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Ambac Financial Group, Inc. Announces Third Quarter Net Income of $111.0 Million, Up 22%.

Business Editors

NEW YORK--(BUSINESS WIRE)--Oct. 17, 2001

Third Quarter Operating Earnings Per Diluted Share (1) up 18%,

Core Earnings Per Diluted Share (1) Up 14%

Third Quarter Adjusted Gross Premiums Written (2) Increase 1%

Ambac Financial Group, Inc. (NYSE: ABK) (Ambac) today announced third quarter 2001 net income of $111.0 million or $1.02 per diluted share. This represents a 22% increase from third quarter 2000 net income of $90.9 million and a 21% increase in net income per diluted share from $0.84 in the third quarter 2000.

Commenting on the results, Ambac Chairman and CEO Phillip B. Lassiter noted, "The horrific events of September 11th only a few blocks from our offices tested this organization. I am unabashedly proud of how our people responded. Most important of all, they are safe and sound. The operating impact on Ambac was fortunately minimal, although several large transactions scheduled to close within the quarter were postponed to the fourth quarter."

"We have completed our risk portfolio review and, as previously reported, continue to believe that we will not encounter material claims as a result of the tragic event, although I do expect that we will see some ratings downgrades on underlying exposures. The impact of ratings migration and wider credit spreads creates opportunities for Ambac, both from the standpoint of additional candidates for insurance as well as higher premiums, since our product value tracks credit spreads. Our business prospects remain quite attractive in all of our markets, both domestic and foreign."

Earnings Per Diluted Share

In addition to net income, Ambac presents operating earnings and core earnings, as discussed in Footnote 1. These measures, though not substitutes for net income, are useful for analysis in that they eliminate certain items, such as realized gains and losses, unrealized mark-to-market gains and losses in the structured credit derivatives business, the effect of refundings and calls and certain non-recurring items, to highlight the more consistent elements of earnings.

For the third quarter of 2001, operating earnings were $111.9 million, up 20% from the $93.4 million in operating earnings for the third quarter of 2000. Core earnings for the third quarter of 2001 were $105.9 million, an increase of 16% from $91.5 million in core earnings for the third quarter of 2000.

The following table shows net income, operating earnings and core earnings, all per diluted share:

 Table I

 Third Quarter Nine Months
 % %
 2001 2000 Change 2001 2000 Change
Net income per diluted $1.02 $0.84 +21% $2.90 $2.51 +16%
 share
Operating earnings per $1.03 $0.87 +18% $2.93 $2.59 +13%
 diluted share
Core earnings per $0.97 $0.85 +14% $2.79 $2.49 +12%
 diluted share


Revenues

Total revenues in the third quarter of 2001 were $181.3 million, an increase of 18% from $153.7 million in revenues for the third quarter of 2000.

Highlights

Adjusted gross premiums written(2) in the third quarter of 2001 were $180.6 million, up 1% from $179.3 million in the third quarter of 2000. An increase in municipal and international finance adjusted gross premiums written was offset by a decline in structured finance adjusted gross premiums written.

On the municipal side, Ambac benefited from increased municipal volume and insured penetration, partially offset by lower market share. The structured business was negatively impacted by the tragic events of September 11th, with several large transactions postponed. The international business was dominated by structured transactions, including a large health care securitization in the UK.

A breakdown of adjusted gross premiums written by market sector is included below as Table II.

 Table II
 Adjusted Gross Premiums Written (a)


 $-millions Third Quarter Nine Months
 % %
 2001 2000 Change 2001 2000 Change
Municipal Finance $98.8 $ 89.6 +10% $292.2 $159.0 +84%

Structured Finance 27.6 53.6 -49% 160.9 176.3 -9%

International 54.2 36.1 +50% 193.0 178.7 +8%

Total $180.6 $179.3 +1% $646.1 $514.0 +26%

(a) The definition of adjusted gross premiums has been revised and the
 prior period has been restated. See Note 2.


Net premiums written in the third quarter of 2001 of $117.0 million were 9% lower than net premiums written of $127.9 million in the same period of 2000. The decrease in the quarter stemmed largely from higher cessions of municipal premiums written pursuant to a reinsurance treaty that Ambac put into place earlier this year. The treaty is designed to limit single risk exposures. Gross premiums written for the third quarter of 2001 were offset by $35.9 million in ceded premiums. In the third quarter of 2000, ceded premiums were $20.1 million.

