SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 1-10777
Ambac Financial Group, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 13-3621676
(State of incorporation) (I.R.S. employer identification no.)
One State Street Plaza
New York, New York 10004
(Address of principal executive offices) (Zip code)
(212) 668-0340
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
As of June 30, 1997, 35,045,383 shares of Common Stock, par value $0.01 per
share, (net of 294,809 treasury shares) and -0- shares of Class A Common Stock,
par value $0.01 per share, of the Registrant were outstanding.
Ambac Financial Group, Inc. and Subsidiaries
INDEX
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PAGE
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PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - June 30, 1997
and December 31, 1996................................................ 3
Consolidated Statements of Operations - three months and six months
ended June 30, 1997 and June 30, 1996................................ 4
Consolidated Statements of Cash Flows - six months
ended June 30, 1997 and June 30, 1996................................ 5
Notes to Consolidated Financial Statements............................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................. 7
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.................... 21
Item 5. Other Information...................................................... 22
Item 6. Exhibits and Reports on Form 8-K....................................... 23
SIGNATURES...................................................................... 24
INDEX TO EXHIBITS............................................................... 25
PART I FINANCIAL INFORMATION
Item 1 - Financial Statements of Ambac Financial Group, Inc. and Subsidiaries
Ambac Financial Group, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, 1997 and December 31, 1996
(Dollars in Thousands)
June 30, 1997 December 31, 1996
------------- -----------------
(unaudited)
Assets
Investments:
Bonds, at fair value
(amortized cost of $5,617,889 in 1997 and $4,979,017 in 1996) $ 5,716,838 $ 5,088,031
Short-term investments, at cost (approximates fair value) 142,337 112,511
----------- -----------
Total investments 5,859,175 5,200,542
Cash 6,752 7,734
Securities purchased under agreements to resell 182,082 201,169
Receivable for municipal investment agreements 32,173 33,299
Receivable for securities sold 58,799 18,467
Investment income due and accrued 69,897 65,920
Deferred acquisition costs 101,391 94,212
Prepaid reinsurance 169,194 168,786
Notes receivable 70,350 --
Other assets 90,022 85,836
----------- -----------
Total assets $ 6,639,835 $ 5,875,965
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Unearned premiums $ 1,031,131 $ 991,224
Losses and loss adjustment expenses 61,041 60,220
Ceded reinsurance balances payable 11,723 7,438
Obligations under municipal investment agreements 2,723,041 2,417,817
Obligations under municipal investment repurchase agreements 578,426 336,773
Payment agreement obligations 70,350 --
Deferred income taxes 82,396 80,086
Current income taxes 8,792 6,538
Debentures 223,831 223,798
Accrued interest payable 37,709 29,958
Accounts payable and other liabilities 45,773 57,689
Payable for securities purchased 74,456 49,408
----------- -----------
Total liabilities 4,948,669 4,260,949
----------- -----------
Stockholders' equity:
Preferred stock -- --
Common stock, Class A -- --
Common stock 353 353
Additional paid-in capital 499,244 498,401
Unrealized gains on investments, net of tax 54,117 58,911
Retained earnings 1,157,098 1,072,418
Cumulative translation adjustment 397 --
Common stock held in treasury at cost (20,043) (15,067)
----------- -----------
Total stockholders' equity 1,691,166 1,615,016
----------- -----------
Total liabilities and stockholders' equity $ 6,639,835 $ 5,875,965
=========== ===========
See accompanying Notes to Consolidated Financial Statements
3
Ambac Financial Group, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
For the Periods Ended June 30, 1997 and 1996
(Dollars in Thousands Except Common Share Data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ -------------------------------
1997 1996 1997 1996
------------------------------ -------------------------------
Financial Guarantee Insurance operations:
Gross premiums written $73,740 $58,115 $125,532 $108,402
Ceded premiums written (7,195) (9,836) (12,627) (19,448)
------------ ------------ ------------ ------------
Net premiums written 66,545 48,279 112,905 88,954
Increase in unearned premiums (30,159) (8,634) (39,486) (21,116)
------------ ------------ ------------ ------------
Net premiums earned 36,386 39,645 73,419 67,838
Net investment income 39,258 35,498 77,705 70,325
Net realized gains (losses) 3,479 (22,100) 4,291 (19,744)
Other income 2,285 2,236 3,388 3,628
------------ ------------ ------------ ------------
Total Financial Guarantee revenues 81,408 55,279 158,803 122,047
------------ ------------ ------------ ------------
Losses and loss adjustment expenses 664 1,700 1,392 2,510
Underwriting and operating expenses 9,732 10,351 18,824 19,099
------------ ------------ ------------ ------------
Total Financial Guarantee expenses 10,396 12,051 20,216 21,609
------------ ------------ ------------ ------------
Financial Guarantee Insurance operating income 71,012 43,228 138,587 100,438
Financial Management Services operating income (loss) 755 2,737 (1,003) 7,612
Equity in income of affiliate -- -- -- 627
Interest expense (5,303) (5,167) (10,544) (10,425)
Other income (deductions), net 1,372 1,366 2,404 919
Other net realized gains -- 155,613 788 155,613
------------ ------------ ------------ ------------
Income before income taxes 67,836 197,777 130,232 254,784
------------ ------------ ------------ ------------
Income tax expense (benefit):
Current taxes 10,964 66,939 21,749 79,913
Deferred taxes 3,259 (5,109) 5,132 (5,629)
------------ ------------ ------------ ------------
Total income taxes 14,223 61,830 26,881 74,284
------------ ------------ ------------ ------------
Net income $53,613 $135,947 $103,351 $180,500
============ ============ ============ ============
Net income per common share $1.53 $3.89 $2.96 $5.16
============ ============ ============ ============
Weighted average number of
common shares outstanding 34,978,676 34,915,449 34,961,172 34,984,680
============ ============ ============ ============
Pro forma net income per common share
retroactively adjusted to reflect the two-
for-one split of common stock $0.77 $1.94 $1.48 $2.58
============ ============ ============ ============
Pro forma weighted average number of
common shares outstanding retroactively
adjusted to reflect the two-for-one split
of common stock 70,024,059 69,960,832 70,006,555 70,030,063
============ ============ ============ ============
See accompanying Notes to Consolidated Financial Statements
4
Ambac Financial Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
For The Periods Ended June 30, 1997 and 1996
(Dollars in Thousands)
Six Months Ended
June 30,
-------------------------------
1997 1996
----------- -----------
Cash flows from operating activities:
Net income $103,351 $180,500
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 872 1,077
Amortization of bond premium and discount (723) (453)
Current income taxes 2,254 55,749
Deferred income taxes 5,299 (5,756)
Deferred acquisition costs (7,179) (5,487)
Unearned premiums, net 39,499 21,115
Losses and loss adjustment expenses 821 (6,567)
