SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended September 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 1-10777
Ambac Financial Group, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 13-3621676
(State of incorporation) (I.R.S. employer identification no.)
One State Street Plaza
New York, New York 10004
(Address of principal executive offices) (Zip code)
(212) 668-0340
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of September 30, 2000, 70,201,974 shares of Common Stock, par value
$0.01 per share, (net of 478,410 treasury shares) of the Registrant were
outstanding.
Ambac Financial Group, Inc. and Subsidiaries
INDEX
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PAGE
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PART I FINANCIAL INFORMATION
Item 1. Consolidated Unaudited Financial Statements
Consolidated Balance Sheets - September 30, 2000
and December 31, 1999................................................................. 3
Consolidated Statements of Operations - three months and nine months
ended September 30, 2000 and 1999..................................................... 4
Consolidated Statements of Stockholders' Equity - nine months ended September 30,
2000 and 1999......................................................................... 5
Consolidated Statements of Cash Flows - nine months ended
September 30, 2000 and 1999........................................................... 6
Notes to Consolidated Unaudited Financial Statements.................................. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................... 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk........................................................................... 21
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...................................................... 23
SIGNATURES...................................................................................... 24
INDEX TO EXHIBITS............................................................................... 25
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements of Ambac Financial Group, Inc. and Subsidiaries
Ambac Financial Group, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 2000 and December 31, 1999
(Dollars in Thousands)
September 30, 2000 December 31, 1999
------------------ -----------------
(unaudited)
Assets
- ------
Investments:
Fixed income securities, at fair value
(amortized cost of $8,385,830 in 2000 and $9,028,184
in 1999) $8,260,574 $8,738,471
Short-term investments, at cost (approximates fair value) 150,214 220,896
Other 5,401 3,168
------------------------ ------------------------
Total investments 8,416,189 8,962,535
Cash 14,855 13,588
Securities purchased under agreements to resell 186,009 103,000
Receivable for investment agreements 33,439 45,918
Receivable for securities sold 38,014 15,369
Investment income due and accrued 118,048 128,668
Reinsurance recoverable 826 500
Prepaid reinsurance 239,281 217,977
Deferred acquisition costs 147,413 135,324
Deferred income taxes - 57,377
Loans 696,790 685,488
Receivable from brokers and dealers - 717,000
Other assets 223,860 262,352
------------------------ ------------------------
Total assets $10,114,724 $11,345,096
======================== ========================
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities:
Unearned premiums $1,497,541 $1,431,076
Losses and loss adjustment expenses 128,517 121,475
Ceded reinsurance balances payable 13,607 15,028
Obligations under investment and payment agreements 3,643,349 4,180,513
Obligations under investment repurchase agreements 1,605,521 1,959,741
Deferred income taxes 22,547 -
Current income taxes 20,876 24,831
Debentures 424,044 423,995
Accrued interest payable 85,428 91,142
Other liabilities 234,044 268,696
Payable to brokers and dealers - 717,000
Payable for securities purchased 66,706 93,149
------------------------ ------------------------
Total liabilities 7,742,180 9,326,646
------------------------ ------------------------
Stockholders' equity:
Preferred stock - -
Common stock 707 707
Additional paid-in capital 532,753 525,012
Accumulated other comprehensive loss (85,869) (187,540)
Retained earnings 1,948,822 1,713,446
Common stock held in treasury at cost (23,869) (33,175)
------------------------ ------------------------
Total stockholders' equity 2,372,544 2,018,450
------------------------ ------------------------
Total liabilities and stockholders' equity $10,114,724 $11,345,096
======================== ========================
See accompanying Notes to Consolidated Unaudited Financial Statements
3
Ambac Financial Group, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
For the Periods Ended September 30, 2000 and 1999
(Dollars in Thousands Except Share Data)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- ---------------------------------
2000 1999 2000 1999
------------------------------- ---------------------------------
Revenues:
Financial Guarantee:
Gross premiums written $147,949 $106,841 $338,956 $295,703
Ceded premiums written (20,077) (11,896) (62,451) (33,440)
-------------- -------------- --------------- ---------------
Net premiums written $127,872 $94,945 $276,505 $262,263
============== ============== =============== ===============
Net premiums earned $78,695 $68,325 $230,774 $192,566
Net fees earned and other income 5,645 1,720 10,693 4,304
Net investment income 61,090 52,946 177,623 153,726
Net realized losses (2,535) (62) (2,103) (5,542)
Financial Services:
Revenue 10,856 12,097 46,425 37,947
Net realized (losses) gains (600) 8 (7,871) (3,292)
Other:
Revenue 517 2,164 1,522 8,587
Net realized gains - - - 775
-------------- -------------- --------------- ---------------
Total revenues 153,668 137,198 457,063 389,071
-------------- -------------- --------------- ---------------
Expenses:
Financial Guarantee:
Losses and loss adjustment expenses 3,908 3,000 10,757 8,000
Underwriting and operating expenses 13,208 11,976 40,562 35,765
Financial Services 5,808 6,174 18,563 19,930
Interest 9,394 9,145 28,153 27,322
Other 2,010 1,520 5,424 4,735
-------------- -------------- --------------- ---------------
Total expenses 34,328 31,815 103,459 95,752
-------------- -------------- --------------- ---------------
Income before income taxes 119,340 105,383 353,604 293,319
Provision for income taxes 28,432 25,581 84,418 69,354
-------------- -------------- --------------- ---------------
Net income $90,908 $79,802 $269,186 $223,965
============== ============== =============== ===============
Net income per share $1.30 $1.14 $3.85 $3.20
============== ============== =============== ===============
Net income per diluted share $1.27 $1.12 $3.77 $3.14
============== ============== =============== ===============
Weighted average number of
shares outstanding 70,074,472 69,911,638 69,921,951 69,902,757
============== ============== =============== ===============
Weighted average number of diluted
shares outstanding 71,821,452 71,337,017 71,367,874 71,367,987
============== ============== =============== ===============
Pro forma net income per share retroactively
adjusted to reflect the three-for-two split of
common stock $0.86 $0.76 $2.56 $2.13
============== ============== =============== ===============
Pro forma net income per diluted share
retroactively adjusted to reflect the
three-for-two split of common stock $0.84 $0.74 $2.51 $2.09
============== ============== =============== ===============
Pro forma weighted average number of
shares outstanding retroactively adjusted to
reflect the three-for-two split of common stock 105,175,459 105,012,625 105,022,938 105,003,744
============== ============== =============== ===============
Pro forma weighted average number of diluted
shares outstanding retroactively adjusted to
reflect the three-for-two split of common stock 107,795,929 107,311,494 107,191,823 107,191,936
============== ============== =============== ===============
See accompanying Notes to Consolidated Unaudited Financial Statements
4
Ambac Financial Group, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(Unaudited)
For The Nine Months Ended September 30, 2000 and 1999
(Dollars in Thousands)
2000 1999
-------------------------------- -------------------------------
Retained Earnings:
Balance at January 1 $1,713,446 $1,449,832
Net income 269,186 $269,186 223,965 $223,965
---------------- ---------------
Dividends declared - common stock (23,775) (21,672)
Exercise of stock options (10,035) (13,800)
---------------- ----------------
Balance at September 30 $1,948,822 $1,638,325
---------------- ----------------
Accumulated Other Comprehensive (Loss) Income:
Balance at January 1 ($187,540) $159,313
Unrealized gains (losses) on securities,
$168,221, and ($412,240), pre-tax in
2000 and 1999, respectively(1) 103,552 (258,072)
Foreign currency translation loss (1,881) (205)
---------------- ---------------
Other comprehensive income (loss) 101,671 101,671 (258,277) (258,277)
-------------------------------- -------------------------------
Comprehensive income $370,857 ($34,312)
================ ===============
Balance at September 30 ($85,869) ($98,964)
---------------- ----------------
Preferred Stock:
Balance at January 1 and September 30 $- $-
---------------- ----------------
Common Stock:
Balance at January 1 and September 30 $707 $707
---------------- ----------------
Additional Paid-in Capital:
Balance at January 1 $525,012 $519,305
Exercise of stock options 7,741 3,029
---------------- ----------------
Balance at September 30 $532,753 $522,334
---------------- ----------------
Common Stock Held in Treasury at Cost:
Balance at January 1 ($33,175) ($33,067)
Cost of shares acquired (15,037) (16,643)
Shares issued under equity plans 24,343 14,505
---------------- ----------------
Balance at September 30 ($23,869) ($35,205)
---------------- ----------------
Total Stockholders' Equity at September 30 $2,372,544 $2,027,197
================ ================
(1) Disclosure of reclassification amount:
Unrealized holding gains (losses) arising
during period $97,069 ($263,310)
Less: reclassification adjustment for
net losses included in net income (6,483) (5,238)
---------------- ----------------
Net unrealized gains (losses) on securities $103,552 ($258,072)
================ ================
See accompanying Notes to Consolidated Unaudited Financial Statements.