Net premiums written for the nine months of 2001 of $426.9 million were 54% higher than net premiums written of $276.5 million in the same period of 2000.

Net premiums earned for the third quarter of 2001 were $98.0 million, which represented a 25% increase from the $78.7 million earned in the third quarter of 2000. Net premiums earned increased for all market segments. Municipal earned premium growth accelerated due to increased activity in that market. The growth rate for structured earned premiums slowed during the quarter, partially due to higher levels of prepayments in insured mortgage-backed obligations.

Net premiums earned include accelerated premiums, which result from refundings and calls recognized during the quarter. Accelerated premiums were $10.5 million in the third quarter of 2001 (which had a net income per diluted share effect of $0.05), up 218% from $3.3 million ($0.02 per diluted share) in accelerated premiums in the third quarter of 2000.

Net premiums earned for the nine months of 2001 were $276.5 million, which represented a 20% increase from the $230.8 million earned in the first nine months of 2000. Accelerated premiums were $27.2 million for the first nine months of 2001 (which had a net income per diluted share effect of $0.14), up 49% from $18.2 million ($0.10 per diluted share) in accelerated premiums for the first nine months of 2000.

A breakdown of normal net premiums earned by market sector is included below as Table III. Normal net premiums earned exclude accelerated premiums that result from refundings and calls.

 Table III
 Normal Net Premiums Earned


 $-millions Third Quarter Nine Months
 % %
 2001 2000 Change 2001 2000 Change
Municipal Finance $38.3 $33.7 +14% $110.3 $101.2 +9%

Structured Finance 32.5 28.3 +15% 94.5 77.0 +23%

International 16.7 13.4 +25% 44.5 34.4 +29%

Total $87.5 $75.4 +16% $249.3 $212.6 +17%


Net fees and other premiums earned which includes revenues from structured credit derivative transactions, were $3.3 million in the third quarter 2001, down 41% from the $5.6 million for the third quarter of 2000. Income related to structured credit derivatives was partially offset by a $3.1 million unrealized mark-to-market loss in the third quarter 2001 and a $0.7 million unrealized mark-to-market loss in the third quarter of 2000. These amounts were eliminated in the calculation of Ambac's presentation of operating and core earnings.

Net fees and other premiums earned were $16.4 million in the first nine months of 2001, up 53% from the $10.7 million in the first nine months of 2000.

Net investment income for the third quarter of 2001 was $67.3 million, representing an increase of 10% from $61.1 million in the comparable period of 2000. This increase was due primarily to the growth in the investment portfolio from ongoing operations, partially offset by a lower reinvestment rate due to the current interest rate environment.

Net investment income for the first nine months of 2001 was $196.9 million, representing an increase of 11% from $177.6 million in the comparable period of 2000.

Financial services revenues, excluding realized gains and losses, were $10.2 million in the third quarter of 2001, down 6% from the $10.9 million in revenues for the third quarter of 2000. An increase in municipal swap revenues was more than offset by a decline in investment agreement revenue. Investment agreement revenue has declined due to lower interest rate spreads.

Financial services revenues, excluding realized gains and losses, were $36.5 million in the first nine months of 2001, down 21% from the $46.4 million in revenues for the first nine months of 2000.

Expenses

Highlights

Financial guarantee expenses of $21.7 million for the third quarter of 2001 increased by 27% over the $17.1 million of expenses for the same quarter of 2000. This increase was due to higher compensation costs and increased loss and loss adjustment expenses. In addition, the amortization of deferred costs increased due to the increase in refunding activity.

Financial guarantee expenses of $65.2 million for the first nine months of 2001 increased by 27% over the $51.3 million of expenses for the same period of 2000.

Financial services expenses for the third quarter of 2001 of $5.0 million declined by 14% from $5.8 million in expenses for the third quarter of 2000.

Financial services expenses for the first nine months of 2001 of $16.6 million decreased by 11% from $18.6 million in expenses for the first nine months of 2000.

