<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended Commission File Number
December 31, 1998 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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $0.01 per share and
Preferred Stock Purchase Rights New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
None
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 ___
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 15, 1999 was $3,871,191,894 (based upon the closing price
of the Registrant's shares of the New York Stock Exchange on March 15, 1999,
which was $55.563). For purposes of this information, the outstanding shares of
Common Stock which were owned by all directors and executive officers of the
Registrant were deemed to be shares of Common Stock held by affiliates.
As of March 15, 1999, 69,976,787 shares of Common Stock, par value $0.01 per
share, (net of 703,597 treasury shares) were outstanding.
Documents Incorporated By Reference
Portions of the Registrant's Annual Report to Stockholders for the year
ended December 31, 1998 are incorporated by reference into Parts II and IV
hereof. Portions of the Registrant's Proxy Statement dated March 30, 1999 in
connection with the Annual Meeting of Stockholders to be held on May 12, 1999
are incorporated by reference into Part III hereof.
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TABLE OF CONTENTS
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Page
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PART I
<S> <C> <C>
Item 1. Business................................................................ 1
Item 2. Properties.............................................................. 27
Item 3. Legal Proceedings....................................................... 27
Item 4. Submission of Matters to a
Vote of Security Holders................................................ 27
PART II
Item 5. Market for Registrant's Common
Equity and Related Stockholder Matters.................................. 27
Item 6. Selected Financial Data................................................. 28
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................... 28
Item 7A. Quantitative and Qualitative Disclosures 28
About Market Risk.......................................................
Item 8. Financial Statements and Supplementary Data............................. 28
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure..................................... 28
PART III
Item 10. Directors and Executive Officers
of the Registrant....................................................... 28
Item 11. Executive Compensation.................................................. 29
Item 12. Security Ownership of Certain
Beneficial Owners and Management........................................ 29
Item 13. Certain Relationships and
Related Transactions.................................................... 29
PART IV
Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K...................................... 29
SIGNATURES 35
FINANCIAL STATEMENT SCHEDULES................................................................. S-1
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Part I
Item 1. Business.
GENERAL
Ambac Financial Group, Inc. (the "Company"), headquartered in New York
City, is a holding company whose subsidiaries provide financial guarantee
insurance and financial services to clients in both the public and private
sectors around the world. The Company was incorporated on April 29, 1991. The
Company's principal operating subsidiary, Ambac Assurance Corporation ("Ambac
Assurance"), is a leading insurer of municipal and structured finance
obligations. Through its financial management services subsidiaries, the Company
provides investment agreements, interest rate swaps, investment advisory and
cash management services, primarily to states, municipalities and their
authorities.
In December 1997, Ambac Assurance acquired Connie Lee Holdings, Inc. and
its triple-A rated financial guarantee insurance subsidiary, Connie Lee
Insurance Company ("Connie Lee"). Connie Lee, which guaranteed bonds primarily
for college and hospital infrastructure projects, did not write any new business
in 1998.
Ambac Assurance is primarily engaged in insuring municipal and structured
finance obligations and is the successor of the oldest municipal bond insurance
company, which wrote the first municipal bond insurance policy in 1971.
Financial guarantee insurance written by Ambac Assurance in both the primary and
secondary markets guarantees payment when due of the principal of and interest
on the obligation insured. In the case of a default on an insured obligation,
payments under the insurance policy may not be accelerated by the policyholder
without Ambac Assurance's consent. Ambac Assurance seeks to minimize the risk
inherent in its insurance portfolio by maintaining a diverse portfolio, which
spreads its risk across a number of criteria, including issue size, type of
bond, geographic area and obligor. As of December 31, 1998, Ambac Assurance's
net insurance in force (after giving effect for reinsurance) was $317.7 billion.
See "Insurance in Force" below.
Ambac Assurance has earned triple-A ratings, the highest ratings available
from Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings
Group ("S&P"), Fitch IBCA, Inc., ("Fitch") and Japan Rating and Investment
Information, Inc. ("Japan R&I"). These ratings are an essential part of Ambac
Assurance's ability to provide credit enhancement. See "Rating Agencies" below.
The Company's investment agreement business ("IA Business"), conducted
through its subsidiaries, Ambac Capital Management, Inc. ("ACMI") and Ambac
Capital Funding, Inc. ("ACFI") provide investment agreements primarily to
states, municipalities and their authorities. Investment agreements written by
ACMI and ACFI are rated triple-A by virtue of Ambac Assurance's insurance
policies which guarantee their payment obligations. Investment agreements are
primarily used by municipal bond issuers to invest bond proceeds until the
proceeds can be used for their intended purpose, such as financing construction.
The investment agreement provides for the guaranteed return of principal
invested, and for the payment of interest thereon at a guaranteed rate. See
"Investment Agreements" below.
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The Company provides interest rate swaps through its subsidiary Ambac
Financial Services, L.P. ("AFSLP") to states, municipalities and their
authorities, and other entities in connection with their financings. The
interest rate swaps provided by AFSLP are insured by Ambac Assurance and provide
a financing alternative that can reduce a municipal issuer's overall borrowing
costs. See "Municipal Interest Rate Swaps" below.
The Company provides investment advisory, cash management and fund
administration services through its subsidiary, Cadre Financial Services, Inc.
("Cadre"), and broker/dealer services through its subsidiary, Cadre Securities,
Inc. ("Cadre Securities"), to school districts, hospitals and health
organizations, and municipalities.
As a holding company, Ambac Financial Group, Inc. is largely dependent on
dividends from Ambac Assurance, its principal operating subsidiary, and interest
income from its investment portfolio, to pay dividends on its capital stock, to
pay principal and interest on its indebtedness, to pay its operating expenses,
and to make capital investments in its subsidiaries. Dividends from Ambac
Assurance are subject to certain insurance regulatory restrictions. See
"Insurance Regulatory Matters -- Wisconsin Dividend Restrictions" below and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" in the Company's 1998 Annual
Report to Stockholders.
In this Form 10K, we may make statements about our future results that are
considered "forward-looking statements" under the Private Securities Litigation
Reform Act of 1995. These statements are based on our current expectations and
the current economic environment. We caution you that these statements are not
guarantees of future performance. They involve a number of risks and
uncertainties that are difficult to predict. Our actual results could differ
materially from those expressed or implied in the forward-looking statements.
Among the factors that could cause actual results to differ materially are: (1)
changes in the economic, credit, or interest rate environment in the United
States and abroad; (2) the level of activity within the national and worldwide
debt markets; (3) competitive conditions and pricing levels; (4) legislative and
regulatory developments; (5) changes in tax laws; and (6) other risks and
uncertainties that have not been identified at this time. We undertake no
obligation to publicly correct or update any forward-looking statement if we
later become aware that it is not likely to be achieved.
BUSINESS SEGMENTS
The following paragraphs describe the business operations of Ambac
Financial Group, Inc. and its subsidiaries (sometimes collectively referred to
as "the Company") for the Company's two reportable segments: Financial Guarantee
Insurance and Financial Management Services.
Financial Guarantee Insurance
Financial guarantee insurance, of the type written by Ambac Assurance,
guarantees to the holder of the underlying obligation, the timely payment of
principal and interest by the issuer on such obligation in accordance with its
original payment schedule. Accordingly, in the case of an issuer default on the
insured obligation, payments under the insurance policy may not be accelerated
by the policyholder without Ambac Assurance's consent.
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Financial guarantee insurance provides a form of credit enhancement that
benefits both the issuer and the investor. Issuers benefit because their
securities are sold with a higher credit rating than securities of the issuer
sold on an uninsured basis, resulting in interest cost savings and greater
marketability. In addition, for complex financings and obligations of issuers
that are not well known by investors, insured obligations receive greater market
acceptance than uninsured obligations. Investors benefit from greater
marketability and a reduction in the risk of loss associated with an issuer's
default.
The Company derives financial guarantee insurance revenues from: (i)
premiums earned over the life of the obligations insured; (ii) net investment
income; (iii) net realized gains and losses; and (iv) fees. Excluding
transactions with affiliates, total financial guarantee insurance revenues were
$408.4 million, $339.2 million and $266.3 million in 1998, 1997 and 1996,
respectively. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Note 17 of Notes to Consolidated Financial
Statements in the Company's 1998 Annual Report to Stockholders.
Financial guarantee insurance is sold in three principal markets: the U.S.
Municipal Market, the U.S. Structured Finance and Asset-backed Market, and the
International Market.
U. S. Municipal Market
Until 1993, Ambac Assurance was almost exclusively focused on the
municipal market in the United States. The municipal market includes taxable and
tax-exempt bonds, notes and other evidences of indebtedness issued by states,
political subdivisions (e.g., cities, counties, towns and villages), water,
sewer, electric and other utility districts, airports, higher educational
institutions, hospitals, transportation and housing authorities and other
similar authorities and agencies. Municipal obligations are generally supported
by either the taxing authority of the issuer or the issuer's or underlying
obligor's ability to collect fees or assessments for certain projects or public
services. More recently, the municipal market has expanded to include
structured and asset-backed bond issues for tax liens, sports stadiums, lease
pools and other municipal assets. The following table sets forth the volume of
new issues of long-term (longer than 12 months) municipal bonds and the volume
of new issues of insured long-term municipal bonds over the period from 1989
through 1998 in the United States.
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U.S. Long-Term Municipal Market
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Insured
Bonds as
Percentage
Total Insured of Total
Volume Volume Volume
($ in Billions) ----------- --------- ------------
<S> <C> <C> <C>
1989........................................................ $125.0 $ 31.1 24.9%
1990........................................................ 127.8 33.5 26.2
1991........................................................ 172.4 51.9 30.1
1992........................................................ 234.7 80.8 34.4
1993........................................................ 292.2 107.8 36.9
1994........................................................ 164.8 61.4 37.3
1995........................................................ 160.3 68.5 42.7
1996........................................................ 183.5 85.5 46.6
1997........................................................ 215.1 104.8 48.7
1998........................................................ 280.1 143.0 51.1
</TABLE>
Source: Amounts, except for 1998, are based upon estimated data reported by The
Bond Buyer's 1998 Yearbook. The 1998 amounts are Ambac Assurance
estimates, compiled from industry sources including Securities Data-
Company, Inc. and The Bond Buyer. Amounts represent gross par amounts
issued or insured, respectively, during such year.
The foregoing table illustrates the changes in the total volume and
insured volume of new issues of municipal bonds over the past ten years. Changes
in volume of municipal bond issuance during this period are primarily
attributable to changes in refunding activity related to the then-current
interest rate environment, along with steady growth in the underlying market.
Insured volume, as a percentage of total volume, has grown consistently over the
period but is not expected to increase materially from current levels.
Although there have been certain monetary defaults in bond issues of
substantial amounts, incidents of monetary default on municipal bonds have
historically been infrequent. Based upon data reported by the Association of
Financial Guaranty Insurors, the percentage of insured municipal bonds
experiencing monetary defaults in recent years is relatively low compared to the
entire municipal market. The relatively low incidence of municipal bond defaults
may be partially the result of safeguards developed over the years since the
Great Depression of the 1930's, when a great number of municipal defaults
occurred. Such safeguards include the imposition of issuer debt limits, greater
supervision by state governments of local debt administration, and more thorough
credit reviews by investment firms, rating agencies and institutional investors.
While these safeguards address many of the causes of earlier defaults, they may
be inadequate to prevent an increased level of defaults in the future caused by
presently unforeseen economic and other factors.
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U.S. Structured Finance and Asset-backed Market
Insurance of securities in the Structured Finance and Asset-backed Market
is typically issued in connection with structured financings or securitizations
in which the securities being issued are secured by or payable from a specific
pool of assets having an ascertainable cash flow or market value and held by a
special purpose issuing entity. Such obligations include, but are not limited
to: mortgage-backed securities and pools of home equity loans, credit card
receivables, trade receivables or other assets. While most structured finance
and asset-backed obligations are secured by or represent interest in pools of
assets, monoline financial guarantors have also insured structured finance and
asset-backed obligations secured by one or a few assets.
In general, structured finance and asset-backed obligations are payable
only from cash flow generated by a pool of assets and take the form of either
"pass-through" obligations, which represent interests in the related assets, or
"pay-through" obligations, which generally are debt obligations which are
collateralized by the related assets. Both types of obligations also generally
have the benefit of over-collateralization or one or more forms of credit
enhancement to cover credit risks associated with the related assets.
Structured finance and asset-backed obligations generally entail two
forms of risks: asset risk, which relates to the amount and quality of asset
coverage; and structural risk, which relates to the extent to which the
transaction structure protects the interests of the investors, and therefore the
insurer.
In general, the amount and quality of asset coverage required is
determined by the historical performance of the assets. The future performance
of the underlying pool of assets will generally determine whether the amount of
over-collateralization or other credit enhancement ultimately is sufficient to
protect investors, and therefore the insurer, against adverse asset performance.
The ability of the servicer of the assets to properly service and collect the
underlying assets often is a factor in determining future asset performance.
Structural risks addressed by asset-backed transactions include
bankruptcy and tax risks. Structured and asset-backed securities are usually
designed to protect the investors, and therefore the insurer, from the
bankruptcy or insolvency of the entity that originated the underlying assets as
well as from the bankruptcy or insolvency of the servicer of those assets (the
servicer of the assets is typically responsible for collecting cash payments on
the underlying assets and forwarding such payments, net of servicing fees, to
the special purpose issuing entity). Related issues that often arise concern
whether the sale of the assets by the originator to the issuer of the asset-
backed obligations would be respected in the event of the bankruptcy or
insolvency of the originator and whether the servicer of the assets may be
permitted or required to delay the remittance to investors of any cash
collections held by it or received by it after the time it becomes subject to
bankruptcy or insolvency proceedings. In addition, servicer risk is often
present in these transactions. Generally, servicer risk is the risk that
inefficiencies at the servicer level contribute to a decline in the collections
of borrower payments in the transaction. Ambac Assurance addresses these risks
through its credit underwriting guidelines, standards and procedures.
The U.S. structured finance and asset-backed market in which Ambac
Assurance provides financial guarantee insurance is broad and disparate,
comprising public issues and private placements. The increasingly varied classes
of assets securitized or guaranteed, and
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the recent rapid development of the market, make estimating the size of the
aggregate U.S. structured finance and asset-backed markets difficult. One of the
most well developed sectors of this market is the U.S. public asset-backed
market. The volume in this market in recent years is summarized in the following
table.
U.S. Public Asset-Backed Securities
<TABLE>
<CAPTION>
Total
($ in Billions) Volume
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<S> <C>
1993................................................................................. $ 57.7
1994................................................................................. 75.5
1995................................................................................. 108.0
1996................................................................................. 151.1
1997................................................................................. 178.2
1998................................................................................. 183.6
</TABLE>
Source: Amounts are based upon estimated data reported by Asset Sales Report.
Approximately 26% and 20% of the U.S. public asset-backed market was
insured in 1998 and 1997, respectively.
International Market
Outside of the United States, sovereign and sub-sovereign, structured and
asset-backed, utilities and other issuers are increasingly using financial
guarantee insurance, particularly in markets throughout Western Europe. A number
of important trends in international markets have contributed to this expansion.
In the United Kingdom, Australia and elsewhere, ongoing privatization efforts
have shifted the burden of funding from the government to public and private
capital markets, where investors may seek the security of financial guarantee
insurance. In Europe, Japan and Latin America, there is growing interest in
asset-backed securitization, especially through commercial paper conduits.
While the principles of securitization have been increasingly applied in
overseas markets, development in particular countries has varied due to the
sophistication of the local capital markets and the impact of financial
regulatory requirements, accounting standards and legal systems. It is
anticipated that securitization will continue to expand internationally, albeit
at varying rates in each country. Ambac Assurance insures both asset-backed and
structured transactions, sovereign and sub-sovereign debt issues, utilities, and
other obligations in selected international markets.
Ambac Assurance believes that the risk profile of the international
business it insures is generally the same as in the U.S. However, an
understanding of the unique risks related to the particular country and region
that could impact the credit of the issuer is necessary. These risks include
legal and political environments, capital market dynamics, exposures to foreign
exchange, and the degree of governmental support. Ambac Assurance monitors these
risks carefully and addresses them through its credit underwriting guidelines,
standards and procedures.
In 1997, Ambac Assurance capitalized a new subsidiary in the United
Kingdom, Ambac Assurance UK Limited ("Ambac UK"), which is authorized to conduct
certain classes of general insurance business in the United Kingdom. Ambac UK is
the Company's primary vehicle for directly issuing financial guarantee insurance
policies in the United Kingdom and
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Europe. Ambac Assurance and Ambac UK have entered into a net worth maintenance
agreement and reinsurance agreements.
In 1995, Ambac Assurance and MBIA Insurance Corporation ("MBIA") formed
an unincorporated joint venture, MBIA. AMBAC International (the "Joint
Venture"), to market financial guarantee insurance outside of the United States.
The joint venture was formed with the goal of bringing the combined capital and
human resources of the two companies together to more efficiently serve the
international markets. Since the inception of the joint venture, the two
companies have insured a combined total par amount of approximately $26.4
billion related to international risks under the joint venture. Under the joint
venture, financial guarantee policies are issued separately by each of the
companies. While retaining the right to act individually, each company has the
opportunity to reinsure up to 50 percent of the non-U.S. financial guarantee
business written by the other company as part of the joint venture. Customer
preference, licensing and market considerations determine which company insures
a transaction.
Underwriting and Surveillance
Underwriting guidelines, policies and procedures have been developed by
Ambac Assurance's management with the intent that Ambac Assurance insure only
those obligations which, in the opinion of Ambac Assurance analysts, are of
investment grade quality.
Ambac Assurance's financial guarantee insurance activity outside of the
U.S. market became significant in 1996. Geographically, the markets receiving
Ambac Assurance's primary international focus have been the United Kingdom,
Australia, France, Japan and certain parts of Latin America. In addition, Ambac
has insured transactions in which the geographic risk is spread over multiple
countries. The types of international obligations insured have primarily been
asset-backed securities, sovereign and sub-sovereign obligations, special
revenue and infrastructure obligations, collateralized bond obligations and
collateralized loan obligations. Management has developed underwriting standards
for international risks that are consistent with those applied to risks in the
United States. In addition, management believes that the international risks
insured to date are largely similar in risk type to those insured in the United
States.
The underwriting process involves review of structural, legal and credit
issues, including compliance with current Ambac Assurance underwriting
standards. These standards are reviewed periodically by management.
Ambac Assurance's policy is to reduce default risk associated with the
obligations insured by it to the extent practicable. The decision to insure an
issue is based upon the issuer's ability to repay the bonds, security features
and structure, rather than upon an actuarial or statistical prediction of the
likelihood that the issuer will default on the underlying debt obligation. Ambac
Assurance insures only those bonds on which it expects not to incur a loss.
However, Ambac Assurance's policy is to provide for loss reserves that are
adequate to cover potential losses. See "Losses and Reserves" below.
Underwriting criteria have been developed for each bond type, reflecting the
differences in, for example, economic and social factors, debt management,
project essentiality, financial management, legal and administrative factors,
revenue sources and security features.
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All requests for insurance are reviewed by members of Ambac Assurance's
underwriting staff, which is divided into major underwriting groups. The
underwriting process is designed to screen issues carefully and begins with a
thorough credit analysis by the primary analyst assigned to the issue. The
credit is then reviewed within the primary analyst's underwriting group. At a
minimum, the primary analyst's recommendation to qualify or reject an issue must
be approved by a concurring analyst and an underwriting officer. The number of
additional approvals required and the extent of an attorney's involvement in a
particular credit depends on the aggregate amount of Ambac Assurance's existing
or potential exposure to the credit and, in some cases, on the structure of the
credit or whether it is the first time such credit or structure is being
reviewed. On large credits, where the aggregate exposure exceeds a certain pre-
determined amount, the insurance decision must be approved by a credit committee
comprised of senior underwriting officers and an attorney in addition to the
analysts and underwriting officer mentioned above. Ambac Assurance assigns
internal ratings to individual exposures as part of the underwriting process and
at surveillance reviews. These internal ratings, which represent Ambac
Assurance's independent judgments, are based upon underlying credit parameters
similar to those used by rating agencies.
Ambac Assurance determines premium rates on the basis of the bond type
and its perception of the risk it is assuming based on the credit strength of
the bond issue. Factors considered in pricing include the maturity and structure
of the issue, and other credit and market factors, including, but not limited
to, security features, the presence or absence of a debt service reserve fund or
additional credit enhancement features and the interest rate spread between
insured and uninsured obligations with characteristics similar to those of the
proposed bond issue. Also critical in assessing risk are factors such as the
credit quality of the issuer, type of issue, the repayment source, the type of
security pledged, the presence of restrictive covenants, and the bond's
maturity. Each bond issue is evaluated in accordance with, and the final premium
rate is a function of, the particular factors as they relate to such issue.
Charges for new issue insurance also take into account the benefits to be
obtained by the issuer, as well as the cost and the projected return to Ambac
Assurance.
Surveillance groups review the insured portfolio for concentration of
risk by: (i) specific bond types; (ii) geographically; and (iii) size of issue.
The groups are also responsible for portfolio surveillance. Portfolio
surveillance analysts schedule and execute regular and ad hoc reviews of credits
in the book of business. Risk-adjusted surveillance strategies have been
developed for each bond type. Review periods and scope of review vary by bond
type based upon the risk inherent in the nature of the credits. The focus of the
surveillance review is to determine credit trends and recommend appropriate
classification and review periods. Generally, the surveillance reviews are
performed by analysts having the same experience and authority as those
reviewing issues for initial underwriting.
Those issues that are either in default or have developed problems that,
with the passage of time, may lead to a claim or loss are tracked closely by the
appropriate surveillance team. The documents underlying any problem credit are
reviewed by internal or outside counsel and an analysis is prepared outlining
Ambac Assurance's rights and potential remedies, the duties of all parties
involved and recommendations for corrective actions. This analysis, along with
the schedule of corrective actions, is reviewed in the regular remedial credit
meetings. Ambac Assurance also meets with issuers to reach agreement upon the
nature and the scope of the problem and to discuss the issuers' operating plans.
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In many instances, Ambac Assurance, under the terms of the documents
governing the underlying obligation, has the ability, among other things, to
direct that audits be performed with respect to servicer and trustee contractual
responsibilities and to meet with the appropriate officials to outline Ambac
Assurance's concerns and rights. When the underlying economics so indicate,
Ambac Assurance may aid in a restructuring to improve the debt service coverage.
The rating agencies also monitor the credits underlying Ambac Assurance's
insurance in force and, in most cases, advise Ambac Assurance of the credit
rating each issue would receive if it were not insured.
In 1998, the Company established the Portfolio Risk Management Committee,
comprised of senior management and senior risk managers. The committee's
principal mission is to establish policies to manage, monitor and model risk
concentrations within the insured portfolio. This committee works closely with
the senior credit committees of each underwriting group to assure that credit
criteria are maintained, are appropriate, and are systematically and
consistently applied.
Insurance Written
Ambac Assurance provides financial guarantee insurance for obligations in
the U.S. Municipal Market, U.S. Structured Finance and Asset-backed Market and
the International Market. Total insured gross par for the years ended December
31, 1998, 1997 and 1996 were $61.5 billion, $45.5 billion and $35.7 billion,
respectively.
Insurance Written - U. S. Municipal Market
Ambac Assurance insured gross par of $33.9 billion, $29.5 billion and
$26.7 billion in 1998, 1997 and 1996, respectively, in the U.S. Municipal
Market. In the U.S. Municipal Market, an issuer typically pays an up-front
premium to Ambac Assurance at the time the policy is issued. Premiums are
usually quoted as a percentage of the total amount of principal and interest
that is scheduled to become due during the life of the bonds.
Proposed new municipal bond issues are submitted to Ambac Assurance to
determine their insurability by issuers or by their investment bankers or
financial advisors. Municipal bond issues are sold on either a competitive or a
negotiated basis. With respect to competitive issues, an issuer will publish a
notice of sale soliciting bids for the purchase of a proposed issue of municipal
bonds. Various syndicates are then formed by potential bidders on the bonds.
These syndicates then solicit a determination from some or all of the financial
guarantee insurers whether an issue is insurable and at what premium rate and on
what terms. The syndicate then determines whether to bid on the issue with
insurance (and if so, with which insurer) or without insurance. The issuer then
generally selects the syndicate with the lowest bid. In a negotiated offering,
an individual investment banker or team of investment bankers has already been
selected by the issuer and that banker or team then typically solicits premium
quotes and terms from the insurers.
Ambac Assurance also provides insurance on bonds outstanding in the
secondary market that are typically purchased by an institution to facilitate
the sale of municipal bonds in its portfolio or inventory. The insurance
generally increases the sale price of bonds (typically by an amount greater than
the cost of the policy) and affords a wider secondary
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market and therefore greater marketability to a given issue of previously-issued
bonds. As is the case with new issues, the premium is generally payable in full
at the time of policy issuance. Ambac Assurance employs the same underwriting
standards on secondary market issues that it does on new municipal bond issues.
The new issue U.S. Municipal Market includes insurance policies designed
to satisfy debt service reserve fund requirements of municipal bond issuers.
These policies insure the availability of an amount not to exceed the debt
service reserve fund requirement for the issues, which in most cases is the
lesser of one year's maximum principal and interest payments or approximately
10% of the original principal amount of a bond issue. Any amounts drawn under
the debt service reserve fund policy must be reimbursed by the issuer within a
specified time period and at a specified interest rate.
As of December 31, 1998 and 1997, net outstanding par exposure related to
U.S. municipal bond transactions was $156.9 billion and $141.4 billion,
respectively.
Insurance Written - U.S. Structured Finance and Asset-Backed Market
Ambac Assurance insured gross par of $22.6 billion, $12.8 billion and
$6.5 billion in 1998, 1997 and 1996, respectively, in the U.S Structured Finance
and Asset-backed Market.
Within this market, Ambac Assurance is active in several segments, the
largest of which are the mortgage-backed and home equity and commercial asset-
backed markets.
Within the mortgage-backed and home equity market, Ambac Assurance seeks
to work with higher quality, well-capitalized issuers. The issuers typically
originate or purchase first lien mortgages, home equity loans or home equity
lines of credit, which are in turn sold by the issuers in the form of asset-
backed securities. In considering whether to insure these securities, Ambac
Assurance analyzes the quality of the underlying assets (mortgage loans, home
equity loans, etc.), the structure of the securitization, the experience and
financial strength of the servicer of the underlying assets and the credit
quality of the issuer. All of these factors, along with market conditions
determine the premium rate to be charged for the insurance.
The commercial asset-backed area includes the insurance of commercial
paper asset-backed conduits ("conduits") and other asset-backed securitizations.
Conduits are used by issuers to efficiently fund assets in the short-term
commercial paper market. Typically sponsored by large commercial banks, whose
customers sell financial assets such as trade receivables to the conduit, which
in turn issues commercial paper to fund the purchase of the assets. When Ambac
Assurance underwrites a new conduit for insurance, it evaluates the quality of
the assets to be sold to the conduit, the process by which the sponsoring bank
adds assets to the conduit, the quality of the conduit's management team and the
bank sponsoring the conduit, as well as the structure of the conduit itself. All
these factors, along with competitive conditions are used in determining the
premium rate to be charged. In addition to providing program level enhancement
covering the entire conduit structure, Ambac Assurance also may write insurance
against the default of a specific security sold into a conduit.
Premiums for U.S. structured finance and asset-backed policies are based
on a percentage of either principal or principal and interest insured. The
timing of the collection of
10
<PAGE>
structured finance and asset-backed premiums varies among individual
transactions; some being collected in a single payment at policy inception date,
and others being collected periodically (i.e., monthly, quarterly or annually).
As of December 31, 1998 and 1997, net outstanding par exposure related to U.S.
structured finance and asset-backed transactions was $32.9 billion and $18.6
billion, respectively.
Insurance Written - International Market
Ambac Assurance insured gross par of $5.0 billion, $3.1 billion and $2.5
billion in 1998, 1997 and 1996, respectively, in the International Market.
All of Ambac Assurance's international business is written through the
Joint Venture. The Joint Venture has offices in Europe (London, Paris and
Madrid), Australia, Japan and New York. The Joint Venture's strategy in the
international markets is to strengthen its franchise in developed markets by
focusing on high quality infrastructure, structured finance, securitization, and
utility finance transactions, and in emerging markets by focusing on top tier
future flow transactions.
Premiums for international policies are based on a percentage of either
principal or principal and interest insured. The timing of the collection of
structured finance and asset-backed premiums varies among individual
transactions; some being collected in a single payment at policy inception date,
and others being collected periodically (i.e., monthly, quarterly or annually).
As of December 31, 1998 and 1997, net outstanding par exposure related to
international transactions was $8.5 billion and $5.6 billion, respectively.
Insurance in Force
Ambac Assurance underwrites and prices financial guarantee insurance on
the assumption that the insurance will remain in force until maturity of the
insured bonds. Ambac Assurance estimates that the average life (as opposed to
the stated maturity) of its insurance policies on new issue par in force at
December 31, 1998 was 11 years. The 11 year average life is determined by
applying a weighted average calculation, using the remaining years to maturity
of each insured bond, and weighting them on the basis of the remaining par
insured. No assumptions are made for any prepayment of insured bonds or for any
future refundings of insured issues. Municipal bonds generally have provisions
that allow the issuer to prepay all or a portion of the outstanding amount prior
to maturity.
Ambac Assurance seeks to maintain a diversified insurance portfolio
designed to spread its risk based on a variety of criteria, including: (i) issue
size; (ii) type of bond; (iii) geographic area; and (iv) issuer.
As of December 31, 1998, the total net par amount of insured bonds
outstanding was $198.3 billion.
11
<PAGE>
Types of Bonds
The table below shows the distribution by bond type of Ambac Assurance's
insured portfolio as of December 31, 1998.
Insured Portfolio by Bond Type
as of December 31, 1998
<TABLE>
<CAPTION>
% of Total Net
Net Par Amount Par Amount
Bond Type Outstanding Outstanding
- -------------------------------------------------------------------------- ---------- -----------
<S> <C> <C>
($ In Millions)
U.S. Municipal Market:
General obligation...................................................... $ 37,502 19%
Lease and tax-backed revenue............................................ 36,929 19
Utility revenue......................................................... 27,014 14
Health care revenue..................................................... 20,071 10
Investor-owned utilities................................................ 8,013 4
Transportation revenue.................................................. 7,831 4
Higher education........................................................ 7,720 4
Housing revenue......................................................... 6,445 3
Student loans........................................................... 4,528 2
Other................................................................... 873 -
---------- -------
Total Municipal...................................................... 156,926 79
---------- -------
U.S. Structured and Asset-backed Market:
Mortgage-backed and home equity........................................ 19,478 10
Commercial asset-backed................................................ 10,015 5
Other consumer asset-backed............................................ 2,132 1
Banks/financial institutions........................................... 671 1
Other.................................................................. 567 -
---------- -------
Total U.S. Structured Finance and Asset-backed....................... 32,863 17
---------- -------
Total U.S............................................................ 189,789 96
---------- -------
International Market:
Commercial asset-backed............................................... 3,180 2
Banks/financial institutions.......................................... 1,514 1
Utilities............................................................. 1,073 -
Sovereign/sub-sovereign............................................... 1,027 -
Mortgage-backed and home equity....................................... 607 -
Other................................................................. 1,084 1
---------- -------
Total International.................................................. 8,485 4
---------- -------
Grand Total...................................................... $198,274 100%
========== =======
</TABLE>
12
<PAGE>
The table below shows the percentage, by bond type, of new business insured
by Ambac Assurance during each of the last five years.
New Business Insured by Bond Type (1)
<TABLE>
<CAPTION>
Bond Type 1998 1997 1996 1995 1994
- ---------------------------------------- -------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
U.S. Municipal Market:
General obligation..................... 10% 18% 16% 23% 29%
Utilities (2).......................... 12 12 15 16 21
Lease and tax-backed revenue........... 15 17 23 16 16
Health care revenue.................... 8 8 7 8 8
Housing revenue........................ 2 3 3 5 5
Transportation revenue................. 2 2 3 5 5
Student loans.......................... 1 1 3 5 4
Higher education....................... 2 3 3 3 4
Other.................................. 1 1 0 0 1
-------- ------- ------- ------- ------
Total Municipal...................... 53 65 73 81 93
-------- ------- ------- ------- ------
U.S. Structured and Asset-backed
Market:
Mortgage-backed and home..............
Equity............................. 22 18 12 8 1
Commercial asset-backed............... 14 8 4 5 0
Other consumer asset-backed........... 1 1 0 0 0
Banks/financial institutions.......... 2 2 0 0 0
Other................................. 0 1 3 1 1
-------- ------- ------- ------- ------
Total U.S. Structured and
Asset-backed........................ 39 30 19 14 2
-------- ------- ------- ------- ------
Total U.S. 92 95 92 95 95
-------- ------- ------- ------- ------
International Market:
Commercial asset-backed............... 4 1 6 2 1
Sovereign/sub-sovereign............... 0 1 0 0 0
Mortgage-backed and home..............
Equity............................. 0 1 0 0 0
Utilities............................. 1 1 0 0 0
Banks/financial institutions.......... 2 0 0 0 0
Other................................. 1 1 2 3 4
-------- ------- ------- ------- ------
Total International.................. 8 5 8 5 5
-------- ------- ------- ------- ------
Grand Total.......................... 100% 100% 100% 100% 100%
======== ======= ======= ======= ======
</TABLE>
(1) Stated as a percentage of total net par amount insured during such year.
(2) Includes investor-owned utilities.
Issue Size
Ambac Assurance seeks a broad coverage of the market by insuring small
and large issues alike. Ambac Assurance's insured exposure as of December 31,
1998, reflects the historical emphasis on issues insured with an original par
amount of less than $25 million in the municipal market. However, with the
entrance into the Structured Finance and Asset-backed and International Markets
in recent years, Ambac Assurance's emphasis has evolved towards larger deals.
The following table sets forth the distribution of Ambac Assurance's insured
portfolio as of December 31, 1998, with respect to the original size of each
insured issue:
13
<PAGE>
Original Par Amount Per Issue
as of December 31, 1998
<TABLE>
<CAPTION>
% of Total Number Net Par Amount % of Total Net Par
Original Par Amount Number of Issues of Issues Outstanding Amount Outstanding
- ------------------------------------- ----------------- ----------------- -------------------- --------------------
($ In Millions)
<S> <C> <C> <C> <C>
Less than $10 million................ 8,297 66% $ 24,261 12%
$10-25 million....................... 2,155 17 26,513 13
$25-50 million....................... 1,049 8 28,736 15
Greater than $50 million............. 1,185 9 118,764 60
----------------- ----------------- -------------------- --------------------
12,686 100% $198,274 100%
================= ================= ==================== ====================
</TABLE>
Geographic Area
Ambac Assurance is licensed to write business in the U.S. and abroad. As
of December 31, 1998, the eight largest U.S. states, as measured by net par
amount outstanding, accounted for approximately 47% of Ambac Assurance's total
net par amount outstanding. The following table sets forth the geographic
distribution of Ambac Assurance's insured exposure as of December 31, 1998.
Insured Portfolio by Geographic Area as of December 31, 1998
<TABLE>
<CAPTION>
Net Par Amount % of Total Net Par
Geographic Area Outstanding Amount Outstanding
- ------------------------------------------------------------ --------------- -------------------
<S> <C> <C>
($ In Millions)
Domestic:
California................................................ $ 22,535 11%
New York.................................................. 16,144 8
Pennsylvania.............................................. 13,778 7
Florida................................................... 12,259 6
Texas..................................................... 9,038 5
Illinois.................................................. 7,344 4
New Jersey................................................ 6,362 3
Michigan.................................................. 6,136 3
Ohio...................................................... 6,127 3
Massachusetts............................................. 5,638 3
Nationally Diversified.................................... 27,791 14
Other States.............................................. 56,637 29
----------- ----------
Total Domestic......................................... 189,789 96
----------- ----------
International:
United Kingdom............................................ 2,289 1
Australia................................................. 779 1
France.................................................... 692 -
Japan..................................................... 675 -
Italy..................................................... 571 -
Internationally Diversified............................... 1,621 1
Other International....................................... 1,858 1
----------- ----------
Total International.................................... 8,485 4
----------- ----------
Grand Total............................................ $198,274 100%
=========== ==========
</TABLE>
14
<PAGE>
Single Risk
Ambac Assurance has adopted underwriting and exposure management policies
designed to limit the net insurance in force for any one credit. In addition,
Ambac Assurance uses reinsurance to limit net exposure to any one credit. As of
December 31, 1998, Ambac Assurance's net par amount outstanding for its 20
largest credits, totaling $12.7 billion, was approximately 6% of Ambac
Assurance's total net par amount outstanding with no one credit representing
more than 1% of Ambac Assurance's total net par amount outstanding. Ambac
Assurance is also subject to certain regulatory limits and rating agency
guidelines on exposure to a single credit. See "Insurance Regulatory Matters"
and "Rating Agencies," below.
Underlying Ratings
The following table sets forth Ambac Assurance's insured portfolio by
underlying rating prior to being insured by Ambac Assurance, as of December 31,
1998:
Insured Portfolio by Underlying Rating (1)
as of December 31, 1998
<TABLE>
<CAPTION>
Net Par Amount % of Total Net Par
Rating Outstanding Amount Outstanding
- ------------------------------------------------------------ --------------------- ---------------------
($ In millions)
<S> <C> <C>
AAA......................................................... $ 225 1%
AA.......................................................... 19,730 10
A........................................................... 119,050 60
BBB......................................................... 57,760 29
BIG (2)..................................................... 1,509 1
---------- ---------
$198,274 100%
========== =========
</TABLE>
(1) Ratings represent Ambac Assurance internal ratings.
(2) Represents those bonds which have been categorized as "below investment
grade" by Ambac Assurance.
Losses and Reserves
Ambac Assurance's policy is to provide for loss and loss adjustment
expense reserves that are adequate to cover potential unidentified losses
inherent to the portfolio, as well as losses that may arise from insured
obligations which are currently or imminently in monetary default. The active
credit reserve ("ACR") represents an estimate of unidentified losses from our
insured obligations. As of December 31, 1998, Ambac Assurance's ACR was $78.2
million. When a monetary default occurs or is imminent with respect to a
particular insured obligation, a reserve ("case basis reserve") is established
in an amount that is sufficient to cover the present value of the anticipated
defaulted debt service payments over the expected period of default and the
estimated expenses associated with settling the claims, less estimated
recoveries under salvage or subrogation rights. In estimating the losses on
monetary defaults, Ambac Assurance makes its assessment based on the full term
of the insured obligation. All or part of the case basis reserve is allocated
from any ACR available. Ambac Assurance's net case basis reserves totaled $33.9
million at December 31, 1998.
15
<PAGE>
The most recent three-year history of Ambac Assurance's loss reserves,
and losses and loss adjustment expenses incurred and paid, is described in the
table below:
Reserve for Losses and Loss Adjustment Expenses
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------
1998 1997 1996
---------- ------------ -----------
<S> <C> <C>
($ In Thousands)
Reserve for losses and loss adjustment expenses at
January 1,.............................................. $103,345 $ 60,613 $66,637
Less: reinsurance recoverables.............................. 4,219 393 641
---------- ----------- -----------
Net reserve for losses and loss adjustment expenses
at January 1,........................................... 99,126 60,220 65,996
Losses and loss adjustment expenses incurred................ 6,000 2,854 3,778
Losses and loss adjustment expenses paid (net of
salvage received).......................................... 7,030 (2,474) (9,554)
Net balance for Connie Lee, at acquisition.................. - 38,526 -
---------- ----------- -----------
Net reserve for losses and loss adjustment expenses
at December 31,......................................... 112,156 99,126 60,220
Plus: reinsurance recoverables.............................. 3,638 4,219 393
---------- ----------- -----------
Reserve for losses and loss adjustment expenses at
December 31,............................................... $115,794 $103,345 $60,613
========== =========== ===========
</TABLE>
Management of Ambac Assurance believes that the reserves for losses and
loss adjustment expenses are adequate to cover the ultimate net costs of claims,
but the reserves are necessarily based on estimates and there can be no
assurance that the ultimate liability will not exceed such estimates. See Note 2
of Notes to Consolidated Financial Statements in the Company's 1998 Annual
Report to Stockholders.
Competition
The financial guarantee insurance business is highly competitive. Ambac
Assurance's principal competitors in the market for financial guarantee
insurance in the U.S. are three other triple-A rated monoline insurance
companies, Financial Guaranty Insurance Company ("FGIC"), Financial Security
Assurance Inc. ("FSA") and MBIA. In addition, banks, multiline insurers and
reinsurers, and lower rated financial guarantee insurance companies represent
additional participants in the broader market. According to Ambac Assurance
estimates based on industry sources, Ambac Assurance, FGIC, FSA and MBIA, in the
aggregate, insured almost all of the new issue municipal bonds insured during
1998, with Ambac Assurance insuring approximately 21% of such bonds, FGIC
insuring approximately 21%, FSA insuring approximately 23%, and MBIA insuring
approximately 35%. The principal competitive factors are: (i) premium rates;
(ii) conditions precedent to the issuance of a policy related to the structure
and security features of a proposed bond issue; (iii) the financial strength of
an insurer; and (iv) the quality of service provided to issuers, investors and
other clients of the issuer. With respect to each of these competitive factors,
Ambac Assurance believes it is on equal footing with each of its principal
competitors.
Financial guarantee insurance also competes domestically and
internationally with other forms of credit enhancement, including letters of
credit and guarantees (for example, mortgage guarantees where pools of mortgages
secure debt service payments) provided by banks and other financial
institutions, some of which are governmental agencies. Letters of credit are
most often issued for periods of less than 10 years, although there is no legal
restriction on the issuance of letters of credit having longer terms. Thus,
financial
16
<PAGE>
institutions and banks issuing letters of credit compete directly with Ambac
Assurance to guarantee short-term notes and bonds with a maturity of less than
10 years.
In order to enter the financial guarantee market, certain requirements
must be met. Most restrictive of which is that a significant minimum amount of
capital is required of a financial guarantee insurer in order to obtain
financial strength ratings by the rating agencies. In addition, under the New
York law, a monoline financial guarantee insurance company must have at least
$75 million of paid-in capital and surplus and maintain thereafter at least $65
million of policyholders' surplus. A similar law in California imposes a $100
million minimum capital and surplus requirement, with a maintenance requirement
thereafter of $75 million.
Reinsurance
State insurance laws and regulations (as well as the rating agencies)
impose minimum capital requirements on financial guarantee insurance companies,
limiting the aggregate amount of insurance which may be written and the maximum
size of any single risk exposure which may be assumed. Such companies can use
reinsurance to diversify risk, increase underwriting capacity, reduce additional
capital needs, stabilize shareholder returns and strengthen financial ratios.
See "Insurance Regulatory Matters," below.
Historically, Ambac Assurance had employed treaty insurance programs that
provided quota share and surplus share reinsurance. Under such programs, Ambac
Assurance ceded a percentage of certain insured policies along with a surplus
layer of reinsurance in excess of quota share.
Ambac Assurance has also entered into facultative reinsurance agreements
with certain of the same reinsurers that are party to the agreements described
above, that allow Ambac Assurance to reduce its large risks, to manage its
portfolio of insurance by bond type and geographic distribution, and to provide
additional capacity for frequent bond issuers. Under these agreements, portions
of Ambac Assurance's interests and liabilities are ceded on an issue-by-issue
basis. A ceding commission is withheld to defray Ambac Assurance's underwriting
expenses. In addition, Ambac Assurance and MBIA, in conjunction with the Joint
Venture, have entered into facultative reinsurance agreements whereupon each
company may reinsure the other on risks insured in conjunction with the joint
venture.
Effective January 1, 1997, Ambac Assurance discontinued ceding new
business under the quota share and surplus share reinsurance programs as
described above, and only uses facultative reinsurance agreements to reduce its
risks and manage its insurance portfolio.
As of December 31, 1998, Ambac Assurance had retained approximately 86%
of its gross insurance in force of $367.8 billion and had ceded approximately
14% to its treaty and facultative reinsurers. See Note 11 of Notes to
Consolidated Financial Statements in the Company's 1998 Annual Report to
Stockholders.
As a primary insurer, Ambac Assurance is required to honor its
obligations to its policyholders whether or not its reinsurers perform their
obligations under the various reinsurance agreements with Ambac Assurance. To
minimize its exposure to significant losses from reinsurer insolvencies, Ambac
Assurance evaluates the financial condition of its
17
<PAGE>
reinsurers, prepares annual written reviews of such reinsurers and monitors for
concentrations of credit risk. Ambac Assurance's current primary reinsurers are
AXA Re Finance, Capital Reinsurance Company, Enhance Reinsurance Company, and
MBIA.
Rating Agencies
Moody's, S&P, Fitch and Japan R&I periodically review the business and
financial condition of Ambac Assurance and other companies providing financial
guarantee insurance. These rating agencies' reviews focus on the insurer's
underwriting policies and procedures and the quality of the obligations insured.
The rating agencies frequently perform assessments of the credits insured by
Ambac Assurance to confirm that Ambac Assurance continues to meet the capital
allocation criteria considered necessary by the particular rating agency to
maintain Ambac Assurance's triple-A ratings. A rating by Moody's, S&P, Fitch or
Japan R&I, however, is not a "market rating" or a recommendation to buy, hold or
sell any security. Ambac Assurance's ability to attract new business or to
compete with other triple-A rated financial guarantors, and its results of
operations and financial condition, would be materially adversely affected by
any reduction in its ratings.
Insurance Regulatory Matters
General Law
Ambac Assurance is licensed to do business as an insurance company in all
50 states, the District of Columbia, the Commonwealth of Puerto Rico and Guam,
as well as in the United Kingdom through its wholly-owned subsidiary, Ambac UK.
It is subject to the insurance laws and regulations of the State of Wisconsin
(the "Wisconsin Insurance Laws"), its state of incorporation, and the insurance
laws and regulations of other states in which it is licensed to transact
business, and the United Kingdom. These laws and regulations, as well as the
level of supervisory authority that may be exercised by the various state
insurance departments, vary by jurisdiction, but generally require insurance
companies to maintain minimum standards of business conduct and solvency, meet
certain financial tests, file certain reports with regulatory authorities,
including information concerning their capital structure, ownership and
financial condition, and require prior approval of certain changes in control of
domestic insurance companies and their direct and indirect parents and the
payment of certain dividends and distributions. In addition, these laws and
regulations require approval of certain inter-corporate transfers of assets and
certain transactions between insurance companies and their direct and indirect
parents and affiliates, and generally require that all such transactions have
terms no less favorable than terms that would result from transactions between
parties negotiating at arm's length. Ambac Assurance is required to file
quarterly and annual statutory financial statements in each jurisdiction in
which it is licensed, and is subject to single and aggregate risk limits and
other statutory restrictions concerning the types and quality of investments and
the filing and use of policy forms and premium rates. Additionally, Ambac
Assurance's accounts and operations are subject to periodic examination by the
Office of the Commissioner of Insurance of the State of Wisconsin (the
"Wisconsin Commissioner") (the last such examination having been conducted in
1997 for the period ended December 31, 1996) and other state insurance
regulatory authorities. See Note 8 of Notes to Consolidated Financial Statements
in the Company's 1998 Annual Report to Stockholders.
The Company believes that Ambac Assurance is in material compliance with
all applicable insurance laws and regulations.
18
<PAGE>
Insurance Holding Company Laws
Under the Wisconsin insurance holding company laws, any acquisition of
control of the Company and thereby indirect control of Ambac Assurance requires
the prior approval of the Wisconsin Commissioner. "Control" is defined as the
direct or indirect power to direct or cause the direction of the management and
policies of a person. Any purchaser of 10% or more of the outstanding voting
stock of a corporation is presumed to have acquired control of that corporation
and its subsidiaries unless the Wisconsin Commissioner, upon application,
determines otherwise. For purposes of this 10% test, the Company believes that a
holder of common stock having the right to cast 10% of the votes which may be
cast by the holders of all shares of common stock of the Company would be deemed
to have control of Ambac Assurance within the meaning of the Wisconsin Insurance
Laws. As of December 31, 1998, no person held 10% or more of the outstanding
common stock of the Company.
The Wisconsin insurance holding company laws also require prior approval
by the Wisconsin Commissioner of certain transactions between Ambac Assurance
and companies affiliated with Ambac Assurance.
Wisconsin Dividend Restrictions
Pursuant to the Wisconsin Insurance Laws, Ambac Assurance may declare
dividends, subject to any restriction in its articles of incorporation, provided
that, after giving effect to the distribution, it would not violate certain
statutory equity, solvency, income and asset tests. Distributions to the
shareholder (other than stock dividends) must be reported to the Wisconsin
Commissioner. Extraordinary dividends must be reported prior to payment and are
subject to disapproval by the Wisconsin Commissioner. An extraordinary dividend
is defined as a dividend or distribution, the fair market value of which,
together with all dividends from the preceding 12 months, exceeds the lesser of:
(a) 10% of policyholders' surplus as of the preceding December 31; or (b) the
greater of: (i) statutory net income for the calendar year preceding the date of
the dividend or distribution, minus realized capital gains for that calendar
year; or (ii) the aggregate of statutory net income for the three calendar years
preceding the date of the dividend or distribution, minus realized capital gains
for those calendar years and minus dividends paid or credited and distributions
made within the first two of the preceding three calendar years.
During 1998, Ambac Assurance paid to the Company cash dividends on its
common stock totaling $48.0 million. See Note 8 of Notes to Consolidated
Financial Statements in the Company's 1998 Annual Report to Stockholders.
New York Financial Guarantee Insurance Law
New York's comprehensive financial guarantee insurance law governs the
conduct of business of all financial guarantee insurers licensed to do business
in New York, including Ambac Assurance. This law requires a financial guarantee
insurer to contribute to a contingency reserve an amount equal to 50% of
premiums as they are earned on a statutory basis on policies written prior to
July 1, 1989, and, with respect to policies written on and after July 1, 1989,
it must make contributions over a period of 20 years for municipal bonds and 15
years for all other obligations until the contingency reserve for such insured
obligations equals the greater of 50% of premiums written for the relevant
category
19
<PAGE>
of insurance or a percentage of the principal guaranteed, varying from
0.55% to 2.50%, depending upon the type of obligation guaranteed. This reserve
must be maintained for the periods specified above, except that withdrawals by
the insurer may be permitted under specified circumstances in the event that
actual loss experience exceeds certain thresholds or if the reserve accumulated
is deemed excessive in relation to the insurer's outstanding insured
obligations. Financial guarantee insurers are also required to maintain case
basis loss and loss adjustment expense reserves and unearned premium reserves on
bases established by the regulations.
The New York financial guarantee insurance law establishes single risk
limits applicable to all obligations issued by a single entity and backed by a
single revenue source. Under the limit applicable to municipal bonds, the
insured average annual debt service for a single risk, net of reinsurance and
collateral, may not exceed 10% of the sum of the insurer's policyholders'
surplus and contingency reserves. In addition, insured principal of municipal
bonds attributable to any single risk, net of reinsurance and collateral, is
limited to 75% of the insurer's policyholders' surplus and contingency reserves.
Additional single risk limits, which generally are more restrictive than the
municipal bond single risk limit, are also specified for several other
categories of insured obligations, including structured finance obligations.
Aggregate risk limits are also established on the basis of aggregate net
liability and policyholders' surplus requirements. "Aggregate net liability" is
defined as outstanding principal and interest of guaranteed obligations insured,
net of reinsurance and collateral. Under these limits, policyholders' surplus
and contingency reserves must at least equal a percentage of aggregate net
liability that is equal to the sum of various percentages of aggregate net
liability for various categories of specified obligations. The percentage varies
from 0.33% for municipal bonds to 4.00% for certain non-investment grade
obligations.
Financial Guarantee Insurance Regulation in Other States
The Wisconsin insurance laws and regulations governing municipal bond
insurers are similar to those in New York. Under the Wisconsin regulations,
Ambac Assurance must establish a contingency reserve in an amount equal to 50%
of net statutory earned premium on municipal bond insurance policies. This
reserve must be maintained for 20 years. However, the regulations provide that
compliance with contingency reserve provisions under statutes in other
jurisdictions that result in greater contributions than under the Wisconsin
regulations is deemed to constitute compliance with the Wisconsin regulations.
The Wisconsin regulations also include certain single and aggregate risk
limitations. The average annual debt service for any single issue of municipal
bonds may not exceed 10% of Ambac Assurance's policyholders' surplus. In
addition, Ambac Assurance's cumulative net liability, defined as one-third of
one percent of the insured unpaid principal and interest covered by current
municipal bond insurance policies, may not exceed its qualified statutory
capital, which is defined as the sum of its capital and surplus and contingency
reserve.
California has financial guarantee insurance laws similar in structure to
those of New York. None of the risk limits established in California's
legislation with respect to business transacted by Ambac Assurance are more
stringent in any material respect than the corresponding provisions in the New
York financial guarantee insurance statute. California law requires a financial
guarantee insurer to contribute to a contingency reserve an amount equal to 50%
of premiums as they are earned on a statutory basis on policies written prior to
July 1, 1989, and, with respect to policies written on and after July 1,
20
<PAGE>
1989, it must make contributions over a period of 20 years for municipal bonds
and 15 years for all other obligations until the contingency reserve for such
insured obligations equals a percentage of principal outstanding, varying from
0.80% to 3.00%, depending upon the type of obligation guaranteed. This reserve
must be maintained for the periods specified above, except that withdrawals by
the insurer may be permitted under specified circumstances in the event that
actual loss experience exceeds certain thresholds or if the reserve accumulated
is deemed excessive in relation to the insurer's outstanding insured
obligations. Ambac Assurance's reported contingency reserve is equal to the
greater of the required reserve as calculated under New York and California law.
In addition to the laws and regulations of New York, Wisconsin and
California, Ambac Assurance is subject to laws and regulations of other states
concerning the transaction of financial guarantee insurance, none of which is
more stringent in any material respect than the New York financial guarantee
insurance statute.
Financial Management Services
The Company's Financial Management Services Division provides investment
agreements, interest rate swaps, and investment advisory and fund administration
services, principally to states, municipalities and their authorities, school
districts, and hospitals and health organizations.
Financial management services revenues are derived from: (i) net
investment income; (ii) net swap trading revenues; (iii) fund management and
advisory revenues; and (iv) net realized gains and losses. Excluding
transactions with affiliates, total revenues were $32.4 million, $34.6 million
and $22.4 million in 1998, 1997 and 1996, respectively. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note 17 of Notes to Consolidated Financial Statements in the Company's 1998
Annual Report to Stockholders.
The principal competitive factors among providers of investment
agreements are: (i) contract rates; (ii) conditions precedent to the issuance of
a policy related to the structure and security features of a proposed investment
contract; (iii) the financial strength of the financial guarantee provider; and
(iv) the quality of service provided to issuers, investors and other clients of
the issuer. The Company believes that the IA Business competes favorably with
respect to each of these factors.
