AMBAC FINANCIAL GROUP INC [AMBC] Filings

10-Q 1 ambc-20230630.htm 10-Q ambc-20230630

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 June 30, 2023


☐			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

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 August 4, 2023, 45,303,998 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	50
	Consolidated Balance Sheets (Unaudited)	2		Ambac Assurance UK Limited Financial Results Under UK Accounting Principles	50
	Consolidated Statements of Total Comprehensive Income (Loss) (Unaudited)	3		Non-GAAP Financial Measures	51
	Consolidated Statements of Stockholders' Equity (Unaudited)	4	3	Quantitative and Qualitative Disclosures About Market Risk	53
	Consolidated Statements of Cash Flows (Unaudited)	5	4	Controls and Procedures	53
	Notes to Unaudited Consolidated Financial Statements	6
2	Management's Discussion and Analysis of Financial Condition and Results of Operations	33	PART II. OTHER INFORMATION
	Executive Summary	33	1	Legal Proceedings	53
	Critical Accounting Policies and Estimates	35	1A	Risk Factors	53
	Financial Guarantees in Force	36	2	Unregistered Sales of Equity Securities and Use of Proceeds	53
	Results of Operations	38	3	Defaults Upon Senior Securities	53
	Liquidity and Capital Resources	43	5	Other Information	54
	Balance Sheet	45	6	Exhibits	53
	Variable Interest Entities	50	SIGNATURES		54
	Accounting Standards	50

| Ambac Financial Group, Inc. i 2023 Second Quarter FORM 10-Q |

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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, 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 2022 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 high degree of 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 insurance business, the insurance distribution business, or related businesses; (3) inadequacy of reserves established for losses and loss expenses and the possibility that changes in loss reserves may result in further volatility of earnings or financial results; (4) potential for rehabilitation proceedings or other regulatory intervention or restrictions against AAC; (5) 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; (6) our inability to effectively reduce insured financial guarantee exposures or achieve recoveries or investment objectives; (7) our inability to generate the significant amount of cash needed to service our debt and financial obligations, and our inability to refinance our indebtedness; (8) Ambac’s substantial indebtedness could adversely affect its financial condition and operating flexibility; (9) 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; (10) greater than expected underwriting losses in the Company’s specialty property and casualty insurance business; (11) failure of specialty insurance program partners to properly market, underwrite or administer policies; (12) inability to obtain reinsurance coverage on expected terms; (13) loss of key relationships for production of business in specialty property and casualty and insurance distribution businesses or the inability to secure such additional relationships to produce expected results; (14) the impact of catastrophic public health, environmental or natural events, or global or regional conflicts, on significant portions of our insured portfolio; (15) credit risks related to large single risks, risk concentrations and correlated risks; (16) risks associated with adverse selection as Ambac’s financial guarantee insurance portfolio runs off; (17) the risk that Ambac’s risk management policies and practices do not anticipate certain risks and/or the magnitude of potential for loss; (18) restrictive covenants in agreements and instruments that impair Ambac’s ability to pursue or achieve its business strategies; (19) adverse effects on operating results or the Company’s financial position resulting from measures taken to reduce financial guarantee risks in its insured portfolio; (20) disagreements or disputes with Ambac's insurance regulators; (21) loss of control rights in transactions for which we provide financial guarantee insurance; (22) inability to realize expected recoveries of financial guarantee losses; (23) risks attendant to the change in composition of securities in the Ambac’s investment portfolio; (24) adverse impacts from changes in prevailing interest rates; (25) events or circumstances that result in the impairment of our intangible assets and/or goodwill that was recorded in connection with Ambac’s acquisitions; (26) risks associated with the discontinuance of the London Inter-Bank Offered Rate; (27) factors that may negatively influence the amount of installment premiums paid to Ambac; (28) the risk of litigation and regulatory inquiries or investigations, and the risk of adverse outcomes in connection therewith; (29) the Company’s ability to adapt to the rapid pace of regulatory change; (30) actions of stakeholders whose interests are not aligned with broader interests of Ambac's stockholders; (31) system security risks, data protection breaches and cyber attacks; (32) 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; (33) failures in services or products provided by third parties; (34) political developments that disrupt the economies where the Company has insured exposures; (35) our inability to attract and retain qualified executives, senior managers and other employees, or the loss of such personnel; (36) fluctuations in foreign currency exchange rates; (37) failure to realize our business expansion plans or failure of such plans to create value; (38) greater competition for our specialty property and casualty insurance business and/or our insurance distribution business; (39) loss or lowering of the AM Best rating for our property and casualty insurance company subsidiaries; (40) disintermediation within the insurance industry or greater competition from technology-based insurance solutions; (41) 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 (42) other risks and uncertainties that have not been identified at this time.

