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Ambac Financial Group, Inc.'s (Ambac) primary operating subsidiary, the AAA-rated Ambac Assurance Corporation, was the first to offer insurance on municipal bonds. The subsidiary is now the cornerstone of its increasingly diversified parent company. Ambac Financial's core business areas involve public, structured, and international finance.
In Wisconsin: 1960s-70s
Ambac's story begins in Milwaukee, Wisconsin. MGIC Investment Corp., a holding company with its primary business in home mortgage insurance, began a diversification drive in the late 1960s. The company first expanded into commercial building mortgage insurance and then picked up home building and land development concerns. Gerald L. Friedman, nephew of founder Max H. Karl, was instrumental in the establishment of an endeavor that took them further from their core business area.
American Municipal Bond Assurance Corporation (AMBAC) was created in 1971 to insure the principal and interest of municipal bonds against default. The company's first issue was a general obligation bond for construction on an Alaskan medical facility. AMBAC's first competitor came along three years later. The Municipal Bond Insurance Association (MBIA) was formed as a consortium of major insurance companies--Aetna, Fireman's Fund, Travelers, Cigna, and Continental--according to Business Week.
Just as AMBAC faced its first challenger in the industry it had pioneered, MGIC's fortunes turned toward the worse. The company suffered a $1.9 million loss in 1974. Reorganization followed. Lines of business were dropped. Friedman took over operations as president, with his uncle in the post of chairman.
The difficulties of another entity actually helped AMBAC at this time. New York City's well publicized financial woes drove up the demand for bond insurance in 1975.
Back on track in the late 1970s, MGIC drew the attention of a suitor, Baldwin-United Corp. The multibillion-dollar holding company owned insurance and savings and loan operations and was identified with annuities and S&H Green Stamps.
In 1981, MGIC lost its independence and its president. In addition, AMBAC moved to the Big Apple.
New York Minutes: 1980s
"Friedman says he fought selling MGIC to Baldwin-United because he feared an alliance with a 'second-rate company with weak management and a very weak balance sheet' would undermine his plans to move AMBAC into other kinds of financial guarantees," according to Business Week. He left in protest of the deal.
The weight of the $1.2 billion price tag on MGIC contributed to the collapse of Baldwin-United in 1983. In addition, a for-sale sign went up on its subsidiaries. AMBAC was forced into a defensive posture just as a new competitor entered the market. Friedman established Financial Guaranty Insurance Co. (FGIC) in alliance with General Electric Credit, Merrill Lynch, Morgan, General Re, Shearson Lehman/American Express, and Kemper Group.
Coming off a record year in 1982, AMBAC's prospects for 1983 looked even better. But uncertainty surrounding its future, plus heavy-hitting competition, knocked the bond insurer off its top spot in the industry. MBIA usurped AMBAC as the leader in municipal bond insurance in 1984.
Furthermore, AMBAC had to begin paying on Washington Public Power Supply System bonds. AMBAC's liability on the default, which totaled $2.25 billion, was an estimated $75 million. Even though the claims would be paid over the life of the bond, AMBAC was required to up its reserves.
Yet, it was just this financial vulnerability of large institutions that drove the industry in which AMBAC operated. "When you step back and look at the growth of financial guarantees, it is a sad commentary on the condition of the municipal and corporate sectors," Robert Mebus, a managing director of Standard & Poor's told Business Week.
In 1985, Citibank (the principal subsidiary of Citicorp) acquired majority control of Ambac Inc., parent company of AMBAC. Other investors, including Xerox Corp., Ambac management, and Stephens Inc., an investment banking firm, held the remaining equity. The estimated sale price ranged from $150 million to $200 million, according to the Wall Street Journal.
Citibank infused the company with additional capital. At the time of purchase, AMBAC held about 40 percent of the municipal bond insurance market. Anticipating the Tax Reform Act of 1986, municipalities doubled the high watermark of any previous year and issued $207 billion of long-term debt in 1985.
AMBAC's share of the insured new municipal issue market was 26.2 percent in 1986. But the Citibank subsidiary was regaining ground, climbing to 30.6 percent in 1988.
In 1989, Citibank gained sole ownership of the municipal bond insurer, purchasing the remaining shares it had not already secured from its former partners. About that time, allegations regarding Citibank's parent company, pertaining to its business practices, were leveled by a competitor. "FGIC said it believes Citicorp is exploiting a loophole in banking regulations and that it 'double-counts' Ambac's capital for its own banking purposes. That allows Ambac to unfairly cut prices and expand its market share," according to the Wall Street Journal. Citicorp denied the double-counting charge.
