Ambac(AMBC) - 2021 Q4 - Annual Report

PART I Item 1. Business 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][18][542] - 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][546] - 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][257] - Ambac Assurance Corporation (AAC) and Ambac UK are legacy financial guarantee insurance carriers in run-off since 2008, unable to write new business[16][18][542] - 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][63][261] - Ambac acquired 80% of Xchange Benefits, LLC and Xchange Affinity Underwriting Agency, LLC (MGA/U) on December 31, 2020[18][66][542] - AAC's ability to pay dividends to AFG is significantly restricted by financial, regulatory, legal, and contractual limitations, making future payments highly unlikely[23][94][117] 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 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][112] - 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][115][116] - 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][125][134] - 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][157][163][164] - 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][166] - 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][187][188][200] - Uncertainties regarding LIBOR discontinuance could adversely affect asset, derivative, and liability values, potentially impacting Ambac's results and financial condition[182][185][186] Item 1B. Unresolved Staff Comments No unresolved staff comments require disclosure in this report - No matters require disclosure under Item 1B[238] Item 2. Properties 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] - Ambac UK maintains an office in London, England, with a lease expiring in October 2025[239] - Xchange has office spaces in Armonk, NY (lease expires July 2028) and Indianapolis, IN (lease expires March 2024)[239] - A disaster recovery site is maintained in Kingston, NY, with a lease expiring in March 2024[240] Item 3. Legal Proceedings 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] Item 4. Mine Safety Disclosures This item is not applicable to Ambac Financial Group, Inc - Mine Safety Disclosures are not applicable to the Registrant[241] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 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] - As of February 22, 2022, there were 20 stockholders of record for common stock and 60 for warrants[244] - 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] 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][250] Item 6. Selected Financial Data This section is reserved and contains no selected financial data - This section is reserved and contains no selected financial data[254] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 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][261][262] - Ambac completed risk reduction transactions totaling $2,695 million in 2021, primarily through quota share reinsurance ($1,695 million)[265] - The COVID-19 pandemic caused economic disruptions but resulted in no defaults of Ambac-insured obligations as of December 31, 2021, with potential RMBS claim increases offset by excess spread benefits[272][274] - The Eighth Amended Plan of Adjustment for Puerto Rico was confirmed on January 18, 2022, and PRIFA/CCDA Qualifying Modifications were approved on January 20, 2022, resolving significant portions of AAC's Puerto Rico exposure[269][128][1043] Consolidated Financial Results (2021 vs 2020 vs 2019) | ($ 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 $11,187 million at December 31, 2021, primarily due to debt refinancing, loss payments, and lower subrogation recoverables[422][424] Adjusted Earnings (Loss) (2021 vs 2020 vs 2019) | ($ 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 | $919 | Item 7A. Quantitative and Qualitative Disclosures about Market Risk Ambac's market risk primarily arises from interest rate, foreign currency, and equity value changes, managed through monitoring systems and sensitivity analyses - Ambac's primary market risk exposures stem from changes in interest rates, foreign currency exchange rates, and equity values of limited partnership and other alternative investments[502] Estimated Change in Fair Value of Fixed Maturity Investment Portfolio (100 bps interest rate increase) | December 31, | 2021 ($ 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) | $(54) | Item 8. Financial Statements and Supplementary Data This section presents Ambac's audited consolidated financial statements for 2019-2021, including balance sheets, income statements, equity, and cash flows, with an unqualified audit opinion from KPMG LLP - KPMG LLP issued an unqualified opinion on Ambac's consolidated financial statements for the three-year period ended December 31, 2021[523] - KPMG LLP also expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting as of December 31, 2021[515][524] - The evaluation of loss and loss expense reserves and subrogation recoverable was identified as a critical audit matter due to high estimation uncertainty and subjective judgments[528][529] Consolidated Balance Sheet Highlights (2021 vs 2020) | ($ 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 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] Item 9A. Controls and Procedures 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] - Management concluded that internal control over financial reporting was effective as of December 31, 2021, based on the COSO 2013 framework[1091] - No material changes in internal control over financial reporting occurred during Q4 2021, despite employees working remotely due to the COVID-19 pandemic[1092] Item 9B. Other Information 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] PART III Item 10. Directors, Executive Officers and Corporate Governance 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] - Ambac's Code of Business Conduct, promoting integrity and ethical behavior, is available on its website[1096] Item 11. Executive Compensation 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] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 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] 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 | $0.00 | 1,255,643 | Item 13. Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the 2022 Proxy Statement - Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2022 Proxy Statement[1104] Item 14. Principal Accountant Fees and Services Information concerning principal accountant fees and services is incorporated by reference from the 2022 Proxy Statement - Information on principal accountant fees and services is incorporated by reference from the 2022 Proxy Statement[1105] PART IV Item 15. Exhibits, Financial Statement Schedules This section lists all documents filed as part of the annual report, including consolidated financial statements, financial schedules, and a comprehensive list of exhibits - The consolidated financial statements included in Part II, Item 8 are filed as part of this Annual Report on Form 10-K[1107] - Financial statement schedules filed include Schedule I (Summary of Investments), Schedule II (Condensed Financial Information of Registrant), and Schedule IV (Reinsurance)[1108] Summary of Investments Other Than Investments in Related Parties (Dec 31, 2021) | Type of Investment | Cost ($ 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