EXHIBIT 99.05
AMBAC ASSURANCE CORPORATION AND SUBSIDIARIES
(a wholly owned subsidiary of Ambac Financial Group, Inc.)
Consolidated Unaudited Financial Statements
As of March 31, 2003 and December 31, 2002
and for the Three Months Ended March 31, 2003 and 2002
Ambac Assurance Corporation and Subsidiaries
Consolidated Balance Sheets
March 31, 2003 and December 31, 2002
(Dollars in Thousands Except Share Data)
March 31, 2003 | December 31, 2002 | |||||
(unaudited) | ||||||
ASSETS | ||||||
Investments: | ||||||
Fixed income securities, at fair value (amortized cost of $6,179,045 in 2003 | $ | 6,545,796 | $ | 6,223,062 | ||
Short-term investments, at cost (approximates fair value) |
| 207,900 |
| 287,315 | ||
Other (cost of $3,132 in 2003 and $2,415 in 2002) |
| 2,016 |
| 1,394 | ||
Total investments |
| 6,755,712 |
| 6,511,771 | ||
Cash |
| 36,160 |
| 15,876 | ||
Securities purchased under agreements to resell |
| 91,056 |
| 57,753 | ||
Receivable for securities sold |
| 213 |
| 230 | ||
Investment income due and accrued |
| 79,752 |
| 80,825 | ||
Reinsurance recoverable on paid and unpaid losses |
| 5,381 |
| 4,842 | ||
Prepaid reinsurance |
| 299,400 |
| 296,126 | ||
Deferred acquisition costs |
| 174,440 |
| 174,055 | ||
Derivative product assets |
| 1,080,086 |
| 1,010,081 | ||
Other assets |
| 40,996 |
| 43,821 | ||
Total assets | $ | 8,563,196 | $ | 8,195,380 | ||
LIABILITIES AND STOCKHOLDER'S EQUITY | ||||||
Liabilities: | ||||||
Unearned premiums | $ | 2,174,194 | $ | 2,137,460 | ||
Losses and loss adjustment expense reserve |
| 177,788 |
| 172,137 | ||
Ceded reinsurance balances payable |
| 11,572 |
| 16,930 | ||
Obligations under payment agreements |
| 249,810 |
| 250,534 | ||
Deferred income taxes |
| 234,505 |
| 232,269 | ||
Current income taxes |
| 68,335 |
| 41,375 | ||
Notes payable to affiliate |
| 143,655 |
| 111,350 | ||
Payable for securities purchased |
| 64,973 |
| 70,761 | ||
Derivative product liabilities |
| 1,044,338 |
| 953,772 | ||
Other liabilities |
| 105,906 |
| 126,729 | ||
Total liabilities |
| 4,275,076 |
| 4,113,317 | ||
Stockholder's equity: | ||||||
Preferred stock, par value $1,000 per share; authorized shares—285,000; |
| — |
| — | ||
Common stock, par value $2.50 per share; authorized shares — 40,000,000; |
| 82,000 |
| 82,000 | ||
Additional paid-in capital |
| 994,889 |
| 920,146 | ||
Accumulated other comprehensive income |
| 236,891 |
| 231,436 | ||
Retained earnings |
| 2,974,340 |
| 2,848,481 | ||
Total stockholder's equity |
| 4,288,120 |
| 4,082,063 | ||
Total liabilities and stockholder's equity | $ | 8,563,196 | $ | 8,195,380 | ||
See accompanying Notes to Consolidated Unaudited Financial Statements.