Other Items

Total net realized gains for the third quarter of 2001 were $1.7 million. For the third quarter of 2000 net realized losses were $3.1 million.

Interest expense for the third quarter of 2001 was $9.4 million, relatively flat from 2000.

Balance Sheet

Highlights

Total assets as of September 30, 2001 were $11.41 billion, up 13% from total assets of $10.12 billion at December 31, 2000. This increase was due primarily to cash generated from business during the period and higher volume in the guaranteed investment contract business. As of September 30, 2001, stockholders' equity was $2.96 billion, a 14% increase from year-end 2000 stockholders' equity of $2.60 billion. The increase stemmed primarily from net income during the period.

Cash Dividend Declared

At its October 2001 Board meeting, the Board of Directors of Ambac Financial Group Inc. approved the regular quarterly cash dividend of $0.09 per share of common stock. The dividend is payable on December 5, 2001 to stockholders of record on November 12, 2001.

Forward-Looking Statements

In his remarks, the Chairman made 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.

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 municipal 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

Note: Common stock data has been retroactively adjusted to reflect the three-for-two stock split effective December 12, 2000.

(1) Core earnings and operating earnings are not substitutes for net

income computed in accordance with accounting principles generally

accepted in the United States of America (GAAP), but are important

measures used by management, equity analysts and investors to

measure Ambac's financial results. The Company defines operating

earnings as net income, less the effect of realized gains and

losses, unrealized mark-to-market gains and losses in the

Company's structured credit derivatives business and certain

non-recurring items. Core earnings, which Ambac reports as

analytical data, is defined as operating earnings less net

insurance premiums earned from refundings and calls. 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.

(2) Adjusted gross premiums written, which is not promulgated under

GAAP, is used by management, equity analysts and investors to

measure Ambac's financial results. Adjusted gross premiums

written, which Ambac reports as analytical data, are defined as

gross (direct and assumed) up-front premiums written plus the

present value of estimated installment premiums written on

insurance policies and structured credit derivatives issued in the

period. Previously, adjusted gross premiums written was net of

premiums related to international deals that were ceded to MBIA

Insurance Corporation pursuant to a joint venture that ceased

during 2000. Prior period amounts have been restated. The

definition of adjusted gross premiums written used by Ambac may

differ from definitions of adjusted gross premiums written used by

other public holding companies of financial guarantors.

 Ambac Financial Group, Inc. and Subsidiaries
 Consolidated Statements of Operations
 (Unaudited)
 For The Periods Ended September 30, 2001 and 2000
 (Dollars in Thousands Except Share Data)


 Three Months Ended Nine Months Ended
 September 30, September 30,
 --------------------- --------------------
 2001 2000 2001 2000
 --------------------- --------------------
Revenues:
 Financial Guarantee:
 Gross prems. written $152,918 $147,949 $499,253 $338,956
 Ceded prems. written (35,874) (20,077) (72,342) (62,451)
 -------- -------- -------- --------
 Net prems. written $117,044 $127,872 $426,911 $276,505
 -----------------------------------------

 Net prems. earned $98,019 $78,695 $276,547 $230,774
 Net fees and other
 premiums earned 3,323 5,645 16,423 10,693
 Net investment income 67,318 61,090 196,852 177,623
 Net rlzd. gns. (losses) 6,633 (2,535) 3,009 (2,103)
 Financial Services:
 Revenue 10,231 10,856 36,457 46,425
 Net realized losses (3,589) (600) (2,524) (7,871)
 Other:
 Revenue 786 517 3,093 1,522
 Net realized losses (1,383) - (1,383) -
 -------- ------- -------- --------
 Total revenues 181,338 153,668 528,474 457,063
 -------- ------- -------- --------
Expenses:
 Financial Guarantee:
 Losses & loss adj. exp. 5,100 3,908 14,500 10,757
 Und. & oprtg. exp. 16,602 13,208 50,671 40,562
 Financial Services 5,023 5,808 16,627 18,563
 Interest 9,370 9,394 28,338 28,153
 Other 921 2,010 4,372 5,424
 -------- ------- -------- --------
 Total expenses 37,016 34,328 114,508 103,459
 -------- ------- -------- --------

