Exhibit 13.01
6
5-Year Performance
[bar chart]
Operating Earnings per Diluted Share/1/
(in dollars)
97 1.98
98 2.46
99 2.93
00 3.48
01 4.00
Core Earnings per Diluted Share/1/
(in dollars)
97 1.83
98 2.21
99 2.73
00 3.37
01 3.80
Operating Return on Equity/2/
97 12.9%
98 14.3%
99 15.1%
00 15.7%
01 16.0%
Expense Ratio/3/
97 28.4%
98 21.9%
99 18.2%
00 17.1%
01 17.0%
[end bar chart]
1 Operating earnings and core earnings are not substitutes for net income
computed in accordance with accounting principles generally accepted in the
United States of America (GAAP), but are important measures used by management,
equity analysts and investors to measure Ambac's financial results. Ambac
defines operating earnings as net income, less the effect of realized and
unrealized gains and losses and certain non-recurring items. Core earnings,
which Ambac reports as analytical data, is defined as operating earnings less
net insurance premiums earned from refundings and calls. The definitions of
operating earnings and core earnings used by Ambac may differ from definitions
of operating earnings and core earnings used by other public holding companies
of financial guarantors. See 'Supplemental Analytical Financial Data' in the
Management's Discussion and Analysis section of this report.
2 Operating return on equity is defined as operating earnings divided by
average stockholders' equity, exclusive of unrealized gains/losses on the
investment portfolio.
3 Expense ratio is computed as financial guarantee underwriting and operating
expenses divided by net premiums earned and other credit enhancement fees.
7
FINANCIAL HIGHLIGHTS
Ambac Financial Group, Inc. and Subsidiaries
(Dollars in millions, except per share amounts) 2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS HIGHLIGHTS
Gross premiums written $ 683.3 $ 483.1 $ 445.2 $ 361.0 $ 286.2
Net premiums earned and other credit
enhancement fees 400.4 323.4 268.3 213.0 154.0
Net investment income 267.8 241.0 209.3 186.2 159.7
Financial services net revenue 52.2 62.7 51.6 49.5 35.2
Total revenue 724.9 621.3 533.3 457.0 381.8
Losses and loss adjustment expenses 20.0 15.0 11.0 6.0 2.9
Financial guarantee underwriting and
operating expenses 68.0 55.2 48.8 46.7 40.7
Financial services expenses 21.8 24.8 25.8 35.5 28.0
Interest expense 40.4 37.5 36.5 32.8 21.3
Net income 432.9 366.2 307.9 254.0 223.0
Net income per share:
Basic 4.10 3.49 2.94 2.42 2.12
Diluted 3.97 3.41 2.88 2.37 2.09
Return on equity 15.5% 15.9% 15.0% 12.8% 12.8%
Cash dividends declared per common share 0.340 0.307 0.280 0.253 0.230
- -----------------------------------------------------------------------------------------------------------
BALANCE SHEET HIGHLIGHTS
Total investments, at fair value $ 10,287.9 $ 8,323.9 $ 8,962.5 $ 8,748.4 $ 6,915.1
Prepaid reinsurance 267.7 242.6 218.0 199.9 183.5
Total assets 12,267.7 10,120.3 11,345.1 11,212.3 8,291.7
Unearned premiums 1,780.3 1,546.3 1,431.1 1,294.2 1,179.0
Losses and loss adjustment expense reserve 152.4 132.4 121.5 115.8 103.3
Obligations under investment agreements,
investment repurchase agreements and
payment agreements 5,511.9 4,892.9 6,140.3 5,956.8 4,321.0
Debentures 619.3 424.1 424.0 423.9 223.9
Total stockholders' equity 2,983.7 2,596.1 2,018.5 2,096.1 1,872.5
- -----------------------------------------------------------------------------------------------------------
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Ambac Financial Group, Inc., headquartered in New York City, is a holding
company whose subsidiaries provide financial guarantees and financial services
to clients in both the public and private sectors around the world.
The following paragraphs describe the consolidated results of operations of
Ambac and its subsidiaries for 2001, 2000 and 1999, and its financial condition
as of December 31, 2001 and 2000. These results are presented for Ambac's two
reportable segments: Financial Guarantee and Financial Services. Management has
identified the accounting for loss and loss adjustment expenses and the
valuation of financial instruments as critical accounting policies. These
policies are discussed in the applicable sections of this document. This
discussion should be read in conjunction with the consolidated financial
statements and notes thereon included elsewhere in this report.
Materials in this annual report may contain information that includes or is
based upon forward-looking statements within the meaning of the Securities
Litigation Reform Act of 1995. Forward-looking statements present Ambac's
expectations or forecasts of future events. You can identify these statements by
the fact that they do not relate strictly to historical or current facts and
relate to future operating or financial performance.
Any or all of Ambac's forward-looking statements here or in other
publications may turn out to be wrong and are based on current expectations and
the current economic environment. Ambac's actual results may vary materially,
and there are no guarantees about the performance of Ambac's securities. Among
factors that could cause actual results to differ materially are: (1) changes in
the economic, credit or interest rate environment in the United States and
abroad; (2) the level of activity within the national and worldwide debt
markets; (3) competitive conditions and pricing levels; (4) legislative and
regulatory developments; (5) changes in tax laws; (6) the policies and actions
of the United States and other governments and (7) other risks and uncertainties
that have not been identified at this time. Ambac is not obligated to publicly
correct or update any forward-looking statement if we later become aware that it
is not likely to be achieved, except as required by law. You are advised,
however, to consult any further disclosures we make on related subjects in
Ambac's reports to the Securities and Exchange Commission.
RESULTS OF OPERATIONS
CONSOLIDATED NET INCOME. Ambac's net income in 2001 was $432.9 million or $3.97
per diluted share, an increase of 18% from $366.2 million, and 16% from $3.41
per diluted share in 2000. This increase was primarily attributable to growth
in Financial Guarantee operating income partially offset by a decline in
Financial Services operating income. Financial Guarantee revenues increased by
$106.5 million, or 19%. Financial Services revenues decreased by $4.3 million,
or 8%. Excluding realized and unrealized gains and losses, Financial Guarantee
and Financial Services revenues increased by 18% and decreased by 17%,
respectively. Financial Guarantee total expenses increased $17.8 million, or
25%.
Ambac's net income in 2000 increased 19% from $307.9 million, and 18% from
$2.88 per diluted share, in 1999. This increase was primarily attributable to
the growth in Financial Guarantee operating income.
Ambac's income before income taxes was $568.7 million in 2001, an 18%
increase from income before income taxes of $482.1 million in 2000. Of the
$568.7 million of income (loss) before income taxes in 2001, $583.9 million was
from Financial Guarantee, $27.4 million from Financial Services and $(42.6)
million from Corporate. Corporate consists primarily of Ambac's interest
expense. That compares to income (loss) before income taxes in 2000 of $495.2
million, $28.8 million and $(41.8) million from Financial Guarantee, Financial
Services and Corporate, respectively. Ambac's income before income taxes
increased 19% from $404.7 million in 1999. Income before income taxes in 1999
consisted of $414.3 million from Financial Guarantee, $22.7 million from
Financial Services and $(32.3) million from Corporate.
FINANCIAL GUARANTEE Ambac provides financial guarantees for debt obligations
through its principal operating subsidiary Ambac Assurance Corporation, as well
as credit protection in the form of structured credit derivatives through Ambac
Credit Products LLC, a wholly owned subsidiary of Ambac Assurance. Ambac
provides these services in three principal markets: public finance, structured
finance and international finance.
Public finance obligations are bonds issued by states, municipalities and
other governmental or not-for-profit entities located in the United States
("Public Finance"). Bond proceeds are used to finance or refinance a broad
spectrum of public purpose initiatives, including education, utility,
transportation, healthcare and other general purpose projects. Although Ambac
generally guarantees the full range of Public Finance obligations, more
recently, Ambac has been concentrating on those deals in the Public Finance area
which require more structuring skills. Certain projects which had been financed
by the local or U.S. government alone are now being financed through
public/private partnerships. In these transactions, debt service on the bonds,
rather than being paid solely by tax revenues or other governmental funds, are
being paid from a variety of revenue sources, including revenues derived from
the project itself. Examples of these deals include stadium financings, student
housing and military housing.
Structured finance obligations include the securitization of a variety of
asset types such as mortgages, home equity loans, leases and pooled corporate
obligations originated in the United States ("Structured Finance"). Currently,
the largest component of Ambac's structured business stems from the
securitization of mortgages and home equity loans. Another target area in
Structured Finance is the credit enhancement of pooled corporate obligations and
structured credit derivatives. These transactions involve the securitization of
a portfolio of corporate or asset-backed obligations and, as with all
securitizations, Ambac's participation is generally structured with first loss
protection or over-collateralization.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
International finance obligations include public purpose infrastructure
projects and asset-backed securities originated outside of the United States
("International Finance"). Ambac's emphasis internationally has been on Western
Europe, Japan and Australia. In the United Kingdom, Ambac has participated
extensively in the Private Finance Initiative, whereby the government has been
privatizing certain activities. In Japan, Ambac has an alliance with Yasuda
Kasai Financial Guarantee Insurance Co. Ltd., the only triple-A rated financial
guarantor in Japan. Ambac also participates in developing markets through
certain structures such as pooled debt obligations or future flow transactions.
Future flow transactions essentially securitize future revenue streams derived
from the sale of commodities or receivables.
GROSS PAR VALUE WRITTEN. Ambac Assurance guaranteed $90.1 billion of par value
bonds during 2001, an increase of 17% from $77.0 billion in 2000. Par value
written during 2000 was flat compared to $77.2 billion written during 1999.
Par value written during 2001 comprised $35.9 billion from the guarantee of
Public Finance bond obligations, $33.0 billion from Structured Finance
obligations and $21.2 billion from International Finance obligations, versus
$21.4 billion, $30.7 billion and $24.9 billion, respectively, in 2000 and $32.5
billion, $33.5 billion and $11.2 billion, respectively, in 1999. The 2001
increase in guaranteed Public Finance bond obligations was affected by a 47%
increase in total Public Finance issuance, an increase in insured market
penetration from 41% in 2000 to 47% in 2001, and an increase in Ambac's Public
Finance market share during the period from 22% in 2000 to 25% in 2001. The
increase in total issuance was largely the result of the lower interest rate
environment, causing an increase in both the refinancing and new money
components of the market during 2001. The increase in guaranteed Structured
Finance obligations during 2001 resulted from higher mortgage-backed guarantees
and greater penetration into other consumer asset-backed markets (auto rental,
credit card and lease securitizations). International Finance obligations
guaranteed during 2001 decreased, primarily due to lower structured credit
derivatives written. This was partially offset by greater penetration into the
United Kingdom residential mortgage-backed market.
The following table provides a breakdown of net par guaranteed outstanding
by market sector:
(Dollars in billions) 2001 2000
- -----------------------------------------------------------
Public Finance $196.6 $180.3
Structured Finance 72.6 64.7
International Finance 48.8 31.3
- -----------------------------------------------------------
Total net par outstanding $318.0 $276.3
===========================================================
GROSS PREMIUMS WRITTEN. Gross premiums written in 2001 were $683.3 million, an
increase of 41% from $483.1 million in 2000. Up-front premiums written in 2001
were $440.8 million, an increase of 49% from 295.9 million. This increase
resulted from increased business activity in all markets, particularly Public
Finance, as discussed above under "Gross Par Value Written." Installment
premiums written in 2001 were $242.5 million, an increase of 30% from $187.2
million in 2000. The growth in installment premiums is due to the growing book
of business in all segments with written premiums of $44.8 million for
transactions guaranteed in 2001. Gross premiums written in 2000 increased 8%
from $445.2 million in 1999. Strong business activity in Structured Finance and
International Finance transactions were partially offset by lower Public
Finance transactions. The following table sets forth the amounts of gross
premiums written and related gross par written by type:
(Dollars in millions) 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------
Gross Gross Gross Gross Gross Gross
Premiums Par Premiums Par Premiums Par
Written Written Written Written Written Written
- -------------------------------------------------------------------------------------------------------------------
Public Finance:
Up-front:
New issue $333.8 $30,617 $203.1 $17,660 $261.5 $27,242
Secondary market 21.0 1,678 14.0 1,261 14.8 1,570
- -------------------------------------------------------------------------------------------------------------------
Sub-total up-front 354.8 32,295 217.1 18,921 276.3 28,812
Installment 32.9 3,605 22.4 2,495 21.7 3,649
- -------------------------------------------------------------------------------------------------------------------
Total Public Finance 387.7 35,900 239.5 21,416 298.0 32,461
- -------------------------------------------------------------------------------------------------------------------
Structured Finance:
Up-front 9.5 1,135 25.6 2,179 7.9 842
Installment 138.5 31,921 108.2 28,518 67.6 32,623
- -------------------------------------------------------------------------------------------------------------------
Total Structured Finance 148.0 33,056 133.8 30,697 75.5 33,465
- -------------------------------------------------------------------------------------------------------------------
International Finance:
Up-front 76.5 2,965 53.2 3,180 35.6 1,242
Installment 71.1 18,212 56.6 21,691 36.1 10,018
- -------------------------------------------------------------------------------------------------------------------
Total International Finance 147.6 21,177 109.8 24,871 71.7 11,260
- -------------------------------------------------------------------------------------------------------------------
Total $683.3 $90,133 $483.1 $76,984 $445.2 $77,186
===================================================================================================================
Total up-front $440.8 $36,395 $295.9 $24,280 $319.8 $30,896
Total installment 242.5 53,738 187.2 52,704 125.4 46,290
- -------------------------------------------------------------------------------------------------------------------
Total $683.3 $90,133 $483.1 $76,984 $445.2 $77,186
===================================================================================================================
23
ADJUSTED GROSS PREMIUMS. (1) Adjusted gross premiums written were $974.3
million in 2001, up 37% from $710.7 million in 2000. The increase was due to
increased activity in all markets. Public Finance adjusted gross premiums were
$417.9 million in 2001, up 62% from $258.5 million in 2000. This increase
resulted from higher issuance, higher insured penetration and increased market
share, as discussed above under "Gross Par Value Written." Structured Finance
adjusted gross premiums were $257.3 million in 2001, up 11% from $231.8 million
in 2000. This increase resulted from increased business activity in consumer
asset-backed transactions, particularly mortgage, auto rental and credit card
asset types. International Finance adjusted gross premiums were $299.0 million
in 2001, up 36% from $220.5 million in 2000. International Finance business
continues to be dominated by large transactions with the top ten deals
comprising $153.3 million and $119.5 million in 2001 and 2000, respectively.
These deals represent 51% and 54% of total International Finance adjusted gross
premiums written for 2001 and 2000, respectively. For 2001, the top ten deals
comprise utility obligations, asset-backed securitizations and future flow
transactions. Adjusted gross premiums written in 2000 increased 9% from $652.0
million in 1999. The increase in 2000 was driven by pricing increases for all
business lines and was affected by changes in market issuance. The aggregate
net present value, calculated at a 7% discount rate, of estimated future
installment premiums was $986.8 million at December 31, 2001, up 29% from
$763.9 million at December 31, 2000.
CEDED PREMIUMS WRITTEN. Ceded premiums written in 2001 were $95.5 million, up
18% from $80.8 million in 2000. The increase in ceded premiums written in 2001
was largely due to higher cessions of Public Finance premiums pursuant to a
reinsurance surplus share treaty that Ambac Assurance implemented during 2001,
partially offset by lower cessions on International Finance transactions. This
new treaty covers certain large domestic and international policies that are
underwritten directly by Ambac Assurance. Ceded premiums written in 2000 were
up 31% from $61.8 million in 1999. Ceded premiums written in 2000 were affected
by a large facultative cede of Public Finance health care exposure. Excluding
this cession in 2000, ceded premiums written in 2000 increased 20% over ceded
premiums written in 1999, primarily due to increased gross premiums written as
well as increased ceded premiums written on international policies and
mortgage-backed business. Ceded premiums written were 14%, 17%, and 14% of
gross premiums written in 2001, 2000 and 1999, respectively.
NET PREMIUMS EARNED AND OTHER CREDIT ENHANCEMENT FEES. Net premiums earned and
other credit enhancement fees during 2001 were $400.4 million, an increase of
24% from $323.4 million in 2000. This increase was primarily the result of the
larger Financial Guarantee book of business, higher refundings, calls, and
other accelerations of previously insured obligations (collectively referred to
as "refundings") during the year and higher other credit enhancement fees
earned from the structured credit derivatives business.
When an issue insured by Ambac Assurance has been refunded or called, any
remaining unearned premium (net of refunding credits, if any) is generally
earned at that time. Earnings on refundings typically relate to insured Public
Finance obligations, where the premium is usually paid up front for the life of
the policy. 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 during 2001 included $38.6 million (net
income per diluted share effect of $0.20) from refundings of previously insured
issues. Net premiums earned in 2000 included $22.2 million (net income per
diluted share effect of $0.12) from refundings. Excluding the effect of
accelerated earnings related to refundings, normal net premiums earned (which is
defined as net premiums earned less refundings) in 2001 were $340.1 million, an
increase of 18% from $289.0 million in 2000. The increase in normal net premiums
earned resulted from strong business written from prior periods in all areas.
Normal net premiums earned from transactions guaranteed in 2001 were $43.1
million.
Other credit enhancement fees in 2001, which is primarily comprised of fees
received from the structured credit derivatives product, were $21.7 million, an
increase of 78% from $12.2 million in 2000. This increase was due to rapid
growth in the structured credit derivative business in 2000 and 2001.
