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Ambac Financial Group, Inc. Announces Second Quarter 2010 Results

AAC recorded a statutory net loss during the second quarter of 2010. The primary drivers of the statutory net loss were (i) statutory loss and loss expenses related primarily to AAC’s RMBS financial guarantee portfolio for both initial defaults and continued deterioration in previously defaulted credits; (ii) impairment losses related to AAC’s CDO of ABS transactions that were commuted during the quarter; and (iii) impairment losses within AAC’s investment portfolio driven by reduced pricing on certain previously impaired RMBS securities. These negative drivers were partially offset by revenues (primarily premiums earned and investment income) generated during the quarter.

AAC’s consolidated claims-paying resources amount to approximately $8.5 billion as of June 30, 2010, down from $10.8 billion at March 31, 2010, as net cash outflows during the quarter exceeded the ongoing cash inflows from operations.

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) ability of Ambac Assurance to realize the remediation recoveries contained in its loss reserves; (2) 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; (3) the unlikely ability of Ambac Assurance to pay dividends to Ambac in the near term; (4) 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 (as defined in Part I, Item 1, Recent Developments) constitutes an event of default under the applicable debt indenture or an event of default under the applicable ISDA contract; (5) adverse events arising from the Segregated Account Rehabilitation Proceedings (as defined in Part I, Item 1, Recent Developments), 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; (6) litigation arising from the Segregated Account Rehabilitation Proceedings; (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; (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 the 2009 Annual Report on Form 10-K and Part II, Item 1A of this Form 10-Q 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 (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 Balance Sheets
June 30, 2010 and December 31, 2009
(Dollars in Thousands Except Share Data)
   
 

June 30, 2010

December 31, 2009

(unaudited)

Assets

 
Investments:
Fixed income securities, at fair value
(amortized cost of $5,668,300 in 2010 and $7,605,565 in 2009) $ 5,925,170 $ 7,572,570
Fixed income securities pledged as collateral, at fair value
(amortized cost of $123,766 in 2010 and $164,356 in 2009) 127,432 167,366
Short-term investments (amortized cost of $514,780 in 2010 and $962,007 in 2009) 514,780 962,007
Other (cost of $100 in 2010 and $1,278 in 2009)   100     1,278  
Total investments 6,567,482 8,703,221
 
Cash and cash equivalents 56,677 112,079
Receivable for securities sold 14,481 3,106
Investment income due and accrued 47,995 73,062
Premium receivables 2,789,353 3,718,158
Reinsurance recoverable on paid and unpaid losses 121,715 78,115
Deferred ceded premium 386,665 500,804
Subrogation recoverable 1,046,610 902,612
Deferred taxes - 11,250
Current income taxes - 421,438
Deferred acquisition costs 263,258 279,704
Loans 70,849 80,410
Derivative assets 504,125 496,494
Other assets 173,270 229,299
Variable interest entity assets:
Fixed income securities, at fair value 1,801,557 525,947
Restricted cash 1,977 1,151
Investment income due and accrued 3,866 4,133
Loans 16,189,761 2,635,961
Derivative assets 4,546 109,411
Other assets   11,598     12  
Total assets $ 30,055,785   $ 18,886,367  
 

Liabilities and Stockholders' Equity

 
Liabilities:
Unearned premiums $ 4,714,527 $ 5,687,114
Loss and loss expense reserve 5,221,886 4,771,684
Ceded premiums payable 224,740 291,843
Obligations under investment and payment agreements 879,381 1,177,406
Obligations under investment repurchase agreements 113,296 113,527
Current taxes 22,384 -
Long-term debt 1,815,017 1,631,556
Accrued interest payable 58,345 47,125
Derivative liabilities 452,136 3,536,858
Other liabilities 140,999 248,655
Payable for securities purchased 24,151 2,074
Variable interest entity liabilities:
Accrued interest payable 3,307 3,482
Long-term debt 16,518,312 3,008,628
Derivative liabilities 1,277,302 -
Other liabilities   12,681     60  
Total liabilities   31,478,464     20,520,012  
 
Stockholders' (deficit) equity:
Ambac Financial Group, Inc.:
Preferred stock - -
Common stock 3,080 2,944
Additional paid-in capital 2,185,134 2,172,656
Accumulated other comprehensive loss 219,939 (24,827 )
Accumulated deficit (4,031,055 ) (3,878,015 )
Common stock held in treasury at cost   (454,203 )   (560,543 )
Total Ambac Financial Group, Inc. stockholders' deficit (2,077,105 ) (2,287,785 )
 
