Ambac Financial Group Inc. (NYSE: ABK)

Ambac Financial Group Inc. (ABK) is a primarily a holding company. The Company, through its subsidiaries, provides financial guarantees and financial services to clients in both the public and private sectors worldwide. ABK’s activities are divided into two business segments. The Financial Guarantee segment provides financial guarantees (including credit derivatives) for public finance, structured finance and other obligations. The Financial Services segment provided investment agreements, funding conduits, interest rate, total return and currency swaps, principally to clients of the financial guarantee business. During the year ended December 31, 2008, the Company discontinued writing new investment agreements and derivative products in its Financial Services segment. Its existing investment agreement and derivative product portfolios are in active runoff, which may include transaction terminations, settlements, restructuring, transfers and natural attrition as contracts mature.

Ambac Financial Group was founded in 1971 and is headquartered in New York, New York.

Share Statistics Nov-4-09			2007	2008	%Chg	Q2 2008	Q2 2009	% Chg
Symbol	ABK	Revenue, Mn	-4.2B	-2.8B	33.3%	1.3B	-474.4M	136.5%
Current price	$1.20	Gross margin	N/A	N/A	N/A	N/A	N/A	N/A
52wk Range:	$0.35-$3.58	Oper. margin	120.1%	199.9%	79.8	115.5%	372.1%	256.6
Avg Vol (3m):	994,755	Net margin	77.1%	203.7%	126.6	61.8%	499.3%	437.5
Market Cap.	440.0M
Dil. Shares Outst.	287.6M	EPS, $	-31.56	-22.31	29.3%	-2.79	-8.24	195.3%

Source: https://trading.scottrade.com/quotesresearch/ScottradeResearch.aspx?symbol=ABK , http://www.ambac.com/ , http://www.reuters.com/finance/stocks/incomeStatement?symbol=ABK

Financial Summary

ABK is a holding company whose affiliates provide financial guarantees and financial services to clients in both the public and private sectors around the world. The principal operating subsidiary, Ambac Assurance Corporation, a guarantor of public finance and structured finance obligations, has been assigned a Caa2 rating (developing outlook) from Moody’s Investors Services, Inc., and a CC rating (negative outlook) from Standard & Poor’s Ratings Services. ABK through its subsidiaries, also provided investment agreements, interest rate swaps, total return swaps and funding conduits, principally to clients of the financial guarantee business, which include municipalities and their authorities, health care organizations and asset-backed issuers.

ABK reported second quarter 2009 net loss of $2,396.6 million, or a net loss of $8.33 per share. This compares to second quarter 2008 net income of $823.1 million, or income of $2.80 on a fully-diluted per share basis. The second quarter 2009 results reflect higher loss and loss expenses primarily related to the residential mortgage-backed securities (RMBS) insured portfolio and other-than-temporary impairment losses in its investment portfolios related to RMBS and tax-exempt municipal securities that it is prepared to sell. Additionally, during the quarter, ABK increased its deferred tax asset valuation allowance.

In 2008, ABK’s second quarter results reflected a positive change in fair value of credit derivatives amounting to $961.6 million, primarily related to its own credit spreads widening; and a reduction of loss reserves amounting to $339.3 million, primarily related to the insured second lien residential mortgage-backed securities portfolio.

Net premiums earned for the second quarter of 2009 were $177.7 million, down 45% from $325.5 million earned in the second quarter of 2008. Normal earned premiums amounted to $143.9 million and $166.2 million in the second quarter 2009 and 2008, respectively. Normal earned premium amounts reported in 2009 are not comparable to amounts that were reported in 2008. Net premiums earned include accelerated premiums, which result from refundings, calls and other accelerations recognized during the quarter. Accelerated premiums were $33.8 million in the second quarter of 2009, down significantly from $159.2 million in the second quarter 2008. During the second quarter 2008, a lack of liquidity in the auction rate and variable rate bond markets had resulted in significant refinancing activity in the municipal sector.

Net investment income excluding variable interest entities for the second quarter of 2009 was $120.4 million, representing a decrease of 5% from $127.3 million in the comparable period of 2008. The decrease was primarily due to lower invested assets driven by reductions in the portfolio to pay commutations on CDO of ABS transactions and RMBS claim payments, partially offset by $800 million proceeds from the issuance of AAC preferred stock in December 2008 and January 2009, and cash flow from the collection of financial guarantee premiums, tax refunds and fees and coupon receipts on invested assets.