5
Ambac Financial Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
For The Nine Months Ended September 30, 2000 and 1999
(Dollars in Thousands)
Nine Months Ended
September 30,
---------------------------------------
2000 1999
---------------- ----------------
Cash flows from operating activities:
Net income $269,186 $223,965
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,708 2,167
Amortization of bond premium and discount (8,812) (3,809)
Current income taxes (3,955) 19,421
Deferred income taxes 15,255 3,515
Deferred acquisition costs (12,089) (12,460)
Unearned premiums, net 45,161 69,672
Losses and loss adjustment expenses 6,716 7,183
Ceded reinsurance balances payable (1,421) (2,494)
Investment income due and accrued 10,620 9,346
Accrued interest payable (5,714) (6,596)
Net realized losses 9,974 8,059
Interest rate swaps, at market (178) (22,448)
Other, net (1,321) 3,383
---------------- ----------------
Net cash provided by operating activities 326,130 298,904
---------------- ----------------
Cash flows from investing activities:
Proceeds from sales of bonds 899,561 1,930,672
Proceeds from matured bonds 1,340,538 1,020,893
Purchases of bonds (1,643,518) (3,650,767)
Change in short-term investments 70,682 (70,887)
Securities purchased under agreements to resell (83,009) 133,002
Loans (11,302) (12,994)
Other, net (4,441) 9,868
---------------- ----------------
Net cash provided by (used in) investing activities 568,511 (640,213)
---------------- ----------------
Cash flows from financing activities:
Dividends paid (23,775) (21,672)
Proceeds from issuance of investment agreements 1,314,928 2,268,867
Payments for investment agreement draws (2,205,135) (1,913,267)
Payment agreements 11,302 12,994
Proceeds from sale of treasury stock 24,343 14,505
Purchases of treasury stock (15,037) (16,643)
---------------- ----------------
Net cash (used in) provided by financing activities (893,374) 344,784
---------------- ----------------
Net cash flow 1,267 3,475
Cash at January 1 13,588 8,239
---------------- ----------------
Cash at September 30 $14,855 $11,714
================ ================
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Income taxes $65,400 $43,599
================ ================
Interest expense on debt $30,481 $29,569
================ ================
Interest expense on investment agreements $217,823 $220,929
================ ================
See accompanying Notes to Consolidated Unaudited Financial Statements
6
Ambac Financial Group, Inc. and Subsidiaries
Notes to Consolidated Unaudited Financial Statements
(Dollars in thousands)
(1) Basis of Presentation
Ambac Financial Group, Inc., (the "Company") headquartered in New York
City, is a holding company whose affiliates provide financial guarantees and
financial services to clients in both the public and private sectors around the
world. The Company's principal operating subsidiary, Ambac Assurance Corporation
("Ambac Assurance"), a leading provider of financial guarantees for municipal
and structured finance obligations, has earned triple-A ratings, the highest
ratings available from Moody's Investors Service, Inc., Standard & Poor's
Ratings Group, Fitch, and Rating and Investment Information, Inc. The Company,
through its subsidiaries, also provides investment agreements, interest rate
swaps and investment advisory and cash management services, primarily to states,
municipalities and municipal authorities.
The Company's consolidated unaudited interim financial statements have
been prepared on the basis of accounting principles generally accepted in the
United States of America ("GAAP") and, in the opinion of management, reflect all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the Company's financial condition, results of operations
and cash flows for the periods presented. The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported revenues and expenses during the reporting period.
Actual results could differ from those estimates. The results of operations for
the three months and nine months ended September 30, 2000 may not be indicative
of the results that may be expected for the full year ending December 31, 2000.
These consolidated financial statements and notes should be read in conjunction
with the financial statements and notes included in the audited consolidated
financial statements of Ambac Financial Group, Inc. and its subsidiaries
contained in (i) the Company's Annual Report on Form 10-K for the year ended
December 31, 1999, which was filed with the Securities and Exchange Commission
(the "Commission") on March 30, 2000, (ii) the Company's Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 2000, which was filed with
the Commission on May 12, 2000 and (iii) the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 2000, which was filed with the
Commission on August 11, 2000.
The consolidated financial statements include the accounts of the Company
and each of its subsidiaries. All significant intercompany balances have been
eliminated.
Certain reclassifications have been made to prior periods' amounts to
conform to the current period's presentation.
(2) Segment Information
The Company has two reportable segments, as follows: (1) Financial
Guarantee, which primarily guarantees municipal and structured finance
obligations; and (2) Financial Services, which provides investment agreements,
interest rate swaps, and investment advisory and cash management services.
7
Notes to Consolidated Unaudited Financial Statements (Continued)
(Dollars in thousands)
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different marketing strategies, personnel skill sets and
technology.
Pursuant to insurance and indemnity agreements, Ambac Assurance guarantees
the swap and investment agreement obligations of those financial services
subsidiaries. Intersegment revenues include the premiums earned under those
agreements, but which are eliminated in the consolidated financial statements.
Such premiums are accounted for as if they were premiums to third parties, that
is, at current market prices.
Information provided below for "Corporate and Other" relates to Ambac
Financial Group, Inc. corporate activities. Revenue from unaffiliated customers
in the "Corporate and Other" column consists primarily of interest income and
realized gains or losses from investment securities.
