<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended March 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 1-10777
AMBAC INC.
(Exact name of Registrant as specified in its charter)
Delaware 13-3621676
(State of incorporation) (I.R.S. employer
identification no.)
One State Street Plaza
New York, New York 10004
(Address of principal executive offices) (Zip code)
(212) 668-0340
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
- -
As of March 31, 1997, 34,884,729 shares of Common Stock, par value $0.01 per
share, (net of 455,463 treasury shares) and -0- shares of Class A Common Stock,
par value $0.01 per share, of the Registrant were outstanding.
<PAGE>
AMBAC Inc. and Subsidiaries
INDEX
-----
PAGE
----
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - March 31, 1997
and December 31, 1996........................................ 3
Consolidated Statements of Operations - three months
ended March 31, 1997 and March 31, 1996...................... 4
Consolidated Statements of Cash Flows - three months
ended March 31, 1997 and March 31, 1996...................... 5
Notes to Consolidated Financial Statements................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 7
PART II OTHER INFORMATION
Item 5. Other Information............................................ 15
Item 6. Exhibits and Reports on Form 8-K............................. 15
SIGNATURES............................................................. 16
INDEX TO EXHIBITS...................................................... 17
<PAGE>
AMBAC Inc. and Subsidiaries
Consolidated Balance Sheets
March 31, 1997 and December 31, 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
-------------- -----------------
(unaudited)
<S> <C> <C>
Assets
Investments:
Bonds, at fair value
(amortized cost of $5,086,192 in 1997 and $4,979,017 in 1996) $5,096,874 $5,088,031
Short-term investments, at cost (approximates fair value) 105,516 112,511
-------------- ---------------
Total investments 5,202,390 5,200,542
Cash 8,475 7,734
Securities purchased under agreements to resell 133,156 201,169
Receivable for municipal investment contracts 97,669 33,299
Receivable for securities sold 25,382 18,467
Investment income due and accrued 64,809 65,920
Deferred acquisition costs 97,387 94,212
Prepaid reinsurance 167,617 168,786
Other assets 88,262 85,836
-------------- ---------------
Total assets $5,885,147 $5,875,965
============== ===============
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities:
Unearned premiums $999,382 $991,224
Losses and loss adjustment expenses 60,510 60,220
Ceded reinsurance balances payable 4,164 7,438
Obligations under municipal investment contracts 2,428,606 2,417,817
Obligations under municipal investment repurchase contracts 345,744 336,773
Deferred income taxes 48,494 80,086
Current income taxes 14,750 6,538
Debentures 223,814 223,798
Accrued interest payable 42,405 29,958
Accounts payable and other liabilities 43,330 57,689
Payable for securities purchased 88,865 49,408
-------------- ---------------
Total liabilities 4,300,064 4,260,949
-------------- ---------------
Stockholders' equity:
Preferred stock - -
Common stock, Class A - -
Common stock 353 353
Additional paid-in capital 497,176 498,401
Unrealized gains on investments, net of tax 2,877 58,911
Retained earnings 1,115,407 1,072,418
Cumulative translation adjustment 81 -
Common stock held in treasury at cost (30,811) (15,067)
-------------- ---------------
Total stockholders' equity 1,585,083 1,615,016
-------------- ---------------
Total liabilities and stockholders' equity $5,885,147 $5,875,965
============== ===============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
3
<PAGE>
AMBAC Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
For the Three Months Ended March 31, 1997 and 1996
(Dollars in Thousands Except Common Share Data)
Three Months Ended
March 31,
-----------------------------
1997 1996
-----------------------------
Financial guarantee insurance operations:
Gross premiums written $ 51,792 $ 50,287
Ceded premiums written (5,432) (9,612)
------------ ------------
Net premiums written 46,360 40,675
Increase in unearned premiums (9,327) (12,482)
------------ ------------
Net premiums earned 37,033 28,193
Net investment income 38,447 34,827
Net realized gains 812 2,356
Other income 1,103 1,392
------------ ------------
Total financial guarantee revenues 77,395 66,768
------------ ------------
Losses and loss adjustment expenses 728 810
Underwriting and operating expenses 9,092 8,748
------------ ------------
Total financial guarantee expenses 9,820 9,558
------------ ------------
Financial guarantee insurance operating income 67,575 57,210
Financial services operating (loss) income (1,284) 4,875
Equity in income of affiliate -- 627
Interest expense (5,241) (5,258)
Other income (deductions), net 558 (447)
Other net realized gains 788 --
------------ ------------
Income before income taxes 62,396 57,007
Income tax expense (benefit):
Current taxes 10,785 12,974
Deferred taxes 1,873 (520)
------------ ------------
Total income taxes 12,658 12,454
------------ ------------
Net income $ 49,738 $ 44,553
============ ============
Net income per common share $ 1.42 $ 1.27
============ ============
Weighted average number of
common shares outstanding 34,943,668 35,053,910
============ ============
See accompanying Notes to Consolidated Financial Statements
4
<PAGE>
AMBAC Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
For The Periods Ended March 31, 1997 and 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------
1997 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 49,738 $ 44,553
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 438 504
Amortization of bond premium and discount (736) (228)
Current income taxes 8,212 10,442
Deferred income taxes 2,010 (683)
Deferred acquisition costs (3,175) (2,785)
Unearned premiums, net 9,327 12,482
