Ambac Financial Group, Inc. Announces Third Quarter 2012 Results

  Ambac Financial Group, Inc. Announces Third Quarter 2012 Results

Business Wire

NEW YORK -- November 14, 2012

Ambac Financial Group, Inc. (“Ambac”) today announced a third quarter 2012 net
profit of $157.5 million, or a net profit of $0.52 per share. This compares to
a third quarter 2011 net loss of $75.5 million, or a net loss of $0.25 per
share. Relative to third quarter 2011, third quarter 2012 results were
primarily driven by lower derivative product losses, a positive net change in
the fair value of credit derivatives, a lower provision for income taxes, and
lower operating and interest expenses, partially offset by lower income on
variable interest entities (“VIE”) and higher loss and loss expenses.

Third Quarter 2012 Summary

Relative to the third quarter of 2011,

  *Net premiums earned increased $11.1 million to $113.1 million
  *Net investment income declined $6.6 million to $84.1 million
  *Net change in the fair value of credit derivatives increased $22.9 million
    to a gain of $27.4 million
  *Derivative product losses decreased $179.8 million to $36.0 million
  *Income on VIEs decreased $48.9 million to $6.1 million
  *Loss and loss expenses increased $41.5 million to a net benefit of $18.7
    million
  *Income tax expense decreased $74.3 million to $0.7 million
  *Operating and interest expenses decreased $21.3 million to $56.6 million

As of September 30, 2012, unrestricted cash, short-term securities and bonds
at Ambac, the holding company, totaled $31.5 million, a decline of $2.4
million from June 30, 2012.

Financial Results

Net Premiums Earned

Net premiums earned for the third quarter of 2012 were $113.1 million, up 11%
from $102.0 million earned in the third quarter of 2011. Net premiums earned
include accelerated premiums, resulting from refundings, calls, and other
policy accelerations recognized during the quarter. Accelerated premiums were
$34.4 million in the third quarter of 2012, up 83% from $18.8 million in the
third quarter of 2011. The increase in accelerated premiums was primarily
driven by an increase in the overall volume of bond calls within the public
finance market due to low interest rates, and refinancings by healthcare
providers, partially offset by negative accelerations resulting from the
maturity and early termination of certain structured finance policies, during
the period. Normal net premiums earned, which exclude accelerated premiums,
were $78.7 million in the third quarter of 2012, down 5% from $83.2 million in
the third quarter of 2011. The decline in normal net premiums earned was
primarily due to the continued run-off of the insured portfolio as a result of
transaction terminations, refundings, and scheduled maturities.

Net Investment Income

For the combined financial guarantee, financial services, and corporate
investment portfolios, net investment income for the third quarter of 2012 was
$84.1 million, a decrease of 7% from $90.7 million earned in the third quarter
of 2011. Financial Guarantee net investment income fell less than 1% to $81.0
million from $81.6 million due to the shift in portfolio holdings toward
short-term securities in anticipation of the commencement of the partial
payment of claims allocated to the Segregated Account of Ambac Assurance
Corporation (the “Segregated Account”), partially offset by the impact of a
greater percentage of long-term holdings in higher yielding securities insured
by Ambac Assurance Corporation (“Ambac Assurance”). The size of the Financial
Guarantee long-term asset portfolio has declined by approximately $269 million
since September30, 2011, as continuing collection of installment paying
financial guarantee premiums and coupon receipts on invested assets were
offset by the resumption of partial claim payments on Segregated Account
policies, commutation payments, and the repurchase of surplus notes in the
second quarter of 2012.

Financial Services investment income for the three months ended September 30,
2012 was $3.0 million compared to $9.0 million for the third quarter of 2011.
The decline in Financial Services investment income was driven primarily by
sales of securities to fund the repayment of intercompany loans and investment
agreements as investment agreement obligations were reduced to $416 million at
September30, 2012, from $590 million at September30, 2011.

