<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, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-10777
Ambac Financial Group, 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, 1999, 69,823,747 shares of Common Stock, par value $0.01
per share, (net of 856,637 treasury shares) of the Registrant were outstanding.
<PAGE>
Ambac Financial Group, Inc. and Subsidiaries
INDEX
-----
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - March 31, 1999
and December 31, 1998................................................................. 3
Consolidated Statements of Operations - three months ended
March 31, 1999 and 1998............................................................... 4
Consolidated Statements of Stockholders' Equity - three months
ended March 31, 1999 and 1998......................................................... 5
Consolidated Statements of Cash Flows - three months
ended March 31, 1999 and 1998......................................................... 6
Notes to Consolidated Financial Statements............................................ 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................... 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk........................................................................... 20
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................................................... 21
SIGNATURES....................................................................................... 22
INDEX TO EXHIBITS................................................................................ 23
</TABLE>
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements of Ambac Financial Group, Inc. and Subsidiaries
Ambac Financial Group, Inc. and Subsidiaries
Consolidated Balance Sheets
March 31, 1999 and December 31, 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -------------------
(unaudited)
<S> <C> <C>
Assets
- ------
Investments:
Fixed income securities, at fair value
(amortized cost of $8,628,483 in 1999
and $8,307,046 in 1998) $8,805,489 $8,622,282
Short-term investments, at cost (approximates fair value) 142,052 119,528
Other 6,596 6,567
------------------------ --------------------
Total investments 8,954,137 8,748,377
Cash 8,860 8,239
Securities purchased under agreements to resell 181,357 252,295
Receivable for investment agreements 79,920 73,142
Receivable for securities sold 73,072 16,233
Investment income due and accrued 103,607 125,929
Reinsurance recoverable 3,668 3,638
Prepaid reinsurance 196,388 199,920
Deferred acquisition costs 125,327 120,619
Loans 693,144 673,930
Receivable from brokers and dealers 750,000 750,000
Other assets 172,415 239,989
------------------------ --------------------
Total assets $11,341,895 $11,212,311
======================== ====================
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities:
Unearned premiums $1,315,320 $1,294,214
Losses and loss adjustment expenses 118,190 115,794
Ceded reinsurance balances payable 4,004 6,576
Obligations under investment and payment agreements 4,825,056 4,774,953
Obligations under investment repurchase agreements 1,284,067 1,181,810
Deferred income taxes 114,141 145,782
Current income taxes 26,712 6,949
Debentures 423,946 423,929
Accrued interest payable 70,546 89,615
Accounts payable and other liabilities 169,103 262,423
Payable to brokers and dealers 750,000 750,000
Payable for securities purchased 144,672 64,176
------------------------ --------------------
Total liabilities 9,245,757 9,116,221
------------------------ --------------------
Stockholders' equity:
Preferred stock - -
Common stock 707 707
Additional paid-in capital 519,633 519,305
Accumulated other comprehensive income 100,395 159,313
Retained earnings 1,515,336 1,449,832
Common stock held in treasury at cost (39,933) (33,067)
------------------------ --------------------
Total stockholders' equity 2,096,138 2,096,090
------------------------ --------------------
Total liabilities and stockholders' equity $11,341,895 $11,212,311
======================== ====================
</TABLE>
See accompanying Notes to Consolidated Financial Statements
3
<PAGE>
Ambac Financial Group, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
For the Periods Ended March 31, 1999 and 1998
(Dollars in Thousands Except Share Data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------------
1999 1998
-------------------------------------
<S> <C> <C>
Revenues:
Financial Guarantee Insurance:
Gross premiums written $90,154 $77,487
Ceded premiums written (5,086) (26,087)
---------------- ----------------
Net premiums written 85,068 51,400
(Increase) decrease in unearned premiums (24,771) 1,784
---------------- ----------------
Net premiums earned 60,297 53,184
Net investment income 49,484 45,040
Net realized gains 89 1,175
Other income 1,507 1,965
Financial Management Services:
Revenue 12,712 12,754
Net realized losses (313) (898)
Other:
Revenue 3,820 1,356
Net realized gains 775 607
---------------- ----------------
Total revenues 128,371 115,183
---------------- ----------------
Expenses:
Financial Guarantee Insurance:
Losses and loss adjustment expenses 2,500 1,577
Underwriting and operating expenses 11,917 12,018
Financial Management Services 6,977 7,443
Interest 9,083 5,612
Other 1,943 2,336
---------------- ----------------
Total expenses 32,420 28,986
---------------- ---------------
Income before income taxes 95,951 86,197
Provision for income taxes 22,757 20,539
---------------- ----------------
Net income $73,194 $65,658
================ ================
Net income per share $1.05 $0.94
================ ================
Net income per diluted share $1.03 $0.92
================ ================
Weighted average number of
shares outstanding 69,919,175 70,039,795
================ ================
Weighted average number of diluted
shares outstanding 71,335,606 71,632,026
================ ================
</TABLE>
See accompanying Notes to Consolidated Financial Statements
4
<PAGE>
Ambac Financial Group, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(Unaudited)
For The Three Months Ended March 31, 1999 and 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
1999 1998
-------------------------------- --------------------------------
<S> <C> <C> <C> <C>
Retained Earnings:
Balance at January 1 $1,449,832 $1,262,740
Net income 73,194 $73,194 65,658 $65,658
---------------- ----------------
Dividends declared - common stock (6,997) (6,300)
Exercise of stock options (693) (15,918)
---------------- ----------------
Balance at March 31 $1,515,336 $1,306,180
---------------- ----------------
Accumulated Other Comprehensive Income:
Balance at January 1 $159,313 $135,223
Unrealized losses on securities, (($93,341),
and ($10,300), pre-tax in 1999
and 1998, respectively)(1) (58,311) (5,996)
Foreign currency gain (loss) (607) 344
---------------- ----------------
Other comprehensive income (58,918) (58,918) (5,652) (5,652)
-------------------------------- --------------------------------
Comprehensive income $14,276 $60,006
================ ================
Balance at March 31 $100,395 $129,571
---------------- ----------------
Preferred Stock:
Balance at January 1 and March 31 $- $-
---------------- ----------------
Common Stock:
Balance at January 1 and March 31 $707 $707
---------------- ----------------
Additional Paid-in Capital:
Balance at January 1 $519,305 $500,107
Exercise of stock options 328 3,690
---------------- ----------------
Balance at March 31 $519,633 $503,797
---------------- ----------------
Common Stock Held in Treasury at Cost:
Balance at January 1 ($33,067) ($26,295)
Cost of shares acquired (9,126) (9,274)
Shares issued under equity plans 2,260 9,518
---------------- ----------------
Balance at March 31 ($39,933) ($26,051)
---------------- ----------------
Total Stockholders' Equity at March 31 $2,096,138 $1,914,204
================ ================
(1) Disclosure of reclassification amount:
Unrealized holding losses arising during period ($57,953) ($4,814)
Less: reclassification adjustment for net gains