Ceded reinsurance balances payable 4,285 (7,889)
Investment income due and accrued (3,977) (6,314)
Accrued interest payable 7,751 3,806
Gain on sales of investments (5,158) (135,850)
Accounts payable and other liabilities (11,916) 2,543
Other, net (12,389) (12,183)
----------- -----------
Net cash provided by operating activities 122,790 84,291
----------- -----------
Cash flows from investing activities:
Proceeds from sales of bonds 859,455 815,183
Proceeds from matured bonds 582,984 444,344
Purchases of bonds (2,091,575) (1,985,878)
Change in short-term investments (29,826) (54,286)
Securities purchased under agreements to resell 19,087 91,694
Proceeds from sale of affiliate -- 202,609
Other, net 4,638 3,389
----------- -----------
Net cash used in investing activities (655,237) (482,945)
----------- -----------
Cash flows from financing activities:
Dividends paid (11,562) (10,500)
Proceeds from issuance of municipal investment agreements 1,158,705 938,111
Payments for municipal investment agreement draws (610,702) (522,548)
Proceeds from sale of treasury stock 27,227 7,701
Purchases of treasury stock (32,203) (20,891)
----------- -----------
Net cash provided by financing activities 531,465 391,873
----------- -----------
Net cash flow (982) (6,781)
Cash at January 1 7,734 12,167
----------- -----------
Cash at June 30 $6,752 $5,386
=========== ===========
Supplemental disclosure of cash flow information Cash paid during the period
for:
Income taxes $14,110 $23,392
=========== ===========
Interest expense on debt $10,896 $10,846
=========== ===========
Interest expense on municipal investment agreements $76,099 $68,493
=========== ===========
See accompanying Notes to Consolidated Financial Statements
5
Ambac Financial Group, Inc. and Subsidiaries
Notes to Consolidated Unaudited Financial Statements
(1) Basis of Presentation
Ambac Financial Group, Inc., formerly known as AMBAC Inc., (the "Company")
headquartered in New York City, is a holding company that provides through its
affiliates financial guarantee insurance and financial management services to
clients in both the public and private sectors in the U.S. and abroad. The
Company's principal operating subsidiary, Ambac Assurance Corporation ("Ambac
Assurance"), a leading insurer of municipal and structured finance obligations,
has been assigned triple-A claims-paying ability ratings, the highest ratings
available from Moody's Investors Service, Inc., Standard & Poor's Ratings Group,
Fitch Investors Service, L.P. and Nippon Investors Service, Inc. Through its
Financial Management Services Division, the Company provides investment
agreements, interest rate swaps, investment advisory and cash management
services, and procurement systems principally to states, municipalities and
their authorities, school districts, and hospitals and health organizations.
The Company's consolidated unaudited interim financial statements have been
prepared on the basis of generally accepted accounting principles ("GAAP") and,
in the opinion of management, reflect all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the Company's
financial condition, results of operations and cash flows for the periods
presented. The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported revenues
and expenses during the reporting period. Actual results could differ from those
estimates. The results of operations for the three months and six months ended
June 30, 1997 may not be indicative of the results that may be expected for the
full year ending December 31, 1997. These consolidated financial statements and
notes should be read in conjunction with the financial statements and notes
included in the audited consolidated financial statements of Ambac Financial
Group, Inc. and its subsidiaries contained in (i) the Company's Annual Report on
Form 10-K for the year ended December 31, 1996, which was filed with the
Securities and Exchange Commission (the "Commission") on March 31, 1997, and
(ii) the Company's Quarterly Report on Form 10-Q for the quarterly period ended
on March 31, 1997, which was filed with the Commission on May 15, 1997.
The consolidated financial statements include the accounts of the Company
and each of its subsidiaries. All significant intercompany balances have been
eliminated.
(2) Two-for-One Stock Split
On July 31, 1997, the Company announced that its Board of Directors had
approved a two-for-one split of the Company's common stock in the form of a
stock dividend. Stockholders of record on August 29, 1997 will receive on
September 10, 1997, one additional share for each share they own on the record
date. The proforma number of common shares outstanding presented on the
Consolidated Statements of Operations, assumes that the additional shares issued
on the effective date of the two-for-one split, will be equal to the number of
shares outstanding at June 30, 1997. The actual number of additional shares
issued on the effective date may differ.
6
Notes to Consolidated Unaudited Financial Statements (Continued)
(3) Future Impact of New Accounting Standard
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("SFAS 128"), entitled "Earnings Per
Share." SFAS 128 will replace the presentations of primary and fully diluted
earnings per share under current accounting standards with "basic earnings per
share" and "diluted earnings per share," respectively. Basic earnings per share
excludes dilution and is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding during
the period, whereas primary earnings per share includes the impact of assumed
conversion of common stock equivalents. Diluted earnings per share under SFAS
128 is generally similar to fully diluted earnings per share. For calendar year
enterprises, SFAS 128 must be adopted commencing with year end 1997 financial
statements, and will then apply retroactively to both annual and interim
periods, requiring the restatement of previously presented earnings per share
data. Earlier application of SFAS 128 is not permitted. Based on preliminary
calculations, the Company does not believe that earnings per share computed
under SFAS 128 would be materially different from the earnings per share data
presented herein.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following paragraphs describe the consolidated results of operations of
Ambac Financial Group, Inc. and its subsidiaries (sometimes collectively
referred to as the "Company") for the three and six month periods ended June 30,
1997 and 1996, and its financial condition as of June 30, 1997 and December 31,
1996. These results are presented for the Company's two business segments:
Financial Guarantee Insurance and Financial Management Services (formerly called
the "Financial Services" segment).
Results of Operations
Three Months Ended June 30, 1997 Versus Three Months Ended June 30, 1996
Consolidated Net Income
The Company's net income for the three months ended June 30, 1997 was $53.6
million or $1.53 per common share, a decrease of 61% from $135.9 million or
$3.89 per common share in the three months ended June 30, 1996. The decrease
from the prior period was primarily the result of a net realized gain of $155.6
million (which had a net income per common share effect of $2.88) from the
Company's sale of its former affiliate, HCIA Inc. ("HCIA"). Excluding the effect
of this one-time gain, net income increased 52% over the second quarter of 1996.
This increase in net income was attributable to higher Financial Guarantee
Insurance operating income, partially offset by lower Financial Management
Services operating income.
