Ambac Financial Group, Inc. Announces Fourth Quarter 2011 Results

Date : 03/22/2012 @ 9:40PM
Source : Business Wire
Stock : Ambac Financial Group, Inc. (ABKFQ)
Quote : 0.0031  0.0 (0.00%) @ 12:00AM

Ambac Financial Group, Inc. Announces Fourth Quarter 2011 Results

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    



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