Losses and loss adjustment expenses 290 (7,890)
Ceded reinsurance balances payable (3,274) (8,722)
Investment income due and accrued 1,111 2,052
Accrued interest payable 12,447 9,955
Gain on sales of investments (1,600) (2,356)
Accounts payable and other liabilities (14,359) (3,042)
Other, net (5,615) (14,750)
--------- -----------
Net cash provided by operating activities 54,814 39,532
--------- -----------
Cash flows from investing activities:
Proceeds from sales of bonds 325,530 425,410
Proceeds from matured bonds 254,857 203,810
Purchases of bonds (652,347) (1,040,283)
Change in short-term investments 6,995 (20,176)
Securities purchased under agreements to resell 68,013 67,887
Other, net 9,030 6,130
--------- -----------
Net cash provided by (used in) investing activities 12,078 (357,222)
--------- -----------
Cash flows from financing activities:
Dividends paid (5,797) (5,264)
Proceeds from issuance of municipal investment contracts 239,105 530,238
Payments for municipal investment contract draws (283,715) (212,044)
Proceeds from sale of treasury stock 13,684 4,693
Purchases of treasury stock (29,428) (8,222)
--------- -----------
Net cash (used in) provided by financing activities (66,151) 309,401
--------- -----------
Net cash flow 741 (8,289)
Cash at January 1 7,734 12,167
--------- -----------
Cash at March 31 $ 8,475 $ 3,878
========= ===========
Supplemental disclosure of cash flow information
Cash paid during the period for:
Income taxes $ 249 $ 2,152
========= ===========
Interest expense on debt $ 7,557 $ 7,524
========= ===========
Interest expense on municipal investment contracts $ 24,715 $ 24,843
========= ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
5
<PAGE>
AMBAC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
AMBAC Inc. (the "Company"), headquartered in New York City, is a holding
company that provides through its affiliates financial guarantee insurance and
financial services to clients in both the public and private sectors. The
Company's principal operating subsidiary, AMBAC Indemnity Corporation ("AMBAC
Indemnity"), a leading insurer of municipal and structured finance obligations,
has been assigned triple-A claims-paying ability ratings, the highest ratings
available from Moody's Investors Service, Inc., Standard & Poor's Ratings Group,
Fitch Investors Service, L.P. and Nippon Investors Service, Inc. Through its
Financial Services Division, the Company provides investment contracts, interest
rate swaps, investment advisory and cash management services, and procurement
software primarily to states, municipalities and municipal authorities.
The Company's consolidated unaudited interim financial statements have
been prepared on the basis of generally accepted accounting principles ("GAAP")
and, in the opinion of management, reflect all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the Company'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, 1997
may not be indicative of the results that may be expected for the full year
ending December 31, 1997. 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 Inc. and its
subsidiaries contained in the Company's Annual Report on Form 10-K for the year
ended December 31, 1996, which was filed with the Securities and Exchange
Commission on March 31, 1997.
The consolidated financial statements include the accounts of the
Company and each of its subsidiaries. All significant intercompany balances have
been eliminated.
(2) FUTURE IMPACT OF NEW ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), entitled
"Earnings Per Share." SFAS 128 will replace the presentations of primary and
fully diluted earnings per share under current accounting standards with "basic
earnings per share" and "diluted earnings per share," respectively. Basic
earnings per share excludes dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding during the period, whereas primary earnings per share includes the
impact of assumed conversion of common stock equivalents. Diluted earnings per
share under SFAS 128 is generally similar to fully diluted earnings per share.
For calendar year enterprises, SFAS 128 must be adopted commencing with year end
1997 financial statements, and will then apply retroactively to both annual and
interim periods, requiring the restatement of previously presented earnings per
share data. Earlier application of SFAS 128 is not permitted. Based on
preliminary calculations, the Company does not believe that earnings per share
computed under SFAS 128 would be materially different from the earnings per
share data presented herein.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following paragraphs describe the consolidated results of operations
of AMBAC Inc. and its subsidiaries (sometimes collectively referred to as the
"Company") for the three months ended March 31, 1997 and 1996, and its financial
condition as of March 31, 1997 and December 31, 1996. These results are
presented for the Company's two business segments: Financial Guarantee Insurance
and Financial Services.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 VERSUS THREE MONTHS ENDED MARCH 31, 1996
CONSOLIDATED NET INCOME
The Company's net income for the three months ended March 31, 1997 was
$49.7 million or $1.42 per common share, an increase of 12% from $44.6 million
or $1.27 per common share in the three months ended March 31, 1996. The increase
in net income for the quarter over the comparable prior period was the result of
higher net premiums earned and higher net investment income, partially offset by
lower financial services operating results (which included a restructuring
charge). The consolidation of certain Financial Services operations resulted in
a $3.5 million restructuring charge (which had a net income per common share
effect of $0.06) in the current quarter. Excluding the effect of this
restructuring charge, net income increased 16% over the corresponding period of
1996.