2
Ambac Assurance Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
For The Three Months Ended March 31, 2003 and 2002
(Dollars in Thousands)
Three Months Ended March 31, | ||||||||
2003 | 2002 | |||||||
Revenues: | ||||||||
Financial Guarantee: | ||||||||
Gross premiums written | $ | 201,409 |
| $ | 151,469 |
| ||
Ceded premiums written |
| (31,168 | ) |
| (19,549 | ) | ||
Net premiums written | $ | 170,241 |
| $ | 131,920 |
| ||
Net premiums earned | $ | 136,592 |
| $ | 105,212 |
| ||
Other credit enhancement fees |
| 10,364 |
|
| 6,288 |
| ||
Net premiums earned and other credit enhancement fees |
| 146,956 |
|
| 111,500 |
| ||
Net investment income |
| 76,595 |
|
| 72,547 |
| ||
Net realized investment gains (losses) |
| 13,943 |
|
| (500 | ) | ||
Net mark-to-market losses on credit derivative contracts |
| (12,176 | ) |
| (4,071 | ) | ||
Other income |
| 826 |
|
| 1,560 |
| ||
Financial Services: | ||||||||
Interest from payment agreements |
| 3,001 |
|
| — |
| ||
Other revenue |
| 5,563 |
|
| 7,242 |
| ||
Total revenues |
| 234,708 |
|
| 188,278 |
| ||
Expenses: | ||||||||
Financial Guarantee: | ||||||||
Losses and loss adjustment expenses |
| 9,800 |
|
| 5,700 |
| ||
Underwriting and operating expenses |
| 22,597 |
|
| 19,060 |
| ||
Interest expense |
| 178 |
|
| 822 |
| ||
Financial Services: | ||||||||
Interest from payment agreements |
| 1,025 |
|
| — |
| ||
Other expenses |
| 1,578 |
|
| 1,234 |
| ||
Total expenses |
| 35,178 |
|
| 26,816 |
| ||
Income before income taxes |
| 199,530 |
|
| 161,462 |
| ||
Provision for income taxes |
| 51,271 |
|
| 40,433 |
| ||
Net income | $ | 148,259 |
| $ | 121,029 |
| ||
See accompanying Notes to Consolidated Unaudited Financial Statements
3
Ambac Assurance Corporation and Subsidiaries
Consolidated Statements of Stockholder's Equity
(Unaudited)
For The Three Months Ended March 31, 2003 and 2002
(Dollars in Thousands)
2003 | 2002 | |||||||||||||||
Retained Earnings: | ||||||||||||||||
Balance at January 1 | $ | 2,848,481 |
| $ | 2,386,073 |
| ||||||||||
Net income |
| 148,259 |
| $ | 148,259 |
|
| 121,029 |
| $ | 121,029 |
| ||||
Dividends declared—common stock |
| (22,400 | ) |
| (19,500 | ) | ||||||||||
Balance at March 31 | $ | 2,974,340 |
| $ | 2,487,602 |
| ||||||||||
Accumulated Other Comprehensive Income: | ||||||||||||||||
Balance at January 1 | $ | 231,436 |
| $ | 80,556 |
| ||||||||||
Unrealized gains (losses) on securities, $9,020 |
| 5,863 |
|
| (26,633 | ) | ||||||||||
Foreign currency translation loss |
| (408 | ) |
| (419 | ) | ||||||||||
Other comprehensive income (loss) |
| 5,455 |
|
| 5,455 |
|
| (27,052 | ) |
| (27,052 | ) | ||||
Comprehensive income | $ | 153,714 |
| $ | 93,977 |
| ||||||||||
Balance at March 31 | $ | 236,891 |
| $ | 53,504 |
| ||||||||||
Preferred Stock: | ||||||||||||||||
Balance at January 1 and March 31 | $ | — |
| $ | — |
| ||||||||||
Common Stock: | ||||||||||||||||
Balance at January 1 and March 31 | $ | 82,000 |
| $ | 82,000 |
| ||||||||||
Additional Paid-in Capital: | ||||||||||||||||
Balance at January 1 | $ | 920,146 |
| $ | 928,094 |
| ||||||||||
Capital contribution |
| 75,000 |
|
| — |
| ||||||||||
Capital issuance costs |
| (1,476 | ) |
| (607 | ) | ||||||||||
Stock-based compensation |
| 1,049 |
|
| — |
| ||||||||||
Exercise of stock options |
| 170 |
|
| 375 |
| ||||||||||
Balance at March 31 | $ | 994,889 |
| $ | 927,862 |
| ||||||||||
Total Stockholder's Equity at March 31 | $ | 4,288,120 |
| $ | 3,550,968 |
| ||||||||||
(1) Disclosure of reclassification amount: | ||||||||||||||||
Unrealized holding (losses) gains arising during period |
| ($3,200 | ) |
| ($26,349 | ) | ||||||||||
Less: reclassification adjustment for net securities gains |
| (9,063 | ) |
| 284 |
| ||||||||||
Net unrealized gains (losses) on securities | $ | 5,863 |
|
| ($26,633 | ) | ||||||||||
See accompanying Notes to Consolidated Unaudited Financial Statements.
