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, 1996

[_]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934

        COMMISSION FILE NUMBER: 1-10777



                                   AMBAC 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, 1996, 34,839,706 shares of Common Stock, par value $0.01
per share, (net of 500,486 treasury shares) and -0- shares of Class A Common
Stock, par value $0.01 per share, of the Registrant were outstanding.

 
                          AMBAC INC. AND SUBSIDIARIES

                                     INDEX
                                     -----
PAGE ---- PART I FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheets - June 30, 1996 and December 31, 1995....................................... 3 Consolidated Statements of Operations - three months and six months ended June 30, 1996 and June 30, 1995............ 4 Consolidated Statements of Cash Flows - six months ended June 30, 1996 and June 30, 1995....................... 5 Notes to Consolidated Financial Statements.................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 9 PART II OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders.......... 21 Item 5. Other Information............................................. 21 Item 6. Exhibits...................................................... 22 SIGNATURES............................................................. 23 INDEX TO EXHIBITS...................................................... 24
PART 1 - FINANCIAL INFORMATION Item 1 - Financial Statements of AMBAC Inc. and Subsidiaries AMBAC Inc. and Subsidiaries Consolidated Balance Sheets June 30, 1996 and December 31, 1995 (Dollars in Thousands)
June 30, 1996 December 31, 1995 ------------- ----------------- (unaudited) Assets - ------ Investments: Bonds, at fair value (amortized cost of $4,782,496 in 1996 and $4,082,791 in 1995) $4,814,547 $4,264,904 Short-term investments, at cost (approximates fair value) 230,975 176,689 ---------- ---------- Total investments 5,045,522 4,441,593 Cash 5,386 12,167 Securities purchased under agreements to resell 148,586 240,280 Receivable for municipal investment contracts 47,968 204,797 Receivable for securities 65,688 14,523 Investment income due and accrued 62,684 56,370 Investment in affiliate - 45,019 Deferred acquisition costs 88,107 82,620 Prepaid reinsurance 162,166 153,372 Other assets 64,835 58,538 ---------- ---------- Total assets $5,690,942 $5,309,279 ========== ========== Liabilities and Stockholders' Equity - ------------------------------------ Liabilities: Unearned premiums $932,935 $903,026 Losses and loss adjustment expenses 59,429 65,996 Ceded reinsurance balances payable 6,765 14,654 Obligations under municipal investment contracts 2,382,653 2,185,746 Obligations under municipal investment repurchase contracts 302,939 241,112 Deferred income taxes 42,969 103,697 Current income taxes 60,874 5,125 Debentures 223,765 223,732 Accrued interest payable 29,300 25,494 Accounts payable and other liabilities 47,121 44,578 Payable for securities 129,988 92,131 ---------- ---------- Total liabilities 4,218,738 3,905,291 ---------- ----------- Stockholders' equity: Preferred stock - - Common stock, Class A - - Common stock 353 353 Additional paid-in capital 493,501 492,495 Unrealized gains on investments, net of tax 12,918 102,470 Retained earnings 989,431 819,479 Common stock held in treasury at cost (23,999) (10,809) ---------- ---------- Total stockholders' equity 1,472,204 1,403,988 ---------- ---------- Total liabilities and stockholders' equity $5,690,942 $5,309,279 ========== ==========
See accompanying Notes to Consolidated Financial Statements 3 AMBAC Inc. and Subsidiaries Consolidated Statements of Operations (Unaudited) For the Periods Ended June 30, 1996 and 1995 (Dollars in Thousands Except Common Share Data)
Three Months Ended Six Months Ended June 30 June 30, ---------------------------- ---------------------------- 1996 1995 1996 1995 ---------------------------- ---------------------------- Financial guarantee insurance operations: Gross premiums written $58,115 $36,402 $108,402 $76,598 Ceded premiums written (9,836) 6,514 (19,448) 3,055 ---------- ---------- ---------- ---------- Net premiums written 48,279 42,916 88,954 79,653 Increase in unearned premiums (8,634) (15,069) (21,116) (27,589) ---------- ---------- ---------- ---------- Net premiums earned 39,645 27,847 67,838 52,064 Net investment income 35,498 32,292 70,325 64,047 Net realized losses (22,100) (2,202) (19,744) (6,876) Other income 2,236 1,628 3,628 3,189 ---------- ---------- ---------- ---------- Total financial guarantee revenues 55,279 59,565 122,047 112,424 ---------- ---------- ---------- ---------- Losses and loss adjustment expenses 1,700 341 2,510 1,369 Underwriting and operating expenses 10,351 9,130 19,099 17,175 ---------- ---------- ---------- ---------- Total financial guarantee expenses 12,051 9,471 21,609 18,544 ---------- ---------- ---------- ---------- Financial guarantee insurance operating income 43,228 50,094 100,438 93,880 Financial services operating income (loss) 2,737 (752) 7,612 775 Equity in income of affiliate - 1,867 627 2,093 Interest expense (5,167) (5,221) (10,425) (10,208) Other income (deductions), net 1,366 (209) 919 (436) Other net realized gains 155,613 - 155,613 - ---------- ---------- ---------- ---------- Income before income taxes 197,777 45,779 254,784 86,104 ---------- ---------- ---------- ---------- Income tax expense: Current taxes 66,939 5,789 79,913 11,230 Deferred taxes (5,109) 3,005 (5,629) 4,588 ---------- ---------- ---------- ---------- Total income taxes 61,830 8,794 74,284 15,818 ---------- ---------- ---------- ---------- Net income $135,947 $36,985 $180,500 $70,286 ========== ========== ========== ========== Per share amounts - Net income per common share $3.89 $1.05 $5.16 $2.00 ========== ========== ========== ========== Weighted average number of common shares outstanding 34,915,449 35,091,221 34,984,680 35,090,641 ========== ========== ========== ==========
See accompanying Notes to Consolidated Financial Statements 4 AMBAC Inc. and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) For The Periods Ended June 30, 1996 and 1995 (Dollars in Thousands)
Six Months Ended June 30, ---------------------------- 1996 1995 ---------- ---------- Cash flows from operating activities: Net income $180,500 $70,286 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 1,077 3,726 Amortization of bond premium and discount (453) 321 Current income taxes payable 55,749 2,758 Deferred income taxes payable (5,756) 4,857 Deferred acquisition costs (5,487) (9,366) Unearned premiums, net 21,115 27,590 Losses and loss adjustment expenses (6,567) 45 Ceded reinsurance balances payable (7,889) (422) Accrued interest payable 3,806 2,357 (Gain) loss on sale of investments (135,850) 7,058 Other, net (15,954) (16,352) ---------- ---------- Net cash provided by operating activities 84,291 92,858 ---------- ---------- Cash flows from investing activities: Proceeds from sales of bonds 815,183 1,330,441 Proceeds from matured bonds 444,344 266,957 Purchases of bonds (1,985,878) (1,829,763) Change in short-term investments (54,286) 46,622 Securities purchased under agreements to resell 91,694 (9,392) Proceeds from sale of affiliate 202,609 - Other, net 3,389 (5,010) ---------- ---------- Net cash used in investing activities (482,945) (200,145) ---------- ---------- Cash flows from financing activities: Dividends paid (10,500) (9,470) Proceeds from issuance of municipal investment contracts 938,111 643,853 Payments for municipal investment contract draws (522,548) (526,833) Proceeds from sale of treasury stock 7,701 3,331 Purchases of treasury stock (20,891) (734) ---------- ---------- Net cash provided by financing activities 391,873 110,147 ---------- ---------- Net cash flow (6,781) 2,860 Cash at beginning of year 12,167 4,441 ---------- ---------- Cash at June 30 $5,386 $7,301 ========== ========== Supplemental disclosure of cash flow information Cash paid during the year for: Income taxes $23,392 $8,250 ========== ========== Interest expense on debt $10,846 $10,583 ========== ========== Interest expense on municipal investment contracts $68,493 $58,558 ========== ==========
