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UNITED STATES
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, 2001 1-10777
Ambac Financial Group, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 13-3621676
(State of incorporation) (I.R.S. employer identification no.)
One State Street Plaza
New York, New York 10004
(Address of principal executive offices) (Zip code)
(212) 668-0340
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $0.01 per share and
Preferred Stock Purchase Rights New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 18, 2002 was $6,172,530,043 (based upon the closing price
of the Registrant's shares of the New York Stock Exchange on March 18, 2002,
which was $59.33). 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 18, 2002, 105,909,028 shares of Common Stock, par value $0.01
per share, (net of 111,509 treasury shares) were outstanding.
Documents Incorporated By Reference
Portions of the Registrant's Annual Report to Stockholders for the year
ended December 31, 2001 are incorporated by reference into Parts II and IV
hereof. The Registrant's Proxy Statement filed or to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A involving the
election of directors at the Annual Meeting of Stockholders scheduled to be held
on May 7, 2002 are incorporated by reference into Part III hereof.
TABLE OF CONTENTS
Page
----
PART I
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 .......................... 25
Item 6. Selected Financial Data ......................................... 25
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 ............................................... 26
Item 11. Executive Compensation .......................................... 26
Item 12. Security Ownership of Certain
Beneficial Owners and Management ................................ 26
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
Part I
Item 1. Business.
GENERAL
Ambac Financial Group, Inc., 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. Ambac Financial Group was incorporated on April 29, 1991. Ambac Financial
Group provides financial guarantees for public finance and structured finance
obligations through its principal operating subsidiary, Ambac Assurance
Corporation. Through its financial services subsidiaries, Ambac Financial Group
provides financial and investment products including investment agreements,
interest rate and total return swaps, funding conduits, investment advisory and
cash management services, principally to its financial guarantee clients which
include municipalities and their authorities, school districts, health care
organizations and asset-backed issuers.
Ambac Assurance, which serves the global capital markets, is primarily
engaged in guaranteeing public finance and structured finance obligations and is
the successor to the founding financial guarantee insurance company, which wrote
the first bond insurance policy in 1971. Financial guarantee insurance policies
written by Ambac Assurance in both the primary and secondary markets generally
guarantee payment when due of the principal of and interest on the guaranteed
obligation. 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, 2001, Ambac Assurance's net financial guarantee
in force (after giving effect for reinsurance) was $476.2 billion. See
"Financial Guarantee in Force" below.
Ambac Credit Products LLC, 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 in which highly rated credit risk is assumed by Ambac Credit
Products. These contracts require Ambac Credit Products to make payments upon
the occurrence of certain defined credit events relating to an underlying
obligation or portfolio of obligations (generally a fixed income obligation).
Structured credit derivatives issued by Ambac Credit Products are insured by
Ambac Assurance. See "Business Segments -- Financial Guarantee" below and
"Management's Discussion and Analysis -- Risk Management" in Ambac Financial
Group's 2001 Annual Report to Stockholders for more detail about structured
credit derivatives.
Ambac Assurance has earned triple-A ratings, the highest ratings available
from Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings
Services ("S&P"), Fitch, Inc. ("Fitch") and Rating and Investment Information,
Inc. ("R&I"). These ratings are an essential part of Ambac Assurance's ability
to provide credit enhancement. See "Rating Agencies" below.
Ambac Financial Group's investment agreement business, conducted through
its subsidiary, Ambac Capital Funding, Inc., provides investment agreements
primarily to municipalities and their authorities, structured finance
obligations and international issuers. Investment agreements issued by Ambac
Capital Funding are insured by Ambac Assurance. Investment agreements are
primarily used by issuers to invest bond proceeds until the proceeds can be used
for their intended purpose. 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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Ambac Financial Group provides interest rate and total return swaps through
its subsidiary Ambac Financial Services, L.P., primarily to states,
municipalities and their authorities, issuers of asset-backed securities and
other entities in connection with their financings. Ambac Financial Services
also enters into total return swaps with professional counterparties. Total
return swaps are only used for fixed income obligations, which meet Ambac
Assurance's credit underwriting criteria. See "Derivative Products" below.
Ambac Financial Group provides investment advisory, cash management and
fund administration services through its subsidiary, Cadre Financial Services,
Inc., and broker/dealer services through its subsidiary, Cadre Securities, Inc.,
primarily to school districts, hospitals and health care 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, to purchase its common stock in the
open market 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
Ambac Financial Group's 2001 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 Ambac Financial
Group'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 and relate to future operating or financial performance.
Any or all of our forward-looking statements here or in other publications
may turn out to be wrong and are based on current expectations and the current
economic environment. Ambac Financial Group's actual results may vary
materially, and there are no guarantees about the performance of Ambac Financial
Group's securities. 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; (6) the
policies and actions of the United States and other governments and (7) other
risks and uncertainties that have not been identified at this time. Ambac
Financial Group is not obligated to publicly correct or update any
forward-looking statement if we later become aware that it is not likely to be
achieved, except as required by law. You are advised, however, to consult any
further disclosures we make on related subjects in Ambac Financial Group's
reports to the Securities and Exchange Commission ("SEC").
2
BUSINESS SEGMENTS
The following paragraphs describe the business operations of Ambac
Financial Group, Inc. and its subsidiaries for it'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.
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, secondary market price stability, active
credit surveillance and protection from loss associated with issuer default.
Structured credit derivatives written by Ambac Credit Products provide
credit protection in respect of specific financial obligations (primarily fixed
income obligations). Ambac Credit Product's structured credit derivative
contracts relate to highly rated risks, investment grade risks, and in some
cases are partially hedged with various financial institutions or structured
with first loss protection. Such structuring mitigates Ambac Credit Product's
risk of loss and reduces the price volatility of these financial instruments.
Should a defined credit event occur, Ambac Credit Products would generally make
a payment equivalent to the difference between the par value and market value of
the underlying obligation.
Ambac Financial Group derives financial guarantee revenues from: (i)
premiums earned over the life of the obligations guaranteed; (ii) net investment
income; (iii) revenue from credit derivative transactions; (iv) net realized
gains and losses from sales of investment securities; and (v) certain
structuring and other fees. Financial guarantee revenues were $672.0 million,
$565.4 million and $474.1 million in 2001, 2000 and 1999, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 17 of Notes to Consolidated Financial Statements in Ambac
Financial Group's 2001 Annual Report to Stockholders.
Financial guarantee products are sold in three principal markets: the U.S.
public finance market, the U.S. structured finance and asset-backed market, and
the international market. Total gross par guaranteed for the years ended
December 31, 2001, 2000 and 1999 was $90.1 billion, $77.0 billion and $77.2
billion, respectively.
U. S. Public Finance Market
The U.S. public finance market includes taxable and tax-exempt bonds, notes
and other evidences of indebtedness issued by states, political subdivisions
(e.g., cities, counties, towns and villages), water, sewer, electric and other
utility districts, airports, higher educational institutions, hospitals,
transportation and housing authorities and other similar authorities and
agencies. Public finance obligations are generally supported by either the
taxing authority of the
3
issuer or the issuer's or underlying obligor's ability to collect fees or
assessments for certain projects or public services. More recently, the public
finance market has expanded to include structured, project finance and
asset-backed bond issues for infrastructure projects, sports stadiums, lease
pools and other municipal purposes. This portion of the market is growing and
has become a focus for Ambac Financial Group in recent years. The following
table sets forth the volume of new issues of long-term (longer than 12 months)
public finance bonds and the volume of new issues of insured long-term public
finance bonds over the past ten years in the United States.
U.S. Public Finance Long-Term Market
------------------------------------
Refundings Insured Bonds
New Total as Percentage Insured as Percentage
($ in Billions) Money Refundings Volume of Total Volume Volume of Total Volume
----- ---------- ------ --------------- ------ ---------------
1992 .............. $ 142.2 $ 92.5 $234.7 39.4% $ 80.8 34.4%
1993 .............. 142.1 150.1 292.2 51.4 108.0 37.0
1994 .............. 126.4 38.6 165.0 23.4 61.5 37.3
1995 .............. 126.1 33.9 160.0 21.1 68.5 42.8
1996 .............. 139.1 45.9 185.0 24.8 85.7 46.3
1997 .............. 160.5 60.1 220.6 27.2 107.5 48.7
1998 .............. 204.2 82.0 286.2 28.9 145.1 50.7
1999 .............. 189.0 38.3 227.3 16.8 105.3 46.3
2000 .............. 180.7 19.4 200.1 9.7 79.3 39.6
2001 .............. 224.6 61.7 286.3 21.6 133.2 46.5
Source: Amounts, except for 2001, are based upon estimated data reported by The
Bond Buyer's 2001 Yearbook. The 2001 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 public finance bonds over the past ten years. Changes in
volume of public finance bond issuance during this period are primarily
attributable to changes in refunding activity related to the then-current
interest rate environment, along with the issuers new money requirements.
