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SPINE COPY
2023 ANNUAL REPORT
SHAREHOLDER
EQUITY
(in billions)
$1.36
$1.25
$1.0
1.36
1.02
0.68
0.34
0.00
BOOK VALUE
PER SHARE
(in dollars)
$30
$28
$22
30.0
22.5
15.0
7.5
0.0
2021
2022
2023
2021
2022
2023
2021
2022
2023
FINANCIAL HIGHLIGHTS
30.0
ADJUSTED
BOOK VALUE
22.5
(in billions)
$1.30
$1.27
$.87
ADVERSELY CLASSFIED
BOOK VALUE
CREDITS OUTSTANDING
(in billions)
ADJUSTED
(in billions)
$5
$.87
$4
ADJUSTED
BOOK VALUE
(in billions)
$1.27
6.0
$1.30
$1.30
3.0
$1.27
4.5
1.5
$.87
2021
2022
2023
0.0
0.325
2021
2022
2023
2021
2022
2023
2021
2022
2023
28
$30
21
1.300
$30
14
0.975
7
0.650
2023
0
0.325
0.000
2023
ADJUSTED
BOOK VALUE
(in billions)
$1.30
$1.27
$.87
P&C PREMIUM
PRODUCTION
(in millions)
$504
$282
$131
2021
2022
2023
1.300
0.975
0.650
0.325
0.000
504
378
252
126
0
30.0
15.0
22.5
7.5
15.0
0.0
7.5
0.0
6.0
3.0
4.5
1.5
3.0
0.0
1.5
0.0
6.0
P&C PREMIUM
PRODUCTION
4.5
(in millions)
$504
$282
$131
$6
1.300
0.975
0.650
0.000
504
378
252
126
0
P&C PREMIUM
PRODUCTION
(in millions)
P&C PREMIUM
PRODUCTION
(in millions)
$504
$282
$504
$282
2022
2023
$131
2021
$131
2021
2022
2023
2021
2022
2023
1.300
0.975
1.300
0.650
0.975
0.325
0.650
0.000
0.325
0.000
504
378
504
252
378
126
252
0
126
0
20.25
2021
2022
2023
2021
2022
2023
15.0
1.36
7.5
1.02
$22
0.68
0.0
0.34
0.00
2021
SHAREHOLDER
EQUITY
(in billions)
$1.36
$1.25
$1.0
2021
2022
2023
FINANCIAL GUARANTEE
NET PAR OUTSTANDING
(in billions)
$28
$23
$20
2021
2022
2023
MGA
PARTNERS
17
8
2021
2022
2023
1.36
SHAREHOLDER
EQUITY
(in billions)
1.02
$1.36
$1.25
0.68
0.34
0.00
$1.0
FINANCIAL GUARANTEE
28
NET PAR OUTSTANDING
(in billions)
21
$28
14
7
0
$23
$20
BOOK VALUE
PER SHARE
(in dollars)
SHAREHOLDER
EQUITY
(in billions)
$28
$30
$22
$1.36
$1.25
$1.0
2021
2022
2023
ADVERSELY CLASSFIED
CREDITS OUTSTANDING
(in billions)
FINANCIAL GUARANTEE
NET PAR OUTSTANDING
$6
(in billions)
$5
$28
$4
$23
$20
2021
2022
2023
6.0
4.5
3.0
1.5
0.0
1.36
1.02
0.68
0.34
0.00
28
21
14
7
0
27.00
20.25
13.50
6.75
0.00
2021
2022
2023
2021
2022
2023
27
27.00
MGA
PARTNERS
MGA
PARTNERS
20.25
13.50
6.75
0.00
17
8
27
27
17
8
2021
2022
2023
2021
2022
2023
28
$6
21
14
7
0
2021
27.00
20.25
13.50
6.75
0.00
SHAREHOLDER
EQUITY
(in billions)
30.0
BOOK VALUE
PER SHARE
(in dollars)
22.5
SHAREHOLDER
EQUITY
(in billions)
$1.25
$30
$28
$1.0
$1.0
$1.25
2021
2022
ADJUSTED
BOOK VALUE
(in billions)
BOOK VALUE
1.36
PER SHARE
$1.27
(in dollars)
1.02
$1.30
$.87
1.36
0.68
1.02
0.34
0.68
0.00
$22
$30
$28
2021
2022
2023
0.34
0.00
$1.36
30.0
$1.36
22.5
15.0
2023
7.5
0.0
BOOK VALUE
PER SHARE
FINANCIAL GUARANTEE
NET PAR OUTSTANDING
(in dollars)
(in billions)
ADJUSTED
1.300
BOOK VALUE
(in billions)
$28
0.975
(in dollars)
BOOK VALUE
PER SHARE
$28
$23
$1.27
$22
$20
$1.30
$22
$28
30.0
0.650
22.5
0.325
$.87
15.0
0.000
7.5
2021
2022
2023
2021
2022
0.0
2022
2023
2021
2022
2023
2021
2022
2023
2021
2022
2023
2021
2022
+9%
+8%
+2%
FINANCIAL GUARANTEE
NET PAR OUTSTANDING
(in billions)
P&C PREMIUM
PRODUCTION
(in millions)
MGA
PARTNERS
ADVERSELY CLASSFIED
CREDITS OUTSTANDING
(in billions)
ADVERSELY CLASSFIED
FINANCIAL GUARANTEE
CREDITS OUTSTANDING
NET PAR OUTSTANDING
$28
(in billions)
(in billions)
$23
28
ADVERSELY CLASSFIED
CREDITS OUTSTANDING
(in billions)
$504
21
P&C PREMIUM
504
PRODUCTION
(in millions)
378
ADVERSELY CLASSFIED
CREDITS OUTSTANDING
$6
27
(in billions)
27.00
$5
$5
$4
$28
$23
2021
2022
$20
6.0
4.5
$20
3.0
2023
1.5
-14%
0.0
2022
2023
2021
2022
2023
28
14
21
7
$6
$282
$5
$131
14
0
$4
2021
2022
2023
7
0
+79%
2021
2022
2023
6.0
252
4.5
126
3.0
0
8
2021
1.5
$131
0.0
17
$504
$6
$5
$282
2022
2023
2021
2022
+59%
2021
2022
2023
2021
2022
$4
504
13.50
378
6.75
$4
252
0.00
2023
126
0
2023
MGA
PARTNERS
Net Income
$4 MILLION
MGA
PARTNERS
27
27.00
20.25
Adjusted Net Income
27.00
13.50
17
27
$93 MILLION
17
8
2021
2022
2023
8
2021
2022
2023
20.25
6.75
13.50
0.00
6.75
0.00
EBITDA
$107 MILLION
Adversely Classified Credits
26% REDUCTION
A MESSAGE FROM OUR CEO
“ Having accomplished our strategic
priorities for 2023—including achieving
profitability in our specialty P&C insurance
segment and launching a process to
explore strategic options for our legacy
financial guarantee business—we expect
2024 to be a transformative year for
Ambac as we continue to strive to
enhance long-term shareholder value.”
Dear Fellow Shareholders,
2023 was another milestone year for Ambac. Three years ago,
we embarked on a journey to build a specialty property and
casualty insurance platform that included a distribution division
and a specialty program insurance carrier.
Our vision is to create the premier destination for MGA and program operators, and the quick ascent of our P&C
businesses demonstrates that we have built a strong foundation to deliver on that goal. Key to our success is our
people. In 2023 we hired top industry talent to help drive our growth and both Everspan and Cirrata exceeded
their 2023 targets, generating over a half billion dollars of premium production, an 80% increase over 2022.
That accomplishment is a testament to the hard work of the Everspan and Cirrata teams, whose achievements
I will further expound on in the following pages. In 2023, we also added Kristi Matus and Michael Price as
Directors, further bolstering the P&C expertise of our Board.
While our future lies in the property and casualty insurance sector, we remain committed to maximizing the value
of our legacy financial guarantee business. In 2023, we continued to improve the quality of the insured portfolio
through various de-risking initiatives, which for the full year resulted in a reduction in net par outstanding by 14%
and adversely classified credits by 26%. In addition, following the completion of an internal review process and
analysis of the strategic options available for the legacy financial guarantee business, we appointed investment
bank Moelis & Company to explore potential transactions with interested parties.
As I noted in previous letters, Ambac remains committed to sustainability and responsible business practices.
We continue to refine our policies to better reflect how these practices are embedded in our corporate culture,
strategy, and decision-making. As part of our ongoing efforts to improve our disclosures, in 2023 we updated our
Corporate Governance Guidelines and Code of Business Conduct and Ethics, and we published an updated and
amended Corporate Social Responsibility (CSR) report in February 2024.
We are excited about the direction Ambac is headed. As we look to the future, we are well positioned to leverage
the strong growth generated in 2023, and we believe our specialty insurance platform is poised to deliver
significant, incremental value for Ambac’s shareholders.
1
EVERSPAN
SPECIALTY PROGRAM INSURANCE CARRIER
In its second full year of operation, Everspan wrote $273 million of gross premium, achieving profitability in the
second half of the year while establishing itself as a preferred partner of MGAs and reinsurers. Everspan exceeded
its 2023 targets while maintaining its commitment to underwriting excellence and strong program oversight.
Everspan had a very strong year, generating gross
premium written of $273 million, an 87% increase over
2022 and a 9% increase over its 2023 target of $250
million. While we are pleased with those numbers, we
are equally, if not more, focused on combined ratio,
which factors both underwriting results and expense
management, and is a more accurate gauge of an
insurer’s performance and profitability. Everspan’s
100% combined ratio, reported in the fourth quarter,
demonstrates a positive trend that we aim to
improve in the coming quarters. Everspan’s fourth
quarter results marked the fifth consecutive
quarterly improvement for the business, which we
believe has achieved the necessary scale to generate
underwriting profitability. Everspan is now on a
pathway to generating mid-teen ROEs at scale,
over the insurance cycle.
Portfolio diversification was also a key area of focus
for Everspan in 2023, as the business sought to
expand and diversify its MGA program partners. At
year end, Everspan had 23 program partners, up from
14 a year ago. Equally important, its programs spanned
a wide range of business classes, including commercial
auto, excess liability, workers compensation and
general liability, among others. Everspan’s book is now
more balanced across risk classes, which should have
the long-term benefit of more stable and predictable
underwriting results.
It is important to note that Everspan’s growth was
achieved without sacrificing robust underwriting
standards. Everspan accepted less than 5% of the
program submissions it received, which is a testament
to its careful selection methods. Its rigorous review
process is underpinned by robust diligence and a
“gross line” underwriting approach, meaning it applies
the same evaluation criteria regardless of whether it
retains 30% or very little risk. Uniform application of
underwriting criteria helps keep Everspan’s interests
aligned with the interests of its reinsurance partners.
Everspan also aligns interests through its high-touch
engagement model. With two full years of operation
under its belt, it has established a comprehensive
approach to program management, employing
proactive risk management and oversight to achieve
profitability for itself and its partners. We believe
this approach is a strategic differentiator in the
marketplace and a cornerstone to our achievements.
$273 MILLION
of GPW in 2023 Up 87%
Combined Ratio
107%
23
MGA Programs
2023 GPW
61% E&S vs 39% Admitted
Shareholders’ Equity
$123 MILLION
GROSS PREMIUM WRITTEN (GPW)
& NUMBER OF PROGRAMS
(in millions)
$300
$225
$150
$75
$0
$273
$146
$13
2021
2022
2023
30
24
18
12
6
(
p
r
o
g
r
a
m
#
)
300
225
150
75
0
Gross Premium Written
# of Programs
2
CIRRATA
INSURANCE DISTRIBUTION PLATFORM
With a growing portfolio of distribution businesses, Cirrata has doubled its revenue in the last two years and beat
its growth targets, achieving $231 million in placed premiums for 2023. It continues to attract premier underwriting
teams looking to scale their businesses with Ambac’s support.
Cirrata, like Everspan, exceeded its 2023 targets. It
placed $231 million of premium in 2023, an increase of
70% over the prior year and a 15% increase over its 2023
target of $200 million. It also produced over $11 million
of EBITDA. Cirrata’s revenue has doubled to $52 million
in the last two years, while its EBITDA margin remains
attractive at 22%.
Cirrata’s growth has been fueled by both organic
initiatives and the financial performance of recent
acquisitions. It has acquired and onboarded three
companies over the last 18 months and now operates
four programs across various classes of business,
including specialty commercial auto, professional
liability, inland marine, employer stop loss, and affinity
programs. After purchasing majority stakes in All Trans
Risk Solutions and Capacity Marine Corporation at the
end of 2022, we acquired a majority stake in Riverton
Insurance Agency in August 2023. Xchange Benefits,
our first MGU, rounds out the Cirrata portfolio.
executive management and specialty lines experience,
making him the ideal candidate to expand the Cirrata
platform and build its profile in the specialty property
and casualty insurance market.
In 2023, Cirrata reached the size and scale to
necessitate its own dedicated leadership team, and
in May we appointed industry veteran Naveen Anand
as President of Cirrata Group. Naveen has extensive
We continue to see significant opportunities for growth
at Cirrata, whether across our current businesses,
via organic initiatives, or through additional M&A
transactions and de novo incubations.
$231 MILLION
of Premium Placed Up 71% Over 2022
EBITDA Margin (1) of 22% Generating
$11 MILLION (2)
of EBITDA in 2023
REVENUE UP 68%
in 2023
RIVERTON INSURANCE AGENCY CORP.
Acquired August 1
(1) EBITDA/Net Insurance Distribution Revenues
(2) Represents 100% inclusive of non-controlling interests
REVENUE & EBITDA
(in millions)
$60
$50
$40
$30
$20
$10
$0
$31
$26
$52
$12
$10
$8
$6
$4
$2
$0
I
(
E
B
T
D
A
)
2021
2022
2023
Revenue
EBITDA
60
50
40
30
20
10
0
3
LEGACY FINANCIAL GUARANTEE
STRIVING TO MAXIMIZE ECONOMIC VALUE
We continue to focus on crystallizing the value of our Legacy Financial Guarantee business, which has been in
run-off since 2008, with the goal of further maximizing value for shareholders.
Since I joined Ambac seven years ago, we have de-
risked and de-levered the insured portfolio by over
$42 billion, materially improving our business risk
profile and quality of our book value. During 2023
we continued our active de-risking efforts, which we
expect will further enhance value for Ambac and
its shareholders.
Net insured par exposure for our legacy portfolio was
$20 billion at December 31, 2023, down approximately
14% from $23 billion at year-end 2022. Our adversely
classified credit exposure at year end was $3.5 billion,
a reduction of 26% from the prior year end.
Following a thorough process over the last year, the
Wisconsin Office of the Commissioner of Insurance
(OCI) has finalized its capital model and Stipulation
and Order, providing a new regulatory framework for
the legacy business. This new framework provides
Ambac with clarity on capital requirements and
pathways toward realization of value from the Legacy
Financial Guarantee companies.
Finally, in the fourth quarter we engaged Moelis &
Company, along with other external advisors, to assess
strategic options for our legacy business.
ADVERSELY CLASSIFIED
CREDITS NET PAR
(in billions)
NET PAR EXPOSURE
SINCE 2018
(in billions)
$10.9
$7.5
$6.8
$6.4
$4.7
$3.5
$12
$10
$8
$6
$4
$2
$0
$47
$38
$34
$28
$23
$20
12
$50
10
$40
8
$30
6
$20
4
$10
2
0
$0
2018
2019
2020
2021
2022
2023
2018
2019
2020
2021
2022
2023
4
2024 OUTLOOK
DELIVERING LONG-TERM VALUE CREATION
EVERSPAN
n Target GPW +$400 million in 2024 growing
to +$500 million in 2025 (1,2)
n Target mid-teens ROE at scale and over
the cycle
n Target combined ratio under 100%
CIRRATA
n
Target premiums placed +$300 million
in 2024 (1,2)
n Target +$60 million revenue in 2024 (1,2)
n Target +20% EBITDA margins (1)
(1) Forward looking targets and projections subject to change.
Targets and projections may not be realized and are not
meant to provide guarantees of performance. Please refer
to Ambac’s annual report on form 10-K for the year ended
December 31, 2023, for more information about Ambac’s
business and related risk factors.
(2) Subject to market conditions.
In conclusion, I am pleased with our continued
progress on our strategic priorities and am very
excited about Ambac’s prospects in 2024 and beyond.
I would like to thank you, our shareholders, for your
ongoing support and the Board, our Executive
Management team and dedicated employees for their
tireless commitment to the execution of our strategic
priorities for the benefit of all our stakeholders.
Sincerely,
STRATEGIC PRIORITIES
SPECIALTY PROPERTY
AND CASUALTY
INSURANCE PLATFORM:
n Growing our Specialty Property and
Casualty Insurance business to generate
underwriting profits from a diversified
portfolio of commercial and personal
liability risks accessed primarily through
program administrators.
n Expanding our Insurance Distribution
business based on deep domain knowledge
in specialty and niche classes of risk that
generate attractive margins at scale.
This will be achieved through acquisitions,
establishing new businesses “de-novo,”
and organic growth and diversification
supported by a centralized technology-led
shared services offering.
n Making opportunistic investments that are
strategic to both the Specialty Property
and Casualty Insurance and Insurance
Distribution businesses.
LEGACY FINANCIAL
GUARANTEE:
n Actively managing, de-risking and
mitigating insured portfolio risk, and
pursuing recoveries of previously paid losses.
n Improving operating efficiency and
optimizing our asset and liability profile.
n Exploring strategic options to further
maximize value for Ambac.
Claude LeBlanc
President and Chief Executive Officer
5
BOARD OF DIRECTORS
EXECUTIVE OFFICERS
JEFFREY S. STEIN (2), (3)
Chairman
Founder and Managing Partner
of Stein Advisors LLC
IAN D. HAFT (1)*, (4)
Chief Executive Officer
of Surgis Capital LLC
and Chief Financial Officer
of Electric Monster Media, Inc.
LISA G. IGLESIAS (1), (3)*
Executive Vice President
General Counsel of Unum Group
JOAN LAMM-TENNANT (2), (3), (4)*
Founder and Former
Chief Executive Officer of
Blue Marble Microinsurance
KRISTI A. MATUS (1), (2)*
Former Chief Financial Officer
and Chief Operating Officer
of Buckle Agency LLC
MICHAEL D. PRICE (1), (4)
Former President and
Chief Executive Officer of
Platinum Underwriters Holdings, Ltd.
CLAUDE LeBLANC
President and
Chief Executive Officer
DAVID TRICK
Executive Vice President,
Chief Financial Officer
and Treasurer
R. SHARON SMITH
Executive Vice President
and Chief Strategy Officer
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
CLAUDE LeBLANC
President and
Chief Executive Officer
DAN McGINNIS
Senior Managing Director
and Chief Operating Officer
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Member of Governance and Nominating Committee
(4) Member of Strategy 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, 2023
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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
Common Stock, par value $0.01 per share
Trading Symbols
AMBC
Name of each exchange on which registered
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. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the
filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received
by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
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, 2023 was $623,109,150. As of
February 26, 2024, there were 45,195,370 shares of Common Stock, par value $0.01 per share, were outstanding.
Portions of the Registrant’s Proxy Statement related to its 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.
Documents Incorporated By Reference
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Cautionary Statement Pursuant to the Private Securities Litigation Reform Act of 1995 .......................................
1
Item Number
Page
Item Number
Page
PART I
PART II (CONTINUED)
1 Business ..............................................................
Introduction .........................................................
Description of the Business ................................
Enterprise Risk Management ..............................
Available Information .........................................
Insurance Regulatory Matters and Other
Restrictions .........................................................
Investments and Investment Policy ....................
Employees ...........................................................
1A Risk Factors ........................................................
1B Unresolved Staff Comments ...............................
1C Cybersecurity ......................................................
2 Properties ............................................................
3 Legal Proceedings ...............................................
4 Mine Safety Disclosures .....................................
PART II
5
Market for Registrant’s Common Equity,
Related Stockholder Matters and Issuer
Purchases of Equity Securities ............................
6 Reserved .............................................................
7 Management’s Discussion and Analysis of
Financial Condition and Results of Operations ..
Executive Summary ............................................
Critical Accounting Policies and Estimates .......
Financial Guarantees in Force ............................
Results of Operations ..........................................
Liquidity and Capital Resources .........................
2
2
2
9
10
11
12
13
13
25
25
26
27
27
27
28
28
29
30
33
37
44
Balance Sheet ......................................................
Accounting Standards .........................................
U.S. Statutory Basis Financial Results ...............
Ambac UK Financial Results Under UK
Accounting Principles .........................................
Non-GAAP Financial Measures .........................
7A Quantitative and Qualitative Disclosures about
Market Risk ........................................................
8 Financial Statements and Supplementary Data ..
9
Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure ...........................................................
9A Controls and Procedures .....................................
45
50
50
52
53
55
58
122
122
9B Other Information ...............................................
123
PART III
10 Directors, Executive Officers and Corporate
Governance .........................................................
123
11 Executive Compensation ....................................
123
12
Security Ownership of Certain Beneficial
Owners and Management and Related
Stockholder Matters ............................................
13 Certain Relationships and Related
Transactions, and Director Independence ...........
123
123
14 Principal Accountant Fees and Services .............
123
PART IV
15 Exhibits, Financial Statement Schedules ............
123
Schedule I—Summary of Investment .................
127
Schedule II—Condensed Financial Information
of Registrant (Parent Company Only) ................
Schedule III—Supplementary Insurance
Information .........................................................
128
133
16 Form 10-K Summary ..........................................
133
SIGNATURES ............................................................
134
CAUTIONARY STATEMENT PURSUANT TO THE
PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995
those expressions or verbs,
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
identify forward-looking
of
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
those
discussed under “Risk Factors” in Part I, Item 1A in this Annual
Report on Form 10-K.
include, among others,
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 Financial
Group’s (“AFG”) and its subsidiaries’ (collectively, “Ambac” or
the “Company”) 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 high degree of
volatility in the price of AFG’s common stock; (2) uncertainty
concerning the Company’s ability to achieve value for holders
of its securities, whether from Ambac Assurance Corporation
(“AAC”) and its subsidiaries or from the specialty property and
casualty insurance business, the insurance distribution business,
or related businesses; (3) inadequacy of reserves established for
losses and loss expenses and the possibility that changes in loss
reserves may result in further volatility of earnings or financial
results; (4) potential for rehabilitation proceedings or other
regulatory intervention or restrictions against AAC; (5) credit
risk throughout Ambac’s business, including but not limited to
credit risk related to insured residential mortgage-backed
securities, student loan and other asset securitizations, public
finance obligations (including risks associated with Chapter 9
and other restructuring proceedings), issuers of securities in our
investment portfolios, and exposures to reinsurers; (6) our
inability to effectively reduce insured financial guarantee
exposures or achieve recoveries or investment objectives; (7)
AAC’s inability to generate the significant amount of cash
needed to service its debt and financial obligations, and its
inability to refinance its indebtedness; (8) AAC’s substantial
indebtedness could adversely affect the Company’s financial
condition and operating flexibility; (9) 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; (10)
greater than expected underwriting losses in the Company’s
specialty property and casualty insurance business; (11) failure
of specialty insurance program partners to properly market,
underwrite or administer policies; (12) inability to obtain
reinsurance coverage on expected terms; (13) loss of key
relationships for production of business in specialty property and
casualty and insurance distribution businesses or the inability to
secure such additional relationships to produce expected results;
(14) the impact of catastrophic public health, environmental or
natural events, or global or regional conflicts; (15) credit risks
related to large single risks, risk concentrations and correlated
risks; (16) risks associated with adverse selection as Ambac’s
financial guarantee insurance portfolio runs off; (17) the risk
that Ambac’s risk management policies and practices do not
anticipate certain risks and/or the magnitude of potential for
loss; (18) restrictive covenants in agreements and instruments
that impair Ambac’s ability to pursue or achieve its business
strategies; (19) adverse effects on operating results or the
Company’s financial position resulting from measures taken to
reduce financial guarantee risks in its insured portfolio; (20)
disagreements or disputes with Ambac's insurance regulators;
(21) loss of control rights in transactions for which we provide
financial guarantee insurance; (22) inability to realize expected
recoveries of financial guarantee losses; (23) risks attendant to
the change in composition of securities in Ambac’s investment
portfolio; (24) adverse impacts from changes in prevailing
interest rates; (25) events or circumstances that result in the
impairment of our intangible assets and/or goodwill that was
recorded in connection with Ambac’s acquisitions; (26) factors
that may negatively influence the amount of installment
premiums paid to Ambac; (27) the risk of litigation, regulatory
inquiries, investigations, claims or proceedings, and the risk of
adverse outcomes in connection therewith; (28) the Company’s
ability to adapt to the rapid pace of regulatory change; (29)
actions of stakeholders whose interests are not aligned with
broader interests of Ambac's stockholders; (30) system security
risks, data protection breaches and cyber attacks; (31) 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; (32) failures in services or products
provided by third parties; (33) political developments that
disrupt
insured
exposures; (34) our inability to attract and retain qualified
executives, senior managers and other employees, or the loss of
such personnel; (35) fluctuations in foreign currency exchange
rates; (36) failure to realize our business expansion plans or
failure of such plans to create value; (37) greater competition for
our specialty property and casualty insurance business and/or
our insurance distribution business; (38) loss or lowering of the
AM Best rating for our property and casualty insurance
company subsidiaries;
the
insurance industry or greater competition from technology-based
insurance solutions or non-traditional insurance markets; (40)
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 (41) other risks and
uncertainties that have not been identified at this time.
(39) disintermediation within
the economies where
the Company has
Ambac Financial Group, Inc
1
2023 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 operates
three principal businesses:
• Legacy Financial Guarantee ("LFG") Insurance —
Ambac's financial guarantee business includes the activities
of Ambac Assurance Corporation ("AAC") and its wholly
owned subsidiaries,
including Ambac Assurance UK
Limited (“Ambac UK”) and Ambac Financial Services
LLC ("AFS"). Both AAC and Ambac UK are financial
guarantee insurance companies that have been in run-off,
having not underwritten any new business since 2008. AFS
is AAC's legacy interest rate swap provider which is also
currently being run-off.
• Specialty Property and Casualty Insurance — Ambac's
specialty property and casualty program business
("Specialty Property and Casualty Insurance") includes five
admitted carriers and an excess and surplus lines (“E&S” or
“nonadmitted”) carrier (collectively, “Everspan”). Everspan
carriers have an AM Best rating of 'A-' (Excellent).
• Insurance Distribution — Ambac's insurance distribution
business includes managing general agents/underwriters
(collectively "MGAs" or "MGA/Us") and insurance brokers
operating as part of Cirrata Group.
Beginning in 2022, the Company began reporting these three
business operations as segments; see Note 3. Segment
Information for further information.
AFG, on a standalone basis, had $211 million in net assets
(excluding its investment in subsidiaries) and net operating loss
carry-forwards of $3,400 million ($1,760 million of which is
allocated to AAC) at December 31, 2023. See Schedule II for
more information on the holding company.
Strategies to Enhance Shareholder Value
is
The Company's primary goal
long-term
shareholder value through the execution of targeted strategies
for its (i) Specialty Property and Casualty Insurance and
Insurance Distribution businesses and (ii) Legacy Financial
Guarantee Insurance business.
to maximize
Specialty Property and Casualty Insurance and Insurance
Distribution strategic priorities include:
• Growing our Specialty Property and Casualty Insurance
business to generate underwriting profits from a diversified
liability risks
portfolio of commercial and personal
accessed primarily through program administrators.
• Expanding our Insurance Distribution business based on
deep domain knowledge in specialty and niche classes of
risk which generate attractive margins at scale. This will be
achieved through acquisitions, establishing new businesses
“de-novo,” and organic growth and diversification
supported by a centralized technology led shared services
offering.
• Making opportunistic investments that are strategic to both
the Specialty Property and Casualty Insurance and
Insurance Distribution businesses.
Legacy Financial Guarantee Insurance strategic priorities
include:
• Actively managing, de-risking and mitigating insured
portfolio risk, and pursuing recoveries of previously paid
losses.
• Improving operating efficiency and optimizing our asset
and liability profile.
• Exploring strategic options to further maximize value for
AFG.
DESCRIPTION OF THE BUSINESS
Legacy Financial Guarantee Insurance:
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
interest on the obligations guaranteed. Pursuant
to such
guarantees, AAC and Ambac UK make payments if the obligor
responsible for making payments fails to do so when due. AAC
and Ambac UK last wrote insurance policies in 2008 and have
been in run-off ever since.
Financial guarantee revenues consist mostly of premiums earned
from run-off insurance contracts, net of reinsurance, and
income on investments held in AAC's and Ambac UK's
investment portfolios. Financial guarantee expenses consist of:
(i) loss and commutation payments; (ii) loss adjustment
expenses; (iii) interest expense on debt, (iv) operating expenses
and (v) insurance intangible amortization.
Ambac's Legacy Financial Guarantee Insurance business
strategy is to increase the residual value of AAC and Ambac UK
with the ultimate goal of monetizing such value through (i)
dividends and capital distributions while managing their active
run-off; (ii) one or more reinsurance transactions or other de-
risking transactions that will accelerate or enhance the ability of
AAC and/or Ambac UK to pay dividends and make capital
distributions; (iii) the sale of all or portions of AAC and/or
Ambac UK; or (iv) other strategic transactions to accelerate and/
or enhance the above-stated corporate strategy.
Ambac and its advisors are actively discussing strategic options
for its Legacy Financial Guarantee Insurance business with
interested parties. While we anticipate that these discussions will
be completed in 2024 there can be no assurance that we will
ultimately complete any strategic initiative.
AAC and Ambac UK have been reducing risk within their
insured portfolios focusing on exposures to financially stressed
insured exposures as well as large and concentrated exposures.
Opportunities for remediating losses on poorly performing
Ambac Financial Group, Inc
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2023 Form 10-K
insured exposures depend on a number of factors including
market conditions, the structure of the underlying risk, the
perception of AAC’s or Ambac UK’s creditworthiness, as well
as counterparty specific factors. Their ability to remediate risk
and commute policies may be limited by available liquidity.
Additionally, AAC and Ambac UK are actively managing their
to optimize capital
regulatory
allocation in complex insured portfolios that include long
duration obligations.
frameworks and seeking
The execution of Ambac’s strategy to increase and monetize the
value of its investment in AAC is subject to the restrictions set
forth in the Settlement Agreement, dated as of June 7, 2010, as
amended (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 OCI, AFG and AAC that became effective on February 22,
2024 (the “Stipulation and Order”), replacing the Stipulation and
Order that became effective on February 12, 2018, as amended
(the “2018 Stipulation and Order”), each of which requires the
Office of the Commissioner of Insurance for the State of
Wisconsin ("OCI") and, under certain circumstances, holders of
surplus notes, 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 Settlement Agreement limits 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
limitations). 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.
as
and
surplus
reserves
• The Stipulation and Order requires AAC to maintain a level
of
regards
contingency
policyholders which provide reasonable security against
contingencies affecting AAC’s financial position that are
not otherwise fully covered by reserves or reinsurance;
discount loss reserves in a manner approved by OCI;
maintain OCI’s Runoff Capital Framework (as defined and
described below) according to parameters specified by
OCI; pay the costs of consultants and other experts retained
by OCI; refrain from certain affiliate transactions and the
payment of any dividend or other distribution without the
prior non-disapproval of OCI; notify OCI of events that
would or would be reasonably likely to cause a material
adverse effect to AAC or its affiliates; obtain OCI’s non-
disapproval to exercise certain control rights with respect to
certain policies that were previously allocated to the
Segregated Account of AAC; obtain OCI’s approval for
non-ordinary course transactions involving consideration to
be paid by AAC of $100 million or more; and obtain OCI’s
approval of any changes to AAC’s investment policy or
derivative use plan. The Stipulation and Order also
requires AFG to use its best efforts to preserve the use of
NOLs for the benefit of AAC and its subsidiaries. The
Stipulation and Order differs from the 2018 Stipulation and
Order in that the 2018 Stipulation and Order (i) did not
refer to OCI’s Runoff Capital Framework; (ii) included
certain affirmative covenants concerning books and
records, and reporting of information or events, that were
not included in the Stipulation and Order; and (iii)
contained a more restrictive limitation on transactions with
affiliates. 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.
The execution of Ambac’s strategy to increase the value of its
investment in AAC may be affected by a new capital framework
developed and implemented by OCI to assist OCI with making
decisions related to capital management at AAC ("OCI's Runoff
Capital Framework"). OCI’s Runoff Capital Framework applies
risk-based and other adjustments to AAC’s assets and insured
liabilities, as determined by OCI in its sole discretion. OCI’s
Runoff Capital Framework allows AAC to understand the likely
impact of various developments and actions now or in the future
on AAC’s capital position thereunder. No changes in AAC’s
current management of the business are required by OCI’s
Runoff Capital Framework. AAC’s ability to use capital for
potential future deleveraging transactions or distributions will
require AAC to sustain an excess of risk-adjusted assets over
risk-adjusted insured liabilities according to OCI’s Runoff
Capital Framework, and to obtain OCI’s approval, and there can
be no assurance that OCI will approve any such use of capital.
The results of OCI’s Runoff Capital Framework are expected to
vary over time based on changes in AAC’s financial position,
insured portfolio developments, the impact of strategic actions
taken by AAC, the impact of asset/liability management by
AAC and, possibly, changes to the inputs and assumptions
utilized by OCI.
AAC has a significant amount of debt outstanding in the form of
principal and accrued but unpaid interest on surplus notes.
Surplus notes are treated as capital for regulatory purposes as the
obligation to pay principal and interest on them is subordinated
to the obligation to pay policyholder claims and such payments
cannot be made without the explicit authorization of the OCI.
legal and contractual
AAC’s ability to pay dividends to AFG has also been
significantly restricted by AAC’s financial condition and by
regulatory,
restrictions. Substantial
uncertainty remains as to AAC's ability to pay dividends to AFG
and the timing of any such dividends, which constrains AFG's
liquidity. Refer to "Dividend Restrictions, Including Contractual
Restrictions" below and to Note 8. Insurance Regulatory
Restrictions to the Consolidated Financial Statements included
in this Annual Report on Form 10-K, for more information on
dividend payment restrictions.
Interest rate derivative transactions were executed through AFS,
a wholly-owned subsidiary of AAC. All remaining interest rate
derivative positions, which are substantially economically
hedged, relate to legacy financial guarantee customer swaps.
Until the second quarter of 2023, interest rate derivatives were
also used to partially hedge interest rate risk in the financial
Ambac Financial Group, Inc
3
2023 Form 10-K
guarantee insurance and investment portfolios. AFS continues
to be required to post collateral in excess of the market value of
certain interest rate derivatives when they are in a mark-to-
market loss position. While not anticipated, early 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 and other cash needs.
Ambac manages a variety of 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 Annual Report on Form 10-K for further information.
Risk Management
Ambac’s financial guarantee insurance policies expose the
Company to the direct credit risk of the assets and/or obligor
supporting 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, including
the risk of economic recession; natural disaster; pandemic 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 management of the insured financial guarantee portfolio,
including Surveillance and Risk Remediation (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 and the Stipulation and Order,
among other constraints. To the extent OCI's approval is
required in connection with risk management activities, OCI's
decisions may be guided by OCI's Runoff Capital Framework.
See Note 1. Background and Business Description to the
Consolidated Financial Statements included in this Annual
Report on Form 10-K for further information.
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 this Annual Report on Form 10-K for
further discussion of the various credit classifications utilized by
Ambac.
surveillance activities
The insured portfolio contains exposures that are correlated and/
or concentrated. RMG's
include
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
residential mortgage-backed securities ("RMBS"), for example,
which have several correlations including those associated with
consumer lending, unemployment, interest rates 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 large-scale domestic military spending or troop
level cutbacks on our privatized military housing portfolio and
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.
Watchlist and Adversely Classified Credits
Watch list and adversely classified credits are tracked closely
and are discussed as part of scheduled RMG credit meetings. A
summary of developments regarding adversely classified credits
and credit trends is also provided to AFG’s, AAC’s and Ambac
UK's Boards 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.
Surveillance
Risk Remediation
Surveillance is focused on the early identification of potential
stress and/or credit deterioration and the related analysis of
credit exposures
insured portfolio. Additionally,
Surveillance evaluates the impact of changes in the economic,
regulatory or political environment on the insured portfolio.
the
in
Analysts 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. 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 credit classifications, ratings and changes to a
Risk Remediation activities are centered on exposure reduction
and loss mitigation related to the insured portfolio. In particular,
the focus is on reducing exposure to credits that have negative
developing trends, the potential for future adverse development
or are already adversely classified by, among other things,
exercising rights and remedies, which may help to mitigate
losses in the event of further deterioration or events of default,
or, as available, working with an issuer to refinance, defease or
otherwise retire debt.
Loss mitigation focuses on the execution of commutation and
related claims reduction or workout strategies for policies with
potential future claims. For certain adversely classified, survey
list and watch list credits (as described in Note 2. Basis of
Presentation and Significant Accounting Policies
the
Consolidated Financial Statements included in Part II, Item 8 of
this Annual Report on Form 10-K), risk remediation or loss
to
Ambac Financial Group, Inc
4
2023 Form 10-K
mitigation plans are developed and implemented that may
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 Ambac’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. 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 to assist in examining the
underlying contracts or collateral, providing industry specific
advice and/or executing strategies.
Control Rights
In certain domestic and
international structured finance
transactions, structured public finance transactions, public-
private partnerships and other transactions, AAC and Ambac
UK may be the control party as a result of insuring a
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 AAC and Ambac UK are party to and/or have certain
rights in documents supporting transactions in the insured
portfolio, they may receive requests for amendments, consents
and waivers (“ACW”). Decisions to approve or reject ACWs are
made by AAC’s and Ambac UK’s risk management groups
based upon certain credit factors, such as the issuer’s ability to
repay the bonds and the bond’s security features and structure.
P&C Industry Overview
We operate within the $875 billion U.S. P&C insurance market
with a particular focus on the commercial MGA/U program
market both on an Admitted and Excess & Surplus Lines
("E&S") basis.
Admitted and E&S Insurance
Insurance carriers sell commercial P&C products in the United
States through one of two markets: the Admitted market and the
E&S market.
The Admitted insurance market, which has highly regulated
rates and policy forms, is more consistent in price and coverage.
In the E&S market, there is increased flexibility in pricing,
terms, and conditions in response to evolving market dynamics,
and E&S carriers can tailor insurance products to facilitate
coverage that would not otherwise be attainable. This unique
flexibility lends itself to providing solutions for unique risks,
which has driven meaningful growth within the E&S market
over the last decade exceeding the growth rate of the Admitted
market.
According to data from AM Best, the E&S market generated
approximately $99 billion of direct written premium in 2022 an
increase of 19.2% over the prior year and and represents over
11% of the industry direct premium volume. The E&S market is
more heavily focused in commercial lines and accounted for
over 21% of total commercial direct written premium for the
first time in 2022. For the period of 2012 through 2022 the E&S
sector had a compound annual growth rate of 11% compared to
5% for the overall U.S. P&C sector.
indicated below: Everspan
Everspan presently has five admitted carriers, which are wholly-
owned except as
Insurance
Company; Greenwood
Insurance Company; Consolidated
National Insurance Company; Consolidated Specialty Insurance
Company; and Providence Washington Insurance Company
(90.1% owned). Everspan Indemnity Insurance Company
("Everspan Indemnity"), an E&S carrier, which is eligible to
write business in all U.S. states and territories, is also part of
Everspan.
MGA/U Program Market
It is estimated that U.S. MGA/Us generate between $70 to $100
billion of direct premiums in 2023. We believe there are
significant advantages to the MGA/U business model when it
comes to capturing the opportunity in the E&S market and
propelling profitable growth. MGA/Us are specialized types of
insurance agents or brokers that are vested with underwriting
insurer, administering programs and
authority
negotiating contracts on their behalf. This is a particularly useful
vehicle for P&C insurers as MGA/Us tend to participate in the
E&S market where specialized expertise is needed to underwrite
policies. Additionally, MGA/Us are cost effective means for an
insurer or reinsurer to access or grow a particular class of
business they find attractive given the MGA/U already possesses
product expertise and distribution capabilities.
from an
According to data from AM Best, the MGA/U sector is one of
fastest growing segments of the U.S. P&C insurance market
with 2022 direct premium written of $68 billion, an increase of
14% over the prior year, and loss ratios consistently lower than
the P&C sector overall. In 2022, AM Best identified 654 MGAs
in the U.S. market with likely several hundred additional MGAs
not counted in that group as their premium production falls
below the filing threshold. We believe the growth in the MGA/U
and program space is likely to continue as the industry continues
its move towards increased specialization.
Specialty Property and Casualty Insurance
Everspan’s strategy is to generate sustainable and profitable,
long-term specialty property and casualty program business with
a focus on diverse classes of commercial and personal liability
risks across an expanding roster of MGA/U partners.
As a specialty property and casualty program group. Everspan
may retain a percentage of the business it underwrites.
Everspan's management team has significant years of experience
in the program insurance and reinsurance sectors and has long-
standing and broad relationships with MGA/Us, reinsurers,
third-party claims administrators
brokers, producers and
("TPAs"). Everspan
through program
administrators and managing general agents, reinsurers, brokers,
producers and others. Subject
to Everspan's operational
oversight, Everspan engages these third parties to market and
administer policies and handle claims within defined authorities
on Everspan's behalf.
sources business
Everspan is focused on generating strong underwriting results
and stable fee income as part of its specialty program business
model.
Ambac Financial Group, Inc
5
2023 Form 10-K
For the year ended December 31, 2023, Everspan generated
$273 million of gross written premium, of which Everspan
retained approximately 29%,
including assumed written
premiums. Everspan retained approximately 17% of its direct
written premiums, with the balance primarily ceded to quota
share reinsurers.
Everspan may retain up to 30% of risk on each direct program
and will reinsure the remainder to reinsurers and other providers
of risk capital. These reinsurers may be domestic and foreign
reinsurers and institutional risk investors (capacity providers).
While underwriting direct business produced by MGA/Us is
Everspan's primary means of distribution, Everspan also
selectively assumes reinsurance to further its goal of writing a
diversified book of specialty P&C business while efficiently
managing its exposure limits. For example, the Company would
evaluate, and may write certain lines, including those with
catastrophe risk or Workers’ Compensation on an assumed
basis. Everspan may participate as a reinsurer on up to 30% of a
program, which is in line with its strategy to retain up to 30% of
risk per program. Participation as a reinsurer will affect the
retention ratio as Everspan's portion of assumed premiums is
reflected fully in both Gross and Net Written Premiums.
The following table sets forth gross written premiums (direct
and assumed) by line of business for the years ended December
31, 2023 and 2022:
($ in millions)
Year Ended December 31,
2023
2022
of credit issued by or trust accounts in the custody of NAIC-
qualified financial institutions, to secure the reinsured risks.
The following graph shows our reinsurance carriers' AM Best
rating based on share of ceded premium for the year ended
December 31, 2023:
A
14%
A-
1%
NR
16%
A+
16%
A++
53%
(1) NR represents reinsurance carriers not rated by AM Best.
Generally, under the terms of reinsurance contracts with such
carriers the reinsurer is required to post collateral to Everspan.
See Note 7. Insurance Contracts to the Consolidated Financial
Statements included in Part II, Item 8 in this Annual Report on
Form 10-K for further information on reinsurance recoverables,
including the evaluation for credit impairments.
Commercial auto liability .................................... $
122 $
117
Competitive Strengths:
Excess liability .....................................................
General liability ...................................................
Surety ..................................................................
Non-standard auto ...............................................
Workers Compensation .......................................
Commercial auto physical damage ......................
Other ....................................................................
41
27
26
20
20
12
6
5
6
4
—
—
13
1
Gross written premiums ....................................... $
273 $
146
Everspan purchases reinsurance to manage its net retention on
individual risks and overall exposure to losses, while providing
it with the ability to offer policies with sufficient limits to meet
reinsurance
producer and policyholder needs. Generally,
contracts are specific to a program and are renewed annually, at
which time they are subject to renegotiation. The key
contractual provisions include, but are not limited to, those
relating to the scope of business reinsured, ceding commissions,
required reports to reinsurers, dispute resolution, any required
collateral, and Everspan's termination rights when, among other
triggers, a reinsurer defaults (such as by failing to collateralize
its obligations when required) or its financial strength falls
below an agreed level. Everspan’s ceded reinsurance contracts
do not legally discharge Everspan from its primary liability for
the full amount of the policies, and Everspan will be required to
pay the loss and bear collection risk if a reinsurer fails to meet
its obligations under the reinsurance agreement.
Everspan mitigates this credit risk by selecting well capitalized,
highly rated, authorized capacity providers, or requiring that the
capacity provider post collateral, typically in the form of letters
Specialty Property and Casualty Insurance is a competitive
industry. Everspan believes that it can successfully operate in
this industry in part based upon the following competitive
strengths.
• Experience — Everspan has an experienced leadership
team across underwriting, pricing, claims, and business
development with an average tenure of over 30 years in the
insurance industry.
• Underwriting Focused Strategy — Everspan is driven by
underwriting performance, which
is achieved via
comprehensive diligence and monitoring of MGA/U
partners from our in-house pricing actuaries, claims
executives, and program managers. This underwriting focus
also aides in achieving and maintaining support from
reinsurance partners.
• Risk Appetite — Everspan may retain up to 30% of the risk
it underwrites. This meaningful participation serves to align
interests with our reinsurers.
• Commitment to Program Distribution — Everspan does
not have any direct distribution capability as
is
committed to the program market distributed through
MGA/Us. As a result, Everspan does not have channel
conflicts which would compete with programs partners in
underwriting business.
it
• Nimble Platform — A simplified organizational structure
which allows Everspan to be efficient and quick in
responding to the needs of program partners as well as
finding customized solutions. We believe this provides a
Ambac Financial Group, Inc
6
2023 Form 10-K
competitive advantage to the more traditional competitors
in the market.
• Aligned Ownership — Everspan has a stable ownership
structure which is equally focused on long-term value
creation based on strong underwriting performance. This
alignment of interest and strategic vision allows Everspan
to leverage resources across Ambac and access capital for
future initiatives.
Competition:
Everspan faces competition from program business market
participants such as Accelerant, Benchmark, Clear Blue, Core
Specialty, Falls Lake, Fortegra, Obsidian, Spinnaker, State
National, Transverse, and Trisura. Most of these entities have
both admitted and E&S carriers. Competition may take the form
of lower program fees, broader coverages, greater product
flexibility, higher coverage limits, greater customer service or
higher financial strength ratings by independent rating agencies.
Few barriers exist to prevent existing insurers from entering
target markets within the property and casualty industry. Market
the degree of
conditions and capital capacity
competition at any point in time.
influence
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 underwriting capacity, pricing and
policy terms and conditions are generally more favorable for
insurers. Historically, the performance of the property and
casualty insurance industry 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'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 competes than in the standard insurance
market. For the last several years the property and casualty
industry has been in a period of high premium rates with a
shortage of underwriting capacity. While not anticipated to end
in the short-term, this cyclical period will eventually end,
perhaps unexpectedly. The end of this favorable cycle could
have negative consequences
for Everspan's growth and
profitability prospects.
Business Acquisition and Program Partner Selection:
focus on generating
With our
long-term underwriting
profitability, we are selective in adding new program partners.
We look for program partners that share our vision of
underwriting performance and
return expectations and
consequently are selective about with whom we partner. As of
December 31, 2023, we have 23 programs with 19 MGA/Us. In
2023 we reviewed over 180 submissions and agreed to contract
11 new programs with eight new MGA/Us and two MGA/Us
with an existing relationship, while renewing or extending
twelve programs with eleven incumbent MGA/Us. Included in
2023 new programs are two executed via assumed reinsurance.
As noted above, most of Everspan’s programs are sourced either
from MGA/Us or through other third parties, such as reinsurance
brokers, that are seeking to provide customized insurance
solutions that require a carrier with a high rating from AM Best.
Everspan works with MGA/Us that leverage both data and
technology to streamline or improve the underwriting process.
Everspan may also source programs as a reinsurer. Accessing
programs as a reinsurer provides Everspan the ability to
diversify its risk profile, efficiently manage its exposure limits
and underwrite programs in a cost efficient manner, amongst
other benefits.
For each new opportunity that Everspan chooses to evaluate, an
initial evaluation of the MGA/U is conducted, including an
assessment of its underwriting approach, philosophy, size,
quality of management, past performance, future performance
targets and, above all, compatibility with Everspan’s operating
model, risk appetite, and existing book of business. Everspan
conducts substantial due diligence on all program partners led
by the Underwriting Risk Committee which is chaired by
Everspan’s Chief Underwriting Officer. As part of the diligence
process, Everspan works closely with potential MGA/Us to
design program underwriting guidelines, ongoing reporting and
auditing requirements. Everspan also typically requires the
producing partner to retain underwriting risk or otherwise align
incentives with program underwriting performance.
Additionally, as part of the diligence process for each program,
Everspan will perform a review of the claims management
function, typically performed by a TPA, which in some cases are
managed by the MGA/U or producing partner. Diligence
focuses on claims handling and
litigation management,
compliance, finance, governance, staff and vendor management,
data and IT.
After due diligence is completed and acceptable reinsurers are
identified, each program is presented to the Underwriting Risk
final approval. The Underwriting Risk
Committee
Committee will consider recommendations made by the credit
subcommittee regarding the financial strength of the MGA/Us
and/or reinsurers.
for
Ongoing Monitoring:
For active programs, Everspan authorizes MGA/Us
to
underwrite and bind coverages in accordance with approved
underwriting guidelines and delegates authority to the TPA for
claims adjustment and payment. Everspan closely monitors
each MGA/U and TPA’s adherence to the agreed upon
underwriting and claims guidelines. Everspan will conduct
periodic reviews of loss experience, rate levels, reserves and the
overall financial health of the MGA/U and TPA and hold
monthly underwriting meetings with both the MGA/U and TPA.
Underwriting and claims data is provided by the MGA/Us and
TPAs monthly. Additionally, Everspan conducts underwriting,
claims and accounting audits, generally on-site, at least once a
year for MGA/U and TPA partners which administer a material
amount of Everspan's business. Everspan determines whether it
will continue to participate on a program no less than annually,
generally at the anniversary date of the program. The renewal
process entails an assessment, with Underwriting Risk
operating
of
Committee
performance, profitability, and available reinsurance capacity.
Everspan maintains the right to terminate relationships with its
MGA/Us and TPAs. Reasons to terminate a relationship include
participation,
program's
the
Ambac Financial Group, Inc
7
2023 Form 10-K
an inability to produce targeted underwriting results, writing
exposures outside of agreed upon risk tolerances, delinquency in
meeting reporting requirements, a change of strategic direction,
or failure to meet collateral or other commitments to Everspan.
Ratings:
Everspan carriers have an AM Best financial strength ratings
("FSR") of 'A-' (Excellent) and Financial Strength Category of
Class VIII. Risk is shared among the Everspan carriers via a
reinsurance agreement and an intercompany pooling agreement
(the "Everspan Pool"). We view this rating and financial size
category as a competitive advantage in the marketplace. Ratings
are an important factor in assessing Everspan’s competitive
position, operation capabilities and risk management in the
insurance industry.
Insurance Distribution
its existing
Ambac’s
Insurance Distribution business, Cirrata Group
("Cirrata"), has a strategy to build a diversified portfolio of
MGA/Us and other insurance distributors covering various P&C
Insurance
to grow
products. Ambac plans
Distribution business using several strategies, including (i)
organic growth, (ii) additional acquisitions and/or partnerships,
and (iii) hiring experienced underwriting teams to incubate start-
up MGA/Us. Key criteria include a track record of profitability
and a seasoned management team. Insurance underwritten
through Ambac's MGA/Us may utilize Everspan as an insurance
carrier, but are not be required to do so, depending on strategic
and operational considerations.
The following table sets forth Cirrata's premiums placed by line
of business:
($ in millions)
Year ended December 31,
Employee stop loss
Limited & short-term medical
Commercial auto
Marine
Professional liability
Other
Premiums placed
2023
2022
$
76 $
54
62
19
12
6
231 $
$
72
48
11
1
—
4
135
Cirrata's portfolio at December 31, 2023, includes the following
entities:
Xchange — Ambac owns an 80% controlling interest in
Xchange Benefits, LLC ("Xchange"). Xchange operates through
specialty producers in accident and health ("A&H") sectors
across the U.S. which are typically not targeted by large direct
writers and to whom Xchange can provide customized offerings.