Net premiums earned and other credit enhancement fees during 2000 increased
21% from $268.3 million in 1999. This increase was primarily the result of the
larger Financial Guarantee book of business and higher other credit enhancement
fees, partially offset by decreased refundings. Net premiums earned in 1999
included $35.9 million (net income per diluted share effect of $0.19) from
refundings. Excluding the effect of accelerated earnings related to refundings,
normal net premiums earned in 2000 increased 26% from $228.5 million in 1999.
Other credit enhancement fees more than tripled from $3.9 million in 1999.
The following table provides a breakdown of net premiums earned by market
sector and other credit enhancement fees:
(Dollars in millions) 2001 2000 1999
- ------------------------------------------------------------
Public Finance $149.1 $135.6 $130.7
Structured Finance 128.7 105.9 68.1
International Finance 62.3 47.5 29.7
- ------------------------------------------------------------
Total normal premiums
earned 340.1 289.0 228.5
Refundings 38.6 22.2 35.9
- ------------------------------------------------------------
Total net premiums earned 378.7 311.2 264.4
Other credit enhancement fees 21.7 12.2 3.9
- ------------------------------------------------------------
Total net premiums earned
and other credit
enhancement fees $400.4 $323.4 $268.3
============================================================
NET INVESTMENT INCOME. Net investment income in 2001 was $267.8 million, an
increase of 11% from $241.0 million in 2000. The increase was attributable to:
(i) the growth of the investment portfolio resulting from the growth in the
Financial Guarantee book of business, partially offset by a lower reinvestment
rate due to the current interest rate environment; and (ii) a capital
contribution from Ambac Financial Group, Inc. to Ambac Assurance totaling
approximately $176 million during the fourth quarter of 2001. The contribution
was in the form of taxable securities. Investments in tax-exempt securities
amounted to 65% of the total fair value of the portfolio as of December 31,
2001, versus 72% and 74% as of December 31, 2000 and December 31, 1999,
respectively. The average pre-tax yield-to-maturity on the investment portfolio
was 5.74% as of December 31, 2001 compared with 6.20% and 6.08% at December 31,
2000 and 1999, respectively. Net investment income in 2000
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
increased 15% from $209.3 million in 1999. This increase was primarily
attributable to the growth of the investment portfolio resulting from the
growth in the Financial Guarantee book of business, investment of new money at
higher taxable rates during 2000 as opposed to primarily tax-exempt rates in
1999 and capital contributions from Ambac Financial Group to Ambac Assurance
totaling approximately $200 million during the course of 1999.
NET REALIZED LOSSES. Net realized losses in 2001 were $1.5 million, compared to
net realized losses of $3.4 million and $5.7 million in 2000 and 1999,
respectively. The following table details amounts included in net realized
losses:
(Dollars in millions) 2001 2000 1999
- ---------------------------------------------------------
Net gains (losses) on
securities sold $ 5.3 $ 4.2 $(5.7)
Foreign exchange losses
on investments (3.2) (3.5) --
Change in fair value of
structured credit derivatives (3.6) (4.1) --
- ---------------------------------------------------------
Net realized losses $(1.5) $(3.4) $(5.7)
=========================================================
Net gains (losses) on securities sold are generated as a result of the ongoing
management of the investment portfolio. Foreign exchange gains and losses
result from investing in certain high-grade foreign currency denominated
securities. The change in fair value of structured credit derivatives reflects
net mark-to-market gains and losses due to changes in credit spreads.
OTHER INCOME. Other income in 2001 was $5.2 million, an increase of 18% from
$4.4 million in 2000. Included in other income are deal structuring fees and
commitment fees. Other income doubled in 2000 from $2.2 million in 1999.
LOSSES AND LOSS ADJUSTMENT EXPENSES. Losses and loss adjustment expenses in
2001 were $20.0 million, versus $15.0 million in 2000 and $11.0 million in
1999. Losses and loss adjustment expenses are based upon estimates of the
ultimate aggregate losses inherent in the Financial Guarantee portfolio. The
liability for losses and loss adjustment expenses consists of the active credit
reserve, which represents an estimate of the expected levels of debt service
defaults resulting from credit failures on currently guaranteed issues that are
not presently or imminently in default, and case basis loss reserves for
obligations in monetary default, or, in the judgment of management, for which
default is imminent. The following table summarizes Ambac's loss reserves split
between case basis loss reserves and active credit reserves at December 31,
2001 and 2000:
(Dollars in millions) 2001 2000
- -------------------------------------------------------
Net loss and loss adjustment
expense reserves:
Case basis reserves* $ 27.8 $ 31.0
Active credit reserves 122.3 100.3
- -------------------------------------------------------
Total $150.1 $131.3
=======================================================
*After netting reinsurance recoverable amounting to $2.3 million and $1.1
million in 2001 and 2000, respectively.
The following table summarizes the changes in the total net loss reserves
for the years ended December 31, 2001 and 2000:
(Dollars in millions) 2001 2000
- ---------------------------------------------------------------
Beginning balance of net loss reserves $131.3 $121.0
Additions to loss reserves 20.0 15.0
Losses paid (2.6) (4.7)
Recoveries of previously paid losses 1.4 --
- ---------------------------------------------------------------
Ending balance of net loss reserves $150.1 $131.3
===============================================================
Management continually reviews and monitors the guaranteed book of business for
potential problem credits. Case reserves on guaranteed issues presently in
monetary default were $7.1 million at December 31, 2001. These obligations in
monetary default require debt service through 2026 totaling $11.6 million.
Annual debt service payments are $0.5 million, $0.7 million, $0.5 million, $2.9
million and $0.3 million for 2002, 2003, 2004, 2005 and 2006, respectively. Case
reserves on guaranteed issues not presently in monetary default were $20.7
million at December 31, 2001. Net par related to the $20.7 million in case
reserves amounted to $94.3 million at December 31, 2001. Additions (reductions)
made to the case reserve totaled $(3.2) million, $4.8 million and $(7.7) million
in 2001, 2000 and 1999, respectively. The net reduction in the 2001 case reserve
reflects a $6.0 million reduction for two guaranteed issues, as a result of the
improved financial condition of the obligor. Excluding $.04 million of paid
losses on Structured Finance obligations in 2001, the entire case reserves,
losses paid and recoveries relate to the Public Finance book of business for all
periods presented.
Ambac Assurance's management believes that the reserves for losses and loss
adjustment expenses are adequate to cover the ultimate net cost of claims, but
the reserves are necessarily based on estimates and there can be no assurance
that the ultimate liability will not exceed such estimates.
UNDERWRITING AND OPERATING EXPENSES. Underwriting and operating expenses of
$68.0 million in 2001 increased by 23% from $55.2 million in 2000. Underwriting
and operating expenses in 2000 increased 13% from $48.8 million in 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. In
2001, gross underwriting and operating expenses were $99.3 million, an increase
of 12% from $88.6 million in 2000. During 2000, gross underwriting and operating
expenses increased 19% from $74.5 million in 1999. The increases in gross
underwriting and operating expenses in both 2001 and 2000 reflect the overall
increased business activity in those years and are primarily attributable to
higher compensation costs related to the
25
addition of staff. Underwriting and operating expenses deferred were $59.5
million, $55.8 million, and $45.9 million in 2001, 2000 and 1999,
respectively.The amortization of previously deferred expenses and reinsurance
commissions was $28.2 million, $22.5 million, and $20.8 million in 2001, 2000
and 1999, respectively. The ratio of amortization of previously deferred
expenses to net premiums earned and other credit enhancement fees was 7.0%, 6.9%
and 7.8% for 2001, 2000 and 1999, respectively.
FINANCIAL SERVICES
Through its financial services subsidiaries, Ambac provides financial and
investment products including investment agreements, interest rate swaps,
funding conduits, investment advisory and cash management services, principally
to its financial guarantee clients, which include municipalities and their
authorities, school districts, health care organizations and asset-backed
issuers.
Revenues in 2001 decreased 17% to $52.2 million (excludes $3.0 million in
net realized losses) from $62.7 million (excludes $9.1 million in net realized
losses) in 2000. This decrease is primarily due to lower revenues from interest
rate swaps and lower investment agreement revenues due to lower interest rate
spreads, partially offset by higher volume. Revenues from investment advisory
and cash management increased 6% in 2001 compared to 2000. Revenues in 2000
reflected a 22% increase from $51.6 million (excludes $3.1 million in net
realized losses) in 1999. The increase in revenue from 1999 to 2000 was
primarily due to higher revenues from interest rate swaps, including higher
post-inception revenues from existing business and higher volume of business
activity. This was partially offset by a decline in investment agreement revenue
due to lower outstanding volume, which resulted from maturing investment
agreements and declining Public Finance market issuance in 2000 compared to
1999. Revenues from investment advisory and cash management increased 16% in
2000 compared to 1999.
Financial Services expenses in 2001 were $21.8 million, a decrease of 12%
from $24.8 million in 2000. Expenses in 2000 decreased 4% from $25.8 million in
1999.
CORPORATE ITEMS
INTEREST EXPENSE. Interest expense was $40.4 million, $37.5 million and $36.5
million in 2001, 2000 and 1999, respectively. The 2001 increase is primarily
attributable to Ambac's issuance of $200 million in debentures in October 2001.
OTHER REVENUE. Other revenue includes investment income of Ambac Financial
Group. Other revenue was $4.3 million, $2.3 million and $9.9 million in 2001,
2000 and 1999, respectively. The 2000 decrease is due to the capital
contributions to Ambac Assurance during 1999 (see "Net Investment Income"
section above).
OTHER EXPENSES. Other expenses include the operating expenses of Ambac Financial
Group. Other expenses were $5.9 million in 2001, $6.7 million in 2000, and $6.5
million in 1999.
INCOME TAXES. Income taxes for 2001 were at an effective rate of 23.9%, compared
to 24.1% and 23.9% for 2000 and 1999, respectively. The decrease in the
effective tax rate in 2001, as compared to 2000, is due to a favorable
settlement of a state income tax audit, partially offset by increased
underwriting profits. The increase in the effective tax rate from 1999 to 2000
is primarily the result of the growth in underwriting profits.
SUPPLEMENTAL ANALYTICAL FINANCIAL DATA
CORE EARNINGS.(2) In 2001, core earnings were $414.2 million, an increase of 15%
from $361.6 million in 2000. This increase was primarily the result of continued
higher normal premiums earned from the growth in the Financial Guarantee book of
business, higher other credit enhancement fees and higher net investment income
from Financial Guarantee operations. These increases were partially offset by
higher expenses in the Financial Guarantee segment and lower revenues from the
Financial Services segment. In 2000, core earnings increased 24% from $292.6
million in 1999. The increase was primarily the result of higher normal premiums
earned from the growth in the Financial Guarantee book of business and higher
net investment income from Financial Guarantee operations and growth in
Financial Services earnings.
OPERATING EARNINGS.(2) Operating earnings in 2001 were $436.2 million, an
increase of 17% from $374.3 million in 2000. This increase was primarily the
result of continued higher normal premiums earned from the growth in the
Financial Guarantee book of business and higher refundings, higher other credit
enhancement fees and higher net investment income from Financial Guarantee
operations. These increases were partially offset by higher expenses in the
Financial Guarantee segment and lower revenues from the Financial Services
segment. Operating earnings in 2000 increased 20% from $313.1 million in 1999.
The increase was primarily the result of higher normal premiums earned from the
growth in the Financial Guarantee book of business, partially offset by lower
refundings and higher net investment income from Financial Guarantee operations
and growth in Financial Services earnings.
Following is a table reconciling net income computed in accordance with
accounting principles generally accepted in the United States of America
("GAAP") to operating earnings and core earnings for the years ended December
31, 2001, 2000 and 1999:
(Dollars in Millions) 2001 2000 1999
- -----------------------------------------------------------
Net income $432.9 $366.2 $307.9
Net realized losses, after tax 3.3 8.1 5.2
- -----------------------------------------------------------
Operating earnings 436.2 374.3 313.1
Premiums earned from
refundings, after tax (22.0) (12.7) (20.5)
- -----------------------------------------------------------
Core earnings $414.2 $361.6 $292.6
===========================================================
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
AMBAC FINANCIAL GROUP, INC. Liquidity. Ambac's liquidity, both on a short-term
basis (for the next twelve months) and a long-term basis (beyond the next twelve
months), is largely dependent upon: (i) Ambac Assurance and other subsidiaries'
ability to pay dividends or make payments to Ambac; 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 2001, Ambac
Assurance paid dividends of $68.0 million on its common stock to Ambac. For
further discussion, see Note 9 of Notes to Consolidated Financial Statements.
Ambac's principal uses of liquidity are for the payment of its operating
expenses, income taxes, 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 2002, and the income it
expects to receive from its investment portfolio, management believes that Ambac
will have sufficient liquidity to satisfy its needs over the next twelve months,
including the ability to pay dividends on its common stock in accordance with
its dividend policy. Beyond the next twelve months, Ambac Assurance's ability to
declare and pay dividends to Ambac 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
Ambac 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 Ambac'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, taxes, dividends to
Ambac, and capital investments in its subsidiaries. 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 2001, Ambac contributed
approximately $176 million of capital to Ambac Assurance to support the growth
in the Financial Guarantee business.
FINANCIAL SERVICES LIQUIDITY. The principal uses of liquidity by financial
services subsidiaries are payment of investment agreement obligations pursuant
to defined terms, net obligations under interest rate swaps and related hedges,
operating expenses, income taxes, and dividends to Ambac. 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 maturity
schedule of its obligations under the investment agreements), net receipts from
interest rate swaps and related hedges, and fees for investment management
services. Additionally, from time to time, liquidity needs are satisfied by
short-term intercompany loans from Ambac. The investment objectives with respect
to investment agreements are to achieve the highest after-tax total return,
subject to a minimum average quality rating of Aa/AA on invested assets, and to
maintain cash flow matching of invested assets to funded liabilities to minimize
interest rate and liquidity exposure. Financial Services subsidiaries maintain a
portion of their assets in short-term investments and repurchase agreements in
order to meet unexpected liquidity needs.
CREDIT FACILITIES. Ambac and Ambac Assurance have a revolving credit facility
with four major international banks for $200 million, which expires in August
2002 and provides a two-year term loan provision. The facility is available for
general corporate purposes, including the payment of claims. As of December 31,
2001 and 2000, no amounts were outstanding under this credit facility.
Ambac Credit Products has a revolving credit facility with one major
international bank for $50 million that expires in June 2002 and provides a
three-year term loan provision. The facility is available to Ambac Credit
Products for general corporate purposes, including payments in regard to its
structured credit derivative activities. As of December 31, 2001 and 2000, no
amounts were outstanding under this facility.
CAPITAL SUPPORT. Ambac Assurance maintains third party capital support in the
form of a seven-year irrevocable limited recourse credit facility from a group
of highly rated banks. This credit facility provides liquidity to Ambac
Assurance in the event claims from municipal or certain structured obligations
in its guaranteed portfolios exceed specified levels. Repayment of amounts drawn
under the credit facility is limited primarily to the amount of any recoveries
of losses related to policy obligations in the guaranteed portfolios. During
2001, Ambac Assurance replaced a portion of the facility with a new capital
markets structure (see below). Consequently, the facility was reduced from $800
million to $400 million. The facility's expiration date was also extended to
June 30, 2008. As of December 31, 2001 and 2000, no amounts were outstanding
under this facility.
Ambac Assurance acquired a perpetual put option on its own preferred stock
from a trust established by a major investment bank. The trust was created as a
vehicle for providing capital support to Ambac Assurance by allowing it to
obtain immediate access to new capital at its sole discretion at any time
through the exercise of the put option. If the put option were exercised, the
preferred stock holdings of Ambac Assurance would give investors the rights of
an equity investor in Ambac Assurance. Such rights are subordinate to insurance
claims, as well as to the general unsecured creditors of Ambac Assurance. If
exercised, Ambac Assurance would receive up to $400 million in return for the
issuance of its own perpetual preferred stock, the proceeds of which may be used
for any purpose including the payment of claims. Dividend payments on
27
the preferred stock are cumulative only if Ambac Assurance pays dividends on
its common stock. The trust is a special purpose trust that is restricted to
holding high quality short-term commercial paper investments to ensure that it
can meet its obligations under the put option. To fund these investments, the
trust has issued its own auction market perpetual preferred stock. Ambac
Assurance pays a floating put option fee. The trust is rated AA/Aa2 by Standard
& Poor's and Moody's respectively.
STOCK REPURCHASE PROGRAM. The Board of Directors of Ambac has authorized the
establishment of a stock repurchase program that permits the repurchase of up to
12,000,000 shares of Ambac's common stock. During 2001, Ambac acquired
approximately 781,000 treasury shares for an aggregate amount of $40.9 million.
Since inception of the stock repurchase program, Ambac has acquired
approximately 8,272,000 shares for an aggregate amount of $224.8 million.
ADJUSTED BOOK VALUE. (3) Adjusted Book Value ("ABV") per share increased 16% to
$42.03 at December 31, 2001 from $36.35 at December 31, 2000.
The following table reconciles book value per share to ABV per share as of
December 31, 2001 and 2000:
2001 2000
- ----------------------------------------------------------
Book value per share $28.26 $24.60
After-tax value of:
Net unearned premium reserve 9.31 8.02
Deferred acquisition costs (1.00) (0.95)
Present value of future
installment premiums 6.07 4.71
Net unrealized (losses) gains on
investment agreement liabilities (0.61) (0.03)
- ----------------------------------------------------------
Adjusted book value per share $42.03 $36.35
==========================================================
BALANCE SHEET. Total assets as of December 31, 2001 were $12.27 billion, an
increase of 21% from $10.12 billion at December 31, 2000. This increase was due
primarily to cash generated from business written during 2001, higher volume in
the guaranteed investment agreement business, as well as Ambac's $200 million
debt offering in October 2001. Stockholders' equity as of December 31, 2001 was
$2.98 billion, an increase of 15% from $2.60 billion at year-end 2000. The
increase stemmed primarily from net income for the year.