Insured volume, as a percentage of total volume, which had grown consistently
from 1992 through 1998, declined during 1999 and 2000. The decline during 2000
is generally considered to have resulted from the combination of the relatively
high credit quality of issues that came to market during the period and the
firmness in premium pricing in the industry. During 2001, this market has shown
a resurgence, largely the result of the lower interest rate environment causing
an increase in both the refinancing and new money components of the market.
Also, the percentage of insured bonds increased, partially due to general credit
concerns.
Ambac Assurance guaranteed gross par of $35.9 billion, $21.4 billion and
$32.5 billion in 2001, 2000 and 1999, respectively, in the U.S. public finance
market.
In the U.S. public 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 insured bonds.
Proposed new public finance bond issues are submitted to Ambac Assurance by
issuers (or their investment bankers or financial advisors) to determine their
suitability for financial guarantee. Public finance 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 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
4
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 financial guarantees on public finance bonds
outstanding in the secondary market that are typically purchased by an
institution to facilitate the sale of bonds in its portfolio or inventory. The
financial guarantee 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 public finance issues.
As of December 31, 2001 and 2000, net outstanding par exposure related to
public finance bond transactions was $196.6 billion and $180.3 billion,
respectively. See "Financial Guarantees in Force - Types of Bonds" below, for a
breakout of net outstanding par exposure by bond type.
U.S. Structured Finance and Asset-backed Market
Financial guarantees of securities in the U.S. structured finance and
asset-backed market are typically issued in connection with transactions in
which the securities being issued are secured by or payable from a specific pool
of financial or tangible assets. This pool of assets has an identifiable cash
flow or market value and is generally held by a special purpose issuing entity.
Asset-backed securizations may be supported by a broad range of financial
assets including mortgage loans and home equity loans, credit card receivables,
trade receivables, auto loans, student loans and leases. Collateralized debt
obligations, a type of structured finance transaction, are typically backed by
corporate, sovereign or sub-sovereign debt. Equipment enhanced trust
certificates are secured by specific tangible assets (e.g. aircraft) and the
cash flow generated thereby, typically rental income and the liquidation value
of the assets.
Structured finance also encompasses credit enhancement for asset-backed
commercial paper conduits ("conduits"). Conduits are used by issuers to
efficiently fund assets in the short-term commercial paper market. Typically
sponsored by financial institutions, the conduits typically purchase financial
assets and asset-backed securities, and issue commercial paper to fund the
purchase of the assets. In addition to providing credit enhancement to the
conduit with respect to all assets owned by the conduit, Ambac Assurance may
also provide a financial guarantee against the default of a specific financial
asset sold into a conduit.
Structured finance and asset-backed obligations insured by Ambac Assurance
generally have the benefit of over-collateralization and/or other forms of
credit enhancement to mitigate credit risks associated with the related assets.
Unlike the public finance market in which a substantial portion of the
deals is bid competitively by the financial guarantors, the structured and
asset-backed market is essentially a negotiated one. The financial guarantor
will work directly with the investment bank or client to create an acceptable
structure. Consequently, in addition to the types of deals listed above,
structured finance will also include unique transactions and small market
niches.
5
The U.S. structured finance and asset-backed market in which Ambac
Assurance provides financial guarantees is broad and varied, comprising public
issues, private placements and asset-backed commercial paper. The increasing
array of classes of assets securitized or guaranteed, and the recent rapid
development of the market, makes estimating the size of the aggregate U.S.
structured finance and asset-backed markets difficult. Three of the most
developed sectors of this market are public asset-backed, mortgage-backed
securities and asset-backed commercial paper. According to Asset-Backed Alert,
volume in U.S. public asset-backed and mortgage-backed securities combined
totaled $471.3 billion and $341.3 billion in 2001 and 2000, respectively.
Approximately 19% and 21% of those markets were insured in 2001 and 2000,
respectively. According to the Federal Reserve, total asset-backed commercial
paper outstanding at December 31, 2001 and 2000 was approximately $745.3 billion
and $641.8 billion, respectively.
Ambac Assurance insured gross par of $33.0 billion, $30.7 billion and $33.5
billion in 2001, 2000 and 1999, respectively, in the U.S. Structured Finance and
Asset-backed market.
Premiums for structured finance and asset-backed policies are typically
based on a percentage of principal insured. Generally, the timing of the
collection of structured finance and asset-backed premiums are collected in a
single payment at policy inception date, and others being collected periodically
(e.g., monthly, quarterly or annually) from the cash flow generated by the
underlying assets.
As of December 31, 2001 and 2000, net outstanding par exposure related to
U.S. structured finance and asset-backed transactions was $72.6 billion and
$64.7 billion, respectively. See "Financial Guarantees in Force - Types of
Bonds" below, for a breakout of net outstanding par exposure by bond type.
International Finance Market
Outside of the United States, structured and asset-backed issuers,
utilities, sovereign and sub-sovereign issuers, and other issuers are
increasingly using financial guarantee products, particularly in markets
throughout Western Europe. A number of important trends in international finance
markets have contributed to this expansion. In the United Kingdom, Australia and
elsewhere, ongoing privatization efforts have shifted certain risks associated
with the development or impairment of infrastructure projects from the
government to market participants, thus prompting investors in such projects to
seek the security of financial guarantee products. In Europe, Australia, Japan
and the Emerging Markets, 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 legal and
financial regulatory requirements and accounting standards. It is anticipated
that securitization will continue to expand internationally, albeit at varying
rates in each country. Ambac Assurance insures a wide array of obligations in
the international finance markets including infrastructure finance, asset-backed
and structured finance transactions, utilities, and other obligations in
selected international finance markets.
Ambac Assurance's strategy in the international finance 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
6
future flow transactions (structured transactions secured by cash flows
generated from exports or payment remittances) and collateralized debt
obligations.
Since 1997, Ambac Assurance UK Limited, which is authorized to conduct
certain classes of general financial guarantee business in the United Kingdom,
has been Ambac Assurance'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.
During 2000, Ambac Assurance entered into an alliance agreement in Japan
with Yasuda Fire and Marine and now occupies joint offices in Japan with Yasuda
Kasai Financial Guarantee Insurance Company, Limited ("YKFG"), a Yasuda Fire and
Marine subsidiary and the first triple-A rated monoline financial guarantor in
Japan. Together, Ambac Assurance and YKFG will seek to significantly increase
the market for financial guarantees in Japan.
From 1995 to March 2000, Ambac Assurance and MBIA Insurance Corporation
("MBIA") marketed financial guarantees outside of the United States via an
unincorporated joint venture, MBIA.AMBAC International (the "Joint Venture").
The companies now market and originate financial guarantees independently.
While there is evidence that the volume of international structured finance
transactions has increased significantly in the recent past, unlike the public
finance and domestic asset-backed markets, there are few statistics that
effectively track volume in the global markets. There are several reasons for
this, including the varied nature of the deals coming to market, the early
stages of development of certain asset classes and the fact that many
international deals are privately placed.
Ambac Assurance guaranteed gross par of $21.2 billion, $24.9 billion and
$11.2 billion in 2001, 2000 and 1999, respectively, in the international finance
market. Premiums for international finance policies are based on a percentage of
either principal or principal and interest insured. The timing of the collection
of international finance 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, 2001 and 2000, net outstanding par exposure related to
international finance transactions was $48.8 billion and $31.3 billion,
respectively. See "Financial Guarantees in Force - Types of Bonds" below, for a
breakout of net outstanding par exposure by bond type.
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 with a remote risk of 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.
The underwriting process involves review of structural, legal, political
and credit issues, including compliance with current Ambac Assurance
underwriting standards. These standards are reviewed periodically by management.
Additionally, the underwriting process often entails extensive on-site due
diligence covering the issuer and other parties to an insured transaction.
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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.
Members of Ambac Assurance's underwriting staff review all requests for
guarantees. The underwriting process is designed to screen issues and begins
with a 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 Ambac
Assurance's aggregate exposure to the credit. In some cases, the complexity of
the credit or whether it is a new asset type are determining factors in the
approval/review process. For large, complex or new types of credits, 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.
