Ambac Financial Group, Inc. Adding diversity to our financial sector holdings.
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Transcript of Ambac Financial Group, Inc. Adding diversity to our financial sector holdings.
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Ambac Financial Group, Inc.
Adding diversity to our financial sector holdings
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Current Finance Sector Holdings
Washington Mutual Citigroup Bank of America Alliance Capital Fannie Mae
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Investment Thesis
Low interest rates Flat yield curve Infrastructure deficit Continued stress on State and Local
Budgets
Lead to continued strength in debt markets
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Strategy for the Sector
Trade Fannie Mae for Ambac
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Why Buy Ambac Financial Group?
A history of solid performance Double digit ROE and EPS growth Good valuations International growth opportunities
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Historical Performance
-100%
-50%
0%
50%
100%
150%
200%
May-00 May-01 May-02 May-03 May-04
ABK
^SPX
AC
BAC
C
FNM
WM
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Risk Return Comparison
ABK AC BAC C FNM WM
Historical Beta 0.48 1.29 0.59 1.31 0.22 0.03
Return / STD Dev 0.21 0.10 0.25 0.08 0.05 0.19
Annualized Return 19% 10% 20% 7% 5% 27%
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Ambac Financials Business
Financial Guaranty Public finance Structured finance International finance
Financial Services Interest rate swaps Total return swaps Funding conduits
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Financial Guaranty Business
$240
$132
$87
Public Finance
Sturctured Finance
I nternationalFinanace
Net par in billions of dollars 12/2004
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Financial Guaranty Revenue
$764
$361
$44
Premiums EarnedI nvestment GainsOther
Billions of dollars 2004
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Competition for Ambac
Only three players globally High barriers to entry Ambac is a strong competitor
28% market share in 2003 Highest gross par written for 2004
History of consolidation if market crowds
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Indicators of Success
Industry leading 15% ROE average over the last 10 years
Double digit earnings growth for 12 years running
Effective underwriting Efficient operations
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Combined Expense Ratio
0%
10%
20%
30%
40%
50%
60%
70%
2001 2002 2003 2004
ABKMBI AI nd. Ave.
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Loss Ratio
0%
5%
10%
15%
20%
25%
30%
35%
2001 2002 2003 2004
ABKMBI AI nd. Ave.
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Income Projections by Business
0
200
400
600
800
1000
1200
2004 2007 2009 2011 2013
I nternationalFinanceStructuredFinancePublic Finance
Historic
CAGR = 19%
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Valuation Methods Used Price to book value Price to earnings
value Excess return
dividend model
Current Price $72.39
$82
$99
$78 $83
P/ E P/ B DDM Target
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Recommendations
Purchase Ambac Financial Group
Sell Fannie Mae
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What’s Wrong With Fannie No audited financial statements Effect of regulatory changes on future
revenues is unknowable Currently running without CEO and CFO Too difficult to understand given high
manager turnover
And…
FNM does not meet our investment policy requirements.
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Investment Objective 1
“Security selection is to be made on the basis of a supportive fundamental analysis of a stock.”
Impossible to be thorough without financial statements
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Investment Objective 2
“Maintain a risk level comparable to the S&P 500”
Company specific risks are significantly greater than other members of the S&P 500.
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Investment Objective 3
“The investment guidelines are based on an investment horizon generally greater than 1 year and consistent with a normal market cycle of approximately 5 to 7 years.”
Market cycle has shifted
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Suggested Trade
Ticker Quantity Price Total
Sell FNM 57 $ 59 $ 3,372
Buy ABK 50 $ 72 $ 3,620
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Questions?