<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 September 30, 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 September 30, 1999, 69,920,289 shares of Common Stock, par value
$0.01 per share, (net of 760,095 treasury shares) of the Registrant were
outstanding.
<PAGE>
Ambac Financial Group, Inc. and Subsidiaries
INDEX
-----
PART I FINANCIAL INFORMATION
PAGE
----
<TABLE>
<CAPTION>
Item 1. Consolidated Financial Statements
<S> <C>
Consolidated Balance Sheets - September 30, 1999
and December 31, 1998............................................. 3
Consolidated Statements of Operations - three months and
nine months ended September 30, 1999 and 1998..................... 4
Consolidated Statements of Stockholders' Equity - nine months
ended September 30, 1999 and 1998................................. 5
Consolidated Statements of Cash Flows - nine months ended
September 30, 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....................................................... 22
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..................................... 23
SIGNATURES.................................................................... 24
INDEX TO EXHIBITS............................................................. 25
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM I - Financial Statements of Ambac Financial Group, Inc. and Subsidiaries
Ambac Financial Group, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 1999 and December 31, 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
(unaudited)
Assets
Investments:
<S> <C> <C>
Fixed income securities, at fair value
(amortized cost of $9,034,012 in 1999 and $8,307,046 in 1998) $8,885,127 $8,622,282
Short-term investments, at cost (approximates fair value) 190,415 119,528
Other 2,592 6,567
------------------------ -----------------------
Total investments 9,078,134 8,748,377
Cash 11,714 8,239
Securities purchased under agreements to resell 119,293 252,295
Receivable for investment agreements 93,767 73,142
Receivable for securities sold 33,575 16,233
Investment income due and accrued 116,583 125,929
Reinsurance recoverable 3,688 3,638
Prepaid reinsurance 201,579 199,920
Deferred acquisition costs 133,079 120,619
Deferred income taxes 4,872 -
Loans 686,924 673,930
Receivable from brokers and dealers 650,000 750,000
Other assets 192,455 239,989
------------------------ -----------------------
Total assets $11,325,663 $11,212,311
========================= =======================
Liabilities and Stockholders' Equity
Liabilities:
Unearned premiums $1,365,545 $1,294,214
Losses and loss adjustment expenses 123,027 115,794
Ceded reinsurance balances payable 4,082 6,576
Obligations under investment and payment agreements 4,432,908 4,774,953
Obligations under investment repurchase agreements 1,913,073 1,181,810
Deferred income taxes - 145,782
Current income taxes 26,370 6,949
Debentures 423,979 423,929
Accrued interest payable 83,019 89,615
Other liabilities 206,335 262,423
Payable to brokers and dealers 650,000 750,000
Payable for securities purchased 70,128 64,176
------------------------ -----------------------
Total liabilities 9,298,466 9,116,221
------------------------ -----------------------
Stockholders' equity:
Preferred stock - -
Common stock 707 707
Additional paid-in capital 522,334 519,305
Accumulated other comprehensive income (98,964) 159,313
Retained earnings 1,638,325 1,449,832
Common stock held in treasury at cost (35,205) (33,067)
------------------------ -----------------------
Total stockholders' equity 2,027,197 2,096,090
------------------------ -----------------------
Total liabilities and stockholders' equity $11,325,663 $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 September 30, 1999 and 1998
(Dollars in Thousands Except Share Data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- ----------------------------------
1999 1998 1999 1998
----------------------------------- ----------------------------------
Revenues:
<S> <C> <C> <C> <C>
Financial Guarantee:
Gross premiums written $106,841 $88,731 $295,703 $254,260
Ceded premiums written (11,896) (4,764) (33,440) (40,899)
---------------- ---------------- ---------------- ---------------
Net premiums written $94,945 $83,967 $262,263 $213,361
================ ================ ================ ===============
Net premiums earned $68,325 $50,143 $192,566 $156,645
Net fees earned and other income 1,720 385 4,304 2,585
Net investment income 52,946 47,436 153,726 138,348
Net realized (losses) gains (62) 537 (5,542) 1,203
Financial Management Services:
Revenue 12,097 13,541 37,947 39,027
Net realized gains (losses) 8 156 (3,292) (7,092)
Other:
Revenue 2,164 4,450 8,587 9,853
Net realized gains - 709 775 2,226
---------------- ---------------- ---------------- ---------------
Total revenues 137,198 117,357 389,071 342,795
---------------- ---------------- ---------------- ---------------
Expenses:
Financial Guarantee:
Losses and loss adjustment expenses 3,000 1,500 8,000 4,500
Underwriting and operating expenses 11,976 11,844 35,765 35,052
Financial Management Services 6,174 8,237 19,930 24,283
Interest 9,145 9,254 27,322 23,648
Other 1,520 1,323 4,735 5,403
---------------- ---------------- ---------------- ---------------
Total expenses 31,815 32,158 95,752 92,886
---------------- ---------------- ---------------- ---------------
Income before income taxes 105,383 85,199 293,319 249,909
Provision for income taxes 25,581 19,817 69,354 58,073
---------------- ---------------- ---------------- ---------------
Net income $79,802 $65,382 $223,965 $191,836
================ ================ ================ ===============
Net income per share $1.14 $0.94 $3.20 $2.74
================ ================ ================ ===============
Net income per diluted share $1.12 $0.92 $3.14 $2.68
================ ================ ================ ===============
Weighted average number of
shares outstanding 69,911,638 69,823,032 69,902,757 69,959,334
================ ================ ================ ===============
Weighted average number of diluted
shares outstanding 71,337,017 71,389,724 71,367,987 71,509,315
================ ================ ================ ===============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
4
<PAGE>
Ambac Financial Group, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(Unaudited)
For The Nine Months Ended September 30, 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 223,965 $223,965 191,836 $191,836
---------------- ------------
Dividends declared - common stock (21,672) (19,594)
Exercise of stock options (13,800) (24,798)
---------------- ----------
Balance at September 30 $1,638,325 $1,410,184
---------------- ----------
Accumulated Other Comprehensive Income:
Balance at January 1 $159,313 $135,223
Unrealized (losses) gains on securities, ($412,240),
and $109,563, pre-tax in 1999 and 1998, respectively(1) (258,072) 70,067
Foreign currency (loss) gain (205) 673
---------------- -----------
Other comprehensive (loss) income (258,277) (258,277) 70,740 70,740
-------------------------------- ----------------------
Comprehensive (loss) income ($34,312) $262,576
================ ===========
Balance at September 30 ($98,964) $205,963
---------------- ----------
Preferred Stock:
Balance at January 1 and September 30 $- $-
---------------- ------------
Common Stock:
Balance at January 1 and September 30 $707 $707
---------------- ------------
Additional Paid-in Capital:
Balance at January 1 $519,305 $500,107
Exercise of stock options 3,029 13,115
---------------- ------------
Balance at September 30 $522,334 $513,222
---------------- ------------
Common Stock Held in Treasury at Cost:
Balance at January 1 ($33,067) ($26,295)
Cost of shares acquired (16,643) (45,649)
Shares issued under equity plans 14,505 26,251
---------------- ------------
Balance at September 30 ($35,205) ($45,693)
---------------- ------------
Total Stockholders' Equity at September 30 $2,027,197 $2,084,383
================ ============
(1) Disclosure of reclassification amount:
Unrealized holding (losses) gains arising during period ($263,310) $78,711
Less: reclassification adjustment for net (losses) gains
included in net income (5,238) 8,644
---------------- ----------
Net unrealized (losses) gains on securities ($258,072) $70,067
================ ==========
</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 September 30, 1999 and 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $223,965 $191,836
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,167 1,785
Amortization of bond premium and discount (3,809) (3,948)
Current income taxes 19,421 939
Deferred income taxes 3,515 (6,181)
Deferred acquisition costs (12,460) (10,634)
Unearned premiums, net 69,672 56,857
Losses and loss adjustment expenses 7,183 14,150
Ceded reinsurance balances payable (2,494) (5,482)
Investment income due and accrued 9,346 (21,452)
Accrued interest payable (6,596) 18,545
Losses on sales of investments 8,059 3,663
Interest rate swaps, at market (22,448) 13,589
Other, net 3,383 2,159
---------------- ----------------
Net cash provided by operating activities 298,904 255,826
---------------- ----------------
Cash flows from investing activities:
Proceeds from sales of bonds 1,930,672 1,347,504
Proceeds from matured bonds 1,020,893 887,467
Purchases of bonds (3,650,767) (3,423,562)
Change in short-term investments (70,887) (33,708)
Securities purchased under agreements to resell 133,002 (251,335)
Loans (12,994) (175,948)
Other, net 9,868 (38,884)
---------------- ----------------
Net cash used in investing activities (640,213) (1,688,466)
---------------- ----------------
Cash flows from financing activities:
Dividends paid (21,672) (19,594)
Proceeds from issuance of investment agreements 2,268,867 2,670,496
Payments for investment agreement draws (1,913,267) (1,568,146)
Proceeds from issuance of debentures - 193,700
Payment agreements 12,994 175,948
Proceeds from sale of treasury stock 14,505 26,251
Purchases of treasury stock (16,643) (45,649)
---------------- ----------------
Net cash provided by financing activities 344,784 1,433,006
---------------- ----------------
Net cash flow 3,475 366
Cash at January 1 8,239 9,256
---------------- ----------------
Cash at September 30 $11,714 $9,622
================ ================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes $43,599 $53,338
================ ================
Interest expense on debt $29,569 $25,934
================ ================
Interest expense on investment agreements $220,929 $179,610
================ ================
</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 affiliates provide financial guarantees and
financial management 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 provider of financial guarantees for
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. The Company, through its subsidiaries, also provides
investment agreements, interest rate swaps and investment advisory and cash
management services, primarily to states, municipalities and municipal
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 and nine
months ended September 30, 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 (i) 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 (the "Commission") on
March 30, 1999, (ii) the Company's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1999, which was filed with the Commission on
May 12, 1999, and (iii) the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1999, which was filed with the Commission on
August 13, 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, which guarantees 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.
7
<PAGE>
Notes to Consolidated Unaudited Financial Statements (Continued)
(Dollars in thousands)
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.
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 but which are eliminated in the consolidated financial
statements. 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. Corporate and other revenue from
unaffiliated customers consists primarily of interest income and realized gains
or losses from investment securities.
The following tables summarize the financial information by reportable
segment as of and for the three and nine-month periods ended September 30, 1999
and 1998:
<TABLE>
<CAPTION>
Financial
Financial Management Corporate Intersegment
Three months ended September 30, Guarantee Services And Other Eliminations Consolidated
----------------- --------------- ---------------- ----------------- -------------
1999:
<S> <C> <C> <C> <C> <C>
Revenues:
Unaffiliated customers.......... $ 122,929 $ 12,105 $ 2,164 $ - $ 137,198
Intersegment.................... 758 (846) 13,148 (13,060) -
------------- ----------------------------------- ------------------- ------------------
Total revenues................... $ 123,687 $ 11,259 $ 15,312 ($13,060) $ 137,198
------------- ----------------------------------- ------------------- ------------------
Income before income taxes:
Unaffiliated customers.......... $ 107,953 $ 5,931 ($8,501) $ - $ 105,383
Intersegment.................... 1,164 (1,023) 13,148 (13,289) -
------------- ----------------- -------------- ------------------- ------------------
Total income before income taxes. $ 109,117 $ 4,908 $ 4,647 ($13,289) $ 105,383
------------- ----------------- -------------- ------------------- ------------------
Identifiable assets.............. $3,952,407 $7,217,599 $155,657 $ - $11,325,663
------------- ----------------- -------------- ------------------- ------------------
1998:
Revenues:
Unaffiliated customers.......... $ 98,501 $ 13,697 $ 5,159 $ - $ 117,357
Intersegment.................... 650 (691) 12,162 (12,121) -
------------- ---------------- -------------- ------------------- ------------------
Total revenues.................... $ 99,151 $ 13,006 $ 17,321 ($12,121) $ 117,357
------------- ---------------- -------------- ------------------- ------------------
Income before income taxes:
Unaffiliated customers.......... $ 85,157 $ 5,460 ($5,418) $ - $ 85,199
Intersegment.................... 660 (976) 12,162 (11,846) -
------------- --------------- -------------- ------------------- ------------------
Total income before income taxes.. $ 85,817 $ 4,484 $ 6,744 ($11,846) $ 85,199
------------- --------------- -------------- ------------------- ------------------
Identifiable assets............... $3,812,399 $7,010,293 $269,014 $ - $11,091,706
------------- --------------- -------------- ------------------- ------------------
</TABLE>
8
<PAGE>
Notes to Consolidated Unaudited Financial Statements (Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Financial
Financial Management Corporate Intersegment
Nine months ended September 30, Guarantee Services And Other Eliminations Consolidated
----------------- ----------------- ---------------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
1999:
Revenues:
Unaffiliated customers......... $ 345,054 $ 34,655 $ 9,362 $ - $ 389,071
Intersegment................... 2,300 (2,586) 39,491 (39,205) -
--------------- -------------------------------------- ------------ ------------
Total revenues................... $ 347,354 $ 32,069 $ 48,853 ($39,205) $ 389,071
--------------- -------------------------------------- ------------ ------------
Income before income taxes:
Unaffiliated customers......... $ 301,289 $ 14,725 ($22,695) $ - $ 293,319
Intersegment................... 2,848 (2,990) 39,491 (39,349) -
--------------- ----------------- ---------------- ------------- ------------
Total income before income taxes. $ 304,137 $ 11,735 $ 16,796 ($39,349) $ 293,319
--------------- ----------------- ---------------- ------------- ------------
Identifiable assets $3,952,407 $7,217,599 $ 155,657 $ - $11,325,663
--------------- ----------------- ---------------- ------------- ------------
1998:
Revenues:
Unaffiliated customers......... $ 298,781 $ 31,935 $ 12,079 $ - $ 342,795
Intersegment................... 2,013 (1,996) 36,315 (36,332) -
--------------- ----------------- ---------------- ----------------- -----------
Total revenues................... $ 300,794 $ 29,939 $ 48,394 ($36,332) $ 342,795
--------------- ----------------- ---------------- ----------------- -----------
Income before income taxes:
Unaffiliated customers......... $ 259,229 $ 7,652 ($16,972) $ - $ 249,909
Intersegment................... 2,013 (3,040) 36,315 (35,288) -
--------------- ----------------- ---------------- ----------------- -----------
Total income before income taxes. $ 261,242 $ 4,612 $ 19,343 ($35,288) $ 249,909
--------------- ----------------- ---------------- ----------------- -----------
Identifiable assets $3,812,399 $7,010,293 $ 269,014 $ - $11,091,706
--------------- ----------------- ---------------- ----------------- -----------
</TABLE>
The following table summarizes gross premiums written and net premiums
earned included in the financial guarantee segment by location of risk for the
three and nine-month periods ended September 30, 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Nine Months
------------------------------------------- --------------------------------------
Gross Premiums Net Premiums Gross Premiums Net Premiums
Written Earned Written Earned
--------------------- ------------------- ------------------ ---------------
<S> <C> <C> <C> <C>
1999:
United States.............................. $ 97,228 $60,468 $254,231 $171,789
United Kingdom............................. 388 851 15,585 2,259
Japan...................................... 1,235 1,037 3,723 3,504
France..................................... 833 341 1,914 772
Australia.................................. 183 419 729 1,085
Mexico..................................... 3,533 1,431 7,469 3,263
Internationally diversified (1)............ 2,363 2,051 7,838 5,568
Other international........................ 1,078 1,727 4,214 4,326
--------------------- ------------------- --------------------- --------------
Total.................................. $106,841 $68,325 $295,703 $192,566
--------------------- ------------------- --------------------- --------------
1998:
United States.............................. $ 81,767 $46,598 $214,101 $147,197
United Kingdom............................. 19 442 19,842 1,162
Japan...................................... 987 528 3,387 1,632
France..................................... 185 427 954 1,339
Australia.................................. 4,259 161 11,916 354
Mexico..................................... 190 190 190 190
Internationally diversified (1)............ 1,180 868 2,768 2,245
Other international........................ 144 929 1,102 2,526
--------------------- ------------------- --------------------- --------------
Total.................................. $ 88,731 $50,143 $254,260 $156,645
--------------------- ------------------- --------------------- --------------
</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 and nine month periods ended
September 30, 1999 and 1998, and its financial condition as of September 30,
1999 and December 31, 1998. These results include the Company's two reportable
segments: Financial Guarantee and Financial Management Services.