See accompanying Notes to Consolidated Financial Statements 5 AMBAC INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (1) BASIS OF PRESENTATION AMBAC Inc. (the "Company") is a holding company that provides through its affiliates financial guarantee insurance and financial services to clients in both the public and private sectors. AMBAC Indemnity Corporation ("AMBAC Indemnity"), the Company's principal operating subsidiary, is a leading insurer of municipal and structured finance obligations. AMBAC Indemnity has been assigned triple-A claims-paying ability ratings, the highest ratings available from Moody's Investors Service, Inc., Standard & Poor's Ratings Group and Fitch Investors Service, L.P. AMBAC Inc.'s Financial Services Division provides investment contracts, interest rate swaps and investment management principally to states, municipalities and municipal authorities. 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, 1996, may not be indicative of the results that may be expected for the full year ending December 31, 1996. 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 Inc. and its subsidiaries contained in (i) the Company's Annual Report on Form 10-K for the year ended December 31, 1995, which was filed with the Securities and Exchange Commission (the "Commission") on April 1, 1996, (ii) the Company's Quarterly Report on Form 10-Q for the quarterly period ended on March 31, 1996, which was filed with the Commission on May 15, 1996, and (iii) the Company's Current Report on Form 8-K dated January 31, 1996, which was filed on February 28, 1996. The consolidated financial statements include the accounts of the Company and each of its subsidiaries. All significant intercompany balances have been eliminated. 6 NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (CONTINUED) (2) INCOME TAXES The effect of temporary differences giving rise to significant portions of the deferred tax liabilities and deferred tax assets as of June 30, 1996 and December 31, 1995, are presented below:
(Dollars in Thousands) June 30, 1996 December 31, 1995 ------------- ----------------- Deferred tax liabilities: Net unrealized gains on bonds............. $ 3,286 $ 58,258 Deferred acquisition costs................ 30,837 28,917 Unearned premiums......................... 25,609 22,167 Unrealized gain on investment in affiliate - 7,730 Investments............................... 1,530 3,638 Other..................................... 1,767 2,566 ------- -------- Total deferred tax.................. 63,029 123,276 ------- -------- Deferred tax assets: Loss reserves............................. 11,096 9,631 Insurance in force........................ 2,702 2,870 Compensation.............................. 2,507 2,672 Other..................................... 3,755 4,406 ------- -------- Total deferred tax assets........... 20,060 19,579 Valuation allowance....................... - - ------- -------- Net deferred tax assets............. 20,060 19,579 ------- -------- Total net deferred tax liabilities.. $42,969 $103,697 ======= ========
The valuation allowance for deferred tax assets did not change during the six months ended June 30, 1996. The Company believes that no valuation allowance is necessary in connection with the deferred tax assets. The tax provisions in the accompanying consolidated financial statements reflect effective tax rates differing from the prevailing federal corporate income tax rates. A reconciliation of these differences is as follows:
Three Months Ended June 30, --------------------------------- (Dollars in Thousands) 1996 % 1995 % ------- ---- ------- ----- Computed expected tax expense at statutory rate............... $69,222 35.0% $16,023 35.0% Increases (reductions) in expected tax resulting from: Tax-Exempt interest....... (7,413) (3.7) (7,242) (15.8) Other, net................ 21 - 13 - ------- ---- ------- ----- $61,830 31.3% $ 8,794 19.2% ======= ==== ======= =====
7 NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (CONTINUED)
Six Months Ended June 30, ----------------------------------- (Dollars in Thousands) 1996 % 1995 % -------- ---- -------- ----- Computed expected tax expense at statutory rate............... $ 89,174 35.0% $ 30,136 35.0% Increases (reductions) in expected tax resulting from: Tax-Exempt interest...... (14,425) (5.7) (14,182) (16.5) Other, net............... (465) (0.1) (136) (0.1) -------- ---- -------- ----- $ 74,284 29.2% $ 15,818 18.4% ======== ==== ======== =====
8 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 Inc. and its subsidiaries (sometimes collectively referred to as the "Company") for the three and six month periods ended June 30, 1996 and 1995, and its financial condition as of June 30, 1996 and December 31, 1995. These results are presented for the Company's two business segments: Financial Guarantee Insurance and Financial Services. RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 1996 VERSUS THREE MONTHS ENDED JUNE 30, 1995 OVERVIEW The Company's net income for the three months ended June 30, 1996 was $135.9 million or $3.89 per common share, an increase of 267% from $37.0 million or $1.05 per common share in the three months ended June 30, 1995. The increase in net income for the quarter over the comparable prior period was primarily the result of the net realized gain of $155.6 million from the Company's sale of its affiliate, HCIA Inc. This gain was partially offset by realized losses on sales of securities in its investment portfolio of $22.1 million. The net effect of these actions was a net realized gain of $133.5 million, which had a net income per common share effect of $2.47. The increase in net income also resulted from increased premiums earned, higher investment income and higher financial services operating income, partially offset by higher expenses. FINANCIAL GUARANTEE INSURANCE The Company provides financial guarantee insurance through its principal operating subsidiary, AMBAC Indemnity Corporation ("AMBAC Indemnity"), which is a leading insurer of municipal and structured finance transactions. Financial guarantee insurance operating income for the three months ended June 30, 1996 was $43.2 million, a decrease of 14% from $50.1 million in the three months ended June 30, 1995. The decrease was primarily the result of increased net realized losses on sales of investments and higher expenses, partially offset by increased premiums earned and increased investment income. AMBAC Indemnity insured $9.2 billion in par value bonds during the three months ended June 30, 1996, an increase of 104% from $4.5 billion in the three months ended June 30, 1995. Par value written for the second quarter of 1996 comprised $7.1 billion from municipal bond insurance and $2.1 billion from structured finance insurance, versus $4.0 billion and $0.5 billion, respectively, in the second quarter of 1995. According to estimates based on industry sources, the total volume of new issues of municipal bonds increased 15% to $47.3 billion during the three months ended June 30, 1996 from $41.3 billion in the three months ended June 30, 1995. During the three months ended June 30, 1996, the insured portion of the new issue municipal bond market increased to 50.4% from 45.1% for the three months ended June 30, 1995, reflecting increased demand for insured bonds. During the three months ended June 30, 1996, AMBAC Indemnity's share of the long-term insured new issue municipal bond market, based on gross par amount of insurance written and stated as a percentage of total insured new issue municipal bonds, was approximately 27%, as compared to approximately 24% during the three months ended June 30, 1995. (Market size amounts; insured percentage and market share 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.) 