| Ambac Financial Group, Inc. 16 2020 First Quarter FORM 10-Q |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
(1) The underwriting origination dates for all policies included are greater than five years prior to the current reporting date.
Below is a rollforward of the premium receivable allowance for credit losses as of March 31, 2020:
|
|
|
|
|
|
Beginning balance (1)
|
|
$
|
9
|
|
Current period provision (2)
|
|
5
|
|
Write-offs of the allowance
|
|
—
|
|
Recoveries of previously written-off amounts
|
|
—
|
|
Ending balance
|
|
$
|
14
|
|
|
|
(1)
|
At December 31, 2019, $9 of premiums receivable were deemed uncollectible as determined under prior GAAP rules.
|
|
|
(2)
|
Includes $3from the adoption of ASU 2016-13 on January 1, 2020.
|
At March 31, 2020, Ambac had past due premiums of $1, of which $1 was over 120 days past due and has been included in the allowance for credit losses.
The key indicator management uses to assess the credit quality of reinsurance recoverables is collateral posted by the reinsurers and independent rating agency credit ratings. For all reinsurance contracts where Ambac has recorded a recoverable, the fair value of collateral posted by the reinsurer to Ambac Assurance exceeds Ambac Assurance's reinsurance recoverable carrying value, net of ceded premiums payable. As a result, Ambac Assurance has no net credit exposure and there is no allowance for credit losses at March 31, 2020.
Loss and Loss Expense Reserves:
Ambac’s loss and loss expense reserves (“loss reserves”) are based on management’s on-going review of the financial guarantee credit portfolio. Below are the components of the loss reserves liability and the Subrogation recoverable asset at March 31, 2020 and December 31, 2019:
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|
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|
|
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|
|
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|
|
|
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|
|
|
|
|
|
|
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March 31, 2020:
|
|
December 31, 2019:
|
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|
Present Value of Expected
Net Cash Flows
|
|
Unearned
Premium
Revenue
|
|
Gross Loss and
Loss Expense
Reserves
|
|
Present Value of Expected
Net Cash Flows
|
|
Unearned
Premium
Revenue
|
|
Gross Loss and
Loss Expense
Reserves
|
Balance Sheet Line Item
|
|
Claims and
Loss Expenses
|
|
Recoveries
|
|
|
|
Claims and
Loss Expenses
|
|
Recoveries
|
|
|
Loss and loss expense reserves
|
|
$
|
2,112
|
|
|
$
|
(245
|
)
|
|
$
|
(70
|
)
|
|
$
|
1,797
|
|
|
$
|
1,835
|
|
|
$
|
(233
|
)
|
|
$
|
(54
|
)
|
|
$
|
1,548
|
|
Subrogation recoverable
|
|
135
|
|
|
(2,327
|
)
|
|
—
|
|
|
(2,192
|
)
|
|
131
|
|
|
(2,160
|
)
|
|
—
|
|
|
(2,029
|
)
|
Totals
|
|
$
|
2,247
|
|
|
$
|
(2,572
|
)
|
|
$
|
(70
|
)
|
|
$
|
(395
|
)
|
|
$
|
1,966
|
|
|
$
|
(2,394
|
)
|
|
$
|
(54
|
)
|
|
$
|
(482
|
)
|
Below is the loss reserves roll-forward, net of subrogation recoverable and reinsurance, for the affected periods:
|
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|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Beginning gross loss and loss expense reserves
|
$
|
(482
|
)
|
|
$
|
(107
|
)
|
Reinsurance recoverable
|
26
|
|
|
23
|
|
Beginning balance of net loss and loss expense reserves
|
(508
|
)
|
|
(130
|
)
|
Losses and loss expenses (benefit):
|
|
|
|
Current year
|
27
|
|
|
1
|
|
Prior years
|
90
|
|
|
12
|
|
Total (1) (2)
|
117
|
|
|
12
|
|
Loss and loss expenses paid (recovered):
|
|
|
|
Current year
|
—
|
|
|
—
|
|
Prior years
|
39
|
|
|
64
|
|
Total
|
39
|
|
|
64
|
|
Foreign exchange effect
|
—
|
|
|
6
|
|
Ending net loss and loss expense reserves
|
(430
|
)
|
|
(176
|
)
|
Impact of VIE consolidation
|
—
|
|
|
(72
|
)
|
Reinsurance recoverable (3)
|
35
|
|
|
26
|
|
Ending gross loss and loss expense reserves
|
$
|
(395
|
)
|
|
$
|
(222
|
)
|
|
|
(1)
|
Total losses and loss expenses (benefit) includes $(10) and $(5) for the three months ended March 31, 2020 and 2019, respectively, related to ceded reinsurance.
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(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). The losses and loss expense (benefit) incurred associated with changes in estimated R&Ws for the three months ended March 31, 2020 and 2019 was $(36) and $4, respectively.
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(3)
|
Represents reinsurance recoverable on future loss and loss expenses. Additionally, the Balance Sheet line "Reinsurance recoverable on paid and unpaid losses" includes reinsurance recoverables (payables) of $1 and $1 as of March 31, 2020 and 2019, respectively, related to previously presented loss and loss expenses and subrogation.
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For 2020, the adverse development in prior years was primarily a result of deterioration in Public Finance credits, primarily Puerto Rico, partially offset by positive development in the RMBS portfolio.
For 2019, the adverse development in prior years was primarily a result of deterioration in Public Finance credits, partially offset by positive development in the RMBS and Ambac UK portfolios.
| Ambac Financial Group, Inc. 17 2020 First Quarter FORM 10-Q |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
The tables below summarize information related to policies currently included in Ambac’s loss reserves or subrogation recoverable at March 31, 2020 and December 31, 2019. Gross par exposures include capital appreciation bonds which are reported at the par amount at the time of issuance of the insurance policy as opposed to the current accreted value of the bond. The weighted average risk-free rate used to discount loss reserves at March 31, 2020 and December 31, 2019 was 0.9% and 2.1%, respectively.
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|
Surveillance Categories as of March 31, 2020
|
|
I
|
|
IA
|
|
II
|
|
III
|
|
IV
|
|
V
|
|
Total
|
Number of policies
|
33
|
|
|
22
|
|
|
14
|
|
|
16
|
|
|
136
|
|
|
3
|
|
|
224
|
|
Remaining weighted-average contract period (in years) (1)
|
24
|
|
|
21
|
|
|
9
|
|
|
17
|
|
|
15
|
|
|
2
|
|
|
15
|
|
Gross insured contractual payments outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
$
|
727
|
|
|
$
|
483
|
|
|
$
|
607
|
|
|
$
|
1,524
|
|
|
$
|
3,667
|
|
|
$
|
37
|
|
|
$
|
7,046
|
|
Interest
|
394
|
|
|
507
|
|
|
512
|
|
|
326
|
|
|
1,608
|
|
|
11
|
|
|
3,358
|
|
Total
|
$
|
1,121
|
|
|
$
|
991
|
|
|
$
|
1,119
|
|
|
$
|
1,850
|
|
|
$
|
5,275
|
|
|
$
|
48
|
|
|
$
|
10,404
|
|
Gross undiscounted claim liability
|
$
|
18
|
|
|
$
|
44
|
|
|
$
|
41
|
|
|
$
|
521
|
|
|
$
|
1,778
|
|
|
$
|
48
|
|
|
$
|
2,450
|
|
Discount, gross claim liability
|
(1
|
)
|
|
(2
|
)
|
|
(1
|
)
|
|
(71
|
)
|
|
(184
|
)
|
|
—
|
|
|
(259
|
)
|
Gross claim liability before all subrogation and before reinsurance
|
17
|
|
|
42
|
|
|
41
|
|
|
450
|
|
|
1,594
|
|
|
47
|
|
|
2,191
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross RMBS subrogation (2)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,771
|
)
|
|
—
|
|
|
(1,771
|
)
|
Discount, RMBS subrogation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7
|
|
|
—
|
|
|
7
|
|
Discounted RMBS subrogation, before reinsurance
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,764
|
)
|
|
—
|
|
|
(1,764
|
)
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross other subrogation (3)
|
—
|
|
|
—
|
|
|
—
|
|
|
(39
|
)
|
|
(777
|
)
|
|
(13
|
)
|
|
(829
|
)
|
Discount, other subrogation
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
18
|
|
|
1
|
|
|
21
|
|
Discounted other subrogation, before reinsurance
|
—
|
|
|
—
|
|
|
—
|
|
|
(38
|
)
|
|
(759
|
)
|
|
(11
|
)
|
|
(809
|
)
|
Gross claim liability, net of all subrogation and discounts, before reinsurance
|
17
|
|
|
42
|
|
|
41
|
|
|
412
|
|
|
(929
|
)
|
|
36
|
|
|
(381
|
)
|
Less: Unearned premium revenue
|
(2
|
)
|
|
(9
|
)
|
|
(5
|
)
|
|
(19
|
)
|
|
(34
|
)
|
|
—
|
|
|
(70
|
)
|
Plus: Loss expense reserves
|
—
|
|
|
1
|
|
|
1
|
|
|
4
|
|
|
50
|
|
|
—
|
|
|
55
|
|
Gross loss and loss expense reserves
|
$
|
15
|
|
|
$
|
34
|
|
|
$
|
36
|
|
|
$
|
397
|
|
|
$
|
(914
|
)
|
|
$
|
36
|
|
|
$
|
(395
|
)
|
Reinsurance recoverable reported on Balance Sheet (4)
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
9
|
|
|
$
|
27
|
|
|
$
|
(7
|
)
|
|
$
|
—
|
|
|
$
|
36
|
|
|
|
(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 $35 related to future loss and loss expenses and $1 related to presented loss and loss expenses and subrogation.
|
| Ambac Financial Group, Inc. 18 2020 First Quarter FORM 10-Q |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Surveillance Categories as of December 31, 2019
|
|
I
|
|
IA
|
|
II
|
|
III
|
|
IV
|
|
V
|
|
Total
|
Number of policies
|
34
|
|
|
18
|
|
|
11
|
|
|
16
|
|
|
139
|
|
|
3
|
|
|
221
|
|
Remaining weighted-average contract period (in years) (1)
|
8
|
|
|
21
|
|
|
9
|
|
|
17
|
|
|
14
|
|
|
3
|
|
|
15
|
|
Gross insured contractual payments outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
$
|
668
|
|
|
$
|
510
|
|
|
$
|
277
|
|
|
$
|
857
|
|
|
$
|
3,819
|
|
|
$
|
37
|
|
|
$
|
6,168
|
|
Interest
|
340
|
|
|
507
|
|
|
128
|
|
|
366
|
|
|
1,678
|
|
|
11
|
|
|
3,029
|
|
Total
|
$
|
1,007
|
|
|
$
|
1,016
|
|
|
$
|
404
|
|
|
$
|
1,223
|
|
|
$
|
5,498
|
|
|
$
|
48
|
|
|
$
|
9,197
|
|
Gross undiscounted claim liability
|
$
|
2
|
|
|
$
|
44
|
|
|
$
|
21
|
|
|
$
|
541
|
|
|
$
|
1,778
|
|
|
$
|
48
|
|
|
$
|
2,434
|
|
Discount, gross claim liability
|
—
|
|
|
(5
|
)
|
|
(1
|
)
|
|
(152
|
)
|
|
(381
|
)
|
|
(2
|
)
|
|
(541
|
)
|
Gross claim liability before all subrogation and before reinsurance
|
2
|
|
|
39
|
|
|
20
|
|
|
389
|
|
|
1,397
|
|
|
46
|
|
|
1,893
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross RMBS subrogation (2)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,777
|
)
|
|
—
|
|
|
(1,777
|
)
|
Discount, RMBS subrogation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
49
|
|
|
—
|
|
|
49
|
|
Discounted RMBS subrogation, before reinsurance
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,727
|
)
|
|
—
|
|
|
(1,727
|
)
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross other subrogation (3)
|
—
|
|
|
—
|
|
|
—
|
|
|
(41
|
)
|
|
(666
|
)
|
|
(13
|
)
|
|
(720
|
)
|
Discount, other subrogation
|
—
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
47
|
|
|
3
|
|
|
53
|
|
Discounted other subrogation, before reinsurance
|
—
|
|
|
—
|
|
|
—
|
|
|
(37
|
)
|
|
(620
|
)
|
|
(10
|
)
|
|
(666
|
)
|
Gross claim liability, net of all subrogation and discounts, before reinsurance
|
2
|
|
|
39
|
|
|
20
|
|
|
353
|
|
|
(950
|
)
|
|
36
|
|
|
(501
|
)
|
Less: Unearned premium revenue
|
(1
|
)
|
|
(9
|
)
|
|
(1
|
)
|
|
(7
|
)
|
|
(35
|
)
|
|
—
|
|
|
(54
|
)
|
Plus: Loss expense reserves
|
1
|
|
|
1
|
|
|
1
|
|
|
4
|
|
|
67
|
|
|
—
|
|
|
73
|
|
Gross loss and loss expense reserves
|
$
|
1
|
|
|
$
|
30
|
|
|
$
|
20
|
|
|
$
|
349
|
|
|
$
|
(918
|
)
|
|
$
|
36
|
|
|
$
|
(482
|
)
|
Reinsurance recoverable reported on Balance Sheet (4)
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
7
|
|
|
$
|
24
|
|
|
$
|
(10
|
)
|
|
$
|
—
|
|
|
$
|
26
|
|
|
|
(1)
|
Remaining weighted-average contract period is weighted based on projected gross claims over the lives of the respective policies.
|
|
|
(2)
|
RMBS subrogation represents Ambac’s estimate of subrogation recoveries from RMBS transaction sponsors for R&W breaches.
|
|
|
(3)
|
Other subrogation represents subrogation related to excess spread and other contractual cash flows on public finance and structured finance transactions, including RMBS.
|
|
|
(4)
|
Reinsurance recoverable reported on Balance Sheet includes reinsurance recoverables of $26 related to future loss and loss expenses and $0 related to presented loss and loss expenses and subrogation.
|
COVID-19
As a result of the COVID-19 related economic disruption on markets where Ambac provides financial guarantees, including lower tax, project, and business revenues and increases in forbearances or delinquencies on mortgage and student loan payments, we have increased our loss reserves. The duration and depth of the recession; actions such as monetary policy and fiscal stimulus, including the CARES Act in the US that was signed into law on March 27, 2020, and future fiscal stimulus programs; and our insured obligors' financial flexibility and ability to mitigate the operational and economic impact of the recession will determine the ultimate impact to Ambac's insured portfolio. Accordingly, our loss reserves may be under-estimated as a result of the ultimate scope, duration and magnitude of the effects of COVID-19.