Materials in this Form 10-Q may contain information that includes or
is based upon forward-looking statements within the meaning of the Securities
Litigation Reform Act of 1995. Forward-looking statements give our expectations
or forecasts of future events. You can identify these statements by the fact
that they do not relate strictly to historical or current facts. They use words
such as "anticipate," "estimate," "expect," "project," "intend," "plan,"
"believe," and other words and terms of similar meaning in connection with a
discussion of future operating or financial performance. In particular, these
include statements relating to future actions, prospective services or products,
future performance or results of current and anticipated services or products,
sales efforts, expenses, the outcome of contingencies such as legal proceedings,
and financial results.
Any or all of our forward-looking statements here or in other publications
may turn out to be wrong. They can be affected by inaccurate assumptions or by
known or unknown risks and uncertainties. Many such factors will be important in
determining our actual future results. Our actual results may vary materially,
and there are no guarantees about the performance of the Company's stock. These
statements are based on current expectations and the current economic
environment. They involve a number of risks and uncertainties that are difficult
to predict. These statements are not guarantees of future performance. Actual
results could differ materially from those expressed or implied in the forward-
looking statements. Among 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. Ambac
undertakes no obligation to publicly correct or update any forward-looking
statement if we later become aware that it is not likely to be achieved. You are
advised, however, to consult any further disclosures we make on related subjects
in our reports to the SEC.
Results of Operations
Consolidated Net Income
The Company's net income for the three months ended September 30, 1999 was
$79.8 million or $1.12 per diluted share. This represents a 22% increase from
the three months ended September 30, 1998 net income of $65.4 million or $0.92
per diluted share. This increase in net income was largely attributable to
higher Financial Guarantee operating income driven by a $24.4 million, or 25%,
increase in revenues. The Company's net income for the nine months ended
September 30, 1999 was $224.0 million or $3.14 per diluted share. This
represents an increase of 17% from the comparable prior period net income of
$191.8 million or $2.68 per diluted share. This increase in net income was
largely attributable to higher Financial Guarantee operating income driven by a
$46.3 million, or 15%, increase in revenues.
10
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Financial Guarantee
The Company provides financial guarantees through its principal operating
subsidiary, Ambac Assurance Corporation ("Ambac Assurance"). Ambac Assurance
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 (the "JV arrangement").
Ambac Assurance, through its wholly owned subsidiary, Ambac Credit Products
("ACP"), also issues structured credit derivatives.
Gross Par Written. Ambac Assurance insured $19.7 billion in par value
------------------
bonds during the three months ended September 30, 1999 and $56.3 billion in par
value bonds during the nine months ended September 30, 1999, an increase of 37%
from $14.4 billion in the three months ended September 30, 1998 and an increase
of 24% from $45.3 billion in par value bonds during the nine months ended
September 30, 1998. Par value written for the third quarter of 1999 was
comprised of $7.8 billion from municipal bond obligations, $10.4 billion from
structured finance obligations and $1.6 billion from international obligations,
compared to $8.5 billion, $5.1 billion and $0.8 billion, respectively, in the
third quarter of 1998. Par value written for the nine months ended September 30,
1999 was comprised of $24.4 billion from municipal bond obligations, $26.7
billion from structured finance obligations and $5.1 billion from international
obligations, compared to $26.2 billion, $16.1 billion and $3.0 billion,
respectively, in the nine months ended September 30, 1998. Insured municipal
obligations for the three and nine-month periods ended September 30, 1999 were
affected by declines of 18% and 21%, respectively, in total issuance. The
decline in issuance in 1999 has been partially offset by an overall increase in
Ambac's municipal market share. The increases in insured structured finance
obligations during the three and nine-month periods ended September 30, 1999,
were principally in the mortgage-backed and asset-backed sectors.
Management anticipates, based on growth experienced in the last few years,
that in the foreseeable future, the structured finance and international markets
may grow more rapidly than the municipal market. Management believes that these
markets may see large quarterly variances primarily due to general market
conditions and the developmental nature of these markets.
Gross Premiums Written. Gross premiums written for the three and nine-
-----------------------
month periods ended September 30, 1999 were $106.8 million and $295.7 million,
respectively, increases of 20% and 16% from $88.7 million and $254.3 million, in
the three and nine-month periods ended September 30, 1998, respectively.
Increased business activity in structured finance transactions, especially
mortgage-backed and asset-backed transactions, has spurred the increase.
Additionally, on the municipal side, improved market premium rates as well as
Ambac's increased market share during the first nine months of 1999 has more
than offset the overall decline in municipal market issuance when compared to
the first nine months of 1998. The following tables set forth the amounts of
gross premiums written and the related gross par written by type:
11
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
<TABLE>
<CAPTION>
Three Months Ended September 30,
------------------------------------------------------------------
(Dollars in Millions) 1999 1998
------------------------------- -------------------------------
Gross Gross Gross Gross
Premiums Par Premiums Par
Written Written Written Written
------------- -------------- --------------- ------------
<S> <C> <C> <C> <C>
Municipal finance:
Up-front:
New issue................................................... $ 69.0 $ 6,725 $66.4 $7,717
Secondary market............................................ 4.0 303 1.6 196
------------- -------------- --------------- ------------
Sub-total up-front......................................... 73.0 7,028 68.0 7,913
Installment:............................................... 4.2 746 4.0 577
------------- -------------- --------------- ------------
Total municipal finance.................................. 77.2 7,774 72.0 8,490
------------- -------------- --------------- ------------
Structured finance:
Up-front.................................................... - - 0.2 1,526
Installment................................................. 20.0 10,396 9.5 3,601
------------- -------------- --------------- ------------
Total structured finance............................... 20.0 10,396 9.7 5,127
------------- -------------- --------------- ------------
International(1):
Up-front.............................................. 0.7 73 4.3 228
Installment........................................... 8.9 1,489 2.7 575
------------- -------------- --------------- ------------
Total international................................. 9.6 1,562 7.0 803
------------- -------------- --------------- ------------
Total................................................. $106.8 $19,732 $88.7 $14,420
============= ============== =============== ============
Total up-front................................................. $ 73.7 $ 7,101 $72.5 $ 9,667
Total installment.............................................. 33.1 12,631 16.2 4,753
------------- -------------- --------------- ------------
Total................................................. $106.8 $19,732 $88.7 $14,420
============= ============== =============== ============
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------------------------------------------
(Dollars in Millions) 1999 1998
-------------------------------- -------------------------------
Gross Gross Gross Gross
Premiums Par Premiums Par
Written Written Written Written
-------------- -------------- --------------- ------------
<S> <C> <C> <C> <C>
Municipal finance:
Up-front:
New issue................................................... $183.7 $20,826 $165.7 $22,980
Secondary market............................................ 7.9 933 12.3 1,152
-------------- -------------- --------------- ------------
Sub-total up-front......................................... 191.6 21,759 178.0 24,132
Installment:............................................... 15.1 2,666 10.8 2,050
-------------- -------------- --------------- ------------
Total municipal finance.................................. 206.7 24,425 188.8 26,182
-------------- -------------- --------------- ------------
Structured finance:
Up-front.................................................... 0.5 36 1.0 1,823
Installment................................................. 47.0 26,712 24.3 14,247
-------------- -------------- --------------- ------------
Total structured finance............................... 47.5 26,748 25.3 16,070
-------------- -------------- --------------- ------------
International(1):
Up-front.............................................. 18.9 349 32.7 934
Installment........................................... 22.6 4,749 7.5 2,100
-------------- -------------- --------------- ------------
Total international................................. 41.5 5,098 40.2 3,034
-------------- -------------- --------------- ------------
Total................................................. $295.7 $56,271 $254.3 $45,286
============== ============== =============== =============
Total up-front................................................. $211.0 $22,144 $211.7 $26,889
Total installment.............................................. 84.7 34,127 42.6 18,397
-------------- -------------- --------------- ------------
Total................................................. $295.7 $56,271 $254.3 $45,286
============== ============== =============== ============
</TABLE>
(1) Gross par written excludes amounts ceded to MBIA Insurance Corporation under
our international joint venture of $538.9 million and $80.0 million for the
three months ended September 30, 1999 and 1998, respectively, and $2,685.3
million and $1,111.1 million for the nine months ended September 30, 1999 and
1998, respectively.
12
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Ceded Premiums Written. Ceded premiums written for the three and nine
-----------------------
months ended September 30, 1999 were $11.9 million and $33.4 million,
respectively, an increase of 148% from $4.8 million in the three months ended
September 30, 1998 and a decrease of 18% from $40.9 million in the nine months
ended September 30, 1998. The increase in ceded premiums written for the third
quarter of 1999 is primarily due to increased ceded premiums written on
international policies via the JV arrangement with MBIA as well as a higher
quarterly cede of municipal business written. The decrease in ceded premiums
written for the nine months ended September 30, 1999 is primarily due to the
one-time cede of $11.3 million of the portfolio purchased through the
acquisition of Connie Lee Insurance Company ("Connie Lee") during the first
quarter of 1998 as well as the overall decrease in international premiums ceded
under the JV arrangement during the first quarter of 1999 as compared to the
first quarter of 1998. Ceded premiums written were 11.1% and 11.3% of gross
premiums written for the three and nine months ended September 30, 1999,
respectively, compared with 5.4% and 11.6% (excluding the one-time cede of the
Connie Lee portfolio in 1998) for the three and nine months ended September 30,
1998, respectively.
Net Premiums Written. Net premiums written for the three and nine months
---------------------
ended September 30, 1999 were $94.9 million and $262.3 million, respectively.
The increase of 13% from $84.0 million in the three months ended September 30,
1998 reflects the higher gross premiums written partially offset by the
increased ceded premiums. The increase of 23% from $213.4 million in the nine
months ended September 30, 1998 reflects the higher gross premiums written as
well as the substantial decrease in premiums ceded to reinsurers during the
first quarter of 1999, compared with the corresponding prior period.
Net Premiums Earned. Net premiums earned during the three and nine months
--------------------
ended September 30, 1999 were $68.3 million and $192.6 million, respectively, an
increase of 36% from $50.1 million in the three months ended September 30, 1998,
and an increase of 23% from $156.6 million in the nine months ended September
30, 1998. These increases were primarily the result of increased normal net
premiums earned (defined as net premiums earned excluding the effects of
refundings, calls and other accelerations of previously insured obligations,
collectively referred to as "refundings") during the periods. Normal net
premiums earned increased 41% from $43.2 million in the third quarter of 1998 to
$60.9 million in the third quarter of 1999. Normal net premiums earned for the
nine months ended September 30, 1999 were $164.8 million, an increase of 38%
from $119.5 million in the nine months ended September 30, 1998. The increases
in normal net premiums earned resulted from strong business written in all
areas, particularly structured and international finance.
