AMBAC FINANCIAL GROUP INC [AMBC] Filings

10-Q 1 ambc-20220331.htm 10-Q ambc-20220331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM						10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2022


☐			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 World Trade Center

New York

10007

(Address of principal executive offices)

(Zip code)


	(212)	658-7470
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common stock par value $0.01 per share

AMBC

New York Stock Exchange

Warrants

AMBC WS

New York Stock Exchange

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 ☒ No ☐

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act): (Check one):

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒ No ☐

As of May 6, 2022, 45,039,916 shares of common stock, par value $0.01 per share, of the Registrant were outstanding.

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

TABLE OF CONTENTS


Cautionary Statement Pursuant to the Private Securities Litigation Reform Act of 1995					1

Item Number		Page	Item Number		Page
PART I. FINANCIAL INFORMATION			PART I (CONTINUED)
1	Unaudited Consolidated Financial Statements of Ambac Financial Group, Inc. and Subsidiaries			U.S. Insurance Statutory Basis Financial Results	66
	Consolidated Balance Sheets (Unaudited)	3		Ambac Assurance UK Limited Financial Results Under UK Accounting Principles	67
	Consolidated Statements of Total Comprehensive Income (Loss) (Unaudited)	4		Non-GAAP Financial Measures	67
	Consolidated Statements of Stockholders' Equity (Unaudited)	5	3	Quantitative and Qualitative Disclosures About Market Risk	69
	Consolidated Statements of Cash Flows (Unaudited)	6	4	Controls and Procedures	69
	Notes to Unaudited Consolidated Financial Statements	7
2	Management's Discussion and Analysis of Financial Condition and Results of Operations	45	PART II. OTHER INFORMATION
	Executive Summary	45	1	Legal Proceedings	69
	Critical Accounting Policies and Estimates	48	1A	Risk Factors	69
	Financial Guarantees in Force	48	2	Unregistered Sales of Equity Securities and Use of Proceeds	71
	Results of Operations	53	3	Defaults Upon Senior Securities	71
	Liquidity and Capital Resources	58	5	Other Information	72
	Balance Sheet	60	6	Exhibits	71
	Variable Interest Entities	66	SIGNATURES		72
	Accounting Standards	66

| Ambac Financial Group, Inc. i 2022 First Quarter FORM 10-Q |

Table of Contents

CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Management has included in Parts I and II of this Quarterly Report on Form 10-Q, including this MD&A, statements that may constitute “forward-looking statements” within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Words such as “estimate,” “project,” “plan,” “believe,” “anticipate,” “intend,” “planned,” “potential” and similar expressions, or future or conditional verbs such as “will,” “should,” “would,” “could,” and “may,” or the negative of those expressions or verbs, identify forward-looking statements. We caution readers that these statements are not guarantees of future performance. Forward-looking statements are not historical facts but instead represent only our beliefs regarding future events, which may by their nature be inherently uncertain and some of which may be outside our control. These statements may relate to plans and objectives with respect to the future, among other things which may change. We are alerting you to the possibility that our actual results may differ, possibly materially, from the expected objectives or anticipated results that may be suggested, expressed or implied by these forward-looking statements. Important factors that could cause our results to differ, possibly materially, from those indicated in the forward-looking statements include, among others, those discussed under “Risk Factors” in Part I, Item 1A of the 2021 Annual Report on Form 10-K and in Part II, Item 1A of this quarterly Report on Form 10-Q.

