Ambac Financial Group, Inc. Announces Fourth Quarter 2012 Results
Ambac Financial Group, Inc. Announces Fourth Quarter 2012 Results
Business Wire
NEW YORK -- February 28, 2013
Ambac Financial Group, Inc. (“Ambac”) today announced a fourth quarter 2012
net profit of $143.6 million, or a net profit of $0.47 per share. This
compares to a fourth quarter 2011 net loss of $963.2 million, or a net loss of
$3.18 per share. Relative to fourth quarter 2011, the improved fourth quarter
2012 results were primarily driven by lower loss and loss expenses and higher
income on variable interest entities (“VIEs”), partially offset by fair value
losses on credit derivatives.
Fourth Quarter 2012 Summary
Relative to the fourth quarter of 2011,
* Net premiums earned declined $9.3 million to $103.5 million
* Net investment income increased $0.9 million to $92.9 million
* Other than temporary impairment losses decreased $33.4 million to $0.2
million
* Net change in the fair value of credit derivatives decreased $50.2 million
to a loss of $22.0 million
* Derivative product losses decreased $8.6 million to $11.9 million
* Income on VIEs increased $266.5 million to $0.9 million
* Loss and loss expenses decreased $840.4 million to a net benefit of $36.7
million
* Operating and interest expense decreased $9.6 million to $58.9 million
As of December 31, 2012, unrestricted cash, short-term securities and bonds at
Ambac, the holding company, totaled $30.4 million, a decline of $1.1 million
from September 30, 2012.
Financial Results
Net Premiums Earned
Net premiums earned for the fourth quarter of 2012 were $103.5 million, down
8% from $112.8 million earned in the fourth quarter of 2011. Net premiums
earned include accelerated premiums, resulting from calls and other policy
accelerations recognized during the quarter. Accelerated premiums were $41.6
million in the fourth quarter of 2012, up 38% from $30.2 million in the fourth
quarter of 2011. The increase in accelerated premiums was primarily driven by
a high volume of bond calls due to the low level of interest rates,
particularly with respect to certain transportation credits, in addition to
accelerations resulting from the early termination of certain structured
finance policies. Normal net premiums earned, which exclude accelerated
premiums, were $61.9 million in the fourth quarter of 2012, down 25% from
$82.7 million in the fourth quarter of 2011. The decline in normal net
premiums earned was primarily due to the continued run-off of the insured
portfolio and write-downs of premium receivables on an impaired transaction.
Net Investment Income
For the consolidated investment portfolio, net investment income for the
fourth quarter of 2012 was $92.9 million, an increase of 1% from $92.0 million
earned in the fourth quarter of 2011.
Financial Guarantee net investment income increased 6% to $89.7 million from
$84.9 million which was largely attributable to the greater percentage of
holdings in higher yielding residential mortgage backed securities (“RMBS”)
insured by Ambac Assurance Corporation (“Ambac Assurance”). The amortized cost
of the Financial Guarantee long term investment portfolio declined by
approximately $191.5 million since December 31, 2011, as the collection of
installment premiums, and coupon receipts on invested assets were offset by
claims payments, including 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 December 31,
2012 was $3.2 million compared to $7.0 million for the fourth quarter of 2011.
The decline in Financial Services investment income was driven primarily by
sales of securities to fund the partial repayment of intercompany loans and
investment agreements.
Net Other-Than-Temporary Impairments
Net other-than-temporary impairments of invested assets recognized in earnings
declined to $0.2 million for the three months ended December 31, 2012, from
$33.7 million for the three months ended December 31, 2011. Impairment charges
in both periods were related to investments in RMBS, including those
guaranteed by Ambac Assurance.