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Gross premiums written for the three months ended June 30, 1996 were $58.1 million, an increase of 60% from $36.4 million in the three months ended June 30, 1995. 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) 1996 % 1995 % ----- --- ----- --- Municipal premiums: Up-front policies: New issue............................ $47.0 81% $21.4 59% Secondary market..................... 2.5 4 6.4 17 ----- --- ----- --- Sub-total up-front................. 49.5 85 27.8 76 ----- --- ----- --- Installment policies: Annual policies...................... 2.5 4 3.0 8 Portfolio products................... 1.0 2 1.4 4 ----- --- ----- --- Sub-total installment.............. 3.5 6 4.4 12 ----- --- ----- --- Total municipal premiums......... 53.0 91 32.2 88 ----- --- ----- --- Structured finance premiums: Up-front............................. 2.7 5 3.5 10 Installment.......................... 2.4 4 0.7 2 ----- --- ----- --- Total structured finance premiums 5.1 9 4.2 12 ----- --- ----- --- Total gross premiums..................... $58.1 100% $36.4 100% ===== === ===== ===
While most of AMBAC Indemnity's premiums written are collected up-front at policy issuance, a growing portion of premiums are collected on an installment basis. The present value of estimated future installment premiums written in the second quarter of 1996 was $22.0 million, an increase of 93% from $11.4 million in the second quarter of 1995. The net aggregate present value of estimated future installment premiums was $128.0 million and $110.0 million as of June 30, 1996 and December 31, 1995, respectively. Adjusted gross premiums, which represent up-front premiums written plus the present value of estimated future installment premiums written in the period, were $74.1 million in the second quarter of 1996, up 74% from $42.7 million in the second quarter of 1995. Ceded premiums written for the second quarter of 1996 were $9.8 million, versus ($6.5) million in the second quarter of 1995. Ceded premiums written in the second quarter of 1995 included the collection of $18.1 million in return premiums from the cancellation of reinsurance contracts. Excluding such return premiums, ceded premiums written in the second quarter of 1996 decreased by 16% compared to the second quarter of 1995. The decrease reflects lower premiums ceded under facultative reinsurance agreements in the second quarter of 1996. Net premiums written for the three months ended June 30, 1996 were $48.3 million, an increase of 13% from $42.9 million in the three months ended June 30, 1995. The increase in net premiums written in the second quarter of 1996 over the comparable prior period is less significant than the increase in gross premiums written. This is because net premiums written in the second quarter of 1995 reflect return premiums from the cancellation of reinsurance contracts in that period. Net premiums earned during the three months ended June 30, 1996 were $39.6 million, an increase of 42% from $27.8 million in the three months ended June 30, 1995. The increase was primarily the result of increased premiums earned from refundings and calls in the second quarter of 1996 and growth in premiums earned from the underlying book of business during the period. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Net premiums earned for 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 of previously insured issues. Net premiums earned in the three months ended June 30, 1995 included $5.4 million (which had a net income per common share effect of $0.08) 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, 1996 were $25.8 million, an increase of 15% from $22.5 million in the three months ended June 30, 1995. Net investment income for the three months ended June 30, 1996 was $35.5 million, an increase of 10% from $32.3 million in the three months ended June 30, 1995. The increase was primarily attributable to the growth of the investment portfolio partially offset by a slightly lower investment yield in the second quarter of 1996. AMBAC Indemnity's investments in tax-exempt securities amounted to 76% of the total market value of its portfolio as of June 30, 1996, versus 78% at June 30, 1995. The average pre-tax yield-to-maturity on the financial guarantee insurance investment portfolio was 6.49% and 6.57% as of June 30, 1996 and 1995, respectively. AMBAC Indemnity's net realized losses for the three months ended June 30, 1996 were ($22.1) million, versus ($2.2) million in the three months ended June 30, 1995. The net realized losses in the second quarter of 1996 were generated to partially offset the realized gain from the sale of HCIA. Losses and loss adjustment expenses for the three months ended June 30, 1996 were $1.7 million, versus $0.3 million in the three months ended June 30, 1995. Losses and loss adjustment expenses are generally based upon estimates of the ultimate aggregate losses inherent in the obligations insured in each period. Losses and loss adjustment expenses, exclusive of salvage recognized, were $1.7 million and $0.9 million for the three months ended June 30, 1996 and 1995, respectively. No salvage was recognized in the three month period ended June 30, 1996, as compared to $0.6 million in the comparable period in 1995. Underwriting and operating expenses for the second quarter of 1996 were $10.4 million, an increase of 14% from $9.1 million in the second quarter of 1995, primarily due to a non-recurring charge for severance of $1.0 million and higher amortization of previously deferred acquisition costs. 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, 1996, AMBAC Indemnity's gross underwriting and operating expenses were $15.1 million, an increase of 24% from $12.2 million in the three months ended June 30, 1995 primarily due to higher premium taxes and the severance charge discussed above. Underwriting and operating expenses deferred were $8.5 million and $6.4 million for the three months ended June 30, 1996 and 1995, respectively. Reinsurance commissions which relate to the current period were $0.3 million and ($0.6) million for the three months ended June 30, 1996 and 1995, respectively. The amortization of previously deferred expenses and reinsurance commissions was $3.4 million and $2.7 million for the three months ended June 30, 1996 and 1995, respectively. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) FINANCIAL SERVICES Through its financial services subsidiaries, the Company provides investment contracts, interest rate swaps and investment management principally to states, municipalities and municipal authorities. Financial services operating income (loss) for the three months ended June 30, 1996 was $2.7 million, versus ($0.8) million in the three months ended June 30, 1995. Financial services revenues for the second quarter of 1996 were $5.1 million, versus $1.1 million in the second quarter of 1995. The increase was primarily due to revenues on interest rate swaps during the second quarter of 1996. In the comparable prior period, market fears of broad based tax reform caused the Company to recognize net unrealized losses in the swap portfolio. Financial services expenses for the second quarter of 1996 were $2.4 million versus $1.8 million in the second quarter of 1995. The increased expenses were primarily due to start-up costs associated with the new investment management business which began in late 1995. CORPORATE ITEMS On May 6, 1996, the Company sold its 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). Interest expense for the three months ended June 30, 1996 was $5.2 million, unchanged from the comparable period in 1995. Other income (deductions), net, includes investment income and operating expenses of the parent company, AMBAC Inc. Other income (deductions) increased to $1.4 million in the second quarter of 1996 from ($0.2) million in the comparable period of 1995 due to additional investment income generated by the holding company from the proceeds of the HCIA sale. Income taxes for the three months ended June 30, 1996 were at an effective rate of 31.3%, versus 19.2% in the three months ended June 30, 1995. The increase is primarily the result of the realized gain from the sale of HCIA. SUPPLEMENTAL ANALYTICAL FINANCIAL DATA Core earnings for the three months ended June 30, 1996, were $41.8 million, an increase of 18% from $35.5 million for the three months ended June 30, 1995. The increase in core earnings was primarily due to the continued growth in net premiums earned and net investment income from financial guarantee insurance operations, as well as increased operating income from its financial services division. Core earnings, which the Company reports as analytical data, exclude the effect on consolidated net income from net realized gains and losses, net insurance premiums earned from refundings and calls and certain non-recurring items. Core earnings is not a substitute for net income computed in accordance with Generally Accepted Accounting Principles ("GAAP"), but is an important measure used by management, equity analysts and investors to measure the financial results of the Company. The definition of core earnings used by the Company may differ from definitions of core earnings used by other public financial guarantors and should be considered in such context. Operating earnings for the second quarter of 1996 were $49.6 million, an increase of 29% from $38.5 million in the second quarter of 1995. The Company defines operating earnings as net income, less the effect of net realized gains and losses and certain non-recurring items. Similar to core earnings, operating earnings is used by management, equity analysts and 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) investors to measure the financial results of the Company but is not a substitute for net income computed in accordance with GAAP. The following table reconciles net income computed in accordance with GAAP to operating earnings and core earnings for the three months ended June 30, 1996 and 1995:
(Dollars in Millions)/(1)/ 1996 1995 ------ ----- Net Income................................... $135.9 $37.0 Net realized (gains)/losses, after tax....... (86.3) 1.5 ------ ----- Operating earnings...................... 49.6 38.5 Premiums earned from refundings, calls and other accelerations, after tax (7.8) (2.9) ------ ----- Core earnings....................... $ 41.8 $35.5 ====== =====
(1) Numbers may not add due to rounding. The weighted average number of shares outstanding during the second quarter of 1996 and 1995 was 34.9 million and 35.1 million, respectively. RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1996 VERSUS SIX MONTHS ENDED JUNE 30, 1995 OVERVIEW The Company's net income for the six months ended June 30, 1996 was $180.5 million or $5.16 per common share, an increase of 157% from $70.3 million or $2.00 per common share in the six months ended June 30, 1995. The increase in net income for the six month period over the comparable prior period was primarily the result of the net realized gain of $155.6 million from the Company's sale of its affiliate, HCIA Inc. in May 1996. This gain was partially offset by net realized losses on sales of securities in its investment portfolio of $19.7 million. The increase in net income also resulted from higher financial guarantee insurance operating income resulting from the continued growth in net premiums earned and higher net investment income, as well as higher financial services operating income, partially offset by higher expenses. FINANCIAL GUARANTEE INSURANCE Financial guarantee insurance operating income for the six months ended June 30, 1996 was $100.4 million, an increase of 7% from $93.9 million in the six months ended June 30, 1995. The increase was primarily the result of increased premiums earned, increased investment income, partially offset by higher expenses in the period. AMBAC Indemnity insured $15.5 billion in par value bonds during the six months ended June 30, 1996, an increase of 57% from $9.9 billion in the six months ended June 30, 1995. Par value written for the six months ended June 30, 1996 comprised $11.7 billion from municipal bond insurance and $3.8 billion from structured finance insurance, versus $8.0 billion and $1.9 billion, respectively, in the comparable period in 1995. According to estimates based on industry sources, the total volume of new issues of municipal bonds increased 27% to $88.6 billion during the six months ended June 30, 1996 from $70.0 billion in the six months ended June 30, 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 1995. During the six months ended June 30, 1996, the insured portion of the new issue municipal bond market increased to 48.7% from 38.7% for the six months ended June 30, 1995, reflecting increased demand for insured bonds. During the six months ended June 30, 1996, AMBAC Indemnity's share of the long-term insured new issue municipal bond market, based on gross par amount of insurance written and stated as a percentage of total insured new issue municipal bonds, was approximately 27%, as compared to approximately 24% during the six months ended June 30, 1995. (Market size amounts, insured percentage and market share 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 for the six months ended June 30, 1996 were $108.4 million, an increase of 42% from $76.6 million in the six months ended June 30, 1995. 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) 1996 % 1995 % ------ --- ----- --- Municipal premiums: Up-front policies: New issue............................ $ 76.2 70% $45.5 60% Secondary market..................... 7.3 7 16.4 21 ------ --- ----- --- Sub-total up-front................. 83.5 77 61.9 81 ------ --- ----- --- Installment policies: Annual policies...................... 3.9 4 3.5 4 Portfolio products................... 2.1 2 2.9 4 ------ --- ----- --- Sub-total installment.............. 6.0 6 6.4 8 ------ --- ----- --- Total municipal premiums......... 89.5 83 68.3 89 ------ --- ----- --- Structured finance premiums: Up-front........................... 15.0 14 7.0 9 Installment........................ 3.9 3 1.3 2 ------ --- ----- --- Total structured finance premiums 18.9 17 8.3 11 ------ --- ----- --- Total gross premiums..................... $108.4 100% $76.6 100% ====== === ===== ===