Any or all of management’s forward-looking statements here or in other publications may turn out to be incorrect and are based on management’s current belief or opinions. Ambac Financial Group’s (“AFG”) and its subsidiaries’ (collectively, “Ambac” or the “Company”) actual results may vary materially, and there are no guarantees about the performance of Ambac’s securities. Among events, risks, uncertainties or factors that could cause actual results to differ materially are: (1) the highly speculative nature of AFG’s common stock and volatility in the price of AFG’s common stock; (2) uncertainty concerning the Company’s ability to achieve value for holders of its securities, whether from Ambac Assurance Corporation (“AAC”) and its subsidiaries or from the specialty property and casualty program insurance business, the distribution business, or related businesses; (3) the inability of AAC to realize the expected recoveries, including RMBS litigation recoveries, included in its financial statements, or changes in estimated RMBS litigation recoveries over time; (4) failure to recover claims paid on Puerto Rico exposures or realization of losses in amounts higher than expected; (5) inadequacy of reserves established for losses and loss expenses and possibility that changes in loss reserves may result in further volatility of earnings or financial results; (6) potential for rehabilitation proceedings or other regulatory intervention against AAC; (7) credit risk throughout Ambac’s business, including but not limited to credit risk related to insured residential mortgage-backed securities, student loan and other asset securitizations, public finance obligations (including risks associated with Chapter 9 and other restructuring proceedings), issuers of securities in our investment portfolios, and exposures to reinsurers; (8) our inability to effectively reduce insured financial guarantee exposures or achieve recoveries or investment objectives; (9) our inability to generate the significant amount of cash needed to service our debt and financial obligations, including through litigation recoveries or disposition of assets, and our inability to refinance our indebtedness; (10) Ambac’s substantial indebtedness could adversely affect its financial condition and operating flexibility; (11) Ambac may not be able to obtain financing or raise capital on acceptable terms or at all due to its substantial indebtedness and financial condition; (12) the impact of catastrophic public health, environmental or natural events, including events like the COVID-19 pandemic, or global or regional conflicts, on significant portions of our insured portfolio; (13) credit risks related to large single risks, risk concentrations and correlated risks; (14) risks associated with adverse selection as Ambac’s financial guarantee insurance portfolio runs

off; (15) the risk that Ambac’s risk management policies and practices do not anticipate certain risks and/or the magnitude of potential for loss; (16) restrictive covenants in agreements and instruments that impair Ambac’s ability to pursue or achieve its business strategies; (17) adverse effects on operating results or the Company’s financial position resulting from measures taken to reduce financial guarantee risks in its insured portfolio; (18) disagreements or disputes with Ambac's insurance regulators; (19) loss of control rights in transactions for which we provide financial guarantee insurance; (20) adverse tax consequences or other costs resulting from the characterization of the AAC’s surplus notes or other obligations as equity; (21) risks attendant to the change in composition of securities in the Ambac’s investment portfolio; (22) adverse impacts from changes in prevailing interest rates; (23) events or circumstances that result in the impairment of our intangible assets and/or goodwill that was recorded in connection with Ambac’s acquisition of 80% of the membership interests of Xchange Benefits, LLC; (24) risks associated with the expected discontinuance of the London Inter-Bank Offered Rate; (25) factors that may negatively influence the amount of installment premiums paid to Ambac; (26) risks relating to determinations of amounts of impairments taken on investments; (27) the risk of litigation and regulatory inquiries or investigations, and the risk of adverse outcomes in connection therewith; (28) actions of stakeholders whose interests are not aligned with broader interests of Ambac's stockholders; (29) system security risks, data protection breaches and cyber attacks; (30) regulatory oversight of Ambac Assurance UK Limited (“Ambac UK”) and applicable regulatory restrictions may adversely affect our ability to realize value from Ambac UK or the amount of value we ultimately realize; (31) failures in services or products provided by third parties; (32) our inability to attract and retain qualified executives, senior managers and other employees, or the loss of such personnel; (33) fluctuations in foreign currency exchange rates; (34) failure to realize our business expansion plans or failure of such plans to create value; (35) greater competition for our specialty property & casualty program insurance business; (36) loss or lowering of the AM Best rating for our property and casualty insurance company subsidiaries; (37) disintermediation within the insurance industry or greater competition that negatively impacts our managing general agency/underwriting business; (38) changes in law or in the functioning of the healthcare market that impair the business model of our accident and health managing general underwriter; and (39) other risks and uncertainties that have not been identified at this time.

