Ambac Financial Group, Inc. (NYSE:AMBC) Q2 2022 Earnings Conference Call August 9, 2022 8:30 AM ET Company Participants Charles Sebaski - Head of Investor Relation Claude LeBlanc - Chief Executive Officer David Trick - Chief Financial Officer Conference Call Participants Operator Greetings, and welcome to Ambac Financial Group, Inc. Second Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator I ...

[Cautionary Statement Pursuant to the Private Securities Litigation Reform Act of 1995](index=4&type=section&id=CAUTIONARY%20STATEMENT%20PURSUANT%20TO%20THE%20PRIVATE%20SECURITIES%20LITIGATION%20REFORM%20ACT%20OF%201995) This section warns that forward-looking statements are subject to material risks, including litigation, credit risk, and global events - The report contains forward-looking statements, and actual results may differ materially due to various factors, including highly speculative common stock, inability to realize expected recoveries (e.g., RMBS litigation), failure to recover Puerto Rico claims, inadequacy of loss reserves, and potential regulatory intervention[6](index=6&type=chunk) - Key risks include credit risk across insured portfolios (RMBS, student loans, public finance), inability to reduce exposures or achieve investment objectives, substantial indebtedness affecting financial condition, and potential adverse impacts from catastrophic events (e.g., COVID-19) or global conflicts[6](index=6&type=chunk) PART I. FINANCIAL INFORMATION [Item 1. Unaudited Consolidated Financial Statements of Ambac Financial Group, Inc. and Subsidiaries](index=5&type=section&id=Item%201.%20Unaudited%20Consolidated%20Financial%20Statements%20of%20Ambac%20Financial%20Group%2C%20Inc.%20and%20Subsidiaries) This section provides unaudited consolidated financial statements, including balance sheets, income, equity, and cash flows, with detailed explanatory notes [Consolidated Balance Sheets (Unaudited)](index=5&type=section&id=Consolidated%20Balance%20Sheets%20(Unaudited)) This presents the company's financial position, detailing assets, liabilities, and equity at specific points in time Metric | June 30, 2022 ($ millions) | December 31, 2021 ($ millions) |:---|:---|:---| | Total assets | $10,061 | $12,303 | | Total liabilities | $9,198 | $11,187 | | Total stockholders' equity | $846 | $1,098 | - Total assets decreased by **$2,242 million (18.2%)** from December 31, 2021, to June 30, 2022, primarily due to settlement of VIE obligations, loss and interest payments, lower subrogation recoverables, declines in invested asset values, and lower derivative assets[7](index=7&type=chunk)[324](index=324&type=chunk) - Total liabilities decreased by **$1,989 million (17.8%)** from December 31, 2021, to June 30, 2022, mainly driven by payments of VIE long-term debt, loss and loss expenses, and lower derivative liabilities[7](index=7&type=chunk)[324](index=324&type=chunk) - Total stockholders' equity decreased by **$252 million (22.9%)** from December 31, 2021, to June 30, 2022, primarily due to changes in unrealized losses on invested assets and losses on foreign currency translation[7](index=7&type=chunk)[325](index=325&type=chunk) [Consolidated Statements of Total Comprehensive Income (Loss) (Unaudited)](index=6&type=section&id=Consolidated%20Statements%20of%20Total%20Comprehensive%20Income%20(Loss)%20(Unaudited)) This statement outlines the company's financial performance, including net income and other comprehensive income components Metric | Three Months Ended June 30, 2022 ($ millions) | Three Months Ended June 30, 2021 ($ millions) | Six Months Ended June 30, 2022 ($ millions) | Six Months Ended June 30, 2021 ($ millions) |:---|:---|:---|:---|:---| | Total revenues | $86 | $49 | $206 | $178 | | Total expenses | $80 | $66 | $197 | $177 | | Pre-tax income (loss) | $6 | $(18) | $9 | $1 | | Net income (loss) attributable to common stockholders | $5 | $(29) | $7 | $(12) | | Total comprehensive income (loss) attributable to common stockholders | $(121) | $(2) | $(247) | $(3) | | Basic EPS | $0.11 | $(0.63) | $0.15 | $(0.54) | | Diluted EPS | $0.11 | $(0.63) | $0.15 | $(0.54) | - Net income attributable to common stockholders significantly improved to **$5 million** for Q2 2022 from **$(29) million** for Q2 2021, and to **$7 million** for YTD 2022 from **$(12) million** for YTD 2021[8](index=8&type=chunk) - Total comprehensive income (loss) attributable to common stockholders saw a substantial decrease, moving from **$(2) million** in Q2 2021 to **$(121) million** in Q2 2022, and from **$(3) million** in YTD 2021 to **$(247) million** in YTD 2022, primarily due to unrealized losses on securities and foreign currency translation[8](index=8&type=chunk) [Consolidated Statements of Stockholders' Equity (Unaudited)](index=7&type=section&id=Consolidated%20Statements%20of%20Stockholders'%20Equity%20(Unaudited)) This statement details changes in the company's equity accounts over a period, including retained earnings and comprehensive income Metric | Balance at March 31, 2022 ($ millions) | Balance at June 30, 2022 ($ millions) |:---|:---|:---| | Total Stockholders' Equity | $974 | $846 | | Retained Earnings | $723 | $728 | | Accumulated Other Comprehensive Income (Loss) | $(70) | $(196) | | Common Stock in Treasury, at Cost | $(2) | $(16) | Metric | Balance at January 1, 2022 ($ millions) | Balance at June 30, 2022 ($ millions) |:---|:---|:---| | Total Stockholders' Equity | $1,098 | $846 | | Retained Earnings | $726 | $728 | | Accumulated Other Comprehensive Income (Loss) | $58 | $(196) | | Common Stock in Treasury, at Cost | $(3) | $(16) | - The decrease in total stockholders' equity from **$1,098 million** at January 1, 2022, to **$846 million** at June 30, 2022, was primarily driven by total comprehensive loss of **$(247) million** and share repurchases of **$14 million**, partially offset by stock-based compensation of **$10 million**[13](index=13&type=chunk) [Consolidated Statements of Cash Flows (Unaudited)](index=8&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows%20(Unaudited)) This statement reports cash generated and used by operating, investing, and financing activities over a period Cash Flow Activity | Six Months Ended June 30, 2022 ($ millions) | Six Months Ended June 30, 2021 ($ millions) |:---|:---|:---| | Net cash provided by (used in) operating activities | $11 | $(83) | | Net cash provided by investing activities | $440 | $187 | | Net cash used in financing activities | $(434) | $(107) | | Net increase (decrease) in cash, cash equivalents, and restricted cash | $16 | $(4) | | Cash, cash equivalents, and restricted cash at beginning of period | $23 | $35 | | Cash, cash equivalents, and restricted cash at end of period | $39 | $32 | - Net cash provided by operating activities significantly improved to **$11 million** for the six months ended June 30, 2022, compared to net cash used of **$(83) million** in the prior year, driven by debt service payments, operating expenses, reinsurance premiums, and cash settlements from Puerto Rico restructuring[15](index=15&type=chunk)[319](index=319&type=chunk) - Net cash used in financing activities increased to **$(434) million** for the six months ended June 30, 2022, from **$(107) million** in the prior year, primarily due to payments for extinguishment of surplus notes, share repurchases, and paydowns of VIE debt obligations, including those from the Puerto Rico restructuring[15](index=15&type=chunk)[321](index=321&type=chunk) [Notes to Unaudited Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Unaudited%20Consolidated%20Financial%20Statements) This section provides detailed explanations and additional information supporting the consolidated financial statements [Note 1. Background and Business Description](index=10&type=section&id=Note%201.%20Background%20and%20Business%20Description) This note describes Ambac's business segments and strategic priorities for its operations - Ambac operates in three business segments: Legacy Financial Guarantee Insurance (in runoff since 2008), Specialty Property & Casualty Insurance (including Everspan, with recent acquisitions of 21st Century companies), and Insurance Distribution (including Xchange Benefits, LLC)[19](index=19&type=chunk)[20](index=20&type=chunk)[21](index=21&type=chunk) - Strategic priorities for the Specialty P&C Insurance Platform include growing and diversifying the business, building a leading insurance distribution business, and making opportunistic strategic investments[22](index=22&type=chunk) - Strategic priorities for Legacy Financial Guarantee Companies include actively managing and de-risking the insured portfolio, pursuing loss recovery through litigation (especially RMBS), improving operating efficiency, and exploring strategic options to maximize value[23](index=23&type=chunk) [Note 2. Basis of Presentation and Significant Accounting Policies](index=11&type=section&id=Note%202.%20Basis%20of%20Presentation%20and%20Significant%20Accounting%20Policies) This note outlines the accounting principles and policies used in preparing the consolidated financial statements - The consolidated financial statements are prepared in accordance with U.S. GAAP for interim financial reporting and include entities where AFG has a controlling financial interest, including consolidated Variable Interest Entities (VIEs)[28](index=28&type=chunk)[29](index=29&type=chunk) - Foreign currency transaction gains/(losses) were **$7 million** for the six months ended June 30, 2022, and **$(7) million** for the six months ended June 30, 2021, primarily from remeasuring Ambac UK's assets and liabilities[31](index=31&type=chunk) Metric | Six Months Ended June 30, 2022 ($ millions) | Six Months Ended June 30, 2021 ($ millions) |:---|:---|:---| | Beginning balance | $18 | $7 | | Net income attributable to redeemable noncontrolling interest (ASC 810) | $0 | $0 | | Adjustment to redemption value (ASC 480) | $0 | $14 | | Ending balance | $18 | $20 | [Note 3. Segment Information](index=13&type=section&id=Note%203.%20Segment%20Information) This note provides financial data for Ambac's operating segments, including revenues, income, and assets - Ambac reports results in three segments: Legacy Financial Guarantee Insurance, Specialty Property and Casualty Insurance, and Insurance Distribution, plus Corporate and Other[38](index=38&type=chunk) Three Months Ended June 30, 2022 ($ millions): | Segment | Total Revenues | Pretax Income (Loss) | Total Assets | |:---|:---|:---|:---| | Legacy Financial Guarantee Insurance | $75 | $7 | $9,579 | | Specialty Property & Casualty Insurance | $4 | $(1) | $229 | | Insurance Distribution | $6 | $0 | $94 | | Corporate & Other | $2 | $1 | $159 | | **Consolidated** | **$86** | **$6** | **$10,061** | Six Months Ended June 30, 2022 ($ millions): | Segment | Total Revenues | Pretax Income (Loss) | Total Assets | |:---|:---|:---|:---| | Legacy Financial Guarantee Insurance | $184 | $13 | $9,579 | | Specialty Property & Casualty Insurance | $5 | $(4) | $229 | | Insurance Distribution | $15 | $2 | $94 | | Corporate & Other | $2 | $(3) | $159 | | **Consolidated** | **$206** | **$9** | **$10,061** | Three Months Ended June 30, 2021 ($ millions): | Segment | Total Revenues | Pretax Income (Loss) | Total Assets | |:---|:---|:---|:---| | Legacy Financial Guarantee Insurance | $42 | $(16) | $12,532 | | Specialty Property & Casualty Insurance | $0 | $(2) | $109 | | Insurance Distribution | $6 | $0 | $97 | | Corporate & Other | $0 | $0 | $169 | | **Consolidated** | **$49** | **$(18)** | **$12,907** | Six Months Ended June 30, 2021 ($ millions): | Segment | Total Revenues | Pretax Income (Loss) | Total Assets | |:---|:---|:---|:---| | Legacy Financial Guarantee Insurance | $160 | $8 | $12,532 | | Specialty Property & Casualty Insurance | $0 | $(3) | $109 | | Insurance Distribution | $13 | $2 | $97 | | Corporate & Other | $4 | $(6) | $169 | | **Consolidated** | **$178** | **$1** | **$12,907** | [Note 4. Investments](index=15&type=section&id=Note%204.%20Investments) This note details Ambac's investment portfolio, including fixed maturity securities and net investment income - Ambac's non-VIE invested assets primarily consist of fixed maturity securities (available-for-sale or trading) and interests in pooled investment funds (Other investments)[45](index=45&type=chunk) Available-for-Sale Investments (excluding VIEs) ($ millions): | Category | June 30, 2022 Fair Value | December 31, 2021 Fair Value | |:---|:---|:---| | Fixed maturity securities | $1,410 | $1,730 | | Short-term | $452 | $414 | | Fixed maturity securities pledged as collateral | $85 | $120 | | **Total available-for-sale investments** | **$1,947** | **$2,265** | Net Investment Income (Loss) ($ millions): | Category | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | |:---|:---|:---|:---|:---| | Fixed maturity securities | $13 | $23 | $28 | $46 | | Short-term investments | $1 | $0 | $1 | $0 | | Investment expense | $(1) | $(1) | $(3) | $(3) | | Fixed maturity securities - trading | $(11) | $0 | $(21) | $0 | | Other investments | $(23) | $20 | $(23) | $47 | | **Total net investment income (loss)** | **$(21)** | **$42** | **$(16)** | **$91** | - Net investment income (loss) decreased by **$63 million** for the three months and **$107 million** for the six months ended June 30, 2022, compared to prior year periods, primarily due to losses on pooled fund investments and lower income from Ambac-insured securities[55](index=55&type=chunk)[276](index=276&type=chunk)[277](index=277&type=chunk) [Note 5. Fair Value Measurements](index=20&type=section&id=Note%205.