The following tables summarize the financial information by reportable
segment as of and for the three and nine-month periods ended September 30, 2000
and 1999:
Financial Financial Corporate Intersegment
Three months ended September 30, Guarantee Services And Other Eliminations Consolidated
------------- ------------- ------------ --------------- ----------------
2000:
Revenues:
Unaffiliated customers....... $ 142,895 $ 10,256 $ 517 $ - $ 153,668
Intersegment................. 909 (815) 15,958 (16,052) -
------------- ------------- ------------ --------------- ----------------
Total revenues................... $ 143,804 $ 9,441 $ 16,475 ($16,052) $ 153,668
------------- ------------- ------------ --------------- ----------------
Income before income taxes:
Unaffiliated customers....... $ 125,779 $ 4,448 ($10,887) $ - $ 119,340
Intersegment................. 909 (809) 15,957 (16,057) -
------------- ------------- ------------ --------------- ----------------
Total income before income taxes. $ 126,688 $ 3,639 $ 5,070 ($16,057) $ 119,340
------------- ------------- ------------ --------------- ----------------
Identifiable assets.............. $4,591,374 $5,474,619 $ 48,731 $ - $10,114,724
------------- ------------- ------------ --------------- ----------------
1999:
Revenues:
Unaffiliated customers....... $ 122,929 $ 12,105 $ 2,164 $ - $ 137,198
Intersegment................. 758 (846) 13,148 (13,060) -
------------- ------------- ------------ --------------- ----------------
Total revenues................... $ 123,687 $ 11,259 $ 15,312 ($13,060) $ 137,198
------------- ------------- ------------ --------------- ----------------
Income before income taxes:
Unaffiliated customers....... $ 107,953 $ 5,931 ($8,501) $ - $ 105,383
Intersegment................. 1,164 (1,023) 13,148 (13,289) -
------------- ------------- ------------ --------------- ----------------
Total income before income taxes. $ 109,117 $ 4,908 $ 4,647 ($13,289) $ 105,383
------------- ------------- ------------ --------------- ----------------
Identifiable assets.............. $3,952,407 $7,217,599 $ 155,657 $ - $11,325,663
------------- ------------- ------------ --------------- ----------------
8
Notes to Consolidated Unaudited Financial Statements (Continued)
(Dollars in thousands)
Financial Financial Corporate Intersegment
Nine months ended September 30, Guarantee Services And Other Eliminations Consolidated
------------- ------------- ------------ --------------- ----------------
2000:
Revenues:
Unaffiliated customers....... $ 416,987 $ 38,554 $ 1,522 $ - $ 457,063
Intersegment................. 2,679 (2,463) 47,886 (48,102) -
------------- ------------- ------------ --------------- ----------------
Total revenues................... $ 419,666 $ 36,091 $ 49,408 ($48,102) $ 457,063
------------- ------------- ------------ --------------- ----------------
Income before income taxes:
Unaffiliated customers....... $ 365,668 $ 19,991 ($32,055) $ - $ 353,604
Intersegment................. 2,679 (2,412) 47,885 (48,152) -
------------- ------------- ------------ --------------- ----------------
Total income before income taxes. $ 368,347 $ 17,579 $ 15,830 ($48,152) $ 353,604
------------- ------------- ------------ --------------- ----------------
Identifiable assets.............. $4,591,374 $5,474,619 $ 48,731 $ - $10,114,724
------------- ------------- ------------ --------------- ----------------
1999:
Revenues:
Unaffiliated customers....... $ 345,054 $ 34,655 $ 9,362 $ - $ 389,071
Intersegment................. 2,300 (2,586) 39,491 (39,205) -
------------- ------------- ------------ --------------- ----------------
Total revenues................... $ 347,354 $ 32,069 $ 48,853 ($39,205) $ 389,071
------------- ------------- ------------ --------------- ----------------
Income before income taxes:
Unaffiliated customers....... $ 301,289 $ 14,725 ($22,695) $ - $ 293,319
Intersegment................. 2,848 (2,990) 39,491 (39,349) -
------------- ------------- ------------ --------------- ----------------
Total income before income taxes. $ 304,137 $ 11,735 $ 16,796 ($39,349) $ 293,319
------------- ------------- ------------ --------------- ----------------
Identifiable assets.............. $3,952,407 $7,217,599 $ 155,657 $ - $11,325,663
------------- ------------- ------------ --------------- ----------------
The following table summarizes gross premiums written and net premiums
earned included in the financial guarantee segment by location of risk for the
three and nine-month periods ended September 30, 2000 and 1999.
Three Months Nine Months
------------------------------------------- ------------------------------------------
Gross Premiums Net Premiums Gross Premiums Net Premiums
2000: Written Earned Written Earned
--------------------- ------------------- --------------------- ------------------
United States.......................... $124,160 $65,262 $256,963 $196,399
Australia.............................. 9,163 942 26,589 2,386
Mexico................................. 3,960 1,942 12,106 5,555
Japan.................................. 1,903 1,737 5,374 4,943
France................................. 129 268 650 861
United Kingdom......................... 1,930 2,130 15,429 4,554
Internationally diversified (1)........ 3,709 4,299 9,656 9,727
Other international.................... 2,995 2,115 12,189 6,349
--------------------- ------------------- --------------------- ------------------
Total.............................. $147,949 $78,695 $338,956 $230,774
--------------------- ------------------- --------------------- ------------------
1999:
United States.......................... $ 97,228 $60,468 $254,231 $171,789
Australia.............................. 183 419 729 1,085
Mexico................................. 3,533 1,431 7,469 3,263
Japan.................................. 1,235 1,037 3,723 3,504
France................................. 833 341 1,914 772
United Kingdom......................... 388 851 15,585 2,259
Internationally diversified (1)........ 2,363 2,051 7,838 5,568
Other international.................... 1,078 1,727 4,214 4,326
--------------------- ------------------- --------------------- ------------------
Total.............................. $106,841 $68,325 $295,703 $192,566
--------------------- ------------------- --------------------- ------------------
1) Internationally diversified may include components of domestic exposure.
9
Notes to Consolidated Unaudited Financial Statements (Continued)
(Dollars in thousands)
(3) Three-for-Two Stock Split
On October 18, 2000, the Company announced that its Board of Directors had
approved a three-for-two split of the Company's common stock in the form of a
50% common stock dividend. Stockholders of record on November 27, 2000 will
receive on December 12, 2000, one additional share for every two shares they own
on the record date. The pro-forma number of common shares outstanding presented
on the Consolidated Statements of Operations assumes that the additional shares
issued on the effective date of the three-for-two split, will be equal to 50% of
the number of shares outstanding at September 30, 2000. The actual number of
additional shares issued on the effective date may differ.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following paragraphs describe the consolidated results of operations of
Ambac Financial Group, Inc. and its subsidiaries (sometimes collectively
referred to as the "Company") for the three and nine-month periods ended
September 30, 2000 and 1999, and its financial condition as of September 30,
2000 and December 31, 1999. These results include the Company's two reportable
segments: Financial Guarantee and Financial Services.
Materials in this Form 10-Q may contain information that includes or
is based upon forward-looking statements within the meaning of the Securities
Litigation Reform Act of 1995. Forward-looking statements give the Company's
expectations or forecasts of future events. You can identify these statements by
the fact that they do not relate strictly to historical or current facts. They
use words such as "anticipate," "estimate," "expect," "project," "intend,"
"plan," "believe," and other words and terms of similar meaning in connection
with a discussion of future operating or financial performance. In particular,
these include statements relating to future actions, prospective services or
products, future performance or results of current and anticipated services or
products, sales efforts, expenses, the outcome of contingencies such as legal
proceedings, and financial results.
