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AMBAC FINANCIAL GROUP INC – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations
The objectives of our Management's Discussion and Analysis of Financial
Condition and Results of Operations ("MD&A") are to provide users of our
consolidated financial statements with the following:
•A narrative explanation from the perspective of management of our financial
condition, results of operations, cash flows, liquidity and certain other
factors that may affect future results;
•Context to the consolidated financial statements; and
•Information that allows assessment of the likelihood that past performance is
indicative of future performance.
The following discussion should be read in conjunction with our consolidated financial statements in Item 8 of this Report and the matters described under Item 1A. Risk Factors in this Annual Report on Form 10-K for the year endedDecember 31, 2022 . Refer to Item 1. Description of the Business and Note 1. Background and Business Description for a description of our business and our key strategies to achieve our primary goal to maximize shareholder value.
MD&A includes the following sections:
Page
Executive Summary 27
Critical Accounting Estimates 30
Financial Guarantees in Force 32
Results of Operations 38
Liquidity and Capital Resources 44
Balance Sheet 46
Accounting Standards 52
Ambac Assurance Statutory Basis Financial Results 52
Ambac UK Financial Results under UK Accounting Principles 54
Non-GAAP Financial Measures 54
EXECUTIVE SUMMARY ($ in millions)
AFG Net Assets:
AFG has the following net assets to support its goals and strategies, including
the development and growth of its Specialty Property and Casualty Insurance and
Insurance Distribution businesses, acquisitions and capital management. AFG does
not have any commitment or other obligation to provide capital or liquidity to
AAC, whose financial guarantee business has been in run-off since 2008. As of
December 31, 2022 , AFG's stand alone net assets, excluding its equity
investments in subsidiaries, were $223 .
($ in millions)
Cash and short-term investments $ 178
Other investments (1) 28
Other net assets 17
Total $ 223
(1)Includes strategic minority investments in insurance services businesses of
From
for
AFG's subsidiaries/businesses are divided into three segments, the key value
metrics of which are summarized below along with other recent developments.
Specialty Property and Casualty Insurance Segment
The key value metrics for the
for the years ended
Year ended December 31, 2022 2021 Gross premiums written$ 146 $ 13 Net premiums written 29 3 Pretax income (loss)$ (6) $ (8)
Earnings before interest, taxes, depreciation and amortization (6)
(8) Loss ratio 65.4 % 71.4 % Stockholders Equity (1)$ 110 $ 109
(1)Represents Ambac's stockholders equity in the
Insurance
To support expansion of the admitted insurance component of its business, onJanuary 3, 2022 , Everspan (rated 'A-' (Excellent) by AM Best) completed the acquisition of three admitted carriers (the "21st Century Companies") from a national insurance group that has a Financial Strength Rating of "A" (Excellent) from AM Best. The 21st Century Companies collectively possess certificates of authority in thirty-nine states. All legacy liabilities remain with affiliates of the sellers through reinsurance and contractual indemnities. Such acquisitions enhanced Everspan's capabilities to launch new admitted programs, develop innovative products and provide enhanced flexibility to foster strategic relationships with prospective program partners.
For additional information on the Specialty Property and Casualty Insurance
Segment see the Results of Operations section below in this Management
Discussion and Analysis.
| Ambac Financial Group, Inc. 27 2022 FORM 10-K -------------------------------------------------------------------------------- Table of Contents , Insurance Distribution Segment
The key value metrics for the Insurance Distribution segment for the years ended
Year ended December 31, 2022 2021 Premiums placed$ 135 $ 117 Commission income 31 26 Sub-producer commission expense 18 15 Net commissions 13 12 Pretax income (loss)$ 5 $ 4 Earnings before interest, taxes, depreciation and amortization 6 5 Stockholders Equity (1)$ 93 $ 66
(1)Represents Ambac's stockholders equity in the Insurance Distribution segment,
including intercompany eliminations.
EffectiveNovember 1, 2022 ,Ambac acquired controlling interests inAll Trans Risk Solutions, LLC ("All Trans") andCapacity Marine Corporation ("Capacity Marine"), adding approximately$60 of annual premiums placed to the Insurance Distribution segment, for a collective purchase price of$26 . Refer to Note 4. Business Combination to the Consolidated Financial Statements, included in Part II, Item 8 in this Annual Report on Form 10-K for further details on these acquisitions.
For additional information about the Insurance Distribution Segment see the
Results of Operations section below in this Management Discussion and Analysis.
Legacy Financial Guarantee Insurance Segment
The key value metrics for the
the years ended
Year ended December 31, 2022 2021 Net premiums earned$ 42 $ 46 Net investment income 12 138 Net gains on derivative contracts 128 22 Net realized gains on extinguishment of debt 81 33 Litigation recoveries 126 - Loss and lossadjustment expenses (benefit) (406) (89) General and administrative expenses 102 77 Interest expense 168 187 Pretax income (loss)$ 540 $ 20 Stockholders Equity (1)$ 826 $ 684
Adversely Classified Credit Net Par Outstanding
(1)Represents Ambac's stockholders equity in the
Insurance
assets of
A key strategy forAmbac is to increase the value of its investment in AAC by actively managing its assets and liabilities. Asset management primarily entails maximizing the risk-adjusted return on non-VIE invested assets and managing liquidity to help ensure resources are available to meet
operational and strategic cash needs. These strategic cash needs include
activities associated with
programs.
Settlement of RMBS Litigations and Redemption of Secured Notes:
InOctober 2022 , AAC entered into a Settlement Agreement and Release (the "BOA Settlement Agreement") with Bank of America Corporation and certain affiliates thereof (together, the "BOA Parties") whereby the BOA Parties paid AAC the sum of$1,840 (the "BOA Settlement Payment"). In connection with the Settlement Payment, as required under the terms of AAC's secured debt, AAC utilized$1,431 of the BOA Settlement Payment to redeem a majority of the principal and accrued interest of its secured debt. OnDecember 29, 2022 , AAC entered into a Settlement Agreement and Release (the "Nomura Settlement Agreement") withNomura Credit & Capital, Inc. ("Nomura") to settle its RMBS litigation against Nomura. As a result, Nomura paid AAC$140 million (the "Nomura Settlement Payment") inJanuary 2023 . AAC used all proceeds of the Nomura Settlement Payment plus cash on hand to repay the remaining outstanding balance of Tier 2 Notes (as described in Note 13. Long-Term Debt to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K).
The settlements with the BOA Parties and Nomura brought to closure all of AAC's
legacy litigation against RMBS sponsors.
These settlement receipts materially exceeded the amount of subrogation recovery recorded onAmbac's consolidated GAAP financial statements. Refer to Note 1. Background and Business Description in Part II, Item 8 in this Annual Report on Form 10-K for further details of the BOA Settlement Agreement and the Nomura Settlement Agreement and related impacts onAmbac's Statement of Comprehensive Income. Asset Management Investment portfolios are subject to internal investment guidelines as well as restrictions imposed by insurance laws and regulations which limit the types and quality of investments a carrier may acquire. In the case of AAC, theWisconsin Office of the Commissioner of Insurance ("OCI") has the right to approve changes to the investment guidelines pursuant to the Settlement Agreement, dated as ofJune 7, 2010 (the "Settlement Agreement"), by and among AAC,Ambac Credit Products LLC ("ACP"), AFG and certain counterparties to credit default swaps with ACP that were guaranteed by AAC. The investment portfolios of AAC andAmbac UK hold fixed maturity securities and various pooled investment funds. Refer to Note 5. Investments to the Consolidated Financial Statements, included in Part II, Item 8 in this Annual Report on Form 10-K for further details of fixed maturity investments by asset category and pooled investment funds by investment type. AtDecember 31, 2022 and 2021,Ambac and its subsidiaries owned$286 and$609 , respectively, of distressed AAC and AmbacUK -insured bonds, including significant concentrations of insured RMBS bonds and, in 2021, insuredPuerto Rico bonds. As a result of thePuerto Rico restructurings discussed under "Liability and Insured Exposure Management" below, | Ambac Financial Group, Inc. 28 2022 FORM 10-K -------------------------------------------------------------------------------- Table of Contents , there are no AAC-insuredPuerto Rico bonds held in the investment portfolio as ofDecember 31, 2022 . Subject to internal and regulatory guidelines, market conditions and other constraints,Ambac may continue to opportunistically purchase or sell AAC and AmbacUK -insured securities, surplus notes and/or other AAC issued securities, and may consider opportunities to exchange securities issued by AAC for other securities issued by AFG or AAC.
Liability and Insured Exposure Management
AAC's Risk Management Group focuses on the implementation and execution of risk reduction, defeasance and loss recovery strategies. Analysts evaluate the estimated timing and severity of projected policy claims as well as the potential impact of loss mitigation or remediation strategies in order to target and prioritize policies, or portions thereof, for commutation, reinsurance, refinancing, restructuring or other risk reduction strategies. For targeted policies, analysts will engage with issuers, bondholders and other economic stakeholders to negotiate, structure and execute such strategies. During 2022,Ambac completed risk reduction transactions consisting of refinancings and commutations of$2,707 , of which,$806 related toPuerto Rico . Refer below to the Financial Guarantees In Force section of the Management Discussion and Analysis for Results of Operations, Financial Guarantees in Force for additional details of thePuerto Rico restructuring. The following table provides a comparison of total, adversely classified ("ACC") and watch list (as described in Note 2. Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K) credit net par outstanding in the insured portfolio atDecember 31, 2022 and 2021. Net par exposure within theU.S. public finance market includes capital appreciation bonds which are reported at the par amount at the time of issuance of the insurance policy as opposed to the current accreted value of the bonds. ($ in billions) December 31, 2022 2021 Variance Total$ 22,613 $ 28,020 $ (5,407) (19) % ACC$ 4,735 $ 6,361 $ (1,626) (26) % Watch List$ 3,044 $ 3,824 $ (780) (20) %
The decrease in total, ACC and watch list credit net par outstanding resulted
from active de-risking (including AAC's exposures to
strengthening of the USD versus the GBP and EURO, as well as scheduled
maturities, amortizations, refundings and calls.
The current conflict betweenRussia andUkraine and the related sanctions and other penalties imposed by countries across the globe againstRussia are creating substantial uncertainty in the global economy. We do not have operations inRussia orUkraine or any insured exposures in those countries.Ambac's investment portfolio exposure to Russian issuers is not meaningful. Given our insignificant exposure, we have not experienced, and do not expect this conflict to have, a material adverse impact on our results of operations, financial condition or cash flows. However, as the conflict continues and if it were to escalate, the global economy and capital markets may be adversely impacted in ways that we cannot predict and therefore we are unable to estimate the ultimate impact that this conflict may have on our future financial condition, results of operations, and cash flows.
Financial Statement Impact of Foreign Currency
The impact of foreign currency as reported inAmbac's Consolidated Statement of Total Comprehensive Income (Loss) for the years endedDecember 31, 2022 and 2021 included the following: ($ in millions) December 31, 2022 2021 Net income (1)$ 11 $ (7) Gain (losses) on foreign currency translation (net of tax) (85) (8)
Unrealized gains (losses) on non-functional currency
available-for-sale securities (net of tax)
11 3 Impact on total comprehensive income (loss) $
(63)
(1) A portion of AmbacUK's , and to a lesser extent AAC's, assets and liabilities are denominated in currencies other than its functional currency and accordingly, we recognized net foreign currency transaction gains/(losses) as a result of changes to foreign currency rates through our Consolidated Statement of Total Comprehensive Income (Loss). Refer to Note 2. Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report in Form 10-K for further details on transaction gains and losses. Future changes to currency rates, may adversely affect our financial results. Refer to Part II, Item 7A "Quantitative and Qualitative Disclosures about Market Risk" for further information on the impact of future currency rate changes onAmbac's financial instruments.
LIBOR Sunset
Ambac continuously monitors regulatory and industry developments related to the transition from LIBOR to alternative reference rates. In 2021,New York State passed legislation addressing the cessation ofU.S. Dollar ("USD") LIBOR and specified a recommended benchmark replacement based on the Secured Overnight Financing Rate ("SOFR") for certain legacy transactions. Similar federal legislation was passed into law inMarch 2022 and theFederal Reserve's Board of Governors adopted the final rules for implementing this legislation inDecember 2022 . WhileAmbac believes the LIBOR law is a positive step, there remains some uncertainty about how it will be interpreted or challenged as well as about other aspects of the discontinuance of LIBOR. At the same time, regulatory and governmental authorities continue to promote the creation and functioning of post-LIBOR indices, SOFR in particular. See the Risk Factor entitled "Uncertainties regarding the expected discontinuance of the London Inter-Bank Offered Rate or any other interest rate benchmark could have adverse consequences" found in Part I, Item 1A of this Annual Report on Form 10-K.
SEC Proposed Rules on Climate Related Information
On
amendments that would require public
| Ambac Financial Group, Inc. 29 2022 FORM 10-K -------------------------------------------------------------------------------- Table of Contents , companies to include certain climate-related information in their periodic reports and registration statements, including oversight and governance, material impacts (operational and financial), risk identification and management, and Scope 1, 2 and 3 emissions (the "Proposed Rule"). For accelerated filers, such asAmbac , the Scope 1 and 2 emissions disclosures would require attestation from a third party. These new requirements, if adopted, would at the earliest take effect in fiscal year 2024 and begin to apply toSEC filings in 2025.Ambac is reviewing the Proposed Rule and assessing related compliance obligations and other effects on our operations. CRITICAL ACCOUNTING POLICIES AND ESTIMATESAmbac's Consolidated Financial Statements have been prepared in accordance with GAAP. This section highlights accounting estimates management views as critical because they are most important to the portrayal of the Company's financial condition; and require management to make difficult and subjective judgments regarding matters that are inherently uncertain and subject to change. These estimates are evaluated on an on-going basis considering historical developments, political events, market conditions, industry trends and other information. There can be no assurance that actual results will conform to estimates and that reported results of operations will not be materially adversely affected by the need to make future accounting adjustments to reflect changes in these estimates from time to time. Management has identified the following critical accounting policies and estimates: (i) valuation of financial guarantee loss and loss adjustment expense reserves, (ii) valuation of certain financial instruments and (iii) valuation of deferred tax assets. Management has discussed each of these critical accounting policies and estimates with the Audit Committee, including the reasons why they are considered critical and how current and anticipated future events impact those determinations. Additional information about these policies can be found in Note 2. Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K.
Valuation of Financial Guarantee Losses and Loss Expense Reserves (including
Subrogation Recoverables)
The loss and loss adjustment expense reserves and subrogation recoverable assets (collectively defined as "loss reserves") discussed in this section relate only toAmbac's non-derivative financial guarantee insurance policies issued to beneficiaries, including unconsolidated VIEs. A loss reserve is recorded on the balance sheet on a policy-by-policy basis at the present value ("PV") of expected net claim cash outflows or expected net recovery cash inflows, discounted at risk-free rates. The estimate for future net cash flows consider the likelihood of all possible outcomes that may occur from missed principal and/or interest payments on the insured obligation. This estimate also considers future recoveries related to remediation strategies and other contractual or subrogation-related cash flows. The evaluation process for expected future net cash flows is subject to certain estimates and judgments regarding the probability of default by the issuer of the insured security, probability of negotiation or settlement outcomes (which may include commutation, litigation and other settlements, and/or a refinancing), probability of a restructuring outcome (which may include payment moratoriums, debt haircuts and/or subsequent recoveries) and the expected loss severity of credits for each insurance contract. As the probability of default for an individual credit increases and/or the severity of loss given a default increases, our loss reserve for that insured obligation will also increase. Political, economic, credit or other unforeseen events could have an adverse impact on default probabilities and loss severities. The loss reserves for many transactions are derived from the issuer's creditworthiness. For public finance issuers, loss reserves will consider not only creditworthiness but also political dynamics and economic status and prospects. The loss reserves for transactions which have no direct issuer support, such as most structured finance exposures, including RMBS and student loan exposures, are derived from the default activity and the estimated loss given default of the underlying collateral supporting the transactions. In addition, many transactions have a combination of issuer/entity and collateral support. Loss reserves reflect our assessment of the transaction's overall structure, support and expected performance. Loss reserve volatility will be a direct result of the credit performance of our insured portfolio, including the number, size, bond types and quality of credits included in our loss reserves; our ability to execute workout strategies and commutations; economic and market conditions; and management's judgments with regards to the current performance and future developments within the insured portfolio. The number and severity of credits included in our loss reserves depend to a large extent on transaction specific attributes, but will generally increase during periods of economic stress and decline during periods of economic prosperity. Reinsurance contracts mitigate our loss reserves but sinceAmbac currently has minimal exposure ceded to reinsurers on financial guarantee credits with loss reserves, the existing reinsurance contracts are unlikely to have a significant effect on loss reserve volatility. Loss reserve volatility will also be materially impacted by changes in interest rates from period to period. | Ambac Financial Group, Inc. 30 2022 FORM 10-K -------------------------------------------------------------------------------- Table of Contents , The table below indicates the gross par outstanding and gross loss reserves (including loss expenses) related to policies inAmbac's Financial Guarantee loss and loss adjustment expense reserves atDecember 31, 2022 and 2021: Gross Par Gross Loss and Loss Adjustment Expense Outstanding Reserves (1) (2) (1) (3) (4) December 31, 2022 Structured Finance$ 2,050 $ 358 Domestic Public Finance 1,215 75 Other 782 3 Loss expenses - 8 Totals$ 4,047 444 December 31, 2021 Structured Finance$ 2,371 (1,178) Domestic Public Finance 2,742 562 Other 1,189 17 Loss expenses - 45 Totals$ 6,302 (554) (1) Ceded par outstanding on policies with loss reserves and ceded loss and loss adjustment expense reserves are$472 and$33 respectively, atDecember 31, 2022 , and$784 and$24 , respectively atDecember 31, 2021 . Ceded loss and loss adjustment expense reserves are included in Reinsurance recoverable on paid and unpaid losses.
