Ambac Financial Group, Inc. Announces First Quarter Net Income of
$185.5 Million, Up 8% First Quarter Net Income Per Diluted Share Of
$1.66, Up 7%, NEW YORK, April 20 /PRNewswire-FirstCall/ -- Ambac
Financial Group, Inc. (NYSE:ABK) (Ambac) today announced first
quarter 2005 net income of $185.5 million, or $1.66 per diluted
share. This represents an 8% increase from first quarter 2004 net
income of $171.6 million, and a 7% increase in net income per
diluted share from $1.55 in the first quarter of 2004. Net Income
Per Diluted Share Ambac presents net income and net income per
diluted share. These measures are computed in conformity with U.S.
generally accepted accounting principles (GAAP). However, the
research analysts have not adjusted their reporting of earnings to
a strictly GAAP basis. In order to assist investors in their
understanding of quarterly results, Ambac provides other
information. Earnings measures reported by research analysts
typically exclude net gains and losses from sales of investment
securities and mark-to-market gains and losses on credit and total
return derivative contracts and derivative hedge contracts ("net
security gains and losses") and certain non-recurring items.
Certain research analysts further exclude the impact of accelerated
premiums earned on guaranteed obligations that have been refunded
and other accelerated earnings ("accelerated earnings"). During the
first quarter 2005, net security gains and losses had the effect of
increasing net income by $5.9 million, $0.05 on a per diluted share
basis. Accelerated earnings had the effect of increasing net income
by $18.9 million, or $0.17 per diluted share for the first quarter
2005. Table I, below, provides first quarter comparisons for 2005
and 2004. Table I First Quarter % 2005 2004 Change Net income per
diluted share $ 1.66 $ 1.55 + 7% Effect of net security gains ($
0.05) ($ 0.06) n.a. Sub-total excluding effect of net security
gains(a) 1.61 1.49 +8% Effect of accelerated earnings ($ 0.17) ($
0.08) n.a. Sub-total excluding items $ 1.44 $ 1.41 + 2% (a)
Consensus earnings that are reported by earnings estimate services,
such as First Call, are on this basis, which excludes net security
gains and losses and non-recurring items. Commenting on the overall
results, Ambac President and Chief Executive Officer, Robert J.
Genader, noted, "Premium production came in below our expectation
for the quarter. While deal activity was good, the fact is we
closed very few large transactions, particularly internationally,
during the quarter. Given our backlog and deal flow, I expect
improvement in future quarters. That said, we are witnessing more
intense competitive pressures in the consumer asset-backed area and
certain segments of the municipal market. We will, of course,
continue to adhere to our long-standing standards for risk/return
that has served us so well over the economic and competitive
cycles." Revenues Highlights * Credit enhancement production(1) in
the first quarter of 2005 was $199.0 million, down 23% from the
first quarter of 2004 which came in at $258.8 million. Growth in
public finance was more than offset by declines in production in
international. Table II, below, provides the first quarter
comparison of credit enhancement production by market sector, for
2005 and 2004. Table II Credit Enhancement Production(1) $-millions
First Quarter % 2005 2004 Change Public Finance $ 109.0 $ 96.9 +
12% Structured Finance 76.9 77.2 0 % International 13.1 84.7 - 85%
Total $ 199.0 $ 258.8 - 23% * In Public Finance, municipal market
issuance, as reported by third party sources, was higher in the
first quarter of 2005 compared to the comparable prior period and
insured market penetration increased quarter on quarter. However,
increased competition and the lack of large, highly structured
transactions tempered Ambac's growth in production in this sector.
U.S. structured finance was flat as increased activity in
collateralized debt obligations, structured insurance and investor
owned utilities was offset by slower consumer asset-backed
securities writings. Competition from the market in the form of
senior/subordination execution and from other financial guarantors
remains very strong in the consumer asset-backed securitizations
segment. International writings were significantly lower as very
few deals closed during the quarter demonstrating once again the
lumpiness of this sector. * Net premiums written in the first
quarter of 2005 of $255.7 million were 33% higher than net premiums
written of $192.5 million in the same period of 2004. Gross
premiums written in the first quarter of 2005 and 2004 were
credited/(offset) by $26.6 million and ($33.9) million in ceded
premiums, respectively. Ceded premiums written in the first quarter
of 2005 included the collection of $55.8 million in return premiums
from the cancellation of a reinsurance contract, as discussed below
under "Reinsurance Cancellation." Excluding the return premiums,
ceded premiums in the first quarter of 2005 decreased by 14% to
$29.2 million during the period. Ceded premiums as a percentage of
gross premiums written were 12.7% and 15.0% for the first quarter
of 2005 (exclusive of the return premiums) and 2004, respectively.
