Ambac(AMBC) - 2020 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This section details Ambac's unaudited financial statements, management's analysis, market risk, and internal controls Item 1. Unaudited Financial Statements This section provides Ambac's unaudited consolidated financial statements for Q1 2020, along with comprehensive accompanying notes Consolidated Balance Sheets As of March 31, 2020, total assets decreased to $12,777 million from $13,320 million, with stockholders' equity significantly reduced to $1,062 million from $1,536 million Consolidated Balance Sheet Summary (in millions) | Account | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Assets | $12,777 | $13,320 | | Total Investments | $3,400 | $3,792 | | Subrogation recoverable | $2,192 | $2,029 | | VIE Assets | $5,925 | $6,286 | | Total Liabilities | $11,716 | $11,783 | | Loss and loss expense reserves | $1,797 | $1,548 | | Long-term debt | $2,760 | $2,822 | | VIE Liabilities | $5,873 | $6,212 | | Total Stockholders' Equity | $1,062 | $1,536 | Consolidated Statements of Total Comprehensive Income (Loss) Ambac reported a net loss of $280 million for Q1 2020, significantly higher than the $43 million loss in Q1 2019, resulting in a total comprehensive loss of $470 million Q1 2020 Statement of Total Comprehensive Income (Loss) (in millions, except per share data) | Metric | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Total Revenues | $(70) | $100 | | Total Expenses | $217 | $142 | | Pre-tax income (loss) | $(287) | $(41) | | Net income (loss) attributable to common stockholders | $(280) | $(43) | | Total comprehensive income (loss) | $(470) | $28 | | Diluted EPS | $(6.07) | $(0.94) | Notes to Unaudited Consolidated Financial Statements These notes detail Ambac's accounting policies, business strategy as a run-off insurer, new accounting standards, and significant legal proceedings - The company's primary goal is to maximize shareholder value through active runoff of Ambac Assurance, rationalizing capital structures, loss recovery via litigation, and evaluating new business opportunities, subject to significant risks including the COVID-19 pandemic[13] - Effective January 1, 2020, the company adopted ASU 2016-13 (CECL), changing the methodology for measuring credit losses on financial instruments, with an initial adoption adjustment not material to retained earnings[24][25] - Ambac is involved in significant litigation, including adversary proceedings by the Financial Oversight and Management Board for Puerto Rico and its own lawsuits to recover losses from Puerto Rico bond underwriters and RMBS transaction sponsors[173][174][186][199] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2020 financial performance, highlighting the COVID-19 pandemic's impact on results, the financial guarantee portfolio, liquidity, and non-GAAP measures Executive Summary This summary outlines Ambac's value maximization goal, highlighting the COVID-19 pandemic's adverse impact on credit risk, loss reserves, and investment returns - The COVID-19 pandemic has significantly impacted Ambac's financial position and results, increasing credit risk in the insured and investment portfolios, leading to higher loss reserves and a negative total return on the investment portfolio of approximately (4.4)% in Q1 2020[217][219][224] - Adversely classified credits (ACC) net par exposure increased by 11% to $8.38 billion, primarily due to credits impacted by COVID-19, while watch list credits decreased by 19% to $5.44 billion[214][215] - As of March 31, 2020, the net assets of the holding company, AFG, were $482 million, including $317 million in cash and short-term investments[228][229] Financial Guarantees in Force Total net par outstanding decreased to $36.2 billion, with the portfolio concentrated and significantly stressed by COVID-19, particularly in Puerto Rico Net Par Outstanding by Market (in millions) | Market | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Public Finance | $17,093 | $17,653 | | Structured Finance | $7,139 | $7,508 | | International Finance | $11,954 | $12,857 | | Total | $36,186 | $38,018 | - The top ten insured exposures represent $7.3 billion, or 20.1% of total net par outstanding, with several downgraded due to COVID-19 impacts[236][237] - Ambac's exposure to Puerto Rico was $1.105 billion in net par as of March 31, 2020, with ongoing restructuring and COVID-19 creating substantial uncertainty and risk of material losses[246][250][255] Results of Operations Ambac reported a net loss of $280 million in Q1 2020, driven by decreased investment income, increased derivative losses, and higher loss expenses due to COVID-19 Summary of Financial Results (in millions) | Line Item | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Net premiums earned | $10 | $28 | | Net investment income (loss) | $(21) | $55 | | Net gains (losses) on derivative contracts | $(70) | $(16) | | Losses and loss expenses (benefit) | $117 | $12 | | Net income (loss) attributable to common stockholders | $(280) | $(43) | - Net premiums earned decreased to $10 million from $28 million, due to portfolio runoff and the absence of large accelerated earnings like the $12 million from the COFINA restructuring in Q1 2019[275][276] - Losses and loss expenses increased to $117 million from $12 million, driven by higher projected losses in domestic public finance due to lower discount rates and COVID-19 impacts, partially offset by favorable RMBS development[290] Liquidity and Capital Resources AFG's liquidity was $482 million, impacted by COVID-19 reducing asset values and increasing collateral, while OCI declined Ambac Assurance's surplus note payment - AFG's liquidity at the holding company level was $482 million as of March 31, 2020, with dividends from Ambac Assurance highly unlikely in the foreseeable future[300][304] - In April 2020, the Office of the Commissioner of Insurance (OCI) declined Ambac Assurance's request to pay principal and accrued interest on surplus notes