While most of AMBAC Indemnity's premiums written are collected up-front at policy issuance, a growing portion of premiums are collected on an installment basis. The present value of estimated future installment premiums written in the six month period ended June 30, 1996 was $29.6 million, an increase of 97% from $15.0 million in the same period of 1995. The aggregate present value of estimated future installment premiums was $128.0 million and $110.0 million as of June 30, 1996 and December 31, 1995, respectively. Adjusted gross premiums, which represent up-front premiums written plus the present value of estimated future installment premiums written in the period, in the first six months of 1996 were $128.1 million, up 53% from $83.8 million in the comparable period of 1995. Ceded premiums written for the first six months of 1996 were $19.4 million, versus $(3.1) million in the comparable period of 1995. Ceded premiums written in the six months ended June 30, 1995, included the collection of $18.1 million in return premiums from the cancellation of reinsurance contracts. Excluding these return premiums, ceded premiums written in the six months ended June 30, 1996, increased by 29% compared to the same period 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) of 1995. The increase reflects higher premiums ceded under facultative and surplus share reinsurance agreements primarily related to structured finance transactions written in 1996. Net premiums written for the six months ended June 30, 1996 were $89.0 million, an increase of 12% from $79.7 million in the six months ended June 30, 1995. Net premiums earned during the six months ended June 30, 1996 were $67.8 million, an increase of 30% from $52.1 million in the six months ended June 30, 1995. The increase was primarily the result of higher premiums earned from refundings and calls and the growth in premiums earned from the underlying book of business in the six months ended June 30, 1996. Net premiums earned for the six months ended June 30, 1996 included $18.1 million (which had a net income per common share effect of $0.29) from refundings, calls and other accelerations of previously insured issues. Net premiums earned in the six months ended June 30, 1995 included $8.9 million (which had a net income per common share effect of $0.14) 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 30, 1996 were $49.8 million, an increase of 15% from $43.2 million in the six months ended June 30, 1995. Net investment income for the six months ended June 30, 1996 was $70.3 million, an increase of 10% from $64.0 million in the six months ended June 30, 1995. The increase was primarily attributable to the growth of the investment portfolio partially offset by a slightly lower investment yield in the first six months of 1996. AMBAC Indemnity's net realized losses for the six months ended June 30, 1996 were ($19.7) million, versus ($6.9) million in the six months ended June 30, 1995. The net realized losses in 1996 were generated mostly during the second quarter to partially offset the realized gain from the sale of HCIA. Losses and loss adjustment expenses for the six months ended June 30, 1996 were $2.5 million, versus $1.4 million in the six months ended June 30, 1995. Losses and loss adjustment expenses, exclusive of salvage recognized, were $2.6 million and $2.0 million for the six months ended June 30, 1996 and 1995, respectively. Salvage recognized amounted to $0.1 million and $0.6 for the six month periods ended June 30, 1996 and 1995, respectively. Underwriting and operating expenses for the first six months of 1996 were $19.1 million, an increase of 11% from $17.2 million in the comparable period of 1995, primarily due to a one time severance charge of $1.0 million incurred in the second quarter and higher amortization of previously deferred acquisition costs during the period. During the six month period ended June 30, 1996, AMBAC Indemnity's gross underwriting and operating expenses were $27.8 million, an increase of 12% from $24.8 million in the six months ended June 30, 1995, primarily due to higher premium taxes and the severance charge discussed above. Underwriting and operating expenses deferred were $15.5 million and $13.0 million for the six months ended June 30, 1996 and 1995, respectively. Reinsurance commissions which relate to the current period were $0.6 million and ($0.6) million for the six months ended June 30, 1996 and 1995, respectively. The amortization of previously deferred expenses and reinsurance commissions was $6.2 million and $4.8 million for the six months ended June 30, 1996 and 1995, respectively. 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) FINANCIAL SERVICES Financial services operating income for the six months ended June 30, 1996 was $7.6 million, versus $0.8 million in the six months ended June 30, 1995. Financial services revenues for the six months ended June 30, 1996, were $12.1 million, versus $4.5 million in the comparable period of 1995. The increase was primarily due to revenues on interest rate swaps during 1996. In comparison, during the second quarter of 1995 market fears of broad based tax reform caused the Company to recognize net unrealized losses in the swap portfolio. Financial services expenses for the six months ended June 30, 1996, were $4.5 million versus $3.7 million in the six months ended June 30, 1995. The increased expenses were primarily due to start-up costs associated with the new investment management business which began in late 1995. CORPORATE ITEMS Interest expense for the six months ended June 30, 1996 was $10.4 million, an increase of 2% from $10.2 million in the six months ended June 30, 1995, primarily due to higher commitment fees for credit facilities. Other income (deductions), net, which includes the investment income and operating expenses of the parent company, AMBAC Inc. increased to $0.9 million in the first six months of 1996 from ($0.4) million in the comparable period of 1995 due to additional investment income generated by AMBAC Inc. from the proceeds of the HCIA sale. Income taxes for the six months ended June 30, 1996 were at an effective rate of 29.2%, versus 18.4% in the six months ended June 30, 1995. The increase is primarily the result of the realized gain from the sale of HCIA. SUPPLEMENTAL ANALYTICAL FINANCIAL DATA For the six months ended June 30, 1996, core earnings were $82.4 million, an increase of 18% from $70.0 million for the six months ended June 30, 1995. The increase in core earnings was primarily due to the continued growth in net premiums earned and net investment income from financial guarantee insurance operations, as well as increased operating income from its financial services division, partially offset by increased expenses. Operating earnings for the first six months of 1996 were $92.7 million, an increase of 24% from $74.9 million in the comparable period of 1995. The following table reconciles net income computed in accordance with GAAP to operating earnings and core earnings for the six months ended June 30, 1996 and 1995:
(Dollars in Millions)/(1)/ 1996 1995 ------ ----- Net Income.............................. $180.5 $70.3 Net realized (gains)/losses, after tax.. (87.8) 4.6 ------ ----- Operating earnings................. 92.7 74.9 Premiums earned from refundings, calls and other accelerations, after tax............................ (10.2) (4.9) Core earnings...................... $ 82.4 $70.0 ====== =====