included in net income 358 1,182
---------------- ----------------
Net unrealized losses on securities ($58,311) ($5,996)
================ ================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
Ambac Financial Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
For The Periods Ended March 31, 1999 and 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $73,194 $65,658
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 671 377
Amortization of bond premium and discount (1,695) (1,005)
Current income taxes 19,763 5,720
Deferred income taxes 3,389 2,443
Deferred acquisition costs (4,708) (1,041)
Unearned premiums, net 24,638 (1,727)
Losses and loss adjustment expenses 2,366 2,617
Ceded reinsurance balances payable (2,572) 5,094
Investment income due and accrued 22,322 (1,935)
Accrued interest payable (19,069) 5,395
Gain on sales of investments (551) (884)
Interest rate swaps, at market (20,603) 366
Other, net (6,962) (7,489)
---------------- ----------------
Net cash provided by operating activities 90,183 73,589
---------------- ----------------
Cash flows from investing activities:
Proceeds from sales of bonds 768,940 187,234
Proceeds from matured bonds 343,545 351,223
Purchases of bonds (1,371,224) (1,070,748)
Change in short-term investments (22,524) (8,985)
Securities purchased under agreements to resell 70,938 (142,266)
Loans (19,214) (531)
Other, net 8,257 (1,837)
---------------- ----------------
Net cash used in investing activities (221,282) (685,910)
---------------- ----------------
Cash flows from financing activities:
Dividends paid (6,997) (6,300)
Proceeds from issuance of investment agreements 518,595 1,043,675
Payments for investment agreement draws (392,226) (424,515)
Payment agreements 19,214 531
Proceeds from sale of treasury stock 2,260 9,518
Purchases of treasury stock (9,126) (9,274)
---------------- ----------------
Net cash provided by financing activities 131,720 613,635
---------------- ----------------
Net cash flow 621 1,314
Cash at January 1 8,239 9,256
---------------- ----------------
Cash at March 31 $8,860 $10,570
================ ================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes $0 $8,700
================ ================
Interest expense on debt $11,196 $7,761
================ ================
Interest expense on investment agreements $72,880 $52,029
================ ================
</TABLE>
See accompanying Notes to Consolidated Financial Statements
6
<PAGE>
Ambac Financial Group, Inc. and Subsidiaries
Notes to Consolidated Unaudited Financial Statements
(1) Basis of Presentation
Ambac Financial Group, Inc., (the "Company") headquartered in New York
City, is a holding company whose subsidiaries provide financial guarantee
insurance and financial services to clients in both the public and private
sectors around the world. The Company's principal operating subsidiary, Ambac
Assurance Corporation ("Ambac Assurance"), a leading insurer of municipal and
structured finance obligations, has earned triple-A ratings, the highest ratings
available from Moody's Investors Service, Inc., Standard & Poor's Ratings Group,
Fitch IBCA, Inc., and Japan Rating and Investment Information, Inc. Through its
financial management services subsidiaries, the Company provides investment
agreements, interest rate swaps and investment advisory and cash management
services, primarily to states, municipalities and their authorities.
The Company's consolidated unaudited interim financial statements have
been prepared on the basis of U.S. 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, 1999 may not be indicative of the results that may be expected for the full
year ending December 31, 1999. 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 Financial Group, Inc.
and its subsidiaries contained in the Company's Annual Report on Form 10-K for
the year ended December 31, 1998, which was filed with the Securities and
Exchange Commission on March 30, 1999.
The consolidated financial statements include the accounts of the Company
and each of its subsidiaries. All significant intercompany balances have been
eliminated.
Certain reclassifications have been made to prior periods' amounts to
conform to the current period's presentation.
(2) Segment Information
The Company has two reportable segments, as follows: (1) Financial
Guarantee Insurance, which provides insurance of municipal and structured
finance obligations; and (2) Financial Management Services, which provides
investment agreements, interest rate swaps, and investment advisory and cash
management services. During the fourth quarter of 1998, the Company discontinued
its operations relating to electronic commerce applications for the municipal
marketplace.
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different marketing strategies, personnel skill sets and
technology.
7
<PAGE>
Notes to Consolidated Unaudited Financial Statements (Continued)
Pursuant to insurance and indemnity agreements, Ambac Assurance
guarantees the swap and investment agreement obligations of those financial
management services subsidiaries. Intersegment revenues include the premiums
earned under those agreements. Such premiums are accounted for as if they were
premiums to third parties, that is, at current market prices.
Information provided below for "Corporate and Other" relates to Ambac
Financial Group, Inc. corporate activities. Revenue from unaffiliated customers
of $4,595 and $1,963 consists primarily of interest income and realized gains or
losses from investment securities for the periods ended March 31, 1999 and 1998,
respectively.
The following table is a summary of the financial information by
reportable segment as of and for the periods ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
Financial Financial
($ in Thousands) Guarantee Management Corporate Intersegment
Insurance Services and Other Eliminations Consolidated
------------- -------------- ------------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
1999:
Revenues:
Unaffiliated customers....... $ 111,377 $ 12,399 $ 4,595 $ - $ 128,371
Intersegment................. 772 (900) 13,200 (13,072) -
------------- -------------------------------- -------------- -----------------
Total revenues................... $ 112,149 $ 11,499 $ 17,795 ($13,072) $ 128,371
------------- -------------------------------- -------------- -----------------
Income before income taxes:
Unaffiliated customers....... $ 96,960 $ 5,422 ($6,431) $ - $ 95,951
Intersegment................. 772 (910) 13,200 (13,062) -
------------- -------------- ------------- -------------- -----------------
Total income before income taxes. $ 97,732 $ 4,512 $ 6,769 ($13,062) $ 95,951
------------- -------------- ------------- -------------- -----------------
Identifiable assets $3,954,945 $7,147,298 $239,652 $ - $11,341,895
------------- -------------- ------------- -------------- -----------------
1998:
Revenues:
Unaffiliated customers....... $ 101,364 $ 11,856 $ 1,963 $ - $ 115,183
Intersegment................. 719 586 12,093 (13,398) -
------------- -------------- ------------- -------------- -----------------
Total revenues................... $ 102,083 $ 12,442 $ 14,056 ($13,398) $ 115,183
------------- -------------- ------------- -------------- -----------------
Income before income taxes:
Unaffiliated customers....... $ 87,769 $ 4,413 ($5,985) $ - $ 86,197
Intersegment................. 719 (953) 12,093 (11,859) -
------------- -------------- ------------- -------------- -----------------
Total income before income taxes. $ 88,488 $ 3,460 $ 6,108 ($11,859) $ 86,197
------------- -------------- ------------- -------------- -----------------
Identifiable assets $3,482,821 $5,535,468 $ 94,926 $ - $ 9,113,215
------------- -------------- ------------- -------------- -----------------
</TABLE>
8
<PAGE>
Notes to Consolidated Unaudited Financial Statements (Continued)
The following table summarizes gross premiums written and net premiums
earned included in the financial guarantee segment by location of risk.