(2) Gross Par Outstanding includes capital appreciation bonds, which are
reported at the par amount at the time of issuance of the insurance policy as
opposed to the current accreted value of the bond.
(3) Loss and Loss Adjustment Expense reserves atDecember 31, 2022 , of$444 are included in the balance sheet in the following line items: Loss and loss adjustment expense reserves:$715 and Subrogation recoverable:$(271) . Loss and Loss Adjustment Expense reserves atDecember 31, 2021 , of$(554) are included in the balance sheet in the following line items: Loss and loss adjustment expense reserves:$1,538 and Subrogation recoverable:$(2,092) . (4)Ambac records as a component of its loss and loss adjustment expense reserves, estimated recoveries related to securitized loans in RMBS transactions that breached certain representations and warranties.Ambac has recorded gross estimated recoveries of$140 and$1,730 atDecember 31, 2022 and 2021, respectively. See the Balance Sheet section of this Management's Discussion and Analysis of Financial Condition and Results of Operations below for a discussion on the reasons for changes to Gross Loss and Loss Adjustment Expense Reserves during 2022. See Note 2. Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements, included in Part II, Item 8 in this Annual Report on Form 10-K for a description of the cash flow and statistical methodologies used to develop loss reserves. The majority of our large loss reserves utilize the cash flow method of reserving. Various cash flow scenarios are developed to represent the range of possible outcomes and resultant future claim payments and timing. Scenarios and probabilities of each are adjusted regularly to reflect changes in status, outlook and our analysis and views. Significant judgment is used to develop the cash flow assumptions and related probabilities, and there can be no
certainty that the scenarios or probabilities will not deviate materially from
ultimate outcomes.
•In some cases, such as RMBS and student loans, cash flow projections include the modeling of a securitization's cash flows to determine the resources available to pay debt service on our insured obligations. Key assumptions impacting RMBS cash flow models include borrower credit characteristics, projected home price appreciation, interest rates and mortgage loan modification activity. Key assumptions impacting student loan cash flow models include projected loan defaults, recoveries and interest rates. •In other cases, such as many public finance exposures, we consider the issuer's overall ability and willingness to pay as it relates to the existing fiscal, economic, legal, restructuring and/or political framework relevant to a particular exposure or group of exposures. We then develop multiple scenarios where issuer debt service is paid, missed and/or haircut with claims paid then factor in any projected recovery amount (and potential variability of the recovery amount) and the timing thereof. There is no certainty our assumptions as to scenarios or probabilities will not be subject to material changes as developments occur. •In estimating loss reserves, we may also incorporate scenarios which represent the potential outcome of remediation strategies. Remediation scenarios could include (i) a potential refinancing of the transaction by the issuer; (ii) the issuer's ability to redeem outstanding securities at a discount, thereby increasing the structure's ability to absorb future losses; and (iii) our ability to terminate, restructure or commute the policy in whole or in part. The remediation scenarios and the related probabilities of occurrence vary by policy depending on ongoing and expected discussions and negotiations with issuers and/or investors. In addition to commutation negotiations that are underway with various counterparties in various forms, our reserve estimates may also include scenarios which incorporate our ability and/or expectation to commute additional exposure with other counterparties.
Valuation of Certain Financial Instruments
The Fair Value Measurement Topic of the ASC requires financial instruments to be classified within a three-level fair value hierarchy. The fair value hierarchy, the financial instruments classified within each level, our valuation methods, inputs, assumptions and the review and validation procedures over quoted and modeled pricing are further detailed in Note 6. Fair Value Measurements to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K. The level of judgment in estimating fair value is largely dependent on the amount of observable market information available to fair value a financial instrument, which is also determinative of where the financial instrument is classified in the fair value hierarchy. Level 3 instruments are valued using models which use one or more significant inputs or value drivers that are unobservable and therefore require significant judgment. Level 3 financial instruments which are material include certain | Ambac Financial Group, Inc. 31 2022 FORM 10-K -------------------------------------------------------------------------------- Table of Contents , invested assets, uncollateralized interest rate swaps and investments and loan receivables of consolidated VIEs. Model-derived valuations of Level 3 financial instruments incorporate estimates of the effects ofAmbac's own credit risk and/or counterparty credit risk, which can be complex and judgmental. Furthermore, Level 3 investments and loan receivables of consolidated VIEs incorporate estimates ofAmbac's financial guarantee cash flows, including future premiums and losses. Such cash flow estimates require judgments regarding prepayments of VIE debt, loss probabilities and loss severities, all of which are inherently uncertain. All models and related assumptions are continuously re-evaluated by management and enhanced, as appropriate, based on improvements in information and modeling techniques. The re-evaluation process includes a quarterly meeting of senior Finance personnel to review and approve changes to models and key assumptions. As a result of the significant judgment for the above-described instruments, the actual trade value of the financial instrument in the market, or exit value of the financial instrument owned byAmbac , may be significantly different from its recorded fair value.
Valuation of Deferred Tax Assets
Our provision for taxes is based on our income, statutory tax rates and tax
planning opportunities available to us in the jurisdictions in which we operate.
Tax laws are complex and subject to different interpretations by the taxpayer
and respective governmental taxing authorities. Significant judgment is required
in determining our tax expense and in evaluating our tax positions. We review
our tax positions quarterly and adjust the balances as new information becomes
available. Deferred tax assets arise because of temporary differences between
the financial reporting and tax bases of assets and liabilities, as well as from
net operating loss ("NOL"). More specifically, deferred tax assets represent a
future tax benefit that results from losses recorded under GAAP in a current
period which are only deductible for tax purposes in future periods and NOL
carry forwards.
Valuation allowances are established to reduce deferred tax assets to an amount
that "more likely than not" will be realized. Management considers all available
evidence, both positive and negative, when determining whether to establish
and/or maintain a valuation allowance against deferred tax assets, with
significant weight given to evidence that can be objectively verified. Positive
evidence includes reduced potential for material loss as a result of settling
RMBS representation and warranty litigation and resolving exposure to Puerto
Rico , Everspan's receipt of an 'A-'' Financial Strength Rating from AM Best, the
launch of a specialty program property and casualty insurance business, AFG's
acquisition of majority interests in MGA/U businesses and AAC's reduction of
material amounts of debt. Negative evidence includes the potential for
unrecognized future insurance tax losses; cumulative pre-tax losses, adjusted
for nonrecurring one-time events, for the last three years; the legacy financial
guarantee business remains in run-off; and material amounts of debt remain at
AAC.
The level of deferred tax asset recognition is influenced by management's
assessment of future expected taxable income, which depends on the existence of
sufficient taxable income within the carry forward periods available under the
tax law. As a result of the above-described risks and uncertainties associated
with future operating results, management believes it is more likely than not
that the Company will not generate sufficient taxable income to recover part or
all the U.S. federal deferred tax asset and therefore has a full valuation
allowance. To the extent such risks and uncertainties are resolved, Ambac may
have the ability to establish a history of making reliable estimates of future
income which could ultimately result in a reduction to the deferred tax asset
valuation allowance. See Note 17. Income Taxes to the Consolidated Financial
Statements, included in Part II, Item 8 in this Annual Report on Form 10-K for
additional information on the Company's deferred income taxes.
FINANCIAL GUARANTEES IN FORCE
($ in millions)
Financial guarantee products were sold in three principal markets: U.S. public
finance, U.S. structured finance and international finance. The following table
provides a breakdown of guaranteed net par outstanding by market at December 31,
2022 and 2021. Net par exposures within the U.S. public finance market include
capital appreciation bonds which are reported at the par amount at the time of
issuance of the insurance policy as opposed to the current accreted value of the
bonds. Guaranteed net par outstanding includes the exposures of policies
insuring variable interest entities ("VIEs") consolidated in accordance with the
Consolidation Topic of the ASC. Guaranteed net par outstanding excludes the
exposures of policies that insure bonds which have been refunded or pre-refunded
and for 2021 excludes exposure of the policy insuring the Sitka Senior Secured
Notes as defined in Note 1. Background and Business Description to the
Consolidated Financial Statements included in Part II, Item 8 in this Annual
Report on Form 10-K.
December 31, 2022 2021
Public Finance (1) (2) $ 10,547 $ 12,360
Structured Finance 3,612 4,904
International Finance 8,454 10,756
Total net par outstanding $ 22,613 $ 28,020
(1) Includes
(2) Includes
Below we will discuss the significant exposures in our insured portfolio relating to each of the three markets. See Note 7. Financial Guarantees in Force to the Consolidated Financial Statements, included in Part II, Item 8 in this Annual Report on Form 10-K for exposures by bond type.
AAC's portfolio of
outstanding, representing 47% of
2022
| Ambac Financial Group, Inc. 32 2022 FORM 10-K -------------------------------------------------------------------------------- Table of Contents , This reduction in exposure was due to thePuerto Rico restructuring transactions, other active de-riskings, scheduled paydowns, and early terminations (calls, refundings and pre-refundings).Ambac's U.S. public finance portfolio consists of municipal bonds such as general obligation, revenue, and lease and tax-backed obligations of state and local government entities, and also includes several non-municipal types of bonds, such as financings with public and private elements, which generally finance infrastructure, housing and other public interests, the largest sector of which isU.S. military housing which accounts for approximately 51% of AAC'sU.S. Public Finance Insured Portfolio.
Municipal Bonds
Municipal bonds are generally supported directly or indirectly by the issuer's taxing authority or by public sector fees and assessments which may or may not be specifically pledged. Risk factors in these transactions derive from the municipal issuer, including its fiscal management, politics, and economic position, as well as its ability and willingness to continue to pay its debt service. Municipal bankruptcies and similar proceedings, while still relatively uncommon, have occurred, exposingAmbac to the risk of liquidity claims and ultimate losses if issuers cannot successfully adjust their liabilities without impairing creditors. Non-Municipal Bonds Public/private transactions are generally structured to achieve their targeted public interest objective without direct support from the public sector. Some examples of this type of financing include affordable housing, private education, and privatized military housing. Protections within these financings provided toAmbac usually include the strength of the financed asset's essentiality and public purpose and may include financial covenants, collateral and control rights. Risk factors include financial underperformance, event risk and a shift in the asset's mission or essentiality.
Military Housing Bonds
AAC's largest concentration of non-municipal bonds isU.S. military housing.Ambac insures$5,400 net par of privatized military housing debt. The debt was issued to finance the construction and/or renovation of housing units for military personnel and their families on domesticU.S. military bases. Debt service is not directly paid or guaranteed by theU.S. Government . Rather, the bonds are serviced from the cash flow generated in most cases by rental payments deposited by the military directly into lockbox accounts as part of each service personnel's Basic Allowance for Housing (BAH). In typically small percentages, rental payments can also come from civilians, including retired service personnel andUS Department of Defense contractors living on a particular base. Collateral for these transactions includes the BAH payments as well as an interest in the ground lease. Risk factors affecting these transactions include ongoing base essentiality, military deployments, theU.S. government's commitment to fund the BAH, marketability/attractiveness of the on-base housing units versus off-base housing, construction completion, environmental remediation, natural disasters, excessive utility and other operating costs and housing management.Ambac's exposure to privatized military housing debt is a growing concentration given the long-dated maturity profile of the exposure relative to
other parts of
military housing represented approximately 24% of net par outstanding as
compared to 19.6% as of
Ambac's portfolio ofU.S. structured finance exposures is$3,612 in net par outstanding, representing 16% ofAmbac's net par outstanding as ofDecember 31, 2022 , and a 26% reduction from the amount outstanding atDecember 31, 2021 . This reduction in exposure was primarily related to (i) RMBS policies, which continued to prepay as well as incur claims, (ii) de-risking activity and (iii) scheduled paydowns. Current insured exposures primarily include securitizations of mortgage loans, home equity loans and student loans, in each case where the majority of the underlying collateral risk is situated inthe United States . AtDecember 31, 2022 , RMBS represented approximately 9% of net par outstanding. Structured finance securitization exposures generally entail three forms of risk: (i) asset risk, which relates to the amount and quality of the underlying assets; (ii) structural risk, which relates to the extent to which the transaction's legal structure and credit support provide protection from loss; and (iii) servicer risk, which is the risk that poor performance at the servicer or manager level contributes to a decline in cash flow available to the transaction. AAC seeks to mitigate and manage these risks through its risk management practices.
International Finance Insured Portfolio
Ambac's portfolio of international finance insured exposures is$8,454 in net par outstanding, representing 37% ofAmbac's net par outstanding as ofDecember 31, 2022 , and a 21% reduction from the amount outstanding atDecember 31, 2021 . This reduction in exposure was primarily the result of commutations and a strengthening of the US dollar versus the British pound and the Euro.Ambac's international finance insured exposures include a wide array of obligations in the international markets, including infrastructure financings, utility obligations, whole business securitizations (e.g., securitizations of substantially all of the operating assets of a corporation) and sub-sovereign credits. AtDecember 31, 2022 , sub-sovereign and investor-owned and public utilities represented approximately 18% and 11% of net par outstanding, respectively.Ambac has no insured exposure related to emerging markets. When underwriting transactions in the international markets,Ambac considered the specific risks related to the particular country and region that could impact the credit of the issuer. These risks include the legal and political environment, capital markets dynamics, foreign exchange issues and the degree of governmental support.Ambac continues to assess these risks through its ongoing risk management. AmbacUK , which is regulated in theUnited Kingdom ("UK"), was AAC's primary vehicle for directly issuing financial guarantee policies in theUK and theEuropean Union with$8,194 net par outstanding atDecember 31, 2022 . The portfolio of insured exposures underwritten by AmbacUK is financially supported exclusively by the assets of AmbacUK and no capital support arrangements are in place with any otherAmbac affiliate. | Ambac Financial Group, Inc. 33 2022 FORM 10-K -------------------------------------------------------------------------------- Table of Contents ,Ambac's international net par exposures are principally in theUnited Kingdom ($7,223 ); however, we also have exposures with credit risk based in various EU member states, including
sovereign bonds of the above EU countries.