Non-controlling interest:   654,426     654,140  
Total stockholders' deficit   (1,422,679 )   (1,633,645 )
Total liabilities and stockholders' deficit $ 30,055,785   $ 18,886,367  
 
Number of shares outstanding (net of treasury shares)   302,022,750     287,598,189  
Book value per share (controlling interest)   ($6.88 )   ($7.95 )
 
 
Ambac Financial Group, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
For the Three and Six Months Ended June 30, 2010 and 2009
(Dollars in Thousands Except Share Data)
       
 
Three Months Ended June 30, Six Months Ended June 30,
  2010       2009     2010       2009  
Revenues:
Financial Guarantee:
Net premiums earned $ 167,005 $ 177,732 $ 292,236 $ 374,544
Net investment income 69,028 125,506 186,598 226,381
Other-than-temporary impairment losses:
Total other-than-temporary impairment losses (7,777 ) (675,394 ) (41,245 ) (1,420,135 )
Portion of loss recognized in other comprehensive income   290     -     2,409     -  
Net other-than temporary impairment losses recognized in earnings   (7,487 )   (675,394 )   (38,836 )   (1,420,135 )
 
Net realized investment gains (losses) 18,281 7,710 73,420 6,159
 
Change in fair value of credit derivatives:
Realized gains and (losses) and other settlements (2,777,295 ) (5,053 ) (2,767,371 ) 1,570
Unrealized gains   2,979,476     6,016     2,802,413     1,545,243  
Net change in fair value of credit derivatives 202,181 963 35,042 1,546,813
 
Other (loss) income (30,243 ) 39,221 (86,146 ) 40,944
(Loss) income on variable interest entities (38,546 ) 33 (531,250 ) 44
Financial Services:
Investment income 8,861 19,004 18,129 39,888
Derivative products (70,957 ) (44,219 ) (129,184 ) (58,418 )
Other-than-temporary impairment losses:
Total other-than-temporary impairment losses (3,079 ) (186,708 ) (3,079 ) (272,198 )
Portion of loss recognized in other comprehensive income   -     -     -     -  
 
Net other-than temporary impairment losses recognized in earnings   (3,079 )   (186,708 )   (3,079 )   (272,198 )
Net realized investment gains (losses) 65,832 (2,310 ) 67,242 114,236
Net change in fair value of total return swaps - 22,052 - 11,671
Net mark-to-market (losses) gains on non-trading derivatives (11,556 ) 7,529 (14,295 ) 7,690
Corporate and Other:
Other income 1,157 32,000 1,461 32,216
Net realized gains   10,693     -     10,693     33  
 
Total revenues   381,170     (476,881 )   (117,969 )   649,868  
 
Expenses:
Financial Guarantee:
Loss and loss expenses 323,326 1,230,847 412,478 1,970,677
Underwriting and operating expenses 58,931 48,842 109,427 105,454
Interest expense 6,886 - 6,886 -
Financial Services:
Interest on investment and payment agreements 4,357 8,311 9,791 21,100
Operating expenses 3,124 3,541 6,751 7,492
Corporate and Other:
Interest 29,597 29,837 59,756 59,683
Other expenses   12,645     (3,337 )   24,593     684  
 
Total expenses   438,866     1,318,041     629,682     2,165,090  
 
Pre-tax loss from continuing operations (57,696 ) (1,794,922 ) (747,651 ) (1,515,222 )
(Benefit) provision for income taxes   (122 )   573,861     (15 )   1,245,761  
 
Net loss (57,574 ) (2,368,783 ) (747,636 ) (2,760,983 )
 
Less: net loss attributable to noncontrolling interest   (15 )   11     (26 )   (2 )
 
Net loss attributable to Ambac Financial Group, Inc.   ($57,559 )   ($2,368,794 )   ($747,610 )   ($2,760,981 )
 
 
Net loss per share   ($0.20 )   ($8.24 )   ($2.59 )   ($9.60 )
 
Net loss per diluted share   ($0.20 )   ($8.24 )   ($2.59 )   ($9.60 )
 
 
Weighted average number of common shares outstanding:
 
Basic   290,050,931     287,639,234     289,147,236     287,602,413  
 
Diluted   290,050,931     287,639,234     289,147,236     287,602,413  




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