SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 September 30, 1997, 70,117,170 shares of Common Stock, par value
$0.01 per share, (net of 563,214 treasury shares) of the Registrant were
outstanding.
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
INDEX
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PAGE
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PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - September 30, 1997
and December 31, 1996............................................................. 3
Consolidated Statements of Operations - three months and nine months
ended September 30, 1997 and September 30, 1996................................... 4
Consolidated Statements of Cash Flows - nine months
ended September 30, 1997 and September 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 5. Other Information..................................................................... 21
Item 6. Exhibits and Reports on Form 8-K...................................................... 21
SIGNATURES..................................................................................... 22
INDEX TO EXHIBITS.............................................................................. 23
PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements of Ambac Financial Group, Inc. and Subsidiaries
Ambac Financial Group, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 1997 and December 31, 1996
(Dollars in Thousands)
September 30, 1997 December 31, 1996
------------------ -----------------
(unaudited)
Assets
- ------
Investments:
Bonds, at fair value
(amortized cost of $5,805,053 in 1997 and $4,979,017 in 1996) $5,980,343 $5,088,031
Short-term investments, at cost (approximates fair value) 149,026 112,511
------------------ -----------------
Total investments 6,129,369 5,200,542
Cash 45 7,734
Securities purchased under agreements to resell 179,595 201,169
Receivable for municipal investment agreements 359,275 33,299
Receivable for securities sold 55,973 18,467
Investment income due and accrued 69,115 65,920
Deferred acquisition costs 103,922 94,212
Prepaid reinsurance 169,962 168,786
Loans 280,791 -
Other assets 64,662 85,836
------------------ -----------------
Total assets $7,412,709 $5,875,965
================== =================
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities:
Unearned premiums $1,042,081 $ 991,224
Losses and loss adjustment expenses 61,087 60,220
Ceded reinsurance balances payable 4,544 7,438
Obligations under investment and payment agreements 3,270,407 2,417,817
Obligations under municipal investment repurchase agreements 645,892 336,773
Deferred income taxes 115,721 80,086
Current income taxes 11,743 6,538
Debentures 223,847 223,798
Accrued interest payable 46,821 29,958
Accounts payable and other liabilities 89,731 57,689
Payable for securities purchased 112,883 49,408
------------------ -----------------
Total liabilities 5,624,757 4,260,949
------------------ -----------------
Stockholders' equity:
Preferred stock - -
Common stock 707 353
Additional paid-in capital 499,825 498,401
Unrealized gains on investments, net of tax 95,828 58,911
Retained earnings 1,210,885 1,072,418
Cumulative translation adjustment (154) -
Common stock held in treasury at cost (19,139) (15,067)
------------------ -----------------
Total stockholders' equity 1,787,952 1,615,016
------------------ -----------------
Total liabilities and stockholders' equity $7,412,709 $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 September 30,1997 and 1996
(Dollars in Thousands Except Common Share Data)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
Financial Guarantee Insurance operations:
Gross premiums written $ 52,371 $ 67,613 $ 177,903 $ 176,015
Ceded premiums written (6,495) (9,813) (19,122) (29,261)
------------ ------------ ------------ ------------
Net premiums written 45,876 57,800 158,781 146,754
Increase in unearned premiums (10,204) (24,055) (49,690) (45,171)
------------ ------------ ------------ ------------
Net premiums earned 35,672 33,745 109,091 101,583
Net investment income 40,109 36,887 117,814 107,212
Net realized gains (losses) 13,931 (5,381) 18,222 (25,125)
Other income 881 1,305 4,269 4,933
------------ ------------ ------------ ------------
Total Financial Guarantee revenues 90,593 66,556 249,396 188,603
------------ ------------ ------------ ------------
Losses and loss adjustment expenses 730 1,301 2,122 3,811
Underwriting and operating expenses 10,173 8,646 28,997 27,745
------------ ------------ ------------ ------------
Total Financial Guarantee expenses 10,903 9,947 31,119 31,556
------------ ------------ ------------ ------------
Financial Guarantee Insurance operating income 79,690 56,609 218,277 157,047
Financial Management Services operating income 4,380 965 3,377 8,577
Equity in income of affiliate - - - 627
Interest expense (5,391) (5,248) (15,935) (15,673)
Other income (deductions), net 998 2,359 3,402 3,278
Other net realized gains (40) - 748 155,613
------------ ------------ ------------ ------------
Income before income taxes 79,637 54,685 209,869 309,469
------------ ------------ ------------ ------------
Income tax expense (benefit):
Current taxes 10,746 9,994 32,495 89,907
