QUOTE AND NEWS
newratings.com  Jul 25  Comment 
WASHINGTON (dpa-AFX) - Ambac Financial Group Inc. (AMBC) announced Friday that its principal financial guarantee subsidiary, Ambac Assurance Corporation , has finalized a settlement with the City of Detroit regarding its insured limited tax...
newratings.com  May 12  Comment 
WASHINGTON (dpa-AFX) - Ambac Financial Group, Inc. (ABKFQ.PK) posted first-quarter net income of $155.9 million, down from $282.3 million in the comparable quarter last year. Earnings per share for the latest first quarter rose to $3.31 from $0.93...
SeekingAlpha  Mar 30  Comment 
ByMichael Blair: I published a recent article warning of the risks of stock buybacks at market highs and received some comments disputing the thought and asserting that companies with large buybacks outperform. I did not say buybacks were all bad,...
TheStreet.com  Mar 28  Comment 
Story updated at 10 a.m. to reflect market activity. NEW YORK (TheStreet) -- Ambac Financial Group was downgraded to "sell" from "neutral" by MKM Partners Friday. Shares of Ambac fell 3.8% to $29.85 in morning trading The firm set a price...
TheStreet.com  Mar 4  Comment 
NEW YORK (TheStreet) -- Ambac Financial Group  is trading higher on Tuesday after posting better-than-expected quarterly earnings a day earlier. By midafternoon, shares had added 5.2% to $34.82. Trading volume of 2.4 million was more than double...
TheStreet.com  Feb 26  Comment 
NEW YORK (TheStreet) -- Ambac Financial Group  surged to an all-time high of $31.73 on Wednesday on higher-than-usual volume. The stock closed at $31.12, up 9.27% from its previous close of $28.48, and amassed a volume of 3,241,433, nearly...
SeekingAlpha  Feb 26  Comment 
By Alpha Gen Capital: Many pundits and analysts have panned investing in financials, especially banks, given the regulatory issues brought on by the Financial Crisis, namely the Dodd-Frank law which neutered most of the profit drivers that banks...
StreetInsider.com  Nov 8  Comment 
Visit StreetInsider.com at http://www.streetinsider.com/Corporate+News/AMBAC+%28ABK%29+files+suit+versus+City+of+Detroit/8865328.html for the full story.
Benzinga  Oct 24  Comment 
Ambac Assurance Corporation (NASDAQ: AMBC) today announced that the Wisconsin Court of Appeals has affirmed orders of the Circuit Court for Dane County, Wisconsin confirming the validity of, and approving the rehabilitation plan of the Segregated...
StreetInsider.com  Oct 10  Comment 
Visit StreetInsider.com at http://www.streetinsider.com/Corporate+News/Ambac+Financial+%28AMBC%29+Delivers+Presentation+on+Puerto+Rican+Exposure/8768916.html for the full story.




 

Ambac Financial Group, Inc. (NYSE:ABK) is the second largest bond insurer in the United States, and has two main businesses: financial guarantees and financial services. Its primary business, which operates as a monoline insurer, is known as Ambac Assurance Group. It earns revenues by writing insurance policies on municipal bonds and other asset backed securities, protecting holders of these assets against default. In other words, if a bond or security fails, Ambac will guarantee the interest and the principal. In 2010, Ambac incurred a net loss of $735 million, while earning $434 million in total revenues.[1]

Ambac's profits and revenues are susceptible to changes in the regulatory environment, its ability to accurately estimate the risk in bonds, as well as the demand for bond insurance. In 2010, Ambac earned a total of $434 million in total revenues, and a net loss of $735 million.[2]

Company Overview

Headquartered in New York City, Ambac Financial Group provides financial guarantees and financial services to clients worldwide. Its main business is in the bond insurance industry, where it insures the second most bonds behind only MBIA (MBI). In the past, Ambac also insured large numbers of collateralized debt obligation (CDO) such as mortgage backed securities (MBS). However, with the onset of the 2007 Credit Crunch and 2008 Financial Crisis leading to many mortgages defaulting, Ambac was obligated to cover increasingly large numbers of failed mortgage backed securities, leading Ambac to lose its top credit ratings.