Xchange conducts business through approximately ten insurance
carriers and dozens of agents and other distributors.
Xchange's main products for which it is delegated underwriting
authority by insurance carriers include:
• Employer Stop Loss ("ESL") — provides protection for
self-insured employers by serving as a reimbursement
mechanism for catastrophic claims, both specific and in
aggregate exceeding pre-determined levels.
• Limited Benefit Medical ("LM") — designed as a
supplement to traditional Affordable Care Act medical
programs and sold primarily through affinity groups,
providing a variety of medically related benefits such as
inpatient hospital stays, diagnostic services or physician
visits.
• Short-term Medical ("STM") — sold primarily through
affinity groups, providing non Affordable Care Act
comprehensive medical coverage for short durations (i.e.
less than one year).
• Xchange Re ("MGA/U") / Distribution Re ("Captive") —
in January 2023, Xchange launched two new growth
initiatives; Xchange Re an A&H reinsurance MGA/U and
Distribution Re a protected cell captive insurance company
domiciled in Tennessee which will mainly insure high
deductible medical stop loss plans. Xchange does not
intend to accept or retain any risk from Distribution Re.
All Trans — Effective November 1, 2022, Ambac acquired an
85% controlling interest in All Trans Risk Solutions, LLC ("All
All Trans is a full service managing general
Trans").
underwriter with delegated underwriting
in
commercial automobile insurance for specific "for-hire" auto
classes; principally private school bus operators. In 2024,
AllTrans launched a new program primarily focussed on charter
buses. All Trans' track record of performance has allowed the
company to maintain a consistent panel of insurance carriers and
client relationships, several of which go back over 25 years.
authority
Capacity Marine — Effective November 1, 2022, Ambac
acquired an 80% controlling interest in Capacity Marine
Corporation ("Capacity Marine").
Capacity Marine is a
wholesale and retail brokerage and reinsurance intermediary
specializing in more sophisticated marine and international risk
in expsoures such as ports, terminals, and stevedores.
interest
Riverton — Effective August 1, 2023, Ambac acquired an 80%
controlling
in Riverton Insurance Agency, Corp.
("Riverton"). Riverton offers professional liability insurance
programs
licensed architects, engineers, construction
managers and real estate professionals. Riverton's retail agency
places professional liability for real estate agents with various
markets.
to
In addition to existing MGA/Us and acquisitions, de novo
MGA/U formations will be a core element of the Insurance
Distribution segment's growth strategy.
Cirrata's businesses are compensated for their services primarily
by commissions paid by insurance carriers for underwriting,
structuring and/or administering polices and, in some cases for
managing claims under agency agreements. Commission
revenues are usually based on a percentage of the premiums
placed. The businesses are also eligible to receive profit sharing
contingent commissions on certain programs based on the
underwriting results of the policies they write, which may cause
some variability
recognition.
Commission revenues experience seasonality during the year,
primarily from Xchange whose ESL programs are mostly
underwritten in January and July resulting in revenue and
earnings concentrations in the first and third quarters each
calendar year. Given the recent acquisitions and potential de
revenue and earnings
in
Ambac Financial Group, Inc
8
2023 Form 10-K
novo launches, this seasonality is expected to become more
muted over time.
Expenses at Cirrata include commissions the businesses pay to
their independent agents/producers, compensation for their
management and staff and intangible asset amortization from
acquisitions. Commission expenses are a variable cost as we
pay a percentage of premiums written to the agents/producers.
Insurance Distribution generated gross commission revenue of
$51 million and $31 million during the years ended December
31, 2023 and 2022, respectively and net commission revenue
(gross commissions less commission expenses) of $22 million
and $13 million, respectively.
Commission revenue and expense growth will be driven by the
businesses' continued expansion and diversification of its
products across regions, products, and carriers.
Competitive Strengths:
• Deep specialty domain knowledge — Our Insurance
Distribution businesses are anchored by a deep specialty
domain knowledge in their respective classes of business.
This knowledge is key to generating the underwriting
results necessary
long-standing carrier
relationships.
to maintain
• Long standing carrier relationships — Our MGA/Us
strive towards long and durable carrier relationships
supported by a focus on underwriting profitability. P&C
insurance is a cyclical industry with opportunistic players
entering and exiting the business. We believe that growing
multi-year carrier relationships are evidence of the value
created by our MGA/U, a value which we believe should
sustain through routine market cycles.
• Strong
distribution
relationships — Distribution
relationships provide value in several ways. First, carrier
partners are looking for both underwriting expertise and
distribution access when working with MGA/Us. In
addition the quality of distribution relationships helps in
allowing our MGA/Us access to higher quality risks from
the wholesale and retail agents which we believe over time
will help produce better underwriting results..
Competition:
The MGA/U insurance sector is highly competitive, and firms
actively compete with Cirrata's businesses for customers and
insurance carrier capacity.
• 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,
making prices and margins competitive. Blue Cross,
UnitedHealth, CIGNA and Aetna are the largest writers.
Competition also comes from large direct writers such as
Tokio Marine, HCC and Sun Life as well as smaller
carriers such as Gerber Life writing through other MGA/U
firms.
• For LM and STM, overall market conditions remain stable.
the
The overall market
unemployed and others seek options for
individual
insurance. Competition for Xchange's business comes from
large as entrepreneurs,
is
both direct carriers and other intermediaries and, depending
on the product, may include Blue Cross, UnitedHealth,
CIGNA, Aetna, Tokio Marine, Houston Casualty
Company, Sun Life, United Health, Axis, Chubb, and
National General.
• In the commercial auto "for-hire" classes All Trans
competes with a variety of carriers both national and
regional. Overall, carriers have been cutting back on their
participation and or capacity in commercial auto due to
poor underwriting performance, which has benefited All
Trans which is focused on narrower niche classes of risk
within the larger commercial auto sector. This competitive
environment has allowed All Trans to price properly and
provide strong underwriting results. All Trans competes
with Lancer insurance, National Interstate, Utica, RLI and
various other MGA/U companies.
• In professional liability markets, overall market conditions
remain stable. Riverton competes with RLI, CNA, Hartford
and various other MGA/U companies.
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
financial
associated with
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
Ambac Financial Group, Inc
9
2023 Form 10-K
• The Compensation Committee oversees the management of
risk primarily associated with our ability to attract,
motivate and retain quality talent (particularly executive
talent) and with setting financial incentives that do not
motivate undue risk-taking.
into
• 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, including integration of ESG and
the
sustainability policies, practices and goals
Company's business strategy and decision making.
Additionally, the Governance and Nominating Committee
oversees the processes for evaluation of the performance of
the Board of Directors and its committees each year and
considers risk management effectiveness as part of its
evaluation. This committee also reviews succession plans
for Ambac's executive officers,
the Chief
Executive Officer. 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.
including
• The Strategy Committee oversees the management of
strategic plans and initiatives.
The Board of Directors receives quarterly updates from Board
committees and the Board provides guidance to individual
committee activities, as appropriate.
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, is comprised of executive and senior
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 executive and senior management and the Board of
Directors.
Ambac management has established other 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 provide
oversight of the key risk remediation issues impacting
AAC. The purview of the committee is to review and
the financial
approve risk remediation activities for
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 CEO, Head of Risk
Management, CFO and senior managers from throughout
risk, corporate services, operations, legal and finance.
• 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 CEO, CFO, Chief Accounting
Officer, General Counsel, Chief Operating Officer, Head of
Risk Management and senior managers from finance and
legal.
• The AAC Reserve Committee's objective is to provide
oversight and review of the reserving process at AAC and
Ambac UK. The committee reviews and discusses, on at
least a quarterly basis, reserve-related developments and
key metrics and assumptions, including, but not limited to,
credit, economic, interest rates, legal and regulatory. The
committee gives approval to proceed with the development
of loss estimates and related projections utilized in
developing the consolidated quarterly reserves of the
Legacy Financial Guarantee Insurance business. Members
of the Reserve Committee include the CEO, Head of Risk
Management, CFO, General Counsel and senior managers
throughout risk, legal and finance.
• The Everspan Underwriting Risk Committee's objective is
to provide oversight of the active underwriting operations
of Everspan, develop underwriting parameters, and assist
the Boards of the Everspan companies in overseeing the
integrity and effectiveness of Everspan’s underwriting risk
management framework. Members of
the committee
include the CEO, key members of Everspan management
and other senior managers or advisors of Ambac.
Additionally, a Reinsurance and Program Administrator
Credit Risk sub-committee was established at the direction
of the Underwriting Risk Committee to assist with the
management of credit
from ceded
reinsurance and program administrators.
risk emanating
The Company’s Enterprise Risk Management efforts build upon
the foundation of an effective internal control environment. The
design of any risk management or control system must reflect
the fact that there are resource constraints, and the benefits must
be considered relative to their costs. As a result, the possibility
of material financial loss remains regardless of the Company’s
Enterprise Risk Management efforts. An investor should
carefully consider the risks and all of the other information set
forth in this annual report, including the discussions included in
Item 1A. Risk Factors, Item 7A. Quantitative and Qualitative
Disclosures About Market Risk, and Item 8. Financial
Statements and Supplementary Data.
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;
Ambac Financial Group, Inc
10
2023 Form 10-K
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 Annual Report on
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
AAC 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”) as a domestic insurer.
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 State of Arizona and regulated by the
Arizona Department of Insurance and Financial Institutions as
domestic insurers. The subsidiaries of Everspan Insurance are
domiciled in various States and are therefore subject to the
insurance laws and regulations of their respective domiciliary
States and regulated by the insurance departments of those
States as domestic insurers. AAC, Everspan Insurance and its
subsidiaries are also subject
laws and
regulations of the other jurisdictions in which they are licensed
and operate as foreign insurers in such jurisdictions. See Note 8.
Insurance Regulatory Restrictions to the Consolidated Financial
Statements included in Part II, Item 8 in this Annual Report on
Form 10-K for further information on regulatory restrictions.
insurance
the
to
Pursuant to the terms of the Settlement Agreement and the
Stipulation and Order, AAC must seek prior approval by OCI of
certain corporate actions. The Settlement Agreement and
Stipulation and Order 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. Certain of
the Settlement
Agreement may be waived with the approval of the OCI and/or
the requisite percentage of holders of AAC's surplus notes.
OCI's Runoff Capital Framework will help OCI determine
whether to approve AAC making payments on or acquiring its
surplus notes and Auction Market Preferred Shares ("AMPS")
and distributing capital to AFG.
the restrictions
in
The Insurance Distribution businesses, like other MGA/Us,
program administrators and brokers, may be subject to licensing
requirements and regulation by insurance regulators in various
states in which they conduct business.
United Kingdom
The Prudential Regulatory Authority ("PRA") and Financial
Conduct Authority ("FCA") (and their predecessor regulator the
Financial Services Authority (“FSA”)) exercise significant
oversight over 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. See Note 8. Insurance Regulatory
Restrictions to the Consolidated Financial Statements included
in Part II, Item 8 in this Annual Report on Form 10-K for further
information on regulatory restrictions.
Regulation of Change in Control
Under applicable insurance law, any acquisition of control of
AFG, or any other direct or indirect acquisition of control of
AAC or one or more members of the Everspan group of
companies, requires the prior approval (or non-disapproval) of
the domiciliary regulator of the acquired company (or, in the
case of AFG, the domiciliary regulators of AAC and each
member of Everspan). “Control” is generally 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 applicable insurance regulator, 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 presumably
deemed to have control of AAC, Everspan Indemnity, Everspan
Insurance and its subsidiaries within the meaning of applicable
insurance laws and regulations, although insurance regulators
may in their discretion deem control not to exist where, for
example, control is disclaimed by a passive investor. The United
Kingdom has similar requirements applicable in respect of AFG,
as the ultimate holding company of Ambac UK.
Dividend Restrictions,
Restrictions
AAC:
Including Contractual
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 2024. AAC’s ability to pay
dividends is restricted by the Settlement Agreement, the
Stipulation and Order and the terms of its AMPS. OCI's
decisions regarding dividends will be guided by OCI's Runoff
Insurance Regulatory
Capital Framework. See Note 8.
Restrictions to the Consolidated Financial Statements included
in Part II, Item 8 in this Annual Report on Form 10-K for further
information on dividends. As a result of these restrictions,
substantial uncertainty remains as to AAC's ability to pay
dividends to AFG and the timing of any such dividends.
Pursuant to the Settlement Agreement, 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 to
AFG for the payment of operating expenses, a pro rata amount
of AAC's surplus notes would also need to be redeemed at par.
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
Ambac Financial Group, Inc
11
2023 Form 10-K
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
that all
the AMPS become cumulative until
accumulated and unpaid dividends have been paid on the
AMPS.
the date
Ambac UK:
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 (including dividends), 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). 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 rules governing capital
extraction by insurance firms in run off require Ambac UK to
consider its future capital requirements over a 3 to 5 year period
in both base case and downside stress scenarios before declaring
a dividend. Ambac UK annually prepares these forecasts and
stress tests as part of its regulatory submissions to the PRA each
April. If the stress tests and forecasts show adequate liquidity
and regulatory capital buffers then, subject to PRA approval, it
may be possible for Ambac UK to pay dividends to AAC in the
near future.
Everspan Companies:
Everspan Indemnity, Everspan Insurance and its subsidiaries are
also subject to regulatory restrictions on their ability to pay
dividends. 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.
Furthermore, certain subsidiaries of Everspan Insurance are
restricted from paying dividends to Everspan Insurance until
2025 or later, unless otherwise approved by the domestic
regulator of the relevant subsidiary, pursuant to the regulatory
orders approving the acquisition of those subsidiaries.
Cirrata Companies:
Ambac's MGA/U subsidiaries are not restricted from paying
dividends or partner distributions (collectively "Distributions")
to their owners or partners, including Cirrata, which is 100%
owned by AFG. Ambac's established MGA/Us historically have
paid Distributions equating to the majority of their individual
EBITDA, subject to working capital and other capital needs, on
a quarterly basis. Newly formed de-novo MGA/Us are not
expected to make regular distributions to their partners until they
become profitable and generate free cash flow on a steady and/
or predictable basis.
INVESTMENTS AND INVESTMENT POLICY
As of December 31, 2023,
the consolidated non-VIE
investments of Ambac had an aggregate fair value of
approximately $2,664 million. Investments are primarily
managed by third party investment management firms overseen
internally. All investments are made in accordance with the
general objectives, policies, and guidelines for investments
approved 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.
As of December 31, 2023, the AAC and Everspan non-VIE
investment portfolios had an aggregate
fair value of
approximately $1,810 million. The investment objective is to
achieve the highest risk-adjusted after-tax return on a diversified
investment portfolio 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 to the respective investment policies.
Within its guidelines, AAC 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 and the Stipulation and Order, and
may be affected by OCI's Runoff Capital Framework as
discussed above in Insurance Regulatory Matters and Other
Restrictions. See Note 1. Background and Business Description
to the Consolidated Financial Statements included in Part II,
Item 8 in this Annual Report on Form 10-K for more
information. Such requirements could adversely impact the
performance of the investment portfolio.
As of December 31, 2023, the non-VIE Ambac UK investment
portfolio had an aggregate fair value of approximately $663
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, 2023, the non-VIE AFG (parent company
only, excluding investments in subsidiaries) investment portfolio
had an aggregate fair value of approximately $188 million. The
primary investment objective is to preserve capital for strategic
uses while maximizing income. The investment portfolio is
subject to internal investment guidelines. Such guidelines set
forth minimum credit rating requirements and credit risk
concentration limits.
As of December 31, 2023, the non-VIE Insurance Distribution
fair value of
investment portfolio had an aggregate
approximately $4 million, primarily consisting of money market
funds.
Ambac Financial Group, Inc
12
2023 Form 10-K
liquidity,
At December 31, 2023 and 2022 Ambac owned $369 and $286,
respectively, of distressed AAC and Ambac UK-insured bonds,
primarily RMBS and student loan bonds. Refer to Note 4.
Investments of the Consolidated Financial Statements included
in Part II, Item 8 in this Annual Report on Form 10-K for further
discussion of Ambac insured securities held in the investment
portfolio. From time to time depending on and in light of
prevailing market conditions, our
internal and
regulatory guidelines, contractual restrictions and OCI’s Run-off
Capital Framework, Ambac may seek to opportunistically (i)
purchase or sell AAC and Ambac UK-insured securities; (ii)
reduce, redeem, repurchase or otherwise retire its outstanding
indebtedness, surplus notes and other AAC issued securities,
including through open market repurchases, tender offers,
repayments, redemptions or otherwise; and (iii) consider
opportunities to exchange securities issued by AAC for other
securities issued by AFG or AAC. Any such opportunistic
liability or capital management transactions with respect to
surplus notes or AMPS would in all cases be subject to and
require OCI approval. OCI’s approval may be granted or denied
in OCI’s sole discretion.
The following table provide certain information concerning the
consolidated investments of Ambac:
Investment Category
($ in millions)
December 31,
Carrying
Value
Weighted
Average
Yield (1)
Carrying
Value
Weighted
Average
Yield (1)
2023
2022
Municipal obligations
$
Corporate securities
Foreign obligations
U.S. government
obligations
Residential mortgage-
backed securities
Commercial mortgage-
backed securities
Asset-backed securities
Short-term investments
Total fixed maturity-
available-for-sale
72
745
100
4.8 % $
3.3 %
2.6 %
43
598
76
4.6 %
2.6 %
1.5 %
250
19
442
452
7.2 %
238
8.3 %
5.6 %
8.5 %
5.3 %
15
361
572
5.5 %
7.0 %
4.0 %
2,162
5.2 %
1,966
4.4 %
Fixed maturity securities -
trading (2)
Other investments (3)
27
475
— %
— %
59
568
Total
$
2,664
5.2 % $
2,593
— %
— %
4.4 %
(1) Yields are stated on a pre-tax basis, based on average amortized
cost for both long and short term fixed-maturity investments.
(2) Fixed maturity securities held for trading are Puerto Rico
municipal obligations received in connection with the 2022
restructuring of AAC-insured Puerto Rico obligations.
(3) Other
investments consist primarily of
in pooled
investment funds that are either classified as trading securities or
are reported under the equity method. Refer to Note 4. Investments
of the Consolidated Financial Statements included in Part II,
Item 8 in this Annual Report on Form 10-K for further information
about Other investments.
interests
EMPLOYEES
As of December 31, 2023, Ambac had 168 employees in the
United States and 10 employees in the United Kingdom. Our
2023 voluntary turnover rate was approximately 8.3%. 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 executive management and
senior management positions as the need arises. The Company
has established a senior advisory team to work with, and advise,
executive management on key initiatives, and has invested in
both personal and professional growth programs to identify and
prepare individuals 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
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
Item 1A. Risk Factors ($ in millions)
Capitalized terms used but not defined in this section shall have
the meanings ascribed thereto in Part I, Item 1 in this Annual
Report on Form 10-K or in Note 1. Background and Business
Description to the Consolidated Financial Statements included
in Part II, Item 8 in this Annual Report on Form 10-K unless
otherwise indicated.
Risks Related to AFG Common Shares ...............................
Risk Related to the Company's Business .............................
Risks Related to Capital, Liquidity and Credit Markets ......
Page
13
15
23
Risks Related to AFG Common Shares
The price per share of AFG's common stock may be
subject
including
significant price declines.
to a high degree of volatility,
Ambac's Legacy Financial Guarantee Insurance business is in
run-off and faces significant risks and uncertainties described
elsewhere in Part I, Item 1A. Risk Factors. In addition, Ambac's
Specialty Property and Casualty Insurance and Insurance
Distribution businesses are in the early stages of development
and relatively small; therefore, they are also subject to
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;
• changes in the actual or perceived risk within our Legacy
Financial Guarantee ("LFG") insured portfolio;
82
3.0 %
65
1.9 %
Our risk factors are organized in the following sections
Ambac Financial Group, Inc
13
2023 Form 10-K
• changes to regulatory status;
• changes in investors’ or analysts’ valuation measures for
our stock;
• market perceptions of our success, or lack thereof, in
pursuing and implementing our Specialty Property and
Casualty Insurance and Insurance Distribution businesses
and our new business strategy more generally;
• the
impact or perceived
impact of any acquisition,
disposition or other strategic transaction, including entry
into a new line of business or the sale of all or a part of the
LFG business, on the value or long-term prospects of the
Company;
• adverse developments in the industries and markets in
which we operate, including the property and casualty
insurance, underwriting and brokerage industries, or the
fixed income and equity capital markets;
• adverse market and/or economic conditions, such as those
caused by a recession or inflation, which increase our risk
of loss on insurance policies and depress the value and/or
liquidity of our investments and other assets;
• adverse developments in current or future litigations; and
• results and actions of other participants in our industries.
The price of AFG's shares may also be affected by the risks
described below, including risks associated with AAC’s ability
to deliver value to AFG. Investments in AFG's common stock
may be subject to a high degree of volatility.
AFG may not be able to realize value from its LFG
businesses.
The value of AFG's common stock is partially dependent upon
realizing residual value from AAC by means of a full or partial
sale and/or the receipt of dividends.
While AFG is exploring strategic options, including the
possibility of a full or partial sale of AAC and Ambac UK, AFG
can provide no assurance that such a transaction will be
consummated or, if consummated, whether the value obtained
will ultimately prove to be greater than the value of the LFG
business reflected in AFG's common stock or that could be
realized in a longer-term run-off scenario. AFG may be unable
to secure a binding offer for the full or partial sale of the LFG
business on terms viewed as acceptable by the Board of
Directors of AFG or at all. If an acceptable offer is made and
accepted, the closing of the sale would be subject to several
conditions, including regulatory and other approvals, which may
not be satisfied. In the absence of a full or partial sale of the
LFG business, the Company plans to continue to actively run-off
the LFG business. See Part I, Item I. Description of Business -
Legacy Financial Guarantee Insurance.
There can be no assurance that AFG will be able to realize
residual value through receiving dividends from the continued
run-off of AAC. AFG's ability to realize residual value 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, surplus
note holders and preferred stock holders. AAC's ability to satisfy
all of its obligations that are senior to AFG's equity depends on a
number of considerations, including its ability to recover losses
previously paid; avoid material losses from litigation; 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;
realize material value from its investment in Ambac UK; and
repay and/or restructure its indebtedness in a timely manner
such that accruing interest costs are manageable. Payments of
principal and interest on AAC's surplus notes are subject to the
express approval of the Wisconsin OCI.
from
losses
Increased loss development in the LFG insured portfolio, or
significant
litigation or other events or
circumstances may prompt OCI to determine that it is in the best
interests of policyholders to initiate rehabilitation proceedings
with respect to AAC or to issue supervisory orders that impose
restrictions on AAC, either preemptively or in response to any
such event or circumstance.
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
the
relief,
acceleration of losses based on early termination triggers, and
the loss of control rights in insured transactions. Any such
consequences may reduce or eliminate any residual value of
AAC for AFG. Additionally, the rehabilitator would assume
control of all of AAC’s assets and management of AAC. In
exercising control, the rehabilitator would act solely for the
benefit of policyholders, which may result in material adverse
consequences for our security holders. Similar risks would arise
if Ambac UK were to become subject to a proceeding to protect
the interests of its policyholders, in which case AAC's ability to
realize value from Ambac UK (and consequently AFG's ability
to realize value from AAC) would diminish. If OCI were to
issue supervisory orders imposing restrictions on AAC, AAC's
ability to satisfy its obligations to policyholders or creditors, or
its ability to deliver value to AFG, may be significantly
constrained.
Due to the above considerations, as well as applicable legal and
contractual restrictions described elsewhere herein, substantial
uncertainty remains as to AAC's ability to pay dividends to AFG
and the timing of any such dividends.
Ambac is planning to further develop and expand its
Insurance and
Specialty Property and Casualty
Insurance Distribution businesses; however, such plans
may not be realized, or if realized, may not create value
and may negatively impact our financial results.
The value of AFG's common stock depends in part upon the
ability of Ambac to generate earnings apart from the LFG
business. Ambac is planning to further develop and expand its
Specialty Property and Casualty Insurance and Insurance
Distribution businesses. Such plans may involve additional
acquisitions of assets or existing businesses and the development
of businesses through new or existing subsidiaries. Currently, it
is not possible to fully predict the future prospects or other
characteristics of such businesses. While we expect to conduct
business, financial and legal due diligence in connection with
future business or acquisition
the evaluation of any
opportunities, there can be no assurance our due diligence will
identify every matter that could have a material adverse effect
on us. Efforts to pursue certain business opportunities may be
Ambac Financial Group, Inc
14
2023 Form 10-K
unsuccessful or require significant financial or other resources,
which could have a negative impact on our operating results and
financial condition. To implement our growth strategy, we must
be able to meet our capital needs, expand our systems and our
internal controls effectively, allocate our human resources
optimally, identify and hire qualified employees and effectively
integrate any acquisitions we make in our effort to achieve
growth. No assurance can be given that Ambac will successfully
execute its plans for new business, generate any earnings or
value from new businesses or be able to successfully integrate
any such business into our current operating structure. The
failure to manage our growth effectively could have a material
adverse effect on our business, financial condition and results of
operations.
Our business performance and growth plans could be negatively
affected if we are not able to, among other things, gain internal
efficiencies through the application of effective technology
across our businesses, integrate operations, and/or innovate
product and operational solutions. Conversely, investments in
internal systems or innovative product offerings may fail to
yield sufficient return to cover their investment.
Our ability to successfully manage ongoing organizational
changes could impact our business results, where the level of
costs and/or disruption may be significant and change over time,
and the benefits may be less than we originally expect.
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 our strategy and/
or initiatives will not be abandoned or amended to take account
of such changes. Any such adjustment or abandonment may
have a material adverse effect on our securities.
Risks Related to the Company's Business
Loss reserves for the LFG business may not be adequate
to cover potential losses, and changes in loss reserves
may result in further volatility of net income and
comprehensive income.
LFG loss reserves are established when management has
observed credit deterioration in its insured credits. Loss reserves
established with respect to our LFG insurance policies issued to
beneficiaries are based upon estimates and judgments by
management, including estimates and judgments with respect to
the probability of default; the severity of loss upon default;
management’s ability
to execute policy commutations,
restructurings and other loss mitigation strategies; and estimated
subrogation and other
loss recoveries. The objective of
establishing loss reserve estimates is not to, and our loss
reserves do not, reflect the worst possible outcomes. While our
reserving scenarios reflect a wide range of possible outcomes
(on a probability weighted basis), reflecting the 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 materially change over
time as circumstances, our
assumptions, or our models change.
Catastrophic events, including environmental and public
health events that result in material disruption of
economic activity, loss of human life or significant
property damage, can have a materially negative impact
on our financial and operational performance. Such
stresses could result in liquidity strains or permanent
losses.
Public health crises and/or natural disasters can cause economic
and financial disruptions that may adversely affect, our business
and results of operations. For example, AAC insures the
obligations of a number of issuers, such as municipalities and
securitization vehicles, including those backed by consumer
loans such as mortgages and student loans, that may be
substantially affected by the prolonged economic effects of
pandemics, other public health crises, environmental events or
natural disasters. Municipalities and their authorities, agencies
and instrumentalities, especially those dependent on narrow
revenue streams flowing from particular economic activities,
such as sales taxes, may suffer disproportionately, from
depressed revenues due to the lingering negative economic
impact brought about by such events. In response to such events,
the U.S. Federal government and State governments and their
agencies may adopt policies or guidelines to provide emergency
relief to consumers, such as limiting debt collection efforts,
extensions, modifications or
encouraging or
forbearance with respect to certain loans and fees, and
establishing foreclosure and eviction moratoriums. These or
similar types of emergency responses to future events may cause
Ambac to experience higher losses in its insured portfolio.
requiring
Future environmental or other public health events and natural
disasters can result in significant potential liabilities for issuers,
that increase the potential for default on obligations insured by
AAC and Ambac UK.
Everspan may be exposed to losses arising out of unpredictable
catastrophic events. These include natural catastrophes and other
disasters, such as hurricanes, earthquakes, windstorms, floods,
wildfires, and severe winter weather. Catastrophes can also
include man-made disasters, such as terrorist attacks and other
destructive acts, war, political unrest, explosions, cyber-attacks,
nuclear, biological, chemical or radiological events and
infrastructure failures. A severe catastrophe or a series of
losses exceeding Everspan’s
catastrophes could result
reinsurance protection and may have a material adverse impact
on our results of operations or financial condition.
in
Changing weather patterns and climate change have added to the
unpredictability, frequency and severity of weather-related
catastrophes incurred by the property and casualty insurance
industry in recent years. These changing weather patterns make
it more difficult to predict and model catastrophic events,
reducing our ability to accurately price exposure to such events
and mitigate its risks.
Further, we use internally developed and third-party vendor
tools and models to assess exposure to catastrophe losses. The
models assume various conditions and probability scenarios and
may not accurately predict future losses or measure losses
currently incurred. Limitations in these tools and models may
Ambac Financial Group, Inc
15
2023 Form 10-K
adversely affect our results of operations and financial
condition.
The ultimate impact of a catastrophic event on insurers 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 a
particular 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 insurance; the availability of
cost-effective financing; management of public health crisis
remediation efforts; 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 following such catastrophic events we do not
have sufficient resources or financial flexibility, receive
adequate measures of support or realize the appropriate level of
economic recovery, our ultimate ability to operate could be
materially impaired and we could suffer material permanent
losses and therefore may have an adverse effect on our results of
operations and financial condition. Counterparties that service
aspects of our business may be similarly impacted and, if their
operations are impaired due to a catastrophe, it may be difficult
or costly to us to find alternatives to such servicing capabilities.
AAC and Ambac UK are subject to credit and other risks
in their insured portfolios; we are also subject to risks
associated with adverse selection as our
insured
portfolios run off.
Performance of our insured LFG transactions, including (but not
limited to) those backed by municipal, utility, sovereign/sub-
sovereign, military housing and consumer risk, can be adversely
affected by general economic conditions, such as recession,
federal budget cuts, decisions of governmental authorities about
utilizing assets or facilities, inflation, unemployment levels,
increasing
underemployment, home price depreciation,
foreclosure rates, unavailability of consumer credit, mortgage
product attributes, borrower and/or originator
fraud or
misrepresentations, and asset servicer performance and financial
health.
While deterioration in the performance of transactions insured
by AAC and Ambac UK, including mortgage and student loan
securitizations 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 insured LFG 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, 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 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.
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
payment moratoriums, 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. Issuers in Chapter 9 or similar proceedings may
obtain judicial rulings and orders that impair creditors' rights or
their ability to collect on amounts owed. In certain cases,
judicial decisions may be contrary to AAC's expectations or
understanding of the law or its rights thereunder, which may
lead to worse outcomes in Chapter 9 or similar proceedings than
anticipated at the outset.
in higher
As the runoff of the insured portfolio continues, the proportion
of exposures we rate as below investment grade relative to the
aggregate insured portfolio may increase, leaving the portfolio
risk exposures and
increasingly concentrated
heightening risks associated with large single risk exposures to
particular
losses caused by catastrophic events
(including public health crises, terrorist acts and natural
disasters), and losses in respect of different, but correlated,
credit exposures. These risks may result in greater volatility or
have adverse effects on the Company's results from operations
and on our financial condition.
issuers,
We may not be able to effectively reduce LFG insured
exposures; measures taken to reduce risks may have an
adverse effect on the Company's operating results or
financial position.
In pursuing the objective of improving our financial position, we
are seeking to terminate, commute, reinsure or otherwise reduce
LFG 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
negatively impact our operating results or financial position.
Ambac Financial Group, Inc
16
2023 Form 10-K
Our risk management policies and practices may not
adequately identify significant risks.
As described in Part I, Item 1, “Risk Management” in this
Annual Report on Form 10-K, we have established risk
management policies and practices which seek to mitigate our
exposure to credit risk in our legacy financial guarantee insured
portfolio. Ongoing surveillance of credit risks in our legacy
financial guarantee 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 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 mitigate 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 timely
establish loss reserves that are sufficient in relation to such risks.
We operate within an enterprise risk management (“ERM”)
framework designed to assess and monitor risks. However, no
assurance can be given that we will effectively identify, review,
monitor or manage all relevant risks. Nor can we provide
assurance that our ERM framework will result in us accurately
identifying all risks and adequately limiting our exposures based
on our assessments. Any ineffectiveness in our controls or
procedures or failure to manage these risks may have an adverse
effect on our results of operations and financial condition.
The Settlement Agreement, Stipulation and Order and
OCI's Runoff Capital Framework may impair AAC's
ability to pursue its business strategies.
Pursuant to the terms of the Settlement Agreement and
Stipulation and Order, AAC must seek prior approval by OCI of
certain corporate actions. The Settlement Agreement and
Stipulation and Order also include covenants that 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, and (ii) in the case of
the Stipulation and Order, remain in place until the OCI decides
to relax such restrictions. Certain of these restrictions may be
waived with the approval of holders of surplus notes and/or
OCI. If we are unable to obtain the required consents under the
Settlement Agreement and/or the Stipulation and Order, AAC
may not be able to execute its planned business strategies.
In addition, OCI's Runoff Capital Framework and decisions
based thereon are expected to affect AAC's ability to reduce
financial leverage at AAC, pay dividends to AFG, and/or make
payments on surplus notes or AMPS.
OCI has certain enforcement rights with respect to the
Settlement Agreement and Stipulation and Order, and retains
full discretion over the design of, and assumption utilized in,
OCI's Runoff Capital Framework and the implications thereof.
Disputes may arise over the interpretation of such agreements or
instruments, the exercise or purported exercise of rights
thereunder,
the
performance of or failure or purported failure to adhere to the
terms thereof. Any such dispute could have material adverse
the determinations made
thereunder, or
effects on AAC, and the Company more broadly, whether
litigation, administrative proceedings, supervisory
through
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 or issue supervisory orders against AAC.
We use analytical models and tools to help project
performance of our insured LFG obligations and our
investment portfolio but actual results could differ
materially from 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 LFG 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 credit impairments on the
investment portfolio. 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.
We are subject to the risk of litigation 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 LFG business. Please see Note 19. Commitments
and Contingencies to the Consolidated Financial Statements
included in Part II, Item 8 in this Annual Report on Form 10-K
for information on various proceedings.
It is not possible to predict the extent to which additional suits
involving AFG, AAC or one or more other subsidiaries will be
filed, and it is also not possible to predict the outcome of
litigation. It is possible that there could be unfavorable outcomes
in existing or future proceedings. Management may be unable to
make meaningful or reasonable estimates of the amount or range
of losses that could result from unfavorable outcomes or of the
expenses that will be incurred in connection with such lawsuits.
Under some circumstances, adverse results
in any such
proceedings and/or the incurring of significant litigation or other
expenses could be material to our business, operations, financial
position, profitability or cash flows.
Ambac Financial Group, Inc
17
2023 Form 10-K
Everspan may be subject to disputes with policyholders
regarding the scope and extent of coverage offered under
Everspan's policies; be required to defend claimants in suits
against its policyholders for covered liability claims; face
allegations of
into
commercial disputes with its reinsurers, MGA/Us or TPAs
regarding their respective contractual obligations and rights.
Under some circumstances, the results of such disputes or suits
may lead to liabilities beyond those which are anticipated or
reserved.
improper claims handling; or enter
Political developments may materially adversely affect
our business.
local or foreign government
Our insurance businesses and our results of operations can be
materially affected by political developments at the federal, state
levels. Government
and/or
shutdowns, trade disputes, political turnover, judicial decisions,
adverse changes in governmental funding, or poor public policy
decision making could disrupt the national, international 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, counterparties, or portfolios may
concurrently and/or consecutively experience losses or increased
stress as a result of any such event or series of events.
We operate in in a highly regulated industry and our
business will be negatively affected if we are not able to
anticipate and keep pace with rapid changes
in
government laws and regulations or if government laws
and regulations impair our business or increase our
costs.
Our U.S. LFG and Specialty Property and Casualty Insurance
subsidiaries are highly regulated as insurance carriers in the
States of their domicile and the jurisdictions in which they are
licensed. Our owned MGA/Us and
insurance brokerage
subsidiaries are also required to maintain certain entity-level
licenses as well as
individual officers or
licenses of
representatives that are essential to their ability to conduct
business. Each of the foregoing must also comply with laws
generally applicable to insurance entities, including those
relating to governance, capital, and operational requirements.
of
and
technology,
social
Government laws and regulations applicable to our businesses
develop and change rapidly in response to consumer demands
and public policies. State legislatures and insurance departments
place increasing burdens on insurance carriers and producers
with respect to matters such as cybersecurity, data privacy,
governance,
management
environmental
risk
management. Such laws and regulations require substantial
resources to ensure that the Company has appropriate and
effective compliance programs in place. If we are unable to
keep pace with changes in applicable law and regulations, or if
we otherwise fail in our compliance efforts, the Company may
fines, sanctions, governmental orders or
be subject
modifications
individually or
collectively impair our business or increase our costs, possibly
materially.
to business practices
corporate
and
enterprise
issues,
that
to
In addition, the Company from time to time receives various
regulatory inquiries and requests for information, and its
insurance carrier subsidiaries are subject to examination by
regulatory authorities. It is not possible to predict the extent to
which additional regulatory inquiries or requests for information
will be made, nor the outcome of inquiries, requests for
information or examination, which exposes the Company to
potential fines, sanctions, governmental orders or modifications
to business practices that individually or collectively impair our
business or increase our costs, possibly materially.
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. The PRA and
FCA act generally in the interests of Ambac UK policyholders
and will not take into account the interests of AAC or the
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.
Ambac UK is required to meet certain minimum capital
requirements under applicable
rules
("Solvency II"). Ambac UK exceeded the required capital
thresholds as of December 31, 2023 .
regulatory capital
However, there remains a risk that market movements impacting
its investments or adverse credit developments impacting loss
reserving requirements within its insured portfolio could result
in the capital position becoming deficient once again.
Everspan may not be successful in executing its business
plans or may experience greater
than expected
losses and/or reinsurance
insurance underwriting
losses
counterparty
material to Everspan's capital position, a downgrade of
its AM Best rating and a loss of its franchise value.
Such events could have a material adverse impact on the
value of AFG's shares.
losses, which could result
in
Everspan is in the early stage of developing a portfolio of
specialty insurance program business. Its business plan entails
establishing programs with program administrators, managing
general agents and managing general underwriters ("MGA/Us"),
with claims handled by TPAs. The success of these programs is
dependent upon the quality of insurance risk underwritten by the
MGA/Us,
the quality of underwriting and operational
performance, as well as oversight, of the MGA/Us and TPAs by
Ambac Financial Group, Inc
18
2023 Form 10-K
Everspan, the quality and creditworthiness of reinsurance
obtained with respect to the underlying risks, loss experience
over time, premium levels, competition and other factors, some
of which are outside Everspan's control. Should Everspan fail in
executing its business plans or experience greater than expected
losses due to operational issues, poor risk selection, default or
failure to perform by reinsurers, failure to timely realize ultimate
loss exposure, a departure of qualified MGA/Us from the
industry, enhanced scrutiny from regulators or ratings agencies
specific to the program business model, failure to collect
amounts due to it or other factors, Everspan may suffer losses
that are material to its capital position, a downgrade in its AM
Best rating and/or a loss of its franchise value. Any such
outcomes could have a material adverse impact on the value of
AFG's shares.
A downgrade in the AM Best financial strength rating of
Everspan may negatively affect our business.
to meet obligations
The financial strength of Everspan is evaluated by AM Best,
which issues a "FSR, an important factor in establishing the
competitive position of Everspan. The FSR reflects AM Best’s
opinion of Everspan's financial strength, operating performance,
strategic position and ability
to
policyholders, and are not evaluations directed to investors.
Everspan's FSR is subject to periodic review, and the criteria
used in the rating methodologies are subject to change. All of
the insurance companies that comprise Everspan are rated
"A-" (Excellent). A downgrade in Everspan's FSR could make it
more difficult
insurance policies and Everspan's
distribution channels may cease to transact with them, which
would adversely affect our business, financial condition and
results of operations.
to sell
Failure of Everspan's Program Partners to properly
market, underwrite or administer policies could
adversely affect us.
The marketing, underwriting, administration and servicing of
policies in our Specialty Property and Casualty Insurance
business have been contracted to the MGA/Us with which
Everspan transacts. Any failure by the MGA/Us or TPAs to
properly handle these functions could result in liability to us.
Even though the MGA/Us and TPAs with which Everspan
transacts may be required to indemnify Everspan for any such
liability or monetary losses, there are risks for which indemnity
may be insufficient or entirely unavailable if, for example, the
relevant program partner becomes insolvent or is otherwise
unable to pay us. Furthermore, any failure to properly handle
the marketing, underwriting, administration and servicing of
policies in our Specialty Property and Casualty Insurance
business could also create regulatory issues or harm our
reputation, which could materially and adversely affect our
business, financial condition and results of operations.
If in our Specialty Property and Casualty Insurance
business we are unable to accurately underwrite risks
and charge competitive yet profitable rates to our clients
and policyholders, our business, financial condition and
results of operations may be adversely affected.
In general, the premiums for our Specialty Property and
Casualty Insurance policies are established at the time a policy is
income,
investment
issued and, therefore, before all of our underlying costs are
known. Like other property and casualty insurance companies,
Everspan relies on estimates and assumptions in setting its
rates
rates. Establishing adequate premium
premium
is
necessary,
to generate
together with
sufficient revenue to offset losses, loss adjustment expenses,
acquisition costs and general and administrative expenses in
order to earn a profit. The rate environment is also subject to
market cycles, which can be difficult to predict and make it
difficult to adequately price risk. If Everspan does not
accurately assess the risks that it assumes, it may not charge
adequate premiums to cover its losses and expenses, which
would adversely affect our results of operations and our
profitability. Alternatively, Everspan could set its premiums too
high, which could reduce its competitiveness and lead to lower
policyholder retention, resulting in lower revenues. Pricing is a
highly complex exercise involving the acquisition and analysis
of historical loss data and the projection of future trends, loss
costs, expenses, and inflation trends, among other factors, for
each of Everspan's products in multiple risk tiers and many
different markets. Everspan seeks to implement its pricing
accurately in accordance with its assumptions. Everspan's ability
to undertake these efforts successfully and, as a result, to
accurately price its policies, is subject to a number of risks and
uncertainties, including insufficient or unreliable data; incorrect
or incomplete analysis of available data; uncertainties generally
inherent in estimates and assumptions; failure to implement
appropriate actuarial projections and ratings formulas or other
pricing methodologies; regulatory constraints on rate increases;
failure to accurately estimate investment yields and the duration
loss adjustment expenses;
of
disagreements with reinsurers or the MGA/Us with whom
Everspan transacts as to the adequacy of pricing assumptions;
and unanticipated court decisions, legislation or regulatory
action.
losses and
liabilities
for
If Everspan is unable to obtain reinsurance coverage at
reasonable prices or on terms that adequately protect it,
we may be required to bear increased risks or reduce the
level of our underwriting commitments.
Everspan purchases reinsurance as part of its overall risk
management strategy. While reinsurance does not discharge our
insurance subsidiaries from their obligations to pay claims for
losses insured under their insurance policies, it does make the
reinsurer liable to them for the reinsured portion of the risk. At
the inception of a new program, Everspan generally acts as an
issuing carrier and reinsures a majority of such risk to third
parties in contracts that are generally subject to term limitations
or termination rights. Everspan may be unable to maintain its
current reinsurance arrangements or to obtain other reinsurance
in adequate amounts and at favorable rates, particularly if
reinsurers become unwilling or unable to support our specialty
property and casualty business in the future. Additionally,
market conditions beyond our control may
the
availability and cost of reinsurance and could have an adverse
effect on our business, financial condition and results of
operations. A decline in the availability of reinsurance may
increase the cost of reinsurance and materially and adversely
affect our business prospects. Everspan may, at certain times, be
forced to incur additional costs for reinsurance or may be unable
to obtain sufficient reinsurance on acceptable terms or from
impact
Ambac Financial Group, Inc
19
2023 Form 10-K
reinsurers which satisfy Everspan's criteria as acceptable
security. In the latter case, Everspan would have to accept an
increase in exposure to risk, reduce the amount of business
written by it or seek alternatives in line with Everspan's risk
limits, all of which could adversely affect our business, financial
condition and results of operations.
to whom we outsource
Counterparties
functions,
including policy and claims administration, such as
MGAs and TPAs, may default on their operational and
financial obligations to us.
We have outsourced certain processes and functions to third
parties over which we have no control and may continue to do
so in the future. Outsourcing functions to third parties exposes
us to increased risk related to service disruptions. Further, we
may suffer financial losses if a counterparty defaults on a
financial obligation to us, including with respect to insurance
agency commissions which adjust over time. If we do not
effectively develop, implement and monitor these relationships
and the solvency of our counterparties, the providers do not
perform as anticipated, technological or other problems are
incurred, or such relationships are terminated, we may not
realize expected productivity improvements or cost efficiencies
and may experience operational difficulties, increased costs, and
a loss of business. Further, policyholders and claimants may
suffer delays or lapses in service levels which may create extra-
contractual exposures. The increased risks identified above
could expose us to disruption of service, monetary and
reputational damages, competitive disadvantage and significant
increases in compliance costs.
Our
to
insurance carrier subsidiaries are subject
reinsurance counterparty credit risk. Their reinsurers
may not pay on losses in a timely fashion, or at all.
Our insurance carrier subsidiaries purchase reinsurance to
transfer part of the risk they have underwritten to reinsurance
companies in exchange for part of the premium they receive in
connection with the risk. Although reinsurance makes reinsurers
liable to our carriers for the risk transferred or ceded to the
reinsurers, it does not relieve our insurance carrier subsidiaries
of their liabilities to policyholders. Accordingly, our insurance
carrier subsidiaries are exposed to credit risk with respect to
their reinsurers, especially to the extent reinsurance receivables
are not sufficiently secured by collateral or do not benefit from
other credit enhancements. Our insurance carrier subsidiaries
also bear the risk that they are unable to receive, or there is a
substantial delay in receiving, the reinsurance recoverable for
any reason, including that the terms of the reinsurance contract
do not reflect the intent of the parties to the contract; there is a
disagreement between the parties as to their intent; the terms of
the contract cannot be legally enforced; the terms of the contract
are interpreted by a court or arbitration panel differently than
intended by our insurance carrier subsidiaries; the reinsurance
transaction performs differently than our insurance carrier
subsidiaries anticipated due
the
reinsurance structure, terms or conditions; or changes in law and
regulation, or in the interpretation of laws and regulations,
affects a reinsurance transaction. These risks my be exacerbated
to the extent that our insurance carrier subsidiaries' reinsurance
recoverables are overly concentrated with one or a small subset
of reinsurers.
to a flawed design of
The insolvency of one or more of our insurance carrier
subsidiaries' reinsurers, or their inability or unwillingness to
make timely payments if and when required under the terms of
reinsurance contracts, could adversely affect our business,
financial condition and results of operations.
If actual claims exceed loss and loss adjustment expense
reserves for Everspan, or if changes in the estimated
level of loss and loss adjustment expense reserves are
necessary, including as a result of, among other things,
changes in the legal/ tort, regulatory and economic
environments in which Everspan operates, our financial
results could be materially and adversely affected.
reserves
loss adjustment expense
Loss and
represent
management estimates of what the ultimate settlement and
These estimates are
administration of claims will cost.
developed using common and industry accepted actuarial
techniques. Nevertheless, the process of estimating loss and loss
adjustment expense reserves involves a high degree of judgment
and is subject to a number of variables, which can be affected by
internal and external events, such as changes in claims handling,
changes in loss cost trends, catastrophic events and social
inflation.
Elevated social inflation trends are likely to continue. Social
inflation, which includes increased litigation, partially supported
by access to litigation financing; changes in social norms; an
erosion of the public sentiment towards insurers’ interpretation
of coverage levels and limits; and increased damage awards by
juries, may make it difficult for Everspan to estimate loss
reserves, establish adequate product pricing, and maintain a
strong competitive position with consumers.
Moreover, the impact of catastrophic events may not be
adequately reflected in claims reserves and, accordingly, could
adversely impact results. Catastrophic losses are caused by wind
and hail, wildfires, tornadoes, hurricanes, tropical storms,
earthquakes, severe freeze events, volcanic eruptions, terrorism,
cyber attacks, civil unrest, and industrial accidents and other
such events.
We also face potential exposure to various types of new and
emerging tort claims which were not known or anticipated when
our insurance products were originally priced.
The impact of many of these items on ultimate costs for claims
and claim adjustment expense reserves could be material and is
difficult to estimate.
Our ability to grow Everspan will depend in part on the
addition of new Program Partners, and our ability to
effectively onboard such new Program Partners could
have an adverse effect on our business, financial
condition and results of operations.
Our ability to grow Everspan will depend in part on the addition
of new MGA/Us. If Everspan does not effectively and timely
source, evaluate and onboard new MGA/Us, including assisting
such MGA/Us to quickly resolve any post-onboarding matters
and provide effective ongoing support, Everspan's ability to add
new MGA/Us and its relationships with its existing Program
Partners could be adversely affected. Additionally, Everspan's
Ambac Financial Group, Inc
20
2023 Form 10-K
reputation with potential new MGA/Us could be damaged if it
fails to effectively onboard MGA/Us with whom it has signed
definitive legal agreements. Such reputational damage could
make it more difficult for Everspan to attract new and retain
existing program partners, which could have an adverse effect
on our business, financial condition and results of operations.
We compete with a large number of companies in the
property
for
underwriting premium.
insurance
industry
casualty
and
intense competition for premium,
We compete with a large number of companies in the property
and casualty insurance industry for underwriting premium.
During periods of
in
particular, our Specialty Property and Casualty Insurance and
Insurance Distribution businesses may be challenged to maintain
competitiveness with other companies that may seek to write
policies without the same regard for risk and profitability
targeted by our Specialty Property and Casualty Insurance and
Insurance Distribution businesses. During these times, it may be
difficult for Everspan or our MGA/Us to grow or maintain
premium volume without lowering underwriting standards,
sacrificing income, or both.
In addition, our Specialty Property and Casualty Insurance and
Insurance Distribution businesses face competition from a wide
range of specialty insurance companies, underwriting agencies
and intermediaries, as well as diversified financial services
companies that are significantly larger than our specialty
property and casualty insurance and insurance distribution
businesses are and that have significantly larger financial,
marketing, management and other resources. Some of these
competitors also have longer standing and better established
market recognition than Everspan does. The greater resources or
market presence that these competitors possess may enable them
to avoid or defray particular costs, employ greater pricing
flexibility, have a higher tolerance for risk or loss, or exploit
other advantages that may make it more difficult for us to
compete. We may incur increased costs in competing for
underwriting revenues in this environment. If we are unable to
compete effectively in the markets in which our Specialty
Property and Casualty Insurance and Insurance Distribution
businesses operate or expand into, our underwriting revenues
may decline, as well as overall business results.
Impairment of intangible assets and goodwill, resulting
from acquisitions, could adversely affect our results of
operations.
In connection with Ambac’s acquisition of
insurance
distribution businesses (MGA/Us and brokers), Ambac recorded
the fair value of identifiable intangible assets (primarily related
to distribution relationships) and goodwill. The intangible assets
will be amortized over their remaining useful lives. 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 will be tested for impairment annually or whenever
events occur or circumstances change that may indicate
impairment. Intangible asset and goodwill 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 Insurance
intangible asset or goodwill
Distribution Business. Any
impairment could adversely affect the Company's operating
results and financial condition.
Our
Insurance Distribution businesses derive a
significant portion of their 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.
The commissions of our MGA/Us and insurance broker were
derived from insurance policies underwritten by a limited
number of insurance companies. Should one or more of these
insurance companies terminate its arrangements with our
Insurance Distribution businesses or otherwise decrease the
number of insurance policies underwritten for it, we may lose
significant commission revenues or lose significant business
to
production while seeking other
underwrite the business.
insurance companies
Our Insurance Distribution businesses, results of
operations, financial condition and liquidity may be
materially adversely affected by certain potential claims
or proceedings.
