AMBAC FINANCIAL GROUP INC - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2004

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 1-10777

Ambac Financial Group, Inc.

(Exact name of Registrant as specified in its charter)


Delaware		13-3621676
(State of incorporation)		(I.R.S. employer identification no.)

One State Street Plaza

New York, New York

10004

(Address of principal executive offices)

(Zip code)

(212) 668-0340

(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨

As of April 30, 2004, 108,402,363 shares of Common Stock, par value $0.01 per share, (net of 385,842 treasury shares) of the Registrant were outstanding.

Ambac Financial Group, Inc. and Subsidiaries

INDEX


		PAGE

PART I FINANCIAL INFORMATION

Item 1.	Unaudited Financial Statements of Ambac Financial Group, Inc. and Subsidiaries

	Consolidated Balance Sheets – March 31, 2004 and December 31, 2003	3

	Consolidated Statements of Operations – three months ended March 31, 2004 and 2003	4

	Consolidated Statements of Stockholders’ Equity – three months ended March 31, 2004 and 2003	5

	Consolidated Statements of Cash Flows – three months ended March 31, 2004 and 2003	6

	Notes to Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35

Item 4.	Controls and Procedures	36

PART II OTHER INFORMATION

Item 6.	Exhibits and Reports on Form 8-K	37

SIGNATURES		38

INDEX TO EXHIBITS		39

PART 1 - FINANCIAL INFORMATION

Item 1 - Financial Statements of Ambac Financial Group, Inc. and Subsidiaries

Ambac Financial Group, Inc. and Subsidiaries

Consolidated Balance Sheets

March 31, 2004 and December 31, 2003

(Dollars in Thousands)


	March 31, 2004			December 31, 2003
	(unaudited)
Assets

Investments:
Fixed income securities, at fair value (amortized cost of $12,671,020 in 2004 and $12,403,247 in 2003)	$	13,240,910		$	12,860,068
Fixed income securities pledged as collateral, at fair value (amortized cost of $693,448 in 2004 and $662,046 in 2003)		696,089			661,422
Short-term investments, at cost (approximates fair value)		226,451			250,382
Other (cost of $4,543 in 2004 and $4,528 in 2003)		4,591			4,417

Total investments		14,168,041			13,776,289

Cash		20,046			24,449
Securities purchased under agreements to resell		147,000			54,015
Receivable for securities sold		17,823			4,425
Investment income due and accrued		125,957			159,439
Reinsurance recoverable on paid and unpaid losses		3,266			3,030
Prepaid reinsurance		328,254			325,461
Deferred acquisition costs		176,523			175,296
Loans		832,959			837,981
Derivative product assets		1,394,449			1,146,408
Variable interest entity		170,663			189,482
Other assets		72,467			51,039

Total assets	$	17,457,448		$	16,747,314

Liabilities and Stockholders’ Equity

Liabilities:
Unearned premiums	$	2,576,080		$	2,545,490
Losses and loss expense reserve		230,810			189,414
Ceded reinsurance balances payable		17,043			15,383
Obligations under investment and payment agreements		6,612,176			6,545,759
Obligations under investment repurchase agreements		474,951			530,644
Securities sold under agreement to repurchase		163,200			225,500
Deferred income taxes		229,281			171,058
Current income taxes		52,769			43,176
Debentures		791,791			791,775
Accrued interest payable		47,012			73,941
Derivative product liabilities		1,175,826			946,178
Other liabilities		227,659			222,126
Variable interest entity		170,663			189,482
Payable for securities purchased		158,659			2,830

Total liabilities		12,927,920			12,492,756

Stockholders’ equity:
Preferred stock		—			—
Common stock		1,084			1,073
Additional paid-in capital		646,989			606,468
Accumulated other comprehensive income		353,500			266,919
Retained earnings		3,534,042			3,380,098
Common stock held in treasury at cost		(6,087	)		—

Total stockholders’ equity		4,529,528			4,254,558

Total liabilities and stockholders’ equity	$	17,457,448		$	16,747,314

See accompanying Notes to Consolidated Financial Statements

Ambac Financial Group, Inc. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

For the Three Months Ended March 31, 2004 and 2003

(Dollars in Thousands Except Share Data)


	Three Months Ended March 31,
	2004			2003
Revenues:
Financial Guarantee:
Gross premiums written	$	226,434		$	197,219
Ceded premiums written		(33,886	)		(31,168	)

Net premiums written	$	192,548		$	166,051

Net premiums earned	$	165,435		$	134,752
Other credit enhancement fees		11,436			10,364

Net premiums earned and other credit enhancement fees		176,871			145,116
Net investment income		86,704			76,595
Net realized investment gains		11,871			13,943
Net mark-to-market gains (losses) on credit derivative contracts		6,962			(12,176	)
Variable interest entity		1,061			—
Other (loss) income		(12,219	)		825
Financial Services:
Interest from investment and payment agreements		52,350			58,996
Other revenue		7,420			5,547
Net realized investment gains		5,951			308
Net mark-to-market gains on derivative hedge contracts		63			677
Corporate:
Net investment income		370			931
Net realized investment losses		(24	)		—

Total revenues		337,380			290,762

Expenses:
Financial Guarantee:
Losses and loss expenses		17,500			9,800
Underwriting and operating expenses		25,654			22,166
Variable interest entity		904			—
Financial Services:
Interest from investment and payment agreements		42,692			53,432
Other expenses		3,695			2,957
Interest		13,625			12,454
Corporate		2,189			8,273

Total expenses		106,259			109,082

Income before income taxes		231,121			181,680
Provision for income taxes		59,366			43,618

Income from continuing operations		171,755			138,062

Discontinued operations:
Loss from discontinued operations		(240	)		(231	)
Income tax benefit		(96	)		(92	)

Net loss from discontinued operations		(144	)		(139	)

Net income	$	171,611		$	137,923

Earnings per share:
Income from continuing operations	$	1.59		$	1.30
Discontinued operations	$	0.00		$	0.00

Net income	$	1.59		$	1.30

Earnings per diluted share:
Income from continuing operations	$	1.55		$	1.27
Discontinued operations	$	0.00		$	0.00

Net income	$	1.55		$	1.27

Weighted average number of common shares outstanding:
Basic		107,769,564			106,050,379

Diluted		110,397,003			108,737,211

See accompanying Notes to Consolidated Financial Statements

Ambac Financial Group, Inc. and Subsidiaries

Consolidated Statements of Stockholders' Equity

(Unaudited)

For The Three Months Ended March 31, 2004 and 2003

(Dollars in Thousands)

2004

2003

Retained Earnings:

Balance at January 1

3,380,098

2,820,281

Net income

171,611

137,923

Dividends declared – common stock

(11,830

)

(10,602

)

Exercise of stock options

(5,837

)

(1,356

)

Balance at March 31

3,534,042

2,946,246

Accumulated Other Comprehensive Income:

Balance at January 1

266,919

265,427

Unrealized gains on securities, $111,756 and $15,477, pre-tax in 2004 and 2003, respectively(1)

70,160

9,623

Gain (loss) on derivative hedges

14,959

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