Deferred taxes 8,096 863 13,228 (4,766)
------------ ------------ ------------ ------------
Total income taxes 18,842 10,857 45,723 85,141
------------ ------------ ------------ ------------
Net income $ 60,795 $ 43,828 $ 164,146 $ 224,328
============ ============ ============ ===========
Net income per common share $0.87 $0.63 $2.35 $3.21
============ ============ ============ ===========
Weighted average number of
common shares outstanding 70,108,341 69,811,116 69,984,344 69,916,612
============ ============ ============ ===========
See accompanying Notes to Consolidated Financial Statements
4
Ambac Financial Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
For The Periods Ended September 30, 1997 and 1996
(Dollars in Thousands)
Nine Months Ended
September 30,
-----------------------------
1997 1996
------------ ------------
Cash flows from operating activities:
Net income $ 164,146 $ 224,328
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,292 1,696
Amortization of bond premium and discount (1,881) (980)
Current income taxes 5,205 25,888
Deferred income taxes 13,364 (5,154)
Deferred acquisition costs (9,710) (7,402)
Unearned premiums, net 49,681 45,171
Losses and loss adjustment expenses 867 (5,826)
Ceded reinsurance balances payable (2,894) (3,374)
Investment income due and accrued (3,195) (6,510)
Accrued interest payable 16,863 14,852
Gain on sales of investments (20,118) (130,473)
Accounts payable and other liabilities 32,042 5,684
Other, net 13,196 (12,774)
------------ ------------
Net cash provided by operating activities 258,858 145,126
------------ ------------
Cash flows from investing activities:
Proceeds from sales of bonds 1,413,892 1,324,619
Proceeds from matured bonds 838,475 713,445
Purchases of bonds (3,035,714) (2,840,183)
Change in short-term investments (36,515) (2,563)
Securities purchased under agreements to resell 21,574 23,225
Proceeds from sale of affiliate - 202,609
Other, net (1,258) 3,424
------------ ------------
Net cash used in investing activities (799,546) (575,424)
------------ ------------
Cash flows from financing activities:
Dividends paid (17,871) (15,730)
Proceeds from issuance of municipal investment agreements 1,716,586 1,268,896
Payments for municipal investment agreement draws (1,161,644) (813,672)
Proceeds from sale of treasury stock 28,131 12,835
Purchases of treasury stock (32,203) (20,891)
------------ ------------
Net cash provided by financing activities 532,999 431,438
------------ ------------
Net cash flow (7,689) 1,140
Cash at January 1 7,734 12,167
------------ ------------
Cash at September 30 $45 $13,307
============ ============
Supplemental disclosure of cash flow information
Cash paid during the period for:
Income taxes $20,663 $59,401
============ ============
Interest expense on debt $18,460 $18,375
============ ============
Interest expense on municipal investment agreements $113,695 $96,540
============ ============
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., (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
electronic commerce solutions, 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 nine months ended
September 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, (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 and
(iii) the Company's Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1997, which was filed with the Commission on August 14, 1997.
The consolidated financial statements include the accounts of the Company
and each of its subsidiaries. All significant intercompany balances have been
eliminated.
Certain reclassifications have been made to prior periods' amounts to
conform to the current period's presentation.
All common stock data has been retroactively adjusted to reflect the two-
for-one stock split effective September 10, 1997.
6
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (CONTINUED)
(2) 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 nine month periods ended
September 30, 1997 and 1996, and its financial condition as of September 30,
1997 and December 31, 1996. These results are presented for the Company's two
business segments: Financial Guarantee Insurance and Financial Management
Services.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 VERSUS THREE MONTHS ENDED
SEPTEMBER 30, 1996
CONSOLIDATED NET INCOME
The Company's net income for the three months ended September 30, 1997 was
$60.8 million or $0.87 per common share, an increase of 38% from $43.8 million
or $0.63 per common share in the three months ended September 30, 1996. This
increase in net income was attributable to higher operating income in both
business segments.
FINANCIAL GUARANTEE INSURANCE
Operating Income. Through its principal operating subsidiary, Ambac
----------------
Assurance, the Company insures municipal and structured finance obligations.
Operating income for the three months ended September 30, 1997 was $79.7
million, an increase of 41% from $56.6 million in the three months ended
September 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, and higher net investment income, partially offset by lower
premiums earned from refundings, calls and other accelerations and higher
underwriting and operating expenses.