%20Fair%20Value%20Measurements) This note explains the fair value hierarchy and measurements applied to Ambac's financial assets and liabilities - Ambac categorizes fair value measurements into a three-level hierarchy: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1 quoted prices), and Level 3 (unobservable inputs)[71](index=71&type=chunk)[72](index=72&type=chunk) Financial Assets by Fair Value Level (June 30, 2022, $ millions): | Category | Total Fair Value | Level 1 | Level 2 | Level 3 | |:---|:---|:---|:---|:---| | Fixed maturity securities | $1,410 | $143 | $1,028 | $80 | | Fixed maturity securities, pledged as collateral | $85 | $85 | $0 | $0 | | Short term investments | $452 | $450 | $2 | $0 | | Other investments (excluding NAV) | $590 | $72 | $0 | $0 | | Cash, cash equivalents and restricted cash | $37 | $37 | $0 | $0 | | Derivative assets | $40 | $0 | $3 | $37 | | Other assets-Loans | $2 | $0 | $0 | $2 | | Variable interest entity assets | $4,841 | $2 | $160 | $4,677 | | **Total financial assets** | **$7,458** | **$789** | **$1,353** | **$4,798** | Financial Liabilities by Fair Value Level (June 30, 2022, $ millions): | Category | Total Fair Value | Level 1 | Level 2 | Level 3 | |:---|:---|:---|:---|:---| | Long term debt, including accrued interest | $2,065 | $0 | $2,052 | $13 | | Derivative liabilities | $63 | $3 | $60 | $0 | | Liabilities for net financial guarantees written | $(348) | $0 | $0 | $(348) | | Variable interest entity liabilities | $4,816 | $0 | $4,691 | $161 | | **Total financial liabilities** | **$6,632** | **$3** | **$6,802** | **$(174)** | - Level 3 financial assets and liabilities, which rely on significant unobservable inputs, include a substantial portion of Variable Interest Entity assets and liabilities, as well as certain corporate obligations, other asset-backed securities, and derivative instruments[76](index=76&type=chunk)[72](index=72&type=chunk) [Note 6. Insurance Contracts](index=27&type=section&id=Note%206.%20Insurance%20Contracts) This note provides details on net premiums earned, loss reserves, and subrogation recoverables related to insurance contracts Net Premiums Earned by Location ($ millions): | Location | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | |:---|:---|:---|:---|:---| | United States | $10 | $7 | $20 | $14 | | United Kingdom | $3 | $4 | $7 | $7 | | Other international | $1 | $1 | $2 | $4 | | **Total** | **$14** | **$11** | **$28** | **$25** | - Net premiums earned increased by **$3 million** for both the three and six months ended June 30, 2022, compared to the prior year periods, driven by growth in specialty property and casualty net premiums[104](index=104&type=chunk)[274](index=274&type=chunk) Loss and Loss Expense Reserves and Subrogation Recoverable ($ millions): | Balance Sheet Line Item | June 30, 2022 | December 31, 2021 | |:---|:---|:---| | Loss and loss expense reserves | $1,019 | $1,570 | | Subrogation recoverable | $(1,667) | $(2,092) | | **Totals** | **$(647)** | **$(522)** | - For the six months ended June 30, 2022, adverse development in prior years' loss reserves was primarily due to a reduction in RMBS R&W recoverable, partially offset by the positive benefit of the Puerto Rico restructuring[119](index=119&type=chunk) - Ambac's Puerto Rico net par outstanding significantly reduced from **$1,054 million** at December 31, 2021, to **$467 million** at June 30, 2022, due to the effectiveness of the Eighth Amended POA and related qualifying modifications, leading to commutations and accelerations of AAC-insured bonds[248](index=248&type=chunk)[255](index=255&type=chunk)[256](index=256&type=chunk)[257](index=257&type=chunk) - RMBS R&W subrogation recoveries decreased from **$1,730 million** at December 31, 2021, to **$1,484 million** at June 30, 2022, primarily due to management's view of the effect of the New York Court of Appeals' decision in U.S. Bank National Association v. DLJ Mortgage Capital, Inc. on AAC's breach-of-contract cases[140](index=140&type=chunk) [Note 7. Derivative Instruments](index=36&type=section&id=Note%207.%20Derivative%20Instruments) This note details the fair values, gains, and losses associated with Ambac's derivative contracts Derivative Instruments Gross Fair Values ($ millions): | Category | June 30, 2022 | December 31, 2021 | |:---|:---|:---| | Non-VIE Derivative Assets | $41 | $76 | | Non-VIE Derivative Liabilities | $62 | $95 | | VIE Derivative Assets | $51 | $38 | | VIE Derivative Liabilities | $1,476 | $1,940 | Gains and Losses on Derivative Contracts ($ millions): | Category | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | |:---|:---|:---|:---|:---| | Non-VIE derivatives | $29 | $(11) | $86 | $14 | | Variable Interest Entities | $278 | $(61) | $289 | $35 | | **Total derivative contracts** | **$307** | **$(72)** | **$376** | **$49** | - Net gains on interest rate derivatives for the three and six months ended June 30, 2022, were **$28 million** and **$85 million**, respectively, reflecting changes in fair value from increases in forward interest rates and lower counterparty credit adjustments[147](index=147&type=chunk)[280](index=280&type=chunk) - All credit derivative contracts outstanding at December 31, 2021, have terminated as of June 30, 2022, with no significant impact on financial position[88](index=88&type=chunk)[150](index=150&type=chunk) [Note 8. Intangible Assets](index=38&type=section&id=Note%208.%20Intangible%20Assets) This note provides information on the carrying value and amortization of Ambac's intangible assets Intangible Assets ($ millions): | Category | June 30, 2022 | December 31, 2021 | |:---|:---|:---| | Net insurance intangible asset | $284 | $320 | | Net other intangible assets | $32 | $33 | | Insurance licenses (indefinite-lived) | $14 | $9 | | **Total intangible assets** | **$330** | **$362** | Amortization Expense ($ millions): | Category | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | |:---|:---|:---|:---|:---| | Insurance amortization expense | $13 | $13 | $26 | $31 | | Other amortization expense | $1 | $1 | $1 | $1 | | **Total** | **$13** | **$14** | **$28** | **$33** | - Total intangible assets decreased from **$362 million** at December 31, 2021, to **$330 million** at June 30, 2022, primarily due to amortization, partially offset by new intangible assets acquired during 2022[156](index=156&type=chunk)[334](index=334&type=chunk) [Note 9. Variable Interest Entities](index=38&type=section&id=Note%209.%20Variable%20Interest%20Entities) This note describes Ambac's involvement with Variable Interest Entities, including their assets, liabilities, and related income - Ambac's involvement with Variable Interest Entities (VIEs) includes providing financial guarantees for debt obligations (FG VIEs), sponsoring special purpose entities, and investing in collateralized debt obligations[159](index=159&type=chunk) Consolidated FG VIEs Assets and Liabilities ($ millions): | Category | June 30, 2022 | December 31, 2021 | |:---|:---|:---| | Total VIE Assets | $4,841 | $6,216 | | Total VIE Liabilities | $4,816 | $6,156 | | Net VIE Assets (Liabilities) | $25 | $60 | Income (Loss) on Variable Interest Entities ($ millions): | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | |:---|:---|:---|:---|:---| | Net change in fair value of VIE assets and liabilities reported in earnings under the fair value option | $0 | $2 | $(1) | $1 | | Investment income (loss) | $(1) | $2 | $(5) | $3 | | Interest expense on long-term debt | $(5) | $(1) | $(7) | $(3) | | Gain (loss) from consolidating VIEs | $0 | $0 | $28 | $0 | | **Income (loss) on variable interest entities** | **$(6)** | **$2** | **$15** | **$2** | - Income (loss) on VIEs for the six months ended June 30, 2022, included a **$28 million** gain from consolidating two new trusts established in connection with the Puerto Rico restructuring in March 2022[167](index=167&type=chunk) Non-Consolidated VIEs Maximum Loss Exposure ($ millions): | Category | June 30, 2022 | December 31, 2021 | |:---|:---|:---| | Global structured finance | $4,038 | $4,879 | | Global public finance | $19,204 | $20,233 | | **Total** | **$23,242** | **$25,112** | [Note 10. Revenues From Contracts with Customers](index=41&type=section&id=Note%2010.%20Revenues%20From%20Contracts%20with%20Customers) This note details revenues generated from contracts with customers, particularly within the insurance distribution business Insurance Distribution Revenues by Policy Type ($ millions): | Policy Type | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | |:---|:---|:---|:---|:---| | Employer Stop Loss | $1 | $1 | $5 | $4 | | Affinity Products | $5 | $5 | $9 | $9 | | Other | $0 | $0 | $0 | $0 | | **Total** | **$6** | **$6** | **$15** | **$13** | - Total revenues from contracts with customers for the Insurance Distribution business increased to **$15 million** for the six months ended June 30, 2022, from **$13 million** in the prior year, primarily due to growth in the business[173](index=173&type=chunk)[177](index=177&type=chunk) Contract Assets and Liabilities ($ millions): | Category | June 30, 2022 | December 31, 2021 | |:---|:---|:---| | Commissions receivable | $2 | $2 | | Contract assets | $5 | $4 | | Contract liabilities | $1 | $1 | [Note 11. Comprehensive Income](index=42&type=section&id=Note%2011.%20Comprehensive%20Income) This note provides a rollforward of accumulated other comprehensive income (loss) components Accumulated Other Comprehensive Income (Loss) Rollforward (Six Months Ended June 30, 2022, $ millions): | Component | Beginning Balance (Jan 1, 2022) | Other Comprehensive Income Before Reclassifications | Amounts Reclassified from AOCI | Ending Balance (Jun 30, 2022) | |:---|:---|:---|:---|:---| | Unrealized Gains (Losses) on Available-for-Sale Securities | $154 | $(171) | $(6) | $(23) | | Amortization of Postretirement Benefit | $4 | $0 | $0 | $4 | | Gain (Loss) on Foreign Currency Translation | $(100) | $(78) | $0 | $(177) | | Credit Risk Changes of Fair Value Option Liabilities | $(1) | $0 | $1 | $0 | | **Total** | **$58** | **$(249)** | **$(5)** | **$(196)** | - Accumulated other comprehensive income (loss) shifted from a gain of **$58 million** at January 1, 2022, to a loss of **$(196) million** at June 30, 2022, primarily due to significant unrealized losses on available-for-sale securities and foreign currency translation losses[179](index=179&type=chunk) [Note 12. Net Income Per Share](index=43&type=section&id=Note%2012.%20Net%20Income%20Per%20Share) This note details the calculation of basic and diluted net income per share for common stockholders Net Income Per Share Calculation ($ millions, except share data): | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | |:---|:---|:---|:---|:---| | Net income (loss) attributable to common stockholders | $5 | $(29) | $7 | $(12) | | Adjustment to redemption value (ASC 480) | $0 | $(1) | $0 | $(14) | | **Numerator of basic and diluted EPS** | **$5** | **$(29)** | **$7** | **$(25)** | | Basic EPS | $0.11 | $(0.63) | $0.15 | $(0.54) | | Diluted EPS | $0.11 | $(0.63) | $0.15 | $(0.54) | Weighted Average Number of Common Shares Outstanding: | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | |:---|:---|:---|:---|:---| | Basic weighted average shares outstanding denominator | 45,519,093 | 46,576,673 | 46,121,927 | 46,446,087 | | Diluted weighted average shares outstanding denominator | 45,685,349 | 46,576,673 | 46,310,687 | 46,446,087 | - AFG repurchased **1,605,316 shares** for **$14.2 million** at an average price of **$8.86 per share** during the second quarter of 2022, under a **$20 million** share repurchase program approved in March 2022, with an additional **$15 million** authorized in May 2022[184](index=184&type=chunk)[394](index=394&type=chunk) [Note 13. Income Taxes](index=44&type=section&id=Note%2013.%20Income%20Taxes) This note provides information on Ambac's income tax provision and deferred tax assets - Ambac maintains a full valuation allowance against its deferred tax assets, as management believes it is more likely than not that sufficient U.S. federal, state, and local taxable income will not be generated to recover them[190](index=190&type=chunk) Consolidated Pretax Income (Loss) by Geography ($ millions): | Geography | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | |:---|:---|:---|:---|:---| | U.S. | $10 | $(27) | $10 | $(10) | | Foreign | $(4) | $10 | $0 | $12 | | **Total** | **$6** | **$(18)** | **$9** | **$1** | Provision for Income Taxes ($ millions): | Component | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | |:---|:---|:---|:---|:---| | Total Current taxes | $1 | $2 | $2 | $7 | | Total Deferred taxes | $0 | $9 | $(1) | $6 | | **Provision for income taxes** | **$1** | **$11** | **$1** | **$13** | - The provision for income taxes decreased by **$10 million** for the three months and **$11 million** for the six months ended June 30, 2022, compared to prior year periods, primarily due to the 2021 effect on deferred tax liability from an increase in UK tax rates[193](index=193&type=chunk)[293](index=293&type=chunk) [Note 14. Commitments and Contingencies](index=44&type=section&id=Note%2014.