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Ambac Financial Group sees rating downgraded
Sep 15, 2010

Morningstar is initiating coverage of Ambac Financial Group with a rating of "C." Morningstar feels that one sure sign of a problem with an insurance company is when its governing regulator steps in to negotiate settlements with policyholders. Such an occurrence happened earlier this year when the insurance commissioner of Wisconsin, the state of domicile for Ambac, segregated reserves to settle claims from certain high-risk policies at a severe discount to policy liability. Ambac was stripped of its AAA credit rating by Fitch Ratings in January of 2008, after the company abandoned plans to raise new equity. Matt Fabian, managing director at Municipal Market Advisors in Westport, Conn., said, "This makes Ambac insurance toxic. The market has no tolerance for a ratings-deprived insurer.'' In a Sept. 2 letter, the Association of Financial Guaranty Insurers (AFGI), a trade association of insurers and re-insurers of municipal bonds and asset-backed securities, stated that Bank of America should repurchase as much as $20 billion in home loans that were based on misinformation. The letter claims that more than 50 percent of toxic home-equity credit lines and residential mortgages from the two-year span of 2005-2007 should be re-purchased. Ambac Financial Group Inc. is a member of AFGI, and the group claims re-purchases may range from $10 billion to $20 billion. In late August, Aurelius Capital Management LP, Fir Tree Inc., King Street Capital LP, King Street Capital Master Fund Ltd., Monarch Alternative Capital LP and Stonehill Capital Management—holders of residential mortgage-backed securities (RBMS) policies—sued Ambac in the Circuit Court of Dane County, Wis., to prevent what they allege is acceptance of payments from Ambac Assurance to its parent company Ambac Financial. Ambac ran into trouble in the midst of the financial crisis over its insurance of RBMS, is now in runoff. Also in August, Ambac's management announced that it was seeking a restructuring of its debt through a pre-packaged bankruptcy, which would have debt holders exchange debt claims for equity. Earlier this year, the firm negotiated an exchange with some debt holders for equity. As of the end of the second quarter, Ambac had cash and marketable securities at the holding company of $76 million. Current annual debt service is $87 million. Ambac Financial Group announced a second quarter 2010 net loss of $57.6 million, or a net loss of $0.20 per share. This compares to a second quarter 2009 net loss of $2,368.8 million, or a net loss of $8.24 per share. The second quarter 2010 results reflect loss and loss expenses in consumer asset-backed securities, other structured finance exposures and a transportation transaction and a net operating loss in the financial services segment, partially offset by a positive change in fair value of credit derivatives.  
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