Any or all of the Company's forward-looking statements here or in
other publications may turn out to be wrong. They can be affected by inaccurate
assumptions or by known or unknown risks and uncertainties. Many such factors
will be important in determining the Company's actual future results. The
Company's actual results may vary materially, and there are no guarantees about
the performance of the Company's stock. These statements are based on current
expectations and the current economic environment. They involve a number of
risks and uncertainties that are difficult to predict. These statements are not
guarantees of future performance. Actual results could differ materially from
those expressed or implied in the forward-looking statements. Among factors that
could cause actual results to differ materially are: (1) changes in the
economic, credit or interest rate environment in the United States and abroad;
(2) the level of activity within the national and worldwide debt markets; (3)
competitive conditions and pricing levels; (4) legislative and regulatory
developments; (5) changes in tax laws; and (6) other risks and uncertainties
that have not been identified at this time. The Company undertakes no obligation
to publicly correct or update any forward-looking statement if we later become
aware that it is not likely to be achieved. You are advised, however, to consult
any further disclosures we make on related subjects in the Company's reports to
the Commission.
10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Results of Operations
Consolidated Net Income
The Company's net income for the three months ended September 30, 2000 was
$90.9 million or $1.27 per diluted share. This represents a 14% increase from
the three months ended September 30, 1999 net income of $79.8 million and a 13%
increase in net income per diluted share from $1.12 in the three months ended
September 30, 1999. The increase in net income was primarily attributable to
higher Financial Guarantee operating earnings driven by a $20.0 million, or 16%,
increase in revenues. The Company's net income for the nine months ended
September 30, 2000 was $269.2 million, or $3.77, per diluted share. This
represents an increase of 20% from the comparable prior period net income of
$224.0 million, or $3.14, per diluted share.
Financial Guarantee
The Company provides financial guarantees through its principal operating
subsidiary, Ambac Assurance Corporation ("Ambac Assurance"). Ambac Assurance's
wholly owned subsidiary, Ambac Assurance UK Limited, serves clients in the
international market. Additionally, Ambac Assurance had served clients in
international markets through its participation in MBIA.AMBAC International, an
unincorporated joint venture with MBIA Insurance Corporation ("MBIA"). During
2000, Ambac Assurance and MBIA announced the restructuring of that arrangement
whereby the two companies continue the current reciprocal reinsurance
arrangements for international business through at least the end of 2000;
however, they will market and originate financial guarantees independently. This
restructuring was in reaction to a growing acceptance of the financial guarantee
product internationally and the belief that separate origination functions would
be beneficial to the further expansion of the market. Originally, the
restructuring would not have applied to joint venture activities in Japan. Ambac
Assurance and MBIA subsequently determined to include the Japan market in the
restructuring in order to use a consistent approach to the conduct of business
in the global markets.
Ambac Credit Products, L.L.C. ("ACP"), a wholly owned subsidiary of Ambac
Assurance, also provides credit protection in the global markets in the form of
structured credit derivatives.
Gross Par Written. Ambac Assurance guaranteed $16.5 billion in par value
------------------
during the three months ended September 30, 2000, a 16% decrease from $19.7
billion in par during the comparable prior year period. During the nine months
ended September 30, 2000, Ambac Assurance guaranteed $48.3 billion in par value,
a decrease of 14% from $56.3 billion in par value during the comparable period
in 1999. Par value written for the third quarter of 2000 was comprised of $7.6
billion from municipal bond obligations, $5.5 billion from structured finance
obligations and $3.4 billion from international obligations, compared to $7.8
billion, $10.4 billion and $1.6 billion, respectively, in the third quarter of
1999. Par value written for the nine months ended September 30, 2000 was
comprised of $14.2 billion from municipal bond obligations, $21.7 billion from
structured finance obligations and $12.4 billion from international obligations,
compared to $24.4 billion, $26.8 billion and $5.1 billion, respectively, in the
nine months ended September 30, 1999. Insured municipal obligations for the
three and nine month periods
11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
ended September 30, 2000 were affected by declines of 10% and 18%, respectively,
in total issuance versus comparable prior year periods. The decline in total
issuance was largely attributable to the rising interest rate environment
causing a decline in the refinancing component of the market during the periods.
International growth is largely attributable to Ambac Assurance's further
penetration into the credit derivatives market.
Management anticipates, based on growth experienced in the last few years,
that the Company's structured finance and international businesses will grow
more rapidly than the municipal business. Management believes that business
written in the structured finance and international markets may see large
quarterly variances primarily due to general market conditions and the
developmental nature of segments of these markets.
Gross Premiums Written. Gross premiums written for the three and nine-month
-----------------------
periods ended September 30, 2000 were $147.9 million and $339.0 million,
respectively, an increase of 38% over $106.8 million in the three-month period
ended September 30, 1999 and an increase of 15% over $295.7 million in the nine
months ended September 30, 1999. On the municipal side, the Company saw an
increase in up-front premiums written for the three months ended September 30,
2000, primarily resulting from a large, highly structured municipal transaction.
The growth in Structured Finance and International premiums written is a result
of the increased level of guaranteed installment deals combined with the annuity
nature of the premium receipts. Accordingly, premiums written for Structured
Finance and International installment premiums has grown to $118.3 million for
the nine months ended September 30, 2000 from $69.6 million in the comparable
period in 1999. The following tables set forth the amounts of gross premiums
written and the related gross par written by type:
Three Months Ended September 30,
---------------------------------------------------------------------
(Dollars in Millions) 2000 1999
-------------------------------- ---------------------------------
Gross Gross Gross Gross
Premiums Par Premiums Par
Written Written Written Written
-------------- -------------- --------------- --------------
Municipal finance:
Up-front:
New issue............................................ $ 80.9 $ 6,720 $ 69.0 $ 6,725
Secondary market..................................... 2.2 246 4.0 303
-------------- -------------- --------------- --------------
Sub-total up-front.................................. 83.1 6,966 73.0 7,028
Installment......................................... 4.2 685 4.2 746
-------------- -------------- --------------- --------------
Total municipal finance........................... 87.3 7,651 77.2 7,774
-------------- -------------- --------------- --------------
Structured finance:
Up-front............................................. 6.9 316 - -
Installment.......................................... 29.9 5,187 20.0 10,396
-------------- -------------- --------------- --------------
Total structured finance........................ 36.8 5,503 20.0 10,396
-------------- -------------- --------------- --------------
International(1):
Up-front....................................... 9.6 502 0.7 73
Installment.................................... 14.2 2,881 8.9 1,489
-------------- -------------- --------------- --------------
Total international.......................... 23.8 3,383 9.6 1,562
-------------- -------------- --------------- --------------
Total.......................................... $147.9 $16,537 $106.8 $19,732
============== ============== =============== ==============
Total up-front.......................................... $ 99.6 $ 7,784 $ 73.7 $ 7,101
Total installment....................................... 48.3 8,753 33.1 12,631
-------------- -------------- --------------- --------------
Total.......................................... $147.9 $16,537 $106.8 $19,732
============== ============== =============== ==============
12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Nine Months Ended September 30,
---------------------------------------------------------------------
(Dollars in Millions) 2000 1999
-------------------------------- ---------------------------------
Gross Gross Gross Gross
Premiums Par Premiums Par
Written Written Written Written
-------------- -------------- --------------- --------------
Municipal finance:
Up-front:
New issue............................................. $129.9 $11,898 $183.7 $20,826
Secondary market...................................... 8.6 842 7.9 933
-------------- -------------- --------------- --------------
Sub-total up-front................................... 138.5 12,740 191.6 21,759
Installment.......................................... 14.5 1,500 15.1 2,666
-------------- -------------- --------------- --------------
Total municipal finance............................ 153.0 14,240 206.7 24,425
-------------- -------------- --------------- --------------
Structured finance:
Up-front.............................................. 25.5 1,878 0.5 36
Installment........................................... 78.5 19,776 47.0 26,712
-------------- -------------- --------------- --------------
Total structured finance......................... 104.0 21,654 47.5 26,748
-------------- -------------- --------------- --------------
International(1):
Up-front........................................ 42.2 1,427 18.9 349
Installment..................................... 39.8 10,946 22.6 4,749
-------------- -------------- --------------- --------------
Total international............................. 82.0 12,373 41.5 5,098
-------------- -------------- --------------- --------------
Total........................................... $339.0 $48,267 $295.7 $56,271
============== ============== =============== ==============
Total up-front........................................... $206.3 $16,045 $211.0 $22,144
Total installment........................................ 132.7 32,222 84.7 34,127
-------------- -------------- --------------- --------------
Total........................................... $339.0 $48,267 $295.7 $56,271
============== ============== =============== ==============
(1) Gross par written is (increased)/reduced by reinsurance cessions to MBIA on
international business of ($72.4) million and $538.9 million for the three
months ended September 30, 2000 and 1999, respectively, and $4,828.7 million and
$2,685.3 million for the nine months ended September 30, 2000 and 1999,
respectively.
