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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, 1999 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
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. [X]
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 14, 2000 was $3,026,518,517 (based upon the closing price
of the Registrant's shares of the New York Stock Exchange on March 14, 2000,
which was $43.938). 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 14, 2000, 69,788,425 shares of Common Stock, par value $0.01 per
share, (net of 891,959 treasury shares) were outstanding.
Documents Incorporated By Reference
Portions of the Registrant's Annual Report to Stockholders for the year
ended December 31, 1999 are incorporated by reference into Parts II and IV
hereof. Portions of the Registrant's Proxy Statement dated March 31, 2000 in
connection with the Annual Meeting of Stockholders to be held on May 10, 2000
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
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Item 1. Business......................................................... 1
Item 2. Properties....................................................... 25
Item 3. Legal Proceedings................................................ 25
Item 4. Submission of Matters to a
Vote of Security Holders......................................... 25
PART II
Item 5. Market for Registrant's Common
Equity and Related Stockholder Matters........................... 26
Item 6. Selected Financial Data.......................................... 26
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 26
Item 7A. Quantitative and Qualitative Disclosures 26
About Market Risk................................................
Item 8. Financial Statements and Supplementary Data...................... 26
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure.............................. 26
PART III
Item 10. Directors and Executive Officers
of the Registrant................................................ 27
Item 11. Executive Compensation........................................... 27
Item 12. Security Ownership of Certain
Beneficial Owners and Management................................. 27
Item 13. Certain Relationships and
Related Transactions............................................. 27
PART IV
Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K............................... 27
SIGNATURES.................................................................... 33
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
products and other financial services to clients in both the public and private
sectors around the world. The Company was incorporated on April 29, 1991. The
Company provides financial guarantees for municipal and structured finance
obligations through its principal operating subsidiary, Ambac Assurance
Corporation ("Ambac Assurance"). Through its financial services subsidiaries,
the Company provides investment agreements, interest rate swaps, investment
advisory and cash management services, primarily to states, municipalities and
their authorities.
Ambac Assurance is primarily engaged in guaranteeing 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 products written by Ambac Assurance in both the
primary and secondary markets guarantee payment when due of the principal of and
interest on the guaranteed obligation. In the case of a default on a guaranteed
obligation, payments under the financial guarantee policy may not be accelerated
by the policyholder without Ambac Assurance's consent. Ambac Assurance seeks to
minimize the risk inherent in its financial guarantee 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, 1999,
Ambac Assurance's net financial guarantee in force (after giving effect for
reinsurance) was $374.5 billion. See "Financial Guarantee in Force" below.
Ambac Credit Products L.L.C. ("ACP"), a wholly-owned subsidiary of Ambac
Assurance, provides credit protection in the global markets in the form of
structured credit derivatives. These structured credit derivatives involve
private transactions with high quality counterparties. These contracts require
ACP to make payments upon the occurrence of certain defined credit events
relating to an underlying obligation (generally a fixed income security).
Structured credit derivatives issued by ACP are guaranteed by Ambac Assurance.
See "Business Segments -- Financial Guarantee" below and "Management's
Discussion and Analysis -- Market Risk" in the Company's 1999 Annual Report to
Shareholders.
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 subsidiary, Ambac Capital Funding, Inc. ("ACFI") provides investment
agreements primarily to states, municipalities and their authorities. Investment
agreements written by ACFI are rated triple-A by virtue of Ambac Assurance's
financial guarantee. 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") primarily to states, municipalities and their
authorities, and other entities in connection with their financings. The
interest rate swaps provided by AFSLP are guaranteed by Ambac Assurance and
provide a financing alternative that may reduce an issuer's overall borrowing
costs. See "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"), primarily 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, 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
- -- Liquidity and Capital Resources" in the Company's 1999 Annual Report to
Stockholders.
Materials in this Form 10-K 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 our forward-looking statements here or in other
publications may turn out to be wrong. They can be affected by inaccurate
assumptions or by known or unknown risks and uncertainties. Many such factors
will be important in determining 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. Ambac undertakes no obligation to
publicly correct or update any forward-looking statement if we later become
aware that it is not likely to be achieved. You are advised, however, to consult
any further disclosures we make on related subjects in our reports to the
Securities Exchange Commission.
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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
and Financial Services.
Financial Guarantee
Generally, financial guarantee insurance written by Ambac Assurance
guarantees to the holder of the underlying obligation timely payment of
principal and interest by the issuer on such obligation in accordance with its
original payment schedule. Accordingly, in the case of issuer default on the
guaranteed obligation, payments under the financial guarantee policy may not be
accelerated by the policyholder without Ambac Assurance's consent.
Financial guarantee insurance is 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 without
credit enhancement, resulting in interest cost savings and greater
marketability. In addition, for complex financings and obligations of issuers
that are not well known by investors, credit enhanced obligations receive
greater market acceptance than obligations without credit enhancement. Investors
benefit from greater marketability and a reduction in the risk of loss
associated with issuer default.
Structured credit derivatives written by ACP provide credit protection in
respect of specific securities, loans or other credits. Should a defined credit
event occur, ACP would generally pay a claim equivalent to the difference
between the par value and market value of the underlying obligation. 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.
The Company derives financial guarantee revenues from: (i) premiums earned
over the life of the obligations insured or covered under a credit derivative;
(ii) net investment income; (iii) net realized gains and losses; (iv) certain
structuring fees; and (v) mark-to-market gains/losses on credit derivatives
transactions. Financial guarantee revenues were $474.1 million, $408.4 million
and $339.2 million in 1999, 1998 and 1997, respectively. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note 17 of Notes to Consolidated Financial Statements in the Company's 1999
Annual Report to Stockholders.
Financial guarantee products are sold in three principal markets: the U.S.
Municipal Market, the U.S. Structured Finance and Asset-backed Market, and the
International Market.
U. S. Municipal Market
Until 1993, Ambac Assurance was almost exclusively focused on the municipal
market in the United States. The U.S. municipal market includes taxable and tax-
exempt bonds, notes and other evidences of indebtedness issued by states,
political subdivisions (e.g., cities, counties, towns and villages), water,
sewer, electric and other utility districts, airports, higher educational
institutions, hospitals, transportation and housing authorities and other
similar authorities and agencies. Municipal obligations are generally supported
by either the taxing authority of the issuer or the issuer's or underlying
obligor's ability to collect fees or assessments for certain projects or public
services. More recently, the municipal market has expanded to include
structured and asset-backed bond issues for tax liens, sports
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stadiums, lease pools and other municipal assets. The following table sets forth
the volume of new issues of long-term (longer than 12 months) municipal bonds
and the volume of new issues of insured long-term municipal bonds over the past
ten years in the United States.
U.S. Long-Term Municipal Market
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Insured Bonds
Total Insured as Percentage
($ in Billions) Volume Volume of Total Volume
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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................................................... 220.7 107.5 48.7
1998................................................... 285.9 145.3 50.8
1999................................................... 219.3 104.3 47.6
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Source: Amounts, except for 1999, are based upon estimated data reported by The
Bond Buyer's 1999 Yearbook. The 1999 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, which had grown consistently from 1990 through
1998, has now declined slightly and is not expected to increase or decrease
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 low relative 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.
U.S. Structured Finance and Asset-backed Market
Insurance of securities in the U.S. 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, Ambac Assurance has also guaranteed structured
finance and asset-backed obligations secured by one or a few assets.
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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 mitigate 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 guarantor.
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 guarantor, 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 guarantor, 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 guarantees is broad and disparate, comprising
public issues and private placements. The increasingly varied classes of assets
securitized or guaranteed, and the recent rapid development of the market, make
estimating the size of the aggregate U.S. structured finance and asset-backed
markets difficult. Two of the most developed sectors of this market are public
asset-backed and mortgage-backed securities. According to Asset-Backed Alert,
volume in these two markets combined totaled $298.7 billion and $319.0 billion
in 1999 and 1998, respectively. Approximately 21% and 19% of those markets were
insured in 1999 and 1998, respectively.
International Market
Outside of the United States, sovereign and sub-sovereign issuers,
structured and asset-backed issuers, utilities and other issuers are
increasingly using financial guarantee products, 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
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government to public and private capital markets, where investors may seek the
security of financial guarantee products. In Europe, Japan and Latin America,
there is growing interest in asset-backed securitization.
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 structural risk profile of the
international business it guarantees 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 subsidiary in the United Kingdom,
Ambac Assurance UK Limited ("Ambac UK"), which is authorized to conduct certain
classes of general financial guarantee business in the United Kingdom. Ambac UK
is the Company's primary vehicle for directly issuing financial guarantee
policies in the United Kingdom and Europe. Ambac UK has entered into net worth
maintenance and reinsurance agreements with Ambac Assurance which support its
triple-A ratings.
In 1995, Ambac Assurance and MBIA Insurance Corporation ("MBIA") formed an
unincorporated joint venture, MBIA. AMBAC International (the "Joint Venture"),
to market financial guarantees outside of the United States. Since the inception
of the Joint Venture, the two companies have guaranteed a combined total par
amount of approximately $41.6 billion of international exposure 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 international 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. On March 21, 2000,
Ambac Assurance and MBIA announced the restructuring of their Joint Venture
arrangement. While Ambac Assurance and MBIA will continue having reciprocal
reinsurance arrangements for international business, the companies will market
and originate financial guarantees independently, with the exception of business
conducted in Japan. The Company believes that the restructuring of the Joint
Venture will not result in any reduction in premiums written from international
business, although no assurances can be given that such a reduction will not
occur.
Underwriting and Surveillance
Underwriting guidelines, policies and procedures have been developed by
Ambac Assurance's management with the intent that Ambac Assurance guarantee only
those obligations which, in the opinion of Ambac Assurance analysts, are of
investment grade quality.
Ambac Assurance's financial guarantee 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
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of Latin America. In addition, Ambac has guaranteed transactions in which the
geographic risk is spread over multiple countries. The types of international
obligations guaranteed 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. It believes that risk
associated with its international book of business is similar in risk type to
its domestic structured finance book of business.
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, and the severity of
loss experienced upon the occurrence of a default, associated with the
obligations guaranteed by it to the extent practicable. The decision to
guarantee an issue is based upon such factors as the issuer's ability to repay
the bonds, the bond's security features and the bond's structure, rather than
upon an actuarial or statistical prediction of the likelihood that the issuer
will default on the underlying debt obligation. Ambac Assurance guarantees only
those bonds on which it expects not to incur a loss. However, losses may occur
from time to time and it is Ambac Assurance's policy 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.
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 for a particular credit depends on the aggregate
amount of Ambac Assurance's existing or potential exposure to the credit. In
some cases, the structure of the credit or whether it is the first time such
credit or structure is being reviewed are determining factors in the
approval/review process. On large credits where the aggregate exposure exceeds a
certain pre-determined amount, or new types of credit exposure, the underwriting
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 term to maturity, structure of
the issue, and 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. 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
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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. The premium rate for a new issue 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 and other credit professionals review the financial
guarantee portfolio for concentration of risk by (i) specific bond types; (ii)
geographic location; and (iii) size of issue. The separate underwriting 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.
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. Internal or outside counsel reviews the documents
underlying any problem credit 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.
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
financial guarantee in force and, in most cases, advise Ambac Assurance of the
credit rating each issue would receive if it were not insured.
Surveillance of the credit quality of underlying reference entities in
ACP's credit derivatives portfolio is performed on a daily basis. Credit
spreads, which act as a measure of the market's perception of an issuer's credit
quality, are monitored to identify potential problems. In addition, published
credit ratings and current news reports are monitored regularly.
The Company has a Portfolio Risk Management Committee ("PRMC") which has
established various procedures and controls to monitor and manage credit risk.
The PRMC is comprised of senior credit professionals and senior management of
the Company. Its scope is enterprise-wide and its focus is on risk measurement,
risk/return optimization, and capital attribution in a portfolio context. This
committee works closely with the senior credit committees of each underwriting
group to assure that credit criteria are appropriate, maintained, and
systematically and consistently applied.
Financial Guarantees Written
Ambac Assurance provides financial guarantees for obligations in the U.S.
Municipal Finance market, U.S. Structured Finance and Asset-backed market and
the International
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market. Total gross par guaranteed for the years ended December 31, 1999, 1998
and 1997 was $73.3 billion, $61.5 billion and $45.5 billion, respectively.
Financial Guarantees Written - U.S. Municipal Finance Market
Ambac Assurance guaranteed gross par of $32.5 billion, $33.9 billion and
$29.5 billion in 1999, 1998 and 1997, respectively, in the U.S. Municipal
Finance market. In the U.S. Municipal Finance 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 by
issuers (or their investment bankers or financial advisors) to determine their
suitability for financial guarantee. 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. Potential bidders on the bonds then form syndicates.
These syndicates then solicit a determination from some or all of the financial
guarantors whether an issue is suitable for financial guarantee and at what
premium rate and on what terms. The syndicate then determines whether to bid on
the issue with a financial guarantee (and if so, with which financial guarantor)
or without a financial guarantee. The issuer then generally selects the
syndicate with the lowest bid. In a negotiated offering, the issuer has already
selected an investment bank and that investment bank solicits premium quotes and
terms from the financial guarantors.
Ambac Assurance also provides guarantees 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 guaranty
generally increases the sale price of bonds (typically by an amount greater than
the cost of the policy) and affords a wider secondary 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 guarantees 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. The issuer must reimburse any amounts drawn
under the debt service reserve fund policy within a specified time period and at
a specified interest rate.
As of December 31, 1999 and 1998, net outstanding par exposure related to
municipal bond transactions was $173.0 billion and $156.9 billion, respectively.
Financial Guarantees Written - U.S. Structured Finance and Asset-Backed
Market
Ambac Assurance guaranteed gross par of $33.4 billion, $22.6 billion and
$12.8 billion in 1999, 1998 and 1997, respectively, in the U.S. Structured
Finance and Asset-backed market.
9
<PAGE>
Within this market, Ambac Assurance is active in several segments, the
largest of which are the mortgage-backed and home equity loan and commercial
asset-backed markets.
Within the mortgage-backed and home equity loan 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 guarantee these securities,
Ambac Assurance analyzes the quality of the underlying assets, 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
guarantee.
The commercial asset-backed area includes providing levels of credit
enhancement for 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
financial institutions, customers sell financial assets such as trade
receivables to the conduits, which in turn issue commercial paper to fund the
purchase of the assets. When Ambac Assurance underwrites a new conduit for
insurance it evaluates, among other factors: (i) the quality of the assets to be
sold to the conduit; (ii) the process by which the sponsoring financial
institution adds assets to the conduit; (iii) the quality of the management team
of the conduit and the financial institution sponsoring the conduit; and (iv)
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 provide financial guarantee against the default of a
specific security sold into a conduit.
Premiums for 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 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 (e.g., monthly,
quarterly or annually). As of December 31, 1999 and 1998, net outstanding par
exposure related to U.S. structured finance and asset-backed transactions was
$53.0 billion and $32.9 billion, respectively.
Financial Guarantees Written - International Market
Ambac Assurance guaranteed gross par of $7.4 billion, $5.0 billion and $3.1
billion in 1999, 1998 and 1997, respectively, in the International market.
Ambac Assurance'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 (structured
transactions secured by future inflows of assets) and collateralized debt
obligations.
Premiums for international policies are based on a percentage of either
principal or principal and interest guaranteed. The timing of the collection of
international 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, 1999 and 1998, net outstanding par
exposure related to international transactions was $14.3 billion and $8.5
billion, respectively.
10
<PAGE>
Financial Guarantees in Force
Ambac Assurance underwrites and prices financial guarantees on the
assumption that the guarantee will remain in force until maturity of the
underlying bonds. Ambac Assurance estimates that the average life of its
guarantees on new issue par in force at December 31, 1999 was 10 1/2 years. The
10 1/2 year average life is determined by applying a weighted average
calculation, using the remaining years to maturity of each guaranteed bond, and
weighting them on the basis of the remaining par guaranteed. No assumptions are
made for prepayments or future refundings of guaranteed 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 financial guarantee
portfolio designed to spread its risk based on a variety of criteria, including
issue size, type of bond, geographic area and issuer.
As of December 31, 1999, the total net par amount of guaranteed bonds
outstanding was $240.3 billion.
Types of Bonds
The table below shows the distribution by bond type of Ambac Assurance's
guaranteed portfolio as of December 31, 1999.
Guaranteed Portfolio by Bond Type
as of December 31, 1999
<TABLE>
<CAPTION>
%of Total Net Par
Net Par Amount Amount
Bond Type Outstanding Outstanding
- ----------------------------------------------------------------------- -------------- ------------------
($ In Millions)
U.S. Municipal Finance:
<S> <C> <C>
Lease and tax-backed revenue...................................... $ 40,874 17%
General obligation................................................ 39,777 17
Utility revenue................................................... 28,867 12
Health care revenue............................................... 18,628 8
Transportation revenue............................................ 10,247 4
Investor-owned utilities.......................................... 9,393 4
Higher education.................................................. 9,172 4
Housing revenue................................................... 7,033 3
Student loans..................................................... 5,474 2
Other............................................................. 3,550 1
--------------- -----------------
Total U.S. Municipal Finance................................... 173,015 72
--------------- -----------------
U.S. Structured Finance:
Mortgage-backed and home equity.................................. 33,294 14
Asset-backed and conduits........................................ 16,398 7
Other............................................................ 3,270 1
--------------- -----------------
Total Structured Finance....................................... 52,962 22
--------------- -----------------
Total Domestic................................................. 225,977 94
--------------- ---------------
International:......................................................
Asset-backed and conduits....................................... 6,023 3
Structured credit derivatives................................... 2,110 1
Utilities....................................................... 1,188 1
Mortgage-backed and home equity................................. 1,172 -
Sovereign/sub-sovereign......................................... 1,097 -
Other........................................................... 2,740 1
--------------- ---------------
Total International............................................ 14,330 6
--------------- -----------------
Grand Total................................................ $240,307 100%
=============== =================
</TABLE>
11
<PAGE>
Historically, International included all transactions conducted through the
Joint Venture. Joint Venture transactions may include components of domestic
exposure.
The table below shows the percentage, by bond type, of new business
guaranteed by Ambac Assurance during each of the last five years.
New Business Guaranteed by Bond Type (1)
<TABLE>
<CAPTION>
Bond Type 1999 1998 1997 1996 1995
- --------------------------------------- ------- ------ ------ ------ -------
U.S. Municipal Finance:
<S> <C> <C> <C> <C> <C>
General obligation.................... 9% 10% 18% 16% 23%
Utilities (2)......................... 9 12 12 15 16
Lease and tax-backed revenue.......... 9 15 17 23 16
Health care revenue................... 4 8 8 7 8
Transportation revenue................ 4 2 2 3 5
Higher education...................... 3 2 3 3 3
Student loans......................... 2 1 1 3 5
Housing revenue....................... 1 2 3 3 5
Other................................. 1 1 1 0 0
-------------------------------------------------
Total Municipal Finance............. 42 53 65 73 81
-------------------------------------------------
U.S. Structured Finance:
Mortgage-backed and home.............
Equity............................ 30 22 18 12 8
Asset-backed and conduits............ 16 15 9 4 5
Other................................ 2 2 3 3 1
-------------------------------------------------
Total Structured Finance............ 48 39 30 19 14
-------------------------------------------------
Total Domestic.................. 90 92 95 92 95
-------------------------------------------------
International:
Asset-backed and conduits............ 4 4 1 6 2
Structured credit derivatives........ 4 0 0 0 0
Mortgage-backed and home.............
Equity............................ 1 0 1 0 0
Sovereign/sub-sovereign.............. 0 0 1 0 0
Utilities............................ 0 1 1 0 0
Other................................ 1 3 1 2 3
-------------------------------------------------
Total International................. 10 8 5 8 5
-------------------------------------------------
Grand Total......................... 100% 100% 100% 100% 100%
=================================================
</TABLE>
(1) Stated as a percentage of total net par amount guaranteed during such year.
(2) Includes investor-owned utilities.
Issue Size
Ambac Assurance seeks a broad coverage of the market by guaranteeing small
and large issues alike. Ambac Assurance's financial guarantee exposure as of
December 31, 1999 reflects the historical emphasis on issues guaranteed with an
original par amount of less than $25 million in the municipal market. However,
with the entrance into the U.S. Structured Finance and International markets in
recent years, Ambac Assurance's emphasis has evolved towards larger deals. The
following table sets forth the distribution of Ambac Assurance's guaranteed
portfolio as of December 31, 1999, with respect to the original size of each
guaranteed issue:
12
<PAGE>
Original Par Amount Per Issue
as of December 31, 1999
<TABLE>
<CAPTION>
% of Total Net Par % of Total Net
Number Amount Par Amount
Original Par Amount Number of Issues of Issues Outstanding Outstanding
- ------------------------------- ------------------ ----------------- ------------------- ------------------
($ In Millions)
<S> <C> <C> <C> <C>
Less than $10 million.......... 9,062 65% $ 23,789 10%
$10-25 million................. 2,378 17 29,022 12
$25-50 million................. 1,156 8 32,136 13
Greater than $50 million....... 1,408 10 155,360 65
------------------ ----------------- ------------------- ------------------
14,004 100% $240,307 100%
================== ================= =================== ==================
</TABLE>
Geographic Area
Ambac Assurance is licensed to write business in the U.S. and abroad. As of
December 31, 1999, the ten largest U.S. states, as measured by net par amount
outstanding, accounted for approximately 47% of Ambac Assurance's total net par
amount outstanding. The following table sets forth the geographic distribution
of Ambac Assurance's insured exposure as of December 31, 1999.
Guaranteed Portfolio by Geographic Area as of December 31, 1999
<TABLE>
<CAPTION>
Net Par % of Total Net
Amount Par Amount
Geographic Area Outstanding Outstanding
- --------------------------------------------------------------------- --------------------- ---------------------
($ In Millions)
Domestic:
<S> <C> <C>
California......................................................... $ 25,225 11%
New York........................................................... 16,576 7
Pennsylvania....................................................... 14,498 6
Florida............................................................ 13,406 6
Texas.............................................................. 9,352 4
Illinois........................................................... 8,097 3
Ohio............................................................... 6,917 3
New Jersey......................................................... 6,762 3
Massachusetts...................................................... 6,366 2
Michigan........................................................... 5,661 2
Mortgage and asset-backed.......................................... 49,693 21
Other states....................................................... 63,424 26
--------------------- ---------------------
Total Domestic.................................................. 225,977 94
--------------------- ---------------------
International:
United Kingdom..................................................... 2,416 1
Japan.............................................................. 1,485 1
France............................................................. 738 -
Australia.......................................................... 722 -
Mexico............................................................. 569 -
Internationally diversified........................................ 5,686 3
Other International................................................ 2,714 1
--------------------- ---------------------
Total International............................................. 14,330 6
--------------------- ---------------------
Grand Total..................................................... $240,307 100%
===================== =====================
</TABLE>
Mortgage and asset-backed obligations include guarantees with multiple
locations of risk within the United States. Internationally diversified includes
structured credit derivatives and other guarantees with multiple locations of
risk globally. Historically, International included all transactions conducted
through the Joint Venture. Joint Venture transactions may include components of
domestic exposure.
13
<PAGE>
Single Risk
Ambac Assurance has adopted underwriting and exposure management policies
designed to limit the net guarantees in force for any one credit. In addition,
Ambac Assurance uses reinsurance to limit net exposure to any one credit. As of
December 31, 1999, Ambac Assurance's net par amount outstanding for its 20
largest credits, totaling $12.8 billion, was approximately 5% of Ambac
Assurance's total net par amount outstanding with no one credit representing
more than 1% of Ambac Assurance's total net par amount outstanding. Ambac
Assurance is also subject to certain regulatory limits and rating agency
guidelines on exposure to a single credit. See "Insurance Regulatory Matters"
and "Rating Agencies," below.
Underlying Ratings
The following table sets forth Ambac Assurance's financial guarantee
portfolio by underlying rating prior to being guaranteed by Ambac Assurance, as
of December 31, 1999:
Insured Portfolio by Underlying Rating (1)
as of December 31, 1999
<TABLE>
<CAPTION>
Net Par Amount % of Total Net Par
Rating Outstanding Amount Outstanding
- ---------------------------------------------------------------------- --------------------- ---------------------
($ In millions)
<S> <C> <C>
AAA................................................................... $ 3,496 1%
AA.................................................................... 29,179 12
A..................................................................... 131,571 55
BBB................................................................... 75,082 31
BIG (2)............................................................... 979 less than 1
--------------------- ---------------------
$240,307 100%
===================== =====================
</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 guaranteed obligations
which are currently or imminently in monetary default. The active credit reserve
("ACR") represents an estimate of unidentified losses from our guaranteed
obligations. As of December 31, 1999, Ambac Assurance's ACR was $94.8 million.
When a monetary default occurs or is imminent with respect to a particular
guaranteed obligation, a 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 guaranteed
obligation. All or part of the case basis reserve may be allocated from
available ACR. Ambac Assurance's net case basis reserves totaled $26.2 million
at December 31, 1999.
14
<PAGE>
The most recent three-year history of Ambac Assurance's loss reserves, and
losses and loss adjustment expenses incurred and paid, is detailed in the table
below:
Reserve for Losses and Loss Adjustment Expenses
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------
1999 1998 1997
------------- ---------------- ----------------
<S> <C> <C> <C>
($ In Thousands)
Reserve for losses and loss adjustment expenses at January 1,........... $115,794 $103,345 $ 60,613
Less: reinsurance recoverable........................................... 3,638 4,219 393
------------- ---------------- ----------------
Net reserve for losses and loss adjustment expenses at January 1,....... 112,156 99,126 60,220
Losses and loss adjustment expenses incurred............................ 11,000 6,000 2,854
Losses and loss adjustment expenses paid (net of salvage received)...... (2,181) 7,030 (2,474)
Net balance for Connie Lee, at acquisition.............................. -- -- 38,526
------------- ---------------- ----------------
Net reserve for losses and loss adjustment expenses at December 31,..... 120,975 112,156 99,126
Plus: reinsurance recoverable........................................... 500 3,638 4,219
------------- ---------------- ----------------
Reserve for losses and loss adjustment expenses at December 31,......... $121,475 $115,794 $103,345
============= ================ ================
</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 1999 Annual
Report to Stockholders.