Largest Insured Exposures:
The table below showsAmbac's ten largest exposures, by repayment source, as a percentage of total financial guarantee net par outstanding atDecember 31, 2022 (in millions): % of Total Ambac Net Par Net Par Sector Co. Bond Kind Country-Bond Type Ratings (1) Ultimate Maturity Year Outstanding Outstanding IF AUK Investor Owned Utility Gas - UK-Utility BBB+ 2037$ 805 3.6 % unsecured IF AUK Other Asset Securitizations UK-Asset Securitizations BBB 2033 744 3.3 % IF AUK PFI - Accommodation UK-Infrastructure A- 2040 723 3.2 % IF AUK PFI - Hospitals UK-Infrastructure A- 2046 688 3.0 % IF AUK Investor Owned Utility Other - UK-Utility A- 2035 598 2.6 % unsecured IF AUK Sub-Sovereign Italy-Sub-Sovereign BIG 2035 591 2.6 % IF AUK Investor Owned Utility Electric - UK-Utility BBB+ 2036 556 2.5 % unsecured PF AAC US State Lease/Appropriation US-Lease and Tax-backed BBB- 2036 489 2.2 % Revenue IF AUK PFI - Accommodation UK-Infrastructure BBB+ 2038 472 2.1 % PF AAC Military Housing US-Housing Revenue BBB- 2052 450 2.0 % Total$ 6,116 27.1 %
PF = Public Finance, SF = Structured Finance, IF = International Finance
AAC =
(1)Internal credit ratings are provided solely to indicate the underlying credit quality of guaranteed obligations based on the view ofAmbac . In cases whereAmbac has insured multiple tranches of an issue with varying internal ratings, or more than one obligation of an issuer with varying internal ratings, a weighted average rating is used.Ambac credit ratings are subject to revision at any time and do not constitute investment advice. BIG denotes credits deemed below investment grade. Net par related to the top ten exposures reduced$1,209 fromDecember 31, 2021 . Exposures are impacted by commutations, changes in foreign exchange rates ($575 reduction during 2022), certain indexation rates linked to inflation measures in theUnited Kingdom (RPI) andAustralia (CPI), and scheduled and unscheduled paydowns. As a result of recent increases in inflation, such indexation-linked exposures have increased at a faster pace than they have historically. The concentration of net par amongst the top ten (as a percentage of net par outstanding) increased slightly to 27.1% atDecember 31, 2022 , from 26.2% atDecember 31, 2021 . Excluding the top ten exposures, the remaining insured portfolio of financial guarantees has an average net par outstanding of$30 per single risk, with insured exposures ranging up to$386 and a median net par outstanding of$5 . Given thatAmbac has not written any new insurance policies since 2008, the risk exists that the insured portfolio becomes increasingly concentrated to large and/or below investment grade exposures.
Our exposure toPuerto Rico (the "Commonwealth") consisted of several different issuing entities (all below investment grade and whereby AAC has paid substantial claims since 2016) that have been part of the debt restructuring process under the Puerto Rico Oversight, Management, and Economic Stability Act ("PROMESA"), aU.S. federal law enacted in 2016 that, among other things, established a financial oversight board (the "FOMB") and provided for a process for restructuring debt that roughly followsU.S. Bankruptcy laws. As ofDecember 6, 2022 , all AAC-insuredPuerto Rico obligations have been restructured under PROMESA via court-approved plans of adjustment or qualifying modifications. The following table outlinesAmbac's insured net par outstanding to eachCommonwealth of Puerto Rico issuer. Net Par Outstanding December 31, ($ in millions) 2022 2021PR Highways and Transportation Authority (1998 Resolution - Senior Lien Transportation Revenue) (1) $ 178 $ 394PR Sales Tax Financing Corporation - Senior Sales Tax Revenue (COFINA) 66 73PR Highways and Transportation Authority (1968 Resolution - Highway Revenue) - 4PR Infrastructure Financing Authority (Special Tax Revenue) - 403PR Convention Center District Authority (Hotel Occupancy Tax - 86Commonwealth of Puerto Rico - General Obligation Bonds - 11PR Public Buildings Authority - Guaranteed by the Commonwealth of Puerto Rico - 83 Total Net Exposure to The Commonwealth of Puerto Rico and Related Entities $ 244 $ 1,054 Total Net P&I Exposure to The Commonwealth of Puerto Rico and Related Entities $ 884 $ 2,423 | Ambac Financial Group, Inc. 34 2022 FORM 10-K --------------------------------------------------------------------------------
Table of Contents ,
(1) As of
acceleration and redemption payments consistent with AAC's plan to further
de-risk its exposure to
Commonwealth Plan of Adjustment (Title III Case)
OnJanuary 18, 2022 , JudgeLaura Taylor Swain ,U.S. District Court for the District of Puerto Rico , entered an order confirming the Eighth Amended Title III Joint Plan of Adjustment of theCommonwealth of Puerto Rico , et al. ("Eighth Amended POA") together with the Qualifying Modifications for PRIFA and CCDA ("PRIFA QM" and "CCDA QM", respectively). OnMarch 15, 2022 , the Eighth Amended POA, the PRIFA QM and CCDA QM became effective, restructuring approximately$33,000 of debt across various Commonwealth instrumentalities, including obligations insured by AAC, and approximately$50,000 in pension obligations. The Eighth Amended POA, among other things, incorporated the settlement reflected in the PRIFA Related Plan Support Agreement ("PRIFA PSA") that was signed onJuly 27, 2021 , by the FOMB, as representative of theCommonwealth of Puerto Rico , AAC, FGIC, and other holders of bonds issued by PRIFA. The Eighth Amended POA also incorporated the settlements reflected in the PRHTA/CCDA Related Plan Support Agreement ("PRHTA/CCDA PSA") datedMay 5, 2021 , and the Amended and Restated Plan Support Agreement with the FOMB, as representative of theCommonwealth of Puerto Rico , PBA, and the Employee Retirement System of the Government of theCommonwealth of Puerto Rico ("Amended and Restated GO / PBA PSA") dated as ofJuly 12, 2021 .
AAC-Insured Bond Effective Date Transactions
GO / PBA
On the Eight Amended POA effective date, AAC-insured GO and PBA bondholders who elected commutation of their insurance received: i) their respective shares of GO/PBA plan consideration available under the Eighth Amended POA, and ii) cash fromAmbac .Ambac's obligations to the bondholders under theAmbac insurance policies who elected this option were deemed to be fully satisfied. On the plan effective date, about 50% and 27% of the outstanding par of theAmbac -insured GO and PBA bonds, respectively, totaling about$28 of insured par was commuted. The AAC-insured GO and PBA bondholders who failed to elect commutation received payment, in cash, of the outstanding principal amount of the bondholders' insured bonds plus the accrued and unpaid interest thereon as of the effective date (the "Ambac Acceleration Price."). Pursuant to this option, bondholders received the Ambac Acceleration Price in full and final discharge ofAmbac's obligations under theAmbac insurance policies. As of the effective date, all the remaining outstanding AAC-insured GO and PBA bonds were satisfied and eliminated via commutation or acceleration.
PRIFA / CCDA
On the Eight Amended POA effective date, AAC-insured PRIFA and CCDA bondholders who elected commutation of their insurance received: 1) their respective shares of PRIFA or CCDA plan consideration available under the Eighth Amended POA and the PRIFA QM, or CCDA QM, as applicable, and 2) cash fromAmbac .Ambac's obligations to the bondholders under theAmbac insurance policies who elected this option were deemed to be fully satisfied. The AAC-insured PRIFA and CCDA bondholders who failed to elect commutation had their bondholders' respective shares of consideration available under the Commonwealth Plan and the PRIFA QM, or CCDA QM, as applicable, deposited into a trust. On the plan effective date, about 39% and 19% of the outstanding par of the AAC-insured PRIFA and CCDA bonds, respectively, totaling about$172 of insured par was commuted with the remainder totaling about$317 of insured par deposited into the trusts. During the second quarter of 2022, the remainder of those PRIFA and CCDA bonds belonging to bondholders who elected not to commute their AAC Insurance Policies and were deposited into trusts together with such policies were all accelerated, satisfying and eliminating all of the AAC-insured PRIFA and CCDA bonds.
PRHTA Plan of Adjustment (Title III Case)
OnOctober 12, 2022 ,Judge Swain entered an order confirming the Fifth Amended Title III Plan of Adjustment ofThe Puerto Rico Highways and Transportation Authority (" PRHTA POA"). OnDecember 6, 2022 , the PRHTA POA became effective, restructuring approximately$6,400 of PRHTA claims, including obligations insured by AAC. The PRHTA POA, among other things incorporated the settlement reflected in the PRHTA/CCDA PSA.
PRHTA / CCDA PSA
AAC signed a joinder to the PRHTA/CCDA PSA onJuly 15, 2021 . The PRHTA/CCDA PSA, originally executed onMay 5, 2021 , provided for certain consideration for holders of bonds issued by certain Commonwealth instrumentalities, PRHTA and CCDA on account of their claims against the Commonwealth arising from such bonds ("Clawback" claims). Under the PRHTA/ CCDA PSA, PRHTA creditors shared$389 of cash proceeds that was paid onJuly 8, 2022 , once the PRHTA distribution condition was met pursuant to the Eighth Amended POA (the "Interim Distribution"). In addition, PRHTA creditors received an approximately 69% share of the Clawback contingent value instrument ("CVI"), subject to a lifetime nominal cap of about$3,698 , which was also paid as part of the Interim Distribution. The PRHTA Clawback CVI is subject to a PRHTA-specific waterfall: holders of PRHTA '68 bonds will receive the first dollars of Clawback CVI, followed by holders of PRHTA '98 bonds PRHTA bondholders also received new PRHTA bonds with a face amount of$1,245 . Of the$1,245 in new bonds, approximately$646.4 was allocated to holders of PRHTA '68 bonds and approximately$598.6 was allocated to holders of PRHTA '98 bonds. In addition, AAC and other PRHTA creditors received restriction fees and consummation costs that were payable at the effective date of the PRHTA POA.
PRHTA Interim Distribution
OnJuly 8, 2022 , following satisfaction of the PRHTA distribution condition, AAC received its share of the Interim Distribution of cash and Clawback CVI related to theAmbac insured PRHTA '68 and '98 bonds in satisfaction of the Clawback claims against the Commonwealth under the Eighth Amended POA. The Interim Distribution to AAC totaled approximately$19 of cash and$295 maximum notional value of Clawback CVI, which had been recorded as cash and fixed maturity securities - trading (at fair value), respectively, on the Consolidated Balance Sheet. On the PRHTA POA effective date, a portion of the cash and Clawback CVI were: (i) | Ambac Financial Group, Inc. 35 2022 FORM 10-K -------------------------------------------------------------------------------- Table of Contents , distributed to PRHTA '98 commuting bondholders together with the new PRHTA bonds in connection with the PRHTA POA and a commutation payment from AAC in full satisfaction of and in full and final discharge ofAmbac's obligations under theAmbac insurance policies or (ii) deposited into a trust, as described below, together with the new PRHTA bonds or in connection with the PRHTA POA.
PRHTA Effective Date Transactions
On the PRHTA effective date, 1) all remaining outstanding AAC-insured PRHTA '68 bonds were fully satisfied and eliminated via acceleration, and 2), pursuant to bondholder election, AAC-insured PRHTA '98 bondholders who elected commutation of their insurance received (i) their share of PRHTA plan consideration under the PRHTA POA and the interim distribution under the Eighth Amended POA, and (ii) cash from AAC. AAC's obligations to the bondholders under theAmbac insurance policies who elected this option were deemed to be fully satisfied and eliminated. The AAC-insured PRHTA '98 bondholders who failed to elect commutation had their bondholders' share of plan consideration under the PRHTA POA and the interim distribution under the Eighth Amended POA deposited into a trust. On the plan effective date, about 21% of the outstanding par of the AAC-insured PRHTA 98 bonds, totaling about$83 of net par outstanding was commuted with the remainder totaling about$312 of net par outstanding being deposited into the trusts. Following the effective date, subsequent redemptions of trust units via the pass through of plan consideration proceeds and AAC acceleration payments further reduced AAC-insured PRHTA '98 net par exposure to$178 as ofDecember 31, 2022 . Since year-end, AAC-insured PRHTA exposure has been further reduced through redemptions of trusts units via the pass through of plan consideration proceeds, interest on plan consideration, and AAC acceleration payments.
Additional Insured Portfolio Information
Average Life of Insured Portfolio
Ambac estimates that the average life of its guarantees on par in force atDecember 31, 2022 , is approximately 10 years. The average life is determined by applying a weighted average calculation, using the remaining years to expected maturity of each guaranteed bond, and weighting them on the basis of the remaining net par guaranteed. Except for RMBS policies, no assumptions are made for non-contractual reductions, refundings or terminations of insured issues. RMBS policies incorporate assumptions on expected prepayments over the remaining life of the insured obligation.
The following table depicts amortization of existing guaranteed net par
outstanding:
Net Par Outstanding Amortization (1) Estimated Net ($ in millions) Amortization 2023$ 1,251 2024 1,505 2025 1,252 2026 1,208 2027 1,014 2023 - 2027$ 6,230 2028 - 2032 5,172 2033 - 2037 6,597 2038 - 2042 2,040 After 2042 2,574 Total$ 22,613 (1) Depicts amortization of existing guaranteed portfolio, assuming no advance refundings, as ofDecember 31, 2022 . Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay guaranteed obligations. Exposure Currency
The table below shows the distribution by currency of
guaranteed net par outstanding as of
Net Par Net Par
Amount Amount Percentage
Outstanding Outstanding of Net Par
Currency in Base in U.S. Amount
($ in millions) Currency Dollars Outstanding
U.S. Dollars $ 14,350 $ 14,350 63 %
British Pounds £ 5,842 7,048 31 %
Euros € 894 956 4 %
Australian Dollars A$ 380 259 1 %
Total $ 22,613 100 %
See Note 7. Financial Guarantees in Force to the Consolidated Financial
Statements, included in Part II, Item 8 included in this Annual Report on Form
10-K, for geographic detail by location of risk as of
Ratings Distribution
The following charts provide a rating distribution of existing net par outstanding based upon internalAmbac credit ratings atDecember 31, 2022 and 2021, and a distribution ofAmbac's below investment grade ("BIG") net par exposures atDecember 31, 2022 and 2021. BIG is defined as those exposures with an internal credit rating below BBB-: | Ambac Financial Group, Inc. 36 2022 FORM 10-K -------------------------------------------------------------------------------- Table of Contents , [[Image Removed: ambc-20221231_g4.jpg]] [[Image Removed: ambc-20221231_g5.jpg]] Note: AAA is less than 1% in both periods. (1) Internal credit ratings are provided solely to indicate the underlying credit quality of guaranteed obligations based on the view ofAmbac . In cases whereAmbac has insured multiple tranches of an issue with varying internal ratings, or more than one obligation of an issuer with varying internal ratings, a weighted average rating is used.Ambac credit ratings are subject to revision at any time and do not constitute investment advice.
Summary of Below Investment Grade Exposure:
Bond Type Net Par Outstanding December 31, 2022 2021 Public Finance: Military Housing$ 366 $ 370 Puerto Rico 244 1,054 Other 213 317 Total Public Finance 823 1,741 Structured Finance: RMBS 1,841 2,170 Student loans 275 302 Total Structured Finance 2,117 2,472 International Finance: Sovereign/sub-sovereign 701 774 Transportation 310 389 Other 2 62 Total International Finance 1,013 1,225 Total$ 3,953 $ 5,438
The net decline in below investment grade exposures is primarily due to
de-risking activities, including the
exchange rates of
Below investment grade exposures could increase as a relative proportion of the guarantee portfolio given that stressed borrowers generally have less ability to prepay or refinance their debt. Accordingly, due to these and other factors, it is not unreasonable to expect the proportion of below investment grade exposure in the guarantee portfolio to continue to increase in the future.
Ceded Reinsurance
AAC has reinsurance in place pursuant to surplus share treaties and facultative agreements. As a primary financial guarantor, AAC is required to honor its obligations to its policyholders whether or not its reinsurers perform their obligations under these reinsurance agreements. AAC's reinsurers all have applicable ratings of A of better. As ofDecember 31, 2022 , the aggregate amount of insured par ceded by AAC to reinsurers under reinsurance agreements was$4,938 , with the largest reinsurer accounting for$2,187 or 7.9% of gross par outstanding atDecember 31, 2022 . |Ambac Financial Group, Inc. 37 2022 FORM 10-K --------------------------------------------------------------------------------
Table of Contents ,
The following table shows the distribution, by bond type, of AAC's ceded
guaranteed portfolio at
Ceded Par Amount
Bond Type Outstanding
December 31, 2022 2021
Public Finance:
General obligation $ 1,265 $ 1,458
Lease and tax-backed revenue 1,169 1,618
Housing revenue 910 922
Transportation revenue 699 749
Other 555 612
Total Public Finance 4,598 5,359
Structured Finance:
Investor-owned utilities 174 222
Structured insurance - 313
Other 136 185
Total Structured Finance 310 720
Total Domestic 4,908 6,079
International Finance:
Total International Finance 30 23
Total $ 4,938 $ 6,102
Percentage of Gross Par Ceded 18 % 18 %
RESULTS OF OPERATIONS ($ in millions) The following discussion should be read along with the financial statements included in this Annual Report on Form 10-K, as well as Part II, "Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Annual Report on Form 10-K for the year endedDecember 31, 2021 , which provides additional information on comparisons of years 2021 and 2020. Net income attributable to common stockholders for the year endedDecember 31, 2022 , was$522 compared to a net loss attributable to common stockholders of$17 for the year endedDecember 31, 2021 . The net income variance was primarily driven by: (i) a higher benefit through loss and loss adjustment expenses, (ii) a litigation recovery, (iii) higher gains on derivative contracts, (iv) higher net gains on extinguishment of debt, and (v) lower interest expense, partially offset by lower returns from the investment portfolio.
