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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 June 30, 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 July 30, 2004, 108,456,419 shares of Common Stock, par value $0.01 per share, (net of 332,454 treasury shares) of the Registrant were outstanding.

 

Table of Contents

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 – June 30, 2004 and December 31, 2003    3
    Consolidated Statements of Operations – three and six months ended June 30, 2004 and 2003    4
    Consolidated Statements of Stockholders’ Equity – six months ended June 30, 2004 and 2003    5
    Consolidated Statements of Cash Flows – six months ended June 30, 2004 and 2003    6
    Notes to Unaudited 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    38
Item 4.   Controls and Procedures    39

PART II OTHER INFORMATION

    
Item 4.   Submission of Matters to a Vote of Security Holders    40
Item 6.   Exhibits and Reports on Form 8-K    41

SIGNATURES

    42

INDEX TO EXHIBITS

    43

Table of Contents

PART 1 - FINANCIAL INFORMATION

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

 

Ambac Financial Group, Inc. and Subsidiaries

Consolidated Balance Sheets

June 30, 2004 and December 31, 2003

(Dollars in Thousands)

 

     June 30, 2004
     December 31, 2003
     (unaudited)      

Assets

               

Investments:

               

Fixed income securities, at fair value (amortized cost of $12,864,478 in 2004 and $12,403,247 in 2003)

    $ 13,057,681     $ 12,860,068

Fixed income securities pledged as collateral, at fair value (amortized cost of $661,637 in 2004 and $662,046 in 2003)

      656,938       661,422

Short-term investments, at cost (approximates fair value)

      238,184       250,382

Other (cost of $4,196 in 2004 and $4,528 in 2003)

      4,208       4,417
    
 

Total investments

      13,957,011       13,776,289

Cash

      33,164       24,449

Securities purchased under agreements to resell

      43,000       54,015

Receivable for securities sold

      152,192       4,425

Investment income due and accrued

      142,361       159,439

Reinsurance recoverable on paid and unpaid losses

      2,183       3,030

Prepaid reinsurance

      290,234       325,461

Deferred acquisition costs

      190,299       175,296

Loans

      835,429       837,981

Derivative product assets

      978,679       1,146,408

Variable interest entity

      150,779       189,482

Other assets

      76,175       51,039
    
 

Total assets

    $ 16,851,506     $ 16,747,314
    
 

Liabilities and Stockholders’ Equity

               

Liabilities:

               

Unearned premiums

    $ 2,727,315     $ 2,545,490

Loss and loss expense reserves

      238,091       189,414

Ceded reinsurance balances payable

      23,134       15,383

Obligations under investment and payment agreements

      6,388,408       6,545,759

Obligations under investment repurchase agreements

      342,801       530,644

Securities sold under agreement to repurchase

      223,200       225,500

Deferred income taxes

      110,304       171,058

Current income taxes

      39,385       43,176

Debentures

      791,807       791,775

Accrued interest payable

      56,917       73,941

Derivative product liabilities

      796,363       946,178

Other liabilities

      233,663       222,126

Variable interest entity

      150,779       189,482

Payable for securities purchased

      265,126       2,830
    
 

Total liabilities

      12,387,293       12,492,756
    
 

Stockholders’ equity:

               

Preferred stock

      —         —  

Common stock

      1,088       1,073

Additional paid-in capital

      670,293       606,468

Accumulated other comprehensive income

      120,035       266,919

Retained earnings

      3,698,656       3,380,098

Common stock held in treasury at cost

      (25,859 )     —  
    
 

Total stockholders’ equity

      4,464,213       4,254,558
    
 

Total liabilities and stockholders’ equity

    $ 16,851,506     $ 16,747,314
    
 

 

See accompanying Notes to Unaudited Consolidated Financial Statements

 

3

Table of Contents

Ambac Financial Group, Inc. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

For the Three and Six Months Ended June 30, 2004 and 2003

(Dollars in Thousands Except Share Data)

 

    

Three Months Ended

June 30,

    

Six Months Ended

June 30,

  
     2004
     2003
     2004
     2003
  

Revenues:

                                 

Financial Guarantee:

                                 

Gross premiums written

    $ 363,196     $ 386,005     $ 589,630     $ 583,224  

Ceded premiums written

      15,949       (42,313 )     (17,937 )     (73,481 )
    
 
 
 

Net premiums written

    $ 379,145     $ 343,692     $ 571,693     $ 509,743  
    
 
 
 

Net premiums earned

    $ 189,593     $ 151,992     $ 355,028     $ 286,744  

Other credit enhancement fees

      11,809       12,294       23,245       22,658  
    
 
 
 

Net premiums earned and other credit enhancement fees

      201,402       164,286       378,273       309,402  

Net investment income

      88,081       79,892       174,785       156,487  

Net realized investment gains

      3,294       12,777       15,165       26,720  

Net mark-to-market gains (losses) on credit derivative contracts

      3,256       10,002       10,218       (2,174 )

Variable interest entity

      839       —         1,900       —    

Other income (loss)

      1,355       1,931       (10,864 )     2,756  

Financial Services:

                                 

Interest from investment and payment agreements

      45,740       55,476       98,090       114,472  

Other revenue (loss)

      7,698       (9,544 )     15,118       (3,997 )

Net realized investment (losses) gains

      (108 )     4,641       5,843       4,949  

Net mark-to-market gains on derivative hedge contracts

      41       51       104       728  

Corporate:

                                 

Net investment income

      386       2,108       756       3,039  

Net realized investment gains

      42       —         18       —    
    
 
 
 

Total revenues

      352,026       321,620       689,406       612,382  
    
 
 
 

Expenses:

                                 

Financial Guarantee:

                                 

Loss and loss expenses

      17,500       10,900       35,000       20,700  

Underwriting and operating expenses

      29,246       21,013       54,900       43,179  

Variable interest entity

      701       —         1,605       —    

Financial Services:

                                 

Interest from investment and payment agreements

      40,678       50,160       83,370       103,592  

Other expenses

      3,381       2,557       7,076       5,514  

Interest

      13,461       14,537       27,086       26,991  

Corporate

      2,601       2,227       4,790       10,500  
    
 
 
 

Total expenses

      107,568       101,394       213,827       210,476  
    
 
 
 

Income before income taxes

      244,458       220,226       475,579       401,906  

Provision for income taxes

      63,562       57,469       122,928       101,087  
    
 
 
 

Income from continuing operations

      180,896       162,757       352,651       300,819  
    
 
 
 

Discontinued operations:

                                 

Loss from discontinued operations

      (310 )     (312 )     (550 )     (543 )

Income tax benefit

      (124 )     (126 )     (220 )     (218 )
    
 
 
 

Net loss from discontinued operations

      (186 )     (186 )     (330 )     (325 )