The following table summarizes the composition of the fair value of Ambac's
investment portfolio by segment at December 31, 2001, and 2000:
Financial Financial
(Dollars in Millions) Guarantee Services Corporate Total
- ------------------------------------------------------------------------------------------------------------------------
2001:
Fixed income securities:
Municipal obligations $3,540.3 $144.5 $ -- $3,684.8
Corporate obligations 656.2 674.4 -- 1,330.6
Foreign government obligations 96.6 -- -- 96.6
U.S. government obligations 54.8 6.0 17.5 78.3
Mortgage and asset-backed securities
(includes U.S. government agency obligations) 735.2 2,530.4 13.3 3,278.9
Other 1.4 -- 0.8 2.2
- ------------------------------------------------------------------------------------------------------------------------
5,084.5 3,355.3 31.6 8,471.4
Short-term 170.6 225.2 19.2 415.0
- ------------------------------------------------------------------------------------------------------------------------
5,255.1 3,580.5 50.8 8,886.4
- ------------------------------------------------------------------------------------------------------------------------
Fixed income securities pledged as collateral:
Mortgage and asset-backed securities
(includes U.S. government agency obligations) -- 1,401.5 -- 1,401.5
- ------------------------------------------------------------------------------------------------------------------------
Total investments $5,255.1 $4,982.0 $50.8 $10,287.9
- ------------------------------------------------------------------------------------------------------------------------
Percent total 51.1% 48.4% 0.5% 100%
- ------------------------------------------------------------------------------------------------------------------------
2000:
Fixed income securities:
Municipal obligations $3,328.8 $ 86.2 $ -- $3,415.0
Corporate obligations 422.1 551.6 7.0 980.7
Foreign government obligations 35.4 -- -- 35.4
U.S. government obligations 49.4 23.3 -- 72.7
Mortgage and asset-backed securities
(including U.S. government agency obligations) 262.9 2,058.5 -- 2,321.4
Other 0.7 0.2 5.0 5.9
- ------------------------------------------------------------------------------------------------------------------------
4,099.3 2,719.8 12.0 6,831.1
Short-term 218.5 0.5 34.5 253.5
- ------------------------------------------------------------------------------------------------------------------------
4,317.8 2,720.3 46.5 7,084.6
- ------------------------------------------------------------------------------------------------------------------------
Fixed income securities pledged as collateral:
Mortgage and asset-backed securities
(including U.S. government agency obligations) -- 1,239.3 -- 1,239.3
- ------------------------------------------------------------------------------------------------------------------------
Total investments $4,317.8 $3,959.6 $46.5 $8,323.9
- ------------------------------------------------------------------------------------------------------------------------
Percent total 51.9% 47.6% 0.5% 100%
========================================================================================================================
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Ambac's investment objectives for the Financial Guarantee portfolio are to
maintain an investment duration that closely approximates the expected duration
of related financial guarantee liabilities and achieve the highest after-tax net
investment income, while maintaining a conservative credit risk profile. The
Financial Guarantee investment portfolio is subject to internal investment
guidelines, which are approved by Ambac's Board of Directors. Such guidelines
set forth minimum credit rating requirements and credit risk concentration
limits. As of December 31, 2001 and 2000, Ambac's Financial Guarantee investment
portfolio had a weighted average credit rating of AA, based primarily on
Standard & Poor's ratings.
Approximately 85% and 92% of the mortgage and asset-backed securities in
the Financial Guarantee portfolio is composed of securities issued by various
U.S. government agencies, as of December 31, 2001 and 2000, respectively.
Short-term investments in the Financial Guarantee portfolio consisted
primarily of money market funds, foreign and domestic time deposits, and
discount notes.
The Financial Services investment portfolio consists primarily of assets
funded with the proceeds from the issuance of investment agreement liabilities.
The investment objectives of the portfolio are to match the investment security
maturity schedule to the maturity schedule of related liabilities under the
investment agreements and achieve the highest after-tax net investment income.
The investment portfolio is subject to internal investment guidelines, which are
approved by Ambac's Board of Directors. Such guidelines set forth minimum credit
rating requirements and credit risk concentration limits. As of December 31,
2001 and 2000, Ambac's Financial Services investment portfolio had a weighted
average credit rating of AA, based primarily on Standard & Poor's ratings.
Approximately 69% and 52% of the mortgage and asset-backed securities in
the Financial Services portfolio is composed of securities issued by various
U.S. government agencies, as of December 31, 2001 and 2000, respectively.
Short-term investments in the Financial Services portfolio consisted of
money-market funds.
As discussed in Notes 2 and 13 to the Consolidated Financial Statements,
Ambac enters into derivative contracts held for trading purposes. Changes in the
fair value of derivative contracts held for trading purposes are recognized
immediately in earnings. The net fair value of derivative contracts held for
trading purposes was $58 million at December 31, 2001. Of that amount, $60
million was determined using internal valuation models and $(2) million was
provided by external sources. Contracts with maturities in excess of 5 years
accounted for $65 million of the net fair value. Contracts with maturities of 5
years or less accounted for $(7) million of net fair value.
In determining fair value of investment securities and derivative
contracts, Ambac uses information provided by independent external sources or
when independent information is not available, internal valuation models are
used. Internal valuation models include estimates, made by management which
utilize current and historical market data. The valuation results from internal
models could differ materially from amounts that would be realized in the
market.
SPECIAL PURPOSE ENTITIES. Ambac has sponsored two special purpose entities. The
business purpose of these entities is to provide certain financial guarantee
clients with funding for their debt obligations. Ambac receives financial
guarantee premiums and may receive other fees for this service. Ambac accounts
for these entities as Qualified Special Purpose Entities ("QSPEs") in accordance
with Statement of Financial Accounting Standards 140. The QSPEs are
non-consolidated, bankruptcy remote entities. Ambac purchases debt obligations
from certain financial guarantee clients and sells these obligations to the
QSPEs. The purchase by the QSPE is financed through the issuance of medium-term
notes ("MTNs"), which are collateralized by the purchased assets. These MTNs are
generally structured to match the cash flow of the assets purchased. Derivative
contracts may be used (interest rate and currency swaps) for hedging purposes
only. Derivative hedges are established at the time MTNs are issued to purchase
financial assets. Ambac Assurance may issue a financial guarantee insurance
policy on the assets sold, the MTNs issued or both. As of December 31, 2001,
Ambac Assurance had insurance policies issued for all assets and MTNs owned and
outstanding by the QSPEs. Since these exposures are insured, any losses incurred
would be included in Ambac's Consolidated Statements of Operations. Under the
terms of an Administrative Agency Agreement, Ambac provides certain
administrative duties, including asset and liability servicing responsibilities.
Assets sold to the QSPEs during 2001, 2000 and 1999 were $793.4 million, $159.9
million and $100.0 million, respectively. No gains or losses were recognized on
these sales. As of December 31, 2001, the estimated fair value of financial
assets, MTN liabilities and derivative hedge assets were $989.9 million,
$1,003.6 million and $11.7 million, respectively. Estimated fair value is
determined utilizing valuation models. These models include estimates, made by
management, which utilize current market information. The valuation results from
these models could differ materially from amounts that would actually be
realized in the market. Ambac Assurance received gross premiums and other fees
for issuing financial guarantee policies on the assets and MTNs of $23.7
million, $3.2 million and $1.0 million for the years ended December 31, 2001,
2000 and 1999, respectively. Ambac received up-front fees for providing
administrative agency services amounting to $0.3 million, $0.2 million and $0.1
million for 2001, 2000 and 1999, respectively.
29
CASH FLOWS. Net cash provided by operating activities was $671.8 million,
$481.3 million and $454.4 million during 2001, 2000 and 1999, respectively.
These cash flows were primarily provided by the Financial Guarantee operations.
Net cash provided by (used in) financing activities was $760.8 million,
$(1,226.0) million and $181.2 million during 2001, 2000 and 1999, respectively.
Financing activities for the years ended 2001 and 1999 included $621.4 million
and $199.2 million, respectively, in net investment agreements issued (net of
investment agreement draws). Financing activity for the year ended 2000
included $1,217.8 million used by the investment agreement business for net
draws paid (net of investment agreements issued). The total cash provided by
(used in) operating and financing activities was $1,432.6 million, $(744.6)
million and $635.6 million during 2001, 2000 and 1999, respectively. From these
totals, $(1,401.4) million, $776.5 million and $(630.3) million was (used in)
provided by investing activities in 2001, 2000 and 1999, respectively. These
investing activities were primarily net purchases of investment securities
during 2001 and 1999, and principally net proceeds from sales and maturities of
investment securities during 2000.
MATERIAL COMMITMENTS. Ambac has made no commitments for material capital
expenditures within the next twelve months.
RISK MANAGEMENT
In the ordinary course of business, Ambac, through its affiliates, manages a
variety of risks, principally credit, market, liquidity, operational and legal.
These risks are identified, measured and monitored through a variety of control
mechanisms, which are in place at different levels throughout the organization.
CREDIT RISK. Ambac is exposed to credit risk in various capacities including as
an issuer of financial guarantees, as counterparty to derivative and other
financial contracts and as a holder of investment securities. Ambac's Portfolio
Risk Management Committee ("PRMC") employs various procedures and controls to
monitor and manage credit risk. The PRMC is comprised of senior risk
professionals and senior management of Ambac. Its purview is enterprise-wide
and its focus is on risk limits and measurement, concentration and correlation
of risk, and the attribution of economic and regulatory capital in a portfolio
context.
All financial guarantees and structured credit derivatives issued are
subject to a formal underwriting process. Various factors affecting the credit
worthiness of the underlying obligation are evaluated during the underwriting
process. Senior credit personnel approve all transactions prior to issuing a
financial guarantee. Subsequent to issuance of a financial guarantee, Ambac
periodically performs reviews of exposures according to a schedule based on the
risk profile of the guaranteed obligations. Proactive credit remediation can
help secure rights and remedies which mitigate losses in the event of default.
Ambac manages credit risk associated with its investment portfolio through
adherence to specific investment guidelines. These guidelines establish limits
based upon single risk concentration limits and minimum credit rating standards.
Additionally, senior credit personnel monitor the portfolio on a continuous
basis. Credit risk relating to derivative positions primarily concern
counterparty default. Counterparty default exposure is mitigated through the use
of industry standard collateral posting agreements. When a derivative
counterparty credit exposure exceeds approved limits, they are required to post
collateral to Ambac.
MARKET RISK. Market risk represents the potential for losses that may result
from changes in the value of a financial instrument as a result of changes in
market conditions. The primary market risks that would impact the value of
Ambac's financial instruments are interest rate risk, basis risk (e.g., 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 Ambac's Risk
Analysis group are responsible for monitoring risk limits and applying risk
measurement methodologies. The estimation of potential losses arising from
adverse changes in market conditions is a key element in managing market risk.
Ambac utilizes various systems, models and stress test scenarios to monitor and
manage market risk. This process includes frequent analyses of both parallel
and non-parallel shifts in the yield curve, "Value-at-Risk" ("VaR") and changes
in credit spreads. These models include estimates, made by management, which
utilize current and historical market information. The valuation results from
these models could differ materially from amounts that would actually be
realized in the market.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial instruments that may be adversely affected by changes in interest
rates consist primarily of investment securities, investment agreement
liabilities, debentures, and certain derivative contracts (primarily interest
rate swaps and futures) used for hedging purposes. The following table
summarizes the estimated change in fair value (based primarily on the valuation
models discussed above) on the net balance of Ambac's investment securities,
investment agreement liabilities, debentures and derivative hedges, assuming
immediate changes in interest rates at specified levels at December 31, 2001 and
2000:
(Dollars in Millions) Estimated
Estimated net change in net
Change in Interest rates fair value fair value
- ---------------------------------------------------------
2001:
300 basis point rise $3,616 $(1,075)
200 basis point rise 3,987 (704)
100 basis point rise 4,344 (347)
Base scenario 4,691 --
100 basis point decline 5,063 372
200 basis point decline 5,426 735
300 basis point decline 5,780 1,089
- ---------------------------------------------------------
2000:
300 basis point rise $3,004 $ (967)
200 basis point rise 3,334 (637)
100 basis point rise 3,657 (314)
Base scenario 3,971 --
100 basis point decline 4,278 307
200 basis point decline 4,576 605
300 basis point decline 4,864 893
=========================================================
Ambac, through its affiliate Ambac Financial Services, L.P., is a provider of
interest rate swaps to states, municipalities and their authorities and other
entities in connection with their financings. Ambac Financial Services 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. Ambac's
municipal interest rate swap portfolio may be adversely affected by changes in
basis. If actual or projected tax-exempt interest rates change in relation to
taxable interest rates, Ambac will experience a mark-to-market gain or loss.
Most municipal interest rate swaps transacted by Ambac Financial Services
contain provisions that are designed to protect Ambac 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 VaR, is a key
element in management's monitoring of basis risk for the municipal interest rate
swap portfolio. Ambac has developed a VaR methodology to estimate potential
losses over a specified holding period and based on certain probabilistic
assessments. Ambac's methodology estimates VaR using a 300-day historical "look
back" period. This means that changes in market values are simulated using
market inputs from the past 300 days. For the years ended December 31, 2001 and
2000, Ambac's VaR, for its interest rate swap portfolio, calculated at a
ninety-nine percent confidence level, averaged approximately $0.9 million and
$1.3 million, respectively. Ambac's VaR ranged from a high of $1.9 million to a
low of $0.4 million in 2001, and from a high of $1.8 million to a low of $0.8
million in 2000. Since no single measure can capture all dimensions of market
risk, Ambac supplements its VaR 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 Ambac's outstanding structured credit derivative contracts.
Ambac, through its affiliate Ambac Credit Products, enters into structured
credit derivative contracts. These contracts require Ambac Credit Products to
make payments upon the occurrence of certain defined credit events relating to
an underlying obligation (generally a fixed income obligation). If credit
spreads of the underlying obligations change, the market value of the related
structured credit derivative changes. As such, Ambac Credit Products could
experience mark-to-market gains or losses. 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.
Substantially all of Ambac Credit Product's contracts are partially hedged with
various financial institutions or structured with first loss protection. Such
structuring mitigates Ambac Credit Product's risk of loss and reduces the price
volatility of these financial instruments. Personnel in Ambac's Structured
Finance surveillance group monitor credit spread risk. Additionally, management
models the potential impact of credit spread changes on the value of its
contracts. The following table summarizes the estimated change in fair value
(based primarily on the valuation models
31
discussed above) on the net balance of Ambac's net structured credit derivative
position assuming immediate changes in credit spreads at specified levels at
December 31, 2001 and 2000:
(Dollars in Millions) Estimated
Estimated net unrealized
Change in credit spreads fair value gain/(loss)
- -------------------------------------------------------
2001:
75 basis point widening $(26) $(18)
50 basis point widening (19) (11)
25 basis point widening (13) (5)
Base scenario (8) --
25 basis point narrowing (7) 1
50 basis point narrowing (5) 3
75 basis point narrowing (3) 5
- -------------------------------------------------------
2000:
75 basis point widening $(14) $ (7)
50 basis point widening (11) (4)
25 basis point widening (8) (1)
Base scenario (7) --
25 basis point narrowing (4) 3
50 basis point narrowing 0 7
75 basis point narrowing 4 11
=======================================================
LIQUIDITY RISK. Liquidity risk relates to the possible inability to satisfy
contractual obligations when due. This risk is present in financial guarantee
contracts, structured credit derivatives, investment agreements, interest rate
swaps and futures contracts. Ambac Assurance manages its liquidity risk by
maintaining a comprehensive daily analysis of projected cash flows.
Additionally, Ambac Assurance maintains a minimum level of cash and short-term
investments at all times. Ambac Credit Products manage the liquidity risk
inherent in the structured credit derivative portfolio by holding cash and
short-term investments, closely matching the dates that derivative payments are
made and received, and by maintaining a revolving credit agreement. The
investment agreement business manages liquidity risk by matching the maturity
schedules of its invested assets, including hedges, with the maturity schedules
of its investment agreement liabilities. Additionally, Ambac's policy is to
maintain a minimum level of cash and short-term assets equivalent to a specified
percentage of its investment agreement liabilities outstanding. Ambac Financial
Services maintains cash and short-term investments, closely matches the dates
swap payments are made and received, and limits the amount of risk hedged with
futures contracts. See additional discussion in "Liquidity and Capital
Resources" section.
OPERATIONAL RISK. Operational risk relates to the potential for loss caused by a
breakdown in information, communication and settlement systems. Ambac mitigates
operational risk by maintaining systems (and system backup) and procedures to
monitor transactions and positions, documentation and confirmation of
transactions and ensuring compliance with regulations.
LEGAL RISK. Legal risks attendant to Ambac's businesses include uncertainty with
respect to the enforceability of the obligations insured by Ambac Assurance and
the security thereof, as well as uncertainty with respect to the enforceability
of the obligations of Ambac's counterparties, including contractual provisions
intended to reduce exposure by providing for the offsetting or netting of mutual
obligations. Ambac seeks to remove or minimize such uncertainties through
continuous consultation with internal and external legal advisers to analyze and
understand the nature of legal risk, to improve documentation and to strengthen
transaction structure.
Footnotes.