The principal competitive factors among providers of interest rate swap
contracts are: (i) pricing of contracts; (ii) the financial strength of the
financial guarantee provider; (iii) the ability to structure a complete
financial package; and (iv) the quality of service provided to issuers,
investors and other clients of the issuer. The Company believes that AFSLP
competes favorably with respect to each of these competitive factors.
The principal competitive factors among providers of investment advisory
and fund administration services are: (i) pricing of services; (ii) investment
returns; (iii) the ability to provide services tailored to customers needs; and
(iv) the quality of service provided to customers. The Company believes that
Cadre and Cadre Securities compete favorably with respect to each of these
competitive factors.
21
<PAGE>
Investment Agreements
The principal purpose of the IA Business is providing investment
agreements, including investment repurchase agreements, primarily to states,
municipalities and their authorities. Investment agreements are used by
municipal bond issuers to invest bond proceeds until such proceeds can be used
for their intended purpose, such as financing construction. The investment
agreement provides for the guaranteed return of principal invested, as well as
the payment of interest thereon at a guaranteed rate and is rated triple-A by
virtue of Ambac Assurance's insurance policy, which guarantees its payment
obligations.
The IA Business manages its balance sheet to protect against a number
of risks inherent in its business including liquidity, market (principally
interest rate) and credit risk. The IA Business is managed with the goal of
matching the effective duration of the invested assets, including hedges, to the
effective duration of the investment agreement liabilities. The IA Business
maintains expected cash flow matching of invested assets (including hedges) to
funded liabilities in order to minimize market and liquidity risk.
A source of liquidity risk is the ability of some counterparties to
withdraw moneys on dates other than those specified in the draw down schedule.
Liquidity risk is somewhat mitigated by provisions in certain of the municipal
investment agreements that limit an issuer's ability to draw on the funds and by
risk management procedures that require the regular re-evaluation and re-
projection of draw down schedules. Investments are restricted to fixed income
securities with a minimum average portfolio credit quality of Aa/AA. Based upon
management's projections, the IA Business maintains funds invested in cash and
cash equivalents to meet short-term liquidity needs.
The following table sets forth the net payments due under the IA
Business' settled investment agreements in each of the next five years ending
December 31, and the period thereafter, based on expected call dates:
Obligations Under Investment Agreements
<TABLE>
<CAPTION>
($ In Thousands) Principal Amount (1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C>
1999............................................................................................... $2,308,820
2000............................................................................................... 1,237,441
2001............................................................................................... 554,655
2002............................................................................................... 190,338
2003............................................................................................... 29,481
All later years.................................................................................... 888,955
-----------
$5,209,690
===========
</TABLE>
(1) As of December 31, 1998, the interest rates on these agreements ranged from
4.00% to 8.14%.
The IA Business uses derivative contracts in the normal course of
business for hedging purposes as part of its overall interest rate risk
management. Several of its derivative contracts have been entered into with its
affiliate, AFSLP. Derivative contracts used by the IA Business include financial
instruments with off-balance sheet risk such as interest rate futures contracts,
interest rate swap agreements and purchased interest rate option contracts.
These instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amounts recognized in the financial statements.
Interest rate futures contracts are commitments to either purchase or
sell designated financial instruments at a future date for a specified price and
are settled in cash.
22
<PAGE>
Initial margin requirements are met in cash or other financial instruments, and
changes in the contract values are settled daily. Futures contracts have little
credit risk since futures exchanges are the counterparties.
Interest rate swap contracts are agreements where the IA Business agrees
with other parties to exchange, at specified intervals, the difference between
fixed-rate and floating-rate interest amounts or the difference between
different interest rate indices calculated by reference to an agreed upon
notional amount.
Municipal Interest Rate Swaps
AFSLP provides interest rate swaps primarily to states, municipalities
and their authorities, and other entities in connection with their financings.
In addition, AFSLP also provides interest rate swaps to the IA Business, an
affiliate. AFSLP is subject to "basis risk," (the relationship between changes
in tax-exempt and taxable interest rates). If actual or projected tax-exempt
interest rates change in relation to taxable rates, AFSLP will experience an
unrealized mark-to-market gain or loss. The AFSLP swap portfolio is considered
held for trading purposes. The interest rate swaps provided by AFSLP are insured
by Ambac Assurance through policies that guarantee the obligations of AFSLP and
its counterparties.
AFSLP is a limited partnership. Ambac Assurance, the sole limited
partner, owns a limited partnership interest representing 90% of the total
partnership interests of AFSLP. Ambac Financial Services Holdings, Inc. ("AFS
Holdings"), a wholly-owned subsidiary of the Company, the sole general partner,
owns a general partnership interest representing 10% of the total partnership
interest in AFSLP.
Interest rate swaps are agreements to exchange with a counterparty, a
stream of periodic payments calculated by reference to agreed upon interest
rates, indices and notional amounts.
In the ordinary course of business, AFSLP manages a variety of risks -
principally (i) credit; (ii) market; (iii) liquidity; (iv) operational; and (v)
legal. These risks are identified, measured, and monitored through a variety of
control mechanisms, which are in place at different levels throughout the
organization.
Investment Advisory and Cash Management
In December 1996, the Company acquired certain assets and assumed certain
liabilities of Cadre. Cadre is registered as an investment adviser with the
Securities and Exchange Commission and with certain states that currently
require such registration. As a registered adviser, Cadre is subject to
regulation in certain aspects of its business, particularly with respect to
investment advisory services provided to investment companies and clients.
In June 1997, the Company acquired certain assets and assumed certain
liabilities of Cadre Securities. Cadre Securities principal business is the
distribution of money market funds to the education, healthcare and municipal
sectors, as well as the brokering of short-term fixed income securities trades
on behalf of its clients. Cadre Securities is registered as a broker-dealer with
the Securities and Exchange Commission and with certain states that require such
registration, and it is a member of the National Association of Securities
23
<PAGE>
Dealers, Inc. As a registered broker-dealer, Cadre Securities is subject to the
net capital requirements of Rule 15c3-1 of the Securities Exchange Act of 1934,
as amended, which is designed to measure the general financial condition and
liquidity of a broker-dealer. In accordance with this rule, the ratio of
aggregate indebtedness to net capital ("net capital ratio") shall not exceed 15
to 1. At December 31, 1998, Cadre Securities had net capital of $672,530, which
was $572,530 in excess of its required net capital of $100,000. The net capital
ratio was 0.83 to 1.
Cadre provides investment advisory and administrative services to money
market funds which are primarily offered to qualified participants, including
school districts, healthcare service providers and municipalities. At December
31, 1998, Cadre and Cadre Securities provided services to approximately 3,000
clients with approximately $6.8 billion in assets.
Fees from the money market funds for which Cadre and Cadre Securities
performs services are based on percentages of the average daily net assets of
such funds. Fees for brokering short-term fixed income securities trades on
behalf of clients are based on a mark-up in the price of the securities. These
fees are recorded upon execution of the trades since, at that time,
substantially all of Cadre and Cadre Securities obligations have been fulfilled.
Investments and Investment Policy
As of December 31, 1998, the consolidated investments of the Company had
an aggregate fair value of $8.7 billion and an aggregate amortized cost of $8.4
billion. These investments are managed internally by officers of the Company and
its subsidiaries, who are experienced investment managers. In the normal course
of business, the Company uses derivative contracts for hedging purposes as part
of its overall interest rate risk management. These derivative contracts include
interest rate futures contracts, interest rate swap agreements and purchased
interest rate option contracts. All investments, including derivative contracts,
are effected in accordance with the general objectives and guidelines for
investments established by each subsidiary's Board of Directors, including
guidelines relating to credit quality, risk concentration and holding period.
These guidelines are periodically reviewed and revised as appropriate.
Pursuant to Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," the Company
has designated all investments as "available-for-sale" and reports them at fair
value. Unrealized gains and losses are excluded from earnings and reported as a
component of accumulated other comprehensive income in stockholders' equity, net
of tax.
As of December 31, 1998, Ambac Assurance's investment portfolio had an
aggregate fair value of $3.4 billion and an aggregate amortized cost of $3.2
billion. The investment policy established by the Board of Directors of Ambac
Assurance for its investments is designed to achieve diversification of the
portfolio and generally to preclude investments in obligations insured by Ambac
Assurance. Ambac Assurance's current investment policy only permits investment
in investment grade fixed-income securities, consistent with its goal to achieve
the highest after-tax, long-term return. This policy takes into consideration
Ambac Assurance's desire for both current income and long-term capital growth.
Ambac Assurance is subject to limits on types and quality of investments imposed
by the insurance laws and regulations of the States of Wisconsin and New York.
In
24
<PAGE>
compliance with these laws, Ambac Assurance's Board of Directors approves each
specific investment transaction of Ambac Assurance. See "Insurance Regulatory
Matters - General Law," above.
As of December 31, 1998, the IA Business' investment portfolio had an
aggregate fair value of $5.1 billion and an aggregate amortized cost of $5.0
billion. The investment policy established by the Board of Directors of the IA
Business for its investments is designed to achieve the highest after-tax return
on equity, subject to minimum average quality ratings. For further discussion,
see "Investment Agreements," above.
The following tables set forth certain information concerning the
investments of the Company:
Investments by Rating (1)
as of December 31, 1998
<TABLE>
<CAPTION>
% of Investment
Rating Portfolio
- -------------------------------------------------------------------------------------------------------- ----------------------
<S> <C>
AAA (2)................................................................................................. 71%
AA...................................................................................................... 14
A....................................................................................................... 14
BBB..................................................................................................... 1
Not Rated............................................................................................... -
---------
100%
=========
</TABLE>
(1) Ratings represent S&P classifications.
(2) Includes U.S. Treasury and agency obligations, which comprised
approximately 34% of the total investment portfolio.
Summary of Investments
As of December 31,
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Carrying Value Average Yield Carrying Value Average Yield Carrying Value Average Yield
Investment Category (1) (2) (1) (2) (1) (2)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
($ In Thousands)
Long-term investments:
Taxable bonds................ $6,082,903 6.61% $4,545,177 6.75% $3,116,373 6.69%
Tax-exempt bonds............. 2,539,379 6.13 2,228,667 6.20 1,971,658 6.21
------------ ------------ ------------
Total long-term investments
8,622,282 6.47 6,773,844 6.55 5,088,031 6.52
Short-term investments (3).... 119,528 5.69 136,278 5.43 112,511 5.24
------------ ------------ ------------
Total investments.......... $8,741,810 6.45% $6,910,122 6.52% $5,200,542 6.46%
============ ============ ============
</TABLE>
(1) Yields presented include assets held in the IA Business portfolio. Interest
expense on related investment agreements was $263.6 million, $186.7 million
and $154.5 million in 1998, 1997 and 1996, respectively.
(2) Yields are stated on a pre-tax basis, based on average amortized cost.
(3) Includes taxable and tax-exempt investments.
25
<PAGE>
Investments by Security Type
As of December 31,
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Carrying Value Average Yield Carrying Value Average Yield Carrying Value Average Yield
Investment Category (1) (2) (1) (2) (1) (2)
- ------------------------------- ------------- ------------- -------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
($ In Thousands)
Municipal obligations (4)..... $2,801,324 6.19% $2,298,996 6.20% $1,982,911 6.21%
Corporate securities.......... 1,435,427 7.33 1,093,587 7.61 963,890 7.56
U.S. government obligations...
122,896 5.80 139,598 6.25 102,430 6.09
Mortgage- and asset-backed
securities (includes U.S.
Government Agency
obligations) (3)............. 4,262,635 6.36 3,222,756 6.46 2,035,115 6.35
Other......................... - - 18,907 3.72 3,685 3.50
------------ ------------ ------------
Total long-term investments
8,622,282 6.47 6,773,844 6.55 5,088,031 6.52
Short-term investments (4).... 119,528 5.69 136,278 5.43 112,511 5.24
------------ ------------ ------------
Total investments.......... $8,741,810 6.45% $6,910,122 6.52% $5,200,542 6.46%
============ ============ ============
</TABLE>
(1) Yields presented include assets held in the IA Business portfolio. Interest
expense on related investment agreements was $263.6 million, $186.7 million
and $154.5 million in 1998, 1997 and 1996, respectively.
(2) Yields are stated on a pre-tax basis, based on average amortized cost.
(3) The actual maturity dates of mortgage- and asset-backed securities are
uncertain because the underlying mortgages may be paid prior to the stated
maturity of such securities. This possibility of prepayment creates the risk
that the Company will be unable to replace such investments with securities
of comparable yield.
(4) Includes taxable and tax-exempt investments.
Distribution of Investments by Maturity
as of December 31, 1998
<TABLE>
<CAPTION>
Amortized Estimated
Maturity Cost Fair Value
- ---------------------------------------------------------------------------- ---------- ----------
($ In Thousands)
<S> <C> <C>
Due in one year or less (1)................................................. $ 250,741 $ 252,235
Due after one year through five years....................................... 222,466 232,054
Due after five years through ten years...................................... 399,846 423,355
Due after ten years......................................................... 3,328,886 3,571,531
---------- ----------
4,201,939 4,479,175
Mortgage- and asset-backed securities (2)................................... 4,224,636 4,262,635
---------- ----------
Total investments........................................................... $8,426,575 $8,741,810
========== ==========
</TABLE>
(1) Includes long-term investments in the amount of $132.6 million maturing
within one year.
(2) The actual maturity dates of mortgage- and asset-backed securities are
uncertain because the underlying mortgages may be paid prior to the stated
maturity of such securities. This possibility of prepayment creates the risk
that the Company will be unable to replace such investments with securities
of comparable yield.
For further discussion, see Note 3 of Notes to Consolidated Financial
Statements in the Company's 1998 Annual Report to Stockholders.
26
<PAGE>
Employees
As of December 31, 1998, the Company and its subsidiaries had 388
employees. None of the employees is covered by collective bargaining agreements.
The Company considers its employee relations to be satisfactory.
Item 2. Properties.
The principal executive offices of the Company are located at One State
Street Plaza, New York, New York 10004. The telephone number is (212) 668-0340.
Ambac Assurance maintains its principal executive offices at One State
Street Plaza, New York, New York 10004, which consists of approximately 121,000
square feet of office space, under an agreement that expires on September 30,
2019. Ambac UK maintains offices in London, England.
Cadre maintains its principal executive office at 905 Marconi Avenue,
Ronkonkoma, New York 11779. The office building is owned by the Company. It
consists of approximately 15,000 square feet of office space and storage.
Item 3. Legal Proceedings.
There are no material lawsuits pending, or to the knowledge of the Company
threatened, to which the Company or any of its majority-owned subsidiaries is a
party.
Item 4. Submission of Matters to a Vote of Security-Holders.
There were no matters submitted to a vote of security holders during the
fourth quarter of 1998.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Information relating to the principal market on which the Company's Common
Stock is tradable, the high and low sales prices per share for each full
quarterly period within the two most recent fiscal years, and the frequency and
amount of any cash dividends declared for the two most recent fiscal years is
set forth on page 50 of the Company's 1998 Annual Report to Stockholders and
such information is incorporated herein by reference. Information concerning
restrictions on the payment of dividends is set forth in Item 1 above under the
caption "Insurance Regulatory Matters - Wisconsin Dividend Restrictions." As of
March 22, 1999, there were 88 stockholders of record of the Company's Common
Stock, which is listed on the New York Stock Exchange.
27
<PAGE>
Item 6. Selected Financial Data.
Selected financial data for the Company and its subsidiaries for each of
the last five fiscal years is set forth under the caption "Financial Highlights"
on page 4 of the Company's 1998 Annual Report to Stockholders. Such information
is incorporated herein by reference and should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto contained on pages 32 to
48 of such Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Management's Discussion and Analysis of Financial Condition and Results of
Operations is set forth under the same caption on pages 23 through 30 of the
Company's 1998 Annual Report to Stockholders. Such information is incorporated
herein by reference and should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto contained on pages 32 to 48 of such
Annual Report. Management's Discussion and Analysis of Financial Condition and
Results of Operations includes the Company's status of Year 2000 matters.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Quantitative and Qualitative Disclosures About Market Risk is set forth
under the caption Risk Management on pages 28 and 29 of the Company's 1998
Annual Report to Stockholders. Such information is incorporated herein by
reference and should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto contained on pages 32 to 48 of such Annual
Report.
Item 8. Financial Statements and Supplementary Data.
The 1998 Consolidated Financial Statements, together with the Notes
thereto and the Independent Auditors' Report thereon, are set forth on pages 31
through 48 of the Company's 1998 Annual Report to Stockholders. Such information
is incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Part III
Item 10. Directors and Executive Officers of the Registrant.
Information relating to the Company's directors and executive officers is
set forth on pages 7, 11, 12, 27 and 28 of the Company's 1999 Proxy Statement
and such information is incorporated herein by reference.
28
<PAGE>
Item 11. Executive Compensation.
Information relating to compensation of the Company's directors and
executive officers is set forth on pages 9 to 11 and on pages 13 to 21 of the
Company's 1999 Proxy Statement and such information is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information relating to security ownership of certain beneficial owners
and management is set forth on pages 5 to 7 of the Company's 1999 Proxy
Statement and such information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
None.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents filed as a part of this report:
1. Financial Statements
--------------------
The following consolidated financial statements included in the 1998
Annual Report to Stockholders are incorporated herein by reference
under Part II, Item 8:
<TABLE>
<CAPTION>
Page Number
In Annual Report
--------------------
<S> <C> <C>
Independent Auditors' Report.................................. 31
Consolidated Balance Sheets as of December 31,
1998 and 1997................................................. 32
Consolidated Statements of Operations for each of
the years ended December 31, 1998, 1997 and 1996.............. 33
Consolidated Statements of Stockholders' Equity for each of
the years ended December 31, 1998, 1997 and 1996 34
Consolidated Statements of Cash Flows for each of
the years ended December 31, 1998, 1997 and 1996.............. 35
Notes to Consolidated Financial Statements.................... 36-48
</TABLE>
29
<PAGE>
2. Financial Statement Schedules
-----------------------------
The financial statement schedules filed herein, which are the only
schedules required to be filed, are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Independent Auditors' Report (Page S-1)
Schedule I -- Summary of Investments Other Than (Page S-2)
Investments in Related Parties
Schedule II -- Condensed Financial Information of (Pages S-3
Registrant (Parent Company Only) to S-7)
Schedule IV -- Reinsurance (Page S-8)
</TABLE>
3. Exhibits
--------
<TABLE>
<CAPTION>
The following items are annexed as exhibits:
Exhibit Number Description
------------- -----------
<S> <C>
3.01 Conformed Amended and Restated Certificate of Incorporation of the Company
filed with the Secretary of State of the State of Delaware on July 11, 1997.
(Filed as Exhibit 4.05 to the Company's Quarterly Report for the quarter ended
September 30, 1997 and incorporated herein by reference.)
3.02 Conformed Copy of the Certificate of Amendment to the Amended and Restated
Certificate of Incorporation of the Company filed with the Secretary of State
of the State of Delaware on May 13, 1998. (Filed as Exhibit 4.04 to the
Company's Quarterly Report for the quarter ended June 30, 1998 and incorporated
herein by reference.)
3.03 By-laws of the Company, as amended through January 28, 1998. (Filed as Exhibit
3.02 to the Company's Annual Report on Form 10-K for the year ended December
31, 1997 and incorporated herein by reference.)
4.01 Definitive Engraved Stock Certificate representing shares of Common Stock.
(Filed as Exhibit 4.01 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997 and incorporated herein by reference.)
4.02 Indenture, dated as of August 1, 1991, between the Company and The Chase
Manhattan Bank (National Association), Trustee. (Filed as Exhibit 4.01 to the
Company's Registration Statement on Form S-3 (Reg. No. 33-59290) and
incorporated herein by reference.)
4.03 Indenture dated as of April 1, 1998, between the Company and First Union
National Bank, Trustee. (Filed as Exhibit 5.2 to the Company's Current Report
on Form 8-K dated April 1, 1998 and incorporated herein by reference.)
</TABLE>
30
<PAGE>
<TABLE>
<S> <C>
4.04 Rights Agreement, dated as of January 31, 1996, between Ambac Financial Group,
Inc. and Citibank N.A., as Rights Agent, including all exhibits thereto. (Filed
as Exhibit 1 to the Company's Registration Statement on Form 8-A dated February
27, 1996 and incorporated herein by reference.)
4.05 Form of 9.38% Debenture due August 1, 2011. (Filed as Exhibit 4.02 to the
Registration Statement on Form S-1 (Reg. No. 33-40385) and incorporated herein
by reference.)
4.06 Form of 7.50% Debenture due May 1, 2023.
4.07 Form of 7.08% Debenture due March 31, 2098. (Filed as Exhibit 5.3 to the
Company's Current Report on Form 8-K dated April 1, 1998 and incorporated
herein by reference.)
10.01* Second Amended and Restated Employment Agreement dated as of December 2, 1997,
between the Company and Phillip B. Lassiter. (Filed as Exhibit 10.01 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1997 and
incorporated herein by reference.)
10.02* Ambac Financial Group, Inc. 1991 Stock Incentive Plan, as amended as of
December 2, 1997 (Filed as Exhibit 10.02 to the Company's Annual Report on Form
10-K for the year ended December 31, 1996 and incorporated herein by reference.)
10.03* Ambac Financial Group, Inc. 1997 Equity Plan, amended as of October 28, 1997.
(Filed as Exhibit 10.03 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997 and incorporated herein by reference.)
10.04* Ambac Financial Group, Inc. 1991 Non-Employee Directors Stock Plan (Filed as
Exhibit 10.09 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1992 and incorporated herein by reference.)
10.05* Ambac Financial Group, Inc. 1997 Non-Employee Directors Equity Plan. (Filed as
Exhibit 4.2 to the Company's Registration Statement on Form S-8 (Reg. No.
333-52449) and incorporated herein by reference.)
10.06* Ambac Financial Group, Inc. 1997 Executive Incentive Plan. (Filed as Exhibit
10.24 to the Company's Quarterly Report on Form 10-Q for the period ended June
30, 1997 and incorporated herein by reference.)
</TABLE>
- -------------------
* Management contract or compensatory plan, contract or arrangement required to
be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
---------
31
<PAGE>
<TABLE>
<S> <C>
10.07* Ambac Financial Group, Inc. Deferred Compensation Plan for Outside Directors
and Eligible Senior Officers, effective as of December 1, 1993 and amended and
restated as of October 27, 1998.
10.08* Form of Amended and Restated Management Retention Agreement dated as of
December 2, 1997. (Filed as Exhibit 10.08 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997 and incorporated herein by
reference.)
10.09* The Ambac Financial Group, Inc. Non-Qualified Savings Incentive Plan (effective
as of January 1, 1995). (Filed as Exhibit 10.16 to the Company's Quarterly
Report on Form 10-Q for the period ended September 30, 1995, and incorporated
herein by reference.)
10.10* Amendment Number 1 to the Ambac Financial Group, Inc. Non-Qualified Savings
Incentive Plan effective as of April 30, 1997. (Filed as Exhibit 10.10 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1997 and
incorporated herein by reference.)
10.11* Ambac Financial Group, Inc. Excess Benefits Pension Plan (Amended and Restated
as of January 1, 1994) (As amended through October 25, 1995). (Filed as
Exhibit 10.17 to the Company's Quarterly Report on Form 10-Q for the period
ended September 30, 1995, and incorporated herein by reference.)
10.12* Amendment Number 1 to the Ambac Financial Group, Inc. Excess Benefits Pension
Plan effective as of April 30, 1997. (Filed as Exhibit 10.12 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997 and
incorporated herein by reference.)
10.13* Supplemental Pension Agreement between the Company and Philip B. Lassiter dated
April 30, 1997. (Filed as Exhibit 10.24 in the Company's Quarterly Report Form
10-Q for the quarter ended June 30, 1997, and incorporated herein by reference.)
10.14* Supplemental Pension Agreement between the Company and David L. Boyle dated
April 30, 1997. (Filed as Exhibit 10.25 in the Company's Quarterly Report Form
10-Q for the quarter ended June 30, 1997, and incorporated herein by reference.)
10.15* Ambac Financial Group, Inc. Supplemental Pension Plan (Amended and Restated as
of January 1, 1995) (As amended through October 25, 1995). (Filed as Exhibit
10.18 to the Company's Quarterly Report on Form 10-Q for the period ended
September 30, 1995, and incorporated herein by reference.)
</TABLE>
- -------------------
* Management contract or compensatory plan, contract or arrangement required to
be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
---------
32
<PAGE>
<TABLE>
<S> <C>
10.16* Amendment Number 1 to the Ambac Financial Group, Inc. Supplemental Pension Plan
effective as of April 30, 1997. (Filed as Exhibit 10.18 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997 and incorporated
herein by reference.)
10.17 Lease Agreement, dated as of January 1, 1992 between South Ferry Building
Company and Ambac Assurance Corporation. (Filed as Exhibit 10.36 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1992 and incorporated herein by reference.)
10.18 Amendment to Lease Agreement dated August 1, 1997 between South Ferry Building
Company and Ambac Assurance Corporation. (Filed as Exhibit 10.20 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1997 and
incorporated herein by reference.)
10.19 Tax Settlement Agreement, dated as of March 30, 1993, among Citicorp, Citibank,
N.A., Citicorp Financial Guaranty Holdings, Inc., Ambac Financial Group, Inc.,
Ambac Assurance Corporation, American Municipal Bond Holding Company and Health
Care Investment Analysts, Inc. (Filed as Exhibit 10.02 to the Company's
Registration Statement on Form S-3 (Registration No. 33-59290) and incorporated
herein by reference.)
10.20 Conformed copy of U.S. $150,000,000 Credit Agreement, dated as of August 3,
1998 (the "BNS Credit Agreement") among the Company and Ambac Assurance
Corporation as the Borrowers, Certain Commercial Lending Institutions as the
Lenders, Citibank, N.A., as the Documentation Agent, First National Bank of
Chicago, as the Co-Agent,and The Bank of Nova Scotia, acting through its New
York Agency, as the Arranger and the Administrative Agent. (Filed as Exhibit
10.22 to the Company's Quarterly Report on Form 10-Q for the period ended June
30, 1998 and incorporated herein by reference.)
10.21 $555,000,000 Amended and Restated Credit Agreement, dated December 2, 1998
between Ambac Assurance Corporation and various banks and Deutsche Bank AG (New
York Branch), as Agent.
10.22 Joint Venture Agreement Ambac Assurance Corporation and MBIA Insurance Company
dated as of September 11, 1995.
12.01 Statement re computation of ratios.
13.01 Annual Report to Stockholders for the fiscal year ended December 31, 1998.
(Furnished for the information of the Securities and Exchange Commission and
not deemed "filed" as part of this Form 10-K except for those portions that are
expressly incorporated by reference.)
</TABLE>
33
<PAGE>
<TABLE>
<S> <C>
21.01 List of Subsidiaries of Ambac Financial Group, Inc.
24.01 Power of Attorney from Phillip B. Lassiter.
24.02 Power of Attorney from Frank J. Bivona.
24.03 Power of Attorney from Michael A. Callen.
24.04 Power of Attorney from Renso L. Caporali.
24.05 Power of Attorney from Richard Dulude.
24.06 Power of Attorney from W. Grant Gregory.
24.07 Power of Attorney from C. Roderick O'Neil.
27.00 Financial Data Schedule.
99.01 Ambac Assurance Corporation and Subsidiaries Consolidated Financial Statements
(with independent auditors' report thereon) as of December 31, 1998 and 1997.
</TABLE>
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the fourth quarter of 1998.
--------
On March 24, 1999, the Company filed a current report on Form 8-K containing
consolidated financial statements (with independent auditors' report thereon) of
Ambac Assurance Corporation and Subsidiaries as of December 31, 1998 and 1997.
34
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AMBAC FINANCIAL GROUP, INC.
(Registrant)
Dated: March 30, 1999 By: /s/ Frank J. Bivona
------------------------------------
Name: Frank J. Bivona
Title: Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
Phillip B. Lassiter* Chairman, President March 30, 1999
- ------------------------------------------ and Chief Executive Officer
Phillip B. Lassiter and Director (Principal Executive
Officer)
/s/ Frank J. Bivona Executive Vice President, and March 30, 1999
- ------------------------------------------ Chief Financial Officer (Principal
Frank J. Bivona Financial and Accounting Officer)
Michael A. Callen* Director March 30, 1999
- ------------------------------------------
Michael A. Callen
Renso L. Caporali* Director March 30, 1999
- ------------------------------------------
Renso L. Caporali
Richard Dulude* Director March 30, 1999
- ------------------------------------------
Richard Dulude
W. Grant Gregory* Director March 30, 1999
- ------------------------------------------
W. Grant Gregory
C. Roderick O'Neil* Director March 30, 1999
- ------------------------------------------
C. Roderick O'Neil
</TABLE>
- ---------------------
* Frank J. Bivona, by signing his name hereto, does hereby sign this Annual
Report on Form 10-K on behalf of each of the directors and officers of the
Registrant after whose typed names asterisks appear pursuant to powers of
attorney duly executed by such directors and officers and filed with the
Securities and Exchange Commission as exhibits to this report.
By: /s/ Frank J. Bivona
------------------------------
Frank J. Bivona
Attorney-in-fact
35
<PAGE>
INDEPENDENT AUDITORS' REPORT ON SCHEDULES AND CONSENT
The Board of Directors
Ambac Financial Group, Inc.:
The audits referred to in our report dated January 27, 1999, included the
related financial statement schedules as of December 31, 1998 and 1997 and for
each of the years in the three-year period ended December 31, 1998, included in
this Form 10-K. These financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statement schedules based on our audit. In our opinion, such
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
We consent to the use of our reports incorporated by reference in the
registration statement (No. 333-43695) on Form S-3, and the registration
statements (Nos. 33-47970, 33-63134, 33-47971, 33-44913 and 333-52449) on Form
S-8 of Ambac Financial Group, Inc.
New York, New York
March 30, 1999
S-1
<PAGE>
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
SCHEDULE I - SUMMARY OF INVESTMENTS
Other Than Investments in Related Parties
December 31, 1998
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Amount at which
Amortized Estimated shown in the
Type of Investment Cost Fair Value balance sheet
- ------------------------------------------------------------ ------------ ----------- ---------------
<S> <C> <C> <C>
U.S. Government obligations................................. $ 114,385 $ 122,896 $ 122,896
Municipal obligations....................................... 2,632,276 2,801,324 2,801,324
Mortgage- and asset-backed securities (includes U.S.
Government Agency obligations)............................. 4,224,636 4,262,635 4,262,635
Corporate obligations....................................... 1,335,749 1,435,427 1,435,427
Other....................................................... 119,528 119,528 119,528
------------ ------------ -----------
Total investments...................................... $8,426,574 $8,741,810 $8,741,810
============ ============ ===========
</TABLE>
S-2
<PAGE>
AMBAC FINANCIAL GROUP, INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (PARENT COMPANY ONLY)
Condensed Balance Sheets
December 31, 1998 and 1997
(Dollar Amounts in Thousands Except Per Share Data)
<TABLE>
<CAPTION>
1998 1997
----------- -------------
ASSETS
Assets:
<S> <C> <C>
Cash....................................................................... $ 116 $ 8
Investments in subsidiaries................................................ 2,275,995 2,002,653
Fixed income securities, at fair value
(amortized cost of $205,456 in 1998 and $65,772 in 1997).................. 209,182 70,380
Short-term investments, at cost (approximates fair value).................. 24,144 13,592
Other investments.......................................................... 1,522 --
Current income taxes receivable............................................ -- 4,576
Deferred income taxes receivable........................................... 12,984 2,207
Other assets............................................................... 23,586 9,876
---------- ----------
Total assets.............................................................. $2,547,529 $2,103,292
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Debentures................................................................. 423,929 223,864
Current income taxes payable............................................... 1,029 --
Accrued interest payable................................................... 6,797 6,797
Accounts payable and other liabilities..................................... 19,684 149
---------- ----------
Total liabilities......................................................... 451,439 230,810
---------- ----------
Stockholders' equity:
Preferred stock, par value $0.01 per share; authorized shares - 4,000,000;
issued and outstanding shares - none....................................... -- --
Common Stock, par value $0.01 per share; authorized shares - 200,000,000 at
December 31, 1998 and 100,000,000 at December 31, 1997; issued shares -
70,680,384 at December 31, 1998 and December 31, 1997...................... 707 707
Additional paid-in capital.................................................. 519,305 500,107
Accumulated other comprehensive income...................................... 159,313 135,223
Retained earnings........................................................... 1,449,832 1,262,740
Common Stock held in treasury at cost, 738,381 shares at December 31, 1998
and 732,947 at December 31, 1997 (33,067) (26,295)
---------- ----------
Total stockholders' equity................................................ 2,096,090 1,872,482
---------- ----------
Total liabilities and stockholders' equity................................ $2,547,529 $2,103,292
========== ==========
</TABLE>
S-3
<PAGE>
AMBAC FINANCIAL GROUP, INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (PARENT COMPANY ONLY)
Condensed Statements of Operations
Three Years Ended December 31,
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> C> C>
Revenues:
Dividend income........................................... $ 48,000 $ 44,000 $ 44,000
Extraordinary dividend (1)................................ -- -- 115,865
Interest and other income................................. 14,336 7,047 7,589
Net realized gains........................................ 2,507 748 66,633
-------- -------- --------
Total revenues........................................... 64,843 51,795 234,087
-------- -------- --------
Expenses:
Interest expense.......................................... 29,722 19,053 18,852
Operating expenses........................................ 6,815 2,826 3,477
-------- -------- --------
Total expenses........................................... 36,537 21,879 22,329
-------- -------- --------
Income before income taxes and equity in undistributed
net income of subsidiaries................................. 28,306 29,916 211,758
Federal income tax (benefit) expense........................ (6,274) (5,433) 18,203
-------- -------- --------
Income before equity in undistributed net income of
subsidiaries............................................... 34,580 35,349 193,555
Equity in undistributed net income of subsidiaries.......... 219,414 187,681 82,762
-------- -------- --------
Net income.................................................. 253,994 223,030 276,317
======== ======== ========
</TABLE>
(1) Represents fair value of 2,378,672 shares of HCIA common stock received from
Ambac Assurance in the form of an extraordinary dividend on April 30, 1996.
S-4
<PAGE>
AMBAC FINANCIAL GROUP, INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (PARENT COMPANY ONLY)
Condensed Statements of Stockholders' Equity
Three Years Ended December 31,
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------------------------------------------
Retained Earnings:
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1 $1,262,740 $1,072,418 $ 819,479
Net income 253,994 $253,994 223,030 $223,030 276,317 $276,317
--------- --------- ---------
Dividends declared - (26,571) (24,165) (21,500)
common stock
Exercise of stock options (40,331) (8,543) (1,878)
---------- ---------- ----------
Balance at December 31 $1,449,832 $1,262,740 $1,072,418
---------- ---------- ----------
Accumulated Other
Comprehensive Income:
Balance at January 1 $ 135,223 $ 58,911 $ 102,470
Unrealized gains (losses) on
securities, ($36,476,
$121,347, and ($71,667),
pre-tax, in 1998, 1997
and 1996, respectively) (1) 23,889 76,155 (43,559)
Foreign currency gain 201 157 --
--------- --------- ---------
Other comprehensive income 24,090 24,090 76,312 76,312 (43,559) (43,559)
---------- -------- ---------- -------- ----------- --------
Total comprehensive income $278,084 $299,342 $232,758
======== ======== ========
Balance at December 31 $ 159,313 $ 135,223 $ 58,911
---------- ---------- ----------
Preferred Stock:
Balance at January 1 and
December 31 $ $ $
-- -- --
---------- ---------- ----------
Common Stock:
Balance at January 1 $ 707 $ 353 $ 353
Stock split effected as dividend -- 354 --
---------- ---------- ----------
Balance at December 31 $ 707 $ 707 $ 353
---------- ---------- ----------
Additional Paid-in Capital:
Balance at January 1 $ 500,107 $ 498,401 $ 492,495
Issuance of stock -- (3,506) 3,624
Exercise of stock options 19,198 5,566 2,282
Stock split effected as dividend -- (354) --
---------- ---------- ----------
Balance at December 31 $ 519,305 $ 500,107 $ 498,401
---------- ---------- ----------
Common Stock Held in
Treasury at Cost:
Balance at January 1 $ (26,295) $ (15,067) $ (10,809)
Cost of shares acquired (52,738) (40,397) (31,751)
Shares issued under equity plans 45,966 29,169 17,211
Issued to acquire subsidiary -- -- 10,282
---------- ---------- ----------
Balance at December 31 $ (33,067) $ (26,295) $ (15,067)
---------- ---------- ----------
Total Stockholders' Equity at
December 31 $2,096,090 $1,872,482 $1,615,016
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
(1) Disclosure of reclassification amount: 1998 1997 1996
----------------------------
<S> <C> <C> <C>
Unrealized holding gains (losses) arising during period $34,526 $88,744 $(56,195)
Less: reclassification adjustment for net gains (losses) included in net income 10,637 12,589 (12,636)
--------------------------
Net unrealized gains (losses) on securities $23,889 $76,155 $(43,559)
==========================
</TABLE>
S-5
<PAGE>
AMBAC FINANCIAL GROUP, INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (PARENT COMPANY ONLY)
Condensed Statements of Cash Flows
Three Years Ended December 31,
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
----------- -------- ---------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income................................................ $ 253,994 $ 223,030 $ 276,317
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Equity in undistributed net income of
Subsidiaries............................................. (219,414) (187,681) (82,762)
Extraordinary dividend(1)................................. -- -- (115,865)
(Gain) loss on sale of investments........................ (2,507) (748) (66,633)
(Decrease) increase in current income
taxes payable........................................... 5,605 (1,510) (10,443)
Increase in other assets............................. (13,710) (4,770) (1,355)
Other, net................................................ (16,843) (15,945) (6,965)
---------- --------- ----------
Net cash provided by (used in) operating
activities 7,125 12,376 (7,706)
---------- --------- ----------
Cash flows from investing activities:
Proceeds from sales of bonds.............................. 69,097 39,728 17,396
Purchases of bonds........................................ (206,430) -- (121,734)
Proceeds from sale of affiliate........................... -- -- 202,609
Change in short-term investments.......................... (10,552) 2,130 (4,585)
Other, net (1,489) -- 13,842
---------- --------- ----------
Net cash (used in) provided by investing activities......
(149,374) 41,858 107,528
---------- --------- ----------
Cash flows from financing activities:
Dividends paid............................................ (26,571) (24,165) (21,500)
Proceeds from issuance of debentures...................... 193,700 -- --
Purchases of treasury stock............................... (52,738) (40,397) (31,751)
Proceeds from sale of treasury stock...................... 45,966 29,169 17,211
Contribution to subsidiaries.............................. (18,000) (18,842) (63,801)
---------- --------- ----------
Net cash provided by (used in) financing activities......
142,357 (54,235) (99,841)
---------- --------- ----------
Net cash flow............................................... 108 (1) (19)
Cash at January 1......................................... 8 9 28
---------- --------- ----------
Cash at December 31....................................... $ 116 $ 8 $ 9
========== ========= ==========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes............................................. $ 60,000 $ 12,861 $ 90,197
========== ========= =========
Interest expense......................................... $ 30,072 $ 19,687 $ 19,687
========== ========= =========
</TABLE>
(1) Represents fair value of 2,378,672 shares of HCIA common stock received from
Ambac Assurance in the form of an extraordinary dividend on April 30, 1996.
S-6
<PAGE>
AMBAC FINANCIAL GROUP, INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (PARENT COMPANY ONLY)
Note to Condensed Financial Information
The condensed financial information of Ambac Financial Group, Inc. for
the years ended December 31, 1998, 1997 and 1996, should be read in conjunction
with the consolidated financial statements of Ambac Financial Group, Inc. and
Subsidiaries and the notes thereto. Investments in subsidiaries are accounted
for using the equity method of accounting.
S-7
<PAGE>
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
SCHEDULE IV - REINSURANCE
(Dollar Amounts in Thousands Except Percentages)
<TABLE>
<CAPTION>
Assumed
Ceded to from Percentage of
Gross Other Other Amount Assumed
Insurance Premiums Written Amount Companies Companies Net Amount to Net
- ---------------------------------------- ------ --------- -------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996............ $240,544 $37,793 $ 6,664 $209,415 3.18 %
Year ended December 31, 1997............ $277,814 $32,452 $ 8,349 $253,711 3.29 %
Year ended December 31, 1998............ $333,652 $49,563 $27,359 $311,448 8.78 %
</TABLE>
S-8
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number Description
---------------- -----------
<S> <C>
4.06 Form of 7.50% Debenture due May 1, 2023.
10.07 Ambac Financial Group, Inc. Deferred Compensation Plan for Outside
Directors and Eligible Senior Officers, effective as of December 1,
1993 and amended and restated as of October 27, 1998.
10.21 $555,000,000 Amended and Restated Credit Agreement, dated December
2, 1998 between Ambac Assurance Corporation and various banks and
Deutsche Bank AG (New York Branch), as Agent.
10.22 Joint Venture Agreement between Ambac Assurance Corporation and MBIA
Insurance Company.
12.01 Statement re computation of ratios.
13.01 Annual Report to Stockholders for the fiscal year ended December 31,
1998. (Furnished for the information of the Securities and Exchange
Commission and not deemed "filed" as part of this Form 10-K except
for those portions that are expressly incorporated by reference.)
21.01 List of Subsidiaries of Ambac Financial Group, Inc.
24.01 Power of Attorney from Phillip B. Lassiter.
24.02 Power of Attorney from Frank J. Bivona.
24.03 Power of Attorney from Michael A. Callen.
24.04 Power of Attorney from Renso L. Caporali.
24.05 Power of Attorney from Richard Dulude.
24.06 Power of Attorney from W. Grant Gregory.
24.07 Power of Attorney from C. Roderick O'Neil.
27.00 Financial Data Schedule.
99.01 Ambac Assurance Corporation and Subsidiaries Consolidated Financial
Statements (with independent auditors' report thereon) as of
December 31, 1998 and 1997.
</TABLE>
<PAGE>
EXHIBIT 4.06
CUSIP 023139 AB 4
SEE REVERSE FOR
AMBAC CERTAIN DEFINITIONS
INC.
7 1/2% DEBENTURE DUE 2023
AMBAC INC., a Delaware corporation (herein called the "Company", which term
includes any successor corporation under the Indenture hereinafter referred
to), for value received, hereby promises to pay to
7 1/2% 7 1/2%
DUE 2023 DUE 2023
,or registered assigns, the principal sum of DOLLARS
on May 1, 2023 and to pay interest thereon from May 1, 1993 or from the most
recent Interest Payment Date to whIch interest has been paid or duly provided
for, semi-annually in arrears on May 1 and November 1, 1993 at the rate of 71/2%
per annum, until the principal hereof is paid or made available for payment .
The Interest so payable, and punctually paid or duly provided for, on any
Interest Payment Date will, as provided In such indenture, be paid to the Person
in whose name this Security (or one or more Predecessor Securities) is
registered at the close of business on the Regular Record Date for such
interest, which shall be the April 15 or October 15 (whether or not a Business
Day), as the case may be, next preceding such Interest Payment Date. Any such
interest not punctually paid or duly provided for will forthwith cease to be
payable to the Person in whose name this Security (or one or more Predecessor
Securities) is registered on such Regular Record Date and may either be paid to
the Person in whose name this Security (or one or more Predecessor Securities)
is registered at the close of business on a Special Record Date for the payment
of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be
given to Holders of Securities of this series not more than 15 and not less than
10 days prior to such Special Record Date, or be paid at any time in any other
lawful manner not inconsistent with the requirements of any securities exchange
on which such Securities may be listed, as more fully provided in the Indenture.
Each payment of Interest hereon shall include interest accrued from and
including the preceding Interest Payment Date or the date of issuance, as the
case may be, to and excluding the relevant Interest Payment Date or' Maturity,
as the case may be.
Payment of the principal of and interest on this Security will be made
at the office or agency of the Company maintained for that purpose in
The City and State of New York, in such coin or currency of the United
States of America as at the time of payment is legal tender for payment
of public and private debts, provided, however, that at the option of
the Company payment of interest may be made by check mailed to the
address of the Person entitled thereto as such address shall appear in
the Security Register.
Reference is hereby made to the further provisions of this Security set
forth on the reverse hereof, which further provisions shall for all
purposes have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been executed by the
Trustee referred to on the reverse hereof by manual signature, this
Security shall not be entitled to any benefit under the indenture or be
valid or obligatory for any purpose.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed under its corporate seal.
Dated:
<TABLE>
<S> <C>
TRUSTEES CERTFICATE OF AUTHENTICATION
This in one of the Securities of the
series designated therein referred to in
the within-mentioned indenture. AMBAC INC.
THE CHASE MANHATTAN BANK (NATIONAL ASSOCIATION), Attest: By:
as Trustee
By: By: /s/ Richard Gross /s/ Phillip Lassiter
SENIOR VICE PRESIDENT CHAIRMAN OF THE BOARD,
Authorized Officer AND SECRETARY PRESIDENT, AND CHIEF
EXECUTIVE OFFICER
</TABLE>
<PAGE>
AMBAC INC.
71/2% DEBENTURE DUE 2023
- --------------------------------------------------------------------------------
This Security is one of a duly authorized issue of securities of the Company
(herein called the "Securities"), issued and to be issued in one or more series
under an Indenture, dated as of August 1, 1991 as it may be supplemented from
time to time (herein called the "Indenture"), between the Company and The Chase
Manhattan Bank (National Association). Trustee (herein called the "Trustee",
which term includes any successor trustee under the Indenture with respect to
the series of which this Security is a part), to which Indenture reference is
hereby made for a statement of the respective rights, limitations of rights,
duties and immunities thereunder of the Company, the Trustee and the Holders of
the Securities and of the terms upon which the Securities are, and are to be
authenticated and delivered. This Security is one of the series designated on
the face hereof, limited in aggregate principal amount to $75,000,000.
The Securities of this series may not be redeemed prior to Maturity.
The Securities of this series are not subject to the operation of any sinking
fund.
If an Event of Default with respect to Securities of this series shall occur
and be continuing, the principal of the Securities of this series may be
declared due and payable in the manner and with the effect provided in the
Indenture.
The Indenture contains provisions for defeasance at any time of (a) the entire
indebtedness of the Company on this Security and (b) certain restrictive
covenants and the related defaults and Events of Default applicable to the
Company, in either case upon compliance by the Company with certain conditions
set forth therein, which provisions apply to this Security.
The indenture permits, with certain exceptions as therein provided, the amend-
ment thereof and the modification of the rights and obligations of the Company
and the rights of the Holders of the Securities of each series to be affected
under the Indenture at any time by the Company and the Trustee with the consent
of the Holders of not less than a majority in principal amount of all
Outstanding Securities to be so affected. The Indenture also contains provisions
permitting the Holders of not less than a majority in principal amount of the
Outstanding Securities, on behalf of the Holders of all Outstanding Securities,
to waive compliance by the Company with certain provisions of the Indenture, and
contains provisions permitting the Holders of not less than a majority in
principal amount, in certain instances of the Outstanding Securities of
individual series and in other instances of all Securities at the time
Outstanding to waive on behalf of all of the Holders of Securities of such
individual series or of the Holders of all Securities at the time Outstanding,
as the case may be, certain past defaults under the Indenture and their
consequences. Any such consent or waiver by the Holder of this Security shall be
conclusive and binding upon such Holder and upon all future Holders of this
Security and of any Security issued upon the registration of transfer hereof or
in exchange hereof or in lieu hereof, whether or not notation of such consent or
waiver is made upon this Security.
No reference herein to the Indenture and no provision of this Security or of
the Indenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay or make provision as provided in the
Indenture for the payment of the amount of principal of and interest on this
Security herein provided and at the times, place and rate, and in the coin or
currency herein prescribed.
As provided in the Indenture and subject to certain limitations therein and
herein set forth, the transfer of this Security is registrable in the Security
Register, upon surrender of this Security for registration of transfer at the
office or agency of the Company in any place where the principal of and interest
on this Security are payable, duly endorsed by, or accompanied by a written
instrument of transfer in form satisfactory to the Company and the Security
Registrar duly executed by, the Holder hereof or his attorney duly authorized in
writing, and thereupon one or more new Securities of this series, of authorized
denominations and for the same aggregate principal amount, will be issued to the
designated transferee or transferees.
The Securities of this series are issuable only in registered form without
coupons in denominations of $1,000 and any integral multiple thereof. As
provided in the Indenture and subject to certain limitations therein set forth,
Securities of this series are exchangeable for a like aggregate principal amount
of Securities of this series of a different authorized denomination, as
requested by the Holder surrendering the same.
No service charge shall be made for any such registration of transferor
exchange, but the Company may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith.
Prior to due presentment of this Security for registration of transfer, the
Company, the Trustee and any agent of the Company or the Trustee may treat the
Person in whose name this Security is registered as the owner hereof for all
purposes, whether or not this Security be overdue, and neither the Company, the
Trustee nor any such agent shall be affected by notice to the contrary.
All terms used in this Security that are defined in the Indenture shall have
the meanings assigned to them in the Indenture.
- --------------------------------------------------------------------------------
ABBREVIATIONS
The following abbreviations, when used in the inscription on the face of this
instrument, shall be construed as though they were written out in full according
to applicable laws or regulations.
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT --_____________________ Custodian ______________
TEN ENT -- as tenants by the entiretes (Cust) (Minor)
JT TEN -- as joint tenants with right Under Uniform Gifts to Minors Act
of survivorship and not as tenants in common ____________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list,
FOR VALUE RECEIVED, the undersigned hereby sell(s). assign(s) and
transfer(s) unto
PLEASE INSERT SOCAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
Please print or type name and address, including zip code, of assignee
the within Security and all rights thereunder, irrevocably constituting and
appointing
to transfer said Security on the books of the Company, with full power of
substitution in the premises.
Dated ___________
SIGNATURE GUARANTEED
NOTICE The signature to this assignment
must correspond with the name as
it appears upon the face of the
within Security in every
particular, without alteration
or enlargement or any change
whatsoever.
<PAGE>
EXHIBIT 10.07
AMBAC FINANCIAL GROUP, INC.
DEFERRED COMPENSATION PLAN
FOR OUTSIDE DIRECTORS
AND ELIGIBLE SENIOR OFFICERS
Effective as of December 1, 1993
and Amended and Restated as of October 27, 1998
<PAGE>
AMBAC FINANCIAL GROUP, INC.
DEFERRED COMPENSATION PLAN FOR
OUTSIDE DIRECTORS AND ELIGIBLE SENIOR OFFICERS
AMBAC FINANCIAL GROUP, INC., a Delaware corporation (the "Company"),
adopts the Ambac Deferred Compensation Plan for Outside Directors and Eligible
Senior Officers (the "Plan"), effective as of December 1, 1993 and amended and
restated as of October 27, 1998.
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).
<PAGE>
Ambac Financial Group, Inc.
Deferred Compensation Plan
Page 2 of 13
"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).
"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 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
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 or Eligible
Compensation, as applicable, 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 becomes an Outside Director.
"Eligible Compensation" means, (i) in the case of a Participant who is
an Outside Director, such Participant's Director Fees for the relevant Deferral
Year, and (ii) in the case of a Participant who is an Eligible Officer, 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).
<PAGE>
Ambac Financial Group, Inc.
Deferred Compensation Plan
Page 3 of 13
"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.
"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 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 or 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.
"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.
<PAGE>
Ambac Financial Group, Inc.
Deferred Compensation Plan
Page 4 of 13
"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
and 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) Directors. Any Outside Director may participate in the Plan.
(b) Officers. Officers of the Company or its Subsidiaries who are
designated by the Board as "officers" for purposes of Section 16 of the Exchange
Act, as well as such other senior officers of the Company and its Subsidiaries
as may be designated from time to time by the Committee, may participate in the
Plan.
(c) Becoming a Participant. An Outside Director or Eligible Officer
becomes a Participant for any Deferral Year by filing a Deferral Election Form
according to Section 5 of the Plan.
5. Deferral Elections
<PAGE>
Ambac Financial Group, Inc.
Deferred Compensation Plan
Page 5 of 13
(a) General Provisions. A Participant may elect to defer all or a
specified percentage (in multiples of 10 percent) of his 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 Outside Director and Eligible Officer will be provided
with a Deferral Election Form and a Beneficiary Designation Form. In order for
an Outside Director or Eligible Officer to participate in the Plan for a given
Deferral Year, a Deferral Election Form, completed and signed by him, must be
delivered to the Secretary of the Board on or prior to the applicable Election
Date. An Outside Director or Eligible Officer electing to participate in the
Plan for a given Deferral Year shall indicate on his 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 or her Deferred Benefit commence following termination of service as
an Outside Director or termination of employment (as the case may be) 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 or Eligible
Officer 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 Eligible Compensation 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.
(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 2000, a written revocation of
such Deferral Election must be delivered to the Secretary of the Board
before the close of business on December 31, 1999.)
<PAGE>
Ambac Financial Group, Inc.
Deferred Compensation Plan
Page 6 of 13
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.
(A) 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) 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 10%, 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
Phantom Stock 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 Phantom Stock Option; and
(iii) Such other Performance Options as the Committee may make
available to Participants from time to time.
<PAGE>
Ambac Financial Group, Inc.
Deferred Compensation Plan
Page 7 of 13
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.
(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 or 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 or 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 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.
<PAGE>
Ambac Financial Group, Inc.
Deferred Compensation Plan
Page 8 of 13
(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.
(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.
<PAGE>
Ambac Financial Group, Inc.
Deferred Compensation Plan
Page 9 of 13
(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) in the case of an Outside Director, termination of
service as an Outside Director (unless upon such termination of service the
Participant becomes an employee of the Company or any Subsidiary, in which
case the following clause (B) shall apply), and (B) in the case of an
Eligible Officer, 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
<PAGE>
Ambac Financial Group, Inc.
Deferred Compensation Plan
Page 10 of 13
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 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 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.
<PAGE>
Ambac Financial Group, Inc.
Deferred Compensation Plan
Page 11 of 13
9. Employer's Obligation
This Plan is unfunded. A Deferred Compensation Account represents at
all times an unfunded and unsecured contractual obligation of, in the case of
deferrals by Outside Directors, the Company and, in the case of deferrals by
Eligible Officers, the relevant Employer. Each Participant or Beneficiary will
be an unsecured creditor of the Company or the relevant Employer, as the case
may be. Amounts payable under the Plan will be satisfied solely out of the
general assets of the Company or the relevant Employer subject to the claims of
the Company's or such 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 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. Neither the Company nor any other 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 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 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
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
<PAGE>
Ambac Financial Group, Inc.
Deferred Compensation Plan
Page 12 of 13
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 212-344-5297 (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 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
<PAGE>
Ambac Financial Group, Inc.
Deferred Compensation Plan
Page 13 of 13
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 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.
In addition, 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 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
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.
<PAGE>
AMBAC FINANCIAL GROUP, INC.
