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Ambac Financial Group, Inc. Announces Third Quarter 2011 Results

^{Published on 2011-11-09 19:41:09 - Market Wire}
 

NEW YORK--([ BUSINESS WIRE ])--Ambac Financial Group, Inc. (OTC: ABKFQ) (Ambac) today announced a third quarter 2011 net loss of $75.5 million, or a net loss of $0.25 per share. This compares to third quarter 2010 net income of $76.0 million, or net income of $0.25 per share. Relative to third quarter 2010, third quarter 2011 results were primarily driven by derivative product losses, a decline in other (loss) income, and a higher provision for income taxes, partially offset by lower net loss and loss expenses.

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.

Third Quarter 2011 Summary

Relative to the third quarter of 2010,

• Net premiums earned declined $41 million to $102.1 million
• Net investment income increased $11.8 million to $81.6 million
• Net loss and loss expenses incurred were down $225.6 million, resulting in a net benefit of $60.2 million
• Other (loss) income declined $191.9 million to a loss of $5.0 million
• Income on variable interest entities (aVIEsa) increased $28.6 million to $55.0 million
• Net losses in the financial services segment, primarily relating to derivative product losses, increased $135.0 million to $211.9 million
• Provision for income taxes increased $74.9 million to $75.0 million
• Corporate interest and other expense declined $41.8 million to $1.8 million, primarily as a result of lower interest expense, as Ambac no longer accrues interest on its debt listed under Liabilities Subject to Compromise, following its bankruptcy filing on November8, 2010
• Unrestricted cash, short-term securities and bonds at the holding company (Ambac Financial Group, Inc.) decreased $5.0 million to $46.3 million

Financial Results

Net Premiums Earned

Net premiums earned for the third quarter of 2011 were $102.1 million, down 29% from $143.1 million earned in the third quarter of 2010. Net premiums earned include accelerated premiums, which result from refundings, calls, and other accelerations recognized during the quarter. Accelerated premiums were $18.8 million in the third quarter of 2011, down 37% from $30.0 million in the third 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. Normal net premiums earned, which exclude accelerated premiums, were $83.2 million in the third quarter of 2011, down 26% from $113.1 million in the third 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.

Net Investment Income

Net investment income for the third quarter of 2011 was $81.6 million, an increase of 17% over $69.8 million earned in the third 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 impact of holding a greater position in Ambac Assurance guaranteed securities versus the same period in 2010.

Financial Guarantee Loss Reserves

Loss and loss expenses for the three months ended September30, 2011 was a net benefit of $60.2 million as compared to a net loss of $165.4 million for the three month period ending September 30, 2010. Losses for the three months ended September30, 2011 were driven by lower estimated losses in the first-lien RMBS and student loan portfolios, offset by an increase in estimated losses for the second-lien RMBS portfolio and for certain structured finance credits.

Loss and loss expenses paid, net of recoveries from all policies, amounted to a net recovery of $18.2 million during the third quarter 2011 versus $63.9 million net paid for the same period in 2010. The amount of actual claims paid during each period was 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 third quarter of 2011 amounted to $337.5 million versus $428.3 million during the same period in 2010. Since the establishment of the Segregated Account in March 2010, a total of $2,451.2 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 September 30, 2011, were $3,688.6 million, including $2,442.1 million relating to claims on RMBS exposures that have been presented since March 24, 2010 and unpaid as a result of the claims moratorium. RMBS reserves as of September 30, 2011 are net of $2,570.2 million of estimated remediation recoveries. The estimate of remediation recoveries related to material representation and warranty breaches is down 0.1% from $2,573.3 million reported as of June 30, 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.

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 net gain of $4.5 million for the third quarter of 2011, down 52% from a net gain of $9.4 million for the third quarter of 2010. The net gain on change in fair value of credit derivatives for the three months ended September30, 2011 resulted primarily from CDS fees earned and the reversal of unrealized losses associated with terminations, partially offset by declines in certain reference obligation prices particularly related to student loan securitizations.

Other (Loss) Income

Other (loss) income for the three months ended September30, 2011 was a loss of $5.0 million compared to income of $186.9 million for the three months ended September30, 2010. The third quarter 2011 loss was primarily attributable to mark-to-market losses related to Ambac's option to call up to $500 million par of surplus notes at 20% of par value, and the impact of the movement in the British Pound and the Euro to U.S. Dollar exchange rates on premium receivables. Other income in third quarter 2010 was driven by a net gain of $157.8 million resulting from the consolidating effect of terminating the reinsurance agreement between Ambac Assurance and Ambac UK.

