Ambac 4Q Results Lead To Moody's Review

Ambac Financial Group, Inc. reported a 2008 fourth quarter net loss of $2.3 billion, compared to a 2007 fourth quarter net loss of $3.3 billion.

For the year, the New York-based bond insurer reported a $5.6 billion net loss compared to a $3.2 billion loss in 2007. The company cited the housing market and economy in general as the reason for the losses.

Speaking to its quarterly results, Ambac acknowledged it has recorded "significant mark-to market losses on its CDS [credit default swap] portfolio and has incurred losses in its insured RMBS [residential mortgage backed securities] portfolio."

These losses, Ambac said, have been greater than originally anticipated, leading to revised estimates of potential future increases in loss reserves to "conservatively reflect the potential impact that further deterioration in Ambac's insured portfolio would have on future taxable income."

The reported results led Moody's Investors Service to place the New York-based bond insurer's Baa1 financial strength ratings under review for possible downgrade.

Moody's said it will analyze risks related to regulatory capital requirements, and update its assessment of Ambac's capital adequacy position relative to its current risk exposures, the degree to which the company's constrained holding company liquidity and impaired financial flexibility impacts its insurance financial strength and debt ratings, as well as developments related to the establishment of Everspan Financial Guarantee as a subsidiary of Ambac Assurance.

Ambac's president and chief executive officer, David Wallis, said in a statement that Everspan Financial Guaranty will be a municipal-only financial guarantor, and is expected to begin doing business during the second quarter.

The move to split off a company to handle the more risk-free municipal business is a growing trend. Last month MBIA Inc. announced it was creating a National Public Finance Guarantee Corp where it would place its municipal bond business.

Moody's said, "Ambac's increased losses continue to reflect both the significant volatility of the company's mortgage-related risk exposures as well as the challenges inherent in estimating the losses that will ultimately develop from this portfolio over time."

The outcome of the ratings review could result in a multi-notch downgrade, including the possibility of non-investment grade insurance financial strength ratings, Moody's said.

The rating agency added its review of Ambac should finish up in the next few weeks.

Also under review, according to Moody's, are debt ratings of Ambac Financial Group, Inc., and Moody's-rated securities that are guaranteed by Ambac, "except those with higher published underlying ratings (and for structured finance securities, except those with higher published or unpublished underlying ratings)."

Mr. Wallis said in a statement, "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.

"We continue to place significant emphasis on de-risking our portfolio. The successful commutation of $3.5 billion of CDO [collateralized debt obligation] of ABS [asset back securities] exposures, including two CDO-squared deals, was constructive and we will continue to pursue this de-risking approach."