Ambac Reports Lower Profit - Analyst Blog

Just after a day of filing for Chapter 11 bankruptcy, Ambac Financial Group Inc. (ABK) reported third-quarter 2010 earnings per share of 25 cents, a substantial decline from $7.58 per share reported in the prior-year period. Net income in the quarter was $76 million compared with $2.188 billion in third-quarter 2009.

Results in the quarter under review accounted for lower unrealized mark-to-market gains in the credit derivatives portfolio as well as lower loss and loss expenses.

Operating loss in the Financial Services segment narrowed to $77.4 million in the reported quarter from a loss of $213.7 million a year ago.

Net premiums earned in the quarter declined 40% year over year to $143.0 million from $238.4 million in the year-ago quarter.

Net investment income of $69.8 million declined 49% year over year from $137.6 million in the prior-year period. The decline resulted from a shrinkage in the asset base, lower average yield on the portfolio and decrease in interest income related to Ambac Assurance Corporation's insured residential mortgage-backed securities held in the financial guarantee investment portfolio.

Total net loss and loss expenses in the quarter were $165.4 million, a substantial decline of 64% from $459.2 million in third-quarter 2009. Losses and loss expenses largely issued from credit deterioration in certain student loan transactions, higher expense related to loss mitigation and remediation strategies of the residential mortgage-backed securities (RMBS) portfolio. However, higher remediation recoveries on certain RMBS transactions were a partial offset.

Financial Update

Cash and cash equivalents at the end of the quarter were $69.8 million, down from $149.5 million at the end of third-quarter 2009.

Long-term debt at third-quarter 2010 end was $1.8 billion, down from $2.8 billion at the end of third-quarter 2009.

The once-leading municipal bond insurer called trouble upon itself by insuring structured financial products that were tied to subprime mortgages and carried mammoth risks. Following the collapse of the U.S. housing market in 2008, these assets triggered huge claims, ultimately making the company incur severe losses.

During March 2010, the state of Wisconsin took control of some of Ambac Assurance Corporation's worst-hit assets worth $64 billion. Ambac feared failure to cover its operating expenses and debt service obligations after second-quarter 2011. The company had then stated that failure on its part to pay the due interest or principal will accelerate the maturity of outstanding debt, leading the company to raise new capital.

Ambac succumbed to the pre-packaged bankruptcy route as it failed to raise additional capital. It was also unable to come to terms with an ad hoc committee of certain senior debtholders to restructure its outstanding debt through a prepackaged bankruptcy proceeding.

On Monday, the company filed for bankruptcy protection under Chapter 11 Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York.