Ceded Premiums Written. Ceded premiums written for the three and nine
-----------------------
months ended September 30, 2000 were $20.1 million and $62.5 million,
respectively, an increase of 69% from $11.9 million in the three months ended
September 30, 1999 and an increase of 87% from $33.4 million in the nine months
ended September 30, 1999. The increase in ceded premiums written for the third
quarter of 2000 was primarily due to increased ceded premiums written on
structured and international business. The increase in ceded premiums written
for the nine months ended September 30, 2000 was affected by a one-time cede of
municipal health care exposure during the first quarter of 2000 as well as the
increased ceded premiums written on structured and international policies during
2000. Ceded premiums written were 13.6% and 18.4% of gross premiums written for
the three and nine months ended September 30, 2000, respectively, compared with
11.1% and 11.3% for the three and nine months ended September 30, 1999,
respectively.
Net Premiums Written. Net premiums written for the three and nine months
---------------------
ended September 30, 2000 were $127.9 million and $276.5 million, respectively.
The 35% increase from $94.9 million in the three months ended September 30, 1999
reflects the higher level of gross premiums written during the third quarter of
2000, partially offset by increased ceded premiums. The increase of 5% from
$262.3 million in the nine months ended September 30, 1999 reflects the higher
level of gross premiums written, partially offset by higher premiums ceded to
reinsurers during the nine-month period as compared to the corresponding prior
period.
Net Premiums Earned. Net premiums earned during the three and nine months
--------------------
ended September 30, 2000 were $78.7 million and $230.8 million, respectively, an
increase of 15% from $68.3 million in the three months ended September 30, 1999,
and an increase of 20% from $192.6 million in the nine months ended September
30, 1999. These increases were
13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
primarily the result of increased normal net premiums earned (defined as net
premiums earned excluding the effects of refundings, calls and other
accelerations of previously insured obligations, collectively referred to as
"refundings") during the periods. Normal net premiums earned increased 24% from
$60.9 million in the third quarter of 1999 to $75.4 million in the third quarter
of 2000. Normal net premiums earned for the nine months ended September 30, 2000
were $212.6 million, an increase of 29% from $164.8 million in the nine months
ended September 30, 1999. The increases in normal net premiums earned resulted
primarily from strong business written from prior periods in all areas,
particularly Structured Finance and International.
Net premiums earned include accelerated premiums that result from
refundings. When an issue insured by Ambac Assurance has been refunded or
called, the remaining unearned premium (net of refunding credits, if any) is
generally earned at that time. Refunding levels vary depending upon a number of
conditions, primarily the relationship between current interest rates and
interest rates on outstanding debt. Net premiums earned for the three and nine
months ended September 30, 2000 included $3.3 million (which had a net income
per diluted share effect of $0.03) and $18.2 million (which had a net income per
diluted share effect of $0.15), respectively, from refundings. Net premiums
earned for the three and nine months ended September 30, 1999 included $7.4
million (which had a net income per diluted share effect of $0.06) and $27.7
million (which had a net income per diluted share effect of $0.22),
respectively, from refundings.
Net Investment Income. Net investment income for the three and nine months
----------------------
ended September 30, 2000 were $61.1 million and $177.6 million, respectively, an
increase of 16% from $52.9 million in the three months ended September 30, 1999
and an increase of 16% from $153.7 million in the nine months ended September
30, 1999. The increases were primarily attributable to the growth of the
investment portfolio from ongoing operations. Additionally, investment income
benefited from capital contributions from the parent company to Ambac Assurance.
Ambac Assurance's investments in tax-exempt securities amounted to 75% of the
total fair value of its portfolio as of September 30, 2000, versus 73% at
September 30, 1999. The average pre-tax yield-to-maturity on the investment
portfolio was 6.15% and 6.05% as of September 30, 2000 and 1999, respectively.
Net Realized Losses. Net realized losses for the three and nine months
--------------------
ended September 30, 2000 were $2.5 million and $2.1 million, respectively,
compared to net realized losses of $0.1 million and $5.5 million for the three
and nine months ended September 30, 1999. Included in net realized losses for
the three and nine months ended September 30, 2000 is $2.3 million and $5.0
million, respectively, of foreign exchange losses related to Ambac Assurance's
investment portfolio. Foreign exchange losses were not material in 1999. It is
the Company's policy to protect its return on capital on international financial
guarantees where the premium is received up-front in foreign currency by
investing in high-grade local currency securities. This insures that the
Company's return on capital remains relatively constant, as the insurance
liability, in U.S. dollar terms, rises or falls over time.
Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses
------------------------------------
for the three and nine months ended September 30, 2000 were $3.9 million and
$10.8 million, respectively, compared to $3.0 million and $8.0 million for the
three and nine months ended September 30, 1999, respectively. These increases
are due to the overall increase in business activity in most sectors. Losses and
loss adjustment expenses are generally based upon
14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
estimates of the ultimate aggregate losses inherent in the insured portfolio.
There was no salvage received during the respective periods in 2000 and 1999.
Underwriting and Operating Expenses. Underwriting and operating expenses
------------------------------------
for the three and nine months ended September 30, 2000 were $13.2 million and
$40.6 million, respectively, an increase of 10% from $12.0 million in the three
months ended September 30, 1999 and an increase of 13% from $35.8 million in the
nine months ended September 30, 1999. Underwriting and operating expenses
consist of gross underwriting and operating expenses, less the deferral to
future periods of expenses and reinsurance commissions related to the
acquisition of new insurance contracts, plus the amortization of previously
deferred expenses and reinsurance commissions. During the three and nine-month
periods ended September 30, 2000, gross underwriting and operating expenses were
$22.5 million and $63.5 million, respectively, an increase of 22% from $18.5
million in the three months ended September 30, 1999 and an increase of 17% from
$54.3 million in the nine months ended September 30, 1999. The increases reflect
the overall increased business activity during the periods and are primarily due
to increased compensation related to new hires and increased premium tax
expense. Underwriting and operating expenses deferred for the three and nine
months ended September 30, 2000 were $14.7 million and $39.7 million,
respectively, compared to $11.6 million and $33.3 million for the three and nine
months ended September 30, 1999, respectively. The amortization of previously
deferred expenses and reinsurance commissions for the three and nine months
ended September 30, 2000 were $5.6 million and $16.9 million, respectively,
compared to $5.6 million and $15.3 million for the three and nine months ended
September 30,1999, respectively.