<TABLE>
<CAPTION>
Gross Premiums Net Premiums
Written Earned
----------------------- ----------------------
<S> <C> <C>
1999:
United States.......................................... $78,919 $55,091
United Kingdom......................................... 5,667 661
Australia.............................................. 381 421
France................................................. 227 248
Japan.................................................. 995 977
Italy.................................................. - 232
Internationally diversified (1)........................ 1,160 914
Other international.................................... 2,805 1,753
----------------------- ----------------------
Total $90,154 $60,297
----------------------- ----------------------
1998:
United States.......................................... $61,834 $50,301
United Kingdom......................................... 9,356 364
Australia.............................................. 4,189 68
France................................................. 236 474
Japan.................................................. 989 495
Italy.................................................. - 249
Internationally diversified (1)........................ 791 653
Other international.................................... 92 580
----------------------- ----------------------
Total $77,487 $53,184
----------------------- ----------------------
</TABLE>
(1) Internationally diversified represents insured policies with multiple
locations of risk.
9
<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 Financial Group, Inc. and its subsidiaries (sometimes collectively
referred to as the "Company") for the three month periods ended March 31, 1999
and 1998, and its financial condition as of March 31, 1999 and December 31,
1998. These results include the Company's two reportable segments: Financial
Guarantee Insurance and Financial Management Services.
In this Form 10-Q, we make statements about our future results that are
considered "forward-looking statements" under the Private Securities Litigation
Reform Act of 1995. These statements are based on our 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; and (6) 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.
Results of Operations
Three Months Ended March 31, 1999 Versus
Three Months Ended March 31, 1998
Consolidated Net Income
The Company's net income for the three months ended March 31, 1999 was
$73.2 million or $1.03 per diluted share. This represents an 11% increase from
the three months ended March 31, 1998 net income of $65.7 million, and a 12%
increase in net income per diluted share from $0.92 for the prior period. This
increase in net income was largely attributable to higher Financial Guarantee
Insurance revenues.
Financial Guarantee Insurance
Gross Par Written. Ambac Assurance insured $19.2 billion in par value
-----------------
bonds during the three months ended March 31, 1999, an increase of 32% from
$14.6 billion in the three months ended March 31, 1998. Par value written for
the first quarter of 1999 was comprised of $8.8 billion from domestic municipal
bond obligations, $9.6 billion from domestic structured finance obligations and
$0.8 billion from international obligations, compared to $9.1 billion, $4.5
billion and $1.0 billion, respectively, in the first quarter of 1998. The first
quarter of 1999 insured domestic municipal obligations were affected by an 18%
decline in total issuance partially offset by an increase in Ambac market share.
The first quarter 1999 increase in insured domestic structured finance
obligations was principally in the mortgage-backed and asset-backed sectors.
10
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Management believes, based on growth experienced in the last few years,
that in the foreseeable future, domestic structured finance and international
markets may grow more rapidly than the domestic municipal market and may see
large quarterly variances, primarily due to the developmental nature of these
markets.
Ambac serves clients in international markets through its wholly-owned
subsidiary Ambac Assurance UK Limited and through its participation in a joint
venture with MBIA Insurance Corporation, MBIA.AMBAC International.
Gross Premiums Written. Gross premiums written for the three months ended
----------------------
March 31, 1999 were $90.2 million, an increase of 16% from $77.5 million in the
three months ended March 31, 1998. Pricing during the first quarter of 1999 has
improved over the first quarter of 1998 in many municipal sectors. The following
table sets forth the amounts of gross premiums written and the related gross par
written by type:
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------------------------------------------
(Dollars in Millions) 1999 1998
------------------------------- --------------------------------
Gross Gross Gross Gross
Premiums Par Premiums Par
Written Written Written Written
------------- -------------- --------------- -------------
<S> <C> <C> <C> <C>
Domestic:
Municipal finance:
Up-front:
New issue ............................................... $ 60.4 $ 7,684 $ 49.5 $ 8,310
Secondary market ........................................ 1.3 141 2.9 252
------- ------- ------- -------
Sub-total up-front ..................................... 61.7 7,825 52.4 8,562
Installment: ............................................. 3.7 970 2.7 488
------- ------- ------- -------
Total municipal finance .............................. 65.4 8,795 55.1 9,050
------- ------- ------- -------
Structured finance:
Up-front ................................................ 0.2 39 0.1 108
Installment ............................................. 13.4 9,539 6.7 4,363
------- ------- ------- -------
Total structured finance ........................... 13.6 9,578 6.8 4,471
------- ------- ------- -------
Total domestic ................................... 79.0 18,373 61.9 13,521
------- ------- ------- -------
International:
Up-front .......................................... 7.1 115 13.5 312
Installment ....................................... 4.1 680 2.1 741
------- ------- ------- -------
Total international .............................. 11.2 795 15.6 1,053
------- ------- ------- -------
Total ........................................... $ 90.2 $19,168 $ 77.5 $14,574
======= ======= ======= =======
Total up-front ............................................. $ 69.0 $ 7,979 $ 66.0 $ 8,982
Total installment .......................................... 21.2 11,189 11.5 5,592
------- ------- ------- -------
Total ............................................. $ 90.2 $19,168 $ 77.5 $14,574
======= ======= ======= =======
</TABLE>
Ceded Premiums Written. Ceded premiums written for the first quarter of
----------------------
1999 were $5.1 million, compared to $26.1 million in the first quarter of 1998.
The decrease in ceded premiums written is primarily due to two factors: (i) the
first quarter of 1998 ceded premiums written included the one-time cede of $11.3
million of the portfolio purchased through the acquisition of Connie Lee
Insurance Company ("Connie Lee") and; (ii) a decrease of ceded premiums written
on international policies due to decreased volume. Ceded premiums written,
excluding the one-time cede of the Connie Lee portfolio in 1998, were 6% and 19%
of gross premiums written for the three months ended March 31, 1999 and 1998,
respectively.
