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
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
Income Projections by Business Historic CAGR = 19%
Valuation Methods Used Price to book value Price to earnings value Excess return dividend model Current Price $72.39
Recommendations Purchase Ambac Financial Group Sell Fannie Mae
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.
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
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.
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