Financial Services
Through its financial services subsidiaries, the Company provides a variety
of financial products including investment agreements, interest rate swaps and
investment advisory and cash management services, to its clients which include
states, municipalities and their authorities, school districts, and hospitals
and health organizations.
Revenues. Revenues, excluding realized gains and losses, for the three and
---------
nine months ended September 30, 2000 were $10.9 million and $46.4 million,
respectively, down 10% from $12.1 million for the three months ended September
30, 1999 and up 22% from $37.9 million in the nine months ended September 30,
1999. Investment agreement revenues declined to $4.6 million in the third
quarter of 2000 compared to $6.2 million in the third quarter of 1999, primarily
due to lower volume in that business. Interest rate swap revenues declined 10%,
from $2.9 million in the third quarter of 1999 to $2.6 million in the third
quarter of 2000. The declines in the investment agreement and interest rate swap
businesses were partially offset by a 24% increase in the investment advisory
and cash management revenues. Interest rate swap revenues for the nine months
ended September 30, 2000 were $21.4 million, up 83% from $11.7 million in the
nine months ended September 30, 1999 on increased volume, primarily in the
second quarter of 2000. Investment agreement revenues for the nine months ended
September 30, 2000 were $15.4 million, down 13% from $17.8 million in the nine
months ended September 30, 1999. Investment advisory and cash management
revenues for the nine months ended September 30, 2000 were $9.6 million, up 14%
from $8.4 million in the nine months ended September 30, 1999.
15
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Expenses. Expenses for the three and nine months ended September 30, 2000
---------
were $5.8 million and $18.6 million, respectively, down 6% from $6.2 million for
the three months ended September 30, 1999 and down 7% from $19.9 million for the
nine months ended September 30, 1999. The decline in expenses is primarily
driven by lower compensation costs at the financial services subsidiaries.
Corporate Items
Interest Expense. Interest expense for the three and nine months ended
-----------------
September 30, 2000 was $9.4 million and $28.2 million, respectively, compared to
$9.1 million for the three months ended September 30, 1999 and $27.3 million for
the nine months ended September 30, 1999. These increases are primarily due to
increased fees associated with the December 1999 increase in Ambac Assurance's
third party capital support.
Income Taxes. Income taxes for the three and nine months ended September
-------------
30, 2000 were at an effective rate of 23.8% and 23.9%, respectively, versus
24.3% and 23.6% for the three and nine months ended September 30, 1999.
Supplemental Analytical Financial Data
Management, equity analysts and investors consider the following four
measures important in analyzing the financial results, and measuring the
intrinsic value of the Company: core earnings; operating earnings; adjusted
gross premiums written; and adjusted book value. However, none of these measures
are promulgated in accordance with GAAP and should not be considered as
substitutes for net income, gross premiums written and book value. The
definitions of core earnings, operating earnings, adjusted gross premiums
written and adjusted book value described below may differ from the definitions
used by other public holding companies of financial guarantee insurers.
Core Earnings. The Company defines core earnings as consolidated net
--------------
income, less the effect of net realized gains and losses, net insurance premiums
earned from refundings and calls and certain non-recurring items. Core earnings
for the three and nine months ended September 30, 2000 were $91.1 million and
$265.3 million, respectively, an increase of 20% from $75.6 million for the
three months ended September 30, 1999 and an increase of 24% from $213.4 million
for the nine months ended September 30, 1999. These increases were primarily the
result of higher normal net premiums earned from the growth in the financial
guarantee book of business and higher net investment income from the financial
guarantee segment, partially offset by higher expenses in the financial
guarantee business. Core earnings also increased for the nine-month period
comparison as a result of higher interest rate swap revenues, which is a
component of financial services revenues.
The Company has a 15% core earnings growth target. This is not an earnings
projection for a particular period but rather a long-term target based on
management's comfort level with the Company's earnings prospects. Periodic
actual results will vary from this target. The Company cannot provide a specific
growth target for operating earnings, as the changing interest rate environment
affects these results.
16
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Operating Earnings. The Company defines operating earnings as consolidated
-------------------
net income, less the effect of net realized gains and losses and certain non-
recurring items. Operating earnings for the three and nine months ended
September 30, 2000 were $92.9 million and $275.7 million, respectively, an
increase of 16% from $79.8 million in the three months ended September 30, 1999
and an increase of 20% from $229.2 million in the nine months ended September
30, 1999.
The following table reconciles net income computed in accordance with
GAAP to operating earnings and core earnings for the three and nine months ended
September 30, 2000 and 1999:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------
(Dollars in Millions) 2000 1999 2000 1999
----------- --------- --------- ----------
Net Income................................................ $90.9 $79.8 $269.2 $224.0
Net realized losses, after tax............................ 2.0 - 6.5 5.2
----------- --------- --------- ----------
Operating earnings..................................... 92.9 79.8 275.7 229.2
Premiums earned from refundings, calls and other
accelerations, after tax................................. (1.8) (4.2) (10.4) (15.8)
----------- --------- --------- ----------
Core earnings.......................................... $91.1 $75.6 $265.3 $213.4
=========== ========= ========= ==========
There were 71.8 million and 71.4 million weighted-average diluted shares
outstanding during the three and nine months ended September 30, 2000,
respectively. The weighted-average number of diluted shares outstanding during
the three and nine months ended September 30, 1999 was 71.3 million and 71.4
million shares, respectively.
Adjusted Gross Premiums Written. The Company defines adjusted gross
--------------------------------
premiums written ("AGP") as gross up-front premiums written plus the present
value of estimated installment premiums written on insurance policies and
structured credit derivatives issued in the period. While the majority of
municipal finance premiums are collected up-front at policy issuance, the
majority of Ambac Assurance's structured finance and international premiums are
collected on an installment basis. AGP for the three and nine months ended
September 30, 2000 were $179.9 million and $467.5 million, respectively, up 9%
from $164.6 million written in the three months ended September 30, 1999 and up
9% from $429.8 million written in the nine months ended September 30, 1999. The
increase in the third quarter of 2000 was primarily due to increased activity in
structured finance and municipal finance transactions. On the municipal side,
the Company experienced an increase of 8% in AGP. Although overall municipal
market volume and insured penetration declined, the Company's market share for
the quarter increased. The increase in the nine months ended September 30, 2000
was primarily due to increased activity in structured finance and international
transactions, partially offset by a significant decline in municipal
transactions driven by lower issuance and decreased market penetration during
the period. The structured and international AGP is concentrated in large
transactions. Structured and international transactions guaranteed by Ambac
Assurance with AGP greater than $4.0 million increased from four and eleven for
the three and nine months ended September 30, 1999, respectively, to six and
twenty-four for the three and nine months ended September 30, 2000,
respectively. The present value of future installment premiums written for the
three and nine months ended September 30, 2000 was $82.6 million and $278.8
million, respectively, a decrease of 9% from $90.9 million written in
17
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
the third quarter of 1999, and an increase of 22% from $227.6 million in the
nine months ended September 30, 1999. The aggregate net present value of
estimated future installment premiums was $668.8 million and $527.2 million as
of September 30, 2000 and December 31, 1999, respectively.