Our owned MGA/Us and
insurance brokerage operating
subsidiaries are subject to various potential claims 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 our MGA/Us and
insurance brokerage operating
subsidiaries often assist
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 our MGA/Us and
insurance brokerage operating
subsidiaries place 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 our reputation and cause harm to carrier,
customer or employee relationships, or divert personnel and
management resources.
Acquiring new MGA/Us is core to our Insurance
Distribution business strategy. Risks associated with
such endeavors could adversely affect our growth and
results of operations.
Acquisitions have been an important contributor of growth in
that
the Insurance Distribution business and we believe
additional acquisitions will be important to maintaining future
growth. Failure
identify and complete
acquisitions likely would result in us achieving slower growth.
Moreover,
to achieve
anticipated revenue and earnings levels could result in slower
than anticipated growth and result in intangible asset or goodwill
impairment charges.
the failure of acquisition
successfully
targets
to
Ambac Financial Group, Inc
21
2023 Form 10-K
The current market share of our Insurance Distribution
increased
businesses may decrease because of
competition from
technology
insurance companies,
companies and the financial services industry, as well as
the shift away from traditional insurance markets.
The insurance distribution business is highly competitive and we
actively compete 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. Other
competitive concerns may include pricing, the entrance of
technology companies into the insurance distribution business
and the direct-to-consumer insurance carriers that do not utilize
third party agents and brokers as production sources.
Additionally,
experience
consolidation, and therefore we may experience increased
competition from insurance companies and the financial services
industry, as a growing number of larger financial institutions
increasingly, and aggressively, offer a wider variety of financial
services, including insurance distribution services. While we
collaborate and compete 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.
industry may
insurance
the
Technological changes to the way insurance is distributed,
underwritten, and administered also present competitive risks.
For example, our competitive position could be impacted if we
are unable to cost-effectively deploy technology, such as
machine learning and artificial intelligence, which collects and
analyzes large sets of data to make underwriting or other
decisions, or if our competitors collect and use data which we do
not have the ability to access or use. In addition, usage-based
methods of determining premiums (e.g., telematics) can impact
product pricing and design and are becoming an increasingly
important competitive factor. The landscape of law and
regulation governing these areas presents additional risk to the
extent we are unable to timely adapt to ensure compliance.
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 operations.
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 Accident and
Health 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.
Our Insurance Distribution businesses and their results
of operations and financial condition may be adversely
affected by conditions that result in reduced insurer
capacity.
Our Insurance Distribution business 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
among insurance carriers and reinsurers may diminish because
of our performance or due to factors outside our control. For
example, capacity could be reduced by insurance companies
failing or withdrawing from writing certain coverages that our
Insurance Distribution businesses offer to their customers. To
the extent that reinsurance becomes less widely available or
significantly more expensive, we may not be able to procure the
amount or types of coverage that our customers desire and the
coverage we are able to procure for our customers may be more
expensive or limited.
Variations in commission income that results from the
timing of policy renewals and the net effect of new and
lost business production may have unexpected effects on
our results of operations.
Commission income can vary quarterly or annually due to the
timing of policy renewals and the net effect of new and lost
business production. We do not control the factors that cause
these variations. Specifically, customers’ demand for insurance
products can influence the timing of 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
flows. Profit-sharing contingent
of operations and cash
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 significant amount
of total commissions and fees. Due to, among other things, the
inherent uncertainty of loss and changes in underwriting criteria
by insurance companies, there will be a level of uncertainty
related to the payment of profit-sharing contingent commissions.
System security risks, data protection breaches and
cyber-attacks could adversely affect our business and
results of operations.
We and our vendors and contractual counterparties rely on our
information technology systems for many enterprise-critical
functions and a prolonged 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, as well as those of our
vendors and contractual counterparties, 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,
or the network's security system of a vendor or contractual
counterparty, and misappropriate or compromise confidential
information, create system disruptions or cause shutdowns. The
ability of hackers to infiltrate and compromise our information
Ambac Financial Group, Inc
22
2023 Form 10-K
systems or the contents thereof may be enhanced by generative
artificial intelligence, which may be more difficult to detect and
defend. In addition to our own confidential information, we and
our vendors and contractual counterparties sometimes receive
and are required to protect confidential information obtained
from third parties (including us in the case of a vendor or
contractual counterparty) and personally identifiable information
of individuals. To the extent any disruption or security breach
results in a loss or damage to our data (or the data of a vendor or
contractual counterparty on which we rely), 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
incident response, 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. Additionally, we are an acquisitive
organization and the process of integrating the information
systems of the businesses we acquire is complex and exposes us
to additional risk as we might not adequately
identify
weaknesses in the targets’ information systems, which could
expose us to unexpected liabilities or make our own systems
more vulnerable to attack.
We may be adversely affected by failures in services or
products provided by third parties.
We outsource and may further outsource certain technology and
business process functions, and rely upon third-party vendors
and contractual counterparties for other essential services and
information, such as the provision of data used in setting loss
reserves. If we do not effectively develop, implement and
monitor our vendor and contractual counterparty relationships, if
third party providers do not perform as anticipated, if we
experience technological or other problems, or if vendor or other
contractual relationships relevant to our business process
terminated, we may not realize expected
functions are
improvements or cost efficiencies and may
productivity
experience operational difficulties, increased costs and a loss of
business. 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
results of operations. Our
our
outsourcing of certain
technology and business process
functions to third parties may expose us to increased risk related
to data security, service disruptions or the effectiveness of our
control system. These risks could
increase as vendors
increasingly offer cloud-based software services rather than
software services which can be run within our data centers or as
we choose to move additional functions to the cloud.
financial condition and
Our ability to attract and retain qualified executives,
senior managers and other 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 and senior management teams. In addition to
these officers, we rely on key staff with insurance, underwriting,
business development, credit, risk management, structured
finance, investment, accounting, finance, legal, technology and
other technical and specialized skills. The market for qualified
executives, senior managers and other employees has become
very competitive. As a result of the run-off status of AAC and
the early-stage status of AFG's other businesses, we may
experience higher employee turnover and finding qualified
replacements may be more difficult. The loss of the services of
members of our executive and/or senior management teams or
our inability to hire and retain other talented personnel could
delay or prevent us from succeeding in executing our strategies,
which could 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
the attention of management and
operations and divert
employees. Such activities could interfere with our ability to
execute on our strategic plans.
Risks Related to Capital, Liquidity and Credit
Markets
substantial
AAC has
indebtedness, which could
adversely affect our financial condition, operational
flexibility and our ability to obtain financing in the
future.
AAC is highly leveraged. AAC’s ability to make payments on
and/or refinance its surplus notes and to fund its operations will
depend on its ability to generate substantial operating cash flow
and on the performance of the LFG insured portfolio. AAC’s
cash flow generation will depend on receipt of premiums,
investment returns, and dividends and capital distributions from
Ambac UK, offset by policyholder claims, commutation
payments, reinsurance premiums, costs and potential losses from
litigation, operating and loss adjustment expenses, and interest
expense, all of which may be subject to prevailing economic
conditions and to financial, business and other factors, many of
which are beyond our control and many of which may be event-
driven. There is substantial risk that AAC may not have the
financial resources necessary to pay its surplus notes in full due
to risks associated with its cash flow, insured portfolio, and
other liabilities, as discussed elsewhere in these Risk Factors.
If AAC cannot pay its obligations from operating cash flow, it
will have to take actions such as selling assets, restructuring or
refinancing its surplus notes or seeking additional capital. Any
of these remedies may not, if necessary, be effected on
Ambac Financial Group, Inc
23
2023 Form 10-K
commercially reasonable terms, or at all. The value of assets to
be sold will depend on market and economic conditions; the
availability of buyers; the requirements and conditions of local
law, including regulatory restrictions; and other factors that may
result in AAC or a party enforcing rights against AAC to be
unable to receive proceeds sufficient to discharge AAC's
obligations. Furthermore, the ability of creditors or claimants to
realize upon any assets, may also be subject to bankruptcy and
insolvency law limitations or similar limitations applicable in
insurance company rehabilitation or liquidation proceedings.
Because of these and other factors beyond our control, AAC
may be unable to pay or discharge the principal or interest on its
surplus notes, which would impair AAC's value and the value of
AFG.
Surplus note principal and interest payments cannot be made
without the approval of the OCI, which OCI will grant or
withhold in its sole discretion. OCI's determinations about
whether and when to authorize surplus note payments could
materially impact the Company's financial position. Ambac can
provide no assurance as to when surplus note principal and
interest payments will be made. If OCI does not approve
payments on or the acquisition of surplus notes over time, the
ongoing accretion of interest on the notes may impair AAC's
ability to extinguish the notes in full. Surplus notes are
subordinated in right of payment to policyholder and other
claims.
AAC's substantial indebtedness could have other significant
consequences for our financial condition and operational
flexibility. For example, it could:
• 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, acquisitions,
general corporate purposes or other purposes on
satisfactory terms or at all;
• require AAC to dedicate a substantial portion of its cash
flow from operations to the payment of surplus notes,
thereby reducing the funds available for operations and to
fund the execution of key strategies, including the return of
capital to AFG;
• limit or restrict AFG from making strategic acquisitions or
cause us to make non-strategic divestitures;
• limit AAC's ability, or increase the costs, to refinance
surplus notes or repay surplus notes due to ongoing interest
accretion; and
• limit our ability to attract and retain key employees.
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 AAC's substantial leverage.
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.
We expect to recover material amounts of claims payments
through cash flows in the securitization 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, the performance of
servicers involved in securitizations in which AAC participates
as insurer, as well as numerous regulatory, legal and compliance
considerations and risks.
Adverse developments with respect to any of the factors
described above 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, particularly its surplus
notes and preferred stock obligations;
initiation of
rehabilitation proceedings against AAC; eliminating or reducing
the possibility 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.
the
Revenues and cash flow will be adversely impacted by a
decline in realization of installment premiums.
A significant percentage of our LFG premium revenue is
attributable to installment premiums. The amount of installment
premiums we collect is declining along with the insured
portfolio. The amount of installment premiums we actually
realize could be further reduced due to factors such as early
termination of insurance contracts, new reinsurance transactions,
accelerated prepayments of underlying obligations or
insufficiency of cash flows (by the premium paying entity). The
reduction in installment premiums will result in lower revenues
and cash flow in the future.
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, and could adversely impact our ability to achieve our
strategic objectives. Our financial condition, the risks described
elsewhere in Part I, Item 1A in this Annual Report on Form 10-
K for the fiscal year ended December 31, 2023, as well as other
factors, may constrain our financing abilities. Our ability to
secure third-party financing will depend upon our future
operating performance, regulatory conditions, 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
Ambac Financial Group, Inc
24
2023 Form 10-K
our business 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 effectively and efficiently manage our balance
sheet, any of which could have a material adverse effect on our
business, financial condition and results of operations.
The composition of the securities in our investment
portfolio may expose us to greater risk than before we
invested in alternative assets.
AAC and Ambac UK allocate a portion of their investment
portfolios in below investment grade securities; equities and/or
alternative assets; such as hedge funds. 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.
Changes in prevailing interest rate levels and market
conditions could adversely impact our business results
and prospects.
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
likely be sold at discounted prices.
investments would
Additionally, increasing interest rates would have an adverse
impact on the legacy financial guarantee 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 portion of these exposures are
floating rate consumer 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.
Decreasing interest rates could result in early terminations of
financial guarantee insurance policies in respect of which AAC
and Ambac UK 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
increase collateral requirements related to AAC's residual legacy
customer 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.
Our risk to changes in interest rates and market conditions could
be magnified in the event that the US or UK were to enter into
an economic recession. While interest rates may decline during
a recession, credit and liquidity risks would be expected to
increase which may cause us to experience losses in our
investment portfolios and insured portfolios. These losses may
have a material adverse affect on our results of operations and
financial condition, particularly if any economic rescission were
prolonged.
Item 1B. Unresolved Staff Comments — No matters
require disclosure.
Item 1C. Cybersecurity.
The Company is exposed to diverse cybersecurity risks that have
the potential to significantly impact our business operations,
financial standing, and reputation. We seek to identify, assess,
and manage these risks, with the aim of safeguarding our critical
systems and information, and employ a documented process to
respond in the event of a cybersecurity incident. This approach
includes regular evaluations of our information systems and
and potential
infrastructure
weaknesses through the use of system monitoring tools, as well
as monitoring industry trends, threat intelligence, and emerging
risks to anticipate and proactively assess potential threats. We
engage third-party cybersecurity experts to conduct penetration
testing, vulnerability scans, and risk assessments, informed by
the NIST (National Institute of Standards and Technology)
Cybersecurity Framework guidelines, to increase the likelihood
that system risks are identified.
identify vulnerabilities
to
To identify potential risks, Ambac also assesses the security
measures of vendors and third-party service providers that have
access to the Company’s information systems and sensitive data.
Each review involves an initial risk assessment of the provider,
and initial and periodic reviews of the provider's cybersecurity
program to evaluate security standards, access controls and
security measures. The Company generally requires vendors and
third party service providers to report to the Company any
cybersecurity incidents involving the providers’ systems that
could affect the Company, or to have cybersecurity incident
notice requirements in their cybersecurity programs.
to managing cybersecurity risks
Our approach
includes
implementing cybersecurity measures such as selective use of
encryption, firewalls, data loss prevention, security monitoring,
endpoint detection and response, anti-spam and anti-phishing
email security, and intrusion detection systems to fortify our
defenses. We conduct mandatory annual employee cybersecurity
training programs and frequent simulated phishing campaigns to
enhance cybersecurity knowledge and practices across the
organization. Ambac maintains an incident response plan that is
updated regularly to respond to changes in the organization,
risks and laws. Ambac also conducts an annual test to restore
business critical systems and data from back-ups. We have
established reporting processes and escalation pathways for our
business units and functions to identify, assess and manage
potential cybersecurity incidents in a timely manner. Once an
incident is identified, the Chief Information Security Officer
(“CISO”) (with the assistance of the IT team) will begin the
investigation to determine the level of risk of the event and the
appropriate response.
the Company oversees
The Board of Directors of
the
management of risks from cybersecurity threats through its
review of quarterly reports from the CISO on the status of the
Company’s cybersecurity preparedness; updates on information
systems; and any cybersecurity threats of which management
Ambac Financial Group, Inc
25
2023 Form 10-K
has become aware. In addition the Board receives periodic
cybersecurity awareness training.
The Company’s technology staff and CISO conduct weekly
meetings, attended regularly by the Chief Operating Officer and
Chief Information Officer, to review: (i) implementation of new
security measures, (ii) results of existing technical system
monitoring tools to identify any potential risk and propose
remediation, as necessary; (iii) newly disclosed software patch
updates to assess risks and set patch implementation priorities;
and (iv) threat intelligence from various organizations, such as
the Cybersecurity and Infrastructure Security Agency, to assess
risks and suggest security measures, as necessary. Cybersecurity
risk is also included in the Company’s Enterprise Risk
Management (“ERM”) process that involves senior management
and other personnel in the identification, assessment and
management of a broad range of risks (including cybersecurity
risks) that could affect the Company’s ability to execute on its
corporate strategy and fulfill its business objectives. The
Company’s Chief Operating Officer and Chief Information
Officer provide input and updates to the Enterprise Risk
Committee (comprised of members of management) on
cybersecurity preparedness and emerging risks. The Enterprise
Risk Committee produces
the relevant risk management
information for executive and senior management and the Board
of Directors, which receives ERM updates on a quarterly basis.
The Chief Operating Officer and Chief Information Officer are
also members of the Company's Disclosure Committee and
provide updates on cybersecurity threats and emerging risks to
the Disclosure Committee prior to the filing of each quarterly
report on Form 10-Q and annual report on Form 10-K.
The Company’s Chief Information Officer and CISO bring over
35 years of combined experience in the technology and
cybersecurity space. The Chief Information Officer has served
as a chief information officer and chief technology officer of
both private and public institutions for the past 10 years and was
responsible for the IT operations and cybersecurity practices of
those institutions. The CISO is a certified cybersecurity
professional and technologist. He holds an active ISO/ANSI-
accredited cybersecurity certification and has experience
managing
industries,
security programs across multiple
including financial services and insurance. Other credentials
among Ambac’s IT staff include a Certified Information
Systems Security Professional certification and a Masters
Degree in cybersecurity risk and management.
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, disclosure of cybersecurity
risk management practices, reporting of cybersecurity incidents,
and implementation of governance practices. For example, the
National Association of Insurance Commissioners (“NAIC”)
adopted the NAIC Insurance Data Security Model Law (#668)
(“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
risk assessment, overseeing
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 many states and may be enacted in
other states. Certain of 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”) cybersecurity regulation, which establishes
requirements for covered financial services institutions to
implement a cybersecurity program designed to protect the
confidentiality, integrity and availability of information systems
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. Recent amendments to the NYDFS cybersecurity
regulation impose additional security requirements and new
governance obligations.
framework
regulation
The California Consumer Privacy Act, went into effect in
January 2020, and provides additional privacy rights for
California residents, and in November 2020, California further
expanded privacy rights for California residents by enacting the
California Privacy Rights Act, which became effective January
1, 2023. Several other
similar
comprehensive privacy laws. We anticipate federal and state
regulators to continue to enact legislation related to privacy and
cybersecurity, which may
require additional compliance
investments and changes to policies, procedures and operations.
states have
enacted
The federal Health Insurance Portability and Accountability Act
of 1996 and its implementing regulations (“HIPAA”) impose
minimum standards on covered entities, such as health insurers,
for the privacy and security of protected health information
(“PHI”). The Health Information Technology for Economic and
Clinical Health Act, enacted in 2009 (“HITECH”) provides for
the extension of certain privacy and security provisions of
HIPAA to business associates of covered entities that handle
electronic PHI. Xchange specializes in accident and health
insurance and is a business associate of the health insurers
carriers it partners with, making it subject to compliance with
the provisions of HITECH and HIPAA applicable to business
associates.
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, New York that expires in December
2029 (25,871 square feet) that has been sublet through its
expiration date.
Operations of each of our segments are carried out either in our
executive office at One World Trade Center or in other leased
offices under operating leases in New Jersey, New York, Indiana
and London England. The lease terms typically do not exceed
ten years in length.
Ambac Financial Group, Inc
26
2023 Form 10-K
When restricted stock unit awards issued by Ambac vest or
settle, they become taxable compensation to employees. For
certain awards, shares may be withheld to cover the employee's
portion of withholding taxes. In the fourth quarter of 2023,
Ambac purchased shares from employees that settled restricted
stock units to meet employee tax withholdings.
On March 29, 2022, our Board of Directors approved a share
repurchase program authorizing up to $20 million in share
repurchases, with an expiration date of March 31, 2024, which
may be terminated at any time. On May 5, 2022, the Board of
Directors authorized an additional $15 million share repurchase.
The following table shows shares repurchased by year.
($ in millions, except per share)
Year ended December 31,
2022
2023
Total
Shares repurchased
1,605,316
325,068
1,930,384
Total cost
Average purchase price per share
Unused authorization amount
$
$
14.2 $
4.5 $
8.86 $
13.88 $
$
18.7
9.70
16.3
Shares purchased from employees to satisfy withholding taxes,
as described above, do not count towards utilization under the
Company's share repurchase program.
In the opinion of the Company’s management, the Company’s
properties are adequate and suitable for its business as presently
conducted and are adequately maintained.
Item 3. Legal Proceedings
Refer to Notes to the Consolidated Financial Statements—Note
19. Commitments and Contingencies included in Part II, Item 8
in this Annual Report on 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
The Company 's common stock trades on the NYSE under the
symbol “AMBC". The Company's warrants previously traded
on the NYSE under the symbol "AMBC WS" and as of April 30,
2023, all of the then outstanding warrants expired without being
exercised.
Holders
On February 26, 2024, there were 16 stockholders of record of
AFG’s common stock.
Dividends
The Company did not pay cash dividends on its common stock
during 2023 and 2022. 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 8.
Insurance Regulatory Restrictions to the Consolidated Financial
Statements included in Part II, Item 8 in this Annual Report on
Form 10-K.
Purchases of Equity Securities By the Issuer and
Affiliated Purchasers
The following table summarizes Ambac's share purchases
during the fourth quarter of 2023.
October
2023
November
2023
December
2023
Fourth
Quarter
2023
—
—
469
469
$
—
$
—
$
14.75
$
14.75
—
—
—
—
$
16
$
16
$
16
$
16
Total Shares
Purchased (1)
Average Price Paid
Per Share
Total Number of
Shares Purchased as
Part of Publicly
Announced Plan
Maximum Dollar
Value That may Yet
be Purchased Under
the Plan
(1) There were no other repurchase of equity securities made during
the three months ended December 31, 2023.
Ambac Financial Group, Inc
27
2023 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, 2018,
through December 31, 2023, with the Russell 2000 Index and S&P Completion Index. The graph assumes $100 was invested on December
31, 2018, in our common stock at the closing price of $17.24 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
$150
$100
$50
$0
2018
Ambac Financial Group, Inc.
Russell 2000 Index
S&P Completion Index
Item 6.
[Reserved]
2019
2020
2021
2022
2023
Ambac Financial Group, Inc.
Russell 2000 Index
S&P Completion Index
2018
$100
$100
$100
2019
$125
$124
$126
December 31,
2020
$89
$147
$165
2021
$93
$167
$184
2022
$101
$131
$133
2023
$96
$151
$164
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of
Operations ($ and £ in millions)
The objectives of our Management’s Discussion and Analysis of
Financial Condition and Results of Operations (“MD&A”) are to
provide users of our consolidated financial statements with the
following:
• A narrative explanation
the perspective of
results of
management of our
operations, cash flows, liquidity and certain other factors
that may affect future results;
financial condition,
from
• Context to the consolidated financial statements; and
• Information that allows assessment of the likelihood that
past performance is indicative of future performance.
The following discussion should be read in conjunction with our
consolidated financial statements in Item 8 of this Report and
the matters described under Item 1A. Risk Factors in this
Annual Report on Form 10-K for the year ended December 31,
2023. Refer to Item 1. Description of the Business and Note 1.
Background and Business Description for a description of our
business and our key strategies to achieve our primary goal to
maximize shareholder value.
Organization of Information
MD&A includes the following sections:
Executive Summary .........................................................
Critical Accounting Policies and Estimates ....................
Financial Guarantees in Force .......................................
Results of Operations ......................................................
Liquidity and Capital Resources .....................................
Balance Sheet ..................................................................
Accounting Standards .....................................................
U.S. Statutory Basis Financial Results ............................
Ambac UK Financial Results under UK Accounting
Principles ........................................................................
Non-GAAP Financial Measures ......................................
Page
29
30
33
37
44
45
50
50
52
53
Ambac Financial Group, Inc
28
2023 Form 10-K
EXECUTIVE SUMMARY
AFG Net Assets:
AFG has the following net assets to support its goals and
strategies, including the development and growth of its Specialty
Property and Casualty Insurance and Insurance Distribution
businesses, acquisitions and capital management. AFG does not
have any commitment or other obligation to provide capital or
liquidity to AAC, whose financial guarantee business has been
in run-off since 2008. As of December 31, 2023 and 2022,
AFG's stand alone net assets, excluding its equity investments in
subsidiaries, were $211 and $223, respectively.
December 31,
2023
2022
Cash and short-term investments
$
156 $
178
Other investments (1)
Other net assets
Total
32
23
28
17
$
211 $
223
(1)
Includes strategic minority investments in insurance services
businesses of $26.
The decrease in AFG net assets, excluding its equity investments
in subsidiaries, during 2023 was driven by operating expenses,
capital contributions to subsidiaries, the acquisition of Riverton
Insurance Agency and share repurchases, partially offset by
interest income and distributions from subsidiaries.
AFG's subsidiaries/businesses are divided into three segments, the key value metrics of which are summarized below along with other
recent developments.
($ in millions)
Premiums placed
Gross premiums written
Net premiums written
Total revenues
Total expenses
Pretax income (loss)
EBITDA
Ambac Stockholders’ Equity (1)
Non-redeemable noncontrolling interest
Total stockholders’ equity
Redeemable noncontrolling interest
Year Ended December 31, 2023
Year Ended December 31, 2022
Legacy
Financial
Guarantee
Insurance
Specialty
Property
&
Casualty
Insurance
Insurance
Distribution
Corporate
& Other
Consoli-
dated
Legacy
Financial
Guarantee
Insurance
Specialty
Property
&
Casualty
Insurance
Insurance
Distribution
Corporate
& Other
Consoli-
dated
$
231
$
231
$
135
$
$
15
$
(35)
144
127
17
107
923
51
974
273
80
64
64
—
—
122
2
124
288
$
(20) $
9
22
(13)
(12)
211
44
269
257
12
107
1,362
53
211
1,415
17
52
$
44
7
11
105
105
17
(6)
451
(89)
540
754
826
51
877
146
29
18
25
(6)
(6)
110
2
112
31
$
27
5
7
93
93
20
4
17
(14)
(14)
223
223
1,305
20
135
127
23
505
(20)
525
742
1,252
53
(1) Represents Ambac's stockholders equity for each segment, including intercompany eliminations.
Banking Sector Crisis of 2023
The collapse of several banks in early 2023 precipitated a
sudden loss of confidence in the banking system, prompting
bank runs and the U.S. government to provide direct support to
failed banks and, through an expansive emergency lending
program, the system more broadly. In the U.S., this crisis was in
part a consequence of rising interest rates, resulting in large
declines in the market value of U.S. Treasury and government-
backed debt held by banking institutions. The risk of additional
bank financial stress and/or failures due to asset-liability
mismatches or other risks, such as outsized exposure to
commercial real estate, remains. Despite actions by government
agencies and regulators to mitigate the consequences of these
bank failures by providing liquidity and guaranteeing uninsured
deposits, there is no guarantee that they will provide similar
support in the event of additional bank failures. In Europe,
regulators stepped in to facilitate mergers of stressed banks into
more stable institutions. The ability or willingness of healthy
banks to merge with stressed banks in the future is also subject
to significant uncertainty.
Ambac's cash balances held at banks was $27 as of December
31, 2023 and $42 as of December 31, 2022. Substantially all of
these cash balances were uninsured as of December 31, 2023
and December 31, 2022 because they either (i) exceeded the two
hundred and fifty thousand FDIC insurance limit or (ii) were
held in foreign banks. These cash balances were held primarily
with Ambac's main operating banks which are large money
center and/or global banks. Ambac actively manages its cash
balances to limit bank risk and to enhance yield by transferring
most of its funds to government and prime money market funds.
Included in the cash balances above is $16 of cash of companies
Ambac has acquired within its insurance distribution businesses
that are held in regional banks. The management of these
is under
balances and
consideration as part of Ambac's ongoing integration of these
acquired businesses. In addition, cash balances held by variable
interest entities ("VIEs") that are consolidated in Ambac's
financial statements as a result of Ambac's financial guarantees
totaled $246 and $17 as of December 31, 2023 and 2022,
respectively. These amounts relate primarily to cash collateral
posted against derivative assets and reserve balances maintained
the associated bank exposure
Ambac Financial Group, Inc
29
2023 Form 10-K
under the VIEs' governing documents and are not directly
managed by Ambac.
CRITICAL ACCOUNTING POLICIES AND
ESTIMATES
Ambac also has exposure to banks through its fixed maturity
investment portfolio totaling $169 and $119 as of December 31,
2023 and December 31, 2022, respectively. All of these
investments are managed by third-party asset management firms
which follow single and sector risk limits established by Ambac.
The average rating of our fixed income investment in banks was
A- as of December 31, 2023.
Financial Statement Impact of Foreign Currency:
The impact of foreign currency as reported in Ambac's
Consolidated Statement of Total Comprehensive Income (Loss)
for the years ended December 31, 2023 and 2022 included the
following:
($ in millions)
December 31,
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)
2023
2022
$
(3) $
11
40
(6)
(85)
11
Impact on total comprehensive income (loss)
$
31 $
(63)
(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 on
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
SEC Proposed Rules on Climate Related Information
On March 21, 2022, the Securities and Exchange Commission
(“SEC”) proposed rule amendments that would require public
companies to include certain climate-related information in their
periodic reports and registration statements, including oversight
and governance, material impacts (operational and financial),
risk identification and management, and Scope 1, 2 and 3
emissions (the “Proposed Rule”). For accelerated filers, such as
Ambac, the Scope 1 and 2 emissions disclosures would require
attestation from a third party. These new requirements, if
adopted, would at the earliest take effect in fiscal year 2024 and
begin to apply to SEC filings in 2025. Final climate disclosure
rules have not yet been issued, however the rulemaking agendas
for U.S. agencies released in December 2023 indicate the SEC is
targeting April 2024 for finalization. Ambac has reviewed the
Proposed Rule and will reassess our related compliance
obligations and other effects on our operations when the final
rule is issued.
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 considering 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 financial guarantee loss
and loss adjustment 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
those determinations.
anticipated
Additional information about these 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.
future events
impact
Valuation of Financial Guarantee Losses and Loss
Expense
Subrogation
Recoverables)
(including
Reserves
The loss and loss adjustment expense reserves and subrogation
recoverable assets (collectively defined as "loss reserves")
discussed in this section relate solely to Ambac’s financial
guarantee insurance policies issued to beneficiaries. A loss
reserve is recorded on the balance sheet on a policy-by-policy
basis at 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 considers
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 remediation strategies and other contractual or subrogation-
related cash flows.
The evaluation process for expected future net cash flows is
subject to estimates and judgments regarding the probability of
default by the issuer of the insured security, the probability of
negotiation or settlement outcomes (which may
include
commutation,
litigation and other settlements, and/or a
refinancing), the probability of restructuring outcomes (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, environmental, credit or other unforeseen events
Ambac Financial Group, Inc
30
2023 Form 10-K
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
the estimated loss given default of the 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 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 the
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
prosperity. Reinsurance contracts may mitigate future loss
reserve volatility. While Ambac currently has minimal exposure
ceded to reinsurers on financial guarantee credits with loss
reserves, the existing reinsurance contracts would reduce future
volatility to the extent loss reserves are established on those
risks ceded to reinsurers. 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 Financial Guarantee loss and loss adjustment expense
reserves at December 31, 2023 and 2022:
Gross Loss
and Loss
Adjustment
Expense
Reserves
(1) (3) (4)
Gross Par
Outstanding
(1) (2)
$
1,860
$
$
$
834
1,144
—
3,838
2,050
1,215
782
—
$
4,047
497
66
(8)
4
559
358
75
3
8
444
December 31, 2023
Structured Finance
Domestic Public Finance
Other
Loss expenses
Totals
December 31, 2022
Structured Finance
Domestic Public Finance
Other
Loss expenses
Totals
(1) Ceded par outstanding on policies with loss reserves and ceded
loss and loss adjustment expense reserves are $362 and $30
respectively, at December 31, 2023, and $472 and $33,
respectively at December 31, 2022. Ceded loss and loss adjustment
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 Adjustment Expense reserves at December 31,
2023, of $559 are included in the balance sheet in the following
line items: Loss and loss adjustment expense reserves: $696 and
Subrogation recoverable: $137. Loss and Loss Adjustment
Expense reserves at December 31, 2022, of $444 are included in
the balance sheet in the following line items: Loss and loss
adjustment expense reserves: $715 and Subrogation recoverable:
$271.
(4) Ambac records as a component of its loss and loss adjustment
expense reserves, estimated recoveries related to securitized loans
in RMBS transactions that breached certain representations and
warranties. Ambac has recorded gross estimated recoveries of $0
and $140 at December 31, 2023 and 2022, respectively.
See the Balance Sheet section of this Management's Discussion
and Analysis of Financial Condition and Results of Operations
below for a discussion on the reasons for changes to Gross Loss
and Loss Adjustment Expense Reserves during 2023.
See Note 2. Basis of Presentation and Significant Accounting
Policies to the Consolidated Financial Statements, included in
Part II, Item 8 in this Annual Report on Form 10-K for a
description of the cash flow and statistical methodologies used
to develop loss reserves. The majority of our large loss reserves
utilize the cash flow method of reserving. Various 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.
the cash flow
Significant
assumptions and related probabilities, and there can be no
certainty that the scenarios or probabilities will not deviate
materially from ultimate outcomes.
to develop
judgment
is used
• In some cases, such as RMBS and student loans, cash flow
projections include the modeling of a securitization's cash
flows to determine the resources available to pay debt
service on our insured obligations. During the first quarter
of 2023, Ambac revised the model it uses to project RMBS
collateral losses considering the seasoning of our RMBS
exposure and management’s view that the most relevant
determinant of prospective collateral performance
is
Individual home price
borrower payment status.
less a critical
appreciation/depreciation has become
determinant of performance considering
the general
appreciation in home values over the past few years as well
as the impact of loan modifications. The average estimated
loan-to-values of the collateral related to insured exposures
have declined to under 50% from peaks above 110%. Key
assumptions impacting student loan cash flow models
include projected loan defaults, recoveries and interest
rates. During the second quarter of 2023, we revised our
approach to projecting future defaults to both reflect the
student loan collateral's seasoning and generally stable
performance.
• In other cases, such as many public finance exposures, we
consider the issuer's 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
Ambac Financial Group, Inc
31
2023 Form 10-K
paid, missed and/or haircut with claims paid then factor in
any projected recovery amount (and potential variability of
the recovery amount) and the timing thereof. There is no
certainty our assumptions as to scenarios or probabilities
will not be subject to material changes as developments
occur.
strategies. Remediation
• In estimating loss reserves, we may also incorporate
the potential outcome of
scenarios which represent
remediation
scenarios could
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
value hierarchy. The fair value hierarchy,
the financial
instruments classified within each level, our valuation methods,
inputs, assumptions and the review and validation procedures
over quoted and modeled pricing are further detailed in Note 5.
Fair Value Measurements
the Consolidated Financial
to
Statements included in Part II, Item 8 in this Annual Report on
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 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
is
taxing authorities. Significant
governmental
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, future GAAP
income that will not result in corresponding taxable income and
NOL carry forwards.
Valuation allowances are established to reduce deferred tax
assets to an amount that “more likely than not” will be realized.
Management considers all available evidence, both positive and
negative, when determining whether to establish and/or maintain
a valuation allowance against deferred
tax assets, with
significant weight given to evidence that can be objectively
verified. Positive evidence includes reduced potential for
material loss as a result of settling RMBS representation and
warranty litigation and resolving exposure to Puerto Rico,
Everspan's receipt of an 'A-'' Financial Strength Rating from AM
Best, the launch of a specialty program property and casualty
insurance business, AFG's acquisition of majority interests in
MGA/U businesses and AAC's reduction of material amounts of
debt. Negative evidence
includes Specialty Property and
Casualty Insurance and Insurance Distribution businesses not
yet at scale, the Legacy Financial Guarantee Insurance business
remaining in run-off, and material amounts of debt at AAC.
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 part or all the U.S. federal 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 16.
the Consolidated Financial
to
Statements, included in Part II, Item 8 in this Annual Report on
Form 10-K for additional information on the Company's
deferred income taxes.
Income Taxes
Ambac Financial Group, Inc
32
2023 Form 10-K
FINANCIAL GUARANTEES IN FORCE
Financial guarantee products were sold in three principal
markets: U.S. public finance, U.S. structured finance and
international finance. 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
(“VIEs”)
consolidated in accordance with the Consolidation Topic of the
ASC. Guaranteed net par outstanding excludes the exposures of
policies that insure bonds which have been refunded, pre-
refunded or synthetically commuted.
insuring variable
interest entities
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
thereof, for commutation,
prioritize policies, or portions
reinsurance, refinancing, restructuring or other risk reduction
strategies. For targeted policies, analysts will engage with
issuers, bondholders and other economic stakeholders
to
negotiate, structure and execute such strategies. During 2023,
Ambac completed risk reduction transactions equating to
$2,419, including a quota share reinsurance cession of $2,069
insured par, consisting primarily of military housing risk of
$1,958.
The following table provides a comparison of total, adversely
classified ("ACC") and watch list (as described in Note 2. Basis
of Presentation and Significant Accounting Policies to the
Consolidated Financial Statements included in Part II, Item 8 of
this Annual Report on Form 10-K) credit net par outstanding in
the insured portfolio at December 31, 2023 and 2022.
($ in billions)
December 31,
Total
ACC
Watch List
2023
19,541
3,504
2,181
$
$
$
2022
22,613
4,735
3,044
$
$
$
Variance
$
$
$
(3,072)
(1,231)
(863)
(11) %
(26) %
(28) %
The decrease in total, ACC and watch list credit net par
outstanding resulted from active de-risking (primarily from the
reinsurance cession noted above), scheduled maturities,
amortizations, refundings and calls, partially offset by a
weakening of the USD versus the GBP.
The following table provides a breakdown of guaranteed net par
outstanding by market at December 31, 2023 and 2022.
December 31,
Public Finance (1)
Structured Finance
International Finance
2023
2022
$
7,562
$
10,547
3,315
8,664
3,612
8,454
Total net par outstanding
$
19,541
$
22,613
(1)
Includes $3,371 and $5,400 of Military Housing net par
outstanding at December 31, 2023 and 2022, respectively.
Below we discuss the significant exposures in our insured
portfolio relating to each of the three markets. See Note 6.
Financial Guarantees in Force to the Consolidated Financial
Statements, included in Part II, Item 8 in this Annual Report on
Form 10-K for exposures by bond type.
U.S. Public Finance Insured Portfolio
AAC’s portfolio of U.S. public finance exposures totaled $7,562
in net par outstanding, representing 39% of Ambac’s net par
outstanding as of December 31, 2023, and a 28% reduction from
the amount outstanding at December 31, 2022. This reduction
resulted from active de-risking (primarily from the above-
mentioned reinsurance cession of $2,069 of insured par),
scheduled paydowns, and early terminations (calls, refundings
and pre-refundings). Ambac’s U.S. public finance portfolio
consists of municipal bonds such as general obligation, revenue,
and lease and tax-backed obligations of state and local
government entities, and also includes several non-municipal
types of bonds, such as financings with public and private
elements, which generally finance infrastructure, housing and
other public interests, the largest sector of which is U.S. military
housing which accounts for approximately 45% of AAC's U.S.
Public Finance Insured Portfolio.
Municipal Bonds
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.
Non-Municipal Bonds
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, and privatized
military 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.
Military Housing Bonds
AAC's largest concentration of non-municipal bonds is U.S.
military housing. Ambac insures $3,371 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 typically
small percentages, rental payments can also come from civilians,
including retired service personnel and US Department of
Defense contractors 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
Ambac Financial Group, Inc
33
2023 Form 10-K
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, natural disasters, excessive utility and other
operating costs and housing management. As of December 31,
2023, privatized military housing represented approximately
17% of net par outstanding as compared to 24% as of December
31, 2022. Ambac's privatized military housing exposure
decreased from 2022 as a result of the above-mentioned
reinsurance cession.
U.S. Structured Finance Portfolio
Ambac’s portfolio of U.S. structured finance exposures is
$3,315 in net par outstanding, representing 17% of Ambac’s net
par outstanding as of December 31, 2023, and an 8% reduction
from the amount outstanding at December 31, 2022. This
reduction in exposure was primarily related to (i) RMBS
policies, which continued to prepay as well as incur claims and
(ii) scheduled paydowns.
Current insured exposures primarily include securitizations of
mortgage loans, home equity loans and student loans, and
investor-owned utilities in each case where the majority of the
underlying collateral risk is situated in the United States. At
December 31, 2023, RMBS represented approximately 9% of
net par outstanding.
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.
International Finance Insured Portfolio
Ambac’s portfolio of international finance insured exposures is
$8,664 in net par outstanding, representing 44% of Ambac’s net
par outstanding as of December 31, 2023, and a 2% increase
from the amount outstanding at December 31, 2022. This
increase in exposure was primarily the result of a weakening of
the US dollar versus the British pound and the Euro, partially
offset by de-risking activity. Ambac’s international finance
insured exposures include a wide array of obligations in the
international markets, including infrastructure financings, utility
obligations, whole business securitizations (e.g., securitizations
of substantially all of the operating assets of a corporation) and
sub-sovereign credits.
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, as
well as emerging risks, through its ongoing risk management.
Ambac's international net par exposures are principally in the
United Kingdom ($7,502); however, we also have exposures
with credit risk based in various EU member states, including
Austria, France, Germany and Italy ($895).
At December 31, 2023, sub-sovereign and investor-owned and
public utilities represented approximately 22% and 15%
(Electric 5%, Gas 5% and Water 5%) of total net par
outstanding, respectively. Ambac has no insured exposure
related to emerging markets.
Ambac UK, which is regulated in the United Kingdom (“UK”),
was AAC’s primary vehicle for directly issuing financial
guarantee policies in the UK and the European Union with
$8,397 net par outstanding at December 31, 2023 (represents
approximately 97% of Ambac's
international net par
outstanding). 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.
Ambac Financial Group, Inc
34
2023 Form 10-K
Largest Insured Exposures:
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, 2023 (in millions):
Sector Co.
Bond Kind
Investor Owned Utility Gas - unsecured
PFI - Hospitals
PFI - Accommodation
Other Asset Securitizations
AUK
AUK
AUK
AUK
AUK
AUK
AUK
AUK
IF
IF
IF
IF
IF
IF
IF
IF
PF
IF
Total
Sub-Sovereign
PFI - Accommodation
AAC
US State Lease/Appropriation
AUK
PFI - Hospitals
Net Par
Outstanding
% of Total
Net Par
Outstanding
Country-Bond Type
UK-Utility
UK-Infrastructure
UK-Infrastructure
Ambac
Ratings (1)
BBB+
BBB+
A-
UK-Asset Securitizations
BBB+
Italy-Sub-Sovereign
UK-Infrastructure
US-Lease and Tax-backed
Revenue
UK-Infrastructure
A-
BBB+
BIG
A-
BBB
BBB-
Ultimate
Maturity
Year
2037 $
2046
2040
2033
2035
2036
2035
2038
2036
2040
896
741
739
696
683
618
576
478
357
307
$
6,091
4.6 %
3.8 %
3.8 %
3.6 %
3.5 %
3.2 %
2.9 %
2.4 %
1.8 %
1.6 %
31.2 %
Investor Owned Utility Other - unsecured
Investor Owned Utility Electric - unsecured
UK-Utility
UK-Utility
PF = Public Finance, SF = Structured Finance, IF = International Finance
AAC = Ambac Assurance, AUK = Ambac UK
(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.
Net par related to the top ten exposures reduced $25 from
December 31, 2022. Exposures are impacted by commutations,
changes in foreign exchange rates ($283 increase during 2023),
certain indexation rates linked to inflation measures in the
United Kingdom (RPI) and scheduled and unscheduled
paydowns. As a result of recent increases in inflation, such
indexation-linked exposures have increased at a faster pace than
they have historically.
The concentration of net par amongst the top ten (as a
percentage of net par outstanding) increased to 31% at
December 31, 2023, from 27% at December 31, 2022.
Excluding the top ten exposures, the remaining insured portfolio
of financial guarantees has an average net par outstanding of $28
per single risk, with insured exposures ranging up to $307 and a
median net par outstanding of $5.
Additional Insured Portfolio Information
Average Life of Insured Portfolio
Ambac estimates that the average life of its guarantees on par in
force at December 31, 2023, is approximately 10 years. The
average life is determined by applying a weighted average
calculation, using the remaining years to expected maturity of
each guaranteed bond, and weighting them on the basis of the
remaining net par guaranteed. Except for RMBS policies, no
assumptions are made for non-contractual reductions, refundings
or terminations of insured issues. RMBS policies incorporate
assumptions on expected prepayments over the remaining life of
the insured obligation.
The following table depicts amortization of existing guaranteed
net par outstanding:
($ in millions)
Net Par Outstanding Amortization (1)
Estimated Net
Amortization
2024
2025
2026
2027
2028
2024 - 2028
2029 - 2033
2034 - 2038
2039 - 2043
After 2043
Total
$
$
1,355
1,181
1,152
964
1,161
5,813
4,345
6,424
1,340
1,619
$
19,541
(1) Depicts amortization of existing guaranteed portfolio, assuming no
advance refundings, as of December 31, 2023. Expected maturities
will differ from contractual maturities because borrowers may have
the right to call or prepay guaranteed obligations.
Exposure Currency
The table below shows the distribution by currency of Ambac's
existing guaranteed net par outstanding as of December 31,
2023:
Net Par
Amount
Outstanding
in Base
Currency
Net Par
Amount
Outstanding
in U.S.
Dollars
Percentage
of Net Par
Amount
Outstanding
Currency
(in millions)
U.S. Dollars
British Pounds
Euros
$
£
€
11,039
$
5,769
800
391
11,039
7,353
883
266
Australian Dollars
A$
56 %
38 %
5 %
1 %
100 %
Total
$
19,541
Ambac Financial Group, Inc
35
2023 Form 10-K
See Note 6. Financial Guarantees in Force to the Consolidated
Financial Statements, included in Part II, Item 8 included in this
Annual Report on Form 10-K, for geographic detail by location
of risk as of December 31, 2023.
Ratings Distribution
The following charts provide a rating distribution of existing net
par outstanding based upon internal Ambac credit ratings at
December 31, 2023 and 2022, and a distribution of Ambac's
below
("BIG") net par exposures at
December 31, 2023 and 2022. BIG is defined as those exposures
with an internal credit rating below BBB-:
investment grade
December 31, 2023
BIG: 18%
AA: 7%
A: 35%
BBB: 40%
December 31, 2022
BIG: 17%
AA: 7%
Summary of Below Investment Grade Exposure:
Bond Type
December 31,
Public Finance:
Military Housing
General Obligations
Lease and tax-backed revenue
Other
Total Public Finance
Structured Finance:
RMBS
Student Loans
Total Structured Finance
International Finance:
Sovereign/sub-sovereign
Transportation
Other
Total International Finance
Total
Net Par Outstanding
2023
2022
$
361
$
85
80
37
563
1,642
264
1,906
693
307
1
1,001
$
3,470
$
366
151
252
54
823
1,841
275
2,117
701
310
2
1,013
3,953
The net decline in below investment grade exposures is
significantly due to de-risking activities, including Puerto Rico
of $165 and from the above mentioned reinsurance transaction
of $50.
Below investment grade exposures could increase as a relative
proportion of the guarantee portfolio given that Ambac hasn't
written any new financial guarantee business since 2008 and
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.
A: 36%
Ceded Reinsurance
BBB: 40%
Note: AAA is less than 1% in both periods.
(1)
to
Internal credit ratings are provided solely
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.
indicate
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
these reinsurance agreements. AAC's reinsurers all have
applicable ratings of A or better. As of December 31, 2023, the
aggregate amount of insured par ceded by AAC to reinsurers
under reinsurance agreements was $6,464, with the largest
reinsurer accounting for $2,766 or 10.6% of gross par
outstanding at December 31, 2023.
Ambac Financial Group, Inc
36
2023 Form 10-K
The following table shows the distribution, by bond type, of
AAC’s ceded guaranteed portfolio at December 31, 2023:
A summary of our financial results is shown below:
Year Ended December 31,
2023
2022
2021
Bond Type
December 31,
Public Finance:
Housing revenue
Lease and tax-backed revenue
General obligation
Transportation revenue
Other
Total Public Finance
Structured Finance:
Investor-owned utilities
Other
Total Structured Finance
Total Domestic
International Finance:
Total International Finance
Total
Ceded Par Amount
Outstanding
2023
2022
$
2,829
$
910
1,125
1,112
599
494
6,159
174
100
274
1,169
1,265
699
555
4,598
174
136
310
6,433
4,908
31
30
$
6,464
$
4,938
Percentage of Gross Par Ceded
25 %
18 %
RESULTS OF OPERATIONS
The following discussion should be read along with the financial
statements included in this Annual Report on Form 10-K, as
well as Part II, "Item 7, Management's Discussion and Analysis
of Financial Condition and Results of Operations" in this Annual
Report on Form 10-K for the year ended December 31, 2022,
which provides additional information on comparisons of years
2022 and 2021.
Net income attributable to common stockholders for the year
ended December 31, 2023, was $4 compared to a net income
attributable to common stockholders of $522 for the year ended
December 31, 2022. The net income variance was primarily
driven by: (i) a lower loss and loss adjustment expenses benefit,
(ii) a litigation recovery in 2022, (iii) 2022 gains on derivative
contracts, and (iv) 2022 net gains on extinguishment of debt,
partially offset by higher returns from the investment portfolio
and lower interest expense.
Revenues:
Net premiums earned
Commission income
Program fees
Net investment income
$
Net investment gains (losses),
including impairments
Net gains (losses) on derivative
contracts
Net realized gains on
extinguishment of debt
Income (loss) on variable interest
entities
Other income
Litigation recoveries
Expenses:
Losses and loss adjustment
expenses
Amortization of deferred
acquisition costs, net
Commission expense
General and administrative
expenses
Intangible amortization
Interest expense
Provision (benefit) for income
taxes
Net income (loss)
Less: net (gain) loss attributable
to noncontrolling interest
Net income (loss) attributable to
common stockholders
$
$
78
51
8
140
(22)
(1)
—
3
11
—
$
56
31
3
17
31
129
81
21
10
126
47
26
—
139
7
22
33
7
1
—
(33)
(396)
(88)
11
29
156
29
64
7
5
(1)
3
18
141
47
168
2
522
(1)
1
15
111
55
187
18
(16)
(1)
4
$
522
$
(17)
Ambac's results for the year ended December 31, 2023
compared to the year ended December 31, 2022 were impacted
by the following:
• During 2023, Ambac completed LFG risk reduction
transactions primarily through a quota share reinsurance
cession, consisting primarily of military housing risk. This
reinsurance cession had an adverse impact on net premiums
earned of approximately $2.
• As of December 6, 2022, all AAC-insured Puerto Rico
obligations were restructured under PROMESA via court-
approved plans of adjustment or qualifying modifications.
As a result of
these restructurings, Ambac's 2022
consolidated financial results included a net benefit of $180
in losses and gains of $37 on the consolidation of newly
established variable interest entities; partially offset by net
losses of $23 from sales and changes to the fair value of
securities received by AAC in the restructurings and losses
of $17 on the VIEs after initial consolidation.
• On October 6, 2022, AAC entered into a Settlement
Agreement and Release with Bank of America Corporation
and certain affiliates thereof (the "BOA Parties") whereby
the parties settled all RMBS litigation brought by AAC
against the BOA Parties and AAC received $1,840 (the
"BOA Settlement Payment"). On December 29, 2022,
AAC entered into a Settlement Agreement and Release
with Nomura Credit & Capital, Inc. ("Nomura") whereby
the parties settled all RMBS litigation brought by AAC
Ambac Financial Group, Inc
37
2023 Form 10-K
against Nomura and AAC received $140 on January 3,
2023. AAC used the proceeds from these settlements (net
of reinsurance) plus approximately $6 of cash on hand to
fully redeem all debt obligations secured by the net
proceeds of litigations brought by AAC against RMBS
sponsors. The settlements with the BOA Parties and
Nomura brought to closure all of AAC's legacy litigation
against RMBS sponsors. See Note 1. Background and
Business Description in Part II, Item 8 in this Annual
Report on Form 10-K for further information. During
2022, AAC recorded a gain of $123 million in loss and loss
adjustment expenses and litigation recoveries of $126,
offset by net realized losses on extinguishment of debt of
$53 related to the above-mentioned settlement agreements.
Interest expense was significantly reduced in 2023 as a
result of these settlements.
The following paragraphs describe the consolidated results of
operations of Ambac and its subsidiaries for 2023 and 2022.
Gross Premiums Written.
Gross premiums written
increased $161 for the year ended December 31, 2023,
compared to the same periods in the prior year, as shown by
segment below.
Year Ended December 31,
2023
2022
2021
Legacy Financial Guaranty Insurance $
15 $
(20) $
(11)
Specialty Property & Casualty
Insurance
Total
273
146
$
288 $
127 $
13
2
Legacy Financial Guarantee Insurance gross premiums written
relate to changes in expected and contractual premium cash
flows for existing financial guarantees in force.
Specialty P&C growth is primarily driven by the number of
active programs and their size as of December 31, 2023, we
have twenty-three programs with nineteen MGA/Us.
