KBW Diversified Financials Conference Douglas Renfield-Miller Executive Vice President, Ambac Financial Group. June 4, 2008

Transcription

1 KBW Diversified Financials Conference Douglas Renfield-Miller Executive Vice President, Ambac Financial Group June 4, 2008.

2 Key Messages Strong capital and liquidity Exceed Moody s and S&P s Triple-A target capital levels as of 4/30/08 Foresee no need to raise additional dilutive equity Seasoning of exposures and increasing transparency lending greater certainty to projections of ultimate claims Credit concerns remain concentrated in relatively few transactions Maintaining client relationships through market turmoil Credit crisis validates need for financial guarantees Enterprise Risk Management revamped under new Chief Risk Officer Reducing volatility through aggressive remediation, appropriate reserving, risk transfer, and refocused business 2

3 Agenda Capital Adequacy and Liquidity First Quarter Results Portfolio Update Business Outlook 3

4 Strong Capital Position Covers Rating Agency Triple-A Stresses Accumulated over $2.0 billion of capital since YE-2007 $1.5 B capital raise Portfolio amortization in excess of $500MM Substantial shrinkage in Investment Agreement business Ability to manage down exposures and release capital attests to strength of financial guarantor model Revenue and cash flow remain robust despite limited new business Strong capital position Exceeded Moody s triple-a target as of April 30, 2008 Over $700MM above S&P s triple-a target Capital continues to build; project substantial cushion at end of June 4

5 More Than Adequately Capitalized Against Worst Case 1 $16.0 bn Ambac Claims- Paying Resources $9.0 bn $12.7 bn $7.0 bn $5.4 bn $3.3 bn Ambac Impairment and Reserves as of March 31, 2008 Moody s Stressed PV Moody s Aaa Target (1.3 x Stressed PV) 1 Reflects mortgage-related exposures only 5

6 Experiencing First Tail Event Historical claim payments covered by operating earnings Claims-Paying Resources sized to protect against unexpected, stressed losses 6

7 Strong Liquidity Guarantee scheduled principal and interest; claims spread over time $12 billion, high-quality, liquid investment portfolio Purchased U.S. Treasury securities with maturities targeted to match anticipated claims Investment portfolio generates on average $1 billion of cash from interest and maturing principal in each of next four years Minimum $400 million of installment premiums will be collected in each of the next three years $100 million of capital proceeds retained at holding company Two-years debt service accumulated at holdco by year-end Common dividend reduced to $0.04 per annum Low operating expenses 7

8 Anticipated Claim Payments Easily Managed Claim Payments 1 ($ Thousands) Expected Q 08 Remaining $86,739 $105,568 $(2,128) $34,053 $150, premium inflows and investment earnings cover anticipated claims more than 4X $331 million in estimated net installment premiums and fees on credit derivatives for period 4/1/08-12/31/08 Project over $500 million of Investment earnings for Net of Reinsurance 2 For RMBS and Credit Derivatives only 8

9 Agenda Capital Adequacy and Liquidity First Quarter Results Portfolio Update Business Outlook 9

10 Financials $7.8 billion cumulative mark-to-market on CDS driven primarily by mortgage-related CDO exposures Signs marks may begin to reverse (e.g. ABX) Reserves and impairments for Q1 primarily driven by: Financial Guarantees of RMBS: $1,045 million CDS on CDOs of ABS: $940 million (impairment embedded within MTM) Cumulative impairments to date on CDS: Approximately 100% against $1.0 billion single-a CDO-squareds 60% against double-a CDO-squared liquidity needs will be driven by: HELOC and CDO-squared transactions Financial Services Business 10

11 Quarterly Financial Guarantee Earnings Components ($ Millions) 1Q07 2Q07 3Q07 4Q07 1Q08 Normal Earned Premium 1 $191.8 $ $ $ $ Investment Income $ $ $ $ $ Gross Operating Expenses $ 49.2 $ 48.9 $ 50.6 $ 47.0 $ Q 2008 Normal Earned Premium reflects impact of December reinsurance ($6.9mm) to Assured Guaranty 18% reduction in Gross Financial Guarantee Underwriting and Operating Expenses from Q due to lower compensation costs and premium taxes 1 Includes fees on credit derivative contracts. 11

12 April 2008 Snapshot 1 Selected Data (unaudited $ millions) April 2008 Insured Portfolio Normal Premiums Earned (1) $ 56.4 Accelerated Net Premiums Earned (2) 54.6 Mark-to-Market on Credit Derivatives (3) - CDO of ABS (>25% MBS) (228.0) - Other (including CLOs) 52.0 Investment Portfolio Net Investment Income 42.2 Change in Fair Value of the Investment Portfolio (4) - Financial Guarantee Portfolio (5.9) - Financial Services Portfolio (47.5) Financial Guarantee Liquidity Installment Premiums Written, net of reinsurance 36.2 Investment Portfolio Cash Received (5) 49.0 Claims Paid, net of reinsurance (16.2) 1,2,3,4,5 For footnotes please refer to full release posted at 12