The following table sets forth the amounts of AGP by type and percent of
total for the three and nine months ended September 30, 2000 and 1999:
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------------- --------------------------------------
(Dollars in Millions) 2000 % 1999 % 2000 % 1999 %
-------- ------ -------- ------ ------- ------- ------- -------
Municipal Finance:
Up-front:
New issue.............................. $ 80.9 45% $ 69.0 42% $129.9 28% $183.7 43%
Secondary market....................... 2.2 1 4.0 2 8.6 2 8.0 2
-------- ------ -------- ------ ------- ------- ------- -------
Sub-total up-front.................. 83.1 46 73.0 44 138.5 30 191.7 45
Installment............................... 6.5 4 9.7 6 20.4 4 33.3 7
-------- ------ -------- ------ ------- ------- ------- -------
Total Municipal Finance......... 89.6 50 82.7 50 158.9 34 225.0 52
-------- ------ -------- ------ ------- ------- ------- -------
Structured Finance:
Up-front............................... 7.0 4 - - 24.8 6 0.5 -
Installment............................ 46.6 26 46.0 28 150.8 32 123.1 29
-------- ------ -------- ------ ------- ------- ------- -------
Total Structured Finance.......... 53.6 30 46.0 28 175.6 38 123.6 29
-------- ------ -------- ------ ------- ------- ------- -------
International (1):
Up-front............................. 7.2 4 0.7 1 25.4 5 10.0 2
Installment.......................... 29.5 16 35.2 21 107.6 23 71.2 17
-------- ------ -------- ------ ------- ------- ------- -------
Total International.............. 36.7 20 35.9 22 133.0 28 81.2 19
-------- ------ -------- ------ ------- ------- ------- -------
Total adjusted gross premiums................. $179.9 100% $ 164.6 100% $467.5 100% $429.8 100%
======== ====== ======== ====== ======= ======= ======= =======
Total up-front................................ $ 97.3 54% $ 73.7 45% $188.7 40% $202.2 47%
Total installment............................. 82.6 46 90.9 55 278.8 60 227.6 53
-------- ------ -------- ------ ------- ------- ------- -------
Total adjusted gross premiums................ $179.9 100% $164.68 100% $467.5 100% $429.8 100%
======== ====== ======== ====== ======= ======= ======= =======
(1) Adjusted gross premiums written is (increased)/reduced by reinsurance
cessions to MBIA on international business of ($0.6) million and $13.4 million
for the three months ended September 30, 2000 and 1999, respectively, and $46.5
million and $43.2 million for the nine months ended September 30, 2000 and 1999,
respectively.
Adjusted Book Value. Adjusted book value ("ABV") per common share increased
--------------------
14% to $51.01 at September 30, 2000 compared to $44.68 at December 31, 1999. The
Company derives ABV by beginning with stockholders' equity (book value) and
adding or subtracting the after-tax value of: the net unearned premium reserve;
deferred acquisition costs; the present value of estimated net future
installment premiums; and the unrealized gain or loss on investment agreement
liabilities. These adjustments will not be realized until future periods and may
differ materially from the amounts used in determining ABV. The following table
reconciles book value per share to ABV per share as of September 30, 2000 and
December 31, 1999. All amounts are calculated on a pre-split basis. The three-
for-two stock split takes place on December 12, 2000.
September 30, December 31,
2000 1999
------------------- -------------------
Book value per share.................................................. $33.80 $28.85
After-tax value of:
Net unearned premium reserve........................................ 11.65 11.28
Deferred acquisition costs.......................................... (1.37) (1.26)
Present value of installment premiums............................... 6.20 4.90
Unrealized gain on investment agreement liabilities................. 0.73 0.91
------------------- -------------------
Adjusted book value per share......................................... $51.01 $44.68
=================== ===================
18
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Liquidity and Capital Resources
Ambac Financial Group, Inc. Liquidity. The Company's liquidity, both on a
--------------------------------------
short-term basis (for the next twelve months) and a long-term basis (beyond the
next twelve months), is largely dependent upon (i) Ambac Assurance's and other
subsidiaries' ability to pay dividends or make payments to the Company; and (ii)
external financings. Pursuant to Wisconsin insurance laws, Ambac Assurance may
declare dividends, provided that, after giving effect to the distribution, it
would not violate certain statutory equity, solvency and asset tests. During the
nine months ended September 30, 2000, Ambac Assurance paid dividends of $44.9
million on its common stock to the Company.
The Company's principal uses of liquidity are for the payment of its
operating expenses, interest on its debt, dividends on its shares of common
stock, purchases of its common stock in the open market and capital investments
in its subsidiaries. Based on the amount of dividends that it expects to receive
from Ambac Assurance and other subsidiaries during the next twelve months and
the income it expects to receive from its investment portfolio, management
believes that the Company will have sufficient liquidity to satisfy its
liquidity needs over the next twelve months, including the ability to pay
dividends on its common stock in accordance with its dividend policy. Beyond the
next twelve months, Ambac Assurance's ability to declare and pay dividends to
the Company may be influenced by a variety of factors, including adverse market
changes, insurance regulatory changes and changes in general economic
conditions. Consequently, although management believes that the Company will
continue to have sufficient liquidity to meet its debt service and other
obligations over the long term, no guarantee can be given that Ambac Assurance
will be permitted to dividend amounts sufficient to pay all of the Company's
operating expenses, debt service obligations and dividends on its common stock.
Ambac Assurance Liquidity. The principal uses of Ambac Assurance's
--------------------------
liquidity are the payment of operating expenses, reinsurance premiums, income
taxes and dividends to the Company. Management believes that Ambac Assurance's
operating liquidity needs can be funded exclusively from its operating cash
flow. The principal sources of Ambac Assurance's liquidity are gross premiums
written, scheduled investment maturities, net investment income and receipts
from structured credit derivatives. During 1999, the Company contributed $200
million to Ambac Assurance to support the growth in the financial guarantee
business.
Financial Services Liquidity. The principal uses of liquidity by Financial
-----------------------------
Services subsidiaries are payment of investment agreement obligations pursuant
to defined terms, net obligations under interest rate swaps and related hedges,
operating expenses and income taxes. Management believes that its Financial
Services liquidity needs can be funded primarily from its operating cash flow
and the maturity of its invested assets. The principal sources of this segment's
liquidity are proceeds from issuance of investment agreements, net investment
income, maturities of securities from its investment portfolio (which are
invested with the objective of matching the cash flows of its obligations under
the investment agreements), net receipts from interest rate swaps and related
hedges, and fees for investment management services. Additionally, from time to
time, liquidity needs are satisfied by short-term inter-company loans from Ambac
Financial Group, Inc. The investment objectives with respect to investment
agreements are to achieve the highest after-tax total return, subject to a
minimum average credit quality rating of Aa/AA on invested assets, and to
maintain cash flow matching of invested assets to related liabilities to
minimize interest rate and liquidity exposure. Financial
19
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Services maintains a portion of its assets in short-term investments and
repurchase agreements in order to meet unexpected liquidity needs.
Credit Facilities. The Company and Ambac Assurance have a revolving credit
------------------
facility with three major international banks for $150 million, which expires in
August 2001 and provides a two-year term loan provision. The facility is
available for general corporate purposes, including the payment of claims. As of
September 30, 2000 and December 31, 1999, no amounts were outstanding under this
credit facility.
Ambac Assurance maintains third party capital support in the form of a
seven-year irrevocable limited recourse credit facility from a group of highly
rated banks for $750 million. This credit facility provides liquidity to Ambac
Assurance in the event claims from municipal obligations in its covered
portfolio exceed specified levels. Repayment of amounts drawn under the credit
facility are limited primarily to the amount of any recoveries of losses related
to municipal policy obligations. The line expires in December 2006. As of
September 30, 2000 and December 31, 1999, no amounts were outstanding under this
facility.