A summary of our financial results is shown below:
Year Ended December 31, 2022 2021 2020 Revenues: Net premiums earned$ 56 $ 47 $ 54 Commission income 31 26 - Program fees 3 - - Net investment income 17 139 122 Net investment gains (losses), including impairments 31
7 22
Net gains (losses) on derivative contracts 129 22 (50) Net realized gains on extinguishment of debt 81 33 - Income (loss) on variable interest entities 21 7 5 Other income 10 1 3 Litigation recoveries 126 - - Expenses: Losses and loss adjustment expenses (benefit) (396) (88) 225 Amortization of deferred acquisition costs, net 3 1 - Commission expense 18 15 - General and administrative expenses 141 111 92 Intangible amortization 47 55 57 Interest expense 168 187 222 Provision (benefit) for income taxes 2 18 (3) Net income (loss) 522 (16) (437) Less: net (gain) loss attributable to noncontrolling interest (1) (1) - Net income (loss) attributable to common stockholders$ 522
by the following:
•As ofDecember 6, 2022 , all AAC-insuredPuerto Rico obligations were restructured under PROMESA via court-approved plans of adjustment or qualifying modifications. As a result of these successful restructurings,Ambac's 2022 consolidated financial results included a net benefit of$180 in losses and gains of$37 on the consolidation of newly established variable interest entities; partially offset by net losses of$23 from sales and changes to the fair value of securities received by AAC in the restructurings, losses of$17 on the VIEs after initial consolidation and accelerated amortization of the insurance intangible asset. | Ambac Financial Group, Inc. 38 2022 FORM 10-K -------------------------------------------------------------------------------- Table of Contents , •OnOctober 6, 2022 , AAC entered into a Settlement Agreement and Release with Bank of America Corporation and certain affiliates thereof (the "BOA Parties") whereby the parties settled all RMBS litigation brought by AAC against the BOA Parties and AAC received$1,840 . OnDecember 29, 2022 , AAC entered into a Settlement Agreement and Release withNomura Credit & Capital, Inc. whereby the parties settled all RMBS litigation brought by AAC against Nomura and AAC received$140 onJanuary 3, 2023 . AAC used the proceeds from these settlements (net of reinsurance) plus approximately$6 of cash on hand to fully redeem all debt obligations secured by the net proceeds of litigations brought by AAC against RMBS sponsors. The settlements with the BOA Parties and Nomura brought to closure all of AAC's legacy litigation against RMBS sponsors. See Note 1. Background and Business Description in Part II, Item 8 in this Annual Report on Form 10-K for further information. During 2022, AAC recorded a gain of$123 million in loss and loss adjustment expenses and litigation recoveries of$126 , offset by net realized losses on extinguishment of debt of$53 related to the above-mentioned settlement agreements.
The following paragraphs describe the consolidated results of operations of
Gross Premiums Written. Gross premiums written increased$125 for the year endedDecember 31, 2022 , compared to the same periods in the prior year, as shown by segment below. Year Ended December 31, 2022 2021 2020
Legacy
Total
$ 127 $ 2 $ (1) Legacy Financial Guarantee Insurance gross written premiums were negative from de-riskings, pre-payments and other changes in expected cash flows of insured transactions.
See gross premiums written by line of business for the
Casualty Insurance
this Annual Report on Form 10-K.
Net Premiums Earned. Net premiums earned for the year endedDecember 31, 2022 increased by$9 or 20% as compared to net premiums earned for the year endedDecember 31, 2021 , as shown below. Year Ended December 31, 2022 2021 2020
Legacy
Total
56 47 54
The reduction in
earned was primarily due to de-risking activities, run-off of the insured
portfolio, and the impact from the strengthening of the US dollar relative to
the British Pound Sterling. The increase in Specialty Property & Casualty
Insurance net premiums earned was driven by the growth in net premiums written.
Commission Income. Commission income was$31 compared to$26 , for the years endedDecember 31, 2022 and 2021. Commissions include both base and profit sharing commissions of the Insurance Distribution segment. The increase was driven by greater premiums placed by Xchange Benefits as well as premiums placed byAll Trans and Capacity Marine since their acquisition inNovember 2022 . Commission expense will largely track changes in gross commission. For the year endedDecember 31, 2022 commissions expenses were$18 compared to$15 for the year endedDecember 31, 2021 , representing approximately 58% of commission income in both periods. Program Fees. Program fee revenues were$3 compared to less than$1 for the yearsDecember 31, 2022 and 2021, respectively. Program fee revenues represent the recognition of ceding commissions in excess of direct acquisition costs received from reinsurers and minimum fees received from MGA/Us until the related program reaches a certain level of premium. Program fees are typically charged as a percentage of premiums ceded to reinsurers as a component of total ceding commissions. Net Investment Income. Net investment income primarily consists of interest and net discount accretion on fixed maturity securities classified as available-for-sale, interest and changes in fair value of fixed maturity securities classified as trading, and net gains (losses) on pooled investment funds which include changes in fair value of the funds' net assets. Fixed maturity securities include investments inAmbac -insured securities that are made opportunistically based on their risk/reward and asset-liability management characteristics. Investments in pooled investment funds and certain other investments are either classified as trading securities with changes in fair value recognized in earnings or are reported under the equity method. These funds and other investments are reported in Other investments on the Consolidated Balance Sheets. For further information about investment funds held, refer to Note 5. Investments to the Consolidated Financial Statements, included in Part II, Item 8 in this Annual Report on Form 10-K. Net investment income for the periods presented were driven by theLegacy Financial Guarantee Insurance segment, other segments' results were not significant.
Net investment income from
securities other than
table below:
Year Ended December 31, 2022 2021 2020 Securities available-for-sale:Ambac -insured (including secured notes) $ 24 $ 45 $ 62 Securities available-for-sale and short-term other than Ambac-insured 42 29 41 Other investments (includes trading securities) (49) 66 19 Net investment income $ 17$ 139 $ 122 | Ambac Financial Group, Inc. 39 2022 FORM 10-K -------------------------------------------------------------------------------- Table of Contents , Net investment income decreased$123 for the year endedDecember 31, 2022 , compared to 2021. As described further below, the variance was primarily driven by 2022 fair value losses within fund investments and on fixed maturity investments classified as trading, and the impact of the LSNI Secured Note redemption inJuly 2021 . •Other investments results decreased$115 in 2022, compared to the prior year, including losses of$23 on securities received in thePuerto Rico restructurings which are classified as trading. Pooled fund investments produced a net loss of$26 in 2022, a decrease of$92 compared to 2021. The decrease was driven by net losses in most fund categories compared to generally strong performance in 2021, with the largest declines being in hedge funds, equities, high-yield and leveraged loan funds and real estate. Investments in pooled funds may be volatile, but are generally expected to produce higher returns than traditional fixed maturity investments. •Investment income fromAmbac -insured securities decreased$21 in 2022, compared to 2021, due primarily to lower levels of secured note holdings, the impact of theMarch 15, 2022 andDecember 6, 2022 Puerto Rico restructurings and continued runoff of AAC-insured RMBS.
•Net investment income from available-for-sales securities other than
to higher portfolio yields.
Net Investment Gains (Losses), including Impairments. The following table
provides a breakdown of net investment gains, for the periods presented:
Year Ended December 31, 2022 2021
2020
Net realized gains on securities sold or called
Net foreign exchange gains (losses)
14 (5)
(4)
Credit impairment - - - Intent / requirement to sell impairments - - -
Total net investment gains, including impairments
Net investment gains on securities sold or called during the year endedDecember 31, 2022 , included a recovery of$9 from a class-action settlement relating to certain RMBS securities previously held in the investment portfolio,$4 from the distribution of residual assets of a legacy financial guarantee student loan restructuring vehicle and$5 from the mandatory redemption of Sitka Senior Secured Notes over their amortized cost value. Realized gains in 2021 included$4 on the sale of AFG's equity interest in theCorolla Trust in connection with the Corolla Note Exchange (as such terms are defined in Note 1. Background and Business Information to the Consolidated Financial Statements included in this Annual Report). Other net realized gains on securities sold or called in 2022 and 2021 are primarily from sales in connection with routine portfolio management.
Credit impairments are recorded as an allowance for credit losses with changes
in the allowance recorded through earnings.
Any non-credit related impairment amounts on the securities are recorded in other comprehensive income. If management either: (i) has the intent to sell its investment in a debt security or (ii) determines that the Company is more likely than not will be required to sell the debt security before its anticipated recovery, then the amortized cost of the security is written-down to fair value with a corresponding impairment charge recognized in earnings.Net Gains (Losses) on Derivative Contracts. Net gains (losses) on derivative contracts are primarily from the Company's interest rate derivatives portfolio, which is positioned to benefit from rising rates as a partial economic hedge against interest rate exposure in the financial guarantee insurance and investment portfolios. Net gains (losses) on interest rate derivatives generally reflect mark-to-market gains (losses) in the portfolio caused by increases (declines) in forward interest rates during the periods, the carrying cost of the portfolio, and the impact of counterparty credit adjustments as discussed below. Results from other non-VIE derivatives were not significant to the periods presented. Net gains on interest rate derivatives for the year endedDecember 31, 2022 , were$128 , compared to a net losses of$22 for the year endedDecember 31, 2021 . The net gain for the year endedDecember 31, 2022 , reflects changes in fair value from increases in forward interest rates and lower counterparty credit adjustments on certain derivative assets, partially offset by portfolio carrying costs. The improved results for the year endedDecember 31, 2022 , resulted from significant interest rate increases combined with favorable portfolio positioning and the impact of credit spreads in derivative assets as described further below. Counterparty credit adjustments are generally applicable for uncollateralized derivative assets that may not be offset by derivative liabilities under a master netting agreement. In periods when credit spreads are stable, counterparty credit adjustments will generally have a proportionate offsetting impact to gains or losses on derivative assets, relative to fully collateralized assets. In addition to the impact of interest rates on the underlying derivative asset values, the changes in counterparty credit adjustments are driven by movement of credit spreads. Generally, narrowing (widening) of credit spreads will increase (decrease) derivative gains relative to a period of stable credit spreads. Inclusion of counterparty credit adjustments in the valuation of interest rate derivatives resulted in gains (losses) within Net gains (losses) on derivative contracts of$8 and$5 for the years endedDecember 31, 2022 and 2021, respectively. The lower counterparty credit adjustments for both periods reflected lower underlying asset values with the further impact of credit spread widening in 2022 and narrowing in 2021. Net Realized Gains on Extinguishment of Debt. Net realized gains on extinguishment of debt was$81 for year endedDecember 31, 2022 . Gains were recognized due to repurchases of surplus notes below their carrying values, partially offset with losses recognized on the redemption of the Sitka AAC Note (as defined in Note 1. Background and Business Description to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K) above its carrying value. | Ambac Financial Group, Inc. 40 2022 FORM 10-K -------------------------------------------------------------------------------- Table of Contents , AAC repurchased$266 million current par of surplus notes from third party holders between the second and fourth quarters of 2022. Net realized gains on extinguishment of debt was$33 for the year endedDecember 31, 2021 , resulting from the 2021 exchanges of junior surplus notes below their carrying values. Refer to Note 1. Background and Business Description in the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for further discussion of the 2021 Surplus Notes Exchanges. Subject to internal and regulatory guidelines, market conditions and other constraints,Ambac may continue to opportunistically purchase surplus notes and may consider opportunities to exchange securities issued by it from time to time for other securities issued by it. Income (Loss) on Variable Interest Entities. Included within Income (loss) on variable interest entities are income statement amounts relating to FG-VIEs consolidated under the Consolidation Topic of the ASC as a result ofAmbac's variable interest arising from financial guarantees written byAmbac's subsidiaries, including gains or losses attributable to consolidating or deconsolidating FG-VIEs during the periods reported. Generally, the Company's consolidated VIEs are entities for whichAmbac has provided financial guarantees on all of or a portion of its assets or liabilities. In consolidation, assets and liabilities of the FG-VIEs are initially reported at fair value and the related insurance assets and liabilities are eliminated. However, the amount of FG-VIE net assets (liabilities) that remain in consolidation generally result from the net positive (negative) projected cash flows from (to) the VIEs which are attributable toAmbac's insurance subsidiaries in the form of financial guarantee insurance premiums, fees and losses. In the case of VIEs with net negative projected cash flows, the net liability is generally to be funded byAmbac's insurance subsidiaries through insurance claim payments. Differences between the net carrying value of the insurance accounts under the Financial Services-Insurance Topic of the ASC and the carrying value of the consolidated FG-VIE's net assets or liabilities are recorded through income at the time of consolidation. Additionally, terminations or other changes toAmbac's financial guarantee insurance policies that impact projected cash flows between a consolidated FG-VIE andAmbac could result in gains or losses, even if such policy changes do not result in deconsolidation of the FG-VIE. Income (loss) on variable interest entities was$21 and$7 for the years endedDecember 31, 2022 and 2021, respectively. Results for the year endedDecember 31, 2022 , related primarily to three VIE trusts created in connection with thePuerto Rico restructurings in 2022. The year endedDecember 31, 2022 , included the initial$37 gain upon consolidation, losses of$9 from changes to fair value of these VIEs' assets, and losses of$7 from these VIEs driven by interest costs. Results for the year endedDecember 31, 2021 , were due primarily to gains on higher valuation of net assets of VIEs, together with realized gains of$2 on sales of assets from theCOFINA Trust . Refer to Note 12. Variable Interest Entities to the Consolidated Financial Statements included in this Annual Report on Form 10-K for further information on the accounting for VIEs. Litigation Recoveries. In connection with the settlement agreement with Bank of America Corporation and certain affiliates, the BOA Settlement Payment included recoveries from litigations for alleged breaches of contractual obligations and fraud by the BOA Parties. Management allocated the BOA Settlement Payment to each of the litigations based on previously developed valuations of each individual litigation. The portion of the BOA Settlement Payment allocated to fraud litigation recoveries has been recorded as a litigation recovery in the Statement of Comprehensive Income (Loss).
Losses and Loss Adjustment Expenses (Benefit). Losses and loss adjustment
expenses include the financial guarantee and specialty property and casualty
businesses.
Loss and loss adjustment expenses decreased$308 for the year endedDecember 31, 2022 , compared to the prior year. Legacy financial guarantee loss and loss adjustment expenses (benefit) were$(406) and$(89) for the years endedDecember 31, 2022 and 2021, respectively.Specialty Property and Casualty Insurance loss and loss adjustment expenses were$9 and $- for the years endedDecember 31, 2022 and 2021, respectively LFG Losses and loss expenses (benefit) for 2022, were driven by favorable RMBS development due to the impact of the settlement agreements with Bank of America Corporation and certain affiliates thereof and Nomura Credit and Capital, Inc.of$123 and the positive impact of discount rates, and favorable loss development in domestic public finance (primarily due to thePuerto Rico restructurings of$180 ).
LFG Losses and loss expenses for 2021 were largely driven by favorable loss
development in domestic public finance, primarily related to
structured finance, primarily related to improved credit in RMBS, partially
offset by the negative impact of discount rates, and loss expenses incurred.