(1) Adjusted gross premiums written, which is not promulgated under accounting
principles generally accepted in the United States of America (GAAP), is used by
management, equity analysts and investors to measure the financial results of
Ambac. Adjusted gross premiums written, which Ambac reports as analytical data,
is defined as gross (direct and assumed) up-front premiums written plus the
present value of estimated future installment premiums written on insurance
policies and structured credit derivatives issued in the period. Previously,
adjusted gross premiums written was net of premiums related to international
deals that were ceded to MBIA Insurance Corporation pursuant to a joint venture
that ceased during 2000. Prior period amounts have been restated. The definition
of adjusted gross premiums written used by Ambac may differ from definitions of
adjusted gross premiums written used by other public holding companies of
financial guarantee insurers.
(2) Core earnings and operating earnings are not substitutes for net income
computed in accordance with GAAP, but are important measures used by management,
equity analysts and investors to measure Ambac's financial results. Ambac
defines operating earnings as net income, less the effect of realized and
unrealized gains and losses and certain non-recurring items. Core earnings,
which Ambac reports as analytical data, is defined as operating earnings less
net insurance premiums earned from refundings and calls. The definitions of
operating earnings and core earnings used by Ambac may differ from definitions
of operating earnings and core earnings used by other public holding companies
of financial guarantors. See "Supplemental Analytical Financial Data."
(3) Adjusted book value, which is not promulgated under GAAP, is used by
management, equity analysts and investors as a measurement of Ambac's intrinsic
value with no benefit given for ongoing business activity. Management derives
adjusted book value by beginning with stockholders' equity (book value) and
adding or subtracting the after-tax value of: the net unearned premium reserve,
deferred acquisition costs, the present value of estimated net future
installment premiums, and the unrealized gain or loss on investment agreement
liabilities. The definition of adjusted book value used by Ambac may differ from
definitions of adjusted book value used by other public holding companies of
financial guarantors. The adjustments to book value described above will not be
realized until future periods and may differ materially from the amounts used in
determining adjusted book value.
32
REPORT ON MANAGEMENT'S RESPONSIBILITIES
The management of Ambac Financial Group, Inc. is responsible for the integrity
and objectivity of the financial statements and all other financial information
presented in this Annual Report and for assuring that such information fairly
presents the consolidated financial position and operating results of Ambac
Financial Group, Inc. The accompanying consolidated financial statements have
been prepared in conformity with accounting principles generally accepted in
the United States of America using management's best estimates and judgment.
The financial information presented elsewhere in this Annual Report is
consistent with that in the consolidated financial statements.
Ambac Financial Group, Inc. maintains a system of internal accounting
controls designed to provide reasonable assurance that assets are safeguarded
against loss or unauthorized use and that the financial records are reliable for
use in preparing financial statements and maintaining accountability of assets.
Qualified and professional financial personnel maintain and monitor these
internal controls on a continuous basis. The concept of reasonable assurance is
based on the recognition that the cost of a system of internal control should
not exceed the related benefits.
Ambac Financial Group, Inc.'s consolidated financial statements have been
audited by KPMG LLP, independent auditors, whose audits were made in accordance
with auditing standards generally accepted in the United States of America and
included a review of internal accounting controls to the extent necessary to
express an opinion on the fairness of the consolidated financial statements.
The Audit Committee of the Board of Directors, comprised solely of outside
directors, meets regularly with financial management, the independent auditors
and the internal auditors to review the work and procedures of each. The
independent auditors and the internal auditors have free access to the Audit
Committee, without the presence of management, to discuss the results of their
work and their considerations of Ambac and its subsidiaries and the quality of
Ambac Financial Group, Inc.'s financial reporting. The Board of Directors, upon
recommendation of the Audit Committee, appoints the independent auditors,
subject to stockholder approval.
/s/ Phillip B. Lassiter
Phillip B. Lassiter
Chairman and Chief Executive Officer
/s/ Frank J. Bivona
Frank J. Bivona
Vice Chairman and Chief Financial Officer
January 23, 2002
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Ambac Financial Group, Inc.
We have audited the accompanying consolidated balance sheets of Ambac Financial
Group, Inc. and subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 2001. These
consolidated financial statements are the responsibility of Ambac Financial
Group, Inc.'s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Ambac
Financial Group, Inc. and subsidiaries as of December 31, 2001 and 2000, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
KPMG LLP
New York, New York
January 23, 2002
33
CONSOLIDATED BALANCE SHEETS
Ambac Financial Group, Inc. and Subsidiaries
(Dollars in Thousands, Except Share Amounts) December 31, 2001 2000
- -------------------------------------------------------------------------------------------------------------------
ASSETS:
Investments:
Fixed income securities, at fair value
(amortized cost of $8,355,596 in 2001 and $6,743,450 in 2000) $ 8,469,157 $ 6,825,152
Fixed income securities pledged as collateral, at fair value
(amortized cost of $1,393,193 in 2001 and $1,238,401 in 2000) 1,401,528 1,239,349
Short-term investments, at cost (approximates fair value) 415,002 253,519
Other, at cost 2,163 5,852
- -------------------------------------------------------------------------------------------------------------------
Total investments 10,287,850 8,323,872
Cash 76,580 20,493
Cash pledged as collateral -- 24,935
Securities purchased under agreements to resell 11,200 255,786
Receivable for investment agreements 4,101 6,663
Receivable for securities sold 8,922 1,926
Investment income due and accrued 144,463 130,692
Reinsurance recoverable 2,259 1,091
Prepaid reinsurance 267,655 242,604
Deferred acquisition costs 163,477 153,424
Loans 901,194 695,251
Other assets 399,994 263,563
- -------------------------------------------------------------------------------------------------------------------
Total assets $12,267,695 $10,120,300
===================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Unearned premiums $ 1,780,272 $ 1,546,290
Losses and loss adjustment expense reserve 152,352 132,445
Ceded reinsurance balances payable 10,146 10,892
Obligations under investment and payment agreements 4,089,777 3,509,049
Obligations under investment repurchase agreements 1,422,151 1,383,882
Securities sold under agreement to repurchase 425,000 --
Deferred income taxes 123,077 106,035
Current income taxes 98,145 25,628
Debentures 619,315 424,061
Accrued interest payable 84,225 90,575
Other liabilities 416,632 291,394
Payable for securities purchased 62,915 3,935
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 9,284,007 7,524,186
- -------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, par value $0.01 per share; authorized shares--
4,000,000; issued and outstanding shares--none -- --
Common stock, par value $0.01 per share; authorized shares--
200,000,000 at December 31, 2001 and December 31, 2000;
issued shares--106,020,537 at December 31, 2001 and
December 31, 2000 1,060 1,060
Additional paid-in capital 538,135 533,558
Accumulated other comprehensive income 62,476 45,154
Retained earnings 2,403,473 2,035,209
Common stock held in treasury at cost, 436,488 shares at
December 31, 2001 and 469,932 at December 31, 2000 (21,456) (18,867)
- -------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 2,983,688 2,596,114
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $12,267,695 $10,120,300
===================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
34
CONSOLIDATED STATEMENTS OF OPERATIONS
Ambac Financial Group, Inc. and Subsidiaries
(Dollars in Thousands Except Share Amounts) Years Ended December 31, 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------
REVENUES:
Financial Guarantee:
Gross premiums written $683,296 $483,082 $445,242
Ceded premiums written (95,534) (80,789) (61,845)
- -------------------------------------------------------------------------------------------------------------------
Net premiums written $587,762 $402,293 $383,397
===================================================================================================================
Net premiums earned $378,734 $311,276 $264,426
Other credit enhancement fees 21,661 12,157 3,887
- -------------------------------------------------------------------------------------------------------------------
Net premiums earned and other credit enhancement fees 400,395 323,433 268,313
Net investment income 267,847 241,047 209,284
Net realized losses (1,464) (3,430) (5,675)
Other income 5,180 4,371 2,167
Financial Services:
Net revenue 52,225 62,675 51,607
Net realized losses (3,026) (9,110) (3,124)
Other:
Revenue 4,327 2,316 9,906
Net realized (losses) gains (564) 8 797
- -------------------------------------------------------------------------------------------------------------------
Total revenues 724,920 621,310 533,275
- -------------------------------------------------------------------------------------------------------------------
EXPENSES:
Financial Guarantee:
Losses and loss adjustment expenses 20,000 15,000 11,000
Underwriting and operating expenses 67,989 55,235 48,804
Financial Services 21,815 24,805 25,782
Interest 40,442 37,477 36,525
Other 5,947 6,669 6,506
- -------------------------------------------------------------------------------------------------------------------
Total expenses 156,193 139,186 128,617
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes 568,727 482,124 404,658
Provision for income taxes 135,821 115,952 96,741
- -------------------------------------------------------------------------------------------------------------------
Net income $432,906 $366,172 $307,917
===================================================================================================================
Net income per share:
Basic $4.10 $3.49 $2.94
Diluted $3.97 $3.41 $2.88
===================================================================================================================
Weighted average number of common shares outstanding:
Basic 105,705,957 105,031,473 104,869,721
Diluted 108,948,133 107,415,430 107,049,315
===================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
35
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Ambac Financial Group, Inc. and Subsidiaries
(Dollars in Thousands) Years Ended December 31, 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS:
Balance at January 1 $2,035,209 $1,713,446 $1,449,832
Net income 432,906 $432,906 366,172 $366,172 307,917 $ 307,917
-------- -------- --------
Dividends declared--common stock (35,937) (32,213) (29,366)
Exercise of stock options (28,705) (12,196) (14,937)
---------- ---------- ----------
Balance at December 31 $2,403,473 $2,035,209 $1,713,446
---------- ---------- ----------
ACCUMULATED OTHER COMPREHENSIVE
INCOME (LOSS):
Balance at January 1 $ 45,154 $ (187,540) $ 159,313
Unrealized gains (losses) on securities,
$39,542, $373,291, and $(552,645),
pre-tax in 2001, 2000
and 1999, respectively (1) 23,643 234,178 (346,211)
Cumulative effect of accounting change (880) -- --
Loss on derivative hedges (4,371) -- --
Foreign currency loss (1,070) (1,484) (642)
-------- -------- ---------
Other comprehensive income (loss) 17,322 17,322 232,694 232,694 (346,853) (346,853)
---------- -------- ---------- -------- --------- ---------
Total comprehensive income (loss) $450,228 $598,866 $ (38,936)
======== ======== =========
Balance at December 31 $ 62,476 $ 45,154 $ (187,540)
---------- ---------- ----------
PREFERRED STOCK:
Balance at January 1 and December 31 $ -- $ -- $ --
---------- ---------- ----------
COMMON STOCK:
Balance at January 1 $ 1,060 $ 707 $ 707
Stock split effected as dividend -- 353 --
---------- ---------- ----------
Balance at December 31 $ 1,060 $ 1,060 $ 707
---------- ---------- ----------
ADDITIONAL PAID-IN CAPITAL:
Balance at January 1 $ 533,558 $ 525,012 $ 519,305
Exercise of stock options 13,045 8,899 5,707
Capital issuance costs (8,468) -- --
Stock split effected as dividend -- (353) --
---------- ---------- ----------
Balance at December 31 $ 538,135 $ 533,558 $ 525,012
---------- ---------- ----------
COMMON STOCK HELD IN TREASURY AT COST:
Balance at January 1 $ (18,867) $ (33,175) $ (33,067)
Cost of shares acquired (40,876) (23,618) (17,626)
Shares issued under equity plans 38,287 37,926 17,518
---------- ---------- ----------
Balance at December 31 $ (21,456) $ (18,867) $ (33,175)
---------- ---------- ----------
TOTAL STOCKHOLDERS' EQUITY AT DECEMBER 31 $2,983,688 $2,596,114 $2,018,450
========== ========== ==========
(1) Disclosure of reclassification amount:
Unrealized holding gains (losses) arising
during period $ 25,817 $ 230,985 $ (351,412)
Less: reclassification adjustment for net
(losses) gains included in net income 2,174 (3,193) (5,201)
---------- ---------- ----------
Net unrealized gains (losses) on securities $ 23,643 $ 234,178 $ (346,211)
===================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
36
CONSOLIDATED STATEMENTS OF CASH FLOWS
Ambac Financial Group, Inc. and Subsidiaries
(Dollars in Thousands) Years Ended December 31, 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 432,906 $ 366,172 $ 307,917
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,479 3,614 2,969
Amortization of bond premium and discount (15,916) (12,972) (4,444)
Current income taxes 72,517 797 17,882
Deferred income taxes 4,991 24,300 3,274
Deferred acquisition costs (10,053) (18,100) (14,705)
Unearned premiums, net 208,931 90,587 118,805
Losses and loss adjustment expenses 18,739 10,379 8,819
Ceded reinsurance balances payable (746) (4,136) 8,452
Investment income due and accrued (13,771) (2,024) (2,739)
Accrued interest payable (6,350) (567) 1,527
Net realized losses 5,054 12,532 8,002
Other, net (27,950) 10,746 (1,359)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 671,831 481,328 454,400
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of bonds 2,243,276 1,636,904 2,403,583
Proceeds from matured bonds 2,538,173 1,843,482 1,371,715
Purchases of bonds (6,497,633) (2,502,176) (4,427,369)
Change in short-term investments (161,483) (32,623) (101,368)
Securities purchased under agreements to resell 244,586 (152,786) 149,295
Securities sold under agreements to repurchase 425,000 -- --
Loans (205,943) (9,763) (11,558)
Other, net 12,580 (6,553) (14,591)
- -------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (1,401,444) 776,485 (630,293)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (35,937) (32,213) (29,366)
Proceeds from issuance of investment agreements 3,044,900 1,637,935 3,051,508
Payments for investment agreement draws (2,423,516) (2,855,766) (2,852,350)
Proceeds from issuance of debentures 193,700 -- --
Payment agreements 175 9,763 11,558
Payment for buyback of debentures (7,500) -- --
Capital issuance costs (8,468) -- --
Purchases of treasury stock (40,876) (23,618) (17,626)
Proceeds from sale of treasury stock 38,287 37,926 17,518
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 760,765 (1,225,973) 181,242
- -------------------------------------------------------------------------------------------------------------------
NET CASH FLOW 31,152 31,840 5,349
Cash and cash pledged as collateral at January 1 45,428 13,588 8,239
- -------------------------------------------------------------------------------------------------------------------
Cash and cash pledged as collateral at December 31 $ 76,580 $ 45,428 $ 13,588
===================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Income taxes $ 45,268 $ 82,400 $ 70,100
===================================================================================================================
Interest expense on debt $ 44,632 $ 34,304 $ 36,743
===================================================================================================================
Interest expense on investment agreements $ 231,498 $ 286,589 $ 298,309
===================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, Except Share Amounts)
1 BACKGROUND
Ambac Financial Group, Inc is a holding company whose subsidiaries provide
financial guarantees and financial services to clients in both the public and
private sectors around the world. Ambac's principal operating subsidiary, Ambac
Assurance Corporation, a leading provider of financial guarantees for public
finance and structured finance obligations, has earned triple-A ratings, the
highest ratings available from Moody's Investors Service, Inc., Standard &
Poor's Ratings Services, Fitch Inc., and Rating and Investment Information,
Inc. Ambac's Financial Services segment provides financial and investment
products including investment agreements, interest rate swaps, funding
conduits, investment advisory and cash management services, principally to its
clients which include municipalities and other public entities, school
districts, health care organizations and asset-backed issuers.
2 SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements of Ambac and subsidiaries
have been prepared on the basis of accounting principles generally accepted in
the United States of America ("GAAP"). The preparation of financial statements
in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported revenues and expenses during the reporting period. Actual results
could differ from those estimates. The significant accounting policies of Ambac
are described below:
CONSOLIDATION: The consolidated financial statements include the accounts of
Ambac and its subsidiaries. All significant intercompany balances have been
eliminated.
INVESTMENTS: Ambac's investment portfolio is accounted for on a trade-date basis
and consists primarily of investments in fixed income securities that are
considered available-for-sale and are carried at fair value. Fair value is based
primarily on quotes obtained from independent market sources. When quotes are
not available, valuation models are used to estimate fair value. These models
include estimates, made by management, which utilize current market information.
The valuation results from these models could differ materially from amounts
that would actually be realized in the market. Short-term investments are
carried at cost, which approximates fair value. Unrealized gains and losses, net
of deferred income taxes, are included as a component of "Accumulated Other
Comprehensive Income (Loss)" in stockholders' equity and are computed using
amortized cost as the basis. For purposes of computing amortized cost, premiums
and discounts are accounted for using the interest method. For bonds purchased
at a price below par value, discounts are accreted over the remaining term of
the securities. For bonds purchased at a price above par value which have call
features, premiums are amortized to the most likely call dates as determined by
management. For premium bonds that do not have call features, such premiums are
amortized over the remaining terms of the securities. Premiums and discounts on
mortgage-backed and asset-backed securities are adjusted for the effects of
actual and anticipated prepayments. Realized gains and losses on the sale of
investments are determined on the basis of specific identification.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE: Securities purchased under agreements to resell are
collateralized investment transactions, and are recorded at their contracted
resale amounts, plus accrued interest. Ambac takes possession of the collateral
underlying those agreements and monitors its market value on a daily basis and,
when necessary, requires prompt transfer of additional collateral to reflect
current market value. Securities sold under agreements to repurchase are
collateralized financing transactions, and are recorded at their contracted
resale amounts, plus accrued interest. Ambac nets securities purchased under
agreements to resell and securities sold under agreements to repurchase that are
executed with the same counterparty under legally enforceable netting agreements
that meet the applicable netting criteria. At December 31, 2001 and 2000,
collateral underlying securities purchased under agreements to resell had an
average credit rating of triple-A and a weighted average maturity of less than
30 days.
