ABK Ambac Financial Grp. Common Stock

Ambac Financial Group, Inc. (NYSE: ABK) (Ambac) today announced second quarter 2005 net income of $186.1 million, or $1.69 per diluted share. This represents a 3% increase from second quarter 2004 net income of $180.7 million, and a 4% increase in net income per diluted share from $1.63 in the second quarter of 2004. Net Income Per Diluted Share Net income and net income per diluted share are computed in conformity with U.S. generally accepted accounting principles (GAAP). However, many research analysts and investors do not limit their analysis of our 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 the net income impact of net gains and losses from sales of investment securities and mark-to-market gains and losses on credit, total return and non-trading derivative contracts ("net security gains and losses") and certain non-recurring and other items. Certain research analysts and investors further exclude the net income impact of accelerated premiums earned on guaranteed obligations that have been refunded and other accelerated earnings ("accelerated earnings"). During the second quarter 2005, net security gains and losses had the effect of increasing net income by $14.9 million, $0.14 on a per diluted share basis. Accelerated earnings had the effect of increasing net income by $14.0 million, or $0.12 per diluted share for the second quarter 2005. Table I, below, provides second quarter and six-month comparisons for the years 2005 and 2004. -0- *T Table I Second Quarter Six Months % % 2005 2004 Change 2005 2004 Change ---- ---- ------ ---- ----- ------ Net income per diluted share $1.69 $1.63 + 4% $3.35 $3.18 + 5% Effect of net security gains ($0.14) ($0.04) n.a. ($0.19) ($0.11) n.a. Non-recurring and other(a) $0.00 ($0.02) n.a. $0.00 ($0.02) n.a. ------- ------- ------- ------- Sub-total excluding effect of net security gains/losses and non- recurring items(b) $1.55 $1.57 - 1% $3.16 $3.05 + 4% Effect of Accelerated earnings ($0.12) ($0.16) n.a. ($0.29) ($0.23) n.a. ------- ------- ------- ------- Total excluding items $1.43 $1.41 + 1% $2.87 $2.82 + 2% ======= ======= ======= ======= *T (a) 2004 second quarter and six months results have been adjusted by $2.2 million for expenses related to Ambac's contingent capital facility to be comparable with 2005 reporting. (b) 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, "Ambac's top line production results for the quarter are very gratifying considering the market conditions. While spreads remain tight in many asset classes, we continue to see significant opportunities to put our capital to use at attractive returns. Being a diversified, global guarantor with size and scale, Ambac is active in many different markets around the world. We continue to judiciously seek transactions in markets where we bring the most value. That is a strategy that has been prominent in driving our returns to be the best in the industry." Mr. Genader added, "Our overall results were impacted by market conditions in our financial services segment and do not reflect the reasonable quarter achieved within our primary business of financial guaranty." Revenues Highlights -- Credit enhancement production(1) in the second quarter of 2005 was $397.9 million, down 3% from the second quarter of 2004 which came in at $411.2 million. Growth in U.S. structured finance and international was more than offset by a decline in production in U.S. public finance. Credit enhancement production for the six months of 2005 of $596.9 million was 11% lower than credit enhancement production of $670.0 million in the same period of 2004 due primarily to lower production in the U.S. public finance and international segments. Table II, below, provides the second quarter and six-month comparisons of credit enhancement production by market sector, for 2005 and 2004. -0- *T Table II Credit Enhancement Production(1) $-millions Second Quarter Six Months % % 2005 2004 Change 2005 2004 Change ------- --------------- ------- --------------- Public Finance $170.0 $237.7 - 28% $279.0 $334.6 - 17% Structured Finance 141.6 89.6 + 58% 218.6 166.8 + 31% International 86.3 83.9 + 3% 99.3 168.6 - 41% ------- ------- ------- ------- Total $397.9 $411.2 - 3% $596.9 $670.0 - 11% ======= ======= ======= ======= *T -- In Public Finance, municipal market issuance, as reported by third party sources, was 8% higher in the second quarter of 2005 than in the comparable prior period while insured market penetration was at 61%, relatively unchanged quarter on quarter. However, Ambac's production in this sector was impacted by increased competition from other financial guarantors, fewer health care transactions written during the period, and the fact that few large, highly structured transactions came to market during the quarter. Additionally, the second quarter 2004 included one very large transportation