Earnings Preview: Ambac Financial Group

Ambac Financial Group (ABK) is expected to report Q3 earnings before the open Wednesday with a conference call scheduled for 8:30 am.

Guidance

Analysts are looking for EPS of (50c) on revenue of $420.08M. The consensus range for EPS is ($1.15) to (13c), according to First Call. Only one analyst provided a revenue estimate.

Ambac recently asked the U.S. Treasury, within the framework of the TARP program, to guarantee its securities and guarantee that it would not suffer losses over a certain amount. CNBC reported last month that the government was considering taking a stake in Ambac and other bond insurers.

On October 21, Ambac named David Wallis as its new CEO. Wallis, who had been serving as the company's Chief Risk Officer, will take over for interim CEO Michael Callen. Callen will keep his post as the company's executive chairman.

Ambac received some bad news when Moody's placed the company's Aa3 insurance financial strength rating on review for a possible downgrade on September 18. The ratings agency noted that it took the action following its upward revision to cumulative loss projections for subprime RMBS exposures.

Moody's added that its review of Ambac's ratings would focus on the impact of increasing cumulative loss rate projections on Ambac's mortgage-related exposures and risk-adjusted capital position. The ratings agency also noted that it had previously increased its estimate on losses from 2006 vintage subprime first-lien pools to an average of 22%, compared with the agency's estimate of 14% to 18% in January 2008.

Comments

[Tom Armistead:]

I recently reduced the size of my long position in ABK, because I am worried about the potential liquidity difficulties they would face in the event of a downgrade. They would need to post collateral on deals in their asset management business, and would need permission from the Wisconsin Insurance Dept. to make intercompany transactions in order to do so.

I have been studying up on synthetic CDOs and have not been very happy about what I have learned. Some of the CDOs ABK insures contain a fair amount of synthetic collateral.

Based on adjusted Book Value as computed by the company, there is a lot of potential value here - 15 per share - but since the collapse of Lehman created difficulties around collateral in ABK's asset management business, particularly in view of Moody's potential downgrade, I regard the stock as speculative, since the creation of value depends on government assistance.

2008 Nov 04 02:57 PM