Ambac(AMBC) - 2022 Q2 - Quarterly Report

Cautionary Statement Pursuant to the Private Securities Litigation Reform Act of 1995 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] - 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] PART I. FINANCIAL INFORMATION Item 1. Unaudited Consolidated Financial Statements of Ambac Financial Group, Inc. and Subsidiaries This section provides unaudited consolidated financial statements, including balance sheets, income, equity, and cash flows, with detailed explanatory notes Consolidated Balance Sheets (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][324] - 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][324] - Total stockholders' equity decreased by $252 million (22.9%) from December 31, 2021, to June 30, 2022, primarily due to changes in unrealized losses on invested assets and losses on foreign currency translation[7][325] Consolidated Statements of Total Comprehensive Income (Loss) (Unaudited) This statement outlines the company's financial performance, including net income and other comprehensive income components Metric | Three Months Ended June 30, 2022 ($ 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] - 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 $(247) million in YTD 2022, primarily due to unrealized losses on securities and foreign currency translation[8] Consolidated Statements of Stockholders' Equity (Unaudited) This statement details changes in the company's equity accounts over a period, including retained earnings and comprehensive income Metric | Balance at March 31, 2022 ($ 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 $10 million[13] Consolidated Statements of Cash Flows (Unaudited) This statement reports cash generated and used by operating, investing, and financing activities over a period Cash Flow Activity | Six Months Ended June 30, 2022 ($ 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][319] - 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][321] Notes to Unaudited Consolidated Financial Statements This section provides detailed explanations and additional information supporting the consolidated financial statements Note 1. Background and Business Description 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][20][21] - 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] - 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] Note 2. Basis of Presentation and Significant Accounting Policies 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][29] - Foreign currency transaction gains/(losses) were $7 million for the six months ended June 30, 2022, and $(7) million for the six months ended June 30, 2021, primarily from remeasuring Ambac UK's assets and liabilities[31] Metric | Six Months Ended June 30, 2022 ($ 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 | $20 | Note 3. Segment Information This note provides financial data for Ambac's operating segments, including revenues, income, and assets - Ambac reports results in three segments: Legacy Financial Guarantee Insurance, Specialty Property and Casualty Insurance, and Insurance Distribution, plus Corporate and Other[38] Three Months Ended June 30, 2022 ($ 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 | $12,907 | Note 4. Investments This note details Ambac's investment portfolio, including fixed maturity securities and net investment income - Ambac's non-VIE invested assets primarily consist of fixed maturity securities (available-for-sale or trading) and interests in pooled investment funds (Other investments)[45] Available-for-Sale Investments (excluding VIEs) ($ 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][276][277] Note 5. Fair Value Measurements 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][72] 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 | $(174) | - Level 3 financial assets and liabilities, which rely on significant unobservable inputs, include a substantial portion of Variable Interest Entity assets and liabilities, as well as certain corporate obligations, other asset-backed securities, and derivative instruments[76][72] Note 6. Insurance Contracts This note provides details on net premiums earned, loss reserves, and subrogation recoverables related to insurance contracts Net Premiums Earned by Location ($ 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 $3 million for both the three and six months ended June 30, 2022, compared to the prior year periods, driven by growth in specialty property and casualty net premiums[104][274] Loss and Loss Expense Reserves and Subrogation Recoverable ($ 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] - 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][255][256][257] - RMBS R&W subrogation recoveries decreased from $1,730 million at December 31, 2021, to $1,484 million at June 30, 2022, primarily due to management's view of the effect of the New York Court of Appeals' decision in U.S. Bank National Association v. DLJ Mortgage Capital, Inc. on AAC's breach-of-contract cases[140] Note 7. Derivative Instruments This note details the fair values, gains, and losses associated with Ambac's derivative contracts Derivative Instruments Gross Fair Values ($ 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 $85 million, respectively, reflecting changes in fair value from increases in forward interest rates and lower counterparty credit adjustments[147][280] - All credit derivative contracts outstanding at December 31, 