Ambac Financial Group Inc. yesterday reported a fourth-quarter net loss of $2.34 billion in 2008, which compares to a $3.27 billion fourth-quarter net loss in 2007, as it prepares to launch muni-only subsidiary Everspan Financial Guaranty Corp.
Ambac said the net loss reflected a $594.4 million net change in the fair value of derivatives, in addition to an increase in the deferred tax asset valuation allowance, increased loss provisions related to residential mortgage-backed securities, and mark-to-market and realized losses on terminations related to derivative products within the financial services segment.
Partially offsetting that were increased accelerated premiums related to refundings in the financial guarantee segment and net realized gains on terminations on investment agreements in the financial services segment.
Ambac recorded at net loss of $5.6 billion in 2008 compared to a net loss of $3.2 billion in 2007.
Ambac in 2009 will focus on managing its existing portfolio and relaunching Everspan, the old Connie Lee Insurance Co., which it expects will write new business during the second quarter.
"While our financial results continue to be affected by the disappointing housing market and other economic conditions, I am encouraged by the progress made in relation to some of our strategic initiatives," chief executive officer and president David Wallis said in a statement. "We continue to place significant emphasis on de-risking our portfolio."
Ambac continues to work on its remediation efforts within its portfolio of residential mortgage-backed securities guarantees, looking for breaches of warranties and representations in loans that can lead to buybacks, settlements, or litigation. It also continues to consider further commutations of its collateralized debt obligations, already paying a combined $1.85 billion to commute exposures with a par of $4.9 billion.
Ambac said of its $39.6 billion in net par direct residential mortgaged-backed securities exposure outstanding, 36%, or $14.3 billion, was below investment grade. Of its $26.1 billion in CDOs of asset-backed securities guarantees, 84%, or $21.9 billion, are rated below investment grade - all of which had originally been rated triple-A.
In regards to Everspan, Ambac said that the muni-only insurer has made all its presentations to the rating agencies and expects a response from them within the next few weeks. Everspan hopes to begin writing new business during the second quarter.
Ambac will put at least an additional $350 million into Everspan to bring its total capitalization to at least $500 million. Ambac had planned to recapitalize Everspan at a level of $1 billion before it delayed its plans in September when Standard & Poor's put bond insurance subsidiary Ambac Assurance Corp. on review for downgrade.
Everspan will have a board made up of a majority of independent directors and can't pay dividends to its parent for three years. It will not assume any of Ambac Assurance's legacy public finance exposures, differing from the approach MBIA Inc. took in restructuring its subsidaries to form a muni-only insurer.
MBIA Insurance Corp. has ceded its entire $537 billion book of public finance business to MBIA Insurance Corp. of Illinois, which will serve as a muni-only insurer to be renamed National Public Finance Guarantee Corp. MBIA paid MBIA Illinois $2.89 billion for taking on the public finance book and capitalized it with an additional $2.09 billion.
Even though Everspan will not take on the existing Ambac book, Ambac Assurance policyholders will benefit from any success at Everspan because the muni-only insurer is a subsidiary. Executives believe returns at Everspan will be better than the fixed-income securities Ambac would otherwise invest in.
"Given the capital base of Everspan, we think it's best utilized to help jump-start the municipal finance business and just get out into the market," Everspan chief executive officer Douglas Renfield-Miller said yesterday during a conference call will executives and investors.
Ambac, along with MBIA, has lobbied politicians and policymakers in Washington requesting assistance from the Treasury Department, including through capital injections. Wallis said yesterday that there can be little or no assurance that funds from the Troubled Asset Relief Program would be coming, and that it was unclear if there would be overall benefit to Ambac if they were available.
Treasury officials told reporters earlier this month that it would provide no direct assistance to the insurers.
"We do not need public funds to support our obligations to policyholders," Wallis said. "The successful development of a strong platform in Everspan will provide a new benchmark in transparency and will provide a permanent adherenace to the chosen ... core business. This investment will be both supportive to policyholders and accretive to shareholders."
Ambac share dipped 9.90% yesterday to $0.91. The stock has fallen more than 99% since hitting a high of $96.10 in May 2007.