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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended Commission File Number
December 31, 1998 1-10777
Ambac Financial Group, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 13-3621676
(State of incorporation) (I.R.S. employer identification no.)
One State Street Plaza
New York, New York 10004
(Address of principal executive offices) (Zip code)
(212) 668-0340
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $0.01 per share and
Preferred Stock Purchase Rights New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 15, 1999 was $3,871,191,894 (based upon the closing price
of the Registrant's shares of the New York Stock Exchange on March 15, 1999,
which was $55.563). For purposes of this information, the outstanding shares of
Common Stock which were owned by all directors and executive officers of the
Registrant were deemed to be shares of Common Stock held by affiliates.
As of March 15, 1999, 69,976,787 shares of Common Stock, par value $0.01 per
share, (net of 703,597 treasury shares) were outstanding.
Documents Incorporated By Reference
Portions of the Registrant's Annual Report to Stockholders for the year
ended December 31, 1998 are incorporated by reference into Parts II and IV
hereof. Portions of the Registrant's Proxy Statement dated March 30, 1999 in
connection with the Annual Meeting of Stockholders to be held on May 12, 1999
are incorporated by reference into Part III hereof.
TABLE OF CONTENTS
Page
----------
PART I
Item 1. Business................................................................ 1
Item 2. Properties.............................................................. 27
Item 3. Legal Proceedings....................................................... 27
Item 4. Submission of Matters to a
Vote of Security Holders................................................ 27
PART II
Item 5. Market for Registrant's Common
Equity and Related Stockholder Matters.................................. 27
Item 6. Selected Financial Data................................................. 28
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................... 28
Item 7A. Quantitative and Qualitative Disclosures 28
About Market Risk.......................................................
Item 8. Financial Statements and Supplementary Data............................. 28
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure..................................... 28
PART III
Item 10. Directors and Executive Officers
of the Registrant....................................................... 28
Item 11. Executive Compensation.................................................. 29
Item 12. Security Ownership of Certain
Beneficial Owners and Management........................................ 29
Item 13. Certain Relationships and
Related Transactions.................................................... 29
PART IV
Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K...................................... 29
SIGNATURES 35
FINANCIAL STATEMENT SCHEDULES................................................................. S-1
Part I
Item 1. Business.
GENERAL
Ambac Financial Group, Inc. (the "Company"), headquartered in New York
City, is a holding company whose subsidiaries provide financial guarantee
insurance and financial services to clients in both the public and private
sectors around the world. The Company was incorporated on April 29, 1991. The
Company's principal operating subsidiary, Ambac Assurance Corporation ("Ambac
Assurance"), is a leading insurer of municipal and structured finance
obligations. Through its financial management services subsidiaries, the Company
provides investment agreements, interest rate swaps, investment advisory and
cash management services, primarily to states, municipalities and their
authorities.
In December 1997, Ambac Assurance acquired Connie Lee Holdings, Inc. and
its triple-A rated financial guarantee insurance subsidiary, Connie Lee
Insurance Company ("Connie Lee"). Connie Lee, which guaranteed bonds primarily
for college and hospital infrastructure projects, did not write any new business
in 1998.
Ambac Assurance is primarily engaged in insuring municipal and structured
finance obligations and is the successor of the oldest municipal bond insurance
company, which wrote the first municipal bond insurance policy in 1971.
Financial guarantee insurance written by Ambac Assurance in both the primary and
secondary markets guarantees payment when due of the principal of and interest
on the obligation insured. In the case of a default on an insured obligation,
payments under the insurance policy may not be accelerated by the policyholder
without Ambac Assurance's consent. Ambac Assurance seeks to minimize the risk
inherent in its insurance portfolio by maintaining a diverse portfolio, which
spreads its risk across a number of criteria, including issue size, type of
bond, geographic area and obligor. As of December 31, 1998, Ambac Assurance's
net insurance in force (after giving effect for reinsurance) was $317.7 billion.
See "Insurance in Force" below.
Ambac Assurance has earned triple-A ratings, the highest ratings available
from Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings
Group ("S&P"), Fitch IBCA, Inc., ("Fitch") and Japan Rating and Investment
Information, Inc. ("Japan R&I"). These ratings are an essential part of Ambac
Assurance's ability to provide credit enhancement. See "Rating Agencies" below.
The Company's investment agreement business ("IA Business"), conducted
through its subsidiaries, Ambac Capital Management, Inc. ("ACMI") and Ambac
Capital Funding, Inc. ("ACFI") provide investment agreements primarily to
states, municipalities and their authorities. Investment agreements written by
ACMI and ACFI are rated triple-A by virtue of Ambac Assurance's insurance
policies which guarantee their payment obligations. Investment agreements are
primarily used by municipal bond issuers to invest bond proceeds until the
proceeds can be used for their intended purpose, such as financing construction.
The investment agreement provides for the guaranteed return of principal
invested, and for the payment of interest thereon at a guaranteed rate. See
"Investment Agreements" below.
1
The Company provides interest rate swaps through its subsidiary Ambac
Financial Services, L.P. ("AFSLP") to states, municipalities and their
authorities, and other entities in connection with their financings. The
interest rate swaps provided by AFSLP are insured by Ambac Assurance and provide
a financing alternative that can reduce a municipal issuer's overall borrowing
costs. See "Municipal Interest Rate Swaps" below.
The Company provides investment advisory, cash management and fund
administration services through its subsidiary, Cadre Financial Services, Inc.
("Cadre"), and broker/dealer services through its subsidiary, Cadre Securities,
Inc. ("Cadre Securities"), to school districts, hospitals and health
organizations, and municipalities.
As a holding company, Ambac Financial Group, Inc. is largely dependent on
dividends from Ambac Assurance, its principal operating subsidiary, and interest
income from its investment portfolio, to pay dividends on its capital stock, to
pay principal and interest on its indebtedness, to pay its operating expenses,
and to make capital investments in its subsidiaries. Dividends from Ambac
Assurance are subject to certain insurance regulatory restrictions. See
"Insurance Regulatory Matters -- Wisconsin Dividend Restrictions" below and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" in the Company's 1998 Annual
Report to Stockholders.
In this Form 10K, we may make statements about our future results that are
considered "forward-looking statements" under the Private Securities Litigation
Reform Act of 1995. These statements are based on our current expectations and
the current economic environment. We caution you that these statements are not
guarantees of future performance. They involve a number of risks and
uncertainties that are difficult to predict. Our actual results could differ
materially from those expressed or implied in the forward-looking statements.
Among the factors that could cause actual results to differ materially are: (1)
changes in the economic, credit, or interest rate environment in the United
States and abroad; (2) the level of activity within the national and worldwide
debt markets; (3) competitive conditions and pricing levels; (4) legislative and
regulatory developments; (5) changes in tax laws; and (6) other risks and
uncertainties that have not been identified at this time. We undertake no
obligation to publicly correct or update any forward-looking statement if we
later become aware that it is not likely to be achieved.
BUSINESS SEGMENTS
The following paragraphs describe the business operations of Ambac
Financial Group, Inc. and its subsidiaries (sometimes collectively referred to
as "the Company") for the Company's two reportable segments: Financial Guarantee
Insurance and Financial Management Services.
Financial Guarantee Insurance
Financial guarantee insurance, of the type written by Ambac Assurance,
guarantees to the holder of the underlying obligation, the timely payment of
principal and interest by the issuer on such obligation in accordance with its
original payment schedule. Accordingly, in the case of an issuer default on the
insured obligation, payments under the insurance policy may not be accelerated
by the policyholder without Ambac Assurance's consent.
2
Financial guarantee insurance provides a form of credit enhancement that
benefits both the issuer and the investor. Issuers benefit because their
securities are sold with a higher credit rating than securities of the issuer
sold on an uninsured basis, resulting in interest cost savings and greater
marketability. In addition, for complex financings and obligations of issuers
that are not well known by investors, insured obligations receive greater market
acceptance than uninsured obligations. Investors benefit from greater
marketability and a reduction in the risk of loss associated with an issuer's
default.
The Company derives financial guarantee insurance revenues from: (i)
premiums earned over the life of the obligations insured; (ii) net investment
income; (iii) net realized gains and losses; and (iv) fees. Excluding
transactions with affiliates, total financial guarantee insurance revenues were
$408.4 million, $339.2 million and $266.3 million in 1998, 1997 and 1996,
respectively. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Note 17 of Notes to Consolidated Financial
Statements in the Company's 1998 Annual Report to Stockholders.
Financial guarantee insurance is sold in three principal markets: the U.S.
Municipal Market, the U.S. Structured Finance and Asset-backed Market, and the
International Market.
U. S. Municipal Market
Until 1993, Ambac Assurance was almost exclusively focused on the
municipal market in the United States. The municipal market includes taxable and
tax-exempt bonds, notes and other evidences of indebtedness issued by states,
political subdivisions (e.g., cities, counties, towns and villages), water,
sewer, electric and other utility districts, airports, higher educational
institutions, hospitals, transportation and housing authorities and other
similar authorities and agencies. Municipal obligations are generally supported
by either the taxing authority of the issuer or the issuer's or underlying
obligor's ability to collect fees or assessments for certain projects or public
services. More recently, the municipal market has expanded to include
structured and asset-backed bond issues for tax liens, sports stadiums, lease
pools and other municipal assets. The following table sets forth the volume of
new issues of long-term (longer than 12 months) municipal bonds and the volume
of new issues of insured long-term municipal bonds over the period from 1989
through 1998 in the United States.
3
U.S. Long-Term Municipal Market
Insured
Bonds as
Percentage
Total Insured of Total
Volume Volume Volume
($ in Billions) ----------- --------- ------------
1989........................................................ $125.0 $ 31.1 24.9%
1990........................................................ 127.8 33.5 26.2
1991........................................................ 172.4 51.9 30.1
1992........................................................ 234.7 80.8 34.4
1993........................................................ 292.2 107.8 36.9
1994........................................................ 164.8 61.4 37.3
1995........................................................ 160.3 68.5 42.7
1996........................................................ 183.5 85.5 46.6
1997........................................................ 215.1 104.8 48.7
1998........................................................ 280.1 143.0 51.1
Source: Amounts, except for 1998, are based upon estimated data reported by The
Bond Buyer's 1998 Yearbook. The 1998 amounts are Ambac Assurance
estimates, compiled from industry sources including Securities Data-
Company, Inc. and The Bond Buyer. Amounts represent gross par amounts
issued or insured, respectively, during such year.
The foregoing table illustrates the changes in the total volume and
insured volume of new issues of municipal bonds over the past ten years. Changes
in volume of municipal bond issuance during this period are primarily
attributable to changes in refunding activity related to the then-current
interest rate environment, along with steady growth in the underlying market.
Insured volume, as a percentage of total volume, has grown consistently over the
period but is not expected to increase materially from current levels.
Although there have been certain monetary defaults in bond issues of
substantial amounts, incidents of monetary default on municipal bonds have
historically been infrequent. Based upon data reported by the Association of
Financial Guaranty Insurors, the percentage of insured municipal bonds
experiencing monetary defaults in recent years is relatively low compared to the
entire municipal market. The relatively low incidence of municipal bond defaults
may be partially the result of safeguards developed over the years since the
Great Depression of the 1930's, when a great number of municipal defaults
occurred. Such safeguards include the imposition of issuer debt limits, greater
supervision by state governments of local debt administration, and more thorough
credit reviews by investment firms, rating agencies and institutional investors.
While these safeguards address many of the causes of earlier defaults, they may
be inadequate to prevent an increased level of defaults in the future caused by
presently unforeseen economic and other factors.
4
U.S. Structured Finance and Asset-backed Market
Insurance of securities in the Structured Finance and Asset-backed Market
is typically issued in connection with structured financings or securitizations
in which the securities being issued are secured by or payable from a specific
pool of assets having an ascertainable cash flow or market value and held by a
special purpose issuing entity. Such obligations include, but are not limited
to: mortgage-backed securities and pools of home equity loans, credit card
receivables, trade receivables or other assets. While most structured finance
and asset-backed obligations are secured by or represent interest in pools of
assets, monoline financial guarantors have also insured structured finance and
asset-backed obligations secured by one or a few assets.
