Ambac Financial Group, Inc. Announces Third Quarter Net Income of $213.5 Million, up 22%.Third Quarter Net Income Per Diluted di·lute tr.v. di·lut·ed, di·lut·ing, di·lutes 1. To make thinner or less concentrated by adding a liquid such as water. 2. To lessen the force, strength, purity, or brilliance of, especially by admixture. Share of $1.98, up 23% Third Quarter Credit Enhancement Credit Enhancement A method whereby a company attempts to improve its debt or credit worthiness. Notes: Credit enhancements take many different forms. An example of a credit enhancement would be conversion rights added on to a debt instrument in order to lower the issuing Production((1)) $216.2 million, down 16% NEW YORK New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of -- Ambac Financial Group Ambac Financial Group (NYSE: ABK) is an American Insurer of bonds, including municipal bonds. Ambac Financial Group, Inc. (NYSE: ABK) is a holding company whose subsidiaries provide financial guarantee products and other financial services to clients in both , Inc. (NYSE NYSE See: New York Stock Exchange : ABK ABK Abkuerzung (German: Abbreviation) ABK Anybody Killa (musician) ABK Ahli Bank of Kuwait ABK American Bank of Kosovo ABK Aphakic Bullous Keratopathy (ophthalmology) ) (Ambac) today announced third quarter 2006 net income of $213.5 million, or $1.98 per diluted share. This represents a 22% increase from third quarter 2005 net income of $175.1 million, and a 23% increase in net income per diluted share from $1.61 in the third quarter of 2005. Net Income Per Diluted Share Net income and net income per diluted share are computed in conformity with U.S. generally accepted accounting principles The standard accounting rules, regulations, and procedures used by companies in maintaining their financial records. Generally accepted accounting principles (GAAP) provide companies and accountants with a consistent set of guidelines that cover both broad accounting (GAAP GAAP See: Generally Accepted Accounting Principles GAAP See 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 third quarter 2006, net security gains and losses had the effect of increasing net income by $6.5 million, $0.06 on a per diluted share basis. Accelerated earnings had the effect of increasing net income by $14.5 million, or $0.13 per diluted share for the third quarter 2006. Table I, below, provides third quarter and nine-month comparisons of earnings for 2006 and 2005. [TABLE OMITTED] Commenting on the overall results, Ambac Chairman and Chief Executive Officer, Robert J. Genader, noted, "I am pleased with the results given the challenging environment we have faced during much of the year. We are currently witnessing a solid level of deal inquiries and opportunities across most of our business segments. Domestic public finance, however, continues to pose a challenge given the decline in issuance and intensified in·ten·si·fy v. in·ten·si·fied, in·ten·si·fy·ing, in·ten·si·fies v.tr. 1. To make intense or more intense: pricing pressures. We remain steadfast in judiciously ju·di·cious adj. Having or exhibiting sound judgment; prudent. [From French judicieux, from Latin i allocating our capital to transactions that enable us to continue to deliver superior returns." Revenues Highlights Credit enhancement production((1)) in the third quarter of 2006 was $216.2 million, down 16% from the third quarter of 2005 which came in at $256.6 million. Growth in international was more than offset by declines in U.S. public finance and U.S. structured finance. Credit enhancement production((1)) for the nine months of 2006 of $980.7 million was 15% higher than credit enhancement production of $853.5 million in the same period of 2005, driven by growth in the international and U.S. structured finance markets during the nine-month period. Table II, below, provides the third quarter and nine-month comparisons of credit enhancement production by market segment for 2006 and 2005. [TABLE OMITTED] In public finance, Ambac's premium production was lower as overall market issuance, as reported by third party sources, was down approximately 14% quarter on quarter. The decline in issuance for the quarter was driven by significantly reduced refunding issuance. The new money component of issuance for the quarter was relatively flat as compared to the third quarter of 2005. Contributing to the lower premium production was increased competition from other financial guarantors and the mix of business coming to market. We note that fewer highly structured transactions commanding stronger pricing have come to market recently. Ambac had healthy writings in the stadium financing sector during the quarter and health care writings were strong albeit lower than in the comparable prior quarter. U.S. structured finance production during the quarter was lower as increased writings in auto securitizations and pooled debt obligations were more than offset by lower commercial asset-backed securitizations and mortgage-backed securities Mortgage-backed securities (MSBs) Securities backed by a pool of mortgage loans. . Competition from the senior/subordinated market remains challenging and spreads remain tight across most asset classes of U.S. structured finance. International production was stronger but compares to a relatively light prior year