Puerto Rico:
Ambac has exposure to the Commonwealth of Puerto Rico (the "Commonwealth") and its instrumentalities across several different
issuing entities with total net par exposure of $1,105. Components of Puerto Rico net par outstanding include capital appreciation bonds which are reported at the par amount at the time of issuance of the related insurance policy as opposed to the current accreted value of the bonds. Each issuing entity has its own credit risk profile attributable to discrete revenue sources, direct general obligation pledges or general obligation guarantees. The Commonwealth of Puerto Rico and certain of its instrumentalities have defaulted and may continue to default on debt service payments, including payments owed on bonds insured by Ambac Assurance. Ambac Assurance may be required to make significant amounts of policy payments over the next several years, the recoverability of which is subject to great uncertainty, which may lead to a material increase in permanent losses causing a material adverse impact on our results of operations and financial condition. Our exposure to Puerto Rico is impacted by the amount of monies available for debt service, which is in turn affected by a number of factors including demographic trends, economic conditions (including the impact
| Ambac Financial Group, Inc. 19 2020 First Quarter FORM 10-Q |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
from the COVID-19 pandemic), tax policy and revenues, impact of reforms, fiscal plans, government actions, political instability, budgetary performance and flexibility, weather and seismic events, litigation outcomes, as well as federal funding of Commonwealth needs. In the near term, the financial and economic outlook for Puerto Rico is dependent upon a still fragile infrastructure, heightening its vulnerability to additional natural disasters. The longer term recovery of the Commonwealth economy and its essential infrastructure will likely be dependent on, among other factors, the management, usage and efficacy of federal resources.
It is difficult to predict the long-term capacity and willingness of the Puerto Rico government and its instrumentalities to pay debt service on bonded debt and how their debt burden and financial flexibility might affect Ambac Assurance's claim potential, risk profile and long-term financial strength.
Substantial uncertainty exists with respect to the ultimate outcome for creditors in Puerto Rico, such as Ambac Assurance, due to, amongst other matters, legislation enacted by the Commonwealth and the federal government, including PROMESA; actions taken pursuant to such laws, including the Title III filings; the economic consequences of the COVID-19 pandemic; as well as political uncertainty and leadership turnover. Ambac Assurance is involved in multiple litigations relating to actions taken by the Commonwealth or the Financial Oversight and Management Board for Puerto Rico (the “Oversight Board”) pursuant to certain enacted legislation, court rulings, and other issues and may not be successful in pursuing claims or protecting its interests. As a result of litigation or other aspects of the restructuring processes, the differences among the credits insured by Ambac Assurance may not be respected.
Ambac Assurance has participated and may continue to participate in mediation related to potential debt restructurings. Mediation may not be productive or may not resolve Ambac Assurance's claims in a manner that avoids significant losses. No assurances can be given that negotiations will be successfully concluded, that Commonwealth, Oversight Board and creditor parties will reach definitive agreements on additional debt restructurings, that any additional negotiated transaction debt restructuring, definitive agreement or Plans of Adjustment will be approved by the court and completed, or that any transaction or Plans of Adjustment will not have a material adverse impact on Ambac's financial condition or results of operations. It is possible that certain restructuring process solutions, together with associated legislation, budgetary, and/or public policy proposals could be adopted and could further impair our exposures, causing losses that could have a material adverse impact on our results of operations and financial condition.
While our reserving scenarios account for a wide range of possible outcomes, reflecting the significant uncertainty regarding future developments and outcomes, given our exposure to Puerto Rico and the economic, fiscal, legal and political uncertainties associated therewith as well as the uncertainties emanating from the COVID-19 pandemic and the damage caused by hurricanes Maria and Irma, our loss reserves may ultimately prove to be insufficient to cover our losses, potentially having a material adverse effect on our results of operations and financial position.
Ambac has considered these developments and other factors in evaluating its Puerto Rico loss reserves. During the three months ended March 31, 2020, Ambac had incurred losses associated with its Domestic Public Finance insured portfolio of $178, which was primarily impacted by lower discount rates and the continued uncertainty and volatility of the situation in Puerto Rico. While management believes its reserves are adequate to cover losses in its Public Finance insured portfolio, there can be no assurance that Ambac may not incur additional losses in the future, given the circumstances described herein. Such additional losses may have a material adverse effect on Ambac’s results of operations and financial condition and may result in adverse consequences such as impairing the ability of Ambac Assurance to honor its financial obligations; the initiation of rehabilitation proceedings against Ambac Assurance; decreased likelihood of Ambac Assurance delivering value to Ambac, through dividends or otherwise; and a significant drop in the value of securities issued or insured by Ambac or Ambac Assurance. For public finance credits, including Puerto Rico, for which Ambac has an estimate of expected loss at March 31, 2020, the possible increase in loss reserves under stress or other adverse conditions and circumstances was estimated to be approximately $1,220. This possible increase in loss reserves under stress or other adverse conditions is significant and if we were to experience such incremental losses, our stockholders’ equity as of March 31, 2020 would decrease from $1,062 to $(158). There can be no assurance that losses may not exceed such amount.
Representation and Warranty Recoveries:
Ambac records estimated subrogation recoveries for breaches of R&Ws by sponsors of certain RMBS transactions. For a discussion of the approach utilized to estimate R&W subrogation recoveries, see Note 2. Basis of Presentation and Significant Accounting Policies in the Notes to Consolidated Financial Statements included Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
Ambac has recorded R&W subrogation recoveries of $1,764 ($1,738 net of reinsurance) and $1,727 ($1,702 net of reinsurance) at March 31, 2020 and December 31, 2019, respectively. R&W recovery proceeds up to the first $1,400 and above $1,600 have been pledged as security on certain of Ambac's long-term debt obligations as described further in Note 1. Background and Business Description in the Notes to Consolidated Financial Statements included Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
Below is the rollforward of R&W subrogation for the affected periods:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Discounted R&W subrogation (gross of reinsurance) at beginning of period
|
$
|
1,727
|
|
|
$
|
1,771
|
|
All other changes (1)
|
36
|
|
|
(43
|
)
|
Discounted R&W subrogation (gross of reinsurance) at end of period
|
$
|
1,764
|
|
|
$
|
1,727
|
|
|
|
(1)
|
All other changes which may impact RMBS R&W subrogation recoveries include changes in actual or projected collateral
|
| Ambac Financial Group, Inc. 20 2020 First Quarter FORM 10-Q |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
performance, changes in the creditworthiness of a sponsor and/or the projected timing of recoveries.
Our ability to realize R&W subrogation recoveries is subject to significant uncertainty, including risks inherent in litigation; collectability of such amounts from counterparties (and/or their respective parents and affiliates); timing of receipt of any such recoveries; intervention by OCI, which could impede our ability to take actions required to realize such recoveries; and uncertainty inherent in the assumptions used in estimating such recoveries. Failure to realize R&W subrogation recoveries for any reason or the realization of R&W subrogation recoveries materially below the amount recorded on Ambac's consolidated balance sheet would have a material adverse effect on our results of operations and financial condition and may result in adverse consequences such as impairing the ability of Ambac Assurance to honor its financial obligations; the initiation of rehabilitation proceedings against Ambac Assurance; decreased likelihood of Ambac Assurance delivering value to Ambac, through dividends or otherwise; and a significant drop in the value of securities issued or insured by Ambac or Ambac Assurance.
Insurance intangible asset:
The insurance intangible amortization expense is included in insurance intangible amortization on the Consolidated Statements of Total Comprehensive Income (Loss). For the three months ended March 31, 2020 and 2019, the insurance intangible amortization expense was $13 and $36, respectively. As of March 31, 2020 and December 31, 2019, the gross carrying value of the insurance
intangible asset was $1,261 and $1,273, respectively. Accumulated amortization of the insurance intangible asset was $854 and $847, as of March 31, 2020 and December 31, 2019, respectively, resulting in a net insurance intangible asset of $406 and $427, respectively.
The estimated future amortization expense for the net insurance intangible asset is as follows:
|
|
|
|
|
|
Amortization expense (1) (2)
|
|
|
2020 (nine months)
|
|
$
|
33
|
|
2021
|
|
39
|
|
2022
|
|
35
|
|
2023
|
|
32
|
|
2024
|
|
29
|
|
Thereafter
|
|
239
|
|
|
|
(1)
|
The insurance intangible asset will be amortized using a level-yield method based on par exposure of the related financial guarantee insurance or reinsurance contracts. Future amortization considers the use of contractual lives for many bond types which do not have homogeneous pools of underlying collateral. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay certain obligations. If those bonds types are retired early, amortization expense may differ in the period of call or refinancing.
|
(2) The weighted-average amortizations period is 7.6 years.
7. FAIR VALUE MEASUREMENTS
The Fair Value Measurement Topic of the ASC establishes a framework for measuring fair value and disclosures about fair value measurements.
Fair Value Hierarchy:
The Fair Value Measurement Topic of the ASC specifies a fair value hierarchy based on whether the inputs to valuation techniques used to measure fair value are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect Company-based assumptions. The fair value hierarchy prioritizes model inputs into three broad levels as follows:
|
|
|
|
|
l
|
Level 1
|
|
Quoted prices for identical instruments in active markets. Assets and liabilities classified as Level 1 include US Treasury and other foreign government obligations traded in highly liquid and transparent markets, certain highly liquid pooled fund investments, exchange traded futures contracts, variable rate demand obligations and money market funds.
|
|
|
|
l
|
Level 2
|
|
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 income 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.