In general, structured finance and asset-backed obligations are payable
only from cash flow generated by a pool of assets and take the form of either
"pass-through" obligations, which represent interests in the related assets, or
"pay-through" obligations, which generally are debt obligations which are
collateralized by the related assets. Both types of obligations also generally
have the benefit of over-collateralization or one or more forms of credit
enhancement to cover credit risks associated with the related assets.
Structured finance and asset-backed obligations generally entail two
forms of risks: asset risk, which relates to the amount and quality of asset
coverage; and structural risk, which relates to the extent to which the
transaction structure protects the interests of the investors, and therefore the
insurer.
In general, the amount and quality of asset coverage required is
determined by the historical performance of the assets. The future performance
of the underlying pool of assets will generally determine whether the amount of
over-collateralization or other credit enhancement ultimately is sufficient to
protect investors, and therefore the insurer, against adverse asset performance.
The ability of the servicer of the assets to properly service and collect the
underlying assets often is a factor in determining future asset performance.
Structural risks addressed by asset-backed transactions include
bankruptcy and tax risks. Structured and asset-backed securities are usually
designed to protect the investors, and therefore the insurer, from the
bankruptcy or insolvency of the entity that originated the underlying assets as
well as from the bankruptcy or insolvency of the servicer of those assets (the
servicer of the assets is typically responsible for collecting cash payments on
the underlying assets and forwarding such payments, net of servicing fees, to
the special purpose issuing entity). Related issues that often arise concern
whether the sale of the assets by the originator to the issuer of the asset-
backed obligations would be respected in the event of the bankruptcy or
insolvency of the originator and whether the servicer of the assets may be
permitted or required to delay the remittance to investors of any cash
collections held by it or received by it after the time it becomes subject to
bankruptcy or insolvency proceedings. In addition, servicer risk is often
present in these transactions. Generally, servicer risk is the risk that
inefficiencies at the servicer level contribute to a decline in the collections
of borrower payments in the transaction. Ambac Assurance addresses these risks
through its credit underwriting guidelines, standards and procedures.
The U.S. structured finance and asset-backed market in which Ambac
Assurance provides financial guarantee insurance is broad and disparate,
comprising public issues and private placements. The increasingly varied classes
of assets securitized or guaranteed, and
5
the recent rapid development of the market, make estimating the size of the
aggregate U.S. structured finance and asset-backed markets difficult. One of the
most well developed sectors of this market is the U.S. public asset-backed
market. The volume in this market in recent years is summarized in the following
table.
U.S. Public Asset-Backed Securities
Total
($ in Billions) Volume
--------
1993................................................................................. $ 57.7
1994................................................................................. 75.5
1995................................................................................. 108.0
1996................................................................................. 151.1
1997................................................................................. 178.2
1998................................................................................. 183.6
Source: Amounts are based upon estimated data reported by Asset Sales Report.
Approximately 26% and 20% of the U.S. public asset-backed market was
insured in 1998 and 1997, respectively.
International Market
Outside of the United States, sovereign and sub-sovereign, structured and
asset-backed, utilities and other issuers are increasingly using financial
guarantee insurance, particularly in markets throughout Western Europe. A number
of important trends in international markets have contributed to this expansion.
In the United Kingdom, Australia and elsewhere, ongoing privatization efforts
have shifted the burden of funding from the government to public and private
capital markets, where investors may seek the security of financial guarantee
insurance. In Europe, Japan and Latin America, there is growing interest in
asset-backed securitization, especially through commercial paper conduits.
While the principles of securitization have been increasingly applied in
overseas markets, development in particular countries has varied due to the
sophistication of the local capital markets and the impact of financial
regulatory requirements, accounting standards and legal systems. It is
anticipated that securitization will continue to expand internationally, albeit
at varying rates in each country. Ambac Assurance insures both asset-backed and
structured transactions, sovereign and sub-sovereign debt issues, utilities, and
other obligations in selected international markets.
Ambac Assurance believes that the risk profile of the international
business it insures is generally the same as in the U.S. However, an
understanding of the unique risks related to the particular country and region
that could impact the credit of the issuer is necessary. These risks include
legal and political environments, capital market dynamics, exposures to foreign
exchange, and the degree of governmental support. Ambac Assurance monitors these
risks carefully and addresses them through its credit underwriting guidelines,
standards and procedures.
In 1997, Ambac Assurance capitalized a new subsidiary in the United
Kingdom, Ambac Assurance UK Limited ("Ambac UK"), which is authorized to conduct
certain classes of general insurance business in the United Kingdom. Ambac UK is
the Company's primary vehicle for directly issuing financial guarantee insurance
policies in the United Kingdom and
6
Europe. Ambac Assurance and Ambac UK have entered into a net worth maintenance
agreement and reinsurance agreements.
In 1995, Ambac Assurance and MBIA Insurance Corporation ("MBIA") formed
an unincorporated joint venture, MBIA. AMBAC International (the "Joint
Venture"), to market financial guarantee insurance outside of the United States.
The joint venture was formed with the goal of bringing the combined capital and
human resources of the two companies together to more efficiently serve the
international markets. Since the inception of the joint venture, the two
companies have insured a combined total par amount of approximately $26.4
billion related to international risks under the joint venture. Under the joint
venture, financial guarantee policies are issued separately by each of the
companies. While retaining the right to act individually, each company has the
opportunity to reinsure up to 50 percent of the non-U.S. financial guarantee
business written by the other company as part of the joint venture. Customer
preference, licensing and market considerations determine which company insures
a transaction.
Underwriting and Surveillance
Underwriting guidelines, policies and procedures have been developed by
Ambac Assurance's management with the intent that Ambac Assurance insure only
those obligations which, in the opinion of Ambac Assurance analysts, are of
investment grade quality.
Ambac Assurance's financial guarantee insurance activity outside of the
U.S. market became significant in 1996. Geographically, the markets receiving
Ambac Assurance's primary international focus have been the United Kingdom,
Australia, France, Japan and certain parts of Latin America. In addition, Ambac
has insured transactions in which the geographic risk is spread over multiple
countries. The types of international obligations insured have primarily been
asset-backed securities, sovereign and sub-sovereign obligations, special
revenue and infrastructure obligations, collateralized bond obligations and
collateralized loan obligations. Management has developed underwriting standards
for international risks that are consistent with those applied to risks in the
United States. In addition, management believes that the international risks
insured to date are largely similar in risk type to those insured in the United
States.
The underwriting process involves review of structural, legal and credit
issues, including compliance with current Ambac Assurance underwriting
standards. These standards are reviewed periodically by management.
Ambac Assurance's policy is to reduce default risk associated with the
obligations insured by it to the extent practicable. The decision to insure an
issue is based upon the issuer's ability to repay the bonds, security features
and structure, rather than upon an actuarial or statistical prediction of the
likelihood that the issuer will default on the underlying debt obligation. Ambac
Assurance insures only those bonds on which it expects not to incur a loss.
However, Ambac Assurance's policy is to provide for loss reserves that are
adequate to cover potential losses. See "Losses and Reserves" below.
Underwriting criteria have been developed for each bond type, reflecting the
differences in, for example, economic and social factors, debt management,
project essentiality, financial management, legal and administrative factors,
revenue sources and security features.
7
All requests for insurance are reviewed by members of Ambac Assurance's
underwriting staff, which is divided into major underwriting groups. The
underwriting process is designed to screen issues carefully and begins with a
thorough credit analysis by the primary analyst assigned to the issue. The
credit is then reviewed within the primary analyst's underwriting group. At a
minimum, the primary analyst's recommendation to qualify or reject an issue must
be approved by a concurring analyst and an underwriting officer. The number of
additional approvals required and the extent of an attorney's involvement in a
particular credit depends on the aggregate amount of Ambac Assurance's existing
or potential exposure to the credit and, in some cases, on the structure of the
credit or whether it is the first time such credit or structure is being
reviewed. On large credits, where the aggregate exposure exceeds a certain pre-
determined amount, the insurance decision must be approved by a credit committee
comprised of senior underwriting officers and an attorney in addition to the
analysts and underwriting officer mentioned above. Ambac Assurance assigns
internal ratings to individual exposures as part of the underwriting process and
at surveillance reviews. These internal ratings, which represent Ambac
Assurance's independent judgments, are based upon underlying credit parameters
similar to those used by rating agencies.
Ambac Assurance determines premium rates on the basis of the bond type
and its perception of the risk it is assuming based on the credit strength of
the bond issue. Factors considered in pricing include the maturity and structure
of the issue, and other credit and market factors, including, but not limited
to, security features, the presence or absence of a debt service reserve fund or
additional credit enhancement features and the interest rate spread between
insured and uninsured obligations with characteristics similar to those of the
proposed bond issue. Also critical in assessing risk are factors such as the
credit quality of the issuer, type of issue, the repayment source, the type of
security pledged, the presence of restrictive covenants, and the bond's
maturity. Each bond issue is evaluated in accordance with, and the final premium
rate is a function of, the particular factors as they relate to such issue.
Charges for new issue insurance also take into account the benefits to be
obtained by the issuer, as well as the cost and the projected return to Ambac
Assurance.
Surveillance groups review the insured portfolio for concentration of
risk by: (i) specific bond types; (ii) geographically; and (iii) size of issue.
The groups are also responsible for portfolio surveillance. Portfolio
surveillance analysts schedule and execute regular and ad hoc reviews of credits
in the book of business. Risk-adjusted surveillance strategies have been
developed for each bond type. Review periods and scope of review vary by bond
type based upon the risk inherent in the nature of the credits. The focus of the
surveillance review is to determine credit trends and recommend appropriate
classification and review periods. Generally, the surveillance reviews are
performed by analysts having the same experience and authority as those
reviewing issues for initial underwriting.
Those issues that are either in default or have developed problems that,
with the passage of time, may lead to a claim or loss are tracked closely by the
appropriate surveillance team. The documents underlying any problem credit are
reviewed by internal or outside counsel and an analysis is prepared outlining
Ambac Assurance's rights and potential remedies, the duties of all parties
involved and recommendations for corrective actions. This analysis, along with
the schedule of corrective actions, is reviewed in the regular remedial credit
meetings. Ambac Assurance also meets with issuers to reach agreement upon the
nature and the scope of the problem and to discuss the issuers' operating plans.
8
In many instances, Ambac Assurance, under the terms of the documents
governing the underlying obligation, has the ability, among other things, to
direct that audits be performed with respect to servicer and trustee contractual
responsibilities and to meet with the appropriate officials to outline Ambac
Assurance's concerns and rights. When the underlying economics so indicate,
Ambac Assurance may aid in a restructuring to improve the debt service coverage.
The rating agencies also monitor the credits underlying Ambac Assurance's
insurance in force and, in most cases, advise Ambac Assurance of the credit
rating each issue would receive if it were not insured.
In 1998, the Company established the Portfolio Risk Management Committee,
comprised of senior management and senior risk managers. The committee's
principal mission is to establish policies to manage, monitor and model risk
concentrations within the insured portfolio. This committee works closely with
the senior credit committees of each underwriting group to assure that credit
criteria are maintained, are appropriate, and are systematically and
consistently applied.
Insurance Written
Ambac Assurance provides financial guarantee insurance for obligations in
the U.S. Municipal Market, U.S. Structured Finance and Asset-backed Market and
the International Market. Total insured gross par for the years ended December
31, 1998, 1997 and 1996 were $61.5 billion, $45.5 billion and $35.7 billion,
respectively.
