EX-99.07 3 dex9907.txt AMBAC ASSURANCE CORPORATION AND SUBSIDIARIES Exhibit 99.07 AMBAC ASSURANCE CORPORATION AND SUBSIDIARIES (a wholly owned subsidiary of Ambac Financial Group, Inc.) Consolidated Unaudited Financial Statements As of September 30, 2001 and December 31, 2000 and for the Periods Ended September 30, 2001 and 2000 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 for municipal 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. Financial guarantees underwritten by Ambac Assurance guarantee payment when due of the principal of and interest on the obligation guaranteed. In the case of a monetary default on the guaranteed bond, payments may not be accelerated by the policyholder without Ambac Assurance's consent. As of September 30, 2001, Ambac Assurance's net guarantees in force (principal and interest) were $454,105,978. Ambac Assurance is a wholly owned subsidiary of Ambac Financial Group, Inc., a holding company whose subsidiaries provide financial guarantees 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 Credit Products L.L.C., a wholly owned subsidiary of Ambac Assurance, also provides credit protection in the form of structured credit derivatives. These structured credit derivatives require that Ambac Credit Products make a payment upon the occurrence of certain defined credit events relating to an underlying obligation (generally a fixed income obligation). Should a credit event occur, Ambac Credit Products would generally pay an amount equivalent to the difference between the par value and market value of the underlying obligation. The majority of Ambac Credit Product's structured credit derivatives have been structured with certain first loss protection. 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. The accompanying consolidated unaudited interim financial statements have been prepared on the basis of accounting principles generally accepted in the United States of America 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 and nine months ended September 30, 2001 may not be indicative of the results that may be expected for the full year ending December Ambac Assurance Corporation and Subsidiaries Notes to Consolidated Unaudited Financial Statements (Continued) 31, 2001. These 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 Corporation and its subsidiaries as of December 31, 2000 and 1999, and for each of the years in the three-year period ended December 31, 2000 which was filed with the Securities and Exchange Commission on March 28, 2001 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 Change In June 1998, the Financial Accounting Standards Board issued FAS Statement 133, "Accounting for Derivative Instruments and Hedging Activities". FAS 133, as amended by FAS 138 and related guidance, established accounting and reporting standards for derivative instruments and hedging activities. Ambac Assurance adopted FAS 133 and its related guidance on January 1, 2001 that resulted in no impact on the consolidated financial statements. (3) Goodwill and Other Intangible Assets In July 2001, the FASB issued FAS Statement 142, "Goodwill and Other Intangible Assets". FAS 142 addresses the initial recognition and measurement of intangible assets either singly or within a group of assets, as well as the measurement of goodwill and other intangible assets subsequent to their initial acquisition. FAS 142 changes the accounting for goodwill and intangible assets that have indefinite useful lives from an amortization approach to an impairment-only approach that requires that those assets be tested at least annually for impairment. Intangible assets that have finite useful lives will continue to be amortized over their useful lives, but without an arbitrary ceiling on their useful lives. FAS 142 is required to be applied starting with fiscal years beginning after December 15, 2001 and is required to be applied at the beginning of an entity's fiscal year. The statement is to be applied to all goodwill and other intangible assets recognized in an entity's financial statements at that date. Impairment losses for goodwill and indefinite lived intangible assets that arise due to the initial application of FAS 142 (resulting from an impairment test) are to be reported as a change in accounting principle. Retroactive application is not permitted. Ambac has not yet determined the impact that FAS 142 will have on its consolidated financial statements. Ambac Assurance Corporation and Subsidiaries Consolidated Balance Sheets September 30, 2001 and December 31, 2000 (Dollars in Thousands Except Share Data)
September 30, 2001 December 31, 2000 ----------------------- ------------------------ (unaudited) ASSETS ------ Investments: Fixed income securities, at fair value (amortized cost of $4,565,456 in 2001 and $3,969,932 in 2000) $4,775,871 $4,098,511 Short-term investments, at cost (approximates fair value) 156,499 218,505 Other 1,223 715 ----------------------- ------------------------ Total investments 4,933,593 4,317,731 Cash 92,087 11,893 Cash pledged as collateral 11,842 24,935 Securities purchased under agreements to resell - 11,786 Receivable for securities sold 636 1,215 Investment income due and accrued 63,993 67,132 Deferred acquisition costs 160,765 153,424 Reinsurance recoverable 1,919 1,091 Prepaid reinsurance 265,811 242,604 Other assets 402,187 230,908 ----------------------- ------------------------ Total assets $5,932,833 $5,062,719 ======================= ======================== LIABILITIES AND STOCKHOLDER'S EQUITY ------------------------------------ Liabilities: Unearned premiums $1,729,649 $1,556,250 Losses and loss adjustment expense reserve 146,613 132,445 Ceded reinsurance balances payable 20,159 10,892 Deferred income taxes 182,633 146,839 Current income taxes 90,422 31,308 Other liabilities 422,116 255,308 Payable for securities purchased 92,789 3,935 ----------------------- ------------------------ Total liabilities 2,684,381 2,136,977 ----------------------- ------------------------ Stockholder's equity: Preferred stock, par value $1,000 per share; authorized shares - 285,000; issued and outstanding shares - none - - Common stock, par value $2.50 per share; authorized shares - 40,000,000; issued and outstanding shares - 32,800,000 at September 30, 2001 and December 31, 2000 82,000 82,000 Additional paid-in capital 760,303 760,006 Accumulated other comprehensive income 134,735 81,616 Retained earnings 2,271,414 2,002,120 ----------------------- ------------------------ Total stockholder's equity 3,248,452 2,925,742 ----------------------- ------------------------ Total liabilities and stockholder's equity $5,932,833 $5,062,719 ======================= ========================