deal. U.S. structured finance was significantly higher as increased activity in auto securitizations and investor owned utilities was partially offset by lower mortgage-backed and other home equity related securitizations. Competition from the market in the form of senior/subordination execution and from other financial guarantors remains very strong in the MBS sector. International writings were slightly higher as increased activity in utility deals was largely offset by slower MBS and transportation activity. The international segment remains very lumpy primarily due to long transaction closing cycles typically caused by the size and complexity of the deals. -- Net premiums written in the second quarter of 2005 of $268.6 million were 29% lower than net premiums written of $379.1 million in the same period of 2004. Gross premiums written in the second quarter of 2005 and 2004 were (offset)/credited by ($54.0) million and $15.9 million, respectively, in ceded premiums. Ceded premiums written in the second quarter of 2004 included the collection of $64.8 million in return premiums from the cancellation of certain reinsurance contracts. Excluding the return premiums in the comparable prior quarter, ceded premiums in the second quarter of 2005 increased by 10% from $48.9 million. Ceded premiums as a percentage of gross premiums written were 16.7% and 13.5% for the second quarter of 2005 and 2004 (exclusive of the return premiums), respectively. The mix of business underwritten and greater treaty participation during the quarter drove the increase. Net premiums written for the six months of 2005 of $524.4 million were 8% lower than net premiums written of $571.7 million in the same period of 2004. Excluding the impact of return premiums in each of the periods ($55.8 million in the first quarter of 2005 and $64.8 million in the second quarter of 2004), net premiums written are down 8%, period on period primarily due to less U.S. public finance business written during 2005. A breakdown of gross premiums written by market sector and ceded premiums for the second quarter and six-month periods of 2005 and 2004 are included below in Table III. -0- *T Table III Premiums Written $-millions Second Quarter Six Months % % 2005 2004 Change 2005 2004 Change ------- ------ ------- ------ ----- ------ Public Finance $174.2 $237.5 - 27% $281.4 $338.7 - 17% Structured Finance 79.0 68.5 + 15% 153.1 141.6 + 8% International 69.4 57.2 + 21% 117.3 109.3 + 7% ------- ------- ------- ------- Total Gross Premiums Written 322.6 363.2 - 11% 551.8 589.6 - 6% Ceded Premiums Written (54.0) 15.9 - (27.4) (17.9) + 53% ------- ------- ------- ------- Net Premiums Written $268.6 $379.1 - 29% $524.4 $571.7 - 8% ======= ======= ======= ======= *T -- Net premiums earned and other credit enhancement fees for the second quarter of 2005 were $205.8 million, which represented a 2% increase from the $201.4 million earned in the second 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 (such as reinsurance cancellations) recognized during the quarter. Accelerated premiums were $24.5 million in the second quarter of 2005 (which had a net income per diluted share effect of $0.12), down 26% from $33.1 million ($0.16 per diluted share) in accelerated premiums in the second quarter of 2004. Accelerated premiums in the second quarter of 2004 include $10.4 million from the cancellation of reinsurance with certain reinsurers. Long-term interest rates have remained relatively low during 2005 and we continue to see strong refunding activity in our public finance segment. However, as interest rates rise, the level of accelerated premiums should decline. Net premiums earned and other credit enhancement fees for the first half of 2005 were $417.5 million, which represented a 10% increase from the $378.3 million earned in the first half of 2004. Accelerated premiums were $59.0 million for the first half 2005 ($0.29 per diluted share), up 22% from $48.3 million ($0.23 per diluted share) in accelerated premiums for the first half of 2004. Accelerated premiums in the first half of 2005 includes the impact of a reinsurance cancellation in the first quarter of 2005 amounting to $4.5 million. Accelerated premiums in the comparable period of 2004 include the impact of reinsurance cancellations in the second quarter of 2004, as discussed above. 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. -0- *T Table IV Net Premiums Earned and Other Credit Enhancement Fees $-millions Second Quarter Six Months % % 2005 2004 Change 2005 2004 Change ------- ------ ------- ------- ------ ------- Public Finance $54.6 $50.7 + 8% $109.8 $99.8 + 10% Structured Finance 71.7 67.6 + 6% 140.3 133.2 + 5% International 55.0 50.0 + 10% 108.4 97.0 + 12% ------- ------- ------- ------- Total Normal Premiums/Fees 181.3 168.3 + 8% 358.5 330.0 + 9% Accelerated Premiums 24.5 33.1 - 26% 59.0 48.3 + 22% ------- ------- ------- ------- Total $205.8 $201.4 + 2% $417.5 $378.3 + 10% ======= ======= ======= ======= *T Public finance earned premiums, before accelerations, grew 8%. 