Given the collapse of the credit markets, it isn't really surprising but it looks like Ambac's situation has deteriorated significantly (MBIA also reported but since I don't own it, I don't follow it closely.) Here is a news update from MarketWatch:
The company blamed the bigger loss on hits from credit derivatives, increased loss provisioning primarily related to second-lien residential mortgage-backed securities (RMBS) insurance transactions and market losses on RMBS within the financial services investment portfolio.
Its operating loss was $7.81 a share, against the 74 cents a share loss that analysts forecast by FactSet estimated.
I don't think analysts really follow Ambac closely anymore or know what is going on but talk about missing estimates by a magnitude of 10x. A risk for investors is the fact that analysts are still overly bullish with their estimates--and I'm not talking about Ambac. I haven't looked up the numbers but I suspect that there will be some wild misses in the commodities complex now than prices have plunged significantly.
I just quickly looked through the 3Q08 presentation and it looks like real impairment of at least $2.5 billion was booked. Talk about a terrible investment decision. I was investing in Ambac early in the year with the view total losses might amount to several billion, yet we have Ambac booking more than $2 billion in just one quarter.
The biggest risk right now is breaching statutory requirements. Ambac is still above regulator requirements from what I can gather but it is awfully close.
A sign that this is quickly heading towards zero, not that this hasn't been obvious, is book value. It has finally hit a negative value of -$2.97 per share, from +$6.76 per share last quarter. Adjusted book value is still positive, at +$7.18 per share. For reference, the share is trading around $2.51 right now. It should be noted that the market is pricing in a dire scenario. The stock, although off 25% today, is still way above the lows set in July. There is still the possibility of mark-to-market losses reversing and improving the potential return but the company needs to survive on its own.
A bet on Ambac was a bullish bet on housing and, unfortunately, that completely backfired. My feeling was that if housing declines 20%, the monolines would recover. Right now it looks like housing might drop further, possibly by 30% (I think they dropped around 40% during the Great Depression but that seems unlikely.) In fact, so many negative events have transpired that this decision looks mild. I mean, I never would have expected in my wildest nightmares that AIG's share price would be below Ambac's. Just about the only right thing was picking a monoline which cannot face a run on the bank.
Tags: Ambac (ABK)