Net premiums earned include accelerated premiums that result from
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 and nine
months ended September 30, 1999 included $7.4 million (which had a net income
per diluted share effect of $0.06) and $27.7 million (which had a net income per
diluted share effect of $0.22), respectively, from refundings. Net premiums
earned in the three and nine months ended September 30, 1998 included $6.9
million (which had a net income per diluted share effect of $0.06) and $37.1
million (which had a net income per diluted share effect of $0.30),
respectively, from refundings.
13
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Net Investment Income. Net investment income for the three and nine months
----------------------
ended September 30, 1999 were $52.9 million and $153.7 million, respectively, an
increase of 12% from $47.4 million in the three months ended September 30, 1998
and an increase of 11% from $138.3 million in the nine months ended September
30, 1998. The increases were primarily attributable to the growth of the
investment portfolio from ongoing operations. Additionally, investment income
grew in the third quarter of 1999 compared with the corresponding prior period
due to a capital contribution of $100 million from the parent company to Ambac
Assurance in April 1999. Ambac Assurance's investments in tax-exempt securities
amounted to 73% of the total market value of its portfolio as of September 30,
1999, versus 72% at September 30, 1998. The average pre-tax yield-to-maturity on
the investment portfolio was 6.05% and 6.33% as of September 30, 1999 and 1998,
respectively.
Net Realized Gains (Losses). Net realized losses were $0.1 million for the
----------------------------
three months ended September 30, 1999, compared to $0.5 million in net realized
gains for the comparative prior period in 1998. Net realized losses were $5.5
million for the nine months ended September 30, 1999, compared to net realized
gains of $1.2 million for the nine months ended September 30, 1998.
Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses
------------------------------------
for the three and nine months ended September 30, 1999 were $3.0 million and
$8.0 million, respectively, compared to $1.5 million and $4.5 million for the
three and nine months ended September 30, 1998, respectively. 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. There has been no salvage received during 1999, compared to
$3.7 million and $10.9 million for the three and nine months ended September 30,
1998, respectively.
Underwriting and Operating Expenses. Underwriting and operating expenses
------------------------------------
for the three and nine months ended September 30, 1999 were $12.0 million and
$35.8 million, respectively, representing increases of 2% from $11.8 million and
$35.1 million in the three and nine months ended September 30, 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 and nine-month periods ended September 30, 1999, gross underwriting
and operating expenses were $18.5 million and $54.3 million, respectively, an
increase of 2% from $18.2 million in the three months ended September 30, 1998
and an increase of 8% from $50.1 million in the nine months ended September 30,
1998. These increases reflect the overall increased business activity during the
period. Underwriting and operating expenses deferred for the three and nine
months ended September 30, 1999 were $11.6 million and $33.3 million,
respectively, compared to $10.4 million and $28.1 million for the three and nine
months ended September 30, 1998, respectively. The amortization of previously
deferred expenses and reinsurance commissions for the three and nine months
ended September 30, 1999 were $5.6 million and $15.3 million, respectively,
compared to $4.2 million and $13.6 million for the three and nine months ended
September 30, 1998, respectively.
14
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Financial Management Services
Through its financial management services subsidiaries, the Company
provides investment agreements, interest rate swaps and investment advisory and
cash management services, principally to states, municipalities and their
authorities, school districts, and hospitals and health organizations.
Revenues. Revenues, net of realized gains and losses, for the three and
---------
nine months ended September 30, 1999 were $12.1 million and $37.9 million,
respectively, down 10% from $13.5 million for the three months ended September
30, 1998 and 3% from $39.0 million in the nine months ended September 30, 1998.
Continuing the trend from the first two quarters of 1999, higher investment
agreement revenue ($6.2 million in the third quarter of 1999, up 35% from $4.6
million in the third quarter of 1998), was offset by lower interest rate swap
revenue ($2.9 million in the third quarter of 1999, down 50% from $5.8 million
in the third quarter of 1998).
Expenses. Expenses for the three and nine months ended September 30, 1999
---------
were $6.2 million and $19.9 million, respectively, down 24% from $8.2 million
for the three months ended September 30, 1998 and down 18% from $24.3 million
for the nine months ended September 30, 1998. These decreases were primarily due
to savings related to the fourth quarter 1998 closing of Ambac Connect, Inc., a
former electronic commerce subsidiary.
Corporate Items
Interest Expense. Interest expense for the three and nine months ended
-----------------
September 30, 1999 were $9.1 million and $27.3 million, respectively, compared
to $9.3 million and $23.6 million for the three and nine months ended September
30, 1998, respectively. The increase in interest expense for the nine-month
period ended September 30, 1999, compared with the corresponding prior period is
due to the $200 million debt issuance in April 1998.
Income Taxes. Income taxes for the three and nine months ended September
-------------
30, 1999 were at an effective rate of 24.3% and 23.6%, respectively, versus
23.3% and 23.2% for the three and nine months ended September 30, 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.
Core Earnings. Core earnings for the three and nine months ended September
--------------
30, 1999 were $75.6 million and $213.4 million, respectively, an increase of 25%
from $60.5 million for the three months ended September 30, 1998 and an increase
of 23% from $173.1 million for the nine months ended September 30, 1998. These
increases in core earnings were primarily the result of higher normal net
premiums earned from the growth in the insurance book of
15
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
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
calls and certain non-recurring items.
Operating Earnings. Operating earnings for the three and nine months ended
-------------------
September 30, 1999 were $79.8 million and $229.2 million, respectively, an
increase of 24% from $64.5 million in the three months ended September 30, 1998
and an increase of 18% from $194.2 million in the nine months ended September
30, 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 and nine months ended
September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------------
(Dollars in Millions) 1999 1998 1999 1998
--------------------------------------------
<S> <C> <C> <C> <C>
Net Income................................................ $79.8 $65.4 $224.0 $191.8
Net realized losses (gains), after tax.................... - (0.9) 5.2 2.4
--------------------------------------------
Operating earnings..................................... 79.8 64.5 229.2 194.2
Premiums earned from refundings, calls and other
accelerations, after tax................................. (4.2) (4.0) (15.8) (21.1)
--------------------------------------------
Core earnings.......................................... $75.6 $60.5 $213.4 $173.1
============================================
</TABLE>
There were 71.3 million and 71.4 million weighted-average diluted shares
outstanding during the three and nine months ended September 30, 1999,
respectively. The weighted-average number of diluted shares outstanding during
the three and nine months ended September 30, 1998 were 71.4 million and 71.5
million, respectively.
Adjusted Gross Premiums Written. The Company defines adjusted gross
--------------------------------
premiums written as gross up-front premiums written plus the present value of
estimated future installment premiums written on insurance policies and
structured credit derivatives issued 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 for the three
and nine months ended September 30, 1999 were $164.6 million and $429.8 million,
respectively, up 46% from $113.0 million in the three months ended September 30,
1998 and up 37% from $312.7 million in the nine months ended September 30, 1998.
The increases in the third quarter of 1999, as well as the nine-month period
ended September 30, 1999 were primarily due to the increase in installment
premiums written on structured finance transactions, especially on mortgage-
backed and asset-backed securities. The present value of future installment
premiums written for the three and nine months ended September 30, 1999 was
$90.9 million and $227.6 million, respectively, an increase of 123% from $40.8
million written in the third quarter of 1998 and an increase of 102% from $112.4
million written in the nine months ended September 30, 1998. The aggregate net
present value of estimated future installment premiums was $497.1 million and
$308.4 million as of September 30, 1999 and December 31, 1998, respectively. At
September 30, 1999, the rate used to discount future installment premiums was
changed from 9% to 7%. The prior period's estimate of present value of future
installment premiums has not been restated.
16
<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 and nine months ended
September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
----------------------------------------- -----------------------------------
(Dollars in Millions) 1999 % 1998 % 1999 % 1998 %
------------ ----- --------- ----- ----- -- ------- ----
Municipal Finance:
Up-front:
<S> <C> <C> <C> <C> <C> <C>
New issue........................... $ 69.0 42% $ 66.4 59% $183.7 43% $165.7 53%
Secondary market.................... 4.0 2 1.6 1 8.0 2 12.3 4
-------- ----- ------ ----- ------- ---- ------ ----
Sub-total up-front................. 73.0 44 68.0 60 191.7 45 178.0 57
Installment........................ 9.7 6 4.0 4 33.3 7 15.8 5
-------- ----- ------ ----- ------- ---- ------- ----
Total Municipal Finance.......... 82.7 50 72.0 64 225.0 52 193.8 62
-------- ----- ------ ----- ------- ---- ------- ----
Structured Finance:
Up-front............................ - - 0.2 - 0.5 - 1.0 -
Installment......................... 46.0 28 17.8 16 123.1 29 48.2 16
-------- ----- ------ ----- ------- ---- ------- ----
Total Structured Finance.......... 46.0 28 18.0 16 123.6 29 49.2 16
-------- ----- ------ ----- ------- ---- ------- ----
International (1):
Up-front...................... 0.7 1 4.0 4 10.0 2 21.3 7
Installment................... 35.2 21 19.0 16 71.2 17 48.4 15
-------- ----- ------ ----- ------- ---- ------- ----
Total International.............. 35.9 22 23.0 20 81.2 19 69.7 22
-------- ----- ------ ----- ------- ---- ------- ----
Total adjusted gross premiums.......... $164.6 100% $113.0 100% $429.8 100% $312.7 100%
-------- ----- ------ ----- ------- ---- ------ ----
Total up-front......................... $ 73.7 45% $ 72.2 64% $202.2 47% $200.3 64%
Total installment...................... 90.9 55 40.8 36 227.6 53 112.4 36
-------- ----- ------ ----- ------ ---- ------ ----
Total adjusted gross premiums......... $164.6 100% $113.0 100% $429.8 100% $312.7 100%
-------- ----- ------ ----- ------ ---- ------ ----
</TABLE>
(1) Excludes amounts ceded to MBIA Insurance Corporation under our international
joint venture of $13.4 million and $1.9 million for the three months ended
September 30, 1999 and 1998, respectively, and $43.2 million and $17.4 million
for the nine months ended September 30, 1999 and 1998, respectively.
Adjusted Book Value. Adjusted book value ("ABV") per common share increased
--------------------
5% to $44.22 at September 30, 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. At September 30,
1999, the rate used to discount future installment premiums was changed from 9%
to 7%. The prior period's estimate of present value of future installment
premiums has not been restated. The ABV was positively affected by the Company's
net income for the nine-month period ended September 30, 1999, the increase in
the after-tax present value of estimated net future installment premiums, net
unearned premium reserve and the unrealized gain on investment agreement
liabilities during the period, partially offset by the negative effect of the
change in the after-tax unrealized gain/loss in the investment portfolio
(included in book value), which went from a net unrealized gain of $159.0
million at December 31, 1998, to a net unrealized loss of $99.1 million at
September 30, 1999.
17
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
The following table reconciles book value per share to ABV per share as of
September 30, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------------- -------------------
<S> <C> <C>
Book value per share.................................................. $28.99 $29.97
After-tax value of:
Net unearned premium reserve........................................ 10.82 10.17
Deferred acquisition costs.......................................... (1.23) (1.12)
Present value of installment premiums............................... 4.62 2.86
Unrealized gain on investment agreement liabilities................. 1.02 0.10
------------------- -------------------
Adjusted book value per share......................................... $44.22 $41.98
=================== ===================
</TABLE>
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 nine months ended
September 30, 1999, Ambac Assurance paid dividends of $39.0 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 the next twelve months 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. The Company
believes that Ambac Assurance will have sufficient liquidity to satisfy any
claims that may occur related to the Y2K problem, as defined below.
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
18
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
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.
Credit Facilities. The Company and Ambac Assurance have a revolving credit
------------------
facility with three major international banks for $150 million, which expires in
August 2000 and provides a two-year term loan provision. The facility is
available for general corporate purposes, including the payment of claims. As of
September 30, 1999 and December 31, 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 high
quality 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
September 30, 1999 and December 31, 1998, no amounts were outstanding under this
facility.
ACP has a revolving credit facility with one major international bank for
$50 million, which expires in June 2000 and provides a three-year term loan
provision. The facility is available to ACP for general corporate purposes,
including payments in regard to its credit derivatives activities. The credit
facility became effective on July 1, 1999. As of September 30, 1999, 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
nine months ended September 30, 1999, the Company acquired approximately 307,000
shares for an aggregate amount of $16.6 million. Since inception of the Stock
Repurchase Program, the Company has acquired approximately 4,555,000 shares for
an aggregate amount of $159.3 million.
Balance Sheet. As of September 30, 1999, the fair value of the Company's
--------------
consolidated investment portfolio was $9.08 billion, an increase of 4% 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
financial guarantee operations largely offset by declines in the market values
of the investment portfolios resulting from higher interest rates during the
period.
Cash Flows. Net cash provided by operating activities was $298.9 million
-----------
and $255.8 million during the nine months ended September 30, 1999 and 1998,
respectively. These cash flows were primarily provided from financial guarantee
operations.
19
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Net cash provided by financing activities was $344.8 million during the
nine months ended September 30, 1999, $355.6 million was from investment
agreements issued (net of draws paid). For the nine months ended September 30,
1998, $1,433.0 million was provided in financing activities, of which $1,102.4
million was from investment agreements issued (net of draws paid).