Other-than-temporary losses in the AAC investment portfolio amounted to ($675.4) million in the second quarter of 2009, compared to a net loss of ($2.4) million in the second quarter 2008. In connection with the Company’s revised investment strategies, during the second quarter 2009, management determined its intent to sell certain investment securities (primarily Alt-A RMBS securities rated below investment grade by Moody’s or S&P and tax-exempt municipal securities) held in the insurance company investment portfolio. As a result of this decision, other-than-temporary impairment charges were recorded through earnings on such securities that were in an unrealized loss position. These amounts represent the entire difference between the amortized cost and estimated fair value of the impacted securities as of June 30, 2009. Prior to management’s decision to sell these securities, unrealized losses were recorded in stockholders’ equity.

Total net loss and loss expenses were $1,230.8 million in the second quarter 2009, compared to a net reduction in loss reserves amounting to ($339.3) million recorded in the second quarter of 2008. Losses and loss expenses in the second quarter 2009 were primarily related to second-lien and Alt-A RMBS insured securities as continued deterioration beyond that which had been expected at March 31, 2009, continues to be observed.

At June 30, 2009, AAC reported statutory capital and surplus of $305.6 million and contingency reserves of $173.6 million, down from $372.8 million and $1,946.6 million, respectively, at March 31, 2009. AAC statutory capital and surplus was negatively impacted by the net loss recorded during the quarter. The primary drivers of the statutory net loss were: (i) statutory impairment losses on credit derivatives amounting to $1,568.7 million; and (ii) statutory loss and loss expenses incurred of $751.0 million during the second quarter. The statutory impairment losses, which relate to AAC’s insured portfolio of CDOs of ABS, was driven by rising forward LIBOR rates, which increase estimated future cash outflows, and further deterioration of the underlying collateral within the CDO of ABS transactions. The statutory loss and loss expenses relate primarily to deterioration in AAC’s second-lien and Alt-A mortgage-backed securities financial guarantee portfolios, as discussed above under “Financial Guarantee Loss Reserves.” Statutory capital and surplus was positively impacted by a release of contingency reserves amounting to approximately $1.8 billion as of June 30, 2009, as approved by the OCI. AAC’s claims-paying resources amount to approximately $11.9 billion at June 30, 2009, flat to March 31, 2009, as net cash outflows driven by increasing RMBS claims paid were offset by ongoing cash inflows from installment premiums and investments. The approximate $746 million of payments related to the two CDO of ABS transactions that were settled/commuted in July, discussed above, will negatively impact claims-paying resources.

Source: http://ir.ambac.com/phoenix.zhtml?c=80774&p=IROL-irhome

Analyst Consensus

Buy

Outperform

Hold

Underperform

Sell

No Opinion

This is the consensus forecast amongst 3 polled investment analysts. Against the Ambac Financial Group Inc company.

Analyst Detail	Buy	Outperform	Hold	Underperform	Sell	No Opinion
Latest	0	0	2	1	0	0
4 weeks ago	0	0	2	1	0	0
2 months ago	0	0	2	1	0	0
3 months ago	0	0	2	1	0	0
Last year	0	0	4	1	0	0

The 2 analysts offering 12 month price targets for Inc ABK have a median target of 1.00, with a high estimate of 1.00 and a low estimate of 1.00. The median estimate represents a -9.91% decrease from the last price of 1.11.

Source: Financial Times.com

# of Estimates	Mean	High	Low	1 Year Ago
SALES (in millions)
Quarter Ending Mar-09	1	298.80	298.80	298.80	–
Earnings (per share)
Quarter Ending Dec-09	1	-1.04	-1.04	-1.04	0.17
Year Ending Dec-09	1	-6.41	-6.41	-6.41	-1.35
Year Ending Dec-10	1	-1.85	-1.85	-1.85	1.85
LT Growth Rate (%)	1	5.00	5.00	5.00	–

Source: http://www.reuters.com/finance/stocks/estimates?symbol=ABK

Investment Highlights

ABK announced earlier this year that it has postponed its efforts to launch Everspan Financial Guarantee Corp. (Everspan). It will, however, continue to focus on its ongoing loss mitigation efforts and other new business initiatives. ABK had been seeking to launch Everspan in order to write financial guarantee insurance in the public finance market as a separate, stand-alone legal entity. To launch the business, it was essential that it receive sufficient financial strength ratings to enable Everspan to successfully compete in the targeted market. Everspan was seeking to raise third-party capital in addition to any amounts contributed by Ambac Assurance Corporation in order to achieve such ratings. Although ABK engaged in discussions with third parties to raise capital for Everspan, none of these discussions have resulted in a satisfactory outcome. In light of this decision, Douglas Renfield-Miller, CEO of Everspan and executive vice president of ABK and Ambac Assurance Corporation, announced that he will retire effective January 1, 2010. Between now and December 31, 2009, Renfield-Miller will provide support and consultation to the Company.

