Ambac Financial Group, Inc. (NYSE: ABK) (Ambac) today announced
third quarter 2006 net income of $213.5 million, or $1.98 per
diluted share. This represents a 22% increase from third quarter
2005 net income of $175.1 million, and a 23% increase in net income
per diluted share from $1.61 in the third quarter of 2005. 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 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 (collectively �net security gains
and losses�) and certain 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
third quarter 2006, net security gains and losses had the effect of
increasing net income by $6.5 million, $0.06 on a per diluted share
basis. Accelerated earnings had the effect of increasing net income
by $14.5 million, or $0.13 per diluted share for the third quarter
2006. Table I, below, provides third quarter and nine-month
comparisons of earnings for 2006 and 2005. Table I Earnings Per
Diluted Share � Third Quarter Nine Months 2006� 2005� % Change
2006� 2005� % Change Net income per diluted share $1.98� $1.61� +
23% $6.26� $4.97� + 26% Effect of net security gains ($0.06)
($0.08) n.a. ($0.44) ($0.27) n.a. Operating earnings(a)(b) $1.92�
$1.53� + 25% $5.82� $4.70� + 24% Effect of Accelerated earnings
($0.13) ($0.26) n.a. ($0.46) ($0.56) n.a. Core earnings(b) $1.79�
$1.27� + 41% $5.36� $4.14� + 29% � (a) Consensus earnings that are
reported by earnings estimate services, such as First Call, are on
this basis. (b) Operating and core earnings are non-GAAP measures.
See footnote 2 on page 10. Commenting on the overall results, Ambac
Chairman and Chief Executive Officer, Robert J. Genader, noted, �I
am pleased with the results given the challenging environment�we
have�faced�during much of the�year. We are currently�witnessing a
solid�level of deal inquiries and opportunities across most of our
business segments. Domestic public finance, however, continues to
pose a�challenge given the decline in issuance�and
intensified�pricing pressures. We remain steadfast in judiciously
allocating our capital to transactions that enable us to�continue
to�deliver�superior returns.� Revenues Highlights Credit
enhancement production(1) in the third quarter of 2006 was $216.2
million, down 16% from the third quarter of 2005 which came in at
$256.6 million. Growth in international was more than offset by
declines in U.S. public finance and U.S. structured finance. Credit
enhancement production(1) for the nine months of 2006 of $980.7
million was 15% higher than credit enhancement production of $853.5
million in the same period of 2005, driven by growth in the
international and U.S. structured finance markets during the
nine-month period. Table II, below, provides the third quarter and
nine-month comparisons of credit enhancement production by market
segment for 2006 and 2005. Table II Credit Enhancement
Production(1) � $-millions Third Quarter Nine Months � 2006� �
2005� % Change� � 2006� � 2005� % Change� Public Finance $ 89.8� $
118.3� - 24% $ 321.0� $ 397.3� - 19% Structured Finance 78.6�
117.0� - 33% 382.2� 335.5� + 14% International � 47.8� � 21.3� +
124% � 277.5� � 120.7� + 130% Total $ 216.2� $ 256.6� - 16% $
980.7� $ 853.5� + 15% In public finance, Ambac�s premium production
was lower as overall market issuance, as reported by third party
sources, was down approximately 14% quarter on quarter. The decline
in issuance for the quarter was driven by significantly reduced
refunding issuance. The new money component of issuance for the
quarter was relatively flat as compared to the third quarter of
2005. Contributing to the lower premium production was increased
competition from other financial guarantors and the mix of business
coming to market. We note that fewer highly structured transactions
commanding stronger pricing have come to market recently. Ambac had
healthy writings in the stadium financing sector during the quarter
and health care writings were strong albeit lower than in the
comparable prior quarter. U.S. structured finance production during
the quarter was lower as increased writings in auto securitizations
and pooled debt obligations were more than offset by lower
commercial asset-backed securitizations and mortgage-backed
securities. Competition from the senior/subordinated market remains
challenging and spreads remain tight across most asset classes of
U.S. structured finance. International production was stronger but
compares to a relatively light prior year quarter. The
international quarter was highlighted by two deals out of the U.K,
one an infrastructure transaction and the other a structured
finance transaction. Ambac continues to see attractive
opportunities across diverse geographic regions and asset classes
outside of the U.S. Net premiums written in the third quarter of
2006 of $186.0 million were 9% lower than net premiums written of
$203.6 million in the same period of 2005. Gross premiums written
in the third quarter of 2006 and 2005 were $212.3 million and
$237.9 million, respectively. The decreases in net and gross
premiums written are primarily attributable to less up-front
premiums collected on U.S. public finance business written during
the third quarter of 2006. Ceded premiums as a percentage of gross
premiums written were 12.4% and 14.4% for the third quarter of 2006
and 2005, respectively. Net premiums written for the nine months of
2006 of $669.4 million were 8% lower than net premiums written of
$728.0 million in the same period of 2005. Excluding the impact of
return premiums from reinsurance cancellations in each of the
periods ($37.0 million in the first quarter of 2006 and $55.8
million in the first quarter of 2005), net premiums written are
down 6% period on period primarily due to less up-front premiums
collected on U.S. public finance business written during 2006. A
breakdown of gross premiums written by market segment and ceded
premiums for the third quarter and nine-month periods of 2006 and
2005 are included below in Table III. Table III Premiums Written �
$-millions Third Quarter Nine Months � 2006� � 2005� % Change� �
2006� � 2005� % Change� Public Finance $ 71.1� $ 111.7� - 36% $
286.3� $ 393.2� - 27% Structured Finance 78.8� 78.1� + 1% 247.8�
231.2� + 7% International � 62.4� � 48.1� + 30% � 210.7� � 165.3� +
27% Total Gross Premiums Written 212.3� 237.9� - 11% 744.8� 789.7�
- 6% Ceded Premiums Written � (26.3) � (34.3) - 23% � (75.4) �
(61.7) + 22% Net Premiums Written $ 186.0� $ 203.6� - 9% $ 669.4� $
728.0� - 8% Net premiums earned and other credit enhancement fees
for the third quarter of 2006 were $214.5 million, which
represented a 7% decrease from the $231.1 million earned in the
third quarter of 2005. The decrease was driven by lower accelerated
premiums from refundings and policy termination fees offset by
increased normal premiums and other credit enhancement fees earned
in U.S. public finance and U.S. structured finance. Net premiums
earned include accelerated premiums, which result from refundings,
calls and other accelerations recognized during the quarter.