quarter. The international quarter was highlighted by two deals out of the U.K, one an infrastructure transaction and the other a structured finance transaction. Ambac continues to see attractive opportunities across diverse geographic regions and asset classes outside of the U.S. Net premiums written in the third quarter of 2006 of $186.0 million were 9% lower than net premiums written of $203.6 million in the same period of 2005. Gross premiums written When a non-life insurance company closes a contract to provide insurance against loss, the revenues (premiums) expected to be received over the life of the contract are called gross premiums written. in the third quarter of 2006 and 2005 were $212.3 million and $237.9 million, respectively. The decreases in net and gross premiums written are primarily attributable to less up-front premiums collected on U.S. public finance business written during the third quarter of 2006. Ceded premiums as a percentage of gross premiums written were 12.4% and 14.4% for the third quarter of 2006 and 2005, respectively. Net premiums written for the nine months of 2006 of $669.4 million were 8% lower than net premiums written of $728.0 million in the same period of 2005. Excluding the impact of return premiums from reinsurance The contract made between an insurance company and a third party to protect the insurance company from losses. The contract provides for the third party to pay for the loss sustained by the insurance company when the company makes a payment on the original contract. cancellations in each of the periods ($37.0 million in the first quarter of 2006 and $55.8 million in the first quarter of 2005), net premiums written are down 6% period on period primarily due to less up-front premiums collected on U.S. public finance business written during 2006. A breakdown of gross premiums written by market segment and ceded premiums for the third quarter and nine-month periods of 2006 and 2005 are included below in Table III. [TABLE OMITTED] Net premiums earned and other credit enhancement fees for the third quarter of 2006 were $214.5 million, which represented a 7% decrease from the $231.1 million earned in the third quarter of 2005. The decrease was driven by lower accelerated premiums from refundings and policy termination fees termination fee The one-time charge for terminating or transferring an individual retirement account. If a financial institution charges a termination fee, the fee must be spelled out in the original agreement that is signed when the account is opened. offset by increased normal premiums and other credit enhancement fees earned in U.S. public finance and U.S. structured finance. Net premiums earned include accelerated premiums, which result from refundings, calls and other accelerations recognized during the quarter. Accelerated premiums were $24.5 million in the third quarter of 2006, down 50% from $48.9 million in accelerated premiums in the third quarter of 2005. The third quarter 2005 accelerated premiums were impacted by one large refunded transaction, representing almost half of the total accelerated amount in that quarter. Net premiums earned and other credit enhancement fees for the first nine months of 2006 were $647.9 million, flat to $648.6 million earned in the first nine months of 2005. Accelerated premiums were $86.9 million for the nine-month period of 2006, down 20% from $107.9 million in accelerated premiums for the comparable period of 2005. Accelerated premiums in 2006 and 2005 include $7.7 million and $4.5 million, respectively, related to the impact of reinsurance cancellations which occurred in the first quarter of the respective years. A breakdown of net premiums earned and other credit enhancement fees by market segment for 2006 and 2005 are included below in Table IV. Normal net premiums earned exclude accelerated premiums that result from refundings, calls and other accelerations. [TABLE OMITTED] Public finance earned premiums Earned premium is the portion of an insurance written premium which is considered "earned" by the insurer, based on the part of the policy period that the insurance has been in effect, and during which the insurer has been exposed to loss. , before accelerations, grew 3% quarter on quarter. Earned premium growth in this segment has been negatively impacted by declining issuance and competitive pricing throughout 2006, compounded by the high level of refunding activity in Ambac's public finance book. Structured finance earned premiums and other credit enhancement fees grew 12%. The rate of growth in structured finance has improved as the recent level of writings in asset classes such as commercial asset-backed securities Asset-backed security A security that is collateralized by loans, leases, receivables, or installment contracts on personal property, not real estate. asset-backed security A debt security collateralized by specific assets. , auto securitizations and pooled debt obligations has increased. Narrow credit spreads and high prepayment speeds Prepayment speed Also called speed, the estimated rate at which mortgagors pay off their loans ahead of schedule, critical in assessing the value of mortgage pass-through securities. in the mortgage-backed and home equity book of business and early terminations of transactions in other