Net cash used in investing activities was $640.2 million during the nine
months ended September 30, 1999, $3,650.8 million was used to purchase bonds,
partially offset by proceeds from sales and maturities of bonds of $2,951.6
million. For the nine months ended September 30, 1998, $1,688.5 million was used
in investing activities, $3,423.6 million was used to purchase bonds, partially
offset by proceeds from sales and maturities of bonds of $2,235.0 million.
Material Commitments. The Company has made no commitments for material
---------------------
capital expenditures within the next twelve months.
Year 2000. The issue commonly known as the Y2K problem ("Y2K") relates to
----------
whether computer programs and embedded computer chips will be able to
distinguish between the year 1900 and the year 2000. In 1998, the Company
commenced an initiative to assess and address any risks posed by the Y2K
problem. This initiative was a high priority undertaking and considered crucial
to the operation of the Company's businesses. Pursuant to this initiative, the
Company assessed the risks to its businesses related to the functionality of its
own computer systems and those of third parties. All phases of the initiative
have been completed and the Company has addressed any problems brought to light
as a result of the initiative.
The Company appointed a Y2K Steering Committee comprised of members of
senior management. The committee was given full responsibility and authority to
establish methodologies and budgets and to allocate necessary resources. The
committee was 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 also contracted with an
outside consultant to support its Y2K initiative.
The initiative was comprised of 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.
The total cost of identifying, testing and remediating its critical systems
was approximately $1.1 million, $0.4 million of which was incurred during 1999.
The Company's principal Y2K risks were grouped into
four categories:
(1) Company's Internal Systems Risk. This is the risk that the Company does
not successfully ready its operations for the next century. The Company,
like other financial
20
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
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. Although findings indicate
that the systems supporting the Company's internal operations will be
compliant, management has nevertheless developed contingent procedures in
the event its critical systems should fail. These procedures are being
tested and are expected to be satisfactory.
(2) Third Party Risk. This is the risk of disruption of Company operations
due to operational failures of third parties. 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. Based on the results of its
inquiries to third parties, the Company does not expect significant
disruptions related to the Y2K failure of its suppliers.
(3) Issuer Risk. This is the risk of failure by an obligor of obligations
insured by Ambac Assurance Corporation and its subsidiaries, including
Connie Lee Insurance Company (collectively, the "insurance companies") to
make scheduled payment of debt service due to the obligor's Y2K-related
systems, thus triggering a claim under the applicable insurance policy. In
the event a claim resulting solely from a Y2K problem occurs, the Company
would utilize its sources of liquidity to pay claims and has in fact
increased liquidity for such purpose. The Company would expect full
recovery of such claims when Y2K problems are resolved. The Company
presently has no specific reserves for claims solely associated with Y2K
events. The Company has incorporated Y2K guidelines into its underwriting
and surveillance process and routinely assesses Y2K risk associated with
issuers of both its insured obligations and potential issuers. The Company
relies on information provided by the issuers of these obligations, does
not independently verify such information and therefore cannot attest to
its accuracy.
(4) Financial Institution Risk. Financial institution risk includes the
risk of Y2K systems-related failures by the trustees or paying agents on
transactions insured by one of the insurance companies. 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 the insurance companies' 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 have
been tested. Based on the results of its reviews and inquiries, the Company
believes that the likelihood of system failure by a third party financial
institution is minimal.
21
<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 a 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 within
the Company monitors trading risk limits and, together with senior management,
is involved in the application of risk measurement methodologies.
22
<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
----------- ---------------------------------------------
10.26 Ambac Financial Group, Inc. Deferred Compensation Plan for
Outside Directors, effective as of December 1, 1993 and
amended and restated as of October 26, 1999.
10.27 Ambac Financial Group, Inc. 1997 Equity Plan Senior Officer
Deferred Compensation Sub-Plan of the 1997 Equity Plan
effective as of October 26, 1999.
27.00 Financial Data Schedule.
99.04 Ambac Assurance Corporation and Subsidiaries Consolidated
Unaudited Financial Statements as of September 30, 1999 and
December 31, 1998 and for the periods ended September 30,
1999 and 1998.
(b) Reports on Form 8-K:
There was no reports on Form 8-K filed during the third quarter of 1999.
23
<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: November 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)
24
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
- ----------------- -----------------------------------------------------
10.26 Ambac Financial Group, Inc. Deferred Compensation Plan
for Outside Directors, effective as of December 1,
1993 and amended and restated as of October 26, 1999.
10.27 Ambac Financial Group, Inc. 1997 Equity Plan Senior
Officer Deferred Compensation Sub-Plan of the 1997
Equity Plan effective as of October 26, 1999.
27.00 Financial Data Schedule.
99.04 Ambac Assurance Corporation and Subsidiaries
Consolidated Unaudited Financial Statements as of
September 30, 1999 and December 31, 1998 and for the
periods ended September 30, 1999 and 1998.
25
<PAGE>
EXHIBIT 10.26
AMBAC FINANCIAL GROUP, INC.
DEFERRED COMPENSATION PLAN
FOR OUTSIDE DIRECTORS
Effective as of December 1, 1993,
Amended and Restated as of October 26, 1999
<PAGE>
Ambac Financial Group, Inc.
Deferred Compensation Plan For Outside Directors
Page 2 of 13
AMBAC FINANCIAL GROUP, INC.
DEFERRED COMPENSATION PLAN FOR
OUTSIDE DIRECTORS
1. Definitions
"Account" and "Deferred Compensation Account" are used interchangeably
and mean the bookkeeping record established for each Participant. A Deferred
Compensation Account is established only for purposes of measuring a Deferred
Benefit and not to segregate assets or to identify assets that may be used to
pay a Deferred Benefit.
"Account Value" means the amount reflected on the books and records of
the Company as the value of a Participant's Deferred Compensation Account at any
date of determination, as determined in accordance with this Plan.
"Annual Fees" means the cash portion of (i) any annual fee payable to
an Outside Director for service on the Board, (ii) any other fee determined on
an annual basis and payable for service on (as distinguished from attendance at
meetings of), or for acting as chairperson of, any committee of the Board and
(iii) any similar annual fee payable in respect of service on the board of
directors of any Subsidiary or any committee of any such board of directors.
"Beneficiary" or "Beneficiaries" means a person or other entity
designated by a Participant on a Beneficiary Designation Form to receive
Deferred Benefit payments in the event of the Participant's death.
"Beneficiary Designation Form" means a document, in form approved by
the Committee, to be used by Participants to name their respective
Beneficiaries.
"Board" means the Board of Directors of the Company.
"Cash Deferral Option" means a Performance Option under which the
Deferred Amount credited to a Participant's Deferred Compensation Account is
carried as a cash balance to which interest equivalents are credited from time
to time as provided in Section 6(c)(i). "Committee" means the Compensation and
Organization Committee of the Board or any successor committee thereto.
"Common Stock" means the Company's common stock, par value $0.01 per
share.
"Conversion Date" has the meaning assigned to such term in Section
6(e).
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Ambac Financial Group, Inc.
Deferred Compensation Plan For Outside Directors
Page 3 of 13
"Deemed Capital Gain Tax Charge" has the meaning assigned to such term
in Section 6(c).
"Deferral Election" means the election of a Participant, made in
accordance with the terms and conditions of the Plan, to defer all or a portion
of his/her Directors Fees for a Deferral Year.
"Deferral Election Form" means a document, in form approved by the
Committee, pursuant to which a Participant makes a Deferral Election.
"Deferral Year" means the calendar year, starting with calendar year
1994. If an individual becomes eligible to participate in the Plan after the
commencement of a Deferral Year, the Deferral Year for the individual shall be
the remainder of such Deferral Year.
"Deferred Amount" means the amount of Directors Fees, deferred by a
Participant pursuant to a Deferral Election.
"Deferred Benefit" means the amount that will be paid on a deferred
basis under the Plan to a Participant who has made a Deferral Election. A
Participant's Deferred Benefit will equal the Account Value of his or her
Deferred Compensation Account, calculated as provided herein.
"Director Fees" means the aggregate of a Participant's Annual Fees and
Meeting Fees.
"Election Date" means December 31 of the year preceding the beginning
of the Deferral Year, provided, however, that if an individual becomes an
Outside Director for the first time during a Deferral Year, that Outside
Director's Election Date for such Deferral Year is any day within thirty days of
the date he/she becomes an Outside Director.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" of a share of Common Stock means the average of
the highest and the lowest quoted selling price of a share of Common Stock as
reported on the composite tape for securities listed on the New York Stock
Exchange, or such other national securities exchange as may be designated by the
Committee, or in the event that the Common Stock is not listed for trading on a
national securities exchange but is quoted on an automated quotation system, on
such automated quotation system, in any such case on the valuation date (or if
there were no sales on the valuation date, the average of the highest and the
lowest quoted selling prices as reported on such composite tape or automated
quotation system for the most recent day during which a sale occurred).
"Meeting Fees" means (i) any meeting fee payable in respect of
attendance at or participation in meetings of the Board or any committee of the
Board or any meeting of the
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Ambac Financial Group, Inc.
Deferred Compensation Plan For Outside Directors
Page 4 of 13
stockholders of the Company and (ii) any similar meeting fee payable in respect
of service on the board of directors of any Subsidiary or any committee of any
such board of directors.
"Outside Director" means a duly-elected member of the Board who is not
an employee of the Company or any Subsidiary.
"Participant" means an Outside Director who participates in the Plan
pursuant to Section 4.
"Performance Option" means the performance options made available from
time to time for selection by Participants to measure the return (positive or
negative) to be attributed to Deferred Amounts.
"Phantom Stock Option" means a Performance Option under which a
Deferred Amount is credited to a Participant's Deferred Compensation Account as
a number of Phantom Stock Units.
"Phantom Stock Unit" means a bookkeeping unit representing one share
of Common Stock.
"Subsidiary" means any corporation 50 percent or more of the voting
stock of which is owned directly or indirectly by the Company.
2. Purpose
The purpose of the Plan is to provide the Company's Outside Directors
an opportunity to defer payment of all or part of their Directors Fees in
accordance with the terms and conditions set forth herein.
3. Administration
(a) Authority. The Committee will be responsible for administering
the Plan. The Committee will have authority to adopt such rules as it may deem
appropriate to carry out the purposes of the Plan, and shall have authority to
interpret and construe the provisions of the Plan and any agreements under the
Plan and to make determinations pursuant to any Plan provision. Each
interpretation, determination or other action made or taken by the Committee
pursuant to the Plan shall be final and binding on all persons. No member of
the Committee shall be liable for any action or determination made in good
faith, and the members of the Committee shall be entitled to indemnification and
reimbursement in the manner provided in the Company's Amended and Restated
Certificate of Incorporation as it may be amended from time to time.
(b) Delegation. The Committee may designate a committee composed of
one or more members of the Board to carry out its responsibilities under such
conditions as it may set.
<PAGE>
Ambac Financial Group, Inc.
Deferred Compensation Plan For Outside Directors
Page 5 of 13
4. Eligibility
(a) Directors. Any Outside Director may participate in the Plan.
(b) Becoming a Participant. An Outside Director becomes a
Participant for any Deferral Year by filing a Deferral Election Form according
to Section 5 of the Plan.
5. Deferral Elections
(a) General Provisions. A Participant may elect to defer all or a
specified percentage (in multiples of 10 percent) of Directors Fees for a
Deferral Year, in the manner provided in this Section 5. A Participant's
Deferred Benefit is at all times nonforfeitable.
(b) Deferral Election Forms. Before the Election Date applicable to
a Deferral Year, each Outside Director will be provided with a Deferral Election
Form and a Beneficiary Designation Form. In order for an Outside Director to
participate in the Plan for a given Deferral Year, a Deferral Election Form,
completed and signed by him/her, must be delivered to the Secretary of the Board
on or prior to the applicable Election Date. An Outside Director electing to
participate in the Plan for a given Deferral Year shall indicate on his/her
Deferral Election Form:
(i) the percentage of Director Fees for the applicable Deferral
Year to be deferred;
(ii) the allocation of the Deferred Amount among the several
Performance Options then available to Participants, in accordance with the
terms and conditions of Section 6(b); and
(iii) the Participant's election either to have distribution
of his/her Deferred Benefit commence following termination of service as an
Outside Director or to have such distribution commence as of a date
specified on such Form, provided, however, that any such election
concerning the commencement of distribution of a Participant's Deferred
Benefit shall be subject to the terms and conditions of Section 6(e).
(c) Effect of No Deferral Election. An Outside Director who does
not submit a completed and signed Deferral Election Form to the Secretary of the
Board before the relevant Election Date is not a Participant for the Deferral
Year and may not defer his/her Directors Fee for the Deferral Year.
(d) Revocation of Deferral Election.
(i) A Participant may revoke a Deferral Election applicable to
a Deferral Year, but only pursuant to the procedure described in subsection
(ii) below. Any purported revocation that does not comply with subsection
(ii) below will not be given effect.
<PAGE>
Ambac Financial Group, Inc.
Deferred Compensation Plan For Outside Directors
Page 6 of 13
(ii) To be effective, a revocation must be in writing and
signed by the Participant, must express the Participant's intention to
revoke his Deferral Election applicable to that Deferral Year, and must be
delivered to the Secretary of the Board before the close of business on the
Election Date applicable to such Deferral Year. For example, to revoke a
Deferral Election relating to calendar year 2001, a written revocation of
such Deferral Election must be delivered to the Secretary of the Board
before the close of business on December 31, 2000.
