Ambac Swings to Worse-Than-Expected Loss

Updated from 10:11 a.m. EDT

Ambac(ABK Quote) on Wednesday confessed enormous losses in the first quarter, as the bond insurer's struggle over the growing damage in the credit derivative market continues.

The New York-based firm reported an eye-popping net loss of $1.6 billion, or $11.69 per share, vs. a profit of $213 million, or $2.02 a diluted share, in the year-ago period. Excluding certain marks, gains and losses and other factors not included in analysts' forecasts, Ambac's operating loss was $6.93 a share, vs. a $2 profit in the year-ago period. Analysts had been expecting a loss of $1.51, according to Thomson Financial.

Cramer: Ambac Deserves No Love

"The housing market crisis continues to disrupt the global credit markets and our credit derivatives and direct mortgage portfolios were severely impacted once again," Chairman and interim CEO Michael Callen noted in a company statement. "While we realize that these are disappointing credit results, we continue to believe that the capital raise and strategic business actions taken during the quarter will enable us to get beyond this credit market."

Ambac said it marked down its credit derivative portfolio to $1.7 billion. The loss included an estimated credit impairment of $940 million related to collateralized mortgage obligations, backed by residential mortgage-backed securities. Ambac expects that it will have to make claim payments and set about trying to establish a number to prepare for that possibility.

On its conference call on Wednesday morning, Ambac cited Bear Stearns'(BSC Quote) collapse as a particularly painful deal for the company -- executives on the call said the firm lost 82% of its collateral in JPMorgan Chase's(JPM Quote) purchase of Bear.

First Franklin TICKER TYPE="EQUITY" SYMBOL="FFHS" EXCHANGE="NYSE" PRIMARY="NO"/>, the subprime mortgage operation Merrill Lynch(MER Quote) bought from National City(NCC Quote) in 2006 and shuttered earlier this year, was another source of rapid losses, executives said.

Still, when asked point blank if Ambac was going bankrupt, executives emphatically said no.

Ambac shares were plummeting in trading Wednesday, recently down 40.1% to $3.61.

Ambac raised $1.5 billion in capital last month, to satisfy ratings agencies who had been clamoring for it and other financial guarantors to shore up their capital base in the face of mounting losses in the credit market.

But despite their efforts to raise capital, Ambac and MBIA (MBI Quote), the two biggest players in the bond insurance space, were hit with downgrades to their pristine credit ratings, which impair their ability to win new business.

That lack of business coming into the company is a major point of concern. Ambac has written very little business since late 2007. In an effort to accumulate capital, the insurer suspended underwriting all structured finance business for six months.

The firm also noted that its compensation to executives has dropped and that some of the people that had made the underwriting decisions that have caused so much pain are no longer employed there.

Assets have risen 6% to $24.9 billion, partly as a result of the capital raise in March. Goldman Sachs analyst James Fotheringham believed the company should have raised an additional $1 billion. He lowered his estimates and price target when the company priced its equity offering in March.

"We anticipate further capital announcements in the future, along with further dilution to shareholders," he wrote. His 12-month target price is $7.

MBIA is also expected to report a weak quarter on May 13. Ambac said that it continues to work closely with the ratings agencies and had presented a preview of the first quarter to the agencies.

Closely held insurer FGIC, whose investors include fellow guarantor PMI Group(PMI Quote) and private-equity firm the Blackstone Group(BX Quote), also was downgraded by all three major ratings agencies earlier this year and, earlier this month, said it was exploring a sale and other strategic alternatives. Goldman Sachs is acting as an advisor.

"I wouldn't be a bit surprised to see transactions occurring in the industry," Callen said when asked about consolidation within the industry.

Meanwhile, new and smaller players are posing potentially stiffer competition for the big players. Billionaire investor Wilbur Ross in February invested $1 billion into Assured Guaranty(AGO Quote), which maintains its triple-A ratings. And Warren Buffet's Berkshire Hathaway(BRK.A Quote) launched its own municipal bond guarantor business earlier this year.