Net Premiums Written. Net premiums written increased
$22 for the year ended December 31, 2023 compared to the year
ended December 31, 2022, as shown by segment below:
Year Ended December 31,
2023
2022
2021
Legacy Financial Guaranty Insurance $
(35) $
(6) $
(35)
Specialty Property & Casualty
Insurance
Total
80
29
$
44 $
23 $
3
(33)
Legacy Financial Guarantee Insurance net premiums written
relate to changes in expected and contractual premium cash
flows for existing financial guarantees in force, and reinsurance
cessions in 2023 and 2021.
Specialty P&C growth is primarily driven by the number of
active programs and their size as of December 31, 2023, in
addition to the impact of two assumed reinsurance transactions
executed during 2023.
Net Premiums Earned. Net premiums earned for the year
ended December 31, 2023 increased by $22 or 38% as compared
to net premiums earned for the year ended December 31, 2022,
as shown below.
Year Ended December 31,
2023
2022
2021
Legacy Financial Guaranty Insurance $
26 $
42 $
Specialty Property and Casualty
Insurance
Total
52
14
78 $
56 $
46
1
47
reinsurance
The reduction in the Legacy Financial Guarantee Insurance
segment was primarily due to de-risking activities, including the
2023
the 2022 Puerto Rico
restructurings, and run-off of the insured portfolio. The increase
in Specialty Property and Casualty Insurance net premiums
earned was driven by the growth in net premiums written.
transaction,
Commission
Income and Commission Expense.
Commission income was $51 compared to $31, for the years
ended December 31, 2023 and 2022. Commissions include both
base and profit sharing commissions from Cirrata Group
companies in the Insurance Distribution segment. The increase
was driven by organic growth in premiums placed as well as the
acquisition of All Trans and Capacity Marine in November of
2022 and Riverton in August of 2023. Commission expense will
largely track changes in gross commission.
For the year ended December 31, 2023 commission expense was
$29 compared to $18 for the year ended December 31, 2022,
representing approximately 57% of commission income in both
periods.
Program Fees. Program fee revenues were $8 compared $3
for the years December 31, 2023 and 2022, respectively.
Program fee revenues represent the recognition of ceding
commissions in excess of direct acquisition costs received from
reinsurers and minimum fees received from MGA/Us until
related programs reach certain levels of premium ceded.
Program fees are charged as a percentage of premiums ceded to
reinsurers as a component of total ceding commissions.
Net Investment Income. Net investment income primarily
consists of interest and net discount accretion on fixed maturity
securities classified as available-for-sale, interest and changes in
fair value of fixed maturity securities classified as trading, and
net gains (losses) on pooled investment funds which include
changes in fair value of the funds' net assets. Fixed maturity
securities include investments in Ambac-insured securities that
are made opportunistically based on their risk/reward and asset-
liability management characteristics. 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 4.
Investments to the Consolidated Financial Statements, included
in Part II, Item 8 in this Annual Report on Form 10-K. Net
investment income for the periods presented were driven by the
Legacy Financial Guarantee Insurance segment; other segments'
results were not significant.
Ambac Financial Group, Inc
38
2023 Form 10-K
investment
Net
from Ambac-insured securities,
available-for-sale securities other than Ambac-insured and Other
investments is summarized in the table below:
income
Year Ended December 31,
2023
2022
2021
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)
$
24
$
24
$
45
69
47
42
(49)
29
66
139
Net investment income
$
140
$
17
$
Net investment income increased $123 for the year ended
December 31, 2023, compared to 2022.
• Income from Other investments and trading securities
increased $97 in 2023, compared to the prior year. Pooled
fund investments produced a gain of $40, an increase of
$66 from 2022, driven by improved performance in all fund
categories even with a lower allocation to funds overall.
The largest increases were in hedge funds, equities and
high-yield and leverage loan funds. Investments in pooled
funds may be volatile, but are generally expected to
produce higher returns than traditional fixed maturity
investments. Gains on securities received in the Puerto
Rico restructurings, which are classified as trading, were $7
in 2023, compared to a loss of $23 in 2022.
• Net investment income from available-for-sales securities
other than Ambac-insured securities increased $27 in 2023,
compared to the prior year, due to higher portfolio yields.
• Investment income from Ambac-insured securities was flat
compared to 2022. Higher average holdings of Ambac-
insured RMBS and student loans in 2023 offset the impact
of the 2022 settlements of Puerto Rico bonds and the
redemption of Sitka Senior Secured Notes (as defined in
Note 12. Long-Term Debt to the Consolidated Financial
Statements included in Part II, Item 8 in the Annual Report
on Form 10-K) held in the portfolio in 2022.
Investment Gains
Net
including
Impairments. The following table provides a breakdown of
net investment gains, for the periods presented:
(Losses),
Year Ended December 31,
2023
2022
2021
Net realized gains on securities sold
or called
$
(4) $
Net foreign exchange gains (losses)
Credit impairment
Intent / requirement to sell
impairments
Total net investment gains,
including impairments
(4)
(3)
(12)
$
18
14
—
—
$
(22) $
31
$
11
(5)
—
—
7
Net investment gains (losses) during the year ended December
31, 2023, included impairments of Ambac-insured student loan
securities that management intends to sell. Net investment gains
during the year ended December 31, 2022, included a recovery
of $9 from a class-action settlement relating to certain RMBS
securities previously held in the investment portfolio, $4 from
the distribution of residual assets of a legacy financial guarantee
student loan restructuring vehicle and $5 from the mandatory
redemption of Sitka Senior Secured Notes over their amortized
cost value. Other net realized gains on securities sold or called
in 2023 and 2022 are primarily from sales in connection with
routine portfolio management. Refer to Note 2. Basis of
Presentation and Significant Accounting Policies
the
Consolidated Financial Statements located in Part II, Item 8 in
this Annual Report on Form 10-K for a description of the
Company's policies related to investment impairments.
to
Net Gains (Losses) on Derivative Contracts. Net gains
(losses) on derivative contracts are primarily from
the
Company's interest rate derivatives portfolio. Into the second
quarter of 2023, the interest rate derivatives portfolio was
positioned to benefit from rising rates as a partial economic
hedge against interest rate exposure in the financial guarantee
insurance and investment portfolios. This economic hedge was
substantially reduced since September 30, 2022, and was fully
removed during the second quarter of 2023. Net gains (losses)
on interest rate derivatives 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 other non-VIE derivatives were not
significant to the periods presented.
Net losses on interest rate derivatives for the year ended
December 31, 2023, were $1, compared to a net gains of $128
for the year ended December 31, 2022. Results for the year
ended December 31, 2023, reflect the impacts of interest rate
shifts in the early part of 2023 and counterparty credit
adjustments as noted below. The net gains in 2022 were driven
primarily by the significant rate increase during the year.
Counterparty credit adjustments are generally applicable for
uncollateralized derivative assets that may not be offset by
derivative liabilities under a master netting agreement. In
periods when credit spreads are stable, counterparty credit
adjustments will generally have a proportionate offsetting
impact to gains or losses on derivative assets, relative to fully
collateralized assets. In addition to the impact of interest rates on
the underlying derivative asset values,
in
counterparty credit adjustments are driven by movement of
credit spreads. Generally, narrowing (widening) of credit
spreads will increase (decrease) derivative gains relative to a
period of stable credit spreads. Inclusion of counterparty credit
adjustments in the valuation of interest rate derivatives resulted
in gains (losses) within Net gains (losses) on derivative contracts
of $2 and $8 for the years ended December 31, 2023 and 2022,
respectively. The lower counterparty credit adjustments for both
periods reflected lower underlying asset values with the further
impact of credit spread narrowing in 2023 and widening in
2022.
the changes
Net Realized Gains on Extinguishment of Debt. Net
realized gains on extinguishment of debt was $0 for year ended
December 31, 2023. Net realized gains on extinguishment of
debt was $81 for the year ended December 31, 2022. Gains
were recognized due to repurchases of surplus notes below their
carrying values, partially offset with losses recognized on the
redemption of the Sitka AAC Note (as defined in Note 12.
Long-term Debt to the Consolidated Financial Statements
included in Part II, Item 8 in this Annual Report on Form 10-K)
Ambac Financial Group, Inc
39
2023 Form 10-K
liquidity,
above its carrying value. AAC repurchased $266 million current
par of surplus notes from third party holders in 2022. Subject to
prevailing market conditions, our
internal and
regulatory guidelines and approvals, contractual restrictions and
OCI’s Run-off Capital Framework, Ambac may continue to
opportunistically reduce, redeem, repurchase or otherwise retire
its outstanding surplus notes, including through open market
redemptions or
repurchases,
otherwise, and may consider opportunities
to exchange
securities issued by it from time to time for other securities
issued by AFG or AAC.
tender offers,
repayments,
losses attributable
including gains or
Income (Loss) on Variable Interest Entities. Included
within Income (loss) on variable interest entities are income
statement amounts relating to LFG-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,
to
consolidating or deconsolidating LFG-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,
most assets and liabilities of the LFG-VIEs are initially reported
at fair value, except for customer contract assets and liabilities
which are accounted for under the Revenue from Contracts with
Customers Topic of the ASC. The related insurance assets and
liabilities are eliminated in consolidation. The amount of LFG-
VIE net assets (liabilities)
in consolidation
incorporate the net positive (negative) future cash flows from
(to) the VIEs which are attributable to Ambac’s insurance
subsidiaries in the form of financial guarantee insurance
premiums, fees and losses. Generally, LFG-VIEs in a net
liability position are expected to have some portion of their
obligations 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 LFG-VIEs' 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 LFG-VIE and Ambac could result in gains or
losses, even
in
deconsolidation of the LFG-VIE.
if such policy changes do not result
that remain
Income (loss) on variable interest entities was $3 and $21 for the
years ended December 31, 2023 and 2022, respectively. Results
for the year ended December 31, 2023, were driven primarily by
the $4 gain upon consolidation of a VIE for which Ambac UK
guarantees the senior debt. Results for the year ended December
31, 2022. related primarily to three VIE trusts created in
connection with the Puerto Rico restructurings in 2022. The
2022 gain
initial $37 million gain upon
consolidation, losses of $9 from changes to fair value of these
VIEs' assets, and losses of $7 from these VIEs' interest and other
costs. Refer to Note 11. 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.
included
the
Litigation Recoveries. For the year ended December 31,
2022, in connection with the settlement agreement with Bank of
included recoveries from
America Corporation and certain affiliates, the BOA Settlement
litigations for alleged
Payment
breaches of contractual obligations and fraud by the BOA
Parties. Management allocated the BOA Settlement Payment to
each of the litigations based on previously developed valuations
of each individual litigation. The portion of the BOA
Settlement Payment allocated to fraud litigation recoveries has
been recorded as a litigation recovery in the Statement of
Comprehensive Income (Loss).
Losses and Loss Adjustment Expenses (Benefit).
Losses and loss adjustment expenses increased $364 for the year
ended December 31, 2023, compared to the prior year. Below
provides the breakout of loss and loss expenses by segment:
Year Ended December 31,
Legacy financial guarantee
Specialty property and casualty
insurance
Total
2023
2022
(69) $
(406) $
37
9 $
(33) $
(396) $
2021
(89)
—
(88)
$
$
The large variance within legacy financial guarantee was driven
by activities in the RMBS portfolio in 2023 and 2022, including
the impact of the Settlement Agreements with Bank of America
Corporation and certain affiliates thereof and the settlement
agreement with Nomura during 2022. Refer to discussion of
each segment's results below for further details.
General and Administrative Expenses ("G&A"). The
following table provides a summary of G&A expenses for the
periods presented:
Year Ended December 31,
2023
2022
2021
Compensation
Non-compensation
Total
$
$
$
73
84
$
66
75
156
$
141
$
62
49
111
G&A expenses for the year ended December 31, 2023 are $156,
an increase of $15 from G&A expenses for the year ended
December 31, 2022. The increase was primarily due to the
following:
• Higher compensation costs primarily due to a net increase
in staffing from additions in the Specialty Property and
Casualty Insurance and Insurance Distribution segments
and the impact of performance factor adjustments on
incentive compensation expense, partially offset by
reductions in staffing in the Legacy Financial Guarantee
Insurance segment.
• Higher non-compensation costs primarily
to
increased Legacy Financial Guarantee Insurance segment
defensive litigation expenses and costs associated with
growth of the Specialty Property and Casualty Insurance
and Insurance Distribution businesses.
related
Intangible Amortization. Insurance intangible amortization
was $25 and $44 for the years ended December 31, 2023 and
2022, respectively. The decrease was driven primarily by the
timing of de-risking transactions (including Puerto Rico in 2022)
and the reduced size of the financial guarantee insured portfolio.
Insurance intangible amortization will decline after policies
mature or they are de-risked Other intangible amortization was
$3 and $3 for the years ended December 31, 2023 and 2022
Ambac Financial Group, Inc
40
2023 Form 10-K
relating
segment.
to acquisitions within
the Insurance Distribution
Interest Expense. All interest expense relates to the Legacy
Financial Guarantee Insurance segment and includes accrued
interest on the LSNI Ambac Note (fully redeemed in 2021),
Sitka AAC Note (fully redeemed during the fourth quarter of
2022), Tier 2 Notes (fully redeemed during the first quarter of
2023), 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:
Year Ended December 31,
Surplus Notes (1)
$
LSNI Ambac Note
Sitka AAC Note
Tier 2 Notes
Other
2023
2022
2021
$
62
—
—
—
1
$
78
—
63
26
1
77
50
32
27
1
Total interest expense
$
64
$
168
$
187
(1)
Includes interest on Junior Surplus Notes that were acquired and
retired in 2021.
The decrease in interest expense for the year ended December
31, 2023, compared to the year ended December 31, 2022,
reflects the impact of the 2022 redemption of secured notes and
purchases of surplus notes as described further under "Debt
Redemptions and Extinguishments" in Note 12. Long-term Debt
to the Consolidated Financial Statements included in Part II,
Item 8 in this Annual Report on Form 10-K.
Surplus note principal and interest payments require the
approval of OCI. In May 2023, OCI declined the request of
AAC to pay the principal amount of the surplus notes, plus all
accrued and unpaid interest thereon, on the then next scheduled
payment date of June 7, 2023. As a result, the scheduled
payment date for interest, and the scheduled maturity date for
payment of principal of the surplus notes was 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
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 were accrued for and
AAC is accruing interest on the interest amounts following each
scheduled payment date. Total accrued and unpaid interest for
surplus notes outstanding to third parties was $475 at December
31, 2023. As required by the terms of surplus notes, AAC will
continue to seek OCI’s approval to make payments of principal
and interest on its surplus notes. OCI’s approval may be granted
or denied in OCI’s sole discretion. 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 two exceptional payments. Ambac can provide no
assurance as to when or if surplus note principal and interest
payments will be made.
Provision for Income Taxes. The provision for income
taxes for the year ended December 31, 2023 and 2022, was a
expense of $7 and $2, respectively. Income taxes for the year
ended December 31, 2023 and 2022, includes provisions for
income tax due in respect of Ambac UK of $8 and $3,
respectively.
At December 31, 2023, the Company had approximately $3,400
of U.S. Federal net ordinary operating loss carryforwards,
including approximately $1,640 at AFG and $1,760 at AAC.
Results of Operations by Segment
Legacy Financial Guarantee Insurance
Year Ended December 31,
2023
2022
Revenues:
Net premiums earned
Net investment income
Net investment gains (losses), including
impairments
Net gains (losses) on derivative contracts
Net realized gains on extinguishment of debt
Other income
Litigation recoveries
Total
Expenses:
Losses and loss adjustment expenses
General and administrative expenses
Total
EBITDA
Interest expense
Depreciation
Intangible amortization
Pretax income (loss)
Ambac's stockholders equity (1)
$
26 $
127
(23)
(1)
—
15
—
144
(69)
106
37
107
64
1
25
17 $
42
12
32
128
81
30
126
451
(406)
102
(303)
754
168
2
44
540
$
$
923 $
826
(1) Represents the share of Ambac stockholders equity for each
subsidiary within the Legacy Financial Guarantee Insurance
segment, including intercompany eliminations.
The Legacy Financial Guarantee Insurance segment is in active
runoff. This will generally result in lower premium earned,
investment
intangible
income, operating expenses and
amortization. The variability
the financial results are
primarily driven by changes in loss and loss adjustment
expenses resulting from, amongst other
litigation
settlements, credit developments and de-risking transactions.
Key variances not discussed above in the Consolidated Results
section are as follows:
items,
in
Net premiums earned. Net premiums earned decreased $16
for the year ended December 31, 2023, compared to the same
period in the prior year. Net premiums earned were impacted by
the organic and active runoff of the financial guarantee insured
portfolio resulting in a reduction to current and future normal net
premiums earned and the following:
• Changes to the allowance for credit losses on the premium
receivable asset. The positive impact on net premiums
earned related to credit losses amounted to $1 and $4 for
the years ended December 31, 2023 and 2022, respectively.
Ambac Financial Group, Inc
41
2023 Form 10-K
Specialty Property and Casualty Insurance
• Accelerated financial guarantee premiums earned as a
insured
result of calls and other accelerations on
obligations, largely due to active de-risking of the insured
portfolio, were $0 and $8 for the years ended December 31,
2023 and 2022, respectively.
Losses and Loss Adjustment Expenses (Benefit). The
following provides details for losses and loss expenses (benefit)
incurred for the periods presented:
Year Ended December 31,
Gross premiums written
Net premiums written
Revenues:
Net premiums earned
Net investment income
Year Ended December 31,
Structured Finance
Domestic Public Finance
Other
Totals (1)
2023
2022
$
(63) $
(5)
(2)
(207)
(192)
(6)
Net investment gains (losses), including
impairments
Program fees
Total
Expenses:
$
(69) $
(406)
Losses and loss adjustment expenses
(1)
Includes loss expenses incurred of $4 and $29 for the year ended
years ended December 31, 2023 and 2022, respectively.
Loss and loss expenses (benefit) for 2023, was largely driven by
RMBS recoveries and favorable development related to student
loans, partially offset by the negative impact of discount rates on
the RMBS portfolio. Changes in RMBS recoveries impacting
loss and loss expenses can be volatile and therefore each period's
results are not indicative of potential future results.
Losses and loss expenses (benefit) for 2022, were driven by
favorable RMBS development due to the impact of the
settlement agreements with the BOA Parties and Nomura of
$123, the positive impact of discount rates, and favorable loss
development in domestic public finance (primarily due to the
Puerto Rico restructurings of $180).
G&A Expenses. The increase in Legacy Financial Guarantee
Insurance segment operating expenses during the year ended
December 31, 2023, as compared to the year ended December
31, 2022, is driven primarily by additional costs related to
defensive litigation, partially offset by the impact of headcount
and other cost reductions in the segment.
Amortization of deferred acquisition costs, net
General and administrative expenses
Net (gain) loss attributable to noncontrolling
interest
EBITDA
Pretax income (loss)
Loss and LAE Ratio
Combined Ratio
Ambac's stockholders equity (1)
$
122
$
110
(1) Represents Ambac stockholders equity in the Specialty Property
intercompany
Insurance
including
segment,
and Casualty
eliminations.
The Specialty Property and Casualty Insurance segment has
grown significantly since underwriting its first program in May
2021. Twenty-three programs were authorized to issue policies
as of December 31, 2023. The growth in both the number and
size of these programs has contributed to the increase in gross
and net premiums written, net premiums earned, net loss and
loss adjustment expenses incurred and amortization of deferred
acquisition costs.
2023
2022
$
$
$
273
80
52
4
—
8
64
37
11
16
—
—
—
$
$
$
$
146
29
14
2
—
3
18
9
3
13
—
(6)
(6)
70.7 %
106.5 %
65.4 %
156.5 %
Ambac Financial Group, Inc
42
2023 Form 10-K
Losses and Loss Adjustment Expenses (Benefit). Loss
and loss expenses incurred increased for the year ended
December 31, 2023, relative to the year ended December 31,
2022, primarily due to the growth and diversification of the
business. Everspan's loss ratio (including ULAE) was 70.7%
and 65.4% for the years ended December 31, 2023 and 2022,
respectively, inclusive of prior years development of 0.3% and
0.2%, respectively. The shift in the loss ratio was driven by
commercial auto loss experience in the current accident year and
diversification, primarily due to the addition of personal auto
and workers compensation programs
through assumed
reinsurance. Everspan's loss ratio may shift as the inforce book
of business grows and diversifies. The increase in the Loss and
LAE ratio for the year ended December 31, 2023, compared to
December 31, 2022, was partially offset by a benefit to
acquisition costs as a result of sliding scale commission
arrangements with program partners. Such benefit reduced the
Specialty Property and Casualty Insurance segments expense
ratio by 3.2% and 1.3% for the years ended December 31, 2023
and 2022, respectively. Certain Everspan programs were
structured to include sliding scale commission arrangements
within a loss ratio range. These sliding scale arrangements
mitigate net income volatility.
increasing economic and social
Loss and loss adjustment expenses incurred may be adversely
inflation,
impacted by
particularly within the commercial auto business. The impact of
inflation on ultimate loss reserves is difficult to estimate,
particularly in light of recent disruptions to the judicial system,
supply chain and labor markets. In addition, going forward, we
may not be able to offset the impact of inflation on our loss costs
with sufficient price increases. The estimation of loss reserves
may also be more difficult during extreme events, such as a
pandemic, or during the persistence of volatile or uncertain
economic conditions, due to, amongst other reasons, unexpected
changes in behavior of judicial decisions, claimants and
policyholders, including fraudulent reporting of exposures and/
or losses. Due to the inherent uncertainty underlying loss reserve
estimates, the final resolution of the estimated liability for loss
and loss adjustment expenses will likely be higher or lower than
the related loss reserves at the reporting date. In addition, our
estimate of losses and loss expenses may change. These
additional liabilities or increases in estimates, or a range of
either, could vary significantly from period to period.
G&A Expenses. General and administrative costs increased
for the year ended December 31, 2023, relative to the year ended
December 31, 2022, primarily resulting from the growth in
Everspan's staffing and operations. The impact of growing
operations was muted by costs incurred in 2022 in connection
with the acquisition of additional shell insurance companies.
Insurance Distribution
Year Ended December 31,
Premiums placed
Commission income
Commission expense
Net commissions
Expenses:
General and administrative expenses
EBITDA
Depreciation (1)
Intangible amortization
Pretax income (loss)
Ambac's stockholders equity (2)
2023
2022
231 $
135
51 $
29
22
11
11
—
4
7 $
105 $
31
18
13
6
7
—
3
5
93
$
$
$
$
(1) The Consolidated Statements of Comprehensive Income includes
this in General and Administrative Expenses.
(2) Represents the share of Ambac stockholders equity for each
subsidiary within the Insurance Distribution segment, including
intercompany eliminations.
Ambac's
Insurance Distribution segment, Cirrata Group
"Cirrata", currently includes Xchange Benefits, a P&C MGA
specializing in accident and health products; All Trans, an MGA
specializing in commercial automobile insurance for specific
"for-hire" auto classes; Capacity Marine, a wholesale and retail
brokerage and reinsurance intermediary specializing in marine
and international risk; and Riverton Insurance Agency, an
insurance services business specializing in professional liability
lines and consisting of a MGA and a retail agency. The
Insurance Distribution business is typically compensated for its
services primarily by commissions paid by insurance carriers for
underwriting, structuring and/or administering polices and, in
some cases, the managing of claims under an agency agreement.
Commission revenues are usually based on a percentage of the
premiums placed. Cirrata is also eligible to receive profit sharing
contingent commissions on certain of its programs based on the
underwriting results of the policies it places with the carrier,
which may cause some variability in revenue and earnings.
for
Cirrata business placed premiums
its carriers of
approximately $231 for the year ended December 31, 2023, up
$95 or 70% as compared to the year ended December 31, 2022.
The growth was primarily driven by (i) premiums placed by All
Trans and Capacity Marine since their acquisition in November
2022; (ii) premiums placed by Riverton since its acquisition in
August 2023 and (iii) organic growth at Xchange of
approximately 10%.
Insurance Distribution businesses may experience seasonal
impacts on their revenues and operations. For example,
Employer Stop Loss business underwritten by Xchange has
seasonality in January and July, which results in revenue and
earnings concentrations in the first and third quarters each
calendar year. Seasonal impacts on the Insurance Distribution
segment, and therefore Ambac's results, may increase or
decrease over time depending on the relative growth of certain
classes of business as well as acquisitions.
Ambac Financial Group, Inc
43
2023 Form 10-K
G&A Expenses. General and Administrative expenses for the
year ended December 31, 2023, increased as compared to the
year ended December 31, 2022, as a result of the addition of the
operating expenses of All Trans, Capacity Marine and Riverton,
which were acquired in November 2022, November 2022, and
August 2023, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Holding Company Liquidity
AFG is organized as a legal entity separate and distinct from its
operating subsidiaries. AFG is a holding company with no
outstanding debt. AFG’s liquidity is primarily dependent on its
net assets, excluding the operating subsidiaries that it owns,
totaling $211 as of December 31, 2023, and secondarily on
distributions and expense sharing payments from its operating
subsidiaries.
• 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 per year to cover expenses
not otherwise reimbursed. The $4 reimbursement for 2022
expenses was approved by OCI and paid to AFG in March
2023.
• Substantial uncertainty remains as to AAC's ability to pay
dividends to AFG and the timing of any such dividends.
• Everspan's ability to make future dividend payments will
mostly depend on its future profitability relative to its
capital needs to support growth. Everspan is not expected
to pay dividends in the near term.
• Cirrata does not have any regulatory restrictions on its
ability to make distributions. AFG received distributions
from Cirrata of $8 and $6 during the years ended December
31, 2023 and 2022.
AFG's principal uses of liquidity are: (i) the payment of
operating expenses, including costs to explore opportunities to
grow and diversify Ambac, (ii) the making of strategic
investments, which may include illiquid investments and (iii)
making capital investments to acquire, grow and/or capitalize
new and/or existing businesses; such capital investments include
investments in technology to support the efficient operation of
our Specialty Property and Casualty Insurance and Insurance
Distribution businesses. AFG may also provide short-term
financial support, primarily in the form of loans, to its operating
subsidiaries to support their operating requirements. AFG
supported the development of the Specialty Property and
Casualty Insurance business, and its acquisitions, with cash
contributions of $6 and $14 to the Everspan group of companies
during
the years ended December 31, 2023 and 2022,
respectively.
In the opinion of the Company’s management, the net assets of
AFG are currently sufficient to meet AFG’s current liquidity
requirements. However, events, opportunities or circumstances
could arise that may cause AFG to seek additional capital (e.g.
through the issuance of debt, equity or hybrid securities).
Operating Companies' Liquidity
Insurance:
Sources of liquidity for the Company’s insurance subsidiaries
are through funds generated from premiums, recoveries of prior
claim payments, reinsurance recoveries, fees, investment income
and maturities and sales of investments.
• See Note 7. Insurance Contracts to the Consolidated
Financial Statements included in Part II, Item 8, in this
Annual Report on Form 10-K for a summary of future
gross financial guarantee premiums to be collected by AAC
and Ambac UK under existing
insurance policies.
Termination of
financial guarantee policies on an
accelerated basis may adversely impact AAC’s liquidity.
Cash provided from these sources is used primarily for claim
payments and commutations, loss expenses, acquisition costs
(Specialty Property and Casualty Insurance segment only), debt
service (Legacy Financial Guarantee Insurance segment only),
operating expenses, reinsurance payments and purchases of
securities and other investments.
• Interest and principal payments on AAC surplus notes are
subject to the approval of OCI, which has full discretion
over payments regardless of the liquidity position of AAC.
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, 2023. Current principal outstanding on AAC's
long-term debt consisted of $519 of surplus notes. AAC's
future interest obligations on long-term debt include $475
of accrued and unpaid interest.
• AFS provided
to
interest
rate derivatives
financial
guarantee customers and used derivatives to provide a
partial hedge against interest rate risk in AAC's insurance
and investment portfolios. Since June 30, 2023, AFS' only
remaining derivative positions include a limited number of
legacy customer swaps and their associated hedges. AAC
lends AFS cash and securities 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.
Insurance subsidiaries manage their liquidity risk by maintaining
comprehensive analyses of projected cash flows and maintaining
specified levels of cash and short-term investments at all times.
It is the opinion of the Company’s management that the
insurance subsidiaries’ near term liquidity needs will be
adequately met from the sources described above.
Insurance Distribution:
The
liquidity requirements of our Insurance Distribution
subsidiaries are met primarily by funds generated from
commission receipts (both base and profit commissions). Base
commissions are generally received monthly, whereas profit
commissions are received only if the business underwritten is
profitable. Cash provided from these sources is used primarily
Ambac Financial Group, Inc
44
2023 Form 10-K
for commissions paid to sub-producers, operating expenses and
distributions to AFG and other members.
Consolidated Cash Flow Statement Discussion
The following table summarizes the net cash flows for the
periods presented.
Year Ended December 31,
2023
2022
2021
Cash provided by (used in):
Operating activities
$
Investing activities
Financing activities (1)
Effect of foreign exchange on
cash and cash equivalents
200
435
$
1,335
$
866
(423)
(2,163)
1
(1)
Net cash flow
$
213
$
38
$
(131)
776
(657)
—
(12)
(1) Because the trusts established under the Puerto Rico restructurings
are consolidated VIEs, certain payments made by AAC to
accelerate AAC-insured bonds that were deposited into the trusts
are reflected as payments of VIE liabilities within financing
activities. Cash used in financing activities includes $113 and
$311 from such AAC payments for the years ended December 31,
2023 and 2022, respectively.
Operating activities
The following represents the significant cash operating activities
during the years ended December 31, 2023 and 2022:
• Cash provided by (i) gross premiums (net of commissions)
were $209 and $139 for the years ended December 31,
2023 and 2022, respectively; (ii) non-VIE interest rate
derivatives were $22 and $84 for the years ended
December 31, 2023 and 2022, respectively; (iii) non-VIE
investment portfolio income was $96 and $82 for the years
ended December 31, 2023 and 2022, respectively; and (iv)
cash settlements from
the Puerto Rico restructuring
transactions to the consolidated trusts were $47 for the year
ended December 31, 2022.
• Payments for accreted interest on redemption of the Tier 2
Notes were $50 for the year ended December 31, 2023.
interest on
Payments for debt service and accreted
redemptions and debt repurchases of the Sitka AAC Note,
Tier 2 Notes and Surplus Notes were $59, $70 and $154,
respectively, for the year ended December 31, 2022.
• Payments related to (i) operating expenses were $120 and
$94 for the years ended December 31, 2023 and 2022,
respectively; (ii) reinsurance premiums paid (net of
commissions) were $137 and $66 for the years ended
December 31, 2023 and 2022, respectively; and (iii) VIE
the year ended
derivative payments were $326 for
December 31, 2022.
• Fraud litigation recoveries of $126 allocated from the BOA
Settlement Payment.
• Net Legacy Financial Guarantee Insurance loss and loss
adjustment
including
paid
commutation payments, during the years ended December
31, 2023 and 2022 are detailed below:
(recovered),
expenses
Year Ended December 31,
Net losses paid
Net subrogation received (1)
Net loss expenses paid
Net cash flow
2023
2022
$
30 $
298
(232)
(1,951)
8
48
$
(194) $
(1,605)
(1)
2023 includes Nomura R&W settlement proceeds of $140. 2022
includes the majority of the recoveries from the BOA Settlement
Payment except for the portion allocated to fraud litigation
recoveries.
Future operating cash flows will primarily be impacted by net
premium collections, investment coupon receipts, fee and net
commission revenues, operating expenses, net claim and loss
expense payments and debt interest payments.
Financing Activities
Financing activities for the year ended December 31, 2023,
included payments for the redemption of Tier 2 Notes of $97,
share repurchases of $5 and paydowns and maturities of VIE
debt obligations of $315.
Financing activities for the year ended December 31, 2022,
included payments for repurchase of surplus notes of $191,
redemption of the Sitka AAC Note of $1,210, partial redemption
of Tier 2 Notes of $143, share repurchases of $14, repurchases
of auction market preferred shares of $8 and paydowns and
maturities of VIE debt obligations of $591 (including payments
for the accelerations of the VIE trusts created from the Puerto
Rico restructuring).
Collateral
Insurance segment and
AFS hedged a portion of the interest rate risk in the Legacy
Financial Guarantee
investment
portfolios, along with legacy customer interest rate swaps, with
standardized derivative contracts which contain collateral or
margin requirements. Since the second quarter of 2023, AFS's
only remaining derivative positions include a limited number of
legacy customer swaps and their associated hedges. Under these
hedge agreements, AFS is required to post collateral in excess of
the derivative unrealized loss amount. All AFS derivative
contracts containing ratings-based downgrade triggers that could
result in collateral posting or termination have been triggered.
AFS may look to re-establish hedge positions that are terminated
early, resulting in additional collateral obligations. The amount
of additional collateral 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 posted by AFS totaled $50 (cash of $23 and securities
at fair value of $27), including independent amounts, under
these contracts at December 31, 2023.
BALANCE SHEET
Total assets increased by approximately $456 from December
31, 2022 to $8,428 at December 31, 2023, primarily due to (i)
the increase in asset values of VIEs, driven by a new VIE
consolidated in the fourth quarter of 2023 and the weakening of
the US dollar against the British Pound Sterling and (ii) the
impact on premium receivables, reinsurance recoverables and
Ambac Financial Group, Inc
45
2023 Form 10-K
deferred ceded premiums from growth in the Specialty Property
and Casualty Insurance business.
liabilities
increased by approximately $349
Total
from
December 31, 2022, to $6,997 as of December 31, 2023,
primarily due to (i) increases in the value of VIEs liabilities
based on consistent factors as noted above in assets, and (ii)
higher unearned premiums and ceded premiums payable from
the growth in the Specialty Property and Casualty Insurance
business, partially offset by the reduction in long-term debt that
was fully redeemed on January 15, 2023, primarily from the
Nomura Settlement Payment as more fully described in Note 1.
Background and Business Description to the Consolidated
Financial Statements in this Annual Report on Form 10-K
located in Part II. Item 8.
As of December 31, 2023, total stockholders’ equity was
$1,415, compared with total stockholders’ equity of $1,305 at
December 31, 2022. This increase was primarily due to a Total
Comprehensive Income during 2023 primarily driven by the net
income attributable to common stockholders for the year ended
Investment Portfolio
December 31, 2023 of $4, unrealized gains on investments of
$51 and translation gains on the consolidation of AFG's foreign
subsidiaries.of $40.
Ambac's investment portfolio is managed under established
guidelines designed to meet the investment objectives of AAC,
Everspan, 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 4. Investments to the Consolidated Financial
Statements in this Annual Report on Form 10-K located in Part
information about Ambac's consolidated
II. Item 8 for
investment portfolio. Ambac's
investment policies and
objectives do not apply to the assets of VIEs consolidated as a
result of
insurance
subsidiaries.
financial guarantees written by
its
The following table summarizes the composition of Ambac’s investment portfolio, excluding VIE investments, at carrying value at
December 31, 2023 and 2022:
December 31, 2023
December 31, 2022
Legacy
Financial
Guarantee
Insurance
Specialty
Property &
Casualty
Insurance
Insurance
Distribution
Corporate
& Other
Consolidated
Legacy
Financial
Guarantee
Insurance
Specialty
Property &
Casualty
Insurance
Insurance
Distribution
Corporate
& Other
$
12
—
175
16
—
—
—
—
—
—
—
Consolidated
$
1,395
59
507
568
64
2,593
Fixed maturity securities
$
1,575
$
121
$
27
225
457
27
—
41
—
—
$
—
—
4
—
—
14
—
156
18
—
$
1,710
$
1,281
$
102
$
27
426
475
27
59
303
552
64
—
29
—
—
Fixed maturity securities - trading
Short-term
Other investments
Fixed maturity securities pledged as
collateral
Total investments (1)
$
2,310
$
162
$
4
$
188
$
2,664
$
2,259
$
131
$
$
203
$
(1)
Includes investments denominated in non-US dollar currencies with a fair value of £342 ($436) and €25 ($27) as of December 31, 2023 and £296
($357) and €39 ($42) as of December 31, 2022.
Ambac invests in various asset classes in its fixed maturity securities portfolio. Other investments include diversified equity interests in
pooled funds. Refer to Note 4. Investments to the Consolidated Financial Statements 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.
Ambac Financial Group, Inc
46
2023 Form 10-K
The following charts provide the ratings(1) distribution of the
fixed maturity investment portfolio based on fair value at
December 31, 2023 and 2022.
Insurance and Specialty Property and Casualty Insurance
premiums receivables were $244 and $46, respectively.
Premium receivables by payment currency were as follows:
BIG (2)
18%
BBB
16%
December 31, 2023
NR (2)
8%
AAA
23%
AA
18%
A
17%
December 31, 2022
BIG (2)
15%
BBB
14%
NR (2)
9%
A
15%
AAA
28%
AA
19%
(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 21% and 19% of the 2023 and 2022 combined fixed
maturity investment portfolios, respectively. The increase is
primarily due to purchases of insured Student Loan bonds.
Ambac's premium receivables
Premium Receivables.
increased to $290 at December 31, 2023, from $269 at
December 31, 2022. As further discussed in Note 7. Insurance
Contracts to the Consolidated Financial Statements, in this
Annual Report Form 10-K located in Part II. Item 8, the increase
is primarily due to growth in the Specialty Property and
Casualty Insurance Segment, including receivables related to a
workers compensation program where Everspan participates as a
reinsurer. At December 31, 2023, Legacy Financial Guarantee
Currency
(Amounts in millions)
U.S. Dollars
British Pounds
Euros
Total
Premium
Receivable in
Payment
Currency
Premium
Receivable in
U.S. dollars
$
£
€
204
$
57
12
$
204
72
13
290
Reinsurance Recoverable on Paid and Unpaid Losses.
Ambac has reinsurance in place pursuant to quota share, surplus
share treaty and facultative agreements. To minimize its
exposure to losses from reinsurers, Ambac (i) monitors the
financial condition of its reinsurers; (ii) is entitled to receive
collateral from its reinsurance counterparties under certain
reinsurance contracts; and (iii) has certain cancellation rights
that can be exercised in the event of rating agency downgrades
of a reinsurer (among other events and circumstances). For those
reinsurance counterparties that do not currently post collateral,
Ambac’s reinsurers are well capitalized, highly rated, authorized
capacity providers. Ambac benefited from letters of credit and
collateral amounting to approximately $131 from its reinsurers
at December 31, 2023.
As of December 31, 2023 and 2022, reinsurance recoverable on
paid and unpaid losses were $195 and $115, respectively.
Specialty Property and Casualty Insurance amounted to $165
and $82 at December 31, 2023 and 2022, respectively; increase
driven largely from growth of the business. Legacy Financial
Guarantee Insurance amounted to $30 and $33 at December 31,
2023 and 2022, respectively.
Intangible Assets. Intangible assets includes (i) an insurance
intangible asset that was established at AFG's emergence from
bankruptcy in 2013, representing the difference between the fair
value and aggregate carrying value of the financial guarantee
insurance and reinsurance assets and liabilities; (ii) intangible
assets established as part of the acquisition of Xchange in 2020,
All Trans and Capacity Marine in 2022, and Riverton in 2023;
and (iii) indefinite-lived intangible assets established as part of
the acquisition of admitted carriers in both 2021 and 2022.
As of December 31, 2023 and 2022, the net intangible asset was
$307 and $326, respectively. The decline is driven by
amortization; partially offset by translation gains from the
consolidation of Ambac's foreign subsidiary (Ambac UK) and
established intangibles from the acquisition of Riverton.
Ambac Financial Group, Inc
47
2023 Form 10-K
issued
policies
Loss and Loss Adjustment Expense Reserves and
Subrogation Recoverable.
Loss and loss adjustment
expense reserves are based upon estimates of the ultimate
aggregate losses inherent in the non-derivative portfolio for
insurance
including
unconsolidated VIEs. The evaluation process for determining
the level of reserves is subject to certain estimates and
judgments. Refer to the "Critical Accounting Policies and
Estimates"
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
“Results of Operations”
beneficiaries,
and
to
included in Note 2. Basis of Presentation and Significant
Insurance Contracts,
Accounting Policies and Note 7.
respectively, to 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 adjustment expenses.
loss and
recoverables and before
loss adjustment expense reserves net of
The
subrogation
reinsurance as of
December 31, 2023 and 2022 were $756 and $534, respectively.
Loss and loss adjustment expense reserves are included in the
Consolidated Balance Sheets as follows:
Specialty
Property
and
Casualty
Gross Loss
and Loss
Expense
Reserves
December 31, 2023:
Legacy Financial Guarantee
Present Value of Expected
Net Cash Flows
Claims and
Loss
Expenses
Recoveries
Unearned
Premium
Revenue
Gross Loss
and Loss
Expense
Reserves (2)
Specialty
Property
and
Casualty
Gross Loss
and Loss
Expense
Reserves
December 31, 2022:
Legacy Financial Guarantee
Present Value of Expected
Net Cash Flows
Claims and
Loss
Expenses
Recoveries
Unearned
Premium
Revenue
Gross Loss
and Loss
Expense
Reserves (2)
Balance Sheet Line Item
Loss and loss adjustment expense reserves
Subrogation recoverable
Totals
$
$
197
$
779
$
(55) $
(28) $
893
$
—
1
(139)
—
(137)
197
$
780
$
(194) $
(28) $
756
$
90
—
90
$
$
787
$
(44) $
(28) $
5
(276)
—
791
$
(319) $
(28) $
805
(271)
534
Legacy Financial Guarantee Insurance. Ambac has exposure to various bond types issued in the debt capital markets. The bond
types that have experienced the most significant claims, including through commutations, are RMBS, student loan securities and public
finance securities. These bond types represent 91% of our ever-to-date insurance claims recorded with RMBS comprising 61%.
The table below indicates gross par outstanding and the components of gross loss and loss adjustment expense reserves related to policies
in Ambac’s gross loss and loss adjustment expense reserves at December 31, 2023 and 2022:
December 31, 2023:
Present Value of Expected
Net Cash Flows
Gross Par
Outstanding
(1)
Claims and
Loss
Expenses
Recoveries
Unearned
Premium
Revenue
Gross Loss
and Loss
Expense
Reserves
(1)(2)
December 31, 2022:
Present Value of Expected
Net Cash Flows
Gross Par
Outstanding
(1)
Claims and
Loss
Expenses
Recoveries
Unearned
Premium
Revenue
Gross Loss
and Loss
Expense
Reserves
(1)(2)
$
1,860
$
679
$
(172) $
(10) $
497
$
2,050
$
664
$
(296) $
(10) $
834
1,144
—
82
15
4
(8)
(13)
—
(8)
(10)
—
66
(8)
4
1,215
782
—
96
23
8
(11)
(12)
—
(10)
(8)
—
358
75
3
8
$
3,838
$
780
$
(194) $
(28) $
559
$
4,047
$
791
$
(319) $
(28) $
444
($ in millions)
Structured Finance
Domestic Public Finance
Other
Loss expenses
Totals
(1) Ceded par outstanding on policies with loss reserves and ceded loss and loss adjustment expense reserves were $362 and $30, respectively, at
December 31, 2023 and $472 and $33, respectively at December 31, 2022. Ceded loss and loss adjustment expense reserves are included in
Reinsurance recoverable on paid and unpaid losses.
(2) Loss reserves are included in the balance sheet as loss and loss adjustment expense reserves or Subrogation recoverable dependent on if a policy is in a
net liability or net recoverable position.
The table below reflects the timing of expected financial guarantee claim payments based on policy specific probability weighted cash
flows, excluding expected recoveries. These deal specific cash flows are based on the expected cash flows of the underlying transactions
with the majority of these payments expected at or close to the final maturity of the related insurance policy. The timing of expected claim
payments for credits with reserves that were established using our statistical loss reserve method is determined based on the weighted
average expected life of the exposure. Refer to the Loss Reserves section in Note 2. Basis of Presentation and Significant Accounting
Policies to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K for further discussion of
our statistical loss reserve method. The timing of these payments may vary significantly from the amounts shown below, especially for
credits that are based on our statistical loss reserve method.
($ in millions)
Claim payments
Payments Due by Period
Total
Less Than
1 Year
1 - 3 Years
3 - 5 Years
More Than
5 Years
$
1,202
$
93
$
51
$
42
$
1,016
Ambac Financial Group, Inc
48
2023 Form 10-K
Variability of Expected Losses and Recoveries
Ambac’s management believes loss reserves (present value of
expected cash flows, net of recoveries) are adequate to cover
future claim payments, but there can be no assurance that the
ultimate liability will not be higher than such estimates.
While our loss reserves reflect 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. Accordingly, it is
possible that our estimated loss reserves, gross of reinsurance,
for financial guarantee insurance policies could be understated.
We have attempted to identify possible cash flows related to
losses and recoveries using more stressful assumptions than 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, 2023, 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 in this Annual Report on Form 10-K as well
as the descriptions of variability in "Structured Finance," "Public
Finance," and "Other Credits, including Ambac UK," below 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, particularly
its outstanding surplus note and
preferred stock 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.
Structured Finance
RMBS:
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 general effect of a
weakened economy characterized by growing unemployment
and wage pressures. During the first quarter of 2023, Ambac
revised the model it uses to project RMBS collateral losses
considering
the seasoning of our RMBS exposure and
management’s view that the most relevant determinant of
prospective collateral performance is borrower payment status.
Individual home price appreciation/depreciation has become a
less critical determinant of performance considering the general
appreciation in home values over the past few years as well as
the impact of loan modifications. The average estimated loan-
to-values of the collateral related to insured exposures have
declined to under 50% from peaks above 110%. Projected
losses in our RMBS exposures and related loss reserves, may
increase or decrease in the future. Possible stress case losses
assume higher default
lower
prepayments.
loss severities and
rates,
Student Loans:
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 economic impact from
public health crises and/or natural or other catastrophic
events. Such factors may also 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. During the second quarter
of 2023, we revised our approach to projecting future defaults to
reflect the student loan collateral's seasoning.
Structured Finance Variability:
Using the approaches described above, the possible increase in
loss reserves for structured finance credits for which we have an
estimate of expected loss at December 31, 2023, could be
approximately $55. Due to the uncertainties related to risks
associated with structured finance credits, there can be no
assurance that losses may not exceed our stress case estimates.
Public Finance
Ambac’s U.S. public finance portfolio consists 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 transactions with public and
private elements, which generally finance infrastructure, housing
and other public purpose facilities and interests, the largest
sector of which is U.S. military housing.
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 because of the local, regional or national economic
impact of public health crises and/or natural or other
catastrophic events, or the impact of political changes or
governmental decisions.
Our experience with the city of Detroit's bankruptcy and
Commonwealth of Puerto Rico's Title III proceedings as well as
other municipal bankruptcies demonstrates the preferential
treatment of certain creditor classes, especially 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 exposure, such as Chicago's school
district, the State of New Jersey and 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 are generally
considered more secure municipal financings, such as dedicated
Ambac Financial Group, Inc
49
2023 Form 10-K
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. Moreover, issuers in Chapter 9 or
similar proceedings may obtain judicial rulings and orders that
impair creditors' rights or their ability to collect on amounts
owed. In certain cases, judicial decisions may be contrary to
AAC's expectations or understanding of the law or its rights
thereunder, which may lead to worse outcomes in Chapter 9 or
similar proceedings than anticipated at the outset.
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 could deprive
issuers access to funding at a level necessary to avoid defaulting
on their obligations.
For the public finance credits for which we have an estimate of
expected loss at December 31, 2023, the sum of all the highest
stress case loss scenarios is $125 and there can be no assurance
that losses may not exceed such amounts.
Other Credits, including Ambac UK
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 $330
greater than the loss reserves at December 31, 2023. There can
be no assurance that losses may not exceed our stress case
estimates.
Long-term Debt. The carrying value of each of these as of
December 31, 2023 and 2022 is below:
December 31,
Surplus Notes
Tier 2 Notes
Ambac UK Debt
Total Long-term Debt
Accrued Interest Payable
Total
2023
2022
$
491
$
—
17
508
475
983
$
477
146
16
639
427
$
1,065
to
The decrease in long-term debt, including accrued interest
payable, from December 31, 2022 resulted primarily from the
full redemption of the Tier 2 Notes in 2023, described further in
Note 1. Background and Business Description
the
Consolidated Financial Statements, included in this Annual
Report on Form 10-K, partially offset by the accrual of interest
on the surplus notes and Ambac UK debt. In May 2023, OCI
declined the request of AAC to pay the principal amount of the
surplus notes, plus all accrued and unpaid interest thereon, on
the then next scheduled payment date of June 7, 2023. As a
result, the scheduled payment date for interest, and the
scheduled maturity date for payment of principal of the surplus
notes was 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 enforce the payment of the principal of, or
interest on, surplus notes in the absence of OCI approval to pay
such amount.
Redeemable Noncontrolling Interest.
The decrease
during 2023 was the result the remeasurement of the redemption
value of put options provided
to minority owners
(noncontrolling interest holders) of Cirrata entities acquired as if
the put was exercised on December 31, 2023, partially offset by
new put options issued during the acquisition of Riverton during
2023. No put options are exercisable at December 31, 2023.
ACCOUNTING STANDARDS
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
a discussion of the impact of recent accounting pronouncements
on Ambac’s financial condition and results of operations.
U.S. STATUTORY BASIS FINANCIAL RESULTS
AFG's U.S. insurance subsidiaries prepare financial statements
under accounting practices prescribed or permitted by its
domiciliary state regulator (“SAP”) for determining and
reporting the financial condition and results of operations of an
insurance company. The National Association of Insurance
Commissioners (“NAIC”) Accounting Practices and Procedures
manual (“NAIC SAP”) is adopted as a component of prescribed
practices by each domiciliary state. For further information, see
Note 8. Insurance Regulatory Restrictions to the Consolidated
Financial Statements included in Part II, Item 8 in this Annual
Report Form 10-K.
Ambac Assurance Corporation
AAC’s statutory policyholder surplus and qualified statutory
capital (defined as the sum of policyholders surplus and
Ambac Financial Group, Inc
50
2023 Form 10-K
mandatory contingency reserves) were $897 and $1,201,
respectively, at December 31, 2023, as compared to $598 and
$1,191, respectively, at December 31, 2022. As of December
31, 2023, statutory policyholder surplus and qualified statutory
capital included $519 principal balance of surplus notes
outstanding and $115 liquidation preference of preferred stock
outstanding. These surplus notes (including related accrued
interest of $475 that is not recorded under statutory basis
accounting principles); preferred stock; and all other liabilities,
including insurance claims are obligations that, individually and
collectively, have claims on the resources of AAC that are
senior to AFG's equity and therefore impede AFG's ability to
realize residual value and/or receive dividends from AAC.
The significant drivers to the net increase in policyholder
surplus of $301 during 2023 was a reduction to contingency
reserves of $290 and investment valuation changes that are
direct charges to surplus of $10. The decline in contingency
reserves was the result of the release of excess contingency
reserves (which was approved by OCI) of $298.
insured obligations, which
AAC's statutory surplus, and therefore AFG's ultimate ability to
realize residual value and/or dividends from AAC, is sensitive to
multiple factors, including: (i) loss reserve development, (ii)
timing of surplus note payments, (iii) ongoing interest costs
associated with surplus notes, (iv) swap gains and losses at AFS,
the financial position of which is supported by certain
guarantees and financing arrangements from AAC, (v) first time
payment defaults of
increase
statutory loss reserves, (vi) commutations of insurance policies
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 fair value, (ix)
realized gains and losses, including losses arising from other
than temporary impairments of investment securities, (x) the
ultimate residual value of Ambac UK, which is currently a non-
admitted asset under SAP and may be impacted by numerous
factors including foreign exchange rates, and (xi) future changes
to prescribed practices by the OCI.
The significant differences between GAAP and SAP are that
under SAP:
• Under SAP, loss reserves are only established for losses on
guaranteed obligations that have experienced a payment
default. Loss reserves are 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 (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 3.9%.
• 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.
• Majority 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. Ambac Assurance's cash loan to AFS is included on
the SAP balance sheet, net of an allowance
for
uncollectible amounts and changes in the allowance are
recognized through other income. Under GAAP, all inter-
company transactions are eliminated in consolidation.