A breakdown of gross premiums written by market sector and ceded
premiums are included below in Table III. Table III Premiums
Written $-millions First Quarter % 2005 2004 Change Public Finance
$ 107.2 $ 101.2 + 6% Structured Finance 74.1 73.1 + 1%
International 47.8 52.1 - 8% Total Gross Premiums Written 229.1
226.4 + 1% Ceded Premiums Written 26.6 (33.9) - Net Premiums
Written $ 255.7 $ 192.5 + 33% * Net premiums earned and other
credit enhancement fees for the first quarter of 2005 were $211.7
million, which represented a 20% increase from the $176.9 million
earned in the first quarter of 2004. Net premiums earned increased
for all market sectors. Net premiums earned include accelerated
premiums, which result from refundings, calls and other
accelerations recognized during the quarter. Accelerated premiums
were $34.5 million in the first quarter of 2005 (which had a net
income per diluted share effect of $0.17), up 127% from $15.2
million ($0.08 per diluted share) in accelerated premiums in the
first quarter of 2004. The low interest rate environment during the
period continued the strong refunding activity that we saw
throughout 2004. However, as interest rates continue to rise, the
level of accelerated premiums should decline. Accelerated premiums
in the first quarter of 2005 also include the impact of the
reinsurance cancellations, as discussed below under "Reinsurance
Cancellation." A breakdown of net premiums earned and other credit
enhancement fees by market sector are included below in Table IV.
Normal net premiums earned exclude accelerated premiums that result
from refundings, calls and other accelerations. Table IV Net
Premiums Earned and Other Credit Enhancement Fees $-millions First
Quarter % 2005 2004 Change Public Finance $ 55.2 $ 49.1 + 12%
Structured Finance 68.6 65.6 + 5% International 53.4 47.0 + 14%
Total Normal Premiums/Fees $ 177.2 $ 161.7 + 10% Accelerated
Premiums 34.5 15.2 + 127% Total $ 211.7 $ 176.9 + 20% Public
finance exhibited a healthy growth trend as its earned premiums,
before accelerations, grew 12%. Ambac's focus on higher value-added
structured municipal transactions, combined with diligent
management of risk limit capacity has resulted in attractive
returns and good earned premiums growth in public finance, our most
mature sector. Structured finance earned premiums and other credit
enhancement fees grew 5%. The rate of growth in structured finance
continues to decelerate, adversely impacted by lower premium
production in mortgage- backed and home equity securitizations.
This relatively short-term asset class had experienced significant
growth in years prior to 2004, fueled by heavy issuance and strong
demand for insurance. However, increased competition from both the
industry and the market in the form of senior/subordination
structures, has led to lower growth in writings in this segment.
The lower business writings combined with the high level of
amortization of principal has reduced the size of the portfolio,
resulting in declining earnings. International earned premiums and
other credit enhancement fees grew 14%. The rate of growth remains
healthy, however it is lower than recent prior years. The decline
is driven primarily by reduced pooled debt obligations business.