These credit ratings play a vital aspect to Ambac's business, as potential clients use the rating to determine the likelihood that Ambac will remain solvent (be able to meet insurance claims against them). Since its credit rating downgrade, Ambac has had difficulty obtaining new financial guarantee transactions.[3]

In response to the loss of its AAA rating and recent losses, Ambac began implementing a refocused business strategy. Included in this strategy are the discontinuation of writing new business in its Financial Services segment, stopping quarterly dividend payments, and the reactivation of Everspan as a stand alone legal entity.[4] Everspan was a financial guarantee Insurance company that was purchased by Ambac in 1997 and placed into runoff.[3] However, Ambac has faced problems with reactivating Everspan, and has since put on hold the Everspan project.[5]

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Key Trends and Forces

Ambac has declared bankruptcy

Ambac has filed and declared for Chapter 11 bankruptcy in New York. It declared total liabilities of $1.68 billion, and also announced that it was unable to reach an agreement for a prepackaged bankruptcy, which would have allowed for a faster restructuring.[6]

The Wisconsin Circuit Court approved a rehabilitation plan by Ambac's regulating group, which essentially is a plan to help bring Ambac profitable and eventually out of bankruptcy.[7] The rehabilitation plan put some of the most troubled bond guarantees into a separate account, thereby leaving the remaining portion of the company in better financial shape. However, the United States Justice Department filed a federal suit with regards to the restructuring of Ambac, claiming that the state courts did not have the power to essentially stop the federal government from collecting up to $700 million in taxes.[8] The Federal Government wants to ensure that the rehabilitation plan does not interfere with its ability to collect the taxes, and has temporarily stopped the plan from continuing.

Reactivation of Everspan

One leg of Ambac's refocused business strategy is the reactivation of Everspan. Everspan was a financial guarantee insurance company purchased by Ambac in 1997 and placed into runoff.[3] Ambac hopes to bring it back as a municipal bond insurer, and by separating it from its main business, it also hopes to achieve the high credit ratings necessary to compete and generate new business. However, Ambac has since announced that it is delaying the reactivation of Everspan.[5]

Credit Ratings

Ambac's business model is largely dependent upon its overall credit rating. Credit ratings provide objective judgments about the insurer’s ability to pay insured parties when necessary. Declines in the credit quality of the company will cause its potential customer pool to shrink because of increased cost of capital. It receives an insurance premiums by guaranteeing the coupon and principal of bonds. This premium is almost entirely based on Ambac's financial strength. Since Ambac first lost its AAA rating, Ambac's credit rating has been downgraded to Ba3, non-investment or "junk" grade. Ambac's credit rating was further into junk grade, as Standard & Poor's Ratings Services dropped it from BBB to CC.[9] Furthermore, as a result of these credit rating downgrades, many of Ambac's clients exercised options in their contractual agreements which allowed them to either cancel their contract or to demand additional collateral in the event of credit rating downgrades.[10]

Credit Spreads

The spread between the interest rates on credit instruments insured by Ambac and the risk-free rate is a major driver affecting the premiums earned by the company. Wider spreads mean larger premiums and generally higher margins, whereas narrow spreads decrease premiums. Higher credit spreads generally leads to two offsetting trends for Ambac. First, wider spreads indicate that it becomes more likely to incur losses on securities insured when spreads were lower. This can be potentially offset by making future business more attractive due to higher premiums. However, because its low credit ratings, it will be difficult for Ambac to offset losses with new business, as low credit ratings not only decrease consumer confidence, but also raises its cost of underwriting policies.

Competition

The guarantor/financial insurance business is highly competitive. The only barrier to entry that deters smaller financial entities from entering the market is a minimum capital requirement necessary to maintain a strong credit ratings. Largely, companies compete on a mix of price and consumer trust as well as judgment of the insurer’s ability to pay. Ambac also competes with alternative forms of insurance, including derivative contracts such as credit default swaps, which are written by most major bank and financial institutions. This makes the credit insurance business substantially larger and more competitive. Ambac is a financial guarantor insurance giant, and competes directly against large bond insurers, most notably MBIA (MBI).

  • MBIA (MBI), headquartered in New York City, is the world's largest bond insurer. Like Ambac, MBIA has begun implementing a restructuring plan aimed at bringing in new business.[11] However, MBIA's new restructuring plan has met resistance from its counterparties and is facing lawsuits.




References

  1. ABK 10-K 2010 Item 6 Pg. 43
  2. 3.0 3.1 3.2 ABK 10-K 2008 Item 1 Pg. 3
  3. ABK 10-K 2008 Item 1 Pg. 5
  4. 5.0 5.1 Ambac postpones plan for new muni bond insurer. Alistair Barr. MarketWatch.
  5. Bond insurer Ambac files for bankruptcy. Tom Hals. Reuters
  6. Ambac rehabilitation plan approved. Alistair Barr. MarketWatch.
  7. U.S. sues to block Ambac rehabilitation plan: filing. Caroline Humer. Reuters.
  8. Ambac Ratings Cut Deep Into Junk. Lavonne Kuykendall and Jay Miller. The Wall Street Journal.
  9. MBI 10-K 2008 Item 1 Pg. 2
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