General and Administrative Expenses ("G&A"). The following table provides a
summary of G&A expenses for the periods presented:
($ in millions) Year Ended December 31, 2022 2021 2020 Compensation$ 66 $ 62 $ 51 Non-compensation 75 49 41 Total 141 111 92
G&A expenses for the year ended
from G&A expenses for the year ended
primarily due to the following:
•Higher compensation costs primarily due to a net increase in staffing from additions in theSpecialty Property and Casualty Insurance and Insurance Distribution segments, partially offset by reductions in staffing in the Legacy Financial Guaranty segment, and the impact of performance factor adjustments on incentive compensation expense. •Higher non-compensation costs primarily related toLegacy Financial Guarantee Insurance segment defensive litigation expenses of$26 andSpecialty Property and Casualty Insurance segment costs associated with growth of the business. These items were partially offset by a reduction in advisory fees associated with Legacy Financial | Ambac Financial Group, Inc. 41 2022 FORM 10-K -------------------------------------------------------------------------------- Table of Contents ,Guarantee Insurance stemming from the 2021 secured note refinancing. Intangible Amortization. Insurance intangible amortization was$44 and$52 for the years endedDecember 31, 2022 and 2021, respectively. The decrease in amortization for the year endedDecember 31, 2022 , compared to 2021, is primarily due to run-off of the insured portfolio and de-risking activity. Other intangible amortization was$3 and$3 for the years endedDecember 31, 2022 and 2021 relating to the acquisitions within the Insurance Distribution segment. Interest Expense. Interest expense includes accrued interest on the LSNI Ambac Note (as defined in Note 1. Background and Business Description to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K), Sitka AAC Note, Tier 2 Notes, surplus notes and other debt obligations. Additionally, interest expense includes discount accretion when the debt instrument carrying value is at a discount to par. The following table provides details by type of obligation for the periods presented: Year Ended December 31, 2022 2021 2020 Surplus Notes (1)$ 78 $ 77 $ 85 LSNI Ambac Note - 50 107 Sitka AAC Note 63 32 - Tier 2 Notes 26 27 28 Other 1 1 1 Total interest expense$ 168 $ 187 $ 222
(1)Includes interest on Junior Surplus Notes that were acquired and retired in
2021.
The decrease in interest expense for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 , reflects the impact of the 2021 refinancing and 2022 redemption of secured notes as described further under "Secured Note Refinancing" and "Redemption of Notes" in Note 1. Background and Business Description to the Consolidated Financial Statements, included in this Annual Report on Form 10-K. These transactions resulted in lower debt outstanding and a lower coupon interest rate on the Sitka AAC Note relative to the LSNI Ambac Note. Interest expense for 2022 also declined as a result of purchases of surplus notes throughout the year. These benefits were partially offset by the effects of interest compounding on surplus notes and the Tier 2 Notes. Surplus note principal and interest payments require the approval of OCI. InMay 2022 , OCI declined the request of AAC to pay the principal amount of the surplus notes, plus all accrued and unpaid interest thereon, on the then next scheduled payment date ofJune 7, 2022 . As a result, the scheduled payment date for interest, and the scheduled maturity date for payment of principal of the surplus notes, was extended until OCI grants approval to make the payment. Interest will accrue, compounded on each anniversary of the original scheduled payment date or scheduled maturity date, on any unpaid principal or interest through the actual date of payment, at 5.1% per annum. Holders of surplus notes will have no rights to enforce the payment of the principal of, or interest on, surplus notes in the absence of OCI approval to pay such amount. The interest on the outstanding surplus notes were accrued for and AAC is accruing interest on the interest amounts following each scheduled payment date. Total accrued and unpaid interest for surplus notes outstanding to third parties was$427 atDecember 31, 2022 . Since the issuance of the surplus notes in 2010, OCI has declined to approve regular payments of interest on surplus notes, although the OCI has permitted two exceptional payments. Provision for Income Taxes. The provision for income taxes for the year endedDecember 31, 2022 and 2021, was a expense of$2 and$18 , respectively. Income taxes for the year endedDecember 31, 2022 and 2021, includes provisions for income tax due in respect of AmbacUK of$3 and$16 , respectively. AtDecember 31, 2022 , the Company had approximately$3,454 ofU.S. Federal net ordinary operating loss carryforwards, including approximately$1,630 at AFG and$1,824 at AAC. Results of Operations by Segment
Year Ended December 31, 2022 2021 Revenues: Net premiums earned$ 42 $ 46 Net investment income 12 138 Net investment gains (losses), including impairments 32 3 Net gains (losses) on derivative contracts 128 22 Net realized gains on extinguishment of debt 81 33 Other income 30 8 Litigation recoveries 126 - Total 451 250 Expenses: Losses and loss adjustment expenses (benefit) (406) (89) General and administrative expenses
102 77
Total (303) (12) Earnings before interest, taxes, depreciation and amortization (1) 754 262 Interest expense 168 187 Depreciation 2 2 Intangible amortization 44 52 Pretax income (loss)$ 540 $ 20 Stockholders equity (2)$ 826 $ 684
(1)Abbreviated as "EBITDA" in future references
(2)Represents the share of
the
eliminations.
The Legacy Financial Guarantee Insurance segment is in active runoff. This will generally result in lower premium earned, investment income, operating expenses and intangible amortization. The variability in the financial results are primarily driven by changes in loss and loss adjustment expenses resulting from, amongst other items, litigation settlements, credit developments and de-risking transactions. Additionally, the segment results are impacted by changes in interest rates as they impact net gains on derivative contracts and | Ambac Financial Group, Inc. 42 2022 FORM 10-K -------------------------------------------------------------------------------- Table of Contents , interest expense on the floating rate Sitka AAC Note (prior to its redemption in 2022). Key variances not discussed above in the Consolidated Results section are as follows: Net premiums earned. Net premiums earned decreased$4 for the year endedDecember 31, 2022 , compared to the same period in the prior year. Net premiums earned were impacted by the organic and active runoff of the financial guarantee insured portfolio resulting in a reduction to current and future normal net premiums earned and the following: •Changes to the allowance for credit losses on the premium receivable asset. The positive impact on net premiums earned related to credit losses amounted to$4 and$8 for the years endedDecember 31, 2022 and 2021, respectively. •Accelerated financial guarantee premiums earned as a result of calls and other accelerations on insured obligations, largely due to active de-risking of the insured portfolio, were$8 and$1 for the years endedDecember 31, 2022 and 2021, respectively.
Losses and Loss Adjustment Expenses (Benefit). Losses and loss adjustment
expenses are based upon estimates of the aggregate losses inherent in the
non-derivative portfolio for insurance policies issued to beneficiaries,
excluding consolidated VIEs.
Ambac recorded as a component of its loss reserve estimate subrogation recoverables related to securitized loans in RMBS transactions with respect to which AAC pursued claims for breaches of representations and warranties.Ambac has recorded representation and warranty ("R&W") subrogation recoverables, net of reinsurance, of$140 and$1,704 atDecember 31, 2022 and 2021, respectively. The decrease in these recoverables was primarily attributable to the settlement agreement with Bank of America Corporation and certain affiliates. OnDecember 29, 2022 , AAC entered into a Settlement Agreement and Release withNomura Credit & Capital, Inc. whereby the parties settled all RMBS litigation brought by AAC against Nomura and AAC received$140 onJanuary 3, 2023 bringing to a close all of AAC's legacy litigation against RMBS sponsor. The following provides details for losses and loss expenses (benefit) incurred for the periods presented: Year Ended December 31, 2022 2021 Structured Finance$ (207) $ (20) Domestic Public Finance (192) (73) Other (6) 4 Totals (1)$ (406) $ (89)
(1) Includes loss expenses incurred of
Losses and loss expenses (benefit) for 2022, were driven by favorable RMBS development due to the impact of the settlement agreements with Bank of America Corporation and certain affiliates thereof and Nomura Credit andCapital, Inc. of$123 and the positive impact of discount rates, and favorable loss development in domestic public finance (primarily due to thePuerto Rico restructurings of$180 ).
Legacy financial guarantee losses and loss expenses for 2021 were largely driven
by favorable loss development in domestic
public finance, primarily related to
primarily related to improved credit in RMBS, partially offset by the negative
impact of discount rates, and loss expenses incurred.
G&A Expenses. The increase in operating expenses during the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 , is driven primarily by additional costs related to defensive litigation of$26 . Compensation cost benefits relative to 2021 from headcount reductions in the segment were more than offset by the impact of incentive compensation performance factor adjustments and severance charges.
Year Ended December 31, 2022 2021 Gross premiums written$ 146 $ 13 Net premiums written 29 3 Revenues: Net premiums earned$ 14 $ 1 Net investment income 2 1 Net investment gains (losses), including impairments - - Program fees 3 - Total 18 2 Expenses: Losses and loss adjustment expenses (benefit) 9
-
Amortization of deferred acquisition costs, net 3
-
General and administrative expenses 13
9
Net (gain) loss attributable to noncontrolling interest - - EBITDA (6)$ (8) Pretax income (loss)$ (6) $ (8) Loss and LAE Ratio 65.4 % NM Combined Ratio 158.1 % NM Ambac's stockholders equity (1)$ 110 $
109
(1)Represents Ambac stockholders equity in the
Insurance
The Specialty Property and Casualty Insurance segment has grown significantly since underwriting its first program inMay 2021 . Fourteen programs were authorized to issue policies as ofDecember 31, 2022 . The growth in both the number and size of these programs has contributed to the increase in gross and net premiums written, net premiums earned and net loss and loss adjustment expenses incurred. Loss and loss adjustment expenses incurred may be adversely impacted by increasing economic and social inflation, particularly within the commercial auto business. The impact of inflation on ultimate loss reserves is difficult to estimate, particularly in light of recent disruptions to the judicial system, supply chain and labor markets. Going forward, we may not be able to offset the impact of inflation on our loss costs with sufficient price increases. The estimation of loss reserves may also be more difficult during extreme events, such as a | Ambac Financial Group, Inc. 43 2022 FORM 10-K -------------------------------------------------------------------------------- Table of Contents , pandemic, or during the persistence of volatile or uncertain economic conditions, due to, amongst other reasons, unexpected changes in behavior of claimants and policyholders, including an increase in fraudulent reporting of exposures and/or losses. Due to the inherent uncertainty underlying loss reserve estimates, the final resolution of the estimated liability for loss and loss adjustment expenses will likely be higher or lower than the related loss reserves at the reporting date. In addition, our estimate of losses and loss expenses may change. These additional liabilities or increases in estimates, or a range of either, could vary significantly from period to period.
On
damage primarily in the states of
estimate of losses and loss expenses from this event is not material.
Segment pre-tax net income was favorably impacted by underwriting income driven by growth in earned premium and program fees relative to loss and loss adjustment expenses for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 . General and Administrative expenses for the year endedDecember 31, 2022 increased as compared to the year endedDecember 31, 2021 primarily driven by costs associated with the increase in Everspan's operations including changes in staffing. Costs associated with the acquisition of additional shell insurance companies, as we continued to ramp up Everspan's operations, impacted pre-tax income for the year endedDecember 31, 2022 by approximately$1 , relative to the year endedDecember 31, 2021 . Insurance Distribution Year Ended December 31, 2022 2021 Premiums placed$ 135 $ 117 Commission income$ 31 $ 26 Commission expense 18 15 Net commissions 13 12 Expenses: General and administrative expenses 6 5 Net (gain) attributable to noncontrolling interest (1) (1) EBITDA 6 5 Depreciation (1) - - Intangible amortization 3 3 Pretax income (loss)$ 5 $ 4 Ambac's stockholders equity (2)$ 93 $ 66
(1) The Consolidated Statements of Comprehensive Income includes this in
General and Administrative Expenses.
(2) Represents the share of
within the Insurance Distribution segment, including intercompany eliminations.
includes Xchange Benefits, a P&C MGA specializing in accident and health
products;
underwriting authority in commercial automobile insurance for
specific "for-hire" auto classes; and Capacity Marine, a wholesale and retail brokerage and reinsurance intermediary specializing in marine and international risk. The Insurance Distribution business is typically compensated for its services primarily by commissions paid by insurance carriers for underwriting, structuring and/or administering polices and, in some cases, the managing of claims under an agency agreement. Commission revenues are usually based on a percentage of the premiums placed. Cirrata is also eligible to receive profit sharing contingent commissions on certain of its programs based on the underwriting results of the policies it places with the carrier, which may cause some variability in revenue and earnings. Cirrata business placed premiums for its carriers of approximately$135 for the year endedDecember 31, 2022 , up$18 or 15% as compared to the year endedDecember 31, 2021 . The growth was primarily driven by premiums placed byAll Trans and Capacity Marine since their acquisition inNovember 2022 . Employer Stop Loss business underwritten by Xchange has seasonality in January and July, which result in revenue and earnings concentrations in the first and third quarters each calendar year, however, we expect this to become less pronounced over time as Cirrata continues to grow and diversify into other classes of business. G&A Expenses. General and Administrative expenses for the year endedDecember 31, 2022 increased slightly as compared to the year endedDecember 31, 2021 as a result of employees hired to support the ESL renewal rights acquisition that occurred onApril 29, 2022 and operating costs atAll Trans and Capacity Marine since their acquisition inNovember 2022 . LIQUIDITY AND CAPITAL RESOURCES ($ in millions)
Holding Company Liquidity
AFG is organized as a legal entity separate and distinct from its operating subsidiaries. AFG is a holding company with no outstanding debt. AFG's liquidity is primarily dependent on its net assets, excluding the operating subsidiaries that it owns, totaling$223 as ofDecember 31, 2022 , and secondarily on distributions and expense sharing payments from its operating subsidiaries. •Under an inter-company cost allocation agreement, AFG is reimbursed by AAC for a portion of certain operating costs and expenses and, if approved by OCI, entitled to an additional payment of up to$4 per year to cover expenses not otherwise reimbursed. The$4 reimbursement for 2021 expenses was approved by OCI and paid to AFG inApril 2022 .
•Substantial uncertainty remains as to AAC's ability to pay dividends to AFG and
the timing of any such dividends.
•Everspan's ability to make future dividend payments will mostly depend on its future profitability relative to its capital needs to support growth. Everspan is not expected to pay dividends in the near term. | Ambac Financial Group, Inc. 44 2022 FORM 10-K -------------------------------------------------------------------------------- Table of Contents , •Cirrata does not have any regulatory restrictions on its ability to make distributions. AFG received distributions from Cirrata of$6 and$6 during the years endedDecember 31, 2022 and 2021. AFG's principal uses of liquidity are: (i) the payment of operating expenses, including costs to explore opportunities to grow and diversifyAmbac , (ii) the making of strategic investments, which may include illiquid investments and (iii) making capital investments to acquire, grow and/or capitalize new and/or existing businesses; such capital investments include investments in technology to support the efficient operation of our Specialty Property and Casualty and Insurance Distribution businesses. AFG may also provide short-term financial support, primarily in the form of loans, to its operating subsidiaries to support their operating requirements. AFG supported the development of theSpecialty Property and Casualty Insurance business, and its acquisitions, with cash contributions of$15 and$92 to the Everspan group of companies during the years endedDecember 31, 2022 and 2021, respectively. In the opinion of the Company's management the net assets of AFG are sufficient to meet AFG's current liquidity requirements. However, events, opportunities or circumstances could arise that may cause AFG to seek additional capital (e.g. through the issuance of debt, equity or hybrid securities).
Operating Companies' Liquidity
Insurance:
Sources of liquidity for the Company's insurance subsidiaries are through funds
generated from premiums, recoveries of prior claim payments, reinsurance
recoveries, fees, investment income and maturities and sales of investments.