Financial Guarantee Insurance
Operating Income. Through its principal operating subsidiary, Ambac
Assurance Corporation ("Ambac Assurance"), the Company provides financial
guarantee insurance. Financial Guarantee Insurance operating income for the
three months ended June 30, 1997 was $71.0 million, an increase of 64% from
$43.2 million in the three months ended June 30, 1996. This increase was
primarily due to realized gains from sales of securities for the period,
7
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
increased premiums earned from the underlying book of business, higher net
investment income, and lower expenses, partially offset by lower premiums earned
from refundings, calls and other accelerations.
Gross Par Written. Ambac Assurance insured $10.6 billion in par value bonds
during the three months ended June 30, 1997, an increase of 15% from $9.2
billion in the three months ended June 30, 1996. Par value written for the
second quarter of 1997 was comprised of $7.3 billion from municipal bond
insurance and $3.3 billion from structured finance insurance, compared to $7.1
billion and $2.1 billion, respectively, in the second quarter of 1996. According
to estimates based on industry sources, the total volume of new issues of
municipal bonds increased 12% from $49.6 billion during the three months ended
June 30, 1996 to $55.7 billion in the three months ended June 30, 1997. During
the three months ended June 30, 1997, the insured portion of the new issue
municipal bond market increased to approximately 52% from approximately 48% for
the three months ended June 30, 1996, reflecting increased demand for insured
bonds. (Market size amounts and insured percentage figures used in this
paragraph were determined on a sale date basis, in conformity with industry
practices; all other amounts and percentage figures in this discussion were
determined on a closing date basis.)
Gross Premiums Written. Gross premiums written for the three months ended
June 30, 1997 were $73.7 million, an increase of 27% from $58.1 million in the
three months ended June 30, 1996. The following table sets forth the amounts of
gross premiums written by type and percent of total:
Three Months Ended June 30,
------------------------------------
(Dollars in Millions) 1997(1) %(1) 1996(1) %(1)
------- ----- ------- -----
Domestic:
Municipal finance premiums:
Up-front policies:
New issue ............................ $47.7 65% $47.0 81%
Secondary market ..................... 7.4 10 2.5 4
----- ----- ----- -----
Sub-total up-front written ......... 55.0 75 49.5 85
----- ----- ----- -----
Installment policies:
Annual policies ...................... 3.0 4 2.5 4
Portfolio products ................... 0.8 1 1.0 2
----- ----- ----- -----
Sub-total installment written .... 3.8 5 3.5 6
----- ----- ----- -----
Total municipal finance written . 58.8 80 53.0 91
----- ----- ----- -----
Structured finance premiums:
Up-front ............................. 0.6 1 0.7 1
Installment .......................... 4.5 6 1.8 3
----- ----- ----- -----
Total structured finance written 5.1 7 2.5 4
----- ----- ----- -----
Total domestic written ...... 64.0 87 55.5 95
----- ----- ----- -----
International:
Up-front .......................... 8.3 11 2.0 3
Installment ....................... 1.5 2 0.6 1
----- ----- ----- -----
Total international written . 9.8 13 2.6 4
----- ----- ----- -----
Total up-front written ..................... 64.0 87 52.2 90
Total installment written .................. 9.8 13 5.9 10
----- ----- ----- -----
Grand total written ....................... $73.7 100% $58.1 100%
===== ===== ===== =====
(1) Numbers may not add due to rounding.
8
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Ceded Premiums Written. Ceded premiums written for the second quarter of
1997 were $7.2 million, compared to $9.8 million in the second quarter of 1996.
The 27% decrease in ceded premiums written is primarily due to the non-renewal
of the automatic treaty reinsurance for domestic business effective January 1,
1997, partially offset by higher ceded premiums for international business.
Ambac Assurance uses facultative reinsurance agreements to reduce its risk and
manage its insurance portfolio. Ceded premiums written were 9.8% and 16.9% of
gross premiums written for the three month periods ended June 30, 1997 and 1996,
respectively.
Net Premiums Written. Net premiums written for the three months ended June
30, 1997 were $66.5 million, an increase of 38% from the $48.3 million in the
three months ended June 30, 1996. This increase reflects higher gross premiums
written and lower premiums ceded to reinsurers in the three months ended June
30, 1997 compared with the corresponding prior period.
Net Premiums Earned. Net premiums earned during the three months ended June
30, 1997 were $36.4 million, a decrease of 8% from $39.6 million in the three
months ended June 30, 1996. The decrease was primarily due to the decline in
premiums earned from refundings, calls and other accelerations for the three
months ended June 30, 1997, partially offset by the continued growth in premiums
earned from the underlying book of business during the period. Net premiums
earned for the three months ended June 30, 1997 included $5.8 million (which had
a net income per common share effect of $0.09) from refundings, calls and other
accelerations of previously insured issues. Net premiums earned in the three
months ended June 30, 1996 included $13.8 million (which had a net income per
common share effect of $0.22) from refundings, calls and other accelerations.
Refunding levels vary depending upon a number of conditions, primarily the
relationship between current interest rates and interest rates on outstanding
debt. Excluding the effect of accelerated earnings from refundings, calls and
other accelerations, net premiums earned for the three months ended June 30,
1997 were $30.6 million, an increase of 19% from $25.8 million in the three
months ended June 30, 1996.
Net Investment Income. Net investment income for the three months ended
June 30, 1997 was $39.3 million, an increase of 11% from $35.5 million in the
three months ended June 30, 1996. The increase was primarily attributable to the
growth of the investment portfolio. Ambac Assurance's investments in tax-exempt
securities amounted to 80% of the total market value of its portfolio as of June
30, 1997, versus 76% at June 30, 1996. The average pre-tax yield-to-maturity on
the Financial Guarantee Insurance investment portfolio was 6.40% and 6.49% as of
June 30, 1997 and 1996, respectively.
Net Realized Gains (Losses). Net realized gains were $3.5 million for the
three months ended June 30, 1997, compared to $22.1 million in net realized
losses for the comparative prior period in 1996. The net realized losses in the
three months ended June 30, 1996 partially offset the net realized gain on the
sale of HCIA.
Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses
for the three months ended June 30, 1997 were $0.7 million, versus $1.7 million
in the three months ended June 30, 1996. Losses and loss adjustment expenses are
generally based upon estimates of the ultimate aggregate losses inherent in the
obligations insured. No salvage was recognized for the three month periods ended
June 30, 1997 and 1996, respectively.