%20Commitments%20and%20Contingencies) This note details Ambac's involvement in various legal proceedings and potential financial obligations - Ambac is involved in various legal proceedings, including litigation against the company (e.g., Monterey Bay Military Housing, FOMB for Puerto Rico cases) and litigation filed or joined by Ambac (e.g., RMBS litigation, Puerto Rico-related cases)[195](index=195&type=chunk)[197](index=197&type=chunk)[208](index=208&type=chunk)[216](index=216&type=chunk) - Several Puerto Rico-related litigations (FOMB v. Autonomy Master Fund, FOMB v. PRIFA, FOMB v. PRCCDA, FOMB v. PRHTA, FOMB v. Ambac Assurance Corp. (PROMESA constitutionality)) have been resolved by the Commonwealth Plan, with appeals pending[197](index=197&type=chunk)[198](index=198&type=chunk)[199](index=199&type=chunk)[202](index=202&type=chunk)[214](index=214&type=chunk) - RMBS litigation continues, with ongoing motions and trials. The New York Court of Appeals' decision in U.S. Bank National Association v. DLJ Mortgage Capital, Inc. may affect AAC's recovery basis for a significant portion of breaching loans[216](index=216&type=chunk)[217](index=217&type=chunk) - Management believes it has substantial defenses to claims and intends to defend vigorously, but adverse outcomes in any proceedings could be material to business, operations, financial position, profitability, or cash flows[207](index=207&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=50&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses Ambac's financial condition, operations, cash flows, and liquidity, including critical accounting estimates and non-GAAP measures [Executive Summary](index=50&type=section&id=Executive%20Summary) This summary highlights key financial and operational performance indicators across Ambac's business segments AFG Net Assets (excluding equity investments in subsidiaries) ($ millions): | Category | June 30, 2022 | |:---|:---| | Cash and short-term investments | $120 | | Other investments | $83 | | Other net assets | $15 | | **Total** | **$218** | - AFG repurchased **1,605,316 shares** for **$14 million** at an average price of **$8.86 per share** during Q2 2022[222](index=222&type=chunk) Specialty Property and Casualty Insurance Segment Key Metrics ($ millions): | Metric | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2022 | |:---|:---|:---| | Gross premiums written | $41 | $65 | | Net premiums written | $8 | $13 | | Pretax income (loss) | $(1) | $(4) | | Stockholders Equity | $114 | N/A | Insurance Distribution Segment Key Metrics ($ millions): | Metric | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2022 | |:---|:---|:---| | Premiums placed | $24 | $69 | | Commission income | $6 | $15 | | Net commissions | $2 | $7 | | Pretax income (loss) | $0 | $2 | | Stockholders Equity | $65 | N/A | Legacy Financial Guarantee Insurance Segment Key Metrics ($ millions): | Metric | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2022 | |:---|:---|:---| | Net premiums earned | $11 | $24 | | Net investment income | $(22) | $(18) | | Loss and loss expenses (benefit) | $(14) | $9 | | Pretax income (loss) | $7 | $13 | | Stockholders Equity | $450 | N/A | | Adversely Classified Credit Net Par Outstanding | $5,217 | N/A | - The Legacy Financial Guarantee segment's total and adversely classified (ACC) credit net par outstanding decreased by **10%** and **18%** respectively, driven by active de-risking and scheduled maturities, amortizations, refundings, and calls[238](index=238&type=chunk) - Ambac has no operations or insured exposures in Russia or Ukraine, and its investment portfolio exposure to Russian issuers is not meaningful, thus not expecting a material adverse impact from the conflict[239](index=239&type=chunk) - Ambac is monitoring the LIBOR transition and the SEC's proposed rules on climate-related information, assessing compliance obligations and potential impacts[241](index=241&type=chunk)[244](index=244&type=chunk) [Critical Accounting Estimates](index=53&type=section&id=Critical%20Accounting%20Estimates) This section refers to the detailed discussion of Ambac's critical accounting policies and estimates - Ambac's critical accounting policies and estimates are discussed in detail in the Company's Annual Report on Form 10-K for the year ended December 31, 2021[245](index=245&type=chunk) [Financial Guarantees in Force](index=53&type=section&id=Financial%20Guarantees%20in%20Force) This section details Ambac's guaranteed net par outstanding by market and top insured exposures Guaranteed Net Par Outstanding by Market ($ millions): | Market | June 30, 2022 | December 31, 2021 | |:---|:---|:---| | Public Finance | $11,403 | $12,360 | | Structured Finance | $4,154 | $4,904 | | International Finance | $9,743 | $10,756 | | **Total net par outstanding** | **$25,300** | **$28,020** | - Total net par outstanding decreased by **$2,720 million (9.7%)** from December 31, 2021, to June 30, 2022, with significant reductions in Public Finance and International Finance[248](index=248&type=chunk) Top Ten Insured Exposures by Repayment Source (June 30, 2022, $ millions): | Risk Name | Country-Bond Type | Ambac Ratings | Ultimate Maturity Year | Net Par Outstanding | % of Total Net Par Outstanding | |:---|:---|:---|:---|:---|:---| | Capital Hospitals plc | UK-Infrastructure | A- | 2046 | $877 | 3.5% | | Anglian Water | UK-Utility | A- | 2035 | $874 | 3.5% | | Mitchells & Butlers Finance plc | UK-Asset Securitizations | BBB | 2033 | $786 | 3.1% | | National Grid Gas | UK-Utility | BBB+ | 2037 | $765 | 3.0% | | Aspire Defence Finance plc | UK-Infrastructure | A- | 2040 | $741 | 2.9% | | New Jersey Transportation Trust Fund Authority | US-Lease and Taxbacked Revenue | BBB- | 2036 | $623 | 2.5% | | Posillipo Finance II S.r.l | Italy-Sub-Sovereign | BIG | 2035 | $594 | 2.3% | | National Grid Electricity Transmission | UK-Utility | BBB+ | 2036 | $533 | 2.1% | | Catalyst Healthcare (Manchester) Financing plc | UK-Infrastructure | BBB- | 2040 | $509 | 2.0% | | RMPA Services plc | UK-Infrastructure | BBB+ | 2038 | $486 | 1.9% | | **Total** | | | | **$6,788** | **26.8%** | - Puerto Rico net par outstanding decreased from **$1,054 million** at December 31, 2021, to **$467 million** at June 30, 2022, primarily due to the restructuring of GO, PBA, PRIFA, and CCDA bonds. The remaining exposure is mainly to PR Highways and Transportation Authority (PRHTA)[248](index=248&type=chunk)[254](index=254&type=chunk)[255](index=255&type=chunk)[256](index=256&type=chunk)[257](index=257&type=chunk)[258](index=258&type=chunk) Summary of Below Investment Grade Exposure ($ millions): | Bond Type | June 30, 2022 | December 31, 2021 | |:---|:---|:---| | Public Finance | $1,064 | $1,741 | | Structured Finance | $2,262 | $2,472 | | International Finance | $1,105 | $1,225 | | **Total** | **$4,431** | **$5,438** | - The net decline in below investment grade exposures is primarily due to de-risking activities, including the Puerto Rico restructuring[270](index=270&type=chunk) [Results of Operations](index=57&type=section&id=Results%20of%20Operations) This section analyzes Ambac's financial performance, including revenues, expenses, and net income drivers Summary of Financial Results ($ millions): | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | |:---|:---|:---|:---|:---| | Gross premiums written | $37 | $(3) | $67 | $(5) | | Net premiums earned | $14 | $11 | $28 | $25 | | Net investment income | $(21) | $42 | $(16) | $91 | | Net investment gains (losses), including impairments | $7 | $(2) | $17 | $1 | | Net gains (losses) on derivative contracts | $29 | $(11) | $86 | $14 | | Net realized gains (losses) on extinguishment of debt | $57 | $0 | $57 | $33 | | Commission income | $6 | $6 | $15 | $13 | | Income (loss) on variable interest entities | $(6) | $2 | $15 | $2 | | Losses and loss expenses (benefit) | $(12) | $(26) | $12 | $(18) | | Intangible amortization | $13 | $14 | $28 | $33 | | Operating expenses | $34 | $28 | $68 | $62 | | Interest expense | $45 | $50 | $89 | $100 | | Net income (loss) attributable to common stockholders | $5 | $(29) | $7 | $(12) | - Ambac's Q2 2022 results were significantly impacted by a **$198 million** gain from the Puerto Rico restructuring (recorded in Q1 2022) and a **$242 million** reduction in RMBS R&W subrogation recoveries (including **$186 million** due to the HEAT court decision)[272](index=272&type=chunk)[273](index=273&type=chunk) - Gross premiums written increased by **$40 million** for the three months and **$72 million** for the six months ended June 30, 2022, primarily driven by growth in the Specialty Property & Casualty Insurance segment[274](index=274&type=chunk) - Net investment income (loss) decreased by **$63 million** for the three months and **$107 million** for the six months ended June 30, 2022, mainly due to losses on pooled fund investments and lower income from Ambac-insured securities[276](index=276&type=chunk)[277](index=277&type=chunk) - Net gains on derivative contracts significantly improved to **$29 million** for the three months and **$86 million** for the six months ended June 30, 2022, from losses in the prior year, reflecting increases in forward interest rates and favorable portfolio positioning[280](index=280&type=chunk) - Net realized gains on extinguishment of debt were **$57 million** for the three and six months ended June 30, 2022, resulting from repurchases of surplus notes below their carrying values[283](index=283&type=chunk) - Losses and loss expenses (benefit) for the six months ended June 30, 2022, were **$12 million**, compared to a benefit of **$(18) million** in the prior year, primarily due to the reduction in RMBS R&W subrogation recoveries, partially offset by favorable loss development in domestic public finance[298](index=298&type=chunk) - Interest expense decreased by **$5 million** for the three months and **$11 million** for the six months ended June 30, 2022, mainly due to the Secured Note Refinancing, partially offset by discount accretion on reissued surplus notes[291](index=291&type=chunk) [Liquidity and Capital Resources](index=63&type=section&id=Liquidity%20and%20Capital%20Resources) This section discusses Ambac's liquidity sources, uses of funds, and capital management strategies - AFG's liquidity is primarily dependent on its net assets (**$218 million** at June 30, 2022) and distributions from operating subsidiaries. Principal uses include operating expenses, strategic investments, and capital contributions to new/existing businesses[307](index=307&type=chunk)[309](index=309&type=chunk) - AAC's ability to realize RMBS R&W subrogation recoveries is subject to significant uncertainty, and failure to recover or recovering materially less than estimated could adversely impact its liquidity[312](index=312&type=chunk) - Interest and principal payments on surplus notes require OCI approval, which was declined for the June 7, 2022 payment, extending maturity and accruing additional interest[292](index=292&type=chunk)[314](index=314&type=chunk) Net Cash Flow Activities (Six Months Ended June 30, $ millions): | Activity | 2022 | 2021 | |:---|:---|:---| | Operating activities | $11 | $(83) | | Investing activities | $440 | $187 | | Financing activities | $(434) | $(107) | | Foreign exchange impact on cash and cash equivalents | $(1) | $0 | | **Net cash flow** | **$16** | **$(4)** | - Financing activities for H1 2022 included **$58 million** for surplus note extinguishment, **$14 million** for share repurchases, and **$359 million** for VIE debt paydowns, including Puerto Rico restructuring-related payments[321](index=321&type=chunk) [Balance Sheet](index=66&type=section&id=Balance%20Sheet) This section analyzes changes in Ambac's assets, liabilities, and stockholders' equity - Total assets decreased by **$2,242 million** to **$10,061 million** at June 30, 2022, and total liabilities decreased by **$1,989 million** to **$9,198 million**, primarily due to VIE obligation settlements, loss payments, and declines in invested asset values[324](index=324&type=chunk) - Total stockholders' equity decreased to **$846 million** at June 30, 2022, from **$1,098 million** at December 31, 2021, mainly due to unrealized losses on invested assets and foreign currency translation losses[325](index=325&type=chunk) Investment Portfolio Composition (excluding VIEs) at Carrying Value ($ millions): | Category | June 30, 2022 | December 31, 2021 | |:---|:---|:---| | Fixed maturity securities | $1,410 | $1,730 | | Fixed maturity securities - trading | $2 | $0 | | Short-term | $452 | $414 | | Other investments | $598 | $690 | | Fixed maturity securities pledged as collateral | $85 | $120 | | **Total investments** | **$2,547** | **$2,955** | - Premium receivables decreased to **$311 million** at June 30, 2022, from **$323 million** at December 31, 2021, driven by Legacy Financial Guarantee Insurance Segment activities, partially offset by growth in Specialty P&C Insurance Segment[330](index=330&type=chunk) - Derivative assets decreased from **$76 million** to **$40 million**, and derivative liabilities decreased from **$95 million** to **$61 million**, primarily due to higher interest rates during H1 2022[335](index=335&type=chunk) Long-term Debt Carrying Value ($ millions): | Debt Type | June 30, 2022 | December 31, 2021 | |:---|:---|:---| | Surplus notes | $671 | $729 | | Sitka AAC note | $1,156 | $1,154 | | Tier 2 notes | $347 | $333 | | Ambac UK debt | $15 | $15 | | **Total Long-term Debt** | **$2,189** | **$2,230** | [Variable Interest Entities](index=71&type=section&id=Variable%20Interest%20Entities) This section refers to detailed information on Ambac's variable interest entities - Detailed information regarding variable interest entities is provided in Note 9 to the Unaudited Consolidated Financial Statements[354](index=354&type=chunk) [Accounting Standards](index=71&type=section&id=Accounting%20Standards) This section confirms no new applicable accounting standards have been issued but not yet adopted - There are no new accounting standards applicable to Ambac that have been issued but not yet adopted[355](index=355&type=chunk) [U.S. Insurance Statutory Basis Financial Results](index=72&type=section&id=U.S.