|
|
|
|
l
|
Level 3
|
|
Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. This hierarchy requires the use of observable market data when available. Assets and liabilities classified as Level 3 include credit derivative contracts, certain uncollateralized interest rate swap contracts, equity interests in Ambac sponsored special purpose entities and certain investments in fixed income 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 following table sets forth the carrying amount and fair value of Ambac’s financial assets and liabilities as of March 31, 2020 and December 31, 2019, including the level within the fair value hierarchy at which fair value measurements are categorized. As required by the Fair Value Measurement Topic of the ASC, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
| Ambac Financial Group, Inc. 21 2020 First Quarter FORM 10-Q |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
Amount
|
|
Total Fair
Value
|
|
Fair Value Measurements Categorized as:
|
March 31, 2020:
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
Municipal obligations
|
|
$
|
218
|
|
|
$
|
218
|
|
|
$
|
—
|
|
|
$
|
218
|
|
|
$
|
—
|
|
Corporate obligations
|
|
1,261
|
|
|
1,261
|
|
|
—
|
|
|
1,261
|
|
|
—
|
|
Foreign obligations
|
|
42
|
|
|
42
|
|
|
42
|
|
|
—
|
|
|
—
|
|
U.S. government obligations
|
|
177
|
|
|
177
|
|
|
177
|
|
|
—
|
|
|
—
|
|
Residential mortgage-backed securities
|
|
203
|
|
|
203
|
|
|
—
|
|
|
203
|
|
|
—
|
|
Commercial mortgage-backed securities
|
|
51
|
|
|
51
|
|
|
—
|
|
|
51
|
|
|
—
|
|
Collateralized debt obligations
|
|
132
|
|
|
132
|
|
|
—
|
|
|
132
|
|
|
—
|
|
Other asset-backed securities
|
|
283
|
|
|
283
|
|
|
—
|
|
|
217
|
|
|
66
|
|
Fixed income securities, pledged as collateral:
|
|
|
|
|
|
|
|
|
|
|
Short-term
|
|
85
|
|
|
85
|
|
|
85
|
|
|
—
|
|
|
—
|
|
Short term investments
|
|
586
|
|
|
586
|
|
|
528
|
|
|
57
|
|
|
—
|
|
Other investments (1)
|
|
363
|
|
|
345
|
|
|
84
|
|
|
—
|
|
|
30
|
|
Cash, cash equivalents and restricted cash
|
|
89
|
|
|
89
|
|
|
86
|
|
|
3
|
|
|
—
|
|
Derivative assets:
|
|
|
|
|
|
|
|
|
|
|
Credit derivatives
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Interest rate swaps—asset position
|
|
89
|
|
|
89
|
|
|
—
|
|
|
10
|
|
|
79
|
|
Interest rate swaps—liability position
|
|
(1
|
)
|
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
Other assets - equity in sponsored VIE
|
|
3
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
3
|
|
Other assets-Loans
|
|
10
|
|
|
11
|
|
|
—
|
|
|
—
|
|
|
11
|
|
Variable interest entity assets:
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities: Corporate obligations
|
|
2,806
|
|
|
2,806
|
|
|
—
|
|
|
—
|
|
|
2,806
|
|
Fixed income securities: Municipal obligations
|
|
122
|
|
|
122
|
|
|
—
|
|
|
122
|
|
|
—
|
|
Restricted cash
|
|
2
|
|
|
2
|
|
|
2
|
|
|
—
|
|
|
—
|
|
Loans
|
|
2,932
|
|
|
2,932
|
|
|
—
|
|
|
—
|
|
|
2,932
|
|
Derivative assets: Currency swaps-asset position
|
|
62
|
|
|
62
|
|
|
—
|
|
|
62
|
|
|
—
|
|
Total financial assets
|
|
$
|
9,513
|
|
|
$
|
9,498
|
|
|
$
|
1,004
|
|
|
$
|
2,335
|
|
|
$
|
5,927
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
Long term debt, including accrued interest
|
|
$
|
3,217
|
|
|
$
|
2,924
|
|
|
$
|
—
|
|
|
$
|
2,584
|
|
|
$
|
341
|
|
Derivative liabilities:
|
|
|
|
|
|
|
|
|
|
|
Credit derivatives
|
|
2
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Interest rate swaps—asset position
|
|
(1
|
)
|
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
Interest rate swaps—liability position
|
|
136
|
|
|
136
|
|
|
—
|
|
|
136
|
|
|
—
|
|
Liabilities for net financial guarantees written (2)
|
|
(763
|
)
|
|
1,057
|
|
|
—
|
|
|
—
|
|
|
1,057
|
|
Variable interest entity liabilities:
|
|
|
|
|
|
|
|
|
|
|
Long-term debt (includes $4,092 at fair value)
|
|
4,263
|
|
|
4,274
|
|
|
—
|
|
|
4,115
|
|
|
158
|
|
Derivative liabilities: Interest rate swaps—liability position
|
|
1,610
|
|
|
1,610
|
|
|
—
|
|
|
1,610
|
|
|
—
|
|
Total financial liabilities
|
|
$
|
8,464
|
|
|
$
|
10,001
|
|
|
$
|
—
|
|
|
$
|
8,444
|
|
|
$
|
1,558
|
|
| Ambac Financial Group, Inc. 22 2020 First Quarter FORM 10-Q |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
Amount
|
|
Total Fair
Value
|
|
Fair Value Measurements Categorized as:
|
December 31, 2019:
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
Municipal obligations
|
|
$
|
215
|
|
|
$
|
215
|
|
|
$
|
—
|
|
|
$
|
215
|
|
|
$
|
—
|
|
Corporate obligations
|
|
1,430
|
|
|
1,430
|
|
|
—
|
|
|
1,430
|
|
|
—
|
|
Foreign obligations
|
|
44
|
|
|
44
|
|
|
44
|
|
|
—
|
|
|
—
|
|
U.S. government obligations
|
|
156
|
|
|
156
|
|
|
156
|
|
|
—
|
|
|
—
|
|
Residential mortgage-backed securities
|
|
248
|
|
|
248
|
|
|
—
|
|
|
248
|
|
|
—
|
|
Commercial mortgage-backed securities
|
|
50
|
|
|
50
|
|
|
—
|
|
|
50
|
|
|
—
|
|
Collateralized debt obligations
|
|
146
|
|
|
146
|
|
|
—
|
|
|
146
|
|
|
—
|
|
Other asset-backed securities
|
|
287
|
|
|
287
|
|
|
—
|
|
|
215
|
|
|
72
|
|
Fixed income securities, pledged as collateral:
|
|
|
|
|
|
|
|
|
|
|
Short-term
|
|
85
|
|
|
85
|
|
|
85
|
|
|
—
|
|
|
—
|
|
Short term investments
|
|
653
|
|
|
653
|
|
|
598
|
|
|
55
|
|
|
—
|
|
Other investments (1)
|
|
478
|
|
|
493
|
|
|
136
|
|
|
—
|
|
|
61
|
|
Cash and cash equivalents and restricted cash
|
|
79
|
|
|
79
|
|
|
70
|
|
|
9
|
|
|
—
|
|
Derivative assets:
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps—asset position
|
|
75
|
|
|
75
|
|
|
—
|
|
|
8
|
|
|
67
|
|
Other assets - equity in sponsored VIE
|
|
3
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
3
|
|
Other assets-loans
|
|
10
|
|
|
13
|
|
|
—
|
|
|
—
|
|
|
13
|
|
Variable interest entity assets:
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities: Corporate obligations
|
|
2,957
|
|
|
2,957
|
|
|
—
|
|
|
—
|
|
|
2,957
|
|
Fixed income securities: Municipal obligations
|
|
164
|
|
|
164
|
|
|
—
|
|
|
164
|
|
|
—
|
|
Restricted cash
|
|
2
|
|
|
2
|
|
|
2
|
|
|
—
|
|
|
—
|
|
Loans
|
|
3,108
|
|
|
3,108
|
|
|
—
|
|
|
—
|
|
|
3,108
|
|
Derivative assets: Currency swaps—asset position
|
|
52
|
|
|
52
|
|
|
—
|
|
|
52
|
|
|
—
|
|
Total financial assets
|
|
$
|
10,242
|
|
|
$
|
10,260
|
|
|
$
|
1,091
|
|
|
$
|
2,593
|
|
|
$
|
6,281
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
Long term debt, including accrued interest
|
|
$
|
3,262
|
|
|
$
|
3,274
|
|
|
$
|
—
|
|
|
$
|
2,829
|
|
|
$
|
445
|
|
Derivative liabilities:
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps—liability position
|
|
89
|
|
|
89
|
|
|
—
|
|
|
89
|
|
|
—
|
|
Liabilities for net financial guarantees written (2)
|
|
(863
|
)
|
|
284
|
|
|
—
|
|
|
—
|
|
|
284
|
|
Variable interest entity liabilities:
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
4,554
|
|
|
4,567
|
|
|
—
|
|
|
4,408
|
|
|
159
|
|
Derivative liabilities: Interest rate swaps—liability position
|
|
1,657
|
|
|
1,657
|
|
|
—
|
|
|
1,657
|
|
|
—
|
|
Total financial liabilities
|
|
$
|
8,699
|
|
|
$
|
9,872
|
|
|
$
|
—
|
|
|
$
|
8,983
|
|
|
$
|
889
|
|
|
|
(1)
|
Excluded from the fair value measurement categories in the table above are investment funds of $232 and $296 as of March 31, 2020 and December 31, 2019, respectively, which are measured using NAV as a practical expedient.
|
|
|
(2)
|
The carrying value of net financial guarantees written includes the following balance sheet items: Premium receivables; Reinsurance recoverable on paid and unpaid losses; Deferred ceded premium; Subrogation recoverable; Insurance intangible asset; Unearned premiums; Loss and loss expense reserves; Ceded premiums payable, premiums taxes payable and other deferred fees recorded in Other liabilities.
|
| Ambac Financial Group, Inc. 23 2020 First Quarter FORM 10-Q |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Determination of Fair Value:
When available, Ambac uses quoted active market prices specific to the financial instrument to determine fair value, and classifies such items within Level 1. The determination of fair value for financial instruments categorized in Level 2 or 3 involves judgment due to the complexity of factors contributing to the valuation. Third-party sources from which we obtain independent market quotes also use assumptions, judgments and estimates in determining financial instrument values and different third parties may use different methodologies or provide different values for financial instruments. In addition, the use of internal valuation models may require assumptions 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 income securities, equity interests in pooled investment funds, derivative instruments, certain variable interest entity assets and liabilities and interests in Ambac sponsored special purpose entities. Valuation of financial instruments is performed by Ambac’s finance group using methods approved by senior financial management with consultation from risk management and portfolio managers as appropriate. Preliminary valuation results are discussed with portfolio managers quarterly to assess consistency with market transactions and trends as applicable. Market transactions such as trades or negotiated settlements of similar positions, if any, are reviewed to validate fair value model results. However, many of the financial instruments valued using 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 financial management. Other valuation control procedures specific to particular portfolios are described further below.
Fixed Income Securities:
The fair values of fixed income investment securities are based primarily on market prices received from quotes or alternative pricing sources. Because many fixed income 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 income 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 March 31, 2020, approximately 4%, 94% and 2% of the fixed income investment portfolio
(excluding variable interest entity investments) was valued using broker quotes, alternative pricing sources and internal valuation models, respectively. At December 31, 2019, approximately 4%, 94% and 2% of the fixed income 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 income 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) and/or internally modeled prices, 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 income securities classified as Level 3 is included below:
Other asset-backed securities: This security is a subordinated tranche of a resecuritization collateralized by Ambac-insured military housing bonds. The fair value classified as Level 3 was $66 and $72 at March 31, 2020 and December 31, 2019, respectively. Fair value was calculated using a discounted cash flow approach with expected future cash flows discounted using a yield consistent with the security type and rating. Significant inputs for the valuation at March 31, 2020 and December 31, 2019 include the following:
|
|
|
March 31, 2020:
|
a. Coupon rate:
|
5.98%
|
b. Average Life:
|
15.36 years
|
c. Yield:
|
13.00%
|
|
|
December 31, 2019:
|
a. Coupon rate:
|
5.97%
|
b. Average Life:
|
15.58 years
|
c. Yield:
|
11.75%
|
Other Investments:
Other investments primarily relate to investments in pooled investment funds. The fair value of pooled investment funds is determined using dealer quotes or alternative pricing sources when such investments have readily determinable fair values. When fair value is not readily determinable, pooled investment funds are valued using NAV as a practical expedient as permitted under the Fair Value Measurement Topic of the ASC. Refer to Note 8.
| Ambac Financial Group, Inc. 24 2020 First Quarter FORM 10-Q |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Investments for additional information about such investments in pooled funds that are reported at fair value using NAV as a practical expedient.
Other investments also includes Ambac's equity interest in a non-consolidated VIE created in connection with Ambac's monetization of Ambac Assurance junior surplus notes. This equity interest is carried under the equity method. Fair value for the non-consolidated VIE equity interest is internally calculated using a market approach and is classified as Level 3.
Derivative Instruments:
Ambac’s derivative instruments primarily comprise interest rate swaps, credit default swaps and exchange traded futures contracts. Fair value is determined based upon market quotes from independent sources, when available. When independent quotes are not available, fair value is determined using valuation models. These valuation models require market-driven inputs, including contractual terms, credit spreads and ratings on underlying referenced obligations, yield curves and tax-exempt interest ratios. The valuation of certain derivative contracts also require the use of data inputs and assumptions that are determined by management and are not readily observable in the market. Under the Fair Value Measurement Topic of the ASC, Ambac is required to consider its own credit risk when measuring the fair value of derivatives and other liabilities. Factors considered in estimating the amount of any Ambac credit valuation adjustment ("CVA") on such contracts include collateral posting provisions, right of set-off with the counterparty, the period of time remaining on the derivative and the pricing of recent terminations. The fair value of credit derivative liabilities was reduced by $0 and $0 at March 31, 2020 and December 31, 2019, respectively, as a result of incorporating an Ambac CVA into the valuation model for these contracts. Interest rate swap liabilities are collateralized and are not adjusted with an Ambac CVA at March 31, 2020 and December 31, 2019.
Interest rate swaps that are not centrally cleared are valued using vendor-developed models that incorporate interest rates and yield curves that are observable and regularly quoted. These models provide the net present value of the derivatives based on contractual terms and observable market data. Generally, the need for counterparty (or Ambac) CVAs on interest rate derivatives is mitigated by the existence of collateral posting agreements under which adequate collateral has been posted. Certain of these derivative contracts entered into with financial guarantee customers are not subject to collateral posting agreements. Counterparty credit risk related to such customer derivative assets is included in our determination of their fair value.
Ambac's remaining credit derivatives ("CDS") are valued using an internal model that uses traditional financial guarantee CDS pricing to calculate the fair value of the derivative contract based on the reference obligation's current pricing, remaining life and credit rating and Ambac's own credit risk. The model calculates the difference between the present value of the projected fees receivable under the CDS and our estimate of the fees a financial guarantor of comparable credit quality would charge to provide the same protection at the balance sheet date. Unobservable inputs used include Ambac's internal reference obligation credit ratings and expected life, estimates of fees that would be charged to assume the credit derivative obligation and Ambac's CVA. Ambac is party to
only one remaining credit derivative with internal credit rating of AA at March 31, 2020. Ambac has not made any significant changes to its modeling techniques or related model inputs for the periods presented.
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 market place, on a present value basis, to provide the same protection as of the balance sheet date. This fair value estimate of financial guarantees is presented on a net basis and includes direct and assumed contracts written, net of ceded reinsurance contracts.
Long-term Debt:
Long-term debt includes Ambac Assurance surplus notes and junior surplus notes, the Ambac Note and Tier 2 Notes issued in connection with the Rehabilitation Exit Transactions and the Ambac UK debt issued in connection with the Ballantyne commutation. The fair values of surplus notes, the Ambac Note and Tier 2 Notes are classified as Level 2. The fair value of junior surplus notes and Ambac UK debt are classified as Level 3.
Other Financial Assets and Liabilities:
Included in Other assets are Loans and Ambac’s equity interest in an Ambac sponsored VIE established to provide certain financial guarantee clients with funding for their debt obligations. The fair values of these financial assets are estimated based upon internal valuation models and are classified as Level 3.
Variable Interest Entity Assets and Liabilities:
The financial assets and liabilities of VIEs consolidated under the Consolidation Topic of the ASC consist primarily of fixed income securities, loans, derivative and debt instruments and are generally carried at fair value. These consolidated VIEs are securitization entities which have liabilities and/or assets guaranteed by Ambac Assurance or Ambac UK. The fair values of VIE debt instruments are determined using the same methodologies used to value Ambac’s fixed income securities in its investment portfolio as described above. VIE debt fair value is based on market prices received from independent market sources. Such quotes are considered Level 2 and generally consider a variety of factors, including recent trades of the same and similar securities. VIE debt fair value balances at March 31, 2020 and December 31, 2019 were based on market prices received from independent market sources and do not use significant unobservable inputs. Comparable to the sensitivities of investments in fixed income 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 VIE debt.