FINANCIAL GUARANTEE INSURANCE
Operating Income. The Company provides financial guarantee insurance
-----------------
through its principal operating subsidiary, AMBAC Indemnity Corporation ("AMBAC
Indemnity"), which is a leading insurer of municipal and structured finance
obligations. Financial guarantee insurance operating income for the three months
ended March 31, 1997 was $67.6 million, an increase of 18% from $57.2 million in
the three months ended March 31, 1996. This increase was primarily the result of
increased premiums earned and higher net investment income, partially offset by
lower net realized gains.
Gross Par Written. AMBAC Indemnity insured $7.9 billion in par value
------------------
bonds during the three months ended March 31, 1997, an increase of 23% from $6.4
billion in the three months ended March 31, 1996. Par value written for the
first quarter of 1997 was comprised of $5.2 billion from municipal bond
insurance and $2.7 billion from structured finance insurance, versus $4.6
billion and $1.8 billion, respectively, in the first quarter of 1996. According
to estimates based on industry sources, the total volume of new issues of
municipal bonds decreased 9% from $41.7 billion during the three months ended
March 31, 1996 to $38.0 billion in the three months ended March 31, 1997. During
the three months ended March 31, 1997, the insured portion of the new issue
municipal bond market increased to approximately 52% from approximately 46% for
the three months ended March 31, 1996, reflecting increased demand for insured
bonds. (Market size amounts and insured percentage figures used in this
paragraph were determined on a sale date basis, in conformity with industry
practices; all other amounts and percentage figures in this discussion were
determined on a closing date basis.)
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Gross Premiums Written. Gross premiums written for the three months
-----------------------
ended March 31, 1997 were $51.8 million, an increase of 3% from $50.3 million in
the three months ended March 31, 1996. The following table sets forth the
amounts of gross premiums written by type and percent of total:
Three Months Ended March 31,
--------------------------------------
(Dollars in Millions) 1997 % 1996 %
-------- ------- -------- --------
Municipal premiums:
Up-front policies:
New issue..................... $31.9 61% $29.2 58%
Secondary market.............. 4.6 9 4.8 9
-------- ------- -------- -------
Sub-total up-front.......... 36.5 70 34.0 67
-------- ------- -------- --------
Installment policies:
Annual policies............... 1.8 3 1.4 3
Portfolio products............ 0.8 2 1.0 2
-------- -------- -------- --------
Sub-total installment..... 2.6 5 2.4 5
-------- ------- -------- --------
Total municipal premiums 39.1 75 36.4 72
-------- ------- -------- --------
Structured finance premiums:
Up-front...................... 8.0 16 12.4 25
Installment................... 4.7 9 1.5 3
-------- ------- -------- --------
Total structured finance
premiums....... 12.7 25 13.9 28
-------- ------- -------- --------
Total gross premiums.............. $51.8 100% $50.3 100%
======== ======= ======== ========
Ceded Premiums Written. Ceded premiums written for the first quarter of
-----------------------
1997 were $5.4 million, versus $9.6 million in the first quarter of 1996. The
44% decrease in ceded premiums written is primarily due to the non-renewal in
1997 of the automatic treaty reinsurance programs. AMBAC Indemnity uses
facultative reinsurance agreements to reduce its risk and manage its insurance
portfolio. Ceded premiums written were 10.5% and 19.1% of gross premiums written
for the three month periods ended March 31, 1997 and 1996, respectively.
Net Premiums Written. Net premiums written for the three months ended
---------------------
March 31, 1997 were $46.4 million, an increase of 14% from the $40.7 million in
the three months ended March 31, 1996. This increase reflects slightly higher
gross premiums written and lower premiums ceded to reinsurers in the three
months ended March 31, 1997 compared with the corresponding prior period.
Net Premiums Earned. Net premiums earned during the three months ended
--------------------
March 31, 1997 were $37.0 million, an increase of 31% from $28.2 million in the
three months ended March 31, 1996. The increase was primarily the result of
increased premiums earned from the underlying book of business and higher
premiums earned from refundings, calls and other accelerations in the three
months ended March 31, 1997. Net premiums earned for the three months ended
March 31, 1997 included $7.6 million (which had a net income per common share
effect of $0.12) from refundings, calls and other accelerations of previously
insured issues. Net premiums earned in the three months ended March 31, 1996
included $4.3 million (which had a net income per common share effect of $0.07)
from refundings, calls and other accelerations. Refunding levels vary depending
upon a number of conditions, primarily the relationship between current interest
rates and interest rates on outstanding debt. Excluding the effect of
accelerated earnings from refundings, calls and other accelerations, net
premiums earned for the three months ended March 31, 1997 were $29.4 million, an
increase of 23% from $23.9 million in the three months ended March 31, 1996.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Net Investment Income. Net investment income for the three months ended
----------------------
March 31, 1997 was $38.4 million, an increase of 10% from $34.8 million in the
three months ended March 31, 1996. The increase was primarily attributable to
the growth of the investment portfolio. AMBAC Indemnity's investments in tax-
exempt securities amounted to 79% of the total market value of its portfolio as
of March 31, 1997, versus 69% at March 31, 1996. The average pre-tax yield-to-
maturity on the financial guarantee insurance investment portfolio was 6.46% and
6.41% as of March 31, 1997 and 1996, respectively.
Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses
------------------------------------
for the three months ended March 31, 1997 were $0.7 million, versus $0.8 million
in the three months ended March 31, 1996. Losses and loss adjustment expenses
are generally based upon estimates of the ultimate aggregate losses inherent in
the obligations insured. Losses and loss adjustment expenses, exclusive of
salvage recognized, were $0.7 million and $0.9 million for the three months
ended March 31, 1997 and 1996, respectively. Salvage recognized amounted to none
and $0.1 million for the three month periods ended March 31, 1997 and 1996,
respectively.
Underwriting and Operating Expenses. Underwriting and operating expenses
------------------------------------
for the first quarter of 1997 were $9.1 million, an increase of 4% from $8.8
million in the first quarter of 1996 primarily due to higher amortization of
previously deferred acquisition costs. Underwriting and operating expenses
consist of gross underwriting and operating expenses, less the deferral to
future periods of expenses and reinsurance commissions related to the
acquisition of new insurance contracts, plus the amortization of previously
deferred expenses and reinsurance commissions. During the three month period
ended March 31, 1997, AMBAC Indemnity's gross underwriting and operating
expenses were $13.6 million, an increase of 7% from $12.7 million in the three
months ended March 31, 1996, primarily due to higher premium taxes. Underwriting
and operating expenses deferred were $7.9 million and $7.0 million for the three
months ended March 31, 1997 and 1996, respectively. Reinsurance commissions
which relate to the current period were none and ($0.3) million for the three
months ended March 31, 1997 and 1996, respectively. The amortization of
previously deferred expenses and reinsurance commissions was $3.4 million and
$2.8 million for the three months ended March 31, 1997 and 1996, respectively.
FINANCIAL SERVICES
Operating Income. Through its Financial Services subsidiaries, the
-----------------
Company provides investment contracts, interest rate swaps, investment advisory
and cash management, and procurement software principally to states,
municipalities, municipal authorities and hospitals and health organizations.
Financial Services had an operating loss for the three months ended March 31,
1997 of $1.3 million, versus income of $4.9 million in the three months ended
March 31, 1996. As noted above, Financial Services results included a $3.5
million restructuring charge for the consolidation of the Company's Westport,
Connecticut office into the Company's corporate headquarters in New York City.
Financial Services revenues for the first quarter of 1997 were $7.1 million,
versus $7.0 million in the first quarter of 1996. The increase was primarily due
to the inclusion of revenues of Cadre Financial Services, Inc. ("Cadre"), the
assets of which the Company acquired on December 31, 1996, partially offset by
lower revenues on interest rate swaps. Financial Services expenses, excluding
the restructuring charge, for the first quarter of 1997 were $4.9 million versus
$2.1 million in the first quarter of 1996. These
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
increased expenses resulted primarily from the consolidation of Cadre into the
Financial Services businesses.
CORPORATE ITEMS
Equity in Income of Affiliate. In May 1996, the Company sold its
-----------------------------
remaining interest in HCIA Inc. ("HCIA") common stock. The Company's share of
income in the first three months of 1996 is reported as "Equity in income of
affiliate" which amounted to $0.6 million in the first quarter of 1996.
Interest Expense and Other Income (Deductions), Net. Interest expense
---------------------------------------------------
for the three months ended March 31, 1997 was $5.2 million, essentially flat
compared to $5.3 million for the three months ended March 31, 1996. Other income
(deductions), net, includes investment income and operating expenses of the
holding company, AMBAC Inc. Other income (deductions), net, increased from a
loss of $0.4 million for the three months ended March 31, 1996 to a gain of $0.6
million for the three months ended March 31, 1997, primarily as a result of the
additional investment income generated by AMBAC Inc. from the proceeds of the
sale of HCIA.
Income Taxes. Income taxes for the three months ended March 31, 1997
------------
were at an effective rate of 20.3%, versus 21.8% in the three months ended March
31, 1996.
SUPPLEMENTAL ANALYTICAL FINANCIAL DATA
Management, equity analysts and investors consider the following four
measures important in analyzing the financial results, and measuring the
intrinsic value of the Company: core earnings; operating earnings; adjusted
gross premiums written; and adjusted book value. However, none of these measures
are promulgated in accordance with generally accepted accounting principles
("GAAP") and should not be considered as substitutes for net income, gross
premiums written and book value. The definitions of core earnings, operating
earnings, adjusted gross premiums written and adjusted book value described
below may differ from the definitions used by other public holding companies of
financial guarantee insurers.
Core Earnings. Core earnings for the three months ended March 31, 1997
-------------
were $46.5 million , an increase of 15% from $40.6 million for the three months
ended March 31, 1996. The increase in core earnings was primarily the result of
continued growth in net premiums earned from the underlying book of business and
net investment income from financial guarantee insurance operations, partially
offset by lower Financial Services operating results. The Company defines core
earnings as consolidated net income, less the effect of net realized gains and
losses, net insurance premiums earned from refundings and calls and certain
non-recurring items.
Operating Earnings. Operating earnings for the first quarter of 1997
------------------
were $50.8 million, an increase of 18% from $43.0 million in the first quarter
of 1996. The Company defines operating earnings as consolidated net income, less
the effect of net realized gains and losses and certain non-recurring items.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The following table reconciles net income computed in accordance with
GAAP to operating earnings and core earnings for the three months ended March
31, 1997 and 1996 :
(Dollars in Millions) 1997(1) 1996(1)
---------- ----------
Net Income...................................... $49.7 $44.6
Net realized gains, after tax................... (1.0) (1.5)
Non-recurring item, after tax................... 2.1 -
---------- ----------
Operating earnings...................... 50.8 43.0
Premiums earned from refundings,
calls and other accelerations, after tax... (4.3) (2.4)
---------- ----------
Core earnings........................... $46.5 $40.6
========== ==========
(1) Numbers may not add due to rounding.