%20Insurance%20Statutory%20Basis%20Financial%20Results) This section presents the statutory financial results for Ambac Assurance Corporation (AAC) and Everspan Indemnity AAC Statutory Financial Results ($ millions): | Metric | June 30, 2022 | December 31, 2021 | |:---|:---|:---| | Statutory policyholder surplus | $700 | $757 | | Qualified statutory capital | $1,283 | $1,322 | - AAC's statutory policyholder surplus decreased by **$57 million**, and qualified statutory capital decreased by **$39 million**, from December 31, 2021, to June 30, 2022, primarily due to surplus note repurchases, contingency reserve contributions, and fair value decreases in pooled funds, partially offset by statutory net income[359](index=359&type=chunk) - Everspan Indemnity Insurance Company's statutory policyholder surplus increased to **$109 million** at June 30, 2022, from **$106 million** at December 31, 2021, driven by capital contributions[361](index=361&type=chunk) [Ambac Assurance UK Limited Financial Results Under UK Accounting Principles](index=72&type=section&id=Ambac%20Assurance%20UK%20Limited%20Financial%20Results%20Under%20UK%20Accounting%20Principles) This section provides Ambac UK's financial results under UK GAAP and Solvency II capital metrics Ambac UK Financial Results (£ millions): | Metric | June 30, 2022 | December 31, 2021 | |:---|:---|:---| | Shareholder funds (UK GAAP) | £452 | £444 | | Carrying value of cash and investments | £503 | £500 | | Available capital resources (Solvency II) | £287 | N/A | | Eligible capital resources (Solvency II) | £282 | N/A | | Regulatory capital requirements (Solvency II) | £228 | N/A | | Solvency II capital surplus | £54 | N/A | - Ambac UK's shareholder funds under UK GAAP increased to **£452 million** at June 30, 2022, from **£444 million** at December 31, 2021, primarily due to continued premium receipts and foreign exchange gains, partially offset by investment losses and operating expenses[362](index=362&type=chunk) - Under Solvency II, Ambac UK had a capital surplus of **£54 million** at June 30, 2022, with eligible capital resources of **£282 million** against regulatory capital requirements of **£228 million**[363](index=363&type=chunk) [Non-GAAP Financial Measures](index=72&type=section&id=Non-GAAP%20Financial%20Measures) This section presents non-GAAP financial measures like EBITDA, adjusted earnings, and adjusted book value - Ambac reports three non-GAAP financial measures: EBITDA, adjusted earnings, and adjusted book value, to provide greater transparency and enhanced visibility into underlying business drivers[364](index=364&type=chunk)[365](index=365&type=chunk) EBITDA Reconciliation (Three Months Ended June 30, 2022, $ millions): | Segment | Pretax Income (Loss) | Interest Expense | Amortization of Intangible Assets | EBITDA | |:---|:---|:---|:---|:---| | Legacy Financial Guarantee Insurance | $7 | $45 | $13 | $65 | | Specialty Property & Casualty Insurance | $(1) | $0 | $0 | $(1) | | Insurance Distribution | $0 | $0 | $1 | $1 | | Corporate & Other | $1 | $0 | $0 | $1 | | **Consolidated** | **$6** | **$45** | **$13** | **$65** | EBITDA Reconciliation (Six Months Ended June 30, 2022, $ millions): | Segment | Pretax Income (Loss) | Interest Expense | Depreciation | Amortization of Intangible Assets | Net (gain) attributable to noncontrolling interest | EBITDA | |:---|:---|:---|:---|:---|:---|:---| | Legacy Financial Guarantee Insurance | $13 | $89 | $1 | $26 | $0 | $130 | | Specialty Property & Casualty Insurance | $(4) | $0 | $0 | $0 | $0 | $(4) | | Insurance Distribution | $2 | $0 | $0 | $1 | $(1) | $3 | | Corporate & Other | $(3) | $0 | $0 | $0 | $0 | $(3) | | **Consolidated** | **$9** | **$89** | **$1** | **$28** | **$(1)** | **$126** | Adjusted Earnings (Loss) Reconciliation ($ millions, except share data): | Metric | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2022 | |:---|:---|:---| | Net income (loss) attributable to common stockholders | $5 | $7 | | Insurance intangible amortization | $13 | $26 | | Foreign exchange (gains) losses | $(5) | $(7) | | **Adjusted earnings (loss)** | **$13** | **$27** | | Diluted EPS | $0.28 | $0.57 | Adjusted Book Value Reconciliation ($ millions, except share data): | Metric | June 30, 2022 | December 31, 2021 | |:---|:---|:---| | Total Ambac Financial Group, Inc. stockholders' equity | $784 | $1,038 | | Insurance intangible asset | $(284) | $(320) | | Net unearned premiums and fees in excess of expected losses | $250 | $310 | | Net unrealized investment (gains) losses in Accumulated Other Comprehensive Income | $23 | $(154) | | **Adjusted book value** | **$773** | **$874** | | Per Share | $17.20 | $18.88 | - The decrease in Adjusted Book Value was primarily attributable to the adverse effect of foreign exchange losses and higher discount rates on the present value of legacy financial guarantee installment premiums, partially offset by Adjusted earnings for the six months ended June 30, 2022[374](index=374&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=75&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section reports no material changes in the company's market risks since December 31, 2021 - No material changes in market risks were identified as of June 30, 2022, compared to December 31, 2021[376](index=376&type=chunk) [Item 4. Controls and Procedures](index=75&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that Ambac's disclosure controls and procedures were effective as of June 30, 2022, with no material changes to internal controls - Ambac's disclosure controls and procedures were effective as of June 30, 2022[377](index=377&type=chunk) - No changes in internal control over financial reporting occurred during the quarter ended June 30, 2022, that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting[378](index=378&type=chunk) PART II. OTHER INFORMATION [Item 1. Legal Proceedings](index=75&type=section&id=Item%201.%20Legal%20Proceedings) This section refers to Note 14 for a comprehensive discussion of legal proceedings involving Ambac and its subsidiaries - Information on legal proceedings against Ambac and its subsidiaries is detailed in Note 14 of the Unaudited Consolidated Financial Statements[379](index=379&type=chunk) [Item 1A. Risk Factors](index=75&type=section&id=Item%201A.%20Risk%20Factors) This section highlights risks related to AAC's inability to realize RMBS R&W subrogation recoveries, including court decision impacts on liquidity and financial condition - AAC's inability to realize expected RMBS R&W subrogation recoveries, estimated at **$1,462 million** (net of reinsurance) as of June 30, 2022, could adversely impact liquidity, financial condition, and the value of its securities[382](index=382&type=chunk)[383](index=383&type=chunk)[389](index=389&type=chunk) - The outcome of RMBS litigations is inherently unpredictable, and adverse rulings, such as the New York Court of Appeals' decision in the HEAT case, could significantly impact AAC's ability to pursue claims, the amount or timing of recovery, or settlement dynamics[384](index=384&type=chunk) - Failure to realize RMBS R&W subrogation recoveries could lead to material adverse effects, including impairing AAC's ability to honor financial obligations, initiating rehabilitation proceedings, reducing value delivery to AFG, and a significant drop in the value of securities[385](index=385&type=chunk)[386](index=386&type=chunk)[391](index=391&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=77&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section reports no unregistered equity sales and details the company's share repurchase activities during Q2 2022 - No unregistered sales of equity securities occurred[392](index=392&type=chunk) Share Repurchases During Q2 2022: | Month | Total Shares Purchased | Average Price Paid Per Share ($) | |:---|:---|:---| | Apr-2022 | 1,505,316 | 8.78 | | May-2022 | 100,000 | 10.07 | | Jun-2022 | 0 | 0 | | **Second Quarter 2022 Total** | **1,605,316** | **8.86** | - As of June 30, 2022, AFG had **$20.8 million** remaining under its authorized share repurchase program[394](index=394&type=chunk) [Item 3. Defaults Upon Senior Securities](index=77&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) This section confirms no matters require disclosure regarding defaults upon senior securities - No matters require disclosure regarding defaults upon senior securities[395](index=395&type=chunk) [Item 5. Other Information](index=77&type=section&id=Item%205.%20Other%20Information) This section confirms no other information requires disclosure - No other information requires disclosure[395](index=395&type=chunk) [Item 6. Exhibits](index=78&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed as part of the Form 10-Q, including corporate documents and certifications - The report includes various exhibits such as Amended and Restated Certificate of Incorporation, Amended Bylaws, Certifications of CEO and CFO, and XBRL Instance Documents[397](index=397&type=chunk) [SIGNATURES](index=78&type=section&id=SIGNATURES) This section contains the formal signatures required for the Form 10-Q, confirming its submission - The report is signed by David Trick, Chief Financial Officer and Treasurer, on behalf of Ambac Financial Group, Inc. on August 8, 2022[398](index=398&type=chunk)[399](index=399&type=chunk)

Ambac Financial Group, Inc. (NYSE:AMBC) Q1 2022 Earnings Conference Call May 11, 2022 8:30 AM ET Company Participants Charles Sebaski - Head of Investor Relation Claude LeBlanc - President & Chief Executive Officer David Trick - Executive Vice President, Chief Financial Officer & Treasurer Conference Call Participants David Belport - Wells Fargo Advisors Operator Greetings and welcome to Ambac Financial Group, Inc. First Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A ...

[Cautionary Statement Pursuant to the Private Securities Litigation Reform Act of 1995](index=4&type=section&id=Cautionary%20Statement%20Pursuant%20to%20the%20Private%20Securities%20Litigation%20Reform%20Act%20of%201995) - **Forward-looking statements** are not guarantees of future performance; actual results may **differ materially** due to various factors[8](index=8&type=chunk) - Key risks include **volatility** in common stock price, **uncertainty** in achieving value from subsidiaries, **inability to realize expected recoveries** (e.g., RMBS litigation), **higher-than-expected losses** on Puerto Rico exposures, and **inadequacy of loss reserves**[8](index=8&type=chunk) - Other **significant risks** involve **credit risk**, **inability to effectively reduce insured financial guarantee exposures**, challenges in generating cash for debt service, **substantial indebtedness**, and potential for rehabilitation proceedings or other regulatory intervention against AAC[8](index=8&type=chunk) [PART I. FINANCIAL INFORMATION](index=5&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) [Item 1. Unaudited Consolidated Financial Statements of Ambac Financial Group, Inc. and Subsidiaries](index=5&type=section&id=Item%201.%20Unaudited%20Consolidated%20Financial%20Statements%20of%20Ambac%20Financial%20Group%2C%20Inc.%20and%20Subsidiaries) Ambac presents its unaudited consolidated financial statements for **Q1 2022**, including balance sheets, income, equity, cash flows, and explanatory notes [Consolidated Balance Sheets (Unaudited)](index=6&type=section&id=Consolidated%20Balance%20Sheets%20(Unaudited)) | Metric | March 31, 2022 (Millions $) | December 31, 2021 (Millions $) | Change (Millions $) | | :----- | :-------------------------- | :----------------------------- | :------------------ | | Total Assets | 11,531 | 12,303 | (772) | | Total Liabilities | 10,538 | 11,187 | (649) | | Total Stockholders' Equity | 974 | 1,098 | (124) | | Loss and Loss Expense Reserves | 1,067 | 1,570 | (503) | | Subrogation Recoverable | 1,714 | 2,092 | (378) | | Long-term Debt | 2,242 | 2,230 | 12 | | VIE Long-term Debt | 4,124 | 4,216 | (92) | - The **decrease** in **total assets** was primarily driven by **lower subrogation recoverables**, **declines** in **invested asset values**, and **reduced variable interest entity (VIE) assets**[10](index=10&type=chunk)[323](index=323&type=chunk) - The **reduction** in **total liabilities** was mainly due to **lower loss and loss expense reserves** and **decreased VIE long-term debt**[10](index=10&type=chunk)[323](index=323&type=chunk) [Consolidated Statements of Total Comprehensive Income (Loss) (Unaudited)](index=7&type=section&id=Consolidated%20Statements%20of%20Total%20Comprehensive%20Income%20(Loss)%20(Unaudited)) | Metric | Three Months Ended March 31, 2022 (Millions $) | Three Months Ended March 31, 2021 (Millions $) | Change (Millions $) | | :----- | :--------------------------------------------- | :--------------------------------------------- | :------------------ | | Total Revenues | 119 | 129 | (10) | | Total Expenses | 116 | 110 | 6 | | Pre-tax Income (Loss) | 3 | 19 | (16) | | Net Income (Loss) | 2 | 17 | (15) | | Net Income Attributable to Common Stockholders | 2 | 17 | (15) | | Total Comprehensive Income (Loss) Attributable to Common Stockholders | (125) | (2) | (123) | | Basic EPS | 0.04 | 0.08 | (0.04) | | Diluted EPS | 0.04 | 0.08 | (0.04) | - **Net investment income decreased significantly** from **$49 million** in **Q1 2021** to **$5 million** in **Q1 2022**[11](index=11&type=chunk) - **Net gains on derivative contracts increased** to **$57 million** in **Q1 2022** from **$25 million** in **Q1 2021**[11](index=11&type=chunk) - **Losses and loss expenses increased** to **$24 million** in **Q1 2022** from **$8 million** in **Q1 2021**[11](index=11&type=chunk) [Consolidated Statements of Stockholders' Equity (Unaudited)](index=8&type=section&id=Consolidated%20Statements%20of%20Stockholders'%20Equity%20(Unaudited)) | Metric | December 31, 2021 (Millions $) | March 31, 2022 (Millions $) | Change (Millions $) | | :----- | :----------------------------- | :-------------------------- | :------------------ | | Balance at Beginning of Period | 1,098 | 1,098 | 0 | | Total Comprehensive Income (Loss) | (125) | (125) | (125) | | Stock-based Compensation | 5 | 5 | 0 | | Cost of Shares (acquired) issued under equity plan | (3) | (3) | 0 | | Balance at End of Period | 974 | 974 | 0 | - **Accumulated Other Comprehensive Income (Loss)** shifted from a **gain of $58 million** at **December 31, 2021**, to a **loss of $(70) million** at **March 31, 2022**, reflecting **unrealized losses on securities** and **foreign currency translation**[14](index=14&type=chunk) [Consolidated Statements of Cash Flows (Unaudited)](index=9&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows%20(Unaudited)) | Metric | Three Months Ended March 31, 2022 (Millions $) | Three Months Ended March 31, 2021 (Millions $) | Change (Millions $) | | :----- | :--------------------------------------------- | :--------------------------------------------- | :------------------ | | Net Cash Provided by (Used in) Operating Activities | 9 | (40) | 49 | | Net Cash Provided by Investing Activities | 136 | 116 | 20 | | Net Cash Used in Financing Activities | (52) | (69) | 17 | | Net Cash Flow | 93 | 6 | 87 | | Cash, Cash Equivalents, and Restricted Cash at End of Period | 116 | 42 | 74 | - **Operating cash flow improved significantly** due to changes in unearned premiums, **losses and loss expenses**, and derivative assets and liabilities[16](index=16&type=chunk) - **Investing cash flow was boosted** by proceeds from sales of bonds and changes in short-term investments[16](index=16&type=chunk) [Notes to Unaudited Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Unaudited%20Consolidated%20Financial%20Statements) [Note 1. Background and Business Description](index=11&type=section&id=Note%201.