•See Note 8. Insurance Contracts to the Consolidated Financial Statements included in Part II, Item 8, in this Annual Report on Form 10-K for a summary of future gross financial guarantee premiums to be collected by AAC and AmbacUK . Termination of financial guarantee policies on an accelerated basis may adversely impact AAC's liquidity. Cash provided from these sources is used primarily for claim payments and commutations, loss expenses, acquisition costs (Specialty Property and Casualty Insurance segment only), debt service (Legacy Financial Guarantee segment only), operating expenses, reinsurance payments and purchases of securities and other investments. •Interest and principal payments on surplus notes are subject to the approval of OCI, which has full discretion over payments regardless of the liquidity position of AAC. As discussed more fully in "Results of Operations" above in this Management's Discussion and Analysis, OCI declined AAC's request to pay the principal amount of the surplus notes, plus all accrued and unpaid interest thereon, onJune 7, 2022 . •As further described in Note 1. Background and Business Description to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K: (i) effectiveOctober 29, 2022 , AAC wholly redeemed the Sitka AAC Note and partially redeemed Tier 2 Notes and (ii) effectiveJanuary 15, 2023 , AAC fully redeemed the remaining Tier 2 Notes. Additionally, in the second and fourth quarters of 2022, AAC repurchased$334 current par of surplus notes (including$67 from AFG). Following these redemptions and repurchases, current principal outstanding on AAC's long-term debt consisted of$519 of surplus notes. AAC's future interest obligations on long-term debt after giving effect to these redemptions include$447 of accrued and unpaid interest that would be payable on surplus notes if approved by OCI on the next scheduled payment date ofJune 7, 2023 . •Ambac Financial Services ("AFS") uses interest rate derivatives (primarily interest rate swaps andUS Treasury futures) as a partial economic hedge against the effects of rising interest rates elsewhere in the Legacy Financial Guarantee segment. AFS's derivatives also include interest rate swaps previously provided to asset-backed issuers and other entities in connection with their financings. AAC lends AFS cash and securities as needed to fund payments under these derivative contracts, collateral posting requirements and operating expenses. Intercompany loans are governed by an established lending agreement with defined borrowing limits that has received non-disapproval from OCI. Insurance subsidiaries manage their liquidity risk by maintaining comprehensive analyses of projected cash flows and maintaining specified levels of cash and short-term investments at all times. It is the opinion of the Company's management that the insurance subsidiaries' near term liquidity needs will be adequately met from the sources described above.
Insurance Distribution:
The liquidity requirements of our Insurance Distribution subsidiaries are met primarily by funds generated from commission receipts (both base and profit commissions). Base commissions are generally received monthly, whereas profit commissions are received only if the business underwritten is profitable. Cash provided from these sources is used primarily for commissions paid to sub-producers, operating expenses and distributions to AFG and other members.
Consolidated Cash Flow Statement Discussion
The following table summarizes the net cash flows for the periods presented. Year Ended December 31, 2022 2021 2020 Cash provided by (used in): Operating activities$ 1,335 $ (131) $ (175) Investing activities 866 776 432 Financing activities (1) (2,163) (657) (303) Effect of foreign exchange on cash and cash equivalents (1) - - Net cash flow$ 38 $ (12) $ (46) (1)During the 2022, AAC made payments of$476 to accelerate AAC-insured PRIFA, CCDA and HTA bonds that were not commuted and were deposited into trusts established under thePuerto Rico restructurings. Also during 2022, AAC received$165 for redemption of PRIFA trust units held in its investment portfolio. Because these trusts are consolidated VIEs, this net cash activity of | Ambac Financial Group, Inc. 45 2022 FORM 10-K -------------------------------------------------------------------------------- Table of Contents ,$311 is reflected as payments of VIE liabilities in financing activities for the year endedDecember 31, 2022 .
Operating activities
The following represents the significant cash operating activities during the
years ended
•Cash provided by (i) gross premiums (net of commissions paid) were$139 and$38 for the years endedDecember 31, 2022 and 2021, respectively; (ii) non-VIE interest rate derivatives were$84 and$(1) for the years endedDecember 31, 2022 and 2021, respectively; (iii) VIE derivative payments were$(326) and$(24) for the years endedDecember 31, 2022 and 2021, respectively; (iv) non-VIE investment portfolio income was$82 and$80 for the years endedDecember 31, 2022 and 2021, respectively; and (v) cash settlements from thePuerto Rico restructuring transactions to the consolidated trusts were$47 for the year endedDecember 31, 2022 . •Payments for non VIE debt service and accreted interest on redemptions and debt repurchases of the Sitka AAC Note, Tier 2 Notes and Surplus Notes were$59 ,$70 and$154 , respectively, for the year endedDecember 31, 2022 . Debt service payments on the LSNI Ambac Note and Sitka AAC Note were$51 and$30 , respectively, for the year endedDecember 31, 2021 . •Payments related to (i) operating expenses were$94 and$83 for the years endedDecember 31, 2022 and 2021, respectively; and (ii) reinsurance premiums paid were$66 and$26 for the years endedDecember 31, 2022 and 2021, respectively •Net Legacy Financial Guarantee Insurance loss and loss adjustment expenses paid (recovered), including commutation payments, during the years endedDecember 31, 2022 and 2021 are detailed below: Year EndedDecember 31, 2022
2021
Net loss and loss adjustment expenses paid (recovered): Net losses paid$ 298 $ 103 Net subrogation received (1) (1,951) (121) Net loss expenses paid 48 77 Net cash flow$ (1,605) $ 59
(1)Includes the majority of the recoveries from the BOA Settlement Payment
except for the portion allocated to fraud litigation recoveries. The fraud
litigation recoveries were
operations.
Future operating cash flows will primarily be impacted by net premium
collections, investment coupon receipts, fee and net commission revenues,
operating expenses, net claim and loss expense payments and debt interest
payments.
Financing Activities
Financing activities for the year endedDecember 31, 2022 , included payments for repurchase of surplus notes of$191 , redemption of Sitka AAC Note of$1,210 , partial redemption of Tier 2 Notes of$143 , share repurchases of$14 , repurchases of auction market preferred shares of$8 and paydowns and maturities of VIE debt obligations of$591 (including payments
for the accelerations of the VIE trusts created from the
restructuring).
Financing activities for the year endedDecember 31, 2021 , include paydowns of the LSNI Ambac Note of$1,641 and paydowns and maturities of VIE debt obligations of$170 . Net cash used in financing activities was partially offset by net proceeds from issuance of the Sitka AAC Note of$1,163 .
Future financing activities will include additional accelerations and
redemptions of the VIE trusts created from the
including
Collateral
AFS hedges a portion of the interest rate risk in theLegacy Financial Guarantee Insurance segment and investment portfolios, along with legacy customer interest rate swaps, with standardized derivative contracts, including financial futures contracts, which contain collateral or margin requirements. Under these hedge agreements, AFS is required to post collateral or margin to its counterparties and futures commission merchants to cover unrealized losses. In addition, AFS is required to post collateral or margin in excess of the amounts needed to cover unrealized losses. All AFS derivative contracts containing ratings-based downgrade triggers that could result in collateral or margin posting or a termination have been triggered. If terminations were to occur, AFS would be required to make termination payments but would also receive a return of collateral or margin in the form of cash orU.S. Treasury obligations with market values equal to or in excess of market values of the swaps and futures contracts. AFS may look to re-establish hedge positions that are terminated early, resulting in additional collateral or margin obligations. The amount of additional collateral or margin posted on derivatives contracts will depend on several variables including the degree to which counterparties exercise their termination rights (or agreements terminate automatically) and the terms on which hedges can be replaced. All collateral and margin obligations are currently met. Collateral and margin posted by AFS totaled$70 (cash and securities, at fair value, of$6 and$64 respectively), including independent amounts, under these contracts atDecember 31, 2022 . BALANCE SHEET ($ in millions) Total assets decreased by approximately$4,330 fromDecember 31, 2021 to$7,973 atDecember 31, 2022 , primarily due to the reduction in asset values of VIEs of$2,162 and subrogation recoverables of$1,821 . The decline in VIEs was driven by increases in interest rates, the strengthening of the US dollar against the British Pound Sterling and assets used to fund VIE obligation repayments. The decline in subrogation recoverables was largely due to receipts under the settlement agreement with Bank of America Corporation and certain affiliates. Additional declines in total assets were the result of (i) the payment of loss and loss adjustment expenses, interest and operating expenses, (ii) declines in invested asset values, (iii) lower derivative assets caused by rising interest rates, (iv) repurchases ofAmbac common stock and AAC surplus notes and (v) lower premium receivables and intangible assets from | Ambac Financial Group, Inc. 46 2022 FORM 10-K -------------------------------------------------------------------------------- Table of Contents , the continued runoff of the financial guarantee insurance portfolio. Total liabilities decreased by approximately$4,540 fromDecember 31, 2021 , to$6,647 as ofDecember 31, 2022 , primarily due to reductions in the value of VIEs liabilities of$1,996 based on consistent factors as noted above in assets. Additional liability declines driven by (i) the significant reduction in gross loss reserves from thePuerto Rico restructuring; (ii) the impacts of the redemption of secured notes of$1,352 described in Note 1. Background and Business Description in this Annual Report on Form 10-K located in Part II. Item 8, (iii) repurchases of AAC surplus notes during 2022 with a carrying value of principal and interest of$461 atDecember 31, 2021 , and (iv) lower derivative liabilities caused by rising interest rates. As ofDecember 31, 2022 , total stockholders' equity was$1,305 , compared with total stockholders' equity of$1,098 atDecember 31, 2021 . This increase was primarily due to a Total Comprehensive Income during 2022 primarily driven by the net
income attributable to common stockholders for the year ended
of
translation losses on the consolidation of AFG's foreign subsidiaries.of
Ambac's investment portfolio is managed under established guidelines designed to meet the investment objectives of AAC, Everspan, AmbacUK and AFG. Refer to "Description of the Business - Investments and Investment Policy" in this Annual Report on Form 10-K located in Part I. Item 1, for further description ofAmbac's investment policies and applicable regulations.
Refer to Note 5. Investments to the Consolidated Financial Statements in this
Annual Report on Form 10-K located in Part II. Item 8 for information about
objectives do not apply to the assets of VIEs consolidated as a result of
financial guarantees written by its insurance subsidiaries.
Investment Portfolio
The following table summarizes the composition of
excluding VIE investments, at carrying value at
Specialty
Legacy Financial Property and
Guarantee Casualty Insurance Corporate &
Insurance Insurance Distribution Other Consolidated
December 31, 2022
Fixed maturity securities $ 1,281 $ 102 $ - $ 12 $ 1,395
Fixed maturity securities - trading 59 - - - 59
Short-term 303 29 - 175 507
Other investments 552 - - 16 568
Fixed maturity securities pledged as
collateral 64 - - - 64
Total investments (1) $ 2,259 $ 131 $ - $ 203 $ 2,593
December 31, 2021
Fixed maturity securities $ 1,630 $ 72 $ - $ 28 $ 1,730
Fixed maturity securities - trading - - - - -
Short-term 258 32 - 124 414
Other investments 679 - - 11 690
Fixed maturity securities pledged as
collateral 120 - - - 120
Total investments (1) $ 2,687 $ 104 $ - $ 164 $ 2,955
(1) Includes investments denominated in non-US dollar currencies with a fair
value of £296 ($357 ) and €39 ($42 ) as of December 31, 2022 and £341 ($462 ) and
€38 ($43 ) as of December 31, 2021 .
Ambac invests in various asset classes in its fixed maturity securities
portfolio. Other investments include diversified equity interests in pooled
funds. Refer to Note 5. Investments to the Consolidated Financial Statements in
this Annual Report on Form 10-K located in Part II. Item 8 for information about
fixed maturity securities and pooled funds by asset class.
| Ambac Financial Group, Inc. 47 2022 FORM 10-K
--------------------------------------------------------------------------------
Table of Contents ,
The following charts provide the ratings(1) distribution of the fixed maturity
investment portfolio based on fair value at December 31, 2022 and 2021.
[[Image Removed: ambc-20221231_g6.jpg]]
[[Image Removed: ambc-20221231_g7.jpg]]
(1)Ratings are based on the lower of Moody's or S&P ratings. If ratings are
unavailable from Moody's or S&P, Fitch ratings are used. If guaranteed, rating
represents the higher of the underlying or guarantor's financial strength
rating.
(2)Below investment grade and not rated bonds insured byAmbac represented 19% and 32% of the 2022 and 2021 combined fixed maturity investment portfolios, respectively. The decrease is primarily due to the impact of the settlement of insuredPuerto Rico bonds described above, under Financial Guarantees in Force. Premium Receivables.Ambac's premium receivables decreased to$269 atDecember 31, 2022 , from$323 atDecember 31, 2021 . As further discussed in Note 8. Insurance Contracts to the Consolidated Financial Statements, in this Annual Report Form 10-K located in Part II. Item 8, the decrease is due to premium receipts and adjustments for changes in expected and contractual cash flows on financial guarantee insurance contracts, partially offset by decreases to the
allowance for credit losses, accretion of the financial guarantee premium
receivable discount and increases to premium receivables on the
Property and Casualty Insurance
issuances.
Premium receivables by payment currency were as follows:
Currency Premium Receivable Premium Receivable in (Amounts in millions) in Payment Currency U.S. dollars U.S. Dollars $ 184 $184 British Pounds £ 5971 Euros € 13 14 Total $ 269 Reinsurance Recoverable on Paid and Unpaid Losses.Ambac has reinsurance in place pursuant to quota share, surplus share treaty and facultative agreements. To minimize its exposure to losses from reinsurers,Ambac (i) monitors the financial condition of its reinsurers; (ii) is entitled to receive collateral from its reinsurance counterparties under certain reinsurance contracts; and (iii) has certain cancellation rights that can be exercised in the event of rating agency downgrades of a reinsurer (among other events and circumstances). For those reinsurance counterparties that do not currently post collateral,Ambac's reinsurers are well capitalized, highly rated, authorized capacity providers.Ambac benefited from letters of credit and collateral amounting to approximately$116 from its reinsurers atDecember 31, 2022 . As ofDecember 31, 2022 and 2021, reinsurance recoverable on paid and unpaid losses were$115 and$55 , respectively.Special Property and Casualty Insurance amounted to$82 and$32 atDecember 31, 2022 and 2021, respectively. Legacy Financial Guarantee amounted to$33 and$23 atDecember 31, 2022 and 2021, respectively. The increase was primarily a result of the growth of theSpecial Property and Casualty Insurance business. Intangible Assets. Intangible assets includes (i) an insurance intangible asset that was established at AFG's emergence from bankruptcy, representing the difference between the fair value and aggregate carrying value of the financial guarantee insurance and reinsurance assets and liabilities, (ii) intangible assets established as part of the acquisition of Xchange in 2020, (iii) indefinite-lived intangible assets established as part of the acquisition of admitted carriers in both 2021 and 2022, and (iv) intangible assets established as part of the acquisition ofAll Trans and Capacity Marine in 2022. Refer to Note 4. Business Combination to the Consolidated Financial Statements, in this Annual Report Form 10-K located in Part II. Item 8 for further information relating to the acquisitions of Xchange,All Trans and Capacity Marine.
As of
respectively. The decline is driven by amortization and translation gains
(losses) from the consolidation of
partially offset by the new assets established in 2022.