Insurance Written - U. S. Municipal Market
Ambac Assurance insured gross par of $33.9 billion, $29.5 billion and
$26.7 billion in 1998, 1997 and 1996, respectively, in the U.S. Municipal
Market. In the U.S. Municipal Market, an issuer typically pays an up-front
premium to Ambac Assurance at the time the policy is issued. Premiums are
usually quoted as a percentage of the total amount of principal and interest
that is scheduled to become due during the life of the bonds.
Proposed new municipal bond issues are submitted to Ambac Assurance to
determine their insurability by issuers or by their investment bankers or
financial advisors. Municipal bond issues are sold on either a competitive or a
negotiated basis. With respect to competitive issues, an issuer will publish a
notice of sale soliciting bids for the purchase of a proposed issue of municipal
bonds. Various syndicates are then formed by potential bidders on the bonds.
These syndicates then solicit a determination from some or all of the financial
guarantee insurers whether an issue is insurable and at what premium rate and on
what terms. The syndicate then determines whether to bid on the issue with
insurance (and if so, with which insurer) or without insurance. The issuer then
generally selects the syndicate with the lowest bid. In a negotiated offering,
an individual investment banker or team of investment bankers has already been
selected by the issuer and that banker or team then typically solicits premium
quotes and terms from the insurers.
Ambac Assurance also provides insurance on bonds outstanding in the
secondary market that are typically purchased by an institution to facilitate
the sale of municipal bonds in its portfolio or inventory. The insurance
generally increases the sale price of bonds (typically by an amount greater than
the cost of the policy) and affords a wider secondary
9
market and therefore greater marketability to a given issue of previously-issued
bonds. As is the case with new issues, the premium is generally payable in full
at the time of policy issuance. Ambac Assurance employs the same underwriting
standards on secondary market issues that it does on new municipal bond issues.
The new issue U.S. Municipal Market includes insurance policies designed
to satisfy debt service reserve fund requirements of municipal bond issuers.
These policies insure the availability of an amount not to exceed the debt
service reserve fund requirement for the issues, which in most cases is the
lesser of one year's maximum principal and interest payments or approximately
10% of the original principal amount of a bond issue. Any amounts drawn under
the debt service reserve fund policy must be reimbursed by the issuer within a
specified time period and at a specified interest rate.
As of December 31, 1998 and 1997, net outstanding par exposure related to
U.S. municipal bond transactions was $156.9 billion and $141.4 billion,
respectively.
Insurance Written - U.S. Structured Finance and Asset-Backed Market
Ambac Assurance insured gross par of $22.6 billion, $12.8 billion and
$6.5 billion in 1998, 1997 and 1996, respectively, in the U.S Structured Finance
and Asset-backed Market.
Within this market, Ambac Assurance is active in several segments, the
largest of which are the mortgage-backed and home equity and commercial asset-
backed markets.
Within the mortgage-backed and home equity market, Ambac Assurance seeks
to work with higher quality, well-capitalized issuers. The issuers typically
originate or purchase first lien mortgages, home equity loans or home equity
lines of credit, which are in turn sold by the issuers in the form of asset-
backed securities. In considering whether to insure these securities, Ambac
Assurance analyzes the quality of the underlying assets (mortgage loans, home
equity loans, etc.), the structure of the securitization, the experience and
financial strength of the servicer of the underlying assets and the credit
quality of the issuer. All of these factors, along with market conditions
determine the premium rate to be charged for the insurance.
The commercial asset-backed area includes the insurance of commercial
paper asset-backed conduits ("conduits") and other asset-backed securitizations.
Conduits are used by issuers to efficiently fund assets in the short-term
commercial paper market. Typically sponsored by large commercial banks, whose
customers sell financial assets such as trade receivables to the conduit, which
in turn issues commercial paper to fund the purchase of the assets. When Ambac
Assurance underwrites a new conduit for insurance, it evaluates the quality of
the assets to be sold to the conduit, the process by which the sponsoring bank
adds assets to the conduit, the quality of the conduit's management team and the
bank sponsoring the conduit, as well as the structure of the conduit itself. All
these factors, along with competitive conditions are used in determining the
premium rate to be charged. In addition to providing program level enhancement
covering the entire conduit structure, Ambac Assurance also may write insurance
against the default of a specific security sold into a conduit.
Premiums for U.S. structured finance and asset-backed policies are based
on a percentage of either principal or principal and interest insured. The
timing of the collection of
10
structured finance and asset-backed premiums varies among individual
transactions; some being collected in a single payment at policy inception date,
and others being collected periodically (i.e., monthly, quarterly or annually).
As of December 31, 1998 and 1997, net outstanding par exposure related to U.S.
structured finance and asset-backed transactions was $32.9 billion and $18.6
billion, respectively.
Insurance Written - International Market
Ambac Assurance insured gross par of $5.0 billion, $3.1 billion and $2.5
billion in 1998, 1997 and 1996, respectively, in the International Market.
All of Ambac Assurance's international business is written through the
Joint Venture. The Joint Venture has offices in Europe (London, Paris and
Madrid), Australia, Japan and New York. The Joint Venture's strategy in the
international markets is to strengthen its franchise in developed markets by
focusing on high quality infrastructure, structured finance, securitization, and
utility finance transactions, and in emerging markets by focusing on top tier
future flow transactions.
Premiums for international policies are based on a percentage of either
principal or principal and interest insured. The timing of the collection of
structured finance and asset-backed premiums varies among individual
transactions; some being collected in a single payment at policy inception date,
and others being collected periodically (i.e., monthly, quarterly or annually).
As of December 31, 1998 and 1997, net outstanding par exposure related to
international transactions was $8.5 billion and $5.6 billion, respectively.
Insurance in Force
Ambac Assurance underwrites and prices financial guarantee insurance on
the assumption that the insurance will remain in force until maturity of the
insured bonds. Ambac Assurance estimates that the average life (as opposed to
the stated maturity) of its insurance policies on new issue par in force at
December 31, 1998 was 11 years. The 11 year average life is determined by
applying a weighted average calculation, using the remaining years to maturity
of each insured bond, and weighting them on the basis of the remaining par
insured. No assumptions are made for any prepayment of insured bonds or for any
future refundings of insured issues. Municipal bonds generally have provisions
that allow the issuer to prepay all or a portion of the outstanding amount prior
to maturity.
Ambac Assurance seeks to maintain a diversified insurance portfolio
designed to spread its risk based on a variety of criteria, including: (i) issue
size; (ii) type of bond; (iii) geographic area; and (iv) issuer.
As of December 31, 1998, the total net par amount of insured bonds
outstanding was $198.3 billion.
11
Types of Bonds
The table below shows the distribution by bond type of Ambac Assurance's
insured portfolio as of December 31, 1998.
Insured Portfolio by Bond Type
as of December 31, 1998
% of Total Net
Net Par Amount Par Amount
Bond Type Outstanding Outstanding
- -------------------------------------------------------------------------- ---------- -----------
($ In Millions)
U.S. Municipal Market:
General obligation...................................................... $ 37,502 19%
Lease and tax-backed revenue............................................ 36,929 19
Utility revenue......................................................... 27,014 14
Health care revenue..................................................... 20,071 10
Investor-owned utilities................................................ 8,013 4
Transportation revenue.................................................. 7,831 4
Higher education........................................................ 7,720 4
Housing revenue......................................................... 6,445 3
Student loans........................................................... 4,528 2
Other................................................................... 873 -
---------- -------
Total Municipal...................................................... 156,926 79
---------- -------
U.S. Structured and Asset-backed Market:
Mortgage-backed and home equity........................................ 19,478 10
Commercial asset-backed................................................ 10,015 5
Other consumer asset-backed............................................ 2,132 1
Banks/financial institutions........................................... 671 1
Other.................................................................. 567 -
---------- -------
Total U.S. Structured Finance and Asset-backed....................... 32,863 17
---------- -------
Total U.S............................................................ 189,789 96
---------- -------
International Market:
Commercial asset-backed............................................... 3,180 2
Banks/financial institutions.......................................... 1,514 1
Utilities............................................................. 1,073 -
Sovereign/sub-sovereign............................................... 1,027 -
Mortgage-backed and home equity....................................... 607 -
Other................................................................. 1,084 1
---------- -------
Total International.................................................. 8,485 4
---------- -------
Grand Total...................................................... $198,274 100%
========== =======
12
The table below shows the percentage, by bond type, of new business insured
by Ambac Assurance during each of the last five years.
New Business Insured by Bond Type (1)
Bond Type 1998 1997 1996 1995 1994
- ---------------------------------------- -------- ------- ------- ------- ------
U.S. Municipal Market:
General obligation..................... 10% 18% 16% 23% 29%
Utilities (2).......................... 12 12 15 16 21
Lease and tax-backed revenue........... 15 17 23 16 16
Health care revenue.................... 8 8 7 8 8
Housing revenue........................ 2 3 3 5 5
Transportation revenue................. 2 2 3 5 5
Student loans.......................... 1 1 3 5 4
Higher education....................... 2 3 3 3 4
Other.................................. 1 1 0 0 1
-------- ------- ------- ------- ------
Total Municipal...................... 53 65 73 81 93
-------- ------- ------- ------- ------
U.S. Structured and Asset-backed
Market:
Mortgage-backed and home..............
Equity............................. 22 18 12 8 1
Commercial asset-backed............... 14 8 4 5 0
Other consumer asset-backed........... 1 1 0 0 0
Banks/financial institutions.......... 2 2 0 0 0
Other................................. 0 1 3 1 1
-------- ------- ------- ------- ------
Total U.S. Structured and
Asset-backed........................ 39 30 19 14 2
-------- ------- ------- ------- ------
Total U.S. 92 95 92 95 95
-------- ------- ------- ------- ------
International Market:
Commercial asset-backed............... 4 1 6 2 1
Sovereign/sub-sovereign............... 0 1 0 0 0
Mortgage-backed and home..............
Equity............................. 0 1 0 0 0
Utilities............................. 1 1 0 0 0
Banks/financial institutions.......... 2 0 0 0 0
Other................................. 1 1 2 3 4
-------- ------- ------- ------- ------
Total International.................. 8 5 8 5 5
-------- ------- ------- ------- ------
Grand Total.......................... 100% 100% 100% 100% 100%
======== ======= ======= ======= ======
(1) Stated as a percentage of total net par amount insured during such year.
(2) Includes investor-owned utilities.
Issue Size
Ambac Assurance seeks a broad coverage of the market by insuring small
and large issues alike. Ambac Assurance's insured exposure as of December 31,
1998, reflects the historical emphasis on issues insured with an original par
amount of less than $25 million in the municipal market. However, with the
entrance into the Structured Finance and Asset-backed and International Markets
in recent years, Ambac Assurance's emphasis has evolved towards larger deals.
The following table sets forth the distribution of Ambac Assurance's insured
portfolio as of December 31, 1998, with respect to the original size of each
insured issue:
13
Original Par Amount Per Issue
as of December 31, 1998
% of Total Number Net Par Amount % of Total Net Par
Original Par Amount Number of Issues of Issues Outstanding Amount Outstanding
- ------------------------------------- ----------------- ----------------- -------------------- --------------------
($ In Millions)
Less than $10 million................ 8,297 66% $ 24,261 12%
$10-25 million....................... 2,155 17 26,513 13
$25-50 million....................... 1,049 8 28,736 15
Greater than $50 million............. 1,185 9 118,764 60
----------------- ----------------- -------------------- --------------------
12,686 100% $198,274 100%
================= ================= ==================== ====================
Geographic Area
Ambac Assurance is licensed to write business in the U.S. and abroad. As
of December 31, 1998, the eight largest U.S. states, as measured by net par
amount outstanding, accounted for approximately 47% of Ambac Assurance's total
net par amount outstanding. The following table sets forth the geographic
distribution of Ambac Assurance's insured exposure as of December 31, 1998.