• 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.
• Under SAP, 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. Under SAP,
the principal balance of surplus notes is included in surplus
whereas under GAAP surplus note principal is reported at
par, less unamortized discount within long-term debt. All
payments of principal and interest on surplus notes are
subject to the approval of the OCI.
• 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. Under GAAP, for installment premium
transactions, a premium receivable asset and offsetting
UPR liability are established in an amount equal to the
present value of future premiums to be collected over the
life of the transaction.
• Insurance
intangibles
that arose as a result of
the
implementation of Fresh Start reporting are 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.
• Unearned premiums and loss reserves are presented net of
ceded amounts, while under GAAP, they are reflected gross
of ceded amounts.
Ambac Financial Group, Inc
51
2023 Form 10-K
Everspan Indemnity Insurance Company
Indemnity
statutory
Everspan
policyholder surplus was $108 at December 31, 2023, as
compared to $107 at December 31, 2022.
Insurance Company’s
The significant changes to policyholder surplus for the year
ended December 31, 2023, were total capital contributions of
$7.3, offset by a net loss at Everspan Indemnity Insurance
Company, including its subsidiaries, of $7.1 during the year
ended December 31, 2023, primarily driven by G&A expenses
as the business continues to scale. Acquisition costs, primarily
commissions, are generally expensed immediately whereas the
related premium is recognized over the life of the policy.
The significant differences between GAAP and SAP are that
under SAP:
• 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.
• Majority owned subsidiaries are not consolidated; rather,
the equity basis of accounting is utilized and the carrying
values of these investments are subject to admissibility
Providence Washington Insurance Company's
tests.
("PWIC") and the 21st Century Companies' (as defined in
Note 7. Insurance Contracts in Part II, Item 8 in the
Consolidated Financial Statements included in this Annual
Report on Form 10-K) carrying values include a goodwill
component representing the acquisition cost in excess of
the related entity's statutory surplus. Goodwill is amortized
over ten years. Under GAAP, the initial acquisition of the
companies were recorded as asset acquisitions, which
required i) all net assets to initially be recorded at fair
value, and ii) the acquisition costs in excess of the fair
value of net assets to be allocated to the bases of certain
types of assets based on their relative fair values, if
applicable. Acquired assets include intangible assets with
indefinite lives. Such assets are not amortized but their
estimated useful lives are reevaluated each reporting
period. No goodwill is recorded for asset acquisitions.
• Acquisition costs and ceding commissions, other than
excess ceding commissions, are expensed or recognized at
the time of a transaction. Under GAAP, acquisition costs
and ceding commissions are deferred and recognized over
the life of the related transaction.
• Unearned premiums and loss reserves are presented net of
ceded amounts, while under GAAP, they are reflected gross
of ceded amounts.
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 £489 at December 31, 2023, as compared
to £468 at December 31, 2022. At December 31, 2023, the
carrying value of cash and investments was £535, an increase
from £508 at December 31, 2022. The increase in shareholder
funds and cash and investments was primarily due to the
continued receipt of premiums and investment income, and from
investment
foreign exchange gains within Ambac UK's
portfolio, partially offset by loss expenses, operating expenses
and tax payments.
The significant differences between US 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 for loss provisions 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, currently at 3.2%. The discount rate
used for estimated recoveries under subrogation rights is
reflective of the credit risk of the counterparty from which
subrogation will be received, currently 5.3%. Under U.S.
GAAP, loss reserves are established (net of US 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 3.9%.
• Investments in fixed maturity securities are stated at
amortized cost, subject
to an other-than-temporary
impairment evaluation. Under US GAAP, all fixed maturity
investments are reported at fair value.
• VIEs are not required to be assessed for consolidation.
Under US GAAP, as noted under U.S. 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 US 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. Under GAAP, for installment premium
transactions, a premium receivable asset and offsetting
UPR liability are established in an amount equal to the
present value of future premiums to be collected over the
life of the transaction.
• Insurance
intangibles
that arose as a result of
the
implementation of Fresh Start reporting are not a concept
within UK GAAP. Under US GAAP, this insurance
intangible asset is amortized as an expense on a level yield
basis over the life of the related insurance risks.
• Unearned premiums and loss reserves are presented net of
ceded amounts, while under GAAP, they are reflected gross
of ceded amounts.
Ambac Financial Group, Inc
52
2023 Form 10-K
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.
Available and eligible capital resources under Solvency II, to
meet solvency capital requirements, were £430 at December 31,
2023. This is an increase from December 31, 2022, when
available and eligible capital resources to meet solvency capital
requirements were £338. Eligible capital resources at December
31, 2023 and December 31, 2022, are in comparison to
regulatory capital requirements of £220 and £213, respectively.
Therefore, Ambac UK was in a surplus position in terms of
compliance with applicable regulatory capital requirements by
£210 at December 31, 2023, and was in a surplus position by
£125 at December 31, 2022. The surplus increased as of
December 31, 2023, due to the combined impact of (i) a
decrease in technical provision liabilities and hence an increase
in eligible own funds due to regulatory changes which came into
effect in December 2023 and (ii) an increase in eligible own
funds from the increase in investments over the year.
Final annual Solvency II data and Ambac UK's annual Solvency
and Financial Condition Report will be published on Ambac's
website in April 2023.
NON-GAAP FINANCIAL MEASURES
In addition to reporting the Company’s quarterly financial
results in accordance with GAAP, the Company is reporting
non-GAAP financial measures: EBITDA, Adjusted Net Income
and Adjusted Book Value. These amounts are derived from our
consolidated financial information, but are not presented in our
consolidated financial statements prepared in accordance with
GAAP.
into
We present non-GAAP supplemental financial information
because we believe such information is of interest to the
investment community, and that it provides greater transparency
and enhanced visibility
the underlying drivers and
performance of our businesses on a basis that may not be
otherwise apparent on a GAAP basis. We view these non-GAAP
financial measures as important indicators when assessing and
evaluating our performance on a segmented and consolidated
basis and they are presented to improve the comparability of our
results between periods by eliminating the impact of the items
that may not be representative of our core operating
performance. These non-GAAP financial measures 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.
Beginning January 1, 2023, Ambac replaced the non-GAAP
measure Adjusted Earnings with a new non-GAAP measure
Adjusted Net Income to better align with other participants in
the Property & Casualty insurance industry, including insurance
carriers and other peers in the insurance distribution business.
We are presenting Adjusted Net Income for the current and prior
periods contained within this Form 10-K so this non-GAAP
financial measure compares both periods on the same basis.
The following paragraphs define each non-GAAP financial
measure. A tabular reconciliation of the non-GAAP financial
measure and the most comparable GAAP financial measure is
also presented below.
EBITDA — We define EBITDA as net income (loss) before
interest expense, income taxes, depreciation and amortization of
intangible assets.
Ambac Financial Group, Inc
53
2023 Form 10-K
Year Ended December 31, 2023
Net income (loss)
Adjustments:
Interest expense
Income taxes
Depreciation
Amortization of intangible assets
EBITDA (1)
Year Ended December 31, 2022
Net income (loss)
Adjustments:
Interest expense
Income taxes
Depreciation
Amortization of intangible assets
EBITDA (1)
Year Ended December 31, 2021
Net income (loss)
Adjustments:
Interest expense
Income taxes
Depreciation
Amortization of intangible assets
EBITDA (1)
Legacy Financial
Guarantee
Insurance
Specialty
Property and
Casualty
Insurance
Insurance
Distribution
Corporate &
Other
Consolidated
$
9
$
—
$
7
$
(11)
$
64
8
1
25
107
$
—
—
—
—
—
$
—
—
—
4
11
—
(1)
—
—
$
(12)
$
537
$
(6)
$
5
$
(13)
$
168
3
2
44
754
$
—
—
—
—
(6)
$
—
—
—
3
7
—
—
—
—
$
(14)
$
5
64
7
2
29
107
522
168
2
2
47
742
4
$
(8)
$
4
$
(17)
$
(16)
187
16
2
52
$
262
$
—
—
—
—
(8)
$
—
—
—
3
6
—
2
—
—
$
(15)
$
187
18
2
55
246
$
$
$
$
(1) EBITDA is prior to the impact of noncontrolling interests, and relates to subsidiaries where Ambac does not own 100% in the amounts of $2, $1 and $1
for the years ended December 31, 2023, 2022 and 2021, respectively. The noncontrolling interest are primarily in the Insurance Distribution segment.
Adjusted Net Income (Loss) — We define Adjusted Net Income
(Loss) as net income (loss) attributable to common stockholders
adjusted to reflect the following items: (i) net investment (gains)
losses, including impairments; (ii) amortization of intangible
assets; (iii) litigation costs, including attorneys fees and other
expenses to defend litigation against the Company, excluding
loss adjustment expenses; (iv) foreign exchange (gains) losses;
(v) workforce change costs, which primarily include severance
and other costs related to employee terminations; and (vi) net
(gain) loss on extinguishment of debt. Adjusted Net Income is
also adjusted for the effect of the above items on both income
taxes and noncontrolling interests. The income tax effects are
determined by applying the statutory tax rate in each jurisdiction
that generate these adjustments. The noncontrolling interest
adjustments relate to subsidiaries where Ambac does not own
100%
The following table reconciles net income attributable to common stockholders to the non-GAAP measure, Adjusted Net Income (Loss) on
a total dollar amount and per diluted share basis, for all periods presented:
($ in millions, except per share data)
Year Ended December 31,
$ Amount
Per Diluted
Share (1)
$ Amount
Per Diluted
Share (1)
$ Amount
Per Diluted
Share (1)
Net income (loss) attributable to common stockholders
$
4
$
0.18
$
522
$
11.31
$
(17) $
(0.61)
2023
2022
2021
Adjustments:
Net investment (gains) losses, including impairments
Intangible amortization
Litigation costs
Foreign exchange (gains) losses
Workforce change costs
Net (gain) loss on extinguishment of debt
Pretax adjusted net income (loss)
Income tax effects
Net (gains) attributable to noncontrolling interests
Adjusted Net Income (Loss)
22
29
41
(1)
1
—
96
(2)
(1)
0.49
0.62
0.87
(0.02)
0.02
—
2.16
(0.03)
(0.02)
(31)
(0.68)
47
33
3
1
(81)
494
2
(1)
1.01
0.71
0.06
0.03
(1.75)
10.69
0.04
(0.01)
(7)
55
7
3
1
(33)
9
(1)
(1)
$
93
$
2.11
$
495
$
10.72
$
7
$
(0.14)
1.19
0.15
0.06
0.01
(0.70)
(0.04)
(0.02)
(0.01)
(0.07)
Ambac Financial Group, Inc
54
2023 Form 10-K
(1) Per diluted share includes the impact of adjusting redeemable
noncontrolling interest to its redemption value.
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:
•
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
• Net unearned premiums and fees in excess of expected
losses: Addition of the value of the unearned premium
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. This adjustment is only made for financial
guarantee contracts since such premiums are non-
refundable.
• Net unrealized investment (gains) losses in Accumulated
the
Other Comprehensive
unrealized gains and losses on the Company’s investments
that are recorded as a component of accumulated other
comprehensive income (“AOCI”), net of income taxes.
Income: Elimination of
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, tax
planning strategies and other considerations, we utilized a 0%
effective tax rate for non-GAAP operating adjustments to
Adjusted Book.
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,
Total Ambac Financial Group, Inc. stockholders’ equity
Adjustments:
Insurance intangible asset
Net unearned premiums and fees in excess of expected losses
Net unrealized investment (gains) losses in Accumulated Other Comprehensive Income (Loss)
2023
2022
$ Amount
Per Share
$ Amount
Per Share
$
1,362
$
30.13
$
1,252
$
27.85
(245)
162
20
(5.43)
3.59
0.45
(266)
214
71
(5.91)
4.76
1.59
28.29
Adjusted Book Value
$
1,299
$
28.74
$
1,272
$
The increase in Adjusted Book was primarily attributable to
Ambac's net income for the year ended December 31, 2023
(excluding earned premium previously included in Adjusted
Book Value) and the positive effect of foreign exchange rates on
the consolidation of AFG's foreign subsidiaries, partially offset
by the impact of the reinsurance de-risking transaction executed
during 2023.
Factors that impact changes to Adjusted Book Value include
many of the same factors that impact Adjusted Net Income,
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
($ in millions)
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 foreign 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 generally classified as available for sale,
recognized
with
the effect of market movements
Ambac Financial Group, Inc
55
2023 Form 10-K
immediately through Other comprehensive income, or
through Net income when securities are sold or when an
impairment charge is recorded, although certain securities
held at December 31, 2023, are classified as trading with
changes in fair value reported through Net income as they
occur.
• 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
Note 4. Investments in this Annual Report on Form 10-K
located in Part II. Item 8.
• As of December 31, 2022, the interest rate derivatives
portfolio was managed as a partial hedge against the effects
of rising interest rates elsewhere in the Company, including
on Ambac's financial guarantee exposures. As of December
31, 2023, the interest rate derivatives portfolio contains
only legacy interest rate swaps with financial guarantee
counterparties and associated hedges. Changes in fair value
of interest rate derivatives are recognized immediately
through Net income. For additional information about
Ambac’s interest rate derivatives, see Note 9. Derivative
Instruments to the Consolidated Financial Statements
included in Part II, Item 8 in this Annual Report on Form
10-K.
• 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
additional
consolidated
information about Ambac’s debt obligations, see Note 12.
Long-term Debt to the Consolidated Financial Statements
included in Part II, Item 8 in this Annual Report on Form
10-K.
statements.
financial
For
risk
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
sensitivity measures below. Financial
the market
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 11. Variable Interest
Entities to the Consolidated Financial Statements included in
Part II, Item 8 in this Annual Report on 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
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.
Market Risk Sensitivities
Interest Rate Risk. Financial instruments for which fair
value may be affected by changes in interest rates consist
primarily of fixed maturity investment securities, long-term debt
and interest 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 lower the fair value of our debt
obligations and (at December 31, 2022) result in net fair value
gains on interest rate derivatives. Interest rate changes do not
have a significant
interest rate
derivatives position at December 31, 2023. 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.
impact on Ambac's net
The following table summarizes the estimated change in fair
value of our fixed maturity investment portfolio from a
hypothetical immediate increase in interest rates of 100 basis
points across the yield curve as of December 31, 2023 and 2022:
December 31,
Fair value of fixed maturity investment (1)
Pre-tax impact of 100 basis point increase in
interest rates
2023
2022
$ 1,820
$
1,740
Decrease in dollars
As a percent of fair value
$
(50)
$
(53)
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, 2023 and 2022:
December 31,
Fair value of long-term debt including
accrued interest (1)
Pre-tax impact of 100 basis point decrease in
interest rates
Increase in dollars
As a percent of fair value
Fair value of interest rate derivative net
assets (liabilities) (1)
Pre-tax impact of 100 basis point decrease in
interest rates
2023
2022
$
(697)
$
(878)
$
(24)
$
(18)
3 %
2 %
$
(10)
$
(12)
Pre-tax loss from change in fair value in dollars
$
(4)
$
(20)
(1) Excludes long-term debt and derivative instruments of VIEs
consolidated as a result of Ambac’s financial guarantees
Ambac Financial Group, Inc
56
2023 Form 10-K
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 Euro. 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, 2023 and
2022:
December 31,
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
2023
2022
$
$
463 $
398
(93) $
(80)
(1) Excludes investments in distressed Ambac-insured securities and
securities held by VIEs consolidated as a result of Ambac’s
financial guarantees
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.
December 31,
Fair value of investments in pooled funds
Pre-tax impact of 10% decline in NAV of the
funds
$
$
2023
2022
463 $
556
(46) $
(56)
Ambac Financial Group, Inc
57
2023 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 Account Firm KPMG LLP, New York, NY, PCAOB ID 185
59
Consolidated Financial Statements
Consolidated Balance Sheets ....................................................
62 Consolidated Statements of Stockholders’ Equity ....................
64
Consolidated Statements of Total Comprehensive Income
(Loss) .........................................................................................
63 Consolidated Statements of Cash Flows ...................................
65
Notes to Consolidated Financial Statements
Note 1. Background and Business Description ........................
66 Note 11. Variable Interest Entities ............................................. 104
Note 2. Basis of Presentation and Significant Accounting
Policies ........................................................................
68 Note 12. Long-term Debt ........................................................... 107
Note 3. Segment Information ....................................................
82 Note 13. Revenues From Contracts with Customers ................. 109
Note 4. Investments .................................................................
84 Note 14. Comprehensive Income ............................................... 110
Note 5. Fair Value Measurements ...........................................
87 Note 15. Net Income Per Share .................................................. 110
Note 6. Financial Guarantees in Force ......................................
92 Note 16. Income Taxes .............................................................. 111
Note 7. Insurance Contracts ......................................................
93 Note 17. Employment Benefit Plans .......................................... 112
Note 8. Insurance Regulatory Restrictions
99 Note 18. Leases .......................................................................... 115
Note 9. Derivative Instruments ................................................ 103 Note 19. Commitments and Contingencies ................................ 115
Note 10. Goodwill and Intangible Assets .................................. 104
Ambac Financial Group, Inc
58
2023 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
February 27, 2024
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, 2023, 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, 2023, 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, 2023 and 2022, 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, 2023, and the related notes and
financial statement schedules I, II and III (collectively, the
consolidated financial statements), and our report dated
February 27, 2024 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
59
2023 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
Critical Audit Matter
We have audited the accompanying consolidated balance sheets
of Ambac Financial Group, Inc. and subsidiaries (the Company)
as of December 31, 2023 and 2022, 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, 2023, and the related notes and
financial statement schedules I, II and III (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, 2023 and 2022, and the results of its operations
and its cash flows for each of the years in the three-year period
ended December 31, 2023, 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, 2023, 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 February 27, 2024 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.
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 adjustment expense reserves and
subrogation recoverable
As described in Notes 2 and 7 to the consolidated financial
statements, the Company estimates financial guarantee loss and
loss adjustment 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
adjustment 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, 2023, the Company recorded loss and loss
adjustment expense reserves of $893 million and subrogation
recoverable of $137 million.
We identified the evaluation of loss adjustment reserves as a
critical audit matter. The evaluation encompassed the
assessment of the loss reserves 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, and (4) the probability of
remediation, settlement and restructuring outcomes. 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 assistance of credit
risk and valuation professionals with specialized industry
knowledge and experience, 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 assumptions and the
sources of data and the analysis of the loss reserves. We
involved credit risk professionals with specialized skills and
Ambac Financial Group, Inc
60
2023 Form 10-K
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 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 assumptions, including:
the likelihood of possible outcomes regarding the
probability of default by the issuer of the insured security;
the expected loss severity for each insurance policy; and,
the probability of remediation, settlement and restructuring
outcomes, and the sources of data and assumptions used in
the calculation of loss reserves by comparing to the
Company’s internal experience and related historical and
industry trends.
/s/ KPMG LLP
We have served as the Company’s auditor since 1985.
New York, New York
February 27, 2024
Ambac Financial Group, Inc
61
2023 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 $1,744 and $1,469)
Fixed maturity securities - trading, at fair value
Short-term investments, at fair value (amortized cost of $426 and $507)
Short-term investments pledged as collateral, at fair value (amortized cost of $27 and $64)
Other investments (includes $463 and $556 at fair value)
Total investments (net of allowance for credit losses of $3 and $0)
Cash and cash equivalents (including $12 and $14 of restricted cash)
Premium receivables (net of allowance for credit losses of $4 and $5)
Reinsurance recoverable on paid and unpaid losses (net of allowance for credit losses of $0 and $0)
Deferred ceded premium
Deferred acquisition costs
Subrogation recoverable
Intangible assets, less accumulated amortization
Goodwill
Other assets
Variable interest entity assets:
Fixed maturity securities, at fair value
Restricted cash
Loans, at fair value
Derivative and other assets
Total assets
Liabilities and Stockholders’ Equity:
Liabilities:
Unearned premiums
Loss and loss adjustment expense reserves
Ceded premiums payable
Deferred program fees and reinsurance commissions
Long-term debt
Accrued interest payable
Other liabilities
Variable interest entity liabilities:
Long-term debt (includes $2,710 and $2,788 at fair value)
Derivative liabilities
Other liabilities
Total liabilities
Commitments and contingencies (See Note 19)
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: 46,659,144 and 46,658,990
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings
Treasury stock, shares at cost: 1,463,774 and 1,685,233
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
62
2023 Form 10-K
2023
2022
1,710 $
27
426
27
475
2,664
28
290
195
204
11
137
307
70
129
2,167
246
1,663
318
8,428 $
422 $
893
90
6
508
475
199
2,967
1,197
240
6,997
1,395
59
507
64
568
2,593
44
269
115
124
3
271
326
61
112
1,967
17
1,829
241
7,973
372
805
39
5
639
427
201
3,107
1,048
5
6,647
17
20
—
—
292
(160)
1,246
(17)
1,362
53
1,415
8,428 $
—
—
274
(253)
1,245
(15)
1,252
53
1,305
7,973
$
$
$
$
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Total Comprehensive Income (Loss)
(Dollars in millions, except share data) Year Ended December 31,
Revenues:
Net premiums earned
Commission income
Program fees
Net investment income
Net investment gains (losses), including impairments
Net gains (losses) on derivative contracts
Net realized gains on extinguishment of debt
Income (loss) on variable interest entities
Other income
Litigation recoveries
Total revenues and other income
Expenses:
Losses and loss adjustment expenses
Amortization of deferred acquisition costs, net
Commission expense
General and administrative expenses
Intangible amortization
Interest expense
Total expenses
Pretax income (loss)
Provision (benefit) for income taxes
Net income (loss)
Less: net (gain) loss attributable to noncontrolling interest
Plus: gain on purchase of auction market preferred shares
Net income (loss) attributable to common stockholders
Other comprehensive income (loss), after tax
Net income (loss)
Unrealized gains (losses) on securities, net of income tax provision (benefit) of $2, $(6) 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), net of income tax
Total comprehensive income, net of income tax
Less: net (gain) loss attributable to noncontrolling interest
Plus: gain on purchase of auction market preferred shares
Total comprehensive income attributable to common stockholders
Net income (loss) per shared attributable to common stockholders
Basic
Diluted
Weighted average number of common shares outstanding:
Basic
Diluted
See accompanying Notes to Consolidated Financial Statements
2023
2022
2021
$
78 $
56 $
51
8
140
(22)
(1)
—
3
11
—
269
31
3
17
31
129
81
21
10
126
505
47
26
—
139
7
22
33
7
1
—
282
(33)
(396)
(88)
11
29
156
29
64
257
12
7
5
(1)
—
3
18
141
47
168
(20)
525
2
522
(1)
1
4 $
522 $
5 $
522 $
51
40
—
2
93
98
(1)
—
(225)
(85)
—
(1)
(310)
212
(1)
1
96 $
212 $
1
15
111
55
187
281
2
18
(16)
(1)
—
(17)
(16)
(12)
(8)
(1)
(1)
(21)
(38)
(1)
—
(38)
0.18 $
0.18 $
11.48 $
11.31 $
(0.61)
(0.61)
$
$
$
$
$
45,636,649
45,719,906
46,535,001
46,540,706
46,414,830
46,535,001
Ambac Financial Group, Inc
63
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
($ in Millions)
Total
Preferred
Stock
Common
Stock
Ambac Financial Group, Inc.
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Common
Stock Held in
Treasury, at
Cost
Nonredeemable
Noncontrolling
Interest
Retained
Earnings
Balance at December 31, 2020
$
1,140 $
— $
— $
242 $
79 $
759 $
(1) $
Total comprehensive income
(loss)
Stock-based compensation
Cost of shares (acquired) issued
under equity plan
Changes to noncontrolling
interest
(38)
14
(6)
(12)
—
—
—
—
—
—
—
—
—
14
—
—
(21)
—
—
—
(17)
—
(4)
(12)
—
—
(2)
—
Balance at December 31, 2021
$
1,098 $
— $
— $
257 $
58 $
726 $
(3) $
Total comprehensive income
(loss)
Stock-based compensation
Cost of shares (acquired) issued
under equity plan
Cost of shares repurchased
Changes to noncontrolling
interest
Sale of noncontrolling interest in
subsidiary
Purchase of Ambac Assurance
auction market preferred shares
Balance at December 31, 2022
$
Total comprehensive income
(loss)
Stock-based compensation
Cost of shares (acquired) issued
under equity plan
Cost of shares repurchased
Changes to noncontrolling
interest
211
17
(4)
(14)
3
2
—
—
—
—
—
—
—
—
—
—
—
—
(8)
1,305 $
—
— $
—
— $
—
17
—
—
—
—
—
(310)
—
—
—
—
—
—
521
—
(5)
—
3
—
1
274 $
(253) $ 1,245 $
96
17
(5)
(5)
5
—
—
—
—
—
—
—
—
—
—
—
17
—
—
—
93
—
—
—
—
4
—
(8)
—
5
—
—
2
(14)
—
—
—
(15) $
—
—
3
(5)
—
Balance at December 31, 2023
$
1,415 $
— $
— $
292 $
(160) $ 1,246 $
(17) $
See accompanying Notes to Consolidated Financial Statements
60
—
—
—
—
60
—
—
—
—
—
2
(9)
53
—
—
—
—
—
53
Ambac Financial Group, Inc
64
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
($ in millions) Year Ended December 31,
Cash flows from operating activities:
Net income attributable to common stockholders
Redeemable noncontrolling interest
Repurchase of auction market preferred shares
Net income
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation
Amortization of bond premium and discount
Share-based compensation
Unearned premiums, net
Losses and loss expenses, net
Ceded premiums payable
Premium receivables
Accrued interest payable
Amortization of intangible assets
Net investment gains (losses), including impairments
(Gain) loss on extinguishment of debt
Variable interest entity activities
Other, net
Net cash provided by 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
Change in consolidated VIE cash collateral
Proceeds from paydowns of consolidated VIE assets
Acquisitions, net of cash acquired
Other, net
Net cash provided by investing activities
Cash flows from financing activities:
Proceeds from issuance of Sitka AAC Note
Proceeds from issuance of Surplus Notes
Paydowns of LSNI Ambac Note
Payments for debt issuance costs
Payments for purchases of common stock
Payments for purchase of surplus notes
Payments for redemption of Sitka AAC Note
Payments for redemption of Tier 2 Notes
Payments for auction market preferred shares
Tax payments related to shares withheld for share-based compensation plans
Distributions to noncontrolling interest holders
Payments of consolidated VIE liabilities, net
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
2023
2022
2021
$
4 $
(1)
—
5
522 $
(1)
1
522
2
(15)
17
(30)
130
52
(21)
(1)
29
22
—
(3)
13
200
140
74
(415)
209
(80)
118
(42)
235
199
(7)
6
435
—
—
—
—
(5)
—
—
(97)
—
(5)
(2)
(315)
(423)
1
213
61
$
274 $
2
(11)
17
(58)
1,220
6
54
(134)
47
(31)
(81)
(21)
(196)
1,335
523
206
(403)
166
(112)
(52)
44
—
504
(18)
9
866
—
—
—
—
(14)
(191)
(1,210)
(143)
(8)
(4)
(1)
(591)
(2,163)
(1)
38
23
61 $
(17)
(1)
—
(16)
2
(13)
14
(82)
(147)
6
48
103
55
(7)
(33)
(7)
(56)
(131)
236
698
(343)
39
(127)
98
9
—
171
—
(5)
776
1,163
11
(1,641)
(12)
—
—
—
—
—
(6)
(1)
(170)
(657)
—
(12)
35
23
Ambac Financial Group, Inc
65
2023 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:
• Legacy Financial Guarantee Insurance — Ambac's
financial guarantee business includes the activities of
Ambac Assurance Corporation ("AAC") and its wholly
owned subsidiaries,
including Ambac Assurance UK
Limited (“Ambac UK”) and Ambac Financial Services
LLC ("AFS"). Both AAC and Ambac UK have financial
guarantee insurance portfolios that have been in runoff
since 2008. AFS provided interest rate derivatives to
financial guarantee customers and used derivatives to
hedge interest rate risk in AAC's insurance and investment
portfolios.
Since June 2023, AFS' only remaining
derivative positions include a limited number of legacy
customer swaps and their associated hedges.
• Specialty Property and Casualty Insurance — Ambac's
Specialty Property and Casualty
Insurance program
business includes five admitted carriers and an excess and
insurer
surplus
(collectively, “Everspan”). Everspan carriers have an AM
Best rating of 'A-' (Excellent).
“nonadmitted”)
(“E&S” or
lines
• Insurance Distribution — Ambac's specialty property and
casualty ("P&C") insurance distribution business, which
currently
includes Managing General Agents and
Underwriters (collectively "MGAs") and insurance brokers.
Currently includes (i) Xchange Benefits, LLC (“Xchange”),
a P&C MGA specializing in accident and health products,
(ii) All Trans Risk Solutions, LLC ("All Trans"), an MGA
specializing in specialty commercial automobile insurance
for specific "for-hire" auto classes, (iii) Capacity Marine
Corporation ("Capacity Marine"), a wholesale and retail
brokerage and reinsurance intermediary specializing in
marine and international risk, and (iv) Riverton Insurance
Agency, Corp. ("Riverton"), which was acquired on August
1, 2023, an insurance services business specializing in
professional liability lines and consisting of an MGA and a
retail agency. Both All Trans and Capacity Marine
Corporation were acquired in November 2022.
Beginning in 2022, the Company began reporting these three
business operations as segments; see Note 3. Segment
Information for further information.
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 AFG’s common stock or (ii) the
percentage stock ownership interest in AFG of any holder of 5%
or more of AFG’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
is
The Company's primary goal
long-term
shareholder value through the execution of targeted strategies
for its (i) Specialty Property and Casualty Insurance and
Insurance Distribution businesses and (ii) Legacy Financial
Guarantee Insurance business.
to maximize
Specialty Property and Casualty Insurance and Insurance
Distribution strategic priorities include:
• Growing our Specialty Property and Casualty Insurance
business to generate underwriting profits from a diversified
Ambac Financial Group, Inc
66
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
portfolio of commercial and personal
accessed primarily through program administrators.
liability risks
• Expanding our Insurance Distribution business based on
deep domain knowledge in specialty and niche classes of
risk which generate attractive margins at scale. This will be
achieved through acquisitions, establishing new businesses
“de-novo,” and organic growth and diversification
supported by a centralized technology led shared services
offering.
• Making opportunistic investments that are strategic to both
the Specialty Property and Casualty Insurance and
Insurance Distribution businesses.
Legacy Financial Guarantee Insurance strategic priorities
include:
• Actively managing, de-risking and mitigating insured
portfolio risk, and pursuing recoveries of previously paid
losses.
• Improving operating efficiency and optimizing our asset
and liability profile.
• Exploring strategic options to further maximize value for
AFG.
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, as amended
(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 OCI, AFG and
AAC that became effective on February 22, 2024 (the
“Stipulation and Order”), replacing the Stipulation and Order
that became effective on February 12, 2018, as amended (the
"2018 Stipulation and Order"), each of which requires OCI and,
under certain circumstances contemplated by the Settlement
Agreement, holders of surplus notes, 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 Settlement Agreement limits 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 limitations). 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.
The Stipulation and Order requires AAC to maintain a level of
surplus and contingency reserves as regards policyholders which
provide reasonable security against contingencies affecting
AAC’s financial position that are not otherwise fully covered by
reserves or reinsurance; discount loss reserves in a manner
approved by OCI; maintain OCI’s Runoff Capital Framework
according to parameters specified by OCI; pay the costs of
consultants and other experts retained by OCI; limit affiliate
transactions and
the payment of any dividend or other
distribution without the prior non-disapproval of OCI; notify
OCI of events that would or would be reasonably likely to cause
a material adverse effect to AAC or its affiliates; obtain OCI’s
non-disapproval to exercise certain control rights with respect to
certain policies that were previously allocated to the Segregated
Account of AAC; obtain OCI’s approval for non-ordinary
course transactions involving consideration to be paid by AAC
of $100 or more; and obtain OCI’s approval of any changes to
AAC’s
The
investment policy or derivative use plan.
Stipulation and Order also requires AFG to use its best efforts to
preserve the use of NOLs for the benefit of AAC and its
subsidiaries. The Stipulation and Order differs from the 2018
Stipulation and Order in that the 2018 Stipulation and Order (i)
did not refer to OCI’s Runoff Capital Framework; (ii) included
certain affirmative covenants concerning books and records, and
reporting of information or events, that were not included in the
Stipulation and Order; and (iii) contained a more restrictive
limitation on transactions with affiliates. 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.
The execution of Ambac’s strategy to increase the value of its
investment in AAC may be affected by a new capital framework
developed and implemented by OCI to assist OCI with making
decisions related to capital management at AAC ("OCI's Runoff
Capital Framework"). OCI’s Runoff Capital Framework applies
risk-based and other adjustments to AAC’s assets and insured
liabilities, as determined by OCI in its sole discretion. OCI’s
Runoff Capital Framework allows AAC to understand the likely
impact of various developments and actions now or in the future
on AAC’s capital position thereunder. No changes in AAC’s
current management of the business are required by OCI’s
Runoff Capital Framework. AAC’s ability to use capital for
potential future deleveraging transactions or distributions will
require AAC to sustain an excess of risk-adjusted assets over
risk-adjusted insured liabilities according to OCI’s Runoff
Capital Framework, and to obtain OCI’s approval, and there can
be no assurance that OCI will approve any such use of capital.
The results of OCI’s Runoff Capital Framework are expected to
vary over time based on changes in AAC’s financial position,
insured portfolio developments, the impact of strategic actions
taken by AAC, the impact of asset/liability management by
AAC and, possibly, changes to the inputs and assumptions
utilized by OCI.
Opportunities for remediating losses on poorly performing
insured transactions 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.
Ambac Financial Group, Inc
67
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Settlement of RMBS Litigations and Redemption of
Secured Notes:
the redemption of the Sitka AAC Note following receipt of the
BOA Settlement Payment, was as follows:
In October 2022, AAC entered into a Settlement Agreement and
Release (the “BOA Settlement Agreement”) with Bank of
America Corporation and certain affiliates thereof (together, the
“BOA Parties”) pursuant to which the BOA Parties paid AAC
the sum of $1,840 (the “BOA Settlement Payment”) following
the dismissal of AAC’s lawsuits against the BOA Parties
concerning certain
residential mortgage-backed securities
(“RMBS”) trusts, and the withdrawal by AAC of its objections,
including any pending appeals, concerning the settlements that
were the subject of certain trust instructional proceedings. In
exchange for the BOA Settlement Payment, AAC, on its own
behalf and on behalf of its affiliates, agreed to release the BOA
Parties and related parties (the “Released Parties”) from claims
asserted or which could have been asserted in AAC’s pending
litigations against the BOA Parties as well as claims that AAC
and its affiliates ever had, may currently have or may have in the
future against the Released Parties, subject to certain limited
exceptions. The BOA Settlement Agreement also requires AAC
to dismiss other pending claims against the Released Parties, and
to generally refrain from, and in certain situations hold the
Released Parties harmless with respect to, certain actions taken
by AAC with respect to RMBS trusts created prior to the date of
the BOA Settlement Agreement involving the Released Parties.
The BOA Settlement Payment
included recoveries from
litigations for alleged breaches of contractual obligations and
fraud by the BOA Parties. Management allocated the BOA
Settlement Payment to each of the litigations based on
previously developed valuations of each individual litigation.
The portion of the BOA Settlement Payment allocated to fraud
litigation recoveries has been recorded as a litigation recovery in
the Statement of Comprehensive Income (Loss).
On December 29, 2022, AAC entered into a Settlement
Agreement and Release (the “Nomura Settlement Agreement”)
with Nomura Credit & Capital, Inc. (“Nomura”) to settle its
litigation against Nomura concerning certain RMBS trusts (the
“Trusts”). Pursuant to the Nomura Settlement Agreement,
Nomura made a cash payment to AAC of $140 (the "Nomura
Settlement Payment"), and AAC and Nomura agreed to release
each other and their respective affiliates and related persons
from any claims relating to the Trusts, the financial guaranty
policies issued by AAC in connection with Trusts (other than
AAC’s obligations to pay insurance claims under such policies),
the securities related to the Trusts, and the mortgage loans
related to the Trusts. The Nomura Settlement Payment received
in January 2023 reduced the subrogation recoverable asset on
the Consolidated Balance Sheet.
During 2022 and 2023, AAC wholly redeemed its secured debt,
in accordance with the terms of such debt, utilizing the BOA
Settlement Payment, the Nomura Settlement Payment and other
resources as further discussed in Note 12. Long-term Debt.
Impact
Comprehensive Income (Loss):
the Consolidated
to
Statement
of
The total gain recognized in net income attributable to common
stockholders related to entering into the BOA Settlement
Agreement and the Nomura Settlement Agreement, including
Year Ended December 31,
Losses and loss benefit (1)
Litigation recoveries
Net realized gains (losses) on extinguishment of debt
Net investment gains (losses), including impairments
Impact to net income attributable to common
stockholders
$
2022
362
126
(53)
5
$
440
(1) 2022 losses and loss benefit relating to R&W recoveries were
$123.
2. BASIS OF PRESENTATION AND
SIGNIFICANT ACCOUNTING POLICIES
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. There can be no
assurance that actual results will conform to such estimates and
any future changes in estimates could be material to the financial
statements.
financial statements
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
Ambac Financial Group, Inc
68
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
beneficiary of a VIE is required to consolidate the VIE. See
Note 11. 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 and deconsolidated.
AFG Unconsolidated Financial Information
Financial information of AFG is presented in Schedule II in this
Annual Report on Form 10-K as of December 31, 2023 and
2022 and for the years ended December 31, 2023, 2022 and
2021. Investments in subsidiaries are accounted for using the
equity method of accounting in Schedule II.
Measurement of Credit Losses on Financial
Instruments (CECL)
Ambac measures credit losses on financial assets that are not
accounted for at fair value through net income in accordance
with the Current Expected Credit Loss standard or "CECL".
• The CECL impact on available-for-sale debt securities is
discussed in the Investments sub-section below.
• The CECL impact on amortized cost assets, including
contract assets and receivables accounted for under the
ASC 606 revenue recognition standard, is addressed in the
Premiums, Reinsurance Recoverables, Loans and Revenue
Recognition sub-sections below. These amortized cost
assets reflect management's current estimate of all expected
lifetime credit losses. The estimate of expected lifetime
credit
information, current
information, as well as reasonable and supportable
forecasts. Expected lifetime credit losses for amortized cost
assets are recorded as an allowance for credit losses, with
subsequent
the allowance
reflected in net income each period.
losses considers historical
increases or decreases
in
CECL does not apply to subrogation recoveries of previously
paid and unpaid losses on insurance contracts accounted for
under ASC 944 nor does it apply to equity method investments
accounted for under ASC 323.
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:
trading as defined by
• Investments in fixed maturity securities are either classified
the
as available-for-sale or
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 the 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 are amortized or accreted over the
remaining term of the securities and premiums are
amortized to the earliest call date. Investments in fixed
maturity securities classified at trading are reported in the
financial statements at fair value with unrealized gains and
losses included in Net investment income on the Statement
of Total Comprehensive Income (Loss).
• 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.
• Preferred equity investments that do not have readily
determinable fair values and are carried at cost, less any
impairments as permitted under the Investments—Equity
Securities Topic of the ASC.
VIE investments in fixed maturity securities are carried at fair
value as they are classified as either available-for-sale or trading
as defined by the Investments—Debt Securities Topic of the
ASC, or accounted for under the fair value option election. For
additional information about VIE investments, including fair
value by asset-type, see Note 11. Variable Interest Entities.
for pooled
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
readily determinable
the
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. Refer to
Note 5. Fair Value Measurements for further description of the
methodologies used to determine the fair value of investments,
including model inputs and assumptions where applicable.
investment
funds,
Ambac has a formal 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.
If management either: (i) has the intent to sell its investment in
an impaired debt security or (ii) determines that the Company
Ambac Financial Group, Inc
69
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
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
written-down to fair value.
If management does not intend to sell, or will not be required to
sell the debt security, the security is reviewed for credit
impairment. Factors considered to identify and assess securities
for credit impairment include: (i) fair values that have declined
by 20% or more below amortized cost; (ii) recent downgrades
by rating agencies; (iii) the financial condition of the issuer and
financial guarantor, as applicable, and an analysis of projected
defaults on the underlying collateral; and (iv) whether scheduled
interest payments are past due. 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. Improvements to estimated credit losses
for available-for-sale debt securities are recognized immediately
in net income. If we believe a decline in the fair value of a
particular fixed maturity available-for-sale 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.
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 credit impairment in future
periods.
Ambac has made certain accounting policy elections related to
interest receivable ("AIR") for available-for-sale
accrued
investments under CECL. 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 4.
Investments. AIR at December 31, 2023 and 2022 was $14 and
$10, respectively.
Refer to Note 4. Investments for further credit impairment
disclosures.
Premiums
Legacy Financial Guarantee Insurance
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, 2023 and 2022, was 3.2%. and 3.0%,
the weighted average period of future
respectively, and
the premium receivable at
to estimate
premiums used
December 31, 2023 and 2022, was 7.7 years and 8.0 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
the premium
installment paying policies,
method). For
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.
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
been legally defeased whereby government securities are
purchased by the issuer with the proceeds of a new bond
transactions, we offset
Ambac Financial Group, Inc
70
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
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.
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
involving special purpose
entities, we further evaluate the 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.
transactions
Management utilizes either a discounted cash flow ("DCF") or
probability of default/loss given default ("PD/LGD") approach
to estimate credit impairment on premium receivables. 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 7. Insurance Contracts for further credit
impairment disclosures.
AAC has reinsurance in place pursuant to surplus share treaties
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.
Specialty Property and Casualty Insurance
terms applied against
Gross written premiums on insurance policies are recorded at
the inception of the policy and can be received on an upfront or
installment basis. Ceded premiums written are based on
contractual
related gross written
premiums. Premiums, net of reinsurance, are recognized as
revenue on a daily pro-rata basis over the term of the insured
risk. Unearned premiums and Deferred ceded premiums
represents the portion of gross and ceded premiums written that
relate to unexpired risk, respectively.
Premium receivables represent balances currently due and
amounts not yet due from policyholders, insurance carriers,
managing general agents or producers issuing insurance policies
on Everspan's behalf. Premium receivables are reported net of
an allowance for expected credit losses. The allowance is based
upon Everspan's ongoing review of amounts outstanding,
including delinquencies and write-offs, and other relevant
factors. Credit risk is partially mitigated by the managing
general agent's ability to cancel the policy on behalf of Everspan
if the policyholder does not pay the premium, thereby reducing
the related policy's premium written and Everspan's premium
receivable.
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. 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 financial guarantee 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
Ambac Financial Group, Inc
71
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
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 primarily to
hedge certain economic risks inherent in its asset and liability
portfolios.
None of Ambac’s derivative contracts were
designated as hedges under the Derivatives and Hedging Topic
of the ASC. Ambac's derivatives have consisted primarily of
interest rate swaps and futures contracts.
• Ambac's current derivatives portfolio consists of certain
legacy interest rate swaps executed in connection with
financial guarantee client financings. In recent years,
Ambac's
interest rate derivatives portfolio consisted
primarily of interest rate swaps and futures contracts to
economically hedge interest rate risk in the financial
guarantee and investment portfolios, managed on the basis
of its net sensitivity to changes in interest rates. The
economic hedge positions of the portfolio were fully exited
in early 2023. Changes in the fair value of these interest
rate derivatives are recorded, along with changes in fair
value of other derivative contracts, 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, and are
included in Other assets and Other liabilities, respectively.
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 9. Derivative Instruments for further
discussion of the Company’s use of derivative instruments and
their impact of the consolidated financial statements. Refer to
Note 5. 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.
Deferred Acquisition Costs, Ceding Commissions and
Deferred Program Fees
The Specialty Property and Casualty Program business defers
acquisition costs incurred that are related directly to the
successful acquisition of new or renewal insurance contracts,
including commissions paid to managing general agents for
direct business, and paid to insurance carriers when acquired via
assumed reinsurance. Ceding commissions received from
reinsurers represent a recovery of related acquisition costs.
Deferred acquisition costs, net of ceding commissions, are
amortized over the related policy period, generally one year, and
recognized in amortization of deferred acquisition costs. Ceding
commissions received in excess of the related direct acquisition
costs are deferred and amortized over the related policy period,
and recognized as program fees.
Goodwill
Goodwill is attributable to acquisitions in the Insurance
Distribution segment and represents the acquisition cost in
excess of the fair value of net assets acquired, including
identifiable 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. The annual test of goodwill impairment is as of
October 1st of each year. Depending on the reporting unit,
management utilizes one of two approaches for impairment
testing. Under the first approach, qualitative factors are first
assessed to determine if it is more likely than not that the fair
value of the reporting unit is less than its carrying amount. If it is
more likely than not, then a quantitative impairment evaluation
is performed. Under the second approach, management bypasses
the qualitative evaluation and proceeds directly
the
quantitative evaluation. The quantitative evaluation under both
of the above approaches 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. There have
been no accumulated impairment losses since this goodwill was
established.
to
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 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 initial insurance intangible asset was assigned to
groups of insurance and reinsurance contracts with similar
Ambac Financial Group, Inc
72
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
characteristics and has been amortized using a level-yield
method based on par exposure of the related groups.
Finite-lived intangibles
Ambac acquired identifiable intangible assets attributable to the
Insurance Distribution segment. The intangible assets primarily
relate 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. The carrying amount of the intangible asset
is not recoverable if it exceeds the projected undiscounted cash
flows expected to result from the use and eventual disposal of
the asset or asset group. If deemed unrecoverable, an
impairment loss is recognized for the excess carrying amount
over the fair value. There have been no accumulated impairment
losses since these finite-lived intangible assets were established.
Indefinite-lived intangibles
Ambac acquired identifiable intangible assets attributable to its
acquisitions of carriers in both 2021 and 2022, which were
accounted for as asset acquisitions (Specialty Property and
Casualty Insurance segment). The intangible assets relate to
insurance licenses which have indefinite lives and therefore are
not amortized. The useful lives are re-evaluated each period to
determine whether facts and circumstances continue to support
an indefinite life. The Company tests indefinite-lived acquired
intangible assets for impairment annually or more frequently if
circumstances indicate a possible impairment. Ambac tests
indefinite-lived intangibles for impairment as of October 1st of
each year. If, after assessing qualitative factors, management
believes it is more likely than not that the intangible assets are
impaired, a quantitative impairment evaluation is performed.
Management also has the option to bypass the qualitative
evaluation and proceed directly to the quantitative evaluation.
The quantitative test compares the estimated fair value of the
intangible asset with its carrying value. An impairment is
recognized for the excess of the carrying amount of the
intangible asset over it estimated fair value. If the asset’s
estimated fair value exceeds its carrying value, the intangible
asset is not impaired. There have been no accumulated
impairment losses since these indefinite-lived intangible assets
were established.
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 and (ii) fiduciary cash held by Ambac's insurance
distribution subsidiaries as described below.
Fiduciary Funds
As an intermediary, we hold funds, generally in a fiduciary
capacity, for the account of third parties, typically as the result
of premiums received from retail brokers or insureds that are in
transit to insurers and claims due that are in transit from
insurers. Since fiduciary assets are not available for corporate
use, they are shown in the consolidated balance sheets as
restricted cash and we present an equal and corresponding
fiduciary liability relating to these funds representing amounts or
claims or premiums due on our consolidated balance sheets
(included in Other liabilities).
Fiduciary funds are generally required to be kept in bank
accounts subject
to guidelines which emphasize capital
preservation and liquidity. The Company is entitled to retain
investment income earned on certain of these fiduciary funds in
accordance with industry custom and practice and, in some
cases, as supported by agreements with insureds.
Restricted cash for net uncollected premiums and claims and the
related fiduciary liabilities were $12 and $14 at December 31,
2023 and 2022, respectively.
Loss and Loss Adjustment Expenses
Legacy Financial Guarantee
The loss and loss adjustment expense reserve (“loss reserve”)
policy relates only
to Ambac’s non-derivative financial
guarantee 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 insured 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 remediation strategies and other contractual or
subrogation-related cash flows.
• 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 adjustment 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
Ambac Financial Group, Inc
73
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
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
adversely classified credit rating includes the deterioration of an
issuer’s financial condition, underperformance of the underlying
transactions such as
collateral
mortgage-backed or
securitizations), poor
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 collateral dependent
loan
student
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, large exposure concentration or concern
related to the issuer or transaction or the overall financial
and economic sustainability.
CLASS IA – “Potential Problem with Risks to be Dimensioned”
- Credits that are fully current and monetary default or claims-
payment are not anticipated. The 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.
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 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
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).
losses. RMG may accept
• 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
Ambac Financial Group, Inc
74
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
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
loans 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 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 to develop
projected future claim payment estimates. 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 consider 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 future installment premiums, and/
or other restructuring possibilities in our scenarios. The
commutation scenarios and the related 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
Ambac insures RMBS transactions collateralized by (i) first-lien
mortgages; and (ii) second-lien mortgage loans such as closed-
end seconds and home equity lines of credit. 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 loan,
second-lien loans may carry a significantly higher severity in the
event of a loss.
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. The RMBS cash flow model
projects collateral performance utilizing a combination of
historical performance along with the most recent loan status
information to project future collateral performance.
In addition to the base case, we analyze historical volatility of
performance to develop 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.
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.
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.
Student Loan Expected Loss Estimate
loan
insured portfolio consists of credits
The student
collateralized by private student loans. The calculation of loss
reserves for our student loan portfolio involves evaluating
numerous factors that can impact ultimate losses. Since our
policies cover timely interest and ultimate principal payment,
our loss projections must make assumptions for many factors
covering a long 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
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.
tendering or commuting
for
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.
Ambac Financial Group, Inc
75
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Specialty Property and Casualty
Loss and loss adjustment expense reserves for Specialty
Property and Casualty policies represent management's estimate
of the ultimate liability for unpaid losses and loss expenses for
claims that have been reported and claims that have been
incurred but not yet reported ("IBNR") as of the balance sheet
date.
the
liability, but
Loss and loss adjustment expense reserves do not represent an
instead represent
exact calculation of
management estimates, primarily utilizing actuarial expertise
and projection methods that develop estimates for the ultimate
cost of claims and claim adjustment expenses. The reserves are
estimated based upon experience and using a variety of actuarial
methods. These estimates are reviewed and are subject to the
impact of future changes in factors such as claim severity and
frequency, underwriting and claims practices, changes in social
and economic conditions including the impact of inflation, legal
and judicial developments, medical cost trends and upward
trends in damage awards. Our actuarial methods may also rely
on external data, such as industry loss ratios, loss development
factors, or trend factors. Such data while more mature than
Everspan's own data may not be perfectly representative of the
particular business written by Everspan. The ultimate amount
for loss and loss adjustment expenses may be in excess, or less
than, the amounts recorded on our financial statements. Because
the establishment of claims and claim adjustment expense
reserves is an inherently uncertain process involving estimates
and judgment, currently estimated claims and claim adjustment
expense reserves may change. Adjustments will be reflected as
part of the net increase or reduction in loss and loss adjustment
expense reserves in the periods in which they become known.
Cumulative amounts paid and case reserves held as of the
balance sheet date are subtracted from the estimate of the
ultimate cost of claims and claim adjustment expenses to derive
incurred but not reported (IBNR) reserves. There were no
changes in methodology in the past year.
Detailed claim data is typically insufficient to produce a reliable
indication of the initial estimate for ultimate claims and claim
adjustment expenses for an accident year. As a result, the initial
estimate for an accident year is generally based on an exposure-
based method using the loss ratio projection method. The loss
ratio projection method develops an initial estimate of ultimate
claims and claim adjustment expenses for an accident year by
multiplying earned premium for the accident year by a projected
loss ratio. The projected loss ratio is determined by analyzing
prior period experience, and adjusting for loss cost trends, rate
level differences, mix of business changes and other known or
observed factors influencing the accident year relative to prior
accident years.
For prior accident years, the following estimation and analysis
methods are principally used by the Company’s actuaries to
estimate the ultimate cost of claims and claim adjustment
expenses. These estimation and analysis methods are typically
referred to as conventional actuarial methods.