Net Change in Fair Value of Credit Derivatives

The net change in fair value of credit derivatives was a gain of $27.4 million
for the three months ended September30, 2012, compared to a gain of $4.5
million for the three months ended September30, 2011. The gain for the three
month period ended September30, 2012, resulted from improvement in reference
obligation prices, gains associated with the runoff of the portfolio and
credit derivative (“CDS”) fees earned. The gain for the three month period
ended September30, 2011, resulted primarily from CDS fees earned and the
reversal of unrealized losses associated with terminations, partially offset
by declines in certain reference obligation prices particularly related to
student loan securitizations. There was no change to the Ambac Assurance
credit valuation adjustment during the periods.

Derivative Products

For the third quarter of 2012, the derivative products business produced a net
loss of $36.0 million compared to a net loss of $215.8 million for the third
quarter of 2011. The net loss for the three months ended September 30, 2012
was primarily driven by realized losses relating to the negotiated termination
of a derivatives contract. The derivative products portfolio has been
positioned to record gains in a rising interest rate environment in order to
provide a hedge against the impact of rising rates on certain exposures within
the financial guarantee insurance portfolio. Interest rate movements did not
have a significant impact on results for the third quarter of 2012, while
derivative product losses incurred during the third quarter of 2011 were
primarilythe result of mark-to-market movements in the portfolio caused by
declining interest rates during the period.

Income on Variable Interest Entities

Income on variable interest entities for the three months ended September 30,
2012 was $6.1 million compared to $55.0 million for the three month period
ending September 30, 2011. For the third quarter of 2012, the gain was the
result of positive changes in the fair value of net assets of consolidated
VIEs during the period. Results for the three months ended September 30, 2011
were driven by a $53.1 million net gain on one VIE. Adverse performance in the
business underlying this VIE during the period was reflected through a
decrease in the fair value of the VIE’s liabilities, partially offset by an
impairment charge against its intangible assets.

Financial Guarantee Loss Reserves

Loss and loss expenses for the three months ended September30, 2012 were a
net benefit of $18.7 million compared to a net benefit of $60.2 million for
the three months ended September30, 2011. Losses for the three months ended
September 30, 2012 were driven by lower estimated losses for first lien and
second lien residential mortgage backed securities (“RMBS”), partially offset
by an increase in estimated losses for certain student loan transactions and
asset-backed transactions.

The amount of actual claims paid during the period was impacted by the claims
payment moratorium imposed on March 24, 2010 as part of the Segregated Account
rehabilitation proceedings. On September 20, 2012, in accordance with certain
rules published by the rehabilitator of the Segregated Account (the “Policy
Claim Rules”), the Segregated Account commenced paying 25% of each permitted
policy claim that arose since the commencement of the claims payment
moratorium. Claims permitted in accordance with the Policy Claim Rules in
September 2012 were $2.7 billion, including $2.6 billion of claims related to
the moratorium period. Loss and loss expenses paid, including commutations,
net of recoveries and reinsurance from all policies, amounted to $644.6
million during the third quarter of 2012. At September 30, 2012, a total of
$3.4 billion of presented claims remain unpaid because of the Segregated
Account rehabilitation proceedings and related court orders.

Loss reserves (gross of reinsurance and net of subrogation recoveries) for all
RMBS insurance exposures as of September 30, 2012, were $3.9 billion,
including unpaid claims. RMBS reserves as of September 30, 2012, are net of
$2.7 billion of estimated representation and warranty breach remediation
recoveries, down 3% from $2.8 billion reported as of June 30, 2012. Ambac
Assurance is pursuing remedies and enforcing its rights, through lawsuits and
other methods, to seek redress for breaches of representations and warranties
and fraud related to the information provided by both the underwriters and
sponsors of various RMBS transactions and for failure to comply with the
obligation by the sponsors to repurchase ineligible loans.

Provision for Income Taxes

Income tax expense was $0.7 million for the three months ended September 30,
2012, compared to $75.0 million for the three months ended September 30, 2011.
Income tax expense in the third quarter of 2011 related predominantly to the
accrual of additional Federal income tax expense to bring the overall reserve
for income taxes in line with Ambac’s intent to consummate the IRS settlement.