Public Finance Underwriting:
---------------------------
In addition to general underwriting standards, each asset class, and bond
type within asset class, has more specific underwriting criteria. For example,
the critical risk factors for public finance credits will include the credit
quality of the issuer, type of issue, the repayment source, the type of security
pledged, the presence of restrictive covenants, and the bond's maturity. Each
bond issue is evaluated in accordance with, and the final premium rate is a
function of, the particular factors as they relate to such issue.
Underwriting criteria that have been developed for each bond type reflect
the differences in, for example, economic and social factors, debt management,
project essentiality, financial management, legal and administrative factors,
revenue sources and security features.
Structured Finance Underwriting:
-------------------------------
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 or value 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 or manager to properly service and/or
manage the underlying assets often is a factor in determining future asset
performance.
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
8
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 poor performance at the servicer level
contributes 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.
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.
International Finance Underwriting:
----------------------------------
In the international markets, Ambac Assurance seeks to guarantee
transactions of the same high credit standards it applies in its U.S. business.
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, country limits, standards and procedures.
Geographically, the markets receiving Ambac Assurance's primary
international focus have been the United Kingdom, Australia, Japan, France,
Germany and certain parts 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 pooled
corporate obligations, asset-backed securities, sovereign and sub-sovereign
obligations, special revenue and infrastructure obligations. Management believes
that risk associated with its international book of business is similar in risk
type to its domestic structured finance book of business and, in fact,
international transactions may include components of domestic exposure.
Pricing:
-------
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 security features and other
credit enhancement features. Additionally, the interest rate spread between
insured and uninsured obligations with characteristics similar to those of the
proposed bond issue is considered in the pricing process as well as the cost and
the projected return to Ambac Assurance. The premium rate for a new issue also
takes into account the benefits to be obtained by the issuer.
Surveillance and Remediation:
----------------------------
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. 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
9
appropriate classification and review periods. The separate underwriting groups
are also responsible for portfolio surveillance which entails a broader
examination of trends in specific asset classes and bond types.
Surveillance of the credit quality of underlying reference obligations in
the Ambac Financial Group's structured credit derivatives portfolio is performed
on a regular 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.
Those issues that are either in default or have developed problems that
eventually may lead to a claim or loss are tracked closely by the appropriate
surveillance team. Internal and/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. Ambac Assurance would 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.
Portfolio Risk Management Committee:
-----------------------------------
Ambac Financial Group has a Portfolio Risk Management Committee ("PRMC")
which has established various procedures and controls to monitor and manage
credit risk. The Portfolio Risk Management Committee is comprised of senior
credit professionals and senior management of Ambac Financial Group. Its purview
is enterprise-wide and its focus is on risk limits and measurement,
concentration and correlation of risk, and the attribution of economic and
regulatory capital in a portfolio context. This committee works closely with the
senior credit committees of each underwriting group to assure that credit
criteria are maintained, are appropriate and are systematically and consistently
applied.
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 par in force at December 31, 2001 was 11 years. The 11 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.
10
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, 2001, the total net par amount of guaranteed bonds
outstanding was $318.0 billion.
Types of Bonds
The table below shows the distribution by bond type of Ambac Assurance's
guaranteed portfolio as of December 31, 2001.
Guaranteed Portfolio by Bond Type
as of December 31, 2001
% of Total Net
Net Par Amount Par Amount
Bond Type Outstanding Outstanding
- ---------------------------------------------------------------------- -------------------- -----------------
($ In Millions)
U.S. Public Finance:
Lease and tax-backed revenue .................................. $ 52,102 16%
General obligation ............................................ 39,664 13
Utility revenue ............................................... 29,513 9
Health care revenue ........................................... 19,003 6
Transportation revenue ........................................ 13,000 4
Higher education .............................................. 11,854 4
Investor-owned utilities ...................................... 11,642 4
Housing revenue ............................................... 7,476 2
Student loans ................................................. 7,249 2
Other ......................................................... 5,103 2
-------------------- -----------------
Total U.S. Public Finance ................................. 196,606 62
-------------------- -----------------
U.S. Structured Finance:
Mortgage-backed and home equity ............................... 42,723 14
Asset-backed and conduits ..................................... 23,302 7
Other ......................................................... 6,612 2
-------------------- -----------------
Total Structured Finance .................................. 72,637 23
-------------------- -----------------
Total Domestic. ........................................... 269,243 85
-------------------- -----------------
International Finance:
Structured credit derivatives ................................. 26,123 8
Asset-backed and conduits ..................................... 11,721 4
Utilities ..................................................... 2,878 1
Mortgage-backed and home equity ............................... 2,602 1
Sovereign/sub-sovereign ....................................... 1,299 -
Other ......................................................... 4,177 1
-------------------- -----------------
Total International Finance ............................... 48,800 15
-------------------- -----------------
Grand Total ........................................... $ 318,043 100%
==================== =================
International Finance transactions includes components of domestic
exposure.
11
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)/
Bond Type 2001 2000 1999 1998 1997
- -------------------------------------------- -------------- ------------- -------------- -------------- -------------
U.S. Public Finance:
Lease and tax-backed revenue ......... 13% 12% 9% 15% 17%
Utilities/(2)/ ....................... 7 5 9 12 12
General obligation ................... 6 5 9 10 18
Transportation revenue ............... 4 2 4 2 2
Higher education ..................... 3 1 3 2 3
Health care revenue .................. 3 0 4 8 8
Student loans ........................ 1 2 2 1 1
Housing revenue ...................... 1 1 1 2 3
Other ................................ 1 1 1 1 1
-------------- ------------- -------------- -------------- -------------
Total U.S. Public Finance .......... 39 29 42 53 65
-------------- ------------- -------------- -------------- -------------
U.S. Structured Finance:
Mortgage-backed and home
equity ........................... 21 21 30 22 18
Asset-backed and conduits ........... 13 16 16 15 9
Other ............................... 3 5 2 2 3
-------------- ------------- -------------- -------------- -------------
Total U.S. Structured Finance ...... 37 42 48 39 30
-------------- ------------- -------------- -------------- -------------
Total Domestic ................. 76 71 90 92 95
-------------- ------------- -------------- -------------- -------------
International Finance:
Structured credit derivatives ....... 14 20 4 0 0
Asset-backed and conduits ........... 5 6 4 4 1
Utilities ........................... 2 1 0 1 1
Mortgage-backed and home
equity ........................... 2 1 1 0 1
Sovereign/sub-sovereign ............. 0 0 0 0 1
Other ............................... 1 1 1 3 1
-------------- ------------- -------------- -------------- -------------
Total International Finance ....... 24 29 10 8 5
-------------- ------------- -------------- -------------- -------------
Grand Total ........................ 100% 100% 100% 100% 100%
============== ============= ============== ============== =============
(1) Stated as a percentage of total net par amounts 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, 2001 reflects the historical emphasis on issues guaranteed with an
original par amount of less than $25 million in the public finance market.
However, U.S. structured finance and international finance transactions have an
emphasis on larger deals. The following table sets forth the distribution of
Ambac Assurance's guaranteed portfolio as of December 31, 2001, with respect to
the original size of each guaranteed issue:
12
Original Par Amount Per Issue
as of December 31, 2001
% of Total Net Par % of Total Net
Number of Number of Amount Par Amount
Original Par Amount Issues Issues Outstanding Outstanding
- ------------------------------------- ---------------- ---------------- --------------- ----------------
($ In Millions)
Less than $10 million ............... 8,569 59% $ 25,259 8%
$10-25 million ...................... 2,741 19 33,574 11
$25-50 million ...................... 1,313 9 36,172 11
Greater than $50 million ............ 1,825 13 223,038 70
---------------- ---------------- --------------- ----------------
14,448 100% $ 318,043 100%
================ ================ =============== ================
Geographic Area
Ambac Assurance is licensed to write business in the U.S. and abroad. As of
December 31, 2001, the ten largest U.S. states, as measured by net par amount
outstanding, accounted for approximately 39% 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, 2001.