Competition
The financial guarantee business is highly competitive. Ambac Assurance's
principal competitors in the market for financial guarantees 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. 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 the
guarantor; 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 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 guarantor in order to obtain financial
strength ratings by the rating agencies. In addition, under the New York law, a
monoline financial guarantor must have at least $75 million of paid-in capital
and surplus and maintain thereafter at least $65 million of
15
<PAGE>
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 and single risk limits 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.
Ambac Assurance has facultative reinsurance agreements with certain high
quality reinsurers 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 have
entered into facultative reinsurance agreements whereby each company may
reinsure the other on risks guaranteed internationally.
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 in excess of the quota share. Effective January 1, 1997, Ambac Assurance
discontinued ceding new business under the quota share and surplus share
reinsurance programs and only uses facultative reinsurance agreements to reduce
its risks and manage its insurance portfolio.
As of December 31, 1999, Ambac Assurance had retained approximately 87% of
its gross financial guarantees in force of $430.5 billion and had ceded
approximately 13% to its treaty and facultative reinsurers. See Note 11 of Notes
to Consolidated Financial Statements in the Company's 1999 Annual Report to
Stockholders.
As a primary financial guarantor, 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 reinsurers, prepares annual
written reviews of such reinsurers and monitors for concentrations of credit
risk. Ambac Assurance's current primary reinsurers are American Re, 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
guarantees. These rating agencies' reviews focus on the guarantor's underwriting
policies and procedures and the quality of the obligations guaranteed. The
rating agencies frequently perform assessments of the credits guaranteed by
Ambac Assurance to confirm that Ambac Assurance continues to meet the capital
allocation criteria considered necessary by the
16
<PAGE>
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 the
territory of Guam. Ambac U.K., Ambac Assurance's wholly-owned subsidiary, is
licensed to transact insurance in the United Kingdom. Ambac Assurance 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. Ambac
U.K. is subject to the insurance laws and regulations of 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. They generally require financial guarantors 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. They generally
require prior approval of certain changes in control of domestic financial
guarantors 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 financial guarantors and their direct and indirect parents and
affiliates. They 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. It 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 1999 Annual Report to Stockholders.
The Company believes that Ambac Assurance is in material compliance with
all applicable insurance laws and regulations.
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 test, the Company believes that a
holder of common stock having the right to cast 10% of the votes which may be
cast by
17
<PAGE>
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.
Pursuant to these laws, both FMR Corp. and J.P. Morgan & Co. Incorporated
each obtained approval from the Wisconsin Insurance Commissioner to acquire
greater than 10% of the Company's outstanding stock. As of December 31, 1999
their respective percentages of ownership were approximately 11.0% and 10.4%. In
their respective requests for approval from the Wisconsin Commissioner, each
entity disclaimed any present intention to exercise control over the Company or
Ambac Assurance or to control or attempt to control the management or operations
of the Company or Ambac Assurance.
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 1999, 1998 and 1997, Ambac Assurance paid to the Company cash
dividends on its common stock totaling $52.0 million, $48.0 million and $44.0
million, respectively. See Note 8 of Notes to Consolidated Financial Statements
in the Company's 1999 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 guarantors licensed to do business in New
York, including Ambac Assurance. This law requires a financial guarantor 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. 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. Contributions continue until the contingency reserve for such
insured obligations equals the greater of 50% of premiums written for the
relevant category 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 guarantor may be permitted under specified circumstances in
the event that actual loss experience
18
<PAGE>
exceeds certain thresholds or if the reserve accumulated is deemed excessive in
relation to the guarantor's outstanding guaranteed obligations. Financial
guarantors 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
guaranteed average annual debt service for a single risk, net of reinsurance and
collateral, may not exceed 10% of the sum of the guarantor's policyholders'
surplus and contingency reserves. In addition, guaranteed principal of municipal
bonds attributable to any single risk, net of reinsurance and collateral, is
limited to 75% of the guarantor'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 guaranteed 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, 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
guarantors 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 financial guarantee 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 guaranteed 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
guarantor 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. 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 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,
19
<PAGE>
except that withdrawals by the financial guarantor 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
financial guarantor'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 guarantees, none of which is more
stringent in any material respect than the New York financial guarantee
insurance statute.
Financial Services
The Company's Financial Services Segment 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 services revenues are derived from: (i) net investment income;
(ii) net swap revenues; (iii) fund management and advisory revenues; and (iv)
net realized gains and losses. Excluding transactions with affiliates, total
revenues were $48.5 million, $32.4 million and $34.6 million in 1999, 1998 and
1997, respectively. See "Management's Discussion and Analysis" and Note 17 of
Notes to Consolidated Financial Statements in the Company's 1999 Annual Report
to Stockholders.
The principal competitive factors among providers of investment agreements
are: (i) contract interest 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. With respect to each of these competitive factors, the Company
believes that ACFI is on equal footing with each of its principal competitors.
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. With respect to each of these
competitive factors, the Company believes that AFSLP is on equal footing with
each of its principal competitors.
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. With respect to each of these
competitive factors, the Company believes that Cadre and Cadre Securities are on
equal footing with each of their principal competitors.
Investment Agreements
The principal purpose of ACFI 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
20
<PAGE>
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 financial guarantee policy, which
guarantees its payment obligations.
ACFI manages its balance sheet to protect against a number of risks
inherent in its business including liquidity, market (principally interest rate)
and credit risk. See "Management's Discussion and Analysis -- Market Risk" in
the Company's 1999 Annual Report. ACFI 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. Its goal is to match the
expected cash flow 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, ACFI maintains funds invested in cash and cash
equivalents to meet short-term liquidity needs.
The following table sets forth the net payments due under ACFIs' settled
investment agreements in each of the next five years ending December 31, and the
period thereafter, based on expected call dates:
Investment Agreements Obligations
<TABLE>
<CAPTION>
($ In Thousands) Principal Amount (1)
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
2000............................................................................... $2,457,817
2001............................................................................... 1,384,598
2002............................................................................... 483,254
2003............................................................................... 69,164
2004............................................................................... 40,466
All later years.................................................................... 973,549
----------------------------
$5,408,848
============================
</TABLE>
(1) As of December 31, 1999, the interest rates on these agreements ranged from
4.00% to 8.14%.
ACFI currently uses interest rate swap contracts in the normal course of
business for hedging purposes as part of its overall interest rate risk
management. Some of its interest rate swap agreements have been entered into
with its affiliate, AFSLP. Other derivative contracts that have been used by
ACFI, and may be used in the future, include financial instruments with off-
balance sheet risk such as interest rate futures contracts, 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 swap contracts are agreements where ACFI 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.
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. Initial margin requirements are met in cash or other financial
instruments, and
21
<PAGE>
changes in the contract values are settled daily. Futures contracts have little
credit risk since futures exchanges are the counterparties.
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 ACFI, an affiliate. AFSLP
is subject to changes in the relationship between tax-exempt and taxable
interest rates, referred to as "basis risk." 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 interest rate swaps provided by
AFSLP are guaranteed 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.
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. See "Management's Discussion and Analysis -- Market Risk" in the
Company's Annual Report.
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 SEC.
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. Cadre provides investment advisory and
administrative services to money market funds that are primarily offered to
qualified participants, including school districts, healthcare service providers
and municipalities.
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. It also serves as placement agent and dealer for
securities issued by its affiliates in private placement transactions. Cadre
Securities is registered as a broker-dealer with the SEC and with certain states
that require such registration, and it is a member of the National Association
of Securities 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, 1999, Cadre Securities had net capital
of $202,668, which was $102,668 in excess of its required net capital of
$100,000. The net capital ratio was 3.7 to 1.
22
<PAGE>
At December 31, 1999, Cadre and Cadre Securities provided services to
approximately 3,000 clients with approximately $6.9 billion in assets.
Fees from the money market funds for which Cadre and Cadre Securities
perform services are based on percentages of the average daily net assets of
such funds. Cadre Securities receives fees for brokering short-term fixed income
securities trades by marking up the price of the securities purchased and sold
on behalf of clients. These fees are recorded upon execution of the trades
since, at that time, substantially all of Cadre Securities' obligations have
been fulfilled.
Investments and Investment Policy
As of December 31, 1999, the consolidated investments of the Company had an
aggregate fair value of approximately $9.0 billion and an aggregate amortized
cost of approximately $9.3 billion. These investments are managed internally by
officers of the Company, 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
may 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. These
guidelines encompass credit quality, risk concentration and holding period, and
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 (Loss) Income", in stockholders'
equity, net of tax.
As of December 31, 1999, Ambac Assurance's investment portfolio had an
aggregate fair value of approximately $3.7 billion and an aggregate amortized
cost of approximately $3.9 billion. Ambac Assurance's investment policy is
designed to achieve diversification of its portfolio and 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 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, 1999, ACFI's investment portfolio had an aggregate fair
value of approximately $5.2 billion and an aggregate amortized cost of $5.4
billion. ACFI's investment policy is designed to achieve the highest after-tax
return on equity, subject to minimum average quality ratings. For further
discussion, see "Investment Agreements," above.
23
<PAGE>
The following tables provide certain information concerning the investments
of the Company:
Investments by Rating (1)
as of December 31, 1999
<TABLE>
<CAPTION>
% of Investment
Rating Portfolio
- ------------------------------------------------------------------------------------------- ----------------------
<S> <C>
AAA (2).................................................................................... 77%
AA......................................................................................... 12
A.......................................................................................... 9
BBB........................................................................................ -
Not Rated.................................................................................. 2
----------------------
100%
======================
</TABLE>
(1) Ratings represent S&P classifications. If unavailable, Moody's rating is
used.
(2) Includes U.S. Treasury and agency obligations, which comprised
approximately 27% of the total investment portfolio.
Summary of Investments
As of December 31,
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
1999 1998 1997
-------------------------------- ------------------------------ --------------------------
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Investment Category Value Yield (1) (2) Value Yield (1) (2) Value Yield (1) (2)
- --------------------------------------------------- -------------- ------------ -------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
($ In Thousands)
Long-term investments:
Taxable bonds....................... $6,001,199 6.28% $6,082,903 6.61% $4,545,177 6.75%
Tax-exempt bonds.................... 2,737,272 5.78 2,539,379 6.13 2,228,667 6.20
------------- ------------- ----------------
Total long-term investments....... 8,738,471 6.13 8,622,282 6.47 6,773,844 6.55
Short-term investments (3): 220,896 5.56 119,528 5.69 136,278 5.43
------------- ------------- ----------------
Total investments................. $8,959,367 6.11% $8,741,810 6.45% $6,910,122 6.52%
============= ============= ================
</TABLE>
(1) Yields presented include assets held in the IA Business portfolio. Interest
expense on related investment agreements was $299.5 million, $263.6 million
and $186.7 million in 1999, 1998 and 1997, respectively.
(2) Yields are stated on a pre-tax basis, based on average amortized cost.
(3) Includes taxable and tax-exempt investments.
<TABLE>
<CAPTION>
Investments by Security Type
As of December 31,
------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------------ ------------------------- ------------------------------
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Investment Category Value Yield (1) (2) Value Yield (1)(2) Value Yield (1) (2)
- ----------------------------------------------------------- ------------- ---------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
($ In Thousands)
Municipal obligations (4)................ $2,962,939 5.80% $2,801,324 6.19% $2,298,996 6.20%
Corporate securities..................... 1,008,504 7.10 1,435,427 7.33 1,093,587 7.61
U.S. government obligations.............. 62,479 6.10 122,896 5.80 139,598 6.25
Mortgage- and asset-backed securities
(includes U.S. Government Agency
obligations) (3)........................ 4,704,549 6.08 4,262,635 6.36 3,222,756 6.46
Other.................................... -- -- -- -- 18,907 3.72
---------- ----------- --------------
Total long-term investments............. 8,738,471 6.13 8,622,282 6.47 6,773,844 6.55
Short-term investments (4)............... 220,896 5.56 119,528 5.69 136,278 5.43
---------- ----------- --------------
Total investments....................... $8,959,367 6.11% $8,741,810 6.45% $6,910,122 6.52%
========== =========== ==============
</TABLE>
(1) Yields presented include assets held in the IA Business portfolio. Interest
expense on related investment agreements was $299.5 million, $263.6 million
and $186.7 million in 1999, 1998 and 1997, respectively.
(2) Yields are stated on a pre-tax basis, based on average amortized cost.
(3) The actual maturity dates of mortgage- and asset-backed securities are
uncertain because the underlying mortgages may be paid prior to the stated
maturity of such securities. This possibility of prepayment creates the risk
that the Company will be unable to replace such investments with securities
of comparable yield.
(4) Includes taxable and tax-exempt investments.
24
<PAGE>
Distribution of Investments by Maturity
as of December 31, 1999
<TABLE>
<CAPTION>
Amortized Estimated
Maturity Cost Fair Value
- ------------------------------------------------------------------------ ------------------------- -------------------------
($ In Thousands)
<S> <C> <C>
Due in one year or less (1)............................................. $ 296,784 $ 296,646
Due after one year through five years................................... 284,950 292,852
Due after five years through ten years.................................. 402,370 402,065
Due after ten years..................................................... 3,488,560 3,263,255
------------------------- -------------------------
4,472,664 4,254,818
Mortgage- and asset-backed securities (2)............................... 4,776,416 4,704,549
------------------------- -------------------------
Total investments....................................................... $9,249,080 $8,959,367
========================= =========================
</TABLE>
(1) Includes securities with a fair value of $75.7 million, which are classified
as long-term investments in the tables above but which mature 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 1999 Annual Report to Stockholders.
Employees
As of December 31, 1999, the Company and its subsidiaries had 331
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 its principal offices at Hasilwood House, 60 Bishopgate,
London EC2N4BE, England, which consists of 7,100 square feet of office space,
under an agreement that expires in December 2006.
Cadre maintains its principal executive office at 905 Marconi Avenue,
Ronkonkoma, New York 11779. The Company owns the office building. 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 1999.
25
<PAGE>
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 53 of the Company's 1999 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 20, 2000, there were 75 stockholders of record of the Company's Common
Stock, which is listed on the New York Stock Exchange.
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 captions "Financial
Highlights" and "Five Year Highlights" on pages 4 and 5, respectively, of the
Company's 1999 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 33 through 51 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 31 of the
Company's 1999 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 33 through 51 of
such Annual Report.
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 29 to 31 of the Company's 1999 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 33 to 51 of such Annual Report.
Item 8. Financial Statements and Supplementary Data.
The 1999 Consolidated Financial Statements, together with the Notes thereto
and the Independent Auditors' Report thereon, are set forth on pages 32 through
51 of the Company's 1999 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.
26
<PAGE>
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, 29 and 30 of the Company's 2000 Proxy Statement
and such information is incorporated herein by reference.
Item 11. Executive Compensation.
Information relating to compensation of the Company's directors and
executive officers is set forth on pages 9 and 10 and on pages 13 to 22 of the
Company's 2000 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 2000 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 1999
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.................................. 32
Consolidated Balance Sheets as of December 31,
1999 and 1998................................................. 33
Consolidated Statements of Operations for each of
the years ended December 31, 1999, 1998 and 1997.............. 34
Consolidated Statements of Stockholders' Equity for each of
the years ended December 31, 1999, 1998 and 1997 35
Consolidated Statements of Cash Flows for each of
the years ended December 31, 1999, 1998 and 1997.............. 36
Notes to Consolidated Financial Statements.................... 37-51
</TABLE>
27
<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>
Independent Auditors' Report (Page S-1)
<S> <C> <C> <C> <C>
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
--------
The following items are annexed as
exhibits:
Exhibit Number Description
- ------------- -----------
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.)
28
<PAGE>
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. (Filed as
Exhibit 4.06 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1998 and
incorporated herein by reference.)
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.)
- -----------------
* Management contract or compensatory plan, contract or arrangement required to
be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
---------
29
<PAGE>
10.07* Ambac Financial Group, Inc. Deferred Compensation Plan
for Outside Directors, effective as of December 1,
1993 and amended and restated as of October 26, 1999.
(Filed as Exhibit 10.26 to the Company's Quarterly
Report on Form 10-Q for the period ended September 30,
1999 and incorporated herein by reference.)
10.08* Ambac Financial Group, Inc. 1997 Equity Plan Senior
Officer Deferred Compensation Sub-Plan of the 1997
Equity Plan effective as of October 26, 1999 (Filed as
Exhibit 10.27 to the Company's Quarterly Report on
Form 10-Q for the period ended September 30, 1999 and
incorporated herein by reference.)
10.09* 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.)
10.10* 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.)
10.11* 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.)
10.12* 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.)
10.13* 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.)
10.14* 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.)
10.15* 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.)
10.16* 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.)
- ------------------
* Management contract or compensatory plan, contract or arrangement required to
be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
---------
30
<PAGE>
10.17* 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.)
10.18* Agreement and General Release between Joseph V.
Salzano, the Company and Ambac Assurance Corporation
dated December 29, 1999.
10.19 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.)
10.20 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.)
10.21 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.)
10.22 Conformed copy of Amended U.S. $150,000,000 Credit
Agreement, dated as of August 3, 1999 (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 10.23
to the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 1999 and incorporated herein by
reference.)
10.23 $750,000,000 Amended and Restated Credit Agreement,
dated December 2, 1999 between Ambac Assurance
Corporation and various banks and Deutsche Bank AG
(New York Branch), as Agent.
10.24 Joint Venture Agreement Ambac Assurance Corporation
and MBIA Insurance Company dated as of September 11,
1995. (Filed as Exhibit 10.22 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1998 and incorporated herein by reference.)
- -------------------------------------------------------------------------------
* 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>
<C> <S> <C>
10.25 Conformed Copy of U.S. $50,000,000 Revolving Credit Agreement, dated as of July
1, 1999 among Ambac Credit Products, LLC, the banks, financial institutions and
other institutional lenders (the "Initial Lenders") listed on the signature
pages thereof, and The Bank of New York, as Agent for the Lenders. (Filed as
Exhibit 10.24 to the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 1999 and incorporated herein by reference.)
12.01 Statement re computation of ratios.
13.01 Annual Report to Stockholders for the fiscal year ended December 31, 1999.
(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 Michael A. Callen.
24.03 Power of Attorney from Renso L. Caporali.
24.04 Power of Attorney from Richard Dulude.
24.05 Power of Attorney from W. Grant Gregory.
24.06 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, 1999 and 1998.
</TABLE>
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the fourth quarter of 1999.
--------
However, 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.
32
<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, 2000 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, 2000
- -------------------------------- and Chief Executive Officer
Phillip B. Lassiter and Director (Principal Executive
Officer)
/s/ Frank J. Bivona Executive Vice President, and March 30, 2000
- -------------------------------- Chief Financial Officer (Principal
Frank J. Bivona Financial and Accounting Officer)
Michael A. Callen* Director March 30, 2000
- --------------------------------
Michael A. Callen
Renso L. Caporali* Director March 30, 2000
- --------------------------------
Renso L. Caporali
Richard Dulude* Director March 30, 2000
- --------------------------------
Richard Dulude
W. Grant Gregory* Director March 30, 2000
- --------------------------------
W. Grant Gregory
C. Roderick O'Neil* Director March 30, 2000
- --------------------------------
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
33
<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 21, 2000, included the
related financial statement schedules as of December 31, 1999 and 1998 and for
each of the years in the three-year period ended December 31, 1999, 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 audits. 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.
/s/ KPMG LLP
New York, New York
March 30, 2000
<PAGE>
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
SCHEDULE I - SUMMARY OF INVESTMENTS
Other Than Investments in Related Parties
December 31, 1999
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Amount at which
shown in
Amortized Estimated the balance
Type of Investment Cost Fair Value sheet
- ----------------------------------------------------------------- --------------------- ----------------- ---------------
<S> <C> <C> <C>
U.S. Government obligations...................................... $ 63,197 $ 62,479 $ 62,479
Municipal obligations............................................ 3,094,469 2,962,939 2,962,939
Mortgage- and asset-backed securities (includes U.S. Government
Agency obligations)............................................. 4,776,416 4,704,549 4,704,549
Corporate obligations............................................ 1,094,102 1,008,504 1,008,504
Other............................................................ 220,896 220,896 220,896
--------------------- ------------------- ---------------
Total investments........................................... $9,249,080 $8,959,367 $8,959,367
===================== =================== ===============
</TABLE>
S-1
<PAGE>
AMBAC FINANCIAL GROUP, INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (PARENT COMPANY ONLY)
Condensed Balance Sheets
December 31, 1999 and 1998
(Dollar Amounts in Thousands Except Share Data)
<TABLE>
<CAPTION>
1999 1998
------------------- -----------------
ASSETS
Assets:
<S> <C> <C>
Cash........................................................................ $ 3 $ 116
Investments in subsidiaries................................................. 2,422,278 2,275,995
Fixed income securities, at fair value
(amortized cost of $6,169 in 1999 and $205,456 in 1998).................... 5,695 209,182
Short-term investments, at cost (approximates fair value)................... 12,323 24,144
Other investments........................................................... 3,074 1,522
Current income taxes receivable............................................. 1,913 --
Deferred income taxes receivable............................................ 17,516 12,984
Other assets................................................................ 17,650 23,586
------------------ -----------------
Total assets............................................................... $ 2,480,452 $ 2,547,529
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Debentures.................................................................. $ 423,995 $ 423,929
Current income taxes payable................................................ -- 1,029
Accrued interest payable.................................................... 6,797 6,797
Accounts payable and other liabilities...................................... 31,210 19,684
------------------ -----------------
Total liabilities.......................................................... 462,002 451,439
------------------ -----------------
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, 1999 and 1998; issued shares - 70,680,384 at December 31, 1999
and 1998.................................................................... 707 707
Additional paid-in capital................................................... 525,012 519,305
Accumulated other comprehensive (loss) income................................ (187,540) 159,313
Retained earnings............................................................ 1,713,446 1,449,832
Common Stock held in treasury at cost, 722,592 shares at December 31, 1999
and 738,381 at December 31, 1998............................................ (33,175) (33,067)
------------------ -----------------
Total stockholders' equity................................................. 2,018,450 2,096,090
------------------ -----------------
Total liabilities and stockholders' equity................................. $ 2,480,452 $ 2,547,529
================== =================
</TABLE>
S-2
<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>
1999 1998 1997
---------------- ---------------- ----------------
Revenues:
<S> <C> <C> <C>
Dividend income........................................... $ 52,000 $ 48,000 $ 44,000
Interest and other income................................. 10,567 14,336 7,047
Net realized gains........................................ 797 2,507 748
---------------- ---------------- ----------------
Total revenues........................................... 63,364 64,843 51,795
---------------- ---------------- ----------------
Expenses:
Interest expense.......................................... 33,470 29,722 19,053
Operating expenses........................................ 6,506 6,815 2,826
---------------- ---------------- ----------------
Total expenses........................................... 39,976 36,537 21,879
---------------- ---------------- ----------------
Income before income taxes and equity in undistributed
net income of subsidiaries................................. 23,388 28,306 29,916
Federal income tax benefit.................................. (10,260) (6,274) (5,433)
---------------- ---------------- ----------------
Income before equity in undistributed net income of
subsidiaries............................................... 33,648 34,580 35,349
Equity in undistributed net income of subsidiaries.......... 274,269 219,414 187,681
---------------- ---------------- ----------------
Net income.................................................. 307,917 253,994 223,030
================ ================ ================
</TABLE>
S-3
<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>
1999 1998 1997
-------------------------- ---------------------- ---------------------
Retained Earnings:
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1 $1,449,832 $1,262,740 $1,072,418
Net income 307,917 $ 307,917 253,994 $253,994 223,030 $223,030
-------------- ------------ ------------
Dividends declared - (29,366) (26,571) (24,165)
Exercise of stock options (14,937) (40,331) (8,543)
------------ ---------- ----------
Balance at December 31 $1,713,446 $1,449,832 $1,262,740
------------ ---------- ----------
Accumulated Other
Comprehensive (Loss) Income:
Balance at January 1 $ 159,313 $ 135,223 $ 58,911
Unrealized (losses) gains on
securities, ($552,645),
$36,476, and $121,347,
pre-tax, in 1999, 1998
and 1997, respectively) (1) (346,211) 23,889 76,155
Foreign currency gain (642) 201 157
------------ ---------- ----------
Other comprehensive (loss) income (346,853) (346,853) 24,090 24,090 76,312 76,312
-------------------------- ---------------------- ----------------------
Total comprehensive (loss) income $(38,936) $278,084 $299,342
============== ============ ============
Balance at December 31 $ (187,540) $ 159,313 $ 135,223
------------ ---------- ----------
Preferred Stock:
Balance at January 1 and
December 31 $ $ $
-- -- --
------------ --------------- --------------
Common Stock:
Balance at January 1 $ 707 $ 707 $ 353
Stock split effected as dividend -- -- 354
------------ --------------- --------------
Balance at December 31 $ 707 $ 707 $ 707
------------ --------------- --------------
Additional Paid-in Capital:
Balance at January 1 $ 519,305 $ 500,107 $ 498,401
Issuance of stock -- -- (3,506)
Exercise of stock options 5,707 19,198 5,566
Stock split effected as dividend -- -- (354)
------------ --------------- --------------
Balance at December 31 $ 525,012 $ 519,305 $ 500,107
------------ --------------- --------------
Common Stock Held in
Treasury at Cost:
Balance at January 1 $ (33,067) $ (26,295) $ (15,067)
Cost of shares acquired (17,626) (52,738) (40,397)
Shares issued under equity plans 17,518 45,966 29,169
Issued to acquire subsidiary -- -- --
------------ --------------- --------------
Balance at December 31 $ (33,175) $ (33,067) $ (26,295)
------------ --------------- --------------
Total Stockholders' Equity at
December 31 $2,018,450 $2,096,090 $1,872,482
============ =============== ==============
</TABLE>
<TABLE>
<CAPTION>
(1) Disclosure of reclassification amount: 1999 1998 1997
------------------------------
<S> <C> <C> <C>
Unrealized holding (losses) gains arising during period $(351,412) $34,526 $88,744
Less: reclassification adjustment for net (losses) gains included in net income (5,201) 10,637 12,589
------------------------------
Net unrealized (losses) gains on securities $(346,211) $23,889 $76,155
==============================
</TABLE>
S-4
<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>
1999 1998 1997
----------------- ---------------- ----------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income................................................ $ 307,917 $ 253,994 $ 223,030
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Equity in undistributed net income of
Subsidiaries............................................. (274,269) (219,414) (187,681)
Gain on sale of investments............................... (797) (2,507) (748)
(Decrease) increase in current income
taxes payable........................................... (2,942) 5,605 (1,510)
Decrease (increase) in other assets.................. 5,936 (13,710) (4,770)
Other, net................................................ (5,188) (16,843) (15,945)
----------------- ---------------- ----------------
Net cash provided by operating activities................ 30,657 7,125 12,376
----------------- ---------------- ----------------
Cash flows from investing activities:
Proceeds from sales of bonds.............................. 16,627 69,097 39,728
Purchases of bonds........................................ (22,625) (206,430) --
Change in short-term investments.......................... 11,821 (10,552) 2,130
Other, net (1,544) (1,489) --
----------------- ---------------- ----------------
Net cash provided by (used in) investing activities.....