New business generation in this asset class has slowed
significantly as credit spreads have narrowed, having an adverse
impact on pricing. * Net investment income for the first quarter of
2005 was $102.0 million, representing an increase of 16% from $87.7
million in the comparable period of 2004. Net investment income
excluding net investment income from Variable Interest Entities
("VIEs") for the first quarter of 2005 was $90.7 million,
representing an increase of 5% from $86.7 million in the first
quarter of 2004. This increase was due primarily to the growth in
the investment portfolio driven by ongoing collection of financial
guarantee premiums and fees, partially offset by a lower
reinvestment rate due to the interest rate environment. Investment
income was also adversely impacted by approximately $3.0 million
due to the temporary build up of short-term investments during the
quarter. Net investment income from VIE for the first quarter of
2005 was $11.3 million, up from $1.0 million in the first quarter
of 2004. Investment income from VIEs result from the consolidation
of certain trusts that Ambac has insured and consolidated under
accounting pronouncement FIN 46. The increase in interest income
from VIEs reflects the consolidation of two transactions executed
in the fourth quarter of 2004. Investment income from VIEs is
offset by interest expense on VIEs, shown separately in the
Consolidated Statements of Operations. * Financial services, which
is composed of gross interest income less gross interest expense
from investment and payment agreements plus revenue from certain
derivative products and excludes net realized investment gains and
losses and unrealized gains and losses on total return swaps and
derivative hedge contracts, were $15.0 million in the first quarter
of 2005, compared to $15.3 million for the first quarter of 2004.
Reinsurance Cancellation * During the first quarter 2005 Ambac
completed the previously announced cancellation of a reinsurance
contract with a reinsurer. The insured par that was recaptured as a
result of the cancellation totaled approximately $7.5 billion.
Included in ceded premiums in our Consolidated Statement of
Operations is $55.8 million in returned premiums from the
cancellation, of which approximately $51.3 million was deferred.
The difference, $4.5 million, included in accelerated premiums,
results from the difference between the negotiated amount of
returned premiums and the associated unearned premium remaining on
the underlying guarantees. Offsetting the accelerated earnings are
approximately $1.8 million of reinsurance commissions paid in
excess of the unamortized reinsurance commissions previously
deferred. The net impact of this cancellation, presented in Tables
I and IV, above, as part of accelerated premiums, amounted to
approximately $2.7 million, $1.8 million after-tax, or $0.02 per
diluted share. In addition to the $51.3 million of deferred
premiums collected, approximately $70.0 million net present value
of future installment premiums is expected to be recognized in
future earned premiums over the remaining life of the guarantees.
Expenses Highlights * Financial guarantee expenses of $68.5 million
for the first quarter of 2005 increased by 55% over the $44.1
million of expenses for the same quarter of 2004. Financial
guarantee expenses excluding interest expense on VIE notes grew 31%
from $43.3 million in the first quarter of 2004 to $56.9 million in
the first quarter of 2005, primarily due to higher compensation
expense, increased loss provisioning and the impact on net
reinsurance commissions in connection with the cancellation of
reinsurance during the period, as discussed above in "Reinsurance
Cancellation." Compensation expense increased primarily due to the
expensing of stock-based compensation (the annual grant of
restricted stock units and stock options) received in January by
employees aged 55 and older and who are not required to perform
future services to attain vesting rights, as per company policy.
The loss provision of $23.5 million for the first quarter of 2005
was 34% higher than the $17.5 million recorded in the first quarter
of 2004 due to the increased case reserves, as described below in
"Loss Reserve Activity." Interest expense on VIE notes for the
first quarter of 2005 was $11.6 million, up from $0.7 million in
the first quarter of 2004. Interest expense on VIE notes result
from the consolidation of certain trusts that Ambac has insured and
consolidated under accounting pronouncement, FIN 46. * Financial
services other expenses, which represent the operating expenses for
the segment, amounted to $3.8 million for the first quarter of
2005, up slightly from $3.7 million for the first quarter of 2004.
