Ambac reports 4th-quarter loss of $3.26 billion as credit markets suffer
NEW YORK -- Ambac Financial Group Inc. swung to a deep fourth-quarter loss after taking a $5.21 billion write-down, and is reviewing ways to raise capital, the troubled bond insurer said Tuesday.
The New York firm booked a loss of $3.26 billion, or $31.85 per share, versus a profit of $202.7 million, or $1.88 per share, in the year-ago period.
The company took a loss of $5.21 billion, or $33.14 per share, on the book value of certain financial instruments, called credit derivatives. These help insure bond buyers against losses if the bond issuer defaults or the assets underlying the bond lose value.
That total included a charge of $1.11 billion, or $7.03 per share, that the company set aside because it expects to have to pay claims on defaults related to securities backed by risky subprime mortgages.
The company's operating loss reached $6.21 per share versus a profit of $1.88 per share last year. Analysts expected that result to be a loss of $3.50 per share, according to Thomson Financial.
Ambac said it is "evaluating strategic alternatives with a number of potential partners," as it seeks to maintain its "AAA" rating with two agencies and regain it after being downgraded by a third.
"We view the current perceptions of Ambac's business by both the market and ratings agencies as underestimating Ambac's strengths and future potential," Chief Executive Michael Callen said in a statement.
Fitch Ratings cut Ambac to "AA" last week, which could strip the insurer of its ability to drum up new business, particularly with municipalities.
Business slowed sharply in the quarter, with net premiums written dropping 78 percent to $49.3 million. But the company continued to book premium revenue, gaining 4 percent to $233.2 million. If Ambac isn't able to write new insurance, it will still generate premium revenue and have to pay claims, which is known as being in a state of "run off."
Municipalities need bond insurers to have the top "AAA" rating because that backing enables them to pay lower interest rates on bonds they issue. Ambac and MBIA Inc. insure $700 billion in municipal bonds, a somewhat mundane area of the market but one that delivers steady profits.
But the insurers extended themselves into riskier bond issues -- including ones backed by subprime mortgages -- in search of higher returns. When the assets underlying those bonds started faltering last year, default risks rose.
Fitch said it cut Ambac's ratings because the company does not have enough capital reserves to cover the higher potential defaults. MBIA raised $1 billion in capital last week to boost its reserves, but Ambac balked at such a move, saying the market conditions were not optimal.
Callen said he thinks Ambac can continue to write new insurance and that he is confident the company can "strengthen our capital position further" to regain the "AAA" rating from Fitch.