9
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Underwriting and Operating Expenses. Underwriting and operating expenses
for the second quarter of 1997 were $9.7 million, a decrease of 7% from $10.4
million in the second quarter of 1996, primarily as a result of lower gross
underwriting expenses. Underwriting and operating expenses consist of gross
underwriting and operating expenses, less the deferral to future periods of
expenses and reinsurance commissions related to the acquisition of new insurance
contracts, plus the amortization of previously deferred expenses and reinsurance
commissions. During the three month period ended June 30, 1997, Ambac
Assurance's gross underwriting and operating expenses were $14.4 million, a
decrease of 5% from $15.1 million in the three months ended June 30, 1996,
primarily due to lower premium taxes and compensation expenses. Underwriting and
operating expenses deferred were $8.0 million and $8.5 million for the three
months ended June 30, 1997 and 1996, respectively. Reinsurance commissions which
relate to the current period were none and $0.3 million for the three months
ended June 30, 1997 and 1996, respectively. The amortization of previously
deferred expenses and reinsurance commissions was $3.3 million and $3.4 million
for the three months ended June 30, 1997 and 1996, respectively.
Financial Management Services
Operating Income. Through its Financial Management Services subsidiaries,
the Company provides investment agreements, interest rate swaps, investment
advisory and cash management services, and procurement systems principally to
states, municipalities and their authorities, school districts, and hospitals
and health organizations. Financial Management Services operating income for the
three months ended June 30, 1997 was $0.8 million, down from $2.7 million in the
three months ended June 30, 1996. Revenues for the second quarter of 1997 were
$6.2 million, up from $5.1 million in the second quarter of 1996. The increase
was primarily due to the inclusion of investment advisory and cash management
services revenues of Cadre Financial Services, Inc. ("Cadre"), the assets and
name of which the Company acquired on December 31, 1996, partially offset by
lower revenues on interest rate swaps. Expenses for the second quarter of 1997
were $5.4 million, up from $2.4 million in the second quarter of 1996. These
increased expenses resulted primarily from the consolidation of Cadre and the
Company's software procurement affiliate, Ambac Connect, Inc., into the
Financial Management Services businesses.
Corporate Items
Interest Expense and Other Income (Deductions), Net. Interest expense for
the three months ended June 30, 1997 was $5.3 million, up slightly from $5.2
million for the three months ended June 30, 1996. Other income (deductions),
net, includes investment income and operating expenses of the holding company,
Ambac Financial Group, Inc. Other income (deductions), net, was $1.4 million for
the three months ended June 30, 1997, flat compared to the comparative prior
period.
Other Net Realized Gains. On May 6, 1996, the Company sold its remaining
4,159,505 shares of HCIA common stock in a secondary public offering yielding
net proceeds to the Company of $202.6 million. The sale resulted in a net
realized gain of $155.6 million, pre-tax, $100.6 million, after-tax, (net income
per common share effect of $2.88).
10
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Income Taxes. Income taxes for the three months ended June 30, 1997 were at
an effective rate of 20.9%, versus 31.3% in the three months ended June 30,
1996. The higher effective tax rate in the second quarter of 1996 reflected the
realized gain on the sale of HCIA.
Supplemental Analytical Financial Data
Management, equity analysts and investors consider the following four
measures important in analyzing the financial results, and measuring the
intrinsic value of the Company: core earnings; operating earnings; adjusted
gross premiums written; and adjusted book value. However, none of these measures
are promulgated in accordance with generally accepted accounting principles
("GAAP") and should not be considered as substitutes for net income, gross
premiums written and book value. The definitions of core earnings, operating
earnings, adjusted gross premiums written and adjusted book value described
below may differ from the definitions used by other public holding companies of
financial guarantee insurers.
Core Earnings. Core earnings for the three months ended June 30, 1997 were
$48.0 million , an increase of 14% from $41.8 million for the three months ended
June 30, 1996. The increase in core earnings was primarily the result of
continued growth in net premiums earned from the underlying book of business,
higher net investment income and lower expenses from Financial Guarantee
Insurance operations, partially offset by lower Financial Management Services
operating income. The Company defines core earnings as consolidated net income,
less the effect of net realized gains and losses, net insurance premiums earned
from refundings and calls and certain non-recurring items.
Operating Earnings. Operating earnings for the second quarter of 1997 were
$51.3 million, an increase of 4% from $49.6 million in the second quarter of
1996. The Company defines operating earnings as consolidated net income, less
the effect of net realized gains and losses and certain non-recurring items.
The following table reconciles net income computed in accordance with GAAP
to operating earnings and core earnings for the three months ended June 30, 1997
and 1996:
(Dollars in Millions) 1997(1) 1996(1)
------------ ------------
Net Income..................................................... $53.6 $135.9
Net realized gains, after tax.................................. (2.3) (86.3)
------------ ------------
Operating earnings.................................... 51.3 49.6
Premiums earned from refundings,
calls and other accelerations, after tax................. (3.3) (7.8)
------------ ------------
Core earnings......................................... $48.0 $41.8
============ ============
(1) Numbers may not add due to rounding.
The weighted average number of shares outstanding during the second quarter
of 1997 and 1996 was 35.0 million and 34.9 million, respectively.
Adjusted Gross Premiums Written. Adjusted gross premiums written were $84.5
million in the second quarter of 1997, up 14% from $74.1 million in the second
quarter of 1996. The Company defines adjusted gross premiums written as up-front
premiums written plus the present value of estimated future installment premiums
written in the period. While most of Ambac Assurance's premiums written are
collected up-front at policy issuance, a growing
11
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
portion of premiums are collected on an installment basis. The net present value
of estimated future installment premiums written in the second quarter of 1997
was $20.6 million, a decrease of 6% from $22.0 million written in the second
quarter of 1996. The aggregate net present value of estimated future installment
premiums was $186.4 million and $157.7 million as of June 30, 1997 and December
31, 1996, respectively.
The following table reconciles total up-front premiums written to adjusted
gross premiums written for the three months ended June 30, 1997 and 1996:
(Dollars in Millions) 1997(1) 1996(1)
----------- ------------
Adjusted Gross Premium Analysis:
Total Up-front premiums written............................. $64.0 $52.2
PV of estimated future installment premiums................. 20.6 22.0
=========== ============
Adjusted gross premiums written................... $84.5 $74.1
=========== ============
(1) Numbers may not add due to rounding.
Adjusted Book Value. Adjusted book value ("ABV") per common share increased
5% to $65.83 at June 30, 1997 compared to $62.50 at December 31, 1996.
Management derives ABV by beginning with stockholders' equity (book value) and
adding or subtracting the after-tax value of: the net unearned premium reserve;
deferred acquisition costs; the present value of estimated net future
installment premiums; and the unrealized gain or loss on investment agreement
liabilities. These adjustments will not be realized until future periods and may
differ materially from the amounts used in determining ABV.
The following table reconciles book value per share to ABV per share as of
June 30, 1997 and December 31, 1996:
June 30, December 31,
1997(1) 1996(1)
----------- ------------
Book value per share............................................ $48.26 $46.02
After-tax value of:
Net unearned premium reserve................................ 15.98 15.25
Deferred acquisition costs.................................. (1.88) (1.74)
Present value of installment premiums...................... 3.45 2.91
Unrealized gain on investment agreement liabilities......... 0.03 0.06
----------- ------------
Adjusted book value per share................................... $65.83 $62.50
=========== ============
(1) Numbers may not add due to rounding.