Net Change in Fair Value of Credit Derivatives
The net change in fair value of credit derivatives was a loss of $22.0 million
for the three months ended December 31, 2012, compared to a gain of $28.1
million for the three months ended December 31, 2011. The 2012 fourth quarter
loss resulted from a negative change in the Ambac Assurance credit valuation
adjustment (“CVA”), reflecting the higher value of Ambac obligations observed
in the market. The adverse impact of the Ambac CVA in the fourth quarter of
2012 was partially offset by Credit Default Swap (“CDS”) fees received,
increases in certain reference obligation prices, and gains associated with
the runoff of the portfolio. The gain for fourth quarter of 2011 was primarily
driven by CDS fees received, the impact of increases in certain reference
obligation prices, and gains associated with the runoff of the portfolio.
Derivative Products
For the fourth quarter of 2012, the derivative products business produced a
net loss of $11.9 million compared to a net loss of $20.5 million for the
fourth quarter of 2011. 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. The net loss for the fourth quarter
of 2012 was primarily driven by mark-to-market losses resulting from the
negative change in the Ambac CVA, partially offset by gains attributable to
rising interest rates during the period. Derivative product losses incurred
during the fourth quarter of 2011 were primarily the result of mark-to-market
movements in the portfolio caused by declining interest rates during the
period.
Income (Loss) on Variable Interest Entities
Income on variable interest entities for the three months ended December 31,
2012 was $0.9 million compared to a loss of $265.6 million for the three month
period ending December 31, 2011. The 2012 fourth quarter gain was the result
of positive changes in the fair value of net assets of consolidated VIEs
during the period, while the 2011 fourth quarter loss was primarily
attributable to the net impact of deconsolidating a credit impaired
transaction in December 2011.
Financial Guarantee Loss Reserves
Loss and loss expenses for the fourth quarter of 2012 were a net benefit of
$36.7 million compared to a net loss of $803.6 million for the fourth quarter
of 2011. The net benefit for the three months ended December 31, 2012 was
driven by lower estimated losses for first lien RMBS and certain student loan
transactions, partially offset by an increase in loss estimates for second
lien RMBS, and certain Ambac U.K. credits.
Loss and loss expenses paid, including commutations, net of recoveries and
reinsurance from all policies, amounted to $346.5 million during the fourth
quarter of 2012. 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 the fourth quarter of 2012 were $1.5 billion, including $1.1
billion of claims related to the moratorium period. At December 31, 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, net of subrogation recoveries, and
excluding loss adjustment expenses) as of December 31, 2012 were $6.0 billion,
down 6% from $6.4 billion at September 30, 2012, while loss reserves
specifically relating to RMBS insurance exposures, including unpaid claims,
declined 9% to $3.6 billion at December 31, 2012 from $3.9 billion at
September 30, 2012. RMBS reserves as of December 31, 2012, are net of $2.5
billion of estimated representation and warranty breach remediation
recoveries, down 6% from $2.7 billion reported as of September 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 various RMBS transactions.
Expenses
Underwriting and operating expenses for the three months ended December 31,
2012 were flat at $35.6 million, as compared to $35.4 million for the three
months ended December 31, 2011. Underwriting and operating expenses for the
three months ended December 31, 2012 were driven by lower consulting costs,
legal fees, and compensation costs, offset by an increase in the amortization
of deferred acquisition costs. Interest expense was $23.4 million during the
fourth quarter of 2012 versus $33.1 million in the fourth quarter of 2011. The
decrease in interest expense during the fourth quarter of 2012 was primarily
attributable to the lower par amount of surplus notes outstanding following
the exercise of certain call options on surplus notes in June 2012, and lower
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 December 31, 2012
were $2.7 million as compared to $10.1 million for the three months ending
December 31, 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 fourth quarter of 2012 to $27.0 billion from
$26.9 billion at September 30, 2012. The increase in total assets was due to
an increase in VIE assets to $17.8 billion from $17.4 billion, partially
offset by declines in the consolidated non-VIE investment portfolio to $6.3
billion from $6.4 billion and premium receivables to $1.6 billion from $1.8
billion.