4
Ambac Assurance Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
For The Three Months Ended March 31, 2003 and 2002
(Dollars in Thousands)
Three Months Ended March 31, | ||||||||
2003 | 2002 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 148,259 |
| $ | 121,029 |
| ||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization |
| 707 |
|
| 704 |
| ||
Amortization of bond premium and discount |
| 97 |
|
| (1,666 | ) | ||
Current income taxes |
| 26,960 |
|
| (62,583 | ) | ||
Deferred income taxes |
| (922 | ) |
| 3,822 |
| ||
Deferred acquisition costs |
| (385 | ) |
| (3,946 | ) | ||
Unearned premiums, net |
| 33,460 |
|
| 26,509 |
| ||
Losses and loss adjustment expenses |
| 5,112 |
|
| 3,745 |
| ||
Ceded reinsurance balances payable |
| (5,358 | ) |
| (2,436 | ) | ||
Net realized investment (gains) losses |
| (13,943 | ) |
| 500 |
| ||
Mark-to-market losses on credit derivative contracts |
| 12,176 |
|
| 4,071 |
| ||
Other, net |
| (28,356 | ) |
| (8,457 | ) | ||
Net cash provided by operating activities |
| 177,807 |
|
| 81,292 |
| ||
Cash flows from investing activities: | ||||||||
Proceeds from sales of bonds |
| 344,087 |
|
| 79,569 |
| ||
Proceeds from maturities of bonds |
| 82,793 |
|
| 67,497 |
| ||
Purchases of bonds |
| (732,862 | ) |
| (232,954 | ) | ||
Change in short-term investments |
| 79,415 |
|
| 35,944 |
| ||
Securities purchased under agreements to resell |
| (998 | ) |
| — |
| ||
Other, net |
| (12,663 | ) |
| (5,768 | ) | ||
Net cash used in investing activities |
| (240,228 | ) |
| (55,712 | ) | ||
Cash flows from financing activities: | ||||||||
Dividends paid |
| (22,400 | ) |
| (19,500 | ) | ||
Capital contribution |
| 75,000 |
|
| — |
| ||
Capital issuance costs |
| (1,476 | ) |
| (607 | ) | ||
Payment agreements |
| (724 | ) |
| — |
| ||
Short-term financing from affilates, net |
| 32,305 |
|
| — |
| ||
Long-term financing from affiliates |
| — |
|
| (7,300 | ) | ||
Net cash used in financing activities |
| 82,705 |
|
| (27,407 | ) | ||
Net cash flow |
| 20,284 |
|
| (1,827 | ) | ||
Cash and cash pledged as collateral at January 1 |
| 15,876 |
|
| 33,678 |
| ||
Cash and cash pledged as collateral at March 31 | $ | 36,160 |
| $ | 31,851 |
| ||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid during the period for: | ||||||||
Income taxes | $ | 15,000 |
| $ | 68,149 |
| ||
Interest expense on notes | $ | 178 |
| $ | 271 |
| ||
Interest expense on payment agreements | $ | 158 |
| $ | — |
| ||
See accompanying Notes to Consolidated Unaudited Financial Statements.
5
Ambac Assurance Corporation and Subsidiaries
Notes to Consolidated Unaudited Financial Statements
(Dollars in Thousands)
(1) Basis of Presentation
Ambac Assurance Corporation is a leading provider of financial guarantees to clients in both the public and private sectors around the world. Ambac Assurance provides financial guarantees on public finance and structured finance obligations. Ambac Assurance 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. Insurance policies insured by Ambac Assurance guarantee payment when due of the principal of and interest on the obligation guaranteed. As of March 31, 2003, Ambac Assurance’s net guarantees in force (principal and interest) were $575,463,129. Ambac Assurance is a wholly-owned subsidiary of Ambac Financial Group, Inc., a holding company whose subsidiaries provide financial guarantee products and financial services to clients in both the public and private sectors around the world.
Ambac Assurance serves clients in international markets through its wholly-owned subsidiary Ambac Assurance UK Limited. Ambac U.K. is licensed to transact credit, suretyship and financial guarantee insurance in the United Kingdom and to offer insurance services into twelve other European countries. Ambac UK is subject to regulation by the Financial Services Authority (“FSA”) in the conduct of its insurance business.