Expenses

Underwriting and operating expenses for the three months ended September30,
2012 were $33.3 million, as compared to $44.9 million for the three months
ended September30, 2011. The decrease in underwriting and operating expenses
for the three months ended September30, 2012 was primarily due to lower
amortization of deferred acquisition costs, consulting costs, legal fees,
premium taxes, and compensation costs. Interest expense for the combined
Financial Guarantee and Financial Services sectors was $23.3 million during
the third quarter of 2012 versus $33.1 million in the third quarter of 2011.
The decrease in interest expense during the third quarter of 2012 was
primarily attributable to the lower par amount of surplus notes and investment
agreement liabilities outstanding during the period.

Reorganization Items, Net

For purposes of presenting an entity’s financial evolution during a Chapter 11
reorganization, the financial statements for periods including and after
filing the Chapter 11 petition distinguish transactions and events that are
directly associated with the reorganization from the ongoing operations of the
business. Reorganization items during the three months ended September30,
2012 were $1.3 million as compared to $8.5 million for the three months ending
September30, 2011. The decrease was due to lower professional fees incurred
following the confirmation of the bankruptcy plan of reorganization in March
2012.

Balance Sheet and Liquidity

Total assets increased during the third quarter of 2012 to $26.9 billion from
$26.6 billion at June 30, 2012. The increase in total assets was primarily due
to an increase in VIE assets to $17.4 billion from $16.6 billion, partially
offset by a decline in the consolidated non-VIE investment portfolio to $6.4
billion from $6.7 billion.

During the third quarter of 2012, the fair value of the financial guarantee
non-VIE investment portfolio fell by $227 million to $5.8 billion (amortized
cost of $5.3 billion) as of September 30, 2012. The decrease reflects the use
of assets to fund the partial payment of Segregated Account policy claims
beginning September 20, 2012, partially offset by improved valuations. The
portfolio consists primarily of high quality municipal and corporate bonds,
asset backed securities, U.S. Treasuries, Agency RMBS, as well as non-agency
RMBS, including Ambac Assurance guaranteed RMBS. The fair value of the
financial services investment portfolio declined $18 million to $569 million
during the third quarter.

Liabilities subject to compromise totaled approximately $1.7 billion at
September 30, 2012. The amount of liabilities subject to compromise represents
Ambac’s estimate of known or potential pre-petition claims to be addressed in
connection with the Chapter 11 reorganization. As of September 30, 2012,
liabilities subject to compromise consist of the following (in thousands):

     Debt obligations and accrued interest payable     $1,690,312
          Other                                                17,096
          Consolidated liabilities subject to compromise       $1,707.408


Overview of Ambac Assurance Statutory Results

During the third quarter of 2012, Ambac Assurance generated statutory net
income of $143.1 million. Third quarter 2012 results were primarily driven by
(i) premiums earned of $122.6 million, and (ii) net investment income of
$102.4 million, partially offset by net losses and loss expenses of $60.4
million. As of September 30, 2012, Ambac Assurance reported policyholder
surplus of $100.0 million, unchanged from June 30, 2012. Pursuant to a
prescribed accounting practice, the results of the Segregated Account are not
included in Ambac Assurance’s financial statements if Ambac Assurance’s
surplus is (or would be) less than $100.0 million. As of September 30, 2012,
Ambac Assurance’s General Account did not assume $296.0 million of the
Segregated Account insurance liabilities under the Segregated Account
reinsurance agreement, down from $436.3 million as of June 30, 2012. The
Segregated Account reported statutory policyholder surplus of ($193.7) million
as of September 30, 2012, up from ($333.2) million as of June 30, 2012.

Ambac Assurance’s claims-paying resources amounted to approximately $5.6
billion as of September 30, 2012, down approximately $600 million from $6.2
billion at June 30, 2012. This excludes Ambac Assurance UK Limited’s
claims-paying resources of approximately $1.1 billion. The decrease in claims
paying resources was primarily attributable to the commencement by the
Segregated Account of 25% partial payments on permitted policy claims that
arose since the commencement of the Segregated Account rehabilitation
proceedings.

