Ambac Financial Group, Inc. (NYSE: ABK) (Ambac) today announced
first quarter 2007 net income of $213.3 million, or $2.02 per
diluted share. This represents a 4% decrease from first quarter
2006 net income of $221.1 million, and a 2% decrease in net income
per diluted share from $2.06 a year earlier. 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 first
quarter 2007, net security gains and losses had the effect of
increasing net income by $2.5 million, or $0.02 on a per diluted
share basis. Accelerated earnings had the effect of increasing net
income by $24.7 million, or $0.24 per diluted share during the
quarter. Table I, below, provides first quarter comparisons of
earnings for 2007 and 2006. Table I Earnings Per Diluted Share �
First Quarter 2007� 2006� % Change� Net income per diluted share $
2.02� $ 2.06� - 2% Effect of net security gains ($ 0.02) ($ 0.08)
n.a. Operating earnings(a)(b) $ 2.00� $ 1.98� +1% Effect of
accelerated earnings ($ 0.24) ($ 0.11) n.a. Core earnings(b) $
1.76� $ 1.87� - 6% (a) 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,
below. Commenting on the overall results, Ambac Chairman and Chief
Executive Officer, Robert J. Genader, noted, �The first quarter
evidenced improved business production across all major business
sectors relative to the 2006 comparable quarter. Debt issuance and
capital markets activity continues to be strong. Importantly,
recent evidence of credit spread widening in the mortgage related
asset classes should lead to increased demand for our core
financial guarantee product, provided of course, that wider spreads
continue to prevail.� Revenues Highlights Credit enhancement
production(1) in the first quarter of 2007 was $310.1 million, up
33% from $233.5 million reported in the first quarter of 2006.
Growth was achieved in all three sectors, led by the 49% increase
in U.S. structured finance. Table II, below, provides the quarterly
comparisons of credit enhancement production by market sector for
2007 and 2006. Table II Credit Enhancement Production(1) �
$-millions First Quarter 2007� 2006� % Change� Public Finance $
114.6� $ 99.2� + 16% Structured Finance 135.4� 90.7� + 49%
International 60.1� 43.6� + 38% Total $310.1� $ 233.5� + 33% In
public finance, Ambac�s premium production increased primarily due
to increased overall market issuance which was up almost 50%,
quarter on quarter (as reported by third party sources). The
increase in issuance for the quarter was driven by strong new-money
and refunding issuance across the full range of municipal products.
Ambac�s market share of the insured market was approximately 26%.
Ambac wrote significantly more tax revenue transactions and fewer
health care transactions in the first quarter of 2007 relative to
the comparable prior quarter resulting in a decline in average
pricing in this sector. Ambac�s strategy continues to be centered
on underwriting the more highly structured transactions in the
municipal market. U.S. structured finance production during the
quarter was higher as strong capital market issuance continued into
2007 in the U.S. During the quarter, Ambac benefited from increased
writings in utilities, structured insurance and pooled debt
obligations (CDOs). Those increased writings were partially offset
by lower writings of commercial asset-backed and auto
securitizations during the quarter. While business activity in the
mortgage-backed securities asset class has recently picked up
significantly, Ambac�s writings in that product were flat, quarter
on quarter. Ambac remains focused on achieving the best risk-rated
returns and will remain disciplined until pricing in this product
is commensurate with the level of risk. Competition from the
senior/subordinated market is starting to ease in MBS and certain
types of CDO transactions but remains challenging across most other
asset classes of U.S. structured finance. International production
was stronger as Ambac closed two sizable European infrastructure
transactions in the current quarter including a guarantee on a
major Austrian toll road, the largest Public Private Partnership
(�PPP�) on the European continent to date. The quarter also saw
strong flow in Investor Owned Utilities, pooled debt obligations
and asset-backed securitizations. During the quarter, Ambac closed
deals in six different countries. Management continues to believe
that the broad international markets provide an array of
opportunities and will be a driver of short-term and long-term
growth for Ambac. Net premiums written (which represent premiums
collected during the period, net of reinsurance) in the first
quarter of 2007 of $220.4 million were 3% lower than net premiums
written of $227.8 million in the comparable period of 2006. The
decrease is primarily a result of reinsurance cancellations in the
first quarter 2006, as discussed below under �Reinsurance
Cancellations�. Gross premiums written in the first quarter of 2007
amounted to $249.9 million, representing a 14% increase from $219.0
million in the first quarter 2006. The increase in gross premiums
written is primarily attributable to higher U.S. public finance
business written during the first quarter of 2007. Ceded premiums
written reduced gross premiums by $29.5 million in the first
quarter 2007, compared to a net addition of $8.8 million in the
first quarter of 2006. Ceded premiums written in the first quarter
2006 includes the impact of the collection of $37.0 million in
return premiums from the cancellations of reinsurance contracts.