| Ambac Financial Group, Inc. 1 2023 Second Quarter FORM 10-Q |

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PART I. FINANCIAL INFORMATION

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

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets


	June 30,		December 31,
(Dollars in millions, except share data) (June 30, 2023 (Unaudited))	2023		2022
Assets:
Investments:
Fixed maturity securities - available-for-sale, at fair value (amortized cost of $1,631 and $1,469)	$	1,552	$	1,395

Fixed maturity securities - trading, at fair value	28		59
Short-term investments, at fair value (amortized cost of $365 and $507)	365		507
Short-term investments pledged as collateral, at fair value (amortized cost of $36 and $64)	36		64
Other investments (includes $518 and $556 at fair value)	530		568
Total investments (net of allowance for credit losses of $1 and $0)	2,510		2,593
Cash and cash equivalents (including $10 and $14 of restricted cash)	43		44



Premium receivables (net of allowance for credit losses of $5 and $5)	276		269
Reinsurance recoverable on paid and unpaid losses (net of allowance for credit losses of $0 and $0)	149		115
Deferred ceded premium	198		124
Deferred acquisition costs	4		3
Subrogation recoverable	139		271

Derivative assets	26		27

Intangible assets	317		326
Goodwill	61		61
Other assets	89		84
Variable interest entity assets:
Fixed maturity securities, at fair value	2,056		1,967
Restricted cash	266		17

Loans, at fair value	1,772		1,829


Derivative and other assets	226		241
Total assets	$	8,132	$	7,973
Liabilities and Stockholders’ Equity:
Liabilities:

Unearned premiums	$	394	$	372
Loss and loss adjustment expense reserves	863		805
Ceded premiums payable	96		39

Deferred program fees and reinsurance commissions	6		5


Long-term debt	501		639
Accrued interest payable	450		427
Derivative liabilities	37		38
Other liabilities	136		163

Variable interest entity liabilities:

Long-term debt (includes $2,785 and $2,788 at fair value)	2,956		3,107
Derivative liabilities	1,106		1,048
Other liabilities	264		5
Total liabilities	6,809		6,647
Commitments and contingencies (See Note 14)
Redeemable noncontrolling interest	20		20
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: 46,659,144 and 46,658,990	—		—
Additional paid-in capital	283		274
Accumulated other comprehensive income (loss)	(209)		(253)
Retained earnings	1,191		1,245
Treasury stock, shares at cost: 1,355,146 and 1,685,233	(15)		(15)
Total Ambac Financial Group, Inc. stockholders’ equity	1,250		1,252
Nonredeemable noncontrolling interest	53		53
Total stockholders’ equity	1,303		1,305
Total liabilities, redeemable noncontrolling interest and stockholders’ equity	$	8,132	$	7,973

See accompanying Notes to Unaudited Consolidated Financial Statements

| Ambac Financial Group, Inc. 2 2023 Second Quarter FORM 10-Q |

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AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