Guaranteed Portfolio by Geographic Area as of December 31, 2001
Net Par % of Total Net
Amount Par Amount
Geographic Area Outstanding Outstanding
--------------------------------------------------------- ----------------- ----------------
($ In Millions)
Domestic:
California ............................................ $ 27,896 9%
New York .............................................. 18,095 5
Florida ............................................... 15,370 5
Pennsylvania .......................................... 14,949 5
Texas ................................................. 10,060 3
Illinois .............................................. 9,368 3
New Jersey ............................................ 8,694 3
Ohio .................................................. 7,131 2
Massachusetts ......................................... 6,931 2
Michigan .............................................. 6,103 2
Mortgage and asset-backed ............................. 66,025 21
Other states .......................................... 78,621 25
----------------- ----------------
Total Domestic ..................................... 269,243 85
----------------- ----------------
International:
United Kingdom ........................................ 6,531 2
Australia ............................................. 1,623 1
Japan ................................................. 1,167 1
France ................................................ 1,155 --
Germany ............................................... 948 --
Mexico ................................................ 654 --
Internationally diversified ........................... 32,621 10
Other international ................................... 4,101 1
----------------- ----------------
Total International ................................ 48,800 15
----------------- ----------------
Grand Total ........................................ $ 318,043 100%
================= ================
Mortgage and asset-backed obligations include guarantees with multiple
locations of risk within the United States. Internationally diversified includes
pooled corporate obligations which includes components of domestic exposure.
13
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, 2001, Ambac Assurance's net par amount outstanding
for its 20 largest credits, totaling $13.4 billion, was approximately 4.2% of
Ambac Assurance's total net par amount outstanding with no one credit
representing more than 1% of Ambac Assurance's total net par amount outstanding.
Ambac Assurance is also subject to certain regulatory limits and rating agency
guidelines on exposure to a single credit. See "Insurance Regulatory Matters"
and "Rating Agencies," below.
Underlying Ratings
The following table sets forth Ambac Assurance's financial guarantee
portfolio by underlying rating prior to being guaranteed by Ambac Assurance, as
of December 31, 2001:
Insured Portfolio by Underlying Rating /(1)/
as of December 31, 2001
Net Par % of Total Net
Amount Par Amount
Rating Outstanding Outstanding
--------------------------------------------------------- ----------------- ----------------
($ In millions)
AAA ................................................... $ 22,122 7%
AA .................................................... 67,059 21
A ..................................................... 146,827 46
BBB ................................................... 79,560 25
BIG /(2)/ ............................................. 2,475 *1
-------- --------
$318,043 100%
======== ========
* Denotes less than
(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
Although there have been certain monetary defaults in bond issues of
substantial amounts, the incidence of monetary default on public finance and
structured finance bonds has historically been infrequent. The relatively low
incidence of bond defaults is the result of many factors, including the high
quality of issuers, the essentiality of funding, strong cash flow and legal
structures. Ambac Assurance's loss experience has been excellent historically,
due to its adherence to strict underwriting standards within these already high
quality markets. While this underwriting process has resulted in low loss rates
historically, an increased level of defaults in the future may be caused by
presently unforeseen economic and other factors.
Ambac Assurance's policy is to provide for loss and loss adjustment expense
reserves that are adequate to cover potential unidentified losses inherent in
the portfolio, as well as losses that may arise from guaranteed obligations
which are currently or imminently in monetary default. The active credit reserve
represents an estimate of unidentified losses from our guaranteed obligations.
As of December 31, 2001, Ambac Assurance's active credit reserve was $122.3
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,
14
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 the
available active credit reserve. Ambac Assurance's net case basis reserves
totaled $27.8 million at December 31, 2001.
The most recent three-year history of Ambac Assurance's loss reserves,
and losses and loss adjustment expenses incurred and paid, is detailed in the
table below:
Reserve for Losses and Loss Adjustment Expenses
Years Ended December 31,
------------------------------------------
2001 2000 1999
------------- ------------ -------------
($ In Thousands)
Reserve for losses and loss adjustment expenses at January 1, ............... $132,445 $121,475 $115,794
Less: reinsurance recoverable ............................................... 1,091 500 3,638
------------- ------------ -------------
Net reserve for losses and loss adjustment expenses at January 1, ........... 131,354 120,975 112,156
Losses and loss adjustment expenses incurred ................................ 20,000 15,000 11,000
Losses and loss adjustment expenses paid (net of salvage received)........... (1,261) (4,621) (2,181)
------------- ------------ -------------
Net reserve for losses and loss adjustment expenses at December 31, ......... 150,093 131,354 120,975
Plus: reinsurance recoverable................................................ 2,259 1,091 500
------------- ------------ -------------
Reserve for losses and loss adjustment expenses at December 31, ............. $152,352 $132,445 $121,475
============= ============ =============
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
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 2 and Note 6 of Notes to Consolidated Financial Statements
in Ambac Financial Group's 2001 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, Financial Security Assurance Inc. and MBIA. In addition,
banks, smaller and lower rated financial guarantee insurance companies,
multiline insurers and reinsurers 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 at least 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
15
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
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 and treaty 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. In
April 2001, Ambac Assurance entered into a new surplus share treaty in order to
secure reinsurance on large domestic and international transactions.
Additionally, Ambac Assurance utilizes facultative reinsurance when needed. A
ceding commission is withheld by Ambac Assurance to defray its underwriting
expenses.
As of December 31, 2001, Ambac Assurance had retained approximately 88%
of its gross financial guarantees in force of $542.5 billion and had ceded
approximately 12% to its reinsurers. The largest reinsurer accounts for 3% of
gross financial guarantees in force. See Note 12 of Notes to Consolidated
Financial Statements in Ambac Financial Group's 2001 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 Ace Guaranty Re, American
Re, AXA Re Finance, Enhance Reinsurance Company, Yasuda Kasai Financial
Guarantee, Ram Reinsurance Limited and MBIA.
Rating Agencies
Moody's, S&P, Fitch and Ratings & Investment 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 have access to all insured
obligations and 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 particular rating agency to
maintain Ambac Assurance's triple-A ratings. A rating by Moody's, S&P, Fitch or
Ratings & Investment, 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.
16
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 and to offer insurance
services into twelve other European countries. 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") and other state insurance regulatory authorities. See Note 9 of
Notes to Consolidated Financial Statements in Ambac Financial Group's 2001
Annual Report to Stockholders.
Ambac Financial Group 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 Ambac Financial Group 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, Ambac Financial
Group believes that a holder of common stock having the right to cast 10% of the
votes which may be cast by the holders of all shares of common stock of Ambac
Financial Group would be deemed to have control of Ambac Assurance within the
meaning of the Wisconsin Insurance Laws.
Pursuant to these laws, JP Morgan Chase obtained approval from the
Wisconsin Insurance Commissioner to acquire greater than 10% of Ambac Financial
Group's outstanding stock. As of December 31, 2001 their percentage of ownership
was approximately 14.7%. In
17
their request for approval from the Wisconsin Commissioner, JP Morgan Chase
disclaimed any present intention to exercise control over Ambac Financial Group
or Ambac Assurance or to control or attempt to control the management or
operations of Ambac Financial Group 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 2001, 2000 and 1999, Ambac Assurance paid to Ambac Financial
Group, Inc. cash dividends on its common stock totaling $68.0 million, $59.8
million and $52.0 million, respectively. See Note 9 of Notes to Consolidated
Financial Statements in Ambac Financial Group's 2001 Annual Report to
Stockholders.
Statutory Contingency Reserve
Ambac Assurance is required to establish a mandatory contingency
reserve in accordance with the National Association of Insurance Commissioners
("NAIC") Accounting Practices and Procedures manual ("NAIC SAP"). Under NAIC
SAP, financial guarantors are required to establish a contingency reserve equal
to the greater of 50% of premiums written, or a stated percentage of the
principal guaranteed depending on the category of obligation insured.
Contributions are required to be made in equal quarterly installments over a
period of 20 years for municipal bonds and 15 years for all other obligations.
Contributions may be discontinued if the total reserve established for all
categories exceeds the sum of the stated percentages contained therein
multiplied by the unpaid principal balance. This reserve must be maintained for
the periods specified above, except that the guarantor may be permitted to
release reserves 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 guarantor's outstanding guaranteed obligations,
with notice to or approval by the insurance commissioner.
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
18
Assurance. 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 with respect to obligations insured by financial guaranty insurers. Such
limits are specific to the type of insured obligation (for example, municipal or
asset-backed). The limits generally compare the insured principal amount
outstanding and/or average annual debt service on the insured obligations, net
of reinsurance and collateral, for a single risk to the insurer's qualified
statutory capital, which is defined as the sum of the insurer's policyholders'
surplus and contingency reserves. As of December 31, 2001 and 2000, Ambac
Assurance and its subsidiaries were in compliance with these regulatory
requirements.
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. 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.
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
Ambac Financial Group's Financial Services segment provides financial
and investment products including investment agreements; interest rate and total
return swaps; funding conduits; investment advisory and cash management
services, principally to its financial guarantee clients which include
municipalities and their authorities, school districts, health care
organizations and asset-backed issuers.
