AMBAC FINANCIAL GROUP, INC. Item 7.01. Regulation FD Disclosure. During theAmbac Financial Group, Inc.'s Annual Meeting of Stockholders, Mr.Claude LeBlanc , the Company's Chief Executive Officer will make reference to two non-GAAP financial measures: Adjusted Earnings and Adjusted Book Value. The most directly comparable GAAP measures are net income attributable to common stockholders forAdjusted Earnings and Total Ambac Financial Group, Inc. stockholders' equity for Adjusted Book Value. A non-GAAP financial measure is a numerical measure of financial performance or financial position that excludes (or includes) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP. We are presenting these non-GAAP financial measures because they provide greater transparency and enhanced visibility into the underlying drivers of our business. Adjusted Earnings and Adjusted Book Value are not substitutes for the Company's GAAP reporting, should not be viewed in isolation and may differ from similar reporting provided by other companies, which may define non-GAAP measures differently.Ambac has a significantU.S. tax net operating loss ("NOL") that is offset by a full valuation allowance in the GAAP consolidated financial statements. As a result of this and other considerations, we utilized a 0% effective tax rate for non-GAAP adjustments; which is subject to change. The following paragraphs define each non-GAAP financial measure and describe why it is useful. A reconciliation of the non-GAAP financial measure and the most directly comparable GAAP financial measure is also presented below. Adjusted Earnings (Loss). Adjusted Earnings (Loss) is defined as net income (loss) attributable to common stockholders, as reported under GAAP, adjusted on an after-tax basis for the following: •Non-credit impairment fair value (gain) loss on credit derivatives: Elimination of the non-credit impairment fair value gains (losses) on credit derivatives, which is the amount in excess of the present value of the expected estimated credit losses. Such fair value adjustments are affected by, and in part fluctuate with, changes in market factors such as interest rates and credit spreads, including the market's perception ofAmbac's credit risk ("Ambac CVA"), and are not expected to result in an economic gain or loss. These adjustments allow for all financial guarantee contracts to be accounted for consistent with the Financial Services - Insurance Topic of ASC, whether or not they are subject to derivative accounting rules. •Insurance intangible amortization: Elimination of the amortization of the financial guarantee insurance intangible asset that arose as a result of theAmbac's emergence from bankruptcy and implementation of Fresh Start reporting. This adjustment ensures that all financial guarantee contracts are accounted for consistent with the provisions of the Financial Services - Insurance Topic of the ASC. •Foreign exchange (gains) losses: Elimination of the foreign exchange gains (losses) on the re-measurement of assets, liabilities and transactions in non-functional currencies. This adjustment eliminates the foreign exchange gains (losses) on all assets, liabilities and transactions in non-functional currencies, which enables users of our financial statements to better view the business results without the impact of fluctuations in foreign currency exchange rates and facilitates period-to-period comparisons ofAmbac's operating performance. 1 -------------------------------------------------------------------------------- The following table reconciles net income attributable to common stockholders to the non-GAAP measure, Adjusted Earnings on a total dollar amount and per diluted share basis, for all periods presented: 2020 2019 2018 ($ in millions, except per share data) Per Diluted Per Diluted Per Diluted Year Ended December 31, $ Amount Share $ Amount Share $ Amount Share Net income (loss) attributable to common stockholders$ (437) $ (9.47) $ (216) $ (4.69) $ 186 $ 3.99 Adjustments: Non-credit impairment fair value (gain) loss on credit derivatives - - (1) (0.03) 1 0.02 Insurance intangible amortization 57 1.23 295 6.43 107 2.30 Foreign exchange (gains) losses 3 0.06 (12) (0.26) 7 0.15 Adjusted Earnings (Loss)$ (378) $ (8.19)
