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Ambac Financial Group, Inc. Announces First Quarter 2011 Results

^{Published on 2011-05-10 15:35:39 - Market Wire}
 

NEW YORK--([ BUSINESS WIRE ])--Ambac Financial Group, Inc. (OTC: ABKFQ) (Ambac) today announced a first quarter 2011 net loss of $819.3 million or $2.71 per share. This compares to a first quarter 2010 net loss of $690.1 million, or $2.39 per share. Relative to first quarter 2010 results, the first quarter 2011 results reflect an increase in loss and loss expenses, lower net premiums earned, and lower net investment income and realized gains, partially offset by a lower net loss on the change in fair value of credit derivatives, lower other-than-temporary impairment losses on securities held, improvement in financial services segment revenue, lower VIE losses, and an increase in other income.

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.

First Quarter 2011 Summary

• Net loss and loss expenses incurred amounted to $919.6 million for the current quarter, up from $89.2 million in the first quarter of 2010. This was primarily attributable to deterioration in first-lien RMBS, and certain structured insurance, student loan and transportation transactions.
• The net change in fair value of credit derivatives was negative $8.9 million in the current quarter, improving from negative $167.1 million in the first quarter 2010.
• The financial services segment operating income was $20.9 million, up from negative $58.0 million for the first quarter of 2010.
• VIE results narrowed to a $6.1 million loss from a $492.7 million reported loss in the first quarter 2010.
• Statutory surplus of Ambac Assurance Corporation (aAACa) totaled approximately $822.2 million, down from $1,026.9 million at December 31, 2010, impacted by a statutory net loss of $169.1 million for the three-month period.
• Unrestricted cash, short-term securities and bonds at the holding company (Ambac Financial Group, Inc.) amounted to $58.6 million as of March 31, 2011.

Financial Results

Net Premiums Earned

Net premiums earned for the first quarter of 2011 were $91.8 million, down 27% from $125.2 million earned in the first quarter of 2010. Net premiums earned include accelerated premiums, which result from calls, terminations and other accelerations recognized during the quarter. Accelerated premiums were negative $0.1 million in the first quarter of 2011, down from income of $12.1 million in the first quarter 2010. This was primarily driven by a decline in public finance refunding activity in 2011 relative to the prior year and negative accelerations on certain structured finance transactions which terminated during the period. The GAAP premiums receivable for these structured finance transactions were in excess of the related unearned premium reserve at termination, resulting in negative accelerated earned premiums. Normal net premiums earned, which exclude accelerated premiums, were $91.9 million in the first quarter of 2011, down 19% from $113.1 million in the first quarter of 2010. Normal net premiums earned for the period have been negatively impacted by the lack of new business written and the runoff of the insured portfolio.

Net Investment Income

Net investment income for the first quarter of 2011 was $71.7 million, representing a decrease of 39% from $117.6 million in the first quarter of 2010. The decrease was primarily attributable to a decline in the invested asset base and lower average yields in the portfolio. Reductions in the portfolio asset base were driven by required payment obligations to cover insurance losses and to settle commutations of insurance policies and credit default swaps. Portfolio yield was impacted by a reduction in interest income on AAC guaranteed securities that were allocated to the Segregated Account near the end of the first quarter of 2010, partially offset by the gradual re-allocation of portfolio investments from tax exempt municipals to corporate and taxable municipal securities having higher pre-tax yields.

Net Change in Fair Value of Credit Derivatives

The net change in fair value of credit derivatives, which consists of realized and unrealized gains/(losses) and other settlements on credit derivatives, was a loss of $8.9 million for the first quarter of 2011, compared to a loss of $167.1 million for the first quarter of 2010. The net loss in first quarter of 2011 was attributable to a reduction in valuation adjustment to reflect Ambaca™s own credit risk in the fair value of its credit derivative liabilities, partially offset by improved reference obligation prices and gains from portfolio runoff. First quarter 2010 results were negatively impacted by fair value changes in the CDO of ABS portfolio (which was subsequently fully commuted in June 2010) and by a lower credit valuation adjustment, partially offset by improvement in reference obligation pricing on non-CDO of ABS credits.

Variable Interest Entities

During the first quarter of 2011, Ambac recorded losses on variable interest entities (aVIEsa) amounting to $6.1 million. Included in this loss is the impact of the deconsolidation of one VIE during the period. This compares to a loss of $492.7 million during the first quarter of 2010 which was primarily due to deconsolidation of certain VIEs, and the re-establishment of loss reserves related to those transactions. These VIEs primarily consisted of RMBS transactions and were deconsolidated upon allocation of the related AAC guarantee policies to the Segregated Account. As of March 31, 2011, the Company's balance sheet included 18 consolidated VIEs with $16.2 billion of assets and $16.0 billion of liabilities.

Financial Guarantee Loss Reserves

Total net loss and loss expenses were up considerably to $919.6 million in the first quarter of 2011, as compared to $89.2 million in the first quarter of 2010. Higher reported loss and loss expenses for the three months ended March 31, 2011 were caused by deterioration in first-lien RMBS, and higher estimated losses on certain structured insurance, student loan, and transportation credits, that were partially offset by lower estimated losses in the second lien RMBS portfolio. During the first quarter of 2011, we began using a recently licensed statistical regression model to develop additional estimates of projected losses for both our second and first-lien transactions. We incorporated this new model via a blending of the results between our existing models and the new regression model. Although there can be no certainty with regard to projecting losses, we believe a blend is a reasonable approach to projecting losses in our RMBS portfolio.

