S&P Downgrades Ambac After Company Reports Higher Losses

NU Online News Service, July 29, 3:38 p.m. EDT

Standard & Poor's Ratings Services has downgraded municipal bond insurer Ambac Assurance Corp. after the company reported its losses on credit derivatives increased by about $1.6 billion in the second quarter of this year.

New York-based Ambac Financial Group Inc., the parent company of Ambac Assurance, reported Monday that the losses on the credited derivatives increased to $4.9 billion and it expects to report statutory loss and loss expenses incurred amounting to approximately $800 million for the quarter.

S&P lowered the financial strength, counterparty credit and financial enhancement ratings on Ambac Assurance from "triple-B" (good) to "double-C" (weak). The ratings were removed from CreditWatch and the outlook is developing.

The counterparty credit rating on Ambac Financial Group was lowered from "double-B" (marginal) to "double-C" with a negative outlook.

"This rating action reflects our view of the significant deterioration in Ambac's insured portfolio of nonprime residential mortgage-backed securities and related CDOs," said David Veno, an S&P credit analyst, in a statement.

The losses will require the company to strengthen reserves, creating a "significant negative effect on operating results, which will likely cause surplus to decline to below regulator-required minimums," S&P said.

In its release on Monday, Ambac said Ambac Assurance's statutory capital and surplus stood at $373 million as of March 31 and it has contingency reserves of $1.95 billion. The company has asked Wisconsin's commissioner of insurance to release a substantial portion of the reserve--a move that has not yet been approved.

The company said it expects to report total net loss and loss expenses of approximately $1.3 billion for the second quarter of this year. The company will make its earnings report on Aug. 5.

To preserve cash, the company said it will stop paying the semi-annual interest on its directly issued subordinated capital securities starting Aug. 1. It will also stop paying the monthly dividend on Ambac Assurance's outstanding auction market preferred shares on the same day.

Ambac stopped paying a stock dividend in December last year.