Ambac Financial Group, Inc. (OTCQB: ABKFQ) (Ambac) today
announced a fourth quarter 2011 net loss of $963.2 million, or a
net loss of $3.18 per share. This compares to a fourth quarter 2010
net loss of $81.6 million, or a net loss of $0.27 per share.
Relative to fourth quarter 2010, fourth quarter 2011 results were
primarily driven by higher net loss and loss expenses, derivative
product losses, and higher losses on variable interest entities
(“VIE’s”).
As previously announced, on November 8, 2010, Ambac filed for a
voluntary petition for relief under Chapter 11 of the United States
Bankruptcy Code (“Bankruptcy Code”) in the United States Bankruptcy
Court for the Southern District of New York (“Bankruptcy Court”).
The Bankruptcy Court entered an order confirming Ambac’s plan of
reorganization on March 14, 2012. However, Ambac is not currently
able to estimate when it will be able to consummate such
reorganization. Until the plan of reorganization is consummated and
Ambac emerges from bankruptcy, Ambac will continue to operate in
the ordinary course of business as “debtor-in-possession” in
accordance with the applicable provisions of the Bankruptcy Code
and the orders of the Bankruptcy Court.
Fourth Quarter 2011
Summary
Relative to the fourth quarter of 2010,
- Net premiums earned increased $2.2
million to $112.8 million
- Net investment income increased $16.7
million to $92.0 million
- Net loss and loss expenses incurred
were up $662.2 million to $803.6 million
- Loss on VIEs increased $153.8 million
to $265.6 million
- Derivative product revenues declined
$121.4 million to a net loss of $20.5 million
As of December 31, 2011, unrestricted cash, short-term
securities and bonds at the holding company (Ambac) totaled $35.4
million, a decline of $10.9 million from September 30, 2011.
Financial Results
Net Premiums Earned
Net premiums earned for the fourth quarter of 2011 were $112.9
million, up 2% from $110.7 million earned in the fourth quarter of
2010. Net premiums earned include accelerated premiums, which
result from refundings, calls, and other accelerations recognized
during the quarter. Accelerated premiums were $30.2 million in the
fourth quarter of 2011, up 247% from $8.7 million in the fourth
quarter 2010. The increase in accelerated premiums was primarily
driven by a commutation of a portion of a large transportation
transaction during the quarter. Normal net premiums earned, which
exclude accelerated premiums, were $82.7 million in the fourth
quarter of 2011, down 19% from $102.0 million in the fourth quarter
of 2010. Normal net premiums earned for the period have been
negatively impacted by the lack of new business written and the
continued run-off of the insured portfolio.
Net Investment Income
For the combined financial guarantee and financial services
investment portfolios, net investment income for the fourth quarter
of 2011 was $92.0 million, an increase of 22% from $75.3 million
earned for the fourth quarter of 2010. The increase was primarily
attributable to a higher average portfolio yield and an increase in
the size of the long term invested asset base in the financial
guarantee investment portfolio. The higher average portfolio yield
was achieved through the ongoing re-allocation of financial
guarantee portfolio investments from tax exempt municipal
securities to taxable securities having higher pre-tax yields,
including Ambac Assurance (Ambac’s principal operating subsidiary)
guaranteed securities, versus the same period in 2010.
Financial Guarantee Loss Reserves
Loss and loss expenses for the fourth quarter of 2011 were
$803.6 million as compared to $141.5 million for the three month
period ending December 31, 2010. Losses for the three months ended
December 31, 2011 were driven by higher estimated losses in
the first-lien RMBS and student loan portfolios, partially offset
by a decrease in estimated losses for the second-lien RMBS and
transportation portfolios and higher projected recoveries under
representation and warranty breaches for certain RMBS
transactions.
Loss and loss expenses paid, including commutations, net of
recoveries from all policies, amounted to $230.3 million during the
fourth quarter 2011 versus a $9.6 million net recovery for the same
period in 2010. The amount of actual claims paid during each period
was impacted by the payment moratorium imposed on March 24, 2010 by
the court overseeing the rehabilitation of the segregated account
established under Wisconsin law to which Ambac Assurance allocated
certain liabilities (the “Segregated Account”). Claims presented to
Ambac Assurance and unpaid during the fourth quarter of 2011
amounted to $317.4 million versus $327.6 million during the same
period in 2010. Since the establishment of the Segregated Account
in March 2010, a total of $2,768.6 million of claims have been
presented to Ambac Assurance and remain unpaid due to the
moratorium.