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 6%. The rate of growth in structured finance has slowed over the past year, 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 significantly lower writings in this segment. The lower business writings combined with the high level of principal pay downs has reduced the size of the portfolio, resulting in lower earnings from this asset class. International earned premiums and other credit enhancement fees grew 10%. The rate of growth remains healthy, however it is lower than recent prior years. The decline is driven primarily by maturities and calls of our pooled debt obligations outstanding. Additionally, new business generation in this asset class has slowed significantly as credit spreads have generally narrowed, reducing the need for financial guarantee protection. -- Net investment income for the second quarter of 2005 was $104.5 million, representing an increase of 18% from $88.9 million in the comparable period of 2004. Net investment income excluding net investment income from Variable Interest Entities ("VIEs") for the second quarter of 2005 was $92.2 million, representing an increase of 5% from $88.1 million in the second 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 and the repurchase of Ambac stock totaling approximately $134 million. Net investment income from VIEs for the second quarter of 2005 was $12.3 million, up from $0.8 million in the second 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. Net investment income (including net investment income from VIEs) for the six months of 2005 was $206.5 million, representing an increase of 17% from $176.6 million in the comparable period of 2004, primarily as a result of the reasons provided above. Financial services. The financial services segment is comprised of the investment agreement business and derivative products business. The investment agreement business is managed with the goal of approximately matching the cash flows of the investment agreement liabilities with the cash flows of the related investment portfolio. To achieve this goal in the investment agreement business, derivative contracts ("non-trading derivative contracts") are used for hedging purposes. The primary activities in the derivative products business are intermediation of interest rate and currency swap transactions and taking total return swap positions on certain fixed income obligations. Most of the swap intermediation is done on a fully hedged basis with the exception of certain municipal interest rate swaps that are not hedged for the basis difference between taxable and tax-exempt interest rates. As such, changes in the relationship between taxable and tax-exempt interest rates will result in mark to market gains or losses in this business line. Gross interest income less gross interest expense from investment and payment agreements plus results from the derivative products business, excluding net realized investment gains and losses and unrealized gains and losses on total return swaps and non-trading derivative contracts, were $0.2 million in the second quarter of 2005, compared to $12.5 million for the second quarter of 2004. The decrease was driven by the derivative products business. Revenues in that segment were ($3.7) million in the second quarter of 2005, down from $7.4 million in the second quarter of 2004. Net revenue included mark-to-market (losses)/gains primarily resulting from the (increase)/decrease in the ratio of tax-exempt interest rates to taxable interest rates amounting to ($6.0) million and $4.6 million in the second quarter of 2005 and 2004, respectively. Financial services revenues were $15.2 million in the first half of 2005, down 45% from the $27.8 million of revenues in the first half of 2004 primarily due to the reasons provided above. Expenses Highlights -- Financial guarantee expenses of $62.2 million for the second quarter of 2005 increased by 31% over the $47.4 million of expenses for the same quarter of 2004. Financial guarantee expenses excluding interest expense on VIE notes grew 8% from $46.8 million in the second quarter of 2004 to $50.3 million in the second quarter of 2005, primarily due to higher compensation expense and increased loss provisioning. The second quarter 2004 expenses include $3.5 million of additional reinsurance commissions related to the cancellation of reinsurance during that quarter. The loss provision of $21.7 million for the second quarter of 2005 was 24% higher than the $17.5 million recorded in the second quarter of 2004 primarily due to increased active credit reserves and a small increase in case reserves for one credit, as described below in "Loss Reserve Activity." Interest expense on VIE notes for the