19
Financial services revenues are primarily derived from: (i) net
investment income; (ii) net swap revenues; (iii) fund management and advisory
revenues; and (iv) net realized gains and losses on sales of securities. Total
revenues were $49.2 million, $53.6 million and $48.5 million in 2001, 2000 and
1999, respectively. See "Management's Discussion and Analysis" and Note 17 of
Notes to Consolidated Financial Statements in Ambac Financial Group's 2001
Annual Report to Stockholders.
The principal competitive factors among providers of financial service
products that Ambac Financial Group offers are: (1) pricing of contracts; (2)
investment returns; (3) the financial strength of the financial guarantee
provider; (4) the ability to provide services tailored to customers' needs; and
(5) the quality of service provided to customers. With respect to each of these
competitive factors, Ambac Financial Group believes that it is on equal footing
with its principal competitors.
Investment Agreements
The principal purpose of Ambac Capital Funding is providing investment
agreements, including repurchase agreements, primarily to municipalities
and their authorities and structured finance entities. 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. Investment agreements used in structured financings provide a
guaranteed investment return customized to meet expected cash flow
requirements. The investment agreement provides for the guaranteed return
of principal invested, as well as the payment of interest thereon at a
guaranteed rate and is rated triple-A by virtue of Ambac Assurance's
financial guarantee policy, which guarantees its payment obligations.
Ambac Capital Funding manages its balance sheet to protect against a
number of risks inherent in its business including liquidity, market
(principally interest rate), credit, operational and legal risk. See
"Management's Discussion and Analysis -- Risk Management" in Ambac Financial
Group's 2001 Annual Report to Stockholders. Ambac Capital Funding is managed
with the goal of matching the payment schedule of the invested assets, including
hedges, to the payment schedule of the investment agreement 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 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 credit quality such that the overall minimum average portfolio credit
quality is maintained at Aa/AA. Based upon management's projections, Ambac
Capital Funding maintains funds invested in cash and cash equivalents to meet
short-term liquidity needs.
The following table sets forth the net payments due under Ambac Capital
Funding's settled investment agreements in each of the next five years ending
December 31 and the period thereafter, based on expected call dates:
20
Investment Agreements Obligations
($ In Thousands) Principal Amount /(1)/
-----------------------------------------------------------------------
2002 ........................................... $ 1,620,833
2003 ........................................... 1,181,083
2004 ........................................... 450,428
2005 ........................................... 93,552
2006 ........................................... 20,373
All later years ................................ 1,419,630
---------------------
$ 4,785,899
=====================
(1) As of December 31, 2001, the interest rates on these agreements
ranged from 2.0% to 8.1%.
Ambac Capital Funding may use interest rate swap contracts in the
normal course of business for hedging purposes as part of its overall cash flow
risk management. Some of its interest rate swap agreements have been entered
into with its affiliate, Ambac Financial Services. Interest rate swap contracts
are agreements where Ambac Capital Funding 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.
Derivative Products
Ambac Financial Services provides interest rate swaps and other
derivative products primarily to states, municipalities and their authorities,
asset-backed entities and other entities in connection with their financings.
Ambac Financial Services generally hedges its transactions with clients to
eliminate sensitivity to overall interest rates. On interest rate swaps for
municipals, Ambac Financial Services 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, Ambac Financial Services may experience a mark-to-market gain or loss.
Most municipal interest rate swaps transacted by Ambac Financial Services
contain provisions that are designed to protect Ambac Financial Group against
certain forms of tax reform, thus mitigating its basis risk. The interest rate
swaps provided by Ambac Financial Services are guaranteed by Ambac Assurance
through policies that guarantee the obligations of Ambac Financial Services and
its counterparties. Total return swaps are only used for fixed income
obligations, which meet Ambac Assurance's credit underwriting criteria.
Ambac Financial Services is a limited partnership. Ambac Assurance, the
sole limited partner, owns a limited partnership interest representing 90% of
the total partnership interests of Ambac Financial Services. Ambac Financial
Services Holdings, Inc., a wholly-owned subsidiary of Ambac Financial Group, the
sole general partner, owns a general partnership interest representing 10% of
the total partnership interest in Ambac Financial Services.
Ambac Financial Services manages a variety of risks inherent in its
business, including 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.
See "Management's Discussion and Analysis - Risk Management" in Ambac Financial
Group's 2001 Annual Report to Stockholders.
Investment Advisory and Cash Management
Cadre Financial Services is registered as an investment adviser with
the SEC. As a registered adviser, Cadre Financial Services is subject to
regulation in certain aspects of its
21
business, particularly with respect to investment advisory services provided to
investment companies and clients. Cadre Financial Services provides investment
advisory and administrative services to money market funds that are primarily
offered to qualified participants, including school districts, health care
service providers and municipalities.
Cadre Securities' principal business is the distribution of money market
funds to the education, health care 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, 2001, Cadre Securities had net capital of approximately
$0.7 million, which was $0.6 million in excess of its required net capital of
$100 thousand. The net capital ratio was 1.8 to 1.
At December 31, 2001, Cadre Financial Services and Cadre Securities
provided services to approximately 2,700 clients with approximately $7.5 billion
in assets.
Fees from the money market funds for which Cadre Financial Services 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, 2001, the consolidated investments of Ambac Financial
Group had an aggregate fair value of approximately $10.3 billion and an
aggregate amortized cost of approximately $10.2 billion. These investments are
managed internally by officers of Ambac Financial Group, who are experienced
investment managers. All investments 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," Ambac
Financial Group has designated all investments as "available-for-sale" and
reports them at fair value. Unrealized gains and losses are excluded from
earnings and reported as a component of "Accumulated Other Comprehensive Income
(Loss)", in stockholders' equity, net of tax.
As of December 31, 2001, Ambac Assurance's investment portfolio had an
aggregate fair value of approximately $5.3 billion and an aggregate amortized
cost of approximately $5.1 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
22
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, 2001, the investment agreement business investment
portfolio had an aggregate fair value of approximately $5.0 billion and an
aggregate amortized cost of approximately $5.0 billion. Ambac Capital Funding's
investment policy is designed to achieve the highest after-tax return on equity,
subject to minimum average quality ratings. For further discussion, see
"Investment Agreements," above.
The following tables provide certain information concerning the
investments of Ambac Financial Group:
Investments by Rating /(1)/
as of December 31, 2001
% of Investment
Rating Portfolio
- --------------------------------------------------------------- ---------------
AAA /(2)/ ..................................................... 77%
AA ............................................................ 11
A ............................................................. 8
BBB ........................................................... 2
BIG ........................................................... *1
Not Rated ..................................................... 2
---------------
100%
===============
* Denotes less than
(1) Ratings represent S&P classifications. If unavailable, Moody's rating is
used.
(2) Includes U.S. Treasury and agency obligations, which comprised
approximately 33% of the total investment portfolio.
Summary of Investments
As of December 31
---------------------------------------------------------------------------------------------------------
2001 2000 1999
------------------------------------------ ------------------------------ ---------------------------
Weighted Weighted Weighted
Average Average Average
Carrying Yield Carrying Yield Carrying Yield
Investment Category Value /(1)/ /(2)/ Value /(1)/ /(2)/ Value /(1)/ /(2)/
- ---------------------------------------------------- ------------- ----------- ---------------- ----------- --------------
($ In Thousands)
Long-term investments:
Taxable bonds ....................... $ 6,471,468 5.50% $ 4,945,457 6.62% $ 6,001,199 6.28%
Tax-exempt bonds .................... 3,399,217 5.47 3,119,044 5.77 2,737,272 5.78
----------- ------------ -----------
Total long-term investments ...... 9,870,685 5.49 8,064,501 6.29 8,738,471 6.13
Short-term investments /(3)/: 415,002 2.25 253,519 6.30 220,896 5.56
----------- ------------ -----------
Total ............................ $10,285,687 5.35% $ 8,318,020 6.30% $ 8,959,367 6.11%
=========== ============ ===========
(1) Yields presented include assets held in the Investment Agreement Business
portfolio. Interest expense on related investment agreements was $235.4
million, $283.0 million and $299.5 million in 2001, 2000 and 1999,
respectively.
(2) Yields are stated on a pre-tax basis, based on average amortized cost.
(3) Includes taxable and tax-exempt investments.
