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Ambac Financial Group, Inc. Announces Second Quarter 2011 Results

^{Published on 2011-08-09 22:01:05 - Market Wire}
 

NEW YORK--([ BUSINESS WIRE ])--Ambac Financial Group, Inc. (OTC: ABKFQ) (Ambac) today announced a second quarter 2011 net loss of $102.4 million or a net loss of $0.34 per share. This compares to a second quarter 2010 net loss of $57.6 million, or a net loss of $0.20 per share. Second quarter 2011 results were primarily driven by lower net premiums earned, a lower net change in the fair value of credit derivatives, and lower total expenses, particularly net loss and loss expenses as compared to the second quarter of 2010.

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.

Second Quarter 2011 Summary

• Net premiums earned were $99.3 million, down from $167.0 million for the second quarter of 2010.
• Net investment income increased to $88.0 million from $69.0 million reported in the second quarter 2010.
• The net change in the fair value of credit derivatives declined to $24.3 million from $202.2 million in the second quarter of 2010.
• Income on variable interest entities (aVIEsa) increased to a gain of $2.4 million from a loss of $38.5 million in the second quarter of 2010.
• Net loss and loss expenses incurred amounted to $196.4 million for the current quarter, down from $323.3 million in the second quarter of 2010.
• Expenses, other than net loss and loss expenses and reorganization items, declined to $47.2 million versus $115.5 million in the second quarter of 2010, as a result of lower stock compensation, consulting and legal fees, and premises expenditures.
• Unrestricted cash, short-term securities and bonds at the holding company (Ambac Financial Group, Inc.) amounted to $51.3 million as of June 30, 2011, down from $58.6 million as of March 31, 2011.

Financial Results

Net Premiums Earned

Net premiums earned for the second quarter of 2011 were $99.3 million, down 41% from $167.0 million earned in the second quarter of 2010. Net premiums earned include accelerated premiums, which result from calls, terminations and other accelerations recognized during the quarter. Accelerated premiums were $11.3 million in the second quarter of 2011, down from $54.3 million in the second quarter 2010. This was primarily driven by the continued decline in the volume of calls and refundings in the public finance sector in 2011 relative to the prior year. Additionally, during the second quarter of 2010, two large international transactions terminated, generating $21.5 million in accelerated earned premiums. Normal net premiums earned, which exclude accelerated premiums, were $88.0 million in the second quarter of 2011, down 22% from $112.7 million in the second quarter of 2010. Normal net premiums earned for the period have been negatively impacted by the lack of new business written and the continued runoff of the insured portfolio due to refundings, early terminations, and scheduled maturities.

Net Investment Income

Net investment income for the second quarter of 2011 was $88.0 million, representing an increase of 28% over $69.0 million earned in the second quarter of 2010. The increase was primarily attributable to a higher average portfolio yield and an increase in the size of the long term invested asset base. The higher average portfolio yield was achieved through the ongoing re-allocation of portfolio investments from tax exempt municipals to taxable securities having higher pre-tax yields and the acquisition of Ambac Assurance guaranteed securities from the market at attractive yields. The increase in the balance of the long term investment portfolio was attributable to the moratorium on segregated account claims payments which has permitted the company to invest cash received from coupon payments on securities positions and from the continued receipt of installment premiums.

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 positive $24.3 million for the second quarter of 2011, compared to a positive $202.2 million for the second quarter of 2010. The second quarter 2011 results were primarily attributable to an improvement in reference obligation prices, the reversal of unrealized losses associated with terminations and the amortization of fair value liabilities due to runoff of the portfolio. Ambaca™s credit valuation adjustment (aCVAa) was unchanged in the current period, while during the second quarter of 2010 the increase in Ambaca™s CVA was a primary component of the higher net change in fair value of credit derivatives. Also during 2010, realized gains and losses and other settlements on credit derivatives were impacted by the settlement of CDO of ABS and certain other CDO liabilities.

Financial Guarantee Loss Reserves

Total net loss and loss expenses declined $126.9 million to $196.4 million in the second quarter of 2011, as compared to $323.3 million for the second quarter of 2010. Loss and loss expenses for the three months ended June 30, 2011 were driven by higher estimated losses in the first-lien RMBS portfolio, offset by a reduction in estimated losses for the second lien RMBS portfolio, as well as higher expected losses from certain student loan and transportation credits.

Loss and loss expenses paid, net of recoveries from all policies, amounted to a net recovery of $23.4 million during the second quarter 2011. This compares to a net recovery of $17.1 million for the same period in 2010. Actual claims paid during the second quarters of 2010 and 2011 were impacted by the payment moratorium imposed on March 24, 2010 by the court overseeing the Segregated Account rehabilitation. Claims presented to Ambac Assurance and unpaid during the second quarter of 2011 amounted to $345.6 million versus $525.4 million during the same period in 2010. Since the establishment of the Segregated Account in March 2010, a total of $2,113.8 million of claims have been presented to Ambac Assurance and remain unpaid due to the moratorium.