Accelerated premiums were $24.5 million in the third quarter of
2006, down 50% from $48.9 million in accelerated premiums in the
third quarter of 2005. The third quarter 2005 accelerated premiums
were impacted by one large refunded transaction, representing
almost half of the total accelerated amount in that quarter. Net
premiums earned and other credit enhancement fees for the first
nine months of 2006 were $647.9 million, flat to $648.6 million
earned in the first nine months of 2005. Accelerated premiums were
$86.9 million for the nine-month period of 2006, down 20% from
$107.9 million in accelerated premiums for the comparable period of
2005. Accelerated premiums in 2006 and 2005 include $7.7 million
and $4.5 million, respectively, related to the impact of
reinsurance cancellations which occurred in the first quarter of
the respective years. A breakdown of net premiums earned and other
credit enhancement fees by market segment for 2006 and 2005 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 Third Quarter Nine Months � 2006� �
2005� % Change� � 2006� � 2005� % Change� Public Finance $ 58.8� $
56.9� + 3% $ 172.8� $ 166.7� + 4% Structured Finance 80.3� 71.4� +
12% 235.1� 211.7� + 11% International � 50.9� � 53.9� - 6% � 153.1�
� 162.3� - 6% Total Normal Premiums/Fees 190.0� 182.2� + 4% 561.0�
540.7� + 4% Accelerated Premiums � 24.5� � 48.9� - 50% � 86.9� �
107.9� - 19% Total $ 214.5� $ 231.1� - 7% $ 647.9� $ 648.6� - 0%
Public finance earned premiums, before accelerations, grew 3%
quarter on quarter. Earned premium growth in this segment has been
negatively impacted by declining issuance and competitive pricing
throughout 2006, compounded by the high level of refunding activity
in Ambac�s public finance book. Structured finance earned premiums
and other credit enhancement fees grew 12%. The rate of growth in
structured finance has improved as the recent level of writings in
asset classes such as commercial asset-backed securities, auto
securitizations and pooled debt obligations has increased. Narrow
credit spreads and high prepayment speeds in the mortgage-backed
and home equity book of business and early terminations of
transactions in other structured finance sectors continue to
partially offset the positive effects of new business writings.
International earned premiums and other credit enhancement fees
decreased by 6%. The decline was driven primarily by significant
paydowns and calls over the past several quarters and the recent
business mix which has trended towards long-dated infrastructure
transactions that earn premiums over a longer period of time than
typical structured finance exposures. Net investment income
(including net investment income from VIEs) for the third quarter
of 2006 was $120.2 million, representing an increase of 9% from
$110.6 million in the comparable period of 2005. This increase was
due primarily to growth in the investment portfolio driven by the
ongoing collection of financial guarantee premiums and fees and a
$200 million capital contribution from the parent company in the
fourth quarter of 2005, partially offset by a $5.3 million net
positive adjustment booked in the third quarter 2005 for municipal
bonds within the portfolio that had been pre-refunded. 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 nine months of 2006 was $351.2 million, representing an
increase of 11% from $317.1 million in the comparable period of
2005, primarily as a result of the reasons provided above.
Financial services revenues. The financial services segment is
comprised of the investment agreement business and the derivative
products business. 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, was $13.3 million in
the third quarter of 2006, down 22% from $17.1 million in the third
quarter of 2005. The decrease was primarily due to lower
mark-to-market gains included within derivative products revenues
in the third quarter 2006 relative to the comparable prior quarter,
partially offset by higher investment agreement revenues from
improving spreads during that quarter. Financial services revenues
were $35.8 million in the first nine months of 2006, up 1% from the
$35.4 million of revenues in the first nine months of 2005.
Expenses Highlights Financial guarantee expenses of $40.4 million
for the third quarter of 2006 decreased by 69% from the $128.6
million of expenses for the same quarter of 2005. Financial
guarantee loss and loss expenses were ($2.5) million in the third
quarter of 2006 down from $89.1 million in the third quarter of
2005. The third quarter 2005 loss provision resulted primarily from
our exposure to municipal credits impacted by Hurricane Katrina.
The current quarter�s negative loss provision is primarily the
result of a release of a portion of the Katrina provision partially
offset by increased reserves, primarily in the U.S. public finance
sector. See �Loss Reserve Activity,� below, for additional
information on losses. Net underwriting and operating expenses of
the financial guarantee segment totaled $30.2 million in the third
quarter of 2006, up 9% from $27.8 million in the third quarter of
2005 primarily due to increased compensation expense. Interest
expense on VIE notes amounting to $12.8 million and $11.6 million
in the third quarter of 2006 and 2005, respectively, result from
the consolidation of certain trusts that Ambac has insured and
consolidated under accounting pronouncement FIN 46. Financial
guarantee expenses of $147.7 million for the nine months of 2006
decreased 43% from $259.2 million for the same period of 2005. The
decrease results primarily from lower loss expenses partially
offset by higher compensation expenses during the period. Loss
Reserve Activity Case basis loss reserves (loss reserves for
exposures that have defaulted) decreased $12.0 million during the
third quarter of 2006 from $138.7 million at June 30, 2006 to
$126.7 million at September 30, 2006. The decrease was driven
primarily by claim payments made during the quarter amounting to
$8.9 million. Active credit reserves (�ACR�) are established for
probable and estimable losses due to credit deterioration on
adversely classified insured transactions. Ambac continuously
monitors its insured portfolio actively seeking to mitigate claims.
The ACR increased by $0.6 million during the quarter, from $147.0
million at June 30, 2006 to $147.6 million at September 30, 2006.