The weighted average number of shares outstanding during the first
quarter of 1997 and 1996 was 34.9 million and 35.1 million, respectively.
Adjusted Gross Premiums Written. Adjusted gross premiums written were
--------------------------------
$69.3 million in the first quarter of 1997, up 28% from $54.0 million in the
first quarter of 1996. The Company defines adjusted gross premiums written as
upfront premiums written plus the present value of estimated future installment
premiums written in the period. While most of AMBAC Indemnity's premiums written
are collected up-front at policy issuance, a growing portion of premiums are
collected on an installment basis. The present value of estimated future
installment premiums written in the first quarter of 1997 was $24.9 million, an
increase of 228% from $7.6 million in the first quarter of 1996. The aggregate
net present value of estimated future installment premiums was $177.2 million
and $157.7 million as of March 31, 1997 and December 31, 1996, respectively.
The following table reconciles total up-front premiums written to
adjusted gross premiums written for the three months ended March 31, 1997 and
1996:
(Dollars in Millions) 1997(1) 1996(1)
---------- ----------
Adjusted Gross Premium Analysis:
Total Up-front premiums written................. $44.5 $46.4
PV of estimated future installment premiums..... 24.9 7.6
---------- ----------
Adjusted gross premiums written........ $69.3 $54.0
========== ==========
(1) Numbers may not add due to rounding.
Adjusted Book Value. Adjusted book value ("ABV") per common share
--------------------
increased 1% to $62.98 at March 31, 1997 compared to $62.50 at December 31,
1996. 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 contract
liabilities. These adjustments will not be realized until future periods and may
differ materially from the amounts used in determining ABV.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The following table reconciles book value per share to adjusted book value
per share as of March 31, 1997 and December 31, 1996:
<TABLE>
<CAPTION> March 31, December 31,
1997(1) 1996(1)
------------------ -----------------
<S> <C> <C>
Book value per share................................. $45.44 $46.02
After-tax value of:
Net unearned premium reserve..................... 15.51 15.25
Deferred acquisition costs....................... (1.81) (1.74)
Present value of installment premiums............ 3.30 2.91
Unrealized gain on investment contract
liabilities..................................... 0.55 0.06
------------------ -----------------
Adjusted book value per share........................ $62.98 $62.50
================== =================
(1) Numbers may not add due to rounding.
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
AMBAC Inc. Liquidity. The Company's liquidity, both on a short-term
---------------------
basis (for the next twelve months) and a long-term basis (beyond the next twelve
months), is largely dependent upon AMBAC Indemnity's ability to pay dividends or
make payments to the Company and external financings.
Pursuant to Wisconsin insurance laws, AMBAC Indemnity may declare
dividends, provided that, after giving effect to the distribution, it would not
violate certain statutory equity, solvency and asset tests. However, on April
30, 1996, AMBAC Indemnity, in conjunction with the sale of the Company's
remaining holdings in HCIA common stock, delivered to the Company (in the form
of an extraordinary dividend) its 2,378,672 shares of HCIA common stock, at fair
value. The Office of the Commissioner of Insurance of the State of Wisconsin
(the "Wisconsin Commissioner") approved such dividend. As a result, any
dividends paid by AMBAC Indemnity to the Company through June 30, 1997, require
pre-approval from the Wisconsin Commissioner. The Wisconsin Commissioner has
stated to AMBAC Indemnity management that it does not foresee any reason pre-
approval of anticipated dividends to be paid through June 30, 1997 would not be
given. Anticipated dividends on the common stock paid thereafter and through
year-end 1997, will not require such pre-approval. During the three months ended
March 31, 1997, AMBAC Indemnity paid dividends of $11.0 million on its common
stock to the Company.
The Company's principal uses of liquidity are for the payment of its
operating expenses, interest on its debt, dividends on its shares of Common
Stock and capital investments in its subsidiaries. Based on the amount of
dividends that the Company expects to receive from AMBAC Indemnity during 1997
with the anticipated prior approval of regulatory authorities along with the
proceeds from the Company's sale of HCIA common stock, the Company believes it
will have sufficient liquidity to satisfy its liquidity needs over the next
twelve months, including the payment of dividends on the Common Stock in
accordance with its current dividend policy. Beyond the next twelve months,
AMBAC Indemnity's ability to declare and pay dividends to the Company may be
influenced by a variety of factors, including adverse market changes, insurance
regulatory changes and changes in general economic conditions. Consequently,
although the Company believes that it will continue to have sufficient liquidity
to
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
meet its debt service and other obligations over the long term, no assurance can
be given that AMBAC Indemnity will be permitted to dividend amounts sufficient
to pay all of the Company's operating expenses, debt service obligations and
dividends on its Common Stock.