About Ambac

Ambac filed for a voluntary petition for relief under Chapter 11 of the United
States Bankruptcy Code (“Bankruptcy Code”) in the United States Bankruptcy
Court for the Southern District of New York (“Bankruptcy Court”) on November
8, 2010. The Bankruptcy Court entered an order confirming Ambac’s plan of
reorganization on March 14, 2012. However, Ambac is not currently able to
estimate when it will be able to consummate such plan. Until the plan of
reorganization is consummated and Ambac emerges from bankruptcy, Ambac will
continue to operate in the ordinary course of business as
“debtor-in-possession” in accordance with the applicable provisions of the
Bankruptcy Code and the orders of the Bankruptcy Court. Currently, Ambac’s
common stock trades in the over-the-counter market under ticker symbol ABKFQ.
Upon consummation of the plan of reorganization, Ambac’s existing common stock
will be cancelled and extinguished and the holders thereof will not be
entitled to receive, and will not retain, any property or interest on account
of such common stock.

Additional information regarding Ambac’s third quarter 2012 financial results,
including its quarterly report on Form 10-Q for the quarter ended September
30, 2012, can be found on Ambac’s website at www.ambac.com under the Investor
Relations tab.

Forward-Looking Statements

This release includes statements that may constitute “forward-looking
statements” within the meaning of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Any or all of management’s
forward-looking statements here or in other publications may turn out to be
incorrect and are based on Ambac management’s current belief or opinions.
Ambac’s actual results may vary materially, and there are no guarantees about
the performance of Ambac’s securities. Among events, risks, uncertainties or
factors that could cause actual results to differ materially are: (1)failure
to consummatea plan of reorganization under Chapter 11, which may lead to the
commencement of liquidation proceedings pursuant to Chapter 7; (2)the impact
of the bankruptcy proceeding on the holders of Ambac securities; (3)failure
to satisfactorily resolve our dispute with the United States Internal Revenue
Service; (4)the unlikelihood that Ambac Assurance Corporation (“Ambac
Assurance”) will pay dividends to Ambac in the foreseeable future; (5)adverse
events arising from the Segregated Account Rehabilitation Proceedings,
including the failure of the injunctions issued by the Wisconsin
Rehabilitation Court to protect the Segregated Account and Ambac Assurance
from certain adverse actions; (6)litigation arising from the Segregated
Account Rehabilitation Proceedings; (7)decisions made by the Rehabilitator
for the benefit of policyholders may result in material adverse consequences
for Ambac’s securityholders; (8)potential of a full rehabilitation proceeding
against Ambac Assurance or material changes to the Segregated Account
Rehabilitation Plan, with resulting adverse impacts; (9)inadequacy of
reserves established for losses and loss expenses, including our inability to
realize the remediation recoveries or future commutations included in our
reserves; (10)adverse developments in our portfolio of insured public finance
credits; (11)market risks impacting assets in our investment portfolio or the
value of our assets posted as collateral in respect of investment agreements
and interest rate swap and currency swap transactions; (12)risks relating to
determination of amount of impairments taken on investments; (13)credit and
liquidity risks due to unscheduled and unanticipated withdrawals on investment
agreements; (14)market spreads and pricing on insured collateralized loan
obligations (“CLOs”) and other derivative products insured or issued by Ambac
or its subsidiaries; (15)Ambac’s financial position and the Segregated
Account Rehabilitation Proceedings may prompt departures of key employees and
may impact our ability to attract qualified executives and employees; (16)the
risk of litigation and regulatory inquiries or investigations, and the risk of
adverse outcomes in connection therewith, which could have a material adverse
effect on our business, operations, financial position, profitability or cash
flows; (17)credit risk throughout our business, including but not limited to
credit risk related to residential mortgage-backed securities, student loan
and other asset securitizations, CLOs, public finance obligations and
exposures to reinsurers; (18)default by one or more of Ambac Assurance’s
portfolio investments, insured issuers, counterparties or reinsurers; (19)the
risk that our risk management policies and practices do not anticipate certain
risks and/or the magnitude of potential for loss as a result of unforeseen
risks; (20)factors that may influence the amount of installment premiums paid
to Ambac, including the Segregated Account Rehabilitation Proceedings;
(21)changes in prevailing interest rates; (22)the risk of volatility in
income and earnings, including volatility due to the application of fair value
accounting, required under the relevant derivative accounting guidance;
(23)changes in accounting principles or practices that may impact Ambac’s
reported financial results; (24)legislative and regulatory developments;
(25)operational risks, including with respect to internal processes, risk
models, systems and employees; (26)changes in tax laws, tax disputes and
other tax-related risks; and (27)other risks and uncertainties that have not
been identified at this time, and (28) the risks described in the Risk Factors
section in Part I, Item1A of Ambac’s Annual Report on Form 10-K for the
fiscal year ended December31, 2011, and also disclosed from time to time by
Ambac in its subsequent reports on Form 10-Q and Form 8-K, which are available
on the Ambac website at www.ambac.com and at the SEC’s website, www.sec.gov.
Readers are cautioned that forward-looking statements speak only as of the
date they are made and that Ambac does not undertake to update forward-looking
statements to reflect circumstances or events that arise after the date the
statements are made. You are therefore advised to consult any further
disclosures we make on related subjects in Ambac’s reports to the SEC.