Excluding the return premiums in 2006, ceded premiums in the first
quarter of 2007 increased by 5% from $28.2 million in the first
quarter of 2006. Ceded premiums (exclusive of return premiums in
2006) as a percentage of gross premiums written were 11.8% and
12.9% for the first quarter of 2007 and 2006, respectively. A
breakdown of gross premiums written by market sector and ceded
premiums for the first quarter 2007 and 2006 are included below in
Table III. Table III Premiums Written � $-millions First Quarter
2007� 2006� % Change� Public Finance $ 114.4� $ 92.3� + 24%
Structured Finance 83.2� 78.8� + 6% International 52.3� 47.9� + 9%
Total Gross Premiums Written 249.9� 219.0� + 14% Ceded Premiums
Written (29.5) 8.8� -� Net Premiums Written $ 220.4� $ 227.8� - 3%
Net premiums earned and other credit enhancement fees for the first
quarter of 2007 were $231.6 million, which represented an 11%
increase from the $208.4 million earned in the first quarter of
2006. The increase was driven by higher accelerated premiums from
refundings and policy termination fees, as well as higher normal
premiums and other credit enhancement fees across all sectors. Net
premiums earned include accelerated premiums, which result from
refundings, calls and other accelerations recognized during the
quarter. Accelerated premiums were $39.7 million in the first
quarter of 2007, up 59% from $25.0 million in accelerated premiums
in the first quarter of 2006. During the first quarter 2007,
approximately $33.8 million of the accelerated premiums related to
U.S. public finance transactions and the remainder related to U.S.
structured finance and international transactions. Accelerated
premiums in the first quarter of 2006 include $7.7 million related
to the impact of reinsurance cancellations, as discussed below
under �Reinsurance Cancellations.� A breakdown of net premiums
earned and other credit enhancement fees by market sector for the
first quarter 2007 and 2006 are included below in Table IV. Normal
net premiums earned exclude accelerated premiums that result from
refundings, calls and other accelerations. Table IV Net Premiums
Earned and Other Credit Enhancement Fees � $-millions First Quarter
2007� 2006� % Change� Public Finance $ 58.4� $ 55.8� + 5%
Structured Finance 82.0� 76.9� + 7% International 51.5� 50.7� + 2%
Total Normal Premiums/Fees 191.9� 183.4� + 5% Accelerated Premiums
39.7� 25.0� + 59% Total $ 231.6� $ 208.4� + 11% Public finance
earned premiums, before accelerations, grew 5% this quarter. Earned
premium growth in this sector remains fairly steady but has been
negatively impacted by the high level of refunding activity in
Ambac�s public finance book in recent years, competitive pricing
and the mix of business underwritten in recent periods. Structured
finance earned premiums and other credit enhancement fees grew 7%.
The rate of growth in structured finance has improved recently
driven by strong premium production in asset classes such as pooled
debt obligations and commercial asset-backed securities over the
past several quarters. International earned premiums and other
credit enhancement fees increased 2%. The increase is an
improvement over 2006 when international earned premiums had been
on the decline. The improvement is driven primarily by strong
business writings across many geographies and asset classes during
2006 and the first quarter 2007. Net investment income for the
first quarter of 2007 was $112.1 million, representing an increase
of 10% from $101.7 million in the comparable period of 2006. This
increase was due primarily to growth in the investment portfolio
driven by the ongoing collection of financial guarantee premiums
and fees. Other income for the first quarter of 2007 was $2.9
million, significantly lower than $29.0 million reported in the
comparable period of 2006. During the first quarter of 2006, Ambac
sold three aircraft from a defaulted enhanced equipment trust
certificate transaction. The gain on the sale of the aircraft
amounted to $25.0 million and was included in �other income� rather
than as a loss recovery because the aircraft had been classified as
operating assets for the short period of time in which the company
took possession of them after the default. 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 $10.6 million in the first quarter of
2007, down 9% from $11.7 million in the first quarter of 2006. The
decrease was primarily due to lower mark-to-market gains included
within derivative products revenues in the first quarter 2007.
Reinsurance Cancellations During the first quarter 2006, Ambac
cancelled its remaining reinsurance contracts with two reinsurers
and recaptured $3.9 billion of par outstanding. Included in ceded
premiums in our Consolidated Statement of Operations is $37.0
million in returned premiums from the cancellations, of which
approximately $29.3 million was deferred. The difference, $7.7
million, included in accelerated premiums, resulted from the
difference between the contractual amount of returned premiums and
the associated unearned premium remaining on the previously ceded
portion of the underlying guarantees. The net income impact of the
cancellations, presented in Table I, above, as part of accelerated
premiums, amounted to approximately $2.0 million, or $0.02 per
diluted share. Expenses Highlights Financial guarantee expenses of
$47.8 million for the first quarter of 2007 increased 26% from
$38.0 million of expenses for the first quarter of 2006. Financial
guarantee loss and loss expenses were $11.4 million in the first
quarter of 2007, up from $0.1 million in the first quarter of 2006.