Loss Reserve Activity * The net case basis loss reserve (loss
reserves for exposures that have defaulted) increased $14.0 million
in the first quarter of 2005. This increase consisted of additional
case basis reserves of $34.4 million, partially offset by $20.4
million of net paid losses. The additions during the quarter relate
primarily to two exposures. During the quarter we increased the
case reserve related to an enhanced equipment trust certificate
("EETC") by $18.5 million. In the fourth quarter of 2004, we
established a case basis reserve for this credit amounting to $40
million. This EETC exposure represents a securitization of seven
commercial aircraft leases where Ambac wrapped the senior most
layer of the transaction. During the fourth quarter 2004, the
airline leasing the aircraft filed for bankruptcy and defaulted on
its lease obligations. In late March and early April of 2005, Ambac
purchased the seven aircraft at auction in order to secure rights
to the underlying aircraft collateral. During the week of April 11,
2005 Ambac successfully closed on the sale of four of the aircraft.
Ambac continues to actively seek remarketing options for the three
remaining aircraft to minimize ultimate loss associated with this
transaction. The additional case reserve this quarter relates
primarily to adjusting the carrying values of the remaining three
aircraft to reflect current market conditions. Appraisal
information on commercial aircraft can be volatile as there are
limited transactions to observe. Additionally, we increased an
existing case basis loss reserve by $13.4 million for a stressed
health care exposure that has defaulted on its debt obligations.
The financial condition of that healthcare institution continued to
deteriorate during the quarter. Other Items * Total net securities
gains/(losses) for the first quarter of 2005 were $9.1 million on a
pre-tax basis, or $0.05 per diluted share; consisting of net
realized gains on investment securities of $1.9 million, net
mark-to-market gains on credit and total return derivatives of $6.0
million and net mark-to-market gains on derivative hedge contracts
of $1.2 million. For the first quarter of 2004, net securities
gains/(losses) were $11.5 million on a pre-tax basis, or $0.06 per
diluted share; consisting of net realized gains on investment
securities of $17.8 million, net mark-to-market gains on credit and
total return derivatives of $8.7 million and net mark-to-market
losses on derivative hedge contracts of ($15.0) million. The net
mark-to-market losses on derivative hedge contracts in the first
quarter 2004 related almost entirely to interest rate hedge
contracts in Ambac's medium-term note funding conduit. The results
from the medium-term note funding conduit are included in "Other
income (loss)" in the Consolidated Statements of Operations. *
Other income (loss) for the first quarter of 2005 was $2.4 million
compared to ($12.2) million in the comparable prior quarter. The
2004 balance includes the mark-to-market losses on derivative hedge
contracts related to Ambac's medium-term funding conduit, as
discussed above. Included within "Other income (loss)" in both the
first quarter of 2005 and 2004 was approximately $0.3 million of
structuring fees revenues. Structuring fees are negotiated for
certain domestic and international structured finance transactions,
typically are collected at close of the transactions, and are
earned ratably over the life of the transactions. Ambac has
approximately $10.0 million of deferred structuring fees included
in "Other liabilities" in the Consolidated Balance Sheets as of
March 31, 2005. Balance Sheet Highlights * Total assets as of March
31, 2005 were $18.6 billion, flat from total assets of $18.6
billion at December 31, 2004. Cash generated from business written
during the period was offset by a decline in the unrealized gains
in the investment portfolio driven by higher interest rates during
the period. As of March 31, 2005, stockholders' equity was $5.11
billion, a 2% increase from year-end 2004 stockholders' equity of
$5.02 billion. The increase stemmed primarily from net income
during the period, but was partially offset by the reduction in
"Accumulated Other Comprehensive Income," driven by higher interest
rates during the period. Guidance In our third quarter 2004 press
release, Ambac provided an estimate for growth in income excluding
net securities gains and losses and the impact of accelerated
earnings from refundings in the range of 12% to 14% for 2005. While
the first quarter earnings were adversely impacted by certain items
such as the increased compensation expense and the impact on
investment income from the high level of short-term holdings,
discussed above, other factors have caused us to believe that the