• The paid loss development method assumes that the future
change (positive or negative) in cumulative paid losses for
a given cohort of claims will occur in a stable, predictable
pattern from year-to-year, consistent with the pattern
observed in past cohorts.
• The case incurred development method is the same as the
paid loss development method, but is based on cumulative
case-incurred losses rather than paid losses.
• The Bornhuetter-Ferguson method uses an initial estimate
of ultimate losses for a given product line reserve
component, typically expressed as a ratio to earned
premium. The method assumes that the ratio of additional
claim activity to earned premium for that component is
relatively stable and predictable over time and that actual
claim activity to date is not a credible predictor of further
activity for that component. The method is used most often
for more recent accident years where claim data is sparse
and/or volatile, with a transition to other methods as the
underlying claim data becomes more voluminous and
therefore more credible.
While these are the principal methods utilized, the Company’s
actuaries have available to them the full range of actuarial
methods developed by the casualty actuarial profession. Most
actuarial methods assume that past patterns demonstrated in the
data will repeat themselves in the future.
The Company performs a continuing review of its loss and loss
adjustment expense reserves, including its reserving techniques
and the impact of reinsurance. Since the reserves are based on
estimates, the ultimate liability may be more or less than such
reserves.
Reinsurance Recoverable
The Company uses ceded reinsurance to transfer certain
insurance risk, along with premiums written and earned, to other
insurance carriers that agree to share in such risks. The primary
purpose of the reinsurance is to (i) protect the Company, at a
cost, from losses in excess of amounts it is willing to accept, (ii)
protect the Company's capital, and (iii) within the Specialty
Property and Casualty Insurance operations, to manage the
Company's net retention on individual risks and overall exposure
to losses while providing the Company the ability to offer
policies with sufficient limits to meet policyholder needs.
• Within its Specialty Property and Casualty Insurance
segment, the Company generally enters into quota share
reinsurance agreements whereby the Company cedes to the
capacity providers (reinsurers) a substantial amount
(generally 70% or more) of its gross liability under all
policies issued by and on behalf of the Company by the
MGA/U.
Ambac is exposed to the credit risk of the reinsurer, or the risk
that one of its reinsurers becomes insolvent or otherwise unable
or unwilling to pay policyholder claims. This credit risk is
generally mitigated by either selecting well capitalized, highly
rated authorized capacity providers or requiring that the capacity
provider post collateral to secure the reinsured risks, which in
some instances, exceeds the related reinsurance recoverable.
Ambac Financial Group, Inc
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2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Amounts recoverable from reinsurers are estimated in a manner
consistent with the associated loss and loss adjustment expense
reserves. The Company reports its reinsurance recoverables net
of an allowance for amounts
to be
uncollectible.
that are estimated
The reinsurance of risk does not legally relieve Ambac of its
original liability to its policyholders. In the event that any of
Ambac’s reinsurers are unable to meet their obligations under
reinsurance contracts, Ambac would, nonetheless, be liable to its
policyholders for the full amount of its policy.
To minimize its credit exposure to losses from reinsurer
insolvencies, Ambac (i) is entitled to receive collateral from
certain reinsurance counterparties pursuant to the terms of the
relevant reinsurance contracts and (ii) has certain cancellation
rights that can be exercised by Ambac in the event of rating
agency downgrades of a reinsurer (among other events and
circumstances). For those reinsurance counterparties that do not
reinsurers are well
currently post collateral, Ambac’s
capitalized, highly rated, authorized capacity providers.
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 total unsecured
recoverable to be evaluated for credit impairment, Ambac nets
the reinsurance recoverable amount by ceded premiums payable
and the fair value of collateral posted, if any.
The key factors in assessing credit impairment for reinsurance
recoverables are independent rating agency credit ratings and
loss severities. Management utilizes a probability of default/loss
given default ("PD/LGD") approach, which is applied to the net
unsecured reinsurance recoverable amount. Refer to Note 7.
Insurance Contracts for 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 surplus note repurchases,
the pro-rata purchase price related to principal and accrued
interest is reported as a financing and operating activity,
respectively, on the Statement of Cash Flows.
For long-term debt issued by consolidated VIEs in which
Ambac's variable interest arises from financial guarantees
written by Ambac's subsidiaries ("LFG 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 LFG 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 LFG 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, 2023 and 2022, AAC had 4,596 shares of
issued and outstanding Auction Market Preferred Shares
("AMPS") with a liquidation preference of $115 (reported as
nonredeemable noncontrolling interest of $51 on Ambac's
balance sheet). In 2022, Ambac purchased 905 shares of AMPS
for $8. The difference between this amount paid to AMPS
holders and the carrying amount was reflected as an increase to
for
Net
approximately $1. The auction occurs every 28 days and the
dividend rate has continuously been reset at the maximum, equal
to the Reference Rate plus 200 basis points. Beginning July 1,
2023, the Reference Rate for the AMPS is one-month CME
Term SOFR plus 0.11448 percent. Prior to July 1, 2023, the
Reference Rate was one-month LIBOR.
income attributable
to common
shareholders
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, All Trans, Capacity Marine and Riverton
acquisitions resulted in 80%, 85%, 80% and 80%, respectively,
ownership of the acquired entities by Ambac. Under the terms of
all the acquisition agreements, Ambac has call options to
purchase the remaining interest from the minority owners (i.e.,
noncontrolling interests) and the minority owners have put
options to sell their remaining interests to Ambac. Because the
exercise of the put options are outside the control of Ambac, in
accordance with the Distinguishing Liabilities from Equity
Topic of the ASC, Ambac reports redeemable noncontrolling
interests in the mezzanine section of its consolidated balance
sheet.
The redeemable noncontrolling interest is remeasured each
period as the greater of:
i. the carrying value under ASC 810, which attributes a
portion of consolidated net income (loss) to the redeemable
noncontrolling interest, and
Ambac Financial Group, Inc
77
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
ii. the redemption value of the put option under ASC 480 as if
it were exercisable at the end of the reporting period.
in
increase (decrease)
the carrying amount of
Any
the
redeemable noncontrolling interest as a result of adjusting to the
redemption value of the put option is recorded as an offset to
retained earnings. The impact of such differences on earnings
per share are presented in Note 15. Net Income Per Share.
Following
interest.
is a rollforward of redeemable noncontrolling
Years ended December 31,
Beginning balance
2023
2022
$
20 $
18
Fair value of redeemable noncontrolling
interest at acquisition date
Net income attributable to redeemable
noncontrolling interest (ASC 810)
Distributions
Adjustment to redemption value (ASC 480 )
2
1
(2)
(5)
Ending Balance
$
17 $
5
1
(1)
(3)
20
Revenue Recognition
Revenues for the Insurance Distribution business operations and
certain revenues of a consolidated VIE are recognized in
accordance with the Revenue from Contracts with Customers
Topic of the ASC. The following steps are applied to recognize
revenue: (i) identify the contract(s) with the customer, (ii)
identify the performance obligations in the contract(s), (iii)
determine the transaction price, and (iv) allocate the transaction
price to the performance obligations in the contract and
recognize revenue when (or as) the entity satisfies a performance
obligation. A performance obligation is satisfied either at a point
in time or over time depending on the nature of the product or
service provided, and the specific terms of the contract with
customers.
Insurance Distribution
Insurance Distribution performance obligations consist of
underwriting and placing policies with insurers and, for certain
products, providing claims servicing. Revenue from employer
stop loss policies ("ESL") is apportioned to policy placement
and claims servicing based on the relative stand-alone selling
price of the respective performance obligations with policy
placement revenue recognized upfront while claims servicing
revenue is recognized over the claim adjustment period.
Revenue from other insurance policies are recognized up front
as no further performance obligations exist after policy
placement.
Revenue consists of base and profit-sharing commissions.
• Base commissions, associated with policy placement and
claims servicing, are estimated by applying the contractual
commission percentages to estimated gross premiums
placed.
• Profit-sharing
commissions
variable
consideration associated with policy placement only and
are estimated based on expected loss ratios and the
estimated gross premium for base commissions.
represent
Base and profit-sharing commissions are estimated with a
constraint applied such that a significant reversal of revenue in
the future is not probable. Revenue is reported in Commissions
income on the Consolidated Statement of Total Comprehensive
Income.
the Company's right
Contract assets represent
to future
consideration for services it has already transferred to the
customer, which is subject to certain contingencies. Once the
right to consideration becomes unconditional, it is reported as a
receivable. Contract assets are evaluated for credit loss under
CECL. Management utilizes a PD/LGD approach, similar to the
financial guarantee premium
one described above
receivables and
the
Company's obligation to transfer services for which it has
already received consideration from the customer. Contract
assets and receivables are reported as other assets, and contract
liabilities are reported as other liabilities, on the Consolidated
Balance Sheet.
for
loans. Contract
liabilities
represent
The Company’s costs to obtain customer contracts relate to
certain commissions paid to independent agents for procuring
policies. As these costs relate to the Company’s policy
placement performance obligation to its customers, they are
expensed as incurred. These costs are reported in Commission
expenses
of Total
Comprehensive Income.
the Consolidated Statement
on
Consolidated VIE
Refer to Note 11. Variable Interest Entities for further
discussion on Ambac's involvement with VIEs and triggering
events resulting in consolidation. Ambac consolidated a VIE on
December 31, 2023 which has a contract with a governmental
to provide construction and facilities management
entity
services in return for periodic concession payments. These
services have been
the VIE's performance
obligations. Revenue is apportioned to these performance
obligations based on their respective stand-alone selling prices.
Revenue is estimated based on regularly updated cash flow
projections.
identified as
This is a long-term contract that contains a significant financing
component related to construction. As the construction services
have already been completed, revenue recognized for this
performance obligation will solely consist of interest income.
Facilities management services are provided, and
thus
recognized, over time and will consist of services revenue.
Costs to fulfill the customer contract primarily relate to fees paid
to vendors to provide the facilities management services and
will be expensed as incurred. All revenue and expense items will
be reported within Income (loss) from variable interest entities.
Contract assets are evaluated for credit losses under CECL.
Management utilizes a PD/LGD approach, similar to the one
described above for financial guarantee premium receivables
and loans. Contract assets are reported within Derivative and
other assets in the Variable interest entity asset section of the
Consolidated Balance Sheet.
Ambac Financial Group, Inc
78
2023 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
established and charged
to expense based on actuarial
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 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 and consultants.
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:
• Restricted stock units — only require future service and
accordingly the respective fair value is recognized as
compensation expense over the relevant service period.
the achievement of
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.
In 2020, the Ambac UK Board of Directors adopted a long term
incentive plan for Ambac UK employees, 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
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. 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 Total Comprehensive Income (Loss). The lease
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. 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
lease and non-lease
to not separate
practical expedient
components.
specified performance
• Performance stock units — require both future service and
achieving
to vest.
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
targets
Ambac Financial Group, Inc
79
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Depreciation and Amortization
Income Taxes
Ambac files a consolidated U.S. Federal income tax return with
its subsidiaries. Ambac and its subsidiaries also file separate or
combined income tax returns in various states, local and foreign
jurisdictions. Current tax assets and liabilities are recognized for
taxes refundable or payable for the current year.
to differences between
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable
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.
The Income Taxes Topic of the ASC requires that companies
assess whether valuation allowances should be established
against their deferred tax assets based on management's
assessment and 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, including the adjustment
to redemption value of the redeemable noncontrolling interest,
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, including the adjustment to redemption value of
the redeemable controlling interest, by the Basic Weighted-
Average Shares Outstanding plus all potentially dilutive
common shares outstanding during the period. All potentially
dilutive common shares outstanding consider common stock
deliverable pursuant to warrants, unvested restricted stock units
and performance
existing
compensation plans.
stock units granted under
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.
Income
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.
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 $(3), $11 and $(7) for the years
ended December 31, 2023, 2022 and 2021, respectively.
Foreign currency transactions gains/(losses) are primarily the
result of remeasuring Ambac UK's assets and liabilities
denominated in currencies (primarily the U.S. dollar and the
Euro) other than its functional currency (the British Pound
Sterling).
Commitments and Contingencies
The Company and its subsidiaries are defendants in or parties to
actual, pending and threatened lawsuits and proceedings. A
liability is accrued for such contingencies when a loss is both
probable and reasonably estimable. If a loss is not "probable and
reasonably estimable," but is reasonably possible, disclosure of
the contingency and an estimate of the loss or range of loss is
required if such an estimate can be determined. Significant
management judgment is required to apply this guidance. As a
legal contingency develops, the Company, in conjunction with
outside counsel, evaluates what
level of accrual and/or
disclosure is required under the guidance. See the Litigation
Against Ambac section of Note 19. Commitments and
Contingencies for additional
legal
contingencies and related accounting evaluation.
information about our
Ambac Financial Group, Inc
80
2023 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:
Exchange of investments in Puerto Rico bonds for new securities issued in the restructuring transactions
Decrease in long-term debt as a result of surplus notes exchanges
Securities acquired (transferred) in transactions related to Puerto Rico restructurings
Loans acquired through financial guarantee subrogation
VIE long-term debt issued related to Puerto Rico restructurings
Decrease in VIE loans as a result of de-consolidations
Decrease in VIE long-term debt as a result of de-consolidations
Increase in VIE long-term debt as a result of consolidations
December 31,
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
$
$
2023
2022
2021
11
50
—
—
(1)
—
—
133
133
89
$
6
$
283
185
—
508
20
583
—
—
—
15
80
—
71
—
—
—
—
—
—
2023
2022
2021
$
16
12
246
274
$
31
14
17
61
17
5
2
23
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.
Adopted Accounting Standards
There have been no new accounting standards adopted during
2023.
Future Application of Accounting Standards
Segment Reporting:
In November 2023, the FASB issued ASU 2023-07, Segment
Reporting (Topic 280) - Improvement to Reportable Segment
Disclosures. The ASU requires disclosure of the following:
• Significant segment expenses regularly provided to the
chief operating decision maker (CODM) and included
within the reported measure(s) of a segment’s profit or loss.
• The amount and composition of "other segment items".
This amount reconciles segment revenue, less significant
expenses, to the reported measure(s) of a segment’s profit
or loss.
• The CODM's title and position.
• How the CODM uses the reported measure(s) of a
segment’s profit or loss to assess segment performance and
decide how to allocate resources.
• All segment profit or loss and assets disclosures currently
required annually by Topic 280, as well as those introduced
by the ASU, to also be disclosed in interim periods.
The ASU also permits a public entity to report multiple
measures of a segment’s profit or loss as long as: i) all the
reported measures of a segment’s profit or loss are used by the
CODM for purposes of assessing performance and allocating
resources; and ii) the measure closest to GAAP is also provided.
The ASU is effective for fiscal years beginning after December
15, 2023, and interim periods within fiscal years beginning after
December 15, 2024, with early adoption permitted. Ambac will
adopt this ASU for the annual reporting period ending
December 31, 2024 and we are evaluating its impact on Ambac's
financial statements.
Income Taxes:
In December 2023, the FASB issued ASU 2023-09, Income
Taxes (Topic 740) - Improvements to Income Tax Disclosures.
The enhancements in the ASU include the following:
• Within the rate reconciliation table, disclosure of additional
categories of information about federal, state and foreign
income taxes and providing more details about the
reconciling items in some categories if the items meet a
quantitative threshold.
• Annual disclosure of income taxes paid (net of refunds
received) disaggregated by federal (national), state and
foreign taxes and disaggregation of the information by
jurisdiction based on a quantitative threshold.
• Other disclosures include: i) income (or loss) from
continuing operations before income tax expense (or
benefit) disaggregated between domestic and foreign and
ii) income tax expense (or benefit) from continuing
operations disaggregated by federal (national), state, and
foreign.
The ASU is effective for annual periods beginning after
December 15, 2024, with early adoption permitted. Ambac will
adopt this ASU on January 1, 2025 and we are evaluating its
impact on Ambac's financial statements.
Ambac Financial Group, Inc
81
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
3. SEGMENT INFORMATION
The Company reports its results of operations in three segments:
Legacy Financial Guarantee Insurance, Specialty Property and
Casualty Insurance and Insurance Distribution, separate from
Corporate and Other, which is consistent with the manner in
which the Company's chief operating decision maker ("CODM")
reviews the business to assess performance and allocate
resources. See Note 1. Background and Business Description
for a description of each of the Company's business segments.
tables summarize
the components of
the
The following
Company’s total revenues and expenses, pretax income (loss)
and total assets by reportable business segment. Information
provided below for “Corporate and Other” primarily relates to
the operations of AFG, which will include investment income on
its investment portfolio and costs to maintain the operations of
AFG, including public company reporting, capital management
and business development costs for
the acquisition and
development of new business initiatives.
Year Ended December 31, 2023
Revenues:
Net premiums earned
Commission income
Program fees
Net investment income
Net investment gains (losses), including impairments
Net gains (losses) on derivative contracts
Other income (expense), including VIEs
Total revenues (1)
Expenses:
Loss and loss adjustment expenses (benefit)
Amortization of deferred acquisition costs, net
Commission expenses
General and administrative expenses (2)
Depreciation expense (2)
Intangible amortization
Interest expense
Total expenses
Pretax income (loss)
Income tax expense (benefit)
Net income (loss)
Total Assets
Legacy
Financial
Guarantee
Insurance
Specialty
Property &
Casualty
Insurance
Insurance
Distribution
Corporate &
Other
Consolidated
$
26 $
127
(23)
(1)
15
144
(69)
—
106
1
25
64
127
17
8
52
8
4
—
—
64
37
11
16
—
64
—
—
$
51
— $
—
52
29
11
—
4
44
7
—
$
9
—
—
—
9
21
—
22
(13)
(1)
9 $
— $
7 $
(11) $
$
$
78
51
8
140
(22)
(1)
15
269
(33)
11
29
155
2
29
64
257
12
7
5
7,537 $
523 $
155 $
213 $
8,428
Ambac Financial Group, Inc
82
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Legacy
Financial
Guarantee
Insurance
Specialty
Property &
Casualty
Insurance
Insurance
Distribution
Corporate &
Other
Consolidated
$
42 $
$
31
$
25
(6) $
—
(6) $
14
3
2
—
—
18
9
3
13
—
1
—
1
—
—
2
—
—
9
—
9
(8) $
—
(8) $
$
3
—
1
—
4
17
—
17
(14) $
—
(13) $
56
31
3
17
31
129
81
31
126
505
(396)
3
18
139
2
47
168
(20)
525
2
522
$
1
4
—
5
19
—
19
(15) $
2
(17) $
47
26
—
139
7
22
33
8
—
282
(88)
1
15
110
2
55
187
281
2
18
(16)
1
31
18
6
—
3
27
5 $
—
5 $
—
26
15
5
—
3
22
4 $
—
4 $
7,292 $
316 $
138 $
226 $
7,973
Legacy
Financial
Guarantee
Insurance
Specialty
Property &
Casualty
Insurance
Insurance
Distribution
Corporate &
Other
Consolidated (1)
$
46 $
$
26
$
12
32
128
81
30
126
451
(406)
—
102
2
44
168
(89)
540 $
3
537 $
138
3
22
33
8
—
250
(89)
—
77
2
52
187
230
20 $
16
4 $
$
$
$
$
$
$
Year Ended December 31, 2022
Revenues:
Net premiums earned
Commission income
Program fees
Net investment income
Net investment gains (losses), including impairments
Net gains (losses) on derivative contracts
Net realized gains (losses) on extinguishment of debt
Other income (expense), including VIEs
Litigation recoveries
Total revenues and other income (1)
Expenses:
Loss and loss adjustment expenses (benefit)
Amortization of deferred acquisition costs, net
Commission expenses
General and administrative expenses (2)
Depreciation expense (2)
Intangible amortization
Interest expense
Total expenses
Pretax income (loss)
Income tax expense (benefit)
Net income (loss)
Total Assets
Year Ended December 31, 2021
Revenues:
Net premiums earned
Commission income
Program fees
Net investment income
Net investment gains (losses), including impairments
Net gains (losses) on derivative contracts
Net realized gains (losses) on extinguishment of debt
Other income (expense), including VIEs
Litigation recoveries
Total revenue (1)
Expenses:
Loss and loss adjustment expenses (benefit)
Amortization of deferred acquisition costs, net
Commission expenses
General and administrative expenses (2)
Depreciation expense (2)
Intangible amortization
Interest expense
Total expenses
Pretax income (loss)
Income tax expense (benefit)
Net income (loss)
Total Assets (1)
11,871 $
156 $
93 $
182 $
12,303
Ambac Financial Group, Inc
83
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
(1)
Inter-segment revenues and inter-segment pre-tax income (loss) amounts are insignificant and are not presented separately. Total assets noted in the
Corporate and Other Column is net of AFG's investment in surplus notes issued by the Legacy Financial Guarantee Segment with fair values of $90 at
December 31, 2021.
(2) The Consolidated Statements of Comprehensive Income (Loss) presents the sum of these items as General & Administrative Expenses.
4. INVESTMENTS
Ambac’s non-VIE invested assets are primarily comprised of (i)
fixed maturity securities classified as either available-for-sale or
trading securities, (ii) interests in pooled investment funds which
are reported within Other investments on the Consolidated
Balance Sheets and (iii) preferred equity investments which are
reported within Other investments on 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. Fixed maturity securities
classified as trading are unrated municipal bond and other
obligations of Puerto Rico
in
connection with the 2022 restructuring of AAC-insured Puerto
Rico obligations.
issuing entities received
Fixed Maturity Securities
The amortized cost and estimated fair value of available-for-sale investments, excluding VIE investments, at December 31, 2023 and 2022
were as follows:
December 31, 2023
December 31, 2022
Amortized
Cost
Allowance
for Credit
Losses
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
Amortized
Cost
Allowance
for Credit
Losses
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
$
1
$
72
$
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 (1)
Short-term
Fixed maturity securities pledged as
collateral:
Short-term
$
72
$
785
105
85
239
19
139
301
1,744
426
2,170
27
27
$
—
—
—
—
3
—
—
—
3
—
3
—
—
Total available-for-sale investments
$
2,197
$
3
$
1
4
1
1
28
—
1
3
40
—
40
—
—
40
44
6
4
14
—
1
1
71
—
71
—
—
71
$
745
100
82
250
19
139
303
1,710
426
2,135
27
27
44
659
85
68
230
15
141
227
1,469
507
1,977
64
64
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1
—
—
28
—
—
2
31
—
31
—
—
2
63
9
4
19
—
4
5
106
—
106
—
—
43
598
76
65
238
15
137
224
1,395
507
1,902
64
64
$
2,162
2,041
$
—
$
31
$
106
$
1,966
(1) Consists primarily of Ambac's holdings of military housing and student loan securities.
The amortized cost and estimated fair value of available-for-sale
investments, excluding VIE investments, at December 31, 2023,
by contractual maturity, were as follows:
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.
Amortized
Cost
Estimated
Fair Value
Unrealized Losses on Fixed Maturity Securities
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
Commercial mortgage-backed securities
Collateralized debt obligations
Other asset-backed securities
Total
$
544
581
293
80
544
560
271
76
1,500
1,451
239
19
139
301
250
19
139
303
The following table shows gross unrealized losses and fair
values of Ambac’s available-for-sale investments, excluding
VIE investments, which at December 31, 2023, did not have an
allowance for credit losses under the CECL standard. 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, 2023 and 2022:
$
2,197
$
2,162
Ambac Financial Group, Inc
84
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
December 31, 2023
December 31, 2022
Less Than 12 Months
12 Months or More
Total
Less Than 12 Months
12 Months or More
Total
Fair
Value
Gross
Unrealized
Loss
Fair
Value
Gross
Unrealized
Loss
Fair
Value
Gross
Unrealized
Loss
Fair
Value
Gross
Unrealized
Loss
Fair
Value
Gross
Unrealized
Loss
Fair
Value
Gross
Unrealized
Loss
Fixed maturity securities:
Municipal obligations
$
7
$
—
$
16
$
1
$
23
$
1
$
21
$
1
$
7
$
1
$
28
$
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 temporarily impaired
securities
75
8
27
6
3
1
57
184
4
2
—
1
—
—
—
1
4
—
509
56
37
98
—
93
35
844
—
43
6
2
14
—
1
1
68
—
584
64
63
104
3
95
92
1,028
4
44
6
4
14
—
1
1
71
—
280
27
40
132
3
90
198
791
78
21
2
3
19
—
3
4
53
—
279
47
19
—
—
36
5
392
8
42
7
1
—
—
1
1
53
—
559
73
58
132
3
126
203
1,183
86
2
63
9
4
19
—
4
5
106
—
$
187
$
4
$
844
$
68
$ 1,032
$
71
$
869
$
53
$
400
$
53
$ 1,269
$
106
Management has determined that the securities in the above
table do not have credit impairment as of December 31, 2023
and 2022 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, 2023, 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.
The declines in fair value and resultant unrealized losses across
asset classes as of December 31, 2023, included in the above
table resulted from the impact of increasing interest rates and
market spreads. Management has determined that the securities
with unrealized
impaired. Further
losses are not credit
discussion of management's assessment with respect to security
categories with larger unrealized loss balances is below.
Corporate obligations
The gross unrealized losses on corporate obligations as of
December 31, 2023, resulted from an increase in interest rates
and, to a lesser extent, market spreads since the securities were
purchased. Unrealized losses of $44 related to 662 investment
grade securities with an average unrealized loss equal to 7% of
amortized cost at December 31, 2023. Securities that have
below investment grade credit ratings or are unrated comprise
$1 of the gross unrealized loss and have an average unrealized
loss equal to 5% of amortized cost at December 31, 2023.
Management believes that the full and timely receipt of all
principal and interest payment on corporate obligations with
unrealized losses as of December 31, 2023, is probable.
Residential mortgage-backed securities
As of December 31, 2023, all of the $14 unrealized loss on
residential mortgage-backed securities related to 11 Ambac-
insured securities. Four of these account for $13 of the
unrealized loss and have an average unrealized loss equal to
14% of amortized cost. The majority of these unrealized losses
relate to securities with long dated weighted average lives
making their fair values more sensitive to interest rate changes.
Also, most of these securities have below investment grade
credit ratings or are unrated. The unrealized losses on these
obligations resulted from adverse market conditions for long
dated credit assets. As noted above, expected cash flows used in
evaluating credit
impairment of Ambac-insured securities
contemplate full and timely payment of all principal and interest
payments on Ambac-insured securities. This assumption is
included in the projection of model based cash flows used in
evaluating credit
in
securitized financial assets, including the residential mortgage
backed and student loan asset backed securities included in this
group.
impairments on beneficial
interests
Investment Income (Loss)
Net investment income (loss) was comprised of the following
for the affected periods:
Year Ended December 31,
2023
2022
2021
Fixed maturity securities
$
Short-term investments
Loans
Investment expense
Securities available-for-sale and
short-term
Fixed maturity securities -
trading
Other investments
$
76
22
—
(6)
93
7
40
$
61
11
1
(6)
66
(23)
(26)
78
—
—
(6)
74
—
66
Total net investment income (loss)
$
140
$
17
$
139
Net investment income (loss) from Other investments primarily
represents changes in fair value on equity securities including
certain pooled investment funds, and income from investment
limited partnerships and other equity interests accounted for
under the equity method.
Ambac Financial Group, Inc
85
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Investments Gains
Net
Impairments
(Losses),
including
The following table details amounts included in net investment
gains (losses) and impairments included in earnings for the
affected periods:
Year Ended December 31,
2023
2022
2021
Gross realized gains on securities
$
1
$
36
$
Gross realized losses on securities
Foreign exchange (losses) gains
Credit impairments
Intent to sell impairments
Net investment gains (losses),
including impairments
(4)
(4)
(3)
(12)
(18)
14
—
—
$
(22) $
31
$
14
(2)
(5)
—
—
7
Ambac had an allowance for credit losses $3 and $0 at
December 31, 2023 and 2022, respectively. The increase of $3
for the year ended December 31, 2023 relates to additions to the
allowance for credit losses on residential mortgage-backed
securities for which credit losses were not previously recorded.
Ambac did not purchase any financial assets with credit
deterioration for the years ended December 31, 2023 and 2022.
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 $27 and $64 at
December 31, 2023 and 2022, 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
investments
Consolidated Balance Sheets as "Short-term
Other Investments
pledged as collateral, at fair value". Refer to Note 9. 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 $24 and $23 at December 31, 2023 and
2022, 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 as December 31, 2023,
were deposited as security in connection with a letter of credit
issued for an office lease. Fiduciary funds held by Ambac's
insurance distribution subsidiaries, carried at $2 and $0 at
December 31, 2023 and 2022, respectively, are included in
invested assets.
Guaranteed Securities
Ambac’s fixed maturity portfolio includes securities covered by
guarantees issued by AAC or Ambac UK (“insured securities”).
The following table represents the fair value and weighted-
average underlying rating of insured securities in Ambac's
investment portfolio at December 31, 2023 and 2022,
respectively:
December 31,
Municipal
Obligations
Mortgage-
backed
Securities
Asset-
backed
Securities
Total
2023:
2022:
$
$
9
$
240
$
232
$
482
10
$
236
$
157
$
403
Weighted
Average
Underlying
Rating (1)
B-
B
(1) Ratings are based on the lower of Standard & Poor’s or Moody’s
rating. If unavailable, Ambac’s internal rating is used.
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. Redemption of certain funds valued using NAV may be subject to
withdrawal limitations and/or redemption fees which vary with the timing and notification of withdrawal provided by the investor. In
addition to these investments, Ambac has unfunded commitments of $41 to private credit and private equity funds at December 31, 2023.
Class of Funds
December 31,
Hedge funds (1)
High yield and leveraged loans (2) (10)
Private credit (3)
Private equity (4)
Investment grade floating rate income (5)
Equity market investments (6) (10)
Real estate properties (7)
Insurance-linked investments (8)
Convertible bonds (9)(10)
2023
2022
Redemption Frequency
Redemption Notice Period
$
112
$
186
quarterly or semi-annually
85
84
70
52
38
21
1
—
80
84
47
daily
quarterly if permitted
quarterly if permitted
63 weekly
daily or quarterly
see footnote (7)
see footnote (9)
daily
64
22
1
8
556
90 days
0 - 30 days
180 days if permitted
90 days if permitted
0 days
0 - 90 days
see footnote (7)
see footnote (9)
0 days
Total equity investments in pooled funds
$
463
$
(1) This class seeks to generate superior risk-adjusted returns through
selective asset sourcing, active trading and hedging strategies
across a range of asset types.
(2) This class of funds includes investments in high quality floating
rate debt securities including ABS and corporate floating rate
notes.
Ambac Financial Group, Inc
86
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
(3) This class aims to obtain high long-term returns primarily through
credit and preferred equity investments with low liquidity and
defined term.
(4) This class seeks to generate long-term capital appreciation through
investments in private equity, equity-related and other instruments.
(5) This class of funds includes investments in high quality floating
rate debt securities including ABS and corporate floating rate
notes.
(6) This class of funds aim to achieve long-term growth through
diversified exposure to global equity markets.
(7)
Investments consist of UK property to generate income and capital
growth.
(8) This class seeks to generate returns from insurance markets
through investments in catastrophe bonds, life insurance and other
insurance linked investments. This investment is restricted in
connection with the unwind of certain insurance linked exposures.
Ambac has redeemed its investment to the extent permitted by the
fund.
(9) This class seeks to generate total return from portfolios focused
primarily on convertible securities.
(10) These categories include fair value amounts totaling $77 and $61
at December 31, 2023 and 2022, respectively, that are readily
determinable and are priced through pricing vendors, including for
Equity market investments of $38 and $53, High yield and
leveraged loans products $39 and $0, and Convertible bonds
investments $0 and $8.
5. FAIR VALUE MEASUREMENTS
Other investments also includes preferred equity investments
with a carrying value of $13 and $12 as of December 31, 2023
and 2022, respectively, that do not have readily determinable
fair values and are carried at cost, less any impairments as
permitted under the Investments — Equity Securities Topic of
the ASC. There were no impairments recorded on these
investments or adjustments to fair value to reflect observable
price changes in identical or similar investments from the same
issuer during the periods presented.
The portion of net unrealized gains (losses) related to securities
classified as trading and equity securities, excluding those
reported using the equity method, still held at the end of each
period is as follows:
Year Ended December 31,
2023
2022
2021
Net gains (losses) recognized during
the period on trading and equity
securities
Less: net gains (losses) recognized
during the reporting period on
trading and equity securities sold
during the period
Unrealized gains (losses) recognized
during the reporting period on
trading and equity securities still
held at the reporting date
$
25
$
(48) $
23
18
(26)
1
$
7
$
(22) $
22
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 has 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 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
certain uncollateralized interest rate swap contracts 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.
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 Investments — Equity Securities Topic of the ASC permits the
measurement of certain equity securities without a readily determinable fair value at cost, less impairment, and adjusted to fair value when
observable price changes in identical or similar investments from the same issuer occur (the "measurement alternative"). The fair values of
investments measured under this measurement alternative are not included in the below disclosures of fair value of financial instruments.
Ambac Financial Group, Inc
87
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
The following table sets forth the carrying amount and fair value of Ambac’s financial assets and liabilities as of December 31, 2023 and
2022, 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.
December 31, 2023:
December 31, 2022:
Carrying
Amount
Total Fair
Value
Fair Value Measurements Categorized as:
Level 1
Level 2
Level 3
Carrying
Amount
Total Fair
Value
Fair Value Measurements Categorized as:
Level 1
Level 2
Level 3
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, cash equivalents and restricted cash
Other assets - Derivatives:
Interest rate swaps—asset position
Warrants
Other assets-loans
Variable interest entity assets:
Fixed maturity securities: Corporate
obligations, fair value option
Fixed maturity securities: Municipal
obligation, trading
Fixed maturity securities: Municipal
obligations, available-for-sale
Restricted cash
Loans
Derivative assets: Interest rate swaps—
asset position
Derivative assets: Currency swaps—asset
position
Total financial assets
Financial liabilities:
$
99
$
99
$
745
100
82
250
19
139
303
27
426
475
28
25
1
2
745
100
82
250
19
139
303
27
426
463
28
25
1
2
2,072
2,072
—
95
246
—
95
246
1,663
1,663
190
36
190
36
—
—
100
82
—
—
—
—
27
421
77
27
—
—
—
—
—
—
246
—
—
—
$
99
$
726
—
—
250
19
139
235
—
5
—
2
—
—
—
—
—
95
—
190
36
$
—
19
—
—
—
—
—
68
—
—
—
—
25
1
2
$
102
598
76
65
238
15
137
224
64
507
568
44
27
1
10
$
102
598
76
65
238
15
137
224
64
507
556
44
27
1
10
2,072
1,828
1,828
—
—
—
43
96
17
43
96
17
1,663
1,829
1,829
—
—
190
49
190
49
$
—
—
76
65
—
—
—
—
64
506
61
43
—
—
—
—
—
—
17
—
—
—
$
102
585
—
—
238
15
137
157
—
1
—
1
1
—
—
—
43
96
—
—
190
49
—
12
—
—
—
—
—
67
—
—
—
—
26
1
10
1,828
—
—
—
1,829
—
—
$
7,022
$
7,010
$
979
$
1,795
$
3,850
$
6,726
$
6,715
$
833
$
1,615
$
3,772
Long term debt, including accrued interest
$
983
$
697
$
—
$
679
$
18
$
1,065
$
878
$
—
$
864
$
Other liabilities - Derivatives:
Interest rate swaps—liability position
Liabilities for net financial guarantees
written (2)
Variable interest entity liabilities:
35
292
35
788
Long-term debt (includes $2,710 and $2,788
at fair value)
Derivative liabilities: Interest rate swaps—
liability position
2,967
2,980
1,197
1,197
Total financial liabilities
$
5,474
$
5,697
$
—
—
—
—
—
35
—
2,760
1,197
—
788
220
—
38
159
38
476
3,107
3,145
1,048
1,048
5,586
$
4,671
$
1,026
$
5,418
$
—
—
—
—
—
38
—
2,992
1,048
4,942
14
—
476
154
—
644
(1) Excluded from the fair value measurement categories in the table above are investment funds of $386 and $494 as of December 31, 2023 and 2022,
respectively, which are measured using NAV as a practical expedient. Also excluded from the fair value measurements in the table above are equity
securities with a carrying value of $13 and $12 as of December 31, 2023 and 2022, respectively, that do not have readily determinable fair values and
have carrying amounts determined using the measurement alternative.
(2) The carrying value of net financial guarantees written includes financial guarantee amounts in 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 adjustment 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
instrument values and
estimates
in determining financial
Ambac Financial Group, Inc
88
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
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
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, and
certain variable interest entity assets and liabilities. 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, 2023, approximately 2%, 94%, and
4% 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, 2022, approximately 5%,
91%, and 4% 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
$68 and $67 at December 31, 2023 and 2022, 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, 2023 and 2022 include the
following:
December 31,
a. Coupon rate ..............................................
2023
5.97%
2022
5.98%
b. Average Life ............................................
12.80 years
13.46 years
c. Yield .........................................................
12.00%
12.60%
Corporate obligations: This includes certain investments in
convertible debt securities. The fair value classified as Level 3
was $19 and $12 at December 31, 2023 and 2022, respectively.
Fair value was calculated by discounting cash flows to average
maturity of 0.89 years and yield of 11.2% at December 31,
2023, and 1.75 years and a yield of 11.3% at December 31,
2022. Yields used are consistent with the security type and
rating.
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 4. Investments for additional information about
such investments in pooled funds that are reported at fair value
using NAV as a practical expedient.
Ambac Financial Group, Inc
89
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Derivative Instruments
Ambac’s derivative instruments primarily comprise interest rate
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 yield curves. 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 derivative
liabilities. Factors considered in estimating the amount of any
Ambac credit valuation adjustment ("CVA") on such contracts
include collateral posting provisions, right of set-off with the
counterparty, the period of time remaining on the derivative and
the pricing of recent terminations. The aggregate Ambac CVA
impact was not significant to the fair value of derivatives at both
December 31, 2023 or 2022.
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.
As of December 31, 2023 Ambac holds warrants to purchase
preferred stock of a development stage company. These
warrants have a fair value of $1 as of December 31, 2023,
determined using a standard warrant valuation model with
internally developed input assumptions.
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
As of December 31, 2023, long-term debt includes AAC surplus
notes and the Ambac UK debt issued in connection with a policy
commutation. As further described in Note 12. Long-term Debt
the Tier 2 Notes were fully redeemed effective January 15,
2023. The fair values of surplus notes and Tier 2 Notes are
classified as Level 2. The fair value of Ambac UK debt is
classified as Level 3.
Other Financial Assets and Liabilities
Included in Other assets are loans, the fair values of which are
estimated based upon internal valuation models and are
classified as Level 3.
Variable Interest Entity Assets and Liabilities
liabilities of Legacy Financial
The financial assets and
Guarantee Insurance VIEs ("LFG 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 11. Variable Interest
Entities, these LFG VIEs are securitization entities which have
liabilities and/or assets guaranteed by AAC or Ambac UK.
The fair values of LFG 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 and classified Level 3.
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 LFG VIE long-term debt.
LFG 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 LFG VIE fixed maturity securities and loan
assets are generally based on Level 2 market price quotes
received from independent market sources when available.
When LFG VIE asset fair values are not readily available from
market quotes, values are estimated internally and classified
Level 3. Internal valuations of LFG 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 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 weighted average
rate of 6.3% and 6.8% at December 31, 2023 and 2022,
respectively. At December 31, 2023, the range of these discount
rates was between 5.3% and 7.8%. At December 31, 2022, the
range of these discount rates was between 5.8% and 8.5%.
Ambac Financial Group, Inc
90
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
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 2023, 2022 and 2021.
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, 2023
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
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
Investments
Derivatives
Investments
Loans
Total
$
79
$
26
$
1,828
$
1,829
$
3,762
VIE Assets and Liabilities
1
3
6
—
—
(2)
87
$
—
—
—
—
—
—
26
200
68
—
—
—
(24)
142
100
—
—
—
(274)
$
2,072
$
1,663
$
343
170
6
—
—
(300)
3,848
1
$
—
$
200
$
142
$
343
3
$
—
$
68
$
100
$
170
$
$
$
Level-3 Financial Assets and Liabilities Accounted for at Fair Value
Year Ended December 31, 2022
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
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
Investments
Derivatives
Investments
Loans
Total
$
91
$
70
$
3,320
$
2,718
$
6,199
VIE Assets and Liabilities
1
(12)
—
—
—
(1)
(38)
—
—
—
—
(6)
(789)
(353)
—
—
—
(333)
(279)
—
—
—
(349)
(278)
79
$
26
$
1,828
$
1,829
$
(1,160)
(644)
—
—
—
(633)
3,762
1
$
(38) $
(789) $
(333) $
(1,160)
(12) $
—
$
(353) $
(279) $
(644)
$
$
$
Ambac Financial Group, Inc
91
2023 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, 2021
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
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
Investments
Other
Assets
VIE Assets and Liabilities
Derivatives
Investments
Loans
Total
$
78
$
1
$
84
$
3,215
$
2,998
$
6,376
1
1
13
—
—
—
—
—
—
—
(2)
91
$
(1)
—
$
(6)
—
—
—
—
(8)
176
(32)
—
—
—
(38)
59
(26)
—
—
—
(313)
70
$
3,320
$
2,718
$
230
(58)
13
—
—
(362)
6,199
(1) $
—
$
(6) $
176
$
59
$
227
(1) $
—
$
—
$
(32) $
(26) $
(59)
$
$
$
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. There
were no transfers of financial instruments into or out of Level 3 in the periods disclosed.
Gains and losses (realized and unrealized) relating to Level 3 assets and liabilities included in earnings for the affected periods are reported
as follows:
Year Ended December 31, 2023
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, 2022
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, 2021
Total gains (losses) included in earnings for the period
Changes in unrealized gains (losses) relating to financial instruments still held at the reporting date
Net
Investment
Income
Net Gains
(Losses) on
Derivative
Contracts
Income (Loss)
on Variable
Interest
Entities
Other
Income
(Expense)
$
$
$
1
$
—
$
—
—
$
341
341
$
$
1
1
1
1
(38) $
(1,123) $
(39)
(1,123)
(6) $
(6)
$
235
235
—
—
—
—
—
—
6. FINANCIAL GUARANTEES IN FORCE
Legacy financial guarantees outstanding includes the exposures
of policies that insure variable interest entities (“VIEs”)
consolidated in accordance with ASC Topic 810, Consolidation.
Financial guarantees outstanding include 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 refunded, pre-
refunded or synthetically commuted. The gross par amount of
financial guarantees outstanding was $26,005 and $27,551 at
December 31, 2023 and 2022, respectively. The par amount of
financial guarantees outstanding, net of reinsurance, was
$19,541 and $22,613 at December 31, 2023 and 2022,
respectively. As of December 31, 2023, the aggregate amount of
financial guarantee insured par ceded to reinsurers under
reinsurance agreements was $6,464 with the largest reinsurer
accounting for $2,766 or 10.6% of gross par outstanding at
December 31, 2023.
Ambac Financial Group, Inc
92
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
As of December 31, 2023 and 2022, the legacy financial
guarantee portfolio consisted of the types of guaranteed bonds as
shown in the following table:
Net Par Outstanding December 31, (1)
2023
2022
Public Finance:
Housing revenue (2)
Lease and tax-backed revenue
General obligation
Other
Total Public Finance
Structured Finance:
Mortgage-backed and home equity
Investor-owned utilities
Other
Total Structured Finance
International Finance:
Sovereign/sub-sovereign
Investor-owned and public utilities
Asset-backed and other
Transportation
Total International Finance
Total
$
3,443
$
1,542
1,051
1,526
7,562
1,712
1,077
526
3,315
4,221
2,855
862
726
8,664
5,491
1,979
1,301
1,776
10,547
1,930
1,103
579
3,612
4,077
2,583
1,083
711
8,454
$
19,541
$
22,613
(1) Net 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.
(2)
Includes $3,371 and $5,400 of Military Housing net par at
December 31, 2023 and 2022, respectively.
As of December 31, 2023 and 2022, the financial guaranteed
portfolio by location of risk was as outlined in the table below:
Net Par Outstanding December 31,
2023
2022
United States
United Kingdom
Italy
Austria
Australia
France
Other international
Total
$
10,877
$
14,159
7,502
7,223
576
307
266
12
1
644
310
259
14
4
$
19,541
$
22,613
Gross financial guarantees in force (principal and interest) were
$41,733 and $44,734 at December 31, 2023 and 2022,
respectively. Net financial guarantees in force (after giving
effect
to reinsurance) were $29,121 and $34,975 as of
December 31, 2023 and 2022, respectively.
In the United States, no state accounted for more than 6% of the
total net par outstanding at December 31, 2023. The highest
single insured risk represented 4.6% of the total net par amount
guaranteed.
7. INSURANCE CONTRACTS
Amounts presented in this Note relate only to Ambac’s non-
derivative insurance business for insurance policies issued to
beneficiaries, excluding consolidated VIEs.
Premiums
The effect of reinsurance on premiums written and earned was
as follows:
Year Ended
December 31,
Direct
Assumed
Ceded
Net
Premiums
2023:
Written
Earned
2022:
Written
Earned
2021:
Written
Earned
$
$
$
$
$
249
224
127
126
2
$
62
40
18
—
—
—
—
$
$
244
164
$
104
$
69
35
15
$
44
78
23
56
$
(33)
47
Included in net earned premiums are accelerated financial
guarantee premium revenues for retired financial guarantee
obligations for the years ended December 31, 2023, 2022 and
2021, of $0, $8 and $1, respectively.
The following table summarizes net premiums earned by
location of risk:
Year Ended December 31,
2023
2022
2021
United States
United Kingdom
Other international
Total
$
65
11
2
$
41
13
3
78
$
56
$
27
14
6
47
Premium Receivables, including Credit Impairments
Premium receivables at December 31, 2023 and 2022 were $290
and $269, respectively.
Below is the gross premium receivable roll-forward, net of the
allowance for credit losses, for the affected periods:
Year Ended December 31,
2023
2022
Beginning premium receivable
$
269
$
323
$
Premiums written on new business,
net of commissions
Premium receipts
Adjustments for changes in
expected and contractual cash
flows for contracts (1)
Accretion of premium receivable
discount for contracts
Consolidation of VIEs
Changes to allowance for credit
losses
Other adjustments (including
foreign exchange) (2)
210
(208)
117
(139)
6
8
(1)
1
4
8
—
4
(12)
Ending premium receivable (3)
$
290
$
269
$
(31)
(27)
2021
370
10
(43)
8
—
8
(4)
323
(1) Adjustments for changes in expected and contractual cash flows
are primarily due to indexation offset by reductions in insured
exposure as a result of early policy terminations and unscheduled
principal paydowns for financial guarantee policies.
Ambac Financial Group, Inc
93
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
(2)
Includes foreign exchange gains/(losses) of $4, ($13) and $(2) for
2023, 2022,and 2021 respectively.
(3) Premium receivable includes premiums to be received in foreign
denominated currencies most notably in British Pounds and Euros.
At December 31, 2023, 2022 and 2021 premium receivables
include British Pounds of $72 (£57), $71 (£59) and $108 (£80),
respectively, and Euros of $13 (€12), $14 (€13) and $16 (€14),
respectively.
Management evaluates premium receivables for expected credit
losses ("credit impairment") in accordance with the CECL
standard, which is further described in Note 2. Basis of
Presentation and Significant Accounting Policies. The key
indicator management uses to assess the credit quality of legacy
financial guarantee 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
financial guarantee premium receivables by risk classification
code and asset class as of December 31, 2023 and 2022:
Type of Guaranteed Bond
I
IA
II
III
IV
Total
I
IA
II
III
IV
Total
Surveillance Categories as of December 31, 2023
Surveillance Categories as of December 31, 2022
Public Finance:
Housing revenue
Other
Total Public Finance
Structured Finance:
Mortgage-backed and home equity
Student loan
Other
Total Structured Finance
International:
Sovereign/sub-sovereign
Investor-owned and public utilities
Other
Total International
Total (1) (2)
$
131
$
3
$
5
$ —
$ —
$
139 $
140 $
3 $
5 $ — $ — $
148
1
133
—
—
4
4
51
18
3
72
$
210
$
—
3
—
—
—
—
13
—
—
13
16
—
5
—
—
—
—
—
—
—
—
—
—
—
7
—
7
—
—
—
—
$
5
$
7
$
—
—
11
—
—
11
—
—
—
—
11
1
140
2
142
12
7
4
22
64
18
3
85
—
1
4
5
49
18
2
70
—
3
—
1
—
1
7
—
—
7
—
5
—
—
—
—
—
—
—
—
—
—
—
7
—
7
9
—
—
9
—
—
11
—
—
11
—
—
—
—
2
150
11
8
4
24
64
18
2
85
$
248 $
217 $
10 $
5 $
16 $
11 $
259
(1) Excludes specialty property and casualty premium receivables of $46 and $16 at December 31, 2023 and 2022, respectively and has recorded an
allowance for credit losses of less than a million in both periods.
(2) 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, 2023 and 2022:
Year Ended December 31,
2023
2022
2021
Beginning balance
$
5
$
9 $
Current period provision (benefit)
Write-offs of the allowance
Recoveries of previously written-
off amounts
(1)
—
—
(4)
—
—
Ending balance
$
4
$
5 $
17
(6)
(2)
—
9
At December 31, 2023 and 2022, $1 and $0 of premiums were past
due.
Ambac Financial Group, Inc
94
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
(1) Future premiums to be collected are undiscounted, gross of
allowance for credit losses, 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
lives were
premium
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
The following table summarizes the future Legacy Financial
Guarantee gross undiscounted premiums to be collected and
future premiums earned, net of reinsurance at December 31,
2023:
Future
Premiums
to be
Collected (1)
Future
Premiums
to be
Earned Net of
Reinsurance (2)
Three months ended:
March 31, 2024
June 30, 2024
September 30, 2024
December 31, 2024
Twelve months ended:
December 31, 2025
December 31, 2026
December 31, 2027
December 31, 2028
Five years ended:
December 31, 2033
December 31, 2038
December 31, 2043
December 31, 2048
December 31, 2053
$
$
8
6
7
5
26
25
24
23
93
54
25
12
2
5
4
4
4
16
16
15
14
55
28
9
4
1
Total
$
310
$
173
Loss and Loss Adjustment Expense Reserves
Ambac's loss and loss adjustment expense reserves ("loss reserves") are based on management's on-going review of the insured portfolio.
Below are the components of the loss and loss adjustment expense reserves and the subrogation recoverable asset at December 31, 2023
and 2022:
December 31, 2023:
December 31, 2022:
LFG
Present Value of
Expected
Net Cash Flow
Claims
and
Loss
Expenses
Recoveries
Unearned
Premium
Revenue
SPC
Gross
Loss and
Loss
Expense
Reserves
Gross
Loss and
Loss
Expense
Reserves
SPC
Gross
Loss and
Loss
Expense
Reserves
LFG
Present Value of
Expected
Net Cash Flow
Claims
and
Loss
Expenses
Unearned
Premium
Revenue
Recoveries
Gross
Loss and
Loss
Expense
Reserves
$
$
197 $
779
$
(55) $
(28) $
893 $
90 $
787 $
(44) $
(28) $
805
—
1
(139)
—
(137)
—
5
(276)
—
(271)
197 $
780
$
(194) $
(28) $
756 $
90 $
791 $
(319) $
(28) $
534
Balance Sheet Line Item
Loss and loss adjustment expense
reserves
Subrogation recoverable
Totals
SPC = Specialty Property and Casualty, LFG = Legacy Financial Guarantee
Ambac Financial Group, Inc
95
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Below is the loss and loss reserve expense roll-forward, net of
subrogation recoverable and reinsurance, for the affected
periods.