11
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Net Premiums Written. Net premiums written for the three months ended
--------------------
March 31, 1999 were $85.1 million, an increase of 66% from the $51.4 million in
the three months ended March 31, 1998. This increase reflects higher gross
premiums written, as well as the substantial decrease in premiums ceded to
reinsurers in the three months ended March 31, 1999 compared with the
corresponding prior period.
Net Premiums Earned. Net premiums earned during the three months ended
-------------------
March 31, 1999 were $60.3 million, an increase of 13% from $53.2 million in the
three months ended March 31, 1998. The increase was primarily the result of
increased premiums earned from the underlying book of business, referred to as
normal net premiums earned. Normal net premiums earned increased 35% from $36.9
million in the first quarter of 1998 to $49.8 million in the first quarter of
1999.
Net premiums earned include accelerated premiums that result from
refundings, calls, and other accelerations of previously insured obligations
(collectively referred to as "refundings"). When an issue insured by Ambac
Assurance has been refunded or called, the remaining unearned premium (net of
refunding credits, if any) is generally earned at that time. Refunding levels
vary depending upon a number of conditions, primarily the relationship between
current interest rates and interest rates on outstanding debt. Net premiums
earned for the three months ended March 31, 1999 included $10.5 million (which
had a net income per diluted share effect of $0.08) from refundings. Net
premiums earned in the three months ended March 31, 1998 included $16.3 million
(which had a net income per diluted share effect of $0.13) from refundings.
Net Investment Income. Net investment income for the three months ended
---------------------
March 31, 1999 was $49.5 million, an increase of 10% from $45.0 million in the
three months ended March 31, 1998. The increase was primarily attributable to
the growth of the investment portfolio from ongoing operations. Ambac
Assurance's investments in tax-exempt securities amounted to 75% of the total
market value of its portfolio as of March 31, 1999, versus 73% at March 31,
1998. The average pre-tax yield-to-maturity on the investment portfolio was
6.08% and 6.41% as of March 31, 1999 and 1998, respectively.
Net Realized Gains. Net realized gains were $0.1 million for the three
------------------
months ended March 31, 1999, compared to $1.2 million in net realized gains for
the comparative prior period in 1998.
Other Income. Other income was $1.5 million for the three months ended
------------
March 31, 1999, compared to $2.0 million for the three months ended March 31,
1998. This decrease was primarily due to a decrease in commitment and
structuring fees received.
Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses
-----------------------------------
for the three months ended March 31, 1999 were $2.5 million, versus $1.6 million
in the three months ended March 31, 1998. The increase is due to increased
business written. Losses and loss adjustment expenses are generally based upon
estimates of the ultimate aggregate losses inherent in the insured portfolio.
Salvage recognized for the three-month periods ended March 31, 1999 and 1998,
amounted to $0 and $1.7 million, respectively.
12
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Underwriting and Operating Expenses. Underwriting and operating expenses
-----------------------------------
for the first quarter of 1999 were $11.9 million, compared to $12.0 million in
the first quarter of 1998. 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, 1999, gross
underwriting and operating expenses were $17.7 million, an increase of 14% from
$15.5 million in the three months ended March 31, 1998. This increase reflects
the overall increased business activity during the period. Underwriting and
operating expenses deferred were $10.6 million and $8.2 million for the three
months ended March 31, 1999 and 1998, respectively. The amortization of
previously deferred expenses and reinsurance commissions was $4.8 million and
$4.7 million for the three months ended March 31, 1999 and 1998, respectively.
Financial Management Services
Through its financial management services subsidiaries, the Company
provides investment agreements, interest rate swaps, investment advisory and
cash management services, principally to states, municipalities and their
authorities, school districts, and hospitals and health organizations. Revenues,
net of realized gains and losses, for the three months ended March 31, 1999 were
$12.7 million, compared to $12.8 million for the three months ended March 31,
1998. Higher investment agreement revenue ($5.4 million in the first quarter of
1999, up 15% from $4.7 million in the first quarter of 1998), were offset by
lower interest rate swap revenue ($4.5 million in the first quarter of 1999,
down 17% from $5.4 million in the first quarter of 1998). Expenses for the first
quarter of 1999 were $7.0 million, down from $7.4 million in the first quarter
of 1998. This decrease was primarily due to the fourth quarter, 1998 closing of
Ambac Connect, Inc., a former electronic commerce subsidiary, partially offset
by higher expenses in the investment agreement business.
Corporate Items
Interest Expense. Interest expense for the three months ended March 31,
----------------
1999 was $9.1 million, compared to $5.6 million for the three months ended March
31, 1998. The increase is due to the Company's issuance of $200 million of
debentures on April 1, 1998.
Income Taxes. Income taxes for the three months ended March 31, 1999 were
------------
at an effective rate of 23.7%, versus 23.8% in the three months ended March 31,
1998.
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 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.
13
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Core Earnings. Core earnings for the three months ended March 31, 1999 were
-------------
$66.9 million, an increase of 20% from $55.8 million for the three months ended
March 31, 1998. The increase in core earnings was primarily the result of higher
normal net premiums earned from the growth in the insurance book of business and
higher net investment income from insurance operations. 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 certain non-recurring
items.
Operating Earnings. Operating earnings for the first quarter of 1999 were
------------------
$72.8 million, an increase of 12% from $65.1 million in the first quarter of
1998. The Company defines operating earnings as consolidated net income, less
the effect of net realized gains and losses and certain non-recurring items.
The following table reconciles net income computed in accordance with
GAAP to operating earnings and core earnings for the three months ended March
31, 1999 and 1998:
<TABLE>
<CAPTION>
(Dollars in Millions) 1999 1998
---------------- ----------------
<S> <C> <C>
Net Income..................................... $73.2 $65.7
Net realized gains, after tax.................. (0.4) (0.6)
Non-recurring item, after tax.................. - -
---------------- ----------------
Operating earnings.......................... 72.8 65.1
Premiums earned from refundings, after tax..... (5.9) (9.3)
---------------- ----------------
Core earnings............................... $66.9 $55.8
================ ================
</TABLE>
The weighted average number of diluted shares outstanding during the first
quarter of 1999 and 1998 was 71.3 million and 71.6 million, respectively.