6. Deferred Compensation Accounts; Distributions
(a) Deferred Compensation Accounts.
(i) Establishment of Accounts. A Participant's deferrals will
be credited to a Deferred Compensation Account set up for that Participant.
Each Deferred Compensation Account will be credited with Deferred Amounts,
as provided in Section 6(b), and credited (or charged) with earnings (or
loss) as provided in Section 6(c).
(ii) Crediting of Deferred Amounts.
Director Fees. As of the last business day of each calendar
quarter, an Outside Director's Deferred Compensation Account will be
credited with (A) 25% of Annual Fees deferred for the Deferral Year in
which such quarter occurs and (B) 100% of deferred Meeting Fees earned
during such quarter.
(b) Allocations Among Performance Options. A Participant shall have
the right to allocate the Deferred Amount for any Deferral Year, in minimum
allocations of at least 10%, among one or more Performance Options made
available from time to time under the Plan. The Performance Options generally
available to Participants shall include:
(i) A Cash Deferral Option;
(ii) A Phantom Stock Option; and
(iii) Such other Performance Options as the Committee may make available to
Participants from time to time. Deemed allocations among the available
Performance Options shall be made exclusively for the purpose of determining the
Account Value from time to time, and the Company will have no obligation to
invest amounts corresponding to Deferred Amounts in investment vehicles
corresponding to the Performance Options selected by the Participant.
Participants may change the deemed allocation of their Account Value among the
Performance Options then available under the Plan in accordance with procedures
established by the Committee from time to time; provided, however, that, unless
otherwise determined by the Committee, no such reallocation shall be made more
frequently than quarterly; and provided further that no such reallocation may
result in less than 10% of the Account Value being deemed allocated to any
single Performance Option.
<PAGE>
Ambac Financial Group, Inc.
Deferred Compensation Plan For Outside Directors
Page 7 of 13
(c) Determination of Account Value.
The Company will from time to time calculate the Account Value based
on the Participant's Deferred Amounts and his/her then-effective elections with
respect to deemed allocation of the Account among the available Performance
Options. Such calculation will be based on the best information available to
the Company as of the date of determination, which information may include
estimates. In addition, the following shall apply:
(i) Amounts allocated to the Cash Deferral Option (including amounts
resulting from the conversion of Phantom Stock Units as provided in Section
6(c)(ii)), will be credited with interest equivalents as of the first
business day of each calendar quarter based upon the average daily balance
credited to such Cash Option (which balance shall include any earnings on
amounts so credited pursuant to this Section 6(c)(i)) during the preceding
quarter. Interest equivalents will be calculated using the 90-day
commercial paper composite rate published by the Federal Reserve Bank as of
the last business day of such preceding calendar quarter, or such other
rate as the Committee may designate from time to time by resolution.
(ii) The number of Phantom Stock Units credited to a Participant's
Deferred Compensation Account (including fractions of Phantom Stock Units)
will be determined by dividing (A) the amount of Director Fees deferred by
(B) the Fair Market Value of a share of Common Stock on the date of
crediting.
(iii) If the Company pays any cash or other dividend or makes any
other distribution in respect of the Common Stock, each Phantom Stock Unit
credited to the Deferred Compensation Account of a Participant will be
credited with an additional number of Phantom Stock Units (including
fractions thereof) determined by dividing (A) the amount of cash, or the
value (as determined by the Committee) of any securities or other property,
paid or distributed in respect of one outstanding share of Common Stock by
(B) the Fair Market Value of a share of Common Stock on the date of such
payment or distribution. Such credit shall be made effective as of the
date of the dividend or other distribution in respect of the Common Stock.
(iv) In determining the value attributable to that portion of a
Participant's Deferred Compensation Account allocated to Performance
Options other than the Cash Deferral Option and the Phantom Share Option,
the Company will track the rate of return (positive or negative) over the
relevant measurement period of the investment fund, index or other vehicle
by reference to which the Performance Option is defined.
(v) Upon any reallocation of all or any portion of a Participant's
Deferred Compensation Account from one Performance Option to any other
Performance Option, the Company may charge such Account with an amount not
to exceed 5% of the amount so reallocated. The amount of the charge shall
be determined by the Company in its discretion and may vary depending on
the Performance Options from which and into which the Account is being
reallocated.
<PAGE>
Ambac Financial Group, Inc.
Deferred Compensation Plan For Outside Directors
Page 8 of 13
(vi) In addition, the returns attributable to a Deferred Compensation
Account shall be subject to the following adjustments:
(A) Returns attributable to any Performance Option other than the
Phantom Stock Option shall be reduced to reflect the amount that a
corporate taxpayer in the highest tax bracket for federal corporate
tax purposes would pay on the interests, dividends, distribution or
similar items of income that it would receive if it had invested in
the commercial paper, investment fund, index or other vehicle by
reference to which the Performance Option is defined for the period of
time, and in the same amounts, that the relevant Deferred Compensation
Account was deemed allocated to such Performance Option.
(B) Upon any change in the deemed allocation of a Participant's
Deferred Compensation Account among the Performance Options then
available, the Account shall be charged with the amount (if any) (the
"Deemed Capital Gain Tax Charge") of capital gains tax that a
corporate taxpayer in the highest bracket for federal corporate tax
purposes would pay upon the amount of gain it would recognize had it
invested in the investment fund, index or other vehicle by reference
to which the Performance Option is defined for the period of time, and
in the same amounts, that the relevant Deferred Compensation Account
was deemed allocated to such Performance Option. No credit shall be
made to an Account for any loss that would be recognized by a
corporate taxpayer that had invested in such Performance Option for
such period and in such amount.
The amount of the adjustments described in this subparagrpah (vi) shall be
determined by the Company in its discretion. The Company shall use its
best efforts to apply adjustments on a consistent basis to all Participants
who invest in any particular Performance Option.
(d) Manner of Payment of Deferred Benefit. All payments of Deferred
Benefits under the Plan will be in cash. The Company shall pay a Participant's
Deferred Benefit either in a single lump sum or in a series of installments, as
the Committee in its sole discretion shall determine, provided, however, that if
the Committee elects to pay a Participant's Deferred Benefit in a series of
installments, such installments shall be paid no more frequently than quarterly
and the Deferred Benefit must be distributed over a period not exceeding five
years. The Committee may, but shall not be required to, consult with the
Participant prior to determining the manner of payment of such Participant's
Deferred Benefit. If the Committee elects to pay a Participant's Deferred
Benefit in a series of installments, the relative size of such installments
shall be determined by the Committee in its discretion, and such installments
need not be in equal amounts or equal percentages of such Benefit. The unpaid
portion of a Participant's Deferred Benefit shall continue to be credited with
earnings as provided in Section 6(c) until paid.
(e) Commencement of Payment of Deferred Benefit. For purposes of
this Agreement a "Conversion Date" means the earliest to occur of:
(i)(A) termination of service as an Outside Director (unless
upon such termination
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Ambac Financial Group, Inc.
Deferred Compensation Plan For Outside Directors
Page 9 of 13
of service the Participant becomes an employee of the Company or any
Subsidiary, in which case the following clause (B) shall apply), and (B)
termination of employment with the Company and its Subsidiaries (unless
upon such termination of employment the Participant becomes an Outside
Director, in which case the foregoing clause (A) shall apply);
(ii) the date specified in the Deferral Election Form executed
by the Participant; or
(iii) the Participant's death.
Notwithstanding any other term or provision of this Plan, upon the occurrence of
a Conversion Date, any portion of a Participant's Deferred Compensation Account
that is allocated either to the Phantom Unit Option or to any Performance Option
other than the Cash Deferral Option will be converted into the Cash Deferral
Option based upon (X) in the case of amounts allocated to the Phantom Unit
Option, the Fair Market Value of the Common Stock as of the Conversion Date and
(Y) in the case of any Performance Option other than the Phantom Stock Option,
the net asset value or other relevant valuation measure of the investment fund,
index or other vehicle by reference to which the Performance Option is defined,
determined as of the Conversion Date or, if such net asset value or other
valuation information is not available as of the Conversion Date, as of the
latest date preceding the Conversion Date for which the same is generally
available. The amount credited to the Cash Deferral Option as a result of such
conversion shall, in the case of conversions from any Performance Option other
than the Phantom Stock Option, be subject to the Deemed Capital Gain Tax Charge
as described in Section 6(c) above. Following conversion, amounts so credited to
the Cash Deferral Option will be credited with interest equivalents as provided
in Section 6(c)(i). Except as provided in Section 6(f), a Participant's Deferred
Benefit shall be paid (if payable in a lump sum), or commence to be paid (if
payable in a series of installments), to the Participant as soon as practicable
(but in no event more than 60 days) after the Conversion Date.
(f) Death. In the event of a Participant's death, the Participant's
entire Deferred Benefit (including any unpaid portion thereof corresponding to
installments not yet paid at the time of death), to the extent not distributed
earlier pursuant to Section 6(e), will be distributed in a lump sum to the
Participant's Beneficiary or Beneficiaries (or, in the absence of any
Beneficiary, to the Participant's estate) on a date, selected by the Committee,
no more than six months after the Participant's date of death.
(g) Statements. The Company will furnish each Participant with a
statement setting forth the value of the Participant's Deferred Compensation
Account as of the end of each calendar year and all credits to and payments from
the Deferred Compensation Account during such year. Such statement will be
furnished no later than 60 days after the end of each calendar year.
7. Designation of Beneficiary
(a) Beneficiary Designations. Each Participant may designate a
Beneficiary to
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Ambac Financial Group, Inc.
Deferred Compensation Plan For Outside Directors
Page 10 of 13
receive any Deferred Benefit due under the Plan upon the Participant's death by
executing a Beneficiary Designation Form. A Beneficiary designation is not
binding on the Company until the Secretary of the Board receives the Beneficiary
Designation Form. If no designation is made or no designated Beneficiary is
alive (or in the case of an entity designated as a Beneficiary, in existence) at
the time of the Participant's death, payments due under the Plan will be made to
the Participant's estate.
(b) Change of Beneficiary Designation. A Participant may change an
earlier Beneficiary designation by executing a later Beneficiary Designation
Form. The execution of a Beneficiary Designation Form revokes and rescinds any
prior Beneficiary Designation Form.
8. Amendments
(a) General Power of Committee. Subject to Section 8(b), the Plan
may be altered, amended, suspended, or terminated at any time by the Committee
in its sole discretion.
(b) When Participants' Consents Required. Except for a termination
of the Plan caused by the Committee's determination that the laws upon which the
Plan is based have changed in a manner that negates the Plan's objectives, the
Committee may not alter, amend, suspend, or terminate the Plan without the
consent of any Participant to the extent that such action would result in the
distribution to such Participant of amounts then credited to his/her Deferred
Compensation Account in any manner other than as provided in the Plan or could
reasonably be expected to result in the immediate taxation to such Participant
of Deferred Benefits.
9. Employer's Obligation
This Plan is unfunded. A Deferred Compensation Account represents at
all times an unfunded and unsecured contractual obligation of the Company. Each
Participant or Beneficiary will be an unsecured creditor of the Company.
Amounts payable under the Plan will be satisfied solely out of the general
assets of the Company subject to the claims of the Company's creditors. No
Participant, Beneficiary or any other person shall have any interest in any fund
or in any specific asset of the Company by reason of any amount credited to
him/her hereunder, nor shall any Participant, Beneficiary or any other person
have any right to receive any distribution under the Plan except as, and to the
extent, expressly provided in the Plan. The Company will not segregate any funds
or assets for Deferred Benefits or issue any notes or security for the payment
of any Deferred Benefits. Any reserve or other asset that the Company may
establish or acquire to assure itself of the funds to provide benefits under the
Plan shall not serve in any way as security to any Participant, Beneficiary or
other person for the performance of the Company under the Plan.
10. No Control by Participant
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Ambac Financial Group, Inc.
Deferred Compensation Plan For Outside Directors
Page 11 of 13
A Participant shall have no control over his Deferred Compensation
Account except for (i) designating initial allocation among Performance Options
and subsequently revising such allocation, in all cases to the extent permitted
by the Plan, (ii) designating the date of initial distribution of benefits on
his Deferral Election Form (which designation shall be subject to the terms and
conditions of the Plan, including without limitation Section 6) and (iii)
designating his or her Beneficiary on a Beneficiary Designation Form.
11. Restrictions on Transfer
The Company shall pay all amounts payable under the Plan only to the
Participant or Beneficiary designated under the Plan to receive such amounts.
Neither a Participant nor his Beneficiary shall have any right to anticipate,
alienate, sell, transfer, assign, pledge, encumber or change any benefits to
which he may become entitled under the Plan, and any attempt to do so shall be
void. A Deferred Benefit shall not be subject to attachment, execution by levy,
garnishment, or other legal or equitable process for a Participant's or
Beneficiary's debts or other obligations.
12. Election and Revocation Notices
Notices of elections or revocations of elections under the Plan must be
in writing. A notice of election or revocation of election will be deemed
delivered to the Secretary of the Board on the date it is (i) delivered
personally to the Secretary of the Board at One State Street Plaza, New York,
New York 10004 (or at such other address as the Company may from time to time
designate as the address for elections and revocations of elections under the
Plan), (ii) mailed by registered mail or certified mail to the Secretary of the
Board at such address or (iii) sent by facsimile transmission to the Secretary
of the Board at 212-208-3558 (or such other facsimile transmission number as the
Company may designate from time to time for elections and revocations of
elections under the Plan), provided that an original signed election or
revocation of election is received by the Secretary of the Board no later than
10 business days after such transmission.
