Ambac very close to being seized by the regulator

Ambac warned of huge losses, before it hosts an earnings call on August 5th. MarketWatch reports:

Ambac Financial Group shares dropped 13% Tuesday after the bond insurer said it's likely to lose about $1.3 billion and will stop paying interest and dividends on some securities.

Additionally, the company said that its Ambac Assurance unit has asked regulators for permission to release a big chunk of rainy-day money known as contingency reserves. Without that, the unit would have negative statutory capital of more than $1 billion.

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Ambac said its Ambac Assurance unit expects to report estimated statutory impairment losses on credit derivatives jumped $1.6 billion to roughly $4.9 billion during the second quarter. The unit will also incur about $800 million in statutory loss and loss expenses in the period, the company added.

The increase in impairment losses were driven by problems with the guarantees that Ambac Assurance sold on CDOs that held asset-backed securities. One problem was that the underlying assets in the CDOs continued to deteriorate in the period, Ambac explained.

The $800 million in loss and loss expenses were mainly triggered by deteriorating second-lien and Alt-A mortgage-backed securities that Ambac Assurance guaranteed.

The impairments include two deals in which Ambac counterparties agreed to tear up CDO guarantees they bought from the insurer in return for $750 million in cash.

The impairment losses reduce Ambac's statutory capital and surplus, which comprises a cushion of extra assets that insurers have to keep for state regulatory purposes.

At the end of March, Ambac Assurance had $372.8 million in statutory capital and surplus. With the $1.6 billion in extra impairments from the second quarter, the unit would have negative statutory capital and surplus of more than $1 billion.

Ambac Assurance has appealed to Wisconsin State Insurance Commissioner Sean Dilweg to let it release a substantial part of its contingency reserves, which totaled $1.95 billion at the end of March. That would top off the unit's statutory capital and surplus.

Ambac noted that it can't say for sure whether the regulator will allow the release. A spokeswoman for Dilweg didn't immediately respond to a request for comment.

CreditSights' Di Carlo said Ambac Assurance will likely be granted regulatory approval to release contingency reserves. However, the analyst still expects capital levels to continue to deteriorate.

In related news, S&P cut Ambac Assurance deep into junk, from BBB to CC.

No hope, really. There was a remote chance of survival solely on the CDO losses but once HELOCs and Alt-As started posting huge losses, it was pretty much over... worst investment of my life. Oh well...