13 Loss Reserves and Credit Derivative Impairments ($ Thousands), End of Period Balances 2,046,156 1,105,741 1,131, , , ,803 37, ,707 47, , , ,816 1Q07 2Q07 3Q07 4Q07 1Q08 Case Reserves Active Credit Reserves Credit Derivative Impairment 13

14 Why Did Loss Estimates Change So Much From Q3 2007? Financial market dislocation much more severe than expected ABX volatility Rating agency downgrades Frozen markets U.S. economic weakness Focused initially on sub-prime; second lien issues only evident later Abrupt and rapid deterioration in select second lien transactions Tipping point for CDO-squareds triggered by ratings downgrades Events of Default triggered by ratings, not realized losses High correlation 14

15 FAS 163 Covers premium revenue and claim liability recognition and related disclosures Will bring industry-wide consistency to accounting Modified substantially from exposure draft; reflects industry input Claim liability recognition consistent with Ambac s current loss recognition methodology Active credit reserves (ACR) established for probable and estimable losses due to credit deterioration on certain adversely classified transactions 15

16 Adjusted Book Value (ex unrealized gains and losses) $40 ($ per share) $30 $17.64 $1.96 $0.47 $31.26 $4.64 $20 $6.47 $0.47 $15.83 $10 $4.52 $5.31 $0 0 Reported Book Value Net Unearned Premium Reserve PV of Future Installment Premiums Unrealized Loss on Investment Agreement Liabilities Reported Adjusted Book Value Cum. Unrealized MTM Loss Cum. Impairment Unrealized Loss on Investments Unrealized Loss on Investment Agreement Liabilities Adjusted Book Value ex Unrealized 16

17 Agenda Capital Adequacy and Liquidity First Quarter Results Portfolio Update Business Outlook 17

18 Portfolio Update: Key Messages Direct RMBS: Certain second lien transactions experiencing extreme stress but no systemic deterioration Reserves based on conservative cumulative loss assumptions Reserves don t incorporate remediation possibilities CDOs of ABS: CDO-squareds largely reserved against CDOs of High Grade ABS concerns focused on small number of transactions Pursuing variety of options to reduce tail risk Other Exposures: Remainder of portfolio performing well; no signs of spillover 18

19 RMBS Portfolio: Product Type and Ambac Rating Portfolio Composition by Rating Distribution ($ billions) AAA AA A BBB BIG HELOC Residential Mortgages - Sub- Residential Mortgages - Mid- Pooled RMBS outside the US Closed End 2nd Liens Affordability Mortgage Product Mortgages-Other Residential Mortgages - Prime Prime Prime (i/o, neg am) Second Lien transactions contain no material subprime exposure Certain piggy-back Closed-End Second and investment bank HELOC transactions have shown deterioration 19

20 CES Summary ($MM) Conventional CES 80/20 Piggyback CES with High concentration of Purchase and Stated Doc Loans Net Par Outstanding at 3/31/08 $2,490 $2,528 Reserves $0 $635 Weighted Average Cumulative Collateral Loss 1.63% 9.25% Weighted Average 60+ del. (including FC & REO) 4.2% 13.5% Weighted Average Loan Age (months) Conventional CES showing acceptable performance Mainly refinance, full doc or streamlined loans with good geographic diversification and lower CLTVs Piggyback CES with high concentrations of purchase and stated doc loans encompass 100% of CES reserves Minimum12 months seasoning enables reasoned reserving estimates 20

21 HELOC Summary ($MM) Net Par Outstanding as of 3/31/08 Bank Originated Non-Bank Originated Originated Pre $4,757 $4,527 $2,095 Reserves $0 $431 $0 Weighted Average Cumulative Collateral Loss 0.16% 3% 1.4% Weighted Average 60+del. (including FC & REO) 0.50% 6.3% 6.2% Weighted Average Loan Age (months) Bank originated and pre-2005 transactions performing in-line with expectations Substantial seasoning enables reasoned reserving estimates 21

22 RMBS Remediation Aggressive remediation efforts Currently, more than 20 transactions undergoing diagnostic, forensic and legal scrutiny involving outside assistance; actions include: Model-based screening for unexpectedly poorly performing loans Analysis of serious delinquency buckets Loan level file and document review Review of legal documents focusing on representations and warranties Building cases to support claims of fraudulent activity; offending loans may be put back to originator Submitted 3 breach notices, expect to submit more Remediation efforts successful on previous deals Remediation efforts to not alter commitment to honor financial guarantees to bondholders 22

