ABK Ambac Financial Grp. Common Stock

Ambac Financial Group, Inc. (NYSE: ABK) (Ambac) today announced first quarter 2010 net loss of $690.1 million, or net loss of $2.39 per share. This compares to a first quarter 2009 net loss of $392.2 million, or net loss of $1.36 per share. The first quarter 2010 results reflect a loss reported as a result of a new consolidations accounting standard. In 2009, Ambac’s first quarter results reflected a large positive change in fair value of credit derivatives offset by loss and loss adjustment expenses primarily related to residential mortgage-backed securities (RMBS) exposure, other than temporary impairment write downs of RMBS securities in the investment portfolios and a $600 million increase in the deferred tax asset valuation allowance.

First Quarter 2010 Summary

• Recorded a $495.1 million loss related to the new consolidations accounting standard as described under “Implementation of New Accounting Standards,” below. The loss is considered to be non-recurring as it results from the deconsolidation of a number of variable interest entities. Excluding the effect of this non-recurring item, Ambac would have reported a net loss of $195.0 million, or net loss of $0.68 per share.
• Net change in fair value of credit derivatives was negative $167.1 million.
• Net loss and loss expenses incurred amounted to $89.2 million for the current quarter, down considerably from the first quarter of 2009.
• Statutory surplus of Ambac Assurance Corporation (“AAC”) was reduced to approximately $160 million at March 31, 2010 from $801.9 million at December 31, 2009.

Financial Results

Implementation of New Accounting Standards

Effective January 1, 2010, Ambac adopted Accounting Standards Update No. (“ASU”) 2009-17, “Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities”.

ASU 2009-17 requires Ambac to consolidate certain enterprises known as variable interest entities (“VIEs”) primarily when Ambac’s insurance policies or written credit derivatives (“financial guarantees”) give it a controlling financial interest in those entities. The standard requires Ambac to perform ongoing analysis to determine whether Ambac’s variable interests (by virtue of its financial guarantees) give it a controlling financial interest in the VIE and to consolidate the VIE if so determined. The net impact of implementing ASU 2009-17 on January 1, 2010, was to require Ambac to consolidate 83 additional VIEs resulting in an increase to shareholders' equity of $705.0 million. This adoption gain resulted from the initial recognition of all assets and liabilities of the newly consolidated VIEs at fair value in Ambac’s financial statements, while eliminating from its financial statements the related net insurance liabilities which are generally calculated using estimated future cash flows discounted at risk free interest rates.

On March 24, 2010, Ambac acquiesced to the Office of the Commissioner of Insurance of the State of Wisconsin’s (“OCI’s”) request to establish a segregated account pursuant to Wisconsin statutes (the “Segregated Account”) for purposes of initiation of the rehabilitation of the Segregated Account. AAC has allocated certain policies to the Segregated Account. The rehabilitation resulted in Ambac no longer having the unilateral power to direct the activities of 49 VIEs whose insurance policies were allocated to the Segregated Account, and therefore those VIEs were de-consolidated as of March 24, 2010. The de-consolidation resulted in Ambac reversing the ASU 2009-17 transition effect for those specific transactions with the charge to Ambac’s Consolidated Statement of Operations for the period amounting to $495.1 million.

As of March 31, 2010, the Company's balance sheet included 41 consolidated VIEs (remaining after the de-consolidation as of March 24th) with $20.6 billion of assets and $20.2 billion of liabilities.