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


	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in millions, except share data)	2023		2022		2023		2022
Revenues:
Net premiums earned	$	15	$	14	$	29	28
Commission income	10		6		25		15
Program fees	2		1		4		1



Net investment income (loss)	35		(21)		69		(16)





Net investment gains (losses), including impairments	(3)		7		(8)		17





Net gains (losses) on derivative contracts	—		29		(3)		86
Net realized gains on extinguishment of debt	—		57		—		57

Other income	2		—		5		3
Income (loss) on variable interest entities	—		(6)		(1)		15

Total revenues and other income	62		86		120		206
Expenses:
Losses and loss adjustment expenses	7		(12)		25		12
Amortization of deferred acquisition costs, net	1		—		3		—
Commission expense	6		4		14		8
General and administrative expenses	36		30		72		59
Intangible amortization	7		13		13		28
Interest expense	16		45		32		89

Total expenses	73		80		160		197


Pretax income (loss)	(11)		6		(40)		9
Provision for income taxes	2		1		6		1
Net income (loss)	(13)		5		(46)		8
Less: net (gain) loss attributable to noncontrolling interest	—		—		(1)		—

Net income (loss) attributable to common stockholders	$	(13)	$	5	$	(47)	$	7
Other comprehensive income (loss), after tax
Net income (loss)	$	(13)	$	5	$	(46)	$	8
Unrealized gains (losses) on securities, net of income tax provision (benefit) of $(3), $(2), $(1) and $(4)	(13)		(72)		5		(177)
Gains (losses) on foreign currency translation, net of income tax provision (benefit) of $0, $0, $0 and $0	21		(55)		37		(78)
Credit risk changes of fair value option liabilities, net of income tax provision (benefit) of $0, $0, $0 and $0	—		1		—		1
Changes to postretirement benefit, net of income tax provision (benefit) of $0, $0, $0 and $0	—		—		2		—
Total other comprehensive income (loss), net of income tax	8		(126)		44		(254)
Total comprehensive income (loss), net of income tax	(5)		(121)		(2)		(246)
Less: comprehensive (gain) loss attributable to the noncontrolling interest	—		—		(1)		—



Total comprehensive income (loss) attributable to common stockholders	$	(6)	$	(121)	$	(3)	$	(247)
Net income (loss) per share attributable to common stockholders:
Basic	$	(0.29)	$	0.11	$	(1.02)	$	0.15
Diluted	$	(0.29)	$	0.11	$	(1.02)	$	0.15
Weighted average number of common shares outstanding:
Basic	45,757,234		45,519,093		45,661,288		46,121,927
Diluted	45,757,234		45,685,349		45,661,288		46,310,687

See accompanying Notes to Unaudited Consolidated Financial Statements

| Ambac Financial Group, Inc. 3 2023 Second Quarter FORM 10-Q |

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AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity (Unaudited)


Three months ended June 30, 2023 and 2022

			Ambac Financial Group, Inc.
(Dollars in millions)	Total		Preferred Stock		Common Stock		Additional Paid-in Capital		Accumulated Other Comprehensive Income		Retained Earnings		Common Stock Held in Treasury, at Cost		Nonredeemable Noncontrolling Interest
Balance at March 31, 2023	$	1,307	$	—	$	—	$	278	$	(217)	$	1,206	$	(14)	$	53
Total comprehensive income (loss)	(6)		—		—		—		8		(13)		—		—





Stock-based compensation	5		—		—		5		—		—		—		—
Cost of shares repurchased	(3)												(3)
Cost of shares (acquired) issued under equity plan	—		—		—		—		—		(2)		2		—







Balance at June 30, 2023	$	1,303	$	—	$	—	$	283	$	(209)	$	1,191	$	(15)	$	53

Balance at March 31, 2022	$	974	$	—	$	—	$	262	$	(70)	$	723	$	(2)	$	60
Total comprehensive income (loss)	(121)		—		—		—		(126)		5		—		—





