Ambac Loss Wider than Expected

Ambac Financial Group’s (ABK - Analyst Report) third-quarter loss of $2.35 per share was wider than the Zacks Consensus Estimate of a loss of $1.22 per share. Last year, the company had reported a loss of $7.81 per share. Losses were driven by higher loss expenses in its Residential Mortgage Backed Securities (RMBS) insured portfolio.
 
Revenues came in at $2.7 billion, compared with negative revenues of $2.3 billion in the prior-year quarter. The improvement in revenues was brought about by $2.9 billion of unrealized gains in credit derivatives.
 
Net premiums earned in the quarter were $238.4 million, down 16% year over year. Normal net premiums amounted to $148.1 million and $155 million in the third quarters of 2009 and 2008, respectively.
 
Net investment income was $135 million, representing an increase of 6.3% from $127 million in the comparable period of 2008. The increase was primarily due to an increase in the average yield of the portfolio as the mix of securities has shifted from being primarily tax-exempt to a greater percentage of taxable securities. The impact from increasing yields was partially offset by an overall decrease in the asset base.

Other-than-temporary impairment losses in the financial guarantee investment portfolio amounted to $32.5 million, compared to a net loss of $2.5 million in the third quarter 2008.

Net realized investment gains in the financial guarantee investment portfolio amounted to $92.3 million in the quarter, up 78%, compared to $51.9 million in the year-ago quarter, driven by investment repositioning.
 
Though Ambac saw an improvement in loss and loss expenses for the quarter, going to $459.2 million from $607.7 million a year ago net claims paid totaled $315.1 million in the quarter from $189.2 million last year, with most of the payouts related to RMBS transactions.
 
Book value per share was a negative $9.83, compared with negative $13.17 at Dec 31, 2008. Total stockholders’ equity was a negative $2.2 billion, compared with a negative equity of $3.1 billion in the year earlier period.
 
Since the onset of housing crisis, Ambac has been hit by losses on its coverage of risky financial instruments such as mortgage-backed securities and has been working to reduce its exposure to such debt instruments. We are yet to see any significant positive turnaround in Ambac, neither do we expect any in the near future. While we expect a prolonged environment of uncertainty, we continue to recommend the shares as Neutral.