<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 1-10777
Ambac Financial Group, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 13-3621676
(State of incorporation) (I.R.S. employer identification no.)
One State Street Plaza
New York, New York 10004
(Address of principal executive offices) (Zip code)
(212) 668-0340
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No__
-
As of March 31, 2000, 69,827,973 shares of Common Stock, par value $0.01
per share, (net of 852,411 treasury shares) of the Registrant were outstanding.
<PAGE>
Ambac Financial Group, Inc. and Subsidiaries
INDEX
-----
<TABLE>
<CAPTION>
PAGE
------
Item 1. Consolidated Financial Statements
<S> <C>
Consolidated Balance Sheets - March 31, 2000
and December 31, 1999............................................................. 3
Consolidated Statements of Operations - three months
ended March 31, 2000 and 1999..................................................... 4
Consolidated Statements of Stockholders' Equity - three months
ended March 31, 2000 and 1999..................................................... 5
Consolidated Statements of Cash Flows - three months ended
March 31, 2000 and 1999............................................................. 6
Notes to Consolidated Financial Statements.......................................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................. 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk......................................................................... 19
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................................... 21
SIGNATURES..................................................................................... 22
INDEX TO EXHIBITS.............................................................................. 23
</TABLE>
<PAGE>
Ambac Financial Group, Inc. and Subsidiaries
Consolidated Balance Sheets
March 31, 2000 and December 31, 1999
(Dollars in Thousands)
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
(unaudited)
Assets
<S> <C> <C>
Investments:
Fixed income securities, at fair value
(amortized cost of $9,086,367 in 2000 and $9,028,184 in 1999) $ 8,897,548 $ 8,738,471
Short-term investments, at cost (approximates fair value) 104,544 220,896
Other 4,839 3,168
------------ ------------
Total investments 9,006,931 8,962,535
Cash 46,560 13,588
Securities purchased under agreements to resell 151,633 103,000
Receivable for investment agreements 38,739 45,918
Receivable for securities sold 3,161 15,369
Investment income due and accrued 107,920 128,668
Reinsurance recoverable 552 500
Prepaid reinsurance 222,657 217,977
Deferred acquisition costs 138,408 135,324
Deferred income taxes 10,402 57,377
Loans 702,887 685,488
Receivable from brokers and dealers 500,000 717,000
Other assets 212,757 262,352
------------ ------------
Total assets $ 11,142,607 $ 11,345,096
============ ============
Liabilities and Stockholders' Equity
Liabilities:
Unearned premiums $ 1,417,729 $ 1,431,076
Losses and loss adjustment expenses 124,323 121,475
Ceded reinsurance balances payable 15,081 15,028
Obligations under investment and payment agreements 4,089,535 4,180,513
Obligations under investment repurchase agreements 2,049,891 1,959,741
Current income taxes 32,627 24,831
Debentures 424,012 423,995
Accrued interest payable 78,379 91,142
Other liabilities 223,824 268,696
Payable to brokers and dealers 500,000 717,000
Payable for securities purchased 36,485 93,149
------------ ------------
Total liabilities 8,991,886 9,326,646
------------ ------------
Stockholders' equity:
Preferred stock -- --
Common stock 707 707
Additional paid-in capital 525,325 525,012
Accumulated other comprehensive loss (126,192) (187,540)
Retained earnings 1,789,260 1,713,446
Common stock held in treasury at cost (38,379) (33,175)
------------ ------------
Total stockholders' equity 2,150,721 2,018,450
------------ ------------
Total liabilities and stockholders' equity $ 11,142,607 $ 11,345,096
============ ============
</TABLE>
See accompanying Notes to Consolidated Unaudited Financial Statements
3
<PAGE>
Ambac Financial Group, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
For the Periods Ended March 31, 2000 and 1999
(Dollars in Thousands Except Share Data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------------
2000 1999
------------------------------------
<S> <C> <C>
Revenues:
Financial Guarantee:
Gross premiums written $ 69,338 $ 90,154
Ceded premiums written (16,127) (5,086)
--------- ---------
Net premiums written $ 53,211 $ 85,068
========= =========
Net premiums earned $ 71,158 $ 60,297
Net fees earned and other income 1,795 1,507
Net investment income 57,631 49,484
Net realized gains 462 89
Financial Services:
Revenue 14,442 12,712
Net realized losses (181) (313)
Other:
Revenue 567 3,820
Net realized gains -- 775
--------- ---------
Total revenues 145,874 128,371
--------- ---------
Expenses:
Financial Guarantee:
Losses and loss adjustment expenses 3,249 2,500
Underwriting and operating expenses 13,478 11,917
Financial Services 6,479 6,977
Interest 9,379 9,083
Other 1,195 1,943
--------- ---------
Total expenses 33,780 32,420
--------- ---------
Income before income taxes 112,094 95,951
Provision for income taxes 26,456 22,757
--------- ---------
Net income $ 85,638 $ 73,194
========= =========
Net income per share $1.23 $1.05
========== =========
Net income per diluted share $1.20 $1.03
========== =========
Weighted average number of
shares outstanding 69,862,702 69,919,175
=========== ==========
Weighted average number of diluted
shares outstanding 71,203,095 71,335,606
=========== ==========
</TABLE>
See accompanying Notes to Consolidated Unaudited Financial Statements
4
<PAGE>
Ambac Financial Group, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(Unaudited)
For The Periods Ended March 31, 2000 and 1999
(Dollars in Thousands)
<TABLE>
<CAPTION>
2000 1999
-------------------------- -----------------------------
<S> <C> <C> <C> <C>
Retained Earnings:
Balance at January 1 $1,713,446 $1,449,832
Net income 85,638 $85,638 73,194 $73,194
----------- ----------------
Dividends declared - common stock (7,698) (6,997)
Exercise of stock options (2,126) (693)
---------------- ---------------
Balance at March 31 $1,789,260 $1,515,336
---------------- ---------------
Accumulated Other Comprehensive (Loss) Income:
Balance at January 1 ($187,540) $159,313
Unrealized gains (losses) on securities, $100,936,
and ($93,341), pre-tax in 2000 and 1999, respectively(1) 61,621 (58,311)
Foreign currency (loss) gain (273) (607)
----------- ----------------
Other comprehensive income (loss) 61,348 61,348 (58,918) (58,918)
--------------------------- -------------------------------
Comprehensive income $146,986 $14,276
=========== ================
Balance at March 31 ($126,192) $100,395
---------------- ---------------
Preferred Stock:
Balance at January 1 and March 31 $- $-
---------------- ---------------
Common Stock:
Balance at January 1 and March 31 $707 $707
---------------- ---------------
Additional Paid-in Capital:
Balance at January 1 $525,012 $519,305
Exercise of stock options 313 328
---------------- ---------------
Balance at March 31 $525,325 $519,633
---------------- ---------------
Common Stock Held in Treasury at Cost:
Balance at January 1 ($33,175) ($33,067)
Cost of shares acquired (9,161) (9,126)
Shares issued under equity plans 3,957 2,260
---------------- ---------------
Balance at March 31 ($38,379) ($39,933)
---------------- ---------------
Total Stockholders' Equity at March 31 $2,150,721 $2,096,138
================ ===============
(1) Disclosure of reclassification amount:
Unrealized holding gains (losses) arising during period $61,804 ($57,953)
Less: reclassification adjustment for net gains
included in net income 183 358
---------------- ---------------
Net unrealized gains (losses) on securities $61,621 ($58,311)
================ ===============
</TABLE>
See accompanying Notes to Consolidated Unaudited Financial Statements.