(1) Numbers may not add due to rounding. 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) See "Management's Discussion and Analysis - Results of Operations, Three Months Ended June 30, 1996 Versus Three Months Ended June 30, 1995," for definitions of "core earnings" and "operating earnings". The weighted average number of shares outstanding during the six month periods ended June 30, 1996 and 1995 were 35.0 million and 35.1 million, respectively. LIQUIDITY AND CAPITAL RESOURCES 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 Indemnity's ability to pay dividends or make payments to the Company and external financings. Pursuant to Wisconsin insurance laws, AMBAC Indemnity may declare dividends, provided that, after giving effect to the distribution, it would not violate certain statutory equity, solvency and asset tests. As of December 31, 1995, the maximum amount available during 1996 under Wisconsin's insurance laws and regulations for payment of dividends to the Company by AMBAC Indemnity without prior approval of regulatory authorities was approximately $86 million. However, on April 30, 1996, AMBAC Indemnity, with the approval of the Office of the Commissioner of Insurance of the State of Wisconsin (the "Wisconsin Commissioner"), transferred its 2,378,672 shares of HCIA to the Company in the form of an extraordinary dividend, at fair value. The Company subsequently sold all 4,159,505 of its shares on May 6, 1996. As a result of such dividend, any dividends paid by AMBAC Indemnity to the Company for the twelve months following April 30, 1996, will require pre-approval from the Wisconsin Commissioner. However, the Wisconsin Commissioner has stated to AMBAC Indemnity management that, based on AMBAC Indemnity's financial position as of the date of the Wisconsin Commissioner's approval of the extraordinary dividend, it anticipates that quarterly dividend payments for the balance of 1996 similar to those made during 1995 will not be disapproved. During the six months ended June 30, 1996, AMBAC Indemnity paid dividends to the Company totaling $20 million. The holding 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 AMBAC Indemnity expects to pay during 1996 with the anticipated prior approval of regulatory authorities along with the proceeds from its sale of HCIA common stock, 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 dividend policy. Beyond the next twelve months, AMBAC Indemnity'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 Indemnity will be permitted to dividend amounts sufficient to pay all of the Company's operating expenses, debt service obligations and dividends on its Common Stock. The principal uses of AMBAC Indemnity's liquidity are the payment of operating expenses, reinsurance premiums, income taxes and dividends to the Company. The Company 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) believes that AMBAC Indemnity's operating liquidity needs can be funded exclusively from its operating cash flow. The principal sources of AMBAC Indemnity's liquidity are gross premiums written, scheduled investment maturities and net investment income. Premiums for AMBAC Indemnity's financial guarantee insurance policies are, in most cases, 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. The principal uses of liquidity by the Company's financial services subsidiaries are the payment of investment contract obligations pursuant to defined terms, obligations under interest rate swaps, operating expenses and income taxes. The Company believes that its financial 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 services liquidity are proceeds from issuance of investment contracts, 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 contracts, and receipts from interest rate swaps. The Company's investment objective with respect to investment contracts is to achieve the highest after-tax total return, subject to a minimum average quality rating of Aa/AA on invested assets and maintaining cash flow matching of invested assets to funded liabilities to minimize interest rate and liquidity exposure. The Company maintains a portion of its financial services assets in short-term investments and repurchase agreements in order to meet unexpected liquidity needs. As of June 30, 1996, the Company and AMBAC Indemnity had a three-year revolving credit facility with two major international banks, as co-agents, for $100 million, which expires in July 1998. This facility is available for general corporate purposes, including the payment of claims. As of June 30, 1996 and 1995, no amounts were outstanding under this credit facility. AMBAC Indemnity has an agreement with another major international bank, as agent, for a $300 million credit facility, expiring in 2002. This facility is a seven-year stand-by irrevocable limited recourse line-of-credit, which will provide liquidity to AMBAC Indemnity in the event 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, 1996 and 1995, no amounts were outstanding under this line. During the six months ended June 30, 1996, the Company acquired 430,000 treasury shares in the open market under its existing stock repurchase program. Adjusted Book Value ("ABV") per common share increased 3% to $57.89 at June 30, 1996 from $56.47 at December 31, 1995. ABV, which is not promulgated under Generally Accepted Accounting Principles ("GAAP"), is used by management, equity analysts and investors as a measure of the company's intrinsic value, with no benefit given for ongoing business activity. Management derives ABV by beginning with stockholders' equity (book value) and adding or subtracting the after-tax effect of: (i) balance sheet items where revenue has been collected and deferred or an expense has been incurred and deferred, which will be recognized in income with the passage of time; (ii) material off-balance sheet assets and liabilities; and (iii) material mark-to-market adjustments to assets and liabilities recorded on the balance sheet using an accounting policy which differs materially from market value. The definition of ABV used by the Company differs from definitions of ABV used by other public financial guarantors, and should be considered in such context. The adjustments described 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) above will not be realized until future periods and may materially differ from the amounts used in determining ABV. The following table reconciles Book Value Per Share to Adjusted Book Value Per Share as of June 30, 1996 and December 31, 1995:
June 30, December 31, 1996/(1)/ 1995/(1)/ --------- ------------ Book value per share.................... $42.26 $40.04 After-tax value of: Net unearned premium reserve........ 14.38 13.89 Deferred acquisition costs.......... (1.64) (1.54) Present value of installment premiums........................... 2.38 2.05 Unrealized gain on investment in HCIA/(2)/.......................... - 2.77 Unrealized gain (loss) on investment contract liabilities.... 0.50 (0.74) ------ ------ Adjusted book value per share........... $57.89 $56.47 ====== ======
