Ambac Financial Group Inc. Reports Operating Results (10-Q)
Ambac Financial Group Inc. has a market cap of $382.49 million; its shares were traded at around $1.33 with and P/S ratio of 0.1. ABK is in the portfolios of Third Avenue Management, Martin Whitman of Third Avenue Value Fund, Bruce Kovner of Caxton Associates, Irving Kahn of Kahn Brothers & Company Inc., Oak Value of Oak Value Capital Management.
Highlight of Business Operations: Cash Flows. Net cash provided by (used in) operating activities was $427.1 million and ($284.2) million during the three months ended March 31, 2010 and 2009, respectively. The cash provided by operating activities was primarily due to the Federal tax refund of $443.9 million received in the first quarter of 2010. Operating cash flows were positively impacted by the claim moratorium with respect to the rehabilitation of the Segregated Account ($130.1 millions of claims presented but net paid in the first quarter of 2010). The negative cash used in operating activities in 2009 was primarily due to high payments under derivative swap obligations, high loss payments on insurance policies and CDS contracts. Future net cash provided by operating activities will be impacted by the level of premium collections and claim payments, including payments under credit default swap contracts.
Net cash used in financing activities was ($30.8) million and ($866.6) million during the three months ended March 31, 2010 and 2009, respectively. Financing activities for the three months ended March 31, 2010 included repayments of investment and payment agreements of $31.1 million. Financing activities for the three months ended March 31, 2009 included repayments of investment and payment agreements of $985.8 million, partially offset by proceeds from Ambac Assurances preferred stock issuance of $100 million.
Net cash (used in) provided by investing activities was ($393.6) million and $1,150.8 million during the three months ended March 31, 2010 and 2009, respectively. These investing activities were primarily from sales and maturities of fixed income securities to meet operating cash flow needs.
Net cash provided by operating, investing and financing activities was $2.7 million and $0.1 million during the three months ended March 31, 2010 and 2009, respectively.
Ambac, through its subsidiary Ambac Financial Services, is a provider of interest rate and currency swaps to states, municipalities and their authorities and other entities in connection with their financings. Ambac Financial Services manages its swaps business with the goal of being market neutral to changes in benchmark interest rates while retaining some basis risk. Basis risk in the portfolio arises from (i) variability in the ratio of benchmark tax-exempt to taxable interest rates, (ii) potential changes in municipal issuers bond-specific variable rates relative to taxable interest rates, and (iii) variability between Treasury and swap rates. If actual or projected benchmark tax-exempt interest rates increase or decrease in a parallel shift by 1% in relation to taxable interest rates, Ambac would experience a mark-to-market gain or loss of $0.02 million and $0.02 million at March 31, 2010 and December 31, 2009, respectively. For a 1 basis point parallel shift in USD Libor interest rates versus the US Treasury rate Ambac would experience a mark-to-market gain or loss of $0.01 million and $0.06 million at March 31, 2010 and December 31, 2009. respectively. The derivative portfolio also includes an unhedged Sterling-denominated exposure to Consumer Price Inflation in the United Kingdom (UKRPI). For a 1% change in UKRPI for all maturities Ambac would experience a mark-to-market gain or loss of $0.01 million and $0.01 million at March 31, 2010 and December 31, 2009, respectively. Each of the amounts above are presenting sensitivity (gain or loss) under the assumption that everything else remains unchanged. Actual changes in tax-exempt interest rates, UKRPI and US Libor vs. US Treasury, as well as changes in Libor curves for different currencies themselves are correlated. This correlation is taken into account when we produce VaR numbers based on historical changes of all interest rate risk components as discussed below.
The estimation of potential losses arising from adverse changes in market relationships, known as VaR, is a key element in managements monitoring of basis risk for the municipal interest rate swap portfolio. Ambac has developed a VaR methodology to estimate potential losses using a one day time horizon and a 99% confidence level. This means that Ambac would expect to incur losses greater than that predicted by VaR estimates only once in every 100 trading days, or about 2.5 times a year. Ambacs methodology estimates VaR using a 300-day historical look back period. This means that changes in market values are simulated using market inputs from the past 300 days. For the three months ended March 31, 2010 and the year ended December 31, 2009, Ambacs VaR, for its interest rate swap portfolio averaged approximately $5.2 million and $4.5 million, respectively. Ambacs VaR ranged from a high of $6.5 million to a low of $3.2 million in the three months ended March 31, 2010 and from a high of $6.5 million to a low of $2.2 million in the year ended December 31, 2009. Ambac supplements its VaR methodology, which it believes is a good risk management tool in normal markets, by performing rigorous stress testing to measure the potential for losses in abnormally volatile markets. These stress tests include (i) parallel and non-parallel shifts in the benchmark interest rate curve and (ii) immediate changes in normal basis relationships, such as those between taxable and tax-exempt markets.
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