13. Waivers
The waiver of a breach of any provision in the Plan shall not operate
as and may not be construed as a waiver of any later breach.
14. Governing Law
The Plan shall be construed in accordance with and governed by the laws
of the State of New York.
<PAGE>
Ambac Financial Group, Inc.
Deferred Compensation Plan For Outside Directors
Page 12 of 13
15. Effective Date
The Plan shall be effective as of December 1, 1993 and Deferral
Elections may be made beginning with Eligible Compensation earned during the
year beginning January 1, 1994.
16. Construction
The headings in the Plan have been inserted for convenience of
reference only and are to be ignored in any construction of the Plan's
provisions. If a provision of the Plan is not valid or enforceable, that fact
shall in no way affect the validity or enforceability of any other Provision.
Use of one gender includes the other, and the singular and plural include each
other. The provisions of the Plan are binding on the Company, each
Participating Subsidiary and their respective successors or assigns, and on the
Participants, their Beneficiaries, heirs, and personal representatives.
17. Tax Withholding
The Company shall have the right, in connection with any Deferral
Election, (i) to require the Participant to remit to the Company an amount
sufficient to satisfy any Federal, state or local tax withholding requirements,
(ii) to withhold an amount necessary to satisfy such requirements from other
cash compensation owed to the Participant or (iii) to reduce the amount of
Director Fees deferred pursuant to the Plan in order to ensure that all such
requirements are satisfied. The Company shall also have the right to deduct
from all cash payments made pursuant to the Plan any Federal, state or local
taxes required to be withheld with respect to such payments.
18. No Right to Reelection or Continued Employment
Nothing in the Plan shall be deemed to create any obligation on the
part of the Board to nominate any of its members for reelection by the Company's
stockholders, nor confer upon any Outside Director the right to remain a member
of the Board for any period of time, or at any particular rate of compensation.
19. No Stockholder Rights
The crediting of Phantom Stock Units to a Participant's Deferred
Compensation Account shall not confer on the Participant any rights as a
stockholder of the Company, nor shall such Units confer on any Participant any
right to receive stock of the Company in settlement thereof.
20. Adjustment of and Changes in Shares
<PAGE>
Ambac Financial Group, Inc.
Deferred Compensation Plan For Outside Directors
Page 13 of 13
In the event of any merger, consolidation, recapitalization,
reclassification, stock dividend, special cash dividend or other change in
corporate structure affecting the Common Stock, the Committee shall make such
adjustments, if any, as it deems appropriate in the number of Phantom Stock
Units credited to a Participant's Deferred Compensation Account. The foregoing
adjustments shall be decided by the Committee in its discretion.
21. About the Plan
The Deferred Compensation Plan for Outside Directors and Senior
Officers was established as of December 1, 1993 by Ambac Inc. In 1997 Ambac
Inc. became Ambac Financial Group, Inc. The Plan was amended on October 28,
1998 in order to offer its participants more investment options.
The Plan was amended and restated, effective October 26, 1999 to
provide that this Plan be available only to Outside Directors. Senior Officers
no longer participate in this Plan as a new deferred plan has been adopted for
them.
<PAGE>
AMBAC FINANCIAL GROUP, INC.
DEFERRED COMPENSATION PLAN
FOR OUTSIDE DIRECTORS
Beneficiary Designation Form
To: Secretary, Board of Directors
Ambac Financial Group, Inc.
I designate ___________________________ as my primary Beneficiary(ies)
of any benefits that become payable under the Ambac Deferred Compensation Plan
for Outside Directors (the "Plan") as a result of my death.
If a designated Beneficiary survives me but dies (or if a trust,
terminates) before all benefits have been paid to the Beneficiary, I direct the
remainder of the payments to be made as the Beneficiary designates or, if the
Beneficiary fails to properly execute a Beneficiary designation, to the
Beneficiary's estate, or, if a trust, to the trustee to be distributed in
accordance with the terms of the trust.
This designation revokes and rescinds any prior Beneficiary designation
made by me.
If a Beneficiary is not named, or if there is no Beneficiary otherwise
in existence at the time of my death, I understand that payments will be made
according to Section 7(a) of the Plan.
I understand that this Beneficiary designation applies until revoked by
my written request.
I also understand that, in executing this Beneficiary designation, I
agree to be bound by the terms and conditions of the Plan and agree that such
terms and conditions are binding upon my Beneficiary(ies), distributee(s), and
personal representative(s).
_____________________________
Signature
________________ _____________________________
Date Name (Please Print)
<PAGE>
EXHIBIT 10.27
AMBAC FINANCIAL GROUP, INC. 1997 EQUITY PLAN
Sub Plan - -
DEFERRED COMPENSATION FOR
ELIGIBLE SENIOR OFFICERS
Effective as of October 26, 1999
<PAGE>
Ambac Financial Group, Inc.
Deferred Compensation Plan
Page 2 of 13
AMBAC FINANCIAL GROUP, INC. 1997 EQUITY PLAN SUB PLAN- -
DEFERRED COMPENSATION FOR
ELIGIBLE SENIOR OFFICERS
AMBAC FINANCIAL GROUP, INC., a Delaware corporation (the "Company"), adopts the
Ambac Financial Group, Inc. 1997 Equity Plan, Sub Plan - - Deferred
Compensation for Eligible Senior Officers (the "Plan"), effective as of October
26, 1999.
1. Definitions
For purposes of the Plan, unless defined below, the definitions set
forth in the Ambac 1997 Equity Plan, as amended ("Equity Plan"), are applicable
to the Plan.
"Account" and "Deferred Compensation Account" are used interchangeably
and mean the bookkeeping record established for each Participant. A Deferred
Compensation Account is established only for purposes of measuring a Deferred
Benefit and not to segregate assets or to identify assets that may be used to
pay a Deferred Benefit.
"Account Value" means the amount reflected on the books and records of
the Company as the value of a Participant's Deferred Compensation Account at any
date of determination, as determined in accordance with this Plan.
"Beneficiary" or "Beneficiaries" means a person or other entity
designated by a Participant on a Beneficiary Designation Form to receive
Deferred Benefit payments in the event of the Participant's death.
"Beneficiary Designation Form" means a document, in form approved by
the Committee, to be used by Participants to name their respective
Beneficiaries.
"Cash Deferral Option" means a Performance Option under which the
Deferred Amount credited to a Participant's Deferred Compensation Account is
carried as a cash balance to which interest equivalents are credited from time
to time as provided in Section 6(c)(i).
"Conversion Date" has the meaning assigned to such term in Section
6(e).
"Deemed Capital Gain Tax Charge" has the meaning assigned to such term
in Section 6(c).
<PAGE>
Ambac Financial Group, Inc.
Deferred Compensation Plan
Page 3 of 13
"Deferral Election" means the election of a Participant, made in
accordance with the terms and conditions of the Plan, to defer all or a portion
of his/her Eligible Compensation for a Deferral Year.
"Deferral Election Form" means a document, in form approved by the
Committee, pursuant to which a Participant makes a Deferral Election.
"Deferral Year" means the calendar year, starting with calendar year
1999. If an individual becomes eligible to participate in the Plan after the
commencement of a Deferral Year, the Deferral Year for the individual shall be
the remainder of such Deferral Year.
"Deferred Amount" means the amount of Eligible Compensation deferred
by a Participant pursuant to a Deferral Election.
"Deferred Benefit" means the amount that will be paid on a deferred
basis under the Plan to a Participant who has made a Deferral Election. A
Participant's Deferred Benefit will equal the Account Value of his/her Deferred
Compensation Account, calculated as provided herein.
"Election Date" means June 30 of the year preceding the beginning of
the Deferral Year.
"Eligible Compensation" means the cash portion of such Participant's
bonus for the relevant Deferral Year (it being understood that the amount of
such bonus may not be determined until after the end of the relevant Deferral
Year).
"Eligible Officer" means a senior officer of the Company or a
Participating Subsidiary who is eligible to participate in the Plan
pursuant to Section 4(b).
"Employer" means the Company or a Participating Subsidiary, as the
case may be, that employs an Eligible Officer.
"Participant" means an Eligible Officer who participates in the Plan
pursuant to Section 4.
"Participating Subsidiary" means any Subsidiary that has, by
resolution of its board of directors, agreed to participate in the Plan with
respect to, and to be responsible for the Deferred Benefits of, Eligible
Officers who are employed by it.
"Performance Option" means the performance options made available from
time to time for selection by Participants to measure the return (positive or
negative) to be attributed to Deferred Amounts.
<PAGE>
Ambac Financial Group, Inc.
Deferred Compensation Plan
Page 4 of 13
"Restricted Stock Unit" -- A restricted stock unit ( or "RSU")
represents the right to receive one share of Common Stock, subject to the
terms and conditions of the applicable award. The terms of any award of
RSUs normally will include "vesting" requirements. If the vesting
requirements are not met, an employee may forfeit his RSUs. Once RSUs
become vested, and any other conditions imposed by the award have been
satisfied by the employee, he/she will receive from Ambac the value of the
RSUs in Common Stock.
"Subsidiary" means any corporation 50 percent or more of the voting
stock of which is owned directly or indirectly by the Company.
2. Purpose
The purpose of the Plan is to provide the Company's Eligible Officers
an opportunity to defer payment of all or part of their Eligible Compensation in
accordance with the terms and conditions set forth herein.
3. Administration
(a) Authority. The Committee will be responsible for administering
the Plan. The Committee will have authority to adopt such rules as it may deem
appropriate to carry out the purposes of the Plan, and shall have authority to
interpret and construe the provisions of the Plan and any agreements under the
Plan and to make determinations pursuant to any Plan provision. Each
interpretation, determination or other action made or taken by the Committee
pursuant to the Plan shall be final and binding on all persons. No member of
the Committee shall be liable for any action or determination made in good
faith, and the members of the Committee shall be entitled to indemnification and
reimbursement in the manner provided in the Company's Amended and Restated
Certificate of Incorporation as it may be amended from time to time.
(b) Delegation. The Committee may designate a committee composed of
one or more members of the Board to carry out its responsibilities under such
conditions as it may set.
4. Eligibility
(a) Officers. Officers of the Company or Ambac Assurance who are
appointed Managing Director, or any officer title senior to Managing Director as
well as such other senior officers of the Company and its Subsidiaries as may be
designated from time to time by the Managing Director, Human Resources, may
participate in the Plan.
(b) Becoming a Participant. An Eligible Officer becomes a
Participant for any Deferral Year by filing a Deferral Election Form according
to Section 5 of the Plan.
<PAGE>
Ambac Financial Group, Inc.
Deferred Compensation Plan
Page 5 of 13
5. Deferral Elections
(a) General Provisions. A Participant may elect to defer all or a
specified percentage (in multiples of 5 percent) of his/her Eligible
Compensation for a Deferral Year, in the manner provided in this Section 5. A
Participant's Deferred Benefit is at all times nonforfeitable.
(b) Deferral Election Forms. Before the Election Date applicable to
a Deferral Year, each Eligible Officer will be provided with a Deferral Election
Form and a Beneficiary Designation Form. In order for an Eligible Officer to
participate in the Plan for a given Deferral Year, a Deferral Election Form,
completed and signed by him/her, must be delivered to the Managing Director,
Human Resources on or prior to the applicable Election Date. An Eligible
Officer electing to participate in the Plan for a given Deferral Year shall
indicate on his/her Deferral Election Form:
(i) the percentage of Eligible Compensation for the applicable
Deferral Year to be deferred;
(ii) the allocation of the Deferred Amount among the several
Performance Options then available to Participants, in accordance with the
terms and conditions of Section 6(b); and
(iii) the Participant's election either to have distribution of
his/her Deferred Benefit commence following termination of employment or to
have such distribution commence as of a date specified on such Form,
provided, however, that any such election concerning the commencement of
distribution of a Participant's Deferred Benefit shall be subject to the
terms and conditions of Section 6(e).
(iv) if the Participant has not yet met the applicable stock
ownership guideline associated with their officer title, twenty-five
percent (25%) of their Eligible Compensation will automatically be in the
form of RSUs. The Participant need not make any Deferral Election. In
addition to the automatic twenty-five percent (25%) deferral in the form of
RSUs, the Participant has not yet met the applicable ownership guideline
associated with their title he/she may elect to defer an additional portion
of their Eligible Compensation. Such further Deferral Election is subject
to the terms and conditions of Section 6(b). Once a Participant has met the
ownership target, he/she may elect to defer up to one hundred percent
(100%) of their Eligible Compensation.
(c) Effect of No Deferral Election. An Eligible Officer who does
not submit a completed and signed Deferral Election Form to the Managing
Director, Human Resources before the relevant Election Date is not a Participant
for the Deferral Year and may not defer his/her Eligible Compensation for the
Deferral Year.
(d) Revocation of Deferral Election.
A Participant may revoke a Deferral Election applicable to a
Deferral Year, but only pursuant to the procedure described in subsection
(ii) below.
<PAGE>
Ambac Financial Group, Inc.
Deferred Compensation Plan
Page 6 of 13
(ii) To be effective, a revocation must be in writing and signed by
the Participant, must express the Participant's intention to revoke his/her
Deferral Election applicable to that Deferral Year, and must be delivered
to the Managing Director, Human Resources before the close of business on
the Election Date applicable to such Deferral Year.