5
<PAGE>
Ambac Financial Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
For The Periods Ended March 31, 2000 and 1999
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------- ------------
2000 1999
---------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 85,638 $ 73,194
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 868 671
Amortization of bond premium and discount (2,153) (1,695)
Current income taxes 7,796 19,763
Deferred income taxes 7,661 3,389
Deferred acquisition costs (3,084) (4,708)
Unearned premiums, net (18,027) 24,638
Losses and loss adjustment expenses 2,796 2,366
Ceded reinsurance balances payable 53 (2,572)
Investment income due and accrued 20,748 22,322
Accrued interest payable (12,763) (19,069)
Net gains on sales of investments (281) (551)
Interest rate swaps, at market 11 (20,603)
Other, net 2,056 (6,962)
----------- -----------
Net cash provided by operating activities 91,319 90,183
----------- -----------
Cash flows from investing activities:
Proceeds from sales of bonds 228,303 768,940
Proceeds from matured bonds 415,504 343,545
Purchases of bonds (743,926) (1,371,224)
Change in short-term investments 116,352 (22,524)
Securities purchased under agreements to resell (48,633) 70,938
Loans (17,399) (19,214)
Other, net (1,998) 8,257
----------- -----------
Net cash used in investing activities (51,797) (221,282)
----------- -----------
Cash flows from financing activities:
Dividends paid (7,698) (6,997)
Proceeds from issuance of investment agreements 607,030 518,595
Payments for investment agreement draws (618,077) (392,226)
Payment agreements 17,399 19,214
Proceeds from sale of treasury stock 3,957 2,260
Purchases of treasury stock (9,161) (9,126)
----------- -----------
Net cash (used in) provided by financing activities (6,550) 131,720
----------- -----------
Net cash flow 32,972 621
Cash at January 1 13,588 8,239
----------- -----------
Cash at March 31 $ 46,560 $ 8,860
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes $ 10,700 $ --
=========== ===========
Interest expense on debt $ 11,562 $ 11,196
=========== ===========
Interest expense on investment agreements $ 71,964 $ 72,880
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Unaudited Financial Statements
6
<PAGE>
(1) Basis of Presentation
Ambac Financial Group, Inc., (the "Company") headquartered in New York
City, is a holding company whose affiliates provide financial guarantees and
financial services to clients in both the public and private sectors around the
world. The Company's principal operating subsidiary, Ambac Assurance Corporation
("Ambac Assurance"), a leading provider of financial guarantees for municipal
and structured finance obligations, has earned triple-A ratings, the highest
ratings available from Moody's Investors Service, Inc., Standard & Poor's
Ratings Group, Fitch IBCA, Inc., and Japan Rating and Investment Information,
Inc. The Company, through its subsidiaries, also provides investment
agreements, interest rate swaps and investment advisory and cash management
services, primarily to states, municipalities and municipal authorities.
The Company's consolidated unaudited interim financial statements have
been prepared on the basis of U.S. generally accepted accounting principles
("GAAP") and, in the opinion of management, reflect all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
Company's financial condition, results of operations and cash flows for the
periods presented. The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the reported
revenues and expenses during the reporting period. Actual results could differ
from those estimates. The results of operations for the three months ended March
31, 2000 may not be indicative of the results that may be expected for the full
year ending December 31, 2000. These consolidated financial statements and notes
should be read in conjunction with the financial statements and notes included
in the audited consolidated financial statements of Ambac Financial Group, Inc.
and its subsidiaries contained in the Company's Annual Report on Form 10-K for
the year ended December 31, 1999, which was filed with the Securities and
Exchange Commission on March 30, 2000.
The consolidated financial statements include the accounts of the Company
and each of its subsidiaries. All significant intercompany balances have been
eliminated.
Certain reclassifications have been made to prior periods' amounts to
conform to the current period's presentation.
(2) Segment Information
The Company has two reportable segments, as follows: (1) Financial
Guarantee, which guarantees municipal and structured finance obligations; and
(2) Financial Services, which provides investment agreements, interest rate
swaps, and investment advisory and cash management services.
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different marketing strategies, personnel skill sets and
technology.
Pursuant to insurance and indemnity agreements, Ambac Assurance
guarantees the swap and investment agreement obligations of those financial
services subsidiaries. Intersegment revenues include the premiums earned under
those agreements, but which are eliminated in the
7
<PAGE>
Notes to Consolidated Unaudited Financial Statements (Continued)
(Dollars in thousands)
consolidated financial statements. Such premiums are accounted for as if they
were premiums to third parties, that is, at current market prices.
Information provided below for "Corporate and Other" relates to Ambac
Financial Group, Inc. corporate activities. Corporate and other revenue from
unaffiliated customers consists primarily of interest income and realized gains
or losses from investment securities.
The following tables summarize the financial information by reportable
segment as of and for the three-month periods ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
Financial Financial Corporate Intersegment
Three months ended March 31, Guarantee Services And Other Eliminations Consolidated
2000: ----------- ----------- ----------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenues:
Unaffiliated customers....... $ 131,046 $ 14,261 $ 567 $ - $ 145,874
Intersegment................. 823 (838) 15,971 (15,956) -
----------- ----------- --------- ----------- -----------
Total revenues................... $ 131,869 $ 13,423 $ 16,538 ($15,956) $ 145,874
----------- ----------- --------- ----------- -----------
Income before income taxes:
Unaffiliated customers....... $ 114,319 $ 7,782 ($10,007) $ - $ 112,094
Intersegment................. 823 (1,053) 15,971 (15,741) -
----------- ----------- --------- ----------- -----------
Total income before income taxes. $ 115,142 $ 6,729 $ 5,964 ($15,741) $ 112,094
----------- ----------- --------- ----------- -----------
Identifiable assets.............. $4,244,893 $6,850,118 $ 47,596 $ - $11,142,607
----------- ----------- --------- ----------- -----------
1999:
Revenues:
Unaffiliated customers....... $ 111,377 $ 12,399 $ 4,595 $ - $ 128,371
Intersegment................. 772 (900) 13,200 (13,072) -
----------- ----------- --------- ----------- -----------
Total revenues................... $ 112,149 $ 11,499 $ 17,795 ($13,072) $ 128,371
----------- ----------- --------- ----------- -----------
Income before income taxes:
Unaffiliated customers....... $ 96,960 $ 5,422 ($6,431) $ - $ 95,951
Intersegment................. 772 (910) 13,200 (13,062) -
----------- ----------- --------- ----------- -----------
Total income before income taxes. $ 97,732 $ 4,512 $ 6,769 ($13,062) $ 95,951
----------- ----------- --------- ----------- -----------
Identifiable assets.............. $3,954,945 $7,147,298 $ 239,652 $ - $11,341,895
----------- ----------- --------- ----------- -----------
</TABLE>
The following table summarizes gross premiums written and net premiums
earned included in the financial guarantee segment by location of risk for the
three-month periods ended March 31, 2000 and 1999.
