April 09, 2010, 5:18 PM EDT
By Jody Shenn
April 9 (Bloomberg) -- Ambac Financial Group Inc., the bond insurer that stopped paying some claims and accepting new business, jumped 71 percent in New York trading after reporting fourth-quarter net income of $558.1 million amid a tax benefit and unrealized gains on derivatives.
The company, which also said it has “insufficient capital” to finance itself past the second quarter of next year and may need to file for bankruptcy, climbed 46 cents to $1.10, the highest in five months, in New York Stock Exchange composite trading as of 4:15 p.m. It reported the profit under generally accepted accounting principles yesterday.
The “equity market reaction is dumbfounding,” Rob Haines, an insurance analyst with CreditSights Inc. in New York, said in an e-mail. The “GAAP earnings number sounds good, but nothing has really changed.”
Ambac’s net income, equal to $1.93 a share, compares with a net loss of $2.34 billion, or $8.14 a share, a year earlier, the New York-based company said yesterday in a statement after the close of regular trading. The insurer said its main unit received a $443.9 million tax refund as a result of U.S. legislation that passed last quarter, allowing it to use recent losses to offset past levies.
The company, the second-largest bond guarantor, sold the industry’s first policy on municipal debt 39 years ago and was crippled in recent years by an expansion into risky insurance, including collateralized debt obligations tied to subprime mortgages before the worst housing slump since the 1930s.
Regulator Takeover
Last month, Wisconsin Insurance Commissioner Sean Dilweg took over some of Ambac’s policies on residential mortgage securities and other debt, placing them in a separate account and halting some payments, to protect municipal bondholders who count on the company’s guarantees.
Today’s advance in the shares was the biggest gain since January 2008. The stock is down from as high as $96.08 in May 2007. Armonk, New York-based MBIA Inc., the largest bond insurer, gained 14 cents, or 1.9 percent, to $7.69.
Ambac’s segregated account includes some municipal debt such as $1.2 billion of bonds sold by the Las Vegas Monorail Co., while the company’s credit-default swaps on subprime-tied CDOs remain in Ambac’s main insurance unit with most of its public-finance obligations.
In an interview yesterday, Dilweg said municipal bondholders shouldn’t worry that their securities will end up being transferred to the segregated account, partly because a judge would need to approve any shuffling.
Looking ‘Bleak’
“You should feel more stable because we’ve assessed and stress tested the company,” Dilweg said, addressing municipal bondholders. “Our intention is durable coverage in the general account.”
Ambac’s main unit has offered to pay $2.6 billion in cash and $2 billion of surplus notes to settle with counterparties on the CDOs filled with asset-backed securities, the parent company said in a statement last month. CDOs package pools of securities and slice them into pieces of varying risk. The notes may be repaid, with regulator permission, if surplus funds remain.
“Things look bleak” for Ambac, with the holding company “running out of time quickly,” Haines said. The tax refund went toward bolstering capital at the company’s insurance unit, so the benefit won’t “move the meter,” he added.
--Editors: Chapin Wright, Richard Bedard, Charles W. Stevens
To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net
To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net.
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