Ambac Financial Group, Inc. (NYSE: ABK) (Ambac) today
announced third quarter 2009 net income of $2,188.3 million, or net
income of $7.58 per diluted share. This compares to third quarter
2008 net loss of $2,431.2 million, or net loss of $8.45 on a per
share basis. The third quarter 2009 results reflect significant
unrealized mark-to-market gains in the credit derivatives portfolio
and gains resulting from reinsurance cancellations during the
quarter. In 2008, Ambac’s third quarter results reflected a
significant negative net change in fair value of credit
derivatives.
Quarter Summary
- Net change in fair value of
credit derivatives amounted to positive $2,132.9 million, driven
primarily by the ASC Topic 820 (formerly known as FAS 157)
adjustment related to Ambac’s credit spread widening.
- Net loss and loss expenses
incurred amounted to $459.2 million for the quarter, relating to
other asset-backed securities transactions and a municipal
transportation credit.
- Reinsurance cancellations with
three reinsurance counterparties during the quarter resulted in net
income improvement of approximately $303.0 million.
- In the financial services
segment, the derivative products business results declined by
$205.3 million, quarter on quarter.
- ASC Topic 944 (formerly known as
FAS 163) was implemented on January 1, 2009. Due to changes in
calculations of certain income statement items, such as net
premiums earned and loss and loss expenses, 2009 and 2008 amounts
are not comparable.
Ambac’s President and Chief Executive Officer, David Wallis,
commented, “Our GAAP financial results tend to fluctuate based upon
risk perception and its impact on mark-to-market changes. However,
I remain optimistic about our remediation efforts. We continue to
make progress in de-risking the balance sheet via negotiated
reinsurance buy-backs, CDO of ABS commutations, settlements related
to defaulted RMBS transactions as well as expanded analysis of
expected recoveries relating to RMBS representation and warranty
breaches.”
Financial
Results
Net Premiums Earned
Net premiums earned for the third quarter of 2009 were $238.4
million, down 16% from $282.3 million earned in the third quarter
of 2008. Normal net premiums earned amounted to $148.1 million and
$155.0 million in the third quarter 2009 and 2008, respectively. As
a result of the implementation of ASC Topic 944, as discussed
above, normal earned premium amounts reported in 2009 are not
comparable to amounts that were reported in 2008.
Net premiums earned include accelerated premiums, which result
from calls, terminations and other accelerations recognized during
the quarter. Accelerated premiums were $90.3 million in the third
quarter of 2009, down 29% from $127.3 million in the third quarter
2008. In the third quarter 2009, one terminated international
transaction accounted for more than half of the accelerated
premiums reported in the quarter. During much of 2008, a lack of
liquidity in the auction rate and variable rate bond markets had
resulted in significant refinancing activity in the municipal
sector.
Net Investment Income
Net investment income excluding variable interest entities for
the third quarter of 2009 was $132.3 million, representing an
increase of 7% from $123.3 million in the comparable period of
2008. 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 impact from increasing yields was partially offset by an
overall decrease in the asset base as claim payments on insured
residential mortgage-backed securities (RMBS) transactions and
commutations and settlements of CDO of ABS transactions 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 losses in the financial
guarantee investment portfolio amounted to $32.5 million in the
third quarter of 2009, compared to a net loss of $2.5 million in
the third quarter 2008. In connection with the Company’s revised
investment strategies (which it had initiated in the second quarter
of 2009), during the third quarter 2009 management decided to sell
certain additional investment securities (primarily Alt-A RMBS
securities downgraded to below investment grade by Moody’s or
S&P during the quarter) held in the financial guarantee
investment portfolio. As a result of this decision,
other-than-temporary impairment charges were recorded through
earnings on such securities that were in an unrealized loss
position. Prior to management’s decision to sell these securities,
unrealized losses on these securities were recorded in
stockholders’ equity.
Net Realized Investment Gains
Net realized investment gains in the financial guarantee
investment portfolio amounted to $92.3 million in the third quarter
of 2009, up 78% compared to $51.9 million in the third quarter
2008, driven by investment repositioning in line with revised
investment strategies, as noted above.