See �Loss Reserve Activity,� below, for additional information on
losses. Net underwriting and operating expenses of the financial
guarantee segment totaled $36.4 million in the first quarter of
2007, down 4% from $37.9 million in the first quarter of 2006
primarily due to additional accruals taken in 2006 under new
accounting rules for stock-based compensation for retirement
eligible employees. Loss Reserve Activity Case basis loss reserves
(loss reserves for exposures that have defaulted) decreased $4.8
million during the first quarter of 2007 from $42.5 million at
December 31, 2006 to $37.7 million at March 31, 2007. The decrease
was driven by improving conditions on certain credits for which we
had previously paid claims. Total net claim payments during the
quarter amounted to ($0.1) million. Active credit reserves (�ACR�)
are established for probable and estimable losses due to credit
deterioration on certain adversely classified insured transactions.
The ACR increased by $16.2 million during the quarter, from $172.6
million at December 31, 2006 to $188.8 million at March 31, 2007.
The increase was driven primarily by net increases in reserves on
certain credits within the U.S. public finance portfolio. Other
Items Total net securities gains/(losses) for the first quarter of
2007 were $3.7 million, consisting of net realized gains on
investment securities of $6.6 million, net mark-to-market losses on
credit and total return derivatives of ($1.9) million and net
mark-to-market losses on non-trading derivative contracts of ($1.0)
million. Approximately $6.2 million of the net realized gains on
investment securities relate to cash recoveries received during the
quarter related to a security in the investment agreement portfolio
that had recognized impairment losses in prior years. For the first
quarter of 2006, net securities gains/(losses) were $13.4 million,
consisting of net realized gains on investment securities of $5.1
million, net mark-to-market gains on credit and total return
derivatives of $7.2 million and net mark-to-market gains on
non-trading derivative contracts of $1.1 million. Balance Sheet
Highlights Total assets as of March 31, 2007 were $20.11 billion,
down 1% from total assets of $20.27 billion at December 31, 2006.
The decrease was primarily driven by a net draw down from our
investment agreement portfolio, partially offset by cash generated
from operations during the period. On February 12, 2007, Ambac
issued $400 million of Directly-Issued Subordinated Capital
Securities (DISCSSM). Ambac used the net proceeds from the offering
and additional funds to purchase $400 million worth of shares of
its common stock. The common stock was purchased through an
accelerated share buyback agreement and resulted in 4.26 million
shares acquired during the quarter. The total number of additional
shares that will ultimately be repurchased under the program will
be based on the volume-weighted average share price of the
Company�s common shares during the term of the accelerated buyback
agreement. As of March 31, 2007, stockholders� equity was $5.99
billion, a 3% decrease from year-end 2006 stockholders� equity of
$6.18 billion. The decrease was primarily the result of the $400
million share buyback, partially offset by net income during the
period. Annual Meeting of Stockholders As previously announced, the
Board of Directors set the 2007 Annual Meeting of Stockholders for
Tuesday, May 8, 2007, at 11:30 a.m. in New York City. The record
date for determining stockholders entitled to notice of, and to
vote at, the annual meeting was the close of business, March 9,
2007. 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) the amount of reserves established for losses and loss
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 and
Fitch, 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 5.4% and 5.1% during the first quarter of
2007 and 2006, respectively. The definition of credit enhancement
production used by Ambac may differ from definitions of credit
enhancement production (or similar terms) used by other public
holding companies of financial guarantors. The following table
reconciles credit enhancement production to gross premiums written
calculated in accordance with GAAP: $-millions First Quarter �
2007� 2006� Credit enhancement production $ 310� $ 233� Present
value of estimated installment premiums written on insurance
policies and structured credit derivatives issued in the period � �
� (198) � � � (136) Gross up-front premiums written 112� 97� Gross
installment premiums written on insurance policies � 138� � 122�
Gross premiums written $ 250� $ 219� (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 Subsidiaries Consolidated Statements of Operations
