ABK Ambac Financial Grp. Common Stock

Ambac Financial Group, Inc. Announces Fourth Quarter Net Income of $188.8 Million, Up 19% Fourth Quarter Net Income Per Diluted Share of $1.69, up 17%, NEW YORK, Jan. 26 /PRNewswire-FirstCall/ -- Ambac Financial Group, Inc. (NYSE:ABK) (Ambac) today announced fourth quarter 2004 net income of $188.8 million, or $1.69 per diluted share. This represents a 19% increase from fourth quarter 2003 net income of $158.8 million, and a 17% increase in net income per diluted share from $1.44 per diluted share in the fourth quarter of 2003. Net Income Per Diluted Share Ambac presents net income and net income per diluted share. These measures are computed in accordance with accounting principles generally accepted in the United States of America (GAAP). However, the research analysts have not adjusted their reporting of earnings to a strictly GAAP basis. In order to assist investors in their understanding of quarterly results, Ambac provides other information. Earnings measures reported by research analysts typically exclude net gains and losses from sales of investment securities and mark-to-market gains and losses on credit and total return derivative contracts and derivative hedge contracts ("net security gains and losses") and certain non-recurring items. Certain research analysts further exclude the impact of accelerated premiums earned on guaranteed obligations that have been refunded and other accelerated earnings ("accelerated earnings"). During the fourth quarter 2004, net security gains and losses had the effect of increasing net income by $10.7 million, $0.09 on a per diluted share basis. Accelerated earnings had the effect of increasing net income by $7.2 million, or $0.07 per diluted share for the fourth quarter 2004. Table I, below, provides fourth quarter and full year comparisons for 2004 and 2003. Table I Fourth Quarter Full Year % % 2004 2003 Change 2004 2003 Change Net income per diluted share $1.69 $1.44 + 17% $6.53 $5.66 + 15% Effect of net security (gains)/losses ($0.09) ($0.05) n.a. ($0.26) ($0.26) n.a. Non-recurring items(1) $0.00 $0.08 n.a. $0.01 $0.12 n.a. Sub-total excluding effect of net security gains/losses and non-recurring items(2) $1.60 $1.47 + 9% $6.28 $5.52 + 14% Effect of accelerated earnings ($0.07) ($0.15) n.a. ($0.41) ($0.43) n.a. Total excluding items $1.53 $1.32 + 16% $5.87 $5.09 + 15% (1) Fourth quarter 2003 amount represents discontinued operations of Cadre Financial Services, Inc. Full year 2003 also includes the write off of previously deferred issuance expenses related to redeemed debentures. Full year 2004 amount represents additional charges related to Cadre. (2) 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, "I am very pleased with the overall results and the level of business produced during the quarter and the full year, especially in light of the challenging credit spread and competitive environment. Looking forward, we believe that the combination of market/product expansion with the creativity and execution capability that Ambac brings to those markets, produces a strong outlook for 2005 and beyond." Revenues Highlights * Credit enhancement production(1) in the fourth quarter of 2004 was $344.2 million, down 20% from the strong production of the fourth quarter of 2003 which came in at $428.9 million. Growth in international production was offset by declines in production in U.S. public and structured finance. Table II, below, provides fourth quarter and full year comparisons of credit enhancement production, by market sector, for 2004 and 2003. Table II Credit Enhancement Production $-millions Fourth Quarter Full Year % % 2004 2003 Change 2004 2003 Change Public Finance $101.5 $197.7 - 49% $542.0 $650.9 - 17% Structured Finance 88.5 109.0 - 19% 378.8 473.1 - 20% International 154.2 122.2 + 26% 367.0 364.9 + 1% Total $344.2 $428.9 - 20% $1,287.8 $1,488.9 - 14% * While overall municipal market issuance, as reported by third party sources, was slightly lower in the fourth quarter of 2004 compared to the comparable prior period, the primary reasons that our U.S. public finance production was lower, quarter on quarter, were the mix of the issuance and increased competition. During the current quarter, fewer of the large structured municipal real estate and project finance transactions that Ambac targets came to market. Additionally, while spreads in the municipal sector generally remain wide relative to historical levels, competition amongst financial guarantors in certain municipal