Farewell, MBIA. We hardly knew ye.

Ambac Not Yet Back

by Jeffrey Cane Apr 23 2008

Big loss shows a long road is still ahead for bond insurers.

They have held on to their valuable triple-A ratings, but the big bond insurers are not out of the woods yet.

The No. 2 bond insurer, Ambac Financial Group, today reported a $1.66 billion loss in its first quarter after losing $1.73 billion on credit derivatives.

The loss of $11.69 per share was much wider than analysts' forecasts and compared with a profit of $213.3 million, or $2.02 per share, in the quarter a year earlier

Much of the loss on credit derivatives—$940 million—was on collateralized debt obligations tied to mortgages.

"The housing-market crisis continues to disrupt the global credit markets, and our credit derivatives and direct-mortgage portfolios were severely impacted once again," Michael Callen, Ambac's chief executive, said. "While we realize that these are disappointing credit results, we continue to believe that the capital raise and strategic business actions taken during the quarter will enable us to get beyond this credit market."

Last month, Ambac said it would raise at least $1.5 billion in new capital by selling common stock and equity units. The plan disappointed investors, but it reassured the credit-ratings agencies Moody's and Standard & Poor's, who maintained their triple-A ratings on the company. For bond insurers, a triple-A rating is the engine of their business. That rating provides a blanket of protection for states and municipalities that issue bonds, allowing them to pay a lower interest rate

For Ambac and its larger rival, MBIA, their business and stock price has been whipsawed by concerns that their exposure to C.D.O.'s and other structured financial products leave them vulnerable to billions of dollars in mortgage-related losses. Both have shored up their capital and shifted their focus back to their core business of muni-bond insurance.

The question now is whether that business can be the profitable money machine it once was.

Callen said "we have recently started to see some business come our way in the municipal markets."

But a number of people, including Bill Gross of Pimco and Jesse Eisinger in the February issue of Condé Nast Portfolio, have questioned the need for municipal-bond insurance. Some big issuers, like the state of California, have recently agreed.

Bloomberg News, citing Thomson Financial data, notes that Ambac insured just 1 percent of municipal bonds sold during the first quarter while a smaller competitor, Financial Security Assurance Inc., a unit of Dexia SA of Brussels and Paris, took 65 percent of the market.