DEFERRED ACQUISITION COSTS: Certain costs incurred, primarily related to the
production of business, have been deferred. These costs include direct and
indirect expenses related to underwriting, marketing and policy issuance, rating
agency fees and premium taxes, net of reinsurance ceding commissions. The
deferred acquisition costs are being amortized over the periods in which the
related premiums are earned, and such amortization amounted to $28,203, $22,472
and $20,843 for 2001, 2000 and 1999, respectively. Deferred acquisition costs,
net of such amortization, amounted to $10,053, $18,100 and $14,705 for 2001,
2000 and 1999, respectively.
LOANS: Loans are reported at their outstanding unpaid principal balances, net of
any deferred fees and fair value hedge adjustments. Interest income is accrued
on the unpaid principal balance. Deferred fees are amortized to income over the
contractual life of the loan using the interest method or the straight-line
method if not materially different.
LOSSES AND LOSS ADJUSTMENT EXPENSE RESERVE: The reserve for losses and loss
adjustment expenses consists of the active credit reserve and case basis loss
and loss adjustment expense reserves. The development of the active credit
reserve is based upon estimates of the expected levels of debt service defaults
resulting from credit failures on currently guaranteed issues that are not
presently or imminently in default. When losses occur (actual monetary defaults
or defaults which are imminent on guaranteed obligations), case basis loss
reserves are established in an amount that is sufficient to cover the present
value of the anticipated defaulted debt service payments over the expected
period of default and estimated expenses associated with settling the claims,
less estimated recoveries under salvage or subrogation rights. During 2001, 2000
and 1999, paid losses were $2,595, $4,622, and $2,213, respectively. All or
parts
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, Except Share Amounts)
of case basis loss reserves are allocated from any active credit reserves
available. During 2001, 2000 and 1999, salvage received were $1,333, $0 and
$31, respectively.
Management believes that the reserves for losses and loss adjustment
expenses are adequate to cover the ultimate net cost of claims, but the
reserves are necessarily based on estimates and there can be no assurance that
the ultimate liability will not exceed such estimates.
OBLIGATIONS UNDER INVESTMENT AND PAYMENT AGREEMENTS AND INVESTMENT REPURCHASE
AGREEMENTS: Obligations under investment and payment agreements and investment
repurchase agreements are recorded as liabilities on the consolidated balance
sheets at the face value of the agreement, adjusted for draws paid and interest
credited to the account. Unsettled agreements are accrued on a trade-date basis
on the consolidated balance sheets at the time of commitment. Interest expense
is computed based upon daily outstanding settled liability balances at rates and
periods specified in the agreements. Net interest income relating to investment
agreements and investment repurchase agreements is included as a component of
Financial Services revenue.
NET PREMIUMS EARNED: Up-front insurance premiums written are received for an
entire bond issue. A bond issue may contain several maturities. The premium is
allocated to each bond maturity proportionally, based on total principal amount
guaranteed and is recognized on a straight-line basis over the term of each
maturity. Installment insurance premiums written are recognized over each
installment period, generally one year or less. When an issue insured by Ambac
Assurance has been refunded or called, the remaining unrecognized premium (net
of refunding credits, if any) is generally recognized at that time.
FINANCIAL SERVICES REVENUE: Ambac's Financial Services net revenues includes
the following product lines which are offered through various subsidiaries:
Investment agreements--Ambac provides investment agreement and investment
repurchase agreements principally to states, municipalities, municipal
authorities and asset-backed issuers, whereby Ambac agrees to pay an agreed-upon
return based on funds deposited. Proceeds from these investment agreement and
investment repurchase agreement obligations are used to invest in high credit
quality fixed income investments. Net revenues includes interest expense from
investment agreement and investment repurchase agreement obligations and
interest income from related investments.
Interest rate swaps and total return swaps--Ambac provides interest rate swaps
principally to states, municipalities and municipal authorities in connection
with their financings. Ambac also enters into total return swaps with various
financial institutions. All interest rate swaps and total return swap revenues
are accounted for as "Derivative Contracts Held for Trading Purposes," which is
discussed in the Derivatives section below.
Investment advisory and cash management--Ambac provides investment advisory and
administrative services for money market funds that are primarily offered to
qualified participants including school districts, health care service
providers and municipalities. Cash management services include the distribution
of money market funds, as well as the brokering of short-term fixed income
securities trades on behalf of Ambac clients. Fees from investment advisory and
cash management services are based on percentages of the average daily net
assets of the money market funds serviced as well as a broker mark-up on
short-term fixed income securities trades. Fees from investment advisory and
cash management services are recognized when earned, consistent with the
accrual basis of accounting.
DEPRECIATION AND AMORTIZATION: Depreciation of furniture and fixtures and
electronic data processing equipment is charged over the estimated useful lives
of the respective assets, ranging from three to five years, using the
straight-line method. Amortization of leasehold improvements and intangibles,
including goodwill attributable to the acquisition of certain subsidiaries, is
charged over the estimated useful lives of the respective assets, ranging from
three to 15 years, using the straight-line method.
POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS: Ambac provides various
postretirement and postemployment benefits, including pension, and health and
life benefits covering substantially all employees who meet certain age and
service requirements. Ambac accounts for these benefits under the accrual
method of accounting. Amounts related to the defined benefit pension plan and
postretirement health benefits are charged based on actuarial determinations.
FOREIGN CURRENCY: Financial statement accounts expressed in foreign currencies
are translated into U.S. dollars in accordance with FAS Statement 52 "Foreign
Currency Translation" ("SFAS 52"). Under SFAS 52, functional currency assets
and liabilities are translated into U.S. dollars using exchange rates in effect
at the balance sheet dates and the related translation adjustments are recorded
as a separate component of comprehensive income, net of any related taxes.
Functional currencies are generally the currencies of the local operating
environment. Income statement accounts expressed in functional currencies are
translated using average exchange rates. Foreign currency transaction gains and
losses arising primarily from transactions in short-term investment securities
and cash denominated in foreign currency are reflected in net income. The
Consolidated Statements of Operations include pre-tax losses from such foreign
exchange items of $3,389, $3,748 and $841 for 2001, 2000 and 1999, respectively.
INCOME TAXES: Ambac files a consolidated Federal income tax return with its
subsidiaries. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted
39
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
the period that includes the enactment date.
STOCK COMPENSATION PLANS: In 1997, Ambac adopted the Ambac 1997 Equity Plan.
Under this plan, awards are granted to eligible employees of Ambac in the form
of non-qualified stock options or other stock-based awards. Ambac accounts for
its incentive stock options and stock-based awards under FAS Statement 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 permits a
company to choose either the fair value based method of accounting as defined
in the Statement or the intrinsic value based method of accounting as
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"), for its stock-based compensation plans. Companies electing the
accounting requirements under APB 25 must also make pro-forma disclosures of
net income, earnings per share and earnings per diluted share as if the fair
value based method of accounting had been applied. Ambac has elected to account
for its plans under APB 25.
DERIVATIVE CONTRACTS: In June 1998 the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Certain Hedging Activities." In June
2000 the FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an amendment of SFAS 133." SFAS No.
133 and SFAS No. 138 require all derivative instruments be recorded on the
balance sheet at their respective fair values. SFAS No. 133 and SFAS No. 138 are
effective for all fiscal quarters of all fiscal years beginning after June 30,
2000; Ambac adopted SFAS No. 133 and SFAS No. 138 on January 1, 2001. In
accordance with the transition provisions of SFAS 133, Ambac has recorded
transition adjustment losses of $880 (net of related income tax) in Accumulated
Other Comprehensive Income and $408 (net of related income tax) in net income.
All derivative instruments are recognized in the consolidated balance sheet
as either assets or liabilities depending on the rights or obligations under the
contracts. All derivative instruments are measured at estimated fair value. The
fair values of derivative instruments are determined by broker quotes or
valuation models when broker quotes are not available. Valuation models include
estimates, made by management, which utilize current market information. The
valuation results from these models could differ materially from amounts that
would actually be realized in the market.
DERIVATIVE CONTRACTS USED FOR HEDGING PURPOSES: Interest rate and currency swaps
are utilized to hedge exposure to changes in fair value of assets or liabilities
resulting from changes in interest rates and foreign exchange rates,
respectively. These interest rate and currency swap hedges are referred to as
"fair value" hedges. Gains and losses on fair value hedges are recognized
currently in earnings. The gain or loss on the hedged asset or liability
attributable to the hedged risk (interest rate or foreign exchange risk) adjusts
the carrying amount of the hedged item and is recognized currently in earnings.
If the fair value hedge is fully effective, the gain or loss on the interest
rate or currency swap will exactly offset the gain or loss on the hedged item.
Interest rate swaps are also utilized to hedge the exposure to variable interest
rates. These interest rate swap hedges are referred to as "cash flow" hedges.
Gains and losses on interest rate swaps designated as cash flow hedges are
reported in "Accumulated Other Comprehensive Income (Loss)" in stockholders'
equity, until earnings are affected by the variability in cash flows of the
designated hedged item. The ineffective portions of fair value and cash flow
hedges are reported in earnings with no related offset.
Ambac discontinues hedge accounting prospectively when it is determined
that the derivative is no longer effective in offsetting changes in the fair
value or cash flows of the hedged item, the derivative expires, is sold or
terminated. When hedge accounting is discontinued because it is determined that
the derivative no longer qualifies as an effective fair value hedge, Ambac
continues to carry the derivative on the balance sheet at its fair value, and no
longer adjusts the hedged asset or liability for changes in fair value. The
adjustment of the carrying amount of the hedged asset or liability is accounted
for in the same manner as other components of the carrying amount of that asset
or liability. When hedge accounting is discontinued because it is determined
that the derivative no longer qualifies as an effective cash flow hedge, Ambac
continues to carry the derivative on the balance sheet at its fair value. The
net derivative gain or loss related to a discontinued cash flow hedge will
continue to be reported in Accumulated Other Comprehensive Income (Loss) and
amortized into earnings as a yield adjustment to the previously designated asset
or liability. If the previously designated asset or liability is sold or
matures, the net derivative gain or loss related to a discontinued cash flow
hedge reported in Accumulated Other Comprehensive Income (Loss) will be
reclassified into earnings immediately. All subsequent changes in fair values of
derivatives previously designated as cash flow hedges will be recognized
currently in earnings. As of December 31, 2001, $586 of deferred losses on
derivative instruments reported in Accumulated Other Comprehensive Income are
expected to be reclassified to earnings during the next twelve months.
Transactions and events expected to occur over the next twelve months that will
necessitate reclassifying these derivative losses include the repricing of a
variable-rate investment agreement.
DERIVATIVE CONTRACTS HELD FOR TRADING PURPOSES: Ambac, through its subsidiary
Ambac Financial Services, L.P., provides interest rate swaps to states,
municipalities and their authorities, and other entities in connection with
their financings. Ambac Financial Services also enters into total return swaps
with professional counterparties. Total return swaps are only used for fixed
income obligations, which meet Ambac Assurance's credit underwriting criteria.
Ambac Financial Services uses futures contracts for hedging purposes as part of
its overall interest rate risk management. Ambac, through its subsidiary Ambac
Credit Products LLC, enters into structured credit derivative transactions with
various financial institutions. Ambac Financial Service's interest rate swaps,
total return swaps and futures contracts and Ambac Credit Product's structured
credit derivatives are held for trading purposes. These contracts are recorded
on trade date at fair value. Changes in fair value are recorded as a component
of Financial Services net revenue for
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, Except Share Amounts)
interest rate swaps, total return swaps and futures contracts in the
accompanying Consolidated Statement of Operations. The fee component of
structured credit derivatives is reflected in other credit enhancement fees in
the accompanying consolidated statement of operations. The mark-to-market gain
or loss associated with credit spread changes on structured credit derivatives
is reflected in net realized gains (losses) in the accompanying Consolidated
Statement of Operations. Amounts included in net realized losses for credit
spread mark-to-market were $3,588, $4,111 and $0 for the years ended December
31, 2001, 2000 and 1999, respectively.
All derivative contracts used for hedging purposes and held for trading
purposes are recorded on the balance sheet on a gross basis; assets and
liabilities are netted by customer only when a legal right of set-off exists.
Gross asset and gross liability balances for all derivatives are recorded as
other assets or other liabilities on the Consolidated Balance Sheets.
SPECIAL PURPOSE ENTITIES: Ambac has sponsored two special purpose entities. The
business purpose of these entities is to provide certain financial guarantee
clients with funding for their debt obligations. Ambac receives financial
guarantee premiums and may receive other fees for this service. Ambac accounts
for these entities as Qualified Special Purpose Entities ("QSPEs") in accordance
with Statement of Financial Accounting Standards 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." The QSPEs
are non-consolidated, bankruptcy remote entities. Ambac purchases debt
obligations from certain financial guarantee clients and sells these obligations
to the QSPEs. The purchase by the QSPE is financed through the issuance of
medium-term notes ("MTNs"), which are collateralized by the purchased assets.
These MTNs are generally structured to match the cash flow of the assets
purchased. Derivative contracts may be used (interest rate and currency swaps)
for hedging purposes only. Derivative hedges are established at the time MTNs
are issued to purchase financial assets. Ambac Assurance may issue a financial
guarantee insurance policy on the assets sold, the MTNs issued or both. As of
December 31, 2001, Ambac Assurance had insurance policies issued for all assets
and MTNs owned and outstanding by the QSPEs. Since these exposures are insured,
any losses incurred would be included in Ambac's Consolidated Statements of
Operations. Under the terms of an Administrative Agency Agreement, Ambac
provides certain administrative duties, including asset and liability servicing
responsibilities. Assets sold to the QSPEs during 2001, 2000 and 1999 were
$793,438, $159,937 and $100,027, respectively. No gains or losses were
recognized on these sales. As of December 31, 2001, the estimated fair value of
financial assets, MTN liabilities and derivative hedge assets were
$989,905,$1,003,588 and $11,677, respectively. Estimated fair value is
determined utilizing valuation models. These models include estimates, made by
management, which utilize current market information. The valuation results from
these models could differ materially from amounts that would actually be
realized in the market.
NET INCOME PER SHARE: Basic net income per share is computed by dividing net
income by the weighted-average number of common shares outstanding during the
year. Diluted net income per share is computed similar to basic net income per
share except that the weighted average shares outstanding are increased to
include 3,242,176, 2,383,957 and 2,179,594 additional shares from the assumed
conversion of dilutive stock options and restricted stock units at December 31,
2001, 2000 and 1999, respectively. The number of additional shares is
calculated by assuming that outstanding stock options were exercised and that
the proceeds from such exercises were used to acquire shares of common stock at
the average market price during the year.
ACCOUNTING STANDARDS: In July 2001, the FASB issued FAS Statement 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 addresses the
initial recognition and measurement of intangible assets either singly or
within a group of assets, as well as the measurement of goodwill and other
intangible assets subsequent to their initial acquisition. SFAS 142 changes the
accounting for goodwill and intangible assets that have indefinite useful lives
from an amortization approach to an impairment-only approach that requires that
those assets be tested at least annually for impairment. Intangible assets
that have finite useful lives will continue to be amortized over their useful
lives, but without an arbitrary ceiling on their useful lives. SFAS 142 is
required to be applied starting with fiscal years beginning after December 15,
2001 and is required to be applied at the beginning of an entity's fiscal year.
The statement is to be applied to all goodwill and other intangible assets
recognized in an entity's financial statements at that date. Impairment losses
for goodwill and indefinite lived intangible assets that arise due to the
initial application of SFAS 142 (resulting from an impairment test) are to be
reported as a change in accounting principle. Retroactive application is not
permitted.
In August 2001, the FASB issued FAS Statement 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). SFAS 143 requires companies to record the
fair value of an asset retirement obligation as a liability in the period in
which it incurs a legal obligation associated with the retirement of tangible
long-lived assets that result from the acquisition, construction, development
and/or normal use of the assets. Companies also record a corresponding asset
which is depreciated over the life of the asset. Subsequent to the initial
measurement of the asset retirement obligation, the obligation is adjusted at
the end of each period to reflect the passage of time and changes in the
estimated future cash flows underlying the obligation. Ambac is required to
adopt SFAS 143 on January 1, 2003.
In October 2001, the FASB issued FAS Statement 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. This Statement requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. SFAS Statement 144 requires
companies to separately report discontinued operations and extends that
reporting to a component of an entity that either has been
41
disposed of (by sale, abandonment, or in a distribution to owners) or is
classified as held for sale. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less costs to sell. Ambac is required to
adopt SFAS 144 on January 1, 2002. Ambac does not expect any material impact
from the adoption of SFAS 142, SFAS 143 or SFAS 144.
RECLASSIFICATIONS: Certain reclassifications have been made to prior years'
amounts to conform to the current year's presentation.