The increase was driven by increased reserves on certain credits
within the U.S. public finance and structured finance portfolios,
offset by a $35.6 million reduction in the ACR for Hurricane
Katrina impacted credits. At September 30, 2006, the specific
Hurricane Katrina-related provision amounts to $50.5 million, down
from $90.4 million at June 30, 2006. The decrease is primarily due
to significant state and federal support recently provided to the
region, particularly the greater New Orleans area. Ambac did not
pay any Katrina-related claims during the quarter. Provision for
income taxes for the third quarter of 2006 amounted to $83.6
million, an effective tax rate of 28.1%. This compares to the third
quarter of 2005 tax provision of $51.9 million, an effective tax
rate of 22.8%. The increased tax rate in 2006 was due to the net
release of tax reserves in the third quarter 2005 and higher
taxable income resulting from improved financial guarantee
underwriting results in the third quarter 2006 relative to the
comparable prior period primarily as a result of Hurricane Katrina
related loss activity. Provision for income taxes for the nine
months of 2006 amounted to $252.5 million, an effective tax rate of
27.3%. This compares to the nine months of 2005 tax provision of
$193.1 million, an effective tax rate of 26.1%. The increased tax
rate in 2006 is explained above. Other Items Total net securities
gains/(losses) for the third quarter of 2006 were $9.9 million, or
$0.06 per diluted share; consisting of net realized gains on
investment securities of $7.9 million, net mark-to-market gains on
credit and total return derivatives of $2.1 million and net
mark-to-market losses on non-trading derivative contracts of ($0.1)
million. For the third quarter of 2005, net securities
gains/(losses) were $14.5 million, or $0.08 per diluted share;
consisting of net realized gains on investment securities of $9.5
million, net mark-to-market gains on credit and total return
derivatives of $3.9 million and net mark-to-market gains on
non-trading derivative contracts of $1.1 million. Total net
securities gains/(losses) for the nine months of 2006 were $74.4
million, or $0.44 per diluted share; consisting of net realized
gains on investment securities of $57.5 million, net mark-to-market
gains on credit and total return derivatives of $16.5 million and
net mark-to-market gains on non-trading derivative contracts of
$0.4 million. Approximately $51 million of the net realized gains
on investment securities relate to cash recoveries received during
the year related to a security in the investment agreement
portfolio that had been written down in 2002 and 2003. For the nine
months of 2005, net securities gains were $53.1 million, or $0.27
per diluted share; consisting of net realized gains on investment
securities of $10.8 million, mark-to-market losses on credit
derivatives and total return swaps of ($7.0) million and net
mark-to-market gains on non-trading derivative contracts of $49.3
million. The mark-to-market gains on non-trading derivative
contracts relate almost entirely to interest rate hedge contracts
in Ambac�s investment agreement business that were redesignated to
meet the technical requirements of FAS 133 as of July 1, 2005.
Balance Sheet Highlights Total assets as of September 30, 2006 were
$21.09 billion, up 7% from total assets of $19.73 billion at
December 31, 2005. The increase was driven by cash generated from
operations during the period. As of September 30, 2006,
stockholders� equity was $6.01 billion, a 12% increase from
year-end 2005 stockholders� equity of $5.37 billion. The increase
was primarily the result of net income during the period. Increased
Share Buyback Authorization At its October 2006 Board meeting, the
Board of Directors of Ambac Financial Group, Inc. increased the
number of shares available under the Company�s Share Repurchase
Program by six million shares. Including this additional
authorization, Ambac has approximately 9.7 million shares remaining
under its Share Repurchase Program. Shares will be repurchased in
the open market or in private transactions at times and prices
considered appropriate by Ambac. Cash Dividend Declared At its
October 2006 Board meeting, the Board of Directors approved the
regular quarterly cash dividend of $0.18 per share of common stock.
The dividend is payable on December 6, 2006 to stockholders of
record on November 10, 2006. Forward-Looking Statements This
release, in particular the Chairman 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 discount rate used to measure the present value of
estimated installment premiums was 6.0% and 7.0% during the third
quarter of 2006 and 2005, respectively. 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 Third Quarter Nine Months �
2006� � 2005� � 2006� � 2005� Credit enhancement production $ 216�
$ 257� $ 981� $ 854� Present value of estimated installmentpremiums
written on insurance policiesand structured credit derivatives
issuedin the period � (149) � (143) � (643) � (446) Gross up-front
premiums written $ 67� $ 114� $ 338� $ 408� Gross installment
premiums writtenon insurance policies � 145� � 124� � 407� � 382�
Gross premiums written $ 212� $ 238� $ 745� $ 790� (2) Operating
earnings and core earnings are not substitutes for net income
computed in accordance with GAAP, but are useful measures of
performance used by management, equity analysts and investors.
Operating earnings measures income from operations excluding the
impact of investment portfolio realized gains and losses,
mark-to-market gains and losses from certain non-trading derivative
instruments and certain other items. Core earnings further exclude
the impact of refundings, calls and other accelerations. The
definitions of operating earnings and core earnings used by Ambac
may differ from definitions of operating earnings and core earnings
used by other public holding companies of financial guarantors.