DEFERRED COMPENSATION PLAN
FOR OUTSIDE DIRECTORS
AND ELIGIBLE SENIOR OFFICERS
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 and 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 10.21
$555,000,000
AMENDED AND RESTATED CREDIT AGREEMENT
among
AMBAC ASSURANCE CORPORATION,
VARIOUS BANKS,
and
DEUTSCHE BANK AG,
NEW YORK BRANCH
as Agent
__________________________________
Dated as of December 2, 1998
__________________________________
<PAGE>
TABLE OF CONTENTS
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SECTION 1. DEFINITIONS AND PRINCIPLES OF CONSTRUCTION...................................... 1
Section 1.01 Defined Terms............................................................ 1
Section 1.02 Principles of Construction............................................... 11
SECTION 2. AMOUNT AND TERMS OF CREDIT...................................................... 11
Section 2.01 The Loans................................................................ 11
Section 2.02 Amount of Each Borrowing................................................. 11
Section 2.03 Notice of Borrowing...................................................... 12
Section 2.04 Disbursement of Funds.................................................... 12
Section 2.05 Notes.................................................................... 12
Section 2.06 Interest................................................................. 13
Section 2.07 Capital Adequacy......................................................... 13
SECTION 3. COMMITMENT FEES, FEES; AND TERMINATIONS,
EXTENSIONS AND INCREASES OF COMMITMENTS AND
CONTINGENT COMMITMENTS.......................................................... 14
Section 3.01 Fees..................................................................... 14
Section 3.02 Voluntary Termination of Unutilized Commitments and Unutilized
Contingent Commitments................................................... 14
Section 3.03 Mandatory Termination of Commitments and Contingent
Commitments.............................................................. 15
Section 3.04 Expiry Date.............................................................. 15
Section 3.05 Increase of Commitments.................................................. 16
SECTION 4. PREPAYMENTS: PAYMENTS........................................................... 17
Section 4.01 Voluntary Prepayments.................................................... 17
Section 4.02 Mandatory Prepayments.................................................... 18
Section 4.03 Method and Place of Payment.............................................. 18
Section 4.04 Net Payments............................................................. 18
Section 4.05 Limitations on Sources of Payment........................................ 20
SECTION 5. CONDITIONS PRECEDENT TO EFFECTIVENESS........................................... 20
Section 5.01 Execution of Agreement; Notes............................................ 20
Section 5.02 No Default; Representations and Warranties............................... 20
Section 5.03 Opinions of Counsel...................................................... 20
Section 5.04 Corporate Documents; Proceedings......................................... 21
Section 5.05 Covered Portfolio, etc................................................... 21
Section 5.06 Adverse Change, Rating, etc.............................................. 21
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Section 5.07 Litigation............................................................... 22
Section 5.08 Fees, etc................................................................ 22
SECTION 6. CONDITIONS PRECEDENT TO ALL CREDIT EVENTS....................................... 22
Section 6.01 Loss Threshold Incurrence Date........................................... 22
Section 6.02 Notice of Borrowing...................................................... 22
SECTION 7. REPRESENTATIONS, WARRANTIES AND AGREEMENTS...................................... 23
Section 7.01 Corporate Status......................................................... 23
Section 7.02 Corporate Power and Authority............................................ 23
Section 7.03 No Violation............................................................. 23
Section 7.04 Governmental Approvals................................................... 23
Section 7.05 Financial Statements; Financial Condition; Undisclosed Liabilities; etc.. 24
Section 7.06 Litigation............................................................... 25
Section 7.07 True and Complete Disclosure............................................. 25
Section 7.08 Use of Proceeds; Margin Regulations........................................... 25
Section 7.09 Tax Returns and Payments................................................. 25
Section 7.10 Compliance with ERISA.................................................... 25
Section 7.11 Capitalization........................................................... 26
Section 7.12 Subsidiaries............................................................. 26
Section 7.13 Compliance with Statutes, etc............................................ 26
Section 7.14 Investment Company Act................................................... 26
Section 7.15 Public Utility Holding Company Act....................................... 27
Section 7.16 Compliance with Insurance Law............................................ 27
Section 7.17 Covered Portfolio........................................................ 28
SECTION 8. AFFIRMATIVE COVENANTS........................................................... 28
Section 8.01 Information Covenants.................................................... 28
Section 8.02 Books, Records and Inspections........................................... 30
Section 8.03 Maintenance of Property, Insurance....................................... 30
Section 8.04 Corporate Franchises..................................................... 30
Section 8.05 Compliance with Statutes, etc............................................ 31
Section 8.06 ERISA.................................................................... 31
Section 8.07 Performance of Obligations............................................... 31
Section 8.08 Use of Proceeds.......................................................... 31
Section 8.09 Conduct of Business...................................................... 32
Section 8.10 Underwriting Criteria.................................................... 32
Section 8.11 Collection of Pledged Recoveries and Pledged Premiums.................... 32
Section 8.12 Pledged Reserve Release Notice........................................... 32
Section 8.13 Registry................................................................. 32
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(2)
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SECTION 9. NEGATIVE COVENANTS................................................................ 32
Section 9.01 Liens...................................................................... 32
Section 9.02 Consolidation, Merger, Sale of Assets, etc................................. 33
SECTION 10. EVENTS OF DEFAULT................................................................ 34
Section 10.01 Payments.................................................................. 34
Section 10.02 Representations, etc...................................................... 34
Section 10.03 Covenants................................................................. 34
Section 10.04 Default Under Other Agreements............................................ 34
Section 10.05 Bankruptcy, etc........................................................... 35
Section 10.06 ERISA..................................................................... 35
Section 10.07 Security Agreement........................................................ 35
Section 10.08 Judgments................................................................. 36
Section 10.09 Change of Control......................................................... 36
SECTION 11. THE AGENT........................................................................ 36
Section 11.01 Appointment............................................................... 36
Section 11.02 Nature of Duties.......................................................... 36
Section 11.03 Lack of Reliance on the Agent............................................. 37
Section 11.04 Certain Rights of the Agent............................................... 37
Section 11.05 Reliance.................................................................. 37
Section 11.06 Indemnification........................................................... 37
Section 11.07 The Agent in Its Individual Capacity...................................... 38
Section 11.08 Resignation by the Agent.................................................. 38
SECTION 12. MISCELLANEOUS.................................................................... 39
Section 12.01 Payment of Expenses, etc.................................................. 39
Section 12.02 Right of Setoff........................................................... 39
Section 12.03 Notices................................................................... 40
Section 12.04 Benefit of Agreement...................................................... 40
Section 12.05 No Waiver; Remedies Cumulative............................................ 42
Section 12.06 Calculations; Computations................................................ 43
Section 12.07 Governing Law; Submission to Jurisdiction; Venue.......................... 43
Section 12.08 Obligation to Make Payments in Dollars.................................... 44
Section 12.09 Counterparts.............................................................. 44
Section 12.10 Effectiveness............................................................. 44
Section 12.11 Headings Descriptive...................................................... 44
Section 12.12 Amendment or Waiver....................................................... 44
Section 12.13 Survival.................................................................. 45
Section 12.14 Exclusions from Covered Portfolio......................................... 45
</TABLE>
(3)
<PAGE>
SCHEDULES
- ---------
Schedule I Commitments and Contingent Commitments
Schedule II Undisclosed Liabilities
Schedule III Subsidiaries
Schedule IV Reinsurance Agreements
EXHIBITS
- --------
Exhibit A Notice of Borrowing
Exhibit B Note
Exhibit C-1 Opinion of Stephen D. Cooke, Senior Vice President and General
Counsel of the Borrower
Exhibit C-2 Opinion of Shearman & Sterling, New York Special Counsel to the
Borrower
Exhibit C-3 Opinion of Ross & Stevens, S.C., Wisconsin Special Counsel to the
Borrower
Exhibit D Officers' Certificate of the Borrower
Exhibit E [Intentionally Left Blank]
Exhibit F Assignment and Assumption Agreement
Exhibit G Section 4.04(b)(iii) Certificate
(4)
<PAGE>
AMENDED AND RESTATED CREDIT AGREEMENT, dated as of December 2, 1998,
among AMBAC ASSURANCE CORPORATION (formerly, AMBAC INDEMNITY CORPORATION) (the
"Borrower"), a Wisconsin stock insurance corporation, the Banks party hereto
from time to time, and DEUTSCHE BANK AG, NEW YORK BRANCH, acting in its capacity
as Agent pursuant to Section 11 hereof (in such capacity, the "Agent").
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Borrower, certain of the Banks and the Agent are parties
to the Original Credit Agreement (as hereinafter defined);
WHEREAS, the Borrower, the Banks and the Agent have agreed to amend
and restate in its entirety the Original Credit Agreement as provided herein;
and
WHEREAS, subject to and upon the terms and conditions herein set
forth, the Banks are willing to make available to the Borrower the credit
facility provided for herein;
NOW, THEREFORE, IT IS AGREED:
SECTION 1. DEFINITIONS AND PRINCIPLES OF CONSTRUCTION.
Section 1.01 Defined Terms. As used in this Agreement, the following
-------------
terms shall have the following meanings (such meanings to be equally applicable
to both the singular and plural forms of the terms defined):
"Affiliate" shall mean, with respect to any Person, any other Person
(other than an individual) directly or indirectly controlling, controlled by, or
under direct or indirect common control with, such Person; provided, however,
that an Affiliate of the Borrower shall include any Person that directly or
indirectly owns more than 5% of the Borrower and any officer or director of the
Borrower or any such Person. A Person shall be deemed to control another Person
if such Person possesses, directly or indirectly, the power to direct or cause
the direction of the management and policies of such other Person, whether
through the ownership of voting securities, by contract or otherwise.
"Agent" shall mean Deutsche Bank AG, New York Branch, in its capacity
as Agent for the Banks hereunder, and shall include any successor to the Agent
appointed pursuant to Section 11.08.
"Agreement" shall mean this Amended and Restated Credit Agreement, as
modified, supplemented or amended from time to time.
"Applicable Margin" shall mean a percentage per annum equal to 1.50%.
"Authorized Officer" shall mean any president, senior vice-president
and general counsel, chief financial officer or treasurer of the Borrower.
<PAGE>
"Assignment and Assumption Agreement" shall mean any Assignment and
Assumption Agreement substantially in the form of Exhibit F entered into
pursuant to the terms hereof.
"Average Annual Debt Service", as of a specified date with respect to
an Insured Obligation, shall mean the applicable Retained Percentage times the
sum of (i) the aggregate outstanding principal amount of such Insured
Obligation, and (ii) the aggregate amount of interest thereafter required to be
paid on such Insured Obligation (giving effect to all mandatory sinking fund
payments or other regularly scheduled required redemptions, prepayments or other
retirement of principal), divided by the number of whole and fractional years
from the date of determination to the latest maturity date of such Insured
Obligation, and with respect to the Covered Portfolio as of such date as
specified, shall mean the sum of the Average Annual Debt Service as of such date
of all Insured Obligations contained in the Covered Portfolio. In the event
that an Insured Obligation bears interest at a variable rate, the interest
thereon for purposes of the determination of Average Annual Debt Service shall
be calculated at the rate employed by the Borrower to compute average annual
debt service with respect to such Insured Obligation in accordance with its
customary business practices.
"Bank" shall mean the banks listed on the signature pages hereof on
the Effective Date as well as any institution which becomes a Bank hereunder
pursuant to Section 3.05 or 12.04(b).
"Base Rate" shall mean the higher of (i) 1/4 of 1% in excess of the
Federal Funds Rate and (ii) the Prime Lending Rate.
"Bankruptcy Code" shall have the meaning provided in Section 10.05.
"Borrower" shall have the meaning provided in the first paragraph of
this Agreement.
"Borrower's Rating" shall mean the Borrower's claims-paying rating.
"Borrowing" shall mean the borrowing of Loans on a given date.
"Business Day" shall mean any day except Saturday, Sunday and any day
which shall be in New York City a legal holiday or a day on which banking
institutions are authorized or required by law or other government action to
close.
"Change of Control" shall mean and include the occurrence of any of
the following events: any Person, entity or "group" (within the meaning of
Sections 13(d) or 14(d) of the Securities Exchange Act of 1934) other than any
Person, entity or "group" which, immediately prior to such event, was a
Subsidiary of the Parent (A) shall have acquired beneficial ownership of 20% or
more of any outstanding class of capital stock of the Parent or the Borrower
having ordinary voting power in the election of directors, provided that any
--------
Person, entity or group shall be permitted to acquire up to 25% of the
outstanding capital stock of any such class in a transaction
2
<PAGE>
approved before the consummation of same by a majority of the directors of the
Parent or the Borrower or (B) shall have obtained the power (whether or not
exercised) to elect the majority of the Board of Directors of the Parent or the
Borrower.
"Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time, and the regulations promulgated and rulings issued thereunder.
Section references to the Code are to the Code, as in effect at the date of this
Agreement and any subsequent provisions of the Code, amendatory thereof,
supplemental thereto or substituted therefor.
"Collateral" shall mean all "Collateral" as defined in the Security
Agreement.
"Collateral Account" shall have the meaning set forth in the Security
Agreement.
"Collateral Agent" shall have the meaning set forth in the Security
Agreement.
"Commitment" shall mean for each Bank the amount set forth opposite
such Bank's name in Part A of Schedule I hereto directly below the column
entitled "Commitment", as the same may be (x) reduced from time to time pursuant
to Section 3.02 and/or 3.03 and (y) adjusted from time to time as a result of
assignments to or from such Bank pursuant to Section 3.04, 3.05 or 12.04.
"Commitment Date" shall have the meaning provided in Section 3.05.
"Commitment Fees" shall have the meaning provided in Section 3.01(a).
"Commitment Period" initially shall mean the period commencing on the
Effective Date and ending on the Expiry Date and, from and after the date of any
extension of the Expiry Date, shall mean the period commencing on the date which
is seven years prior to the Expiry Date and ending on the Expiry Date.
"Contingent Commitment" shall mean for each Part C Bank the amount set
forth opposite such Part C Bank's name in Part C of Schedule I hereto directly
below the column entitled "Contingent Commitment", as the same may be (x)
reduced from time to time pursuant to Section 3.02 and/or 3.03 and (y) adjusted
from time to time as a result of assignments to or from such Part C Bank
pursuant to Section 3.04, 3.05 or 12.04.
"Contingent Obligation" shall mean, as to any Person, any obligation
of such Person guaranteeing or intended to guarantee any Indebtedness, leases,
dividends or other obligations ("primary obligations") of any other Person (the
"primary obligor") in any manner, whether directly or indirectly, including,
without limitation, any obligation of such Person, whether or not contingent,
(i) to purchase any such primary obligation or any property constituting direct
or indirect security therefor, (ii) to advance or supply funds (x) for the
purchase or payment of any such primary obligation or (y) to maintain working
capital or equity capital of the primary obligor or otherwise to maintain the
net worth or solvency of the primary obligor, (iii) to purchase property,
securities or services primarily for the purpose of assuring the holder of any
3
<PAGE>
such primary obligation of the ability of the primary obligor to make payment of
such primary obligation or (iv) otherwise to assure or hold harmless the holder
of such primary obligation against loss in respect thereof; provided, however,
that the term Contingent Obligation shall not include endorsements of
instruments for deposit or collection in the ordinary course of business. The
amount of any Contingent Obligation shall be deemed to be an amount equal to the
stated or determinable amount of the primary obligation in respect of which such
Contingent Obligation is made or, if not stated or determinable, the maximum
reasonably anticipated liability in respect thereof (assuming such Person is
required to perform thereunder) as determined by such Person in good faith.
"Covered Portfolio" shall mean and include each Insured Obligation as
of the Effective Date and each Insured Obligation issued thereafter and prior to
the Loss Threshold Incurrence Date other than any Insured Obligation which is
excluded from the Covered Portfolio pursuant to Section 12.14.
"Credit Documents" shall mean this Agreement, each Note and the
Security Agreement.
"Credit Event" shall mean the making of any Loan.
"Cumulative Losses" for a specified period shall mean the aggregate
Losses of the Borrower determined cumulatively during such period without regard
to Pledged Recoveries.
"Declining Bank" shall have the meaning provided in Section 3.04.
"Default" shall mean any event, act or condition which with notice or
lapse of time, or both, would constitute an Event of Default.
"Defaulted Loan" means, with respect to any Bank at any time, the Loan
or portion of any Loan required to be made by such Bank to the Borrower pursuant
to Section 2.01 at or prior to such time that has not been made by such Bank as
of such time.
"Defaulting Bank" means, at any time, any Bank that, at such time,
owes a Defaulted Loan.
"Department" shall mean the Insurance Department of the State of
Wisconsin.
"Dollars" and the sign "$" shall each mean freely transferable lawful
money of the United States.
"Effective Date" shall have the meaning provided in Section 12.10.
"Eligible Transferee" shall mean and include a commercial bank,
financial institution or other "accredited investor" (as defined in Regulation D
of the Securities Act of 1933, as amended, and the rules and regulations
promulgated thereunder) assigned, or the parent
4
<PAGE>
of which is assigned, an unsecured senior debt rating (or shadow rating as
reflected in a letter) by each of Moody's and S&P.
"Extending Bank" shall have the meaning provided in Section 3.04.
"Extension Request" shall have the meaning set forth in Section 3.04.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time, and the regulations promulgated and rulings
issued thereunder. Section references to ERISA are to ERISA, as in effect at
the date of this Agreement, and to any subsequent provisions of ERISA,
amendatory thereof, supplemental thereto or substituted therefor.
"ERISA Affiliate" shall mean any person (as defined in Section 3(9) of
ERISA) which together with the Borrower or any of its Subsidiaries would be
deemed to be a "single employer" within the meaning of Section 414(b), (c), (m)
or (o) of the Code.
"Event of Default" shall have the meaning provided in Section 10.
"Expiry Date" shall have the meaning set forth in Section 3.04.
"Federal Funds Rate" shall mean for any period, a fluctuating interest
rate equal for each day during such period to the weighted average of the rates
on overnight Federal Funds transactions with members of the Federal Reserve
System arranged by Federal Funds brokers, as published for such day (or, if such
day is not a Business Day, for the next preceding Business Day) by the Federal
Reserve Bank of New York, or, if such rate is not so published for any day which
is a Business Day, the average of the quotations for such day on such
transactions received by the Agent from three Federal Funds brokers of
recognized standing selected by the Agent.
"Fees" shall mean all amounts payable pursuant to or referred to in
Section 3.01.
"holder of any Note" shall mean any Federal Reserve Bank to which a
Bank has pledged its Note to the extent such Federal Reserve Bank has foreclosed
upon such Note.
"Increase Date" shall have the meaning provided in Section 3.05.
"Increase Request" shall have the meaning provided in Section 3.05.
"Increasing Bank" shall have the meaning provided in Section 3.05.
"Increasing Extending Bank" shall have the meaning provided in Section
3.04.
"Indebtedness" shall mean, as to any Person, without duplication, (i)
all indebtedness (including principal, interest, fees and charges) of such
Person for borrowed money or for the deferred purchase price of property or
services, (ii) the face amount of all letters of credit issued for the account
of such Person and all drafts drawn thereunder, (iii) all liabilities
5
<PAGE>
secured by any Lien on any property owned by such Person, whether or not such
liabilities have been assumed by such Person, (iv) the aggregate amount required
to be capitalized under leases under which such Person is the lessee and (v) all
Contingent Obligations of such Person.
"Installment Premiums" shall mean any and all premiums which are
required to be paid or claimed to be required to be paid to or for the account
of the Borrower in respect of Insured Obligations in the Covered Portfolio on a
periodic basis rather than by payment in full on the date of the effectiveness
of the relevant Insurance Contract.
"Insurance Contracts" shall have the meaning set forth in Section
7.16.
"Insured Obligation" shall mean "municipal obligation bonds",
"special revenue bonds", "industrial development bonds" and "utility first
mortgage obligations" which the Borrower is permitted to insure under the
provisions of Section 6904 (b) (1) (A), (B) or (C) of the New York Insurance Law
(without regard to clause (J) thereof) as in effect on the date hereof issued by
the United States of America, a state thereof or the District of Columbia, a
municipality or governmental unit or other political subdivision of the
foregoing or any public agency or instrumentality thereof, to the extent that
the payment of principal thereof, together with interest thereon, is insured,
reinsured or otherwise guaranteed by the Borrower under any Insurance Contract
or by Connie Lee Insurance Company under any Insurance Contract in existence on
the Effective Date.
"Lending Office" shall mean the office of the Agent located at 31 West
52nd Street, New York, NY 10019 or such other office, Subsidiary or Affiliate
of the Agent as the Agent may from time to time specify as such to the Borrower.
"Lien" shall mean any mortgage, pledge, hypothecation, assignment,
deposit arrangement, encumbrance, lien (statutory or other), preference,
priority or other security agreement of any kind or nature whatsoever
(including, without limitation, any conditional sale or other title retention
agreement, any financing or similar statement or notice filed under the UCC or
any other similar recording or notice statute, and any lease having
substantially the same effect as any of the foregoing).
"Loan" shall have the meaning provided in Section 2.01.
"Loss" shall mean at any time the aggregate sum of (i) the amount paid
by the Borrower at such time or required at such time to be paid by the Borrower
on claims under an Insurance Contract with respect to an Insured Obligation in
the Covered Portfolio by reason of the failure by the issuer thereof or other
obligor with respect thereto to pay insured amounts on such Insured Obligations
when due, plus (ii) Permitted Reserves at such time minus (iii) amounts paid at
---- -----
such time or reasonably expected by the Borrower at such time to be paid to the
Borrower under reinsurance agreements (whether facultative or treaty) and
similar arrangements with respect to the claims referred to in clause (i) above;
provided that, without limiting the generality of the foregoing, the term "Loss"
shall not include any damages or penalties required at such time
6
<PAGE>
to be paid by the Borrower in respect of an Insurance Contract by reason of the
breach by the Borrower of its obligations thereunder or the cancellation or
termination thereof other than in accordance with its terms.
"Loss Threshold Incurrence Date" shall mean the date on which the
Borrower has Cumulative Losses (net of recoveries) during the relevant
Commitment Period equal to the greater of (i) $450 million and (ii) 5.75% of
Average Annual Debt Service on the Covered Portfolio as of such date.
"Majority Banks" shall mean at any time Banks owed at least 51% of the
aggregate principal amount of the Loans outstanding at such time or, if no Loans
are outstanding at such time, Banks holding at least 51% of the aggregate
Commitments at such time; provided, however, that if any Bank shall be a
-------- -------
Defaulting Bank at such time, there shall be excluded from the determination of
Majority Banks at such time (i) the aggregate principal amount of the Loans
owing to such Bank and outstanding at such time and (ii) the Commitment of such
Bank at such time.
"Majority Participants" shall have the meaning set forth in Section
12.04.
"Margin Stock" shall have the meaning provided in Regulation U of the
Board of Governors of the Federal Reserve System.
"Moody's" shall mean Moody's Investors Service, Inc.
"Multiemployer Plan" shall mean any multiemployer plan as defined in
Section 4001(1)(3) of ERISA, which is contributed to by (or to which there is an
obligation to contribute of) the Borrower or a Subsidiary of the Borrower or an
ERISA Affiliate, and each such plan for the 5 year period immediately following
the latest date on which the Borrower, or a Subsidiary of the Borrower, or an
ERISA Affiliate contributed to or had an obligation to contribute to such plan.
"Note" shall have the meaning provided in Section 2.05.
"Notice of Borrowing" shall have the meaning provided in Section 2.03.
"Notice Office" shall mean the office of the Agent located at 31 West
52nd Street, New York, NY 10019, or such other office as the Agent may
hereafter designate in writing as such to the Borrower.
"Obligations" shall mean all amounts owing to the Agent, Collateral
Agent or any Bank pursuant to the terms of this Agreement or any other Credit
Document.
"Original Credit Agreement" means the Credit Agreement, dated as of
December 2, 1993, among the Borrower, certain of the Banks and the Agent, as
modified, supplemented and amended from time to time prior to the date hereof.
7
<PAGE>
"Parent" shall mean Ambac Financial Group, Inc., a Delaware
corporation.
"Part B Bank" shall mean each Bank listed on Part B of Schedule I
hereto.
"Part C Bank" shall mean each Bank listed on Part C of Schedule I
hereto.
"Payment Office" shall mean the office of the Agent located at 31 West
52nd Street, New York, NY 10019, or such other office as the Agent may
hereafter designate in writing as such to the Borrower.
"PBGC" shall mean the Pension Benefit Guaranty Corporation established
pursuant to Section 4002 of ERISA or any successor thereto.
"Permitted Liens" shall have the meaning set forth in Section 9.01.
"Permitted Reserves" shall mean at any time any and all reserves
established or maintained by the Borrower at such time which are deemed
necessary or prudent in the reasonable judgment of the management of the
Borrower by reason of the failure or anticipated failure by the issuer of an
Insured Obligation contained in the Covered Portfolio or other obligor with
respect thereto to pay such Insured Obligation when due as reflected on the
Borrower's books and which are or will be reported by the Borrower in its
statutory financial statements.
"Person" shall mean any individual, partnership, joint venture, firm,
corporation, association, trust or other enterprise or any government or
political subdivision or any agency, department or instrumentality thereof.
"Plan" shall mean an employee pension benefit plan (other than a
Multiemployer Plan) which is covered by Title IV of ERISA or subject to the
minimum funding standards under Section 412 of the Code, which is maintained or
contributed to by (or to which there is an obligation to contribute of), or at
any time during the five calendar years preceding the date of this Agreement was
maintained or contributed to by (or to which there was an obligation to
contribute of), the Borrower or an ERISA Affiliate.
"Pledged Premiums" shall mean at any time on and after the Loss
Threshold Incurrence Date (i) any and all Installment Premiums which are paid or
payable to the Borrower at such time with respect to defaulted Insured
Obligations in the Covered Portfolio minus (ii) the aggregate amount of such
Installment Premiums referred to in the next preceding clause (i) paid or
payable to any Person other than the Borrower at such time under reinsurance
agreements (whether facultative or treaty) and similar arrangements.
"Pledged Recoveries" shall mean at any time on and after the Loss
Threshold Incurrence Date any and all moneys and other payments, property and
other consideration and compensation received or receivable by or for the
account of the Borrower at such time (excluding the aggregate amount of any and
all monies, payments, property, consideration and compensation paid or payable
to any Person other than the Borrower under reinsurance
8
<PAGE>
agreements (whether facultative or treaty) and similar arrangements) as
repayment or reimbursement of, or otherwise in respect of or arising out of, the
payment of a claim by the Borrower under an Insurance Contract covering any
Insured Obligation in the Covered Portfolio (without regard to whether such
claim was paid from the proceeds of a Loan), whether from the issuer thereof or
any other Person including without limitation under or pursuant to (i) such
Insurance Contract, any reimbursement agreement, guaranty, letter of credit,
mortgage, security agreement, pledge agreement or other contract, agreement or
arrangement, (ii) any account or account receivable, (iii) any compromise,
settlement or similar arrangement, (iv) any voluntary payment or gift, (v) any
reinsurance of such Insured Obligation to the extent that payment or expected
payment under such reinsurance was not deducted in determining the Loss
attributed to the Borrower's payment or required payment of such claim, (vi) any
contractual, statutory, common law or other right of subrogation, (vii) any
realization upon any mortgage, security interest or other Lien, (viii) any cause
of action, whether sounding in tort, contract or otherwise, and any judicial,
arbitration or other proceeding by or before any court, agency, tribunal,
association or other governmental or private body, or (ix) any other legal or
equitable right or claim, whether or not similar to the foregoing), less the
out-of-pocket costs and expenses, including without limitation attorneys fees
and court costs, reasonably incurred by the Borrower in connection with the
collection or other realization of such moneys and other payments, property and
other consideration and compensation.
"Pledged Reserves Account" shall mean an account established with
Deutsche Bank, AG, New York Branch in accordance with Section 2.01(b) of the
Security Agreement.
"Pledged Reserves Account Funds" shall mean at any time the aggregate
amount of proceeds of Loans borrowed hereunder for the purpose of establishing
or maintaining Permitted Reserves, such proceeds to be deposited in the Pledged
Reserves Account in accordance with Section 2.01(b) of the Security Agreement.
"Pledged Reserve Release Notice" shall have the meaning set forth in
Section 8.12.
"Pledged Reserve Repayment Date" shall mean the date on which the
Borrower delivers the Pledged Reserve Release Notice required by Section 8.12.
"Prime Lending Rate" shall mean the rate as announced by Deutsche Bank
AG, New York Branch, from time to time as its prime lending rate, the Prime
Lending Rate to change when and as such prime lending rate changes. The Prime
Lending Rate is a reference rate and does not necessarily represent the lowest
or best rate actually charged to any customer. Deutsche Bank AG, New York
Branch, may make commercial loans or other loans at rates of interest at, above
or below the Prime Lending Rate.
"Replacement Bank" shall have the meaning provided in Section 3.04.
9
<PAGE>
"Reportable Event" shall mean an event described in Section 4043(c) of
ERISA with respect to a Plan as to which the 30-day notice requirement has not
been waived by the PBGC.
"Retained Percentage" of an Insured Obligation shall mean 100% minus
the aggregate percentage of the risk under Insurance Contracts with respect
thereto which has been ceded by the Borrower to other Persons under reinsurance
agreements (whether facultative or treaty) and similar arrangements.
"SEC" shall have the meaning provided in Section 8.01(f).
"Security Agreement" shall mean the Pledge and Security Agreement,
dated as of December 2, 1993, between the Borrower and Deutsche Bank AG, New
York Branch, as Collateral Agent, as modified, supplemented or amended from time
to time.
"S&P" shall mean Standard & Poor's Corporation.
"Subsidiary" shall mean, as to any Person, (i) any corporation more
than 50% of whose stock of any class or classes having by the terms thereof
ordinary voting power to elect a majority of the directors of such corporation
(irrespective of whether or not at the time stock of any class or classes of
such corporation shall have or might have voting power by reason of the
happening of any contingency) is at the time owned by such Person and/or one or
more Subsidiaries of such Person and (ii) any partnership, association, joint
venture or other entity in which such Person and/or one or more Subsidiaries of
such Person has more than a 50% equity interest at the time.
"Taxes" shall have the meaning provided in Section 4.04(a).
"UCC" shall mean the Uniform Commercial Code as from time to time in
effect in the relevant jurisdiction.
"Unfunded Current Liability" of any Plan means the amount, if any, by
which the present value of the accrued benefits under the Plan as of the close
of its most recent plan year, determined in accordance with Statement of
Financial Accounting Standards No. 35, based upon the actuarial assumptions used
by the Plan's actuary in the most recent annual valuation of the Plan, exceeds
the fair market value of the assets allocable thereto, determined in accordance
with Section 412 of the Code.
"United States" and "U.S." shall each mean the United States of
America.
"Unutilized Commitment" shall mean, for any Bank, at any time, the
Commitment of such Bank at such time less the aggregate principal amount of all
Loans made by such Bank pursuant to Section 2.01(a) prior to such time.
10
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"Unutilized Contingent Commitment" shall mean, for any Part C Bank, at
any time, the Contingent Commitment of such Bank at such time less the aggregate
principal amount of all Loans made by such Bank pursuant to Section 2.01(b)
prior to such time.
"Wholly-Owned Subsidiary" shall mean, as to any Person, (i) any
corporation 100% of whose capital stock is at the time owned by such Person
and/or one or more Wholly-Owned Subsidiaries of such Person and (ii) any
partnership, association, joint venture or other entity in which such Person
and/or one or more Wholly-Owned Subsidiaries of such Person has a 100% equity
interest at such time.
Section 1.02 Principles of Construction. All references to sections,
--------------------------
schedules and exhibits are to sections, schedules and exhibits in or to this
Agreement unless otherwise specified. The words "hereof," "herein" and
"hereunder" and words of similar import when used in this Agreement shall refer
to this Agreement as a whole and not to any particular provision of this
Agreement.
SECTION 2. AMOUNT AND TERMS OF CREDIT.
--------------------------
Section 2.01 The Loans. (a) Subject to and upon the terms and
---------
conditions set forth herein, each Bank severally agrees, at any time and from
time to time prior to the Expiry Date, to make loans (such loans, together with
any loans made pursuant to Section 2.01(b), being each a "Loan" and
collectively, the "Loans") to the Borrower, provided, however, that the
principal amount of any Loan made by a Bank at any time pursuant to this Section
2.01(a) shall not exceed the Unutilized Commitment of such Bank at such time.
(b) In the event that (i) the Borrower requests a Borrowing under
Section 2.01(a) and (ii) any Part B Bank shall fail to make on the date
specified in the Notice of Borrowing for such requested Borrowing any Loan or
any portion of a Loan required to be made by such Bank hereunder representing
such Bank's pro rata portion (in accordance with the Commitment of such Bank and
--- ----
the aggregate Commitments of all of the Banks as in effect on such date) of the
amount of such requested Borrowing, then each Part C Bank severally agrees to
make a Loan to the Borrower on such date in an amount equal to such Part C
Bank's pro rata portion (in accordance with the Contingent Commitment of such
--- ----
Part C Bank and the aggregate Contingent Commitments of all of the Part C Banks
as in effect on such date) of such Part B Bank's Defaulted Loan, provided,
however, that the principal amount of any Loan made by a Part C Bank at any time
pursuant to this Section 2.01(b) shall not exceed the Unutilized Contingent
Commitment of such Part C Bank at such time.
(c) Once repaid, Loans incurred hereunder may not be reborrowed.
Section 2.02 Amount of Each Borrowing. The aggregate principal
------------------------
amount of each Borrowing hereunder shall not (i) be less than $2,000,000, and if
greater, shall be in an integral multiple of $1,000,000 and (ii) exceed the
lesser of (x) Cumulative Losses incurred after the occurrence of the Loss
Threshold Incurrence Date less the aggregate principal amount
11
<PAGE>
of all Loans previously made and (y) the aggregate Unutilized Commitments of all
Banks as in effect on the date such Borrowing is made.
Section 2.03 Notice of Borrowing. Whenever the Borrower desires to
-------------------
make a Borrowing hereunder, it shall give the Agent at its Notice Office at
least two Business Days' prior notice made hereunder, provided that any such
notice shall be deemed to have been given on a certain day only if given before
12:00 Noon (New York time) on such day. Each such notice (each a "Notice of
Borrowing") shall be in the form of Exhibit A, appropriately completed to
specify the aggregate principal amount of the Loans to be made pursuant to such
Borrowing, and the date of such Borrowing (which shall be a Business Day).
Section 2.04 Disbursement of Funds. (a) No later than 11:00 A.M.
---------------------
(New York time) on the date specified in each Notice of Borrowing, (i) each Bank
will make available at the Payment Office of the Agent its pro rata portion (in
--- ----
accordance with the Commitment of such Bank and the aggregate Commitments of all
of the Banks as in effect on such date) of the amount of the Borrowing requested
to be made on such date, in Dollars and in immediately available funds and (ii)
the Agent will make available to the Borrower the aggregate of the amounts so
made available by the Banks on such day at its Payment Office.
(b) In the event that any Part B Bank shall fail to make available at
the Payment Office of the Agent its pro rata portion (in accordance with the
--- ----
Commitment of such Bank and the aggregate Commitments of all of the Banks as in
effect on such date) of the amount of the Borrowing requested to be made in any
Notice of Borrowing, at or prior to 11:00 A.M. (New York time) on the date
specified in such Notice of Borrowing, the Agent shall immediately notify each
Part C Bank that such Part B Bank has so defaulted and no later than 1:00 P.M.
(New York time) on such date, (i) each Part C Bank will (subject to the proviso
at the end of Section 2.01(b) make available at the Payment Office of the Agent
its pro rata portion (in accordance with the Contingent Commitment of such Part
--- ----
C Bank and the aggregate Contingent Commitments of all of the Part C Banks as in
effect on such date) of such Part B Bank's Defaulted Loan, in Dollars and in
immediately available funds and (ii) the Agent will make available to the
Borrower the aggregate of the amounts so made available by the Part C Banks on
such day at its Payment Office.
Section 2.05 Notes. The Borrower's obligation to pay the principal
-----
of, and interest on, the Loans made by each Bank shall be evidenced by a
promissory note duly executed and delivered by the Borrower substantially in the
form of Exhibit B with blanks appropriately completed in conformity herewith
(each a "Note" and, collectively, the "Notes"). Each Note shall (i) be payable
to the order of such Bank and be dated the Effective Date if such Bank shall be
a party hereto on the Effective Date or the effective date of the Assignment and
Assumption Agreement pursuant to which it becomes a party hereto if such Bank
shall become a party hereto after the Effective Date, (ii) be in a stated
principal amount equal to such Bank's Commitment (plus, if such Bank shall be a
Part C Bank, such Bank's Contingent Commitment) and be payable in the principal
amount of the Loans evidenced thereby, (iii) mature, with respect to each Loan
evidenced thereby, on the Expiry Date, (iv) bear interest as
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provided in the appropriate clause of Section 2.06 in respect of the Loans
evidenced thereby and (v) be entitled to the benefits of this Agreement and be
secured by the Security Agreement. Each Bank will note on its internal records
the amount of each Loan made by it and each payment in respect thereof and will
prior to any transfer of its Note endorse on the reverse side thereof the
outstanding principal amount of Loans evidenced thereby. Failure to make any
such notation shall not affect the Borrower's obligations in respect of such
Loans.
Section 2.06 Interest. (a) The Borrower agrees to pay interest in
--------
respect of the unpaid principal amount of each Loan from the date the proceeds
thereof are made available to the Borrower until the maturity thereof (whether
by acceleration or otherwise) at a rate per annum which shall be equal to the
Base Rate in effect from time to time plus the Applicable Margin.
(b) Overdue principal and, to the extent permitted by law, overdue
interest in respect of each Loan and any other overdue amount payable by the
Borrower hereunder shall bear interest from the date payment thereof was due
until (but not including) the date of actual payment at a rate per annum equal
to 3.5% per annum in excess of the Base Rate in effect from time to time.
(c) Accrued (and theretofore unpaid) interest shall be payable (i) in
respect of each Loan, quarterly in arrears on the first Business Day of each
March, June, September and December, and (ii) in respect of each Loan, on any
prepayment (on the amount prepaid), at maturity (whether by acceleration or
otherwise) and, after such maturity, on demand.
Section 2.07 Capital Adequacy. If any Bank determines at any time
----------------
that any applicable law or governmental rule, regulation, order or request
(whether or not having the force of law) concerning capital adequacy, or any
change in interpretation or administration thereof by any governmental
authority, central bank or comparable agency, will have the effect of increasing
the amount of capital required or expected to be maintained by such Bank based
on the existence of its Commitment and/or Contingent Commitment hereunder or its
obligations hereunder, then the Borrower shall pay to such Bank, upon its
written demand therefor, such additional amounts as shall be required to
compensate such Bank for the increased cost to such Bank as a result of such
increase of capital; provided, however, that the Borrower shall be required to
pay to such Bank only such additional amounts as shall be required to compensate
such Bank for such increased cost as shall accrue from and after the date of
demand by such Bank. In determining such additional amounts, such Bank will act
reasonably and in good faith and will use averaging and attribution methods
which are reasonable, provided that such Bank's determination of compensation
owing under this Section 2.07 shall: (i) absent manifest error, be final and
conclusive and binding on all the parties hereto and (ii) be subject to the
proviso in the preceding sentence. Each Bank, upon determining that any
additional amounts will be payable pursuant to this Section 2.07, will give
prompt written notice thereof to the Borrower, which notice shall show the basis
for the calculation of such additional amounts. The failure to give any such
notice shall not be
13
<PAGE>
deemed to be a waiver of any of the Borrower's obligations to pay additional
amounts pursuant to this Section 2.07, provided that the Borrower shall not be
required to pay any such amounts until it receives written notice from a Bank in
accordance with this Section 2.07. Notwithstanding anything herein to the
contrary, the Borrower shall have the right to unilaterally terminate the
Commitment and/or Contingent Commitment of any Bank demanding additional amounts
under this Section 2.07 sixty (60) days after providing to such Bank a notice of
termination. The Borrower shall, concurrent with such termination, pay to such
Bank the aggregate amount, if any at such time, payable by the Borrower to such
Bank under this Agreement.
SECTION 3. COMMITMENT FEES, FEES; AND TERMINATIONS, EXTENSIONS AND INCREASES OF
--------------------------------------------------------------------
COMMITMENTS AND CONTINGENT COMMITMENTS.
--------------------------------------
Section 3.01 Fees. (a) The Borrower agrees to pay to the Agent for
----
distribution to the Banks pro rata in accordance with their respective
--- ----
Unutilized Commitments a commitment fee (such commitment fee, together with the
commitment fee payable pursuant to Section 3.01(b), being the "Commitment Fees")
for the period from the Effective Date until the Expiry Date (or such earlier
date as the Commitments shall have been terminated) computed as agreed in
writing from time to time by the Borrower, the Banks and the Agent; provided,
--------
however, that any Commitment Fee accrued with respect to the Unutilized
- -------
Commitment of a Defaulting Bank during the period prior to the time such Bank
became a Defaulting Bank and unpaid at such time shall not be payable by the
Borrower so long as such Bank shall be a Defaulting Bank except to the extent
that such Commitment Fee shall otherwise have been due and payable by the
Borrower prior to such time; and provided further that no Commitment Fee shall
-------- -------
accrue on the Unutilized Commitment of a Defaulting Bank so long as such Bank
shall be a Defaulting Bank.
(b) The Borrower agrees to pay each Part C Bank a Commitment Fee for
the period from the Effective Date until the Expiry Date (or such earlier date
as the Contingent Commitment of such Part C Bank shall have been terminated)
computed as agreed in writing from time to time by the Borrower and such Part C
Bank.
(c) Accrued Commitment Fees shall be due and payable quarterly in
arrears on the first Business Day of each March, June, September and December of
each year and on the Expiry Date or upon such earlier date as the Commitments or
the Contingent Commitments, as the case may be, shall be terminated.
(d) The Borrower shall pay to the Agent such fees in connection with
the Credit Documents as may be agreed to from time to time between the Borrower
and the Agent.
Section 3.02 Voluntary Termination of Unutilized Commitments and
---------------------------------------------------
Unutilized Contingent Commitments. Upon at least five Business Days' prior
- ---------------------------------
notice to the Agent at its Notice Office, the Borrower shall have the right to
terminate the Unutilized Commitments or the Unutilized Contingent Commitments,
or both, in whole or in part, in minimum aggregate amounts of $5,000,000 (or, if
greater, in integral multiples of $1,000,000) for the Unutilized Commitments
14
<PAGE>
and the Unutilized Contingent Commitments, respectively, provided that the
Borrower shall concurrently satisfy its obligations, if any at such time, under
Section 3.01.
Section 3.03 Mandatory Termination of Commitments and Contingent
---------------------------------------------------
Commitments. (a) The Commitment of each Bank shall be permanently reduced on
- -----------
each date a Loan is made by such Bank pursuant to Section 2.01(a) by the amount
of such Loan. The Contingent Commitment of each Part C Bank shall be
permanently reduced on each date a Loan is made by such Bank pursuant to Section
2.01(b) by the amount of such Loan.
(b) Notwithstanding anything herein to the contrary, the Borrower
shall have the right to unilaterally terminate the Commitment and/or Contingent
Commitment of any Bank if, at any time after the Effective Date if such Bank
shall be a party hereto on the Effective Date, or at any time after the
effective date of the Assignment and Assumption Agreement pursuant to which it
becomes a party hereto if such Bank shall become a party hereto after the
Effective Date pursuant to Section 3.04 or 12.04, or at any time after the
Increase Date on which it becomes a party hereto if such Bank shall become a
party hereto after the Effective Date pursuant to Section 3.05, the unsecured
senior debt rating (or shadow rating as reflected in a letter) of such Bank or
its parent shall be downgraded by Moody's or S&P, such termination to be
effective sixty (60) days after providing to such Bank a notice of termination.
The Borrower shall, concurrent with such termination, pay to such Bank the
aggregate amount, if any at such time, payable by the Borrower to such Bank
under this Agreement.
(c) In addition to any other mandatory Commitment reductions pursuant
to this Section 3.03, the Commitment of any Bank which does not agree to extend
the Expiry Date pursuant to Section 3.04, and the Contingent Commitment of such
Bank if such Bank is a Part C Bank, shall each terminate in its entirety on such
Expiry Date then in effect.
(d) In addition to any other mandatory Commitment reductions pursuant
to this Section 3.03, the Commitment of each Bank, and the Contingent Commitment
of each Part C Bank, shall each terminate in its entirety on the Expiry Date.
Section 3.04 Expiry Date. (a) The expiration of the Commitments and
-----------
Contingent Commitments shall be December 2, 2005 (the "Expiry Date"); provided,
--------
however, that before (but not earlier than 120 days nor later than 90 days
- -------
before) each anniversary of the Effective Date, the Borrower may make a written
request (an "Extension Request") to the Agent at its Notice Office who shall
forward a copy to each of the Banks that the Expiry Date be extended by one
calendar year. Such Extension Request shall include a certification by a senior
officer of the Borrower that no Default or Event of Default has occurred and is
continuing and all representations and warranties contained herein and the other
Credit Documents are true and correct in all material aspects on and as of the
date of the Extension Request (it being understood and agreed that any
representation or warranty which expressly refers by its terms to a specified
date shall be required to be true only as of such date). If by the date
occurring 45 days next succeeding the Agent's receipt of such Extension Request,
any Bank agrees thereto in writing by so indicating on counterparts of the
Extension Request and delivering such counterpart to the
15
<PAGE>
Borrower, "Expiry Date" as to such Bank shall mean the December 2, occurring in
the calendar year next succeeding the Expiry Date then in effect, provided that
--------
any failure to so notify the Borrower shall be deemed to be a disapproval by
such Bank of the Borrower's Extension Request. The Commitment of any Bank which
does not so agree, and the Contingent Commitment of such Bank if such Bank is a
Part C Bank, shall terminate upon the Expiry Date then in effect. No Bank shall
be obligated to grant any extension pursuant to this Section 3.04 and any such
extension shall be in the sole discretion of each Bank. The Borrower shall pay
to each Bank which does not so agree all amounts owing under its Note and this
Agreement on the effective date of the termination of such Bank's Commitment.
(b) If less than all of the Banks consent to an Extension Request
(each Bank that has not so consented being a "Declining Bank", and each other
--------------
Bank being an "Extending Bank"), the Borrower shall have the right to require
--------------
any Declining Bank to assign in full its rights and obligations under this
Agreement (i) to any one or more Extending Banks designated by the Borrower that
have offered in their returned counterpart of the Extension Request to increase
their respective Commitments (and, if any such Extending Bank is a Part C Bank,
its Contingent Commitment) in an aggregate amount at least equal to the amount
of such Declining Bank's Commitment (and, if such Declining Bank is a Part C
Bank, its Contingent Commitment) (each such Extending Bank being an "Increasing
Extending Bank") and (ii) to the extent of any shortfall in the aggregate amount
of extended Commitments or extended Contingent Commitments, to any one or more
Eligible Transferees designated by the Borrower that agree to assume all of such
rights and obligations (each such Eligible Transferee being a "Replacement
Bank"), provided that (1) such Declining Bank shall have received payment of all
amounts owing under its Note and this Agreement on the effective date of such
assignment, (2) such assignment shall otherwise have occurred in compliance with
Section 12.04 including, without limitation, clauses (iii) and (iv) of
subsection (b) thereof and (3) the effective date of such assignment shall be
the date specified by the Borrower and agreed to by the Replacement Bank or
Increasing Extending Bank, as the case may be, which date shall be on or prior
to the applicable Expiry Date.
Section 3.05 Increase of Commitments. (a) The Borrower may, at any
-----------------------
time but in any event not more than one time during any period of 12 consecutive
calendar months, make a written request (an "Increase Request") to the Agent at
its Notice Office (who shall forward a copy to each of the Banks) that (i) the
Commitments of the Banks be increased by an aggregate amount, together with the
aggregate amount by which the Commitments of the Banks were previously increased
pursuant to this Section 3.05, not to exceed $50,000,000 in excess of the
aggregate amount of the Commitments as of the date of this Agreement and (ii)
the Contingent Commitments of the Part C Banks be increased by an aggregate
amount, together with the aggregate amount by which the Contingent Commitments
of the Part C Banks were previously increased pursuant to this Section 3.05, not
to exceed $25,000,000 in excess of the aggregate amount of the Contingent
Commitments as of the date of this Agreement. Such Increase Request shall
include a certification by a senior officer of the Borrower that no Default or
Event of Default has occurred and is continuing and all representations and
warranties contained herein and the other Credit Documents are true and correct
in all material respects on and as of the date of the Increase Request (it being
understood and agreed that any representation or warranty which
16
<PAGE>
expressly refers by its terms to a specified date shall be required to be true
only as of such date). Any such increase in Commitments or Contingent
Commitments shall be effective as of a date (the "Increase Date") specified in
the related Increase Notice that is (A) prior to the Expiry Date and (B) at
least 10 days after the date of such Increase Notice. Each Increase Notice shall
specify the date by which Banks who wish to increase their Commitment or
Contingent Commitments, as the case may be, must consent to such increase (the
"Commitment Date"), which date shall be no later than five Business Days prior
to the related Increase Date. Each Bank that is willing to increase its
Commitment and/or Contingent Commitment, as the case may be (each an "Increasing
Bank"), shall notify the Agent on or prior to the Commitment Date of the amount
by which it is willing to increase its Commitment and/or Contingent Commitment,
as the case may be, which amount shall not exceed the respective amount
specified in the relevant Increase Notice. No Bank shall be obligated to
increase its Commitment and/or Contingent Commitment pursuant to this Section
3.05 and any such increase shall be in the sole discretion of each Bank. If the
Banks notify the Agent that they are willing to increase the amount of their
respective Commitments and/or Contingent Commitment, as the case may be, by an
aggregate amount that exceeds the amount of the requested increase, the
requested increase shall be allocated among the Banks willing to participate
therein ratably in accordance with the amount by which they offered to increase
their respective Commitments and/or Contingent Commitment, as the case may be,
on the Commitment Date.
(b) Promptly following each Commitment Date, the Agent shall notify
the Borrower as to the amount, if any, by which the Banks are willing to
participate in the requested increase. If the aggregate amount by which the
Banks are willing to increase their Commitments and/or Contingent Commitment, as
the case may be, on any such Commitment Date is less than the requested amount,
then any one or more Eligible Transferees designated by the Borrower that agree
to provide Commitments and/or Contingent Commitments for the shortfall may
become party to this Agreement by executing and delivering a counterpart of this
Agreement.
(c) On each Increase Date, each Eligible Transferee that accepts an
offer to participate in a requested Commitment increase in accordance with
Section 3.05(b) shall become a Bank party to this Agreement as of such Increase
Date and the Commitment and/or Contingent Commitment, as the case may be, of
each Increasing Lender shall be increased as of such Increase Date by the amount
set forth in its notice delivered to the Agent in accordance with Section
3.05(a) (or by the amount allocated to such Bank pursuant to the last sentence
of Section 3.05(a)).
SECTION 4. PREPAYMENTS: PAYMENTS.
---------------------
Section 4.01 Voluntary Prepayments. The Borrower shall have the
---------------------
right to prepay the Loans, without premium or penalty, in whole or in part from
time to time, provided that the Borrower shall give the Agent at its Notice
Office at least three Business Days' prior notice of its intent to prepay the
Loans.
17
<PAGE>
Section 4.02 Mandatory Prepayments. On each Pledged Reserve
---------------------
Repayment Date, an amount equal to 100% of the Pledged Reserves Account Funds
with respect to which the Borrower has delivered a Pledged Reserve Release
Notice as required by Section 8.12 shall be applied as a mandatory prepayment of
principal of outstanding Loans.
Section 4.03 Method and Place of Payment. Except as otherwise
---------------------------
specifically provided herein, all payments under this Agreement or any Note
shall be made to the Agent not later than 12:00 Noon (New York time) on the date
when due and shall be made in Dollars in immediately available funds at the
Agent's Payment Office. Whenever any payment to be made hereunder or under the
Note shall be stated to be due on a day which is not a Business Day, the due
date thereof shall be extended to the next succeeding Business Day and, with
respect to payments of principal, interest shall be payable at the applicable
rate during such extension.
Section 4.04 Net Payments. (a) All payments made by the Borrower
------------
hereunder or under any Note will be made without setoff, counterclaim or other
defense. Except as provided in Section 4.04(b) and Section 12.04(b), all such
payments will be made free and clear of, and without deduction or withholding
for, any present or future taxes, levies, imposts, duties, fees, assessments or
other charges of whatever nature now or hereafter imposed by any jurisdiction or
by any political subdivision or taxing authority thereof or therein with respect
to such payment (but excluding any tax imposed on or measured by the net income
or gross income or gross receipts of any Bank (other than withholding taxes or
taxes in lieu of withholding taxes) pursuant to the laws of the jurisdiction (or
any political subdivision or taxing authority thereof or therein) in which the
principal office or lending office of such Bank is located or in which such Bank
is organized or in which such Bank is doing business through a branch or office
from which such jurisdiction treats a Loan as having been made) and all
interest, penalties or similar liabilities with respect thereto (collectively,
"Taxes"). If any Taxes are so levied or imposed, the Borrower agrees to pay the
full amount of such Taxes and such additional amounts as may be necessary so
that every payment of all amounts due hereunder or under any Note, after
withholding or deduction for or on account of any Taxes, will not be less than
the amount provided for herein or in such Note. The Borrower shall also
reimburse each Bank, upon its written request, which request shall show the
basis for calculation of such reimbursement, for taxes imposed on or measured by
the net income of such Bank pursuant to the laws of the jurisdiction (or any
political subdivision or taxing authority thereof or therein) in which its
principal office or lending office is located or in which such Bank is organized
or in which such Bank is doing business through a branch or office from which
such jurisdiction treats a Loan as having been made as it shall determine are
payable by it in respect of amounts paid to or on behalf of such Bank pursuant
to the preceding sentence. The Borrower will furnish to the applicable Bank
within 45 days after the date the payment of any Taxes is due pursuant to
applicable law certified copies of any tax receipts available to the Borrower
evidencing such payment by the Borrower. The Borrower will indemnify and hold
harmless each Bank, and reimburse each Bank upon its written request, for the
amount of any Taxes so levied or imposed and paid by such Bank.