(Unaudited) For the Three Months Ended March 31, 2007 and 2006
(Dollars in Thousands Except Share Data) � Three Months Ended March
31, 2007� � 2006� Revenues: Financial Guarantee: Gross premiums
written $249,912� $219,058� Ceded premiums written (29,484) 8,757�
Net premiums written $220,428� $227,815� � Net premiums earned
$216,006� $194,232� Other credit enhancement fees 15,553� 14,188�
Net premiums earned and other credit enhancement fees 231,559�
208,420� Net investment income 112,064� 101,734� Net realized
investment gains (losses) 440� (379) Net mark-to-market (losses)
gains on credit derivative contracts (5,124) 1,953� Other income
2,856� 28,962� Financial Services: Investment income 105,970�
81,935� Derivative products 3,606� 4,686� Net realized investment
gains 6,161� 5,503� Net mark-to-market gains on total return swap
contracts 3,215� 5,223� Net mark-to-market (losses) gains on
non-trading derivatives (499) 244� Corporate: Net investment income
1,581� 3,000� � Total revenues 461,829� 441,281� � Expenses:
Financial Guarantee: Loss and loss expenses 11,422� 127�
Underwriting and operating expenses 36,376� 37,858� Financial
Services: Interest on investment and payment agreements 98,958�
74,965� Operating expenses 3,288� 3,572� Interest 19,289� 19,475�
Corporate 3,256� 3,643� � Total expenses 172,589� 139,640� � Income
before income taxes 289,240� 301,641� Provision for income taxes
75,897� 80,501� � Net income $213,343� $221,140� � � � Net income
per share $2.04� $2.08� � Net income per diluted share $2.02�
$2.06� � � Weighted average number of common shares outstanding: �
Basic 104,643,529� 106,438,758� � Diluted 105,600,555� 107,430,787�
Ambac Financial Group, Inc. and Subsidiaries Consolidated Balance
Sheets March 31, 2007 and December 31, 2006 (Dollars in Thousands
Except Share Data) � March 31, 2007 December 31, 2006 (unaudited)
Assets � Investments: Fixed income securities, at fair value
(amortized cost of $16,585,654 in 2007 and $16,484,257 in 2006)
$16,888,069� $16,800,338� Fixed income securities pledged as
collateral, at fair value (amortized cost of $455,210 in 2007 and
$311,546 in 2006) 452,324� 307,101� Short-term investments, at cost
(approximates fair value) 270,196� 311,759� Other (cost of $13,458
in 2007 and $13,427 in 2006) 14,460� 14,391� Total investments
17,625,049� 17,433,589� � Cash 31,489� 31,868� Securities purchased
under agreements to resell -� 273,000� Receivable for securities
sold 1,743� 12,857� Investment income due and accrued 154,614�
193,199� Reinsurance recoverable on paid and unpaid losses 4,120�
3,921� Prepaid reinsurance 319,310� 315,498� Deferred acquisition
costs 263,282� 252,115� Loans 602,624� 625,422� Derivative assets
995,236� 1,019,339� Other assets 114,393� 107,005� Total assets
$20,111,860� $20,267,813� � Liabilities and Stockholders' Equity �
Liabilities: Unearned premiums $3,045,911� $3,037,544� Loss and
loss expense reserve 231,314� 220,074� Ceded reinsurance balances
payable 20,888� 20,084� Obligations under investment and payment
agreements 7,747,778� 8,202,590� Obligations under investment
repurchase agreements 151,797� 154,287� Securities sold under
agreement to repurchase 128,000� -� Deferred income taxes 261,448�
263,483� Current income taxes 119,258� 49,920� Long-term debt
1,389,176� 991,804� Accrued interest payable 103,685� 105,129�
Derivative liabilities 654,070� 667,066� Other liabilities 225,090�
275,670� Payable for securities purchased 44,266� 95,973� Total
liabilities 14,122,681� 14,083,624� � Stockholders' equity:
Preferred stock -� -� Common stock 1,092� 1,092� Additional paid-in
capital 814,223� 790,168� Accumulated other comprehensive income
187,605� 197,576� Retained earnings 5,626,344� 5,454,575� Common
stock held in treasury at cost (640,085) (259,222) Total
stockholders' equity 5,989,179� 6,184,189� Total liabilities and
stockholders' equity $20,111,860� $20,267,813� � Number of shares
outstanding (net of treasury shares) 101,775,497� 105,730,553� Book
value per share $58.85� $58.49� Ambac Assurance Corporation and
Subsidiaries Capitalization Table - GAAP March 31, 2007 and
December 31, 2006 (Dollars in Millions) � The following table sets
forth Ambac Assurance's consolidated capitalization as of March 31,
2007 and December 31, 2006, respectively, on the basis of
accounting principles generally accepted in the United States of
America. � March 31, December 31, 2007� 2006� (unaudited) �
Long-term debt $0� $0� � Stockholder's equity: Common stock 82� 82�
Additional paid-in capital 1,532� 1,509� Accumulated other
comprehensive income 134� 142� Retained earnings 5,434� 5,259�
Total stockholder's equity $7,182� $6,992�
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