(1) Numbers may not add due to rounding. (2) The Company sold its remaining investment in HCIA on May 6, 1996. As of June 30, 1996, the fair value of the Company's consolidated investment portfolio was $5.05 billion, an increase of 14% from $4.44 billion at December 31, 1995. The increase was primarily due to the growth of the Company's financial guarantee insurance and financial services operations and the proceeds from the sale of HCIA, partially offset by a decline in market value of the Company's investment portfolio resulting from the increase in interest rates during the six months ended June 30, 1996. Net cash provided by operating activities was $84.3 million and $92.9 million during the six months ended June 30, 1996 and 1995, respectively. These cash flows were primarily provided by the financial guarantee insurance operations. Net cash provided by financing activities was $391.9 million and $110.1 million during the six months ended June 30, 1996 and 1995, respectively. This activity included $415.6 million and $117.0 million, respectively, in municipal investment contracts issued (net of draws paid). The total cash provided by operating and financing activities was $476.2 million and $203.0 million during the six months ended June 30, 1996 and 1995, respectively. From these totals, $482.9 million and $200.1 million was used in investing activities, principally purchases of bonds, offset by proceeds from sale of affiliate and sales and maturities of bonds during the six months ended June 30, 1996 and 1995, respectively. 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. In the normal course of business, the Company uses interest rate contracts for hedging purposes as part of its overall interest rate risk management. The Company also 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. In addition, one of the Company's financial services subsidiaries, AMBAC Financial Services, Limited Partnership ("AFS"), is an interest 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) rate swaps dealer principally to states, municipalities and municipal authorities. AFS manages its interest rate swap business with the goal of being market neutral to changes in overall interest rates, while retaining "basis risk," the relationship between changes in floating tax-exempt and taxable interest rates. If actual or projected floating tax-exempt interest rates rise in relation to floating taxable interest rates, AFS will experience an unrealized mark-to-market loss. Conversely, if actual or projected floating tax-exempt interest rates decline in relation to floating taxable interest rates, AFS will experience an unrealized mark-to-market gain. 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 15, 1996, 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 30,778,914 1,300 Michael A. Callen 30,778,914 1,300 Renso L. Caporali 30,778,764 1,450 Richard Dulude 30,778,769 1,445 W. Grant Gregory 30,778,914 1,300 C. Roderick O'Neil 30,778,869 1,345
There were 4,239,874 broker non-votes for this proposal. PROPOSAL 2 The proposal to ratify the selection of KPMG Peat Marwick ---------- LLP as independent auditors of the Company and its subsidiaries for 1996 was adopted, with 30,704,254 votes in favor, 11,313 votes against and 3,996 votes abstaining. There were 4,300,525 broker non-votes for this proposal. ITEM 5 - OTHER INFORMATION On August 8, 1996, AMBAC Capital Corporation, a wholly-owned subsidiary of the Company, acquired a controlling equity interest in USA Services, Inc., a Delaware corporation ("USA Services"), and a successor corporation to Advanced Procurement Systems, Inc., a Texas corporation. USA Services is an Austin, Texas based computer software company that provides procurement software to state and local governments. 21 PART II - OTHER INFORMATION ITEM 6 - EXHIBITS THE FOLLOWING ARE ANNEXED AS EXHIBITS:
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 11.00 Statement re computation of per share earnings. 27.00 Financial Data Schedule. 99.04 AMBAC Indemnity Corporation and Subsidiaries Consolidated Unaudited Financial Statements as of June 30, 1996 and December 31, 1995 and for the periods ended June 30, 1996 and 1995.
22 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 INC. (REGISTRANT) DATED: AUGUST 14, 1996 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) 23 INDEX TO EXHIBITS
EXHIBIT DESCRIPTION NUMBER ----------- - ------- 11.00 Statement re computation of per share earnings. 27.00 Financial Data Schedule. 99.04 AMBAC Indemnity Corporation and Subsidiaries Consolidated Unaudited Financial Statements as of June 30, 1996 and December 31, 1995 and for the periods ended June 30, 1996 and 1995.
24

 
                                                                      EXHIBIT 11



                          AMBAC INC. AND SUBSIDIARIES
                 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
                FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1996
                (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, 1996 JUNE 30, 1996 ------------------ ---------------- Net income.................................... $135,947 $180,500 -------- -------- Fully diluted shares: Average number of common shares outstanding 34,915 34,985 Assumed exercise of dilutive stock......... 662 662 options (1)............................... -------- -------- 35,577 35,647 ======== ======== Earnings per share assuming full dilution (2) $ 3.82 $ 5.06 ======== ========
(1) As of June 30, 1996, approximately 2,425,000 stock options and restricted stock units had been granted and were outstanding. Based upon various exercise prices, the total consideration for the options and restricted stock units will be approximately $91.9 million. The dilution would be the equivalent of approximately 662,000 shares, using the treasury stock method, based upon a market value of $52.13 per share. (2) In accordance with Accounting Principles Board Opinion No. 15, any reduction of less than 3% need not be considered as dilution. Accordingly, the consolidated statements of operations on page 4 of this report reflect net income per common share of $3.89 and $5.16 for the three and six months ended June 30, 1996, respectively.
 


7 1,000 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 4,814,547 0 0 0 0 0 5,045,522 5,386 0 88,107 5,690,942 59,429 932,935 0 0 223,765 0 0 353 1,471,851 5,690,942 67,838 70,325 135,869 3,628 2,510 19,099 0 254,784 74,284 180,500 0 0 0 180,500 5.16 5.16 0 0 0 0 0 0 0


                                                                   EXHIBIT 99.04

                 AMBAC Indemnity Corporation and Subsidiaries
                  Consolidated Unaudited Financial Statements
                   as of June 30, 1996 and December 31, 1995
              and for the six months ended June 30, 1996 and 1995




                 AMBAC Indemnity Corporation and Subsidiaries
                          Consolidated Balance Sheets
                      June 30, 1996 and December 31, 1995
                   (Dollars in Thousands Except Share Data)

June 30, 1996 December 31, 1995 ------------- ----------------- (unaudited) Assets - ------ Investments: Bonds held in available for sale account, at fair value (amortized cost of $2,162,449 in 1996 and $2,090,101 in 1995) $2,214,817 $2,224,528 Short-term investments, at cost (approximates fair value) 133,629 163,953 ---------- ---------- Total investments 2,348,446 2,388,481 Cash 3,888 6,912 Securities purchased under agreements to resell 3,992 4,120 Receivable for securities 64,288 8,136 Investment income due and accrued 40,207 38,319 Investment in affiliate - 25,827 Deferred acquisition costs 88,107 82,620 Current income taxes - 2,171 Prepaid reinsurance 162,166 153,372 Other assets 54,378 48,472 ---------- ---------- Total assets $2,765,472 $2,758,430 ========== ========== Liabilities and Stockholder's Equity Liabilities: Unearned premiums $936,870 $906,136 Losses and loss adjustment expenses 59,429 65,996 Ceded reinsurance balances payable 6,765 14,654 Deferred income taxes 57,190 85,008 Current income taxes 3,116 - Accounts payable and other liabilities 47,035 43,625 Payable for securities 112,413 86,304 ---------- ---------- Total liabilities 1,222,818 1,201,723 ---------- ---------- Stockholder's equity: Preferred stock, par value $1,000.00 per share; authorized shares - 285,000; issued and outstanding shares - none - - Common stock, par value $2.50 per share; authorized shares - 40,000,000; issued and outstanding shares - 32,800,000 at June 30, 1996 and December 31, 1995 82,000 82,000 Additional paid-in capital 514,305 481,059 Unrealized gains (losses) on investments, net of tax 34,039 87,112 Retained earnings 912,310 906,536 ---------- ---------- Total stockholder's equity 1,542,654 1,556,707 ---------- ---------- Total liabilities and stockholder's equity $2,765,472 $2,758,430 ========== ==========