Insured Portfolio by Geographic Area as of December 31, 1998
Net Par Amount % of Total Net Par
Geographic Area Outstanding Amount Outstanding
- ------------------------------------------------------------ --------------- -------------------
($ In Millions)
Domestic:
California................................................ $ 22,535 11%
New York.................................................. 16,144 8
Pennsylvania.............................................. 13,778 7
Florida................................................... 12,259 6
Texas..................................................... 9,038 5
Illinois.................................................. 7,344 4
New Jersey................................................ 6,362 3
Michigan.................................................. 6,136 3
Ohio...................................................... 6,127 3
Massachusetts............................................. 5,638 3
Nationally Diversified.................................... 27,791 14
Other States.............................................. 56,637 29
----------- ----------
Total Domestic......................................... 189,789 96
----------- ----------
International:
United Kingdom............................................ 2,289 1
Australia................................................. 779 1
France.................................................... 692 -
Japan..................................................... 675 -
Italy..................................................... 571 -
Internationally Diversified............................... 1,621 1
Other International....................................... 1,858 1
----------- ----------
Total International.................................... 8,485 4
----------- ----------
Grand Total............................................ $198,274 100%
=========== ==========
14
Single Risk
Ambac Assurance has adopted underwriting and exposure management policies
designed to limit the net insurance in force for any one credit. In addition,
Ambac Assurance uses reinsurance to limit net exposure to any one credit. As of
December 31, 1998, Ambac Assurance's net par amount outstanding for its 20
largest credits, totaling $12.7 billion, was approximately 6% of Ambac
Assurance's total net par amount outstanding with no one credit representing
more than 1% of Ambac Assurance's total net par amount outstanding. Ambac
Assurance is also subject to certain regulatory limits and rating agency
guidelines on exposure to a single credit. See "Insurance Regulatory Matters"
and "Rating Agencies," below.
Underlying Ratings
The following table sets forth Ambac Assurance's insured portfolio by
underlying rating prior to being insured by Ambac Assurance, as of December 31,
1998:
Insured Portfolio by Underlying Rating (1)
as of December 31, 1998
Net Par Amount % of Total Net Par
Rating Outstanding Amount Outstanding
- ------------------------------------------------------------ --------------------- ---------------------
($ In millions)
AAA......................................................... $ 225 1%
AA.......................................................... 19,730 10
A........................................................... 119,050 60
BBB......................................................... 57,760 29
BIG (2)..................................................... 1,509 1
---------- ---------
$198,274 100%
========== =========
(1) Ratings represent Ambac Assurance internal ratings.
(2) Represents those bonds which have been categorized as "below investment
grade" by Ambac Assurance.
Losses and Reserves
Ambac Assurance's policy is to provide for loss and loss adjustment
expense reserves that are adequate to cover potential unidentified losses
inherent to the portfolio, as well as losses that may arise from insured
obligations which are currently or imminently in monetary default. The active
credit reserve ("ACR") represents an estimate of unidentified losses from our
insured obligations. As of December 31, 1998, Ambac Assurance's ACR was $78.2
million. When a monetary default occurs or is imminent with respect to a
particular insured obligation, a reserve ("case basis reserve") is established
in an amount that is sufficient to cover the present value of the anticipated
defaulted debt service payments over the expected period of default and the
estimated expenses associated with settling the claims, less estimated
recoveries under salvage or subrogation rights. In estimating the losses on
monetary defaults, Ambac Assurance makes its assessment based on the full term
of the insured obligation. All or part of the case basis reserve is allocated
from any ACR available. Ambac Assurance's net case basis reserves totaled $33.9
million at December 31, 1998.
15
The most recent three-year history of Ambac Assurance's loss reserves,
and losses and loss adjustment expenses incurred and paid, is described in the
table below:
Reserve for Losses and Loss Adjustment Expenses
Years Ended December 31,
-----------------------------------------------
1998 1997 1996
---------- ------------ -----------
($ In Thousands)
Reserve for losses and loss adjustment expenses at
January 1,.............................................. $103,345 $ 60,613 $66,637
Less: reinsurance recoverables.............................. 4,219 393 641
---------- ----------- -----------
Net reserve for losses and loss adjustment expenses
at January 1,........................................... 99,126 60,220 65,996
Losses and loss adjustment expenses incurred................ 6,000 2,854 3,778
Losses and loss adjustment expenses paid (net of
salvage received).......................................... 7,030 (2,474) (9,554)
Net balance for Connie Lee, at acquisition.................. - 38,526 -
---------- ----------- -----------
Net reserve for losses and loss adjustment expenses
at December 31,......................................... 112,156 99,126 60,220
Plus: reinsurance recoverables.............................. 3,638 4,219 393
---------- ----------- -----------
Reserve for losses and loss adjustment expenses at
December 31,............................................... $115,794 $103,345 $60,613
========== =========== ===========
Management of Ambac Assurance believes that the reserves for losses and
loss adjustment expenses are adequate to cover the ultimate net costs of claims,
but the reserves are necessarily based on estimates and there can be no
assurance that the ultimate liability will not exceed such estimates. See Note 2
of Notes to Consolidated Financial Statements in the Company's 1998 Annual
Report to Stockholders.
Competition
The financial guarantee insurance business is highly competitive. Ambac
Assurance's principal competitors in the market for financial guarantee
insurance in the U.S. are three other triple-A rated monoline insurance
companies, Financial Guaranty Insurance Company ("FGIC"), Financial Security
Assurance Inc. ("FSA") and MBIA. In addition, banks, multiline insurers and
reinsurers, and lower rated financial guarantee insurance companies represent
additional participants in the broader market. According to Ambac Assurance
estimates based on industry sources, Ambac Assurance, FGIC, FSA and MBIA, in the
aggregate, insured almost all of the new issue municipal bonds insured during
1998, with Ambac Assurance insuring approximately 21% of such bonds, FGIC
insuring approximately 21%, FSA insuring approximately 23%, and MBIA insuring
approximately 35%. The principal competitive factors are: (i) premium rates;
(ii) conditions precedent to the issuance of a policy related to the structure
and security features of a proposed bond issue; (iii) the financial strength of
an insurer; and (iv) the quality of service provided to issuers, investors and
other clients of the issuer. With respect to each of these competitive factors,
Ambac Assurance believes it is on equal footing with each of its principal
competitors.
Financial guarantee insurance also competes domestically and
internationally with other forms of credit enhancement, including letters of
credit and guarantees (for example, mortgage guarantees where pools of mortgages
secure debt service payments) provided by banks and other financial
institutions, some of which are governmental agencies. Letters of credit are
most often issued for periods of less than 10 years, although there is no legal
restriction on the issuance of letters of credit having longer terms. Thus,
financial
16
institutions and banks issuing letters of credit compete directly with Ambac
Assurance to guarantee short-term notes and bonds with a maturity of less than
10 years.
In order to enter the financial guarantee market, certain requirements
must be met. Most restrictive of which is that a significant minimum amount of
capital is required of a financial guarantee insurer in order to obtain
financial strength ratings by the rating agencies. In addition, under the New
York law, a monoline financial guarantee insurance company must have at least
$75 million of paid-in capital and surplus and maintain thereafter at least $65
million of policyholders' surplus. A similar law in California imposes a $100
million minimum capital and surplus requirement, with a maintenance requirement
thereafter of $75 million.
Reinsurance
State insurance laws and regulations (as well as the rating agencies)
impose minimum capital requirements on financial guarantee insurance companies,
limiting the aggregate amount of insurance which may be written and the maximum
size of any single risk exposure which may be assumed. Such companies can use
reinsurance to diversify risk, increase underwriting capacity, reduce additional
capital needs, stabilize shareholder returns and strengthen financial ratios.
See "Insurance Regulatory Matters," below.
Historically, Ambac Assurance had employed treaty insurance programs that
provided quota share and surplus share reinsurance. Under such programs, Ambac
Assurance ceded a percentage of certain insured policies along with a surplus
layer of reinsurance in excess of quota share.
Ambac Assurance has also entered into facultative reinsurance agreements
with certain of the same reinsurers that are party to the agreements described
above, that allow Ambac Assurance to reduce its large risks, to manage its
portfolio of insurance by bond type and geographic distribution, and to provide
additional capacity for frequent bond issuers. Under these agreements, portions
of Ambac Assurance's interests and liabilities are ceded on an issue-by-issue
basis. A ceding commission is withheld to defray Ambac Assurance's underwriting
expenses. In addition, Ambac Assurance and MBIA, in conjunction with the Joint
Venture, have entered into facultative reinsurance agreements whereupon each
company may reinsure the other on risks insured in conjunction with the joint
venture.
Effective January 1, 1997, Ambac Assurance discontinued ceding new
business under the quota share and surplus share reinsurance programs as
described above, and only uses facultative reinsurance agreements to reduce its
risks and manage its insurance portfolio.
As of December 31, 1998, Ambac Assurance had retained approximately 86%
of its gross insurance in force of $367.8 billion and had ceded approximately
14% to its treaty and facultative reinsurers. See Note 11 of Notes to
Consolidated Financial Statements in the Company's 1998 Annual Report to
Stockholders.
As a primary insurer, Ambac Assurance is required to honor its
obligations to its policyholders whether or not its reinsurers perform their
obligations under the various reinsurance agreements with Ambac Assurance. To
minimize its exposure to significant losses from reinsurer insolvencies, Ambac
Assurance evaluates the financial condition of its
17
reinsurers, prepares annual written reviews of such reinsurers and monitors for
concentrations of credit risk. Ambac Assurance's current primary reinsurers are
AXA Re Finance, Capital Reinsurance Company, Enhance Reinsurance Company, and
MBIA.
Rating Agencies
Moody's, S&P, Fitch and Japan R&I periodically review the business and
financial condition of Ambac Assurance and other companies providing financial
guarantee insurance. These rating agencies' reviews focus on the insurer's
underwriting policies and procedures and the quality of the obligations insured.
The rating agencies frequently perform assessments of the credits insured by
Ambac Assurance to confirm that Ambac Assurance continues to meet the capital
allocation criteria considered necessary by the particular rating agency to
maintain Ambac Assurance's triple-A ratings. A rating by Moody's, S&P, Fitch or
Japan R&I, however, is not a "market rating" or a recommendation to buy, hold or
sell any security. Ambac Assurance's ability to attract new business or to
compete with other triple-A rated financial guarantors, and its results of
operations and financial condition, would be materially adversely affected by
any reduction in its ratings.
Insurance Regulatory Matters
General Law
Ambac Assurance is licensed to do business as an insurance company in all
50 states, the District of Columbia, the Commonwealth of Puerto Rico and Guam,
as well as in the United Kingdom through its wholly-owned subsidiary, Ambac UK.
It is subject to the insurance laws and regulations of the State of Wisconsin
(the "Wisconsin Insurance Laws"), its state of incorporation, and the insurance
laws and regulations of other states in which it is licensed to transact
business, and the United Kingdom. These laws and regulations, as well as the
level of supervisory authority that may be exercised by the various state
insurance departments, vary by jurisdiction, but generally require insurance
companies to maintain minimum standards of business conduct and solvency, meet
certain financial tests, file certain reports with regulatory authorities,
including information concerning their capital structure, ownership and
financial condition, and require prior approval of certain changes in control of
domestic insurance companies and their direct and indirect parents and the
payment of certain dividends and distributions. In addition, these laws and
regulations require approval of certain inter-corporate transfers of assets and
certain transactions between insurance companies and their direct and indirect
parents and affiliates, and generally require that all such transactions have
terms no less favorable than terms that would result from transactions between
parties negotiating at arm's length. Ambac Assurance is required to file
quarterly and annual statutory financial statements in each jurisdiction in
which it is licensed, and is subject to single and aggregate risk limits and
other statutory restrictions concerning the types and quality of investments and
the filing and use of policy forms and premium rates. Additionally, Ambac
Assurance's accounts and operations are subject to periodic examination by the
Office of the Commissioner of Insurance of the State of Wisconsin (the
"Wisconsin Commissioner") (the last such examination having been conducted in
1997 for the period ended December 31, 1996) and other state insurance
regulatory authorities. See Note 8 of Notes to Consolidated Financial Statements
in the Company's 1998 Annual Report to Stockholders.