(b) Each Bank which is not a United States person (as such term is
defined in Section 7701(a)(30) of the Code) for U.S. Federal income tax purposes
agrees (i) in the case of
18
<PAGE>
any such Bank that is a "bank" within the meaning of Section 881(c)(3)(A) of the
Code and which constitutes a Bank hereunder on the Effective Date, to provide to
the Borrower and the Agent on or prior to the Effective Date two original signed
copies of Service Form 4224 or Form 1001 certifying to such Bank's entitlement
to an exemption from United States withholding tax with respect to payments to
be made under this Agreement and under any Note, (ii) in the case of any such
Bank that is a "bank" within the meaning of Section 881(c)(3)(A) of the Code,
that, to the extent legally entitled to do so, (x) with respect to a Bank that
is an assignee or transferee of an interest under this Agreement pursuant to
Section 12.04(b) (unless the respective Bank was already a Bank hereunder
immediately prior to such assignment or transfer), upon the date of such
assignment or transfer to such Bank, and (y) with respect to any such Bank, from
time to time upon the reasonable written request of the Borrower after the
Effective Date, such Bank will provide to the Borrower two original signed
copies of Internal Revenue Service Form 4224 or Form 1001 (or any successor
forms) certifying to such Bank's entitlement to an exemption from, or reduction
in, United States withholding tax with respect to payments to be made under this
Agreement and under any Note, (iii) in the case of a Bank other than a Bank
described in clause (i) or (ii) above on or prior to the Effective Date, to
provide to the Borrower (1) a certificate substantially in the form of Exhibit G
hereto (any such certificate, a "Section 4.04(b)(iii) Certificate") and (2) two
accurate and complete original signed copies of Internal Revenue Service Form W-
8, certifying to such Bank's legal entitlement at the date of such certificate
(assuming compliance by the Borrower with Section 8.13, to an exemption from
U.S. withholding tax under the provisions of Section 881(c) of the Code with
respect to payments to be made under this Agreement and (iv) in the case of any
such Bank (other than a Bank described in clause (i) or (ii) above), (x) with
respect to a Bank that is an assignee or transferee of an interest under this
Agreement pursuant to Section 12.04(b) (unless the respective Bank was already a
Bank hereunder immediately prior to such assignment or transfer), upon the date
of such assignment or transfer to such Bank, and (y) with respect to any such
Bank, from time to time upon the reasonable written request of the Borrower
after the Effective Date, to provide to the Borrower such other forms as may be
required in order to establish the entitlement of such Bank to an exemption from
withholding with respect to payments under this Agreement and under any Note.
Notwithstanding anything to the contrary contained in Section 4.04(a), but
subject to the immediately succeeding sentence, the Borrower shall be entitled,
to the extent it is required to do so by law, to deduct or withhold Taxes
imposed by the United States (or any political subdivision or taxing authority
thereof or therein) from interest, fees or other amounts payable hereunder
(without any obligation to pay the respective Bank additional amounts with
respect thereto) for the account of any Bank which is not a United States person
(as such term is defined in Section 7701(a)(30) of the Code) for U.S. Federal
income tax purposes and which has not provided to the Borrower such forms
required to be provided to the Borrower pursuant to the first sentence of this
Section 4.04(b). Notwithstanding anything to the contrary contained in the
preceding sentence and except as set forth in Section 12.04(b), the Borrower
agrees to indemnify each Bank in the manner set forth in Section 4.04(a) in
respect of any amounts deducted or withheld by it as described in the
immediately preceding sentence as a result of any changes after the Effective
Date in any applicable law, treaty, governmental rule, regulation, guideline or
order, or in the interpretation thereof, relating to the deducting or
withholding of Taxes.
19
<PAGE>
(c) If the Borrower pays an additional amount pursuant to Section
4.04 and a Bank receives any refund of tax or credit against its tax liabilities
as a result of such payment by the Borrower, such Bank shall pay to the Borrower
an amount that such Bank determines, in its reasonable judgment, is equal to the
net tax benefit obtained by such Bank as a result of such payment by the
Borrower. Any such payment required pursuant to the immediately preceding
sentence shall be accompanied by a schedule that sets forth the Bank's basis for
its calculation of such net tax benefit. Whether or not a Bank claims any
refund or credit shall be in the sole discretion of each Bank. Nothing in this
Section 4.04(c) shall require a Bank to disclose or detail its calculation of
the amount of any tax benefit or any other amount to the Borrower or any other
Person (including, without limitation, any tax return) other than the provision
of the schedule referred to above.
Section 4.05 Limitations on Sources of Payment. Notwithstanding any
---------------------------------
other provision of this Agreement or of any other Credit Document, the
obligations of the Borrower to make payments of principal and interest on the
Loans and the Notes are limited recourse obligations of the Borrower payable
solely from the Pledged Recoveries, the Pledged Premiums, the Pledged Reserves
Account Funds and the other Collateral, and none of the Agent, the Collateral
Agent, any Bank or any other Person shall be entitled to procure any money
judgment against or to levy or foreclose upon or attach any other assets or
properties of the Borrower for payment of such obligations; provided, however,
that nothing herein contained shall limit, restrict or impair the lien created
by the Security Agreement or the right of any Bank to exercise any of its rights
herein or in any of the other Credit Documents upon the occurrence of an Event
of Default or otherwise, or to bring suit and obtain a judgment against the
Borrower (recourse thereon being limited as to payment of principal and interest
on the Loans and the Notes as provided in this Section 4.05).
SECTION 5. CONDITIONS PRECEDENT TO EFFECTIVENESS.
-------------------------------------
This Agreement shall become effective subject to the satisfaction
(or waiver by the Banks) of the following conditions:
Section 5.01 Execution of Agreement; Notes. The Borrower and each
-----------------------------
Bank shall have signed a copy hereof (whether the same or different copies) and
shall have delivered the same to the Agent at its Notice Office and there shall
have been delivered to each Bank a Note executed by the Borrower in the amount,
maturity and as otherwise provided herein.
Section 5.02 No Default; Representations and Warranties. There
------------------------------------------
shall exist no Default or Event of Default and all representations and
warranties contained herein and in the other Credit Documents shall be true and
correct in all material respects with the same effect as though such
representations and warranties had been made on and as of the Effective Date.
Section 5.03 Opinions of Counsel. (a) The Agent shall have
-------------------
received an opinion addressed to it and the Banks and dated the Effective Date
(i) from Stephen D. Cooke, Esq., Senior Vice-President and General Counsel of
the Borrower covering the matters set forth in
20
<PAGE>
Exhibit C-1, (ii) from Shearman & Sterling, special New York counsel to the
Borrower covering the matters set forth in Exhibit C-2, (iii) from DeWitt Ross &
Stevens SC, special Wisconsin counsel to the Borrower covering the matters set
forth in Exhibit C-3 and (iv) from White & Case, counsel to the Agent, in form
and substance satisfactory to it.
(b) Moody's and S&P shall have received an opinion addressed to each
of them and dated the Effective Date from counsel to each of the Banks in form
and substance satisfactory to each of them.
Section 5.04 Corporate Documents; Proceedings. (a) The Agent shall
--------------------------------
have received a certificate, dated the Effective Date, signed by the President
or any Vice President of the Borrower, and attested to by the Secretary or any
Assistant Secretary of the Borrower, in the form of Exhibit D with appropriate
insertions, together with copies of the Restated Articles of Incorporation
certified by the Superintendent of the Department and Restated By-Laws of the
Borrower and the resolutions of the Borrower referred to in such certificate.
(b) All corporate and legal proceedings and all instruments and
agreements in connection with the transactions contemplated in this Agreement
and the other Credit Documents shall be satisfactory in form and substance to
the Agent, and it shall have received all information and copies of all
documents and papers, including records of corporate proceedings and
governmental approvals, if any, which the Agent reasonably may have requested in
connection therewith, such documents and papers where appropriate to be
certified by proper corporate or governmental authorities.
Section 5.05 Covered Portfolio, etc. The Agent shall have received a
-----------------------
certificate, dated the Effective Date, signed by the President or any Vice
President of the Borrower, setting forth in reasonable detail as of September
30, 1998 (i) each Insured Obligation in the Covered Portfolio and each
reinsurance agreement or similar arrangement which covers any material amount of
such Insured Obligations, (ii) each default by the issuer of any such Insured
Obligation or other obligor with respect thereto which has formed or could form
the basis of a claim under an Insurance Contract, (iii) each default by any
party to any such reinsurance agreement or similar arrangement, (iv) each claim
paid by the Borrower under any Insurance Contract with respect to such Insured
Obligations, (v) the Borrower's reasonable estimate as of September 30, 1998 of
the Average Annual Debt Service on the Covered Portfolio, (vi) the Borrower's
Cumulative Losses (stating separately any Permitted Reserves included therein)
for the period from January 1, 1993 through September 30, 1998, and (vii) the
Borrower's reasonable estimate as of September 30, 1998 of Installment Premiums
payable with respect to the Covered Portfolio.
Section 5.06 Adverse Change, Rating, etc. (a) Nothing shall have
---------------------------
occurred (and no Bank shall have become aware of any facts or conditions not
previously known) which such Bank shall reasonably determine has, or could
reasonably be expected to have, a material adverse effect on the rights or
remedies of such Bank, or on the ability of the Borrower to perform its
obligations to such Bank or which has, or could reasonably be expected to have,
a materially
21
<PAGE>
adverse effect on the business, operations, property, assets, liabilities or
condition (financial or otherwise) of the Borrower.
(b) All necessary governmental (domestic and foreign) and third party
approvals in connection with the transactions contemplated by the Credit
Documents and otherwise referred to herein or therein shall have been obtained
and remain in effect, and all applicable waiting periods shall have expired
without any action being taken by any competent authority which restrains,
prevents or imposes materially adverse conditions upon the consummation of the
transactions contemplated by the Credit Documents and otherwise referred to
herein or therein. Additionally, there shall not exist any judgment, order,
injunction or other restraint issued or filed or a hearing seeking injunctive
relief or other restraint pending or notified prohibiting or imposing materially
adverse conditions upon the making of the Loans.
(c) On the Effective Date, the Borrower's Rating assigned by Moody's
and S&P shall be Aaa and AAA, respectively.
Section 5.07 Litigation. No litigation by any entity (private or
----------
governmental) shall be pending or threatened with respect to this Agreement or
any documentation executed in connection herewith or the transactions
contemplated hereby, or with respect to any material Indebtedness of the
Borrower or which any Bank shall determine could reasonably be expected to have
a materially adverse effect on the business, operations, property, assets,
liabilities or condition (financial or otherwise) of the Borrower.
Section 5.08 Fees, etc. The Borrower shall have paid to the Agent
---------
and to the Banks all costs, fees and expenses (including, without limitation,
legal fees and expenses) payable to the Agent and/or the Banks to the extent
then due.
All of the certificates, legal opinions and other documents and papers
referred to in this Section 5, unless otherwise specified, shall have been
delivered to the Agent at its Notice Office.
SECTION 6. CONDITIONS PRECEDENT TO ALL CREDIT EVENTS.
-----------------------------------------
The obligation of the banks to make loans is subject, at the time of
each such credit event (except as hereinafter indicated), to the satisfaction of
the following conditions:
Section 6.01 Loss Threshold Incurrence Date. At or prior to the
------------------------------
time of each such Credit Event, the Loss Threshold Incurrence Date shall have
occurred.
Section 6.02 Notice of Borrowing. Prior to the making of each
-------------------
Loan, the Agent shall have received a Notice of Borrowing meeting the
requirements of Section 2.03.
The acceptance of the proceeds of each Credit Event shall constitute
a representation and warranty by the Borrower to each Bank that the Loss
Threshold Incurrence Date has occurred.
22
<PAGE>
SECTION 7. REPRESENTATIONS, WARRANTIES AND AGREEMENTS.
------------------------------------------
In order to induce the Banks to enter into this Agreement, the
Borrower makes the following representations, warranties and agreements as of
the Effective Date, which shall survive the execution and delivery of this
Agreement and the Notes (it being understood and agreed that any representation
or warranty which expressly refers by its terms to a specified date shall be
required to be true and correct in all material respect only as of such date):
Section 7.01 Corporate Status. Each of the Borrower and its
----------------
Subsidiaries (i) is a duly organized and validly existing corporation in good
standing under the laws of the jurisdiction of its incorporation, (ii) has the
power and authority to own its property and assets and to transact the business
in which it is engaged and (iii) is duly qualified as a foreign corporation and
in good standing in each jurisdiction where the ownership, leasing or operation
of property or the conduct of its business requires such qualification.
Section 7.02 Corporate Power and Authority. The Borrower has the
-----------------------------
corporate power to execute, deliver and perform the terms and provisions of each
of the Credit Documents to which it is party and has taken all necessary
corporate action to authorize the execution, delivery and performance by it of
each of such Credit Documents. The Borrower has, or in the case of the Notes,
by the Effective Date will have, duly executed and delivered each of the Credit
Documents to which it is party, and each of such Credit Documents constitutes
or, in the case of the Notes when executed and delivered, will constitute, its
legal, valid and binding obligation enforceable in accordance with its terms.
Section 7.03 No Violation. Neither the execution, delivery or
------------
performance by the Borrower of the Credit Documents to which it is a party, nor
compliance by it with the terms and provisions thereof, nor the use of the
proceeds of the Loans (i) will contravene any provision of any law, statute,
rule or regulation or any order, writ, injunction or decree of any court or
governmental instrumentality, (ii) will conflict or be inconsistent with or
result in any breach of any of the terms, covenants, conditions or provisions
of, or constitute a default under, or result in the creation or imposition of
(or the obligation to create or impose) any Lien (except pursuant to the
Security Agreement) upon any of the property or assets of the Borrower or any of
its Subsidiaries pursuant to the terms of any indenture, mortgage, deed of
trust, credit agreement, loan agreement or any other agreement, contract or
instrument to which the Borrower or any of its Subsidiaries is a party or by
which it or any of its property or assets is bound or to which it may be subject
or (iii) will violate any provision of the Certificate of Incorporation or By-
Laws of the Borrower or any of its Subsidiaries.
Section 7.04 Governmental Approvals. No order, consent, approval,
----------------------
license, authorization or validation of, or filing, recording or registration
with (except as have been obtained or made prior to the Effective Date), or
exemption by, any governmental or public body or authority, or any subdivision
thereof, is required to authorize, or is required in connection with, (i) the
execution, delivery and performance of any Credit Document to which the Borrower
is a party or (ii) the legality, validity, binding effect or enforceability of
any such Credit Document.
23
<PAGE>
Section 7.05 Financial Statements; Financial Condition; Undisclosed
------------------------------------------------------
Liabilities; etc. (a) The consolidated balance sheets of the Parent and its
- ----------------
Subsidiaries at December 31, 1997 and March 31, 1998, June 30, 1998 and
September 30, 1998 and the related consolidated statements, of operations and
cash flows of the Parent and its Subsidiaries for the fiscal year or period, as
the case may be, ended on such date and heretofore furnished to the Agent
present fairly, subject, in the case of such balance sheets as at March 31,
1998, June 30, 1998 and September 30, 1998 and such statements of operations and
cash flows for the three, six and nine months then ended, respectively, to year-
end audit adjustments, the consolidated financial condition of the Parent and
its Subsidiaries at such dates and the consolidated results of operations of the
Parent and its Subsidiaries for the periods ended on such dates. All such
financial statements have been prepared in accordance with generally accepted
accounting principles and practices consistently applied, subject, in the case
of such balance sheets as at March 31, 1998, June 30, 1998 and September 30,
1998 and such statements of operations and cash flows for the three, six and
nine months then ended, respectively, to year-end audit adjustments. Since
September 30, 1998, there has been no material adverse change in the business,
operations, property, assets or condition (financial or otherwise) of the Parent
or of the Borrower and its Subsidiaries taken as a whole.
(b) The Borrower's annual statements and its financial statements as
filed with the Department for the years ended December 31, 1996 and December 31,
1997 and its quarterly statements and financial statements as filed with the
Department for the periods ended March 31, 1998, June 30, 1998 and September 30,
1998 heretofore furnished to the Agent present fairly, subject, in the case of
such financial statements as at March 31, 1998, June 30, 1998 and September 30,
1998 and for the three, six and nine months then ended, respectively, to year-
end audit adjustments, the financial condition of the Borrower as of the
respective dates of such statements. Such annual and quarterly statements and
financial statements were prepared in accordance with the statutory accounting
principles set forth in the Wisconsin Insurance Law, all of the assets described
therein were the absolute property of the Borrower at the dates set forth
therein, free and clear of any liens or claims thereon, except as therein
stated, and each such annual statement is a full and true statement of all the
assets and liabilities and of the condition and affairs of the Borrower as of
December 31 of the year covered thereby and of its income and deductions
therefrom for the year ended on such date. Since September 30, 1998, there has
been no material adverse change in the business, operations, property, assets or
condition (financial or otherwise) of the Borrower or the Borrower and its
Subsidiaries taken as a whole.
(c) Except as fully reflected in the financial statements delivered
pursuant to Section 7.05(a), Section 7.05(b) or in Schedule II hereto, there
were as of the Effective Date no liabilities or obligations with respect to the
Borrower or any of its Subsidiaries of any nature whatsoever (whether absolute,
accrued, contingent or otherwise and whether or not due) which, either
individually or in aggregate, would be material to the Borrower or to the
Borrower and its Subsidiaries taken as a whole. Except as set forth in Schedule
II hereto, as of the Effective Date the Borrower does not know of any basis for
the assertion against the Borrower or any of its Subsidiaries of any liability
or obligation of any nature whatsoever that is not fully reflected in the
financial statements delivered pursuant to Section 7.05(a) and Section 7.05(b)
which, either
24
<PAGE>
individually or in the aggregate, could reasonably be expected to
be material to the Borrower or to the Borrower and its Subsidiaries taken as a
whole.
Section 7.06 Litigation. There are no actions, suits or proceedings
----------
pending or, to the best knowledge of the Borrower, threatened (i) with respect
to any Credit Document or (ii) that are reasonably likely to materially and
adversely affect the business, operations, property, assets or condition
(financial or otherwise) of the Borrower or of the Borrower and its Subsidiaries
taken as a whole.
Section 7.07 True and Complete Disclosure. All factual information
----------------------------
(taken as a whole) heretofore or contemporaneously furnished by or on behalf of
the Borrower in writing to the Banks (including without limitation all
information contained in the Credit Documents) for purposes of or in connection
with this Agreement or any transaction contemplated herein is, and all other
such factual information (taken as a whole) hereafter furnished by or on behalf
of the Borrower in writing to the Banks will be, true and accurate in all
material respects on the date as of which such information is dated or certified
and not incomplete by omitting to state any fact necessary to make such
information (taken as a whole) not misleading at such time in light of the
circumstances under which such information was provided.
Section 7.08 Use of Proceeds; Margin Regulations. All proceeds of
-----------------------------------
each Loan shall be used by the Borrower only to establish and/or maintain
Permitted Reserves in the Pledged Reserves Account and/or to pay or reimburse
itself for the payment of Losses in respect of the Covered Portfolio and no part
of the proceeds of any Loan will be used by the Borrower to purchase or carry
any Margin Stock or to extend credit to others for the purpose of purchasing or
carrying any Margin Stock. Neither the making of any Loan nor the use of the
proceeds thereof will violate or be inconsistent with the provisions of
Regulations T, U or X of the Board of Governors of the Federal Reserve System.
Section 7.09 Tax Returns and Payments. Each of the Borrower and its
------------------------
Subsidiaries has filed all tax returns required to be filed by it and has paid
all income taxes payable by it which have become due pursuant to such tax
returns and all other taxes and assessments payable by it which have become due,
other than those not yet delinquent and except for those contested in good faith
and for which adequate reserves have been established. Each of the Borrower and
its Subsidiaries has paid, or has provided adequate reserves (in the good faith
judgment of the management of the Borrower) for the payment of, all federal and
state income taxes applicable for all prior fiscal years and for the current
fiscal year to the date hereof.
Section 7.10 Compliance with ERISA. Each Plan is in substantial
---------------------
compliance with its terms and with the applicable provisions of ERISA and the
Code; no Reportable Event has occurred with respect to any Plan; no Plan has an
accumulated or waived funding deficiency or has applied for an extension of any
amortization period within the meaning of Section 412 of the Code or Section 302
of ERISA; neither the Borrower or any ERISA Affiliate has incurred any material
liability to or on account of a Plan or Multiemployer Plan pursuant to Section
409, 502(i), 515, 4201, 4204, 4212, 4062, 4063, 4064 or 4069 of ERISA or Section
401(a)(29), 4971
25
<PAGE>
or 4975 of the Code which has not been satisfied in full or expects to incur any
material liability under any of the foregoing sections with respect to any such
Plan or Multiemployer Plan; no condition exists which presents a material risk
to the Borrower or any ERISA Affiliate of incurring a material liability to or
on account of a Plan pursuant to the foregoing provisions of ERISA and the Code;
neither the Borrower nor any of its ERISA Affiliates is or has ever been a party
to, or is or has ever been required to make contributions to, or has terminated
any multiemployer plan; no Lien imposed under the Code or ERISA on the assets of
the Borrower or any of its Subsidiaries or any ERISA Affiliate exists or is
likely to arise on account of any Plan or Multiemployer Plan; and the Borrower
and its Subsidiaries do not maintain or contribute to any employee welfare
benefit plan (as defined in Section 3(1) of ERISA) which provides benefits to
retired employees or other former employees (other than as required by Section
601 of ERISA) or any employee pension benefit plan (as defined in Section 3(2)
of ERISA) the obligations with respect to which could reasonably be expected to
have a material adverse effect on the ability of the Borrower to perform its
obligations under this Agreement.
Section 7.11 Capitalization. On the Effective Date, the authorized
--------------
capital stock of the Borrower consists of (i) 40,000,000 shares of common stock,
$2.50 par value per share, of which 32,800,000 shares are issued and outstanding
and (ii) 285,000 shares of serial preferred stock, $1,000 par value per share,
of which no shares are issued and outstanding. All such outstanding shares have
been duly and validly issued, are fully paid and non-assessable. The Borrower
does not have outstanding any securities convertible into or exchangeable for
its capital stock or outstanding any rights to subscribe for or to purchase, or
any options for the purchase of, or any agreements providing for the issuance
(contingent or otherwise) of, or any calls, commitments or claims of any
character relating to, its capital stock.
Section 7.12 Subsidiaries. On the Effective Date, the corporations
------------
listed on Schedule III are the only Subsidiaries of the Borrower. Schedule III
correctly sets forth, as of the Effective Date, the percentage ownership (direct
and indirect) of the Borrower in each class of capital stock of each of its
Subsidiaries and also identifies the direct owner thereof.
Section 7.13 Compliance with Statutes, etc. Each of the Borrower and
-----------------------------
its Subsidiaries is in compliance with all applicable statutes, regulations and
orders of, and all applicable restrictions imposed by, all governmental bodies,
domestic or foreign, in respect of the conduct of its business and the ownership
of its property (including applicable statutes, regulations, orders and
restrictions relating to environmental standards and controls), except such
noncompliances as would not reasonably be expected to have, in the aggregate, a
material adverse effect on the business, operations, property, assets or
condition (financial or otherwise) of the Borrower or of the Borrower and its
Subsidiaries taken as a whole.
Section 7.14 Investment Company Act. Neither the Borrower nor any of
----------------------
its Subsidiaries is an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
26
<PAGE>
Section 7.15 Public Utility Holding Company Act. Neither the
----------------------------------
Borrower nor any of its Subsidiaries is a "holding company," or a "subsidiary
company" of a "holding company," or an "affiliate" of a "holding company" or of
a "subsidiary company" of a "holding company" within the meaning of the Public
Utility Holding Company Act of 1935, as amended.
Section 7.16 Compliance with Insurance Law. The Borrower is duly
-----------------------------
licensed to transact business as a surety insurance corporation by the
Department and as a financial guaranty insurance corporation by the New York
Insurance Department and (a) has all other requisite federal, state and other
governmental licenses, authorizations, permits, consents and approvals to
conduct its insurance and other business as presently conducted and proposed to
be conducted in the States of Wisconsin and New York and each other jurisdiction
in which it writes or issues policies of insurance (including without limitation
any form of financial guaranty insurance, fidelity and surety insurance or
credit insurance), surety bonds, guaranties, contracts of reinsurance or other
undertakings similar to the foregoing (collectively, "Insurance Contracts") or
in which it conducts business, except for failures, if any, to have such
licenses, authorizations, permits, consents and approvals which singly or in the
aggregate could not reasonably be expected to have a material adverse effect on
the business, assets, operations or financial condition of the Borrower or the
ability of the Borrower to perform its obligations under this Agreement or any
of the other Credit Documents, (b) has made all filings of each of its forms of
Insurance Contracts and of its rates and charges with the Department and all
other federal, state and other administrative or governmental bodies required
for the use thereof and has obtained all requisite approvals thereof, except for
failures, if any, to file or to obtain such approvals which singly or in the
aggregate could not reasonably be expected to have a material adverse effect on
the business, assets, operations or financial condition of the Borrower or the
ability of the Borrower to perform its obligations under this Agreement or any
of the other Credit Documents, (c) has duly established and maintains all
reserves required under the New York Insurance Law, the Wisconsin Insurance Law
and the regulations of the Department thereunder and other applicable federal,
state and other laws, rules and regulations, except for failures, if any, to
maintain reserves which could not reasonably be expected to have a material
adverse effect on the business, assets, operations or financial condition of the
Borrower or the ability of the Borrower to perform its obligations under this
Agreement or any of the other Credit Documents, (d) has duly filed all annual
statements, financial statements and other information and reports required to
have been filed with the Department and each other federal, state and other
administrative or governmental body, except for failures, if any, to file which
singly or in the aggregate could not reasonably be expected to have a material
adverse effect on the business, assets, operations, property or condition
(financial or otherwise) of the Borrower or the ability of the Borrower to
perform its obligations under this Agreement or any of the Credit Documents, and
(e) is in compliance (and has not received any notice from the Department or
similar administrative or governmental body or an authorized representative
thereof claiming that it is not in compliance) with the Wisconsin Insurance Law
and the regulations of the Department thereunder and with all other applicable
federal, state and other laws relating to its insurance and other business,
except with respect to failures, if any, to comply which singly or in the
aggregate could not reasonably be expected to have a material adverse effect on
the business, assets, operations, property or
27
<PAGE>
condition (financial or otherwise) of the Borrower or the ability of the
Borrower to perform its obligations under this Agreement or any of the other
Credit Documents.
Section 7.17 Covered Portfolio. Substantially all of the Insured
-----------------
Obligations in the Covered Portfolio on the Effective Date were insured by the
Borrower under Insurance Contracts in the form or forms heretofore supplied to
the Agent in accordance with the Borrower's underwriting criteria. The Borrower
has no reason to believe that its rights included among the Collateral are not
valid and binding against the obligors thereunder in accordance with their
respective terms, except insofar as enforceability may be limited by bankruptcy,
insolvency, moratorium or other similar laws affecting the enforcement of
creditors' rights generally and the availability of equitable remedies, except
for such Collateral which, in the aggregate, could not reasonably be expected to
have a material adverse effect on the right and ability of the Collateral Agent,
in accordance with the Security Agreement, to realize upon the Collateral as a
whole. Schedule IV attached hereto sets forth a listing, as of September 30,
1998, of the reinsurer and the related amounts (both ceded par inforce and ceded
principal and interest inforce) of reinsured Insured Obligations as of such
date.
SECTION 8. AFFIRMATIVE COVENANTS.
---------------------
The Borrower covenants and agrees that on and after the Effective
Date and until the Commitments have terminated and the Loans and the Notes,
together with interest, Fees and all other obligations incurred hereunder and
thereunder, are paid in full:
Section 8.01 Information Covenants. The Borrower will furnish
---------------------
to the Agent and, upon the request of any Bank addressed to the chief financial
officer or treasurer of the Borrower, to such Bank:
(a) Quarterly Parent Financial Statements. Within 60 days after the
-------------------------------------
close of each of the first three quarterly accounting periods in each fiscal
year of the Parent, the consolidated balance sheets of the Parent and its
consolidated Subsidiaries as at the end of such quarterly period and the related
consolidated statements of operations and cash flows for such quarterly period
and for the elapsed portion of the fiscal year ended with the last day of such
quarterly period, in each case setting forth comparative figures for the related
periods in the prior fiscal year, all of which shall be certified by the chief
financial officer or treasurer of the Parent, subject to year-end audit
adjustments.
(b) Annual Parent Financial Statements. Within 120 days after the
----------------------------------
close of each fiscal year of the Parent, the consolidated balance sheets of the
Parent and its consolidated Subsidiaries as at the end of such fiscal year and
the related consolidated statements of operations, stockholders' equity and of
cash flow for such fiscal year, in each case setting forth comparative figures
for the preceding fiscal year and certified, in the case of the consolidated
financial statements, by independent certified public accountants of recognized
national standing reasonably acceptable to the Agent.
28
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(c) Quarterly and Annual Borrower Financial Statements. Promptly,
--------------------------------------------------
and in any event within five Business Days after the filing thereof, a copy of
the annual statement for each calendar year and quarterly statements for each
calendar quarter as filed with the Department or other then comparable agency of
other applicable jurisdictions and the financial statements of the Borrower for
such calendar year or quarter prepared in accordance with statutory accounting
practices, accompanied by any and all letters, reports and/or certifications
prepared by public accountants required to be filed with the Department or such
other comparable agency, certified by the chief financial officer or treasurer
of the Borrower as presenting fairly in accordance with statutory accounting
principles applied (except as specifically set forth therein) on a basis
consistent with prior periods, the information contained therein.
(d) Officer's Certificates. At the time of the delivery of the
----------------------
financial statements provided for in Section 8.01(a), (b) and (c), a certificate
of the chief financial officer or treasurer of the Borrower (i) listing the
Insured Obligations in the Covered Portfolio (and if the Loss Threshold
Incurrence Date has occurred identifying the Insurance Contracts with respect
thereto) and calculating in reasonable detail as of the date of such financial
statements (A) the Average Annual Debt Service on the Covered Portfolio, (B) if
such date is prior to the Loss Threshold Incurrence Date, the Borrower's
Cumulative Losses (stating separately any Permitted Reserves included therein)
for the current Commitment Period, and (C) if such date is on or after the
occurrence of the Loss Threshold Incurrence Date, (1) the date of the occurrence
thereof, (2) evidence of the occurrence thereof, (3) the amount of Permitted
Reserves as of the date of such financial statements, and (4) the aggregate
amount of Pledged Recoveries received by or for the account of the Borrower
during the current Commitment Period on or prior to the date of such financial
statements, (ii) certifying information with respect to reinsured Insured
Obligations as of the date of such financial statements in a format comparable
to Schedule IV attached hereto, (iii) to the effect that, to the best of his
knowledge, no Default or Event of Default has occurred and is continuing or, if
any Default or Event of Default has occurred and is continuing, specifying the
nature and extent thereof, and (iv) listing the Losses occurring in the
applicable period.
(e) Notice of Default or Litigation. Promptly, and in any event
-------------------------------
within three Business Days, after an Authorized Officer obtains knowledge
thereof, written notice of (i) the occurrence of any event which constitutes a
Default or Event of Default, (ii) any litigation or governmental proceeding
(including, without limitation, any investigation by or before the Department)
pending (x) against the Borrower or any of its Subsidiaries which could
reasonably be expected to have a materially adverse effect upon the business,
operations, property, assets or condition (financial or otherwise) of the
Borrower or any of its Subsidiaries or (y) with respect to any Credit Document,
(iii) any other event which could reasonably be expected to have a materially
adverse effect upon the business, operations, property, assets or condition
(financial or otherwise) of the Borrower or any of its Subsidiaries, (iv) any
rating report received by the Borrower published by Moody's, S&P or, if either
Moody's or S&P no longer rates the claims-paying ability of the Borrower any
other nationally recognized rating agency which, with the consent of the
Borrower, rates the creditworthiness of obligations insured by the Borrower, (v)
to the extent that Cumulative Losses during the Commitment Period exceed
$25,000,000, each Loss, including without limitation, identification of the
Insured Obligation with respect to which
29
<PAGE>
such Loss occurred, (vi) each default by the issuer of any Insured Obligation in
the Covered Portfolio or other obligor with respect thereto which could form the
basis of a claim under an Insurance Contract and (vii) each default by any party
to a reinsurance agreement or similar arrangement with the Borrower which covers
any material amount of Insured Obligations in the Covered Portfolio; and, to the
extent Cumulative Losses during the Commitment Period are equal to or less than
$25,000,000, within 60 days after the close of each of the first three
accounting periods in each fiscal year of the Parent and within 120 days after
the close of the fiscal year of the Parent, as appropriate, written notice of
each Loss which occurred during such accounting period or fiscal year, as
appropriate, including without limitation, identification of the Insured
Obligation with respect to which such Loss occurred.
(f) Other Reports and Filings. Promptly, copies of all financial
-------------------------
information, proxy materials and other information and reports, if any, which
the Parent and/or Borrower shall file with the Securities and Exchange
Commission or any governmental agencies substituted therefor (the "SEC").
(g) Other Information. From time to time, such other information or
-----------------
documents (financial or otherwise) as any Bank may reasonably request,
including, without limitation, information with respect to, and copies of, any
relevant reinsurance agreement.
Section 8.02 Books, Records and Inspections. The Borrower will, and
------------------------------
will cause each of its Subsidiaries to, keep proper books of record and account
in which full, true and correct entries in conformity with generally accepted
and/or statutory accounting principles, as applicable, and all requirements of
law shall be made of all dealings and transactions in relation to its business
and activities. The Borrower will, and will cause each of its Subsidiaries to,
permit officers and designated representatives of the Agent to visit and
inspect, under guidance of officers of the Borrower or such Subsidiary, any of
the properties of the Borrower or such Subsidiary, and to examine the books of
record and account of the Borrower or such Subsidiary and discuss the affairs,
finances and accounts of the Borrower or such Subsidiary with, and be advised as
to the same by, its and their officers, all at such reasonable times and
intervals and to such reasonable extent as any Bank may request.
Section 8.03 Maintenance of Property, Insurance. The Borrower will,
----------------------------------
and will cause each of its Subsidiaries to, (i) keep all property useful and
necessary in its business in good working order and condition, (ii) maintain
with financially sound and reputable insurance companies insurance on all its
property in at least such amounts and against at least such risks as is
consistent and in accordance with industry practice and (iii) furnish to the
Agent, upon its reasonable request, full information as to the insurance
carried.
Section 8.04 Corporate Franchises. The Borrower will, and will cause
--------------------
each of its Subsidiaries to, do or cause to be done, all things necessary to
preserve and keep in full force and effect its existence and its material
rights, franchises, licenses and patents; provided, however, that nothing in
this Section 8.04 shall prevent the withdrawal, lapse or termination by the
Borrower or any of its Subsidiaries of any right, franchise, license or patent
or its qualification as a foreign
30
<PAGE>
corporation in any jurisdiction or shall prevent the Borrower or any of its
Subsidiaries from taking any other action where such withdrawal, lapse,
termination or action could not reasonably be expected to have a material
adverse effect on the business, operations, property, assets or condition
(financial or otherwise) of the Borrower or the Borrower and its Subsidiaries
taken as a whole.
Section 8.05 Compliance with Statutes, etc. The Borrower will, and
-----------------------------
will cause each of its Subsidiaries to, comply with all applicable statutes,
regulations and orders of, and all applicable restrictions imposed by, all
governmental bodies, domestic or foreign, in respect of the conduct of its
business and the ownership of its property (including applicable statutes,
regulations, orders and restrictions relating to environmental standards and
controls), except such noncompliances as could not reasonably be expected to
have, in the aggregate, a material adverse effect on the business, operations,
property, assets or condition (financial or otherwise) of the Borrower or of the
Borrower and its Subsidiaries taken as a whole.
Section 8.06 ERISA. Promptly after an Authorized Officer of the
-----
Borrower has received notice or otherwise has knowledge thereof, the Borrower
will deliver to the Bank written notice describing in reasonable detail the
occurrence of any of the following: that a Reportable Event has occurred; that
an accumulated funding deficiency, within the meaning of Section 412 of the Code
or Section 302 of ERISA has been incurred or an application may be or has been
made to the Secretary of the Treasury for a waiver or modification of the
minimum funding standard (including any required installment payments) or an
extension of any amortization period under Section 412 of the Code or Section
303 or 304 of ERISA with respect to a Plan; that a Plan has an Unfunded Current
Liability giving rise to a Lien under ERISA; or that the Borrower or any ERISA
Affiliates will or may incur any material liability (including any contingent or
secondary liability) to or on account of the termination of or withdrawal from a
Plan or Multiemployer Plan under Section 4062, 4063, 4064, 4069, 4201, 4204, or
4212 of ERISA. Upon written request of the Agent, the Borrower will deliver to
each of the Banks a complete copy of the annual report (Form 5500) of each Plan
required to be filed with the Internal Revenue Service.
Section 8.07 Performance of Obligations. The Borrower will, and will
--------------------------
cause each of its Subsidiaries to, perform all its obligations under the terms
of each mortgage, indenture, security agreement and other debt instrument by
which it is bound, except such non-performances as could not reasonably be
expected to have in the aggregate a material adverse effect on the business,
operations, property, assets or condition (financial or otherwise) of the
Borrower or of the Borrower and its Subsidiaries taken as a whole.
Section 8.08 Use of Proceeds. The Borrower will use the proceeds of
---------------
the Loans only to pay or reimburse itself for the payment of Losses (including
establishing and/or maintaining Permitted Reserves in the Pledged Reserves
Account) in respect of the Covered Portfolio.
31
<PAGE>
Section 8.09 Conduct of Business. The Borrower will and will cause
-------------------
each of its Subsidiaries to continue to engage in business of the same general
type as conducted by it on the Effective Date.
Section 8.10 Underwriting Criteria. The Borrower shall maintain its
---------------------
criteria for underwriting Insurance Contracts substantially as heretofore in
effect.
Section 8.11 Collection of Pledged Recoveries and Pledged Premiums.
-----------------------------------------------------
The Borrower shall at all times use its commercially reasonable efforts to
collect and otherwise realize upon all Pledged Recoveries and Pledged Premiums
in compliance with applicable law and in a commercially reasonable manner.
Section 8.12 Pledged Reserve Release Notice. The Borrower hereby
------------------------------
acknowledges and agrees that if, at any time, it shall cease to maintain all or
any portion of Permitted Reserves in respect of which Pledged Reserves Account
Funds have been deposited in the Pledged Reserves Account, the Borrower as
promptly as possible (and in any event within three Business Days) after it
shall cease to maintain such Permitted Reserves shall give written notice
thereof (each such notice, a "Pledged Reserve Release Notice") to the Agent and
the Collateral Agent which notice shall provide the amount of such Pledged
Reserves Account Funds that have been released.
Section 8.13 Registry. The Borrower hereby covenants that it shall
--------
maintain a register on which it will record the Commitment from time to time of
each of the Banks, the Loans made by each of the Banks and each repayment in
respect of the principal amount of the Loans of each Bank. Failure to make any
such recordation, or any error in such recordation, shall not affect the
Borrower's obligations in respect of such Loans. Upon the request of the
Borrower, the Agent hereby agrees to use its reasonable efforts to provide to
the Borrower such information not otherwise available to the Borrower, as the
Borrower shall reasonably request from time to time in order to enable it to
fulfill its obligations pursuant to this Section 8.13. Without limiting the
Borrower's obligations hereunder, the Borrower shall indemnify any Bank
described in Section 4.04(b)(iii) for losses related to the withholding of
taxes, including any interest and penalties thereon arising as a result of the
Borrower's failure to comply with this Section 8.13.
SECTION 9. NEGATIVE COVENANTS.
------------------
The Borrower covenants and agrees that on and after the Effective
Date and until the Commitments have terminated and the Loans and the Notes,
together with interest, Fees and all other obligations incurred hereunder and
thereunder, are paid in full:
Section 9.01 Liens. The Borrower will not, and will not permit any
-----
of its Subsidiaries to, create, incur, assume or suffer to exist any Lien upon
or with respect to any Pledged Recoveries, Pledged Premiums, Pledged Reserves
Account Funds or other Collateral, provided that the provisions of this Section
9.01 shall not prevent the creation, incurrence,
32
<PAGE>
assumption or existence of the following (Liens described below are herein
referred to as "Permitted Liens"):
(i) the Lien in favor of the Banks under the Security Agreement or
otherwise permitted thereunder;
(ii) inchoate Liens for taxes, assessments or governmental charges or
levies not yet due or Liens for taxes, assessments or governmental charges or
levies being contested in good faith and by appropriate proceedings for which
adequate reserves have been established in accordance with generally accepted
accounting principles;
(iii) Liens in respect of property or assets of the Borrower or any
of its Subsidiaries imposed by law, which were incurred in the ordinary course
of business and do not secure Indebtedness for borrowed money, such as
carriers', warehousemen's, materialmen's and mechanics' liens and other similar
Liens arising in the ordinary course of business, which relate to Indebtedness
which has not been paid when due and payable in accordance with its terms and
which are being contested in good faith by appropriate proceedings, which
proceedings have the effect of preventing the forfeiture or sale of the property
or assets subject to any such Lien; and
(iv) Liens in respect of statutory preference or priorities granted
to certain claims under the Insurers Rehabilitation and Liquidation Act, Chapter
645, Wisconsin Statutes.
Section 9.02 Consolidation, Merger, Sale of Assets, etc. The
------------------------------------------
Borrower will not, and will not permit any of its Subsidiaries to, wind up,
liquidate or dissolve its affairs or enter into any transaction of merger or
consolidation, or convey, sell, lease or otherwise dispose of (or agree to do
any of the foregoing at any future time) all or any substantial part of its
property or assets, or purchase or otherwise acquire (in one or a series of
related transactions) all or substantially all of the property or assets (other
than purchases or other acquisitions of inventory, materials and equipment in
the ordinary course of business) of any Person, or permit any of its
Subsidiaries so to do any of the foregoing, except that:
(i) each of the Borrower and its Subsidiaries may in the ordinary
course of business sell or lease assets;
(ii) any Subsidiary may wind up its affairs or liquidate or dissolve
into, and may consolidate or merge with or into, the Borrower or any other
Subsidiary of the Borrower;
(iii) the assets or stock of any Subsidiary of the Borrower may be
purchased or otherwise acquired by the Borrower or any other Subsidiary of the
Borrower;
(iv) the Borrower or any of its Subsidiaries may purchase or
otherwise acquire all or substantially all of the properties or assets of any
Person (other than the Borrower) or acquire such Person by merger so long as (w)
no Default or Event of Default has occurred and is continuing or would occur
after giving effect thereto, (x) the consolidated net worth (determined in
accordance with U.S. generally accepted accounting principles) of the Borrower
and its
33
<PAGE>
Subsidiaries taken as a whole immediately after giving effect to such purchase,
acquisition or merger is at least equal to its consolidated net worth
immediately prior to such purchase, acquisition or merger and (y) such purchase,
acquisition or merger shall not result in any downgrading of the Borrower's
Rating assigned by Moody's or S&P from that in effect immediately prior to such
purchase, acquisition or merger and (z) the Borrower shall deliver to the Agent
a certificate of the Chief Financial Officer of the Borrower stating that such
purchase, merger or acquisition complied with the conditions contained in this
clause (iv); and
(v) the Borrower and any of its Subsidiaries may convey, sell or
otherwise dispose of any of their respective properties or assets so long as,
immediately prior to the time of such disposition, the value of such properties
or assets being disposed of does not exceed 10% of the aggregate value of the
assets of the Borrower and its Subsidiaries as such assets are carried on the
consolidated balance sheet of the Borrower and its Subsidiaries at such time.
SECTION 10. EVENTS OF DEFAULT.
----------------
Upon the occurrence of any of the following specified events (each an
"Event of Default"):
Section 10.01 Payments. The Borrower shall (i) default in the
--------
payment when due of any principal of any Loan or any Note or (ii) default, and
such default shall continue unremedied for two or more Business Days, in the
payment when due of any interest on any Loan or any Note or any Fees or any
other amounts owing hereunder or under any Note; or
Section 10.02 Representations, etc. Any representation, warranty or
--------------------
statement made by or on behalf of the Borrower herein or in any other Credit
Document or in any certificate delivered pursuant hereto or thereto shall prove
to be untrue in any material respect on the date as of which made or deemed
made; or
Section 10.03 Covenants. Section 10.03 (e), 8.08, 8.09, 8.10, 8.11,
---------
8.12 or 9 hereof and such default shall continue unremedied for a period of 15
Business Days after written notice to the Borrower by the Agent or Bank, or (ii)
default in the due performance or observance by it of any term, covenant or
agreement (other than those referred to in Sections 10.01 and 10.02 and clause
(i) of this Section 10.03) contained in this Agreement and such default shall
continue unremedied for a period of 30 days after written notice to the Borrower
by the Agent or any Bank; or
Section 10.04 Default Under Other Agreements. The Borrower or any of
------------------------------
its Subsidiaries shall (i) default in any payment of any Indebtedness (other
than the Notes) with an outstanding principal balance in excess of $15,000,000
beyond the period of grace, if any, provided in the instrument or agreement
under which such Indebtedness was created or (ii) default in the observance or
performance of any agreement or condition relating to any such Indebtedness
beyond the grace period as provided therein (other than the Notes) or contained
in any instrument or agreement evidencing, securing or relating thereto, or any
other event shall occur or condition
34
<PAGE>
exist, the effect of any such default or other event or condition is to cause,
or to permit the holder or holders of such Indebtedness (or a trustee or agent
on behalf of such holder or holders) to cause any such Indebtedness to become
due prior to its stated maturity; or any Indebtedness of the Borrower or any of
its Subsidiaries shall be declared to be due and payable, or required to be
prepaid other than by a regularly scheduled required prepayment, prior to the
stated maturity thereof; or
Section 10.05 Bankruptcy, etc. The Borrower or any of its
---------------
Subsidiaries shall commence a voluntary case concerning itself under Title 11 of
the United States Code entitled "Bankruptcy," as now or hereafter in effect, or
any successor thereto (the "Bankruptcy Code"); or an involuntary case is
commenced against the Borrower or any of its Subsidiaries, and the petition is
not controverted within 10 days, or is not dismissed within 60 days, after
commencement of the case; or a custodian (as defined in the Bankruptcy Code) is
appointed for, or takes charge of, all or substantially all of the property of
the Borrower or any of its Subsidiaries, or the Borrower or any of its
Subsidiaries commences any other proceeding under any reorganization,
arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or
liquidation or similar law of any jurisdiction whether now or hereafter in
effect relating to the Borrower or any of its Subsidiaries, or there is
commenced against the Borrower or any of its Subsidiaries any such proceeding
which remains undismissed or unstayed for a period of 60 days, or the Borrower
or any of its Subsidiaries is adjudicated insolvent or bankrupt; or any order of
relief or other order approving any such case or proceeding is entered; or the
Borrower or any of its Subsidiaries suffers any appointment of any custodian or
the like for it or any substantial part of its property to continue undischarged
or unstayed for a period of 60 days; or the Borrower or any of its Subsidiaries
makes a general assignment for the benefit of creditors; or any corporate action
is taken by the Borrower or any of its Subsidiaries for the purpose of effecting
any of the foregoing; or
Section 10.06 ERISA. (a) Any Plan shall fail to maintain the
-----
minimum funding standard required for any plan year or part thereof or a waiver
of such standard or extension of any amortization period is sought or granted
under Section 412 of the Code, or the Borrower or any of its ERISA Affiliates
has incurred or is likely to incur a liability to or on account of a Plan or
Multiemployer Plan under Section 4062, 4063, 4064, 4069, 4201, 4204 or 4212 of
ERISA, or the Borrower or any Subsidiary has incurred or is likely to incur
liabilities pursuant to one or more employee welfare benefit plans (as defined
in Section 3(1) of ERISA) which provide benefits to retired employees (other
than as required by Section 601 of ERISA), involving in the aggregate for the
Borrower and its Subsidiaries a liability of $10,000,000 or more at any time;
(b) there shall result from any such event or events the imposition of a Lien
upon the assets of the Borrower or any of its Subsidiaries, the granting of a
security interest, or a liability or a material risk of incurring a liability,
and (c) which Lien, security interest or liability, in the opinion of the Banks,
will have a material adverse effect upon the business, operations, property,
assets or condition (financial or otherwise) of the Borrower or of the Borrower
and its Subsidiaries taken as a whole; or
Section 10.07 Security Agreement. (i) The Security Agreement or any
------------------
provision thereof shall cease to be in full force and effect, or shall cease in
any material respect to give the
35
<PAGE>
Collateral Agent for the benefit of the Banks, the Liens, rights, powers and
privileges purported to be created thereby, or (ii) the Borrower shall otherwise
default in any material respect in the due performance or observance of any
term, covenant or agreement on its part to be performed or observed pursuant to
the Security Agreement and such default shall continue unremedied for a period
of 30 days after written notice to the Borrower by the Agent or, in the event
there is no Agent, any Bank; or
Section 10.08 Judgments. One or more judgments or decrees shall be
---------
entered against the Borrower or any of its Subsidiaries involving in the
aggregate for the Borrower and its Subsidiaries a liability (not paid or fully
covered by insurance) of $15,000,000 or more at any one time, and all such
judgments or decrees shall not have been vacated, discharged or stayed or bonded
pending appeal within 60 days after the entry thereof; or
Section 10.09 Change of Control. A Change of Control shall occur;
-----------------
then, and in any such event, and at any time thereafter, if any Event of Default
shall then be continuing, the Agent may or shall upon direction from the
Majority Banks, by written notice to the Borrower, take the following actions to
the extent permitted below (provided, that, if an Event of Default specified in
Section 10.05 shall occur with respect to the Borrower, the result which would
occur upon the giving of written notice to the Borrower as specified below shall
occur automatically without the giving of any such notice): if any Event of
Default has occurred and is continuing, the Agent may declare the principal of
and any accrued interest in respect of all Loans and the Notes and all
obligations owing hereunder and thereunder to be, whereupon the same shall
become, forthwith due and payable without presentment, demand, protest or other
notice of any kind, all of which are hereby waived by the Borrower.
SECTION 11. THE AGENT.
---------
Section 11.01 Appointment. The Banks hereby designate Deutsche Bank
-----------
AG, New York Branch as Agent (for purposes of this Section 11, the term "Agent"
shall also include Deutsche Bank AG, New York Branch in its capacity as
Collateral Agent pursuant to the Security Documents) to act as specified herein
and in the other Credit Documents. Each Bank hereby irrevocably authorizes, and
each holder of any Note by the acceptance of such Note shall be deemed
irrevocably to authorize, the Agent to take such action on its behalf under the
provisions of this Agreement, the other Credit Documents and any other
instruments and agreements referred to herein or therein and to exercise such
powers and to perform such duties hereunder and thereunder as are specifically
delegated to or required of the Agent by the terms hereof and thereof and such
other powers as are reasonably incidental thereto. The Agent may perform any of
its duties hereunder by or through its officers, directors, agents or employees.
Section 11.02 Nature of Duties. The Agent shall not have any duties
----------------
or responsibilities except those expressly set forth in this Agreement and the
Security Agreement. Neither the Agent nor any of its officers, directors,
agents or employees shall be liable for any action taken or omitted by it or
them hereunder or under any other Credit Document or in connection herewith or
therewith, unless caused by its or their gross negligence or willful miscon-
36
<PAGE>
duct. The duties of the Agent shall be mechanical and administrative in nature;
the Agent shall not have by reason of this Agreement or any other Credit
Document a fiduciary relationship in respect of any Bank or the holder of any
Note; and nothing in this Agreement or any other Credit Document, expressed or
implied, is intended to or shall be so construed as to impose upon the Agent any
obligations in respect of this Agreement or any other Credit Document except as
expressly set forth herein or therein.
Section 11.03 Lack of Reliance on the Agent. Independently and
-----------------------------
without reliance upon the Agent, each Bank and the holder of each Note, to the
extent it deems appropriate, has made and shall continue to make (i) its own
independent investigation of the financial condition and affairs of the Borrower
in connection with the making and the continuance of the Loans and the taking or
not taking of any action in connection herewith and (ii) its own appraisal of
the creditworthiness of the Borrower and, except as expressly provided in this
Agreement, the Agent shall not have any duty or responsibility, either initially
or on a continuing basis, to provide any Bank with any credit or other
information with respect thereto, whether coming into its possession before the
making of the Loans or at any time or times thereafter. The Agent shall not be
responsible to any Bank or the holder of any Note for any recitals, statements,
information, representations or warranties herein or in any document,
certificate or other writing delivered in connection herewith or for the
execution, effectiveness, genuineness, validity, enforceability, perfection,
collectability, priority or sufficiency of this Agreement or any other Credit
Document or the financial condition of the Borrower or be required to make any
inquiry concerning either the performance or observance of any of the terms,
provisions or conditions of this Agreement or any other Credit Document, or the
financial condition of the Borrower or the existence or possible existence of
any Default or Event of Default.
Section 11.04 Certain Rights of the Agent. If the Agent shall
---------------------------
request instructions from the Banks with respect to any act or action (including
failure to act) in connection with this Agreement or any other Credit Document,
the Agent shall be entitled to refrain from such act or taking such action
unless and until the Agent shall have received instructions from the Majority
Banks; and the Agent shall not incur liability to any Person by reason of so
refraining. Without limiting the foregoing, no Bank or the holder of any Note
shall have any right of action whatsoever against the Agent as a result of the
Agent acting or refraining from acting hereunder or under any other Credit
Document in accordance with the instructions of the Majority Banks.
Section 11.05 Reliance. The Agent shall be entitled to rely, and
--------
shall be fully protected in relying, upon any note, writing, resolution, notice,
statement, certificate, telex, teletype or telecopier message, cablegram,
radiogram, order or other document or telephone message signed, sent or made by
any Person that the Agent believed to be the proper Person, and, with respect to
all legal matters pertaining to this Agreement and any other Credit Document and
its duties hereunder and thereunder, upon advice of counsel selected by the
Agent.
Section 11.06 Indemnification. To the extent the Agent is not
---------------
reimbursed and indemnified by the Borrower, each Bank will reimburse and
indemnify the Agent for and against any and all liabilities, obligations,
losses, damages, penalties, claims, actions, judgments, costs,
37
<PAGE>
expenses or disbursements of whatsoever kind or nature which may be imposed on,
asserted against or incurred by the Agent in performing its duties hereunder or
under any other Credit Document, in any way relating to or arising out of this
Agreement or any other Credit Document; provided that no Bank shall be liable
--------
for any portion of such liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements resulting from the
Agent's gross negligence or willful misconduct.
Section 11.07 The Agent in Its Individual Capacity. With respect to
------------------------------------
its obligation to make Loans under this Agreement, the Agent shall have the
rights and powers specified herein for a "Bank" and may exercise the same rights
and powers as though it was not performing the duties specified herein; and the
term "Banks," "holders of Notes" or any similar terms shall, unless the context
clearly otherwise indicates, include the Agent in its individual capacity. The
Agent may accept deposits from, lend money to, and generally engage in any kind
of banking, trust or other business with the Borrower or any Affiliate of the
Borrower as if they were not performing the duties specified herein, and may
accept fees and other consideration from the Borrower for services in connection
with this Agreement and otherwise without having to account for the same to the
Banks.
Section 11.08 Resignation by the Agent. (a) The Agent may resign
------------------------
from the performance of all its functions and duties hereunder and/or under the
other Credit Documents at any time by giving 15 Business Days' prior written
notice to the Borrower and the Banks. In the case of the resignation by the
Agent, such resignation shall take effect upon the appointment of a successor
Agent pursuant to clause (b) or (c) below or as otherwise provided below.
(b) Upon any such notice of resignation by the Agent, the Banks shall
appoint a successor Agent hereunder or thereunder who shall be a commercial bank
or trust company reasonably acceptable to the Borrower (it being understood and
agreed that any Bank is deemed to be acceptable to the Borrower).