VIE derivative asset and liability fair values are determined using valuation models. When specific derivative contractual terms are available and may be valued primarily by reference to interest rates, foreign exchange rates and yield curves that are observable and regularly quoted, the derivatives are valued using vendor-developed models. Other derivatives within the VIEs that include significant unobservable valuation inputs are valued using internally developed
| Ambac Financial Group, Inc. 25 2020 First Quarter FORM 10-Q |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
models. VIE derivative liability fair value balances at March 31, 2020 and December 31, 2019 were developed using vendor-developed models and do not use significant unobservable inputs.
The fair value of VIE assets are obtained from market quotes when available. Typically VIE asset fair values are not readily available from market quotes and are estimated internally. The consolidated VIEs are entities in which net cash flows from assets and derivatives (after adjusting for financial guarantor cash flows and other expenses) will be paid out to note holders or equity interests. Internal valuations of VIE assets (fixed income securities or loans), therefore, are generally derived from the fair value of notes and derivatives, as described above, adjusted for the fair value of cash flows from Ambac’s financial guarantee. The fair value of financial guarantee cash flows include: (i) estimated future premiums discounted at a rate consistent with that implicit in the fair value of the VIE’s liabilities and (ii) internal estimates of future loss payments by Ambac discounted at a rate that includes Ambac’s own credit risk. Estimated future premium payments to be paid by the VIEs were discounted at a par-weighted average rate of 2.5% and 2.7% at March 31, 2020 and December 31, 2019, respectively. At March 31, 2020, the range of these discount rates was between 2.3% and 11.0%. The value of future loss payments to be paid by Ambac to the VIEs was adjusted to include an Ambac CVA appropriate for the term of expected Ambac claim payments.
| Ambac Financial Group, Inc. 26 2020 First Quarter FORM 10-Q |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited 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 2020 and 2019. 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VIE Assets and Liabilities
|
|
|
|
|
Investments
|
|
Other
Assets(1)
|
|
Derivatives
|
|
Investments
|
|
Loans
|
|
Long-term
Debt
|
|
Total
|
Three Months Ended March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
72
|
|
|
$
|
3
|
|
|
$
|
66
|
|
|
$
|
2,957
|
|
|
$
|
3,108
|
|
|
$
|
—
|
|
|
$
|
6,207
|
|
Total gains/(losses) realized and unrealized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings
|
|
—
|
|
|
—
|
|
|
12
|
|
|
30
|
|
|
88
|
|
|
—
|
|
|
130
|
|
Included in other comprehensive income
|
|
(6
|
)
|
|
—
|
|
|
—
|
|
|
(181
|
)
|
|
(190
|
)
|
|
—
|
|
|
(377
|
)
|
Purchases
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Issuances
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Sales
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Settlements
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
(74
|
)
|
|
—
|
|
|
(76
|
)
|
Balance, end of period
|
|
$
|
66
|
|
|
$
|
3
|
|
|
$
|
77
|
|
|
$
|
2,806
|
|
|
$
|
2,932
|
|
|
$
|
—
|
|
|
$
|
5,884
|
|
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
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12
|
|
|
$
|
30
|
|
|
$
|
88
|
|
|
$
|
—
|
|
|
$
|
129
|
|
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
|
|
$
|
(6
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(181
|
)
|
|
$
|
(190
|
)
|
|
$
|
—
|
|
|
$
|
(377
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
72
|
|
|
$
|
5
|
|
|
$
|
46
|
|
|
$
|
2,737
|
|
|
$
|
4,288
|
|
|
$
|
(217
|
)
|
|
$
|
6,930
|
|
Total gains/(losses) realized and unrealized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings
|
|
—
|
|
|
—
|
|
|
8
|
|
|
67
|
|
|
88
|
|
|
(3
|
)
|
|
160
|
|
Included in other comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
54
|
|
|
85
|
|
|
(4
|
)
|
|
135
|
|
Purchases
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Issuances
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Sales
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Settlements
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
(85
|
)
|
|
—
|
|
|
(87
|
)
|
Balance, end of period
|
|
$
|
72
|
|
|
$
|
4
|
|
|
$
|
53
|
|
|
$
|
2,858
|
|
|
$
|
4,376
|
|
|
$
|
(224
|
)
|
|
$
|
7,139
|
|
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
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8
|
|
|
$
|
67
|
|
|
$
|
88
|
|
|
$
|
3
|
|
|
$
|
166
|
|
|
|
(1)
|
Other assets carried at fair value and classified as Level 3 relate to an equity interest in an Ambac sponsored VIE.
|
| Ambac Financial Group, Inc. 27 2020 First Quarter FORM 10-Q |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
The tables below provide roll-forward information by class of investments and derivatives measured using significant unobservable inputs.
|
|
|
|
|
|
|
|
|
|
Level 3 - Investments by Class:
|
|
|
|
|
|
|
Three Months Ended March 31,
|
Other Asset Backed Securities
|
|
2020
|
|
2019
|
Balance, beginning of period
|
|
$
|
72
|
|
|
$
|
72
|
|
Total gains/(losses) realized and unrealized:
|
|
|
|
|
Included in earnings
|
|
—
|
|
|
—
|
|
Included in other comprehensive income
|
|
(6
|
)
|
|
—
|
|
Purchases
|
|
—
|
|
|
—
|
|
Issuances
|
|
—
|
|
|
—
|
|
Sales
|
|
—
|
|
|
—
|
|
Settlements
|
|
—
|
|
|
—
|
|
Balance, end of period
|
|
$
|
66
|
|
|
$
|
72
|
|
The amount of total gains/(losses) included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date
|
|
$
|
—
|
|
|
$
|
—
|
|
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
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 - Derivatives by Class:
|
|
|
|
|
|
|
Three Months Ended March 31, 2020
|
|
Three Months Ended March 31, 2019
|
|
|
Interest
Rate Swaps
|
|
Credit
Derivatives
|
|
Total
Derivatives
|
|
Interest
Rate Swaps
|
|
Credit
Derivatives
|
|
Total
Derivatives
|
Balance, beginning of period
|
|
$
|
67
|
|
|
$
|
—
|
|
|
$
|
66
|
|
|
$
|
47
|
|
|
$
|
(1
|
)
|
|
$
|
46
|
|
Total gains/(losses) realized and unrealized:
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings
|
|
13
|
|
|
(1
|
)
|
|
12
|
|
|
8
|
|
|
—
|
|
|
8
|
|
Included in other comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Purchases
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Issuances
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Sales
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Settlements
|
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
Balance, end of period
|
|
$
|
79
|
|
|
$
|
(2
|
)
|
|
$
|
77
|
|
|
$
|
54
|
|
|
$
|
(1
|
)
|
|
$
|
53
|
|
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
|
|
$
|
13
|
|
|
$
|
(2
|
)
|
|
$
|
12
|
|
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
8
|
|
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:
| Ambac Financial Group, Inc. 28 2020 First Quarter FORM 10-Q |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Investment
Income
|
|
Net Gains
(Losses) on
Derivative
Contracts
|
|
Income
(Loss) on
Variable
Interest
Entities
|
|
Other
Income
or (Loss)
|
Three Months Ended March 31, 2020:
|
|
|
|
|
|
|
|
|
Total gains or losses included in earnings for the period
|
|
$
|
—
|
|
|
$
|
12
|
|
|
$
|
118
|
|
|
$
|
—
|
|
Changes in unrealized gains or losses included in earnings relating to the assets and liabilities still held at the reporting date
|
|
—
|
|
|
12
|
|
|
118
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2019:
|
|
|
|
|
|
|
|
|
Total gains or losses included in earnings for the period
|
|
$
|
—
|
|
|
$
|
8
|
|
|
$
|
152
|
|
|
$
|
—
|
|
Changes in unrealized gains or losses included in earnings relating to the assets and liabilities still held at the reporting date
|
|
—
|
|
|
8
|
|
|
152
|
|
|
—
|
|
8. INVESTMENTS
Ambac’s non-VIE invested assets are primarily comprised of fixed income securities classified as available-for-sale and interests in pooled investment funds 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. Other investments also include equity interests held by AFG including in an unconsolidated trust created in connection with its sale of Segregated Account junior surplus notes on August 28, 2014.
Disclosures in this Note for the period ended March 31, 2020, are in accordance with the new CECL standard adopted January 1, 2020, which is more fully described in Note 2, Basis of Presentation and Significant Accounting Policies. To the extent disclosures for periods prior to January 1, 2020, made in accordance with prior GAAP rules differ from disclosures under the new CECL standard, such differences are explained below.
Fixed Income Securities:
The amortized cost and estimated fair value of available-for-sale investments, excluding VIE investments, at March 31, 2020 and December 31, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Allowance for Credit Losses
|
|
Gross
Unrealized
Gains in AOCI
|
|
Gross
Unrealized
Losses in AOCI
|
|
Estimated
Fair Value
|
March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
Municipal obligations
|
|
$
|
196
|
|
|
$
|
—
|
|
|
$
|
23
|
|
|
$
|
1
|
|
|
$
|
218
|
|
Corporate obligations (1)
|
|
1,284
|
|
|
—
|
|
|
18
|
|
|
42
|
|
|
1,261
|
|
Foreign obligations
|
|
41
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
42
|
|
U.S. government obligations
|
|
168
|
|
|
—
|
|
|
10
|
|
|
—
|
|
|
177
|
|
Residential mortgage-backed securities
|
|
207
|
|
|
—
|
|
|
14
|
|
|
19
|
|
|
203
|
|
Commercial mortgage-backed securities
|
|
51
|
|
|
—
|
|
|
1
|
|
|
1
|
|
|
51
|
|
Collateralized debt obligations
|
|
144
|
|
|
—
|
|
|
—
|
|
|
11
|
|
|
132
|
|
Other asset-backed securities
|
|
277
|
|
|
—
|
|
|
14
|
|
|
8
|
|
|
283
|
|
|
|
2,367
|
|
|
—
|
|
|
81
|
|
|
81
|
|
|
2,367
|
|
Short-term
|
|
586
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
586
|
|
|
|
2,953
|
|
|
—
|
|
|
81
|
|
|
81
|
|
|
2,952
|
|
Fixed income securities pledged as collateral:
|
|
|
|
|
|
|
|
|
|
|
Short-term
|
|
85
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
85
|
|
Total collateralized investments
|
|
85
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
85
|
|
Total available-for-sale investments
|
|
$
|
3,038
|
|
|
$
|
—
|
|
|
$
|
81
|
|
|
$
|
81
|
|
|
$
|
3,037
|
|
| Ambac Financial Group, Inc. 29 2020 First Quarter FORM 10-Q |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
|
Non-credit
Other-than
temporary
Impairments (2)
|
December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
Municipal obligations
|
|
$
|
194
|
|
|
$
|
22
|
|
|
$
|
—
|
|
|
$
|
215
|
|
|
$
|
—
|
|
Corporate obligations (1)
|
|
1,396
|
|
|
36
|
|
|
2
|
|
|
1,430
|
|
|
—
|
|
Foreign obligations
|
|
44
|
|
|
1
|
|
|
—
|
|
|
44
|
|
|
—
|
|
U.S. government obligations
|
|
157
|
|
|
2
|
|
|
2
|
|
|
156
|
|
|
—
|
|
Residential mortgage-backed securities
|
|
200
|
|
|
47
|
|
|
—
|
|
|
248
|
|
|
—
|
|
Commercial mortgage-backed securities
|
|
49
|
|
|
1
|
|
|
—
|
|
|
50
|
|
|
—
|
|
Collateralized debt obligations
|
|
147
|
|
|
—
|
|
|
1
|
|
|
146
|
|
|
—
|
|
Other asset-backed securities
|
|
263
|
|
|
24
|
|
|
—
|
|
|
287
|
|
|
—
|
|
|
|
2,450
|
|
|
132
|
|
|
5
|
|
|
2,577
|
|
|
—
|
|
Short-term
|
|
653
|
|
|
—
|
|
|
—
|
|
|
653
|
|
|
—
|
|
|
|
3,103
|
|
|
132
|
|
|
5
|
|
|
3,230
|
|
|
—
|
|
Fixed income securities pledged as collateral:
|
|
|
|
|
|
|
|
|
|
|
Short-term
|
|
85
|
|
|
—
|
|
|
—
|
|
|
85
|
|
|
—
|
|
Total collateralized investments
|
|
85
|
|
|
—
|
|
|
—
|
|
|
85
|
|
|
—
|
|
Total available-for-sale investments
|
|
$
|
3,187
|
|
|
$
|
132
|
|
|
$
|
5
|
|
|
$
|
3,314
|
|
|
$
|
—
|
|
|
|
(1)
|
Includes Ambac's holdings of the secured notes issued by Ambac LSNI in connection with the Rehabilitation Exit Transactions.
|
|
|
(2)
|
At December 31, 2019, represents the amount of non-credit other-than-temporary impairment losses remaining in accumulated other comprehensive income on securities that also had a credit impairment. These losses are included in gross unrealized losses at December 31, 2019.
|
The amortized cost and estimated fair value of available-for-sale investments, excluding VIE investments, at March 31, 2020, by contractual maturity, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Estimated
Fair Value
|
Due in one year or less
|
|
$
|
683
|
|
|
$
|
683
|
|
Due after one year through five years
|
|
1,083
|
|
|
1,062
|
|
Due after five years through ten years
|
|
447
|
|
|
462
|
|
Due after ten years
|
|
145
|
|
|
161
|
|
|
|
2,359
|
|
|
2,368
|
|
Residential mortgage-backed securities
|
|
207
|
|
|
203
|
|
Commercial mortgage-backed securities
|
|
51
|
|
|
51
|
|
Collateralized debt obligations
|
|
144
|
|
|
132
|
|
Other asset-backed securities
|
|
277
|
|
|
283
|
|
Total
|
|
$
|
3,038
|
|
|
$
|
3,037
|
|
Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay certain obligations with or without call or prepayment penalties.
