AMBAC FINANCIAL GROUP, INC.
2020 ANNUAL REPORT
2
> ABOUT AMBAC
Ambac Financial Group, Inc. (“Ambac” or “AFG”), headquartered in New York City, is
a financial services holding company. Ambac’s subsidiaries include: Ambac Assurance
Corporation and Ambac Assurance UK Limited, financial guarantee insurance
companies currently in runoff; Everspan Indemnity Insurance Company and Everspan
Insurance Company, specialty property & casualty program insurers; and Xchange
Benefits, LLC and Xchange Affinity Underwriting Agency, LLC, property & casualty
Managing General Underwriters. Ambac’s common stock trades on the New York
Stock Exchange under the symbol “AMBC”. The Amended and Restated Certificate
of Incorporation of Ambac contains substantial restrictions on the ability to transfer
Ambac’s common stock. Subject to limited exceptions, any attempted transfer of
common stock shall be prohibited and void to the extent that, as a result of such
transfer (or any series of transfers of which such transfer is a part), any person or group
of persons shall become a holder of 5% or more of Ambac’s common stock or a holder
of 5% or more of Ambac’s common stock increases its ownership interest. Ambac
is committed to providing timely and accurate information to the investing public,
consistent with our legal and regulatory obligations. To that end, we use our website to
convey information about our businesses, including the anticipated release of quarterly
financial results, quarterly financial, statistical and business-related information. For
more information, please go to www.ambac.com.
MISSION
n Optimize our business and its
components to achieve maximum
return for shareholders
n Aggressively pursue financially
sound strategies to reduce risk
and decrease the size of the
insured portfolio
VISION
n Transition to a growth-oriented
platform sufficiently capitalized
to support businesses that
are synergistic with Ambac’s
core competencies
VALUES
n Culture of respect, inclusion,
collaboration and transparency
n Attract, retain and reward
top performers who meet
standards of excellence,
integrity and collaboration
Forward-Looking Statements In this Annual Report, we have included statements that may constitute “forward-looking statements” within the meaning of the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. Words such as “estimate,” “expect,” “project,” “plan,” “believe,” “anticipate,” “intend,” “planned,”
“potential” and similar expressions, or future or conditional verbs such as “will,” “should,” “would,” “could,” and “may,” or the negative of those expressions or verbs,
identify forward-looking statements. We caution readers that these statements are not guarantees of future performance. Forward-looking statements are not historical
facts but instead represent only our beliefs regarding future events, which may by their nature be inherently uncertain and some of which may be outside our control.
These statements may relate to plans and objectives with respect to the future, among other things which may change. We are alerting you to the possibility that our
actual results may differ, possibly materially, from the expected objectives or anticipated results that may be suggested, expressed or implied by these forward-looking
statements. Important factors that could cause our results to differ, possibly materially, from those indicated in the forward-looking statements include, among others,
those discussed under “Risk Factors” in our most recent SEC filed quarterly or annual report.
3
> DEAR FELLOW SHAREHOLDERS
“ As I reflect on our shared experience
brought about by the pandemic, I
am grateful for the demonstration of
community, the perseverance of our
employees and Board of Directors
and their commitment to progressing
our strategic initiatives.”
CLAUDE LeBLANC
President and Chief Executive Officer
This year has been one of significant challenges that have tested our collective resolve. As I reflect on
our shared experience brought about by the pandemic, I am grateful for the demonstration of community,
the perseverance of our employees and Board of Directors and their commitment to progressing our
strategic initiatives.
As we navigated through the challenges posed by the pandemic, the health, safety and well-being of
our employees was always a top priority and we took immediate steps to protect our staff. In active dialogue
with our Board and key service providers, we implemented significant measures to ensure the safety of our
employees and uninterrupted business operations, including:
n A swift and smooth transition to remote work;
n Comprehensive data and security enhancements to ensure a secure remote digital environment;
n Engaging an infectious disease specialist to lead multiple informational panel discussions,
and provide support and guidance to our employees regarding proper COVID-19 protocols; and
n Enlisting environmental and architectural design specialists to advise on and implement appropriate
safety measures within our work environment.
Recognizing the importance of keeping employees engaged during this period we expanded our wellness
programs and relied on multiple virtual meeting platforms to provide frequent and transparent communication,
ensuring that all employee questions and concerns were addressed in a timely manner. I look forward to
welcoming all employees back to our offices as vaccinations become more widely available and we are able to
safely reopen.
2020 was also a year of great social unrest across our nation as we all grappled with issues related to
race and systemic inequalities. We have publicly committed to doing our part, have expanded internal
initiatives via a multi-pronged approach and donated to several organizations dedicated to social justice
causes. Ambac fosters an inclusive work environment as part of its stated core values and is committed to
advancing diversity initiatives.
1
> BOOK VALUE/SHARE
> ADJUSTED BOOK VALUE/SHARE (1)
$40
$35
$30
$25
$20
$15
$10
$5
$0
$37.41 $37.94
$31.09
$35.12
$32.41
$30.52
$23.57
Dec
2014
Dec
2015
Dec
2016
Dec
2017
Dec
2018
Dec
2019
Dec
2020
$35
40
$30
35
$25
30
25
$20
20
$15
15
$10
10
$5
$0
5
0
$28.15 $29.48
$28.83
$27.58
$24.34
$20.05
$15.01
Dec
2014
Dec
2015
Dec
2016
Dec
2017
Dec
2018
Dec
2019
Dec
2020
35
30
25
20
15
10
5
0
There remains a lot of work to do as we strive
to ensure an equal playing field for everyone, and
we will continue to drive those initiatives internally
while also actively lending our voice and support to
related causes.
As we adapted to our new environment we
maintained our focus on our strategic priorities,
namely, stabilizing our insurance platform, pursuing
our loss recovery efforts, rationalizing our capital and
liability structure, improving our operational platform
and advancing our new business activities.
For 2020 we reported a net loss of $437 million,
or $9.47 per diluted share, and Adjusted Loss(1) of
$378 million, or $8.19 per diluted share. Stockholders’
equity at December 31, 2020, was $1.1 billion, or
$23.57 per share and Adjusted Book Value(1) was $0.9
billion or $20.05 per share. Our GAAP net loss for the
year, compared to Adjusted Loss, primarily reflects
exclusion of amortization expense for our insurance
intangible asset.
Our results for the year were impacted by higher
projected losses in domestic public finance exposures,
including Puerto Rico, and those exposures directly
impacted by the economic impact from COVID-19. Net
investment income was also lower compared to 2019,
driven by market volatility from the impact of the
pandemic, a lower allocation toward higher yielding
Ambac-insured securities and a lower invested asset
base as a result of derisking transactions executed
in 2019.
During the year we continued to focus aggressively
on existing credits targeted for derisking but also
expanded our efforts to include COVID impacted credits.
Notable transactions executed during the
year included:
n The refinancing of an international utility
transaction with net par outstanding of
$298 million;
n The refinancing of an international stadium
transaction with a net par of $217 million;
n The commutation and refunding of our
last remaining Chicago GO exposure with
net par of $171 million;
n Active negotiation of enhanced credit and
liquidity protections for key COVID stressed
exposures, including two of our largest
insured exposures; and
n The commutation, refinancing and
cancellation of several municipal and
structured credit exposures.
Net par outstanding was reduced by
approximately $4 billion, or 11%, to $34 billion at
year-end 2020. Of this, Adversely Classified and
2
> INSURED PORTFOLIO NET PAR (3)
($ in billions)
> WATCH LIST AND ADVERSELY
CLASSIFIED CREDITS (2), (3)
($ in billions)
$250
$200
$150
$100
$50
$0
# of Credits
6,000
4,000
Reduced by
11% in 2020
2,000
Dec
2014
Dec
2015
Dec
2016
Dec
2017
Dec
2018
Dec
2019
Dec
2020
PF
SF
Int’l
# of Credits
0
$19.91
Reduced by
8% in 2020
$14.29
$13.18
250
200
$25.20
150
100
50
0
$35
$30
$25
$20
$15
$10
$5
$0
Dec
2017
Dec
2018
Dec
2019
Dec
2020
6000
4000
2000
0
35
30
25
20
15
10
5
0
Watch List Credits decreased 13%, excluding the
COVID impacted credits and by 8% including those
credits, to $13 billion at December 31, 2020. I am
extremely pleased with what we accomplished
notwithstanding the challenging environment.
As we head into 2021, we have maintained our
momentum with the successful execution of a large
quota share reinsurance transaction in January
involving a portfolio of public finance credits with
net par outstanding of approximately $823 million
at December 31, 2020.
We will continue to pursue various options to
sculpt and de-risk our insured portfolio to reduce
potential tail risk, including additional reinsurance
transactions, commutations and remediations. We
believe that such transactions will improve the
overall quality of our Book and Adjusted Book
Values and increase optionality for our financial
guaranty insurance subsidiaries.
During the year we also continued to progress
our loss recovery efforts, in particular with respect
to our RMBS litigations. We were nearing trial in our
main case against Bank of America/Countrywide,
but the court twice postponed the trial due to
COVID. Currently we are awaiting a new trial date
and appealing the dismissal of our fraud claim. The
timing for the trial will depend on a number of factors,
including the calendar of a new judge to be assigned
to the case, the impact of the pandemic on court
proceedings, and the status of our fraud appeal. We
continue to be focused on resolving our remaining
RMBS litigation as quickly and favorably as possible.
With regards to rationalizing our capital and
liability structures, we made additional redemptions
of our outstanding Secured Notes during the year
totaling $121 million, which brings our total Senior
Note redemptions to over $500 million, further
de-levering our balance sheet and lowering annual
interest costs.
We also reduced operating expenses during the
year by $10 million, reflecting our ongoing focus on
reducing costs. We will continue our efforts to reduce
operating expenses and implement cost efficiencies
in our legacy financial guarantee business. However,
as we progress our new business initiatives, we do
expect there will be some related increase in expenses
on a consolidated basis.
The year culminated with the successful
advancement of our new business strategy, furthering
our goal of executing initiatives that we believe
will drive sustainable long-term shareholder value.
Our three Pillar new business strategy is focused
on transforming Ambac Financial Group into a
financial services holding company with a portfolio of
3
AMBAC’S NEW BUSINESS
THREE PILLAR STRATEGY
PILLAR I
> SPECIALTY PROGRAM PROPERTY
& CASUALTY INSURANCE
PILLAR II
> MANAGING GENERAL AGENCY/
MANAGING GENERAL UNDERWRITING
PILLAR III
> INSURANCE SERVICES
synergistic, recurring fee-based businesses that will
generate strong earnings and allow for the utilization
of Ambac’s NOLs.
Pillar I is built around Everspan Group, our
specialty program insurance platform. Everspan
Group was established during the year following the
successful redomestication and license expansion of
our admitted carrier, Everspan Insurance Company
and the de novo establishment of Everspan Indemnity
Insurance Company, a surplus lines carrier, each
domiciled in Arizona. Everspan Group secured an
“A-” (Excellent) rating from AM Best in February
2021 and, with capital in excess of $100 million, will
operate as a Class VIII property & casualty insurance
platform. Everspan Group will source business from
multiple channels including Managing General Agents,
reinsurance brokers, aggregators and other producers.
Everspan will be differentiated in the P&C specialty
program market with its ability to retain up to 30% of
the risk it underwrites, creating a strong alignment of
interest with its reinsurance partners. Everspan will
generate revenue from fronting fees, net premiums on
retained risk, and investment income.
access to (i) high growth businesses with attractive
rates of return and (ii) the ability to diversify
revenues. During 2020 we successfully launched
this component of our strategy with the acquisition
of 80% of the membership interests of Xchange, a
specialty accident and health MGU that has delivered
outstanding growth and profitability, supported by
major insurers, reinsurers, third party administrators,
brokers and producers since its inception in 2010.
Xchange will continue operating under its own brand
with its existing leadership team. We are excited
about the future growth prospects for Xchange, which
include expanding its geographic distribution and
product diversification and adding new carriers. We
will continue to build out our MGA/MGU Program
Manager business through organic growth, additional
acquisitions and/or partnerships, and investments in
de-novo platforms.
Pillar III of our strategy targets investments in
complementary service businesses that will support
Pillars I and II, including potential investments in
insurtech platforms and third-party administrators.
As I reflect on Ambac’s accomplishments over the
Pillar II of our strategy encompasses fee-based
managing general agent and managing general
underwriter businesses. The MGA/MGU Program
Manager sector is attractive to us because it offers
past four years since I joined as CEO, I am extremely
proud of all of our achievements as we continue to
progress our strategic priorities to generate long-term
value for our shareholders.
4
Our three Pillar strategy is
focused on transforming
Ambac Financial Group
into a financial services
holding company with
a portfolio of synergistic,
recurring fee-based
businesses that will
generate strong earnings
and allow for the utilization
of Ambac’s NOLs.
The ongoing support of our Board of Directors
and all of our employees makes what we do possible.
I would like to thank them and you, our shareholders,
for your continued support and confidence as we
advance our efforts to move the company in a new
direction. I look forward to updating you as we
progress our initiatives in 2021.
Sincerely,
> OUR STRATEGIC
PRIORITIES
n Active runoff of AAC and its
subsidiaries through transaction
terminations, commutations,
restructurings, and reinsurance
with a focus on our watch list
credits and known and potential
future adversely classified
credits, that we believe will
improve our risk profile, and
maximizing the risk-adjusted
return on invested assets;
n Ongoing rationalization of
Ambac’s capital and liability
structures;
n Loss recovery through active
litigation management and
exercise of contractual and
legal rights;
n Ongoing review of the
effectiveness and efficiency of
Ambac’s operating platform; and
n Focused growth of our three
pillar strategy to advance our
goal of generating long-term
shareholder value with attractive
risk adjusted returns.
Claude LeBlanc
President and Chief Executive Officer
(1) Ambac reports two non-GAAP financial measures: Adjusted Earnings (Loss) and Adjusted Book Value. The most directly comparable GAAP measures are net income
attributable to common stockholders for Adjusted Earnings (Loss) and Total Ambac Financial Group, Inc. stockholders’ equity for Adjusted Book value. A non-GAAP financial
measure is a numerical measure of financial performance or financial position that excludes (or includes) amounts that are included in (or excluded from) the most directly
comparable measure calculated and presented in accordance with GAAP. We are presenting these non-GAAP financial measures because they provide greater transparency
and enhanced visibility into the underlying drivers of our business. Adjusted Earnings (Loss) and Adjusted Book Value are not substitutes for the Company’s GAAP reporting,
should not be viewed in isolation and may differ from similar reporting provided by other companies, which may define non-GAAP measures differently. Each of the
reconciling items is presented in Appendix A to this Annual Report.
(2) Adversely Classified Credits are either in default or have developed problems that eventually may lead to a default. Watch List Credits are performing credits that demonstrate
the potential for long-term material adverse development.
(3) Par throughout this Annual Report includes capital appreciation bonds (“CABs”) which are reported at the par amount at the time of issuance of the insurance policy as
opposed to the current accreted value of the bonds.
5
> BOARD OF DIRECTORS
> EXECUTIVE OFFICERS
JEFFREY S. STEIN (3)
Chairman
Founder and Managing Partner
of Stein Advisors LLC
ALEXANDER D. GREENE (2)*, (3), (4)
Former Managing Partner and
Head of U.S. Private Equity at
Brookfield Asset Management
IAN D. HAFT (1), (2), (4)*
Chief Executive Officer
of Surgis Capital LLC
and Chief Financial Officer
of Electric Monster Media, Inc.
DAVID L. HERZOG (1)*, (4)
Former Chief Financial Officer
of AIG
JOAN LAMM-TENNANT (1), (4)
Founder and Former
Chief Executive Officer of
Blue Marble Microinsurance
CLAUDE LeBLANC
President and
Chief Executive Officer
CLAUDE LeBLANC
President and
Chief Executive Officer
DAVID TRICK
Executive Vice President,
Chief Financial Officer
and Treasurer
DAVID BARRANCO
Senior Managing Director,
Head of Risk Management
ROBERT B. EISMAN
Senior Managing Director,
Chief Accounting Officer
and Controller
STEPHEN M. KSENAK
Senior Managing Director
and General Counsel
MICHAEL REILLY
Senior Managing Director,
Chief Information Officer and
Chief Administrative Officer
C. JAMES PRIEUR (1), (2), (3)*
Former Chief Executive Officer
of CNO Financial Group, Inc.
R. SHARON SMITH
Senior Managing Director
and Chief of Staff
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Member of Governance and Nominating Committee
(4) Member of Strategy and Risk Policy Committee
*Chair of Committee
6
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒
☐
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2020
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 1-10777
AMBAC FINANCIAL GROUP, INC.
(Exact name of Registrant as specified in its charter)
Delaware
(State of incorporation)
One World Trade Center New York NY
(Address of principal executive offices)
13-3621676
(I.R.S. employer identification no.)
10007
(Zip code)
(212) 658-7470
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbols
Name of each exchange on which registered
Common Stock, par value $0.01 per share
Warrants
AMBC
AMBC WS
New York Stock Exchange
New York Stock Exchange
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting
company”and"emerging growth company" in Rule 12b-2 of the Exchange Act): (Check one):
Large accelerated filer ☒ Accelerated filer
☐ Non-accelerated filer ☐ Smaller reporting company
☐ Emerging growth company
☐
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its
internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public
accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of voting stock held by non-affiliates of the Registrant as of the close of business on June 30, 2020 was
$655,986,870. As of February 26, 2021, there were 45,850,468 shares of Common Stock, par value $0.01 per share, were outstanding.
Documents Incorporated By Reference
Portions of the Registrant’s proxy statement for its 2021 annual meeting of stockholders are incorporated by reference in this Form 10-K in
response to Part III Items 10, 11, 12, 13, and 14.
[This page intentionally left blank]
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Cautionary Statement Pursuant to the Private Securities Litigation Reform Act of 1995...........................................................
1
Item Number
PART I
Page
Item Number
PART II (CONTINUED)
Page
62
65
142
7A Quantitative and Qualitative Disclosures about
Market Risk................................................................
8
9
Financial Statements and Supplementary Data..........
Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure.........................
9A Controls and Procedures.............................................
142
9B Other Information.......................................................
142
PART III
10 Directors, Executive Officers and Corporate
Governance.................................................................
142
11 Executive Compensation............................................
143
12 Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters...
13 Certain Relationships and Related Transactions, and
Director Independence................................................
143
143
14 Principal Accountant Fees and Services.....................
143
PART IV
15 Exhibits, Financial Statement Schedules....................
144
Schedule I—Summary of Investments Other Than
Investments in Related Parties.................................
Schedule II—Condensed Financial Information of
Registrant (Parent Company Only).........................
148
149
Schedule IV—Reinsurance......................................
154
SIGNATURES..................................................................
155
1
Business......................................................................
Introduction................................................................
Description of the Business........................................
Insurance Regulatory Matters and Other
Restrictions.................................................................
Investments and Investment Policy............................
Employees..................................................................
1A Risk Factors................................................................
1B Unresolved Staff Comments.......................................
2
3
Properties....................................................................
Legal Proceedings.......................................................
4 Mine Safety Disclosures.............................................
PART II
Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities....................................................................
Selected Financial Data..............................................
5
6
7 Management’s Discussion and Analysis of Financial
Condition and Results of Operations..........................
Company Overview.................................................
Executive Summary.................................................
Critical Accounting Policies and Estimates ............
Financial Guarantees in Force.................................
Results of Operations...............................................
Liquidity and Capital Resources..............................
Balance Sheet..........................................................
Accounting Standards..............................................
Ambac Assurance Statutory Basis Financial
Results.....................................................................
Ambac UK Financial Results Under UK
Accounting Principles..............................................
Non-GAAP Financial Measures..............................
2
2
2
7
9
10
10
24
24
24
24
24
26
27
27
27
31
33
43
48
52
58
58
59
60
[This page intentionally left blank]
CAUTIONARY STATEMENT PURSUANT TO THE
PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995
In this Annual Report, we have included statements that may
constitute “forward-looking statements” within the meaning of the
safe harbor provisions of the Private Securities Litigation Reform
Act of 1995. Words such as “estimate,” “project,” “plan,”
“believe,” “anticipate,” “intend,” “planned,” “potential” and
similar expressions, or future or conditional verbs such as “will,”
“should,” “would,” “could,” and “may,” or the negative of those
expressions or verbs, identify forward-looking statements. We
caution readers that these statements are not guarantees of future
performance. Forward-looking statements are not historical facts
but instead represent only our beliefs regarding future events,
which may by their nature be inherently uncertain and some of
which may be outside our control. These statements may relate to
plans and objectives with respect to the future, among other things
which may change. We are alerting you to the possibility that our
actual results may differ, possibly materially, from the expected
objectives or anticipated results that may be suggested, expressed
or implied by these forward-looking statements. Important factors
that could cause our results to differ, possibly materially, from
those indicated in the forward-looking statements include, among
others, those discussed under “Risk Factors” in Part I, Item 1A of
this Annual Report on Form 10-K.
Any or all of management’s forward-looking statements here or in
other publications may turn out to be incorrect and are based on
management’s current belief or opinions. Ambac’s actual results
may vary materially, and there are no guarantees about the
performance of Ambac’s securities. Among events, risks,
uncertainties or factors that could cause actual results to differ
materially are: (1) the highly speculative nature of AFG’s
common stock and volatility in the price of AFG’s common stock;
(2) Ambac's inability to realize the expected recoveries, including
RMBS litigation recoveries, included in its financial statements
which would have a materially adverse effect on Ambac
Assurance Corporation's ("AAC") financial condition and may
lead to regulatory intervention; (3) failure to recover claims paid
on Puerto Rico exposures or realization of losses in amounts
higher than expected; (4) increases to loss and loss expense
reserves; (5) inadequacy of reserves established for losses and
loss expenses and possibility that changes in loss reserves may
result in further volatility of earnings or financial results; (6)
uncertainty concerning the Company’s ability to achieve value for
holders of its securities, whether from AAC and its subsidiaries or
from transactions or opportunities apart from AAC and its
subsidiaries, including new business initiatives relating to the
specialty property and casualty program insurance business, the
managing general agency/underwriting business, or related
businesses; (7) potential of rehabilitation proceedings against
AAC; (8) increased fiscal stress experienced by issuers of public
finance obligations or an increased incidence of Chapter 9 filings
or other restructuring proceedings by public finance issuers,
including an increased risk of loss on revenue bonds of distressed
public finance issuers due to judicial decisions adverse to revenue
bond holders; (9) our inability to mitigate or remediate losses,
commute or reduce insured exposures or achieve recoveries or
investment objectives, or the failure of any transaction intended to
accomplish one or more of these objectives to deliver anticipated
results; (10) insufficiency or unavailability of collateral to pay
secured obligations; (11) credit risk throughout Ambac’s business,
including but not limited to credit risk related to residential
mortgage-backed securities, student
loan and other asset
securitizations, public finance obligations and exposures to
reinsurers; (12) the impact of catastrophic environmental or
natural events, including catastrophic public health events like the
COVID-19 pandemic, on significant portions of our insured and
investment portfolios; (13) credit risks related to large single
risks, risk concentrations and correlated risks; (14) the risk that
Ambac’s risk management policies and practices do not anticipate
certain risks and/or the magnitude of potential for loss; (15) risks
associated with adverse selection as Ambac’s insured portfolio
runs off; (16) Ambac’s substantial indebtedness could adversely
affect its financial condition and operating flexibility; (17) Ambac
may not be able to obtain financing or raise capital on acceptable
terms or at all due to its substantial indebtedness and financial
condition; (18) Ambac may not be able to generate the significant
amount of cash needed to service its debt and financial
obligations, and may not be able to refinance its indebtedness;
(19) restrictive covenants in agreements and instruments may
impair Ambac’s ability to pursue or achieve its business
strategies; (20) adverse effects on operating results or the
Company’s financial position resulting from measures taken to
reduce risks in its insured portfolio; (21) disagreements or
disputes with Ambac's insurance regulators; (22) default by one or
more of Ambac's portfolio investments, insured issuers or
counterparties; (23) loss of control rights in transactions for which
we provide insurance due to a finding that Ambac has defaulted;
(24) adverse tax consequences or other costs resulting from the
characterization of the AAC’s surplus notes or other obligations
as equity; (25) risks attendant to the change in composition of
securities in the Ambac’s investment portfolio; (26) adverse
impacts from changes in prevailing interest rates; (27) our results
of operation may be adversely affected by events or
circumstances that result in the impairment of our intangible
assets and/or goodwill that was recorded in connection with
Ambac’s acquisition of 80% of the membership interests of
Xchange; (28) risks associated with the expected discontinuance
of the London Inter-Bank Offered Rate; (29) factors that may
negatively influence the amount of installment premiums paid to
the Ambac; (30) market risks impacting assets in the Ambac’s
investment portfolio or the value of our assets posted as collateral
in respect of interest rate swap transactions; (31) risks relating to
determinations of amounts of impairments taken on investments;
inquiries or
(32)
investigations, and the risk of adverse outcomes in connection
therewith, which could have a material adverse effect on Ambac’s
business, operations, financial position, profitability or cash
flows; (33) actions of stakeholders whose interests are not aligned
with broader interests of the Ambac's stockholders; (34) system
security risks, data protection breaches and cyber attacks; (35)
changes in accounting principles or practices that may impact
Ambac’s reported financial results; (36) regulatory oversight of
Ambac Assurance UK Limited ("Ambac UK") and applicable
regulatory restrictions may adversely affect our ability to realize
value from Ambac UK or the amount of value we ultimately
realize; (37) operational risks, including with respect to internal
processes, risk and investment models, systems and employees,
and failures in services or products provided by third parties; (38)
Ambac’s financial position that may prompt departures of key
employees and may impact the its ability to attract qualified
executives and employees; (39) fluctuations in foreign currency
exchange rates could adversely impact the insured portfolio in the
event of loss reserves or claim payments denominated in a
currency other than US dollars and the value of non-US dollar
denominated securities
(40)
disintermediation within the insurance industry that negatively
impacts our managing general agency/underwriting business; (41)
changes in law or in the functioning of the healthcare market that
impair the business model of our accident and health managing
general underwriter; and (42) other risks and uncertainties that
have not been identified at this time.
investment portfolio;
litigation and
regulatory
risk of
in our
the
| Ambac Financial Group, Inc. 1 2020 FORM 10-K |
PART I
Item 1. Business
INTRODUCTION
Ambac Financial Group, Inc. ("AFG"), headquartered in New
York City, is a financial services holding company incorporated
in the State of Delaware on April 29, 1991. References to
“Ambac,” the “Company,” “we,” “our,” and “us” are to AFG
and its subsidiaries, as the context requires. Ambac's business
operations include:
• Financial Guarantee ("FG") Insurance — Ambac
Assurance Corporation ("Ambac Assurance" or "AAC")
and its wholly owned subsidiary Ambac Assurance UK
Limited
financial guarantee
businesses, both of which have been in runoff since 2008.
(“Ambac UK”),
legacy
• Specialty Property & Casualty Program Insurance —
Currently includes admitted carrier Everspan Insurance
Company and nonadmitted carrier Everspan Indemnity
Insurance Company (collectively, "Everspan" or
the
"Everspan Group"). This platform, which received an A-
Financial Strength Rating from A.M. Best in February
2021, is expected to launch new underwriting programs in
2021.
• Managing General Agency / Underwriting — Currently
includes Xchange Benefits, LLC and Xchange Affinity
Underwriting Agency, LLC (collectively, “Xchange”) a
property and casualty Managing General Underwriter of
which AFG acquired 80% on December 31, 2020. Refer to
Note 3. Business Combination for further information
relating to this acquisition.
AFG has $366 million in net assets (excluding its investment in
subsidiaries) and net operating loss carry-forwards of $3,639
million ($2,182 million of which is allocated to AAC) at
December 31, 2020. See Schedule II for more information on
the holding company.
financial
information, allocated
As of and for the year ended December 31, 2020, management
reviewed
resources and
measured financial performance on a consolidated basis and
accordingly the Company had a single reportable segment. As a
result of the acquisition of Xchange and the expected launch of
the Everspan Group platform, segments will be re-evaluated in
2021.
Corporate Strategy:
The Company's primary goal is to maximize shareholder value
through executing the following key strategies:
its subsidiaries
• Active runoff of AAC and
through
transaction terminations, commutations, restructurings, and
reinsurance with a focus on our watch list credits and
known and potential future adversely classified credits, that
we believe will improve our risk profile, and maximizing
the risk-adjusted return on invested assets;
• Ongoing rationalization of Ambac's capital and liability
structures;
• Loss recovery through active litigation management and
exercise of contractual and legal rights;
• Ongoing review of the effectiveness and efficiency of
Ambac's operating platform; and
• Further expanding into specialty property and casualty
program insurance, managing general agency/underwriting
and potentially other insurance and insurance related
businesses that will generate long-term shareholder value
with attractive risk-adjusted returns and meet other
preestablished criteria.
DESCRIPTION OF THE BUSINESS
Financial Guarantee Insurance Business:
Ambac's Financial Guarantee strategy is to increase the value of
its investment in AAC and Ambac UK. With regards to AAC,
this strategy is subject to the restrictions set forth in the
Settlement Agreement, dated as of June 7, 2010 (the "Settlement
Agreement"), by and among AAC, Ambac Credit Products LLC
("ACP"), AFG and certain counterparties to credit default swaps
with ACP that were guaranteed by AAC, as well as the
Stipulation and Order (as defined in Note 1. Background and
Business Description to the Consolidated Financial Statements
included in Part II, Item 8 of this Form 10-K) and in the
indenture for the Tier 2 Notes (as defined in Note 1. Background
the Consolidated Financial
to
and Business Description
Statements included in Part II, Item 8 of this Form 10-K), each
of which requires OCI (as defined below) and, under certain
circumstances, holders of the debt instruments benefiting from
such restrictions, to approve certain actions taken by or in
respect of AAC. In exercising its approval rights, OCI will act
for the benefit of policyholders, and will not take into account
the interests of AFG. See Note 1. Background and Business
Description to the Consolidated Financial Statements included
in Part II, Item 8 in this Form 10-K for further information.
the obligations guaranteed. Pursuant
Financial guarantee insurance policies provide an unconditional
and irrevocable guarantee which protects the holder of a debt
obligation against non-payment when due of the principal and
to such
interest on
guarantees, AAC and Ambac UK make payments if the obligor
responsible for making payments fails to do so when due.
Financial guarantee revenues consist mostly of premiums earned
from insurance contracts, net of reinsurance. Financial guarantee
expenses consist of: (i) loss and commutation payments; (ii) loss
adjustment expenses; (iii) interest expense on debt and (iv)
insurance intangible amortization.
AAC and Ambac UK have been working toward reducing
uncertainties within their insured portfolios such as exposures to
financially stressed municipal entities (including Puerto Rico)
and asset-backed securities (including residential mortgage-
backed securities ("RMBS") and student loan-backed securities).
Additionally, AAC and Ambac UK are actively prosecuting
legal claims (including RMBS-related lawsuits brought by
AAC), managing their regulatory frameworks, seeking to
optimize capital allocation in a challenging environment that
includes long duration obligations and attempting to retain key
employees.
Opportunities for remediating losses on poorly performing
insured transactions also depend on market conditions, including
the perception of AAC’s creditworthiness, the structure of the
underlying risk and associated policy as well as other
| Ambac Financial Group, Inc. 2 2020 FORM 10-K |
counterparty specific factors. AAC's ability to commute policies
or purchase certain investments may also be limited by available
liquidity.
The deterioration of AAC's and Ambac UK's financial condition
beginning in 2007 has prevented these companies from being
able to write new financial guaranty business. Not writing new
business has and continues to negatively impact Ambac’s
operations and financial results. AAC’s ability to pay dividends
and, as a result, AFG’s liquidity, have been significantly
restricted by the deterioration of AAC’s financial condition and
by regulatory, legal and contractual restrictions. It is highly
unlikely that AAC will be able to make dividend payments to
AFG for the foreseeable future. Refer to "Dividend Restrictions,
Including Contractual Restrictions" below and Note 9. Insurance
Regulatory Restrictions
the Consolidated Financial
Statements included in Part II, Item 8 in this Form 10-K, for
more information on dividend payment restrictions.
to
Interest rate derivative transactions are executed through Ambac
Financial Services (“AFS”), a wholly-owned subsidiary of
AAC. The primary activity of AFS is to partially hedge interest
rate risk in the financial guarantee insurance and investment
portfolios. Accordingly, interest rate derivatives are positioned
to benefit from rising rates. Under agreements governing
interest rate derivative positions, AFS generally must post
collateral or margin in excess of the market value of the swaps
and futures contracts. All AFS derivative contracts containing
ratings-based downgrade triggers that could result in collateral
or margin posting or a termination have been triggered. A
termination of AFS’s derivatives could result in losses. AFS has
borrowed cash and securities from AAC to help support its
collateral and margin posting requirements, previous termination
payments and other cash needs.
Credit risks relating to interest rate derivative positions primarily
relate to the default of a counterparty. AFS's interest rate
derivatives generally consist of centrally cleared swaps, US
treasury futures and some over-the-counter ("OTC") swaps with
financial guarantee
counterparties.
Counterparty default exposure is mitigated through the use of
industry standard collateral posting agreements or margin
posting requirements.
customers or bank
• Cleared swaps, futures and OTC derivatives with bank
counterparties require margin or collateral to be posted up
to or in excess of the market value of the interest rate
derivatives. Interest rate derivative contracts entered into
with financial guarantee customers are not subject to
collateral posting agreements. In some cases, interest rate
derivatives between Ambac and financial guarantee
customers are placed through a third party financial
intermediary and similarly do not require collateral posting.
• Credit risk associated with financial guarantee customer
derivatives and credit derivatives, is managed through the
risk management processes described
the Risk
Management Group section below.
in
Ambac manages a variety of market risks inherent in its
businesses, including credit, market, liquidity, operational and
legal. These risks are identified, measured, and monitored
through a variety of control mechanisms, which are in place at
different levels throughout the organization. See “Quantitative
and Qualitative Disclosures About Market Risk” included in
Part II, Item 7A in this Form 10-K for further information.
Segregated Account
In March 2010, AAC established a segregated account pursuant
to Wisconsin Stat. §611.24(2) (the “Segregated Account”) to
segregate certain segments of AAC’s liabilities. The Office of
the Commissioner of Insurance for the State of Wisconsin
(“OCI” (which term shall be understood to refer to such office
as regulator of AAC and to refer to the Commissioner of
Insurance for the State of Wisconsin as rehabilitator of the
the context
Segregated Account (the “Rehabilitator”), as
requires)) commenced
the
in
Wisconsin Circuit Court for Dane County (the “Rehabilitation
Court”) with respect to the Segregated Account (the “Segregated
Account Rehabilitation Proceedings”) in order to permit OCI to
facilitate an orderly run-off and/or settlement of the liabilities
allocated to the Segregated Account pursuant to the provisions
of the Wisconsin Insurers Rehabilitation and Liquidation Act.
AAC, itself, did not enter rehabilitation proceedings.
rehabilitation proceedings
A plan of rehabilitation for the Segregated Account, as amended
(the "Segregated Account Rehabilitation Plan"), became
effective on June 12, 2014. On September 25, 2017 the
Rehabilitator filed a motion in the Rehabilitation Court seeking
entry of an order approving an amendment to the Segregated
Account Rehabilitation Plan (the "Second Amended Plan of
Rehabilitation"). Following the conclusion of a Confirmation
Hearing on January 22, 2018, the Rehabilitation Court entered
an order granting the Rehabilitator's motion and confirming the
Second Amended Plan of Rehabilitation. On February 12, 2018
the Second Amended Plan of
(the "Effective Date"),
Rehabilitation
the
became
rehabilitation of the Segregated Account was concluded. Refer
to Note 1. Background and Business Description to the
Consolidated Financial Statements included in Part II, Item 8 in
this Form 10-K, for more information on the Segregated
the Segregated Account Rehabilitation
Account
Proceedings.
Consequently,
effective.
and
Risk Management
the assets and/or obligor supporting
Ambac’s financial guarantee insurance policies and credit
derivative contracts expose the Company to the direct credit risk
of
the guaranteed
obligation. In addition, insured transactions expose Ambac to
indirect risks that may increase our overall risk, such as credit
risk separate from, but correlated with, our direct credit risk;
market; model; economic; natural disaster and mortality or other
non-credit type risks. Please refer to Item 7 “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations - Financial Guarantees in Force” section below for
details on the financial guarantee insured portfolio.
The Risk Management Group ("RMG") is primarily responsible
for the development, implementation and oversight of loss
mitigation strategies, surveillance and remediation of the insured
financial guarantee portfolio (including through the pursuit of
recoveries in respect of paid claims and commutations of
policies). Our ability to execute certain risk management
activities may be limited by the restrictions set forth in the
Settlement Agreement, the Stipulation and Order and the
indenture for the Tier 2 Notes. See Note 1. Background and
| Ambac Financial Group, Inc. 3 2020 FORM 10-K |
Business Description to the Consolidated Financial Statements
included in Part II, Item 8 in this Form 10-K for further
information.
Ambac’s RMG has an organizational structure designed around
four primary areas of focus: Surveillance, Risk Remediation,
Credit Risk Management and Loss Reserving and Analytics.
Surveillance
This group's focus is on the early identification of potential
stress or deterioration in connection with credit exposures in the
insured portfolio and the related credit analysis associated with
these and other insured portfolio exposures. Additionally,
Surveillance will evaluate the impact of changes in the
economic, regulatory or political environment on the insured
portfolio.
Analysts in this group perform periodic credit reviews of insured
exposures according to a schedule based on the risk profile of
the guaranteed obligations or as necessitated by specific credit
events or other macro-economic variables. Risk-adjusted
surveillance strategies have been developed for each bond type
with review periods and scope of review based upon each bond
type’s risk profile. The risk profile is assessed regularly in
response to our own experience and judgments or external
factors such as the economic environment and industry trends.
The focus of a credit review is to assess performance, identify
credit trends and recommend appropriate credit classifications,
ratings and changes to a transaction or bond type’s review
period and surveillance requirements. Please refer to Note 2.
Basis of Presentation and Significant Accounting Policies to the
Consolidated Financial Statements included in Part II, Item 8 in
this Form 10-K for further discussion of the various credit
classifications utilized by Ambac. If a problem is detected, the
Surveillance group will then work with the Risk Remediation
group on a loss mitigation plan, as necessary.
surveillance activities
The insured portfolio contains exposures that are correlated and/
include
or concentrated. RMG's
identifying these types of exposures and identifying the risks
that would or could trigger credit deterioration across these
related exposures. This is the case with student loans and
RMBS, for example, which have several correlations including
those associated with consumer lending, unemployment and
home prices. In the future, Ambac’s portfolio may be subject to
similar credit deterioration arising from concentrated and/or
correlated risks. Examples of other such risks that could impact
our portfolio, and that our surveillance is designed to monitor
include the impact of potential municipal bankruptcy contagion,
the impact of tax reform on state and municipal bond issuers, or
the impact of large scale domestic military cutbacks on our
privatized military housing portfolio or event risk such as
pandemics (e.g., COVID-19), natural disasters or other regional
stresses. Most such risks cannot be predicted and may
materialize unexpectedly or develop rapidly. Although our
surveillance allows us to connect the event and stress to the
related exposures and assign an adverse credit classification and
estimate losses across the affected credits, when necessary, we
may not have adequate resources or contractual rights and
remedies to mitigate loss arising from such risks.
Risk Remediation
Risk Remediation's focus is on exposure reduction, loss
mitigation, avoiding defaults, and restructuring related to the
insured portfolio. In particular, this group focuses on reducing
exposure to credits that have current negative developing trends,
have the potential for future adverse development or are already
adversely classified by, among other things, securing rights and
remedies, both of which may help to mitigate losses in the event
of further deterioration or event of default, or, as available,
working with an issuer to refinance or retire debt.
Loss mitigation and restructuring focuses on the analysis,
implementation and execution of commutation and related
claims reduction, defeasance or workout strategies for policies
with potential future claims. Efforts are focused on minimizing
claims and maximizing recoveries, typically following an event
of default. The emphasis on reducing risk is centered on
reducing exposure on a prioritized basis.
For certain adversely classified, survey list and watch list
credits, RMG analysts will develop and
implement a
remediation or loss mitigation plan that could include actions
such as working with the issuer, trustee, bond counsel, servicer
and other interested parties in an attempt to remediate the
problem and minimize AAC’s exposure to potential loss. Other
actions could include working with bond holders and other
economic stakeholders to negotiate, structure and execute
solutions, such as commutations. In addition, reinsurance is used
as a remediation tool to reduce exposure to certain targeted
policies and large concentrations.
Adversely classified, survey list and watch list credits are
tracked closely by RMG analysts as part of the risk remediation
process and are discussed at regularly scheduled meetings with
Credit Risk Management (see discussion following in “Credit
Risk Management”). In some cases, the RMG will engage
restructuring or workout experts, attorneys and/or other
consultants with appropriate expertise in the targeted loss
mitigation area
the
underlying contracts or collateral, providing industry specific
advice and/or executing strategies.
to assist management
in examining
We have established cross-functional teams in key areas of
focus, comprised of personnel both within the RMG and in other
departments, to target proactive mitigation and remediation of
losses and potential future losses associated with certain credits
and sectors in the insured portfolio. An example of such efforts
includes the teams of professionals focused on the review and
enforcement of contractual representations and warranties
("R&W") supporting RMBS policies. Members of these cross-
functional teams will often work with external experts in the
pursuit of risk reduction efforts.
Credit Risk Management ("CRM")
The CRM function manages the decision process for all material
matters that affect credit exposures within the insured portfolio.
CRM provides a forum for independent assessments, reviews
and approvals and drives consistency and timeliness. The scope
of credit matters under the purview of CRM includes material
amendments, consents and waivers, evaluation of remediation or
loss mitigation plans, credit
review scheduling, credit
classifications, rating designations, review of watch list or
adversely classified credits, sector reviews and overall portfolio
| Ambac Financial Group, Inc. 4 2020 FORM 10-K |
reviews. Formal plans or transactions that relate to risk
remediation, loss mitigation or restructuring may also require
Risk Committee approval.
Control Rights
In structured transactions, including certain structured public
finance transactions, AAC may be the control party as a result of
insuring the transaction’s senior class or tranche of debt
obligations. The control party may direct specified parties,
usually the trustee, to take or not take certain actions following
contractual defaults or trigger events. Control rights and the
scope of direction and remedies vary considerably among our
insured transactions. Because Ambac is party to and/or has
certain rights in documents supporting transactions in the
insured portfolio, Ambac frequently receives requests for
amendments, consents and waivers (“ACWs”). RMG reviews,
analyzes and processes all requests for ACWs. The decision to
approve or reject ACWs is based upon certain credit factors,
such as the issuer’s ability to repay the bonds and the bond’s
security features and structure. As part of the CRM process,
members of the RMG review, analyze and process all requests
for ACWs.
As a part of the Segregated Account Rehabilitation Proceedings,
the Rehabilitation Court enjoined certain actions by other parties
to preserve AAC’s control rights that could otherwise have
lapsed or been compromised. Pursuant to the Second Amended
Plan of Rehabilitation and orders of the Rehabilitation Court,
such protections continue after the conclusion of the Segregated
Account Rehabilitation Proceedings.
Watch List and Adversely Classified Credits
Watch list and adversely classified credits are tracked closely by
the appropriate RMG teams and discussed as part of the CRM
process. Adversely classified credit meetings include members
of RMG and other groups within the Company, as necessary. As
part of the review, relevant information, along with the plan for
corrective actions and a reassessment of the credit’s rating and
credit classification is considered. Internal and/or external
counsel generally review the documents underlying any problem
credit and, if applicable, an analysis is prepared outlining
Ambac’s rights and potential remedies, the duties of all parties
involved and recommendations for corrective actions. Ambac
also meets with relevant parties to the transaction as necessary.
The review schedule for adversely classified credits is tailored to
the remediation plan to track and prompt timely action and
internal and external resourcing. A summary of
proper
developments regarding adversely classified credits and credit
trends is also provided to AFG’s, AAC’s and Ambac UK's
Board of Directors no less than quarterly.
Ambac assigns internal credit ratings to individual exposures as
part of the surveillance process. These internal credit ratings,
which represent Ambac’s independent judgments, are based
upon underlying credit parameters consistent with the exposure
type.
Loss Reserving and Analytics ("LRA")
LRA manages the quarterly loss reserving process for insured
portfolio credits with projected policy claims. It also supports
the development, operation and/or maintenance of various
analytical models used in the loss reserving process as well as in
other risk management functions. LRA works with surveillance
and risk remediation analysts responsible for a particular credit
on the development, review and implementation of loss reserve
scenarios and related analysis.
Specialty Property & Casualty Program Insurance
The specialty property & casualty program insurance business
currently
Insurance
includes admitted carrier Everspan
Company and nonadmitted carrier Everspan
Indemnity
Insurance Company (collectively, “Everspan Group”). Everspan
Group received a Class VIII, A- Financial Strength Rating from
A.M. Best Rating Services, Inc. in February 2021, has capital in
excess of $100 million, and is expected to begin writing new
property and casualty specialty insurance programs in the first
half of 2021. Everspan Group is pursuing a sustainable, long
term niche property/casualty program strategy with diverse
classes of risks and plans to source business through diverse
channels
including Managing General Agents, brokers,
producers and others. Everspan Group's business model will rely
on third party producers or capacity providers to provide the
infrastructure associated with policy administration, claims
handling and other insurance company services. Everspan
Group may retain up to 30% of it gross written premiums and, to
the extent applicable, will reinsure the remainder to reinsurers
and other providers of risk capital. With its strong capital base,
Everspan Group will be differentiated in the specialty program
insurance market with its focus on underwriting results, risk
retention, long-term relationships, and the avoidance of channel
conflicts.
Everspan Group hired a management team with a successful
track record in specialty program insurance business and
relationships with Managing General Agents, brokers, producers
and third party claims administrators.
The specialty property & casualty program insurance business
will generate income from (i) ceding fees, by offering carrier
capacity to specialty general agents and other producers who
sell, control and administer books of insurance business that are
supported by third parties that assume reinsurance risk and (ii)
net insurance underwriting income from any retained risk. Its
core expenses will include compensation, agent commissions
and other overhead costs.
Everspan Group will face competition from long standing
program business market participants such as State National as
well as more recent entrants such as Clear Blue Insurance
Group, Spinnaker Insurance Company, Trisura and Accredited
Surety and Casualty Company, Inc. Everspan Group will also
compete with new companies that continue to be formed to enter
the insurance markets, particularly companies with new or
"disruptive" technologies or business models. Competition may
take the form of lower prices, broader coverages, greater product
flexibility, higher coverage limits, higher quality services or
higher ratings by independent rating agencies.
Few barriers exist to prevent insurers from entering target
markets within the property and casualty industry. Market
conditions and capital capacity
the degree of
competition at any point in time. During periods of excess
underwriting capacity, as defined by the availability of capital,
competition can result in lower pricing and less favorable policy
terms and conditions for insurers. During periods of reduced
influence
| Ambac Financial Group, Inc. 5 2020 FORM 10-K |
underwriting capacity, pricing and policy terms and conditions
are generally more favorable for insurers. Historically, the
performance of the property and casualty insurance industries
has tended to fluctuate in cyclical periods of price competition
and excess underwriting capacity, followed by periods of high
premium rates and shortages of underwriting capacity. At any
given time, Everspan Group's portfolio of insurance products
could experience varying combinations of these characteristics.
This cyclical market pattern can be more pronounced in the
specialty insurance and reinsurance markets in which Everspan
Group competes than the standard insurance market.
Managing General Agency / Underwriting
On December 31, 2020, Ambac acquired 80% of
the
membership interests of Xchange. Formed in 2010, Xchange is
a specialty-niche, property and casualty Managing General
Underwriter ("MGU") focused on accident and health ("A&H")
products. Below is a description of its largest products for
which it provides underwriting services:
Employer Stop Loss ("ESL") — provides protection for self-
insured employers by serving as a reimbursement mechanism
for catastrophic claims exceeding pre-determined levels.
Limited Medical ("LM") — designed for those not covered by
traditional medical programs and sold primarily through affinity
groups, providing a variety of medically related benefits such as
hospital or physician visits.
Short-term Medical ("STM") — sold primarily through affinity
groups, providing comprehensive medical coverage for short
periods of time (i.e. less than one year).
Xchange's management team, which retained 20% ownership of
the business, has significant longstanding relationships with
carriers, agents, policyholders, affinity groups and reinsurers.
Xchange conducts business
through approximately seven
insurance carriers and dozens of agents and other distributors.
is compensated
Xchange
its services primarily by
for
commissions paid by insurance companies for underwriting,
structuring and/or administering polices and, in the case of ESL,
managing claims under an agency agreement. Commission
revenues are usually based on a percentage of the premiums paid
by the insured. Xchange is also eligible to receive profit sharing
contingent commissions on certain programs (mostly LM and
STM) based on the underwriting results of the policies it writes,
which may cause some variability in revenue and earning
recognition. Business written by Xchange is generally
concentrated in January and July, which may result is revenue
and earnings concentrations in the first and third quarters each
calendar year. Xchange's core expenses include commissions it
pays to its independent agents and compensation for its
management and staff, which currently total 20 individuals.
The MGU business is highly competitive and a number of firms
actively compete with Xchange for customers and insurance
carrier capacity. However, the ESL market is increasing in size
as large companies continue to transition from fully insured to
self-funded. As the market size increases, capital is flowing into
the market, but prices and margins remain stable. For LM and
STM, overall market conditions remain stable. The market as a
whole remains vast, as entrepreneurs and the unemployed seek
options for individual insurance. Competition for Xchange's
business comes
from both direct carriers and other
intermediaries and, depending on the product, may include Blue
Cross, UnitedHealth, CIGNA, Aetna, Tokyo Marine, Houston
Casualty Company, Sun Life, United Health, Axis, Chubb, and
National General.
including
(i) organic growth,
Xchange is one component of Ambac's broader Managing
General Agent ("MGA")/MGU business strategy. Ambac
expects to grow the MGA/MGU business using several
(ii) additional
strategies,
acquisitions and/or partnerships, and (iii) establishing de-novo
platforms. Future expansion of the MGA/MGU business is
expected to include other property and casualty products and
services in addition to A&H. Insurance underwritten through
Ambac's MGA/MGUs may utilize the Everspan Group as an
insurance carrier, but will not necessarily be required to do so,
depending on a number of strategic and operational
considerations.
ENTERPRISE RISK MANAGEMENT
The Company's policies and procedures relating
to risk
assessment and risk management are overseen by its Board of
Directors. The Board of Directors takes an enterprise-wide
approach to risk management oversight that is designed to
support the Company's business plans at a level of risk
considered by the Board to be reasonable. A fundamental part of
risk assessment and risk management is not only understanding
the risks the Company faces and what steps management is
taking to manage those risks, but also understanding what level
of risk is appropriate for the Company. The Board of Directors
periodically reviews the Company's business plan, factoring risk
management into account. It also approves the Company's risk
appetite statements, which articulate the Company's tolerance
for certain risks and describes the general types of risk that the
Company accepts, within certain parameters, or attempts to
avoid.
While the Board of Directors has the ultimate oversight
responsibility for
the risk management process, various
committees of the Board also have responsibilities related to risk
assessment and risk management, and management has
responsibility for managing the risks to which the Company is
exposed and reporting on such matters to the Board of Directors
and applicable Board committees.
to
the
respect
risk assessment and
integrity of Ambac’s
• The Audit Committee oversees the management of risks
associated with
financial
statements and its compliance with legal and regulatory
requirements. In addition, the Audit Committee discusses
policies with
risk
management, including major financial risk exposures and
the steps management has taken to monitor and control
such exposures. The Audit Committee reviews with
management, internal auditors and independent auditors
Ambac's critical accounting policies, Ambac's system of
internal controls over financial reporting and the quality
and appropriateness of disclosure and content in the
financial
financial
communications.
and other
statements
external
• The Compensation Committee oversees the management of
risk primarily associated with our ability to attract,
| Ambac Financial Group, Inc. 6 2020 FORM 10-K |
motivate and retain quality talent (particularly executive
talent) and with setting financial incentives that do not
motivate undue risk-taking.
• The Governance and Nominating Committee oversees the
management of risk primarily associated with Ambac’s
ability to attract and retain quality directors, Ambac’s
corporate governance programs and practices and our
compliance therewith. Additionally, the Governance and
Nominating Committee oversees
for
evaluation of the performance of the Board of Directors
and
risk
its committees each year and considers
management effectiveness as part of its evaluation. The
Governance and Nominating Committee also performs
oversight of the business ethics and compliance program,
and reviews compliance with Ambac’s Code of Business
Conduct.
the processes
• The Strategy Committee oversees the management of risk
and risk appetite primarily with respect to strategic plans
and initiatives.
The Board of Directors also receives quarterly updates from
Board committees, and
to
individual committee activities as appropriate.
the Board provides guidance
In order to assist the Board of Directors in overseeing Ambac’s
risk management, Ambac uses enterprise risk management, a
company-wide process that involves the Board of Directors,
management and other personnel in an integrated effort to
identify, assess and manage a broad range of risks (e.g., credit,
financial, legal, liquidity, market, model, operational, regulatory,
reputational and strategic), that may affect the Company’s
ability to execute on its corporate strategy and fulfill its business
objectives. The Enterprise Risk Committee (“ERC”), which is a
management committee,
level
management responsible for assisting in the management of the
Company’s risks on an individual and aggregate basis. The ERC
produces the relevant risk management information for senior
management and the Board of Directors.
is comprised of
senior
Ambac management has established management committees to
assist in managing the risks throughout the enterprise. These
committees will meet monthly or as needed on an ad hoc basis.
• The AAC Risk Committee's objective is to establish an
interdisciplinary team of professionals to provide oversight
of the key risk remediation issues impacting AAC and
Ambac UK. The purview of the committee is to review
and approve risk remediation activities for the financial
guarantee
the Risk
insured portfolio. Additionally,
Committee will provide oversight and review new risk
remediation structures or approaches in connection with
risk remediation plans or anticipated transactions. Members
of the Risk Committee include the Chief Executive Officer,
Head of Risk Management, Chief Financial Officer and
senior managers from throughout risk, corporate services,
operations, investment management, legal and finance.
• The Asset Liability Management Committee's (“ALCO”)
objective is to foster an enterprise wide culture and
approach to liquidity management, asset management, asset
valuation and hedging. Members of ALCO include the
Chief Executive Officer, Chief Financial Officer, Head of
Risk Management and senior managers from investment
management and the Risk Management Group.
• The Disclosure Committee's objective is to assist the CEO
and CFO in their responsibilities to design, establish,
maintain and evaluate the effectiveness of disclosure
controls and procedures. Members of the Disclosure
Committee include the Chief Executive Officer, Chief
Financial Officer, Chief Accounting Officer, Head of Risk
Management and senior managers from throughout finance,
legal, risk and corporate services.
Everspan Group established an Underwriting Committee in
2021 to review the strategy, and provide oversight of the active
underwriting operations of Everspan Group, and to assist the
Boards of the Everspan Group companies in overseeing the
integrity and effectiveness of Everspan Group’s underwriting
risk management framework. Members of the committee
include Ambac's Chief Executive Officer, key members of
Everspan Group management and other senior managers or
advisors of Ambac.
Xchange established an Underwriting Committee in 2021 for the
purpose of reviewing and approving any new business initiative
or product line proposed to be undertaken by Xchange.
Members of the Underwriting Committee include Ambac's
Chief Executive Officer, Chief Financial Officer, key members
of Xchange management and other senior managers or advisors
of Ambac.
AVAILABLE INFORMATION
Our Internet address is www.ambac.com. We make available
through the investor relations section of our web site, annual
reports on Form 10-K, quarterly reports on Form 10-Q and
current reports on Form 8-K, and any amendments to those
reports, filed or furnished pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934, as amended, as well as
proxy statements, as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the U.S.
Securities and Exchange Commission. Our Investor Relations
Department can be contacted at Ambac Financial Group, Inc.,
One World Trade Center, 41st Floor, New York, New York
10007, Attn: Investor Relations, telephone: 212-208-3222 email:
ir@ambac.com. The reference to our website address does not
constitute inclusion or incorporation by reference of the
information contained on our website in this Form 10-K or other
filings with the SEC and the information contained on our
website is not part of this document.
INSURANCE REGULATORY MATTERS AND
OTHER RESTRICTIONS
Regulatory Matters
United States
Ambac Assurance is domiciled in the state of Wisconsin and is
therefore subject to the insurance laws and regulations of the
State of Wisconsin and regulated by the Wisconsin Office of the
Commissioner of Insurance (“OCI”). Everspan Indemnity
Insurance Company ("Everspan Indemnity") and its wholly
owned subsidiary, Everspan Insurance Company ("Everspan
Insurance") are domiciled in the state of Arizona and are
therefore subject to the insurance laws and regulations of the
| Ambac Financial Group, Inc. 7 2020 FORM 10-K |
State of Arizona and regulated by the Arizona Department of
Insurance and Financial Institutions (“DIFI”). AAC and
Everspan Insurance are also subject to the insurance laws and
regulations of the other jurisdictions in which they are licensed.
See Note 9.
the
Consolidated Financial Statements included in Part II, Item 8 in
this Form 10-K
regulatory
restrictions.
Insurance Regulatory Restrictions
information on
further
for
to
regulation
of regulated entities, and information stored on those systems.
The
for
imposes a governance
cybersecurity program, risk based minimum standards for
technology systems for data protection, monitoring and testing,
third-party service provider reviews, security incident response
and reporting to NYDFS of certain security incidents, annual
certifications of regulatory compliance to NYDFS, and other
requirements.
framework
is subject
Xchange
is a property and casualty managing general
underwriter, specializing in accident and health insurance.
Xchange, like other managing general agents and program
administrators,
licensing requirements and
to
regulation by insurance regulators in various states in which
they conduct business. Every state and Washington, D.C. have
enacted a version of the NAIC Model Managing General Agents
Act, which governs licensing and the relationship between
insurers and managing general agents.
In addition, pursuant to the terms of the Settlement Agreement,
the Stipulation and Order and the indenture for the Tier 2 Notes,
AAC must seek prior approval by OCI of certain corporate
actions. The Settlement Agreement, Stipulation and Order and
indenture for the Tier 2 Notes include covenants which restrict
the operations of AAC. The Settlement Agreement will remain
in force until the surplus notes issued thereunder have been
redeemed, repurchased or repaid in full. The Stipulation and
Order will remain in force for so long as OCI determines it to be
necessary. The indenture for the Tier 2 Notes will remain in
force until the Tier 2 Notes have been redeemed, repurchased or
repaid in full. Certain of the restrictions in the Settlement
Agreement and indenture for the Tier 2 Notes may be waived
with the approval of the OCI and/or the requisite percentage of
holders of debt securities issued thereunder.
Cybersecurity and Privacy Regulation
Ambac and its subsidiaries are subject to various U.S. Federal
and state laws and regulations with respect to privacy, data
protection and cybersecurity that require financial institutions,
including insurance companies and agencies, to safeguard
personal and other sensitive information, and may provide for
notice of their practices relating to the collection, disclosure and
processing of personal information, and any related security
breaches. For example, the National Association of Insurance
Commissioners (“NAIC”), an organization of state insurance
regulators, adopted the Insurance Data Security Model Law
(“NAIC Model Law”) that creates rules for insurers and other
covered entities addressing data security and the investigation
and notification of cybersecurity events involving unauthorized
access to, or the misuse of, certain nonpublic information. This
includes maintaining an information security program based on
third-party service
ongoing
providers, investigating data breaches and notifying regulators
of a cybersecurity event. Legislation based on the NAIC Model
Law has been enacted in eleven states and may be enacted in
other states. Our subsidiaries, as insurance companies and
agencies licensed in the State of New York, are also required to
comply with the New York Department of Financial Services
(“NYDFS”)
establishes
requirements for covered financial services institutions to
implement a cybersecurity program designed to protect the
confidentiality, integrity and availability of information systems
risk assessment, overseeing
regulation, which
cybersecurity
United Kingdom
The Prudential Regulatory Authority ("PRA") and Financial
Conduct Authority ("FCA") (and their predecessor regulator the
Financial Services Authority (“FSA”)) exercise significant
oversight of Ambac UK. In 2009, the FSA limited Ambac UK’s
license to undertaking only run-off related activity. As such,
Ambac UK is authorized to run-off its insurance portfolio in the
United Kingdom and a number of other EU countries. EU
legislation allowed Ambac UK to conduct business in EU states
other than the United Kingdom through a “passporting”
arrangement, which eliminated the necessity of additional
licensing or authorization in those other EU jurisdictions.
On December 31, 2020, Ambac UK's authorization to run-off
insurance policies in the EU through passporting arrangements
ceased. This was a consequence of the end of the transition
period agreed between the UK Government and the EU
following the UK's exit from the EU on January 31, 2020.
Ambac UK's outstanding policies in the EU were either
commuted or the benefits of those policies were transferred to
UK entities during the year. Ambac UK therefore no longer
services any
the EU. Ambac UK
maintained a branch in Milan, Italy until December 18, 2020,
but closed the branch on that date following the transfer of the
last remaining policy in the branch to the UK on 1 December
2020. See Item 1A. Risk Factors in Part I, Item 1A and Note 9.
Insurance Regulatory Restrictions to the Consolidated Financial
Statements included in Part II, Item 8 in this Form 10-K for
further information on Brexit related developments as well as
other regulatory restrictions.
insurance policies
in
Regulation of change in control
Under applicable Wisconsin and Arizona law, any acquisition of
control of AFG, or any other direct or indirect acquisition of
control of Ambac Assurance or the Everspan Group, requires the
prior approval of OCI and DIFI, respectively. “Control” is
defined as the direct or indirect power to direct or cause the
direction of the management and policies of a person. Any
purchaser of 10% or more of the outstanding voting stock of a
corporation is presumed to have acquired control of that
corporation and its subsidiaries unless the OCI or DIFI, as
applicable, upon application, determines otherwise. For
purposes of this test, AFG believes that a holder of common
stock having the right to cast 10% or more of the votes which
may be cast by the holders of all shares of common stock of
AFG would be deemed to have control of Ambac Assurance,
Everspan Indemnity and Everspan Insurance within the meaning
of the applicable Wisconsin and Arizona insurance laws and
regulations. The United Kingdom has similar requirements
applicable in respect of AFG, as the ultimate holding company
of Ambac UK.
| Ambac Financial Group, Inc. 8 2020 FORM 10-K |
Dividend Restrictions, Including Contractual Restrictions
INVESTMENTS AND INVESTMENT POLICY
Due to contractual and regulatory restrictions, AAC has been
unable to pay ordinary dividends to AFG since 2008 and will be
unable to pay ordinary dividends in 2021. AAC’s ability to pay
dividends is further restricted by the Settlement Agreement, the
Stipulation and Order, the indenture for the Tier 2 Notes and the
terms of its Auction Market Preferred Shares ("AMPS"). See
Note 9. Insurance Regulatory Restrictions to the Consolidated
Financial Statements included in Part II, Item 8 in this Form 10-
K for further information on dividends. As a result of these
restrictions, AAC is not expected to pay dividends to AFG for
the foreseeable future.
Everspan Indemnity and Everspan Insurance are also subject to
to pay dividends.
regulatory restrictions on
Everspan Indemnity and Everspan Insurance do not have
sufficient earned surplus at this time to pay ordinary dividends
under the insurance laws and regulations of Arizona.
their ability
While the UK insurance regulatory laws impose no statutory
restrictions on an insurer’s ability to declare a dividend, the
PRA’s and FCA’s capital requirements in practice act as a
restriction on the payment of dividends, where a firm has a
lower level of regulatory capital than its regulatory capital
requirement as is the case for Ambac UK. Further, the FSA
amended Ambac UK’s license in 2010 such that the PRA must
specifically approve any transfer of value and/or assets from
Ambac UK to AAC or any other Ambac group company, other
than in respect of certain disclosed contracts between the two
parties (such as in respect of a management services agreement
between AAC and Ambac UK). As a result, Ambac UK is not
expected to pay any dividends to AAC for the foreseeable
future.
Pursuant to the Settlement Agreement and the indenture for the
Tier 2 Notes, AAC may not make any “Restricted
Payment” (which includes dividends from AAC to AFG) in
excess of $5 million in the aggregate per annum, other than
Restricted Payments from AAC to AFG in an amount up to $7.5
million per annum solely to pay operating expenses of AFG.
Concurrent with making any such Restricted Payment, a pro rata
amount of AAC's surplus notes would also need to be redeemed
at par. Any such payment on surplus notes would require either
payment or collateralization of a proportional amount of the Tier
2 Notes (or interest thereon) in accordance with the terms of the
Tier 2 Note indenture.
The Stipulation and Order requires OCI approval for the
payment of any dividend or distribution on the common stock of
AAC.
Under the terms of AAC’s AMPS, dividends may not be paid on
the common stock of AAC unless all accrued and unpaid
dividends on the AMPS for the then current dividend period
have been paid, provided that dividends on the common stock
may be made at all times for the purpose of, and only in such
amounts as are necessary for, enabling AFG (i) to service its
indebtedness for borrowed money as such payments become due
or (ii) to pay its operating expenses. If dividends are paid on the
common stock as provided in the prior sentence, dividends on
the AMPS become cumulative until
that all
accumulated and unpaid dividends have been paid on the
AMPS.
the date
As of December 31, 2020,
the consolidated non-VIE
investments of Ambac had an aggregate fair value of
approximately $3,544 million. Investments are managed both
internally by experienced investment managers and externally
by investment management firms. All investments are made in
accordance with the general objectives, policies, and guidelines
for investments reviewed or overseen by the Board of Directors
of the applicable subsidiary. These policies and guidelines
include liquidity, credit quality, diversification and duration
objectives and are periodically reviewed and revised as
appropriate. Additionally, senior credit personnel monitor the
portfolio on a continuous basis.
the
As of December 31, 2020, the AAC and Everspan Group non-
VIE investment portfolios had an aggregate fair value of
approximately $2,603 million. The investment objective is to
achieve the highest risk-adjusted after-tax return on a diversified
portfolio of fixed maturity investments and pooled investment
funds consistent with the respective company's risk tolerance
while employing active asset/liability management practices to
satisfy all operating and strategic liquidity needs. In addition to
internal investment policies and guidelines, the investment
portfolio of each company is subject to limits on the types and
quality of investments imposed by applicable insurance laws and
regulations of the jurisdictions in which it is licensed. The Board
of Directors of each respective subsidiary approves any changes
its guidelines, AAC
to
opportunistically purchases and sells AAC and Ambac UK
insured securities given their relative risk/reward characteristics.
In certain instances, AAC may exceed its established credit
rating or concentration limits with appropriate regulatory
approval. Changes to AAC’s investment policies are subject to
approval by OCI pursuant to covenants made by AAC in the
Settlement Agreement, the Stipulation and Order and the
indenture for the Tier 2 Notes. See Note 1. Background and
Business Description to the Consolidated Financial Statements
included in Part II, Item 8 in this Form 10-K for more
information about the Settlement Agreement, the Stipulation and
Order and the indenture for the Tier 2 Notes. Such requirements
could adversely impact the performance of the investment
portfolio.
investment policy. Within
As of December 31, 2020, the non-VIE Ambac UK investment
portfolio had an aggregate fair value of approximately $651
million. Ambac UK’s investment policy is designed with the
primary objectives of ensuring a reasonable risk-adjusted return
over the remaining runoff of the insured portfolio and that
Ambac UK is able to meet its financial obligations as they fall
due, in particular with respect to policy holder claims. Ambac
UK’s investment portfolio is primarily diversified fixed maturity
securities and pooled investment funds. The portfolio is subject
to internal investment guidelines and may be subject to limits on
types and quality of investments imposed by its regulator. The
Board of Directors of Ambac UK approves any changes or
exceptions to Ambac UK’s investment policy.
As of December 31, 2020, the non-VIE AFG (parent company
only, excluding investments in subsidiaries) investment portfolio
had an aggregate fair value of approximately $290 million. The
primary investment objective is to preserve capital for strategic
uses while maximizing income. The investment portfolio is
| Ambac Financial Group, Inc. 9 2020 FORM 10-K |
subject to internal investment guidelines. Such guidelines set
forth minimum credit rating requirements and credit risk
concentration limits. Included in the investment portfolio is
AFG's investment in securities insured or issued by AAC,
including surplus notes ($59 million fair value at December 31,
2020) that are eliminated in consolidation.
establish market-based compensation levels. We believe that our
current compensation and
reflect high
performance expectations as part of our merit pay philosophy.
The targeted use of long-term equity incentive plan awards for
key talent is an important element of Ambac’s long-term
retention strategy.
incentive
levels
The following table provide certain information concerning the
consolidated investments of Ambac:
Item 1A. Risk Factors
Investment Category
($ in millions)
December 31,
Municipal obligations
Corporate securities
Foreign obligations
U.S. government
obligations
Residential mortgage-
backed securities
Asset-backed securities
Total long-term fixed
maturity investments
Short-term investments
Other investments (3)
2020
2019
Weighted
Average
Yield (1)
Carrying
Value (2)
Weighted
Average
Yield (1)
4.8 % $
215
3.9 % 1,430
98
0.2 %
44
1.6 %
156
2.0 %
6.6 %
5.7 %
248
484
Carrying
Value (2)
$
358
1,077
121
302
377
2,332
4.3 % 2,577
617
595
0.1 %
— %
737
478
5.4 %
4.6 %
0.8 %
8.9 %
5.6 %
5.0 %
1.5 %
— %
4.2 %
Total
$ 3,544
3.4 % $ 3,792
(1) Yields are stated on a pre-tax basis, based on average amortized
cost for both long and short term fixed-maturity investments.
(2)
Includes investments guaranteed by AAC and Ambac UK
("Ambac insured"). Refer to Note 11. Investments of the
Consolidated Financial Statements included in Part II, Item 8 in
this Form 10-K for further discussion of Ambac insured securities
held in the investment portfolio.
(3) Other investments include interests in pooled investment funds that
are either classified as trading securities or are reported under the
equity method and Ambac's interests in an unconsolidated trust
created in connection with its sale of junior surplus notes on
August 28, 2014.
EMPLOYEES
As of December 31, 2020, Ambac had 115 employees in the
United States and 10 employees in the United Kingdom. Our
2020 voluntary turnover rate was approximately 3.3%. Ambac
considers its employee relations to be satisfactory.
Ambac’s focus has been on identifying and retaining key talent
through individual development programs following skills
assessments. Ambac’s succession planning has
identified
internal candidates that could fill senior management and mid-
level management positions as the need arises. The Company
has established a senior advisory team to work with, and advise,
senior management on key initiatives, and invested in both
personal and professional growth programs to identify and
prepare executives for promotion within the Company. The
Company continues to rely on compensation components (such
as salary, long-term incentive plan awards, deferred cash awards
and short-term incentive plan awards) to support employee
retention and discourage excessive risk taking. The Company
incorporates performance metrics as part of the annual short-
term incentive bonus offering with increased bonus potential for
exceptional results. We utilize third-party benchmark data to
Capitalized terms used but not defined in this section shall have
the meanings ascribed thereto in Part I, Item 1 in this Form 10-K
or in Note 1. Background and Business Description to the
Consolidated Financial Statements included in Part II, Item 8 in
this Form 10-K unless otherwise indicated.
Our risk factors are organized in the following sections.
Risks Related to AFG Common Shares........................
Risks Related to FG Insured Portfolio Losses.............
Risks Related to Indebtedness......................................
Risks Related to Capital, Liquidity and Markets.........
Risks Related to Financial and Credit Markets...........
Risks Related to the Company's Business....................
Risks Related to International Business.......................
Risks Related to Taxation.............................................
Risks Related to Strategic Plan....................................
Risks Related to Managing General Underwriting
Business........................................................................
Page
10
11
15
17
19
20
21
21
22
23
Risks Related to AFG Common Shares
Investments in AFG's common stock are highly speculative
and the price per share of AFG's common stock may be
subject to a high degree of volatility, including significant
price declines.
Ambac's principal business is in run-off and faces significant
risks and uncertainties described elsewhere in Part I, Item 1A.
Risk Factors. Although AFG's common stock is listed on the
New York Stock Exchange ("NYSE"), there can be no assurance
as to the liquidity of the trading market or the price at which
such shares can be sold. The price of the shares may decline
substantially in response to a number of events or circumstances,
including but not limited to:
• adverse developments in our financial condition or results
of operations;
• actual or perceived adverse developments with regards to
AAC's residential mortgage-backed securities ("RMBS")
litigations;
• changes in the actual or perceived risk within our FG
to
insured
concentrations of credit risk, such as in Puerto Rico;
particularly with
portfolio,
regards
• changes to regulatory status;
• changes in investors’ or analysts’ valuation measures for
our stock;
• market perceptions of our success, or lack thereof, in
pursuing our business strategy;
| Ambac Financial Group, Inc. 10 2020 FORM 10-K |
• the
impact or perceived
impact of any acquisition,
disposition or other strategic transaction, including entry
into a new line of business, on the value or long-term
prospects of the Company; and
• results and actions of other participants in our industry.
In addition, the price of AFG's shares may be affected by the
additional risks described below, including risks associated with
AAC’s ability to deliver value to AFG. Investments in AFG's
common stock should be considered highly speculative and may
be subject to a high degree of volatility.
The occurrence of certain events could result in the initiation
of rehabilitation proceedings against AAC, with resulting
adverse consequences to holders of our securities.
Increased loss development in the FG insured portfolio or
significant losses or other events resulting from litigation,
including the failure to achieve expected recoveries from
existing litigations concerning insured RMBS, may prompt OCI
to determine that it is in the best interests of policyholders to
initiate rehabilitation proceedings with respect to AAC, either
preemptively or in response to any such event.
the assertion of damages by counterparties,
If OCI were to decide to initiate rehabilitation proceedings with
respect to AAC, adverse consequences may result, including,
without limitation and absent enforceable protective injunctive
relief,
the
acceleration of losses based on early termination triggers, and
the loss of control rights in insured transactions. Any such
consequences may reduce any residual value of AAC.
Additionally, the rehabilitator would assume control of all of
AAC’s assets and management of AAC. In exercising control,
the rehabilitator would act for the benefit of policyholders, and
would not take into account the interests of our security holders,
which may result in material adverse consequences for our
security holders.
AFG may not be able to realize value from AAC or generate
earnings apart from AAC.
The value of AFG's common stock is partially dependent upon
realizing residual value and/or receiving dividends from AAC;
the receipt of payments to be made by AAC pursuant to the
intercompany expense sharing and cost allocation agreement
(the "Cost Allocation Agreement"); the receipt of payments on
investments made in surplus notes issued by AAC; and the
receipt of payments on other investments. There can be no
assurance that AFG will be able to realize residual value and/or
receive dividends from AAC, which is in run-off. AFG's ability
to realize residual value and/or receive dividends from AAC will
depend upon, amongst other considerations, AAC's ability to
satisfy all of its obligations that are senior to AFG's equity
interests, including obligations to policyholders, holders of its
indebtedness (including surplus notes, the Ambac Note and the
Tier 2 Notes) and holders of its preferred stock. AAC's ability to
satisfy all of its obligations is dependent on a number of
considerations including its ability to achieve recoveries and
mitigate losses from its insured portfolio, which is subject to
significant risks and uncertainties, including as a result of
varying potential perceptions of the value of AAC’s guarantees
and securities.
Due to the above considerations, as well as applicable legal and
contractual restrictions described elsewhere herein, it is highly
unlikely that AAC will be able to pay AFG any dividends for the
foreseeable future. Furthermore, the payments to be made to
AFG under the intercompany Cost Allocation Agreement are
subject to, in certain instances, OCI approval, making the
amount and timing of such payments uncertain. Specifically,
the Cost Allocation Agreement provides
that AAC's
reimbursement of certain AFG operating expenses is subject to
the approval of OCI and limited to $4.0 million per annum. We
can provide no assurance as to whether OCI will approve such
reimbursement or any portion thereof.
The value of AFG's common stock also depends upon the ability
of Ambac to generate earnings apart from AAC. As noted below
in Risks Related to Strategic Plan, Ambac is exploring further
expansion
into specialty property and casualty program
insurance, managing general agent/underwriter, and potentially
other insurance and insurance related businesses that, among
other things, may permit utilization of Ambac’s net operating
loss carry-forwards, but there are no assurances regarding its
ability to acquire or develop any material businesses or the
prospects for any such businesses.
Risks Related to FG Insured Portfolio Losses
Loss reserves may not be adequate to cover potential losses,
and changes in loss reserves may result in further volatility of
net income and comprehensive income.
its
in
respect
to our non-derivative
Loss reserves are established when management has observed
insured credits. Loss reserves
credit deterioration
established with
financial
guarantee insurance policies are based upon estimates and
judgments by management, including estimates and judgments
with respect to the probability of default; the severity of loss
to execute policy
upon default; management’s ability
commutations,
loss mitigation
restructurings and other
strategies; and estimated remediation recoveries for, among
other things, breaches by RMBS issuers of representations and
warranties. The objective of establishing loss reserve estimates
is not to, and our loss reserves do not, reflect the worst possible
outcome. While our reserving scenarios reflect a wide range of
possible outcomes (on a probability weighted basis), reflecting
the significant uncertainty regarding future developments and
outcomes, our loss reserves may change materially based on
future developments. As a result of inherent uncertainties in the
estimates and judgments made to determine loss reserves, there
can be no assurance that either the actual losses in our financial
guarantee insurance portfolio will not exceed such reserves or
that our reserves will not increase or decrease materially over
time as circumstances, our assumptions, or our models change.
Additionally, inherent in our estimates of loss severities and
remediation recoveries is the assumption that AAC or its
subsidiaries, as applicable, will retain control rights in respect of
our insured portfolio. However, according to the terms of
relevant transaction documents, AAC or its subsidiaries, as
applicable, may lose control rights in many insured transactions
if, among other things, the relevant insurer is the subject of
delinquency proceedings and/or other regulatory actions. If
AAC or its subsidiaries lose control rights, their ability to
mitigate loss severities and realize remediation recoveries will
| Ambac Financial Group, Inc. 11 2020 FORM 10-K |
be compromised, and actual ultimate losses in the insured
portfolio could exceed current loss reserves.
Some issuers of public finance obligations insured by AAC are
experiencing fiscal stress that could result in increased losses
on those obligations or increased liquidity claims, including
losses or claims resulting from payment defaults, Chapter 9
bankruptcy or other restructuring proceedings or loss of
market access.
Some issuers of public finance obligations insured by AAC have
reported, or may
report, budget shortfalls, significantly
underfunded pensions or other fiscal stresses that imperil their
ability to pay debt service or will require them to significantly
raise taxes and/or cut spending in order to satisfy their
obligations. Furthermore, over time, the consequences of poor
public policy decisions by state and local governments or
increases in tax burdens can impact demographic trends, such as
out-migration from one state or municipality to another, that
may negatively impact the creditworthiness of related issuers.
Some issuers of obligations insured by AAC have declared a
payment moratorium, defaulted or filed for bankruptcy or
similar debt adjustment proceedings, raising concerns about
their ultimate ability or willingness to service the debt insured
by AAC and AAC's ability to recover claims paid in the future.
If the issuers of the obligations in the public finance portfolio
are unable to raise taxes, cut spending, or receive federal or state
assistance, or if such issuers default or file for bankruptcy under
Chapter 9 or for similar relief under other laws that allow for the
adjustment of debts, AAC may experience liquidity claims and/
or ultimate losses on those obligations, which could adversely
affect the Company's business, financial condition and results of
operations.
Catastrophic public health or environmental events, like the
COVID-19 pandemic or those associated with hurricanes,
earthquakes, wildfires and droughts, that result in material
disruption of economic activity, loss of human life or
significant property damage, can have a materially negative
impact on the financial performance of issuers of public
finance, structured finance, investor owned utility, privatized
military housing and other obligations insured by AAC. Such
stresses could result in liquidity claims and/or permanent
losses on obligations of those obligations.
The emergence of the COVID-19 pandemic and the resulting
containment measures have caused economic and financial
disruptions that have adversely affected, and are expected to
continue to materially adversely affect, our business and results
of operations. Ambac insures the obligations of a number of
issuers that have been, or may in the future be, substantially
affected by the economic effects of COVID-19, such as
municipalities and securitizations, including those backed by
consumer loans such as mortgages or student loans. As
described more fully in Management's Discussion and Analysis
of Financial Condition and Results of Operations, municipalities
and their authorities, agencies and instrumentalities, especially
those dependent on narrow revenue streams flowing from
particular economic activities, have suffered, and are expected to
continue to suffer, from severely depressed revenues due to
shelter-in-place orders, social distancing guidelines, travel bans
and restrictions, and business shutdowns as well as an economic
the COVID-19 pandemic.
recession brought about by
Furthermore, securitizations dependent on cash flows from
payments on mortgage loans, student loans or other assets have
experienced, and are expected to continue to experience,
shortfalls in receipts due to borrower nonpayments. See Part II,
Item 7 of this Form 10-K, Management's Discussion and
Analysis of Financial Condition and Results of Operations,
Executive Summary, Financial Guarantees in Force, Liquidity
and Capital Resources and Balance Sheet for further detail.
The U.S. Federal government and other governments globally
have taken certain measures to aid consumers, businesses, state
and local governments, and the financial markets, but the impact
of such aid remains unclear. U.S. Federal and State governments
and their agencies have also adopted policies or guidelines to
provide emergency relief to consumers, such as limiting debt
requiring extensions,
collection efforts, encouraging or
modifications or forbearance with respect to certain loans and
fees, and establishing foreclosure and eviction moratoriums.
Several of these policies or guidelines have been extended
beyond their initial terms and could be expanded over time as
the economic effects of the pandemic become more well known.
To the extent such measures cause greater incidences of missed
mortgage loan, student loan or other debt service payments than
would have occurred without governmental intervention, Ambac
may experience higher losses in its insured portfolio of asset-
backed securities.
AAC also insures the obligations of a number of issuers that
have been, or may in the future be, substantially affected by
environmental or other public health events, including flooding,
hurricanes, earthquakes, wildfires and drought. In addition,
certain catastrophic environmental events, notably wildfires, can
result in significant potential liabilities for issuers such as
investor-owned utilities that increase bankruptcy risk and the
potential default on obligations of the issuer insured by AAC.
The ultimate impact of a catastrophic public health event like
COVID-19 or a catastrophic environmental event on issuers and
their obligations, and the economy in general, is by its very
nature uncertain, and will be determined by a number of factors
including, but not limited to, the depth and duration of the crisis;
the extent to which affected consumers, businesses, municipal
entities and other debtors or sources of revenues recover from
depressed economic circumstances, and the timelines for such
recoveries; the level and efficacy of government intervention or
support for municipal entities, consumers, businesses and the
financial markets via emergency relief measures; the availability
of
the availability of cost-effective financing;
management of public health crisis remediation efforts,
including
the availability, utilization and efficacy of
vaccinations; the effectiveness of other public or private crisis
management efforts, mitigation measures or support; and certain
socio-economic variables, such as unemployment
levels.
Consequently, if issuers affected by such catastrophic events do
not have sufficient resources or financial flexibility, receive
adequate measures of support or realize the appropriate level of
economic recovery, their ultimate ability to service the debt
insured by Ambac could be materially impaired and Ambac
could suffer material permanent losses.
insurance;
At this time, there are significant uncertainties surrounding the
ultimate number of claims and the extent of losses Ambac will
face as a result of the economic effects of the COVID-19
pandemic. Actual losses may vary materially from Ambac's loss
| Ambac Financial Group, Inc. 12 2020 FORM 10-K |
and loss expense reserves due to the factors described above and
the inherent uncertainties in estimating losses given the evolving
nature of the pandemic and its impact on issuers of Ambac
insured debt and the economy in general. Potential ultimate
losses from the economic consequences of the COVID-19
pandemic could be material and therefore may have an adverse
effect on our results of operations and financial condition.
AAC insures obligations of the Commonwealth of Puerto Rico,
including certain of its authorities and public corporations that
are either subject to a Title III bankruptcy protection
proceeding under the Puerto Rico Oversight, Management and
Stability Act ("PROMESA") or have otherwise suspended debt
service payments. AAC has made and may continue to be
required to make significant amounts of policy payments over
the next several years, the recoverability of which is subject to
great uncertainty, which may lead to material permanent
losses. While we believe our reserves are adequate to cover
losses on Puerto Rico insured bonds, there can be no
assurance that AAC may not incur additional losses in the
future, particularly given the uncertainty related to the
ongoing Title III proceedings and the developing economic,
political and legal circumstances in Puerto Rico. Such losses
may have a material adverse effect on AAC's results of
operation and financial condition.
including
AAC has exposure to the Commonwealth of Puerto Rico (the
"Commonwealth"),
its authorities and public
corporations. Each has its own credit risk profile attributable to,
as applicable, discrete revenue sources, direct general obligation
pledges and/or general obligation guarantees. AAC had
approximately $1,070 million of net par exposure to the
Commonwealth and these instrumentalities at December 31,
the overall Puerto Rico net par
2020. Components of
outstanding include capital appreciation bonds that are reported
at the par amount at the time of issuance of the related insurance
policy as opposed to the current accreted value of the bonds.
The outstanding net insured amount including accretion on
capital appreciation bonds is approximately $1,284 million at
December 31, 2020. Total net insured lifetime debt service (net
par and interest) to the Commonwealth of Puerto Rico and its
instrumentalities was approximately $2,540 million at December
31, 2020.
As a result of the developments described in these Risk Factors
and elsewhere in this 10-K (see Part II, Item 7, Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Financial Guarantees in Force, and Note 7.
Financial Guarantee Insurance Contracts to the Consolidated
Financial Statements included in Part II, Item 8 in this Form 10-
K), the Commonwealth of Puerto Rico and certain of its
instrumentalities are continuing to default on debt service
payments, including payments owed on bonds insured by AAC.
AAC has made, and may continue to be required to make,
significant amounts of policy payments over the next several
years, the recoverability of which is subject to great uncertainty,
which may lead to material permanent losses. Our exposure to
Puerto Rico is impacted by the amount of monies available for
debt service, which is in turn affected by a number of factors
including variability in economic growth and demographic
trends, tax revenues, changes in law or the effects thereof,
essential services expense, federal funding of Commonwealth
needs as well as interpretation of legislation, legal documents,
and updated financial information (when available).