Ambac Credit Products LLC, a wholly owned subsidiary of Ambac Assurance, provides credit protection in the global markets in the form of structured credit derivatives. These structured credit derivatives, which are privately negotiated contracts, provide the counterparty with credit protection against the occurrence of a specific event such as a payment default or bankruptcy relating to an underlying obligation (generally a fixed income obligation). Upon a credit event, Ambac is required to either (i) purchase the underlying obligation at its par value and a loss is realized for the difference between the par and market value of the underlying obligation or (ii), make a payment equivalent to the difference between the par value and market value of the underlying obligation. Substantially all of Ambac’s structured credit derivative contracts are partially hedged with various financial institutions or structured with first loss protection. Structured credit derivatives issued by Ambac Credit Products are insured by Ambac Assurance.
Ambac Assurance, as the sole limited partner, owns a limited partnership interest representing 90% of the total partnership interests of Ambac Financial Services, L.P., a limited partnership which provides interest rate swaps primarily to states, municipalities and their authorities. The sole general partner of Ambac Financial Services, Ambac Financial Services Holdings, Inc., a wholly-owned subsidiary of Ambac Financial Group, owns a general partnership interest representing 10% of the total partnership interest in Ambac Financial Services. Ambac Financial Services provides interest rate swaps and other derivative products primarily to states, municipalities and their authorities, issuers of asset-backed securities and other entities in connection with their financings. The interest rate swaps provided by Ambac Financial Services are guaranteed by Ambac Assurance through policies that guarantee the obligations of Ambac Financial Services and its counterparties. Total return swaps, which are entered into by Ambac Capital Services, are only used for fixed income obligations, which meet Ambac Assurance’s credit underwriting criteria.
6
Ambac Assurance Corporation and Subsidiaries
Notes to Consolidated Unaudited Financial Statements (continued)
The accompanying consolidated unaudited interim financial statements have been prepared on the basis of accounting principles generally accepted in the United States of America (“GAAP”) and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of Ambac Assurance’s financial condition, results of operations and cash flows for the periods presented. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported revenues and expenses during the reporting period. Actual results could differ from those estimates. The results of operations for the three months ended March 31, 2003 may not be indicative of the results that may be expected for the full year ending December 31, 2003. These consolidated financial statements and notes should be read in conjunction with the financial statements and notes included in the audited consolidated financial statements of Ambac Assurance and its subsidiaries as of December 31, 2002 and 2001, and for each of the years in the three-year period ended December 31, 2002 which was filed with the Securities and Exchange Commission on March 28, 2003 as Exhibit 99.01 to Ambac Financial Group Inc.’s Form 10-K.
The consolidated financial statements include the accounts of Ambac Assurance and each of its subsidiaries. All significant intercompany balances have been eliminated.
Certain reclassifications have been made to prior period’s amounts to conform to the current period’s presentation.
(2) Accounting Standards
In January 2003, the FASB issued FAS Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). FIN 46 clarifies the consolidation rules to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 requires variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. Variable interest entities that effectively disperse risks will not be consolidated. FIN 46 requires disclosures for entities that have either a primary or significant variable interest in a variable interest entity. Ambac Assurance is required to adopt the consolidation provisions of FIN 46 on July 1, 2003. Based upon Ambac Assurance’s current assessment, it does not have a significant variable interest in any Variable Interest Entity affected by this Interpretation.
(3) Segment Information
Ambac Assurance has two reportable segments, as follows: (1) financial guarantee, which provides financial guarantee products (including structured credit derivatives) for public finance and structured finance obligations; and (2) financial services, which provides payment agreements, interest rate and total return swaps.
7
Ambac Assurance Corporation and Subsidiaries
Notes to Consolidated Unaudited Financial Statements (continued)
Ambac’s reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different marketing strategies, personnel skill sets and technology.
Pursuant to insurance and indemnity agreements between Ambac Financial Services and Ambac Assurance, Ambac Financial Services’ payment obligations under its swap agreements are guaranteed by Ambac Assurance. Additionally, the payment obligations of Ambac Financial Services’ counterparties, under their swap agreements with Ambac Financial Services, are guaranteed by Ambac Assurance pursuant to insurance and indemnity agreements. Intersegment revenues include the premiums earned under those agreements, but which are eliminated in the consolidated financial statements. Such premiums are accounted for as if they were premiums to third parties, that is, at current market prices.