During the fourth quarter of 2012, the fair value of the financial guarantee
non-VIE investment portfolio increased by $77 million to $5.9 billion, as of
December 31, 2012. 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
increase in fair value between periods reflects higher valuations,
particularly with respect to Ambac Assurance guaranteed RMBS, partially offset
by the use of assets to fund the partial payment of Segregated Account
permitted policy claims. The fair value of the financial services investment
portfolio declined $186 million to $383 million during the fourth quarter.
Liabilities subject to compromise totaled approximately $1.7 billion at
December 31, 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 December 31, 2012,
liabilities subject to compromise consist of the following (in thousands):
Debt obligations and accrued interest payable $1,690,312
Other 14,592
Consolidated liabilities subject to compromise $1,704.904
Overview of Ambac Assurance Statutory Results
During the fourth quarter of 2012, Ambac Assurance generated statutory net
income of $45.6 million. Fourth quarter 2012 results were primarily
attributable to premiums earned of $125.4 million, and net investment income
of $108.1 million, partially offset by impairment on securities held of $46.3
million, net loss and loss expenses of $90.0 million, and $29.5 million of
impairment losses relating to the guarantee of subsidiary liabilities. As of
December 31, 2012, Ambac Assurance reported policyholder surplus of $100.0
million, unchanged from September 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 December 31, 2012, Ambac Assurance’s
General Account did not assume $163.7 million of the Segregated Account
insurance liabilities under the Segregated Account reinsurance agreement, down
from $296.0 million as of September 30, 2012. The Segregated Account reported
statutory policyholder surplus of ($61.8) million as of December 31, 2012, up
from ($193.7) million as of September 30, 2012.
Ambac Assurance’s claims-paying resources amounted to approximately $5.5
billion as of December 31, 2012, down approximately $0.1 billion from $5.6
billion at September 30, 2012. This excludes Ambac Assurance UK Limited’s
claims-paying resources of approximately $1.0 billion. The decrease in claims
paying resources was primarily attributable to loss payments, including 25%
partial payments on Segregated Account policy claims.
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.
Holders of Ambac’s common stock, debt securities or other claims subject to
the Chapter 11 proceeding are restricted as to the amount of such securities
or other claims that they may hold. On September 27, 2012, the Bankruptcy
Court entered an order (the “NOL Order”), amending and restating an order
entered on November 30, 2010, establishing procedures for certain transfers or
acquisitions of equity interests in and claims (including debt securities)
against Ambac to maximize the possibility that the "ownership change" (as
defined under Section 382 of the Internal Revenue Code of 1986, as amended (an
“Ownership Change”)) that will occur upon consummation of Ambac’s plan of
reorganization will qualify for the special exception to the limitations under
Section 382(a) for Ownership Changes occurring as a result of a bankruptcy
plan of reorganization (the “Section 382(l)(5) Plan Exception”). Ambac's
ability to use its net operating loss carry-forwards (“NOLs”) could be
substantially limited if there were an Ownership Change that does not qualify
for the Section 382(l)(5) Plan Exception. The NOL Order generally restricts
investors from acquiring Ambac stock if after any such acquisition a holder
would beneficially own at least 13,500,000 shares of Ambac stock. The NOL
Order also generally restricts investors from transferring or acquiring claims
(including debt securities) if after any such transfer or acquisition a holder
would beneficially own claims that could result in such holder receiving stock
in reorganized Ambac pursuant to the terms of the plan of reorganization with
a value equal to or greater than 4.5% of the value of the stock of reorganized
Ambac. A holder would reach that threshold with ownership of $56,929,773 of
senior debt securities or any combination of debt securities and other claims
that could result in such holder receiving stock in reorganized Ambac pursuant
to the terms of the plan of reorganization with a value equal to or greater
than 4.5% of the value of the stock of reorganized Ambac. Holders are
encouraged to review the NOL Order for more information.
