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$1.70 0.21 (14.09%)
10/10/2008 4:03 PM

Ambac Financial Group, Inc. (ABK)

CAPS Rating:
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A holding company whose subsidiaries provide financial guarantee products and other financial services to clients in both the public and private sectors around the world.

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Avatar lonbker (31.34) Submitted: 9/01/07 11:10 AM : Outperform Start Price: $61.23 ABK Score: -57.24

the market does not understand Ambac's business. The company is trading at about 0.7x adjusted book (which takes account of premiums it will receive in the future based on policies already written).

Ambac's exposer to sub prime is only at the very high end of CDO's. Even when their web site says they are guaranteeing down to a single A level actually about 95% of their exposure is AAA (because they do not take mezzanine positions).

Losses from this portfolio will be driven by both severity and frequency of homeowner default. However Ambac uses the three worst housing downturns in US history (Texas oil crisis, New England early 90s, and great depressions) to set its base case analysis. In general it then requires no losses on a sensitivity 2.5-3.0x greater than this loss.

Additionally, you can see from presentations on their web site that their, and the other monolines, % of the US not agency mortgage market has crashed from about 60% to less than 10% over the last 3 years. This is because the rating agencies have weakened their standards during this period but the monolines have not.

Thus, not only are losses going to be far less than people think (I would be not be surprised if Q3 reserving is nil), but new business prospects are better than at any time in the last three years.

It will take some time for the market to figure Ambac out as it is a complex business. However, in the end fundamentals will prevail.

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Avatar beegdawg007 (26.54) Submitted: 11/01/07 7:33 PM

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Morningstar has a fair value of $111 for ABK. The market apparenlty does not undertand that the Financial Guarantee insurance sold by ABK, guarantees only the monthly payment. It does not guarantee the nominal value of the instrument. In addition, the insurance rates charged by companies like ABK have recently increased significantly so future business will be even more profitable. The CEO of ABK was on CNBC this afternoon when he was cornered by Maria and Dylan on the floor of the NY Stock Exchange. He stated emphatically that the stock is now seriously underpriced. He also stated that the earnings for ABK are very predictable and that the analysts know right now what the 4th quarter earings will be within a few pennies. That means that 4th quarter earnings will be close to $2.00! Those of you with access to Morningstar - Note: some brokers provide free MS reports - might profit from reading the recently updated (10/24) MS report. It is very informative.

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