Ambac(AMBC) - 2022 Q1 - Quarterly Report

Cautionary Statement Pursuant to the Private Securities Litigation Reform Act of 1995 - Forward-looking statements are not guarantees of future performance; actual results may differ materially due to various factors[8] - 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] - 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] PART I. FINANCIAL INFORMATION Item 1. Unaudited Consolidated Financial Statements of Ambac Financial Group, Inc. and Subsidiaries Ambac presents its unaudited consolidated financial statements for Q1 2022, including balance sheets, income, equity, cash flows, and explanatory notes Consolidated Balance Sheets (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][323] - The reduction in total liabilities was mainly due to lower loss and loss expense reserves and decreased VIE long-term debt[10][323] Consolidated Statements of Total Comprehensive Income (Loss) (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] - Net gains on derivative contracts increased to $57 million in Q1 2022 from $25 million in Q1 2021[11] - Losses and loss expenses increased to $24 million in Q1 2022 from $8 million in Q1 2021[11] Consolidated Statements of Stockholders' Equity (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] Consolidated Statements of Cash Flows (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] - Investing cash flow was boosted by proceeds from sales of bonds and changes in short-term investments[16] Notes to Unaudited Consolidated Financial Statements Note 1. Background and Business Description - 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] - 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] - 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] Note 2. Basis of Presentation and Significant Accounting Policies - Consolidated financial statements include AFG and all entities where it has a controlling financial interest, including VIEs where AFG is the primary beneficiary[23] - 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] | 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 - 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] | 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 - Ambac's non-VIE invested assets are mainly fixed maturity securities (available-for-sale or trading) and pooled investment funds[38] | 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][277][278][279] Note 5. Fair Value Measurements - Fair value hierarchy: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), Level 3 (significant unobservable inputs)[69][70] - 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] - 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][95] Note 6. Insurance Contracts | 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][274] - 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][130][131][132] Note 7. Derivative Instruments | 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] - All ratings-based contingent features in Ambac's non-cleared interest rate swaps have been triggered, requiring maximum collateral levels to be posted[155] Note 8. Intangible Assets | 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] Note 9. Variable Interest Entities - 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] | 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][285] Note 10. Revenues From Contracts with Customers | 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] Note 11. Comprehensive Income | 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] - Foreign currency translation resulted in a loss of $(23) million in Q1 2022, contrasting with a gain of $6 million in Q1 2021[179] Note 12. Net Income Per Share | 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] - 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][390] Note 13. Income Taxes | 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] Note 14. Commitments and Contingencies - 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][197][217] - 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][218] - 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][381][384] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Ambac's Q1 2022 financial condition, operations, cash flows, liquidity, segment results, and non-GAAP measures Executive Summary - Ambac recorded a $198 million gain in Q1 2022 from the successful restructuring of a significant portion of its Puerto Rico exposures[274] - 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] | 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][230] - 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] Critical Accounting Policies and Estimates - Ambac's financial statements are prepared in accordance with U.S. GAAP, requiring material estimates and assumptions[247] - 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] Financial Guarantees in Force | 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] | 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][262][263] | 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 | 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] - 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] - 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][298] - Insurance Distribution segment's premiums placed increased by 12% to $45 million in Q1 2022, driving higher gross and sub-producer commissions[303] Liquidity and Capital Resources - AFG's net assets, excluding equity investments in subsidiaries, were $243 million at March 31, 2022, providing liquidity for development and acquisitions[224][304] - 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] | 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] - 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] Balance Sheet - Total assets decreased by $772 million, and total liabilities decreased by $649 million from December 31, 2021, to March 31, 2022[323] - 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] | 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] - 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][337] Variable Interest Entities - For detailed information on VIEs, refer to Note 9 of the Unaudited Consolidated Financial Statements[358] - Ambac's involvement with VIEs arises from financial guarantees provided by AAC and Ambac UK for debt obligations issued by special purpose entities[159] - 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] Accounting Standards - No new accounting standards have been issued but not yet adopted that are applicable to Ambac[359] - 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] U.S. Insurance Statutory Basis Financial Results | 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] - Everspan Indemnity Insurance Company's statutory policyholder surplus increased to $110 million from $106 million, driven by $13 million in capital contributions[363] - 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] Ambac Assurance UK Limited Financial Results Under UK Accounting Principles | 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] - 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] Non-GAAP Financial Measures - Non-GAAP measures (EBITDA, adjusted earnings, adjusted book value) are used to provide transparency into business drivers and facilitate period-to-period comparisons[366] | 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] Item 3. Quantitative and Qualitative Disclosures About Market Risk 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] Item 4. Controls and Procedures 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] - No material changes to internal control over financial reporting occurred during the quarter ended March 31, 2022[376] PART II. OTHER INFORMATION Item 1. Legal Proceedings 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] Item 1A. Risk Factors 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] - 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][382][384] - 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] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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] | 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] Item 3. Defaults Upon Senior Securities No matters require disclosure regarding defaults upon senior securities - No matters require disclosure regarding defaults upon senior securities[390] Item 5. Other Information No matters require disclosure under this item - No matters require disclosure under this item[390] Item 6. Exhibits 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] - 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] - XBRL Instance Document, Taxonomy Extension Schema, Calculation Linkbase, Label Linkbase, Presentation Linkbase, and Definition Linkbase Documents are included[392] SIGNATURES - The report is signed by David Trick, Chief Financial Officer and Treasurer, on May 10, 2022[393][394]