Stock Alert for Ambac Financial Group Inc. (ABK)
Ambac Financial Group Inc. (ABK) is primarily a holding company. The Company, through its subsidiaries, provides financial guarantees and financial services to clients in both the public and private sectors worldwide. ABK’s activities are divided into two business segments. The Financial Guarantee segment provides financial guarantees (including credit derivatives) for public finance, structured finance and other obligations. The Financial Services segment provides investment agreements, funding conduits, interest rate, total return and currency swaps, principally to clients of the financial guarantee business. During the year ended December 31, 2008, the Company discontinued writing new investment agreements and derivative products in its Financial Services segment. Its existing investment agreement and derivative product portfolios are in active runoff, which may include transaction terminations, settlements, restructuring, transfers and natural attrition as contracts mature.
Ambac Financial Group was founded in 1971 and is headquartered in New York, New York.
| Share Statistics (Aug-30-10) | FY
2007 |
FY
2008 |
%
Chg |
Q4 2008 | Q4 2009 | %
Chg |
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| Symbol | ABK | Revenue, $Mn | -4.22B | -2.75B | 34.8% | -202.2M | 566.9M | 380.4% |
| Current price | $0.50 | Gross marg. | n/a | n/a | n/a | n/a | n/a | n/a |
| 52wk Range: | $3.39-0.40 | Oper. margin | 120.1% | 199.9% | 66.4% | 0.6% | 20.5% | 3316% |
| Avg Vol (3m): | 17,553,600 | Net margin | 77.0% | 204.0% | 62.3% | 1.2% | 98.4% | 8100% |
| Market Cap. | 145.23M | |||||||
| Shares Outst. | 302.1M | EPS, $ | -31.56 | -22.31 | 29.3% | -8.14 | -1.93 | 76.3% |
Source: Reuters.com, SEC Filings.
Financial Summary
ABK recently announced a second quarter 2010 net loss of $57.6 million, or a net loss of $0.20 per share. This compares to a second quarter 2009 net loss of $2,368.8 million, or a net loss of $8.24 per share. The second quarter 2010 results reflect loss and loss expenses in consumer asset-backed securities, other structured finance exposures and a transportation transaction and a net operating loss in the financial services segment, partially offset by a positive change in fair value of credit derivatives. In 2009, ABK’s second-quarter results reflected significant loss and loss expenses related to the insured residential mortgage-backed securities (“RMBS”) portfolio, other-than-temporary impairment write downs of securities in its investment portfolios and an increase in its deferred tax asset valuation allowance.
Second-Quarter 2010 Summary
- Net loss and loss expenses incurred amounted to $323.3 million for the current quarter, down from $1,230.8 million in the second quarter of 2009.
- Net change in fair value of credit derivatives was positive $202.2 million in the current quarter, up from $1.0 million in the second quarter 2009.
- The financial services segment recorded a $69.6 million operating loss primarily related to interest rate movements in the derivative products business.
- Statutory surplus of Ambac Assurance Corp. (“AAC”) increased to approximately $1.5 billion at June 30, 2010, from $160.2 million at March 31, 2010, driven primarily by the CDO of ABS commutation settlement on June 7, 2010.
Net Premiums Earned
Net premiums earned for the second quarter of 2010 were $167.0 million, down 6% from $177.7 million earned in the second quarter of 2009. Net premiums earned include accelerated premiums, which result from calls, terminations and other accelerations recognized during the quarter. Accelerated premiums were $54.3 million in the second quarter of 2010, up 61% from $33.8 million in the second quarter 2009. Normal net premiums earned, which exclude accelerated premiums, were $112.7 million in the second quarter of 2010, down 22% from $143.9 million in the second quarter of 2009. Normal net premiums earned for the period have been negatively impacted by the lack of new business written and the high level of refunding and terminations over the past two and a half years, as well as non-recognition of premiums earned on VIEs that have been consolidated as a result of implementation of ASU 2009-17, effective January 1, 2010.