23
Investments by Security Type
As of December 31,
-------------------------------------------------------------------------------
2001 2000 1999
-------------------------- ------------------------- -------------------------
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Investment Category Value Yield Value Yield Value Yield
/(1)/ /(2)/ /(1)/ /(2)/ /(1)/ /(2)/
- ----------------------------------------------------- ---------- ------------- ----------- ------------- -----------
($ In Thousands)
Municipal obligations /(4)/ ........... $ 3,684,798 5.56% $3,414,964 5.85% $2,962,939 5.80%
Corporate securities .................. 1,330,589 6.66 980,746 7.47 989,460 7.11
Foreign government obligations ........ 96,600 4.68 35,370 6.08 19,044 6.22
U.S. government obligations ........... 78,254 5.65 72,709 6.08 62,479 6.10
Mortgage and asset-backed securities
(includes U.S. government agency
obligations)/(3)/...................... 4,680,444 5.10 3,560,712 6.39 4,704,549 6.08
----------- ----------- ------------
Total long-term investments ....... 9,870,685 5.49 8,064,501 6.29 8,738,471 6.13
Short-term investments/(4)/............ 415,002 2.25 253,519 6.30 220,896 5.56
----------- ----------- ------------
Total ............................. $10,285,687 5.35% $8,318,020 6.30% $8,959,367 6.11%
=========== =========== ============
(1) Yields presented include assets held in the Investment Agreement Business
portfolio. Interest expense on related investment agreements was $235.4
million, $283.0 million and $299.5 million in 2001, 2000 and 1999,
respectively.
(2) Yields are stated on a pre-tax basis, based on average amortized cost.
(3) The actual maturity dates of mortgage- and asset-backed securities are
uncertain because the underlying mortgages may be paid prior to the stated
maturity of such securities. This possibility of prepayment creates the risk
that Ambac Financial Group will be unable to replace such investments with
securities of comparable yield.
(4) Includes taxable and tax-exempt investments.
Distribution of Investments by Maturity
as of December 31, 2001
Amortized Estimated
Maturity Cost Fair Value
- --------------------------------------------- ------------- --------------
($ In Thousands)
Due in one year or less /(1)/................ $ 452,835 $ 453,292
Due after one year through five years........ 548,262 564,073
Due after five years through ten years ...... 749,742 763,697
Due after ten years ......................... 3,760,787 3,824,181
----------- -----------
5,511,626 5,605,243
Mortgage and asset-backed securities /(2)/... 4,652,165 4,680,444
----------- -----------
Total ....................................... $ 10,163,791 $ 10,285,687
=========== ===========
(1) Includes securities with a fair value of $38.3 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 Ambac Financial Group will be unable to replace such investments
with securities of comparable yield.
For further discussion, see Note 2 and 3 of Notes to Consolidated
Financial Statements in Ambac Financial Group's 2001 Annual Report to
Stockholders.
Employees
As of December 31, 2001, Ambac Financial Group and its
subsidiaries had 370 employees. None of the employees are covered by collective
bargaining agreements. Ambac Financial Group considers its employee relations to
be satisfactory.
24
Item 2. Properties.
The principal executive offices of Ambac Financial Group are located at
One State Street Plaza, New York, New York 10004. The telephone number is (212)
668-0340.
Ambac Assurance, Ambac Capital Funding and Ambac Financial Services
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
Bishopsgate, London EC2N4BE, England, which consists of 7,100 square feet of
office space, under an agreement that expires in December 2006.
Cadre Financial Services and Cadre Securities maintains its principal
executive office at 905 Marconi Avenue, Ronkonkoma, New York 11779. Cadre
Financial Services 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 Ambac
Financial Group threatened, to which Ambac Financial Group 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 2001.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Information relating to the principal market on which Ambac Financial
Group'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 the inside back cover of Ambac Financial Group's
2001 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 18, 2002, there were 79
stockholders of record of Ambac Financial Group's Common Stock, which is listed
on the New York Stock Exchange.
Item 6. Selected Financial Data.
Selected financial data for Ambac Financial Group and its subsidiaries
for each of the last five fiscal years is set forth under the captions "Five
Year Performance" and "Financial Highlights" on page 6 and page 7, respectively,
of Ambac Financial Group's 2001 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 53 of such Annual Report.
25
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 21 through 31 of
Ambac Financial Group's 2001 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 53 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 Ambac Financial Group's
2001 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 53 of such Annual
Report.
Item 8. Financial Statements and Supplementary Data.
The 2001 Consolidated Financial Statements, together with the Notes
thereto and the Independent Auditors' Report thereon, are set forth on pages 32
through 53 of Ambac Financial Group's 2001 Annual Report to Stockholders. Such
information is incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Part III
Item 10. Directors and Executive Officers of the Registrant.
This item is omitted because a definitive proxy statement which
involves the election of directors will be filed with the Securities and
Exchange Commission not later than 120 days after the close of the fiscal year
pursuant to Regulation 14A.
Item 11. Executive Compensation.
This item is omitted because a definitive proxy statement which
involves the election of directors will be filed with the Securities and
Exchange Commission not later than 120 days after the close of the fiscal year
pursuant to Regulation 14A.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
This item is omitted because a definitive proxy statement which
involves the election of directors will be filed with the Securities and
Exchange Commission not later than 120 days after the close of the fiscal year
pursuant to Regulation 14A.
26
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
2001 Annual Report to Stockholders are incorporated herein by
reference under Part II, Item 8:
Page Number
In Annual Report
---------------------
Independent Auditors' Report.......................................... 32
Consolidated Balance Sheets as of December 31,
2001 and 2000......................................................... 33
Consolidated Statements of Operations for each of
the years ended December 31, 2001, 2000 and 1999...................... 34
Consolidated Statements of Stockholders' Equity for each of
the years ended December 31, 2001, 2000 and 1999...................... 35
Consolidated Statements of Cash Flows for each of
the years ended December 31, 2001, 2000 and 1999...................... 36
Notes to Consolidated Financial Statements............................ 37-53
2. Financial Statement Schedules
-----------------------------
The financial statement schedules filed herein, which are the
only schedules required to be filed, are as follows:
Independent Auditors' Report (Page S-1)
Schedule I -- Summary of Investments Other Than Investments (Page S-2)
in Related Parties
Schedule II -- Condensed Financial Information of Registrant (Pages S-3
(Parent Company Only) to S-7)
Schedule IV -- Reinsurance (Page S-8)
27
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.)
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.)
4.08 Form of 7.00% Debenture due October 17, 2051. (Filed
as Exhibit 1 to the Company's Registration Statement
on Form 8-A dated October 26, 2001 and incorporated
herein by reference.)
28
4.09 Indenture dated as of August 24, 2001 between Ambac
Financial Group and the Chase Manhattan Bank as
trustee. (Filed as Exhibit 4.1 to the Company's
Registration Statement on Form S-3 (Reg. No.
333-57206) 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 December 12, 2000.
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. (as amended through December
12, 2000.)
10.06* Ambac Financial Group, Inc. 1997 Executive Incentive
Plan, amended as of January 1, 2000. (Filed as Exhibit
10.23 to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 2000 and incorporated
herein by reference.)
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.)
_______________________________
* 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
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.)
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 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.)
10.19 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.)
_______________________________
* Management contract or compensatory plan, contract or arrangment required to
be filed as an exhibit pursuant to Item 14(c) of Form 10-k.
---------
30
10.20 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.)
10.21 Conformed copy of U.S. $150,000,000 Credit Agreement,
dated as of August 3, 1998 (the "BNS Credit
Agreement") among the Company and Ambac Assurance
Corporation as the Borrowers, Certain Commercial
Lending Institutions as the Lenders, Citibank, N.A.,
as the Documentation Agent, First National Bank of
Chicago, as the Co-Agent, and The Bank of Nova Scotia,
acting through its New York Agency, as the Arranger
and the Administrative Agent. (Filed as Exhibit 10.22
to the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 1998 and incorporated herein by
reference.)
10.22 First Amendment to the BNS Agreement dated August 3,
1999 (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 Third Amendment to the BNS Agreement dated as of
August 3, 2001 among Ambac Financial Group an Ambac
Assurance as the Borrowers, Citibank, N.A. as the
Document Agent and as Lender, The Bank of New York and
Caja Madrid, each as co-agent and as Lender, and The
Bank of Nova Scotia, as Administrative Agent for the
Lenders and, as Lender. (Filed as Exhibit 10.27 to
Ambac Financial Group's Quarterly Report on Form 10-Q
for the period ended June 30, 2001 and incorporated
herein by reference.