Adjusted Gross Premiums Written. The Company defines adjusted gross
-------------------------------
premiums written as up-front premiums written plus the present value of
estimated future installment premiums written in the period. While a majority of
premiums are collected up-front at policy issuance, a growing portion of
premiums is collected on an installment basis. Adjusted gross premiums written
were $130.4 million in the first quarter of 1999, up 53% from $85.3 million in
the first quarter of 1998. The increase in the first quarter of 1999 was
primarily due to increased up-front premiums in the municipal finance market
(increasing from $52.4 million in the first quarter of 1998 to $61.7 million in
the first quarter of 1999, an 18% increase) as well as the increase in the
present value of estimated future installment premiums written in the first
quarter of 1999. The present value of future installment premiums written was
$64.8 million in the first quarter of 1999, an increase of 158% from $25.1
million written in the first quarter of 1998. The aggregate net present value of
estimated future installment premiums was $336.7 million and $308.4 million as
of March 31, 1999 and December 31, 1998, respectively.
14
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
The following table sets forth the amounts of adjusted gross premiums
written by type and percent of total for the three months ended March 31, 1999
and 1998:
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------------------------------------
(Dollars in Millions) 1999 % 1998 %
---------------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
Domestic:
Municipal finance policies:
Up-front policies:
New issue .................................................. $ 60.4 46% $ 49.5 58%
Secondary market ........................................... 1.3 1 2.9 3
-------- ----- ------- ----
Sub-total up-front ........................................ 61.7 47 52.4 61
Installment policies .......................................... 9.7 8 3.0 4
-------- ----- ------- ----
Total municipal finance policies ........................ 71.4 55 55.4 65
-------- ----- ------- ----
Structured finance policies:
Up-front .................................................... 0.1 - 0.1 -
Installment ................................................. 43.2 33 14.5 17
-------- ----- ------- ----
Total structured finance policies ............................... 43.3 33 14.6 17
-------- ----- ------- ----
Total domestic written .......................................... 114.7 88 70.0 82
-------- ---- ------- ----
International /(1)/:
Up-front .................................................... 3.8 3 7.7 9
Installment ................................................. 11.9 9 7.6 9
-------- ----- ------- ----
Total international written ............................ 15.7 12 15.3 18
-------- ----- ------- ----
Total adjusted gross premiums written ........................... $ 130.4 100% $ 85.3 100%
======== ==== ======= ====
Total up-front written .......................................... $ 65.6 50% $ 60.2 71%
Total installment written ....................................... 64.8 50 25.1 29
-------- ----- ------- ----
Total adjusted gross premiums written ........................... $ 130.4 100% $ 85.3 100%
======== ===== ======= ====
</TABLE>
(1) Excludes amounts ceded to MBIA Insurance Corporation under our international
joint venture of $16.3 million and $7.3 million for the three months ended March
31, 1999 and 1998, respectively.
Adjusted Book Value. Adjusted book value ("ABV") per common share increased
-------------------
3% to $43.17 at March 31, 1999 compared to $41.98 at December 31, 1998. The
Company 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 following table reconciles book value per share to ABV per share as of
March 31, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------------- -------------------
<S> <C> <C>
Book value per share.................................................. $30.02 $29.97
After-tax value of:
Net unearned premium reserve........................................ 10.42 10.17
Deferred acquisition costs.......................................... (1.17) (1.12)
Present value of installment premiums............................... 3.14 2.86
Unrealized gain on investment agreement liabilities................. 0.76 0.10
------------------- -------------------
Adjusted book value per share......................................... $43.17 $41.98
=================== ===================
</TABLE>
15
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Liquidity and Capital Resources
Ambac Financial Group, 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 (i) Ambac Assurance's ability to
pay dividends or make payments to the Company; and (ii) external financings.
Pursuant to Wisconsin insurance laws, Ambac Assurance may declare dividends,
provided that, after giving effect to the distribution, it would not violate
certain statutory equity, solvency and asset tests. During the three months
ended March 31, 1999, Ambac Assurance paid dividends of $13.0 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 Ambac Assurance expects to pay during 1999 and the income it
expects to receive from its investment portfolio, 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 dividend policy. Beyond the next twelve months, Ambac Assurance'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
management believes that it will continue to have sufficient liquidity to meet
its debt service and other obligations over the long term, no guarantee can be
given that Ambac Assurance will be permitted to dividend amounts sufficient to
pay all of the Company's operating expenses, debt service obligations and cash
dividends on its common stock.
Ambac Assurance Liquidity. The principal uses of Ambac Assurance's
--------------------------
liquidity are the payment of operating expenses, reinsurance premiums, income
taxes and dividends to the Company. The Company believes that Ambac Assurance's
operating liquidity needs can be funded exclusively from its operating cash
flow. The principal sources of Ambac Assurance's liquidity are gross premiums
written, scheduled investment maturities and net investment income.
Financial Management Services Liquidity. The principal uses of liquidity by
----------------------------------------
Financial Management Services subsidiaries are the payment of investment
agreement obligations pursuant to defined terms, net obligations under interest
rate swaps and related hedges, operating expenses and income taxes. The Company
believes that its financial management services liquidity needs can be funded
primarily from its operating cash flow and the maturity of its invested assets.
The principal sources of this segment's liquidity are proceeds from issuance of
investment agreements, 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 agreements), net receipts from
interest rate swaps and related hedges, and fees for investment management
services. Additionally, from time to time, liquidity needs are satisfied by
short-term inter-company loans from Ambac Financial Group, Inc. The investment
objectives with respect to investment agreements 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. A portion of
Financial Management Services assets is maintained in short-term investments and
repurchase agreements in order to meet unexpected liquidity needs.
16
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Credit Facilities. The Company and Ambac Assurance have a revolving credit
------------------
facility with three major international banks for $150 million, which expires in
August 1999 and provides a two-year term loan provision. The facility is
available for general corporate purposes, including the payment of claims. As of
March 31, 1999 and 1998, no amounts were outstanding under this credit facility.
Ambac Assurance maintains third party capital support in the form of a
seven-year irrevocable limited recourse credit facility from a group of highly-
rated international banks. This credit facility provides liquidity to Ambac
Assurance in the event claims from municipal obligations in its covered
portfolio exceed specified levels. Repayment of amounts drawn under the facility
is limited primarily to the amount of any recoveries of losses related to policy
obligations. On May 3, 1999, total third party capital support was increased
from $555 million to $575 million. The line expires in December 2005. As of
March 31, 1999 and 1998, no amounts were outstanding under this facility.