Substantial uncertainty also exists with respect to the ultimate
outcome for creditors in Puerto Rico due to the Commonwealth
Plan of Adjustment or changes thereto, as well as legislation
enacted by the Commonwealth and the United States, including
PROMESA, as well as actions taken in reliance on such laws,
including Title III filings. AAC is involved in multiple
litigations relating to such actions and other issues and may not
be successful in pursuing claims or protecting its interests.
Given the numerous uncertainties and risks existing with respect
to the restructuring process, outcomes associated with the
Commonwealth Plan of Adjustment or any changes thereto and
relevant litigation, no assurance can be given that ultimate debt
service discounts will not be very severe and cause Ambac to
experience losses materially exceeding current reserves. It is
possible that certain restructuring process solutions, together
with associated legislation, budgetary, and/or public policy
proposals could be adopted and could significantly further
impair our exposures. In addition, there are possible final legal
determinations, including failing to recognize or properly
differentiate legal structures and protections applicable to such
exposures, that could result in losses exceeding our current
reserves by a material amount and further increases to our loss
reserves. In particular, in a Title III process, should court-
approved plans of adjustment for the Commonwealth, Puerto
Rico Highways and Transportation Authority ("PRHTA"), the
Puerto Rico Public Buildings Authority ("PBA") or any other
issuers of Ambac-insured debt that may or may not file for Title
III protection contemplate discounts to debt service implied by,
or even worse than, the Commonwealth Fiscal Plan (May 27,
2020) or Ambac receive unfavorable judgments in the litigations
to which it is a party, Ambac’s financial condition would be
materially adversely affected. For example, the amended
disclosure statement and plan of adjustment ("Amended POA")
to restructure $35 billion of debt and other claims against the
Commonwealth of Puerto Rico, PBA, and Employees
Retirement Systems ("ERS"), as well as more than $50 billion in
pension liabilities that was filed by the Federal Oversight
Management Board for Puerto Rico ("Oversight Board") on
February 28, 2020, provides for an average of 3.9% recoveries
on claims for non-General Obligation and PBA bonds, including
revenue bonds insured by Ambac. If the Amended POA was
confirmed in its current form, Ambac's financial condition
would be materially adversely affected. It is also possible that
economic or demographic outcomes may be as, or worse than,
forecasted in the Commonwealth Fiscal Plan or under proposals
or plans promulgated by
its
instrumentalities in or in connection with a Title III process or
otherwise. Even a negotiated restructuring to which Ambac
agrees as part of mediation or other process may involve
material losses in excess of current reserves. While our reserving
scenarios reflect a wide range of possible outcomes reflecting
the significant uncertainty regarding future developments and
outcomes, given our exposure to Puerto Rico and the economic,
fiscal, legal and political uncertainties associated therewith, our
loss reserves may ultimately prove to be insufficient to cover our
losses, potentially by a material amount, and may be subject to
material volatility.
the Commonwealth or
| Ambac Financial Group, Inc. 13 2020 FORM 10-K |
Certain judicial decisions related to the Commonwealth of
Puerto Rico's PROMESA Title III proceedings may materially
adversely affect our Public Finance insured portfolio.
On January 13, 2020, the U.S. Supreme Court denied a petition
for Writ of Certiorari to review decisions in March and June
2019 by the U.S. Court of Appeals for the First Circuit that
affirmed decisions by the U.S. District Court overseeing the
PROMESA Title III proceedings for the PRHTA, decisions
which found that under Sections 928(a) and 922(d) of the U.S.
Bankruptcy Code, municipal issuers of revenue bonds secured
by special revenues are permitted, but not required, to apply
special revenues to pay debt service on such revenue bonds
during the pendency of bankruptcy proceedings for such
municipal issuers. The complainants, including AAC, had
sought an order compelling PRHTA, as the debtor, to continue
to make debt service payments on its revenue bonds from
pledged special revenues during the pendency of its Title III
case, but the First Circuit affirmed the District Court’s
dismissals of the complaints, holding that it could not compel
the issuer to make such payments. The First Circuit's decisions
challenge what had been a commonly understood notion in the
municipal
revenue
bondholders secured by special revenues (as defined in Chapter
9 of the U.S. Bankruptcy Code) would continue to receive
payment during a bankruptcy of the municipal issuer. Although
the First Circuit’s decisions are binding only on federal district
and bankruptcy courts
in Maine, Massachusetts, New
Hampshire, Puerto Rico and Rhode Island, they introduce
significant uncertainty into the public finance market, may make
it more difficult for municipal instrumentalities to procure
revenue bond financings in the future and increase the credit risk
to bondholders of existing special revenue bonds, particularly
those from weaker issuers.
finance marketplace
that municipal
It is unclear how these rulings may ultimately impact Ambac's
revenue bond municipal exposures, inclusive of Puerto Rico.
However, potential impacts could include ratings downgrades,
decreased or more costly access to capital markets for certain
issuers to refinance their insured debt or raise new debt, and
lower recoveries in a restructuring or bankruptcy. At December
31, 2020, AAC insured approximately $3,644 million of net par
of special revenue issuers, including $1,235 million net par of
watch list exposure and $1,333 million net par of adversely
classified exposure, $490 million of which was Puerto Rico
exposure.
We are subject to credit risk and other risks in our insured
portfolio, including related to RMBS and securities backed by
student loans. We are also subject to risks associated with
adverse selection as our insured portfolio runs off. Measures
taken to reduce such risks may have an adverse effect on the
Company's operating results or financial position.
Performance of our insured transactions, including (but not
limited to) RMBS transactions and those involving securities
backed by student loans, can be adversely affected by general
economic conditions, such as recession, rising unemployment
rates, underemployment, home prices that decline or do not
increase in the patterns assumed in our models, increasing
foreclosure rates and unavailability of consumer credit,
mortgage product attributes, such as interest rate adjustments
and balloon payment obligations, borrower and/or originator
fraud, mortgage and student loan servicer performance or
underperformance and financial difficulty, such as risks related
to whether the servicer may be required to delay the remittance
of any cash collections held by it or received by it after the time
it becomes subject to bankruptcy or insolvency proceedings.
While further deterioration in the performance of consumer
assets, including mortgage-related assets and student loans, may
occur, the timing, extent and duration of any future deterioration
of the credit markets is unknown, as is the impact on potential
claim payments and ultimate losses on the securities within our
portfolio. In addition, there can be no assurance that any
governmental or private sector initiatives designed to address
such credit deterioration in the markets will be successful or
inure to the benefit of the transactions we insure. For example,
any initiative which permits the discharge of student loan debt in
bankruptcy may adversely affect our portfolio. Similarly,
servicer settlements with governmental authorities regarding
foreclosure or servicing irregularities are generally designed to
protect borrowers and may increase losses on securities we
insure. In particular, the student loan industry and, specifically,
trusts with securities insured by AAC have been subject to
heightened Consumer Finance Protection Bureau (CFPB)
scrutiny and enforcement action over servicing and collections
practices and potential chain of title issues and, consequently,
any settlements, orders, consents or penalties resulting from
CFPB actions, or any failure on the part of servicers or other
parties asserting claims against delinquent borrowers to establish
title to the loans, could lead to increased losses on securities we
insure. Risks such as these are potentially heightened by
Democratic control of the United States Congress and executive
branch.
In addition, there can be no assurance that AAC would be
successful, or that it would not be delayed, in enforcing the
subordination provisions, credit enhancements or other
contractual provisions of the RMBS that AAC insures.
As the runoff of the insured portfolio continues, the proportion
of exposures we rate as below investment grade relative to the
aggregate insured portfolio is likely to continue to increase,
leaving the portfolio increasingly concentrated in higher risk
exposures. This risk may result in greater volatility or have
adverse effects on the Company's results from operations and on
our financial condition.
One of our primary goals is to create shareholder value through
transaction terminations, policy commutations, reinsurance,
settlements and restructurings that we believe will improve our
risk profile. As we take such actions to reduce known and
potential risks, such actions may negatively
impact our
operating results or financial position in one or more reporting
periods.
Our credit risk management policies and practices may not
adequately identify significant risks.
As described in Part I, Item 1, “Risk Management” in this Form
10-K, we have established risk management policies and
practices which seek to mitigate our exposure to credit risk in
our insured portfolio. Ongoing surveillance of credit risks in our
insured portfolio is an important component of our risk
management process. These policies and practices in the past
have not insulated us from risks that were unforeseen and which
had unanticipated loss severity, and such policies and practices
| Ambac Financial Group, Inc. 14 2020 FORM 10-K |
may not do so in the future. There can be no assurance that these
policies and practices will be adequate to avoid future losses. If
we are not able to identify significant risks, we may not be able
to timely remediate such risks, thereby increasing the amount of
losses to which we are exposed. An inability to identify
significant risks could also result in the failure to establish loss
reserves that are sufficient in relation to such risks.
We use analytical models and tools to assist our projection of
performance of our insured obligations and our investment
portfolio but actual results could differ materially from the
model and tool outputs and related analyses.
We rely on internally and externally developed complex
financial models, including default models related to RMBS and
a waterfall tool provided by a nationally recognized vendor for
RMBS and student loan exposures, to project performance of
our insured obligations and similar securities in our investment
portfolio. These models and tools assume various conditions,
probability scenarios, facts and circumstances, and there can be
no assurance that such models or tools accurately predict or
measure the quantum of losses, loss reserves and timing of
losses. Differences in the models and tools that we employ,
uncertainties or flaws in these financial models and tools, or
faulty assumptions inherent in these financial models and tools
or those determined by management could lead to material
changes in projected outcomes, and could include increased
losses, loss reserves and/or other than temporary investment
impairments. Moreover, estimates of transaction performance
depend in part on the interpretation of contracts and other bases
of our legal rights. Such interpretations may prove to be
incorrect or different interpretations may be employed by bond
trustees and other transaction participants and, ultimately courts,
which could lead to increased losses, loss reserves and/or
investment impairments.
Political developments may materially adversely affect our
insured portfolio.
Our insured exposures and our results of operations can be
materially affected by political developments at the federal, state
and/or local government levels. Government shutdowns, trade
disputes, political turnover, judicial decisions, adverse changes
in federal funding, or poor public policy decision making could
disrupt the national and local economies where we have insured
exposures. In addition, we are exposed to correlation risk as a
result of the possibility that multiple credits may concurrently
and/or consecutively experience losses or increased stress as a
result of any such event or series of events.
Risks Related to Indebtedness
AAC's ability to generate the significant amount of cash
needed to service its debt and financial obligations and its
ability to refinance all or a portion of its indebtedness or
obtain additional financing depends on many factors beyond
our control.
AAC is highly leveraged. AAC’s ability to make payments on
and/or refinance its debt and to fund its operations will depend
on its ability to generate substantial operating cash flow and on
the performance of the insured portfolio. AAC’s cash flow
generation will depend on receipt of premiums, investment
returns, earnings from subsidiaries and potential litigation
recoveries offset by policyholder claims, commutation
payments, reinsurance premiums, operating and loss adjustment
expenses, and interest expense, which will be subject to
prevailing economic conditions and to financial, business and
other factors, many of which are beyond our control and many
of which are event-driven. There is substantial risk that AAC
may not have the financial resources necessary to pay its debts
in full and on time due to risks associated with its cash flow,
expected litigation recoveries and insured portfolio, as discussed
elsewhere in these Risk Factors.
As of December 31, 2020, AAC had approximately $1,947
million of indebtedness outstanding (the Tier 2 Notes and the
Ambac Note) that are senior to its surplus notes. AAC had $573
million principal balance of surplus notes outstanding plus $365
million principal balance of junior surplus notes outstanding as
of December 31, 2020. The Tier 2 Notes and the Ambac Note
are secured by potential litigation recoveries (and in the case of
the Ambac Note, other assets), the receipt of which is highly
uncertain, as more fully discussed in Part I, Item 1A. Risk
Factors. Failure to achieve litigation recoveries in an amount
sufficient to repay the Tier 2 Notes and the Ambac Note would
materially weaken AAC’s ability to service its indebtedness.
If AAC cannot pay its policyholders’ claims or service its debt,
it will have to take actions such as selling assets, restructuring or
refinancing its debt or seeking additional capital. Any of these
remedies may not, if necessary, be effected on commercially
reasonable terms, or at all. Because of these and other factors
beyond our control, AAC may be unable to pay the principal,
interest or other amounts on its indebtedness when due or ever.
We have substantial indebtedness, which could adversely affect
our financial condition, operational flexibility and our ability
to obtain financing in the future.
substantial
Our
significant
consequences for our financial condition and operational
flexibility. For example, it could:
indebtedness
could
have
• increase our vulnerability to general adverse economic,
competitive and industry conditions;
• limit our ability to obtain additional financing in the future
for working capital, capital expenditures, payment of
requirements,
debt
policyholder
acquisitions, general corporate purposes or other purposes
on satisfactory terms or at all;
claims,
service
• require us to dedicate a substantial portion of our cash flow
from operations to the payment of our indebtedness,
thereby reducing the funds available to us for operations
and to fund the execution of our key strategies;
• limit or restrict us from making strategic acquisitions or
cause us to make non-strategic divestitures;
• limit our ability or increase the costs to refinance
indebtedness or repay such indebtedness due to ongoing
interest accretion;
• limit our ability to attract and retain key employees; and
• limit our ability to enter into hedging transactions by
reducing the number of counterparties with whom we can
enter into such transactions, as well as the volume of those
transactions.
| Ambac Financial Group, Inc. 15 2020 FORM 10-K |
Despite current indebtedness levels, we may incur additional
debt. While restrictive covenants in certain of our contracts may
limit the amount of additional indebtedness AAC may incur, we
may obtain waivers of those restrictions and incur additional
indebtedness in the future. In addition, if Ambac incurred
indebtedness, its ability to make scheduled payments on, or
refinance, any such indebtedness may depend on the ability of
our subsidiaries to make distributions or pay dividends, which in
turn will depend on their future operating performance and
contractual, legal and regulatory restrictions on the payment of
distributions or dividends to which they may be subject. There
can be no assurance that any such dividends or distributions
would be made. This could further exacerbate the risks
associated with our substantial leverage.
There may not be sufficient collateral to pay any or all of the
Secured Notes or Tier 2 Notes.
In addition to AAC’s right to representation and warranty
("R&W") recoveries in respect of the RMBS litigations, which
is inherently uncertain, the Ambac Note is also secured by cash
and securities having an estimated fair market value of
approximately $178 million. However, there can be no
assurance that the fair market value of these securities will not
decrease significantly. The value of the securities collateral in
the event of liquidation will depend on market and economic
conditions,
the availability of buyers and other factors.
Consequently, when combined with potential R&W recoveries,
liquidating the securities collateral securing the Ambac Note
may not produce proceeds in an amount sufficient to pay all
amounts due on the Secured Notes.
in
insurance
applicable
limitations
The ability of the holders of the Secured Notes or Tier 2 Notes
to realize upon any of the collateral securing the Ambac Note
and the Secured Notes or Tier 2 Notes, as the case may be, may
also be subject to bankruptcy and insolvency law limitations or
similar
company
rehabilitation or liquidation proceedings. In the event of
rehabilitation, liquidation, conservation, dissolution or other
insolvency proceeding, AAC cannot assure holders that the
proceeds from any sale or liquidation of the securities collateral
will be sufficient to pay any or all of AAC’s obligations under
the Ambac Note. Moreover, the rehabilitator, liquidator or court
overseeing such a proceeding may not assign value to the
collateral with respect to the Ambac Note or the Tier 2 Notes,
including AAC’s rights to recoveries in respect of the RMBS
litigations, in an amount sufficient to discharge all or a
substantial portion of AAC's obligations under or with respect to
the Ambac Note, the Secured Notes and/or the Tier 2 Notes.
AAC has not made regular interest or principal payments on
surplus notes and can not provide any assurance as to when
payments will be made, if ever.
Payments of interest and principal on surplus notes are subject to
the prior approval of the OCI. Since the issuance of the surplus
notes in 2010, OCI has declined to approve regular payments of
interest on surplus notes, although the OCI has permitted
exceptional payments in connection with (a) increasing the
percentage of deferred policy payments of the Segregated
Account of AAC from 25% to 45% in 2014 and (b) a one-time
payment of approximately six months of interest on the surplus
notes outstanding immediately after the consummation of the
Rehabilitation Exit Transactions in 2018. AAC also did not
receive approval from OCI to make payment of the surplus notes
on their scheduled maturity date of June 7, 2020, and therefore
the scheduled maturity date was extended until OCI grants
approval to make payment, in part or in full. Interest will
accrue, compounded on each anniversary of the original
scheduled maturity date, on any unpaid principal and interest
through the actual date of payment, at 5.1% per annum. Holders
of surplus notes have no rights to enforce the payment of the
principal of, or interest on, surplus notes in the absence of OCI
approval to pay such amount. If OCI does not approve regular
payments on the surplus notes within the next several years, the
total amount due for surplus notes may exceed AAC's financial
resources and holders of surplus notes may not ever be paid in
full.
Surplus notes are subordinated in right of payment to other
claims, which could impair the right of the holders of such
notes to receive interest and principal in the event of our
insolvency or a similar occurrence.
Surplus notes are unsecured obligations of AAC and are
expressly subordinated in right of payment to all of AAC’s
existing and future indebtedness and policy claims. The surplus
notes are subject to provisions of Wisconsin insurance law,
which establishes the priority of distribution of claims from the
estate of an insolvent insurance company. In the event that
AAC becomes subject to rehabilitation, liquidation, conservation
or dissolution, holders of AAC’s senior indebtedness and policy
claims would be afforded a higher priority of distribution than
holders of the surplus notes, and accordingly would have the
right to be paid in full before holders of the surplus notes would
be paid. Due to the nature of AAC’s business, the amount of
such higher priority claims in any rehabilitation, liquidation,
conservation or dissolution is likely to be many times greater
than any free and divisible surplus and it is likely that the
holders of surplus notes would not recover any payment in such
circumstances. In addition, claims of holders of the surplus
notes will be subordinated to certain liabilities of the Company’s
subsidiaries that are guaranteed by AAC.
The amount of interest payable on the Secured Notes is set
only once per interest period based on the three-month LIBOR
rate on the applicable interest determination date, which rate
may fluctuate substantially; increases in interest rates will
increase
the cost of servicing our debt reducing our
profitability and may affect our ability to make payment on the
Secured Notes.
The Secured Notes will bear interest at floating rates that could
rise significantly, increasing AAC’s interest expense and
reducing its cash flow and profitability. Each one percentage
point increase in interest rates would result in a $6 million
increase in the annual cash interest payments due on the Secured
increases significantly,
Notes. If AAC’s
whether due to changes in LIBOR or increased borrowing costs
when it refinances its current indebtedness, AAC may not be
able to make payments with respect to the Secured Notes or its
other indebtedness.
interest expense
Ambac’s estimated R&W recovery may be reduced, causing
the perceived value of the collateral securing the Secured
Notes and Tier 2 Notes to change, and any such change may
be material.
| Ambac Financial Group, Inc. 16 2020 FORM 10-K |
Ambac reevaluates its estimated R&W recoveries on a quarterly
basis in connection with the preparation of its financial
statements. See “Critical Accounting Policies and Estimates” in
Part II, Item 7, Note 2. Basis of Presentation and Significant
Accounting Policies and Note 8. Financial Guarantee Insurance
Contracts to the Consolidated Financial Statements included in
Part II, Item 8 of this Form 10-K for the fiscal year ended
December 31, 2020. As a result of any reevaluation, the
estimated amount of Ambac’s R&W recovery may be adjusted
downward due to, among other things, changes in management's
view of such estimated recoveries and/or changes in the loss
reserves related to such recoveries, and any adjustment may be
material. A reduction in estimated R&W recoveries may result
in material changes in Ambac’s financial condition, including its
capital and liquidity. In addition, any reduction to estimated
R&W recoveries may alter the perceived value of the collateral
securing the Secured Notes and Tier 2 Notes before payment on
the Secured Notes or Tier 2 Notes is made in full, which may
affect the value of, and trading market, if any, for, the Secured
Notes or Tier 2 Notes. Management makes no representation
that the estimated R&W recoveries will not be reduced,
materially, including in the near term. There can be no assurance
that the estimated R&W recoveries securing the Secured Notes
and Tier 2 Notes will equal or exceed the principal amount of
the Secured Notes and Tier 2 Notes, respectively, at all times
prior to maturity.
Risks Related to Capital, Liquidity and Markets
Our inability to realize the expected recoveries included in our
financial statements could adversely impact our liquidity,
financial condition and results of operations and the value of
our securities, including the Secured Notes and Tier 2 Notes.
to
things, representations with respect
AAC is pursuing claims in litigation with respect to certain
RMBS transactions that it insured. These claims are based on,
among other
the
characteristics of the securitized loans, the absence of borrower
fraud in the underlying loan pools or other misconduct in the
origination process, the compliance of loans with the prevailing
underwriting policies, and compliance of the RMBS transaction
counterparties with policies and procedures related to loan
origination and securitization. In such cases, where contract
claims are being pursued, the sponsor of the transaction is
contractually obligated
to repurchase, cure or substitute
collateral for any loan that breaches the representations and
warranties. However, generally the sponsors have not honored
those obligations and have vigorously defended claims brought
against them.
As of December 31, 2020, we have estimated RMBS R&W
subrogation recoveries of $1,725 million (net of reinsurance)
included in our financial statements. These estimated recoveries
are based on
the
aforementioned litigations and represent a probability-weighted
estimate of amounts we expect to recover under various possible
scenarios. The estimated recoveries we have recorded do not
represent the best or the worst possible outcomes with respect to
any particular transaction or group of transactions.
the contractual claims brought
in
There can be no assurance that AAC will be successful in
prosecuting its claims in the RMBS litigations. The outcome of
any litigation, including the RMBS litigations, is inherently
unpredictable, including because of risks intrinsic in the
adversarial nature of litigation. Motions made to the court,
rulings and appeals - in the cases being prosecuted by AAC or in
other relevant cases - could delay or otherwise impact any
recovery by AAC. Moreover, rulings that may be adverse to
AAC (in any of its RMBS litigations, as well as in other RMBS
cases in which it is not a party) could adversely affect AAC’s
ability to pursue its claims or the amount or timing of any
recovery, or negatively alter settlement dynamics with RMBS
litigation defendants. Any litigation award or settlement may be
for an amount less than the amount necessary (even when
combined with other pledged collateral) to pay the Secured
Notes or the Tier 2 Notes, which could have a material adverse
effect on our financial condition or results of operations and
make it more difficult for AAC to repay the Ambac Note (and
therefore make it more difficult for the issuer of the Secured
Notes to repay the Secured Notes) and/or the Tier 2 Notes and/
or AAC’s outstanding surplus notes, on a timely basis or at all.
In the event that AAC is unable to satisfy its obligations with
respect to the Secured Notes or Tier 2 Notes, holders will have
the right to foreclose on any available collateral and to sue AAC
for failure to make required payments; however, there can be no
assurance that the sale of collateral will produce proceeds in an
amount sufficient to pay any or all amounts due on the Secured
Notes or Tier 2 Notes, as the case may be, or that holders will be
successful in any litigation seeking payments. Additionally,
while AAC may pursue settlement negotiations, there can be no
assurance that any settlement negotiations will materialize or
that any settlement agreement can be reached on terms
acceptable to AAC, or at all. Depending on the length of time
required to resolve these litigations, either through settlement or
at trial, AAC could incur greater litigation expenses than
currently projected. If a case is brought to trial, AAC’s ultimate
recovery would be subject to the additional risks inherent in any
trial, including adverse findings or determinations by the trier of
fact or the court, which could adversely impact the value of our
securities, including the Secured Notes and Tier 2 Notes.
Any litigation award is subject to risks of recovery, including
that the sponsor is unable pay a judgment that AAC may obtain
in litigation. In some instances, AAC also has claims against a
parent or an acquirer of the counterparty. However, AAC may
not be successful in enforcing its claims against any successor
entity.
The RMBS litigations could also be adversely affected if AAC
does not have sufficient resources to actively prosecute its
claims or becomes subject
liquidation,
conservation or dissolution, or otherwise impaired by actions of
OCI.
to rehabilitation,
Our ability to realize the estimated RMBS R&W subrogation
recoveries included in our financial statements and the time of
the recoveries, if any, is subject to significant uncertainty,
including the risks described above and uncertainties inherent in
the assumptions used in estimating such recoveries. The amount
of these subrogation recoveries is significant and if we were
unable to recover all such amounts, our stockholders’ equity as
of December 31, 2020 would decrease from $1,140 million to
$(585) million.
We expect to recover material amounts of claims payments
through remediation measures including the litigation described
above as well as through cash flows in the securitization
| Ambac Financial Group, Inc. 17 2020 FORM 10-K |
structures of transactions that AAC insures. Realization of such
expected recoveries is subject to various risks and uncertainties,
including the rights and defenses of other parties with interests
that conflict with AAC's interests, the performance of the
collateral and assets backing the obligations that AAC insures,
and the performance of servicers involved in securitizations in
which AAC participates as insurer. Additionally, our ability to
realize recoveries in insured transactions may be impaired if the
continuing orders of the Rehabilitation Court are not effective.
Adverse developments with respect to such variables may cause
our recoveries to fall below expectations, which could have a
material adverse effect on our financial condition, including our
capital and liquidity, and may result in adverse consequences
such as impairing the ability of AAC to honor its financial
obligations; the initiation of rehabilitation proceedings against
AAC; decreased likelihood of AAC delivering value to AFG,
through dividends or otherwise; diminished business prospects
due to third party concerns about our ability to recover losses;
and a significant drop in the value of securities issued or insured
by AFG or AAC, including the Secured Notes and Tier 2 Notes.
Ambac’s estimate of RMBS litigation recoveries is subject to
significant uncertainty and changes to the estimate could
adversely impact its liquidity, financial condition and results of
operations.
For Ambac’s RMBS cases for which it records an RMBS R&W
subrogation recovery in its financial statements, Ambac has
obtained loan files from the relevant original pool and has
conducted loan file re-underwriting to derive a breach rate that is
extrapolated to estimate the damages Ambac expects to recover.
Ambac does not estimate an RMBS R&W subrogation recovery
for litigations where its sole claim is for fraudulent inducement.
If
these
recovery.
The amount estimated for purposes of Ambac’s RMBS R&W
subrogation recovery and the amount Ambac may ultimately
receive is subject to significant uncertainty, as described in the
immediately preceding risk factor. Ambac’s findings and
assumptions regarding collateral performance and Ambac’s
expectations with respect to the outcome of the RMBS
litigations have a significant impact on Ambac’s estimated
RMBS R&W subrogation
findings,
assumptions or estimates prove to be incorrect or otherwise do
not support our claims, actual recoveries could differ materially
from those estimated. Actual recoveries will ultimately depend
on future events and there can be no assurance that our view of
collateral performance or our estimated RMBS R&W
subrogation recoveries will not differ from actual events.
Although Ambac believes that its methodology for estimating
recoveries is appropriate, the methodologies Ambac uses to
estimate expected collateral losses and specific transaction
performance may not be similar to methodologies used by
Ambac’s
counterparties or other market
participants. The determination of expected RMBS R&W
subrogation recoveries is an inherently subjective and complex
process involving numerous estimates and assumptions and
judgments by management, using both internal and external data
sources to derive a specific transaction's cash flows. As a result,
Ambac’s current estimates may not reflect Ambac’s ultimate
recovery, and management makes no representation that the
actual amounts recovered, if any, will not differ materially from
those estimated. The failure of Ambac’s actual recoveries to
competitors,
meet or exceed its current estimates could result in a material
adverse effect on Ambac’s financial condition, including its
capital and liquidity.
We may not be able to commute or reduce FG insured
exposures.
In pursuing the objective of improving our financial position, we
are seeking to commute or reduce FG insured exposures. De-
risking transactions may not be feasible or economically viable.
We cannot provide any assurance that any such transaction will
be consummated in the future, or if it is, as to the timing, terms
or conditions of any such transaction. Even if we consummate
one or more of such transactions, doing so may ultimately prove
to be unsuccessful in creating value for any or all of our
stakeholders and may adversely affect our operating results or
financial position.
Revenues and cash flow would be adversely impacted by a
decline in realization of installment premiums.
A significant percentage of our premium revenue is attributable
to installment premiums. The amount of installment premiums
we actually realize could be reduced in the future due to factors
such as early termination of insurance contracts, accelerated
prepayments of underlying obligations or insufficiency of cash
flows (by the premium paying entity). Such reductions would
result in lower revenues.
The composition of the securities in our investment portfolio
exposes us to greater risk than before we invested in
"alternative assets."
Each of AAC and Ambac UK maintains a portion of its
investment portfolio in below investment grade securities,
equities and/or “alternative assets” with the objective to increase
risk-adjusted portfolio returns. Investments in below investment
grade securities, equities and “alternative assets” could expose
AAC and/or Ambac UK to greater earnings volatility, increased
losses and decreased liquidity in the investment portfolio.
We may have future capital needs and may not be able to
obtain third-party financing or raise additional third-party
capital on acceptable terms, or at all.
An inability to obtain third-party debt financing or raise
additional third-party capital, when required by us or when
business conditions warrant, could have a material adverse
effect on our business, financial condition and results of
operations. The economic conditions affecting our industry, as
well as other factors, may constrain our financing abilities. Our
ability to secure third-party financing, if available, and to satisfy
or refinance our financial obligations under indebtedness
outstanding from time to time will depend upon regulatory
conditions, our future operating performance, the availability of
credit generally, economic conditions and financial, business
and other factors, many of which are beyond our control. The
market conditions and the macroeconomic conditions that affect
our industry could have a material adverse effect on our ability
to secure third-party financing on favorable terms, if at all.
If third-party financing is not available when needed, or is
available on unfavorable terms, we may be unable to take
advantage of business opportunities, respond to competitive
pressures or refinance our outstanding indebtedness, any of
| Ambac Financial Group, Inc. 18 2020 FORM 10-K |
which could have a material adverse effect on our business,
financial condition and results of operations.
AAC may in the future report a policyholders’ deficit or
become insolvent.
related
the Rehabilitation Exit Transactions and
While
transactions were designed to improve our financial condition,
we will continue to be subject to risks and uncertainties that
could materially affect our financial position, including those
relating to our exposures in Puerto Rico, our efforts to recover
losses on insured RMBS through litigation, and other risks
described in the Risk Factors set forth in this Item 1A.
Therefore, even following consummation of the Rehabilitation
Exit Transactions, circumstances may occur that would cause
AAC to report a policyholders’ deficit, not comply with the
statutory minimum
undergo
policyholders’
rehabilitation and/or become insolvent.
surplus,
The determination of the amount of credit impairments taken
on our investments is highly subjective and could materially
impact our results of operations or financial position.
The determination of the amount of credit impairments on our
investments varies by investment type and is based upon our
periodic evaluation and assessment of known and inherent risks
associated with the respective asset class. Such evaluations and
assessments are revised as conditions change and new
information becomes available. Management updates
its
evaluations regularly and reflects changes in impairments as
such evaluations are revised. There can be no assurance that
management has accurately assessed the level of impairments
taken in our financial statements. Furthermore, additional
impairments may need to be taken in the future and historical
trends may not be indicative of future impairments. We use
financial models and tools to project impairments. Differences
and flaws in these models and tools, and/or faulty assumptions
inherent in these models and tools and those determined by
management, could lead to increased impairments.
Risks Related to the Financial and Credit Markets
in prevailing
Changes
levels and market
conditions could adversely impact our business results and
prospects.
interest rate
Increases in prevailing interest rate levels can adversely affect
the value of our investment portfolio and, therefore, our
financial strength. In the event that investments must be sold in
order to pay claims, to pay debt obligations, to meet collateral
posting requirements or to meet other liquidity needs, such
investments would
likely be sold at discounted prices.
Additionally, increasing interest rates would have an adverse
impact on our insured portfolio. For example, increasing interest
rates could result in higher claim payments in respect of
defaulted obligations that bear floating rates of interest. Higher
interest rates can also lead to increased credit stress on consumer
asset-backed transactions (as the securitized assets supporting a
rate consumer
portion of
obligations), slower prepayment speeds and resulting “extension
risk” relative to such consumer asset-backed transactions in our
insured and investment portfolios, and decreased refinancing
activity.
these exposures are
floating
Decreasing interest rates could result in early terminations of
financial guarantee insurance policies in respect of which we are
paid on an installment basis and do not receive a termination
premium, thus reducing premium earned for these transactions.
Decreases in prevailing interest rates may also limit growth of,
or reduce, investment income and may adversely impact our
interest rate swap portfolio.
Our investment portfolio may also be adversely affected by
credit rating downgrades, ABS and RMBS prepayment speeds,
foreign exchange movements, spread volatility, and credit
losses.
We are subject to credit risk throughout our businesses,
including large single risks, risk concentrations, correlated
risks and reinsurance counterparty credit risk.
in
We are exposed to the risk that issuers of debt which we have
insured, issuers of debt which we hold in our investment
portfolio, reinsurers and other contract counterparties (including
their financial
derivative counterparties) may default
obligations, whether as the result of insolvency, lack of liquidity,
operational failure, fraud or other reasons. These credit risks
could cause increased losses and loss reserves, and/or estimates
of credit impairments and mark-to-market losses with respect to
credit derivatives in our financial guarantee business; and we
could experience losses and decreases in the value of our
investment portfolio and, therefore, our financial strength. Such
credit risks may be in the form of large single risk exposures to
particular issuers, reinsurers or counterparties; losses caused by
catastrophic events (including public health crises, terrorist acts
and natural disasters); losses caused by increases in municipal
defaults; losses in respect of different, but correlated, credit
exposures; or other forms of credit risk.
Uncertainties regarding the expected discontinuance of the
London Inter-Bank Offered Rate or any other interest rate
benchmark could have adverse consequences.
In 2017, the U.K. Financial Conduct Authority (“FCA”), which
regulates the London Interbank Offered Rate ("LIBOR"),
announced that it will no longer persuade or compel banks to
submit rates for the calculation of LIBOR after 2021. On
November 30, 2020, the ICE Benchmark Administration and the
FCA announced that most tenors of USD LIBOR are now
expected to be published only through June 2023. However,
Non-USD LIBOR, certain less common tenors of USD-LIBOR
and certain other indices which are utilized as benchmarks are
not expected to be published after 2021. AAC and Ambac UK
insure securities, own assets, are party to certain derivative
contracts and have issued debt and other obligations that
reference LIBOR. While regulators and market participants
have suggested substitute benchmark rates for LIBOR, such as
the Secured Overnight Financing Rate, the impact of the
discontinuance and replacement of LIBOR is uncertain. It is not
currently possible to know with certainty whether LIBOR will
continue to be viewed as an acceptable benchmark, what rate or
rates may become accepted alternatives to LIBOR, or what the
effect of any such changes in views and alternatives may have
on the financial markets for LIBOR-linked financial instruments
for the periods preceding and following LIBOR's cessation.
Differences in contractual provisions of certain legacy assets and
liabilities and other factors, may cause the consequences of the
discontinuance of LIBOR to vary by instrument. Legislation has
been introduced in both the UK and the United States, including
| Ambac Financial Group, Inc. 19 2020 FORM 10-K |
at the New York State level, to address issues with respect to
legacy LIBOR-linked assets and liabilities, however it is unclear
whether these initiatives will be passed and if so, whether they
will fully address the issues associated with legacy transactions.
As a result, the value of our assets, derivatives and liabilities;
costs to operate our business; and the losses associated with our
insured portfolio may be affected in a way that may ultimately
materially adversely impact Ambac’s results of operations and
financial condition. In addition, Ambac may experience adverse
tax and accounting impacts, system and model disruption, and
increased liquidity demands in connection with the transition
away from LIBOR
that may have adverse operational
consequences resulting in further adverse impacts on Ambac’s
results of operations and financial condition. Ambac continues
to actively monitor developments surrounding the transition
from LIBOR-based indices and evaluate the potential impact. In
addition to reviewing several hundred transactions involving
various LIBOR-based indices, Ambac has made, or is in the
process of making, adjustments to its reporting and analytical
infrastructures to facilitate the transition from LIBOR.
Risks Related to the Company's Business
We are subject to the risk of litigation and regulatory inquiries
or investigations, and the outcome of proceedings we are or
may become involved in could have a material adverse effect
on our business, operations, financial position, profitability or
cash flows.
AAC is defending or otherwise involved in various lawsuits
relating to its financial guarantee business. In addition, the
Company from time to time receives various regulatory inquiries
and requests for information. Please see Note 17. Commitments
and Contingencies to the Consolidated Financial Statements
included in Part II, Item 8 in this Form 10-K for information on
these various proceedings.
requests
regulatory
inquiries or
It is not possible to predict whether additional suits involving
AFG, AAC or one or more other subsidiaries will be filed or
for
whether additional
information will be made, and it is also not possible to predict
the outcome of litigation, inquiries or requests for information. It
is possible that there could be unfavorable outcomes in these or
other proceedings. Management is unable to make a meaningful
estimate of the amount or range of loss that could result from
unfavorable outcomes or of the expenses that will be incurred in
defending these lawsuits. Under some circumstances, adverse
results in any such proceedings and/or the incurring of
significant litigation expenses could be material to our business,
operations, financial position, profitability or cash flows.
The Settlement Agreement, Stipulation and Order and
Indenture for the Tier 2 Notes contain restrictive covenants
that may impair our ability to pursue our business strategies.
Pursuant to the terms of the Settlement Agreement, Stipulation
and Order and indenture for the Tier 2 Notes, AAC must seek
prior approval by OCI of certain corporate actions. The
Settlement Agreement, Stipulation and Order and indenture for
the Tier 2 Notes also include covenants which restrict the
operations of AAC which, (i) in the case of the Settlement
Agreement, remain in force until the surplus notes that were
issued pursuant to the Settlement Agreement have been
redeemed, repurchased or repaid in full, (ii) in the case of the
Stipulation and Order, remain in place until the OCI decides to
relax such restrictions, and (iii) in the case of the indenture for
the Tier 2 Notes, remain in force until the Tier 2 Notes have
been redeemed, repurchased or repaid in full. Certain of these
restrictions may be waived with the approval of holders of the
applicable debt securities and/or OCI. If we are unable to obtain
the required consents under the Settlement Agreement, the
Stipulation and Order and/or the indenture for the Tier 2 Notes,
we may not be able to execute our planned business strategies.
OCI has certain enforcement rights with respect to the
Settlement Agreement and Stipulation and Order. Disputes may
arise over the interpretation of such agreements, the exercise or
purported exercise of rights thereunder, or the performance of or
failure or purported failure to perform obligations thereunder.
Any such dispute could have material adverse effects on the
Company, whether
administrative
proceedings, supervisory orders, failure to execute transactions
sought by management, interference with corporate strategies,
objectives or prerogatives,
inefficient decision-making or
execution, forced realignment of resources, increased costs,
distractions to management, strained working relationships or
otherwise. Such effects would also increase the risk that OCI
would seek to initiate rehabilitation proceedings against AAC.
litigation,
through
Impairment of the intangible and goodwill assets, which
resulted from the acquisition of Xchange, could adversely
affect our results of operations.
In connection with Ambac’s acquisition of 80% of the
membership interests of Xchange, Ambac recorded the fair
value of identifiable intangible assets (primarily related to
distribution relationships) and goodwill. The intangible assets
will be amortized over their useful lives (weighted average of 14
years). The Company will test intangible assets for impairment
if certain events occur or circumstances change indicating that
the carrying amount of the intangible asset may not be
recoverable. Goodwill reflects the excess purchase consideration
over net assets acquired and will be tested for impairment
annually or whenever events occur or circumstances change that
impairment. Intangible asset and goodwill
may
impairments are driven by a variety of factors, which could
include, among other things, declining future cash flows of the
acquired business as addressed in other risk factors related to the
Managing General Underwriting Business. Any intangible asset
or goodwill impairment could adversely affect the Company's
operating results and financial condition.
indicate
System security risks, data protection breaches and cyber-
attacks could adversely affect our business and results of
operations.
functions and a prolonged
We rely on our information technology systems for many
enterprise-critical
failure or
interruption of these systems for any reason could cause
significant disruption to our operations and have a material
adverse effect on our business, financial condition and operating
results. Our information technology and application systems
may be vulnerable to threats from computer viruses, natural
disasters, unauthorized access, cyber-attack and other similar
disruptions. Computer hackers may be able to penetrate our
network’s system security and misappropriate or compromise
confidential information, create system disruptions or cause
shutdowns. In addition to our own confidential information, we
sometimes receive and are required to protect confidential
third parties and personally
information obtained
from
| Ambac Financial Group, Inc. 20 2020 FORM 10-K |
identifiable information of individuals. To the extent any
disruption or security breach results in a loss or damage to our
data, or inappropriate disclosure of our confidential information
or that of others, or personally identifiable information of
individuals, it could cause significant financial losses that are
either not, or not fully, insured against, cause damage to our
reputation, affect our relationships with third parties, lead to
claims against us, result in regulatory action, or otherwise have a
material adverse effect on our business or results of operations.
In addition, we may be required to incur significant costs to
mitigate the damage caused by any security breach, or to protect
against future damage. Moreover, although we have disaster
recovery and business continuity plans in place, we may not be
able to adequately execute these plans in a timely fashion in the
event of a disruption to our information technology and
application systems.
We may be adversely affected by failures in services or
products provided by third parties.
We have outsourced and may continue to outsource certain
activities of our operations and business, and rely upon third-
party vendors for other essential services and information, such
as the provision of data used in setting loss reserves and the
provision of risk management information and services. A
material failure by an external service or information provider or
a material defect in the products, services or information
provided thereby could adversely affect our financial condition
and results of operations.
Our inability to attract and retain qualified executives and
employees or the loss of any of these personnel could
negatively impact our business.
Our ability to execute on our business strategies depends on the
retention and recruitment of qualified executives and other
professionals. We rely substantially upon the services of our
current executive team. In addition to these officers, we require
key staff with risk mitigation, structured finance, insurance,
credit, investment, accounting, finance, legal and technical
skills. As a result of Ambac’s financial situation, there is a
higher risk that executive officers and other key staff will leave
the Company and replacements may not be motivated to join the
Company. The loss of the services of members of our senior
management team or our inability to hire and retain other
talented personnel could delay or prevent us from succeeding in
executing our strategies, which could further negatively impact
our business.
Our business could be negatively affected by actions of
stakeholders whose interests may not be aligned with the
broader interests of our stockholders.
Ambac could be negatively affected as a result of actions by
stakeholders whose interests may not be aligned with the
broader interests of our stockholders, and responding to any
such actions could be costly and time-consuming, disrupt
operations and divert
the attention of management and
employees. Such activities could interfere with our ability to
execute on our strategic plans.
Risks Related to International Business
Actions of the PRA and FCA could reduce the value of Ambac
UK realizable by AAC, which would adversely affect our
securityholders.
Ambac’s international business is operated by Ambac UK,
which is regulated by the Prudential Regulation Authority
(“PRA”) for prudential purposes and the Financial Conduct
Authority (“FCA”) for conduct purposes. The terms of Ambac
UK’s regulatory authority are now restricted and Ambac UK is
in run-off. Among other things, Ambac UK may not write any
new business, and, with respect to any entity within the Ambac
group of affiliates, commute, vary or terminate any existing
financial guaranty policy, transfer certain assets, or pay
dividends, without the prior approval of the PRA and FCA. The
PRA and FCA act generally in the interests of Ambac UK
policyholders and will not take into account the interests of
securityholders of Ambac when considering whether to provide
any such approval. Accordingly, determinations made by the
PRA and FCA, in their capacity as Ambac UK’s regulators,
could potentially result in adverse consequences for our
securityholders and also reduce the value realizable by AAC for
Ambac UK.
Regulatory uncertainty in relation to Ambac UK’s capital
position could adversely affect the value of Ambac UK and
affect our securityholders.
Under applicable regulatory capital rules (“Solvency II”) Ambac
UK remains deficient in terms of capital. Ambac UK does not
have a remedial plan other than to build its assets over time by
on-going premium collections and earned investment income, as
well as attempting to accelerate the run-off of its exposures.
Further, there currently is no prospect of any capital support
from the Ambac group of affiliates. The PRA is aware of
Ambac UK’s position and prospects. The PRA supervisory
statement SS7/15 “Supervision of firms in difficulty or run-off”
notes that “there are many circumstances in which a run-off
strategy is in the best interests of policyholders” and notes that
the PRA will review such firms and that they “may be permitted
to continue activities necessary to carry out existing contracts in
a manner, and for so long as, the PRA considers necessary in
order
to
policyholders”. Ambac UK clearly falls into this category and
therefore Ambac UK’s current run-off approach remains at all
times subject to the PRA continuing to take no action in relation
to its capital deficit and related Solvency II requirements.
Alternative courses of action open to the PRA could adversely
impact the anticipated run-off trajectory of Ambac UK and
impact its value.
to afford an appropriate degree of protection
Risks Related to Taxation
Surplus notes received in the AMPS Exchange and by holders
of Deferred Amounts pursuant to the Second Amended Plan of
Rehabilitation along with other debt reissued by Ambac may
not be fungible for U.S. federal income tax purposes with other
surplus notes and debt currently outstanding.
Surplus notes received in the AMPS Exchange and by holders of
Deferred Amounts pursuant to the Second Amended Plan of
Rehabilitation along with other debt reissued by Ambac
(together "Reissued Debt") have different issue prices for U.S.
issued
federal
the originally
tax purposes
income
than
| Ambac Financial Group, Inc. 21 2020 FORM 10-K |
outstanding surplus notes and other debt and, therefore, are
expected to accrue original issue discount (“OID”) in an amount
that differs from the amounts of OID accruing on the originally
issued surplus notes and other debt currently outstanding, as the
case may be. Therefore, Reissued Debt may not be fungible
with the other outstanding surplus notes and debt, as applicable,
for U.S. federal income tax purposes. Because Reissued Debt
has the same CUSIP numbers as other related surplus notes and
debt currently outstanding, the Reissued Debt will not be readily
distinguishable from the other outstanding surplus notes and
debt, as applicable. This could create uncertainty in the market
and could adversely affect the liquidity and/or trading values of
surplus notes and other debt.
Certain surplus notes or other obligations of AAC may be
characterized as equity of AAC and as a result, AAC may no
longer be a member of
tax
consolidated group of which AFG is the common parent.
the U.S. federal
income
It is possible that certain surplus notes or other obligations of
AAC may be characterized as equity of AAC for U.S. federal
income tax purposes. If such surplus notes or other obligations
are characterized as equity of AAC that is taken into account for
tax affiliation purposes and it is determined that such “equity”
represented more than twenty percent of the total value of the
stock of AAC, AAC may no longer be characterized as an
includable corporation that is affiliated with AFG. As a result,
AAC would no longer be characterized as a member of the U.S.
federal income tax consolidated group of which AFG is the
common parent (the “Ambac Consolidated Group”) and AAC
would be required to file a separate consolidated tax return as
the common parent of a new U.S. federal income tax
consolidated group including AAC as the new common parent
and AAC’s affiliated subsidiaries (the “AAC Consolidated Tax
Group”).
To the extent AAC is no longer a member of the Ambac
Consolidated Group, AAC’s net operating loss carry-forwards
("NOLs") (and certain other available tax attributes of AAC and
the other members of the AAC Consolidated Tax Group) may
no longer be available for use by the AAC Consolidated Tax
Group or any of the remaining members of the AAC
Consolidated Tax Group to reduce the U.S. federal income tax
liabilities of the AAC Consolidated Tax Group. AFG, AAC and
their affiliates entered into a tax sharing agreement that would
require AFG to make certain tax elections that could mitigate the
loss of NOLs and other tax attributes resulting from a
deconsolidation of AAC from the Ambac Consolidated Group.
However, in the event of a deconsolidation, certain other
benefits resulting from U.S. federal income tax consolidation
may no longer be available to the Ambac Consolidated Group,
including certain favorable rules relating
transactions
occurring between members of the Ambac Consolidated Group
and members of the AAC Consolidated Tax Group.
to
If surplus notes or other obligations are characterized as
equity of AAC, the AAC NOLs (and certain other tax attributes
or tax benefits of the Ambac Consolidated Group) may be
subject to limitation under Section 382 of the Tax Code.
It is possible that certain surplus notes or other obligations may
be characterized as equity of AAC for U.S. federal income tax
purposes. Such characterization could result in an “ownership
change” of AAC for purposes of Section 382 of the Tax Code. If
such an ownership change were to occur, the value and amount
of the AAC NOLs would be substantially impaired, increasing
the U.S. federal income tax liability of AAC and materially
reducing the value of AAC’s stock owned by AFG and the
potential for future dividend payments from AAC to AFG.
Deductions with respect to interest accruing on certain surplus
notes may be eliminated or deferred until payment.
To the extent certain surplus notes are characterized as equity
for U.S. federal income tax purposes, accrued interest will not
be deductible by AAC. In addition, even if such surplus notes
are characterized as debt for U.S. federal income tax purposes,
the deduction of interest accruing on such surplus notes may be
deferred until paid or eliminated in part depending upon (i) the
terms of any deferral and payment provisions provided in such
surplus notes, (ii) whether such surplus notes have “significant
original issue discount,” and (iii) the yield to maturity of surplus
notes. To the extent deductions with respect to interest are
eliminated or deferred, the U.S. federal income tax of the
members of the Ambac Consolidated Group or the members of
the AAC Consolidated Tax Group as the case may be, could be
increased reducing the amount of cash available to pay its
obligations.
Risks Related to Strategic Plan
Ambac is planning to further develop and expand the Specialty
Property and Casualty Program Insurance business and the
Managing General Agency/Underwriting business, which may
permit utilization of Ambac’s net operating loss carry-
forwards; however, such plans may not be realized, or if
realized, may not create value and may negatively impact our
financial results.
Ambac is planning to further develop and expand the Specialty
Property and Casualty Program Insurance Business and the
Managing General Agency/Underwriting business which may,
amongst other things, permit utilization of its net operating loss
carry-forwards. Such plans may involve additional acquisitions
of assets or existing businesses and the development of
businesses through new or existing subsidiaries. It is not
possible at this time to fully predict the future prospects or other
characteristics of such businesses. Although we intend to
conduct business, financial and legal due diligence in connection
with the evaluation of any future business or acquisition
opportunities, there can be no assurance our due diligence
investigations will identify every matter that could have a
material adverse effect on us. Efforts to pursue certain business
opportunities may be unsuccessful or require significant
financial or other resources, which could have a negative impact
on our operating results and financial condition. No assurance
can be given that Ambac will be able to successfully execute its
plans for new business, generate any earnings from new
businesses or be able to successfully integrate any such business
into our current operating structure.
Moreover, Ambac’s ability to enter into new businesses apart
from AAC is subject to some doubt, given the financial
condition of AAC, counterparty or rating agency concerns about
our ability to mitigate insured portfolio losses or recover losses
in litigation, the difficulty of leveraging or monetizing Ambac’s
other assets, and the uncertainty of its ability to raise capital.
Due to these factors, as well as those relating to AAC as
| Ambac Financial Group, Inc. 22 2020 FORM 10-K |
described in this Item 1A. Risk Factors, the value of our
securities is speculative.
Ambac’s current strategy and initiatives have been derived from,
and created as a consequence of, the Company’s current
financial condition and circumstances. Should changes in
Ambac’s circumstances or financial condition or in the political,
economic and/or legal environment occur, there can be no
assurance that all or any part of such strategy and/or initiatives
will not be abandoned or amended to take account of such
changes. Any such adjustment or abandonment may have an
adverse effect on our securities.
Risks Related to the Managing General Underwriting
Business
Xchange derives a significant portion of its commission
revenues from a limited number of insurance companies, the
loss of any of which could result in lower commissions or loss
of business production.
from
For the year ended December 31, 2020, a majority of Xchange’s
total commissions was derived
insurance policies
underwritten by a limited number of insurance companies.
Should one or more of these insurance companies terminate its
arrangements with Xchange or otherwise decrease the number of
insurance policies underwritten for it, Xchange may lose
significant commission revenues or lose significant business
production while
to
underwrite the business.
insurance companies
it seeks other
Xchange’s business, results of operation, financial condition
and liquidity may be materially adversely affected by certain
potential claims, regulatory actions or proceedings.
Xchange is subject to various potential claims, regulatory
actions and other proceedings, including those relating to
alleged errors and omissions in connection with the placement
or servicing of insurance and/or the provision of services in the
ordinary course of business, of which we cannot, and likely will
not be able to, predict the outcome with certainty. Because
Xchange often assists customers with matters
involving
substantial amounts of money, including the placement of
insurance and the handling of related claims that customers may
assert, errors and omissions, claims against it may arise alleging
potential liability for all or part of the amounts in question. Also,
the failure of an insurer with whom Xchange places business
could result in errors and omissions claims against it by its
customers, which could adversely affect Ambac’s results of
operations and financial condition. Claimants may seek large
damage awards, and these claims may involve potentially
significant legal costs and damages. In addition, regardless of
monetary costs, these matters could have a material adverse
effect on Xchange's reputation and cause harm to its carrier,
customer or employee relationships, or divert personnel and
management resources.
Xchange’s current market share may decrease because of
disintermediation within the insurance industry, including
increased competition from insurance companies, technology
companies and the financial services industry, as well as the
shift away from traditional insurance markets.
The MGU business is highly competitive and Xchange actively
competes with numerous firms for customers and insurance
companies, many of which have relationships with insurance
companies or have a significant presence in niche insurance
markets that may give them an advantage over it. Other
competitive concerns may include the quality of Xchange’s
products and services, its pricing and the entrance of technology
companies into the MGU business. A number of insurance
companies are engaged in the direct sale of insurance and do not
pay commissions to agents and brokers. In addition, and to the
extent that banks, securities firms, private equity funds, and
insurance companies affiliate, the financial services industry
may experience further consolidation, and Xchange therefore
may experience
insurance
increased competition
companies and the financial services industry, as a growing
number of
increasingly, and
aggressively, offer a wider variety of financial services,
including MGU services. While Xchange collaborates and
competes in these segments on a fee-for-service basis, we cannot
be certain that such alternative markets will provide the same
level of insurance coverage or profitability as traditional
insurance markets.
larger financial
institutions
from
Changes in law or in the functioning of the healthcare market
could significantly impair Xchange’s business and therefore
negatively impact Ambac’s financial condition and results of
operation.
has
industry. While Xchange
Adoption of a single payer healthcare system or a public health
insurance option would likely adversely impact the entire
healthcare
historically
demonstrated an ability to adjust its products to major changes
in the healthcare industry, given its focus on A&H products,
Xchange would likely be adversely impacted by such a material
change in the U.S. healthcare system particularly if private
health insurance is eliminated, materially limited, or is rendered
noncompetitive. Material adverse developments to Xchange's
business would have a negative impact on Ambac's financial
condition and results of operations which could be material.
Xchange’s business and results of operation and financial
condition may be adversely affected by conditions that result in
reduced insurer capacity.
Xchange’s results of operations depend on the continued
capacity of insurance carriers to underwrite risk and provide
coverage, which depends in turn on those insurance companies’
ability to procure reinsurance. Capacity could also be reduced by
insurance companies failing or withdrawing from writing certain
coverages that Xchange offers to its customers. Xchange has no
control over these matters. To the extent that reinsurance
becomes less widely available or significantly more expensive,
Xchange may not be able to procure the amount or types of
coverage that its customers desire and the coverage Xchange is
able to procure for its customers may be more expensive or
limited.
Variations in Xchange’s commissions that result from the
timing of policy renewals and the net effect of new and lost
business production may have unexpected effects on our
results of operation.
Xchange’s commission income can vary quarterly or annually
due to the timing of policy renewals and the net effect of new
and lost business production. Xchange does not control the
factors that cause these variations. Specifically, customers’
demand for insurance products can influence the timing of
| Ambac Financial Group, Inc. 23 2020 FORM 10-K |
renewals, new business and lost business (which includes
policies that are not renewed), and cancellations. Quarterly and
annual fluctuations in revenues based upon increases and
decreases associated with the timing of new business, policy
renewals and payments from
insurance companies may
adversely affect our financial condition, results of operations
and cash flows. Profit-sharing contingent commissions are paid
by insurance companies based upon the profitability of the
business placed with such companies. In the past these
commissions have accounted for a material amount of
Xchange’s total commissions and fees. Due to, among other
things, the inherent uncertainty of loss in Xchange’s industry
and changes in underwriting criteria by insurance companies,
there will be a level of uncertainty related to the payment of
profit-sharing contingent commissions.
Item 1B. Unresolved Staff Comments — No matters
require disclosure.
Item 2.
Properties
The executive office of Ambac is located at One World Trade
Center, New York, New York 10007, and consists of 46,927
square feet of office space, under a sublease agreement that
expires in January 2030. Ambac continues to hold a lease at
One State Street Plaza that expires in December 2029 (25,871
square feet). Ambac has sublet this space through its expiration
date. During 2020, Ambac leased additional office space in
New Jersey that expires in May 2021.
Additionally, Ambac maintains a disaster recovery site as part of
its Disaster Recovery Plan under a lease that expires in March
2024. This remote warm-back-up facility is capable of serving
the needs of the disaster recovery team to support all business
operations.
Ambac UK maintains an office in London, England, which
consists of 3,514 square feet of office space, under a lease
agreement that expires in October 2025.
Xchange maintains office space in (i) Armonk, NY which
consists of 2,754 square feet under a lease agreement that
expires in July 2028 and (ii) Indianapolis, IN which consists of
3,678 square feet under a lease agreement that expires in March
2024.
Item 3. Legal Proceedings
Refer to Notes to the Consolidated Financial Statements—Note
17. Commitments and Contingencies included in Part II, Item 8
in this Form 10-K for a discussion on legal proceedings against
Ambac.
Item 4. Mine Safety Disclosures — Not applicable.
PART II
Item 5. Market for Registrant's Common Equity,
Related Stockholder Matters and Issuer Purchases of
Equity Securities
Market Information
On February 3, 2020, the Company 's common stock and
warrants began trading on the NYSE under the symbol “AMBC"
and "AMBC WS," respectively. Prior to being listed on the
NYSE, the Company's common stock and warrants were listed
on NASDAQ under the symbols “AMBC” and "AMBCW,"
respectively.
Holders
On February 26, 2021, there were 20 stockholders of record of
AFG’s common stock and 60 holders of record of AFG's
warrants.
Dividends
The Company did not pay cash dividends on its common stock
during 2020 and 2019. Information concerning restrictions on
the payment of dividends from Ambac's insurance subsidiaries is
set forth in Item 1 above under the caption “Dividend
Restrictions, Including Contractual Restrictions" and in Note 9.
Insurance Regulatory Restrictions to the Consolidated Financial
Statements included in Part II, Item 8 in this Form 10-K.
Purchases of Equity Securities By the Issuer and Affiliated
Purchasers
There were no repurchases of equity securities during the fourth
quarter of 2020. Ambac does not have a stock repurchase
program.
Warrants
Each warrant represents the right to purchase one share of AFG
common stock. The warrants are exercisable for cash at any
time on or prior to April 30, 2023 at an exercise price of $16.67
per share. The warrants also have a cashless exercise provision.
to
the warrant repurchase program.
On June 30, 2015, the Board of Directors of AFG authorized the
establishment of a warrant repurchase program that permits the
repurchase of up to $10 million of warrants. On November 3,
2016, the Board of Directors of AFG authorized an additional
$10 million
AFG
repurchased 985,331 warrants at a cost of $8.1 million and then
reissued 824,307 of the repurchased warrants on August 3, 2018
in connection with the AMPS Exchange (as defined in Note 1.
Background and Business Description to the Consolidated
Financial Statements included in Part II, Item 8 in this Form 10-
K). The remaining aggregate authorization at December 31,
2020 is $11.9 million. Refer to Note 1. Background and
Business Description to the Consolidated Financial Statements
included in Part II, Item 8 in this Form 10-K for further
discussion of the AMPS Exchange. Ambac currently has
4,877,749 warrants outstanding.
| Ambac Financial Group, Inc. 24 2020 FORM 10-K |
Stock Performance Graph
The following graph compares the performance of an investment in our common stock from the close of business on December 31, 2015
through December 31, 2020, with the Russell 2000 Index and S&P Completion Index. The graph assumes $100 was invested on December
31, 2015 in our common Stock at the closing price of $14.09 per share and at the closing price for the Russell 2000 Index and S&P
Completion Index. It also assumes that dividends (if any) were reinvested on the date of payment without payment of any commissions.
The performance shown in the graph represents past performance and should not be considered an indication of future performance.
$200
$175
$150
$125
$100
2015
2016
2017
2018
2019
2020
Ambac Financial Group, Inc.
Russell 2000 Index
S&P Completion Index
`
Ambac Financial Group, Inc.
Russell 2000 Index
S&P Completion Index
December 31,
2015
2016
2017
2018
2019
2020
$100
$100
$100
$160
$120
$114
$113
$136
$133
$122
$119
$119
$153
$148
$150
$109
$175
$195
| Ambac Financial Group, Inc. 25 2020 FORM 10-K |
Item 6.
Selected Financial Data
The following financial information for the five years ended December 31, 2020, has been derived from Ambac’s Consolidated Financial
Statements. This information should be read in conjunction with the Consolidated Financial Statements and related notes located in Part II,
Item 8 in this Form 10-K.
($ in millions, except per share data)
Total Comprehensive Income (Loss) Highlights:
Year Ended December 31,
2020
2019
2018
2017
2016
Gross premiums written.....................................................................................
$
(1) $
(28) $
(24) $
(14) $
Net premiums earned..........................................................................................
Net investment income (2)...................................................................................
Net realized investment gains.............................................................................
Net gains (losses) on derivative contracts..........................................................
Net realized (losses) gains on extinguishment of debt (2)...................................
Income (loss) on Variable Interest Entities ("VIEs").........................................
Other income (3)..................................................................................................
Losses and loss expenses (benefit) (1) (2)..............................................................
Operating expenses (2).........................................................................................
Interest expense (2)..............................................................................................
Insurance intangible amortization......................................................................
Pre-tax income (loss)..........................................................................................
Net income (loss)................................................................................................
Net income (loss) attributable to Common Shareholders...................................
Total comprehensive income attributable to Ambac Financial Group, Inc.....
Net income (loss) per share:
54
122
22
(50)
—
5
3
225
92
222
57
(440)
(437)
(437)
(400)
66
227
81
(50)
—
38
134
13
103
269
295
(183)
(216)
(216)
(125)
111
273
108
$
7
3
3
5
(224)
112
242
107
273
267
186
192
175
361
(15)
76
5
20
—
513
122
120
151
(284)
(329)
(329)
(335)
Basic................................................................................................................
Diluted.............................................................................................................
$
$
(9.47) $
(4.69) $
4.07 $
(7.25) $
(9.47) $
(4.69) $
3.99 $
(7.25) $
(54)
197
313
17
(30)
5
(14)
18
(11)
114
124
175
105
74
75
21
1.66
1.64
(1) Ambac records the impact of estimated recoveries related to securitized loans in RMBS transactions that breached certain representations and
warranties within losses and loss expenses (benefit). The expense (benefit) associated with changes to our estimated recoveries for the years ended
December 31, 2020, 2019, 2018, 2017 and 2016 were $(23), $42, $62, $72, and $(71), respectively.
(2) On February 12, 2018, AAC executed the Rehabilitation Exit Transactions (as defined in Note 1. Background and Business Description to the
Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K). These transactions directly resulted in: (i) a Loss
and loss expense benefit of $288; (ii) operating expenses of $17 and (iii) realized gains on extinguishment of debt of $3. Additionally, changes to the
investment portfolio and to the composition of long-term debt arising from the transactions significantly impacted net investment income and interest
expense for 2018 compared to prior years. Refer to Results of Operations included in Item 7 of this Form 10-K for a further discussion of the
Rehabilitation Exit Transactions and their impact on financial results in 2018.
(3) Other income also includes proceeds received by AAC in September 2019 in connection with an SEC action against Citigroup Global Markets Inc. in
the amount of $142. Refer to Note 17. Commitments and Contingencies located in Part II Item 8 in this Form 10-K for further details on the SEC
action.
| Ambac Financial Group, Inc. 26 2020 FORM 10-K |
($ in millions) December 31
Balance Sheet Highlights:
2020
2019
2018
2017
2016
Total non-variable interest entity investments..................................................... $
3,544 $
3,792 $
3,937 $
5,741 $
6,500
Cash and cash equivalents....................................................................................
Premium receivable..............................................................................................
Insurance intangible asset.....................................................................................
Subrogation recoverable (1)...................................................................................
Deferred ceded premium......................................................................................
Total VIE assets...................................................................................................
20
370
409
2,156
70
6,398
24
416
427
2,029
82
6,286
63
495
719
1,933
61
7,093
Total assets...........................................................................................................
13,220
13,320
14,589
Unearned premiums.............................................................................................
Loss and loss expense reserves (1)........................................................................
Long-term debt (2).................................................................................................
Derivative liabilities.............................................................................................
Total VIE liabilities..............................................................................................
Total liabilities......................................................................................................
Total stockholders’ equity....................................................................................
456
1,759
2,739
114
6,328
12,074
1,140
518
1,548
2,822
90
6,212
11,783
1,536
630
1,826
2,929
77
6,981
12,956
1,633
624
586
847
631
52
14,501
23,192
783
4,745
992
83
14,366
21,547
1,645
91
661
962
685
70
13,368
22,636
967
4,381
1,114
319
13,235
20,658
1,978
Total liabilities and stockholders' equity.............................................................. $
13,220 $
13,320 $
14,589 $
23,192 $
22,636
(1) Ambac records as a component of its loss reserves and subrogation recoverable, estimated recoveries related to securitized loans in RMBS transactions
that breached certain representations and warranties ("R&W"). Ambac has recorded gross estimated R&W recoveries of $1,751, $1,727, $1,771,
$1,834, and $1,907 at December 31, 2020, 2019, 2018, 2017 and 2016, respectively.
(2) Long-term debt includes AAC surplus notes and junior surplus notes, the Ambac Note and Tier 2 Notes issued in connection with the Rehabilitation
Exit Transactions in 2018 and the Ambac UK debt issued in connection with the Ballantyne commutation in 2019. Long-term debt for all years
excludes the portion of long-term debt associated with variable interest entities.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) contains certain financial
measures, in particular the presentation of Adjusted Earnings and Adjusted Book Value, which are not presented in accordance with
accounting principles generally accepted in the United States (“GAAP”). We are presenting these non-GAAP financial measures because
they provide greater transparency and enhanced visibility into the underlying drivers of our business. We do not intend for these non-
GAAP financial measures to be a substitute for any GAAP financial measures and they may differ from similar reporting provided by other
companies. Readers of this Form 10-K should use these non-GAAP financial measures only in conjunction with the comparable GAAP
financial measures. Adjusted Earnings and Adjusted Book Value are non-GAAP financial measures that adjust for the impact of certain
non-recurring or non-economic GAAP accounting requirements and include the addition of certain items that the Company has or expects
to realize in the future, but that are not reported under GAAP. We provide reconciliations to the most directly comparable GAAP
measures; Adjusted Earnings to Net income attributable to common stockholders and Adjusted Book Value to Total Ambac Financial
Group, Inc. stockholders’ equity.
COMPANY OVERVIEW
See Part I, Item 1. "Description of the Business" and Note 1.
Background and Business Description for a description of the
Company and our key strategies to achieve our primary goal to
maximize shareholder value.
EXECUTIVE SUMMARY
AFG
During 2020, Ambac made significant progress
the
development of its specialty property and casualty program
agency/underwriting
insurance
businesses:
and managing
general
in
Specialty Property & Casualty Program Insurance — AFG's
activities included the following:
• Established Everspan Indemnity Insurance Company,
which is eligible under the Non-admitted and Reinsurance
Reform Act to write surplus lines in all states, subject to
satisfying minimum capital requirements, which were met
in first quarter 2021. Everspan Indemnity Insurance
Company is seeking to be included on state eligibility lists
in numerous states.
• Completed the re-domestication of Everspan Insurance
to Arizona. Additionally,
Company from Wisconsin
Everspan Insurance Company recently converted its license
in Arizona to write property and casualty insurance and is
working on similarly converting its licenses in all other
states. Everspan Insurance Company has been repositioned
as a subsidiary of Everspan Indemnity Insurance Company,
forming the Everspan Group.
• Neither company has yet issued any new policies. The
Everspan Group platform received an A- Financial Strength
| Ambac Financial Group, Inc. 27 2020 FORM 10-K |
Rating from A.M. Best in February 2021 and is expected to
launch new underwriting programs in 2021.
negotiate, structure and execute such strategies. During 2020,
successful risk reduction transactions included:
Managing General Agency/Underwriting — AFG purchased
80% of Xchange Benefits, LLC and Xchange Affinity
Underwriting Agency, LLC (collectively, “Xchange”). Refer to
Note 3. Business Combination for further information relating to
this acquisition.
AFG Net Assets
As of December 31, 2020 net assets of AFG, excluding its
equity investments in subsidiaries, were $366 million.
($ in millions)
Cash and short-term investments
Other investments (1)
Other net assets
Total
$
$
236
120
10
366
(1)
Includes surplus notes (fair value of $59 million) issued by AAC
that are eliminated in consolidation.
AAC and Subsidiaries
A key strategy for Ambac is to increase the value of its
investment in AAC by actively managing its assets and
liabilities. Asset management primarily entails maximizing the
risk-adjusted return on non-VIE invested assets and managing
liquidity to help ensure resources are available to meet
operational and strategic cash needs. These strategic cash needs
include activities associated with Ambac's liability management
and loss mitigation programs.
Asset Management
to
internal
Investment portfolios are subject
investment
guidelines, as well as limits on types and quality of investments
imposed by insurance laws and regulations. The investment
portfolios of AAC and Ambac UK also hold fixed maturity
securities and various pooled investment funds. Refer to Note
11. Investments to the Consolidated Financial Statements,
included in Part II, Item 8 in this Form 10-K for further details
of fixed maturity investments by asset category and pooled
investment funds by investment type.
At December 31, 2020, Ambac and its subsidiaries owned
$621 million of distressed Ambac-insured bonds, including
significant concentrations of insured Puerto Rico and RMBS
bonds, and excluding Ambac's holdings of secured notes issued
by Ambac LSNI. Subject to internal and regulatory guidelines,
market conditions and other constraints, Ambac may continue to
opportunistically purchase or sell Ambac-insured securities.
Liability and Insured Exposure Management
AAC's Risk Management Group focuses on the implementation
and execution of risk reduction, defeasance and loss recovery
strategies. Analysts evaluate the estimated timing and severity
of projected policy claims as well as the potential impact of loss
mitigation or remediation strategies in order to target and
prioritize policies, or portions
thereof, for commutation,
reinsurance, refinancing, restructuring or other risk reduction
strategies. For targeted policies, analysts will engage with
to
issuers, bondholders and other economic stakeholders
• A commutation in January 2020, via a refunding, of a
transaction with net par
watch
outstanding of $171 million at December 31, 2019;
list public finance
• A refinancing in February 2020 of an adversely classified
asset-backed leasing transaction with net par outstanding of
$86 million at December 31, 2019;
• Purchasing quota share reinsurance in June 2020 on a
transportation revenue credit with net par outstanding of
$33 million at December 31, 2019;
• A refinancing in August 2020 of an international stadium
transaction with net par outstanding of $217 million at
December 31, 2019;
• A refinancing in November 2020 of an international utility
transaction with net par outstanding of $298 million at
December 31, 2019; and
• Partial commutations of $32 million of adversely classified
credits over the course of 2020.
AAC's RMG had additional successes in the first quarter of 2021
as follows:
• In January 2021, AAC completed the purchase of quota
share reinsurance on a portfolio of public finance credits
with net par outstanding of approximately $823 million at
December 31, 2020. Par ceded included general obligation
($347 million),
tax-backed revenue ($234
million), higher education ($161 million) and transportation
($81 million) and included $160 million of watch list and
adversely classified credits.
lease and
• In February 2021, AAC's exposure to an adversely
classified stadium transaction was reduced by $540 million
through the combination of a refinancing and quota share
reinsurance.
The following table provides a comparison of total, adversely
classified ("ACC") and watch list credit net par outstanding in
the insured portfolio at December 31, 2020 and 2019. Net par
exposure within the U.S. public finance market includes capital
appreciation bonds which are reported at the par amount at the
time of issuance of the insurance policy as opposed to the
current accreted value of the bonds.
($ in billions)
December 31,
Total
ACC
Watch List
2020
2019
Variance
$ 33,888 $ 38,018 $
(4,130)
$
$
8,458 $
7,535 $
923
4,720 $
6,752 $
(2,032)
(11) %
12 %
(30) %
The decrease in total net par outstanding resulted from active de-
risking initiatives, including the transactions noted above, as
well as scheduled maturities, amortizations, refundings and
calls. This overall decrease in total net par outstanding was
partially offset by the weakening of the US Dollar compared to
the British Pound and the Euro.
The increase in ACC exposures is primarily due to the addition
of credits impacted by COVID-19 (including $982 million of net
par outstanding from the Watch List category), such as hotel tax,
insured
stadium, convention center and public house
| Ambac Financial Group, Inc. 28 2020 FORM 10-K |
transactions, partially offset by active de-risking and issuer
paydowns and calls.
various monetary policy, fiscal stimulus measures and other
actions have helped to moderate the economic impact.
The decrease in Watch List net par outstanding resulted from
active de-risking initiatives (including the transactions noted
above), downgrades to ACC due to COVID-19, and scheduled
maturities, amortizations, refundings and calls.
In addition, as a result of the economic impacts from the
COVID-19 pandemic, $2,397 million of net par outstanding in
sectors such as mass transit, toll roads, and private higher
education, among others, have been added to the Survey List.
The Survey List is a categorization for enhanced monitoring of
currently performing credits.
We also continue to experience stress in our exposure to Puerto
Rico that consists of several different issuing entities (all below
investment grade). Each issuing entity has its own credit risk
profile attributable to discreet revenue sources, direct general
obligation pledges and general obligation guarantees. Refer to
Part II, Item 7, Management’s Discussion and Analysis of
Financial Condition and Results of Operations, Financial
Guarantees in Force, in this Annual Report on Form 10-K for
additional information regarding the different issuing entities
that encompass Ambac's exposures to Puerto Rico.
COVID-19
In March 2020, the outbreak of COVID-19, caused by a novel
strain of the coronavirus, was recognized as a pandemic by the
World Health Organization, and the outbreak is widespread
globally, including in the markets in which we operate. The
COVID-19 outbreak had, and continues to have, a notable
impact on general economic conditions, including but not
limited to higher unemployment; volatility in the capital
markets; closure or severe curtailment of the operations and,
hence, revenues, of many businesses and public and private
enterprises to which we are directly or indirectly exposed, such
as hotels, restaurants, sports and entertainment facilities, airports
and other transportation facilities, and retail establishments,
mostly due to social distancing guidelines, travel bans and
restrictions, and business restrictions and shutdowns.
In the U.S., significant monetary policy actions, fiscal stimulus
measures and other relief measures have helped to moderate the
economic impact of COVID-19. These measures include
monetary policy decisions, such as quantitative easing,
providing liquidity to financial institutions, providing liquidity
to credit markets, the Paycheck Protection Program Lending
Facility and the Main Street Business Lending Program;
Congressional actions, such as the $2.4 trillion Coronavirus Aid,
Relief and Economic Security ("CARES") Act, the $483 billion
Paycheck Protection Program And Health Care Enactment Act,
the $190 billion Families First Coronavirus Response Act, and,
most
the $920 billion 2021 Consolidated
Appropriations Act, which, among other things, provides direct
payments to households, support for small businesses, renter
assistance and funding for transport, airlines, education and state
and local governments. In addition, housing measures, such as
forbearance on mortgages and suspension of foreclosures and
evictions, and various executive orders have helped to provide
relief. Outside of the US, and in the United Kingdom and Italy
in particular, where Ambac has insured portfolio exposure,
recently,
job
Nonetheless, the U.S. and many large global economies
contracted on a full year basis in 2020. In the U.S., the trajectory
and sustainability of the economic recovery experienced in the
second half of 2020 is uncertain due to, among other things, the
magnitude of
further
losses, uncertainty
regarding
government support measures,
the acceleration of new
COVID-19 cases and the uncertainty related to the timing of a
critical mass of COVID-19 vaccines being provided to the
broader population. For the Ambac insured portfolio, credit risk
remains elevated due to the historical and future economic and
financial impact related to the COVID-19 crisis.
COVID-19 has also impacted Ambac's operating environment.
Ambac has implemented a COVID-19 response plan designed to
ensure the safety of our staff and business continuity. Our
employees transitioned to working remotely in March 2020
while maintaining full operational capabilities. Since July 2020,
Ambac opened certain of its offices to allow a portion of the
workforce to safely return on a voluntary basis. We have not
experienced and do not anticipate incurring material net
incremental operating expenditures to maintain the current
operating environment. Although many of Ambac's critical
third-party service providers are operating with employees
working remotely, we have not presently
identified or
experienced any limitations or operational constraints with
respect to services provided. Ambac does not believe that our
current operating environment has resulted in a significant
change to our disclosure controls or internal controls over
financial reporting.
COVID-19 has adversely impacted Ambac's financial position
and results of operations as credit risk in the insured and
investment portfolios has increased. In the insured portfolio,
municipal, mortgage-backed, student loan and other asset
securitization exposures could be materially adversely impacted,
and as a result, with the exception of the mortgage-backed
sector, we increased loss reserves across each of these and other
sectors during the year ended December 31, 2020. In the
mortgage-backed sector, significantly lower interest rates have
increased excess spread levels and largely offset the impact of
higher mortgage delinquencies and projected losses resulting
from the COVID-19 pandemic. We are continuously evaluating
and updating our view of the macro economic environment as
well as our specific credit view of each of our insured exposures
considering the significant uncertainties brought upon us by the
COVID-19 pandemic. The overall financial
impact from
COVID-19 has been and will be a function of (i) the willingness
and ability of issuers of insured debt and other counterparties to
pay their obligations when due; (ii) the impact of changes to
interest rates on policy and derivative payments; and (iii) the
performance of the investment portfolio.
• Ambac’s insurance policies will be drawn in the event that
the issuers of insured obligations do not make payments on
their obligations when due. As a result of the COVID-19
related economic impact on issuers and markets where
Ambac provides financial guarantees; including lower tax,
project, and business
in
forbearances or delinquencies on mortgage and student
loan payments, we have increased our loss reserves and
revenues and
increases
| Ambac Financial Group, Inc. 29 2020 FORM 10-K |
may further increase them in the future depending on the
duration and severity of the crisis. The crisis may also
impair certain issuers' ability to pay premiums owed to
Ambac; however, we believe such issuers currently have
the ability to continue to pay such premiums timely, but
this is subject to change.
• Ambac has exposure to reinsurance counterparties for their
portions of future claim payments. Ambac has reinsured
approximately 13.3% of its gross par outstanding to four
reinsurance counterparties. Each of these reinsurance
counterparties is experienced in the business of reinsuring
and/or writing financial guaranty insurance. All have
current ratings of A+ (by S&P) or better and have
collateralization or replacement triggers upon downgrade.
Ambac actively monitors each of these reinsurance entities
and currently believes they have the ability to perform
under their respective reinsurance policies, but this is
subject to change.
• Ambac is exposed to the risk that contractual counterparties
(including those under our RMBS litigations and derivative
counterparties) may default in their financial obligations,
whether as the result of insolvency, lack of liquidity,
operational failure, fraud or other reasons. At present,
Ambac has no concerns about the ability of our contractual
counterparties, which include certain regulated exchanges
in the case of interest rate swaps and futures, to perform
under their contracts, but this is subject to change.
real
estate
hospitality,
commercial
• Asset prices declined substantially during the first quarter,
particularly in directly affected industries such as tourism,
airlines,
and
manufacturing. While Ambac does not have significant
investments in these asset classes, we did experience a
negative total return for the investment portfolio of
approximately (4.4)% during the three month period ending
March 31, 2020. We evaluated the investment portfolio at
March 31, 2020, and in subsequent quarters, and have not
recognized credit impairments. Over the last three quarters
of 2020, we have repositioned the investment portfolio to
manage credit risk while improving risk adjusted return,
including redeploying capital into new asset categories.
Ambac recognized a total return for the investment
portfolio of approximately 4.1% for the year ended
December 31, 2020
Given the economic uncertainties associated with the duration
and effects of the COVID-19 pandemic, it is impossible to fully
predict all of its consequences and, as a result, it is possible that
our future operating results and financial condition may be
materially adversely affected. Refer to "Financial Guarantees In
Force,"
"Balance Sheet
Commentary" for further financial details on the current impact
from COVID-19.
"Results of Operations" and
With regard to Ambac's new business strategic objective, we
continue to evaluate opportunities in a disciplined manner. Our
evaluation process has been revised to incorporate consideration
of the impact of COVID-19 on new business prospects as well
as Ambac's existing business and operations.
Financial Statement Impact of Foreign Currency
The impact of foreign currency as reported in Ambac's
Consolidated Statement of Total Comprehensive Income (Loss)
for the year ended December 31, 2020 included the following:
($ in millions)
Net income (1)
Gain (losses) on foreign currency translation (net
$
of tax)
Unrealized gains (losses) on non-functional
currency available-for-sale securities (net of tax)
Impact on total comprehensive income (loss)
$
(1)
23
(2)
20
(1) A portion of Ambac UK's, and to a lesser extent AAC's, assets and
liabilities are denominated in currencies other than its functional
currency and accordingly, we recognized net foreign currency
transaction gains/(losses) as a result of changes to foreign currency
rates through our Consolidated Statement of Total Comprehensive
Income (Loss). Refer to Note 2. Basis of Presentation and
Significant Accounting Policies to the Consolidated Financial
Statements included in Part II, Item 8 in this Annual Report in
Form 10-K for further details on transaction gains and losses.
Future changes to currency rates, may adversely affect our
financial results. Refer to Part II, Item 7A "Quantitative and
Qualitative Disclosures about Market Risk"
further
information on the impact of future currency rate changes on
Ambac's financial instruments.
for
LIBOR Sunset
In July 2017, the Financial Conduct Authority, the authority that
regulates LIBOR, announced its intention to stop compelling
banks to submit rates for the calculation of LIBOR after 2021.
The Alternative Reference Rates Committee (‘ARRC’), a group
of private-market participants convened by the Federal Reserve
Board and the Federal Reserve Bank of New York to help
ensure a successful transition from U.S. dollar LIBOR (‘USD-
LIBOR’) to a more robust reference rate, proposed that the
Secured Overnight Financing Rate (‘SOFR’) represents the best
alternative to USD-LIBOR for use in derivatives and other
financial contracts that are currently indexed to USD-LIBOR.
ARRC has proposed a transition plan with specific steps and
timelines designed to encourage the adoption of SOFR and
guide the transition to SOFR from USD-LIBOR. The Finanical
Conduct Authority in the United Kingdom and other regulatory
bodies have issued statements encouraging cessation of new
transactions referencing USD LIBOR after December 31, 2021,
while supporting extension of the publication of major USD-
LIBOR tenors to mid-2023 to allow additional legacy contracts
to mature on their existing terms. Organizations are currently
working on industry-wide and company-specific transition plans
related to derivatives and cash markets exposed to USD-LIBOR.
Similar efforts are underway to identify suitable replacement
reference rates for LIBOR in other major currencies. As of
December 31, 2020, the Company has exposure to LIBOR in the
following areas: (i) the financial guarantee insured portfolio, (ii)
the Ambac Note included in long-term debt, (iii) certain invested
assets and interest rate derivatives.
Ambac has reviewed its financial guarantee portfolio to identify
insured transactions that it believes may be vulnerable to the
transition from LIBOR. The review focused on insured issues
that are scheduled or projected to have an outstanding principal
| Ambac Financial Group, Inc. 30 2020 FORM 10-K |
balance as of December 31, 2021. The Company reviewed the
governing documents' provisions for the setting of interest rates
in the event of unavailability of LIBOR ("fallback language").
The Company has initiated a dialogue with relevant trustees,
calculation agents, auction agents, servicers and other parties
these
responsible for
transactions. Most have not yet committed to a course of action.
Also, whatever interest rate is set by the party responsible may
be challenged in the court by other parties.
the rate change
implementing
in
The Ambac Note is referenced to 3-month LIBOR and has a
final maturity of February 12, 2023. Recent developments as
summarized above indicate that major LIBOR tenors may
continue to be published through the maturity date of the Ambac
Note.
instruments' fallback
investments, we are working with our
Ambac's
investment and derivative portfolios have been
evaluated to assess the risk of LIBOR unavailability based on
the respective
language and parties
responsible for implementing the alternative rates. Investments
that are Ambac-insured securities, are being addressed through
efforts on the financial guarantee portfolio described above. For
other
investment
managers to ensure LIBOR indexed positions in our portfolio
contain unambiguous fallback language. Ambac's centrally
cleared interest rate swaps are expected to follow LIBOR
transition steps outlined by the International Swaps and
Derivatives Association, Inc. ("ISDA").
Our non-cleared
interest rate swaps either have offsetting LIBOR exposure with a
single counterparty that serves as calculation agent responsible
for rate changes or have Ambac as the calculation agent.
Given the uncertainty of the ultimate timing of the LIBOR
sunset, as well as the lack of clarity on decisions that parties
responsible for calculating interest rates will make and the
reaction of impacted parties as well as the unknown level of
interest rates when the change occurs, the Company cannot at
this time predict the impact of the discontinuance of LIBOR, if it
occurs, on every obligation the Company guarantees or on its
instruments. For more
financial
other LIBOR
information, see the the risk factor "Uncertainties regarding the
expected discontinuance of the London Inter-Bank Offered Rate
or any other interest rate benchmark could have adverse
consequences" found in Part I, Item 1A of this Form 10-K.
indexed
CRITICAL ACCOUNTING POLICIES AND
ESTIMATES
Ambac's Consolidated Financial Statements have been prepared
in accordance with GAAP. This section highlights accounting
estimates management views as critical because they are most
important to the portrayal of the Company's financial condition;
and require management to make difficult and subjective
judgments regarding matters that are inherently uncertain and
subject to change. These estimates are evaluated on an on-going
basis based on historical developments, political events, market
conditions, industry trends and other information. There can be
no assurance that actual results will conform to estimates and
that reported results of operations will not be materially
adversely affected by the need to make future accounting
adjustments to reflect changes in these estimates from time to
time.
