Wednesday, February 25, 2009 0 comments

Ambac announces 4Q 2008 results

Not surprisingly, Ambac announced a massive loss for the 4th quarter (you can access the presentation here):

Ambac Financial Group, Inc. today announced fourth quarter 2008 net loss of $2,340.8 million, or a net loss of $8.14 on a per share basis. This compares to fourth quarter 2007 net loss of $3,273.9 million, or net loss of $32.03 on a per share basis. The fourth quarter 2008 results reflect ($594.4) million net change in fair value of credit derivatives.

...


Quarter Summary

  • The deferred tax asset valuation allowance amounts to $2,053.0 million at December 31, 2008, representing an increase of $1,534.0 million from September 30, 2008. Over the past 24 months, Ambac has recorded significant mark-to-market losses on its CDS portfolio and has incurred losses in its insured RMBS portfolio...

  • Net loss provisioning of $916.4 million was recorded for the quarter primarily relating to the RMBS insurance portfolio. The quarterly provision was offset by a benefit resulting from an increase in estimated recoveries from substantiated representation and warranty breaches in certain second-lien RMBS transactions.

  • Net change in fair value of credit derivatives amounted to ($594.4) million. However, estimated impairment losses in this portfolio did not change significantly. As previously announced on November 19, 2008, four CDO of ABS transactions with an aggregate of approximately $3.5 billion notional outstanding were settled with counterparties in exchange for a total cash payment by Ambac Assurance Corporation (AAC) of $1.0 billion.

  • As previously announced on November 6, 2008, Ambac received approval from the Wisconsin Office of the Commissioner of Insurance (OCI) to utilize the resources of AAC to resolve the ratings-driven liquidity gap in the financial services business and, as of this date, all collateral requirements of that business have been met




It's complicated to figure out the reality of the situation, given the multiple moving parts. If I'm reading it correctly, Ambac posted almost $916 million of actual losses. It's not surprising given the collapse in the economy in the last quarter but it's terrible news for Ambac. No sign of stabilization in anything--all this without potential future losses from auto loans and corporate loans in the future. Ambac is very close to being insolvent.

Management's focus seems to be to get its public finance bond insurer, called Everspan, up and running. Unlike MBIA, Everspan will be a subsidiary of Ambac Assurance (rather than the holding company.) This is not good news for shareholders but it may not matter as much in the end. I'm skeptical and have leaned towards a complete shut down and run-off the company, so I don't think it matters whose subsidiary Everspan ends up being.

I have extracted some useful slides from their 4Q 2008 Financial Highlights presentation below (all slides from Ambac and current as of February 25 2009.)

Cumulative Losses



It's dissapointing, although not surprising, to see the losses keep mounting. There is some work done in commuting some deals but one cannot count on them. We need to see losses stabilize and that hasn't happened. I have been completely wrong on expecting losses to stabilize (not surprising given how I was expecting a 20% decline in home prices and that will end up being optimistic--home prices look like they will drop between 35% and 40%.)

Current Insured Portfolio

Overall



Most of the insured portfolio is still investment grade but the BBB and BIG components, most of it in HELOC and CES, are a huge risk. Monolines insured with very thin margins and small changes wipes out everything.

Direct RMBS



I remember mentioning many months ago that Ambac will likely go bankrupt or survive based on the performance of HELOC and CES. As the economy worsens (although it's possible the economy will start improving, slowly, this year) greater losses are possible. The only minor positive, if any, is that most of the downgrades related to direct RMBS may have already occurred (the ratings shown are Ambac ratings but I suspect it'll be similar to rating agency ratings.)

CDO of ABS



This chart clearly shows how toxic the CDOs were. What strated off as being rated as AAA, AA and A (these are Ambac ratings but rating agency ratings will be similar) have completely dissapeared. Practically all the CDOs are BBB or Below-Investment-Grade right now. It's difficult to say how bad the losses will be since they are paid out over a long period of time (discounted value may not be as bad.)

CDO (excluding CDO of ABS)



The high ratings imply no problems so far. I wouldn't be concerned as much with corporate loans. Some are probably questionable but corporate balance sheets of non-financial firms in America are relatively strong.

Student Loan ABS



As Ambac says on the slide, almost half is backed by the government. The rest are questionable but manageable.

Auto Loan ABS



A lot of auto ABS are BBB but they were originally BBB as well. This, hopefully, means that Ambac priced them with a bigger margin with an expectation of some defaults. In contrast, many mortgage bonds were rated AAA and were priced as such, which obviously turned out to be a huge mistake. Autos also depreciate so we never had the situation of pricing the asset as if it would appreciate--a key problem with mortgage bonds.

Payment Schedule



The above chart outlines the payments that Ambac expects to make over the next 50 years or so. There are some large payments related to HELOC and CES that need to be made within 2 years but the rest will occur decades from now. (I haven't looked up why there is a negative payment in 2011.) As I have mentioned several times before, monoline bond insurers are special type of business that can become insolvent long before they are illiquid. These insurers can stay alive, paying out claims as they come due, for 50 years even though the company has gone bankrupt.

Adjusted Book Value



Ugly numbers but it all comes down to the degree of reversal in the mark-to-market losses.

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