4,279 (149,374) 41,858
----------------- ---------------- ----------------
Cash flows from financing activities:
Dividends paid............................................ (29,366) (26,571) (24,165)
Proceeds from issuance of debentures...................... -- 193,700 --
Purchases of treasury stock............................... (17,626) (52,738) (40,397)
Proceeds from sale of treasury stock...................... 17,518 45,966 29,169
Contribution to subsidiaries.............................. (5,575) (18,000) (18,842)
----------------- ---------------- ----------------
Net cash (used in) provided by financing activities.....
(35,049) 142,357 (54,235)
----------------- ---------------- ----------------
Net cash flow............................................... (113) 108 (1)
Cash at January 1......................................... 116 8 9
----------------- ---------------- ----------------
Cash at December 31....................................... $ 3 $ 116 $ 8
================= ================ ================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes............................................. $ 37,000 $ 60,000 $ 12,861
================= ================ ================
Interest expense......................................... $ 33,848 $ 30,072 $ 19,687
================= ================ ================
</TABLE>
Supplemental disclosure of non-cash financing activities:
Ambac Financial Group, Inc. contributed fixed income securities to Ambac
Assurance Corporation amounting to $101,479 and $107,533 in April 1999 and
November 1999, respectively.
S-5
<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, 1999, 1998 and 1997, 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-6
<PAGE>
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
SCHEDULE IV - REINSURANCE
(Dollar Amounts in Thousands Except Percentages)
<TABLE>
<CAPTION>
Assumed Percentage of
Ceded to from Amount
Gross Other Other Net Assumed to
Insurance Premiums Written Amount Companies Companies Amount Net
- ---------------------------------------- --------- ---------- --------- -------------- ------------
<S> <C> <C> <C> <C> <C>
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%
Year ended December 31, 1999............ $420,669 $61,845 $24,573 $383,397 6.41%
</TABLE>
S-7
<PAGE>
INDEX TO EXHIBITS
Exhibit Number Description
- -------------- -----------
<TABLE>
<C> <S> <C>
10.18 Agreement and General Release between Joseph V. Salzano, the Company
and Ambac Assurance Corporation dated December 29, 1999.
10.23 $750,000,000 Amended and Restated Credit Agreement, dated December
2, 1999 between Ambac Assurance Corporation and various banks and
Deutsche Bank AG (New York Branch), as Agent.
12.01 Statement re computation of ratios.
13.01 Annual Report to Stockholders for the fiscal year ended December 31,
1999. (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 Michael A. Callen.
24.03 Power of Attorney from Renso L. Caporali.
24.04 Power of Attorney from Richard Dulude.
24.05 Power of Attorney from W. Grant Gregory.
24.06 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, 1999 and 1998.
</TABLE>
<PAGE>
EXHIBIT 10.18
December 21, 1999
as amended December 29, 1999
Joseph V. Salzano, Esq.
2 Charlton Street, #6A
New York, NY 10014
Dear Mr. Salzano:
This Agreement and General Release ("Agreement") sets forth our agreement
regarding your employment relationship with Ambac Assurance Corporation
("Ambac"), and the termination of that relationship. As a result of discussions
between you and Ambac, it has been decided that a mutually agreed upon
resignation is in the best interest of both parties. By signing this Agreement,
you hereby acknowledge and agree to the following terms and conditions
concerning your resignation from Ambac:
1. Effective Date of Resignation.
-----------------------------
Your Resignation as an employee of Ambac shall be effective April 28, 2000
(the "Resignation Date").
During the period from the date of this Agreement through February 11, 2000
(the "Employment Period"), you will continue to report to the President and
Chief Executive Officer and continue to perform your full-time duties.
During the period from February 12, 2000 through April 28, 2000 (the
"Transition Period") you will be on-call and no longer be required to
report to the office unless requested. You agree to make yourself available
to provide information or assistance concerning work within your
responsibilities at Ambac, as requested by the President and Chief
Executive Officer of Ambac.
2. Severance Pay.
-------------
(a) During the Employment and Transition Periods, you will continue to
receive your regular salary.
(b) You will be paid severance, the total sum of which will be $225,000.
Said amount will be paid in a lump sum, within twenty business days of the
Effective Date of this
<PAGE>
Page 2 of 10
Agreement (as defined in Paragraph 20 of this Agreement). Said payment will
be net of applicable Federal, state and local taxes.
3. Bonuses for 1999.
----------------
You will be paid a bonus of $125,000 for work performed during the calendar
year 1999. Said amount will be paid at the same time bonuses are paid to
Ambac's general population for the 1999 performance year. Said payment will
be net of applicable Federal, state and local taxes. If you do not sign
this Agreement and, following the Resignation Date, Exhibit A following or
if you revoke this Agreement, you forfeit your right to any payment
provided for in this paragraph 3 and, to the extent any payment has been
made, you agree to return all payments made pursuant to this paragraph.
4. Benefits.
--------
From the date of this Agreement through the Resignation Date, your current
benefit elections will continue. During this period, you will be required
to make your normal employee contribution to benefit coverage and will be
subject to any increases in employee contribution that a regular employee
with like coverage may be required to pay.
After the Resignation Date, you will continue to be covered under Ambac's
medical and dental plans through May 31, 2000. During this period, you will
be required to make your normal employee contribution for benefit coverage
and will be subject to any increases in employee contribution that a
regular employee with like coverage may be required to pay. Thereafter, you
will be eligible for continued benefits under the applicable provisions of
COBRA.
5. Vacation.
--------
You will be paid any accrued and unused vacation earned through the
Resignation Date. Your accrued and unused vacation through the Resignation
Date totals 5 days. Said vacation time will be paid with your last regular
paycheck.
6. Stock Options and Restricted Stock Units.
----------------------------------------
i) As of the date of this Agreement, 167,501 of the Ambac stock options
that have been granted to you by the Compensation and Organization
Committee of Ambac Financial Group, Inc.'s Board of Directors are vested.
As of the Resignation Date, an additional 37,666 options will have vested.
In consideration of your entering into this Agreement and this Agreement
becoming irrevocable, the following options will vest on the Effective Date
of this Agreement: 1,333 granted January 27, 1998 and 12,000 granted on
January 26, 1999.
<PAGE>
Page 3 of 10
ii) After the Effective Date, you will have thirty days from the
Resignation Date to exercise the options with 1991 through 1993 grant
dates, you will have six months from the Resignation Date to exercise the
options with 1994 through 1996 grant dates and one year from the
Resignation Date to exercise the vested stock options granted in 1997, 1998
and 1999. The terms of the 1997 Equity Plan and the General Terms and
Conditions of the respective stock option grants shall govern in the event
of death or disability. Any vested options not exercised within the time
frames set forth above will be forfeited.
iii) As of the date of this Agreement, none of the Ambac Restricted Stock
Units that have been granted to you are vested. One-half of the RSUs
granted to you in January 1999 will be vested as of January 26, 2000. These
RSUs will be settled no later than the January following your Resignation
Date (January 2001). The balance of the RSUs granted to you will not vest
and be forfeited. In lieu of the RSUs that will be forfeited, Ambac will
pay you, during calendar year 1999, the sum of $40,000.
iv) As of the Resignation Date, you will not be subject to Ambac's
Insider Trading Policies, but you will remain subject to provisions imposed
by federal and state securities laws prohibiting insider trading. If you
have any questions regarding this matter, please contact Ambac's General
Counsel or Managing Director, Human Resources.
7. Outplacement
------------
Ambac will engage an outplacement firm to provide you with job placement
services for a period of three months or through the date upon which you
secure new employment or engage in any consulting or independent contractor
work, whichever is earlier. The terms and conditions of the outplacement
services will be at Ambac's sole discretion. To affirmatively elect
outplacement, please contact Ambac's Managing Director, Human Resources and
Employment Counsel to initiate outplacement by July 30, 2000. If you do not
commence outplacement by September 30, 2000, you forfeit this service.
8. Retirement Plans.
----------------
i) You will be vested in Ambac's Pension Plan as of your Resignation Date
and, therefore, be entitled to a benefit as a vested participant from
Ambac. Your pension benefit calculation will include all credited service
through the Resignation Date.
ii) Through the Resignation Date, company-match and profit-sharing
contributions will be credited on your behalf to the Ambac Financial Group,
Inc. Savings Incentive Plan, subject to the terms and conditions of the
Plan.
9. You agree and acknowledge that the payments and benefits to be made in
accordance with paragraphs 2, 3, 4, 6 and 7 of this Agreement exceed any
sums to which you would otherwise be entitled under any Ambac policy, plan
and/or procedure.
<PAGE>
Page 4 of 10
10. Any Ambac property currently in your possession shall be returned to Ambac
(at Ambac's expense) at your earliest convenience, but no later than
February 11, 2000.
11. Confidentiality.
---------------
In consideration for the payments described above, you agree to the
following:
(a) Ambac (Ambac refers to Ambac Financial Group, Inc. and all of its
affiliates) is engaged in a highly competitive business and that, in
connection with your employment, you have access to information relating
to Ambac's business that provides Ambac with a competitive advantage,
that is not generally known by persons not employed by Ambac, and that
could not easily be determined or learned by someone outside Ambac
(collectively, "Confidential Information"). Such Confidential
Information includes, but is not limited to, the identity,
characteristics and preferences of Ambac's customers (as defined below)
and accounts, matters relating to information, pricing, fee and
commission structures, trading policies and procedures, trade secrets,
records, files, memoranda, documents, reports, and other written,
printed or recorded materials and data, regardless of data storage
method (collectively "Documents") received, created, or used by you
during the course of your employment and other methods of doing
business, whether or not marketed as confidential or secret. As used
herein, "Customer" shall include all clients and actively pursued
prospective clients of Ambac.
(b) You agree that before and after the Resignation Date, you shall
not, directly or indirectly, use or disclose such Confidential
Information, except as may be necessary in the good faith performance of
your duties to Ambac. You acknowledge that all Confidential Information
will remain the sole property of Ambac and will be returned by you to
Ambac within five business days of the Resignation Date. The terms and
conditions of this paragraph 11(a) and (b) are in addition to and do not
supersede or replace the terms and obligations of Ambac's Code of
Business Conduct.
(c) You further agree that from the Effective Date of this Agreement
through six months following the Resignation Date, you will not, for any
reason, unless Ambac consents in writing, hire or seek to hire, whether
on your own behalf or on behalf of any other person or entity, any
person who is an employee of Ambac at the Resignation Date, or who left
the employ of Ambac within three months prior to such date. If you
breach any of the terms of this paragraph 11(c), you forfeit your right
to future payments provided for herein from the date of such breach and,
to the extent any payments have been made, you agree to return all
payments made pursuant to this Agreement.
(d) In view of the nature of Ambac's business, you also acknowledge
that the restrictions contained in paragraph 11 are fair, reasonable and
necessary to protect the legitimate business interests of Ambac and that
Ambac will suffer irreparable harm in
<PAGE>
Page 5 of 10
the event of any actual or intended violation by you of this paragraph.
You, therefore, agree that, in the event of any actual or intended
violation by you of paragraph 11(b) or 11(c), Ambac shall be entitled to
a court order requiring you to cease any such violations in addition to
and without prejudice to any other rights or remedies which may be
available to Ambac through the legal system.
(e) You shall not be deemed to be in breach of any covenant set forth in
this Agreement on the basis of any communications you may have with third
parties relating to: (i) the fact of your employment by Ambac; (ii) your
job titles at Ambac; (iii) the dates of your employment by Ambac; (iv) the
responsibilities and authorities of your positions at Ambac; (v) the nature
and extent of your achievements during employment by Ambac; and (vi) the
names and positions of individuals with whom you worked during your
employment at Ambac. You hereby authorize Ambac to provide the information
responsive to items (i) through (iv) and (vi) to prospective employers.
(f) You shall not be deemed in breach of the confidentiality obligations
set forth in paragraph 11 if, compelled by legal process or court order,
you are to participate in any administrative, judicial or criminal
investigation, probe, grand jury proceeding or other demand for testimony,
information or documentation.
(g) Before initiating any litigation, Ambac shall give written notice to
you if it believes you are in violation of any covenant or obligation under
this agreement. Upon written request, you will receive Ambac's
determination in writing regarding whether a particular activity or act
would be deemed in breach of your obligations and/or covenants under this
Agreement.
12. General Releases.
----------------
In consideration of the payments provided for in paragraphs 2, 3, 4, 6 and
7 of this Agreement, and other valuable consideration as set forth in this
Agreement, you for yourself and for your heirs, executors, administrators,
trustees, legal representatives and assigns (hereinafter collectively
referred to as the "Releasors") hereby release and discharge Ambac, and any
and all of its parent corporations, shareholders, subsidiaries, divisions,
affiliated and related entities, employee benefit and/or pension plans or
funds, successors and assigns, and any and all of its or their past,
present or future officers, directors, agents, stockholders, fiduciaries,
administrators, employees or assigns (whether acting as agents for Ambac or
in their individual capacities) (hereinafter collectively referred to as
"Releasees"), of and from any and all claims, demands, causes of action,
and liabilities of any kind whatsoever, whether known or unknown, whether
arising in law or in equity or arising out of any Federal, state or city
constitution, statute, ordinance, bylaw or regulation (including but not
limited to, all common law claims, all claims arising under the Age
Discrimination in Employment Act of 1967, the Older Workers Benefit
Protection Act, Title VII of the Civil Rights Act of 1964, as amended, the
New York State Human Rights Law, the New
<PAGE>
Page 6 of 10
York City Administrative Code, and the like) or by reason of any act,
omission, transaction, conduct or occurrence up to and including the
Effective Date of this Agreement and General Release, which you ever had,
now have or hereafter can, shall or may have against the Releasees for,
upon or by reason of any act, omission, transaction, conduct or occurrence
up to and including the date of this Agreement.
In consideration of the payments provided for in paragraphs 2, 3, 4, 6 and
7 of this Agreement, and other valuable consideration as set forth herein,
you also agree to provide Ambac, on the Resignation Date, with an executed
copy of a General Release in the form annexed hereto as Exhibit A.
Not withstanding the above, nothing herein precludes you from enforcing the
terms of this Agreement or from initiating a claim arising under this
Agreement.
13. (a) You represent and warrant that you will not commence, maintain,
prosecute or participate in any action or proceeding of any kind (judicial
or administrative) against any of the Releasees, arising out of any act,
omission, transaction or occurrence happening up to and including the
Effective Date of this Agreement, and have not done so as of the Effective
Date of this Agreement.
(b) Ambac represents and warrants that it will not commence or maintain any
action or proceeding of any kind (judicial or administrative) against you,
arising out of any act, omission, transaction or occurrence happening up to
and including the Effective Date of this Agreement to the extent Ambac is
aware of such act, omission, transaction or occurrence at the time this
Agreement is executed.
14. The terms, conditions, and existence of this Agreement are and shall be
treated as confidential and shall not hereafter be disclosed by you to any
person or entity, except to attorneys, accountants, financial planning or
tax advisors, or immediate family members, or as may be required by law.
Any individual to whom the terms and conditions of this Agreement have been
disclosed will be advised of the confidentiality requirements of this
paragraph. You further agree not to solicit or initiate any demand by
others not party to this Agreement for any disclosure of its terms and
obligations regarding Confidential Information.
15. You agree not to make any derogatory statements of any kind about Ambac (or
any of its subsidiaries, parents, affiliates or related business entities),
or any present or former employee or director of Ambac relating to
performance of his/her duties on behalf of Ambac (or any of its
subsidiaries, parents, affiliates or related business entities) or act in a
manner that is or may be directly harmful to Ambac (or any of its
subsidiaries, parents, affiliates or related business entities).
<PAGE>
Page 7 of 10
16. Ambac agrees to direct all officers with the title of Vice President and
above and with knowledge of the circumstances surrounding your Resignation
to refrain from making any derogatory statements of any kind about you.
17. You agree to cooperate fully with Ambac and its employees by providing
information to Ambac and its representatives, agents or advisors regarding
any business matters with which you were involved on behalf of Ambac and to
cooperate fully in the event of any litigation or legal, administrative or
regulatory proceeding, the facts of which you have knowledge or regarding
any business matters of which you have knowledge or information, including,
but not limited to, providing testimony on behalf of Ambac at any legal,
administrative or regulatory proceedings. Ambac will reimburse you for any
lost wages and/or reasonable expenses for travel, lodging and meals that
result from your compliance with this paragraph.
To the extent you are a named party to any action, suit or proceeding as a
result of your having been an officer or employee of the Company or any
subsidiary thereof, the Company will indemnify you to the fullest extent
permitted (including payment of expenses in advance of final disposition of
a proceeding) by the laws of the State of Delaware, as in effect at the
time of the subject act or omission, or by the Certificate of Incorporation
and By-Laws of the Company, as in effect at such time or on the date of
this Agreement, whichever affords the greatest protection to you, and you
shall be entitled to the protection of any insurance policies the Company
may elect to maintain generally for the benefit of its directors and
officers (and to the extent the Company maintains such an insurance policy
or policies, you shall be covered by such policy or policies, in accordance
with its or their terms, to the maximum extent of the coverage provided for
any Company officer or director), against all costs, charges and expenses
whatsoever incurred or sustained by you or your legal representatives at
the time such costs, charges and expenses are incurred or sustained, in
connection with such actions.
18. In the event of any breach of paragraphs 11 through 15 or paragraph 17,
Ambac shall provide you with written notice (to the address set forth on
page one of this Agreement) and you will have five business days from the
date of receipt of said written notice to cure any curable breach. If you
fail to cure any such breach or the breach is not curable, Ambac shall be
released from any obligation to make any payment to you or on your behalf
and provide any benefits under this Agreement. Ambac shall be further
entitled to pursue any and all of its remedies under the law arising out of
such breach including, but not limited to, recoupment of all monies paid to
you by Ambac or as a result of your entering into this Agreement. In any
action alleging breach of this Agreement, the prevailing party shall be
entitled to recover reasonable costs and/or attorneys' fees incurred to
enforce this Agreement.
19. The making of this Agreement is not intended, and shall not be construed,
as an admission that Ambac, its subsidiaries, parents, affiliates, or
related business entities, or
<PAGE>
Page 8 of 10
any person now or previously employed by Ambac or any of its subsidiaries,
parents, affiliates, or related business entities, have violated any
Federal, state, or local law (statutory or decisional), ordinance or any
common law rule, or that Ambac, its subsidiaries, parents, affiliates, or
related business entities, or any person now or previously employed by
Ambac, its subsidiaries, parents, affiliates or related business entities,
have committed any wrong against you.
20. You may accept this Agreement by signing it and returning it to Ambac.
After signing this Agreement, you shall be given a period of seven (7) days
(the "Revocation Period") during which you may revoke this Agreement by
indicating your desire to do so in writing addressed to Ambac, Human
Resources Department, Attention: Gregg L. Bienstock, Esq., One State Street
Plaza, New York, New York 10004. This Agreement is effective eight (8) days
following your signing of the Agreement and Exhibit A (the "Effective
Date"). If you do not accept this Agreement, as indicated above, or in the
event you revoke this Agreement or Exhibit A during the Revocation Period,
this Agreement shall be null and void.
21. You represent and warrant you have carefully read this Agreement in its
entirety; that you have an opportunity to consider fully the terms of this
Agreement for twenty one (21) days; that you have been advised by Ambac in
writing to consult with an attorney of your choice in connection with this
Agreement, that you fully understand the significance of all of the terms
and conditions of this Agreement; that you have discussed it with your
independent legal counsel, or have had a reasonable opportunity to do so;
that you have had answered to your satisfaction any questions you have
asked with regard to the meaning and significance of any of the provisions
of this Agreement; and that you are signing this Agreement voluntarily and
of your own free will and assent to all of the terms and conditions
contained herein.
22. Any disputes or controversies relating to this Agreement shall be
interpreted under the laws of the State of New York without regard to
conflicts laws principles thereof. If at any time after the date of the
execution of this Agreement, any provision of this Agreement shall be held
by any court of competent jurisdiction to be illegal, void, or
unenforceable, such provision, however, shall have no effect upon and shall
not impair the enforceability of any other provision of this Agreement,
provided that upon a finding by a court of competent jurisdiction that the
General Releases given by you are illegal and/or unenforceable, you shall
be required to sign a valid release embodying substantially the same terms
of the General Releases contained herein or, if you fail to do so, be
required to pay Ambac all amounts paid to you or on your behalf by Ambac
pursuant to this Agreement.
<PAGE>
Page 9 of 10
23. This Agreement constitutes the complete understanding between the parties.
No other promises or agreements shall be binding unless in writing and
signed by the parties.
/s/ Joseph Salzano 12/29/99
------------------------------------ ----------------
Joseph V. Salzano Date
Ambac Financial Group, Inc.
Ambac Assurance Corporation
By: /s/ Gregg Bienstock 12/29/99
--------------------------------- ----------------
Gregg L. Bienstock, Managing Director Date
<PAGE>
Page 10 of 10
Exhibit A
In consideration of the payments and other valuable consideration as set
forth in the Agreement and General Release entered into by Ambac and Joseph V.
Salzano on December __, 1999:
Joseph V. Salzano, for himself and for his heirs, executors,
administrators, trustees, legal representatives and assigns (hereinafter
collectively referred to as the "Releasors"), hereby releases and discharges
Ambac, and any and all of its parent corporations, shareholders, subsidiaries,
divisions, affiliated and related entities, employee benefit and/or pension
plans or funds, successors and assigns, and any and all of its or their past,
present or future officers, directors, agents, stockholders, trustees,
fiduciaries, administrators, employees or assignees (whether acting as agents
for Ambac or in their individual capacities) (hereinafter collectively referred
to as "Releasees"), of and from any and all claims, demands, causes of action,
and liabilities of any kind whatsoever, whether known or unknown, whether
arising in law or in equity or arising out of any Federal, state or city
constitution, statute, ordinance, bylaw or regulation (including but not limited
to, all common law claims, all claims arising under the Age Discrimination in
Employment Act of 1967, the Older Workers Benefit Protection Act, Title VII of
the Civil Rights Act of 1964, as amended, the New York State Human Rights Law,
the New York City Administrative Code, and the like) or by reason of any act,
omission, transaction, conduct or occurrence up to and including the date of
this Exhibit A, which you ever had, now have or hereafter can, shall or may have
against the Releasees for, upon or by reason of any act, omission, transaction
or occurrence, up to and including the date of this General Release.
____________________________________ _________
Joseph V. Salzano Date
Ambac Financial Group, Inc.
Ambac Assurance Corporation
By: _______________________________ _________
Gregg L. Bienstock, Managing Director Date
<PAGE>
EXHIBIT 10.23
FIRST AMENDMENT
to
AMENDED AND RESTATED CREDIT AGREEMENT
among
AMBAC ASSURANCE CORPORATION,
VARIOUS BANKS,
BANK OF AMERICA, NA,
as Syndication Agent,
THE BANK OF NEW YORK,
as Documentation Agent
and
DEUTSCHE BANK AG, NEW YORK BRANCH,
as Agent
__________________________________
Dated as of December 2, 1999
__________________________________
<PAGE>
FIRST AMENDMENT
THIS FIRST AMENDMENT, dated as of December 2, 1999 (this "Amendment"),
---------
among AMBAC ASSURANCE CORPORATION, a Wisconsin stock insurance corporation (the
"Borrower"), the financial institutions which have executed this Amendment below
--------
as Banks (as defined below), BANK OF AMERICA, NA, acting in its capacity as
Syndication Agent pursuant to Section 11 of the Original Credit Agreement (as
defined below), as amended hereby (in such capacity, the "Syndication Agent"),
-----------------
THE BANK OF NEW YORK, acting in its capacity as Documentation Agent pursuant to
Section 11 of the Original Credit Agreement, as amended hereby (in such
capacity, the "Documentation Agent"), and DEUTSCHE BANK AG, NEW YORK BRANCH,
-------------------
acting in its capacity as Agent pursuant to Section 11 of the Original Credit
Agreement, as amended hereby (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 Amended and Restated Credit Agreement, dated as of December 2, 1998, as
supplemented as of May 3, 1999 (the "Original Credit Agreement" and, as amended
-------------------------
by this Agreement and from time to time hereafter amended, supplemented or
otherwise modified from time to time, the "Credit Agreement"); and
----------------
WHEREAS, at the request of the Borrower, the parties hereto have
agreed, upon the terms and subject to the conditions hereinafter set forth, to
extend the Expiry Date (as defined in the Credit Agreement), to increase the
aggregate Commitments of the Banks from $575,000,000 to $750,000,000 and modify
the Commitments (as defined in the Credit Agreement) of certain Banks, to
provide for the appointment of the Syndication Agent and the Documentation Agent
and otherwise to modify the Original Credit Agreement in certain respects;
NOW, THEREFORE, IT IS AGREED:
ARTICLE I
MODIFICATIONS TO CREDIT AGREEMENT
Section 1.01. Defined Terms. Except as otherwise specified herein,
-------------
terms used in this Amendment and defined in the Credit Agreement shall have the
meanings provided therein.
