S&P Slashes Ambac to Junk on Expected Losses

Bond insurer Ambac Financial Group (ABK) this week estimated statutory impairment losses on credit derivatives for its Ambac Assurance segment rose by $1.6bn to a total $4.9bn in Q209. These losses, which the firm expects to report on August 5, are tied to collateralized debt obligations on asset-backed securities, the underlying collateral of which continues to decline in performance. The firm expects to post a $1.3bn quarterly loss, including an estimated statutory loss and loss expenses incurred at approximately $800m. Deterioration in Ambac Assurance’s second-lien and Alt-A mortgage-backed securities financial guarantee portfolios drive the expected statutory loss and loss expenses, the company said in a corporate release. Ambac also said it plans to discontinue paying certain monthly dividends in order to reserve cash. In light of its capital troubles and the declining quality of its insured books, Standard & Poor’s on late Tuesday slashed Ambac Assurance to double-C from triple-B, effectively lowering it to junk status. “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 S&P’s credit analyst David Veno in a statement. “This has required the company to strengthen reserves to account for higher projected claims.” S&P said the additional reserves will have a significant negative effect on operating results, which will likely cause surplus to decline to below regulator-required minimums. In March, Ambac Assurance bore $1.9bn of so-called contingency reserves. It requested permission from the Wisconsin Office of the Commissioner of Insurance (OCI) to release some of the contingency reserves into surplus. Although the OCI had yet to respond to the request at the time this story went to press, S&P noted the approval for Ambac to boost its surplus might allow the rating agency to lift it up to triple-C, but not likely higher. If, however, the request remains unanswered and regulators must come to Ambac’s aid, S&P may act on its “developing” outlook of the firm and revise the rating down to single-R. Write to Diana Golobay. Disclaimer: The author held no relevant investments when this story was published.