Ambac Financial Group, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 2012 and December 31, 2011
(Dollars in Thousands Except Share Data)

                                    September 30, 2012   December 31, 2011
                                      (unaudited)
Assets
                                                             
Investments:
Fixed income securities, at fair
value
(amortized cost of $4,887,684         $  5,440,690           $  5,830,289
2012 and $5,346,897 in 2011)
Fixed income securities pledged
as collateral, at fair value
(amortized cost of $285,284 in           285,860                263,530
2012 and $261,958 in 2011)
Short-term investments (amortized
of $713,137 in 2012 and $783,015         713,467                783,071
in 2011)
Other (approximates fair value)         100                  100          
Total investments                        6,440,117              6,876,990
                                                             
Cash                                     90,065                 15,999
Restricted cash                          2,500                  2,500
Receivable for securities                10,005                 38,164
Investment income due and accrued        37,182                 45,328
Premium receivables                      1,755,830              2,028,479
Reinsurance recoverable on paid          172,439                159,902
and unpaid losses
Deferred ceded premium                   190,540                221,303
Subrogation recoverable                  514,084                659,810
Deferred acquisition costs               205,818                223,510
Loans                                    10,380                 18,996
Derivative assets                        97,464                 175,207
Other assets                             63,759                 104,300
Variable interest entity assets:
Fixed income securities, at fair         2,160,113              2,199,338
value
Restricted cash                          2,293                  2,140
Investment income due and accrued        1,228                  4,032
Loans                                    15,188,358             14,329,515
Other assets                            5,717                8,182        
Total assets                          $  26,947,892         $  27,113,695   
                                                             
Liabilities and Stockholders'
Deficit
                                                             
Liabilities:
Liabilities subject to compromise     $  1,707,408           $  1,707,421
Unearned premiums                        2,985,542              3,457,157
Losses and loss expense reserve          7,034,224              7,044,070
Ceded premiums payable                   94,089                 115,555
Obligations under investment             397,570                523,046
agreements
Obligations under investment             18,276                 23,500
repurchase agreements
Current taxes                            97,379                 95,709
Long-term debt                           146,909                223,601
Accrued interest payable                 210,108                170,169
Derivative liabilities                   455,587                414,508
Other liabilities                        98,161                 107,441
Payable for securities purchased         15,009                 1,665
Variable interest entity
liabilities:
Accrued interest payable                 825                    3,490
Long-term debt                           15,113,094             14,288,540
Derivative liabilities                   2,060,951              2,087,052
Other liabilities                       273                  304          
Total liabilities                       30,435,405           30,263,228   
                                                             