Section 1.02. Extension of Expiry Date. Section 3.04 of the Original
------------------------
Credit Agreement is hereby amended to replace the date "December 2, 2005"
appearing therein with the date "December 2, 2006."
Section 1.03. Increase of Commitments.
-----------------------
(a) The aggregate Commitments of the Banks are hereby increased
from $575,000,000 to $750,000,000, and the Commitments of the respective
Banks and
<PAGE>
the other information set forth in Schedule 1 to the Credit Agreement are
hereby amended and restated to read as set forth on Schedule 1 to this
Amendment.
(b) Each Bank which is a party hereto and is not a party to the
Original Credit Agreement hereby (i) confirms that it has received a copy
of the Original 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 the Credit Agreement; (ii)
agrees that it will, independently and without reliance upon the Agent, the
Syndication Agent, the Documentation Agent or any other Bank and based on
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) 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 (iv) to the
extent legally entitled to do so, agrees to provide to the Borrower on or
before the Amendment Effective Date (as defined in Section 4.05 below) the
forms described in the penultimate sentence of Section 12.04(b) of the
Credit Agreement. The initial address for each such Bank for purposes of
Section 12.03 of the Credit Agreement shall be as set forth opposite such
Bank's signature to this Amendment.
Section 1.04. Section 10.03. Section 10.03 of the Credit Agreement
-------------
is hereby amended and restated to read in its entirety as follows:
"Section 10.03. Covenants. The Borrower or any of its
---------
Subsidiaries shall (i) default in the due performance or observance by it
of any term, covenant or agreement contained in Section 8.01(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 1.05. Agents. Section 11.01 of the Original Credit Agreement
------
is hereby amended to add the following two paragraphs at the end thereof.
"The Banks hereby designate Bank of America, NA as Syndication
Agent to act as specified in the 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 Syndication Agent
to take such action on its behalf under the provisions of the 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
Syndication Agent by the terms hereof and thereof and such other powers as
are reasonably incidental thereto. The Syndication Agent may perform any of
its duties hereunder by or through its officers, directors, agents or
employees. For purposes of Sections 11.02 through 11.08 hereof, the term
-3-
<PAGE>
"Agent" shall also include Bank of America, NA in its capacity as
Syndication Agent.
"The Banks hereby designate The Bank of New York as Documentation
Agent to act as specified in the 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 Documentation Agent
to take such action on its behalf under the provisions of the 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
Documentation Agent by the terms hereof and thereof and such other powers
as are reasonably incidental thereto. The Documentation Agent may perform
any of its duties hereunder by or through its officers, directors, agents
or employees. For purposes of Sections 11.02 through 11.08 hereof, the term
"Agent" shall also include The Bank of New York in its capacity as
Documentation Agent."
ARTICLE II
CONDITIONS PRECEDENT TO EFFECTIVENESS
This Amendment shall become effective as of the Amendment Effective
Date, subject to the satisfaction (or waiver by the Banks) of the following
conditions:
Section 2.01. No Default; Representations and Warranties. There
------------------------------------------
shall exist no Default or Event of Default, and all representations and
warranties set forth herein 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 Amendment Effective Date (or, in the case of any such
representation or warranty which expressly refers by its terms to a specified
date, as of such specified date).
Section 2.02. Execution of Amendment; Notes, etc.
-----------------------------------
(a) The Borrower, each Bank, the Agent, the Syndication Agent
and the Documentation Agent 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.
(b) There shall have been delivered to each Bank having a new or
modified Commitment pursuant to this Amendment a Note executed by the
Borrower in the amount, maturity and as otherwise provided in the Credit
Agreement.
(c) The Borrower, each Bank and the Agent shall have signed a
copy of an amendment and restatement, dated as of the date of this
Amendment, of the letter agreement, dated as of December 10, 1998, which
was entered into pursuant to Section 3.01(a) of the Original Credit
Agreement and sets forth the basis for the calculation of the Commitment
Fees (such amendment and restatement, together with this Amendment and the
additional Notes described in Section 2.02(b), the "Amendment Documents").
-------------------
-4-
<PAGE>
Section 2.03. Opinions of Counsel.
-------------------
(a) The Agent shall have received an opinion addressed to it and
the Banks and dated the Amendment Effective Date (i) from Stephen D. Cooke,
Esq., Senior Vice-President and General Counsel of the Borrower covering
the matters set forth in Exhibit A-1, (ii) from Shearman & Sterling,
special New York counsel to the Borrower covering the matters set forth in
Exhibit A-2, (iii) from DeWitt Ross & Stevens SC, special Wisconsin counsel
to the Borrower covering the matters set forth in Exhibit A-3 [and (iv)
from Sullivan & Worcester LLP, counsel to the Agent, in form and substance
satisfactory to it].
(b) The Borrower shall have received an opinion addressed to
each of the Borrower, Moody's and S&P and dated the Amendment Effective
Date from counsel to each Bank having a new or modified Commitment pursuant
to this Amendment, in form and substance satisfactory to each of them.
Section 2.04. Corporate Documents; Proceedings.
--------------------------------
(a) The Agent shall have received a certificate, dated the
Amendment 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 B with appropriate insertions,
together with copies of 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
Amendment 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 2.05. 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 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 this
Amendment and 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
-5-
<PAGE>
hereby or 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 Amendment Effective Date, the Borrower's Rating
assigned by Moody's and S&P shall be Aaa and AAA, respectively.
Section 2.06. Litigation. No litigation by any entity (private or
----------
governmental) shall be pending or threatened with respect to this Amendment or
any Credit Document or any documentation executed in connection herewith or
therewith or the transactions contemplated hereby or thereby, 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 2.07. 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 2, unless otherwise specified, shall have been delivered to
the Agent at its Notice Office.
ARTICLE III
REPRESENTATIONS, WARRANTIES AND AGREEMENTS
In order to induce the Agent, the Syndication Agent, the Documentation
Agent and the Banks to enter into this Amendment, the Borrower makes the
following representations, warranties and agreements as of the Amendment
Effective Date, which shall survive the execution and delivery of this Amendment
and the making of any Loans (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 respects only as
of such date):
Section 3.01. Corporate Power and Authority. The Borrower has the
-----------------------------
corporate power to execute, deliver and perform the terms and provisions of the
Amendment 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 Amendment Documents. The Borrower has, or in the case of the Amendment
Documents (other than this Amendment), by the Amendment Effective Date will
have, duly executed and delivered each of the Amendment Documents to which it is
party, and this Amendment constitutes and, when executed and delivered, each
other Amendment Document will constitute, its legal, valid and binding
obligation enforceable in accordance with its terms.
Section 3.02. No Violation. Neither the execution, delivery or
------------
performance by the Borrower of the Amendment Documents to which it is a party,
nor compliance by it with the terms and provisions thereof, (i) will contravene
any provision of any law, statute, rule or
-6-
<PAGE>
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 3.03. 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 Amendment 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 Amendment Document to
which the Borrower is a party or (ii) the legality, validity, binding effect or
enforceability of any such Amendment Document.
Section 3.04. Financial Statements; Financial Condition.
-----------------------------------------
(a) The consolidated balance sheets of the Parent and its
Subsidiaries at December 31, 1998 and March 31, 1999, June 30, 1999 and
September 30, 1999 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, 1999, June 30, 1999 and September 30, 1999 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, 1999, June 30, 1999 and September 30, 1999 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, 1999, 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 year ended December 31,
1998 and its quarterly statements and financial statements as filed with
the Department for the periods ended March 31, 1999, June 30, 1999 and
September 30, 1999 heretofore furnished to the Agent present fairly,
subject, in the case of such financial statements as at March 31, 1999,
June 30, 1999 and September 30, 1999 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
-7-
<PAGE>
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, 1999, 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.
Section 3.05. Covered Portfolio. Substantially all of the Insured
-----------------
Obligations in the Covered Portfolio on the Amendment 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.
Section 3.06. Confirmation of Representations and Warranties. The
----------------------------------------------
Borrower hereby confirms that its representations and warranties set forth in
the Credit Documents to which it is a party are true and correct in all material
respects as of the date hereof (or, in the case of any representation or
warranty set forth in any Credit Document which expressly refers by its terms to
a specified date, as of such specified date).
ARTICLE IV
MISCELLANEOUS
Section 4.01. Credit Agreement. Except as expressly modified as
----------------
contemplated hereby, the Credit Agreement and the other Credit Documents are
hereby confirmed to be in full force and effect in accordance with their
respective terms. This Amendment is intended by the parties to constitute an
amendment and modification to, and otherwise to constitute a continuation of,
the Credit Agreement and the Credit Documents, and is not intended by any party
and shall not be construed to constitute a novation thereof or of any
Indebtedness of the Borrower thereunder. For purposes of the Credit Agreement
and the other Credit Documents, the term "Banks" shall include each party which
has executed this Amendment below as a Bank, and the term "Credit Documents"
shall include this Amendment.
Section 4.02. Survival. All covenants, agreements, representations
---------
and warranties made herein or in any Credit Document or in any certificate,
document or instrument delivered pursuant hereto or thereto shall survive the
effective date hereof, the making of any Loan and the occurrence of the Expiry
Date and shall continue in full force and effect so long as
-8-
<PAGE>
principal of or interest on any Loan or Note remains outstanding or unpaid, any
other amount payable by the Borrower under the Credit Agreement, any Note or any
other Credit Document remains unpaid or any other obligation of the Borrower to
perform any other act hereunder or under the Credit Agreement, any Note or any
other Credit Document remains unsatisfied or the Banks have any obligation to
make a Loan or any other advance of moneys to the Borrower under the Credit
Agreement.
Section 4.03. Governing Law. This Amendment and the rights and
-------------
obligations of the parties hereunder shall be construed in accordance with and
be governed by the law of the State of New York.
Section 4.04. Counterparts. This Amendment 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 4.05. Effectiveness. This Amendment shall become effective
-------------
as of December 2, 1999 (the "Amendment Effective Date") when the Borrower, the
------------------------
Banks, the Agent, the Syndication Agent and the Documentation Agent 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 2 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 Amendment Effective Date.
In the event that such written notice shall not have been delivered on or before
December 10, 1999, the provisions of this Amendment shall become and be null and
void.
Section 4.06. Headings Descriptive. The headings of the several
--------------------
sections and subsections of this Amendment are inserted for convenience only and
shall not in any way affect the meaning or construction of any provision of this
Amendment.
Section 4.07. Amendment or Waiver. Neither this Amendment nor any
-------------------
terms hereof may be changed, waived, discharged or terminated except as provided
in Section 12.12 of the Credit Agreement.
-9-
<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.
AMBAC ASSURANCE CORPORATION
By /s/ Robert W. Starr
--------------------
Name:
Title: FVP & Treasurer
LANDESBANK HESSEN-THURINGEN
GIROZENTRALE
By /s/ Lisa S. Pent
-----------------
Name:
Title: Senior Vice President, Manager
By /s/ John A. Sarno
------------------
Name:
Title: Vice President, Portfolio Manager
COOPERATIEVE CENTRALE
RAIFFEISEN-BOERENLEENBANK
B.A., "RABOBANK NEDERLAND",
NEW YORK BRANCH
By /s/ W. Pieter C. Kodde
-----------------------
Name:
Title: Senior Vice President
By /s/ Angela R. Reilly
---------------------
Name:
Title: Vice President
-10-
<PAGE>
BAYERISCHE LANDESBANK
GIROZENTRALE
By /s/ Scott M. Allison
---------------------
Name:
Title: First Vice President
By /s/ Alexander Kohnert
----------------------
Name:
Title: First Vice President
WESTDEUTSCHE LANDESBANK
GIROZENTRALE, NEW YORK
BRANCH
By /s/ Lillian T. Lum
-------------------
Name:
Title: Director
By /s/ Anne T. McKenna
--------------------
Name:
Title: Vice President
535 Madison Avenue LANDESBANK BADEN-
New York, New York 10022 WURTTEMBERG, NEW YORK
Attention: Franz Waas BRANCH
Telecopy: (212) 584-1702
By______________________________
Name:
Title:
By /s/ Orly Watson
----------------
Name:
Title: Vice President
FIRST UNION NATIONAL BANK
OF NORTH CAROLINA
By /s/ Thomas L. Stitchberry
--------------------------
Name:
Title: Senior Vice President
-11-
<PAGE>
KBC BANK N.V.
By /s/ Patrick L. Owens
---------------------
Name:
Title: Vice President
By /s/ Robert Snauffer
--------------------
Name:
Title: First Vice President
LLOYDS TSB BANK PLC (formerly
known as Lloyds Bank PLC)
By /s/ Louise Miller
------------------
Name:
Title: Assistant VP, Structured Finance
THE CHASE MANHATTAN BANK
By /s/ Robert A. Fester
---------------------
Name:
Title: Vice President
222 Broadway BARCLAYS BANK PLC
New York, New York 10038
Attention: Richard Herder
By /s/ Richard Herder
-------------------
Name:
Title: Director
-12-
<PAGE>
BANK OF AMERICA, NA (formerly,
known as Nationsbank, N.A.), individually
and as Syndication Agent
By /s/ Joan L. D'Amico
--------------------
Name:
Title: Principal
Insurance Division THE BANK OF NEW YORK,
One Wall Street, 17/th/ Floor Individually and as Documentation Agent
New York, New York 10288
Attention: Andrew Pollard
Telecopy: (212) 809-9520 By /s/ Andrew J. Pollard
----------------------
Name:
Title: Vice President
DEUTSCHE BANK AG,
NEW YORK BRANCH,
Individually and as Agent
By /s/ George-Ann Tobin
---------------------
Name:
Title: Managing Director
By /s/ John S. McGill
-------------------
Name:
Title: Director
-13-
<PAGE>
SCHEDULE 1
TO FIRST AMENDMENT
COMMITMENTS
-----------
PART A
Commitments
-----------
<TABLE>
<CAPTION>
Name Commitment
- ---- ----------
<S> <C>
Landesbank Hessen-Thuringen Girozentrale $110,000,000.00
Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., 80,000,000.00
"Rabobank Nederland", New York Branch
The Bank of New York 75,000,000.00
Bayerische Landesbank Girozentrale 75,000,000.00
Westdeutsche Landesbank Girozentrale, New York Branch 75,000,000.00
Deutsche Bank AG, New York Branch 70,000,000.00
Landesbank Baden-Wurttemburg, New York Branch 50,000,000.00
Bank of America, NA 45,000,000.00
First Union National Bank of North Carolina 40,000,000.00
KBC Bank N.V. 40,000,000.00
Lloyds TSB Bank PLC 35,000,000.00
The Chase Manhattan Bank 30,000,000.00
Barclays Bank PLC 25,000,000.00
---------------
Total $750,000,000.00
</TABLE>
<PAGE>
PART B
Part B Banks
------------
Name
- ----
Bank of America, NA
The Bank of New York
Barclays Bank PLC
The Chase Manhattan Bank
Deutsche Bank AG, New York Branch
First Union National Bank of North
Carolina
KBC Bank N.V.
Lloyds TSB Bank PLC
Westdeutsche Landesbank Girozentrale,
New York Branch
(ii)
<PAGE>
PART C
Part C Banks/Contingent Commitments
-----------------------------------
Name Commitment
- ---- ----------
Bayerische Landesbank Girozentrale $100,000,000.00
Cooperatieve Centrale Raiffeisen- 66,500,000.00
Boerenleenbank B.A., "Rabobank -------------
Nederland", New York Branch
Total $166,500,000.00
(iii)
<PAGE>
EXHIBIT A-1
TO FIRST AMENDMENT
Form of Opinion of Senior General Counsel of the Borrower
---------------------------------------------------------
<PAGE>
EXHIBIT A-2
TO FIRST AMENDMENT
Form of Opinion of Shearman & Sterling
--------------------------------------
<PAGE>
EXHIBIT A-3
TO FIRST AMENDMENT
Form of Opinion of DeWitt Ross & Stevens SC
-------------------------------------------
<PAGE>
EXHIBIT B
TO FIRST AMENDMENT
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 2.04(a) of the
First Amendment, dated December 2, 1999 (the "First Amendment"), to the Amended
and Restated Credit Agreement, dated as of December 2, 1998, among the Borrower,
various Banks, Bank of America, NA, as Syndication Agent, The Bank of New York,
as Documentation Agent, 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 ____________, 1999 (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.
Name Office Signature
---------- ------------- -------------
Frank J. Bivona Executive Vice President and Chief
Financial Officer ____________________
Stephen D. Cooke Senior Vice President, General
Counsel and Secretary ____________________
Robert W. Starr First Vice President and Treasurer ____________________
3. There have been no amendments adopted to the Borrower's Restated
Articles of Incorporation or By-laws since December 2, 1998, and the copies
thereof attached to the certificate, dated December 2, 1998 and delivered to the
Agent pursuant to Section 5.04(a) of the Credit Agreement, remain true and
correct copies thereof.
4. Attached hereto as Annex A is a true and correct copy of
resolutions duly adopted by the Board of Directors of the Borrower at a meeting
on October 27, 1999, at which a 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 A, no resolutions
have been adopted by the Board of Directors of the Borrower which deal with
<PAGE>
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.
5. On the date hereof, the representations and warranties contained
in Article 3 of the First Amendment are true and correct.
6. On the date hereof, no Default or Event of Default has occurred
and is continuing.
7. 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 _____ day of
December, 1999.
AMBAC ASSURANCE CORPORATION
_________________________________________
Name: Frank J. Bivona
Executive Vice President and Chief
Financial Officer
B-2
<PAGE>
I, the undersigned, 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 and 4
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 _____ day of
December, 1999.
AMBAC ASSURANCE CORPORATION
______________________________________
Name: Stephen D. Cooke
Title: Senior Vice President, General
Counsel and Secretary
B-3
<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,
----------------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges 11.56x 10.50x 13.41x 17.91x 10.77x
</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 13.01
Financial Highlights
4
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES Years Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------------
(Dollars in millions, except share amounts) 1999 1998 1997 1996* 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS HIGHLIGHTS
Gross premiums written $ 445.2 $ 361.0 $ 286.2 $ 247.2 $ 193.3
Net premiums earned 264.4 212.7 154.0 136.6 111.8
Net investment income 209.3 186.2 159.7 144.9 131.0
Financial services net revenue 51.7 49.5 35.2 22.0 13.1
Total revenue 533.3 457.0 381.8 452.9 282.3
Losses and loss adjustment expenses 11.0 6.0 2.9 3.8 3.4
Financial guarantee underwriting and operating expenses 48.8 46.7 40.7 37.2 34.5
Financial services expenses 25.8 35.5 28.0 12.0 7.8
Interest expense 36.5 32.8 21.3 20.9 20.9
Net income 307.9 254.0 223.0 276.3 167.6
Net income per share 4.40 3.63 3.19 3.95 2.39
Net income per diluted share 4.31 3.56 3.13 3.91 2.37
Return on equity 15.0% 12.8% 12.8% 18.3% 13.8%
Cash dividends declared per common share 0.420 0.380 0.345 0.308 0.278
<CAPTION>
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES As of December 31,
- ---------------------------------------------------------------------------------------------------------------------------------
(Dollars in millions) 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET HIGHLIGHTS
Total investments, at fair value $ 8,962.5 $ 8,748.4 $6,915.1 $5,200.5 $4,441.6
Prepaid reinsurance 218.0 199.9 183.5 168.8 153.4
Total assets 11,345.1 11,212.3 8,291.7 5,876.4 5,309.3
Unearned premiums 1,431.1 1,294.2 1,179.0 991.2 903.0
Losses and loss adjustment expenses 121.5 115.8 103.3 60.6 66.0
Obligations under investment agreements, investment
repurchase agreements and payment agreements 6,140.3 5,956.8 4,321.0 2,754.6 2,426.9
Debentures 424.0 423.9 223.9 223.8 223.7
Total stockholders' equity 2,018.5 2,096.1 1,872.5 1,615.0 1,404.0
</TABLE>
* 1996 includes a one-time gain from the sale of a subsidiary equal to $155.6
million pretax and $100.6 million after tax.
<PAGE>
5
Five Year Highlights
TOTAL OPERATING REVENUES/1/ OPERATING EARNINGS PER DILUTED SHARES/2/
(DOLLAR IN MILLIONS) (DOLLARS)
[BARGRAPH APPEARS HERE] [BARGRAPH APPEARS HERE]
1995 1996 1997 1998 1999 1995 1996 1997 1998 1999
263.1 316.7 360.6 467.9 541.3 2.23 2.66 2.97 3.69 4.39
CORE EARNINGS PER DILUTED SHARE/2/ ADJUSTED GROSS PREMIUMS WRITTEN/3/
(DOLLARS) (DOLLARS IN MILLIONS)
[BARGRAPH APPEARS HERE] [BARGRAPH APPEARS HERE]
1995 1996 1997 1998 1999 1995 1996 1997 1998 1999
2.05 2.41 $2.75 3.32 4.10 216.6 286.8 329.3 458.0 595.0
1. Operating revenues exclude net realized gains and losses.
2 Core earnings and operating earnings are not substitutes for net income
computed in accordance with Generally Accepted Accounting Principles
(GAAP) but are important measures used by management, equity analysts
and investors to measure financial results. Operating earnings exclude
the effect on net income from net realized gains and losses and certain
non-recurring items. Core earnings is defined as operating earnings less
the effect on net income from insurance premiums earned from refundings
and calls. The definitions of operating and core earnings used by Ambac
Financial Group, Inc. may differ from definitions of operating and core
earnings used by other public holding companies of financial guarantee
insurers.
3 Adjusted gross premiums written ("AGP") is not promulgated under GAAP.
It includes gross up-front premiums written plus the present value of
estimated future installment premiums written on insurance policies and
structured credit derivatives issued in the period. Additionally, AGP is
reduced for amounts ceded to MBIA under our international joint venture.
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.
<PAGE>
23
Management's Discussion and Analysis
General
Ambac Financial Group, Inc. ("AFGI"), 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 following paragraphs describe the consolidated results of operations of
AFGI and its affiliates (collectively referred to as the "Company") for 1999,
1998 and 1997, and its financial condition as of December 31, 1999 and 1998.
These results are presented for the Company's two reportable segments: Financial
Guarantee and Financial Services. This discussion should be read in conjunction
with the consolidated financial statements included elsewhere in this report.
Materials in this annual report 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 in 1999 was $307.9 million or
$4.31 per diluted share, an increase of 21% from $254.0 million or $3.56 per
diluted share in 1998. This increase was primarily attributable to growth in
both Financial Guarantee and Financial Services operating income. Financial
Guarantee revenues increased by $65.7 million, or 16%. Excluding realized gains
and losses, Financial Guarantee revenues increased by 19%. Financial Services
revenues increased by $16.1 million, or 50%, while its expenses decreased by
$9.7 million, or 27%. Excluding realized losses, Financial Services revenues
increased by 4%.
The Company's net income in 1998 increased 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 and Financial Services revenues, partially
offset by lower net realized gains and higher net realized losses in the
Financial Guarantee segment and the Financial Services segment, respectively, in
1998.
Financial Guarantee
The Company provides financial guarantees for municipal and structured finance
obligations through its principal operating subsidiary, Ambac Assurance
Corporation ("Ambac Assurance"). Ambac Assurance's wholly-owned subsidiary,
Ambac Assurance UK Limited, serves clients in the international market.
Additionally, Ambac Assurance serves clients in international markets through
its participation in an unincorporated joint venture with MBIA Insurance
Corporation, MBIA. AMBAC International (the "JV Arrangement"). See Note 5 of
Notes to Consolidated Financial Statements for further discussion about the JV
Arrangement. Ambac Credit Products, L.L.C. ("ACP"), a
[PICTURE APPEARS HERE]
<PAGE>
24
Management's Discussion And Analysis
wholly-owned subsidiary of Ambac Assurance, also provides credit protection in
the global markets in the form of structured credit derivatives.
Gross Par Value Written. Ambac Assurance guaranteed $73.3 billion of par
value obligations during 1999, an increase of 19% from $61.5 billion in 1998.
Par value written in 1998 represented an increase of 35% from $45.5 billion in
1997. Par value written in 1999 comprised $32.5 billion from the guarantee of
municipal bond obligations, $33.4 billion from structured finance obligations
and $7.4 billion from international obligations, versus $33.9 billion, $22.6
billion and $5.0 billion, respectively, in 1998 and $29.4 billion, $12.9 billion
and $3.2 billion, respectively, in 1997. The 1999 decrease in guaranteed
municipal bond obligations was affected by a 22% decline in total issuance that
was largely offset by an overall increase in Ambac's municipal market share. The
increases in guaranteed structured finance obligations during 1999 were
principally in the mortgage-backed and asset-backed sectors while the 1999
increase in international obligations guaranteed resulted primarily from
expansion of the financial guarantee product into structured credit derivatives.