second quarter of 2005 was $11.8 million, up from $0.7 million in the second 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 guarantee expenses of $130.6 million for the first six months of 2005 increased by 43% over the $91.5 million of expenses for the same period of 2004. Expenses excluding interest expense on VIE notes grew 19% primarily as a result of the reasons provided above. -- Financial services other expenses, which represent the operating expenses for the segment, amounted to $3.4 million for the second quarter of 2005, flat to the comparable prior period. Financial services expenses for the first half of 2005 of $7.3 million were flat to the comparable prior period. -- Corporate operating expenses amounted to $5.5 million in the second quarter of 2005 compared to $2.6 million incurred in the second quarter of 2004 due to expenses related to Ambac's contingent capital facility for the first half of 2005. Prior period amounts were recorded directly in shareholders' equity in the Consolidated Balance Sheet rather than in corporate operating expenses. Historically, the cost of our contingent capital facility has ranged from $0.9 million to $1.7 million per quarter. Loss Reserve Activity -- The case basis loss reserve (loss reserves for exposures that have defaulted) decreased $44.1 million during the second quarter of 2005 from $130.7 at March 31, 2005 to $86.6 million at June 30, 2005. The decrease resulted primarily from payments made during the quarter to fully settle all claims on the defaulted enhanced equipment trust certificate transaction that was reported in prior quarters. No other loss reserve activity was recorded relating to that transaction during the period. The payments made were partially offset by a $5.1 million addition to an existing case reserve for a stressed health care exposure. -- The net active credit reserve ("ACR") increased by $15.6 million during the quarter, primarily as a result of deterioration in credit quality of certain structured finance transactions. Ambac's ACR is established for probable and estimable losses due to credit deterioration on insured transactions that are considered adversely classified. Ambac continuously monitors its insured portfolio actively seeking to mitigate claims. Other Items -- Total net securities gains/(losses) for the second quarter of 2005 were $29.6 million on a pre-tax basis, or $0.14 per diluted share; consisting of net realized losses on investment securities of ($0.6) million, net mark-to-market losses on credit and total return derivatives of ($17.0) million and net mark-to-market gains on non-trading derivative contracts of $47.2 million. The net mark-to-market loss on credit and total return derivatives was primarily due to market conditions resulting in extension of the weighted average life of certain transactions within our pooled debt obligations portfolio and spread widening on certain credits within our total return portfolio. The mark-to-market gains on non-trading derivative contracts relate almost entirely to interest rate hedge contracts related to long-term fixed rate liabilities in Ambac's investment agreement business. Although these hedges were highly effective economically, they did not meet the strict technical requirements for hedge accounting under FAS 133. Of the $47.2 million net mark-to-market gain on these non-trading derivatives recorded in the quarter, $27.3 million relates to mark-to-market gains in the current quarter primarily resulting from declining long-term interest rates during the period. These hedges have been redesignated to meet the technical requirements of FAS 133 as of July 1, 2005. It is expected that the mark-to-market of the hedges and the hedged items will substantially offset each other in the income statement prospectively. For the second quarter of 2004, net securities gains/(losses) were $6.7 million on a pre-tax basis, or $0.04 per diluted share; consisting of net realized gains on investment securities of $3.2 million, and net mark-to-market gains on credit and total return derivatives of $3.5 million. Total net securities gains/(losses) for the first half of 2005 were $38.8 million, consisting of net realized gains on investment securities of $1.3 million, net mark-to-market losses on credit and total return derivatives of ($10.9) million and net mark-to-market gains on non-trading derivative contracts of $48.4 million. For the first half of 2004 net securities gains were $19.2 million, consisting of net realized gains on investment securities of $21.0 million, mark-to-market gains on credit derivatives and total return swaps of $12.2 million and net mark-to-market losses on non-trading derivative contracts of ($14.0) million. The losses on non-trading derivative contracts relate almost entirely to a mark-to-market adjustment on interest rate hedge contracts in Ambac's medium-term note funding