Straight talk from Ambac…

January 28, 2008

images-13.jpegLate Friday, bond insurer Ambac (ABK) filed this 8K disclosing both a subpoena from the state of Massachusetts and a class action lawsuit, which had been reported earlier in the week (attorneys aren’t usually shy about sending out press releases) and which you can read about here.

But it was the last part of the 8-K that caught my eye. That’s because Ambac had decided that the risk factors that it included in the 10-K filed last March 1 (when the stock was trading just shy of $90) no longer apply and it just wants its investors to know! And while we here at footnoted always applaud corporate candor, it’s hard to see this as anything other than a tad-too-late attempt to CYA. So what risk factors did Ambac update and which did they seem to emphasize more heavily? Here’s a brief rundown of some of the biggest changes:

The new first risk factor (which had been #8 in the 10-K) now warns about “adverse business performance” impacting the company’s ability to pay dividends and make other payments. The second risk factor (which had been the old #1) now provides additional details on what happens if the ratings for Ambac Assurance were downgraded, which as those who follow Ambac know, happened on Jan. 18 when Fitch downgraded Ambac to AA (from Triple A) and S&P put it on “credit watch negative”, leading to some pretty severe language about what could happen as a result.

Risk Factor #3 had been all the way down at #16 in the 10-K and now includes a warning about the ratings impacting new business. Risk Factor #5 now includes a new paragraph about single risks that Ambac faces, including this warning: “No single reinsurance counterparty represents more than 15% of the $85.6B in par ceded, except for Assured Guaranty Re Limited to which we have reinsured $34.4B of par.”

All told, the 8K has 23 risk factors and a lot more meat vs. the 17 more sparsely worded warnings included in last year’s 10-K. And while risk factors are always a bit of CYA, it kind of makes you wonder why Ambac would be doing this now, given that the new 10-K should be out in about a month. In some ways, it’s similar to what happens when analysts downgrade a stock after the thing has already sunk like a stone. (Oh wait — that did happen at Ambac when three analysts issued downgrades on Jan. 18).

When straight talk is late talk, it’s not really straight after all.

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