12% to 14% range of growth is not achievable in 2005. The primary
factor is slower growth in normal earned premium and other credit
enhancement fees, as discussed above. Our revised estimate range
for full year 2005 growth is 4% to 8%. Ambac management remains
confident that the growth in the world capital markets will
continue to provide attractive business opportunities and create
value for our franchise. However, the portion of earnings that are
driven by market conditions, mix of business and the credit
environment, has become less predictable. As such, prospectively
Ambac will no longer provide earnings estimates. We will, however,
continue to provide quarterly updates on market activity,
competition and the overall business environment. Management
believes this is a prudent policy and is consistent with the
growing number of public companies that no longer provide earnings
guidance. Annual Meeting of Stockholders As previously announced,
the Board of Directors set the 2005 Annual Meeting of Stockholders
for Tuesday, May 3, 2005, at 11:30 a.m. in New York City. The
record date for determining stockholders entitled to notice of, and
to vote at, the annual meeting was the close of business, March 7,
2005. Forward-Looking Statements This release, in particular the
President and Chief Executive Officer's remarks, contains
statements about our future results that may be considered
"forward-looking statements" under the Private Securities
Litigation Reform Act of 1995. These statements are based on
current expectations and the current economic environment. We
caution you that these statements are not guarantees of future
performance. They involve a number of risks and uncertainties that
are difficult to predict. Our actual results could differ
materially from those expressed or implied in the forward-looking
statements. Among the factors that could cause actual results to
differ materially are (1) changes in the economic, credit, or
interest rate environment in the United States and abroad; (2) the
level of activity within the national and worldwide debt markets;
(3) competitive conditions and pricing levels; (4) legislative and
regulatory developments; (5) changes in tax laws; (6) the policies
and actions of the United States and other governments; and (7)
other risks and uncertainties that have not been identified at this
time. We undertake no obligation to publicly correct or update any
forward-looking statement if we later become aware that it is not
likely to be achieved, except as required by law. Ambac Financial
Group, Inc., headquartered in New York City, is a holding company
whose affiliates provide financial guarantees and financial
services to clients in both the public and private sectors around
the world. Ambac's principal operating subsidiary, Ambac Assurance
Corporation, a leading guarantor of public finance and structured
finance obligations, has earned triple-A ratings, the highest
ratings available from Moody's Investors Service, Inc., Standard
& Poor's Ratings Services, Fitch, Inc. and Rating and
Investment Information, Inc. Ambac Financial Group, Inc. common
stock is listed on the New York Stock Exchange (ticker symbol ABK).
Footnotes (1) Credit enhancement production, which is not
promulgated under GAAP, is used by management, equity analysts and
investors as an indication of new business production in the
period. Credit enhancement production, which Ambac reports as
analytical data, is defined as gross (direct and assumed) up-front
premiums plus the present value of estimated installment premiums
on insurance policies and structured credit derivatives issued in
the period. The definition of credit enhancement production used by
Ambac may differ from definitions of credit enhancement production
used by other public holding companies of financial guarantors. The
following table reconciles credit enhancement production to gross
premiums written calculated in accordance with GAAP: $-millions
First Quarter 2005 2004 Credit enhancement production $ 199 $ 259
Present value of estimated installment premiums on insurance
policies and structured credit derivatives issued in the period
(94) (140) Gross up-front premiums written $ 105 $ 119 Gross
installment premiums written on insurance policies 124 107 Gross
premiums written $ 229 $ 226 Ambac Financial Group, Inc. and
Subsidiaries Consolidated Statements of Operations (Unaudited) For
the Three Months Ended March 31, 2005 and 2004 (Dollars in
Thousands Except Share Data) Three Months Ended March 31, 2005 2004
Revenues: Financial Guarantee: Gross premiums written $229,126
$226,434 Ceded premiums written 26,627 (33,886) Net premiums
written $255,753 $192,548 Net premiums earned $199,634 $165,435
Other credit enhancement fees 12,067 11,436 Net premiums earned and