Management has identified the following critical accounting
policies and estimates: (i) valuation of loss and loss expense
reserves, (ii) valuation of certain financial instruments and
(iii) valuation of deferred tax assets. Management has discussed
each of these critical accounting policies and estimates with the
Audit Committee, including the reasons why they are considered
critical and how current and anticipated future events impact
these
those determinations. Additional
policies can be found in Note 2. Basis of Presentation and
Significant Accounting Policies to the Consolidated Financial
Statements included in Part II, Item 8 in this Form 10-K.
information about
Valuation of Losses and Loss Expense Reserves (including
Subrogation Recoverables)
The loss and loss expense reserves and subrogation recoverable
assets (collectively defined as "loss reserves") discussed in this
section relate only to Ambac’s non-derivative insurance policies
issued to beneficiaries, including unconsolidated VIEs. A loss
reserve is recorded on the balance sheet on a policy-by-policy
basis based upon the present value ("PV") of expected net claim
cash outflows or expected net recovery cash inflows, discounted
at risk-free rates. The estimate for future net cash flows consider
the likelihood of all possible outcomes that may occur from
missed principal and/or interest payments on the insured
obligation. This estimate also considers future recoveries related
to breaches of contractual representations and warranties by
RMBS transaction sponsors, remediation strategies, excess
spread and other contractual or subrogation-related cash flows.
Ambac’s approach to resolving disputes involving contractual
breaches by transaction sponsors or other third parties has
included negotiations and/or pursuing litigation. Ambac does not
estimate recoveries for litigations where its sole claim is for
fraudulent inducement, since any remedies under such claims
would be non-contractual.
The evaluation process for expected future net cash flows is
subject to certain estimates and judgments regarding the
probability of default by the issuer of the insured security,
probability of remediation and settlement outcomes (which may
include commutation, litigation settlements, refinancings and/or
other settlement outcomes), probability of a restructuring
outcome (which may include payment moratoriums, debt
haircuts and/or subsequent recoveries) and the expected loss
severity of credits for each insurance contract.
As the probability of default for an individual credit increases
and/or the severity of loss given a default increases, our loss
reserve for that insured obligation will also increase. Political,
economic, credit or other unforeseen events could have an
adverse impact on default probabilities and loss severities.
The loss reserves for many transactions are derived from the
issuer’s creditworthiness. For public finance issuers, loss
reserves will consider not only creditworthiness but also
political dynamics and economic status and prospects. The loss
reserves for transactions which have no direct issuer support,
such as most structured finance exposures, including RMBS and
student loan exposures, are derived from the default activity and
loss given default of underlying collateral supporting the
transactions. In addition, many transactions have a combination
of issuer/entity and collateral support. Loss reserves reflect our
assessment of the transaction’s overall structure, support and
expected performance. Loss reserve volatility will be a direct
result of the credit performance of our insured portfolio,
including the number, size, bond types and quality of credits
| Ambac Financial Group, Inc. 31 2020 FORM 10-K |
included in our loss reserves; our ability to execute workout
strategies and commutations; economic and market conditions;
and management's judgments with regards to the current
performance and future developments within
insured
portfolio. The number and severity of credits included in our
loss reserves depend to a large extent on transaction specific
attributes, but will generally
increase during periods of
economic stress and decline during periods of economic
the
prosperity. Reinsurance contracts mitigate our loss reserves but
since Ambac currently has minimal exposure ceded to reinsurers
on credits with loss reserves, the existing reinsurance contracts
are unlikely to have a significant effect on loss reserve volatility.
Loss reserve volatility will also be materially impacted by
changes in interest rates from period to period.
The table below indicates the gross par outstanding and gross loss reserves (including loss expenses) related to policies in Ambac’s loss and
loss expense reserves at December 31, 2020 and 2019:
2020
2019
($ in millions) December 31
RMBS
Domestic Public Finance
Student Loans
Ambac UK and Other Credits
Loss expenses
Totals
Gross Par
Outstanding(1)(2)
$
2,530 $
Gross Loss and
Loss Expense
Reserves(1)(3)(4)
Gross Par
Outstanding(1)(2)
Gross Loss and
Loss Expense
Reserves(1)(3)(4)
3,016
415
1,612
—
(1,446) $
724
234
23
68
3,027 $
2,398
472
271
—
(1,392)
627
208
3
73
$
7,573 $
(397) $
6,168 $
(482)
(1) Ceded par outstanding on policies with loss reserves and ceded loss and loss expense reserves are $739 and $33 respectively, at December 31, 2020
and $511 and $26, respectively at December 31, 2019. Ceded loss and loss expense reserves are included in Reinsurance recoverable on paid and
unpaid losses.
(2) Gross Par Outstanding includes capital appreciation bonds, which are reported at the par amount at the time of issuance of the insurance policy as
opposed to the current accreted value of the bond.
(3) Loss and Loss Expense reserves at December 31, 2020 of $(397) are included in the balance sheet in the following line items: Loss and loss expense
reserves: $1,759 and Subrogation recoverable: $2,156. Loss and Loss Expense reserves at December 31, 2019 of $(482) are included in the balance
sheet in the following line items: Loss and loss expense reserves: $1,548 and Subrogation recoverable: $2,029.
(4) Ambac records as a component of its loss and loss expense reserves, estimated recoveries related to securitized loans in RMBS transactions that
breached certain representations and warranties. Ambac has recorded gross estimated recoveries of $1,751 and $1,727 at December 31, 2020 and
2019, respectively.
See Note 2. Basis of Presentation and Significant Accounting
Policies to the Consolidated Financial Statements, included in
Part II, Item 8 in this Form 10-K for a description of the cash
flow and statistical methodologies used to develop loss reserves.
Most of our reserved credits with large loss reserves utilize the
cash flow method of reserving. Alternative cash flow scenarios
are developed to represent the range of possible outcomes and
resultant future claim payments and timing. Scenarios and
probabilities of each are adjusted regularly to reflect changes in
status, outlook and our analysis and views.
Significant
judgment is used to develop the cash flow assumptions and
related probabilities, and there can be no certainty that the
scenarios or probabilities will not deviate materially from
ultimate outcomes.
In some cases, such as RMBS and student loans, cash flow
projections include the modeling of an issuer or transaction’s
future revenues and expenses to determine the resources
available to pay debt service on our insured obligations. With
respect to RMBS, a component of our loss reserve estimate
includes subrogation recoveries related to securitized loans in
such transactions that breached certain representations and
warranties ("R&W"). In other cases, such as many public
finance exposures including our Puerto Rico exposures, we
consider the issuers’ overall ability and willingness to pay, as it
relates to the existing fiscal, economic, legal, restructuring and/
or political framework relevant to a particular exposure or group
of exposures. We then develop multiple scenarios where issuer
debt service is paid, missed and/or haircut with claims paid then
modeled for any recovery amount and timing. There is no
certainty our assumptions as to scenarios or probabilities will
not be subject to material changes as developments occur.
In estimating loss reserves, we also incorporate scenarios which
represent the potential outcome of remediation strategies.
Remediation scenarios may include (i) a potential refinancing of
the transaction by the issuer; (ii) the issuer’s ability to redeem
outstanding securities at a discount, thereby increasing the
structure’s ability to absorb future losses; and (iii) our ability to
terminate, restructure or commute the policy in whole or in part.
The remediation scenarios and the related probabilities of
occurrence vary by policy depending on ongoing and expected
discussions and negotiations with issuers and/or investors. In
addition to commutation negotiations that are underway with
various counterparties in various forms, our reserve estimates
may also include scenarios which incorporate our ability and/or
expectation
to commute additional exposure with other
counterparties.
Valuation of Certain Financial Instruments
The Fair Value Measurement Topic of the ASC requires
financial instruments to be classified within a three-level fair
the financial
value hierarchy. The fair value hierarchy,
instruments classified within each level, our valuation methods,
| Ambac Financial Group, Inc. 32 2020 FORM 10-K |
inputs, assumptions and the review and validation procedures
over quoted and modeled pricing are further detailed in Note 10.
Fair Value Measurements
the Consolidated Financial
to
Statements included in Part II, Item 8 in this Form 10-K.
The level of judgment in estimating fair value is largely
dependent on the amount of observable market information
available to fair value a financial instrument, which is also
determinative of where the financial instrument is classified in
the fair value hierarchy. Level 3 instruments are valued using
models which use one or more significant inputs or value drivers
that are unobservable and therefore require significant judgment.
Level 3 financial instruments which are material include certain
invested assets, uncollateralized
interest rate swaps and
investments and loan receivables of consolidated VIEs. Model-
derived valuations of Level 3 financial instruments incorporate
estimates of the effects of Ambac's own credit risk and/or
counterparty credit risk, which can be complex and judgmental.
Furthermore, Level 3 investments and loan receivables of
consolidated VIEs incorporate estimates of Ambac's financial
guarantee cash flows, including future premiums and losses.
Such cash
regarding
prepayments of VIE debt, loss probabilities and loss severities,
all of which are inherently uncertain.
flow estimates
judgments
require
All models and related assumptions are continuously re-
evaluated by management and enhanced, as appropriate, based
on improvements in information and modeling techniques. The
re-evaluation process includes a quarterly meeting of senior
Finance and Risk personnel to review and approve changes to
models and key assumptions.
As a result of the significant judgment for the above-described
instruments, the actual trade value of the financial instrument in
the market, or exit value of the financial instrument owned by
Ambac, may be significantly different from its recorded fair
value.
Valuation of Deferred Tax Assets
judgment
Our provision for taxes is based on our income, statutory tax
rates and tax planning opportunities available to us in the
jurisdictions in which we operate. Tax laws are complex and
subject to different interpretations by the taxpayer and respective
governmental
is
taxing authorities. Significant
required in determining our tax expense and in evaluating our
tax positions. We review our tax positions quarterly and adjust
the balances as new information becomes available. Deferred tax
assets arise because of temporary differences between the
financial reporting and tax bases of assets and liabilities, as well
as from net operating loss ("NOL"). More specifically, deferred
tax assets represent a future tax benefit that results from losses
recorded under GAAP in a current period which are only
deductible for tax purposes in future periods and NOL carry
forwards.
Valuation allowances are established to reduce deferred tax
assets to an amount that “more likely than not” will be realized.
On a quarterly basis, management identifies and considers all
available evidence, both positive and negative, in making the
determination with significant weight given to evidence that can
be objectively verified. Negative evidence includes the potential
for unrecognized future insurance tax losses; cumulative pre-tax
losses in recent years; uncertainty regarding timing and
magnitude of RMBS R&W litigation recoveries; and no new
financial guarantee business.
The level of deferred tax asset recognition is influenced by
management’s assessment of future expected taxable income,
which depends on the existence of sufficient taxable income
within the carry forward periods available under the tax law. As
a result of the above-described risks and uncertainties associated
with future operating results, management believes it is more
likely than not that the Company will not generate sufficient
taxable income to recover the U.S. deferred tax asset and
therefore has a full valuation allowance. To the extent such risks
and uncertainties are resolved, Ambac may have the ability to
establish a history of making reliable estimates of future income
which could ultimately result in a reduction to the deferred tax
asset valuation allowance. See Note 14. Income Taxes to the
Consolidated Financial Statements, included in Part II, Item 8 in
this Form 10-K for additional information on the Company's
deferred income taxes.
FINANCIAL GUARANTEES IN FORCE
The following table provides a breakdown of guaranteed net par
outstanding by market sector at December 31, 2020 and 2019.
Net par exposures within the U.S. public finance market include
capital appreciation bonds which are reported at the par amount
at the time of issuance of the insurance policy as opposed to the
current accreted value of the bonds. Guaranteed net par
outstanding includes the exposures of policies that insure
variable interest entities (“VIEs”) consolidated by Ambac in
accordance with
the ASC,
Consolidation. Guaranteed net par outstanding excludes the
exposures of policies that insure bonds which have been
refunded or pre-refunded and the policy that insures the notes
issued by Ambac LSNI as defined in Note 1. Background and
Business Description to the Consolidated Financial Statements
included in Part II, Item 8 in this Form 10-K.
the Consolidation Topic of
($ in millions) December 31,
Public Finance (1)(2)
Structured Finance
International Finance
Total net par outstanding
2020
2019
$
15,497 $
17,653
6,337
12,054
$
33,888 $
7,508
12,857
38,018
(1)
Includes $5,575 and $5,654 of Military Housing net par
outstanding at December 31, 2020 and 2019, respectively.
(2) Includes $1,070 and $1,123 of Puerto Rico net par outstanding at
December 31, 2020 and 2019, respectively. Components of Puerto
Rico net par outstanding as well as other Public Finance exposures
include capital appreciation bonds which are reported at the par
amount at the time of issuance of the related insurance policy as
opposed to the current accreted value of the bonds.
| Ambac Financial Group, Inc. 33 2020 FORM 10-K |
The table below shows Ambac’s ten largest exposures, by repayment source, as a percentage of total financial guarantee net par
outstanding at December 31, 2020 (in millions):
($ in
millions)
Risk Name
IF
IF
IF
IF
IF
AUK Mitchells & Butlers Finance plc-UK Pub Securitisation
AUK Capital Hospitals plc (3)
AUK Aspire Defence Finance plc
AUK Anglian Water
AUK National Grid Gas
PF
AAC
New Jersey Transportation Trust Fund Authority -
Transportation System
IF
IF
IF
PF
AUK Posillipo Finance II S.r.l
AUK Ostregion Investmentgesellschaft NR 1 SA (3)
AUK RMPA Services plc
AAC Mets Queens Baseball Stadium Project, NY, Lease Revenue (4)
Total
PF = Public Finance, SF = Structured Finance, IF = International Finance
AAC = Ambac Assurance, AUK = Ambac UK
Ambac
Ratings (1)
Net Par
Outstanding (2)
% of Total
Net Par
Outstanding
Bond Type
UK-Asset
Securitizations
UK-Infrastructure
UK-Infrastructure
UK-Utility
UK-Utility
US-Lease and Tax-
backed Revenue
Italy-Sub-Sovereign
Austria-
Infrastructure
BBB
$
A-
A-
A-
A-
BBB-
BIG
BIG
UK-Infrastructure
BBB+
US-Stadium
Financing
BIG
974
903
870
853
788
767
742
707
575
540
2.9 %
2.7 %
2.6 %
2.5 %
2.3 %
2.3 %
2.2 %
2.1 %
1.7 %
1.6 %
$
7,719
22.9 %
(1)
Internal credit ratings are provided solely to indicate the underlying credit quality of guaranteed obligations based on the view of Ambac. In cases
where Ambac has insured multiple tranches of an issue with varying internal ratings, or more than one obligation of an issuer with varying internal
ratings, a weighted average rating is used. Ambac credit ratings are subject to revision at any time and do not constitute investment advice. BIG
denotes credits deemed below investment grade.
(2) Net Par includes capital appreciation bonds, which are reported at the par amount at the time of issuance of the insurance policy as opposed to the
current accreted value of the bonds.
(3) A portion of this transaction is insured by an insurance policy issued by AAC. AAC has issued policies for these transactions that will only pay in the
event that Ambac UK does not pay under its insurance policies (“second to pay policies")
(4)
In February 2021, the net par outstanding for this transaction was reduced to zero through the combination of a refinancing and quota share
reinsurance.
Net par related to the top ten exposures increased $79 million from December 31, 2019. Exposures are impacted by changes in foreign
exchange rates, certain indexation rates and scheduled and unscheduled paydowns. The increase from 2019 was primarily related to
changes in foreign exchange rates partially offset by scheduled paydowns. The concentration of net par amongst the top ten (as a
percentage of net par outstanding) has increased to 23% from 20% at December 31, 2019. Certain credits within the top ten have had
Ambac rating downgrades since December 31, 2019, primarily related to the impact of COVID-19, including Mitchells & Butlers Finance
plc, New Jersey Transportation Trust Fund Authority and Mets Queens Baseball Stadium Project. Aspire Defence Finance plc's rating at
December 31, 2020, improved since December 31, 2019. The remaining insured portfolio of financial guarantees has an average net par
outstanding of $32 million per single risk, with insured exposures ranging up to $534 million and a median net par outstanding of $5
million.
Given that Ambac has not written any new insurance policies since 2008, the risk exists that the insured portfolio becomes increasingly
concentrated to large and/or below investment grade exposures.
COVID-19
COVID-19 and the public health responses by the US federal
and state governments at the onset of the pandemic resulted in a
shut down for several months of significant portions of the US
economy, including areas that Ambac's insured obligors rely
upon to generate the revenues and cash flows necessary to
service debts we insure. Governments outside the US, in
markets in which Ambac operates, also implemented similar
measures to the US. Ambac undertook a detailed analysis of the
potential impact of the closure of certain portions of the US
economy and certain other economies, including the UK, Italy,
and Australia, to assess the impact of the resulting global
economic contraction on
insured financial guarantee
its
portfolio. The economic contraction and the subsequent but still
uncertain recovery; actions such as monetary policy and fiscal
stimulus, including the CARES Act in the US that was signed
into law on March 27, 2020, and other fiscal stimulus programs;
and our insured obligors' financial flexibility and ability to
mitigate the operational and economic impact of the recession
will determine the ultimate impact to Ambac's insured portfolio.
CARES Act and Other Relief Measures
The $2.4 trillion Coronavirus Aid, Relief, and Economic
Security Act ("CARES Act") provides relief and stimulus funds
for American consumers, businesses and industries impacted by
COVID-19. Other Congressional measures, such as the $483
billion Paycheck Protection Program and Health Care
Enhancement Act ("PPE & HCE Act") and the recent $920
billion Consolidated 2021 Appropriations Act have provided
additional measures to moderate the impact of COVID-19 on the
economy.
| Ambac Financial Group, Inc. 34 2020 FORM 10-K |
The CARES Act together with the PPP & HCE Act and the
2021 Consolidated Appropriations Act have several measures
that impacted US municipalities and other borrowers, including
consumers, such as mortgage and student loan borrowers,
represented in our insured portfolio, including:
• A program for direct lending, loans, loan guarantees and
investments
and
municipalities, including to passenger airlines and cargo
airlines;
businesses,
eligible
states
to
• Programs for small business loans;
• Business tax breaks, including payroll tax deferral;
• Allocations of direct aid to state and local governments to
reimburse them for the costs of dealing with COVID-19;
• The Public Health and Social Services Fund for distribution
of grants to healthcare providers and hospitals;
• Grants for transit agencies;
• Grants for airport authorities;
• Funding for transport, airlines, education, state and local
governments, health, vaccines, nutrition;
• Emergency jobless benefits;
• Renter assistance; and
• Direct payments to households and for unemployment
insurance.
Despite the above provisions, which are designed to help
mitigate the economic impact of the COVID-19 pandemic
generally, the CARES Act contains certain provisions that may
adversely affect Ambac.
In March 2020, the CARES Act temporarily suspended
payments on all student loans held by the Department of
Education through September 30, 2020. The moratorium on
payments has twice been extended by executive order and is
now set to expire on September 30, 2021. Although the CARES
Act provision did not include the private student loans owned by
special purpose entities that have their securitized obligations
guaranteed by AAC, we have incorporated into our loss reserves
analysis assumptions related to increased delinquencies for
borrowers with private student loans who often also have federal
student loans and have elected not to pay altogether. Despite the
assumed increase in delinquencies and losses related to this
phenomena as well as the general deterioration in consumer
credit related to the economic downturn, AAC does not
anticipate making substantial claim payments on insured student
loan transactions for several years due to the structures
governing the insured bonds.
Additionally, the federal government has provided temporary
relief measures to which servicers of mortgage loans must
adhere. The Federal Housing Administration ("FHA") of the US
Department of Housing and Urban Development and the Federal
Housing Finance Agency ("FHFA") are providing temporary
relief measures that require mortgage loan servicers to offer
relief to borrowers who suffer hardship as a result of COVID-19.
The relief measures include moratoriums on foreclosures and
evictions as well as the expansion of forbearance and subsequent
repayment options. Such servicers are generally applying these
guidelines to non-FHFA loans, including those loans owned by
special purpose entities that have their securitized obligations
guaranteed by AAC. Moreover, several State agencies have
issued similar guidance to mortgage loan servicers concerning
loan forbearances and other relief for borrowers. Depending on
the trajectory and strength of the economic recovery, there may
still be pressure to extend the duration of forbearances and
subsequently to offer generous repayment plans. Forbearances
increased sharply across the AAC's insured first lien RMBS
obligations during the second quarter of 2020 and early in the
third quarter of 2020, but then dropped later in the third quarter
of 2020 through the end of the year, albeit to still elevated
levels. The ultimate impact of forbearances and other relief
measures, such as foreclosure and eviction moratoriums, on
AAC's insured RMBS obligations are still unclear. However, we
have assumed that such measures, as well as the residual impact
of the global recession, will have an adverse impact on our
insured RMBS transactions. Consequently, we have anticipated
that we will experience an increase in claim payments for certain
of our insured RMBS obligations. However, we also anticipate
that the significant decline in interest rates experienced during
2020 will likely generate additional excess spread recoveries on
insured RMBS obligations that will mostly compensate for such
adverse effects.
In the UK all non-essential leisure, food and retail operations,
including public houses were closed from March 20, 2020, as a
consequence of the COVID-19 pandemic. Premises were
allowed to gradually reopen from June 1, 2020, such that by July
4, 2020, the majority of outlets were permitted to reopen. The
UK Government introduced a number of measures to mitigate
the impact of these enforced closures including rebating
employers 80% of staff salaries (up to a £2,500 per month per
employee cap), tax deferrals, sales tax reductions, business loan
schemes and property tax relief. On January 5, 2021, the UK
Government reimposed the closure of non-essential leisure food
and retail operations until February 15, 2021, with a gradual
opening of venues on regional basis thereafter. The mitigating
measures noted above will continue through this period before
then being slowly withdrawn by April 30, 2021.
While Ambac expects the foregoing measures to help mitigate
economic damage and aid the functioning of the capital markets,
Ambac's exposure to credit risk as a result of the economic
fallout from the COVID-19 pandemic remains elevated, and we
could experience material losses that would adversely impact
our future results of operations and financial condition.
Insured Portfolio
A deep recession during the first half of 2020 was followed by a
moderate recovery in the second half of 2020 that still left the
U.S. with an overall contraction in GDP for the full year.
Economic growth for 2021, while expected to be positive, is also
expected to be tempered by the continued uncertainty related to
the elevated infection rate of COVID-19 in the U.S. and the
uncertain timing related to achieving a critical mass of
COVID-19 vaccinations across the populace. Recovery to 2019
levels of economic output are not expected until late 2021 or
early 2022. Consequently, we expect pressure will remain on
U.S. states and local governments which are currently facing
significant budget strains as tax and other revenues have faltered
as a result of COVID-19 related shutdowns, job losses and travel
restrictions. In addition states may need to cut aid to local
municipalities that are also under pressure from lost revenues.
| Ambac Financial Group, Inc. 35 2020 FORM 10-K |
Monetary policy and federal stimulus through the CARES Act
and other programs has benefited and is expected to continue to
benefit in the overall economic recovery and more specifically
provide some relief to state and local governments, including to
issuers of municipal debt insured by Ambac, although the
sufficiency of such benefits remains uncertain.
As part of the detailed analysis of the insured portfolio, we have
identified certain Public Finance sectors
that are most
susceptible to potential claims or impairments as a result of a
prolonged or uneven recovery from the COVID-19 crisis. Our
near-term concerns are concentrated on exposures substantially
reliant on narrow, economically sensitive revenue streams. The
ability of issuers of these obligations to pay is expected to be
stressed although several issuers expressed a willingness to use
their balance sheets to support their obligations and avoid
defaults in the near-term. Ambac's insured par outstanding, net
of reinsurance ("NPO"), to these Public Finance sectors are as
follows at December 31, 2020:
($ in millions)
Market / Sector
Stadiums
Toll Roads / Bridges
Dedicated Tax
Rail / Mass Transit
Hotels / Convention Centers
Higher Education Auxiliary
Airports
Total Debt
Service Due
Next Twelve
Months
Total NPO
$
634 $
457
358
311
248
235
111
42
43
51
15
43
25
22
Total Public Finance
$
2,354 $
241
The RMBS and student loan insured portfolios are expected to
be adversely impacted by the previously mentioned forbearances
and the overall state of the U.S. economy which contracted in
2020, and where unemployment is still elevated and job
participation rates are depressed. Expected to offset such impact
for RMBS exposures is the benefit to excess spread within the
securitization structures as a result of the significant reduction in
interest rates, which will result in higher recoveries. Ambac
reduced its exposure to stadiums by $540 million of net par in
February 2021.
the
the
issuer
revenue of
Ambac insured exposure includes a number of international
policies where
is demand
dependent. Such transactions have been impacted by the
reduction of revenue due to the COVID-19 pandemic. Ambac
and its advisors are working closely with impacted issuers to
review their plans and liquidity facilities in light of these events.
In connection with these efforts. Ambac's NPO with respect to
international demand dependent policies are as follows at
December 31, 2020:
($ in millions)
Market / Sector
Asset Securitizations
Toll Roads / Bridges
Airports
Higher Education
Total
Total Debt
Service Due
for Twelve
Months
Total NPO
$
974 $
768
215
178
86
62
7
10
$
2,135 $
165
At this time, there are significant uncertainties surrounding the
ultimate number of claims and scope of damage resulting from
this pandemic. Actual losses from these events may vary
materially from Ambac's loss and loss expense reserves due to
several factors, including the inherent uncertainties in making
such determinations and the evolving nature of this pandemic.
Potential losses from the economic consequences of the
COVID-19 pandemic could be material and therefore may have
a material adverse effect on our results of operations and
financial condition.
U.S. Public Finance Insured Portfolio
Ambac’s portfolio of U.S. public finance exposures is $15,497
million, representing 46% of Ambac’s net par outstanding as of
December 31, 2020, and a 12% reduction from the amount
outstanding at December 31, 2019. This reduction in exposure
was due to additional reinsurance acquired, restructuring and
related commutation transactions, scheduled paydowns, and
early terminations (calls, refundings and pre-refundings). While
Ambac’s U.S. public finance portfolio consists predominantly of
municipal bonds such as general obligation, revenue, and lease
and tax-backed obligations of state and local government
entities, the portfolio also comprises a wide array of non-
municipal types of bonds, including financings for not-for-profit
entities and transactions with public and private elements, which
generally finance infrastructure, housing and other public
interests. See Note 7. Financial Guarantees in Force to the
Consolidated Financial Statements, included in Part II, Item 8 in
this Form 10-K for exposures by bond type.
Municipal bonds are generally supported directly or indirectly
by the issuer’s taxing authority or by public sector fees and
assessments which may or may not be specifically pledged. Risk
factors in these transactions derive from the municipal issuer,
including its fiscal management, politics, and economic position,
as well as its ability and willingness to continue to pay its debt
service. Municipal bankruptcies and similar proceedings, while
still relatively uncommon, have occurred, exposing Ambac to
the risk of liquidity claims and ultimate losses if issuers cannot
successfully adjust their liabilities without impairing creditors.
Not-for-profit transactions are generally supported by the not-
for-profit entities’ net revenues and may also include specific
pledges, liens and/or mortgages. The entity typically serves a
well-defined market and promulgates a public purpose mission.
These transactions may afford Ambac contractual protections
such as financial covenants and control rights in the event of
issuer breaches and defaults. Risk factors in these transactions
derive from the creditworthiness of the issuer, including but not
limited to, its financial condition, leverage, management,
business mix, competitive position, industry and socioeconomic
trends, government programs and other factors. Examples of
| Ambac Financial Group, Inc. 36 2020 FORM 10-K |
these types of transactions include not-for-profit hospitals,
universities, associations and charities.
Public/private transactions are generally structured to achieve
their targeted public interest objective without direct support
from the public sector. Some examples of this type of financing
include affordable housing, private education, privatized
military housing and student housing. Protections within these
financings provided to Ambac usually include the strength of the
financed asset’s essentiality and public purpose and may include
financial covenants, collateral and control rights. Risk factors
include financial underperformance, event risk and a shift in the
asset’s mission or essentiality. One example of this type of
financing is U.S. military housing.
• Ambac insures approximately $5,575 million net par of
privatized military housing debt. The debt was issued to
finance the construction and/or renovation of housing units
for military personnel and their families on domestic U.S.
military bases. Debt service is not directly paid or
guaranteed by the U.S. Government. Rather, the bonds are
serviced from the cash flow generated in most cases by
rental payments deposited by the military directly into
lockbox accounts as part of each service personnel’s Basic
Allowance for Housing (BAH). In a small number of cases
rental payments also come from civilians, including retired
service personnel, living on a particular base. Collateral for
these transactions includes the BAH payments as well as an
interest in the ground lease. Risk factors affecting these
transactions include ongoing base essentiality, military
deployments, the U.S. government’s commitment to fund
the BAH, marketability/attractiveness of
the on-base
housing units versus off-base housing, construction
completion, environmental remediation, utility and other
operating costs and housing management. Ambac's
exposure to privatized military housing debt is a growing
concentration given the long-dated maturity profile of the
exposure relative to faster run-off of other parts of
Ambac's insured portfolio. As of December 31, 2020,
privatized military housing represented approximately 16%
of net par outstanding.
Puerto Rico
its
Ambac has exposure to the Commonwealth of Puerto Rico (the
"Commonwealth") and
instrumentalities across several
different issuing entities with total net par exposure of $1,070 as
of December 31, 2020. Each has its own credit risk profile
attributable to, as applicable, discrete revenue sources, direct
general obligation pledges and/or general obligation guarantees.
COVID-19
At this time, it remains very difficult to predict what the shape
and timing of the post COVID-19 recovery will be for the
Commonwealth of Puerto Rico, not least because the depth and
length of COVID-19's impact is still uncertain. The island does
not appear to be insulated from the fiscal and economic impact
COVID-19 has had on U.S. municipalities on the mainland. Net
general fund revenue collected from July-November 2020
totaled $4.01 billion, down about $210 million from the $4.22
billion collected during the same period in 2019, according to
the Puerto Rico Treasury Department's tax collection reports
released in January 2021. Sales and use, corporate income and
personal income tax collections have all been adversely
impacted to varying degrees by the pandemic. It is unclear if this
cumulative underperformance will continue, what this implies
for the Commonwealth’s ability to pay debt service, and what
lasting effects COVID-19 will have on the economic and
financial profile of Puerto Rico.
Over the longer-term, Puerto Rico's recovery profile will be
impacted by a wide range of factors as well as financial
considerations including, but not limited to:
• the fiscal and monetary policies of the federal government
which will shape the trajectory of the U.S. economy;
• the speed and efficacy of targeted federal aid packages to
(1) help Puerto Rico address the negative economic effects
of the pandemic and (2) rebuild better and more resilient
infrastructure post-Hurricanes Irma and Maria in 2017 and
earthquakes in 2020;
• the receptivity, availability, pace and effectiveness of
vaccinations for COVID-19;
• changes to supplemental Medicaid funding relief and other
federal transfer payments; and
• the willingness and ability of
implement much needed
the Commonwealth
fiscal and
government
structural reforms.
to
Commonwealth Fiscal Plan
the Oversight Board certified
the
On May 27, 2020,
Commonwealth Fiscal Plan, which purports to incorporate the
impact of COVID-19 on the Commonwealth economy, and
projects diminished growth, budget surplus, and debt capacity as
compared to previous versions of the Commonwealth Fiscal
Plan. The Commonwealth Fiscal Plan will significantly inform
the Commonwealth Plan of Adjustment, and the diminished
economic performance described in the new Fiscal Plan implies
worse outcomes than had been previously disclosed for creditors
under the Commonwealth's Plan of Adjustment.
According to a letter sent January 19, 2021, from the Oversight
Board's Executive Director, Natalie Jaresko, to Governor Pedro
Pierluisi and legislative leaders, the Oversight Board is aiming
to certify an updated Commonwealth Fiscal Plan reflecting new
information regarding the Commonwealth’s macroeconomic
environment and government revenues and expenditures, as well
as the impact of expenses from the anticipated amended
Commonwealth Plan of Adjustment. The letter also establishes
the timeline for the annual fiscal plan revision process, which
would conclude with the Oversight Board certification of the
Commonwealth Fiscal Plan by April 23, 2021.
No assurances can be given that Ambac's financial condition
will not suffer a materially negative impact as an ultimate result
of the Commonwealth Fiscal Plan, the Commonwealth Plan of
Adjustment, or any future changes or revisions
the
Commonwealth Fiscal Plan or future fiscal plans and/or plans of
adjustment for Puerto Rico Highways and Transportation
Authority ("PRHTA") or other Puerto Rico instrumentalities.
to
Commonwealth Plan of Adjustment
On February 9, 2020, the Oversight Board announced it reached
an agreement in principle on a plan support agreement (the
the
"Amended PSA") with certain creditors supporting
| Ambac Financial Group, Inc. 37 2020 FORM 10-K |
restructuring of the Commonwealth's General Obligation ("GO")
and Public Building Authority ("PBA") debt. On February 28,
2020, the Oversight Board filed an Amended POA and an
amended Disclosure Statement to restructure approximately $35
billion of debt and other claims against the Commonwealth of
Puerto Rico, PBA, Employees Retirement System (ERS), and
other issuers as well as more than $50 billion in pension
liabilities. If confirmed, the Amended POA would reduce
Commonwealth debt and other claims from $35 billion to less
than $11 billion, a 70% haircut and would also reduce the
Commonwealth’s annual debt service by 56%. Treatment for
pension claims would include a reduction in pension payments
by as much as 8.5% for retirees who currently receive at least
$1,200 a month, such that approximately 75% of current and
future retirees would not face any cuts, and the establishment of
a pension reserve fund to help support retirement payments in
future
disproportionately
disadvantages claims against the Commonwealth related to
certain revenue bonds issued by Puerto Rico instrumentalities,
including those insured by AAC, providing for an estimated
recovery of 3.9% on claims against the Commonwealth related
to PRHTA bonds, Puerto Rico Infrastructure Financing
Authority ("PRIFA") Special Tax Revenue ("Rum Tax") bonds,
and Puerto Rico Convention Center District Authority
("PRCCDA") bonds.
years. The Amended POA
In light of COVID-19 and its impact, and potential future
impact, on the Commonwealth, the Oversight Board and the
parties to the Amended PSA began negotiating revisions to the
Amended PSA without terminating that agreement. Information
released publicly regarding these negotiations indicated that
proposals considered during the course of such negotiations
implied recoveries related to certain revenue bonds insured by
AAC below 3.9%.
On October 28, 2020, the Court ordered the Oversight Board to
file, by February 10, 2021, either (i) an informative motion with
a term sheet disclosing the economic and structural terms and
features of a proposed amended Commonwealth Plan of
Adjustment, or (ii) the proposed amended Commonwealth Plan
of Adjustment itself, together with a proposed timeline for
disclosure statement and confirmation hearings. On February 16,
2021, the Court entered an order granting the Oversight Board’s
motion to extend the court’s deadline to file a Commonwealth
Plan of Adjustment or comprehensive term sheet to March 8,
2021. The Oversight Board's motion disclosed that the Oversight
Board reached an agreement in principle regarding the terms of
a new plan support agreement (the “Second Amended PSA”)
with certain holders of GO Bond Claims and/or CW Guarantee
Bond Claims (each as defined in the Second Amended PSA) and
holders of PBA Bond Claims (as defined in the Second
Amended PSA). The motion also indicated that the requested
extension of the deadline to March 8, 2021, will allow the
Oversight Board to schedule and conduct additional mediation
sessions with parties in interest to increase support for the
forthcoming Commonwealth Plan of Adjustment.
On February 22, 2021, the Oversight Board, as representative of
the Commonwealth of Puerto Rico, PBA, and the Employee
Retirement System of the Government of the Commonwealth of
Puerto Rico publicly disclosed the Second Amended PSA.
Assured Guaranty Corp. and Assured Guaranty Municipal Corp.
("Assured"), Syncora Guarantee Inc., and National Public
Finance Guarantee Corporation ("National") have conditionally
agreed to the Second Amended PSA. In addition, by a Joint
Notice of Termination, dated February 22, 2021, the Amended
PSA, dated as of February 9, 2020, was terminated and is of no
further force or effect. On February 23, 2021, the Oversight
Board announced that the Second Amended PSA had the
support of 70% of all GO Bond and PBA Bond claims. In the
Second Amended PSA, approximately $18.8 billion of the GO
and GO-guaranteed liabilities will be reduced to approximately
$7.4 billion, newly issued securities will be GO-only with no
inclusion of the COFINA junior lien bonds contemplated within
the February 2020 Amended POA, and creditors will accept part
of their recovery consideration in the form of a contingent value
instrument (“CVI”) that pays out if a portion of the island’s
Sales and Use Tax outperforms the projections in the Oversight
Board’s Certified Fiscal Plan.
The Government of the Commonwealth of Puerto Rico and
Ambac Assurance are not currently parties to the Second
Amended PSA. Further, the Second Amended PSA provides that
Assured and National may terminate their agreement to the
Second Amended PSA on or prior to March 31, 2021; until that
date, Assured and National are permitted to continue litigation
against the Oversight Board with respect to certain revenue bond
exposures. If Assured and National do not terminate their
agreement by March 31, 2021, the Second Amended PSA
requires that Assured and National take no further action with
respect to such revenue bond-related litigation.
the
recoveries on claims against
those
Given that the Oversight Board has stated publicly that it is
further amending the Amended POA, including to reflect the
terms of the Second Amended PSA, it is not yet clear how the
Commonwealth Plan of Adjustment will be modified or how the
final adjustments will impact revenues available to the Puerto
Rico instrumentalities addressed in the Commonwealth Plan of
Adjustment or
the
Commonwealth by creditors of
instrumentalities,
including Ambac and Ambac-insured bondholders. If the
Commonwealth Plan of Adjustment were confirmed in its
current form, Ambac's financial condition would suffer a
materially negative impact. Refer to Note 8. Financial Guarantee
Insurance Contracts, in this Annual Report Form 10-K located in
Part II for the possible increase in loss reserves under stress or
other adverse conditions,
the
Commonwealth Plan of Adjustment. There can be no assurance
that losses may not exceed such estimates.
impact of
including
the
Political Developments
In 2020, President Donald J. Trump appointed Justin Peterson,
Betty A. Rosa, John E. Nixon and Antonio L. Medina Comas as
new members of the Oversight Board and reappointed Andrew
G. Biggs, David Skeel and Arthur Gonzalez to new terms.
The Puerto Rico gubernatorial election was held on November
3, 2020, to elect the governor of Puerto Rico, concurrently with
the election of the Resident Commissioner, the Senate, the
House of Representatives, and
the 78
municipalities. Pedro Pierluisi of Puerto Rico’s pro-statehood
New Progressive Party was voted to become the territory’s next
governor in 2021. In terms of the local legislature, there will be
a “shared government”;
the Resident
Commissioner from the PNP and Legislative leadership from the
PDP. The new President of the Senate will be Senator Jose Luis
the House will be
Dalmau and
the new Speaker of
the Governor and
the mayors of
| Ambac Financial Group, Inc. 38 2020 FORM 10-K |
Representative Rafael "Tatito" Hernández (former Chair of
House Treasury Committee 2013-2016).
It is unclear how the Oversight Board member changes and local
election outcomes will impact the debt restructuring process,
negotiations, timing and ultimate recoveries for Ambac.
Ambac Title III Litigation Update
AAC is party to a number of litigations related to its Puerto Rico
exposures, and actively participates in the Commonwealth’s
Title III proceedings before the United States District Court for
the District of Puerto Rico.
On January 16, 2020, AAC, together with other monoline
insurers, filed motions which sought to lift the automatic stay
and allow AAC and others to enforce their rights related to
PRHTA, PRCCDA and PRIFA in an alternative forum. Through
orders issued on July 2 and September 9, 2020, Judge Swain
largely denied the motions, while holding in abeyance further
proceedings in the PRCCDA motion relating to a particular
account over which it is undisputed the monolines have a lien.
AAC and the other movants have appealed the PRHTA and
PRIFA decisions. Briefing concluded in late December with
oral argument heard in February 2021. Ambac is unable to
predict when and how the issues raised in these cases will be
resolved. If AAC is unsuccessful in any of these proceedings,
Ambac’s financial condition, including liquidity, loss reserves
and capital resources may suffer a materially negative impact.
to disallow
their proofs of claim against
On January 16, 2020, the Oversight Board filed four adversary
proceeding complaints against AAC and other monoline insurers
seeking
the
Commonwealth as they relate to PRHTA, PRCCDA, and PRIFA
bonds. On April 28, 2020, the Oversight Board filed partial
motions for summary judgment. Briefing has concluded on
those motions for summary judgment and oral argument was
held on September 23, 2020. On January 20, 2021, the District
Court granted defendants’
the
adjudication of the summary judgment motions until defendants
have the opportunity to conduct certain discovery. Discovery is
ongoing.
for deferral of
request
AAC, along with other monoline insurers, filed a motion
seeking appointment of trustees under Section 926 of the
Bankruptcy Code to pursue certain avoidance actions on behalf
of PRHTA against the Commonwealth of Puerto Rico. The
motion attached a proposed complaint detailing the avoidance
claims that movants would pursue. On August 11, 2020, the
Court denied the motion and AAC and the other movants have
appealed that denial. AAC and the other movants filed a motion
to hold that appeal in abeyance pending the First Circuit’s
resolution of the appeal from the Court’s denial of the PRHTA
lift-stay motion (as described above). Briefing on both motions
concluded on October 27, 2020. On December 22, 2020, the
First Circuit denied the motion to hold the appeal in abeyance,
and referred the motion to dismiss to the panel determining the
merits of the appeal. Movants’ opening brief before the First
Circuit was filed on February 17, 2021.
Refer to Note 17. Commitments and Contingencies to the
Consolidated Financial Statements, included in Part II, Item 8 of
this Form 10-K for further information about Ambac's litigation
relating to Puerto Rico.
Mediation
The status, timing and subject of any past or future mediation
discussion has not yet been publicly disclosed. The timeline for
resolution of Puerto Rico’s debt restructuring process is
uncertain.
The Oversight Board disclosed, in a status report filed with the
Title III court in September 2020, that it has resumed formal
discussions with creditors with the guidance of the mediation
team led by Judge Houser. Prior to the talks with creditors, the
Oversight Board held discussions with the Puerto Rico Fiscal
Agency
("AAFAF")
concerning the terms of a Commonwealth Plan of Adjustment
and what, if any, modifications or amendments needed to be
proposed.
and Finance Advisory Authority
On February 10, 2021, the Oversight Board disclosed that
mediation resulted in an agreement in principle with certain GO
and PBA bondholders. The Second Amended PSA was publicly
disclosed on February 23, 2021.
successfully concluded,
No assurances can be given that further debt restructuring
negotiations will be
the
Commonwealth, Oversight Board and creditor parties will reach
definitive agreements on debt restructurings, that any additional
negotiated transaction, debt restructuring, definitive agreement,
PSA or Plan of Adjustment will be approved by the court and
completed, or that any transaction or Plan of Adjustment will
not have a materially adverse impact on Ambac's financial
condition or results of operations.
that
Federal Aid
The full extent of federal government support to Puerto Rico is
still uncertain as existing federal stimulus has not been fully
disbursed and additional measures are likely to be enacted. A
new U.S. President, Puerto Rico governor, and Oversight Board
makeup could all accelerate the aid distribution process if there
was a higher comfort level from the federal government
regarding the local management and efficacy of federal disaster
resources. Furthermore, a change in the federal government's
approach to Puerto Rico's needs, including Social Security
disability payments, Medicaid, and other health and nutritional
assistance programs, is possible under the new administration.
But while the previously allocated hurricane disaster relief
funds, the more recent COVID-19 crisis related funds and
potential new federal support are all expected to support
economic recovery and growth in Puerto Rico, there can be no
assurances as to the certainty, timing, usage, efficacy or
magnitude of benefits to creditor outcomes related to disaster aid
and ensuing economic growth, if any.
Summary
Ambac has considered these developments and other factors in
evaluating its Puerto Rico loss reserves. During the year ended
December 31, 2020, Ambac had incurred losses associated with
its Domestic Public Finance insured portfolio of $256 million,
which was impacted by lower discount rates, the continued
uncertainty and volatility of the situation in Puerto Rico,
including the potential impact of the COVID-19 crisis on the
Commonwealth and the developing potential impact of the
COVID-19 crisis on other sectors in the Domestic Public
Finance insured portfolio; and loss adjustment expenses related
to the cost of defending our rights and pursuing recoveries.
| Ambac Financial Group, Inc. 39 2020 FORM 10-K |
While management believes its reserves are adequate to cover
losses in its Public Finance insured portfolio, there can be no
assurance that Ambac may not incur additional losses in the
future, particularly given the developing economic, political, and
legal circumstances in Puerto Rico and the overall uncertain
impact of the COVID-19 crisis on the Commonwealth and the
Domestic Public Finance Insured Portfolio in general. Such
additional losses may have a material adverse effect on Ambac’s
results of operations and financial condition.
The following table shows Ambac's insured exposure to each issuer segregated by whether such debt obligation is subject to the Priority
Debt Provision or "clawback." Ambac has initiated litigation challenging the application of the "clawback" announced by Governor
Padilla, Puerto Rico's former governor, on December 1, 2015. A description of Ambac's legal challenge is provided in Note 17.
Commitments and Contingencies in the Consolidated Financial Statements, included in Part II, Item 8 in this Form 10-K.
Range of
Maturity
Ambac
Ratings (1)
Net Par
Outstanding (2)
Net Par
and Interest
Outstanding (3)(8)
Ever-to-Date
Net Claims
Paid (4)
($ in millions)
Exposures Subject to Priority Debt Provision (5)
PR Highways and Transportation Authority (1968
Resolution - Highway Revenue) (6)
PR Highways and Transportation Authority (1998
Resolution - Senior Lien Transportation Revenue) (6)
PR Infrastructure Financing Authority (Special Tax
Revenue) (7)
PR Convention Center District Authority (Hotel Occupancy
Tax)
Total
2021-2027
2021-2042
2023-2044
2021-2031
Exposures Not Subject to Priority Debt Provision
Commonwealth of Puerto Rico - General Obligation Bonds
2021-2023
PR Public Buildings Authority - Guaranteed by the
Commonwealth of Puerto Rico
PR Sales Tax Financing Corporation - Senior Sales Tax
Revenue (COFINA)
Total
Total Net Exposure to The Commonwealth of
Puerto Rico and Related Entities
2021-2035
2047-2054
BIG
BIG
BIG
BIG
BIG
BIG
BIG
$
4 $
10 $
395
404
86
889
18
83
80
181
639
887
128
1,664
19
145
712
876
$
1,070 $
2,540 $
23
144
187
68
422
49
87
37
173
595
(1)
Internal credit ratings are provided solely to indicate the underlying credit quality of guaranteed obligations based on the view of Ambac. In cases
where Ambac has insured multiple tranches of an issue with varying internal ratings, or more than one obligation of an issuer with varying internal
ratings, a weighted average rating is used. Ambac credit ratings are subject to revision at any time and do not constitute investment advice. BIG
denotes credits deemed below investment grade.
(2) Net Par includes capital appreciation bonds, which are reported at the par amount at the time of issuance of the insurance policy as opposed to the
current accreted value of the bonds. Accretion of the capital appreciation bonds would increase the related net par by $214 at December 31, 2020.
(3) Net Par and Interest Outstanding ("P&I") represents the total insured future debt service remaining over the lifetime of the bonds. P&I for capital
appreciation bonds does not represent the accreted amount as noted in footnote (2) but rather the amount due at respective maturity dates.
(4)
In addition to ever-to-date net claims paid, Ambac made net claim payments of $23 in January 2021.
(5) Commonly known as "clawback," provision pursuant to Section 8 of Article VI of the Constitution of the Commonwealth of Puerto Rico. Under this
provision, in the event Commonwealth available revenues and any surplus for any fiscal year are insufficient to meet the appropriations made for that
year, interest on the public debt and amortization thereof shall first be paid and other disbursements, including debt service on the obligations subject to
such provision as described above (to the extent payable from such revenues), shall thereafter be made in accordance with the order of priorities
established by law. These exposures are also subject to Act No. 5-2017, as amended, also known as the Financial Emergency and Fiscal Responsibility
Act of 2017, which declares an emergency period that has been subsequently re-extended until June 30, 2021, from its prior December 31, 2020,
deadline. Pursuant to Act 5-2017, all executive orders issued under Act No. 21-2016 (as amended, known as the Puerto Rico Emergency Moratorium
and Financial Rehabilitation Act), shall continue in full force and effect until amended, rescinded or superseded.
(6) Certain Pledged Revenues for Highways and Transportation Revenue Bonds such as Toll Revenues and Investment Earnings are not subject to the
Priority Debt Provision.
(7) Payable from and secured by proceeds from a federal excise tax imposed on all items produced in Puerto Rico and sold on the mainland of the United
States. Currently, rum is the only product from Puerto Rico subject to this federal excise tax.
(8) Net Par and Interest Outstanding excludes the effects of a 10% current interest rate on $60 net par of PR Public Building Authority ("PBA") bonds with
a maturity date of July 1, 2035, resulting from the absence of a remarketing. Should a remarketing not occur before the maturity of the bonds, the Net
Par and Interest Outstanding for PBA exposure would increase by $39.
U.S. Structured Finance Portfolio
Ambac’s portfolio of U.S. structured finance exposures is
$6,337 million, representing 19% of Ambac’s net par
outstanding as of December 31, 2020, and a 16% reduction from
the amount outstanding at December 31, 2019. This reduction in
exposure was primarily related to residential mortgage-backed
securities ("RMBS") policies, which continued to prepay as well
as incur claims.
| Ambac Financial Group, Inc. 40 2020 FORM 10-K |
Current insured exposures include securitizations of mortgage
loans, home equity loans and student loans as well as other
asset-backed financings, in each case where the majority of the
underlying collateral risk is situated in the United States.
Additionally, Ambac’s structured finance insured portfolio
includes secured and unsecured debt issued by investor-owned
utilities and structured
transactions providing
insurance
insurance on the notes of trusts established in connection with
the reinsurance of defined blocks of life insurance that were
used to fund regulatory reserves associated with level premium
term life insurance policies (commonly referred to as Regulation
XXX reserves).
See Note 7. Financial Guarantees in Force to the Consolidated
Financial Statements, included in Part II, Item 8 included in this
Form 10-K, for exposures by bond type as of December 31,
2020.
Structured finance securitization exposures generally entail three
forms of risk: (i) asset risk, which relates to the amount and
quality of the underlying assets; (ii) structural risk, which relates
to the extent to which the transaction’s legal structure and credit
support provide protection from loss; and (iii) servicer risk,
which is the risk that poor performance at the servicer or
manager level contributes to a decline in cash flow available to
the transaction. AAC seeks to mitigate and manage these risks
through its risk management practices.
Ambac has exposure to the U.S. mortgage market primarily
through direct financial guarantees of RMBS,
including
transactions that contain risks to first and second lien mortgages.
Ambac's total net par exposure to RMBS at December 31, 2020,
was approximately $3,635 million ($2,137 million, $1,399
million, $99 million are first lien, second lien and other
respectively), a decrease of 18% during 2020. At December 31,
2020, 88% of RMBS net par exposure relates to securitizations
issued during 2005 through 2007.
International Finance Insured Portfolio
Ambac’s portfolio of international finance insured exposures is
$12,054 million, representing 36% of Ambac’s net par
outstanding as of December 31, 2020, and a 6% reduction from
the amount outstanding at December 31, 2019. This reduction in
exposure was primarily the result of policy terminations,
refinancings and scheduled maturities within stadiums and
investor-owned utilities, partially offset by a weakening of the
US dollar versus the British pound. Ambac’s international
finance insured exposures include a wide array of obligations in
the international markets, including infrastructure financings,
asset-securitizations, utility obligations, whole business
securitizations (e.g., securitizations of substantially all of the
operating assets of a corporation) and sub-sovereign credits.
Ambac has no insured exposure related to emerging markets.
See Note 7. Financial Guarantees in Force to the Consolidated
Financial Statements, included in Part II, Item 8 included in this
Form 10-K, for exposures by bond type as of December 31,
2020.
When underwriting transactions in the international markets,
Ambac considered the specific risks related to the particular
country and region that could impact the credit of the issuer.
These risks include the legal and political environment, capital
markets dynamics, foreign exchange issues and the degree of
governmental support. Ambac continues to assess these risks
through its ongoing risk management.
Ambac UK, which is regulated in the United Kingdom (“UK”),
had been AAC’s primary vehicle for directly issuing financial
guarantee policies in the UK and the European Union with
$11,186 million net par outstanding at December 31, 2020. The
portfolio of insured exposures underwritten by Ambac UK is
financially supported exclusively by the assets of Ambac UK
and no capital support arrangements are in place with any other
Ambac affiliate.
European Union Exposures (“EU”)
Ambac's international net par exposures are principally in the
United Kingdom ($9,711 million); however, we also have
exposures with credit risk based in various EU member states,
including Austria, France, Germany and Italy ($1,797 million).
Italy, with net par exposure of $803 million, in particular has
experienced economic, fiscal and political strains since the 2008
global financial crisis such that the likelihood of default on an
insured sub-sovereign obligation in that country is higher than
when the policy was underwritten.
Ambac does not guarantee any sovereign bonds of the above EU
countries.
Brexit:
In January 2020 the UK Government and EU ratified the terms
of a legal binding treaty ("Withdrawal Agreement") setting out
the terms of a transition period to apply to the UK until
December 31, 2020. The effect of the withdrawal agreement was
to retain the rights and obligations between the UK and the EU
from the date of the UK's exit from the EU on January 31, 2020,
("Exit Day") to the end of this transition period.
Prior to December 31, 2020, Ambac UK either commuted any
policies with EU based policyholders or transferred the benefits
of those policies to UK policyholders. In addition, Ambac UK
transferred the administration of its last remaining policy within
its Italian Branch to the UK on December 1, 2020, and closed its
Italian Branch on December 18, 2020. Therefore, while Ambac
UK's net par exposures continue to contain credit risk based in
EU member states, Ambac UK no longer services any insurance
policies with EU based policyholders and its ability to continue
to service its insurance portfolio is therefore not impacted by
Brexit.
Additional Insured Portfolio Information
Average Life of Insured Portfolio
Ambac underwrote and priced financial guarantees based on the
assumption that the guarantees would remain in force until the
maturity of the underlying bonds. Ambac estimates that the
average life of its guarantees on par in force at December 31,
2020 is approximately 10 years. The average life is determined
by applying a weighted average calculation, using the remaining
years to expected maturity of each guaranteed bond, and
weighting them on the basis of the remaining net par guaranteed.
Except for RMBS policies, no assumptions are made for non-
contractual reductions, refundings or terminations of insured
issues. RMBS policies incorporate assumptions on expected
prepayments over the remaining life of the insured obligation.
| Ambac Financial Group, Inc. 41 2020 FORM 10-K |
The following table depicts amortization of existing guaranteed
net par outstanding:
Net Par Outstanding Amortization (1)
($ in millions)
Estimated Net
Amortization
(1) Mortgage and asset-backed obligations includes guarantees with
multiple locations of risk within the United States and is primarily
comprised of residential mortgage and commercial asset-backed
securitizations.
(2) Other international may include components of U.S. exposure.
Exposure Currency
The table below shows the distribution by currency of Ambac's
existing guaranteed net par outstanding as of December 31,
2020:
Currency
($ in millions)
U.S. Dollars
British Pounds
Euros
Net Par
Amount
Outstanding
in Base
Currency
Net Par
Amount
Outstanding
in U.S.
Dollars
Percentage
of Net Par
Amount
Outstanding
$
£
€
22,205 $
22,205
6,940
1,455
545
9,486
1,777
420
65.5 %
28.0 %
5.2 %
1.2 %
Australian Dollars
A$
Total
$
33,888
100.0 %
Ratings Distribution
The following charts provide a rating distribution of existing net
par outstanding based upon internal Ambac credit ratings at
December 31, 2020 and 2019 and a distribution by bond type of
Ambac's below investment grade ("BIG") net par exposures at
December 31, 2020 and 2019. BIG is defined as those exposures
with an internal credit rating below BBB-:
December 31, 2020
AA: 7%
BIG: 22%
A
37%
BBB: 34%
2021
2022
2023
2024
2025
2021-2025
2026-2030
2031-2035
2036-2040
After 2040
Total
$
2,903
2,768
1,753
2,037
1,556
$
11,017
7,141
6,595
5,687
3,448
$
33,888
(1) Depicts amortization of existing guaranteed portfolio, assuming no
Expected
advance refundings, as of December 31, 2020.
maturities will differ
from contractual maturities because
borrowers may have the right to call or prepay guaranteed
obligations.
Geographic Area
The following table sets forth the geographic distribution of
Ambac's existing guaranteed net par outstanding as of December
31, 2020:
Geographic Area
($ in millions)
Domestic:
Net Par
Amount
Outstanding
% of Total
Net Par
Amount
Outstanding
Mortgage and asset-backed (1)
Colorado
$
3,646
2,362
2,104
1,816
1,290
1,233
1,070
896
799
656
627
5,335
21,834
10.8 %
7.0 %
6.2 %
5.4 %
3.8 %
3.6 %
3.2 %
2.6 %
2.4 %
1.9 %
1.9 %
15.7 %
64.4 %
California
New York
New Jersey
Texas
Puerto Rico
Pennsylvania
Washington
Florida
Oregon
Other domestic
Total Domestic
International:
United Kingdom
Italy
Austria
Australia
France
Other international (2)
Total International Finance
Total
December 31, 2019
AA: 10%
9,711
28.7 %
BIG: 20%
803
707
420
277
136
12,054
33,888
$
2.4 %
2.1 %
1.2 %
0.8 %
0.4 %
35.6 %
100.0 %
BBB: 31%
A
39%
Note: AAA is less than 1% in both periods.
| Ambac Financial Group, Inc. 42 2020 FORM 10-K |
(1)
to
indicate
the
Internal credit ratings are provided solely
underlying credit quality of guaranteed obligations based on the
view of Ambac. In cases where Ambac has insured multiple
tranches of an issue with varying internal ratings, or more than one
obligation of an issuer with varying internal ratings, a weighted
average rating is used. Ambac credit ratings are subject to revision
at any time and do not constitute investment advice. BIG denotes
credits deemed below investment grade.
Summary of Below Investment Grade Exposure:
Bond Type ($ in millions)
Public Finance:
Lease and tax-backed (1)
Stadium
General obligation (1)
Housing (2)
Transportation
Other
Total Public Finance
Structured Finance:
RMBS
Student loans
Other
Total Structured Finance
International Finance:
Other
Total International Finance
Net Par Outstanding -
December 31,
2020
2019
$
1,194 $
1,109
540
325
308
30
38
—
525
311
27
42
2,435
2,014
2,800
512
—
3,312
1,574
1,574
3,362
620
33
4,015
1,455
1,455
7,484
Total
$
7,321 $
(1) Lease and tax-backed includes $969 and $1,014 of Puerto Rico net
par at December 31, 2020 and 2019, respectively. General
obligation includes $101 and $109 of Puerto Rico net par at
December 31, 2020 and 2019, respectively. Puerto Rico net par
outstanding includes capital appreciation bonds which are reported
at the par amount at the time of issuance of the related insurance
policy as opposed to the current accreted value of the bonds.
(2)
Includes $308 and $311 of military housing net par at
December 31, 2020 and 2019, respectively.
The net decline in below investment grade exposures is
primarily due to commutation of certain general obligation
exposures, the partial commutation of a structured finance
transaction mostly offset by the addition of certain exposures
driven by the COVID-19 pandemic (lease and tax-backed,
stadiums and an international structured finance exposure).
Below investment grade exposures could increase as a relative
proportion of the guarantee portfolio given that stressed
borrowers generally have less ability to prepay or refinance their
debt. Accordingly, due to these and other factors, it is not
unreasonable to expect the proportion of below investment grade
exposure in the guarantee portfolio to continue to increase in the
future.
Ceded Reinsurance
AAC has reinsurance in place pursuant to surplus share treaties
and facultative agreements. As a primary financial guarantor,
AAC is required to honor its obligations to its policyholders
whether or not its reinsurers perform their obligations under
to defray
these reinsurance agreements. For exposures reinsured, AAC
generally withholds a ceding commission
its
underwriting and operating expenses. To minimize its exposure
to losses from reinsurers, AAC (i) monitors the financial
condition of its reinsurers; (ii) is entitled to receive collateral
from its reinsurance counterparties in certain reinsurance
contracts; and (iii) has certain cancellation rights that can be
exercised by AAC in the event of rating agency downgrades of a
reinsurer (among other events and circumstances). AAC held
letters of credit and collateral amounting to $117 million from
its reinsurers at December 31, 2020. As of December 31, 2020,
the aggregate amount of insured par ceded by AAC to reinsurers
under reinsurance agreements was $5,182 million, with the
largest reinsurer accounting for $2,398 million or 6.1% of gross
par outstanding at December 31, 2020.
The following table shows the distribution, by bond type, of
AAC’s ceded guaranteed portfolio at December 31, 2020:
Ceded Par
Amount
Outstanding
% of Gross
Par Ceded
Bond Type ($ in millions)
Public Finance:
General obligation
Lease and tax-backed revenue
Housing revenue
Transportation revenue
Utility revenue
Higher education
Other
Total Public Finance
Structured Finance:
Investor-owned utilities
Student loan
Structured insurance
Mortgage-backed and home equity
Asset-backed and other
Total Structured Finance
Total Domestic
International Finance:
Investor-owned and public utilities
Transportation
Asset-backed
Total International Finance
$
1,327
1,156
934
586
243
167
99
4,512
224
219
115
40
21
619
5,131
26
25
—
51
Total
$
5,182
36 %
22 %
14 %
43 %
27 %
18 %
10 %
23 %
12 %
26 %
27 %
1 %
12 %
9 %
19 %
1 %
2 %
— %
— %
13 %
RESULTS OF OPERATIONS
The following discussion should be read along with the financial
statements included in this Form 10-K, as well as Part II, "Item
7, Management's Discussion and Analysis's of Financial
Condition and Results of Operations" of our Form 10-K for the
year ended December 31, 2019, which provides additional
information on comparisons of years 2019 and 2018.
Net loss attributable to common stockholders for the year ended
December 31, 2020, was $437 million compared to a net loss
attributable to common stockholders of $216 for the year ended
December 31, 2019. The increase in loss was primarily driven
by: (i) higher loss and loss expenses, (ii) receipt of $142 million
| Ambac Financial Group, Inc. 43 2020 FORM 10-K |
arising from the settlement between the SEC and Citigroup
which was recognized as a gain in Other income for the year
ended December 31, 2019, (iii) lower net investment income,
(iv) lower net realized investment gains, and (v) lower income
on variable interest entities, partially offset by (a) lower
insurance intangible amortization and (b) lower interest and
operating expenses.
A summary of our financial results is shown below:
($ in millions)
Year Ended December 31,
Revenues:
2020
2019
2018
Net premiums earned
$
54 $
66 $
122
22
(50)
3
5
225
57
92
222
(3)
(437)
227
81
(50)
134
38
13
295
103
269
32
(216)
111
273
108
7
8
3
(224)
107
112
242
5
267
Net investment income
Net realized investment
gains (losses)
Net gains (losses) on
derivative contracts
Other income (expense) (1)
Income (loss) on variable
interest entities
Expenses:
Losses and loss expenses
(benefit)
Insurance intangible
amortization
Operating expenses
Interest expense
Provision for income taxes
Net income (loss)
Less: loss on exchange of
auction market preferred
shares (2)
Net income (loss)
attributable to common
stockholders
—
—
82
$
(437) $
(216) $
186
(1)
(2)
2019 includes proceeds received in connection with an SEC action
against Citigroup Global Markets Inc. in the amount of $142
million.
In connection with the AMPS Exchange, the difference between
the fair value of consideration provided to AMPS holders and the
carrying amount of the AMPS has been reflected as a reduction to
Net income attributable to common stockholders in 2018 for
approximately $82. Refer to Note 1. Background and Business
Description for a discussion of the AMPS Exchange.
Ambac's results of operations and financial position have been
adversely impacted by the COVID-19 pandemic's effect on the
global economy and financial markets. Significant interest rate
declines during 2020 contributed to a net increase in loss
reserves and losses on interest rate derivative contracts. Credit
driven losses were also recognized in the three months ended
March 31, 2020, within losses incurred (primarily from public
finance insurance policies) and losses in counterparty credit
adjustments on derivative asset valuations. Financial market
disruptions were reflected through lower valuations of certain
fixed maturity securities (recorded through other comprehensive
income) and the majority of other investments (recorded through
net investment income). During the last three quarters of 2020,
credit
impacting
counterparty credit adjustments on derivative assets and
valuations of investment securities). The scope, duration and
magnitude of the direct and indirect effects of COVID-19 are
(favorably
recovered
spreads
largely
evolving in ways that are difficult or impossible to anticipate.
As a result, it is possible that Ambac's results of operations and
financial condition may be further adversely affected by the
evolving affects of the COVID-19 pandemic. For additional
information on the risks posed by COVID-19, refer to “Part I,
Item 1A-Risk Factors” in this Form 10-K.
During 2019, Ambac executed on a number of restructuring /
commutation transactions that had significant impacts to the
consolidated results of operations. As described further below,
the completion of the these transactions, including the related
changes to invested assets, intangible assets, loss reserves and
debt of the Company, had a significant impact on the
comparability of the results of operation for the years ended
December 31, 2020, 2019 and 2018. The most significant
transactions were:
the POA,
Puerto Rico COFINA Plan of Adjustment ("POA"). On
February 12, 2019,
including certain related
commutation transactions, and subsequent distributions, became
effective, resulting in a significant reduction of AAC's insured
net par exposure to COFINA. Pursuant to the COFINA POA,
approximately 75% of holders of AAC-insured senior COFINA
bonds (including Ambac) elected to commute their insurance
policy. Under this restructuring, Ambac-insured COFINA
bonds that were not commuted were deposited, along with new
uninsured COFINA bonds, into a newly formed trust called the
COFINA Class 2 Trust ("COFINA Trust"), a VIE that Ambac
determined must be consolidated. Sales of assets from the
COFINA Trust may be made from time to time with proceeds
used to redeem the trust's debt.
Ballantyne Re plc ("Ballantyne") Restructuring. On April 25,
2019, Ballantyne commenced, under Irish law, a restructuring
transaction ("Restructuring") in respect of its obligations,
including obligations that were guaranteed by Ambac UK. The
arrangement was approved on June 17, 2019. With the
successful implementation of the Restructuring, Ambac UK has
ceased to have any exposure with respect to the obligations of
Ballantyne.
The following paragraphs describe the consolidated results of
operations of Ambac for 2020 and 2019.
Net Premiums Earned. Net premiums earned for the year
ended December 31, 2020, decreased by $12 million or 18% as
compared to net premiums earned for the year ended December
31, 2019.
remaining unearned premium
We present accelerated premiums, which result from calls and
other accelerations of insured obligations separate from normal
net premiums earned. When an insured bond has been retired,
is
any
recognized at that time to the extent the financial guarantee
contract is legally extinguished, causing accelerated premium
revenue. For installment premium paying transactions, we offset
the recognition of any remaining UPR by the reduction of the
related premium receivable to zero (as it will not be collected as
a result of the retirement), which may cause negative accelerated
premium revenue.
("UPR")
revenue
| Ambac Financial Group, Inc. 44 2020 FORM 10-K |
Normal net premiums earned are impacted by the following:
• The runoff of the insured portfolio, including through
transaction terminations, calls and scheduled maturities,
which reduce normal net premiums earned.
• New ceded
reinsurance which
reduces normal net
premiums earned over the remaining period of the related
ceded policies.
asset. Ambac
• Changes to the allowance for credit losses on the premium
adopted ASU 2016-13,
receivable
Measurement of Credit Losses on Financial Instruments
("CECL"), on January 1, 2020, and assesses the allowance
for credit losses on premium receivables on a quarterly
basis. Prior to adoption of ASU 2016-13, Ambac assessed
collectability of premium receivables in accordance with
ASC 944 and recorded an allowance for uncollectible
premiums.
• The strengthening or weakening of the U.S. dollar relative
to the British Pound since Ambac's wholly-owned UK
subsidiary, Ambac UK, operates in the United Kingdom
and the British Pound is its functional currency.
• Pre-refundings of insured securities, primarily Public
Finance transactions. Since the maturity date of pre-
refunded securities is shortened (to a specified call date
from its previous legal maturity), normal net premiums
earned will increase over the remaining period of the
related policy.
Normal net premiums earned and accelerated premiums are
reconciled to total net premiums earned in the table below. The
following table provides a breakdown of normal premiums
earned by market:
($ in millions)
Year Ended December 31,
2020
2019
2018
Public finance
$
21 $
27 $
Structured finance
International finance
Total net normal premiums
earned
Total net accelerated
earnings
$
$
Total net premiums earned $
8
13
10
19
42 $
56 $
37
17
23
77
12 $
54 $
10 $
66 $
35
111
in Ambac-insured securities
Net Investment Income. Net investment income primarily
consists of interest and net discount accretion on fixed maturity
securities classified as available-for-sale, and net gains (losses)
on pooled investment funds which include changes in fair value
of the funds' net assets. Fixed maturity securities include
investments
that are made
opportunistically based on their risk/reward and asset-liability
management characteristics.
As described further below,
investment income from holdings of Ambac-insured securities
(including Secured Notes issued by Ambac LSNI, LLC) for the
restructuring
periods presented have been affected by
transactions involving Puerto Rico COFINA and Ballantyne
bonds. Investments in pooled investment funds and certain
other investments are either classified as trading securities with
changes in fair value recognized in earnings or are reported
under the equity method. These funds and other investments are
reported in Other investments on the Consolidated Balance
Sheets. For further information about investment funds held,
refer to Note 11. Investments to the Consolidated Financial
Statements, included in this Annual Report on Form 10-K.
investment
Net
from Ambac-insured securities,
available-for-sale and short-term securities other than Ambac-
insured and Other investments is summarized in the table below:
income
2020
2019
2018
$
62 $
121 $
220
($ in millions)
Year Ended December 31,
Securities available-for-sale:
Ambac-insured (including
Secured Notes)
Securities available-for-sale
and short-term other than
Ambac-insured
Other investments (includes
trading securities)
Net investment income
$
122 $
227 $
41
19
75
32
51
2
273
Net investment income decreased $106 million for the year
ended December 31, 2020 compared to 2019. As described
further below, the variances were primarily driven by 2020
pricing volatility within fund investments resulting from the
impact of the COVID-19 pandemic on financial markets and the
impact of de-risking transactions in 2019, including lower
subsequent allocations
to higher yielding Ambac-insured
securities and a lower overall invested asset base.
• Investment
income
from Ambac-insured
securities
decreased $59 million in 2020, compared to 2019. The
decrease was due primarily to the effects of the 2019 de-
risking of Ballantyne and lower income on Secured Notes
issued by Ambac LSNI, LLC. The Ballantyne restructuring
in June 2019 resulted in accelerated discount accretion into
income and settled the Ballantyne bonds held in the
investment portfolio. Income on the Secured Notes
declined from 2019 due to quarterly early redemptions and
the impact of lower rates, as the coupon rate is indexed to
LIBOR subject to a 1.0% LIBOR floor. Additionally,
income on Ambac insured-RMBS declined compared to
2019 primarily as a result of declining interest rates over
both 2020 and 2019.
• Net investment income from available-for-sales securities
other than Ambac-insured securities decreased $34 million
in 2020, compared to the prior year. The decrease resulted
from the favorable impact of high yielding uninsured
COFINA bonds received under the POA on 2019 income,
as well as the impact of a smaller asset base and lower
average yields in 2020. All of the uninsured COFINA
bonds received under the POA were sold from Ambac's
non-VIE investment portfolio by December 31, 2019, with
reinvestment in lower yielding fixed maturities or allocated
to pooled funds included in Other investments. Additional
re-allocation of the portfolio in 2020 toward pooled funds
and Ambac-insured bonds from investment grade corporate
bonds, commercial mortgage backed securities and certain
CLOs resulted in a lower asset base and average yield in
this portion of the portfolio. The use of cash for early debt
redemptions and operating cash needs also contributed to
the smaller asset base, while
steadily declining
reinvestment rates on short-term holdings adversely
| Ambac Financial Group, Inc. 45 2020 FORM 10-K |
impacted the average yield of available-for-sale securities
other than Ambac-insured in 2020 compared to 2019.
investments
• Other investments income decreased $13 million in 2020,
compared to the prior year. The decrease resulted from the
financial market impact of the COVID-19 pandemic and
in 2020,
fund
repositioning of pooled
compared to strong portfolio returns in 2019. Other
investments income for 2020 included lower returns on
equity, high-yield and loan funds, partially offset by higher
income from hedge fund investments. Higher income on
hedge funds was driven primarily by net gains on
investments funded mostly following the initial broad
market decline of the first quarter. Decreased holdings of
equity, high yield and loan funds in the first half of 2020
resulted in recognition of only modest net gains on such
holdings for the full year, compared to above average
performance in these asset types in 2019.
Net Realized Investment Gains. The following table provides a
breakdown of net realized gains, for the periods presented:
($ in millions)
Year Ended December 31,
Net gains on securities sold
or called
Foreign exchange gains
(losses)
Credit impairment
Intent / requirement to sell
impairments
2020
2019
2018
$
26 $
59 $
105
(4)
—
—
22
—
—
7
—
(3)
108
Total net realized gains
$
22 $
81 $
Net realized gains on securities sold or called during the year
ended December 31, 2020, are primarily from sales in
connection with routine portfolio management. Net realized
gain on securities sold or called for the year ended December 31,
2019, included $50 million of net gains related to the impact of
the COFINA POA, including sales of Ambac-insured Puerto
Rico COFINA bonds and new uninsured COFINA bonds
received in the commutation. Also included in realized gains for
the year ended December 31, 2019, are $23 million of realized
foreign exchange gains arising from the settlement of Ballantyne
bonds held in the investment portfolio.
Impairments are reported through earnings if management
intends to sell securities or it is more likely than not that the
Company will be required to sell before recovery of amortized
cost. Credit impairments are recorded in earnings only to the
extent management does not intend to sell, and it is not more
likely than not that the Company will be required to sell the
securities, before recovery of their amortized cost. When credit
impairments are recorded, any non-credit related impairment
amounts on the securities are recorded in other comprehensive
income.
Net Gains (Losses) on Derivative Contracts. Net gains (losses)
on derivative contracts includes result from the Company's
interest rate derivatives portfolio and its runoff credit derivative
portfolio. The interest rate derivatives portfolio is positioned to
benefit from rising rates as a partial economic hedge against
interest rate exposure in the financial guarantee and investment
portfolios. As forward rates and interest rate exposures
elsewhere in the company have declined over the course of 2019
and 2020, the economic hedge position has been adjusted. Net
gain (loss) on interest rate derivatives generally reflect mark-to-
market gains (losses) in the portfolio caused by increases
(declines) in forward interest rates during the periods, the
carrying cost of the portfolio, and the impact of counterparty
credit adjustments as discussed below. Results from credit
derivatives were not significant to the periods presented.
• Net losses on interest rate derivatives for the year ended
December 31, 2020, were $50 million, compared to $51
million for the year ended December 31, 2019. The net
loss for the year ended December 31, 2020, reflects
significant declines in forward interest rates, triggered by
the COVID-19 pandemic, and losses from the application
of counterparty credit adjustment, described further below.
The net losses for the year ended December 31, 2019,
reflect the impact of declines in forward interest rates,
partially offset by negative net carrying costs driven by an
inverted yield curve. Although interest rates declined more
in 2020 than in 2019, their impact on derivative losses was
lower due to the relative positioning of the portfolio in each
period.
in
• Counterparty credit adjustments are generally applicable
for uncollateralized derivative assets that may not be offset
by derivative liabilities under a master netting agreement.
Inclusion of counterparty credit adjustments
the
valuation of interest rate derivatives resulted in losses
within Net gains (losses) on derivative contracts of $(6)
million and $(2) million for the years ended December 31,
2020 and 2019, respectively. The loss for the year ended
December 31, 2020, was driven by wider credit spreads
reflecting the credit rating downgrade of a derivative
first quarter,
counterparty by Ambac during
simultaneous with an increase in the underlying asset
values as interest rates declined. The losses on counterparty
credit adjustments for the 2019 periods are primarily due to
increases in the underlying asset values as interest rates
declined.
the
Other income (expense). Other income (expense) included
various fees, primarily consent and waiver fees, as well as
foreign exchange gains (losses) unrelated to investments or loss
reserves. Other income also included proceeds received by
AAC in September 2019 in connection with an SEC action
against Citigroup Global Markets Inc. in the amount of $142
million.
Income (loss) on Variable Interest Entities. Included within
Income (loss) on variable interest entities are income statement
amounts relating to VIEs consolidated under the Consolidation
Topic of the ASC as a result of Ambac's variable interest arising
from financial guarantees written by Ambac's subsidiaries,
including gains or losses attributable to consolidating or
deconsolidating VIEs during the periods reported. Generally,
the Company’s consolidated VIEs are entities for which Ambac
has provided financial guarantees on all of or a portion of its
assets or liabilities. In consolidation, assets and liabilities of the
VIEs are initially reported at fair value and the related insurance
assets and liabilities are eliminated. However, the amount of
VIE net assets (liabilities) that remain in consolidation generally
result from the net positive (negative) projected cash flows from
(to) the VIEs which are attributable to Ambac’s insurance
subsidiaries in the form of financial guarantee insurance
| Ambac Financial Group, Inc. 46 2020 FORM 10-K |
premiums, fees and losses. In the case of VIEs with net negative
projected cash flows, the net liability is generally to be funded
by Ambac’s insurance subsidiaries through insurance claim
payments. Differences between the net carrying value of the
insurance accounts under the Financial Services—Insurance
Topic of the ASC and the carrying value of the consolidated
VIE’s net assets or liabilities are recorded through income at the
time of consolidation. Additionally, terminations or other
changes to Ambac's financial guarantee insurance policies that
impact projected cash flows between a consolidated VIE and
Ambac could result in gains or losses, even if such policy
changes do not result in deconsolidation of the VIE.
Income (loss) on variable interest entities was $5 million and
$38 million for the years ended December 31, 2020 and 2019,
respectively. Results for the year ended December 31, 2020,
were due primarily to realized gains of $8 million on sales of
assets from the COFINA Trust partially offset by the lower
valuation of net assets on a VIE impacted by COVID-19.
Results for the year ended December 31, 2019, were driven by
the impact of the creation and subsequent activities of the
COFINA Trust. Income from COFINA Trust for the the year
ended December 31, 2019, was $26 million, including $15
million from consolidation and $13 million from realized
investment gains on sales of assets from the trust, partially offset
by net interest expense and fees. Income for the year ended
December 31, 2019, also included a gain on the fair value of net
assets of a VIE arising from an increase in projected cash flows
on the VIE's assets due to higher financial guarantee insurance
premiums. Results for 2019 also included a loss of $2 million
from deconsolidation of a VIE.
Refer to Note 4. Variable Interest Entities to the Consolidated
Financial Statements included in this Annual Report on Form
10-K for further information on the accounting for VIEs.
Losses and Loss Expenses (Benefit). Losses and loss expenses
are based upon estimates of the aggregate losses inherent in the
non-derivative financial guarantee portfolio for
insurance
policies issued to beneficiaries, including unconsolidated VIEs.
Ambac records as a component of its loss reserve estimate
subrogation recoveries related to securitized loans in RMBS
transactions with respect to which AAC is pursuing claims for
breaches of representations and warranties. Ambac does not
include potential recoveries attributed solely to fraudulent
inducement claims in our litigations in our estimate of
subrogation recoveries. Generally, the sponsor of an RMBS
transaction provided representations and warranties with respect
to the securitized loans, including representations with respect to
the loan characteristics, the absence of borrower fraud in the
underlying loan pools or other misconduct in the origination
process and attesting to the compliance of loans with the
prevailing underwriting policies. Ambac has
recorded
representation and warranty ("R&W") subrogation recoveries,
net of reinsurance, of $1,725 million and $1,702 million at
December 31, 2020 and 2019, respectively. The increase in
these recoveries was primarily driven by lower discount rates
used to discount estimated cash flows. Refer to Note 2. Basis of
Presentation and Significant Accounting Policies
the
Consolidated Financial Statements included in Part II, Item 8 in
this Annual Report on Form 10-K for more information
to
regarding
recoveries.
the estimation process
for R&W subrogation
The following table provides details, by bond type, for losses
and loss expenses (benefit) incurred for the periods presented:
($ in millions)
Year Ended December 31,
RMBS (1)
Domestic Public Finance
Student Loans
Ambac UK and Other
Credits
Interest on Deferred
Amounts
Discount on Rehabilitation
Exit Transaction
Totals (2)
2020
2019
2018
$
(76) $
(93) $
256
24
21
—
—
250
(17)
(127)
—
—
$
225 $
13 $
(8)
37
(4)
19
21
(288)
(224)
(1) The loss and loss expense (benefit) associated with changes in
estimated representation and warranties for the year ended
December 31, 2020, 2019 and 2018 was ($23), $42 and $62,
respectively.
(2) Includes loss expenses incurred of $103, $78 and $92 for the year
ended December 31, 2020, 2019 and 2018, respectively.
Losses and loss expenses for 2020 were driven by the following:
• Higher projected losses in domestic public finance driven
by lower discount rates (primarily relating to Puerto Rico),
loss expenses incurred and incurred losses related to
transactions directly impacted by the economic impact
from COVID-19; and
• An increase in student loan losses as a result of lower
discount rates and the impact from COVID-19; partially
offset by
• Improved RMBS losses as a result of the positive impact of
lower interest rates on excess spread, reduced by lower
discount rates and expected losses from COVID-19 related
delinquencies.
Losses and loss expenses for 2019 were driven by the following:
• Higher projected losses in domestic public finance driven
mostly by lower discount rates and additions to Puerto Rico
loss reserves, partially offset by;
• Favorable development within Ambac UK and Other
Credits primarily due to the Ballantyne commutation;
• Favorable RMBS development as a result of credit
improvement, the impact on excess spread from declines in
interest rates and a trustee settlement related to Lehman
sponsored transactions, partially offset by RMBS R&W
litigation loss expenses incurred and a reduction to
estimated RMBS R&W subrogation recoveries.
Insurance
Insurance Intangible Amortization.
intangible
amortization was $57 million and $295 million for the years
ended December 31, 2020 and 2019, respectively. The decrease
in intangible amortization for the year ended December 31,
2020, compared to 2019, is primarily due to accelerated
amortization as a result of the Ballantyne commutation that
occurred in 2019.
| Ambac Financial Group, Inc. 47 2020 FORM 10-K |
Operating Expenses. Operating expenses consist of gross
operating expenses plus reinsurance commissions.
The
following table provides a summary of operating expenses for
the periods presented:
($ in millions)
Year Ended December 31,
Compensation
Non-compensation
Gross operating expenses
Reinsurance commissions,
net
2020
2019
2018
$
51 $
58 $
41
92
—
44
103
—
55
56
111
1
112
Total operating expenses
$
92 $
103 $
Gross operating expenses for the year ended December 31, 2020
are $92 million, a decrease of $10 million from gross operating
expenses for the year ended December 31, 2019. The decrease
was primarily due to the following:
• Lower compensation costs primarily due to: (i) lower
salaries and severance resulting from continued right sizing
of staffing levels partially offset by hiring in connection
with the launch of Everspan Group and (ii) lower incentive
compensation costs primarily related to the Ballantyne
restructuring incentive compensation recognized in 2019
• Lower non-compensation costs primarily due to: (i) a UK
Value Added Tax (VAT) refund recognized in 2020, (ii)
lower premises costs as a result of relocating Ambac's
corporate headquarters, and (iii) lower subscription and
data access costs associated with runoff of the financial
guarantee portfolio partially offset by: (i) increased legal
fees and (ii) incremental costs arising due to the COVID-19
pandemic.
Legal and consulting services provided for the benefit of OCI
were flat at $2 million during the years ended December 31,
2020 and 2019.
Interest Expense. Interest expense includes accrued interest on
the Ambac Note, Tier 2 Notes, surplus notes and other debt
obligations. Additionally, interest expense includes discount
accretion when the debt instrument carrying value is at a
discount to par.
The following table provides details by type of obligation for the
periods presented:
Surplus note principal and interest payments require the
approval of OCI. Since the issuance of the surplus notes in 2010,
OCI has declined to approve regular payments of interest on
surplus notes, although the OCI has permitted exceptional
payments in connection with (a) increasing the percentage of
deferred policy payments of the Segregated Account of Ambac
Assurance from 25% to 45% in 2014 and (b) a one-time
payment of approximately six months of interest on the surplus
notes (other than junior surplus notes) outstanding immediately
after consummation of the Rehabilitation Exit Transactions (as
defined in Part II, Item 8, Note 1 Background and Business
Description to the Consolidated Financial Statements included
in this Form 10-K) in 2018.
to make
the payment.
In April 2020, OCI declined the request of Ambac Assurance to
pay the principal amount of the surplus notes, plus all accrued
and unpaid interest thereon, on the scheduled maturity date of
June 7, 2020. As a result, the scheduled payment date for
interest, and the scheduled maturity date for payment of
principal of the surplus notes, shall be extended until OCI grants
approval
Interest will accrue,
compounded on each anniversary of the original scheduled
payment date or scheduled maturity date, on any unpaid
principal or interest through the actual date of payment, at 5.1%
per annum. Holders of surplus notes will have no rights to
enforce the payment of the principal of, or interest on, surplus
notes in the absence of OCI approval to pay such amount. The
interest on the outstanding surplus notes and junior surplus notes
were accrued for and Ambac Assurance is accruing interest on
the interest amounts following each scheduled interest payment
date. Total accrued and unpaid interest for surplus notes and
junior surplus notes outstanding
third parties were
$344 million and $172 million, respectively, at December 31,
2020.
to
Provision for Income Taxes. The provision for income taxes for
the year ended December 31, 2020 and 2019, was a benefit of
$3 million and an expense of $32 million, respectively. Income
taxes for the year ended December 31, 2020 and 2019, includes
provisions for income tax due in respect of Ambac UK of $(3)
million and $36 million, respectively.
At December 31, 2020, the Company had approximately $3,639
million of U.S. Federal net ordinary operating
loss
carryforwards, including approximately $1,457 million at AFG
and $2,182 million at AAC.