23 Ambac s CDO of ABS Sub-Prime Exposure $31.9 billion exposure* Impairment concentrated on three CDO^2 transactions and one CDO of mezzanine ABS totaling approximately $3.0 billion Ambac s CDO of Subprime Exposure ($ Billions) CDOs of high grades qualitatively different; impairment charges limited 26.0 High Grade CDO of CDOs Mezzanine Outstanding Commitment * Includes a $2.9 billion outstanding commitment to provide financial guarantee on static pool of securities, primarily consisting of sub-prime and midprime residential mortgage-backed securitizations As of March 31,

24 Ratings Migration in CDO of ABS Exposures CDO of ABS Ratings Migration (by ABK Rating) ($ millions) At Close % 31-Dec-07 % 31-Mar-08 % AAA $31,939 98% $2,661 8% $1,663 5% AA 510 2% 11,481 36% 3,982 13% A - 0% 10,831 34% 7,148 22% BBB - 0% 4,241 13% 12,105 38% BIG - 0% 2,896 9% 6,971 22% Total $32, % $32, % $31, % 24

25 CDO of High Grade Portfolio: $26 billion Potential claims payments estimated to be several years out $4.1 billion rated non-investment grade Primarily caused by poor performance in CDO buckets 30-40% CDO buckets versus subordination of 19-20% Weak performance in a large BBB bucket affected one transaction $7.1 billion rated single-a; $9.1 billion rated BBB Positions closely monitored to ensure appropriate cash flow distributions Trigger points for Events of Default and liquidation and manager removal rights verified to ensure fast remediation response 25

26 ABS CDO Remediation Efforts Exploring options to purchase credit protection on some or all of the transactions Potential restructuring of Ambac s exposure Ensure maximum recovery Identify and mitigate possible credit events Acceleration and liquidation possibilities being evaluated Review reinvestment opportunities Working with outside parties to generate the widest range of possible alternatives 26

27 Agenda Capital Adequacy and Liquidity First Quarter Results Portfolio Update Business Outlook 27

28 Market Update Lower issuance across Municipal, Structured and International Sectors Ratings uncertainty combined with paralyzed credit markets resulted in little business production in first quarter Trading value impacted by ratings uncertainty Significant progress working with issuers in variable rate markets Significantly improved pricing environment 25-30% of capacity has exited Wider credit spreads across all sectors Rational competition 28

29 Business Initiatives Simpler business with reduced volatility: No more CDOs No more CDS Financial Services discontinued Building capital and reducing expenses: 6-month moratorium on Structured Finance Enhanced capital management at deal and portfolio level Reduced headcount Proactive communication with rating agencies and regulators Ensure future ratings stability, building healthy capital cushion above triple-a requirements 29

30 Narrower Business Focus Emphasize Public Finance and Global Infrastructure Municipal finance Healthcare Global utilities Global Infrastructure Refocus Structured Finance Government guaranteed Student Loans Leasing and Asset Finance Structured Insurance Bank-sponsored ABCP conduits 30

31 U.S. Public Finance: A Large And Steadily Growing Market Uninsured Insured Ambac Insured $ Billions % Penetration rates 48% 51% 46% 40% 45% 50% 50% 54% 57% 49% 47% Ambac s market share of the insured market 24% 20% 26% 22% 24% 21% 21% 23% 24% 24% 24% Stable and steadily growing with highly fragmented issuer base Issuers and investors fragmented: 87,525 local government units in US; paper largely held by retail investors and retail mutual funds Volume growth driven by stable financing needs, as well as more volatile, interest-rate driven refinancing needs Insured penetration rates historically ~50%; Ambac has averaged ~23% market share 31 Source: The Bond Buyer/Thompson Financial, U.S. Census Bureau

32 U.S. Public Finance: Strong Demand For Insured Paper Retail investors Holders of municipal debt, 2007 Percent Other 15% ~60% of municipal debt held by retail investors Insurance Companies 10% 15% 20% Money Market 10% and Closed End Funds 15% 35% Households Mutual Funds Investors value low surveillance requirements Ambac guarantee and remediation tailored to these investors Demand outside retail segment should increase as a result of current market conditions 32 Source: Federal Reserve

33 Improved Competitive Landscape Claims-Paying Resources* ($ billions) $16.1 $16.0 $7.5 $5.4? $4.7 $3.6 $3.0?? MBIA Ambac FSA FGIC AGO SCA CIFG * Amount as of 3/31/08 except FGIC and CIFG which are as of 12/07 Source: The Bond Buyer/Thompson Financial, Company reports/announcements 33