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 gain of $2,132.9 million for the third quarter of 2009,
compared to a loss of ($2,705.2) million in the comparable period
of 2008.
Realized gains/(losses) and other settlements from credit
derivative contracts represents 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 third quarter of 2009 and
2008 amounted to ($732.9) million and ($837.9) million,
respectively. Third quarter 2009 fees received of $12.8 million
were offset by settlement and commutation payments of $745.7
million, while third quarter 2008 fees received of $15.3 million
were offset by a commutation payment of $850.0 million and $3.2
million of losses paid.
Net unrealized gains on credit derivative contracts were
$2,865.8 million in the third quarter 2009, compared to net
unrealized losses amounting to ($1,867.3) million in the third
quarter 2008. The net gain during the third quarter of 2009 is
primarily the result of the net decrease in mark-to-market
liabilities due to widening in Ambac Assurance Corporation’s
(AAC’s) credit spreads (ASC Topic 820 adjustment) and, to a lesser
extent, improvement in the average values of reference obligations
other than CDOs of ABS. The positive effects were partially offset
by further downgrades in CDO of ABS obligations. The net unrealized
losses during the third quarter 2008 resulted primarily from lower
values on the reference obligations across all asset classes and
internal ratings downgrades of the CDO of ABS portfolio, partially
offset by widening in AAC’s credit spreads.
Financial Guarantee Loss Reserves
Total net loss and loss expenses were $459.2 million in the
third quarter 2009, compared to $607.7 million recorded in the
third quarter of 2008. Losses and loss expenses in the third
quarter 2009 were related to further credit deterioration in
certain non-RMBS transactions that had previously been reserved,
partially offset by net reserve reductions in the RMBS portfolio
driven by increased estimates in remediation recoveries on certain
second-lien RMBS transactions. The non-RMBS losses and loss
expenses are highly concentrated in a handful of asset-backed
securitizations and one municipal transportation transaction.
In accordance with the provisions of ASC Topic 944, for 2009
Ambac uses a discount rate equal to the weighted average estimated
risk-free rate of approximately 2.5% to determine the loss
reserves. That compares to 4.5% used in 2008.
Total net claims paid in the third quarter 2009 and 2008 of
$315.1 million and $182.4 million, respectively, were primarily
related to RMBS transactions.
Loss and loss expense reserves for all RMBS insurance exposures
at September 30, 2009 total $2,661.0 million. RMBS reserves are net
of $1,902.8 million of estimated remediation recoveries. The
estimate of remediation recoveries related to material
representation and warranty breaches increased from $1,162.1
million at June 30, 2009, as a result of breaches identified during
the re-underwriting of two additional transactions, as well as an
enhancement of the estimation approach to use a statistical sample
to extrapolate ultimate results on certain of the transactions
under review.
Reinsurance Cancellations
During the third quarter 2009, Ambac cancelled reinsurance
contracts with three reinsurers, including Radian Asset Assurance
Inc., Swiss Reinsurance Company and MBIA Insurance Corp. (MBIA)
(the MBIA cancellation was a net settlement as both companies
mutually agreed to cancel reinsurance with the other) and
recaptured approximately $15.3 billion of par outstanding. The net
income impact of the cancellations, included in the Consolidated
Statement of Operations as part of Other Income and as a reduction
in Operating Expenses, amounted to approximately $285.5 million and
($17.5) million, respectively.
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, excluding net realized investment gains and losses and
unrealized gains and losses on total return swaps and non-trading
derivative contracts, was ($210.4) million in the third quarter of
2009, down from ($3.4) million in the third quarter of 2008. The
decline was driven by derivative products results which declined by
$205.3 million, quarter on quarter, due to valuation adjustments on
the remaining swap portfolio, losses resulting from interest rate
movements during the quarter and losses realized on transactions
that derivative counterparties terminated as a result of the
downgrades of AAC as guarantor of the swaps.
Other-than-temporary losses in the financial services investment
portfolio amounted to ($11.7) million in the third quarter of 2009.
During the third quarter 2009, management decided to dispose of
certain monoline-guaranteed investment securities held in the
financial services investment portfolio.