Net Premiums Earned

Net premiums earned for the first quarter of 2010 were $125.2 million, down 36% from $196.8 million earned in the first quarter of 2009. Net premiums earned include accelerated premiums, which result from calls, terminations and other accelerations recognized during the quarter. Accelerated premiums were $12.1 million in the first quarter of 2010, down 70% from $41.0 million in the first quarter 2009. Normal net premiums earned, which exclude accelerated premiums, were $113.1 million in the first quarter of 2010, down 27% from $155.8 million in the first quarter of 2009. Normal net premiums earned for the period have been negatively impacted by no new business written and the high level of refundings and terminations over the past two 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 first quarter of 2010 was $117.6 million, representing an increase of 17% from $100.9 million in the first quarter of 2009. 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 rising yields on taxable securities include the impact from accretion of bond discounts on AAC-insured securities and RMBS securities previously written down to fair value as a result of other-than-temporary impairments in earlier periods. The impact from increasing yields was partially offset by an overall decrease in the asset base as claim payments on insured RMBS transactions and commutations and settlements of collateralized debt obligations of asset-backed securities (CDO of ABS) transactions over the past twelve months 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 (“OTTI”) losses in the financial guarantee investment portfolio were ($31.3) million in the first quarter of 2010, compared to OTTI losses of ($744.7) million in the first quarter of 2009. The first quarter 2010 OTTI loss was driven primarily by impairment write downs on Ambac-wrapped RMBS securities within its investment portfolio as well as student loan securities that management identified for sale as of March 31, 2010. The first quarter 2009 OTTI impairment loss was driven by write-downs during the quarter of certain Alt-A RMBS securities within the investment portfolio that management believed to be credit impaired.

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 loss of ($167.1) million for the first quarter of 2010, compared to a gain of $1,545.9 million for the first quarter of 2009.

Realized gains/(losses) and other settlements from credit derivative contracts represent 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 first quarter of 2010 and 2009 amounted to $9.9 million and $6.6 million, respectively.

Net unrealized gains/(losses) on credit derivative contracts were ($177.1) million in the first quarter of 2010, compared to net unrealized gains amounting to $1,539.2 million in the first quarter 2009. The net loss during the first quarter of 2010 is primarily the result of the impact of changes in AAC credit spreads since December 31, 2009 on the fair value of CDO of ABS transactions (ASC Topic 820 adjustment), partially offset by the net decrease in mark-to-market liabilities of other credit derivative transactions due to improvements in the average values of reference obligations. As of March 31, 2010, the fair value of CDO transactions named in the non-binding proposed settlement agreement entered into on March 24, 2010, approximates their expected settlement value. The net unrealized gains reported during the first quarter of 2009 resulted primarily from the effect of widening AAC credit spreads on the measurement of fair value of credit derivative liabilities during that period.

Financial Guarantee Loss Reserves

Total net loss and loss expenses were $89.2 million in the first quarter of 2010, compared to $739.8 million in the first quarter of 2009. Losses and loss expenses in the first quarter of 2010 were primarily related to credit deterioration in the second-lien segment of the insured RMBS portfolio and student loan transactions, partially offset by net improvement in certain first-lien RMBS transactions. First quarter of 2009 loss and loss expenses were driven by continued deterioration in the performance of the RMBS portfolio, most prominently in the first-lien product.

Total net insurance claims paid in the first quarter of 2010 were $231.7 million, related primarily to RMBS transactions. Excluded from claims paid are amounts that were unpaid in late March as a result of the moratorium imposed by the OCI on March 24, 2010, amounting to $130.1 million. Total insurance claims paid and unpaid (due to the OCI moratorium) total to $361.8 million. Total net claims paid in the first quarter of 2009 were $312.3 million, primarily related to second-lien RMBS transactions.

Loss and loss expense reserves for all RMBS insurance exposures as of March 31, 2010, were $2,616.8 million. RMBS reserves are net of $2,069.2 million of estimated remediation recoveries. The estimate of remediation recoveries related to material representation and warranty breaches increased from $2,026.3 million as of December 31, 2009, primarily as a result of breaches identified during the re-underwriting of an additional transaction. 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. Additionally, Ambac is in the process of re-underwriting additional transactions that have drastically underperformed expectations and the forensic results of those transactions will be available over the next few quarters.