<TABLE>
<CAPTION>
Three Months Three Months
2000 1999
----------------------------------------- --------------------------------
Gross Premiums Net Premiums Gross Premiums Net Premiums
Written Earned Written Earned
----------------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
United States.............................. $54,509 $61,386 $78,919 $55,091
Australia.................................. 4,391 518 381 421
Mexico..................................... 3,961 1,658 1,265 761
Japan...................................... 1,720 1,643 995 977
France..................................... 244 272 227 248
United Kingdom............................. 15 1,254 5,667 661
Internationally diversified (1)............ 2,228 2,711 1,160 914
Other international........................ 2,270 1,716 1,540 1,224
----------------------- ---------------- ---------------- ---------------
Total.................................. $69,338 $71,158 $90,154 $60,297
----------------------- ---------------- ---------------- ---------------
</TABLE>
(1) Internationally diversified may include components of domestic exposure.
8
<PAGE>
ITEM 2. Management's Discussion and Analysis of
Financial condition and Results of Operations
The following paragraphs describe the consolidated results of operations of
Ambac Financial Group, Inc. and its subsidiaries (sometimes collectively
referred to as the "Company") for the three-month periods ended March 31, 2000
and 1999, and its financial condition as of March 31, 2000 and December 31,
1999. These results include the Company's two reportable segments: Financial
Guarantee and Financial Services.
Materials in this Form 10-Q may contain information that includes or
is based upon forward-looking statements within the meaning of the Securities
Litigation Reform Act of 1995. Forward-looking statements give the Company's
expectations or forecasts of future events. You can identify these statements by
the fact that they do not relate strictly to historical or current facts. They
use words such as "anticipate," "estimate," "expect," "project," "intend,"
"plan," "believe," and other words and terms of similar meaning in connection
with a discussion of future operating or financial performance. In particular,
these include statements relating to future actions, prospective services or
products, future performance or results of current and anticipated services or
products, sales efforts, expenses, the outcome of contingencies such as legal
proceedings, and financial results.
Any or all of the Company's forward-looking statements here or in
other publications may turn out to be wrong. They can be affected by inaccurate
assumptions or by known or unknown risks and uncertainties. Many such factors
will be important in determining the Company's actual future results. The
Company's actual results may vary materially, and there are no guarantees about
the performance of the Company's stock. These statements are based on current
expectations and the current economic environment. They involve a number of
risks and uncertainties that are difficult to predict. These statements are not
guarantees of future performance. Actual results could differ materially from
those expressed or implied in the forward-looking statements. Among factors that
could cause actual results to differ materially are: (1) changes in the
economic, credit or interest rate environment in the United States and abroad;
(2) the level of activity within the national and worldwide debt markets; (3)
competitive conditions and pricing levels; (4) legislative and regulatory
developments; (5) changes in tax laws, and (6) other risks and uncertainties
that have not been identified at this time. The Company undertakes no obligation
to publicly correct or update any forward-looking statement if we later become
aware that it is not likely to be achieved. You are advised, however, to consult
any further disclosures we make on related subjects in the Company's reports to
the SEC.
Results of Operations
Consolidated Net Income
The Company's net income for the three months ended March 31, 2000 was
$85.6 million, or $1.20 per diluted share, up 17% from the three months ended
March 31, 1999 net income of $73.2 million, or $1.03 per diluted share. The
increase in net income was primarily attributable to higher Financial Guarantee
operating income driven by a $19.6 million, or 18%, increase in revenues.
Financial Guarantee
The Company provides financial guarantees through its principal operating
subsidiary, Ambac Assurance Corporation ("Ambac Assurance"). Ambac Assurance's
wholly-owned
9
<PAGE>
ITEM 2. Management's Discussion and Analysis of
Financial condition and Results of Operations (Continued)
subsidiary, Ambac Assurance UK Limited, serves clients in the international
market. Additionally, Ambac Assurance had served clients in international
markets through its participation in MBIA.AMBAC International, an unincorporated
joint venture with MBIA Insurance Corporation ("MBIA"). On March 21, 2000, Ambac
Assurance and MBIA announced the restructuring of that arrangement. Ambac
Assurance and MBIA will continue its current reciprocal reinsurance arrangements
for international business through at least the end of 2000, however, the
companies will market and originate financial guarantees independently. This
restructuring was in reaction to a growing acceptance of the financial guarantee
product internationally and the belief that separate origination functions would
be beneficial to the further expansion of the market. The restructuring did not
affect business conducted in Japan where the market for financial guarantees is
just beginning to develop. The companies will continue to market and originate
transactions jointly under the original arrangement in Japan.
Ambac Credit Products, L.L.C. ("ACP"), a wholly owned subsidiary of Ambac
Assurance, also provides credit protection in the global markets in the form of
structured credit derivatives.
Gross Par Written. Ambac Assurance guaranteed $13.3 billion in par value
------------------
bonds during the three months ended March 31, 2000, a decrease of 31% from $19.2
billion in par value bonds during the three months ended March 31, 1999. Par
value written for the first quarter of 2000 was comprised of $2.4 billion from
municipal bond obligations, $8.0 billion from structured finance obligations and
$2.9 billion from international obligations, compared to $8.8 billion, $9.6
billion and $0.8 billion, respectively, in the first quarter of 1999. Insured
municipal obligations for the three-month period ended March 31, 2000 were
affected by a 33% decline in total issuance that was attributable to a 78%
decline in the refinancing component of the market and a 2% decline in new money
issuance. Additionally, decreases in insured penetration (from approximately 53%
in the first quarter of 1999 to approximately 44% in the first quarter of 2000)
and Ambac's municipal market share contributed to the decline in insured
municipal obligations in the first quarter of 2000 compared to the first quarter
of 1999.
Management anticipates, based on growth experienced in the last few years,
that in the foreseeable future, the Company's structured finance and
international businesses will grow more rapidly than the municipal business.
Management believes that business written in the structured finance and
international markets may see large quarterly variances primarily due to general
market conditions and the developmental nature of these markets.
