8-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported):	October 17, 2002
	(October 16, 2002)

AMBAC FINANCIAL GROUP, INC.

(Exact name of Registrant as specified in its charter)

Delaware	1-10777	13-3621676
(State of incorporation)	(Commission file number)	(I.R.S. employer identification no.)
One State Street Plaza		10004
New York, New York		(Zip code)
(Address of principal executive offices)

(212) 668-0340

(Registrant’s telephone number, including area code)

Page 1 of 16 Pages

Index to Exhibits on Page 4

Item 5.    Other Events

On October 16, 2002, Ambac Financial Group, Inc. (the “Registrant”) issued a press release containing unaudited interim financial information and accompanying discussion for the 2002 third quarter and nine month earnings. Exhibit 99.10 is a copy of such press release and is incorporated by reference.

Item 7.    Financial Statements, Pro Forma Financial Information and Exhibits

(c)    Exhibits.

Exhibit Number	Item
99.10	Unaudited interim financial statements and accompanying discussion for the three and nine months ended September 30, 2002 contained in the press release issued by the Registrant on October 16, 2002.

Page 2 of 16

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Ambac Financial Group, Inc.
	(Registrant)
Dated: October 17, 2002	By:  /s/  FRANK J. BIVONA
	Frank J. Bivona         Vice Chairman and         Chief Financial Officer

Page 3 of 16

INDEX TO EXHIBITS

Exhibit Number	Description of Exhibit
99.10	Unaudited interim financial statements and accompanying discussion for the three and nine months ended September 30, 2002 contained in the press release issued by the Registrant on October 16, 2002.

Page 4 of 16

EX-99.10

EXHIBIT 99.10

Ambac Financial Group, Inc.

One State Street Plaza

New York, NY 10004

212.668.0340

News Release

For Immediate Release

Investor/Media Contact: Peter R. Poillon

(212) 208-3333

ppoillon@ambac.com

Web site: www.ambac.com

AMBAC FINANCIAL GROUP, INC. ANNOUNCES

THIRD QUARTER NET INCOME OF $131.7 MILLION, UP 19%

Third Quarter Net Income Per Diluted Share of $1.21, up 19%,

Third Quarter Adjusted Gross Premiums Written⁽¹⁾ $305.6 million, up 69%

NEW YORK, October 16, 2002—Ambac Financial Group, Inc. (NYSE: ABK) (Ambac) today announced third quarter 2002 net income of $131.7 million, or $1.21 per diluted share. This represents a 19% increase from third quarter 2001 net income of $111.0 million, or $1.02 per diluted share.

Net Income Per Diluted Share

Ambac presents net income and net income per diluted share. These measures are computed in accordance with accounting principles generally accepted in the United States of America (GAAP). However, the earnings research and estimate services have not adjusted their calculations to report strictly GAAP accounting. In order to assist investors in their understanding of quarterly results, Ambac will provide other useful information.

Earnings measures reported by earnings research and estimate services typically exclude: (i) net gains and losses from sales of investment securities and mark-to-market gains and losses on credit derivative contracts (“net security gains and losses”); and (ii) accelerated premiums earned on guaranteed obligations that have been refunded (“refundings”). During the third quarter 2002, net security gains and losses had a net income effect of ($0.1) million, no impact on per share data. Refundings had a net income effect of $8.9 million, or $0.08 per diluted share for the third quarter 2002. Table I, below, provides third quarter and nine months comparisons for the years 2002 and 2001.

Ambac Third Quarter 2002 Earnings/2

Table I

	Third Quarter								Nine Months
	2002			2001			% Change		2002			2001			% Change
Net income per diluted share	$	1.21		$	1.02		+19	%	$	3.38		$	2.90		+17	%
Effect of net security losses	$	0.00		$	0.01		n.a.		$	0.05		$	0.03		n.a.
Sub-total excluding item*	$	1.21		$	1.03		+17	%	$	3.43		$	2.93		+17	%
Effect of refundings	($	0.08	)	($	0.05	)	n.a.		($	0.18	)	($	0.14	)	n.a.
Total excluding items	$	1.13		$	0.97		+16	%	$	3.25		$	2.79		+16	%

* Consensus earnings that are reported by earnings research and estimate services are comparable to this line.