7
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Gross Par Written. Ambac Assurance insured $9.3 billion in par value bonds
-----------------
during the three months ended September 30, 1997, an increase of 12% from $8.3
billion in the three months ended September 30, 1996. Par value written for the
third quarter of 1997 was comprised of $5.9 billion from municipal bond
insurance and $3.4 billion from structured finance insurance, compared to $6.7
billion and $1.6 billion, respectively, in the third quarter of 1996. According
to estimates based on industry sources, the total volume of new issues of
municipal bonds increased 59% from $35.5 billion during the three months ended
September 30, 1996 to $56.3 billion in the three months ended September 30,
1997. During the three months ended September 30, 1997, the insured portion of
the new issue municipal bond market decreased slightly to approximately 51% from
approximately 52% for the three months ended September 30, 1996. (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
----------------------
September 30, 1997 were $52.4 million, a decrease of 22% from $67.6 million in
the three months ended September 30, 1996. The following table sets forth the
amounts of gross premiums written by type and percent of total:
Three Months Ended September 30,
----------------------------------------------------------------------
(Dollars in Millions) 1997(1) %(1) 1996(1) %(1)
------------ ---------- ------------- -----------
Domestic:
Municipal finance premiums:
Up-front policies:
New issue.......................................... $33.3 64% $49.1 73%
Secondary market................................... 2.0 4 10.2 15
------------ ---------- ------------- -----------
Sub-total up-front written........................ 35.3 67 59.3 88
------------ ---------- ------------- -----------
Installment policies:
Annual policies.................................... 2.3 4 2.3 3
Portfolio products................................. 0.7 1 0.9 1
------------ ---------- ------------- -----------
Sub-total installment written.................. 3.0 6 3.2 5
------------ ---------- ------------- -----------
Total municipal finance written................. 38.4 73 62.5 92
------------ ---------- ------------- -----------
Structured finance premiums:
Up-front........................................... 0.9 2 0.1 -
Installment........................................ 5.2 10 2.3 3
------------ ---------- ------------- -----------
Total structured finance written.............. 6.1 12 2.4 4
------------ ---------- ------------- -----------
Total domestic written..................... 44.5 85 64.9 96
------------ ---------- ------------- -----------
International:
Up-front........................................... 6.5 12 1.6 2
Installment........................................ 1.4 3 1.1 2
------------ ---------- ------------- -----------
Total international written................ 7.9 15 2.7 4
------------ ---------- ------------- -----------
Total up-front written................................ 42.7 81 61.0 90
Total installment written............................. 9.7 19 6.6 10
------------ ---------- ------------- -----------
Grand total written $52.4 100% $67.6 100%
============ ========== ============= ===========
(1) Numbers may not add due to rounding.
Ceded Premiums Written. Ceded premiums written for the third quarter of
----------------------
1997 were $6.5 million, compared to $9.8 million in the third quarter of 1996.
The 34% 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 12% and 15% of
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
gross premiums written for the three month periods ended September 30, 1997 and
1996, respectively.
Net Premiums Written. Net premiums written for the three months ended
--------------------
September 30, 1997 were $45.9 million, a decrease of 21% from the $57.8 million
in the three months ended September 30, 1996. This decrease reflects lower gross
premiums written, offset by lower premiums ceded to reinsurers in the three
months ended September 30, 1997 compared with the corresponding prior period.
Net Premiums Earned. Net premiums earned during the three months ended
-------------------
September 30, 1997 were $35.7 million, an increase of 6% from $33.7 million in
the three months ended September 30, 1996. The increase was primarily the result
of increased premiums earned from the underlying book of business during the
period, partially offset by a decline in premiums earned from refundings, calls
and other accelerations for the three months ended September 30, 1997. Net
premiums earned for the three months ended September 30, 1997 included $3.5
million (which had a net income per common share effect of $0.03) from
refundings, calls and other accelerations of previously insured issues. Net
premiums earned in the three months ended September 30, 1996 included $7.1
million (which had a net income per common share effect of $0.06) 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 September 30, 1997 were $32.2
million, an increase of 21% from $26.7 million in the three months ended
September 30, 1996.
Net Investment Income. Net investment income for the three months ended
---------------------
September 30, 1997 was $40.1 million, an increase of 9% from $36.9 million in
the three months ended September 30, 1996. The increase was primarily
attributable to the growth of the investment portfolio. Ambac Assurance's
investments in tax-exempt securities amounted to 79% of the total market value
of its portfolio as of September 30, 1997, versus 76% at September 30, 1996. The
average pre-tax yield-to-maturity on the investment portfolio was 6.35% and
6.47% as of September 30, 1997 and 1996, respectively.