Income before income taxes 144,322 119,340 413,966 353,604
Provision for income taxes 33,314 28,432 97,398 84,418
 -------- ------- -------- --------
Income before acctg change 111,008 90,908 316,568 269,186
Cumulative effect of acctg
 chg (net of income taxes
 of $219) - - (408) -
 -------- ------- -------- --------
 Net income $111,008 $90,908 $316,160 $269,186
 ======== ======= ======== ========

Net income per share $1.05 $0.86 $2.99 $2.57
 ===== ===== ===== =====
Net income per diluted share $1.02 $0.84 $2.90 $2.51
 ===== ===== ===== =====
Weighted average no. of
 shs. outstanding 105,781,745 105,111,708 105,753,654 104,882,927
 =========== =========== =========== ===========
Weighted average no. of
 diluted shs. outstd. 109,077,058 107,732,178 108,980,936 107,051,811
 =========== =========== =========== ===========



 Ambac Financial Group, Inc. and Subsidiaries
 Consolidated Balance Sheets
 September 30, 2001 and December 31, 2000
 (Dollars in Thousands Except Share Data)


 September 30, December 31,
 2001 2000
 ------------ -----------
 (unaudited)
ASSETS

Investments:

Fixed income securities, at fair value
 (amortized cost of $7,643,798 in
 2001 and $6,743,450 in 2000) $7,866,192 $6,825,152
Fixed income securities pledged as
 collateral, at fair value (amortized
 cost of $1,067,256 in 2001 and $1,238,401
 in 2000 1,083,593 1,239,349
Short-term investments, at cost
 (approximates fair value) 184,809 253,519
Other 1,933 5,852
 ----------- -----------
 Total investments 9,136,527 8,323,872

Cash 99,585 20,493
Cash pledged as collateral 11,842 24,935
Sec. purchased under agreements to resell 361,100 255,786
Receivable for investment agreements 67,518 6,663
Receivable for securities sold 5,381 1,926
Investment income due and accrued 119,456 130,692
Reinsurance recoverable 1,919 1,091
Prepaid reinsurance 265,811 242,604
Deferred acquisition costs 160,765 153,424
Loans 720,327 695,251
Other assets 460,272 263,563
 ----------- -----------
 Total assets $11,410,503 $10,120,300
 =========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:

Unearned premiums $1,719,890 $1,546,290
Losses and loss adjustment expense reserve 146,613 132,445
Ceded reinsurance balances payable 20,159 10,892
Obligations under investment and
 payment agreements 3,653,081 3,509,049
Obligations under investment
 repurchase agreements 1,527,055 1,383,882
Deferred income taxes 167,183 106,035
Current income taxes 60,206 25,628
Debentures 416,633 424,061
Accrued interest payable 75,280 90,575
Other liabilities 500,138 291,394
Payable for securities purchased 160,323 3,935
 ----------- -----------
 Total liabilities 8,446,561 7,524,186
 ----------- -----------

Stockholders' equity:

Preferred stock - -
Common stock 1,060 1,060
Additional paid-in capital 544,519 533,558
Accumulated other comprehensive income 136,651 45,154
Retained earnings 2,303,313 2,035,209
Common stock held in treasury at cost (21,601) (18,867)
 ----------- -----------
 Total stockholders' equity 2,963,942 2,596,114
 ----------- -----------
 Total liabilities and stockholders' equity $11,410,503 $10,120,300
 =========== ===========

Number of shares outstanding
 (net of treasury shares) 105,592,743 105,550,605
 =========== ===========
Book value per share $28.07 $24.60
 =========== ===========



 Ambac Financial Group, Inc. and Subsidiaries
 Supplemental Analytical Data: Components of Core Earnings (1)
 For The Periods Ended September 30, 2001 and 2000



 Three Months Ended Nine Months Ended
 September 30, September 30,
 ------------------- -------------------
 2001 2000 2001 2000
 ------------------- -------------------
Net income $111,008 $90,908 $316,160 $269,186
Adjustments:
 Net realized (gns) lsses (1,080) 2,038 583 6,483
 Unrlz mark-to-market lsses 1,986 444 1,962 1,250
 Non-recurring item - - 408 -
 -------- ------- -------- --------
Operating earnings 111,914 93,390 319,113 276,919
 Refundings, calls and
 other accelerations (5,995) (1,857) (15,524) (10,387)
 -------- ------- -------- --------
Core earnings $105,919 $91,533 $303,589 $266,532
 ======== ======= ======== ========