%20Background%20and%20Business%20Description) - Ambac's business operations are segmented into **Legacy Financial Guarantee Insurance**, **Specialty Property & Casualty Insurance**, and **Insurance Distribution**, with the financial guarantee business in runoff since **2008**[20](index=20&type=chunk) - **Strategic priorities** for the **Specialty P&C Insurance Platform** include growing and diversifying with program partners, building a leading insurance distribution business, and making opportunistic investments[20](index=20&type=chunk) - **Strategic priorities** for **Legacy Financial Guarantee Companies** involve actively managing and de-risking the insured portfolio, pursuing **loss recovery** through litigation (especially RMBS), improving operating efficiency, and optimizing asset/liability profiles[20](index=20&type=chunk) [Note 2. Basis of Presentation and Significant Accounting Policies](index=12&type=section&id=Note%202.%20Basis%20of%20Presentation%20and%20Significant%20Accounting%20Policies) - Consolidated financial statements include AFG and all entities where it has a controlling financial interest, including **VIEs** where AFG is the **primary beneficiary**[23](index=23&type=chunk) - Redeemable noncontrolling interest is remeasured each period as the greater of its carrying value under **ASC 810** or the redemption value of the put option under **ASC 480**[28](index=28&type=chunk) | Metric | Three Months Ended March 31, 2022 (Millions $) | Three Months Ended March 31, 2021 (Millions $) | | :----- | :--------------------------------------------- | :--------------------------------------------- | | Redeemable Noncontrolling Interest - Beginning Balance | 18 | 7 | | Adjustment to Redemption Value (ASC 480) | 0 | 13 | | Redeemable Noncontrolling Interest - Ending Balance | 18 | 20 | [Note 3. Segment Information](index=14&type=section&id=Note%203.%20Segment%20Information) - Ambac's operations are segmented into **Legacy Financial Guarantee Insurance**, **Specialty Property and Casualty Insurance**, and **Insurance Distribution**, consistent with how the CODM assesses performance[33](index=33&type=chunk) | Metric (Millions $) | Legacy Financial Guarantee Insurance (Q1 2022) | Specialty Property & Casualty Insurance (Q1 2022) | Insurance Distribution (Q1 2022) | Corporate & Other (Q1 2022) | Consolidated (Q1 2022) | | :------------------ | :--------------------------------------------- | :------------------------------------------------ | :------------------------------- | :-------------------------- | :----------------------- | | Total Revenues | 109 | 2 | 9 | 0 | 119 | | Total Expenses | 102 | 4 | 6 | 3 | 116 | | Pretax Income (Loss) | 6 | (2) | 2 | (3) | 3 | | Total Assets | 11,075 | 191 | 97 | 168 | 11,531 | | Metric (Millions $) | Legacy Financial Guarantee Insurance (Q1 2021) | Specialty Property & Casualty Insurance (Q1 2021) | Insurance Distribution (Q1 2021) | Corporate & Other (Q1 2021) | Consolidated (Q1 2021) | | :------------------ | :--------------------------------------------- | :------------------------------------------------ | :------------------------------- | :-------------------------- | :----------------------- | | Total Revenues | 118 | 0 | 7 | 4 | 129 | | Total Expenses | 94 | 1 | 5 | 10 | 110 | | Pretax Income (Loss) | 24 | (1) | 2 | (6) | 19 | | Total Assets | 12,470 | 108 | 98 | 165 | 12,840 | [Note 4. Investments](index=15&type=section&id=Note%204.%20Investments) - Ambac's non-VIE invested assets are mainly **fixed maturity securities** (available-for-sale or trading) and pooled investment funds[38](index=38&type=chunk) | Metric (Millions $) | March 31, 2022 | December 31, 2021 | Change | | :------------------ | :------------- | :---------------- | :----- | | Total Available-for-Sale Investments | 2,036 | 2,265 | (229) | | Total Investments (net of allowance for credit losses) | 2,815 | 2,955 | (140) | | Metric (Millions $) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change | | :------------------ | :-------------------------------- | :-------------------------------- | :----- | | Net Investment Income | 5 | 49 | (44) | | Net Investment Gains (Losses), including impairments | 10 | 2 | 8 | - The **decrease** in **net investment income** was primarily due to a **$36 million decrease** in income from 'Other investments' (pooled funds) and an **$8 million decrease** from Ambac-insured securities[52](index=52&type=chunk)[277](index=277&type=chunk)[278](index=278&type=chunk)[279](index=279&type=chunk) [Note 5. Fair Value Measurements](index=21&type=section&id=Note%205.%20Fair%20Value%20Measurements) - **Fair value hierarchy**: **Level 1** (quoted prices in active markets), **Level 2** (observable inputs other than Level 1), **Level 3** (**significant unobservable inputs**)[69](index=69&type=chunk)[70](index=70&type=chunk) - For **March 31, 2022**, **total financial assets** were **$8,864 million** (carrying amount), with **$5,741 million** categorized as **Level 3**. **Total financial liabilities** were **$7,930 million** (carrying amount), with **$(17) million** categorized as **Level 3**[74](index=74&type=chunk) - The fair values of **FG VIE long-term debt** are primarily based on **Level 2 market price quotes**, while **FG VIE fixed maturity securities** and loan assets are generally based on **Level 2 market price quotes** or internal estimations[94](index=94&type=chunk)[95](index=95&type=chunk) [Note 6. Insurance Contracts](index=27&type=section&id=Note%206.%20Insurance%20Contracts) | Metric (Millions $) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change | | :------------------ | :-------------------------------- | :-------------------------------- | :----- | | Net Premiums Written | 12 | (9) | 21 | | Net Premiums Earned | 15 | 14 | 1 | | Metric (Millions $) | March 31, 2022 | December 31, 2021 | Change | | :------------------ | :------------- | :---------------- | :----- | | Premium Receivables | 317 | 323 | (6) | | Loss and Loss Expense Reserves | 1,067 | 1,570 | (503) | | Subrogation Recoverable | 1,714 | 2,092 | (378) | | Gross Loss and Loss Expense Reserves (net of subrogation and discounts, before reinsurance) | (680) | (543) | (137) | - The **reduction** in **RMBS R&W subrogation recoveries** by **$224 million** in **Q1 2022** was a **primary driver** for the change in **loss and loss expense reserves**, partially offset by **favorable loss development** from the Puerto Rico restructuring[118](index=118&type=chunk)[274](index=274&type=chunk) - Ambac's **Puerto Rico exposure** was **significantly reduced** in **Q1 2022** due to the Eighth Amended POA and qualifying modifications for PRIFA and CCDA, with remaining unrestructured exposure primarily in PRHTA[129](index=129&type=chunk)[130](index=130&type=chunk)[131](index=131&type=chunk)[132](index=132&type=chunk) [Note 7. Derivative Instruments](index=35&type=section&id=Note%207.%20Derivative%20Instruments) | Metric (Millions $) | March 31, 2022 | December 31, 2021 | Change | | :------------------ | :------------- | :---------------- | :----- | | Non-VIE Derivative Assets | 55 | 76 | (21) | | Non-VIE Derivative Liabilities | 76 | 95 | (19) | | VIE Derivative Assets | 42 | 38 | 4 | | VIE Derivative Liabilities | 1,866 | 1,940 | (74) | | Metric (Millions $) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change | | :------------------ | :-------------------------------- | :-------------------------------- | :----- | | Net Gains (Losses) on Non-VIE Derivatives | 57 | 25 | 32 | | Net Gains (Losses) on VIE Derivatives | 11 | 96 | (85) | | Total Derivative Contracts | 68 | 121 | (53) | - The **increase** in **net gains on non-VIE derivatives** was primarily due to **significant increases** in forward interest rates and **favorable portfolio positioning** in **Q1 2022**[281](index=281&type=chunk) - All ratings-based contingent features in Ambac's non-cleared interest rate swaps have been triggered, requiring **maximum collateral levels** to be posted[155](index=155&type=chunk) [Note 8. Intangible Assets](index=37&type=section&id=Note%208.%20Intangible%20Assets) | Metric (Millions $) | March 31, 2022 | December 31, 2021 | Change | | :------------------ | :------------- | :---------------- | :----- | | Net Insurance Intangible Asset | 303 | 320 | (17) | | Net Other Intangible Assets | 32 | 33 | (1) | | Insurance Licenses (Indefinite-lived) | 14 | 9 | 5 | | Total Intangible Assets | 350 | 362 | (12) | | Metric (Millions $) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change | | :------------------ | :-------------------------------- | :-------------------------------- | :----- | | Insurance Amortization Expense | 14 | 19 | (5) | | Other Amortization Expense | 1 | 1 | 0 | - The **decrease** in **insurance intangible amortization** is driven by the run-off of the insured portfolio and de-risking activity[286](index=286&type=chunk) [Note 9. Variable Interest Entities](index=37&type=section&id=Note%209.%20Variable%20Interest%20Entities) - Ambac consolidates **FG VIEs** where it has the obligation to absorb expected losses and the power to direct activities that **significantly impact economic performance**[161](index=161&type=chunk) | Metric (Millions $) | March 31, 2022 | December 31, 2021 | Change | | :------------------ | :------------- | :---------------- | :----- | | Total FG VIE Assets | 5,925 | 6,216 | (291) | | Total FG VIE Liabilities | 5,993 | 6,156 | (163) | | Number of FG VIEs Consolidated | 8 | 6 | 2 | | Metric (Millions $) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change | | :------------------ | :-------------------------------- | :-------------------------------- | :----- | | Income (Loss) on Variable Interest Entities | 22 | 0 | 22 | - The **$22 million income** on **VIEs** in **Q1 2022** was primarily due to a **$28 million gain** from consolidating two new trusts established during the Puerto Rico restructuring[167](index=167&type=chunk)[285](index=285&type=chunk) [Note 10. Revenues From Contracts with Customers](index=40&type=section&id=Note%2010.%20Revenues%20From%20Contracts%20with%20Customers) | Policy Type (Millions $) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change | | :----------------------- | :-------------------------------- | :-------------------------------- | :----- | | Employer Stop Loss | 4 | 3 | 1 | | Affinity Products | 5 | 4 | 1 | | Total | 9 | 7 | 2 | | Metric (Millions $) | March 31, 2022 | December 31, 2021 | Change | | :------------------ | :------------- | :---------------- | :----- | | Commissions Receivable | 3 | 2 | 1 | | Contract Assets | 6 | 4 | 2 | | Contract Liabilities | 1 | 1 | 0 | - The **increase** in **commission income** is primarily driven by **greater premiums placed** in the **Insurance Distribution segment**[283](index=283&type=chunk) [Note 11. Comprehensive Income](index=41&type=section&id=Note%2011.%20Comprehensive%20Income) | Metric (Millions $) | December 31, 2021 | March 31, 2022 | Change | | :------------------ | :---------------- | :------------- | :----- | | Beginning Balance | 58 | 58 | 0 | | Other Comprehensive Income (Loss) before Reclassifications | (127) | (127) | (127) | | Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) | (1) | (1) | 0 | | Ending Balance | (70) | (70) | 0 | - **Unrealized losses on available-for-sale securities** contributed **$(105) million** to **other comprehensive income (loss)** in **Q1 2022**, compared to **$(24) million** in **Q1 2021**[179](index=179&type=chunk) - **Foreign currency translation** resulted in a **loss of $(23) million** in **Q1 2022**, contrasting with a **gain of $6 million** in **Q1 2021**[179](index=179&type=chunk) [Note 12. Net Income Per Share](index=42&type=section&id=Note%2012.%20Net%20Income%20Per%20Share) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change | | :----- | :-------------------------------- | :-------------------------------- | :----- | | Net Income Attributable to Common Stockholders (Millions $) | 2 | 17 | (15) | | Numerator of Basic and Diluted EPS (Millions $) | 2 | 4 | (2) | | Basic EPS | 0.04 | 0.08 | (0.04) | | Diluted EPS | 0.04 | 0.08 | (0.04) | - As of **May 6, 2022**, **45,039,916 shares** of common stock were outstanding[5](index=5&type=chunk) - AFG's Board of Directors approved a **$20 million share repurchase program** in **March 2022**, and an additional **$15 million** in **May 2022**, bringing the **total unused authorized amount** to **$21.8 million**[184](index=184&type=chunk)[390](index=390&type=chunk) [Note 13. Income Taxes](index=43&type=section&id=Note%2013.%20Income%20Taxes) | Metric (Millions $) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change | | :------------------ | :-------------------------------- | :-------------------------------- | :----- | | U.S. Pre-tax Income (Loss) | (1) | 17 | (18) | | Foreign Pre-tax Income (Loss) | 4 | 2 | 2 | | Total Pre-tax Income (Loss) | 3 | 19 | (16) | | Metric (Millions $) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change | | :------------------ | :-------------------------------- | :-------------------------------- | :----- | | Total Current Taxes | 2 | 5 | (3) | | Total Deferred Taxes | (1) | (3) | 2 | | Provision for Income Taxes | 0 | 2 | (2) | - Ambac maintains a **full valuation allowance** against its deferred tax assets, as management believes it is more likely than not that **sufficient U.S. federal, state, and local taxable income** will not be generated to realize these assets[190](index=190&type=chunk) [Note 14. Commitments and Contingencies](index=43&type=section&id=Note%2014.