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 was ($54.4) million for the first quarter of 2010, down from ($6.1) million for the first quarter of 2009. The decrease was primarily driven by losses on terminations of swaps within the derivative products business. The interest rate swap and investment agreement businesses are in run-off.

Balance Sheet and Liquidity

Total assets increased by approximately $16,929.3 million during the first quarter of 2010, primarily due to the consolidation of certain trusts that AAC has insured and consolidated under accounting pronouncement ASU 2009-17 (described above).

The fair value of the consolidated non-VIE investment portfolio increased from $8.7 billion (amortized cost of $8.7 billion) as of December 31, 2009 to $9.7 billion (amortized cost of $9.6 billion) as of March 31, 2010. The increase was driven by the receipt of a $440 million tax refund during the quarter, approximately $400 million of securities purchased at quarter end, not yet paid (offset to “Payable for securities purchased” in Liabilities portion of balance sheet), and to a lesser extent, generally increased market values of securities in the financial guarantee investment portfolio.

The financial guarantee non-VIE investment portfolio had a fair value of $8.2 billion (amortized cost of $8.0 billion) as of March 31, 2010, and included $2.4 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.

Cash, short-term securities and bonds at the holding company amounted to $107.3 million as of March 31, 2010. Ambac’s annual debt service costs amount to approximately $89.0 million. As a result of the recent actions taken by OCI (as discussed in our press release dated March 25, 2010 and in our 10-K filed with Securities Exchange Commission on April 9, 2010), management believes that it is highly unlikely that AAC will be able to make dividend payments to Ambac for the foreseeable future.

Overview of AAC Statutory Results

As of March 31, 2010, AAC reported statutory capital and surplus of approximately $160 million, down from $801.9 million as of December 31, 2009. AAC’s statutory financial statements include the results of AAC’s general account, the Segregated Account which was formed on March 24, 2010, Ambac Assurance UK Ltd. and Everspan Financial Guarantee Corporation. Statutory capital and surplus was negatively impacted by the statutory net loss recorded during the quarter. The primary drivers of the statutory net loss were (i) statutory impairment losses related to AAC’s insured portfolio of CDO of ABS transactions, driven by deterioration of the underlying RMBS collateral within the CDO of ABS transactions; and (ii) statutory loss and loss expenses related primarily to deterioration in AAC’s RMBS financial guarantee portfolio. These negative drivers were partially offset by: (i) revenues (primarily premiums earned and investment income) generated during the quarter; and (ii) unrealized gains on subsidiaries - Ambac Assurance UK Ltd. and Everspan Financial Guarantee Corporation.

AAC’s consolidated claims-paying resources amount to approximately $10.8 billion as of March 31, 2010, flat to December 31, 2009, as net cash inflows driven primarily by a tax refund received during the quarter and ongoing cash inflows from operations were offset by RMBS claims paid.

Annual Meeting of Stockholders

As previously announced, the Board of Directors has set the 2010 Annual Meeting of Stockholders for Monday, June 14, 2010, at 1:00 p.m. in New York City. The record date for determining stockholders entitled to notice of, and to vote at, the annual meeting was the close of business, April 20, 2010.

