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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 September 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 October 29, 2004, 108,667,550 shares of Common Stock, par value $0.01 per share, (net of 121,323 treasury shares) of the Registrant were outstanding.

 

Table of Contents

Ambac Financial Group, Inc. and Subsidiaries

 

INDEX

 

          PAGE

PART I   FINANCIAL INFORMATION

    

Item 1.

    Financial Statements of Ambac Financial Group, Inc. and Subsidiaries     
     Consolidated Balance Sheets – September 30, 2004 (unaudited) and December 31, 2003    3
     Consolidated Statements of Operations (unaudited) – three and nine months ended September 30, 2004 and 2003    4
     Consolidated Statements of Stockholders’ Equity (unaudited) – nine months ended September 30, 2004 and 2003    5
     Consolidated Statements of Cash Flows (unaudited) – nine months ended September 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    16

Item 3.

    Quantitative and Qualitative Disclosures About Market Risk    40

Item 4.

    Controls and Procedures    41

PART II   OTHER INFORMATION

    

Item 6.

    Exhibits and Reports on Form 8-K    42

SIGNATURES

   43

INDEX TO EXHIBITS

   44

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

September 30, 2004 and December 31, 2003

(Dollars in Thousands)

 

    

September 30,

2004

    

December 31,

2003

     (unaudited)      

Assets

               

Investments:

               

Fixed income securities, at fair value (amortized cost of $13,063,997 in 2004 and $12,592,398 in 2003)

    $ 13,530,312     $ 13,049,219

Fixed income securities pledged as collateral, at fair value (amortized cost of $519,902 in 2004 and $662,046 in 2003)

      518,053       661,422

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

      176,705       250,382

Other (cost of $4,233 in 2004 and $4,528 in 2003)

      4,453       4,417
    
 

Total investments

      14,229,523       13,965,440

Cash

      25,838       24,539

Securities purchased under agreements to resell

      62,000       54,015

Receivable for securities and loans sold

      173,973       4,425

Investment income due and accrued

      143,930       159,680

Reinsurance recoverable on paid and unpaid losses

      1,773       3,030

Prepaid reinsurance

      286,201       325,461

Deferred acquisition costs

      194,186       175,296

Loans

      676,690       837,981

Derivative product assets

      1,128,726       1,146,408

Other assets

      69,577       51,039
    
 

Total assets

    $ 16,992,417     $ 16,747,314
    
 

Liabilities and Stockholders' Equity

               

Liabilities:

               

Unearned premiums

    $ 2,731,657     $ 2,545,490

Loss and loss expense reserves

      229,586       189,414

Ceded reinsurance balances payable

      4,325       15,383

Obligations under investment and payment agreements

      6,313,378       6,545,759

Obligations under investment repurchase agreements

      295,816       530,644

Variable interest entity floating rate notes

      134,098       189,151

Securities sold under agreement to repurchase

      159,200       225,500

Deferred income taxes

      192,482       171,058

Current income taxes

      33,917       43,176

Debentures

      791,823       791,775

Accrued interest payable

      59,932       74,235

Derivative product liabilities

      932,317       946,178

Other liabilities

      225,158       222,163

Payable for securities purchased

      79,890       2,830
    
 

Total liabilities

      12,183,579       12,492,756
    
 

Stockholders' equity:

               

Preferred stock

      —         —  

Common stock

      1,088       1,073

Additional paid-in capital

      672,411       606,468

Accumulated other comprehensive income

      285,192       266,919

Retained earnings

      3,860,248       3,380,098

Common stock held in treasury at cost

      (10,101 )     —  
    
 

Total stockholders’ equity

      4,808,838       4,254,558
    
 

Total liabilities and stockholders’ equity

    $ 16,992,417     $ 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 Nine Months Ended September 30, 2004 and 2003

(Dollars in Thousands Except Share Data)

 

    

Three Months Ended

September 30,

    

Nine Months Ended

September 30,

  
     2004
     2003
     2004
     2003
  

Revenues:

                                 

Financial Guarantee:

                                 

Gross premiums written

    $ 210,587     $ 280,330     $ 800,217     $ 863,554  

Ceded premiums written

      (18,649 )     (17,451 )     (36,586 )     (90,932 )
    
 
 
 

Net premiums written

    $ 191,938     $ 262,879     $ 763,631     $ 772,622  
    
 
 
 

Net premiums earned

    $ 183,499     $ 159,626     $ 538,527     $ 446,370  

Other credit enhancement fees

      11,839       11,936       35,084       34,594  
    
 
 
 

Net premiums earned and other credit enhancement fees

      195,338       171,562       573,611       480,964  

Net investment income

      89,593       80,890       264,378       237,377  

Net realized investment gains

      7,358       7,037       22,523       33,757  

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

      (330 )     (4,053 )     9,888       (6,227 )

Variable interest entity

      861       —         2,761       —    

Other income (loss)

      799       949       (10,065 )     3,705  

Financial Services:

                                 

Interest from investment and payment agreements

      48,452       47,227       146,542       161,699  

Derivative products

      10,452       17,251       25,570       13,254  

Net realized investment (losses) gains

      (830 )     (1,161 )     5,013       3,788  

Net mark-to-market gains on derivative hedge contracts

      22       11       126       739  

Corporate:

                                 

Net investment income

      416       1,977       1,172       5,016  

Net realized investment gains

      —         —         18       —    
    
 
 
 

Total revenues

      352,131       321,690       1,041,537       934,072  
    
 
 
 

Expenses:

                                 

Financial Guarantee:

                                 

Loss and loss expenses

      17,700       15,900       52,700       36,600  

Underwriting and operating expenses

      26,157       23,795       81,057       66,974  

Variable interest entity

      739       —         2,344       —    

Financial Services:

                                 

Interest from investment and payment agreements

      41,736       45,890       125,106       149,482  

Other expenses

      3,349       3,350       10,425       8,864  

Interest

      13,722       13,750       40,808       40,741  

Corporate

      2,678       1,938       7,468       12,438  
    
 
 
 

Total expenses

      106,081       104,623       319,908       315,099  
    
 
 
 

Income before income taxes

      246,050       217,067       721,629       618,973  

Provision for income taxes

      61,632       56,986       184,560       158,073  
    
 
 
 

Income from continuing operations

      184,418       160,081       537,069       460,900  
    
 
 
 

Discontinued operations:

                                 

Loss from discontinued operations

      (799 )     (686 )     (1,349 )     (1,229 )

Income tax expense (benefit)

      160       (274 )     (60 )     (492 )
    
 
 
 

Net loss from discontinued operations

      (959 )     (412 )     (1,289 )     (737 )