Ambac Financial Group, Inc. and SubsidiariesConsolidated Statements
of Operations(Unaudited)For the Three and Nine Months Ended
September 30, 2006 and 2005(Dollars in Thousands Except Share Data)
� � Three Months Ended Nine Months Ended September 30, September
30, 2006� � 2005� 2006� � 2005� Revenues: Financial Guarantee:
Gross premiums written $212,301� $237,943� $744,766� $789,697�
Ceded premiums written (26,351) (34,296) (75,341) (61,707) Net
premiums written $185,950� $203,647� $669,425� $727,990� � Net
premiums earned $198,499� $218,098� $603,467� $610,974� Other
credit enhancement fees 16,057� 13,014� 44,400� 37,617� Net
premiums earned and other credit enhancement fees 214,556� 231,112�
647,867� 648,591� Net investment income 120,247� 110,646� 351,185�
317,104� Net realized investment gains 1,329� 5,013� 2,842� 6,004�
Net mark-to-market gains (losses) on credit derivative contracts
2,572� 1,555� 9,906� (4,785) Other income 2,655� 2,859� 35,039�
6,150� Financial Services: Investment income 107,191� 70,854�
287,174� 192,951� Derivative products 3,252� 8,896� 11,259� 13,202�
Net realized investment gains 6,636� 4,520� 53,867� 4,808� Net
mark-to-market (losses) gains on total return swap contracts (501)
2,347� 6,540� (2,255) Net mark-to-market (losses) gains on
non-trading derivatives (1,175) (57) (1,237) 48,869� Corporate: Net
investment income 3,545� 515� 9,941� 1,320� Net realized investment
gains -� -� 791� -� � Total revenues 460,307� 438,260� 1,415,174�
1,231,959� � Expenses: Financial Guarantee: Loss and loss expenses
(2,543) 89,126� 10,406� 134,255� Underwriting and operating
expenses 30,192� 27,844� 99,959� 89,939� Interest expense on
variable interest entity notes 12,754� 11,623� 37,335� 35,018�
Financial Services: Interest from investment and payment agreements
97,126� 62,602� 262,624� 170,781� Other expenses 3,119� 2,912�
9,994� 10,162� Interest 19,474� 13,627� 58,424� 40,653� Corporate
3,036� 3,548� 10,679� 11,291� � Total expenses 163,158� 211,282�
489,421� 492,099� � Income before income taxes 297,149� 226,978�
925,753� 739,860� Provision for income taxes 83,626� 51,861�
252,520� 193,102� � Net income $213,523� $175,117� $673,233�
$546,758� � � � Net income per share $2.00� $1.63� $6.32� $5.02� �
Net income per diluted share $1.98� $1.61� $6.26� $4.97� � �
Weighted average number of common shares outstanding: � Basic
106,725,567� 107,392,176� 106,549,856� 108,891,738� � Diluted
107,737,122� 108,484,035� 107,473,723� 110,121,701� Ambac Financial
Group, Inc. and SubsidiariesConsolidated Balance SheetsSeptember
30, 2006 and December 31, 2005(Dollars in Thousands Except Share
Data) � � September 30, 2006 December 31, 2005 (unaudited) Assets �
Investments: Fixed income securities, at fair value (amortized cost
of $16,526,366 in 2006 and $14,781,028 in 2005) $16,855,600�
$15,124,016� Fixed income securities pledged as collateral, at fair
value (amortized cost of $381,625 in 2006 and $378,480 in 2005)
375,288� 371,160� Short-term investments, at cost (approximates
fair value) 277,763� 472,034� Other (cost of $98,467 in 2006 and
$13,537 in 2005) 99,474� 14,173� Total investments 17,608,125�
15,981,383� � Cash 42,182� 28,295� Securities purchased under
agreements to resell 282,450� 419,000� Receivable for securities
sold 1,909� 2,161� Investment income due and accrued 182,979�
178,779� Reinsurance recoverable on paid and unpaid losses 5,292�
3,730� Prepaid reinsurance 311,564� 303,383� Deferred acquisition
costs 220,252� 202,195� Loans 1,199,287� 1,344,140� Derivative
assets 1,125,519� 1,102,649� Other assets 113,618� 159,425� Total
assets $21,093,177� $19,725,140� � Liabilities and Stockholders'
Equity � Liabilities: Unearned premiums $3,030,641� $2,954,718�
Loss and loss expense reserve 279,614� 304,139� Ceded reinsurance
balances payable 16,964� 23,746� Obligations under investment and
payment agreements 7,743,869� 7,056,222� Obligations under
investment repurchase agreements 157,151� 196,568� Securities sold
under agreement to repurchase 139,486� -� Deferred income taxes
261,228� 257,987� Current income taxes 29,281� 16,726� Long-term
debt 2,213,303� 2,233,582� Accrued interest payable 108,247�
108,195� Derivative liabilities 846,911� 935,440� Other liabilities
254,577� 253,969� Payable for securities purchased 6,588� 11,641�
Total liabilities 15,087,860� 14,352,933� � Stockholders' equity:
Preferred stock -� -� Common stock 1,092� 1,092� Additional paid-in
capital 755,749� 723,680� Accumulated other comprehensive income
199,752� 202,312� Retained earnings 5,265,443� 4,692,701� Common
stock held in treasury at cost (216,719) (247,578) Total
stockholders' equity 6,005,317� 5,372,207� Total liabilities and
stockholders' equity $21,093,177� $19,725,140� � Number of shares
outstanding (net of treasury shares) 106,192,941� 105,639,446� Book
value per share $56.55� $50.85� Ambac Assurance Corporation and
SubsidiariesCapitalization Table - GAAPSeptember 30, 2006 and
December 31, 2005(Dollars in Millions) � � The following table sets
forth Ambac Assurance's consolidatedcapitalization as of September
30, 2006 and December 31, 2005,respectively, on the basis of
accounting principles generallyaccepted in the United States of
America. � September 30, December 31, 2006� 2005� (unaudited) �
Unearned premiums $ 3,040� $ 2,966� Long-term debt 1,022� 1,042�
Other liabilities � 1,980� � 1,996� Total liabilities � 6,042� �
6,004� � Stockholder's equity: Common stock 82� 82� Additional
paid-in capital 1,476� 1,453� Accumulated other comprehensive
income 144� 137� Retained earnings � 5,063� � 4,499� Total
stockholder's equity � 6,765� � 6,171� Total liabilities and
stockholder's equity $ 12,807� $ 12,175� Ambac Financial Group,
Inc. (NYSE: ABK) (Ambac) today announced third quarter 2006 net
income of $213.5 million, or $1.98 per diluted share. This
represents a 22% increase from third quarter 2005 net income of
$175.1 million, and a 23% increase in net income per diluted share
from $1.61 in the third quarter of 2005. 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 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 (collectively "net security gains and losses") and
certain 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 third
quarter 2006, net security gains and losses had the effect of
increasing net income by $6.5 million, $0.06 on a per diluted share
basis. Accelerated earnings had the effect of increasing net income
by $14.5 million, or $0.13 per diluted share for the third quarter
2006. Table I, below, provides third quarter and nine-month
comparisons of earnings for 2006 and 2005. -0- *T Table I Earnings
Per Diluted Share Third Quarter Nine Months % % 2006 2005 Change
2006 2005 Change ------- ------- ------- ------- ------- -------
Net income per diluted share $1.98 $1.61 + 23% $6.26 $4.97 + 26%
Effect of net security gains ($0.06) ($0.08) n.a. ($0.44) ($0.27)
n.a. ------- ------- ------- ------- Operating earnings(a)(b) $1.92
$1.53 + 25% $5.82 $4.70 + 24% Effect of Accelerated earnings
($0.13) ($0.26) n.a. ($0.46) ($0.56) n.a. ------- ------- -------
------- Core earnings(b) $1.79 $1.27 + 41% $5.36 $4.14 + 29%
======= ======= ======= ======= (a) Consensus earnings that are
reported by earnings estimate services, such as First Call, are on
this basis. (b) Operating and core earnings are non-GAAP measures.