2021, have terminated as of June 30, 2022, with no significant impact on financial position[88][150] Note 8. Intangible Assets This note provides information on the carrying value and amortization of Ambac's intangible assets Intangible Assets ($ 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 $330 million at June 30, 2022, primarily due to amortization, partially offset by new intangible assets acquired during 2022[156][334] Note 9. Variable Interest Entities This note describes Ambac's involvement with Variable Interest Entities, including their assets, liabilities, and related income - Ambac's involvement with Variable Interest Entities (VIEs) includes providing financial guarantees for debt obligations (FG VIEs), sponsoring special purpose entities, and investing in collateralized debt obligations[159] Consolidated FG VIEs Assets and Liabilities ($ 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 $28 million gain from consolidating two new trusts established in connection with the Puerto Rico restructuring in March 2022[167] Non-Consolidated VIEs Maximum Loss Exposure ($ 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 | $25,112 | Note 10. Revenues From Contracts with Customers This note details revenues generated from contracts with customers, particularly within the insurance distribution business Insurance Distribution Revenues by Policy Type ($ 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 $13 million in the prior year, primarily due to growth in the business[173][177] Contract Assets and Liabilities ($ millions): | Category | June 30, 2022 | December 31, 2021 | |:---|:---|:---| | Commissions receivable | $2 | $2 | | Contract assets | $5 | $4 | | Contract liabilities | $1 | $1 | Note 11. Comprehensive Income 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 $(196) million at June 30, 2022, primarily due to significant unrealized losses on available-for-sale securities and foreign currency translation losses[179] Note 12. Net Income Per Share This note details the calculation of basic and diluted net income per share for common stockholders Net Income Per Share Calculation ($ 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 $15 million authorized in May 2022[184][394] Note 13. Income Taxes This note provides information on Ambac's income tax provision and deferred tax assets - Ambac maintains a full valuation allowance against its deferred tax assets, as management believes it is more likely than not that sufficient U.S. federal, state, and local taxable income will not be generated to recover them[190] Consolidated Pretax Income (Loss) by Geography ($ 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 $11 million for the six months ended June 30, 2022, compared to prior year periods, primarily due to the 2021 effect on deferred tax liability from an increase in UK tax rates[193][293] Note 14. Commitments and Contingencies This note details Ambac's involvement in various legal proceedings and potential financial obligations - Ambac is involved in various legal proceedings, including litigation against the company (e.g., Monterey Bay Military Housing, FOMB for Puerto Rico cases) and litigation filed or joined by Ambac (e.g., RMBS litigation, Puerto Rico-related cases)[195][197][208][216] - Several Puerto Rico-related litigations (FOMB v. Autonomy Master Fund, FOMB v. PRIFA, FOMB v. PRCCDA, FOMB v. PRHTA, FOMB v. Ambac Assurance Corp. (PROMESA constitutionality)) have been resolved by the Commonwealth Plan, with appeals pending[197][198][199][202][214] - RMBS litigation continues, with ongoing motions and trials. The New York Court of Appeals' decision in U.S. Bank National Association v. DLJ Mortgage Capital, Inc. may affect AAC's recovery basis for a significant portion of breaching loans[216][217] - Management believes it has substantial defenses to claims and intends to defend vigorously, but adverse outcomes in any proceedings could be material to business, operations, financial position, profitability, or cash flows[207] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Ambac's financial condition, operations, cash flows, and liquidity, including critical accounting estimates and non-GAAP measures Executive Summary This summary highlights key financial and operational performance indicators across Ambac's business segments AFG Net Assets (excluding equity investments in subsidiaries) ($ 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 $8.86 per share during Q2 2022[222] Specialty Property and Casualty Insurance Segment Key Metrics ($ 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 | $5,217 | N/A | - The Legacy Financial Guarantee segment's total and adversely classified (ACC) credit net par outstanding decreased by 10% and 18% respectively, driven by active de-risking and scheduled maturities, amortizations, refundings, and calls[238] - Ambac has no operations or insured exposures in Russia or Ukraine, and its investment portfolio exposure to Russian issuers is not meaningful, thus not expecting a material adverse impact from the conflict[239] - Ambac is monitoring the LIBOR transition and the SEC's proposed rules on climate-related information, assessing compliance obligations and potential impacts[241][244] Critical Accounting Estimates This section refers to the detailed discussion of Ambac's critical accounting policies and estimates - Ambac's critical accounting policies and estimates are discussed in detail in the Company's Annual Report