Gross Premiums Written. Gross premiums written for the three-month
-----------------------
period ended March 31, 2000 were $69.3 million, a decrease of 23% from $90.2
million in the three-month period ended March 31, 1999. On the municipal side,
the negative factors discussed above under "Gross Par Written" also affected
gross premiums written, but were partially offset by improved market premium
rates. Structured finance continues to see strong business activity in the
mortgage-backed, home equity, lease and conduit markets while the international
business saw strong activity in the collateralized bond obligation ("CBO")
arena. The following tables set forth the amounts of gross premiums written and
the related gross par written by type:
10
<PAGE>
ITEM 2. Management's Discussion and Analysis of
Financial condition and Results of Operations (Continued)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------------------------
(Dollars in Millions) 2000 1999
------------------------ --------------------------
Gross Gross Gross Gross
Premiums Par Premiums Par
Written Written Written Written
----------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Municipal finance:
Up-front:
New issue.................................................... $23.5 $ 2,015 $60.4 $ 7,684
Secondary market............................................. 3.3 263 1.3 141
----------- ------------ ----------- ---------
Sub-total up-front.......................................... 26.8 2,278 61.7 7,825
Installment: 4.6 155 3.7 970
----------- ------------ ----------- ---------
Total municipal finance................................... 31.4 2,433 65.4 8,795
----------- ------------ ----------- ---------
Structured finance: -
Up-front..................................................... 0.1 0.2 39
Installment.................................................. 23.0 7,992 13.4 9,539
----------- ------------ ----------- ---------
Total structured finance................................ 23.1 7,992 13.6 9,578
----------- ------------ ----------- ---------
International(1):
Up-front............................................... 4.2 159 7.1 115
Installment............................................ 10.6 2,752 4.1 680
----------- ------------ ----------- ---------
Total international.................................. 14.8 2,911 11.2 795
----------- ------------ ----------- ---------
Total.................................................. $69.3 $13,336 $90.2 $19,168
----------- ------------ ----------- ---------
Total up-front.................................................. $31.1 $ 2,437 $69.0 $ 7,979
Total installment............................................... 38.2 10,899 21.2 11,189
----------- ------------ ----------- ---------
Total.................................................. $69.3 $13,336 $90.2 $19,168
----------- ------------ ----------- ---------
</TABLE>
(1) Gross par written is reduced by reinsurance cessions to MBIA on
international business of $1,261.9 million and $800.8 million for the three
months ended March 31, 2000 and 1999, respectively.
Ceded Premiums Written. Ceded premiums written for the three months ended
-----------------------
March 31, 2000 were $16.1 million, an increase of 216% from $5.1 million in the
three months ended March 31, 1999. The increase in ceded premiums written for
the first quarter of 2000 was primarily due to a one-time cede of municipal
health care exposure and increased ceded premiums written on international
policies. Ceded premiums written were 23.3% and 5.6% of gross premiums written
for the three months ended March 31, 2000 and March 31, 1999, respectively.
Net Premiums Written. Net premiums written for the three months ended March
---------------------
31, 2000 were $53.2 million, a decrease of 37% from $85.1 million in the three
months ended March 31, 1999. This decrease reflects the lower gross premiums
written during the first quarter of 2000 as well as the higher premiums ceded to
reinsurers during the period as compared to the same period of 1999.
Net Premiums Earned. Net premiums earned during the three months ended
--------------------
March 31, 2000 were $71.2 million, an increase of 18% from $60.3 million in the
three months ended March 31, 1999. The increase was primarily the result of
increased normal net premiums earned (defined as net premiums earned excluding
the effects of refundings, calls and other accelerations of previously insured
obligations, collectively referred to as "refundings") during the periods.
Normal net premiums earned increased 34% from $49.8 million in the first quarter
of 1999 to $66.6 million in the first quarter of 2000. The increases in normal
net premiums earned resulted primarily from strong business written from prior
periods in all areas, particularly structured and international finance.
Net premiums earned include accelerated premiums that result from
refundings. When an issue insured by Ambac Assurance has been refunded or
called, the remaining unearned premium (net of refunding credits, if any) is
generally earned at that time. Refunding levels vary depending upon a number of
conditions, primarily the relationship between current interest rates and
interest rates on outstanding debt. Net premiums earned for the three months
ended March 31, 2000 included $4.6 million (which had a net income per diluted
share effect of $0.04). Net premiums earned in the three months ended March 31,
1999 included $10.5 million (which had a net income per diluted share effect of
$0.08) from refundings.
11
<PAGE>
ITEM 2. Management's Discussion and Analysis of
Financial condition and Results of Operations (Continued)
Net Investment Income. Net investment income for the three months ended
----------------------
March 31, 2000 was $57.6 million, an increase of 16% from $49.5 million in the
three months ended March 31, 1999. This increase was primarily attributable to
the growth of the investment portfolio from ongoing operations. Additionally,
investment income grew in the first quarter of 2000 compared with the
corresponding prior period due to capital contributions amounting to
approximately $200 million from the parent company to Ambac Assurance in 1999.
Ambac Assurance's investments in tax-exempt securities amounted to 77% of the
total market value of its portfolio as of March 31, 2000, versus 75% at March
31, 1999. The average pre-tax yield-to-maturity on the investment portfolio was
6.06% and 6.08% as of March 31, 2000 and 1999, respectively.
Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses
------------------------------------
for the three months ended March 31, 2000 were $3.2 million, compared to $2.5
million for the three months ended March 31, 1999. The increase is due to the
recent increases in business activity over most sectors. Losses and loss
adjustment expenses are generally based upon estimates of the ultimate aggregate
losses inherent in the insured portfolio. There was no salvage received during
either the first quarter of 2000 or the first quarter of 1999.
Underwriting and Operating Expenses. Underwriting and operating expenses
------------------------------------
for the three months ended March 31, 2000 were $13.5 million, an increase of 13%
from $11.9 million in the three months ended March 31, 1999. Underwriting and
operating expenses consist of gross underwriting and operating expenses, less
the deferral to future periods of expenses and reinsurance commissions related
to the acquisition of new insurance contracts, plus the amortization of
previously deferred expenses and reinsurance commissions. During the three month
period ended March 31, 2000, gross underwriting and operating expenses were
$20.4 million, an increase of 15% from $17.7 million in the three months ended
March 31, 1999. This increase reflects the overall increase in business activity
during recent periods and is primarily due to increased compensation related to
new hires. Underwriting and operating expenses deferred were $12.3 million and
$10.6 million for the three months ended March 31, 2000 and 1999, respectively.
The amortization of previously deferred expenses and reinsurance commissions
were $5.4 million and $4.8 million for the three months ended March 31, 2000 and
1999, respectively.
12
<PAGE>
ITEM 2. Management's Discussion and Analysis of
Financial condition and Results of Operations (Continued)
Financial Services
Through its financial services subsidiaries, the Company provides
investment agreements, interest rate swaps and investment advisory and cash
management services, principally to states, municipalities and their
authorities, school districts, and hospitals and health organizations. Slower
activity in the new issue municipal market has resulted in lower new business
written in these product areas.
Revenues. Revenues, net of realized gains and losses, for the three months
---------
ended March 31, 2000 were $14.4 million, up 13% from $12.7 million for the three
months ended March 31, 1999. This increase is primarily due to higher interest
rate swap revenue ($5.9 million in the first quarter of 2000, up 31% from $4.5
million in the first quarter of 1999)primarily attributable to earnings on
business written in prior periods. Investment agreements were $5.6 million in
the first quarter of 2000, up 4% from $5.4 million in the first quarter of 1999.
Expenses. Expenses for the three months ended March 31, 2000 were $6.5
---------
million, down 7% from $7.0 million for the three months ended March 31, 1999.
Corporate Items
Interest Expense. Interest expense for the three months ended March 31,
-----------------
2000 was $9.4 million, compared to $9.1 million for the three months ended March
31, 1999. The increase is primarily due to increased fees associated with the
increase in Ambac Assurance's claims line of credit from high quality banks in
December 1999.