Unrealized Losses on Fixed Income Securities:
The following table shows gross unrealized losses and fair values of Ambac’s available-for-sale investments, excluding VIE investments, which at March 31, 2020, did not have an allowance for credit losses under the new CECL standard and, at December 31, 2019 did not have other-than-temporary impairments recorded in earnings under prior GAAP. This information is aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at March 31, 2020 and December 31, 2019:
| Ambac Financial Group, Inc. 30 2020 First Quarter FORM 10-Q |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
12 Months or More
|
|
Total
|
|
|
Fair Value
|
|
Gross
Unrealized
Loss
|
|
Fair Value
|
|
Gross
Unrealized
Loss
|
|
Fair Value
|
|
Gross
Unrealized
Loss
|
March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal obligations
|
|
$
|
15
|
|
|
$
|
1
|
|
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
23
|
|
|
$
|
1
|
|
Corporate obligations
|
|
769
|
|
|
42
|
|
|
—
|
|
|
—
|
|
|
769
|
|
|
42
|
|
Foreign obligations
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
U.S. government obligations
|
|
3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
—
|
|
Residential mortgage-backed securities
|
|
125
|
|
|
19
|
|
|
—
|
|
|
—
|
|
|
125
|
|
|
19
|
|
Commercial mortgage-backed securities
|
|
24
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
24
|
|
|
1
|
|
Collateralized debt obligations
|
|
99
|
|
|
8
|
|
|
33
|
|
|
3
|
|
|
132
|
|
|
11
|
|
Other asset-backed securities
|
|
83
|
|
|
7
|
|
|
7
|
|
|
1
|
|
|
90
|
|
|
8
|
|
|
|
1,119
|
|
|
77
|
|
|
48
|
|
|
4
|
|
|
1,167
|
|
|
81
|
|
Short-term
|
|
50
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
50
|
|
|
—
|
|
Total securities
|
|
$
|
1,169
|
|
|
$
|
77
|
|
|
$
|
48
|
|
|
$
|
4
|
|
|
$
|
1,217
|
|
|
$
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
12 Months or More
|
|
Total
|
|
|
Fair Value
|
|
Gross
Unrealized
Loss
|
|
Fair Value
|
|
Gross
Unrealized
Loss
|
|
Fair Value
|
|
Gross
Unrealized
Loss
|
December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal obligations
|
|
$
|
13
|
|
|
$
|
—
|
|
|
$
|
10
|
|
|
$
|
—
|
|
|
$
|
23
|
|
|
$
|
—
|
|
Corporate obligations
|
|
63
|
|
|
2
|
|
|
5
|
|
|
—
|
|
|
68
|
|
|
2
|
|
Foreign obligations
|
|
20
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
20
|
|
|
—
|
|
U.S. government obligations
|
|
36
|
|
|
2
|
|
|
2
|
|
|
—
|
|
|
38
|
|
|
2
|
|
Residential mortgage-backed securities
|
|
5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5
|
|
|
—
|
|
Commercial mortgage-backed securities
|
|
7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7
|
|
|
—
|
|
Collateralized debt obligations
|
|
53
|
|
|
—
|
|
|
63
|
|
|
1
|
|
|
116
|
|
|
1
|
|
Other asset-backed securities
|
|
2
|
|
|
—
|
|
|
7
|
|
|
—
|
|
|
10
|
|
|
—
|
|
|
|
200
|
|
|
4
|
|
|
88
|
|
|
1
|
|
|
288
|
|
|
5
|
|
Short-term
|
|
201
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
201
|
|
|
—
|
|
Total securities
|
|
$
|
401
|
|
|
$
|
4
|
|
|
$
|
88
|
|
|
$
|
1
|
|
|
$
|
489
|
|
|
$
|
5
|
|
Management has determined that the securities in the above table do not have credit impairment as of March 31, 2020 and December 31, 2019, based upon various factors, including (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 March 31, 2020 includes the expectation that all principal and interest payments on securities guaranteed by Ambac Assurance or Ambac UK will be made timely and in full.
As of March 31, 2020, corporate securities in an unrealized loss position included $456 of Secured Notes issued by Ambac LSNI with an unrealized loss $24. The Secured Notes are insured under a financial guarantee policy issued by Ambac Assurance. Corporate
securities also included $12 million of other non-investment grade securities with an aggregate gross unrealized loss of $4. The determination that these securities were not credit impaired was based on a security level assessment of default probability derived from historical data for the applicable asset class and credit rating. This assessment also considered the potential increased risk under a stressed macroeconomic environment. The remaining corporate securities carry investment grade credit ratings and suffered temporary price declines consistent with the broader bond market. There are no expected defaults among these securities.
Residential mortgage backed securities ("RMBS") and other asset backed securities in an unrealized loss position at March 31, 2020, are primarily RMBS and student loan securities guaranteed by Ambac Assurance. For these securities, management compared the present value of cash flows expected to be collected to the amortized cost basis of the securities to assess whether the amortized cost will
| Ambac Financial Group, Inc. 31 2020 First Quarter FORM 10-Q |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
be recovered. Cash flows considered full payment of interest and principal through Ambac's financial guarantee. For floating rate securities, future cash flows were adjusted to reflect changes in the index rate applicable to each security as of the evaluation date. Cash flows were discounted at the effective interest rate. Adverse changes in cash flows attributable solely to changes in the index rate of securities are not considered impaired.
Collateralized debt obligations in an unrealized loss position at March 31, 2020, are highly rated collateralized loan obligations ("CLOs"). The CLO market experienced indiscriminate price declines as certain market participants sought to generate excess liquidity. Management determined that these price declines are temporary and that the CLOs are not credit impaired as of March 31, 2020.
Ambac’s assessment about whether a decline in value is other-than-temporary reflects management’s current judgment regarding facts and circumstances specific to a security and other factors. If that judgment changes, Ambac may record a charge for credit impairment in future periods.
Realized Gains and Losses including Impairments:
The following table details amounts included in net realized gains (losses) and impairments included in earnings for the affected periods:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2020
|
|
2019
|
Gross realized gains on securities
|
|
$
|
6
|
|
|
$
|
24
|
|
Gross realized losses on securities
|
|
—
|
|
|
(4
|
)
|
Net foreign exchange (losses) gains
|
|
2
|
|
|
(3
|
)
|
Credit impairments (1)
|
|
—
|
|
|
—
|
|
Intent / requirement to sell impairments (2)
|
|
—
|
|
|
—
|
|
Net realized gains (losses)
|
|
$
|
8
|
|
|
$
|
17
|
|
|
|
(1)
|
Includes securities which management does not intend to sell and it is not more likely than not that the company will be required to sell before recovery of the amortized cost basis.
|
|
|
(2)
|
Includes securities which management either intends sell or it is more likely than not that the company will be required to sell before recovery of the amortized cost basis.
|
The following table presents a roll-forward of Ambac’s cumulative credit losses on debt securities for which a portion of an other-than-temporary impairment was recognized in other comprehensive income under prior GAAP for the period ended December 31, 2019:
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
|
|
Balance, beginning of period
|
|
$
|
12
|
|
Additions for credit impairments recognized on:
|
|
|
Securities not previously impaired
|
|
—
|
|
Securities previously impaired
|
|
—
|
|
Reductions for credit impairments previously recognized on:
|
|
|
Securities that matured or were sold during the period
|
|
—
|
|
Balance, end of period
|
|
$
|
12
|
|
Ambac had zero allowance for credit losses at March 31, 2020.
Ambac did not purchase any financial assets with credit deterioration for the three month period ended March 31, 2020.
Counterparty Collateral, Deposits with Regulators and Other Restrictions:
Ambac routinely pledges and receives collateral related to certain transactions. Securities held directly in Ambac’s investment portfolio with a fair value of $85 and $85 at March 31, 2020 and December 31, 2019, respectively, were pledged to derivative counterparties. Ambac’s derivative counterparties have the right to re-pledge the investment securities and as such, these pledged securities are separately classified on the Consolidated Balance Sheets as “Fixed income securities pledged as collateral, at fair value”. Refer to Note 9. Derivative Instruments for further information on cash collateral. There were no securities received from other counterparties that were re-pledged by Ambac.
Securities carried at $7 and $6 at March 31, 2020 and December 31, 2019, respectively, were deposited by Ambac and Everspan with governmental authorities or designated custodian banks as required by laws affecting insurance companies. Invested assets carried at $1 at March 31, 2020 and December 31, 2019 were deposited as security in connection with a letter of credit issued for an office lease.
Securities with a fair value of $174 and $197 at March 31, 2020 and December 31, 2019, respectively, were pledged as collateral and as sources of funding to repay the Secured Notes issued by Ambac LSNI. The securities may not be transferred or repledged by Ambac LSNI. Collateral may be sold to fund redemptions of the Secured Notes. Ambac Assurance also pledged for the benefit of the holders of Secured Notes (other than Ambac Assurance) the proceeds of interest payments and partial redemptions of the Secured Notes held by Ambac Assurance. The amount of such proceeds held by Ambac Assurance was $31 and $55 at March 31, 2020 and December 31, 2019, respectively, and is included in Restricted cash on the Consolidated Balance Sheet. Ambac Assurance may, from time to time, sell all or a portion of the Secured Notes it owns. In the event that Ambac Assurance sells any of the Secured Notes it owns, the proceeds must be used to redeem a like amount of the Ambac Note at par. The price at which Ambac Assurance sells the Secured Notes may differ from the price at which it redeems the Secured Notes.
| Ambac Financial Group, Inc. 32 2020 First Quarter FORM 10-Q |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Guaranteed Securities:
Ambac’s fixed income portfolio includes securities covered by guarantees issued by Ambac Assurance and other financial guarantors (“insured securities”). The published rating agency ratings on these securities reflect the higher of the financial strength rating of the financial guarantor or the rating of the underlying issuer. Rating agencies do not always publish separate underlying ratings (those ratings excluding the insurance by the financial guarantor). In the event these underlying ratings are not available from the rating agencies, Ambac will assign an internal rating. The following table represents the fair value, including the value of the financial guarantee, and weighted-average underlying rating, excluding the financial guarantee, of the insured securities at March 31, 2020 and December 31, 2019, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal
Obligations
|
|
Corporate
Obligations (2)
|
|
Mortgage
and Asset-
backed
Securities
|
|
Total
|
|
Weighted
Average
Underlying
Rating (1)
|
March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
Ambac Assurance Corporation
|
|
$
|
181
|
|
|
$
|
495
|
|
|
$
|
396
|
|
|
$
|
1,072
|
|
|
B
|
National Public Finance Guarantee Corporation
|
|
9
|
|
|
—
|
|
|
—
|
|
|
9
|
|
|
BBB-
|
Total
|
|
$
|
189
|
|
|
$
|
495
|
|
|
$
|
396
|
|
|
$
|
1,081
|
|
|
B
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
Ambac Assurance Corporation
|
|
$
|
176
|
|
|
$
|
535
|
|
|
$
|
442
|
|
|
$
|
1,153
|
|
|
B-
|
National Public Finance Guarantee Corporation
|
|
11
|
|
|
—
|
|
|
—
|
|
|
11
|
|
|
BBB-
|
Total
|
|
$
|
187
|
|
|
$
|
535
|
|
|
$
|
442
|
|
|
$
|
1,164
|
|
|
B-
|
|
|
(1)
|
Ratings are based on the lower of Standard & Poor’s or Moody’s rating. If unavailable, Ambac’s internal rating is used.
|
|
|
(2)
|
Represents Ambac's holdings of secured notes issued by Ambac LSNI in connection with the Rehabilitation Exit Transactions. These secured notes are insured by Ambac Assurance.
|
Other Investments:
Ambac's investment portfolio includes interests in various pooled investment funds. Fair value and additional information about investments in pooled funds, by investment type, is summarized in the table below. Except as noted in the table, fair value as reported is determined using net asset value ("NAV") as a practical expedient. In addition to these investments, Ambac has unfunded commitments at March 31, 2020 of $76 to private credit, private equity and hedge funds.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
Class of Funds
|
|
March 31,
2020
|
|
December 31,
2019
|
|
Redemption Frequency
|
|
Redemption Notice Period
|
Real estate properties (1)
|
|
$
|
15
|
|
|
$
|
16
|
|
|
quarterly
|
|
10 business days
|
Hedge funds (2)
|
|
60
|
|
|
65
|
|
|
quarterly
|
|
90 days
|
High yields and leveraged loans (3) (10)
|
|
57
|
|
|
176
|
|
|
daily
|
|
0 - 30 days
|
Private credit (4)
|
|
47
|
|
|
51
|
|
|
quarterly
|
|
180 days if permitted
|
Insurance-linked investments (5)
|
|
3
|
|
|
3
|
|
|
fully redeemed
|
|
none
|
Equity market investments (6) (10)
|
|
58
|
|
|
55
|
|
|
daily
|
|
0 days
|
Investment grade floating rate income (7)
|
|
52
|
|
|
66
|
|
|
weekly
|
|
0 days
|
Private equity (8)
|
|
4
|
|
|
—
|
|
|
quarterly
|
|
90 days if permitted
|
Emerging markets debt (9) (10)
|
|
16
|
|
|
—
|
|
|
daily
|
|
0 days
|
Total equity investments in pooled funds
|
|
$
|
312
|
|
|
$
|
432
|
|
|
|
|
|
|
|
(1)
|
Investments consist of UK property to generate income and capital growth.