See footnote 2 on page 10. *T Commenting on the overall results,
Ambac Chairman and Chief Executive Officer, Robert J. Genader,
noted, "I am pleased with the results given the challenging
environment we have faced during much of the year. We are currently
witnessing a solid level of deal inquiries and opportunities across
most of our business segments. Domestic public finance, however,
continues to pose a challenge given the decline in issuance and
intensified pricing pressures. We remain steadfast in judiciously
allocating our capital to transactions that enable us to continue
to deliver superior returns." Revenues Highlights Credit
enhancement production(1) in the third quarter of 2006 was $216.2
million, down 16% from the third quarter of 2005 which came in at
$256.6 million. Growth in international was more than offset by
declines in U.S. public finance and U.S. structured finance. Credit
enhancement production(1) for the nine months of 2006 of $980.7
million was 15% higher than credit enhancement production of $853.5
million in the same period of 2005, driven by growth in the
international and U.S. structured finance markets during the
nine-month period. Table II, below, provides the third quarter and
nine-month comparisons of credit enhancement production by market
segment for 2006 and 2005. -0- *T Table II Credit Enhancement
Production(1) $-millions Third Quarter Nine Months % % 2006 2005
Change 2006 2005 Change ------- ------- ------- ------- -------
------- Public Finance $ 89.8 $118.3 - 24% $321.0 $397.3 - 19%
Structured Finance 78.6 117.0 - 33% 382.2 335.5 + 14% International
47.8 21.3 + 124% 277.5 120.7 + 130% ------- ------- ------- -------
Total $216.2 $256.6 - 16% $980.7 $853.5 + 15% ======= =======
======= ======= *T In public finance, Ambac's premium production
was lower as overall market issuance, as reported by third party
sources, was down approximately 14% quarter on quarter. The decline
in issuance for the quarter was driven by significantly reduced
refunding issuance. The new money component of issuance for the
quarter was relatively flat as compared to the third quarter of
2005. Contributing to the lower premium production was increased
competition from other financial guarantors and the mix of business
coming to market. We note that fewer highly structured transactions
commanding stronger pricing have come to market recently. Ambac had
healthy writings in the stadium financing sector during the quarter
and health care writings were strong albeit lower than in the
comparable prior quarter. U.S. structured finance production during
the quarter was lower as increased writings in auto securitizations
and pooled debt obligations were more than offset by lower
commercial asset-backed securitizations and mortgage-backed
securities. Competition from the senior/subordinated market remains
challenging and spreads remain tight across most asset classes of
U.S. structured finance. International production was stronger but
compares to a relatively light prior year quarter. The
international quarter was highlighted by two deals out of the U.K,
one an infrastructure transaction and the other a structured
finance transaction. Ambac continues to see attractive
opportunities across diverse geographic regions and asset classes
outside of the U.S. Net premiums written in the third quarter of
2006 of $186.0 million were 9% lower than net premiums written of
$203.6 million in the same period of 2005. Gross premiums written
in the third quarter of 2006 and 2005 were $212.3 million and
$237.9 million, respectively. The decreases in net and gross
premiums written are primarily attributable to less up-front
premiums collected on U.S. public finance business written during
the third quarter of 2006. Ceded premiums as a percentage of gross
premiums written were 12.4% and 14.4% for the third quarter of 2006
and 2005, respectively. Net premiums written for the nine months of
2006 of $669.4 million were 8% lower than net premiums written of
$728.0 million in the same period of 2005. Excluding the impact of
return premiums from reinsurance cancellations in each of the
periods ($37.0 million in the first quarter of 2006 and $55.8
million in the first quarter of 2005), net premiums written are
down 6% period on period primarily due to less up-front premiums
collected on U.S. public finance business written during 2006. A
breakdown of gross premiums written by market segment and ceded
premiums for the third quarter and nine-month periods of 2006 and
2005 are included below in Table III. -0- *T Table III Premiums
Written $-millions Third Quarter Nine Months % % 2006 2005 Change
2006 2005 Change ------- ------- ------- ------- ------- -------
Public Finance $ 71.1 $111.7 - 36% $286.3 $393.2 - 27% Structured
Finance 78.8 78.1 + 1% 247.8 231.2 + 7% International 62.4 48.1 +
30% 210.7 165.3 + 27% ------- ------- ------- ------- Total Gross
Premiums Written 212.3 237.9 - 11% 744.8 789.7 - 6% Ceded Premiums
Written (26.3) (34.3) - 23% (75.4) (61.7) + 22% ------- -------
------- ------- Net Premiums Written $186.0 $203.6 - 9% $669.4
$728.0 - 8% ======= ======= ======= ======= *T Net premiums earned
and other credit enhancement fees for the third quarter of 2006
were $214.5 million, which represented a 7% decrease from the
$231.1 million earned in the third quarter of 2005. The decrease
was driven by lower accelerated premiums from refundings and policy
termination fees offset by increased normal premiums and other
credit enhancement fees earned in U.S. public finance and U.S.
structured finance. Net premiums earned include accelerated
premiums, which result from refundings, calls and other
accelerations recognized during the quarter. Accelerated premiums
were $24.5 million in the third quarter of 2006, down 50% from
$48.9 million in accelerated premiums in the third quarter of 2005.