conduit recorded in the first quarter of 2004. The results from the medium-term note funding conduit are included in "Other (loss)/income" in the Consolidated Statements of Operations. Balance Sheet Highlights -- Total assets as of June 30, 2005 were $19.5 billion, up 4% from total assets of $18.7 billion at December 31, 2004. The increase was driven by cash generated from business written during the period and an increase in the unrealized gains in the investment portfolio driven by lower long-term interest rates during the period. As of June 30, 2005, stockholders' equity was $5.29 billion, a 5% increase from year-end 2004 stockholders' equity of $5.02 billion. The increase was primarily the result of net income during the period, and increased "Accumulated Other Comprehensive Income," driven by lower long-term interest rates during the period, partially offset by stock buybacks during the period. Increased Cash Dividend Declared At its July 2005 Board meeting, the Board of Directors of Ambac Financial Group Inc. approved a 20% increase in the regular quarterly cash dividend from $0.125 to $0.15 per share of common stock. The dividend is payable on September 7, 2005 to stockholders of record on August 10, 2005. Ambac has declared an increased cash dividend in every year since going public in 1991. 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; (7) changes in capital requirement or other criteria of rating agencies; (8) changes in accounting principles or practices that may impact the Company's reported financial results; (9) inadequacy of reserves established for losses and loss adjustment expenses; (10) default of one or more of the Company's reinsurers; (11) market spreads and pricing on insured pooled debt obligations and other derivative products insured or issued by the Company; (12) prepayment speeds on insured asset-backed securities and other factors that may influence the amount of installment premiums paid to the Company; and (13) 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: -0- *T $-millions Second Quarter Six Months 2005 2004 2005 2004 ------- ------- ------ ------- Credit enhancement production $398 $411 $597 $670 Present value of estimated installment premiums written on insurance policies and structured credit derivatives issued in the period (208) (175) (302) (314) ------- ------ ------ ----- Gross up-front premiums written $ 190 $ 236 $295 $356 Gross installment premiums written on insurance policies 133 127 257 234 ------ ----- ------- ----- Gross premiums written $323 $363 $552 $590 ====== ===== ======= ===== Ambac Financial Group, Inc. and Subsidiaries Consolidated Statements of Operations (Unaudited) For the Three and Six Months Ended June 30, 2005 and 2004 (Dollars in Thousands Except Share Data) Three Months Ended Six Months ended June 30, June 30, ------------------------- ------------------------- 2005 2004 2005 2004 ------------------------- ------------------------- Revenues: Financial Guarantee: Gross premiums written $322,628 $363,196 $551,754 $589,630 Ceded premiums written (54,038) 15,949 (27,411) (17,937) ------------ ------------ ------------ ------------ Net premiums written $268,590 $379,145 $524,343 $571,693 ============ ============ ============ ============ Net premiums earned $193,242 $189,593 $392,876 $355,028 Other credit enhancement fees 12,536 11,809 24,603 23,245 ------------ ------------ ------------ ------------ Net premiums earned and other credit enhancement fees 205,778 201,402 417,479 378,273 Net investment income 104,450 88,919 206,458 176,634 Net realized investment (losses) gains (1,030) 3,294 991 15,165 Net mark-to- market (losses) gains on credit derivative contracts (11,606) 3,256 (6,340) 10,218 Other income (loss) 906 1,356 3,291 (10,813) Financial Services: Interest from investment and payment agreements 64,861 45,740 122,542 98,090 Derivative products (9,109) 7,698 (296) 15,118 Net realized investment gains (losses) 443 (108) 288 5,843 Net mark-to- market gains on non-trading derivatives 51,268 41 51,959 104 Corporate: Net investment income 396 386 805 756 Net realized investment gains - 42 - 18 ------------ ------------ ------------ ------------ Total revenues 406,357 352,026 797,177 689,406 ------------ ------------ ------------ ------------ Expenses: Financial Guarantee: Loss and loss expenses 21,657 17,500 45,129 35,000 Underwriting and operating expenses 28,692 29,277 62,095 55,113 Interest expense on variable interest entity notes 11,816 670 23,395 1,392 Financial Services: Interest from investment and payment agreements 60,877 40,678 111,657 83,370 Other expenses 3,431 3,381 7,250 7,076 Interest 13,513 13,461 27,026 27,086 Corporate 5,461 2,601 7,743 4,790 ------------ ------------ ------------ ------------ Total expenses 145,447 107,568 284,295 213,827 ------------ ------------ ------------ ------------ Income before income taxes 260,910 