The Company believes that Ambac Assurance is in material compliance with
all applicable insurance laws and regulations.
18
Insurance Holding Company Laws
Under the Wisconsin insurance holding company laws, any acquisition of
control of the Company and thereby indirect control of Ambac Assurance requires
the prior approval of the Wisconsin Commissioner. "Control" is defined as the
direct or indirect power to direct or cause the direction of the management and
policies of a person. Any purchaser of 10% or more of the outstanding voting
stock of a corporation is presumed to have acquired control of that corporation
and its subsidiaries unless the Wisconsin Commissioner, upon application,
determines otherwise. For purposes of this 10% test, the Company believes that a
holder of common stock having the right to cast 10% of the votes which may be
cast by the holders of all shares of common stock of the Company would be deemed
to have control of Ambac Assurance within the meaning of the Wisconsin Insurance
Laws. As of December 31, 1998, no person held 10% or more of the outstanding
common stock of the Company.
The Wisconsin insurance holding company laws also require prior approval
by the Wisconsin Commissioner of certain transactions between Ambac Assurance
and companies affiliated with Ambac Assurance.
Wisconsin Dividend Restrictions
Pursuant to the Wisconsin Insurance Laws, Ambac Assurance may declare
dividends, subject to any restriction in its articles of incorporation, provided
that, after giving effect to the distribution, it would not violate certain
statutory equity, solvency, income and asset tests. Distributions to the
shareholder (other than stock dividends) must be reported to the Wisconsin
Commissioner. Extraordinary dividends must be reported prior to payment and are
subject to disapproval by the Wisconsin Commissioner. An extraordinary dividend
is defined as a dividend or distribution, the fair market value of which,
together with all dividends from the preceding 12 months, exceeds the lesser of:
(a) 10% of policyholders' surplus as of the preceding December 31; or (b) the
greater of: (i) statutory net income for the calendar year preceding the date of
the dividend or distribution, minus realized capital gains for that calendar
year; or (ii) the aggregate of statutory net income for the three calendar years
preceding the date of the dividend or distribution, minus realized capital gains
for those calendar years and minus dividends paid or credited and distributions
made within the first two of the preceding three calendar years.
During 1998, Ambac Assurance paid to the Company cash dividends on its
common stock totaling $48.0 million. See Note 8 of Notes to Consolidated
Financial Statements in the Company's 1998 Annual Report to Stockholders.
New York Financial Guarantee Insurance Law
New York's comprehensive financial guarantee insurance law governs the
conduct of business of all financial guarantee insurers licensed to do business
in New York, including Ambac Assurance. This law requires a financial guarantee
insurer to contribute to a contingency reserve an amount equal to 50% of
premiums as they are earned on a statutory basis on policies written prior to
July 1, 1989, and, with respect to policies written on and after July 1, 1989,
it must make contributions over a period of 20 years for municipal bonds and 15
years for all other obligations until the contingency reserve for such insured
obligations equals the greater of 50% of premiums written for the relevant
category
19
of insurance or a percentage of the principal guaranteed, varying from
0.55% to 2.50%, depending upon the type of obligation guaranteed. This reserve
must be maintained for the periods specified above, except that withdrawals by
the insurer may be permitted under specified circumstances in the event that
actual loss experience exceeds certain thresholds or if the reserve accumulated
is deemed excessive in relation to the insurer's outstanding insured
obligations. Financial guarantee insurers are also required to maintain case
basis loss and loss adjustment expense reserves and unearned premium reserves on
bases established by the regulations.
The New York financial guarantee insurance law establishes single risk
limits applicable to all obligations issued by a single entity and backed by a
single revenue source. Under the limit applicable to municipal bonds, the
insured average annual debt service for a single risk, net of reinsurance and
collateral, may not exceed 10% of the sum of the insurer's policyholders'
surplus and contingency reserves. In addition, insured principal of municipal
bonds attributable to any single risk, net of reinsurance and collateral, is
limited to 75% of the insurer's policyholders' surplus and contingency reserves.
Additional single risk limits, which generally are more restrictive than the
municipal bond single risk limit, are also specified for several other
categories of insured obligations, including structured finance obligations.
Aggregate risk limits are also established on the basis of aggregate net
liability and policyholders' surplus requirements. "Aggregate net liability" is
defined as outstanding principal and interest of guaranteed obligations insured,
net of reinsurance and collateral. Under these limits, policyholders' surplus
and contingency reserves must at least equal a percentage of aggregate net
liability that is equal to the sum of various percentages of aggregate net
liability for various categories of specified obligations. The percentage varies
from 0.33% for municipal bonds to 4.00% for certain non-investment grade
obligations.
Financial Guarantee Insurance Regulation in Other States
The Wisconsin insurance laws and regulations governing municipal bond
insurers are similar to those in New York. Under the Wisconsin regulations,
Ambac Assurance must establish a contingency reserve in an amount equal to 50%
of net statutory earned premium on municipal bond insurance policies. This
reserve must be maintained for 20 years. However, the regulations provide that
compliance with contingency reserve provisions under statutes in other
jurisdictions that result in greater contributions than under the Wisconsin
regulations is deemed to constitute compliance with the Wisconsin regulations.
The Wisconsin regulations also include certain single and aggregate risk
limitations. The average annual debt service for any single issue of municipal
bonds may not exceed 10% of Ambac Assurance's policyholders' surplus. In
addition, Ambac Assurance's cumulative net liability, defined as one-third of
one percent of the insured unpaid principal and interest covered by current
municipal bond insurance policies, may not exceed its qualified statutory
capital, which is defined as the sum of its capital and surplus and contingency
reserve.
California has financial guarantee insurance laws similar in structure to
those of New York. None of the risk limits established in California's
legislation with respect to business transacted by Ambac Assurance are more
stringent in any material respect than the corresponding provisions in the New
York financial guarantee insurance statute. California law requires a financial
guarantee insurer to contribute to a contingency reserve an amount equal to 50%
of premiums as they are earned on a statutory basis on policies written prior to
July 1, 1989, and, with respect to policies written on and after July 1,
20
1989, it must make contributions over a period of 20 years for municipal bonds
and 15 years for all other obligations until the contingency reserve for such
insured obligations equals a percentage of principal outstanding, varying from
0.80% to 3.00%, depending upon the type of obligation guaranteed. This reserve
must be maintained for the periods specified above, except that withdrawals by
the insurer may be permitted under specified circumstances in the event that
actual loss experience exceeds certain thresholds or if the reserve accumulated
is deemed excessive in relation to the insurer's outstanding insured
obligations. Ambac Assurance's reported contingency reserve is equal to the
greater of the required reserve as calculated under New York and California law.
In addition to the laws and regulations of New York, Wisconsin and
California, Ambac Assurance is subject to laws and regulations of other states
concerning the transaction of financial guarantee insurance, none of which is
more stringent in any material respect than the New York financial guarantee
insurance statute.
Financial Management Services
The Company's Financial Management Services Division provides investment
agreements, interest rate swaps, and investment advisory and fund administration
services, principally to states, municipalities and their authorities, school
districts, and hospitals and health organizations.
Financial management services revenues are derived from: (i) net
investment income; (ii) net swap trading revenues; (iii) fund management and
advisory revenues; and (iv) net realized gains and losses. Excluding
transactions with affiliates, total revenues were $32.4 million, $34.6 million
and $22.4 million in 1998, 1997 and 1996, respectively. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note 17 of Notes to Consolidated Financial Statements in the Company's 1998
Annual Report to Stockholders.
The principal competitive factors among providers of investment
agreements are: (i) contract rates; (ii) conditions precedent to the issuance of
a policy related to the structure and security features of a proposed investment
contract; (iii) the financial strength of the financial guarantee provider; and
(iv) the quality of service provided to issuers, investors and other clients of
the issuer. The Company believes that the IA Business competes favorably with
respect to each of these factors.
The principal competitive factors among providers of interest rate swap
contracts are: (i) pricing of contracts; (ii) the financial strength of the
financial guarantee provider; (iii) the ability to structure a complete
financial package; and (iv) the quality of service provided to issuers,
investors and other clients of the issuer. The Company believes that AFSLP
competes favorably with respect to each of these competitive factors.
The principal competitive factors among providers of investment advisory
and fund administration services are: (i) pricing of services; (ii) investment
returns; (iii) the ability to provide services tailored to customers needs; and
(iv) the quality of service provided to customers. The Company believes that
Cadre and Cadre Securities compete favorably with respect to each of these
competitive factors.
21
Investment Agreements
The principal purpose of the IA Business is providing investment
agreements, including investment repurchase agreements, primarily to states,
municipalities and their authorities. Investment agreements are used by
municipal bond issuers to invest bond proceeds until such proceeds can be used
for their intended purpose, such as financing construction. The investment
agreement provides for the guaranteed return of principal invested, as well as
the payment of interest thereon at a guaranteed rate and is rated triple-A by
virtue of Ambac Assurance's insurance policy, which guarantees its payment
obligations.
The IA Business manages its balance sheet to protect against a number
of risks inherent in its business including liquidity, market (principally
interest rate) and credit risk. The IA Business is managed with the goal of
matching the effective duration of the invested assets, including hedges, to the
effective duration of the investment agreement liabilities. The IA Business
maintains expected cash flow matching of invested assets (including hedges) to
funded liabilities in order to minimize market and liquidity risk.
A source of liquidity risk is the ability of some counterparties to
withdraw moneys on dates other than those specified in the draw down schedule.
Liquidity risk is somewhat mitigated by provisions in certain of the municipal
investment agreements that limit an issuer's ability to draw on the funds and by
risk management procedures that require the regular re-evaluation and re-
projection of draw down schedules. Investments are restricted to fixed income
securities with a minimum average portfolio credit quality of Aa/AA. Based upon
management's projections, the IA Business maintains funds invested in cash and
cash equivalents to meet short-term liquidity needs.
The following table sets forth the net payments due under the IA
Business' settled investment agreements in each of the next five years ending
December 31, and the period thereafter, based on expected call dates:
Obligations Under Investment Agreements
($ In Thousands) Principal Amount (1)
- --------------------------------------------------------------------------------------------------------------------------------
1999............................................................................................... $2,308,820
2000............................................................................................... 1,237,441
2001............................................................................................... 554,655
2002............................................................................................... 190,338
2003............................................................................................... 29,481
All later years.................................................................................... 888,955
-----------
$5,209,690
===========
(1) As of December 31, 1998, the interest rates on these agreements ranged from
4.00% to 8.14%.
The IA Business uses derivative contracts in the normal course of
business for hedging purposes as part of its overall interest rate risk
management. Several of its derivative contracts have been entered into with its
affiliate, AFSLP. Derivative contracts used by the IA Business include financial
instruments with off-balance sheet risk such as interest rate futures contracts,
interest rate swap agreements and purchased interest rate option contracts.
These instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amounts recognized in the financial statements.
Interest rate futures contracts are commitments to either purchase or
sell designated financial instruments at a future date for a specified price and
are settled in cash.
22
Initial margin requirements are met in cash or other financial instruments, and
changes in the contract values are settled daily. Futures contracts have little
credit risk since futures exchanges are the counterparties.
Interest rate swap contracts are agreements where the IA Business agrees
with other parties to exchange, at specified intervals, the difference between
fixed-rate and floating-rate interest amounts or the difference between
different interest rate indices calculated by reference to an agreed upon
notional amount.
Municipal Interest Rate Swaps
AFSLP provides interest rate swaps primarily to states, municipalities
and their authorities, and other entities in connection with their financings.
In addition, AFSLP also provides interest rate swaps to the IA Business, an
affiliate. AFSLP is subject to "basis risk," (the relationship between changes
in tax-exempt and taxable interest rates). If actual or projected tax-exempt
interest rates change in relation to taxable rates, AFSLP will experience an
unrealized mark-to-market gain or loss. The AFSLP swap portfolio is considered
held for trading purposes. The interest rate swaps provided by AFSLP are insured
by Ambac Assurance through policies that guarantee the obligations of AFSLP and
its counterparties.
