Ambac Narrows Loss, Lowers Debt - Analyst Blog

Ambac Financial Group Inc. (ABK) reported its second-quarter 2010 loss per share of 20 cents, a vast improvement from a loss of $8.24 per share reported in the prior-year period. Net loss in the quarter was $57.6 million compared with a net loss of $2.4 billion in second-quarter 2009.
 
Results in the quarter under review suffered as the bond issuer incurred loss and loss expenses in consumer asset-backed securities, other structured finance exposures and a transportation transaction, as well as a net operating loss in the Financial Services segment. However, a positive change in the fair value of credit derivatives was a partial offset.
 
Operating loss in the Financial Services segment in the quarter was $69.6 million, wider than the loss of $37.1 million in the prior-year quarter. Loss deteriorated further largely due to declining interest rates on the financial services derivatives portfolio, partially offset by lower termination losses on canceled swaps and valuation adjustments relating to Ambac’s credit risk.
 
Net premiums earned in the quarter declined 6% year over year to $167.0 million from $177.7 million in the year-ago quarter.
 
Net investment income of $69.0 million declined 45% year over year from $125.5 million in the prior-year period. The decline resulted from shrinkage in the asset base, lower average yield on the portfolio and decrease in interest income related to Ambac Assurance Corporation insured residential mortgage-backed securities held in the financial guarantee investment portfolio.
 
Total net loss and loss expenses in the quarter were $323.3 million, a substantial decline of 74% from $1,230.8 million in second-quarter 2009. Losses and loss expenses largely issued from credit deterioration in certain student loan transactions as well as the impact of using a lower average risk-free rate to discount losses.
 
Financial Update
 
Cash and cash equivalents at the end of the quarter were $56.7 million, down from $112.1 million at the end of fiscal 2009.
 
Long-term debt at second-quarter 2010 end was $1.8 billion, up from $1.6 billion at the end of first-quarter 2010 due to the issuance of $2.0 billion of surplus notes related to the collateralized debt obligations of asset backed securities commutation that have a carrying value of $200.1 million as of June 30, 2010. However, Ambac lowered its debt level by converting certain 9⅜% debentures due in August 2011 into equity.
 
Ambac issued approximately 13.6 million in common stock in exchange for $20.3 million in aggregate principal amount of its 9⅜% debentures and recognized a gain on the extinguishment of those debentures amounting to $10.7 million during the period.
 
Following the collapse of the U.S. housing market in 2008, Ambac has been enmeshed in difficulties. Ambac’s ability to generate new business remains affected. Also, in March 2010, the state of Wisconsin took control of some of Ambac Assurance Corporation’s worst-hit assets worth $64 billion. Ambac even fears bankruptcy if it fails to pull through its cash position and defaults on its debt. However, the company’s efforts to lower its debt level by converting them into equity will provide some cushion.
 
We remain “Neutral” on Ambac Financial.