Stock Repurchase Program. The Board of Directors of the Company has
-------------------------
authorized the establishment of a stock repurchase program that permits the
repurchase of up to 6,000,000 shares of the Company's Common Stock. During the
three months ended March 31, 1999, the Company acquired approximately 169,000
shares for an aggregate amount of $9.1 million. Since inception of the Stock
Repurchase Program, the Company has acquired approximately 4,417,000 shares for
an aggregate amount of $151.8 million.
Balance Sheet. As of March 31, 1999, the fair value of the Company's
--------------
consolidated investment portfolio was $8.95 billion, an increase of 2% from
$8.75 billion at December 31, 1998. This increase was primarily due to the
increased volume in investment and payment agreements and cash flow from
operations largely offset by declines in market values resulting from higher
interest rates.
Cash Flows. Net cash provided by operating activities was $90.2 million and
-----------
$73.6 million during the three months ended March 31, 1999 and 1998,
respectively. These cash flows were primarily provided from insurance
operations.
Net cash provided by financing activities was $131.7 million during the
three months ended March 31, 1999, of which $126.4 million was from investment
agreements issued (net of draws paid). For the three months ended March 31,
1998, $613.6 million was provided in financing activities, of which $619.2
million was from investment agreements issued (net of draws paid).
Net cash used in investing activities was $221.3 million during the three
months ended March 31, 1999, of which $1,300.3 million was used to purchase
bonds and securities purchased under agreements to resell, partially offset by
proceeds from bonds of $1,112.5 million. For the three months ended March 31,
1998, $685.9 million was used in investing activities, of which $1,213.0 million
was used to purchase bonds and securities purchased under agreements to resell,
partially offset by proceeds from bonds of $538.5 million.
Material Commitments. The Company has made no commitments for material
---------------------
capital expenditures within the next twelve months.
17
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Year 2000. The Company has nearly completed addressing the issue of
----------
computer programs' and embedded computer chips' ability to distinguish between
the year 1900 and the year 2000, commonly known as the Y2K problem ("Y2K"). The
Company has assessed the risks to its businesses related to the functionality of
its own computer systems and those of third parties. This has been a high
priority undertaking and considered crucial to the operation of the Company's
businesses.
The Company has a Y2K Steering Committee comprised of members of senior
management. The committee has full responsibility and authority to establish
methodologies and budgets and to allocate necessary resources. The committee is
responsible for the coordination of internal and external resources with the
goal of evaluating and remediating, if necessary, critical internal and external
technology systems. The Company has also contracted with an outside consultant
to support its Y2K initiative.
In connection with this initiative, the Company embarked on a three-
phase process. Phase I was an inventory analysis and impact assessment.
Inventory included: (a) those information technology systems which were deemed
critical to running the businesses, (b) non-information technology systems such
as fire systems, elevators and the like, (c) material third parties such as
electronic data interchange ("EDI") partners, (d) hardware and software vendors,
and (e) business user spreadsheets. Phase II was the testing phase during which:
(a) all critical systems were tested, (b) transactions were run through critical
systems by applying various permutations and combinations of Y2K sensitive
dates, and (c) results were reviewed independently by each business unit. In
Phase III, the extent of code repair was determined and remediated.
All phases of the initiative have been completed except for the testing
of EDI partners' systems, which is expected to be completed by June 30, 1999.
The total cost of identifying, testing and remediating its critical
systems was approximately $1.1 million, $0.4 million of which was incurred
during the first quarter of 1999.
The Company's principal Y2K risks can be grouped into four categories.
The first is the risk that the Company does not successfully ready its
operations for the next century. The second is the risk of disruption of Company
operations due to operational failures of third parties. The third is the risk
of business interruption among obligors of Ambac-insured obligations such that
the scheduled payment of debt service does not occur, thus triggering a claim
under its insurance policy. The fourth is financial institution risk. These
risks are further described below.
Company's Internal Systems Risk. The Company, like other financial
institutions, is heavily dependent upon its computer systems. Y2K problems in
the Company's internal systems could result in an interruption in, or failure
of, certain normal business activities or operations. Such failures could
adversely affect the Company's operations.
Third Party Risk. Computer failure of third parties may also jeopardize
Company operations, but how seriously depends on the nature and duration of such
failures. Such third parties could include suppliers of telecommunications,
electric power suppliers, and services provided by governmental agencies.
Although the Company's inquiries are underway, the
18
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Company does not yet have the information to estimate the likelihood of
significant disruptions among its suppliers.
Issuer Risk. A potential exposure to the Company is the failure by any
insured issuer to make debt service payments due to an issuer's systems failure.
An issuer's failure to make debt service payments due to Y2K related systems
failures could result in a claim under an Ambac Assurance insurance policy. In
such event, the Company would utilize its sources of liquidity to pay claims.
The Company would expect full recovery of such claims when Y2K problems are
resolved.
Financial Institution Risk. Financial institution risk includes
trustees or paying agents on transactions insured by the Company. The Company
relies on the operating systems of such trustees to identify the correct
interest payment dates, calculate the correct payments and, through various
payment systems, to move the funds to the bondholders. This risk is mitigated by
the fact that Ambac Assurance's obligation to pay claims is related to the
creditworthiness of the issuer and not the trustee. However, to minimize payment
disruption and identify potential future problems, the Company requested
compliance statements from certain trustees or paying agents of its insured
transactions, reviewed the appropriate publicly available disclosures and
monitored the activities of the banking regulatory agencies for Y2K
developments. Additionally, financial institution risk relates to custodians of
securities held for its own account and the accounts of others. The securities
settlement and custody systems deemed critical to the conduct of the Company's
operations are also being tested.
With respect to the Company's internal operations, although findings do
not give any indications that these systems will be non-compliant, management
has developed contingent procedures in the event its critical systems should
fail. These procedures have been approved by the Company's Board of Directors.
19
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In the ordinary course of business, the Company, through its
subsidiaries, manages a variety of risks, principally market, credit, liquidity,
operational, and legal. These risks are identified, measured and monitored
through a variety of control mechanisms that are in place at different levels
throughout the organization.
Market risk represents the potential for losses that may result from
changes in the market value of a financial instrument as a result of changes in
market conditions. The Company has financial instruments held for purposes other
than trading and for trading purposes. The principal market risk for the
Company's financial instruments held for purposes other than trading is interest
rate risk. An independent market risk management group is involved in setting
and monitoring risk limits and the application of risk measurement
methodologies. The estimation of potential losses arising from adverse changes
in market conditions is a key element in managing market risk. The Company
utilizes various models and stress test scenarios to monitor and manage interest
rate risk. This process includes frequent analyses of both parallel and non-
parallel shifts in the yield curve. These models include estimates, made by
management, that utilize current and historical market information. The
valuation results from these models could differ materially from amounts that
would actually be realized in the market. Financial instruments held for
purposes other than trading which may be adversely affected by changes in
interest rates consist primarily of investment securities, investment agreement
liabilities, debentures, and related derivative contracts (primarily interest
rate swaps and financial futures) used for hedging purposes.
