Bond Insurer Ambac Posts Wider Loss on Second-Lien RMBS Woes

Ambac Financial Group (ABK) posted a $690.1m net Q110 loss, widened from a $392.2m net loss in the year-ago quarter, as write-downs in mortgage securities and the adoption of certain accounting standards weighed on company results. Ambac’s exposure to residential mortgage-backed securities (RMBS) and write-downs of RMBS securities also drove the quarter’s losses. The bond insurer posted $31.3m of other-than-temporary impairment losses in the quarter, narrowed from $744.7m in the year-ago quarter. Write-downs of Ambac-wrapped RMBS securities within its investment portfolio drove the losses. Credit deterioration in the second-lien segment of Ambac’s insured RMBS portfolio drove $89.2m of total net losses in the quarter, while improvement in certain first-lien RMBS transactions kept losses significantly narrowed from $739.8m in the year-ago quarter. Ambac recorded a $495.1m loss related to the adoption of Accounting Standards Update (ASU) 2009-17 in January. The ASU required the firm to consolidate certain enterprises known as variable interest entities (VIEs) when its insurance policies or written credit derivatives give the company a controlling financial interest in those entities. As a result, Ambac consolidated 83 VIEs, which increased shareholders’ equity by $705m. But then, in March, Ambac’s principal operating subsidiary, Ambac Assurance Corp., established a segregated account to hold insurance policies related to RMBS and other structured finance transactions for orderly runoff and settlement. As a result, Ambac no longer held a controlling interest in the 49 VIEs whose insurance policies were allocated to the segregated account. Those VIEs were de-consolidated as of March 24, at a $495.1m charge to Ambac’s consolidated statement of operations. Write to Diana Golobay.

Disclosure: the author holds no relevant investment positions.

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