The interest rate swap and investment agreement businesses are
in run-off. The investment and payment agreement portfolio has been
reduced by approximately $1.3 billion during the first nine months
of 2009 to approximately $1.4 billion at September 30, 2009,
through negotiated terminations, terminations contractually
triggered by rating downgrades of AAC, and scheduled
amortization.
Balance Sheet and
Liquidity
Total assets declined by approximately $1,950 million during the
third quarter 2009, primarily due to cash settlements and
commutations on CDO of ABS transactions and RMBS claim payments
made during the quarter and the deconsolidation during the quarter
of one variable interest entity upon the termination of the
financial guarantee policy related to the transaction.
The fair value of the consolidated investment portfolio
decreased from $9.9 billion (amortized cost of $10.4 billion) at
June 30, 2009, to $9.8 billion (amortized cost of $9.9 billion) at
September 30, 2009. The decrease in fair value was primarily due to
settlement, commutation and loss payments made during the quarter,
partially offset by increasing market values within the
portfolios.
The financial guarantee investment portfolio has a fair value of
$8.3 billion (amortized cost of $8.3 billion) at September 30,
2009, and includes $1.2 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.
Ambac’s total financial guarantee net par exposure has decreased
6% from $434.3 billion at December 31, 2008 to $409.3 billion at
September 30, 2009, driven by amortization and refundings during
the period offset by the recapture of exposure resulting from
reinsurance cancellations discussed above.
Cash, short-term securities and bonds at the holding company
amounted to $164.8 million at September 30, 2009. Ambac’s annual
debt service costs amount to approximately $89.0 million. AAC is
not permitted to make dividend payments to the holding company in
2009 without first receiving permission from OCI. AAC has not
requested permission to pay a dividend in 2009.
AAC Statutory Results Not Yet
Available
The statutory results of AAC are not yet available. Management
expects to complete the statutory statements by the filing deadline
of November 16, 2009. AAC’s claims paying resources amount to
approximately $11.4 billion at September 30, 2009, down from
approximately $11.9 billion at June 30, 2009, primarily due to $746
million paid in July for CDO of ABS settlements and commutations
and insured RMBS claims paid during the quarter partially offset by
cash inflows from the reinsurance buy backs.
About Ambac
Ambac Financial Group, Inc., headquartered in New York City, is
a holding company whose affiliates provide 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 (developing
outlook) from Moody's Investors Service, Inc. and a CC rating
(outlook developing) 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 wrong and are based on
Ambac’s management 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’s liquidity is currently insufficient to
fund its needs beyond the near term and failure to successfully
execute on its current strategies could result in it running out of
liquidity; (2) as a result of Ambac Assurance’s deteriorating
financial condition, regulators could commence delinquency
proceedings; (3) 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; (4) the actions of the U. S. Government,
Federal Reserve and other government and regulatory bodies to
stabilize the financial markets; (5) 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; (6) market
spreads and pricing on insured CDOs and other derivative products
insured or issued by Ambac; (7) the risk that holders of debt
securities or counterparties on credit default swaps or other
similar agreements seek to declare events of default or seek
judicial relief or bring claims alleging violation or breach of
covenants by Ambac or one of its subsidiaries; (8) default by
one or more of Ambac Assurance’s portfolio investments,
insured issuers, counterparties or reinsurers; (9) inadequacy
of reserves established for losses and loss expenses;
(10) changes in capital requirements whether resulting from
downgrades in our insured portfolio or changes in rating agencies’
rating criteria or other reasons; (11) the risk that we may be
required to raise additional capital, which could have a dilutive
effect on our outstanding equity capital and/or future earnings;
(12) our ability or inability to raise additional capital,
including the risks that regulatory or other approvals for any plan
to raise capital are not obtained, or that various conditions to
such a plan, either imposed by third parties or imposed by Ambac or
its Board of Directors, are not satisfied and thus potentially