Commenting on the overall results, Ambac Chairman and CEO Phillip B. Lassiter noted, “Business activity was robust in all sectors without let up during the quarter. I see no reason for that to change anytime soon as client demand and pricing continues to be as favorable as I can ever recall.”

Revenues

Total revenues in the third quarter of 2002 were $220.4 million, an increase of 22% from $181.3 million in revenues for the third quarter of 2001.

Highlights

• Adjusted gross premiums written⁽¹⁾ in the third quarter of 2002 were $305.6 million, up 69% from the third quarter of 2001 of $180.6 million. Strong premium growth was achieved in all of Ambac’s business lines—public, structured and international finance.

In public finance, Ambac continues to benefit from the significant increase in new issuance of municipal bonds. Healthy writings of transportation and healthcare drove the growth. Structured finance growth was spurred by strong demand in many areas of the consumer asset-backed market, primarily mortgage-backed, auto and credit card transactions. In international finance, deal activity remains strong as Ambac was able to close several large transactions in a wide array of bond types including transportation, utilities, mortgage-backed and collateralized debt obligations.

Ambac Third Quarter 2002 Earnings/3

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

Table II

Adjusted Gross Premiums Written

$-millions	Third Quarter					Nine Months
	2002		2001		% Change	2002		2001		% Change
Public Finance	$	126.8	$	79.5	+59%	$	335.7	$	249.5	+35%
Structured Finance		85.6		51.4	+67%		266.5		212.6	+25%
International		93.2		49.7	+88%		192.0		184.0	+4%
Total	$	305.6		180.6	+69%	$	794.2	$	646.1	+23%

• Net premiums written in the third quarter of 2002 of $178.3 million were 52% higher than net premiums written of $117.0 million in the same period of 2001. Gross premiums written for the third quarter of 2002 were offset by $26.9 million in ceded premiums. In the third quarter of 2001, ceded premiums were $35.9 million.

    Net premiums written for the nine months of 2002 of $479.0 million were 12% higher than net premiums written of $426.9 million in the same period of 2001.

• Net premiums earned and other credit enhancement fees for the third quarter of 2002 were $129.7 million, which represented a 25% increase from the $103.9 million earned in the third quarter of 2001. Net premiums earned increased for all market segments. Public finance earned premium growth resulted from increased activity in that market over the past several quarters, enhanced by the company’s continued focus on structured municipal obligations – a growing market that exhibits solid pricing and risk adjusted returns. Earned premium growth for structured finance continues to be driven by strong writings in consumer asset backed transactions and other structured transactions. The growth was partially offset by the continued high level of pay-downs of the existing mortgage-backed book. International net earned premium and other credit enhancement fee growth also accelerated during the quarter, primarily as a result of strong activity in Europe, Japan and Australia.

    Net premiums earned include accelerated premiums, which result from refundings and calls recognized during the quarter. Accelerated premiums were $15.7 million in the third quarter of 2002 (which had a net income per diluted share effect of $0.08), up 50% from $10.5 million ($0.05 per diluted share) in accelerated premiums in the third quarter of 2001. Included in third quarter 2002 accelerated premiums was $4.3 million from international transactions. There were no international accelerated premiums in the comparable prior period. The relatively high level of accelerated earnings has generally been prompted by the current low interest rate environment. When interest rates rise in the future, accelerated earnings will decline.

Ambac Third Quarter 2002 Earnings/4

Net premiums earned and other credit enhancement fees for the nine months of 2002 were $359.9 million, representing a 23% increase from the $292.1 million earned during the first nine months of 2001. Accelerated premiums were $34.2 million for the nine months of 2002 ($0.18 per diluted share), up 26% from $27.2 million ($0.14 per diluted share) in accelerated premiums for the nine months of 2001.

A breakdown of net premiums earned and other credit enhancement fees by market sector are included below as Table III. Normal net premiums earned exclude accelerated premiums that result from refundings and calls.