Ambac Financial Group, Inc. and Subsidiaries
Supplemental Analytical Data: Components of Adjusted Book Value
Per Share (2)
September 30, 2001 and December 31, 2000


 September 30, December 31,
 2001 2000
 ------------ ------------

Book value $28.07 $24.60
After-tax value of:
 Net unearned premium reserve less
 deferred acquisition costs 7.97 7.07
 Present value of future installment
 premiums 5.35 4.71
 Unrealized loss on investment
 agreement liabilities (0.92) (0.03)
 ------ ------
Adjusted book value $40.47 $36.35
 ====== ======

(1) See footnote (1) in October 17, 2001 press release.

(2) Adjusted book value (ABV), which is not promulgated under GAAP, is
 used by management, equity analysts and investors as a measurement
 of the Company's intrinsic value with no benefit given for ongoing
 business activity. Management derives ABV by beginning with
 stockholders' equity (book value) and adding or subtracting the
 after-tax value of: the net unearned premium reserve; deferred
 acquisition costs; the present value of estimated net future
 installment premiums; and the unrealized gain or loss on
 investment agreement liabilities. These adjustments will not be
 realized until future periods and may differ materially from the
 amounts used in determining ABV. The definition of ABV used by the
 Company may differ from definitions of ABV used by other public
 holding companies of financial guarantee insurers.



 Ambac Assurance Corporation
 Statutory Accounting, Financial and Capital Information (1)
 September 30, 2001 and December 31, 2000
 (Dollars in Thousands, Except Ratios)



 September 30, December 31,
 2001 2000
 ------------ ------------

Capital and Claims-Paying Resources:
 Contingency reserve $1,213,016 $1,080,748
 Capital and surplus 1,771,305 1,655,151
 ---------- ----------
 Qualified statutory capital 2,984,321 2,735,899

 Unearned premiums 1,791,723 1,615,422
 Losses and loss adjustment
 expenses 36,875 31,034
 ---------- ----------
 Policyholders' reserves 4,812,919 4,382,355

 Third party capital support (2) 800,000 800,000
 Present value of future install prem. 868,599 763,882
 ---------- ----------
 Total claims-paying resources $6,481,518 $5,946,237
 ========== ==========

 Net financial guarantees in force $454,105,978 $418,385,960

 Capital ratio (3) 152:1 153:1

 Financial resources ratio (4) 70:1 70:1


(1) Statutory accounting information for Ambac Assurance Corporation
 and Connie Lee Insurance Company are combined for purposes of this
 schedule. Qualified statutory capital for Ambac Assurance, on a
 stand alone basis, as of September 30, 2001 and December 31, 2000
 are $2.963 billion and $2.716 billion, respectively.

(2) Third party capital support represents a limited recourse
 irrevocable line of credit with a group of high quality banks.

(3) Capital ratio is net financial guarantees in force divided by
 qualified statutory capital.

(4) Financial resources ratio is net financial guarantees in force
 divided by total claims-paying resources.



 Ambac Assurance Corporation and Subsidiaries
 Capitalization Table - GAAP
 September 30, 2001 and December 31, 2000
 (Dollars in Millions)

The following table sets forth Ambac Assurance's consolidated
capitalization as of September 30, 2001 and December 31, 2000,
respectively, on the basis of accounting principles generally accepted
in the United States of America.


 September 30, December 31,
 2001 2000
 ------------ ------------
 (unaudited)

Unearned premiums $1,730 $1,556
Other liabilities 954 581
 ------ ------
Total liabilities 2,684 2,137
 ------ ------
Stockholder's equity:
 Common stock 82 82
 Additional paid-in capital 760 760
 Accumulated other comprehensive income 135 82
 Retained earnings 2,271 2,002
 ------ ------
Total stockholder's equity 3,248 2,926
 ------ ------
Total liabilities and stockholder's equity $5,932 $5,063
 ====== ======
COPYRIGHT 2001 Business Wire
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2001, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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