2020
2019
2018
LIQUIDITY AND CAPITAL RESOURCES
($ in millions)
Year Ended December 31,
Surplus notes (1)
Ambac note
Tier 2 notes
Other
$
85 $
99 $
107
28
1
143
26
—
80
139
22
1
Total interest expense
$
222 $
269 $
242
(1)
Includes junior surplus notes.
The decrease in interest expense for the year ended December
31, 2020, compared to 2019 was primarily driven by optional
redemptions and lower rate resets of the floating rate Ambac
Note and lower discount accretion on surplus notes, partially
offset by interest compounding on the surplus notes and the Tier
2 Notes.
investment
Ambac Financial Group, Inc. ("AFG") Liquidity. AFG’s
liquidity is primarily dependent on its cash, investments
in subsidiaries), and net
(excluding equity
receivables totaling $366 million as of December 31, 2020.
AFG also receives partial expense reimbursements under the
terms of an expense sharing agreement with AAC, and is
expected to receive distributions beginning in 2021 from its 80%
ownership stake in Xchange.
• During 2020, AFG established Everspan
Indemnity
Insurance Company with an initial capital contribution of
$15 million. Additionally, AFG purchased Everspan
Insurance Company from AAC for approximately $14
| Ambac Financial Group, Inc. 48 2020 FORM 10-K |
million and repositioned it as a subsidiary of Everspan
Indemnity Insurance Company, forming the Everspan
Group. In order to obtain an A- Financial Strength Rating
from A.M. Best, AFG contributed an additional $82 million
to Everspan Indemnity Insurance Company in February
2021.
• In December 2020, AFG further amended its existing
amended and restated tax sharing agreement among AFG,
AAC and certain affiliates (the "Third TSA Amendment"),
in connection with which AAC paid to AFG approximately
$28 million of accrued payments based on net operating
loss carry-forwards (“NOLs”) used by AAC ("tolling
payments") in 2017. Under the Third TSA Amendment,
AAC and AFG agreed to eliminate AAC's requirement to
make future tolling payments based on its utilization of
NOLs for any taxable year beginning on or after January 1,
2019 in exchange for a reallocation of $210 million of
NOL's from AAC to AFG.
• Under an inter-company cost allocation agreement, AFG is
reimbursed by AAC for a portion of certain operating costs
and expenses and, if approved by OCI, entitled to an
additional payment of up to $4 million per year to cover
expenses not otherwise reimbursed. OCI approved this $4
million reimbursement for 2019 expenses, which was paid
in March 2020.
AFG's investments include securities directly and indirectly
issued and/or insured by AAC, some of which are eliminated in
consolidation. Securities issued or insured by AAC are generally
less liquid than investment grade and other traded investments.
the
investments, payments under
It is highly unlikely that AAC will be able to make dividend
payments to AFG for the foreseeable future and therefore cash
and
intercompany cost
allocation agreement and distributions from Xchange will be
AFG’s principal sources of liquidity in the near term. Refer to
Part I, Item 1, “Insurance Regulatory Matters — Dividend
Restrictions, Including Contractual Restrictions” in this Annual
Report on Form 10-K, and Note 9. Insurance Regulatory
Restrictions to the Consolidated Financial Statements included
in Part II, Item 8, in this Annual Report on Form 10-K, for more
information on dividend payment restrictions.
The principal uses of liquidity are the payment of operating
expenses, including costs to explore opportunities to grow and
diversify Ambac; the making of investments, which may include
securities issued or insured by AAC and other less liquid
investments; and capital expenditures
to acquire and/or
capitalize new businesses. Contingencies could cause material
liquidity strains.
The following table includes aggregated information about contractual obligations for AFG and its subsidiaries at December 31, 2020,
excluding variable interest entities consolidated as a result of AAC’s and Ambac UK's financial guarantee contracts. These obligations
include payments due under specified contractual obligations, aggregated by type of contractual obligation, including claim payments,
principal and interest payments under AAC’s surplus notes, the Ambac Note, Tier 2 Notes and Ambac UK debt, and payments due under
operating leases. The table and commentary below reflect scheduled payments and maturities based on the original payment terms specified
in the underlying agreements and contracts, or expected required payment dates if earlier.
($ in millions)
Surplus note obligations(1)
Ambac note obligations(2)
Tier 2 note obligations(3)
Ambac UK debt obligations(4)
Operating lease obligations(5)
Purchase obligations(6)
Postretirement benefits(7)
Loss and loss expenses(8)
Income taxes
Total
Less Than 1 Year
1 - 3 Years
3 - 5 Years
More Than 5
Years
Payments Due by Period
$
3,884 $
894 $
1,849
5,394
41
45
11
5
2,395
—
98
—
—
5
7
—
94
—
— $
1,751
—
—
10
4
1
140
—
— $
—
—
—
10
—
1
167
—
2,990
—
5,394
41
19
—
3
1,993
—
10,440
Total
$
13,624 $
1,098 $
1,906 $
178 $
(1) Amounts due on surplus notes (excluding junior surplus notes)
include principal on their scheduled maturity date and interest on
including payment of previously
scheduled payment dates,
deferred interest totaling $320 million on the next anniversary of
the original scheduled payment date of June 7, 2021. Also
includes all principal and interest on junior surplus notes on the
date all future and existing senior indebtedness of Ambac
Assurance policy and other priority claims against Ambac
Assurance have been paid in full (included in the more than 5 years
column). Surplus note principal and interest payments require the
approval of OCI. Since the issuance of the surplus notes in 2010,
OCI has declined to approve regular payments of interest on
surplus notes, although the OCI has permitted exceptional
payments in connection with (a) increasing the percentage of
deferred policy payments of the Segregated Account of Ambac
junior surplus notes) outstanding
Assurance from 25% to 45% in 2014 and (b) a one-time payment
of approximately six months of interest on the surplus notes (other
immediately after
than
consummation of the Rehabilitation Exit Transactions in 2018. In
April 2020, OCI declined the request of Ambac Assurance to pay
the principal amount of the surplus notes, plus all accrued and
unpaid interest thereon, on the scheduled maturity date of June 7,
2020. As a result, the scheduled payment date for interest, and the
scheduled maturity date for payment of principal of the surplus
notes, shall be extended until OCI grants approval to make the
payment. Interest will accrue, compounded on each anniversary of
the original scheduled payment date or scheduled maturity date, on
any unpaid principal or interest through the actual date of payment,
at 5.1% per annum. Holders of surplus notes will have no rights to
| Ambac Financial Group, Inc. 49 2020 FORM 10-K |
(2)
enforce the payment of the principal of, or interest on, surplus
notes in the absence of OCI approval to pay such amount.
Includes principal on Ambac Note as of December 31, 2020 to be
paid on its legal maturity date of February 12, 2023, and scheduled
interest payments. Interest amounts on this variable rate debt are
projected at a rate of 6.00% which is based on the index rate in
effect at the balance sheet date. These notes are subject to
mandatory
significantly
accelerate the timing of required payments, as described further in
Note 13. Long-term Debt to the Consolidated Financial Statements
included in Part II, Item 8 in this Form 10-K.
redemption provisions
that could
(3)
Includes principal and compounded paid-in-kind interest on Tier 2
notes to be paid on their legal maturity date of February 12, 2055.
These notes are subject to mandatory redemption provisions that
could significantly accelerate the timing of required payments, as
described further in Note 13. Long-term Debt to the Consolidated
Financial Statements included in Part II, Item 8 in this Form 10-K.
(4)
Includes principal on the zero coupon note payable on its legal
maturity date of May 2, 2036.
(5) Amount represents future lease payments on lease agreements
existing as of December 31, 2020. Includes fixed costs, such as
base rent, and estimated variable costs, such as real estate taxes
and electricity.
(6) Purchase
represent
obligations
for
contractually scheduled fixed terms and amounts due for various
technology-related maintenance agreements and other outside
services.
expenditures
future
(7) Amount
represents
to AAC's
future payments
postretirement medical reimbursements to current retirees over the
next 10 years.
relating
(8) The timing of expected claim payments is based on deal specific
cash flows, excluding expected recoveries. These deal specific
cash flows are based on the expected cash flows of the underlying
transactions. The timing of expected claim payments for credits
with reserves that were established using our statistical loss reserve
method is determined based on the weighted average expected life
of the exposure. Refer to the Loss Reserves section in Note 2.
Basis of Presentation and Significant Accounting Policies to the
Consolidated Financial Statements included in Part II, Item 8 in
this Form 10-K for further discussion of our statistical loss reserve
method. The timing of these payments may vary significantly from
the amounts shown above, especially for credits that are based on
our statistical loss reserve method.
AAC Liquidity. AAC’s liquidity is dependent on the balance of
liquid investments and, over time, the net impact of sources and
uses of funds. The principal sources of AAC’s liquidity are
gross installment premiums on insurance policies; principal and
interest payments from investments; sales of investments;
proceeds from repayment of affiliate loans; and recoveries on
claim payments, including from litigation and reinsurance
recoveries. Termination of installment premium policies on an
accelerated basis may adversely impact AAC’s liquidity.
The principal uses of AAC’s liquidity are the payment of
operating and loss adjustment expenses, claims, commutation
and related expense payments on insurance policies, ceded
reinsurance premiums, principal and interest payments on
outstanding debt, additional loans to affiliates, and purchases of
securities and other investments that may not be immediately
converted into cash. In December 2020, AAC paid to AFG $28
million of tolling payments, which as described above it will no
longer be required to make for future tax years.
• The COVID-19 pandemic had a negative impact on
Ambac's liquidity resources as a consequence of the initial
severe reaction of the capital markets and potential for
prolonged low reinvestment rates on invested assets;
derivative losses, which required either timely settlement or
additional collateral posting; and higher credit risk within
the
further described below.
Nevertheless, Ambac has not yet experienced incremental
demands on its liquidity, from higher claims, other than the
aforementioned impact of derivatives.
insured portfolio, as
• Claim payments may increase during and in the aftermath
of the global recession and COVID-19 pandemic as issuers,
particularly those with revenues that were interrupted by
the effects of the pandemic, including social distancing,
other restrictions on activities and
in
unemployment, may not have sufficient cash inflows to pay
debt service on Ambac-insured debt. Refer to "Financial
Guarantees in Force" in this Management's Discussion and
Analysis for further discussion of the potential impact of
the COVID-19 pandemic on claim payments.
increase
the
• Interest and principal payments on surplus notes are subject
to the approval of OCI, which has full discretion over
payments regardless of the liquidity position of AAC. Any
such payment on surplus notes would require either
payment or collateralization of a portion of the Tier 2 Notes
under the terms of the Tier 2 Note indenture. See Note 13.
Long-term Debt to the Consolidated Financial Statements,
included in Part II, Item 8 in this Form 10-K for further
discussion of the payment terms and conditions of the Tier
2 Notes. As discussed more fully in "Results of
Operations" above in this Management's Discussion and
Analysis, OCI declined AAC's request to pay the principal
amount of the surplus notes, plus all accrued and unpaid
interest thereon, on June 7, 2020.
intercompany
AAC's
its wholly owned
loans are with
subsidiary, Ambac Financial Services ("AFS"). AFS uses
interest rate derivatives (primarily interest rate swaps and US
Treasury futures) as a partial hedge against the effects of rising
interest rates elsewhere in the Company, including on AAC’s
financial guarantee exposures. AFS's derivatives
include,
interest rate swaps previously provided to asset-backed issuers
and other entities in connection with their financings. AAC
loans cash and securities to AFS as needed to fund payments
under these derivative contracts, collateral posting requirements
and operating expenses. Intercompany loans are governed by an
established lending agreement with defined borrowing limits
that has received non-disapproval from OCI.
AAC manages its liquidity risk by maintaining comprehensive
analyses of projected cash flows and maintaining specified
levels of cash and short-term investments at all times.
AAC is limited in its ability to pay dividends pursuant to the
terms of its Auction Market Preferred Shares (“AMPS”), which
state that dividends may not be paid on the common stock of
AAC unless all accrued and unpaid dividends on the AMPS for
the then current dividend period have been paid, provided that
dividends on the common stock may be made at all times for the
purpose of, and only in such amounts as are necessary for
enabling AFG (i) to service its indebtedness for borrowed
money as such payments become due or (ii) to pay its operating
expenses. If dividends are paid on the common stock for such
purposes, dividends on the AMPS become cumulative until the
| Ambac Financial Group, Inc. 50 2020 FORM 10-K |
date that all accumulated and unpaid dividends have been paid
on the AMPS. AAC has not paid dividends on the AMPS since
2010. AAC is also subject to additional restrictions on the
payment of dividends pursuant to certain contractual and
regulatory restrictions. Refer to Part I, Item 1, “Insurance
Including
Regulatory Matters
Contractual Restrictions” in this Annual Report on Form 10-K,
and Note 9.
the
Consolidated Financial Statements included in Part II, Item 8, in
this Annual Report on Form 10-K, for more information on
dividend payment restrictions.
Insurance Regulatory Restrictions
- Dividend Restrictions,
to
Our ability to realize RMBS representation and warranty
("R&W") subrogation recoveries is subject to significant
uncertainty, including risks inherent in litigation, collectability
of such amounts from counterparties (and/or their respective
parents and affiliates), timing of receipt of any such recoveries,
including uncertainty due to delays in court proceedings as a
result of the COVID-19 pandemic, intervention by the OCI,
which could impede our ability to take actions required to
realize such recoveries, and uncertainty
the
assumptions used in estimating the amount of such recoveries.
The amount of these subrogation recoveries is significant and if
we are unable to recover any amounts or recover materially less
than our estimated recoveries, our future available liquidity to
pay claims, debt service and meet our other obligations would
be reduced materially. See Part I, Item 1A. Risk Factors in this
Annual Report on Form 10-K for more information about risks
relating to our RMBS R&W subrogation recoveries.
inherent
in
Cash Flow Statement Discussion. The following
summarizes the net cash flows for the periods presented.
table
• Cash provided by the investment portfolio was $104
million and $144 million for the years ended December 31,
2020 and 2019, respectively.
• Net loss and loss expenses paid, including commutation
payments are detailed below:
($ in million)
Year Ended
December 31,
Net losses paid (1)
Net subrogation
received (2)
Net loss expenses paid
2020
2019
2018
$
159 $
416 $
344
Net cash flow
$
149 $
318 $
(118)
108
(168)
70
(140)
117
321
(1) Net losses paid include commutation payments of $13, $214
and $87 for the years ended December 31, 2020, 2019 and
2018, respectively.
(2) For the year ended December 31, 2019, subrogation received
includes $36 of settlement proceeds related to Lehman
sponsored RMBS transactions and $23 related to the
COFINA Plan of Adjustment.
Future operating cash flows will primarily be impacted by
interest payments on outstanding debt, claim and expense
payments, investment receipts and premium collections.
Investing Activities
During 2020, AAC and Ambac UK continued to diversify their
investment portfolio from fixed maturity to other assets,
primarily hedge funds (increase in fair value of $11 million).
Additionally, AFG purchased 80% of Xchange for $74 million
in 2020, net of cash acquired.
($ in million)
Year Ended December 31,
Cash provided by (used in):
2020
2019
2018
Financing Activities
Operating activities
Investing activities
Financing activities
$
(175) $
(311) $
(1,543)
432
(303)
1,000
(691)
1,588
(585)
Effect of foreign exchange
on cash and cash equivalents
—
—
—
Net cash flow
$
(46) $
(2) $
(541)
Operating activities
Financing activities for the year ended December 31, 2020,
include paydowns of the Ambac Note of $121 million and
paydowns/maturities of VIE debt obligations of $178 million.
Financing activities for the year ended December 31, 2019,
include paydowns of the Ambac Note of $178 million and
paydowns of VIE debt obligations of $542 million, proceeds of
$19 million from the re-issuance of 1,386 shares of Ambac-
owned AMPS and proceeds of $12 million from issuance of
Ambac UK debt.
The following represents the significant cash operating activities
during the years ended December 31, 2020 and 2019:
Collateral
• Debt service on the Ambac Note was $107 million and
$143 million for the years ended December 31, 2020 and
2019, respectively.
• In September 2019, AAC received $142 million in
connection with an SEC settlement with Citigroup Global
Markets Inc.
• Cash used related to interest rate derivatives was $20
million and $75 million for the years ended December 31,
2020 and 2019, respectively.
• Cash used for operating expenses were $76 million and $82
million for the years ended December 31, 2020 and 2019,
respectively.
AFS hedges a portion of the interest rate risk in the financial
guarantee and investment portfolio, along with legacy customer
interest rate swaps with standardized derivative contracts,
including financial futures contracts, which contain collateral or
margin requirements. Under these hedge agreements, AFS is
required to post collateral or margin to its counterparties and
futures commission merchants to cover unrealized losses. In
addition, AFS is required to post collateral or margin in excess
of the amounts needed to cover unrealized losses. All AFS
derivative contracts containing ratings-based downgrade triggers
that could result in collateral or margin posting or a termination
have been triggered. If terminations were to occur, AFS would
be required to make termination payments but would also
receive a return of collateral or margin in the form of cash or
U.S. Treasury obligations with market values equal to or in
excess of market values of the swaps and futures contracts. AFS
| Ambac Financial Group, Inc. 51 2020 FORM 10-K |
In the second quarter of 2020, Ambac monetized a material
portion of its investments in certain assets classes; including
corporate securities rated below the 'A' rated category, all
directly owned CMBS (other than Military Housing bonds), and
approximately 50% of all CLOs (all rated investment grade) and
acquired additional distressed Ambac-insured securities. In the
third quarter of 2020, Ambac began acquiring corporate
securities rated below 'A' again. These actions resulted in
changes to the credit rating distribution of available-for-sale
investments from December 31, 2019, to December 31, 2020,
illustrated in the charts below.
The following table summarizes the composition of Ambac’s
investment portfolio, excluding VIE investments, at carrying
value at December 31, 2020 and 2019:
($ in millions)
December 31,
Fixed maturity securities
Short-term
Other investments
Securities pledged as collateral
Total investments (1)
2020
2019
$
2,317 $
2,577
492
595
140
653
478
85
$
3,544 $
3,792
(1)
Includes investments denominated in non-US dollar currencies
with a fair value of £317 ($434) and €39 ($48) as of December 31,
2020 and £257 ($341) and €2 ($2) as of December 31, 2019.
Ambac invests in various asset classes in its fixed maturity
securities portfolio. Other investments include diversified
equity interests in pooled funds. Refer to Note 11. Investments
in this Annual Report on Form 10-K located in Part II. Item 8
for information about fixed maturity securities and pooled funds
by asset class.
may look to re-establish hedge positions that are terminated
early, resulting in additional collateral or margin obligations.
The amount of additional collateral or margin posted on
derivatives contracts will depend on several variables including
the degree to which counterparties exercise their termination
rights (or agreements terminate automatically) and the terms on
which hedges can be replaced. All collateral and margin
obligations are currently met. Collateral and margin posted by
AFS totaled a net amount of $141 million (cash and securities
collateral of $1 million and $140 million, respectively),
including
these contracts at
December 31, 2020.
independent amounts, under
Ambac Credit Products (“ACP”) is not required to post
its outstanding credit derivative
collateral under any of
contracts.
BALANCE SHEET
Total assets decreased by approximately $100 million from
December 31, 2019 to $13,220 million at December 31, 2020,
primarily due to payment of loss and loss adjustment expenses,
interest and operating expenses, and partial redemptions of long-
term debt. These were partially offset by higher VIE assets
caused by the impact of currency changes (strengthening of
pound sterling). Other significant changes during 2020 were
higher subrogation recoverables primarily related to increases in
excess spread on RMBS, as a result of lower interest rates, and
lower premium receivables from the continued runoff of the
financial guarantee insurance portfolio.
Total liabilities increased by approximately $290 million from
December 31, 2019, to $12,074 million as of December 31,
2020, primarily due to higher loss reserves and higher
consolidated VIE liabilities resulting from currency changes (as
notes above), partially offset by lower unearned premiums from
the continued runoff of the financial guarantee insurance
portfolio.
As of December 31, 2020, total stockholders’ equity was $1,140
million, compared with total stockholders’ equity of $1,536
million at December 31, 2019. This decrease was primarily due
to
a Total Comprehensive Loss during 2020. The
Comprehensive Loss was primarily driven by the net loss
attributable to common stockholders for the year ended
December 31, 2020, of $437 million and translation gains on the
consolidation of AFG's foreign subsidiaries.of $23 million.
Investment Portfolio. Ambac's investment portfolio is managed
under established guidelines designed to meet the investment
objectives of AAC, Everspan Group, Ambac UK and AFG.
Refer to "Description of the Business — Investments and
Investment Policy" in this Annual Report on Form 10-K located
in Part I. Item 1, for further description of Ambac's investment
policies and applicable regulations.
Refer to Note 11. Investments in this Annual Report on Form
10-K located in Part II. Item 8 for information about Ambac's
consolidated investment portfolio. Ambac's investment polices
and objectives do not apply to the assets of VIEs consolidated as
a result of financial guarantees written by its insurance
subsidiaries.
| Ambac Financial Group, Inc. 52 2020 FORM 10-K |
The following charts provide the ratings(1) distribution of the
fixed maturity investment portfolio based on fair value at
December 31, 2020 and 2019.
December 31, 2020
BBB
9%
December 31, 2019
AAA
15%
AA
18%
A
13%
AAA
21%
AA
16%
NR (2)
23%
BIG (2)
22%
NR (2)
22%
BIG (2)
14%
BBB
15%
A
12%
Premium receivables by payment currency were as follows:
Currency
(Amounts in millions)
U.S. Dollars
British Pounds
Euros
Total
Premium
Receivable in
Payment
Currency
Premium
Receivable in
U.S. dollars
$
£
€
234 $
86
16
$
234
117
19
370
is entitled
to receive collateral from
Reinsurance Recoverable on Paid and Unpaid Losses. AAC
has reinsurance in place pursuant to surplus share treaty and
facultative agreements. To minimize its exposure to losses from
reinsurers, AAC (i) monitors the financial condition of its
reinsurers; (ii)
its
reinsurance counterparties under certain reinsurance contracts;
and (iii) has certain cancellation rights that can be exercised by
AAC in the event of rating agency downgrades of a reinsurer
(among other events and circumstances). AAC benefited from
letters of credit and collateral amounting to approximately $117
million from its reinsurers at December 31, 2020. As of
December 31, 2020 and 2019, reinsurance recoverable on paid
losses were $33 million and $26 million,
and unpaid
respectively. The increase was primarily a result of adverse
development in public finance and student loan insured
exposures.
Intangible Assets. Intangible assets includes (i) an insurance
intangible asset that was established at the Fresh Start Reporting
Date, representing the difference between the fair value and
aggregate carrying value of the financial guarantee insurance
and reinsurance assets and liabilities of $373 million and (ii)
intangible assets of $38 million established as part of the
acquisition of Xchange on December 31, 2020. Refer to Note
3. Business Combination for further information relating to this
acquisition.
As of December 31, 2020 and 2019 the net insurance intangible
asset was $409 million and $427 million, respectively. Other
than through amortization, variance in the insurance intangible
asset
the
consolidation of Ambac's foreign subsidiary (Ambac UK).
translation gains (losses) from
is solely from
(1) Ratings are based on the lower of Moody’s or S&P ratings. If
ratings are unavailable from Moody's or S&P, Fitch ratings are
used. If guaranteed, rating represents the higher of the underlying
or guarantor’s financial strength rating.
(2) Below investment grade and not rated bonds insured by Ambac
represented 41% and 33% of the 2020 and 2019 combined
investment portfolios, respectively.
Premium Receivables. Ambac's premium receivables decreased
to $370 million at December 31, 2020, from $416 million at
December 31, 2019. As further discussed in Note 8. Financial
Guarantee Insurance Contracts, in this Annual Report Form 10-
K located in Part II. Item 8, the decrease is due to premium
receipts, adjustments for changes in expected and contractual
cash flows and increases to the allowance for credit losses,
partially offset by accretion of the premium receivable discount.
Derivative Assets and Liabilities. The interest rate derivative
portfolio is positioned to benefit from rising rates as a partial
hedge against interest rate exposure in the financial guarantee
and investment portfolios. Derivative assets and liabilities on
the balance sheet primarily reflect the portion of the portfolio
that is not subject to daily cash variation margin payments.
Derivative assets increased from $75 million at December 31,
2019, to $93 million as of December 31, 2020. Derivative
liabilities increased from $90 million at December 31, 2019, to
$114 million as of December 31, 2020. The increases resulted
primarily from lower interest rates during the year ended
December 31, 2020. The interest driven increase in derivative
assets was partially offset by higher counterparty credit
adjustments.
| Ambac Financial Group, Inc. 53 2020 FORM 10-K |
Loss and Loss Expense Reserves and Subrogation
Recoverable. Loss and loss expense reserves are based upon
estimates of the ultimate aggregate losses inherent in the non-
derivative portfolio for insurance policies issued to beneficiaries,
including unconsolidated VIEs.
loss and
loss expense reserves net of subrogation
The
recoverables and before reinsurance as of December 31, 2020
and 2019 were $(397) million and $(482) million, respectively.
Loss and loss expense reserves are included in the Consolidated
Balance Sheets as follows:
The evaluation process for determining the level of reserves is
subject to certain estimates and judgments. Refer to the "Critical
Accounting Policies and Estimates" and “Results of Operations”
sections of Management’s Discussion and Analysis of Financial
Condition and Results of Operations, in addition to Basis of
Presentation and Significant Accounting Policies and Loss
Reserves sections included in Note 2. Basis of Presentation and
Significant Accounting Policies and Note 8. Financial Guarantee
Insurance Contracts, respectively, of the Consolidated Financial
Statements included in Part II, Item 8 in this Annual Report on
Form 10-K, for further information on loss and loss expenses.
($ in millions)
Balance Sheet Line Item
December 31, 2020:
Loss and loss expense reserves
Subrogation recoverable
Totals
December 31, 2019:
Loss and loss expense reserves
Subrogation recoverable
Totals
Present Value of Expected
Net Cash Flows
Claims and
Loss
Expenses
Recoveries (1)
Unearned
Premium
Revenue
Gross Loss
and Loss
Expense
Reserves
$
$
$
$
2,060 $
(229) $
(72) $
100
(2,256)
—
2,160 $
(2,485) $
(72) $
1,835 $
(233) $
(54) $
131
(2,160)
—
1,966 $
(2,394) $
(54) $
1,759
(2,156)
(397)
1,548
(2,029)
(482)
(1) Present value of future recoveries include R&W subrogation recoveries of $1,751 and $1,727 at December 31, 2020 and 2019, respectively.
Ambac has exposure to various bond types issued in the debt
capital markets. Our experience has shown that, for the majority
of bond types, we have not experienced significant claims. The
bond types that have experienced significant claims, including
residential mortgage-backed
through
commutations,
are
securities (“RMBS”), student loan securities and public finance
securities. These bond types represent 94% of our ever-to-date
insurance claims recorded with RMBS comprising 75%.
| Ambac Financial Group, Inc. 54 2020 FORM 10-K |
The table below indicates gross par outstanding and the components of gross loss and loss expense reserves related to policies in Ambac’s
gross loss and loss expense reserves at December 31, 2020 and 2019:
($ in millions)
December 31, 2020:
RMBS
Domestic Public Finance
Student Loans
Ambac UK and Other Credits
Loss expenses
Totals
December 31, 2019:
RMBS
Domestic Public Finance
Student Loans
Ambac UK and Other Credits
Loss expenses
Totals
Present Value of Expected
Net Cash Flows
Gross Par
Outstanding (1)(2)
Claims and
Loss
Expenses
Recoveries
Unearned
Premium
Revenue
Gross Loss
and Loss
Expense
Reserves (1)(3)
$
2,530 $
669 $
(2,102) $
(13) $
(1,446)
$
$
3,016
415
1,612
—
1,112
271
40
68
(349)
(34)
—
—
(39)
(3)
(17)
—
724
234
23
68
7,573 $
2,160 $
(2,485) $
(72) $
(397)
3,027 $
634 $
(2,013) $
(13) $
(1,392)
2,398
472
271
—
1,007
248
4
73
(344)
(36)
—
—
(36)
(4)
(1)
—
627
208
3
73
$
6,168 $
1,966 $
(2,394) $
(54) $
(482)
(1) Ceded par outstanding on policies with loss reserves and ceded loss and loss expense reserves are $739 and $33 respectively, at December 31, 2020
and $511 and $26, respectively at December 31, 2019. Ceded loss and loss expense reserves are included in Reinsurance recoverable on paid and
unpaid losses.
(2) Gross Par Outstanding includes capital appreciation bonds, which are reported at the par amount at the time of issuance of the insurance policy as
opposed to the current accreted value of the bond.
(3) Loss reserves are included in the balance sheet as Loss and loss expense reserves or Subrogation recoverable dependent on if a policy is in a net
liability or net recoverable position.
Variability of Expected Losses and Recoveries
Ambac’s management believes that the estimated future loss
component of loss reserves (present value of expected net cash
flows) are adequate to cover future claims presented, but there
can be no assurance that the ultimate liability will not be higher
than such estimates.
than
stressful assumptions
It is possible that our estimated future losses for insurance
policies discussed above could be understated or that our
estimated future recoveries could be overstated. We have
attempted to identify possible cash flows related to losses and
recoveries using more
the
probability-weighted outcome recorded. The possible net cash
flows consider the highest stress scenario that was utilized in the
development of our probability-weighted expected loss at
December 31, 2020, and assumes an inability to execute any
commutation transactions with issuers and/or investors. Such
stress scenarios are developed based on management’s view
about all possible outcomes relating to losses and recoveries. In
arriving at such view, management makes considerable
judgments about the possibility of various future events.
Although we do not believe it is possible to have stressed
outcomes in all cases, it is possible that we could have stress
case outcomes in some or even many cases. See “Risk Factors”
in Part I, Item 1A as well as the descriptions of "RMBS
Variability," "Public Finance Variability," "Student Loan
Variability," and "Other Credits,
including Ambac UK,
Variability," in Part II, Item 7 of this Annual Report on From
10-K for further discussion of the risks relating to future losses
and recoveries that could result in more highly stressed
outcomes appearing below.
The occurrence of these stressed outcomes individually or
collectively would have a material adverse effect on our results
of operations and financial condition and may result in
materially adverse consequence for Ambac, including (without
limitation) impairing the ability of AAC to honor its financial
obligations; the initiation of rehabilitation proceedings against
AAC; decreased likelihood of AAC delivering value to AFG,
through dividends or otherwise; and a significant drop in the
value of securities issued or insured by AFG or AAC.
RMBS Variability
Ambac has exposure to the U.S. mortgage market primarily
through financial guarantees of RMBS, including transactions
collateralized by first and second liens.
Changes to assumptions that could make our reserves under-
estimated include an increase in interest rates, deterioration in
housing prices, poor servicing, government intervention into the
functioning of the mortgage market and the effect of a weakened
economy characterized by growing unemployment and wage
pressures. We utilize a model to project losses in our RMBS
exposures and changes to reserves, either upward or downward,
are not unlikely if we used a different model or methodology to
project losses.
| Ambac Financial Group, Inc. 55 2020 FORM 10-K |
We established a representation and warranty subrogation
recovery as further discussed in Note 8. Financial Guarantee
Insurance Contracts to the Consolidated Financial Statements
included in this Annual Report on Form 10-K. Our ability to
realize RMBS representation and warranty recoveries is subject
to significant uncertainty, including risks inherent in litigation,
collectability of such amounts from counterparties (and/or their
respective parents and affiliates), delays in realizing such
recoveries, including delays in getting to trial due to court
closures caused by COVID-19 or other events, intervention by
the OCI, which could impede our ability to take actions required
to realize such recoveries, and uncertainty inherent in the
assumptions used in estimating such recoveries. Additionally,
our R&W actual subrogation recoveries could be significantly
lower than our estimate of $1,725 million, net of reinsurance, as
of December 31, 2020, if the sponsors of these transactions:
(i) fail to honor their obligations to repurchase the mortgage
loans, (ii) successfully dispute our breach findings or claims for
damages, (iii) no longer have the financial means to fully satisfy
their obligations under the transaction documents, or (iv) our
pursuit of recoveries is otherwise unsuccessful. Failure to realize
R&W subrogation recoveries for any reason or the realization of
R&W subrogation recoveries materially below the amount
recorded on Ambac's consolidated balance sheet would have a
material adverse effect on our results of operations and financial
condition.
In the case of both first and second-lien exposures, the possible
lower housing price appreciation
stress case assumes a
projection, which in turn drives higher defaults and severities.
Using this approach, the possible increase in loss reserves for
RMBS credits for which we have an estimate of expected loss at
December 31, 2020, could be approximately $15 million.
the absence of any R&W subrogation
Combined with
recoveries, a possible increase in loss reserves for RMBS could
be approximately $1,740 million. A loss of this magnitude may
render AAC insolvent. Additionally, loss payments are sensitive
to changes in interest rates, increasing as interest rates rise. For
example an increase in interest rates of 0.50% could increase our
estimate of expected losses by approximately $30 million.
There can be no assurance that losses may not exceed such
amounts. Additionally, the RMBS portfolio is sensitive to the
COVID-19 related forbearances and delinquencies caused by the
related general economic downturn. Due to the uncertainties
related to the economic effects of the COVID-19 pandemic and
other risks associated with RMBS, there can be no assurance
that losses may not exceed our stress case estimates.
Public Finance Variability
Ambac’s U.S. public finance portfolio consists predominantly of
municipal bonds such as general and revenue obligations and
lease and tax-backed obligations of state and local government
entities; however, the portfolio also includes a wide array of
non-municipal types of bonds, including financings for not-for-
profit entities and transactions with public and private elements,
which generally finance infrastructure, housing and other public
purpose facilities and interests. The increase in public finance
gross loss reserves at December 31, 2020, as compared to
December 31, 2019, was primarily related to declines in
discount rates, changes in assumptions on certain credits,
particularly Puerto Rico and adverse impact on loss reserves
from the global and issuer-specific economic impact of the
COVID-19 pandemic. Total public finance gross loss reserves
and related gross par outstanding on Ambac insured obligations
by bond type were as follows:
($ in millions)
Issuer Type
December 31,
Lease and tax-backed
General obligation
Housing
Transportation revenue
Other
Total
2020
2019
Gross Par
Outstanding (1)
Gross Loss
Reserves
Gross Par
Outstanding (1)
Gross Loss
Reserves
$
1,366 $
589
453
220
388
693 $
(37)
27
30
11
1,075 $
681
457
88
97
$
3,016 $
724 $
2,398 $
561
(16)
29
42
11
627
(1) Gross Par Outstanding includes capital appreciation bonds, which are reported at the par amount at the time of issuance of the insurance policy as
opposed to the current accreted value of the bond.
It is possible our loss reserves for public finance credits may be
under-estimated if issuers are faced with prolonged exposure to
adverse political, judicial, economic, fiscal or socioeconomic
events or trends. Additionally, our loss reserves may be under-
estimated as a result of the ultimate scope, duration and
magnitude of the effects of COVID-19. The COVID-19 related
economic downturn has put a strain on municipal issuers,
particularly those dependent upon narrow sources of revenues or
dedicated taxes to support debt service, such as hotel occupancy
taxes, sales taxes, parking revenues, tolls, licensing fees, etc. A
prolonged recovery from the COVID-19 related economic
downturn could put additional stresses on these issuers as well
as other types of municipal finance issuers and result in
increased defaults and potential additional losses for Ambac.
Our experience with the city of Detroit in 2013 in its bankruptcy
proceeding was not favorable and renders future outcomes with
other public finance issuers even more difficult to predict and
may increase the risk that we may suffer losses that could be
sizable. We agreed to settlements regarding our insured Detroit
general obligation bonds that provide better treatment of our
exposures than the city planned to include in its plan of
adjustment, but nevertheless required us to incur a loss for a
significant portion of our exposure. An additional troubling
precedent in the Detroit case, as well as other municipal
bankruptcies, is the preferential treatment of certain creditor
classes, especially the public pensions. The cost of pensions and
the need to address frequently sizable unfunded or underfunded
pensions is often a key driver of stress for many municipalities
and their related authorities, including entities to whom we have
| Ambac Financial Group, Inc. 56 2020 FORM 10-K |
significant exposure, such as Chicago's school district, the State
of New Jersey and many others. Less severe treatment of
pension obligations in bankruptcy may lead to worse outcomes
for traditional debt creditors.
Variability of outcomes applies to even what is generally
considered more secure municipal financings, such as dedicated
sales tax revenue bonds that capture sales tax revenues for debt
service ahead of any amounts being deposited into the general
fund of an issuer. In the case of the Puerto Rico COFINA sales
tax bonds that were part of the Commonwealth of Puerto Rico's
Title III proceedings, AAC and other creditors agreed to settle at
a recovery rate equal to about 93% of pre-petition amounts owed
on the Ambac insured senior COFINA bonds. In the COFINA
case, the senior bonds still received a reduction or "haircut"
despite the existence of junior COFINA bonds, which received a
recovery rate equal to about 56% of pre-petition amounts owed.
In addition, municipal entities may be more inclined to use
bankruptcy to resolve their financial stresses if they believe
preferred outcomes for various creditor groups can be achieved.
We expect municipal bankruptcies and defaults to continue to be
challenging to project given the unique political, economic,
fiscal, legal, governance and public policy differences among
municipalities as well as the complexity, long duration and
relative infrequency of the cases themselves in forums with a
scarcity of legal precedent.
Another potentially adverse development that could cause the
loss reserves on our public finance credits to be underestimated
is deterioration in the municipal bond market, resulting from
reduced or limited access to alternative forms of credit (such as
bank loans) or other exogenous factors, such as changes in tax
law that could reduce certain municipal investors' appetite for
tax-exempt municipal bonds or put pressure on issuers in states
with high state and local taxes. These factors, as well as more
recent volatility in the municipal markets as a result of the
COVID-19 related economic downturn and
the building
budgetary pressures at the state and local level related to the cost
of fighting the virus, could deprive issuers access to funding at a
level necessary to avoid defaulting on their obligations.
In addition, a judicial decision in connection with the PRHTA
Title III proceedings could cause the loss reserves on our public
finance credits to be underestimated. On January 13, 2020, the
U.S. Supreme Court denied a petition for certiorari arising out of
an appeal of the March 26, 2019, ruling by the U.S. Court of
Appeals for the First Circuit. In the ruling, the First Circuit
affirmed the decision by the U.S. District Court overseeing the
PROMESA Title III proceedings for the PRHTA, found that
under Sections 928(a) and 922(d) of the U.S. Bankruptcy Code,
municipal issuers of revenue bonds secured by special revenues
are permitted, but not required, to apply special revenues to pay
debt service on such revenue bonds during the pendency of
bankruptcy proceedings for such municipal issuers. The First
Circuit's decision challenges what had been a commonly
understood notion in the municipal finance marketplace that
municipal revenues bondholders secured by special revenues (as
defined in Chapter 9 of the U.S. Bankruptcy Code) would
continue to receive payment during a bankruptcy of the
municipal issuer. This decision introduces uncertainty into the
public finance market and it may make it more difficult for
municipal instrumentalities to procure revenue bond financings
in the future and increases the credit risk to bondholders of
existing special revenue bonds, particularly those from weaker
issuers.
While our loss reserves consider our judgment regarding issuers’
financial flexibility to adapt to adverse markets, they may not
adequately capture sudden, unexpected or protracted uncertainty
that adversely affects market conditions, such as the developing
COVID-19 related economic downturn.
Our exposures to the Commonwealth of Puerto Rico are under
stress arising from
the Commonwealth’s poor financial
condition, weak economy, loss of capital markets access, and the
severe damage caused by hurricanes Irma and Maria and other
natural disasters. These factors, taken together with the payment
moratorium on debt service of the Commonwealth and its
instrumentalities, ongoing PROMESA Title III proceedings, and
certain other provisions under PROMESA, the potential for
restructurings of debt insured by AAC, either with or without its
consent, and the possibility of protracted litigation as a result of
which its rights may be materially impaired, may cause losses to
exceed current reserves in a material manner. See Note 17.
Commitments and Contingencies to the Consolidated Financial
Statements in Part II, Item 8 and "Financial Guarantees in
Force" section of Management’s Discussion and Analysis of
Financial Condition and Results of Operations included in Part
II, Item 7 in this Annual Report on Form 10-K for further
updates relating to Puerto Rico.
the possible
Material additional losses on our public finance credits caused
by the aforementioned factors, including the possibility of a
protracted recovery related to the COVID-19 crisis would have a
material adverse effect on our results of operations and financial
condition. For the public finance credits, including Puerto Rico,
for which we have an estimate of expected loss at December 31,
2020,
loss reserves could be
approximately $1,200 million. and there can be no assurance
that losses may not exceed our stress case estimates. A loss of
this magnitude may render AAC insolvent. Among other things,
this estimate includes the possibility that the Commonwealth
Plan of Adjustment (as discussed above in the Financial
Guarantees in Force section of this Management Discussion and
Analysis) were to become effective.
increase
in
Student Loan Variability
Changes to assumptions that could make our reserves under-
estimated include, but are not limited to, increases in interest
rates, default rates and loss severities on the collateral due to
economic or other factors, including the COVID-19 related
economic downturn. Such factors may include lower recoveries
on defaulted loans or additional losses on collateral or trust
assets, including as a result of any enforcement actions by the
Consumer Finance Protection Bureau. For student loan credits
for which we have an estimate of expected loss at December 31,
2020,
loss reserves could be
approximately $25 million. Additionally, an increase in interest
rates of 0.50% could increase our estimate of expected losses by
approximately $20 million. Additionally, the student loan
portfolio is sensitive to COVID-19 related payment moratoriums
and delinquencies caused by the general economic downturn.
Due to such factors, there can be no assurance that losses may
not exceed our stress case estimates.
the possible
increase
in
| Ambac Financial Group, Inc. 57 2020 FORM 10-K |
Other Credits, including Ambac UK, Variability
It is possible our loss reserves on other types of credits,
including those insured by Ambac UK, may be under-estimated
because of various risks that vary widely, including the risk that
we may not be able to recover or mitigate losses through our
remediation processes. For all other credits, including Ambac
UK, for which we have an estimate of expected loss, the sum of
all the highest stress case loss scenarios is approximately $400
million greater than the loss reserves at December 31, 2020.
Additionally, our loss reserves may be under estimated as a
result of the ultimate scope, duration and magnitude of the
effects of COVID-19. There can be no assurance that losses
may not exceed our stress case estimates.
Long-term Debt. Long-term debt consists of senior and junior
surplus notes issued by AAC, the Ambac Note and Tier 2 Notes
issued in connection with the Rehabilitation Exit Transactions,
and Ambac UK debt issued in connection with the 2019
Ballantyne commutation. The carrying value of each of these as
of December 31, 2020 and 2019 is below:
($ in millions)
Surplus notes
Ambac note
Tier 2 notes
Ambac UK debt
December 31,
2020
December 31,
2019
$
778 $
1,641
306
14
769
1,763
278
13
Total Long-term Debt
$
2,739 $
2,822
The decrease in long-term debt from December 31, 2019 is
primarily due to optional redemptions of the Ambac Note of
$121 million, partially offset by accretion on the carrying value
of the surplus notes, Tier 2 Notes and Ambac UK debt.
Redeemable Noncontrolling Interest. The increase during 2020
was the result of the acquisition of Xchange on December 31,
2020. Refer to Note 3. Business Combination for further
information relating to this acquisition.
ACCOUNTING STANDARDS
The following accounting standards have been issued but have
not yet been adopted. We do not expect these accounting
standards to have a consequential impact on Ambac's financial
statements.
Convertible Instruments and Contracts in an Entity's Own
Equity
In August 2020, the FASB issued ASU 2020-06, Accounting for
Convertible Instruments and Contracts in an Entity's Own
Equity. The ASU i) simplifies the accounting for convertible
debt and convertible preferred stock by reducing the number of
accounting models, and amends certain disclosures, ii) amends
and simplifies the derivative scope exception guidance for
contracts in an entity's own equity, including share-based
compensation, and iii) amends the diluted earnings per share
calculations for convertible instruments and contracts in an
entity's own equity. The ASU is effective for fiscal years ending
after December 15, 2021, with early adoption permitted. Ambac
will adopt this ASU on January 1, 2022.
Simplifying Income Tax Accounting
In December 2019, the FASB issued ASU 2019-12, Income
Taxes (Topic 740) - Simplifying the Accounting for Income
Taxes. The FASB issued this ASU as part of its initiative to
reduce complexity in accounting standards. The ASU removes
certain exceptions in the guidance related to investments, intra-
period allocations and interim period allocations. It further adds
new guidance related to the allocation of consolidated income
taxes and evaluating a step-up in the tax basis of goodwill. The
ASU is effective for fiscal years beginning after December 15,
2020, with early adoption permitted. The modified disclosures
must be applied on a retrospective basis for all periods
presented. Ambac will adopt this ASU on January 1, 2021.
Please refer to Note 2. Basis of Presentation and Significant
Accounting Policies to the Consolidated Financial Statements,
included in Part II, Item 8 in this Annual Report Form 10-K for
the year ended December 31, 2020, for a discussion of the
impact of other recent accounting pronouncements on Ambac’s
financial condition and results of operations.
AAC STATUTORY BASIS FINANCIAL RESULTS
AAC statutory financial statements are prepared on the basis of
accounting practices prescribed or permitted by the OCI. OCI
recognizes only statutory accounting practices prescribed or
permitted by the State of Wisconsin (“SAP”) for determining
and reporting the financial condition and results of operations of
an insurance company for determining its solvency under
Wisconsin Insurance Law. The National Association of
Insurance Commissioners (“NAIC”) Accounting Practices and
Procedures manual (“NAIC SAP”) has been adopted as a
component of prescribed practices by the State of Wisconsin.
Additionally, the OCI has prescribed additional practices and
has permitted accounting practices for AAC. For further
information, see Note 9. Insurance Regulatory Restrictions to
the Consolidated Financial Statements included in Part II, Item 8
in this Annual Report Form 10-K.
AAC’s statutory policyholder surplus and qualified statutory
capital (defined as the sum of policyholders surplus and
mandatory contingency reserves) were $865 million and $1,413
million at December 31, 2020, respectively, as compared to
$1,088 million and $1,618 million at December 31, 2019,
respectively. As of December 31, 2020, statutory policyholder
surplus and qualified statutory capital included $573 million
principal balance of surplus notes outstanding, $365 million
principal balance of junior surplus notes outstanding and $138
million liquidation preference of preferred stock outstanding.
These surplus and junior surplus notes (including related
accrued interest of $544 million that is not recorded under
statutory basis accounting principles), preferred stock and all
other liabilities (including insurance claims and debt issued by
AAC) are obligations that have claims on the resources of AAC
that are senior to AFG's equity and therefore impact AFG's
ability to realize residual value or receive dividends from AAC.
The significant drivers to the net decrease in policyholder
surplus were statutory net losses of $213 million for the year
from
ended December 31, 2020,
(excluding dividends
| Ambac Financial Group, Inc. 58 2020 FORM 10-K |
subsidiaries) and contributions to contingency reserves of $18
million.
AAC’s statutory surplus is sensitive to multiple factors,
including: (i) loss reserve development, (ii) approval by OCI of
interest costs
payments on surplus notes, (iii) on-going
associated with the Ambac Note and Tier 2 Notes, including
changes to the interest rates as the Ambac Note is a floating rate
obligation, (iv) deterioration in the financial position of AAC
subsidiaries that have their obligations guaranteed by AAC,
(v) first time payment defaults of insured obligations, which
increase statutory loss reserves, (vi) commutations of insurance
policies or credit derivative contracts at amounts that differ from
the amount of liabilities recorded, (vii) reinsurance contract
terminations at amounts that differ from net assets recorded,
(viii) changes to the fair value of pooled fund and other
investments carried at
(ix) settlements of
representation and warranty breach claims at amounts that differ
from amounts recorded, including failures to collect such
amounts, (x) realized gains and losses, including losses arising
from other than temporary impairments of investment securities,
and (xi) future changes to prescribed SAP practices by the OCI.
fair value,
The significant differences between GAAP and SAP are that
under SAP:
• Loss reserves are only established for losses on guaranteed
obligations that have experienced a payment default in an
amount that is sufficient to cover the present value of the
anticipated defaulted debt service payments over the
expected period of default, less estimated recoveries under
subrogation rights (5.1% as prescribed by OCI). Under
GAAP, in addition to the establishment of loss reserves for
defaulted obligations, loss reserves are established (net of
GAAP basis unearned premium revenue) for obligations
that have experienced credit deterioration, but have not yet
defaulted using a weighted-average risk-free discount rate,
currently at 1.1%.
• Mandatory contingency reserves are required based upon
the type of obligation insured, whereas GAAP does not
require such a reserve. Releases of the contingency reserves
are generally subject to OCI approval and relate to a
determination that the held reserves are deemed excessive.
• Investment grade fixed maturity investments are stated at
amortized cost and certain below investment grade fixed
maturity investments are reported at the lower of amortized
cost or fair value. Under GAAP, all fixed maturity
investments are reported at fair value.
• Wholly owned subsidiaries are not consolidated; rather, the
equity basis of accounting is utilized and the carrying
values of these investments are subject to admissibility
tests.
• Variable interest entities ("VIE") are not required to be
assessed for consolidation. Under GAAP, a reporting entity
that has both the following characteristics is required to
consolidate the VIE: a) the power to direct the activities of
the VIE that most significantly impact the VIE’s economic
performance and b) the obligation to absorb losses of the
VIE or the right to receive benefits from the VIE that could
potentially be significant to the VIE. AAC generally has the
obligation to absorb losses of VIEs that could potentially be
significant to the VIE as the result of its guarantee of
insured obligations issued by VIEs. For certain VIEs AAC
has the power to direct the most significant activities of the
VIE and accordingly consolidates the related VIEs under
GAAP.
• All payments of principal and interest on the surplus notes
are subject to the approval of the OCI. Unpaid interest due
on the surplus notes is expensed when the approval for
payment of interest has been granted by the OCI. Under
GAAP, interest on surplus notes is accrued regardless of
OCI approval.
• Upfront premiums written are earned on a basis
proportionate to the remaining scheduled debt service to the
original total principal and interest insured. Installment
premiums are reflected in income pro-rata over the period
covered by the premium payment. Under GAAP, premium
revenues for both upfront and installment premiums are
earned over the life of the financial guarantee contract in
proportion to the insured principal amount outstanding at
each reporting date.
• Insurance
intangibles
that arose as a result of
the
implementation of Fresh Start reporting is not a concept
within SAP. This insurance intangible asset is amortized as
an expense on a level yield basis over the life of the related
insurance risks.
AMBAC UK FINANCIAL RESULTS UNDER UK
ACCOUNTING PRINCIPLES
Ambac UK is required to prepare financial statements under
FRS 102 "The Financial Reporting Standard applicable in the
UK and Republic of Ireland." Ambac UK’s shareholder funds
under UK GAAP were £412 million at December 31, 2020, as
compared to £387 million at December 31, 2019. At December
31, 2020, the carrying value of cash and investments was £481
million, a increase from £470 million at December 31, 2019.
The increase in shareholders’ funds and cash and investments
was primarily due to the continued receipt of premiums and
investment income, partially offset by loss expenses, foreign
exchange losses within Ambac UK's investment portfolio and
operating expense and tax payments.
The significant differences between U.S. GAAP and UK GAAP
are that under UK GAAP:
• Loss reserves are only established for losses on guaranteed
obligations when, in the judgment of management, a
monetary default in the timely payment of debt service is
likely to occur, which would result in Ambac UK incurring
a loss. A loss provision is established in an amount that is
sufficient to cover the present value of the anticipated
defaulted debt service payments over the expected period
of default, less estimated recoveries under subrogation
rights. The discount rate is equal to the lower of the rate of
return on invested assets for either the current year or the
period covering the current year plus the four previous
years. Under U.S. GAAP, loss reserves are established (net
of U.S. GAAP basis unearned premium revenue) for
obligations that have experienced credit deterioration, but
have not yet defaulted using a weighted-average risk-free
discount rate.
• Investments in fixed maturity securities are stated at
to an other-than-temporary
amortized cost, subject
| Ambac Financial Group, Inc. 59 2020 FORM 10-K |
impairment evaluation. Under U.S. GAAP, all bonds are
reported at fair value and are evaluated for credit
impairments under CECL,
• Purchases of Ambac UK insured securities are bifurcated
into an intrinsic and an Ambac UK claim based value. The
intrinsic value is recorded as an investment whereas the
Ambac UK claim based value is recorded as a claim
payment with an accompanying reduction in Ambac UK
loss reserves. Under U.S. GAAP, investments in Ambac
UK insured securities are reported as investments and do
not reduce loss reserves.
• VIEs are not required to be assessed for consolidation.
Under U.S. GAAP, as noted under AAC Statutory Basis
Financial Results above, VIE's with certain characteristics
are required to be consolidated. For several VIEs Ambac
UK has the power to direct the most significant activities of
the VIE and accordingly consolidates the related VIEs
under U.S. GAAP.
• Upfront premiums written are earned on a basis
proportionate to the remaining scheduled debt service to the
total principal and interest insured. Installment premiums
are reflected in income pro-rata over the period covered by
the premium payment. Under U.S. GAAP, premium
revenues for both upfront and installment premiums are
earned over the life of the financial guarantee contract in
proportion to the insured principal amount outstanding at
each reporting date.
• Insurance
intangibles
that arose as a result of
the
implementation of Fresh Start reporting is not a concept
within UK GAAP. Under U.S. GAAP, this insurance
intangible asset is amortized as an expense on a level yield
basis over the life of the related insurance risks.
Ambac UK is also required to prepare financial information in
accordance with the Solvency II Directive. The basis of
preparation of this information is significantly different from
both US GAAP and UK GAAP. The calculation of capital
resources, regulatory capital requirements and regulatory capital
deficits under Solvency II at December 31, 2020, will be
published on Ambac's website during March 2021. Final annual
Solvency II data and Ambac UK's annual Solvency and
Financial Condition Report will be published on Ambac's
website during April 2021.
Available capital resources under Solvency II were a surplus of
£196 million at December 31, 2020, of which £188 million are
eligible to meet solvency capital requirements. This is an
increase from December 31, 2019, when available capital
resources were a surplus of £184 million of which £178 million
were eligible to meet solvency capital requirements. Eligible
capital resources at December 31, 2020 and December 31, 2019,
are in comparison to regulatory capital requirements of £256
million and £208 million, respectively. Therefore, Ambac UK
was deficient in terms of compliance with applicable regulatory
capital requirements by £72 million and £30 million at
December 31, 2020 and December 31, 2019, respectively. The
deficit increased as at December 31, 2020, due to the combined
impact of (i) the reduction in long term interest rates, which
resulted in an increase in technical provision liabilities and
hence a reduction in eligible own funds and (ii) an increase in
capital requirements for non-life risk due to parameter changes
the solvency capital requirement calculation. The
within
regulators are aware of the deficiency in capital resources as
compared to capital requirements and dialogue between Ambac
UK management and its regulators remains ongoing with respect
to options for addressing the shortcoming, although such options
remain few.
NON-GAAP FINANCIAL MEASURES
In addition to reporting the Company’s quarterly financial
results in accordance with GAAP, the Company currently
reports two non-GAAP financial measures: Adjusted Earnings
and Adjusted Book Value. The most directly comparable GAAP
measures are net income attributable to common stockholders
for Adjusted Earnings and Total Ambac Financial Group, Inc.
stockholders’ equity for Adjusted Book Value. A non-GAAP
is a numerical measure of financial
financial measure
performance or financial position that excludes (or includes)
amounts that are included in (or excluded from) the most
directly comparable measure calculated and presented
in
accordance with GAAP. We are presenting these non-GAAP
financial measures because they provide greater transparency
and enhanced visibility into the underlying drivers of our
business. Adjusted Earnings and Adjusted Book Value are not
substitutes for the Company’s GAAP reporting, should not be
viewed in isolation and may differ from similar reporting
provided by other companies, which may define non-GAAP
measures differently.
Ambac has a significant U.S. tax net operating loss (“NOL”)
that is offset by a full valuation allowance in the GAAP
consolidated financial statements. As a result of this and other
considerations, we utilized a 0% effective tax rate for non-
GAAP adjustments; which is subject to change.
The following paragraphs define each non-GAAP financial
measure and describe why it is useful. A reconciliation of the
non-GAAP financial measure and the most directly comparable
GAAP financial measure is also presented below.
Adjusted Earnings (Loss). Adjusted Earnings (Loss) is defined
as net income (loss) attributable to common stockholders, as
reported under GAAP, adjusted on an after-tax basis for the
following:
• Non-credit impairment fair value (gain) loss on credit
derivatives: Elimination of the non-credit impairment fair
value gains (losses) on credit derivatives, which is the
amount in excess of the present value of the expected
estimated credit losses. Such fair value adjustments are
affected by, and in part fluctuate with, changes in market
factors such as interest rates and credit spreads, including
the market’s perception of Ambac’s credit risk (“Ambac
CVA”), and are not expected to result in an economic gain
or loss. These adjustments allow for all financial guarantee
contracts to be accounted for consistent with the Financial
Services – Insurance Topic of ASC, whether or not they are
subject to derivative accounting rules.
• Insurance intangible amortization: Elimination of the
amortization of the financial guarantee insurance intangible
asset that arose as a result of the Ambac's emergence from
bankruptcy and implementation of Fresh Start reporting.
This adjustment ensures
that all financial guarantee
contracts are accounted for consistent with the provisions
of the Financial Services – Insurance Topic of the ASC.
| Ambac Financial Group, Inc. 60 2020 FORM 10-K |
• Foreign exchange (gains) losses: Elimination of the foreign
exchange gains (losses) on the re-measurement of assets,
liabilities and transactions in non-functional currencies.
This adjustment eliminates the foreign exchange gains
(losses) on all assets, liabilities and transactions in non-
functional currencies, which enables users of our financial
statements to better view the business results without the
impact of fluctuations in foreign currency exchange rates
and facilitates period-to-period comparisons of Ambac's
operating performance.
The following table reconciles net income attributable to common stockholders to the non-GAAP measure, Adjusted Earnings on a total
dollar amount and per diluted share basis, for all periods presented:
($ in millions, except per share data)
Year Ended December 31,
Net income (loss) attributable to common
stockholders
Adjustments:
Non-credit impairment fair value (gain) loss on credit
derivatives
Insurance intangible amortization
Foreign exchange (gains) losses
Adjusted Earnings (Loss)
2020
2019
2018
$ Amount
Per Diluted
Share
$ Amount
Per Diluted
Share
$ Amount
Per Diluted
Share
$
(437) $
(9.47) $
(216) $
(4.69) $
186 $
3.99
—
57
3
—
1.23
0.06
(1)
295
(12)
(0.03)
6.43
(0.26)
1
107
7
$
(378) $
(8.19) $
66 $
1.44 $
301 $
0.02
2.30
0.15
6.47
Adjusted Book Value. Adjusted Book Value is defined as Total
Ambac Financial Group, Inc. stockholders’ equity as reported
under GAAP, adjusted for after-tax impact of the following:
• Non-credit
fair value
impairment
losses on credit
derivatives: Elimination of the non-credit impairment fair
value loss on credit derivatives, which is the amount in
excess of the present value of the expected estimated
economic credit loss. GAAP fair values are affected by,
and in part fluctuate with, changes in market factors such as
interest rates, credit spreads, including Ambac’s CVA that
are not expected to result in an economic gain or loss.
These adjustments allow for all financial guarantee
contracts to be accounted for within Adjusted Book Value
consistent with the provisions of the Financial Services—
Insurance Topic of the ASC, whether or not they are
subject to derivative accounting rules.
emergence
• Insurance intangible asset: Elimination of the financial
guarantee insurance intangible asset that arose as a result of
Ambac’s
the
from
implementation of Fresh Start reporting. This adjustment
ensures that all financial guarantee contracts are accounted
for within Adjusted Book Value consistent with the
provisions of the Financial Services—Insurance Topic of
the ASC.
bankruptcy
and
revenue ("UPR") on financial guarantee contracts, in excess
of expected losses, net of reinsurance. This non-GAAP
adjustment presents the economics of UPR and expected
losses for financial guarantee contracts on a consistent
basis. In accordance with GAAP, stockholders’ equity
reflects a reduction for expected losses only to the extent
they exceed UPR. However, when expected losses are less
than UPR for a financial guarantee contract, neither
expected losses nor UPR have an impact on stockholders’
equity. This non-GAAP adjustment adds UPR in excess of
expected losses, net of reinsurance, to stockholders’ equity
for financial guarantee contracts where expected losses are
less than UPR.
Income: Elimination of
• Net unrealized investment (gains) losses in Accumulated
Other Comprehensive
the
unrealized gains and losses on the Company’s investments
that are recorded as a component of accumulated other
comprehensive income (“AOCI”). The AOCI component
of the fair value adjustment on the investment portfolio
may differ from realized gains and losses ultimately
recognized by the Company based on the Company’s
investment strategy. This adjustment only allows for such
gains and losses in Adjusted Book Value when realized.
• Net unearned premiums and fees in excess of expected
losses: Addition of the value of the unearned premium
| Ambac Financial Group, Inc. 61 2020 FORM 10-K |
The following table reconciles Total Ambac Financial Group, Inc. stockholders’ equity to the non-GAAP measure Adjusted Book Value on
a dollar amount and per share basis, for all periods presented:
($ in millions, except per share data) December 31,
$ Amount
Per Share
$ Amount
Per Share
Total Ambac Financial Group, Inc. stockholders’ equity
$
1,080 $
23.57 $
1,477 $
32.41
2020
2019
Adjustments:
Non-credit impairment fair value losses on credit derivatives
Insurance intangible asset
Net unearned premiums and fees in excess of expected losses
Net unrealized investment (gains) losses in Accumulated Other Comprehensive Income
(Loss)
—
(373)
378
0.01
(8.14)
8.24
(166)
(3.63)
—
(427)
414
(151)
Adjusted Book Value
$
919 $
20.05 $
1,313 $
0.01
(9.37)
9.09
(3.31)
28.83
The decrease in Adjusted Book Value was primarily attributable
to the Adjusted Loss for the year ended December 31, 2020,
excluding earned premium previously included in Adjusted
Book Value, partially offset by foreign exchange translation
gains.
Factors that impact changes to Adjusted Book Value include
many of the same factors that impact Adjusted Earnings,
including the majority of revenues and expenses, but generally
exclude components of premium earnings since they are
embedded in prior period's Adjusted Book Value through the net
unearned premiums and fees in excess of expected losses
adjustment. Net unearned premiums and fees in excess of
expected losses will affect Adjusted Book Value for (i) changes
to future premium assumptions (e.g. expected term, interest
rates, foreign currency rates, time passage) and (ii) changes to
expected losses for policies which do not exceed their related
unearned premiums and (iii) new reinsurance transactions.
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk
Market risk represents the potential for loss due to adverse
changes in the fair value of financial instruments, as a result of
changes in market rates and prices, such as interest rates
(inclusive of credit spreads), foreign currency exchange rates
and other relevant market rate or price changes. Market risk is,
in part, a function of the markets in which the underlying assets
are traded. The Company’s market risk sensitive financial
instruments are primarily entered into for purposes other than
trading. As discussed further below, the Company’s primary
market risk exposures include those from changes in interest
rates, foreign currency exchange rates and equity values of
limited partnership and other alternative investments.
• The primary market risks for fixed maturity investment
securities are interest rate risk and exchange rate risk.
Ambac’s fixed maturity investment portfolio includes
securities denominated both in U.S. dollars and foreign
currencies, which are sensitive to changes in interest rates
and foreign currency exchange rates. Our fixed maturity
investments are classified as available for sale, with the
effect of market movements recognized
immediately
through Other comprehensive income, or through Net
income when securities are sold or when an impairment
charge is recorded.
• Ambac also invests in limited partnerships and other
alternative investments, primarily consisting of diversified
pooled investment funds, which are reported as Other
investments. These funds are subject to equity value
changes driven primarily by changes to their respective net
asset value (“NAV”). Ambac’s share of the changes of the
equity value of the funds is reported through Net income.
For additional information about Ambac’s investments, see
the Consolidated Financial
Note 11. Investments
Statements included in Part II, Item 8 in this Form 10-K.
to
• The interest rate derivatives portfolio is managed as a
partial hedge against the effects of rising interest rates
elsewhere in the Company, including on Ambac's financial
guarantee exposures. Changes in fair value of interest rate
derivatives are recognized
through Net
income. For additional information about Ambac’s interest
rate derivatives, see Note 12. Derivative Instruments to the
Consolidated Financial Statements included in Part II, Item
8 in this Form 10-K.
immediately
• Although our long-term debt obligations are reported at
amortized cost and not adjusted for fair value changes,
changes in interest rates could have a material impact on
their fair value, though with no direct impact on our
consolidated
additional
information about Ambac’s debt obligations, see Note 13.
Long-Term Debt to the Consolidated Financial Statements
included in Part II, Item 8 in this Form 10-K.
statements.
financial
For
Fixed maturity investment securities that are distressed Ambac-
insured bonds have market risk characteristics that behave
inversely to those associated with future financial guarantee
claim payments. Accordingly, such securities are excluded from
the market risk sensitivity measures below.
Financial
instruments of VIEs that are consolidated as a result of Ambac
financial guarantees are also excluded from Ambac's measures
of market risk. Ambac’s exposure to such consolidated VIEs is
generally limited to financial guarantees outstanding on the
VIEs’ liabilities or assets. See Note 4. Variable Interest Entities
to the Consolidated Financial Statements included in Part II,
Item 8 in this Form 10-K for further information about VIEs
consolidated as a result of Ambac’s financial guarantees.
Ambac utilizes various systems, models and sensitivity
scenarios to monitor and manage market risk. These models
include estimates, made by management, which utilize current
and historical market information. This market information is
considered in management’s judgments about adverse sensitivity
| Ambac Financial Group, Inc. 62 2020 FORM 10-K |
scenarios that are reasonably possible to occur in the near-term.
The impact of these scenarios do not consider the possible
simultaneous movement in other market rates or prices, actions
of management or other factors that could lessen or worsen
actual results. For these reasons, the valuation results from these
models could differ materially from amounts actually realized in
the market. The Company’s market risk exposures have changed
over the course of 2020 primarily as a result of re-positioning of
our investment and derivative portfolios. Prior year-end
quantitative market risk sensitivity disclosures below have been
updated to conform with the current presentation.
Market Risk Sensitivities
Interest Rate Risk
interest
long-term debt and
Financial instruments for which fair value may be affected by
changes in interest rates consist primarily of fixed maturity
investment securities,
rate
derivatives. Increases to interest rates would result in declines
in the fair value of our fixed maturity investment portfolio.
Interest rate increases would also have a negative economic
impact on expected future claim payments within the financial
guarantee portfolio, primarily related to RMBS and student loan
policies. Conversely, interest rate increases would generally
result in fair value gains on interest rate derivatives and lower
the fair value of our debt obligations. Ambac performs scenario
testing to measure the potential for losses in volatile markets.
These scenario tests include parallel and non-parallel shifts in
the benchmark interest rate curve. We also monitor our interest
rates exposure through periodic reviews of projected cash flows
and durations of our asset and liability positions.
The following table summarizes the estimated change in fair
investment portfolio of a
value of our fixed maturity
hypothetical immediate increase in interest rates of 100 basis
points across the yield curve as of December 31, 2020 and 2019:
($ in millions)
December 31,
Fair value of fixed maturity investment (1)
Pre-tax impact of 100 basis point increase
in interest rates
2020
2019
$ 2,329
$ 2,343
Decrease in dollars
As a percent of fair value
$
(69)
$
(65)
3 %
3 %
(1) Excludes investments in distressed Ambac-insured securities and
securities held by VIEs consolidated as a result of Ambac’s
financial guarantees
The following table presents the impact on the fair value of our
long-term debt obligations and interest rate derivatives of a
hypothetical immediate decrease in interest rates of 100 basis
points across the yield curve as of December 31, 2020 and 2019:
($ in millions)
December 31,
Fair value of long-term debt including
accrued interest (1)
Pre-tax impact of 100 basis point decrease
in interest rates
2020
2019
$ (3,071)
$ (3,274)
Increase in dollars
As a percent of fair value
$
(58)
$
(33)
2 %
1 %
Fair value of interest rate derivative net
assets (liabilities) (1)
Pre-tax impact of 100 basis point decrease
in interest rates
Pre-tax loss from change in fair value in
dollars
$
(21)
$
(15)
$
(8)
$
(36)
(1) Excludes long-term debt and derivative instruments of VIEs
consolidated as a result of Ambac’s financial guarantees
Foreign Currency Risk
Ambac has fixed maturity investments and investments in
pooled funds denominated in currencies other than the U.S.
dollar, primarily British pounds sterling and euros. These
financial instruments are primarily invested assets of Ambac UK
and are held in consideration of non-U.S. dollar exposure in the
financial guarantee insurance portfolio and operations of Ambac
UK. The adverse fair value impact of a stronger U.S. dollar
relative to other currencies on investment holdings would be
directionally offset by the economic benefits to non-U.S. dollar
financial guarantees and other risk exposures. The following
table summarizes the estimated decrease in fair value of these
financial instruments assuming immediate 20% strengthening of
the U.S. dollar relative to the foreign currencies as of December
31, 2020 and 2019:
($ in millions)
December 31,
2020
2019
Fair value of investments denominated in
currencies other than the U.S. dollar (1)
Pre-tax impact of 20% strengthening of
the U.S. dollar
$
$
453 $
343
(91) $
(69)
(1) Excludes investments in distressed Ambac-insured securities and
securities held by VIEs consolidated as a result of Ambac’s
financial guarantees
| Ambac Financial Group, Inc. 63 2020 FORM 10-K |
Equity Sensitivity
Ambac’s investment portfolio includes equity and partnership
interests in pooled funds with diverse asset holdings and
strategies. The table below summarizes the decrease in fair
value of Ambac’s pooled fund investments that would occur
assuming an immediate and uniform 10% decline in NAV of the
funds. The selection of a 10% fair value stress is made only as
an illustration of the hypothetical impact of adverse market
movements on Ambac’s
investments with equity value
sensitivity. Actual market shocks could have materially different
aggregate results and would likely not have a uniform impact on
all funds given the diversity of the funds’ holdings and
strategies.
($ in millions)
December 31,
Fair value of investments in pooled funds
Pre-tax impact of 10% decline in NAV of
the funds
$
$
2020
2019
544 $
432
(54) $
(43)
| Ambac Financial Group, Inc. 64 2020 FORM 10-K |
Item 8. Financial Statements and Supplementary Data
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm..................................................................................................................
66
Consolidated Financial Statements
Consolidated Balance Sheets..................................................
69 Consolidated Statements of Stockholders’ Equity.................
Consolidated Statements of Total Comprehensive Income
(Loss)..................................................................................
70 Consolidated Statements of Cash Flows................................
71
72
Notes to Consolidated Financial Statements
Note 1. Background and Business Description...............
Note 2. Basis of Presentation and Significant
Accounting Policies.........................................................
Note 3. Business Combination........................................
Note 4. Variable Interest Entities....................................
Note 5. Comprehensive Income......................................
Note 6. Net Income Per Share.........................................
Note 7. Financial Guarantees in Force............................
Note 8. Financial Guarantee Insurance Contracts...........
73
76
89
90
94
95
96
96
Note 10. Fair Value Measurements.....................................
108
Note 11. Investments...........................................................
116
Note 12. Derivative Instruments..........................................
121
Note 13. Long-term Debt.....................................................
123
Note 14. Income Taxes........................................................
126
Note 15. Employment Benefit Plans...................................
127
Note 16. Leases....................................................................
130
Note 17. Commitments and Contingencies.........................
131
Note 9. Insurance Regulatory Restrictions......................
104
Note 18. Quarterly Information (Unaudited).......................
141
| Ambac Financial Group, Inc. 65 2020 FORM 10-K |
Report of Independent Registered Public Accounting Firm
Definition and Limitations of Internal Control Over Financial
Reporting
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance
with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use,
or disposition of the company’s assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
New York, New York
March 1, 2021
To the Stockholders and Board of Directors
Ambac Financial Group, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Ambac Financial Group, Inc. and
subsidiaries' (the Company) internal control over financial
reporting as of December 31, 2020, based on criteria established
in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. In our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2020, based on criteria established
in Internal Control — Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway
Commission.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of the Company as of
December 31, 2020 and 2019, the related consolidated
statements of total comprehensive income (loss), stockholders’
equity, and cash flows for each of the years in the three-year
period ended December 31, 2020, and the related notes and
financial statement schedules I, II and IV (collectively, the
consolidated financial statements), and our report dated March
1, 2021 expressed an unqualified opinion on those consolidated
financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Report
on Internal Control over Financial Reporting. Our responsibility
is to express an opinion on the Company’s internal control over
financial reporting based on our audit. We are a public
accounting firm registered with the PCAOB and are required to
be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audit in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all
material respects. Our audit of internal control over financial
reporting included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures
as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
| Ambac Financial Group, Inc. 66 2020 FORM 10-K |
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Ambac Financial Group, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets
of Ambac Financial Group, Inc. and subsidiaries (the Company)
as of December 31, 2020 and 2019, the related consolidated
statements of total comprehensive income (loss), stockholders’
equity, and cash flows for each of the years in the three-year
period ended December 31, 2020, and the related notes and
financial statement schedules I, II and IV (collectively, the
consolidated financial statements). In our opinion, the
consolidated financial statements present fairly, in all material
respects, the financial position of the Company as of
December 31, 2020 and 2019, and the results of its operations
and its cash flows for each of the years in the three-year period
ended December 31, 2020, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial
reporting as of December 31, 2020, based on criteria established
in Internal Control — Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated March 1, 2021 expressed an
unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of
the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material
misstatement, whether due to error or fraud. Our audits included
performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether
due to error or fraud, and performing procedures that respond to
those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the
overall presentation of the consolidated financial statements. We
believe that our audits provide a reasonable basis for our
opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising
from the current period audit of the consolidated financial
statements that was communicated or required to be
communicated to the audit committee and that: (1) relates to
accounts or disclosures that are material to the consolidated
financial statements and (2) involved our especially challenging,
subjective, or complex judgments. The communication of a
critical audit matter does not alter in any way our opinion on the
consolidated financial statements, taken as a whole, and we are
not, by communicating the critical audit matter below, providing
a separate opinion on the critical audit matter or on the accounts
or disclosures to which it relates.
Estimate of loss and loss expense reserves and subrogation
recoverable
As described in Notes 2 and 8 to the consolidated financial
statements, the Company estimates loss and loss expense
reserves and subrogation recoverable (loss reserves) on a
policy-by-policy basis based upon the present value of
expected net claim cash outflows or expected net recovery
cash inflows, discounted at risk-free rates. Expected net claim
cash outflows represent the present value of expected claim
cash outflows, less the present value of expected recovery
cash inflows. For such policies, a loss and loss expense
reserves liability is recorded for the present value of expected
net claim cash outflows in excess of the related unearned
premium revenue. Expected net recovery cash inflows
represent the present value of expected recovery cash inflows,
less the present value of expected claim cash outflows. For
such policies, a subrogation recoverable asset is recorded. As
of December 31, 2020, the Company recorded loss and loss
expense reserves of $1,759 million and subrogation
recoverable of $2,156 million.
We identified the evaluation of loss reserves as a critical audit
matter. The evaluation encompassed the assessment of the
loss reserve methodologies, including those methods used to
estimate the following assumptions: (1) credit worthiness of
the issuer of the insured security, (2) the likelihood of
possible outcomes regarding the probability of default by the
issuer of the insured security, (3) the expected loss severity
for each insurance policy, (4) the probability of remediation,
settlement and restructuring outcomes, and (5) the probability
of successful litigation or related settlement outcomes, as well
as the percentage of the breach rates of representations and
warranties underlying certain insured residential mortgage
backed securities. The evaluation of the methods and the
impact of these assumptions required specialized skills and
subjective and complex auditor judgment due to a high level
of estimation uncertainty.
The following are the primary procedures we performed to
address this critical audit matter. With the involvement of
professionals with specialized industry knowledge and
experience, when necessary, we evaluated the design and
tested the operating effectiveness of certain internal controls
related to the Company's estimation of loss reserves. This
included controls related to the determination of the sources
of data and assumptions and the analysis of the loss reserves
and historical trends. We inquired of internal and external
| Ambac Financial Group, Inc. 67 2020 FORM 10-K |
legal counsel and read letters received directly from the
Company’s internal and external legal counsel regarding the
status of litigation underlying certain insurance policies. We
involved credit risk professionals with specialized skills and
knowledge, who assisted in assessing the individual issuer
ratings and credit classifications for certain policies by
evaluating the financial performance of the issuer of the
insured security and underlying collateral. We involved
forensics professionals with specialized skills and knowledge,
who assisted in inspecting underwriting documentation for
certain mortgage loans underlying insured residential
mortgage backed securities, which were examined by the
Company’s consultants engaged to determine breach rates of
representations and warranties. We also involved valuation
professionals with specialized skills and knowledge, who
assisted in:
• evaluating the methods used to estimate loss reserves for
compliance with U.S. generally accepted accounting
principles
• evaluating, for certain policies, the sources of data and
assumptions used in the calculation of loss reserves by
comparing to internal experience and related historical
and industry trends
• developing, for certain policies, an independent estimate
of the loss reserves and comparing it to the recorded
estimate.
/s/ KPMG LLP
We have served as the Company’s auditor since 1985.
New York, New York
March 1, 2021
| Ambac Financial Group, Inc. 68 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in millions, except share data) December 31,
Assets:
Investments:
Fixed maturity securities, at fair value (amortized cost of $2,175 and $2,450)
Fixed maturity securities pledged as collateral, at fair value (amortized cost of $15 and $0)
Short-term investments, at fair value (amortized cost of $492 and $653)
Short-term investments pledged as collateral, at fair value (amortized cost of $125 and $85)
Other investments (includes $544 and $432 at fair value)
Total investments (net of allowance for credit losses of $0 at December 31, 2020)
Cash and cash equivalents
Restricted cash
Premium receivables (net of allowance for credit losses of $17 at December 31, 2020)
Reinsurance recoverable on paid and unpaid losses (net of allowance for credit losses of $0 at December 31, 2020)
Deferred ceded premium
Subrogation recoverable
Derivative assets
Current taxes
Intangible assets
Other assets
Variable interest entity assets:
Fixed maturity securities, at fair value
Restricted cash
Loans, at fair value
Derivative assets
Other assets
Total assets
Liabilities and Stockholders’ Equity:
Liabilities:
Unearned premiums
Loss and loss expense reserves
Ceded premiums payable
Deferred taxes
Current taxes
Long-term debt
Accrued interest payable
Derivative liabilities
Other liabilities
Variable interest entity liabilities:
Accrued interest payable
Long-term debt (includes $4,324 and $4,351 at fair value)
Derivative liabilities
Total liabilities
Commitments and contingencies (See Note 17)
Redeemable noncontrolling interest
Stockholders’ equity:
Preferred stock, par value $0.01 per share; 20,000,000 shares authorized shares; issued and outstanding shares—none
Common stock, par value $0.01 per share; 130,000,000 shares authorized; issued shares: 45,865,081 and 45,571,743)
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings
Treasury stock, shares at cost: 55,942 and 16,343
Total Ambac Financial Group, Inc. stockholders’ equity
Nonredeemable noncontrolling interest
Total stockholders’ equity
Total liabilities, redeemable noncontrolling interest and stockholders’ equity
See accompanying Notes to Consolidated Financial Statements
| Ambac Financial Group, Inc. 69 2020 FORM 10-K |
$
$
$
2020
2019
2,317 $
15
492
125
595
3,544
20
13
370
33
70
2,156
93
—
409
114
3,354
2
2,998
41
2
13,220 $
456 $
1,759
27
24
6
2,739
517
114
106
—
4,493
1,835
12,074
2,577
—
653
85
478
3,792
24
55
416
26
82
2,029
75
11
427
95
3,121
2
3,108
52
3
13,320
518
1,548
29
32
—
2,822
441
90
93
1
4,554
1,657
11,783
7
—
—
—
242
79
759
(1)
1,080
60
1,140
$
13,220 $
—
—
232
42
1,203
—
1,477
60
1,536
13,320
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Total Comprehensive Income (Loss)
(Dollars in millions, except share data) Year Ended December 31,
Revenues:
2020
2019
2018
Net premiums earned
Net investment income
Net realized investment gains (losses)
Net gains (losses) on derivative contracts
Net realized gains (losses) on extinguishment of debt
Other income
Income (loss) on variable interest entities
Total revenues
Expenses:
Losses and loss expenses (benefit)
Intangible amortization
Operating expenses
Interest expense
Total expenses
Pre-tax income (loss)
Provision (benefit) for income taxes
Net income (loss)
Less: loss on exchange of auction market preferred shares
Net income (loss) attributable to common stockholders
Other comprehensive income (loss), after tax:
Net income (loss)
$
54 $
66 $
122
22
(50)
—
3
5
156
225
57
92
222
596
(440)
(3)
(437)
—
227
81
(50)
—
134
38
496
13
295
103
269
680
(183)
32
(216)
—
$
$
(437) $
(216) $
(437) $
(216) $
Unrealized gains (losses) on securities, net of income tax provision (benefit) of $1, $(8) and $2
Gains (losses) on foreign currency translation, net of income tax provision (benefit) of $—, $— and $—
Credit risk changes of fair value option liabilities, net of income tax provision (benefit) of $—, $—
and $—
Changes to postretirement benefit, net of income tax provision (benefit) of $—, $— and $—
Total other comprehensive income (loss), net of income tax
Total comprehensive income (loss)
Less: loss on exchange of auction market preferred shares
Total comprehensive income (loss) attributable to common stockholders
Net income (loss) per share attributable to common stockholders:
Basic
Diluted
Weighted average number of common shares outstanding:
Basic
Diluted
See accompanying Notes to Consolidated Financial Statements
15
23
1
(3)
37
(400)
—
65
26
—
(1)
91
(125)
—
$
$
$
(400) $
(125) $
(9.47) $
(9.47) $
(4.69) $
(4.69) $
46,147,062
45,954,908
45,665,883
46,147,062
45,954,908
46,559,835
111
273
108
7
3
5
3
511
(224)
107
112
242
238
273
5
267
82
186
267
55
(48)
1
(2)
6
274
82
192
4.07
3.99
| Ambac Financial Group, Inc. 70 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
(Dollars in millions)
Total
Ambac Financial Group, Inc.
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Preferred
Stock
Common
Stock
Additional
Paid-in
Capital
Treasury
Stock, at Cost
Nonredeemable
Noncontrolling
Interest
Balance at January 1, 2020
$
1,536 $
1,203 $
42 $
— $
— $
232 $
— $
Total comprehensive income
(loss)
Adjustment to initially apply
ASU 2016-13
Stock-based compensation
Cost of shares (acquired)
issued under equity plan
(400)
(437)
(4)
11
(3)
(4)
—
(2)
37
—
—
—
—
—
—
—
—
—
—
—
—
—
11
—
Balance at December 31, 2020 $
1,140 $
759 $
79 $
— $
— $
242 $
—
—
—
(1)
(1) $
60
—
—
—
—
60
Note: Beginning redeemable noncontrolling interest of $0 + Addition of redeemable NCI of $7 = Ending redeemable noncontrolling interest of $7.
(Dollars in millions)
Balance at January 1, 2019
Total comprehensive income
(loss)
Stock-based compensation
Cost of shares (acquired)
issued under equity plan
Re-issuance of Ambac
Assurance auction market
preferred shares
Balance at December 31, 2019 $
(Dollars in Millions)
Balance at January 1, 2018
Total comprehensive income
(loss)
Adjustment to initially apply
ASU 2016-09
Stock-based compensation
Cost of shares (acquired)
issued under equity plan
Exchange of auction market
preferred shares
Balance at December 31, 2018 $
Total
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Preferred
Stock
Common
Stock
Additional
Paid-in
Capital
Treasury
Stock, at Cost
Nonredeemable
Noncontrolling
Interest
Ambac Financial Group, Inc.
$
1,633 $
1,421 $
(49) $
— $
— $
219 $
— $
(125)
12
(216)
—
(3)
(3)
91
—
—
—
—
—
—
—
—
19
1,536 $
—
1,203 $
—
42 $
—
— $
—
— $
—
12
—
—
232 $
—
—
—
—
— $
41
—
—
—
19
60
Ambac Financial Group, Inc.