Loss reserves (gross of reinsurance and net of subrogation
recoveries) for all RMBS insurance exposures as of December 31,
2011 were $4,455.0 million, including $2,760.6 million relating to
claims on RMBS exposures that have been presented since March 24,
2010, and unpaid as a result of the claims moratorium. RMBS
reserves as of December 31, 2011 are net of $2,720.2 million of
estimated remediation recoveries. The estimate of remediation
recoveries related to material representation and warranty breaches
is up 4.7% from $2,598.3 million reported as of September 30, 2011.
Ambac has initiated and will continue to initiate lawsuits and
other methods to achieve compliance with the repurchase obligations
in the securitization documents with respect to sponsors who
disregard their obligations to repurchase.
Loss on Variable Interest Entities
Loss on variable interest entities for the three months ended
December 31, 2011 was $265.6 million compared to a loss of
$111.8 million for the three month period ending December 31, 2010.
The loss on variable interest entities reflects the net impact of
consolidating and deconsolidating VIEs combined with the financial
results of the VIEs during the period after consolidation. Losses
in both quarters were primarily the result of deconsolidating
certain transactions during those periods. The losses reflect the
impact of re-establishing loss reserves and other financial
guarantee insurance accounts which were eliminated while the VIEs
were consolidated.
Derivative Products
The derivative products business is currently in run-off. It has
been positioned to record gains in a rising interest rate
environment in order to provide a hedge against the impact of
rising rates on certain exposures within the financial guarantee
insurance portfolio. For the current quarter, the derivatives
product business produced a net loss of $20.5 million compared to
net income of $101.0 million for the fourth quarter of 2010.
Results for the fourth quarter of 2011 reflect the impact of mark
to market losses in the derivative products portfolio arising from
declining interest rates, whereas results for the fourth quarter of
2010 benefitted from rising interest rates during the period.
Underwriting and Operating Expenses
Underwriting and operating expenses declined in the fourth
quarter of 2011 to $35.4 million from $55.3 million during the
fourth quarter of 2010. The decline in underwriting and operating
expenses is primarily related to lower compensation, premises,
consulting and legal expenses.
Interest Expense
Interest Expense declined in the fourth quarter of 2011 to $33.1
million from $43.6 million in the fourth quarter of 2010. This
decline was attributable to lower interest expense on Ambac’s
corporate debt as it ceased to accrue interest on such debt
following its bankruptcy filing on November 8, 2010, partially
offset by higher accrued interest on Surplus Notes at Ambac
Assurance.
Reorganization Items, Net
For purposes of presenting an entity’s financial evolution
during a Chapter 11 reorganization, the financial statements for
periods including and after filing the Chapter 11 petition
distinguish transactions and events that are directly associated
with the reorganization from the ongoing operations of the
business. Reorganization items in the fourth quarter of 2011
totaled $10.1 million and were primarily related to professional
advisory fees. Reorganization items during the fourth quarter of
2010 were $32.0 million and were higher primarily as a result of
debt valuation adjustments done during the period.
Balance Sheet and
Liquidity
Total assets decreased during the fourth quarter of 2011 to
$27.1 billion from $27.6 billion at September 30, 2011, primarily
due to declines in the balance of VIE assets, premium receivables,
and the value of the investment portfolio.
During the fourth quarter of 2011, the amount of VIE assets fell
by $140.6 million to $16.5 billion from $16.7 billion and non-VIE
premium receivables declined $74.7 million to $2.0 billion from
$2.1 billion. The fair value of the consolidated non-VIE investment
portfolio fell by $186.2 million to $6.9 billion (amortized cost of
$6.4 billion) as of December 31, 2011 from $7.1 billion (amortized
cost of $6.6 billion) as of September 30, 2011.
The financial guarantee non-VIE investment portfolio balance had
a fair value of $6.0 billion (amortized cost of $5.6 billion) as of
December 31, 2011, down $128.9 million from $6.2 billion (amortized
cost of $5.7 billion) at September 30, 2011. The portfolio consists
of primarily high quality municipal and corporate bonds, asset
backed securities, U.S. Agencies, Agency MBS, as well as non-agency
MBS, including Ambac Assurance guaranteed RMBS.
Liabilities subject to compromise totaled approximately $1.7
billion at December 31, 2011. As required by ASC Topic 852, the
amount of liabilities subject to compromise represents Ambac’s
estimate at December 31, 2011, of known or potential pre-petition
claims to be addressed in connection with the Chapter 11
reorganization. As of December 31, 2011, liabilities subject to
compromise consist of the following:
Accrued interest payable
$68,123
Other
17,109
Senior unsecured notes
1,222,189
Directly-issued Subordinated capital
securities
400,000
Consolidated liabilities subject to compromise $1,707.421
Overview of Ambac Assurance Statutory
Results
As of December 31, 2011, Ambac Assurance reported statutory
capital and surplus of $495.3 million, up from $273.1 million as of
September 30, 2011. Ambac Assurance’s statutory financial
statements include the combined results of Ambac Assurance’s
general account and the Segregated Account (formed on March 24,
2010). Statutory capital and surplus at December 31, 2011, were
positively impacted by the release of $430.3 million of Ambac
Assurance’s contingency reserves, offset by a quarterly statutory
net loss of $182.6 million.