Net Realized Gains (Losses). Net realized gains were $13.9 million for the
---------------------------
three months ended September 30, 1997, compared to $5.4 million in net realized
losses for the comparative prior period in 1996.
Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses
-----------------------------------
for the three months ended September 30, 1997 were $0.7 million, versus $1.3
million in the three months ended September 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 September 30, 1997 and 1996, respectively.
Underwriting and Operating Expenses. Underwriting and operating expenses
-----------------------------------
for the third quarter of 1997 were $10.2 million, an increase of 19% from $8.6
million in the third quarter of 1996, primarily as a result of higher 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
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
commissions. During the three month period ended September 30, 1997, gross
underwriting and operating expenses were $14.3 million, an increase of 12% from
$12.8 million in the three months ended September 30, 1996, primarily due to
higher rating agency fees and advertising, partially offset by lower premium
taxes. Underwriting and operating expenses deferred were $7.5 million and $7.3
million for the three months ended September 30, 1997 and 1996, respectively.
The amortization of previously deferred expenses and reinsurance commissions
was $3.4 million and $3.2 million for the three months ended September 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 electronic commerce solutions,
principally to states, municipalities and their authorities, school districts,
and hospitals and health organizations. Operating income for the three months
ended September 30, 1997 was $4.4 million, up from $1.0 million in the three
months ended September 30, 1996. Revenues for the third quarter of 1997 were
$10.1 million (includes $1.1 million in realized gains), up from $4.0 million in
the third 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, as well as higher revenues on interest rate swaps and
investment agreements. Expenses for the third quarter of 1997 were $5.7 million,
up from $3.1 million in the third quarter of 1996. These increased expenses
resulted primarily from the consolidation of Cadre and the Company's electronic
commerce solutions affiliate, Ambac Connect, Inc., into the Financial Management
Services segment.
CORPORATE ITEMS
Interest Expense and Other Income (Deductions), Net. Interest expense for
---------------------------------------------------
the three months ended September 30, 1997 was $5.4 million, up 4% from $5.2
million for the three months ended September 30, 1996, primarily due to lower
net payments received under an interest rate swap related to the Company's
debentures. Other income (deductions), net, includes investment income and
operating expenses of the holding company. Other income (deductions), net, was
$1.0 million for the three months ended September 30, 1997, down from $2.4
million in the comparative prior period.
Income Taxes. Income taxes for the three months ended September 30, 1997
------------
were at an effective rate of 23.7%, versus 19.9% in the three months ended
September 30, 1996. This increase was primarily due to realized gains in the
three months ended September 30, 1997.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 three months ended September 30, 1997
-------------
were $49.5 million , an increase of 14% from $43.3 million for the three months
ended September 30, 1996. The increase in core earnings was primarily the result
of continued growth in net premiums earned from the underlying book of business
and higher net investment income from insurance operations, as well as higher
operating income from the Financial Management Services segment. 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 third quarter of 1997 were
------------------
$51.5 million, an increase of 9% from $47.3 million in the third 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
September 30, 1997 and 1996:
(Dollars in Millions) 1997(1) 1996(1)
---------- ----------
Net Income................................................................................... $60.8 $43.8
Net realized (gains) / losses, after tax..................................................... (9.3) 3.5
---------- ----------
Operating earnings........................................................................ 51.5 47.3
Premiums earned from refundings,
calls and other accelerations, after tax.................................................. (2.0) (4.0)
---------- ----------
Core earnings............................................................................. $49.5 $43.3
========== ==========
(1) Numbers may not add due to rounding.
The weighted average number of shares outstanding during the third quarter
of 1997 and 1996 was 70.1 million and 69.8 million, respectively.
Adjusted Gross Premiums Written. Adjusted gross premiums written were $62.8
-------------------------------
million in the third quarter of 1997, down 19% from $77.7 million in the third
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 premiums 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
third quarter of 1997 was $20.1 million, an increase of 20% from $16.7 million
written in the third quarter of 1996. The aggregate net present value of
estimated future
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
installment premiums was $187.5 million and $157.7 million as of September 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 September 30, 1997 and 1996:
(Dollars in Millions) 1997(1) 1996(1)
---------- ----------
Adjusted Gross Premium Analysis:
Total Up-front premiums written.............................................................. $42.7 $61.0
PV of estimated future installment premiums.................................................. 20.1 16.7
---------- ----------
Adjusted gross premiums written.......................................................... $62.8 $77.7
========== ==========
(1) Numbers may not add due to rounding.