See accompanying Notes to Consolidated Financial Statements. AMBAC Indemnity Corporation and Subsidiaries Consolidated Statements of Operations (Unaudited) For The Periods Ended June 30, 1996 and 1995 (Dollars in Thousands)
Three Months Ended Six Months Ended June 30, June 30, ----------------------- ------------------------ 1996 1995 1996 1995 ------- ------- -------- ------- Revenues: Gross premiums written $58,768 $36,893 $110,060 $77,465 Ceded premiums written (9,836) 6,514 (19,448) 3,055 ------- ------- -------- ------- Net premiums written 48,932 43,407 90,612 80,520 Increase in unearned premiums (8,870) (15,126) (21,940) (27,563) ------- ------- -------- ------- Net premiums earned 40,062 28,281 68,672 52,957 Net investment income 35,584 32,419 70,489 64,293 Net realized gains (losses) 67,580 (2,202) 69,936 (6,876) Other income 4,753 (393) 10,805 1,985 ------- ------- -------- ------- Total revenues 147,979 58,105 219,902 112,359 ------- ------- -------- ------- Expenses: Losses and loss adjustment expenses 1,700 341 2,510 1,369 Underwriting and operating expenses 11,583 9,916 21,666 19,246 Interest expense 514 306 1,028 637 ------- ------- -------- ------- Total expenses 13,797 10,563 25,204 21,252 ------- ------- -------- ------- Income before income taxes 134,182 47,542 194,698 91,107 ------- ------- -------- ------- Income tax expense: Current taxes 38,665 6,696 52,313 13,543 Deferred taxes 806 2,458 760 3,666 ------- ------- -------- ------- Total income taxes 39,471 9,154 53,073 17,209 ------- ------- -------- ------- Net income 94,711 38,388 141,625 73,898 ======= ======= ======== =======
See accompanying Notes to Consolidated Unaudited Financial Statements AMBAC Indemnity Corporation and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) For The Periods Ended June 30, 1996 and 1995 (Dollars in Thousands)
Six Months Ended June 30, -------------------------- 1996 1995 -------- ----------- Cash flows from operating activities: Net income $141,625 $73,898 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 950 678 Amortization of bond premium and discount (811) (440) Current income taxes payable 5,287 574 Deferred income taxes payable 760 3,666 Deferred acquisition costs (5,487) (9,366) Unearned premiums 21,940 27,563 Losses and loss adjustment expenses (6,567) 45 Ceded reinsurance balances payable (7,889) (422) (Gain) loss on sales of investments (69,936) 6,876 Other, net (8,685) (6,538) -------- ----------- Net cash provided by operating activities 71,187 96,534 -------- ----------- Cash flows from investing activities: Proceeds from sales of bonds at amortized cost 742,407 837,619 Proceeds from maturities of bonds at amortized cost 43,165 70,281 Purchases of bonds at amortized cost (901,331) (1,001,767) Change in short-term investments 30,324 19,183 Proceeds from sale of affiliate 115,865 - Securities purchased under agreements to resell 128 (392) Other, net (1,404) (223) -------- ----------- Net cash provided by (used in) investing activities 29,154 (75,299) -------- ----------- Cash flows from financing activities: Dividends paid (135,865) (20,000) Capital contribution 32,500 - -------- ----------- Net cash used in financing activities (103,365) (20,000) -------- ----------- Net cash flow (3,024) 1,235 Cash at beginning of year 6,912 2,117 -------- ----------- Cash at June 30 $3,888 $3,352 ======== =========== Supplemental disclosure of cash flow information: Cash paid during the year for: Income taxes $13,300 $12,700 ======== ===========
See accompanying Notes to Consolidated Financial Statements. AMBAC INDEMNITY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (1) BASIS OF PRESENTATION AMBAC Indemnity Corporation ("AMBAC Indemnity") is a leading insurer of municipal and structured finance obligations. Financial guarantee insurance underwritten by AMBAC Indemnity guarantees payment when due of the principal of and interest on the obligation insured. In the case of a default on the insured obligation, payments under the insurance policy may not be accelerated by the policyholder without AMBAC Indemnity's consent. As of June 30, 1996, AMBAC Indemnity's net insurance in force (principal and interest) was $209.3 billion. AMBAC Indemnity is a wholly-owned subsidiary of AMBAC Inc., which is a holding company that provides through its affiliates financial guarantee insurance and financial services to both public and private clients. AMBAC Indemnity has one wholly-owned subsidiary, American Municipal Bond Holding Company ("AMBH"), which is a holding company for certain real estate interests. On May 6, 1996, AMBAC Inc. sold its 4,159,505 shares of common stock of its affiliate, HCIA Inc. (NASDAQ:HCIA) ("HCIA") in a secondary public offering. Prior to consummation of the secondary public offering, AMBAC Indemnity delivered to AMBAC Inc. (in the form of an extraordinary dividend) its 2,378,672 shares of HCIA common stock, at fair value. The fair value of the HCIA shares was $115.9 million, based on the offering price per share of HCIA common stock in the secondary public offering. The carrying value of AMBAC Indemnity's HCIA shares was $26.2 million, and the resulting gain to AMBAC Indemnity from the disposition of the shares was $89.7 million. As a result of the secondary public offering, neither AMBAC Indemnity, nor AMBAC Inc. owned any shares of HCIA. AMBAC Indemnity, as the sole limited partner, owns 90% of the total partnership interests of AMBAC Financial Services, Limited Partnership ("AFS"), a limited partnership which provides interest rate swaps primarily to states, municipalities and municipal authorities. The sole general partner of AFS, AMBAC Financial Services Holdings, Inc., a wholly-owned subsidiary of AMBAC Inc., owns a general partnership interest representing 10% of the total partnership interest in AFS. AMBAC Indemnity's consolidated unaudited interim financial statements have been prepared on the basis of generally accepted accounting principles and, in the opinion of management, reflect all adjustments necessary for a fair presentation of the Company's financial condition, results of operations and cash flows for the periods presented. The results of operations for the six months ended June 30, 1996 may not be indicative of the results that may be expected for the full year ending December 31, 1996. These financial statements and notes should be read in conjunction with the financial statements and notes included in the audited consolidated financial statements of AMBAC Indemnity Corporation and its subsidiaries as of December 31, 1995 and 1994, and for each of the years in the three-year period ended December 31, 1995. AMBAC INDEMNITY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (CONTINUED) (2) INCOME TAXES The tax provisions in the accompanying financial statements reflect effective tax rates differing from prevailing federal corporate income tax rates, primarily as a result of tax-exempt interest income.