Ambac Financial Group Monday announced a major loss to shareholders in the first quarter as a result of new accounting rules that required the company to include off-balance sheet activities.

Ambac is the holding company of troubled municipal bond insurer Ambac Assurance Corp., which was downgraded to junk after unsuccessfully insuring structured finance products. The insurer has not written new policies since June 2008.

The parent company posted a net loss of $690 million in the first quarter, compared with a net loss of $392.2 million in the same period one year ago.

It said $495.1 million of that loss is owed to new accounting standards that should be “non-recurring,” and that under old accounting rules the quarterly net loss would have been $195.0 million.

Company stock fell by 23.3% yesterday, or $0.34, to $1.12.

Under the new accounting standards, effective Jan. 1, Ambac was required to analyze its off-balance sheet assets and liabilities, and then consolidate, or include, any entities on which it had a controlling financing interest.

The rules led Ambac to include 83 vehicles known as variable interest entities (VIEs), which hold assets or debt obligations on which Ambac provided financial guarantees.

The structure of the VIEs provided Ambac with financial protection so that, for instance, when a certain transaction defaulted, Ambac would only be liable to make payments on the senior layer of losses.

This became more complicated in late March when Ambac Assurance’s regulator, the Wisconsin Office of the Commissioner of Insurance, directed Ambac to create a segregated account for its more toxic holdings, which are now undergoing “rehabilitation.”

Included among the $35 billion of assets placed into that separate account were a number of VIEs. These were consolidated in January but then de-consolidated, or excluded, once the policies were placed under the responsibility of its regulator.

Overall, 41 VIEs were included in the earnings results, with $20.6 billion of assets and $20.2 billion of liabilities. The types of entities included RMBS securitization trusts, CDO trusts, ABS, and Ambac-sponsored special purpose entities.

Largely as a result of those additions, Ambac’s total assets were $35.8 billion at the end of the quarter, almost double the $18.9 billion in assets at the end of last year. Meanwhile, liabilities were $37.3 billion, up from $20.5 billion at the end of last year.

The stockholders’ deficit for the holding company was $1.48 billion as of March 31, compared with $1.63 billion at year-end 2009. Ambac said the improvement was owed to gains in the fair value of investment securities during the period.

In the future, the accounting rules require Ambac to perform ongoing analysis to determine whether its variable interests — by virtue of its financial guarantees — should or should not be consolidated.

Total revenues in the quarter produced a loss of $499.1 million, compared with a gain of $1.2 billion in the first quarter of 2009.

Both figures, however, were largely a result of the changing values of credit derivatives, which produced a $167 million loss in the most recent quarter, but produced a gain of $1.54 billion in same period one year before.

Net premiums in the first quarter were $125.2 million, down 36% from $196.8 million in the prior year’s first quarter. Accelerated premiums, which result from calls and terminations, were $12.1 million, down 70% from the same period one year ago.

Meanwhile, net investment income was $117.6 million in the quarter, up 17% from $100.9 million in the same period last year. Ambac attributed the shift to an increase in the average yield of its portfolio, which went up as a greater percentage of the securities were taxable instead of tax-exempt.

Other than temporary impairment losses were $31.3 million in the quarter, compared with losses of $744.7 million in the same period last year. The loss was driven by impairment write-downs on residential mortgage backed securities insured by Ambac.

In its 10Q filing with the Securities and Exchange Commission (SEC), Ambac reiterated that it may seek “a negotiated restructuring of its debt through a prepackaged bankruptcy proceeding,” but noted it should have “sufficient liquidity to satisfy its needs through the second quarter of 2011.” Last November, Ambac had said its liquidity could dry up even earlier.

Meanwhile, Ambac Assurance, the bond insurer, reported a statutory capital surplus of $160.1 million at the end of the first quarter, with contingency reserves of $349.9 million. That marks a massive statutory net loss of $821.9 million in the quarter, resulting primarily from credit derivatives and complex mortgage-backed insurance policies

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