Ambac Financial Group, Inc.

International Directory of Company Histories, Volume 65 (1994) by Kathleen Peippo

Ambac Financial Group, Inc.

One State Street Place New York, New York 10004 U.S.A. Telephone: (212) 668-0340 Toll Free: (800) 221-1854 Fax: (212) 509-9190 Web site: http://www.ambac.com

Public Company Founded: 1971 as American Municipal Bond Assurance Corporation Employees: 400 Total Assets: $16.74 billion (2003) Stock Exchanges: New York Ticker Symbol: ABK NAIC: 551112 Offices of Other Holding Companies

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.