3 INVESTMENTS
The amortized cost and estimated fair value of investments in fixed income
securities and short-term investments at December 31, 2001 and 2000 were as
follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------------
2001:
Fixed income securities:
Municipal obligations $ 3,580,822 $133,745 $29,769 $ 3,684,798
Corporate obligations 1,342,990 30,245 42,646 1,330,589
Foreign government obligations 97,109 629 1,138 96,600
U.S. government obligations 75,703 3,750 1,199 78,254
Mortgage and asset-backed securities
(includes U.S. government agency obligations) 3,258,972 36,643 16,699 3,278,916
Short-term 415,002 -- -- 415,002
- -------------------------------------------------------------------------------------------------------------------
8,770,598 205,012 91,451 8,884,159
- -------------------------------------------------------------------------------------------------------------------
Fixed income securities pledged as collateral:
Mortgage and asset-backed securities
(includes U.S. government agency obligations) 1,393,193 12,417 4,082 1,401,528
- -------------------------------------------------------------------------------------------------------------------
Total $10,163,791 $217,429 $95,533 $10,285,687
- -------------------------------------------------------------------------------------------------------------------
2000:
Fixed income securities:
Municipal obligations $ 3,295,256 $140,781 $21,073 $ 3,414,964
Corporate obligations 1,027,211 15,840 62,305 980,746
Foreign government obligations 36,241 83 954 35,370
U.S. government obligations 69,349 3,362 1 72,709
Mortgage and asset-backed securities
(includes U.S. government agency obligations) 2,315,393 14,310 8,341 2,321,363
Short-term 253,519 -- -- 253,519
- -------------------------------------------------------------------------------------------------------------------
6,996,969 174,376 92,674 7,078,671
- -------------------------------------------------------------------------------------------------------------------
Fixed income securities pledged as collateral:
Mortgage and asset-backed securities
(includes U.S. government agency obligations) 1,238,401 3,170 2,222 1,239,349
- -------------------------------------------------------------------------------------------------------------------
Total $ 8,235,370 $177,546 $94,896 $ 8,318,020
===================================================================================================================
The amortized cost and estimated fair value of fixed income securities and
short-term investments at December 31, 2001, by contractual maturity, were as
follows:
Amortized Estimated
Cost Fair Value
- -------------------------------------------------------
Due in one year or less $ 452,835 $ 453,292
Due after one year through
five years 548,262 564,073
Due after five years through
ten years 749,742 763,697
Due after ten years 3,760,787 3,824,181
- -------------------------------------------------------
5,511,626 5,605,243
Mortgage and asset-backed
securities 4,652,165 4,680,444
- -------------------------------------------------------
$10,163,791 $10,285,687
=======================================================
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
Securities carried at $5,964 and $5,843 at December 31, 2001 and 2000,
respectively, were deposited by Ambac with governmental authorities or
designated custodian banks as required by laws affecting insurance companies.
Net investment income from the Financial Guarantee segment was comprised of
the following:
2001 2000 1999
- -------------------------------------------------------
Fixed income securities $260,302 $232,876 $202,805
Short-term investments 9,996 9,904 7,790
- -------------------------------------------------------
Total investment income 270,298 242,780 210,595
Investment expense (2,451) (1,733) (1,311)
- -------------------------------------------------------
Net investment income $267,847 $241,047 $209,284
=======================================================
The Financial Guarantee segment had gross realized gains of $12,100, $9,633 and
$8,050 in 2001, 2000 and 1999, respectively, and gross realized losses of
$9,975, $8,952 and $13,725 in 2001, 2000 and 1999, respectively. Included in
the above are net realized losses of $3,161, $3,509 and $0 in 2001, 2000, and
1999, respectively, related to investments in certain high-grade foreign
currency denominated securities.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, Except Share Amounts)
Net investment income related to the investment agreement business
comprises gross investment income from its investment portfolio less interest
expense from investment agreement liabilities, and is a component of Financial
Services net revenue. The following table summarizes net investment income for
the investment agreement business:
2001 2000 1999
- -------------------------------------------------------
Gross interest income $249,903 $ 303,165 $ 323,175
Gross interest expense (235,448) (283,003) (299,523)
- -------------------------------------------------------
Net investment income $ 14,455 $ 20,162 $ 23,652
=======================================================
The Financial Services segment had gross realized gains of $7,526, $5,605 and
$44,634 in 2001, 2000 and 1999, respectively, and gross realized losses of
$10,551, $14,715 and $47,758 in 2001, 2000 and 1999, respectively. Gross
realized gains and losses in 2000 and 1999 reflect actions taken to re-balance
the investment agreement investment portfolio. This re-balancing caused the
cash flows of invested assets to be more naturally matched to the cash flows of
related liabilities, which allowed Ambac to significantly reduce its derivative
hedges.
As of December 31, 2001 and 2000, Ambac held securities subject to
agreements to resell for $11,200 and $255,786, respectively. The fair value of
those securities at December 31, 2001 and 2000 amounted to $11,566 and $274,682,
respectively, of which $0 and $201,888, respectively, was pledged to
counterparties in connection with certain investment agreements (including
agreements structured as investment repurchase agreements).
In conjunction with its investment agreement business, Ambac routinely
enters into security collateral swaps, whereby repurchase and reverse repurchase
agreements are entered into simultaneously with the same counterparty. Under the
terms of the security collateral swap agreements, both Ambac and the
counterparties have identical rights to pledge or rehypothecate the securities
sold or purchased under the agreement. The fair value of securities sold by
Ambac under agreements to repurchase amounted to $955,118 and $1,239,349 at
December 31, 2001 and 2000, respectively. Such amounts have been classified
separately as "Fixed income securities pledged as collateral" on the
Consolidated Balance Sheets. The fair value of securities simultaneously
purchased by Ambac under agreements to resell amounted to $960,335 and
$1,219,309 at December 31, 2001 and 2000, respectively.
In addition to Ambac entering into security collateral swaps, it has also
entered into reverse repurchase agreements. Under the terms of the agreements,
the counterparties have the right to pledge or rehypothecate the securities
sold. The fair value of securities sold by Ambac under agreements to repurchase
amounted to $446,410 at December 31, 2001. Such amounts have been classified
separately as "Fixed income securities pledged as collateral" on the
Consolidated Balance Sheets.
As of December 31, 2001 and 2000, Ambac had also pledged to certain
investment agreement counterparties securities purchased under agreements to
resell with a fair value of $738,195 and $1,074,714, respectively. Such
securities can not then be pledged by the counterparty to another entity. As of
December 31, 2001 and 2000, Ambac had pledged securities from its investment
portfolio with a fair value of $1,544,461 and $1,491,318 to investment agreement
counterparties. Such securities can not then be pledged by the counterparty to
another entity. Securities pledged to investment agreement counterparties are
maintained in a tri-party collateral account with Ambac's custodian bank. Under
the terms of certain interest rate swap and structured credit derivative
agreements, Ambac and its counterparties may be required to pledge collateral to
the other resulting from changes in the estimated fair value of those positions.
The following amounts were pledged under these agreements at December 31, 2001
and 2000:
Pledged to Pledged by
Ambac Ambac
from its to its
Counterparties Counterparties
- -------------------------------------------------------
2001 2000 2001 2000
- -------------------------------------------------------
Cash $34,200 $-- $-- $24,935
Securities 5,127 -- -- --
=======================================================
Cash pledged by Ambac to its counterparties has been classified separately as
"Cash pledged as collateral" on the Consolidated Balance Sheet.
43
4 LOANS
In the normal course of business, Ambac extended loans for the following
purposes:
Structured Municipal Transactions: Loans have been extended to customers
participating in certain structured municipal transactions. The loans are
collateralized with cash that the customers have deposited with a payment
custodian in amounts adequate to repay the loan balance and interest thereon.
Equipment and other assets underlying the transactions serve as additional
collateral for the loans. Ambac may act as the payment custodian and hold the
funds posted as collateral. As of December 31, 2001 and 2000, the interest rates
on these loans ranged from 6.25% to 8.42%. The loan balances outstanding were
$695,426 and $695,251 as of December 31, 2001 and 2000, respectively. The range
of expected final maturity dates of these loans was May 2004 to January 2027 as
of December 31, 2001.
Project Financing: Ambac has purchased loans which finance an infrastructure
project which is secured by the assets underlying that project. As of December
31, 2001, the interest rates on these loans ranged from 5.28% to 7.03%. The loan
balances outstanding were $181,768 as of December 31, 2001. The range of
expected maturity dates of these loans was July 2014 to July 2019 as of December
31, 2001. There were no project financing loans outstanding as of December 31,
2000.
Investment Partnerships: Ambac has senior secured loans outstanding to certain
investment partnerships which invest in diversified portfolios of assets,
primarily high-yield debt obligations and bank loans. The loans are
collateralized with a first priority lien and security interest in the invested
assets. As of December 31, 2001, the interest rates on these loans ranged from
2.94% to 4.94%. The loans' balances outstanding were $24,000 as of December 31,
2001. The range of final maturity dates for these loans was January 2002 to
March 2002 as of December 31, 2001. There were no investment partnership loans
outstanding as of December 31, 2000.
5 REINSURANCE
In the ordinary course of business, Ambac Assurance cedes exposures under
various reinsurance contracts primarily designed to minimize losses from large
risks and to protect capital and surplus. The effect of reinsurance on premiums
written and earned was as follows:
Years Ended December 31, 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------
Written Earned Written Earned Written Earned
- -------------------------------------------------------------------------------------------------------------
Direct $632,413 $410,392 $440,111 $334,908 $420,669 $289,053
Assumed 50,883 38,825 42,971 32,530 24,573 19,161
Ceded (95,534) (70,483) (80,789) (56,162) (61,845) (43,788)
- -------------------------------------------------------------------------------------------------------------
Net premiums $587,762 $378,734 $402,293 $311,276 $383,397 $264,426
=============================================================================================================
The reinsurance of risk does not relieve the ceding insurer of its original
liability to its policyholders. In the event that all or any of the reinsurers
are unable to meet their obligations to Ambac Assurance under the existing
reinsurance agreements, Ambac Assurance would be liable for such defaulted
amounts. To minimize its exposure to significant losses from reinsurer
insolvencies, Ambac Assurance evaluates the financial condition of its
reinsurers and monitors concentrations of credit risk. As of December 31, 2001,
Ambac Assurance held letters of credit and collateral amounting to approximately
$282,832 from its reinsurers to cover liabilities ceded under the aforementioned
reinsurance contracts. There were no reinsurance recoverables on paid losses as
of December 31, 2001 and 2000. As of December 31, 2001, prepaid reinsurance of
approximately $169,430 was associated with Ambac Assurance's three largest
reinsurers. Ambac pledged cash and fixed income securities to foreign insurers
of $9,295 and $9,386 at December 31, 2001 and 2000, respectively, related to
business assumed from those insurers.
From 1995 to March 2000, Ambac Assurance and MBIA Insurance Corporation
("MBIA") marketed financial guarantees outside of the United States via an
unincorporated joint venture, MBIA.AMBAC International (the "Joint Venture").
Under the Joint Venture, financial guarantee policies were issued separately by
each of the companies. While retaining the right to act individually, each
company had the opportunity to reinsure up to 50 percent of the international
financial guarantee business written by the other company as part of the Joint
Venture. Although the Joint Venture was terminated in March 2000, Ambac
Assurance and MBIA continue reciprocal reinsurance arrangements for
international business. Premiums assumed from MBIA relating to international
business were $46,211, $37,384 and $24,503 in 2001, 2000 and 1999, respectively,
while premiums ceded to MBIA were $21,994, $36,807 and $27,418 in 2001, 2000 and
1999, respectively.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, Except Share Amounts)
6 LOSSES AND LOSS ADJUSTMENT
EXPENSE RESERVE
As discussed in note 2, Ambac Assurance's liability for losses and loss
adjustment expenses consists of case basis and active credit reserves.
Following is a summary of the activity in the case basis loss and active credit
reserve accounts and the components of the liability for loss and loss
adjustment expense reserves:
2001 2000 1999
- ----------------------------------------------------------
Case basis loss and
loss adjustment
expense reserves:
Balance at January 1 $ 32,125 $ 26,705 $ 37,554
Less: reinsurance
recoverables 1,091 501 3,638
- ----------------------------------------------------------
Net Balance at January 1 31,034 26,204 33,916
- ----------------------------------------------------------
Incurred related to:
Current year 3,000 -- 4,000
Prior years (4,938) 9,451 (9,531)
- ----------------------------------------------------------
Total incurred (1,938) 9,451 (5,531)
- ----------------------------------------------------------
Paid related to:
Current year -- -- --
Prior years 1,261 4,621 2,181
- ----------------------------------------------------------
Total paid 1,261 4,621 2,181
- ----------------------------------------------------------
Net balance at December 31 27,835 31,034 26,204
Plus reinsurance
recoverables 2,259 1,091 501
- ----------------------------------------------------------
Balance at December 31 30,094 32,125 26,705
- ----------------------------------------------------------
Active credit reserve:
Balance at January: 100,320 94,771 78,240
Net provision for losses 20,000 15,000 11,000
Transfers (to) from
case reserves 1,938 (9,451) 5,531
- ----------------------------------------------------------
Balance at December 31 122,258 100,320 94,771
- ----------------------------------------------------------
Total $152,352 $132,445 $121,476
==========================================================
7 STOCKHOLDERS' EQUITY
Ambac is authorized to issue 200,000,000 shares of Common Stock, par value
$0.01 per share, of which 106,020,537 were issued as of December 31, 2001.
Ambac is also authorized to issue 4,000,000 shares of preferred stock, $0.01
par value per share, none of which was issued and outstanding as of December
31, 2001.
Dividends declared per share amounted to $0.34, $0.31 and $0.28 in 2001,
2000 and 1999, respectively.
The Board of Directors of Ambac has authorized the establishment of a stock
repurchase program that permits the repurchase of up to 12,000,000 shares of
Ambac's Common Stock. As of December 31, 2001, approximately 8,272,000 shares
had been repurchased under this program for an aggregate amount of $224,826.
STOCKHOLDER RIGHTS PLAN: Ambac adopted a Stockholder Rights Plan under which
stockholders received (after giving effect to two stock splits since adoption of
the Plan) one Right for each three shares of Common Stock owned. Each Right
entitles the registered holder to purchase from Ambac one one-hundredth of a
share of Series A Junior Participating Preferred Stock, par value $0.01 per
share, at a purchase price of $190 per share. The Rights generally detach and
become exercisable when any person or group acquires 20% or more (or announces a
tender offer for 20% or more) of Ambac's Common Stock, at which time each Right
(other than those held by the acquiring company) will entitle the holder to
receive that number of shares of Common Stock of Ambac with a value of two times
the exercise price of the Right. If Ambac is acquired in a merger or other
business combination transaction in which Ambac is not the surviving
corporation, or 50% or more of Ambac's assets, cash flow or earning power is
sold or transferred, each Right will entitle the holder to receive that number
of shares of stock of the acquiring company having a value equal to two times
the exercise price of the Right. The Rights, which expire on January 31, 2006,
are redeemable in whole, but not in part, by action of the Board of Directors of
Ambac at a price of $0.01 per Right at any time prior to their becoming
exercisable.
8 COMMITMENTS AND CONTINGENCIES
Ambac is responsible for leases on the rental of office space. The lease
agreements, which expire periodically through September 2019, contain
provisions for scheduled periodic rent increases and are accounted for as
operating leases. An estimate of future net minimum lease payments in each of
the next five years ending December 31, and the periods thereafter, is as
follows:
Amount
- --------------------------------------------
2002 $ 6,584
2003 6,434
2004 6,434
2005 5,941
2006 5,787
All later years 77,329
- --------------------------------------------
$108,509
============================================
Rent expense for the aforementioned leases amounted to $5,916, $5,578 and
$5,347 for the years ended December 31, 2001, 2000 and 1999, respectively.
Total future rental receipts under sublease agreements are estimated at $1,564.
45
9 INSURANCE REGULATORY RESTRICTIONS
Ambac Assurance is subject to insurance regulatory requirements of the States
of Wisconsin and New York, and the other jurisdictions in which it is
licensed to conduct business.
Ambac Assurance's ability to pay dividends is generally restricted by law
and subject to approval by the Office of the Commissioner of Insurance of the
State of Wisconsin. Wisconsin insurance law restricts the payment of dividends
in any 12-month period without regulatory approval to the lesser of (a) 10% of
policyholders' surplus as of the preceding December 31 and (b) the greater of
(i) statutory net income for the calendar year preceding the date of dividend,
minus realized capital gains for that calendar year and (ii) the aggregate of
statutory net income for three calendar years preceding the date of the
dividend, minus realized capital gains for those calendar years and minus
dividends paid or credited within the first two of the three preceding calendar
years. Based upon these restrictions, at December 31, 2001, the maximum amount
that will be available during 2002 for payment of dividends by Ambac Assurance
is approximately $200,000. Ambac Assurance paid cash dividends of $68,000,
$59,800 and $52,000 on its common stock in 2001, 2000 and 1999, respectively.
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. Such limits are specific to the type of insured
obligation (for example, municipal or asset-backed). The limits compare the
insured net par outstanding and average annual debt service, net of reinsurance
and collateral, for a single risk to the insurer's qualified statutory capital,
which is defined as the sum of the insurer's policyholders' surplus and
contingency reserves. As of December 31, 2001 and 2000, Ambac Assurance and its
subsidiaries were in compliance with these regulatory requirements.
Ambac Assurance's statutory financial statements are prepared on the
basis of accounting practices prescribed or permitted by the Wisconsin
Insurance Department. Effective January 1, 2001, Wisconsin adopted the National
Association of Insurance Commissioners' statutory accounting practices as the
basis of its statutory accounting practices. The adoption of the National
Association of Insurance Commissioners' accounting practices did not have a
material effect on Ambac Assurance's statutory capital. The commissioner of the
Wisconsin Insurance Department has the right to permit specific practices that
deviate from prescribed practices. Ambac Assurance does not have any accounting
practices that are permitted, rather than prescribed, by the Insurance
Department of the State of Wisconsin.
Statutory capital and surplus was $1,996,284 and $1,655,151 at December
31, 2001 and 2000, respectively. Qualified statutory capital was $3,261,935 and
$2,735,899 at December 31, 2001 and 2000, respectively. Statutory net income
for Ambac Assurance was $394,559, $381,328 and $262,756 for 2001, 2000 and
1999, respectively. Statutory capital and surplus differs from stockholders'
equity determined under GAAP principally due to statutory accounting rules that
treat loss reserves, premiums earned, policy acquisition costs, and deferred
income taxes differently.