Income on Variable Interest Entities

Income on variable interest entities for the three months ended September30, 2011 was $55.0 compared to $26.4 million for the three month period ending September30, 2010. Included within income on variable interest entities are gains or losses attributable to consolidating or deconsolidating VIEs and the financial results of the VIEs during the period after elimination of intercompany transactions (generally financial guarantee contracts). Most VIE assets and liabilities consolidated by Ambac are carried at fair value with changes included in earnings. However, the net gains for the three months ended September30, 2011 primarily related to a VIE consolidated effective April 1, 2011, which contains significant intangible assets, the carrying values of which are amortized through earnings over time. For the three months ended September 30, 2011, adverse changes in the expected performance of this transaction resulted in a net gain of $53.1 million in consolidation, reflecting a decrease in the fair value of the VIEas liabilities, partially offset by an impairment charge against its intangible assets. Income for the three months ended September30, 2010 reflects an increase in the fair value of VIE net assets plus net cash receipts by Ambacas insurance subsidiaries on financial guarantee policies associated with these VIEs.

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 derivatives products 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 segment produced a net loss of $211.9 million compared to a net loss of $76.9 million for the third quarter of 2010. Results for both periods primarily reflect the impact of mark to market losses in the derivative products portfolio arising from declining interest rates, partially offset by the impact of Ambacas credit risk on the fair value of uncollateralized derivative liabilities.

Reorganization Items, Net

For purposes of presenting an entityas 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 third quarter of 2011 totaled $8.5 million and were primarily related to professional advisory fees.

Provision for Income Taxes

Provision for income tax expense was $75.0 million for the three months ended September30, 2011 compared to $0.1 million for the three month period ending September30, 2010. This increase primarily related to the accrual of additional Federal income tax expense to bring the overall reserve for income taxes in line with Ambacas intent to settle the IRS Dispute, inclusive of amounts contributed by both the Company and Ambac Assurance as contemplated by the Mediation Agreement with the Creditorsa Committee, Ambac Assurance and OCI.

Balance Sheet and Liquidity

Total assets decreased during the third quarter of 2011, from $27.9 billion at June 30, 2011 to $27.6 billion, primarily due to a decline in the amount of VIE assets during the current period, partially offset by an increase in premium receivables.

The fair value of the consolidated non-VIE investment portfolio decreased from $7.08 billion (amortized cost of $6.6 billion) as of June 30, 2011 to $7.06 billion (amortized cost of $6.6 billion) as of September 30, 2011.

The financial guarantee non-VIE investment portfolio had a fair value of $6.2 billion (amortized cost of $5.7 billion) as of September 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 September 30, 2011. As required by ASC Topic 852, the amount of Liabilities subject to compromise represents Ambacas 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 September 30, 2011, liabilities subject to compromise consist of the following:

Overview of Ambac Assurance Statutory Results

As of September 30, 2011, Ambac Assurance reported statutory capital and surplus of approximately $273.1 million, down from $476.4 million as of June 30, 2011. Ambac Assuranceas statutory financial statements include the combined results of Ambac Assuranceas general account and the Segregated Account (formed on March 24, 2010). Statutory capital and surplus were impacted by a statutory net loss of $181 million for the three-months ended September 30, 2011. This net loss was primarily attributable to an increase in income taxes incurred and impairment losses on intercompany loans to Ambac Assuranceas derivative products subsidiary.

Ambac Assuranceas claims-paying resources amount to approximately $6.6 billion as of September 30, 2011, down $0.3 billion from $6.9 billion at June 30, 2011. This excludes Ambac Assurance UK Limitedas claims-paying resources of approximately $1.0 billion. The decline in claims paying resources was primarily attributable to the items discussed above.

Additional information regarding Ambacas third quarter 2011 financial results, including its filed Form 10Q, can be found on Ambacas 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.as 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 managementas forward-looking statements here or in other publications may turn out to be incorrect and are based on Ambac managementas current belief or opinions. Ambacas actual results may vary materially, and there are no guarantees about the performance of Ambacas 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 or confirmation will be delayed; (2) a plan of reorganization will not be consummated; (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)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 Ambacas securityholders; (9)potential of a full rehabilitation proceeding against Ambac Assurance or material changes to the plan of rehabilitation, 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)Ambacas 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 single exposures to reinsurers; (18)disputes with reinsurers regarding amounts owed us under our reinsurance agreements; (19)default by one or more of Ambac Assuranceas 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 continuation 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 Ambacas 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, Item1A of Ambacas Annual Report on Form 10-K for the fiscal year ended December31, 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 SECas 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 Ambacas reports to the SEC.