necessary capital raising transactions do not occur, or the risk
that for other reasons the Company cannot accomplish any
potentially necessary capital raising transactions;
(13) 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; (14) changes in Ambac’s and/or Ambac
Assurance’s credit or financial strength ratings; (15) risks
relating to the re-launch of Connie Lee as Everspan Financial
Guarantee Corp.; (16) competitive conditions, pricing levels
and reduction in demand for financial guarantee products;
(17) credit and liquidity risks due to unscheduled and
unanticipated withdrawals on investment agreements;
(18) legislative and regulatory developments, including the
Troubled Asset Relief Program and other programs under the
Emergency Economic Stabilization Act and other similar programs;
(19) changes in accounting principles or practices relating to
the financial guarantee industry or that may impact Ambac’s
reported financial results; (20) the risk of volatility in
income and earnings, including volatility due to the application of
fair value accounting, required under ASC Topic 815, to the portion
of our credit enhancement business which is executed in credit
derivative form, and due to the adoption of ASC Topic 944, which,
among other things, introduces volatility in the recognition of
premium earnings and losses; (21) the risk that our
underwriting and 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) operational risks,
including with respect to internal processes, risk models, systems
and employees; (23) factors that may influence the amount of
installment premiums paid to Ambac; (24) 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; (25) the risk that
reinsurers may dispute amounts owed us under our reinsurance
agreements; (26) changes in tax laws; (27) other factors
described in the Risk Factors section in Part I, Item 1A of
our Annual Report on Form 10-K for the fiscal year ended
December 31, 2008 and also disclosed from time to time by
Ambac in its subsequent reports on Form 10-Q and Form 8-K, which
are or will be available on the Ambac website at www.ambac.com and
at the SEC’s website, www.sec.gov; and (28) 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 Balance Sheets September 30, 2009 and
December 31, 2008 (Dollars in Thousands Except Share
Data) September 30,
2009 December 31, 2008
(unaudited)
Assets
Investments: Fixed income securities, at fair
value (amortized cost of $8,298,503 in 2009 and $11,080,723
in 2008) $ 8,233,730 $ 8,537,676
Fixed income securities pledged as collateral, at fair value
(amortized cost of $241,146 in 2009 and $277,291 in 2008)
248,829 286,853 Short-term investments
(approximates fair value) (amortized cost of $1,344,944 in
2009 and $1,454,229 in 2008) 1,344,945 1,454,229
Other (cost of $1,278 in 2009 and $13,956 in 2008)
1,278 14,059 Total
investments 9,828,782 10,292,817 Cash
and cash equivalents 149,554 107,811
Receivable for securities sold 53,339 15,483
Investment income due and accrued 66,899
116,769 Premium receivables 4,016,775
28,895 Reinsurance recoverable on paid and unpaid
losses 68,166 157,627 Deferred ceded
premium 549,199 292,837 Subrogation
recoverable 570,133 10,088 Deferred taxes
- 2,127,499 Current taxes -
192,669 Deferred acquisition costs 300,127
207,229 Loans 607,949 798,848
Derivative assets 1,187,636 2,187,214 Other
assets 700,497 723,887
Total assets $ 18,099,056
$ 17,259,673
Liabilities and Stockholders'
Equity
Liabilities: Unearned premiums $
6,100,656 $ 2,382,152 Loss and loss expense
reserve 4,521,807 2,275,948 Ceded premiums
payable 329,849 15,597 Obligations under
investment and payment agreements 1,416,142
3,244,098 Obligations under investment repurchase
agreements 113,527 113,737 Deferred taxes
18,856 - Current taxes 50,567 -
Long-term debt 2,751,625 1,868,690 Accrued
interest payable 41,948 68,806 Derivative
liabilities 4,652,390 10,089,895 Other
liabilities 253,670 279,616 Payable for
securities purchased 22,560
10,256 Total liabilities
20,273,597 20,348,795
Stockholders' equity: Ambac Financial Group, Inc.:
Preferred stock - - Common stock
2,944 2,944 Additional paid-in capital
2,171,848 2,030,031 Accumulated other
comprehensive loss 6,372 (1,670,198 )
Retained deficit (4,448,113 )
(3,550,768 ) Common stock held in treasury at
cost (561,495 ) (594,318
) Total Ambac Financial Group, Inc. stockholders'
equity (2,828,444 ) (3,782,309 )
Non-controlling interest: 653,903
693,187 Total stockholders'
equity (2,174,541 )
(3,089,122 ) Total liabilities and stockholders'
equity $ 18,099,056 $
17,259,673 Number of shares outstanding
(net of treasury shares) 287,590,520
287,239,482 Book value per share
($9.83 ) ($13.17 )
Ambac Financial Group, Inc.