See accompanying Notes to Consolidated Unaudited Financial Statements. Ambac Assurance Corporation and Subsidiaries Consolidated Statements of Operations (Unaudited) For The Periods Ended September 30, 2001 and 2000 (Dollars in Thousands)
Three Months Ended Nine Months Ended September 30, September 30, ----------------------------------- ------------------------------------ 2001 2000 2001 2000 --------------- --------------- ---------------- ---------------- Revenues: Gross premiums written $153,544 $148,755 $501,968 $341,125 Ceded premiums written (35,874) (20,077) (72,342) (62,451) --------------- --------------- ---------------- ---------------- Net premiums written $117,670 $128,678 $429,626 $278,674 =============== =============== ================ ================ Net premiums earned $98,991 $79,510 $279,463 $233,208 Net fees and other premiums earned 6,752 7,949 29,988 31,387 Net investment income 67,536 61,302 197,921 178,172 Net realized gains (losses) 6,633 (2,535) 3,009 (2,103) --------------- --------------- ---------------- ---------------- Total revenues 179,912 146,226 510,381 440,664 --------------- --------------- ---------------- ---------------- Expenses: Losses and loss adjustment expenses 5,100 3,908 14,500 10,757 Underwriting and operating expenses 17,356 14,399 54,540 46,509 Interest expense 1,157 1,004 3,466 3,043 --------------- --------------- ---------------- ---------------- Total expenses 23,613 19,311 72,506 60,309 --------------- --------------- ---------------- ---------------- Income before income taxes 156,299 126,915 437,875 380,355 Provision for income taxes 48,246 31,641 117,581 95,011 --------------- --------------- ---------------- ---------------- Net income $108,053 $95,274 $320,294 $285,344 =============== =============== ================ ================
See accompanying Notes to Consolidated Unaudited Financial Statements Ambac Assurance Corporation and Subsidiaries Consolidated Statements of Stockholder's Equity (Unaudited) For The Periods Ended September 30, 2001 and 2000 (Dollars in Thousands)
2001 2000 ------------------------------- -------------------------------- Retained Earnings: Balance at January 1 $2,002,120 $1,674,238 Net income 320,294 $320,294 285,344 $285,344 ---------------- ---------------- Dividends declared - common stock (51,000) (44,850) --------------- ---------------- Balance at September 30 $2,271,414 $1,914,732 --------------- ---------------- Accumulated Other Comprehensive Income (Loss): Balance at January 1 $81,616 ($92,049) Unrealized gains on securities, $82,132 and $117,992, pre-tax, in 2001 and 2000, respectively (1) 53,386 76,695 Foreign currency translation loss (267) (1,881) ---------------- ---------------- Other comprehensive (loss) income 53,119 53,119 74,814 74,814 ------------------------------- -------------------------------- Comprehensive income $373,413 $360,158 ================ ================ Balance at September 30 $134,735 ($17,235) --------------- ---------------- Preferred Stock: Balance at January 1 and September 30 $- $- --------------- ---------------- Common Stock: Balance at January 1 and September 30 $82,000 $82,000 --------------- ---------------- Additional Paid-in Capital: Balance at January 1 $760,006 $751,522 Exercise of stock options 297 6,341 --------------- ---------------- Balance at September 30 $760,303 $757,863 --------------- ---------------- Total Stockholder's Equity at September 30 $3,248,452 $2,737,360 =============== ================ (1) Disclosure of reclassification amount: Unrealized holding gains arising during period 56,336 75,328 Less: reclassification adjustment for net gains (losses) included in net income 2,950 (1,367) --------------- ---------------- Net unrealized gains on securities $53,386 $76,695 =============== ================
See accompanying Notes to Consolidated Unaudited Financial Statements. Ambac Assurance Corporation and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) For The Periods Ended September 30, 2001 and 2000 (Dollars in Thousands)
Nine Months Ended September 30, ---------------------------------- 2001 2000 --------------- --------------- Cash flows from operating activities: Net income $320,294 $285,344 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,185 2,198 Amortization of bond premium and discount (5,567) (3,826) Current income taxes 59,114 (2,921) Deferred income taxes 7,048 15,585 Deferred acquisition costs (7,341) (12,089) Unearned premiums, net 150,192 44,880 Losses and loss adjustment expenses 13,340 6,716 Ceded reinsurance balances payable 9,267 (1,421) Net realized losses (gains) (3,009) 2,103 Other, net (2,510) 7,143 --------------- --------------- Net cash provided by operating activities 543,013 343,712 --------------- --------------- Cash flows from investing activities: Proceeds from sales of bonds 479,989 449,308 Proceeds from maturities of bonds 170,276 93,633 Purchases of bonds (1,146,310) (896,433) Change in short-term investments 52,566 82,770 Securities purchased under agreements to resell 11,786 (16,009) Other, net (2,659) (3,992) --------------- --------------- Net cash used in investing activities (434,352) (290,723) --------------- --------------- Cash flows from financing activities: Dividends paid (51,000) (44,850) Short-term financing 9,440 (7,930) --------------- --------------- Net cash used in financing activities (41,560) (52,780) --------------- --------------- Net cash flow 67,101 209 Cash and cash pledged as collateral at January 1 36,828 6,531 --------------- --------------- Cash and cash pledged as collateral at September 30 $103,929 $6,740 =============== =============== Supplemental disclosure of cash flow information: Cash paid during the period for: Income taxes $51,117 $76,005 =============== =============== Interest expense on intercompany line of credit $- $15 =============== ===============
See accompanying Notes to Consolidated Unaudited Financial Statements.