6. Deferred Compensation Accounts; Distributions
(a) Deferred Compensation Accounts.
(i) Establishment of Accounts. A Participant's deferrals will be
credited to a Deferred Compensation Account set up for that Participant.
Each Deferred Compensation Account will be credited with Deferred Amounts,
as provided in Section 6(b), and credited (or charged) with earnings (or
loss) as provided in Section 6(c).
(ii) Crediting of Deferred Amounts.
Bonus Compensation. Bonus compensation deferred by an
Eligible Officer will be credited to such Eligible Officer's Deferred
Compensation Account as of the day on which the Committee meets to
award bonuses for the relevant Deferral Year.
(b) Allocations Among Performance Options. A Participant shall have
the right to allocate the Deferred Amount for any Deferral Year, in minimum
allocations of at least 5%, among one or more Performance Options made available
from time to time under the Plan, provided, however, that, unless the Committee
in its discretion shall determine otherwise, the Deferred Amount of any
Participant who is subject to stock ownership guidelines established by the
Committee or the Company from time to time shall be deemed invested in the
Restricted Stock Unit Option, and such Participant shall not have the right to
elect any other Performance Option, unless and until such Participant has
satisfied such stock ownership guidelines. The Performance Options generally
available to Participants shall include:
(i) A Cash Deferral Option;
(ii) A Restricted Stock Unit Option; and
(iii) Such other Performance Options as the Committee may make
available to Participants from time to time.
Deemed allocations among the available Performance Options shall be made
exclusively for the purpose of determining the Account Value from time to time,
and the Company will have no obligation to invest amounts corresponding to
Deferred Amounts in investment vehicles corresponding to the Performance Options
selected by the Participant. Participants may change the deemed allocation of
their Account Value among the Performance Options then available under the Plan
in accordance with procedures established by the Committee from time to time;
<PAGE>
Ambac Financial Group, Inc.
Deferred Compensation Plan
Page 7 of 13
provided, however, that, unless otherwise determined by the Committee, no such
reallocation shall be made more frequently than quarterly; and provided further
that no such reallocation may result in less than 5% of the Account Value being
deemed allocated to any single Performance Option.
(c) Determination of Account Value.
The Company will from time to time calculate the Account Value based
on the Participant's Deferred Amounts and his/her then-effective elections with
respect to deemed allocation of the Account among the available Performance
Options. Such calculation will be based on the best information available to
the Company as of the date of determination, which information may include
estimates. In addition, the following shall apply:
(i) Amounts allocated to the Cash Deferral Option will be credited
with interest equivalents as of the first business day of each calendar
quarter based upon the average daily balance credited to such Cash Option
(which balance shall include any earnings on amounts so credited pursuant
to this Section 6(c)(i)) during the preceding quarter. Interest
equivalents will be calculated using the 90-day commercial paper composite
rate published by the Federal Reserve Bank as of the last business day of
such preceding calendar quarter, or such other rate as the Committee may
designate from time to time by resolution.
(ii) The number of Restricted Stock Units credited to a
Participant's Deferred Compensation Account (including fractions of
Restricted Stock Units) will be determined by dividing (A) the amount of
bonus compensation deferred by (B) the Fair Market Value of a share of
Common Stock on the date of crediting.
(iii) If the Company pays any cash or other dividend or makes any
other distribution in respect of the Common Stock, each Restricted Stock
Unit credited to the Deferred Compensation Account of a Participant will be
credited with an additional number of Restricted Stock Units (including
fractions thereof) determined by dividing (A) the amount of cash, or the
value (as determined by the Committee) of any securities or other property,
paid or distributed in respect of one outstanding share of Common Stock by
(B) the Fair Market Value of a share of Common Stock on the date of such
payment or distribution. Such credit shall be made effective as of the
date of the dividend or other distribution in respect of the Common Stock.
(iv) In determining the value attributable to that portion of a
Participant's Deferred Compensation Account allocated to Performance
Options other than the Cash Deferral Option and the Restricted Stock Unit
Option, the Company will track the rate of return (positive or negative)
over the relevant measurement period of the investment fund, index or other
vehicle by reference to which the Performance Option is defined.
(v) Upon any reallocation of all or any portion of a Participant's
Deferred Compensation Account from one Performance Option to any other
Performance Option, the Company may charge such Account with an amount not
to exceed 5% of the amount so reallocated. The amount of the charge shall
be determined by the Company in its
<PAGE>
Ambac Financial Group, Inc.
Deferred Compensation Plan
Page 8 of 13
discretion and may vary depending on the Performance Options from which and
into which the Account is being reallocated.
(vi) In addition, the returns attributable to a Deferred Compensation
Account shall be subject to the following adjustments:
(A) Returns attributable to any Performance Option, other than
the Restricted Stock Unit Option, shall be reduced to reflect the
amount that a corporate taxpayer in the highest tax bracket for
federal corporate tax purposes would pay on the interests, dividends,
distribution or similar items of income that it would receive if it
had invested in the commercial paper, investment fund, index or other
vehicle by reference to which the Performance Option is defined for
the period of time, and in the same amounts, that the relevant
Deferred Compensation Account was deemed allocated to such Performance
Option.
(B) Upon any change in the deemed allocation of a Participant's
Deferred Compensation Account among the Performance Options then
available other than the Restricted Stock Unit Option, the Account
shall be charged with the amount (if any) (the "Deemed Capital Gain
Tax Charge") of capital gains tax that a corporate taxpayer in the
highest bracket for federal corporate tax purposes would pay upon the
amount of gain it would recognize had it invested in the investment
fund, index or other vehicle by reference to which the Performance
Option is defined for the period of time, and in the same amounts,
that the relevant Deferred Compensation Account was deemed allocated
to such Performance Option. No credit shall be made to an Account for
any loss that would be recognized by a corporate taxpayer that had
invested in such Performance Option for such period and in such
amount.
The amount of the adjustments described in this subparagrpah (vi) shall be
determined by the Company in its discretion. The Company shall use its
best efforts to apply adjustments on a consistent basis to all Participants
who invest in any particular Performance Option.
(d) Manner of Payment of Deferred Benefit. All payments of Deferred
Benefits under the Plan, other than settlement of Restricted Stock Units which
will be settled in shares, will be in cash. The Company shall pay a
Participant's Deferred Benefit either in a single lump sum or in a series of
installments, as the Committee in its sole discretion shall determine, provided,
however, that if the Committee elects to pay a Participant's Deferred Benefit in
a series of installments, such installments shall be paid no more frequently
than quarterly and the Deferred Benefit must be distributed over a period not
exceeding five years. The Committee may, but shall not be required to, consult
with the Participant prior to determining the manner of payment of such
Participant's Deferred Benefit. If the Committee elects to pay a Participant's
Deferred Benefit in a series of installments, the relative size of such
installments shall be determined by the Committee in its discretion, and such
installments need not be in equal amounts or equal percentages of such Benefit.
The unpaid portion of a Participant's Deferred Benefit shall continue to be
credited with earnings as provided in Section 6(c) until paid.
<PAGE>
Ambac Financial Group, Inc.
Deferred Compensation Plan
Page 9 of 13
(e) Commencement of Payment of Deferred Benefit. For purposes of
this Agreement a "Conversion Date" means the earliest to occur of:
(i) termination of employment with the Company and its Subsidiaries.
(ii) the date specified in the Deferral Election Form executed by the
Participant; or
(iii) the Participant's death.
Notwithstanding any other term or provision of this Plan, upon the occurrence of
a Conversion Date, any portion of a Participant's Deferred Compensation Account
that is allocated either to the Restricted Stock Unit Option or to any
Performance Option other than the Cash Deferral Option will be converted into
the Cash Deferral Option based upon (X) in the case of amounts allocated to the
Restricted Stock Unit Option, the Fair Market Value of the Common Stock as of
the Conversion Date and (Y) in the case of any Performance Option other than the
Restricted Stock Unit Option, the net asset value or other relevant valuation
measure of the investment fund, index or other vehicle by reference to which the
Performance Option is defined, determined as of the Conversion Date or, if such
net asset value or other valuation information is not available as of the
Conversion Date, as of the latest date preceding the Conversion Date for which
the same is generally available. The amount credited to the Cash Deferral Option
as a result of such conversion shall, in the case of conversions from any
Performance Option other than the Restricted Stock Unit Option, be subject to
the Deemed Capital Gain Tax Charge as described in Section 6(c) above. Following
conversion, amounts so credited to the Cash Deferral Option will be credited
with interest equivalents as provided in Section 6(c)(i). Except as provided in
Section 6(f), a Participant's Deferred Benefit shall be paid (if payable in a
lump sum), or commence to be paid (if payable in a series of installments), to
the Participant as soon as practicable (but in no event more than 60 days) after
the Conversion Date.
(f) Death. In the event of a Participant's death, the Participant's
entire Deferred Benefit (including any unpaid portion thereof corresponding to
installments not yet paid at the time of death), to the extent not distributed
earlier pursuant to Section 6(e), will be distributed in a lump sum to the
Participant's Beneficiary or Beneficiaries (or, in the absence of any
Beneficiary, to the Participant's estate) on a date, selected by the Committee,
no more than six months after the Participant's date of death.
(g) Statements. The Company will furnish each Participant with a
statement setting forth the value of the Participant's Deferred Compensation
Account as of the end of each calendar year and all credits to and payments from
the Deferred Compensation Account during such year. Such statement will be
furnished no later than 60 days after the end of each calendar year.
7. Designation of Beneficiary (Confirm applicability re RSUs)
------------------------------
(a) Beneficiary Designations. Each Participant may designate a
Beneficiary to receive any Deferred Benefit due under the Plan upon the
Participant's death by executing a Beneficiary Designation Form. A Beneficiary
designation is not binding on the Company until the
<PAGE>
Ambac Financial Group, Inc.
Deferred Compensation Plan
Page 10 of 13
Secretary of the Board receives the Beneficiary Designation Form. If no
designation is made or no designated Beneficiary is alive (or in the case of an
entity designated as a Beneficiary, in existence) at the time of the
Participant's death, payments due under the Plan will be made to the
Participant's estate.
(b) Change of Beneficiary Designation. A Participant may change an
earlier Beneficiary designation by executing a later Beneficiary Designation
Form. The execution of a Beneficiary Designation Form revokes and rescinds any
prior Beneficiary Designation Form.
8. Amendments
(a) General Power of Committee. Subject to Section 8(b), the Plan
may be altered, amended, suspended, or terminated at any time by the Committee
in its sole discretion.
(b) When Participants' Consents Required. Except for a termination
of the Plan caused by the Committee's determination that the laws upon which the
Plan is based have changed in a manner that negates the Plan's objectives, the
Committee may not alter, amend, suspend, or terminate the Plan without the
consent of any Participant to the extent that such action would result in the
distribution to such Participant of amounts then credited to his/her Deferred
Compensation Account in any manner other than as provided in the Plan or could
reasonably be expected to result in the immediate taxation to such Participant
of Deferred Benefits.
9. Employer's Obligation
This Plan is unfunded. A Deferred Compensation Account represents at
all times an unfunded and unsecured contractual obligation of the relevant
Employer. Each Participant or Beneficiary will be an unsecured creditor of the
relevant Employer, as the case may be. Amounts payable under the Plan will be
satisfied solely out of the general assets of the relevant Employer subject to
the claims of the Employer's creditors. No Participant, Beneficiary or any
other person shall have any interest in any fund or in any specific asset of the
Company or any other Employer by reason of any amount credited to him/her
hereunder, nor shall any Participant, Beneficiary or any other person have any
right to receive any distribution under the Plan except as, and to the extent,
expressly provided in the Plan. The Employer will segregate any funds or assets
for Deferred Benefits or issue any notes or security for the payment of any
Deferred Benefits. Any reserve or other asset that the Company or any other
Employer may establish or acquire to assure itself of the funds to provide
benefits under the Plan shall not serve in any way as security to any
Participant, Beneficiary or other person for the performance of the Company or
any other Employer under the Plan.
10. No Control by Participant
A Participant shall have no control over his/her Deferred Compensation
Account except for (i) designating initial allocation among Performance Options
and subsequently revising such allocation, in all cases to the extent permitted
by the Plan, (ii) designating the date of initial distribution of benefits on
his/her Deferral Election Form (which designation shall be subject to
<PAGE>
Ambac Financial Group, Inc.
Deferred Compensation Plan
Page 11 of 13
the terms and conditions of the Plan, including without limitation Section 6)
and (iii) designating his/her Beneficiary on a Beneficiary Designation Form.
11. Restrictions on Transfer
The Company or the relevant Employer, as the case may be, shall pay all
amounts payable under the Plan only to the Participant or Beneficiary designated
under the Plan to receive such amounts. Neither a Participant nor his/her
Beneficiary shall have any right to anticipate, alienate, sell, transfer,
assign, pledge, encumber or change any benefits to which he/she may become
entitled under the Plan, and any attempt to do so shall be void. A Deferred
Benefit shall not be subject to attachment, execution by levy, garnishment, or
other legal or equitable process for a Participant's or Beneficiary's debts or
other obligations.
12. Election and Revocation Notices
Notices of elections or revocations of elections under the Plan must be
in writing. A notice of election or revocation of election will be deemed
delivered to the Secretary of the Board on the date it is (i) delivered
personally to the secretary of the Board at One State Street Plaza, New York,
New York 10004 (or at such other address as the Company may from time to time
designate as the address for elections and revocations of elections under the
Plan), (ii) mailed by registered mail or certified mail to the Secretary of
the Board at such address or (iii) sent by facsimile transmission to the
Managing Director, Human Resources at 212-208-3131 (or such other facsimile
transmission number as the Company may designate from time to time for elections
and revocations of elections under the Plan), provided that an original signed
election or revocation of election is received by the Secretary of the Board no
later than 10 business days after such transmission.