Income Taxes. Income taxes for the three months ended March 31, 2000 were
-------------
at an effective rate of 23.6%, versus 23.7% for the three months ended March 31,
1999.
Supplemental Analytical Financial Data
Management, equity analysts and investors consider the following four
measures important in analyzing the financial results, and measuring the
intrinsic value of the Company: core earnings; operating earnings; adjusted
gross premiums written; and adjusted book value. However, none of these measures
are promulgated in accordance with GAAP and should not be considered as
substitutes for net income, gross premiums written and book value. The
definitions of core earnings, operating earnings, adjusted gross premiums
written and adjusted book value described below may differ from the definitions
used by other public holding companies of financial guarantee insurers.
Core Earnings. Core earnings for the three months ended March 31, 2000 were
--------------
$82.8 million, an increase of 24% from $66.9 million for the three months ended
March 31, 1999. The increase in core earnings was primarily the result of higher
normal net premiums earned from the growth in the financial guarantee book of
business and higher net investment income from the financial guarantee segment,
as well as higher revenues from the swap business in the financial services
segment. The Company defines core earnings as consolidated net income, less the
effect of net realized gains and losses, net insurance premiums earned from
refundings and calls and certain non-recurring items.
13
<PAGE>
ITEM 2. Management's Discussion and Analysis of
Financial condition and Results of Operations (Continued)
Operating Earnings. Operating earnings for the three months ended March 31,
-------------------
2000 were $85.5 million, an increase of 17% from $72.8 million in the three
months ended March 31, 1999. The Company defines operating earnings as
consolidated net income, less the effect of net realized gains and losses and
certain non-recurring items.
The following table reconciles net income computed in accordance with
GAAP to operating earnings and core earnings for the three months ended March
31, 2000 and 1999:
<TABLE>
<CAPTION>
<S> <C> <C>
(Dollars in Millions) 2000 1999
------- -------
Net Income................................................................................... $85.6 $73.2
Net realized gains, after tax................................................................ (0.1) (0.4)
Non-recurring item, after tax................................................................ - -
------- -------
Operating earnings........................................................................ 85.5 72.8
Premiums earned from refundings, after tax................................................... (2.7) (5.9)
------- -------
Core earnings............................................................................. $82.8 $66.9
======= =======
</TABLE>
There were 71.2 million and 71.3 million weighted-average diluted shares
outstanding during the three months ended March 31, 2000 and 1999, respectively.
Adjusted Gross Premiums Written. The Company defines adjusted gross
--------------------------------
premiums written as gross up-front premiums written plus the present value of
estimated installment premiums written on insurance policies and structured
credit derivatives issued in the period. While the majority of municipal finance
premiums are collected up-front at policy issuance, the majority of Ambac
Assurance's structured finance premiums are collected on an installment basis.
Adjusted gross premiums written for the three months ended March 31, 2000 were
$116.1 million, down 11% from $130.4 million in the three months ended March 31,
1999. The decrease in the first quarter of 2000 was primarily due to the
significant decline in municipal transactions driven by lower issuance and
decreased insured penetration during the period, partially offset by increased
activity in structured finance and international transactions, especially
mortgage-backed securities and CBO's. The present value of future installment
premiums written for the three months ended March 31, 2000 was $87.0 million, an
increase of 34% from $64.8 million written in the first quarter of 1999. The
aggregate net present value of estimated future installment premiums was $577.3
million and $527.2 million as of March 31, 2000 and December 31, 1999,
respectively.
14
<PAGE>
ITEM 2. Management's Discussion and Analysis of
Financial condition and Results of Operations (Continued)
The following table sets forth the amounts of adjusted gross premiums
written by type and percent of total for the three months ended March 31, 2000
and 1999:
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------------------
(Dollars in Millions) 2000 % 1999 %
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Municipal finance policies:
Up-front policies:
New issue..................................................... $ 23.5 20% $ 60.4 46%
Secondary market.............................................. 3.3 3 1.3 1
---------- ---------- ----------- ---------
Sub-total up-front.......................................... 26.8 23 61.7 47
Installment policies......................................... 3.3 3 9.7 8
---------- ---------- ----------- ---------
Total municipal finance policies........................... 30.1 26 71.4 55
---------- ---------- ----------- ---------
Structured finance policies:
Up-front....................................................... 0.1 - 0.1
Installment.................................................... 56.7 49 43.2 33
---------- ---------- ----------- ---------
Total Structured finance policies................................ 56.8 49 43.3 33
---------- ---------- ----------- ---------
International (1):
Up-front................................................... 2.3 2 3.8 3
Installment................................................ 26.9 23 11.9 9
---------- ---------- ----------- ---------
Total international written................................ 29.2 25 15.7 12
---------- ---------- ----------- ---------
Total adjusted gross premiums written............................ $116.1 100% $130.4 100%
---------- ---------- ----------- ---------
Total up-front written........................................... $ 29.2 25% $ 65.6 50%
Total installment written........................................ 86.9 75 64.8 50
---------- ---------- ----------- ---------
Total adjusted gross premiums written............................ $116.1 100% $130.4 100%
---------- ---------- ----------- ---------
</TABLE>
(1) Adjusted gross premiums written is reduced by reinsurance cessions to MBIA
on international business of $4.4 million and $16.3 million for the three
months ended March 31, 2000 and 1999, respectively.
Adjusted Book Value. Adjusted book value ("ABV") per common share
-------------------
increased 5% to $46.85 at March 31, 2000 compared to $44.68 at December 31,
1999. The Company derives ABV by beginning with stockholders' equity (book
value) and adding or subtracting the after-tax value of: the net unearned
premium reserve; deferred acquisition costs; the present value of estimated net
future installment premiums; and the unrealized gain or loss on investment
agreement liabilities. These adjustments will not be realized until future
periods and may differ materially from the amounts used in determining ABV. The
following table reconciles book value per share to ABV per share as of March 31,
2000 and December 31, 1999:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------- -----------
<S> <C> <C>
Book value per share.................................................. $30.80 $28.85
After-tax value of:
Net unearned premium reserve........................................ 11.13 11.28
Deferred acquisition costs.......................................... (1.29) (1.26)
Present value of installment premiums............................... 5.37 4.90
Unrealized gain on investment agreement liabilities................. 0.84 0.91
---------- -----------
Adjusted book value per share......................................... $ 46.85 $ 44.68
---------- -----------
</TABLE>
15
<PAGE>
ITEM 2. Management's Discussion and Analysis of
Financial condition and Results of Operations (Continued)
Liquidity and Capital Resources
Ambac Financial Group, Inc. Liquidity. The Company's liquidity, both on a
--------------------------------------
short-term basis (for the next twelve months) and a long-term basis (beyond the
next twelve months), is largely dependent upon (i) Ambac Assurance's ability to
pay dividends or make payments to the Company; and (ii) external financings.
Pursuant to Wisconsin insurance laws, Ambac Assurance may declare dividends,
provided that, after giving effect to the distribution, it would not violate
certain statutory equity, solvency and asset tests. During the three months
ended March 31, 2000, Ambac Assurance paid dividends of $15.0 million on its
common stock to the Company.