ACP has a revolving credit facility with a major international bank for $50
million that expires in June 2001 and provides a three-year term loan provision.
The facility is available to ACP for general corporate purposes, including
payments in regard to its credit derivative activities. As of September 30, 2000
and December 31, 1999, no amounts were outstanding under this facility.
Stock Repurchase Program. The Board of Directors of the Company has
-------------------------
authorized the establishment of a stock repurchase program that permits the
repurchase of up to 6,000,000 shares of the Company's Common Stock. During the
nine months ended September 30, 2000, the Company acquired approximately 312,000
shares for an aggregate amount of $15.0 million. Since inception of the Stock
Repurchase Program, the Company has acquired approximately 4,885,000 shares for
an aggregate amount of $175.4 million.
Balance Sheet. As of September 30, 2000, the fair value of the Company's
--------------
consolidated investment portfolio was $8.42 billion, down 6% from $8.96 billion
at December 31, 1999. This decrease was primarily due to a decrease in volume in
investment agreements, partially offset by cash flow from financial guarantee
operations and a decline in interest rates causing the fair value of the
investment portfolio to rise. As of September 30, 2000, stockholders' equity was
$2.37 billion, a 17% increase from year-end 1999 stockholders' equity of $2.02
billion. The increase stemmed from a combination of net income for the period
and an increase in the value of the investment portfolio due to a decline in
interest rates.
Cash Flows. Net cash provided by operating activities was $326.1 million
-----------
and $298.9 million during the nine months ended September 30, 2000 and 1999,
respectively. These cash flows were primarily provided by financial guarantee
operations.
Net cash used in financing activities was $893.4 million during the nine
months ended September 30, 2000, $890.2 million was used by investment
agreements draws paid (net of investment agreements issued). For the nine months
ended September 30, 1999, $344.8 million was provided by financing activities,
of which $355.6 million was from investment agreements issued (net of draws
paid).
20
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Net cash provided by investing activities was $568.5 million during the
nine months ended September 30, 2000, $2,240.1 million was provided by sales and
maturities of bonds, partially offset by $1,643.5 million used to purchase
bonds. For the nine months ended September 30, 1999, $640.2 million was used in
investing activities, $3,650.8 million was used to purchase bonds, partially
offset by proceeds from sales and maturities of bonds of $2,951.6 million.
Material Commitments. The Company has made no commitments for material
---------------------
capital expenditures within the next twelve months.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In the ordinary course of business, the Company, through its subsidiaries,
manages a variety of risks, principally market, credit, liquidity, operational,
and legal. These risks are identified, measured and monitored through a variety
of control mechanisms that are in place at different levels throughout the
organization.
Market risk represents the potential for losses that may result from
changes in the market value of a financial instrument as a result of changes in
market conditions. The primary market risks that would impact the value of the
Company's financial instruments are interest rate risk, basis risk (taxable
interest rates relative to tax-exempt interest rates, discussed below) and
credit spread risk. Below we discuss each of these risks and the specific types
of financial instruments impacted. Senior managers in the Company's market risk
management group are involved in setting and monitoring risk limits and the
application of risk measurement methodologies. The estimation of potential
losses arising from adverse changes in market conditions is a key element in
managing market risk. The Company utilizes various systems, models and stress
test scenarios to monitor and manage market risk. This process includes frequent
analyses of parallel and non-parallel shifts in the yield curve, "value-at-risk"
and changes in credit spreads. Models include estimates, made by management,
which utilize current and historical market information. The valuation results
from these models could differ materially from amounts that would actually be
realized in the market.
Financial instruments that may be adversely affected by changes in interest
rates consist primarily of investment securities, investment agreement
liabilities, debentures, and derivative contracts (primarily interest rate
swaps) used for hedging purposes. The Company monitors interest rate risk by
running frequent analyses of parallel and non-parallel shifts in the yield curve
and other stress test scenarios.
Financial instruments that may be adversely affected by changes in basis
include the Company's municipal interest rate swap portfolio. The Company,
through its affiliate Ambac Financial Services, L.P. ("AFSLP"), is a provider of
interest rate swaps to states, municipalities and their authorities and other
entities in connection with their financings. AFSLP manages its business with
the goal of being market neutral to changes in overall interest rates, while
seeking to profit from retaining some basis risk. If actual or projected tax-
exempt interest rates change in relation to taxable interest rates, the Company
will experience an unrealized mark-to-market gain or loss. Since late 1995, most
municipal interest rate swaps transacted by AFSLP contain provisions that are
designed to protect the Company against certain forms of tax reform, thus
mitigating its basis risk. The estimation of potential losses arising from
adverse changes in market relationships, known as value-at-risk, is a key
element in management's
21
Item 3. Quantitative and Qualitative Disclosures About Market Risk
(Continued)
monitoring of basis risk for the municipal interest rate swap portfolio. The
Company has developed a value-at-risk methodology to estimate potential losses
over a specified holding period and based on certain probabilistic assessments.
The Company's methodology estimates value-at-risk using a 300-day historical
"look back" period. This means that changes in market values are simulated using
market inputs from the past 300 days. Since no single measure can capture all
dimensions of market risk, the Company supplements its value-at-risk methodology
by performing daily analyses of parallel and non-parallel shifts in yield curves
and stress test scenarios which measure the potential impact of normal market
conditions, which might cause abnormal volatility swings or disruptions of
market relationships.
Financial instruments that may be adversely affected by changes in credit
spreads include the Company's outstanding structured credit derivative
contracts. The Company, through its affiliate, ACP, enters into structured
credit derivative contracts. These contracts require ACP to make payments upon
the occurrence of certain defined credit events relating to underlying
obligations (generally fixed income securities). If credit spreads of the
underlying obligations change, the market value of the related structured credit
derivative could change. As such, ACP could experience an unrealized mark-to-
market gain or loss. Market liquidity could also impact valuations. Changes in
credit spreads are generally caused by changes in the market's perception of the
credit quality of the underlying obligations. The majority of ACP's contracts
are partially hedged with various financial institutions or structured with
first loss protection. Such structuring mitigates ACP's risk of loss and the
price volatility of these financial instruments. Management models the potential
impact of credit spread changes on the value of the credit derivative contracts
and personnel in the Company's credit surveillance group monitor credit spread
risk.
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PART II - OTHER INFORMATION
Items 1, 2, 3, 4 and 5 are omitted either because they are inapplicable or
because the answer to such question is negative.
Item 6 - Exhibits and Reports on Form 8-K
(a) The following are annexed as exhibits:
Exhibit
Number Description
- -------------- -----------------------------------------------------------------------
27.00 Financial Data Schedule.
99.04 Ambac Assurance Corporation and Subsidiaries Consolidated Unaudited
Financial Statements as of September 30, 2000 and December 31, 1999
and for the periods ended September 30, 2000 and 1999.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the third quarter of 2000.
--------
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Ambac Financial Group, Inc.
(Registrant)
Dated: November 13, 2000 By: /s/ Frank J. Bivona
-------------------
Frank J. Bivona
Executive Vice President and Chief
Financial Officer (Principal Financial
and Accounting Officer and Duly
Authorized Officer)
24
INDEX TO EXHIBITS
Exhibit
Number Description
- ----------------- ----------------------------------------------------------------------
27.00 Financial Data Schedule.
99.04 Ambac Assurance Corporation and Subsidiaries Consolidated Unaudited
Financial Statements as of September 30, 2000 and December 31, 1999
and for the periods ended September 30, 2000 and 1999.
25