AMBAC Indemnity Liquidity. The principal uses of AMBAC Indemnity's
--------------------------
liquidity are the payment of operating expenses, reinsurance premiums, income
taxes and dividends to the Company. The Company believes that AMBAC Indemnity's
operating liquidity needs can be funded exclusively from its operating cash
flow. The principal sources of AMBAC Indemnity's liquidity are gross premiums
written, scheduled investment maturities and net investment income. The majority
of premiums for AMBAC Indemnity's financial guarantee insurance policies are
payable in full at the outset of the term of the policy, even though premiums
are earned over the life of such policies for financial accounting purposes.
Financial Services Liquidity. The principal uses of liquidity by the
-----------------------------
Company's Financial Services subsidiaries are the payment of investment contract
obligations pursuant to defined terms, net obligations under interest rate
swaps, operating expenses and income taxes. The Company believes that its
financial services operating liquidity needs can be funded primarily from its
operating cash flow and the maturity of its invested assets. The principal
sources of Financial Services liquidity are proceeds from issuance of investment
contracts, net investment income, maturities of securities from its investment
portfolio which are invested with the objective of matching the duration of its
obligations under the investment contracts, net receipts from interest rate
swaps and related hedges and fees for investment management services. The
Company's investment objectives with respect to investment contracts are to
achieve the highest after-tax total return, subject to a minimum average quality
rating of Aa/AA on invested assets, and to maintain cash flow matching of
invested assets to funded liabilities to minimize interest rate and liquidity
exposure. The Company maintains a portion of its financial services assets in
short-term investments and repurchase agreements in order to meet unexpected
liquidity needs.
Credit Facilities. The Company and AMBAC Indemnity have a revolving
------------------
credit facility with two major international banks, as co-agents, for $100.0
million, which expires in July 1998. This facility is available for general
corporate purposes, including the payment of claims. As of March 31, 1997 and
1996, no amounts were outstanding under this credit facility.
AMBAC Indemnity has an agreement with a group of Aaa/AAA-rated
international banks for a $350.0 million credit facility, expiring in December
2003. This facility is a seven-year stand-by irrevocable limited recourse
line-of-credit, which will provide liquidity to AMBAC Indemnity in the event
that claims from municipal obligations exceed specified levels. Repayment of any
amounts drawn under the line will be limited primarily to the amount of any
recoveries of losses related to policy obligations. As of March 31, 1997 and
1996, no amounts were outstanding under this line.
Stock Repurchase Program. During the three months ended March 31, 1997,
-------------------------
the Company acquired 435,000 shares in the open market under its existing stock
repurchase program. Since inception of the Stock Repurchase Program, the Company
has acquired approximately 1,496,000 shares for an aggregate amount of $79.0
million.
Balance Sheet. As of March 31, 1997, the fair value of the Company's
--------------
consolidated investment portfolio was $5.20 billion, essentially flat from
December 31, 1996. This was
13
<PAGE>
primarily due to the growth of the Company's financial guarantee insurance and
financial services operations, offset by a decline in market value of the
Company's bond portfolio resulting from the increase in interest rates during
the three months ended March 31, 1997.
Cash Flows. Net cash provided by operating activities was $54.8 million
----------
and $39.5 million during the three months ended March 31, 1997 and 1996,
respectively. These cash flows were primarily provided by the financial
guarantee insurance operations.
Investing activities provided $12.1 million for the three months ended
March 31, 1997, principally proceeds from sales and maturities of bonds,
partially offset by purchases of bonds. For the three months ended March 31,
1996, $357.2 million was used in investing activities, principally purchases of
bonds, partially offset by proceeds from sales and maturities of bonds.
For the three months ended March 31, 1997, $66.1 million was used in
financing activities, which includes $44.6 million in municipal investment
contract draws (net of amounts received). Financing activities for the three
months ended March 31, 1996 provided $309.4 million, of which $318.2 million was
from municipal investment contracts issued (net of draws paid).
Off-Balance Sheet Risk. In the normal course of business, the Company
----------------------
uses interest rate contracts for hedging purposes as part of its overall
interest rate risk management. In addition, the Company's financial services
subsidiaries include a dealer of interest rate swaps primarily to states,
municipalities and municipal authorities. This subsidiary manages its interest
rate swap business with the goal of being market neutral to changes in taxable
interest rates, while retaining "basis risk," the relationship between changes
in floating tax-exempt and floating taxable interest rates. In the ordinary
course of business, the Company manages a variety of other risks - principally
credit, market, liquidity, operational, and legal. These risks are identified,
measured, and monitored through a variety of control mechanisms, which are in
place at different levels throughout the organization.
Material Commitments. The Company has made no commitments for material
--------------------
capital expenditures within the next twelve months. However, management
continually evaluates opportunities to expand the Company's businesses through
internal development of new products as well as acquisitions.
14
<PAGE>
PART II - OTHER INFORMATION
Items 1, 2, 3, and 4 are omitted either because they are inapplicable or
because the answer to such question is negative.
ITEM 5 - OTHER INFORMATION
During the first quarter of 1997, AMBAC Indemnity established a new
subsidiary in the United Kingdom, AMBAC Insurance UK Limited ("AMBAC UK"), which
is authorized to conduct certain classes of general insurance business in the
United Kingdom. As of February 4, 1997, AMBAC UK is the primary vehicle for the
issuance of financial guarantee insurance policies in the United Kingdom and
Europe.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(A) THE FOLLOWING ARE ANNEXED AS EXHIBITS:
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
11.00 Statement re computation of per share earnings.
27.00 Financial Data Schedule.
99.02 AMBAC Indemnity Corporation and Subsidiaries Consolidated
Unaudited Financial Statements as of March 31, 1997 and December
31, 1996 and for the periods ended March 31, 1997 and 1996.