10 INCOME TAXES
Ambac's provision for income taxes is comprised of the following:
2001 2000 1999
- --------------------------------------------------------
Current taxes $123,036 $ 91,779 $89,543
Deferred taxes 12,785 24,173 7,198
- --------------------------------------------------------
$135,821 $115,952 $96,741
========================================================
The total effect of income taxes on income and stockholders' equity for the
years ended December 31, 2001 and 2000 was as follows:
2001 2000
- --------------------------------------------------------
Total income taxes charged to income $135,821 $115,952
- --------------------------------------------------------
Income taxes charged (credited) to
stockholders' equity:
Unrealized gains on investment
securities 12,051 139,112
Exercise of stock options (13,045) (8,899)
- --------------------------------------------------------
Total (credited) charged to
stockholders' equity (994) 130,213
- --------------------------------------------------------
Total effect of income taxes $134,827 $246,165
========================================================
The tax provisions in the accompanying Consolidated Statements of Operations
reflect effective tax rates differing from prevailing Federal corporate
income tax rates. The following is a reconciliation of these differences:
2001 % 2000 % 1999 %
- --------------------------------------------------------------------------------------------------------------
Tax computed at statutory rate $199,054 35.0% $168,743 35.0% $141,630 35.0%
Reductions in expected tax resulting from:
Tax-exempt interest (59,644) (10.5) (50,479) (10.5) (43,241) (10.7)
Other, net (3,589) (0.6) (2,312) (0.4) (1,648) (0.4)
- --------------------------------------------------------------------------------------------------------------
Income tax expense $135,821 23.9% $115,952 24.1% $ 96,741 23.9%
==============================================================================================================
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, Except Share Amounts)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax liabilities and deferred tax assets at December
31, 2001 and 2000 are presented below:
2001 2000
- --------------------------------------------------------------
Deferred tax liabilities:
Contingency reserve $ 163,957 $ 163,957
Unrealized gains on bonds 32,659 20,608
Deferred acquisition costs 56,783 53,133
Unearned premiums and credit fees 57,419 54,292
Investments 6,799 6,419
Other 7,148 930
- --------------------------------------------------------------
Total deferred tax liabilities 324,765 299,339
- --------------------------------------------------------------
Deferred tax assets:
Tax and loss bonds 128,371 128,371
Loss reserves 42,904 35,281
Compensation 26,703 17,499
Alternative minimum tax carryforward -- 7,595
Other 3,710 4,558
- --------------------------------------------------------------
Sub-total deferred tax assets 201,688 193,304
Valuation allowance -- --
- --------------------------------------------------------------
Total deferred tax assets 201,688 193,304
- --------------------------------------------------------------
Net deferred tax liabilities $(123,077) $(106,035)
==============================================================
Ambac believes that no valuation allowance is necessary in connection with
the deferred tax assets.
11 EMPLOYEE BENEFITS
PENSIONS: Ambac has a defined benefit pension plan covering substantially all
employees of Ambac. The benefits are based on years of service and the
employee's highest salary during five consecutive years of employment within the
last ten years of employment. Ambac funding policy is to contribute annually the
maximum amount that can be deducted for Federal income tax purposes.
Contributions are intended to provide not only for benefits attributed to
service-to-date, but also for those expected to be earned in the future.
The table below sets forth a reconciliation of the beginning and ending
projected benefit obligation, beginning and ending balances of the fair value of
plan assets, and the funded status of the plan as of December 31, 2001 and 2000.
2001 2000
- -----------------------------------------------------------
Change in Projected Benefit Obligation:
Projected benefit obligation at
beginning of year $12,669 $11,201
Service cost 1,031 892
Interest cost 853 829
Actuarial (gain) loss (189) 20
Benefits paid (254) (273)
Other 250 --
- -----------------------------------------------------------
Projected benefit obligation at
end of year $14,360 $12,669
- -----------------------------------------------------------
Change in Plan Assets:
Fair value of plan assets at
beginning of year $11,957 $12,841
Actual return on plan assets (872) (611)
Company contributions 2,000 --
Benefits paid (254) (273)
- -----------------------------------------------------------
Fair value of plan assets at
end of year $12,831 $11,957
- -----------------------------------------------------------
Funded status $(1,529) $ (712)
Unrecognized loss (gain) 1,132 (916)
Unrecognized prior service cost (379) (781)
Unrecognized net transition asset -- --
- -----------------------------------------------------------
Pension liability included in
other liabilities $ (776) $(2,409)
===========================================================
47
Net pension costs for 2001, 2000 and 1999 included the following components:
2001 2000 1999
- -----------------------------------------------------------
Service cost $1,031 $ 892 $ 979
Interest cost on expected
benefit obligation 853 829 783
Expected return on
plan assets (1,286) (1,056) (893)
Amortization of unrecognized
transition asset -- -- (3)
Amortization of prior
service cost (151) (151) (151)
Recognized net actuarial
(gain) loss (78) (12) 39
- -----------------------------------------------------------
Net periodic pension cost $ 369 $ 502 $ 754
===========================================================
The discount rate used in the determination of the actuarial present value for
the projected benefit obligation was 7.0% and 7.5% for 2001 and 2000,
respectively. The expected long-term rate of return on assets was 9.25% for
both 2001 and 2000. The rate of increase in future compensation levels used in
determining the actuarial present value of the projected benefit obligation was
4.5% and 5.0% for 2001 and 2000, respectively.
Substantially all employees of Ambac are covered by a defined
contribution plan (the "Savings Incentive Plan"), for which contributions and
costs are determined as 6% of each eligible employee's eligible base salary,
plus a matching company contribution of 50% on contributions up to 6% of base
salary made by eligible employees to the Savings Incentive Plan. The total
cost of the Savings Incentive Plan was $3,037, $2,471 and $2,165 in 2001, 2000
and 1999, respectively.
ANNUAL INCENTIVE PROGRAM: Ambac has an annual incentive program that provides
for awards to key officers and employees based upon predetermined criteria.
The cost of the program for the years ended December 31, 2001, 2000 and 1999
amounted to $27,823, $22,725 and $18,091, respectively.
POSTRETIREMENT HEALTH CARE AND OTHER BENEFITS: Ambac provides certain medical
and life insurance benefits for retired employees and eligible dependents. All
plans are contributory. None of the plans are currently funded.
Postretirement benefits expense was $175, $358 and $497 in 2001, 2000
and 1999, respectively. The unfunded accumulated postretirement benefit
obligation was $1,727 and the related accrued postretirement liability was
$2,504 as of December 31, 2001.
The assumed health care cost trend rates range from 7.5% in 2002,
decreasing ratably to 6.0% in 2008. Increasing the assumed health care cost
trend rate by one percentage point in each future year would increase the
accumulated postretirement benefit obligation at December 31, 2001 by $639 and
the 2001 benefit expense by $103. The discount rate used to measure the
accumulated postretirement benefit obligation and 2001 expense was 7.0%.
12 GUARANTEES IN FORCE
The par amount of financial guarantees outstanding, net of reinsurance, was
$318,043,000 and $276,252,000 at December 31, 2001 and 2000, respectively. As
of December 31, 2001 and 2000, the guarantee portfolio was diversified by type
of guaranteed bond as shown in the following table:
Net Par Amount Outstanding
- -------------------------------------------------------
(Dollars in Millions) 2001 2000
- -------------------------------------------------------
Public Finance:
Lease and tax-backed revenue $ 52,102 $ 46,292
General obligation 39,664 39,432
Utility revenue 29,513 28,504
Health care revenue 19,003 17,837
Transportation revenue 13,000 10,496
Higher education 11,854 9,603
Investor-owned utilities 11,642 10,560
Housing revenue 7,476 7,146
Student loans 7,249 6,375
Other 5,103 4,065
- -------------------------------------------------------
Total Public Finance 196,606 180,310
- -------------------------------------------------------
Structured Finance:
Mortgage-backed and home equity 42,723 38,215
Asset-backed and conduits 23,302 22,121
Other 6,612 4,324
- -------------------------------------------------------
Total Structured Finance 72,637 64,660
- -------------------------------------------------------
International Finance:
Structured credit derivatives 26,123 15,313
Asset-backed and conduits 11,721 8,595
Utilities 2,878 1,803
Mortgage-backed and home equity 2,602 1,364
Sovereign/sub-sovereign 1,299 1,123
Other 4,177 3,084
- -------------------------------------------------------
Total International Finance 48,800 31,282
- -------------------------------------------------------
$318,043 $276,252
=======================================================
As of December 31, 2001 and 2000, the International Finance guaranteed portfolio
is shown in the following table by location of risk:
Net Par Amount Outstanding
- -------------------------------------------------------
(Dollars in Millions) 2001 2000
- -------------------------------------------------------
United Kingdom $ 6,531 $ 3,103
Australia 1,623 1,382
Japan 1,167 1,167
France 1,155 765
Germany 948 471
Mexico 654 608
Internationally diversified 32,621 20,962
Other international 4,101 2,824
- -------------------------------------------------------
Total International Finance $48,800 $31,282
=======================================================
Internationally diversified includes structured credit derivatives which
includes components of domestic exposure.
Direct financial guarantees in force (principal and interest) was
$542,458,000 and $480,631,000 at December 31, 2001 and 2000, respectively. Net
financial guarantees in force (after giving effect to reinsurance) was
$476,190,000 and $418,386,000 as of December 31, 2001 and 2000, respectively.
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, Except Share Amounts)
In the United States, California and New York were the states with the
highest aggregate net par amounts in force, accounting for 8.8% and 5.7% of the
total at December 31, 2001. No other state accounted for more than five
percent. The highest single insured risk represented less than 1% of aggregate
net par amount insured.
13 FAIR VALUE OF FINANCIAL INSTRUMENTS
The following fair value amounts were determined by using independent market
information when available, and appropriate valuation methodologies when market
quotes were not available. In cases where specific market quotes are
unavailable, interpreting market data and estimating market values require
considerable judgment by management. Accordingly, the estimates presented are
not necessarily indicative of the amount Ambac could realize in a current
market exchange.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
INVESTMENTS: The fair values of fixed income investments are based primarily on
quoted market prices received from a nationally recognized pricing service or
dealer quotes. When quotes are not available, fair values are estimated based
upon internal valuation models.
SHORT-TERM INVESTMENTS AND CASH: The fair values of short-term investments and
cash are assumed to approximate amortized cost.
OTHER: The fair value of other investments, primarily mutual funds, are based
on quoted market prices received from a nationally recognized pricing service.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL: The fair value of securities
purchased under agreements to resell is assumed to approximate carrying value.
INVESTMENT INCOME DUE AND ACCRUED: The fair value of investment income due and
accrued is assumed to approximate carrying value.
LOANS: The fair values of loans extended for structured municipal transactions
and investment partnerships are assumed to approximate carrying value. The fair
values of loans extended for project financing are estimated based upon internal
valuation models.
DERIVATIVE CONTRACTS USED FOR HEDGING PURPOSES: The fair values of cash flow
hedges and fair value hedges (interest rate and currency swaps), as defined in
Note 2, are based on quoted dealer prices, current settlement values, or pricing
models. During 2001, there was no net gain or loss recognized in earnings, which
represented fair value or cash flow hedge ineffectiveness. In addition, there
were no gain or loss components of any fair value or cash flow hedges excluded
from the assessment of hedge effectiveness during 2001.
DERIVATIVE CONTRACTS HELD FOR TRADING PURPOSES: The fair values of interest rate
swaps, total return swaps and structured credit derivative transactions, as
discussed in Note 2, are based on quoted dealer prices, current settlement
values, or valuation models.
OBLIGATIONS UNDER INVESTMENT, REPURCHASE AND PAYMENT AGREEMENTS: The fair value
of the liability for investment agreements and repurchase agreements (including
accrued interest) is estimated based upon internal valuation models. The fair
value of payment agreements is assumed to approximate carrying value.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE: The fair value of securities
sold under agreements to repurchase is assumed to approximate carrying value.
DEBENTURES: The fair value of the debentures is based on quoted market prices.
LIABILITY FOR NET FINANCIAL GUARANTEES WRITTEN: The fair value of the liability
for those financial guarantees written is based on the estimated cost to
reinsure those exposures at current market rates, which amount consists of the
current unearned premium reserve, less an estimated ceding commission thereon.
Other financial guarantee insurance policies have been written on an
installment basis, where the future premiums to be received by Ambac are
determined based on the outstanding exposure at the time the premiums are due.
The fair value of Ambac Assurance's liability under its installment premium
policies is measured using the present value of estimated future installment
premiums, less an estimated ceding commission. The estimate of the amounts and
timing of the future installment premiums is based on contractual premium
rates, debt service schedules and expected run-off scenarios. This measure is
used as an estimate of the cost to reinsure Ambac Assurance's liability under
these policies.
49
The carrying amount and estimated fair value of financial instruments
are presented below:
As of December 31, 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
(Dollars in Millions) Amount Fair Value Amount Fair Value
- -------------------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS:
Fixed income securities $8,469 $8,469 $6,825 $6,825
Fixed income securities pledged as collateral 1,402 1,402 1,239 1,239
Short-term investments 415 415 254 254
Other Investments 2 2 6 6
Cash 77 77 20 20
Cash pledged as collateral -- -- 25 25
Securities purchased under agreements to resell 11 11 256 256
Investment income due and accrued 144 144 131 131
Loans 901 889 695 695
DERIVATIVE CONTRACT ASSETS:
Hedging purposes 28 28 -- 4
Trading purposes 296 296 193 193
FINANCIAL LIABILITIES:
Obligations under investment, repurchase and
payment agreements (including accrued interest) 5,596 5,681 4,984 4,986
Securities sold under agreements to repurchase 425 425 -- --
Debentures 619 657 424 432
DERIVATIVE CONTRACT LIABILITIES:
Hedging purposes -- -- -- --
Trading purposes 238 238 156 156
LIABILITY FOR FINANCIAL GUARANTEES WRITTEN:
Gross 1,780 1,246 1,546 1,082
Net of reinsurance 1,513 1,059 1,304 913
Gross installment premiums -- 818 -- 653
Net installment premiums -- 691 -- 535
===================================================================================================================
14 LONG-TERM DEBT AND LINES OF CREDIT
The carrying value of long-term debt was as follows:
As of December 31, 2001 2000
- -------------------------------------------------------
9 3/8% Debentures, due 2011 $144,757 $149,524
7 1/2% Debentures, due 2023 74,558 74,537
7.00% Debentures, due 2051 200,000 --
7.08% Debentures, due 2098 200,000 200,000
- -------------------------------------------------------
$619,315 $424,061
=======================================================
The debentures due on August 1, 2011 were issued on August 8, 1991 in the
principal amount of $150,000 and bear interest of 9 3/8%, payable on February 1
and August 1 of each year and are non-callable. In July 2001, Ambac
extinguished $7,500, thereby reducing the principal amount of the debt to
$142,500. The carrying value of this debt has been adjusted by $2,257 to
reflect fair value hedge gains.
The debentures due on May 1, 2023 were issued on May 11, 1993 in the
principal amount of $75,000 and bear interest of 7 1/2%, payable on May 1 and
November 1 of each year and are non-callable.
The debentures due on March 31, 2098 were issued on April 1, 1998 in the
principal amount of $200,000 and bear interest of 7.08%, payable on March 31,
June 30, September 30 and December 31 of each year. The debentures may not be
redeemed prior to March 31, 2003 and were sold at 100% of their principal
amount. On or after March 31, 2003, Ambac may redeem the debentures, in whole
at any time or in part from time to time, at 100% of their principal amount,
plus accrued interest to the date of redemption.
The debentures due on October 17, 2051 were issued on October 18, 2001
in the principal amount of $200,000 and bear interest of 7.00%, payable on
March 31, June 30, September 30 and December 31 of each year. The debentures
may not be redeemed prior to October 17, 2006 and were sold at 100% of their
principal amount. On or after October 17, 2006, Ambac may redeem the
debentures, in whole at any time or in part from time to time, at 100% of their
principal amount, plus accrued interest to the date of redemption.
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, Except Share Amounts)
Ambac and Ambac Assurance have a revolving credit facility with four
major international banks for $200,000, which expires in August 2002 and
provides a two-year term loan provision. The facility is available for general
corporate purposes, including the payment of claims. As of December 31, 2001
and 2000, no amounts were outstanding under this credit facility.
Ambac Credit Products has a revolving credit facility with one major
international bank for $50,000 that expires in June 2002 and provides a
three-year term loan provision. The facility is available to Ambac Credit
Products for general corporate purposes, including payments in regard to its
structured credit derivative activities. As of December 31, 2001 and 2000, no
amounts were outstanding under this facility.
Ambac Assurance maintains third-party capital support in the form of a
seven-year irrevocable limited recourse credit facility from a group of highly
rated banks. This credit facility provides liquidity to Ambac Assurance in the
event claims from municipal or certain structured obligations in its guaranteed
portfolios exceed specified levels. Repayment of amounts drawn under the credit
facility is limited primarily to the amount of any recoveries of losses related
to policy obligations in the guaranteed portfolios. During 2001, Ambac
Assurance replaced a portion of the facility with a new capital markets
structure (see below). Consequently, the facility was reduced from $800,000 to
$400,000. The facility's expiration date was also extended to June 30, 2008. As
of December 31, 2001 and 2000, no amounts were outstanding under this facility.