The following table is a summary of the financial information by reportable segment as of and for the three months ended March 31, 2003 and 2002:
8
Ambac Assurance Corporation and Subsidiaries
Notes to Consolidated Unaudited Financial Statements (continued)
Three months ended March 31, | Financial Guarantee | Financial Services | Intersegment Eliminations | Consolidated | ||||||||||
2003: | ||||||||||||||
Revenues: | ||||||||||||||
Unaffiliated customers | $ | 226,144 | $ | 8,564 |
| $ | — |
| $ | 234,708 | ||||
Intersegment |
| 619 |
| — |
|
| (619 | ) |
| — | ||||
Total revenues | $ | 226,763 | $ | 8,564 |
| $ | (619 | ) | $ | 234,708 | ||||
Income before income taxes: | ||||||||||||||
Unaffiliated customers | $ | 193,569 | $ | 5,961 |
| $ | — |
| $ | 199,530 | ||||
Intersegment |
| 619 |
| (619 | ) |
| — |
|
| — | ||||
Total income before income taxes | $ | 194,188 | $ | 5,342 |
| $ | — |
| $ | 199,530 | ||||
Identifiable assets | $ | 7,305,860 | $ | 1,257,336 |
| $ | — |
| $ | 8,563,196 | ||||
2002: | ||||||||||||||
Revenues: | ||||||||||||||
Unaffiliated customers | $ | 181,036 | $ | 7,242 |
| $ | — |
| $ | 188,278 | ||||
Intersegment |
| 417 |
| — |
|
| (417 | ) |
| — | ||||
Total revenues | $ | 181,453 | $ | 7,242 |
| $ | (417 | ) | $ | 188,278 | ||||
Income before income taxes: | ||||||||||||||
Unaffiliated customers | $ | 155,454 | $ | 6,008 |
| $ | — |
| $ | 161,462 | ||||
Intersegment |
| 417 |
| (417 | ) |
| — |
|
| — | ||||
Total income before income taxes | $ | 155,871 | $ | 5,591 |
|
| — |
| $ | 161,462 | ||||
Identifiable assets | $ | 5,965,712 | $ | 237,336 |
| $ | — |
| $ | 6,203,048 | ||||
The following table summarizes unaffiliated gross premiums written and net premiums earned and other credit enhancement fees included in the financial guarantee segment by location of risk for the three month periods ended March 31, 2003 and 2002:
Three Months 2003 | Three Months 2002 | |||||||||||
Gross Premiums Written | Net Premiums Earned and Other Credit Enhancement Fees | Gross Premiums Written | Net Premiums Earned and Other Credit Enhancement Fees | |||||||||
United States | $ | 157,630 | $ | 108,308 | $ | 114,053 | $ | 87,064 | ||||
United Kingdom |
| 12,441 |
| 7,310 |
| 18,417 |
| 4,017 | ||||
Japan |
| 6,592 |
| 5,618 |
| 4,184 |
| 2,860 | ||||
Mexico |
| 4,355 |
| 2,007 |
| 4,164 |
| 1,956 | ||||
Australia |
| 4,153 |
| 1,334 |
| 137 |
| 963 | ||||
Germany |
| 432 |
| 1,386 |
| 117 |
| 765 | ||||
France |
| 89 |
| 194 |
| 221 |
| 296 | ||||
Internationally diversified (1) |
| 6,493 |
| 13,858 |
| 3,533 |
| 8,613 | ||||
Other international |
| 9,224 |
| 6,941 |
| 6,643 |
| 4,966 | ||||
Total | $ | 201,409 | $ | 146,956 | $ | 151,469 | $ | 111,500 | ||||
| 1) | Internationally diversified includes guarantees with multiple locations of risk and includes components of United States exposure. |
9
Ambac Assurance Corporation and Subsidiaries
Notes to Consolidated Unaudited Financial Statements (continued)
(4) Stock Options
Ambac Financial Group sponsors the “1997 Equity Plan”, where awards are granted to eligible employees in the form of non-qualified stock options or other stock-based awards. Prior to 2003, Ambac Financial Group accounted for those plans under the recognition and measurement provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees”. Effective January 1, 2003, Ambac Financial Group adopted the fair value recognition provisions of FAS Statement No. 123, “Accounting for Stock-Based Compensation”, prospectively to all employee awards granted after January 1, 2003. The impact of the adoption of the fair value method of accounting for stock-based compensation expense to Ambac Assurance was approximately $1 million for the three months ended March 31, 2003.
10