Net Investment Income
Net investment income for the second quarter of 2010 was $69.0 million, representing a decrease of 45% from $125.5 million in the second quarter of 2009. The decrease was primarily driven by three factors: (i) a decrease in the asset base as commutation settlements on CDO of ABS transactions (including the $2.8 billion payment in the current quarter) and claim payments on insured RMBS and other transactions over the past 12 months were greater than the cash inflows resulting from collections of financial guarantee premiums, fees, tax refunds and coupon receipts on invested assets over the same period; (ii) the average yield on the portfolio decreased as a result of maintaining a large portion of the portfolio in highly liquid short-term securities awaiting the finalization of the CDO of ABS commutation; and (iii) a reduction in interest income related to AAC-insured RMBS held in the financial guarantee investment portfolio that are subject to the payment moratorium ordered by the OCI in connection with the rehabilitation plan for the Segregated Account of AAC.
Other-Than-Temporary Impairment Losses
Other-than-temporary impairment (“OTTI”) losses in the financial guarantee investment portfolio were $7.5 million in the second quarter of 2010, compared to OTTI losses of $675.4 million in the second quarter of 2009. The second-quarter 2010 OTTI loss was driven primarily by impairment write downs on AAC-wrapped RMBS securities within its investment portfolio. The second-quarter 2009 OTTI impairment loss was driven by write-downs of certain RMBS securities rated below investment grade and tax exempt securities within the investment portfolio that management intended to sell in connection with its revised investment strategies.
Net Change in Fair Value of Credit Derivatives
The net change in fair value of credit derivatives, which comprises realized gains/(losses) and other settlements from credit derivatives and unrealized gains/(losses) on credit derivatives, was a gain of $202.2 million for the second quarter of 2010, compared to a gain of $1.0 million for the second quarter of 2009.
Realized losses and other settlements from credit derivative contracts represent the normal accretion into income of fees received for transactions executed in credit derivative format, offset by loss and settlement payments on such transactions. Net realized losses and other settlements from credit derivative contracts in the second quarter of 2010 and 2009 amounted to $2,777.3 million and $5.0 million, respectively. The net realized losses in the second quarter 2010 relate primarily to the counterparty settlement of the CDO of ABS portfolio that was announced on June 7, 2010. ABK paid in the aggregate, cash of $2.6 billion and $2.0 billion of newly issued surplus notes to several counterparties to settle the $16.4 billion of CDO of ABS exposure outstanding at that time. In addition, ABK settled other exposures for $186.5 million.
Net unrealized gains on credit derivative contracts in the second quarter of 2010 and 2009 amounted to $2,979.5 million and $6.0 million, respectively. The net unrealized gain during the second quarter of 2010 is primarily the result of reclassification of unrealized losses to realized losses resulting from the commutations referenced above. Additionally, the unrealized gains were impacted by the net decrease in mark-to-market liabilities of the remaining credit derivative portfolio due to higher valuation adjustments to reflect ABK’s own credit risk. Beginning in the second quarter 2010, the ABK credit valuation adjustment is internally estimated using relevant data points, including the final settlement value of AAC credit default swaps (determined through auction in June 2010) and quoted prices of securities guaranteed by AAC, which indicate the market’s view of the recovery rate on AAC’s insurance obligations.
Financial Guarantee Loss Reserves
Total net loss and loss expenses were $323.3 million in the second quarter of 2010, compared to $1,230.8 million in the second quarter of 2009. Losses and loss expenses in the second quarter of 2010 were primarily related to credit deterioration in certain student loan transactions and the impact of using a lower average risk-free rate to discount losses. Second quarter of 2009 loss and loss expenses were driven by continued deterioration in the RMBS portfolio.
Loss and loss adjustment expenses paid (on policies not allocated to the Segregated Account) during the second quarter 2010, net of recoveries from all policies (allocated and not allocated to the Segregated Account), amounted to a net recovery of $17.1 million. Total insurance claims presented for payment during the quarter but not paid as a result of the moratorium imposed in March 2010 by the OCI on all policies allocated to the Segregated Account amounted to $525.4 million, all related to RMBS policies. Total net claims paid in the second quarter of 2009 were $400.8 million, primarily related to second-lien RMBS transactions.