Table III

Net Premiums Earned and Other Credit Enhancement Fees

$-millions	Third Quarter						Nine Months
	2002		2001		% Change		2002		2001		% Change
Public Finance	$	39.0	$	35.1	+11	%	$	114.3	$	101.5	+13	%
Structured Finance		45.6		37.8	+21	%		130.3		109.0	+20	%
International		29.4		20.5	+43	%		81.1		54.4	+49	%
Total Normal		114.0		93.4	+22	%		325.7		264.9	+23	%
Premiums/Fees
Accelerated Premiums		15.7		10.5	+50	%		34.2		27.2	+26	%
Total	$	129.7	$	103.9	+25	%	$	359.9	$	292.1	+23	%

• Net investment income for the third quarter of 2002 was $75.9 million, representing an increase of 13% from $67.3 million in the comparable period of 2001. This increase was due primarily to the growth in the investment portfolio from ongoing operations, partially offset by a lower reinvestment rate stemming from the current interest rate environment. Investment income was also positively impacted by the proceeds from Ambac’s $200 million debt offering in October 2001.

Net investment income for the nine months of 2002 was $222.0 million, representing an increase of 13% from $196.9 million in the comparable period of 2001.

• Financial services revenues, excluding net securities gains and losses, were $13.6 million in the third quarter of 2002, up 33% from $10.2 million in revenues for the third quarter of 2001. Financial services revenues include revenues from swaps, investment agreements and cash

Ambac Third Quarter 2002 Earnings/5

management. Investment agreement revenue doubled on improved interest spreads and higher volume, while swap and money management revenues were relatively flat during the quarter.

Financial services revenues, excluding net securities gains and losses, were $41.1 million in the nine months of 2002, up 13% from the $36.5 million of revenues in the nine months of 2001.

Expenses

Highlights

• Financial guarantee expenses of $24.6 million for the third quarter of 2002 increased by 13% over the $21.7 million of expenses for the same quarter of 2001. This increase was primarily due to higher compensation costs and normal additions to the general loss provision.

Financial guarantee expenses of $73.3 million for the first nine months of 2002 increased by 12% over the $65.2 million of expenses for the same period of 2001.

• Financial services expenses for the third quarter of 2002 of $5.4 million increased by 8% from $5.0 million in expenses for the third quarter of 2001.

Financial services expenses for the first nine months of 2002 of $16.2 million decreased by 2% from $16.6 million in expenses for the same period of 2001.

Other Items

• Total net securities gains/(losses) for the third quarter of 2002 were ($0.2) million, no per share impact, consisting of net realized gains on investment securities of $6.7 million and net mark-to-market losses on credit derivatives of ($6.9) million. For the third quarter of 2001 net securities losses were ($1.4) million, or ($0.01) per diluted share, consisting of net realized gains on investment securities of $1.7 million and net mark-to-market losses on credit derivatives of ($3.1) million.

Total net securities gains/(losses) for the nine months of 2002 were ($9.0) million, or ($0.05) per diluted share, consisting of net realized gains on investment securities of $10.0 million and mark-to-market losses on credit derivatives of ($19.0) million. For the nine months of 2001 net securities losses were ($4.5) million, or ($0.03) per diluted share, consisting of net realized losses on investment securities of ($1.5) million and mark-to-market losses on credit derivatives of ($3.0) million.

• Interest expense for the third quarter of 2002 was $10.8 million, up 15% from $9.4 million for the third quarter of 2001. The increase is attributable to Ambac’s issuance of $200 million in 50-year debentures in October 2001.

Ambac Third Quarter 2002 Earnings/6

Balance Sheet

Highlights

• Total assets as of September 30, 2002 were $14.69 billion, up 19% from total assets of $12.35 billion at December 31, 2001. This increase was due primarily to cash generated from business written during the period and increased volume in the guaranteed investment contract business. As of September 30, 2002, stockholders’ equity was $3.62 billion, a 21% increase from year-end 2001 stockholders’ equity of $2.98 billion. The increase stemmed primarily from net income during the period and an increase in the fair market value of the investment portfolio due to a decline in interest rates during the period.

Stock Options

Ambac has decided to voluntarily adopt the fair value based method of accounting for stock-based compensation plans as prescribed in Statement of Financial Accounting Standards number 123 “Accounting for Stock-Based Compensation” (FAS 123) beginning in the first quarter of 2003. The fair value based method requires expensing the estimated cost of employee stock options. Currently, Ambac estimates the net income effect of prospectively adopting FAS 123 will be approximately $0.01 per diluted share on a quarterly basis, for options granted in 2003.