%20Commitments%20and%20Contingencies) - Ongoing litigations include Monterey Bay Military Housing, various Puerto Rico Title III adversary proceedings (many resolved by the Commonwealth Plan), and several RMBS cases[195](index=195&type=chunk)[197](index=197&type=chunk)[217](index=217&type=chunk) - The New York Court of Appeals' decision in U.S. Bank National Association v. DLJ Mortgage Capital, Inc. (**HEAT case**) may affect one of the bases for AAC's **RMBS recovery claims**, though management believes other recovery paths exist[138](index=138&type=chunk)[218](index=218&type=chunk) - Realization of **RMBS R&W subrogation recoveries** (**$1,502 million net of reinsurance** at **March 31, 2022**) is **highly uncertain** due to litigation risks, collectability from counterparties, and potential **adverse rulings**. Failure to realize these could **materially impact stockholders' equity**[139](index=139&type=chunk)[381](index=381&type=chunk)[384](index=384&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=48&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses Ambac's **Q1 2022** financial condition, operations, cash flows, liquidity, segment results, and non-GAAP measures [Executive Summary](index=48&type=section&id=Executive%20Summary) - Ambac recorded a **$198 million gain** in **Q1 2022** from the successful restructuring of a **significant portion** of its Puerto Rico exposures[274](index=274&type=chunk) - A **$224 million reduction** in AAC's estimated **RMBS R&W subrogation recoveries** was recorded, partly due to a New York Court of Appeals decision impacting recovery bases[274](index=274&type=chunk) | Metric (Millions $) | March 31, 2022 | | :------------------ | :------------- | | AFG Net Assets (excluding equity investments in subsidiaries) | 243 | | Cash and Short-term Investments | 118 | | Other Investments | 113 | | Other Net Assets | 12 | - The **Specialty Property and Casualty Insurance segment** reported **gross premiums written of $24 million** and a **pretax loss of $(2) million** for **Q1 2022**, while the **Insurance Distribution segment** reported **premiums placed of $45 million** and **pretax income of $2 million**[227](index=227&type=chunk)[230](index=230&type=chunk) - The **Legacy Financial Guarantee Insurance segment** reported **net premiums earned of $13 million**, **net investment income of $5 million**, and **pretax income of $6 million** for **Q1 2022**[233](index=233&type=chunk) [Critical Accounting Policies and Estimates](index=51&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) - Ambac's financial statements are prepared in accordance with **U.S. GAAP**, requiring **material estimates** and assumptions[247](index=247&type=chunk) - For a detailed discussion of **critical accounting policies and estimates**, refer to the Company's Annual Report on **Form 10-K** for the year ended **December 31, 2021**[247](index=247&type=chunk) [Financial Guarantees in Force](index=51&type=section&id=Financial%20Guarantees%20in%20Force) | Metric (Millions $) | March 31, 2022 | December 31, 2021 | Change | Change (%) | | :------------------ | :------------- | :---------------- | :----- | :--------- | | Total Net Par Outstanding | 27,118 | 28,020 | (902) | (3)% | | Adversely Classified Credit (ACC) Net Par Outstanding | 5,884 | 6,361 | (477) | (7)% | | Watch List Net Par Outstanding | 3,729 | 3,824 | (95) | (2)% | - The **decrease** in **net par outstanding** was driven by active de-risking, including the Puerto Rico restructuring, scheduled maturities, amortizations, refundings, and calls[238](index=238&type=chunk) | Puerto Rico Issuer (Millions $) | March 31, 2022 | December 31, 2021 | Change | | :------------------------------ | :------------- | :---------------- | :----- | | PR Highways and Transportation Authority (1998 Resolution) | 394 | 394 | 0 | | PR Infrastructure Financing Authority (Special Tax Revenue) | 247 | 403 | (156) | | PR Convention Center District Authority (Hotel Occupancy Tax) | 70 | 86 | (16) | | Commonwealth of Puerto Rico - General Obligation Bonds | 0 | 11 | (11) | | PR Public Buildings Authority - Guaranteed by the Commonwealth of Puerto Rico | 0 | 83 | (83) | | Total Net Exposure to Puerto Rico | 784 | 1,054 | (270) | - The Eighth Amended POA and qualifying modifications for PRIFA and CCDA became effective on **March 15, 2022**, **significantly reducing AAC-insured Puerto Rico exposures** through commutation and acceleration[256](index=256&type=chunk)[262](index=262&type=chunk)[263](index=263&type=chunk) | Bond Type (Millions $) | March 31, 2022 | December 31, 2021 | Change | | :--------------------- | :------------- | :---------------- | :----- | | Total Below Investment Grade Exposure | 5,020 | 5,438 | (418) | | RMBS (Structured Finance) | 2,080 | 2,170 | (90) | | Puerto Rico (Public Finance) | 784 | 1,054 | (270) | [Results of Operations](index=56&type=section&id=Results%20of%20Operations) | Metric (Millions $) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change | | :------------------ | :-------------------------------- | :-------------------------------- | :----- | | Net Income (Loss) Attributable to Common Stockholders | 2 | 17 | (15) | | Gross Premiums Written | 30 | (2) | 32 | | Net Premiums Earned | 15 | 14 | 1 | | Net Investment Income | 5 | 49 | (44) | | Net Investment Gains (Losses), including impairments | 10 | 2 | 8 | | Net Gains (Losses) on Derivative Contracts | 57 | 25 | 32 | | Income (Loss) on Variable Interest Entities | 22 | 0 | 22 | | Losses and Loss Expenses (benefit) | 24 | 8 | 16 | | Intangible Amortization | 14 | 19 | (5) | | Operating Expenses | 34 | 33 | 1 | | Interest Expense | 44 | 50 | (6) | - The **$198 million gain** from the Puerto Rico restructuring included a **net benefit in losses**, a **gain on consolidation of new VIEs**, partially offset by losses from security sales and fair value changes, and intangible asset amortization[274](index=274&type=chunk) - The **$224 million reduction** in **RMBS R&W subrogation recoveries** was based on AAC's evaluation of the impact of the New York Court of Appeals' **HEAT decision** and changes in discount rates/transaction performance[274](index=274&type=chunk) - **Specialty Property and Casualty Insurance segment's gross premiums written increased** to **$24 million** in **Q1 2022** (from **$0** in **Q1 2021**), reflecting **significant growth** and ten signed programs[275](index=275&type=chunk)[298](index=298&type=chunk) - **Insurance Distribution segment's premiums placed increased** by **12%** to **$45 million** in **Q1 2022**, driving **higher gross** and sub-producer commissions[303](index=303&type=chunk) [Liquidity and Capital Resources](index=61&type=section&id=Liquidity%20and%20Capital%20Resources) - AFG's **net assets**, excluding equity investments in subsidiaries, were **$243 million** at **March 31, 2022**, providing liquidity for development and acquisitions[224](index=224&type=chunk)[304](index=304&type=chunk) - AAC's ability to realize **RMBS representation and warranty subrogation recoveries** is **critical** but **uncertain**, and failure to recover these **material amounts** would **adversely impact its liquidity**[309](index=309&type=chunk) | Metric (Millions $) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change | | :------------------ | :-------------------------------- | :-------------------------------- | :----- | | Net Cash Provided by (Used in) Operating Activities | 9 | (40) | 49 | | Net Cash Provided by Investing Activities | 136 | 116 | 20 | | Net Cash Used in Financing Activities | (52) | (69) | 17 | | Net Cash Flow | 93 | 6 | 87 | - **Operating cash flow improved** due to **higher cash from premiums** (**$28 million** vs. **$12 million**), **interest rate derivatives** (**$11 million** vs. **$3 million**), and Puerto Rico restructuring settlements (**$47 million** in **Q1 2022**)[318](index=318&type=chunk) - Collateral and margin posted by AFS for derivative contracts totaled **$119 million** at **March 31, 2022**, with all ratings-based downgrade triggers having been met[321](index=321&type=chunk) [Balance Sheet](index=63&type=section&id=Balance%20Sheet) - **Total assets decreased** by **$772 million**, and **total liabilities decreased** by **$649 million** from **December 31, 2021**, to **March 31, 2022**[323](index=323&type=chunk) - **Total stockholders' equity decreased** by **$124 million** to **$974 million**, primarily due to changes in **unrealized losses on invested assets** and **foreign currency translation**[324](index=324&type=chunk) | Investment Type (Millions $) | March 31, 2022 | December 31, 2021 | Change | | :--------------------------- | :------------- | :---------------- | :----- | | Fixed Maturity Securities | 1,383 | 1,730 | (347) | | Fixed Maturity Securities - Trading | 119 | 0 | 119 | | Short-term Investments | 540 | 414 | 126 | | Other Investments | 660 | 690 | (30) | | Fixed Maturity Securities Pledged as Collateral | 114 | 120 | (6) | | Total Investments (excluding VIEs) | 2,815 | 2,955 | (140) | - **Premium receivables decreased** to **$317 million** from **$323 million**, driven by the **Legacy Financial Guarantee segment**, partially offset by **growth** in **Specialty P&C**[329](index=329&type=chunk) - **Loss and loss expense reserves**, net of subrogation recoverables and before reinsurance, were **$(647) million** at **March 31, 2022**, compared to **$(522) million** at **December 31, 2021**, with **RMBS R&W subrogation recoveries** at **$1,502 million**[335](index=335&type=chunk)[337](index=337&type=chunk) [Variable Interest Entities](index=66&type=section&id=Variable%20Interest%20Entities) - For detailed information on **VIEs**, refer to **Note 9** of the Unaudited Consolidated Financial Statements[358](index=358&type=chunk) - Ambac's involvement with **VIEs** arises from financial guarantees provided by AAC and Ambac UK for debt obligations issued by special purpose entities[159](index=159&type=chunk) - The consolidation of two new trusts in **Q1 2022**, linked to the Puerto Rico restructuring, resulted in a combined **gain of $28 million**, impacting **income on variable interest entities**[167](index=167&type=chunk) [Accounting Standards](index=66&type=section&id=Accounting%20Standards) - No new accounting standards have been issued but not yet adopted that are applicable to Ambac[359](index=359&type=chunk) - For further discussion on the impact of recent accounting pronouncements, refer to **Note 2** of the Consolidated Financial Statements in the Annual Report on **Form 10-K** and **Part I, Item 1** of this **Form 10-Q**[359](index=359&type=chunk) [U.S. Insurance Statutory Basis Financial Results](index=66&type=section&id=U.S.%20Insurance%20Statutory%20Basis%20Financial%20Results) | Metric (Millions $) | March 31, 2022 | December 31, 2021 | Change | | :------------------ | :------------- | :---------------- | :----- | | AAC Statutory Policyholder Surplus | 805 | 757 | 48 | | AAC Qualified Statutory Capital | 1,378 | 1,322 | 56 | - The **increase** in **AAC's statutory policyholder surplus** was primarily due to **statutory net income of $61 million** for **Q1 2022**[361](index=361&type=chunk) - Everspan Indemnity Insurance Company's **statutory policyholder surplus increased** to **$110 million** from **$106 million**, driven by **$13 million** in capital contributions[363](index=363&type=chunk) - **AAC's statutory surplus** is sensitive to various factors, including **loss reserve development**, **RMBS R&W breach claim resolutions**, OCI approval for surplus note payments, and interest costs on the Sitka AAC Note and Tier 2 Notes[362](index=362&type=chunk) [Ambac Assurance UK Limited Financial Results Under UK Accounting Principles](index=70&type=section&id=Ambac%20Assurance%20UK%20Limited%20Financial%20Results%20Under%20UK%20Accounting%20Principles) | Metric (Millions £) | March 31, 2022 | December 31, 2021 | Change | | :------------------ | :------------- | :---------------- | :----- | | Ambac UK Shareholder Funds (UK GAAP) | 449 | 444 | 5 | | Cash and Investments | 509 | 500 | 9 | - The **increase** in **shareholder funds** was primarily due to continued premium receipts and foreign exchange gains, offset by investment losses, operating expenses, and tax payments[364](index=364&type=chunk) - Under **Solvency II**, Ambac UK had **eligible capital resources of £240 million** against **regulatory capital requirements of £238 million**, resulting in a **£1 million surplus** at **December 31, 2021**[365](index=365&type=chunk) [Non-GAAP Financial Measures](index=70&type=section&id=Non-GAAP%20Financial%20Measures) - **Non-GAAP measures** (**EBITDA**, **adjusted earnings**, **adjusted book value**) are used to provide transparency into business drivers and facilitate period-to-period comparisons[366](index=366&type=chunk) | Metric (Millions $) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change | | :------------------ | :-------------------------------- | :-------------------------------- | :----- | | Consolidated Pretax Income (Loss) | 3 | 19 | (16) | | Consolidated EBITDA | 61 | 88 | (27) | | Metric (Millions $) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change | | :------------------ | :-------------------------------- | :-------------------------------- | :----- | | Net Income (Loss) Attributable to Common Stockholders | 2 | 17 | (15) | | Adjusted Earnings (Loss) | 14 | 41 | (27) | | Adjusted Earnings (Loss) Per Diluted Share | 0.30 | 0.59 | (0.29) | | Metric (Millions $) | March 31, 2022 | December 31, 2021 | Change | | :------------------ | :------------- | :---------------- | :----- | | Total Ambac Financial Group, Inc. Stockholders' Equity | 914 | 1,038 | (124) | | Adjusted Book Value | 841 | 874 | (33) | | Adjusted Book Value Per Share | 18.07 | 18.88 | (0.81) | - The **decrease** in **Adjusted Book Value** was primarily due to **adverse foreign exchange losses** and **higher discount rates** on the present value of legacy financial guarantee installment premiums[372](index=372&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=72&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) No material changes in market risks were identified as of **March 31, 2022**, compared to **December 31, 2021** - No **material changes** in market risks were identified as of **March 31, 2022**, compared to **December 31, 2021**[374](index=374&type=chunk) [Item 4. Controls and Procedures](index=72&type=section&id=Item%204.