When Ambac Financial Group Inc. missed the deadline to file its statutory capital to the Securities and Exchange Commission on Monday, analysts assumed the bond insurer had gone into deficit. Far from it. The company’s principal operating subsidiary nearly tripled its surplus in the third quarter, and in the current quarter it expects to benefit from a hefty government bailout.
Ambac Assurance Corp. reported a surplus of approximately $856 million as of Sept. 30, up from $305.6 million at the end of June, according to its 8K filing with the SEC yesterday.
Investors, who had learned just one week ago that Ambac may have to file for bankruptcy protection, pushed its stock up 44.3% to end at $1.01 on the day.
The company’s third-quarter surplus resulted from commuting, or cancelling, four collateralized debt obligations of asset-backed securities.
The transactions involved an aggregate amount of $5.03 billion notional outstanding at the end of the third quarter. Ambac said they were settled “for cash payments of approximately $520 million,” or about 10 cents on the dollar, resulting in positive adjustments to its total impairment reserves in the quarter.
In addition, third-quarter activity “such as reinsurance recaptures amounting to $311 million” had a positive impact on the surplus, while “credit derivative impairments” of $280 million had a negative impact.
Peter Poillon, managing director of investor relations at Ambac, would not comment on the company’s surplus. He said the statutory results were delayed because the company was “just completing our financial statements. No further comment other than that.”
Credit analysts said the unexpected results are unlikely to change the longer-term prospects for the company, which has not written new insurance since June 2008, according to Thomson Reuters data.
“We seem to be living in an extend-and-pretend world or a delay-and-pray world,” said David Havens, managing director at Hexagon Securities LLC.
Still, Havens said Ambac is too complicated for its regulator, the Wisconsin commissioner of insurance, to comfortably resolve its outstanding transactions, so allowing time for the insurer to commute its exposures is probably a good thing.
“Every day, every week, every quarter that they live on, they continue to have a range of options that they might be able to somehow exercise that will enable them to survive,” Havens said.
Another item in the filing that garnered attention was that Ambac expects to receive about $440 million in tax refunds in the fourth quarter under the Worker, Homeownership and Business Act signed into law by President Obama on Nov. 6.
The legislation is known better for extending unemployment benefits and renewing the $8,000 tax incentive for first-time homebuyers, but it also includes tax relief for businesses that made profits within the past five years and incurred losses in 2008 and 2009.
“A number of companies that … got clobbered over the past couple of years but haven’t gone bankrupt at this point are going to get a little assistance here — they are going to get an actual check in the mail,” Havens said. “I would guess that [Ambac] probably will run through the money but that delays it.”
Poillon said the company found out about the tax refund when it was signed into law, adding that Ambac had not lobbied for the bill. “We had nothing to do with that,” he said.
Other bond insurers may also stand to benefit.
Yesterday, MBIA Inc. released its own 8K filing stating that it may be eligible for as much as $500 million in tax relief. MBIA did not post an operating loss in 2008, and losses in the first three quarters of this year are not large enough to qualify for the full amount of the assistance, so eligibility will be determined by its fourth-quarter results, the filing said.
Assured Guaranty Ltd. is currently analyzing the new legislation to see if it qualifies for the assistance, according to spokeswoman Betsy Castenir. Radian Asset Assurance Inc. does “not expect any significant benefit” from the legislation, said spokeswoman Emily Riley.
Comments were not available at press time from Financial Guaranty Insurance Co., CIFG Assurance North America Inc., Syncora Guarantee Inc, or ACA Financial Guaranty Corp.