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 in 1999 were $445.2 million, an
increase of 23% from $361.0 million in 1998. Business activity in structured
finance transactions as well as improved pricing in the municipal finance market
has spurred this increase. Gross premiums written in 1998 increased 26% from
$286.2 million in 1997. Increased new issue municipal finance and international
premiums primarily drove this increase. The following table sets forth the
amounts of gross premiums written and related gross par written by type:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
(Dollars in millions) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------
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>
Municipal finance:
Up-front:
New issue $ 261.5 $ 27,242 $ 228.2 $ 29,616 $ 178.9 $ 25,889
Secondary market 14.8 1,570 14.6 1,400 19.6 1,530
- ------------------------------------------------------------------------------------------------------
Sub-total up-front 276.3 28,812 242.8 31,016 198.5 27,419
Installment 21.7 3,649 17.7 2,899 13.5 2,024
- ------------------------------------------------------------------------------------------------------
Total municipal finance 298.0 32,461 260.5 33,915 212.0 29,443
- ------------------------------------------------------------------------------------------------------
Structured finance:
Up-front 7.9 824 1.4 1,985 11.1 922
Installment 67.6 32,623 35.7 20,581 19.6 11,952
- ------------------------------------------------------------------------------------------------------
Total structured finance 75.5 33,447 37.1 22,566 30.7 12,874
- ------------------------------------------------------------------------------------------------------
International:
Up-front 35.6 747 52.8 2,463 37.6 1,566
Installment 36.1 6,676 10.6 2,553 5.9 1,575
- ------------------------------------------------------------------------------------------------------
Total international 71.7 7,423 63.4 5,016 43.5 3,141
- ------------------------------------------------------------------------------------------------------
Total $ 445.2 $ 73,331 $ 361.0 $ 61,497 $ 286.2 $ 45,458
- ------------------------------------------------------------------------------------------------------
Total up-front $ 319.8 $ 30,383 $ 297.0 $ 35,464 $ 247.2 $ 29,907
Total installment 125.4 42,948 64.0 26,033 39.0 15,551
- ------------------------------------------------------------------------------------------------------
Total $ 445.2 $ 73,331 $ 361.0 $ 61,497 $ 286.2 $ 45,458
- ------------------------------------------------------------------------------------------------------
</TABLE>
[PICTURE APPEARS HERE]
<PAGE>
25
Adjusted Gross Premiums/(1)/. While the majority of Ambac Assurance's
municipal finance premiums written are collected up front at policy issuance,
the majority of its structured finance premiums are collected on an installment
basis. Adjusted gross premiums ("AGP") written, which are defined as gross
up-front premiums written plus the present value of estimated future installment
premiums written on insurance policies and structured credit derivatives issued
in the period, were $595.0 million in 1999, up 30% from $458.0 million in 1998.
The increase in 1999 was primarily due to the increased business activity in
structured finance transactions, especially on mortgage-backed and asset-backed
securities. AGP written in 1998 increased 39% from $329.3 million in 1997. The
increase in 1998 was primarily due to increased up-front premiums written in the
municipal finance market combined with the increase in the present value of
structured finance and international installment policies. The aggregate net
present value of estimated future installment premiums was $527.2 million,
$308.4 million, and $210.8 million as of December 31, 1999, 1998 and 1997,
respectively.
Ceded Premiums Written. Ceded premiums written in 1999 were $61.8 million, up
25% from $49.6 million in 1998. Ceded premiums written in 1998 were affected by
a one-time cession of $11.6 million of the Connie Lee insured portfolio.
Excluding the one-time cession in 1998, ceded premiums written in 1999 increased
63% over ceded premiums written in 1998. The increase was primarily due to
increased gross premiums written as well as an overall increase in international
premiums ceded under the JV Arrangement during 1999. Excluding the one-time
Connie Lee cession discussed above, ceded premiums written in 1998 were 17%
higher than ceded premiums written in 1997 of $32.5 million. Ceded premiums
written were 14%, 11% (excluding the one-time cession), and 11% of gross
premiums written in 1999, 1998 and 1997, respectively.
Net Premiums Earned. Net premiums earned during 1999 were $264.4 million,
an increase of 24% from $212.7 million in 1998. This increase was primarily the
result of the larger financial guarantee book of business, partially offset by
decreased refundings, calls, and other accelerations of previously insured
obligations (collectively referred to as "refundings") during the year. 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. 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 1999 included $35.9
million (net income per diluted share effect of $0.29) from refundings of
previously insured issues. Net premiums earned in 1998 included $46.9 million
(net income per diluted share effect of $0.37) from refundings. Excluding the
effect of accelerated earnings related to refundings, normal net premiums earned
in 1999 were $228.5 million, an increase of 38% from $165.8 million in 1998. The
increase in normal net premiums earned resulted from strong business written in
all areas.
Net premiums earned during 1998 increased 38% from $154.0 million in 1997.
This increase was primarily the result of the larger financial guarantee book of
business and increased premiums earned 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,
normal net premiums earned in 1998 increased 32% from $126.0 million in 1997.
Net Fees Earned and Other Income. Net fees earned and other income in 1999 was
$6.0 million, an increase of 3% from $5.8 million in 1998. Included in net fees
earned and other income are revenues earned from structured credit derivatives,
deal structuring fees and commitment fees. During 1999, Ambac Assurance's credit
derivatives subsidiary, ACP, earned revenues of $3.9 million. Net fees earned
and other income increased 32% in 1998 from $4.4 million in 1997. There were no
revenues from structured credit derivatives in 1998 and 1997.
Net Investment Income. Net investment income in 1999 was $209.3 million, an
increase of 12% from $186.2 million in 1998. This increase was primarily
attributable to the growth of the investment portfolio resulting from the growth
in the financial guarantee book of business. Additionally, investment income
grew as a result of capital contributions from AFGI totaling approximately $200
million over the course of the year. The contributions were in the form of
taxable securities. Investments in tax-exempt securities amounted to 74% of the
total market value of the portfolio as of December 31, 1999, versus 74% and 75%
as of December 31, 1998 and 1997, respectively. The average pre-tax
yield-to-maturity on the investment portfolio was 6.08% as of December 31, 1999
compared with 6.17% and 6.40% for December 31, 1998 and 1997, respectively. Net
investment income in 1998 increased 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.
Net Realized Gains (Losses). Net realized losses in 1999 were $5.7 million,
compared to net realized gains of $3.7 million and $21.1 million in 1998 and
1997, respectively. Realized gains and losses are generated as a result of the
ongoing management of the investment portfolio.
Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses in 1999
were $11.0 million, versus $6.0 million in 1998 and $2.9 million in 1997. Losses
and loss adjustment expenses are based upon estimates of the ultimate aggregate
losses inherent in the financial guarantee portfolio. The liability for losses
and loss adjustment expenses consists of the active credit reserve ("ACR"),
which represents an estimate of the expected annual levels of debt service
<PAGE>
26
Management's Discussion and Analysis
defaults resulting from credit failures on currently guaranteed issues that are
not presently or imminently in default, 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, 1999 and 1998:
- ------------------------------------------------------
(Dollars in millions) 1999 1998
- ------------------------------------------------------
Net loss and loss adjustment
expense reserves:
Case basis* $ 26.2 $ 33.9
ACR 94.8 78.2
- ------------------------------------------------------
Total $ 121.0 $ 112.1
- ------------------------------------------------------
/*/After netting reinsurance recoverable amounting to $0.5 million and $3.6
million in 1999 and 1998, respectively.
Paid losses, net of salvage received, were $2.2 million, ($7.0) million
and $2.5 million in 1999, 1998 and 1997, respectively.
Underwriting and Operating Expenses. Underwriting and operating expenses were
$48.8 million in 1999, an increase of 4% from $46.7 million in 1998.
Underwriting and operating expenses in 1998 increased 15% from $40.7 million in
1997. 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. In 1999, gross underwriting and operating expenses were $74.5
million, an increase of 10% from $67.8 million in 1998. During 1998, gross
underwriting and operating expenses increased 15% from $59.2 million in 1997.
The increases in gross underwriting and operating expenses in both 1999 and 1998
reflect the overall increased business activity in those years and are primarily
attributable to higher compensation costs and premium taxes. Underwriting and
operating expenses deferred were $45.9 million, $38.2 million, and $32.8 million
in 1999, 1998 and 1997, respectively. The amortization of previously deferred
expenses and reinsurance commissions was $20.8 million, $18.2 million, and $14.2
million in 1999, 1998 and 1997, respectively.
Financial Services
Through its financial services subsidiaries, the Company provides investment
agreements, interest rate swaps, investment advisory and cash management
services, principally to states, municipalities and their authorities, school
districts, and hospitals and health organizations.
Revenues in 1999 were $51.7 million (excludes $3.1 million in net realized
losses), versus $49.5 million (excludes $17.1 million in net realized losses) in
1998. This increase is primarily due to higher revenues on investment agreements
from higher volume and improved net interest spreads, partially offset by lower
revenues on interest rate swaps due to lower volume. In the fourth quarter of
1998, the Company discontinued development of electronic commerce applications
for the municipal marketplace. This effort had been under way through an
affiliate, 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 in
1998. This charge did not affect operating or core earnings(2). In 1998, the
Company incurred 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. The trading loss
and the Ambac Connect charge were partially offset by $10.1 million of realized
gains on fixed-income securities in the investment agreement business during
1998. Revenues in 1998 reflected a 41% increase from $35.2 million (excludes
$0.6 million in net realized losses) in 1997. The increase was primarily due to
higher revenues from interest rate swaps and investment agreements primarily
resulting from increased volume.
Expenses in 1999 were $25.8 million, versus $32.5 million (excluding a $3.0
million restructuring charge for Ambac Connect) in 1998. This decrease was
primarily due to savings related to the closing of Ambac Connect, as discussed
above. Expenses in 1998 increased 33% from $24.5 million (excluding a $3.5
million 1997 restructuring charge for consolidating certain operations in New
York). This increase resulted 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.
Corporate Items
Interest Expense. Interest expense in 1999 was $36.5 million, an increase of 11%
from $32.8 million in 1998. The increase is primarily attributable to paying a
full year's interest expense on AFGI's April 1998 issuance of $200 million in
debentures. Interest expense in 1997 was $21.3 million.
Other Revenue. Other revenue includes investment income of AFGI. Other revenue
decreased to $9.9 million in 1999 from $13.7 million in 1998, primarily due to
capital contributions to Ambac Assurance totaling approximately $200 million
(see "Net Investment Income" section above). Other revenue increased in 1998
from $7.2 million in 1997, primarily due to higher investment income generated
from investing the proceeds of the $200 million in debentures.
Other Expenses. Other expenses include the operating expenses of AFGI. Other
expenses were $6.5 million in 1999, $7.1 million in 1998, and $2.9 million in
1997. The primary reason for the escalating expenses from 1997 to 1998 was
increased compensation costs.
Income Taxes. Income taxes for 1999 were at an effective rate of 23.9%,
compared to 22.8% and 22.0% for 1998 and
<PAGE>
27
1997, respectively. The increasing effective tax rate is primarily the result of
the growth in underwriting profits in proportion to the primarily tax-advantaged
investment income.
Supplemental Analytical Financial Data
Core Earnings/(2)/. In 1999, core earnings were $292.6 million, an increase of
24% from $236.5 million in 1998. This increase was primarily the result of
continued higher normal premiums earned (defined as net premiums earned less the
effect of refundings) from the growth in the financial guarantee book of
business and higher net investment income from financial guarantee operations.
In 1998, core earnings increased 21% from $195.8 million in 1997. The increase
was primarily the result of higher normal premiums earned from the growth in the
financial guarantee book of business and higher net investment income from
financial guarantee operations, as well as higher revenues from the investment
agreement and swap businesses in the financial services segment. 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 1999 were $313.1 million, an
increase of 19% from $263.3 million in 1998. Operating earnings in 1998
increased 24% from $211.8 million in 1997. 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 Principles ("GAAP") to operating earnings and
core earnings for the years ended December 31, 1999, 1998 and 1997:
- --------------------------------------------------------------------------------
(Dollars in millions) 1999 1998 1997
- --------------------------------------------------------------------------------
Net income $ 307.9 $ 254.0 $ 223.0
Net realized losses (gains),
after tax 5.2 7.1 (13.3)
Non-recurring item, after tax - 2.2 2.1
- --------------------------------------------------------------------------------
Operating earnings 313.1 263.3 211.8
Premiums earned from
refundings, after tax (20.5) (26.8) (16.0)
- --------------------------------------------------------------------------------
Core earnings $ 292.6 $ 236.5 $ 195.8
- --------------------------------------------------------------------------------
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 and other subsidiaries' 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 1999, Ambac Assurance paid dividends of
$52.0 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 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 it
expects to receive from Ambac Assurance during 2000, and the income it expects
to receive from its investment portfolio, management believes that AFGI will
have sufficient liquidity to satisfy its 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 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.
Ambac Assurance Liquidity. The principal uses of Ambac Assurance's liquidity are
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, net investment income and receipts from structured credit
derivatives. During 1999, AFGI contributed $200 million of capital 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 intercompany 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.
Financial Services maintains a portion of its assets in short-term investments
and repurchase agreements in order to meet unexpected liquidity needs.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
28
Credit Facilities. AFGI 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 December 31,
1999 and 1998, no amounts were outstanding under this credit facility.
Ambac Assurance maintains third party capital support in the form of a
seven-year irrevocable limited recourse credit facility from a group of highly
rated 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 municipal
policy obligations. During 1999, total third party capital support was increased
from $555 million to $750 million and its expiration reset to December 2, 2006.
As of December 31, 1999 and 1998, no amounts were outstanding under this
facility.
ACP has a revolving credit facility with one 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. The credit
facility became effective on July 1, 1999. As of December 31, 1999, 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 repurchase of up to
6,000,000 shares of AFGI's common stock. During 1999, AFGI acquired
approximately 325,000 treasury shares for an aggregate amount of $17.6 million.
Since inception of the Stock Repurchase Program AFGI has acquired approximately
4,573,000 shares for an aggregate amount of $160.3 million.
Adjusted Book Value./(3)/ Adjusted Book Value ("ABV") per share increased 6% to
$44.68 at December 31, 1999 from $41.98 at December 31, 1998.
The following table reconciles book value per share to ABV per share as of
December 31, 1999 and 1998:
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
Book value per share $ 28.85 $ 29.97
After-tax value of:
Net unearned premium reserve 11.28 10.17
Deferred acquisition costs (1.26) (1.12)
Present value of installment premiums 4.90 2.86
Net unrealized gains on investment
agreement liabilities 0.91 0.10
- --------------------------------------------------------------------------------
Adjusted book value per share $ 44.68 $ 41.98
- --------------------------------------------------------------------------------
Balance Sheet. Total assets as of December 31, 1999 were $11.35 billion,
relatively flat to $11.21 billion at December 31, 1998. Cash flows from
operations and investment activities were largely offset by declines in the
market values of the investment portfolio resulting from rising interest rates
during 1999. Stockholders' equity as of December 31, 1999 was $2.02 billion, a
decrease of 4% from $2.10 billion at year-end 1998. Net income for the year was
more than offset by net unrealized losses in the investment portfolio
(classified as "Accumulated Other Comprehensive (Loss) Income" in Stockholders'
Equity).
The following table summarizes the composition of the Company's investment
portfolio by segment at December 31, 1999, and 1998:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Financial Financial
(Dollars in millions) Guarantee Services Other Total
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999
Municipal obligations $ 2,923.5 $ 39.4 $ - $ 2,962.9
Corporate obligations 420.5 582.4 5.7 1,008.6
U.S. government obligations 60.9 1.6 - 62.5
Mortgage and asset-backed securities (includes
U.S. government agency obligations) 111.0 4,593.5 - 4,704.5
Other - - 3.1 3.1
- ----------------------------------------------------------------------------------------------------------
Total long-term 3,515.9 5,216.9 8.8 8,741.6
Short-term 207.1 1.5 12.3 220.9
- ----------------------------------------------------------------------------------------------------------
Total investments $ 3,723.0 $ 5,218.4 $ 21.1 8,962.5
- ----------------------------------------------------------------------------------------------------------
Percent total 41.5% 58.2% 0.3% 100%
- ----------------------------------------------------------------------------------------------------------
1998
Municipal obligations $ 2,757.2 $ 44.1 $ - $ 2,801.3
Corporate obligations 328.1 980.1 127.2 1,435.4
U.S. government obligations 122.9 - - $ 122.9
Mortgage and asset-backed securities (includes
U.S. government agency obligations) 101.8 4,078.9 81.9 4,262.6
Other - - 6.6 6.6
- ----------------------------------------------------------------------------------------------------------
Total long-term 3,310.0 5,103.1 215.7 8,628.8
Short-term 93.9 1.5 24.1 119.5
- ----------------------------------------------------------------------------------------------------------
Total investments $ 3,403.9 $ 5,104.6 $ 239.8 8,748.3
- ----------------------------------------------------------------------------------------------------------
Percent total 38.9% 58.4% 2.7% 100%
- ----------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
29
The Company's investment objectives for the Financial Guarantee portfolio
are to maintain an investment duration that closely approximates the expected
duration of related financial guarantee liabilities and achieve the highest
after-tax net investment income while maintaining a conservative credit risk
profile. The Financial Guarantee investment portfolio is subject to internal
investment guidelines, which are approved by the Board of Directors. Such
guidelines set forth minimum credit rating requirements and credit risk
concentration limits. As of December 31, 1999 and 1998, the Company's Financial
Guarantee investment portfolio had a weighted average credit rating of AA.
Approximately 87% and 82% of the Mortgage and Asset-Backed Securities in
the Financial Guarantee portfolio is composed of securities issued by various
U.S. government agencies, as of December 31, 1999 and 1998, respectively.
Short-term investments in the Financial Guarantee portfolio consisted
primarily of money market funds, foreign and domestic time deposits, and
discount notes.
The Financial Services investment portfolio consists primarily of assets
funded with the proceeds from the issuance of investment agreement liabilities.
The investment objectives of the portfolio are to match the investment security
duration to the duration of related liabilities under the investment agreements
and achieve the highest after-tax net investment income. The investment
portfolio is subject to internal investment guidelines, approved by the Board of
Directors. Such guidelines set forth minimum credit rating requirements and
credit risk concentration limits. As of December 31, 1999 and 1998, the
Company's Financial Services investment portfolio had a weighted average credit
rating of AA.
Approximately 51% and 67% of the Mortgage and Asset-Backed Securities in
the Financial Services portfolio is composed of securities issued by various
U.S. government agencies, as of December 31, 1999 and 1998, respectively.
CASH FLOWS. Net cash provided by operating activities was $454.4 million, $327.8
million and $316.0 million during 1999, 1998 and 1997, respectively. These cash
flows were primarily provided by the Financial Guarantee operations. Net cash
provided by financing activities was $181.2 million, $1,723.0 million and
$1,564.3 million during 1999, 1998 and 1997, respectively. This activity
included $199.2 million, $1,391.9 million and $1,096.5 million in investment
agreements issued (net of draws paid) in 1999, 1998 and 1997, respectively. The
total cash provided by operating and financing activities was $635.6 million,
$2,050.8 million and $1,880.3 million during 1999, 1998 and 1997, respectively.
From these totals, $630.3 million, $2,051.8 million and $1,878.8 million was
used in investing activities, principally net purchases of investment
securities, during 1999, 1998 and 1997, 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 affiliates, manages
a variety of risks, principally credit, market, liquidity, operational and
legal. These risks are identified, measured and monitored through a variety of
control mechanisms, which are in place at different levels throughout the
organization.
CREDIT RISK. The Company is exposed to credit risk in various capacities
including as an issuer of financial guarantees, as counterparty to derivative
and other financial contracts and as a holder of investment securities. The
Company has a Portfolio Risk Management Committee ("PRMC") which has established
various procedures and controls to monitor and manage credit risk. The PRMC is
comprised of senior credit professionals and senior management of the Company.
Its purview is enterprise-wide and its focus is on risk measurement, risk/return
optimization, and capital attribution in a portfolio context.
All financial guarantees issued are subject to a formal underwriting
process. Various factors affecting the credit worthiness of the underlying
obligation are evaluated during the underwriting process. Senior credit
personnel approve all transactions prior to issuing a financial guarantee.
Subsequent to issuance of a financial guarantee, the Company periodically
performs reviews of exposures according to a pre-determined schedule based on
the risk profile of the insured obligations. The Company also monitors credit
risk relating to derivative and other financial contracts.
The Company manages credit risk associated with its investment portfolio
through adherence to specific investment guidelines. These guidelines establish
limits based upon single risk concentration limits and minimum credit rating
standards. Additionally, senior investment personnel monitor the portfolio on a
continuous basis.
MARKET RISK. 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
<PAGE>
30
MANAGEMENT'S DISCUSSION AND ANALYSIS
monitor and manage market risk. This process includes frequent analyses of both
parallel and non-parallel shifts in the yield curve, "value-at-risk" and changes
in credit spreads. 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 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 following table summarizes the estimated
change in fair value (based primarily on the valuation models discussed above)
on the net balance of the Company's investment securities, investment agreement
liabilities, debentures and derivative hedges, assuming immediate changes in
interest rates at specified levels at December 31, 1999 and 1998:
- -----------------------------------------------------------------------------
(Dollars in millions) Estimated
Change in Estimated change in
interest rates fair value fair value
- -----------------------------------------------------------------------------
1999:
300 basis point rise $ 2,513 $ (927)
200 basis point rise 2,814 (626)
100 basis point rise 3,123 (317)
Base Scenario 3,440 -
100 basis point decline 3,763 323
200 basis point decline 4,098 658
300 basis point decline 4,454 1,014
1998:
300 basis point rise $2,172 $ (758)
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
- -----------------------------------------------------------------------------
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. For the years
ended December 31, 1999 and 1998, the Company's value-at-risk, for its interest
rate swap portfolio, calculated at a ninety-nine percent confidence level,
averaged approximately $1.1 million and $1.0 million, respectively. The
Company's value-at-risk ranged from a high of $1.3 million to a low of $0.9
million in 1999, and from a high of $1.1 million to a low of $0.7 million in
1998. 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.
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 an underlying obligation
(generally a fixed income security). 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. Personnel in the Company's credit
surveillance group monitor credit spread risk. Additionally, management models
the potential impact of credit spread changes on the value of its contracts. At
December 31, 1999 the Company's models estimate ACP would experience an
estimated unrealized loss of $0.8 million, $2.1 million and $4.2 million, based
on overall credit spread widening of 15, 30 and 45 basis points, respectively.
ACP would experience an estimated unrealized gain of $0.9 million, $3.0 million
and $5.0 million, based on overall credit spread narrowing of 15, 30 and 45
basis points, respectively.
<PAGE>
31
LIQUIDITY RISK. Liquidity risk relates to the possible inability to satisfy
contractual obligations when due. This risk is present in financial guarantee
contracts, structured credit derivatives, 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. ACP manages the liquidity risk inherent in the
structured credit derivative portfolio by holding cash and short-term
investments, closely matching the dates that derivative payments are made and
received, and by maintaining a revolving credit agreement. 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 assets equivalent to a specified
percentage of its investment agreement liabilities outstanding. AFSLP maintains
cash and short-term investments, closely matches the dates swap payments are
made and received, and limits the amount of risk hedged with futures contracts.
See additional discussion in "Liquidity and Capital Resources" section.
OPERATIONAL RISK. 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. Legal risks attendant to the Company's businesses include
uncertainty with respect to the enforceability of the obligations insured by
Ambac Assurance, as well as uncertainty with respect to the enforceability of
the 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. To date the Company has had no disruptions with its internal computer
systems as a result of what is commonly known as the Y2K problem. Although the
Company had been running tests on its critical systems throughout 1999, a final
live test occurred on January 1, 2000. The results of that test indicated that
the Company's internal computer systems, and the normal business activities and
operations that depend on them have not been adversely impacted by Y2K sensitive
dates.
Although the Company does not expect issuers of Ambac-guaranteed
obligations to experience significant disruptions due to Y2K, it may take a
considerable amount of time before a full assessment can be made of how each
issuer fared.
FOOTNOTES.
(1) Adjusted gross premiums ("AGP") written, which is not promulgated under
Generally Accepted Accounting Principles ("GAAP"), is used by management, equity
analysts and investors to measure the financial results of the Company. AGP
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 on insurance policies and structured credit derivatives issued
in the period. The definition of AGP written used by the Company may differ from
definitions of AGP written used by other public holding companies of financial
guarantee insurers.
All reinsurance cessions to MBIA under the joint venture reinsurance
arrangement reduce adjusted gross premiums written. Consequently, 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.
