Ambac Financial Group Inc. will not release its fourth-quarter results until March 16, but earlier this week its principal subsidiary posted to its Web site an annual report that gives an idea of where things stood at year-end. The results aren’t too promising.

Ambac Assurance Corp. — once the second-largest municipal bond insurer before the financial crisis reduced its ratings to junk — reported a year-end surplus to policyholders of $802 million, down from $856 million in the third quarter and well below the $1.55 billion reported at the end of 2008.

In the third quarter, the policyholders’ surplus unexpectedly tripled as the insurer paid to commute four collateralized debt obligations of asset-backed securities, wiping more than $5 billion of risky assets off its books.

In the course of the year, Ambac Assurance said it commuted eight CDOs of ABS exposures with multiple counterparties, reducing exposure by more than $8.6 billion. Canceling the contracts cost the insurer nearly $1.4 billion in cash payments.

At year end, Ambac Assurance insured $5.9 billion of subprime-related residential mortgage-backed securities. Through an insurance agreement with subsidiary Ambac Credit Products LLC, it also guaranteed payments on credit default swaps worth about $43.3 billion, as of Dec. 31 2009, a reduction from the $53.9 billion it guaranteed one year before.

Signaling that credit deterioration on its risky derivatives portfolio may continue, Ambac Assurance increased its estimate for impairment losses by 15% to $3.84 billion in 2009, up from $3.35 billion in 2008.

Net income in the fourth quarter fell by $312 million, contributing to an annual loss of $2.48 billion. Substantial as that is, things were worse in 2008 when the company shed $4.03 billion of net income.

Aside from cash payments to commute insurance contracts, the biggest losses Ambac Assurance incurred last year were from risky assets defaulting. The company paid out nearly $1.4 billion on residential mortgage-backed credits that defaulted, plus an additional $530 million from similar credits that defaulted in 2008.

Cash flow has been rapidly declining. The insurer held cash and its equivalents worth $625.4 million at year-end, a reduction of $439.2 million from the prior quarter. One year before, it held cash of $1.18 billion.

To mitigate that outflow, Ambac terminated a number of reinsurance agreements with rival guarantors last year, thereby securing $317 million in pre-tax income for the year.

According to an 8-K filing last November, the insurer had expected to receive $440 million in tax refunds in the fourth quarter, under new legislation designed to help companies that had suffered in the financial crisis. The annual statement indicates that no such refunds have been delivered.

Meanwhile, Ambac Assurance said it hopes to recover roughly $1.9 billion from the sponsors of the toxic structured-finance products it insures. The statement said “evidence of pervasive breaches” is clear given the heavy losses that followed, but it expects remediation to take about three years on average.

More complete results for the year as well as the quarter will be available on March 16, when parent Ambac Financial Group is expected to release its earnings statement and 10-K filing.

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