on Form 10-K for the year ended December 31, 2021[245] Financial Guarantees in Force This section details Ambac's guaranteed net par outstanding by market and top insured exposures Guaranteed Net Par Outstanding by Market ($ 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] 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 $467 million at June 30, 2022, primarily due to the restructuring of GO, PBA, PRIFA, and CCDA bonds. The remaining exposure is mainly to PR Highways and Transportation Authority (PRHTA)[248][254][255][256][257][258] Summary of Below Investment Grade Exposure ($ 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 | $5,438 | - The net decline in below investment grade exposures is primarily due to de-risking activities, including the Puerto Rico restructuring[270] Results of Operations This section analyzes Ambac's financial performance, including revenues, expenses, and net income drivers Summary of Financial Results ($ 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][273] - 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] - 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][277] - 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] - 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] - 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] - 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] Liquidity and Capital Resources 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][309] - 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] - 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][314] 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] Balance Sheet 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] - Total stockholders' equity decreased to $846 million at June 30, 2022, from $1,098 million at December 31, 2021, mainly due to unrealized losses on invested assets and foreign currency translation losses[325] Investment Portfolio Composition (excluding VIEs) at Carrying Value ($ 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] - Derivative assets decreased from $76 million to $40 million, and derivative liabilities decreased from $95 million to $61 million, primarily due to higher interest rates during H1 2022[335] Long-term Debt Carrying Value ($ 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 | $2,230 | Variable Interest Entities This section refers to detailed information on Ambac's variable interest entities - Detailed information regarding variable interest entities is provided in Note 9 to the Unaudited Consolidated Financial Statements[354] Accounting Standards This section confirms no new applicable accounting standards have been issued but not yet adopted - There are no new accounting standards applicable to Ambac that have been issued but not yet adopted[355] U.S. Insurance Statutory Basis Financial Results This section presents the statutory financial results for Ambac Assurance Corporation (AAC) and Everspan Indemnity AAC Statutory Financial Results ($ 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] - 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] Ambac Assurance UK Limited Financial Results Under UK Accounting Principles 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] - 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] Non-GAAP Financial Measures 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][365] 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] Item 3. Quantitative and Qualitative Disclosures About Market Risk 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] Item 4. Controls and Procedures 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] - 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] PART II. OTHER INFORMATION Item 1. Legal Proceedings 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] Item 1A. Risk Factors 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 $1,462 million (net of reinsurance) as of June 30, 2022, could adversely impact liquidity, financial condition, and the value of its securities[382][383][389] - The outcome of RMBS litigations is inherently unpredictable, and adverse rulings, such as the New York Court of Appeals' decision in the HEAT case, could significantly impact AAC's ability to pursue claims, the amount or timing of recovery, or settlement dynamics[384] - Failure to realize RMBS R&W subrogation recoveries could lead to material adverse effects, including impairing AAC's ability to honor financial obligations, initiating rehabilitation proceedings, reducing value delivery to AFG, and a significant drop in the value of securities[385][386][391] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports no unregistered equity sales and details the company's share repurchase activities during Q2 2022 - No unregistered sales of equity securities occurred[392] Share Repurchases During Q2 2022: | Month | Total Shares Purchased | Average Price Paid Per Share ($) | |:---|:---|:---| | 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] Item 3. Defaults Upon Senior Securities This section confirms no matters require disclosure regarding defaults upon senior securities - No matters require disclosure regarding defaults upon senior securities[395] Item 5. Other Information This section confirms no other information requires disclosure - No other information requires disclosure[395] Item 6. Exhibits 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] 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][399]