<PAGE>
32
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 Financial Group, Inc. and the quality of
its 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 21, 2000
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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999 in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
KPMG LLP
New York, New York
January 21, 2000
<PAGE>
33
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except share amounts) December 31, 1999 1998
- -------------------------------------------------------------------------------------------------------------------
ASSETS:
<S> <C> <C>
Investments:
Fixed income securities, at fair value (amortized cost of $9,028,184 in
1999 and $8,307,046 in 1998) $ 8,738,471 $ 8,622,282
Short-term investments, at cost (approximates fair value) 220,896 119,528
Other, at cost 3,168 6,567
- -------------------------------------------------------------------------------------------------------------------
Total investments 8,962,535 8,748,377
Cash 13,588 8,239
Securities purchased under agreements to resell 103,000 252,295
Receivable for investment agreements 45,918 73,142
Receivable for securities sold 15,369 16,233
Investment income due and accrued 128,668 125,929
Reinsurance recoverable 500 3,638
Prepaid reinsurance 217,977 199,920
Deferred acquisition costs 135,324 120,619
Deferred income taxes 57,377 -
Loans 685,488 673,930
Receivable from brokers and dealers 717,000 750,000
Other assets 262,352 239,989
- -------------------------------------------------------------------------------------------------------------------
Total assets $ 11,345,096 $ 11,212,311
===================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Unearned premiums $ 1,431,076 $ 1,294,214
Losses and loss adjustment expenses 121,475 115,794
Ceded reinsurance balances payable 15,028 6,576
Obligations under investment and payment agreements 4,180,513 4,774,953
Obligations under investment repurchase agreements 1,959,741 1,181,810
Deferred income taxes - 145,782
Current income taxes 24,831 6,949
Debentures 423,995 423,929
Accrued interest payable 91,142 89,615
Accounts payable and other liabilities 268,696 262,423
Payable to brokers and dealers 717,000 750,000
Payable for securities purchased 93,149 64,176
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 9,326,646 9,116,221
- -------------------------------------------------------------------------------------------------------------------
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, 1999 and December 31, 1998; issued shares-- 70,680,384
at December 31, 1999 and December 31, 1998 707 707
Additional paid-in capital 525,012 519,305
Accumulated other comprehensive (loss) income (187,540) 159,313
Retained earnings 1,713,446 1,449,832
Common stock held in treasury at cost, 722,592 shares at December 31, 1999 and
738,381 at December 31, 1998 (33,175) (33,067)
- -------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 2,018,450 2,096,090
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 11,345,096 $ 11,212,311
===================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
34
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except share amounts) Years Ended December 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Financial Guarantee:
Gross premiums written $ 445,242 $ 361,011 $ 286,163
Ceded premiums written (61,845) (49,563) (32,452)
- ---------------------------------------------------------------------------------------------------------------------------------
Net premiums written $ 383,397 $ 311,448 $ 253,711
- ---------------------------------------------------------------------------------------------------------------------------------
Net premiums earned $ 264,426 $ 212,684 $ 154,000
Net fees earned and other income 6,034 5,781 4,402
Net investment income 209,284 186,190 159,709
Net realized (losses) gains (5,675) 3,735 21,084
Financial Services:
Net revenue 51,669 49,510 35,249
Net realized losses (3,124) (17,096) (637)
Other:
Revenue 9,906 13,725 7,207
Net realized gains 797 2,507 748
- ---------------------------------------------------------------------------------------------------------------------------------
Total revenues 533,317 457,036 381,762
- ---------------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Financial Guarantee:
Losses and loss adjustment expenses 11,000 6,000 2,854
Underwriting and operating expenses 48,804 46,720 40,672
Financial Services 25,824 35,540 27,993
Interest 36,525 32,761 21,346
Other 6,506 7,103 2,901
- ---------------------------------------------------------------------------------------------------------------------------------
Total expenses 128,659 128,124 95,766
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 404,658 328,912 285,996
Provision for income taxes 96,741 74,918 62,966
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $ 307,917 $ 253,994 $ 223,030
- ---------------------------------------------------------------------------------------------------------------------------------
Net income per share $ 4.40 $ 3.63 $ 3.19
- ---------------------------------------------------------------------------------------------------------------------------------
Net income per diluted share $ 4.31 $ 3.56 $ 3.13
- ---------------------------------------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding 69,913,147 69,939,710 69,988,497
- ---------------------------------------------------------------------------------------------------------------------------------
Weighted average number of diluted shares outstanding 71,366,210 71,330,053 71,227,347
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
35
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Years Ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
RETAINED EARNINGS:
Balance at January 1 $1,449,832 $1,262,740 $1,072,418
Net income 307,917 $ 307,917 253,994 $253,994 223,030 $223,030
--------- -------- --------
Dividends declared--
common stock (29,366) (26,571) (24,165)
Exercise of stock options (14,937) (40,331) (8,543)
---------- ---------- ----------
Balance at December 31 $1,713,446 $1,449,832 $1,262,740
---------- ---------- ----------
ACCUMULATED OTHER
COMPREHENSIVE
(LOSS) INCOME:
Balance at January 1 $ 159,313 $ 135,223 $ 58,911
Unrealized (losses) gains
on securities, ($552,645),
$36,476, and $121,347,
pre-tax in 1999, 1998
and 1997, respectively (1) (346,211) 23,889 76,155
Foreign currency (loss) gain (642) 201 157
--------- -------- --------
Other comprehensive
(loss) income (346,853) (346,853) 24,090 24,090 76,312 76,312
---------- --------- ---------- -------- ---------- --------
Total comprehensive
(loss) income $ (38,936) $278,084 $299,342
--------- -------- --------
Balance at December 31 $ (187,540) $ 159,313 $ 135,223
---------- ---------- ----------
PREFERRED STOCK:
Balance at January 1 and
December 31 $ -- $ -- $ --
---------- ---------- ----------
COMMON STOCK:
Balance at January 1 $ 707 $ 707 $ 353
Stock split effected
as dividend -- -- 354
---------- ---------- ----------
Balance at December 31 $ 707 $ 707 $ 707
---------- ---------- ----------
ADDITIONAL PAID-IN CAPITAL:
Balance at January 1 $ 519,305 $ 500,107 $ 498,401
Issuance of stock -- -- (3,506)
Exercise of stock options 5,707 19,198 5,566
Stock split effected as dividend -- -- (354)
---------- ---------- ----------
Balance at December 31 $ 525,012 $ 519,305 $ 500,107
---------- ---------- ----------
COMMON STOCK HELD IN
TREASURY AT COST:
Balance at January 1 $ (33,067) $ (26,295) $ (15,067)
Cost of shares acquired (17,626) (52,738) (40,397)
Shares issued under equity plans 17,518 45,966 29,169
---------- ---------- ----------
Balance at December 31 $ (33,175) $ (33,067) ($26,295)
---------- ---------- ----------
TOTAL STOCKHOLDERS' EQUITY
AT DECEMBER 31 $2,018,450 $2,096,090 $1,872,482
---------- ---------- ----------
(1) Disclosure of
reclassification amount: 1999 1998 1997
- -------------------------------------------------------------------------------------
Unrealized holding (losses)
gains arising during period $ (351,412) $ 34,526 $ 88,744
Less: reclassification
adjustment for net
(losses) gains included
in net income (5,201) 10,637 12,589
---------- --------- ----------
Net unrealized (losses)
gains on securities $ (346,211) $ 23,889 $ 76,155
---------- --------- ----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
36
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) Years Ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 307,917 $ 253,994 $ 223,030
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,969 2,460 1,925
Amortization of bond premium and discount (4,444) (4,942) (3,257)
Current income taxes 17,882 (2,067) 9,978
Deferred income taxes 3,274 (2,034) 12,015
Deferred acquisition costs (14,705) (14,623) (11,784)
Unearned premiums, net 118,805 98,796 99,706
Losses and loss adjustment expenses 8,819 13,030 408
Ceded reinsurance balances payable 8,452 (2,682) 1,303
Investment income due and accrued (2,739) (47,239) (9,415)
Accrued interest payable 1,527 43,598 16,059
Loss (gain) on sales of investments and affiliates 8,002 10,854 (21,195)
Other, net (1,359) (21,349) (2,762)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 454,400 327,796 316,011
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of bonds 2,403,583 2,020,463 1,718,174
Proceeds from matured bonds 1,371,715 1,034,511 1,080,338
Purchases of bonds (4,427,369) (4,746,366) (4,135,404)
Change in short-term investments (101,368) 16,750 (23,767)
Securities purchased under agreements to resell 149,295 (166,829) 115,703
Loans (11,558) (170,738) (503,192)
Purchase of affiliate, net of cash acquired -- -- (120,006)
Other, net (14,591) (39,617) (10,615)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (630,293) (2,051,826) (1,878,769)
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (29,366) (26,571) (24,165)
Proceeds from issuance of investment agreements 3,051,508 3,628,266 2,805,256
Payments for investment agreement draws (2,852,350) (2,236,348) (1,708,775)
Proceeds from issuance of debentures -- 193,700 --
Payment agreements 11,558 170,738 503,192
Purchases of treasury stock (17,626) (52,738) (40,397)
Proceeds from sale of treasury stock 17,518 45,966 29,169
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 181,242 1,723,013 1,564,280
- ------------------------------------------------------------------------------------------------------------------------------------
NET CASH FLOW 5,349 (1,017) 1,522
Cash at January 1 8,239 9,256 7,734
- ------------------------------------------------------------------------------------------------------------------------------------
Cash at December 31 $ 13,588 $ 8,239 $ 9,256
- ------------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Income taxes $ 70,100 $ 66,853 $ 34,163
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense on debt $ 36,743 $ 33,056 $ 21,799
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense on investment agreements $ 298,309 $ 252,713 $ 169,875
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share
amounts)
1 BACKGROUND
Ambac Financial Group, Inc. ("AFGI") is a holding company whose subsidiaries
provide financial guarantees and financial services to clients in both the
public and private sectors around the world. AFGI'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. AFGI's Financial 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 common 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 or restricted stock units, were
exercised or converted to common shares, respectively.
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
primarily 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 (Loss) 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. At December 31, 1999 such
collateral had a market value approximately equal to 102% of the contract
amount, had an average credit rating of triple-A and a weighted average maturity
of less than 30 days.
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
Services revenue.
PREMIUM REVENUE RECOGNITION: Up-front premiums are earned pro-rata over the
period of risk. Premiums are allocated to each bond maturity based on par amount
and are earned on a straight-line basis over the term of each maturity.
Installment premiums are earned over each installment period, generally one year
or less. 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.
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
<PAGE>
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share
amounts)
service defaults resulting from credit failures on currently guaranteed issues
that are not presently or imminently in default. When losses occur (actual
monetary defaults or defaults which are imminent on guaranteed 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 1999, 1998 and 1997, paid losses, net of salvage received were $2,182,
($7,030), and $2,474, respectively. All or parts 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, 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 $20,843, $18,248
and $14,213 for 1999, 1998 and 1997, respectively. Deferred acquisition costs,
net of such amortization, amounted to $14,705, $14,623 and $11,784 for 1999,
1998 and 1997, 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 rate sensitive assets and liabilities. Futures contracts are designated
at inception as a hedge to specific assets and liabilities. Gains and losses on
futures contracts that qualify as accounting hedges of existing assets or
liabilities are included as a component of "Accumulated Other Comprehensive
(Loss) 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
(Loss) 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).
Derivative Contracts Held for Trading Purposes: The Company, through its
subsidiary Ambac Financial Services, L.P. ("AFSLP"), provides interest rate
swaps to states, municipalities and their authorities, and other entities in
connection with their financings. The Company, through its subsidiary Ambac
Credit Products L.L.C. ("ACP"), enters into structured credit derivative
transactions with various financial institutions. Interest rate swaps and
structured credit derivatives are classified as held for trading purposes. These
contracts are recorded on trade date at fair value. Changes in fair value are
recorded as a component of Financial Services segment income for interest rate
swaps and as a component of Financial Guarantee segment income for structured
credit derivatives. The fair values of interest rate swaps and structured credit
derivatives are determined by broker quotes or valuation models (when broker
quotes are not available). Contracts 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. Gross asset and gross liability balances for interest
rate swaps and structured credit derivatives are recorded as other assets or
other liabilities on the Consolidated Balance Sheets.
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
<PAGE>
39
deferred tax assets and liabilities of a change in tax rates is recognized in
the period that includes the enactment date.
POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS: The Company 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.
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 non-qualified 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: 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 (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, 2000, but
companies may adopt early. The Company will adopt FAS 133 effective January 1,
2001. The impact of adopting FAS 133 as of December 31, 1999 would have been
insignificant to 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, 1999 and 1998 were as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------
1999
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Municipal obligations $3,094,469 $ 40,986 $ 172,516 $2,962,939
Corporate obligations 1,094,102 8,623 94,221 1,008,504
U.S. Government obligations 63,197 778 1,496 62,479
Mortgage- and asset-backed securities
(includes U.S. Government Agency obligations) 4,776,416 1,014 72,881 4,704,549
Short-term 220,896 -- -- 220,896
- ---------------------------------------------------------------------------------------------------------------
Total $9,249,080 $ 51,401 $ 341,114 $8,959,367
- ---------------------------------------------------------------------------------------------------------------
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
Short-term 119,528 -- -- 119,528
- ---------------------------------------------------------------------------------------------------------------
Total $8,426,574 $ 326,495 $ 11,259 $8,741,810
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share
amounts)
The amortized cost and estimated fair value of fixed income securities and
short-term investments at December 31, 1999, by contractual maturity, were as
follows:
- ----------------------------------------------------------------------------
Amortized Estimated
Cost Fair Value
- ----------------------------------------------------------------------------
Due in one year or less $ 296,784 $ 296,646
Due after one year through five years 284,950 292,852
Due after five years through ten years 402,370 402,065
Due after ten years 3,488,560 3,263,255
- ----------------------------------------------------------------------------
4,472,664 4,254,818
Mortgage- and asset-
backed securities 4,776,416 4,704,549
- ----------------------------------------------------------------------------
$9,249,080 $8,959,367
- ----------------------------------------------------------------------------
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 $5,442 and $6,191 at December 31, 1999 and 1998,
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 segment was comprised of
the following:
- ----------------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------
Fixed income securities $202,805 $181,437 $155,810
Short-term investments 7,790 8,139 6,506
- ----------------------------------------------------------------------------
Total investment income 210,595 189,576 162,316
Investment expense (1,311) (3,386) (2,607)
- ----------------------------------------------------------------------------
Net investment income $209,284 $186,190 $159,709
- ----------------------------------------------------------------------------
The Financial Guarantee segment had gross realized gains of $8,050, $14,219
and $25,641 for 1999, 1998 and 1997, respectively, and gross realized losses of
$13,725, $10,484 and $4,557 for 1999, 1998 and 1997, respectively.
Net investment income related to the investment agreement business
comprises gross investment income from its investment portfolio less interest
expense from investment agreement liabilities, and is a component of Financial
Services net revenue. The following table summarizes net investment income for
the investment agreement business:
- ----------------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------
Gross interest income $323,175 $281,904 $200,337
Gross interest expense 299,523 263,586 186,678
- ----------------------------------------------------------------------------
Net investment income $ 23,652 $ 18,318 $ 13,659
- ----------------------------------------------------------------------------
The Financial Services segment had gross realized gains of $44,634, $22,592
and $3,766 for 1999, 1998 and 1997, respectively, and gross realized losses of
$47,758, $39,688 and $4,403 for 1999, 1998 and 1997, respectively. Gross
realized gains and losses in 1999 reflect actions taken to re-balance the
investment agreement investment portfolio. This re-balancing caused the duration
of invested assets to be more naturally matched to the duration of related
liabilities, which allowed the Company to significantly reduce its derivative
hedges. Gross realized gains and losses in 1998 and 1997 include 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 and $1,309 for 1998 and 1997, respectively, and losses
were $18,638 and $3,578 for 1998 and 1997, respectively. Gross realized losses
in 1998 also include the Company's $11,548 write-off of its investment in Ambac
Connect, Inc.
As of December 31, 1999 and 1998, the Company held securities subject to
agreements to resell for $103,000 and $252,295, respectively. The Company held
these securities as collateral under agreements that had terms of less than 30
days.
As of December 31, 1999 and 1998, 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 $3,634,710
and $3,636,519, respectively, in connection with certain investment agreements
(including agreements structured as investment repurchase agreements).
The Company has 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, 1999 and 1998, the Company had
$717,000 and $750,000, respectively, 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. As of December 31, 1999, 1998 and 1997 the
interest rates on these loans ranged from 6.25% to 8.42%.
<PAGE>
41
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:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Years Ended
December 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
Written Earned Written Earned Written Earned
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Direct $ 420,669 $ 289,053 $ 333,652 $ 238,452 $ 277,814 $ 176,009
Assumed 24,573 19,161 27,359 7,367 8,349 3,614
Ceded (61,845) (43,788) (49,563) (33,135) (32,452) (25,623)
- ---------------------------------------------------------------------------------------------------------------
Net premiums $ 383,397 $ 264,426 $ 311,448 $ 212,684 $ 253,711 $ 154,000
- ---------------------------------------------------------------------------------------------------------------
</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 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, 1999 and 1998. As of December 31,
1999, prepaid reinsurance of approximately $158,597 was associated with Ambac
Assurance's three largest reinsurers. As of December 31, 1999, Ambac Assurance
held letters of credit and collateral amounting to approximately $214,896 from
its reinsurers to cover liabilities ceded under the aforementioned reinsurance
contracts.
In 1995, Ambac Assurance and MBIA Insurance Corporation ("MBIA") formed an
unincorporated joint venture, MBIA.AMBAC International. 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 guarantees are issued separately by
each of the companies. Premiums assumed from MBIA under this arrangement were
$24,503, $18,715 and $8,009 in 1999, 1998 and 1997, respectively, and premiums
ceded to MBIA under this arrangement were $27,418, $15,505 and $8,874 in 1999,
1998 and 1997, 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, 1999. 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,
1999.
Dividends declared per share amounted to $0.42, $0.38 and $0.345 in 1999,
1998 and 1997, 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, 1999,
approximately 4,573,000 shares had been repurchased under this program for an
aggregate amount of $160,300.
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
<PAGE>
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share
amounts)
in each of the next five years ending December 31, and the periods thereafter,
is as follows:
- --------------------------------------------------------------
Amount
- --------------------------------------------------------------
2000 $ 7,039
2001 6,206
2002 6,143
2003 6,117
2004 6,122
All later years 83,102
- --------------------------------------------------------------
$114,729
- --------------------------------------------------------------
Rent expense for the aforementioned leases amounted to $5,347, $5,537 and
$5,048 for the years ended December 31, 1999, 1998 and 1997, respectively. Total
rentals to be received under future sublease agreements are estimated at $3,490.
8 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. Based upon these restrictions, at December 31,
1999, the maximum amount that will be available during 2000 for payment of
dividends by Ambac Assurance is approximately $150,000. Ambac Assurance paid
cash dividends of $52,000, $48,000 and $44,000 on its common stock in 1999, 1998
and 1997, respectively.
The New York Financial Guaranty 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 $1,503,303 and $1,162,639 at December 31,
1999 and 1998, respectively. Qualified statutory capital was $2,420,455 and
$1,936,103 at December 31, 1999 and 1998, respectively. Statutory net income for
Ambac Assurance was $262,756, $271,808 and $198,615 for 1999, 1998 and 1997,
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:
- -------------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------
Current taxes $89,543 $72,608 $51,036
Deferred taxes 7,198 2,310 11,930
- -------------------------------------------------------------------------------
$96,741 $74,918 $62,966
- -------------------------------------------------------------------------------
The total effect of income taxes on income and stockholders' equity for the
years ended December 31, 1999 and 1998 was as follows:
- -------------------------------------------------------------------------------
1999 1998
- -------------------------------------------------------------------------------
Total income taxes charged to income $ 96,741 $ 74,918
------------------------
Income taxes credited to
stockholders' equity:
Unrealized (losses) gains on bonds (206,433) 12,587
Exercise of stock options (5,707) (19,198)
------------------------
Total credited to stockholders' equity (212,140) (6,611)
- -------------------------------------------------------------------------------
Total effect of income taxes $(115,399) $ 68,307
- -------------------------------------------------------------------------------
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>
- -----------------------------------------------------------------------------------------------------------------------------------
1999 % 1998 % 1997 %
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tax computed at statutory rate $ 141,630 35.0% $ 115,119 35.0% $ 100,099 35.0%
Reductions in expected tax
resulting from:
Tax-exempt interest (43,241) (10.7) (38,926) (11.8) (35,682) (12.5)
Other, net (1,648) (0.4) (1,275) (0.4) (1,451) (0.5)
- -----------------------------------------------------------------------------------------------------------------------------------
Income tax expense $ 96,741 23.9% $ 74,918 22.8% $ 62,966 22.0%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
43
The tax effects of temporary differences that give rise to significant
portions of the deferred tax liabilities and deferred tax assets at December 31,
1999 and 1998 are presented below:
- ---------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------
Deferred tax liabilities:
Contingency reserve $ 153,613 $ 119,150
Unrealized gains on bonds -- 87,930
Deferred acquisition costs 47,287 42,583
Unearned premiums 43,319 36,728
Investments 5,284 2,442
Other 2,347 1,189
- ---------------------------------------------------------------------------
Total deferred tax liabilities 251,850 290,022
- ---------------------------------------------------------------------------
Deferred tax assets:
Tax and loss bonds 120,971 88,471
Unrealized loss on bonds 118,503 --
Loss reserves 33,339 27,918
Compensation 16,444 12,009
Alternative minimum
tax carryforward 13,625 7,001
Amortization and depreciation 1,256 5,406
Other 5,089 3,435
- ---------------------------------------------------------------------------
Sub-total deferred tax assets 309,227 144,240
Valuation allowance -- --
- ---------------------------------------------------------------------------
Total deferred tax assets 309,227 144,240
- ---------------------------------------------------------------------------
Net deferred tax
assets (liabilities) $ 57,377 $(145,782)
- ---------------------------------------------------------------------------
The Company believes that no valuation allowance is necessary in connection
with the deferred tax assets.
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 highest salary during five consecutive years of
employment within the last ten 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, 1999 and 1998.
- -----------------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------------
CHANGE IN PROJECTED BENEFIT OBLIGATION:
Projected benefit obligation at
beginning of year $12,433 $ 9,374
Service cost 979 691
Interest cost 783 684
Amendments -- 116
Actuarial (gain) loss (2,702) 1,843
Benefits paid (292) (275)
- -----------------------------------------------------------------------------
Projected benefit obligation at
end of year $11,201 $12,433
- -----------------------------------------------------------------------------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at
beginning of year $10,934 $ 9,644
Actual return on plan assets 1,679 1,595
Company contributions 520 --
Benefits paid (292) (275)
Expenses paid -- (30)
- -----------------------------------------------------------------------------
Fair value of plan assets at
end of year $12,841 $10,934
- -----------------------------------------------------------------------------
Funded status $ 1,640 $(1,499)
Unrecognized net (gain) loss (2,615) 1,118
Unrecognized prior service cost (931) (1,289)
Unrecognized net transition asset (1) (4)
- -----------------------------------------------------------------------------
Pension liability included in
other liabilities $(1,907) $(1,674)
- -----------------------------------------------------------------------------
Net pension costs for 1999, 1998 and 1997 included the following components:
- -------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------
Service cost $ 979 $ 807 $ 723
Interest cost on expected
benefit obligation 783 684 601
Expected return on plan assets (893) (793) (701)
Amortization of unrecognized
transition asset (3) (3) (3)
Amortization of prior service cost (151) (165) (165)
Recognized net actuarial loss 39 15 33
- -------------------------------------------------------------------------
Net periodic pension cost $ 754 $ 545 $ 488
- -------------------------------------------------------------------------
<PAGE>
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share
amounts)
The discount rate used in the determination of the actuarial present value
for the projected benefit obligation was 7.50% and 6.50% for 1999 and 1998,
respectively. The expected long-term rate of return on assets was 9.25% for both
1999 and 1998. The rate of increase in future compensation levels used in
determining the actuarial present value of the projected benefit obligation was
5.0% for both 1999 and 1998.
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 eligible base salary,
plus a matching company contribution of 50% on contributions up to 6% of base
salary made by eligible employees to the Savings Incentive Plan. The total cost
of the Savings Incentive Plan was $2,165, $2,063 and $1,806 in 1999, 1998 and
1997, 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 for the years ended December 31, 1999, 1998
and 1997 amounted to $18,091, $16,095 and $12,038, respectively.
POSTRETIREMENT HEALTH CARE AND OTHER BENEFITS: The Company 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 $497, $316 and $262 in 1999, 1998 and
1997, respectively. The unfunded accumulated postretirement benefit obligation
was $2,897 and the related accrued postretirement liability was $2,315 as of
December 31, 1999.
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, 1999 by $415 and the 1999 benefit expense by $78. The
weighted average discount rate used to measure the accumulated postretirement
benefit obligation and 1999 expense was 7.5%.
11 GUARANTEES IN FORCE
The par amount of bonds guaranteed, net of reinsurance, was $240,307,000 and
$198,274,000 at December 31, 1999 and 1998, respectively. As of December 31,
1999 and 1998, the guarantee portfolio was diversified by type of insured bond
as shown in the following table:
- -------------------------------------------------------------------------
Net Par Amount Outstanding
- -------------------------------------------------------------------------
(Dollars in millions) 1999 1998
- -------------------------------------------------------------------------
Municipal finance:
Lease and tax-backed revenue $ 40,874 $ 36,929
General obligation 39,777 37,502
Utility revenue 28,867 27,014
Health care revenue 18,628 20,071
Transportation revenue 10,247 7,831
Investor-owned utilities 9,393 8,013
Higher education 9,172 7,720
Housing revenue 7,033 6,445
Student loans 5,474 4,528
Other 3,550 873
- -------------------------------------------------------------------------
Total municipal finance 173,015 156,926
- -------------------------------------------------------------------------
Structured finance:
Mortgage-backed and home equity 33,294 19,478
Asset-backed and conduits 16,398 12,147
Other 3,270 1,238
- -------------------------------------------------------------------------
Total structured finance 52,962 32,863
- -------------------------------------------------------------------------
International finance:
Asset-backed and conduits 6,023 3,180
Structured credit derivatives 2,110 --
Utilities 1,188 1,073
Mortgage-backed and home equity 1,172 607
Sovereign/sub-sovereign 1,097 1,027
Other 2,740 2,598
- -------------------------------------------------------------------------
Total international finance 14,330 8,485
- -------------------------------------------------------------------------
$240,307 $198,274
=========================================================================
As of December 31, 1999 and 1998, the international insured portfolio is
shown in the following table by location of risk:
- -------------------------------------------------------------------------
Net Par Amount Outstanding
- -------------------------------------------------------------------------
(Dollars in millions) 1999 1998
- -------------------------------------------------------------------------
United Kingdom $ 2,416 $ 2,289
Japan 1,485 675
France 738 692
Australia 722 779
Mexico 569 375
Internationally diversified 5,686 1,621
Other international 2,714 2,054
- -------------------------------------------------------------------------
Total international $ 14,330 $ 8,485
=========================================================================
Internationally diversified includes structured credit derivatives and
other guarantees with multiple locations of risk. International business
includes all transactions conducted through the MBIA- AMBAC International joint
venture. Joint venture transactions may include components of domestic exposure.
Direct financial guarantees in force (principal and interest) was
$430,536,000 and $367,801,000 at December 31,
<PAGE>
45
1999 and 1998, respectively. Net financial guarantees in force (after giving
effect to reinsurance) was $374,484,000 and $317,668,000 as of December 31, 1999
and 1998, respectively.