Loss and loss expenses paid during the first quarter 2011, net of recoveries from all policies, amounted to a net recovery of $6.9 million. During the first quarter of 2010, total net claims paid were $208.3 million, a majority of which related to RMBS. In addition, as a result of the payment moratorium imposed on March 24, 2010 by the court overseeing the Segregated Account rehabilitation, during the first quarter of 2011, $357.3 million of claims were presented to AAC and unpaid versus $130.1 million during the same period in 2010. Since the establishment of the Segregated Account in March 2010, a total of $1,768.7 million of claims have been presented to AAC and remain unpaid.

Loss reserves (gross of reinsurance) for all RMBS insurance exposures as of March 31, 2011, were $3,764 million, including $1,759.1 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 March 31, 2011, are net of $2,498.9 million of estimated remediation recoveries. The estimate of remediation recoveries related to material representation and warranty breaches is up 3.4% from $2,417.1 million reported as of December 31, 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 first quarter of 2011 amounted to $28.1 million. This interest charge results from the accrual of interest plus the accretion of discount on all surplus notes issued by AAC and the Segregated Account of Ambac Assurance Corporation to date. No such surplus notes were outstanding during the first quarter of 2010.

Corporate Interest Expense

There was no corporate interest expense recorded during the first quarter of 2011. This compares to $30.2 million in the first quarter of 2010. 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 first quarter of 2011 was $28.3 million compared to negative $55.9 million in the first quarter of 2010. Other income includes the impact of foreign currency rate changes on AACa™s premiums receivable denominated in currencies other than the US Dollar (gain of $3.0 million in the first quarter of 2011 and loss of $54.7 million in the first quarter of 2010). Additionally, the increase in other income was driven by the impact of a mark to market gain relating to Ambaca™s option to call certain surplus notes issued in 2010.

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 $20.9 million for the first quarter of 2011, up from negative $58.0 million for the first quarter of 2010. 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 first quarter 2011 result was positively impacted by mark-to-market gains caused by changes in long-term interest rates during the period. The comparable quarter of 2010 included losses on terminated swaps and mark-to-market losses due to declining long-term interest rates during the 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. Reorganization items in the first quarter of 2011 totaled $24.8 million primarily relating to professional advisory fees (approximately $10 million), and a lease settlement charge associated with the termination of the Companya™s existing headquarters office lease (approximately $14 million).

Balance Sheet and Liquidity

Total assets decreased during the first quarter of 2011, from $29.0 billion at December 31, 2010 to $27.4 billion at March 31, 2011, primarily as a result of a decrease in VIE assets of approximately $1.8 billion.

The fair value of the consolidated non-VIE investment portfolio increased from $6.9 billion (amortized cost of $6.5 billion) as of December 31, 2010 to $7.0 billion (amortized cost of $6.6 billion) as of March 31, 2011.

The financial guarantee non-VIE investment portfolio had a fair value of $5.9 billion (amortized cost of $5.6 billion) as of March 31, 2011. The portfolio consists of high quality municipal bonds, corporate bonds, asset backed securities, U.S. Agencies, Agency MBS, as well as non-agency MBS, including AAC guaranteed RMBS.

Liabilities subject to compromise totaled $1.7 billion at March 31, 2011. 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 March 31, 2011:

Overview of AAC Statutory Results

As of March 31, 2011, AAC reported statutory capital and surplus of approximately $822.2 million, down from $1,026.9 million as of December 31, 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 were impacted by a statutory net loss of $169.1 million for the three-months ended March 31, 2011. The primary driver of the net loss was an increase in statutory loss and loss expenses related primarily to Ambac Assurancea™s RMBS financial guarantee portfolio for both initial defaults and adverse development in previously defaulted transactions.

AACa™s claims-paying resources amount to approximately $7.0 billion as of March 31, 2011. This excludes Ambac Assurance UK Limiteda™s claims-paying resources of approximately $1.0 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, is a guarantor of public finance and structured finance obligations.

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) changes to the Plan of Rehabilitation for the Segregated Account to protect Ambac Assurance from adverse tax consequences; (11) inadequacy of reserves established for losses and loss expenses, including our inability to realize the remediation recoveries included in our reserves; (12) 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; (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 collateralized loan obligations (aCLOsa) and other derivative products insured or issued by Ambac; (16) 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; (17) 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; (18) credit risk throughout our business, including credit risk related to residential mortgage-backed securities, CLOs, public finance obligations and large single exposures to reinsurers; (19) the risk of defaults or early terminations of insured transactions due to our lack of ratings; (20) the risk that reinsurers may dispute amounts owed us under our reinsurance agreements; (21) default by one or more of Ambac Assurancea™s portfolio investments, insured issuers, counterparties or reinsurers; (22) 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; (23) 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; (24) changes in prevailing interest rates; (25) 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; (26) changes in accounting principles or practices that may impact Ambaca™s reported financial results; (27) legislative and regulatory developments; (28) operational risks, including with respect to internal processes, risk models, systems and employees; (29) changes in tax laws, tax disputes and other tax-related risks; (30) the risk that taxing authorities may disallow deductions of CDS losses as ordinary losses; (31) the risk that taxing authorities may successfully challenge tentative tax refunds received; (32) the effects of a deconsolidation of Ambac Assurance and certain subsidiaries for tax purposes; (33) 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 (34) 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.