Year Ended December 31,
2023
2022
2021
Beginning gross loss and loss
adjustment expense reserves
$
Reinsurance recoverable
Beginning balance of net loss and
loss adjustment expense reserves
Losses and loss expenses (benefit)
incurred:
Current year
Prior years
Total (1)(2)
Loss and loss adjustment expenses
(recovered) paid:
Current year
Prior years
Total
Foreign exchange effect
Ending net loss and loss adjustment
expense reserves
Impact of VIE consolidation (3)
Reinsurance recoverable (4)
Ending gross loss and loss
adjustment expense reserves
534
115
419
37
(69)
(32)
4
(194)
(190)
—
577
(7)
186
756
$
(522) $
(397)
56
33
(578)
(430)
4
(401)
(397)
7
(1,867)
(1,860)
(2)
883
(464)
115
—
(89)
(88)
—
59
59
—
(578)
—
56
534
(522)
(1) Total losses and loss expenses (benefit) includes $(110), $(41) and
$5 for the years ended December 31, 2023, 2022 and 2021,
respectively, related to ceded reinsurance.
(2) Ambac records the impact of estimated recoveries related to
securitized loans in RMBS transactions that breached certain
representations and warranties ("R&W's") by transaction sponsors
within losses and loss expenses (benefit) for the Legacy Financial
Guarantee Insurance segment. The losses and loss expense
(benefit) incurred associated with changes in estimated R&W's for
the year ended December 31, 2023, 2022 and 2021 was $0, $(123)
and $20, respectively. Refer to Note 1. Background and Business
Legacy Financial Guarantee Loss Reserves:
Description to the Consolidated Financial Statements in this
Annual Report on Form 10-K for details of the RMBS litigation
settlements reached in October and December 2022.
(3) Ambac consolidated one, three and zero LFG VIEs during the
years ended December 31, 2023, 2022 and 2021, respectively as
further discussed in Note 11. Variable Interest Entities.
(4) Represents reinsurance recoverable on future loss and loss
adjustment expenses.
Additionally, the Balance Sheet line
"Reinsurance recoverable on paid and unpaid losses" includes
reinsurance recoverables (payables) of $8, $(0) and $(0) as of
December 31, 2023, 2022 and 2021, respectively, related to
previously presented loss and loss adjustment expenses and
subrogation.
For 2023, the favorable development in prior years was largely
driven by RMBS recoveries and favorable development related
to student loans, partially offset by the negative impact of
discount rates on the RMBS portfolio, all in the Legacy
Financial Guarantee Insurance segment.
For 2022, the favorable development in prior years was
primarily attributable to the Puerto Rico restructuring and
favorable RMBS development due to the positive impact of
discount rates and the impact of the litigation settlements with
Bank of America Corporation and certain affiliates thereof and
Nomura Credit & Capital, Inc. as described in Note 1.
Background and Business Description to the Consolidated
Financial Statements in this Annual Report on Form 10-K; both
in the Legacy Financial Guarantee Insurance segment. For
2022, prior years' loss and loss expenses recovered includes
$1,687 related the litigation settlement with Bank of America
Corporation and certain affiliates thereof.
For 2021, the favorable development in prior years was
primarily due to Public Finance credits (largely Puerto Rico) and
the RMBS portfolio.
The tables below summarize information related to policies currently included in Ambac’s loss and loss adjustment expense reserves or
subrogation recoverable at December 31, 2023 and 2022, excluding consolidated VIEs. 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, 2023 and 2022 was 3.9% and 3.9%, respectively.
Ambac Financial Group, Inc
96
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Surveillance Categories as of December 31, 2023
Surveillance Categories as of December 31, 2022
IA
II
III
IV
V
Total
I
IA
II
III
IV
V
Total
I
18
9
8
9
9
13
88
13
13
12
$ 429
$ 1,084
$ 430
$ 394
$ 1,473
$
75
328
262
139
600
$ 505
$ 1,412
$ 692
$ 534
$ 2,073
$
5
7
27
17
44
141
37
6
9
12
93
12
7
19
14
14
12
5
7
162
14
$ 3,838 $ 709 $ 200 $ 459 $ 1,000 $ 1,646 $
34 $ 4,047
1,421
526
198
286
156
565
19
1,750
$ 5,259 $ 1,235 $ 399 $ 745 $ 1,156 $ 2,210 $
53 $ 5,797
$
1
$
19
$
41
$ 324
$ 772
$
44
$ 1,202 $
4 $
4 $
43 $ 446 $ 729 $
53 $ 1,279
—
(2)
(7)
(86)
(323)
(8)
(426)
(1)
(1)
(7)
(162)
(316)
(9)
(496)
$
1
$
17
$
34
$ 239
$ 450
$
36
$ 777 $
3 $
3 $
36 $ 284 $ 413 $
43 $ 783
$ —
$ —
$ —
$ —
$ —
$ —
$ — $ — $ — $ — $ — $ (140) $ — $ (140)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(140)
—
(140)
(13)
(2)
—
(27)
(208)
(11)
(263)
(14)
(4)
—
(31)
(172)
(12)
(233)
2
—
—
4
60
3
69
2
—
—
5
42
4
54
(11)
(2)
—
(23)
(149)
(8)
(194)
(12)
(3)
—
(26)
(130)
(8)
(179)
$
(10) $
15
$
34
$ 215
$ 301
$
28
$ 583 $
(9) $ — $
36 $ 258 $ 143 $
35 $ 464
$ —
$
(12) $
(4) $ —
$
(10) $
(1) $
(28) $
(2) $
(2) $
(5) $
(8) $
(10) $
(1) $
(28)
—
3
—
—
1
—
4
1
1
—
2
4
—
8
$
(10) $
6
$
30
$ 215
$ 292
$
27
$ 559 $
(10) $
(2) $
32 $ 252 $ 137 $
34 $ 444
$
1
$ —
$
8
$
18
$
3
$ —
$
30 $
1 $ — $
8 $
21 $
3 $ — $
33
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
adjustment expense
reserves
Reinsurance
recoverable reported
on Balance Sheet (4)
(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 the Balance Sheet includes reinsurance recoverables of $30 and $33 related to future loss and loss adjustment
expenses and $8 and $(0) related to presented loss and loss adjustment expenses and subrogation at December 31, 2023 and 2022, respectively.
Representation and Warranty Recoverable
Specialty Property & Casualty Loss Reserves
Ambac recorded RMBS R&W subrogation recoverables of $0,
($0 net of reinsurance) and $140, ($140 net of reinsurance) at
December 31, 2023 and 2022, respectively. On December 29,
2022, AAC entered into a Settlement Agreement and Release
with Nomura Credit & Capital, Inc. whereby the parties settled
all RMBS litigation brought by AAC against Nomura and AAC
received $140 on January 3, 2023, bringing to a close all of
AAC's legacy litigation against RMBS sponsors.
Claims Development
The following is a summary of loss and loss adjustment expense
reserves, including certain components, for the Company’s
major product lines by reporting segment at December 31, 2023.
Ambac Financial Group, Inc
97
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Commercial Auto
Years
Net Loss and
Loss
Adjustment
Expense
Reserves
Reinsurance
Recoverables
on Unpaid
Losses
Loss and
Loss
Adjustment
Reserves
Commercial auto
$
22 $
85 $
Unallocated loss adjustment
expense reserves
Other (1)
Total
5
14
41
2
69
156
107
6
84
197
(1)
Includes $44 related to legacy liabilities obtained from the
acquisitions of Providence Washington Insurance Company and
the 21st Century Companies. All
liabilities remain
obligations of affiliates of the sellers through reinsurance and
contractual indemnities.
legacy
The claim development tables that follow present, by accident
year, incurred and cumulative paid claims and allocated claim
adjustment expense on a historical basis. This claim
development information is presented on an undiscounted, net of
reinsurance basis since 2021, Everspan's entry into the Specialty
P&C business. The claim development tables also provide the
historical average annual percentage payout of incurred claims
by age, net of reinsurance, as supplementary information
(identified as unaudited in the tables below). The historical
average annual percentage payout for incurred claims is subject
to variability due to the impact of both large claim activity and
subrogation recoveries, among other items.
Incurred Claims and Allocated LAE, Net of Reinsurance
Accident
Year
Year ended December 31,
2021
2022
2023
IBNR
Reserves at
December
31, 2023
Cumulative
Number of
Reported
Claims
2021
2022
2023
Unaudited
$
— $
— $
1 $
8
Total
$
8
19
28
—
3
10
75
1,112
2,531
Cumulative Paid Claims and Allocated Claim Adjustment Expenses,
Net of Reinsurance
Accident
Year
Year ended December 31,
2021
2022
2023
Unaudited
$
— $
— $
—
Liability for Loss and
Loss Adjustment
Expenses, Net of
Reinsurance
1
Total
2
4
6
2021 -
2023
22
Total net liability
Before
2021
—
22
2021
2022
2023
Average Annual Percentage Payout of Incurred Claims by Age,
Net of Reinsurance
Years
Unaudited
1
9.3 %
2
3
2.9 %
10.7 %
Other
Incurred Claims and Allocated LAE, Net of Reinsurance
Accident
Year
Year Ended December 31,
2021
2022
2023
IBNR
Reserves at
December
31, 2023
Cumulative
Number of
Reported
Claims
2021
2022
2023
Unaudited
$
— $
— $
— $
—
Total
$
—
16
16
—
—
8
0
646
11,595
Cumulative Paid Claims and Allocated LAE,
Net of Reinsurance
Accident
Year
Year Ended December 31,
2021
2022
2023
2021
2022
2023
Unaudited
$
— $
— $
—
Total
—
—
2
2
Liability for Loss and
Loss Adjustment
Expenses, Net of
Reinsurance
2021 -
2023
14
Before
2021
—
14
Total net liability
Average Annual Percentage Payout of Incurred Claims by Age,
Net of Reinsurance
Unaudited
1
3.1 %
2
0.9 %
3
— %
Methodology for Determining Cumulative Number of
Reported Claims
A claim file is created when the Company or the third party
claims administrator is notified of an actual demand for
payment, notified of an event that may lead to a demand for
payment or when it is determined that a demand for payment
could possibly lead to a future demand for payment on another
coverage on the same policy or on another policy. Claim files
are generally created at the claimant by coverage type,
depending on the particular facts and circumstances of the
underlying event.
For purposes of the claims development tables above, claims
reported for direct business are counted even if they eventually
close with no loss payment. Note that claims with zero claim
dollars may still generate some level of claim adjustment
expenses. Claim counts for assumed business are included only
to the extent such counts are available. The methods used to
summarize claim counts have not changed significantly over the
time periods reported in the tables above.
The Company cautions against using the summarized claim
count information provided in this disclosure in attempting to
project ultimate loss payouts by product line. The Company
generally finds claim count data to be useful only on a more
granular basis than the aggregated basis disclosed in the claim
development tables above, as the risks, average values and other
Ambac Financial Group, Inc
98
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
dynamics of the claim process can vary materially by the cause
of loss and coverage within product line.
Reinsurance Recoverables, Including Credit
Impairments:
Ambac’s reinsurance assets, including deferred ceded premiums
and reinsurance recoverables on losses amounted to $398 at
December 31, 2023. Credit exposure existed at December 31,
2023, with respect to reinsurance recoverables to the extent that
any reinsurer may not be able to reimburse Ambac under the
terms of these reinsurance arrangements. At December 31, 2023,
there were ceded reinsurance balances payable of $90 offsetting
this credit exposure. Contractually ceded reinsurance payables
can only be offset against amounts owed from the same
reinsurer in the event that such reinsurer is unable to meet its
obligations to reimburse Ambac.
To minimize its credit exposure to losses from reinsurer
insolvencies, Ambac (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
Ambac in the event of rating agency downgrades of a reinsurer
(among other events and circumstances). Ambac held letters of
credit and collateral amounting to $131 from its reinsurers at
December 31, 2023. For those reinsurance counterparties that
do not currently post collateral, Ambac's reinsurers are well
capitalized, highly
rated, authorized capacity providers.
Additionally, while legacy liabilities from the Providence
Washington Insurance Company ("PWIC") acquisition and the
three admitted carriers acquired by Everspan on January 3, 2022
(the "21st Century Companies") were fully ceded to certain
reinsurers, Everspan also benefits from an unlimited, uncapped
indemnity from Enstar Holdings (US) and 21st Century Premier
Insurance Company, respectively, to mitigate any residual risk
to these reinsurers.
For 2023, our top three reinsurers represented 74% our total
reinsurance recoverables on paid and unpaid losses. These
reinsurance recoverables were primarily from reinsurers with
applicable ratings of A or better. The following table sets forth
our three most significant reinsurers by amount of reinsurance
recoverable as of December 31, 2023.
Type of
Insurance
Rating
(1)
Reinsurance
Recoverable
(2)
Unsecured
Recoverable
(3)
Reinsurers
General
Reinsurance
Company
Specialty
P&C
QBE Insurance
Corporation
Specialty
P&C
Financial
Guarantee
Assured
Guaranty Re
Ltd.
All other
reinsurers
Total
recoverables
A++
A
AA
$
81 $
38
25
50
69
38
—
21
$
195 $
128
(1) Represents financial strength ratings from S&P for financial
guarantee reinsurers and AM Best for specialty P&C reinsurers.
(2) Represents reinsurance recoverables on paid and unpaid losses.
Unsecured amounts from QBE Insurance Corporation is also
supported by an unlimited, uncapped indemnity from Enstar
Holdings (US).
(3) Reinsurance recoverables reduced by ceded premiums payables
due to reinsurers, letters of credit, and collateral posted for the
benefit of Ambac.
Ambac has uncollateralized credit exposure to reinsurers of
$128 and $60 and has recorded an allowance for credit losses of
less than a million at December 31, 2023 and December 31,
2022, respectively. The uncollateralized credit exposure to
reinsurers
the
acquisitions of PWIC and the 21st Century Companies of $44
and $45 at December 31, 2023 and December 31, 2022,
respectively. All legacy liabilities remain with affiliates of the
sellers through reinsurance and contractual indemnities.
liabilities obtained
includes
legacy
from
8. 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 as a domestic insurer. Everspan Indemnity and its
wholly owned subsidiary, Everspan
Insurance Company
("Everspan Insurance"), are domiciled in Arizona and are
subject to the insurance laws and regulations of Arizona (the
“Arizona Insurance Laws”) and are regulated by the Arizona
Department of Insurance and Financial Institutions as domestic
insurers. The other subsidiaries of Everspan
Insurance
(Providence Washington Insurance Company, Greenwood
Insurance Company, Consolidated National Insurance Company
and Consolidated Specialty Insurance Company; together with
Everspan Insurance, the "Everspan Admitted Carriers") are
domiciled in various States and are therefore subject to the
insurance laws and regulations of their respective States of
domicile (together with the Wisconsin Insurance Laws and the
Arizona Insurance Laws, the “State Insurance Laws”) and
regulated by the insurance departments of those States as
domestic insurers. In addition, AAC and the Everspan Admitted
Carriers are subject to the insurance laws and regulations of the
other jurisdictions in which they are licensed and operate as
foreign insurers.
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 (such as risk-based capital), corporate
governance and enterprise risk. AAC, because it is a financial
risk-based capital
guarantee
requirements. As a run-off financial guarantor, AAC has been
operating under the Stipulation and Order required by OCI. OCI
has developed and
implemented OCI's Runoff Capital
Framework to assist OCI with decision making related to capital
and liquidity management at AAC. OCI cannot require AFG or
any other Ambac entity to contribute capital to or otherwise
support AAC. See Note 1. Background and Business
Description for additional information.
is not subject
insurer,
to
Ambac Financial Group, Inc
99
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
insurance
Regulated insurance companies are also required to file
quarterly and annual statutory financial statements in each
jurisdiction in which they are licensed. The State Insurance
Laws also require prior approval (or non-disapproval) of certain
transactions between an insurance carrier and its affiliates. The
level of supervisory authority that may be exercised by non-
domiciliary
jurisdiction.
Generally, however, non-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
non-domiciliary regulator.
regulators varies by
The domiciliary regulators have primary regulatory authority,
including with respect to the initiation and administration of
rehabilitation or liquidation proceedings. Additionally, the
accounts and operations of AAC, Everspan Indemnity and the
Everspan Admitted Carriers are subject to individual periodic
comprehensive
their domestic
financial examinations by
regulators, and may be examined collectively by the lead
regulator of the affiliated insurance company group.
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 thereafter
sought similar amendments to its certificates of authority in all
other states. Everspan Indemnity and the Everspan Admitted
Carriers (collectively, "Everspan") are 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
insurance in all states by virtue of the U.S. Nonadmitted and
Reinsurance Reform Act of 2010.
All of Ambac's insurance subsidiaries are in compliance with the
minimum capital and surplus levels required under the State
Insurance Laws required to transact all business written to date.
general
Insurance Distribution businesses,
like some other
Our
managing
program
administrators, may be subject to licensing requirements and
regulation by insurance regulators in various states in which
they conduct business.
brokerages
agents,
and
In addition to the legal restrictions applicable to AAC as
described herein, pursuant to the terms of the Settlement
Agreement and the Stipulation and Order, AAC must seek prior
approval by OCI of certain corporate actions. The Settlement
Agreement and Stipulation and Order include covenants which
restrict the operations of AAC. The Settlement 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. Certain of the
restrictions in the Settlement Agreement may be waived with the
approval of the OCI and/or the requisite percentage of holders of
AAC's surplus notes. See Note 1. Background and Business
Description for additional information.
Although not domiciled in New York, AAC is nevertheless
subject to the New York insurance law governing financial
guarantee
insurers. New York’s comprehensive financial
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
aggregate
limits, policyholders’ surplus and contingency
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, 2023, AAC is in compliance with
applicable aggregate risk limits and applicable single risk limits.
The financial statements of AAC and Everspan are prepared on
the basis of accounting practices prescribed or permitted by the
State Insurance Laws and the actions of regulatory authorities
thereunder. AAC and Everspan use such statutory accounting
practices prescribed or permitted by the applicable regulatory
their financial
authorities for determining and reporting
condition and results of operations, including for determining
solvency under the State Insurance Laws. The States in which
AAC and Everspan are domiciled 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, net acquisition costs, consolidation of subsidiaries
or variable interest entities and surplus notes differently.
The following are details of statutory surplus for AAC and
Everspan Indemnity:
• AAC’s statutory policyholder surplus was $897 at
December 31, 2023, as compared to $598 as of December
31, 2022.
• Everspan Indemnity has statutory policyholder surplus of
$108 as of December 31, 2023 as compared to $107 as of
December 31, 2022.
Everspan does not have permitted or additional prescribed
practices at December 31, 2023 or December 31, 2022.
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, 2023 and 2022 was lower by $24 and higher by
Ambac Financial Group, Inc
100
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
$90, respectively, than if AAC had reported such amounts in
accordance with NAIC SAP.
investments be reported at amortized cost regardless of its
NAIC risk designation.
Additional Prescribed Accounting Practices
AAC:
Permitted Accounting Practices
AAC:
OCI has prescribed the following accounting practices that differ
from NAIC SAP for AAC:
OCI has allowed the following permitted practice 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, 2023 and 2022 were 5.86% and 3.22%,
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 probable 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. From June 11, 2014 to February 12,
2018, OCI had directed AAC to not evaluate for OTTI
investments in AAC insured securities with designated
policies that were allocated to a segregated account of AAC
in rehabilitation overseen by OCI, and required all such
• 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
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.
the United Kingdom, with
in
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.
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. Ambac UK had
previously been in a capital shortfall position as compared to
these solvency capital
the
requirements since December 31, 2021.
requirements, but has met
Dividend Restrictions,
Restrictions
United States
Including Contractual
State Insurance Regulators prescribe rules that determine if
AAC and Everspan may declare dividends. In addition, AAC
and Everspan are subject to certain restrictions in their
respective articles of incorporation with regards to the payment
of dividends. Board action authorizing a distribution by an
insurance company must generally be reported to the applicable
domiciliary regulator prior to payment. In addition, State
Insurance Laws generally require regulatory approval for the
Ambac Financial Group, Inc
101
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
United Kingdom
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. 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).
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 rules governing capital extraction by
insurance firms in run off require Ambac UK to consider its
future capital requirements over a 3 to 5 year period in both base
case and downside stress scenarios before declaring a dividend.
Ambac UK annually prepares these forecasts and stress tests as
part of its regulatory submissions to the PRA each April. If the
stress tests and forecasts show adequate liquidity and regulatory
capital buffers then, subject to PRA approval, it may be possible
for Ambac UK to pay dividends to AAC within the coming
twelve month period.
payment of extraordinary dividends, which are distributions in
amounts that would exceed certain thresholds, such as a
percentage of surplus or net income for the prior year or number
of years.
Everspan does not have sufficient earned surplus at this time to
pay ordinary dividends under the State Insurance Laws.
Furthermore, certain subsidiaries of Everspan Insurance are
restricted from paying dividends to Everspan Insurance until
2025 or later pursuant to the regulatory orders approving the
acquisition of those subsidiaries, unless specifically approved by
the applicable domiciliary regulator.
Due to losses experienced by AAC, AAC has been unable to pay
ordinary dividends to AFG since 2008 and will be unable to pay
common dividends in 2024 without the prior consent of the OCI,
which is extremely unlikely. AAC’s ability to pay dividends is
further restricted by the Settlement Agreement (as described
below), by the terms of its AMPS (as described below) and by
the Stipulation and Order, and decisions by OCI concerning
dividends or other releases of capital in respect of AAC's debt
and equity will be affected
by OCI's Runoff Capital
Framework. See Note 1. Background and Business Description
for further information. Accordingly, AAC's ability to pay
dividends to AFG and the timing thereof remain subject to
substantial uncertainty.
• 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 $7.5 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.
• 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 the date that all accumulated and
unpaid dividends have been paid on the AMPS.
• The Stipulation and Order requires OCI approval for the
payment of any dividend or distribution on the common
stock of AAC.
• OCI's Runoff Capital Framework and decisions based
thereon may affect AAC's ability to pay dividends to AFG.
Ambac Financial Group, Inc
102
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
9. DERIVATIVE INSTRUMENTS
The following tables summarize the location and 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, 2023 and 2022.
December 31, 2023:
Net Amounts
of Assets/
Liabilities
Presented
in the
Consolidated
Balance
Sheet
Gross
Amount
of Collateral
Received /
Pledged not
Offset in the
Consolidated
Balance
Sheet
Gross
Amounts of
Recognized
Assets /
Liabilities
Gross
Amounts
Offset in the
Consolidated
Balance
Sheet
December 31, 2022:
Gross
Amounts of
Recognized
Assets /
Liabilities
Gross
Amounts
Offset in the
Consolidated
Balance
Sheet
Net Amount
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
25
$
1
—
—
$
25
$
1
—
—
$
25
$
27
$
1
1
—
—
$
27
$
1
$
—
—
26
$
—
$
26
$
—
$
26
$
28
$
—
$
27
$
—
$
35
35
$
$
35
35
$
$
—
$
38
$
—
$
38
$
38
$
—
$
38
$
—
$
38
$
38
$
190
$
190
$
36
36
226
$
226
$
—
—
—
$
$
$
190
49
239
$
$
$
—
—
—
$
$
$
190
49
239
$
$
$
—
—
—
$
$
$
27
1
27
—
—
190
49
239
Other assets:
Interest rate swaps
Warrants
Total non-VIE derivative
assets
Other liabilities:
Interest rate swaps
Total non-VIE derivative
liabilities
Variable interest entities
assets: Derivative and other
assets:
Interest rate swaps
Currency swaps
$
$
$
$
$
35
35
$
$
190
$
36
Total VIE derivative assets
$
226
$
Variable interest entities
liabilities: Derivative
liabilities:
Interest rate swaps
Total VIE derivative
liabilities
$
$
1,197
1,197
$
$
—
—
—
—
—
—
—
$
$
$
$
$
$
1,197
1,197
$
$
—
—
$
$
1,197
$
1,048
$
—
$
1,048
$
—
$
1,048
1,197
$
1,048
$
—
$
1,048
$
—
$
1,048
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 $23 and $6 as of December 31, 2023 and 2022, respectively. Amounts representing an
obligation to return cash collateral were $235 and $0 as of December 31, 2023 and 2022, respectively and are reported in "Variable interest
entity liabilities: Other liabilities".
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, 2023, 2022 and 2021:
Non-VIE derivatives:
Interest rate swaps
Warrants
Futures contracts
Total Non-VIE derivatives
Variable Interest Entities:
Currency swaps
Interest rate swaps
Total Variable Interest Entities
Total derivative contracts
Location of Gain (Loss) Recognized
in Consolidated Statements of
Total Comprehensive Income (Loss)
Net gains (losses) on derivative contracts
Net gains (losses) on derivative contracts
Net gains (losses) on derivative contracts
Income (loss) on variable interest entities
Income (loss) on variable interest entities
Amount of Gain (Loss) Recognized in Consolidated
Statement of Total Comprehensive Income (Loss) –
Year Ended December 31,
2023
2022
2021
(1)
—
—
(1)
(1)
(62)
(63)
$
(64) $
65
1
62
129
24
541
565
694
$
13
—
9
22
2
(152)
(150)
(128)
Interest Rate Derivatives
AFS provided interest rate derivatives to financial guarantee
customers and used derivatives to provide a partial hedge
against interest rate risk in AAC's insurance and investment
portfolios. Since June 30, 2023, AFS's only remaining derivative
positions include a limited number of legacy customer swaps
and their associated hedges.
As of December 31, 2023 and 2022, the notional amounts of
AFS's derivatives are as follows:
Type of Derivative
Interest rate swaps—pay-fixed/receive-
variable
Interest rate swaps—receive-fixed/pay-
variable
Notional - December 31,
2023
2022
$
141
$
167
989
337
Ambac Financial Group, Inc
103
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Warrants:
At December 31, 2023 and 2022, Ambac holds warrants to
purchase preferred stock of a development stage company.
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, 2023 and 2022, were
as follows:
Type of VIE Derivative
Interest rate swaps—receive-fixed/pay-
variable
Interest rate swaps—pay-fixed/receive-
variable
Currency swaps
Notional - December 31,
2023
2022
$
1,662
$
1,573
December 31,
Finite-lived Intangible Assets:
Insurance intangible:
Gross carrying value
Accumulated amortization
Net insurance intangible asset
Other intangibles:
Gross Carrying value
Accumulated amortization
Net other intangible assets
Total finite-lived intangible assets
Indefinite-lived Intangible Assets:
Insurance licenses
Total intangible assets
2023
2022
$
1,258
$
1,247
1,013
245
57
10
47
981
266
52
6
47
$
$
$
292
$
312
14
307
$
$
14
326
864
149
887
176
Amortization Expense:
Contingent Features in Derivatives Related to Ambac
Credit Risk
executed
standardized
Certain interest rate swaps remain with professional swap-dealer
counterparties
derivative
under
documents including collateral support and master netting
agreements. Under these agreements, Ambac is required to post
collateral
losses exceed
the event net unrealized
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.
in
linked
As of December 31, 2023 and 2022, the net liability fair value of
derivative
to
instruments with contingent features
Ambac’s own credit risk was $35 and $38, respectively, related
to which Ambac had posted cash and securities as collateral with
a fair value of $50 and $54, 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, 2023,
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.
10. GOODWILL AND INTANGIBLE ASSETS
The following table presents a rollforward of goodwill at
December 31, 2023 and 2022.
December 31,
Beginning balance
Business acquisitions
Impairments
Ending balance
2023
2022
$
$
61 $
9
—
70 $
46
15
—
61
Intangible asset and accumulated amortization are included in
the Consolidated Balance Sheets, as shown below.
Amortization expense
the Consolidated
Statements of Total Comprehensive Income (Loss), as shown
below.
included
in
is
Year ended December 31,
2023
2022
2021
Insurance intangible
Other intangibles
Total
$
$
25
4
44
$
3
29
$
47
$
52
3
55
The estimated future amortization expense for finite-lived
intangible assets is as follows:
Amortization Expense
2024
2025
2026
2027
2028
Thereafter
Insurance
Intangible
Asset (1)
Other
Intangible
Assets (1)
Total
$
26 $
5 $
24
22
20
18
136
4
4
4
4
26
30
28
26
24
22
162
(1) The weighted-average insurance intangible amortization and other
intangible amortization periods are 7.1 years and 5.3 years,
respectively.
11. VARIABLE INTEREST ENTITIES
Ambac, with its subsidiaries, has engaged in transactions with
variable interest entities ("VIEs") in various capacities.
• AAC and Ambac UK provide financial guarantees for
various debt obligations issued by special purpose entities,
including VIEs ("LFG VIEs");
• Ambac sponsors special purpose entities that issued notes
to investors for various purposes; and
• AAC and Ambac UK
in collateralized debt
invest
obligations, mortgage-backed and other asset-backed
securities issued by VIEs and their ownership interest is
generally insignificant to the VIE and/or they do not have
rights that direct the activities that are most significant to
such VIE.
Ambac Financial Group, Inc
104
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
LFG VIEs
AAC and Ambac UK provide financial guarantees in respect of
assets held or debt obligations of VIEs. AAC and Ambac UK’s
primary variable interest exists through this financial guarantee
insurance. The transaction structures provide certain financial
protection to AAC or Ambac UK. Generally, upon deterioration
in the performance of a transaction or upon an event of default
as specified in the transaction legal documents, AAC or Ambac
UK will obtain certain control rights that enable them to
remediate losses. These rights may enable them to direct the
activities of the entity that most significantly impact the entity’s
economic performance. Under the 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 LFG VIEs.
• We determined that AAC or Ambac UK generally have the
obligation to absorb a LFG 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 LFG VIEs in
cases where we also have the power to direct the activities
that most significantly
the VIE’s economic
impact
performance due to one or more of the following: (i) the
transaction experiencing deterioration and breaching
performance triggers, giving AAC or Ambac UK the ability
to exercise certain control rights, (ii) AAC or Ambac UK
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 not
experiencing deterioration, however due to the passive
nature of the VIE, AAC or Ambac UK's contingent control
rights upon a future breach of performance triggers is
considered to be the power over the most significant
activity.
• A VIE is generally deconsolidated in the period that AAC
or Ambac UK no longer has such control rights, which
could occur
the execution of
remediation activities on the transaction or amortization of
insured exposure, either of which may reduce the degree of
control over a VIE.
in connection with
• Assets and liabilities of LFG 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. Generally, Ambac has
elected the fair value option for consolidated LFG VIE
financial assets and financial liabilities, except in cases
where AAC or Ambac UK was involved in the design of
the VIE and was granted control rights at its inception or
when the financial liabilities are primarily supported by
non-financial assets.
◦ When the fair value option is elected, changes in the fair
value of the LFG 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).
losses reflected
◦ In cases where the fair value option has not been elected,
the LFG VIE's invested assets are fixed maturity
securities and are classified as either available-for-sale or
trading as defined by the Investments - Debt Securities
Topic of the ASC. Available-for-sale assets are reported
in the financial statements at fair value with unrealized
gains and
in Accumulated Other
Comprehensive Income (Loss) in Stockholders' Equity.
Trading assets are reported at fair value with unrealized
gains and losses reflected within net income. When the
fair value option has not been elected for LFG VIE long
term debt obligations, the debt is carried at par less
unamortized discount. Income from the LFG VIE's
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
the
Consolidated Statements of Total Comprehensive
Income (Loss).
interest entities
in
• Upon
initial consolidation of a LFG 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 of the assets and liabilities consolidated, measured
on a fair value basis except for contract assets and liabilities
which are measured at the date of consolidation consistent
with the accounting under the revenue recognition standard.
Upon deconsolidation of a LFG 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 losses 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).
• The impact of consolidating such LFG VIEs on Ambac’s
balance sheet is the elimination of transactions between the
consolidated LFG VIEs and AAC or Ambac UK and the
inclusion of the LFG 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 —
Insurance Topic of
the ASC. Consequently, upon
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,
recoverable,
deferred
unearned premiums, loss and loss expense reserves, ceded
premiums payable and insurance intangible assets. For
investment securities owned by AAC or Ambac UK that
ceded premium,
subrogation
Ambac Financial Group, Inc
105
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
are debt instruments issued by the VIE, the associated debt
and investment balances are eliminated upon consolidation.
LFG VIEs which are consolidated may include recourse and
non-recourse liabilities. LFG VIEs' liabilities that are insured by
AAC or Ambac UK are with recourse, because the AAC or
Ambac UK guarantees the payment of principal and interest in
the event the issuer defaults. LFG VIEs' liabilities that are not
insured by the AAC or Ambac UK are without recourse,
because AAC or Ambac UK has not issued a financial guarantee
and is under no obligation for the payment of principal and
interest of these instruments. AAC or Ambac UK’s economic
exposure to consolidated LFG VIEs is limited to the financial
guarantees issued for recourse liabilities and any additional
variable interests held by them. Additionally, AAC or Ambac
UK’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 AAC or Ambac UK 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 LFG VIEs
are attributable to AAC or Ambac UK’s interests through
financial guarantee premium and loss payments with the VIE.
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, trading
Municipal obligations, available-for-sale (1)
Total LFG VIE fixed maturity securities, at fair value
Restricted cash
Loans, at fair value (2)
Derivative assets
Other assets, including contract assets
Total LFG VIE assets
LIABILITIES:
Long-term debt:
Long-term debt, at fair value (3)
Long-term debt, at par less unamortized discount
Total long-term debt
Derivative liabilities
Cash collateral payable
Other liabilities
Total LFG VIE liabilities
2023
Ambac
Assurance
Ambac UK
Total VIEs
Ambac UK
2022
Ambac
Assurance
Total VIEs
$
2,072
$
—
—
2,072
245
1,663
226
90
—
—
95
95
1
—
—
2
$
2,072
$
1,828
$
—
95
2,167
246
1,663
226
92
—
—
1,828
1
1,829
239
—
—
43
96
139
16
—
—
2
$
1,828
43
96
1,967
17
1,829
239
2
$
4,296
$
98
$
4,394
$
3,896
$
157
$
4,054
$
2,710
$
—
$
2,710
$
2,788
$
—
$
99
2,808
1,197
235
4
159
159
—
—
1
258
2,967
1,197
235
5
—
2,788
1,048
—
—
319
319
—
—
5
2,788
319
3,107
1,048
—
5
$
4,244
$
160
$
4,404
$
3,836
$
324
$
4,160
Number of LFG VIEs consolidated
4
2
6
5
4
9
(1) Available-for-sale LFG VIE fixed maturity securities consist of municipal obligations with an amortized cost basis of $88 and $99 at December 31,
2023 and December 31, 2022, respectively. At December 31, 2023, there were $7 aggregate gross unrealized gains and $0 aggregate gross unrealized
losses. At December 31, 2022, there were $1 aggregate gross unrealized gain and $(4) aggregate gross unrealized losses. All such securities had
contractual maturities due after ten years as of December 31, 2023.
(2) The unpaid principal balances of loan assets carried at fair value were $1,787 and $1,977 as of December 31, 2023 and 2022, respectively.
(3) The unpaid principal balances of long-term debt carried at fair value were $2,952 and $3,064 as of December 31, 2023 and 2022, respectively.
The following schedule details the components of Income (loss) on variable interest entities for the affected periods:
Year ended December 31,
Net change in fair value of VIE assets and liabilities reported under the fair value option
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 under the fair value option
Investment income (loss)
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 VIEs
Income (loss) on variable interest entities
2023
2022
2021
$
4
$
—
$
—
5
7
1
(12)
(1)
4
3
$
$
(1)
(1)
(4)
2
(12)
(1)
37
21
$
4
1
5
6
2
(6)
(1)
—
7
Ambac Financial Group, Inc
106
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Ambac consolidated an additional one, three and zero LFG VIEs during the years ended December 31, 2023, 2022 and 2021, respectively.
Ambac deconsolidated four, zero and zero LFG VIEs during the years ended December 31, 2023, 2022 and 2021, respectively. No gains or
losses resulted from the deconsolidations.
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,
2023 and 2022:
December 31, 2023:
December 31, 2022:
Carrying Value of Assets and Liabilities
Carrying Value of Assets and Liabilities
Maximum
Exposure
To Loss (1)
Insurance
Assets (2)
Insurance
Liabilities (3)
Net
Derivative
Assets
(Liabilities) (4)
Maximum
Exposure
To Loss (1)
Insurance
Assets (2)
Insurance
Liabilities (3)
Net
Derivative
Assets
(Liabilities) (4)
Global structured finance:
Mortgage-backed—residential
Other consumer asset-backed
Other
Total global structured finance
Global public finance
Total
$
2,391
$
135
$
540
433
3,364
17,498
$ 20,861
$
5
2
141
209
351
$
432
200
2
634
202
836
$
— $
2,559 $
266 $
400 $
—
—
—
—
652
430
3,642
17,997
6
2
274
216
225
2
628
212
$
— $ 21,639 $
490 $
840 $
—
—
1
1
—
1
(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 adjustment 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 interest rate swaps on Ambac’s Consolidated Balance Sheets.
Ambac Sponsored Non-consolidated VIEs
On July 6, 2021, Sitka Holdings, LLC ("Sitka"), a wholly-owned
subsidiary of AFG and Ambac's then newly formed non-
consolidated VIE, issued the Sitka Senior Secured Notes.
Ambac's debt obligation to Sitka was reported within Long-term
12. LONG-TERM DEBT
debt on the Consolidated Balance Sheets. The Sitka Senior
Secured Notes were fully redeemed effective as of October 29,
2022.
Long-term debt outstanding, excluding VIE long-term debt, was as follows:
December 31,
Ambac Assurance:
5.1% Surplus Notes
Tier 2 Notes
Ambac UK Debt
Long-term debt
2023
2022
Par Value
Unamortized
Discount
Carrying
Value
Par Value
Unamortized
Discount
Carrying
Value
$
$
519
$
(28) $
491
$
—
41
—
(24)
—
17
519
146
41
$
(42) $
—
(25)
560
$
(52) $
508
$
706
$
(67) $
477
146
16
639
Aggregated annual maturities of non-VIE long-term debt
obligations (based on scheduled maturity dates as further
discussed below) are as follows:
2024
2025
2026
2027
2028
Thereafter
Total
$
519
(1)
—
—
—
—
41
$
560
(1) Surplus Notes had a scheduled maturity date of June 7, 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 June 7, 2020, June 7, 2021, June 7, 2022, and June 7
2023. As a result, the payment date for principal of the surplus
notes was 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. Included in the table above is the potential
principal payment at the next scheduled payment date of June 7,
2024.
Ambac Financial Group, Inc
107
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Surplus Notes
Ambac Assurance's surplus notes, with a par amount of $519
and $519 at December 31, 2023 and 2022, respectively, had a
scheduled maturity of June 7, 2020, which has been extended
until OCI grants approval to pay the principal of the surplus
notes. The discount on surplus notes outstanding as of December
31, 2023, is being accreted into income at a weighted average
effective interest rate of 6.6%.
Surplus note principal and interest payments require the
approval of OCI. In May 2023, OCI declined the request of
AAC to pay the principal amount of the surplus notes, plus all
accrued and unpaid interest thereon, on the then next scheduled
payment date of June 7, 2023. As a result, the scheduled
payment date for interest, and the scheduled maturity date for
payment of principal of the surplus notes was 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 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 were accrued for and AAC is
accruing interest on the interest amounts following each
scheduled payment date. Total accrued and unpaid interest for
surplus notes outstanding to third parties was $475 at December
31, 2023. As required by the terms of surplus notes, AAC will
continue to seek OCI’s approval to make payments of principal
and interest on its surplus notes. OCI’s approval may be granted
or denied in OCI’s sole discretion. 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 two exceptional payments. Ambac can provide no
assurance as to when or if surplus note principal and interest
payments will be made. If OCI does not approve payments on or
the acquisition of surplus notes over time, the ongoing accretion
of interest on the notes may impair AAC's ability to extinguish
the notes in full. Surplus notes are subordinated in right of
payment to policyholder and other claims.
Tier 2 Notes
The Tier 2 Notes, issued on February 12, 2018, had a par value
of $0 and $146 (including paid-in-kind interest of $0 and $49) at
December 31, 2023 and 2022, respectively, and had a legal
maturity of February 12, 2055. Interest on the Tier 2 Notes was
at an annual rate of 8.50%. Other than upon payment of
principal at redemption or maturity, interest payments were not
due in cash on interest payment dates and were 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 was part of the effective yield calculation.
Ambac accreted the discount on the Tier 2 Notes into earnings at
an effective interest rate of 9.9%.
Ambac UK Debt
The Ambac UK debt,
the
issued
commutation of an exposure on June 18, 2019, has a par value
in connection with
of $41 and $41 at December 31, 2023 and 2022, 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 at an effective interest rate
of 7.4%.
Debt Redemptions and Extinguishments
Net realized gains (losses) on extinguishment of debt reported in
the Consolidated Statements of Total Comprehensive Income
(Loss) for the years ended December 31, 2023, 2022 and
2021were $0, $81 and $33, respectively.
In 2021, Sitka, issued $1,175 par amount of LIBOR plus 4.5%
senior secured notes due 2026 (the “Sitka Senior Secured
Notes”). In connection with the issuance and sale of the Sitka
Senior Secured Notes, AAC issued a secured note to Sitka in the
same amount and with the same interest rate and maturity date
as the Sitka Senior Secured Notes (the "Sitka AAC Note").
Effective October 29, 2022, the Sitka AAC Note and Sitka
Senior Secured Notes were wholly redeemed for $1,218 (a price
equal to 103% of the principal amount plus accrued and unpaid
interest) from the proceeds from the BOA Settlement Payment.
Ambac recorded a loss of $53, the difference between the
carrying value of the Sitka AAC Note and the redemption
amount paid, excluding accrued interest.
The Tier 2 Notes were partially redeemed on October 29, 2022,
by approximately $213 from the BOA Settlement Payment and
fully redeemed on January 15, 2023, primarily from the Nomura
Settlement Payment. No gain or loss was recorded on the
redemptions of the Tier 2 Notes. Refer to Note 1. Background
and Business Description for further description of the BOA
Settlement Payment and Nomura Settlement Payment.
During the year ended December 31, 2022, surplus notes with
aggregate par amount of $266 were acquired from third party
holders at prices below the carrying value of the surplus notes
including accrued interest, resulting in a gain of $134.
During the year ended December 31, 2021, purchase agreements
were executed under which AAC issued $280 aggregate
principal amount (and the associated amount of accrued and
unpaid interest thereon) to acquire all its remaining outstanding
junior surplus notes. The Company recorded a gain of $33
arising from these purchases of junior surplus notes below their
carrying values.
Variable Interest Entities, Long-term Debt
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
these
obligations. Consequently, Ambac has consolidated
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
Ambac Financial Group, Inc
108
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
consolidated as a result of the financial guarantee provided by
Ambac was $3,655 and $3,388 as of December 31, 2023 and
2022, respectively. As of December 31, 2023 and 2022, the
ranges of final maturity dates of the outstanding long-term debt
associated with these VIEs were December 2030 to August 2054
and December 2025 to August 2054, respectively. As of
December 31, 2023 and 2022, the interest rates on these VIEs’
long-term debt ranged from 0.00% to 22.20% and 0.00% to
7.93%, respectively. Aggregated annual maturities of VIE
long-term debt following December 31, 2023 are: 2024-$0;
2025-$0; 2026-$0; 2027-$0; 2028-$0; Thereafter-$3,655.
13. REVENUES FROM CONTRACTS WITH
CUSTOMERS
As further described in the Revenue Recognition section of Note
2. Basis of Presentation and Significant Accounting Policies, the
Insurance Distribution businesses and a consolidated VIE have
contracts that are subject to the Revenue from Contracts with
Customers Topic of the ASC.
The following table presents Insurance Distribution commission
revenue recognized disaggregated by policy type for the years
ended December 31, 2023, 2022 and 2021 :
Year ended December 31,
2023
2022
2021
Employer stop loss
Affinity products
Commercial auto
Marine
Professional liability
Other
Total
$
11 $
9 $
22
12
3
3
1
19
2
—
—
—
51 $
31 $
8
18
—
—
—
—
26
During the years ended December 31, 2023, 2022 and 2021, the
amount of
to performance
obligations satisfied in a previous period, inclusive of changes
due to estimates was approximately $5, $6 and $8, respectively.
recognized
revenue
related
Receivables, Contract Assets and Liabilities
The balances of receivables, contract assets and contract
liabilities with customers were as follows:
December 31,
Receivables
Contract assets
Contract liabilities
2023
2022
$
10 $
95
1
7
5
1
Insurance Distribution
Contract assets represent estimated future consideration related
to base commissions and profit-sharing commissions that were
recognized as revenue upon the placement of the policy, but are
not yet billable or collectable. The Company does not have the
right to bill or collect payment on i) base commissions until the
related premiums from policyholders have been collected nor ii)
profit-sharing commissions until after the contract year is
completed.
Contract liabilities represent advance consideration received
from customers related to Employer stop loss base commissions
that will be recognized over time as claims servicing is
performed, which typically occurs between 17 and 20 months
from contract inception. During the years ended December 31,
2023, 2022 and 2021, the Company recognized revenue that was
included in the contract liability balance as of the beginning of
the period of $1, $1 and $1, respectively.
Consolidated VIE
Contract assets of $87 represent future consideration related to
service concession payments for already completed services that
were recognized as revenue but are not yet due. There are no
contract liabilities.
The change in contract assets during the year ended December
31, 2023, was primarily due to the newly consolidated VIE.
As the VIE was consolidated on December 31, 2023, revenues
have not yet been recognized.
Ambac Financial Group, Inc
109
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
14. COMPREHENSIVE INCOME
The following tables detail the changes in the balances of each component of accumulated other comprehensive income for the affected
periods:
Year Ended December 31, 2023:
Year ended December 31, 2022:
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)
Unrealized
Gains
(Losses) on
Available-
for Sale
Securities (1)
Amortization
of
Postretireme
nt Benefit (1)
Gain (Loss)
on Foreign
Currency
Translation
(1)
Credit Risk
Changes of
Fair Value
Option
Liabilities
(1) (2)
Total
Total
Beginning Balance
$
(71) $
3
$
(184) $
(1) $
(253) $
154
$
4
$
(100) $
(1) $
58
Other comprehensive
income (loss) before
reclassifications
Amounts reclassified from
accumulated other
comprehensive income (loss)
Net current period other
comprehensive income (loss)
31
21
51
Ending balance
$
(20) $
3
(1)
2
5
40
—
40
—
—
—
74
19
93
(211)
(14)
(225)
—
(1)
(1)
(85)
—
(85)
—
—
—
$
(144) $
(1) $
(160) $
(71) $
3
$
(184) $
(1) $
(296)
(15)
(310)
(253)
(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.
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,
2023
2022
Affected Line Item in the
Consolidated Statement of
Total Comprehensive Income
$
$
$
$
$
$
22
$
(2)
21
$
(1) $
(1)
(1)
—
(17) Net realized investment gains (losses)
3 Provision for income taxes
(14) 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
—
—
—
19
$
$
— Credit risk changes of fair value option liabilities
— Provision for income taxes
— Net of tax and noncontrolling interest
(15) 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.
15. NET INCOME PER SHARE
Share Repurchases
As of December 31, 2023, 45,195,370 shares of AFG's common
stock (par value $0.01) were issued and outstanding. Common
shares outstanding increased by 221,613, during the year ended
December 31, 2023, primarily due to settlements of employee
restricted and performance stock units, partially offset by share
repurchases. For the three years ended December 31, 2023, 2022
and 2021, 1,503, 0 and 132 warrants were exercised,
respectively, resulting in an issuance of 29, 0 and 4 shares of
common stock, respectively. As of April 30, 2023, all of AFG's
outstanding warrants expired without being exercised.
On March 29, 2022, AFG's Board of Directors approved a share
repurchase program authorizing up to $20 in share repurchases,
with an expiration date of March 31, 2024, which may be
terminated at any time. On May 5, 2022, the Board of Directors
authorized an additional $15 in share repurchase. As of
December 31, 2023, AFG repurchased 1,930,384 shares
(including 325,068 shares in 2023) for $19 with an average
purchase price of $9.70 per share, bringing the total unused
authorized amount to $16.
Ambac Financial Group, Inc
110
2023 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.
16. 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
2018
2020
2019
Consolidated Pretax Income (Loss)
U.S. and foreign components of pre-tax income (loss) were as
follows:
Year Ended December 31,
2023
2022
2021
U.S.
Foreign
Total
$
$
(29) $
511 $
41
12
13
$
525 $
(32)
34
2
Provision (Benefit) for Income Taxes
The components of the provision (benefit) for income taxes
were as follows:
Year Ended December 31,
2023
2022
2021
Current taxes
U.S. state and local
$
Foreign
Total current taxes
Deferred taxes
Domestic
Foreign
Total deferred taxes
Provision for income taxes
$
$
$
—
$
1
8
8
(2)
1
(1) $
7
$
7
6
—
(4)
(4) $
2
$
2
10
12
—
6
6
18
Earnings Per Share Calculation
the adjustment
income (loss) attributable
The numerator of the basic and diluted earnings per share
computation represents net
to
common stockholders adjusted by the retained earnings impact
redeemable
of
noncontrolling interests under ASC 480. The redemption value
adjustment
the Redeemable
Noncontrolling Interests section of Note 2. Basis of Presentation
and Significant Accounting Policies.
redemption value of
further described
to
in
is
The following table provides a reconciliation of net income
attributable to common stockholders to the numerator in the
basic and diluted earnings per share calculation, together with
the resulting earnings per share amounts:
Year ended December 31,
Net income (loss) attributable to
common stockholders
Adjustment to redemption value
(ASC 480)
Numerator of basic and diluted
EPS
Per Share:
Basic
Diluted
2023
2022
2021
$
$
$
$
4 $
522 $
(17)
5
3
(12)
8 $
525 $
(28)
0.18 $
11.48 $
0.18 $
11.31 $
(0.61)
(0.61)
The denominator of the basic earnings per share computation
represents the weighted average common shares outstanding
plus vested restricted stock units (together, "Basic Weighted
Average Shares Outstanding"). The denominator of diluted
earnings per share adjusts the basic weighted average shares
outstanding for all potential dilutive common shares outstanding
during the period. All potential dilutive common shares
outstanding consider common stock deliverable pursuant to
warrants, unvested restricted stock units and performance stock
units granted under existing compensation plans.
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,
2023
2022
2021
Basic weighted average shares
outstanding
Effect of potential dilutive
shares (1):
Warrants
Restricted stock units
Performance stock units (2)
Diluted weighted average shares
outstanding
Anti-dilutive shares excluded
from the above reconciliation
Warrants
Restricted stock units
Performance stock units (2)
45,636,649
45,719,906
46,535,001
—
164,752
739,305
—
144,194
550,730
—
—
—
46,540,706
46,414,830
46,535,001
—
4,877,617
4,877,653
135,058
177,119
—
—
475,333
700,915
(1) For the year ended December 31, 2021, 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
111
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
The total effect of income taxes on net income and stockholders’
equity for the years ended December 31, 2023, 2022 and 2021 is
as follows:
Year Ended December 31,
2023
2022
2021
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, 2023 and 2022, are presented below:
Total income taxes charged to net
income
$
Income taxes charged (credited)
to stockholders’ equity:
Unrealized gains (losses) on
investment securities, including
foreign exchange
Change in retirement benefits
Credit Risk Changes to Fair
Value Options
Valuation allowance to equity
Total charged to stockholders’
equity:
Total effect of income taxes
$
7
$
2
$
18
12
(1)
—
(9)
(47)
—
—
41
2
9
$
(6)
(4) $
(3)
—
—
1
(2)
16
Reconciliation of U.S. Federal Statutory Income Tax
Rate to Actual Income Tax Rate
in
tax provisions
The
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:
Year Ended
December 31,
Tax on income
(loss) at statutory
rate
Changes in
expected tax
resulting from:
Tax-exempt
interest
Foreign taxes
State Income
Taxes
Return to
Provision
Variable Interest
Entities
Valuation
allowance
Other, net
Tax expense on
income (loss)
$
2023
2022
2021
$
3
21 % $ 110
21 % $ —
21 %
—
9
— %
70 %
(1)
4
— %
(2)
(114) %
1 %
8
448 %
—
(1) %
(1)
— %
14
794 %
15
118 % —
— % —
— %
(24)
(197) %
25
5 % —
— %
2
4
7
13 % (131)
(25) %
(4)
(230) %
35 %
(4)
(1) %
1
72 %
60 % $
2
1 % $ 18
991 %
Unrecognized Tax Positions
The Company had no material unrecognized tax benefits at
December 31, 2023 and 2022.