Total
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Preferred
Stock
Common
Stock
Additional
Paid-in
Capital
Treasury
Stock,
at Cost
Noncontrolling
Interest
$
1,645 $
1,234 $
(52) $
— $
— $
200 $
— $
264
274
267
—
12
(1)
3
—
(1)
6
(3)
—
—
—
—
—
—
—
—
—
—
—
—
12
—
—
—
—
—
—
—
—
—
(297)
1,633 $
(82)
1,421 $
—
(49) $
—
— $
—
— $
8
219 $
—
— $
(223)
41
See accompanying Notes to Consolidated Financial Statements
| Ambac Financial Group, Inc. 71 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in millions) Year Ended December 31,
Cash flows from operating activities:
Net income (loss) attributable to common stockholders
Exchange for auction market preferred shares
Net income (loss)
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization
Amortization of bond premium and discount
Share-based compensation
Deferred income taxes
Current income taxes
Unearned premiums, net
Losses and loss expenses, net
Ceded premiums payable
Premium receivables
Accrued interest payable
Amortization of insurance intangible assets
Net realized investment gains
(Gain) loss on extinguishment of debt
Variable interest entity activities
Derivative assets and liabilities
Other, net
Net cash used in operating activities
Cash flows from investing activities:
Proceeds from sales of bonds
Proceeds from matured bonds
Purchases of bonds
Proceeds from sales of other invested assets
Purchases of other invested assets
Change in short-term investments
Change in cash collateral receivable
Proceeds from paydowns of consolidated VIE assets
Acquisition of Xchange, net of cash acquired
Other, net
Net cash provided by investing activities
Cash flows from financing activities:
Net proceeds from issuance of Tier 2 notes
Proceeds from issuance of Ambac UK debt
Proceeds from issuance of surplus notes
Paydowns of Ambac note
Paydowns of a secured borrowing
Payments for extinguishment of surplus notes
Payments for debt issuance costs
Issuance of auction market preferred shares of Ambac Assurance
Payments for auction market preferred shares
Tax payments related to shares withheld for share-based compensation plans
Payments of consolidated VIE liabilities
Net cash used in financing activities
Effect of foreign exchange on cash and cash equivalents
Net cash flow
Cash, cash equivalents, and restricted cash at beginning of period
Cash, cash equivalents, and restricted cash at end of period
See accompanying Notes to Consolidated Financial Statements
2020
2019
2018
$
(437) $
—
(437)
(216) $
—
(216)
1
(15)
11
(9)
17
(48)
76
(3)
44
93
57
(22)
—
(5)
6
59
(175)
1,109
137
(975)
374
(475)
158
—
178
(74)
1
432
—
(63)
12
1
35
(132)
(364)
(4)
77
87
295
(81)
—
(38)
(1)
79
(311)
1,212
379
(959)
81
(137)
(218)
100
543
—
(2)
1,000
—
—
—
(121)
—
—
—
—
—
(3)
(178)
(303)
—
(46)
81
35 $
—
12
—
(178)
—
—
—
19
—
(3)
(542)
(691)
—
(2)
83
81 $
$
186
82
267
1
(137)
12
7
(35)
(163)
(1,633)
(5)
91
9
107
(108)
(3)
(3)
(17)
68
(1,543)
1,248
432
(528)
159
(140)
127
(58)
349
—
—
1,588
240
—
24
(214)
(74)
(191)
(9)
—
(11)
(1)
(349)
(585)
—
(541)
625
83
| Ambac Financial Group, Inc. 72 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
1. BACKGROUND AND BUSINESS DESCRIPTION
Ambac Financial Group, Inc. (“AFG”), headquartered in New
York City, is a financial services holding company incorporated
in the state of Delaware on April 29, 1991. References to
“Ambac,” the “Company,” “we,” “our,” and “us” are to AFG
and its subsidiaries, as the context requires. Ambac's business
operations include:
• Financial Guarantee Insurance — Ambac Assurance
Corporation ("Ambac Assurance" or "AAC") and its
wholly owned subsidiary, Ambac Assurance UK Limited
(“Ambac UK”), legacy financial guarantee businesses, both
of which have been in runoff since 2008. Insurance
policies
issued by AAC and Ambac UK generally
guarantee payment when due of the principal and interest
on the obligations guaranteed.
• Specialty Property & Casualty Program Insurance —
Currently includes admitted insurer Everspan Insurance
Company and excess and surplus lines insurer Everspan
Indemnity Insurance Company (collectively, "Everspan" or
the "Everspan Group"). This platform, which received an
A- Financial Strength Rating from A.M. Best in February
2021, is expected to launch new underwriting programs in
2021.
• Managing General Agency / Underwriting — Currently
includes Xchange Benefits, LLC and Xchange Affinity
Underwriting Agency, LLC (collectively, “Xchange”) a
property and casualty Managing General Underwriter 80%
of which AFG acquired on December 31, 2020. Refer to
Note 3. Business Combination for further information
relating to this acquisition.
financial
information, allocated
As of and for the year ended December 31, 2020, management
reviewed
resources and
measured financial performance on a consolidated basis and
accordingly the Company had a single reportable segment. As a
result of the acquisition of Xchange and the expected launch of
the Everspan platform, segments will be re-evaluated in 2021.
Limitations on Voting and Transfer of Common Stock
AFG’s Amended and Restated Certificate of Incorporation
limits voting and transfer rights of stockholders in significant
ways. Article IV contains voting restrictions applicable to any
person owning at least 10% of AFG's common stock so that
such person (including any group consisting of such person and
any other person with whom such person or any affiliate or
associate of such person has any agreement, contract,
arrangement or understanding with respect to acquiring, voting,
holding or disposing of AFG’s common stock) shall not be
entitled to cast votes in excess of one vote less than 10% of the
votes entitled to be cast by all common stock holders, except as
otherwise approved by the OCI (as defined below). Article XII
contains substantial restrictions on the ability to transfer AFG’s
common stock. In order to preserve certain tax benefits, subject
to limited exceptions, any attempted transfer of common stock
shall be prohibited and void to the extent that, as a result of such
transfer (or any series of transfers of which such transfer is a
part), either (i) any person or group of persons shall become a
holder of 5% or more of the Company’s common stock or
(ii) the percentage stock ownership interest in AFG of any
holder of 5% or more of the Company’s common stock shall be
increased (a “Prohibited Transfer”). These restrictions shall not
apply to an attempted transfer if the transferor or the transferee
obtains the written approval of AFG’s Board of Directors to
such transfer. A purported transferee of a Prohibited Transfer
shall not be recognized as a stockholder of AFG for any purpose
whatsoever in respect of the securities which are the subject of
the Prohibited Transfer (the “Excess Securities”). Until the
Excess Securities are acquired by another person in a transfer
that is not a Prohibited Transfer, the purported transferee of a
Prohibited Transfer shall not be entitled with respect to such
Excess Securities to any rights of stockholders of AFG,
including, without limitation, the right to vote such Excess
Securities and to receive dividends or distributions, whether
liquidating or otherwise, in respect thereof, if any. Once the
Excess Securities have been acquired in a transfer that is not a
Prohibited Transfer, the securities shall cease to be Excess
Securities. If the Board determines that a transfer of securities
constitutes a Prohibited Transfer then, upon written demand by
AFG, the purported transferee shall transfer or cause to be
transferred any certificate or other evidence of ownership of the
Excess Securities within the purported transferee’s possession or
control, together with any distributions paid by AFG with
respect to such Excess Securities, to an agent designated by
AFG. Such agent shall thereafter sell such Excess Securities and
the proceeds of such sale shall be distributed as set forth in the
Amended and Restated Certificate of Incorporation. If the
purported transferee of a Prohibited Transfer has resold the
Excess Securities before receiving such demand, such person
shall be deemed to have sold the Excess Securities for AFG’s
agent and shall be required to transfer to such agent the proceeds
of such sale, which shall be distributed as set forth in the
Amended and Restated Certificate of Incorporation.
Strategies to Enhance Shareholder Value
The Company's primary goal is to maximize shareholder value
through executing the following key strategies:
its subsidiaries
• Active runoff of AAC and
through
transaction terminations, commutations, restructurings, and
reinsurance with a focus on our watch list credits and
known and potential future adversely classified credits, that
we believe will improve our risk profile, and maximizing
the risk-adjusted return on invested assets;
• Ongoing rationalization of Ambac's capital and liability
structures;
• Loss recovery through active litigation management and
exercise of contractual and legal rights;
• Ongoing review of the effectiveness and efficiency of
Ambac's operating platform; and
• Further expanding into specialty property and casualty
program insurance, managing general agency/underwriting
and potentially other insurance and insurance related
businesses that will generate long-term shareholder value
| Ambac Financial Group, Inc. 73 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
with attractive risk-adjusted returns and meet other
preestablished criteria.
completed the restructuring transactions (the "Rehabilitation
Exit Transactions") .
The execution of Ambac’s strategy to increase the value of its
investment in AAC is subject to the restrictions set forth in the
Settlement Agreement, dated as of June 7, 2010 (the "Settlement
Agreement"), by and among AAC, Ambac Credit Products LLC
("ACP"), AFG and certain counterparties to credit default swaps
with ACP that were guaranteed by AAC, as well as the
Stipulation and Order among the Office of the Commissioner of
Insurance for the State of Wisconsin (“OCI”), AFG and AAC
that became effective on February 12, 2018, as amended (the
“Stipulation and Order”), and the indenture for the Tier 2 Notes
(as defined below), each of which requires OCI and, under
certain circumstances, holders of
instruments
benefiting from such restrictions, to approve certain actions
taken by or in respect of AAC. In exercising its approval rights,
OCI will act for the benefit of policyholders, and will not take
into account the interests of AFG.
the debt
Opportunities for remediating losses on poorly performing
insured transactions also depend on market conditions, including
the perception of AAC’s creditworthiness, the structure of the
underlying risk and associated policy as well as other
counterparty specific factors. AAC's ability to commute policies
or purchase certain investments may also be limited by available
liquidity.
The Segregated Account
In March 2010, AAC established a Segregated Account pursuant
to Wisc. Stat. §611.24 (2) (the “Segregated Account”) to
segregate certain segments of AAC’s liabilities, and the
Wisconsin Insurance Commissioner, acting as rehabilitator (the
"Rehabilitator") commenced rehabilitation proceedings in the
Dane County, Wisconsin Circuit Court (the “Rehabilitation
Court”) with respect to the Segregated Account (the “Segregated
Account Rehabilitation Proceedings”) in order to permit OCI to
facilitate an orderly run-off and/or settlement of the liabilities
allocated to the Segregated Account. On October 8, 2010, OCI
filed a plan of rehabilitation for the Segregated Account (the
“Segregated Account Rehabilitation Plan”) in the Rehabilitation
Court, which was confirmed on January 24, 2011. On June 11,
2014, the Rehabilitation Court approved amendments to the
Segregated Account Rehabilitation Plan and the Segregated
Account Rehabilitation Plan, as amended, became effective on
Policy obligations not allocated to the
June 12, 2014.
Segregated Account remained in the General Account of AAC,
and such policies in the General Account were not subject to
and, therefore, were not directly impacted by the Segregated
Account Rehabilitation Plan.
On February 12, 2018, the rehabilitation of the Segregated
Account was concluded pursuant to an amendment to the
Segregated Account Rehabilitation Plan (the "Second Amended
Plan of Rehabilitation"). The conclusion of the rehabilitation
followed the successful completion of Ambac's surplus note
exchange offers and consent solicitation, which, together with
the satisfaction of all conditions precedent to the effectiveness of
the Second Amended Plan of Rehabilitation, including the
discharge of all unpaid policy claims of the Segregated Account,
including accretion amounts thereon ("Deferred Amounts"),
In exchange for an effective consideration package of 40% cash,
41% Secured Notes (as defined below) and 12.5% AAC's 5.1%
surplus notes due 2020 ("senior surplus notes"), paid in respect
of outstanding Deferred Amounts and senior surplus notes.
AAC received the following benefits as a result of the
completion of the Rehabilitation Exit Transactions:
• Satisfaction and discharge of all outstanding Deferred
Amounts (including accretion) of the Segregated Account,
totaling $3,857;
• Cancellation of $552 in principal amount outstanding, plus
accrued and unpaid interest of $257 thereon, of senior
surplus notes; and
• An effective discount of 6.5% on Deferred Amounts
(applied first against accretion) and on the outstanding
amount of principal and accrued and unpaid interest on
tendered senior surplus notes.
AFG received $0.91 in principal amount of Secured Notes for
each $1.00 of Deferred Amounts (including accretion) that it
held, and provided a $0.09 discount in full satisfaction and
discharge of its Deferred Amount claims. AFG did not
participate in the voluntary surplus note exchange offers.
The Secured Notes
A newly formed special purpose entity, Ambac LSNI, LLC
("Ambac LSNI") issued $2,154 of new secured notes (the
“Secured Notes”), secured by all assets of the special purpose
entity, which include a note issued by AAC to the special
purpose entity (the "Ambac Note"), which is secured by a pledge
of AAC’s right, title and interest in up to the first $1,400 of
proceeds (net of reinsurance) from certain litigations in which
AAC seeks redress for breaches of representations and
warranties and/or fraud related to residential mortgage-backed
securitizations (the “RMBS Litigations”). In addition, the
Ambac Note is secured by cash and securities having a market
value of $178 as of December 31, 2020. AAC also pledged for
the benefit of the holders of Secured Notes (other than AAC) the
proceeds of the Secured Notes held by AAC from time to time,
and issued a financial guaranty insurance policy to a trustee for
the benefit of holders of Secured Notes irrevocably guarantying
all principal and interest payments in respect of the Secured
Notes as and when such payments become due and owing.
Prior to the Rehabilitation Exit Transactions, AFG and AAC
owned securities that were insured by AAC and allocated to the
Segregated Account. As a result of the Rehabilitation Exit
Transactions, AFG and AAC received $125 and $644,
respectively, of par amount of Secured Notes issued by Ambac
LSNI. The current holdings of these secured notes are reported
in Investments in the Consolidated Balance Sheets at their fair
value.
Tier 2 Financing
On the effective date of the Rehabilitation Exit Transactions,
AAC issued $240 of senior notes (the “Tier 2 Notes”) secured
by AAC’s rights, title and interest in the cash and non-cash
| Ambac Financial Group, Inc. 74 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
proceeds (net of reinsurance) above $1,600 received
in
connection with the RMBS Litigations. The indenture for the
Tier 2 Notes limits certain activities of AAC and its subsidiaries,
such as issuing certain indebtedness; engaging in mergers and
similar transactions; disposing of assets; making restricted
payments; and creating or permitting liens (among other
restrictions and limitations). The indenture for the Tier 2 Notes
includes certain allowances with respect to these activities and
generally requires the approval of OCI and, in some cases,
holders of
the Tier 2 Notes, for consents, waivers or
amendments.
Bank Settlement Agreement
As part of the Rehabilitation Exit Transactions, AFG and
AAC received sufficient consents from holders of senior surplus
notes for a waiver and amendment (the "BSA Waiver and
Amendment") of the Settlement Agreement. After giving effect
to the BSA Waiver and Amendment, the Settlement Agreement
continues to limit certain activities of AAC and its subsidiaries,
such as issuing indebtedness; engaging in mergers and similar
transactions; disposing of assets; making restricted payments;
creating or permitting liens; engaging in transactions with
affiliates; modifying or creating tax sharing agreements; and
taking certain actions with respect to surplus notes (among other
restrictions and
The Settlement Agreement
includes certain allowances with respect to these activities and
generally requires the approval of OCI and, in some cases,
holders of surplus notes issued pursuant to the Settlement
Agreement, for consents, waivers or amendments.
limitations).
Stipulation and Order
Upon consummation of the Rehabilitation Exit Transactions, the
Stipulation and Order became effective. The Stipulation and
Order includes affirmative covenants, as well as restrictions on
certain business activities and transactions, of AFG and AAC.
The Stipulation and Order has no fixed term and may be
terminated or modified only with the approval of OCI. OCI
reserved the right to modify or terminate the Stipulation and
Order in a manner consistent with the interests of policyholders,
creditors and the public generally.
August 2018 AMPS Exchange
At June 30, 2018, AAC had 26,411 shares of issued and
outstanding AMPS with a liquidation preference of $660
(reported as nonredeemable noncontrolling interest of $264 on
Ambac's balance sheet).
On July 3, 2018, AFG and AAC commenced an offer to
exchange (the “AMPS Exchange”) all of AAC’s outstanding
AMPS for senior surplus notes and, from AFG, cash and
warrants to purchase AFG's common stock. The senior surplus
notes offered in the AMPS Exchange have the same terms as
other outstanding surplus notes of AAC (other than junior
surplus notes). The offering period for the AMPS Exchange
expired on August 1, 2018 and the transaction closed on August
3, 2018 (the "Settlement Date").
In exchange for each AMPS share (i.e. $25 thousand of
liquidation preference), holders received senior surplus notes
with a total outstanding amount (including accrued and unpaid
interest thereon through June 22, 2018 (the "Signing Date"))
equal to $13.875 thousand (the “Repurchase”). AMPS holders
who tendered on or before July 17, 2018, representing 22,096
shares of the AMPS, also received from AFG $0.500 in cash and
37.3076 warrants (rounded down to the nearest whole warrant)
to purchase an equivalent number of shares of common stock of
AFG at an exercise price of $16.67 per share (the “AFG
Purchase” and, together with the Repurchase, the “Purchases”).
As a result of the completion of the Purchases, Ambac:
(1) Repurchased 84.4% or 22,296 AMPS with an aggregate
in
liquidation preference of $557,
including $35
aggregate liquidation preference in the AFG Purchase;
(2) Captured a nominal discount of approximately $227 (a
discount of approximately $253 on a fair market value
basis) on $557 of the total outstanding liquidation
preference of AMPS; and
(3)
Issued, in aggregate, $213 in current principal amount of
senior surplus notes with accrued interest thereon on
Settlement Date of $98, issued 824,307 warrants and
paid $11 in cash.
the balance sheet within
The AMPS are reported on
nonredeemable non-controlling interests and are carried at their
fair value at the date AFG emerged from bankruptcy in April
2013, which is lower than the fair value of the total
consideration provided to the AMPS holders in the Purchases.
The difference between the fair value of consideration provided
to AMPS holders and the carrying amount of the AMPS was
reflected as a reduction to Net income attributable to common
stockholders in 2018 for approximately $82.
At December 31, 2020 and 2019, AAC had 5,501 shares of
issued and outstanding AMPS with a liquidation preference of
$138 (reported as nonredeemable noncontrolling interest of $60
on Ambac's balance sheet), respectively.
2021 Surplus Note Exchanges
On January 19, 2021, AAC entered into a purchase agreement
(the “Purchase Agreement”) with AFG and certain funds or
accounts (the “Note Holders”), pursuant to which (i) the Note
Holders agreed to sell to AAC all of the individual beneficial
interests (the “Interests”) in the 5.1% senior notes due August
28, 2039 (the “Corolla Notes”), issued by the Corolla Trust, a
Delaware statutory trust formed by AFG in 2014, (ii) AFG
agreed to sell to AAC the owner trust certificate for the Corolla
Trust (the “Corolla Certificate”), which constituted all of the
equity interests in the Corolla Trust, and (iii) AAC agreed to
exchange the Interests and the Corolla Certificate for AAC’s
the “Corolla Note
(collectively,
senior
Exchange”). The Note Holders held 100% of the outstanding
Corolla Notes. Pursuant to the Purchase Agreement, each $1.00
principal amount of the Corolla Notes (and the associated
amount of accrued and unpaid interest thereon) was exchanged
for $0.9125 principal amount of senior surplus notes (and the
associated amount of accrued and unpaid interest thereon) on the
date of the consummation of the Corolla Note Exchange (the
“Closing”). In addition, every $1.00 principal amount of the
Corolla Certificate (and the associated amount of accrued and
unpaid interest thereon) was exchanged for $0.64 principal
amount of senior surplus notes (and the associated amount of
surplus notes
| Ambac Financial Group, Inc. 75 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
accrued and unpaid interest thereon) on the date of Closing. The
Closing occurred on January 22, 2021. At the Closing AAC
issued approximately $267 aggregate principal amount of senior
surplus notes to consummate the Corolla Note Exchange and
acquire all of the interests in the Corolla Trust. Subsequent to
the closing the Corolla Trust was dissolved and the junior
surplus note that had been deposited in the Corolla Trust by
AFG in 2014 was canceled.
In February 2021, AAC entered into a purchase agreement
pursuant to which the holder of $15 principal amount of 5.1%
junior surplus notes issued by AAC agreed to sell such notes to
AAC
in exchange for senior surplus notes (the "JSN
Exchange"). Pursuant to the purchase agreement, each $1.00
principal amount of the junior surplus notes (and the associated
amount of accrued and unpaid interest thereon) was exchanged
for $0.8581 principal amount of senior surplus notes (and the
associated amount of accrued and unpaid interest thereon). The
closing of the JSN Exchange occurred on February 11, 2021
when AAC issued approximately $13 aggregate principal
amount of senior surplus notes. Subsequent to the closing of the
JSN Exchange the junior surplus notes were canceled. As a
result of the Corolla Note Exchange and the JSN Exchange,
AAC no longer has any junior surplus notes outstanding.
The surplus notes exchanged pursuant to the Corolla Note
Exchange and the JSN Exchange are part of the same series as,
and rank equally with, the existing surplus notes previously
issued by AAC. After giving effect to the Corolla Note
Exchange and the JSN Exchange, AAC has $853 principal
amount of surplus notes outstanding and total principal and
accrued and unpaid interest of surplus notes outstanding is
$1,414 as of February 11, 2021. Outstanding surplus notes
principal amount includes $83 owned by AFG, which amount is
eliminated in consolidation for purposes of US generally
accepted accounting principles.
2. BASIS OF PRESENTATION AND SIGNIFICANT
ACCOUNTING POLICIES
financial statements
Ambac’s consolidated financial statements have been prepared
on the basis of U.S. generally accepted accounting principles
(“GAAP”). The preparation of
in
conformity with GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets,
liabilities, revenues, expenses and disclosures. Such estimates
that are particularly susceptible to change are used in connection
with certain fair value measurements, valuation of loss reserves
for non-derivative
the valuation
allowance on the deferred tax asset, any of which individually
could be material.
insurance policies and
Consolidation
The consolidated financial statements include the accounts of
AFG and all other entities in which AFG (directly or through its
subsidiaries) has a controlling financial interest, including
variable interest entities (“VIEs”) for which AFG or an AFG
subsidiary is deemed the primary beneficiary in accordance with
the Consolidation Topic of
the Accounting Standards
Codification ("ASC"). All significant intercompany balances
have been eliminated. The usual condition for a controlling
financial interest is ownership of a majority of the voting
interests of an entity. However, a controlling financial interest
may also exist in entities, such as VIEs, through arrangements
that do not involve controlling voting interests. A VIE is an
entity: a) that lacks enough equity investment at risk to permit
the entity to finance its activities without additional subordinated
financial support from other parties; or b) where the group of
equity holders does not have: (1) the power, through voting
rights or similar rights, to direct the activities of an entity that
most significantly impact the entity’s economic performance;
(2) the obligation to absorb the entity’s expected losses; or
(3) the right to receive the entity’s expected residual returns. The
determination of whether a variable interest holder is the
primary beneficiary involves performing a qualitative analysis
of the VIE that includes, among other factors, its capital
structure, contractual terms including the rights of each variable
interest holder, the activities of the VIE, whether the variable
interest holder has the power to direct the activities of a VIE that
most significantly impact the VIE’s economic performance,
whether the variable interest holder has the obligation to absorb
losses of the VIE that could potentially be significant to the VIE
or the right to receive benefits from the VIE that could
potentially be significant to the VIE, related party relationships
and the design of the VIE. An entity that is deemed the primary
beneficiary of a VIE is required to consolidate the VIE. Refer to
Note 4. Variable Interest Entities, for a detailed discussion of
Ambac’s involvement in VIEs, Ambac’s methodology for
determining whether Ambac is required to consolidate a VIE
and the effects of VIEs being consolidated.
AFG Unconsolidated Financial Information
Financial information of AFG is presented in Schedule II to this
Form 10-K as of December 31, 2020 and 2019 and for the years
ended December 31, 2020, 2019 and 2018. Investments in
subsidiaries are accounted for using the equity method of
accounting in Schedule II.
Measurement of Credit Losses on Financial Instruments
(CECL)
Instruments
On January 1, 2020 Ambac adopted ASU 2016-13, Financial
Instruments-Credit Losses (Topic 326) - Measurement of Credit
Losses on Financial Instruments, subsequently amended by
ASU 2018-19, Codification Improvements
to Topic 326,
Financial
- Credit Losses; ASU 2019-04,
Codification Improvements to Topic 326, Financial Instruments
—Credit Losses, Topic 815, Derivatives and Hedging, and Topic
Instruments; ASU 2019-05, Financial
825, Financial
Instruments—Credit Losses (Topic 326): Targeted Transition
Relief; and ASU 2019-11, Codification Improvements to Topic
326, Financial Instruments - Credit Losses (collectively the
Current Expected Credit Loss standard or "CECL").
The new CECL standard affects how reporting entities measure
credit losses for financial assets that are not accounted for at fair
value through net income. For Ambac, these financial assets
include available-for-sale debt securities and amortized cost
assets,
reinsurance
recoverables and loans. CECL does not apply to recoveries of
previously paid losses on financial guarantee insurance contracts
accounted for under ASC 944 nor does it apply to equity method
investments accounted for under ASC 323.
receivables,
specifically
premium
| Ambac Financial Group, Inc. 76 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
• For available-for-sale debt securities, credit losses under
CECL are measured similarly to other-than-temporary
impairments under prior GAAP. The updated guidance was
applied prospectively.
credit
losses
should
• For financial instruments measured at amortized cost,
CECL replaces the "incurred loss" model, which generally
delayed recognition of the full amount of credit losses until
the loss was probable of occurring, with an "expected loss"
model, which reflects an entity's current estimate of all
expected lifetime credit losses. The estimate of expected
lifetime
historical
information, current information, as well as reasonable and
supportable forecasts. Expected lifetime credit losses for
amortized cost assets will be recorded as an allowance for
credit losses, with subsequent increases or decreases in the
allowance reflected in net income each period. The updated
guidance was applied by a cumulative effect adjustment to
the opening balance of retained earnings at January 1,
2020. This adjustment was not material to retained earnings
or any individual balance sheet line item. Refer to the
discussion below for each asset type.
consider
As a result of adopting CECL, management revised its policies
and procedures around the credit impairment evaluation process.
CECL also introduced new disclosures related to the credit
impairment process,
including certain accounting policy
elections that Ambac made under the new standard.
Investments
The Investments - Debt Securities Topic of the ASC requires
that all debt instruments be classified in Ambac’s Consolidated
Balance Sheets according to their purpose and, depending on
that classification, be carried at either cost or fair market value.
Ambac’s non-VIE debt investment portfolio is accounted for on
a trade-date basis and consists primarily of investments in fixed
maturity securities that are considered available-for-sale as
defined by the Investments - Debt Securities Topic of the ASC.
Available-for-sale debt securities are reported in the financial
statements at fair value with unrealized gains and losses, net of
deferred taxes, reflected in Accumulated Other Comprehensive
Income (Loss) in Stockholders’ Equity and computed using
amortized cost as the basis. For purposes of computing
amortized cost, premiums and discounts are accounted for using
the effective interest method over a future term of the security.
For structured debt securities with a large underlying pool of
homogenous loans, such as mortgage-backed and asset-backed
securities, premiums and discounts are adjusted for the effects
of actual and anticipated prepayments. For other fixed maturity
securities, such as corporate and municipal bonds, discounts
were amortized or accreted over the remaining term of the
securities.
Ambac adopted ASU 2017-08, Receivables-
Nonrefundable Fees and Other Costs (Subtopic 310-20) -
Premium Amortization on Purchased Callable Debt Securities,
on January 1, 2019. ASU 2017-08 shortened the amortization
period for the premium on callable debt securities to the earliest
call date. Under previous GAAP, Ambac generally amortized
the premium over the contractual life (i.e. maturity) of the debt
security and if that debt security was called, we would record a
loss equal to the unamortized premium.
Ambac’s non-VIE investment portfolio also includes equity
interests in pooled investment funds which are accounted for in
accordance with the Investments - Equity Securities Topic of the
ASC and reported as Other investments on the Consolidated
Balance Sheet with income reported through Net investment
income on the Statement of Total Comprehensive Income
(Loss). Equity interests in the form of common stock or in-
substance common stock are classified as trading securities and
reported at fair value while limited partner interests in such
funds are reported using the equity method.
Fair value
is based primarily on quotes obtained from
independent market sources. When quotes for fixed maturity
reasonably
securities are not available or cannot be
corroborated, valuation models are used to estimate fair value.
These models include estimates, made by management, which
utilize current market information. When fair value is not
the
readily determinable
investments are valued using net asset value ("NAV") as a
practical expedient as permitted under
the Fair Value
Measurement Topic of the ASC. Investment valuations could
differ materially from amounts that would actually be realized in
the market. Realized gains and losses on the sale of investments
are determined on the basis of specific identification.
for pooled
investment
funds,
VIE investments in fixed maturity securities are carried at fair
value as they are either considered as available for sale securities
the fair value option election. For additional
or under
information about VIE investments, including fair value by
asset-type, see Note 4. Variable Interest Entities.
Ambac has a formal credit impairment review process for fixed
maturity available-for-sale securities in its investment portfolio.
Ambac conducts a review each quarter to identify and evaluate
investments that have indications of impairment in accordance
with the Investments - Debt Securities Topic of the ASC.
• Prior to the adoption of CECL, factors considered to
identify and assess securities for other than temporary
impairment include: (i) fair values that have declined by
20% or more below amortized cost; (ii) market values that
have declined by 5% or more but less than 20% below
amortized cost for a continuous period of at least six
months; (iii) recent downgrades by rating agencies; (iv) the
financial condition of the issuer and financial guarantor, as
applicable, and an analysis of projected defaults on the
underlying collateral; (v) whether scheduled
interest
payments are past due; (vi) whether Ambac has the intent
to sell the security; and (vii) whether it is more likely than
not that Ambac will be required to sell a security before the
anticipated recovery of its amortized cost basis. If we
believed a decline in the fair value of a particular
investment is not credit-related, we recorded the decline as
an unrealized loss net of tax in Accumulated Other
Comprehensive Income (Loss) in Stockholders’ Equity on
our Consolidated Balance Sheets. If it was determined that
a credit impairment existed, the credit impairment loss was
recognized in earnings, and the other-than-temporary
amount related to all other factors was recognized in other
comprehensive income. For fixed maturity securities that
have credit impairments in a period, the previous amortized
| Ambac Financial Group, Inc. 77 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
cost of the security less the amount of the credit impairment
recorded through earnings becomes the investment’s new
amortized cost basis. Ambac accretes the new amortized
cost basis to par or to the estimated future cash flows to be
recovered over the expected remaining life of the security.
• Under CECL, credit losses are evaluated and measured
similarly, however the recognition of credit impairment
losses for available-for-sale debt securities are recorded as
an allowance for credit losses with an offsetting charge to
net income, rather than as a direct write-down of the
security as was required under prior GAAP. As a result,
improvements to estimated credit losses for available-for-
sale debt securities are recognized immediately in net
income
time.
Furthermore, as required under CECL, Ambac no longer
considers the length of time a security has continuously
been in an unrealized loss in the credit impairment process.
income over
than as
interest
rather
If we believe a decline in the fair value of a particular
investment is not credit impaired, we record the decline as an
unrealized loss net of tax in Accumulated Other Comprehensive
Income (Loss) in Stockholders’ Equity on our Consolidated
Balance Sheets. If management either: (i) has the intent to sell
its investment in a debt security or (ii) determines that the
Company more likely than not will be required to sell the debt
security before its anticipated recovery of the amortized cost
basis less any current period credit impairment, then an
impairment charge is recognized in earnings, with the amortized
cost of the security being written-down to fair value.
impairment
The evaluation of securities for credit
is a
quantitative and qualitative process, which is subject to risks and
uncertainties and is intended to determine whether, and to what
extent, declines in the fair value of investments should be
recognized
risks and
in current period earnings. The
uncertainties include changes in general economic conditions,
the issuer’s or guarantor’s financial condition and/or future
prospects, the impact of regulatory actions on the investment
portfolio, the performance of the underlying collateral, the
effects of changes in interest rates or credit spreads and the
expected recovery period. With respect to Ambac insured
securities owned, future cash flows used to measure credit
impairment represents the sum of (i) the bond’s intrinsic cash
flows and (ii) the estimated AAC claim payments. Ambac’s
assessment about whether a decline in value is considered a
credit impairment reflects management’s current judgment
regarding facts and circumstances specific to a security and the
factors noted above. If that judgment changes, Ambac may
ultimately record a charge for other-than-temporary impairment
in future periods.
Ambac has made certain accounting policy elections related to
accrued
interest receivable ("AIR") for available-for-sale
investments under CECL, which are consistent with past
practices under prior GAAP. Elections include: i) not measuring
AIR for credit impairment, instead AIR is written off when it
becomes 90 days past due; ii) writing off AIR by reversing
interest income; iii) presenting AIR separately in Other Assets
on the balance sheet and iv) excluding AIR from amortized cost
balances in required CECL disclosures found in Note 11.
Investments. AIR at December 31, 2020 was $10.
Refer to Note 11. Investments for further credit impairment
disclosures.
Net Premiums
the cash amount received. For
Gross premiums were received either upfront or in installments.
For premiums received upfront, an unearned premium revenue
(“UPR”) liability was established, which was initially recorded
as
installment premium
transactions, a premium receivable asset and offsetting UPR
liability was initially established in an amount equal to: (i) the
present value of future contractual premiums due (the
“contractual” method) or (ii) if the underlying insured obligation
is a homogenous pool of assets which are contractually
prepayable, the present value of premiums to be collected over
the expected life of the transaction (the “expected” method). An
appropriate risk-free rate corresponding to the weighted average
life of each policy and currency is used to discount the future
premiums contractually due or expected to be collected. For
example, U.S. dollar exposures are discounted using U.S.
Treasury rates while exposures denominated in a foreign
currency are discounted using the appropriate risk-free rate for
the respective currency. The weighted average risk-free rate at
December 31, 2020 and 2019, was 2.2%. and 2.4%,
the weighted average period of future
respectively, and
premiums used
the premium receivable at
to estimate
December 31, 2020 and 2019, was 8.3 years and 8.5 years,
respectively.
include
Insured obligations consisting of homogeneous pools for which
Ambac uses expected future premiums to estimate the premium
receivable
residential mortgage-backed securities
("RMBS"). As prepayment assumptions change for homogenous
pool transactions, or if there is an actual prepayment for a
“contractual” method
related
premium receivable and UPR are adjusted in equal and
offsetting amounts with no immediate effect on earnings using
new premium cash flows and the then current risk-free rate
corresponding to the initial weighted average life of the related
policy.
transaction,
installment
the
to
in proportion
For both upfront and installment premium policies, premium
revenues are earned over the life of the financial guarantee
contract
insured principal amount
the
outstanding at each reporting date (referred to as the level-yield
method). For
the premium
installment paying policies,
receivable discount, equating to the difference between the
undiscounted future installment premiums and the present value
of future installment premiums, is accreted as premiums earned
in proportion to the premium receivable balance at each
reporting date.
• For financial guarantee contracts, the issuer's ability and
willingness to pay its insured debt obligation impacts the
payment of policy losses by Ambac as well as the receipt of
premiums from the issuer. As such, management leverages
its existing loss reserve estimation process to evaluate
credit impairment for premium receivables. Key factors in
assessing credit impairment include historical premium
collection data, internal risk classifications, credit ratings
and loss severities. For structured finance transactions
involving special purpose entities, we further evaluate the
| Ambac Financial Group, Inc. 78 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
priority of premiums paid to Ambac within the contractual
waterfall, as required by bond indentures. Ambac has a
formal quarterly credit impairment review process for
premium receivables under financial guarantee insurance
contracts.
• Prior
to
the adoption of CECL, Ambac assessed
collectability of premium receivables in accordance with
ASC 944 and recorded an allowance for uncollectible
premiums.
• Under CECL, management utilizes either a discounted cash
flow ("DCF") or probability of default/loss given default
("PD/LGD") approach to estimate credit impairment. The
DCF approach utilizes expected cash flows developed by
Ambac's Risk Management Group using the same (or
similar) models used for estimating loss reserves where
such models can identify shortfalls in premiums. Credit
impairment using the DCF approach is equal to the
difference between amortized cost and the present value of
expected cash flows. Credit impairment under the PD/LGD
approach is the product of (i) the premium receivable
carrying value, (ii) internally developed default probability
(considering internal ratings and average life), and (iii)
internally developed loss severities.
Refer to Note 8. Financial Guarantee Insurance Contracts for
further credit impairment disclosures.
AAC has reinsurance in place pursuant to surplus share treaty
and facultative reinsurance agreements. Similar
to gross
premiums, premiums ceded to reinsurers were paid either
upfront or in installments. For premiums paid upfront, a deferred
ceded premium asset was established which is initially recorded
as the cash amount paid. For installment premiums, a ceded
premiums payable
liability and offsetting deferred ceded
premium asset were initially established in an amount equal to:
i) the present value of future contractual premiums due or ii) if
the underlying insured obligation is a homogenous pool of
assets, the present value of expected premiums to be paid over
the life of the transaction. An appropriate risk-free rate
corresponding to the weighted average life of each policy and
exposure currency is used to discount the future premiums
contractually due or expected to be collected. Premiums ceded
to reinsurers reduce the amount of premiums earned by Ambac
from its financial guarantee insurance policies. For both upfront
and installment premiums, ceded premiums written are primarily
recognized in earnings in proportion to and at the same time as
the related gross premium revenue is recognized. For premiums
paid to reinsurers on an installment basis, Ambac records the
present value of future ceding commissions as an offset to ceded
premiums payable, using the same assumptions noted above for
installment premiums.
When a bond issue insured by Ambac has been retired early,
typically due to an issuer call, any remaining UPR is recognized
at that time to the extent the financial guarantee contract is
legally extinguished, causing accelerated premium revenue. For
installment premium paying
the
recognition of any remaining UPR by the reduction of the
related premium receivable to zero (as it will not be collected as
a result of the retirement), which may cause negative accelerated
premium revenue. Certain obligations insured by Ambac have
transactions, we offset
been legally defeased whereby government securities are
purchased by the issuer with the proceeds of a new bond
issuance, or less frequently with other funds of the issuer, and
held in escrow. The principal and interest received from the
escrowed securities are then used to retire the Ambac-insured
obligations at a future date either to their maturity date (a
refunding) or a specified call date (a pre-refunding). Ambac has
evaluated the provisions in policies issued on these obligations
and determined those insurance policies have not been legally
extinguished. For policies with refunding securities, premium
revenue recognition is not impacted as the escrowed maturity
date is the same as the previous legal maturity date. For policies
with pre-refunding securities, the maturity date of the pre-
refunded security has been shortened from its previous legal
maturity. Although premium revenue recognition has not been
accelerated in the period of the pre-refunding, it results in an
increase in the rate at which the policy's remaining UPR is to be
recognized.
Loans
Loans are reported at either their outstanding principal balance
less unamortized discount or at fair value.
• Loans not held by consolidated VIEs are reported at their
outstanding principal balance less unamortized discount
and are reported within Other assets on the Consolidated
Balance Sheet. Interest income is earned using the effective
interest method based upon interest accrued on the unpaid
principal balance adjusted for accretion of discounts. A
loan is considered impaired when, based on the financial
condition of the borrower, it is probable that Ambac will be
unable to collect all principal and interest due according to
the contractual terms of the loan agreement. Under CECL,
Ambac has a formal quarterly credit impairment review
process for these loans. The key factors in assessing credit
impairment are internal credit ratings and loss severities.
Management utilizes a PD/LGD approach, similar to the
one described above for premium receivables, which is
applied to the loan carrying value.
• Loans held by VIEs consolidated as required under the
Consolidation Topic of the ASC are carried at fair value
under the fair value option election with changes in fair
value recorded in Income (loss) on variable interest entities
on the Consolidated Statements of Total Comprehensive
Income (Loss). Such loans are reported as Loans, at fair
value within the Variable interest entity assets section of
the Consolidated Balance Sheet.
Derivative Contracts
The Company has entered into derivative contracts to hedge
certain economic risks inherent in its asset and liability
portfolios. None of Ambac’s derivative contracts are designated
as hedges under the Derivatives and Hedging Topic of the ASC.
Ambac's derivatives consist primarily of interest rate swaps and
futures contracts.
• Ambac maintains a portfolio consisting primarily of
interest rate swaps and futures contracts to economically
hedge interest rate risk in the financial guarantee and
investment portfolios. While this portfolio also includes
| Ambac Financial Group, Inc. 79 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
certain legacy interest rate swaps executed in connection
with financial guarantee client financings, the interest rate
derivatives portfolio is managed on the basis of its net
sensitivity to changes in interest rates. Changes in the fair
value of these interest rate derivatives are recorded, along
with changes in fair value of Ambac's remaining credit
derivatives, within Net gains (losses) on derivative
contracts on
the Consolidated Statements of Total
Comprehensive Income (Loss).
• VIEs consolidated under the Consolidation Topic of the
ASC entered into derivative contracts to meet specified
purposes within their securitization structure. Changes in
fair value of consolidated VIE derivatives are included
within Income (loss) on variable interest entities on the
Consolidated Statements of Total Comprehensive Income
(Loss).
All derivatives are recorded on the Consolidated Balance Sheets
at fair value on a gross basis; assets and liabilities are netted by
counterparty only when a legal right of offset exists. Variation
payments on centrally cleared swaps and futures contracts are
considered settlements of the associated derivative balances and
are reflected as a reduction to derivative liabilities or assets on
the Consolidated Balance Sheets. For other derivatives, Ambac
has determined that the amounts recognized for the right to
reclaim cash collateral or the obligation to return cash collateral
may not be used to offset amounts due under the derivative
instruments in the normal course of settlement. Therefore, such
amounts are not offset against fair value amounts recognized for
derivative instruments executed with the same counterparty
under the same master netting arrangement and are included in
"Other assets" on the Consolidated Balance Sheets. Refer to
Note 12. Derivative Instruments for further discussion of the
Company’s use of derivative instruments and their impact of the
consolidated financial statements. Refer to Note 10. Fair Value
Measurements for further description of the methodologies used
to determine the fair value of derivative contracts, including
model inputs and assumptions where applicable.
Goodwill
including
identifiable
Goodwill of $46 is attributable to the Xchange acquisition,
further discussed
in Note 3. Business Combination and
represents the acquisition cost in excess of the fair value of net
assets acquired,
intangible assets.
Goodwill is assigned at acquisition to the applicable reporting
unit of the acquired entity giving rise to the goodwill. Goodwill
is not amortized but is subject to impairment testing. Goodwill
impairment tests are performed annually or more frequently if
circumstances indicate a possible impairment. If, after assessing
qualitative factors, management believes it is more likely than
not that the fair value of a reporting unit is less than its carrying
amount, a quantitative impairment evaluation is performed. The
quantitative goodwill test compares the estimated fair value of
the reporting unit with its carrying value (including goodwill
and identifiable intangible assets). An impairment is recognized
for the excess of the carrying amount of the reporting unit over it
estimated fair value. If the reporting unit’s estimated fair value
exceeds its carrying value, goodwill is not impaired.
As the Xchange acquisition occurred on December 31, 2020 no
goodwill impairment evaluation was performed in 2020.
Intangible Assets
Financial Guarantee Insurance intangible:
Upon Ambac's emergence from bankruptcy in 2013, an
insurance intangible asset was recorded which represented the
difference between the fair value and aggregate carrying value
of the financial guarantee insurance and reinsurance assets and
liabilities. The carrying values of our financial guarantee
insurance and reinsurance contracts continue to be reported and
measured in accordance with their existing accounting policies.
Pursuant to the Financial Services-Insurance Topic of the ASC,
the insurance intangible is to be measured on a basis consistent
with the related financial guarantee insurance and reinsurance
contracts. The insurance intangible asset carrying value is $373
at December 31, 2020 and is amortized using a level-yield
method based on par exposure of the related financial guarantee
insurance or reinsurance contracts and is applied to groups of
contracts with similar characteristics.
Acquired intangible assets:
Ambac acquired $36 of identifiable intangible assets attributable
to the Xchange acquisition, further discussed in Note 3. Business
Combination. The intangible assets are primarily related to
distribution relationships, non-compete agreements and trade
names, all of which have finite lives and are amortized over their
estimated useful lives using the straight-line method.
The Company tests finite-lived acquired intangible assets for
impairment if certain events occur or circumstances change
indicating that the carrying amount of the intangible asset may
not be recoverable. To the extent the carrying value of an asset
or asset group exceeds the projected undiscounted cash flows
expected to result from the use and eventual disposal of the asset
or asset group, the Company determines the asset or asset group
is impaired and records an impairment equal to the difference
between the estimated fair value and the carrying value of the
asset or asset group. In addition, we will recognize an
impairment prior to the sale of an asset or asset group if the
carrying value of the asset or asset group exceeds its estimated
fair value.
As the Xchange acquisition occurred on December 31, 2020,
there was no amortization expense nor any impairment of the
intangible assets in 2020.
Restricted Cash
Cash that we do not have the right to use for general purposes is
recorded as restricted cash in our consolidated balance sheets.
Restricted cash includes (i) consolidated variable interest entity
cash restricted to support the obligations of the consolidated
VIEs, (ii) cash held by AAC received from its investment in
Secured Notes and pledged for the benefit of holders of Secured
Notes (other than AAC) and (iii) fiduciary cash held by Xchange
described below.
Fiduciary Assets and Liabilities: In Xchange's capacity as a
managing general agent, generally it collects premiums from
insureds and remits the premiums to the respective insurance
carriers, net of fees to other parties, including its commissions.
Xchange also collects claims or refunds from carriers on behalf
insurance premiums and claims
of
insureds. Unremitted
| Ambac Financial Group, Inc. 80 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
proceeds are held by Xchange in a fiduciary capacity. Since
fiduciary assets are not available for corporate use, they are
shown in the consolidated balance sheets as an offset to
fiduciary liabilities, which are reported in Other liabilities.
Restricted cash for net uncollected premiums and claims and the
related fiduciary liabilities were $4 at December 31, 2020.
Loss and Loss Expenses
The loss and loss expense reserve (“loss reserve”) policy relates
only to Ambac’s non-derivative insurance business for insurance
policies issued to beneficiaries, including VIEs, for which we do
not consolidate the VIE. Losses and loss expenses are based
upon estimates of the ultimate aggregate losses inherent in the
non-derivative financial guarantee portfolio as of the reporting
date. The policy for derivative contracts is discussed in the
“Derivative Contracts” section above.
A loss reserve is recorded on the balance sheet on a policy-by-
policy basis based upon the present value ("PV") of expected net
claim cash outflows or expected net recovery cash inflows,
discounted at risk-free rates. The estimate for future net cash
flows consider the likelihood of all possible outcomes that may
occur from missed principal and/or interest payments on the
insured obligation. This estimate also considers future recoveries
related to breaches of contractual representations and warranties
by RMBS transaction sponsors, remediation strategies, excess
spread and other contractual or subrogation-related cash flows.
Ambac’s approach to resolving disputes involving contractual
breaches by transaction sponsors or other third parties has
included negotiations and/or pursuing litigation. Ambac does not
estimate recoveries for litigations where its sole claim is for
fraudulent inducement, since any remedies under such claims
would be non-contractual.
• Net claim cash outflow policies represent contracts where
the PV of expected cash outflows are greater than the PV of
expected recovery cash inflows. For such policies, a “Loss
and loss expense reserves” liability is recorded for the
excess of the PV of expected net claim cash outflows over
the unearned premium revenue.
• Net recovery cash inflow policies represent contracts where
the PV of expected recovery cash inflows are greater than
the PV of expected claim cash outflows. For such policies,
a “Subrogation recoverable” asset is recorded.
The evaluation process for determining expected losses is
subject to certain judgments based on our assumptions regarding
the probability of default by the issuer of the insured security,
probability of settlement outcomes (which may
include
commutation settlements, refinancing and/or other settlement
outcomes) and expected severity of credits for each insurance
contract. Ambac’s loss reserves are based on management’s
ongoing review of the financial guarantee credit portfolio.
Active surveillance of the insured portfolio enables Ambac’s
Risk Management Group ("RMG") to track credit migration of
insured obligations from period to period and update internal
classifications and credit ratings for each transaction. Non-
adversely classified credits are assigned a Class I rating while
adversely classified credits are assigned a rating of Class IA
through Class V. The criteria for an exposure to be assigned an
student
(for collateral dependent
loan
adversely classified credit rating includes the deterioration of an
issuer’s financial condition, underperformance of the underlying
transactions such as
collateral
securitizations), poor
mortgage-backed or
performance by the servicer of the underlying collateral and
other adverse economic events or trends. The servicer of the
underlying collateral of an insured securitization transaction is a
consideration in assessing credit quality because the servicer’s
performance can directly impact the performance of the related
issue. For example, a servicer of a mortgage-backed
securitization that does not remain current in its collection
efforts could cause an increase in the delinquency and the
potential for default of the underlying obligation. Similarly, loss
severities increase when a servicer does not effectively handle
loss mitigation activities such as (i) the advancing of delinquent
principal and interest and of default related expenses which are
deemed to be recoverable by the servicer, (ii) pursuit of loan
charge-offs which maximize cash flows from the mortgage loan
pool and (iii) foreclosure and real estate owned disposition
strategies and timelines.
All credits are assigned risk classifications by RMG using the
following guidelines:
CLASS I - “Fully Performing - Meets Ambac Criteria with
Remote Probability of Claim” - Credits that demonstrate
adequate security and structural protection with a strong
capacity to pay interest, repay principal and perform as
underwritten. Factors supporting debt service payment and
performance are considered unlikely to change and any such
change would not have a negative impact upon the fundamental
credit quality. Through ongoing surveillance, Ambac may also
designate Class I credits into one or more of the following
categories:
• Survey List - credits that may lack information or
demonstrate a weakness but further deterioration is not
expected.
• Watch List - credits that demonstrate the potential for
future material adverse development due to such factors as
long-term uncertainty about a particular sector, a certain
structural element or concern related to the issuer or
transaction or
financial and economic
sustainability.
the overall
CLASS IA - “Potential Problem with Risks to be Dimensioned”
- Credits that are fully current and monetary default or claims-
payment are not anticipated. The payor’s or issuer’s financial
condition may be deteriorating or the credits may lack adequate
collateral. A structured financing may also evidence weakness in
its fundamental credit quality as evidenced by its under-
performance relative to its modeled projections at underwriting,
issues related to the servicer’s ability to perform or questions
about the structural integrity of the transaction. While certain of
these credits may still retain an investment grade rating, they
usually have experienced or are vulnerable to a ratings
downgrade. Further investigation is required to dimension and
correct any deficiencies. A complete legal review of documents
may be required. An action plan should be developed with
triggers for future classification changes upward or downward.
| Ambac Financial Group, Inc. 81 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
CLASS II - “Substandard Requiring Intervention” - Credits
whose fundamental credit quality has deteriorated to the point
that timely payment of debt service may be jeopardized by
adversely developing trends of a financial, economic, structural,
managerial or political nature. No claim payment is currently
foreseen but the probability of loss or claim payment over the
life of the transaction is now existent (generally 10% or greater
probability). Class II credits may be border-line or below
investment grade (BBB- to B). Prompt and sustained action
must be taken to execute a comprehensive loss mitigation plan
and correct deficiencies.
CLASS III - “Doubtful with Clear Potential for Loss” - Credits
whose fundamental credit quality has deteriorated to the point
that timely payment of debt service has been or will be
jeopardized by adverse
trends of a financial, economic,
structural, managerial or political nature which, in the absence
of positive change or corrective action, are likely to result in a
loss. The probability of monetary default or claims paying over
the life of the transaction is generally 50% or greater. Full
exercise of all available remedial actions is required to avert or
minimize losses. Class III credits will generally be rated below
investment grade (B to CCC).
CLASS IV - “Imminent Default or Defaulted” - Monetary
default or claim payments have occurred or are expected
imminently. Class IV credits are generally rated D.
CLASS V - “Fully Reserved” - The credit has defaulted and
payments have occurred. The claim payments are scheduled and
known, reserves have been established to fully cover such
claims, and no claim volatility is expected.
The population of credits evaluated in Ambac’s loss reserve
process are: (i) all adversely classified credits (Class IA through
V) and ii) non-adversely classified credits which had an internal
Ambac rating downgrade since the transaction’s inception. One
of two approaches is then utilized to estimate losses to
ultimately determine if a loss reserve should be established. The
first approach is a statistical expected loss approach, which
considers the likelihood of all possible outcomes. The “base
case” statistical expected loss is the product of: (i) the par
outstanding on the credit; (ii) internally developed default
information (taking into consideration internal ratings and
average life of an obligation); (iii) internally developed loss
severities; and (iv) a discount factor. The loss severities and
default information are based on rating agency information, are
specific to each bond type and are established and approved by
senior RMG officers. For certain credit exposures, Ambac’s
additional monitoring, loss remediation efforts and probabilities
of potential settlement outcomes may provide information
relevant to adjust this estimate of “base case” statistical expected
losses. Analysts may accept the “base case” statistical expected
loss as the best estimate of expected loss or assign multiple
probability weighted scenarios
to determine an adjusted
statistical expected loss that better reflects management’s view
of a given transaction’s expected losses, as well as the potential
for additional remediation activities (e.g., commutations).
The second approach entails the use of cash-flow based models
to estimate expected losses (future claims, net of potential
recoveries, expected to be paid to the holder of the insured
financial obligation). Ambac’s RMG group will consider the
likelihood of all possible outcomes and develop appropriate cash
flow scenarios. This approach can include the utilization of
internal or third party models and tools to project future losses
and resultant claim payment estimates. We utilize cash flow
models for RMBS, student loan, Puerto Rico and other
exposures. RMBS and student loan models use historical
performance of the collateral pools in order to then derive future
performance characteristics, such as default and voluntary
prepayment rates, which in turn determine projected future
claim payments. In other cases, such as many public finance
exposures, including our Puerto Rico exposures, we do not
specifically forecast resources available to pay debt service in
the cash flow model itself. Rather, we consider the issuers’
overall ability and willingness to pay, including the fiscal,
economic, legal and political framework. In this approach, a
probability-weighted expected loss estimate is developed based
on assigning probabilities to multiple claim payment scenarios
and applying an appropriate discount factor. Additionally, we
assign a probability to the issuer’s ability to refinance an insured
issue, Ambac’s ability to execute a potential settlement (i.e.,
commutation) of the insurance policy, including the impact on
restructuring
future
installment premiums, and/or other
scenarios. The commutation scenarios and
related
the
probabilities of occurrence vary by transaction, depending on
our view of the likelihood of negotiating such a transaction with
issuers and/or investors.
The discount factor applied to the statistical expected loss
approach is based on a risk-free discount rate corresponding to
the remaining expected weighted-average life of the exposure
and the exposure currency. For the cash flow scenario approach,
discount factors are applied based on a risk-free discount rate
term structure and correspond to the date of each respective cash
flow payment or recovery and the exposure currency. Discount
factors are updated for the current risk-free rate each reporting
period.
Ambac establishes loss expense reserves based on our estimate
of expected net cash outflows for loss expenses, such as legal
and consulting costs.
Below we provide further details of our loss reserve models for
both RMBS and student loan exposures:
RMBS Expected Loss Estimate
insured RMBS
Ambac insures RMBS transactions collateralized by first-lien
mortgages. Ambac has also
transactions
collateralized predominantly by second-lien mortgage loans
such as closed-end seconds and home equity lines of credit. A
second-lien mortgage loan is a type of loan in which the
borrower uses the equity in their home as collateral and the
second-lien loan is subordinate to the first-lien loan outstanding
on the home. Borrowers are obligated to make monthly
payments on both their first and second-lien loans. If the
borrower defaults on the payments due under these loans and the
property is subsequently liquidated, the liquidation proceeds are
first utilized to pay off the first-lien loan (as well as other costs)
and any remaining funds are applied to pay off the second-lien
loan. As a result of this subordinate position to the first-lien
| Ambac Financial Group, Inc. 82 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
loan, second-lien loans may carry a significantly higher severity
in the event of a loss, approaching or exceeding 100%.
(i)
Ambac primarily utilizes a cash flow model (“RMBS cash flow
model”) to develop estimates of projected losses for both our
first and second lien transactions. First, the RMBS cash flow
model projects collateral performance utilizing:
the
loans' characteristics and status,
transaction’s underlying
(“HPA”)
appreciation
price
home
projected
(ii)
and (iii) projected interest rates. Depending in the amount of
collateral information available for each transaction, we project
such performance either at the loan-level or the deal-level. In
the absence of specific loan-level information, the deal-level
approach evaluates a loan pool as if it were a single loan,
selecting certain aggregated deal-level characteristics to then
perform a series of statistical analyses. The deal-level approach
projects performance using a roll-rate that evaluates the possible
future state of a loan based on its current status and three
variables: average FICO (credit score), average current
consolidated loan to value ratio (“CLTV”) and an overall quality
indicator. Observed servicer-level behavior may also have an
impact on projected transaction performance.
We source HPA projections from a market accepted vendor and
interest rate projections are developed from market sources. We
use three HPA projection scenarios to develop a base case as
well as stress and upside cases. The highest probability is
assigned to the base case, with lower probabilities to the stress
and upside cases.
For the liabilities of the transaction which we insure, we
generally utilize waterfall projections generated from a tool
provided by a market accepted vendor. This waterfall tool
allows us to capture the impact of each transaction’s specific
structure (e.g., the waterfall priority of payments, triggers,
redemption priority) to generate our specific projected claims
profile in the base, upside and downside scenarios.
to
revisions
On a monthly basis, we compare monthly claims submitted
against the trustees’ reports, waterfall projections and our
understanding of the transactions’ structures to identify and
resolve discrepancies. We also review the vendor’s published
waterfall
identify significant discrepancies.
Resolving discrepancies is challenging and may take place over
an extended period of time. Moreover, transaction documents
are subject to interpretation, and our interpretation or that of the
vendor and as reflected in our loss reserves may prove to be
incorrect and/or not consistent with trustees directing cash flows
in the future. In some cases, we may utilize an alternative
waterfall structure when our legal and commercial analysis of
the transaction’s payment structure differs from the vendor’s
waterfall structure.
In our experience, market performance and model characteristics
change and therefore need to be updated and reflected in our
models through time. As such, we conduct regular reviews of
current models, alternative models and the overall approach to
loss estimation.
RMBS Representation and Warranty Subrogation Recoveries
in
loans,
including
experience
the underlying
the securitized
Ambac records, as a component of its loss reserve estimate,
subrogation recoveries related to securitized loans in RMBS
transactions that breached certain representations and warranties
described herein. Generally,
the sponsor of an RMBS
transaction provided representations and warranties with respect
to
representations and
warranties with respect to loan characteristics, the absence of
loan pools and other
borrower fraud
misconduct in the origination process and attesting to the
compliance of loans with the prevailing underwriting policies.
In such cases, the sponsor of the transaction is contractually
obligated to repurchase, cure or substitute collateral for any loan
that breaches the representations or warranties. Ambac or its
significant mortgage
counsel engaged consultants with
underwriting
underwriting
to
documentation for mortgage loans underlying certain insured
transactions which exhibited exceptionally poor
RMBS
performance. Factors which Ambac believes to be indicative of
poor performance include (i) high levels of early payment
defaults, (ii) significant numbers of loan liquidations or charge-
offs and resulting high levels of losses and (iii) rapid elimination
of credit protections inherent in the transactions’ structures.
With respect to item (ii), “loan liquidations” refers to loans for
which the servicer has liquidated the related collateral and the
securitization has realized losses on the loan; “charge-offs”
refers to loans which have been written off as uncollectible by
the servicer, generating no recoveries to the securitization, and
may also refer to the unrecovered balance of liquidated loans. In
either case, the servicer has taken actions to recover against the
collateral, and the securitization has incurred losses to the extent
such actions did not result in full repayment of the borrower’s
obligations.
review
the
to
the structure of
loans conformed
to ascertain whether
Generally, subsequent to the forensic exercise of examining loan
the
the
files
representations and warranties, we submitted nonconforming
loans for repurchase to the contractual counterparty bearing the
repurchase obligation, typically the transaction sponsor. In cases
where loans are repurchased by a sponsor, the effect is typically
to offset current period losses and then to increase the over-
collateralization of the securitization, depending on the extent of
loan repurchases and
the securitization.
Specifically, the repurchase price is paid by the sponsor to the
securitization trust which holds the loan. The cash becomes an
asset of the trust, replacing the loan that was repurchased by the
sponsor. On a monthly basis, the cash received related to loan
repurchases by the sponsor is aggregated with cash collections
from the underlying mortgages and applied in accordance with
the trust indenture payment waterfall. To the extent there
continues to be insufficient cash in the waterfall in the current
month to make scheduled principal and interest payments to the
note holders, Ambac is required to make additional claim
payments to cover this shortfall. Ambac may also receive
payments directly from transaction sponsors in settlement of
their repurchase obligations pursuant to negotiated settlement
agreements or otherwise as a result of related litigation.
While the obligation by sponsors to repurchase loans with
material breaches is clear, generally the sponsors have not
honored those obligations without actual or threatened litigation.
| Ambac Financial Group, Inc. 83 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Ambac has utilized the results of the above described loan file
examinations to make demands for loan repurchases from
sponsors or their successors and, in certain instances, as a part of
the basis for litigation. Ambac’s approach to resolving these
disputes has included negotiating with individual sponsors at the
transaction level and in some cases at the individual loan level
and has resulted in the repurchase of some loans. Ambac has
initiated and will continue
lawsuits seeking
compliance with the repurchase obligations in the securitization
documents.
to pursue
that have
experienced
Ambac has performed
above-mentioned, detailed
the
examinations on a variety of second-lien and first-lien
exceptionally poor
transactions
performance. However, the loan file examinations and related
estimated recoveries we have reviewed and recorded to date
have been limited to only those transactions whose sponsors (or
their successors) are subsidiaries of large financial institutions,
all of which carry an investment grade rating from at least one
nationally recognized rating agency, or are otherwise deemed to
have the financial wherewithal to live up to their repurchase
obligations. While our contractual recourse is generally to the
sponsor/subsidiary, rather than to the parent, each of these large
institutions has significant financial resources and may have an
ongoing interest in mortgage finance, and we therefore believe
that the financial institution/parent would ultimately assume
financial responsibility for these obligations if the sponsor/
subsidiary is unable to honor its contractual obligations or pay a
judgment that we may obtain in litigation. Additionally, in the
case of successor institutions, we are not aware of any
provisions that explicitly preclude or limit the successors’ ability
to honor the obligations of the original sponsor. Certain
successor financial institutions have made significant payments
to certain claimants to settle breaches of representations and
warranties perpetrated by sponsors that have been acquired by
such financial institutions. For example, Ambac received a
significant payment in 2016 from JP Morgan to settle RMBS-
related litigation. As a result of these factors, we do not make
significant adjustments to our estimated subrogation recoveries
with respect to the credit risk of these sponsors or their
successors.
Our ability to realize RMBS R&W subrogation recoveries is
subject to significant uncertainty, including risks inherent in
litigation; collectability of such amounts from counterparties
(and/or their respective parents and affiliates); timing of receipt
of any such recoveries; intervention by OCI, which could
impede our ability to take actions required to realize such
recoveries; and uncertainty inherent in the assumptions used in
estimating such recoveries. Failure to realize RMBS R&W
subrogation recoveries for any reason or the realization of
RMBS R&W subrogation recoveries materially below the
amount recorded on Ambac's consolidated balance sheet would
have a material adverse effect on our results of operations and
financial condition and may result in adverse consequences such
as impairing the ability of AAC to honor its financial
obligations; the initiation of rehabilitation proceedings against
AAC; decreased likelihood of AAC delivering value to Ambac,
through dividends or otherwise; and a significant drop in the
value of securities issued and/or insured by Ambac or AAC.
The approach used to estimate RMBS R&W subrogation
recoveries is based on obtaining loan files from the original pool
and conducting loan file re-underwriting to derive a breach rate
to be extrapolated to determine an estimated repurchase
obligation. We limit the estimated repurchase obligation by
ever-to-date incurred losses.
Multiple probability-weighted scenarios are developed by
applying various realization factors to the estimated repurchase
obligation. The realization factors in these scenarios reflect
Ambac’s own assumptions about the likelihood of outcomes
based on all the information available to it including, but not
limited to, (i) discussions with external legal counsel and their
litigation outcomes,
views on ultimate settlement and/or
(ii) assessment of the strength of the specific case and (iii)
experience in settling similar claims. The probability weightings
are developed based on the unique facts and circumstances for
these probability-weighted
each
scenarios represents the undiscounted RMBS R&W subrogation
recovery, which is then discounted using a factor derived from a
risk-free discount rate term structure that corresponds to the
estimated date of each respective recovery.
transaction. The sum of
Student Loan Expected Loss Estimate
loan
the greatest degree of uncertainty
The student
insured portfolio consists of credits
collateralized by private student loans. The calculation of loss
reserves for our student loan portfolio involves evaluating
numerous factors that can impact ultimate losses. The factor
which contributes
in
ascertaining appropriate loss reserves is the long final legal
maturity date of the insured bonds. Most of the student loan
bonds which we insure were issued with original terms of 20 to
40 years until final maturity. Since our policy covers timely
interest and ultimate principal payment, our loss projections
must make assumptions for many factors covering a long time
horizon. Key assumptions that will impact ultimate losses
include, but are not limited to, the following: collateral
performance (which is highly correlated to the economic
environment); interest rates; operating risks associated with the
issuer, servicers, special servicers, and administrators; investor
appetite for tendering or commuting insured obligations and; as
applicable, Ambac’s ability and willingness
to commute
policies. In addition, we consider in our student loan loss
projections the potential impact, if any, of proposed or final
regulatory actions or orders, including by the Consumer
Financial Protection Bureau ("CFPB"), affecting our insured
transactions.
In evaluating our student loan portfolio, our losses are projected
using a cash flow modeling approach. In order to project
collateral performance under the cash flow approach, we use a
default projection tool that constructs lifetime cohort default
curves based on loan and deal-level historical performance data.
To determine ultimate losses on the transactions, the cohort
default curves are used to extrapolate future default behavior.
Additionally, a regression-based model is used to estimate
recoveries on defaulted loans. This regression-based recovery
forecast is grounded in deal-level performance data. For the
liabilities of the transaction which we insure, the transaction
losses are then incorporated into a waterfall tool to develop loss
| Ambac Financial Group, Inc. 84 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
estimates for our exposures in various base, upside and
downside scenarios.
We develop and assign probabilities to multiple cash flow
scenarios based on each transaction’s unique characteristics.
Probabilities assigned are based on available data related to the
credit, information from contact with the issuer (if applicable),
and any economic or market information that may impact the
outcomes of the various scenarios being evaluated. Our base
case usually projects deal performance out to maturity using
expected loss assumptions. As appropriate, we also develop
other cases that incorporate various upside and downside
scenarios that may include changes to defaults and recoveries.
Ceded Reinsurance
is
to
reinsurers
reported as
Loss and loss expense reserve reported on the balance sheet
relates only to direct insurance policies. The corresponding
reinsurance
reserve ceded
recoverable on paid and unpaid losses. AAC has reinsurance in
place pursuant to surplus share treaty and facultative reinsurance
agreements. The reinsurance of risk does not relieve AAC of its
original liability to its policyholders. In the event that any
of Ambac Assurance’s reinsurers are unable to meet their
obligations under reinsurance contracts, AAC would,
nonetheless, be liable to its policyholders for the full amount of
its policy. Credit exposure exists with respect to reinsurance
recoverables to the extent that any reinsurer may not be able to
reinsurance
reimburse AAC under
the
arrangements. To minimize
losses from
reinsurers, AAC (i) monitors the financial condition of its
reinsurers; (ii)
its
reinsurance counterparties in certain reinsurance contracts; and
(iii) has certain cancellation rights that can be exercised by AAC
in the event of rating agency downgrades of a reinsurer (among
other events and circumstances).
terms of
its exposure
to receive collateral from
these
to
is entitled
Under CECL, Ambac has a formal quarterly credit impairment
review process whereby Ambac has elected to use the practical
expedient of considering the fair value of collateral posted by
reinsurers when evaluating credit impairment. To determine the
for credit
total unsecured
impairment, Ambac nets the reinsurance recoverable amount by
ceded premiums payable and the fair value of collateral posted,
if any.
to be evaluated
recoverable
The key factors in assessing credit impairment for reinsurance
recoverables are independent rating agency credit ratings and
loss severities. Management utilizes a PD/LGD approach,
similar to the one described above for premium receivables,
which is applied to the net unsecured reinsurance recoverable
amount.
Refer to Note 8. Financial Guarantee Insurance Contracts for
further credit impairment disclosures.
Long-Term Debt
Long-term debt issued by Ambac is carried at par value less
unamortized discount. Accrued interest and discount accretion
on long-term debt is reported as Interest expense on the
Consolidated Statements of Total Comprehensive Income
(Loss). To the extent Ambac repurchases or redeems its long-
term debt, such repurchases or redemptions may be settled for
an amount different than the carrying value of the obligation.
Any difference between the payment and carrying value of the
obligation is reported in Net realized gains (losses) on
extinguishment of debt on the Consolidated Statements of Total
Comprehensive Income (Loss).
For long-term debt issued by consolidated VIEs in which
Ambac's variable interest arises from financial guarantees
written by Ambac's subsidiaries ("FG VIEs"), we may elect to
use the fair value option on an instrument by instrument basis.
When the fair value option is elected, changes in the fair value
of the FG VIEs' long-term debt is reported within Income (loss)
on variable interest entities in the Consolidated Statements of
Total Comprehensive Income (Loss), except for the portion of
the total change in fair value of financial liabilities caused by
changes in the instrument-specific credit risk which is presented
separately in Other comprehensive income (loss). In cases
where the fair value option has not been elected, the FG VIEs'
long-term debt is carried at par less unamortized discount, with
interest expense reported within Income (loss) on variable
interest entities in the Consolidated Statements of Total
Comprehensive Income (Loss).
Noncontrolling Interests
Nonredeemable noncontrolling interests
At December 31, 2020 and 2019, AAC had 5,501 shares of
issued and outstanding AMPS with a liquidation preference of
$138 (reported as nonredeemable noncontrolling interest of $60
on Ambac's balance sheet). The auction occurs every 28 days
and the dividend rate has continuously been reset at the
maximum rate of one-month LIBOR plus 200 basis points.
Under the terms of the AMPS, dividends may not be paid on the
common stock of AAC unless all accrued and unpaid dividends
on the AMPS for the then current dividend period have been
paid, provided, that dividends on the common stock may be
made at all times for the purpose of, and only in such amounts as
are necessary for, enabling AFG (i) to service its indebtedness
for borrowed money as such payments become due or (ii) to pay
its operating expenses. If dividends are paid on the common
stock as provided in the prior sentence, dividends on the AMPS
become cumulative until the date that all accumulated and
unpaid dividends have been paid on the AMPS. AAC has not
paid dividends on its AMPS since 2010.
Redeemable noncontrolling interests
The Xchange acquisition, further described in Note 3. Business
Combination, resulted in 80% ownership of the acquired entities
by Ambac. Under the terms of the acquisition agreement,
Ambac has a call option to purchase the remaining 20% from
the minority owners (i.e., noncontrolling interests) and the
minority owners have a put option to sell the remaining 20% to
Ambac. The call and put options are exercisable after different
time periods elapse. Because the exercise of the put option is
outside
the
Distinguishing Liabilities from Equity Topic of the ASC,
Ambac reports redeemable noncontrolling interests in the
mezzanine section of its consolidated balance sheet.
the control of Ambac,
in accordance with
| Ambac Financial Group, Inc. 85 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Employee Benefits
Postretirement and Postemployment Benefits
Ambac provides postretirement and postemployment benefits,
including health and life benefits covering employees who meet
certain age and service requirements. Ambac accounts for these
benefits under the accrual method of accounting. Amounts
related to the postretirement health benefits liability are
to expense based on actuarial
established and charged
determinations.
Incentive Compensation
Incentive compensation is a key component of our compensation
strategy. Incentive compensation has two components: short
term incentive compensation (consisting of an annual cash
bonus and, prior to 2020, awards of deferred stock units for
certain officers) and long term incentive plan awards (consisting
of deferred cash and awards of restricted and performance stock
units). Annual decisions with regard to incentive compensation
are generally made in the first quarter of each year and are based
on the prior year's performance for the Company, the employee
and the employee's business unit.
In 2020, the Ambac 2013 Incentive Compensation Plan (the
“2013 Incentive Plan”) was superseded by the 2020 Incentive
Compensation Plan ("2020 Incentive Plan"). Both plans allow
for the granting of stock options, restricted stock, stock
appreciation rights, restricted and performance units and other
awards to employees, directors and consultants that are valued
or determined by reference to Ambac's common stock. Under
these plans, Ambac has issued both cash and equity awards to
US employees.
In connection with the adoption of the 2020 Incentive Plan, all
shares reserved but unissued under the 2013 Incentive Plan were
transferred to the the 2020 Incentive Plan in addition to any
shares underlying outstanding awards under the 2013 Incentive
Plan as of June 2, 2020 that subsequently terminate by
expiration or forfeiture, cancellation, or otherwise are not issued.
Under the 2013 and 2020 Incentive Compensation Plans. Ambac
recognizes compensation costs for all equity classified awards
granted at fair value, which is measured on the grant date, and
records forfeitures for unvested shares only when they occur.
For awards
include service and performance
conditions, the fair value is the market price of Ambac stock on
the grant date. For awards that also contain a market condition,
specifically a total shareholder return ("TSR") modifier, the fair
value is estimated using a Monte Carlo simulation.
that only
The types of equity awards granted to employees are as follows:
• Deferred stock units granted vest upon grant and will settle
and convert to Ambac common stock annually over a two-
year period (50% on the first anniversary of the grant date
and 50% on the second anniversary of the grant date). The
fair value of these grants is recognized as compensation
expense on the date of grant since no future service is
required.
• Restricted stock units granted only require future service
and accordingly the respective fair value is recognized as
compensation expense over the relevant service period.
• Performance stock units granted require both future service
and achieving specified performance targets to vest. Certain
performance stock unit grants also include a market
condition TSR modifier that will cause the total payout at
the end the performance period to increase or decrease
depending on Ambac's stock performance relative to a peer
group. Compensation costs for all performance stock units
are only recognized when
the
performance conditions are considered probable. Once
deemed probable, such compensation costs are recognized
as compensation expense over the relevant service period.
Compensation costs are initially based on the probable
outcome of the performance conditions and adjusted for
subsequent changes in the estimated or actual outcome each
reporting period as necessary. Changes in the estimated or
actual outcome of a performance condition are recognized
by reflecting a retrospective adjustment to compensation
cost in the current period.
the achievement of
In 2015, Ambac UK's Board of Directors adopted a long term
incentive plan which provided cash based performance awards
to Ambac UK employees. Since all performance conditions
under this plan were met, the Ambac UK Board of Directors
adopted a new long term incentive plan for Ambac UK
employees in 2020, which includes both performance and time
based awards. Compensation costs for all performance based
awards are based on the probable outcome of the performance
conditions and adjusted for subsequent changes in the estimated
or actual outcome each reporting period as necessary.
Compensation costs for time-based awards are recognized
evenly over the service period.
Operating Leases
In 2019, Ambac adopted ASU 2016-02, Leases (Topic 842),
amended by ASU 2018-01, Land Easement Practical Expedient;
ASU 2018-10, Codification Improvements to Topic 842; ASU
2018-11, Targeted Improvements; ASU 2018-20, Narrow-
Scope Improvements for Lessors; and ASU 2019-01, Leases
(Topic 842): Codification Improvements (collectively the
"New Lease Standard"). Ambac used a modified retrospective
approach and applied the New Lease Standard on its effective
date of January 1, 2019. Additionally, Ambac applied the New
Lease Standard to its recently acquired affiliate, Xchange, on the
acquisition date of December 31, 2020. Refer to Note 3.
Business Combination for further discussion of the acquisition.
A contract contains a lease if it conveys the right to control the
use of identified property, plant, or equipment for a period of
time in exchange for consideration. Ambac's evaluation of
whether certain contracts contain leases requires judgment
regarding what party controls the asset and whether the asset is
physically distinct.
Ambac is the lessee in leases which are classified as operating
leases. In accordance with the New Lease Standard, Ambac
recognizes a single lease cost, calculated so that the cost is
allocated generally on a straight-line basis over the lease term
within operating expenses in the Consolidated Statements of
| Ambac Financial Group, Inc. 86 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
lease
Income
(Loss). The
Total Comprehensive
term
commences on the earlier of the date when we become legally
obligated for the rent payments or the date on which we take
possession of the property. For such operating leases, Ambac
recognizes a right-of-use ("ROU") asset and a lease liability,
initially measured at the present value of the lease payments, on
the later of the adoption date or lease commencement date. The
discount rate used to initially measure the ROU assets and lease
liabilities reflects the estimated secured borrowing rate of the
applicable Ambac subsidiary, which considers the rate of
existing or recent debt obligations of the entity. All cash
payments are classified within operating activities in the
statement of cash flows.
For contracts where Ambac is the lessee, we have elected the
short-term lease recognition exemption for all leases that
qualify. For those leases that qualify for that exemption, we will
not recognize ROU assets or lease liabilities. For all contracts
where Ambac is the lessee and lessor we have also elected the
practical expedient
lease and non-lease
to not separate
components.
Depreciation and Amortization
Depreciation of furniture and fixtures, certain information
technology development costs and electronic data processing
equipment is charged over the estimated useful lives of the
respective assets, ranging from three to five years, using the
straight-line method. Amortization of leasehold improvements is
charged over the remaining term of the respective operating
lease using the straight-line method.
Foreign Currency
Financial statement accounts expressed in foreign currencies are
translated into U.S. dollars in accordance with the Foreign
Currency Matters Topic of the ASC. The functional currencies
of Ambac's subsidiaries are the local currencies of the country
where the respective subsidiaries are based, which are also the
primary operating environments in which the subsidiaries
operate.
Foreign currency translation: Functional currency assets and
liabilities of Ambac’s foreign subsidiaries are translated into
U.S. dollars using exchange rates in effect at the balance sheet
dates and the related translation adjustments, net of deferred
taxes, are included as a component of Accumulated Other
in Stockholders' Equity.
(Loss)
Comprehensive
Functional currency operating results of foreign subsidiaries are
translated using average exchange rates.
Income
Foreign currency transactions: The impact of non-functional
currency transactions and the remeasurement of non-functional
currency assets and liabilities into the respective subsidiaries'
functional currency (collectively "foreign currency transactions
gains/(losses)") are $(1), $12 and $(7) for the years ended
Foreign currency
December 31, 2020, 2019 and 2018.
transaction gains/(losses) are primarily the result of remeasuring
Ambac UK's assets and liabilities denominated in currencies
other than its functional currency, primarily the U.S. dollar and
the Euro.
Income Taxes
Ambac files a consolidated U.S. Federal income tax return with
its subsidiaries. Ambac UK files tax returns in both the United
Kingdom and Italy (for its Milan branch). Current tax assets and
liabilities are recognized for taxes refundable or payable for the
current year. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
The effect on current and deferred tax assets and liabilities of a
change in tax rates is recognized in the period that includes the
enactment date. In July 2020, United Kingdom legislation
increasing the tax rate from 17% to 19% was fully enacted. As
such, we incorporated the effects of the tax rate increase in our
current and deferred tax evaluation for the year ended December
31, 2020.
The Income Taxes Topic of the ASC requires that companies
assess whether valuation allowances should be established
against their deferred tax assets based on the consideration of all
available evidence using a ‘more likely than not” standard. In
making such judgments, significant weight is given to evidence
that can be objectively verified.
The level of deferred tax asset recognition is influenced by
management’s assessment of future profitability, which depends
on the existence of sufficient taxable income within the carry
forward periods available under the tax law.
Net Income Per Share
Basic net income per share is computed by dividing net income
attributable to common stockholders by the weighted-average
number of common shares outstanding and vested restricted
stock units
(together, "Basic Weighted Average Shares
Outstanding"). Diluted net income per share is computed by
dividing net income attributable to common stockholders by the
Basic Weighted-Average Shares Outstanding plus all potential
dilutive common shares outstanding during the period. All
potential dilutive common shares outstanding consider common
stock deliverable pursuant to warrants, vested and unvested
options, unvested restricted stock units and performance stock
units granted under existing compensation plans.
Reclassifications and Rounding
Reclassifications may have been made to prior years' amounts to
conform to the current year's presentation. Certain amounts and
tables in the consolidated financial statements and associated
notes may not add due to rounding.
| Ambac Financial Group, Inc. 87 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Supplemental Disclosure of Cash Flow Information
Year Ended December 31,
Cash paid during the period for:
Income taxes
Interest on long-term debt
Non-cash investing and financing activities:
Increase in long-term debt in exchange for AMPS
Exchange of investments in Puerto Rico COFINA bonds for new bonds issued in the Plan of Adjustment
Decrease in long-term debt as a result of an exchange for investment securities
Rehabilitation exit transaction discharge of all Deferred Amounts and cancellation of certain senior surplus
notes
2020
2019
2018
$
11 $
21 $
107
—
—
—
—
143
—
510
—
35
232
187
—
—
—
1,919
December 31,
2020
2019
2018
Reconciliation of cash, cash equivalents, and restricted cash reported within the Consolidated Balance
Sheets to the Consolidated Statements of Cash Flow:
Cash and cash equivalents
Restricted cash
Variable Interest Entity Restricted cash
Total cash, cash equivalents, and restricted cash shown on the Consolidated Statements of Cash Flows
$
20 $
24 $
13
2
35
55
2
81
63
19
1
83
Adopted Accounting Standards
Effective January 1, 2020, Ambac adopted the following
accounting standards:
CECL
For further discussion of CECL, refer to the Measurement of
Credit Losses (CECL), Investments, Net Premiums, Loans, and
in Note 2. Basis of
Loss and Loss Expenses sections
Presentation and Significant Accounting Policies; Note 8.
Financial Guarantee
Insurance Contracts; and Note 11.
Investments in the Notes to Consolidated Financial Statements
included in this Annual Report on Form 10-K for the year ended
December 31, 2020.
For available-for-sale debt securities, the updated guidance was
applied prospectively and for financial instruments measured at
amortized cost (i.e. premiums receivable, loans and reinsurance
recoverables),
the updated guidance was applied by a
cumulative effect adjustment to the opening balance of retained
earnings at January 1, 2020. This adjustment was not material to
retained earnings or any individual balance sheet line item.
Fair Value Measurement Disclosures
In August 2018, the FASB issued ASU 2018-13, Fair Value
Measurement (Topic 820) - Disclosure Framework - Changes to
the Disclosure Requirements for Fair Value Measurement. The
ASU modified various disclosure requirements on fair value
measurements. Relevant disclosures
removed,
modified and added are as follows:
that were
• Removals: (1) Amount of and reasons for transfers between
Level 1 and Level 2 of the fair value hierarchy, (2) Policy
for timing of transfers between levels, and (3) Valuation
processes for Level 3 fair value measurements.
• Modifications: (1) For investments in certain entities that
calculate net asset value, disclosures are required for the
timing of liquidation of an investee's assets and the date
when restrictions from redemption might lapse, only if the
investee has communicated the timing to the reporting
entity or publicly announced it and (2) Clarification that the
measurement uncertainty disclosure is to communicate
information about the uncertainty in measurement as of the
reporting date and not possible future changes.
• Additions: (1) Changes in unrealized gains and losses for
the period included in other comprehensive income for
recurring Level 3 fair value measurements held at the end
of the reporting period and (2) Range and weighted average
of significant unobservable inputs used to develop Level 3
fair value measurements. Alternatively, an entity may
disclose other quantitative information (such as the median
or arithmetic average) if it determines that it is a more
reasonable and rational method to reflect the distribution of
unobservable inputs used.
Disclosure amendments related to changes in unrealized gains
and losses included in other comprehensive income (loss) for
Level 3 instruments, the range and weighted average of
significant unobservable inputs, and the narrative description of
measurement uncertainty were applied prospectively only for
the most recent interim or annual period presented. All other
disclosure amendments were applied retrospectively to all
periods presented.
Refer to Note 10. Fair Value Measurements for further
disclosures.
VIE Related Party Guidance
In October 2018, the FASB issued ASU 2018-17, Consolidation
(Topic 810) - Targeted Improvements to Related Party Guidance
for Variable Interest Entities. To determine whether a decision-
making fee is a variable interest, under the new guidance a
reporting entity must consider indirect interests held through
related parties under common control on a proportional basis
| Ambac Financial Group, Inc. 88 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
rather than as a direct interest in its entirety (as was previously
required under prior GAAP). These amendments create
alignment between determining whether a decision making fee
is a variable interest and determining whether a reporting entity
within a related party group is the primary beneficiary of a VIE.
Adoption of this ASU did not impact Ambac's financial
statements.
Cloud Computing Arrangement Service Contracts
In August 2018, the FASB issued ASU 2018-15, Intangibles—
Goodwill and Other— Internal-Use Software (Subtopic 350-40)
- Customer’s Accounting for Implementation Costs Incurred in a
Cloud Computing Arrangement That Is a Service Contract. The
new guidance requires a customer in a cloud computing
arrangement that is a service contract to capitalize certain
implementation costs as if the arrangement was an internal-use
software project. The internal-use software guidance requires the
the
capitalization of certain costs
application development stage. That guidance also requires
entities to expense costs during the preliminary project and post-
implementation stages as they are incurred. Adoption of this
ASU did not impact Ambac's financial statements.
incurred only during
Effective December 31, 2020, Ambac adopted the following
accounting standard:
Defined Benefit and Other Postretirement Plans Disclosures
In August 2018, the FASB issued ASU 2018-14, Compensation
- Retirement Benefits - Defined Benefit Plans - General
(Subtopic 715-20) - Disclosure Framework - Changes to the
Disclosure Requirements for Defined Benefit Plans. The ASU
modifies various disclosure requirements for employers that
sponsor defined benefit pension or other postretirement plans.
Relevant disclosures that have been removed are the effects of a
one percentage point change in assumed health care cost trend
rates on the (a) aggregate of the service and interest cost
components of the net periodic pension cost and (b) benefit
obligation for postretirement healthcare benefits. Adoption of
this ASU only affected disclosures and did not have an impact
on Ambac's financial statements.
Future Application of Accounting Standards:
Reference Rate Reform
to ease
In March 2020, the FASB issued ASU 2020-04, Reference Rate
Reform (Topic 848) - Facilitation of the Effects of Reference
Rate Reform on Financial Reporting. The ASU provides
companies with optional guidance
the potential
accounting burden related to transitioning away from reference
rates, such as LIBOR, that are expected to be discontinued as a
result of initiatives undertaken by various jurisdictions around
the world. For example, under current GAAP, contract
modifications which change a reference rate are required to be
evaluated in determining whether the modifications result in the
establishment of new contracts or the continuation of existing
contracts. The amendments in this ASU provide optional
expedients and exceptions for applying GAAP to contracts,
hedging relationships, and other
transactions affected by
reference rate reform if certain criteria are met. The ASU can be
applied prospectively as of the beginning of the interim period
that includes March 12, 2020, (January 1, 2020 for calendar year
companies) or any date thereafter, but does not apply to contract
modifications and other transactions entered into or evaluated
after December 31, 2022. Management has not determined
when it will adopt this ASU, and the impact on Ambac's
financial statements is being evaluated.
3. BUSINESS COMBINATION
On December 31, 2020, Ambac completed the acquisition of
80% of the membership interests of Xchange for a purchase
price of $81 in cash. Xchange, whose management principals
retained the remaining 20% is a property and casualty Managing
General Underwriter ("MGU"), specializing in accident and
health insurance. Since its inception in 2010, Xchange's business
has been supported by major insurers, reinsurers, third party
administrators, brokers and producers.