12
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Results of Operations
Six Months Ended June 30, 1997 Versus Six Months Ended June 30, 1996
Consolidated Net Income
The Company's net income for the six months ended June 30, 1997 was $103.4
million or $2.96 per common share, a decrease of 43% from $180.5 million or
$5.16 per common share in the six months ended June 30, 1996. The decrease in
net income from the prior period was primarily the result of a net realized gain
of $155.6 million (which had a net income per common share effect of $2.88) from
the Company's sale of its former affiliate, HCIA. Excluding the effect of this
one-time gain, net income increased 29% over the six months ended June 30, 1996.
This increase in net income was attributable to higher Financial Guarantee
Insurance operating income, partially offset by lower Financial Management
Services operating income.
Financial Guarantee Insurance
Operating Income. Financial Guarantee Insurance operating income for the
six months ended June 30, 1997 was $138.6 million, an increase of 38% from
$100.4 million in the six months ended June 30, 1996 This increase was primarily
due to realized gains from sales of securities for the period, increased
premiums earned from the underlying book of business, higher net investment
income, and lower expenses, partially offset by lower premiums earned from
refundings, calls, and other accelerations.
Gross Par Written. Ambac Assurance insured $18.5 billion in par value bonds
during the six months ended June 30, 1997, an increase of 19% from $15.5 billion
in the six months ended June 30, 1996. Par value written for the first six
months of 1997 was comprised of $12.6 billion from municipal bond insurance and
$5.9 billion from structured finance insurance, compared to $11.7 billion and
$3.8 billion, respectively, in the first six months of 1996. According to
estimates based on industry sources, the total volume of new issues of municipal
bonds increased 3% from $91.2 billion during the six months ended June 30, 1996
to $93.7 billion in the six months ended June 30, 1997. During the six months
ended June 30, 1997, the insured portion of the new issue municipal bond market
increased to approximately 52% from approximately 47% for the six months ended
June 30, 1996, reflecting increased demand for insured bonds. (Market size
amounts and insured percentage figures used in this paragraph were determined on
a sale date basis, in conformity with industry practices; all other amounts and
percentage figures in this discussion were determined on a closing date basis.)
13
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Gross Premiums Written. Gross premiums written for the six months ended
June 30, 1997 were $125.5 million, an increase of 16% from $108.4 million in the
six months ended June 30, 1996. The following table sets forth the amounts of
gross premiums written by type and percent of total:
Six Months Ended June 30,
-------------------------------------------------------------
(Dollars in Millions) 1997(1) %(1) 1996(1) %(1)
------------ --------- ------------ ---------
Domestic:
Municipal finance premiums:
Up-front policies:
New issue ............................ $79.6 63% $76.2 70%
Secondary market ..................... 11.9 10 7.3 7
------------ --------- ------------ ---------
Sub-total up-front written ......... 91.5 73 83.5 77
------------ --------- ------------ ---------
Installment policies:
Annual policies ...................... 4.8 4 3.9 4
Portfolio products ................... 1.6 1 2.1 2
------------ --------- ------------ ---------
Sub-total installment written .... 6.4 5 6.0 6
------------ --------- ------------ ---------
Total municipal finance written . 97.9 78 89.5 83
------------ --------- ------------ ---------
Structured finance premiums:
Up-front ............................. 7.8 6 0.9 1
Installment .......................... 8.2 7 3.1 3
------------ --------- ------------ ---------
Total structured finance written 16.1 13 4.0 4
------------ --------- ------------ ---------
Total domestic written ...... 114.0 91 93.5 86
------------ --------- ------------ ---------
International:
Up-front .......................... 9.1 7 14.2 13
Installment ....................... 2.5 2 0.8 1
------------ --------- ------------ ---------
Total international written . 11.6 9 14.9 14
------------ --------- ------------ ---------
Total up-front written ..................... 108.4 86 98.5 91
Total installment written .................. 17.1 14 9.9 9
------------ --------- ------------ ---------
Grand total written ....................... $125.5 100% $108.4 100%
============ ========= ============ =========
(1) Numbers may not add due to rounding.
Ceded Premiums Written. Ceded premiums written for the first six months of
1997 were $12.6 million, compared to $19.4 million in the first six months of
1996. The 35% decrease in ceded premiums written is primarily due to the
non-renewal in 1997 of the automatic treaty reinsurance for domestic business,
partially offset by higher ceded premiums for international business. Ambac
Assurance uses facultative reinsurance agreements to reduce its risk and manage
its insurance portfolio. Ceded premiums written were 10.0% and 17.9% of gross
premiums written for the six month periods ended June 30, 1997 and 1996,
respectively.
Net Premiums Written. Net premiums written for the six months ended June
30, 1997 were $112.9 million, an increase of 27% from the $89.0 million in the
six months ended June 30, 1996. This increase reflects higher gross premiums
written and lower premiums ceded to reinsurers in the six months ended June 30,
1997 compared with the corresponding prior period.
Net Premiums Earned. Net premiums earned during the six months ended June
30, 1997 were $73.4 million, an increase of 8% from $67.8 million in the six
months ended June 30, 1996. The increase was primarily the result of increased
premiums earned from the underlying book of business during the six months ended
June 30, 1997, partially offset by lower premiums earned from refundings, calls
and other accelerations during the period. Net premiums earned for the six
months ended June 30, 1997 included $13.4 million (which had a net income per
common share effect of $0.22) from refundings, calls and other accelerations of
previously insured issues. Net premiums earned in the six months ended June 30,
1996
14
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
included $18.1 million (which had a net income per common share effect of $0.29)
from refundings, calls and other accelerations. Excluding the effect of
accelerated earnings from refundings, calls and other accelerations, net
premiums earned for the six months ended June 31, 1997 were $60.0 million, an
increase of 20% from $49.8 million in the six months ended June 30, 1996.
Net Investment Income. Net investment income for the six months ended June
30, 1997 was $77.7 million, an increase of 11% from $70.3 million in the six
months ended June 30, 1996. The increase was primarily attributable to the
growth of the investment portfolio. Ambac Assurance's investments in tax-exempt
securities amounted to 80% of the total market value of its portfolio as of June
30, 1997, versus 76% at June 30, 1996. The average pre-tax yield-to-maturity on
the Financial Guarantee Insurance investment portfolio was 6.40% and 6.49% as of
June 30, 1997 and 1996, respectively.