Adjusted Book Value. Adjusted Book Value is defined asTotal Ambac Financial Group, Inc. stockholders' equity as reported under GAAP, adjusted for after-tax impact of the following: •Non-credit impairment fair value losses on credit derivatives: Elimination of the non-credit impairment fair value loss on credit derivatives, which is the amount in excess of the present value of the expected estimated economic credit loss. GAAP fair values are affected by, and in part fluctuate with, changes in market factors such as interest rates, credit spreads, includingAmbac's CVA that are not expected to result in an economic gain or loss. These adjustments allow for all financial guarantee contracts to be accounted for within Adjusted Book Value consistent with the provisions of theFinancial Services-Insurance Topic of the ASC, whether or not they are subject to derivative accounting rules. •Insurance intangible asset: Elimination of the financial guarantee insurance intangible asset that arose as a result ofAmbac's emergence from bankruptcy and the implementation of Fresh Start reporting. This adjustment ensures that all financial guarantee contracts are accounted for within Adjusted Book Value consistent with the provisions of the Financial Services-Insurance Topic of the ASC. •Net unearned premiums and fees in excess of expected losses: Addition of the value of the unearned premium revenue ("UPR") on financial guarantee contracts, in excess of expected losses, net of reinsurance. This non-GAAP adjustment presents the economics of UPR and expected losses for financial guarantee contracts on a consistent basis. In accordance with GAAP, stockholders' equity reflects a reduction for expected losses only to the extent they exceed UPR. However, when expected losses are less than UPR for a financial guarantee contract, neither expected losses nor UPR have an impact on stockholders' equity. This non-GAAP adjustment adds UPR in excess of expected losses, net of reinsurance, to stockholders' equity for financial guarantee contracts where expected losses are less than UPR. •Net unrealized investment (gains) losses in Accumulated Other Comprehensive Income: Elimination of the unrealized gains and losses on the Company's investments that are recorded as a component of accumulated other comprehensive income ("AOCI"). The AOCI component of the fair value adjustment on the investment portfolio may differ from realized gains and losses ultimately recognized by the Company based on the Company's investment strategy. This adjustment only allows for such gains and losses in Adjusted Book Value when realized. 2 -------------------------------------------------------------------------------- The following table reconcilesTotal Ambac Financial Group, Inc. stockholders' equity to the non-GAAP measure Adjusted Book Value on a dollar amount and per share basis, for all periods presented: 2020 2019
($ in millions, except per share data)
Per Share
Total Ambac Financial Group, Inc. stockholders'
equity $ 1,080 $ 23.57 $ 1,477 $ 32.41
Adjustments:
Non-credit impairment fair value losses on credit
derivatives - 0.01 - 0.01
Insurance intangible asset (373) (8.14) (427) (9.37)
Net unearned premiums and fees in excess of expected losses
378 8.24 414 9.09
Net unrealized investment (gains) losses in
Accumulated Other Comprehensive Income (Loss) (166) (3.63) (151) (3.31)
Adjusted Book Value $ 919 $ 20.05 $ 1,313 $ 28.83
The decrease in Adjusted Book Value was primarily attributable to the Adjusted
Loss for the year ended December 31, 2020 , excluding earned premium previously
included in Adjusted Book Value, partially offset by foreign exchange
translation gains.
Factors that impact changes to Adjusted Book Value include many of the same
factors that impact Adjusted Earnings, including the majority of revenues and
expenses, but generally exclude components of premium earnings since they are
embedded in prior period's Adjusted Book Value through the net unearned premiums
and fees in excess of expected losses adjustment. Net unearned premiums and fees
in excess of expected losses will affect Adjusted Book Value for (i) changes to
future premium assumptions (e.g. expected term, interest rates, foreign currency
rates, time passage) and (ii) changes to expected losses for policies which do
not exceed their related unearned premiums and (iii) new reinsurance
transactions.
Forward-Looking Statements
In this report, statements that may constitute "forward-looking statements"
within the meaning of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Words such as "estimate," "project," "plan,"
"believe," "anticipate," "intend," "planned," "potential" and similar
expressions, or future or conditional verbs such as "will," "should," "would,"
"could," and "may," or the negative of those expressions or verbs, identify
forward-looking statements. We caution readers that these statements are not
guarantees of future performance. Forward-looking statements are not historical
facts but instead represent only our beliefs regarding future events, which may
by their nature be inherently uncertain and some of which may be outside our
control. These statements may relate to plans and objectives with respect to the
future, among other things which may change. We are alerting you to the
possibility that our actual results may differ, possibly materially, from the
expected objectives or anticipated results that may be suggested, expressed or
implied by these forward-looking statements. Important factors that could cause
our results to differ, possibly materially, from those indicated in the
forward-looking statements include, among others, those discussed under "Risk
Factors" in our most recent SEC filed quarterly or annual report.