(c) If a successor Agent shall not have been so appointed within such
15 Business Day period, the Agent, with the consent of the Borrower, shall then
appoint a successor Agent who shall serve as Agent hereunder or thereunder until
such time, if any, as the Banks appoint a successor Agent as provided above.
(d) If no successor Agent has been appointed pursuant to clause (b) or
(c) above by the 20th Business Day after the date such notice of resignation was
given by the Agent, the Agent may appoint any other Bank which agrees to such
appointment to act as successor Agent and if no Bank so agrees by the 30th
Business Day after the date such notice was given by the Agent, the Agent's
resignation shall become effective on such 30th Business Day and the Banks shall
thereafter perform all the duties of the Agent hereunder and/or under any other
Credit Document until such time, if any, as the Banks appoint a successor Agent
as provided above.
38
<PAGE>
SECTION 12. MISCELLANEOUS.
-------------
Section 12.01 Payment of Expenses, etc. The Borrower shall: (i)
------------------------
whether or not the transactions herein contemplated are consummated, pay all
reasonable out-of-pocket costs and expenses (x) of the Agent (including, without
limitation, the reasonable fees and disbursements of White & Case, LLP, counsel
for the Agent) in connection with the preparation, execution and delivery of
this Agreement and the other Credit Documents and the documents and instruments
referred to herein and therein and any amendment, waiver or consent relating
hereto or thereto and (y) of the Agent and the Banks in connection with the
enforcement of this Agreement and the other Credit Documents and the documents
and instruments referred to herein and therein (including, without limitation,
the reasonable fees and disbursements of counsel for the Agent and the Banks);
(ii) pay and hold each Bank harmless from and against any and all present and
future stamp and other similar taxes with respect to the foregoing matters and
save such Bank harmless from and against any and all liabilities with respect to
or resulting from any delay or omission (other than to the extent attributable
to such Bank) to pay such taxes; and (iii) except as otherwise provided in
Section 4.05, indemnify each Bank, its officers, directors, employees,
representatives and agents from and hold each of them harmless against any and
all liabilities, obligations, losses, damages, penalties, claims, actions,
judgments, suits, and reasonable costs, expenses and disbursements incurred by
any of them as a result of, or arising out of, or in any way related to, or by
reason of, any investigation, litigation or other proceeding (whether or not
such Bank is a party thereto) related to the entering into and/or performance of
this Agreement or any other Credit Document or the use of the proceeds of any
Loans hereunder or the consummation of any transactions contemplated herein or
in any other Credit Document, including, without limitation, the reasonable fees
and disbursements of counsel incurred in connection with any such investigation,
litigation or other proceeding (but excluding any such liabilities, obligations,
losses, etc., to the extent incurred by reason of the gross negligence or
----
willful misconduct of the Person to be indemnified).
Section 12.02 Right of Setoff. Except as otherwise provided in
---------------
Section 4.05 in addition to any rights now or hereafter granted under applicable
law or otherwise, and not by way of limitation of any such rights and to the
extent permitted by applicable law, upon the occurrence of an Event of Default,
each Bank is hereby authorized at any time or from time to time, without
presentment, demand, protest or other notice of any kind to the Borrower or to
any other Person, any such notice being hereby expressly waived, to set off and
to appropriate and apply any and all deposits (general or special), and any
other Indebtedness at any time held or owing by such Bank (including without
limitation by branches and agencies of such Bank wherever located) to or for the
credit or the account of the Borrower against and on account of the Obligations
and liabilities of the Borrower to such Bank under this Agreement or under any
of the other Credit Documents, and all other claims of any nature or description
arising out of or connected with this Agreement or any other Credit Document,
irrespective of whether or not the Bank shall have made any demand hereunder and
although said Obligations, liabilities or claims, or any of them, shall be
contingent or unmatured, provided however that (i) except to the extent provided
in the next succeeding clause (ii), no Bank is authorized hereunder to take any
of the foregoing actions, nor shall any Bank exercise any other right of setoff
or bankers' lien or any other right now or
39
<PAGE>
hereafter granted under applicable law with respect to the Pledged Reserves
Account or any portion of the Pledged Reserves Account Funds or any Collateral
contained in the Pledged Reserves Account (each of the Agent, the Collateral
Agent and each Bank hereby waiving, to the extent permitted by applicable law,
any such right) and (ii) from and after receipt by the Agent or the Collateral
Agent of any Pledged Reserve Release Notice, the Agent, the Collateral Agent or
any Bank is authorized to and may exercise, to the extent permitted by
applicable law, any of such foregoing actions or such rights only with respect
to the amount of Pledged Reserves Account Funds described in such Pledged
Reserve Release Notice and the other Collateral contained in the Pledged
Reserves Account in an amount equal to the interest and other earnings on such
Pledged Reserves Account Funds.
Section 12.03 Notices. Except as otherwise expressly provided
-------
herein, all notices and other communications provided for hereunder shall be in
writing (including telegraphic, telex, facsimile or cable communication) and
mailed, telegraphed, telexed, telecopied, cabled or delivered: if to the
Borrower or any Bank, at its address listed opposite its name on the signature
page hereto; and if to the Agent at its Notice Office; or, as to any Bank or the
Agent, at such other address as shall be designated by such party in a written
notice to the other parties hereto and, as to each other party, at such other
address as shall be designated by such party in a written notice to the Borrower
and the Agent. All such notices and communications shall not be effective until
received by the Agent or the Borrower.
Section 12.04 Benefit of Agreement. (a) This Agreement shall be
--------------------
binding upon and inure to the benefit of and be enforceable by the respective
successors and assigns of the parties hereto; provided, however, that the
Borrower may not assign or transfer any of its rights or obligations hereunder
without the prior written consent of the Banks and, provided further, that, no
Bank may transfer or assign its rights or obligations hereunder or under any of
the other Credit Documents, except as provided in this Section 12.04, provided
further, that no Bank shall transfer, grant or assign any participation under
which the participant shall have rights to approve any amendment to or waiver of
this Agreement or any of the other Credit Documents (x) except to the extent
such amendment or waiver (i) extends the final maturity of any Loan or Note
other than in accordance with Section 3.04, or reduces the rate or extends the
time of payment of interest or Fees thereon, or reduces the principal amount
thereof, or increases the Commitment of any Bank over the amount thereof then in
effect (it being understood that a waiver of any Default or Event of Default
shall not constitute a change in the terms of any Commitment of any Bank), (ii)
releases any material portion of the Collateral under the Security Agreement
except as shall be otherwise provided in any Credit Document, (iii) consents to
the assignment or transfer by the Borrower of any of its rights and obligations
under any Credit Document, (iv) amends the definition of Loss Threshold
Incurrence Date other than to increase the dollar amount or the percentage
specified therein, (v) reduces the percentage specified in the definition of
Majority Participants or (vi) amends, modifies or waives any provision of this
Section 12.04 or (y) except to the extent that a Bank may permit its Majority
Participants to approve any material written amendment, modification, waiver or
release of any other provision of this Agreement or any other Credit Document
which would, if effected, materially adversely affect the interests of its
participants. "Majority Participants" for purposes of this Section 12.04 shall
mean, with respect
40
<PAGE>
to each Bank, at any time participants of such Bank participating in at least
51% of the aggregate principal amount of Loans made by such Bank and outstanding
at such time, or if no such Loans are outstanding at such time, participants of
such Bank participating in at least 51% of the Commitment of such Bank at such
time. In the case of any such participation, the participant shall not
constitute a "Bank" hereunder and shall not have any rights under this Agreement
or any of the other Credit Documents (the participant's rights against any Bank
in respect of such participation to be those set forth in the agreement executed
by such Bank in favor of the participant relating thereto) and all amounts
payable by the Borrower hereunder shall be determined as if such Bank had not
sold such participation, except that the participant shall be entitled to the
benefits of Section 2.07 or 4.04 of this Agreement to the extent that such Bank
would be entitled to such benefits if the participation had not been
transferred, granted or assigned.
(b) Notwithstanding the foregoing, any Bank (or any Bank together with
one or more other Banks) may assign all or a portion of its Commitment (plus, if
such Bank shall be a Part C Bank, such Bank's Contingent Commitment) and related
outstanding rights and Obligations hereunder to one or more Eligible
Transferees, each of which assignees shall become a party to this Agreement as a
Bank and, if applicable, a Part C Bank by execution of an Assignment and
Assumption Agreement and delivery of such Assignment and Assumption Agreement to
the Borrower and the Agent, provided that (i) new Notes will be issued to such
--------
new Bank in the stated amount of its assumed Commitment (plus, if such Bank
shall be a Part C Bank, such Bank's Contingent Commitment), and to the assigning
Bank in the stated amount of the Commitment (plus, if such Bank shall be a Part
C Bank, the Contingent Commitment) if any, retained by it upon the request of
such new Bank or assigning Bank and the surrender of the Note previously issued
to the assigning Bank (or the execution and delivery to the Borrower of an
indemnity satisfactory to the Borrower), such new Notes to be in conformity with
the requirements of Section 2.05 to the extent needed to reflect the revised
Commitments and, if applicable, Contingent Commitments, (ii) unless such
assignment is to an Affiliate of such assigning Bank, and so long as no Default
or Event of Default exists at the time of such assignment, the Borrower shall
have consented to such assignment, (iii) at the time of such assignment, the new
Bank or (except to the extent the new Bank is an affiliate of the assigning
Bank) its parent shall have an unsecured senior debt rating (or shadow rating as
reflected in a letter) by each of Moody's and S&P no lower than the unsecured
senior debt rating (or shadow rating as reflected in a letter) by each of
Moody's and S&P of the assigning Bank or its parent, (iv) in the case of any
assignment of all or a portion of a Part C Bank's Contingent Commitment, the new
Part C Bank or its parent shall have, at the time of such assignment, an
unsecured senior debt rating (or shadow rating as reflected in a letter) by each
of Moody's and S&P of Aaa and AAA, respectively, (v) such assignment shall not
result in a downgrading of the Borrower's Rating by Moody's or S&P from that in
effect immediately prior to such assignment, (vi) the assigning Bank shall
provide notice of any such assignment to the Agent and the Borrower and the
Borrower shall provide notice of same to Moody's and S&P and (vii) the new Bank
shall deliver a legal opinion addressed to each of the Borrower, Moody's and S&P
dated the effective date of the applicable assignment to the effect that this
Agreement constitutes its legal, valid and binding obligation enforceable in
accordance with its terms, except to the extent that the enforceability thereof
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium
or other similar laws generally
41
<PAGE>
affecting creditor's rights and by equitable principles (regardless of whether
enforcement is sought in equity or at law) as the same may be applied in the
event of bankruptcy or similar proceedings with respect to such new Bank. To the
extent of any assignment pursuant to this Section 12.04(b), the assigning Bank
shall be relieved of its obligations hereunder with respect to its assigned
Commitment. At the time of each assignment pursuant to this Section 12.04(b) to
a Person which is not already a Bank hereunder and which is not a United States
person (as such term is defined in Section 7701(a)(30) of the Code) for Federal
income tax purposes, the respective assignee Bank shall, to the extent legally
entitled to do so, provide to the Borrower in the case of a Bank described in
clause (ii) or (iv) of Section 4.04(b), the forms described in such clause (ii)
or (iv), as the case may be. To the extent that an assignment of all or any
portion of a Bank's Commitment and related outstanding Obligations pursuant to
this Section 12.04(b) would at the time of such assignment, result in increased
costs under Section 2.07 or 4.04 from those being charged by the respective
assigning Bank prior to such assignment, then the Borrower shall not be
obligated to pay such increased costs (although the Borrower shall be obligated
to pay any other increased costs of the type described above resulting from
changes in applicable law, or government rules, regulations, orders or requests
after the date of the respective assignment).
(c) Upon the execution and delivery of an Assignment and Assumption
Agreement in accordance with, and subject to the restrictions of, Section
12.04(b), the assignee thereunder shall be a party hereto and, to the extent
that rights and obligations hereunder and under the other Credit Documents have
been assigned to it pursuant to such Assignment and Assumption Agreement, have
the rights and obligations of a "Bank" hereunder and thereunder.
(d) Any Bank claiming any amounts payable pursuant to Section 4.04
shall use reasonable efforts (consistent with legal and regulatory restrictions
and subject to overall policy considerations of such Bank) to designate another
lending office for its Commitment or Loans or take such other action to minimize
such amounts, as may be reasonably requested by the Borrower, provided that such
designation is made or such other action is taken on such terms that such Bank
and its lending office suffer no economic, legal or regulatory disadvantage.
(e) Nothing in this Agreement shall prevent or prohibit any Bank from
pledging its Loans and Notes hereunder to a Federal Reserve Bank in support of
borrowings made by such Bank from such Federal Reserve Bank.
(f) Each Bank shall promptly notify the Borrower of any change in the
location of its applicable lending office. In the event any Bank changes its
applicable lending office, such change shall be treated as an assignment to a
new Bank for purposes of Section 4.04(b) and so much of Section 12.04(b) as
relates to Section 4.04.
Section 12.05 No Waiver; Remedies Cumulative. No failure or delay on
------------------------------
the part of any Bank or the holder of any Note in exercising any right, power or
privilege hereunder or under any other Credit Document and no course of dealing
between the Borrower and any Bank or the holder of any Note shall operate as a
waiver thereof; nor shall any single or partial exercise of any right, power or
privilege hereunder or under any other Credit Document preclude any
42
<PAGE>
other or further exercise thereof or the exercise of any other right, power or
privilege hereunder or thereunder. Except as otherwise expressly provided herein
or in any other Credit Document, the rights, powers and remedies herein or in
any other Credit Document expressly provided are cumulative and not exclusive of
any rights, powers or remedies which any Bank would otherwise have. No notice to
or demand on the Borrower in any case shall entitle the Borrower to any other or
further notice or demand in similar or other circumstances or constitute a
waiver of the rights of any Bank or the holder of any Note to any other or
further action in any circumstances without notice or demand.
Section 12.06 Calculations; Computations. (a) The financial
--------------------------
statements to be furnished to the Banks pursuant to Section 8.01(a) and (b)
shall be made and prepared in accordance with generally accepted accounting
principles in the United States and the financial statements to be furnished to
the Banks pursuant to Section 8.01(c) shall be made and prepared in accordance
with statutory accounting principles, in each case consistently applied
throughout the periods involved (except as set forth in the notes thereto or as
otherwise disclosed in writing by the Borrower to the Banks).
(b) All computations of interest, Commitment Fees and Fees hereunder
shall be made on the basis of a year of 360 days for the actual number of days
(including the first day but excluding the last day) occurring in the period for
which such interest, Commitment Fees or Fees are payable.
Section 12.07 Governing Law; Submission to Jurisdiction; Venue. (a)
------------------------------------------------
This Agreement and the other Credit Documents and the rights and obligations of
the parties hereunder and thereunder shall be construed in accordance with and
be governed by the law of the State of New York. Any legal action or proceeding
against the Borrower with respect to this Agreement or any other Credit Document
may be brought in the courts of the State of New York or of the United States
for the Southern District of New York, and, by execution and delivery of this
Agreement, the Borrower hereby irrevocably accepts for itself and in respect of
its property, generally and unconditionally, the jurisdiction of the aforesaid
courts. The Borrower irrevocably consents to the service of process out of any
of the aforementioned courts in any such action or proceeding by the mailing of
copies thereof by registered or certified mail, postage prepaid, to the Borrower
at its address set forth opposite its signature below, such service to become
effective 30 days after such mailing. Except as otherwise provided in Section
4.05, nothing herein shall affect the right of the Agent or any Bank under this
Agreement to serve process in any other manner permitted by law or to commence
legal proceedings or otherwise proceed against the Borrower in any other
jurisdiction.
(b) The Borrower hereby irrevocably waives any objection which it may
now or hereafter have to the laying of venue of any of the aforesaid actions or
proceedings arising out of or in connection with this Agreement or any other
Credit Document brought in the courts referred to in clause (a) above and hereby
further irrevocably waives and agrees not to plead or claim in any such court
that any such action or proceeding brought in any such court has been brought in
an inconvenient forum.
43
<PAGE>
Section 12.08 Obligation to Make Payments in Dollars. Subject to the
--------------------------------------
provisions of Section 4.05, the obligation of the Borrower to make payment in
Dollars of the principal of and interest on the Notes and any other amounts due
hereunder or under any other Credit Document to the Payment Office of the Agent
as provided in Section 4.03 shall not be discharged or satisfied by any tender,
or any recovery pursuant to any judgment, which is expressed in or converted
into any currency other than Dollars, except to the extent such tender or
recovery shall result in the actual receipt by the Agent at its Payment Office
of the full amount of Dollars expressed to be payable in respect of the
principal of and interest on the Notes and all other amounts due hereunder or
under any other Credit Document. Subject to the provisions of Section 4.05, the
obligation of the Borrower to make payments in Dollars as aforesaid shall be
enforceable as an alternative or additional cause of action for the purpose of
recovery in Dollars of the amount, if any, by which such actual receipt shall
fall short of the full amount of Dollars expressed to be payable in respect of
the principal of and interest on the Notes and any other amounts due under any
other Credit Document, and shall not be affected by judgment being obtained for
any other sums due under this Agreement or under any other Credit Document.
Section 12.09 Counterparts. This Agreement may be executed in any
------------
number of counterparts and by the different parties hereto on separate
counterparts, each of which when so executed and delivered shall be an original,
but all of which shall together constitute one and the same instrument. A set
of counterparts executed by all the parties hereto shall be lodged with the
Borrower and the Agent.
Section 12.10 Effectiveness. This Agreement shall become effective
-------------
on the date (the "Effective Date") on which the Borrower and the Banks shall
have signed a copy hereof (whether the same or different copies) and shall have
delivered the same to the Agent at its Notice Office and the conditions set
forth in Section 5 shall have been satisfied or waived by the Banks, as
evidenced by a written notice by the Agent to the Borrower confirming that the
Agreement has become effective and setting forth the Effective Date.
Section 12.11 Headings Descriptive. The headings of the several
--------------------
sections and subsections of this Agreement are inserted for convenience only and
shall not in any way affect the meaning or construction of any provision of this
Agreement.
Section 12.12 Amendment or Waiver. Neither this Agreement nor any
-------------------
other Credit Document nor any terms hereof or thereof may be changed, waived,
discharged or terminated unless such change, waiver, discharge or termination is
in writing signed by the Majority Banks and the Agent; provided, however, that
no such change, waiver, discharge or termination shall, without the consent of
each Bank (other than any Bank that is, at the time of the proposed extension,
release, amendment, reduction or consent, a Defaulting Bank) (i) extend the
final maturity of any Loan or Note other than in accordance with Section 3.04 or
reduce the rate or extend the time of payment of interest or Fees thereon, or
reduce the principal amount thereof, or increase the Commitment of any Bank over
the amount thereof then in effect (it being understood that a waiver of any
Default or Event of Default shall not constitute a change in the terms of any
Commitment of any Bank), (ii) release any material portion of the Collateral
under
44
<PAGE>
any Security Document except as shall be otherwise provided in any Credit
Document, (iii) amend, modify or waive any provision of this Section 12.12, (iv)
reduce the percentage specified in the definition of Majority Banks, (v) consent
to the assignment or transfer by the Borrower of any of its rights and
obligations under any Credit Document or (vi) amend the definition of Loss
Threshold Incurrence Date other than to increase the dollar amount or the
percentage specified therein.
Section 12.13 Survival. All indemnities set forth herein including,
--------
without limitation, in Sections 2.07, 4.04 and 12.01 shall survive the execution
and delivery of this Agreement and the Notes and the making and repayment of the
Loans.
Section 12.14 Exclusions from Covered Portfolio. In the event that
---------------------------------
any Bank (or any participant to whom such Bank has transferred, granted or
assigned any participation in its rights and obligations hereunder and under the
other Credit Documents) is, or upon the occurrence of any contingency would be,
obligated under the terms of a line of credit, standby bond purchase agreement,
letter of credit, liquidity agreement or similar agreement or arrangement to
purchase any Insured Obligation listed in a certificate delivered by the
Borrower to the Agent pursuant to Section 5.06 or 8.01(d), such Bank (or such
participant) shall promptly notify the Agent, and the Agent shall promptly
notify the Borrower, that such Bank (or such participant) is or would be so
obligated to purchase such Insured Obligation. Upon delivery by the Agent to
the Borrower of any such notice with respect to an Insured Obligation, such
Insured Obligation shall, effective upon delivery of such notice by the Agent to
the Borrower, be excluded from the Covered Portfolio.
45
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused their duly
authorized officers to execute and deliver this Agreement as of the date first
above written.
Address:
- -------
AMBAC ASSURANCE CORPORATION
One State Street Plaza
New York, New York 10004
Attn: Anne Gill
By /s/ Anne Gill
-------------------------------
Name:
Title:
420 Fifth Avenue LANDESBANK HESSEN-THRINGEN
New York, New York 10018 GIROZENTRALE
Attention: Lisa Pent
By /s/ Lisa Pent
------------------------------
Name:
Title:
By
------------------------------
Name:
Title:
560 Lexington Avenue BAYERISCHE LANDESBANK
22nd Floor GIROZENTRALE
New York, New York 10022
Attention: Scott Allison
By /s/ Scott Allison
------------------------------
Name:
Title:
By
------------------------------
Name:
Title:
<PAGE>
1211 Avenue of the Americas WESTDEUTSCHE LANDESBANK
New York, New York 10036 GIROZENTRALE, NEW YORK
Attention: Lillian Tung Lum BRANCH
By /s/ Lillian Tung Lum
-------------------------------
Name:
Title:
By
------------------------------
Name:
Title:
<PAGE>
245 Park Avenue COPERATIEVE CENTRALE
New York, New York 10167 RAIFFEISEN-BOERENLEENBANK
Attention: Angela Reilly B.A., "RABOBANK NEDERALND",
NEW YORK BRANCH
By /s/ Angela Reilly
----------------------------------
Name:
Title:
By
----------------------------------
Name:
Title:
1339 Chestnut Street FIRST UNION NATIONAL BANK
3rd Floor OF NORTH CAROLINA
Philadelphia, Pennsylvania 19107
Attention: Jeff Doherty
By /s/ Jeff Doherty
----------------------------------
Name:
Title:
125 West 55th Street KBC BANK N.V.
New York, New York 10019
Attention: Patrick Owens
By /s/ Patrick Owens
---------------------------------
Name:
Title:
By
---------------------------------
Name:
Title:
901 Main Street NATIONSBANK, N.A.
67th Floor
Dallas, Texas 75202
Attention: Joan D'Amico By /s/ Joan D'Amico
--------------------------------
Name:
Title:
<PAGE>
270 Park Avenue THE CHASE MANHATTAN BANK
New York, New York 10017
Attention: Helen Newcomb
By /s/ Helen Newcomb
--------------------------------
Name:
Title:
<PAGE>
575 Fifth Avenue LLOYDS BANK PLC
New York, New York 10017
Attention: Amy Vespasiano
By /s/ Amy Vespasiano
---------------------------------
Name:
Title:
DEUTSCHE BANK AG,
31 West 52nd Street NEW YORK BRANCH,
New York, New York 10019 Individually and as Agent
Attn:
By
---------------------------------
Name:
Title:
By
---------------------------------
Name:
Title:
<PAGE>
SCHEDULE I
----------
PART A
Commitments
-----------
Name Commitment
- ---- ----------
Landesbank Hessen-Thuringen
Girozentrale $110,000,000.00
Bayerische Landesbank Girozentrale 75,000,000.00
Westdeutsche Landesbank Girozentrale,
New York Branch 75,000,000.00
Cooperatieve Centrale 60,000,000.00
Raiffeisen-Boerenleenbank B.A.,
"Rabobank Nederland", New York Branch
Deutsche Bank AG, New York Branch 50,000,000.00
First Union National Bank of North 40,000,000.00
Carolina
KBC Bank N.V. 40,000,000.00
NationsBank, N.A. 40,000,000.00
Lloyds Bank PLC 35,000,000.00
The Chase Manhattan Bank 30,000,000.00
---------------
Total $555,000,000.00
<PAGE>
PART B
Part B Banks
------------
The Chase Manhattan Bank
Deutsche Bank AG, New York Branch
First Union Bank National Bank of North
Carolina
KBC Bank N.V.
Lloyds Bank PLC
NationsBank, N.A.
Westdeutsche Landesbank Girozentrale,
New York Branch
PART C
Part C Banks/Contingent Commitments
-----------------------------------
Name Commitment
- ---- ----------
Bayerische Landesbank Girozentrale $100,000,000.00
Cooperatieve Centrale Raiffeisen- 50,000,000.00
Boerenleenbank B.A., "Rabobank --------------
Nederland", New York Branch
Total $150,000,000.00
<PAGE>
SCHEDULE II
-----------
Undisclosed Liabilities
-----------------------
None
<PAGE>
SCHEDULE III
------------
Subsidiaries
------------
<TABLE>
<CAPTION>
Jurisdiction of Borrower's
Name of Incorporation or Owner(s) of Equity Percentage
Subsidiary Organization Interests Therein Ownership
- ------------------------- -------------------- ---------------------------- -----------------
<S> <C> <C> <C>
American Municipal Bond Delaware Ambac Assurance Corporation 100%
Holding Company
Ambac Credit Products, LLC Delaware Ambac Assurance Corporation 100%
Ambac Insurance UK Limited UK Ambac Assurance Corporation 100%
Connie Lee Holdings, Inc. Delaware Ambac Assurance Corporation 100%
Ambac Financial Services, L.P. Delaware Ambac Assurance Corporation 90%
(Ambac Financial Services
Holdings, Inc., a wholly-owned
subsidiary of Ambac Financial
Group, Inc. owns the other 10%)
Connie Lee Insurance Company Delaware Connie Lee Holdings, Inc. 100%
Connie Lee Management Wisconsin Connie Lee Holdings, Inc. 100%
Services Corporation
</TABLE>
<PAGE>
EXHIBIT A
---------
NOTICE OF BORROWING
03/19/99 7:57 PM
Deutsche Bank AG,
New York Branch, as Agent
31 West 52nd Street
New York, New York 10019
Attention: Ms. Tykie Tobin
Ladies and Gentlemen:
The undersigned, AMBAC Assurance Corporation (the "Borrower"), refers
to the Amended and Restated Credit Agreement, dated as of December 2, 1998 (as
amended, modified and supplemented from time to time, the "Credit Agreement",
the terms defined therein being used herein as therein defined), among the
Borrower, various Banks from time to time party thereto, and you as Agent for
such banks, and hereby give you notice, irrevocably, pursuant to Section 2.03 of
the Credit Agreement, that the undersigned hereby requests a Borrowing under the
Credit Agreement, and in that connection sets forth below the information
relating to such Borrowing (the "Proposed Borrowing") as required by Section
2.03 of the Credit Agreement:
(i) The Business Day of the Proposed Borrowing is _________, 19__./1/
(ii) The aggregate principal amount of the Proposed Borrowing is
$________.
[(iii) Schedule 1 hereto contains a description of the Loss which the
proceeds of the Loan will be applied to pay, including (a) identification of the
Insured Obligation which has given rise to such Loss, (b) the amount of such
Loss, (c) the amount of the Permitted Reserves, if any, being established with
respect to such Loss and (d) the amount of Pledged Premiums, if any, hereafter
payable to the Borrower in respect of such Insured Obligation.]/2/
[(iii) Schedule 1 hereto contains a description of the Permitted
Reserve which the proceeds of the Loan will be applied to establish, including
(a) an identification of the Insured Obligation which is in default or is
anticipated to be in default, (b) the amount of such default, and (c) the amount
of Pledged Premiums, if any, hereafter payable to the Borrower in respect of
such Insured Obligation.]/3/
- --------------------------------
/1/ Shall be a Business Day at least two Business Days after the date hereof.
/2/ Include one version of subparagraph (iii).
/3/ Include one version of subparagraph (iii).
<PAGE>
Exhibit A
Page 2
The undersigned hereby certifies that the Loss Threshold Incurrence
Date has occurred on or prior to the date of this Notice of Borrowing.
Very truly yours,
AMBAC ASSURANCE CORPORATION
By
--------------------------
Name:
Title:
<PAGE>
Exhibit B
---------
NOTE
$_____________ New York, New York
December 10, 1998
FOR VALUE RECEIVED, AMBAC ASSURANCE CORPORATION, a Wisconsin stock
insurance corporation (the "Borrower"), hereby promises to pay to the order of
_________________ (the "Bank"), in lawful money of the United States of America
in immediately available funds, at the office of Deutsche Bank AG, New York
Branch, as Agent, located at 31 West 52nd Street, New York, New York 10019, on
the Expiry Date (as defined in the hereinafter defined Agreement) the principal
sum of __________ DOLLARS ($___________) or, if less, the then unpaid principal
amount of all Loans (as defined in the Agreement) made by the Bank pursuant to
the Agreement.
The Borrower promises also to pay interest on the unpaid principal
amount hereof in like money at such office at the rates and at the times
provided in Section 2.06 of the Agreement.
This Note is one of the Notes referred to in the Amended and Restated
Credit Agreement, dated as of December 2, 1998 (as amended from time to time,
the "Agreement"), among the Borrower, the lenders from time to time party
thereto (including the Bank) and Deutsche Bank AG, New York Branch, as Agent,
and is entitled to the benefits thereof. This Note is secured by the Security
Agreement (as defined in the Agreement). As provided in the Agreement, this
Note is subject to voluntary prepayment and mandatory repayment prior to the
Expiry Date, in whole or in part.
In case an Event of Default (as defined in the Agreement) shall occur
and be continuing, the principal of and accrued interest on this Note may be
declared to be due and payable in the manner and with the effect provided in the
Agreement.
Except as otherwise provided in the Agreement, the Borrower hereby
waives presentment, demand, protest and notice of any kind in connection with
this Note.
The Bank is authorized to record the date and amount of each Loan and
each payment, prepayment and conversion with respect thereto on the grid
attached hereto or on a continuation thereof which shall be attached hereto and
made a part hereof, and any such notation shall constitute prima facie evidence
----- -----
of the accuracy of the information so recorded; provided, however, that the
failure to make any such notation shall not affect the validity of the
Borrower's obligations hereunder.
THE PAYMENT OBLIGATIONS OF THE BORROWER UNDER THIS NOTE ARE LIMITED AS
PROVIDED IN SECTION 4.05 OF THE AGREEMENT.
<PAGE>
Exhibit B
---------
THIS NOTE IS TRANSFERABLE ONLY IN ACCORDANCE WITH THE PROVISIONS OF
THE AGREEMENT.
THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE
LAW OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE CONFLICT OF LAW PROVISIONS
OF SUCH STATE.
IN WITNESS WHEREOF, the Borrower has caused this Note to be executed
and delivered by its duly authorized officer on the date first above written.
AMBAC ASSURANCE CORPORATION
By
-----------------------------
Title:
<PAGE>
Exhibit B
---------
Page 3
LOAN AND REPAYMENT SCHEDULE
<TABLE>
<CAPTION>
Date Amount of Loan Amount of Principal Unpaid Maturity Interest Notation
Repayment Principal Date Rate Made By
Balance
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
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- -----------------------------------------------------------------------------------------------------------
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- -----------------------------------------------------------------------------------------------------------
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</TABLE>
<PAGE>
EXHIBIT D
---------
AMBAC ASSURANCE CORPORATION
Officers' Certificate
I, the undersigned, Executive Vice President and Chief Financial
Officer of Ambac Assurance Corporation, a Wisconsin stock insurance corporation
(the "Borrower"), DO HEREBY CERTIFY that:
1. This Certificate is furnished pursuant to Section 5.04 of the
Amended and Restated Credit Agreement, dated as of December 2, 1998, among the
Borrower, various Banks and Deutsche Bank AG, New York Branch, as Agent (such
Credit Agreement, as in effect on the date of this Certificate, being herein
called the "Credit Agreement"). Unless otherwise defined herein capitalized
terms used in this Certificate have the meanings assigned to those terms in the
Credit Agreement.
2. The persons named below have been duly elected, have duly
qualified as and at all times since August 1, 1998 (to and including the date
hereof) have been officers of the Borrower, holding the respective offices below
set opposite their names, and the signatures below set opposite their names are
their genuine signatures.
<TABLE>
<CAPTION>
Name Office Signature
- ----------------------- ------------------------------------ ----------------------------------
<S> <C> <C>
Frank J. Bivona Executive Vice President and Chief
Financial Officer /s/ Frank J. Bivona
----------------------------------
Stephen D. Cooke Senior Vice President and General /s/ Stephen D. Cooke
Counsel ----------------------------------
Robert W. Starr First Vice President and Treasurer /s/ Robert W. Starr
----------------------------------
Anne G. Gill Vice President, Assistant General
Counsel and Assistant Secretary /s/ Anne G. Gill
----------------------------------
</TABLE>
3. Attached hereto as Annex A is a certified copy of the Restated
Articles of Incorporation of the Borrower, dated August 4, 1992, and filed with
the Department on August 7, 1992, and the Article of Amendment dated June 11,
1997, and filed with the Department on June 12, 1997, and since June 12, 1997,
there have been no amendments adopted.
4. Attached hereto as Annex B is a true and correct certified copy of
the Restated Corporate By-Laws of the Borrower, dated January 28, 1998, and
filed with the Department on March 2, 1998, as in effect on January 28, 1998,
together with all amendments thereto adopted through the date hereof.
5. Attached hereto as Annex C is a true and correct copy of
resolutions duly adopted by the Board of Directors of the Borrower at a meeting
on December 1, 1998, at which a
<PAGE>
Exhibit D
Page 2
quorum was present and acting throughout, which resolutions have not been
revoked, modified, amended or rescinded and are still in full force and effect.
Except as attached hereto as Annex C, no resolutions have been adopted by the
Board of Directors of the Borrower which deal with the execution, delivery or
performance of any of the Credit Documents, other than as may have been
superseded or replaced by the resolutions attached hereto.
6. On the date hereof, the representations and warranties contained
in Section 6 of the Credit Agreement are true and correct.
7. On the date hereof, no Default or Event of Default has occurred
and is continuing.
8. I know of no proceeding for the dissolution or liquidation of the
Borrower or threatening its existence.
IN WITNESS WHEREOF, I have hereunto set my hand this 10th day of
----
December, 1998.
- --------
AMBAC ASSURANCE CORPORATION
/s/ Frank J. Bivona
-------------------
Name: Frank J. Bivona
Executive Vice President and Chief
Financial Officer
<PAGE>
Exhibit D
Page 3
I, the undersigned, Assistant Secretary of the Borrower, DO HEREBY CERTIFY that:
1. Frank J. Bivona is the duly elected and qualified Executive Vice
President and Chief Financial Officer of the Borrower and the signature above is
his genuine signature.
2. The certifications made by Frank J. Bivona in items 2, 3, 4 and 5
above are true and correct.
3. I know of no proceeding for the dissolution or liquidation of the
Borrower or threatening its existence.
IN WITNESS WHEREOF, I have hereunto set my hand this 10th day of
----
December, 1998.
- --------
AMBAC ASSURANCE CORPORATION
/s/ Anne G. Gill
-----------------------------------------
Name: Anne G. Gill
Title: Vice President, Assistant General
Counsel and Assistant Secretary
<PAGE>
EXHIBIT F
---------
ASSIGNMENT AND ASSUMPTION AGREEMENT
-----------------------------------
Date _________, 19__
Reference is made to the Credit Agreement described in Item 2 of Annex
I hereto (as such Credit Agreement may hereafter be amended, supplemented or
otherwise modified from time to time, the "Credit Agreement"). Unless defined
in Annex I hereto, terms defined in the Credit Agreement are used herein as
therein defined. ___________ (the "Assignor") and __________ (the "Assignee")
hereby agree as follows:
1. The Assignor hereby sells and assigns to the Assignee without
recourse and without representation or warranty (other than as expressly
provided herein), and the Assignee hereby purchases and assumes from the
Assignor, that interest in and to all of the Assignor's rights and obligations
under the Credit Agreement as of the date hereof which represents the percentage
interest specified in Item 4 of Annex I hereto (the "Assigned Share") of all of
the outstanding rights and obligations under the Credit Agreement relating to
the facilities listed in Item 4 of Annex I hereto, including, without
limitation, (i) in the case of any assignment of all or any portion of the
Commitment (if not theretofore terminated), all rights and obligations with
respect to the Assigned Share of such Commitment and (ii) in the case of any
assignment of outstanding Loans, all rights and obligations with respect to the
Assigned Share of such outstanding Loans. After giving effect to such sale and
assignment, the Assignee's Commitment and the amount of the outstanding Loans
owing to the Assignee will be as set forth in Item 4 of Annex I hereto.
2. The Assignor (i) represents and warrants that it is the legal and
beneficial owner of the interest being assigned by it hereunder and that such
interest is free and clear of any adverse claim; (ii) makes no representation or
warranty and assumes no responsibility with respect to any statements,
warranties or representations made in or in connection with the Credit Agreement
or the other Credit Documents or the execution, legality, validity,
enforceability, genuineness, sufficiency or value of the Credit Agreement or the
other Credit Documents or any other instrument or document furnished pursuant
thereto; and (iii) makes no representation or warranty and assumes no
responsibility with respect to the financial condition of the Borrower or any of
the Borrower's Subsidiaries or the performance or observance by the Borrower or
the Borrower's Subsidiaries of any of their obligations under the Credit
Agreement or the other Credit Documents to which they are a party or any other
instrument or document furnished pursuant thereto.
3. The Assignee (i) confirms that it has received a copy of the
Credit Agreement and the other Credit Documents, together with copies of the
financial statements referred to therein and such other documents and
information as it has deemed appropriate to make its own credit analysis and
decision to enter into this Assignment and Assumption Agreement; (ii) agrees
that it will, independently and without reliance upon the Assignor or any other
Bank and based on
<PAGE>
Exhibit F
Page 2
such documents and information as it shall deem appropriate at the time,
continue to make its own credit decisions in taking or not taking action under
the Credit Agreement; (iii) confirms that it is an Eligible Transferee under
Section 12.04(b) of the Credit Agreement; (iv) agrees that it will perform in
accordance with their terms all of the obligations which by the terms of the
Credit Agreement are required to be performed by it as a Bank and; (v) has
delivered the opinion required by Section 12.04(b) of the Credit Agreement[; and
(v) to the extent legally entitled to do so, attaches the forms described in the
penultimate sentence of Section 12.04(b) of the Credit Agreement/1/.
4. Following the execution of this Assignment and Assumption
Agreement by the Assignor and the Assignee, an executed original hereof
(together with all attachments) will be delivered to the Agent. The effective
date of this Assignment and Assumption Agreement shall be the date of execution
hereof by the Assignor and the Assignee (the "Settlement Date").
5. Upon the delivery of a fully executed original hereof to the
Assignor and the Borrower, as of the Settlement Date, (i) the Assignee shall be
a party to the Credit Agreement and, to the extent provided in this Assignment
and Assumption Agreement, have the rights and obligations of a Bank thereunder
and under the other Credit Documents and (ii) the Assignor shall, to the extent
provided in this Assignment and Assumption Agreement, relinquish its rights and
be released from its obligations under the Credit Agreement and the other Credit
Documents.
6. It is agreed that the Assignee shall be entitled to (i) all
interest on the Assigned Share of the Loans at the rates specified in Item 6 of
Annex I and (ii) all Commitment Fees (if applicable) on the Assigned Share of
the Commitment at the rate specified in Item 7 of Annex I hereto; such interest
and, if applicable, Commitment Fees at the rate specified in Item 9 of Annex I
hereto, to be payable by the Borrower directly to the Assignee. It is further
agreed that all payments of principal made on the Assigned Share of the Loans
which occur on and after the Settlement Date will be payable directly by the
Borrower to the Assignee. Upon the Settlement Date, the Assignee shall pay to
the Assignor an amount specified by the Assignor in writing which represents the
Assigned Share of the principal amount of the respective Loans made by the
Assignor pursuant to the Credit Agreement which are outstanding on the
Settlement Date, net of any closing costs, and which are being assigned
hereunder. The Assignor and the Assignee shall make all appropriate adjustments
in payments under the Credit Agreement for periods prior to the Settlement Date
directly between themselves on the Settlement Date.
7. THIS ASSIGNMENT AND ASSUMPTION AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
- -----------------------
/1/ Include if the Assignee is organized under the laws of a jurisdiction
outside of the United States.
<PAGE>
Exhibit F
Page 3
IN WITNESS WHEREOF, the parties hereto have caused their duly
authorized officers to execute and deliver this Assignment and Assumption
Agreement, as of the date first above written, such execution also being made on
Annex I hereto.
Accepted this ____ day [NAME OF ASSIGNOR],
of ___________, 19__ as Assignor
By_____________________________
Title:
[NAME OF ASSIGNEE],
as Assignee
By_____________________________
Title:
[Consented to as of the
date hereof:
AMBAC ASSURANCE CORPORATION
By________________________________/2/
Title:
- --------------------
/2/ Include if Assignee is not an Affiliate of Deutsche Bank AG.
<PAGE>
ANNEX I
-------
ANNEX FOR ASSIGNMENT AND ASSUMPTION AGREEMENT
1. Borrower: AMBAC Assurance Corporation
2. Name and Date of Credit Agreement:
Amended and Restated Credit Agreement, dated as of December 2, 1998, among
AMBAC Assurance Corporation, various Banks and Deutsche Bank AG, New York
Branch, as Agent, as amended, modified and supplemented to the date hereof.
3. Date of Assignment Agreement:
4. Amounts (as of date of item #3 above):
Outstanding
Principal
Commitment of Loans
----------- -----------
a. Aggregate Amount $_________ $_________
for all Banks
b. Assigned Share/1/ __________% __________%
c. Amount of Assigned Share $_________] $_________
6. Rate of Interest to the Assignee:
As set forth in Section 2.06 of the Credit Agreement (unless otherwise
agreed to by the Assignor and the Assignee)/2/
7. Commitment Fees:
As set forth in Section 3.01(a) of the Credit Agreement (unless otherwise
agreed to by the Assignor and the Assignee)/3/
- --------------------------
/1/ Percentage taken to 12 decimal places.
/2/ AMBAC Assurance Corporation and the Agent shall direct the entire amount of
the interest to the Assignee at the rate set forth in Section 2.06 of the
Credit Agreement, with the Assignor and Assignee effecting the agreed upon
sharing of the interest through payments by the Assignee to the Assignor.
<PAGE>
Annex I
Page 2
8. Notice:
ASSIGNOR:
_____________________
_____________________
_____________________
_____________________
Attention:
Telephone:
Telecopier:
Reference:
ASSIGNEE:
_____________________
_____________________
_____________________
_____________________
Attention:
Telephone:
Telecopier:
Reference:
Payment Instructions:
ASSIGNOR:
_____________________
_____________________
_____________________
_____________________
Attention:
Reference:
- ----------------------
(...continued)
/3/ AMBAC Assurance Corporation and the Agent shall direct the entire amount of
the Commitment Fees to the Assignee at the rate set forth in Section
3.01(a) of the Credit Agreement, with the Assignor and the Assignee
effecting the agreed upon sharing of Commitment Fees through payment by the
Assignee to the Assignor.
<PAGE>
Annex I
Page 3
ASSIGNEE:
_____________________
_____________________
_____________________
_____________________
Attention:
Reference:
Accepted and Agreed:
[NAME OF ASSIGNEE] [NAME OF ASSIGNOR]
By______________________ By________________________
______________________ ________________________
(Print Name and Title) (Print Name and Title)
<PAGE>
EXHIBIT G
---------
Section 4.04(B) (III) Certificate
---------------------------------
Reference is hereby made to the Amended and Restated Credit Agreement,
dated as of December 2, 1998, among Ambac Assurance Corporation, various Banks,
and Deutsche Bank AG, New York Branch, as Agent (the "Credit Agreement").
Pursuant to the provisions of Section 4.04 (b) (iii) of the Credit Agreement,
the undersigned hereby certifies that it is not a "bank" as such term is used in
Section 881(c) (3) (A) of the Internal Revenue Code of 1986, as amended.
[NAME OF BANK]
By
-----------------------------
Name:
Title:
<PAGE>
EXHIBIT 10.22
AMBAC ASSURANCE CORPORATION, AMBAC INSURANCE UK LIMITED,
MBIA INSURANCE CORPORATION, AND MBIA ASSURANCE, S.A.
AGREEMENT REGARDING A GLOBAL JOINT VENTURE
This Agreement (the "Agreement") shall respecify the terms of the joint venture
(the "Venture") established by the Agreement Regarding the Formation of a
European Joint Venture dated as of September 11, 1995 and amended as of August
1, 1998 (the "September 11, 1995 Agreement"), shall supersede the September 11,
1995 Agreement, and shall become effective as of January 15, 1999.
The parties to the Venture shall be Ambac Assurance Corporation and AMBAC
Insurance UK Limited (collectively "Ambac") on the one hand and MBIA Insurance
Corporation and MBIA Assurance, S.A. (collectively "MBIA," and together with
Ambac, the "Parties") on the other. The Parties may handle through the Venture,
as further specified in Guidelines that the Parties may promulgate, types of
transactions (1) that generally require an assessment of a non-trivial and bona-
----
fide foreign risk exposure or in which the credit enhancement is sold to a
- ----
foreign purchaser, and (2) on which collaboration by the Parties conforms to all
applicable laws, rules, and regulations ("Global business").
The Parties intend to accomplish through the Venture the following purposes,
among others: (1) increase the quantity and quality of the output and
availability of financial guaranty insurance, other types of credit and guaranty
insurance, or other forms of credit enhancement, (2) reduce the cost, and
increase the availability, of capital financing, and (3) increase the demand for
credit enhancement and capital financing throughout the world. The Parties have
concluded that combining their resources through the Venture will achieve
efficiencies, expand their insurance offerings, and assist in overcoming
significant difficulties that each Party experienced in its separate activities
outside the United States.
The Venture permits the Parties to increase their capacities for covering risks
that would be difficult to cover individually because of their scale, rarity, or
novelty and provides a structure through which the Parties can harmonize their
incentives to integrate their resources and share their goodwill. The Venture
also allows the Parties to compete with banking, governmental funding, and
alternative forms of credit enhancement and structured financing. The Venture
thereby permits the Parties to offer consumers durable access to additional
forms and sources of financing.
The Parties expect that the Venture will enable them to develop expanded
geographic coverage outside the United States and to promote more effectively
established and innovative uses of various forms of credit enhancement in
foreign countries and territories. The improvements and progress that will be
accomplished through the Venture will allow the Parties to diversify and
increase their product offerings and will directly benefit issuers of financial
obligations, investors, others in the international financial community, and
consumers throughout the world.
The Parties anticipate acting mainly (though not exclusively) as primary insurer
and reinsurer, respectively, in jointly serving clients through the Venture. In
addition and without limitation, the
<PAGE>
CONFIDENTIAL
------------
Parties may act jointly through the Venture as and when stated above with
respect to, among others, the following activities and activities related
thereto:
(a) conduct research regarding new business opportunities for the
provision of financial guaranty insurance and other forms of credit enhancement;
(b) market all forms of credit enhancement by, among other things,
informing clients of the increased capacity, expanded expertise, extended
geographic coverage, and improved service that the Parties will offer as a
result of their collaboration under this Agreement and by promoting and
conducting seminars and conferences on credit enhancement and the Parties'
activities through the Venture;
(c) analyze credit risks, select business opportunities that will be
pursued as part of the Venture, and, in some cases, seek to obtain reinsurance
for those opportunities;
(d) compile proposals for the offering of financial guaranty insurance,
other types of credit and guaranty insurance, or other forms of credit
enhancement in which the Parties will act mainly as primary insurer and
reinsurer, respectively (though the Parties may also act as co-insurers or co-
reinsurers);
(e) present and execute such offerings and obtain reinsurance for such
offerings; and
(f) settle claims or risks insured by the Parties through the Venture.
While the Parties are reviewing or pursuing a business opportunity jointly
through the Venture, neither Party shall pursue that opportunity independently
or unilaterally in competition with the Venture, provided, however, that each
Party retains the discretion to terminate unilaterally its consideration of a
business opportunity through the Venture and to pursue that opportunity
independently.
Each Party's participation in any particular Venture activity shall be
determined independently by that Party. In addition, with respect to any
particular Venture activity, each Party shall act only in such capacity (that
is, as primary insurer, reinsurer, or in any other capacity) as is permitted by
applicable law. If any Party requires any authorization to undertake the
business contemplated by this Agreement, that Party shall obtain such
authorization and refrain from conducting such business in the absence of such
authorization. Each Party shall be responsible for its own compliance with the
applicable laws, rules, and regulations related to its participation in this
Agreement.
Each Party shall retain the discretion to act independently and unilaterally if
it so chooses or if a prospective client wishes to deal with either Party on
such a basis, even if the Parties have begun to review or pursue the opportunity
jointly through the Venture. Accordingly, neither Party shall be required to
bring all risks relating to Global business to the Venture. When either Party
acts independently and unilaterally with respect to any Global business matter,
the acting Party shall do so without coordination or cooperation with the other
Party after the acting Party decides to proceed independently and unilaterally.
Each Party shall advise each client in connection with any Global business
matter whether it is acting jointly or separately with respect to that matter.
The Parties shall not engage in joint conduct through the Venture in connection
with types of transactions that do not constitute Global business ("Non-Venture
business"). The Venture formed by
-2-
<PAGE>
CONFIDENTIAL
------------
this Agreement shall have no effect on Ambac's or MBIA's respective Non-Venture
business, and each Party shall continue to act independently and unilaterally
with respect to its Non-Venture business. In addition, each Party shall not
disclose competitively sensitive information regarding its Non-Venture business
or regarding other domestic activities to the other Party.
The Parties shall use "MBIA-Ambac International" as the logo for the Venture.
Each Party shall permit the other Party to use, on a non-exclusive basis and in
conjunction only with Venture business, the trademarks and tradenames listed in
Appendix A to this Agreement in accordance with the terms of Appendix A.
Each Party represents to the other Party that it is authorized to enter into
this Agreement and to exercise all rights and meet all obligations set forth in
this Agreement. This Agreement shall continue in force for five years from the
effective date of this Agreement; provided, however, that this Agreement may be
terminated 30 days following the transmission (by facsimile and registered mail)
of written notification by one Party to the other Party that the notifying Party
wishes to withdraw from the Agreement.
This Agreement constitutes the entire agreement between the Parties regarding
the Venture and can be amended only in writing. This Agreement may be executed
in counterparts that, when taken together, shall constitute a fully executed
original of this Agreement.
IN WITNESS WHEREOF, the Parties have executed this Agreement on the dates set
forth below.
Ambac Assurance Corporation MBIA Insurance Corporation
By: /s/ Phillip B. Lassiter By: /s/ Joseph W. Brown, Jr.
------------------------------- -------------------------
Name: Phillip B. Lassiter Name: Joseph W. Brown, Jr.
------------------------------- -------------------------
Title: Chairman, President, Title: Chief Executive Officer
and Chief Executive Officer -------------------------
-------------------------------
Date: Date:
------------------------------- -------------------------
AMBAC Insurance UK Limited MBIA Assurance, S.A.
By: /s/ John W. Uhlein III By: /s/ Michael J. Maguire
------------------------------- -------------------------
Name: John W. Uhlein III Name: Michael J. Maguire
------------------------------- -------------------------
Title: Managing Director Title: President
------------------------------- -------------------------
Date: Date:
------------------------------- -------------------------
-3-
<PAGE>
APPENDIX A
----------
Each Party shall permit the other Party, on a non-exclusive basis and only
during the term of this Agreement, to use its trademarks and tradenames that are
listed on the following pages in conjunction with the other Party's trademarks
and tradenames that are listed on the following pages solely in connection with
business conducted through the Venture under this Agreement.
Each Party shall retain the right, to be exercised reasonably, to prohibit the
use of its trademark or tradename in connection with any specific instance of
Venture business if the use of such trademark or tradename would violate the
standards that such Party has set for the use of its trademark or tradename in
the ordinary course of its business.
Each Party represents to the other Party that it owns free of any adverse claim
the trademarks and tradenames attributed to it on the following pages.
<PAGE>
(EXHIBIT 12.01)
Ambac Financial Group, Inc.
Ratio of Earnings to Fixed Charges
The following table contains our ratio of earnings to fixed charges for each of
the periods indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges 10.50x 13.41x 17.91x 10.77x 10.14x
- --------------------------
</TABLE>
We computed the ratio of earnings to fixed charges by dividing earnings
before income taxes and extraordinary items plus fixed charges by the fixed
charges. For the purpose of this ratio, fixed charges consist of interest
expense incurred, capitalized interest, amortization of debt expense and
one-third of rental payments under operating leases (an amount deemed
representative of the appropriate interest factor).
<PAGE>
EXHIBIT 13
FINANCIAL
HIGHLIGHTS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Ambac Financial Group, Inc. and Subsidiaries Years Ended December 31,
- -------------------------------------------------------------------------------------------------------------
(Dollars in millions, except per share amounts) 1998 1997 1996* 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS HIGHLIGHTS
Gross premiums written $ 361.0 $ 286.2 $ 247.2 $ 193.3 $ 189.9
Net premiums earned 212.7 154.0 136.6 111.8 117.5
Net investment income 186.2 159.7 144.9 131.0 117.1
Financial management services revenue 49.5 35.2 22.0 13.1 15.9
Total revenues 457.0 381.8 452.9 282.3 242.3
Losses and loss adjustment expenses 6.0 2.9 3.8 3.4 2.6
Financial guarantee insurance underwriting and
operating expenses 46.7 40.7 37.2 34.5 32.8
Financial management services expenses 35.5 28.0 12.0 7.8 6.1
Interest expense 32.8 21.3 20.9 20.9 18.8
Net income 254.0 223.0 276.3 167.6 141.1
Net income per share 3.63 3.19 3.95 2.39 2.00
Net income per diluted share 3.56 3.13 3.91 2.37 1.99
Return on equity 12.8% 12.8% 18.3% 13.8% 13.2%
=============================================================================================================
Ambac Financial Group, Inc. and Subsidiaries As of December 31,
- -------------------------------------------------------------------------------------------------------------
(Dollars in millions) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
BALANCE SHEET HIGHLIGHTS
Total investments, at fair value $ 8,748.4 $ 6,915.1 $ 5,200.5 $ 4,441.6 $ 3,764.2
Prepaid reinsurance 199.9 183.5 168.8 153.4 139.9
Total assets 11,212.3 8,291.7 5,876.4 5,309.3 4,287.0
Unearned premiums 1,294.2 1,179.0 991.2 903.0 836.6
Losses and loss adjustment expenses 115.8 103.3 60.6 66.0 65.7
Obligations under investment agreements, investment
repurchase agreements and payment agreements 5,956.8 4,321.0 2,754.6 2,426.9 2,025.3
Debentures 423.9 223.9 223.8 223.7 223.7
Total stockholders' equity 2,096.1 1,872.5 1,615.0 1,404.0 1,033.5
- -------------------------------------------------------------------------------------------------------------
</TABLE>
* 1996 includes a one-time gain from the sale of a subsidiary equal to $155.6
million pre-tax and $100.6 million after-tax.