and Subsidiaries Consolidated Statements of Operations
(Unaudited) For the Three and Nine Months Ended September
30, 2009 and 2008 (Dollars in Thousands Except Share
Data) Three Months Ended
Nine Months Ended September 30, September 30,
2009 2008 2009 2008
Revenues: Financial Guarantee: Net premiums
earned $ 238,401 $ 282,326 $
612,945 $ 794,663 Net investment income
134,977 126,757 358,157 381,142
Other-than-temporary impairment losses: Total
other-than-temporary impairment losses (32,529 )
(2,548 ) (1,452,664 ) (4,920
) Portion of loss recognized in other comprehensive
income - -
- - Net other-than temporary
impairment losses recognized in earnings (32,529
) (2,548 ) (1,452,664
) (4,920 ) Net realized
investment gains 92,279 51,926 106,904
75,383 Change in fair value of credit
derivatives: Realized losses and gains and other
settlements (732,857 ) (837,929 )
(731,287 ) (805,921 ) Unrealized
gains (losses) 2,865,761
(1,867,250 ) 4,411,004
(2,630,842 ) Net change in fair value of credit
derivatives 2,132,904 (2,705,179 )
3,679,717 (3,436,763 ) Other
income 309,922 (2,713 ) 350,866
7,797 Financial Services: Investment income
18,454 63,810 58,342 205,458
Derivative products (222,450 ) (17,199
) (280,868 ) (102,057 )
Other-than-temporary impairment losses: Total
other-than-temporary impairment losses (11,660 )
(124,280 ) (283,858 ) (451,932
) Portion of loss recognized in other comprehensive
income - -
- - Net other-than
temporary impairment losses recognized in earnings
(11,660 ) (124,280 )
(283,858 ) (451,932 ) Net
realized investment gains 28,109 39,289
142,345 55,173 Net change in fair value on total
return swaps 6,902 (28,279 ) 18,573
(72,977 ) Net mark-to-market (losses) gains on
non-trading derivatives (6,907 ) (5,230
) 783 (4,968 ) Corporate and
other: Other income 1,109 887
33,325 2,751 Net realized investment gains
- - 33
- Total revenues
2,689,511 (2,320,433 )
3,344,600 (2,551,250 )
Expenses: Financial Guarantee: Loss and loss
expenses 459,213 607,702 2,429,890
1,311,169 Underwriting and operating expenses
28,039 47,051 133,537 157,909
Interest expense on variable interest entity notes
2,658 3,367 7,835 10,303 Financial
Services: Interest on investment and payment agreements
6,433 50,048 27,533 196,965
Operating expenses 3,316 3,466 10,808
10,152 Interest 29,918 29,970
89,601 84,422 Corporate and other
5,975 10,027 6,659
33,216 Total expenses
535,552 751,631
2,705,863 1,804,136
Income (loss) before income taxes 2,153,959
(3,072,064 ) 638,737 (4,355,386
) (Benefit) provision for income taxes
(34,284 ) (640,687 )
1,211,477 (1,086,877 )
Net income (loss) 2,188,243 (2,431,377
) (572,740 ) (3,268,509 )
Less: net loss attributable to noncontrolling interest
(14 ) (155 )
(16 ) (78 ) Net income
(loss) attributable to Ambac Financial Group, Inc. $
2,188,257 ($2,431,222 )
($572,724 ) ($3,268,431 )
Net income (loss) per share $ 7.58
($8.45 ) ($1.99 )
($13.66 ) Net income (loss) per
diluted share $ 7.58 ($8.45
) ($1.99 ) ($13.66
) Weighted average number of common shares
outstanding: Basic 288,770,269
287,599,495 287,647,272
239,265,594 Diluted
288,770,269 287,599,495
287,647,272 239,265,594
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