Loss and loss expense reserves for all RMBS insurance exposures as of June 30, 2010, were $2,689.7 million (including $655.5 million representing claims presented but not paid since March 24, 2010, due to the claims moratorium). RMBS reserves are net of $2,227.2 million of estimated net remediation recoveries. The estimate of net remediation recoveries related to material representation and warranty breaches increased from $2,069.2 million as of March 31, 2010, primarily as a result of breaches identified during the re-underwriting of additional transactions. ABK has initiated and may continue to initiate lawsuits seeking compliance with the repurchase obligations in the securitization documents with respect to sponsors who disregard their obligations to repurchase. Additionally, ABK is in the process of re-underwriting additional transactions that have drastically underperformed expectations and the forensic results of those transactions will be available over the next few quarters.
Financial Services
The financial services segment comprises the investment agreement business and the derivative products business. Gross interest income less gross interest expense and operating expenses from investment and payment agreements, plus operating results from the derivative products business was ($69.6) million for the second quarter of 2010, down from ($37.1) million for the second quarter of 2009. The decrease was primarily driven by the impact of declining interest rates on the financial services derivative portfolio during the second quarter of 2010, partially offset by lower termination losses on canceled swaps and valuation adjustments relating to ABK’s credit risk. Beginning in the second half of 2009, the financial services segment has been positioned to record gains in a rising interest rate environment in order to provide a hedge against certain exposures within the financial guarantee segment. The interest rate swap and investment agreement businesses are in run-off.
Balance Sheet and Liquidity
Total assets decreased by approximately $5.8 billion during the second quarter of 2010, from $35.8 billion at March 31, 2010, to $30.0 billion at June 30, 2010, primarily due to the cash outflow related to the commutation of the CDO of ABS portfolio and other exposures discussed above, and the reduction of VIE assets by approximately $2.6 billion, related primarily to commuted CDOs of ABS that had been consolidated in compliance with ASU 2009-17 in the previous quarter.
The fair value of the consolidated non-VIE investment portfolio decreased from $9.7 billion (amortized cost of $9.6 billion) as of March 31, 2010, to $6.6 billion (amortized cost of $6.3 billion) as of June 30, 2010. The decrease was primarily driven by the cash outflow related to the commutations of the CDO of ABS portfolio and other exposures, discussed above, partially offset by generally increased market values of securities in the financial guarantee investment portfolio.
The financial guarantee non-VIE investment portfolio had a fair value of $5.3 billion (amortized cost of $5.0 billion) as of June 30, 2010. The portfolio consists of high quality municipal bonds, corporate bonds, Treasuries, U.S. Agencies and Agency MBS as well as mortgage and asset-backed securities.
Long-term debt increased during the quarter from $1,633.4 million at March 31, 2010, to $1,815.0 million due to the issuance of $2.0 billion of surplus notes related to the CDO of ABS commutation which have a carrying value of $200.1 million at June 30, 2010. The surplus notes will accrete to face value over the 10-year life of the bonds. This increase was partially offset by decreases in ABK’s debt resulting from debt for equity exchanges transacted with certain holders of ABK’s 9⅜% debentures due in August 2011. During the second quarter 2010, ABK issued an aggregate of 13,638,482 shares of its 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.
Cash, short-term securities and bonds at the holding company amounted to $76.0 million as of June 30, 2010. ABK’s annual debt service costs amount to approximately $87.0 million. As a result of the recent actions taken by OCI (as discussed in the Company’s press release dated March 25, 2010, and in its 10-K filed with Securities Exchange Commission on April 9, 2010), management believes that it is highly unlikely that AAC will be able to make dividend payments to ABK for the foreseeable future.
| Financial Strength (Aug-30-2010) | Company | Industry | Sector | S&P 500 |
| Quick Ratio (MRQ) | – | 0.00 | 3.48 | 0.83 |
| Current Ratio (MRQ) | – | 0.00 | 3.83 | 0.97 |
| Long-Term Debt to Equity(MRQ) | – | 12.11 | 88.70 | 126.70 |
| Total Debt to Equity (MRQ) | – | 12.87 | 218.07 | 186.51 |
Source: Reuters.com, SEC Filings.
Analyst Consensus
This is the consensus forecast among one polled investment analysts. Against the Ambac Financial Group Inc company.
| Analyst Detail | Buy | Outperform | Hold | Underperform | Sell | No Opinion |
| Latest | 0 | 0 | 1 | 0 | 0 | 0 |
| 4 weeks ago | 0 | 0 | 1 | 1 | 0 | 0 |
| 2 months ago | 0 | 0 | 1 | 1 | 0 | 0 |
| 3 months ago | 0 | 0 | 1 | 1 | 0 | 0 |
| Last year | 0 | 0 | 2 | 1 | 0 | 0 |
Source: www.ft.com
No consensus analysis data available.