AFSLP is a limited partnership. Ambac Assurance, the sole limited
partner, owns a limited partnership interest representing 90% of the total
partnership interests of AFSLP. Ambac Financial Services Holdings, Inc. ("AFS
Holdings"), a wholly-owned subsidiary of the Company, the sole general partner,
owns a general partnership interest representing 10% of the total partnership
interest in AFSLP.
Interest rate swaps are agreements to exchange with a counterparty, a
stream of periodic payments calculated by reference to agreed upon interest
rates, indices and notional amounts.
In the ordinary course of business, AFSLP manages a variety of risks -
principally (i) credit; (ii) market; (iii) liquidity; (iv) operational; and (v)
legal. These risks are identified, measured, and monitored through a variety of
control mechanisms, which are in place at different levels throughout the
organization.
Investment Advisory and Cash Management
In December 1996, the Company acquired certain assets and assumed certain
liabilities of Cadre. Cadre is registered as an investment adviser with the
Securities and Exchange Commission and with certain states that currently
require such registration. As a registered adviser, Cadre is subject to
regulation in certain aspects of its business, particularly with respect to
investment advisory services provided to investment companies and clients.
In June 1997, the Company acquired certain assets and assumed certain
liabilities of Cadre Securities. Cadre Securities principal business is the
distribution of money market funds to the education, healthcare and municipal
sectors, as well as the brokering of short-term fixed income securities trades
on behalf of its clients. Cadre Securities is registered as a broker-dealer with
the Securities and Exchange Commission and with certain states that require such
registration, and it is a member of the National Association of Securities
23
Dealers, Inc. As a registered broker-dealer, Cadre Securities is subject to the
net capital requirements of Rule 15c3-1 of the Securities Exchange Act of 1934,
as amended, which is designed to measure the general financial condition and
liquidity of a broker-dealer. In accordance with this rule, the ratio of
aggregate indebtedness to net capital ("net capital ratio") shall not exceed 15
to 1. At December 31, 1998, Cadre Securities had net capital of $672,530, which
was $572,530 in excess of its required net capital of $100,000. The net capital
ratio was 0.83 to 1.
Cadre provides investment advisory and administrative services to money
market funds which are primarily offered to qualified participants, including
school districts, healthcare service providers and municipalities. At December
31, 1998, Cadre and Cadre Securities provided services to approximately 3,000
clients with approximately $6.8 billion in assets.
Fees from the money market funds for which Cadre and Cadre Securities
performs services are based on percentages of the average daily net assets of
such funds. Fees for brokering short-term fixed income securities trades on
behalf of clients are based on a mark-up in the price of the securities. These
fees are recorded upon execution of the trades since, at that time,
substantially all of Cadre and Cadre Securities obligations have been fulfilled.
Investments and Investment Policy
As of December 31, 1998, the consolidated investments of the Company had
an aggregate fair value of $8.7 billion and an aggregate amortized cost of $8.4
billion. These investments are managed internally by officers of the Company and
its subsidiaries, who are experienced investment managers. In the normal course
of business, the Company uses derivative contracts for hedging purposes as part
of its overall interest rate risk management. These derivative contracts include
interest rate futures contracts, interest rate swap agreements and purchased
interest rate option contracts. All investments, including derivative contracts,
are effected in accordance with the general objectives and guidelines for
investments established by each subsidiary's Board of Directors, including
guidelines relating to credit quality, risk concentration and holding period.
These guidelines are periodically reviewed and revised as appropriate.
Pursuant to Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," the Company
has designated all investments as "available-for-sale" and reports them at fair
value. Unrealized gains and losses are excluded from earnings and reported as a
component of accumulated other comprehensive income in stockholders' equity, net
of tax.
As of December 31, 1998, Ambac Assurance's investment portfolio had an
aggregate fair value of $3.4 billion and an aggregate amortized cost of $3.2
billion. The investment policy established by the Board of Directors of Ambac
Assurance for its investments is designed to achieve diversification of the
portfolio and generally to preclude investments in obligations insured by Ambac
Assurance. Ambac Assurance's current investment policy only permits investment
in investment grade fixed-income securities, consistent with its goal to achieve
the highest after-tax, long-term return. This policy takes into consideration
Ambac Assurance's desire for both current income and long-term capital growth.
Ambac Assurance is subject to limits on types and quality of investments imposed
by the insurance laws and regulations of the States of Wisconsin and New York.
In
24
compliance with these laws, Ambac Assurance's Board of Directors approves each
specific investment transaction of Ambac Assurance. See "Insurance Regulatory
Matters - General Law," above.
As of December 31, 1998, the IA Business' investment portfolio had an
aggregate fair value of $5.1 billion and an aggregate amortized cost of $5.0
billion. The investment policy established by the Board of Directors of the IA
Business for its investments is designed to achieve the highest after-tax return
on equity, subject to minimum average quality ratings. For further discussion,
see "Investment Agreements," above.
The following tables set forth certain information concerning the
investments of the Company:
Investments by Rating (1)
as of December 31, 1998
% of Investment
Rating Portfolio
- -------------------------------------------------------------------------------------------------------- ----------------------
AAA (2)................................................................................................. 71%
AA...................................................................................................... 14
A....................................................................................................... 14
BBB..................................................................................................... 1
Not Rated............................................................................................... -
---------
100%
=========
(1) Ratings represent S&P classifications.
(2) Includes U.S. Treasury and agency obligations, which comprised
approximately 34% of the total investment portfolio.
Summary of Investments
As of December 31,
------------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Carrying Value Average Yield Carrying Value Average Yield Carrying Value Average Yield
Investment Category (1) (2) (1) (2) (1) (2)
- ------------------------------------------------------------------------------------------------------------------------------------
($ In Thousands)
Long-term investments:
Taxable bonds................ $6,082,903 6.61% $4,545,177 6.75% $3,116,373 6.69%
Tax-exempt bonds............. 2,539,379 6.13 2,228,667 6.20 1,971,658 6.21
------------ ------------ ------------
Total long-term investments
8,622,282 6.47 6,773,844 6.55 5,088,031 6.52
Short-term investments (3).... 119,528 5.69 136,278 5.43 112,511 5.24
------------ ------------ ------------
Total investments.......... $8,741,810 6.45% $6,910,122 6.52% $5,200,542 6.46%
============ ============ ============
(1) Yields presented include assets held in the IA Business portfolio. Interest
expense on related investment agreements was $263.6 million, $186.7 million
and $154.5 million in 1998, 1997 and 1996, respectively.
(2) Yields are stated on a pre-tax basis, based on average amortized cost.
(3) Includes taxable and tax-exempt investments.
25
Investments by Security Type
As of December 31,
------------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Carrying Value Average Yield Carrying Value Average Yield Carrying Value Average Yield
Investment Category (1) (2) (1) (2) (1) (2)
- ------------------------------- ------------- ------------- -------------- ------------- -------------- --------------
($ In Thousands)
Municipal obligations (4)..... $2,801,324 6.19% $2,298,996 6.20% $1,982,911 6.21%
Corporate securities.......... 1,435,427 7.33 1,093,587 7.61 963,890 7.56
U.S. government obligations...
122,896 5.80 139,598 6.25 102,430 6.09
Mortgage- and asset-backed
securities (includes U.S.
Government Agency
obligations) (3)............. 4,262,635 6.36 3,222,756 6.46 2,035,115 6.35
Other......................... - - 18,907 3.72 3,685 3.50
------------ ------------ ------------
Total long-term investments
8,622,282 6.47 6,773,844 6.55 5,088,031 6.52
Short-term investments (4).... 119,528 5.69 136,278 5.43 112,511 5.24
------------ ------------ ------------
Total investments.......... $8,741,810 6.45% $6,910,122 6.52% $5,200,542 6.46%
============ ============ ============
(1) Yields presented include assets held in the IA Business portfolio. Interest
expense on related investment agreements was $263.6 million, $186.7 million
and $154.5 million in 1998, 1997 and 1996, respectively.
(2) Yields are stated on a pre-tax basis, based on average amortized cost.
(3) The actual maturity dates of mortgage- and asset-backed securities are
uncertain because the underlying mortgages may be paid prior to the stated
maturity of such securities. This possibility of prepayment creates the risk
that the Company will be unable to replace such investments with securities
of comparable yield.
(4) Includes taxable and tax-exempt investments.
Distribution of Investments by Maturity
as of December 31, 1998
Amortized Estimated
Maturity Cost Fair Value
- ---------------------------------------------------------------------------- ---------- ----------
($ In Thousands)
Due in one year or less (1)................................................. $ 250,741 $ 252,235
Due after one year through five years....................................... 222,466 232,054
Due after five years through ten years...................................... 399,846 423,355
Due after ten years......................................................... 3,328,886 3,571,531
---------- ----------
4,201,939 4,479,175
Mortgage- and asset-backed securities (2)................................... 4,224,636 4,262,635
---------- ----------
Total investments........................................................... $8,426,575 $8,741,810
========== ==========
(1) Includes long-term investments in the amount of $132.6 million maturing
within one year.
(2) The actual maturity dates of mortgage- and asset-backed securities are
uncertain because the underlying mortgages may be paid prior to the stated
maturity of such securities. This possibility of prepayment creates the risk
that the Company will be unable to replace such investments with securities
of comparable yield.
For further discussion, see Note 3 of Notes to Consolidated Financial
Statements in the Company's 1998 Annual Report to Stockholders.
26
Employees
As of December 31, 1998, the Company and its subsidiaries had 388
employees. None of the employees is covered by collective bargaining agreements.
The Company considers its employee relations to be satisfactory.
Item 2. Properties.
The principal executive offices of the Company are located at One State
Street Plaza, New York, New York 10004. The telephone number is (212) 668-0340.
Ambac Assurance maintains its principal executive offices at One State
Street Plaza, New York, New York 10004, which consists of approximately 121,000
square feet of office space, under an agreement that expires on September 30,
2019. Ambac UK maintains offices in London, England.
Cadre maintains its principal executive office at 905 Marconi Avenue,
Ronkonkoma, New York 11779. The office building is owned by the Company. It
consists of approximately 15,000 square feet of office space and storage.
Item 3. Legal Proceedings.
There are no material lawsuits pending, or to the knowledge of the Company
threatened, to which the Company or any of its majority-owned subsidiaries is a
party.
Item 4. Submission of Matters to a Vote of Security-Holders.
There were no matters submitted to a vote of security holders during the
fourth quarter of 1998.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Information relating to the principal market on which the Company's Common
Stock is tradable, the high and low sales prices per share for each full
quarterly period within the two most recent fiscal years, and the frequency and
amount of any cash dividends declared for the two most recent fiscal years is
set forth on page 50 of the Company's 1998 Annual Report to Stockholders and
such information is incorporated herein by reference. Information concerning
restrictions on the payment of dividends is set forth in Item 1 above under the
caption "Insurance Regulatory Matters - Wisconsin Dividend Restrictions." As of
March 22, 1999, there were 88 stockholders of record of the Company's Common
Stock, which is listed on the New York Stock Exchange.
27
Item 6. Selected Financial Data.
Selected financial data for the Company and its subsidiaries for each of
the last five fiscal years is set forth under the caption "Financial Highlights"
on page 4 of the Company's 1998 Annual Report to Stockholders. Such information
is incorporated herein by reference and should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto contained on pages 32 to
48 of such Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Management's Discussion and Analysis of Financial Condition and Results of
Operations is set forth under the same caption on pages 23 through 30 of the
Company's 1998 Annual Report to Stockholders. Such information is incorporated
herein by reference and should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto contained on pages 32 to 48 of such
Annual Report. Management's Discussion and Analysis of Financial Condition and
Results of Operations includes the Company's status of Year 2000 matters.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Quantitative and Qualitative Disclosures About Market Risk is set forth
under the caption Risk Management on pages 28 and 29 of the Company's 1998
Annual Report to Stockholders. Such information is incorporated herein by
reference and should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto contained on pages 32 to 48 of such Annual
Report.