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's principal operating subsidiary, Ambac Assurance Corporation, a guarantor of public finance and structured finance obligations, has a Caa2 rating under review for possible upgrade from Moody's Investors Service, Inc. and an R (regulatory intervention) financial strength rating 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 incorrect and are based on Ambac management’s 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 has insufficient capital to finance its debt service and operating expense requirements beyond the second quarter of 2011 and may need to seek bankruptcy protection; (2) the unlikely ability of Ambac Assurance to pay dividends to Ambac in the near term; (3) the risk that holders of debt securities or counterparties on credit default swaps or other similar agreements bring claims alleging that the rehabilitation of the Segregated Account constitutes an event of default under the applicable debt indenture or an event of default under the applicable ISDA contract; (4) 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; (5) litigation arising from the Segregated Account Rehabilitation Proceedings; (6) any changes to the Proposed Settlement, or the failure to consummate the Proposed Settlement; (7) decisions made by the rehabilitator for the benefit of policyholders may result in material adverse consequences for Ambac’s securityholders; (8) potential of rehabilitation proceedings against Ambac Assurance, with resulting adverse impacts; (9) the risk that reinsurers may dispute amounts owed us under our reinsurance agreements; (10) possible delisting of Ambac’s common shares from the NYSE; (11) 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; (12) risks which impact assets in Ambac Assurance’s investment portfolio; (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 CDOs and other derivative products insured or issued by Ambac; (16) inadequacy of reserves established for losses and loss expenses, including our inability to realize the remediation recoveries included in our reserves; (17) Ambac’s financial position and the Segregated Account Rehabilitation Proceedings may prompt departures of key employees; (18) 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; (19) 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; (20) the actions of the U. S. Government, Federal Reserve and other government and regulatory bodies to stabilize the financial markets; (21) likely unavailability of adequate capital support and liquidity; (22) 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; (23) default by one or more of Ambac Assurance’s portfolio investments, insured issuers, counterparties or reinsurers; (24) 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; (25) 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; (26) changes in prevailing interest rates; (27) 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, and due to the adoption of the new financial guarantee insurance accounting standard effective January 1, 2009, which, among other things, introduces volatility in the recognition of premium earnings and losses; (28) changes in accounting principles or practices that may impact Ambac’s reported financial results; (29) legislative and regulatory developments; (30) operational risks, including with respect to internal processes, risk models, systems and employees; (31) changes in tax laws and other tax-related risks; (32) other factors described in the Risk Factors section in Part I, Item 1A of Ambac’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009 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 SEC’s website, www.sec.gov; and (33) 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 Statements of Operations (Unaudited) For the Three Months Ended March 31, 2010 and 2009 (Dollars in Thousands Except Share Data)           Three Months Ended March 31, 2010 2009 Revenues: Financial Guarantee: Net premiums earned $125,231 $196,812 Net investment income 117,570 100,875 Other-than-temporary impairment losses: Total other-than-temporary impairment losses (33,468 ) (744,741 ) Portion of loss recognized in other comprehensive income 2,119   -   Net other-than temporary impairment losses recognized in earnings (31,349 ) (744,741 )   Net realized investment gains (losses) 55,139 (1,551 )   Change in fair value of credit derivatives: Realized gains and (losses) and other settlements 9,924 6,623 Unrealized (losses) gains (177,063 ) 1,539,227   Net change in fair value of credit derivatives (167,139 ) 1,545,850   Other (loss) income (55,903 ) 1,723 (Loss) income on variable interest entities (492,704 ) 11 Financial Services: Investment income 9,268 20,884 Derivative products (58,227 ) (14,199 ) Other-than-temporary impairment losses: Total other-than-temporary impairment losses - (85,490 ) Portion of loss recognized in other comprehensive income -   -     Net other-than temporary impairment losses recognized in earnings -   (85,490 ) Net realized investment gains 1,410 116,546 Net change in fair value of total return swaps - (10,381 ) Net mark-to-market (losses) gains on non-trading derivatives (2,739 ) 161 Corporate and Other: Other income 304 216 Net realized investment gains -   33     Total revenues (499,139 ) 1,126,749     Expenses: Financial Guarantee: Loss and loss expenses 89,152 739,830 Underwriting and operating expenses 50,496 56,612 Financial Services: Interest on investment and payment agreements 5,434 12,789 Other expenses 3,627 3,951 Corporate and Other: Interest 30,159 29,846 Other expenses 11,948   4,021     Total expenses 190,816   847,049     Pre-tax (loss) income from continuing operations (689,955 ) 279,700 Provision for income taxes 107   671,900     Net loss (690,062 ) (392,200 )   Less loss attributable to noncontrolling interest (11 ) (13 )   Net loss attributable to Ambac Financial Group, Inc. ($690,051 ) ($392,187 )     Net loss per share attributable to Ambac Financial Group, Inc. common shareholders ($2.39 ) ($1.36 )   Net loss per diluted share attributable to Ambac Financial Group, Inc. common shareholders ($2.39 ) ($1.36 )     Weighted average number of common shares outstanding:   Basic 288,244,846   287,565,182     Diluted 288,244,846   287,565,182     Ambac Financial Group, Inc. and Subsidiaries Consolidated Balance Sheets March 31, 2010 and December 31, 2009 (Dollars in Thousands Except Share Data)         March 31, 2010 December 31, 2009 (unaudited)