4
<PAGE>
FIVE YEAR
HIGHLIGHTS
[THE FOLLOWING DATA WAS REPRESENTED BY A BAR GRAPH]
<TABLE>
<CAPTION>
ADJUSTED GROSS
TOTAL REVENUES NET INCOME CORE EARNINGS PREMIUMS WRITTEN/2/
($ MILLIONS) PER DILUTED SHARE PER DILUTED SHARE/1/ ($ MILLIONS)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
94 $242.3 $1.99 $1.85 $197.1
95 $282.3 $2.37 $2.05 $216.6
96 $452.9* $3.91* $2.41 $286.8
97 $381.8 $3.13 $2.75 $329.3
98 $457.0 $3.56 $3.32 $458.0
- --------------------------------------------------------------------------------------------------
</TABLE>
1 Core earnings is not a substitute for net income computed in accordance with
Generally Accepted Accounting Principles (GAAP). It excludes the effect on
net income from net realized gains and losses, net insurance premiums earned
from refundings and calls and certain non-recurring items. The definition of
core earnings used by Ambac Financial Group, Inc. may differ from definitions
of core earnings used by other public holding companies of financial
guarantee insurers.
2 Adjusted gross premiums written is not promulgated under GAAP. It includes
gross up-front premiums written plus the present value of estimated future
installment premiums written in the period. The definition of adjusted gross
premiums written used by Ambac Financial Group, Inc. may differ from
definitions of adjusted gross premiums written used by other public holding
companies of financial guarantee insurers.
* 1996 includes a one-time gain from the sale of a subsidiary equal to $155.6
million pre-tax and $100.6 million after-tax.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
Ambac Financial Group, Inc. ("AFGI"), headquartered in New York City, is a
holding company whose subsidiaries provide financial guarantee insurance and
financial management services to clients in both the public and private sectors
in the United States and abroad.
The following paragraphs describe the consolidated results of operations of AFGI
and its subsidiaries (collectively referred to as the "Company") for 1998, 1997
and 1996, and its financial condition as of December 31, 1998 and 1997. These
results are presented for the Company's two reportable segments: Financial
Guarantee Insurance and Financial Management Services. This discussion should be
read in conjunction with the consolidated financial statements included
elsewhere in this report.
In this Annual Report, we may make statements about our future results that are
considered "forward-looking statements" under the Private Securities Litigation
Reform Act of 1995. These statements are based on our current expectations and
the current economic environment. We caution you that these statements are not
guarantees of future performance. They involve a number of risks and
uncertainties that are difficult to predict. Our actual results could differ
materially from those expressed or implied in the forward-looking statements.
Among the factors that could cause actual results to differ materially are: (1)
changes in the economic, credit, or interest rate environment in the United
States and abroad; (2) the level of activity within the national and worldwide
debt markets; (3) competitive conditions and pricing levels; (4) legislative and
regulatory developments; (5) changes in tax laws; and (6) other risks and
uncertainties that have not been identified at this time. We undertake no
obligation to publicly correct or update any forward-looking statement if we
later become aware that it is not likely to be achieved.
RESULTS OF OPERATIONS
CONSOLIDATED NET INCOME. The Company's net income in 1998 was $254.0 million or
$3.56 per diluted share, an increase of 14% from $223.0 million or $3.13 per
diluted share in 1997. This increase was primarily attributable to the growth in
both Financial Guarantee Insurance and Financial Management Services revenues,
partially offset by lower net realized gains and higher net realized losses in
the Financial Guarantee Insurance segment and the Financial Management Services
segment, respectively, in 1998. The Company's net income in 1997 decreased 19%
from $276.3 million or $3.91 per diluted share in 1996. This decrease was
primarily the result of a net realized gain in 1996 of $155.6 million (which had
a net income per diluted share effect of $1.42) from the Company's sale of its
former subsidiary, HCIA Inc. ("HCIA"). Excluding the effect of this one-time
gain, 1997 net income increased 27% over 1996 primarily due to higher net income
in the Financial Guarantee Insurance segment, partially offset by lower net
income in the Financial Management Services segment.
FINANCIAL GUARANTEE INSURANCE
The Company provides financial guarantee insurance through its principal
operating subsidiary, Ambac Assurance Corporation ("Ambac Assurance"), which is
a leading insurer of municipal and structured finance obligations both in the
United States and abroad.
In December 1997, Ambac Assurance acquired Connie Lee Holdings, Inc. and its
triple-A rated financial guarantee insurance subsidiary, Connie Lee Insurance
Company ("Connie Lee"). No new business was written by Connie Lee in 1998.
GROSS PAR VALUE WRITTEN. Ambac Assurance insured $61.5 billion of par value
bonds during 1998, an increase of 35% from $45.5 billion in 1997. Par value
[PHOTO]
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
written in 1997 represented an increase of 27% from $35.7 billion in 1996. Par
value written in 1998 comprised $33.9 billion from the insurance of domestic
municipal bond obligations, $22.6 billion from domestic structured finance
obligations and $5.0 billion from international obligations, versus $29.4
billion, $12.9 billion and $3.2 billion, respectively, in 1997 and $26.8
billion, $6.4 billion and $2.5 billion, respectively, in 1996. The 1998 increase
in insured domestic municipal bond obligations resulted primarily from a 30%
increase in market issuance and an increase in insured penetration, partially
offset by lower market share. The 1998 increase in insured domestic structured
finance obligations was attributable to increased market issuance, higher market
penetration and a higher market share in the home equity loan and mortgage-
backed sectors, as well as increased market presence in the commercial asset-
backed sector. The 1998 increase in insured international obligations resulted
from greater acceptance of financial guarantee insurance, primarily in Europe,
Japan and Latin America.
Management believes, based on growth experienced in the last few years, that in
the foreseeable future, domestic structured finance and international markets
will grow more rapidly than the domestic municipal market. Domestic structured
finance and international insured par may see large quarterly variances,
primarily due to the developmental nature of these markets.
Ambac Assurance serves clients in international markets through its wholly-owned
subsidiary Ambac Insurance UK Limited and through an arrangement with MBIA
Insurance Company ("MBIA") to participate in MBIA.AMBAC International, an
unincorporated joint venture with MBIA (the "JV Arrangement"). See Note 5 of
Notes to Consolidated Financial Statements for further discussion about the JV
Arrangement.
GROSS PREMIUMS WRITTEN. Gross premiums written in 1998 were $361.0 million, an
increase of 26% from $286.2 million in 1997. This increase was primarily driven
by a 28% increase in new issue municipal finance premiums and a 46% increase in
international premiums. Gross premiums written in 1997 increased 16% from
$247.2 million in 1996. This increase was primarily due to higher new issue
municipal finance premiums written. The following table sets forth the amounts
of gross premiums written and related gross par written by type:
<TABLE>
<CAPTION>
===========================================================================================================================
(Dollars in millions) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Gross Gross Gross Gross Gross Gross
Premiums Par Premiums Par Premiums Par
Written Written Written Written Written Written
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Domestic:
Municipal finance:
Up-front:
New issue $228.2 $29,616 $178.9 $25,889 $182.9 $23,735
Secondary market 14.6 1,400 19.6 1,530 20.4 1,362
- ---------------------------------------------------------------------------------------------------------------------------
Sub-total up-front 242.8 31,016 198.5 27,419 203.3 25,097
Installment 17.7 2,899 13.5 2,024 13.0 1,641
- ---------------------------------------------------------------------------------------------------------------------------
Total municipal finance 260.5 33,915 212.0 29,443 216.3 26,738
- ---------------------------------------------------------------------------------------------------------------------------
Structured finance:
Up-front 1.4 1,985 11.1 922 1.2 156
Installment 35.7 20,581 19.6 11,952 8.8 6,255
- ---------------------------------------------------------------------------------------------------------------------------
Total structured finance 37.1 22,566 30.7 12,874 10.0 6,411
- ---------------------------------------------------------------------------------------------------------------------------
Total domestic 297.6 56,481 242.7 42,317 226.3 33,149
- ---------------------------------------------------------------------------------------------------------------------------
International:
Up-front 52.8 2,463 37.6 1,566 18.0 690
Installment 10.6 2,553 5.9 1,575 2.9 1,839
- ---------------------------------------------------------------------------------------------------------------------------
Total international 63.4 5,016 43.5 3,141 20.9 2,529
- ---------------------------------------------------------------------------------------------------------------------------
Total $361.0 $61,497 $286.2 $45,458 $247.2 $35,678
===========================================================================================================================
Total up-front $297.0 $35,464 $247.2 $29,907 $222.5 $25,943
Total installment 64.0 26,033 39.0 15,551 24.7 9,735
- ---------------------------------------------------------------------------------------------------------------------------
Total $361.0 $61,497 $286.2 $45,458 $247.2 $35,678
===========================================================================================================================
</TABLE>
ADJUSTED GROSS PREMIUMS. (1) While the majority of Ambac Assurance's premiums
written are collected up front at policy issuance, a growing portion of premiums
are collected on an installment basis. Adjusted gross premiums written, which
are defined as up-front premiums written plus the present value of estimated
future installment premiums written in the period, were $458.0 million in 1998,
up 39% from $329.3 million in 1997. The increase in 1998 was primarily due to
increased up-front premiums written in all markets, combined with the increase
in the present value of international installment policies. Adjusted gross
premiums written in 1997 increased 15% from $286.8 million in 1996. The present
value of estimated future installment premiums written in 1998 was $173.4
million, an increase of 94% from $89.3 million in 1997. The present value of
estimated future installment premiums written in 1997 increased 27% from $70.3
million in 1996. The aggregate net present value of estimated future installment
premiums was $308.4 million, $210.8 million, and $157.7 million as of December
31, 1998, 1997 and 1996, respectively.
24
<PAGE>
CEDED PREMIUMS WRITTEN. Ceded premiums written in 1998 were $49.6 million, up
53% from $32.5 million in 1997. The increase in ceded premiums written is
primarily due to the cession of $11.6 million of premiums related to Connie
Lee's insured portfolio. In 1997, Ambac Assurance began using only facultative
reinsurance to reduce its risk and manage its insurance portfolio. Ceded
premiums written in 1996 were $37.8 million. The 14% decrease from 1996 to 1997
is primarily due to the non-renewal of automatic treaty reinsurance, partially
offset by higher ceded premiums for international business pursuant to the JV
Arrangement. Ceded premiums written were 14%, 11%, and 15% of gross premiums
written in 1998, 1997 and 1996, respectively.
NET PREMIUMS EARNED. Net premiums earned during 1998 were $212.7 million, an
increase of 38% from $154.0 million in 1997. This increase was primarily the
result of higher premiums earned from the growth of the book of business and
increased premiums earned from refundings, calls and other accelerations
(collectively referred to as "refundings") during the year.
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 in 1998 included $46.9
million (net income per diluted share effect of $0.37) from refundings. Net
premiums earned in 1997 included $28.0 million (net income per diluted share
effect of $0.22) from refundings. Excluding the effect of accelerated earnings
related to refundings, net premiums earned in 1998 were $165.8 million, an
increase of 32% from $126.0 million in 1997.
Net premiums earned during 1997 increased 13% from $136.6 million in
1996. This increase was primarily the result of higher premiums earned from the
growth of the book of business during the year, partially offset by a decline in
premiums earned from refundings in 1997. Net premiums earned in 1996 included
$31.3 million (net income per diluted share effect of $0.25) from refundings.
Excluding the effect of accelerated earnings related to refundings, net premiums
earned in 1997 increased 20% from $105.3 million in 1996.
NET INVESTMENT INCOME. Net investment income in 1998 was $186.2 million, an
increase of 17% from $159.7 million in 1997. This increase was primarily
attributable to the growth of the investment portfolio from ongoing operations
and the net increase in the investment portfolio from the acquisition of Connie
Lee, partially offset by lower yields. Investments in tax-exempt securities
amounted to 74% of the total market value of the portfolio as of December 31,
1998, versus 75% and 79% as of December 31, 1997 and 1996, respectively. The
average pre-tax yield-to-maturity on the investment portfolio was 6.17% as of
December 31, 1998 compared with 6.40% and 6.47% for December 31, 1997 and 1996,
respectively. Net investment income in 1997 increased 10% from $144.9 million in
1996. This increase was primarily attributable to the growth of the investment
portfolio, partially offset by lower yields.
NET REALIZED GAINS (LOSSES). Net realized gains in 1998 were $3.7 million,
compared to $21.1 million in net realized gains in 1997. The 1998 and 1997 net
realized gains were generated as a result of the ongoing management of the
investment portfolio. Net realized losses of $20.5 million in 1996 were realized
for tax planning purposes to partially offset the realized gain from the sale of
HCIA.
LOSSES AND LOSS ADJUSTMENT EXPENSES. Losses and loss adjustment expenses in 1998
were $6.0 million, versus $2.9 million in 1997 and $3.8 million in 1996. Losses
and loss adjustment expenses are based upon estimates of the ultimate aggregate
losses inherent in the insured portfolio. The liability for losses and loss
adjustment expenses consists of the active credit reserve ("ACR"), which
represents an estimate of unidentified losses, and case basis loss reserves for
obligations in monetary default, or, in the judgement of management, for which
default is imminent. The Company regularly reviews its outstanding obligations
to determine an appropriate reserve for losses and loss adjustment expenses. The
following table summarizes the Company's loss reserves split between case basis
loss reserves and ACR at December 31, 1998 and 1997:
===========================================================================
(Dollars in millions) 1998 1997
- ---------------------------------------------------------------------------
Net loss and loss adjustment expense reserves:
Case basis* $ 33.9 $50.9
ACR 78.2 48.2
- ---------------------------------------------------------------------------
Total $112.1 $99.1
===========================================================================
* After netting reinsurance recoverable amounting to $3.6 million and $4.2
million in 1998 and 1997, respectively.
Paid losses, net of salvage received, were ($7.0) million, $2.5 million
and $9.6 million in 1998, 1997 and 1996, respectively.
UNDERWRITING AND OPERATING EXPENSES. Underwriting and operating expenses were
$46.7 million in 1998, an increase of 15% from $40.7 million in 1997.
Underwriting and operating expenses in 1997 increased 9% from $37.2 million in
1996. 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 1998, gross underwriting and operating expenses were $67.8
million, an increase of 15% from $59.2 million in 1997. During 1997, gross
underwriting and operating expenses increased 5% from $56.4 million in 1996. The
increase in gross underwriting and operating expenses in both 1998 and 1997
reflects the overall increased business activity in those years. Underwriting
and operating expenses deferred were $38.2 million,
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
$32.8 million, and $32.3 million in 1998, 1997 and 1996, respectively. The
amortization of previously deferred expenses and reinsurance commissions was
$18.2 million, $14.2 million, and $12.5 million in 1998, 1997 and 1996,
respectively.
FINANCIAL MANAGEMENT SERVICES
Through its financial management services subsidiaries, the Company provides
investment agreements, interest rate swaps, investment advisory and cash
management services, principally to states, municipalities and their
authorities, school districts, and hospitals and health organizations. In the
fourth quarter of 1998, the Company discontinued development of electronic
commerce applications for the municipal marketplace. This effort had been
underway as a pilot operation through a subsidiary, Ambac Connect, Inc. ("Ambac
Connect"). The decision resulted in an after-tax charge of $9.5 million, or
$0.13 in net income per diluted share. This charge did not affect operating or
core earnings.(2)
Revenues in 1998 were $49.5 million (excludes $17.1 million in net
realized losses), versus $35.2 million (excludes $0.6 million in net realized
losses) in 1997. This increase is primarily due to higher revenues on interest
rate swaps and investment agreements primarily due to increased volume. In 1998,
realized gains on fixed-income securities in the investment agreement business
of $10.1 million were offset by a realized loss of $11.5 million, representing
the write-off of the Company's entire investment in Ambac Connect (this
write-off is included in the $9.5 million after-tax charge discussed above), and
a $15.7 million loss in a trading position. This trading position, which
represented a small portion of the Company's assets, contained high quality
municipal bonds hedged with treasury futures. The loss was due to a change in
the relationship between municipal and treasury interest rates. This trading
position was closed during the fourth quarter of 1998. Revenues in 1997
reflected a 60% increase from $22.0 million (excludes $0.4 million in net
realized gains) in 1996. The increase was primarily due to revenues of Cadre
Financial Services, Inc. ("Cadre"), acquired at the end of 1996, which provides
investment advisory and cash management services primarily to school districts,
and higher revenues from investment agreements, due to higher volume.
Expenses in 1998 were $32.5 million (excluding a $3.0 million
restructuring charge for Ambac Connect), versus $24.5 million (excluding a $3.5
million restructuring charge for consolidating certain operations in New York)
in 1997. This increase results from higher compensation expenses in the
investment agreement and swap businesses, as well as increased expenditures to
develop the money management and electronic commerce businesses. Expenses in
1997 increased 104% (excluding the $3.5 million 1997 restructuring charge for
consolidating certain operations in New York) from $12.0 million in 1996. This
increase reflects expenses for Cadre and start-up expenses for Ambac Connect.
CORPORATE ITEMS
INTEREST EXPENSE. Interest expense in 1998 was $32.8 million, an increase of 54%
from $21.3 million in 1997. The increase is attributable to AFGI's issuance of
$200 million in debentures in April 1998. Interest expense in 1996 was $20.9
million.
OTHER INCOME. Other income includes investment income of AFGI. Other income
increased to $13.7 million in 1998 from $7.2 million in 1997, primarily due to
higher investment income generated from investing the proceeds of AFGI's $200
million in debentures. Other income decreased in 1997 from $7.9 million in 1996.
OTHER NET REALIZED GAINS. The other net realized gain in 1996 resulted primarily
from the sale of the Company's remaining holdings in HCIA in a secondary public
offering yielding net proceeds of $202.6 million. The sale resulted in a net
realized gain of $155.6 million pre-tax, $100.6 million after-tax (net income
per diluted share effect of $1.42).
OTHER EXPENSES. Other expenses include the operating expenses of AFGI. Other
expenses were $7.1 million in 1998, $2.9 million in 1997, and $3.5 million in
1996. Other expenses were higher in 1998 compared to 1997 primarily due to
increased compensation costs.
INCOME TAXES. Income taxes for 1998 were at an effective rate of 22.8%, compared
to 22.0% and 26.4% for 1997 and 1996, respectively. The 1996 effective tax rate
was higher compared to 1998 and 1997 due to the realized gain of the sale of
HCIA as discussed above.
SUPPLEMENTAL ANALYTICAL FINANCIAL DATA
CORE EARNINGS. (2) In 1998 core earnings were $236.5 million, an increase of 21%
from $195.8 million in 1997. This increase was primarily the result of continued
higher premiums earned from the growth in the insurance book of business and
higher net investment income from insurance operations, as well as higher
revenues from the investment agreement and swap businesses in the Financial
Management Services segment. In 1997 core earnings increased 15% from $170.5
million in 1996. The increase was primarily the result of continued higher
premiums earned from the growth in the insurance book of business and higher net
investment income from insurance operations. Core earnings, which the Company
reports as analytical data, exclude the effect on consolidated net income from
net realized gains and losses, net insurance premiums earned from refundings and
certain non-recurring items.
OPERATING EARNINGS. (2) Operating earnings in 1998 were $263.3 million, an
increase of 24% from $211.8 million in 1997. Operating earnings in 1997
increased 12% from $188.3 million in 1996. The Company defines operating
earnings as net income, less the effect of net realized gains and losses and
certain non-recurring items.
Following is a table reconciling net income computed in accordance with
U.S. Generally Accepted Accounting
26
<PAGE>
Principles ("GAAP") to operating earnings and core earnings for the years ended
December 31, 1998, 1997 and 1996:
===========================================================================
(Dollars in Millions) 1998 1997 1996
- ---------------------------------------------------------------------------
Net income $254.0 $223.0 $276.3
Net realized losses (gains), after tax 7.1 (13.3) (88.0)
Non-recurring item, after tax 2.2 2.1 -
- ---------------------------------------------------------------------------
Operating earnings 263.3 211.8 188.3
Premiums earned from refundings,
after tax (26.8) (16.0) (17.8)
- ---------------------------------------------------------------------------
Core earnings $236.5 $195.8 $170.5
===========================================================================
LIQUIDITY AND CAPITAL RESOURCES
AFGI LIQUIDITY. AFGI'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 AFGI; 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 1998, Ambac Assurance paid dividends of $48.0 million on its
common stock to AFGI. For further discussion, see Note 8 of Notes to
Consolidated Financial Statements.
AFGI's principal uses of liquidity are for the payment of its operating
expenses, interest on its debt, dividends on its shares of common stock, and
capital investments in its subsidiaries. Based on the amount of dividends that
Ambac Assurance expects to pay during 1999 and the income it expects to receive
from its investment portfolio, management believes AFGI 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 AFGI 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 AFGI 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 AFGI's operating
expenses, debt service obligations and dividends on its common stock.
On April 1, 1998, AFGI issued $200.0 million in principal amount of its
7.08% debentures due on March 31, 2098. AFGI may not redeem the debentures prior
to March 31, 2003. On or after March 31, 2003, AFGI may redeem the debentures,
in whole at any time or in part from time to time, at 100% of their principal
amount, plus accrued interest to the date of redemption. Use of the net proceeds
received from the sale of the debentures will be for general corporate purposes,
which include additions to working capital of subsidiaries, acquisitions, and
repurchases of 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 AFGI. Management 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 majority of
premiums for Ambac Assurance's financial guarantee insurance policies are
payable in full at the outset of the term of the policy, even though premiums
are earned over the life of such policies for financial accounting purposes.
FINANCIAL 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. Management
believes that its Financial Management Services liquidity needs can be funded
primarily from its operating cash flow and the maturity of its invested assets.
The principal sources of this segment's liquidity are proceeds from issuance of
investment agreements, net investment income, maturities of securities from its
investment portfolio which are invested with the objective of matching the
duration of its obligations under the investment agreements, net receipts from
interest rate swaps and related hedges, and fees for investment management
services. Additionally, from time to time, liquidity needs are satisfied by
short-term inter-company loans from AFGI. 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 are maintained in short-term investments and repurchase agreements in
order to meet unexpected liquidity needs.
CREDIT FACILITIES. AFGI and Ambac Assurance have a revolving credit facility
with three major international banks for $150 million, which expires in August
1999 and provides a two-year term loan provision. The facility is available for
general corporate purposes, including the payment of claims. As of December 31,
1998 and 1997, no amounts were outstanding under this credit facility.
Ambac Assurance maintains third party capital support in the form of a
seven-year irrevocable limited recourse credit facility from a group of
highly-rated international banks. This credit facility provides liquidity to
Ambac Assurance in the event claims from municipal obligations in its covered
portfolio exceed specified levels. Repayment of amounts drawn under the credit
facility are limited primarily to the amount of any recoveries of losses related
to policy obligations. During 1998, total third party capital support was
increased from $500 million to $555 million and its expiration reset to
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
December 2, 2005. As of December 31, 1998 and 1997, no amounts were outstanding
under this facility.
STOCK REPURCHASE PROGRAM. The Board of Directors of AFGI has authorized the
establishment of a stock repurchase program that permits the purchase of up to
6,000,000 shares of AFGI's common stock. During 1998, AFGI acquired
approximately 976,000 treasury shares for an aggregate amount of $52.7 million.
Since inception of the Stock Repurchase Program, AFGI has acquired approximately
4,248,000 shares for an aggregate amount of $142.7 million.
ADJUSTED BOOK VALUE.(3) Adjusted Book Value ("ABV") per share increased 15% to
$41.98 at December 31, 1998 from $36.59 at December 31, 1997.
The following table reconciles book value per share to ABV per share as
of December 31, 1998 and 1997:
=============================================================================
1998 1997
- -----------------------------------------------------------------------------
Book value per share $29.97 $26.77
After-tax value of:
Net unearned premium reserve 10.17 9.25
Deferred acquisition costs (1.12) (0.99)
Present value of installment premiums 2.86 1.96
Unrealized gain (loss) on investment agreements 0.10 (0.40)
- -----------------------------------------------------------------------------
Adjusted book value per share $41.98 $36.59
=============================================================================
BALANCE SHEET. Total assets as of December 31, 1998 were $11.21 billion, an
increase of 35% over $8.29 billion at December 31, 1997. The increase was
primarily due to the increased volume in investment agreements and positive net
cash flow from the Financial Guarantee Insurance segment. Stockholders' equity
as of December 31, 1998 was $2.10 billion, an increase of 12% from $1.87 billion
at year-end 1997. This increase was primarily due to net income for the year and
higher net unrealized gains in the investment portfolio, partially offset by
dividends to shareholders and stock option exercises.
CASH FLOWS. Net cash provided by operating activities was $337.7 million, $324.5
million and $190.6 million during 1998, 1997 and 1996, respectively. These cash
flows were primarily provided by the Financial Guarantee Insurance operations.
Net cash provided by financing activities was $1,723.0 million, $1,564.3 million
and $463.2 million during 1998, 1997 and 1996, respectively. This activity
included $1,391.9 million, $1,096.5 million and $499.2 million in investment
agreements issued (net of draws paid) in 1998, 1997 and 1996, respectively. The
total cash provided by operating and financing activities was $2,060.7 million,
$1,888.8 million and $653.8 million during 1998, 1997 and 1996, respectively.
From these totals, $2,061.7 million, $1,887.3 million and $658.2 million was
used in investing activities, principally net purchases of investment
securities, during 1998, 1997 and 1996, respectively.
MATERIAL COMMITMENTS. The Company has made no commitments for material capital
expenditures within the next twelve months.
RISK MANAGEMENT
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, which 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, which 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 following table summarizes the estimated change in fair value (based
primarily on the valuation models discussed above) on the net balance of
financial instruments held for purposes other than trading assuming immediate
changes in interest rates at specified levels at December 31, 1998 and 1997:
(Dollars in Millions)
===============================================================================
Estimated fair value of net
Change in financial instruments held Estimated change
interest rates for purposes other than trading in fair value
- -------------------------------------------------------------------------------
1998:
300 basis point rise $2,172 $(757)
200 basis point rise 2,401 (529)
100 basis point rise 2,655 (275)
Base Scenario 2,930 -
100 basis point decline 3,215 285
200 basis point decline 3,500 570
300 basis point decline 3,802 872
1997:
300 basis point rise $2,071 $(560)
200 basis point rise 2,264 (367)
100 basis point rise 2,489 (142)
Base Scenario 2,631 -
100 basis point decline 2,801 170
200 basis point decline 2,965 334
300 basis point decline 3,136 505
===============================================================================
28
<PAGE>
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 floating tax-exempt interest rates change in relation to
floating taxable interest rates, the Company will experience an unrealized mark-
to-market gain or loss. The AFSLP swap portfolio is considered held for trading
purposes. Since late 1995, most municipal interest rate swaps transacted by
AFSLP contain provisions which are designed to protect the Company against
certain forms of tax reform, thus mitigating its basis risk. An independent
market risk management group monitors trading risk limits and, together with
senior management, is involved in the application of risk measurement
methodologies.
The estimation of potential losses arising from adverse changes in
market relationships, known as "value-at-risk," is a key element in managing
market risk for financial instruments held for trading purposes. The Company has
developed a value-at-risk methodology to estimate potential losses over a
specified holding period and based on certain probabilistic assessments. The
Company's methodology estimates value-at-risk using a 300 day historical "look
back" period. This means that changes in market values are simulated using
market inputs from the past 300-days. For the years ended December 31, 1998 and
1997, the Company's value-at-risk, for financial instruments considered held for
trading purposes, calculated at a ninety-nine percent confidence level, averaged
approximately $1.0 million and $0.6 million, respectively. The Company's
value-at-risk ranged from a high of $1.1 million to a low of $0.7 million in
1998, and from a high of $1.1 million to a low of $0.3 million in 1997. Since no
single measure can capture all dimensions of market risk, the Company
supplements its value-at-risk methodology by performing daily analyses of
parallel and non-parallel shifts in yield curves and stress test scenarios which
measure the potential impact of normal market conditions, which might cause
abnormal volatility swings or disruptions of market relationships.
Credit risk arises from the potential inability of issuers of bond
obligations in Ambac Assurance's insured portfolio and other counterparties to
perform on an obligation in accordance with the terms of the contract. The
Company is exposed to credit risk in various capacities including as an issuer
of a financial guarantee policy, as counterparty to financial contracts and as a
holder of investment securities. The Company has established various procedures
and controls to monitor and manage credit risk. These include the initial
credit review and approval process, minimum credit rating requirements, single
credit concentration limits and the continuous monitoring of credit exposures.
Liquidity risk relates to the possible inability to satisfy contractual
obligations when due. This risk is present in financial guarantee insurance,
investment agreements, interest rate swaps and futures contracts. Ambac
Assurance manages its liquidity risk by maintaining a comprehensive daily
analysis of projected cash flows. Additionally, Ambac Assurance maintains a
minimum level of cash and short-term investments at all times. See additional
discussion in "Liquidity and Capital Resources" section. The investment
agreement business manages liquidity risk by matching the effective duration of
its invested assets, including hedges, with the effective duration of its
investment agreement liabilities. Additionally, the Company's policy is to
maintain a minimum level of cash and short-term investments equivalent to a
specified percentage of its investment agreement liabilities outstanding. AFSLP
maintains cash and cash equivalents, closely matching the dates swap payments
are made and received, and limiting the amount of risk hedged with futures
contracts.
Operational risk relates to the potential for loss caused by a breakdown
in information, communication and settlement systems. The Company mitigates
operational risk by maintaining systems and procedures to monitor transactions
and positions, documentation and confirmation of transactions and ensuring
compliance with regulations.
Legal risk relates to the uncertainty of the enforceability, through
legal or judicial processes, of the obligations that Ambac Assurance insures or
obligations of the Company's counterparties, including contractual provisions
intended to reduce exposure by providing for the offsetting or netting of mutual
obligations. The Company seeks to remove or minimize such uncertainties through
continuous consultation with internal and external legal advisers to analyze and
understand the nature of legal risk, to improve documentation and to strengthen
transaction structure.
OTHER MATTERS
YEAR 2000. The Company is addressing the issue of computer programs' and
embedded computer chips' ability to distinguish between the year 1900 and the
year 2000, commonly known as the Y2K problem ("Y2K"). The Company is assessing
the risks to its businesses related to the functionality of its own computer
systems and those of third parties. This is a high priority undertaking and
crucial to the operation of the Company's businesses.
The Company has established a Y2K Steering Committee comprised of
members of senior management. The committee has full responsibility and
authority to establish methodologies and budgets and to allocate necessary
resources. The committee is responsible for the coordination of internal and
external resources with the goal of evaluating and remediating, if necessary,
critical technology systems. The Company has also contracted with an outside
consultant to support its Y2K initiative.
In connection with this initiative, the Company embarked on a three
phase process. Phase I is an inventory analysis and impact assessment. Inventory
included:
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(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 is the testing phase during which: (a) all
critical systems are tested; (b) transactions are run through critical systems
by applying various permutations and combinations of Y2K sensitive dates; and
(c) results are reviewed independently by each business unit. In Phase III, the
extent of code repair is determined and remediated.
Phase I, the inventory analysis and impact assessment, is 100% complete.
Phase II, the testing phase, is 100% complete for all aspects of the business
except for the investment advisory and cash management services business
(Cadre). Phase II is approximately 80% complete for Cadre, and is expected to be
100% complete by March 31, 1999. Phase III, code repair, is 100% complete for
all aspects of the business except for Cadre. Code repair, if necessary for
Cadre, is targeted for completion by March 31, 1999.
The cost of identifying, testing and remediating critical systems is
estimated to be approximately $1.1 million, $0.7 million of which was incurred
in 1998.
The Company's principal Y2K risks can be grouped into four categories.
The first is the risk that the Company does not successfully ready its
operations for the next century. The second is the risk of disruption of Company
operations due to operational failures of third parties. The third is the risk
of business interruption among obligors of Ambac-insured obligations such that
the scheduled payment of debt service does not occur, thus triggering a claim
under its insurance policy. The fourth is financial institution risk. These
risks are further described below.
COMPANY'S INTERNAL SYSTEMS RISK. The Company, like other financial institutions,
is heavily dependent upon its computer systems. Y2K problems in the Company's
internal systems could result in an interruption in, or failure of, certain
normal business activities or operations. Such failures could adversely affect
the Company's operations.
THIRD PARTY RISK. Computer failure of third parties may also jeopardize Company
operations, but how seriously depends on the nature and duration of such
failures. Such third parties could include suppliers of telecommunications,
electric power suppliers, and services provided by governmental agencies.
Although the Company's inquiries are under way, the Company does not yet have
the information to estimate the likelihood of significant disruptions among its
suppliers.
ISSUER RISK. A potential exposure to the Company is the failure by any insured
issuer to make debt service payments due to an issuer's systems failure. An
issuer's failure to make debt service payments due to Y2K related systems
failures may result in a claim under an Ambac Assurance insurance policy. In
such event, the Company would utilize its sources of liquidity to pay claims.
The Company would expect full recovery of such claims.
FINANCIAL INSTITUTION RISK. Financial institution risk includes trustees or
paying agents on transactions insured by the Company. The Company relies on the
operating systems of such trustees to identify the correct interest payment
dates, calculate the correct payments and, through various payment systems, to
move the funds to the bondholders. This risk is mitigated by the fact that Ambac
Assurance's obligation to pay claims is related to the creditworthiness of the
issuer and not the trustee. However, to minimize payment disruption and identify
potential future problems, the Company has 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 procedures outlined above have been applied to
such custodians as well.
With respect to the Company's internal operations, preliminary findings
do not give any indications that these systems will be non-compliant, management
is in the process of developing contingent procedures in the event its critical
systems should fail. With respect to third parties, the Company's inquiries are
underway, and the Company does not expect significant disruptions among vendors,
EDI partners, issuers and financial institutions.
FOOTNOTES
(1) Adjusted gross premiums written, which is not promulgated under GAAP, is
used by management, equity analysts and investors to measure the financial
results of the Company. Adjusted gross premiums written, which the Company
reports as analytical data, is defined as gross up-front premiums written plus
the present value of estimated future installment premiums written in the
period. The definition of adjusted gross premiums written used by the Company
may differ from definitions of adjusted gross premiums written used by other
public holding companies of financial guarantee insurers.
The definition of adjusted gross premiums written, and all current and
historical figures, have been revised to better reflect the Company's
international joint venture arrangement with MBIA. Under the revision, all
reinsurance cessions to MBIA under the joint venture reinsurance arrangement
reduce adjusted gross premiums written. Consequently, the revised adjusted gross
premiums written recorded by the Company includes only the net retention on
business written under the joint venture arrangement.
(2) Core earnings and operating earnings are not substitutes for net income
computed in accordance with GAAP, but are important measures used by management,
equity analysts and investors to measure the financial results of the Company.
The definition of core earnings and operating earnings used by the Company may
differ from definitions of core earnings and operating earnings used by other
public holding companies of financial guarantee insurers.
(3) Adjusted book value ("ABV"), which is not promulgated under GAAP, is used by
management, equity analysts and investors as a measurement of the Company's
intrinsic value with no benefit given for ongoing business activity. Management
derives ABV by beginning with stockholders' equity (book value) and adding or
subtracting the after-tax value of: the net unearned premium reserve, deferred
acquisition costs, the present value of estimated net future installment
premiums, and the unrealized gain or loss on investment agreement liabilities.
The definition of ABV used by the Company may differ from definitions of ABV
used by other public holding companies of financial guarantee insurers. The
adjustments to book value described above will not be realized until future
periods and may differ materially from the amounts used in determining ABV.
30
<PAGE>
REPORT ON MANAGEMENT'S RESPONSIBILITIES
The management of Ambac Financial Group, Inc. is responsible for the integrity
and objectivity of the financial statements and all other financial information
presented in this Annual Report and for assuring that such information fairly
presents the consolidated financial position and operating results of Ambac
Financial Group, Inc. The accompanying consolidated financial statements have
been prepared in conformity with generally accepted accounting principles using
management's best estimates and judgment. The financial information presented
elsewhere in this Annual Report is consistent with that in the consolidated
financial statements.
Ambac Financial Group, Inc. maintains a system of internal accounting
controls designed to provide reasonable assurance that assets are safeguarded
against loss or unauthorized use and that the financial records are reliable for
use in preparing financial statements and maintaining accountability of assets.
Qualified and professional financial personnel maintain and monitor these
internal controls on a continuous basis. The concept of reasonable assurance is
based on the recognition that the cost of a system of internal control should
not exceed the related benefits.
Ambac Financial Group, Inc.'s consolidated financial statements have
been audited by KPMG LLP, independent auditors, whose audits were made in
accordance with generally accepted auditing standards and included a review of
internal accounting controls to the extent necessary to express an opinion on
the fairness of the consolidated financial statements.
The Audit Committee of the Board of Directors, comprised solely of
outside directors, meets regularly with financial management, the independent
auditors and the internal auditors to review the work and procedures of each.
The independent auditors and the internal auditors have free access to the Audit
Committee, without the presence of management, to discuss the results of their
work and their considerations of Ambac and its subsidiaries and the quality of
Ambac Financial Group, Inc.'s financial reporting. The Board of Directors, upon
recommendation of the Audit Committee, appoints the independent auditors,
subject to stockholder approval.
/s/ Phillip B. Lassiter
PHILLIP B. LASSITER
Chairman, President and Chief Executive Officer
/s/ Frank J. Bivona
FRANK J. BIVONA
Executive Vice President and Chief Financial Officer
January 27, 1999
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Ambac Financial Group, Inc.
We have audited the accompanying consolidated balance sheets of Ambac Financial
Group, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1998. These
consolidated financial statements are the responsibility of Ambac Financial
Group, Inc.'s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Ambac
Financial Group, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998 in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
KPMG LLP
New York, New York
January 27, 1999
31
<PAGE>
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
=============================================================================================================
(Dollars in thousands, except per share amounts) December 31, 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Investments:
Fixed income securities, at fair value (amortized cost of $8,307,046
in 1998 and $6,525,650 in 1997) $ 8,622,282 $6,773,844
Short-term investments, at cost (approximates fair value) 119,528 136,278
Other, at cost 6,567 5,000
- -------------------------------------------------------------------------------------------------------------
Total investments 8,748,377 6,915,122
Cash 8,239 9,256
Securities purchased under agreements to resell 252,295 85,466
Receivable for investment agreements 73,142 -
Receivable for securities sold 16,233 106,246
Investment income due and accrued 125,929 78,690
Reinsurance recoverable 3,638 4,219
Prepaid reinsurance 199,920 183,492
Deferred acquisition costs 120,619 105,996
Loans 673,930 503,192
Receivable from brokers and dealers 750,000 183,041
Other assets 239,989 116,985
- -------------------------------------------------------------------------------------------------------------
Total assets $11,212,311 $8,291,705
=============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Unearned premiums $1,294,214 $1,178,990
Losses and loss adjustment expenses 115,794 103,345
Ceded reinsurance balances payable 6,576 9,258
Obligations under investment and payment agreements 4,774,953 3,230,052
Obligations under investment repurchase agreements 1,181,810 1,090,912
Deferred income taxes 145,782 135,228
Current income taxes 6,949 9,016
Debentures 423,929 223,864
Accrued interest payable 89,615 46,017
Accounts payable and other liabilities 262,423 117,153
Payable to brokers and dealers 750,000 -
Payable for securities purchased 64,176 275,388
- -------------------------------------------------------------------------------------------------------------
Total liabilities 9,116,221 6,419,223
- -------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, par value $0.01 per share; authorized shares -
4,000,000; issued and outstanding shares - none - -
Common stock, par value
$0.01 per share; authorized shares -
200,000,000 at December 31, 1998 and 100,000,000 at
December 31, 1997; issued shares - 70,680,384 at
December 31, 1998 and December 31, 1997 707 707
Additional paid-in capital 519,305 500,107
Accumulated other comprehensive income 159,313 135,223
Retained earnings 1,449,832 1,262,740
Common stock held in treasury at cost, 738,381 shares at
December 31, 1998 and 732,947 at December 31, 1997 (33,067) (26,295)
- -------------------------------------------------------------------------------------------------------------
Total stockholders' equity 2,096,090 1,872,482
- -------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $11,212,311 $8,291,705
=============================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements
32
<PAGE>
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
========================================================================================================
(Dollars in thousands, except per share amounts)
Years Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Financial Guarantee Insurance:
Gross premiums written $ 361,011 $ 286,163 $ 247,208
Ceded premiums written (49,563) (32,452) (37,793)
- --------------------------------------------------------------------------------------------------------
Net premiums written 311,448 253,711 209,415
Increase in unearned premiums (98,764) (99,711) (72,786)
- --------------------------------------------------------------------------------------------------------
Net premiums earned 212,684 154,000 136,629
Net investment income 186,190 159,709 144,941
Net realized gains (losses) 3,735 21,084 (20,531)
Other income 5,781 4,402 5,261
Financial Management Services:
Revenue 49,510 35,249 21,973
Net realized (losses) gains (17,096) (637) 393
Other:
Revenue 13,725 7,207 7,929
Net realized gains 2,507 748 156,313
- --------------------------------------------------------------------------------------------------------
Total revenues 457,036 381,762 452,908
- --------------------------------------------------------------------------------------------------------
EXPENSES:
Financial Guarantee Insurance:
Losses and loss adjustment expenses 6,000 2,854 3,778
Underwriting and operating expenses 46,720 40,672 37,182
Financial Management Services 35,540 27,993 12,040
Interest 32,761 21,346 20,925
Other 7,103 2,901 3,477
- --------------------------------------------------------------------------------------------------------
Total expenses 128,124 95,766 77,402
- --------------------------------------------------------------------------------------------------------
Income before income taxes 328,912 285,996 375,506
Provision for income taxes 74,918 62,966 99,189
- --------------------------------------------------------------------------------------------------------
Net income $ 253,994 $ 223,030 $ 276,317
========================================================================================================
Net income per share $ 3.63 $ 3.19 $ 3.95
========================================================================================================
Net income per diluted share $ 3.56 $ 3.13 $ 3.91
========================================================================================================
Weighted average number of shares outstanding 69,939,710 69,988,497 69,929,628
========================================================================================================
Weighted average number of diluted shares outstanding 71,330,053 71,227,347 70,748,470
========================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements
33
<PAGE>
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
=======================================================================================================================
(Dollars in thousands) Years Ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
RETAINED EARNINGS:
Balance at January 1 $1,262,740 $1,072,418 $ 819,479
Net income 253,994 $253,994 223,030 $223,030 276,317 $276,317
---------- ---------- ----------
Dividends declared -
common stock (26,571) (24,165) (21,500)
Exercise of stock options (40,331) (8,543) (1,878)
----------- ----------- -----------
Balance at December 31 $1,449,832 $1,262,740 $1,072,418
----------- ----------- -----------
ACCUMULATED OTHER
COMPREHENSIVE INCOME:
Balance at January 1 $ 135,223 $ 58,911 $ 102,470
Unrealized gains (losses)
on securities, ($36,476,
$121,347,
and ($71,667),
pre-tax, in 1998, 1997
and 1996, respectively)(1) 23,889 76,155 (43,559)
Foreign currency gain 201 157 -
---------- ---------- ----------
Other comprehensive income 24,090 24,090 76,312 76,312 (43,559) (43,559)
----------- ---------- ----------- ---------- ----------- ----------
Total comprehensive income $278,084 $299,342 $232,758
========== ========== ==========
Balance at December 31 $ 159,313 135,223 $ 58,911
----------- ----------- -----------
PREFERRED STOCK:
Balance at January 1
and December 31 $ - $ - $ -
----------- ----------- -----------
COMMON STOCK:
Balance at January 1 $ 707 $ 353 $ 353
Stock split effected
as dividend - 354 -
----------- ----------- -----------
Balance at December 31 $ 707 $ 707 $ 353
----------- ----------- -----------
ADDITIONAL PAID-IN CAPITAL:
Balance at January 1 $ 500,107 $ 498,401 $ 492,495
Issuance of stock - (3,506) 3,624
Exercise of stock options 19,198 5,566 2,282
Stock split effected
as dividend - (354) -
----------- ----------- -----------
Balance at December 31 $ 519,305 $ 500,107 $ 498,401
----------- ----------- -----------
COMMON STOCK HELD IN
TREASURY AT COST:
Balance at January 1 $ (26,295) $ (15,067) $ (10,809)
Cost of shares acquired (52,738) (40,397) (31,751)
Shares issued under
equity plans 45,966 29,169 17,211
Issued to acquire subsidiary - - 10,282
----------- ----------- -----------
Balance at December 31 $ (33,067) $ (26,295) $ (15,067)
----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY
AT DECEMBER 31 $2,096,090 $1,872,482 $1,615,016
=======================================================================================================================
<CAPTION>
(1) Disclosure of reclassification amount: 1998 1997 1996
=============================================================================================
<S> <C> <C> <C>
Unrealized holding gains (losses)
arising during period $34,526 $88,744 $(56,195)
Less: reclassification adjustment
for net gains (losses)
included in net income 10,637 12,589 (12,636)
--------- -------- ---------
Net unrealized gains (losses) on securities $23,889 $76,155 $(43,559)
=============================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
34
<PAGE>
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
=============================================================================================================
(Dollars in thousands) Years Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 253,994 $ 223,030 $ 276,317
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,460 1,925 1,986
Amortization of bond premium and discount (4,942) (3,257) (1,603)
Current income taxes (2,067) 9,978 1,413
Deferred income taxes (2,034) 12,015 4,497
Deferred acquisition costs (14,623) (11,784) (11,592)
Unearned premiums, net 98,796 99,706 72,786
Losses and loss adjustment expenses 13,030 408 (5,776)
Ceded reinsurance balances payable (2,682) 1,303 (7,216)
Investment income due and accrued (47,239) (9,415) (9,550)
Accrued interest payable 43,598 16,059 4,464
Loss (gain) on sales of investments and affiliates 10,854 (21,195) (136,175)
Other, net (11,488) 5,744 1,079
- -------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 337,657 324,517 190,630
- -------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of bonds 2,020,463 1,718,174 1,911,909
Proceeds from matured bonds 1,034,511 1,080,338 959,527
Purchases of bonds (4,746,366) (4,135,404) (3,825,803)
Change in short-term investments 16,750 (23,767) 64,178
Securities purchased under agreements to resell (166,829) 115,703 39,111
Loans (170,738) (503,192) -
Purchase of affiliate, net of cash acquired - (120,006) -
Proceeds from sale of affiliate - - 202,609
Other, net (49,478) (19,121) (9,783)
- -------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (2,061,687) (1,887,275) (658,252)
- -------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (26,571) (24,165) (21,500)
Proceeds from issuance of investment agreements 3,628,266 2,805,256 1,696,813
Payments for investment agreement draws (2,236,348) (1,708,775) (1,197,584)
Proceeds from issuance of debentures 193,700 - -
Payment agreements 170,738 503,192 -
Purchases of treasury stock (52,738) (40,397) (31,751)
Proceeds from sale of treasury stock 45,966 29,169 17,211
- -------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,723,013 1,564,280 463,189
- -------------------------------------------------------------------------------------------------------------
NET CASH FLOW (1,017) 1,522 (4,433)
Cash at January 1 9,256 7,734 12,167
- -------------------------------------------------------------------------------------------------------------
Cash at December 31 $ 8,239 $ 9,256 $ 7,734
=============================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Income taxes $ 66,853 $ 34,163 $ 90,649
=============================================================================================================
Interest expense on debt $ 33,056 $ 21,799 $ 21,675
=============================================================================================================
Interest expense on investment agreements $ 252,713 $ 169,875 $ 148,526
=============================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
1 BACKGROUND
Ambac Financial Group, Inc. ("AFGI") is a holding company whose subsidiaries
provide financial guarantee insurance and financial management services to
clients in both the public and private sectors in the United States and abroad.
AFGI's principal operating subsidiary, Ambac Assurance Corporation ("Ambac
Assurance"), a leading insurer of municipal and structured finance obligations,
has earned triple-A ratings, the highest ratings available from Moody's
Investors Service, Inc., Standard & Poor's Ratings Group, Fitch IBCA, Inc., and
Japan Rating and Investment Information, Inc. AFGI's Financial Management
Services segment 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.
2 SIGNIFICANT ACCOUNTING POLICIES
The accompanying Consolidated Financial Statements of AFGI and subsidiaries (the
"Company") have been prepared on the basis of U.S. Generally Accepted Accounting
Principles ("GAAP"). 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 significant accounting policies of the Company are
described below:
CONSOLIDATION:
The consolidated financial statements include the accounts of AFGI and its
subsidiaries. All significant intercompany balances have been eliminated.
NET INCOME PER SHARE AND NET INCOME PER DILUTED SHARE: Net income per share is
based on the weighted average number of shares outstanding during the year,
retroactively adjusted to reflect a two-for-one stock split in 1997. Net income
per diluted share reflects the potential dilution that would occur if
securities, such as employee stock options, were exercised.
INVESTMENTS:
The Company's investment portfolio is accounted for on a trade-date basis and
consists primarily of investments in fixed income securities that are considered
available-for-sale and are carried at fair value. Fair value is based on quotes
obtained by the Company from independent market sources. Short-term investments
are carried at cost, which approximates fair value. Unrealized gains and losses,
net of deferred income taxes, are included as a component of "Accumulated Other
Comprehensive Income" in stockholders' equity and are computed using amortized
cost as the basis. For purposes of computing amortized cost, premiums and
discounts are accounted for using the interest method. For bonds purchased at a
price below par value, discounts are accreted over the remaining term of the
securities. For bonds purchased at a price above par value which have call
features, premiums are amortized to the most likely call dates as determined by
management. For premium bonds that do not have call features, such premiums are
amortized over the remaining terms of the securities. Premiums and discounts on
mortgage-backed and asset-backed securities are adjusted for the effects of
actual and anticipated prepayments. Realized gains and losses on the sale of
investments are determined on the basis of specific identification.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL:
Securities purchased under agreements to resell are collateralized financing
transactions, and are recorded at their contracted resale amounts, plus accrued
interest. The Company takes possession of the collateral underlying those
agreements and monitors its market value on a daily basis and, when necessary,
requires prompt transfer of additional collateral to reflect current market
value.
LOANS:
Loans are reported at their outstanding unpaid principal balances, net of any
deferred fees. Interest income is accrued on the unpaid principal balance.
Deferred fees are amortized to interest income over the contractual life of the
loan using the interest method or the straight-line method if not materially
different.
OBLIGATIONS UNDER INVESTMENT AND PAYMENT AGREEMENTS:
Obligations under investment and payment agreements and investment repurchase
agreements are recorded as liabilities on the Consolidated Balance Sheets at the
face value of the agreement, adjusted for draws paid and interest credited to
the account. Unsettled agreements are accrued on a trade-date basis on the
Consolidated Balance Sheets at the time of commitment. Interest expense is
computed based upon daily outstanding settled liability balances at rates and
periods specified in the agreements. Net interest income relating to investment
agreements and investment repurchase agreements is included as a component of
Financial Management Services revenue.
PREMIUM REVENUE RECOGNITION:
Premiums can be structured in two ways: (1) computed as a percentage of
principal and interest insured, typically collected in a single payment at
policy inception date, and earned pro-rata over the period of risk; and (2)
computed as a percentage of either principal or principal and interest insured,
collected periodically (i.e., monthly, quarterly or annually), and reflected in
income pro-rata over the period covered by the premium payment.
When a new or secondary market 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.
36
<PAGE>
LOSSES AND LOSS ADJUSTMENT EXPENSES:
The liability for losses and loss adjustment expenses consists of the active
credit reserve ("ACR") and case basis loss and loss adjustment expense reserves.
The development of the ACR is based upon estimates of the expected annual levels
of debt service defaults resulting from credit failures on currently insured
issues that are not presently or imminently in default. When losses occur
(actual monetary defaults or defaults which are imminent on insured
obligations), case basis loss reserves are established in an amount that is
sufficient to cover the present value of the anticipated defaulted debt service
payments over the expected period of default and estimated expenses associated
with settling the claims, less estimated recoveries under salvage or subrogation
rights. During 1998, 1997 and 1996, paid losses, net of salvage received, were
($7,030), $2,474 and $9,554, respectively. All or part of case basis loss
reserves are allocated from any ACR available.
Ambac Assurance's management believes that the reserves for losses and
loss adjustment expenses are adequate to cover the ultimate net cost of claims,
but the reserves are necessarily based on estimates and there can be no
assurance that the ultimate liability will not exceed such estimates.
DEFERRED ACQUISITION COSTS:
Certain costs incurred that vary with, and are primarily related to, the
production of business have been deferred. These costs include direct and
indirect expenses related to underwriting, marketing and policy issuance, rating
agency fees and premium taxes, net of reinsurance ceding commissions. The
deferred acquisition costs are being amortized over the periods in which the
related premiums are earned, and such amortization amounted to $18,248, $14,213
and $12,553 for 1998, 1997 and 1996, respectively. Deferred acquisition costs,
net of such amortization, amounted to $14,623, $11,784 and $11,592 for 1998,
1997 and 1996, respectively.
DEPRECIATION AND AMORTIZATION:
Depreciation of furniture and fixtures and electronic data processing equipment
is provided over the estimated useful lives of the respective assets, ranging
from three to five years, using the straight-line method. Amortization of
leasehold improvements and intangibles, including certain computer software
licenses, is provided over the estimated useful lives of the respective assets,
ranging from three to 10 years, using the straight-line method.
DERIVATIVE CONTRACTS:
DERIVATIVE CONTRACTS HELD FOR PURPOSES OTHER THAN TRADING: The Company uses
derivative contracts (primarily interest rate swaps and futures contracts) for
hedging purposes as part of its overall interest rate risk management.
The Company accounts for its futures contracts in accordance with the
provisions of FAS Statement 80, "Accounting for Futures Contracts" ("FAS 80").
FAS 80 permits hedge accounting for futures contracts when the item to be hedged
exposes the Company to price or interest rate risk, and the futures contract
effectively reduces that exposure and is designated as a hedge. Futures
contracts held for purposes other than trading are used primarily to hedge
interest sensitive assets and liabilities. Futures contracts are designated at
inception as a hedge to specific assets and liabilities. Gains and losses on
futures and options contracts that qualify as accounting hedges of existing
assets or liabilities are included as a component of "Accumulated Other
Comprehensive Income" in stockholders' equity, net of deferred tax, and
amortized over the remaining lives of the assets and liabilities as an
adjustment to interest income or expense. When the hedged asset is sold, or the
hedged liability is settled, the unamortized gain or loss on the related hedge
is recognized in income.
Interest rate swaps that are linked with existing liabilities are
accounted for as a hedge of those liabilities, using the accrual method as an
adjustment to interest expense. Interest rate swaps that are linked with
existing assets classified as available for sale are accounted for as hedges of
those assets, using the accrual method as an adjustment to interest income, with
unrealized gains and losses included as a component of "Accumulated Other
Comprehensive Income" in stockholders' equity, net of deferred tax. Interest
rate risk is managed through the linkage of the interest rate swaps, which
synthetically changes the nature of the underlying asset or liability (for
example, from a fixed to floating interest rate obligation).