Ambac Assurance’s claims-paying resources amount to
approximately $6.4 billion as of December 31, 2011, down $0.2
billion from $6.6 billion at September 30, 2011. This excludes
Ambac Assurance UK Limited’s claims-paying resources of
approximately $1.1 billion. The decline in claims paying resources
was primarily attributable to net claims paid during the
quarter.
Additional information regarding Ambac’s 2011 financial results,
including its Annual Report on Form 10-K for the year ended
December 31, 2011, can be found on Ambac’s website at www.ambac.com
under the Investor Relations tab.
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) a plan of reorganization will not be
consummated; (2) if Ambac is not successful in consummating a
plan of reorganization under Chapter 11, it is likely it would have
to liquidate pursuant to Chapter 7; (3) the impact of the
bankruptcy proceeding on the holders of Ambac securities; (4) our
dispute with the United States Internal Revenue Service may not be
satisfactorily resolved; (5) the unlikely ability of Ambac
Assurance to pay dividends to Ambac in the foreseeable future;
(6) adverse events arising from the Segregated Account
Rehabilitation Proceedings, including the failure of the
injunctions issued by the Wisconsin rehabilitation court to protect
the Segregated Account and Ambac Assurance from certain adverse
actions; (7) litigation arising from the Segregated Account
Rehabilitation Proceedings; (8) decisions made by the
rehabilitator for the benefit of policyholders may result in
material adverse consequences for Ambac’s securityholders;
(9) potential of a full rehabilitation proceeding against
Ambac Assurance or material changes to the Segregated Account plan
of rehabilitation, with resulting adverse impacts;
(10) inadequacy of reserves established for losses and loss
expenses, including our inability to realize the remediation
recoveries or future commutations included in our reserves;
(11) adverse developments in our portfolio of insured public
finance credits; (12) market risks impacting 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; (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 collateralized loan
obligations (“CLOs”) and other derivative products insured or
issued by Ambac or its subsidiaries; (16) Ambac’s financial
position and the Segregated Account Rehabilitation Proceedings may
prompt departures of key employees and may impact our ability to
attract qualified executives and employees; (17) 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; (18) credit risk
throughout our business, including credit risk related to
residential mortgage-backed securities, CLOs, public finance
obligations and exposures to reinsurers; (19) default by one
or more of Ambac Assurance’s portfolio investments, insured
issuers, counterparties or reinsurers; (20) 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; (21) factors that may influence the amount
of installment premiums paid to Ambac, including the continuation
of the payment moratorium with respect to claims payments as a
result of Segregated Account Rehabilitation Proceedings;
(22) changes in prevailing interest rates; (23) 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; (24) changes in accounting principles or practices that
may impact Ambac’s reported financial results;
(25) legislative and regulatory developments;
(26) operational risks, including with respect to internal
processes, risk models, systems and employees; (27) changes in
tax laws, tax disputes and other tax-related risks; (28) other
risks and uncertainties that have not been identified at this time,
and (29) the risks 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, 2011 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. 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 December 31, 2011 and
December 31, 2010 (Dollars in Thousands Except Share
Data)
December 31, 2011
December 31, 2010
Assets
Investments: Fixed income securities, at fair
value (amortized cost of $5,346,897 2011 and $5,424,957 in
2010) $ 5,830,289 $ 5,738,125
Fixed income securities pledged as collateral, at fair value
(amortized cost of $261,958 in 2011 and $120,918 in 2010)
263,530 123,519 Short-term investments (amortized
of $783,015 in 2011 and $991,567 in 2010) 783,071
991,567 Other, at cost (approximates fair value)
100 100 Total
investments 6,876,990 6,853,311
Cash 15,999 9,497 Restricted cash and cash
equivalents 2,500 2,500 Receivable for
securities 38,164 23,505 Investment income due
and accrued 45,328 45,066 Premium
