Ambac Main Unit Posts Loss; Premiums Fall

Ambac Assurance, the main unit of Ambac Financial, swung to a fourth-quarter loss. Premium income fell, and cash flow was negative.
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NEW YORK (TheStreet) -- Ambac Assurance, the main subsidiary of beleaguered insurer Ambac Financial Group (ABK) , posted a $311.6 million fourth-quarter loss as premium income fell and underwriting reverted to a loss.

The subsidiary's loss is a blow for Ambac Financial, which reports earnings March 16. Ambac Assurance is under scrutiny from Wisconsin's insurance regulator, who has put capital and surplus targets on the company. Ambac Financial's shares are trading at 68 cents, down from 81 cents at the beginning of the year.

estimates that Ambac Assurance required about $184.5 million in capital and surplus to meet Wisconsin's regulations as of Dec. 31. Following a $452 million reduction in assets during the fourth quarter, Ambac exceeded that amount by an estimated $440.5 million.

Ambac's business is going backward. The insurer posted a profit of $925 million in the third quarter, helped by investments. The fourth-quarter loss included a $451.2 million tax gain. An additional disappointment for investors is that there were no gains or losses on commutations during the fourth quarter.

Terminations of agreements with several reinsurers including


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resulted in $316.7 of pre-tax income for Ambac Assurance during 2009.

Cash and cash equivalents decreased by $439.2 million to $625.4 million in the fourth quarter. The balance sheet reflects tax receivables of $425.8 million, indicating the insurer didn't receive the benefit of cash reported as a refund in the third quarter.

Premium income fell 5% to $182.5 million, and losses rose 2.9% to $221.4 million in the quarter. Net underwriting losses totaled $141.7 million compared with a $290 million profit in the previous three months.

The surplus, as regards policyholders, dropped to $801.9 million from $855.6 million.

Cash flow was negative. The company recorded $636.9 million in negative operational cash flow in the fourth quarter. Net cash from investments was $175.9 million compared with $918.5 million in the third quarter.

Ambac Assurance's estimated impairment losses climbed 15% to $3.8 billion as of Dec. 31, driven by deterioration in its credit derivative portfolio. The increase includes an offset by the commutation of eight collateralized debt obligations, or CDOs, totaling $8.6 billion for a net cash payment by Ambac Assurance of $1.4 billion. Twenty additional CDO transactions were downgraded to junk during 2009.

Higher impairment losses indicate the company expects additional problems in residential mortgage-backed securities. Ambac incurred $125.3 million in subprime-related losses during 2009. It retained $5.9 billion of subprime residential mortgage-backed securities as of Dec. 31.

Ambac Assurance has $1.1 billion in loss reserves, a reduction of $22.3 million from 2008. The insurer suffered $1.4 billion in losses during 2009 that were attributable to residential mortgage-backed securities.

Ambac Assurance says it should be able to recover $1.9 billion against residential mortgage-backed securities claims. Most of the recoveries will occur during 2012, Ambac says.

Ambac Assurance guarantees CDOs for Ambac Credit Products with $43.3 billion outstanding, a reduction of $10.6 billion from 2008.

None of Ambac's credit-derivative transactions include ratings-based collateral-posting triggers or otherwise require Ambac to put up collateral. That's what caused significant problems for

American International Group

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as its credit rating dropped and collateral calls were made.

-- Reported by Gavin Magor in Jupiter, Fla.

Gavin Magor is the senior analyst responsible for assigning financial-strength ratings to insurance companies. He conducts industry analysis and supports consumer products. Magor has more than 22 years of international experience in operations and credit-risk management, commercial lending and analysis. His experience includes international assignments in Sweden, Mexico, Brazil and the U.S. He holds a master's degree in business administration from The Open University in the U.K.