Adjusted Book Value. Adjusted book value ("ABV") per common share increased
--------------------
9% to $34.21 at September 30, 1997 compared to $31.25 at December 31, 1996. The
Company derives ABV by beginning with stockholders' equity (book value) and
adding or subtracting the after-tax value of: the net unearned premium reserve;
deferred acquisition costs; the present value of estimated net future
installment premiums; and the unrealized gain or loss on investment agreement
liabilities. These adjustments will not be realized until future periods and may
differ materially from the amounts used in determining ABV.
The following table reconciles book value per share to ABV per share as of
September 30, 1997 and December 31, 1996:
September 30, December 31,
1997(1) 1996(1)
------------------------ ------------------------
Book value per share.......................................... $25.50 $23.01
After-tax value of:
Net unearned premium reserve.............................. 8.09 7.62
Deferred acquisition costs................................ (0.97) (0.87)
Present value of installment premiums..................... 1.74 1.45
Unrealized gain on investment agreement liabilities....... (0.14) 0.03
------------------------ ------------------------
Adjusted book value per share................................. $34.21 $31.25
======================== ========================
(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
NINE MONTHS ENDED SEPTEMBER 30, 1997 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 1996
CONSOLIDATED NET INCOME
The Company's net income for the nine months ended September 30, 1997 was
$164.1 million or $2.35 per common share, a decrease of 27% from $224.3 million
or $3.21 per common share in the nine months ended September 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 $1.44) from the Company's sale of its former affiliate, HCIA Inc. Excluding
the effect of this one-time gain, net income increased 33% over the nine months
ended September 30, 1996. This increase in net income was attributable to higher
operating income in the insurance segment, partially offset by lower operating
income in the Financial Management Services segment.
FINANCIAL GUARANTEE INSURANCE
Operating Income. Operating income for the nine months ended September 30,
----------------
1997 was $218.3 million, an increase of 39% from $157.0 million in the nine
months ended September 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 and higher net investment income, partially
offset by lower premiums earned from refundings, calls, and other accelerations.
Gross Par Written. Ambac Assurance insured $27.8 billion in par value bonds
-----------------
during the nine months ended September 30, 1997, an increase of 17% from $23.8
billion in the nine months ended September 30, 1996. Par value written for the
first nine months of 1997 was comprised of $18.4 billion from municipal bond
insurance and $9.4 billion from structured finance insurance, compared to $18.4
billion and $5.4 billion, respectively, in the first nine months of 1996.
According to estimates based on industry sources, the total volume of new issues
of municipal bonds increased 18% from $126.8 billion during the nine months
ended September 30, 1996 to $149.9 billion in the nine months ended September
30, 1997. During the nine months ended September 30, 1997, the insured portion
of the new issue municipal bond market increased to approximately 52% from
approximately 49% for the nine months ended September 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 nine months ended
----------------------
September 30, 1997 were $177.9 million, an increase of 1% from $176.0 million in
the nine months ended September 30, 1996. The following table sets forth the
amounts of gross premiums written by type and percent of total:
Nine Months Ended September 30,
----------------------------------------------------------------------
(Dollars in Millions) 1997(1) %(1) 1996(1) %(1)
------------ ---------- ------------- -----------
Domestic:
Municipal finance premiums:
Up-front policies:
New issue.......................................... $112.9 63% $125.3 71%
Secondary market................................... 13.9 8 17.5 10
------------ ---------- ------------- -----------
Sub-total up-front written........................ 126.9 71 142.8 81
------------ ---------- ------------- -----------
Installment policies:
Annual policies.................................... 7.2 4 6.2 3
Portfolio products................................. 2.3 1 3.0 2
------------ ---------- ------------- -----------
Sub-total installment written.................... 9.4 5 9.2 5
------------ ---------- ------------- -----------
Total municipal finance written................. 136.3 77 152.0 86
------------ ---------- ------------- -----------
Structured finance premiums:
Up-front........................................... 8.7 5 0.9 1
Installment........................................ 13.5 8 5.5 3
------------ ---------- ------------- -----------
Total structured finance written................ 22.2 12 6.4 4
------------ ---------- ------------- -----------
Total domestic written..................... 158.5 89 158.4 90
------------ ---------- ------------- -----------
International:
Up-front........................................... 15.6 9 15.7 9
Installment........................................ 3.9 2 1.9 1
------------ ---------- ------------- -----------
Total international written................ 19.4 11 17.6 10
------------ ---------- ------------- -----------
Total up-front written................................ 151.1 85 159.5 91
Total installment written............................. 26.8 15 16.5 9
------------ ---------- ------------- -----------
Grand total written.................................. $177.9 100% $176.0 100%
============ ========== ============= ===========
(1) Numbers may not add due to rounding.