In the United States, California was the state with the highest aggregate
net par amount in force, accounting for 10.5% of the total at December 31, 1999,
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.
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 interest rate option
contracts. The notional amounts of these financial instruments were as follows:
- ----------------------------------------------------------------------
As of December 31, 1999 1998
- ----------------------------------------------------------------------
Derivative financial instruments with
off-balance sheet risk:
Interest rate futures contracts $ -- $5,836,700
Interest rate swaps 46,492 590,468
Other:
Purchased interest rate options -- 15,000
- ----------------------------------------------------------------------
Notional 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 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, 1999 and 1998, futures and option contracts with an
outstanding notional of $0 and $360,700, respectively, were designated as hedges
of fixed rate liabilities. Additionally, at December 31, 1999 and 1998, futures
and option contracts with an outstanding notional of $0 and $5,491,000,
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.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Maturing after December 31, 2000 2001 2002 2003 2004 Thereafter
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Pay fixed swaps:
Notional amount $33,570 $ -- $ -- $ -- $ -- $ --
Weighted-average fixed rate 7.51%
Receive fixed swaps:
Notional amount $12,271 $11,602 $10,913 $10,205 $9,477 $19,945
Weighted-average fixed rate 6.46% 6.46% 6.46% 6.46% 6.46% 7.09%
Range of implied floating interest rates 6.78% to 7.12% to 7.14% to 7.16% to 7.26% to
7.00% 7.12% 7.14% 7.16% 7.26%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The floating rate side of the Company's interest rate swaps is based on
several indices, ranging from three-month to one-year LIBOR. The floating rates
shown above reflect the range of the implied forward LIBOR yield curve for those
indices, as of December 31, 1999.
FAIR VALUES OF FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING:
The following fair value amounts were 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 primarily 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.
<PAGE>
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share
amounts)
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 quoted market prices.
OBLIGATIONS UNDER INVESTMENT, REPURCHASE AND PAYMENT AGREEMENTS: The fair value
of the liability for investment agreements and repurchase agreements (including
accrued interest) is estimated based upon internal valuation models. 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 where premiums are collected up front 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 guarantees 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:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
As of December 31, 1999 1998
- ---------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
(Dollars in millions) Amount Fair Value Amount Fair Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Fixed income securities $8,738 $ 8,738 $ 8,622 $ 8,622
Short-term investments 221 221 120 120
Other Investments 3 3 7 7
Cash 14 14 8 8
Securities purchased under agreements to resell 103 103 252 252
Loans 685 685 674 674
Receivable from brokers and dealers 717 717 750 750
FINANCIAL LIABILITIES:
Debentures 424 403 424 476
Obligations under investment, repurchase and payment
agreements (including accrued interest) 6,231 6,037 6,046 5,959
Payable to brokers and dealers 717 717 750 750
DERIVATIVE FINANCIAL INSTRUMENTS:
Interest rate futures contracts -- -- (4) --
Interest rate swaps (1) (2) (22) (20)
Interest rate option contracts -- -- -- --
LIABILITY FOR FINANCIAL GUARANTEES WRITTEN:
Gross (up-front) 1,431 1,002 1,294 906
Net of reinsurance (up-front) 1,213 849 1,094 766
Gross installment premiums -- 454 -- 248
Net installment premiums -- 369 -- 216
- ---------------------------------------------------------------------------------------------------------
</TABLE>
13 FINANCIAL INSTRUMENTS CLASSIFIED AS 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. 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.
The AFSLP swap portfolio is classified as held for trading purposes.
ACP enters into structured credit derivative transactions. These structured
credit derivatives require ACP to make payments upon the occurrence of certain
defined credit
<PAGE>
47
events relating to an underlying obligation (generally a fixed income security).
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. The ACP credit derivative portfolio is classified as held for
trading purposes.
The following table summarizes information about the Company's financial
instruments classified as held for trading purposes as of December 31, 1999 and
1998:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Net Estimated Fair Value Average Net Fair Value Notional
- -----------------------------------------------------------------------------------------------------
Assets Liabilities Assets Liabilities Amount
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999:
Derivative financial instruments:
Interest rate swaps $177,192 $129,773 $134,991 $ 96,526 $6,260,740
Structured credit derivatives 27,704 27,438 13,572 13,069 6,315,954
Futures contracts -- -- -- -- 751,700
Other financial instruments -- -- -- -- --
-------------------------------------------------------------
1998:
Derivative financial instruments:
Interest rate swaps $200,454 $163,043 $130,984 $103,414 $5,357,450
Structured credit derivatives -- -- -- -- --
Futures contracts -- -- -- -- 706,700
Other financial instruments -- -- 183,682 181,698 --
- -----------------------------------------------------------------------------------------------------
</TABLE>
Financial instruments classified as held for trading purposes are carried
at estimated fair value. The aggregate amount of revenue recognized from
derivative financial instruments classified as held for trading purposes was
$20,301, $705 and $7,454 for 1999, 1998 and 1997, respectively. Other financial
instruments held for trading purposes consists of fixed income securities held
in 1997 and sold during 1998. The aggregate amount of revenue recognized from
other financial instruments was $2,967 and $1,309 in 1998 and 1997,
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, 1999 1998
- ------------------------------------------------------------------
9 3/8% Debentures, due 2011 $149,480 $149,434
7 1/2% Debentures, due 2023 74,515 74,495
7.08% Debentures, due 2098 200,000 200,000
- ------------------------------------------------------------------
$423,995 $423,929
==================================================================
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.
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.
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.
The Company and Ambac Assurance have a revolving credit facility with three
major international banks for $150,000, 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 December 31, 1999 and
1998, no amounts were outstanding under this credit facility.
Ambac Assurance maintains third party capital support in the form of a
seven-year irrevocable limited recourse credit facility from a group of
highly-rated banks. This credit facility provides liquidity to Ambac Assurance
in the event claims from municipal obligations in its insured 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.
<PAGE>
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share
amounts)
During 1999, such third party capital support was increased from $555,000 to
$750,000, and its expiration reset to December 2006. As of December 31, 1999 and
1998, no amounts were outstanding under this credit facility.
ACP has a revolving credit facility with one major international bank for
$50,000, which expires in June 2000, and provides for three-year term loans. The
facility is available to ACP for general corporate purposes, including the
settlement of transactions related to credit derivative instruments. The credit
facility became effective on July 1, 1999. As of December 31, 1999, no amounts
were outstanding under this credit 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, 1999 and 1998, the interest rates on these
agreements ranged from 4.00% to 8.14%. As of December 31, 1999 and 1998, the
average yield on these agreements was 5.51% and 5.70%, respectively. Obligations
under investment agreements and investment repurchase agreements as of December
31, 1999 and 1998 were as follows:
- -----------------------------------------------------------------
As of December 31, 1999 1998
- -----------------------------------------------------------------
Settled $5,408,848 $5,209,690
Unsettled 45,918 73,142
- -----------------------------------------------------------------
$5,454,766 $5,282,832
=================================================================
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
- ------------------------------------------------------------------
2000 $2,457,817
2001 1,384,598
2002 483,254
2003 69,164
2004 40,466
All later years 973,549
- ------------------------------------------------------------------
$5,408,848
==================================================================
Obligations under payment agreements represent funds received by the
Company from certain customers. These funds serve as collateral for loans
extended by the Company in connection with certain structured transactions. In
connection with these transactions, the Company is obligated to make periodic
agreed upon payments. As of December 31, 1999 and 1998, 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
- ------------------------------------------------------------------
2000 $ (9,761)
2001 (175)
2002 7,525
2003 15,702
2004 23,566
All later years 648,631
- ------------------------------------------------------------------
$ 685,488
==================================================================
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, 1999,
approximately 5,373,000 shares were available for future grant under the Equity
Plan and the Directors Plan. A summary of option activity is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 3,389,364 $31.34 3,917,693 $22.15 4,248,642 $19.37
Granted 879,815 $54.92 969,698 $47.66 859,800 $33.59
Exercised (527,966) $25.10 (1,332,729) $15.78 (898,942) $19.05
Forfeited (80,736) $47.78 (165,298) $34.46 (291,807) $24.99
---------- ---------- ----------
Outstanding at end of year 3,660,477 $37.49 3,389,364 $31.34 3,917,693 $22.15
========== ========== ==========
Exercisable 2,126,910 1,819,872 2,392,853
==========================================================================================================================
</TABLE>
<PAGE>
49
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
-------------------------------------------------------------------------------------------------------
Range of Number Weighted Number
Exercise Outstanding at Average Remaining Weighted Average Exercisable at Weighted Average
Price December 31, 1999 Contract Life Exercise Price December 31, 1999 Exercise Price
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$10 to 25 1,332,120 4.4 $22.07 1,332,120 $22.07
$26 to 45 1,309,838 4.5 $39.72 652,028 $37.67
$46 to 65 1,018,519 5.6 $54.78 142,762 $55.18
---------- ----------
3,660,477 2,126,910
---------- ----------
</TABLE>
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, 1999,
1998 and 1997, would have been reduced to the pro-forma amounts indicated below:
- ----------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------
Net Income:
As reported $307,917 $253,994 $223,030
Pro-forma $300,410 $248,089 $218,852
Earnings per share:
As reported $ 4.40 $ 3.63 $ 3.19
Pro-forma $ 4.30 $ 3.55 $ 3.13
Earnings per diluted share:
As reported $ 4.31 $ 3.56 $ 3.13
Pro-forma $ 4.21 $ 3.48 $ 3.07
- ----------------------------------------------------------------------
The weighted-average fair value (determined as of the date of the grants)
of options granted in 1999, 1998 and 1997 was $16.87 per share, $13.09 per
share, and $9.85 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 1999, 1998 and 1997, respectively: (i) dividend yield of 0.74%, 0.85%
and 1.08%; (ii) expected volatility of 26.3%, 20.5% and 19.4%; (iii) risk-free
interest rates of 4.8%, 5.5% and 6.4%; and (iv) expected lives of approximately
5 years, 5 years and 6 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.
17 SEGMENT INFORMATION
The Company has two reportable segments, as follows: (1) Financial Guarantee,
which provides financial guarantees for municipal and structured finance
obligations; and (2) Financial 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 Services segment for the years 1998 and 1997. Total losses before
income taxes for the electronic commerce business were $6,946 and $3,557 for the
years ended December 31, 1998, and 1997, respectively. Also included for both
revenues and income before income taxes for the year ended December 31, 1998 for
the Financial 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 services subsidiaries. Intersegment revenues
include the premiums earned under those agreements. Such premiums are accounted
for as if they were premiums to third parties, that is, at current market
prices.
Information provided below for "Corporate and Other" relates to Ambac
Financial Group, Inc. corporate activities. Corporate and other revenue from
unaffiliated customers consists primarily of interest income and realized gains
or losses from investment securities.
<PAGE>
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share
amounts)
The following table is a summary of the financial information by reportable
segment for the years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Financial Financial Corporate Intersegment Total
Guarantee Services and Other Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999:
Revenues:
Unaffiliated customers $ 474,069 $ 48,545 $ 10,703 $ -- $ 533,317
Intersegment 3,033 (3,574) 52,661 (52,120) --
- --------------------------------------------------------------------------------------------------------
Total revenues $ 477,102 $ 44,971 $ 63,364 $ (52,120) $ 533,317
- --------------------------------------------------------------------------------------------------------
Income before income taxes:
Unaffiliated customers $ 414,265 $ 22,721 $ (32,328) $ -- $ 404,658
Intersegment 3,850 (3,595) 52,661 (52,916) --
- --------------------------------------------------------------------------------------------------------
Total income before income taxes $ 418,115 $ 19,126 $ 20,333 $ (52,916) $ 404,658
- --------------------------------------------------------------------------------------------------------
Identifiable assets $ 4,184,010 $ 7,104,825 $ 56,261 $ -- $11,345,096
- --------------------------------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
51
The following table summarizes gross premiums written and net premiums
earned included in the financial guarantee segment, by location of risk for the
years ended December 31, 1999, 1998 and 1997.
- -------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------
Gross premiums written:
United States $373,523 $297,565 $242,727
United Kingdom 17,587 30,337 16,144
Japan 6,106 3,970 2,349
France 2,546 1,318 2,911
Australia 739 16,166 --
Mexico 11,115 413 132
Internationally diversified 11,971 4,436 1,831
Other international 21,655 6,806 20,069
- -------------------------------------------------------------------
Total: $445,242 $361,011 $286,163
- -------------------------------------------------------------------
- -------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------
Net premiums earned:
United States $234,679 $198,904 $145,988
United Kingdom 3,054 1,754 903
Japan 5,513 1,941 1,175
France 1,132 1,745 2,048
Australia 1,373 686 114
Mexico 4,365 413 132
Internationally diversified 8,154 3,654 1,409
Other international 6,156 3,587 2,231
- -------------------------------------------------------------------
Total: $264,426 $212,684 $154,000
- -------------------------------------------------------------------
Internationally diversified includes guarantees with multiple locations of
risk. International business includes all transactions conducted through the
MBIA.AMBAC International Joint Venture. Joint venture transactions may include
components of domestic exposure.
18 QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
First Second Third Fourth Full Year
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999:
Gross premiums written $90,154 $98,708 $106,841 $149,539 $445,242
Net premiums written 85,068 82,250 94,945 121,134 383,397
Net premiums earned 60,297 63,944 68,325 71,860 264,426
Net investment income 49,484 51,296 52,946 55,558 209,284
Financial services net revenue 12,712 13,138 12,097 13,722 51,669
Losses and loss adjustment expenses 2,500 2,500 3,000 3,000 11,000
Financial guarantee underwriting and
operating expenses 11,917 11,872 11,976 13,039 48,804
Financial services expenses 6,917 6,779 6,174 5,894 25,824
Income before income taxes 95,951 91,985 105,383 111,339 404,658
Net income 73,194 70,969 79,802 83,952 307,917
Net income per share 1.05 1.02 1.14 1.20 4.40
Net income per diluted share $ 1.03 $ 1.00 $ 1.12 $ 1.18 $ 4.31
- ------------------------------------------------------------------------------------------------------------
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 services net revenue 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 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
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
STOCKHOLDER INFORMATION
<TABLE>
<S> <C> <C> <C>
CORPORATE FRANCE: ANNUAL MEETING OF TRANSFER AGENT,
HEADQUARTERS: 112, Avenue Kleber STOCKHOLDERS REGISTRAR AND DIVIDEND
AMBAC FINANCIAL 75116 Paris, France The Annual Meeting of PAYING AGENT
GROUP, INC. 33 153 704-343 Stockholders of Ambac Citibank, N.A.
One State Street Plaza Financial Group, Inc. will 111 Wall Street, 5th Floor
New York, New York 10004 SPAIN: be held on Wednesday, New York, New York 10043
212-668-0340 Serrano, 20-2degrees Dcha May 10, 2000, at 212-657-5997
fax 212-509-9190 28001 Madrid, Spain 11:30 a.m. in New York
34 9 1 431-6881 City. Detailed information INDEPENDENT AUDITORS
OTHER LOCATIONS: about the meeting is con- KPMG LLP
CADRE FINANCIAL UK: tained in the Notice of New York, New York
SERVICES, INC. Hasilwood House Annual Meeting and Proxy
905 Marconi Avenue 60 Bishopsgate Statement to be sent to STOCK LISTING
Ronkonkoma, New York London EC2N4BE, England each stockholder of record Ambac Financial Group, Inc.
11779 44 171-786-4300 as of March 20, 2000. common stock is listed
516-467-0200 The Company estimates on the New York Stock
TOKYO: that is has approximately Exchange under the ticker
MBIA-AMBAC INTERNATIONAL Shiroyama JT Mori Bldg., 34,000 stockholders. symbol ABK.
JOINT VENTURE OFFICES: 16F
NEW YORK: 4-3-1 Toranomon FORM 10-K INVESTOR RELATIONS
885 Third Avenue Minato-ku A copy of the Company's Frank J. Bivona
New York, New York 10022 Tokyo 105 6016, Japan 1999 Annual Report on Executive Vice President
212-644-1300 8135 403 4625 Form 10-K for the year and Chief Financial Officer
ended December 31,
AUSTRALIA: 1999, as filed with the Brian S. Moore
Level 29, Chifley Tower Securities and Exchange Managing Director
2 Chifley Square Commission, 212-208-3333
Sydney, Australia may be obtained without 1-800-221-1854
NSW 2000 charge by writing to: [email protected]
61 2 9375 2198 Ambac Financial
Group, Inc.,
Attn: Investor Relations
One State Street Plaza
New York, New York 10004
</TABLE>
COMMON STOCK DATA
The table below shows the high and low price per share for each quarter of 1999
and 1998.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
1999 Market Price 1998 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 $ 62 1/8 $ 52 3/4 $ 54 $0.1000 $ 58 9/16 $ 44 3/8 $ 58 7/16 $0.0900
June 30 61 11/16 50 57 1/8 0.1000 61 53 1/2 58 1/2 0.0900
September 30 59 3/8 45 13/16 47 3/8 0.1100 65 15/16 45 9/16 48 0.1000
December 31 63 44 11/16 52 3/16 0.1100 62 3/8 40 7/8 60 3/16 0.1000
==================================================================================================================
</TABLE>
<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 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 Anne G. Gill, 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, 1999, 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 23rd day of February, 2000.
/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 of Ambac
Financial Group, Inc., a Delaware corporation, hereby constitutes and appoints
each of Frank J. Bivona and Anne G. Gill, 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, 1999, 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 23rd day of February, 2000.
/s/ Michael A. Callen
---------------------
Michael A. Callen
<PAGE>
(Exhibit 24.03)
AMBAC FINANCIAL GROUP, INC.
Power of Attorney
-----------------
KNOW ALL MEN BY THESE PRESENTS that the undersigned director of Ambac
Financial Group, Inc., a Delaware corporation, hereby constitutes and appoints
each of Frank J. Bivona and Anne G. Gill, 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, 1999, 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 23rd day of February, 2000.
/s/ Renso L. Caporali
---------------------
Renso L. Caporali
<PAGE>
(Exhibit 24.04)
AMBAC FINANCIAL GROUP, INC.
Power of Attorney
-----------------
KNOW ALL MEN BY THESE PRESENTS that the undersigned director of Ambac
Financial Group, Inc., a Delaware corporation, hereby constitutes and appoints
each of Frank J. Bivona and Anne G. Gill, 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, 1999, 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 23rd day of February, 2000.
/s/ Richard Dulude
------------------
Richard Dulude
<PAGE>
(Exhibit 24.05)
AMBAC FINANCIAL GROUP, INC.
Power of Attorney
-----------------
KNOW ALL MEN BY THESE PRESENTS that the undersigned director of Ambac
Financial Group, Inc., a Delaware corporation, hereby constitutes and appoints
each of Frank J. Bivona and Anne G. Gill, 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, 1999, 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 23rd day of February, 2000.
/s/ W. Grant Gregory
--------------------
W. Grant Gregory
<PAGE>
(Exhibit 24.06)
AMBAC FINANCIAL GROUP, INC.
Power of Attorney
-----------------
KNOW ALL MEN BY THESE PRESENTS that the undersigned director of Ambac
Financial Group, Inc., a Delaware corporation, hereby constitutes and appoints
each of Frank J. Bivona and Anne G. Gill, 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, 1999, 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 23rd day of February, 2000.
/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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 8,738,471
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 3,168
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 8,962,535
<CASH> 13,588
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 135,324
<TOTAL-ASSETS> 11,345,096
<POLICY-LOSSES> 121,475
<UNEARNED-PREMIUMS> 1,431,076
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 423,995
0
0
<COMMON> 707
<OTHER-SE> 2,017,743
<TOTAL-LIABILITY-AND-EQUITY> 11,345,096
264,426
<INVESTMENT-INCOME> 209,284
<INVESTMENT-GAINS> (8,002)
<OTHER-INCOME> 6,034
<BENEFITS> 11,000
<UNDERWRITING-AMORTIZATION> 48,804
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 404,658
<INCOME-TAX> 96,741
<INCOME-CONTINUING> 307,917
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 307,917
<EPS-BASIC> 4.40
<EPS-DILUTED> 4.31
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<PAGE>
EXHIBIT 99.01
AMBAC ASSURANCE CORPORATION AND SUBSIDIARIES
(a wholly-owned subsidiary of Ambac Financial Group, Inc.)
Consolidated Financial Statements
December 31, 1999 and 1998
<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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999 in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
New York, New York
January 21, 2000
<PAGE>
AMBAC ASSURANCE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and 1998
(Dollars in Thousands Except Share Data)
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Investments:
Fixed income securities, at fair value
(amortized cost of $3,657,146 in 1999 and $3,097,289 in 1998)............. $3,515,969 $3,310,047
Short-term investments, at cost (approximates fair value)..................... 207,121 93,912
---------- ----------
Total investments......................................................... 3,723,090 3,403,959
Cash............................................................................. 6,531 4,895
Securities purchased under agreements to resell.................................. -- 5,449
Receivable for securities sold................................................... 18,011 12,132
Investment income due and accrued................................................ 61,147 54,088
Deferred acquisition costs....................................................... 135,324 120,619
Reinsurance recoverable.......................................................... 500 3,638
Prepaid reinsurance.............................................................. 217,977 199,920
Other assets..................................................................... 219,231 212,475
---------- ----------
Total assets.............................................................. $4,381,811 $4,017,175
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Unearned premiums............................................................. $1,441,679 $1,303,203
Losses and loss adjustment expenses........................................... 121,475 115,794
Ceded reinsurance balances payable............................................ 15,028 6,576
Deferred income taxes......................................................... 27,860 144,565
Current income taxes.......................................................... 33,782 19,984
Accounts payable and other liabilities........................................ 233,127 226,950
Payable for securities purchased.............................................. 93,149 33,758
---------- ----------
Total liabilities......................................................... 1,966,100 1,850,830
---------- ----------
Stockholder's equity:
Preferred stock, par value $1,000 per share; authorized
shares -- 285,000; issued and outstanding shares -- none.................. -- --
Common stock, par value $2.50 per share; authorized shares
-- 40,000,000; issued and outstanding shares -- 32,800,000
at December 31, 1999 and December 31, 1998................................ 82,000 82,000
Additional paid-in capital.................................................... 751,522 541,021
Accumulated other comprehensive (loss) income................................. (92,049) 138,651
Retained earnings............................................................. 1,674,238 1,404,673
---------- ----------
Total stockholder's equity................................................ 2,415,711 2,166,345
---------- ----------
Total liabilities and stockholder's equity................................ $4,381,811 $4,017,175
========== ==========
</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,
----------------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Gross premiums written............................................ $449,786 $366,791 $289,383
Ceded premiums written............................................ (61,845) (49,563) (32,452)
---------- ---------- ----------
Net premiums written........................................... $387,941 $317,228 $256,931
========== ========== ==========
Net premiums earned............................................... $267,356 $215,023 $155,668
Net fees earned and other income.................................. 21,907 25,399 16,661
Net investment income............................................. 209,686 186,259 160,088
Net realized (losses) gains....................................... (5,675) (12,346) 18,798
---------- ---------- ----------
Total revenues................................................. 493,274 414,335 351,215
---------- ---------- ----------
Expenses:
Losses and loss adjustment expenses............................... 11,000 6,000 2,854
Underwriting and operating expenses............................... 54,930 51,000 46,769
Interest expense.................................................. 3,055 3,039 2,293
---------- ---------- ----------
Total expenses................................................. 68,985 60,039 51,916
---------- ---------- ----------
Income before income taxes..................................... 424,289 354,296 299,299
---------- ---------- ----------
Income tax expense:
Current taxes..................................................... 95,552 71,395 55,492
Deferred taxes.................................................... 7,172 9,550 11,702
---------- ---------- ----------
Total income taxes............................................. 102,724 80,945 67,194
---------- ---------- ----------
Net income..................................................... $321,565 $273,351 $232,105
========== ========== ==========
</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,
----------------------------------------------------------------------------
1999 1998 1997
---------------------- --------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Retained Earnings:
Balance at January 1 $1,404,673 $1,179,322 $ 991,815
Net income 321,565 $ 321,565 273,351 $273,351 232,105 $232,105
--------- -------- --------
Dividends declared -
common stock (52,000) (48,000) (44,000)
Other -- -- (598)
---------- ---------- ----------
Balance at December 31 $1,674,238 $1,404,673 $1,179,322
---------- ---------- ----------
Accumulated Other
Comprehensive (Loss) Income:
Balance at January 1 $ 138,651 $ 118,119 $ 65,822
Unrealized (losses) gains on
securities, ($353,935),
$31,278, and $80,215,
pre-tax, in 1999, 1998
and 1997, respectively) (1) (230,058) 20,331 52,140
Foreign currency (loss) gain (642) 201 157
--------- -------- --------
Other comprehensive (loss) income (230,700) (230,700) 20,532 20,532 52,297 52,297
---------------------- --------------------- ----------------------
Total comprehensive income $ 90,865 $293,883 $284,402
========= ======== ========
Balance at December 31 ($ 92,049) $ 138,651 $ 118,119
---------- ---------- ----------
Common Stock:
Balance at January 1 and
December 31 $ 82,000 $ 82,000 $ 82,000
---------- ---------- ----------
Additional Paid-in Capital:
Balance at January 1 $ 541,021 $ 521,153 $ 515,684
Capital contribution 209,012 9,000 1,475
Exercise of stock options 1,489 10,868 3,994
---------- ---------- ----------
Balance at December 31 $ 751,522 $ 541,021 $ 521,153
---------- ---------- ----------
Total Stockholder's Equity at
December 31 $2,415,711 $2,166,345 $1,900,594
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
(1) Disclosure of reclassification amount: 1999 1998 1997
-------------------------------------
<S> <C> <C> <C>
Unrealized holding (losses) gains arising during period ($ 233,747) $22,758 $63,182
Less: reclassification adjustment for net (losses)
gains included in net income (3,689) 2,427 11,042
-------------------------------------
Net unrealized (losses) gains on securities ($ 230,058) $20,331 $52,140
=====================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
Ambac Assurance Corporation And Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in Thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income...................................................... $ 321,565 $ 273,351 $ 232,105
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization................................... 2,337 1,877 1,689
Amortization of bond premium and discount....................... (4,552) (1,733) (1,084)
Current income taxes............................................ 13,798 270 18,240
Deferred income taxes........................................... 7,172 11,064 11,702
Deferred acquisition costs...................................... (14,705) (14,623) (11,784)
Unearned premiums, net.......................................... 120,419 102,238 101,257
Losses and loss adjustment expenses............................. 8,819 13,030 408
Ceded reinsurance balances payable.............................. 8,452 (2,682) 1,303
Loss (gain) on sales of investments............................. 5,675 12,346 (18,798)
Other, net...................................................... 7,205 (25,241) 12,315
----------- ----------- -----------
Net cash provided by operating activities.................... 476,185 369,897 347,353
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sales of bonds.................................... 1,235,605 1,127,196 1,346,231
Proceeds from matured bonds..................................... 177,870 126,822 115,476
Purchases of bonds.............................................. (1,715,372) (1,616,863) (1,623,486)
Change in short-term investments................................ (113,209) 22,993 (25,585)
Securities purchased under agreements to resell................. 5,449 (2,965) 1,885
Purchase of affiliate, net of cash acquired..................... -- -- (120,006)
Other, net...................................................... (5,192) (1,472) (236)
----------- ----------- -----------
Net cash used in investing activities........................ (414,849) (344,289) (305,721)
----------- ----------- -----------
Cash flows from financing activities:
Dividends paid.................................................. (52,000) (48,000) (44,000)
Capital contribution............................................ -- 9,000 --
Short-term financing from affiliates............................ (7,700) 10,283 5,347
----------- ----------- -----------
Net cash used in financing activities........................ (59,700) (28,717) (38,653)
----------- ----------- -----------
Net cash flow................................................ 1,636 (3,109) 2,979
Cash at January 1................................................. 4,895 8,004 5,025
----------- ----------- -----------
Cash at December 31............................................... $ 6,531 $ 4,895 $ 8,004
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes................................................. $ 77,456 $ 64,618 $ 42,100
=========== =========== ===========
Interest expense on intercompany line of credit.............. $ 661 $ 783 $ 15
=========== =========== ===========
</TABLE>
Supplemental disclosure of non-cash financing activities:
The Company received capital contributions from its parent company in April
1999 and November 1999, in the form of fixed income securities amounting to
$101,479 and $107,533, respectively.