maturing June 7, 2020, extending the payment date until OCI approval[298][308] - Collateral and margin posted by AFS for derivative contracts totaled a net amount of $165 million at March 31, 2020, an increase driven by market volatility[317] Balance Sheet Total assets decreased to $12.8 billion and stockholders' equity significantly fell to $1.06 billion due to comprehensive loss and investment portfolio declines - Total stockholders' equity decreased from $1,536 million at year-end 2019 to $1,062 million at March 31, 2020, primarily due to a Total Comprehensive Loss of $470 million[5][321] - Loss and loss expense reserves, net of subrogation and before reinsurance, improved from a net liability of $(482) million to $(395) million, largely due to increased R&W subrogation recoveries related to lower discount rates[338] Gross Loss Reserves by Bond Type (in millions) | Bond Type | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | RMBS | $(1,468) | $(1,392) | | Domestic Public Finance | $783 | $627 | | Student Loans | $227 | $208 | | Ambac UK and Other | $8 | $3 | | Total (excl. loss expenses) | $(450) | $(481) | Variability of Expected Losses and Recoveries Estimated loss reserves may be inadequate, with stress scenarios indicating potential increases of $1.76 billion for RMBS and $1.22 billion for public finance - A stress scenario for RMBS, assuming no realization of the $1.74 billion in recorded R&W subrogation recoveries, could increase loss reserves by approximately $1,763 million[346][347] - For public finance credits, including Puerto Rico, a possible increase in loss reserves under a stress scenario is estimated to be approximately $1,220 million, reflecting COVID-19 risks and adverse Puerto Rico restructuring outcomes[359] - For student loan exposures, a stress scenario could increase loss reserves by approximately $35 million, with an additional $20 million increase for every 0.50% rise in interest rates[361] Non-GAAP Financial Measures Ambac reports non-GAAP Adjusted Earnings and Adjusted Book Value, with Q1 2020 Adjusted Loss at $265 million and Adjusted Book Value at $1.01 billion Reconciliation to Adjusted Earnings (Loss) (in millions) | Metric | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Net income (loss) attributable to common stockholders (GAAP) | $(280) | $(43) | | Adjustments (Intangible amortization, etc.) | $15 | $34 | | Adjusted earnings (loss) (Non-GAAP) | $(265) | $(9) | Reconciliation to Adjusted Book Value (in millions) | Metric | March 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Total stockholders' equity (GAAP) | $1,002 | $1,477 | | Adjustments | $9 | $(164) | | Adjusted book value (Non-GAAP) | $1,012 | $1,313 | Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details Ambac's market risk exposures, including interest rate, credit spread, and foreign currency risks, with sensitivities impacted by COVID-19 volatility - The primary market risks are interest rate, credit spread, and foreign currency risk, with sensitivities changed due to the COVID-19 pandemic's impact on markets[384] - A 100 basis point parallel rise in interest rates would result in an estimated net fair value loss of $300 million on the company's fixed income portfolio and derivative instruments[388] - A 50 basis point widening of credit spreads would decrease the fair value of the fixed income investment portfolio by an estimated $29 million and increase net derivative liabilities by $5 million[390][392] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2020, with no material changes to internal controls despite remote work - Management concluded that as of March 31, 2020, Ambac's disclosure controls and procedures were effective[393] - No material changes to internal control over financial reporting occurred in Q1 2020, and the transition to remote work due to COVID-19 has not significantly impacted these controls[394] PART II. OTHER INFORMATION This section provides updates on legal proceedings, risk factors, equity sales, and required exhibits Item 1. Legal Proceedings This section refers to Note 11 for detailed information on legal proceedings, primarily involving Puerto Rico bonds and RMBS litigation - For information on legal proceedings, the report directs readers to Note 11 in Part I, Item 1 and Note 17 in the 2019 Annual Report on Form 10-K[395] Item 1A. Risk Factors This section updates risk factors, emphasizing the material negative impact of catastrophic public health events like the COVID-19 pandemic on insured obligations - A new material risk factor has been identified related to catastrophic public health events like the COVID-19 pandemic[397][398] - The economic disruptions from COVID-19 are adversely affecting issuers of public finance and structured finance obligations insured by Ambac, potentially resulting in material permanent losses[398] - The ultimate financial impact of the pandemic is highly uncertain and depends on factors like the crisis's duration, government support efficacy, and economic recovery pace[401][402] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered equity sales occurred in Q1 2020, but the company repurchased 132,962 shares for approximately $2.7 million to satisfy employee tax obligations Q1 2020 Share Repurchases | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | January 2020 | 14,496 | $19.81 | | February 2020 | — | $— | | March 2020 | 118,466 | $20.02 | | Total Q1 2020 | 132,962 | $20.02 | - The share purchases were conducted to meet employee tax withholding obligations upon the settlement of restricted stock units and are not part of a formal stock repurchase program[404][406] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including stock unit agreements and CEO/CFO certifications - Exhibits filed include forms of 2020 Restricted Stock Unit and Performance Stock Unit award agreements for executives[407] - Required CEO and CFO certifications under Rules 13a-14(a) and 15d-14(a) and Section 906 of the Sarbanes-Oxley Act are included as exhibits[407]