Ceded Premiums Written. Ceded premiums written for the first nine months of
----------------------
1997 were $19.1 million, compared to $29.3 million in the first nine 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 11% and 17% of gross
premiums written for the nine month periods ended September 30, 1997 and 1996,
respectively.
Net Premiums Written. Net premiums written for the nine months ended
--------------------
September 30, 1997 were $158.8 million, an increase of 8% from the $146.8
million in the nine months ended September 30, 1996. This increase reflects
slightly higher gross premiums written and lower premiums ceded to reinsurers in
the nine months ended September 30, 1997 compared with the corresponding prior
period.
Net Premiums Earned. Net premiums earned during the nine months ended
-------------------
September 30, 1997 were $109.1 million, an increase of 7% from $101.6 million in
the nine months ended September 30, 1996. The increase was primarily the result
of increased premiums earned from the underlying book of business during the
nine months ended September 30, 1997, partially offset by lower premiums earned
from refundings, calls and other accelerations during the period. Net premiums
earned for the nine months ended September 30, 1997 included $16.9 million
(which had a net income per common share effect of $0.14) from refundings, calls
and
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
other accelerations of previously insured issues. Net premiums earned in the
nine months ended September 30, 1996 included $25.2 million (which had a net
income per common share effect of $0.20) from refundings, calls and other
accelerations. Excluding the effect of accelerated earnings from refundings,
calls and other accelerations, net premiums earned for the nine months ended
September 30, 1997 were $92.2 million, an increase of 21% from $76.4 million in
the nine months ended September 30, 1996.
Net Investment Income. Net investment income for the nine months ended
---------------------
September 30, 1997 was $117.8 million, an increase of 10% from $107.2 million in
the nine months ended September 30, 1996. The increase was primarily
attributable to the growth of the investment portfolio. Ambac Assurance's
investments in tax-exempt securities amounted to 79% of the total market value
of its portfolio as of September 30, 1997, versus 76% at September 30, 1996. The
average pre-tax yield-to-maturity on the investment portfolio was 6.35% and
6.47% as of September 30, 1997 and 1996, respectively.
Net Realized Gains (Losses). Net realized gains were $18.2 million for the
---------------------------
nine months ended September 30, 1997, compared to $25.1 million in net realized
losses for the comparative prior period in 1996. The net realized losses in the
nine months ended September 30, 1996 partially offset the net realized gain on
the sale of HCIA Inc.
Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses
-----------------------------------
for the nine months ended September 30, 1997 were $2.1 million, versus $3.8
million in the nine months ended September 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 $2.2 million and $3.9 million for the nine
months ended September 30, 1997 and 1996, respectively. Salvage recognized
amounted to $0.1 million for both nine month periods ended September 30, 1997
and 1996.
Underwriting and Operating Expenses. Underwriting and operating expenses
-----------------------------------
for the first nine months of 1997 were $29.0 million, an increase of 5% from
$27.7 million in the first nine months of 1996, primarily due to higher rating
agency fees and expenses relating to Ambac Insurance UK Limited (which began
operations during the first quarter of 1997), partially offset by lower ceding
commission expenses in the nine months ended September 30, 1997. During the nine
month period ended September 30, 1997, gross underwriting and operating expenses
were $42.3 million, an increase of 4% from $40.6 million in the nine months
ended September 30, 1996. Underwriting and operating expenses deferred were
$23.4 million and $22.9 million for the nine months ended September 30, 1997 and
1996, respectively. Reinsurance commissions which relate to the current period
were none and $0.6 million for the nine months ended September 30, 1997 and
1996, respectively. The amortization of previously deferred expenses and
reinsurance commissions was $10.1 million and $9.5 million for the three months
ended September 30, 1997 and 1996, respectively.
FINANCIAL MANAGEMENT SERVICES
Operating Income. Operating income for the nine months ended September 30,
----------------
1997 was $3.4 million, down from $8.6 million in the nine months ended September
30, 1996. These results include a $3.5 million restructuring charge (which had a
net income per common share effect of $0.03) in the current period for the
consolidation of the Company's Westport,
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Connecticut office into the Company's corporate headquarters in New York City.