2002 Earnings Guidance

Ambac management’s guidance on 2002 GAAP net income includes ($0.05) per diluted share year-to-date net security losses but is exclusive of such future gains or losses. Management cannot forecast market factors such as interest rates and credit spreads with sufficient accuracy to make such forecast useful. As such, management currently anticipates net income per diluted share for 2002 of $4.56—$4.60.

Cash Dividend Declared

At its October 2002 Board meeting, the Board of Directors of Ambac Financial Group, Inc. approved the regular quarterly cash dividend of $0.10 per share of common stock. The dividend is payable on December 4, 2002 to stockholders of record on November 11, 2002.

Ambac Third Quarter 2002 Earnings/7

Forward-Looking Statements

This release, in particular the Chairman’s remarks and the section titled “2002 Earnings Guidance”, contains 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, except as required by law.

*******************

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 public finance 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

(1) 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. 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, 2002 and 2001

(Dollars in Thousands Except Share Data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2002			2001			2002			2001
Revenues:
Financial Guarantee:
Gross premiums written	$	205,110		$	152,918		$	550,154		$	499,253
Ceded premiums written		(26,854	)		(35,874	)		(71,108	)		(72,342	)
Net premiums written	$	178,256		$	117,044		$	479,046		$	426,911
Net premiums earned	$	122,396		$	98,019		$	339,680		$	276,547
Other credit enhancement fees		7,307			5,876			20,171			15,524
Net premiums earned and other credit enhancement fees		129,703			103,895			359,851			292,071
Net investment income		75,895			67,318			222,035			196,852
Net securities (losses) gains (1)		(1,500	)		3,578			(10,581	)		(10	)
Other income		472			502			2,586			3,918
Financial Services:
Revenue		13,582			10,231			41,139			36,457
Net securities gains (losses)		1,402			(3,589	)		2,168			(3,151	)
Other:
Revenue		974			786			2,659			3,093
Net securities losses		(127	)		(1,383	)		(571	)		(1,383	)
Total revenues		220,401			181,338			619,286			527,847
Expenses:
Financial Guarantee:
Losses and loss adjustment expenses		6,100			5,100			17,700			14,500
Underwriting and operating expenses		18,467			16,602			55,631			50,671
Financial Services		5,380			5,023			16,215			16,627
Interest		10,774			9,370			32,256			28,338
Other		1,884			921			5,365			4,372
Total expenses		42,605			37,016			127,167			114,508
Income before income taxes		177,796			144,322			492,119			413,339
Provision for income taxes		46,105			33,314			123,715			97,179
Net income	$	131,691		$	111,008		$	368,404		$	316,160
Net income per share:
Basic	$	1.24		$	1.05		$	3.48		$	2.99
Diluted	$	1.21		$	1.02		$	3.38		$	2.90
Weighted average number of common shares outstanding:
Basic		105,865,884			105,781,745			105,940,661			105,753,654
Diluted		108,959,876			109,077,058			109,148,469			108,980,936

(1) Includes net gains (losses) on investment securities sold of $5,408, $6,633, $8,380 and $3,009 for the third quarter of 2002 and 2001 and the nine months ended September 30, 2002 and 2001, respectively, and change in fair value of credit derivatives of ($6,908), ($3,055), ($18,961) and ($3,019) for the third quarter of 2002 and 2001 and the nine months ended September 30, 2002 and 2001, respectively.

Ambac Financial Group, Inc. and Subsidiaries

Consolidated Balance Sheets

September 30, 2002 and December 31, 2001

(Dollars in Thousands Except Share Data)