|
|
|
(2)
|
This class seeks to generate superior risk-adjusted returns through selective asset sourcing, active trading and hedging strategies within structured credit markets, including mortgage-backed securities, commercial real estate securities and loans, CLOs, REITs and asset backed securities.
|
|
|
(3)
|
This class of funds includes investments in a range of instruments including high-yield bonds, leveraged loans, CLOs, ABS and floating rate notes to generate income and capital appreciation.
|
|
|
(4)
|
This class aims to obtain high long-term return primarily through credit and preferred equity investments with low liquidity and defined term.
|
|
|
(5)
|
This class seeks to generate returns from insurance markets through investments in catastrophe bonds, life insurance and other insurance linked investments.
|
|
|
(6)
|
This class of funds aim to achieve long term growth through diversified exposure to global equity markets.
|
|
|
(7)
|
This class of funds includes investments in high quality floating rate debt securities including ABS and corporate floating rate notes as well as ultra-short term bonds and money market instruments.
|
|
|
(8)
|
This class seeks to generate long-term capital appreciation through investments in private equity, equity-related and other instruments.
|
| Ambac Financial Group, Inc. 33 2020 First Quarter FORM 10-Q |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
|
|
(9)
|
This class seeks long-term income and growth through investments in the bonds of issuers in emerging markets.
|
|
|
(10)
|
These categories include fair value amounts totaling $81 and $136 at March 31, 2020 and December 31, 2019, respectively that are readily determinable and are priced through pricing vendors, including for High yield and leveraged loans products: $17 and $81; for Equity market investments: $48 and $55; and for Emerging markets debt $16 and $0
|
Ambac also holds an direct equity interests including in an unconsolidated trust created in connection with the 2014 sale of Segregated Account junior surplus notes, which is accounted for under the equity method.
Investment Income (loss):
Net investment income (loss) was comprised of the following for the affected periods:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2020
|
|
2019
|
Fixed income securities
|
|
$
|
30
|
|
|
$
|
44
|
|
Short-term investments
|
|
2
|
|
|
4
|
|
Loans
|
|
—
|
|
|
—
|
|
Investment expense
|
|
(2
|
)
|
|
(1
|
)
|
Securities available-for-sale and short-term
|
|
31
|
|
|
47
|
|
Other investments
|
|
(52
|
)
|
|
8
|
|
Total net investment income (loss)
|
|
$
|
(21
|
)
|
|
$
|
55
|
|
Net investment income (loss) from Other investments primarily represents changes in fair value on securities classified as trading
or under the fair value option, income from investment limited partnerships accounted for under the equity method and the above noted equity interest in an unconsolidated trust accounted for under the equity method.
The portion of net unrealized gains (losses) related to trading securities still held at the end of each period is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2020
|
|
2019
|
Net gains (losses) recognized during the period on trading securities
|
|
$
|
(32
|
)
|
|
$
|
7
|
|
Less: net gains (losses) recognized during the reporting period on trading securities sold during the period
|
|
(3
|
)
|
|
1
|
|
Unrealized gains (losses) recognized during the reporting period on trading securities still held at the reporting date
|
|
$
|
(29
|
)
|
|
$
|
6
|
|
| Ambac Financial Group, Inc. 34 2020 First Quarter FORM 10-Q |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
9. DERIVATIVE INSTRUMENTS
The following tables summarize the gross fair values of individual derivative instruments and the impact of legal rights of offset as reported in the Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Amounts of
Recognized
Assets /
Liabilities
|
|
Gross
Amounts
Offset in the
Consolidated
Balance Sheet
|
|
Net Amounts
of Assets/
Liabilities
Presented in the Consolidated
Balance Sheet
|
|
Gross Amount
of Collateral
Received /
Pledged Not
Offset in the
Consolidated
Balance Sheet
|
|
Net
Amount
|
March 31, 2020:
|
|
|
|
|
|
|
|
|
|
Derivative Assets:
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
$
|
89
|
|
|
$
|
1
|
|
|
$
|
88
|
|
|
$
|
—
|
|
|
$
|
88
|
|
Total non-VIE derivative assets
|
$
|
89
|
|
|
$
|
1
|
|
|
$
|
88
|
|
|
$
|
—
|
|
|
$
|
88
|
|
Derivative Liabilities:
|
|
|
|
|
|
|
|
|
|
Credit derivatives
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
2
|
|
Interest rate swaps
|
136
|
|
|
1
|
|
|
135
|
|
|
134
|
|
|
1
|
|
Total non-VIE derivative liabilities
|
$
|
138
|
|
|
$
|
1
|
|
|
$
|
137
|
|
|
$
|
134
|
|
|
$
|
3
|
|
Variable Interest Entities Derivative Assets:
|
|
|
|
|
|
|
|
|
|
Currency swaps
|
$
|
62
|
|
|
$
|
—
|
|
|
$
|
62
|
|
|
$
|
—
|
|
|
$
|
62
|
|
Total VIE derivative assets
|
$
|
62
|
|
|
$
|
—
|
|
|
$
|
62
|
|
|
$
|
—
|
|
|
$
|
62
|
|
Variable Interest Entities Derivative Liabilities:
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
$
|
1,610
|
|
|
$
|
—
|
|
|
$
|
1,610
|
|
|
$
|
—
|
|
|
$
|
1,610
|
|
Total VIE derivative liabilities
|
$
|
1,610
|
|
|
$
|
—
|
|
|
$
|
1,610
|
|
|
$
|
—
|
|
|
$
|
1,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019:
|
|
|
|
|
|
|
|
|
|
Derivative Assets:
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
$
|
75
|
|
|
$
|
—
|
|
|
$
|
75
|
|
|
$
|
—
|
|
|
$
|
75
|
|
Total non-VIE derivative assets
|
$
|
75
|
|
|
$
|
—
|
|
|
$
|
75
|
|
|
$
|
—
|
|
|
$
|
75
|
|
Derivative Liabilities:
|
|
|
|
|
|
|
|
|
|
Credit derivatives
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest rate swaps
|
89
|
|
|
—
|
|
|
90
|
|
|
89
|
|
|
1
|
|
Total non-VIE derivative liabilities
|
$
|
90
|
|
|
$
|
—
|
|
|
$
|
90
|
|
|
$
|
89
|
|
|
$
|
1
|
|
Variable Interest Entities Derivative Assets:
|
|
|
|
|
|
|
|
|
|
Currency swaps
|
$
|
52
|
|
|
$
|
—
|
|
|
$
|
52
|
|
|
$
|
—
|
|
|
$
|
52
|
|
Total VIE derivative assets
|
$
|
52
|
|
|
$
|
—
|
|
|
$
|
52
|
|
|
$
|
—
|
|
|
$
|
52
|
|
Variable Interest Entities Derivative Liabilities:
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
$
|
1,657
|
|
|
$
|
—
|
|
|
$
|
1,657
|
|
|
$
|
—
|
|
|
$
|
1,657
|
|
Total VIE derivative liabilities
|
$
|
1,657
|
|
|
$
|
—
|
|
|
$
|
1,657
|
|
|
$
|
—
|
|
|
$
|
1,657
|
|
Amounts recognized for 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 $80 and $36 as of March 31, 2020 and December 31, 2019, respectively. There were no amounts held representing an obligation to return cash collateral as of March 31, 2020 and December 31, 2019.
| Ambac Financial Group, Inc. 35 2020 First Quarter FORM 10-Q |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
The following tables summarize the location and amount of gains and losses of derivative contracts in the Unaudited Consolidated Statements of Total Comprehensive Income (Loss) for the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gain or (Loss)
Recognized in Consolidated
Statements of Total
Comprehensive Income (Loss)
|
|
Amount of Gain or (Loss) Recognized in Consolidated Statement of Total Comprehensive Income (Loss)
|
|
|
Three Months Ended March 31,
|
|
|
2020
|
|
2019
|
Non-VIE derivatives:
|
|
|
|
|
|
|
|
Credit derivatives
|
Net gains (losses) on derivative contracts
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
Interest rate swaps
|
Net gains (losses) on derivative contracts
|
|
(29
|
)
|
|
(3
|
)
|
Futures contracts
|
Net gains (losses) on derivative contracts
|
|
(40
|
)
|
|
(14
|
)
|
Total Non-VIE derivatives
|
|
|
|
|
$
|
(70
|
)
|
|
$
|
(16
|
)
|
Variable Interest Entities:
|
|
|
|
|
|
|
|
Currency swaps
|
Income (loss) on variable interest entities
|
|
$
|
10
|
|
|
$
|
(7
|
)
|
Interest rate swaps
|
Income (loss) on variable interest entities
|
|
47
|
|
|
(70
|
)
|
Total Variable Interest Entities
|
|
57
|
|
|
(77
|
)
|
Total derivative contracts
|
|
|
$
|
(13
|
)
|
|
$
|
(93
|
)
|
Credit Derivatives:
Credit derivatives, which are privately negotiated contracts, provide the counterparty with credit protection against the occurrence of a specific event such as a payment default or bankruptcy relating to an underlying obligation. Credit derivatives issued are insured by Ambac Assurance. None of the outstanding credit derivative transactions at March 31, 2020, include ratings based collateral-posting triggers or otherwise require Ambac to post collateral regardless of Ambac’s ratings or the size of the mark to market exposure to Ambac.
The portfolio of our credit derivatives were written on a “pay-as-you-go” basis. Similar to an insurance policy execution, pay-as-you-go provides that Ambac pays interest shortfalls on the referenced transaction as they are incurred on each scheduled payment date, but only pays principal shortfalls upon the earlier of (i) the date on which the assets designated to fund the referenced obligation have been disposed of and (ii) the legal final maturity date of the referenced obligation.
Ambac maintains internal credit ratings on its guaranteed obligations, including credit derivative contracts, solely to indicate management’s view of the underlying credit quality of the guaranteed obligations. The gross principal notional outstanding for credit derivate contracts was $275 and $280 as of March 31, 2020 and December 31, 2019, respectively, all of which had internal Ambac ratings of AA in both periods.
Interest Rate Derivatives:
Ambac, through its subsidiary Ambac Financial Services (“AFS”), uses interest rate swaps and US Treasury futures contracts to provide a partial economic hedge against the effects of rising interest rates elsewhere in the Company, including on Ambac’s financial guarantee exposures. Additionally, AFS provided interest rate swaps to states, municipalities and their authorities, asset-backed issuers and other entities in connection with their financings. As of March 31, 2020 and December 31, 2019 the notional amounts of AFS’s derivatives are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Notional
|
Type of Derivative
|
|
March 31,
2020
|
|
December 31,
2019
|
Interest rate swaps—receive-fixed/pay-variable
|
|
$
|
328
|
|
|
$
|
332
|
|
Interest rate swaps—pay-fixed/receive-variable
|
|
1,261
|
|
|
1,261
|
|
US Treasury futures contracts—short
|
|
240
|
|
|
755
|
|
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 March 31, 2020 and December 31, 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Notional
|
Type of VIE Derivative
|
|
March 31,
2020
|
|
December 31,
2019
|
Interest rate swaps—receive-fixed/pay-variable
|
|
$
|
1,121
|
|
|
$
|
1,194
|
|
Interest rate swaps—pay-fixed/receive-variable
|
|
1,093
|
|
|
1,176
|
|
Currency swaps
|
|
302
|
|
|
329
|
|
Credit derivatives
|
|
8
|
|
|
9
|
|
Contingent Features in Derivatives Related to Ambac Credit Risk
Ambac’s over-the-counter interest rate swaps are centrally cleared when eligible. Certain interest rate swaps remain with professional swap-dealer counterparties and direct customer counterparties. These non-cleared swaps are generally executed under standardized derivative documents including collateral support and master netting agreements. Under these agreements, Ambac is required to post collateral in the event net unrealized losses exceed
| Ambac Financial Group, Inc. 36 2020 First Quarter FORM 10-Q |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
predetermined threshold levels. Additionally, given that Ambac Assurance is no longer rated by an independent rating agency, counterparties have the right to terminate the swap positions.
As of March 31, 2020 and December 31, 2019, the net liability fair value of derivative instruments with contingent features linked to Ambac’s own credit risk was $132 and $89, respectively, related to which Ambac had posted cash and securities as collateral with a fair value of $154 and $109, respectively. All such ratings-based contingent features have been triggered requiring maximum collateral levels to be posted by Ambac while preserving counterparties’ rights to terminate the contracts. Assuming all such contracts terminated on March 31, 2020, settlement of collateral balances and net derivative liabilities would result in a net receipt of cash and/or securities by Ambac. If counterparties elect to exercise their right to terminate, the actual termination payment amounts will be determined in accordance with derivative contract terms, which may result in amounts that differ from market values as reported in Ambac’s financial statements.
10. 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
|
Tax Year
|
United States
|
2010
|
New York State
|
2013
|
New York City
|
2015
|
United Kingdom
|
2016
|
Italy
|
2015
|
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 and therefore maintains a full valuation allowance.