Net Realized Gains (Losses). Net realized gains were $4.3 million for the
six months ended June 30, 1997, compared to $19.7 million in net realized losses
for the comparative prior period in 1996. The net realized losses in the six
months ended June 30, 1996 partially offset the net realized gain on the sale of
HCIA.
Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses
for the six months ended June 30, 1997 were $1.4 million, versus $2.5 million in
the six months ended June 30, 1996. Losses and loss adjustment expenses are
generally based upon estimates of the ultimate aggregate losses inherent in the
obligations insured. Losses and loss adjustment expenses, exclusive of salvage
recognized, were $1.5 million and $2.6 million for the six months ended June 30,
1997 and 1996, respectively. Salvage recognized amounted to $0.1 million for
both six month periods ended June 30, 1997 and 1996.
Underwriting and Operating Expenses. Underwriting and operating expenses
for the first six months of 1997 were $18.8 million, a decrease of 2% from $19.1
million in the first six months of 1996 primarily due to lower reinsurance
commission expenses in the six months ended June 30, 1997, partially offset by
higher amortization of previously deferred acquisition costs during the period.
During the six month period ended June 30, 1997, Ambac Assurance's gross
underwriting and operating expenses were $28.0 million, relatively flat from
$27.8 million in the six months ended June 30, 1996. Underwriting and operating
expenses deferred were $15.9 million and $15.5 million for the six months ended
June 30, 1997 and 1996, respectively. Reinsurance commissions which relate to
the current period were none and $0.6 million for the six months ended June 30,
1997 and 1996, respectively. The amortization of previously deferred expenses
and reinsurance commissions was $6.7 million and $6.2 million for the three
months ended June 30, 1997 and 1996, respectively.
Financial Management Services
Operating Income. Financial Management Services had an operating loss for
the six months ended June 30, 1997 of $1.0 million, compared to income of $7.6
million in the six months ended June 30, 1996. These results include a $3.5
million restructuring charge (which had a net income per common share effect of
$0.06) in the current period for the consolidation of the Company's Westport,
Connecticut office into the Company's corporate headquarters in New York City.
Revenues for the first six months of 1997 were $13.5 million, up from $12.1
million in the first six months of 1996. The increase was primarily due to the
inclusion of
15
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
revenues of Cadre, partially offset by lower revenues on interest rate swaps.
Expenses for the first six months of 1997, excluding the restructuring charge,
were $11.0 million, compared to $4.5 million in the first six months of 1996.
These increased expenses resulted primarily from the consolidation of Cadre and
Ambac Connect into the Financial Management Services businesses.
Corporate Items
Interest Expense and Other Income (Deductions), Net. Interest expense for
the six months ended June 30, 1997 was $10.5 million, up slightly from $10.4
million for the six months ended June 30, 1996. Other income (deductions), net,
includes investment income and operating expenses of the holding company, Ambac
Financial Group, Inc. Other income (deductions), net, increased from $0.9
million for the six months ended June 30, 1996 to $2.4 million for the six
months ended June 30, 1997, primarily as a result of the additional investment
income generated by Ambac Financial Group, Inc. from the proceeds of the sale of
HCIA.
Income Taxes. Income taxes for the six months ended June 30, 1997 were at
an effective rate of 20.6%, compared to 29.2% in the six months ended June 30,
1996. The higher effective tax rate in the second quarter of 1996 reflected the
realized gain from the sale of HCIA.
Supplemental Analytical Financial Data
Management, equity analysts and investors consider the following four
measures important in analyzing the financial results, and measuring the
intrinsic value of the Company: core earnings; operating earnings; adjusted
gross premiums written; and adjusted book value. However, none of these measures
are promulgated in accordance with GAAP and should not be considered as
substitutes for net income, gross premiums written and book value. The
definitions of core earnings, operating earnings, adjusted gross premiums
written and adjusted book value described below may differ from the definitions
used by other public holding companies of financial guarantee insurers.
Core Earnings. Core earnings for the six months ended June 30, 1997 were
$94.5 million , an increase of 15% from $82.4 million for the six months ended
June 30, 1996. The increase in core earnings was primarily the result of
continued growth in net premiums earned from the underlying book of business,
higher net investment income and lower expenses from Financial Guarantee
Insurance operations, partially offset by lower Financial Management Services
operating results. The Company defines core earnings as consolidated net income,
less the effect of net realized gains and losses, net insurance premiums earned
from refundings and calls and certain non-recurring items.
Operating Earnings. Operating earnings for the six months ended June 30,
1997 were $102.1 million, an increase of 10% from $92.7 million in the six
months ended June 30, 1996. The Company defines operating earnings as
consolidated net income, less the effect of net realized gains and losses and
certain non-recurring items.
16
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
The following table reconciles net income computed in accordance with GAAP
to operating earnings and core earnings for the six months ended June 30, 1997
and 1996:
(Dollars in Millions) 1997(1) 1996(1)
----------- ----------
Net Income......................................................... $103.4 $180.5
Net realized gains, after tax...................................... (3.4) (87.8)
Non-recurring item, after tax...................................... 2.1 --
----------- ----------
Operating earnings........................................ 102.1 92.7
Premiums earned from refundings,
calls and other accelerations, after tax..................... (7.6) (10.2)
----------- ----------
Core earnings............................................. $94.5 $82.4
=========== ==========
(1) Numbers may not add due to rounding.
The weighted average number of shares outstanding during the six month
period ended June 30, 1997 and 1996 were 35.0 million.
Adjusted Gross Premiums Written. Adjusted gross premiums written were
$153.8 million in the first six months of 1997, an increase of 20% from $128.1
million in the first six months of 1996. The Company defines adjusted gross
premiums written as up-front premiums written plus the present value of
estimated future installment premiums written in the period. While most of Ambac
Assurance's premiums written are collected up-front at policy issuance, a
growing portion of premiums are collected on an installment basis. The net
present value of estimated future installment premiums written in the six months
ended June 30, 1997 was $45.4 million, an increase of 53% from $29.6 million in
the six months ended June 30, 1996. The aggregate net present value of estimated
future installment premiums was $186.4 million and $157.7 million as of June 30,
1997 and December 31, 1996, respectively.
The following table reconciles total up-front premiums written to
adjusted gross premiums written for the six months ended June 30, 1997 and 1996:
(Dollars in Millions) 1997(1) 1996(1)
---------- ----------
Adjusted Gross Premium Analysis:
Total Up-front premiums written................................. $108.4 $98.5
PV of estimated future installment premiums..................... 45.4 29.6
---------- ----------
Adjusted gross premiums written....................... $153.8 $128.1
========== ==========
(1) Numbers may not add due to rounding.