(B) REPORTS ON FORM 8-K
On February 14, 1997, the Company filed a Current Report on Form 8-K
with its January 30, 1997 press release containing unaudited financial
information and accompanying discussion for the three months ended December 31,
1996 and the year ended December 31, 1996. On March 12, 1997, the Company filed
a Current Report on Form 8-K containing the consolidated financial statements
(with independent auditors' report thereon) of AMBAC Indemnity Corporation and
Subsidiaries as of December 31, 1996 and 1995. The filing of these Current
Reports on Form 8-K were previously noted in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1996, which was filed on March 31,
1997.
15
<PAGE>
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 Inc.
(Registrant)
Dated: May 15, 1997 By: /s/ Frank J. Bivona
-------------------
Frank J. Bivona
Senior Vice President, Chief
Financial Officer and
Treasurer (Principal Financial
and Accounting Officer and
Duly Authorized Officer)
16
<PAGE>
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
NUMBER -----------
- -------
11.00 Statement re computation of per share earnings.
27.00 Financial Data Schedule.
99.02 AMBAC Indemnity Corporation and Subsidiaries Consolidated
Unaudited Financial Statements as of March 31, 1997 and December
31, 1996 and for the periods ended March 31, 1997 and 1996.
17
<PAGE>
(EXHIBIT NUMBER 11.00)
AMBAC INC. AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Three months ended
March 31, 1997
--------------
Net income......................................... $ 49,738
-------------
Fully diluted shares:
Average number of common shares outstanding 34,944
Assumed exercise of dilutive stock options(1) 854
=============
35,798
=============
Earnings per share assuming full dilution(2) ...... $ 1.39
=============
(1) As of March 31, 1997, approximately 2,303,000 stock options and
restricted stock units had been granted and were outstanding. Based upon
various exercise prices, the total consideration for the options and
restricted stock units will be approximately $97.2 million. The dilution
would be the equivalent of approximately 854,000 shares, using the
treasury stock method, based upon a market value of $67.086 per share.
(2) In accordance with Accounting Principles Board Opinion No. 15, any
reduction of less than 3% need not be considered as dilution.
Accordingly, the consolidated statements of operations on page 4 of this
report reflect net income per common share of $1.42 for the three months
ended March 31, 1997.
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 5,096,874
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 5,202,390
<CASH> 8,475
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 97,387
<TOTAL-ASSETS> 5,885,147
<POLICY-LOSSES> 60,510
<UNEARNED-PREMIUMS> 999,382
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 223,814
0
0
<COMMON> 353
<OTHER-SE> 1,584,730
<TOTAL-LIABILITY-AND-EQUITY> 5,885,147
37,033
<INVESTMENT-INCOME> 38,447
<INVESTMENT-GAINS> 1,600
<OTHER-INCOME> 1,661
<BENEFITS> 728
<UNDERWRITING-AMORTIZATION> 9,092
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 62,396
<INCOME-TAX> 12,658
<INCOME-CONTINUING> 49,738
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 49,738
<EPS-PRIMARY> 1.42
<EPS-DILUTED> 1.42
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<PAGE>
(Exhibit 99.02)
AMBAC Indemnity Corporation and Subsidiaries
(a wholly owned subsidiary of AMBAC Inc.)
Consolidated Unaudited Financial Statements
as of March 31, 1997 and December 31, 1996
and for the periods ended March 31, 1997 and 1996
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Consolidated Balance Sheets
(Dollars in Thousands Except Share Data)
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
-------------- -----------------
(unaudited)
<S> <C> <C>
Assets
- ------
Investments:
Bonds held in available for sale account, at fair value
(amortized cost of $2,392,951 in 1997 and $2,323,259 in 1996) $2,440,103 $2,424,524
Short-term investments, at cost (approximates fair value) 78,449 91,320
---------- ----------
Total investments 2,518,552 2,515,844
Cash 721 5,025
Securities purchased under agreements to resell 10,183 4,369
Receivable for securities 23,611 18,462
Investment income due and accrued 41,436 42,263
Deferred acquisition costs 97,387 94,212
Prepaid reinsurance 167,617 168,786
Other assets 51,013 59,544
---------- ----------
Total assets $2,910,520 $2,908,505
========== ==========
Liabilities and Stockholder's Equity
- ------------------------------------
Liabilities:
Unearned premiums $1,003,339 $ 995,220
Losses and loss adjustment expenses 60,510 60,220
Ceded reinsurance balances payable 4,164 7,438
Deferred income taxes 68,841 84,842
Current income taxes 19,076 8,974
Accounts payable and other liabilities 40,188 50,244
Payable for securities 49,318 46,246
---------- ----------
Total liabilities 1,245,436 1,253,184
---------- ----------
Stockholder's equity:
Preferred stock, par value $1,000.00 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 March 31, 1997 and December 31, 1996 82,000 82,000
Additional paid-in capital 518,470 515,684
Unrealized gains on investments, net of tax 30,649 65,822
Cumulative translation adjustment 81 --
Retained earnings 1,033,884 991,815
---------- ----------
Total stockholder's equity 1,665,084 1,655,321
---------- ----------
Total liabilities and stockholder's equity $2,910,520 $2,908,505