Pursuant to the NOL Order, Ambac may obtain one or more orders from the
Bankruptcy Court to enforce these restrictions by requiring investors to sell
their stock or claims so that their holdings comply with the limitations
imposed by the NOL Order. The NOL Order also contains equity forfeiture
provisions that will limit stock distributions to be made upon effectiveness
of the plan of reorganization to any claimholder that fails to adhere to the
NOL Order and the restrictions prescribed therein. The Bankruptcy Court will
retain jurisdiction to enforce the NOL Order after Ambac emerges from its
Chapter 11 proceeding. Furthermore, the Certificate of Incorporation of Ambac
that will take effect upon emergence contains similar provisions restricting
stock transfers to mitigate the possibility of a future Ownership Change.
Additional information regarding Ambac can be found on Ambac’s website at
www.ambac.com.
Forward-Looking Statements
This press release contains 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 differ materially, and reported results should not
be considered as an indication of future performance. The potential risks and
uncertainties that could cause actual results to differ from the results
predicted include, among others, those risks and uncertainties included under
the captions “Risk Factors” and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” in our Annual Report on Form
10-K for the year ended December 31, 2011, and our most recent Quarterly
Report on Form 10-Q for the quarter ended September 30, 2012, which are
available on the Ambac website at www.ambac.com and at the SEC's website,
www.sec.gov. Additional information will also be set forth in our Annual
Report on Form 10-K for the year ended December 31, 2012. Accordingly, readers
are cautioned not to place undue reliance on forward-looking statements which
speak only as of the date they are made. Ambac does not undertake to update
forward-looking statements to reflect the impact of circumstances or events
that arise after the date the forward-looking statements are made unless
required by law.
Ambac Financial Group, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 2012 and December 31, 2011
(Dollars in Thousands Except Share Data)
December 31, 2012 December 31, 2011
Assets
Investments:
Fixed income securities,
at fair value
(amortized cost of
$4,751,824 2012 and $5,402,395 $5,830,289
$5,346,897 in 2011)
Fixed income securities
pledged as collateral, at
fair value
(amortized cost of
$265,517 in 2012 and 265,779 263,530
$261,958 in 2011)
Short-term investments, at
fair value (amortized of 661,658 783,071
$661,219 in 2012 and $783,015
in 2011)
Other (approximates fair 100 100
value)
Total investments 6,329,932 6,876,990
Cash 43,837 15,999
Restricted cash - 2,500
Receivable for securities 761 38,164
Investment income due and 39,742 45,328
accrued
Premium receivables 1,620,621 2,028,479
Reinsurance recoverable on 159,086 159,902
paid and unpaid losses
Deferred ceded premium 177,893 221,303
Subrogation recoverable 497,346 659,810
Deferred acquisition costs 199,160 223,510
Loans 9,203 18,996
Derivative assets 48,005 175,207
Other assets 39,715 104,300
Variable interest entity
assets:
Fixed income securities, at 2,261,294 2,199,338
fair value
Restricted cash 2,290 2,140
Investment income due and 4,101 4,032
accrued
Loans 15,568,711 14,329,515
Other assets 5,467 8,182
Total assets $27,007,164 $27,113,695
Liabilities and
Stockholders' Deficit
Liabilities:
Liabilities subject to $1,704,904 $1,707,421
compromise
Unearned premiums 2,778,401 3,457,157
Losses and loss expense 6,619,486 7,044,070
reserve
Ceded premiums payable 94,527 115,555
Obligations under 356,091 523,046
investment agreements
Obligations under
investment repurchase 5,926 23,500
agreements