Earlier this year ABK commented on Moody’s decision to downgrade the ratings of ABK’s insurance subsidiaries, Ambac Assurance Corporation (ACC) and Ambac Assurance UK Limited, to Ba3 from Baa1. While ABK believes that Moody’s is entitled to its opinion of the Company’s financial strength, it notes that this is the tenth such opinion change since January 2008. In the intervening time, ABK has taken a number of steps to move its business model forward given the significant changes in the marketplace. In particular, ABK has been actively refining its risk management and remediation capabilities, preparing to launch a well-capitalized, municipal-only financial guarantee subsidiary and developing business opportunities that capitalize on the current market dislocation. ABK is confident of the strength of the financial guarantee business model which is founded on aggressive risk mitigation, organic risk deleveraging and claim payment obligations that reflect scheduled principal and interest over the lives of the transactions. ABK will continue to execute a thoughtful, well-developed strategy to continue to serve issuers, create long-term shareholder value and maintain its critical role in the global capital and credit markets.

ABK recently announced that Ambac Assurance Corporation (AAC), its principal operating subsidiary, expects to report that estimated statutory impairment losses on credit derivatives increased by approximately $1.6 billion in the second quarter to approximately $4.9 billion at June 30, 2009. Additionally, AAC expects to report statutory loss and loss expenses incurred amounting to approximately $800 million for the quarter ended June 30, 2009.

The increase in impairment losses, which relate to AAC’s insured portfolio of collateralized debt obligations of asset-backed securities transactions (CDOs of ABS), was driven by rising forward LIBOR rates, which increase estimated future cash outflows, and further deterioration of the underlying collateral within the CDO of ABS transactions.

The statutory loss and loss expenses relate primarily to deterioration in AAC’s second-lien and Alt-A mortgage-backed securities financial guarantee portfolios. The increase in the estimated impairment losses in the second quarter is net of the impact of a settlement that reduced a significant portion of exposure under a CDO of ABS transaction that closed in July and a commutation of all of the exposure under a different CDO of ABS transaction that we expect will close by the end of July.

The two transactions, with an aggregate of approximately $2.8 billion net notional outstanding at March 31, 2009, are expected to be settled with counterparties for a total cash payment of approximately $750 million. Estimated impairment losses on credit derivatives is a statutory accounting measurement reported in AAC’s statutory filings as “Estimated impairment losses on subsidiary guarantees and commitments.” An increase in estimated impairment losses is recorded as a reduction to statutory income and therefore reduces statutory surplus. At March 31, 2009, AAC reported statutory capital and surplus of $372.8 million and contingency reserves of $1,946.6 million. AAC has requested the approval of the Office of the Commissioner of Insurance of the State of Wisconsin (OCI) to release a substantial portion of its contingency reserves, however, there can be no assurance that the OCI will approve such release. The amount of contingency reserves released, if any, will increase AAC’s statutory capital and surplus by such amount.

Source: Scottrade.com, Reuters.com, ambac.com

Technical Analysis

Moving Average Price Compare

ABK is trading below its 50-day moving average. However, this moving average is trending higher which suggests that there has been buying interest in this stock.

Bollinger Bands

ABK is trading within its Bollinger Bands. This is a normal condition and suggests that the stock is neither overbought nor oversold relative to the recent price action.

MACD

ABK’s MACD is currently indicating a weak bullish signal. Although the MACD is trending above the signal line, the indicator is still below 0, which suggests that the underlying moving averages are bearish.

Comparative Analysis

Company Name	Ticker	Price per	Mrkt. Cap.	P/E		P/S
Nov-4-2009	symbol	Share, $	$ Mn	2009	2010	2009	2010
American International Group Inc.	AIG	39.28	4.93B	N/A	N/M	N/A	N/M
AXA	AXA	25.22	51.08B	N/A	N/M	N/A	N/M
Assured Guaranty Ltd.	AGO	17.70	2.62B	N/A	N/M	N/A	N/M
MBIA Inc.	MBI	4.08	952.61M	N/A	N/M	N/A	N/M
Median		21.57	14.89B
Ambac Financial Group Inc.	ABK	1.20	440.0M	N/A	N/M	N/A	N/M

Source: Reuter.com, Nasdaq.com

Insider Trading Activity

Net Share Purchase Activity

Insider Purchases - Last 6 Months Shares Trans Purchases 30,000 2 Sales N/A 0 Net Shares Purchased (Sold) 30,000 2 Total Insider Shares Held 1.29M N/A % Net Shares Purchased (Sold) 2.4% N/A

Net Institutional Purchases - Prior Qtr to Latest Qtr Shares Net Shares Purchased (Sold) (76,816,600) % Change in Institutional Shares Held (138.5%)

Data provided by Thomson Financial

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