The Company's principal uses of liquidity are for the payment of its
operating expenses, interest on its debt, dividends on its shares of common
stock, purchases of its common stock in the open market and capital investments
in its subsidiaries. Based on the amount of dividends that it expects to receive
from Ambac Assurance during the next twelve months and the income it expects to
receive from its investment portfolio, management believes that the Company will
have sufficient liquidity to satisfy its liquidity needs over the next twelve
months, including the ability to pay dividends on its common stock in accordance
with its dividend policy. Beyond the next twelve months, Ambac Assurance's
ability to declare and pay dividends to the Company may be influenced by a
variety of factors, including adverse market changes, insurance regulatory
changes and changes in general economic conditions. Consequently, although
management believes that the Company will continue to have sufficient liquidity
to meet its debt service and other obligations over the long term, no guarantee
can be given that Ambac Assurance will be permitted to dividend amounts
sufficient to pay all of the Company's operating expenses, debt service
obligations and dividends on its common stock.
Ambac Assurance Liquidity. The principal uses of Ambac Assurance's
--------------------------
liquidity are the payment of operating expenses, reinsurance premiums, income
taxes and dividends to the Company. 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, net investment income and receipts
from structured credit derivatives. During 1999, the Company contributed $200
million to Ambac Assurance to support the growth in the financial guarantee
business.
Financial Services Liquidity. The principal uses of liquidity by Financial
-----------------------------
Services subsidiaries are 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
Services liquidity needs can be funded primarily from its operating cash flow
and the maturity of its invested assets. The principal sources of this segment's
liquidity are proceeds from issuance of investment agreements, net investment
income, maturities of securities from its investment portfolio (which are
invested with the objective of matching the duration of its obligations under
the investment agreements), net receipts from interest rate swaps and related
hedges, and fees for investment management services. Additionally, from time to
time, liquidity needs are satisfied by short-term inter-company loans from Ambac
Financial Group, Inc. The investment objectives with respect to investment
agreements are to achieve the highest after-tax total return, subject to a
minimum average credit quality rating of Aa/AA on invested assets, and to
maintain cash flow matching of invested assets to related liabilities to
minimize interest rate and liquidity exposure. Financial Services
16
<PAGE>
ITEM 2. Management's Discussion and Analysis of
Financial condition and Results of Operations (Continued)
maintains a portion of its assets in short-term investments and repurchase
agreements in order to meet unexpected liquidity needs.
Credit Facilities. The Company and Ambac Assurance have a revolving credit
------------------
facility with three major international banks for $150 million, which expires in
August 2000 and provides a two-year term loan provision. The facility is
available for general corporate purposes, including the payment of claims. As of
March 31, 2000 and December 31, 1999, no amounts were outstanding under this
credit facility.
Ambac Assurance maintains a claims line of credit in the form of a seven-
year irrevocable limited recourse credit facility from a group of highly rated
banks for $750 million. This credit facility provides liquidity to Ambac
Assurance in the event claims from municipal obligations in its covered
portfolio exceed specified levels. Repayments of amounts drawn under the credit
facility are limited primarily to the amount of any recoveries of losses related
to municipal policy obligations. The line expires in December 2006. As of March
31, 2000 and December 31, 1999, no amounts were outstanding under this facility.
ACP has a revolving credit facility with a major international bank for $50
million that expires in June 2000 and provides a three-year term loan provision.
The facility is available to ACP for general corporate purposes, including
payments in regard to its credit derivative activities. As of March 31, 2000 and
December 31, 1999, no amounts were outstanding under this facility.
Stock Repurchase Program. The Board of Directors of the Company has
-------------------------
authorized the establishment of a stock repurchase program that permits the
repurchase of up to 6,000,000 shares of the Company's Common Stock. During the
three months ended March 31, 2000, the Company acquired approximately 202,000
shares for an aggregate amount of $9.2 million. Since inception of the Stock
Repurchase Program, the Company has acquired approximately 4,775,000 shares for
an aggregate amount of $169.5 million.
Balance Sheet. As of March 31, 2000, the fair value of the Company's
--------------
consolidated investment portfolio was $9.01 billion, relatively flat from $8.96
billion at December 31, 1999. This slight increase was primarily due to cash
flow from financial guarantee operations and a decline in interest rates causing
market values to rise, partially offset by a slight decrease in volume in
investment and payment agreements.
Cash Flows. Net cash provided by operating activities was $91.3 million and
-----------
$90.2 million during the three months ended March 31, 2000 and 1999,
respectively. These cash flows were primarily provided from financial guarantee
operations.
Net cash used in financing activities was $6.6 million during the three
months ended March 31, 2000, $11.0 million was used by investment agreements
draws paid (net of investment agreements issued). For the three months ended
March 31, 1999, $131.7 million was provided by financing activities, of which
$126.4 million was from investment agreements issued (net of draws paid).
17
<PAGE>
ITEM 2. Management's Discussion and Analysis of
Financial condition and Results of Operations (Continued)
Net cash used in investing activities was $51.8 million during the three
months ended March 31, 2000, $743.9 million was used to purchase bonds,
partially offset by proceeds from sales and maturities of bonds of $643.8
million. For the three months ended March 31, 1999, $221.3 million was used in
investing activities, $1,371.2 million was used to purchase bonds, partially
offset by proceeds from sales and maturities of bonds of $1,112.5 million.
Material Commitments. The Company has made no commitments for material
---------------------
capital expenditures within the next twelve months.
18
<PAGE>
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
In the ordinary course of business, the Company, through its subsidiaries,
manages a variety of risks, principally market, credit, liquidity, operational,
and legal. These risks are identified, measured and monitored through a variety
of control mechanisms that are in place at different levels throughout the
organization.
Market risk represents the potential for losses that may result from
changes in the market value of a financial instrument as a result of changes in
market conditions. The primary market risks that would impact the value of the
Company's financial instruments are interest rate risk, basis risk (taxable
interest rates relative to tax-exempt interest rates, discussed below) and
credit spread risk. Below we discuss each of these risks and the specific types
of financial instruments impacted. Senior managers in the Company's market risk
management group are 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 systems, models and stress
test scenarios to monitor and manage market risk. This process includes frequent
analyses of parallel and non-parallel shifts in the yield curve, "value-at-risk"
and changes in credit spreads. 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 that may be adversely affected by changes in interest
rates consist primarily of investment securities, investment agreement
liabilities, debentures, and derivative contracts (primarily interest rate
swaps) used for hedging purposes. The Company monitors interest rate risk by
running frequent analyses of parallel and non-parallel shifts in the yield curve
and other stress test scenarios.
Financial instruments that may be adversely affected by changes in basis
include the Company's municipal interest rate swap portfolio. The Company,
through its affiliate Ambac Financial Services, L.P. ("AFSLP"), is a provider of
interest rate swaps to states, municipalities and their authorities and other
entities in connection with their financings. AFSLP manages its business with
the goal of being market neutral to changes in overall interest rates, while
seeking to profit from retaining some basis risk. If actual or projected tax-
exempt interest rates change in relation to taxable interest rates, the Company
will experience an unrealized mark-to-market gain or loss. Since late 1995, most
municipal interest rate swaps transacted by AFSLP contain provisions that are
designed to protect the Company against certain forms of tax reform, thus
mitigating its basis risk. The estimation of potential losses arising from
adverse changes in market relationships, known as value-at-risk, is a key
element in management's monitoring of basis risk for the municipal interest rate
swap portfolio. 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. 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.
