billion.

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 filed for a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. The Company will continue to operate in the ordinary course of business as adebtor-in-possessiona under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. Ambac Financial Group, Inc.a™s common stock trades in the over-the-counter market under the ticker symbol ABKFQ.

Ambac's principal operating subsidiary, Ambac Assurance Corporation, a guarantor of public finance and structured finance obligations, has a Caa2 rating from Moody's Investors Service, Inc.

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 managementa™s forward-looking statements here or in other publications may turn out to be incorrect and are based on Ambac managementa™s current belief or opinions. Ambaca™s actual results may vary materially, and there are no guarantees about the performance of Ambaca™s securities. Among events, risks, uncertainties or factors that could cause actual results to differ materially are: (1) a plan of reorganization under Chapter 11 will not be confirmed; (2) if Ambac is not successful in filing a plan of reorganization under Chapter 11, it is likely it would have to liquidate pursuant to Chapter 7; (3) the impact of the bankruptcy proceeding on the holders of Ambac securities; (4) the unlikely ability of Ambac Assurance Corporation (aAmbac Assurancea) to pay dividends to Ambac in the near term; (5) litigation between Ambac and Ambac Assurance regarding the allocation of net operating losses (aNOLsa) and other claims could reduce the overall value of the Company; (6) 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; (7) litigation arising from the Segregated Account Rehabilitation Proceedings; (8) decisions made by the rehabilitator for the benefit of policyholders may result in material adverse consequences for Ambaca™s securityholders; (9) potential of a full rehabilitation proceeding against Ambac Assurance, with resulting adverse impacts; (10) inadequacy of reserves established for losses and loss expenses, including our inability to realize the remediation recoveries included in our reserves; (11) market risks impacting 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 relating to determination of amount of impairments taken on investments; (13) credit and liquidity risks due to unscheduled and unanticipated withdrawals on investment agreements; (14) market spreads and pricing on insured collateralized loan obligations (aCLOsa) and other derivative products insured or issued by Ambac; (15) Ambaca™s financial position and the Segregated Account Rehabilitation Proceedings may prompt departures of key employees and may impact our ability to attract qualified executives and employees; (16) 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; (17) credit risk throughout our business, including credit risk related to residential mortgage-backed securities, CLOs, public finance obligations and large single exposures to reinsurers; (18) the risk that reinsurers may dispute amounts owed us under our reinsurance agreements; (19) default by one or more of Ambac Assurancea™s portfolio investments, insured issuers, counterparties or reinsurers; (20) 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; (21) 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; (22) changes in prevailing interest rates; (23) 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; (24) changes in accounting principles or practices that may impact Ambaca™s reported financial results; (25) legislative and regulatory developments; (26) operational risks, including with respect to internal processes, risk models, systems and employees; (27) changes in tax laws, tax disputes and other tax-related risks; (28) other factors described in the Risk Factors section in Part I, Item 1A of Ambaca™s Annual Report on Form 10-K for the fiscal year ended December 31, 2010 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 SECa™s website, [ www.sec.gov ]; and (29) 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 Ambaca™s reports to the SEC.