%20Controls%20and%20Procedures) Ambac's disclosure controls and procedures were deemed effective as of **March 31, 2022**, with no material changes to internal control over financial reporting - Ambac's **disclosure controls and procedures** were deemed effective as of **March 31, 2022**[375](index=375&type=chunk) - No **material changes** to **internal control over financial reporting** occurred during the quarter ended **March 31, 2022**[376](index=376&type=chunk) [PART II. OTHER INFORMATION](index=72&type=section&id=PART%20II.%20OTHER%20INFORMATION) [Item 1. Legal Proceedings](index=72&type=section&id=Item%201.%20Legal%20Proceedings) This section refers to Note 14. Commitments and Contingencies for a discussion of legal proceedings against Ambac and its subsidiaries - For details on **legal proceedings**, refer to **Note 14. Commitments and Contingencies** in **Part I, Item 1** of this **Form 10-Q**[377](index=377&type=chunk) [Item 1A. Risk Factors](index=73&type=section&id=Item%201A.%20Risk%20Factors) Risk factors from the **2021 Form 10-K** are incorporated, with an updated focus on uncertain **RMBS R&W subrogation recoveries** and their potential impact - The **risk factors** from the **2021 Annual Report on Form 10-K** are incorporated by reference, with an updated focus on the **inability to realize expected recoveries**[379](index=379&type=chunk) - Estimated **RMBS R&W subrogation recoveries** of **$1,480 million** (net of reinsurance) are included in financial statements, but their realization is subject to **significant uncertainty** due to litigation unpredictability, **adverse rulings** (e.g., **HEAT decision**), and collectability risks[381](index=381&type=chunk)[382](index=382&type=chunk)[384](index=384&type=chunk) - Failure to realize these **significant recoveries** could **materially adversely affect liquidity**, financial condition, and the value of Ambac's securities, potentially impairing AAC's ability to honor obligations or deliver value to AFG[386](index=386&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=74&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) No unregistered sales of equity securities require disclosure; Ambac purchased shares for employee tax withholdings and authorized a **$35 million** repurchase program - No unregistered sales of equity securities require disclosure[387](index=387&type=chunk) | Metric | First Quarter 2022 | | :----- | :----------------- | | Total Shares Purchased | 235,844 | | Average Price Paid Per Share | $14.36 | - Ambac's Board of Directors approved a **$20 million share repurchase program** in **March 2022**, and an additional **$15 million** in **May 2022**, bringing the **total unused authorized amount** to **$21.8 million**[390](index=390&type=chunk) [Item 3. Defaults Upon Senior Securities](index=74&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) No matters require disclosure regarding defaults upon senior securities - No matters require disclosure regarding defaults upon senior securities[390](index=390&type=chunk) [Item 5. Other Information](index=74&type=section&id=Item%205.%20Other%20Information) No matters require disclosure under this item - No matters require disclosure under this item[390](index=390&type=chunk) [Item 6. Exhibits](index=75&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with the **Form 10-Q**, including stock unit agreements and CEO/CFO certifications - Exhibits include forms of **2022 Restricted Stock Unit Award Agreements** and **Performance Stock Unit Award Agreements**[392](index=392&type=chunk) - Certifications from the **Chief Executive Officer** and **Chief Financial Officer** are filed pursuant to **Exchange Act rules** and **Section 906** of the **Sarbanes-Oxley Act of 2002**[392](index=392&type=chunk) - **XBRL Instance Document**, **Taxonomy Extension Schema**, **Calculation Linkbase**, **Label Linkbase**, **Presentation Linkbase**, and **Definition Linkbase Documents** are included[392](index=392&type=chunk) [SIGNATURES](index=75&type=section&id=SIGNATURES) - The report is signed by **David Trick**, **Chief Financial Officer** and **Treasurer**, on **May 10, 2022**[393](index=393&type=chunk)[394](index=394&type=chunk)

Ambac Financial Group, Inc. (NYSE:AMBC) Q4 2021 Earnings Conference Call February 25, 2022 8:30 AM ET Company Participants Lisa Kampf - Head-Investor Relations Claude LeBlanc - Chief Executive Officer David Trick - Chief Financial Officer Conference Call Participants Greg Nihon - Leodium Capital Charles Post - Sterling Grace Operator Greetings, and welcome to Ambac Financial Group, Inc. Fourth Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer s ...

[PART I](index=5&type=section&id=PART%20I) [Item 1. Business](index=5&type=section&id=Item%201.%20Business) Ambac Financial Group operates in financial guarantee, specialty P&C, and MGA/U, focusing on maximizing shareholder value through legacy business run-off and new platform growth - Ambac's operations encompass **Financial Guarantee Insurance**, **Specialty Property & Casualty Program Insurance**, and **Managing General Agency/Underwriting**[14](index=14&type=chunk)[18](index=18&type=chunk)[542](index=542&type=chunk) - The primary goal is to **maximize shareholder value** through strategies for both its Specialty P&C Program Insurance Platform and Financial Guarantee Insurance companies[16](index=16&type=chunk)[546](index=546&type=chunk) - AFG reported **$269 million in net assets** (excluding subsidiaries) and **$3,744 million in net operating loss carry-forwards** as of December 31, 2021[14](index=14&type=chunk)[257](index=257&type=chunk) - **Ambac Assurance Corporation (AAC)** and **Ambac UK** are legacy financial guarantee insurance carriers in run-off since 2008, unable to write new business[16](index=16&type=chunk)[18](index=18&type=chunk)[542](index=542&type=chunk) - **Everspan**, the Specialty P&C platform, received an **AM Best Financial Strength rating of 'A-' (Excellent)** in February 2021 and launched its first insurance program in May 2021[18](index=18&type=chunk)[63](index=63&type=chunk)[261](index=261&type=chunk) - Ambac acquired **80% of Xchange Benefits, LLC and Xchange Affinity Underwriting Agency, LLC (MGA/U)** on December 31, 2020[18](index=18&type=chunk)[66](index=66&type=chunk)[542](index=542&type=chunk) - AAC's ability to pay dividends to AFG is **significantly restricted** by financial, regulatory, legal, and contractual limitations, making future payments highly unlikely[23](index=23&type=chunk)[94](index=94&type=chunk)[117](index=117&type=chunk) Consolidated Investments by Category (2021 vs 2020) | Investment Category | Carrying Value (2021, $ millions) | Weighted Average Yield (2021) | Carrying Value (2020, $ millions) | Weighted Average Yield (2020) | | :---------------------------------- | :-------------------- | :---------------------------- | :-------------------- | :---------------------------- | | Municipal obligations | 340 | 5.3 % | 358 | 4.8 % | | Corporate securities | 613 | 2.2 % | 1,077 | 3.9 % | | Foreign obligations | 87 | 0.5 % | 98 | 0.2 % | | U.S. government obligations | 60 | 1.0 % | 121 | 1.6 % | | Residential mortgage-backed securities | 252 | 7.3 % | 302 | 6.6 % | | Asset-backed securities | 393 | 5.0 % | 377 | 5.7 % | | **Total long-term fixed maturity investments** | **1,745** | **3.9 %** | **2,332** | **4.3 %** | | Short-term investments | 519 | — % | 617 | 0.1 % | | Other investments | 690 | — % | 595 | — % | | **Total** | **2,955** | **2.9 %** | **3,544** | **3.4 %** | [Item 1A. Risk Factors](index=15&type=section&id=1A%20Risk%20Factors) Ambac faces significant risks including stock volatility, uncertainty in legacy financial guarantee value, potential losses from insured portfolios, capital vulnerability, and execution risks in new P&C/MGA/U businesses - Investments in AFG's common stock are **highly speculative** and subject to significant price volatility due to uncertainties in its legacy financial guarantee business and new P&C/MGA/U ventures[111](index=111&type=chunk)[112](index=112&type=chunk) - AAC's ability to deliver value to AFG is **uncertain**, with a risk of rehabilitation proceedings if loss development increases or litigation recoveries are insufficient[113](index=113&type=chunk)[115](index=115&type=chunk)[116](index=116&type=chunk) - Loss reserves for the financial guarantee business may be **inadequate**, especially for Puerto Rico exposures and RMBS, subject to material changes from future developments and litigation outcomes[118](index=118&type=chunk)[125](index=125&type=chunk)[134](index=134&type=chunk) - Estimated RMBS R&W subrogation recoveries of **$1,704 million** (net of reinsurance) are highly uncertain, and failure to realize them could materially impact financial condition and potentially lead to AAC's insolvency[149](index=149&type=chunk)[157](index=157&type=chunk)[163](index=163&type=chunk)[164](index=164&type=chunk) - AAC is **highly leveraged** with **$1,508 million of senior indebtedness** outstanding at December 31, 2021, with debt service dependent on uncertain litigation recoveries and asset performance[165](index=165&type=chunk)[166](index=166&type=chunk) - The Specialty P&C and MGA/U businesses are new and relatively small, facing risks including execution, underwriting losses, reinsurance counterparty failures, and intense competition[111](index=111&type=chunk)[187](index=187&type=chunk)[188](index=188&type=chunk)[200](index=200&type=chunk) - Uncertainties regarding LIBOR discontinuance could **adversely affect asset, derivative, and liability values**, potentially impacting Ambac's results and financial condition[182](index=182&type=chunk)[185](index=185&type=chunk)[186](index=186&type=chunk) [Item 1B. Unresolved Staff Comments](index=30&type=section&id=1B%20Unresolved%20Staff%20Comments) No unresolved staff comments require disclosure in this report - No matters require disclosure under Item 1B[238](index=238&type=chunk) [Item 2. Properties](index=30&type=section&id=2%20Properties) Ambac maintains executive offices in New York City, additional offices in London, Armonk, and Indianapolis, and a disaster recovery site, all under lease agreements - Ambac's executive office is located at One World Trade Center, New York, New York, under a sublease expiring in **January 2030**[238](index=238&type=chunk) - Ambac UK maintains an office in London, England, with a lease expiring in **October 2025**[239](index=239&type=chunk) - Xchange has office spaces in Armonk, NY (lease expires **July 2028**) and Indianapolis, IN (lease expires **March 2024**)[239](index=239&type=chunk) - A disaster recovery site is maintained in Kingston, NY, with a lease expiring in **March 2024**[240](index=240&type=chunk) [Item 3. Legal Proceedings](index=30&type=section&id=3%20Legal%20Proceedings) Legal proceedings against Ambac are detailed in Note 19, 'Commitments and Contingencies,' within the Consolidated Financial Statements - Details on legal proceedings against Ambac are provided in **Note 19. Commitments and Contingencies**[241](index=241&type=chunk) [Item 4. Mine Safety Disclosures](index=30&type=section&id=4%20Mine%20Safety%20Disclosures) This item is not applicable to Ambac Financial Group, Inc - Mine Safety Disclosures are not applicable to the Registrant[241](index=241&type=chunk) [PART II](index=30&type=section&id=PART%20II) [Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=30&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) Ambac's common stock and warrants trade on the NYSE, with no cash dividends paid in 2021 or 2020, and limited equity purchases for employee tax withholdings - Ambac's common stock and warrants trade on the NYSE under symbols **'AMBC'** and **'AMBC WS'** respectively, since February 3, 2020[243](index=243&type=chunk) - As of February 22, 2022, there were **20 stockholders of record for common stock** and **60 for warrants**[244](index=244&type=chunk) - The Company did not pay cash dividends on its common stock during **2021 and 2020**, primarily due to restrictions on dividend payments from its insurance subsidiaries[245](index=245&type=chunk) Issuer Purchases of Equity Securities (Q4 2021) | Period | Total Shares Purchased | Average Price Paid Per Share ($) | | :----- | :--------------------- | :--------------------------- | | October 2021 | 8,057 | $14.38 | | November 2021 | 1,342 | $16.49 | | December 2021 | — | — | | **Q4 2021 Total** | **9,399** | **$14.68** | - Warrants are exercisable for cash at **$16.67 per share** until **April 30, 2023**, with a remaining aggregate authorization of **$11.9 million** for a warrant repurchase program[249](index=249&type=chunk)[250](index=250&type=chunk) [Item 6. Selected Financial Data](index=32&type=section&id=6%20Selected%20Financial%20Data) This section is reserved and contains no selected financial data - This section is reserved and contains no selected financial data[254](index=254&type=chunk) [Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=32&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses Ambac's financial condition, operations, cash flows, and liquidity, highlighting progress in specialty insurance, run-off management, and impacts of external factors - AFG progressed its specialty property and casualty program insurance business in 2021, with **Everspan receiving an 'A-' AM Best rating** and launching its first program, alongside acquiring four insurance shell companies[256](index=256&type=chunk)[261](index=261&type=chunk)[262](index=262&type=chunk) - Ambac completed risk reduction transactions totaling **$2,695 million** in 2021, primarily through **quota share reinsurance ($1,695 million)**[265](index=265&type=chunk) - The COVID-19 pandemic caused economic disruptions but resulted in **no defaults of Ambac-insured obligations** as of December 31, 2021, with potential RMBS claim increases offset by excess spread benefits[272](index=272&type=chunk)[274](index=274&type=chunk) - The **Eighth Amended Plan of Adjustment for Puerto Rico** was confirmed on January 18, 2022, and **PRIFA/CCDA Qualifying Modifications** were approved on January 20, 2022, resolving significant portions of AAC's Puerto Rico