Ambac Profits Send Bears Scurrying

| About: Ambac Financial (AMBC)

Ambac(ABK) announced second quarter 2008 net income of $823.1 million, or net income of $2.80 on a fully-diluted per share basis. This compares to second quarter 2007 net income of $173.0 million, or net income of $1.67 on a fully-diluted per share basis. The increase in the second quarter of 2008 is primarily due to recording net mark-to-market gains on credit derivatives, increased accelerated premiums from refundings, and loss reserve reductions on the direct residential mortgage-backed securities (NASDAQ:RMBS) portfolio, partially offset by market losses on RMBS within the financial services investment portfolio.

Short translation? The write-downs that killed earnings are becoming write-ups and helping them.

Quarter Highlights:
• Financial guarantee revenues, excluding net securities gains/losses and accelerated premiums from refundings (both are defined below), were flat at $314.1 million, quarter over quarter, despite little new business generated during the quarter.

• Net loss reserve reductions of $339.3 million were recorded for the quarter primarily relating to the second-lien direct RMBS portfolio. The majority of this benefit resulted from the inclusion in our loss reserve estimates of substantiated representation and warranty breach recoveries in certain transactions.

• Net mark-to-market gains on credit derivatives amounted to $961.6 million. However, estimated impairment losses in this portfolio amounted to $1,061.9 million during the quarter primarily due to credit deterioration and internal downgrades in several transactions. Operating earnings2 and core earnings2 for the second quarter and six months of 2008, shown below in table I, include the impact of estimated credit impairment for those periods.

• Progress continues in our efforts to establish a triple-A rated public finance subsidiary. The appropriate approval forms have been filed with the Office of the Commissioner of Insurance of the State of Wisconsin (OCI) and the Company believes that it will receive a favorable response; rating agency review is ongoing.

Does this mean they are out of the woods? No. I think however it is safe to say that their complete obsolescence is not in the cards. Coming off the $1.4 billion placement of CDOs last week and now this, one must assume while they may never see the heights they saw two years ago, they will be around for a while.

With famed Bears like Bill Ackman reducing (eliminating?) their shorts on the company and Marty Whitman piling into the stock, it would seem there is reason for the stock jumping from $1 to $5 in a month, the bears are getting out.

Does this make it a buy? I think that it is gambling money.....could hit big, but, be wary..

SEC earnings filing


CDO Sale filing


Disclosure: No position