December 31,
Deferred tax liabilities:
Insurance intangible
Unearned premiums and credit fees
Variable interest entities
Other
Total deferred tax liabilities
Deferred tax assets:
Net operating loss carryforward
Interest expense carryforward
Loss reserves
Debentures
State capital loss carryforward
Compensation
Investments
Other
Subtotal deferred tax assets
Valuation allowance
Total deferred tax assets
Net deferred tax liability
2023
2022
51
23
—
3
77
714
58
42
22
8
5
—
4
853
795
58
19
$
$
56
24
4
1
85
725
66
38
15
8
6
6
4
867
796
70
15
$
$
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 $19 is attributable to
Ambac U.K. and is classified in other liabilities on the
Consolidated Balance Sheet.
NOL & Investment Interest Carryforward
As of December 31, 2023, the Company has (i) $3,400 of NOLs,
which if not utilized will begin expiring in 2030, and will fully
expire in 2042, and (ii) $274 of interest expense tax deduction
carryover, which has an indefinite carryforward period but is
limited in any particular year based on certain provisions.
17. EMPLOYMENT BENEFIT PLANS
Incentive Compensation - Stock Units and Cash
Employees, directors and consultants of Ambac are eligible to
participate in Ambac’s 2020 Incentive Plan, which is the
successor plan to the 2013 Incentive Plan, subject to the
discretion of the Compensation Committee of Ambac’s Board of
Directors. There are 1,475,000 and 4,000,000 shares of Ambac's
common stock authorized for awards under the 2020 Plan and
2013 Plan, respectively. Awards may also be made under the
2020 Plan with respect to the shares that remained available for
grant under the 2013 Plan. In addition, shares subject to
Ambac Financial Group, Inc
112
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
that
outstanding awards granted under
subsequently terminate by expiration or forfeiture, cancellation,
or otherwise without the issuance of such shares become
available for awards under the 2020 Plan.
the 2013 Plan
On June 24, 2021, the Compensation Committee of Ambac's
Board of Directors adopted the Ambac Financial Group, Inc.
Executive Stock Deferral Plan (the “Stock Deferral Plan”).
Under the Stock Deferral Plan, certain executives of AFG and
its subsidiaries who are designated by the compensation
committee as eligible to participate in the Stock Deferral Plan
may elect to defer the settlement of all or a portion of the RSU
(as defined below) awards and PSU (as defined below) awards
that are granted to the executives to a future date(s) selected by
the executive. Deferred awards under the Stock Deferral Plan
(and any related dividend equivalents) will continue to be paid
in shares of common stock of AFG, which will be issued under
the 2020 Plan, provided that any dividend equivalents credited
on a participant’s deferred awards in respect of cash dividends
paid by AFG will be paid to the participant in cash. At the
discretion of the Compensation Committee of the Board of
Directors, RSU and PSU awards may be settled in cash based on
the closing price of AFG's common stock on the last business
day prior to the settlement date. The Stock Deferral Plan is not
funded, and deferred awards under the Stock Deferral Plan are
not segregated from the Company’s general assets.
The amount of stock-based compensation expense and
corresponding after-tax expense are as follows:
Year Ended December 31,
2023
2022
2021
Restricted stock units
Performance awards
Total stock-based compensation
Total stock-based compensation
(after-tax)
$
$
$
5
$
5
$
12
17
$
12
17
$
17
$
17
$
5
10
14
11
Restricted Stock Units (“RSUs”)
RSUs can be awarded to certain employees for a portion of their
STIP compensation, LTIP compensation, sign-on and special
awards for exceptional performance or promotion. RSUs can
also be awarded to consultants for meeting certain contractual
performance goals. The LTIP, sign-on, consultant and special
awards generally vest in equal installments over a two to three
year period. Such vesting is expressly conditioned upon
continued service with Ambac through the applicable vesting
date, although vesting may be accelerated
in certain
circumstances under the awards, including for terminations due
to death, disability, eligible
involuntary
termination by Ambac other than for cause.
retirement, or
As part of our director compensation program, prior to 2021
RSUs were awarded annually on or about April 30 of each year
to directors and would vest on the last day of April of the
following year. During 2021, the director compensation program
was revised to provide for quarterly grants of RSUs that would
vest one year from the grant date. 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 number of calendar days from the grant date until
the next regularly scheduled quarterly grant date pursuant to
Ambac’s director compensation program.
As of December 31, 2023, 1,036,339 RSUs remained
outstanding, of which (i) 634,312 units required future service as
a condition to the delivery of the underlying shares of common
stock and (ii) 402,027 units do not require future service and are
deferred for future settlement. As of December 31, 2022,
923,250 RSUs remained outstanding, of which (i) 538,163 units
required future service as a condition to the delivery of the
underlying shares of common stock, and (ii) 385,087 units did
not require future service and were deferred for future
settlement.
A summary of RSU activity for 2023 is as follows:
Weighted
Average
Grant Date
Fair Value Per
Share
Shares
Outstanding at beginning of period
923,250
$
Granted
Delivered or returned to plan (1)
Forfeited
415,416
(300,164)
(2,163)
Outstanding at end of period
1,036,339
$
15.94
15.72
16.28
16.97
15.75
(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, 2023, Ambac withheld 49,870 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 per share
of RSUs granted during 2023, 2022 and 2021 was $15.72,
$12.48 and $17.39, respectively. As of December 31, 2023,
there was $6 of total unrecognized compensation costs related to
unvested RSUs granted. These costs are expected to be
recognized over a weighted average period of 2.0 years. The fair
value for RSUs vested and delivered during the year ended
December 31, 2023, 2022 and 2021 was $5, $4 and $4,
respectively.
Performance Stock Awards ("PSUs")
PSUs are awarded to certain employees for a portion of their
LTIP compensation and vest after 3 years from grant date. The
actual number of shares payable at settlement is subject to
performance metrics relative
to AFG, Cirrata, Xchange,
Everspan and AAC. Actual payout can range from 0% to 240%
of the number of units granted. Under currently outstanding
award agreements, performance will be evaluated as follows:
Ambac Financial Group, Inc
113
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
• In regards to Xchange, for the 2021 and 2022 PSU awards,
and Cirrata for the 2023 PSU awards, (i) cumulative
earnings before
and
amortization over the vesting period and (ii) for Cirrata
2023 PSU awards, the aggregate of all premiums placed by
Cirrata with any insurance carrier over the vesting period.
taxes, depreciation
interest,
• In regards to Everspan: (i) for the 2022 and 2023 PSU
awards, cumulative earnings before
taxes,
depreciation and amortization over the vesting period and
(ii) for the 2023 PSU award, cumulative direct or assumed
premiums written (including any from Cirrata) and fronting
fees over the vesting period.
interest,
• In regards to AAC: reductions in watch list and adversely
classified credits, which is intended to reward participants
for de-risking the financial guarantee insured portfolio.
• Relative Total Shareholder Return will cause the payout at
the end of the performance period to be increased or
decreased 10% for awards issued through 2021 and 20%
for awards after 2021, 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.
Pursuant to the LTIP award agreements if (i) a termination
occurred prior to the last day of the performance period by
reason of disability, an involuntary termination by the Company
other than for “cause,” or "retirement," the recipient would be
entitled to receive the PSU award at the end of the relevant
performance period based on the satisfaction of the performance
conditions related to such award at the time of termination, and
(ii) a termination occurred prior to the last day of the
performance period by reason of death, the beneficiaries of the
recipient would be entitled to receive the number of PSUs that
the recipient would have been entitled to receive at a 100%
overall payout multiple regardless of the outcome of any of the
performance conditions. The current performance awards shall
be settled within 75 days after the end of the performance
period, including those with partial or accelerated vesting,
subject to any deferrals made pursuant to the Stock Deferral
Plan.
A summary of PSU activity for 2023 is as follows:
Weighted
Average
Grant Date
Fair Value Per
Share
Shares
Outstanding at beginning of period
918,951
$
Granted (1)
Delivered (2)
Forfeited
Performance adjustment (3)
479,079
(525,212)
(1,289)
147,542
Outstanding at end of period
1,019,071
$
15.67
17.72
18.90
17.72
19.50
15.52
(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,
2023, Ambac withheld 231,645 of shares from employees that
settled performance based restricted stock units to meet the
required tax withholdings.
(3) Represents the number of additional shares issued for awards
granted in 2020 as a result of actual performance during the
performance period.
The weighted average grant date fair value per share of PSUs
granted during 2023, 2022 and 2021 was $17.72, $13.44 and
$18.67, respectively. As As of December 31, 2023, there was
$10 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. The
fair value for PSUs vested and delivered during the year ended
December 31, 2023, 2022 and 2021 was $8, $5 and $10,
respectively.
Postretirement Health Care and Postemployment
Benefits
provides
postretirement
and
discretionary
Ambac
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, were $1, $2 and $1 for the years ended
December 31, 2023, 2022 and 2021, respectively.
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 $8 as of December 31, 2023. The assumed health care cost
trend rates range from 5.5% in 2023, decreasing ratably to 4.5%
in 2033.
The following table sets forth projected benefit payments from
Ambac’s postretirement plan over the next ten years for current
retirees:
2024
2025
2026
2027
2028
Thereafter
Total
$
$
—
—
1
1
1
3
6
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, 2023 and
2022, were 4.75% and 5.00%, respectively.
Savings Incentive Plans
As a result of the acquisitions of All Trans and Capacity Marine
effective November 1, 2022, Ambac has multiple savings
incentive plans. Substantially all US employees are covered by
one of these plans. The Plan sponsored by AFG includes
the
employer matching contributions equal
to 100% of
Ambac Financial Group, Inc
114
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
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. Xchange and Riverton employees
moved to this plan from a previous plan (Xchange during 2022
and Riverton during 2023). Employees of All Trans and
Capacity Marine are included in a multiple employer plan that
has discretionary contributions for which none were made
during Ambac's ownership of these entities. The total cost of the
savings incentive plans were $1, $1 and $1 for the years
December 31, 2023, 2022 and 2021, respectively.
18. LEASES
Ambac is the lessee and lessor under certain lease agreements
further described below.
Lessee information
Ambac is the lessee in operating leases for corporate offices,
auto and equipment. Leases in effect at December 31, 2023,
have remaining lease terms ranging from under 1 year to 9
years. Certain of these leases include automatic renewal or early
termination provisions. Ambac does not include these provisions
in the determination of its lease liabilities and right-of-use assets
unless exercise is considered reasonably certain.
included
Lease costs are
the
Consolidated Statement of Total Comprehensive Income (Loss).
The components of lease costs, net of sub-lessor income, is as
follows:
in operating expenses on
Year Ended December 31,
2023
2022
Operating lease cost
Short-term lease cost
Variable lease cost
Sublease income
Total lease cost
$
$
4 $
—
1
(1)
4 $
4
—
—
(1)
4
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,
2023
2022
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)
$
5
$
1
5
—
Supplemental balance sheet information related to leases is as
follows:
December 31,
Operating leases:
2023
2022
Operating lease right of use assets
$
Operating lease liabilities
Weighted average remaining lease term:
$
19
22
21
25
Operating leases
6.1 years
6.8 years
Weighted average discount rate:
Operating leases
7.9 %
7.8 %
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, 2023
Operating
Leases
2024
2025
2026
2027
2028
Thereafter
Total lease payments
Less: imputed interest
Total
Lessor information
$
$
4
5
5
5
5
5
28
(6)
22
Ambac is the lessor in one operating sublease of corporate office
space which has a remaining term of 6.0 years. There are no
extension or termination provisions.
Future undiscounted lease payments to be received are as
follows:
As of December 31, 2023
Operating
Leases
2024
2025
2026
2027
2028
Thereafter
Total lease receipts
$
$
1
1
1
1
1
1
8
19. COMMITMENTS AND CONTINGENCIES
Litigation Against Ambac - Pending Cases
Monterey Bay Military Housing, LLC, et al. v. Ambac
Assurance Corporation, et al. (United States District Court,
Southern District of New York, Case No. 1:19-cv-09193-PGG,
transferred on October 4, 2019 from the 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)
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, (iv) fraudulent misrepresentation, (v)
fraudulent concealment and (vi) conspiracy to commit fraud.
The claims relate to bonds and debt certificates (insured by
the renovation and
AAC)
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
(civil Racketeer
to finance
that were
issued
Ambac Financial Group, Inc
115
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
to dismiss
the Northern District of California on
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. AAC 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
the first amended complaint without
prejudice. On December 17, 2018, Plaintiffs filed a second
amended complaint. On February 15, 2019, AAC 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 10, 2019, after the case was transferred to the
SDNY, the defendants filed motions to vacate or reconsider the
the
decision by
defendants’ motion to dismiss. On March 31, 2021, the court
granted defendants’ motions for reconsideration and, upon
reconsideration, dismissed the claims against AAC and its
former employee for breach of fiduciary duty and for aiding and
abetting breach of AAC’s or its former employee’s fiduciary
duty; dismissed two plaintiffs’ RICO claims against AAC and
its former employee; and in all other respects denied defendants’
motions. Defendants served answers to the second amended
complaint on April 21, 2021, asserting several affirmative
defenses, including a defense for unclean hands focused on the
plaintiffs’ failure
the project properties and
falsification of maintenance records. On May 24, 2021,
plaintiffs moved to strike defendants’ unclean hands defenses.
On September 14, 2021, Magistrate Judge Sarah L. Cave, to
whom plaintiffs’ motion to strike was referred for a Report and
Recommendation,
issued an opinion and order denying
plaintiffs’ motion. On April 6, 2022, certain co-defendants filed
a motion to sever the plaintiffs’ claims and to dismiss all claims
except for claims asserted by the Monterey Bay plaintiffs. On
January 26, 2024, the Court granted the parties leave to file
motions for summary judgment, with opening briefs due March
8, 2024, oppositions due April 19, 2024, and replies due May
10, 2024.
to maintain
In re National Collegiate Student Loan Trusts Litigation
(Delaware Court of Chancery, Consolidated C.A. No. 12111,
filed November 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 AAC, filed motions for judgment on the pleadings
in support of their requested judicial determinations. On August
27, 2020, the Vice Chancellor issued an opinion addressing all
of the pending motions for judgment on the pleadings, which
Indenture Trustee, and other parties
the
granted certain of the parties’ requested judicial determinations
and denied others. He deferred judgment on still other
declarations pending further factual development. The Vice
Chancellor entered a series of stays to facilitate good-faith
settlement discussions, the most recent of which was entered on
May 2, 2023, and stayed the matter through May 5, 2023. On
February 23, 2024, the parties filed a status report stating that
they continue to negotiate a resolution to the various pending
claims.
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
seeks declarations
the general obligation bonds are
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
intended to file, and to seek to confirm, an amended plan of
adjustment (the “Commonwealth Plan”). On March 10, 2020,
the District Court ordered that this case remain stayed while the
Oversight Board attempted to confirm the Commonwealth Plan.
The January 18, 2022 confirmation of the Commonwealth Plan
(described below) resolved this litigation. On May 9, 2022, the
District Court dismissed this case.
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 PRHTA (as defined below),
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; 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 remain
stayed pending further order of the District Court pursuant to the
Oversight Board’s initiation of a separate adversary proceeding
Ambac Financial Group, Inc
116
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
concerning PRHTA bonds (No. 20-ap-00005, discussed below).
The October 12, 2022 confirmation of the PRHTA POA (as
defined and described below) resolved this litigation. AAC
expects this case will be dismissed pursuant to PRHTA POA.
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).
On January 16, 2020, the Oversight Board filed an adversary
proceeding against monoline insurers insuring PRIFA (as
defined below) bonds 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. On May 5, 2021, Assured
Guaranty Corp. and Assured Guaranty Municipal Corp.
(“Assured”) and National Public Finance Guarantee Corporation
(“National”) announced an agreement with the Oversight Board
with respect to the PRHTA/PRCCDA Settlement (as defined
below). On July 14, 2021, AAC and Financial Guaranty
Insurance Company (“FGIC”) reached an agreement in principle
with the Oversight Board with respect to the PRIFA Settlement
(as defined below). On August 2, 2021, the Oversight Board,
AAC, FGIC, and the PRIFA bond trustee jointly moved to stay
this case as a result of the PRIFA Settlement and AAC’s joinder
to
the GO/PBA
Settlement (as defined below). On August 3, 2021, the District
Court ordered that this case be stayed. The January 18, 2022
confirmation of the Commonwealth Plan (described below)
resolved this litigation. On September 30, 2022, the District
Court entered an order closing this adversary proceeding.
the PRHTA/PRCCDA Settlement and
filed proofs of claim against
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).
On January 16, 2020, the Oversight Board filed an adversary
proceeding against monoline insurers insuring PRCCDA (as
defined below) bonds and the PRCCDA bond trustee, all of
the
which defendants
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. On
May 5, 2021, Assured and National announced an agreement
with the Oversight Board with respect to the PRHTA/PRCCDA
Settlement. On July 14, 2021, AAC and FGIC reached an
agreement in principle with the Oversight Board with respect to
the PRIFA Settlement. On August 2, 2021, the Oversight
Board, AAC, FGIC, and the PRCCDA bond trustee jointly
moved to stay this case as a result of the PRIFA Settlement and
AAC’s joinder to the PRHTA/PRCCDA Settlement and the GO/
PBA Settlement. On August 3, 2021, the District Court ordered
that this case be stayed. The January 18, 2022 confirmation of
this
the Commonwealth Plan (described below) resolved
litigation. On September 30, 2022, the Court entered an order
closing this adversary proceeding.
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).
On January 16, 2020, the Oversight Board filed an adversary
proceeding against monoline insurers insuring PRHTA bonds,
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. On
May 5, 2021, Assured and National announced an agreement
with the Oversight Board with respect to the PRHTA/PRCCDA
Settlement. On July 14, 2021, AAC and FGIC reached an
agreement in principle with the Oversight Board with respect to
the PRIFA Settlement. On August 2, 2021, the Oversight Board,
AAC, FGIC, and the PRHTA fiscal agent jointly moved to stay
this case as a result of the PRIFA Settlement and AAC’s joinder
to
the GO/PBA
Settlement. On August 3, 2021, the District Court ordered that
this case be stayed. The January 18, 2022 confirmation of the
Commonwealth Plan (described below) resolved this litigation.
On September 30, 2022, the District Court entered an order
closing this adversary proceeding.
the PRHTA/PRCCDA Settlement and
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).
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 PRHTA, including for lack of secured status.
On March 10, 2020, the District Court stayed this case. On May
5, 2021, Assured and National announced an agreement with the
Oversight Board with respect
the PRHTA/PRCCDA
Settlement. On July 14, 2021, AAC and FGIC reached an
agreement in principle with the Oversight Board with respect to
the PRIFA Settlement. On August 2, 2021, the Oversight
Board, AAC, FGIC, and the PRHTA fiscal agent jointly moved
to stay this case as a result of the PRIFA Settlement and AAC’s
joinder to the PRHTA/PRCCDA Settlement and the GO/PBA
Settlement. On August 3, 2021, the District Court ordered that
this case be stayed. On April 14, 2022, the Oversight Board
filed a notice that this case has not been resolved by the
Commonwealth Plan and should remain pending. The October
12, 2022 confirmation of the PRHTA POA (described below)
resolved this litigation. On September 30, 2022, the Court
entered an order closing this adversary proceeding.
to
Ambac Financial Group, Inc
117
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Litigation Against Ambac - General
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.
The Company periodically receives various regulatory inquiries
and requests for information with respect to investigations and
inquiries that such regulators are conducting. The Company 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 such litigation
routine and incidental to the conduct of its business, such
litigation can potentially result in large monetary awards when a
civil jury is allowed to determine compensatory and/or punitive
damages.
Everspan may be subject to disputes with policyholders
regarding the scope and extent of coverage offered under
Everspan's policies; be required to defend claimants in suits
against its policyholders for covered liability claims; or enter
into commercial disputes with its reinsurers, MGA/Us or third
party
respective
contractual obligations and rights. Under some circumstances,
the results of such disputes or suits may lead to liabilities
beyond those which are anticipated or reserved.
administrators
regarding
claims
their
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 with losses that are probable and reasonably estimable
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 could
result from unfavorable outcomes. Under some circumstances,
adverse results in any such proceedings could be material to our
business, operations, 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.
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
for
(the “PRIFA QM”)
On January 18, 2022, the United States District Court for the
District of Puerto Rico (the “District Court”) entered an order
confirming a plan of adjustment for the Commonwealth of
Puerto Rico (the “Commonwealth Plan”). On January 20, 2022,
the District Court entered orders approving a Qualifying
Modification
the Puerto Rico
Infrastructure Finance Authority (“PRIFA”) and a Qualifying
Modification (the “PRCCDA QM”) for the Puerto Rico
Convention Center District Authority (“PRCCDA”).
On
October 12, 2022, the District Court entered an order confirming
a plan of adjustment (the “PRHTA POA”) for the Puerto Rico
Highways and Transportation Authority (the “PRHTA”). These
two plans of adjustment and two qualifying modifications
incorporated settlements reached between AAC, the Oversight
Board, and certain other parties related to each of AAC’s Puerto
Rico-related exposures, which included agreements with respect
to the treatment of general obligation and Puerto Rico Public
Buildings Authority
“GO/PBA
Settlement”), PRHTA and PRCCDA bonds (the “PRHTA/
PRCCDA Settlement”), and PRIFA bonds (the “PRIFA
the
Settlement”).
Commonwealth Plan, PRIFA QM, PRCCDA QM, and PRHTA
POA resolved the majority of AAC’s outstanding Puerto Rico-
related litigation. Certain parties appealed the confirmation
orders for both the Commonwealth Plan and the PRHTA POA;
all of these appeals have been resolved and the orders
confirming both plans were affirmed. Those appeals are
discussed immediately below, followed by a discussion of
AAC’s additional remaining outstanding Puerto Rico-related
litigation.
these settlements,
incorporating
(“PBA”)
bonds
By
(the
In re Financial Oversight and Management Board for Puerto
Rico (United States District Court, District of Puerto Rico, No.
1:17- bk-03283) (appeals of the Commonwealth Plan). On
January 18, 2022, the District Court entered an order confirming
the Commonwealth Plan and entered its findings of fact and
conclusions of law related thereto. Several parties appealed the
District Court’s confirmation order to the First Circuit Court of
Appeals, but the First Circuit affirmed the District Court in all
appeals and all appeals have been dismissed.
In re Financial Oversight and Management Board for Puerto
Rico (United States District Court, District of Puerto Rico, No.
Ambac Financial Group, Inc
118
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
1:17- bk-03567) (appeal of the PRHTA POA). On October 12,
2022, the District Court entered an order confirming the PRHTA
POA and entered its findings of fact and conclusions of law
related thereto. On October 24, 2022, a group of present and
former employees of PRHTA (“the Vazquez-Velazquez Group”)
filed a notice of appeal with respect to, and a motion to stay, the
PRHTA POA confirmation order. One party appealed the
District Court’s confirmation order to the First Circuit Court of
Appeals, but the First Circuit affirmed the District Court and the
appeal has been dismissed.
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). On January 7, 2016,
AAC, along with co-plaintiffs Assured, 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
the case was
automatically stayed under section 405 of the Puerto Rico
Oversight, Management
and Economic Stability Act
("PROMESA"). 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. AAC expects
this case will be dismissed given the settlements reached
between AAC and the Oversight Board.
that
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 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. The
settlements reached between AAC and the Oversight Board
resolved this litigation, and the January 20, 2022 PRIFA QM
provided for dismissal of this case. AAC expects this case will
be dismissed pursuant to the PRIFA QM.
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 was permitted to continue, with AAC’s
claims against BNYM being limited to those for gross
negligence, willful misconduct and intentional fraud. On
November 17, 2021, the District Court denied as moot BNY's
motion to transfer venue to the District of Puerto Rico and
continued the stay of the action. On July 6, 2022, the District
Court granted AAC’s motion to lift the stay and for leave to file
a Second Amended Complaint (“SAC”). AAC filed its SAC on
July 10, 2022, and on July 25, 2022, BNY moved to dismiss the
SAC. On September 23, 2022, Ambac filed its opposition to
BNY’s motion to dismiss, and on October 24, 2022, BNY filed
its reply in support of its motion to dismiss. Oral argument has
been requested but not yet scheduled.
its
lessees—many of whom
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
PBA seeking declaratory judgment that the leases between PBA
and
and
are
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 March 10, 2020, the District
Court ordered that this case be stayed while the Oversight Board
attempted to confirm the Commonwealth Plan. The January 18,
2022 confirmation of the Commonwealth Plan resolved this
litigation.
agencies
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”). 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. 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
Ambac Financial Group, Inc
119
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
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 February 5 and 19, 2020,
certain parties filed motions to dismiss the claim objection. On
March 10, 2020, the District Court ordered that this matter
remain stayed while the Oversight Board attempted to confirm
the Commonwealth Plan. On July 19, 2020, the Committee filed
a motion to lift the stay on this claim objection in light of
changes to the Commonwealth’s fiscal plan and likely changes
to the Commonwealth Plan 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. On October
1, 2020, the Committee moved the District Court to reconsider
its denial of the Committee’s motion to lift the stay; on October
5, 2020, the District Court denied the Committee’s motion 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
January 18, 2022 confirmation of the Commonwealth Plan
resolved this litigation. On September 30, 2022, the Court
entered an order terminating this matter.
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 and FGIC
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 January 31, 2020,
AAC, FGIC, Assured, and the PRIFA bond trustee filed an
amended motion seeking substantially similar relief. 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. On March 3, 2021, the First Circuit affirmed
the District Court’s opinions denying the motion to lift the stay.
On May 5, 2021, Assured and National announced an agreement
with the Oversight Board with respect to the PRHTA/PRCCDA
Settlement. On July 14, 2021, AAC and FGIC reached an
agreement in principle with the Oversight Board with respect to
the PRIFA Settlement, and as a result of that settlement, also
joined the PRHTA/PRCCDA Settlement. On August 2, 2021,
the Oversight Board, AAC, FGIC, and the PRIFA bond trustee
jointly moved to stay this motion as a result of the PRIFA
Settlement and AAC’s
the PRHTA/PRCCDA
joinder
Settlement and the GO/PBA Settlement. On August 3, 2021, the
District Court ordered that this motion be stayed. The January
18, 2022 confirmation of the Commonwealth Plan resolved this
litigation.
to
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”). On
January 16, 2020, AAC, Assured, National, and FGIC 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. On March 3,
2021, the First Circuit affirmed the District Court’s opinions
denying the motion to lift the stay. On May 5, 2021, Assured
and National announced an agreement with the Oversight Board
with respect to the PRHTA/PRCCDA Settlement. On May 11,
2021, the Oversight Board, Assured, and National jointly moved
to stay this case with respect to Assured and National as a result
of the PRHTA/PRCCDA Settlement. AAC and FGIC objected
to the motion to stay on May 18, 2021, and briefing on the
motion to stay concluded on May 21, 2021. On May 25, 2021,
the District Court ordered this case stayed with respect to
Assured and National as a result of the PRHTA/PRCCDA
Settlement. On July 14, 2021, AAC and FGIC reached an
agreement in principle with the Oversight Board with respect to
the PRIFA Settlement. On August 2, 2021, the Oversight
Board, AAC, FGIC, and the PRHTA fiscal agent jointly moved
to stay this motion as a result of the PRIFA Settlement and
AAC’s joinder to the PRHTA/PRCCDA Settlement and the GO/
PBA Settlement. On August 3, 2021, the District Court ordered
that this motion be stayed. The January 18, 2022 confirmation
of the Commonwealth Plan resolved this litigation.
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”). On January 16,
2020, AAC, FGIC, Assured, 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
the further
enforcement action against PRCCDA; or,
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
in
Ambac Financial Group, Inc
120
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
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
PRCCDA-related adversary proceeding, No. 20-ap-00004. On
May 5, 2021, Assured and National announced an agreement
with the Oversight Board with respect to the PRHTA/PRCCDA
Settlement. On May 11, 2021, the Oversight Board, Assured,
and National jointly moved to stay this case with respect to
Assured and National as a result of the PRHTA/PRCCDA
Settlement. AAC and FGIC objected to the motion to stay on
May 18, 2021, and briefing on the motion to stay concluded on
May 21, 2021. On May 25, 2021, the District Court ordered this
case stayed with respect to Assured and National as a result of
the PRHTA/PRCCDA Settlement. On July 14, 2021, AAC and
FGIC reached an agreement in principle with the Oversight
Board with respect to the PRIFA Settlement. On August 2,
2021, the Oversight Board, AAC, FGIC, and the PRCCDA bond
trustee jointly moved to stay this motion as a result of the
PRIFA Settlement and AAC’s joinder to the PRHTA/PRCCDA
Settlement and the GO/PBA Settlement. On August 3, 2021, the
District Court ordered that this motion be stayed. The January
18, 2022 confirmation of the Commonwealth Plan resolved this
litigation. On September 30, 2022, the Court entered an order
terminating the PRCCDA Stay Motion.
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 memorandum of
the
constitutionality of PROMESA on October 2, 2020. On August
2, 2021, the Oversight Board, AAC, FGIC, and the PRCCDA
bond trustee jointly moved to stay this case as a result of the
PRIFA Settlement and AAC’s joinder to the PRHTA/PRCCDA
Settlement and the GO/PBA Settlement. On August 3, 2021, the
District Court ordered that this case be stayed. The January 18,
2022 confirmation of the Commonwealth Plan resolved this
litigation. On March 23, 2022, the District Court dismissed this
case.
in support of
law
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) (“PRHTA Trustee
Motion”). On July 17, 2020, AAC, Assured, FGIC, and
National filed a motion seeking appointment as trustees under
Section 926 of the Bankruptcy Code to pursue certain avoidance
actions on behalf of PRHTA against the Commonwealth of
Puerto Rico. The PRHTA Trustee Motion attached a proposed
complaint detailing the avoidance claims that movants would
pursue. On August 11, 2020, the District Court denied the
PRHTA Trustee Motion; on August 24, 2020, movants noticed
an appeal of the denial of the PRHTA Trustee Motion to the
First Circuit. On July 29, 2021, AAC, Assured, FGIC, and
National jointly moved to dismiss the appeal at the First Circuit
as a result of the PRHTA/PRCCDA Settlement and the PRIFA
Settlement. On July 30, 2021, the First Circuit dismissed the
appeal.
the
Commonwealth Plan resolved this litigation.
The January 18, 2022 confirmation of
In re Financial Oversight and Management Board for Puerto
Rico (United States District Court, District of Puerto Rico, No.
1:17-bk-03283), Objection of Ambac Assurance Corporation,
Pursuant to Bankruptcy Code Section 502 and Bankruptcy Rule
3007, to Claim Asserted by the Official Committee of Retired
Employees of the Commonwealth of Puerto Rico Appointed in
the Commonwealth’s Title III Case (Dkt. No. 16884, filed June
3, 2021) (“Pension Claim Objection”). On June 3, 2021, AAC
filed a claim objection in the Commonwealth’s Title III case
challenging the amount of the claim filed by the Retiree
Committee against the Commonwealth, which asserted pension
liabilities of at least $58.5 billion. AAC contended that this
asserted pension liability was overstated by at least $9 billion,
and sought disallowance of the Retiree Committee’s proof of
claim to the extent of the overstatement. On June 17, 2021, the
Oversight Board and the Retiree Committee each indicated an
intention to move to terminate the Pension Claim Objection.
The Oversight Board contended that AAC lacked standing to
bring the Pension Claim Objection and that the objection is
moot; the Retiree Committee contended that the Pension Claim
Objection should be addressed at confirmation. AAC responded
on June 21, 2021. On June 22, 2021, the District Court denied
the Pension Claim Objection without prejudice. On August 2,
2021, the Oversight Board and AAC jointly moved to stay this
matter as a result of the PRIFA Settlement and AAC’s joinder to
the PRHTA/PRCCDA Settlement and the GO/PBA Settlement.
On August 3, 2021, the District Court ordered that this matter be
the
stayed.
Commonwealth Plan, which
is currently being appealed,
resolved this litigation.
The January 18, 2022 confirmation of
In re Financial Oversight and Management Board for Puerto
Rico (United States District Court, District of Puerto Rico, No.
1:17- bk-03283), Monolines’ Reply to Underwriter Defendants’
Objection to Plan and Proposed Confirmation Order (Dkt. No.
18871), filed October 27, 2021). On October 19, 2021, certain
the
banks, underwriters, and professionals
underwriting of bonds
the
Commonwealth and its instrumentalities (the “Underwriter
Defendants”) filed an objection to proposed Commonwealth
in
issued or guaranteed by
involved
Ambac Financial Group, Inc
121
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Plan and a related proposed confirmation order. On October 27,
2021, AAC and FGIC filed a reply in response to the
Underwriter Defendants’ objection. The January 18, 2022
confirmation of
this
objection and resolved this litigation.
the Commonwealth Plan overruled
District Court’s order denying their motion to dismiss the
amended complaint. The CFPB filed its responsive brief on
November 7, 2022. The Trusts and other intervenors, including
AAC, filed their reply brief on December 28, 2022. The Third
Circuit heard oral argument in the matter on May 17, 2023.
Student Loans Exposure
Item 9. Changes in and Disagreements with
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
improprieties
servicing practices.
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. 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. On March 26, 2021, the court granted
intervenors’ motion to dismiss for failure to state a claim and
denied the motion to dismiss for lack of subject matter
jurisdiction. The court also denied as moot the CFPB’s
application for entry of default against the Trusts. The CFPB
filed an amended complaint on April 30, 2021. On May 21,
2021, the Trusts and several intervenors, including AAC, moved
to dismiss the CFPB’s amended complaint for failure to state a
claim. On December 13, 2021, the court denied the Trusts' and
intervenors' motions to dismiss the amended complaint. On
December 23, 2021,
intervenors,
including AAC, filed a motion seeking (i) an order certifying for
interlocutory appeal the court’s December 13, 2021 order
denying the motion to dismiss the amended complaint, and (ii) a
stay of the action pending resolution of any appeal. The motion
is fully briefed and remains pending. On January 26, 2022, the
Trusts and several intervenors, including AAC, answered the
CFPB’s amended complaint, asserting several affirmative
defenses and denying that the CFPB is entitled to relief from the
Trusts. On February 11, 2022, the court certified its ruling on
the motion to dismiss for interlocutory appeal to the U.S. Court
of Appeals for the Third Circuit, and stayed the case pending
the Trusts and several
appeal. On February 21, 2022,
intervenors, including AAC, filed a petition with the Third
Circuit for permission to appeal the District Court’s order
denying their motion to dismiss the amended complaint. On
March 3, 2022, the CFPB filed its opposition to the petition for
permission to appeal. On April 29, 2022, the Third Circuit
granted the Trusts' and intervenors' petition. On September 23,
2022, the Trusts and other intervenors, including AAC, filed
their opening brief to the Third Circuit, seeking reversal of the
the Trusts and several
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, 2023 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
Reporting.
is responsible for
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,
Ambac Financial Group, Inc
122
2023 Form 10-K
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 designed and operated, can
provide only reasonable assurance of achieving their objectives.
Based on its evaluations, Ambac's management have concluded
that, as of December 31, 2023, 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, 2023 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
2023 that materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial
reporting. .
Item 9B. Other Information
In the last fiscal quarter, none of our directors or executive
officers adopted, terminated, or modified any Rule 10b5-1
trading arrangement, or any non-Rule 10b5-1
trading
arrangement. No other 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 2024
Annual Meeting of Stockholders which will be filed within 120
days of the end of our fiscal year ended December 31, 2023 (the
“2024 Proxy Statement”) and
incorporated herein by
reference.
is
Ambac has a Code of Business Conduct and Ethics 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
found on Ambac’s website at www.ambac.com on
the
“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 and Ethics 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
Item 11. Executive Compensation
Information relating to Ambac’s executive officer and director
compensation will be in the 2024 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, as well as
information related to equity compensation plans, will be in the
2024 Proxy Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related
Transactions, and Director Independence
to Ambac with respect
Information relating
to certain
relationships and related transactions and director independence
will be in the 2024 Proxy Statement and is incorporated herein
by reference.
Item 14. Principal Accountant Fees and Services
Information relating to principal accountant fees and services
will be in the 2024 Proxy Statement and is incorporated herein
by reference.
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) Documents filed as a part of this report:
1. Financial Statements
The consolidated financial statements included in Part II, Item 8 above are filed as part of this Annual Report on Form 10-K.
Ambac Financial Group, Inc
123
2023 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 III — Supplementary Insurance Information ..........................................................................................................
Page
127
128
133
Exhibit Description
(3) Articles of Incorporation and bylaws:
(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
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
(10) Material contract and management compensation plans and arrangements:
Incentive
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
Financial Group,
Inc.'s Long-Term
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 December 16, 2021)
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
Incorporated by Reference
Filing
Date
Exhibit
Number
Form
Filed
Herewith
8-A
8-K
8-A
8-A
10-K
05/01/13
01/27/23
05/01/13
05/01/13
03/03/14
3.2
2.1
4.1
4.10
8-K
06/08/10
10.3
10-Q
11/09/15
4.1
10-Q
08/11/14
10-K
03/03/14
10-K
8-K
03/03/14
05/03/13
10-K
03/01/23
10.1
10.4
10.5
10.2
10.5
10-K
03/16/11
10.34
10-K
03/16/11
10.33
10-Q
11/15/10
10.1
10-K
02/24/22
10.10
10-K
02/29/16
10.27
Ambac Financial Group, Inc
124
2023 Form 10-K
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
Exhibit Description
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
among Ambac Financial Group,
Inc., Ambac Assurance
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
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
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
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
Form of 2021 Restricted Stock Unit Award Agreement between
Ambac Financial Group, Inc. and Messrs. LeBlanc, Trick and
Ksenak
Form of 2021 Restricted Stock Unit Award Agreement between
Ambac Financial Group, Inc. and Messrs. Barranco, Eisman,
Reilly and Ms. Smith
Form of 2021 Performance Stock Unit Award Agreement between
Ambac Financial Group, Inc. and Messrs. LeBlanc, Trick and
Ksenak
Form of 2021 Performance Stock Unit Award Agreement between
Ambac Financial Group, Inc. and Messrs. Barranco, Eisman,
Reilly and Ms. Smith
Executive Stock Deferral Plan dated June 24, 2021
Settlement Agreement and Release dated as of October 6, 2022 by
and among Bank of America Corporation and certain affiliates and
Ambac Assurance Corporation (Portions of this exhibit have been
omitted in reliance on Regulation S-K Item 601(b)(10)(iv))
Settlement Agreement and Release dated as of December 29, 2022
by and among Nomura Credit & Capital, Inc. and Ambac
Assurance Corporation. (Portions of this exhibit have been
omitted in reliance on Regulation S-K Item 601(b)(10)(iv))
Form of 2022 Restricted Stock Unit Award Agreement between
Ambac Financial Group, Inc. and Messrs. LeBlanc, Trick and
Ksenak
Form of 2022 Restricted Stock Unit Award Agreement between
Ambac Financial Group, Inc. and Messrs. Barranco, Eisman,
McGinnis and Ms. Smith.
Incorporated by Reference
Filing
Date
11/03/16
Exhibit
Number
10.2
Form
10-Q
Filed
Herewith
8-K
12/13/16
10.1
8-K
01/06/17
10.1
10-K
02/28/18
10.38
10-K
02/28/18
10.39
8-K
06/25/18
10.1
10-K
03/02/20
10.45
10-K
03/02/20
10.46
Def 14A
8-K
04/15/20
01/25/21
Ex. B
1.01
10-Q
05/10/21
10.1
10-Q
05/10/21
10.2
10-Q
05/10/21
10.3
10-Q
05/10/21
10.4
8-K
10-K
06/30/21
03/01/23
10.1
10.34
10-K
03/01/23
10.35
10-Q
05/10/22
10.1
10-Q
05/10/22
10.2
Ambac Financial Group, Inc
125
2023 Form 10-K
Filed
Herewith
X
X
X
X
X
X
X
X
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
Exhibit Description
Form of 2022 Performance Stock Unit Award Agreement between
Ambac Financial Group, Inc. and Messrs. LeBlanc, Trick and
Ksenak
Form of 2022 Performance Stock Unit Award Agreement between
Ambac Financial Group, Inc. and Messrs. Barranco, Eisman,
McGinnis and Ms. Smith
Employment Agreement dated as of October 5, 2023, by and
among Ambac Financial Group,
Inc., Ambac Assurance
Corporation and R. Sharon Smith
Employment Agreement dated as of October 5, 2023, by and
among Ambac Financial Group,
Inc., Ambac Assurance
Corporation and Daniel McGinnis
Form of 2023 Restricted Stock Unit Award Agreement between
Ambac Financial Group, Inc. and Messrs. LeBlanc, Trick and
Ksenak.
Form of 2023 Restricted Stock Unit Award Agreement between
Ambac Financial Group, Inc. and Messrs. Barranco, Eisman,
McGinnis and Ms. Smith.
Form of 2023 Performance Stock Unit Award Agreement between
Ambac Financial Group, Inc. and Messrs. LeBlanc, Trick and
Ksenak.
Form of 2023 Performance Stock Unit Award Agreement between
Ambac Financial Group, Inc. and Messrs. Barranco, Eisman,
McGinnis and Ms. Smith.
Stipulation and Order - Office of the Commissioner of Insurance of
the State of Wisconsin, in the Matter of Ambac Assurance
Corporation effective as of February 22, 2024
Incorporated by Reference
Filing
Date
05/10/22
Exhibit
Number
10.3
Form
10-Q
10-Q
05/10/22
10.4
8-K
10/06/23
10.1
10-Q
11/07/23
10.2
10-Q
05/09/23
10.1
10-Q
05/09/23
10.2
10-Q
05/09/23
10.3
10-Q
05/09/23
10.4
(97) Recoupment Policy
97.1
Ambac Financial Group, Inc. - Recoupment Policy
(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 (formatted as Inline XBRL and
contained in Exhibit 101)
++ Furnished herewith.
Ambac Financial Group, Inc
126
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Summary of Investments
Other Than Investments in Related Parties
December 31, 2023
SCHEDULE I
Type of Investment
($ in millions)
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
Fixed income - trading
Other(1)
Total
Cost
Estimated
Fair Value
Amount at Which
Shown in the
Balance Sheet
$
72 $
72 $
785
105
85
239
19
139
301
452
24
432
745
100
82
250
19
139
303
452
27
463
72
745
100
82
250
19
139
303
452
27
475
$
2,652 $
2,652 $
2,664
(1) Excluded from the estimated fair value amount are equity securities with a carrying value of $13 as of December 31, 2023, that do not have readily
determinable fair values and are carried on the balance sheet at cost, less impairment, and adjusted to fair value when observable price changes in
identical or similar investments from the same issuer occur, as permitted under the Investments — Equity Securities Topic of the ASC
See the Report of Independent Registered Public Accounting Firm.
Ambac Financial Group, Inc
127
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Condensed Financial Information
Of Registrant (Parent Company Only)
Condensed Balance Sheets
($ in millions, except share data) December 31,
Assets:
Fixed maturity securities, at fair value (amortized cost of $14 and $13)
Short-term investments, at fair value (amortized cost of $156 and $175)
Other investments
Total investments (net of allowance for credit losses of $0 and $0)
Cash
Investment in subsidiaries
Investment income due and accrued
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: 46,659,144 and 46,658,990
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings
Treasury stock, shares at cost: 1,463,774 and 1,685,233
Total Ambac Financial Group, Inc. stockholders’ equity
Total liabilities and stockholders’ equity
SCHEDULE II
2023
2022
$
14 $
156
18
188
—
12
175
16
203
3
1,150
1,029
1
24
1
19
$
1,365 $
1,255
$
— $
3
4
—
—
292
(160)
1,246
(17)
1,362
$
1,365 $
1
3
3
—
—
274
(253)
1,245
(15)
1,252
1,255
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto and the following notes.
See the Report of Independent Registered Public Accounting Firm.
Ambac Financial Group, Inc
128
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Condensed Financial Information
Of Registrant (Parent Company Only)
Condensed Statement of Comprehensive Income
SCHEDULE II
($ in millions) Year Ended December 31,
2023
2022
2021
$
9 $
10 $
—
—
—
9
22
22
(13)
(1)
(11)
15
—
1
(14)
(2)
17
17
(20)
—
(19)
542
4 $
522 $
4 $
51
40
—
2
93
522 $
(225)
(85)
—
(1)
(310)
$
$
10
—
—
(5)
5
19
19
(14)
2
(16)
(1)
(17)
(17)
(12)
(8)
(1)
(1)
(21)
(38)
Revenues:
Investment income
Other income
Net gains on derivative contracts
Net investment gains (losses), including impairments
Total revenues
Expenses:
General and administrative expenses
Total expenses
Income (loss) before income taxes and net income (loss) of subsidiaries
Federal income tax provision (benefit)
Income (loss) before net income (loss) of subsidiaries
Net income (loss) of subsidiaries
Net income (loss)
Other comprehensive income (loss), after tax:
Net income (loss)
Unrealized gains (losses) on securities, net of income tax provision (benefit) of $2, $(6) 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)
Total comprehensive income (loss) attributable to Ambac Financial Group, Inc.
$
96 $
212 $
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto and the following notes.
See the Report of Independent Registered Public Accounting Firm.
Ambac Financial Group, Inc
129
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Condensed Financial Information
Of Registrant (Parent Company Only)
Condensed Statement of Stockholders' Equity
SCHEDULE II
Total
Preferred
Stock
Common
Stock
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
Common
Stock Held
in Treasury,
at Cost
$
1,080 $
— $
— $
242 $
79 $
759 $
(38)
—
14
(6)
1,038
211
17
(4)
(14)
3
1
1,252
96
17
(5)
(5)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
5
1,362 $
$
—
— $
—
— $
—
—
14
—
257
—
17
—
—
—
—
274
—
17
—
—
—
292 $
(21)
(17)
—
—
—
58
(310)
—
—
—
—
—
(253)
93
—
—
—
—
—
(4)
726
521
—
(5)
—
3
1
1,245
4
—
(8)
—
—
(160) $
5
1,246 $
(1)
—
—
—
(2)
(3)
—
—
2
(14)
—
—
(15)
—
—
3
(5)
—
(17)
($ in millions)
Balance at January 1, 2021
Total comprehensive income (loss)
Adjustment to initially apply ASU
2016-13
Stock-based compensation
Cost of shares (acquired) issued
under equity plan
Balance at December 31, 2021
Total comprehensive income (loss)
Stock-based compensation
Cost of shares (acquired) issued
under equity plan
Cost of shares repurchased
Changes to redeemable
noncontrolling interest
Purchase of Ambac Assurance
auction market preferred shares
Balance at December 31, 2022
Total comprehensive income (loss)
Stock-based compensation
Cost of shares (acquired) issued
under equity plan
Cost of shares repurchased
Change in redeemable
noncontrolling interest
Balance at December 31, 2023
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto and the following notes.
See the Report of Independent Registered Public Accounting Firm.
Ambac Financial Group, Inc
130
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Condensed Financial Information
Of Registrant (Parent Company Only)
Condensed Statements of Cash Flow
SCHEDULE II
($ in millions) Year Ended December 31,
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income loss to net cash used in operating activities:
2023
2022
2021
$
4 $
522 $
(17)
Net (income) loss of subsidiaries
Amortization of bond premium and discount
Net investment gains (losses), including impairments
Increase (decrease) in current income taxes payable
Share-based compensation
(Increase) decrease in other assets and liabilities
Distributions received from majority owned subsidiary
Other, net
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Proceeds from sales and matured bonds
Purchases of bonds
Change in short-term investments
Change in other investments
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Capital contribution to subsidiaries
Cost of shares acquired
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
(15)
—
—
(2)
9
(5)
8
2
2
—
(1)
20
(3)
16
(16)
(5)
(21)
(2)
3
$
— $
(542)
(7)
14
(1)
12
41
6
1
46
68
(1)
(51)
(4)
12
(42)
(14)
(57)
1
1
3 $
1
(9)
5
1
14
(5)
6
(6)
(10)
33
(34)
105
(8)
95
(92)
—
(92)
(6)
7
1
$
— $
— $
—
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto and the following notes.
See the Report of Independent Registered Public Accounting Firm.
Ambac Financial Group, Inc
131
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Condensed Financial Information
Of Registrant (Parent Company Only)
Notes to Condensed Financial Information
(Dollar Amounts in Millions)
SCHEDULE II
The condensed financial information of Ambac Financial Group,
Inc. (“AFG” or the “Registrant”) as of December 31, 2023 and
2022, and for the three years in the period ended December 31,
2023, should be read in conjunction with the consolidated
financial statements of AFG Financial Group, Inc. and
Subsidiaries and the notes thereto included in this Annual
Report on Form 10-K for the year ended December 31, 2023.
AFG, headquartered in New York City, is a financial services
holding company incorporated in the state of Delaware on April
29, 1991.
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, 2023, the Company has (i)
$3,400 of NOLs, which if not utilized will begin expiring in
2030, and will fully expire in 2042, and (ii) $274 of interest
expense tax deduction carryover, which has an indefinite
carryforward period but is limited in any particular year based
on certain provisions.
The NOLs allocated to AFG as of December 31, 2023, were
$1,640, and begin expiring in 2030 and fully expire in 2043.
Ambac Financial Group, Inc
132
2023 Form 10-K
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Supplementary Insurance Information
(Dollar Amounts in Millions)
SCHEDULE III
Deferred
Acquisition
Costs
Loss and
Loss
Adjustment
Expense
Reserves
Unearned
Premium
Earned
Premiums
Net
Investment
Income
Loss and
Loss
Adjustment
Expenses
(Benefit)
Amortization
of Deferred
Amortization
Costs
Other
Operating
Expenses
Net Written
Premiums
$
— $
696 $
267 $
26 $
127 $
(69) $
— $
108 $
(35)
11
197
155
52
4
37
11
16
80
$
— $
715 $
287
42 $
12 $
(406) $
— $
104 $
3
90
85
14
2
9
3
13
(6)
29
$
— $
1,538 $
—
32
385
10
46 $
138 $
(89) $
— $
77 $
(35)
1
1
—
—
9
13
Segment
2023
Legacy Financial
Guarantee Insurance
Specialty Property and
Casualty Insurance
2022
Legacy Financial
Guarantee Insurance
Specialty Property and
Casualty Insurance
2021
Legacy Financial
Guarantee Insurance
Specialty Property and
Casualty Insurance
See the Report of Independent Registered Public Accounting Firm.
Item 16. Form 10-K Summary. — None
Ambac Financial Group, Inc
133
2023 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: February 27, 2024
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
February 27, 2024
Jeffrey S. Stein
/S/ CLAUDE LEBLANC
President, Chief Executive Officer and Director
February 27, 2024
Claude LeBlanc
(Principal Executive Officer)
/S/ DAVID TRICK
Executive Vice President and Chief Financial Officer
February 27, 2024
David Trick
(Principal Financial Officer)
/S/ ROBERT B. EISMAN
Senior Managing Director and Chief Accounting Officer
February 27, 2024
Robert B. Eisman
(Principal Accounting Officer)
/S/ IAN D. HAFT*
Director
Ian D. Haft
/S/ LISA G. IGLESIAS*
Director
Lisa G. Iglesias
February 27, 2024
February 27, 2024
/S/ JOAN LAMM-TENNANT*
Director
February 27, 2024
Joan Lamm-Tennant
/S/ KRISTI A. MATUS*
Director
Kristi A. Matus
/S/ MICHAEL D. PRICE*
Director
Michael D. Price
February 27, 2024
February 27, 2024
/S/ STEPHEN M. KSENAK
Attorney-in-fact
February 27, 2024
*By: Stephen M. Ksenak
Ambac Financial Group, Inc
134
2023 Form 10-K
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”.
INVESTOR RELATIONS
Charles J. Sebaski
Managing Director,
Head of 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
ANNUAL MEETING
OF STOCKHOLDERS
The Annual Meeting of Stockholders
will be held in a virtual format on
Wednesday, June 5, 2024 at 11:00 am
Eastern Time and can be accessed at
www.virtualshareholdermeeting.com/AMBC2024.
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
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
& Ethics 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 2023
Annual Report on Form 10-K.
AMBAC FINANCIAL GROUP, INC.
One World Trade Center, 41st Floor
New York, NY 10007
www.ambac.com