structured finance sectors continue to partially offset the positive effects of new business writings. International earned premiums and other credit enhancement fees decreased by 6%. The decline was driven primarily by significant paydowns and calls over the past several quarters and the recent business mix which has trended towards long-dated infrastructure transactions that earn premiums over a longer period of time than typical structured finance exposures. Net investment income (including net investment income from VIEs) for the third quarter of 2006 was $120.2 million, representing an increase of 9% from $110.6 million in the comparable period of 2005. This increase was due primarily to growth in the investment portfolio driven by the ongoing collection of financial guarantee premiums and fees and a $200 million capital contribution from the parent company in the fourth quarter of 2005, partially offset by a $5.3 million net positive adjustment booked in the third quarter 2005 for municipal bonds within the portfolio that had been pre-refunded. Investment income from VIEs is offset by interest expense on VIEs, shown separately in the Consolidated Statements of Operations. Net investment income (including net investment income from VIEs) for the nine months of 2006 was $351.2 million, representing an increase of 11% from $317.1 million in the comparable period of 2005, primarily as a result of the reasons provided above. Financial services The examples and perspective in this article or section may not represent a worldwide view of the subject. Please [ improve this article] or discuss the issue on the talk page. 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 Unrealized Gain A profit that results from holding on to an asset rather than cashing it in and using the funds. Notes: Let's say you own a stock that has doubled, but you haven't sold it yet. This is said to be an unrealized gain. and losses on total return swaps Total Return Swap Any swap in which the non-floating rate side is based on the total return of an equity or fixed income instrument with a life longer than the swap. Notes: Total return swaps are most common in equity or physical commodity markets. and non-trading derivative contracts, was $13.3 million in the third quarter of 2006, down 22% from $17.1 million in the third quarter of 2005. The decrease was primarily due to lower mark-to-market gains included within derivative products revenues in the third quarter 2006 relative to the comparable prior quarter, partially offset by higher investment agreement revenues from improving spreads during that quarter. Financial services revenues were $35.8 million in the first nine months of 2006, up 1% from the $35.4 million of revenues in the first nine months of 2005. Expenses Highlights Financial guarantee expenses of $40.4 million for the third quarter of 2006 decreased by 69% from the $128.6 million of expenses for the same quarter of 2005. Financial guarantee loss and loss expenses were ($2.5) million in the third quarter of 2006 down from $89.1 million in the third quarter of 2005. The third quarter 2005 loss provision resulted primarily from our exposure to municipal credits impacted by Hurricane Katrina  Editing of this page by unregistered or newly registered users is currently disabled due to vandalism. . The current quarter's negative loss provision is
primarily the result of a release of a portion of the Katrina provision
partially offset by increased reserves, primarily in the U.S. public
finance sector. See "Loss Reserve Activity," below, for
additional information on losses. Net underwriting Underwriting1. The process by which investment bankers raise investment capital from investors on behalf of corporations and governments that are issuing securities (both equity and debt). 2. The process of issuing insurance policies. and operating expenses Operating expenses The amount paid for asset maintenance or the cost of doing business, excluding depreciation. Earnings are distributed after operating expenses are deducted. of the financial guarantee segment totaled $30.2 million in the third quarter of 2006, up 9% from $27.8 million in the third quarter of 2005 primarily due to increased compensation expense. Interest expense on VIE notes amounting to $12.8 million and $11.6 million in the third quarter of 2006 and 2005, respectively, result from the consolidation of certain trusts that Ambac has insured and consolidated under accounting pronouncement FIN fin, organ of locomotion characteristic of fish and consisting of thin tissue supported by cartilaginous or bony rays. In some fish, e.g., the eel, a single fin extends from the back, around the tail, and along the ventral surface. 46. Financial guarantee expenses of $147.7 million for the nine months of 2006 decreased 43% from $259.2 million for the same period of 2005. The decrease results primarily from lower loss expenses partially offset by higher compensation expenses during the period. Loss Reserve Activity Case basis loss reserves (loss reserves for exposures that have defaulted) decreased $12.0 million during the third quarter of 2006 from $138.7 million at June 30, 2006 to $126.7 million at September 30, 2006. The decrease was driven primarily by claim payments made during the quarter amounting to $8.9 million. Active credit reserves ("ACR See riser card. ") are established for probable and estimable es·ti·ma·ble adj. 1. Possible to estimate: estimable assets; an estimable distance. 