Derivative Assets and Liabilities. The interest rate derivative portfolio is positioned to benefit from rising rates as a partial hedge against interest rate exposure in the financial guarantee and investment portfolios. Derivative assets and | Ambac Financial Group, Inc. 48 2022 FORM 10-K -------------------------------------------------------------------------------- Table of Contents , liabilities on the balance sheet primarily reflect the portion of the portfolio that is not subject to daily cash variation margin payments. Derivative assets decreased from$76 atDecember 31, 2021 , to$27 as ofDecember 31, 2022 . Derivative liabilities decreased from$95 atDecember 31, 2021 , to$38 as ofDecember 31, 2022 . The decreases resulted primarily from higher interest rates during the year endedDecember 31, 2022 , with the decline in assets partially offset by lower counterparty credit adjustments. Loss and Loss Adjustment Expense Reserves and Subrogation Recoverable. Loss and loss adjustment expense reserves are based upon estimates of the ultimate aggregate losses inherent in the non-derivative portfolio for insurance policies issued to beneficiaries, including unconsolidated VIEs. The evaluation process for determining the level of reserves is subject to certain estimates and judgments. Refer to the "Critical Accounting Policies and Estimates" and "Results of Operations" sections of Management's Discussion and Analysis of Financial Condition and Results of Operations, in addition to Basis of Presentation and Significant Accounting Policies and Loss Reserves sections included in Note 2. Basis of Presentation and Significant Accounting Policies and Note 8. Insurance Contracts, respectively, to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K, for further information on loss and loss adjustment expenses. The loss and loss adjustment expense reserves net of subrogation recoverables and before reinsurance as ofDecember 31, 2022 and 2021 were$534 and$(522) , respectively. Loss and loss adjustment expense reserves are included in the Consolidated Balance Sheets as follows: Legacy Financial Guarantee Specialty Property Present Value of Expected and Casualty Net Cash Flows Gross Loss Gross Loss and Loss Claims and Unearned and Loss Expense Loss Premium Expense Balance Sheet Line Item Reserves Expenses Recoveries (1) Revenue Reserves
(2)
December 31, 2022 : Loss and loss adjustment expense reserves $ 90$ 787 $ (44)$ (28) $ 805 Subrogation recoverable - 5 (276) - (271) Totals $ 90$ 791 $ (319)$ (28) $ 534 December 31, 2021: : Loss and loss adjustment expense reserves $ 32$ 1,749 $ (155)$ (56) $ 1,570 Subrogation recoverable - 88 (2,180) - (2,092) Totals $ 32$ 1,837 $ (2,335) $ (56) $ (522)
(1)Present value of future recoveries include R&W subrogation recoveries of
and
Legacy Financial Guarantee Insurance .Ambac has exposure to various bond types issued in the debt capital markets. The bond types that have experienced significant claims, including through commutations, are RMBS, student loan securities and public finance securities. These bond types represent 91% of our ever-to-date insurance claims recorded with RMBS comprising 63%. The table below indicates gross par outstanding and the components of gross loss and loss adjustment expense reserves related to policies inAmbac's gross loss and loss adjustment expense reserves atDecember 31, 2022 and 2021: |Ambac Financial Group, Inc. 49 2022 FORM 10-K --------------------------------------------------------------------------------
Table of Contents ,
Present Value of Expected Gross Loss
Net Cash Flows and Loss
Claims and Unearned Expense
Gross Par Loss Premium Reserves
($ in millions) Outstanding (1) Expenses Recoveries Revenue (1)(2)
December 31, 2022:
Structured Finance $ 2,050 $ 664 $ (296) $ (10) $ 358
Domestic Public Finance (3) 1,215 96 (11) (10) 75
Other 782 23 (12) (8) 3
Loss expenses - 8 - - 8
Totals $ 4,047 $ 791 $ (319) $ (28) $ 444
December 31, 2021:
Structured Finance $ 2,371 $ 852 $ (2,018) $ (12) $ (1,178)
Domestic Public Finance 2,742 905 (312) (31) 562
Other 1,189 35 (5) (13) 17
Loss expenses - 45 - - 45
Totals $ 6,302 $ 1,837 $ (2,335) $ (56) $ (554)
(1)Ceded par outstanding on policies with loss reserves and ceded loss and loss
adjustment expense reserves were $472 and $33 , respectively, at December 31,
2022 and $784 and $24 , respectively at December 31, 2021 . Ceded loss and loss
adjustment expense reserves are included in Reinsurance recoverable on paid and
unpaid losses.
(2)Loss reserves are included in the balance sheet as loss and loss adjustment
expense reserves or Subrogation recoverable dependent on if a policy is in a net
liability or net recoverable position.
(3)As a result of the Puerto Rico restructuring and the subsequent acceleration
of the AAC insured PRIFA and CCDA bonds gross par outstanding was reduced by
$593 . Additionally, as a result of the Puerto Rico restructuring and subsequent
consolidation of VIE's of AAC insured HTA bonds gross par outstanding was
reduced by $410 .
The table below reflects the timing of expected financial guarantee claim
payments based on deal specific cash flows, excluding expected recoveries. These
deal specific cash flows are based on the expected cash flows of the underlying
transactions with the majority of these payments expected at or close to the
final maturity of the related insurance policy. The timing of expected claim
payments for credits with reserves that were established using our statistical
loss reserve method is determined based on the weighted average expected life of
the exposure. Refer to the Loss Reserves section in Note 2. Basis of
Presentation and Significant Accounting Policies to the Consolidated Financial
Statements included in Part II, Item 8 in this Annual Report on Form 10-K for
further discussion of our statistical loss reserve method. The timing of these
payments may vary significantly from the amounts shown above, especially for
credits that are based on our statistical loss reserve method.
Payments Due by Period
Less Than More Than
($ in millions) Total 1 Year 1 - 3 Years 3 - 5 Years 5 Years
Claim payments $ 1,279 $ 26 $ 51 $ 46 $ 1,156
Variability of Expected Losses and Recoveries
Ambac's management believes loss reserves (present value of expected cash flows, net of recoveries) are adequate to cover future claim payments, but there can be no assurance that the ultimate liability will not be higher than such estimates. While our loss reserves consider our judgment regarding issuers' financial flexibility to adapt to adverse markets, they may not adequately capture sudden, unexpected or protracted uncertainty that adversely affects market conditions. Accordingly, it is possible that our estimated loss reserves, gross of reinsurance, for financial guarantee insurance policies could be understated. We have attempted to identify possible cash flows related to losses and recoveries using more stressful assumptions than the probability-weighted outcome recorded. The possible net cash flows consider the highest stress scenario that was utilized in the development of our probability-weighted expected loss atDecember 31, 2022 , and assumes an inability to execute any commutation transactions with issuers and/or investors. Such stress scenarios are developed based on management's view about all possible outcomes relating to losses and recoveries. In arriving at such view, management makes considerable judgments about the possibility of various future events. Although we do not believe it is possible to have stressed outcomes in all cases, it is possible that we could have stress case outcomes in some or even many cases. See "Risk Factors" in Part I, Item 1A in this Annual Report on Form 10-K as well as the descriptions of "Structured Finance Variability," "Public Finance Variability," and "Other Credits, including AmbacUK , Variability," below for further discussion of the risks relating to future losses and recoveries that could result in more highly stressed outcomes appearing below. | Ambac Financial Group, Inc. 50 2022 FORM 10-K -------------------------------------------------------------------------------- Table of Contents , The occurrence of these stressed outcomes individually or collectively would have a material adverse effect on our results of operations and financial condition and may result in materially adverse consequence forAmbac , including (without limitation) impairing the ability of AAC to honor its financial obligations, particularly its outstanding surplus note and preferred stock obligations; the initiation of rehabilitation proceedings against AAC; decreased likelihood of AAC delivering value to AFG, through dividends or otherwise; and a significant drop in the value of securities issued or insured by AFG or AAC. Structured Finance RMBS: Changes to assumptions that could make our reserves under-estimated include an increase in interest rates, deterioration in housing prices, poor servicing, government intervention into the functioning of the mortgage market and the effect of a weakened economy characterized by growing unemployment and wage pressures. We utilize a model to project losses in our RMBS exposures and changes to reserves, either upward or downward, are not unlikely if we used a different model or methodology to project losses. In the case of both first and second-lien exposures, the possible stress case assumes a lower housing price appreciation projection, which in turn drives higher defaults and severities.
Student Loans:
Changes to assumptions that could make our reserves under-estimated include, but are not limited to, increases in interest rates, default rates and loss severities on the collateral due to economic or other factors, including the economic impact from public health crises and/or natural or other catastrophic events. Such factors may include lower recoveries on defaulted loans or additional losses on collateral or trust assets, including as a result of any enforcement actions by theConsumer Finance Protection Bureau .
Structured Finance Variability:
Using the approaches described above, the possible increase in loss reserves for structured finance credits for which we have an estimate of expected loss atDecember 31, 2022 , could be approximately$15 . Additionally, loss payments are sensitive to changes in interest rates, increasing as interest rates rise. For example, an increase in interest rates of 1% could increase our estimate of expected losses by approximately$25 . There can be no assurance that losses may not exceed such amounts. Due to the uncertainties related to risks associated with structured finance credits, there can be no assurance that losses may not exceed our stress case estimates.
Public Finance
Ambac's U.S. public finance portfolio consists of municipal bonds such as general and revenue obligations and lease and tax-backed obligations of state and local government entities; however, the portfolio also includes a wide array of non-municipal types of bonds, including transactions with public and private elements, which generally finance infrastructure, housing and other public purpose facilities and interests, the largest sector of which isU.S. military housing. It is possible our loss reserves for public finance credits may be under-estimated if issuers are faced with prolonged exposure to adverse political, judicial, economic, fiscal or socioeconomic events or trends. Additionally, our loss reserves may be under-estimated because of the local, regional or national economic impact from public health crises and/or natural or other catastrophic events. Our experience with the city ofDetroit's bankruptcy andCommonwealth of Puerto Rico's Title III proceedings as well as other municipal bankruptcies demonstrates the preferential treatment of certain creditor classes, especially the public pensions. The cost of pensions and the need to address frequently sizable unfunded or underfunded pensions is often a key driver of stress for many municipalities and their related authorities, including entities to whom we have significant exposure, such asChicago's school district, theState of New Jersey and others. Less severe treatment of pension obligations in bankruptcy may lead to worse outcomes for traditional debt creditors. Variability of outcomes applies to even what are generally considered more secure municipal financings, such as dedicated sales tax revenue bonds that capture sales tax revenues for debt service ahead of any amounts being deposited into the general fund of an issuer. In the case of the Puerto Rico COFINA sales tax bonds that were part of theCommonwealth of Puerto Rico's Title III proceedings, AAC and other creditors agreed to settle at a recovery rate equal to about 93% of pre-petition amounts owed on theAmbac insured senior COFINA bonds. In the COFINA case, the senior bonds still received a reduction or "haircut" despite the existence of junior COFINA bonds, which received a recovery rate equal to about 56% of pre-petition amounts owed. In addition, municipal entities may be more inclined to use bankruptcy to resolve their financial stresses if they believe preferred outcomes for various creditor groups can be achieved. We expect municipal bankruptcies and defaults to continue to be challenging to project given the unique political, economic, fiscal, legal, governance and public policy differences among municipalities as well as the complexity, long duration and relative infrequency of the cases themselves in forums with a scarcity of legal precedent. Moreover, issuers in Chapter 9 or similar proceedings may obtain judicial rulings and orders that impair creditors' rights or their ability to collect on amounts owed. In certain cases, judicial decisions may be contrary to AAC's expectations or understanding of the law or its rights thereunder, which may lead to worse outcomes in Chapter 9 or similar proceedings than anticipated at the outset. Another potentially adverse development that could cause the loss reserves on our public finance credits to be underestimated is deterioration in the municipal bond market, resulting from reduced or limited access to alternative forms of credit (such as bank loans) or other exogenous factors, such as changes in tax law that could reduce certain municipal investors' appetite for tax-exempt municipal bonds or put pressure on issuers in states with high state and local taxes. These factors could deprive issuers access to funding at a level necessary to avoid defaulting on their obligations. | Ambac Financial Group, Inc. 51 2022 FORM 10-K -------------------------------------------------------------------------------- Table of Contents , Following theDecember 6, 2022 , consummation of the PRHTA POA all ofAmbac's exposures to theCommonwealth of Puerto Rico across various instrumentalities have now been restructured and AAC's exposures toPuerto Rico has been reduced to$244 of net par outstanding atDecember 31, 2022 . AAC has further reduced itsPuerto Rico exposure since year-end through accelerations and redemptions. However, some uncertainty remains as it relates to the extent and timing to which exposure management strategies, such as commutation and acceleration, will be executed to further reduce exposure toPuerto Rico , and, to a lesser extent, market conditions such as interest rate movements, credit spread changes on remaining plan consideration supporting AAC-insuredPuerto Rico exposure in trusts, such as COFINA bonds and PRHTA '98 CVI instruments. Material additional losses on our public finance credits caused by the aforementioned factors would have a material adverse effect on our results of operations and financial condition. For the public finance credits, includingPuerto Rico , for which we have an estimate of expected loss atDecember 31, 2022 , the possible increase in loss reserves could be approximately$115 and there can be no assurance that losses may not exceed our stress case estimates.
Other Credits, including Ambac
It is possible our loss reserves on other types of credits, including those insured by AmbacUK , may be under-estimated because of various risks that vary widely, including the risk that we may not be able to recover or mitigate losses through our remediation processes. For all other credits, including AmbacUK , for which we have an estimate of expected loss, the sum of all the highest stress case loss scenarios is approximately$295 greater than the loss reserves atDecember 31, 2022 . There can be no assurance that losses may not exceed our stress case estimates. Long-term Debt. The carrying value of each of these as ofDecember 31, 2022 and 2021 is below: December 31, 2022 2021 Surplus Notes$ 477 $ 729 LSNI Ambac Note - - Sitka AAC Note - 1,154 Tier 2 Notes 146 333 Ambac UK Debt 16 15 Total Long-term Debt$ 639 $ 2,230 The decrease in long-term debt fromDecember 31, 2021 resulted from repurchases of surplus notes and the impact of the redemption of secured notes in 2022, described further in Note 1. Background and Business Description to the Consolidated Financial Statements, included in this Annual Report on Form 10-K, partially offset by accretion on the carrying value of surplus notes andAmbac UK debt, and paid-in-kind interest on Tier 2 Notes. Redeemable Noncontrolling Interest. The increase during 2022 was the result the acquisition ofAll Trans and Capacity Marine partially offset by the remeasurement of the redemption value of the put option provided to the minority owners (noncontrolling interest holders) of Xchange as if it were exercisable onDecember 31, 2022 . Refer to Note 4. Business Combination for further information relating toAmbac's acquisitions. ACCOUNTING STANDARDS
Please refer to Note 2. Basis of Presentation and Significant Accounting
Policies to the Consolidated Financial Statements, included in Part II, Item 8
in this Annual Report Form 10-K for a discussion of the impact of recent
accounting pronouncements on
operations.
U.S. STATUTORY BASIS FINANCIAL RESULTS ($ in millions) AFG'sU.S. insurance subsidiaries prepare financial statements under accounting practices prescribed or permitted by its domiciliary state regulator ("SAP") for determining and reporting the financial condition and results of operations of an insurance company. TheNational Association of Insurance Commissioners ("NAIC") Accounting Practices and Procedures manual ("NAIC SAP") is adopted as a component of prescribed practices by each domiciliary state. For further information, see Note 9. Insurance Regulatory Restrictions to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report Form 10-K.
AAC's statutory policyholder surplus and qualified statutory capital (defined as the sum of policyholders surplus and mandatory contingency reserves) were$598 and$1,191 atDecember 31, 2022 , respectively, as compared to$757 and$1,322 atDecember 31, 2021 , respectively. As ofDecember 31, 2022 , statutory policyholder surplus and qualified statutory capital included$519 principal balance of surplus notes outstanding and$115 liquidation preference of preferred stock outstanding. These surplus notes (including related accrued interest of$427 that is not recorded under statutory basis accounting principles); preferred stock; and all other liabilities, including insurance claims, and$146 principal balance of Tier 2 Notes are obligations that, individually and collectively, have claims on the resources of AAC that are senior to AFG's equity and therefore impede AFG's ability to realize residual value and/or receive dividends from AAC. The significant drivers to the net decrease in policyholder surplus were surplus note repurchases at a cost of$440 , contributions to contingency reserves of$28 and a decrease in the fair value of pooled investments of$16 , partially offset by statutory net income of$328 for the year endedDecember 31, 2022 . Statutory net income for the year endedDecember 31, 2022 was positively impacted by (i) the R&W litigation settlements at amounts in excess of our carrying value; (ii) thePuerto Rico restructuring; and (iii) AFS' repayment of its intercompany loan with AAC that was previously impaired.
AAC's statutory surplus and therefore AFG's ultimate ability to realize residual
value and/or dividends from AAC is sensitive to
| Ambac Financial Group, Inc. 52 2022 FORM 10-K -------------------------------------------------------------------------------- Table of Contents , multiple factors, including: (i) loss reserve development, (ii) approval by OCI of payments on surplus notes, (iii) ongoing interest costs associated with surplus notes, (iv) swap gains and losses at AFS, the financial position of which is supported by certain guarantees and financing arrangements from AAC, (v) first time payment defaults of insured obligations, which increase statutory loss reserves, (vi) commutations of insurance policies at amounts that differ from the amount of liabilities recorded, (vii) reinsurance contract terminations at amounts that differ from net assets recorded, (viii) changes to the fair value of pooled fund and other investments carried at fair value, (ix) realized gains and losses, including losses arising from other than temporary impairments of investment securities, (x) the ultimate residual value of AmbacUK , which may be impacted by numerous factors including foreign exchange rates, and (xi) future changes to prescribed practices by the OCI.