Gains and losses on futures contracts, purchased options or interest
rate swaps that do not qualify as accounting hedges are recognized immediately
in current period income.
DERIVATIVE CONTRACTS HELD FOR TRADING PURPOSES:
The Company, through its subsidiary Ambac Financial Services, L.P. ("AFSLP"), a
provider of interest rate swaps to states, municipalities and their authorities,
and other entities in connection with their financings, uses derivative
contracts which are classified as held for trading purposes. Derivative
contracts are recorded on trade date at fair value. Changes in fair value are
recorded as a component of Financial Management Services segment income. The
fair value of interest rate swaps is determined through the use of valuation
models. Interest rate swaps are recorded on the balance sheet on a gross basis;
assets and liabilities are netted by customer only when a legal right of set-off
exists.
INCOME TAXES:
AFGI files a consolidated federal income tax return with its subsidiaries.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
tax rates is recognized in the period that includes the enactment date.
The Internal Revenue Code permits financial guarantee insurance
companies to deduct from taxable income, subject to certain limitations, the
amounts added to the statutory mandatory contingency reserve for municipal
obligations during the year. The deduction taken is allowed only to the extent
that U.S. Treasury noninterest-bearing tax and loss bonds are purchased at their
par value prior to the original due date of the Company's consolidated federal
tax return and held in an amount equal to the tax benefit attributable to such
deductions. The amounts deducted must be included in taxable income when the
contingency reserve is released, at which time the Company may redeem the tax
and loss bonds to satisfy the additional tax liability. The purchases of tax and
loss bonds are recorded as payments of federal income taxes.
POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS:
The Company provides various postretirement and post-employment benefits,
including pension, and health and life benefits covering substantially all
employees who meet certain age and service requirements. The Company accounts
for these benefits under the accrual method of accounting. Amounts related to
the defined benefit pension plan and postretirement health benefits are charged
based on actuarial determinations.
STOCK COMPENSATION PLANS:
In 1997, the Company adopted the Ambac 1997 Equity Plan. Under this plan, awards
are granted to eligible employees of the Company in the form of incentive stock
options or other stock-based awards. The Company accounts for its incentive
stock options and stock-based awards under FAS Statement 123, "Accounting for
Stock-Based Compensation" ("FAS 123"). FAS 123 permits a company to choose
either the fair value based method of accounting as defined in the Statement or
the intrinsic value based method of accounting as prescribed by APB Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25"), for its stock-based
compensation plans. Companies electing the accounting requirements under APB 25
must also make pro-forma disclosures of net income, earnings per share and
earnings per diluted share as if the fair value based method of accounting had
been applied. The Company has elected to account for its plans under APB 25.
ACCOUNTING STANDARDS:
During 1998, the Company adopted the following new standards: FAS Statement 130,
"Reporting Comprehensive Income" ("FAS 130"); FAS Statement 131, "Disclosures
about Segments of an Enterprise and Related Information" ("FAS 131"); and FAS
Statement 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" ("FAS 132").
FAS 130 establishes standards for the reporting and presentation of
comprehensive income and its components in a full set of financial statements.
Comprehensive income encompasses all changes in stockholders' equity (except
those arising from transactions with stockholders) and includes net income, net
unrealized capital gains or losses on available-for-sale securities and foreign
currency translation adjustments. Comprehensive income is disclosed in the
Consolidated Statement of Stockholders' Equity. FAS 131 redefines how reportable
segments are determined and requires disclosure of certain financial and
descriptive information about a company's reportable segments. Disclosures
regarding the Company's two reportable segments, Financial Guarantee Insurance
and Financial Management Services are included in Note 17. FAS 132 alters
disclosure requirements regarding pensions and other postretirement benefits in
the financial statements of employers who sponsor such benefit plans. The
revised disclosure requirements are designed to provide additional information
to assist readers in evaluating future costs related to such plans. The required
pension disclosures are included in Note 10. As each of these new standards only
requires additional disclosure information in the consolidated financial
statements, they do not affect the Company's consolidated financial position or
results of operations.
In June 1998, the Financial Accounting Standards Board issued FAS
Statement 133, "Accounting for Derivative Instruments and Hedging Activities"
("FAS 133"). FAS 133 establishes accounting and reporting standards for
derivative instruments and hedging activities. The statement requires all
derivatives to be recorded on the balance sheet at fair value and establishes
special accounting for the following three different types of hedges: (1) hedges
of changes in the fair value of assets, liabilities or firm commitments
(referred to as fair value hedges); (2) hedges of the variable cash flows of
forecasted transactions (cash flow hedges); and (3) hedges of foreign currency
exposures of net investments in foreign operations. Though the accounting
treatment and criteria for each of the three types of hedges is unique, they all
result in recognizing offsetting changes in value or cash flow of both the hedge
and the hedged item in earnings in the same period. Changes in the fair value of
derivatives that do not meet the criteria of one of these three categories of
hedges are included in earnings in the period of the change with no related
offset. FAS 133 is effective for years beginning after June 15, 1999, but
companies may adopt early. The Company will adopt FAS 133 effective January 1,
2000. Management is assessing the impact of FAS 133 on the Company's
consolidated financial position and results of operations.
RECLASSIFICATIONS:
Certain reclassifications have been made to prior years' amounts to conform to
the current year's presentation.
3 INVESTMENTS
The amortized cost and estimated fair value of investments in fixed income
securities and short-term investments at December 31, 1998 and 1997 were as
follows:
38
<PAGE>
===========================================================================
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------------
1998
Municipal obligations $2,632,276 $172,960 $3,912 $2,801,324
Corporate obligations 1,335,749 103,030 3,352 1,435,427
U.S. Government
obligations 114,385 8,511 - 122,896
Mortgage- and asset-
backed securities
(includes U.S.
Government Agency
obligations) 4,224,636 41,994 3,995 4,262,635
Other 119,528 - - 119,528
- ---------------------------------------------------------------------------
Total $8,426,574 $326,495 $11,259 $8,741,810
===========================================================================
1997
Municipal obligations $2,146,137 $152,971 $ 112 $2,298,996
Corporate obligations 1,022,995 71,520 928 1,093,587
U.S. Government
obligations 136,771 2,855 28 139,598
Mortgage- and asset-
backed securities
(includes U.S.
Government Agency
obligations) 3,200,262 25,511 3,017 3,222,756
Other 155,763 91 669 155,185
- ---------------------------------------------------------------------------
Total $6,661,928 $252,948 $ 4,754 $6,910,122
===========================================================================
The amortized cost and estimated fair value of fixed income securities and
short-term investments at December 31, 1998, by contractual maturity, were as
follows:
=========================================================================
Estimated
Amortized Fair
Cost Value
- -------------------------------------------------------------------------
Due in one year or less $ 250,741 $ 252,235
Due after one year through five years 222,466 232,054
Due after five years through ten years 399,846 423,355
Due after ten years 3,328,885 3,571,531
- -------------------------------------------------------------------------
4,201,938 4,479,175
Mortgage- and asset-backed securities 4,224,636 4,262,635
- -------------------------------------------------------------------------
$8,426,574 $8,741,810
=========================================================================
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
Securities carried at $6,191 and $8,415 at December 31, 1998 and 1997,
respectively, were deposited by the Company with governmental authorities or
designated custodian banks as required by laws affecting insurance companies.
Net investment income from the Financial Guarantee Insurance segment
comprised the following:
==========================================================================
1998 1997 1996
- --------------------------------------------------------------------------
Fixed income securities $181,437 $155,810 $139,410
Short-term investments 8,139 6,506 7,999
- --------------------------------------------------------------------------
Total investment income 189,576 162,316 147,409
Investment expense (3,386) (2,607) (2,468)
- --------------------------------------------------------------------------
Net investment income $186,190 $159,709 $144,941
==========================================================================
The Financial Guarantee Insurance segment had gross realized gains of
$14,219, $25,641 and $19,236 for 1998, 1997 and 1996, respectively, and gross
realized losses of $10,484, $4,557 and $39,767 for 1998, 1997 and 1996,
respectively.
The Financial Management Services segment had gross realized gains of
$22,592, $3,766 and $3,406 for 1998, 1997 and 1996, respectively, and gross
realized losses of $39,688, $4,403 and $3,013 for 1998, 1997 and 1996,
respectively. Gross realized gains and losses includes amounts related to a
trading position, which represented a small portion of the Company's assets,
containing high quality municipal bonds hedged with treasury futures. These
gains were $2,967, $1,309 and $0 for 1998, 1997 and 1996, respectively, and
losses of $18,638, $3,578 and $0 for 1998, 1997 and 1996, respectively. Gross
realized losses also include the Company's $11,548 write-off of its investment
in Ambac Connect, Inc. in 1998.
Net investment income related to the investment agreement business
comprises gross investment income less related interest expense, and is a
component of Financial Management Services revenue. For 1998, 1997 and 1996,
gross investment income from investment agreements was $281,904, $200,337 and
$165,196, respectively, and the related interest expense was $263,586, $186,678
and $154,484, respectively.
As of December 31, 1998 and 1997, the Company held securities subject to
agreements to resell for $252,295 and $85,466, respectively. These securities
were held as collateral by the Company under agreements that had terms of less
than 30 days.
As of December 31, 1998 and 1997, the Company had pledged (or sold under
agreements to repurchase) securities purchased under agreements to resell and
investment securities to certain municipalities, with a fair value of $3,636,519
and $2,714,719, respectively, in connection with certain investment agreements
(including agreements structured as investment repurchase agreements).
During 1998, the Company entered into security borrowing agreements, the
purpose of which was to limit the Company's cost of collateralizing certain
investment agreements (including agreements structured as investment repurchase
agreements) by reducing the use of securities purchased under agreements to
resell. The security borrowing agreements allow the Company to borrow securities
with a maximum market value of $1,000,000. The borrowings are secured by
Company-owned investment securities. As of December 31, 1998, the Company had
$750,000 in outstanding securities borrowed. The borrowings and related pledged
securities are classified as "Payable to brokers and dealers" and "Receivable
from brokers and dealers," respectively, on the Consolidated Balance Sheets.
4 LOANS
In the normal course of business, the Company has extended loans to customers
participating in certain structured municipal transactions. The loans are
collateralized with cash that the customers have deposited with a payment
custodian in amounts adequate to repay the loan balance and interest thereon.
Equipment and other assets underlying the transactions serve as additional
collateral for the loans. The Company may act as the payment custodian and hold
the funds posted as collateral.
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
As of December 31, 1998 and 1997, the interest rates on these loans ranged from
6.25% to 8.42%.
5 REINSURANCE
In the ordinary course of business, Ambac Assurance cedes exposures under
various reinsurance contracts primarily designed to minimize losses from large
risks and to protect capital and surplus. The effect of reinsurance on premiums
written and earned was as follows:
==========================================================================
Years Ended
December 31, 1998 1997 1996
- --------------------------------------------------------------------------
Written Earned Written Earned Written Earned
- --------------------------------------------------------------------------
Direct $333,652 $238,452 $277,814 $176,009 $240,544 $155,883
Assumed 27,359 7,367 8,349 3,614 6,664 3,126
Ceded (49,563) (33,135) (32,452) (25,623) (37,793) (22,380)
- --------------------------------------------------------------------------
Net premiums $311,448 $212,684 $253,711 $154,000 $209,415 $136,629
==========================================================================
The reinsurance of risk does not relieve the ceding insurer of its
original liability to its policyholders. In the event that all or any of the
reinsurers are unable to meet their obligations to Ambac Assurance under the
existing reinsurance agreements, Ambac Assurance would be liable for such
defaulted amounts. To minimize its exposure to significant losses from reinsurer
insolvencies, Ambac Assurance evaluates the financial condition of its
reinsurers and monitors concentrations of credit risk. There were no reinsurance
recoverables on paid losses as of December 31, 1998 and 1997. As of December 31,
1998, prepaid reinsurance of approximately $159,361 was associated with Ambac
Assurance's three largest reinsurers. As of December 31, 1998, Ambac Assurance
held letters of credit and collateral amounting to approximately $198,957 from
its reinsurers to cover liabilities ceded under the aforementioned reinsurance
contracts.
Ambac Assurance and MBIA Insurance Corporation ("MBIA") formed an
unincorporated joint venture, MBIAoAMBAC International, in 1995. The joint
venture was formed with the goal of bringing the combined capital and human
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. Premiums assumed from
MBIA were $18,715, $8,009 and $4,674 in 1998, 1997 and 1996, respectively.
Premiums ceded to MBIA were $15,505, $8,874 and $6,532 in 1998, 1997 and 1996,
respectively.
6 STOCKHOLDERS' EQUITY
The Company is authorized to issue 200,000,000 shares of common stock, par value
$0.01 per share, of which 70,680,384 were issued as of December 31, 1998. The
Company is also authorized to issue 4,000,000 shares of preferred stock, $0.01
par value per share, none of which was issued and outstanding as of December 31,
1998.
Dividends declared per share amounted to $0.38, $0.345 and $0.3075 in
1998, 1997 and 1996, respectively.
The Board of Directors of the Company (the "Board") 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. As of December 31, 1998,
approximately 4,248,000 shares had been repurchased under this program for an
aggregate amount of $142,700.
STOCKHOLDER RIGHTS PLAN:
The Company adopted a Stockholder Rights Plan under which stockholders received
(after giving effect to a stock split since adoption of the Plan) one Right for
each two shares of common stock owned. Each Right entitles the registered holder
to purchase from the Company one one-hundredth of a share of Series A Junior
Participating Preferred Stock, par value $0.01 per share, at a purchase price of
$190 per share. The Rights generally detach and become exercisable when any
person or group acquires 20% or more (or announces a tender offer for 20% or
more) of the Company's common stock, at which time each Right (other than those
held by the acquiring company) will entitle the holder to receive that number of
shares of common stock of the Company with a value of two times the exercise
price of the Right. If the Company is acquired in a merger or other business
combination transaction in which the Company is not the surviving corporation or
50% or more of the Company's assets, cash flow or earning power is sold or
transferred, each Right will entitle the holder to receive that number of shares
of stock of the acquiring company having a value equal to two times the exercise
price of the Right. The Rights, which expire on January 31, 2006, are redeemable
in whole, but not in part, by action of the Board at a price of $0.01 per Right
at any time prior to their becoming exercisable.
7 COMMITMENTS AND CONTINGENCIES
The Company is responsible for leases on the rental of office space. The lease
agreements, which expire periodically through September 2019, contain provisions
for scheduled periodic rent increases and are accounted for as operating leases.
An estimate of future net minimum lease payments in each of the next five years
ending December 31, and the periods thereafter, is as follows:
===============================
Amount
- -------------------------------
1999 $ 7,067
2000 7,076
2001 6,174
2002 6,115
2003 6,091
All later years 88,369
- -------------------------------
$120,892
===============================
Rent expense for the aforementioned leases amounted to $5,537, $5,048
and $3,862 for the years ended December 31, 1998, 1997 and 1996, respectively.
Total rentals to be received under future sublease agreements is estimated at
$5,125.
8 INSURANCE REGULATORY RESTRICTIONS
Ambac Assurance is subject to insurance regulatory requirements of the States of
Wisconsin and New York,
40
<PAGE>
and the other jurisdictions in which it is licensed to conduct business.
Ambac Assurance's ability to pay dividends is generally restricted by
law and subject to approval by the Office of the Commissioner of Insurance of
the State of Wisconsin (the "Wisconsin Commissioner"). Wisconsin insurance law
restricts the payment of dividends in any 12-month period without regulatory
approval to the lesser of (a) 10% of policyholders' surplus as of the preceding
December 31 and (b) the greater of (i) statutory net income for the calendar
year preceding the date of dividend, minus realized capital gains for that
calendar year and (ii) the aggregate of statutory net income for three calendar
years preceding the date of the dividend, minus realized capital gains for those
calendar years and minus dividends paid or credited within the first two of the
three preceding calendar years. Ambac Assurance paid cash dividends of $48,000,
$44,000 and $40,000 on its common stock in 1998, 1997 and 1996, respectively. In
addition, on April 30, 1996, Ambac Assurance, in conjunction with the sale of
the Company's remaining holdings in HCIA, Inc. ("HCIA") common stock, delivered
to the Company (in the form of an extraordinary dividend) its 2,378,672 shares
of HCIA common stock, at fair value. The Wisconsin Commissioner approved such
dividend. Based upon these restrictions, at December 31, 1998, the maximum
amount that will be available during 1999 for payment of dividends by Ambac
Assurance is approximately $116,200.
The New York Financial Guarantee Insurance Law establishes single risk
limits applicable to all obligations issued by a single entity and backed by a
single revenue source. Under the limit applicable to municipal bonds, the
insured average annual debt service for a single risk, net of reinsurance and
collateral, may not exceed 10% of qualified statutory capital, which is defined
as the sum of insurer's policyholders' surplus and contingency reserves. In
addition, insured principal of municipal bonds attributable to any single risk,
net of reinsurance and collateral, is limited to 75% of Ambac Assurance's
qualified statutory capital. Additional single risk limits, which generally are
more restrictive than the municipal bond single risk limit, are also specified
for several other categories of insured obligations.
Statutory capital and surplus was $1,162,639 and $1,006,829 at December
31, 1998 and 1997, respectively. Qualified statutory capital was $1,920,298 and
$1,655,554 at December 31, 1998 and 1997, respectively. Statutory net income for
Ambac Assurance was $271,808, $198,615 and $222,810 for 1998, 1997 and 1996,
respectively. Statutory capital and surplus differs from stockholders' equity
determined under GAAP principally due to statutory accounting rules that treat
loss reserves, premiums earned, policy acquisition costs, and deferred income
taxes differently.
9 INCOME TAXES
The Company's provision for income taxes is comprised of the following:
1998 1997 1996
======================================================================
Current taxes $72,608 $51,036 $94,392
Deferred taxes 2,310 11,930 4,797
- ----------------------------------------------------------------------
$74,918 $62,966 $99,189
======================================================================
The total effect of income taxes on income and stockholders' equity for the
years ended December 31, 1998 and 1997 was as follows:
======================================================================
1998 1997
- ----------------------------------------------------------------------
Total income taxes charged to income $ 74,918 $ 62,966
- ----------------------------------------------------------------------
Income taxes (credited) charged to stockholders' equity:
Unrealized gains on bonds 12,587 45,192
Exercise of stock options (19,144) (5,566)
- ----------------------------------------------------------------------
Total (credited) charged to stockholders' equity (6,557) 39,626
- ----------------------------------------------------------------------
Total effect of income taxes $ 68,361 $102,592
======================================================================
The tax provisions in the accompanying consolidated statements of operations
reflect effective tax rates differing from prevailing federal corporate income
tax rates. The following is a reconciliation of these differences:
============================================================================
1998 % 1997 % 1996 %
- ----------------------------------------------------------------------------
Computed expected
tax at
statutory rate $115,119 35.0% $100,099 35.0% $131,427 35.0%
Reductions in
expected tax
resulting from:
Tax-exempt
interest (38,926) (11.8) (35,682) (12.5) (30,760) (8.2)
Other, net (1,275) (0.4) (1,451) (0.5) (1,478) (0.4)
- ----------------------------------------------------------------------------
Income tax
expense $ 74,918 22.8% $ 62,966 22.0% $ 99,189 26.4%
============================================================================
The tax effects of temporary differences that give rise to significant
portions of the deferred tax liabilities and deferred tax assets at December 31,
1998 and 1997 are presented below:
========================================================================
1998 1997
- ------------------------------------------------------------------------
Deferred tax liabilities:
Contingency reserve $119,150 $115,360
Unrealized gains on bonds 87,930 75,342
Deferred acquisition costs 42,583 38,030
Unearned premiums 36,728 35,679
Investments 2,442 1,491
Other 1,189 2,026
- ------------------------------------------------------------------------
Total deferred tax liabilities 290,022 267,928
- ------------------------------------------------------------------------
Deferred tax assets:
Tax and loss bonds 88,471 87,951
Loss reserves 27,918 17,182
Alternative minimum tax carryforward 7,001 14,049
Amortization and depreciation 5,406 6,032
Compensation 12,009 4,030
Other 3,435 3,456
- ------------------------------------------------------------------------
Sub-total deferred tax assets 144,240 132,700
Valuation allowance - -
- ------------------------------------------------------------------------
Total deferred tax assets 144,240 132,700
- ------------------------------------------------------------------------
Net deferred tax liabilities $145,782 $135,228
========================================================================
The Company believes that no valuation allowance is necessary in connection
with the deferred tax assets.
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
10 EMPLOYEE BENEFITS
PENSIONS:
The Company has a defined benefit pension plan covering substantially all
employees of the Company. The benefits are based on years of service and the
employee's compensation during the last five years of employment. The Company's
funding policy is to contribute annually the maximum amount that can be deducted
for Federal income tax purposes. Contributions are intended to provide not only
for benefits attributed to service-to-date, but also for those expected to be
earned in the future.
The table below sets forth a reconciliation of the beginning and ending
projected benefit obligation, beginning and ending balances of the fair value of
plan assets, and the funded status of the plan as of December 31, 1998 and 1997.
========================================================================
1998 1997
- ------------------------------------------------------------------------
Change in Projected Benefit Obligation:
Projected benefit obligation at beginning of year $ 9,374 $ 8,189
Service cost 691 723
Interest cost 684 601
Amendments 116 -
Actuarial loss 1,843 114
Benefits paid (275) (253)
- ------------------------------------------------------------------------
Projected benefit obligation at end of year $12,433 $ 9,374
- ------------------------------------------------------------------------
Change in Plan Assets:
Fair value of plan assets at beginning of year $ 9,644 $ 8,153
Actual return on plan assets 1,595 1,635
Company contributions - 138
Benefits paid (275) (253)
Expenses paid (30) (29)
- ------------------------------------------------------------------------
Fair value of plan assets at end of year $10,934 $ 9,644
- ------------------------------------------------------------------------
Funded status $ (1,499) $270
Unrecognized net loss 1,118 62
Unrecognized prior service cost (1,289) (1,454)
Unrecognized net transition asset (4) (7)
- ------------------------------------------------------------------------
Pension liability included in other liabilities $ (1,674) $(1,129)
========================================================================
Net pension costs for 1998, 1997 and 1996 included the following components:
============================================================================
1998 1997 1996
- ----------------------------------------------------------------------------
Service cost $ 807 $ 723 $ 674
Interest cost on expected benefit obligation 684 601 539
Expected return on plan assets (793) (701) (613)
Amortization of unrecognized transition asset (3) (3) (3)
Amortization of prior service cost (165) (165) (165)
Recognized net actuarial loss 15 33 87
- ----------------------------------------------------------------------------
Net periodic pension cost $ 545 $ 488 $ 519
============================================================================
The discount rate used in the determination of the actuarial present
value for the projected benefit obligation was 6.50% and 7.25% for 1998 and
1997, respectively. The expected long-term rate of return on assets was 9.25%
for both 1998 and 1997. The rate of increase in future compensation levels used
in determining the actuarial present value of the projected benefit obligation
was 5.0 % and 4.8% for 1998 and 1997, respectively.
Substantially all employees of the Company are covered by a defined
contribution plan (the "Savings Incentive Plan"), for which contributions and
costs are determined as 6% of each eligible employee's base salary, plus a
matching company contribution of 50% on contributions up to 6% of base salary
made by eligible employees to the plan. The total cost of the Savings Incentive
Plan was $2,063, $1,806 and $1,680 in 1998, 1997 and 1996, respectively.
ANNUAL INCENTIVE PROGRAM:
The Company has an annual incentive program that provides for awards to key
officers and employees based upon predetermined criteria. The cost of the
program in 1998, 1997 and 1996 amounted to $16,095, $12,038 and $10,822,
respectively.
POSTRETIREMENT HEALTH CARE AND OTHER BENEFITS:
Ambac Assurance provides certain medical and life insurance benefits for retired
employees and eligible dependents. All plans are contributory. None of the plans
are currently funded.
Postretirement benefits expense was $316, $262 and $220 in 1998, 1997
and 1996, respectively. The unfunded accumulated postretirement benefit
obligation was $3,121 and the related accrued postretirement liability was
$1,956 as of December 31, 1998.
The assumed health care cost trend rates range from 8.0% in 1999,
decreasing ratably to 5.5% in 2003, and remaining at that level thereafter.
Increasing the assumed health care cost trend rate by one percentage point in
each future year would increase the accumulated postretirement benefit
obligation at December 31, 1998 by $554 and the 1998 benefit expense by $79. The
weighted average discount rate used to measure the accumulated postretirement
benefit obligation and 1998 expense was 6.50%.
11 INSURANCE IN FORCE
The par amount of bonds insured, net of reinsurance, was $198,274,000 and
$165,601,000 at December 31, 1998 and 1997, respectively. As of December 31,
1998 and 1997, the insured portfolio was diversified by type of insured bond as
shown in the following table:
42
<PAGE>
===============================================================================
Net Par Amount Outstanding
- -------------------------------------------------------------------------------
(Dollars in millions) 1998 1997
- -------------------------------------------------------------------------------
Domestic:
Municipal finance:
General obligation $ 37,502 $ 36,324
Lease and tax-backed revenue 36,929 30,980
Utility revenue 27,014 24,913
Health care revenue 20,071 18,545
Investor-owned utilities 8,013 6,255
Transportation revenue 7,831 7,370
Higher education 7,720 6,852
Housing revenue 6,445 6,064
Student loans 4,528 3,516
Other 873 597
- -------------------------------------------------------------------------------
Total municipal finance 156,926 141,416
- -------------------------------------------------------------------------------
Structured finance:
Mortgage-backed and home equity 19,478 11,620
Commercial asset-backed 10,015 4,538
Other consumer asset-backed 2,132 1,514
Banks/financial institutions 671 524
Other 567 439
- -------------------------------------------------------------------------------
Total structured finance 32,863 18,635
- -------------------------------------------------------------------------------
Total domestic 189,789 160,051
- -------------------------------------------------------------------------------
International finance:
Commercial asset-backed 3,180 2,600
Banks/financial institutions 1,514 283
Utilities 1,073 456
Sovereign/sub-sovereign 1,027 981
Mortgage-backed and home equity 607 496
Other 1,084 734
- -------------------------------------------------------------------------------
Total international finance 8,485 5,550
- -------------------------------------------------------------------------------
$198,274 $165,601
===============================================================================
As of December 31, 1998 and 1997, the international insured portfolio is
shown in the following table by location of risk:
==============================================================================
Net Par Amount Outstanding
- ------------------------------------------------------------------------------
(Dollars in millions) 1998 1997
- ------------------------------------------------------------------------------
United Kingdom $2,289 $ 865
Australia 779 63
France 692 1,032
Japan 675 879
Italy 571 555
Internationally diversified (1) 1,621 899
Other international 1,858 1,257
- ------------------------------------------------------------------------------
Total International $8,485 $5,550
==============================================================================
(1) Internationally diversified represents insured policies with multiple
locations of risk.
Direct insurance in force (principal and interest) was $367,801,000 and
$321,104,000 at December 31, 1998 and 1997, respectively. Net insurance in force
(after giving effect to reinsurance) was $317,668,000 and $275,931,000 as of
December 31, 1998 and 1997, respectively.
12 FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING
DERIVATIVE FINANCIAL INSTRUMENTS:
In the normal course of business, the Company becomes a party to various
financial instruments to reduce its exposure to fluctuations in interest rates.
These financial instruments include interest rate swaps, exchange traded futures
contracts and purchased interest rate options. The notional amounts of these
financial instruments were as follows:
==============================================================================
As of December 31, 1998 1997
- ------------------------------------------------------------------------------
Derivative financial instruments with off-balance
sheet risk:
Interest rate futures contracts $5,836,700 $3,689,100
Interest rate swaps 590,468 712,206
Other:
Purchased interest rate options 15,000 85,500
==============================================================================
Notional principal amounts are often used to express the volume of these
transactions and do not reflect the extent to which positions may offset one
another. These amounts do not represent the much smaller amounts potentially
subject to risk.
As discussed in Note 2, interest rate futures and purchased option
contracts held for purposes other than trading are used primarily to hedge
interest rate risk inherent in the portfolio of interest-sensitive assets and
liabilities. Interest rate swaps held for purposes other than trading are used
to manage interest rate risk by synthetically changing the nature of specific
assets or liabilities.
Futures contracts are purchased to hedge interest rate risk inherent in
fixed rate liabilities. Futures contracts are sold to hedge interest rate risk
inherent in fixed rate investment securities. Interest rate option contracts are
purchased to hedge interest rate risk inherent in fixed rate assets and
liabilities. At December 31, 1998 and 1997, futures and purchased option
contracts with an outstanding notional of $360,700 and $627,000, respectively,
were designated as hedges of fixed rate liabilities. Additionally, at December
31, 1998 and 1997, futures and purchased option contracts with an outstanding
notional of $5,491,000 and $3,147,600, respectively, were designated as hedges
of fixed rate investment securities.
Interest rate swaps that require the Company to pay a fixed rate are
used primarily to hedge fixed rate investment securities. Interest rate swaps
that require the Company to receive a fixed rate are used primarily to hedge
fixed rate liabilities. The table below summarizes, for each major type of swap,
the weighted average fixed rate paid or received on the respective notional
amounts outstanding. Notional amounts are used to calculate the contractual
payments to be exchanged.
================================================================================
Pay fixed swaps: Receive fixed swaps:
Maturing Weighted Weighted Range of implied
After Notional average Notional average floating interest
December 31, amount fixed rate amount fixed rate rates
- --------------------------------------------------------------------------------
1999 $299,775 6.98% $12,922 6.46% 4.98% to 5.16%
2000 202,368 7.02% 12,271 6.46% 5.08% to 5.25%
2001 161,145 6.93% 11,602 6.46% 5.23% to 5.35%
2002 173,144 6.93% 10,913 6.46% 5.32% to 5.45%
2003 182,783 6.93% 10,205 6.46% 5.45% to 5.52%
Thereafter 53,924 7.08% 20,354 7.07%
================================================================================
The floating rate side of the Company's interest rate swaps is based on
several indices, primarily one-month, three-month and six-month LIBOR. The
floating rates shown above reflect the range of the implied forward LIBOR yield
curve for those indices, as of December 31, 1998.
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per
share amounts)
FAIR VALUES OF FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING:
Fair value amounts are determined by using independent market information when
available, and appropriate valuation methodologies when market quotes were not
available. In cases where specific market quotes are unavailable, interpreting
market data and estimating market values require considerable judgment by
management. Accordingly, the estimates presented are not necessarily indicative
of the amount the Company could realize in a current market exchange.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
INVESTMENTS: The fair values of fixed income investments are based on quoted
market prices received from a nationally recognized pricing service or dealer
quotes.
SHORT-TERM INVESTMENTS AND CASH: The fair values of short-term investments and
cash are assumed to equal amortized cost.
OTHER: The fair value of other investments, primarily preferred stock, is based
on an evaluation of the underlying company and recent transactions in such
preferred stock.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL: The fair value of securities
purchased under agreements to resell is assumed to approximate carrying value.
LOANS: The fair value of loans is assumed to approximate carrying value.
RECEIVABLE/PAYABLE TO BROKERS AND DEALERS: The fair value of receivable/payable
to brokers and dealers, representing securities borrowed from various
counterparties secured by Company-owned securities, are assumed to approximate
carrying value.
DEBENTURES: The fair value of the debentures is based on the quoted market
prices and dealer quotes.
OBLIGATIONS UNDER INVESTMENT, REPURCHASE AND PAYMENT AGREEMENTS (INCLUDING
ACCRUED INTEREST): The fair value of the liability for investment agreements and
repurchase agreements (including accrued interest) is estimated based upon
valuation models using rates currently offered for contracts of similar
remaining maturities. The fair value of payment agreements is assumed to
approximate carrying value.
DERIVATIVE CONTRACTS: Fair values of derivative contracts (futures, swaps and
interest rate options) are based on quoted market and dealer prices, current
settlement values, or pricing models.
LIABILITY FOR NET FINANCIAL GUARANTEES WRITTEN: The fair value of the liability
for those financial guarantees written related to new issue and secondary market
exposures is based on the estimated cost to reinsure those exposures at current
market rates, which amount consists of the current unearned premium reserve,
less an estimated ceding commission thereon.
Certain other financial guarantee insurance policies have been written
on an installment basis, where the future premiums to be received by the Company
are determined based on the outstanding exposure at the time the premiums are
due. The fair value of Ambac Assurance's liability under its installment premium
policies is measured using the present value of estimated future installment
premiums, less an estimated ceding commission. The estimate of the amounts and
timing of the future installment premiums is based on contractual premium rates,
debt service schedules and expected run-off scenarios. This measure is used as
an estimate of the cost to reinsure Ambac Assurance's liability under these
policies.
The carrying amount and estimated fair value of financial instruments
held for purposes other than trading are presented below:
================================================================================
As of December 31, 1998 1997
- --------------------------------------------------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
(Dollars in Millions) Amount Value Amount Value
- --------------------------------------------------------------------------------
Financial assets:
Fixed income securities $8,622 $8,622 $6,774 $6,774
Short-term investments 120 120 136 136
Other investments 7 7 5 5
Cash 8 8 9 9
Securities purchased under
agreements to resell 252 252 85 85
Loans 674 674 503 503
Receivable from brokers
and dealers 750 750 - -
Financial liabilities:
Debentures 424 476 224 269
Obligations under investment,
repurchase and payment
agreements (including
accrued interest) 6,046 5,959 4,367 4,405
Payable to brokers and dealers 750 750 - -
Derivative financial instruments:
Interest rate futures contracts (4) - (2) -
Interest rate swaps (22) (20) (9) (7)
Purchased interest rate
option contracts - - - -
Liability for financial
guarantees written:
Gross 1,294 906 1,179 855
Net of reinsurance 1,094 766 995 722
Net installment premiums - 216 - 153
================================================================================
13 FINANCIAL INSTRUMENTS HELD FOR TRADING PURPOSES
AFSLP is a provider of interest rate swaps to states, municipalities and their
authorities and other entities in connection with their financings. AFSLP is
subject to basis risk (the relationship between tax-exempt and taxable interest
rates). If actual or projected tax-exempt interest rates change in relation to
taxable rates, the Company will experience an unrealized mark-to-market gain or
loss. The AFSLP swap portfolio is considered held for trading purposes.
44
<PAGE>
The following table summarizes information about the Company's financial
instruments held for trading purposes as of December 31, 1998 and 1997:
=============================================================================
Net Estimated Average Net
Fair Value Fair Value Notional
- ----------------------------------------------------------------- Amount
Assets Liabilities Assets Liabilities
- -----------------------------------------------------------------------------
1998:
Derivative
financial
instruments:
Interest rate
swaps $200,454 $163,043 $130,984 $103,414 $5,357,450
Futures
contracts - - - - 706,700
Other financial
instruments - - 183,682 181,698 -
1997:
Derivative
financial
instruments:
Interest rate
swaps $ 67,743 $ 49,265 $ 43,748 $ 33,954 $3,347,190
Futures
contracts - - - - 514,900
Other financial
instruments 183,041 181,732 160,251 159,213 -
=============================================================================
Financial instruments held for trading purposes are carried at estimated
fair value. The aggregate amount of net trading income recognized from
derivative financial instruments held for trading purposes was $705, $7,454 and
$10,579 for 1998, 1997 and 1996, respectively. Other financial instruments held
for trading purposes consists of fixed income securities held in 1997 and sold
during 1998. The aggregate amount of net trading income recognized from other
financial instruments was $2,967, $1,309 and $0 in 1998, 1997 and 1996,
respectively. Average net fair values were calculated based on average monthly
net fair values. Notional principal amounts are often used to express the volume
of these transactions and do not reflect the extent to which positions may
offset one another. These amounts do not represent the much smaller amounts
potentially subject to risk.
14 LONG-TERM DEBT AND LINES OF CREDIT
The carrying value of long-term debt was as follows:
========================================================================
As of December 31, 1998 1997
- ------------------------------------------------------------------------
9 3/8% Debentures, due 2011 $149,434 $149,389
7 1/2% Debentures, due 2023 74,495 74,475
7.08% Debentures, due 2098 200,000 -
- ------------------------------------------------------------------------
$423,929 $223,864
========================================================================
The debentures due on August 1, 2011 were issued on August 8, 1991 in
the principal amount of $150,000 and bear interest of 9 3/8%, payable on
February 1 and August 1 of each year and are non-callable.
The debentures due on May 1, 2023 were issued on May 11, 1993 in the
principal amount of $75,000 and bear interest of 7 1/2%, payable on May 1 and
November 1 of each year and are non-callable.
The debentures due on March 31, 2098 were issued on April 1, 1998 in the
principal amount of $200,000 and bear interest of 7.08%, payable on March 31,
June 30, September 30 and December 31 of each year. The debentures may not be
redeemed prior to March 31, 2003 and were sold at 100% of their principal
amount. On or after March 31, 2003, the Company may redeem the debentures, in
whole at any time or in part from time to time, at 100% of their principal
amount, plus accrued interest to the date of redemption.
AFGI and Ambac Assurance have a revolving credit facility with three
major international banks for $150,000, which expires in August 1999 and
provides a two-year term loan provision. The facility is available for general
corporate purposes, including the payment of claims. As of December 31, 1998 and
1997, no amounts were outstanding under this credit facility.
Ambac Assurance maintains third party capital support in the form of a
seven-year irrevocable limited recourse credit facility from a group of
highly-rated international banks. This credit facility provides liquidity to
Ambac Assurance in the event claims from municipal obligations in its insured
portfolio exceed specified levels. Repayment of amounts drawn under the credit
facility are limited primarily to the amount of any recoveries of losses related
to policy obligations. During 1998, total third party capital support was
increased from $500,000 to $555,000 and its expiration reset to December 2005.
As of December 31, 1998 and 1997, no amounts were outstanding under this
facility.
15 OBLIGATIONS UNDER INVESTMENT AGREEMENTS AND PAYMENT AGREEMENTS
Obligations under investment agreements, including those structured in the form
of repurchase contracts, are recorded on a trade-date basis. Certain obligations
may be called at various times prior to maturity at the option of the
counterparty. As of December 31, 1998 and 1997, the interest rates on these
agreements ranged from 4.00% to 8.14% and 4.23% to 8.14%, respectively. As of
December 31, 1998 and 1997, the average yield on these agreements was 5.70% and
5.85%, respectively. Obligations under investment agreements and investment
repurchase agreements as of December 31, 1998 and 1997 were as follows:
================================================================
As of December 31, 1998 1997
- ----------------------------------------------------------------
Settled $5,209,690 $3,817,772
Unsettled 73,142 -
- ----------------------------------------------------------------
$5,282,832 $3,817,772
================================================================
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
Net payments due under settled investment agreements in each of the next
five years ending December 31, and the periods thereafter, based on expected
draw dates, are as follows:
================================
Principal
Amount
- --------------------------------
1999 $2,308,820
2000 1,237,441
2001 554,655
2002 190,338
2003 29,481
All later years 888,955
- --------------------------------
$5,209,690
================================
Obligations under payment agreements represent funds received by the
Company from certain municipal customers. These funds serve as collateral for
loans extended by the Company in connection with certain structured municipal
transactions. In connection with these transactions, the Company is obligated to
make periodic agreed upon payments. As of December 31, 1998 and 1997, the
interest rates on these obligations ranged from 6.25% to 8.42%. Net
(deposits)/payments due under payment agreements in each of the next five years
ending December 31, and the periods thereafter, based on contractual payment
dates, are as follows:
================================
Principal
Amount
- --------------------------------
1999 $ (11,558)
2000 (6,971)
2001 2,840
2002 8,493
2003 16,248
All later years 664,879
- --------------------------------
$673,931
================================
16 COMMON STOCK INCENTIVES
The Ambac 1997 Equity Plan (the "Equity Plan") provides for the granting of
stock options, stock appreciation rights, restricted stock units, performance
units and other awards that are valued or determined by reference to the common
stock. Stock options awarded to employees are exercisable and expire as
specified at the time of grant. Additionally, such options generally may not
have a per share exercise price less than the fair market value of a share of
common stock on the date of grant or have a term in excess of ten years from the
date of the grant. The Company also maintains the Ambac 1997 Non-Employee
Directors Equity Plan (the "Directors Plan"), which provides awards of stock
options and restricted stock units to non-employee members of the Company's
Board of Directors. The number of options and their exercise price, and the
number of restricted stock units, awarded to each non-employee director under
the Directors Plan are determined by formula. As of December 31, 1998,
approximately 6,070,000 shares were available for future grant under the Equity
Plan and the Directors Plan. A summary of option activity is as follows:
===============================================================================
1998 1997 1996
- -------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- -------------------------------------------------------------------------------
Outstanding at
beginning
of year 3,917,693 $22.15 4,248,642 $19.37 4,140,824 $18.17
Granted 969,698 $47.66 859,800 $33.59 964,150 $24.25
Exercised (1,332,729) $15.78 (898,942) $19.05 (721,724) $18.53
Forfeited (165,298) $34.46 (291,807) $24.99 (134,608) $21.87
--------- --------- ---------
Outstanding
at end
of year 3,389,364 $31.34 3,917,693 $22.15 4,248,642 $19.37
--------- --------- ---------
Exercisable 1,941,601 2,392,853 2,407,838
===============================================================================
===============================================================================
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------
Weighted
Number Average Weighted Number Weighted
Range of outstanding at Remaining Average Exercisable at Average
Exercise December 31, Contract Exercise December 31, Exercise
Prices 1998 Life Price 1998 Price
- -------------------------------------------------------------------------------
$10 to 24 1,780,468 4.7 $22.02 1,584,390 $21.74
$25 to 44 696,446 5.1 $33.56 235,482 $33.52
$45 to 61 912,450 5.6 $47.84 121,729 $53.42
--------- ---------
3,389,364 1,941,601
===============================================================================
The Company applies APB 25 and related interpretations in accounting for
its plans. Accordingly, since the fair value of the options at grant date equals
the exercise price, no compensation cost has been recognized for its fixed stock
option plan. Had compensation cost for the Company's stock-based compensation
plan been determined consistent with FAS 123, the Company's net income, earnings
per share and earnings per diluted share for the years ended December 31, 1998,
1997 and 1996, would have been reduced to the pro-forma amounts indicated below:
========================================================================
1998 1997 1996
- ------------------------------------------------------------------------
Net Income:
As reported $253,994 $223,030 $276,317
Pro-forma $248,089 $218,852 $273,528
Earnings per share:
As reported $3.63 $3.19 $3.95
Pro-forma $3.55 $3.13 $3.91
Earnings per diluted share:
As reported $3.56 $3.13 $3.91
Pro-forma $3.48 $3.07 $3.87
========================================================================
The weighted-average fair value (determined as of the date of the
grants) of options granted in 1998, 1997 and 1996 was $13.09 per share, $9.85
per share, and $6.19 per share, respectively. The fair value of each option
grant issued was estimated as of the date of the grant using the Black-Scholes
option-pricing model, with the following weighted-average assumptions used for
grants in 1998, 1997 and 1996, respectively: (i) dividend yield of 0.85%, 1.08%
and 1.24%; (ii) expected volatility of 20.5%, 19.4% and 16.5%; (iii) risk-free
interest rates of 5.5%, 6.4% and 6.2%; and (iv) expected lives of 5 years, 6
years and 5 years. The pro-forma amounts disclosed above are not likely to be
representative of the effects of reported pro-forma net income for future years
because options vest over several years and additional awards are granted each
year.
46
<PAGE>
17 SEGMENT INFORMATION
The Company has two reportable segments, as follows: (1)Financial Guarantee
Insurance, which provides insurance of municipal and structured finance
obligations; and (2) Financial Management Services, which provides investment
agreements, interest rate swaps, and investment advisory and cash management
services. During the fourth quarter of 1998, the Company discontinued its
operations relating to electronic commerce applications for the municipal
marketplace. Balances relating to the electronic commerce business are included
in the Financial Management Services segment below. Total losses before income
taxes for the electronic commerce business was $6,946, $3,557 and $617 for the
years ended December 31, 1998, 1997 and 1996, respectively. Also included below
for both revenues and income before income taxes for the Financial Management
Services segment is a $11,548 charge representing the write-off of the
investment in Ambac Connect.
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.
The accounting policies of the segments are the same as those described
in Note 2, "Significant Accounting Policies." Pursuant to insurance and
indemnity agreements, Ambac Assurance guarantees the swap and investment
agreement obligations of those financial management services subsidiaries.
Intersegment revenues include the premiums earned under those agreements. Such
premiums are accounted for as if they were premiums to third parties, that is,
at current market prices.
Information provided below for "Corporate and Other" relates to AFGI
corporate activities. Revenue from unaffiliated customers of $16,232 and $7,955
consists primarily of interest income from investment securities for the years
ended December 31, 1998 and 1997, respectively. Revenue from unaffiliated
customers in 1996 of $164,242 includes a one-time gain from the sale of a
subsidiary of approximately $155,600.
The following table is a summary of the financial information by reportable
segment for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
=================================================================================================================================
Financial Financial
Guarantee Management Corporate Intersegment Total
Insurance Services and Other Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998:
Revenues:
Unaffiliated customers $ 408,390 $ 32,414 $ 16,232 $ - $ 457,036
Intersegment 2,761 (2,819) 48,610 (48,552) -
- ----------------------------------------------------------------------------------------------------------------------------------
Total revenues $ 411,151 $ 29,595 $ 64,842 $ (48,552) $ 457,036
- ----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes:
Unaffiliated customers $ 355,670 $ (3,126) $(23,632) $ - $ 328,912
Intersegment 2,761 (4,891) 48,610 (46,480) -
- ----------------------------------------------------------------------------------------------------------------------------------
Total income before income taxes $ 358,431 $ (8,017) $ 24,978 $ (46,480) $ 328,912
- ----------------------------------------------------------------------------------------------------------------------------------
Identifiable assets $3,825,411 $7,128,350 $258,550 $ - $11,212,311
- ----------------------------------------------------------------------------------------------------------------------------------
1997:
Revenues:
Unaffiliated customers $ 339,195 $ 34,612 $ 7,955 $ - $ 381,762
Intersegment 1,857 (194) 44,068 (45,731) -
- ----------------------------------------------------------------------------------------------------------------------------------
Total revenues $ 341,052 $ 34,418 $ 52,023 $ (45,731) $ 381,762
- ----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes:
Unaffiliated customers $ 295,669 $ 6,619 $(16,292) $ - $ 285,996
Intersegment 1,736 (1,031) 44,068 (44,773) -
- ----------------------------------------------------------------------------------------------------------------------------------
Total income before income taxes $ 297,405 $ 5,588 $ 27,776 $ (44,773) $ 285,996
- ----------------------------------------------------------------------------------------------------------------------------------
Identifiable assets $3,392,333 $4,805,517 $ 93,855 $ - $8,291,705
- ----------------------------------------------------------------------------------------------------------------------------------
1996:
Revenues:
Unaffiliated customers $ 266,300 $ 22,366 $164,242 $ - $ 452,908
Intersegment 1,728 (810) 159,883 (160,801) -
- ----------------------------------------------------------------------------------------------------------------------------------
Total revenues $ 268,028 $ 21,556 $324,125 $ (160,801) $ 452,908
- ----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes:
Unaffiliated customers $ 225,340 $ 10,326 $139,840 $ - $ 375,506
Intersegment 1,728 (980) 159,883 (160,631) -
- ----------------------------------------------------------------------------------------------------------------------------------
Total income before income taxes $ 227,068 $ 9,346 $299,723 $ (160,631) $ 375,506
- ----------------------------------------------------------------------------------------------------------------------------------
Identifiable assets $2,886,657 $2,861,527 $128,174 $ - $5,876,358
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
The following table summarizes gross premiums written and net premiums
earned included in the financial guarantee segment, by location of risk.
==============================================================
Gross Net
Premiums Premiums
Written Earned
- --------------------------------------------------------------
1998:
United States $297,565 $198,904
United Kingdom 30,337 1,754
Australia 16,166 686
France 1,318 1,745
Japan 3,970 1,941
Italy - 974
Internationally diversified(1) 4,436 3,654
Other international 7,219 3,026
- --------------------------------------------------------------
Total $361,011 $212,684
==============================================================
1997:
United States $242,727 $145,988
United Kingdom 16,144 903
Australia - 114
France 2,911 2,048
Japan 2,349 1,175
Italy 4,731 841
Internationally diversified(1) 1,831 1,409
Other international 15,470 1,522
- --------------------------------------------------------------
Total $286,163 $154,000
==============================================================
==============================================================
Gross Net
Premiums Premiums
Written Earned
- --------------------------------------------------------------
1996:
United States $226,276 $131,638
United Kingdom 11,624 751
Australia 1,624 81
France 2,515 1,959
Japan 472 338
Italy - 617
Internationally diversified(1) 392 662
Other international 4,305 583
- --------------------------------------------------------------
Total $247,208 $136,629
==============================================================
(1) Internationally diversified represents insured policies with
multiple locations of risk.
In the United States, California was the state with the highest
aggregate net par amount in force, accounting for 11.4% of the total at December
31, 1998, and no other state accounted for more than ten percent. The highest
single insured risk represented less than 1% of aggregate net par amount
insured. All revenues of the Financial Management Services segment are from
operations in the United States.
18 QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
=================================================================================================================
First Second Third Fourth Full Year
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998:
Gross premiums written $77,487 $88,042 $88,731 $106,751 $361,011
Net premiums written 51,400 77,994 83,967 98,087 311,448
Net premiums earned 53,184 53,318 50,143 56,039 212,684
Net investment income 45,040 45,872 47,436 47,842 186,190
Financial management services income 12,754 12,732 13,541 10,483 49,510
Losses and loss adjustment expenses 1,577 1,423 1,500 1,500 6,000
Financial guarantee underwriting and
operating expenses 12,018 11,190 11,844 11,668 46,720
Financial management services expenses 7,443 8,603 8,237 11,257 35,540
Income before income taxes 86,197 78,513 85,199 79,003 328,912
Net income 65,658 60,796 65,382 62,158 253,994
Net income per share 0.94 0.87 0.94 0.89 3.63
Net income per diluted share $ 0.92 $ 0.85 $ 0.92 $ 0.87 $ 3.56
- -----------------------------------------------------------------------------------------------------------------
1997:
Gross premiums written $51,792 $73,740 $52,371 $108,260 $286,163
Net premiums written 46,360 66,545 45,876 94,930 253,711
Net premiums earned 37,033 36,386 35,672 44,909 154,000
Net investment income 38,447 39,258 40,109 41,895 159,709
Financial management services income 7,222 6,150 9,062 12,815 35,249
Losses and loss adjustment expenses 728 664 730 732 2,854
Financial guarantee underwriting and
operating expenses 9,092 9,732 10,173 11,675 40,672
Financial management services expenses 8,980 5,474 5,751 7,788 27,993
Income before income taxes 62,396 67,836 79,637 76,127 285,996
Net income 49,738 53,613 60,795 58,884 223,030
Net income per share(1) 0.71 0.77 0.87 0.84 3.19
Net income per diluted share $ 0.70 $ 0.75 $ 0.85 $ 0.83 $ 3.13
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net income per share has been retroactively adjusted to reflect the
two-for-one stock split which occurred in September 1997.
48
<PAGE>
STOCKHOLDER INFORMATION
CORPORATE HEADQUARTERS:
AMBAC FINANCIAL GROUP, INC.
One State Street Plaza
New York, New York 10004
212-668-0340
fax 212-509-9190
OTHER LOCATIONS:
CADRE FINANCIAL SERVICES,INC.
905 Marconi Avenue
Ronkonkoma, New York 11779
516-467-0200
MBIA.AMBAC INTERNATIONAL JOINT VENTURE OFFICES:
NEW YORK:
885 Third Avenue
New York, New York 10022
212-644-1300
AUSTRALIA:
Level 29, Chifley Tower
Sydney, Australia
NSW 2000
61 2 9375 2198
FRANCE:
112, Avenue Klebor
75116 Paris, France
33 153 704 343
SPAIN:
Serrano, 20-2 Dcha
28001 Madrid, Spain
34 9 1 431-6881
UK:
Hasilwood House
60 Bishopsgate
London EC2N4BE England
44 171-786-4300
TOKYO:
Shiroyama JT Mori Bldg., 16F
4-3-1 Toranomon Minato-ku
Tokyo 105 6016
8135 403 4625
ANNUAL MEETING OF STOCKHOLDERS
The Annual Meeting of Stockholders of Ambac Financial Group, Inc. will be held
on Wednesday, May 12, 1999, at 11:30 a.m. in New York City. Detailed information
about the meeting is contained in the Notice of Annual Meeting and Proxy
Statement to be sent to each stockholder of record as of March 22, 1999. The
Company estimates that it has approximately 34,000 stockholders.
FORM 10-K
A copy of the Company's 1998 Annual Report on Form 10-K for the year ended
December 31, 1998, as filed with the Securities and Exchange Commission, may be
obtained without charge by writing to: Ambac Financial Group, Inc., Attn:
Investor Relations, One State Street Plaza, New York, New York 10004
TRANSFER AGENT, REGISTRAR AND DIVIDEND PAYING AGENT
Citibank, N.A.
111 Wall Street, 5th Floor
New York, New York 10043
212-657-5997
INDEPENDENT AUDITORS
KPMG LLP
New York, New York
STOCK LISTING
Ambac Financial Group, Inc. common stock is listed on the New York Stock
Exchange under the ticker symbol ABK.
INVESTOR RELATIONS
Frank J. Bivona
Executive Vice President
and Chief Financial Officer
Brian S. Moore
Managing Director
212-208-3333
1-800-221-1854
[email protected]
COMMON STOCK DATA
The table below shows the high and low price per share for each quarter of 1998
and 1997, as adjusted for the two-for-one common stock split, which occurred in
September 1997.
<TABLE>
<CAPTION>
=================================================================================================================================
1998 Market Price 1997 Market Price
- ---------------------------------------------------------------------------------------------------------------------------------
Dividends Dividends
Three Months Ended High Low Close Per Share High Low Close Per Share
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
March 31 $58 9/16 $44 3/8 $58 7/16 $0.0900 $37 $31 5/8 $32 1/4 $0.0825
June 30 61 53 1/2 58 1/2 0.0900 42 1/4 31 38 3/16 0.0825
September 30 65 15/16 45 9/16 48 0.1000 42 15/16 38 1/4 40 11/16 0.0900
December 31 62 3/8 40 7/8 60 3/16 0.1000 47 9/16 40 46 0.0900
=================================================================================================================================
</TABLE>
50
<PAGE>
EXHIBIT 21.01
List of Subsidiaries of Ambac Financial Group, Inc.
--------------------------------------------------
The following is a list of significant and other subsidiaries of Ambac
Financial Group, Inc. The state of incorporation of each subsidiary is included
in parentheses after its name.
Ambac Assurance Corporation (Wisconsin)
Ambac Capital Corporation (Delaware)
AMBAC Capital Management, Inc. (Delaware)
Ambac Investments, Inc. (Delaware)
Ambac Financial Services Holdings, Inc. (Delaware)
Ambac Financial Services, L.P. (Delaware)
<PAGE>
EXHIBIT 24.01
AMBAC FINANCIAL GROUP, INC.
