Ambac Blames Data-Entry Errors for Misstatements

Ambac acknowledged it misstated financial data for its bond-insurance unit, an error that helped it meet capital minimums in Wisconsin.
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(Updates to add today's share price.)



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Ambac Financial


acknowledged in a regulatory filing that it misstated financial results for its bond-insurance business, an error that enabled the company to meet capital requirements in Wisconsin.

Ambac Assurance

, the company's main operating unit, said data entry errors caused it to understate impairment charges for credit default swaps by $278.4 million in the second quarter. The disclosure was made in a filing on Wednesday to the state's Office of the Insurance Commissioner that detailed its third-quarter results.

The misstated impairment charges date back to at least June 2008. If the charges had been accurate,


would have failed to meet capital requirements in Wisconsin for the first and second quarters.

If the $278.4 million in cumulative charges had been factored into Ambac's second-quarter capital surplus, the company would have reported a capital deficit of $148.1 million. This means the company was undercapitalized by $262.7 million as of June 30.

As of March, those charges would have totaled $227.3 million. If they had been excluded from Ambac's first-quarter results, the company would have reported a $60 million capital surplus, falling short of the state's minimum of $114.5 million. Companies that fail to meet capital minimums must submit plans to raise capital.

Ambac shares have climbed more than 30% since Wednesday, when the company said in a separate regulatory filing it had tripled its capital surplus in the third quarter. However, the increase came from a fourth-quarter gain of $520 million from settling $5 billion in collateralized default obligations that was somehow included in its third-quarter financial statements. The stock today fell 0.9% to 99 cents.

The company's capital surplus would have been reported as $154.4 million, not $674.4 million, for the third quarter. That means the company exceeded the $125.2 million minimum by only $29.2 million, a close call for a company with $9 billion in investment assets.

Wisconsin Insurance Commissioner Sean Dilweg said in a statement on Wednesday that his office was "working constructively with the Ambac board and management to evaluate strategic alternatives." He declined to comment on how efforts to rectify the situation could affect Ambac customers, creditors and investors.

The department is seeking advice from the investment bank Jefferies & Co., said spokesman Jim Guidry. He declined to say whether Jeffries had offered any recommendations. Jeffries didn't respond to a request for comment by e-mail. Wisconsin has also hired the law firm Foley & Lardner.

Wisconsin state officials, including deputy insurance commissioner Kim Shaul, were in New York for meetings today. Guidry did not respond to a request to disclose the attendees or purpose of the meetings.

Ambac is depending on a $440 million tax rebate to increase its capital surplus for the fourth quarter. The company's cash flow from operations was negative by $580 million in the third quarter. If that trend continues, the $440 million won't be enough to steady the ailing company.

Ambac has been selling assets and investing in discounted bonds in a bid to shore up its finances. The company generated $918 million in cash from selling $1.6 billion of assets last quarter after additional investment purchases.

In the past year, Ambac Assurance has loaded up on junk bonds, including 13 from Countrywide with a par value of more of than $110 million at an average 50% discount and $70 million in GMAC Mortgage bonds at a 54% discount. Ambac is betting that their values will rise enough to offset its negative cash flow.

Reported by Gavin Magor in Jupiter, Fla.

Gavin Magor joined Ratings in 2008, and is the senior analyst responsible for assigning financial strength ratings to health insurers and supporting other health care-related consumer products, including Medicare supplement insurance, long-term care insurance and elder care information. He conducts industry analysis in these areas. He has more than 20 years' international experience in credit risk management, commercial lending and analysis, working in the U.K., Sweden, Mexico, Brazil and the U.S. He holds a master's degree in business administration from The Open University in the U.K.