Deferred taxes 1,586 -
Current taxes 96,778 95,709
Long-term debt 150,170 223,601
Accrued interest payable 228,835 170,169
Derivative liabilities 453,214 414,508
Other liabilities 102,488 107,441
Payable for securities 25 1,665
purchased
Variable interest entity
liabilities:
Accrued interest payable 3,618 3,490
Long-term debt 15,436,008 14,288,540
Derivative liabilities 2,221,781 2,087,052
Other liabilities 293 304
Total liabilities 30,254,131 30,263,228
Stockholders' deficit:
Preferred stock - -
Common stock 3,080 3,080
Additional paid-in 2,172,027 2,172,027
capital
Accumulated other 625,385 463,259
comprehensive income
Accumulated deficit (6,297,264 ) (6,039,922 )
Common stock held in (410,755 ) (411,419 )
treasury at cost
Total Ambac Financial
Group, Inc. stockholders' (3,907,527 ) (3,812,975 )
deficit
Non-controlling interest 660,560 663,442
Total stockholders' (3,246,967 ) (3,149,533 )
deficit
Total liabilities and $27,007,164 $27,113,695
stockholders' deficit
Number of shares
outstanding (net of 302,436,107 302,428,811
treasury shares)
Ambac Financial Group, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
For the Three Months and Years Ended December 31, 2012 and 2011
(Dollars in Thousands Except Share Data)
Three Months Ended Years Ended
December 31, December 31,
2012 2011 2012 2011
Revenues:
Net premiums earned $103,538 $112,845 $414,604 $405,970
Net investment 92,871 91,990 382,902 354,796
income
Other-than-temporary
impairments:
Total
other-than-temporary (1,355 ) (51,179 ) (15,659 ) (90,356 )
impairment losses
Portion of loss
recognized in other 1,118 17,514 9,669 26,513
comprehensive income
Net other-than
temporary impairment (237 ) (33,665 ) (5,990 ) (63,843 )
losses recognized in
earnings
Net realized 1,480 12,341 72,101 17,347
investment gains
Change in fair value
of credit
derivatives:
Realized gains and 4,442 3,625 13,713 17,001
other settlements
Unrealized (losses) (26,464 ) 24,518 (22,932 ) 31,031
gains
Net change in fair
value of credit (22,022 ) 28,143 (9,219 ) 48,032
derivatives
Derivative products (11,863 ) (20,458 ) (125,004 ) (280,824 )
Net realized gains
(losses) on 165 - (177,580 ) 3,119
extinguishment of
debt
Other income (loss) 5,536 (7,023 ) 106,098 25,535
Income (loss) on
variable interest 884 (265,604 ) 27,777 (214,368 )
entities
Total revenues before
expenses and 170,352 (81,431 ) 685,689 295,764
reorganization items
Expenses:
Losses and loss (36,716 ) 803,648 683,630 1,859,455
expenses
Underwriting and 35,581 35,445 139,029 141,305
operating expenses
Interest expense 23,358 33,088 112,320 128,092
Total expenses
before 22,223 872,181 934,979 2,128,852
reorganization items
Pre-tax income (loss)
from continuing 148,129 (953,612 ) (249,290 ) (1,833,088 )
operations before
reorganization items
Reorganization items 2,735 10,067 7,215 49,861
Pre-tax income
(loss) from 145,394 (963,679 ) (256,505 ) (1,882,949 )
continuing
operations
Provision (benefit) 2,093 (481 ) 2,849 77,422
for income taxes
Net gain (loss) 143,301 (963,198 ) (259,354 ) (1,960,371 )
Less: net (loss)
gain attributable to (275 ) 15 (2,676 ) 60
noncontrolling
interest
Net income (loss)
attributable to $143,576 ($963,213 ) ($256,678 ) ($1,960,431 )
common shareholders
Net income (loss) per
share attributable to
Ambac Financial Group,
Inc.
common shareholders $0.47 ($3.18 ) ($0.85 ) ($6.48 )
Net income (loss) per diluted share attributable to
Ambac Financial Group, Inc.
common shareholders $0.47 ($3.18 ) ($0.85 ) ($6.48 )
Weighted average
number of common
shares outstanding:
Basic 302,579,981 302,467,253 302,468,867 302,439,299
Diluted 302,469,966 302,467,253 302,468,867 302,439,299
Contact:
Ambac Financial Group, Inc.
Michael Fitzgerald, 212-208-3222
mfitzgerald@ambac.com
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