Item 8. Financial Statements and Supplementary Data.
The 1998 Consolidated Financial Statements, together with the Notes
thereto and the Independent Auditors' Report thereon, are set forth on pages 31
through 48 of the Company's 1998 Annual Report to Stockholders. Such information
is incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Part III
Item 10. Directors and Executive Officers of the Registrant.
Information relating to the Company's directors and executive officers is
set forth on pages 7, 11, 12, 27 and 28 of the Company's 1999 Proxy Statement
and such information is incorporated herein by reference.
28
Item 11. Executive Compensation.
Information relating to compensation of the Company's directors and
executive officers is set forth on pages 9 to 11 and on pages 13 to 21 of the
Company's 1999 Proxy Statement and such information is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information relating to security ownership of certain beneficial owners
and management is set forth on pages 5 to 7 of the Company's 1999 Proxy
Statement and such information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
None.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents filed as a part of this report:
1. Financial Statements
--------------------
The following consolidated financial statements included in the 1998
Annual Report to Stockholders are incorporated herein by reference
under Part II, Item 8:
Page Number
In Annual Report
--------------------
Independent Auditors' Report.................................. 31
Consolidated Balance Sheets as of December 31,
1998 and 1997................................................. 32
Consolidated Statements of Operations for each of
the years ended December 31, 1998, 1997 and 1996.............. 33
Consolidated Statements of Stockholders' Equity for each of
the years ended December 31, 1998, 1997 and 1996 34
Consolidated Statements of Cash Flows for each of
the years ended December 31, 1998, 1997 and 1996.............. 35
Notes to Consolidated Financial Statements.................... 36-48
29
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 (Page S-2)
Investments in Related Parties
Schedule II -- Condensed Financial Information of (Pages S-3
Registrant (Parent Company Only) to S-7)
Schedule IV -- Reinsurance (Page S-8)
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.)
30
4.04 Rights Agreement, dated as of January 31, 1996, between Ambac Financial Group,
Inc. and Citibank N.A., as Rights Agent, including all exhibits thereto. (Filed
as Exhibit 1 to the Company's Registration Statement on Form 8-A dated February
27, 1996 and incorporated herein by reference.)
4.05 Form of 9.38% Debenture due August 1, 2011. (Filed as Exhibit 4.02 to the
Registration Statement on Form S-1 (Reg. No. 33-40385) and incorporated herein
by reference.)
4.06 Form of 7.50% Debenture due May 1, 2023.
4.07 Form of 7.08% Debenture due March 31, 2098. (Filed as Exhibit 5.3 to the
Company's Current Report on Form 8-K dated April 1, 1998 and incorporated
herein by reference.)
10.01* Second Amended and Restated Employment Agreement dated as of December 2, 1997,
between the Company and Phillip B. Lassiter. (Filed as Exhibit 10.01 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1997 and
incorporated herein by reference.)
10.02* Ambac Financial Group, Inc. 1991 Stock Incentive Plan, as amended as of
December 2, 1997 (Filed as Exhibit 10.02 to the Company's Annual Report on Form
10-K for the year ended December 31, 1996 and incorporated herein by reference.)
10.03* Ambac Financial Group, Inc. 1997 Equity Plan, amended as of October 28, 1997.
(Filed as Exhibit 10.03 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997 and incorporated herein by reference.)
10.04* Ambac Financial Group, Inc. 1991 Non-Employee Directors Stock Plan (Filed as
Exhibit 10.09 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1992 and incorporated herein by reference.)
10.05* Ambac Financial Group, Inc. 1997 Non-Employee Directors Equity Plan. (Filed as
Exhibit 4.2 to the Company's Registration Statement on Form S-8 (Reg. No.
333-52449) and incorporated herein by reference.)
10.06* Ambac Financial Group, Inc. 1997 Executive Incentive Plan. (Filed as Exhibit
10.24 to the Company's Quarterly Report on Form 10-Q for the period ended June
30, 1997 and incorporated herein by reference.)
- -------------------
* Management contract or compensatory plan, contract or arrangement required to
be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
---------
31
10.07* Ambac Financial Group, Inc. Deferred Compensation Plan for Outside Directors
and Eligible Senior Officers, effective as of December 1, 1993 and amended and
restated as of October 27, 1998.
10.08* Form of Amended and Restated Management Retention Agreement dated as of
December 2, 1997. (Filed as Exhibit 10.08 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997 and incorporated herein by
reference.)
10.09* The Ambac Financial Group, Inc. Non-Qualified Savings Incentive Plan (effective
as of January 1, 1995). (Filed as Exhibit 10.16 to the Company's Quarterly
Report on Form 10-Q for the period ended September 30, 1995, and incorporated
herein by reference.)
10.10* Amendment Number 1 to the Ambac Financial Group, Inc. Non-Qualified Savings
Incentive Plan effective as of April 30, 1997. (Filed as Exhibit 10.10 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1997 and
incorporated herein by reference.)
10.11* Ambac Financial Group, Inc. Excess Benefits Pension Plan (Amended and Restated
as of January 1, 1994) (As amended through October 25, 1995). (Filed as
Exhibit 10.17 to the Company's Quarterly Report on Form 10-Q for the period
ended September 30, 1995, and incorporated herein by reference.)
10.12* Amendment Number 1 to the Ambac Financial Group, Inc. Excess Benefits Pension
Plan effective as of April 30, 1997. (Filed as Exhibit 10.12 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997 and
incorporated herein by reference.)
10.13* Supplemental Pension Agreement between the Company and Philip B. Lassiter dated
April 30, 1997. (Filed as Exhibit 10.24 in the Company's Quarterly Report Form
10-Q for the quarter ended June 30, 1997, and incorporated herein by reference.)
10.14* Supplemental Pension Agreement between the Company and David L. Boyle dated
April 30, 1997. (Filed as Exhibit 10.25 in the Company's Quarterly Report Form
10-Q for the quarter ended June 30, 1997, and incorporated herein by reference.)
10.15* Ambac Financial Group, Inc. Supplemental Pension Plan (Amended and Restated as
of January 1, 1995) (As amended through October 25, 1995). (Filed as Exhibit
10.18 to the Company's Quarterly Report on Form 10-Q for the period ended
September 30, 1995, and incorporated herein by reference.)
- -------------------
* Management contract or compensatory plan, contract or arrangement required to
be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
---------
32
10.16* Amendment Number 1 to the Ambac Financial Group, Inc. Supplemental Pension Plan
effective as of April 30, 1997. (Filed as Exhibit 10.18 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997 and incorporated
herein by reference.)
10.17 Lease Agreement, dated as of January 1, 1992 between South Ferry Building
Company and Ambac Assurance Corporation. (Filed as Exhibit 10.36 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1992 and incorporated herein by reference.)
10.18 Amendment to Lease Agreement dated August 1, 1997 between South Ferry Building
Company and Ambac Assurance Corporation. (Filed as Exhibit 10.20 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1997 and
incorporated herein by reference.)
10.19 Tax Settlement Agreement, dated as of March 30, 1993, among Citicorp, Citibank,
N.A., Citicorp Financial Guaranty Holdings, Inc., Ambac Financial Group, Inc.,
Ambac Assurance Corporation, American Municipal Bond Holding Company and Health
Care Investment Analysts, Inc. (Filed as Exhibit 10.02 to the Company's
Registration Statement on Form S-3 (Registration No. 33-59290) and incorporated
herein by reference.)
10.20 Conformed copy of U.S. $150,000,000 Credit Agreement, dated as of August 3,
1998 (the "BNS Credit Agreement") among the Company and Ambac Assurance
Corporation as the Borrowers, Certain Commercial Lending Institutions as the
Lenders, Citibank, N.A., as the Documentation Agent, First National Bank of
Chicago, as the Co-Agent,and The Bank of Nova Scotia, acting through its New
York Agency, as the Arranger and the Administrative Agent. (Filed as Exhibit
10.22 to the Company's Quarterly Report on Form 10-Q for the period ended June
30, 1998 and incorporated herein by reference.)
10.21 $555,000,000 Amended and Restated Credit Agreement, dated December 2, 1998
between Ambac Assurance Corporation and various banks and Deutsche Bank AG (New
York Branch), as Agent.
10.22 Joint Venture Agreement Ambac Assurance Corporation and MBIA Insurance Company
dated as of September 11, 1995.
12.01 Statement re computation of ratios.
13.01 Annual Report to Stockholders for the fiscal year ended December 31, 1998.
(Furnished for the information of the Securities and Exchange Commission and
not deemed "filed" as part of this Form 10-K except for those portions that are
expressly incorporated by reference.)
33
21.01 List of Subsidiaries of Ambac Financial Group, Inc.
24.01 Power of Attorney from Phillip B. Lassiter.
24.02 Power of Attorney from Frank J. Bivona.
24.03 Power of Attorney from Michael A. Callen.
24.04 Power of Attorney from Renso L. Caporali.
24.05 Power of Attorney from Richard Dulude.
24.06 Power of Attorney from W. Grant Gregory.
24.07 Power of Attorney from C. Roderick O'Neil.
27.00 Financial Data Schedule.
99.01 Ambac Assurance Corporation and Subsidiaries Consolidated Financial Statements
(with independent auditors' report thereon) as of December 31, 1998 and 1997.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the fourth quarter of 1998.
--------
On March 24, 1999, the Company filed a current report on Form 8-K containing
consolidated financial statements (with independent auditors' report thereon) of
Ambac Assurance Corporation and Subsidiaries as of December 31, 1998 and 1997.
34
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AMBAC FINANCIAL GROUP, INC.
(Registrant)
Dated: March 30, 1999 By: /s/ Frank J. Bivona
------------------------------------
Name: Frank J. Bivona
Title: Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
Phillip B. Lassiter* Chairman, President March 30, 1999
- ------------------------------------------ and Chief Executive Officer
Phillip B. Lassiter and Director (Principal Executive
Officer)
/s/ Frank J. Bivona Executive Vice President, and March 30, 1999
- ------------------------------------------ Chief Financial Officer (Principal
Frank J. Bivona Financial and Accounting Officer)
Michael A. Callen* Director March 30, 1999
- ------------------------------------------
Michael A. Callen
Renso L. Caporali* Director March 30, 1999
- ------------------------------------------
Renso L. Caporali
Richard Dulude* Director March 30, 1999
- ------------------------------------------
Richard Dulude
W. Grant Gregory* Director March 30, 1999
- ------------------------------------------
W. Grant Gregory
C. Roderick O'Neil* Director March 30, 1999
- ------------------------------------------
C. Roderick O'Neil
- ---------------------
* Frank J. Bivona, by signing his name hereto, does hereby sign this Annual
Report on Form 10-K on behalf of each of the directors and officers of the
Registrant after whose typed names asterisks appear pursuant to powers of
attorney duly executed by such directors and officers and filed with the
Securities and Exchange Commission as exhibits to this report.
By: /s/ Frank J. Bivona
------------------------------
Frank J. Bivona
Attorney-in-fact
35
INDEPENDENT AUDITORS' REPORT ON SCHEDULES AND CONSENT
The Board of Directors
Ambac Financial Group, Inc.:
The audits referred to in our report dated January 27, 1999, included the
related financial statement schedules as of December 31, 1998 and 1997 and for
each of the years in the three-year period ended December 31, 1998, included in
this Form 10-K. These financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statement schedules based on our audit. In our opinion, such
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
We consent to the use of our reports incorporated by reference in the
registration statement (No. 333-43695) on Form S-3, and the registration
statements (Nos. 33-47970, 33-63134, 33-47971, 33-44913 and 333-52449) on Form
S-8 of Ambac Financial Group, Inc.