Adjusted Book Value. ABV per common share increased 5% to $65.83 at June
30, 1997 compared to $62.50 at December 31, 1996. Management derives ABV by
beginning with stockholders' equity (book value) and adding or subtracting the
after-tax value of: the net unearned premium reserve; deferred acquisition
costs; the present value of estimated net future installment premiums; and the
unrealized gain or loss on investment agreement liabilities. These adjustments
will not be realized until future periods and may differ materially from the
amounts used in determining ABV.
17
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
The following table reconciles book value per share to ABV per share as of
June 30, 1997 and December 31, 1996:
June 30, December 31,
1997(1) 1996(1)
------------- -------------
Book value per share .................................. $48.26 $46.02
After-tax value of:
Net unearned premium reserve ...................... 15.98 15.25
Deferred acquisition costs ........................ (1.88) (1.74)
Present value of installment premiums ............. 3.45 2.91
Unrealized gain on investment agreement liabilities 0.03 0.06
------------- -------------
Adjusted book value per share ......................... $65.83 $62.50
============= =============
(1) Numbers may not add due to rounding.
Liquidity and Capital Resources
Ambac Financial Group, Inc. Liquidity. The Company's liquidity, both on a
short-term basis (for the next twelve months) and a long-term basis (beyond the
next twelve months), is largely dependent upon Ambac Assurance's ability to pay
dividends or make payments to the Company and external financings.
Pursuant to Wisconsin insurance laws, Ambac Assurance may declare
dividends, provided that, after giving effect to the distribution, it would not
violate certain statutory equity, solvency and asset tests. During the six
months ended June 30, 1997, Ambac Assurance paid dividends of $22.0 million on
its common stock to the Company.
The Company's principal uses of liquidity are for the payment of its
operating expenses, interest on its debt, dividends on its shares of Common
Stock and capital investments in its subsidiaries. Based on the amount of
dividends that the Company expects to receive from Ambac Assurance during 1997
along with the income from its investment portfolio, the Company believes it
will have sufficient liquidity to satisfy its liquidity needs over the next
twelve months, including the payment of dividends on the Common Stock in
accordance with its current dividend policy. Beyond the next twelve months,
Ambac Assurance's ability to declare and pay dividends to the Company may be
influenced by a variety of factors, including adverse market changes, insurance
regulatory changes and changes in general economic conditions. Consequently,
although the Company believes that it will continue to have sufficient liquidity
to meet its debt service and other obligations over the long term, no assurance
can be given that Ambac Assurance will be permitted to dividend amounts
sufficient to pay all of the Company's operating expenses, debt service
obligations and cash dividends on its Common Stock.
Ambac Assurance Liquidity. The principal uses of Ambac Assurance's
liquidity are the payment of operating expenses, reinsurance premiums, income
taxes and dividends to the Company. The Company 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 and net investment income. The majority
of premiums for Ambac Assurance's Financial Guarantee Insurance policies are
payable in full at the outset of the term of the policy, even though premiums
are earned over the life of such policies for financial accounting purposes.
18
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Financial Management Services Liquidity. The principal uses of liquidity by
the Company's Financial Management Services subsidiaries are the payment of
investment agreement obligations pursuant to defined terms, net obligations
under interest rate swaps, operating expenses and income taxes. The Company
believes that its Financial Management Services operating liquidity needs can be
funded primarily from its operating cash flow and the maturity of its invested
assets. The principal sources of Financial Management Services liquidity are
proceeds from issuance of investment agreements, net investment income,
maturities of securities from its investment portfolio which are invested with
the objective of matching the duration of its obligations under the investment
agreements, net receipts from interest rate swaps and related hedges and fees
for investment management services. The Company's 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. The Company maintains a portion
of its Financial Management Services assets in short-term investments and
repurchase agreements in order to meet unexpected liquidity needs.
Credit Facilities. The Company and Ambac Assurance have a revolving credit
facility with two major international banks, as co-agents, for $100.0 million,
which expires in July 1998. This facility is available for general corporate
purposes, including the payment of claims. As of June 30, 1997 and 1996, no
amounts were outstanding under this credit facility.
Ambac Assurance has an agreement with a group of Aaa/AAA-rated
international banks for a $350.0 million credit facility, expiring in December
2003. This facility is a seven-year stand-by irrevocable limited recourse
line-of-credit, which will provide liquidity to Ambac Assurance in the event
that claims from municipal obligations exceed specified levels. Repayment of any
amounts drawn under the line will be limited primarily to the amount of any
recoveries of losses related to policy obligations. As of June 30, 1997 and
1996, no amounts were outstanding under this line.
Stock Repurchase Program. During the six months ended June 30, 1997, the
Company acquired 475,000 shares under its existing stock repurchase program.
Since inception of the Stock Repurchase Program, the Company has acquired
approximately 1,536,000 shares.
Balance Sheet. As of June 30, 1997, the fair value of the Company's
consolidated investment portfolio was $5.86 billion, an increase of 13% from
$5.20 billion at December 31, 1996. This was primarily due to the growth of the
Company's Financial Guarantee Insurance and Financial Management Services
operations.
Cash Flows. Net cash provided by operating activities was $122.8 million
and $84.3 million during the six months ended June 30, 1997 and 1996,
respectively. These cash flows were primarily provided by the Financial
Guarantee Insurance operations.
Net cash provided by financing activities was $531.5 million and $391.9
million during the six months ended June 30, 1997 and 1996, respectively. This
activity included $548.0 million and $415.6 million, respectively, in municipal
investment agreements issued (net of draws paid).
19
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
The total cash provided by operating and financing activities was $654.3
million and $476.2 million during the six months ended June 30, 1997 and 1996,
respectively. From these totals, $655.2 million was used in investing activities
during the six months ended June 30, 1997, principally purchases of bonds,
offset by proceeds from sales and maturities of bonds. During the six months
ended June 30, 1996, $482.9 million was used in investing activities,
principally purchases of bonds, offset by proceeds from sales and maturities of
bonds and sale of affiliate.
Off-Balance Sheet Risk. In the normal course of business, the Company uses
interest rate contracts for hedging purposes as part of its overall interest
rate risk management. In addition, one of the Company's Financial Management
Services subsidiaries is a dealer of interest rate swaps primarily to states,
municipalities and municipal authorities. This subsidiary manages its interest
rate swap business with the goal of being market neutral to changes in taxable
interest rates, while retaining "basis risk," the relationship between changes
in floating tax-exempt and floating taxable interest rates. In the ordinary
course of business, the Company manages a variety of other 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.
Material Commitments. The Company has made no commitments for material
capital expenditures within the next twelve months. However, management
continually evaluates opportunities to expand the Company's businesses through
internal development of new products as well as acquisitions.