| Ambac Financial Group, Inc. 1 2022 First Quarter FORM 10-Q |

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Unaudited Financial Statements of Ambac Financial Group, Inc. and Subsidiaries

| Ambac Financial Group, Inc. 2 2022 First Quarter FORM 10-Q |

Table of Contents

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets


	March 31,		December 31,
(Dollars in millions, except share data) (March 31, 2022 (Unaudited))	2022		2021
Assets:
Investments:
Fixed maturity securities - available-for-sale, at fair value (amortized cost of $1,352 and $1,605)	$	1,383	$	1,730
Fixed maturity securities pledged as collateral, at fair value (amortized cost of $15 and $15)	15		15
Fixed maturity securities - trading (includes $119 and $0 at fair value)	119		—
Short-term investments, at fair value (amortized cost of $540 and $415)	540		414
Short-term investments pledged as collateral, at fair value (amortized cost of $99 and $105)	99		105
Other investments (includes $652 and $683 at fair value)	660		690
Total investments (net of allowance for credit losses of $1 and $0)	2,815		2,955
Cash and cash equivalents	60		17
Restricted cash	7		5


Premium receivables (net of allowance for credit losses of $8 and $9)	317		323
Reinsurance recoverable on paid and unpaid losses (net of allowance for credit losses of $0 and $0)	48		55
Deferred ceded premium	100		90
Subrogation recoverable	1,714		2,092


Derivative assets	55		76

Intangible assets	350		362
Goodwill	46		46
Other assets	94		68
Variable interest entity assets:
Fixed maturity securities, at fair value	3,364		3,455
Restricted cash	49		2

Loans, at fair value	2,469		2,718

Derivative assets	42		38
Other assets	1		2
Total assets	$	11,531	$	12,303
Liabilities and Stockholders’ Equity:
Liabilities:

Unearned premiums	$	393	$	395
Loss and loss expense reserves	1,067		1,570
Ceded premiums payable	40		33



Long-term debt	2,242		2,230
Accrued interest payable	593		576
Derivative liabilities	76		95
Other liabilities	135		133

Variable interest entity liabilities:

Long-term debt (includes $3,701 and $4,056 at fair value)	4,124		4,216
Derivative liabilities	1,866		1,940
Other liabilities	3		—
Total liabilities	10,538		11,187
Commitments and contingencies (See Note 14)
Redeemable noncontrolling interest	18		18
Stockholders’ equity:
Preferred stock, par value $0.01 per share;20,000,000 shares authorized shares; issued and outstanding shares—none	—		—
Common stock, par value $0.01 per share; 130,000,000 shares authorized; issued shares: 46,658,990 and 46,477,068	—		—
Additional paid-in capital	262		257
Accumulated other comprehensive income (loss)	(70)		58
Retained earnings	723		726
Treasury stock, shares at cost: 113,758 and 172,929	(2)		(3)
Total Ambac Financial Group, Inc. stockholders’ equity	914		1,038
Nonredeemable noncontrolling interest	60		60
Total stockholders’ equity	974		1,098
Total liabilities, redeemable noncontrolling interest and stockholders’ equity	$	11,531	$	12,303

See accompanying Notes to Unaudited Consolidated Financial Statements

| Ambac Financial Group, Inc. 3 2022 First Quarter FORM 10-Q |

Table of Contents

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Total Comprehensive Income (Loss) (Unaudited)


	Three Months Ended March 31,
(Dollars in millions, except share data)	2022		2021
Revenues:
Net premiums earned	$	15	$	14



Net investment income	5		49





Net investment gains (losses), including impairments	10		2





Net gains (losses) on derivative contracts	57		25
Net realized gains (losses) on extinguishment of debt	—		33
Commission income	9		7
Other income (expense)	2		(2)
Income (loss) on variable interest entities	22		—
Total revenues	119		129
Expenses:
Losses and loss expenses (benefit)	24		8
Intangible amortization	14		19
Operating expenses	34		33
Interest expense	44		50

Total expenses	116		110


Pre-tax income (loss)	3		19
Provision (benefit) for income taxes	—		2
Net income (loss)	2		17
Less: net (gain) loss attributable to noncontrolling interest	—		—

Net income attributable to common stockholders	$	2	$	17
Other comprehensive income (loss), after tax:
Net income (loss)	$	2	$	17
Unrealized gains (losses) on securities, net of income tax provision (benefit) of $(2)and $(2)	(105)		(24)
Gains (losses) on foreign currency translation, net of income tax provision (benefit) of $— and $—	(23)		6
Credit risk changes of fair value option liabilities, net of income tax provision (benefit) of $— and $—	—		(1)
Changes to postretirement benefit, net of income tax provision (benefit) of $— and $—	—		—
Total other comprehensive income (loss), net of income tax	(127)		(18)
Total comprehensive income (loss)	(125)		(1)
Less: comprehensive (gain) loss attributable to the noncontrolling interest	—		—



