Analyst cuts rating on Ambac Financial on mortgage worries
NEW YORK—An analyst cut his rating on bond insurer Ambac Financial Group Inc. Friday after the company said it lost $1.66 billion during the first quarter amid rising mortgage-related losses.
Piper Jaffray analyst Michael Grasher cut his rating on Ambac to "Neutral" from "Buy."
"The new rating reflects our concern for future residential mortgage-backed securities losses," Grasher wrote in a research note. Mortgage-backed securities are bonds backed by pools of mortgages.
Ambac recorded $1.73 billion in losses on a book of contracts promising to cover missed payments on complex investments backed by home loans. Grasher estimated the loss would be only $940.4 million.
Ambac also took $1 billion in loses on its book of home equity products and other mortgage holdings. The rapid increase in deterioration of the home equity products surprised Grasher, he said in the note.
Bond insurers are expected to face rising losses tied to bond backed by mortgages in the coming quarters, as defaults on actual mortgages lead to defaults on bonds backed by the troubled loans. Bond insurers pay out claims to cover principal and interest when a bond issuer misses payments to the investor.
Grasher lowered his price target to $4.50 from $15.
He now expects the bond insurer to lose $10.15 per share in 2008, compared with a previous estimate of a loss of $8.26 per share. Grasher cut his 2009 earnings estimate to profit of $1.66 per share from $2.03 per share.
Shares of Ambac rose 6 cents to $3.82 in afternoon trading.
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