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
AMBAC ASSURANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands)
1 BACKGROUND
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 December 31, 1999, Ambac Assurance's net guarantees in force
(principal and interest) were $374,484,000. 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 and through its participation in an
unincorporated joint venture with MBIA Insurance Corporation ("MBIA"),
MBIA.AMBAC International (the "JV Arrangement"). 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 guarantees are issued separately by each of
the companies.
Ambac Assurance provides another form of financial guarantee, known as
credit derivatives, through its wholly owned subsidiary, Ambac Credit Products
L.L.C. ("ACP"). 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.
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.
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 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. Actual results could differ from those estimates.
<PAGE>
AMBAC ASSURANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollar Amounts in Thousands)
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 primarily of investments in fixed income securities that are
considered available-for-sale and are carried at fair value. Fair value is based
primarily 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 (Loss) 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:
Up-front premiums are earned pro-rata over the period of risk. Premiums are
allocated to each bond maturity based on par amount and are earned on a
straight-line basis over the term of each maturity. Installment premiums are
earned over each installment period, generally one year or less. 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.
2
<PAGE>
AMBAC ASSURANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts 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 (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. The case basis loss reserves
are discounted at 7% for both 1999 and 1998. All or part of case basis loss
reserves are allocated from any ACR available. The following table summarizes
the Company's loss reserves split between case basis loss reserves and ACR at
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
-------------------------------
<S> <C> <C>
Net loss and loss adjustment expense reserves:
Case basis /(*)/ $ 26,204 $ 33,916
ACR 94,771 78,240
-------------------------------
Total $120,975 $112,156
-------------------------------
</TABLE>
(*) After netting reinsurance recoverable amounting to $500 and $3,638
in 1999 and 1998, respectively.
Paid losses, net of salvage received, were $2,181, ($7,030) and $2,474 in
1999, 1998 and 1997, 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 guarantee
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 $20,843, $18,248
and $14,213 for 1999, 1998 and 1997, respectively. Deferred acquisition costs,
net of such amortization, amounted to $14,705, $14,623 and $11,784 for 1999,
1998 and 1997, 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 CLASSIFIED AS HELD FOR TRADING PURPOSES:
The Company, through its affiliate AFSLP, provides interest rate swaps to
states, municipalities and their authorities, and other entities in connection
with their financings. The Company, through its subsidiary ACP, enters into
structured credit derivative transactions with various financial institutions.
Interest rate swaps and structured credit derivatives are classified as held for
trading purposes. These contracts are recorded on trade date at fair value.
Changes in fair value are recorded as a component of net fees earned and other
income on the Consolidated Statements of Operations. The fair value of interest
rate swaps and structured credit derivatives are determined by broker quotes or
valuation models (when broker quotes are not available). Contracts are recorded
on the Consolidated Balance Sheets on a gross basis; assets and liabilities are
netted by customer only when a legal right of set-off exists. Gross asset and
gross liability balances for interest rate swaps and structured credit
derivatives are recorded as other assets or other liabilities on the
Consolidated Balance Sheets.
INCOME TAXES:
Pursuant to a tax sharing agreement, the Company is included in AFGI'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.
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.
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.
4
<PAGE>
AMBAC ASSURANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollar Amounts in Thousands)
ACCOUNTING STANDARDS:
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 (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, 2000, but companies may adopt early. The Company will
adopt FAS 133 effective January 1, 2001. The impact of adopting FAS 133 as of
December 31, 1999 would have been insignificant to 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, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
1999
Municipal obligations.............................. $3,046,162 $ 40,986 $ 163,618 $2,923,530
Corporate obligations.............................. 432,663 8,241 20,403 420,501
U.S. Government obligations........................ 61,620 778 1,481 60,917
Mortgage- and asset-backed securities (includes
U.S. Government Agency Obligations)................ 116,701 546 6,226 111,021
Short-term......................................... 207,121 -- -- 207,121
----------- ---------- ---------- -----------
$3,864,267 $ 50,551 $ 191,728 $3,723,090
=========== ========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
1998
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
Short-term......................................... 93,912 -- -- 93,912
----------- ---------- ---------- -----------
$3,191,201 $ 216,976 $ 4,218 $3,403,959
=========== ========== ========== ===========
</TABLE>
The amortized cost and estimated fair value of fixed income securities and
short-term investments at December 31, 1999, by contractual maturity, were as
follows:
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
----------- ----------
<S> <C> <C>
1999
Due in one year or less.......................................... $ 266,311 $ 266,309
Due after one year through five years............................ 254,231 262,292
Due after five years through ten years........................... 369,020 370,442
Due after ten years.............................................. 2,858,004 2,713,026
----------- ----------
3,747,566 3,612,069
Mortgage- and asset-backed securities (includes U.S.
Government Agency Obligations)................................... 116,701 111,021
----------- ----------
$3,864,267 $3,723,090
=========== ==========
</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 $5,442 and $6,191 at December 31, 1999 and 1998
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>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Fixed income securities.................................. $202,804 $181,437 $155,810
Short-term investments................................... 8,193 8,208 6,885
---------- ---------- ----------
Total investment income............................... 210,997 189,645 162,695
Investment expense....................................... (1,311) (3,386) (2,607)
---------- ---------- ----------
Net investment income................................. $209,686 $186,259 $160,088
========== ========== ==========
</TABLE>
The Company had gross realized gains of $8,050, $17,186 and $26,950 for
1999, 1998 and 1997, respectively, and gross realized losses of $13,725, $29,532
and $8,152 for 1999, 1998 and 1997, respectively. Gross realized gains and
losses in 1998 and 1997 include 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 and
$1,309 for 1998 and 1997, respectively, and losses of $19,047 and $3,593 for
1998 and 1997, respectively.
As of December 31, 1999 and 1998, the Company held securities subject to
agreements to resell for $0 and $5,449, 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,
------------------------------------------------------------------------------------
1999 1998 1997
-------------------------- -------------------------- --------------------------
Written Earned Written Earned Written Earned
----------- ------------ ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Direct................ $425,213 $291,983 $339,432 $240,791 $281,034 $177,677
Assumed............... 24,573 19,161 27,359 7,367 8,349 3,614
Ceded................. (61,845) (43,788) (49,563) (33,135) (32,452) (25,623)
----------- ------------ ----------- ------------ ----------- ------------
Net premiums.......... $387,941 $267,356 $317,228 $215,023 $256,931 $155,668
=========== ============ =========== ============ =========== ============
</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, 1999 and 1998. As of December 31, 1999, prepaid
reinsurance of approximately $158,597 was associated with the Company's three
largest
7
<PAGE>
AMBAC ASSURRANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollar Amounts in Thousands)
reinsurers. As of December 31, 1999, the Company held letters of credit and
collateral amounting to approximately $214,896 from its reinsurers to cover
liabilities ceded under the aforementioned reinsurance contracts.
Premiums assumed from MBIA under the JV Arrangement were $24,503, $18,715
and $8,009 in 1999, 1998 and 1997, respectively. Premiums ceded to MBIA were
$27,418, $15,505 and $8,874 in 1999, 1998 and 1997, 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:
<TABLE>
<CAPTION>
Amount
----------
<S> <C>
2000............................................ $ 6,355
2001............................................ 5,520
2002............................................ 5,437
2003............................................ 5,443
2004............................................ 5,448
All later years................................. 82,933
----------
$111,136
==========
</TABLE>
Rent expense for the aforementioned leases amounted to $5,298, $5,097 and
$4,210 for the years ended December 31, 1999, 1998 and 1997, respectively.
Total rentals to be received under future sublease agreements are estimated at
$978.
6 INSURANCE REGULATORY RESTRICTIONS
Ambac Assurance is subject to the 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. Based upon these restrictions, at December 31,
1999, the maximum amount that will be available during 2000 for payment of
dividends by Ambac Assurance is approximately $150,000.
Ambac Assurance paid cash dividends of $52,000, $48,000 and $44,000 on its
common stock in 1999, 1998 and 1997, respectively.
8
<PAGE>
AMBAC ASSURRANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollar Amounts in Thousands)
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 differs from stockholder's equity determined
under GAAP principally due to statutory accounting rules that treat loss
reserves, premiums earned, policy acquisition costs, deferred income taxes and
investment carrying values differently.
The following is a reconciliation of consolidated stockholder's equity
presented on a GAAP basis for the Company and its consolidated subsidiaries to
statutory capital and surplus for Ambac Assurance Corporation:
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------
1999 1998
---------- ----------
<S> <C> <C>
Ambac Assurance Corporation GAAP stockholder's equity............... $2,415,711 $2,166,345
Mandatory contingency reserve.................................. (917,152) (773,464)
GAAP loss reserves............................................. 94,771 78,240
Unearned premium reserve....................................... (267,233) (234,441)
Deferred acquisition costs..................................... (135,105) (121,665)
Income taxes................................................... 27,860 144,565
Tax and loss bonds............................................. 120,971 88,471
Unrealized gains (losses) on investments....................... 138,396 (216,663)
Statutory goodwill, net of amortization........................ 32,850 36,956
Other.......................................................... (7,766) (5,705)
---------- ----------
Statutory capital and surplus....................................... $1,503,303 $1,162,639
========== ==========
</TABLE>
Statutory net income was $262,756, $271,808 and $198,615 for 1999, 1998 and
1997, respectively.
7 INCOME TAXES
The total effect of income taxes on income and stockholder's equity for the
years ended December 31, 1999 and 1998 was as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Total income taxes charged to income................................ $ 102,724 $ 80,945
---------- ----------
Income taxes charged to stockholder's equity:
Unrealized (losses) gains on bonds................................ (123,877) 10,947
Exercise of stock options......................................... (1,489) (10,868)
---------- ----------
Total (credited) charged to stockholder's equity............... (125,366) 79
---------- ----------
Total effect of income taxes........................................ ($22,642) $ 81,024
========== ==========
</TABLE>
9
<PAGE>
AMBAC ASSURRANCE 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>
1999 % 1998 % 1997 %
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Computed expected tax at
statutory rate............ $148,501 35.0% $124,004 35.0% $104,755 35.0%
Reductions in expected
tax resulting from:
Tax-exempt interest....... (43,136) (10.2) (38,821) (10.9) (35,458) (11.8)
Other, net................ (2,641) (0.6) (4,238) (1.2) (2,103) (0.7)
------------ ------------ ------------ ------------ ------------ ------------
Income tax expense........ $102,724 24.2% $ 80,945 22.9% $ 67,194 22.5%
============ ============ ============ ============ ============ ============
</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,
1999 and 1998 are presented below:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Deferred tax liabilities:
Contingency reserve.......................................... $153,613 $119,150
Unrealized gains on bonds.................................... -- 74,465
Deferred acquisition costs................................... 47,287 42,583
Unearned premiums............................................ 43,319 36,572
Other........................................................ 5,714 1,248
------------ ------------
Total deferred tax liabilities............................. 249,933 274,018
------------ ------------
Deferred tax assets:
Tax and loss bonds........................................... 120,971 88,471
Unrealized losses on bonds................................... 49,412 --
Loss reserves................................................ 33,339 27,918
Alternative minimum tax credit carryforward.................. 9,896 1,838
Amortization and depreciation................................ 1,139 2,778
Compensation................................................. 3,818 4,066
Other........................................................ 3,498 4,382
------------ ------------
Sub-total deferred tax assets.............................. 222,073 129,453
Valuation allowance.......................................... -- --
------------ ------------
Total deferred tax assets.................................. 222,073 129,453
------------ ------------
Net deferred tax liabilities............................... $ 27,860 $144,565
============ ============
</TABLE>
The Company believes that no valuation allowance is necessary in connection
with the deferred tax assets.
10
<PAGE>
AMBAC ASSURRANCE 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. The benefits are based on years of service and the
employee's highest salary during five consecutive years of employment within the
last ten 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, 1999 and
1998:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Change in Projected Benefit Obligation:
Projected benefit obligation at beginning of year..................... $ 12,433 $ 9,374
Service cost.......................................................... 979 691
Interest cost......................................................... 783 684
Amendments............................................................ 0 116
Actuarial (gain) loss................................................. (2,702) 1,843
Benefits paid......................................................... (292) (275)
------------ ------------
Projected benefit obligation at end of year........................... $ 11,201 $ 12,433
------------ ------------
Change in Plan Assets:
Fair value of plan assets at beginning of year........................ $ 10,934 $ 9,644
Actual return on plan assets.......................................... 1,679 1,595
AFGI contributions.................................................... 520 0
Benefits paid......................................................... (292) (275)
Expenses paid......................................................... 0 (30)
------------ ------------
Fair value of plan assets at end of year.............................. $ 12,841 $ 10,934
------------ ------------
Funded status......................................................... $ 1,640 ($ 1,499)
Unrecognized net (gain) loss.......................................... (2,615) 1,118
Unrecognized prior service cost....................................... (931) (1,289)
Unrecognized net transition asset..................................... (1) (4)
------------ ------------
Pension liability included in other liabilities....................... ($ 1,907) ($ 1,674)
============ ============
</TABLE>
AFGI's net pension costs for the years ended December 31, 1999, 1998 and
1997 included the following components:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Service cost...................................... $ 979 $ 807 $ 723
Interest cost on expected benefit obligation...... 783 684 601
Expected return on plan assets.................... (893) (793) (701)
Amortization of unrecognized transition asset..... (3) (3) (3)
Amortization of prior service cost................ (151) (165) (165)
Recognized net actuarial loss..................... 39 15 33
------------ ------------ ------------
Net periodic pension cost......................... $ 754 $ 545 $ 488
============ ============ ============
</TABLE>
11
<PAGE>
AMBAC ASSURRANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollar Amounts in Thousands)
Pension expense is allocated to each of AFGI's subsidiaries based on
percentage of payroll. Pension expense recorded by the Company amounted to $718,
$526 and $431 in 1999, 1998 and 1997, respectively.
The discount rate used in the determination of the actuarial present value
for the projected benefit obligation was 7.50% and 6.50% for 1999 and 1998,
respectively. The expected long-term rate of return on assets was 9.25% for both
1999 and 1998. The rate of increase in future compensation levels used in
determining the actuarial present value of the projected benefit obligation was
5.0% for both 1999 and 1998.
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
eligible base salary, plus a matching company contribution of 50% on
contributions up to 6% of base salary made by eligible employees to the Savings
Incentive Plan. The total cost of the Savings Incentive Plan to Ambac Assurance
was $1,695, $1,299 and $1,417 in 1999, 1998 and 1997, respectively.
Annual Incentive Program:
AFGI has an annual incentive program that provides for awards to key
officers and employees based upon predetermined criteria. The Company's cost of
the program for the years ended December 31, 1999, 1998 and 1997 amounted to
$16,106, $13,877 and $10,392, 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.
The Company's postretirement benefits expense was $456, $275 and $242 in
1999, 1998 and 1997, respectively. AFGI's unfunded accumulated postretirement
benefit obligation was $2,897, and the accrued postretirement liability was
$2,315 as of December 31, 1999.
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 AFGI's accumulated postretirement benefit
obligation at December 31, 1999 by $415 and AFGI's 1999 benefit expense by $78.
The weighted average discount rate used to measure the accumulated
postretirement benefit obligation and 1999 expense was 7.50%.
9 GUARANTEES IN FORCE
The par amount of bonds guaranteed, for non-affiliates, was $273,080,000
and $227,198,000 at December 31, 1999 and 1998, respectively. The par amount of
bonds guaranteed, for non-affiliates, net of reinsurance, was $240,307,000 and
$198,274,000 at December 31, 1999 and 1998, respectively. As of December 31,
1999 and 1998, the guarantee portfolio was diversified by type of insured bond
as shown in the following table:
12
<PAGE>
AMBAC ASSURRANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Net Par Amount Outstanding
-------------------------------------
(Dollars in Millions) 1999 1998
------------ ------------
<S> <C> <C>
Municipal finance:
Lease and tax-backed revenue..................................... $ 40,874 $ 36,929
General obligation............................................... 39,777 37,502
Utility revenue.................................................. 28,867 27,014
Health care revenue.............................................. 18,628 20,071
Transportation revenue........................................... 10,247 7,831
Investor-owned utilities......................................... 9,393 8,013
Higher education................................................. 9,172 7,720
Housing revenue.................................................. 7,033 6,445
Student loans.................................................... 5,474 4,528
Other............................................................ 3,550 873
------------ ------------
Total municipal finance....................................... 173,015 156,926
------------ ------------
Structured finance:
Mortgage-backed and home equity.................................. 33,294 19,478
Asset-backed and conduits........................................ 16,398 12,147
Other............................................................ 3,270 1,238
------------ ------------
Total structured finance...................................... 52,962 32,863
------------ ------------
International finance:
Asset-backed and conduits........................................ 6,023 3,180
Structured credit derivatives.................................... 2,110 0
Utilities........................................................ 1,188 1,073
Mortgage-backed and home equity.................................. 1,172 607
Sovereign/sub-sovereign.......................................... 1,097 1,027
Other............................................................ 2,740 2,598
------------ ------------
Total international finance................................... 14,330 8,485
------------ ------------
$240,307 $198,274
============ ============
</TABLE>
As of December 31, 1999 and 1998, the international guarantee portfolio is
shown in the following table by location of risk:
<TABLE>
<CAPTION>
Net Par Amount Outstanding
-------------------------------------
(Dollars in Millions) 1999 1998
------------ ------------
<S> <C> <C>
United Kingdom........................................ $ 2,416 $2,289
Japan................................................. 1,485 675
France................................................ 738 692
Australia............................................. 722 779
Mexico................................................ 569 375
Internationally diversified........................... 5,686 1,621
Other international................................... 2,714 2,054
------------ ------------
$14,330 $8,485
============ ============
</TABLE>
Internationally diversified includes structured credit derivatives and
other guarantees with multiple locations of risk. International business
includes all transactions conducted through the JV Arrangement. Joint venture
transactions may include components of domestic exposure.
Gross financial guarantees in force (principal and interest) were
$430,536,000 and $367,801,000 at December 31, 1999 and 1998, respectively. Net
financial guarantees in force (after giving effect to reinsurance) were
$374,484,000 and $317,668,000 as of December 31, 1999 and 1998, respectively.
13
<PAGE>
AMBAC ASSURRANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollar Amounts in Thousands)
In the United States, California was the state with the highest aggregate
net par amount in force, accounting for 10.5% of the total at December 31, 1999,
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.
10 FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING
Fair value amounts were 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
primarily 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 where premiums are collected
upfront, 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 ASSURRANCE 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,
--------------------------------------------------------------------------
1999 1998
------------------------------------- -------------------------------
(Dollars in Millions) Carrying Estimated Fair Carrying Estimated Fair
Amount Value Amount Value
----------- ------------------ ---------- ----------------
<S> <C> <C> <C> <C>
Financial assets:
Fixed income securities............... $3,516 $3,516 $3,310 $3,310
Short-term investments................ 207 207 94 94
Cash.................................. 7 7 5 5
Securities purchased under agreements
to resell............................ -- -- 5 5
Liability for financial guarantees
written:
Gross (up-front).................... 1,442 1,009 1,303 912
Net (up-front)..................... 1,224 857 1,103 772
Gross installment premiums.......... -- 454 -- 248
Net installment premiums............ -- 369 -- 216
</TABLE>
11 FINANCIAL INSTRUMENTS CLASSIFIED AS 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 classified as held for trading purposes.
ACP enters into structured credit derivative transactions. These
structured credit derivatives require ACP to make payments upon the occurrence
of certain defined credit events relating to an underlying obligation (generally
a fixed income security). 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 provided by the counterparty. Such structuring mitigates ACP's risk
of loss and the price volatility of these financial instruments. The ACP credit
derivative portfolio is classified as held for trading purposes.
15
<PAGE>
AMBAC ASSURRANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollar Amounts in Thousands)
The following table summarizes information about the Company's financial
instruments held for trading purposes as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Net Estimated Fair Value Average Net Fair Value
------------------------------ -------------------------------
Notional
Assets Liabilities Assets Liabilities Amount
------------ --------------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
1999:
Derivative financial
instruments:
Interest rate swaps............ $177,369 $129,695 $136,008 $ 96,509 $6,321,400
Structured credit derivatives 27,704 27,438 13,572 13,069 6,315,954
Futures contracts.............. -- -- -- -- 751,700
Other financial instruments..... -- -- -- -- --
1998:
Derivative financial
instruments:
Interest rate swaps............ $203,021 $163,140 $134,394 $103,739 $5,857,170
Structured credit derivatives -- -- -- -- --
Futures contracts.............. -- -- -- -- 706,700
Other financial instruments..... -- -- 183,682 181,698 --
</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 $20,301, $825 and
$8,560 for 1999, 1998 and 1997, respectively. Other financial instruments held
for 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 and $1,309 in 1998 and 1997, 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 2000 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, 1999 and 1998, no
amounts were outstanding under this credit facility.
Ambac Assurance maintains third-party capital support in the form of a
seven-year irrevocable limited recourse credit facility from a group of highly-
rated banks. This credit facility provides liquidity to Ambac Assurance in the
event claims from municipal obligations in its insured 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. During 1999, such third-party capital support was increased
from $555,000 to $750,000 and its expiration reset to December 2006. As of
December 31, 1999 and 1998, no amounts were outstanding under this credit
facility.
ACP has a revolving credit facility with one major international bank for
$50,000, which expires in June 2000, and provides for three-year term loans. The
facility is available to ACP for general corporate
16
<PAGE>
AMBAC ASSURRANCE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Dollar Amounts in Thousands)
purposes, including the settlement of transactions related to credit derivative
instruments. The credit facility became effective on July 1, 1999. As of
December 31, 1999, no amounts were outstanding under this credit facility.
13 RELATED PARTY TRANSACTIONS
During 1999 and 1998, 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, 1999 and
1998, the aggregate amount of investment agreements and investment repurchase
agreements insured was $5,503,818 and $5,331,820, respectively, including
accrued interest. These guarantees are collateralized by investment securities,
accrued interest receivable, securities purchased under agreements to resell and
cash and cash equivalents, which as of December 31, 1999 and 1998, had a fair
value of $5,358,300 and $5,387,493, respectively, in the aggregate. During 1999
and 1998, Ambac Assurance recorded gross premiums written of $4,463 and $5,598,
and net premiums earned of $2,850 and $2,156, respectively, related to these
agreements.
During 1998, several interest rate swap transactions were executed between
AFSLP and its affiliates (other than Ambac Assurance), while during 1999 there
were none. As of December 31, 1999 and 1998, these contracts had an outstanding
notional amount of approximately $60,660 and $499,720, respectively. As of
December 31, 1999 and 1998, AFSLP recorded a positive fair value of $888 and
$4,571, respectively, related to these transactions.
AFSLP has a $25 million line of credit with AFGI. The line is available
through August 1, 2000. 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 $7,930 and $15,630 as of December 31, 1999 and 1998, respectively.
14 YEAR 2000
To date the Company has had no disruptions with its internal computer
systems as a result of what is commonly known as the Y2K problem. Although the
Company had been running tests on its critical systems throughout 1999, a final
live test occurred on January 1, 2000. The results of that test indicated that
the Company's internal computer systems, and the normal business activities and
operations that depend on them have not been adversely impacted by Y2K sensitive
dates.
Although the Company does not expect issuers of Ambac-guaranteed
obligations to experience significant disruptions due to Y2K, it may take a
considerable amount of time before a full assessment can be made of how each
issuer fared.
17