exposure[269](index=269&type=chunk)[128](index=128&type=chunk)[1043](index=1043&type=chunk) Consolidated Financial Results (2021 vs 2020 vs 2019) | ($ in millions) | 2021 ($ millions) | 2020 ($ millions) | 2019 ($ millions) | | :------------------------------------------ | :--- | :--- | :--- | | **Revenues:** | | | | | Net premiums earned | $47 | $54 | $66 | | Net investment income | 139 | 122 | 227 | | Net investment gains (losses), including impairments | 7 | 22 | 81 | | Net gains (losses) on derivative contracts | 22 | (50) | (50) | | Net realized gains (losses) on extinguishment of debt | 33 | — | — | | Other income (expense) | 27 | 3 | 134 | | Income (loss) on variable interest entities | 7 | 5 | 38 | | **Expenses:** | | | | | Losses and loss expenses (benefit) | (88) | 225 | 13 | | Intangible amortization | 55 | 57 | 295 | | Operating expenses | 126 | 92 | 103 | | Interest expense | 187 | 222 | 269 | | Provision (benefit) for income taxes | 18 | (3) | 32 | | **Net income (loss) attributable to common stockholders** | **$(17)** | **$(437)** | **$(216)** | - Ambac's total assets decreased by **$917 million to $12,303 million**, and total liabilities decreased by **$886 million to $11,187 million** at December 31, 2021, primarily due to debt refinancing, loss payments, and lower subrogation recoverables[422](index=422&type=chunk)[424](index=424&type=chunk) Adjusted Earnings (Loss) (2021 vs 2020 vs 2019) | ($ in millions) | 2021 ($ millions) | 2020 ($ millions) | 2019 ($ millions) | | :------------------------------------------ | :--- | :--- | :--- | | Net income (loss) attributable to common stockholders | $(17) | $(437) | $(216) | | Adjustments: | | | | | Non-credit impairment fair value (gain) loss on credit derivatives | — | — | (1) | | Insurance intangible amortization | 52 | 57 | 295 | | Foreign exchange (gains) losses | 7 | 3 | (12) | | **Adjusted Earnings (Loss)** | **$43** | **$(378)** | **$66** | Adjusted Book Value (2021 vs 2020) | ($ in millions) | 2021 ($ millions) | 2020 ($ millions) | | :------------------------------------------ | :--- | :--- | | Total Ambac Financial Group, Inc. stockholders' equity | $1,038 | $1,080 | | Adjustments: | | | | Non-credit impairment fair value losses on credit derivatives | — | — | | Insurance intangible asset | (320) | (373) | | Net unearned premiums and fees in excess of expected losses | 310 | 378 | | Net unrealized investment (gains) losses in Accumulated Other Comprehensive Income (Loss) | (154) | (166) | | **Adjusted Book Value** | **$874** | **$919** | [Item 7A. Quantitative and Qualitative Disclosures about Market Risk](index=61&type=section&id=7A%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) Ambac's market risk primarily arises from interest rate, foreign currency, and equity value changes, managed through monitoring systems and sensitivity analyses - Ambac's primary market risk exposures stem from changes in **interest rates**, **foreign currency exchange rates**, and **equity values** of limited partnership and other alternative investments[502](index=502&type=chunk) Estimated Change in Fair Value of Fixed Maturity Investment Portfolio (100 bps interest rate increase) | December 31, | 2021 ($ millions) | 2020 ($ millions) | | :------------- | :--- | :--- | | Fair value of fixed maturity investment | $1,656 | $2,329 | | Decrease in dollars (100 bps increase) | $(50) | $(69) | | As a percent of fair value | 3 % | 3 % | Estimated Change in Fair Value of Long-Term Debt and Derivatives (100 bps interest rate decrease) | December 31, | 2021 ($ millions) | 2020 ($ millions) | | :------------- | :--- | :--- | | Fair value of long-term debt (including accrued interest) | $(2,598) | $(3,071) | | Increase in dollars (100 bps decrease) | $(55) | $(58) | | As a percent of fair value | 2 % | 2 % | | Fair value of interest rate derivative net assets (liabilities) | $(19) | $(21) | | Pre-tax loss from change in fair value in dollars (100 bps decrease) | $(51) | $(8) | Estimated Decrease in Fair Value of Foreign Currency Investments (20% USD strengthening) | December 31, | 2021 ($ millions) | 2020 ($ millions) | | :------------- | :--- | :--- | | Fair value of investments denominated in currencies other than the U.S. dollar | $478 | $453 | | Pre-tax impact of 20% strengthening of the U.S. dollar | $(96) | $(91) | Estimated Decrease in Fair Value of Pooled Fund Investments (10% NAV decline) | December 31, | 2021 ($ millions) | 2020 ($ millions) | | :------------- | :--- | :--- | | Fair value of investments in pooled funds | $683 | $544 | | Pre-tax impact of 10% decline in NAV of the funds | $(68) | $(54) | [Item 8. Financial Statements and Supplementary Data](index=64&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents Ambac's audited consolidated financial statements for 2019-2021, including balance sheets, income statements, equity, and cash flows, with an unqualified audit opinion from KPMG LLP - KPMG LLP issued an **unqualified opinion** on Ambac's consolidated financial statements for the three-year period ended December 31, 2021[523](index=523&type=chunk) - KPMG LLP also expressed an **unqualified opinion** on the effectiveness of the Company's internal control over financial reporting as of December 31, 2021[515](index=515&type=chunk)[524](index=524&type=chunk) - The evaluation of loss and loss expense reserves and subrogation recoverable was identified as a **critical audit matter** due to high estimation uncertainty and subjective judgments[528](index=528&type=chunk)[529](index=529&type=chunk) Consolidated Balance Sheet Highlights (2021 vs 2020) | ($ in millions) | Dec 31, 2021 ($ millions) | Dec 31, 2020 ($ millions) | | :------------------------------------------ | :----------- | :----------- | | **Assets:** | | | | Total investments | $2,955 | $3,544 | | Subrogation recoverable | 2,092 | 2,156 | | Total assets | $12,303 | $13,220 | | **Liabilities & Equity:** | | | | Loss and loss expense reserves | $1,570 | $1,759 | | Long-term debt | 2,230 | 2,739 | | Total liabilities | $11,187 | $12,074 | | Total Ambac Financial Group, Inc. stockholders' equity | 1,038 | 1,080 | | Total stockholders' equity | $1,098 | $1,140 | Consolidated Statements of Total Comprehensive Income (Loss) Highlights (2021 vs 2020 vs 2019) | ($ in millions) | 2021 ($ millions) | 2020 ($ millions) | 2019 ($ millions) | | :------------------------------------------ | :--- | :--- | :--- | | Total revenues | $282 | $156 | $496 | | Total expenses | 281 | 596 | 680 | | Net income (loss) attributable to common stockholders | $(17) | $(437) | $(216) | | Total comprehensive income (loss) attributable to common stockholders | $(38) | $(400) | $(125) | Consolidated Statements of Cash Flows Highlights (2021 vs 2020 vs 2019) | ($ in millions) | 2021 ($ millions) | 2020 ($ millions) | 2019 ($ millions) | | :------------------------------------------ | :--- | :--- | :--- | | Net cash used in operating activities | $(131) | $(175) | $(311) | | Net cash provided by investing activities | 776 | 432 | 1,000 | | Net cash used in financing activities | $(657) | $(303) | $(691) | | Net cash flow | $(12) | $(46) | $(2) | [Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure](index=142&type=section&id=9%20Changes%20in%20and%20Disagreements%20With%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) No changes in or disagreements with accountants on accounting and financial disclosure matters have occurred - There are no changes in or disagreements with accountants on accounting and financial disclosure[1086](index=1086&type=chunk) [Item 9A. Controls and Procedures](index=142&type=section&id=9A%20Controls%20and%20Procedures) Ambac's management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021, with no material changes in Q4 2021 - Ambac's disclosure controls and procedures were **effective** at the reasonable assurance level as of December 31, 2021[1087](index=1087&type=chunk) - Management concluded that internal control over financial reporting was **effective** as of December 31, 2021, based on the COSO 2013 framework[1091](index=1091&type=chunk) - No material changes in internal control over financial reporting occurred during Q4 2021, despite employees working remotely due to the COVID-19 pandemic[1092](index=1092&type=chunk) [Item 9B. Other Information](index=142&type=section&id=9B%20Other%20Information) The Board approved fixing quarterly RSU grant dates for non-employee directors to the first business day of each calendar quarter, starting April 1, 2022 - The Board of Directors approved fixing quarterly RSU grant dates for non-employee directors to the first business day of each calendar quarter, starting **April 1, 2022**[1093](index=1093&type=chunk) [PART III](index=142&type=section&id=PART%20III) [Item 10. Directors, Executive Officers and Corporate Governance](index=142&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information on Ambac's directors, executive officers, and corporate governance is incorporated by reference from the 2022 Proxy Statement - Information on directors, executive officers, and corporate governance is incorporated by reference from the **2022 Proxy Statement**[1095](index=1095&type=chunk) - Ambac's **Code of Business Conduct**, promoting integrity and ethical behavior, is available on its website[1096](index=1096&type=chunk) [Item 11. Executive Compensation](index=143&type=section&id=Item%2011.%20Executive%20Compensation) Information concerning executive officer and director compensation is incorporated by reference from the 2022 Proxy Statement - Information on executive officer and director compensation is incorporated by reference from the **2022 Proxy Statement**[1098](index=1098&type=chunk) [Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=143&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Security ownership information for beneficial owners and management is incorporated by reference from the 2022 Proxy Statement - Information on security ownership is incorporated by reference from the **2022 Proxy Statement**[1100](index=1100&type=chunk) Equity Compensation Plan Information (as of Dec 31, 2021) | Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights ($) | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans | | :------------------------------------------ | :----------------------------------------------------------------------- | :------------------------------------------------------------------------ | :--------------------------------------------------------------------------------------- | | Equity compensation plans approved by security holders | 3,305,528 | $0.00 | 1,255,643 | | Equity compensation plans not approved by security holders | --- | --- | --- | | **Total** | **3,305,528** | **$0.00** | **1,255,643** | [Item 13. Certain Relationships and Related Transactions, and Director Independence](index=144&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the 2022 Proxy Statement - Information on certain relationships, related transactions, and director independence is incorporated by reference from the **2022 Proxy Statement**[1104](index=1104&type=chunk) [Item 14. Principal Accountant Fees and Services](index=144&type=section&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services) Information concerning principal accountant fees and services is incorporated by reference from the 2022 Proxy Statement - Information on principal accountant fees and services is incorporated by reference from the **2022 Proxy Statement**[1105](index=1105&type=chunk) [PART IV](index=144&type=section&id=PART%20IV) [Item 15. Exhibits, Financial Statement Schedules](index=144&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) This section lists all documents filed as part of the annual report, including consolidated financial statements, financial schedules, and a comprehensive list of exhibits - The consolidated financial statements included in **Part II, Item 8** are filed as part of this Annual Report on Form 10-K[1107](index=1107&type=chunk) - Financial statement schedules filed include **Schedule I (Summary of Investments)**, **Schedule II (Condensed Financial Information of Registrant)**, and **Schedule IV (Reinsurance)**[1108](index=1108&type=chunk) Summary of Investments Other Than Investments in Related Parties (Dec 31, 2021) | Type of Investment | Cost ($ millions) | Estimated Fair Value ($ millions) | Amount at Which Shown in the Balance Sheet ($ millions) | | :--------------------------------- | :--- | :------------------- | :--------------------------------------- | | Municipal obligations | $315 | $340 | $340 | | Corporate obligations | 612 | 613 | 613 | | Foreign obligations | 89 | 87 | 87 | | U.S. government obligations | 60 | 60 | 60 | | Residential mortgage-backed securities | 182 | 252 | 252 | | Collateralized debt obligations | 128 | 128 | 128 | | Other asset-backed securities | 234 | 265 | 265 | | Short-term | 520 | 519 | 519 | | Other | 594 | 683 | 690 | | **Total** | **$2,734** | **$2,947** | **$2,955** | Condensed Balance Sheets (Parent Company Only) (2021 vs 2020) | ($ in millions) | Dec 31, 2021 ($ millions) | Dec 31, 2020 ($ millions) | | :------------------------------------------ | :----------- | :----------- | | **Assets:** | | | | Total investments | $254 | $349 | | Investment in subsidiaries | 769 | 714 | | Total assets | $1,041 | $1,082 | | **Liabilities & Equity:** | | | | Total liabilities | $3 | $3 | | Total Ambac Financial Group, Inc. stockholders' equity | 1,038 | 1,080 | | Total liabilities and stockholders' equity | $1,041 | $1,082 | Reinsurance Premiums Written (2021 vs 2020 vs 2019) | ($ in millions) | Gross Amount ($ millions) | Ceded to Other Companies ($ millions) | Assumed from Other Companies ($ millions) | Net Amount ($ millions) | Percentage of Amount Assumed to Net | | :---------------------- | :----------- | :----------------------- | :--------------------------- | :--------- | :---------------------------------- | | Year Ended December 31, 2021 | $2 | $35 | — | $(33) | —% | | Year Ended December 31, 2020 | $(1) | $(1) | — | — | —% | | Year Ended December 31, 2019 | $(28) | 31 | — | $(60) | —% | [SIGNATURES](index=155&type=section&id=SIGNATURES)