other credit enhancement fees 211,701 176,871 Net investment income
102,008 87,715 Net realized investment gains 2,021 11,871 Net
mark-to-market gains on credit derivative contracts 5,266 6,962
Other income (loss) 2,385 (12,169) Financial Services: Interest
from investment and payment agreements 57,681 52,350 Derivative
products 8,813 7,420 Net realized investment (losses) gains (155)
5,951 Net mark-to-market gains on derivative hedge contracts 691 63
Corporate: Net investment income 409 370 Net realized investment
losses - (24) Total revenues 390,820 337,380 Expenses: Financial
Guarantee: Loss and loss expenses 23,472 17,500 Underwriting and
operating expenses 33,403 25,836 Interest expense on variable
interest entity notes 11,579 722 Financial Services: Interest from
investment and payment agreements 50,780 42,692 Other expenses
3,819 3,695 Interest 13,513 13,625 Corporate 2,282 2,189 Total
expenses 138,848 106,259 Income before income taxes 251,972 231,121
Provision for income taxes 66,429 59,366 Income from continuing
operations 185,543 171,755 Discontinued operations: Loss from
discontinued operations - (240) Income tax benefit - (96) Net loss
from discontinued operations - (144) Net income $185,543 $171,611
Earnings per share: Income from continuing operations $1.68 $1.57
Discontinued operations $0.00 ($0.00) Net income $1.68 $1.57
Earnings per diluted share: Income from continuing operations $1.66
$1.55 Discontinued operations $0.00 $0.00 Net income $1.66 $1.55
Weighted average number of common shares outstanding: Basic
110,191,422 108,990,437 Diluted 111,772,811 110,397,003 Ambac
Financial Group, Inc. and Subsidiaries Consolidated Balance Sheets
March 31, 2005 and December 31, 2004 (Dollars in Thousands Except
Share Data) March 31, 2005 December 31, 2004 (unaudited) Assets
Investments: Fixed income securities, at fair value(amortized cost
of $13,995,167 in 2005 and $13,425,475 in 2004) $14,336,984
$13,901,218 Fixed income securities pledged as collateral, at fair
value (amortized cost of $354,347 in 2005 and $345,195 in 2004)
348,296 341,742 Short-term investments, at cost (approximates fair
value) 428,209 521,226 Other (cost of $3,742 in 2005 and $3,731 in
2004) 4,110 4,234 Total investments 15,117,599 14,768,420 Cash
41,699 19,957 Securities purchased under agreements to resell
97,000 353,000 Receivable for securities sold 79,898 1,319
Investment income due and accrued 138,931 162,506 Reinsurance
recoverable on paid and unpaid losses 23,330 16,765 Prepaid
reinsurance 251,573 297,330 Deferred acquisition costs 201,643
184,766 Loans 1,365,827 1,405,700 Derivative assets 1,143,185
1,297,972 Other assets 165,091 77,523 Total assets $18,625,776
$18,585,258 Liabilities and Stockholders' Equity Liabilities:
Unearned premiums $2,788,930 $2,778,893 Loss and loss expense
reserve 259,808 254,055 Ceded reinsurance balances payable 13,693
18,248 Obligations under investment and payment agreements
6,733,883 6,813,914 Obligations under investment repurchase
agreements 246,560 266,806 Deferred income taxes 188,529 217,373
Current income taxes 66,242 16,406 Long-term debt 1,888,886
1,866,207 Accrued interest payable 55,389 71,058 Derivative
liabilities 910,512 1,049,103 Other liabilities 202,556 208,732
Payable for securities purchased 157,560 6 Total liabilities
13,512,548 13,560,801 Stockholders' equity: Preferred stock - -
Common stock 1,089 1,089 Additional paid-in capital 702,409 694,465
Accumulated other comprehensive income 206,212 296,814 Retained
earnings 4,203,859 4,032,089 Common stock held in treasury at cost
(341) - Total stockholders' equity 5,113,228 5,024,457 Total
liabilities and stockholders' equity $18,625,776 $18,585,258 Number
of shares outstanding (net of treasury shares) 108,961,250
108,915,944 Book value per share $46.93 $46.13 Ambac Assurance
Corporation and Subsidiaries Capitalization Table - GAAP March 31,
2005 and December 31, 2004 (Dollars in Millions) The following
table sets forth Ambac Assurance's consolidated capitalization as
of March 31, 2005 and December 31, 2004, respectively, in
accordance with U.S. generally accepted accounting principles.
March 31, December 31, 2005 2004 (unaudited) Unearned premiums
$2,794 $2,783 Long-term debt 1,097 1,074 Other liabilities 2,178
2,192 Total liabilities 6,069 6,049 Stockholder's equity: Common
stock 82 82 Additional paid-in capital 1,239 1,233 Accumulated
other comprehensive income 159 238 Retained earnings 4,258 4,094
Total stockholder's equity 5,738 5,647 Total liabilities and
stockholder's equity $11,807 $11,696 DATASOURCE: Ambac Financial
Group, Inc. CONTACT: Investor/Media Contact, Peter R. Poillon of
Ambac Financial Group, Inc., +1-212-208-3333, Web site:
http://www.ambac.com/
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