Assets

  Investments: Fixed income securities, at fair value (amortized cost of $6,856,400 in 2010 and $7,605,565 in 2009) $7,009,095 $7,572,570 Fixed income securities pledged as collateral, at fair value (amortized cost of $102,361 in 2010 and $164,356 in 2009) 103,400 167,366 Short-term investments (amortized cost of $2,602,585 in 2010 and $962,007 in 2009) 2,602,585 962,007 Other (cost of $1,278 in 2010 and $1,278 in 2009) 1,278   1,278   Total investments 9,716,358 8,703,221   Cash and cash equivalents 114,808 112,079 Receivable for securities sold 41,995 3,106 Investment income due and accrued 46,575 73,062 Premium receivables 2,941,546 3,718,158 Reinsurance recoverable on paid and unpaid losses 89,627 78,115 Deferred ceded premium 395,517 500,804 Subrogation recoverable 877,908 902,612 Deferred taxes - 11,250 Current taxes - 421,438 Deferred acquisition costs 273,405 279,704 Loans 71,090 80,410 Derivative assets 433,688 496,494 Other assets 224,776 229,299 Variable interest entity assets: Fixed income securities, at fair value 4,125,851 525,947 Restricted cash 100,941 1,151 Investment income due and accrued 1,331 4,133 Loans (includes $16,141,419 and $2,428,352 at fair value) 16,355,816 2,635,961 Derivative assets 4,437 109,411 Other assets 8   12   Total assets $35,815,677   $18,886,367    

Liabilities and Stockholders' (Deficit) Equity

  Liabilities: Unearned premiums $4,926,807 $5,687,114 Loss and loss expense reserve 4,680,633 4,771,684 Ceded premiums payable 223,747 291,843 Obligations under investment and payment agreements 1,150,220 1,177,406 Obligations under investment repurchase agreements 113,296 113,527 Current taxes 22,506 -

Long-term debt

1,633,400 1,631,556 Accrued interest payable 47,070 47,125 Derivative liabilities 3,636,091 3,536,858 Other liabilities 226,236 248,655 Payable for securities purchased 399,959 2,074 Variable interest entity liabilities: Accrued interest payable 750 3,482

Long-term debt (includes $18,999,183 and $2,789,556 at fair value)

19,225,145 3,008,628 Derivative liabilities 1,006,534 - Other liabilities 68   60   Total liabilities 37,292,462   20,520,012     Stockholders' (deficit) equity:

Ambac Financial Group, Inc.:

Preferred stock - - Common stock 2,944 2,944 Additional paid-in capital 2,174,247 2,172,656 Accumulated other comprehensive income (loss) 119,660 (24,827 ) Accumulated deficit (3,972,754 ) (3,878,015 ) Common stock held in treasury at cost (454,942 ) (560,543 ) Total Ambac Financial Group, Inc. stockholders' deficit (2,130,845 ) (2,287,785 )   Non-controlling interest: 654,060   654,140   Total stockholders' deficit (1,476,785 ) (1,633,645 ) Total liabilities and stockholders' deficit $35,815,677   $18,886,367     Number of shares outstanding (net of treasury shares) 288,380,178   287,598,189   Book value per share ($7.39 ) ($7.95 )