Ambac Assurance acquired a perpetual put option on its own preferred
stock from a trust established by a major investment bank. The trust was
created as a vehicle for providing capital support to Ambac Assurance by
allowing it to obtain immediate access to new capital at its sole discretion at
any time through the exercise of the put option. If the put option were
exercised, the preferred stock holdings of Ambac Assurance would give investors
the rights of an equity investor in Ambac Assurance. Such rights are
subordinate to insurance claims, as well as to the general unsecured creditors
of Ambac Assurance. If exercised, Ambac Assurance would receive up to $400,000
in return for the issuance of its own perpetual preferred stock, the proceeds
of which may be used for any purpose including the payment of claims. Dividend
payments on the preferred stock are cumulative only if Ambac Assurance pays
dividends on its common stock. The trust is a special purpose trust that is
restricted to holding high quality short-term commercial paper investments to
ensure that it can meet its obligations under the put option. To fund these
investments, the trust has issued its own auction market perpetual preferred
stock. Ambac Assurance pays a floating put option fee. The trust is rated
AA/Aa2 by Standard & Poor's and Moody's respectively.
15 OBLIGATIONS UNDER INVESTMENT AGREEMENTS AND PAYMENT AGREEMENTS
Obligations under investment agreements, including those structured in the form
of repurchase contracts, are recorded on a trade-date basis. Certain obligations
may be called at various times prior to maturity at the option of the
counterparty. As of December 31, 2001 and 2000, the interest rates on these
agreements ranged from 2.00% to 8.14%. As of December 31, 2001 and 2000, the
average yield on these agreements was 5.47% and 5.76%, respectively. Obligations
under investment agreements and investment repurchase agreements as of December
31, 2001 and 2000 were as follows:
As of December 31, 2001 2000
- -------------------------------------------------------
Settled $4,785,899 $4,191,017
Unsettled 4,101 6,663
- -------------------------------------------------------
$4,790,000 $4,197,680
=======================================================
Net payments due under settled investment agreements in each of the next five
years ending December 31, and the periods thereafter, based on expected draw
dates, are as follows:
Principal
Amount
- -------------------------------------------------------
2002 $1,620,833
2003 1,181,083
2004 450,428
2005 93,552
2006 20,373
All later years 1,419,630
- -------------------------------------------------------
$4,785,899
=======================================================
Obligations under payment agreements represent funds received by Ambac from
certain municipal customers. These funds serve as collateral for loans extended
by Ambac in connection with certain structured municipal transactions. In
connection with these transactions, Ambac is obligated to make periodic agreed
upon payments. As of December 31, 2001 and 2000, the interest rates on these
obligations ranged from 6.25% to 8.42%. Net payments due under payment
agreements in each of the next five years ending December 31, and the periods
thereafter, based on contractual payment dates, are as follows:
Principal
Amount
- -------------------------------------------------------
2002 $ 7,525
2003 15,702
2004 23,568
2005 17,200
2006 21,611
All later years 609,820
- -------------------------------------------------------
$695,426
=======================================================
51
16 COMMON STOCK INCENTIVES
The Ambac 1997 Equity Plan (the "Equity Plan") provides for the granting of
stock options, stock appreciation rights, restricted stock units, performance
units and other awards that are valued or determined by reference to the Common
Stock. Stock options awarded to employees are exercisable and expire as
specified at the time of grant. Additionally, such options do not have a per
share exercise price less than the fair market value of a share of Common Stock
on the date of grant or have a term in excess of ten years from the date of the
grant. Ambac also maintains the Ambac 1997 Non-Employee Directors Equity Plan,
which provides awards of stock options and restricted stock units to
non-employee members of Ambac's Board of Directors. The number of options and
their exercise price, and the number of restricted stock units awarded to each
non-employee director under the Directors Equity Plan are determined by
formula. As of December 31, 2001, approximately 5,184,000 shares were available
for future grant under the Equity Plan and the Directors Equity Plan. A summary
of option activity is as follows:
2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- -------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 5,694,711 $27.86 5,490,716 $24.99 5,084,046 $20.89
Granted 1,763,615 $50.37 1,796,052 $32.57 1,319,723 $36.61
Exercised (1,184,329) $25.52 (1,327,754) $20.87 (791,949) $16.73
Forfeited (55,128) $40.33 (264,303) $33.35 (121,104) $31.85
--------- --------- ---------
Outstanding at end of year 6,218,869 $34.70 5,694,711 $27.86 5,490,716 $24.99
========= ========= =========
Exercisable 3,786,156 3,051,448 3,190,365
========= ========= =========
Options Outstanding Options Exercisable
- -----------------------------------------------------------------------------------------------------------------
Weighted
Number Average Weighted Number
Range of Outstanding at Remaining Average Exercisable at Weighted Average
Exercise Prices December 31, 2001 Contract Life Exercise Price December 31, 2001 Exercise Price
- -----------------------------------------------------------------------------------------------------------------
$13 to 30 2,075,028 2.4 $21.73 2,026,528 $21.52
$31 to 47 2,313,795 4.4 $33.87 1,685,121 $33.81
$48 to 60 1,830,046 5.3 $50.47 74,507 $52.66
--------- ---------
6,218,869 3,786,156
--------- ---------
=================================================================================================================
Ambac applies APB 25 and related interpretations in accounting for its plans.
Accordingly, since the fair value of the options at grant date equals the
exercise price, no compensation cost has been recognized for its fixed stock
option plan. Had compensation cost for Ambac's stock-based compensation plan
been determined consistent with SFAS 123, Ambac's net income, earnings per
share and earnings per diluted share for the years ended December 31, 2001,
2000 and 1999, would have been reduced to the pro-forma amounts indicated below:
2001 2000 1999
- ----------------------------------------------------------
Net Income:
As reported $432,906 $366,172 $307,917
Pro-forma $419,310 $357,581 $300,410
Earnings Per Share:
As reported $4.10 $3.49 $2.94
Pro-forma $3.97 $3.40 $2.87
Earnings Per Diluted Share:
As reported $3.97 $3.41 $2.88
Pro-forma $3.85 $3.33 $2.81
==========================================================
The weighted-average fair value (determined as of the date of the grants) of
options granted in 2001, 2000 and 1999 was $17.37 per share, $11.78 per share,
and $11.25 per share, respectively. The fair value of each option grant issued
was estimated as of the date of the grant using the Black-Scholes option-
pricing model, with the following weighted-average assumptions used for grants
in 2001, 2000 and 1999, respectively: (i) dividend yield of 0.65%, 0.92% and
0.74%; (ii) expected volatility of 32.7%, 30.3% and 26.3%; (iii) risk-free
interest rates of 4.8%, 6.5% and 4.8%; and (iv) expected lives of approximately
five years. The pro-forma amounts disclosed above are not likely to be
representative of the effects of reported pro-forma net income for future years
because options vest over several years and additional awards are granted each
year.
17 SEGMENT INFORMATION
Ambac has two reportable segments, as follows: (1) financial guarantee, which
provides financial guarantees (including structured credit derivatives) for
public finance and structured finance obligations; and (2) financial services,
which provides investment agreements, interest rate swaps, funding conduits,
and investment advisory and cash management services.
Ambac's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different marketing strategies, personnel skill sets and
technology.
The accounting policies of the segments are described in Note 2,
"Significant Accounting Policies." Pursuant to insurance and indemnity
agreements, Ambac Assurance guarantees the swap and investment agreement
obligations of those financial services subsidiaries. Intersegment revenues
include the premiums earned under those agreements. Such premiums are
determined as if they were premiums to third parties, that is, at current
market prices.
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, Except Share Amounts)
Information provided below for "Corporate and Other" relates to Ambac
Financial Group, Inc. corporate activities. Corporate and other revenue from
unaffiliated customers consists primarily of interest income. Intersegment
revenues consist of dividends received.
The following table is a summary of the financial information by
reportable segment as of and for the years ended December 31, 2001, 2000 and
1999:
Financial Financial Corporate Intersegment Total
Guarantee Services and Other Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------------
2001
Revenues:
Unaffiliated customers $ 671,958 $ 49,199 $ 3,763 $ -- $ 724,920
Intersegment 5,006 (3,882) 69,000 (70,124) --
- ----------------------------------------------------------------------------------------------------------------------
Total revenues $ 676,964 $ 45,317 $ 72,763 $(70,124) $ 724,920
- ----------------------------------------------------------------------------------------------------------------------
Income before income taxes:
Unaffiliated customers $ 583,969 $ 27,384 $(42,626) $ -- $ 568,727
Intersegment 5,304 (3,933) 67,612 (68,983) --
- ----------------------------------------------------------------------------------------------------------------------
Total income before income taxes $ 589,273 $ 23,451 $ 24,986 $(68,983) $ 568,727
- ----------------------------------------------------------------------------------------------------------------------
Identifiable assets $5,877,713 $6,318,239 $ 71,743 $ -- $12,267,695
- ----------------------------------------------------------------------------------------------------------------------
2000:
Revenues:
Unaffiliated customers $ 565,421 $ 53,565 $ 2,324 $ -- $ 621,310
Intersegment 3,827 (3,259) 63,844 (64,412) --
- ----------------------------------------------------------------------------------------------------------------------
Total revenues $ 569,248 $ 50,306 $ 66,168 $(64,412) $ 621,310
- ----------------------------------------------------------------------------------------------------------------------
Income before income taxes:
Unaffiliated customers $ 495,186 $ 28,760 $(41,822) $ -- $ 482,124
Intersegment 3,827 (3,201) 63,844 (64,470) --
- ----------------------------------------------------------------------------------------------------------------------
Total income before income taxes $ 499,013 $ 25,559 $ 22,022 $(64,470) $ 482,124
- ----------------------------------------------------------------------------------------------------------------------
Identifiable assets $4,870,155 $5,193,747 $ 56,398 $ -- $10,120,300
- ----------------------------------------------------------------------------------------------------------------------
1999:
Revenues:
Unaffiliated customers $ 474,089 $ 48,483 $ 10,703 $ -- $ 533,275
Intersegment 3,033 (3,574) 52,661 (52,120) --
- ----------------------------------------------------------------------------------------------------------------------
Total revenues $ 477,122 $ 44,909 $ 63,364 $(52,120) $ 533,275
- ----------------------------------------------------------------------------------------------------------------------
Income before income taxes:
Unaffiliated customers $ 414,285 $ 22,701 $(32,328) $ -- $ 404,658
Intersegment 3,850 (3,595) 52,661 (52,916) --
- ----------------------------------------------------------------------------------------------------------------------
Total income before income taxes $ 418,135 $ 19,106 $ 20,333 $(52,916) $ 404,658
- ----------------------------------------------------------------------------------------------------------------------
Identifiable assets $4,184,010 $7,104,825 $ 56,261 $ -- $11,345,096
======================================================================================================================
The following table summarizes gross premiums written and net premiums earned
included in the financial guarantee segment, by location of risk for the years
ended December 31, 2001, 2000 and 1999.
2001 2000 1999
- -------------------------------------------------------------
Gross premiums written:
United States $535,725 $373,269 $373,523
United Kingdom 40,650 19,325 17,587
Japan 12,204 7,655 6,106
France 856 970 2,546
Australia 7,308 27,647 739
Germany 483 418 346
Mexico 16,285 16,232 11,115
Internationally diversified 30,615 14,754 11,971
Other international 39,170 22,812 21,309
- -------------------------------------------------------------
Total: $683,296 $483,082 $445,242
=============================================================
2001 2000 1999
- ----------------------------------------------------------
Net premiums earned:
United States $316,489 $263,746 $234,679
United Kingdom 10,965 7,068 3,054
Japan 8,939 6,252 5,513
France 1,116 1,133 1,132
Australia 3,761 3,058 1,373
Germany 449 418 346
Mexico 7,540 7,461 4,365
Internationally diversified 15,757 13,680 8,154
Other international 13,718 8,460 5,810
- ----------------------------------------------------------
Total: $378,734 $311,276 $264,426
==========================================================
Internationally diversified includes components of domestic exposure.
53
18 QUARTERLY FINANCIAL INFORMATION (unaudited)
- -------------------------------------------------------------------------------------------------------------------
First Second Third Fourth Full Year
- -------------------------------------------------------------------------------------------------------------------
2001:
Gross premiums written $109,667 $236,668 $152,918 $184,043 $683,296
Net premiums written 96,966 212,901 117,044 160,851 587,762
Net premiums earned and other
credit enhancement fees 89,769 98,407 103,895 108,324 400,395
Net investment income 64,476 65,058 67,318 70,995 267,847
Financial services revenue 14,459 11,767 10,231 15,768 52,225
Losses and loss adjustment expenses 4,600 4,800 5,100 5,500 20,000
Financial guarantee underwriting and
operating expenses 16,643 17,426 16,602 17,318 67,989
Financial services expenses 5,631 5,973 5,023 5,188 21,815
Income before income taxes 128,871 140,146 144,322 155,388 568,727
Net income 97,515 107,637 111,008 116,746 432,906
Net income per share:
Basic 0.92 1.02 1.05 1.11 4.10
Diluted $0.90 $0.99 $1.02 $1.07 $3.97
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2000:
Gross premiums written $ 69,338 $121,669 $147,949 $144,126 $483,082
Net premiums written 53,211 95,422 127,872 125,788 402,293
Net premiums earned and other
credit enhancement fees 73,498 83,373 82,571 83,991 323,433
Net investment income 57,631 58,902 61,090 63,424 241,047
Financial services revenue 14,442 21,127 10,856 16,250 62,675
Losses and loss adjustment expenses 3,249 3,600 3,908 4,243 15,000
Financial guarantee underwriting and
operating expenses 13,478 13,876 13,208 14,673 55,235
Financial services expenses 6,479 6,276 5,808 6,242 24,805
Income before income taxes 112,094 122,170 119,340 128,520 482,124
Net income 85,638 92,640 90,908 96,986 366,172
Net income per share:
Basic 0.82 0.88 0.86 0.92 3.49
Diluted $0.80 $0.87 $0.84 $0.89 $3.41
===================================================================================================================
STOCKHOLDER INFORMATION
CORPORATE PROFILE: Ambac Financial Group, Inc., 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. Ambac's principal operating subsidiary, Ambac Assurance Corporation, is
a leading guarantor of public and structured finance obligations. It has earned
triple-A ratings, the highest ratings available, from Moody's Investors
Service, Standard & Poor's Ratings Services, Fitch, Inc. and Rating and
Investment Information, Inc.
CORPORATE HEADQUARTERS:
AMBAC FINANCIAL GROUP, INC.
One State Street Plaza
New York, New York 10004
Tel: 212-668-0340
Fax: 212-509-9190
OTHER LOCATIONS:
LONDON
Hasilwood House
60 Bishopsgate
London EC2N 4BE, England
Tel: 44 207 786 4300
Fax: 44 207 786 4343
SYDNEY
ABN AMRO Tower, L31
88 Phillip Street
Sydney 2000 NSW, Australia
Tel: 61 2 8211 0430
Fax: 61 2 8211 0555
Managing Director: Nancy S. Fox
TOKYO
Otemachi Financial Center 17th Floor
5-4, Otemachi 1-chome,
Chiyoda-ku, Tokyo 100-0004
Japan
Tel: 03 5219 2127
Fax: 03 5219 2129
Representative Director: Hideshi Amemiya
CADRE FINANCIAL SERVICES, INC.
AMBAC SECURITIES, INC.
905 Marconi Avenue
Ronkonkoma, New York 11779
Tel: 631-467-0200
Fax: 631-580-8806
COMMON STOCK DATA
The table below shows the high and low price per share for each quarter of 2001
and 2000, as adjusted for the three-for-two common stock split, which occurred
in December 2000.
- -------------------------------------------------------------------------------------------------------------
2001 Market Price 2000 Market Price
- -------------------------------------------------------------------------------------------------------------
Dividends Dividends
Three Months Ended High Low Close Per Share High Low Close Per Share
- -------------------------------------------------------------------------------------------------------------
March 31 64.00 44.25 63.43 $0.0800 35.75 25.92 33.58 $0.0733
June 30 63.75 51.91 58.20 $0.0800 39.00 29.75 36.57 $0.0733
September 30 61.80 42.20 54.71 $0.0900 50.04 36.38 48.83 $0.0800
December 31 58.90 47.02 57.86 $0.0900 58.31 47.00 58.31 $0.0800
- -------------------------------------------------------------------------------------------------------------
ANNUAL MEETING OF STOCKHOLDERS
The Annual Meeting of Stockholders
of Ambac Financial Group, Inc. will be
held on Tuesday, May 7, 2002,
at 11:30 a.m. in New York City. Detailed
information about the meeting is
contained in the Notice of Annual
Meeting and Proxy Statement to be
sent to each stockholder of record
as of March 18, 2002. The Company
estimates that it has approximately
45,000 stockholders.
FORM 10-K
A copy of the Company's 2001
Annual Report on Form 10-K for
the year ended December 31,
2001, as filed with the Securities
and Exchange Commission, may
be obtained without charge by
writing to:
Ambac Financial Group, Inc.
Attn: Investor Relations
One State Street Plaza
New York, New York 10004
TRANSFER AGENT, REGISTRAR AND
DIVIDEND PAYING AGENT
Citibank, N.A.
111 Wall Street, 5th Floor
New York, New York 10043
212-657-5997
INDEPENDENT AUDITORS
KPMG LLP
New York, New York
STOCK LISTING
Ambac Financial Group, Inc.
common stock is listed on the New
York Stock Exchange under the ticker
symbol ABK.
INVESTOR RELATIONS
Frank J. Bivona
Vice Chairman and
Chief Financial Officer
Brian S. Moore
Managing Director
212-208-3333
1-800-221-1854
bmoore@ambac.com