The Company, through its subsidiary Ambac Financial Services, L.P.
("AFSLP"), is a provider of interest rate swaps to states, municipalities and
their authorities and other entities in connection with their financings. AFSLP
manages its business with the goal of being market neutral to changes in overall
interest rates, while seeking to profit from retaining some basis risk. If
actual or projected tax-exempt interest rates change in relation to taxable
interest rates, AFSLP will experience an unrealized mark-to-market gain or loss.
The AFSLP swap portfolio is considered held for trading purposes. Since late
1995, most municipal interest rate swaps transacted by AFSLP contain provisions
that are designed to protect the Company against certain forms of tax reform,
thus mitigating its basis risk. An independent market risk management group
monitors trading risk limits and, together with senior management, is involved
in the application of risk measurement methodologies.
20
<PAGE>
PART II - OTHER INFORMATION
Items 1, 2, 3, 4, and 5 are omitted either because they are inapplicable
or because the answer to such question is negative.
Item 6 - Exhibits and Reports on Form 8-K
(a) The following are annexed as exhibits:
Exhibit
Number Description
- ------ -----------
27.00 Financial Data Schedule.
99.02 Ambac Assurance Corporation and Subsidiaries
Consolidated Unaudited Financial Statements as of
March 31, 1999 and December 31, 1998 and for the
periods ended March 31, 1999 and 1998.
(b) Reports on Form 8-K:
On March 24, 1999, the Company filed a current report on Form 8-K
--------
containing consolidated financial statements (with independent auditor's report
thereon) of Ambac Assurance Corporation and Subsidiaries as of December 31, 1998
and 1997. The filing of this Current Report on Form 8-K was previously noted in
--------
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
---------
1998, which was filed on March 30, 1999.
21
<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 Financial Group, Inc.
(Registrant)
Dated: May 12, 1999 By: /s/ Frank J. Bivona
-------------------
Frank J. Bivona
Executive Vice President and Chief
Financial Officer (Principal Financial
and Accounting Officer and Duly
Authorized Officer)
22
<PAGE>
INDEX TO EXHIBITS
Exhibit Description
Number -----------
- ------
27.00 Financial Data Schedule.
99.02 Ambac Assurance Corporation and Subsidiaries
Consolidated Unaudited Financial Statements as of
March 31, 1999 and December 31, 1998 and for the
periods ended March 31, 1999 and 1998.
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 8,805,489
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 6,596
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 8,954,137
<CASH> 8,860
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 125,327
<TOTAL-ASSETS> 11,341,895
<POLICY-LOSSES> 118,190
<UNEARNED-PREMIUMS> 1,315,320
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 423,946
0
0
<COMMON> 707
<OTHER-SE> 2,095,431
<TOTAL-LIABILITY-AND-EQUITY> 11,341,895
60,297
<INVESTMENT-INCOME> 49,484
<INVESTMENT-GAINS> 551
<OTHER-INCOME> 1,507
<BENEFITS> 2,500
<UNDERWRITING-AMORTIZATION> 11,917
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 95,951
<INCOME-TAX> 22,757
<INCOME-CONTINUING> 73,194
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 73,194
<EPS-PRIMARY> 1.05
<EPS-DILUTED> 1.03
<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 ASSURANCE CORPORATION AND SUBSIDIARIES
(a wholly owned subsidiary of Ambac Financial Group, Inc.)
Consolidated Unaudited Financial Statements
As of March 31, 1999 and December 31, 1998
and for the Periods Ended March 31, 1999 and 1998
<PAGE>
Ambac Assurance Corporation and Subsidiaries
Notes to Consolidated Unaudited Financial Statements
(1) Basis of Presentation
Ambac Assurance Corporation ("Ambac Assurance") is a leading insurer of
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 Rating Group, Fitch IBCA, Inc., and Japan Rating and
Investment Information, Inc. Financial guarantee insurance underwritten by Ambac
Assurance guarantees payment when due of the principal of and interest on the
obligation insured. In the case of a monetary default on the insured bond,
payments under the insurance policy may not be accelerated by the policyholder
without Ambac Assurance's consent. As of March 31, 1999, Ambac Assurance's net
insurance in force (principal and interest) was $335,684,000. Ambac Assurance is
a wholly owned subsidiary of Ambac Financial Group, Inc. ("AFGI"), a holding
company whose subsidiaries provide financial guarantee insurance and financial
management services to clients in both the public and private sectors around the
world.
In December 1997, Ambac Assurance acquired Construction Loan Insurance
Corporation ("CLIC"). CLIC's wholly owned subsidiary, Connie Lee Insurance
Company ("Connie Lee"), a triple-A rated financial guarantee insurance company
which guaranteed bonds primarily for college and hospital infrastructure
projects, has not written any new business since the acquisition. Ambac
Assurance and Connie Lee have arrangements in place to assure that Connie Lee
maintains a level of capital sufficient to support Connie Lee's outstanding
obligations and for Connie Lee insured bonds to retain their triple-A rating.
Ambac Assurance serves clients in international markets through its wholly-
owned subsidiary Ambac Assurance UK Limited and through an arrangement with MBIA
Insurance Company ("MBIA") to participate in MBIA.AMBAC International, an
unincorporated joint venture (the "Joint Venture") formed in 1995. The joint
venture was formed with the goal of bringing the combined resources of the two
companies together to more efficiently serve the international market. Under the
joint venture arrangement, financial guarantee policies are issued separately by
each of the companies and each company has the opportunity to reinsure up to 50%
of international business written.
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. ("AFSLP"), a limited partnership which provides interest rate
swaps primarily to states, municipalities and their authorities. The sole
general partner of AFSLP, Ambac Financial Services Holdings, Inc., a wholly
owned subsidiary of AFGI, owns a general partnership interest representing 10%
of the total partnership interest in AFSLP.
The accompanying consolidated unaudited interim financial statements have
been prepared on the basis of U.S. Generally Accepted Accounting Principles
("GAAP") and, in the opinion of management, reflect all adjustments, consisting
only of normal recurring
<PAGE>
Ambac Assurance Corporation and Subsidiaries
Notes to Consolidated Unaudited Financial Statements (Continued)
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, 1999 may not be indicative of
the results that may be expected for the full year ending December 31, 1999.
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, 1998 and 1997, and for each of the years in the three-year period ended
December 31, 1998.