Total comprehensive income (loss) attributable to common stockholders	$	(125)	$	(2)
Net income (loss) per share attributable to common stockholders:
Basic	$	0.04	$	0.08
Diluted	$	0.04	$	0.08
Weighted average number of common shares outstanding:
Basic	46,731,459		46,314,049
Diluted	47,359,731		46,858,064

See accompanying Notes to Unaudited Consolidated Financial Statements

| Ambac Financial Group, Inc. 4 2022 First Quarter FORM 10-Q |

Table of Contents

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity (Unaudited)


Three months ended March 31, 2022 and 2021

			Ambac Financial Group, Inc.
(Dollars in millions)	Total		Retained Earnings		Accumulated Other Comprehensive Income		Preferred Stock		Common Stock		Additional Paid-in Capital		Common Stock Held in Treasury, at Cost		Nonredeemable Noncontrolling Interest
Balance at December 31, 2021	$	1,098	$	726	$	58	$	—	$	—	$	257	$	(3)	$	60
Total comprehensive income (loss)	(125)		2		(127)		—		—		—		—		—





Stock-based compensation	5		—		—		—		—		5		—		—
Cost of shares (acquired) issued under equity plan	(3)		(5)		—		—		—		—		1		—
Changes to Redeemable NCI	—		—		—		—		—		—		—		—





Balance at March 31, 2022	$	974	$	723	$	(70)	$	—	$	—	$	262	$	(2)	$	60


Balance at December 31, 2020	$	1,140	$	759	$	79	$	—	$	—	$	242	$	(1)	$	60
Total comprehensive income (loss)	(2)		17		(18)		—		—		—		—		—





Stock-based compensation	4		—		—		—		—		4		—		—
Cost of shares (acquired) issued under equity plan	(6)		(2)		—		—		—		—		(4)		—
Changes to redeemable NCI	(13)		(13)






Balance at March 31, 2021	$	1,123	$	761	$	61	$	—	$	—	$	246	$	(5)	$	60

See accompanying Notes to Unaudited Consolidated Financial Statements

| Ambac Financial Group, Inc. 5 2022 First Quarter FORM 10-Q |

Table of Contents

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)


	Three Months Ended March 31,
(Dollars in millions)	2022		2021
Cash flows from operating activities:
Net income (loss) attributable to common stockholders	$	2	$	17

Redeemable noncontrolling interest	—		—
Net income (loss)	2		17
Adjustments to reconcile net income to net cash used in operating activities:


Amortization of bond premium and discount	(3)		(3)

Share-based compensation	5		4



Unearned premiums, net	(11)		(22)
Losses and loss expenses, net	(6)		(17)
Ceded premiums payable	7		(2)

Premium receivables	6		14
Accrued interest payable	24		23
Amortization of intangible assets	14		19

Net investment gains (losses), including impairments	(10)		(2)

(Gain) loss on extinguishment of debt	—		(33)
Variable interest entity activities	(22)		—
Derivative assets and liabilities	(46)		(22)
Other, net	48		(16)
Net cash provided by (used in) operating activities	9		(40)
Cash flows from investing activities:
Proceeds from sales of bonds	141		44
Proceeds from matured bonds	20		39
Purchases of bonds	(33)		(128)
Proceeds from sales of other invested assets	45		48
Purchases of other invested assets	(25)		(41)
Change in short-term investments	(114)		94

Change in cash collateral receivable	54		11
Proceeds from paydowns of consolidated VIE assets	47		50
Other, net	—		(1)
Net cash provided by investing activities	136		116
Cash flows from financing activities:






Paydowns of LSNI Ambac Note	—		(16)






Tax payments related to shares withheld for share-based compensation plans	(3)		(6)



Payments of consolidated VIE liabilities	(49)		(48)
Net cash used in financing activities	(52)		(69)
Effect of foreign exchange on cash, cash equivalents and restricted cash

AMBAC FINANCIAL GROUP INC [AMBC] Filings

AMBAC FINANCIAL GROUP INC [AMBC-WT] Filings