The significant differences between GAAP and SAP are that under SAP:
•Loss reserves are only established for losses on guaranteed obligations that have experienced a payment default in an amount that is sufficient to cover the present value of the anticipated defaulted debt service payments over the expected period of default, less estimated recoveries under subrogation rights (5.1% as prescribed by OCI). Under GAAP, in addition to the establishment of loss reserves for defaulted obligations, loss reserves are established (net of GAAP basis unearned premium revenue) for obligations that have experienced credit deterioration, but have not yet defaulted using a weighted-average risk-free discount rate, currently at 3.9%.
•Mandatory contingency reserves are required based upon the type of obligation
insured, whereas GAAP does not require such a reserve. Releases of the
contingency reserves are generally subject to OCI approval and relate to a
determination that the held reserves are deemed excessive.
•Investment grade fixed maturity investments are stated at amortized cost and
certain below investment grade fixed maturity investments are reported at the
lower of amortized cost or fair value. Under GAAP, all fixed maturity
investments are reported at fair value.
•Wholly owned subsidiaries are not consolidated; rather, the equity basis of
accounting is utilized and the carrying values of these investments are subject
to admissibility tests.
•Variable interest entities ("VIE") are not required to be assessed for
consolidation. Under GAAP, a reporting entity that has both the following
characteristics is required to consolidate the VIE: a) the power to direct the
activities of the VIE that most significantly impact the VIE's economic
performance and b) the obligation to absorb losses of the VIE or the right to
receive benefits from the VIE that could potentially be significant to the VIE.
AAC generally has the obligation to absorb losses of VIEs that could potentially
be significant to the VIE as the result of its guarantee of insured obligations
issued by VIEs. For certain VIEs AAC has the power to direct the most
significant activities of the VIE and accordingly consolidates the related VIEs
under GAAP.
•All payments of principal and interest on the surplus notes are subject to the
approval of the OCI. Unpaid interest due on the surplus notes is expensed when
the approval for payment of interest has been granted by the OCI. Under GAAP,
interest on surplus notes is accrued regardless of OCI approval.
•Upfront premiums written are earned on a basis proportionate to the remaining
scheduled debt service to the original total principal and interest insured.
Installment premiums are reflected in income pro-rata over the period covered by
the premium payment. Under GAAP, premium revenues for both upfront and
installment premiums are earned over the life of the financial guarantee
contract in proportion to the insured principal amount outstanding at each
reporting date.
•Insurance intangibles that arose as a result of the implementation of Fresh
Start reporting are not a concept within SAP. This insurance intangible asset is
amortized as an expense on a level yield basis over the life of the related
insurance risks.
•Unearned premiums and loss reserves are presented net of ceded amounts, while
under GAAP, they are reflected gross of ceded amounts.
at
The significant drivers to the increase in policyholder surplus for the year endedDecember 31, 2022 , were capital contributions of$16 , primarily to support the acquisition of three admitted carriers and the growth of Everspan while maintaining a policyholders surplus in excess of$100 , partially offset by a net loss and changes in investment in subsidiaries, primarily due to a limitation on the amount of goodwill that may be admitted in accordance with SAP.
The significant differences between GAAP and SAP are that under SAP:
•Investment grade fixed maturity investments are stated at amortized cost and certain below investment grade fixed maturity investments are reported at the lower of amortized cost or fair value. Under GAAP, all fixed maturity investments are reported at fair value. •Majority owned subsidiaries are not consolidated; rather, the equity basis of accounting is utilized and the carrying values of these investments are subject to admissibility tests. •The acquisition ofProvidence Washington Insurance Company ("PWIC") and the 21st Century Companies were recorded as equity method investments, which include a goodwill component representing the acquisition cost in excess of the related entity's statutory surplus.Goodwill is being amortized over ten years. Under GAAP, the acquisition of the companies were recorded as asset acquisitions, which require i) all net assets to initially be recorded at fair value, and ii) the acquisition cost in excess of the fair value of net assets to be allocated to the bases of certain types of assets based on their relative fair values, if | Ambac Financial Group, Inc. 53 2022 FORM 10-K -------------------------------------------------------------------------------- Table of Contents , applicable. Acquired assets include intangible assets with indefinite lives. Such assets are not amortized but their estimated useful lives are reevaluated each reporting period. No goodwill is recorded for asset acquisitions. •Acquisition costs and ceding commissions, other than excess ceding commissions, are expensed or recognized at the time of a transaction. Under GAAP, acquisition costs and ceding commissions are deferred and recognized over the life of the related transaction.
•Unearned premiums and loss reserves are presented net of ceded amounts, while
under GAAP, they are reflected gross of ceded amounts.
AMBACUK FINANCIAL RESULTS UNDERUK ACCOUNTING PRINCIPLES (£ in millions) AmbacUK is required to prepare financial statements under FRS 102 "The Financial Reporting Standard applicable in theUK andRepublic of Ireland ." AmbacUK's shareholder funds underUK GAAP were £468 atDecember 31, 2022 , as compared to £444 atDecember 31, 2021 . AtDecember 31, 2022 , the carrying value of cash and investments was £508, an increase from £500 atDecember 31, 2021 . The increase in shareholder funds and cash and investments was primarily due to the continued receipt of premiums and investment income, and from foreign exchange gains within AmbacUK's investment portfolio, partially offset by loss expenses, operating expenses and tax payments.
The significant differences between US GAAP and
•Loss reserves are only established for losses on guaranteed obligations when, in the judgment of management, a monetary default in the timely payment of debt service is likely to occur, which would result in AmbacUK incurring a loss. A loss provision is established in an amount that is sufficient to cover the present value of the anticipated defaulted debt service payments over the expected period of default, less estimated recoveries under subrogation rights. The discount rate for loss provisions is equal to the lower of the rate of return on invested assets for either the current year or the period covering the current year plus the four previous years, currently at 0%. The discount rate used for estimated recoveries under subrogation rights is reflective of the credit risk of the counterparty from which subrogation will be received, currently 5.3%. UnderU.S. GAAP, loss reserves are established (net of US GAAP basis unearned premium revenue) for obligations that have experienced credit deterioration, but have not yet defaulted using a weighted-average risk-free discount rate, currently at 3.5%. •Investments in fixed maturity securities are stated at amortized cost, subject to an other-than-temporary impairment evaluation. Under US GAAP, all bonds are reported at fair value.
•VIEs are not required to be assessed for consolidation. Under US GAAP, as noted
under AAC Statutory Basis Financial Results above, VIE's with certain
characteristics are required to be consolidated. For several VIEs Ambac
accordingly consolidates the related VIEs under
•Upfront premiums written are earned on a basis proportionate to the remaining scheduled debt service to the total principal and interest insured. Installment premiums are reflected in income pro-rata over the period covered by the premium payment. Under US GAAP, premium revenues for both upfront and installment premiums are earned over the life of the financial guarantee contract in proportion to the insured principal amount outstanding at each reporting date. •Insurance intangibles that arose as a result of the implementation of Fresh Start reporting are not a concept withinUK GAAP. Under US GAAP, this insurance intangible asset is amortized as an expense on a level yield basis over the life of the related insurance risks.
•Unearned premiums and loss reserves are presented net of ceded amounts, while
under GAAP, they are reflected gross of ceded amounts.
Ambac
the Solvency II Directive. The basis of preparation of this information is
significantly different from both US GAAP and
Available and eligible capital resources under Solvency II, to meet solvency capital requirements, were £338 atDecember 31, 2022 . This is an increase fromDecember 31, 2021 , when available capital resources were £250 of which £240 were eligible to meet solvency capital requirements. Eligible capital resources atDecember 31, 2022 andDecember 31, 2021 , are in comparison to regulatory capital requirements of £213 and £238, respectively. Therefore, AmbacUK was in a surplus position in terms of compliance with applicable regulatory capital requirements by £125 atDecember 31, 2022 and was in a surplus position by £1 atDecember 31, 2021 . The surplus increased as ofDecember 31, 2022 , due to the combined impact of (i) the increase in long term interest rates, which resulted in a decrease in technical provision liabilities and hence an increase in eligible own funds and (ii) a decrease in capital requirements for non-life risk due to the maturity and de-risking of certain policies, together with natural run-off of the insured portfolio in the year.
Dialogue between Ambac
respect to options for strengthening the capital position further.
Final annual Solvency II data and Ambac
Condition Report will be published on
NON-GAAP FINANCIAL MEASURES
($ in millions)
In addition to reporting the Company's financial results under GAAP,the Company
currently reports three non-GAAP financial measures: EBITDA, adjusted earnings
and adjusted book value. The most directly comparable GAAP measures are pre-tax
net income for EBITDA, net income attributable to
| Ambac Financial Group, Inc. 54 2022 FORM 10-K
--------------------------------------------------------------------------------
Table of Contents ,
common stockholders for adjusted earnings and Total Ambac Financial Group, Inc.
stockholders' equity for adjusted book value. A non-GAAP financial measure is a
numerical measure of financial performance or financial position that excludes
(or includes) amounts that are included in (or excluded from) the most directly
comparable measure calculated and presented in accordance with GAAP. We present
such non-GAAP supplemental financial information because we believe such
information is of interest to the investment community that provides greater
transparency and enhanced visibility into the underlying drivers of our
businesses on a basis that may not be otherwise apparent on a GAAP basis. We
view these non-GAAP financial measures as important indicators when assessing
and evaluating our performance on a segmented and consolidated basis. These
non-GAAP financial measures are not substitutes for the Company's GAAP
reporting, should not be viewed in isolation and may differ from similar
reporting provided by other companies, which may define non-GAAP measures
differently.
Ambac has a significant U.S. tax net operating loss ("NOL") that is offset by a
full valuation allowance in the GAAP consolidated financial statements. As a
result of this and other considerations, we utilized a 0% effective tax rate for
non-GAAP adjustments for both Adjusted Earnings and Adjusted Book Value; which
is subject to change.
The following paragraphs define each non-GAAP financial measure. A
reconciliation of the non-GAAP financial measure and the most directly
comparable GAAP financial measure is also presented below.
EBITDA. EBITDA is defined as net income before interest expense, income taxes, depreciation and amortization of intangible assets. EBITDA is also adjusted for noncontrolling interests in subsidiaries whereAmbac does not own 100%. Specialty Property Legacy Financial and Casualty Guarantee Insurance Insurance Insurance Distribution Corporate & Other Consolidated Year EndedDecember 31, 2022 Pretax income (loss) (1) $ 540 $ (6) $ 5 $ (14) $ 525 Adjustments: Interest expense 168 - - - 168 Depreciation 2 - - - 2 Amortization of intangible assets 44 - 3 - 47 Net (gain) attributable to noncontrolling interest - (1) (1) Earnings before interest, taxes, depreciation and amortization $ 754 $ (6) $ 6 $ (14) $ 740 Year EndedDecember 31, 2021 Pretax income (loss) (1) $ 20 $ (8) $ 4 $ (15) $ 2 Adjustments: Interest expense 187 - - - 187 Depreciation 2 - - - 2 Amortization of intangible assets 52 - 3 - 55 Net (gain) attributable to noncontrolling interest (1) (1) Earnings before interest, taxes, depreciation and amortization $ 262 $ (8) $ 5 $ (15) $ 245
(1)Pretax income (loss) is prior to the impact of noncontrolling interests.
Adjusted Earnings (Loss). Adjusted earnings (loss) is defined as net income
(loss) attributable to common stockholders, as reported under GAAP, adjusted on
an after-tax basis for the following:
•Insurance intangible amortization: Elimination of the amortization of the financial guarantee insurance intangible asset that arose as a result ofAmbac's emergence from bankruptcy and the implementation of Fresh Start reporting. This adjustment ensures that all financial guarantee contracts are accounted for consistent with the provisions of the Financial Services - Insurance Topic of the ASC. •Foreign exchange (gains) losses: Elimination of the foreign exchange gains (losses) on the re-measurement of assets, liabilities and transactions in non-functional currencies. This adjustment eliminates the foreign exchange gains (losses) on all assets, liabilities and transactions in non-functional currencies, which enables users of our financial statements to better view the results without the impact of fluctuations in foreign currency exchange rates and facilitates period-to-period comparisons ofAmbac's operating performance. |Ambac Financial Group, Inc. 55 2022 FORM 10-K --------------------------------------------------------------------------------
Table of Contents ,
The following table reconciles net income attributable to common stockholders to
the non-GAAP measure, Adjusted Earnings on a total dollar amount and per diluted
share basis, for all periods presented:
2022 2021 2020
($ in millions, except per share
data) Per Diluted Per Diluted Per Diluted
Year Ended December 31, $ Amount Share (1) $ Amount Share (1) $ Amount Share (1)
Net income (loss) attributable to
common stockholders $ 522 $ 11.31 $ (17) $ (0.61) $ (437) $ (9.47)
Adjustments:
Non-credit impairment fair value
(gain) loss on credit derivatives - - - - - -
Insurance intangible amortization 44 0.95 52 1.12 57 1.23
Foreign exchange (gains) losses (12) (0.25) 7 0.15 3 0.06
Adjusted Earnings (Loss) (1)
43
(1)Per Diluted share includes the impact of adjusting redeemable noncontrolling
interest to its redemption value
Adjusted Book Value. Adjusted book value is defined asTotal Ambac Financial Group, Inc. stockholders' equity as reported under GAAP, adjusted for after-tax impact of the following: •Insurance intangible asset: Elimination of the financial guarantee insurance intangible asset that arose as a result ofAmbac's emergence from bankruptcy and the implementation of Fresh Start reporting. This adjustment ensures that all financial guarantee contracts are accounted for within adjusted book value consistent with the provisions of the Financial Services-Insurance Topic of the ASC. •Net unearned premiums and fees in excess of expected losses: Addition of the value of the unearned premium revenue ("UPR") on financial guarantee contracts, in excess of expected losses, net of reinsurance. This non-GAAP adjustment presents the economics of UPR and expected losses for financial guarantee contracts on a consistent basis. In accordance with GAAP, stockholders' equity reflects a reduction for expected losses only to the extent they exceed UPR. However, when expected losses are less than UPR for a financial guarantee contract, neither expected losses nor UPR have an impact on stockholders' equity. This non-GAAP adjustment adds UPR in excess of expected losses, net of reinsurance, to stockholders' equity for financial guarantee contracts where expected losses are less than UPR. This adjustment is only made for financial guarantee contracts since such premiums are non-refundable. •Net unrealized investment (gains) losses in Accumulated Other Comprehensive Income: Elimination of the unrealized gains and losses on the Company's investments that are recorded as a component of accumulated other comprehensive income ("AOCI"). The AOCI component of the fair value adjustment on the investment portfolio may differ from realized gains and losses ultimately recognized by the Company based on the Company's investment strategy. This adjustment only allows for such gains and losses in adjusted book value when realized. The following table reconcilesTotal Ambac Financial Group, Inc. stockholders' equity to the non-GAAP measure Adjusted Book Value on a dollar amount and per share basis, for all periods presented: 2022 2021 ($ in millions, except per share data) December 31, $ Amount Per Share $ Amount Per ShareTotal Ambac Financial Group, Inc. stockholders' equity$ 1,252 $ 27.85 $ 1,038 $ 22.42 Adjustments: Insurance intangible asset (266) (5.91) (320) (6.91) Net unearned premiums and fees in excess of expected losses 214 4.76 310 6.68 Net unrealized investment (gains) losses in Accumulated Other Comprehensive Income (Loss) 71 1.59 (154) (3.32) Adjusted Book Value$ 1,272 $ 28.29 $ 874 $ 18.88 The increase in Adjusted Book was primarily attributable to Adjusted earnings for the year endedDecember 31, 2022 (excluding earned premium previously included in Adjusted Book Value), partially offset by translation losses on the consolidation of AFG's foreign subsidiaries. Factors that impact changes to Adjusted Book Value include many of the same factors that impact Adjusted Earnings, including the majority of revenues and expenses, but generally exclude components of premium earnings since they are embedded in prior period's Adjusted Book Value through the net unearned premiums and fees in excess of expected losses adjustment. Net unearned premiums and fees in excess of expected losses will affect Adjusted Book Value for (i) changes to future premium assumptions (e.g. expected term, interest rates, foreign currency rates, time passage) and (ii) changes to expected losses for policies which do not exceed their related unearned premiums and (iii) new reinsurance transactions. | Ambac Financial Group, Inc. 56 2022 FORM 10-K --------------------------------------------------------------------------------
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PALOMAR HOLDINGS, INC. – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations
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