Open to the Public: 1990s
Ambac's net premiums written exceeded $100 million in 1990. But Citicorp was trying to exit the business. When a direct deal to sell failed, Citicorp switched gears and offered slightly more than half of its ownership in the company as common stock to the public.
"By reducing its stake, Citicorp removed Ambac from its books and cut by nearly $1 billion the amount of capital it needs to meet regulators' minimum capital standards, moving the giant banking company into compliance with the minimum capital standards that become effective at the end of 1992," reported the New York Times. More than $86 billion in municipal bonds was insured by Ambac.
Phillip B. Lassiter, moving over from Citibank, was named Ambac Inc. chairman and CEO following the public offering. Citibank sold its remaining shares to the public in February 1992, making Ambac the first bond insurer to be 100 percent publicly held. Trading at nearly $32 per share, the stock had climbed more than 50 percent since the initial public offering in July 1991.
The complete divestiture was prompted by the strength of the stock market, difficulty in Citicorp's core businesses, and a call by the feds for Citicorp to cease double counting its capital, according to the Bond Buyer.
As a part of a streamlining effort, Lassiter took on the additional role of president in August 1992. Product diversification was ratcheted up. In 1993, Ambac entered the fray for guarantees on asset-backed and structured issues. Finally, in 1994, the company began making municipal interest rate swaps, the only company of its type to do so. The move put Ambac into competition with investment banks and securities dealers, among their customers for the core municipal bond insurance business. The demand for bond insurance by states, counties, cities, and towns continued to grow, and the top four insurers held the lion's share of the market.
The bankruptcy of Orange County, California, in 1994 was a double-edged sword for the industry. The potential for municipal failure was once again highlighted but so was the risk to investors in publicly held municipal bond insurers. Seeking to broaden its business outside the country, in 1995, Ambac established a joint venture with MBIA for reinsurance and marketing purposes.
In 1997, the company changed its name to reflect its expansion into new areas of business. Ambac Inc. was renamed Ambac Financial Group, Inc. The municipal insurance subsidiary was renamed Ambac Assurance. The company continued to fine-tune its product mix by buying and selling smaller operations.
The municipal bond business had experienced two decades of double-digit growth. Although growth continued to be strong, market penetration for new bond issues had reached about 50 percent by 1998. Analysts engaged in speculation over the level of success new ventures by bond insurers could achieve, relative to their core business area.
Ambac dropped to fourth place among insurers of municipal bonds during 1998, but outshined its publicly held rivals in terms of the stock market with a rise of 31 percent. Ambac's unwillingness to discount premium prices had eroded market share, but its entry into sectors with higher premiums and brighter growth prospects helped drive up its value on The Street. Ambac's nonmunicipal activities, which accounted for just 6 percent of business in 1994, reached 43 percent in 1998.
Riskier Business: 2000-04
The new century marked Ambac's inclusion on the S&P 500. Technology stocks took a beating during the year. Financial guarantors, still producing double-digit growth, outperformed the market. In addition, Ambac outpaced the two other publicly held bond insurers, once again, with stock rising 67.6 percent on the year.
Ambac dissolved its international joint venture with MBIA in 2000 and opened offices in Tokyo and Sydney in 2001.
The events of September 11, 2001, traumatized the financial industry. Ambac employees had to evacuate their offices near the World Trade Center. Potential claim exposure lay in its credit risks attached to airports and airlines, sectors hard hit by the attacks and the post-9/11 environment.
Bond insurers recorded their best ever year in 2002, with $176.75 billion in volume. The industry benefited from investor fears in the wake of credit defaults, a lowering of interest rates by the Federal Reserve, which drove refunding, and a drop-off in municipal revenue, which forced more borrowing, according to the Bond Buyer. The strength of the bond market helped Ambac achieve 89th place on The Boston Group list of the world's best performing financial stocks during the period from 1998-2002.
Economic conditions helped drive up claims paid during 2003, but Ambac continued to produce strong growth and profit. The country's pressing infrastructure needs and budget shortfalls contributed to record municipal bond issuance. Activity in the United Kingdom helped yield record results in international operations. Structured finance, which included asset-backed business, faced a challenging year. Mortgages and home loans had dominated this segment, but Ambac also had added riskier auto loan and credit card receivables.
Lassiter stepped down as CEO in January 2004 but continued to serve as chairman of the board. Robert J. Genader, 18-year veteran of Ambac and president and chief operating officer, succeeded him.
Principal Subsidiaries: Ambac Assurance Corporation.
Principal Competitors: Financial Guaranty Insurance Co.; Financial Security Assurance; MBIA Insurance Corporation.
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