2. Deserving of esteem; admirable: an estimable young professor. losses due to credit deterioration de·te·ri·o·ra·tion n. The process or condition of becoming worse. on adversely classified insured transactions. Ambac continuously monitors its insured portfolio actively seeking to mitigate claims. The ACR increased by $0.6 million during the quarter, from $147.0 million at June 30, 2006 to $147.6 million at September 30, 2006. The increase was driven by increased reserves on certain credits within the U.S. public finance and structured finance portfolios, offset by a $35.6 million reduction in the ACR for Hurricane Katrina impacted credits. At September 30, 2006, the specific Hurricane Katrina-related provision amounts to $50.5 million, down from $90.4 million at June 30, 2006. The decrease is primarily due to significant state and federal support recently provided to the region, particularly the greater New Orleans New Orleans (ôr`lēənz –lənz, ôrlēnz`), city (2006 pop. 187,525), coextensive with Orleans parish, SE La., between the Mississippi River and Lake Pontchartrain, 107 mi (172 km) by water from the river mouth; founded area. Ambac did not pay any Katrina-related claims during the quarter. Provision for income taxes for the third quarter of 2006 amounted to $83.6 million, an effective tax rate of 28.1%. This compares to the third quarter of 2005 tax provision of $51.9 million, an effective tax rate of 22.8%. The increased tax rate in 2006 was due to the net release of tax reserves in the third quarter 2005 and higher taxable income Under the federal tax law, gross income reduced by adjustments and allowable deductions. It is the income against which tax rates are applied to compute an individual or entity's tax liability. The essence of taxable income is the accrual of some gain, profit, or benefit to a taxpayer. resulting from improved financial guarantee underwriting results in the third quarter 2006 relative to the comparable prior period primarily as a result of Hurricane Katrina related loss activity. Provision for income taxes for the nine months of 2006 amounted to $252.5 million, an effective tax rate of 27.3%. This compares to the nine months of 2005 tax provision of $193.1 million, an effective tax rate of 26.1%. The increased tax rate in 2006 is explained above. Other Items Total net securities gains/(losses) for the third quarter of 2006 were $9.9 million, or $0.06 per diluted share; consisting of net realized gains Realized Gain A gain resulting from selling an asset at a price higher than the original purchase price. Notes: There may be tax consequences for a realized profit. on investment securities of $7.9 million, net mark-to-market gains on credit and total return derivatives of $2.1 million and net mark-to-market losses on non-trading derivative contracts of ($0.1) million. For the third quarter of 2005, net securities gains/(losses) were $14.5 million, or $0.08 per diluted share; consisting of net realized gains on investment securities of $9.5 million, net mark-to-market gains on credit and total return derivatives of $3.9 million and net mark-to-market gains on non-trading derivative contracts of $1.1 million. Total net securities gains/(losses) for the nine months of 2006 were $74.4 million, or $0.44 per diluted share; consisting of net realized gains on investment securities of $57.5 million, net mark-to-market gains on credit and total return derivatives of $16.5 million and net mark-to-market gains on non-trading derivative contracts of $0.4 million. Approximately $51 million of the net realized gains on investment securities relate to cash recoveries received during the year related to a security in the investment agreement portfolio that had been written down in 2002 and 2003. For the nine months of 2005, net securities gains were $53.1 million, or $0.27 per diluted share; consisting of net realized gains on investment securities of $10.8 million, mark-to-market losses on credit derivatives Credit Derivative Privately held negotiable bilateral contracts that allow users to manage their exposure to credit risk. Credit derivatives are financial assets like forward contracts, swaps, and options for which the price is driven by the credit risk of economic agents (private and total return swaps of ($7.0) million and net mark-to-market gains on non-trading derivative contracts of $49.3 million. The mark-to-market gains on non-trading derivative contracts relate almost entirely to interest rate hedge contracts in Ambac's investment agreement business that were redesignated to meet the technical requirements of FAS 133 as of July 1, 2005. Balance Sheet Highlights Total assets as of September 30, 2006 were $21.09 billion, up 7% from total assets of $19.73 billion at December 31, 2005. The increase was driven by cash generated from operations during the period. As of September 30, 2006, stockholders' equity Stockholders' Equity The portion of the balance sheet that includes capital received from investors in exchange for stock (paid-in capital), donated capital, and retained earnings. This is equal to total assets minus liabilities, preferred stock