Stockholders' deficit:
Preferred stock                          -                      -
Common stock                             3,080                  3,080
Additional paid-in capital               2,172,027              2,172,027
Accumulated other comprehensive          527,969                463,259
income
Accumulated deficit                      (6,440,840   )         (6,039,922   )
Common stock held in treasury at        (410,755     )        (411,419     )
cost
Total Ambac Financial Group, Inc.        (4,148,519   )         (3,812,975   )
stockholders' deficit
                                                             
Noncontrolling interest                 661,006              663,442      
Total stockholders' deficit             (3,487,513   )        (3,149,533   )
Total liabilities and                 $  26,947,892         $  27,113,695   
stockholders' deficit
                                                             
Number of shares outstanding (net       302,436,107          302,428,811  
of treasury shares)


Ambac Financial Group, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
For the Three and Nine Months Ended September 30, 2012 and 2011
(Dollars in Thousands Except Share Data)

                      Three Months Ended                 Nine Months Ended
                       September 30,                       September 30,
                       2012             2011              2012             2011
Revenues:                                                                 
                                                                             
Net premiums earned    $ 113,074         $ 102,055         $ 311,066         $ 293,125
Net investment           84,078            90,699            290,031           262,806
income
Other-than-temporary
impairments:
Total
other-than-temporary     (2,501      )     (19,671     )     (14,304     )     (39,177     )
impairment losses
Portion of loss
recognized in other     2,147           8,784           8,551           8,999       
comprehensive income
Net other-than
temporary impairment    (354        )    (10,887     )    (5,753      )    (30,178     )
losses recognized in
earnings
                                                                             
Net realized             3,162             5,084             70,621            5,006
investment gains
                                                                             
Change in fair value
of credit
derivatives:
Realized gains and       2,944             3,829             9,271             13,376
other settlements
Unrealized gains        24,496          676             3,532           6,513       
Net change in fair
value of credit          27,440            4,505             12,803            19,889
derivatives
Derivative products      (36,007     )     (215,775    )     (113,141    )     (260,366    )
Net realized
(losses) gains on        -                 -                 (177,745    )     3,119
extinguishment of
debt
Other (loss) income      (368        )     (4,972      )     100,562           32,558
Income on variable      6,137           55,008          26,893          51,236      
interest entities
                                                                             
Total revenues
before expenses and     197,162         25,717          515,337         377,195     
reorganization items
                                                                             
Expenses:
                                                                             
Losses and loss          (18,745     )     (60,238     )     720,346           1,055,807
expenses
Underwriting and         33,347            44,860            103,448           105,860
operating expenses
Interest expense        23,268          33,074          88,962          95,004      
                                                                             
Total expenses
before                  37,870          17,696          912,756         1,256,671   
reorganization items
                                                                             
Pre-tax income
(loss) from
continuing               159,292           8,021             (397,419    )     (879,476    )
operations before
reorganization items
                                                                             
Reorganization items    1,252           8,519           4,480           39,794      
                                                                             
Pre-tax income
(loss) from              158,040           (498        )     (401,899    )     (919,270    )
continuing
operations
                                                                             
Provision for income    667             75,011          756             77,903      
taxes
                                                                             
Net gain (loss)          157,373           (75,509     )     (402,655    )     (997,173    )
                                                                             
Less: net (loss)
gain attributable to    (171        )    (2          )    (2,401      )    45          
noncontrolling
interest
                                                                             
Net income (loss)
attributable to        $ 157,544         ($75,507    )    ($400,254   )    ($997,218   )
common shareholders
                                                                             
Net income (loss)
per share
attributable to        $ 0.52            ($0.25      )    ($1.32      )    ($3.30      )
Ambac Financial
Group, Inc. common
shareholders
                                                                             
Net income (loss)
per diluted share
attributable to        $ 0.52            ($0.25      )    ($1.32      )    ($3.30      )
Ambac Financial
Group, Inc. common
shareholders
                                                                             
                                                                             
Weighted average
number of common
shares outstanding:
                                                                             
Basic                   302,469,966     302,467,255     302,468,502     302,429,879 
                                                                             
Diluted                 302,582,276     302,467,255     302,468,502     302,429,879 

Contact:

Ambac Financial Group, Inc.
Michael Fitzgerald
mfitzgerald@ambac.com
 
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