Ambac posts a $1.6B Q1 loss

From Bloomberg:

The first-quarter net loss was $1.66 billion, or $11.69 a share, New York-based Ambac said today in a statement.

That is over 10% of their claims paying ability (as stated in the 2007 annual report) in one hit.

Ambac fell as much as 22 percent in early New York Stock Exchange trading as new business slumped 87 percent after states and municipalities shunned its insurance and the market for mortgage securities dried up.

Looking into the detail, we find two major components of the loss: $1.7B mark to market loss on written credit derivatives held at fair value (primarily CDOs of ABS), and a $1B increase in reserving for written financial guarantees on RMBS accounted for as insurance. What I would really like to know is the balance of Ambac's subprime risk taken via CDS vs. that taken financial guarantees. In other words, how does Ambac's fair value write-down compare with its reserves? If $100M of 'average' (whatever that means) exposure taken via CDS generated $20M of write-down, say, how much did Ambac increase its reserves for $100M of average exposure taken via writing financial guarantees?


If things keep on going down like this it is going to get very messy. Still, at least Bill Ackman had a good day.

Update. Meanwhile other market participants old (FSA) and new are queueing to eat Ambac and MBIA's lunch. The FT reports:

Two companies are considering opening new bond insurance firms – a large US bank and a large private equity firm – according to New York’s insurance industry regulator.

Finally, Calculated Risk has a post on adverse selection in the monoline's portfolio: see also slides 31 & 32 of Ambac's Q1 presentation. I'm not sure what exactly if anything one can conclude from the information, but it is interesting.