and intangible assets. was $6.01 billion, a 12% increase from year-end 2005 stockholders' equity of $5.37 billion. The increase was primarily the result of net income during the period. Increased Share Buyback Authorization At its October 2006 Board meeting, the Board of Directors of Ambac Financial Group, Inc. increased the number of shares available under the Company's Share Repurchase Share Repurchase A program by which a company buys back its own shares from the marketplace, reducing the number of outstanding shares. This is usually an indication that the company's management thinks the shares are undervalued. Program by six million shares. Including this additional authorization, Ambac has approximately 9.7 million shares remaining under its Share Repurchase Program. Shares will be repurchased in the open market or in private transactions at times and prices considered appropriate by Ambac. Cash Dividend Declared At its October 2006 Board meeting, the Board of Directors approved the regular quarterly cash dividend of $0.18 per share of common stock. The dividend is payable on December 6, 2006 to stockholders of record on November 10, 2006. Forward-Looking Statements forward-looking statement A projected financial statement based on management expectations. A forward-looking statement involves risks with regard to the accuracy of assumptions underlying the projections. 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 The Private Securities Litigation Reform Act of 1995 (PSLRA) implemented several significant substantive changes affecting certain cases brought under the federal securities laws, including changes related to pleading, discovery, liability, class representation and awards fees and 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 United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. 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) inadequacy of reserves established for losses and loss adjustment 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 New York City: see New York, city. New York City City (pop., 2000: 8,008,278), southeastern New York, at the mouth of the Hudson River. The largest city in the U.S. , 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 An operating subsidiary is a business term frequently used within the United States railroad industry. In the case of a railroad, it refers to a company that is a subsidiary but operates with its own identity and rolling stock. , Ambac Assurance Corporation Ambac Assurance Corporation A subsidiary of publicly traded Ambac Financial Group that provides financial guarantees for municipal borrowers and for asset-backed and structured issues. , a leading guarantor guarantor n. a person or entity that agrees to be responsible for another's debt or performance under a contract, if the other fails to pay or perform. (See: guarantee) GUARANTOR, contracts. He who makes a guaranty. 2. of public finance and structured finance obligations, has earned triple-A ratings, the highest ratings available from Moody's Investors Service Moody's Investors Service A leading global credit rating, research and risk analysis firm. Moody's Investors Service A leading firm engaged in credit rating, risk analysis, and research of fixed-income securities and their issuers. , Inc., Standard & Poor's Ratings Services Ratings Service A company, such as Moody's or Standard & Poor's, that rates various debt and preferred stock issues for safety of payment of principal, interest, or dividends. , Fitch, Inc. and Rating and Investment Information, Inc. Ambac Financial Group, Inc. common stock is listed on the New York Stock Exchange New York Stock Exchange (NYSE) World's largest marketplace for securities. The exchange began as an informal meeting of 24 men in 1792 on what is now Wall Street in New York City. (ticker symbol Ticker Symbol An arrangement of characters (usually letters) representing a particular security listed on an exchange or otherwise traded publicly. When a company issues securities to the public marketplace, it selects an available ticker symbol for its securities which investors ABK). Footnotes (1) Credit enhancement production, which is not promulgated prom·ul·gate tr.v. prom·ul·gat·ed, prom·ul·gat·ing, prom·ul·gates 1. To make known (a decree, for example) by public declaration; announce officially. See Synonyms at announce. 2. 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 6.0% and 7.0% during the third quarter of 2006 and 2005, respectively. The definition of credit enhancement production used by Ambac may differ from definitions of credit enhancement production 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: [TABLE OMITTED] (2) Operating earnings Operating Earnings Profits after subtracting expenses such as marketing, cost of goods sold, administration and general operating costs from revenue. Notes: Tax and interest expenses are not subtracted - operating earnings are synonymous with EBIT (earnings before 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 Derivative instruments Contracts such as options and futures whose price is derived from the price of an underlying financial asset. 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. [TABLE OMITTED] [TABLE OMITTED] [TABLE OMITTED] |
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