	September 30, 2002			December 31, 2001
	(Unaudited)
Assets
Investments:
Fixed income securities, at fair value (amortized cost of $10,163,780 in 2002 and $8,355,596 in 2001)	$	10,710,694		$	8,469,157
Fixed income securities pledged as collateral, at fair value (amortized cost of $809,274 in 2002 and $1,393,193 in 2001)		815,742			1,401,528
Short-term investments, at cost (approximates fair value)		137,369			415,002
Other		2,159			2,163
Total investments		11,665,964			10,287,850
Cash		32,342			76,580
Securities purchased under agreements to resell		24,504			11,200
Receivable for investment agreements		21,369			4,101
Receivable for securities sold		508,156			8,922
Investment income due and accrued		127,961			144,463
Reinsurance recoverable		2,195			2,259
Prepaid reinsurance		273,931			267,655
Deferred acquisition costs		172,718			163,477
Loans		848,399			901,194
Derivative product assets		961,250			383,959
Other assets		49,290			100,460
Total assets	$	14,688,079		$	12,352,120
Liabilities and Stockholders’ Equity
Liabilities:
Unearned premiums	$	1,926,789		$	1,780,272
Losses and loss adjustment expense reserve		167,045			152,352
Ceded reinsurance balances payable		11,248			10,146
Obligations under investment and payment agreements		5,246,902			4,089,777
Obligations under investment repurchase agreements		1,085,946			1,422,151
Securities sold under agreement to repurchase		460,495			425,000
Deferred income taxes		270,930			123,077
Current income taxes		36,675			98,145
Debentures		612,717			619,315
Accrued interest payable		70,278			84,225
Derivative product liabilities		799,719			325,922
Other liabilities		138,175			175,135
Payable for securities purchased		241,036			62,915
Total liabilities		11,067,955			9,368,432
Stockholders’ equity:
Preferred stock		—			—
Common stock		1,062			1,060
Additional paid-in capital		601,792			538,135
Accumulated other comprehensive income		319,793			62,476
Retained earnings		2,719,540			2,403,473
Common stock held in treasury at cost		(22,063	)		(21,456	)
Total stockholders’ equity		3,620,124			2,983,688
Total liabilities and stockholders’ equity	$	14,688,079		$	12,352,120
Number of shares outstanding (net of treasury shares)		105,806,172			105,584,049
Book value per share	$	34.21		$	28.26

Ambac Financial Group, Inc. and Subsidiaries

Supplemental Analytical Data: Components of Adjusted Book Value Per Share ⁽¹⁾

September 30, 2002 and December 31,2001

	September 30, 2002		December 31, 2001
Book value	$34.21		$28.26
After-tax value of:
Net unearned premium reserve less deferred acquisition costs	9.09		8.31
Present value of future installment premiums	6.86		6.07
Unrealized loss on investment
agreement liabilities	(2.85	)	(0.61	)
Adjusted book value	$47.31		$42.03

(1) Adjusted book value (ABV), which is not promulgated in accordance with accounting principles generally accepted in the United States of America (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, 2002 and December 31, 2001

(Dollars in Thousands, Except Ratios)

	September 30, 2002		December 31, 2001
Capital and Claim-Paying Resources:
Contingency reserve	$	1,443,395	$	1,265,652
Capital and surplus		2,153,428		1,996,284
Qualified statutory capital		3,596,823		3,261,936
Unearned premiums		2,020,980		1,860,090
Losses and loss adjustment expenses		45,003		27,835
Policyholders’ reserves		5,662,806		5,149,861
Third party capital support (2)		800,000		800,000
Present value of future installment premiums (3)		1,117,557		986,760
Total claims paying resources	$	7,580,363	$	6,936,621
Net financial guarantees in force	$	524,568,718	$	476,189,690
Capital ratio (4)		146:1		146:1
Financial resources ratio (5)		69:1		69:1

(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, 2002 and December 31, 2001 are $3.564 billion and $3.240 billion, respectively.

(2) Third party capital support at September 30, 2002 represents pre-funded capital which provides for the unconditional ability to issue up to $800 million of preferred stock to high quality asset-backed trusts.

(3) Includes the present value of future credit enhancement fees from structured credit derivatives.

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

(5) 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, 2002 and December 31, 2001

(Dollars in Millions)

The following table sets forth Ambac Assurance’s consolidated capitalization as of September 30, 2002 and December 31, 2001, respectively, on the basis of accounting principles generally accepted in the United States of America.

	September 30,		December 31,
	2002		2001
	(unaudited)
Unearned premiums	$	1,936	$	1,790
Other liabilities		1,702		973
Total liabilities		3,638		2,763
Stockholder’s equity:
Common stock		82		82
Additional paid-in capital		922		928
Accumulated other comprehensive income		273		81
Retained earnings		2,708		2,386
Total stockholder’s equity		3,985		3,477
Total liabilities and stockholder’s equity	$	7,623	$	6,240