Ambac Posts Big Loss, Pounded by Credit Issues


Ambac Financial Group posted another steep loss for the first quarter as turmoil in the bond market pummeled the value of many of the bond insurer's deals. Shares fell 21 percent in premarket trading.

Ambac lost $1.66 billion, or $11.69 per share, in the first quarter, compared with profit of $213.3 million, or $2.02 per share, in the first quarter last year. The company has lost almost $5.3 billion in the last nine months.

Shares tumbled nearly 22 percent in premarket trading and are down nearly 80 percent in 2008.

The New York-based insurer recorded $1.73 billion in losses on a book of contracts promising to cover missed payments on complex investments backed by home loans.

With $524 billion in insured debt, Ambac sells insurance policies promising to repay bondholders when bond issuers default.

The contracts Ambac is recording losses on insure sophisticated investments known as collateralized debt obligations, which splice payments from a number of sources. Because these investments derive some of their payments from mortgage bonds, the insured CDOs suffered from "dramatically lower" prices in the first quarter, especially in March.

The company for accounting purposes has to assume that when bonds lose value, default is more likely. This makes its own insurance contracts worth less because of the heightened likelihood of a claim.

Ambac set aside $1 billion preparing to pay claims on defaulted mortgage debt.

Ambac Earnings

Excluding certain costs and losses Ambac does not consider reflective of business trends, operating loss was $6.93 per share. On that basis, analysts polled by Thomson Financial expected a loss of $1.51 per share.

Ambac shares fell 21 percent to $4.77 in premarket trading from a $6.03 close Tuesday. The stock has lost nearly 77 percent of its value in 2008 and more than 93 percent of its value over the last 12 months.

Demand for certain types of mortgage debt has vanished from the market in the past year as flagging property values and a slowing economy push more homeowners into default. The ensuing fallout in the bond market has yanked down prices and drained liquidity for some bonds Ambac insures.

"The housing market crisis continues to disrupt the global credit markets, and our credit derivatives and direct mortgage portfolios were severely impacted once again," Chief Executive Michael A. Callen said in a statement.

Ambac is currently writing little new business and is trying to raise cash to preserve its financial-strength ratings, which clients rely on for reassurance the company is capable of paying its claims.

Fitch Ratings has already slashed Ambac's ratings, and Standard & Poor's and Moody's are both considering a downgrade.

Premiums fell 38 percent to $135.7 million from $220.4 million.

Ambac said it has access to $16 billion in cash to pay potential claims, and its ratios of cash to debt meet the standards S&P and Moody's have for top-notch ratings.