The third quarter 2005 accelerated premiums were impacted by one
large refunded transaction, representing almost half of the total
accelerated amount in that quarter. Net premiums earned and other
credit enhancement fees for the first nine months of 2006 were
$647.9 million, flat to $648.6 million earned in the first nine
months of 2005. Accelerated premiums were $86.9 million for the
nine-month period of 2006, down 20% from $107.9 million in
accelerated premiums for the comparable period of 2005. Accelerated
premiums in 2006 and 2005 include $7.7 million and $4.5 million,
respectively, related to the impact of reinsurance cancellations
which occurred in the first quarter of the respective years. A
breakdown of net premiums earned and other credit enhancement fees
by market segment for 2006 and 2005 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 Third
Quarter Nine Months % % 2006 2005 Change 2006 2005 Change -------
------- ------- ------- ------- ------- Public Finance $ 58.8 $
56.9 + 3% $172.8 $166.7 + 4% Structured Finance 80.3 71.4 + 12%
235.1 211.7 + 11% International 50.9 53.9 - 6% 153.1 162.3 - 6%
------- ------- ------- ------- Total Normal Premiums/Fees 190.0
182.2 + 4% 561.0 540.7 + 4% Accelerated Premiums 24.5 48.9 - 50%
86.9 107.9 - 19% ------- ------- ------- ------- Total $214.5
$231.1 - 7% $647.9 $648.6 - 0% ======= ======= ======= ======= *T
Public finance earned premiums, before accelerations, grew 3%
quarter on quarter. Earned premium growth in this segment has been
negatively impacted by declining issuance and competitive pricing
throughout 2006, compounded by the high level of refunding activity
in Ambac's public finance book. Structured finance earned premiums
and other credit enhancement fees grew 12%. The rate of growth in
structured finance has improved as the recent level of writings in
asset classes such as commercial asset-backed securities, auto
securitizations and pooled debt obligations has increased. Narrow
credit spreads and high prepayment speeds in the mortgage-backed
and home equity book of business and early terminations of
transactions in other structured finance sectors continue to
partially offset the positive effects of new business writings.
International earned premiums and other credit enhancement fees
decreased by 6%. The decline was driven primarily by significant
paydowns and calls over the past several quarters and the recent
business mix which has trended towards long-dated infrastructure
transactions that earn premiums over a longer period of time than
typical structured finance exposures. Net investment income
(including net investment income from VIEs) for the third quarter
of 2006 was $120.2 million, representing an increase of 9% from
$110.6 million in the comparable period of 2005. This increase was
due primarily to growth in the investment portfolio driven by the
ongoing collection of financial guarantee premiums and fees and a
$200 million capital contribution from the parent company in the
fourth quarter of 2005, partially offset by a $5.3 million net
positive adjustment booked in the third quarter 2005 for municipal
bonds within the portfolio that had been pre-refunded. 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 nine months of 2006 was $351.2 million, representing an
increase of 11% from $317.1 million in the comparable period of
2005, primarily as a result of the reasons provided above.
Financial services revenues. The financial services segment is
comprised of the investment agreement business and the derivative
products business. 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, was $13.3 million in
the third quarter of 2006, down 22% from $17.1 million in the third
quarter of 2005. The decrease was primarily due to lower
mark-to-market gains included within derivative products revenues
in the third quarter 2006 relative to the comparable prior quarter,
partially offset by higher investment agreement revenues from
improving spreads during that quarter. Financial services revenues
were $35.8 million in the first nine months of 2006, up 1% from the
$35.4 million of revenues in the first nine months of 2005.
Expenses Highlights Financial guarantee expenses of $40.4 million
for the third quarter of 2006 decreased by 69% from the $128.6
million of expenses for the same quarter of 2005. Financial
guarantee loss and loss expenses were ($2.5) million in the third
quarter of 2006 down from $89.1 million in the third quarter of
2005. The third quarter 2005 loss provision resulted primarily from
our exposure to municipal credits impacted by Hurricane Katrina.
The current quarter's negative loss provision is primarily the
result of a release of a portion of the Katrina provision partially
offset by increased reserves, primarily in the U.S. public finance
sector. See "Loss Reserve Activity," below, for additional
information on losses. Net underwriting and operating expenses of
the financial guarantee segment totaled $30.2 million in the third
quarter of 2006, up 9% from $27.8 million in the third quarter of
2005 primarily due to increased compensation expense. Interest
expense on VIE notes amounting to $12.8 million and $11.6 million
in the third quarter of 2006 and 2005, respectively, result from
the consolidation of certain trusts that Ambac has insured and
consolidated under accounting pronouncement FIN 46. Financial
guarantee expenses of $147.7 million for the nine months of 2006
decreased 43% from $259.2 million for the same period of 2005. The
decrease results primarily from lower loss expenses partially
offset by higher compensation expenses during the period. Loss
Reserve Activity Case basis loss reserves (loss reserves for
exposures that have defaulted) decreased $12.0 million during the
third quarter of 2006 from $138.7 million at June 30, 2006 to
$126.7 million at September 30, 2006. The decrease was driven
primarily by claim payments made during the quarter amounting to
$8.9 million. Active credit reserves ("ACR") are established for
probable and estimable losses due to credit deterioration on
adversely classified insured transactions. Ambac continuously
monitors its insured portfolio actively seeking to mitigate claims.
The ACR increased by $0.6 million during the quarter, from $147.0
million at June 30, 2006 to $147.6 million at September 30, 2006.