sectors has intensified and pricing has weakened. U.S. structured finance continues to transact business in a wide spectrum of asset classes. During the quarter, strong writings in consumer asset-backed securities transactions were more than offset by the decline in pooled debt obligation and commercial asset-backed transactions. International finance writings were higher than the comparable prior period driven primarily by a large whole-business securitization and strong European infrastructure activity. * Credit enhancement production for the full year of 2004 of $1,287.8 million was 14% lower than credit enhancement production of $1,488.9 million in 2003. * Net premiums written in the fourth quarter of 2004 of $213.2 million were 8% lower than net premiums written of $232.9 million in the same period of 2003, primarily due to the decline in business written in public finance during the quarter. Gross premiums written in the fourth quarter of 2004 and 2003 were reduced by $34.4 million and $47.2 million, respectively, in ceded premiums. Ceded premiums as a percentage of gross premiums written were 14% and 17% for the fourth quarter of 2004 and 2003, respectively. Net premiums written for the full year of 2004 of $976.9 million were 3% lower than net premiums written of $1,005.6 million in the same period of 2003. Gross premiums written for the full year of 2004 and 2003 were reduced by $70.9 million and $138.1 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, as discussed in that quarter. Excluding the return premiums recorded in 2004, ceded premiums for the full year of 2004 decreased by 2% to $135.7 million. A breakdown of gross premiums written by market sector and ceded premiums are included below in Table III. Table III Gross Premiums Written $-millions Fourth Quarter Full Year % % 2004 2003 Change 2004 2003 Change Public Finance $105.7 $153.8 - 31% $537.6 $592.7 - 9% Structured Finance 70.6 75.0 - 6% 281.7 320.6 - 12% International 71.3 51.3 + 39% 228.5 230.4 - 1% Total Gross Premiums Written 247.6 280.1 - 12% 1,047.8 1,143.7 - 8% Ceded Premiums Written (34.4) (47.2) - 27% (70.9) (138.1) - 49% Net Premiums Written $213.2 $232.9 - 8% $976.9 $1,005.6 - 3% * Net premiums earned and other credit enhancement fees for the fourth quarter of 2004 were $190.4 million, which represented a 2% increase from the $186.3 million earned in the fourth quarter of 2003. Net premiums earned increased for all market segments. Net premiums earned include accelerated premiums, which result from refundings, calls and other accelerations recognized during the quarter. Accelerated premiums were $12.7 million in the fourth quarter of 2004 (which had a net income per diluted share effect of $0.07), down 55% from $28.2 million ($0.15 per diluted share) in accelerated premiums in the fourth quarter of 2003. The declining interest rate environment present in 2003 prompted the relatively high level of accelerated premiums. As interest rates have risen in 2004, the level of accelerated premiums has declined. A breakdown of net premiums earned and other credit enhancement fees by market sector are included below in Table IV. Normal net premiums earned exclude accelerated premiums that result from refundings, calls and other accelerations. Table IV Net Premiums Earned and Other Credit Enhancement Fees $-millions Fourth Quarter Full Year % % 2004 2003 Change 2004 2003 Change Public Finance $54.1 $47.5 + 14% $207.4 $176.5 + 18% Structured Finance 70.0 65.2 + 7% 273.3 240.9 + 13% International 53.6 45.4 + 18% 201.4 167.7 + 20% Total Normal Premiums/Fees 177.7 158.1 + 12% 682.1 585.1 + 17% Accelerated Premiums 12.7 28.2 - 55% 81.9 82.2 0% Total $190.4 $186.3 + 2% $764.0 $667.3 + 14% Public finance exhibited a healthy growth trend as its earned premium, before accelerations, grew 14%. Ambac's focus on higher value-added structured municipal transactions, combined with diligent management of risk limit capacity has resulted in improved returns and strong earned premiums growth in public finance, our most mature segment. Structured finance earned premiums and other credit enhancement fees grew 7%. The rate of growth in structured finance has been adversely impacted by mortgage-backed and home equity securitizations. This asset class had experienced significant growth in recent years fueled by heavy issuance and strong demand for insurance, making year-to-year comparisons more difficult. Although writings in the segment recently have been strong, the accelerated prepayments in this book