20
PART II - OTHER INFORMATION
Items 1, 2, and 3 are omitted either because they are inapplicable or
because the answer to such question is negative.
Item 4 - Submission of Matters to a Vote of Security Holders
The following matters were voted upon at the Annual Meeting of Stockholders
of the Company held on May 14, 1997, and received the votes set forth below:
Proposal 1. The following directors were elected to serve on the Company's
Board of Directors:
Number of Votes Cast
----------------------------------------
For Withheld
----------------------------------------
Phillip B. Lassiter 29,796,230 60,166
Michael A. Callen 29,817,630 38,766
Renso L. Caporali 29,817,835 38,561
Richard Dulude 29,817,735 38,661
W. Grant Gregory 29,817,980 38,416
C. Roderick O'Neil 29,801,895 54,501
There were no broker non-votes for this proposal.
Proposal 2A. The proposal to approve the amendment to the Charter to change
the Company's name from AMBAC Inc. to Ambac Financial Group, Inc. was adopted,
with 29,823,450 votes in favor, 6,552 votes against and 26,394 votes abstaining.
There were no broker non-votes for this proposal.
Proposal 2B. The proposal to approve the amendment to the Charter to
increase the number of authorized shares of Common Stock to 100 million was
adopted, with 27,499,778 votes in favor, 2,330,232 votes against and 26,386
votes abstaining. There were no broker non-votes for this proposal.
Proposal 2C. The proposal to approve the amendment to the Charter to
eliminate Class A Common Stock and certain other outdated provisions was
adopted, with 29,552,715 votes in favor, 47,778 votes against and 53,021 votes
abstaining. There were 223,577 broker non-votes for this proposal.
Proposal 3. The proposal to approve the 1997 Equity Plan was adopted, with
29,552,715 votes in favor, 47,778 votes against and 32,326 votes abstaining.
There were 1,817,286 broker non-votes for this proposal.
Proposal 4. The proposal to approve the 1997 Executive Incentive Plan was
adopted, with 27,320,120 votes in favor, 716,152 votes against and 56,721 votes
abstaining. There were 1,763,403 broker non-votes for this proposal.
21
PART II - OTHER INFORMATION (Continued)
Proposal 5. The proposal to approve the 1997 Non-Employee Directors Equity
Plan was adopted, with 26,889,896 votes in favor, 1,152,227 votes against and
50,871 votes abstaining. There were 1,763,402 broker non-votes for this
proposal.
Proposal 6. The proposal to ratify the selection of KPMG Peat Marwick LLP
as independent auditors of the Company and its subsidiaries for 1997 was
adopted, with 29,752,316 votes in favor, 80,142 votes against and 23,938 votes
abstaining. There were no broker non-votes for this proposal.
Item 5 - Other Information
Acquisition of Cadre Securities, Inc.
On June 19, 1997, Ambac Securities Inc., a wholly-owned subsidiary of the
Company, completed its acquisition of certain assets including the name and
assumption of certain liabilities of Cadre Securities, Inc. ("Cadre
Securities"). Cadre Securities is registered as a broker-dealer with the
Securities and Exchange Commission and with certain states that require such
registration, and it is a member of the National Association of Securities
Dealers, Inc. Cadre Securities is a distributor and marketing agent for various
registered and unregistered money market funds and offers its clients U.S.
government securities and money market instruments.
Name Change
As the Company previously announced in its press release on July 11, 1997,
the Company has changed its name from AMBAC Inc. to Ambac Financial Group, Inc.,
effective as of the close of business on July 11, 1997. The name change was
approved by the Company's stockholders at its Annual Meeting in May.
The Company also announced that, as of the close of business on July 11,
1997, it was changing the name of its principal operating subsidiary, AMBAC
Indemnity Corporation, to Ambac Assurance Corporation.
22
Item 6 - Exhibits and Reports on Form 8-K
(a) The following are annexed as exhibits:
Exhibit
Number Description
- ------ -----------
4.05 Amended and Restated Certificate of Incorporation of the Company.
4.06 By-Laws of the Company, as amended on July 11, 1997.
10.19* Employment Letter between David L. Boyle and the Company
dated March 4, 1997.
10.20* Agreement and General Release between W. Dayle Nattress, the
Company and AMBAC Indemnity Corporation dated April 10, 1997.
10.21* Ambac 1997 Equity Plan.
10.22* Ambac 1997 Executive Incentive Plan.
10.23* Ambac 1997 Non-Employee Directors Equity Plan.
10.24* Supplemental Pension Agreement between the Company and
Phillip B. Lassiter dated April 30, 1997.
10.25* Supplemental Pension Agreement between the Company and
David L. Boyle dated April 30, 1997.
11.00 Statement re computation of per share earnings.
27.00 Financial Data Schedule.
99.03 Ambac Assurance Corporation and Subsidiaries Consolidated
Unaudited Financial Statements as of June 30, 1997 and
December 31, 1996 and for the periods ended June 30, 1997 and
1996.
(b) Reports on Form 8-K:
There were no Reports on Form 8-K filed during the second quarter of 1997.
- ----------
* Management contract or compensatory plan, contract or arrangement required to
be filed as an exhibit pursuant to Item 6(a) of Form 10-Q.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Ambac Financial Group, Inc.
(Registrant)
Dated: August 14, 1997 By: /s/ Frank J. Bivona
-------------------
Frank J. Bivona
Senior Vice President, Chief
Financial Officer and Treasurer
(Principal Financial and
Accounting Officer and Duly
Authorized Officer)
24
INDEX TO EXHIBITS
Exhibit Description
- ------- -----------
Number
4.05 Amended and Restated Certificate of Incorporation of the Company.
4.06 By-Laws of the Company, as amended on July 11, 1997.
10.19* Employment Letter between David L. Boyle and the Company.
10.20* Agreement and General Release between W. Dayle Nattress, the
Company and AMBAC Indemnity Corporation dated April 10, 1997.
10.21* Ambac 1997 Equity Plan.
10.22* Ambac 1997 Executive Incentive Plan.
10.23* Ambac 1997 Non-Employee Directors Equity Plan.
10.24* Supplemental Pension Agreement between the Company and
Phillip B. Lassiter dated April 30, 1997.
10.25* Supplemental Pension Agreement between the Company and David
L. Boyle dated April 30, 1997.
11.00 Statement re computation of per share earnings.
27.00 Financial Data Schedule.
99.03 Ambac Assurance Corporation and Subsidiaries Consolidated Unaudited
Financial Statements as of June 30, 1997 and December 31, 1996 and
for the periods ended June 30, 1997 and 1996.
- ----------
* Management contract or compensatory plan, contract or arrangement required to
be filed as an exhibit pursuant to Item 6(a) of Form 10-Q.
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