10.24 $800,000,000 Amended and Restated Credit Agreement,
dated June 30, 2001 between Ambac Assurance
Corporation, various banks, Bank of America, N.A. and
Deutsche Bank AG (New York Branch), as Co-Syndication
Agents and the Bank of New York as Administrative
Agent (the "Soft Capital Agreement".)
10.25 Notice of termination of $400,000,000 of Unutilized
Commitments and Unutilized Contingent Commitments
effective December 21, 2001 under the Soft Capital
Agreement.
10.26 Second Extension of U.S. $50,000,000 Revolving Credit
Agreement, dated June 28, 2001 among Ambac Credit
Products, LLC, the banks, financial institutions and
other institutional lenders (the "Lenders") and The
Bank of New York, as Agent for the Lenders. (Filed as
Exhibit 10.26 to Ambac Financial Group's Quarterly
Report on Form 10-Q for the period ended June 30, 2001
and incorporated herein by reference.)
10.27 Put Option Agreement between Ambac Assurance
Corporation and Dutch Harbor Finance Master Trust, on
Behalf of its Series Dutch Harbor Finance Sub-Trust I,
dated as of December 3, 2001.
10.28 Put Option Agreement between Ambac Assurance
Corporation and Dutch Harbor Finance Master Trust, on
Behalf of its Series Dutch Harbor Finance Sub-Trust
II, dated as of December 3, 2001.
31
10.29 Put Option Agreement between Ambac Assurance
Corporation and Dutch Harbor Finance Master Trust, on
Behalf of its Series Dutch Harbor Finance Sub-Trust
III, dated as of December 3, 2001.
10.30 Put Option Agreement between Ambac Assurance
Corporation and Dutch Harbor Finance Master Trust, on
Behalf of its Series Dutch Harbor Finance Sub-Trust
IV, dated as of December 3, 2001.
12.01 Statement re computation of ratios.
13.01 Annual Report to Stockholders for the fiscal year
ended December 31, 2001. (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 Jill M. Considine.
24.05 Power of Attorney from Richard Dulude.
24.06 Power of Attorney from C. Robert J. Genader.
24.07 Power of Attorney from W. Grant Gregory.
99.01 Ambac Assurance Corporation and Subsidiaries
Consolidated Financial Statements (with independent
auditors' report thereon) as of December 31, 2001 and
2000.
(b) Reports on Form 8-K:
On October 22, 2001, Ambac Financial Group Inc. filed a Current Report
on Form 8-K with its October 17, 2001 press release containing unaudited
--------
financial information and accompanying discussion for the three and nine months
ended September 30, 2001. On December 4, 2001, Ambac Financial Group, Inc. filed
a Current Report on Form 8-K with its December 3, 2001 press release announcing
--------
Ambac Assurance will replace a portion of its bank line capital support with an
innovative capital markets structure. On January 25, 2002, Ambac Financial
Group, Inc. filed a Current Report on Form 8-K with its January 23, 2002 press
--------
release containing unaudited financial information and accompanying discussion
for the three months ended December 31, 2001 and the year ended December 31,
2001.
32
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 26, 2002 By: /s/ Frank J. Bivona
--------------------------
Name: Frank J. Bivona
Title: Vice Chairman 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.
Signature Title Date
- --------- ----- -----
Phillip B. Lassiter* Chairman March 26, 2002
- --------------------------------------------
Phillip B. Lassiter and Chief Executive Officer
and Director (Principal Executive
Officer)
/s/ Frank J. Bivona Vice Chairman, and March 26, 2002
- --------------------------------------------
Frank J. Bivona Chief Financial Officer (Principal
Financial and Accounting Officer)
Michael A. Callen* Director March 26, 2002
- --------------------------------------------
Michael A. Callen
Renso L. Caporali* Director March 26, 2002
- --------------------------------------------
Renso L. Caporali
Jill M. Considine* Director March 26, 2002
- --------------------------------------------
Jill M. Considine
Richard Dulude* Director March 26, 2002
- --------------------------------------------
Richard Dulude
Robert J. Genader* Director March 26, 2002
- --------------------------------------------
Robert J. Genader
W. Grant Gregory* Director March 26, 2002
- --------------------------------------------
W. Grant Gregory
* 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
INDEPENDENT AUDITORS' REPORT ON SCHEDULES AND CONSENT
The Board of Directors
Ambac Financial Group, Inc.:
The audits referred to in our report dated January 23, 2002, included the
related financial statement schedules as of December 31, 2001 and 2000 and for
each of the years in the three-year period ended December 31, 2001, included in
this Form 10-K. These financial statement schedules are the responsibility of
Ambac Financial Group Inc.'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 (Nos. 333-43695 and 333-57206) 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
KPMG LLP
New York, New York
March 26, 2002
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
SCHEDULE I - SUMMARY OF INVESTMENTS
Other Than Investments in Related Parties
December 31, 2001
(Dollar Amounts in Thousands)
Amount at
Amortized Estimated which shown in
Type of Investment Cost Fair Value the balance
sheet
- ------------------------------------------------------------- ---------------- -------------- --------------
U.S. government obligations ................................ $ 75,703 $ 78,254 $ 78,254
Municipal obligations ...................................... 3,580,822 3,684,798 3,684,798
Mortgage- and asset-backed securities (includes U.S.
government agency obligations) ............................. 4,652,165 4,680,444 4,680,444
Corporate obligations ...................................... 1,342,990 1,330,589 1,330,589
Foreign government obligations ............................. 97,109 96,600 96,600
Short-term ................................................. 415,002 415,002 415,002
---------------- -------------- --------------
Total ............................................. $ 10,163,791 $ 10,285,687 $ 10,285,687
================ ============== ==============
S-2
AMBAC FINANCIAL GROUP, INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (PARENT COMPANY ONLY)
Condensed Balance Sheets
December 31, 2001 and 2000
(Dollar Amounts in Thousands Except Share Data)
2001 2000
--------------- --------------
ASSETS
Assets:
Cash ................................................................ $ 2,700 $ 288
Investments in subsidiaries ......................................... 3,560,598 2,985,901
Fixed income securities, at fair value
(amortized cost of $31,887 in 2001 and $7,245 in 2000) ............ 30,830 7,038
Short-term investments, at cost (approximates fair value) ........... 19,160 34,483
Other investments ................................................... 769 4,980
Current income taxes receivable ..................................... 27,813 3,412
Deferred income taxes receivable .................................... 13,843 17,923
Other assets ........................................................ 18,284 9,609
--------------- --------------
Total assets .................................................... $ 3,673,997 $ 3,063,634
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Debentures .......................................................... $ 619,315 $ 424,061
Note payable to subsidiary .......................................... 8,942 --
Accrued interest payable ............................................ 6,155 10,348
Other liabilities ................................................... 55,897 33,111
--------------- --------------
Total liabilities ............................................... 690,309 467,520
--------------- --------------
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, 2001 and 2000; issued shares -
106,020,537 at December 31, 2001 and 2000 .......................... 1,060 1,060
Additional paid-in capital ........................................... 538,135 533,558
Accumulated other comprehensive income ............................... 62,476 45,154
Retained earnings .................................................... 2,403,473 2,035,209
Common Stock held in treasury at cost, 436,488 shares at December 31,
2001 and 469,932 at December 31, 2000 ............................... (21,456) (18,867)
--------------- --------------
Total stockholders' equity ...................................... 2,983,688 2,596,114
--------------- --------------
Total liabilities and stockholders' equity ...................... $ 3,673,997 $ 3,063,634
=============== ==============
S-3
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)
2001 2000 1999
---------------- ----------------- -----------------
Revenues:
Dividend income ....................................... $ 69,000 $ 63,800 $ 52,000
Interest and other income ............................. 4,328 2,359 10,567
Net realized (losses) gains ........................... (564) 8 797
---------------- ----------------- -----------------
Total revenues ....................................... 72,764 66,167 63,364
---------------- ----------------- -----------------
Expenses:
Interest expense ...................................... 35,965 33,450 33,470