New York, New York
March 30, 1999
S-1
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
SCHEDULE I - SUMMARY OF INVESTMENTS
Other Than Investments in Related Parties
December 31, 1998
(Dollar Amounts in Thousands)
Amount at which
Amortized Estimated shown in the
Type of Investment Cost Fair Value balance sheet
- ------------------------------------------------------------ ------------ ----------- ---------------
U.S. Government obligations................................. $ 114,385 $ 122,896 $ 122,896
Municipal obligations....................................... 2,632,276 2,801,324 2,801,324
Mortgage- and asset-backed securities (includes U.S.
Government Agency obligations)............................. 4,224,636 4,262,635 4,262,635
Corporate obligations....................................... 1,335,749 1,435,427 1,435,427
Other....................................................... 119,528 119,528 119,528
------------ ------------ -----------
Total investments...................................... $8,426,574 $8,741,810 $8,741,810
============ ============ ===========
S-2
AMBAC FINANCIAL GROUP, INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (PARENT COMPANY ONLY)
Condensed Balance Sheets
December 31, 1998 and 1997
(Dollar Amounts in Thousands Except Per Share Data)
1998 1997
----------- -------------
ASSETS
Assets:
Cash....................................................................... $ 116 $ 8
Investments in subsidiaries................................................ 2,275,995 2,002,653
Fixed income securities, at fair value
(amortized cost of $205,456 in 1998 and $65,772 in 1997).................. 209,182 70,380
Short-term investments, at cost (approximates fair value).................. 24,144 13,592
Other investments.......................................................... 1,522 --
Current income taxes receivable............................................ -- 4,576
Deferred income taxes receivable........................................... 12,984 2,207
Other assets............................................................... 23,586 9,876
---------- ----------
Total assets.............................................................. $2,547,529 $2,103,292
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Debentures................................................................. 423,929 223,864
Current income taxes payable............................................... 1,029 --
Accrued interest payable................................................... 6,797 6,797
Accounts payable and other liabilities..................................... 19,684 149
---------- ----------
Total liabilities......................................................... 451,439 230,810
---------- ----------
Stockholders' equity:
Preferred stock, par value $0.01 per share; authorized shares - 4,000,000;
issued and outstanding shares - none....................................... -- --
Common Stock, par value $0.01 per share; authorized shares - 200,000,000 at
December 31, 1998 and 100,000,000 at December 31, 1997; issued shares -
70,680,384 at December 31, 1998 and December 31, 1997...................... 707 707
Additional paid-in capital.................................................. 519,305 500,107
Accumulated other comprehensive income...................................... 159,313 135,223
Retained earnings........................................................... 1,449,832 1,262,740
Common Stock held in treasury at cost, 738,381 shares at December 31, 1998
and 732,947 at December 31, 1997 (33,067) (26,295)
---------- ----------
Total stockholders' equity................................................ 2,096,090 1,872,482
---------- ----------
Total liabilities and stockholders' equity................................ $2,547,529 $2,103,292
========== ==========
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)
1998 1997 1996
-------- -------- --------
C> C>
Revenues:
Dividend income........................................... $ 48,000 $ 44,000 $ 44,000
Extraordinary dividend (1)................................ -- -- 115,865
Interest and other income................................. 14,336 7,047 7,589
Net realized gains........................................ 2,507 748 66,633
-------- -------- --------
Total revenues........................................... 64,843 51,795 234,087
-------- -------- --------
Expenses:
Interest expense.......................................... 29,722 19,053 18,852
Operating expenses........................................ 6,815 2,826 3,477
-------- -------- --------
Total expenses........................................... 36,537 21,879 22,329
-------- -------- --------
Income before income taxes and equity in undistributed
net income of subsidiaries................................. 28,306 29,916 211,758
Federal income tax (benefit) expense........................ (6,274) (5,433) 18,203
-------- -------- --------
Income before equity in undistributed net income of
subsidiaries............................................... 34,580 35,349 193,555
Equity in undistributed net income of subsidiaries.......... 219,414 187,681 82,762
-------- -------- --------
Net income.................................................. 253,994 223,030 276,317
======== ======== ========
(1) Represents fair value of 2,378,672 shares of HCIA common stock received from
Ambac Assurance in the form of an extraordinary dividend on April 30, 1996.
S-4
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)
1998 1997 1996
----------------------------------------------------------------------------
Retained Earnings:
Balance at January 1 $1,262,740 $1,072,418 $ 819,479
Net income 253,994 $253,994 223,030 $223,030 276,317 $276,317
--------- --------- ---------
Dividends declared - (26,571) (24,165) (21,500)
common stock
Exercise of stock options (40,331) (8,543) (1,878)
---------- ---------- ----------
Balance at December 31 $1,449,832 $1,262,740 $1,072,418
---------- ---------- ----------
Accumulated Other
Comprehensive Income:
Balance at January 1 $ 135,223 $ 58,911 $ 102,470
Unrealized gains (losses) on
securities, ($36,476,
$121,347, and ($71,667),
pre-tax, in 1998, 1997
and 1996, respectively) (1) 23,889 76,155 (43,559)
Foreign currency gain 201 157 --
--------- --------- ---------
Other comprehensive income 24,090 24,090 76,312 76,312 (43,559) (43,559)
---------- -------- ---------- -------- ----------- --------
Total comprehensive income $278,084 $299,342 $232,758
======== ======== ========
Balance at December 31 $ 159,313 $ 135,223 $ 58,911
---------- ---------- ----------
Preferred Stock:
Balance at January 1 and
December 31 $ $ $
-- -- --
---------- ---------- ----------
Common Stock:
Balance at January 1 $ 707 $ 353 $ 353
Stock split effected as dividend -- 354 --
---------- ---------- ----------
Balance at December 31 $ 707 $ 707 $ 353
---------- ---------- ----------
Additional Paid-in Capital:
Balance at January 1 $ 500,107 $ 498,401 $ 492,495
Issuance of stock -- (3,506) 3,624
Exercise of stock options 19,198 5,566 2,282
Stock split effected as dividend -- (354) --
---------- ---------- ----------
Balance at December 31 $ 519,305 $ 500,107 $ 498,401
---------- ---------- ----------
Common Stock Held in
Treasury at Cost:
Balance at January 1 $ (26,295) $ (15,067) $ (10,809)
Cost of shares acquired (52,738) (40,397) (31,751)
Shares issued under equity plans 45,966 29,169 17,211
Issued to acquire subsidiary -- -- 10,282
---------- ---------- ----------
Balance at December 31 $ (33,067) $ (26,295) $ (15,067)
---------- ---------- ----------
Total Stockholders' Equity at
December 31 $2,096,090 $1,872,482 $1,615,016
========== ========== ==========
(1) Disclosure of reclassification amount: 1998 1997 1996
----------------------------
Unrealized holding gains (losses) arising during period $34,526 $88,744 $(56,195)
Less: reclassification adjustment for net gains (losses) included in net income 10,637 12,589 (12,636)
--------------------------
Net unrealized gains (losses) on securities $23,889 $76,155 $(43,559)
==========================
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)
1998 1997 1996
----------- -------- ---------
Cash flows from operating activities:
Net income................................................ $ 253,994 $ 223,030 $ 276,317
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Equity in undistributed net income of
Subsidiaries............................................. (219,414) (187,681) (82,762)
Extraordinary dividend(1)................................. -- -- (115,865)
(Gain) loss on sale of investments........................ (2,507) (748) (66,633)
(Decrease) increase in current income
taxes payable........................................... 5,605 (1,510) (10,443)
Increase in other assets............................. (13,710) (4,770) (1,355)
Other, net................................................ (16,843) (15,945) (6,965)
---------- --------- ----------
Net cash provided by (used in) operating
activities 7,125 12,376 (7,706)
---------- --------- ----------
Cash flows from investing activities:
Proceeds from sales of bonds.............................. 69,097 39,728 17,396
Purchases of bonds........................................ (206,430) -- (121,734)
Proceeds from sale of affiliate........................... -- -- 202,609
Change in short-term investments.......................... (10,552) 2,130 (4,585)
Other, net (1,489) -- 13,842
---------- --------- ----------
Net cash (used in) provided by investing activities......
(149,374) 41,858 107,528
---------- --------- ----------
Cash flows from financing activities:
Dividends paid............................................ (26,571) (24,165) (21,500)
Proceeds from issuance of debentures...................... 193,700 -- --
Purchases of treasury stock............................... (52,738) (40,397) (31,751)
Proceeds from sale of treasury stock...................... 45,966 29,169 17,211
Contribution to subsidiaries.............................. (18,000) (18,842) (63,801)
---------- --------- ----------
Net cash provided by (used in) financing activities......
142,357 (54,235) (99,841)
---------- --------- ----------
Net cash flow............................................... 108 (1) (19)
Cash at January 1......................................... 8 9 28
---------- --------- ----------
Cash at December 31....................................... $ 116 $ 8 $ 9
========== ========= ==========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes............................................. $ 60,000 $ 12,861 $ 90,197
========== ========= =========
Interest expense......................................... $ 30,072 $ 19,687 $ 19,687
========== ========= =========
(1) Represents fair value of 2,378,672 shares of HCIA common stock received from
Ambac Assurance in the form of an extraordinary dividend on April 30, 1996.
S-6
AMBAC FINANCIAL GROUP, INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (PARENT COMPANY ONLY)
Note to Condensed Financial Information
The condensed financial information of Ambac Financial Group, Inc. for
the years ended December 31, 1998, 1997 and 1996, should be read in conjunction
with the consolidated financial statements of Ambac Financial Group, Inc. and
Subsidiaries and the notes thereto. Investments in subsidiaries are accounted
for using the equity method of accounting.
S-7
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
SCHEDULE IV - REINSURANCE
(Dollar Amounts in Thousands Except Percentages)
Assumed
Ceded to from Percentage of
Gross Other Other Amount Assumed
Insurance Premiums Written Amount Companies Companies Net Amount to Net
- ---------------------------------------- ------ --------- -------- ---------- --------------
Year ended December 31, 1996............ $240,544 $37,793 $ 6,664 $209,415 3.18 %
Year ended December 31, 1997............ $277,814 $32,452 $ 8,349 $253,711 3.29 %
Year ended December 31, 1998............ $333,652 $49,563 $27,359 $311,448 8.78 %
S-8
INDEX TO EXHIBITS
Exhibit Number Description
---------------- -----------
4.06 Form of 7.50% Debenture due May 1, 2023.
10.07 Ambac Financial Group, Inc. Deferred Compensation Plan for Outside
Directors and Eligible Senior Officers, effective as of December 1,
1993 and amended and restated as of October 27, 1998.
10.21 $555,000,000 Amended and Restated Credit Agreement, dated December
2, 1998 between Ambac Assurance Corporation and various banks and
Deutsche Bank AG (New York Branch), as Agent.
10.22 Joint Venture Agreement between Ambac Assurance Corporation and MBIA
Insurance Company.
12.01 Statement re computation of ratios.
13.01 Annual Report to Stockholders for the fiscal year ended December 31,
1998. (Furnished for the information of the Securities and Exchange
Commission and not deemed "filed" as part of this Form 10-K except
for those portions that are expressly incorporated by reference.)
21.01 List of Subsidiaries of Ambac Financial Group, Inc.
24.01 Power of Attorney from Phillip B. Lassiter.
24.02 Power of Attorney from Frank J. Bivona.
24.03 Power of Attorney from Michael A. Callen.
24.04 Power of Attorney from Renso L. Caporali.
24.05 Power of Attorney from Richard Dulude.
24.06 Power of Attorney from W. Grant Gregory.
24.07 Power of Attorney from C. Roderick O'Neil.
27.00 Financial Data Schedule.
99.01 Ambac Assurance Corporation and Subsidiaries Consolidated Financial
Statements (with independent auditors' report thereon) as of
December 31, 1998 and 1997.