Stock-based compensation	5		—		—		5		—		—		—		—
Cost of shares repurchased	(14)		—		—		—		—		—		(14)		—





Sale of minority interest in subsidiary	2						—								2



Balance at June 30, 2022	$	846	$	—	$	—	$	267	$	(196)	$	728	$	(16)	$	62

Six months ended June 30, 2023 and 2022

			Ambac Financial Group, Inc.
(Dollars in millions)	Total		Preferred Stock		Common Stock		Additional Paid-in Capital		Accumulated Other Comprehensive Income		Retained Earnings		Common Stock Held in Treasury, at Cost		Noncontrolling Interest
Balance at January 1, 2023	$	1,305	$	—	$	—	$	274	$	(253)	$	1,245	$	(15)	$	53
Total comprehensive income (loss)	(3)		—		—		—		44		(47)		—		—





Stock-based compensation	8		—		—		8		—		—		—		—
Cost of shares repurchased	(3)												(3)

Cost of shares (acquired) issued under equity plan	(5)		—		—		—		—		(8)		3		—







Balance at June 30, 2023	$	1,303	$	—	$	—	$	283	$	(209)	$	1,191	$	(15)	$	53

Balance at January 1, 2022	$	1,098	$	—	$	—	$	257	$	58	$	726	$	(3)	$	60
Total comprehensive income (loss)	(247)		—		—		—		(254)		7		—		—





Stock-based compensation	10		—		—		10		—		—		—		—
Cost of shares repurchased	(14)												(14)
Cost of shares (acquired) issued under equity plan	(3)		—		—		—		—		(5)		1		—



Sale of minority interest in subsidiary	2						—								2



Balance at June 30, 2022	$	846	$	—	$	—	$	267	$	(196)	$	728	$	(16)	$	62

See accompanying Notes to Unaudited Consolidated Financial Statements

| Ambac Financial Group, Inc. 4 2023 Second Quarter FORM 10-Q |

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AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)


	Six Months Ended June 30,
(Dollars in millions)	2023		2022
Cash flows from operating activities:
Net income attributable to common stockholders	$	(47)	$	7

Redeemable noncontrolling interest	(1)		—
Net income	(46)		8
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation	1		1

Amortization of bond premium and discount	(6)		(6)

Share-based compensation	8		10



Unearned premiums, net	(51)		(25)
Losses and loss expenses, net	144		(13)
Ceded premiums payable	57		11

Premium receivables	(7)		12
Accrued interest payable	(26)		48
Amortization of intangible assets	13		28

Net investment gains (losses), including impairments	8		(17)

(Gain) loss on extinguishment of debt	—		(57)
Variable interest entity activities	1		(15)
Derivative assets and liabilities	25		(54)
Other, net	(21)		81
Net cash provided by operating activities	101		11
Cash flows from investing activities:
Proceeds from sales of bonds	107		387
Proceeds from matured bonds	31		69
Purchases of bonds	(226)		(189)
Proceeds from sales of other invested assets	108		108
Purchases of other invested assets	(42)		(74)
Change in short-term investments	170		(2)

Change in cash collateral	(37)		56
Change in consolidated VIE cash collateral	256		—
Proceeds from paydowns of consolidated VIE assets	113		83
Other, net	10		2
Net cash provided by investing activities	489		440
Cash flows from financing activities:








Payments for purchases of common stock	(3)		(14)
Payments for purchase of surplus notes	—		(58)
Payments for redemption of Tier 2 Notes	(97)		—



Tax payments related to shares withheld for share-based compensation plans	(8)		(3)


Distributions to noncontrolling interest holders	(1)		1
Payments of consolidated VIE liabilities	(235)		(359)
Net cash used in financing activities	(343)		(434)
Effect of foreign exchange on cash, cash equivalents and restricted cash	1		(1)
Net cash flow	248		16
Cash, cash equivalents, and restricted cash at beginning of period	61