The acquisition has been accounted for as a business
combination and advances Ambac's strategy of expanding into
the MGU and Managing General Agent ("MGA") sectors.
Based on the acquisition date and the complexity of the
underlying valuation work, certain amounts included in the
Company's Consolidated Financial Statements may be
provisional and thus subject to further adjustments within the
permitted measurement period as defined by ASC 805.
The following table summarizes the consideration paid for
Xchange and the estimated fair values of the aggregate assets
and liabilities acquired, as well as the fair value of the
noncontrolling interest, at the acquisition date:
Fair Value
Cash
Restricted cash
Intangible assets
Goodwill
Other assets
Total assets acquired
Other liabilities
Total liabilities assumed
Less: Redeemable noncontrolling interest
Total consideration
$
$
$
2
4
36
46
8
96
8
8
7
81
to
reflect
recorded
Goodwill was
the excess purchase
consideration over net assets acquired and primarily consists of
the future economic benefits that we expect to receive as a result
of the acquisition, driven by the value of Xchange's potential
future distribution and carrier relationships, and synergies with
other Ambac business operations. Goodwill that is expected to
be deductible for tax purposes amounts to approximately $36.
The fair values assigned to tangible and identifiable intangible
assets acquired and
liabilities assumed are based on
management’s estimates and assumptions at the time of
acquisition and is subject to updating as more detailed analyses
are completed and additional information about the fair value of
assets acquired and liabilities assumed becomes available.
The fair value of the redeemable non-controlling interest of $7
was estimated based on the non-controlling interest’s respective
share of Xchange's enterprise value, adjusted for the value of
Ambac's call option to purchase, and the minority owners' put
| Ambac Financial Group, Inc. 89 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
interests
option to sell to Ambac, respectively, the remaining 20%
membership
the
in Xchange.
Noncontrolling Interests section of Note 2. Basis of Presentation
and Significant Accounting Policies, for further information
regarding the terms of the call and put option, as well as the
redeemable noncontrolling interest balance sheet classification.
Please refer
to
The following table sets forth the estimated fair values of
identifiable intangible assets acquired and their estimated useful
lives as of the date of acquisition.
Weighted
Average
Remaining
Useful
Life - Years
Fair
Value
$
$
33
1
1
36
15.0
5.0
8.0
Distribution relationships
Non-compete agreements
Trade name
Total
The distribution relationships intangible represents existing
relationships Xchange maintains with a variety of brokers and
distributors across its product lines. It excludes the value of
potential future distribution relationships that may be developed,
which is included in goodwill. The non-compete agreements
intangible relates to agreements entered into with certain key
management personnel of Xchange. The trade name intangible
represents the rights to the Xchange Group brand name which is
well known in the marketplace Xchange competes in.
The overall weighted average useful life of the identified
amortizable intangible assets acquired is fourteen years.
As of December 31, 2020, future annual amortization of finite-
lived acquired intangible assets for the years 2021 through 2025
and thereafter is estimated to be:
Year
2021
2022
2023
2024
2025
Thereafter
Total
Estimated
Expense
$
$
3
3
3
3
3
22
36
• Ambac provides financial guarantees, including credit
derivative contracts, for various debt obligations issued by
special purpose entities, including VIEs ("FG VIEs");
• Ambac sponsors special purpose entities that issued notes
to investors for various purposes; and
• Ambac is an investor in collateralized debt obligations,
mortgage-backed and other asset-backed securities issued
by VIEs and its ownership interest is generally insignificant
to the VIE and/or Ambac does not have rights that direct
the activities that are most significant to such VIE.
FG VIEs
financial protection
Ambac’s subsidiaries provide financial guarantees in respect of
assets held or debt obligations of VIEs. Ambac’s primary
variable interest exists through this financial guarantee insurance
or credit derivative contract. The transaction structures provide
to Ambac. Generally, upon
certain
deterioration in the performance of a transaction or upon an
event of default as specified in the transaction legal documents,
Ambac will obtain certain control rights that enable Ambac to
remediate losses. These rights may enable Ambac to direct the
activities of the entity that most significantly impact the entity’s
economic performance. Under the 2018 Stipulation and Order,
AAC is required to obtain OCI approval with respect to the
exercise of certain significant control rights in connection with
policies that had previously been allocated to the Segregated
Account. Accordingly, AAC does not have the right to direct
the most significant activities of those FG VIEs.
impact
that most significantly
• We determined that Ambac’s subsidiaries generally have
the obligation to absorb a FG VIE's expected losses given
that they have issued financial guarantees supporting
certain liabilities (and in some cases certain assets). As
further described below, Ambac consolidates certain FG
VIEs in cases where we also have the power to direct the
the VIE’s
activities
economic performance due to one or more of the following:
(i) the transaction experiencing deterioration and breaching
performance triggers, giving Ambac the ability to exercise
certain control rights, (ii) Ambac being involved in the
design of the VIE and receiving control rights from its
inception, such as may occur from loss remediation
activities, or (iii) the transaction is not experiencing
deterioration, however due to the passive nature of the VIE,
Ambac's contingent control rights upon a future breach of
performance triggers is considered to be the power over the
most significant activity.
Because the acquisition occurred on last day of the reporting
period, there were no revenues or earnings of Xchange included
in Ambac's Consolidated Statement of Comprehensive Income
for the period ended December 31, 2020.
Pro forma information related to the acquisition has not been
presented as the impact was not material to the Company’s
financial results.
4. VARIABLE INTEREST ENTITIES
Ambac, with its subsidiaries, has engaged in transactions with
variable interest entities ("VIEs") in various capacities.
• A VIE is deconsolidated in the period that Ambac no
longer has such control rights, which could occur in
connection with the execution of remediation activities on
the transaction or amortization of insured exposure, either
of which may reduce the degree of Ambac’s control over a
VIE.
• Assets and liabilities of FG VIEs that are consolidated are
reported within Variable interest entity assets or Variable
interest entity liabilities on the Consolidated Balance
Sheets.
• The election to use the fair value option is made on an
instrument by instrument basis. Ambac has elected the fair
| Ambac Financial Group, Inc. 90 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
value option for consolidated FG VIE financial assets and
financial liabilities, except in cases where Ambac was
involved in the design of the VIE and was granted control
rights at its inception.
◦ When the fair value option is elected, changes in the fair
value of the FG VIE's financial assets and liabilities are
reported within Income (loss) on variable interest entities
in the Consolidated Statements of Total Comprehensive
Income (Loss), except for the portion of the total change
in fair value of financial liabilities caused by changes in
the instrument-specific credit risk which is presented
separately in Other comprehensive income (loss).
◦ In cases where the fair value option has not been elected,
the FG VIE's invested assets are fixed maturity securities
and are considered available-for-sale as defined by the
Investments - Debt Securities Topic of the ASC. These
assets are reported in the financial statements at fair
value with unrealized gains and losses reflected in
Accumulated Other Comprehensive Income (loss) in
Stockholders' Equity. The financial liabilities of these
FG VIEs consist of long term debt obligations and are
carried at par less unamortized discount. Income from
the FG VIE's available-for-sale securities (including
investment income, realized gains and losses and credit
impairments as applicable) and interest expense on long
term debt are reported within Income (loss) on variable
interest entities in the Consolidated Statements of Total
Comprehensive Income (Loss).
• Upon initial consolidation of a FG VIE, Ambac recognizes
a gain or loss in earnings for the difference between: (i) the
fair value of the consideration paid, the fair value of any
non-controlling interests and the reported amount of any
previously held interests and (ii) the net amount, as
measured on a fair value basis, of the assets and liabilities
consolidated. Upon deconsolidation of a FG VIE, Ambac
recognizes a gain or loss for the difference between: (i) the
fair value of any consideration received, the fair value of
any retained non-controlling investment in the VIE and the
carrying amount of any non-controlling interest in the VIE
and (ii) the carrying amount of the VIE’s assets and
liabilities. Gains or
from consolidation and
deconsolidation that are reported in earnings are reported
within Income (loss) on variable interest entities on the
Consolidated Statements of Total Comprehensive Income
(Loss).
losses
• The impact of consolidating such FG VIEs on Ambac’s
balance sheet is the elimination of transactions between the
consolidated FG VIEs and Ambac’s operating subsidiaries
and the inclusion of the FG VIE’s third party assets and
liabilities. For a financial guarantee insurance policy issued
to a consolidated VIE, Ambac does not reflect the financial
guarantee insurance policy in accordance with the related
insurance accounting rules under the Financial Services —
the ASC. Consequently, upon
Insurance Topic of
consolidation, Ambac eliminates the insurance assets and
liabilities associated with the policy from the Consolidated
Balance Sheets. Such insurance assets and liabilities may
include premium receivables, reinsurance recoverable,
deferred
recoverable,
unearned premiums, loss and loss expense reserves, ceded
premiums payable and insurance intangible assets. For
investment securities owned by Ambac that are debt
instruments issued by the VIE, the associated debt and
investment balances are eliminated upon consolidation.
ceded premium,
subrogation
FG VIEs which are consolidated may include non-recourse
assets or liabilities. FG VIEs' liabilities (and in some cases
assets) that are insured by the Company are with recourse,
because the Company guarantees the payment of principal and
interest in the event the issuer defaults. FG VIEs' assets and
liabilities that are not insured by the Company are without
recourse, because Ambac has not issued a financial guarantee
and is under no obligation for the payment of principal and
interest of these instruments. Therefore, the Company’s
economic exposure to consolidated FG VIEs is limited to the
financial guarantees issued for recourse assets and liabilities and
any additional variable interests held by Ambac. Additionally,
Ambac’s general creditors, other than those specific policy
holders which own the VIE debt obligations, do not have rights
with regard to the assets of the VIEs. Ambac evaluates the net
income effects and earnings per share effects to determine
attributions between Ambac and non-controlling interests as a
result of consolidating a VIE. Ambac has determined that the net
income and earnings per share effect of consolidated FG VIEs
are attributable to Ambac’s interests through financial guarantee
premium and loss payments with the VIE.
| Ambac Financial Group, Inc. 91 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
The following table summarizes the carrying values of assets and liabilities, along with other supplemental information related to VIEs that
are consolidated as a result of financial guarantees of Ambac UK and AAC:
December 31,
ASSETS:
Fixed maturity securities, at fair value:
Corporate obligations, fair value option
Municipal obligations, available-for-sale (1)
Total FG VIE fixed maturity securities, at fair value
Restricted cash
Loans, at fair value (2)
Derivative assets
Other assets
Total FG VIE assets
LIABILITIES:
Accrued interest payable
Long-term debt:
2020
Ambac
Assurance
Ambac UK
Total VIEs Ambac UK
2019
Ambac
Assurance
Total VIEs
$
3,215 $
— $
3,215 $
2,957 $
— $
2,957
—
3,215
1
2,998
41
—
139
139
1
—
—
2
139
3,354
2
2,998
41
2
—
2,957
1
3,108
52
1
164
164
1
—
—
2
164
3,121
2
3,108
52
3
6,255 $
143 $
6,398 $
6,119 $
167 $
6,286
— $
— $
— $
1 $
— $
1
$
$
Long-term debt, at fair value (3)
Long-term debt, at par less unamortized discount
Total long-term debt
Derivative liabilities
Total FG VIE liabilities
4,324
—
4,324
1,835
—
169
169
—
4,324
169
4,493
1,835
4,351
—
4,351
1,657
—
203
203
—
$
6,159 $
169 $
6,328 $
6,009 $
203 $
Number of FG VIEs consolidated
5
1
6
6
1
4,351
203
4,554
1,657
6,212
7
(1) Available-for-sale FG VIE fixed-income securities consist of municipal obligations with an amortized cost basis of $113 and $139, and aggregate gross
unrealized gains of $27 and $25 at December 31, 2020 and 2019, respectively. All such securities had contractual maturities due after ten years as of
December 31, 2020.
(2) The unpaid principal balances of loan assets carried at fair value were $2,546 and $2,618 as of December 31, 2020 and 2019, respectively.
(3) The unpaid principal balances of long-term debt carried at fair value were $3,769 and $3,800 as of December 31, 2020 and 2019, respectively.
The following schedule details the components of Income (loss) on variable interest entities for the affected periods:
Year ended December 31,
2020
2019
2018
Net change in fair value of VIE assets and liabilities reported under the fair value option
$
(1) $
13 $
Less: Credit risk changes of fair value option long-term debt reported through other comprehensive income
(loss)
Net change in fair value of VIE assets and liabilities reported in earnings
Investment income on available-for-sale securities
Net realized investment gains (losses) on available-for-sale securities
Interest expense on long-term debt carried at par less unamortized cost
Other expenses
Gain (loss) from consolidating FG VIEs
Gain (loss) from de-consolidating FG VIEs
Income (loss) on variable interest entities
(1)
(3)
7
8
(6)
—
—
—
—
14
10
13
(11)
(1)
15
(2)
$
5 $
38 $
3
(1)
2
—
—
—
—
—
2
3
As further discussed in Note 8. Financial Guarantee Insurance Contracts, on February 12, 2019, in connection with the COFINA POA, the
COFINA Class 2 Trust was established. Ambac was required to consolidate the COFINA Class 2 Trust, which resulted in a gain of $15.
The 2019 balance sheet impact of this additional VIE on the date of consolidation was an increase to total consolidated assets and liabilities
by $292 and $364, respectively. Ambac deconsolidated one, one and four VIEs for the years ended December 31, 2020, 2019 and 2018,
respectively. These VIEs were deconsolidated as a result of guaranteed bond retirements or loss mitigation activities that eliminated or
reduced Ambac's control rights that previously required Ambac to consolidate these entities, and resulted in the gain (loss) on
deconsolidation noted in the above table. The 2020 balance sheet impact of the deconsolidation was a decline in total consolidated assets
and liabilities by $0 and $0 from December 31, 2019 to December 31, 2020.
| Ambac Financial Group, Inc. 92 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
The following table displays the carrying amount of the assets, liabilities and maximum exposure to loss of Ambac’s variable interests in
non-consolidated VIEs resulting from financial guarantee and derivative contracts by major underlying asset classes, as of December 31,
2020 and 2019:
December 31, 2020:
Global structured finance:
Mortgage-backed—residential
Other consumer asset-backed
Other commercial asset-backed
Other
Total global structured finance
Global public finance
Total
December 31, 2019:
Global structured finance:
Mortgage-backed—residential
Other consumer asset-backed
Other commercial asset-backed
Other
Total global structured finance
Global public finance
Total
Carrying Value of Assets and Liabilities
Maximum
Exposure
To Loss (1)
Insurance
Assets (2)
Insurance
Liabilities (3)
Net Derivative
Assets
(Liabilities) (4)
$
4,308 $
2,024 $
580 $
$
$
1,050
24
970
6,352
21,646
24
3
—
2,051
263
239
1
13
834
287
27,998 $
2,314 $
1,122 $
5,373 $
1,913 $
523 $
1,373
314
1,107
8,165
23,341
31
9
7
1,961
287
216
6
18
762
321
$
31,506 $
2,247 $
1,083 $
—
—
—
8
8
—
8
—
—
—
8
8
—
7
(1) Maximum exposure to loss represents the maximum future payments of principal and interest on insured obligations and derivative contracts. Ambac’s
maximum exposure to loss does not include the benefit of any financial instruments (such as reinsurance or hedge contracts) that Ambac may utilize to
mitigate the risks associated with these variable interests.
(2)
(3)
Insurance assets represent the amount included in “Premium receivables” and “Subrogation recoverable” for financial guarantee insurance contracts on
Ambac’s Consolidated Balance Sheets.
Insurance liabilities represent the amount included in “Loss and loss expense reserves” and “Unearned premiums” for financial guarantee insurance
contracts on Ambac’s Consolidated Balance Sheets.
(4) Net derivative assets (liabilities) represent the fair value recognized on credit derivative contracts and interest rate swaps on Ambac’s Consolidated
Balance Sheets.
Ambac Sponsored Non-consolidated VIEs
In 1994, Ambac established a VIE to provide certain financial
guarantee clients with funding for their debt obligations. This
VIE was established as a separate legal entity, demonstrably
distinct from Ambac and that Ambac, its affiliates or its agents
could not unilaterally dissolve. The permitted activities of this
entity are contractually limited to purchasing assets from
Ambac, issuing medium-term notes ("MTNs") to fund such
purchases, executing derivative hedges and obtaining financial
incurred.
guarantee policies with respect
Ambac does not consolidate this entity because the exercise of
related control rights in such policies remain subject to OCI
approval under the Stipulation and Order, as discussed above.
Ambac elected to account for its equity interest in this entity at
fair value under the fair value option in accordance with the
Financial Instruments Topic of the ASC. We believe that the fair
value of the investments in this entity provides for greater
transparency for recording profit or loss as compared to the
equity method under the Investments – Equity Method and Joint
Ventures Topic of the ASC. At December 31, 2020 and 2019
indebtedness
to
the fair value of this entity was $1 and $3, respectively, and is
reported within Other assets on the Consolidated Balance
Sheets.
• Total principal amount of debt outstanding was $410 and
$403 at December 31, 2020 and 2019, respectively. In
each case, Ambac sold assets to this entity, which are
composed of utility obligations with a weighted average
rating of BBB+ at December 31, 2020, and weighted
average life of 0.2 years. The purchase by this entity of
financial assets was financed through the issuance of
MTNs, which are cross-collateralized by the purchased
assets. The MTNs have the same expected weighted
average life as the purchased assets. Derivative contracts
(interest rate swaps) are used within the entity for economic
hedging purposes only. Derivative positions were
established at the time MTNs were issued to purchase
financial assets. As of December 31, 2020, AAC had
financial guarantee insurance policies issued for all assets,
MTNs and derivative contracts owned and outstanding by
the entity.
| Ambac Financial Group, Inc. 93 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
• Insurance premiums paid to AAC by this entity are earned
in a manner consistent with other insurance policies, over
the risk period. Additionally, any losses incurred on such
insurance policies are included in Ambac’s Consolidated
Statements of Total Comprehensive Income (Loss). Under
the terms of an Administrative Agency Agreement, Ambac
provides certain administrative duties, primarily collecting
amounts due on the obligations and making interest
payments on the MTNs.
On August 28, 2014, Ambac monetized its ownership of the
junior surplus note issued to it by AAC by depositing the junior
surplus note into the Corolla Trust, a VIE, in exchange for cash
and the Corolla Certificate, which represented Ambac's right to
residual cash flows from the junior surplus note. Ambac does
not consolidate the VIE since it does not have a variable interest
in the trust. Ambac reports the Corolla Certificate as an equity
investment within Other investments on the Consolidated
Balance Sheets with associated results from operations included
within Net investment income (loss): Other investments on the
Consolidated Statements of Total Comprehensive Income
5. COMPREHENSIVE INCOME
(Loss). The equity investment had a carrying value of $51 and
$46 as of December 31, 2020 and 2019, respectively. As further
described in Note 1. Background and Business Description, on
January 22, 2021, AAC completed the Corolla Note Exchange
transaction whereby it acquired 100% of the outstanding
obligations of the Corolla trust and the owner trust certificate in
exchange for AAC surplus notes.
On February 12, 2018, Ambac formed a VIE, Ambac LSNI,
LLC ("Ambac LSNI"). Ambac LSNI issued Secured Notes in
connection with the Rehabilitation Exit Transactions. Ambac
does not consolidate the VIE since it does not have a variable
interest in the trust. Ambac reports its holdings of Secured
Notes within Fixed Maturity Securities in the Consolidated
Balance Sheets. The carrying value of Secured Notes held by
Ambac was $465 and $535 as of December 31, 2020 and 2019,
respectively. Ambac's debt obligation to the VIE (the Ambac
Note) had a carrying value of $1,641 and $1,763 at
December 31, 2020 and 2019, respectively, and is reported
within Long-term debt on the Consolidated Balance Sheets.
The following tables detail the changes in the balances of each component of accumulated other comprehensive income for the affected
periods:
Unrealized Gains
(Losses) on
Available- for
Sale Securities (1)
Amortization of
Postretirement
Benefit (1)
Gain (Loss) on
Foreign Currency
Translation (1)
Credit Risk
Changes of Fair
Value Option
Liabilities (1) (2)
Total
Year Ended December 31, 2020:
Beginning Balance
$
151 $
8 $
(116) $
(2) $
Other comprehensive income (loss)before
reclassifications
Amounts reclassified from accumulated other
comprehensive income (loss)
Net current period other comprehensive income
(loss)
Balance at December 31, 2020
Year ended December 31, 2019:
Beginning Balance
Other comprehensive income before
reclassifications
Amounts reclassified from accumulated other
comprehensive income
Net current period other comprehensive income
(loss)
Balance at December 31, 2019
$
$
$
36
(21)
15
(2)
(1)
(3)
23
—
23
—
1
1
166 $
5 $
(92) $
— $
86 $
9 $
(142) $
(2) $
142
(76)
65
151 $
1
(1)
(1)
8 $
26
—
26
(116) $
—
—
—
(2) $
42
58
(21)
37
79
(49)
168
(78)
91
42
(1) All amounts are net of tax and noncontrolling interest. Amounts in parentheses indicate reductions to Accumulated Other Comprehensive Income.
(2) Represents the changes in fair value attributable to instrument-specific credit risk of liabilities for which the fair value option is elected.
| Ambac Financial Group, Inc. 94 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
The following table details the significant amounts reclassified from each component of accumulated other comprehensive income, shown
in the above rollforward tables, for the affected periods:
Details about Accumulated Other
Comprehensive Income Components
Unrealized Gains (Losses) on Available-for-Sale
Securities (1)
Amortization of Postretirement Benefit
Prior service cost
Actuarial gains (losses)
Credit Risk Changes of Fair Value Option Liabilities
Total reclassifications for the period
Amount Reclassified from Accumulated
Other Comprehensive Income
Year Ended December 31,
2020
2019
Affected Line Item in the
Consolidated Statement of
Total Comprehensive Income
$
$
$
$
$
$
(22) $
1
(21) $
(1) $
—
(1)
—
(81) Net realized investment gains (losses)
4 Provision for income taxes
(76) Net of tax and noncontrolling interest
(1) Other income
— Other income
(1) Total before tax
— Provision for income taxes
(1) $
(1) Net of tax and noncontrolling interest
2 $
—
1
(21) $
Credit risk changes of fair value option
liabilities
—
— Provision for income taxes
— Net of tax and noncontrolling interest
(78) Net of tax and noncontrolling interest
(1) Net unrealized investment gains (losses) on available for sale securities are included in Ambac's Consolidated Statements of Comprehensive Income as
a component of Accumulated Other Comprehensive Income. Changes in these amounts include reclassification adjustments to exclude from "Other
comprehensive income (loss)" those items that are included as part of "Net income" for a period that has been part of "Other comprehensive income
(loss)" in earlier periods.
6. NET INCOME PER SHARE
As of December 31, 2020, 45,809,139 shares of AFG's common
stock (par value $0.01) and warrants entitling holders to acquire
up to 4,877,749 shares of new common stock at an exercise
price of $16.67 per share were outstanding. For the three years
ended December 31, 2020, 2019 and 2018, 34, 0 and 194
warrants were exercised, respectively, resulting in an issuance of
8, — and 194 shares of common stock, respectively.
On June 30, 2015, the Board of Directors of AFG authorized the
establishment of a warrant repurchase program that permits the
repurchase of up to $10 of warrants. On November 3, 2016, the
Board of Directors of AFG authorized a $10 increase to the
warrant repurchase program. For the years ended December 31,
2020 and 2019, AFG did not repurchase any warrants. As of
December 31, 2020, AFG had repurchased 985,331 warrants at a
total cost of $8 (average cost of $8.21 per warrant). The
remaining aggregate authorization at December 31, 2020 was
$12. In connection with the AMPS Exchange, AFG issued
824,307 of the repurchased warrants at a price of $9.72 per
warrant on August 3, 2018. Refer to Note 1. Background and
Business Description for further discussion of the AMPS
Exchange.
The following table provides a reconciliation of the common
shares used for basic net income per share to the diluted shares
used for diluted net income per share:
Year Ended
December 31,
Basic weighted
average shares
outstanding
Effect of potential
dilutive shares(1):
Warrants
Stock options
Restricted stock units
Performance stock
units (2)
Diluted weighted
average shares
outstanding
Anti-dilutive shares
excluded from the
above reconciliation
Stock options
Warrants
2020
2019
2018
46,147,062
45,954,908
45,665,883
—
—
—
—
—
—
—
—
441,104
—
77,572
375,276
46,147,062
45,954,908
46,559,835
16,121
16,667
16,667
4,877,754
4,877,783
Restricted stock units
302,145
249,263
Performance stock
units (2)
1,002,501
872,258
—
—
—
(1) For the years ended December 31, 2020 and 2019 , Ambac had
a net loss and accordingly excluded all potentially dilutive
securities from the determination of diluted loss per share as their
impact was anti-dilutive.
| Ambac Financial Group, Inc. 95 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
(2) Performance stock units are reflected based on the performance
metrics through the balance sheet date. Vesting of these units is
contingent upon meeting certain performance metrics. Although a
portion of these performance metrics have been achieved as of the
respective period end, it is possible that awards may no longer
meet the metric at the end of the performance period.
(1)
Includes $5,575 and $5,654 of Military Housing net par at
December 31, 2020 and 2019, respectively.
As of December 31, 2020 and 2019, the International Finance
guaranteed portfolio by location of risk was as outlined in the
table below:
Net Par Outstanding December 31,
2020
2019
United Kingdom
$
9,711 $
10,593
Italy
Austria
Australia
France
Other international (1)
Total International Finance
803
707
420
277
136
767
674
382
303
138
$
12,054 $
12,857
(1) Other international may include components of U.S. exposure.
Gross financial guarantees in force (principal and interest) were
$61,895 and $69,826 at December 31, 2020 and 2019,
respectively. Net financial guarantees in force (after giving
effect
to reinsurance) were $51,603 and $58,245 as of
December 31, 2020 and 2019, respectively.
In the United States, Colorado, California and New York were
the states with the highest aggregate net par amounts in force,
accounting for 7.0%, 6.2% and 5.4% of the total at December
31, 2020, respectively. No other state accounted for more than
5%. The highest single insured risk represented 2.9% of the
aggregate net par amount guaranteed.
7. FINANCIAL GUARANTEES IN FORCE
that
insure variable
interest entities
Financial guarantees outstanding includes the exposures of
policies
(“VIEs”)
consolidated in accordance with ASC Topic 810, Consolidation.
Financial guarantees outstanding includes the exposure of
policies that insure capital appreciation bonds which are
reported at the par amount at the time of issuance of the
insurance policy as opposed to the current accreted value of the
bonds. Financial guarantees outstanding exclude the exposures
of policies that insure bonds which have been called, pre-
refunded or refunded and excludes exposure of the policy that
insures the notes issued by Ambac LSNI as defined in Note 1.
Background and Business Description. The gross par amount of
financial guarantees outstanding was $39,070 and $43,908 at
December 31, 2020 and 2019, respectively. The par amount of
financial guarantees outstanding, net of reinsurance, was
$33,888 and $38,018 at December 31, 2020 and 2019,
respectively. As of December 31, 2020, the aggregate amount of
insured par ceded by AAC to reinsurers under reinsurance
agreements was $5,182 with the largest reinsurer accounting for
$2,398 or 6.1% of gross par outstanding at December 31, 2020.
As of December 31, 2020 and 2019, the guarantee portfolio was
diversified by type of guaranteed bond as shown in the
following table:
Net Par Outstanding December 31,
2020
2019
December 31,
Public Finance:
Housing revenue
Lease and tax-backed revenue
General obligation
Transportation revenue
Higher education
Utility revenue
Other
Total Public Finance
Structured Finance:
Mortgage-backed and home equity
Investor-owned utilities
Student loan
Structured Insurance
Asset-backed and other
Total Structured Finance
International Finance:
Sovereign/sub-sovereign
Investor-owned and public utilities
Transportation
Asset-backed and other
Total International Finance
Total
$
5,855 $
4,179
2,345
771
747
675
925
15,497
3,635
1,617
626
311
148
5,991
5,102
3,011
855
885
768
1,041
17,653
4,423
1,675
769
395
246
6,337
7,508
5,270
3,899
1,511
1,374
5,264
4,436
1,532
1,625
12,054
12,857
$
33,888 $
38,018
| Ambac Financial Group, Inc. 96 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
8. FINANCIAL GUARANTEE INSURANCE
CONTRACTS
Amounts presented in this Note relate only to Ambac’s non-
derivative insurance business for insurance policies issued to
beneficiaries, including VIEs, for which we do not consolidate
the VIE.
Net Premiums Earned
Below is the gross premium receivable roll-forward (direct and
assumed contracts) for the affected periods:
Year Ended
December 31,
Beginning premium
receivable
Adjustment to initially
apply ASU 2016-13
Premium receipts
Adjustments for
changes in expected
and contractual cash
flows (1)
Accretion of premium
receivable discount
Deconsolidation of
certain VIEs
Changes to allowance
for credit losses
Other adjustments
(including foreign
exchange)
2020
2019
2018
$
416 $
495 $
586
(3)
(46)
—
(48)
—
(56)
(6)
9
—
(4)
5
(38)
(42)
11
3
(2)
(6)
15
—
2
(10)
Ending premium
receivable (2)
$
370 $
416 $
495
(1) Adjustments for changes in expected and contractual cash flows
primarily due to reductions in insured exposure as a result of early
policy terminations and unscheduled principal paydowns.
(2) Premium receivable includes premiums to be received in foreign
denominated currencies most notably in British Pounds and Euros.
At December 31, 2020, 2019 and 2018 premium receivables
include British Pounds of $117 (£86), $129 (£97) and $131 (£103),
respectively, and Euros of $19 (€16), $26 (€23) and $31 (€27),
respectively.
The effect of reinsurance on premiums written and earned was
as follows:
Year Ended
December 31,
Direct
Assumed
Ceded (1)
Net
Premiums
2020:
Written
Earned
2019:
Written
Earned
2018:
Written
Earned
$
(1) $
— $
(1) $
65
1
12
$
(28) $
— $
31 $
75
—
10
$
(24) $
— $
17 $
119
—
8
—
54
(60)
66
(41)
111
(1)
Includes ceded premium activity related to the execution of new
reinsurance transactions during 2020, 2019 and 2018.
Ambac’s accelerated premium revenue for retired obligations for
the years ended December 31, 2020, 2019 and 2018, was $12,
$10 and $32, respectively.
The following table summarizes net premiums earned by
location of risk:
Year Ended
December 31,
United States
United Kingdom
Other international
Total
2020
2019
2018
$
$
32 $
55 $
24
(2)
17
(6)
88
19
5
54 $
66 $
111
The table below summarizes the future gross undiscounted
premiums to be collected and future premiums earned, net of
reinsurance at December 31, 2020:
Future
Premiums
to be
Collected (1)
Future
Premiums
to be
Earned Net of
Reinsurance (2)
Three months ended:
March 31, 2021
June 30, 2021
September 30, 2021
December 31, 2021
Twelve months ended:
December 31, 2022
December 31, 2023
December 31, 2024
December 31, 2025
Five years ended:
December 31, 2030
December 31, 2035
December 31, 2040
December 31, 2045
December 31, 2050
December 31, 2055
$
12 $
8
9
8
36
34
33
31
132
91
42
19
7
1
9
9
9
9
33
31
29
27
113
72
30
12
4
—
Total
$
462 $
386
(1) Future premiums to be collected are undiscounted and are used to
derive the discounted premium receivable asset recorded on
Ambac's balance sheet.
receivable balance
(2) Future premiums to be earned, net of reinsurance relate to the
unearned premiums liability and deferred ceded premium asset
recorded on Ambac’s balance sheet. The use of contractual lives
for many bond types which do not have homogeneous pools of
underlying collateral is required in the calculation of the premium
receivable as further described in Note 2. Basis of Presentation and
Significant Accounting Policies. This results in a different
premium
lives were
considered. If installment paying policies are retired or prepay
early, premiums reflected in the premium receivable asset and
amounts reported in the above table for such policies may not be
collected. Future premiums to be earned also considers the use of
contractual lives for many bond types which do not have
homogeneous pools of underlying collateral, which may result in
different unearned premium
lives were
considered. If those bonds types are retired early, premium
earnings may be negative in the period of call or refinancing.
if expected
if expected
than
than
| Ambac Financial Group, Inc. 97 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Credit Impairment for Premium Receivables:
Management evaluates premium receivables for expected credit
losses ("credit impairment") in accordance with the CECL
standard adopted January 1, 2020, which is further described in
Note 2. Basis of Presentation and Significant Accounting
Policies. Management's evaluation of credit impairment under
prior GAAP rules was not materially different. Most credit
impairment disclosures below were only made prospectively
from the CECL adoption date as they were not required
previously under GAAP.
As further discussed in Note 2. Basis of Presentation and
Significant Accounting Policies, the key indicator management
uses to assess the credit quality of premium receivables is
Ambac's internal risk classifications for the insured obligation
determined by the Risk Management Group.
Below is the amortized cost basis of premium receivables by risk classification code and asset class as of December 31, 2020:
Type of Guaranteed Bond
I
IA
II
III
IV
Total
Surveillance Categories as of December 31, 2020
Public Finance:
Housing revenue
Other
Total Public Finance
Structured Finance:
Mortgage-backed and home equity
Student loan
Structured insurance
Other
Total Structured Finance
International:
Sovereign/sub-sovereign
Investor-owned and public utilities
Other
Total International
Total (1)
$
155 $
13 $
— $
— $
— $
2
157
3
3
14
7
27
82
31
5
118
15
27
—
—
—
—
—
13
—
—
13
—
—
1
2
—
—
3
—
—
—
—
—
—
3
11
—
—
14
13
—
—
13
—
—
15
—
—
—
15
—
—
—
—
$
302 $
40 $
3 $
27 $
15 $
168
17
185
22
16
14
7
59
108
31
5
144
387
(1) The underwriting origination dates for all policies included are greater than five years prior to the current reporting date.
Below is a rollforward of the premium receivable allowance for
credit losses as of December 31, 2020:
(1) At December 31, 2019, $9 of premiums receivable were deemed
uncollectible as determined under prior GAAP rules.
Year Ended December 31,
Beginning balance (1)
Current period provision (2)
Write-offs of the allowance
Recoveries of previously written-off amounts
Ending balance
2020
(2) The year ended December 31, 2020, includes $3 from the adoption
$
$
9
9
(2)
—
17
of CECL.
At December 31, 2020, Ambac had past due premiums of $0, of
which $0 was over 120 days past due and has been included in
the allowance for credit losses.
| Ambac Financial Group, Inc. 98 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Loss and Loss Expense Reserves
A loss reserve is recorded on the balance sheet on a policy-by-policy basis as further described in Note 2. Basis of Presentation and
Significant Accounting Policies. Below are the components of the Loss and loss expense reserves liability and the Subrogation recoverable
asset at December 31, 2020 and 2019:
Balance Sheet Line Item
December 31, 2020:
Loss and loss expense reserves
Subrogation recoverable
Totals
December 31, 2019:
Loss and loss expense reserves
Subrogation recoverable
Totals
Below is the loss and loss expense reserve roll-forward, net of
subrogation recoverable and reinsurance, for the affected
periods.
Year Ended
December 31,
2020
2019
2018
Beginning gross loss and
loss expense reserves
$
(482) $
(107) $
4,114
Reinsurance recoverable
26
23
41
Beginning balance of net
loss and loss expense
reserves
Losses and loss expenses
(benefit) incurred:
Current year
Prior years (1)
Total (2)(3)
Loss and loss expenses
(recovered) paid:
Current year
Prior years (1)
Total
Foreign exchange effect
Ending net loss and loss
expense reserves
Impact of VIE
consolidation
Reinsurance recoverable (4)
Ending gross loss and loss
expense reserves
(508)
(130)
4,073
15
210
225
1
148
149
2
1
12
13
—
318
318
(1)
5
(228)
(224)
—
3,963
3,964
(15)
(430)
(436)
(130)
—
33
(72)
26
—
23
(397)
(482)
(107)
(1)
2018 loss and loss expenses (recovered) paid includes the
settlement of Deferred Amounts and Interest Accrued on Deferred
Amounts in the amount of $3,000 and $857, respectively in
connection with the Rehabilitation Exit Transactions through a
combination of cash, surplus notes and secured notes. 2018 loss
and loss expenses incurred includes a $288 loss and loss expense
benefit on these settled Deferred Amounts.
Present Value of Expected
Net Cash Flows
Claims and
Loss Expenses
Recoveries
Unearned
Premium
Revenue
Gross Loss and
Loss Expense
Reserves
$
$
$
$
2,060 $
(229) $
100
(2,256)
2,160 $
(2,486) $
1,835 $
(233) $
131
(2,160)
1,966 $
(2,394) $
(72) $
—
(72) $
(54) $
—
(54) $
1,759
(2,156)
(397)
1,548
(2,029)
(482)
(2) Total losses and loss expenses (benefit) includes $(11), $(7) and
$(2) for the years ended December 31, 2020, 2019 and 2018,
respectively, related to ceded reinsurance.
(3) Ambac records the impact of estimated recoveries related to
securitized loans in RMBS transactions that breached certain
representations and warranties within losses and loss expenses
(benefit). The losses and loss expense (benefit) incurred associated
with changes in estimated representation and warranty recoveries
for the year ended December 31, 2020, 2019 and 2018 was $(23),
$42 and $62, respectively.
(4) Represents reinsurance recoverable on future loss and loss
expenses. Additionally, the Balance Sheet line "Reinsurance
recoverable on paid and unpaid losses (net of allowance for credit
losses of $0 at December 31, 2020)" includes reinsurance
recoverables (payables) of $1, $0 and $1 as of December 31, 2020,
2019 and 2018, respectively, related to previously presented loss
and loss expenses and subrogation.
For 2020, the adverse development in prior years was primarily
a result of deterioration in Public Finance credits, including the
impact of lower discount rates, as discussed below in the
section, "Puerto Rico", partially offset by positive development
in the RMBS portfolio, including the benefit of lower discount
rates.
For 2019, the adverse development in prior years was primarily
a result of deterioration in Public Finance credits, primarily
Puerto Rico, partially offset by the benefit for (i) the Ballantyne
Re plc ("Ballantyne") and Puerto Rico COFINA commutations,
and (ii) positive development in the RMBS and Student Loan
portfolios.
For 2018, the net positive development in prior years was
primarily a result of the discount recorded on the Rehabilitation
Exit Transactions partially offset by negative development in the
Public Finance portfolio and interest accrued on Deferred
Amounts prior to the Rehabilitation Exit Transactions.
| Ambac Financial Group, Inc. 99 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
The tables below summarize information related to policies currently included in Ambac’s loss and loss expense reserves or subrogation
recoverable at December 31, 2020 and 2019. Gross par exposures include capital appreciation bonds which are reported at the par amount
at the time of issuance of the insurance policy as opposed to the current accreted value of the bond. The weighted average risk-free rate
used to discount loss reserves at December 31, 2020 and 2019 was 1.1% and 2.1%, respectively.
I
IA
Surveillance Categories as of December 31, 2020
III
IV
II
V
Total
Number of policies
Remaining weighted-average contract
period (in years) (1)
Gross insured contractual payments
outstanding:
Principal
Interest
Total
Gross undiscounted claim liability
Discount, gross claim liability
Gross claim liability before all
subrogation and before reinsurance
Less:
Gross RMBS subrogation (2)
Discount, RMBS subrogation
Discounted RMBS subrogation, before
reinsurance
Less:
Gross other subrogation (3)
Discount, other subrogation
Discounted other subrogation, before
reinsurance
Gross claim liability, net of all
subrogation and discounts, before
reinsurance
Less: Unearned premium revenue
Plus: Loss expense reserves
Gross loss and loss expense reserves
Reinsurance recoverable reported on
Balance Sheet (4)
$
$
$
$
$
$
$
$
$
40
10
25
18
15
8
15
16
132
14
5
7
842 $
1,375 $
595 $
1,469 $
3,246 $
47 $
279
1,011
484
215
1,427
26
232
14
7,573
3,443
1,121 $
2,386 $
1,079 $
1,685 $
4,673 $
72 $
11,016
3 $
—
49 $
(2)
40 $
541 $
1,690 $
72 $
2,395
(1)
(85)
(213)
(3)
(303)
3 $
47 $
40 $
456 $
1,477 $
69 $
2,092
— $
— $
— $
— $
(1,753) $
— $
(1,753)
—
—
—
—
—
3 $
(2) $
1
2 $
—
—
—
—
—
—
—
—
—
—
—
—
(36)
1
(35)
3
(1,751)
(706)
18
(689)
—
—
(12)
1
(11)
47 $
(16) $
2
39 $
(5) $
1
421 $
(17) $
5
(963) $
(30) $
59
58 $
(1) $
—
3
(1,751)
(755)
20
(735)
(394)
(72)
68
32 $
35 $
409 $
(933) $
57 $
(397)
— $
6 $
9 $
24 $
(6) $
— $
33
(1) Remaining weighted-average contract period is weighted based on projected gross claims over the lives of the respective policies.
(2) RMBS subrogation represents Ambac’s estimate of subrogation recoveries from RMBS transaction sponsors for representation and warranty ("R&W")
breaches.
(3) Other subrogation represents subrogation related to excess spread and other contractual cash flows on public finance and structured finance
transactions including RMBS.
(4) Reinsurance recoverable reported on Balance Sheet includes reinsurance recoverables of $33 related to future loss and loss expenses and $1 related to
presented loss and loss expenses and subrogation.
| Ambac Financial Group, Inc. 100 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Number of policies
Remaining weighted-average contract
period (in years) (1)
Gross insured contractual payments
outstanding:
Principal
Interest
Total
Gross undiscounted claim liability
Discount, gross claim liability
Gross claim liability before all subrogation
and before reinsurance
Less:
Gross RMBS subrogation (2)
Discount, RMBS subrogation
Discounted RMBS subrogation, before
reinsurance
Less:
Gross other subrogation (3)
Discount, other subrogation
Discounted other subrogation, before
reinsurance
Gross claim liability, net of all
subrogation and discounts, before
reinsurance
Less: Unearned premium revenue
Plus: Loss expense reserves
Gross loss and loss expense reserves
Reinsurance recoverable reported on
Balance Sheet (4)
$
$
$
$
$
$
$
$
$
Surveillance Categories as of December 31, 2019
I
IA
II
III
IV
V
Total
34
8
18
21
11
9
16
17
139
14
3
3
668 $
510 $
277 $
857 $
3,819 $
37 $
340
507
128
366
1,678
1,007 $
1,016 $
404 $
1,223 $
5,498 $
2 $
44 $
21 $
541 $
1,778 $
—
(5)
(1)
(152)
(381)
11
48 $
48 $
(2)
221
15
6,168
3,029
9,197
2,434
(541)
2 $
39 $
20 $
389 $
1,397 $
46 $
1,893
— $
— $
— $
— $
(1,777) $
— $
(1,777)
—
—
—
—
—
2 $
(1) $
1
1 $
—
—
—
—
—
—
—
—
—
—
—
—
(41)
4
(37)
49
(1,727)
(666)
47
(620)
—
—
(13)
3
(10)
39 $
(9) $
1
20 $
(1) $
1
353 $
(950) $
(7) $
(35) $
4
67
36 $
— $
—
49
(1,727)
(720)
53
(666)
(501)
(54)
73
30 $
20 $
349 $
(918) $
36 $
(482)
— $
6 $
7 $
24 $
(10) $
— $
26
(1) Remaining weighted-average contract period is weighted based on projected gross claims over the lives of the respective policies.
(2) RMBS subrogation represents Ambac's estimate of subrogation recoveries from RMBS transaction sponsors for R&W breaches.
(3) Other subrogation represents subrogation related to excess spread and other contractual cash flows on public finance and structured finance
transactions, including RMBS.
(4) Reinsurance recoverable reported on Balance Sheet includes reinsurance recoverables of $26 related to future loss and loss expenses and $0 related to
presented loss and loss expenses and subrogation.
COVID-19:
In March 2020, the outbreak of COVID-19 pandemic, caused by
a novel strain of the coronavirus, was recognized as a pandemic
by the World Health Organization, and the outbreak is
widespread globally, including in the markets in which we
operate. The COVID-19 outbreak had, and continues to have, a
notable impact on general economic conditions, including but
not limited to higher unemployment; volatility in the capital
markets; closure or severe curtailment of the operations and,
hence, revenues, of many businesses and public and private
enterprises to which we are directly or indirectly exposed, such
as hotels, restaurants, sports and entertainment facilities, airports
and other transportation facilities, and retail establishments,
mostly due to social distancing guidelines, travel bans and
restrictions, and business restrictions and shutdowns.
COVID-19 has adversely impacted Ambac's financial position
and results of operations as credit risk in the insured and
investment portfolios has increased. In the insured portfolio,
municipal, mortgage-backed, student loan and other asset
securitization exposures could be materially adversely impacted,
and as a result, with the exception of the mortgage-backed
sector, we increased loss reserves across each of these and other
sectors during the year ended December 31, 2020. In the
mortgage-backed sector, significantly lower interest rates have
increased excess spread levels and largely offset the impact of
higher mortgage delinquencies and projected losses resulting
from the COVID-19 pandemic.
In the U.S., significant monetary policy actions, fiscal stimulus
measures and other relief measures have helped to moderate the
economic impact of COVID-19. These measures include
monetary policy decisions, such as quantitative easing,
providing liquidity to financial institutions, providing liquidity
to credit markets, the Paycheck Protection Program Lending
Facility and the Main Street Business Lending Program;
| Ambac Financial Group, Inc. 101 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Congressional actions, such as the Coronavirus Aid, Relief and
Economic Security ("CARES") Act, the Paycheck Protection
Program And Health Care Enactment Act, the Families First
Coronavirus Response Act, and, most recently, the 2021
Consolidated Appropriations Act, which, among other things,
provides direct payments to households, support for small
businesses, renter assistance and funding for transport, airlines,
education and state and local governments. In addition, housing
measures, such as forbearance on mortgages and suspension of
foreclosures and evictions, and various executive orders have
helped to provide relief. Outside of the US, and in the United
Kingdom and Italy in particular, where Ambac has insured
portfolio exposure, various monetary policy, fiscal stimulus
measures and other actions have helped to moderate the
economic impact.
We are continuously evaluating and updating our view of the
macro economic environment as well as our specific credit view
of each of our insured exposures considering the significant
uncertainties brought upon us by the COVID-19 pandemic.
Accordingly, our loss reserves may be under-estimated as a
result of the ultimate scope, duration and magnitude of the
effects of COVID-19 pandemic.
Puerto Rico
its
Ambac has exposure to the Commonwealth of Puerto Rico (the
instrumentalities across several
"Commonwealth") and
different issuing entities with total net par exposure of $1,070.
Components of Puerto Rico net par outstanding include capital
appreciation bonds which are reported at the par amount at the
time of issuance of the related insurance policy as opposed to
the current accreted value of the bonds. Each issuing entity has
its own credit risk profile attributable to discrete revenue
sources, direct general obligation pledges or general obligation
guarantees. The Commonwealth of Puerto Rico and certain of its
instrumentalities have defaulted and may continue to default on
debt service payments, including payments owed on bonds
insured by AAC. AAC may be required to make significant
amounts of policy payments over the next several years, the
recoverability of which is subject to great uncertainty, which
may lead to a material increase in permanent losses causing a
material adverse impact on our results of operations and
financial condition. Our exposure to Puerto Rico is impacted by
the amount of monies available for debt service, which is in turn
affected by a number of factors including variability in
tax revenues,
economic growth and demographic
changes in law or the effects thereof, essential services expense,
federal
funding of Commonwealth needs, as well as
interpretation of legislation, legal documents, and updated
financial information (when available). In the near term, the
financial and economic outlook for Puerto Rico is dependent
upon a still fragile infrastructure, heightening its vulnerability to
additional weather events; and the trajectory of recovery from
the COVID-19 pandemic and related economic downturn. The
longer-term recovery of the Commonwealth economy and its
essential infrastructure will likely be dependent on, among other
factors,
the management, usage and efficacy of federal
resources.
trends,
Also important to Puerto Rico's economic growth, government
reform and creditor outcomes is the Commonwealth Fiscal Plan,
inform
certified by the Financial Oversight and Management Board for
Puerto Rico ("Oversight Board") on May 27, 2020. The
Commonwealth Fiscal Plan purports to incorporate the impact of
COVID-19 on the Commonwealth economy, and projects
diminished growth, budget surplus, and debt capacity as
compared to previous versions of the Commonwealth Fiscal
Plan. This is due to the Oversight Board’s projected impact of
COVID-19 on the Puerto Rico economy and tax collections as
well as related general uncertainty on the economic outlook. The
Commonwealth Fiscal Plan will significantly
the
Commonwealth Plan of Adjustment in the Commonwealth's
Title III proceeding, and the diminished economic performance
described in the new Commonwealth Fiscal Plan implies worse
outcomes than had been previously disclosed for creditors under
the Commonwealth Plan of Adjustment. However, as was the
case with previous versions of the Commonwealth Fiscal Plan,
the current version of the Commonwealth Fiscal Plan lacks a
high degree of transparency regarding the underlying data,
assumptions and rationales supporting
those assumptions,
making reconciliation and due diligence difficult. As a result, it
is difficult to predict the long-term capacity and willingness of
the Puerto Rico government and its instrumentalities to pay debt
service on bonded debt and how their debt burden and financial
flexibility might affect AAC's claims development potential, risk
profile and long-term financial strength. According to a letter
sent January 19, 2021, from the Oversight Board's Executive
Director, Natalie Jaresko, to Governor Pedro Pierluisi and
legislative leaders, the Oversight Board expects to certify an
updated Commonwealth Fiscal Plan by April 23, 2021.
Substantial uncertainty exists with respect to the ultimate
outcome for creditors in Puerto Rico, such as AAC, due to,
among other matters, the Commonwealth Plan of Adjustment
and changes that are anticipated to be made thereto to reflect the
terms of the Second Amended PSA; political uncertainty and
leadership turnover; legislation enacted by the Commonwealth
and the federal government, including PROMESA; and actions
taken pursuant to such laws, including Title III filings. AAC is
involved in multiple litigations relating to such actions and other
issues and may not be successful in pursuing claims or
protecting its interests. As a result of litigation or other aspects
of the restructuring processes, the differences among the credits
insured by AAC may not be respected.
AAC has participated and may continue to participate in
mediation related to potential debt restructurings. Mediation
may not be productive or may not resolve AAC's claims in a
manner that avoids significant losses. No assurances can be
given that negotiations will be successfully concluded, that
Commonwealth, Oversight Board and creditor parties will reach
definitive agreements on additional debt restructurings, that any
negotiated transaction debt restructuring, definitive agreement or
plans of adjustment will be approved by the court and
completed, or that any transaction or plans of adjustment will
not have an adverse impact on Ambac's financial condition or
results. It is possible that certain restructuring process solutions,
together with associated legislation, budgetary, and/or public
policy proposals could be adopted and could further impair our
exposures, causing losses that could have a material adverse
impact on our results of operations and financial condition.
| Ambac Financial Group, Inc. 102 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
reflecting
While our reserving scenarios account for a wide range of
possible outcomes,
the significant uncertainty
regarding future developments and outcomes, given our
exposure to Puerto Rico and the economic, fiscal, legal and
political uncertainties associated therewith as well as the
residual effects emanating from
the damage caused by
hurricanes Maria and Irma in 2017, the earthquakes that began
in late December 2019, and COVID-19 our loss reserves may
ultimately prove to be insufficient to cover our losses,
potentially having a material adverse effect on our results of
operations and financial position, and may be subject to material
volatility.
Ambac has considered these developments and other factors in
evaluating its Puerto Rico loss reserves. During the year ended
December 31, 2020, Ambac had incurred losses associated with
its Domestic Public Finance insured portfolio of $256, which
was primarily impacted by the continued uncertainty and
volatility of the situation in Puerto Rico as well as a decline in
the rate used to discount reserves. While management believes
its reserves are adequate to cover losses in its Public Finance
insured portfolio, there can be no assurance that Ambac may not
incur additional losses in the future, given the circumstances
described herein. Such additional losses may have a material
adverse effect on Ambac’s results of operations and financial
condition and may result in adverse consequences such as
impairing the ability of AAC to honor its financial obligations;
the
initiation of rehabilitation proceedings against AAC;
decreased likelihood of AAC delivering value to Ambac,
through dividends or otherwise; and a significant drop in the
value of securities issued or insured by Ambac or AAC. For
public finance credits, including Puerto Rico, as well as other
issuers, for which Ambac has an estimate of expected loss at
December 31, 2020, the possible increase in loss reserves under
stress or other adverse conditions and circumstances was
estimated to be approximately $1,200 This possible increase in
loss reserves under stress or other adverse conditions is very
significant and if we were to experience such incremental losses,
our stockholders’ equity as of December 31, 2020, would
decrease from $1,140 to $(60). However, there can be no
assurance that losses may not exceed such amount.
COFINA Debt Restructuring
On February 4, 2019, the COFINA Plan of Adjustment
("COFINA POA") was confirmed and the Commonwealth 9019
motion was approved by the U.S. District Court for the District
of Puerto Rico. On February 12, 2019, the COFINA POA went
effective. Pursuant to the POA, all existing COFINA senior and
subordinate bonds were discharged and exchanged for cash and
new COFINA current interest and capital appreciation bonds
("new COFINA bonds"). The cash and new COFINA bonds
allocated to COFINA senior bondholders equaled approximately
93% (considering the new COFINA bonds at par) of such senior
bondholders’ allowed claim, in the amount of the COFINA
senior bond accreted value, as of, but not including, May 5,
2017 (the COFINA Title III Petition Date).
As a result of the COFINA POA, and subsequent commutations,
amendments, and redemptions of obligations of the COFINA
Class 2 Trust, AAC's net par outstanding was reduced to $80 as
of December 31, 2020. AAC's remaining policy obligation of
$80 net par is an asset of the COFINA Class 2 Trust, which
holds a ratable distribution of new COFINA bonds, the interest
and principal from which can be used to partially offset
Ambac’s remaining insurance liability. As further discussed in
Note 4. Variable Interest Entities, AAC consolidates the
COFINA Class 2 Trust.
At this time, it is unclear what impact the COFINA restructuring
will have, if any, on the prospective recoveries of AAC's other
insured Puerto Rico instrumentalities.
Representation and Warranty Recoveries
Ambac records estimated RMBS R&W subrogation recoveries
for breaches of R&W by sponsors of certain RMBS transactions.
For a discussion of the approach utilized to estimate RMBS
R&W subrogation recoveries, see Note 2. Basis of Presentation
and Significant Accounting Policies.
Ambac has recorded RMBS R&W subrogation recoveries of
$1,751, ($1,725 net of reinsurance) and $1,727, ($1,702 net of
reinsurance) at December 31, 2020 and 2019, respectively.
Below is the rollforward of RMBS R&W subrogation for the
affected periods:
Year ended December 31,
2020
2019
2018
Discounted RMBS
subrogation recovery (gross
of reinsurance) at beginning
of year
All other changes (1)
Discounted RMBS
subrogation recovery (gross
of reinsurance) at end of
year
$
1,727 $
1,771 $
1,834
23
(43)
(64)
$
1,751 $
1,727 $
1,771
(1) All other changes which may impact RMBS R&W subrogation
recoveries include changes in actual or projected collateral
performance, changes in the creditworthiness of a sponsor and the
projected timing of recoveries.
Ceded Reinsurance
AAC has reinsurance in place pursuant to surplus share treaty
and facultative reinsurance agreements. The reinsurance of risk
does not relieve AAC of its original liability to its policyholders.
In the event that any of AAC’s reinsurers are unable to meet
their obligations under reinsurance contracts, AAC would,
nonetheless, be liable to its policyholders for the full amount of
its policy.
AAC’s reinsurance assets, including deferred ceded premiums
and reinsurance recoverables on losses amounted to $103 at
December 31, 2020. Credit exposure existed at December 31,
2020, with respect to reinsurance recoverables to the extent that
any reinsurer may not be able to reimburse AAC under the terms
of these reinsurance arrangements. At December 31, 2020, there
were ceded reinsurance balances payable of $27 offsetting this
credit exposure.
To minimize its credit exposure to losses from reinsurer
insolvencies, AAC (i) is entitled to receive collateral from its
reinsurance counterparties in certain reinsurance contracts and
(ii) has certain cancellation rights that can be exercised by AAC
in the event of rating agency downgrades of a reinsurer (among
| Ambac Financial Group, Inc. 103 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
other events and circumstances). AAC held letters of credit and
collateral amounting to $117 from its reinsurers at December 31,
2020.
table represents
The following
to
reinsurers and unsecured reinsurance recoverable at December
31, 2020.
the percentage ceded
December 31,
2020
2019
Gross carrying value of insurance
intangible asset
$
1,281 $
1,273
Accumulated amortization of insurance
intangible asset
908
Net insurance intangible asset
$
373 $
847
427
The estimated future amortization expense for the net insurance
intangible asset is as follows:
Percentage
Ceded Par
46%
Net Unsecured
Reinsurance
Recoverable (1)
—
$
Amortization expense (1) (2)
2021
Reinsurers
Assured Guaranty Re Ltd
Build America Mutual
Assurance Company (2)
Assured Guaranty Corporation
Sompo Japan Nipponkoa
Insurance, Inc.
43
8
3
Total
100%
$
30
4
—
34
2022
2023
2024
2025
Thereafter
$
39
35
32
29
26
$
213
(1) Represents reinsurance recoverables on paid and unpaid losses and
deferred ceded premiums, net of ceded premium payables due to
reinsurers, letters of credit, and collateral posted for the benefit of
AAC.
(2) Build America Mutual Assurance Company has an S&P rating of
AA.
Credit Impairment for Reinsurance Recoverables:
Management evaluates reinsurance recoverables for expected
credit losses ("credit impairment") in accordance with the CECL
standard adopted January 1, 2020, which is further described in
Note 2. Basis of Presentation and Significant Accounting
Policies. Management's evaluation of credit impairment under
prior GAAP rules was not materially different. Most credit
impairment disclosures below were only made prospectively
from the CECL adoption date as they were not required
previously under GAAP.
The key indicator management uses to assess the credit quality
of reinsurance recoverables is collateral posted by the reinsurers
and independent rating agency credit ratings. For the majority of
reinsurance contracts where Ambac has recorded a recoverable,
the fair value of collateral posted by the reinsurer to AAC
exceeds AAC's reinsurance recoverable carrying value, net of
ceded premiums payable. AAC has credit exposure of $1 and
has recorded an allowance for credit losses of $0 at December
31, 2020. The calculation of the allowance excludes deferred
ceded premiums as it is a non-monetary asset.
Insurance Intangible Asset
The insurance intangible amortization expense is included in the
Consolidated Statements of Total Comprehensive Income (Loss)
as shown below.
Year Ended December 31,
2020
2019
2018
Insurance amortization
expense
$
57 $
295 $
107
The insurance intangible asset and accumulated amortization are
included in the Consolidated Balance Sheets, as shown below.
(1) The insurance intangible asset will be amortized using a level-yield
method based on par exposure of the related financial guarantee
insurance or reinsurance contracts as described in Note 2. Basis of
Presentation and Significant Accounting Policies. Future
amortization considers the use of contractual lives for many bond
types which do not have homogeneous pools of underlying
collateral. Actual maturities will differ from contractual maturities
because borrowers may have the right to call or prepay certain
obligations. If those bonds types are retired early, amortization
expense may differ in the period of call or refinancing from the
amounts provided in the table above.
(2) The weighted-average amortizations period is 7.5 years.
9. INSURANCE REGULATORY RESTRICTIONS
United States
AAC is domiciled in the State of Wisconsin and, as such, it is
subject to the insurance laws and regulations of the State of
Wisconsin (the “Wisconsin Insurance Laws”) and is regulated
by the OCI. Everspan Indemnity Insurance Company ("Everspan
Indemnity") and
its wholly owned subsidiary, Everspan
Insurance Company ("Everspan Insurance" and, together with
Everspan Indemnity, "Everspan" or the “Everspan Group”), are
domiciled in Arizona and are subject to the insurance laws and
regulations of Arizona (the “Arizona Insurance Laws” and
together with the Wisconsin Insurance Laws, the “State
Insurance Laws”). Everspan is regulated by the Arizona
Department of Insurance and Financial Institutions (“DIFI”). In
addition, both Ambac Assurance and Everspan Insurance are
subject to the insurance laws and regulations of the other
jurisdictions in which they are licensed.
Insurance laws and regulations applicable to insurers vary by
jurisdiction, but the insurance laws and regulations applicable to
our insurance carriers generally require them to maintain
minimum standards of business conduct and solvency; to meet
certain financial tests; and to file policy forms, premium rate
schedules and certain reports with regulatory authorities,
including information concerning capital structure, ownership,
financial condition, corporate governance and enterprise risk.
Regulated insurance companies are also required to file
quarterly and annual statutory financial statements in each
jurisdiction in which they are licensed. The level of supervisory
authority that may be exercised by non-domiciliary insurance
regulators varies by jurisdiction. Generally, however, non-
| Ambac Financial Group, Inc. 104 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
domiciliary regulators are authorized to suspend or revoke the
insurance license they issued and to impose restrictions on that
license in the event that laws or regulations are breached by a
regulated insurance company or in the event that continued or
unrestricted licensing of the regulated insurance company
constitutes a “hazardous condition” (or meets a similar standard)
in the opinion of the regulator.
The domiciliary regulators of Ambac Assurance and Everspan,
OCI and DIFI, respectively, have primary regulatory authority,
including with respect to the initiation and administration of
rehabilitation or liquidation proceedings. Additionally, the
accounts and operations of Ambac Assurance and Everspan are
subject to periodic comprehensive financial examinations by,
respectively, the OCI and DIFI. The State Insurance Laws
require regulated insurance companies to maintain minimum
standards of business conduct, maintain minimum surplus to
policyholders, meet certain financial tests, and file certain
reports, including information concerning their capital structure,
ownership, financial condition, corporate governance and
enterprise risk. The State Insurance Laws also require prior
approval by OCI and DIFI, respectively, of certain transactions
between AAC or Everspan, respectively, and their affiliates.
Ambac Assurance, because it is a financial guarantee insurer is
not subject to risk-based capital requirements.
In December 2020, Everspan Insurance completed its re-
domestication from Wisconsin to Arizona and obtained broad
authority to write property and casualty insurance (while
contemporaneously surrendering its authority to write financial
guaranty insurance) in Arizona. Everspan Insurance is seeking
similar amendments to its certificates of authority in all other
states. Everspan Insurance is subject to risk-based capital
requirements.
Everspan Indemnity was formed in 2020 as a domestic surplus
lines insurer in Arizona and, accordingly, is eligible to write
property and casualty insurance as an excess and surplus lines
insurer in all states by virtue of the U.S. Nonadmitted and
Reinsurance Reform Act of 2010. Everspan Indemnity is subject
to risk-based capital requirements. Neither Everspan Insurance
nor Everspan Indemnity has yet issued any new policies.
Ambac Assurance and Everspan are in compliance with the
minimum capital and surplus levels required under the State
Insurance Laws required to transact all business written to date.
is subject
Xchange, like other managing general agents and program
administrators,
licensing requirements and
to
regulation by insurance regulators in various states in which
they conduct business. Every state and Washington, D.C. have
enacted a version of the NAIC Model Managing General Agents
Act, which governs licensing and the relationship between
insurers and managing general agents.
In addition to the legal restrictions applicable to AAC as
described herein, pursuant to the terms of the Settlement
Agreement, the Stipulation and Order and the indenture for the
Tier 2 Notes, AAC must seek prior approval by OCI of certain
corporate actions. The Settlement Agreement, Stipulation and
Order and indenture for the Tier 2 Notes include covenants
the operations of AAC. The Settlement
which restrict
Agreement will remain in force until the surplus notes that were
issued pursuant to the Settlement Agreement have been
redeemed, repurchased or repaid in full. The Stipulation and
Order will remain in force for so long as OCI determines it to be
necessary. The indenture for the Tier 2 Notes will remain in
force until the Tier 2 Notes have been redeemed, repurchased or
repaid in full. Certain of the restrictions in the Settlement
Agreement and the indenture for the Tier 2 Notes may be
waived with the approval of the OCI and/or the requisite
percentage of holders of the related debt securities.
Although not domiciled in New York, AAC is nevertheless
subject to the New York insurance law governing financial
insurers. New York’s comprehensive financial
guarantee
guarantee insurance law defines the scope of permitted financial
guarantee insurance and governs the conduct of business of all
financial guarantors licensed to do business in New York,
including AAC. The New York financial guarantee insurance
law also establishes single and aggregate risk limits with respect
to insured obligations insured by financial guarantee insurers.
Such single risk limits are specific to the type of insured
obligation (for example, municipal or asset-backed). Under the
limits, policyholders’ surplus and contingency
aggregate
reserves must at least equal a percentage of aggregate net
liability that is equal to the sum of various percentages of
aggregate net liability for various categories of specified
obligations. At December 31, 2020, AAC is in compliance with
applicable aggregate risk limits but not in compliance with
applicable single risk limits. Through run-off of the portfolio,
AAC will continue to seek the reduction in its exposure for
compliance with applicable single and aggregate risk limits, but
may not be able to do so.
The financial statements of AAC and Everspan are prepared on
the basis of accounting practices prescribed or permitted by the
State Insurance Laws and OCI and DIFI actions thereunder.
AAC and Everspan use such statutory accounting practices
prescribed or permitted by the OCI and DIFI, respectively, for
determining and reporting their financial condition and results of
operations, including for determining solvency under the State
Insurance Laws. Both Wisconsin and Arizona have adopted the
National Association of Insurance Commissioners (“NAIC”)
accounting practices and procedures manual (“NAIC SAP”) as a
component of prescribed practices as codified in each state’s
applicable law or regulation.
Statutory policyholder surplus differs from stockholder's equity
determined under GAAP principally due to statutory accounting
rules that treat financial guarantee premiums and loss reserves,
investments, consolidation of subsidiaries or variable interest
entities and surplus notes differently.
• AAC’s statutory policyholder surplus was $865 at
December 31, 2020, as compared to $1,088 as of December
31, 2019.
• Everspan Indemnity has statutory policyholder surplus of
$26 as of December 31, 2020. At December 31, 2020, there
were no significant differences from stockholder's equity
under GAAP.
| Ambac Financial Group, Inc. 105 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Additionally, the OCI has prescribed additional practices and
has permitted accounting practices for AAC. As a result of the
prescribed and permitted practices discussed below, AAC’s
statutory surplus at December 31, 2020 and 2019 was higher by
$40 and lower by $12, respectively, than if AAC had reported
such amounts in accordance with NAIC SAP.
Everspan does not have any prescribed or permitted practices at
December 31, 2020 or December 31, 2019.
Prescribed Accounting Practices
OCI has prescribed the following accounting practices that differ
from NAIC SAP for AAC:
• Paragraph 8 of Statement of Statutory Accounting
Principles No. 60 “Financial Guaranty Insurance” allows
for a deduction from loss reserves for the time value of
money by application of a discount rate equal to the
average rate of return on the admitted assets of the financial
guaranty insurer as of the date of the computation of the
reserve. The discount rate shall be adjusted at the end of
each calendar year. Additionally, in accordance with
paragraph 13.e of Statutory Accounting Principles No. 97
"Investments in Subsidiary, Controlled and Affiliated
Entities" and paragraph 8 of Statutory Accounting
Principles No. 5R “Liabilities, Contingencies and
Impairments of Assets - Revised”, AAC records probable
losses on its subsidiaries for which it guarantees their
obligations. AAC also discounts probable
losses on
guarantees of subsidiary obligations using a discount rate
equal to the average rate of return on its admitted assets.
AAC’s average rates of return on its admitted assets at
December 31, 2020 and 2019 were 4.56% and 5.43%,
respectively. OCI has directed AAC to utilize a prescribed
discount rate of 5.10% for the purpose of discounting both
its loss reserves and its estimated impairment losses on
subsidiary guarantees.
• Paragraph 4 of Statement of Statutory Accounting
Principles No. 41 “Surplus Notes” (“SSAP 41”) states that
proceeds received by the issuer of surplus notes must be in
the form of cash or other admitted assets having readily
determinable values and liquidity satisfactory to the
commissioner of the state of domicile. Under statutory
accounting principles, surplus notes issued in conjunction
with commutations or the settlement of obligations would
be valued at zero upon issuance pursuant to paragraph 4,
SSAP 41. OCI has directed the Company to record surplus
notes issued in connection with commutations or the
settlement of obligations at full par value upon issuance.
The surplus notes issued have a claim against surplus
senior to the preferred and common shareholders.
• Paragraph 35 of Statement of Statutory Accounting
Principles No. 43R ”Loan-backed and Structured
Securities” states
that when an other-than-temporary
impairment ("OTTI") has occurred, the amount of the OTTI
recognized as a realized loss shall equal the difference
between the investment’s amortized cost basis and the
present value of cash flows expected to be collected,
discounted at the loan-backed or structured security’s
effective interest rate. Beginning June 11, 2014, as a result
of the amended Segregated Account Rehabilitation Plan,
OCI has directed the Company to not evaluate investments
in AAC insured securities with policies that were allocated
to the Segregated Account for OTTI and require all such
investments be reported at amortized cost regardless of its
NAIC risk designation. This accounting determination was
intended to recognize that AAC continues to maintain
statutory loss reserves without adjustment for the economic
investment
effects of
securities, improve transparency to the users of the
statutory financial statements and to minimize operational
risks. Effective February 12, 2018, with the Segregated
Account's exit from Rehabilitation, this prescribed practice
is no longer applicable for OTTI evaluations going
forward.
its ownership of
insured
the
Permitted Accounting Practices
OCI has allowed the following permitted practice for AAC:
• Wisconsin accounting practices for changes to contingency
reserves differ from NAIC SAP. Under NAIC SAP,
contributions to and releases from the contingency reserve
are recorded via a direct charge or credit to surplus. Under
the Wisconsin Administrative Code, contributions to and
releases from the contingency reserve are to be recorded
through underwriting income. AAC received permission
from OCI to record contributions to and releases from the
contingency reserve, in accordance with NAIC SAP.
United Kingdom
in
the United Kingdom, with
The Prudential Regulatory Authority (“PRA”) and Financial
Conduct Authority (“FCA”) (and their predecessor regulator the
Financial Services Authority (“FSA”)) are the dual statutory
regulator responsible for regulating the financial services
industry
the purpose of
maintaining confidence in the U.K. financial system, providing
public understanding of the system, securing the proper degree
of protection for consumers and helping to reduce financial
crime. In addition, until December 31, 2020, the regulatory
regime in the United Kingdom must have complied with certain
EU legislation binding on all EU member states.
These regulators have exercised significant oversight of Ambac
UK since 2008, after Ambac, AAC and Ambac UK began
experiencing financial stress. In 2009, Ambac UK’s license to
write new business was curtailed by the FSA and the insurance
license was limited to undertaking only run-off related activity.
As such, Ambac UK is authorized to run-off its credit,
suretyship and financial guarantee insurance portfolio in the
United Kingdom, and (until December 31, 2020) to do the same
through a branch in Milan, Italy, and a number of other
European Union (“EU”) countries. Until December 31, 2020,
EU legislation had allowed Ambac UK to conduct business in
EU states other
through a
“passporting” arrangement, which eliminated the necessity of
those other EU
additional
jurisdictions. These passporting arrangements ended on
December 31, 2020, when the U.K.’s Brexit transitional
arrangements with the EU ended. Ambac UK closed its Milan
branch and transferred it's remaining policy to the United
Kingdom in December 2020. Ambac UK's remaining policies in
the EU were either commuted or the benefits of those policies
licensing or authorization
the United Kingdom
than
in
| Ambac Financial Group, Inc. 106 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
were transferred to United Kingdom entities in advance of
December 31, 2020.
The PRA requires that non-life insurance companies such as
Ambac UK maintain a margin of solvency at all times in respect
of the liabilities of the insurance company, the calculation of
which depends on the type and amount of insurance business a
company writes. These solvency requirements were amended on
January 1, 2016, in order to implement the European Union's
"Solvency II" directive on risk-based capital. Notwithstanding
the foregoing, Ambac UK is deficient in terms of compliance
with currently applicable regulatory capital requirements under
Solvency II directive. The PRA and FCA are aware of the same,
its
and dialogue between Ambac UK management and
regulators remains ongoing with respect
to options for
addressing the shortcoming, although such options remain few.
Dividend Restrictions, Including Contractual Restrictions
Due to losses experienced by AAC, it has been unable to pay
ordinary dividends to AFG since 2008 and will be unable to pay
common dividends in 2021 without the prior consent of the OCI,
which is unlikely. AAC’s ability to pay dividends is further
restricted by the Settlement Agreement (as described below), by
the indenture for the Tier 2 Notes (as described below), by the
terms of its AMPS (as described below) and by the Stipulation
and Order. See Note 1. Background and Business Description
for further information. AAC is not expected to make dividend
payments to AFG for the foreseeable future.
Everspan does not have sufficient earned surplus at this time to
pay ordinary dividends under the Arizona Insurance Laws.
Subject to the foregoing, pursuant to the State Insurance Laws,
AAC and Everspan may declare dividends, subject
to
restrictions in their respective articles of incorporation, provided
that, after giving effect to the distribution, such dividends would
not violate certain statutory solvency, surplus and asset tests.
Board action authorizing a shareholder distribution by AAC
(other than stock dividends) must be reported to the OCI at least
30 days prior to payment, unless the distribution is no more than
15% larger than for the corresponding period in the previous
year. Everspan similarly must report to the DIFI all dividends
and other distributions to shareholders within five business days
following their declaration and at least ten business days before
payment of the dividend or distribution.
In addition, Wisconsin Insurance Laws restrict the payment of
extraordinary dividends, which is any distribution which,
together with distributions in the prior 12 months, is greater than
the lesser of (a) 10% of policyholders’ surplus as of the
preceding December 31, and (b) the greater of (i) statutory net
income (loss) for the calendar year preceding the date of the
dividend, minus realized capital gains for that calendar year or
(ii) the aggregate of statutory net income (loss) for three
calendar years preceding the date of the dividend, minus realized
capital gains for those calendar years and minus dividends paid
or credited within the first two of the three preceding calendar
years. Extraordinary dividends must be reported to OCI at least
30 days prior to payment and are subject to disapproval by the
OCI.
restrict
Insurance Laws also
Arizona
the payment of
extraordinary dividends, which is any dividend or distribution
which together with other dividends or distributions made within
the preceding twelve months exceeds the lesser of (a) 10% of
policyholders’ surplus as of the preceding December 31 and (b)
the net income for the twelve month period ending the preceding
December 31. Extraordinary dividends must be reported to DIFI
at least 30 days prior to payment, during which period DIFI may
disapprove or approve such payment.
UK law prohibits Ambac UK from declaring a dividend to its
shareholders unless it has “profits available for distribution.”
The determination of whether a company has profits available
for distribution is based on its accumulated realized profits less
its accumulated realized losses. While the UK insurance
regulatory laws impose no statutory restrictions on a general
insurer’s ability to declare a dividend, the PRA’s and FCA’s
capital requirements in practice act as a restriction on the
payment of dividends. Further, the FSA amended Ambac UK’s
license in 2010 such that the PRA must specifically approve
(“non-objection”) any transfer of value and/or assets from
Ambac UK to AAC or any other Ambac group company, other
than in respect of certain disclosed contracts between the two
parties (such as in respect of a management services agreement
between AAC and Ambac UK). Ambac UK is not expected to
pay any dividends to AAC for the foreseeable future.
Pursuant to the Settlement Agreement, AAC may not make any
“Restricted Payment” (which includes dividends from AAC to
Ambac) in excess of $5 in the aggregate per annum, other than
Restricted Payments from AAC to Ambac in an amount up to $8
per annum solely to pay operating expenses of Ambac.
Concurrent with making any such Restricted Payment, a pro rata
amount of AAC's surplus notes would also need to be redeemed
at par. The indenture for the Tier 2 Notes contains a similar
restrictive covenant and further requires a proportional payment
of the Tier 2 Notes (or interest thereon) when payments are
made on the surplus notes.
Under the terms of AAC’s AMPS, dividends may not be paid on
the common stock of AAC unless all accrued and unpaid
dividends on the AMPS for the then current dividend period
have been paid, provided, that dividends on the common stock
may be made at all times for the purpose of, and only in such
amounts as are necessary for, enabling Ambac (i) to service its
indebtedness for borrowed money as such payments become due
or (ii) to pay its operating expenses. If dividends are paid on the
common stock as provided in the prior sentence, dividends on
the AMPS become cumulative until
that all
accumulated and unpaid dividends have been paid on the
AMPS.
the date
The Stipulation and Order requires OCI approval for the
payment of any dividend or distribution on the common stock of
AAC.
| Ambac Financial Group, Inc. 107 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
10. FAIR VALUE MEASUREMENTS
The Fair Value Measurement Topic of the ASC establishes a framework for measuring fair value and disclosures about fair value
measurements.
Fair Value Hierarchy
The Fair Value Measurement Topic of the ASC specifies a fair value hierarchy based on whether the inputs to valuation techniques used to
measure fair value are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while
unobservable inputs reflect Company-based assumptions. The fair value hierarchy prioritizes model inputs into three broad levels as
follows:
l Level 1
Quoted prices for identical instruments in active markets. Assets and liabilities classified as Level 1 include US Treasury
and other foreign government obligations traded in highly liquid and transparent markets, certain highly liquid pooled fund
investments, exchange traded futures contracts, variable rate demand obligations and money market funds.
l Level 2
l Level 3
Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are
not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active
markets. Assets and liabilities classified as Level 2 generally include investments in fixed maturity securities representing
municipal, asset-backed and corporate obligations, certain interest rate swap contracts and most long-term debt of variable
interest entities consolidated under the Consolidation Topic of the ASC.
Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. This
hierarchy requires the use of observable market data when available. Assets and liabilities classified as Level 3 include
credit derivative contracts, certain uncollateralized interest rate swap contracts, equity interests in Ambac sponsored special
purpose entities and certain investments in fixed maturity securities. Additionally, Level 3 assets and liabilities generally
include loan receivables, and certain long-term debt of variable interest entities consolidated under the Consolidation Topic
of the ASC.
| Ambac Financial Group, Inc. 108 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
The Fair Value Measurement Topic of the ASC permits, as a practical expedient, the estimation of fair value of certain investments in
funds using the net asset value per share of the investment or its equivalent (“NAV”). Investments in funds valued using NAV are not
categorized as Level 1, 2 or 3 under the fair value hierarchy. The following table sets forth the carrying amount and fair value of Ambac’s
financial assets and liabilities as of December 31, 2020 and 2019, including the level within the fair value hierarchy at which fair value
measurements are categorized. As required by the Fair Value Measurement Topic of the ASC financial assets and liabilities are classified in
their entirety based on the lowest level of input that is significant to the fair value measurement.
Carrying
Amount
Total Fair
Value
Fair Value Measurements Categorized as:
Level 1
Level 2
Level 3
December 31, 2020:
Financial assets:
Fixed maturity securities:
Municipal obligations
Corporate obligations
Foreign obligations
U.S. government obligations
Residential mortgage-backed securities
Collateralized debt obligations
Other asset-backed securities
Fixed maturity securities, pledged as collateral:
U.S. government obligations
Short-term
Short term investments
Other investments (1)
Cash, cash equivalents and restricted cash
Derivative assets:
Interest rate swaps—asset position
Other assets - equity in sponsored VIE
Other assets-Loans
Variable interest entity assets:
Fixed maturity securities: Corporate obligations
Fixed maturity securities: Municipal obligations
Restricted cash
Loans
Derivative assets:
Currency swaps-asset position
Total financial assets
Financial liabilities:
Long term debt, including accrued interest
Derivative liabilities:
Interest rate swaps—liability position
Liabilities for net financial guarantees written (2)
Variable interest entity liabilities:
Long-term debt (includes $4,324 at fair value)
Derivative liabilities:
Interest rate swaps—liability position
$
358 $
358 $
— $
358 $
1,077
1,077
98
106
302
74
303
15
125
492
595
33
93
1
3
3,215
139
2
2,998
41
98
106
302
74
303
15
125
492
597
33
93
1
3
3,215
139
2
2,998
41
4
98
106
—
—
—
15
125
415
91
32
—
—
—
—
—
2
—
—
1,073
—
—
302
74
225
—
—
76
—
2
9
—
—
—
139
—
—
41
$
$
10,071 $
10,073 $
888 $
2,299 $
3,255 $
3,071 $
— $
2,670 $
114
(740)
4,493
1,835
114
539
4,504
1,835
—
—
—
—
114
—
4,349
1,835
Total financial liabilities
$
8,958 $
10,063 $
— $
8,968 $
—
—
—
—
—
—
78
—
—
—
53
—
85
1
3
3,215
—
—
2,998
—
6,433
401
—
539
155
—
1,095
| Ambac Financial Group, Inc. 109 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Carrying
Amount
Total Fair
Value
Fair Value Measurements Categorized as:
Level 1
Level 2
Level 3
December 31, 2019:
Financial assets:
Fixed maturity securities:
Municipal obligations
Corporate obligations
Foreign obligations
U.S. government obligations
Residential mortgage-backed securities
Commercial mortgage-backed securities
Collateralized debt obligations
Other asset-backed securities
Fixed maturity securities, pledged as collateral:
Short-term
Short term investments
Other investments (1)
Cash and cash equivalents and restricted cash
Derivative assets:
Interest rate swaps—asset position
Other assets - equity in sponsored VIE
Other assets-loans
Variable interest entity assets:
Fixed maturity securities: Corporate obligations
Fixed maturity securities: Municipal obligations
Restricted cash
Loans
Derivative assets; Currency swaps-asset position
Total financial assets
Financial liabilities:
Long term debt, including accrued interest
$
$
Derivative liabilities:
Credit derivatives
Interest rate swaps—liability position
Liabilities for net financial guarantees written (2)
Variable interest entity liabilities:
$
215 $
215 $
— $
215 $
1,430
1,430
44
156
248
50
146
287
85
653
478
79
75
3
10
2,957
164
2
3,108
52
44
156
248
50
146
287
85
653
493
79
75
3
13
2,957
164
2
3,108
52
—
44
156
—
—
—
—
85
598
136
70
—
—
—
—
—
2
—
—
1,430
—
—
248
50
146
215
—
55
—
9
8
—
—
—
164
—
—
52
10,242 $
10,260 $
1,091 $
2,593 $
3,262 $
3,274 $
— $
2,829 $
—
89
(863)
—
89
284
—
—
—
—
—
—
—
89
—
4,408
1,657
8,983
—
—
—
—
—
—
—
72
—
—
61
—
67
3
13
2,957
—
—
3,108
—
6,281
445
—
—
284
159
—
889
Long-term debt (includes $4,351 at fair value)
4,554
4,567
Derivative liabilities:
Interest rate swaps—liability position
Total financial liabilities
1,657
$
8,699 $
1,657
9,872
(1) Excluded from the fair value measurement categories in the table above are investment funds of $453 and $296 as of December 31, 2020 and 2019,
respectively, which are measured using NAV as a practical expedient.
(2) The carrying value of net financial guarantees written includes the following balance sheet items: Premium receivables; Reinsurance recoverable on
paid and unpaid losses; Deferred ceded premium; Subrogation recoverable; Insurance intangible asset; Unearned premiums; Loss and loss expense
reserves; Ceded premiums payable, premiums taxes payable and other deferred fees recorded in Other liabilities.
Determination of Fair Value
When available, Ambac uses quoted active market prices
specific to the financial instrument to determine fair value and
classifies such items within Level 1. The determination of fair
value for financial instruments categorized in Level 2 or 3
involves judgment due to the complexity of factors contributing
to the valuation. Third-party sources from which we obtain
independent market quotes also use assumptions, judgments and
estimates
instrument values and
different third parties may use different methodologies or
provide different values for financial instruments. In addition,
the use of internal valuation models may require assumptions
in determining financial
| Ambac Financial Group, Inc. 110 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
about hypothetical or inactive markets. As a result of these
factors, the actual trade value of a financial instrument in the
market, or exit value of a financial instrument position by
Ambac, may be significantly different from its recorded fair
value.
Ambac’s financial instruments carried at fair value are mainly
comprised of investments in fixed maturity securities, equity
interests in pooled investment funds, derivative instruments,
certain variable interest entity assets and liabilities and interests
in Ambac sponsored special purpose entities. Valuation of
financial instruments is performed by Ambac’s finance group
using methods approved by senior financial management with
consultation from risk management and portfolio managers as
appropriate. Preliminary valuation results are discussed with
portfolio managers quarterly to assess consistency with market
transactions and trends as applicable. Market transactions such
as trades or negotiated settlements of similar positions, if any,
are reviewed to validate fair value model results. However many
of
significant
unobservable inputs have very little or no observable market
activity. Methods and significant inputs and assumptions used to
determine fair values across portfolios are reviewed quarterly by
senior
control
financial management. Other valuation
procedures specific to particular portfolios are described further
below.
instruments valued using
financial
the
Fixed Maturity Securities
The fair values of fixed maturity investment securities are based
primarily on market prices received from broker quotes or
alternative pricing sources. Because many fixed maturity
securities do not trade on a daily basis, pricing sources apply
available market information through processes such as matrix
pricing to calculate fair value. Such prices generally consider a
variety of factors, including recent trades of the same and
similar securities. In those cases, the items are classified within
Level 2. For those fixed maturity investments where quotes were
not available or cannot be reasonably corroborated, fair values
are based on internal valuation models. Key inputs to the
internal valuation models generally include maturity date,
coupon and yield curves for asset-type and credit rating
characteristics that closely match those characteristics of the
specific investment securities being valued. Items valued using
valuation models are classified according to the lowest level
input or value driver that is significant to the valuation. Thus, an
item may be classified in Level 3 even though there may be
significant inputs that are readily observable. Longer (shorter)
expected maturities or higher (lower) yields used in the
valuation model will, in isolation, result in decreases (increases)
in fair value. Generally, lower credit ratings or longer expected
maturities will be accompanied by higher yields used to value a
security. At December 31, 2020, approximately 2%, 95%, and
3% of the fixed maturity investment portfolio (excluding
variable interest entity investments) was valued using broker
internal valuation
quotes, alternative pricing sources and
models, respectively. At December 31, 2019, approximately 4%,
94%, and 2% of the fixed maturity investment portfolio
(excluding variable interest entity investments) was valued using
broker quotes, alternative pricing sources and internal valuation
models, respectively.