Loss reserves (gross of reinsurance and net of subrogation recoveries) for all RMBS insurance exposures as of June 30, 2011, were $3,724.5 million, including $2,104.6 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 June 30, 2011 are net of $2,573.3 million of estimated remediation recoveries. Nine additional transactions were added to our estimate of remediation recoveries during the second quarter of 2011. The estimate of remediation recoveries related to material representation and warranty breaches is up 3% from $2,498.9 million reported as of March 31, 2011. Ambac has initiated and will continue to initiate lawsuits and other methods to achieve compliance with the repurchase obligations in the securitization documents with respect to sponsors who disregard their obligations to repurchase.

Financial Services

The financial services segment consists of the investment agreement business and the derivative products business, both of which are in run-off. The financial services business has been positioned to record gains in a rising interest rate environment in order to provide a hedge against the impact of rising rates on certain exposures within the financial guarantee segment. For the current quarter, the financial services business produced a net loss of $59.7 million compared to a net loss of $18.4 million for the second quarter of 2010. Results for both periods primarily reflect the impact of losses in the derivative products portfolio arising from declining interest rates and net interest income on investment agreements. During the second quarter of 2010, the investment agreement business experienced higher realized gains on the termination of certain investment agreements while the derivative products portfolio benefited from positive valuation adjustments related to Ambaca™s credit risk.

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 second quarter of 2011 totaled $6.5 million and were primarily related to professional advisory fees.

Balance Sheet and Liquidity

Total assets increased during the second quarter of 2011, from $27.4 billion at March 31, 2011 to $27.9 billion at June 30, 2011, primarily due to the consolidation of an additional VIE during the current period.

The fair value of the consolidated non-VIE investment portfolio increased from $7.0 billion (amortized cost of $6.6 billion) as of March 31, 2011 to $7.1 billion (amortized cost of $6.6 billion) as of June 30, 2011.

The financial guarantee non-VIE investment portfolio had a fair value of $6.1 billion (amortized cost of $5.6 billion) as of June 30, 2011. The portfolio consists of primarily high quality municipal and corporate bonds, asset backed securities, U.S. Agencies, Agency MBS, as well as non-agency MBS, including Ambac Assurance guaranteed RMBS.

Liabilities subject to compromise totaled approximately $1.7 billion at June 30, 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 orders of the bankruptcy court. As of June 30, 2011, liabilities subject to compromise consist of the following:

Surplus Notes

At June 30, 2011 Ambac Assurance and the Segregated Account had outstanding surplus notes of $2 billion and $89.1 million, respectively. On June 1, the Office of the Commissioner of Insurance of the State of Wisconsin (aOCIa) issued its disapproval of the requests of Ambac Assurance and the rehabilitator of the Segregated Account, acting for and on behalf of the Segregated Account, to pay interest on all outstanding Surplus Notes issued by Ambac Assurance and the Segregated Account on the first scheduled interest payment date of June 7, 2011.

Overview of Ambac Assurance Statutory Results

As of June 30, 2011, Ambac Assurance reported statutory capital and surplus of approximately $476.4 million, down from $801.1 million as of March 31, 2011. Ambac Assurancea™s statutory financial statements include the combined results of Ambac Assurancea™s general account and the Segregated Account (formed on March 24, 2010). Statutory capital and surplus were impacted by a statutory net loss of $289.3 million for the three-months ended June 30, 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.

Ambac Assurancea™s claims-paying resources amount to approximately $6.9 billion as of June 30, 2011, down less than $0.1 billion from March 31, 2011. This excludes Ambac Assurance UK Limiteda™s claims-paying resources of approximately $1.0 billion. The decline was primarily attributable to a reduction in the present value of future installment premiums.

Additional information regarding Ambaca™s second quarter 2011 financial results, including its filed Form 10Q, can be found on Ambaca™s website at [ www.ambac.com ] under the Investor Relations tab.

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) disputes with Ambac Assurance and the OCI with respect to Ambaca™s plan of reorganization; (2) a plan of reorganization under Chapter 11 will not be confirmed; (3) if Ambac is not successful in confirming a plan of reorganization under Chapter 11, it is likely it would have to liquidate pursuant to Chapter 7; (4) the impact of the bankruptcy proceeding on the holders of Ambac securities; (5) the unlikely ability of Ambac Assurance to pay dividends to Ambac in the near term; (6) 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; (7) 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; (8) litigation arising from the Segregated Account Rehabilitation Proceedings; (9) decisions made by the rehabilitator for the benefit of policyholders may result in material adverse consequences for Ambaca™s securityholders; (10) potential of a full rehabilitation proceeding against Ambac Assurance or material changes to the plan of rehabilitation, with resulting adverse impacts; (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 single exposures to reinsurers; (19) disputes with reinsurers regarding amounts owed us under our reinsurance agreements; (20) default by one or more of Ambac Assurancea™s portfolio investments, insured issuers, counterparties or reinsurers; (21) 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; (22) 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; (23) changes in prevailing interest rates; (24) 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; (25) changes in accounting principles or practices that may impact Ambaca™s reported financial results; (26) legislative and regulatory developments; (27) operational risks, including with respect to internal processes, risk models, systems and employees; (28) changes in tax laws, tax disputes and other tax-related risks; (29) 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 (30) 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.