13. Waivers
The waiver of a breach of any provision in the Plan shall not operate
as and may not be construed as a waiver of any later breach.
14. Governing Law
The Plan shall be construed in accordance with and governed by the laws
of the State of New York.
15. Effective Date
The Plan shall be effective as of October 26, 1999.
16. Construction
The headings in the Plan have been inserted for convenience of
reference only and are to be ignored in any construction of the Plan's
provisions. If a provision of the Plan is not
<PAGE>
Ambac Financial Group, Inc.
Deferred Compensation Plan
Page 12 of 13
valid or enforceable, that fact shall in no way affect the validity or
enforceability of any other Provision. Use of one gender includes the other, and
the singular and plural include each other. The provisions of the Plan are
binding on the Company, each Participating Subsidiary and their respective
successors or assigns, and on the Participants, their Beneficiaries, heirs, and
personal representatives.
17. Tax Withholding
The Company shall have the right, in connection with any Deferral
Election, (i) to require the Participant to remit to the Company or the relevant
Participating Subsidiary an amount sufficient to satisfy any Federal, state or
local tax withholding requirements, (ii) to withhold an amount necessary to
satisfy such requirements from other cash compensation owed to the Participant
or (iii) to reduce the amount of Eligible Compensation deferred pursuant to the
Plan in order to ensure that all such requirements are satisfied. The Company
shall also have the right to deduct from all cash payments made pursuant to the
Plan any Federal, state or local taxes required to be withheld with respect to
such payments.
18. No Right to Reelection or Continued Employment
Nothing in this Plan shall be deemed to confer on any Eligible Officer
a right to continued employment, or to limit or restrict the right of the
Company or a Participating Subsidiary to terminate an Eligible Officer's
employment at any time, for any reason, with or without cause.
19. No Stockholder Rights
The crediting of Restricted Stock Units to a Participant's Deferred
Compensation Account shall not confer on the Participant any rights as a
stockholder of the Company.
20. Adjustment of and Changes in Shares
In the event of any merger, consolidation, recapitalization,
reclassification, stock dividend, special cash dividend or other change in
corporate structure affecting the Common Stock, the Committee shall make such
adjustments, if any, as it deems appropriate in the number of Restricted Stock
Units credited to a Participant's Deferred Compensation Account. The foregoing
adjustments shall be decided by the Committee in its discretion.
<PAGE>
AMBAC FINANCIAL GROUP, INC. 1997 EQUITY PLAN
Sub Plan - -
DEFERRED COMPENSATION FOR
ELIGIBLE SENIOR OFFICERS
Beneficiary Designation Form
To: Managing Director, Human Resources
Ambac Financial Group, Inc.
I designate ___________________________ as my primary
Beneficiary(ies) of any benefits that become payable under the Ambac Financial
Group, Inc. 1997 Equity Plan, Sub Plan, Deferred Compensation for Eligible
Senior Officers (the "Plan") as a result of my death.
If a designated Beneficiary survives me but dies (or if a trust,
terminates) before all benefits have been paid to the Beneficiary, I direct the
remainder of the payments to be made as the Beneficiary designates or, if the
Beneficiary fails to properly execute a Beneficiary designation, to the
Beneficiary's estate, or, if a trust, to the trustee to be distributed in
accordance with the terms of the trust.
This designation revokes and rescinds any prior Beneficiary designation
made by me.
If a Beneficiary is not named, or if there is no Beneficiary otherwise
in existence at the time of my death, I understand that payments will be made
according to Section 7(a) of the Plan.
I understand that this Beneficiary designation applies until revoked by
my written request.
I also understand that, in executing this Beneficiary designation, I
agree to be bound by the terms and conditions of the Plan and agree that such
terms and conditions are binding upon my Beneficiary(ies), distributee(s), and
personal representative(s).
---------------------------
Signature
- -------------- ---------------------------
Date Name (Please Print)
<PAGE>
EXHIBIT 99.04
AMBAC ASSURANCE CORPORATION AND SUBSIDIARIES
(a wholly owned subsidiary of Ambac Financial Group, Inc.)
Consolidated Unaudited Financial Statements
As of September 30, 1999 and December 31, 1998
and for the Periods Ended September 30, 1999 and 1998
<PAGE>
Ambac Assurance Corporation and Subsidiaries
Notes to Consolidated Unaudited Financial Statements
(Dollars in Thousands)
(1) Basis of Presentation
Ambac Assurance Corporation ("Ambac Assurance") is a leading provider of
financial guarantees for 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
September 30, 1999, Ambac Assurance's net insurance in force (principal and
interest) was $362,488,000. Ambac Assurance is a wholly owned subsidiary of
Ambac Financial Group, Inc. ("AFGI"), a holding company whose subsidiaries
provide financial guarantees 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 insurance company, guaranteed
bonds primarily for college and hospital infrastructure projects. 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 assume up to 50%
of international business written by the other.
Ambac Assurance, through it's wholly owned subsidiary, Ambac Credit
Products ("ACP") enters into structured credit derivative transactions. These
structured credit derivatives require ACP to make payments upon the occurrence
of certain defined credit events relating to an underlying obligation. Should a
credit event occur, ACP would generally be required to purchase the impaired
asset or to make a payment equivalent to the difference between the par value
and market value of the underlying obligation. The majority of ACP's credit
derivatives have been structured so that a level of first loss protection is
provided.
<PAGE>
Ambac Assurance Corporation and Subsidiaries
Notes to Consolidated Unaudited Financial Statements
(Dollars in Thousands)
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 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 nine months ended
September 30, 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
September 30, 1999 and December 31, 1998
(Dollars in Thousands Except Share Data)
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
-------------------- --------------------
(unaudited)
ASSETS
------
Investments:
<S> <C> <C>
Fixed income securities, at fair value
(amortized cost of $3,406,852 in 1999 and $3,097,289 in 1998) $3,370,641 $3,310,047
Short-term investments, at cost (approximates fair value) 178,800 93,912
---------------------- -----------------------
Total investments 3,549,441 3,403,959
Cash 8,054 4,895
Securities purchased under agreements to resell 10,001 5,449
Receivable for securities sold 34,314 12,132
Investment income due and accrued 54,480 54,088
Deferred acquisition costs 133,079 120,619
Reinsurance recoverable 3,688 3,638
Prepaid reinsurance 201,579 199,920
Other assets 148,851 212,475
---------------------- -----------------------
Total assets $4,143,487 $4,017,175
====================== =======================
LIABILITIES AND STOCKHOLDER'S EQUITY
-------------------------------------
Liabilities:
Unearned premiums $1,376,099 $1,303,203
Losses and loss adjustment expenses 123,027 115,794
Ceded reinsurance balances payable 4,082 6,576
Deferred income taxes 64,856 144,565
Current income taxes 31,371 19,984
Other liabilities 171,668 226,950
Payable for securities purchased 70,128 33,758
---------------------- -----------------------
Total liabilities 1,841,231 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 September 30, 1999 and December 31, 1998 82,000 82,000
Additional paid-in capital 643,725 541,021
Accumulated other comprehensive (loss) income (23,383) 138,651
Retained earnings 1,599,914 1,404,673
---------------------- -----------------------
Total stockholder's equity 2,302,256 2,166,345
---------------------- -----------------------
$4,143,487 $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 September 30, 1999 and 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------- -------------------------------------
1999 1998 1999 1998
---------------- ---------------- ---------------- ----------------
Revenues:
<S> <C> <C> <C> <C>
Gross premiums written $108,415 $90,494 $299,465 $259,090
Ceded premiums written (11,896) (4,764) (33,440) (40,899)
---------------- ---------------- ---------------- ----------------
Net premiums written $96,519 $85,730 $266,025 $218,191
================ ================ ================ ================
Net premiums earned $69,056 $50,705 $194,763 $158,424
Net fees earned and other income 4,430 6,255 15,376 18,915
Net investment income 53,045 47,438 154,003 138,513
Net realized losses (62) (9,273) (5,542) (16,066)
---------------- ---------------- ---------------- ----------------
Total revenues 126,469 95,125 358,600 299,786
---------------- ---------------- ---------------- ----------------
Expenses:
Losses and loss adjustment expenses 3,000 1,500 8,000 4,500
Underwriting and operating expenses 13,167 12,441 40,401 38,613
Interest expense 755 865 2,212 2,287
---------------- ---------------- ---------------- ----------------
Total expenses 16,922 14,806 50,613 45,400
---------------- ---------------- ---------------- ----------------
Income before income taxes 109,547 80,319 307,987 254,386
Provision for income taxes 26,611 17,141 73,746 57,057
---------------- ---------------- ---------------- ----------------
Net income $82,936 $63,178 $234,241 $197,329
================ ================ ================ ================
</TABLE>
See accompanying Notes to Consolidated Unaudited Financial Statements
<PAGE>
Ambac Assurance Corporation and Subsidiaries
Consolidated Statements of Stockholder's Equity
(Unaudited)
For The Periods Ended September 30, 1999 and 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
1999 1998
-------------------------------- --------------------------------
Retained Earnings:
<S> <C> <C> <C> <C>
Balance at January 1 $1,404,673 $1,179,322
Net income 234,241 $234,241 197,329 197,329
----------- ----------
Dividends declared - common stock (39,000) (36,000)
--------------- ---------------
Balance at September 30 $1,599,914 $1,340,651
--------------- ---------------
Accumulated Other Comprehensive Income:
Balance at January 1 $138,651 $118,119
Unrealized (losses) gains on securities, ($248,968)
and $74,322, pre-tax, in 1999 and 1998, respectively (1) (161,829) 48,309
Foreign currency (loss) gain (205) 673
----------- ---------
Other comprehensive (loss) income (162,034) (162,034) 48,982 48,982
------------------------------ ------------------------------
Comprehensive income $72,207 $246,311
========== =========
Balance at September 30 ($23,383) $167,101
---------- ----------
Preferred Stock:
Balance at January 1 and September 30 $- $-
---------- ----------
Common Stock:
Balance at January 1 and September 30 $82,000 $82,000
---------- ----------
Additional Paid-in Capital:
Balance at January 1 $541,021 $521,153
Capital contribution 101,479 -
Exercise of stock options 1,225 5,867
---------- ----------
Balance at September 30 $643,725 $527,020
---------- ----------
Total Stockholder's Equity at September 30 $2,302,256 $2,116,772
========== ==========
(1) Disclosure of reclassification amount:
Unrealized holding (losses) gains arising during period ($165,431) $49,091
Less: reclassification adjustment for net (losses)
gains included in net income (3,602) 782
----------- ----------
Net unrealized (losses) gains on securities ($161,829) $48,309
=========== ==========
</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 September 30, 1999 and 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $234,241 $197,329
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,703 1,234
Amortization of bond premium and discount (3,477) (916)
Current income taxes 11,387 (1,246)
Deferred income taxes 7,429 452
Premiums receivable 5,050 (941)
Deferred acquisition costs (12,460) (10,634)
Unearned premiums, net 71,237 59,908
Losses and loss adjustment expenses 7,183 14,150
Ceded reinsurance balances payable (2,494) (5,482)
Losses on sales of investments 5,542 16,066
Other, net 12,841 (3,090)
--------------- ---------------
Net cash provided by operating activities 338,182 266,830
--------------- ---------------
Cash flows from investing activities:
Proceeds from sales of bonds 913,028 679,926
Proceeds from maturities of bonds 126,435 86,365
Purchases of bonds (1,236,499) (969,016)
Change in short-term investments (84,888) (38,255)
Securities purchased under agreements to resell (4,552) 2,484
Other, net (3,547) (18,006)
--------------- ---------------
Net cash used in investing activities (290,023) (256,502)
--------------- ---------------
Cash flows from financing activities:
Dividends paid (39,000) (36,000)
Short-term financing (6,000) 20,283
--------------- ---------------
Net cash used in financing activities (45,000) (15,717)
--------------- ---------------
Net cash flow 3,159 (5,389)
Cash at January 1 4,895 8,004
--------------- ---------------
Cash at September 30 $8,054 $2,615
=============== ===============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes $50,860 $54,700
=============== ===============
Supplemental disclosure of non-cash financing activitites:
The Company received a capital contribution from its parent company in April, 1999, in the form
of fixed income securities amounting to $101,479.
</TABLE>
See accompanying Notes to Consolidated Unaudited Financial Statements.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 8,885,127
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 2,592
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 9,078,134
<CASH> 11,714
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 133,079
<TOTAL-ASSETS> 11,325,663
<POLICY-LOSSES> 123,027
<UNEARNED-PREMIUMS> 1,365,545
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 423,979
0
0
<COMMON> 707
<OTHER-SE> 2,026,490
<TOTAL-LIABILITY-AND-EQUITY> 11,325,663
192,566
<INVESTMENT-INCOME> 153,726
<INVESTMENT-GAINS> (8,059)
<OTHER-INCOME> 4,304
<BENEFITS> 8,000
<UNDERWRITING-AMORTIZATION> 35,765
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 293,319
<INCOME-TAX> 69,354
<INCOME-CONTINUING> 223,965
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 223,965
<EPS-BASIC> 3.20
<EPS-DILUTED> 3.14
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