244,458 512,882 475,579 Provision for income taxes 74,812 63,562 141,241 122,928 ------------ ------------ ------------ ------------ Income from continuing operations 186,098 180,896 371,641 352,651 ------------ ------------ ------------ ------------ Discontinued operations: Loss from discontinued operations - (310) - (550) Income tax benefit - (124) - (220) ------------ ------------ ------------ ------------ Net loss from discontinued operations - (186) - (330) ------------ ------------ ------------ ------------ Net income $186,098 $180,710 $371,641 $352,321 ============ ============ ============ ============ Earnings per share: Income from continuing operations $1.71 $1.65 $3.39 $3.22 Discontinued operations $0.00 ($0.00) $0.00 ($0.00) ------------ ------------ ------------ ------------ Net income $1.71 $1.65 $3.39 $3.22 ============ ============ ============ ============ Earnings per diluted share: Income from continuing operations $1.69 $1.63 $3.35 $3.18 Discontinued operations $0.00 $0.00 $0.00 $0.00 ------------ ------------ ------------ ------------ Net income $1.69 $1.63 $3.35 $3.18 ============ ============ ============ ============ Weighted average number of common shares outstanding: Basic 109,098,498 109,634,527 109,641,520 109,313,146 ============ ============ ============ ============ Diluted 110,327,148 110,924,314 110,990,318 110,673,431 ============ ============ ============ ============ Ambac Financial Group, Inc. and Subsidiaries Consolidated Balance Sheets June 30, 2005 and December 31, 2004 (Dollars in Thousands Except Share Data) June 30, December 31, 2005 2004 ------------ ------------ (unaudited) Assets ------ Investments: Fixed income securities, at fair value (amortized cost of $14,698,314 in 2005 and $13,425,475 in 2004) $15,260,922 $13,901,218 Fixed income securities pledged as collateral, at fair value (amortized cost of $413,824 in 2005 and $345,195 in 2004) 409,004 341,742 Short-term investments, at cost (approximates fair value) 232,882 521,226 Other (cost of $3,767 in 2005 and $3,731 in 2004) 4,198 4,234 ------------ ------------ Total investments 15,907,006 14,768,420 Cash 36,560 19,957 Securities purchased under agreements to resell 25,000 353,000 Receivable for securities sold 49,491 1,319 Investment income due and accrued 159,483 162,506 Reinsurance recoverable on paid and unpaid losses 1,806 16,765 Prepaid reinsurance 280,579 297,330 Deferred acquisition costs 198,805 184,766 Loans 1,352,328 1,405,700 Derivative assets 1,379,604 1,455,609 Other assets 139,262 77,523 ------------ ------------ Total assets $19,529,924 $18,742,895 ============ ============ Liabilities and Stockholders' Equity ------------------------------------ Liabilities: Unearned premiums $2,892,168 $2,778,893 Loss and loss expense reserve 213,542 254,055 Ceded reinsurance balances payable 31,496 18,248 Obligations under investment and payment agreements 7,093,061 6,813,914 Obligations under investment repurchase agreements 229,466 266,806 Securities sold under agreement to repurchase 42,000 - Deferred income taxes 295,617 217,373 Current income taxes 11,939 16,406 Long-term debt 1,836,277 1,866,207 Accrued interest payable 68,522 71,058 Derivative liabilities 1,187,863 1,206,740 Other liabilities 204,209 208,732 Payable for securities purchased 130,690 6 ------------ ------------ Total liabilities 14,236,850 13,718,438 ------------ ------------ Stockholders' equity: Preferred stock - - Common stock 1,091 1,089 Additional paid-in capital 711,294 694,465 Accumulated other comprehensive income 338,521 296,814 Retained earnings 4,368,225 4,032,089 Common stock held in treasury at cost (126,057) - ------------ ------------ Total stockholders' equity 5,293,074 5,024,457 ------------ ------------ Total liabilities and stockholders' equity $19,529,924 $18,742,895 ============ ============ Number of shares outstanding (net of treasury shares) 107,346,500 108,915,944 ============ ============ Book value per share $49.31 $46.13 ============ ============ Ambac Assurance Corporation and Subsidiaries Capitalization Table - GAAP June 30, 2005 and December 31, 2004 (Dollars in Millions) The following table sets forth Ambac Assurance's consolidated capitalization as of June 30, 2005 and December 31, 2004, respectively, on the basis of accounting principles generally accepted in the United States of America. June December 30, 31, 2005 2004 -------- -------- (unaudited) Unearned premiums $2,897 $2,783 Long-term debt 1,044 1,074 Other liabilities 2,375 2,192 ----------- -------- Total liabilities 6,316 6,049 ----------- -------- Stockholder's equity: Common stock 82 82 Additional paid-in capital 1,248 1,233 Accumulated other comprehensive income 250 238 Retained earnings 4,222 4,094 ----------- -------- Total stockholder's equity 5,802 5,647 ----------- -------- Total liabilities and stockholder's equity $12,118 $11,696 =========== ======== *T