Operating expenses .................................... 5,947 6,669 6,506
---------------- ----------------- -----------------
Total expenses ....................................... 41,912 40,119 39,976
---------------- ----------------- -----------------
Income before income taxes and equity in
undistributed net income of subsidiaries .............. 30,852 26,048 23,388
Federal income tax benefit ................................. (13,341) (18,088) (10,260)
---------------- ----------------- -----------------
Income before equity in undistributed net income of
subsidiaries ........................................... 44,193 44,136 33,648
Equity in undistributed net income of subsidiaries ......... 388,713 322,036 274,269
---------------- ----------------- -----------------
Net income ................................................. $ 432,906 $ 366,172 $ 307,917
================ ================= =================
S-4
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)
2001 2000 1999
------------------------- ------------------------ ------------------------
Retained Earnings:
Balance at January 1 $ 2,035,209 $ 1,713,446 $ 1,449,832
Net income 432,906 $ 432,906 366,172 $ 366,172 307,917 $ 307,917
----------- ---------- ----------
Dividends declared - common stock (35,937) (32,213) (29,366)
Exercise of stock options (28,705) (12,196) (14,937)
------------ ------------ ------------
Balance at December 31 $ 2,403,473 $ 2,035,209 $ 1,713,446
------------ ------------ ------------
Accumulated Other Comprehensive Income
(Loss):
Balance at January 1 $ 45,154 $ (187,540) $ 159,313
Unrealized gains (losses) on securities,
$39,542, $373,291, and $(552,645), pre-tax,
in 2001, 2000 and 1999, respectively)/(1)/ 23,643 234,178 (346,211)
Cumulative effect of accounting change (880) -- --
Loss on derivative hedges (4,371) -- --
Foreign currency gain (1,070) (1,484) (642)
----------- ---------- ----------
Other comprehensive income (loss) 17,322 17,322 232,694 232,694 (346,853) (346,853)
------------------------- ------------------------ ------------------------
Total comprehensive income (loss) $ 450,228 $ 598,866 $ (38,936)
=========== ========== ==========
Balance at December 31 $ 62,476 $ 45,154 $ (187,540)
------------ ------------ ------------
Preferred Stock:
Balance at January 1 and December 31 $ -- $ -- $ --
------------ ------------ ------------
Common Stock:
Balance at January 1 $ 1,060 $ 707 $ 707
Stock split effected as dividend -- 353 --
------------ ------------ ------------
Balance at December 31 $ 1,060 $ 1,060 $ 707
------------ ------------ ------------
Additional Paid-in Capital:
Balance at January 1 $ 533,558 $ 525,012 $ 519,305
Exercise of stock options 13,045 8,899 5,707
Capital issuance costs (8,468) -- --
Stock split effected as dividend -- (353) --
------------ ------------ ------------
Balance at December 31 $ 538,135 $ 533,558 $ 525,012
------------ ------------ ------------
Common Stock Held in Treasury at Cost:
Balance at January 1 $ (18,867) $ (33,175) $ (33,067)
Cost of shares acquired (40,876) (23,618) (17,626)
Shares issued under equity plans 38,287 37,926 17,518
------------ ------------ ------------
Balance at December 31 $ (21,456) $ (18,867) $ (33,175)
------------ ------------ ------------
Total Stockholders' Equity at December 31 $ 2,983,688 $ 2,596,114 $ 2,018,450
============ ============ ============
(1) Disclosure of reclassification amount: 2001 2000 1999
----------------------------------
Unrealized holding gains (losses) arising during period $25,817 $230,985 $(351,412)
Less: reclassification adjustment for net (losses) gains included 2,174 (3,193) (5,201)
in net income ----------------------------------
Net unrealized gains (losses) on securities $23,643 $234,178 $(346,211)
==================================
S-5
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)
2001 2000 1999
---------------- ----------------- -----------------
Cash flows from operating activities:
Net income $ 432,906 $ 366,172 $ 307,917
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in undistributed net income of
Subsidiaries (388,713) (322,036) (274,269)
Net realized losses (gains) 564 (8) (797)
(Increase) decrease in current income
taxes receivable (24,401) (1,499) (2,942)
Decrease (increase) in other assets (8,675) 8,041 5,936
Other, net 6,479 (6,853) (5,188)
---------------- ----------------- -----------------
Net cash provided by operating activities 18,160 43,817 30,657
---------------- ----------------- -----------------
Cash flows from investing activities:
Proceeds from sales of bonds 48,205 -- 16,627
Proceeds from maturities of bonds 3,584 542 --
Purchases of bonds (248,251) (1,615) (22,625)
Change in short-term investments 15,323 (22,160) 11,821
Other, net 8,795 (1,894) (1,544)
---------------- ----------------- -----------------
Net cash (used in) provided by investing
activities (172,344) (25,127) 4,279
---------------- ----------------- -----------------
Cash flows from financing activities:
Dividends paid (35,937) (32,213) (29,366)
Proceeds from issuance of debentures 193,700 -- --
Payment for buyback of debentures (7,500) -- --
Proceeds from intercompany note 8,942 -- --
Purchases of treasury stock (40,876) (23,618) (17,626)
Proceeds from sale of treasury stock 38,287 37,926 17,518
Contribution to subsidiaries (20) (500) (5,575)
---------------- ----------------- -----------------
Net cash provided by (used in) financing
activities 156,596 (18,405) (35,049)
---------------- ----------------- -----------------
Net cash flow 2,412 285 (113)
Cash at January 1 288 3 116
---------------- ----------------- -----------------
Cash at December 31 $ 2,700 $ 288 $ 3
================ ================= =================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes $ 45,000 $ 75,000 $ 37,000
================ ================= =================
Interest expense on debt $ 36,704 $ 33,848 $ 33,848
================ ================= =================
Supplemental disclosure of non-cash financing activities:
Ambac Financial Group, Inc. contributed fixed income securities to Ambac
Assurance Corporation amounting to $176,193 in November 2001 and $101,479 and
$107,533 in April 1999 and November 1999, respectively.
S-6
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, 2001, 2000 and 1999, should be read in conjunction with the
consolidated financial statements of Ambac Financial Group, Inc. and
Subsidiaries and the notes thereto. Investments in subsidiaries are accounted
for using the equity method of accounting.
S-7
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
SCHEDULE IV - REINSURANCE
(Dollar Amounts in Thousands)
Assumed Percentage of
Ceded to from Amount
Gross Other Other Net Amount Assumed to
Insurance Premiums Written Amount Companies Companies Net
- ---------------------------------- --------------- --------------- --------------- --------------- ---------------
Year ended December 31, 1999 ..... $ 420,669 $ 61,845 $ 24,573 $ 383,397 6.41 %
Year ended December 31, 2000 ..... $ 440,111 $ 80,789 $ 42,971 $ 402,293 10.68 %
Year ended December 31, 2001 ..... $ 632,413 $ 95,534 $ 50,883 $ 587,762 8.66 %
S-8
INDEX TO EXHIBITS
Exhibit Number Description
- -------------- -----------
10.03 Ambac Financial Group, Inc. 1997 Equity Plan, amended as of
December 12, 2000.
10.05 Ambac Financial Group, Inc. 1997 Non-Employee Directors
Equity Plan. (as amended through December 12, 2000.)
10.24 $800,000,000 Amended and Restated Credit Agreement, dated
June 30, 2001 between Ambac Assurance Corporation, various
banks, Bank of America, N.A. and Deutsche Bank AG (New York
Branch), as Co-Syndication Agents and the Bank of New York
as Administrative Agent (the "Soft Capital Agreement".)
10.25 Notice of termination of $400,000,000 of Unutilized
Commitments and Unutilized Contingent Commitments effective
December 21, 2001 under the Soft Capital Agreement.
10.27 Put Option Agreement between Ambac Assurance Corporation and
Dutch Harbor Finance Master Trust, on Behalf of its Series
Dutch Harbor Finance Sub-Trust I, dated as of December 3,
2001.
10.28 Put Option Agreement between Ambac Assurance Corporation and
Dutch Harbor Finance Master Trust, on Behalf of its Series
Dutch Harbor Finance Sub-Trust II, dated as of December 3,
2001.
10.29 Put Option Agreement between Ambac Assurance Corporation and
Dutch Harbor Finance Master Trust, on Behalf of its Series
Dutch Harbor Finance Sub-Trust III, dated as of December 3,
2001.
10.30 Put Option Agreement between Ambac Assurance Corporation and
Dutch Harbor Finance Master Trust, on Behalf of its Series
Dutch Harbor Finance Sub-Trust IV, dated as of December 3,
2001.
12.01 Statement re computation of ratios.
13.01 Annual Report to Stockholders for the fiscal year ended
December 31, 2001. (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 Jill M. Considine.
24.05 Power of Attorney from Richard Dulude.
24.06 Power of Attorney from Robert J. Genader.
24.07 Power of Attorney from W. Grant Gregory.
99.01 Ambac Assurance Corporation and Subsidiaries Consolidated
Financial Statements (with independent auditors' report
thereon) as of December 31, 2001 and 2000.