receivables 2,028,479 2,422,596 Reinsurance
recoverable on paid and unpaid losses 159,902
136,986 Deferred ceded premium 221,303
264,858 Subrogation recoverable 659,810
714,270 Deferred acquisition costs 223,510
250,649 Loans 18,996 20,167
Derivative assets 175,207 290,299 Other
assets 104,300 82,579 Variable interest entity
assets: Fixed income securities, at fair value
2,199,338 1,904,361 Restricted cash and cash
equivalents 2,140 2,098 Investment income due
and accrued 4,032 4,065 Loans
14,329,515 16,005,066 Derivative assets
- 4,511 Other assets 8,182
10,729 Total assets $
27,113,695 $ 29,047,113
Liabilities and
Stockholders' Deficit
Liabilities: Liabilities subject to compromise
$ 1,707,421 $ 1,695,231 Unearned
premiums 3,457,157 4,007,886 Loss and loss
expense reserve 7,044,070 5,288,655 Ceded
premiums payable 115,555 141,450 Obligations
under investment agreements 523,046 767,982
Obligations under investment repurchase agreements
23,500 37,650 Current taxes 95,709
22,534 Long-term debt 223,601 208,260
Accrued interest payable 170,169 61,708
Derivative liabilities 414,508 348,791
Other liabilities 107,441 124,748 Payable
for securities purchased 1,665 - Variable
interest entity liabilities: Accrued interest payable
3,490 3,425 Long-term debt 14,288,540
16,101,026 Derivative liabilities 2,087,052
1,580,120 Other liabilities 304
11,875 Total liabilities
30,263,228 30,401,341
Stockholders' deficit: Ambac Financial Group, Inc.:
Preferred stock - - Common stock
3,080 3,080 Additional paid-in capital
2,172,027 2,187,485 Accumulated other
comprehensive income 463,259 291,774
Accumulated deficit (6,039,922 )
(4,042,335 ) Common stock held in treasury at
cost (411,419 ) (448,540
) Total Ambac Financial Group, Inc. stockholders'
deficit (3,812,975 ) (2,008,536 )
Non-controlling interest 663,442
654,308 Total stockholders' deficit
(3,149,533 ) (1,354,228 )
Total liabilities and stockholders' deficit $
27,113,695 $ 29,047,113
Number of shares outstanding (net of treasury shares)
302,428,811 302,123,710
Ambac Financial Group, Inc. and Subsidiaries
Consolidated Statements of Operations For the Three
Months and Years Ended December 31, 2011 and 2010 (Dollars
in Thousands Except Share Data)
Three Months Ended Years Ended December
31, December 31, 2011 2010
2011 2010 Revenues:
Net premiums earned $ 112,845 $
110,654 $ 405,970 $ 545,975
Net investment income 91,988 75,269
354,790 358,563 Other-than-temporary impairment
losses: Total other-than-temporary impairment losses
(51,179 ) (12,398 ) (90,356
) (65,183 ) Portion of loss recognized in
other comprehensive income 17,514
1,094 26,513 5,380
Net other-than temporary impairment losses recognized in
earnings (33,665 ) (11,304
) (63,843 ) (59,803
) Net realized investment gains 12,341
6,100 20,466 159,451 Change in fair
value of credit derivatives: Realized gains (losses) and
other settlements 3,625 4,885 17,001
(2,757,624 ) Unrealized gains
24,518 10,844
31,031 2,817,807 Net change
in fair value of credit derivatives 28,143 15,729
48,032 60,183 Derivative product revenues
(20,456 ) 100,987 (280,818 )
(106,565 ) Net mark-to-market losses on
non-trading derivatives - - -
(14,295 ) Other (loss) income
(7,023 ) 5,328 25,535 107,314
Loss on variable interest entities (265,604
) (111,815 ) (214,368
) (616,688 ) Total
revenues (81,431 ) 190,948
295,764 434,135
Expenses: Loss and loss expenses
803,648 141,488 1,859,455 719,362
Underwriting and operating expenses 35,445
55,339 141,305 254,465 Interest expense
33,088 43,575
128,092 181,329 Total
expenses before reorganization items 872,181
240,402 2,128,852
1,155,156 Pre-tax loss from
continuing operations before reorganization items
(953,612 ) (49,454 ) (1,833,088
) (721,021 ) Reorganization items,
net 10,067 31,980
49,861 31,980
Pre-tax loss from continuing operations (963,679
) (81,434 ) (1,882,949 )
(753,001 ) (Benefit) provision for income
taxes (481 ) 85
77,422 135 Net
loss (963,198 ) (81,519 )
(1,960,371 ) (753,136 ) Less:
net income attributable to noncontrolling interest
15 76 60
63 Net loss attributable to Ambac
Financial Group, Inc. ($963,213 )
($81,595 ) ($1,960,431 )
($753,199 ) Net loss per share
attributable to Ambac Financial Group, Inc. common
shareholders ($3.18 ) ($0.27
) ($6.48 ) ($2.56
) Net loss per diluted share attributable to Ambac
Financial Group, Inc. common shareholders
($3.18 ) ($0.27 )
($6.48 ) ($2.56 )
Weighted average number of common shares outstanding:
Basic 302,467,253
302,191,620 302,439,299
294,423,698 Diluted
302,467,253 302,191,620
302,439,299 294,423,698