The increase was driven by increased reserves on certain credits
within the U.S. public finance and structured finance portfolios,
offset by a $35.6 million reduction in the ACR for Hurricane
Katrina impacted credits. At September 30, 2006, the specific
Hurricane Katrina-related provision amounts to $50.5 million, down
from $90.4 million at June 30, 2006. The decrease is primarily due
to significant state and federal support recently provided to the
region, particularly the greater New Orleans area. Ambac did not
pay any Katrina-related claims during the quarter. Provision for
income taxes for the third quarter of 2006 amounted to $83.6
million, an effective tax rate of 28.1%. This compares to the third
quarter of 2005 tax provision of $51.9 million, an effective tax
rate of 22.8%. The increased tax rate in 2006 was due to the net
release of tax reserves in the third quarter 2005 and higher
taxable income resulting from improved financial guarantee
underwriting results in the third quarter 2006 relative to the
comparable prior period primarily as a result of Hurricane Katrina
related loss activity. Provision for income taxes for the nine
months of 2006 amounted to $252.5 million, an effective tax rate of
27.3%. This compares to the nine months of 2005 tax provision of
$193.1 million, an effective tax rate of 26.1%. The increased tax
rate in 2006 is explained above. Other Items Total net securities
gains/(losses) for the third quarter of 2006 were $9.9 million, or
$0.06 per diluted share; consisting of net realized gains on
investment securities of $7.9 million, net mark-to-market gains on
credit and total return derivatives of $2.1 million and net
mark-to-market losses on non-trading derivative contracts of ($0.1)
million. For the third quarter of 2005, net securities
gains/(losses) were $14.5 million, or $0.08 per diluted share;
consisting of net realized gains on investment securities of $9.5
million, net mark-to-market gains on credit and total return
derivatives of $3.9 million and net mark-to-market gains on
non-trading derivative contracts of $1.1 million. Total net
securities gains/(losses) for the nine months of 2006 were $74.4
million, or $0.44 per diluted share; consisting of net realized
gains on investment securities of $57.5 million, net mark-to-market
gains on credit and total return derivatives of $16.5 million and
net mark-to-market gains on non-trading derivative contracts of
$0.4 million. Approximately $51 million of the net realized gains
on investment securities relate to cash recoveries received during
the year related to a security in the investment agreement
portfolio that had been written down in 2002 and 2003. For the nine
months of 2005, net securities gains were $53.1 million, or $0.27
per diluted share; consisting of net realized gains on investment
securities of $10.8 million, mark-to-market losses on credit
derivatives and total return swaps of ($7.0) million and net
mark-to-market gains on non-trading derivative contracts of $49.3
million. The mark-to-market gains on non-trading derivative
contracts relate almost entirely to interest rate hedge contracts
in Ambac's investment agreement business that were redesignated to
meet the technical requirements of FAS 133 as of July 1, 2005.
Balance Sheet Highlights Total assets as of September 30, 2006 were
$21.09 billion, up 7% from total assets of $19.73 billion at
December 31, 2005. The increase was driven by cash generated from
operations during the period. As of September 30, 2006,
stockholders' equity was $6.01 billion, a 12% increase from
year-end 2005 stockholders' equity of $5.37 billion. The increase
was primarily the result of net income during the period. Increased
Share Buyback Authorization At its October 2006 Board meeting, the
Board of Directors of Ambac Financial Group, Inc. increased the
number of shares available under the Company's Share Repurchase
Program by six million shares. Including this additional
authorization, Ambac has approximately 9.7 million shares remaining
under its Share Repurchase Program. Shares will be repurchased in
the open market or in private transactions at times and prices
considered appropriate by Ambac. Cash Dividend Declared At its
October 2006 Board meeting, the Board of Directors approved the
regular quarterly cash dividend of $0.18 per share of common stock.
The dividend is payable on December 6, 2006 to stockholders of
record on November 10, 2006. Forward-Looking Statements This
release, in particular the Chairman 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 discount rate used to measure the present value of
estimated installment premiums was 6.0% and 7.0% during the third
quarter of 2006 and 2005, respectively. 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 Third Quarter Nine
Months 2006 2005 2006 2005 ------ ------ ------ ------ Credit
enhancement production $ 216 $ 257 $ 981 $ 854 Present value of
estimated installment premiums written on insurance policies and
structured credit derivatives issued in the period (149) (143)
(643) (446) ------ ------ ------ ------ Gross up-front premiums
written $ 67 $ 114 $ 338 $ 408 Gross installment premiums written
on insurance policies 145 124 407 382 ------ ------ ------ ------
Gross premiums written $ 212 $ 238 $ 745 $ 790 ====== ====== ======
====== *T (2) Operating earnings and core earnings are not
substitutes for net income computed in accordance with GAAP, but
are useful measures of performance used by management, equity
analysts and investors. Operating earnings measures income from
operations excluding the impact of investment portfolio realized
gains and losses, mark-to-market gains and losses from certain
non-trading derivative instruments and certain other items. Core
earnings further exclude the impact of refundings, calls and other
accelerations. The definitions of operating earnings and core
earnings used by Ambac may differ from definitions of operating
earnings and core earnings used by other public holding companies
of financial guarantors. -0- *T Ambac Financial Group, Inc. and
Subsidiaries Consolidated Statements of Operations (Unaudited) For
the Three and Nine Months Ended September 30, 2006 and 2005
(Dollars in Thousands Except Share Data) Three Months Ended Nine
Months Ended September 30, September 30, -------------------------
------------------------- 2006 2005 2006 2005
------------------------- ------------------------- Revenues:
Financial Guarantee: Gross premiums written $212,301 $237,943
$744,766 $789,697 Ceded premiums written (26,351) (34,296) (75,341)
(61,707) ------------ ------------ ------------ ------------ Net
premiums written $185,950 $203,647 $669,425 $727,990 ============
============ ============ ============ Net premiums earned $198,499
$218,098 $603,467 $610,974 Other credit enhancement fees 16,057
13,014 44,400 37,617 ------------ ------------ ------------
------------ Net premiums earned and other credit enhancement fees
214,556 231,112 647,867 648,591 Net investment income 120,247
110,646 351,185 317,104 Net realized investment gains 1,329 5,013
2,842 6,004 Net mark-to- market gains (losses) on credit derivative
contracts 2,572 1,555 9,906 (4,785) Other income 2,655 2,859 35,039
6,150 Financial Services: Investment income 107,191 70,854 287,174
192,951 Derivative products 3,252 8,896 11,259 13,202 Net realized
investment gains 6,636 4,520 53,867 4,808 Net mark-to- market
(losses) gains on total return swap contracts (501) 2,347 6,540
(2,255) Net mark-to- market (losses) gains on non- trading
derivatives (1,175) (57) (1,237) 48,869 Corporate: Net investment
income 3,545 515 9,941 1,320 Net realized investment gains - - 791
- ------------ ------------ ------------ ------------ Total
revenues 460,307 438,260 1,415,174 1,231,959 ------------
------------ ------------ ------------ Expenses: Financial
Guarantee: Loss and loss expenses (2,543) 89,126 10,406 134,255
Underwriting and operating expenses 30,192 27,844 99,959 89,939
Interest expense on variable interest entity notes 12,754 11,623
37,335 35,018 Financial Services: Interest from investment and
payment agreements 97,126 62,602 262,624 170,781 Other expenses
3,119 2,912 9,994 10,162 Interest 19,474 13,627 58,424 40,653
Corporate 3,036 3,548 10,679 11,291 ------------ ------------
------------ ------------ Total expenses 163,158 211,282 489,421
492,099 ------------ ------------ ------------ ------------ Income
before income taxes 297,149 226,978 925,753 739,860 Provision for
income taxes 83,626 51,861 252,520 193,102 ------------
------------ ------------ ------------ Net income $213,523 $175,117
$673,233 $546,758 ============ ============ ============
============ Net income per share $2.00 $1.63 $6.32 $5.02
============ ============ ============ ============ Net income per
diluted share $1.98 $1.61 $6.26 $4.97 ============ ============
============ ============ Weighted average number of common shares
outstanding: Basic 106,725,567 107,392,176 106,549,856 108,891,738
============ ============ ============ ============ Diluted
107,737,122 108,484,035 107,473,723 110,121,701 ============
============ ============ ============ *T -0- *T Ambac Financial
Group, Inc. and Subsidiaries Consolidated Balance Sheets September
30, 2006 and December 31, 2005 (Dollars in Thousands Except Share
Data) September 30, December 31, 2006 2005 -------------
------------ (unaudited) Assets
------------------------------------------- Investments: Fixed
income securities, at fair value (amortized cost of $16,526,366 in
2006 and $14,781,028 in 2005) $16,855,600 $15,124,016 Fixed income
securities pledged as collateral, at fair value (amortized cost of
$381,625 in 2006 and $378,480 in 2005) 375,288 371,160 Short-term
investments, at cost (approximates fair value) 277,763 472,034
Other (cost of $98,467 in 2006 and $13,537 in 2005) 99,474 14,173
------------- ------------ Total investments 17,608,125 15,981,383
Cash 42,182 28,295 Securities purchased under agreements to resell
282,450 419,000 Receivable for securities sold 1,909 2,161
Investment income due and accrued 182,979 178,779 Reinsurance
recoverable on paid and unpaid losses 5,292 3,730 Prepaid
reinsurance 311,564 303,383 Deferred acquisition costs 220,252
202,195 Loans 1,199,287 1,344,140 Derivative assets 1,125,519
1,102,649 Other assets 113,618 159,425 ------------- ------------
Total assets $21,093,177 $19,725,140 ============= ============
Liabilities and Stockholders' Equity
------------------------------------------- Liabilities: Unearned
premiums $3,030,641 $2,954,718 Loss and loss expense reserve
279,614 304,139 Ceded reinsurance balances payable 16,964 23,746
Obligations under investment and payment agreements 7,743,869
7,056,222 Obligations under investment repurchase agreements
157,151 196,568 Securities sold under agreement to repurchase
139,486 - Deferred income taxes 261,228 257,987 Current income
taxes 29,281 16,726 Long-term debt 2,213,303 2,233,582 Accrued
interest payable 108,247 108,195 Derivative liabilities 846,911
935,440 Other liabilities 254,577 253,969 Payable for securities
purchased 6,588 11,641 ------------- ------------ Total liabilities
15,087,860 14,352,933 ------------- ------------ Stockholders'
equity: Preferred stock - - Common stock 1,092 1,092 Additional
paid-in capital 755,749 723,680 Accumulated other comprehensive
income 199,752 202,312 Retained earnings 5,265,443 4,692,701 Common
stock held in treasury at cost (216,719) (247,578) -------------
------------ Total stockholders' equity 6,005,317 5,372,207
------------- ------------ Total liabilities and stockholders'
equity $21,093,177 $19,725,140 ============= ============ Number of
shares outstanding (net of treasury shares) 106,192,941 105,639,446
============= ============ Book value per share $56.55 $50.85
============= ============ *T -0- *T Ambac Assurance Corporation
and Subsidiaries Capitalization Table - GAAP September 30, 2006 and
December 31, 2005 (Dollars in Millions) The following table sets
forth Ambac Assurance's consolidated capitalization as of September
30, 2006 and December 31, 2005, respectively, on the basis of
accounting principles generally accepted in the United States of
America. September 30, December 31, 2006 2005 -------------
------------ (unaudited) Unearned premiums $ 3,040 $ 2,966
Long-term debt 1,022 1,042 Other liabilities 1,980 1,996
------------- ------------ Total liabilities 6,042 6,004
------------- ------------ Stockholder's equity: Common stock 82 82
Additional paid-in capital 1,476 1,453 Accumulated other
comprehensive income 144 137 Retained earnings 5,063 4,499
------------- ------------ Total stockholder's equity 6,765 6,171
------------- ------------ Total liabilities and stockholder's
equity $12,807 $12,175 ============= ============ *T
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