Revenues for the first nine months of 1997 were $23.6 million (includes $1.1
million in net realized gains), up from $16.1 million in the first nine months
of 1996. The increase was primarily due to the inclusion of revenues of Cadre,
partially offset by lower revenues on interest rate swaps. Expenses for the
first nine months of 1997, excluding the restructuring charge, were $16.7
million, compared to $7.5 million in the first nine months of 1996. These
increased expenses resulted primarily from the consolidation of Cadre and Ambac
Connect into the Financial Management Services segment.
CORPORATE ITEMS
Interest Expense and Other Income (Deductions), Net. Interest expense for
---------------------------------------------------
the nine months ended September 30, 1997 was $15.9 million, up slightly from
$15.7 million for the nine months ended September 30, 1996. Other income
(deductions), net, includes investment income and operating expenses of the
holding company. Other income (deductions), net, increased slightly from $3.3
million for the nine months ended September 30, 1996 to $3.4 million for the
nine months ended September 30, 1997.
Income Taxes. Income taxes for the nine months ended September 30, 1997
------------
were at an effective rate of 21.8%, compared to 27.5% in the nine months ended
September 30, 1996. The higher effective tax rate in the nine months ended
September 30, 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 nine months ended September 30, 1997
-------------
were $144.0 million , an increase of 15% from $125.7 million for the nine months
ended September 30, 1996. The increase in core earnings was primarily the result
of continued growth in net premiums earned from the underlying book of business
and higher net investment income from insurance operations, partially offset by
lower operating income from the Financial Management Services segment. 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 nine months ended September
------------------
30, 1997 were $153.6 million, an increase of 10% from $140.0 million in the nine
months ended September 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 nine months ended September 30,
1997 and 1996:
(Dollars in Millions) 1997(1) 1996(1)
---------------------------------------
Net Income................................................................... $164.1 $224.3
Net realized gains, after tax................................................ (12.6) (84.3)
Non-recurring item, after tax................................................ 2.1 -
---------------- ----------------
Operating earnings........................................................ 153.6 140.0
Premiums earned from refundings,
calls and other accelerations, after tax.................................. (9.6) (14.3)
---------------- ----------------
Core earnings............................................................. $144.0 $125.7
================ ================
(1) Numbers may not add due to rounding.
The weighted average number of shares outstanding during the nine month
period ended September 30, 1997 and 1996 were 70.0 million and 69.9 million,
respectively .
Adjusted Gross Premiums Written. Adjusted gross premiums written were
-------------------------------
$216.7 million in the first nine months of 1997, an increase of 5% from $205.8
million in the first nine 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 premiums
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 nine months ended September 30, 1997 was
$65.5 million, an increase of 41% from $46.3 million in the nine months ended
September 30, 1996. The aggregate net present value of estimated future
installment premiums was $187.5 million and $157.7 million as of September 30,
1997 and December 31, 1996, respectively.
The following table reconciles total up-front premiums written to adjusted
gross premiums written for the nine months ended September 30, 1997 and 1996:
(Dollars in Millions) 1997(1) 1996(1)
---------- -----------
Adjusted Gross Premium Analysis:
Total Up-front premiums written.............................................................. $151.1 $159.5
PV of estimated future installment premiums.................................................. 65.5 46.3
---------- -----------
Adjusted gross premiums written.......................................................... $216.7 $205.8
========== ===========
(1) Numbers may not add due to rounding.
Adjusted Book Value. ABV per common share increased 9% to $34.21 at
-------------------
September 30, 1997 compared to $31.25 at December 31, 1996. The Company derives
ABV by beginning with stockholders' equity (book value) and adding or
subtracting the after-tax value of: the net unearned premium reserve; deferred
acquisition costs; the present value of estimated net future installment
premiums; and the unrealized gain or loss on investment agreement liabilities.
These adjustments will not be realized until future periods and may differ
materially from the amounts used in determining ABV.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINACIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The following table reconciles book value per share to ABV per share as of
September 30, 1997 and December 31, 1996:
September 30, December 31,
1997(1) 1996(1)
------------------------ ------------------------
Book value per share.......................................... $25.50 $23.01
After-tax value of:
Net unearned premium reserve.............................. 8.09 7.62
Deferred acquisition costs................................ (0.97) (0.87)
Present value of installment premiums..................... 1.74 1.45
Unrealized gain on investment agreement liabilities....... (0.14) 0.03
------------------------ ------------------------
Adjusted book value per share................................. $34.21 $31.25
======================== ========================
(1) Numbers may not add due to rounding.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity for the Holding Company. 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 nine
months ended September 30, 1997, Ambac Assurance paid dividends of $33.0 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. Given the amount of dividends
that the Company expects to receive from Ambac Assurance during 1997 and the
income it expects to receive 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.