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
For The Periods Ended March 31, 1997 and 1996
(Dollars in Thousands)
Three Months Ended
March 31,
------------------------
1997 1996
--------- ---------
Revenues:
Gross premiums written $ 52,170 $ 51,292
Ceded premiums written (5,432) (9,612)
-------- --------
Net premiums written 46,738 41,680
Increase in unearned premiums (9,288) (13,070)
-------- --------
Net premiums earned 37,450 28,610
Net investment income 38,531 34,905
Net realized gains 812 2,356
Other income 2,985 6,052
-------- --------
Total revenues 79,778 71,923
-------- --------
Expenses:
Losses and loss adjustment expenses 728 810
Underwriting and operating expenses 11,054 10,083
Interest expense 565 514
-------- --------
Total expenses 12,347 11,407
-------- --------
Income before income taxes 67,431 60,516
-------- --------
Income tax expense (benefit):
Current taxes 11,419 13,648
Deferred taxes 2,939 (46)
-------- --------
Total income taxes 14,358 13,602
-------- --------
Net income $ 53,073 $ 46,914
======== ========
See accompanying Notes to Consolidated Unaudited Financial Statements
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
For The Periods Ended March 31, 1997 and 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 53,073 $ 46,914
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 438 456
Amortization of bond premium and discount (312) (386)
Current income taxes 10,102 6,959
Deferred income taxes 2,939 (46)
Deferred acquisition costs (3,175) (2,785)
Unearned premiums 9,288 13,070
Losses and loss adjustment expenses 290 (7,890)
Ceded reinsurance balances payable (3,274) (8,722)
Gain on sales of investments (812) (2,356)
Accounts payable and other liabilities (10,056) (1,697)
Other, net 11,603 (8,038)
--------- ---------
Net cash provided by operating activities 70,104 35,479
--------- ---------
Cash flows from investing activities:
Proceeds from sales of bonds at amortized cost 290,528 378,129
Proceeds from maturities of bonds at amortized cost 9,879 24,374
Purchases of bonds at amortized cost (370,716) (406,425)
Change in short-term investments 12,871 (23,006)
Securities purchased under agreements to resell (5,814) (3,703)
Other, net (156) (1,218)
--------- ---------
Net cash used in investing activities (63,408) (31,849)
--------- ---------
Cash flows from financing activities:
Dividends paid (11,000) (10,000)
--------- ---------
Net cash used in financing activities (11,000) (10,000)
--------- ---------
Net cash flow (4,304) (6,370)
Cash at January 1 5,025 6,912
--------- ---------
Cash at March 31 $ 721 $ 542
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes $- $ 6,300
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
AMBAC INDEMNITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
AMBAC Indemnity Corporation ("AMBAC Indemnity") is a leading insurer of
municipal and structured finance obligations and has been assigned triple-A
claims-paying ability ratings, the highest ratings available from Moody's
Investors Service, Inc., Standard & Poor's Ratings Group, Fitch Investors
Service, L.P., and Nippon Investors Services, Inc. Financial guarantee insurance
underwritten by AMBAC Indemnity guarantees payment when due of the principal of
and interest on the obligation insured. In the case of a default on the insured
obligation, payments under the insurance policy may not be accelerated by the
policyholder without AMBAC Indemnity's consent. As of March 31, 1997, AMBAC
Indemnity's net insurance in force (principal and interest) was $231.5 billion.
AMBAC Indemnity is a wholly-owned subsidiary of AMBAC Inc., which is a holding
company that provides through its affiliates financial guarantee insurance and
financial services to clients in both the public and private sectors.
American Municipal Bond Holding Company ("AMBH"), a wholly-owned
subsidiariy of AMBAC Indemnity, is a holding company for certain real estate
interests.
During the first quarter of 1997, AMBAC Indemnity established a new
subsidiary in the United Kingdom, AMBAC Insurance UK Limited ("AMBAC UK"), which
was authorized to conduct certain classes of general insurance business in the
United Kingdom. As of February 4,1997, AMBAC UK is the primary vehicle for the
issuance of financial guarantee insurance policies in the United Kingdom and
Europe.
AMBAC Indemnity, as the sole limited partner, owns 90% of the total
partnership interests of AMBAC Financial Services, Limited Partnership ("AFS"),
a limited partnership which provides interest rate swaps primarily to states,
municipalities and municipal authorities. The sole general partner of AFS, AMBAC
Financial Services Holdings, Inc., a wholly-owned subsidiary of AMBAC Inc., owns
a general partnership interest representing 10% of the total partnership
interest in AFS.
AMBAC Indemnity's consolidated unaudited interim financial statements
have been prepared on the basis of generally accepted accounting principles
("GAAP") and, in the opinion of management, reflect all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
Company'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, 1997 may not be indicative of the results that may be expected for the full
year ending December 31, 1997. 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 Indemnity Corporation and its
subsidiaries as of December 31, 1996 and 1995, and for each of the years in the
three-year period ended December 31, 1996.