19
<PAGE>
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Financial instruments that may be adversely affected by changes in credit
spreads include the Company's outstanding structured credit derivative
contracts. The Company, through its affiliate, ACP, enters into structured
credit derivative contracts. These contracts require ACP to make payments upon
the occurrence of certain defined credit events relating to underlying
obligations (generally fixed income securities). If credit spreads of the
underlying obligations change, the market value of the related structured credit
derivative could change. As such, ACP could experience an unrealized mark-to-
market gain or loss. Market liquidity could also impact valuations. Changes in
credit spreads are generally caused by changes in the market's perception of the
credit quality of the underlying obligations. The majority of ACP's contracts
are partially hedged with various financial institutions or structured with
first loss protection. Such structuring mitigates ACP's risk of loss and the
price volatility of these financial instruments. Management models the potential
impact of credit spread changes on the value of the credit derivative contracts
and personnel in the Company's credit surveillance group monitor credit spread
risk.
20
<PAGE>
PART II - OTHER INFORMATION
Items 1, 2, 3, 4 and 5 are omitted either because they are inapplicable or
because the answer to such question is negative.
Item 6 - Exhibits and Reports on Form 8-K
(a) The following are annexed as exhibits:
Exhibit
Number Description
- -------------- ----------------------------------------------------------
27.00 Financial Data Schedule.
99.02 Ambac Assurance Corporation and Subsidiaries Consolidated
Unaudited Financial Statements as of March 31, 2000 and
December 31, 1999 and for the periods ended March 31, 2000
and 1999.
(b) Reports on Form 8-K:
On January 27, 2000, the Company filed a Current Report on Form 8-K with
--------
its January 26, 2000 press release containing unaudited financial information
and accompanying discussion for the three months ended December 31, 1999 and the
year ended December 31, 1999. On March 13, 2000, 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, 1999 and 1998. On March 22, 2000, the Company
filed a Current Report on Form 8-K with its March 21, 2000 press release
--------
announcing that the Company and MBIA Inc. had decided to restructure their
international joint venture. The filing of these Current Reports on Form 8-K was
--------
previously noted in the Company's Annual Report on Form 10-K for the fiscal year
---------
ended December 31, 1999, which was filed on March 30, 2000.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Ambac Financial Group, Inc.
(Registrant)
Dated: May 12, 2000 By: /s/ Frank J. Bivona
-------------------
Frank J. Bivona
Executive Vice President and Chief
Financial Officer (Principal Financial
and Accounting Officer and Duly
Authorized Officer
22
<PAGE>
EXHIBIT 99.02
AMBAC ASSURANCE CORPORATION AND SUBSIDIARIES
(a wholly owned subsidiary of Ambac Financial Group, Inc.)
Consolidated Unaudited Financial Statements
As of March 31, 2000 and December 31, 1999
and for the Periods Ended March 31, 2000 and 1999
<PAGE>
Ambac Assurance Corporation and Subsidiaries
Notes to Consolidated Unaudited Financial Statements
(Dollars in Thousands)
(1) Basis of Presentation
Ambac Assurance Corporation ("Ambac Assurance") is a leading guarantor 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 guarantees underwritten by Ambac
Assurance guarantee payment when due of the principal of and interest on the
obligation guaranteed. In the case of a monetary default on the guaranteed bond,
payments may not be accelerated by the policyholder without Ambac Assurance's
consent. As of March 31, 2000, Ambac Assurance's net guarantees in force
(principal and interest) were $378,655,000. Ambac Assurance is a wholly owned
subsidiary of Ambac Financial Group, Inc. ("AFGI"), a holding company whose
subsidiaries provide financial guarantees 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,
guaranteed bonds primarily for college and hospital infrastructure projects.
Ambac Assurance and Connie Lee have arrangements in place to ensure that Connie
Lee maintains a level of capital sufficient to support Connie Lee's outstanding
obligations and for Connie Lee insured bonds to retain their triple-A rating.
Ambac Assurance serves clients in international markets through its wholly-
owned subsidiary Ambac Assurance UK Limited. Additionally, Ambac Assurance had
served clients in international markets through its participation in MBIA. AMBAC
International, an unincorporated joint venture with MBIA Insurance Corporation
("MBIA"). On March 21, 2000, Ambac Assurance and MBIA announced the
restructuring of that arrangement. Ambac Assurance and MBIA will continue having
reciprocal reinsurance arrangements for international business until at least
the end of 2000, however, the companies will market and originate financial
guarantees independently. The restructuring did not affect business conducted in
Japan where the companies will continue to market and originate transactions
jointly under the original arrangement.
Ambac Credit Products L.L.C. ("ACP"), a wholly owned subsidiary of Ambac
Assurance, also provides credit protection in the form of structured credit
derivatives. These structured credit derivatives require that ACP make a payment
upon the occurrence of certain defined credit events relating to an underlying
obligation. Should a credit event occur, ACP would generally pay an amount
equivalent to the difference between the par value and market value of the
underlying obligation. The majority of ACP's structured credit derivatives have
been structured with certain first loss protection.
<PAGE>
Ambac Assurance Corporation and Subsidiaries
Notes to Consolidated Unaudited Financial Statements, (Continued)
(Dollars in Thousands)
Ambac Assurance, as the sole limited partner, owns a limited partnership
interest representing 90% of the total partnership interests of Ambac Financial
Services, L..P. ("AFSLP"), a limited partnership which provides interest rate
swaps primarily to states, municipalities and their authorities. The sole
general partner of AFSLP, Ambac Financial Services Holdings, Inc., a wholly
owned subsidiary of AFGI, owns a general partnership interest representing 10%
of the total partnership interest in AFSLP.
The accompanying consolidated unaudited interim financial statements
have been prepared on the basis of U.S. Generally Accepted Accounting Principles
("GAAP") and, in the opinion of management, reflect all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
Company's financial condition, results of operations and cash flows for the
periods presented. The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the reported
revenues and expenses during the reporting period. Actual results could differ
from those estimates. The results of operations for the three months ended March
31, 2000 may not be indicative of the results that may be expected for the full
year ending December 31, 2000. These financial statements and notes should be
read in conjunction with the financial statements and notes included in the
audited consolidated financial statements of Ambac Assurance Corporation and its
subsidiaries as of December 31, 1999 and 1998, and for each of the years in the
three-year period ended December 31, 1999.