Ambac performs various review and validation procedures to
quoted and modeled prices for fixed maturity securities,
including price variance analyses, missing and static price
reviews, overall valuation analysis by portfolio managers and
finance managers and reviews associated with our ongoing
impairment analysis. Unusual prices identified through these
procedures will be evaluated further against alternative third-
party quotes (if available, internally modeled prices and/or other
relevant data, and the pricing source values will be challenged as
necessary. Price challenges generally result in the use of the
pricing source’s quote as originally provided or as revised by the
source following their internal diligence process. A price
challenge may result in a determination by either the pricing
source or Ambac management that the pricing source cannot
provide a reasonable value for a security or cannot adequately
support a quote, in which case Ambac would resort to using
either other quotes or internal models. Results of price
challenges are reviewed by portfolio managers and finance
managers.
Information about the valuation inputs for fixed maturity
securities classified as Level 3 is included below:
Other asset-backed securities: This security is a subordinated
tranche of a securitization collateralized by Ambac-insured
military housing bonds. The fair value classified as Level 3 was
$78 and $72 at December 31, 2020 and 2019, respectively. Fair
value was calculated using a discounted cash flow approach
with expected future cash flows discounted using a yield
consistent with the security type and rating. Significant inputs
for the valuation at December 31, 2020 and 2019 include the
following:
December 31, 2020:
a. Coupon rate.............................................. 5.97%
b. Average Life............................................ 14.83 years
c. Yield......................................................... 10.50%
December 31, 2019:
a. Coupon rate.............................................. 5.97%
b. Average Life............................................ 15.58 years
c. Yield......................................................... 11.75%
Other Investments
Other investments primarily relate to investments in pooled
investment funds. The fair value of pooled investment funds is
determined using dealer quotes or alternative pricing sources
when such investments have readily determinable fair values.
When fair value is not readily determinable, pooled investment
funds are valued using NAV as a practical expedient as
permitted under the Fair Value Measurement Topic of the ASC.
Refer to Note 11. Investments for additional information about
such investments in pooled funds that are reported at fair value
using NAV as a practical expedient.
Other investments also includes Ambac's equity interest in a
non-consolidated VIE created in connection with Ambac's
monetization of AAC junior surplus notes. This equity interest
is carried under the equity method. Fair value for the non-
| Ambac Financial Group, Inc. 111 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
consolidated VIE equity interest is internally calculated using a
market approach and is classified as Level 3.
Derivative Instruments
Ambac’s derivative instruments primarily comprise interest rate
swaps, credit default swaps and exchange traded futures
contracts. Fair value is determined based upon market quotes
from independent sources, when available. When independent
quotes are not available, fair value is determined using valuation
models. These valuation models require market-driven inputs,
including contractual terms, credit spreads and ratings on
underlying referenced obligations, yield curves and tax-exempt
interest ratios. The valuation of certain derivative contracts also
require the use of data inputs and assumptions that are
determined by management and are not readily observable in the
market. Under the Fair Value Measurement Topic of the ASC,
Ambac is required to consider its own credit risk when
measuring the fair value of derivatives and other liabilities.
Factors considered in estimating the amount of any Ambac
credit valuation adjustment ("CVA") on such contracts include
collateral posting provisions,
the
counterparty, the period of time remaining on the derivative and
the pricing of recent terminations. The aggregate Ambac CVA
impact reduced the fair value of derivative liabilities by less than
a million dollars at both December 31, 2020 and 2019.
right of set-off with
Interest rate swaps that are not centrally cleared are valued using
vendor-developed models that incorporate interest rates and
yield curves that are observable and regularly quoted. These
models provide the net present value of the derivatives based on
contractual terms and observable market data. Generally, the
need for counterparty (or Ambac) CVAs on interest rate
derivatives is mitigated by the existence of collateral posting
agreements under which adequate collateral has been posted.
Certain of these derivative contracts entered into with financial
guarantee customers are not subject to collateral posting
agreements. Counterparty credit risk related to such customer
derivative assets is included in our determination of their fair
value.
Ambac's credit derivatives ("CDS") are valued using an internal
model that uses traditional financial guarantee CDS pricing to
calculate the fair value of the derivative contract based on the
reference obligation's current pricing, remaining life and credit
rating and Ambac's own credit risk. The model calculates the
difference between the present value of the projected fees
receivable under the CDS and our estimate of the fees a
financial guarantor of comparable credit quality would charge to
provide
the balance sheet date.
Unobservable inputs used include Ambac's internal reference
obligation credit ratings and expected life, estimates of fees that
would be charged to assume the credit derivative obligation and
Ambac's CVA. Ambac is party to only one remaining credit
derivative with an internal credit rating of AA at December 31,
2020. Ambac has not made any significant changes to its
modeling techniques or related model inputs for the periods
presented.
the same protection at
Financial Guarantees
Fair value of net financial guarantees written represents our
estimate of the cost to Ambac to completely transfer its
insurance obligation to another market participant of comparable
credit worthiness. In theory, this amount should be the same
amount that another market participant of comparable credit
worthiness would hypothetically charge in the marketplace, on a
present value basis, to provide the same protection as of the
balance sheet date. This fair value estimate of financial
guarantees is presented on a net basis and includes direct and
assumed contracts written, net of ceded reinsurance contracts.
Long-term Debt
Long-term debt includes AAC surplus notes and junior surplus
notes, the Ambac Note and Tier 2 Notes issued in connection
with the Rehabilitation Exit Transactions and the Ambac UK
debt issued in connection with the Ballantyne commutation.
The fair values of surplus notes, the Ambac Note and Tier 2
Notes are classified as Level 2. The fair value of junior surplus
notes and Ambac UK debt are classified as Level 3.
Other Financial Assets and Liabilities
Included in Other assets are Loans and Ambac’s equity interest
in an Ambac sponsored VIE established to provide certain
their debt
financial guarantee clients with funding for
obligations. The fair values of these financial assets are
estimated based upon internal valuation models and are
classified as Level 3.
Variable Interest Entity Assets and Liabilities
The financial assets and liabilities of FG VIEs consolidated
under the Consolidation Topic of the ASC consist primarily of
fixed maturity securities and loans held by the VIEs, derivative
instruments and notes issued by the VIEs which are reported as
long-term debt. As described in Note 4. Variable Interest
Entities, these FG VIEs are securitization entities which have
liabilities and/or assets guaranteed by AAC or Ambac UK.
The fair values of FG VIE long-term debt are based on price
quotes received from
independent market sources when
available. Such quotes are considered Level 2 and generally
consider a variety of factors, including recent trades of the same
and similar securities. For those instruments where quotes were
not available or cannot be reasonably corroborated, fair values
are based on internal valuation models. Comparable to the
sensitivities of investments in fixed maturity securities described
above, longer (shorter) expected maturities or higher (lower)
yields used in the valuation model will, in isolation, result in
decreases (increases) in fair value liability measurement for FG
VIE long-term debt.
FG VIE derivative asset and liability fair values are determined
using vendor-developed valuation models, which incorporated
observable market data related to specific derivative contractual
terms including interest rates, foreign exchange rates and yield
curves.
The fair value of FG VIE fixed maturity securities and loan
assets are based on Level 2 market price quotes received from
independent market sources when available. Typically, FG VIE
asset fair values are not readily available from market quotes
and are estimated internally. Internal valuation of each FG VIE’s
fixed maturity securities or loan assets are derived from the fair
values of the notes issued by the respective VIE and the VIE’s
| Ambac Financial Group, Inc. 112 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
derivatives, determined as described above, adjusted for the fair
values of Ambac’s financial guarantees associated with the VIE.
The fair value of financial guarantees consist of: (i) estimated
future premium cash flows discounted at a rate consistent with
that implicit in the fair value of the VIE’s liabilities and (ii)
estimates of future claim payments discounted at a rate that
includes Ambac’s own credit risk. Estimated future premium
payments to be paid by the VIEs were discounted at a par-
weighted average rate of 2.4% and 2.7% at December 31, 2020
and 2019, respectively. At December 31, 2020, the range of
these discount rates was between 1.8% and 3.9%.
Additional Fair Value Information for Financial Assets and Liabilities Accounted for at Fair Value
The following tables present the changes in the Level 3 fair value category for the periods presented in 2020, 2019 and 2018. Ambac
classifies financial instruments in Level 3 of the fair value hierarchy when there is reliance on at least one significant unobservable input to
the valuation model. In addition to these unobservable inputs, the valuation models for Level 3 financial instruments typically also rely on a
number of inputs that are readily observable either directly or indirectly. Thus, the gains and losses presented below include changes in the
fair value related to both observable and unobservable inputs.
Level-3 Financial Assets and Liabilities Accounted for at Fair Value
Year Ended December 31, 2020
Investments
Other
Assets (1)
Derivatives
Investments
Loans
Long-term
Debt
Total
Balance, beginning of period
$
72 $
3 $
66 $
2,957 $
3,108 $
— $
6,207
VIE Assets and Liabilities
Total gains/(losses) realized and unrealized:
Included in earnings
Included in other comprehensive income
Purchases
Issuances
Sales
Settlements
Balance, end of period
The amount of total gains/(losses) included
in earnings attributable to the change in
unrealized gains or losses relating to assets
and liabilities still held at the reporting
date
The amount of total gains/(losses) included
in other comprehensive income attributable
to the change in unrealized gains or losses
relating to assets and liabilities still held at
the reporting date
$
$
$
1
6
—
—
—
(1)
78 $
(2)
—
—
—
—
—
25
—
—
—
—
(7)
183
109
—
—
—
(35)
98
83
—
—
—
(290)
—
—
—
—
—
—
306
198
—
—
—
(334)
1 $
84 $
3,215 $
2,998 $
— $
6,376
— $
(2) $
25 $
183 $
98 $
— $
304
— $
— $
— $
109 $
83 $
— $
192
Level-3 Financial Assets and Liabilities Accounted for at Fair Value
Year Ended December 31, 2019
Investments
Other
Assets
Derivatives
Investments
Loans
Long-term
Debt
Total
Balance, beginning of period
$
72 $
5 $
46 $
2,737 $
4,288 $
(217) $
6,930
VIE Assets and Liabilities
Total gains/(losses) realized and unrealized:
Included in earnings
Included in other comprehensive income
Purchases
Issuances
Sales
Settlements
Deconsolidations of VIEs
Balance, end of period
The amount of total gains/(losses) included in
in
earnings attributable
unrealized gains or losses relating to assets
and liabilities still held at the reporting date
the change
to
2
—
—
—
—
(2)
—
(2)
—
—
—
—
—
—
25
—
—
—
—
(5)
—
138
116
—
—
—
(35)
—
287
74
—
—
—
(690)
(851)
(15)
8
—
—
—
—
223
436
199
—
—
—
(731)
(627)
72 $
3 $
66 $
2,957 $
3,108 $
— $
6,207
— $
(2) $
25 $
138 $
215 $
— $
376
$
$
(1) Other assets carried at fair value and classified as Level 3 relate to an equity interest in an Ambac sponsored VIE.
| Ambac Financial Group, Inc. 113 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Level-3 Financial Assets and Liabilities Accounted for at Fair Value
Year Ended December 31, 2018
Investments
Other
Assets
Derivatives
Investments
Loans
Long-term
Debt
Total
Balance, beginning of period
$
809 $
6 $
61 $
2,914 $
11,529 $
(2,758) $
12,561
VIE Assets and Liabilities
Total gains/(losses) realized and
unrealized:
Included in earnings
Included in other comprehensive income
Purchases
Issuances
Sales
Settlements
Transfers out of Level 3
Deconsolidation of VIEs
Balance, end of period
total gains/(losses)
The amount of
included in earnings attributable to the
change in unrealized gains or losses
relating to assets and liabilities still
held at the reporting date
$
$
36
(53)
—
—
—
(714)
(5)
—
(1)
—
—
—
—
—
—
—
(9)
—
—
—
—
(6)
—
—
16
(158)
—
—
—
(35)
—
—
(201)
(470)
—
—
—
(624)
—
(5,946)
189
91
—
—
—
23
—
2,237
30
(590)
—
—
—
(1,356)
(5)
(3,709)
72 $
5 $
46 $
2,737 $
4,288 $
(217) $
6,930
— $
(1) $
(10) $
16 $
(63) $
47 $
(11)
The tables below provide roll-forward information by class of investments and derivatives measured using significant unobservable inputs.
Level-3 Investments by Class
Year Ended December 31,
Balance, beginning of period
Total gains/(losses) realized and unrealized:
Included in earnings
Included in other comprehensive income
Purchases
Issuances
Sales
Settlements
Balance, end of period
The amount of total gains/(losses) included in earnings
attributable to the change in unrealized gains or losses
relating to assets and liabilities still held at the
reporting date
$
$
Level-3 Investments by Class
Year Ended December 31, 2018
Balance, beginning of period
Total gains/(losses) realized and unrealized:
Included in earnings
Included in other comprehensive income
Purchases
Issuances
Sales
Settlements
Transfers out of Level 3
Balance, end of period
2020
2019
Other Asset
Backed
Securities
Non-Agency
RMBS
Total
Investments
Other Asset
Backed
Securities
Non-Agency
RMBS
Total
Investments
$
72 $
— $
72 $
72 $
— $
1
6
—
—
—
(1)
78 $
—
—
—
—
—
—
— $
1
6
—
—
—
2
—
—
—
—
(1)
78 $
(2)
72 $
—
—
—
—
—
—
— $
72
2
—
—
—
—
(2)
72
— $
— $
— $
— $
— $
—
Other Asset
Backed
Securities
Non-Agency
RMBS
Total
Investments
$
73 $
736 $
809
1
(1)
—
—
—
(1)
—
35
(52)
—
—
—
(713)
(5)
$
$
72 $
— $
— $
— $
36
(53)
—
—
—
(714)
(5)
72
—
The amount of total gains/(losses) included in earnings attributable to the change in unrealized gains or
losses relating to assets and liabilities still held at the reporting date
| Ambac Financial Group, Inc. 114 2020 FORM 10-K |
Level-3 Derivatives by Class
Year Ended December 31,
Balance, beginning of period
Total gains/(losses) realized and unrealized:
Included in earnings
Purchases
Issuances
Sales
Settlements
Balance, end of period
The amount of total gains/(losses) included in earnings
attributable to the change in unrealized gains or losses
relating to assets and liabilities still held at the
reporting date
Level-3 Derivatives by Class
Year Ended December 31, 2018
Balance, beginning of period
Total gains/(losses) realized and unrealized:
Included in earnings
Purchases
Issuances
Sales
Settlements
Balance, end of period
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
2020
2019
Interest
Rate
Swaps
Credit
Derivatives
Total
Derivatives
Interest
Rate
Swaps
Credit
Derivatives
Total
Derivatives
$
67 $
— $
66 $
47 $
(1) $
25
—
—
—
(7)
85
25
—
—
—
—
—
—
—
25
—
—
—
(7)
84
24
—
—
—
(4)
67
25
24
2
—
—
—
—
—
1
46
25
—
—
—
(5)
66
25
Interest
Rate
Swaps
Credit
Derivatives
Total
Derivatives
$
61 $
(1) $
61
(9)
—
—
—
(5)
(1)
—
—
—
—
47 $
(1) $
(9)
—
—
—
(6)
46
(9) $
(1) $
(10)
$
$
The amount of total gains/(losses) included in earnings attributable to the change in unrealized gains or
losses relating to assets and liabilities still held at the reporting date
Invested assets and VIE long-term debt are transferred into Level 3 when internal valuation models that include significant unobservable
inputs are used to estimate fair value. All such securities that have internally modeled fair values have been classified as Level 3.
Derivative instruments are transferred into Level 3 when the use of unobservable inputs becomes significant to the overall valuation.
Invested assets transferred out of Level 3 into Level 2 in 2018 consisted of an Ambac-insured re-REMIC collateralized by distressed
mortgage-backed securities. There were no other transfers of financial instruments into or out of Level 3 in the periods disclosed.
| Ambac Financial Group, Inc. 115 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Gains and losses (realized and unrealized) relating to Level 3 assets and liabilities included in earnings for the affected periods are reported
as follows:
Net
Investment
Income
Net Gains
(Losses) on
Derivative
Contracts
Income (Loss)
on Variable
Interest
Entities
Other
Income
(Expense)
Year Ended December 31, 2020
Total gains (losses) included in earnings for the period
Changes in unrealized gains (losses) relating to financial instruments still held at
the reporting date
Year Ended December 31, 2019
Total gains (losses) included in earnings for the period
$
$
1 $
25 $
281 $
—
25
281
2 $
25 $
410 $
Changes in unrealized gains (losses) relating to financial instruments still held at
the reporting date
—
25
353
Year Ended December 31, 2018
Total gains (losses) included in earnings for the period
$
36 $
(9) $
4 $
Changes in unrealized gains (losses) relating to financial instruments still held at
the reporting date
—
(10)
—
(2)
(2)
(2)
(2)
(1)
(1)
11. INVESTMENTS
investments on
Ambac’s non-VIE invested assets are primarily comprised of
fixed maturity securities classified as available-for-sale and
interests in pooled investment funds which are reported within
Other
the Consolidated Balance Sheets.
Interests in pooled investment funds in the form of common
stock or in-substance common stock are classified as trading
securities, while limited partner interests in such funds are
reported using the equity method. Other investments also
include equity interests held by AFG including the equity
interest in Corolla Trust, an unconsolidated trust created in
connection with its sale of Segregated Account junior surplus
notes on August 28, 2014. As further described in Note 1.
Background and Business Description, on January 22, 2021,
AAC completed the Corolla Note Exchange transaction whereby
it acquired 100% of the outstanding obligations of the Corolla
trust, including the owner trust certificate held by AFG, in
exchange for AAC surplus notes.
Disclosures in this Note for the period ended December 31,
2020, are in accordance with the new CECL standard adopted
January 1, 2020, which is more fully described in Note 2. Basis
of Presentation and Significant Accounting Policies. To the
extent disclosures for periods prior to January 1, 2020, made in
accordance with prior GAAP rules differ from disclosures under
the new CECL standard, such differences are explained below.
| Ambac Financial Group, Inc. 116 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Fixed Maturity Securities
The amortized cost and estimated fair value of available-for-sale investments, excluding VIE investments, at December 31, 2020 and 2019
were as follows:
December 31, 2020
Fixed maturity securities:
Municipal obligations
Corporate obligations (1)
Foreign obligations
U.S. government obligations
Residential mortgage-backed securities
Collateralized debt obligations
Other asset-backed securities (2)
Short-term
Fixed maturity securities pledged as collateral:
U.S. government obligations
Short-term
Amortized
Cost
Allowance for
Credit Losses
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
$
321 $
— $
37 $
— $
1,059
97
105
256
74
263
2,175
492
2,667
15
125
140
—
—
—
—
—
—
—
—
—
—
—
—
24
1
2
46
—
40
149
—
149
—
—
—
6
—
1
—
—
—
8
—
8
—
—
—
358
1,077
98
106
302
74
303
2,317
492
2,809
15
125
140
Total available-for-sale investments
$
2,807 $
— $
149 $
8 $
2,949
December 31, 2019
Fixed maturity securities:
Municipal obligations
Corporate obligations (1)
Foreign obligations
U.S. government obligations
Residential mortgage-backed securities
Commercial mortgage-backed securities
Collateralized debt obligations
Other asset-backed securities (2)
Short-term
Fixed maturity securities pledged as collateral:
Short-term
Total available-for-sale investments
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
Non-credit
Other-than
temporary
Impairments (3)
$
194 $
22 $
— $
215 $
1,396
44
157
200
49
147
263
2,450
653
3,103
85
85
3,187
36
1
2
47
1
—
24
132
—
132
—
—
132
2
—
2
—
—
1
—
5
—
5
—
—
5
1,430
44
156
248
50
146
287
2,577
653
3,230
85
85
3,314
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(1)
Includes Ambac's holdings of the secured notes issued by Ambac LSNI in connection with the Rehabilitation Exit Transactions.
(2) Consists primarily of Ambac's holdings of the military housing securitization bonds.
(3) At December 31, 2019, represents the amount of non-credit other-than-temporary impairment losses remaining in accumulated other comprehensive
income on securities that also had a credit impairment. These losses included in gross unrealized losses at December 31, 2019.
| Ambac Financial Group, Inc. 117 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
The amortized cost and estimated fair value of available-for-sale investments, excluding VIE investments, at December 31, 2020, by
contractual maturity, were as follows:
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Residential mortgage-backed securities
Collateralized debt obligations
Other asset-backed securities
Total
Amortized
Cost
Estimated
Fair Value
$
718 $
873
439
184
2,214
256
74
263
719
880
459
213
2,271
302
74
303
$
2,807 $
2,949
Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay certain obligations with
or without call or prepayment penalties.
Unrealized Losses on Fixed Maturity Securities
The following table shows gross unrealized losses and fair values of Ambac’s available-for-sale investments, excluding VIE investments,
which at December 31, 2020, did not have an allowance for credit losses under the CECL standard and at December 2019, did not have
other-than-temporary impairments recorded in earnings under prior GAAP. This information is aggregated by investment category and
length of time that the individual securities have been in a continuous unrealized loss position, at December 31, 2020 and 2019:
Less Than 12 Months
Gross
Unrealized
Loss
Fair Value
12 Months or More
Total
Fair Value
Gross
Unrealized
Loss
Fair Value
Gross
Unrealized
Loss
December 31, 2020
Fixed maturity securities:
Municipal obligations
Corporate obligations
Foreign obligations
U.S. government obligations
Residential mortgage-backed securities
Commercial mortgage-backed securities
Collateralized debt obligations
Other asset-backed securities
Short-term
$
25 $
543
3
17
14
—
27
—
629
187
— $
6 $
— $
6
—
1
—
—
—
—
7
—
—
—
—
—
—
15
4
25
—
—
—
—
—
—
—
—
—
—
31 $
543
3
17
14
—
42
4
654
187
Total temporarily impaired securities
$
816 $
7 $
25 $
— $
841 $
December 31, 2019
Fixed maturity securities:
Municipal obligations
Corporate obligations
Foreign obligations
U.S. government obligations
Residential mortgage-backed securities
Commercial mortgage-backed securities
Collateralized debt obligations
Other asset-backed securities
Short-term
Total securities
$
13 $
— $
10 $
— $
23 $
63
20
36
5
7
53
2
200
201
2
—
2
—
—
—
—
4
—
5
—
2
—
—
63
7
88
—
—
—
—
—
—
1
—
1
—
68
20
38
5
7
116
10
288
201
$
401 $
4 $
88 $
1 $
489 $
—
6
—
1
—
—
—
—
8
—
8
—
2
—
2
—
—
1
—
5
—
5
| Ambac Financial Group, Inc. 118 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Management has determined that the securities in the above
table do not have credit impairment as of December 31, 2020
and 2019 based upon (i) no actual or expected principal and
interest payment defaults on these securities; (ii) analysis of the
creditworthiness of the issuer and financial guarantor, as
applicable, and (iii) for debt securities that are non-highly rated
beneficial interests in securitized financial assets, analysis of
whether there was an adverse change in projected cash flows.
Management's evaluation as of December 31, 2020, includes the
expectation that all principal and interest payments on securities
guaranteed by AAC or Ambac UK will be made timely and in
full.
Ambac’s assessment about whether a security is credit impaired
reflects management’s current judgment regarding facts and
circumstances specific to the security and other factors. If that
judgment changes, Ambac may record a charge for credit
impairment in future periods.
Realized Gains and Losses including Impairments
The following table details amounts included in net realized
gains (losses) and impairments included in earnings for the
affected periods:
Year Ended
December 31,
Gross realized gains on
securities
Gross realized losses on
securities
Foreign exchange
(losses) gains
Credit impairments
Intent / requirement to
sell impairments
Net realized gains
(losses)
2020
2019
2018
$
38 $
64 $
111
(12)
(4)
— $
(5)
22
— $
(7)
7
—
— $
— $
(3)
22 $
81 $
108
$
$
$
The following table presents a roll-forward of Ambac’s
cumulative credit losses on debt securities for which a portion of
an other-than-temporary impairment was recognized in other
comprehensive income under prior GAAP for the years ended
December 31, 2019 and 2018:
Year Ended December 31,
Balance, beginning of period
Additions for credit impairments
recognized on:
Securities not previously impaired
Reductions for credit impairments
previously recognized on:
Securities that matured or were sold
during the period
Balance, end of period
2019
2018
12
—
(1)
12
67
1
(56)
12
Ambac had zero allowance for credit losses at December 31,
2020.
Ambac did not purchase any financial assets with credit
deterioration for the year ended December 31, 2020.
Counterparty Collateral, Deposits with Regulators and
Other Restrictions
Ambac routinely pledges and receives collateral related to
certain transactions. Securities held directly in Ambac’s
investment portfolio with a fair value of $140 and $85 at
December 31, 2020 and 2019, respectively, were pledged to
derivative counterparties. Ambac’s derivative counterparties
have the right to re-pledge the investment securities and as such,
these pledged securities are separately classified on
the
Consolidated Balance Sheets as “Fixed maturity securities
pledged as collateral, at fair value” and "Short-term investments
pledged as collateral, at fair value". Refer to Note 12. Derivative
Instruments for further information on cash collateral. There
was no cash or securities received from other counterparties that
were re-pledged by Ambac.
Securities carried at $8 and $6 at December 31, 2020 and 2019,
respectively, were deposited by Ambac's insurance subsidiaries
with governmental authorities or designated custodian banks as
required by laws affecting insurance companies. Invested
assets carried at $1 at December 31, 2020 were deposited as
security in connection with a letter of credit issued for an office
lease.
Securities with a fair value of $178 and $197 at December 31,
2020 and 2019, respectively, were pledged as collateral and as
sources of funding to repay the Secured Notes issued by Ambac
LSNI. The securities may not be transferred or re-pledged by
Ambac LSNI. Collateral may be sold to fund redemptions of the
Secured Notes.
AAC also pledged for the benefit of the holders of Secured
Notes (other than AAC) the proceeds of interest payments and
partial redemptions of the Secured Notes held by AAC. The
amount of such proceeds held by AAC was $9 and $55 at
December 31, 2020 and 2019 and is included in Restricted cash
on the Consolidated Balance Sheet. AAC may, from time to
time, sell all or a portion of the Secured Notes it owns. In the
event that AAC sells any of the Secured Notes it owns, the
proceeds must be used to redeem a like amount of the Ambac
Note at par. The price at which AAC sells the Secured Notes
may differ from the price at which it redeems the Secured Notes.
| Ambac Financial Group, Inc. 119 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Guaranteed Securities
Ambac’s fixed maturity portfolio includes securities covered by guarantees issued by AAC and other financial guarantors (“insured
securities”). The published rating agency ratings on these securities reflect the higher of the financial strength rating of the financial
guarantor or the rating of the underlying issuer. Rating agencies do not always publish separate underlying ratings (those ratings excluding
the insurance by the financial guarantor). In the event these underlying ratings are not available from the rating agencies, Ambac will assign
an internal rating. The following table represents the fair value and weighted-average underlying rating of insured securities in Ambac's
investment portfolio at December 31, 2020 and 2019, respectively:
December 31, 2020:
Ambac Assurance Corporation
National Public Finance Guarantee
Corporation
Assured Guaranty Municipal Corporation
Total
December 31, 2019:
Ambac Assurance Corporation
National Public Finance Guarantee
Corporation
Total
$
$
$
$
Municipal
Obligations
Corporate
Obligations (2)
Mortgage
and Asset-
backed
Securities
Weighted
Average
Underlying
Rating (1)
Total
320 $
465 $
481 $
1,266
CCC+
6
1
—
—
—
—
6
1
BBB-
C
327 $
465 $
481 $
1,273
CCC+
176 $
535 $
442 $
11
186 $
—
535 $
—
442 $
1,153
11
1,164
B-
BBB-
B-
(1) Ratings are based on the lower of Standard & Poor’s or Moody’s rating. If unavailable, Ambac’s internal rating is used.
(2) Represents Ambac's holdings of secured notes issued by Ambac LSNI in connection with the Rehabilitation Exit Transactions. These secured notes
are insured by AAC.
Other Investments
Ambac's investment portfolio includes interests in various pooled investment funds. Fair value and additional information about
investments in pooled funds, by investment type, is summarized in the table below. Except as noted in the table, fair value as reported is
determined using net asset value ("NAV") as a practical expedient. In addition to these investments, Ambac has unfunded commitments of
$81 to private credit and private equity funds at December 31, 2020.
Class of Funds
December 31,
Real estate properties (1)
Hedge funds (2)
High yield and leveraged loans (3) (10)
Private credit (4)
Insurance-linked investments (5)
Equity market investments (6) (10)
Investment grade floating rate income (7)
Private equity (8)
Emerging markets debt (9) (10)
2020
2019
Redemption Frequency
Redemption Notice Period
$
16 $
196
78
65
3
73
73
13
25
16 quarterly
10 business days
65 quarterly or semi-annually
90 days
176 daily
0 - 30 days
51 quarterly if permitted
180 days if permitted
3
fully redeemed
55 daily
66 weekly
none
0 days
0 days
— quarterly if permitted
90 days if premitted
— daily
0 days
Total equity investments in pooled funds
$
543 $
432
(1)
Investments consist of UK property to generate income and capital
growth.
(2) This class seeks to generate superior risk-adjusted returns through
selective asset sourcing, active trading and hedging strategies
across a range of asset types.
(5) This class seeks to generate returns from insurance markets
through investments in catastrophe bonds, life insurance and other
insurance linked investments.
(6) This class of funds aim to achieve long-term growth through
diversified exposure to global equity markets.
(3) This class of funds includes investments in a range of instruments
including high-yield bonds, leveraged loans, CLOs, ABS and
floating rate notes to generate income and capital appreciation.
(7) This class of funds includes investments in high quality floating
rate debt securities including ABS and corporate floating rate
notes.
(4) This class aims to obtain high long-term returns primarily through
credit and preferred equity investments with low liquidity and
defined term.
(8) This class seeks to generate long-term capital appreciation through
investments in private equity, equity-related and other instruments.
| Ambac Financial Group, Inc. 120 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
(9) This class seeks long-term income and growth through investments
in the bonds of issuers in emerging markets.
(10) These categories include fair value amounts total $89 and $136 at
December 31, 2020 and 2019, respectively, that are readily
determinable and are priced through pricing vendors, including for
High yield and leveraged loans products; $3 and $81 for Equity
market investments; $60 and $55; for Emerging markets debt of
$25 and $0.
Ambac also held direct equity interests as of December 31, 2020
and 2019, including in an unconsolidated trust created in
connection with the 2014 sale of Segregated Account junior
surplus notes, which is accounted for under the equity method.
Investment Income
Net investment income was comprised of the following for the
affected periods:
Year Ended
December 31,
Fixed maturity
securities
Short-term
investments
Loans
Investment expense
Securities available-
for-sale and short-term
Other investments
Total net investment
income (loss)
2020
2019
2018
$
103 $
183 $
265
5
1
(6)
103
19
17
1
(6)
196
32
$
122 $
227 $
11
1
(7)
271
2
273
Net investment income from Other investments primarily
represents changes in fair value on securities classified as
trading or accounted for under the fair value option, income
from investment limited partnerships accounted for under the
equity method and the above noted equity interest in an
unconsolidated trust accounted for under the equity method.
The portion of net unrealized gains (losses) related to trading
securities still held at the end of each period is as follows:
Year Ended
December 31,
Net gains (losses)
recognized during the
period on trading
securities
Less: net gains (losses)
recognized during the
reporting period on
trading securities sold
during the period
Unrealized gains
(losses) recognized
during the reporting
period on trading
securities still held at
the reporting date
2020
2019
2018
$
— $
24 $
(3)
(18)
7
1
$
18 $
17 $
(4)
12. DERIVATIVE INSTRUMENTS
The following tables summarize the gross fair values of individual derivative instruments and the impact of legal rights of offset as reported
in the Consolidated Balance Sheets as of December 31, 2020 and 2019.
December 31, 2020:
Derivative Assets:
Interest rate swaps
Total non-VIE derivative assets
Derivative Liabilities:
Credit derivatives
Interest rate swaps
Total non-VIE derivative liabilities
Variable Interest Entities Derivative Assets:
Currency swaps
Total VIE derivative assets
Variable Interest Entities Derivative Liabilities:
Interest rate swaps
Total VIE derivative liabilities
Gross
Amounts of
Recognized
Assets /
Liabilities
Gross
Amounts
Offset in the
Consolidated
Balance Sheet
Net Amounts
of Assets/
Liabilities
Presented
in the
Consolidated
Balance Sheet
Gross Amount
of Collateral
Received /
Pledged not
Offset in the
Consolidated
Balance Sheet
Net Amount
$
$
$
$
$
$
$
$
93 $
93 $
— $
114
114 $
41 $
41 $
1,835 $
1,835 $
— $
— $
— $
—
— $
— $
— $
— $
— $
93 $
93 $
— $
114
114 $
41 $
41 $
1,835 $
1,835 $
— $
— $
— $
113
113 $
— $
— $
— $
— $
93
93
—
1
1
41
41
1,835
1,835
| Ambac Financial Group, Inc. 121 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
December 31, 2019:
Derivative Assets:
Interest rate swaps
Total non-VIE derivative assets
Derivative Liabilities:
Credit derivatives
Interest rate swaps
Total non-VIE derivative liabilities
Variable Interest Entities Derivative Assets:
Currency swaps
Total VIE derivative assets
Variable Interest Entities Derivative Liabilities:
Interest rate swaps
Total VIE derivative liabilities
Gross
Amounts of
Recognized
Assets /
Liabilities
Gross
Amounts
Offset in the
Consolidated
Balance Sheet
Net Amounts
of Assets/
Liabilities
Presented
in the
Consolidated
Balance Sheet
Gross Amount
of Collateral
Received /
Pledged not
Offset in the
Consolidated
Balance Sheet
Net Amount
$
$
$
$
$
$
$
$
75 $
75 $
— $
89
90 $
52 $
52 $
1,657 $
1,657 $
— $
— $
— $
—
— $
— $
— $
— $
— $
75 $
75 $
— $
90
90 $
52 $
52 $
1,657 $
1,657 $
— $
— $
— $
89
89 $
— $
— $
— $
— $
75
75
—
1
1
52
52
1,657
1,657
Amounts representing the right to reclaim cash collateral or the obligation to return cash collateral are not offset against fair value amounts
recognized for derivative instruments on the Consolidated Balance Sheets. The amounts representing the right to reclaim cash collateral and
posted margin, recorded in “Other assets” were $1 and $36 as of December 31, 2020 and 2019, respectively. There were no amounts held
representing an obligation to return cash collateral as of December 31, 2020 and 2019.
The following tables summarize the location and amount of gains and losses of derivative contracts in the Consolidated Statements of Total
Comprehensive Income (Loss) for the years ended December 31, 2020, 2019 and 2018:
Location of Gain (Loss) Recognized
in Consolidated Statements of
Total Comprehensive Income (Loss)
Amount of Gain (Loss) Recognized in Consolidated
Statement of Total Comprehensive Income (Loss) –
Year Ended December 31,
2020
2019
2018
Net gains (losses) on derivative contracts
$
— $
2 $
Net gains (losses) on derivative contracts
Net gains (losses) on derivative contracts
Income (loss) on variable interest entities
Income (loss) on variable interest entities
(9)
(41)
(50)
(6)
(138)
(144)
(6)
(45)
(50)
(12)
(20)
(32)
$
(193) $
(82) $
(1)
1
7
7
11
493
505
512
Non-VIE derivatives:
Credit derivatives
Interest rate swaps
Futures contracts
Total non-VIE derivatives
Variable Interest Entities:
Currency swaps
Interest rate swaps
Total Variable Interest Entities
Total derivative contracts
Credit Derivatives
relating
Credit derivatives, which are privately negotiated contracts,
provide the counterparty with credit protection against the
occurrence of a specific event such as a payment default or
bankruptcy
to an underlying obligation. Credit
derivatives issued are insured by AAC. The outstanding credit
derivative transaction at December 31, 2020, does not include
ratings based collateral-posting triggers or otherwise require
Ambac to post collateral regardless of Ambac’s ratings or the
size of the mark to market exposure to Ambac.
Our credit derivatives were written on a “pay-as-you-go” basis.
Similar to an insurance policy, pay-as-you-go provides that
Ambac pays interest shortfalls on the referenced transaction as
they are incurred on each scheduled payment date, but only pays
principal shortfalls upon the earlier of (i) the date on which the
assets designated to fund the referenced obligation have been
disposed of and (ii) the legal final maturity date of the
referenced obligation.
Ambac maintains internal credit ratings on its guaranteed
obligations, including credit derivative contracts, solely to
indicate management’s view of the underlying credit quality of
the guaranteed obligations. The principal notional outstanding
for credit derivative contracts was $257 and $280 as of
| Ambac Financial Group, Inc. 122 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
December 31, 2020 and 2019, respectively, which had internal
Ambac ratings of AA in both periods:
Contingent Features in Derivatives Related to Ambac Credit
Risk
Ambac’s over-the-counter interest rate swaps are centrally
cleared when eligible. Certain interest rate swaps remain with
professional swap-dealer counterparties and direct customer
counterparties. These non-cleared swaps are generally executed
under standardized derivative documents including collateral
support and master netting agreements. Under these agreements,
Ambac is required to post collateral in the event net unrealized
losses exceed predetermined threshold levels. Additionally,
given that AAC is no longer rated by an independent rating
agency, counterparties have the right to terminate the swap
positions.
linked
As of December 31, 2020 and 2019, the net liability fair value of
derivative
to
instruments with contingent features
Ambac’s own credit risk was $113 and $89, respectively, related
to which Ambac had posted cash and securities as collateral with
a fair value of $130 and $109, respectively. All such ratings-
based contingent features have been
triggered requiring
maximum collateral levels to be posted by Ambac while
preserving counterparties’ rights to terminate the contracts.
Assuming all such contracts terminated at fair value on
December 31, 2020, settlement of collateral balances and net
derivative liabilities would result in a net receipt of cash and/or
securities by Ambac. If counterparties elect to exercise their
right to terminate, the actual termination payment amounts will
be determined in accordance with derivative contract terms,
which may result in amounts that differ from market values as
reported in Ambac’s financial statements.
Interest Rate Derivatives
Ambac, through its subsidiary Ambac Financial Services
(“AFS”), uses interest rate swaps, US Treasury futures contracts
and other derivatives, to provide a partial economic hedge
against the effects of rising interest rates elsewhere in the
Company, including on Ambac’s financial guarantee exposures.
Additionally, AFS provided interest rate swaps to states,
municipalities and their authorities, asset-backed issuers and
other entities in connection with their financings. As of
December 31, 2020 and 2019, the notional amounts of AFS's
derivatives are as follows:
Type of Derivative
Notional - December 31,
2020
2019
Interest rate swaps—pay-fixed/receive-
variable
$
726 $
1,261
US Treasury futures contracts—short
Interest rate swaps—receive-fixed/pay-
variable
240
195
755
332
Derivatives of Consolidated Variable Interest Entities
Certain VIEs consolidated under the Consolidation Topic of the
ASC entered into derivative contracts to meet specified purposes
within the securitization structure. The notional for VIE
derivatives outstanding as of December 31, 2020 and 2019, were
as follows:
Type of VIE Derivative
Interest rate swaps—receive-fixed/pay-
variable
Interest rate swaps—pay-fixed/receive-
variable
Currency swaps
Credit derivatives
Notional - December 31,
2020
2019
$
1,233 $
1,194
1,151
308
—
1,176
329
9
13. LONG-TERM DEBT
Long-term debt outstanding, excluding VIE long-term debt, was as follows:
December 31,
2020
2019
Ambac Assurance:
5.1% surplus notes
5.1% junior surplus notes
Ambac note
Tier 2 notes
Ambac UK debt
Long-term debt
Par Value
Unamortized
Discount
Carrying
Value
Par Value
Unamortized
Discount
Carrying
Value
$
531 $
— $
531 $
531 $
(14) $
365
1,641
306
41
(118)
—
—
(27)
247
1,641
306
14
365
1,763
281
41
(113)
—
(4)
(28)
517
252
1,763
278
13
$
2,884 $
(145) $
2,739 $
2,980 $
(159) $
2,822
| Ambac Financial Group, Inc. 123 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Aggregated annual maturities of non-VIE long-term debt
obligations (based on scheduled maturity dates as further
discussed below) are as follows:
December 31, 2018, recognized in Net realized gains (losses)
on extinguishment of debt on the Consolidated Statements of
Total Comprehensive Income.
$
(1)
531
Junior Surplus Notes
2021
2022
2023
2024
2025
Thereafter
Total
—
1,641
—
—
(2)
712
$
2,884
(1)
(2)
Includes $531 related to surplus notes that were not approved for
payment by OCI on their stated June 7, 2020, maturity date
Includes $365 of junior surplus notes that were acquired in January
and February of 2021 in exchanges for an aggregate of $279 of
surplus notes. Refer to "2021 Surplus Note Exchanges" in in Note
1. Background and Business Description.
Surplus Notes
Ambac Assurance's surplus notes, with a par amount of $531
and $531 at December 31, 2020 and 2019, respectively, have a
scheduled maturity of June 7, 2020. Surplus notes outstanding
are recorded at their fair value at the date of issuance. The
discount on surplus notes was accreted into income using the
effective interest method based on projected cash flows at the
date of issuance through June 7, 2020, using a weighted average
imputed interest rate of 10.1%.
Surplus note principal and interest payments require the
approval of OCI. Since the issuance of the surplus notes in 2010,
OCI has declined to approve regular payments of interest on
surplus notes, although the OCI has permitted exceptional
payments in connection with (a) increasing the percentage of
deferred policy payments of the Segregated Account of Ambac
Assurance from 25% to 45% in 2014 and (b) a one-time
payment of approximately six months of interest on the surplus
notes outstanding immediately after consummation of the
Rehabilitation Exit Transactions in 2018 in the amount of $14,
of which $3 was received by AFG for surplus notes that it
owned and that are considered extinguished for accounting
purposes.
In April 2020, OCI declined the request of Ambac Assurance to
pay the principal amount of the surplus notes, plus all accrued
and unpaid interest thereon, on the scheduled maturity date of
June 7, 2020. As a result, the scheduled payment date for
interest, and the scheduled maturity date for payment of
principal of the surplus notes, shall be extended until OCI grants
approval to make the payment. Interest will accrue, compounded
on each anniversary of the original scheduled payment date or
scheduled maturity date, on any unpaid principal or interest
through the actual date of payment, at 5.1% per annum.
Refer to Note 1. Background and Business Description for
further discussion of the Rehabilitation Exit Transactions, the
AMPS Exchange and the 2021 Surplus Note Exchanges, each
involving the issuance of surplus notes by AAC.
The retirement of certain notes as part of the Rehabilitation Exit
Transactions in 2018 resulted in gains of $3 for the year ended
The junior surplus notes have a par value of $365 and $365 at
December 31, 2020 and 2019, respectively. Pursuant to the
Second Amended Plan of Rehabilitation, Ambac Assurance
became the obligor under the junior surplus notes (originally
issued by the Segregated Account) as of February 12, 2018.
issued
junior surplus notes
• Par value at December 31, 2020 and 2019 includes $15 and
in
$15, respectively, of
connection with a settlement agreement (the “OSS
Settlement Agreement”) entered into among Ambac, AAC,
the Segregated Account and One State Street, LLC
(“OSS”) with respect to the termination of Ambac’s office
lease with OSS. A portion of the principal balance of the
originally issued notes were reduced based on rents paid to
OSS by AAC after December 31, 2015. Par value of these
junior surplus notes was reduced by $0 and $2 during the
years ended December 31, 2020 and 2019, respectively, as
rent payments were made by Ambac Assurance. As of
December 31, 2020, there was no remaining balance of the
junior surplus notes that can be reduced on rents paid by
AAC. These junior surplus notes were recorded at their fair
value at the date of issuance. The discount on these notes
was accreted into income from the date of issuance through
June 7, 2020, using the effective interest method at an
imputed interest rate of 19.5%. As further described in
Note 1. Background and Business Description, on February
11, 2021, AAC completed the JSN Exchange, pursuant to
which it acquired all remaining junior surplus notes
originally issued in connection with the OSS Settlement
Agreement.
the Segregated Account,
• Par value at December 31, 2020 and 2019 includes $350 of
a junior surplus note originally issued to AFG pursuant to
AFG's Chapter 11 Reorganization Plan in accordance with
the Mediation Agreement dated September 21, 2011,
among AFG, AAC,
the
Rehabilitator, the OCI and the Official Committee of
Unsecured Creditors of AFG, and that AFG sold to the
Corolla Trust on August 28, 2014. This junior surplus note
was recorded at a discount to par based on its fair value on
August 28, 2014. Ambac is accreting the discount on this
junior surplus note into earnings using the effective interest
method, based on an imputed interest rate of 8.4%. As
further described in Note 1. Background and Business
Description, on January 22, 2021, AAC completed the
Corolla Note Exchange, pursuant to which it effectively
acquired the junior surplus notes from the Corolla Trust.
Ambac Note
The Ambac Note, issued in connection with the Rehabilitation
Exit Transactions on February 12, 2018, as more fully described
in Note 1. Background and Business Description, has a par value
of $1,641 and $1,763 at December 31, 2020 and 2019,
respectively, and has a legal maturity of February 12, 2023.
Interest on the Ambac Note is payable quarterly (on the last day
of each quarter beginning with June 30, 2018) at an annual rate
| Ambac Financial Group, Inc. 124 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
of 3-month U.S. Dollar LIBOR + 5.00%, subject to a 1.00%
LIBOR floor. During the years ended December 31, 2020 and
2019, $121 and $178 par value of the Ambac Note was
redeemed, respectively. The maturity date for the Ambac Note
is the earlier of (x) February 12, 2023, and (y) if the Secured
Notes are then outstanding, the date that is five business days
prior to the date for which OCI has approved the repayment of
the outstanding principal amount of the surplus notes issued by
Ambac Assurance. Promptly, and in any event within four
business days after the receipt (whether directly or indirectly) of
any representation and warranty subrogation recoveries, Ambac
Assurance shall
(the “Mandatory
(i) apply an amount
Redemption Amount”) equal to the lesser of (a) the amount of
representation and warranty subrogation recoveries up to $1,400
and (b) all outstanding principal and accrued and unpaid interest
on the Ambac Note to redeem the Ambac Note, in whole or in
part, as applicable; provided, that any non-cash representation
and warranty subrogation recoveries shall be deemed to be
received upon the receipt of the applicable appraisal.
in
• The portion of the Ambac Note issued in connection with
the exchange of surplus notes ("Ambac Note A") was
accounted for as a debt modification since the creditors
before and after the exchange remained the same and the
change
terms was not considered substantial. A
substantial change is considered to be a change in cash
flows of equal to or greater than 10%, and because the
change in cash flows was less than 10%, debt modification
accounting
is appropriate. Under debt modification
accounting, Ambac Note A was recorded at a discount to
par based on the carrying value of the surplus notes less the
cash consideration paid. Furthermore, no gain or loss was
recorded on the surplus note exchange and a new effective
interest rate was established based on the cash flows of
Ambac Note A. Any consideration paid directly related to
the issuance of Ambac Note A was expensed as incurred.
• The portion of the Ambac Note issued in connection with
the exchange of Deferred Amounts ("Ambac Note B") was
recorded at fair value. The Deferred Amount exchange was
accounted for as an extinguishment of the Deferred
Amounts with the gain reflected as a benefit to loss and
loss expenses. Any consideration paid directly related to
the issuance of Ambac Note B was capitalized and
amortized as part of the effective yield calculation.
The aggregate discount on the entire Ambac Note (portions A
and B) was accreted into earnings from the date of issuance
through September 30, 2018, using the effective interest method,
based on an imputed interest rate of 7.6%. Refer to Note 1.
Background and Business Description for further discussion of
the Rehabilitation Exit Transactions in connection with which
the Ambac Note was issued. Refer to the discussion under
"Counterparty Collateral, Deposits with Regulators and Other
Restrictions" in Note 10. Investments for further information on
security and collateral related to the Ambac Note and the
Secured Notes issued by Ambac LSNI.
Tier 2 Notes
The Tier 2 Notes, issued in connection with the Rehabilitation
Exit Transactions on February 12, 2018, with a par value of
$306 and $281 (including paid-in-kind interest of $66 and $41)
at December 31, 2020 and 2019, respectively, have a legal
maturity of February 12, 2055. Interest on the Tier 2 Notes is at
an annual rate of 8.50%. Other than upon payment of principal
at redemption or maturity, interest payments will not be made in
cash on interest payment dates and shall be paid-in-kind and
compounded on the last day of each calendar quarter. The Tier
2 Notes were recorded at a discount to par as any consideration
paid that was directly related to the issuance of the Tier 2 Notes
was capitalized and is part of the effective yield calculation.
Ambac is accreting the discount on the Tier 2 Notes into
earnings using the effective interest method, based on an
imputed interest rate of 9.9%.
The Tier 2 Notes are subject to mandatory redemption upon: (i)
receipt of representation and warranty subrogation recoveries in
excess of $1,600 ("Tier 2 Net Proceeds") and (ii) payment of
principal or interest on AAC surplus notes. Promptly, and in
any event within five business days after the receipt (whether
directly or indirectly) of Tier 2 Net Proceeds, AAC shall deposit
an amount equal to the Tier 2 Net Proceeds to a collateral
account, provided, that any non-cash representation and
warranty subrogation recoveries shall be deemed to be received
upon the receipt of the applicable appraisal of the consideration
received by AAC. Similarly, within five business dates after a
surplus note payment (other than in connection with the
Rehabilitation Exit Transactions), AAC shall deposit an amount
based on the percentage of surplus notes paid applied to the
outstanding balance of the Tier 2 Notes to a collateral account.
In both cases, the amount deposited shall not be in excess of the
amount required to redeem all outstanding Tier 2 Notes. Also,
such amounts shall be used to initiate a redemption on the initial
call date for the Tier 2 Notes or, if the initial call date has
occurred, promptly following the receipt of the Tier 2 Net
Proceeds or surplus note payment.
The Tier 2 Notes may also be redeemed, in whole or in part, at
the option of Ambac Assurance. Both mandatory and optional
redemptions may be made at a price equal to 100% of the
aggregate principal amount redeemed, plus accrued and unpaid
interest, if any, plus a make-whole premium. Make-whole
premiums are calculated based on future interest payments
through the contractual call date ("Initial Call Date"). The Initial
Call Date at issuance of December 17, 2020, extends ratably
beginning the first anniversary of issuance to September 17,
2021 by the second anniversary, and to March 17, 2022 by the
third anniversary of issuance. There are no extensions of the
Initial Call Date beyond March 17, 2022. The Initial Call Date
for redemptions is determined based on the date the applicable
amounts are deposited to the collateral account.
Ambac UK Debt
The Ambac UK debt, issued in connection with the Ballantyne
commutation on June 18, 2019, has a par value of $41 and $41
at December 31, 2020 and 2019, and a legal maturity of May 2,
2036. Interest on the Ambac UK debt is at an annual rate of
0.00%. The Ambac UK debt was recorded at its fair value at the
date of issuance. The discount on the debt is currently being
accreted into income using the effective interest method at an
imputed interest rate of 7.4%.
| Ambac Financial Group, Inc. 125 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Variable Interest Entities, Long-term Debt
Provision (Benefit) for Income Taxes
The components of the provision (benefit) for income taxes
were as follows:
Year Ended
December 31,
Current taxes
U. S. federal
U.S. state and local
Foreign
Total current taxes
Deferred taxes
Foreign
Total deferred taxes
Provision for income
taxes
$
$
2020
2019
2018
$
— $
— $
—
8
8
(3)
37
34
(10)
(10) $
(1)
(1) $
(3) $
32 $
(2)
2
(1)
—
5
5
5
The total effect of income taxes on net income and stockholders’
equity for the years ended December 31, 2020, 2019 and 2018 is
as follows:
Year Ended
December 31,
Total income taxes
charged to net income
Income taxes charged
(credited) to
stockholders’ equity:
Unrealized gains
(losses) on investment
securities
Unrealized gains
(losses) on foreign
currency translations
Valuation allowance to
equity
Total charged to
stockholders’ equity:
Total effect of income
taxes
2020
2019
2018
$
(3) $
32 $
5
3
—
(3)
1
14
—
(23)
(8)
$
(1) $
24 $
12
—
(9)
3
8
The variable interest entity notes were issued by consolidated
VIEs. Ambac is the primary beneficiary of the VIEs as a result
of providing financial guarantees on certain of the VIEs
obligations. Consequently, Ambac has consolidated
these
variable interest entity notes and all other assets and liabilities of
the VIEs. Ambac is not primarily liable for the debt obligations
of these entities. Ambac would only be required to make
payments on these debt obligations in the event that the issuer
defaults on any principal or interest due and to the extent such
obligations are guaranteed by Ambac. The total unpaid principal
amount of outstanding long-term debt associated with VIEs
consolidated as a result of the financial guarantee provided by
Ambac was $3,927 and $3,990 as of December 31, 2020 and
2019, respectively. As of December 31, 2020 and 2019, the
ranges of final maturity dates of the outstanding long-term debt
associated with these VIEs were December 2025 to August 2054
and December 2025 to August 2054, respectively. As of
December 31, 2020 and 2019, the interest rates on these VIEs’
long-term debt ranged from 0.00% to 7.93% in both years.
respectively. Aggregated annual maturities of VIE long-term
debt following December 31, 2020 are: 2021-$0; 2022-$0;
2023-$0; 2024-$0; 2025-$83; Thereafter-$3,844.
14. INCOME TAXES
AFG files a consolidated Federal income tax return with its
subsidiaries. AFG and its subsidiaries also file separate or
combined income tax returns in various states, local and foreign
jurisdictions. The following are the major jurisdictions in which
Ambac and its subsidiaries operate and the earliest tax years
subject to examination:
Jurisdiction
United States
New York State
New York City
United Kingdom
Italy
Tax Year
2010
2013
2016
2017
2016
Consolidated Pretax Income (Loss)
U.S. and foreign components of pre-tax income (loss) were as
follows:
Year Ended
December 31,
U.S.
Foreign
Total
2020
2019
2018
$
$
(441) $
(174) $
1
(9)
(440) $
(183) $
264
8
273
| Ambac Financial Group, Inc. 126 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Reconciliation of U.S. Federal Statutory Income Tax Rate to Actual Income Tax Rate
The tax provisions in the accompanying Consolidated Statements of Total Comprehensive Loss reflect effective tax rates differing from
prevailing Federal corporate income tax rates. The following is a reconciliation of these differences:
2020
2019
2018
Amount
%
Amount
%
Amount
%
$
(92)
21.0 % $
(38)
21.0 % $
57
21.0 %
Year Ended December 31,
Tax on income (loss) at statutory rate
Changes in expected tax resulting from:
Tax-exempt interest
Foreign taxes
Substantiation adjustment
Valuation allowance
Change in Tax Law
Other, net
Tax expense on income (loss)
$
Unrecognized Tax Positions
A reconciliation of the beginning and ending amounts of
material unrecognized tax benefits for 2020, 2019 and 2018 is as
follows:
Year Ended
December 31,
Balance, beginning of
period
Increases related to
prior year tax positions
Decreases related to
prior year tax positions
2020
2019
2018
$
— $
— $
—
—
—
—
Balance, end of period
$
— $
— $
—
—
—
—
Deferred Income Taxes
The tax effects of temporary differences that give rise to
significant portions of the deferred tax liabilities and deferred
tax assets at December 31, 2020 and 2019, are presented below:
2020
2019
December 31,
Deferred tax liabilities:
Insurance intangible
Unearned premiums and credit fees
Investments
Variable interest entities
Other
Total deferred tax liabilities
Deferred tax assets:
Net operating loss and capital
carryforward
Loss reserves
Debentures
Compensation
Other
Subtotal deferred tax assets
Valuation allowance
Total deferred tax assets
$
78 $
32
22
13
7
152
764
218
22
9
5
1,019
891
128
Net deferred tax liability
$
24 $
90
42
32
12
8
183
742
148
29
7
1
927
777
151
32
(2)
6
(29)
113
—
—
(3)
0.4 %
(1.4) %
6.7 %
(25.6) %
— %
— %
0.7 % $
(3)
40
28
8
—
(2)
32
1.8 %
(22.1) %
(15.3) %
(4.4) %
— %
1.3 %
(17.7) % $
(7)
10
(60)
5
(2)
1
5
(2.5) %
3.9 %
(22.0) %
1.9 %
(0.7) %
0.4 %
2.0 %
In accordance with the Income Tax Topic of the ASC, a
valuation allowance is recognized if, based on the weight of
available evidence, it is more-likely-than-not that some, or all, of
the deferred tax asset will not be realized. As a result of the risks
and uncertainties associated with future operating results,
management believes it is more likely than not that the
Company will not generate sufficient U.S. federal, state and/or
local taxable income to recover the deferred tax operating assets
therefore maintains a full valuation allowance. The
and
remaining net deferred tax liability of $24 is attributable to
Ambac U.K.
NOL Usage
In December 2020, AFG and certain subsidiaries and affiliates
amended their existing tax sharing agreement (the "Third TSA
Amendment"). Under the Third TSA Amendment, AAC and
AFG agreed to reallocate $210 of net operating loss carry-
forwards (“NOLs”) from AAC to AFG and to eliminate AAC's
requirement to make future payments based on its utilization of
NOLs ("tolling payments") for any taxable year beginning on or
after January 1, 2019. In connection with the Third TSA
Amendment, AAC paid to AFG approximately $28 of accrued
tolling payments based on NOLs used by AAC in 2017. The
Third TSA Amendment did not affect the NOL tolling payments
AAC would be required to make in connection with the 2013
Closing Agreement between Ambac and the United States
Internal Revenue Service, which could amount to as much as $8.
As of December 31, 2020, the Company has $3,639 of NOLs,
which if not utilized will begin expiring in 2029, and will fully
expire in 2041.
15. EMPLOYMENT BENEFIT PLANS
Postretirement Health Care and Other Benefits
Ambac provides postretirement and postemployment / severance
benefits, including health and life benefits for certain employees
who meet predefined age and service requirements. None of the
plans are currently funded. Postretirement and postemployment
benefits expense, including severance benefits paid, were $1, $3
and $1 for the years ended December 31, 2020, 2019 and 2018,
respectively.
| Ambac Financial Group, Inc. 127 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Effective August 1, 2005, new employees were not eligible for
postretirement benefits. The current postretirement benefit
requires retirees to purchase their own medical insurance policy
with a portion of their premium being reimbursed by Ambac.
The unfunded accumulated postretirement benefit obligation
was $10 as of December 31, 2020. The assumed health care cost
trend rates range from 5.2% in 2021, decreasing ratably to 4.5%
in 2030.
The following table sets forth projected benefit payments from
Ambac’s postretirement plan over the next ten years for current
retirees:
2021
2022
2023
2024
2025
2025-2029
Total
$
$
—
—
—
—
1
3
5
The discount rate used in determining the projected benefit
obligations for the postretirement plan is selected by reference to
a pension liability index with similar duration to that of the
benefit plan. The rates used for the projected plan benefit
obligations at the measurement date for December 31, 2020 and
2019, were 2.25% and 3.00%, respectively.
Savings Incentive Plan
Substantially all employees of AAC are covered by a defined
contribution plan (the “Savings Incentive Plan”). AAC makes
employer matching contributions equal
the
employees’ contributions, up to 3% of such participants’
compensation, as defined in the plan, plus 50% of contributions
up to an additional 2% of compensation, subject to limits set by
the Internal Revenue Code. The total cost of the Savings
Incentive Plan was $1, $1 and $1 for the years December 31,
2020, 2019 and 2018, respectively.
to 100% of
Incentive Compensation - Stock Units and Cash
term
Incentive compensation is a key component of our compensation
strategy. Our incentive compensation awards generally have two
components: short
incentive compensation awards
("STIP") and long term incentive plan awards ("LTIP"). Annual
decisions with regard to incentive compensation are generally
made in the first quarter of each year and are based on Company
performance and individual and business unit performance of
the previous year. In addition to the stock based awards
discussed below, Ambac's incentive compensation includes cash
payments which may consist of annual awards under the STIP,
deferred payments that vest over two years or other performance
based cash awards. For all employees, an allocation of incentive
compensation is made between STIP and LTIP awards.
Employees, directors and consultants of Ambac are eligible to
participate in Ambac’s 2020 Incentive Compensation Plan
(“2020 Plan”), which is the successor plan to the 2013 Incentive
Compensation Plan ("2013 Plan"), subject to the discretion of
the compensation committee of Ambac’s Board of Directors.
The 2020 Plan and 2013 Plan each provide for incentives and
rewards that are valued or determined by reference to Ambac
common stock as currently traded on the New York Stock
Exchange. Beginning with the June 2, 2020, effective date (the
"Effective Date") of the 2020 Plan, all new awards are granted
under the 2020 Plan and may not be granted under the 2013
Plan. However, the terms and conditions of the 2013 Plan
continue to govern outstanding awards granted under the 2013
Plan. There are 1,475,000 and 4,000,000 shares of Ambac's
common stock authorized for issuance that can be awarded
under the 2020 Plan and 2013 Plan, respectively. Awards may
also be made under the 2020 Plan with respect to the shares that,
as of the Effective Date, remained available for grant under the
2013 Plan. In addition, shares subject to outstanding awards
granted under the 2013 Plan as of the Effective Date that
subsequently terminate by expiration or forfeiture, cancellation,
or otherwise without the issuance of such shares will become
available for awards under the 2020 Plan. Of the total shares
authorized for issuance pursuant to the 2020 Plan and 2013 Plan,
2,096,292 shares are available for future grant as of December
31, 2020. Shares available for future grant are reduced by the
maximum number of shares that could be issued pursuant to
The number of shares
outstanding performance awards.
available for future grant considering the target number of
shares instead of the maximum number of shares related to
performance awards is 3,058,603.
The amount of stock-based compensation expense and
corresponding after-tax expense are as follows:
Year Ended
December 31,
Stock options
Restricted stock units
Performance awards
Total stock-based
compensation
Total stock-based
compensation (after-tax)
Stock Options
2020
2019
2018
$
— $
— $
3
8
4
8
$
$
11 $
12 $
11 $
12 $
—
6
6
12
12
Stock options were awarded in 2013 to directors that had an
expiry term of seven years from the grant date, subject to earlier
expiration upon the recipient's departure from the Company. A
summary of stock option activity for 2020 is as follows:
Weighted
Average
Exercise
Price
Aggregate
Intrinsic
Value
Shares
Weighted
Average
Remaining
Contractual
Life
(in years)
Outstanding at
beginning of
period
Granted
Exercised
Forfeited or
expired
Outstanding at
end of period
Exercisable
16,667 $
20.63
—
—
—
—
(16,667)
20.63
— $
— $
— $
— $
—
—
0.00
0.00
| Ambac Financial Group, Inc. 128 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
No stock options were exercised during the years ended
December 31, 2020, 2019 and 2018, respectively.
Restricted Stock Units (“RSUs”)
to consultants
RSUs have been awarded to certain employees for a portion of
their STIP compensation, LTIP compensation, sign-on, special
awards for exceptional performance. RSUs have also been
awarded
for meeting certain contractual
performance goals. The previously issued STIP awards vested
upon grant, but settlement was deferred (other than for
employment tax withholdings) into two equal installments
generally on the first and second anniversary date of the grant.
The LTIP, sign-on and special awards generally vest in equal
installments over a two to three year period. Awards granted to
consultants vest on the second year anniversary of date of grant.
Such vesting is expressly conditioned upon the respective
employees or non-employees continued service with Ambac
is
through
accelerated for terminations due to death, disability, eligible
retirement, or involuntary termination by the Ambac other than
for cause.
the applicable vesting date, although vesting
RSUs have been awarded annually to directors and vest on the
last day of April of the following year. These RSUs will not
settle until the respective director’s termination from the board
of directors or, if earlier, upon a change in control. All RSUs
provide for accelerated vesting upon a change in control, death
or disability or involuntary removal other than for cause (not
including removal pursuant to a shareholder vote at a regularly
scheduled annual meeting of shareholders). Upon termination
(other than for cause), the unvested RSUs shall partially vest as
of the date of such termination in an amount equal to the number
of then outstanding unvested RSUs multiplied by a fraction, the
numerator of which shall be the number of calendar days which
have lapsed since the grant date and the denominator of which
shall be the total number of calendar days of the original vesting
period.
As of December 31, 2020, 773,657 RSUs remained outstanding,
of which (i) 345,302 units required future service as a condition
to the delivery of the underlying shares of common stock and
(ii) 428,355 units do not require future service and are deferred
for future settlement. As of December 31, 2019, 702,579 RSUs
remained outstanding, of which (i) 248,942 units required future
service as a condition to the delivery of the underlying shares of
common stock, and (ii) 453,637 units did not require future
service and were deferred for future settlement.
A summary of RSU activity for 2020 is as follows:
Weighted
Average
Grant Date
Fair Value
Shares
Outstanding at beginning of period
702,579 $
Granted
Delivered or returned to plan (1)
Forfeited
297,517
(224,829)
(1,610)
Outstanding at end of period
773,657 $
18.19
17.36
17.59
19.19
18.04
(1) When restricted stock unit awards issued by Ambac become
taxable compensation to employees, shares may be withheld to
cover the employee’s withholding taxes. For the year ended
December 31, 2020, Ambac purchased 85,654 of shares from
employees that settled restricted stock units to meet the required
tax withholdings.
Ambac’s closing share price on the grant date was used to
estimate the fair value of the service condition based RSU on the
grant date. The weighted average grant date fair value of RSUs
granted during 2020, 2019 and 2018 was $17.36, $19.75 and
$16.35, respectively. As of December 31, 2020, there was $4 of
total unrecognized compensation costs related to unvested RSUs
granted. These costs are expected to be recognized over a
weighted average period of 1.6 years. The fair value for RSUs
vested and delivered during the year ended December 31, 2020,
2019 and 2018 was $4, $4 and $1, respectively.
Performance Stock Awards ("PSUs")
Performance awards granted vest in 3 years and awards have
components relative to performance at AFG and AAC. Actual
awards can payout 0% to 220% of the number of units granted.
Under currently outstanding award agreements, performance
will be evaluated as follows:
• AFG performance will be evaluated relative to cumulative
earnings before
and
amortization over the vesting period (exclusive of AAC and
its subsidiaries' earnings), which is intended to reward
participants for generating pre-tax income.
taxes, depreciation
interest,
• AAC performance will be evaluated according to: (i)
changes in AAC's assets relative to its insurance and
financial obligations, which
reward
participants for increases in the relative value of AAC, and
(ii) reductions in watch list and adversely classified credits,
which is intended to reward participants for de-risking the
financial guarantee insured portfolio.
intended
to
is
• In 2019, a relative Total Shareholder Return modifier was
added as an additional metric with respect to the LTIP
award payouts. The modifier will cause the payout at the
end of the performance period to be increased or decreased
by 10% if AFG's stock performance compared to a peer
group is at or above the 75th percentile or at or below the
25th percentile, respectively.
These performance metrics are subject to change by the
Compensation Committee of the Board of Directors as Ambac's
business evolves.
Other than voluntary termination or involuntary termination for
cause, and provided that the participant meets certain minimum
service requirements, the performance awards are subject to
either partial or accelerated vesting. The current performance
awards shall be settled within 75 days after the end of the
performance period, including those with partial or accelerated
vesting.
| Ambac Financial Group, Inc. 129 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
A summary of PSU activity for 2020 is as follows:
Weighted
Average
Grant Date
Fair Value
Shares
Outstanding at beginning of period
650,212 $
Granted (1)
Delivered (2)
Forfeited
Performance adjustment (3)
Outstanding at end of period
331,184
(184,896)
(6,071)
54,085
844,514 $
17.98
19.99
22.35
18.00
22.35
18.09
(1) Represents performance share units at 100% of units granted for
LTIP Awards.
(2) Reflects the number of performance shares attributable to the
performance goals attained over the completed performance period
and for which service conditions have been met. When
performance stock unit awards issued by Ambac become taxable
compensation to employees, shares may be withheld to cover the
employee’s withholding taxes. For the year ended December 31,
2020, Ambac purchased 70,340 of shares from employees that
settled performance based restricted stock units to meet the
required tax withholdings.
(3) Represents the increase (decrease) in shares issued for awards
granted in 2017 based upon the attainment of performance metrics
at the end of the performance period.
As of December 31, 2020, there was $6 of total unrecognized
compensation costs related to the PSU portion of unvested
performance awards, which are expected to be recognized over a
weighted average period of 1.7 years.
16. LEASES
Ambac adopted the New Lease Standard, as defined and further
described in Note 2. Basis of Presentation and Significant
Accounting Policies on January 1, 2019. Ambac is the lessee and
lessor for certain lease agreements further described below.
Lessee information
Ambac is the lessee in operating leases for corporate offices, a
data center and equipment. Ambac's purchase of Xchange
resulted in additional office and equipment leases. Leases in
effect at December 31, 2020, have remaining lease terms
ranging from less than 1 year to 9 years. Our data center lease
has an automatic renewal of one-year unless either party elects
to terminate by providing 120 days notice prior to the renewal.
This renewal feature is not recognized in the lease liability or
right-of-use asset as it is not reasonably certain we will elect to
renew. An office lease related to Xchange includes a one-time
early termination provision. The lease liability and right-of-use
asset on this lease consider its full term as Ambac does not
reasonably expect to exercise the early termination option. No
other leases contain extension or termination provisions.
the
Lease costs are
Consolidated Statement of Total Comprehensive Income (Loss).
in operating expenses on
included
The components of lease costs, net of sub-lessor income, is as
follows:
Year Ended December 31,
2020
2019
Operating lease cost
Variable lease cost
Sublease income
Total lease cost
$
$
4 $
—
(1)
4 $
7
—
(1)
7
Ambac is required to make variable lease payments under
certain leases which primarily relates to variable costs of the
lessor, such as taxes, insurance, maintenance and electricity.
Supplemental information related to leases is as follows:
Year Ended December 31,
Cash paid for amounts included in the
measurement of operating lease
liabilities
Right-of-use assets obtained in
exchange for operating lease liabilities
(non-cash) (1)
2020
2019
$
4 $
—
6
30
(1) Includes right-of-use assets of $14 for the year ended December
31, 2019 for leases which existed prior to the New Lease Standard
implementation date of January 1, 2019.
Supplemental balance sheet information related to leases is as
follows:
December 31,
Operating leases:
Operating lease right of use assets
$
Operating lease liabilities
Weighted average remaining lease
term:
2020
2019
$
25
30
25
29
Operating leases
8.7 years
9.9 years
Weighted average discount rate:
Operating leases
7.7 %
7.9 %
Operating lease right of use assets and operating lease liabilities
are included in Other assets and Other liabilities, respectively,
on the consolidated balance sheet.
Future undiscounted lease payments, gross of sublease receipts,
to be made are as follows:
As of December 31, 2020
Operating
Leases
2021
2022
2023
2024
2025
Thereafter
Total lease payments
Less: imputed interest
Total
$
$
5
5
5
5
5
18
41
(11)
30
| Ambac Financial Group, Inc. 130 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Lessor information
Ambac is the lessor in one operating sublease of corporate office
space which has a remaining term of 9.0 years. There are no
extension or termination provisions.
Future undiscounted lease payments to be received are as
follows:
As of December 31, 2020
2021
2022
2023
2024
2025
Thereafter
Total lease receipts
Operating
Leases
$
1
1
1
1
1
5
$
11
17. COMMITMENTS AND CONTINGENCIES
Litigation Against Ambac
(v)
(iv)
fraudulent misrepresentation,
Monterey Bay Military Housing, LLC, et al. v. Ambac
Assurance Corporation, et al. (United States District Court,
Northern District of California, San Jose Division, Case No. 17-
cv-04992-BLF, filed August 28, 2017). Plaintiffs, the corporate
developers of various military housing projects, filed an
amended complaint on October 27, 2017 against AAC, a former
employee of AAC, and certain unaffiliated persons and entities,
asserting claims for (i) violation of 18 U.S.C §§ 1962(c) and
1962(d) (civil Racketeer Influenced and Corrupt Organizations
Act (“RICO”) and conspiracy to commit civil RICO), (ii) breach
of fiduciary duty, (iii) aiding and abetting breach of fiduciary
duty,
fraudulent
concealment and (vi) conspiracy to commit fraud. The claims
relate to bonds and debt certificates (insured by AAC) that were
issued to finance the renovation and construction of housing at
certain military bases. Plaintiffs allege that defendants secretly
conspired to overcharge plaintiffs for the financing of the
projects and directed the excess profits to themselves. Plaintiffs
allege defendants generated these excess profits by supposedly
charging inflated interest rates, manipulating “shadow ratings,”
charging unnecessary fees, and hiding evidence of their alleged
wrongdoing. Plaintiffs seek, among other things, compensatory
damages, disgorgement of profits and fees, punitive damages,
trebled damages and attorneys’ fees. Ambac and the other
defendants filed motions to dismiss the amended complaint on
November 13, 2017. On July 17, 2018, the court granted AAC’s
and the other defendants’ motion to dismiss the first amended
complaint without prejudice. On December 17, 2018, Plaintiffs
filed a second amended complaint. On February 15, 2019,
Ambac and the other defendants filed a motion to dismiss the
second amended complaint. On September 26, 2019, the court
issued a decision denying defendants’ motion to dismiss and sua
sponte reconsidering its previous denial of defendants’ motion to
transfer venue to the Southern District of New York (“SDNY”).
On October 4, 2019, the case was transferred to the SDNY. On
October 10, 2019, the defendants filed motions in the SDNY to
vacate or reconsider the decision by the Northern District of
California on the defendants’ motion to dismiss. On October 24,
2019, plaintiffs filed their brief in opposition to defendants'
motions to vacate or reconsider, and on October 31, 2019,
defendants filed their reply briefs in further support of their
motions. On November 20, 2019, the court ordered that the
defendants’ answers to the second amended complaint would be
due seven days after the court issues a decision on their motions.
that
issued by
Financial Oversight and Management Board for Puerto Rico, et
al. v. Autonomy Master Fund Limited, et al. (United States
District Court, District of Puerto Rico, No. 19-ap-00291, filed
May 2, 2019). On May 2, 2019, the Financial Oversight and
Management Board for Puerto Rico (the "Oversight Board"),
together with the Official Committee of Unsecured Creditors for
the Commonwealth (the "Committee") filed an adversary
proceeding against certain parties that filed proofs of claim on
account of general obligation bonds
the
Commonwealth of Puerto Rico, including AAC. The complaint
the general obligation bonds are
seeks declarations
unsecured obligations and, in the alternative, seeks to avoid any
security interests that holders of such bonds may have. On June
12, 2019, a group of general obligation bondholders moved to
dismiss the complaint. On June 13, 2019, at the request of the
Plaintiffs, the District Court stayed the case until September 1,
2019 as to all defendants; on July 24, 2019, the District Court
referred this matter to mediation and ordered it stayed during the
pendency of such mediation. AAC filed a statement of position
and reservation of rights on February 5, 2020; certain other
defendants filed motions to dismiss on this same date. On
February 9, 2020, the Oversight Board announced that it intends
to file, and to seek to confirm, an amended plan of adjustment
(the “Amended POA”). On March 10, 2020, the District Court
ordered that this case remain stayed while the Oversight Board
attempts to confirm the Amended POA.
Financial Oversight and Management Board for Puerto Rico, et
al. v. Ambac Assurance Corporation, et al. (United States
District Court, District of Puerto Rico, No. 19-ap-00363, filed
May 20, 2019). On May 20, 2019, the Oversight Board,
together with the Committee, as Plaintiffs, filed an adversary
proceeding against certain parties that filed proofs of claim on
account of bonds issued by the Puerto Rico Highways and
Transportation Authority ("PRHTA"), including AAC. The
complaint seeks declarations that the PRHTA bonds are only
secured by revenues on deposit with the PRHTA Fiscal Agent
and that PRHTA bondholders have no security interest in any
other property of PRHTA or the Commonwealth, and in the
alternative, to the extent such other security interests exist, the
complaint seeks to avoid other security interests that holders of
PRHTA bonds may have. On June 14, 2019, at the request of
the Plaintiffs, the District Court stayed the case until September
1, 2019 as to all defendants; on July 24, 2019, the District Court
referred this matter to mediation and ordered it stayed during the
pendency of such mediation. On December 19, 2019, the
District Court ordered that this matter will remain stayed
pending further order of the District Court pursuant to the
Oversight Board’s initiation of a separate adversary proceeding
concerning PRHTA bonds (No. 20-ap-00005, discussed below).
Financial Oversight and Management Board for Puerto Rico v.
Ambac Assurance Corp., et al. (United States District Court,
District of Puerto Rico, No. 20-ap-00003, filed Jan. 16, 2020).
| Ambac Financial Group, Inc. 131 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Pursuant to an order of the District Court setting out an agreed
schedule for litigation submitted by the team of mediators
designated in the Commonwealth’s restructuring cases (the
“Mediation Team“), on January 16, 2020, the Oversight Board
filed an adversary proceeding against monoline insurers insuring
bonds issued by the Puerto Rico Infrastructure Financing
Authority (“PRIFA”) and the PRIFA bond trustee, all of which
Defendants filed proofs of claim against the Commonwealth
relating to PRIFA bonds. The complaint seeks to disallow
Defendants’ proofs of claim against the Commonwealth in their
entirety, including for lack of secured status. On February 27,
2020, defendants filed motions to dismiss. On March 10, 2020,
the District Court stayed the motions to dismiss and authorized
the Oversight Board to move for summary judgment, which
motion defendants opposed. Oral argument on the motion for
summary judgment was held on September 23, 2020. On
January 20, 2021, the District Court granted defendants’ request
for deferral of the adjudication of the summary judgment motion
until defendants have the opportunity to conduct certain
discovery. Discovery is ongoing.
Financial Oversight and Management Board for Puerto Rico v.
Ambac Assurance Corp., et al. (United States District Court,
District of Puerto Rico, No. 20-ap-00004, filed Jan. 16, 2020).
Pursuant to an order of the District Court setting out an agreed
schedule for litigation submitted by the Mediation Team, on
January 16, 2020, the Oversight Board filed an adversary
proceeding against monoline insurers insuring bonds issued by
the Puerto Rico Convention Center District Authority
(“PRCCDA”) and the PRCCDA bond trustee, all of which
Defendants filed proofs of claim against the Commonwealth
relating to PRCCDA bonds. The complaint seeks to disallow
Defendants’ proofs of claim against the Commonwealth in their
entirety, including for lack of secured status. On February 27,
2020, defendants filed motions to dismiss. On March 10, 2020,
the District Court stayed the motions to dismiss and authorized
the Oversight Board to move for summary judgment, which
motion defendants opposed. Oral argument on the motion for
summary judgment was held on September 23, 2020. On
January 20, 2021, the District Court granted defendants’ request
for deferral of the adjudication of the summary judgment motion
until defendants have the opportunity to conduct certain
discovery. Discovery is ongoing.
Financial Oversight and Management Board for Puerto Rico v.
Ambac Assurance Corp., et al. (United States District Court,
District of Puerto Rico, No. 20-ap-00005, filed Jan. 16, 2020).
Pursuant to an order of the District Court setting out an agreed
schedule for litigation submitted by the Mediation Team, on
January 16, 2020, the Oversight Board filed an adversary
proceeding against monoline insurers insuring bonds issued by
PRHTA, certain PRHTA bondholders, and the PRHTA fiscal
agent for bondholders, all of which Defendants filed proofs of
claim against the Commonwealth relating to PRHTA bonds.
The complaint seeks to disallow Defendants’ proofs of claim
against the Commonwealth in their entirety, including for lack
of secured status. On February 27, 2020, defendants filed
motions to dismiss. On March 10, 2020, the District Court
stayed the motions to dismiss and authorized the Oversight
Board to move for summary judgment, which motion defendants
opposed. Oral argument on the motion for summary judgment
was held on September 23, 2020. On January 20, 2021, the
District Court granted defendants’ request for deferral of the
adjudication of the summary judgment motion until defendants
have the opportunity to conduct certain discovery. Discovery is
ongoing.
Financial Oversight and Management Board for Puerto Rico v.
Ambac Assurance Corp., et al. (United States District Court,
District of Puerto Rico, No. 20-ap-00007, filed Jan. 16, 2020).
Pursuant to an order of the District Court setting out an agreed
schedule for litigation submitted by the Mediation Team, on
January 16, 2020, the Oversight Board and the Committee filed
an adversary proceeding against monoline insurers insuring
bonds issued by PRHTA, certain PRHTA bondholders, and the
PRHTA fiscal agent for bondholders, all of which Defendants
filed proofs of claim against PRHTA relating to PRHTA bonds.
The complaint seeks to disallow portions of Defendants’ proofs
of claim against the PRHTA, including for lack of secured
status. On March 10, 2020, the District Court stayed this case.
NC Residuals Owners Trust, et al. v. Wilmington Trust Co., et
al. (Delaware Court of Chancery, C.A. No. 2019-0880, filed
Nov. 1, 2019). On November 1, 2019, AAC became aware of a
new declaratory judgment action filed by certain residual equity
interest holders (“NC Owners” or “Plaintiffs”) in fourteen
National Collegiate Student Loan Trusts (the “Trusts”) against
Wilmington Trust Company, the Owner Trustee for the Trusts;
U.S. Bank National Association, the Indenture Trustee; GSS
Data Services, Inc., the Administrator; and AAC. Through this
action, Plaintiffs seek a number of judicial determinations. On
January 21, 2020, the presiding Vice Chancellor entered an
order consolidating the action with previously filed litigation
relating to the Trusts. On February 13, 2020, AAC, the Owner
Trustee,
filed
declaratory judgment counterclaims. Several parties, including
Plaintiffs and Ambac Assurance, filed motions for judgment on
judicial
the pleadings
determinations. On August 27, 2020, the Vice Chancellor
issued an opinion addressing all of the pending motions for
judgment on the pleadings, which granted certain of the parties’
requested judicial determinations and denied others.
He
deferred judgment on still other declarations pending further
factual development. Trial on
the unresolved contractual
interpretation issues has been scheduled for September 13–17,
2021.
Indenture Trustee, and other parties
support of
requested
their
the
in
AAC’s estimates of projected losses for RMBS transactions
consider, among other things, the RMBS transactions’ payment
waterfall structure, including the application of interest and
principal payments and recoveries, and depend in part on our
interpretations of contracts and other bases of our legal rights.
From time to time, bond trustees and other transaction
participants have employed different contractual interpretations
and have commenced, or threatened to commence, litigation to
resolve these differences. It is not possible to predict whether
additional disputes will arise, nor the outcomes of any potential
litigation. It is possible that there could be unfavorable
outcomes in this or other disputes or proceedings and that our
interpretations may prove to be incorrect, which could lead to
changes to our estimate of loss reserves.
| Ambac Financial Group, Inc. 132 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
AAC has periodically received various regulatory inquiries and
requests for information with respect to investigations and
inquiries that such regulators are conducting. AAC has complied
with all such inquiries and requests for information.
The Company is involved from time to time in various routine
legal proceedings, including proceedings related to litigation
with present or former employees. Although the Company’s
litigation with present or former employees is routine and
incidental to the conduct of its business, such litigation can
result in large monetary awards when a civil jury is allowed to
determine compensatory and/or punitive damages for, among
other things, termination of employment that is wrongful or in
violation of implied contracts.
From time to time, Ambac is subject to allegations concerning
its corporate governance that may lead to litigation, including
derivative litigation, and while the monetary impacts may not be
material, the matters may distract management and the Board of
Directors from their principal focus on Ambac's business,
strategy and objectives.
It is not reasonably possible to predict whether additional suits
will be filed or whether additional inquiries or requests for
information will be made, and it is also not possible to predict
the outcome of litigation, inquiries or requests for information. It
is possible that there could be unfavorable outcomes in these or
other proceedings. Legal accruals for litigation against the
Company which are probable and reasonably estimable, and
management's estimated range of loss for such matters, are
either not applicable or are not material to the operating results
or financial position of the Company. For the litigation matters
the Company is defending that do not meet the “probable and
reasonably estimable” accrual threshold and where no loss
estimates have been provided above, management is unable to
make a meaningful estimate of the amount or range of loss that
from unfavorable outcomes. Under some
could
circumstances, adverse results in any such proceedings could be
material
financial position,
profitability or cash flows. The Company believes that it has
substantial defenses to the claims above and, to the extent that
these actions proceed, the Company intends to defend itself
vigorously; however, the Company is not able to predict the
outcomes of these actions.
to our business, operations,
result
Litigation Filed or Joined by Ambac
In the ordinary course of their businesses, certain of Ambac’s
subsidiaries assert claims in legal proceedings against third
parties to recover losses already paid and/or mitigate future
losses. The amounts recovered and/or losses avoided which may
result from these proceedings is uncertain, although recoveries
and/or losses avoided in any one or more of these proceedings
during any quarter or fiscal year could be material to Ambac’s
results of operations in that quarter or fiscal year.
Puerto Rico
Assured Guaranty Corp., Assured Guaranty Municipal Corp.,
and Ambac Assurance Corporation v. Alejandro Garcia Padilla,
et al. (United States District Court, District of Puerto Rico No.
3:16-cv-01037, filed January 7, 2016). AAC, along with co-
plaintiffs Assured Guaranty Corp. and Assured Guaranty
Municipal Corp., filed a complaint for declaratory and injunctive
relief to protect its rights against the illegal clawback of certain
revenue by the Commonwealth of Puerto Rico. Defendants
moved to dismiss on January 29, 2016. On October 4, 2016, the
court denied the Defendants’ motions to dismiss. On October
14, 2016, Defendants filed a Notice of Automatic Stay, asserting
that Plaintiffs’ claims have been rendered moot and further
asserting that the case was automatically stayed under section
405 of the Puerto Rico Oversight, Management and Economic
Stability Act ("PROMESA"). On October 28, 2016, Plaintiffs
informed the court that neither party was currently challenging
the stay, and expressly reserved their right to seek to lift the stay
at any time. Plaintiffs also objected to Defendants’ assertion that
the case should be dismissed as moot. PROMESA’s litigation
stay expired on May 2, 2017. On May 3, 2017, the Oversight
Board filed a petition to adjust the Commonwealth’s debts under
Title III of PROMESA, resulting in an automatic stay of
litigation against the Commonwealth. On May 17, 2017, the
court issued an order staying this case until further order of the
court.