Power of Attorney
-----------------
KNOW ALL MEN BY THESE PRESENTS that the undersigned director and
officer of Ambac Financial Group, Inc., a Delaware corporation, hereby
constitutes and appoints each of Frank J. Bivona and Joseph V. Salzano, as
his true and lawful attorney-in-fact and agent, with full power of
substitution, for him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K for the year ended
December 31, 1998, to be filed with the Securities and Exchange Commission
and the New York Stock Exchange, and any and all amendments thereto, and
any and all instruments and documents filed as a part of or in connection
with the said Form 10-K or amendments thereto, and does hereby grant unto
each said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that each
said attorney-in-fact and agent shall do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents
as of this 25th day of February, 1999.
/s/ Phillip B. Lassiter
-----------------------
Phillip B. Lassiter
<PAGE>
EXHIBIT 24.02
AMBAC FINANCIAL GROUP, INC.
Power of Attorney
-----------------
KNOW ALL MEN BY THESE PRESENTS that the undersigned director and
officer of Ambac Financial Group, Inc., a Delaware corporation, hereby
constitutes and appoints each of Anne G. Gill and Joseph V. Salzano, as his
true and lawful attorney-in-fact and agent, with full power of
substitution, for him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K for the year ended
December 31, 1998, to be filed with the Securities and Exchange Commission
and the New York Stock Exchange, and any and all amendments thereto, and
any and all instruments and documents filed as a part of or in connection
with the said Form 10-K or amendments thereto, and does hereby grant unto
each said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that each
said attorney-in-fact and agent shall do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents
as of this 25th day of February, 1999.
/s/ Frank J. Bivona
-------------------
Frank J. Bivona
<PAGE>
EXHIBIT 24.03
AMBAC FINANCIAL GROUP, INC.
Power of Attorney
-----------------
KNOW ALL MEN BY THESE PRESENTS that the undersigned director and
officer of Ambac Financial Group, Inc., a Delaware corporation, hereby
constitutes and appoints each of Frank J. Bivona and Joseph V. Salzano, as
his true and lawful attorney-in-fact and agent, with full power of
substitution, for him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K for the year ended
December 31, 1998, to be filed with the Securities and Exchange Commission
and the New York Stock Exchange, and any and all amendments thereto, and
any and all instruments and documents filed as a part of or in connection
with the said Form 10-K or amendments thereto, and does hereby grant unto
each said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that each
said attorney-in-fact and agent shall do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents
as of this 25th day of February, 1999.
/s/ Michael A. Callen
---------------------
Michael A. Callen
<PAGE>
EXHIBIT 24.04
AMBAC FINANCIAL GROUP, INC.
Power of Attorney
-----------------
KNOW ALL MEN BY THESE PRESENTS that the undersigned director and
officer of Ambac Financial Group, Inc., a Delaware corporation, hereby
constitutes and appoints each of Frank J. Bivona and Joseph V. Salzano, as
his true and lawful attorney-in-fact and agent, with full power of
substitution, for him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K for the year ended
December 31, 1998, to be filed with the Securities and Exchange Commission
and the New York Stock Exchange, and any and all amendments thereto, and
any and all instruments and documents filed as a part of or in connection
with the said Form 10-K or amendments thereto, and does hereby grant unto
each said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that each
said attorney-in-fact and agent shall do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents
as of this 25th day of February, 1999.
/s/ Renso L. Caporali
---------------------
Renso L. Caporali
<PAGE>
EXHIBIT 24.05
AMBAC FINANCIAL GROUP, INC.
Power of Attorney
-----------------
KNOW ALL MEN BY THESE PRESENTS that the undersigned director and
officer of Ambac Financial Group, Inc., a Delaware corporation, hereby
constitutes and appoints each of Frank J. Bivona and Joseph V. Salzano, as
his true and lawful attorney-in-fact and agent, with full power of
substitution, for him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K for the year ended
December 31, 1998, to be filed with the Securities and Exchange Commission
and the New York Stock Exchange, and any and all amendments thereto, and
any and all instruments and documents filed as a part of or in connection
with the said Form 10-K or amendments thereto, and does hereby grant unto
each said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that each
said attorney-in-fact and agent shall do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents
as of this 25th day of February, 1999.
/s/ Richard Dulude
------------------
Richard Dulude
<PAGE>
EXHIBIT 24.06
AMBAC FINANCIAL GROUP, INC.
Power of Attorney
-----------------
KNOW ALL MEN BY THESE PRESENTS that the undersigned director and
officer of Ambac Financial Group, Inc., a Delaware corporation, hereby
constitutes and appoints each of Frank J. Bivona and Joseph V. Salzano, as
his true and lawful attorney-in-fact and agent, with full power of
substitution, for him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K for the year ended
December 31, 1998, to be filed with the Securities and Exchange Commission
and the New York Stock Exchange, and any and all amendments thereto, and
any and all instruments and documents filed as a part of or in connection
with the said Form 10-K or amendments thereto, and does hereby grant unto
each said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that each
said attorney-in-fact and agent shall do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents
as of this 25th day of February, 1999.
/s/ W. Grant Gregory
--------------------
W. Grant Gregory
<PAGE>
EXHIBIT 24.07
AMBAC FINANCIAL GROUP, INC.
Power of Attorney
-----------------
KNOW ALL MEN BY THESE PRESENTS that the undersigned director and
officer of Ambac Financial Group, Inc., a Delaware corporation, hereby
constitutes and appoints each of Frank J. Bivona and Joseph V. Salzano, as
his true and lawful attorney-in-fact and agent, with full power of
substitution, for him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K for the year ended
December 31, 1998, to be filed with the Securities and Exchange Commission
and the New York Stock Exchange, and any and all amendments thereto, and
any and all instruments and documents filed as a part of or in connection
with the said Form 10-K or amendments thereto, and does hereby grant unto
each said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that each
said attorney-in-fact and agent shall do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents
as of this 25th day of February, 1999.
/s/ C. Roderick O' Neil
-----------------------
C. Roderick O'Neil
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 8,622,282
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 6,567
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 8,748,377
<CASH> 8,239
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 120,619
<TOTAL-ASSETS> 11,212,311
<POLICY-LOSSES> 115,794
<UNEARNED-PREMIUMS> 1,294,214
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 423,929
0
0
<COMMON> 707
<OTHER-SE> 2,095,383
<TOTAL-LIABILITY-AND-EQUITY> 11,212,311
212,684
<INVESTMENT-INCOME> 186,190
<INVESTMENT-GAINS> (10,854)
<OTHER-INCOME> 5,781
<BENEFITS> 6,000
<UNDERWRITING-AMORTIZATION> 46,720
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 328,912
<INCOME-TAX> 74,918
<INCOME-CONTINUING> 253,994
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 253,994
<EPS-PRIMARY> 3.63
<EPS-DILUTED> 3.56
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<PAGE>
EXHIBIT 99.1
AMBAC ASSURANCE CORPORATION AND SUBSIDIARIES
(a wholly-owned subsidiary of Ambac Financial Group, Inc.)
Consolidated Financial Statements
December 31, 1998 and 1997
<PAGE>
Independent Auditors' Report
The Board of Directors
Ambac Assurance Corporation:
We have audited the accompanying consolidated balance sheets of Ambac
Assurance Corporation and subsidiaries (a wholly-owned subsidiary of Ambac
Financial Group, Inc.) as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholder's equity and cash flows for
each of the years in the three-year period ended December 31, 1998. These
consolidated financial statements are the responsibility of Ambac Assurance
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Ambac
Assurance Corporation and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998 in conformity with generally accepted
accounting principles.
/s/KPMG LLP
KPMG LLP
New York, New York
January 27, 1999
<PAGE>
AMBAC ASSURANCE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
(Dollars in Thousands Except Share Data)
See accompanying Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
1998 1997
-------------- -------------
ASSETS
<S> <C> <C>
Investments:
Fixed income securities, at fair value
(amortized cost of $3,097,289 in 1998 and $2,696,603 in 1997)............. $3,310,047 $2,878,083
Short-term investments, at cost (approximates fair value)..................... 93,912 116,905
-------------- --------------
Total investments......................................................... 3,403,959 2,994,988
Cash............................................................................. 4,895 8,004
Securities purchased under agreements to resell.................................. 5,449 2,484
Receivable for securities sold................................................... 12,132 24,018
Investment income due and accrued................................................ 54,088 49,987
Deferred acquisition costs....................................................... 120,619 105,996
Receivable from brokers and dealers.............................................. -- 183,041
Reinsurance recoverable.......................................................... 3,638 4,219
Prepaid reinsurance.............................................................. 199,920 183,492
Other assets..................................................................... 212,475 90,785
-------------- --------------
Total assets.............................................................. $4,017,175 $3,647,014
============== ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Unearned premiums............................................................. $1,303,203 $1,184,537
Losses and loss adjustment expenses........................................... 115,794 103,345
Ceded reinsurance balances payable............................................ 6,576 9,258
Deferred income taxes......................................................... 144,565 122,554
Current income taxes.......................................................... 19,984 19,714
Accounts payable and other liabilities........................................ 226,950 111,624
Payable for securities purchased.............................................. 33,758 195,388
-------------- --------------
Total liabilities......................................................... 1,850,830 1,746,420
-------------- --------------
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 December 31, 1998 and December 31, 1997................................ 82,000 82,000
Additional paid-in capital.................................................... 541,021 521,153
Accumulated other comprehensive income........................................ 138,651 118,119
Retained earnings............................................................. 1,404,673 1,179,322
-------------- --------------
Total stockholder's equity................................................ 2,166,345 1,900,594
-------------- --------------
Total liabilities and stockholder's equity................................ $4,017,175 $3,647,014
============== ==============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
AMBAC ASSURANCE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Dollars in Thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------
1998 1997 1996
-------------- -------------- -------------
<S> <C> <C> <C>
Revenues:
Gross premiums written............................................ $ 366,791 $ 289,383 $249,761
Ceded premiums written............................................ (49,563) (32,452) (37,793)
-------------- -------------- -------------
Net premiums written........................................... 317,228 256,931 211,968
Increase in unearned premiums, net................................ (102,205) (101,263) (73,671)
-------------- -------------- -------------
Net premiums earned............................................ 215,023 155,668 138,297
Net investment income............................................. 186,259 160,088 145,302
Net realized (losses) gains....................................... (12,346) 18,798 69,149
Other income...................................................... 25,399 16,661 16,418
-------------- -------------- -------------
Total revenues................................................. 414,335 351,215 369,166
-------------- -------------- -------------
Expenses:
Losses and loss adjustment expenses............................... 6,000 2,854 3,778
Underwriting and operating expenses............................... 51,000 46,769 42,459
Interest expense.................................................. 3,039 2,293 2,073
-------------- -------------- -------------
Total expenses................................................. 60,039 51,916 48,310
-------------- -------------- -------------
Income before income taxes..................................... 354,296 299,299 320,856
-------------- -------------- -------------
Income tax expense:
Current taxes..................................................... 71,395 55,492 68,322
Deferred taxes.................................................... 9,550 11,702 11,298
-------------- -------------- -------------
Total income taxes............................................. 80,945 67,194 79,620
-------------- -------------- -------------
Net Income..................................................... $ 273,351 $ 232,105 $241,236
============== ============== =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
AMBAC ASSURANCE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholder's Equity
(Dollars In Thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------------------
1998 1997 1996
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Retained Earnings:
Balance at January 1 $1,179,322 $ 991,815 $ 906,536
Net income 273,351 $273,351 232,105 $232,105 241,236 $241,236
---------- ---------- ----------
Dividends declared
common stock (48,000) (44,000) (155,865)
Other -- (598) (92)
---------- ------------ ------------
Balance at December 31 $1,404,673 $1,179,322 $ 991,815
---------- ------------ ------------
Accumulated Other
Comprehensive Income:
Balance at January 1 $ 118,119 $ 65,822 $ 87,112
Unrealized gains (losses) on
securities, ( $31,278,
$80,241, and ($32,754),
pre-tax, in 1998, 1997
and 1996, respectively) (1) 20,331 52,140 (21,290)
Foreign currency gain 201 157 --
---------- ---------- ----------
Other comprehensive income 20,532 20,532 52,297 52,297 (21,290) (21,290)
---------- ---------- ---------- ---------- ---------- ----------
Total comprehensive income $293,883 $284,402 $219,946
========== ========== ==========
Balance at December 31 $ 138,651 $ 118,119 $ 65,822
---------- ---------- ----------
Common Stock:
Balance at January 1 and
December 31 $ 82,000 $ 82,000 $ 82,000
---------- ---------- ----------
Additional Paid-in Capital:
Balance at January 1 $ 521,153 $ 515,684 $ 481,059
Capital contribution 9,000 1,475 32,500
Exercise of stock options 10,868 3,994 2,125
---------- ---------- ----------
Balance at December 31 $ 541,021 $ 521,153 $ 515,684
---------- ---------- ----------
Total Stockholder's Equity at
December 31 $2,166,345 $1,900,594 $1,655,321
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
(1) Disclosure of reclassification amount: 1998 1997 1996
---------------------------------------------
<S> <C> <C> <C>
Unrealized holding gains (losses) arising during period $22,758 $63,182 $(34,636)
Less: reclassification adjustment for net gains (losses) included in net income 2,427 11,042 (13,346)
---------------------------------------------
Net unrealized gains (losses) on securities $20,331 $52,140 $(21,290)
=============================================
</TABLE>
See accompanying Notes to Consolidated Financial Ststements.
<PAGE>
AMBAC ASSURANCE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in Thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income...................................................... $ 273,351 $ 232,105 $ 241,236
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................................... 1,877 1,689 1,711
Amortization of bond premium and discount....................... (1,733) (1,084) (1,902)
Current income taxes............................................ 270 18,240 11,145
Deferred income taxes........................................... 11,064 11,702 11,299
Deferred acquisition costs...................................... (14,623) (11,784) (11,592)
Unearned premiums............................................... 102,238 101,257 73,671
Losses and loss adjustment expenses............................. 13,030 408 (5,776)
Ceded reinsurance balances payable.............................. (2,682) 1,303 (7,216)
Loss (gain) on sales of investments............................. 12,346 (18,798) (69,149)
Other, net...................................................... (25,241) 12,315 (11,309)
--------------- --------------- ---------------
Net cash provided by operating activities.................... 369,897 347,353 232,118
--------------- --------------- ---------------
Cash flows from investing activities:
Proceeds from sales of bonds at amortized cost.................. 1,127,196 1,346,231 1,555,372
Proceeds from maturities of bonds at amortized cost............. 126,822 115,476 86,292
Purchases of bonds at amortized cost............................ (1,616,863) (1,623,486) (1,938,677)
Change in short-term investments................................ 22,993 (25,585) 72,633
Securities purchased under agreements to resell................. (2,965) 1,885 (249)
Purchase of affiliate........................................... -- (120,006) --
Other, net...................................................... (1,472) (236) (1,876)
--------------- --------------- ---------------
Net cash used in investing activities........................ (344,289) (305,721) (226,505)
--------------- --------------- ---------------
Cash flows from financing activities:
Dividends paid.................................................. (48,000) (44,000) (40,000)
Capital contribution............................................ 9,000 -- 32,500
Short term financing from affiliates............................ 10,283 5,347 --
--------------- --------------- ---------------
Net cash used in financing activities........................ (28,717) (38,653) (7,500)
--------------- --------------- ---------------
Net cash flow................................................ (3,109) 2,979 (1,887)
Cash at January 1................................................. 8,004 5,025 6,912
--------------- --------------- ---------------
Cash at December 31............................................... $ 4,895 $ 8,004 $ 5,025
=============== =============== ===============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes................................................. $ 64,618 $ 42,100 $ 54,504
=============== =============== ===============
Interest expense on intercompany line of credit.............. $ 783 $ 15 --
=============== =============== ===============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
AMBAC ASSURANCE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in Thousands)
1 BACKGROUND
Ambac Assurance Corporation ("Ambac Assurance") is a leading insurer of
municipal and structured finance obligations. Ambac Assurance has earned
triple-A ratings, the highest ratings available from Moody's Investors Service,
Inc., Standard & Poor's Rating Group, Fitch IBCA, Inc., and Japan Rating and
Investment Information, Inc. Financial guarantee insurance underwritten by Ambac
Assurance guarantees payment when due of the principal of and interest on the
obligation insured. In the case of a monetary default on the insured bond,
payments under the insurance policy may not be accelerated by the policyholder
without Ambac Assurance's consent. As of December 31, 1998, Ambac Assurance's
net insurance-in-force (principal and interest) was $317,688,000. Ambac
Assurance is a wholly owned subsidiary of Ambac Financial Group, Inc. ("AFGI"),
a holding company whose subsidiaries provide financial guarantee insurance and
financial services to clients in both the public and private sectors around the
world.
In December 1997, Ambac Assurance acquired Construction Loan Insurance
Corporation ("CLIC"). CLIC's wholly owned subsidiary, Connie Lee Insurance
Company ("Connie Lee"), a triple-A rated financial guarantee insurance company
which guaranteed bonds primarily for college and hospital infrastructure
projects, did not write any new business in 1998. 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 primarily in international markets through
its wholly-owned subsidiary Ambac Assurance UK Limited (formerly known as Ambac
Insurance UK Limited) and through an arrangement with MBIA Insurance Company
("MBIA") to participate in MBIA.AMBAC International, an unincorporated joint
venture (the "Joint Venture") formed in 1995. The joint venture was formed with
the goal of bringing the combined resources of the two companies together to
more efficiently serve the international market. Under the joint venture
arrangement, financial guarantee policies are issued separately by each of the
companies and each company has the opportunity to reinsure up to 50% of
international business written.
Ambac Assurance, as the sole limited partner, owns a limited partnership
interest representing 90% of the total partnership interests of Ambac Financial
Services, L.P. ("AFSLP"), a limited partnership which provides interest rate
swaps primarily to states, municipalities and their authorities. The sole
general partner of AFSLP, Ambac Financial Services Holdings, Inc., a wholly
owned subsidiary of AFGI, owns a general partnership interest representing 10%
of the total partnership interest in AFSLP.
During 1996, in conjunction with the sale of AFGI's and Ambac Assurance's
combined holdings in an affiliate, HCIA Inc. ("HCIA") common stock, Ambac
Assurance delivered to AFGI (in the form of an extraordinary dividend) its
2,378,672 shares of HCIA common stock. As a result, Ambac Assurance recognized a
realized gain of $89,680 on the disposition of the stock.
2 SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements have been prepared on
the basis of U.S. Generally Accepted Accounting Principles ("GAAP"). The
preparation of consolidated 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 consolidated financial statements and the
reported revenues and expenses during the reporting period.
<PAGE>
AMBAC ASSURANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollar Amounts in Thousands)
Actual results could differ from those estimates. The significant accounting
policies of Ambac Assurance and its subsidiaries (sometimes collectively
referred to as the "Company") are as described below:
CONSOLIDATION:
The accompanying consolidated financial statements include the accounts of
Ambac Assurance and its subsidiaries. All significant intercompany balances have
been eliminated.
INVESTMENTS:
The Company's investment portfolio is accounted for on a trade-date basis
and consists entirely of investments in fixed income securities that are
considered available-for-sale and are carried at fair value. Fair value is based
on quotes obtained by the Company from independent market sources. Short-term
investments are carried at cost, which approximates fair value. Unrealized gains
and losses, net of deferred income taxes, are included as a component of
"Accumulated Other Comprehensive Income" in stockholder's equity and are
computed using amortized cost as the basis. For purposes of computing amortized
cost, premiums and discounts are accounted for using the interest method. For
bonds purchased at a price below par value, discounts are accreted over the
remaining term of the securities. For bonds purchased at a price above par value
which have call features, premiums are amortized to the most likely call dates
as determined by management. For premium bonds that do not have call features,
such premiums are amortized over the remaining terms of the securities. Premiums
and discounts on mortgage-backed and asset-backed securities are adjusted for
the effects of actual and anticipated prepayments. Realized gains and losses on
sales of investments are determined on the basis of specific identification.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL:
Securities purchased under agreements to resell are collateralized
financing transactions, and are recorded at their contracted resale amounts,
plus accrued interest. The Company takes possession of the collateral underlying
those agreements and monitors its market value on a daily basis and, when
necessary, requires prompt transfer of additional collateral to reflect current
market value.
PREMIUM REVENUE RECOGNITION:
Premiums can be structured in two ways: (1) computed as a percentage of
principal and interest insured, typically collected in a single payment at
policy inception date, and earned pro rata over the period of risk; and (2)
computed as a percentage of either principal or principal and interest insured,
collected periodically (i.e., monthly, quarterly or annually), and reflected in
income pro rata over the period covered by the premium payment.
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.
2
<PAGE>
AMBAC ASSURANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollars in Thousands)
LOSSES AND LOSS ADJUSTMENT EXPENSES:
The liability for losses and loss adjustment expenses consists of the
active credit reserve ("ACR") and case basis loss and loss adjustment expense
reserves. The development of the ACR is based upon estimates of the expected
annual levels of debt service defaults resulting from credit failures on
currently insured issues that are not presently or imminently in monetary
default. When losses occur (monetary defaults or defaults which are imminent on
insured obligations), case basis loss reserves are established in an amount that
is sufficient to cover the present value of the anticipated defaulted debt
service payments over the expected period of default and estimated expenses
associated with settling the claims, less estimated recoveries under salvage or
subrogation rights. All or part of case basis loss reserves are allocated from
any ACR available. The Company regularly reviews its outstanding obligations to
determine an appropriate reserve for losses and loss adjustment expenses. The
following table summarizes the Company's loss reserves split between case basis
loss reserves and ACR at December 31, 1998 and 1997:
1998 1997
----------------------------
Net loss and loss adjustment expense reserves:
Case basis (*) $ 33,916 $50,860
ACR 78,240 48,266
----------------------------
Total $112,156 $99,126
----------------------------
(*) After netting reinsurance recoverable amounting to $3,638 and $4,219 in
1998 and 1997, respectively.
Paid losses, net of salvage received were ($7,030), $2,474 and $9,554 in
1998, 1997 and 1996, respectively.
Ambac Assurance's management believes that the reserves for losses and loss
adjustment expenses are adequate to cover the ultimate net cost of claims, but
the reserves are necessarily based on estimates and there can be no assurance
that the ultimate liability will not exceed such estimates.
DEFERRED ACQUISITION COSTS:
Certain costs incurred that vary with, and are primarily related to, the
production of business have been deferred. These costs include direct and
indirect expenses related to underwriting, marketing and policy issuance, rating
agency fees and premium taxes, net of reinsurance ceding commissions. The
deferred acquisition costs are being amortized over the periods in which the
related premiums are earned, and such amortization amounted to $18,248, $14,213
and $12,553 for 1998, 1997 and 1996, respectively. Deferred acquisition costs,
net of such amortization, amounted to $14,623, $11,784 and $11,592 for 1998,
1997 and 1996, respectively.
DEPRECIATION AND AMORTIZATION:
Depreciation of furniture and fixtures and electronic data processing
equipment is provided over the estimated useful lives of the respective assets,
ranging from three to five years, using the straight-line method. Amortization
of leasehold improvements and intangibles, including certain computer software
licenses, is provided over the estimated useful lives of the respective assets,
ranging from three to 10 years, using the straight-line method.
3
<PAGE>
AMBAC ASSURANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollar Amounts in Thousands)
DERIVATIVE CONTRACTS:
Derivative Contracts Held for Trading Purposes:
The Company, through its affiliate AFSLP, a provider of interest rate swaps
to states, municipalities and their authorities, and other entities in
connection with their financings, uses derivative contracts that are classified
as held for trading purposes. Derivative contracts are recorded on trade date at
fair value. Changes in fair value are recorded as a component of other income.
The fair value of interest rate swaps is determined through the use of valuation
models. Interest rate swaps are recorded on the balance sheet on a gross basis,
and are included in other assets and accounts payable and other liabilites;
assets and liabilities are netted by customer only when a legal right of set-off
exists.
INCOME TAXES:
Pursuant to a tax-sharing agreement, the Company is included in Ambac
Financial Group, Inc.'s consolidated Federal income tax return. The tax-sharing
agreement provides for the determination of tax expense or benefit based on the
contribution of the Company to AFGI's consolidated Federal income tax liability,
computed substantially as if the Company filed a separate Federal income tax
return. The tax liability due is settled quarterly, with a final settlement
taking place after the filing of the consolidated Federal income tax return.
The Company files its own state income tax returns.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the period that
includes the enactment date.
The Internal Revenue Code permits financial guarantee insurance companies
to deduct from taxable income, subject to certain limitations, the amounts added
to the statutory mandatory contingency reserve for municipal obligations during
the year. The deduction taken is allowed only to the extent that U.S. Treasury
noninterest-bearing tax and loss bonds are purchased in an amount equal to the
tax benefit attributable to such deductions. The amounts deducted must be
included in taxable income when the contingency reserve is released, at which
time the Company may redeem the tax and loss bonds to satisfy the additional tax
liability. Purchases of tax and loss bonds are recorded as payments of Federal
income taxes.
POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS:
AFGI, through its subsidiaries, provides various postretirement and
postemployment benefits, including pension, and health and life benefits
covering substantially all employees who meet certain age and service
requirements. The Company accounts for these benefits under the accrual method
of accounting. Amounts related to the defined benefit pension plan and
postretirement health benefits are charged based on actuarial determinations.
4
<PAGE>
AMBAC ASSURANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollar Amounts in Thousands)
STOCK COMPENSATION PLANS:
The Company participates in AFGI's equity plan. Under this plan, awards are
granted to eligible employees of the Company in the form of incentive stock
options or other stock-based awards. Other than the tax benefits derived from
this plan, pursuant to the tax sharing agreement, no other recognition is given
by the Company.
ACCOUNTING STANDARDS:
During 1998, the Company adopted the following new standards: FAS Statement
130, "Reporting Comprehensive Income" ("FAS 130"); and FAS Statement 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits" ("FAS
132").
FAS 130 establishes standards for the reporting and presentation of
comprehensive income and its components in a full set of financial statements.
Comprehensive income encompasses all changes in stockholder's equity (except
those arising from transactions with stockholders) and includes net income, net
unrealized capital gains or losses on available-for-sale securities and foreign
currency translation adjustments. Comprehensive income is disclosed in the
Consolidated Statement of Stockholder's Equity. FAS 132 alters disclosure
requirements regarding pensions and other postretirement benefits in the
financial statements of employers who sponsor such benefit plans. The revised
disclosure requirements are designed to provide additional information to assist
readers in evaluating future costs related to such plans. The required pension
disclosures are included in Note 8. As each of these new standards only
requires additional disclosure information in the consolidated financial
statements, they do not affect the Company's consolidated financial position or
results of operations.
In June 1998, the Financial Accounting Standards Board issued FAS Statement
133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133").
FAS 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. The statement requires all derivatives to be
recorded on the balance sheet at fair value and establishes special accounting
for the following three different types of hedges: (1) hedges of changes in the
fair value of assets, liabilities or firm commitments (referred to as fair value
hedges); (2) hedges of the variable cash flows of forecasted transactions (cash
flow hedges); and (3) hedges of foreign currency exposures of net investments in
foreign operations. Though the accounting treatment and criteria for each of
the three types of hedges is unique, they all result in recognizing offsetting
changes in value or cash flow of both the hedge and the hedged item in earnings
in the same period. Changes in the fair value of derivatives that do not meet
the criteria of one of these three categories of hedges are included in earnings
in the period of the change with no related offset. FAS 133 is effective for
years beginning after June 15, 1999, but companies may adopt early. The Company
will adopt FAS 133 effective January 1, 2000. Management does not expect the
impact of FAS 133 to have a material affect on the Company's consolidated
financial position and results of operations.
RECLASSIFICATIONS:
Certain reclassifications have been made to prior years' amounts to conform
to the current year's presentation.
5
<PAGE>
AMBAC ASSURANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollar Amounts in Thousands)
3 INVESTMENTS
The amortized cost, gross unrealized gains and losses, and estimated fair
value of investments in fixed income securities and short-term investments at
December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- ----------------- ---------------- ---------------
1998
<S> <C> <C> <C> <C>
Municipal obligations.......................... $2,592,649 $168,481 $3,912 $2,757,218
Corporate obligations.......................... 275,416 36,292 289 311,419
U.S. Government obligations.................... 130,383 9,203 -- 139,586
Mortgage- and asset-backed securities
(includes U.S. Government Agency Obligations). 98,841 3,000 17 101,824
Other.......................................... 93,912 -- -- 93,912
--------------- ----------------- ---------------- ---------------
$3,191,201 $216,976 $4,218 $3,403,959
=============== ================= ================ ===============
</TABLE>
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- ----------------- ---------------- ---------------
1997
<S> <C> <C> <C> <C>
Municipal obligations.......................... $2,126,136 $149,807 $112 $2,275,831
Corporate obligations.......................... 315,492 27,384 36 342,840
U.S. Government obligations.................... 136,771 2,854 27 139,598
Mortgage- and asset-backed securities
(includes U.S. Government Agency Obligations). 98,719 2,190 2 100,907
Other.......................................... 136,390 91 669 135,812
--------------- ----------------- ---------------- ---------------
$2,813,508 $182,326 $846 $2,994,988
=============== ================= ================ ===============
</TABLE>
The amortized cost and estimated fair value of fixed income securities and
short-term investments at December 31, 1998, by contractual maturity, were as
follows:
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
-------------------- --------------------
1998
<S> <C> <C>
Due in one year or less........................................ $ 130,536 $ 131,022
Due after one year through five years.......................... 165,846 174,260
Due after five years through ten years......................... 310,670 330,484
Due after ten years............................................ 2,485,308 2,666,369
-------------------- --------------------
3,092,360 3,302,135
Mortgage- and asset-backed securities (includes U.S.
Government Agency Obligations)................................ 98,841 101,824
-------------------- --------------------
$3,191,201 $3,403,959
==================== ====================
</TABLE>
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
6
<PAGE>
AMBAC ASSURANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollar Amounts in Thousands)
Securities carried at $6,191 and $8,415 at December 31, 1998 and 1997
respectively, were deposited by the Company with governmental authorities or
designated custodian banks as required by laws affecting insurance companies.
Net investment income of the Company comprised the following:
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------- -------------------
<S> <C> <C> <C>
Fixed income securities............................ $181,437 $155,810 $139,410
Short-term investments............................. 8,208 6,885 8,360
------------------- ------------------- -------------------
Total investment income......................... 189,645 162,695 147,770
Investment expense................................. (3,386) (2,607) (2,468)
------------------- ------------------- -------------------
Net investment income........................... $186,259 $160,088 $145,302
=================== =================== ===================
</TABLE>
The Company had gross realized gains of $17,186, $26,950 and $108,916 for
1998, 1997 and 1996, respectively, and gross realized losses of $29,532, $8,152
and $39,767 for 1998, 1997 and 1996, respectively. Gross realized gains and
losses includes amounts related to a trading position, which represented a small
portion of the Company's assets, containing high quality municipal bonds hedged
with treasury futures. These gains were $2,967, $1,309 and $0 for 1998, 1997
and 1996, respectively, and losses of $19,047, $3,593 and $0 for 1998, 1997 and
1996, respectively.
As of December 31, 1998 and 1997, the Company held securities subject to
agreements to resell for $5,449 and $2,484, respectively. Such securities were
held as collateral by the Company. The agreements had terms of less than 30
days.
4 REINSURANCE
In the ordinary course of business, the Company cedes exposures under
various reinsurance contracts primarily designed to minimize losses from large
risks and to protect capital and surplus. The effect of reinsurance on premiums
written and earned was as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------------- --------------------------------- ---------------------------------
Written Earned Written Earned Written Earned
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Direct......... $339,432 $240,791 $281,034 $177,677 $243,097 $157,551
Assumed........ 27,359 7,367 8,349 3,614 6,664 3,126
Ceded.......... (49,563) (33,135) (32,452) (25,623) (37,793) (22,380)
-------------- -------------- -------------- -------------- -------------- --------------
Net premiums... $317,228 $215,023 $256,931 $155,668 $211,968 $138,297
============== ============== ============== ============== ============== ==============
</TABLE>
The reinsurance of risk does not relieve the ceding insurer of its original
liability to its policyholders. In the event that all or any of the reinsurers
are unable to meet their obligations to the Company under the existing
reinsurance agreements, the Company would be liable for such defaulted amounts.
To minimize its exposure to significant losses from reinsurer insolvencies, the
Company evaluates the financial condition of its reinsurers and monitors
concentrations of credit risk. There were no reinsurance recoverables on paid
losses as of December 31, 1998 and 1997. As of December 31, 1998,
7
<PAGE>
AMBAC ASSURANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollar Amounts in Thousands)
prepaid reinsurance of approximately $159,361 was associated with the Company's
three largest reinsurers. As of December 31, 1998, the Company held letters of
credit and collateral amounting to approximately $198,957 from its reinsurers to
cover liabilities ceded under the aforementioned reinsurance contracts.
Premiums written assumed from MBIA under the Joint Venture were $18,715,
$8,009 and $4,674 in 1998, 1997 and 1996, respectively. Premiums written ceded
to MBIA were $15,505, $8,874 and $6,532 in 1998, 1997 and 1996, respectively.
5 COMMITMENTS AND CONTINGENCIES
The Company is responsible for leases on the rental of office space,
principally in New York City. The lease agreements, which expire periodically
through September 2019, contain provisions for scheduled periodic rent increases
and are accounted for as operating leases. An estimate of future net minimum
lease payments in each of the next five years ending December 31, and the
periods thereafter, is as follows:
Amount
----------------
1999................................................... $ 6,116
2000................................................... 6,272
2001................................................... 5,489
2002................................................... 5,411
2003................................................... 5,417
All later years........................................ 87,526
----------------
$116,231
================
Rent expense for the aforementioned leases amounted to $5,097, $4,210 and
$3,286 for the years ended December 31, 1998, 1997 and 1996, respectively.
Total rentals to be received under future sublease agreements are estimated at
$2,235.
6 INSURANCE REGULATORY RESTRICTIONS
Ambac Assurance is subject to insurance regulatory requirements of the
States of Wisconsin and New York, and the other jurisdictions in which it is
licensed to conduct business.
Ambac Assurance's ability to pay dividends is generally restricted by law
and subject to approval by the Office of the Commissioner of Insurance of the
State of Wisconsin (the "Wisconsin Commissioner"). Wisconsin insurance law
restricts the payment of dividends in any 12-month period without regulatory
approval to the lesser of (a) 10% of policyholders' surplus as of the preceding
December 31 and (b) the greater of (i) statutory net income for the calendar
year preceding the date of dividend, minus realized capital gains for that
calendar year and (ii) the aggregate of statutory net income for three calendar
years preceding the date of the dividend, minus realized capital gains for those
calendar years and minus dividends paid or credited within the first two of the
three preceding calendar years.
Ambac Assurance paid cash dividends of $48,000, $44,000 and $40,000 on its
common stock in 1998, 1997 and 1996, respectively. In addition, on April 30,
1996, Ambac Assurance, in conjunction with the sale of the Ambac Financial
Group, Inc.'s remaining holdings in HCIA
8
<PAGE>
AMBAC ASSURANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollar Amounts in Thousands)
common stock, delivered to Ambac Financial Group, Inc. (in the form of an
extraordinary dividend) its 2,378,672 shares of HCIA common stock, at fair
value. The Wisconsin Commissioner approved such dividend. Based upon these
restrictions, at December 31, 1998, the maximum amount that will be available
during 1999 for payment of dividends by Ambac Assurance is approximately
$116,200.
The New York Financial Guarantee Insurance Law establishes single risk
limits applicable to all obligations issued by a single entity and backed by a
single revenue source. Under the limit applicable to municipal bonds, the
insured average annual debt service for a single risk, net of reinsurance and
collateral, may not exceed 10% of qualified statutory capital, which is defined
as the sum of insurer's policyholders' surplus and contingency reserves. In
addition, insured principal of municipal bonds attributable to any single risk,
net of reinsurance and collateral, is limited to 75% of Ambac Assurance's
qualified statutory capital. Additional single risk limits, which generally are
more restrictive than the municipal bond single risk limit, are also specified
for several other categories of insured obligations.
Statutory capital and surplus was $1,162,639 and $1,006,829 at December 31,
1998 and 1997, respectively. Qualified statutory capital was $1,920,298 and
$1,655,554 at December 31, 1998 and 1997, respectively. Statutory net income was
$271,808, $198,615 and $222,810 for 1998, 1997 and 1996, respectively. Statutory
capital and surplus differs from stockholder's equity determined under GAAP
principally due to statutory accounting rules that treat loss reserves, premiums
earned, policy acquisition costs, and deferred income taxes differently.
7 INCOME TAXES
The total effect of income taxes on income and stockholder's equity for the
years ended December 31, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Total income taxes charged to income............... $ 80,945 $67,194
------------- -------------
Income taxes charged to stockholder's equity:
Unrealized gain on bonds......................... 10,947 28,043
Exercise of stock options........................ (10,868) (3,995)
------------- -------------
Total charged to stockholder's equity......... 79 24,048
------------- -------------
Total effect of income taxes....................... $ 81,024 $91,242
============= =============
</TABLE>
9
<PAGE>
AMBAC ASSURANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollar Amounts in Thousands)
The tax provisions in the accompanying consolidated statements of
operations reflect effective tax rates differing from prevailing Federal
corporate income tax rates. The following is a reconciliation of these
differences:
<TABLE>
<CAPTION>
1998 % 1997 % 1996 %
-------------- ------------- -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Computed expected tax at
statutory rate........... $124,004 35.0% $104,755 35.0% $112,300 35.0%
Increases (reductions) in
expected tax resulting from:
Tax-exempt interest....... (38,821) (10.9) (35,458) (11.8) (30,655) (9.6)
Other, net................ (4,238) (1.2) (2,103) (0.7) (2,025) (0.6)
-------------- ------------- -------------- ------------- ------------- -------------
Income tax expense........ $ 80,945 22.9% $ 67,194 22.5% $ 79,620 24.8%
============== ============= ============== ============= ============= =============
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax liabilities and deferred tax assets at December 31,
1998 and 1997 are presented below:
<TABLE>
<CAPTION>
1998 1997
------------- --------------
<S> <C> <C>
Deferred tax liabilities:
Contingency reserve................................ $119,150 $111,160
Unrealized gains on bonds.......................... 74,465 63,518
Deferred acquisition costs......................... 42,583 38,030
Unearned premiums.................................. 36,572 35,591
Other.............................................. 1,248 2,225
------------- --------------
Total deferred tax liabilities..................... 274,018 250,524
------------- --------------
Deferred tax assets:
Tax and loss bonds................................. 88,471 87,951
Loss reserves...................................... 27,918 17,231
Alternative minimum tax credit carryforward........ 1,838 10,049
Amortization and depreciation...................... 2,778 6,556
Compensation....................................... 4,066 3,924
Other.............................................. 4,382 2,259
------------- --------------
Sub-total deferred tax assets...................... 129,453 127,970
Valuation allowance................................ -- --
------------- --------------
Total deferred tax assets.......................... 129,453 127,970
------------- --------------
Net deferred tax liabilities....................... $144,565 $122,554
============= ==============
</TABLE>
The Company believes that no valuation allowance is necessary in connection
with the deferred tax assets.
10
<PAGE>
AMBAC ASSURANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollar Amounts in Thousands)
8 EMPLOYEE BENEFITS
Pensions:
AFGI has a defined benefit pension plan covering substantially all
employees of the Company and most of its subsidiaries. The benefits are based on
years of service and the employee's compensation during the last five years of
employment. AFGI's funding policy is to contribute annually the maximum amount
that can be deducted for Federal income tax purposes. Contributions are intended
to provide not only for benefits attributed to service-to-date but also for
those expected to be earned in the future.
The table below sets forth a reconciliation of AFGI's beginning and ending
projected benefit obligation, beginning and ending balances of the fair value of
plan assets, and the funded status of AFGI's plan as of December 31, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
---------------- --------------------
<S> <C> <C>
Change in Projected Benefit Obligation:
Projected benefit obligation at beginning of year............ $ 9,374 $ 8,189
Service cost................................................. 691 723
Interest cost................................................ 684 601
Amendments................................................... 116 0
Actuarial loss............................................... 1,843 114
Benefits paid................................................ (275) (253)
---------------- --------------------
Projected benefit obligation at end of year.................. $ 12,433 $ 9,374
---------------- --------------------
Change in Plan Assets:
Fair value of plan assets at beginning of year............... $ 9,644 $ 8,153
Actual return on plan assets................................. 1,595 1,635
Company contributions........................................ 0 138
Benefits paid................................................ (275) (253)
Expenses paid................................................ (30) (29)
---------------- --------------------
Fair value of plan assets at end of year..................... $ 10,934 $ 9,644
---------------- --------------------
Funded status................................................ ($ 1,499) $ 270
Unrecognized net loss........................................ 1,118 62
Unrecognized prior service cost.............................. (1,289) (1,454)
Unrecognized net transition asset............................ (4) (7)
---------------- --------------------
Pension liability included in other liabilities.............. ($ 1,674) ($ 1,129)
================ ====================
</TABLE>
AFGI's net pension costs for the years ended December 31, 1998, 1997 and
1996 included the following components:
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ------------------- --------------
<S> <C> <C> <C>
Service cost...................................... $ 807 $ 723 $ 674
Interest cost on expected benefit obligation...... 684 601 539
Expected return on plan assets.................... (793) (701) (613)
Amortization of unrecognized transition asset..... (3) (3) (3)
Amortization of prior service cost................ (165) (165) (165)
Recognized net actuarial loss..................... 15 33 87
------------------ ------------------- --------------
Net periodic pension cost......................... $ 545 $ 488 $ 519
=================== =================== ==============
</TABLE>
11
<PAGE>
AMBAC ASSURANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollar Amounts in Thousands)
The discount rate used in the determination of the actuarial present value
for the projected benefit obligation was 6.50% and 7.25% for 1998 and 1997,
respectively. The expected long-term rate of return on assets was 9.25% for both
1998 and 1997. The rate of increase in future compensation levels used in
determining the actuarial present value of the projected benefit obligation was
5.0% and 4.8% for 1998 and 1997, respectively.
Substantially all employees of AFGI and its subsidiaries are covered by a
defined contribution plan (the "Savings Incentive Plan"), for which
contributions and costs are determined as 6% of each eligible employee's base
salary, plus a matching company contribution of 50% on contributions up to 6% of
base salary made by eligible employees to the plan. The total cost of the
Savings Incentive Plan to Ambac Assurance was $1,299, $1,417 and $1,494 in 1998,
1997 and 1996, respectively.
Annual Incentive Program:
AFGI has an annual incentive program which provides for awards to key
officers and employees based upon predetermined criteria. The cost of the
program for the years ended December 31, 1998, 1997 and 1996 amounted to
$13,877, $10,392 and $8,882, respectively.
Postretirement Health Care and Other Benefits:
Ambac Assurance provides certain medical and life insurance benefits for
retired employees and eligible dependents. All plans are contributory. None of
the plans are currently funded.
Postretirement benefits expense was $275, $242 and $200 in 1998, 1997 and
1996, respectively. The unfunded accumulated postretirement benefit obligation
was $3,121 and the accrued postretirement liability was $1,956 as of December
31, 1998.
The assumed health care cost trend rates range from 8.0% in 1999,
decreasing ratably to 5.5% in 2003, and remaining at that level thereafter.
Increasing the assumed health care cost trend rate by one percentage point in
each future year would increase the accumulated postretirement benefit
obligation at December 31, 1998 by $554 and the 1998 benefit expense by $79. The
weighted average discount rate used to measure the accumulated postretirement
benefit obligation and 1998 expense was 6.50%.
9 INSURANCE IN FORCE
The par amount of bonds insured, for non-affiliates, was $227,198,000 and
$191,592,000 at December 31, 1998 and 1997, respectively. The par amount of
bonds insured, for non-affiliates, net of reinsurance, was $198,274,000 and
$165,601,000 at December 31, 1998 and 1997, respectively. As of December 31,
1998 and 1997, the insured portfolio was diversified by type of insured bond as
shown in the following table:
12
<PAGE>
AMBAC ASSURANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Net Par Amount Outstanding
----------------------------------------------
(Dollars in Millions) 1998 1997
--------------------- ---------------------
<S> <C> <C>
Domestic:
Municipal finance:
General obligation............................................... $ 37,502 $ 36,324
Lease and tax-backed revenue..................................... 36,929 30,980
Utility revenue.................................................. 27,014 24,913
Health care revenue.............................................. 20,071 18,545
Investor-owned utilities......................................... 8,013 6,255
Transportation revenue........................................... 7,831 7,370
Higher education................................................. 7,720 6,852
Housing revenue.................................................. 6,445 6,064
Student loans.................................................... 4,528 3,516
Other............................................................ 873 597
--------------------- ---------------------
Total municipal finance....................................... 156,926 141,416
--------------------- ---------------------
Structured finance:
Mortgage-backed and home equity.................................. 19,478 11,620
Commercial asset-backed.......................................... 10,015 4,538
Other consumer asset-backed...................................... 2,132 1,514
Banks/financial institutions..................................... 671 524
Other............................................................ 567 439
--------------------- ---------------------
Total structured finance...................................... 32,863 18,635
--------------------- ---------------------
Total domestic................................................ 189,789 160,051
--------------------- ---------------------
International finance:
Commercial asset-backed.......................................... 3,180 2,600
Banks/financial institutions..................................... 1,514 283
Utilities........................................................ 1,073 456
Sovereign/sub-sovereign.......................................... 1,027 981
Mortgage-backed and home equity.................................. 607 496
Other............................................................ 1,084 734
--------------------- ---------------------
Total international finance................................... 8,485 5,550
--------------------- ---------------------
$198,274 $165,601
===================== =====================
</TABLE>
As of December 31, 1998 and 1997, the international insured portfolio is
shown in the following table by location of risk:
<TABLE>
<CAPTION>
Net Par Amount Outstanding
----------------------------------------------------
(Dollars in Millions) 1998 1997
----------------------- -----------------------
<S> <C> <C>
United Kingdom........................................ $2,289 $ 865
Australia............................................. 779 63
France................................................ 692 1,032
Japan................................................. 675 879
Italy................................................. 571 555
Internationally diversified (1)....................... 1,621 899
Other international................................... 1,858 1,257
----------------------- -----------------------
$8,485 $5,550
======================= =======================
</TABLE>
(1) Internationally diversified represents insured policies with multiple
locations of risk.
In the United States, California was the state with the highest aggregate
net par amount in force, accounting for 11.4% of the total at December 31, 1998,
and no other state accounted for more than ten
13
<PAGE>
AMBAC ASSURANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollar Amounts in Thousands)
percent. The highest single insured risk represented less than 1% of aggregate
net par amount insured. Direct insurance in force (principal and interest) was
$367,801,000 and $321,104,000 at December 31, 1998 and 1997, respectively. Net
insurance in force (after giving effect to reinsurance) was $317,668,000 and
$275,931,000 as of December 31, 1998 and 1997, respectively.
10 FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING
Fair values of financial instruments held for purposes other than trading:
Fair value amounts are determined by using independent market information
when available, and appropriate valuation methodologies when market quotes were
not available. In cases where specific market quotes are unavailable,
interpreting market data and estimating market values require considerable
judgment by management. Accordingly, the estimates presented are not necessarily
indicative of the amount the Company could realize in a current market exchange.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Investments: The fair values of fixed income investments are based on
quoted market prices received from a nationally recognized pricing service or
dealer quotes.
Short-term investments and cash: The fair values of short-term investments
and cash are assumed to equal amortized cost.
Securities purchased under agreements to resell: The fair value of
securities purchased under agreements to resell is assumed to approximate
carrying value.
Liability for net financial guarantees written: The fair value of the
liability for those financial guarantees written related to new issue and
secondary market exposures is based on the estimated cost to reinsure those
exposures at current market rates, which amount consists of the current unearned
premium reserve, less an estimated ceding commission thereon.
Certain other financial guarantee insurance policies have been written on
an installment basis, where the future premiums to be received by the Company
are determined based on the outstanding exposure at the time the premiums are
due. The fair value of Ambac Assurance's liability under its installment premium
policies is measured using the present value of estimated future installment
premiums, less an assumed ceding commission. The estimate of the amounts and
timing of the future installment premiums is based on contractual premium rates,
debt service schedules and expected run-off scenarios. This measure is used as
an estimate of the cost to reinsure Ambac Assurance's liability under these
policies.
14
<PAGE>
AMBAC ASSURANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollar Amounts in Thousands)
The carrying amount and estimated fair value of financial instruments are
presented below:
<TABLE>
<CAPTION>
As of December 31,
---------------------------------------------------------------------------------
1998 1997
--------------------------------------- --------------------------------------
(Dollars in Millions) Carrying Estimated Fair Carrying Amount Estimated Fair
Amount Value Value
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Financial assets:
Investments........................... $3,310 $3,310 $2,878 $2,878
Short-term investments................ 94 94 117 117
Cash.................................. 5 5 8 8
Securities purchased under agreements
to resell............................ 5 5 2 2
Liability for financial guarantees
written:
Gross............................... 1,303 912 1,185 855
Net of reinsurance.................. 1,103 772 1,002 722
Net installment premiums............ -- 216 -- 153
</TABLE>
11 FINANCIAL INSTRUMENTS HELD FOR TRADING PURPOSES
The Company, through its affiliate AFSLP, is a provider of interest rate
swaps to states, municipalities and their authorities and other entities in
connection with their financings. AFSLP is subject to basis risk (the
relationship between tax-exempt and taxable interest rates). If actual or
projected tax-exempt interest rates change in relation to taxable rates, the
Company will experience an unrealized mark-to-market gain or loss. The AFSLP
swap portfolio is considered held for trading purposes.
The following table summarizes information about the Company's financial
instruments held for trading purposes as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Net Estimated Fair Value Average Net Fair Value
---------------------------------- ------------------------------------
Notional
Assets Liabilities Assets Liabilities Amount
-------------- --------------- --------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
1998:
Derivative financial
instruments:
Interest rate swaps.......... $203,021 $163,140 $134,394 $103,739 $5,857,170
Futures contracts............ -- -- -- -- 706,700
Other financial instruments... -- -- 183,682 181,698 --
1997:
Derivative financial
instruments:
Interest rate swaps.......... $ 71,505 $ 49,772 $ 47,276 $ 34,768 $4,174,160
Futures contracts............ -- -- -- -- 514,900
Other financial instruments... 183,041 181,732 160,251 159,213 --
</TABLE>
Financial instruments held for trading purposes are carried at estimated
fair value. The aggregate amount of net trading income recognized from
derivative financial instruments held for trading purposes was $825, $8,560 and
$10,799 for 1998, 1997 and 1996, respectively. Other financial instruments held
for
15
<PAGE>
AMBAC ASSURANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollar Amounts in Thousands)
trading purposes consist of fixed income securities held in 1997 and sold
during 1998. The aggregate amount of net trading income recognized from other
financial instruments was $2,967, $1,309 and $0 for 1998, 1997 and 1996,
respectively. Average net fair values were calculated based on average monthly
net fair values. Notional principal amounts are often used to express the
volume of these transactions and do not reflect the extent to which positions
may offset one another. These amounts do not represent the much smaller amounts
potentially subject to risk.
12 LINES OF CREDIT
AFGI and Ambac Assurance have a revolving credit facility with three major
international banks for $150,000, which expires in August 1999 and provides a
two-year term loan provision. The facility is available for general corporate
purposes, including the payment of claims. As of December 31, 1998 and 1997, 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
international banks, structured to be comparable to a credit facility from
AAA/Aaa-rated banks. This credit facility provides liquidity to Ambac Assurance
in the event claims from municipal obligations in its insured portfolio exceed
specified levels. Repayment of amounts drawn under the credit facility are
limited primarily to the amount of any recoveries of losses related to policy
obligations. During 1998, such third party capital support was increased from
$500,000 to $555,000 and its expiration reset to December 2005. As of December
31, 1998 and 1997, no amounts were outstanding under this credit facility.
13 RELATED PARTY TRANSACTIONS
During 1998 and 1997, Ambac Assurance guaranteed the timely payment of
principal and interest on obligations under investment agreements and investment
repurchase agreements issued by its affiliates. As of December 31, 1998 and
1997, the aggregate amount of investment agreements and investment repurchase
agreements insured was $5,331,820 and $3,856,786, respectively, including
accrued interest. These insurance policies are collateralized by investment
securities, accrued interest, securities purchased under agreements to resell
and cash and cash equivalents, which as of December 31, 1998 and 1997, had a
fair value of $5,387,493 and $3,936,718, respectively, in the aggregate. During
1998 and 1997, Ambac Assurance recorded gross premiums written of $5,598 and
$3,220, and net premiums earned of $2,156 and $1,668, respectively, related to
these agreements.
During 1998 and 1997, several interest rate swap transactions were executed
between AFSLP and its affiliates (other than Ambac Assurance). As of December
31, 1998 and 1997, these contracts had an outstanding notional amount of
approximately $499,720 and $826,970, respectively. As of December 31, 1998 and
1997, AFSLP recorded a positive fair value of $4,571 and $5,579, respectively,
related to these transactions.
AFSLP has a $25 million line of credit with AFGI. The line is available
through August 1, 1999. The purpose of this line is to fund short-term
liquidity needs of AFSLP's operations. Interest on borrowings is payable at
rates which vary according to the terms. Outstanding borrowings under the line
were $15,630 and $5,347 as of December 31, 1998 and 1997, respectively.
14 YEAR 2000
The Company is addressing the issue of computer programs' and embedded
computer chips' ability to distinguish between the year 1900 and the year 2000,
commonly known as the Y2K problem
16
<PAGE>
AMBAC ASSURANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollar Amounts in Thousands)
("Y2K"). The Company is assessing the risks to its businesses related to the
functionality of its own computer systems and those of third parties. This is a
high priority undertaking and crucial to the operation of the Company's
businesses.
In connection with this initiative, the Company embarked on a three phase
process. Phase I is 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 is the testing phase during which: (a) all
critical systems are tested, (b) transactions are run through critical systems
by applying various permutations and combinations of Y2K sensitive dates, and
(c) results are reviewed independently by each business unit. In Phase III, the
extent of code repair is determined and remediated. All three of the above
phases are complete with aggregate expenditures of approximately $750.
A potential exposure to the Company is the failure by any insured issuer to
make debt service payments due to an issuer's systems failure. An issuer's
failure to make debt service payments due to Y2K related systems failures may
result in a claim under the Company's insurance policy. In such event, the
Company would utilize its sources of liquidity to pay claims. The Company would
expect full recovery of such claims.
With respect to the Company's internal operations, although preliminary
findings do not give any indications that these systems will be non-compliant,
management is in the process of developing contingent procedures in the event
its critical systems should fail. With respect to third parties, the Company's
inquiries are underway, and although the Company does not expect significant
disruptions among vendors, EDI partners, issuers and financial institutions, the
Company is currently developing appropriate contingency plans.
17