<PAGE>
Ambac Assurance Corporation and Subsidiaries
Consolidated Balance Sheets
March 31, 2000 and December 31, 1999
(Dollars in Thousands Except Share Data)
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------------- ---------------------
ASSETS
------
Investments:
<S> <C> <C>
Fixed income securities, at fair value
(amortized cost of $3,752,918 in 2000 and $3,657,146 in 1999) $3,698,593 $3,515,969
Short-term investments, at cost (approximates fair value) 96,363 207,121
Other 801 -
-------------------- ---------------------
Total investments 3,795,757 3,723,090
Cash 37,658 6,531
Securities purchased under agreements to resell 14,633 -
Receivable for securities sold 4,083 18,011
Investment income due and accrued 61,263 61,147
Deferred acquisition costs 138,408 135,324
Reinsurance recoverable 552 500
Prepaid reinsurance 222,657 217,977
Other assets 176,840 219,231
-------------------- ---------------------
Total assets $4,451,851 $4,381,811
==================== =====================
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
Liabilities:
Unearned premiums $1,428,431 $1,441,679
Losses and loss adjustment expenses 124,323 121,475
Ceded reinsurance balances payable 15,081 15,028
Deferred income taxes 61,270 27,860
Current income taxes 49,047 33,782
Other liabilities 190,125 233,127
Payable for securities purchased 36,485 93,149
-------------------- ---------------------
Total liabilities 1,904,762 1,966,100
-------------------- ---------------------
Stockholder's equity:
Preferred stock, par value $1,000 per share; authorized
shares - 285,000; issued and outstanding shares - none - -
Common stock, par value $2.50 per share; authorized shares
- 40,000,000; issued and outstanding shares - 32,800,000
at March 31, 2000 and December 31, 1999 82,000 82,000
Additional paid-in capital 751,821 751,522
Accumulated other comprehensive loss (35,868) (92,049)
Retained earnings 1,749,136 1,674,238
-------------------- ---------------------
Total stockholder's equity 2,547,089 2,415,711
-------------------- ---------------------
Total liabilities and stockholder's equity $4,451,851 $4,381,811
==================== =====================
</TABLE>
See accompanying Notes to Consolidated Unaudited Financial Statements.
<PAGE>
Ambac Assurance Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
For The Periods Ended March 31, 2000 and 1999
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
Revenues:
Gross premiums written $70,261 $91,041
Ceded premiums written (16,127) (5,086)
-------------- --------------
Net premiums written $54,134 $85,955
============== ==============
Net premiums earned $71,982 $61,029
Net fees earned and other income 7,492 5,748
Net investment income 57,783 49,587
Net realized gains 462 89
-------------- --------------
Total revenues 137,719 116,453
-------------- --------------
Expenses:
Losses and loss adjustment expenses 3,249 2,500
Underwriting and operating expenses 15,326 13,628
Interest expense 1,019 724
-------------- --------------
Total expenses 19,594 16,852
-------------- --------------
Income before income taxes 118,125 99,601
Provision for income taxes 28,277 24,034
-------------- --------------
Net income $89,848 $75,567
============== ==============
</TABLE>
See accompanying Notes to Consolidated Unaudited Financial Statements
<PAGE>
Ambac Assurance Corporation and Subsidiaries
Consolidated Statements of Stockholder's Equity
For The Periods Ended March 31, 2000 and 1999
(Dollars in Thousands)
<TABLE>
<CAPTION>
2000 1999
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
Retained Earnings:
Balance at January 1 $1,674,238 $1,404,673
Net income 89,848 $89,848 75,567 75,567
------------- -------------
Dividends declared - common stock (14,950) (13,000)
-------------- --------------
Balance at March 31 $1,749,136 $1,467,240
-------------- --------------
Accumulated Other Comprehensive (Loss) Income:
Balance at January 1 ($92,049) $138,651
Unrealized gains (losses) on securities, $86,852
and ($40,033), pre-tax, in 2000 and 1999,
respectively (1) 56,454 (26,021)
Foreign currency loss (273) (607)
------------- -------------
Other comprehensive income (loss) 56,181 56,181 (26,628) (26,628)
--------------------------- ---------------------------
Comprehensive income $146,029 $48,939
============= =============
Balance at March 31 ($35,868) $112,023
-------------- --------------
Preferred Stock:
Balance at January 1 and March 31 $- $-
-------------- --------------
Common Stock:
Balance at January 1 and March 31 $82,000 $82,000
-------------- --------------
Additional Paid-in Capital:
Balance at January 1 $751,522 $541,021
Exercise of stock options 299 314
-------------- --------------
Balance at March 31 $751,821 $541,335
-------------- --------------
Total Stockholder's Equity at March 31 $2,547,089 $2,202,598
============== ==============
(1) Disclosure of reclassification amount:
Unrealized holding gains (losses) arising during period $56,754 ($25,963)
Less: reclassification adjustment for net gains
included in net income 300 58
-------------- --------------
Net unrealized gains (losses) on securities $56,454 ($26,021)
============== ==============
</TABLE>
See accompanying Notes to Consolidated Unaudited Financial Statements.
<PAGE>
Ambac Assurance Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For The Periods Ended March 31, 2000 and 1999
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 89,848 $ 75,567
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 711 532
Amortization of bond premium and discount (1,071) (1,355)
Current income taxes 15,265 15,932
Deferred income taxes 3,012 4,967
Deferred acquisition costs (3,084) (4,708)
Unearned premiums, net (17,928) 24,793
Losses and loss adjustment expenses 2,796 2,366
Ceded reinsurance balances payable 53 (2,572)
Gains on sales of investments (462) (89)
Premiums receivable 4,492 4,618
Other, net 2,430 4,411
--------- ---------
Net cash provided by operating activities 96,062 124,462
--------- ---------
Cash flows from investing activities:
Proceeds from sales of bonds 175,328 318,384
Proceeds from maturities of bonds 59,419 44,627
Purchases of bonds (371,642) (438,144)
Change in short-term investments 110,758 (26,613)
Securities purchased under agreements to resell (14,633) (1,908)
Other, net (1,285) (130)
--------- ---------
Net cash used in investing activities (42,055) (103,784)
--------- ---------
Cash flows from financing activities:
Dividends paid (14,950) (13,000)
Short-term financing (7,930) (5,000)
--------- ---------
Net cash used in financing activities (22,880) (18,000)
--------- ---------
Net cash flow 31,127 2,678
Cash at January 1 6,531 4,895
--------- ---------
Cash at March 31 $ 37,658 $ 7,573
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes $ 9,700 $-
========= =========
Interest expense on intercompany line of credit $ 15 $ 197
========= =========
</TABLE>
See accompanying Notes to Consolidated Unaudited Financial Statements.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<DEBT-HELD-FOR-SALE> 8,897,548
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 4,839
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 9,006,931
<CASH> 46,560
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 138,408
<TOTAL-ASSETS> 11,142,607
<POLICY-LOSSES> 124,323
<UNEARNED-PREMIUMS> 1,417,729
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 424,012
0
0
<COMMON> 707
<OTHER-SE> 2,150,014
<TOTAL-LIABILITY-AND-EQUITY> 11,142,607
71,158
<INVESTMENT-INCOME> 57,631
<INVESTMENT-GAINS> 281
<OTHER-INCOME> 1,795
<BENEFITS> 3,249
<UNDERWRITING-AMORTIZATION> 13,478
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 112,094
<INCOME-TAX> 26,456
<INCOME-CONTINUING> 85,638
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 85,638
<EPS-BASIC> 1.23
<EPS-DILUTED> 1.20
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