34 What Does the Future Hold? Market still needs monolines Growing infrastructure needs US municipalities falling into deficit Reduced bank appetite for long dated assets Current market highlights value of surveillance and remediation Investors losing billions on unwrapped issues Return to basics: narrower focus and increased transparency should produce lower volatility and higher quality earnings More rational competition and improved pricing Restoring investor confidence will take time; stock price should, over time, reflect true embedded value 34

35 Strengthening Communication Most transparent financial guarantor on mortgage-related exposures Exposures detailed at Proactive outreach and ongoing communication with investors Monthly Snapshot posted at Enhancing user-friendly delivery of information Responding to feedback from investors 35

36 Forward-Looking Statements This presentation contains statements that may constitute "forward-looking statements" within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of Any or all of management s forward-looking statements here or in other publications may turn out to be wrong and are based on Ambac s management s current belief or opinions. Ambac s actual results may vary materially, and there are no guarantees about the performance of Ambac s securities. Among events, risks, uncertainties or factors that could cause actual results to differ materially are: (1) changes in the economic, credit, foreign currency or interest rate environment in the United States and abroad; (2) the level of activity within the national and worldwide credit markets; (3) competitive conditions and pricing levels; (4) legislative and regulatory developments; (5) changes in tax laws; (6) changes in our business plan, including changes resulting from our decision to discontinue writing new business in the financial services area, to significantly reduce new underwriting of structured finance business and to discontinue all new underwritings of structured finance business for six months from March 6, 2008; (7) the policies and actions of the United States and other governments; (8) changes in capital requirements whether resulting from downgrades in our insured portfolio or changes in rating agencies rating criteria or other reasons; (9) changes in Ambac s and/or Ambac Assurance s credit or financial strength ratings; (10) changes in accounting principles or practices relating to the financial guarantee industry or that may impact Ambac s reported financial results; (11) inadequacy of reserves established for losses and loss expenses; (12) default by one or more of Ambac Assurance s portfolio investments, insured issuers, counterparties or reinsurers; (13) credit risk throughout our business, including large single exposures to reinsurers; (14) market spreads and pricing on insured collateralized debt obligations ( CDOs ) and other derivative products insured or issued by Ambac; (15) credit risk related to residential mortgage securities and CDOs; (16) the risk that holders of debt securities or counterparties on credit default swaps or other similar agreements seek to declare events of default or seek judicial relief or bring claims alleging violation or breach of covenants by Ambac or one of its subsidiaries; (17) the risk that our underwriting and risk management policies and practices do not anticipate certain risks and/or the magnitude of potential for loss as a result of unforeseen risks; (18) the risk of volatility in income and earnings, including volatility due to the application of fair value accounting, or FAS 133, to the portion of our credit enhancement business which is executed in credit derivative form; (19) operational risks, including with respect to internal processes, risk models, systems and employees; (20) the risk of decline in market position; (21) the risk that market risks impact assets in our investment portfolio; (22) the risk of credit and liquidity risk due to unscheduled and unanticipated withdrawals on investment agreements; (23) changes in prepayment speeds on insured asset-backed securities; (24) factors that may influence the amount of installment premiums paid to Ambac; (25) the risk that we may be required to raise additional capital, which could have a dilutive effect on our outstanding equity capital and/or future earnings; (26) our ability or inability to raise additional capital, including the risks that regulatory or other approvals for any plan to raise capital are not obtained, or that various conditions to any plan, either imposed by third parties or imposed by Ambac or its Board of Directors, are not satisfied and thus potentially necessary capital raising transactions do not occur, or the risk that for other reasons the Company cannot accomplish any potentially necessary capital raising transactions; (27) the risk that Ambac s holding company structure and certain regulatory and other constraints, including adverse business performance, affect Ambac s ability to pay dividends and make other payments; (28) the risk of litigation and regulatory inquiries or investigations, and the risk of adverse outcomes in connection therewith, which could have a material adverse effect on our business, operations, financial position, profitability or cash flows; (29) other factors described in the Risk Factors section in Part I, 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 and in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 and also disclosed from time to time by Ambac in its subsequent reports on Form 10-Q and Form 8-K, which are or will be available on the Ambac web site at and at the SEC s web site, and (30) other risks and uncertainties that have not been identified at this time. Readers are cautioned that forward-looking statements speak only as of the date they are made and that Ambac does not undertake to update forward-looking statements to reflect circumstances or events that arise after the date the statements are made. You are therefore advised to consult any further disclosures we make on related subjects in Ambac s reports to the SEC. 36