of business combined with increased competition from both other financial guarantors and the market in the form of senior/subordination structures, have led to lower growth in this asset class. International earned premiums and other credit enhancement fees grew 18%. The rate of growth remains strong, however it is lower than the prior year. The decline is driven primarily by reduced pooled debt obligations business. New business generation in this asset class has slowed significantly as credit spreads have narrowed to the point where returns are generally not attractive. Pooled debt obligations had been one of our fastest growing asset classes in the international segment in recent years, making year-to-year comparisons more difficult. Mortgage-backed and home equity securitizations and pooled debt obligations exposures have relatively short average lives. Accordingly, the earnings from these types of exposures are recognized over their short lives and bring some volatility to the earned premium growth rate. A significant portion of the recent premium writings in public finance and for certain bond types within structured finance and international are for longer-term transactions. While the earned premium impact from such long-term writings is not as immediate as the mortgage-backed or pooled debt obligations, they do contribute to stability in Ambac's earned premium stream over the long term. Net premiums earned and other credit enhancement fees for the full year of 2004 were $764.0 million, which represented a 14% increase from the $667.3 million earned in the full year of 2003. Accelerated premiums were $81.9 million for the full year of 2004 (which had a net income per diluted share effect of $0.41), almost flat compared with $82.2 million ($0.43 per diluted share) in accelerated premiums in 2003. Accelerated premiums in 2004 include the impact of the reinsurance cancellations ($7.0 million, or $0.04 per diluted share), as discussed in the second quarter. * Net investment income for the fourth quarter of 2004 was $91.8 million, representing an increase of 10% from $83.7 million in the comparable period of 2003. This increase was due primarily to the growth in the investment portfolio driven by ongoing collection of financial guarantee premiums and fees and the $125 million capital contribution from Ambac Financial Group, Inc. to Ambac Assurance in December 2003. Net investment income for the full year of 2004 was $358.9 million, representing an increase of 12% from $321.1 million in 2003, primarily as a result of the reasons provided above. * Financial services, which is composed of gross interest income less gross interest expense from investment and payment agreements plus revenue from certain derivative products and excludes net realized investment gains and losses and unrealized gains and losses on total return swaps and derivative hedge contracts, were $14.6 million in the fourth quarter of 2004, compared to $9.5 million for the fourth quarter of 2003. Net investment and payment agreement revenues increased approximately $5.0 million from the prior period on improved interest spreads. The recent increase in short-term interest rates and stabilization of longer-term interest rates has improved the net interest margin of the investment agreement business. Declining interest rates adversely impacted net interest rate spreads in the prior period. Derivative products, excluding unrealized net gains from total return swaps, were flat from the prior period. * Financial services were $56.3 million in the full year of 2004, compared to $33.4 million in the full year of 2003. Net investment and payment agreement revenues increased $14.2 million from the prior period on improved interest spreads. Derivative products, excluding unrealized net gains from total return swaps, increased $8.7 million from the prior period. The increase was due primarily to increased interest rate and currency swap activity and net positive mark-to-market adjustments in the current year compared to net negative mark-to-market adjustments recorded in the prior period. Expenses Highlights * Financial guarantee expenses of $43.2 million for the fourth quarter of 2004 increased by 3% over the $41.9 million of expenses for the same quarter of 2003 primarily due to higher compensation expense as we continue to expand our resources to meet global demand for our product. The loss provision of $16.9 million for the fourth quarter of 2004 was relatively flat compared to $16.8 million recorded in