Ambac Shares Rise on Profit Surprise
08/06/08 - 12:12 PM EDT
(ABK - Cramer's Take - Stockpickr) shares shot up as much as 13% Wednesday, after the bond insurer posted a surprising profit in the second quarter.
The bond insurer reported net income of $823.1 million, or $2.80 per diluted share, vs. $173 million, or $1.67 per diluted share, in the year-ago period. The unexpected profit was due to mark-to-market gains on credit derivatives, increased accelerated refunding premiums and a drop in the loss reserves for the mortgage-backed security portfolio.
Excluding gains on credit derivatives of $961.6 million and estimated impairment losses in the portfolio of $1,061.9 million, the company posted an operating loss of $1.53 a share. Analysts polled by Thomson Reuters had forecast a loss of 65 cents a share.
The company, which along with rival MBIA
(MBI - Cramer's Take - Stockpickr) has been hammered by credit downgrades by all three major credit rating agencies, has seen its share price plummet as low as $1.04 from a high of $74.48 in the past year. Less than pristine credit makes it all but impossible for the company to win new business. But the company said it was optimistic about its plan to set up a separate, AAA-rated subsidiary called Connie Lee.
Ambac believes it will receive approval of its plan, which is being reviewed by the ratings agencies. CEO Michael Callen, in a company statement, said the venture "starts fresh with a clean balance sheet," and will be well capitalized and focused on U.S. public finance and global infrastructure exclusively.
Callan said the major hurdle for Connie Lee was the AAA rating. "They've been putting us through the ringer," Callen said of the ratings agencies on a conference call.
The firm's claims paying resources increased from $14.5 billion to $16.3 billion due to the $1.5 billion that the company raised in March. Ambac is currently rated AA and Aa3 by S&P and Moody's, respectively and the capital position is estimated to be in line or in excess of both rating agencies' triple-A requirements.
The company projected that it will take three years to fully recover from the market crisis that has engulfed it for the past year.
Ambac commuted one of its largest collateralized debt obligations, AA Bespoke, by paying $850 million in order to settle the $1.4 billion in exposure. According to CFO Sean Leonard on the conference call, "The exit price was less than the loss."
Ambac shares, which hit as high as $5.35 Wednesday, more recently was up 8.7% to $5.14.