Consolidated Pretax Income (Loss)
U.S. and foreign components of pre-tax income (loss) were as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
U.S.
|
$
|
(257
|
)
|
|
$
|
(63
|
)
|
Foreign
|
(30
|
)
|
|
22
|
|
Total
|
$
|
(287
|
)
|
|
$
|
(41
|
)
|
Provision (Benefit) for Income Taxes
The components of the provision for income taxes were as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Current taxes
|
|
|
|
U. S. federal
|
$
|
—
|
|
|
$
|
—
|
|
U.S. state and local
|
—
|
|
|
(4
|
)
|
Foreign
|
(2
|
)
|
|
6
|
|
Current taxes
|
(2
|
)
|
|
3
|
|
Deferred taxes
|
|
|
|
Foreign
|
(5
|
)
|
|
(1
|
)
|
Deferred taxes
|
(5
|
)
|
|
(1
|
)
|
Provision for income taxes
|
$
|
(7
|
)
|
|
$
|
2
|
|
NOL Usage
Pursuant to the intercompany tax sharing agreement, to the extent Ambac Assurance generates taxable income after September 30, 2011, which is offset with "Allocated NOLs" of $3,650, it is obligated to make payments (“Tolling Payments”), subject to certain credits, to Ambac in accordance with the following NOL usage table, where the “Applicable Percentage” is applied to the aggregate amount of federal income tax liability that would have been paid if the Allocated NOLs were not available. Pursuant to the Closing Agreement between Ambac and the Internal Revenue Service ("IRS"), the IRS will receive 12.5% of Tier C and 17.5% of Tier D payments, if made.
NOL Usage Table
|
|
|
|
|
|
NOL Usage Tier
|
Allocated NOLs
|
|
Applicable
Percentage
|
A
|
The first
|
$479
|
|
15%
|
B
|
The next
|
$1,057
|
after Tier A
|
40%
|
C
|
The next
|
$1,057
|
after Tier B
|
10%
|
D
|
The next
|
$1,057
|
after Tier C
|
15%
|
As of December 31, 2018, Ambac Assurance generated cumulative taxable income of $1,508, leaving $2,142 of the $3,650 Allocated NOLs subject to Tolling Payments. For the year ended December 31, 2019, and three months ended March 31, 2020, Ambac Assurance generated NOLs of approximately $143 and $172, respectively, which will need to be utilized before any new Tolling Payments will be generated.
If not utilized, the NOLs will begin expiring in 2029, and will fully expire in 2040, with the exception of the tax loss generated during the three months ended March 31, 2020 of approximately $168, which if Ambac remains in a loss position at year end 2020, will expire in 2041.
As a result of positive income at Ambac Assurance in 2017, Ambac accrued $28 of tax tolling payments. In May 2018, Ambac executed a waiver under the intercompany tax sharing agreement pursuant to which Ambac Assurance was relieved of the requirement to make the 2017 tax tolling payment by June 1, 2018. Ambac also agreed to continue to defer receipt of the 2017 tax tolling payment from
| Ambac Financial Group, Inc. 37 2020 First Quarter FORM 10-Q |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Ambac Assurance until such time as OCI consents to the payment. While OCI has not defined the conditions under which it will consent to the 2017 tax tolling payment, OCI has indicated that it will consider a number of factors, including asset quality and loss and reserve trends. We can provide no assurance as to whether, or when, OCI will consent to the 2017 tax tolling payment.
Ambac's tax positions are subject to review by the OCI, which may lead to the adoption of positions that reduce the amount of tolling payments otherwise available to Ambac.
As of March 31, 2020, the remaining balance of the $3,650 NOL allocated to Ambac Assurance, and new NOLs accrued during 2019 & 2020, totaled approximately $2,457. As of March 31, 2020 the consolidated group's NOL is approximately $3,703, of which Ambac's NOL was approximately$1,246.
11. COMMITMENTS AND CONTINGENCIES
The following commitments and contingencies provide an update of those discussed in Note 17: Commitments and Contingencies in the Notes to Consolidated Financial Statements included Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, and should be read in conjunction with the complete descriptions provided in the aforementioned Form 10-K.
Litigation Against Ambac
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 issued by the Commonwealth of Puerto Rico, including Ambac Assurance. The complaint seeks declarations that 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. Ambac Assurance filed a statement of position and reservation of rights on February 5, 2020; certain other defendants filed motions to dismiss on this same date. On February 9, 2020, the Oversight Board announced that it intends to file, and to seek to confirm, an amended plan of adjustment (the “Amended POA”). On March 10, 2020, the District Court ordered that this case remain stayed while the Oversight Board attempts to confirm the Amended POA.
Financial Oversight and Management Board for Puerto Rico v. Ambac Assurance Corp., et al. (United States District Court, District of Puerto Rico, No. 20-ap-00003, filed Jan. 16, 2020). Pursuant to an order of the District Court setting out an agreed schedule for litigation submitted by the team of mediators designated in the Commonwealth’s restructuring cases (the “Mediation Team“), on January 16, 2020, the Oversight Board filed an adversary proceeding
against monoline insurers insuring bonds issued by the Puerto Rico Infrastructure Financing Authority (“PRIFA”) and the PRIFA bond trustee, all of which Defendants filed proofs of claim against the Commonwealth relating to PRIFA bonds. The complaint seeks to disallow Defendants’ proofs of claim against the Commonwealth in their entirety, including for lack of secured status. Briefing on motions for summary judgment is expected to conclude on June 16, 2020, and a hearing is scheduled for June 23, 2020.
Financial Oversight and Management Board for Puerto Rico v. Ambac Assurance Corp., et al. (United States District Court, District of Puerto Rico, No. 20-ap-00004, filed Jan. 16, 2020). Pursuant to an order of the District Court setting out an agreed schedule for litigation submitted by the Mediation Team, on January 16, 2020, the Oversight Board filed an adversary proceeding against monoline insurers insuring bonds issued by the Puerto Rico Convention Center District Authority (“PRCCDA”) and the PRCCDA bond trustee, all of which Defendants filed proofs of claim against the Commonwealth relating to PRCCDA bonds. The complaint seeks to disallow Defendants’ proofs of claim against the Commonwealth in their entirety, including for lack of secured status. Briefing on motions for summary judgment is expected to conclude on June 16, 2020, and a hearing is scheduled for June 23, 2020.
Financial Oversight and Management Board for Puerto Rico v. Ambac Assurance Corp., et al. (United States District Court, District of Puerto Rico, No. 20-ap-00005, filed Jan. 16, 2020). Pursuant to an order of the District Court setting out an agreed schedule for litigation submitted by the Mediation Team, on January 16, 2020, the Oversight Board filed an adversary proceeding against monoline insurers insuring bonds issued by the Puerto Rico Highways and Transportation Authority ("PRHTA“), certain PRHTA bondholders, and the PRHTA fiscal agent for bondholders, all of which Defendants filed proofs of claim against the Commonwealth relating to PRHTA bonds. The complaint seeks to disallow Defendants’ proofs of claim against the Commonwealth in their entirety, including for lack of secured status. Briefing on motions for summary judgment is expected to conclude on June 16, 2020, and a hearing is scheduled for June 23, 2020.
Financial Oversight and Management Board for Puerto Rico v. Ambac Assurance Corp., et al. (United States District Court, District of Puerto Rico, No. 20-ap-00007, filed Jan. 16, 2020). Pursuant to an order of the District Court setting out an agreed schedule for litigation submitted by the Mediation Team, on January 16, 2020, the Oversight Board and the Committee filed an adversary proceeding against monoline insurers insuring bonds issued by PRHTA, certain PRHTA bondholders, and the PRHTA fiscal agent for bondholders, all of which Defendants filed proofs of claim against PRHTA relating to PRHTA bonds. The complaint seeks to disallow portions of Defendants’ proofs of claim against the PRHTA, including for lack of secured status. On March 10, 2020, the District Court stayed this case.
NC Residuals Owners Trust, et al. v. Wilmington Trust Co., et al. (Delaware Court of Chancery, C.A. No. 2019-0880, filed Nov. 1, 2019). On November 1, 2019, Ambac Assurance 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
| Ambac Financial Group, Inc. 38 2020 First Quarter FORM 10-Q |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
National Association, the Indenture Trustee; GSS Data Services, Inc., the Administrator; and Ambac Assurance. 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, Ambac Assurance, the Owner Trustee, the Indenture Trustee, and other parties filed declaratory judgment counterclaims. Several parties, including Plaintiffs and Ambac Assurance, have filed motions for judgment on the pleadings in support of their requested judicial determinations, and briefing on those motions is complete.
Ambac Assurance’s estimates of projected losses for RMBS transactions consider, among other things, the RMBS transactions’ payment waterfall structure, including the application of interest and principal payments and recoveries, and depend in part on our interpretations of contracts and other bases of our legal rights. From time to time, bond trustees and other transaction participants have employed different contractual interpretations and have commenced, or threatened to commence, litigation to resolve these differences. It is not possible to predict whether additional disputes will arise, nor the outcomes of any potential litigation. It is possible that there could be unfavorable outcomes in this or other disputes or proceedings and that our interpretations may prove to be incorrect, which could lead to changes to our estimate of loss reserves.
Ambac Assurance has periodically received various regulatory inquiries and requests for information with respect to investigations and inquiries that such regulators are conducting. Ambac Assurance has complied with all such inquiries and requests for information.
The Company is involved from time to time in various routine legal proceedings, including proceedings related to litigation with present or former employees. Although the Company’s litigation with present or former employees is routine and incidental to the conduct of its business, such litigation can result in large monetary awards when a civil jury is allowed to determine compensatory and/or punitive damages for, among other things, termination of employment that is wrongful or in violation of implied contracts.
From time to time, Ambac is subject to allegations concerning its corporate governance that may lead to litigation, including derivative litigation, and while the monetary impacts may not be material, the matters may distract management and the Board of Directors from their principal focus on Ambac's business, strategy and objectives.
It is not reasonably possible to predict whether additional suits will be filed or whether additional inquiries or requests for information will be made, and it is also not possible to predict the outcome of litigation, inquiries or requests for information. It is possible that there could be unfavorable outcomes in these or other proceedings. Legal accruals for litigation against the Company which are probable and reasonably estimable, and management's estimated range of loss for such matters, are either not applicable or are not material to the operating results or financial position of the Company. For the litigation matters the Company is defending that do not meet the “probable and reasonably estimable” accrual threshold and where no loss estimates have been provided above, management is unable to make a meaningful estimate of the amount or range of loss that 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
Financial Oversight and Management Board for Puerto Rico v. Public Buildings Authority (United States District Court, District of Puerto Rico, No. 1:18-ap-00149, filed December 21, 2018). On December 21, 2018, the Oversight Board, together with the Committee, as Plaintiffs, filed a complaint against the Puerto Rico Public Buildings Authority (“PBA”) seeking declaratory judgment that the leases between PBA and its lessees-many of whom are agencies and instrumentalities of the Commonwealth-are “disguised financings,” not true leases, and therefore should not be afforded administrative expense priority under the Bankruptcy Code. On March 12, 2019, Ambac Assurance and other interested parties were permitted to intervene in order to argue that the PBA leases are valid leases, and are entitled to administrative expense treatment under the Bankruptcy Code. On June 16, 2019, the Oversight Board announced that it had entered into a plan support agreement ("PSA") with certain general obligation and PBA bondholders that includes a proposed resolution of claim objections to and issues surrounding both general obligation and PBA bonds, including a proposed settlement of this adversary proceeding. On July 24, 2019, the District Court referred this matter to mediation and ordered it stayed during the pendency of such mediation. On September 27, 2019, the Oversight Board filed a joint plan of adjustment and disclosure statement for the Commonwealth, PBA, and the Employees’ Retirement System for Puerto Rico. On February 9, 2020, the Oversight Board executed a new plan support agreement with additional creditors (the “New PSA”) and announced that it intends to file, and seek to confirm, the Amended POA. On March 10, 2020, the District Court ordered that this case remain stayed while the Oversight Board attempts to confirm the Amended POA.
In re Financial Oversight and Management Board for Puerto Rico (United States District Court, District of Puerto Rico, No. 1:17-bk-03283), Omnibus Objection of (I) Financial Oversight and Management Board, Acting Through its Special Claims Committee, and (II) Official Committee of Unsecured Creditors, Pursuant to Bankruptcy Code Section 502 and Bankruptcy Rule 3007, to Claims Filed or Asserted by Holders of Certain Commonwealth General Obligation Bonds (Dkt. No. 4784, filed January 14, 2019) (“GO Bond Claim Objection Procedures”). On January 14, 2019, the Oversight Board and the Committee filed an omnibus claim
| Ambac Financial Group, Inc. 39 2020 First Quarter FORM 10-Q |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
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 Ambac Assurance. The court subsequently ordered certain consolidated procedures permitting parties in interest an opportunity to participate in litigation of the objection. On April 11, 2019, Ambac Assurance filed a notice of participation in support of the objection, advancing the argument, among other things, that the PBA leases are true leases, but the associated debt nonetheless should be included in the Commonwealth’s debt ceiling calculation such that the 2012 and 2014 general obligation bond issuances are null and void and claims arising therefrom should be disallowed. On June 16, 2019, the Oversight Board announced that it had entered into a PSA with certain general obligation and PBA bondholders that includes a proposed resolution of claim objections to and issues surrounding both general obligation and PBA bonds, including a proposed settlement of this omnibus claim objection. On June 25, 2019, the Oversight Board moved to stay proceedings related to this omnibus claim objection while it pursues confirmation of the plan contemplated in the PSA. On July 24, 2019, the District Court referred this matter to mediation and ordered it stayed during the pendency of such mediation. On February 5, 2020, certain parties filed motions to dismiss the claim objection. On February 9, 2020, the Oversight Board executed the New PSA and announced that it intends to file, and seek to confirm, the Amended POA. Additional motions to dismiss were filed on February 19, 2020. On March 10, 2020, the District Court ordered that this matter remain stayed while the Oversight Board attempts to confirm the Amended POA.