the fourth quarter of 2003. Financial guarantee expenses of $179.3 million for the full year of 2004 increased by 23% over the $145.4 million of expenses for the same period of 2003 primarily due to additions to the loss provision, higher compensation expense and the impact on net reinsurance commissions in connection with the cancellation of reinsurance in the second quarter. The loss provision increased from $53.4 million in 2003, to $69.6 million in 2004, reflecting adverse credit migration on certain exposures in the financial guarantee portfolio during the period. * Financial services other expenses, which represent the operating expenses for the segment, amounted to $4.2 million for the fourth quarter of 2004, up 31% from $3.2 million for the fourth quarter of 2003 primarily due to increased compensation expense. * Financial services other expenses for the full year of 2004 of $14.7 million increased by 21% from $12.1 million in expenses for the full year of 2003. Loss Reserve Activity Net additions to the case basis loss reserve in the fourth quarter of 2004 amounted to $51.5 million. This activity relates primarily to two exposures. During the quarter we established a $40 million case basis reserve for an enhanced equipment trust certificate ("EETC") exposure. Prior to the fourth quarter, we had reserved approximately $17 million in connection with our Active Credit Reserve for this credit. This EETC exposure represents a securitization of aircraft leases where Ambac wrapped the senior most layer of the transaction. During the fourth quarter the airline leasing the aircraft filed for bankruptcy and defaulted on its lease obligation. Additionally, we increased an existing case basis reserve by $18.5 million for a stressed health care exposure that has defaulted on its debt obligations. Other Items * Total net securities gains/(losses) for the fourth quarter of 2004 were $16.5 million on a pre-tax basis, or $0.09 per diluted share; consisting of net realized gains on investment securities of $7.5 million and net mark-to-market gains on credit and total return derivatives of $11.9 million and net mark-to-market losses on derivative hedge contracts of ($2.9) million. For the fourth quarter of 2003, net securities gains/(losses) were $8.5 million on a pre-tax basis, or $0.05 per diluted share; consisting of net realized gains on investment securities of $0.9 million and net mark-to-market gains on credit and total return derivatives of $7.6 million. Total net securities gains/(losses) for the full year of 2004 were $45.8 million, or $0.26 per diluted share, consisting of net realized gains on investment securities of $35.1 million, mark-to-market gains on credit and total return derivatives of $27.1 million and net mark-to-market losses on derivative hedge contracts of ($16.4) million. For the full year of 2003 net securities gains/(losses) were $42.1 million, or $0.26 per diluted share, consisting of net realized gains on investment securities of $38.4 million, mark-to-market gains on credit and total return derivatives of $2.9 million and net mark-to-market losses on derivative hedge contracts of $0.8 million. * Interest expense for the fourth quarter of 2004 was $13.5 million, flat to the fourth quarter of 2003. Balance Sheet Highlights * Total assets as of December 31, 2004 were $17.63 billion, up 5% from total assets of $16.75 billion at December 31, 2003. This increase was due primarily to cash generated from business written during the period. As of December 31, 2004, stockholders' equity was $5.02 billion, an 18% increase from year-end 2003 stockholders' equity of $4.25 billion. The increase stemmed primarily from net income during the period. Cash Dividend Declared At its January 2005 Board meeting, the Board of Directors of Ambac Financial Group, Inc. approved the regular quarterly cash dividend of $0.125 per share of common stock. The dividend is payable on March 2, 2005 to stockholders of record on February 10, 2005. Annual Meeting of Stockholders The Board of Directors also set the 2005 Annual Meeting of Stockholders for Tuesday, May 3, 2005, at 11:30 a.m. in New York City. The record date for determining stockholders entitled to notice of, and to vote at, the annual meeting will be the close of business, March 7, 2005. Forward-Looking Statements This release, in particular the President and Chief Executive Officer's remarks, contains statements about our future results that may be considered "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations and the current economic environment. We caution you that these statements are not guarantees of future performance. They involve a number of risks and uncertainties that are difficult to predict. Our actual results could differ materially from those expressed or implied in the forward-looking statements. Among the factors that could cause actual results to differ materially are (1) changes in the economic, credit, or interest rate environment in the United States and abroad; (2) the level of activity within the national and worldwide debt markets; (3) competitive conditions and pricing levels; (4) legislative and regulatory developments; (5) changes in tax laws; (6) the policies and actions of the United States and other governments; and (7) other risks and uncertainties that have not been identified at this time. We undertake no obligation to publicly correct or update any forward-looking statement if we later become aware that it is not likely to be achieved, except as required by law. Ambac Financial Group, Inc., headquartered in New York City, is a holding company whose affiliates provide financial guarantees and financial services to clients in both the public and private sectors around the world. Ambac's principal operating subsidiary, Ambac Assurance Corporation, a leading guarantor of public finance and structured finance obligations, has earned triple-A ratings, the highest ratings available from Moody's Investors Service, Inc., Standard & Poor's Ratings Services, Fitch, Inc. and Rating and Investment Information, Inc. Ambac Financial Group, Inc. common stock is listed on the New York Stock Exchange (ticker symbol ABK). Footnotes (1) Credit enhancement production, which is not promulgated under GAAP, is used by management, equity analysts and investors as an indication of new business production in the period. Credit enhancement production, which Ambac reports as analytical data, is defined as gross (direct and assumed) up-front premiums plus the present value of estimated installment premiums on insurance policies and structured credit derivatives issued in the period. The definition of credit enhancement production used by Ambac may differ from definitions of credit enhancement production used by other public holding companies of financial guarantors. The following table reconciles credit enhancement production to gross premiums written calculated in accordance with GAAP: $-millions Fourth Quarter Full year 2004 2003 2004 2003 Credit enhancement production $344 $429 $1,288 $1,489 Present value of estimated installment premiums on insurance policies and structured credit derivatives issued in the period (219) (259) (713) (750) Gross up-front premiums written $125 $170 $575 $739 Gross installment premiums written on insurance policies 122 110 473 405 Gross premiums written $247 $280 $1,048 $1,144 Ambac Financial Group, Inc. and Subsidiaries Consolidated Statements of Operations (Unaudited) For the Three Months and Years Ended December 31, 2004 and 2003 (Dollars in Thousands Except Share Data) Three Months Ended Year Ended December 31, December 31, 2004 2003 2004 2003 Revenues: Financial Guarantee: Gross premiums written $247,594 $280,149 $1,047,811 $1,143,703 Ceded premiums written (34,360) (47,214) (70,946) (138,146) Net premiums written $213,234 $232,935 $976,865 $1,005,557 Net premiums earned $178,132 $173,947 $716,659 $620,317 Other credit enhancement fees 12,242 12,339 47,326 46,933 Net premiums earned and other credit enhancement fees 190,374 186,286 763,985 667,250 Net investment income 91,820 83,712 358,908 321,089 Net realized investment gains 7,481 6,433 30,004 40,190 Net mark-to-market (losses) gains on credit derivative contracts 7,846 6,250 17,734 23 Other income (loss) 6,118 1,321 (3,896) 5,026 Financial Services: Interest from investment and payment agreements 52,258 50,275 198,800 211,974 Derivative products 10,205 7,346 35,775 20,600 Net realized investment gains (losses) 86 (5,769) 5,099 (1,981) Net mark-to-market (losses) gains on derivative hedge contracts (3,455) 40 (3,329) 779 Corporate: Net investment income 502 2,010 1,674 7,026 Net realized investment (losses) gains (36) 232 (18) 232 Total revenues 363,199 338,136 1,404,736 1,272,208 Expenses: Financial Guarantee: Loss and loss expenses 16,900 16,800 69,600 53,400 Underwriting and operating expenses 25,528 25,061 106,827 92,035 Interest expense on variable interest entity floating rate notes 806 -- 2,908 -- Financial Services: Interest from investment and payment