Ambac Assurance Corporation v. Puerto Rico Highways and
Transportation Authority (United States District Court, District
of Puerto Rico, No. 16-cv-1893, filed May 10, 2016). AAC filed
a complaint against
the Puerto Rico Highways and
Transportation Authority ("PRHTA") on May 10, 2016, alleging
breach of fiduciary duty and breach of contract in connection
with PRHTA’s extension of an existing toll road concession
agreement. The complaint alleges that it was inappropriate for
PRHTA to enter into the extension agreement in its current state
of financial distress because PRHTA has no control over, and is
unlikely to receive, the proceeds of the transaction. AAC also
filed related motions seeking the appointment of a provisional
receiver for PRHTA and expedited discovery. On May 21, 2017,
the Oversight Board filed a petition to adjust PRHTA’s debts
under Title III of PROMESA, resulting in an automatic stay of
litigation against PRHTA. On May 24, 2017, the court issued an
order staying this case until further order of the court.
Lex Claims, LLC et al. v. Alejandro Garcia Padilla et al. (United
States District Court, District of Puerto Rico, No. 16-2374, filed
July 20, 2016). On October 7, 2016, certain General Obligation
bondholder Plaintiffs in an action to which AAC was not then a
party filed a motion for leave to amend an existing complaint,
adding the Puerto Rico Sales Tax Financing Corporation
("COFINA"), COFINA’s executive director, and the trustee for
the COFINA bonds as Defendants, and asserting numerous
claims that challenged the legal validity of the COFINA
structure and seek injunctive relief requiring the sales and use
tax proceeds securing COFINA’s bonds to be transferred to the
Puerto Rico Treasury. On February 17, 2017, the court permitted
AAC to intervene. On May 3, 2017, a petition under Title III of
PROMESA was filed on behalf of the Commonwealth of Puerto
Rico, and on May 5, 2017, a petition under Title III of
PROMESA was filed on behalf of COFINA, resulting in an
automatic stay of litigation against the Commonwealth and
COFINA (respectively). On May 17, 2017, the court issued an
order staying this case until further order of the court. On
October 19, 2018, the Oversight Board filed (i) a disclosure
statement and a plan of adjustment for COFINA (the “COFINA
Plan”) in the COFINA Title III case incorporating a resolution
| Ambac Financial Group, Inc. 133 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
to
taxes
sales and use
of the dispute between the Commonwealth and COFINA
concerning entitlement
(the
“Commonwealth-COFINA Dispute”), and (ii) a motion under
Bankruptcy Rule 9019 in the Commonwealth Title III case for
approval of the settlement of the Commonwealth-COFINA
Dispute (the “9019 Motion”). On February 4, 2019 the District
Court granted the 9019 Motion and confirmed the COFINA
Plan, which resolves the dispute in this case. The COFINA Plan
became effective on February 12, 2019. Following confirmation
of the COFINA Plan, several parties filed notices of appeal of
the District Court’s confirmation order. On April 12, 2019, the
Oversight Board and the Puerto Rico Fiscal Agency and
Financial Advisory Authority ("AAFAF") moved to dismiss
these appeals as equitably moot because the COFINA Plan has
been consummated. On February 8, 2021, the First Circuit
dismissed the appeals of the confirmation order.
Ambac Assurance Corporation v. Puerto Rico, et al. (United
States District Court, District of Puerto Rico, No. 17-1567, filed
May 2, 2017). On May 2, 2017, AAC filed a complaint seeking
a declaration that the Commonwealth’s Fiscal and Economic
Growth Plan (the "FEGP") and a recently enacted statute called
the “Fiscal Plan Compliance Law” are unconstitutional and
unlawful because they violate the Contracts, Takings, and Due
Process Clauses of the U.S. Constitution, are preempted by
PROMESA, and are unlawful transfers of property from
COFINA to the Commonwealth in violation of PROMESA. On
May 3, 2017, a petition under Title III of PROMESA was filed
on behalf of the Commonwealth of Puerto Rico, and on May 5,
2017, a petition under Title III of PROMESA was filed on
behalf of COFINA, resulting in an automatic stay of litigation
against COFINA. On May 17, 2017, the court issued an order
staying this case until further order of the court. On February 4,
2019, the District Court granted the 9019 Motion and confirmed
the COFINA Plan. The COFINA Plan became effective on
February 12, 2019. Following confirmation of the COFINA
Plan, several parties filed notices of appeal of the District
Court’s confirmation order. AAC anticipates that this case will
be voluntarily dismissed given the effectiveness of the COFINA
Plan.
Ambac Assurance Corporation v. Puerto Rico, et al. (United
States District Court, District of Puerto Rico, No. 17-1568, filed
May 2, 2017). On May 2, 2017, AAC filed a complaint alleging
that various moratorium laws and executive orders enacted by
the Commonwealth to claw back funds from PRIFA, PRHTA,
and PRCCDA bonds violate the Contracts, Takings, and Due
Process Clauses of the U.S. Constitution, are preempted by
PROMESA, and unlawfully transfer PRHTA, PRCCDA, and
PRIFA property to the Commonwealth. On May 3, 2017, a
petition under Title III of PROMESA was filed on behalf of the
Commonwealth of Puerto Rico and on May 21, 2017, a petition
under Title III of PROMESA was filed on behalf of PRHTA,
resulting
the
Commonwealth and PRHTA (respectively). On May 17, 2017,
the court issued an order staying this case until further order of
the court.
in an automatic stay of
litigation against
Ambac Assurance Corporation v. U.S. Department of Treasury
et al. (United States District Court, District of Columbia, No.
17-809, filed May 2, 2017). On May 2, 2017, AAC filed a
complaint against the U.S. Department of Treasury and Steven
Mnuchin, in his official capacity as Secretary of the Treasury,
alleging that Puerto Rico’s ongoing diversion of rum taxes from
PRIFA violates the Contracts, Takings, and Due Process Clauses
of the U.S. Constitution, and seeking an equitable lien on all rum
taxes possessed by the U.S. Treasury, and an injunction
preventing their transfer to the Commonwealth. On May 3,
2017, a petition under Title III of PROMESA was filed on
behalf of the Commonwealth of Puerto Rico. On May 24, 2017,
the Oversight Board filed a statement requesting that the court
take notice of the stay resulting from the Commonwealth’s Title
III filing. On May 25, 2017, the court issued an order staying
this case as a result of the Title III proceedings.
Ambac Assurance Corporation v. Bank of New York Mellon
(United States District Court, Southern District of New York.
No. 1:17-cv-03804, filed May 2, 2017). On May 2, 2017, AAC
filed a complaint in New York State Supreme Court, New York
County, against the trustee for the COFINA bonds, Bank of New
York Mellon ("BNY"), alleging breach of fiduciary, contractual,
and other duties for failing to adequately and appropriately
protect the holders of certain AAC-insured senior COFINA
bonds. On May 19, 2017, BNY filed a notice of removal of this
action from New York state court to the United States District
Court for the Southern District of New York. On May 30, 2017,
the United States District Court for the District of Puerto Rico
entered an order in an adversary proceeding brought by BNY
(No. 1:17-ap-00133) staying this litigation pending further order
of the court. The COFINA Plan became effective on February
12, 2019, and, pursuant to the District Court’s confirmation
order, this litigation is permitted to continue, with Ambac’s
claims against BNYM being limited to those for gross
negligence, willful misconduct and intentional fraud. Following
confirmation of the COFINA Plan, several parties filed notices
of appeal of the District Court’s confirmation order to the First
Circuit Court of Appeals. On April 12, 2019, the Oversight
Board and AAFAF moved to dismiss these appeals as equitably
moot because the COFINA Plan has been consummated. On
February 8, 2021, the First Circuit dismissed the appeals of the
confirmation order.
Bank of New York Mellon v. COFINA, et al. (United States
District Court, District of Puerto Rico, No. 1:17-ap-00133, filed
May 16, 2017). On May 16, 2017, BNY filed an interpleader
action styled as an adversary proceeding against COFINA and
certain creditors of COFINA, including AAC, that have made
competing claims of entitlement to funds held by BNY in order
to determine the parties’ respective entitlements to the funds.
BNY also sought a release of liability in association with the
COFINA funds in its possession.. On September 27, 2018, the
court terminated competing motions for summary judgment
without prejudice in light of the pending agreement in principle
between the agent for COFINA and the agent for the
Commonwealth in adversary proceeding no. 1:17-ap-00257 (the
“Commonwealth-COFINA Dispute,” discussed below). On
October 19, 2018, the Oversight Board filed (i) a disclosure
statement and the COFINA Plan in the COFINA Title III case
incorporating a resolution of the Commonwealth-COFINA
Dispute, and (ii) the 9019 Motion in the Commonwealth Title III
case for approval of the settlement of the Commonwealth-
COFINA Dispute. On February 4, 2019 the District Court
| Ambac Financial Group, Inc. 134 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
granted the 9019 Motion and confirmed the COFINA Plan,
which resolves the dispute in this case. The COFINA Plan
became effective on February 12, 2019. Following confirmation
of the COFINA Plan, several parties filed notices of appeal of
the District Court’s confirmation order to the First Circuit Court
of Appeals. On February 20, 2019, on the joint motion of BNY
and COFINA, the District Court dismissed this case with
prejudice. On April 12, 2019, the Oversight Board and AAFAF
moved to dismiss these appeals as equitably moot because the
COFINA Plan has been consummated. On February 8, 2021, the
First Circuit dismissed the appeals of the confirmation order.
Official Committee of Unsecured Creditors v. Whyte (United
States District Court, District of Puerto Rico, No. 1:17-
ap-00257, filed September 8, 2017) (the Commonwealth-
COFINA Dispute). On August 10, 2017, the court approved a
stipulation between the Oversight Board, the Commonwealth,
COFINA, and certain creditor parties, including AAC, to resolve
the Commonwealth-COFINA Dispute regarding entitlement to
sales and use taxes. The stipulation provided that separate
agents for COFINA and the Commonwealth would litigate the
dispute while preserving the ability of interested parties, to
participate in the litigation. On September 8, 2017, the
Commonwealth Agent filed an adversary proceeding against the
COFINA Agent challenging the COFINA structure on various
grounds. The Commonwealth Agent filed a revised complaint
on October 25, 2017, making technical corrections to the
original complaint. AAC made a motion to intervene in this
action, which the court granted on November 21, 2017. The
Commonwealth Agent filed an amended complaint on January
16, 2018, largely re-stating its original causes of action to fall
within the parameters of the dispute set by the court. After
extensive motion practice, on September 27, 2018, the court
terminated competing summary judgment motions without
prejudice in light of a pending agreement in principle between
the Commonwealth Agent and COFINA Agent. On October 19,
2018, the Oversight Board filed (i) a disclosure statement and
the COFINA Plan in the COFINA Title III case incorporating a
resolution of the Commonwealth-COFINA Dispute, and (ii) the
9019 Motion in the Commonwealth Title III case for approval of
the settlement of the Commonwealth-COFINA Dispute. On
February 4, 2019, the District Court granted the 9019 Motion
and confirmed the COFINA Plan, which resolves the dispute in
this case. The COFINA Plan became effective on February 12,
2019. On February 21, 2019, on the joint motion of the agents
for the Commonwealth and COFINA, the Oversight Board,
AAFAF, and all participating interested parties, the District
Court dismissed
Following
confirmation of the COFINA Plan, several parties filed notices
of appeal of the District Court’s confirmation order to the First
Circuit Court of Appeals. On April 12, 2019, the Oversight
Board and AAFAF moved to dismiss these appeals as equitably
moot because the COFINA Plan has been consummated. On
February 8, 2021, the First Circuit dismissed the appeals of the
confirmation order.
this case with prejudice.
Financial Oversight and Management Board for Puerto Rico v.
Public Buildings Authority (United States District Court,
District of Puerto Rico, No. 1:18-ap-00149, filed December 21,
2018). On December 21, 2018, the Oversight Board, together
with the Committee, as Plaintiffs, filed a complaint against the
Puerto Rico Public Buildings Authority (“PBA”) seeking
declaratory judgment that the leases between PBA and its
lessees-many of whom are agencies and instrumentalities of the
Commonwealth-are “disguised financings,” not true leases, and
therefore should not be afforded administrative expense priority
under the Bankruptcy Code. On March 12, 2019, AAC and
other interested parties were permitted to intervene in order to
argue that the PBA leases are valid leases, and are entitled to
administrative expense treatment under the Bankruptcy Code.
On June 16, 2019, the Oversight Board announced that it had
entered into a plan support agreement ("PSA") with certain
general obligation and PBA bondholders that includes a
issues
proposed
surrounding both general obligation and PBA bonds, including a
proposed settlement of this adversary proceeding. On July 24,
2019, the District Court referred this matter to mediation and
ordered it stayed during the pendency of such mediation. On
September 27, 2019, the Oversight Board filed a joint plan of
adjustment and disclosure statement for the Commonwealth,
PBA, and the Employees’ Retirement System for Puerto Rico.
On February 9, 2020, the Oversight Board executed a new plan
support agreement with additional creditors (the “Amended
PSA”) and announced that it intends to file, and seek to confirm,
the Amended POA. On March 10, 2020, the District Court
ordered that this case be stayed while the Oversight Board
attempts to confirm the Amended POA.
resolution of claim objections
to and
In re Financial Oversight and Management Board for Puerto
Rico (United States District Court, District of Puerto Rico, No.
1:17-bk-03283), Omnibus Objection of (I) Financial Oversight
and Management Board, Acting Through its Special Claims
Committee, and (II) Official Committee of Unsecured Creditors,
Pursuant to Bankruptcy Code Section 502 and Bankruptcy Rule
3007, to Claims Filed or Asserted by Holders of Certain
Commonwealth General Obligation Bonds (Dkt. No. 4784, filed
January 14, 2019) (“GO Bond Claim Objection Procedures”).
On January 14, 2019, the Oversight Board and the Committee
filed an omnibus claim objection in the Commonwealth’s Title
III case challenging claims arising from certain general
obligation bonds issued by the Commonwealth in 2012 and
2014 totaling approximately $6 billion, none of which are held
or insured by AAC. The court subsequently ordered certain
consolidated procedures permitting parties
interest an
opportunity to participate in litigation of the objection. On April
11, 2019, AAC filed a notice of participation in support of the
objection, advancing the argument, among other things, that the
PBA leases are true leases, but the associated debt nonetheless
should be included in the Commonwealth’s debt ceiling
calculation such that the 2012 and 2014 general obligation bond
issuances are null and void and claims arising therefrom should
be disallowed. On June 16, 2019, the Oversight Board
announced that it had entered into a PSA with certain general
obligation and PBA bondholders that includes a proposed
resolution of claim objections to and issues surrounding both
general obligation and PBA bonds, including a proposed
settlement of this omnibus claim objection. On June 25, 2019,
the Oversight Board moved to stay proceedings related to this
omnibus claim objection while it pursues confirmation of the
plan contemplated in the PSA. On July 24, 2019, the District
Court referred this matter to mediation and ordered it stayed
during the pendency of such mediation. On February 5, 2020,
in
| Ambac Financial Group, Inc. 135 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
certain parties filed motions to dismiss the claim objection. On
February 9, 2020, the Oversight Board executed the Amended
PSA and announced that it intends to file, and seek to confirm,
the Amended POA. Additional motions to dismiss were filed on
February 19, 2020. On March 10, 2020, the District Court
ordered that this matter remain stayed while the Oversight Board
attempts to confirm the Amended POA. On July 19, 2020, the
Committee filed a motion to lift the stay on this claim objection
in light of the changes to the fiscal plan and likely changes to the
Commonwealth plan of adjustment in light of COVID-19. On
September 1, 2020, AAC filed a partial joinder to the
Committee’s motion. On September 17, 2020, the District Court
denied the Committee’s motion without prejudice, indicating
that the stay likely would remain in place until at least March
2021. On October 1, 2020, the Committee moved the District
Court to reconsider its denial of the Committee’s motion to lift
the stay in light of materials released by the parties to the
Amended PSA that the Committee argued demonstrate a lack of
agreement between those parties. On October 5, 2020, the
District Court
for
reconsideration. On October 16, 2020, the Committee appealed
to the First Circuit the District Court’s order denying the
Committee’s motion to lift the stay on its claim objection. On
February 22, 2021, the First Circuit dismissed the appeal.
the Committee’s motion
denied
In re Financial Oversight and Management Board for Puerto
Rico (United States District Court, District of Puerto Rico, No.
1:17-bk-03283), Ambac Assurance Corporation’s Motion to
Strike Certain Provisions of the Plan Support Agreement By and
Among the Financial Oversight and Management Board for
Puerto Rico, Certain GO Holders, and Certain PBA Holders
(Dkt. No. 13573, filed July 7, 2020) (“Amended Motion to
Strike PSA”). On June 16, 2019, the Oversight Board
announced that it had entered into a PSA with certain general
obligation and PBA bondholders that includes a proposed
resolution of claim objections to and issues surrounding both
general obligation and PBA bonds. On July 16, 2019, AAC
filed a motion to strike certain provisions of the PSA that it
believes violate PROMESA, including the potential payment of
a breakup fee to creditors who have supported the PSA (Dkt.
No. 8020) (Original Motion to Strike PSA). On February 9,
2020, the Oversight Board executed the Amended PSA and on
March 10, 2020, the District Court denied the Original Motion
to Strike PSA without prejudice given the execution of the
Amended PSA. On July 7, 2020, AAC filed the Amended
Motion to Strike PSA seeking similar relief with respect to the
Amended PSA. Briefing on the Amended Motion to Strike PSA
concluded on October 20, 2020, and the District Court has taken
the matter on submission. On February 23, 2021, the Oversight
Board announced that it entered into a further revised PSA (the
“Second Amended PSA”), and that all parties to the Amended
PSA had jointly terminated the Amended PSA.
In re Financial Oversight and Management Board for Puerto
Rico (United States District Court, District of Puerto Rico, No.
1:17-bk-03283), Ambac Assurance Corporation's Motion and
Memorandum of Law in Support of Its Motion Concerning
Application of the Automatic Stay to the Revenues Securing
PRIFA Rum Tax Bonds (Dkt. No. 7176, filed May 30, 2019)
(“PRIFA Stay Motion”). On May 30, 2019, AAC filed a motion
seeking an order that the automatic stay does not apply to certain
lawsuits AAC seeks to bring or to continue relating to bonds
issued by PRIFA, or, in the alternative, for relief from the
automatic stay to pursue such lawsuits or for adequate protection
of AAC's collateral. On July 24, 2019, the District Court
referred this matter to mediation and ordered it stayed during the
pendency of such mediation. On January 31, 2020, the District
Court granted a motion filed by AAC, together with Assured
Guaranty Corporation, Assured Guaranty Municipal
Corporation, and Financial Guaranty Insurance Company to
amend the PRIFA Stay Motion in order to allow the PRIFA
bond trustee to join the amended motion and to allow movants
to address recent, controlling precedent from the First Circuit,
and AAC filed the amended motion the same day. On July 2,
2020, the District Court denied the motion to lift the stay on
certain grounds. Briefing regarding additional grounds on which
AAC and other movants seek stay relief concluded on August 5,
2020; on September 9, 2020, the District Court denied the
motion to lift the stay on the additional grounds. On September
23, 2020, AAC and the other movants appealed this decision to
the First Circuit. Oral argument was held before the First Circuit
on February 4, 2021.
In re Financial Oversight and Management Board for Puerto
Rico (United States District Court, District of Puerto Rico, No.
1:17-bk-03283), Motion of Assured Guaranty Corp., Assured
Municipal Corp., Ambac Assurance Corporation, National
Public Finance Guarantee Corporation, and Financial
Guaranty Insurance Company for Relief from the Automatic
Stay, or, in the Alternative, Adequate Protection (Dkt. No.
10102, filed January 16, 2020) (“PRHTA Stay Motion”).
Pursuant to an order of the District Court setting out an agreed
schedule for litigation submitted by the Mediation Team, on
January 16, 2020, AAC, together with Assured Guaranty Corp.,
Assured Municipal Corp., National Public Finance Guarantee
Corporation, and Financial Guaranty Insurance Company filed a
motion seeking an order that the automatic stay does not apply
to movants’ enforcement of the application of pledged revenues
to the PRHTA bonds or the enforcement of movants’ liens on
revenues pledged to such bonds, or, in the alternative, for
adequate protection of movants’ interests in the revenues
pledged to PRHTA bonds. On July 2, 2020, the District Court
denied the motion to lift the stay on certain grounds. Briefing
regarding additional grounds on which AAC and other movants
seek stay relief concluded on August 5, 2020; on September 9,
2020, the District Court denied the motion to lift the stay on the
additional grounds. On September 23, 2020, AAC and the other
movants appealed this decision to the First Circuit. Oral
argument was held before the First Circuit on February 4, 2021.
In re Financial Oversight and Management Board for Puerto
Rico (United States District Court, District of Puerto Rico, No.
1:17-bk-03283), Ambac Assurance Corporation, Financial
Guaranty Insurance Company, Assured Guaranty Corp.,
Assured Municipal Corp., and the Bank of New York Mellon’s
Motion Concerning Application of the Automatic Stay to the
Revenues Securing the CCDA Bonds (Dkt. No. 10104, filed
January 16, 2020) (“PRCCDA Stay Motion”). Pursuant to an
order of the District Court setting out an agreed schedule for
litigation submitted by the Mediation Team, on January 16,
together with Financial Guaranty Insurance
2020, AAC,
Company, Assured Guaranty Corp., Assured Municipal Corp.,
| Ambac Financial Group, Inc. 136 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
and the PRCCDA bond trustee, filed a motion seeking an order
either (i) that the automatic stay does not apply to movants’
enforcement of their rights to revenues pledged to PRCCDA
bonds by bringing an enforcement action against PRCCDA; or,
in the alternative, (ii) lifting the automatic stay to enable
movants to pursue an enforcement action against PRCCDA; or,
in the further alternative, (iii) ordering adequate protection of
movants’ interests in the PRCCDA pledged to PRCCDA bonds.
On July 2, 2020, the District Court denied the motion to lift the
stay on certain grounds, but found that the movants had stated a
colorable claim that a certain account was the “Transfer
Account” on which movants hold a lien. Briefing regarding
additional grounds on which AAC and other movants seek stay
relief concluded on August 5, 2020; on September 9, 2020, the
District Court denied the motion to lift the stay on the additional
grounds, and found that a final determination on issues related to
the identity of the Transfer Account would be made in the
decision on the motions for summary judgment issued in the
CCDA-related adversary proceeding, No. 20-ap-00004.
Ambac Assurance Corporation v. Merrill Lynch, Pierce, Fenner
& Smith Incorporated, Citigroup Global Markets Inc., Goldman
Sachs & Co. LLC, J.P. Morgan Securities LLC, Morgan Stanley
& Co. LLC, Oriental Financial Services LLC; Popular Securities
LLC; Raymond James & Associates, Inc., RBC Capital Markets
LLC; Samuel A. Ramirez & Co. Inc., Santander Securities LLC;
UBS Financial Services Inc.; and UBS Securities LLC
(Commonwealth of Puerto Rico, Court of First Instance, San
Juan Superior Court, Case No. SJ-2020-CV-01505, filed
February 19, 2020). On February 19, 2020, AAC filed a
complaint in the Commonwealth of Puerto Rico, Court of First
Instance, San Juan Superior Court, against certain underwriters
of Ambac-insured bonds issued by PRIFA and PRCCDA, with
causes of action under the Puerto Rico civil law doctrines of
actos proprios and Unilateral Declaration of Will. AAC alleges
defendants engaged in inequitable conduct in underwriting
issued by PRIFA and PRCCDA,
Ambac-insured bonds
including failing to investigate and adequately disclose material
information in the official statements for the bonds that
defendants provided to AAC regarding systemic deficiencies in
the Commonwealth’s financial reporting. AAC seeks damages
in compensation for claims paid by AAC on its financial
guaranty insurance policies insuring such bonds, pre-judgment
and post-judgment interest, and attorneys’ fees. On March 20,
2020, Defendants removed this case to the Title III Court. On
April 20, 2020, AAC moved to remand the case back to the
Court of First Instance. On July 29, 2020, the District Court
granted AAC’s motion
the
Commonwealth court. AAC filed an amended complaint in the
Commonwealth court on October 28, 2020. In the Amended
Complaint, AAC added claims on bonds issued by the
Commonwealth, PBA and PRHTA and added defendants that
had underwritten these bonds. Defendants filed motions to
dismiss on December 8 and 14, 2020; AAC filed its opposition
to the motions to dismiss on January 15, 2021. Defendants filed
replies to their motions to dismiss on February 5 and 16, 2021.
AAC will file its sur-reply to the motion to dismiss on March 5,
2021.
the case
remand
to
to
Ambac Assurance Corporation v. Autopistas Metropolitanas de
Puerto Rico, LLC (United States District Court, District of
for
Puerto Rico, No. 3:20-cv-01094, filed February 19, 2020). On
February 19, 2020, AAC filed a complaint in the U.S. District
Court for the District of Puerto Rico, against Autopistas
Metropolitanas de Puerto Rico, LLC (“Metropistas”), which
holds a concession from PRHTA for two Puerto Rico highways,
PR-5 and PR-22, in connection with a 10-year extension of the
concession that was entered into in April 2016. The complaint
includes claims
fraudulent conveyance and unjust
enrichment, alleging that the consideration paid by Metropistas
for the extension was less than reasonably equivalent value and
most of the benefit of such payment was received by the
Commonwealth instead of PRHTA.
AAC also seeks a
declaratory judgment that it has a valid and continuing lien on
certain toll revenues that are being collected by Metropistas. On
March 31, 2020, the Oversight Board filed a motion before the
Title III Court seeking an order directing Ambac to withdraw its
complaint. On April 20, 2020, the District Court ordered this
case stayed pending briefing before the Title III Court on the
Oversight Board’s motion to withdraw. On June 16, 2020, the
Title III Court ordered AAC to withdraw its complaint. AAC
withdrew its complaint on June 23, 2020, and noticed an appeal
from the Title III Court’s order to withdraw on June 30, 2020.
AAC’s opening appeal brief was filed before the First Circuit on
October 19, 2020; briefing was completed on February 12, 2021.
Oral argument is scheduled to be heard on March 8, 2021.
Ambac Assurance Corporation v. Financial Oversight and
Management Board for Puerto Rico (United States District
Court, District of Puerto Rico, No. 3:20-ap-00068, filed May 26,
2020). On May 26, 2020, AAC filed an adversary complaint
before the Title III Court seeking (i) a declaration that titles I, II,
and III of PROMESA are unconstitutional because they violate
the Bankruptcy Clause of the U.S. Constitution (which requires
all bankruptcy laws to be uniform) and (ii) dismissal of the
pending Title III petitions. On August 17, 2020, the Oversight
Board filed a motion to dismiss the complaint; on August 18,
2020, the Official Committee of Retired Employees of the
Commonwealth of Puerto Rico (the “Retiree Committee”) and
the Puerto Rico Fiscal Agency and Financial Advisory Authority
(“AAFAF”) filed joinders to the motion to dismiss. The United
States filed a motion to dismiss on October 2, 2020. Oral
argument on the motions to dismiss was held on January 12,
2021.
In re Financial Oversight and Management Board for Puerto
Rico (United States District Court, District of Puerto Rico, No.
1:17-bk-03283), Urgent Motion for Bridge Order, and Motion
for Appointment as Trustees Under 11 U.S.C. § 926, of Ambac
Assurance Corporation, Assured Guaranty Corp., Assured
Guaranty Municipal Corp., Financial Guaranty Insurance
Company, and National Public Finance Guarantee Corporation
(Dkt. No. 13708, filed July 17, 2020) (“HTA Trustee Motion”).
On July 17, 2020, AAC, together with Assured Guaranty
Corporation, Assured Guaranty Municipal Corporation, and
Financial Guaranty Insurance Company, filed a motion seeking
appointment as trustees under Section 926 of the Bankruptcy
Code to pursue certain avoidance actions on behalf of HTA
against the Commonwealth of Puerto Rico. The HTA Trustee
Motion attached a proposed complaint detailing the avoidance
claims that movants would pursue. On August 11, 2020, the
District Court denied the HTA Trustee Motion; on August 24,
| Ambac Financial Group, Inc. 137 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
2020, movants noticed an appeal of the denial of the HTA
Trustee Motion to the First Circuit. On September 30, 2020,
movants filed a motion with the First Circuit to hold this appeal
in abeyance pending the First Circuit’s resolution of the appeal
from the District Court’s denial of the HTA Lift-Stay Motion.
On October 13, 2020, the Oversight Board opposed the motion
to hold the appeal in abeyance and cross-moved to dismiss the
appeal as moot, arguing that the statute of limitations on the
avoidance actions movants wish to pursue has expired. Briefing
on both motions concluded on October 27, 2020. On December
22, 2020, the First Circuit denied the motion to hold the appeal
in abeyance, and referred the motion to dismiss to the panel
determining the merits of the appeal. Movants’ opening brief
before the First Circuit was filed on February 17, 2021; briefing
is expected to conclude on May 10, 2021.
Student Loans Exposure
in
and deficiencies
CFPB v. Nat’l Collegiate Master Student Loan Trust (United
States District Court, District of Delaware, Case No. 1:17-
cv-01323, filed September 18, 2017). The Consumer Financial
Protection Bureau (“CFPB”) filed a complaint against fifteen
National Collegiate Student Loan Trusts, regarding alleged
servicing practices.
improprieties
Simultaneous with the filing of its complaint, CFPB also filed a
motion to approve a proposed consent judgment that would have
granted monetary damages and injunctive relief against the
Trusts. AAC guaranteed certain securities issued by three of the
Trusts and indirectly insures six other Trusts. On September 20,
2017, AAC filed a motion to intervene in the action, which
motion was granted on October 19, 2018. Following discovery
and briefing, on May 31, 2020, the District Court denied the
CFPB’s motion to approve the proposed consent judgment. On
March 19, 2020, Intervenor Transworld Systems Inc. filed a
motion to dismiss the action for lack of subject matter
jurisdiction. On July 10, 2020, AAC and several other
intervenors filed a motion to dismiss the action for lack of
subject matter jurisdiction and for failure to state a claim.
Briefing on both motions to dismiss is complete. Additionally,
on July 2, 2020, the CFPB submitted an application for entry of
default against the Trusts. AAC and the Owner Trustee opposed
the CFPB’s application, which remains pending.
Nat’l Collegiate Master Student Loan Trust v. Pa. Higher
Education Assistance Agency (PHEAA) (Delaware Court of
Chancery, C.A. No. 12111-VCS, filed March 21, 2016).
Plaintiffs purporting to act on behalf of fifteen National
Collegiate Student Loan Trusts filed a lawsuit against PHEAA, a
servicer of loans in the Trusts, alleging improprieties and
deficiencies
in servicing practices and seeking an order
compelling PHEAA to submit to an emergency audit. PHEAA
submitted papers contesting the validity of certain transfers to
Plaintiffs of beneficial ownership interests in the Trusts. In
addition, the Owner Trustee of the Trusts, Wilmington Trust
Company, WTC, citing
irreconcilable differences with
Plaintiffs, has resigned from its role as Owner Trustee and
moved for appointment of a successor Owner Trustee. On
October 9, 2017, the court directed the parties to meet and
confer to develop a process for selecting an interim Owner
Trustee. AAC guaranteed certain securities issued by three of
the Trusts and indirectly insures certain securities in six other
Trusts. AAC filed a motion to intervene in the action on
October 23, 2017, for the limited purpose of being heard
regarding the appointment of a successor Owner Trustee and
regarding WTC’s contractual commitment and obligation to
remain in that role until such appointment is made. On October
30, 2017, the court denied without prejudice a stipulation filed
by Plaintiffs and WTC purporting to address the Owner Trustee
issue, and instructed that all interested parties be given notice
and an opportunity to participate in discussions to formulate a
process for selecting a successor Owner Trustee. On November
7, 2017, the court ruled in Plaintiffs’ favor and confirmed the
validity of the ownership transfers that PHEAA had disputed.
On January 12, 2018, Plaintiffs filed a motion for injunctive or
declaratory relief requiring WTC, as Owner Trustee, and GSS
Data Services, Inc., as Administrator, to resume processing for
payment bills submitted by lawyers purporting to act on the
Trusts’ behalf. At a hearing on April 3, 2018, the court denied
Plaintiffs’ motion without prejudice and on April 16, 2018
entered an order memorializing its oral ruling. The court also
granted AAC’s motion to intervene on April 10, 2018 and AAC
filed its complaint in intervention on April 16, 2018. On January
21, 2020, Vice Chancellor Slights entered an order consolidating
the action with later-filed litigation pending in Delaware
Chancery Court relating to the Trusts, including a declaratory
judgment action in which AAC was named as a defendant, NC
Residuals Owners Trust, et al. v. Wilmington Trust Co., et al.
(Del. Ct. Ch., C.A. No. 2019-0880, filed Nov. 1, 2019).
RMBS Litigation
In connection with AAC’s efforts to seek redress for breaches of
representations and warranties and fraud related
the
information provided by both the underwriters and the sponsors
of various transactions and for failure to comply with the
obligation by the sponsors to repurchase ineligible loans, AAC
has filed various lawsuits:
to
• Ambac Assurance Corporation and The Segregated
Account of Ambac Assurance Corporation v. First Franklin
Financial Corporation, Bank of America, N.A., Merrill
Lynch, Pierce, Fenner & Smith Inc., Merrill Lynch
Mortgage Lending, Inc., and Merrill Lynch Mortgage
Investors, Inc. (Supreme Court of the State of New York,
County of New York, Case No. 651217/2012, filed
April 16, 2012). AAC has asserted claims for breach of
contract,
indemnification,
reimbursement and has requested the repurchase of loans
that breach representations and warranties as required
under the contracts. On July 18, 2013 the court granted in
part and denied in part Defendants’ motion to dismiss (filed
on July 13, 2012). The court dismissed AAC’s claims for
indemnification and limited AAC’s claim for breach of
loan-level warranties to the repurchase protocol, but denied
dismissal of AAC’s other contractual claims and fraudulent
inducement claim. Discovery is ongoing.
inducement,
fraudulent
• Ambac Assurance Corporation and The Segregated
Account of Ambac Assurance Corporation v. Countrywide
Securities Corp., Countrywide Financial Corp. (a.k.a. Bank
of America Home Loans) and Bank of America Corp.
(Supreme Court of the State of New York, County of New
York, Case No. 651612/2010, filed on September 28,
2010). AAC’s Second Amended Complaint, filed on May
| Ambac Financial Group, Inc. 138 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
28, 2013, asserted claims against Countrywide and Bank of
America (as successor to Countrywide’s liabilities) for,
among other things, breach of contract and fraudulent
inducement. In August and October 2018, Defendants filed
various pre-trial motions. On December 30, 2018, the court
denied all of these pre-trial motions in their entirety and
Defendants appealed. On September 17, 2019, the First
Department affirmed in part and reversed in part the trial
court’s rulings. On October 17, 2019, Countrywide filed a
motion for leave to appeal certain issues to the New York
Court of Appeals and for reargument or leave to appeal
certain other issues. On January 16, 2020, the First
Department recalled and vacated its September 17, 2019
decision and order and substituted a new decision and
order. On the same date, the First Department denied
Countrywide’s motion seeking leave to appeal, without
prejudice to seeking such leave from the reissued decision
and order. On January 30, 2020, Countrywide filed a new
motion for leave to appeal the First Department’s denial of
its motions, which AAC opposed. On June 11, 2020, the
First Department denied Countrywide’s motion for leave to
appeal. On January 14, 2020, the trial court granted AAC’s
motion to supplement and amend certain of its expert
reports. After supplemental expert discovery, on August
12, 2020, Countrywide filed a motion to dismiss, or in the
alternative for summary judgment on, Ambac’s fraud claim
and on December 4, 2020, the Court granted Countrywide’s
motion, resulting in dismissal of AAC's fraud claim. On
December 17, 2020, Ambac filed a notice of appeal from
this decision. On February 22, 2021, Ambac filed its
opening brief for this appeal. This appeal remains pending.
Trial of this matter had been scheduled to commence on
February 22, 2021, but on December 23, 2020 the Court
adjourned the trial due to the COVID-19 pandemic. A new
trial date has not been set.
• Ambac Assurance Corporation and The Segregated
Account of Ambac Assurance Corporation v. Nomura
Credit & Capital, Inc. and Nomura Holding America Inc.
(Supreme Court of the State of New York, County of New
York, Case No. 651359/2013, filed on April 15, 2013).
AAC has asserted claims for material breach of contract
and has requested the repurchase of loans that breach
representations and warranties under the contracts. AAC
also asserted alter ego claims against Nomura Holding
America, Inc. Defendants filed a motion to dismiss on July
12, 2013. On September 22, 2014, plaintiffs filed an
amended complaint which added (in addition to the claims
previously asserted) a claim for fraudulent inducement. On
October 31, 2014 defendants filed a motion to strike the
amended complaint and on November 10, 2014 also filed a
motion to dismiss the fraudulent-inducement claim. On
June 3, 2015, the court denied defendants’ July 2013
motion
for breaches of
representations and warranties, but granted the defendants’
motion to dismiss AAC’s claims for breach of the
repurchase protocol and for alter ego liability against
Nomura Holding. On December 29, 2016, the court denied
Nomura’s motion to strike AAC’s amended complaint and
its motion to dismiss the fraudulent-inducement claim.
Nomura appealed the June 2015 decision to the extent it
to dismiss AAC’s claim
denied its motion to dismiss, filing its opening appellate
brief on March 23, 2017. On December 7, 2017, the First
Department affirmed the trial court’s June 3, 2015 decision.
Discovery is ongoing.
• Ambac Assurance Corporation and the Segregated Account
of Ambac Assurance Corporation v. Countrywide Home
Loans, Inc. (Supreme Court of the State of New York,
County of New York, Case No. 652321/2015, filed on June
30, 2015). On June 30, 2015, AAC and the Segregated
Account filed a Summons with Notice in New York
Supreme Court (the “2015 New York Action”), asserting
claims identical to claims they asserted in a litigation filed
on December 30, 2014 in Wisconsin Circuit Court for Dane
County, Case No 14 CV 3511 (the “Wisconsin Action”).
Specifically, in each action AAC asserted a claim for
fraudulent inducement in connection with its issuance of
insurance policies relating to five residential mortgage-
backed securitizations that are not the subject of AAC’s
previously filed lawsuit against the same defendant. On
July 21, 2015, plaintiffs filed a complaint in the 2015 New
York Action and a motion to stay the 2015 New York
Action pending appeal and litigation of the Wisconsin
Action. Countrywide opposed plaintiffs’ motion to stay and
on August 10, 2015, Countrywide filed a motion to dismiss
the complaint. On September 20, 2016, the court granted
AAC’s motion to stay and held Countrywide’s motion to
dismiss in abeyance pending resolution of the Wisconsin
Action. Following the dismissal of the Wisconsin Action
on March 13, 2018, the court in the 2015 New York Action
vacated
its stay on March 30, 2018, and restored
Countrywide’s motion to dismiss to the calendar. The
parties submitted supplemental letter briefs on April 11,
2018 addressing newly-issued relevant authority. On
December 8, 2020, the court granted Countrywide’s motion
to dismiss the complaint. AAC filed a notice of appeal
from this decision on January 7, 2021. The court entered
judgment in Countrywide’s favor on January 29, 2021 and
AAC filed a notice of appeal from the judgment on
February 2, 2021.
• Ambac Assurance Corporation and the Segregated Account
of Ambac Assurance Corporation v. Countrywide Home
Loans, Inc., Countrywide Securities Corp., Countrywide
Financial Corp., and Bank of America Corp. (Supreme
Court of the State of New York, County of New York,
Case No. 653979/2014, filed on December 30, 2014).
AAC asserted a claim for fraudulent inducement in
connection with AAC’s issuance of insurance policies
relating to eight residential mortgage-backed securitizations
that are not the subject of AAC’s previously filed lawsuits
against the same defendants. On February 20, 2015, the
Countrywide defendants filed a motion to dismiss the
complaint, which Bank of America joined on February 23,
2015. On December 20, 2016, the court denied defendants’
motion to dismiss. Discovery has been completed. The
court has not yet set a schedule for summary judgment or
for trial.
• Ambac Assurance Corporation v. U.S. Bank National
Association (United States District Court, Southern District
of New York, Docket No. 18-cv-5182 (LGS), filed June 8,
2018 (the “SDNY Action”)); In the matter of HarborView
| Ambac Financial Group, Inc. 139 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
relate
two actions
Mortgage Loan Trust 2005-10 (Minnesota state court,
Docket No. 27-TR-CV-17-32 (the “Minnesota Action”)).
These
to U.S. Bank National
Association’s (“U.S. Bank”) acceptance of a proposed
settlement in a separate litigation that U.S. Bank is
prosecuting, as trustee, related to the Harborview Mortgage
Loan Trust, Series 2005-10 (“Harborview 2005-10”), a
residential mortgage-backed securitization for which AAC
issued an insurance policy. On March 6, 2017, U.S. Bank
filed a petition commencing the Minnesota Action, a trust
instruction proceeding in Minnesota state court concerning
the proposed settlement, and on June 12, 2017, U.S. Bank
filed an amended petition. AAC filed a motion to dismiss
the Minnesota Action, which was denied on November 13,
2017, and the denial was affirmed on appeal. On September
6, 2018, U.S. Bank filed its Second Amended Petition, and
AAC and certain other certificateholders objected to, or
otherwise responded to, the petition. Trial, which was
previously scheduled to begin February 1, 2021, has been
rescheduled to October 11 through 15, 2021. On June 8,
2018, AAC filed the SDNY Action asserting claims arising
out of U.S. Bank’s acceptance of the proposed settlement
and treatment of trust recoveries. AAC asserted claims for
declaratory judgment, breach of contract, and breach of
fiduciary duty. On July 16, 2019, the court dismissed
AAC's breach-of-contract and breach-of-fiduciary-duty
claims based on U.S. Bank's acceptance of the settlement;
and dismissed AAC's declaratory
judgment claims
regarding the occurrence of an Event of Default and U.S.
Bank's future distribution of trust recoveries through the
waterfall. The court denied the motion to dismiss AAC's
breach-of-contract claims based on U.S. Bank's past
distribution of trust recoveries through the waterfall. On
January 17, 2020, U.S. Bank moved for summary judgment
regarding the remaining claim relating to distributions. On
February 7, 2020, AAC cross-moved for summary
judgment. On December 7, 2020, the court issued a
decision granting in part and denying in part the parties’
cross-motions for summary judgment. The court granted
U.S. Bank’s motion for summary judgment with respect to
Ambac’s repayment right in the trust waterfall, and granted
Ambac’s motion for summary judgment with respect to the
use of a write-up first method and the offsetting of
recoveries against realized losses. On December 22, 2020,
the court entered final judgment consistent with its prior
decisions, and awarded Ambac nominal damages. On
January 12, 2021, Ambac filed a notice of appeal of that
judgment.
• Ambac Assurance Corporation and The Segregated
Account of Ambac Assurance Corporation v. U.S. Bank
National Association
(United States District Court,
Southern District of New York, Docket No. 17-cv-02614,
filed April 11, 2017). AAC has asserted claims for breach
of contract, breach of fiduciary duty, declaratory judgment,
and violation of the Streit Act in connection with
defendant’s failure to enforce rights and remedies and
defendant’s treatment of trust recoveries, as trustee of five
residential mortgage-backed securitizations for which AAC
issued insurance policies. On September 15, 2017, U.S.
Bank filed a motion to dismiss. On June 29, 2018, the
court granted in part and denied in part U.S. Bank’s motion
to dismiss. The court dismissed the breach-of-fiduciary
duty claim in part as duplicative of the breach-of-contract
claim; dismissed the breach-of-contract claim as untimely
only to the extent that it was premised on U.S. Bank's
obligation
that mortgage documents were
properly delivered to the Trusts; dismissed the Streit Act
claims; and otherwise denied the motion to dismiss.
Discovery is ongoing.
to certify
• In re application of Deutsche Bank National Trust
Company as Trustee of the Harborview Mortgage Loan
Trust Mortgage Loan Pass-Through Certificates, Series
2006-9 (Supreme Court of the State of New York, County
of New York, No. 654208/2018), filed August 23, 2018
(the “Trust Instruction Proceeding”). This action relates to
Deutsche Bank National Trust Company’s (“DBNT”)
proposed settlement of claims related to the Harborview
Mortgage Loan Trust Series 2006-9
(“Harborview
2006-9”). On August 23, 2018, DBNT filed a Petition
commencing the Trust Instruction Proceeding, seeking
judicial instruction pursuant to CPLR Article 77, inter alia,
to accept the proposed settlement with respect of claims
relating to Harborview 2006-9. On November 2, 2018,
AAC and other interested persons filed notices of intention
to appear and answers to DBNT’s petition. AAC sought a
period of discovery before resolution on the merits.
Discovery is now complete. Under the operative case
schedule, merits briefing was completed on January 12,
2021. The court has not yet scheduled a hearing or oral
argument.
| Ambac Financial Group, Inc. 140 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
18. QUARTERLY INFORMATION (Unaudited)
Gross premiums written
Net premiums earned
Net investment income
Net realized investment gains (losses)
Net gains (losses) on derivative contracts
Other income (loss)
Income (loss) on Variable Interest Entities
Losses and loss expenses (benefit)
Insurance intangible amortization
Operating expenses
Interest expense
Pre-tax income (loss)
2020 Quarters
2019 Quarters
First
Second
Third
Fourth
First
Second
Third
Fourth
$
11 $
(1) $
(13) $
1 $
3 $
(21) $
(13) $
10
(21)
8
(70)
—
3
117
13
24
63
11
52
10
2
—
—
16
14
21
58
15
37
2
7
2
—
83
14
23
50
18
53
2
12
1
3
9
16
26
50
28
55
17
(16)
1
16
12
36
25
68
8
86
36
(35)
(9)
3
(133)
226
29
67
(287)
(33)
(108)
(12)
(41)
(100)
10
45
18
(10)
141
11
37
17
26
67
69
2
20
42
9
12
1
7
97
15
23
66
(111)
Net income (loss) attributable to Common Stockholders
$
(280) $
(35) $
(108) $
(14) $
(43) $
(128) $
66 $
(110)
Net income (loss) per share:
Basic
Diluted
$
$
(6.07) $
(0.77) $
(2.33) $
(0.31) $
(0.94) $
(2.79) $
1.44 $
(2.40)
(6.07) $
(0.77) $
(2.33) $
(0.31) $
(0.94) $
(2.79) $
1.41 $
(2.40)
| Ambac Financial Group, Inc. 141 2020 FORM 10-K |
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure — None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Ambac’s
disclosure controls and procedures are designed to ensure that
information required to be disclosed under the Securities
Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in
the SEC’s rules and forms, including without limitation that
information required to be disclosed by Ambac in its SEC filings
is accumulated and communicated to management, including the
Chief Executive Officer (CEO) and Chief Financial Officer
(CFO) as appropriate to allow for timely decisions regarding
required disclosure.
Ambac’s Disclosure Committee assists the CEO and CFO in
their responsibilities to design, establish, maintain and evaluate
the effectiveness of disclosure controls and procedures. The
Disclosure Committee is responsible for, among other things,
the oversight, maintenance and implementation of the disclosure
controls and procedures, subject to the supervision and oversight
of the CEO and CFO. Ambac’s management, with the
participation of
the
effectiveness of Ambac’s disclosure controls and procedures (as
defined in rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) as of December 31, 2020 and, the CEO
and CFO have concluded that at that date Ambac’s disclosure
controls and procedures were effective at the reasonable
assurance level.
its CEO and CFO, has evaluated
Management of Ambac
Management’s Report on Internal Control Over Financial
is responsible for
Reporting.
establishing and maintaining adequate internal control over
financial reporting. Ambac’s internal control over financial
reporting is a process designed under the supervision of the CEO
and CFO and overseen by Ambac’s Board of Directors to
provide reasonable assurance regarding
the reliability of
financial reporting and the preparation of Ambac’s financial
statements for external reporting purposes in accordance with
U.S. generally accepted accounting principles. Ambac’s internal
control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions
and dispositions of assets of Ambac; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with U.S.
generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance
with authorizations of management and directors of Ambac; and
(iii) provide reasonable assurance regarding the prevention or
timely detection and remediation of unauthorized acquisition,
use or disposition of Ambac’s assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal controls over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
the
Ambac management conducted an assessment of
effectiveness of Ambac’s
internal control over financial
reporting based on the criteria established in the Internal Control
— Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
recognizes
Ambac management
that any controls and
procedures, no matter how well operated, can provide only
reasonable assurance of achieving their objectives. Based on its
evaluations, Ambac's management have concluded that, as of
December 31, 2020, our internal control over financial reporting
was effective based on the criteria articulated in the 2013
Internal Control - Integrated Framework. The effectiveness of
our internal control over financial reporting as of December 31,
2020 has been audited by KPMG LLP, an independent
registered public accounting firm, as stated in their report, which
expressed an unqualified opinion on the effectiveness of
Ambac’s internal control over financial reporting.
Changes in Internal Control Over Financial Reporting.
There were no changes in the Company’s internal control over
financial reporting that occurred during the fourth quarter of
2020 that materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial
reporting. We have not experienced any significant change to
our internal controls over financial reporting despite the fact that
our employees are working remotely due to the COVID-19
pandemic. We are continually monitoring and assess the
COVID-19 situation on our internal controls to minimize the
impact on their design and operating effectiveness.
Item 9B. Other Information — No matters require
disclosure.
PART III
Item 10. Directors, Executive Officers and Corporate
Governance
Information relating to AFG’s executive officers and directors,
including its audit committee and audit committee financial
experts will be in AFG’s definitive Proxy Statement for its 2021
Annual Meeting of Stockholders which will be filed within 120
days of the end of our fiscal year ended December 31, 2020 (the
incorporated herein by
“2021 Proxy Statement”) and
reference.
is
Ambac has a Code of Business Conduct which promotes
management’s commitment to integrity and expresses Ambac’s
standards for ethical behavior by providing guidelines for
handling business situations appropriately. This code can be
the
found on Ambac’s website at www.ambac.com on
“Environmental, Social & Governance”
under
"Governance Documents". Ambac will disclose on its website
any amendment to, or waiver from, a provision of its Code of
Business Conduct that applies to its Chief Executive Officer,
Chief Financial Officer or Chief Accounting Officer. Ambac’s
corporate governance guidelines and the charters for the
committees of the Board of Directors are also available on our
website under the “Governance Documents” page.
page
| Ambac Financial Group, Inc. 142 2020 FORM 10-K |
Item 11. Executive Compensation
Information relating to Ambac’s executive officer and director compensation will be in the 2021 Proxy Statement and is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information relating to security ownership of certain beneficial owners of AFG’s common stock and information relating to the security
ownership of AFG’s management will be in the 2021 Proxy Statement and is incorporated herein by reference.
Equity Compensation Plan Information
The following table provides information as of December 31, 2020, regarding securities issued under our 2013 Incentive Compensation
Plan and 2020 Incentive Compensation Plan.
Equity compensation plans approved by security
holders
Plan
Category
2013 Incentive
Compensation Plan (1)
2020 Incentive
Compensation Plan (1)
Equity compensation plans not approved by
security holders
None
Total
Number of Securities
to be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights
Weighted-Average
Exercise Price of
Outstanding
Options,
Warrants and Rights
2,487,910
85,706
---
2,573,616(2) (3)
$0.00
$0.00
---
$0.00 (5)
Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
(Excluding Securities
Reflected in the
Third Column)
—
2,096,092(4)
---
2,096,092(4)
(1) Our 2020 Incentive Compensation Plan ("2020 Plan") was approved by the stockholders of AFG on June 2, 2020 as a successor to our 2013 Incentive
Compensation Plan ("2013 Plan") which was approved on December 18, 2013. Effective June 2, 2020, awards may no longer be granted under the
2013 Plan; authorized and unissued shares under the 2013 Plan are available for issuance under the 2020 Plan.
(2) Represents, as of December 31, 2020, the number of outstanding restricted stock unit awards and the maximum number of performance stock units that
may be issued if certain performance goals are achieved. Refer to Note 15. Employment Benefit Plans to the Consolidated Financial Statements
included in Part II, Item 8 in this Form 10-K for a description of the grants made under our 2013 and 2020 Incentive Compensation Plans. This amount
includes 773,657 restricted stock units and 1,799,959 performance stock units which are based on the maximum number of shares potentially payable
under the awards. Maximum number of shares potentially payable under performance awards range from 200% to 220% of target.
(3) Each restricted stock unit, stock option and performance stock unit awarded under our 2013 and 2020 Incentive Compensation Plans was granted at no
cost to the persons receiving them. Restricted stock units represent the contingent right to receive the equivalent number of shares of AFG common
stock and may vest after the passage of time. Stock options represent the right to acquire an equivalent number of shares of AFG common stock at a
specified exercise price. Performance stock units granted pursuant to the Company's Long Term Incentive Plan represent the contingent right to
receive a number of shares of AFG common stock ranging from 0% to 220% of the number of units granted depending upon the achievement of certain
company-wide performance goals at the end of a specified performance period.
(4) Represents the number of securities remaining available for future issuance under compensation plans assuming the maximum number of shares are
issued on settlement of performance stock units. The number of securities remaining available for future issuance under compensation plans assuming
the target number of shares are issued on settlement of performance stock units would be 3,058,603.
(5) There are no outstanding options as of December 31, 2020. Performance shares and restricted stock units are not included in determining weighted-
average price as they have no exercise price.
Item 13. Certain Relationships and Related
Item 14. Principal Accountant Fees and Services
Transactions, and Director Independence
to Ambac with respect
to certain
Information relating
relationships and related transactions and director independence
will be in the 2021 Proxy Statement and is incorporated herein
by reference.
Information relating to principal accountant fees and services
will be in the 2021 Proxy Statement and is incorporated herein
by reference.
| Ambac Financial Group, Inc. 143 2020 FORM 10-K |
Item 15. Exhibits, Financial Statement Schedules
(a) Documents filed as a part of this report:
1. Financial Statements
PART IV
The consolidated financial statements included in Part II, Item 8 above are filed as part of this Annual Report on Form 10-K.
2. Financial Statement Schedules
The financial statement schedules filed herein, which are the only schedules required to be filed, are as follows:
Schedule I — Summary of Investments Other Than Investments in Related Parties.............................................................
Schedule II — Condensed Financial Information of Registrant (Parent Company Only)......................................................
Schedule IV — Reinsurance...................................................................................................................................................
Page
148
149
154
(b) Exhibits
Exhibit Description
(3) Articles of Incorporation and bylaws:
Incorporated by Reference
Filing
Date
Exhibit
Number
Form
Filed
Herewith
(4)
3.1
Amended and Restated Certificate of Incorporation of Ambac
Financial Group, Inc.
3.2
Amended By-Laws of Ambac Financial Group, Inc.
Instruments defining the rights of security holders, including indentures:
4.1
4.2
4.3
Description of Capital Stock
Specimen form of common stock certificate
Warrant Agreement between Ambac Financial Group, Inc. and
Computershare Inc.
Specimen form of warrant certificate (included in Exhibit 4.2)
Junior Note Fiscal Agency Agreement, dated as of April 30, 2013,
by and between the Segregated Account of Ambac Assurance
Corporation and The Bank of New York Mellon, as fiscal agent
5.1% Junior Surplus Note due June 7, 2020 in the aggregate
amount of $350 million issued by the Segregated Account of
Ambac Assurance Corporation pursuant to the Junior Note Fiscal
Agency Agreement, dated as of April 30, 2013
Form of 5.1% Non-Reducing Junior Surplus Note due June 7, 2020
the Segregated Account of Ambac Assurance
issued by
Corporation
Form of 5.1% Bankruptcy Reducing Junior Surplus Note due June
7, 2020 issued by the Segregated Account of Ambac Assurance
Corporation
Form of 5.1% Reducing Junior Surplus Note due June 7, 2020,
issued by
the Segregated Account of Ambac Assurance
Corporation
Fiscal Agency Agreement, dated as of July 19, 2010, by and
between the Segregated Account of Ambac Assurance Corporation
and The Bank of New York Mellon, as fiscal agent
Form of Surplus Note due June 7, 2020 issued by the Segregated
Account of Ambac Assurance Corporation.(included in Exhibit
4.9)
Fiscal Agency Agreement, dated as of June 7, 2010, by and
between Ambac Assurance Corporation and The Bank of New
York Mellon, as fiscal agent
Amendment dated as of October 3, 2014 to Fiscal Agency
Agreement dated as of June 7, 2010 by and between Ambac
Assurance Corporation and The Bank of New York Mellon, as
fiscal agent
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
8-A
10-K
05/01/13
03/02/20
8-A
8-A
8-A
05/01/13
05/01/13
05/01/13
3.2
3.2
4.1
4.2
10-K
03/03/14
4.5
10-K
03/03/14
4.6
10-K
03/03/14
4.7
10-K
03/03/14
4.8
10-K
03/03/14
4.9
10-K
03/03/14
4.10
8-K
06/08/10
10.3
10-Q
11/09/15
4.1
| Ambac Financial Group, Inc. 144 2020 FORM 10-K |
4.14
4.15
4.16
4.17
Exhibit Description
Indenture (including the form of Notes), dated as of February 12,
2018, between Ambac LSNI, LLC and The Bank of New York
Mellon, as trustee and note collateral agent, providing for the
issuance of insured secured notes
Indenture (including the form of Notes), dated as of February 12,
2018, between Ambac Assurance Corporation and The Bank of
New York Mellon, as trustee and note collateral agent providing
for the issuance of senior notes secured by certain interests in
proceeds of certain RMBS litigation
Supplemental Fiscal Agency Agreement, dated as of February 12,
2018, among the Segregated Account of Ambac Assurance
Corporation, Ambac Assurance Corporation and The Bank of New
York Mellon, as fiscal agent
Promissory Note and Security Agreement dated as of February 12,
2018, of Ambac Assurance Corporation in favor of Ambac LSNI,
LLC
10.9
10.8
10.4
10.7
10.1
10.10
Incentive
10.5
10.6
10.2
10.3
Financial Group,
Inc.'s Long-Term
(10) Material contract and management compensation plans and arrangements:
Amended and Restated Trust Agreement dated as of August 28,
2014, among Ambac Financial Group, Inc., The Bank of New
York Mellon, and Wilmington Trust, National Association
Ambac Financial, Group, Inc.’s Incentive Compensation Plan
Ambac
Compensation Plan
Form of Amended and Restated Restricted Stock Unit Award
Letter for executive officers
Form of Equity Award Letter for directors
Closing Agreement between Ambac Financial, Group, Inc. and
Commissioner of Internal Revenue, dated April 30, 2013
Form of Expense Sharing and Cost Allocation Agreement among
Ambac Assurance Corporation, Ambac Financial Group, Inc. and
their respective subsidiaries and affiliates
Lease, dated as of March 1, 2011, by and between One State
Street, LLC and Ambac Assurance Corporation
Settlement, Discontinuance and Release Agreement, dated as of
March 1, 2011, by and among One State Street, LLC, Ambac
Financial Group, Inc., Ambac Assurance Corporation and the
Segregated Account of Ambac Assurance Corporation
Settlement Agreement, dated as of June 7, 2010, by and among
Ambac Assurance Corporation, Ambac Credit Products LLC,
Ambac Financial Group, Inc. and the parties listed on Schedule A
thereto
Ambac Financial Group, Inc. Severance Pay Plan (Applicable to
termination on or after January 1, 2010)
Lease Modification dated as of September 8, 2015 to the Lease
dated as of March 1, 2011, by and between One State Street, LLC
and Ambac Assurance Corporation
Employment Agreement dated as of November 1, 2016 by and
among Ambac Financial Group,
Inc., Ambac Assurance
Corporation and David Trick
Employment Agreement dated as of December 8, 2016, by and
Inc., Ambac Assurance
among Ambac Financial Group,
Corporation and Claude LeBlanc
Employment Agreement dated as of January 4, 2017 by and among
Ambac Financial Group, Inc., Ambac Assurance Corporation and
Stephen Ksenak
Rehabilitation Exit Support Agreement, by and among Ambac
Assurance Corporation, Ambac Financial Group, Inc. and certain
holders of Ambac Assurance Corporation’s 5.1% Surplus Notes
due 2020 and certain holders of Ambac Assurance Corporation’s
deferred payment obligations, dated as of July 19, 2017
Tier 2 Commitment Letter, dated as of July 19, 2017 from funds
affiliated with or managed by investors party thereto
10.13
10.12
10.17
10.16
10.11
10.14
10.15
Incorporated by Reference
Filing
Date
Exhibit
Number
Form
Filed
Herewith
8-K
02/15/18
4.1
8-K
02/15/18
4.3
8-K
02/15/18
4.4
10-K
02/28/19
4.16
8-K
DEF 14A
08/28/14
11/08/13
10-Q
08/11/14
10-K
10-K
03/03/14
03/03/14
8-K
05/03/13
99.2
A
10.1
10.4
10.5
10.2
8-K
09/27/11
10.2
10-K
03/16/11
10.34
10-K
03/16/11
10.33
10-Q
11/15/10
10.1
10-Q
05/17/10
10.26
10-K
02/29/16
10.27
10-Q
11/03/16
10.2
8-K
12/13/16
10.1
8-K
01/06/17
10.1
8-K
8-K
07/20/17
07/20/17
10.1
10.2
| Ambac Financial Group, Inc. 145 2020 FORM 10-K |
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
Exhibit Description
First Amendment to the Rehabilitation Exit Support Agreement, by
and among Ambac Assurance Corporation, Ambac Financial
Group, Inc. and certain holders of Ambac Assurance Corporation’s
5.1% Surplus Notes due 2020 and certain holders of Ambac
Assurance Corporation’s deferred payment obligations, dated as of
September 21, 2017
Financial Guaranty Insurance Policy, dated February 12, 2018,
issued by Ambac Assurance Corporation
Collateral Agreement, dated as of February 12, 2018, made by
Ambac LSNI, LLC in favor of The Bank of New York Mellon, as
note collateral agent, trustee and paying agent for the secured
parties
Pledge Agreement, dated as of February 12, 2018, made by Ambac
Assurance Corporation in favor of The Bank of New York Mellon,
as note collateral agent, trustee and paying agent
Collateral Agreement, dated as of February 12, 2018, made by
Ambac Assurance Corporation in favor of The Bank of New York
Mellon, as note collateral agent, trustee and paying agent for the
secured parties
Waiver and Amendment, dated as of February 12, 2018, among
Ambac Assurance Corporation, Ambac Credit Products, LLC,
Ambac Financial Group, Inc. and the other signatories party
thereto
Second Amended Plan of Rehabilitation of the Segregated Account
of Ambac Assurance Corporation dated September 25, 2017, and
effective as of February 12, 2018
Order Granting the Rehabilitator’s Motion to Further Amend the
Plan of Rehabilitation and confirming the Second Amended Plan
of Rehabilitation, as amended, Case No. 10-CV-1576 (Dane
County, Wisconsin) dated January 22, 2018
Stipulation and Order - Office of the Commissioner of Insurance of
the State of Wisconsin, in the Matter of the Rehabilitation of the
Segregated Account of Ambac Assurance Corporation effective as
of February 12, 2018
Amendment No. 1 to the Stipulation and Order - Office of the
Commissioner of Insurance of the State of Wisconsin, in the
Matter of the Rehabilitation of the Segregated Account of Ambac
Assurance Corporation effective as of February 12, 2018
Form of 2018 Restricted Stock Unit Award Agreement between
Ambac Financial Group, Inc. and Messrs. LeBlanc, Trick and
Ksenak
Form of 2018 Restricted Stock Unit Award Agreement between
Ambac Financial Group, Inc. and Messrs. Barranco, Eisman,
Reilly and Ms. Smith
Form of 2018 Performance Stock Unit Award Agreement between
Ambac Financial Group, Inc. and Messrs. LeBlanc, Trick and
Ksenak
Form of 2018 Performance Stock Unit Award Agreement between
Ambac Financial Group, Inc. and Messrs. Barranco, Eisman,
Reilly and Ms. Smith
Form of 2018 Deferred Stock Unit Award Agreement between
Ambac Financial Group, Inc. and each of the Company’s executive
officers
Preferred Stock Repurchase and Support Agreement dated as of
June 22, 2018, by and among Ambac Assurance Corporation
(“AAC”), Ambac Financial Group, Inc. and the holders of one or
more series of the AAC’s outstanding Auction Market Preferred
Shares
Form of 2019 Restricted Stock Unit Award Agreement between
Ambac Financial Group, Inc. and Messrs. LeBlanc, Trick and
Ksenak
Incorporated by Reference
Filing
Date
Exhibit
Number
Form
Filed
Herewith
8-K
8-K
09/26/17
02/15/18
10.1
10.1
8-K
02/15/18
10.2
8-K
02/15/18
10.3
8-K
02/15/18
10.4
8-K
02/15/18
10.5
10-K
02/28/18
10.38
10-K
02/28/18
10.39
10-K
02/28/18
10.40
10-K
02/28/19
10.37
10-Q
05/09/18
10.1
10-Q
05/09/18
10.2
10-Q
05/09/18
10.3
10-Q
05/09/18
10.4
10-Q
05/09/18
10.5
8-K
06/25/18
10.1
10-Q
05/09/19
10.1
| Ambac Financial Group, Inc. 146 2020 FORM 10-K |
Filed
Herewith
X
X
X
X
X
X
10.35
10.36
10.37
10.38
10.39
10.40
10.41
10.42
Exhibit Description
Form of 2019 Restricted Stock Unit Award Agreement between
Ambac Financial Group, Inc. and Messrs. Barranco, Eisman,
Reilly and Ms. Smith
Form of 2019 Deferred Stock Unit Award Agreement between
Ambac Financial Group, Inc. and each of the Company’s executive
officers
Form of 2019 Performance Stock Unit Award Agreement between
Ambac Financial Group, Inc. and Messrs. LeBlanc, Trick and
Ksenak
Form of 2019 Performance Stock Unit Award Agreement between
Ambac Financial Group, Inc. and Messrs. Barranco, Eisman,
Reilly and Ms. Smith
SUBLEASE dated as of January 30, 2019, between Advance
Magazine Publishers Inc. (D/B/A CONDE NAST), and Ambac
Assurance Group Corporation
Amended and Restated Employment Agreement dated as of
February 27, 2020, by and among Ambac Financial Group, Inc.,
Ambac Assurance Corporation and Claude LeBlanc
2020 Incentive Compensation Plan
Purchase Agreement, by and among, Ambac Assurance
Corporation, Ambac Financial Group, Inc. and certain funds or
accounts affiliated with or managed by CVC Credit Partners, LLC,
CVC Credit Partners Investment Management Limited and EJF
Capital LLC, dated as of January 19, 2021
Incorporated by Reference
Filing
Date
Exhibit
Number
Form
10-Q
05/09/19
10.2
10-Q
05/09/19
10.5
10-Q
08/08/19
10.1
10-Q
08/08/19
10.2
10-K
03/02/20
10/45
10-K
Def 14A
03/02/20
04/15/20
10.46
Ex. B
8-K
01/25/21
10.1
(99) Additional exhibits
99.1
Second Modified Fifth Amended Plan of Reorganization of Ambac
Financial Group, Inc., effective as of May 1, 2013
10-K
03/03/14
99.3
Other exhibits, filed or furnished, as indicated:
21.1
23.1
24.1
31.1
31.2
32.1++
List of Subsidiaries of Ambac Financial Group, Inc.
Consent of Independent Registered Public Accounting Firm
Power of Attorney for directors of Ambac Financial Group, Inc.
Certification of Chief Executive Officer Pursuant to Rules
13a-14(a) and 15d-14(a) Promulgated under
the Securities
Exchange Act of 1934, as amended
Certification of Chief Financial Officer Pursuant
13a-14(a) and 15d-14(a) Promulgated under
Exchange Act of 1934, as amended
Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
XBRL Instance Document.
to Rules
the Securities
101.INS
101.SCH XBRL Taxonomy Extension Schema Document.
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB XBRL Taxonomy Extension Label Linkbase Document.
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF XBRL Taxonomy Extension Definition Linkbase Document.
104
Cover Page Interactive Data File - The cover page interactive data
file does not appear in the Interactive Data File because its XBRL
tags or embedded within the Inline XBRL document
++ Furnished herewith.
| Ambac Financial Group, Inc. 147 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
SCHEDULE I — SUMMARY OF INVESTMENTS
Other Than Investments in Related Parties
December 31, 2020
Type of Investment
($ in millions)
Municipal obligations
Corporate obligations
Foreign obligations
U.S. government obligations
Residential mortgage-backed securities
Collateralized debt obligations
Other asset-backed securities
Short-term
Other
Total
Cost
Estimated
Fair Value
Amount at Which
Shown in the
Balance Sheet
$
321 $
358 $
592
97
120
256
74
263
617
507
612
98
121
302
74
303
617
544
358
612
98
121
302
74
303
617
544
$
2,847 $
3,028 $
3,028
| Ambac Financial Group, Inc. 148 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
SCHEDULE II— CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (PARENT COMPANY ONLY)
Condensed Balance Sheets
($ in millions, except share data) December 31,
2020
2019
Assets:
Fixed maturity securities, at fair value (amortized cost: 2020—$76 and 2019—$71)
$
66 $
Short-term investments, at cost (approximates fair value)
Other investments
Total investments (net of allowance for credit losses of $2 at December 31, 2020)
Cash
Investment in subsidiaries
Current taxes receivable (1)
Other assets
Total assets
Liabilities and Stockholders' Equity:
Liabilities:
Current taxes
Accounts payable and other liabilities
Total liabilities
Stockholders’ equity:
Preferred stock, par value $0.01 per share; 20,000,000 shares authorized shares; issued and outstanding
shares—none
Common stock, par value $0.01 per share; 130,000,000 shares authorized; issued shares: 45,865,081 and
45,571,743
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings
Treasury stock, shares at cost: 55,942 and 16,343
Total Ambac Financial Group, Inc. stockholders’ equity
Total liabilities and stockholders’ equity
1,082 $
1,478
$
$
229
54
349
7
714
—
13
— $
2
3
—
—
242
79
759
(1)
1,080
70
318
46
434
9
993
30
12
—
2
2
—
—
232
42
1,203
—
1,477
1,478
$
1,082 $
(1) As of December 31, 2019, $28 relates to receivables from the Registrant's wholly-owned subsidiary, Ambac Assurance Corporation, pursuant to the
intercompany tax sharing agreement, with the remainder being state income taxes.
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto and the following notes.
| Ambac Financial Group, Inc. 149 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
SCHEDULE II— CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (PARENT COMPANY ONLY)
Condensed Statement of Comprehensive Income
($ in millions) Year Ended December 31,
2020
2019
2018
Revenues:
Investment income
Net realized gains (losses)
Total revenues
Expenses:
Operating expenses
Total expenses
Income (loss) before income taxes and equity in undistributed net loss of subsidiaries
Federal income tax provision (benefit)
Income before equity in undistributed net income (loss) of subsidiaries
Equity in undistributed net income (loss) of subsidiaries
Net income (loss)
Other comprehensive income (loss), after tax:
Net income (loss)
$
13 $
(1) $
(1)
12
19
19
(7)
—
(7)
(2)
18
16
16
2
(5)
7
$
$
(430)
(437) $
(223)
(216) $
(437) $
(216) $
Unrealized gains (losses) on securities, net of income tax provision (benefit) of $1, $(8)
and $2
Gains (losses) on foreign currency translation, net of income tax provision (benefit) of
$0, $0 and $0
Credit risk changes of fair value option liabilities, net of income tax provision (benefit)
of $0, $0 and $0
Changes to postretirement benefit, net of income tax provision (benefit) of $0, $0 and $0
Total other comprehensive income (loss)
15
23
1
(3)
37
65
26
—
(1)
91
Total comprehensive income (loss) attributable to Ambac Financial Group, Inc.
$
(400) $
(125) $
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto and the following notes.
(2)
(2)
26
8
8
17
(11)
28
157
186
186
55
(48)
1
(2)
6
192
| Ambac Financial Group, Inc. 150 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
SCHEDULE II— CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (PARENT COMPANY ONLY)
Condensed Statement of Stockholders' Equity
($ in millions)
Total
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Preferred
Stock
Common
Stock
Additional
Paid-in
Capital
Common
Stock Held
in Treasury,
at Cost
Balance at January 1, 2020
$
1,477 $
1,203 $
42 $
— $
Total comprehensive income (loss)
(400)
(437)
Adjustment to initially apply ASU
2016-13
Stock-based compensation
Cost of shares (acquired) issued
under equity plan
(4)
11
(3)
(4)
—
(2)
37
—
—
—
—
—
—
—
Balance at December 31, 2020
$
1,080 $
759 $
79 $
— $
Balance at Balance at January 1,
2019
Total comprehensive income (loss)
Stock-based compensation
Cost of shares (acquired) issued
under equity plan
Balance at December 31, 2019
Balance at January 1, 2018
$
1,592 $
1,421 $
(49) $
— $
(125)
12
(3)
(216)
—
(3)
91
—
—
—
—
—
1,477 $
1,203 $
42 $
— $
1,381 $
1,234 $
(52) $
— $
$
$
Total comprehensive income (loss)
192
186
Adjustment to initially apply ASU
2016-01
Stock-based compensation
Cost of shares (acquired) issued
under equity plan
Issuance of warrants
—
12
(1)
8
3
—
(1)
—
6
(3)
—
—
—
—
—
—
—
—
Balance at December 31, 2018
$
1,592 $
1,421 $
(49) $
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
232 $
$
$
$
$
—
—
11
—
242 $
219 $
—
12
—
232 $
200 $
—
—
12
—
8
$
219 $
—
—
—
—
(1)
(1)
—
—
—
—
—
—
—
—
—
—
—
—
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto and the following notes.
| Ambac Financial Group, Inc. 151 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
SCHEDULE II— CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (PARENT COMPANY ONLY)
Condensed Statements of Cash Flow
($ in millions) Year Ended December 31,
Cash flows from operating activities:
Net income (loss)
2020
2019
2018
$
(437) $
(216) $
186
Adjustments to reconcile net income loss to net cash used in operating activities:
Equity in undistributed net (income) loss of subsidiaries
Amortization of bond premium and discount
Net realized gains
Increase (decrease) in current income taxes payable
Share-based compensation
(Increase) decrease in other assets
Other, net
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Proceeds from matured bonds
Purchases of bonds
Change in short-term investments
Change in other investments
Sale of auction market preferred shares of Ambac Assurance
Purchase of auction market preferred shares of Ambac Assurance
Acquisition of Xchange, net of cash acquired
Other, net
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Capital contribution to subsidiaries
Net cash (used in) financing activities
Net cash flow
Cash at beginning of period
Cash at end of period
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes
Non-cash financing activity:
423
(6)
1
30
11
(1)
(10)
11
46
(45)
89
—
—
—
(74)
—
16
(29)
(29)
(2)
9
223
(6)
2
15
12
(8)
(6)
16
86
(2)
(125)
—
19
—
—
—
(22)
—
—
(6)
15
$
$
7 $
9 $
— $
1 $
Issuance of warrants in connection with purchase of auction market preferred shares of
Ambac Assurance
$
— $
— $
(157)
(7)
2
(15)
12
12
—
32
230
(137)
(123)
25
—
(11)
—
(5)
(21)
—
—
11
4
15
4
8
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto and the following notes.
| Ambac Financial Group, Inc. 152 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
SCHEDULE II— CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (PARENT COMPANY ONLY)
Notes to Condensed Financial Information
(Dollar Amounts in Millions)
The condensed financial information of Ambac Financial Group,
Inc. (“AFG” or the “Registrant”) as of December 31, 2020 and
2019, and for the three years in the period ended December 31,
2020, should be read in conjunction with the consolidated
financial statements of AFG Financial Group, Inc. and
Subsidiaries and the notes thereto included in this 2020 Annual
Report on Form 10-K for the year ended December 31, 2020.
AFG, headquartered in New York City, is a financial services
holding company incorporated in the state of Delaware on April
29, 1991.
Business Combination
On December 31, 2020, Ambac completed the acquisition of
80% of the membership interests of Xchange for a purchase
price of $81 in cash. Xchange, whose management principals
retained the remaining 20% of the company, will continue
operating under its existing brand as it seeks to expand its
underwriting partnership with its key carriers in connection with
its planned growth strategy.
See Note 3. Business Combination to the Consolidated Financial
Statements included in Part II, Item 8 in this Form 10-K for
further information.
Income Taxes
AFG files a consolidated Federal income tax return with its U.S.
subsidiaries. AFG and its subsidiaries also file separate or
combined income tax returns in various states, local and foreign
jurisdictions. As of December 31, 2020, Ambac had
consolidated U.S. federal loss carryforwards ("NOLs") totaling
approximately $3,639, which, if not utilized, will begin expiring
in 2029, and will fully expire in 2041.
Pursuant to an intercompany tax sharing agreement, taxable
income generated by AAC after September 30, 2011, is offset
by $3,440 of NOLs allocated to AAC. In December 2020, AFG
and certain affiliates amended their existing tax sharing
agreement (the "Third TSA Amendment"). Under the Third
TSA Amendment, AAC and AFG agreed to reallocate $210 of
net operating loss carry-forwards (“NOLs”) from AAC to AFG
and to eliminate AAC's requirement to make future payments
based on its utilization of NOLs ("tolling payments") for any
taxable year beginning on or after January 1, 2019. In
connection with the Third TSA Amendment, AAC paid to AFG
approximately $28 of accrued tolling payments based on NOLs
used by AAC in 2017. For the year ended December 31, 2020,
the AAC sub-group generated an NOL of $270, that will expire
in 2041.
The NOLs allocated to AFG as of December 31, 2020, were
$1,457, and begin expiring in 2029 and fully expire in 2033.
| Ambac Financial Group, Inc. 153 2020 FORM 10-K |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
SCHEDULE IV— REINSURANCE
Years Ended December 31, 2020, 2019 and 2018
Insurance Premiums Written
($ in millions)
Gross
Amount
Ceded to Other
Companies
Assumed from
Other
Companies
Net
Amount
Percentage of
Amount
Assumed to
Net
Year Ended December 31, 2020
$
(1) $
(1) $
— $
—
—%
Year Ended December 31, 2019
Year Ended December 31, 2018
(28)
(24)
31 $
17
—
—
(60)
—%
(41)
—%
| Ambac Financial Group, Inc. 154 2020 FORM 10-K |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
AMBAC FINANCIAL GROUP, INC.
SIGNATURES
Dated: March 1, 2021
By:
/S/ DAVID TRICK
David Trick
Executive Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/S/ JEFFREY S. STEIN*
Chairman of the Board and Director
March 1, 2021
Jeffrey S. Stein
/S/ CLAUDE LEBLANC
President, Chief Executive Officer and Director
March 1, 2021
Claude LeBlanc
(Principal Executive Officer)
/S/ DAVID TRICK
Executive Vice President and Chief Financial Officer
March 1, 2021
David Trick
(Principal Financial Officer)
/S/ ROBERT B. EISMAN
Senior Managing Director and Chief Accounting Officer
March 1, 2021
Robert B. Eisman
(Principal Accounting Officer)
/S/ ALEXANDER D. GREENE*
Director
Alexander D. Greene
/S/ IAN D. HAFT*
Director
Ian D. Haft
/S/ DAVID L. HERZOG*
Director
David L. Herzog
/S/ C. JAMES PRIEUR*
Director
C. James Prieur
/S/ JOAN LAMM-TENNANT*
Director
Joan Lamm-Tennant
March 1, 2021
March 1, 2021
March 1, 2021
March 1, 2021
March 1, 2021
/S/ STEPHEN M. KSENAK
Attorney-in-fact
March 1, 2021
*By: Stephen M. Ksenak
| Ambac Financial Group, Inc. 155 2020 FORM 10-K |
Appendix A
Non-GAAP Financial Measures
Ambac reports two non-GAAP financial measures: Adjusted Earnings and Adjusted Book Value. The most directly comparable GAAP measures are
net income attributable to common stockholders for Adjusted Earnings and Total Ambac Financial Group, Inc. stockholders’ equity for Adjusted
Book Value. A non-GAAP financial measure is a numerical measure of financial performance or financial position that excludes (or includes)
amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP. We are
presenting these non-GAAP financial measures because they provide greater transparency and enhanced visibility into the underlying drivers of our
business.Adjusted Earnings and Adjusted Book Value are not substitutes for the Company’s GAAP reporting, should not be viewed in isolation and
may differ from similar reporting provided by other companies, which may define non-GAAP measures differently. Below are reconciliations of net
income (loss) attributable to common stockholders to the non-GAAP measure of Adjusted Earnings (Losses) and Total Ambac Financial Group, Inc.
stockholders’ equity per share ("Book Value") to the non-GAAP measure of Adjusted Book Value per share. Each of the reconciling items is more
fully defined in our 2020 Annual Report on Form 10-K within Management's Discussion and Analysis of Financial Condition and Results of
Operations under the heading “Non-GAAP Financial Measures."
Ambac has a significant U.S. tax net operating loss ("NOL") that is offset by a full valuation allowance in the GAAP consolidated financial
statements. As a result of this and other considerations, we utilized a 0% effective tax rate for non-GAAP adjustments; which is subject to change.
Adjusted Earnings (Loss) ($ in millions)
Year Ended December 31,
2014
2015
2016
2017
2018
2019
2020
Net (loss) income attributable to common stockholders
$
484
$
493 $
75
$
(329) $
186
$
(216) $
(437)
Adjustments:
Non-credit impairment fair value (gain) loss on credit derivatives
Insurance intangible amortization
Impairment of goodwill
Foreign exchange (gains) losses (1)
Fair value (gain) loss on interest rate derivatives from Ambac CVA
Adjusted earnings (losses) (2)
(17)
152
—
35
(16)
(37)
170
515
27
(14)
(8)
175
—
39
34
(11)
151
—
(21)
45
1
107
—
7
—
$
637
$
1,154 $
315
$
(165) $
301
$
(1)
295
—
(12)
—
66
—
57
—
3
—
$
(378)
Book Value Per Share / Adjusted Book Value Per Share
December 31,
2014
2015
2016
2017
2018
2019
2020
Total Ambac Financial Group, Inc. Shareholders' Equity (Deficit)
$
31.09
Adjustments:
Non-credit impairment unrealized fair value losses on credit derivatives
Insurance intangible asset
Goodwill
Ambac CVA on derivative product liabilities (excluding credit derivatives)
Net unearned premiums and fees in excess of expected losses
Net unrealized investment (gains) losses in Accumulated Other Comprehensive Income
1.24
(31.35)
(11.43)
(1.43)
31.57
(4.68)
$
$
37.41 $
37.94
$
30.52
$
35.12
$
32.41
$
23.57
—
0.42
0.25
0.01
0.03
(26.91)
(21.30)
(18.71)
(15.87)
—
(1.75)
20.11
(1.13)
—
(0.99)
16.21
(2.63)
—
—
13.20
(0.68)
—
—
10.19
(1.89)
0.01
(9.37)
—
9.09
(3.31)
0.01
(8.14)
—
—
8.24
(3.63)
Adjusted book value (2)
$
15.01
$
28.15 $
29.48
$
24.34
$
27.58
$
28.83
$
20.05
(1) Elimination of the foreign exchange gains (losses) on the re-measurement of assets, liabilities and transactions in non-functional currencies. For periods prior to
2016, we eliminated the foreign exchange gains (losses) on the re-measurement of net premium receivables and loss and loss expense reserves in non-functional
currencies. Given the long-duration of a significant portion of these premium receivables and loss reserves, the foreign exchange re-measurement gains (losses)
are not necessarily indicative of the total foreign exchange gains (losses) that Ambac will ultimately recognize. Beginning in 2016, we have eliminated the foreign
exchange gains (losses) on all assets, liabilities and transactions in non-functional currencies. Expanding this adjustment to include all foreign exchange gains
(losses) enables users of our financial statement to better view the business results without the impact of fluctuations in foreign currency exchange rates,
particularly as assets held in non-functional currencies have grown, and facilitates period-to-period comparisons of Ambac's operating performance. Note that we
have not recast prior period adjustment to conform to the methodology as such amounts were not material.
(2) Totals may not add due to rounding differences.
> CORPORATE INFORMATION
CORPORATE OFFICE
Ambac Financial Group, Inc.
One World Trade Center
41st Floor
New York, NY 10007
212-658-7470
www.ambac.com
COMMON STOCK LISTING
The common stock of Ambac
Financial Group, Inc. trades on
the New York Stock Exchange
under the symbol “AMBC”.
ANNUAL MEETING
OF STOCKHOLDERS
The Annual Meeting of Stockholders
will be held in a virtual format on
Tuesday, May 25, 2021 at 10:30 am
Eastern Time and can be accessed at
www.virtualshareholdermeeting.com/AMBC2021.
INVESTOR SERVICES/
TRANSFER AGENT
COMPUTERSHARE
P.O. BOX 505000
Louisville, KY 40233
Inside the USA call 1-800-662-7232
Outside the USA call 1-781-575-4238
Hearing impaired call 1-800-952-9245
www.computershare.com/investor
or overnight correspondence
can be sent to:
COMPUTERSHARE
462 South 4th Street, Suite 1600
Louisville, KY 40202
INVESTOR RELATIONS
Lisa A. Kampf
Managing Director, Investor Relations
Ambac Financial Group, Inc.
212-208-3222
ir@ambac.com
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
KPMG, LLP
345 Park Avenue
New York, NY 10154
CORPORATE GOVERNANCE
Ambac is committed to maintaining
the independence of Ambac’s
Board of Directors and its committees
and the integrity of its corporate
governance processes. Our Corporate
Governance Guidelines, Code of
Business Conduct and charters that
govern our Board committees, all
of which are designed to keep Ambac
accountable to its shareholders,
can be found at www.ambac.com.
OFFICER CERTIFICATIONS
The certifications of Ambac’s Chief Executive
Officer and Chief Financial Officer, required
under Section 302 of the Sarbanes-Oxley Act
of 2002, have been filed as exhibits to Ambac’s
2020 Annual Report on Form 10-K.
7
AMBAC FINANCIAL GROUP, INC.
One World Trade Center
41st Floor
New York, NY 10007
www.ambac.com