Liquidity for Insurance Operations. Ambac Assurance's principal uses of
-----------------------------------
liquidity are for 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)
Liquidity for Financial Management Services Operations. 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 the operating liquidity needs for Financial Management
Services can be funded primarily from its operating cash flow. The principal
sources of this segments 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 joint 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 September 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 September 30, 1997 and
1996, no amounts were outstanding under this line.
Stock Repurchase Program. During the nine months ended September 30, 1997,
-------------------------
the Company acquired approximately 949,000 shares under its existing stock
repurchase program. Since inception of the Stock Repurchase Program, the Company
has acquired approximately 3,072,000 shares. Under the Stock Repurchase Program
established by the Board of Directors, the Company is authorized to repurchase
up to 6,000,000 shares of the Common Stock.
Balance Sheet. As of September 30, 1997, the fair value of the Company's
--------------
consolidated investment portfolio was $6.13 billion, an increase of 18% from
$5.20 billion at December 31, 1996. This was primarily due to the growth of
operations in both business segments.
Cash Flows. Net cash provided by operating activities was $258.9 million
-----------
and $145.1 million during the nine months ended September 30, 1997 and 1996,
respectively. These cash flows were primarily provided from insurance
operations.
Net cash provided by financing activities was $533.0 million and $431.4
million during the nine months ended September 30, 1997 and 1996, respectively.
This activity included $554.9 million and $455.2 million, respectively, in
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 $791.9
million and $576.5 million during the nine months ended September 30, 1997 and
1996, respectively. From these totals, $799.5 million and $575.4 million was
used in investing activities during the nine months ended September 30, 1997 and
1996, respectively, principally for purchases of bonds, offset by proceeds from
sales and maturities of bonds and from the 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 subsidiaries in the
Financial Management Services segment 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. (See "Part II
Other Information, Item 5." for Ambac Assurance's proposed acquisition of
Construction Loan Insurance Corporation.)
20
PART II - OTHER INFORMATION
Items 1, 2, 3 and 4 are omitted either because they are inapplicable or
because the answer to such question is negative.
ITEM 5 - OTHER INFORMATION
On November 12, 1997, Ambac Assurance announced that the Company and the
shareholders of Construction Loan Insurance Corporation ("CLIC") had approved
their previously announced plans to merge. The merger, which Ambac Assurance
expects to close by December 31, 1997, remains subject to certain contingencies
including satisfaction of applicable federal and state regulatory requirements.
Ambac Assurance will pay $106 million in cash for all of the outstanding shares
of stock of CLIC and will also retire $18.4 million of CLIC's debt obligations.
Based on unaudited financial statements as of September 30, 1997, CLIC had a
book value of $160.8 million. Assuming the merger is consummated as anticipated,
the purchase is expected to have a positive effect on the earnings of the
Company in the range of approximately $0.07 to $0.09 per share in 1998,
depending upon several factors, including, interest rates and general economic
conditions. CLIC is a private, for-profit financial guaranty company that,
through its wholly-owned insurance subsidiary, Connie Lee Insurance Company
("Connie Lee"), guarantees bonds primarily issued for college and hospital
infrastructure projects. While Ambac Assurance does not expect Connie Lee to
write new business, it will make sure that Connie Lee bonds retain their triple-
A ratings.
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
10.21* 1997 Ambac Equity Plan, as amended
11.00 Statement re computation of per share earnings.
27.00 Financial Data Schedule.
99.04 Ambac Assurance Corporation and Subsidiaries Consolidated Unaudited
Financial Statements as of September 30, 1997 and December 31, 1996
and for the periods ended September 30, 1997 and 1996.
(B) REPORTS ON FORM 8-K:
There were no Reports on Form 8-K filed during the third 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.
----------
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Ambac Financial Group, Inc.
(REGISTRANT)
Dated: November 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)
22
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
4.05 Amended and Restated Certificate of Incorporation of the Company.
10.21* 1997 Ambac Equity Plan, as amended.
11.00 Statement re computation of per share earnings.
27.00 Financial Data Schedule.
99.04 Ambac Assurance Corporation and Subsidiaries Consolidated Unaudited
Financial Statements as of September 30, 1997 and December 31, 1996
and for the periods ended September 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.
----------
23