American Municipal Bond Assurance Corporation Details

AMBAC is an American company that globally provides bond insurance to clients in both the public and private sectors. When bondholders contract AMBAC services, they're assured of repayment, thus reducing interest costs.

AMBAC warrants are currently listed in the New York Stock Exchange, and the Wisconsin Insurance Commission insures the company. The company achieves maximum returns for shareholders by implementing strategies to reduce risk and increase the issued bonds' credit rating. Insured bonds command higher prices in the market, have low-interest rates, and enjoy more liquidity when compared to uninsured bonds.

There are two types of municipal bonds:

  • General Obligation Bonds: They are issued by local counties or governments not secured by any assets. General obligation bonds have the power to tax residents to pay bondholders. Property taxes are an example of general obligation bonds.
  • Revenue Bonds: These are agencies created by states to perform certain functions and distribute bonds for precise needs, such as constructing a bridge or even a school. Revenue bonds have the power to charge for their services through a contractual arrangement with a government entity.

Example of American Municipal Bond Assurance Corporation

Let's say client A (the issuer) decides on contracting AMBAC to insure against the default of a municipal bond. AMBAC will price the insurance premium payments based on the risk it identifies from client A. If client A fails to make scheduled payments during the municipal bond duration, AMBAC takes responsibility and makes the payments on behalf of client A.

This arrangement increases client A investors' confidence as they're assured that AMBAC will make the payments if client A defaults. The only thing that client A investors are concerned about is AMBAC's credit rating. Client A's access to debt markets increases due to credit enhancement, resulting from the security's increased value.

AMBAC gets paid a premium by Client A either in installments or as a lump sum. The premium is equal to the perceived risk of failure of Client A. It can also be calculated from the interest savings realized by Client A when he contracted AMBAC services.

History of American Municipal Bond Assurance Corporation

The American Municipal Bond Assurance Corporation was founded in 1971 in Wisconsin to ensure municipal bonds' principal and interest against default. In 1985, Citibank obtained majority control of Ambac. The remaining Ambac shares were subdivided among other investors, including Xerox Corp., Ambac management, and Stephens Inc., an investment banking firm.

In 1989, Citibank purchased the remaining shares from its partners, making it the sole owner of Ambac. As a result, Ambac failed its interest payment debt on November 1, 2010, making them file for bankruptcy protection on November 8, 2010.

The board then decided to choose Tavakoli as the firm's new President and CEO. His managerial skills substantially changed the firm through risk and loss analytics and operational efficiency. In 2017, Claude LeBlanc became the CEO.