Source: http://www.reuters.com/finance/stocks/financialHighlights?symbol=ABK
Investment Highlights
ABK has withdrawn its plans for the sale of up to $1 billion worth of securities, as the late filing of its 10-K for fiscal 2009 annual report debarred it from issuing securities. ABK withdrew the S-3 registration statement filed on April 1, 2009. Earlier this month, the Company was also preparing for bankruptcy protection to restructure its outstanding debt. ABK also fears its inability to cover its operating expenses and debt service obligations after the second quarter of 2011.
The Company has been enmeshed in difficulties since the U.S. housing market collapsed in 2008. Previously, in November 2009, with the filing of the third-quarter 2009 10-Q, ABK had announced that it might file for bankruptcy protection if it fails to pull through its cash position.
Following the state of Wisconsin taking control of some of the Company’s $64 billion worst-hit assets in March 2010, ABK once again resounded the warning.
During the second quarter of 2010, ABK posted a loss of 20 cents a share. However, the loss incurred in the quarter saw a substantial improvement from the loss of $8.24 per share reported in the prior-year period. Nevertheless, the Company continues to suffer losses in consumer asset-backed securities, other structured finance exposures and poor performance at The Financial Services segment.
ABK is vigorously trying to lower its debt level. The Company has been swapping debt for equity. On June 8, ABK commuted $16.4 billion of exposure to collateralized debt obligations of asset-backed securities and $1.4 billion non-collateralized debt obligations of asset-backed securities. ABK also intends to convert certain other non-collateralized debt obligations of asset-backed securities exposures worth $1.5 billion.
On June 17, ABK exchanged $8.5 million in debt for 5 million shares of ABK common stock. Again, on June 30, the Company further converted another $11.8 million in debt to 8.6 million shares of ABK’s common stock.
Source: http://www.ambac.com/ , www.yahoo.com
Technical Analysis
Source: http://stockcharts.com
ABK is below its 13-day moving average. This bearish sign is even more significant because the moving average is also trending lower.
ABK’s recent volatility has been greater than normal. This is evidenced by the increased distance between the upper and lower Bollinger Bands. These bands measure volatility using standard deviation and a large width is due to high volatility. Additionally, ABK is trading within its Bollinger Bands. This is a normal condition and suggests that the stock is neither overbought nor oversold relative to the recent price action.
The MACD for ABK currently indicates a strong bearish signal for two reasons. First, the MACD is below the signal line, a 9-day moving average. Second, the MACD is below the critical level of zero, which implies that the underlying moving averages are trending lower.
Comparative Analysis
| Company Name | Ticker | Price per | Mrkt. Cap. | P/E | P/S | ||
| Aug-30-2010 | symbol | Share, $ | $ Mn | 2010 | 2011 | 2010 | 2011 |
| NYMAGIC Inc. | NYM | 25.53 | 216.99M | 5.35 | n/a | 1.00 | n/a |
| American Physicians Capital Inc. | ACAP | 41.18 | 384.58M | 11.04 | n/a | 2.63 | n/a |
| The PMI Group Inc. | PMI | 3.13 | 504.43M | n/a | n/a | 0.51 | n/a |
| Insurance Median | 368.66M | 8.19 | n/a | 1.38 | n/a | ||
| Ambac Financial Group Inc. | ABK | 0.50 | 145.23M | n/a | n/a | 0.04 | n/a |
Source: Thomson Financial
Insider Trading Activity
| NET SHARES PURCHASE ACTIVITY
Inside Purchases – Last 6 Months |
||
| Shares | Transaction | |
| Purchases | n/a | 0 |
| Sales | 101,197 | 5 |
| Net Shares Purchased (Sold) | (101,197) | 5 |
| Total Insider Shares Held | 15.19M | n/a |
| % Net Shares Purchased (Sold) | (0.7%) | n/a |
| Net Institutional Purchases — Prior Qtr to Latest Qtr | |
| Shares | |
| Net Shares Purchased (Sold) | (38,335,800) |
| % Change in Institutional Shares Held | (93.23%) |
Source: Yahoo Finance
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