agreements 43,837 46,836 168,943 196,318 Other expenses 4,246 3,239 14,671 12,103 Interest 13,514 13,460 54,322 54,201 Corporate 3,215 2,124 10,683 14,562 Total expenses 108,046 107,520 427,954 422,619 Income before income taxes 255,153 230,616 976,782 849,589 Provision for income taxes 66,382 63,417 250,942 221,490 Income from continuing operations 188,771 167,199 725,840 628,099 Discontinued operations: Loss from discontinued operations -- (5,747) (1,349) (6,976) Income tax expense (benefit) -- 2,700 (60) 2,208 Net loss from discontinued operations -- (8,447) (1,289) (9,184) Net income $188,771 $158,752 $724,551 $618,915 Earnings per share: Income from continuing operations $1.72 $1.56 $6.62 $5.90 Discontinued operations $0.00 ($0.08) ($0.01) ($0.09) Net income $1.72 $1.48 $6.61 $5.81 Earnings per diluted share: Income from continuing operations $1.69 $1.52 $6.54 $5.74 Discontinued operations $0.00 ($0.08) ($0.01) ($0.08) Net income $1.69 $1.44 $6.53 $5.66 Weighted average number of common shares outstanding: Basic 110,022,089 106,955,608 109,602,601 106,553,103 Diluted 111,459,460 110,104,339 110,898,854 109,409,776 Ambac Financial Group, Inc. and Subsidiaries Consolidated Balance Sheets December 31, 2004 and December 31, 2003 (Dollars in Thousands Except Share Data) December 31, December 31, 2004 2003 (unaudited) Assets Investments: Fixed income securities, at fair value (amortized cost of $13,198,868 in 2004 and $12,592,398 in 2003) $13,674,611 $13,049,219 Fixed income securities pledged as collateral, at fair value (amortized cost of $345,195 in 2004 and $662,046 in 2003) 341,742 661,422 Short-term investments, at cost (approximates fair value) 521,226 250,382 Other, at fair value (cost of $3,731 in 2004 and $4,528 in 2003) 4,234 4,417 Total investments 14,541,813 13,965,440 Cash 19,511 24,539 Securities purchased under agreements to resell 353,000 54,015 Receivable for securities sold 1,319 4,425 Investment income due and accrued 160,438 159,680 Reinsurance recoverable on paid and unpaid losses 16,765 3,030 Prepaid reinsurance 297,330 325,461 Deferred acquisition costs 184,766 175,296 Loans 678,406 837,981 Derivative product assets 1,297,972 1,146,408 Other assets 77,523 51,039 Total assets $17,628,843 $16,747,314 Liabilities and Stockholders' Equity Liabilities: Unearned premiums $2,778,893 $2,545,490 Loss and loss expense reserves 254,055 189,414 Ceded reinsurance balances payable 18,248 15,383 Obligations under investment and payment agreements 6,813,914 6,545,759 Obligations under investment repurchase agreements 266,806 530,644 Securities sold under agreement to repurchase -- 225,500 Variable interest entity floating rate notes 119,504 189,151 Deferred income taxes 217,373 171,058 Current income taxes 16,406 43,176 Debentures 791,839 791,775 Accrued interest payable 69,094 74,235 Derivative product liabilities 1,048,619 946,178 Other liabilities 209,629 222,163 Payable for securities purchased 6 2,830 Total liabilities 12,604,386 12,492,756 Stockholders' equity: Preferred stock -- -- Common stock 1,089 1,073 Additional paid-in capital 694,465 606,468 Accumulated other comprehensive income 296,814 266,919 Retained earnings 4,032,089 3,380,098 Common stock held in treasury at cost -- -- Total stockholders' equity 5,024,457 4,254,558 Total liabilities and stockholders' equity $17,628,843 $16,747,314 Number of shares outstanding (net of treasury shares) 108,915,944 107,144,148 Book value per share $46.13 $39.71 Ambac Assurance Corporation and Subsidiaries Capitalization Table - GAAP December 31, 2004 and December 31, 2003 (Dollars in Millions) The following table sets forth Ambac Assurance's consolidated capitalization as of December 31, 2004 and December 31, 2003, respectively, on the basis of accounting principles generally accepted in the United States of America. December 31, December 31, 2004 2003 (unaudited) Unearned premiums $2,783 $2,553 Variable interest entity floating rate notes 120 189 Notes payable to affiliate -- 84 Other liabilities 2,189 2,008 Total liabilities 5,092 4,834 Stockholder's equity: Common stock 82 82 Additional paid-in capital 1,233 1,144 Accumulated other comprehensive income 238 243 Retained earnings 4,094 3,430 Total stockholder's equity 5,647 4,899 Total liabilities and stockholder's equity $10,739 $9,733 DATASOURCE: Ambac Financial Group, Inc. CONTACT: Investor and Media, Peter R. Poillon of Ambac Financial Group, Inc., +1-212-208-3333, or Web site: http://www.ambac.com/

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