In re Financial Oversight and Management Board for Puerto Rico (United States District Court, District of Puerto Rico, No. 1:17-bk-03283), Ambac Assurance Corporation’s Motion to Strike Certain Provisions of the Plan Support Agreement By and Among the Financial Oversight and Management Board for Puerto Rico, Certain GO Holders, and Certain PBA Holders (Dkt. No. 8020, filed July 16, 2019) (“Ambac Assurance Motion to Strike PSA”). On June 16, 2019, the Oversight Board announced that it had entered into a PSA with certain general obligation and PBA bondholders that includes a proposed resolution of claim objections to and issues surrounding both general obligation and PBA bonds. On July 16, 2019, Ambac Assurance filed a motion to strike certain provisions of the PSA that it believes violate PROMESA, including the potential payment of a breakup fee to creditors who have supported the PSA. On July 24, 2019, the District Court referred this matter to mediation and ordered it stayed during the pendency of such mediation. On February 9, 2020, the Oversight Board executed the New PSA. On March 10, 2020, the District Court denied Ambac Assurance’s motion without prejudice given the execution of the New PSA.
In re Financial Oversight and Management Board for Puerto Rico (United States District Court, District of Puerto Rico, No. 1:17-bk-03283), Ambac Assurance Corporation's Motion and Memorandum of Law in Support of Its Motion Concerning Application of the Automatic Stay to the Revenues Securing PRIFA Rum Tax Bonds (Dkt. No. 7176, filed May 30, 2019) (“PRIFA Stay Motion”). On May 30, 2019, Ambac Assurance filed a motion seeking an order that the automatic stay does not apply to certain lawsuits Ambac Assurance 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 Ambac Assurance's collateral. On July 24, 2019, the District Court referred this matter to mediation and ordered it stayed during the pendency of such mediation. On January 31, 2020, the District Court granted a motion filed by Ambac Assurance, together with Assured Guaranty Corporation, Assured Guaranty Municipal Corporation, and Financial Guaranty Insurance Company to amend the PRIFA Stay Motion in order to allow the PRIFA bond trustee to join the amended motion and to allow movants to address recent, controlling precedent from the First Circuit, and Ambac Assurance filed the amended motion the same day. A preliminary hearing on the amended motion is scheduled for June 4, 2020.
In re Financial Oversight and Management Board for Puerto Rico (United States District Court, District of Puerto Rico, No. 1:17-bk-03283), Motion of Assured Guaranty Corp., Assured Municipal Corp., Ambac Assurance Corporation, National Public Finance Guarantee Corporation, and Financial Guaranty Insurance Company for Relief from the Automatic Stay, or, in the Alternative, Adequate Protection (Dkt. No. 10102, filed January 16, 2020) (“PRHTA Stay Motion”). Pursuant to an order of the District Court setting out an agreed schedule for litigation submitted by the Mediation Team, on January 16, 2020, Ambac Assurance, together with Assured Guaranty Corp., Assured Municipal Corp., National Public Finance Guarantee Corporation, and Financial Guaranty Insurance Company filed a motion seeking an order that the automatic stay does not apply to movants’ enforcement of the application of pledged revenues to the PRHTA bonds or the enforcement of movants’ liens on revenues pledged to such bonds, or, in the alternative, for adequate protection of movants’ interests in the revenues pledged to PRHTA bonds. A preliminary hearing on the motion is scheduled for June 4, 2020.
In re Financial Oversight and Management Board for Puerto Rico (United States District Court, District of Puerto Rico, No. 1:17-bk-03283), Ambac Assurance Corporation, Financial Guaranty Insurance Company, Assured Guaranty Corp., Assured Municipal Corp., and the Bank of New York Mellon’s Motion Concerning Application of the Automatic Stay to the Revenues Securing the CCDA Bonds (Dkt. No. 10104, filed January 16, 2020) (“PRCCDA Stay Motion”). Pursuant to an order of the District Court setting out an agreed schedule for litigation submitted by the Mediation Team, on January 16, 2020, Ambac Assurance, together with Financial Guaranty Insurance Company, Assured Guaranty Corp., Assured Municipal Corp., and the PRCCDA bond trustee, filed a motion seeking an order either (i) that the automatic stay does not apply to movants’ enforcement of their rights to revenues pledged to PRCCDA bonds by bringing an enforcement action against PRCCDA; or, in the alternative, (ii) lifting the automatic stay to enable movants to pursue an enforcement action against PRCCDA; or, in the further alternative, (iii) ordering adequate protection of movants’ interests in the PRCCDA pledged to PRCCDA bonds. A preliminary hearing on the motion is scheduled for June 4, 2020.
Ambac Assurance Corporation v. Merrill Lynch, Pierce, Fenner & Smith Incorporated, Goldman Sachs & Co. LLC, Citigroup Global Markets Inc., J.P. Morgan Securities LLC, Morgan Stanley & Co. LLC, Samuel A. Ramirez & Co. Inc., Raymond James & Associates, Inc., and UBS Financial Services Inc. (Commonwealth of Puerto Rico, Court of First Instance, San Juan Superior Court, Case No. CV-000248923, filed February 19, 2020). On February 19, 2020,
| Ambac Financial Group, Inc. 40 2020 First Quarter FORM 10-Q |
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Ambac Assurance filed a complaint in the Commonwealth of Puerto Rico, Court of First Instance, San Juan Superior Court, against certain underwriters of Ambac-insured bonds issued by PRIFA and PRCCDA, with causes of action under the Puerto Rico civil law doctrines of actos proprios and Unilateral Declaration of Will. Ambac Assurance alleges defendants engaged in inequitable conduct in underwriting Ambac-insured bonds issued by PRIFA and PRCCDA, including failing to investigate and adequately disclose material information in the official statements for the bonds that defendants provided to Ambac Assurance regarding systemic deficiencies in the Commonwealth’s financial reporting. Ambac Assurance seeks damages in compensation for claims paid by Ambac Assurance on its financial guaranty insurance policies insuring such bonds, pre-judgment and post-judgment interest, and attorneys’ fees. On March 20, 2020, Defendants removed this case to the Title III Court. On April 20, 2020, Ambac moved to remand the case back to the Court of First Instance. Briefing on the motion to remand is scheduled to conclude on June 10, 2020.
Ambac Assurance Corporation v. Autopistas Metropolitanas de Puerto Rico, LLC (United States District Court for the District of Puerto Rico) Case No. 3:20-cv-01094, filed February 19, 2020). On February 19, 2020, Ambac Assurance filed a complaint in the U.S. District Court for the District of Puerto Rico, against Autopistas Metropolitanas de Puerto Rico, LLC (“Metropistas”), which holds a concession from PRHTA for two Puerto Rico highways, PR-5 and PR-22, in connection with a 10-year extension of the concession that was entered into in April 2016. The complaint includes claims for fraudulent conveyance and unjust enrichment, alleging that the consideration paid by Metropistas for the extension was less than reasonably equivalent value and most of the benefit of such payment was received by the Commonwealth instead of PRHTA. Ambac Assurance also seeks a declaratory judgment that it has a valid and continuing lien on certain toll revenues that are being collected by Metropistas. On March 31, 2020, the Oversight Board filed a motion before the Title III Court seeking an order directing Ambac to withdraw its complaint. On April 20, 2020, the District Court ordered this case stayed pending briefing before the Title III Court on the Oversight Board’s motion to withdraw. A hearing before the Title III Court on the motion to withdraw is scheduled for June 3, 2020.
Student Loans Exposure
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 and deficiencies in servicing practices. Simultaneous with the filing of its complaint, CFPB also filed a motion for entry of a proposed consent judgment that would grant monetary damages and injunctive relief against the Trusts. Ambac Assurance guaranteed certain securities issued by three of the Trusts and indirectly insures six other Trusts. On September 20, 2017, Ambac Assurance filed a motion to intervene in the action, which motion was granted on October 19, 2018. On November 29, 2018, the court set a bifurcated discovery and briefing schedule. Discovery and briefing is now complete as to certain threshold issues. Additionally, on March 19, 2020, Intervenor Transworld Systems Inc. filed a motion to dismiss the action for lack of subject matter jurisdiction.
RMBS Litigation
In connection with Ambac Assurance’s efforts to seek redress for breaches of representations and warranties and fraud related to the information provided by both the underwriters and the sponsors of various transactions and for failure to comply with the obligation by the sponsors to repurchase ineligible loans, Ambac Assurance has filed various lawsuits:
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Ambac Assurance Corporation and The Segregated Account of Ambac Assurance Corporation v. Countrywide Securities Corp., Countrywide Financial Corp. (a.k.a. Bank of America Home Loans) and Bank of America Corp. (Supreme Court of the State of New York, County of New York, Case No. 651612/2010, filed on September 28, 2010). Ambac Assurance’s Second Amended Complaint, filed on May 28, 2013, asserted claims against Countrywide and Bank of America (as successor to Countrywide’s liabilities) for, among other things, breach of contract and fraudulent inducement. In August and October 2018, Defendants filed various pre-trial motions. On December 30, 2018, the court denied all of these pre-trial motions in their entirety and Defendants appealed. On September 17, 2019, the First Department affirmed in part and reversed in part the trial court’s rulings. On October 17, 2019, Countrywide filed a motion for leave to appeal certain issues to the New York Court of Appeals and for reargument or leave to appeal certain other issues. On January 16, 2020, the First Department recalled and vacated its September 17, 2019 decision and order and substituted a new decision and order. On the same date, the First Department denied Countrywide’s motion seeking leave to appeal, without prejudice to seeking such leave from the reissued decision and order. On January 30, 2020, Countrywide filed a new motion for leave to appeal the First Department’s denial of its motions, which Ambac Assurance opposed. On January 14, 2020, the trial court granted Ambac Assurance’s motion to supplement and amend certain of its expert reports, and expert discovery is ongoing. Due to the impact of COVID-19 on the court system in New York State, which has caused the postponement of all in-person proceedings, the Court vacated the previously scheduled July 13, 2020 trial date. Given the difficulty or impossibility of predicting the scope, duration and magnitude of the effect of COVID-19 on the New York court system, and the possibility of other intervening causes of delay, we can provide no assurance as to when the trial will be rescheduled.
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Ambac Assurance Corporation v. U.S. Bank National Association (United States District Court, Southern District of New York, Docket No. 18-cv-5182 (LGS), filed June 8, 2018 (the “SDNY Action”)); In the matter of HarborView Mortgage Loan Trust 2005-10 (Minnesota state court, Docket No. 27-TR-CV-17-32 (the “Minnesota Action”)). These two actions relate to U.S. Bank National Association’s (“U.S. Bank”) acceptance of a proposed settlement in a separate litigation that U.S. Bank is prosecuting, as trustee, related to the Harborview Mortgage Loan Trust, Series 2005-10 (“Harborview 2005-10”), a residential mortgage-backed securitization for which Ambac Assurance issued an insurance policy. On March 6, 2017, U.S. Bank filed a petition commencing the Minnesota Action, a trust instruction proceeding in Minnesota state court concerning the proposed settlement, and on June 12, 2017, U.S. Bank filed an amended petition. Ambac Assurance filed a
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AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
motion to dismiss the Minnesota Action, which was denied on November 13, 2017, and the denial was affirmed on appeal. On September 6, 2018, U.S. Bank filed its Second Amended Petition, and Ambac Assurance and certain other certificateholders objected to, or otherwise responded to, the petition. Discovery in the Minnesota Action is ongoing, and the court has set June 20, 2020 as the date for the start of the trial. On June 8, 2018, Ambac Assurance filed the SDNY Action asserting claims arising out of U.S. Bank’s acceptance of the proposed settlement and treatment of trust recoveries. Ambac Assurance asserted claims for declaratory judgment, breach of contract, and breach of fiduciary duty. On July 16, 2019, the court dismissed Ambac Assurance's breach-of-contract and breach-of-fiduciary-duty claims based on U.S. Bank's acceptance of the settlement; and dismissed Ambac Assurance's declaratory judgment claims regarding the occurrence of an Event of Default and U.S. Bank's future distribution of trust recoveries through the waterfall. The court denied the motion to dismiss Ambac Assurance's breach-of-contract claims based on U.S. Bank's past distribution of trust recoveries through the waterfall. On January 17, 2020, U.S. Bank moved for summary judgment regarding the remaining claim relating to distributions. On February 7, 2020, Ambac
Assurance cross-moved for summary judgment. These summary judgment motions are fully briefed.
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In re application of Deutsche Bank National Trust Company as Trustee of the Harborview Mortgage Loan Trust Mortgage Loan Pass-Through Certificates, Series 2006-9 (Supreme Court of the State of New York, County of New York, No. 654208/2018), filed August 23, 2018 (the “Trust Instruction Proceeding”). This action relates to Deutsche Bank National Trust Company’s (“DBNT”) proposed settlement of claims related to the Harborview Mortgage Loan Trust Series 2006-9 (“Harborview 2006-09”). On August 23, 2018, DBNT filed a Petition commencing the Trust Instruction Proceeding, seeking judicial instruction pursuant to CPLR Article 77, inter alia, to accept the proposed settlement with respect of claims relating to Harborview 2006-9. On November 2, 2018, Ambac Assurance and other interested persons filed notices of intention to appear and answers to DBNT’s petition. Ambac Assurance sought a period of discovery before resolution on the merits. Under the current case schedule discovery is to be completed by May 20, 2020 and merits briefing by July 10, 2020. Ambac Assurance expects this schedule to be modified.
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