<PAGE>
Ambac Assurance Corporation and Subsidiaries
Consolidated Balance Sheets
March 31, 1999 and December 31, 1998
(Dollars in Thousands Except Share Data)
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
---------------------- -------------------------
(unaudited)
<S> <C> <C>
ASSETS
------
Investments:
Fixed income securities, at fair value
(amortized cost of $3,214,956 in 1999 and $3,097,289 in 1998) $3,387,681 $3,310,047
Short-term investments, at cost (approximates fair value) 120,525 93,912
---------------------- -----------------------
Total investments 3,508,206 3,403,959
Cash 7,573 4,895
Securities purchased under agreements to resell 7,357 5,449
Receivable for securities sold 44,743 12,132
Investment income due and accrued 50,409 54,088
Deferred acquisition costs 125,327 120,619
Reinsurance recoverable 3,668 3,638
Prepaid reinsurance 196,388 199,920
Other assets 126,746 212,475
---------------------- -----------------------
Total assets $4,070,417 $4,017,175
====================== =======================
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
Liabilities:
Unearned premiums $1,324,464 $1,303,203
Losses and loss adjustment expenses 118,190 115,794
Ceded reinsurance balances payable 4,004 6,576
Deferred income taxes 135,522 144,565
Current income taxes 35,916 19,984
Accounts payable and other liabilities 142,311 226,950
Payable for securities purchased 107,412 33,758
---------------------- -----------------------
Total liabilities 1,867,819 1,850,830
---------------------- -----------------------
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 March 31, 1999 and December 31, 1998 82,000 82,000
Additional paid-in capital 541,335 541,021
Accumulated other comprehensive income 112,023 138,651
Retained earnings 1,467,240 1,404,673
---------------------- -----------------------
Total stockholder's equity 2,202,598 2,166,345
---------------------- -----------------------
$4,070,417 $4,017,175
====================== =======================
</TABLE>
See accompanying Notes to Consolidated Unaudited Financial Statements.
<PAGE>
Ambac Assurance Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
For The Periods Ended March 31, 1999 and 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
Revenues:
Gross premiums written $91,041 $79,621
Ceded premiums written (5,086) (26,087)
---------------- ----------------
Net premiums written 85,955 53,534
(Increase) decrease in unearned premiums, net (24,926) 296
---------------- ----------------
Net premiums earned 61,029 53,830
Net investment income 49,587 45,136
Net realized gains 89 150
Other income 5,748 7,323
---------------- ----------------
Total revenues 116,453 106,439
---------------- ----------------
Expenses:
Losses and loss adjustment expenses 2,500 1,577
Underwriting and operating expenses 13,628 13,548
Interest expense 724 761
---------------- ----------------
Total expenses 16,852 15,886
---------------- ----------------
Income before income taxes 99,601 90,553
Provision for income taxes 24,034 21,829
---------------- ----------------
Net income $75,567 $68,724
================ ================
</TABLE>
See accompanying Notes to Consolidated Unaudited Financial Statements
<PAGE>
Ambac Assurance Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
(Unaudited)
For The Periods Ended March 31, 1999 and 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
1999 1998
-------------------------------- --------------------------------
<S> <C> <C> <C> <C>
Retained Earnings:
Balance at January 1 $1,404,673 $1,179,322
Net income 75,567 $75,567 68,724 $68,724
---------------- ----------------
Dividends declared - common stock (13,000) (12,000)
Other - 1
---------------- ----------------
Balance at March 31 $1,467,240 $1,236,047
---------------- ----------------
Accumulated Other Comprehensive Income:
Balance at January 1 $138,651 $118,119
Unrealized losses on securities,
($40,033) and ($5,545), pre-tax,
in 1999 and 1998, respectively (1) (26,021) (3,604)
Foreign currency (loss) gain (607) 344
---------------- ----------------
Other comprehensive loss (26,628) (26,628) (3,260) (3,260)
-------------------------------- --------------------------------
Comprehensive income $48,939 $65,464
================ ================
Balance at March 31 $112,023 $114,859
---------------- ----------------
Preferred Stock:
Balance at January 1 and March 31 $- $-
---------------- ----------------
Common Stock:
Balance at January 1 and March 31 $82,000 $82,000
---------------- ----------------
Additional Paid-in Capital:
Balance at January 1 $541,021 $521,153
Exercise of stock options 314 3,551
---------------- ----------------
Balance at March 31 $541,335 $524,704
---------------- ----------------
Total Stockholders' Equity at March 31 $2,202,598 $1,957,610
================ ================
(1) Disclosure of reclassification amount:
Unrealized holding losses arising during period ($25,963) ($2,840)
Less: reclassification adjustment for net gains
included in net income 58 764
---------------- ----------------
Net unrealized losses on securities ($26,021) ($3,604)
================ ================
</TABLE>
See accompanying Notes to Consolidated Unaudited Financial Statements.
<PAGE>
Ambac Assurance Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
For The Periods Ended March 31, 1999 and 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $75,567 $68,724
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 532 350
Amortization of bond premium and discount (1,355) (103)
Current income taxes 15,932 6,911
Deferred income taxes 4,967 3,632
Deferred acquisition costs (4,708) (1,041)
Unearned premiums, net 24,793 (238)
Losses and loss adjustment expenses 2,366 2,617
Ceded reinsurance balances payable (2,572) 5,094
Gain on sales of investments (89) (150)
Net unrealized portfolio gain 533 (6,503)
Premiums receivable 4,618 (299)
Other, net 3,878 604
--------------- ---------------
Net cash provided by operating activities 124,462 79,598
--------------- ---------------
Cash flows from investing activities:
Proceeds from sales of bonds at amortized cost 318,384 187,802
Proceeds from maturities of bonds at amortized cost 44,627 33,153
Purchases of bonds at amortized cost (438,144) (293,976)
Change in short-term investments (26,613) 5,870
Securities purchased under agreements to resell (1,908) (3,958)
Other, net (130) (1,439)
--------------- ---------------
Net cash used in investing activities (103,784) (72,548)
--------------- ---------------
Cash flows from financing activities:
Dividends paid (13,000) (12,000)
Short-term financing (5,000) -
--------------- ---------------
Net cash used in financing activities (18,000) (12,000)
--------------- ---------------
Net cash flow 2,678 (4,950)
Cash at January 1 4,895 8,004
--------------- ---------------
Cash at March 31 $7,573 $3,054
=============== ===============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes $0 $7,700
=============== ===============
</TABLE>
See accompanying Notes to Consolidated Unaudited Financial Statements.