Any or all of management's forward-looking statements here or in other
publications may turn out to be incorrect and are based on management's current
belief or opinions. Ambac's actual results may vary materially, and there are no
guarantees about the performance of Ambac's securities. Among events, risks,
uncertainties or factors that could cause actual results to differ materially
are: (1) the highly speculative nature of AFG's common stock and volatility in
the price of AFG's common stock; (2) Ambac's inability to realize the expected
recoveries, including RMBS litigation recoveries, included in its financial
statements which would have a materially adverse effect on Ambac Assurance
Corporation's ("AAC") financial condition and may lead to regulatory
intervention; (3) failure to recover claims paid on Puerto Rico exposures or
realization of losses in amounts higher than expected; (4) increases to loss and
loss expense reserves; (5) inadequacy of reserves established for losses and
loss expenses and possibility that changes in loss reserves may result in
further volatility of earnings or financial results; (6) uncertainty concerning
the Company's ability to achieve value for holders of its securities, whether
from AAC and its subsidiaries or from transactions or opportunities apart from
AAC and its subsidiaries, including new business initiatives relating to the
specialty property and casualty program insurance business, the managing general
agency/underwriting business, or related businesses; (7) potential of
rehabilitation proceedings against AAC; (8) increased
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fiscal stress experienced by issuers of public finance obligations or an
increased incidence of Chapter 9 filings or other restructuring proceedings by
public finance issuers, including an increased risk of loss on revenue bonds of
distressed public finance issuers due to judicial decisions adverse to revenue
bond holders; (9) our inability to mitigate or remediate losses, commute or
reduce insured exposures or achieve recoveries or investment objectives, or the
failure of any transaction intended to accomplish one or more of these
objectives to deliver anticipated results; (10) insufficiency or unavailability
of collateral to pay secured obligations; (11) credit risk throughout Ambac's
business, including but not limited to credit risk related to residential
mortgage-backed securities, student loan and other asset securitizations, public
finance obligations and exposures to reinsurers; (12) the impact of catastrophic
environmental or natural events, including catastrophic public health events
like the COVID-19 pandemic, on significant portions of our insured and
investment portfolios; (13) credit risks related to large single risks, risk
concentrations and correlated risks; (14) the risk that Ambac's risk management
policies and practices do not anticipate certain risks and/or the magnitude of
potential for loss; (15) risks associated with adverse selection as Ambac's
insured portfolio runs off; (16) Ambac's substantial indebtedness could
adversely affect its financial condition and operating flexibility; (17) Ambac
may not be able to obtain financing or raise capital on acceptable terms or at
all due to its substantial indebtedness and financial condition; (18) Ambac may
not be able to generate the significant amount of cash needed to service its
debt and financial obligations, and may not be able to refinance its
indebtedness; (19) restrictive covenants in agreements and instruments may
impair Ambac's ability to pursue or achieve its business strategies; (20)
adverse effects on operating results or the Company's financial position
resulting from measures taken to reduce risks in its insured portfolio; (21)
disagreements or disputes with Ambac's insurance regulators; (22) default by one
or more of Ambac's portfolio investments, insured issuers or counterparties;
(23) loss of control rights in transactions for which we provide insurance due
to a finding that Ambac has defaulted; (24) adverse tax consequences or other
costs resulting from the characterization of the AAC's surplus notes or other
obligations as equity; (25) risks attendant to the change in composition of
securities in the Ambac's investment portfolio; (26) adverse impacts from
changes in prevailing interest rates; (27) our results of operation may be
adversely affected by events or circumstances that result in the impairment of
our intangible assets and/or goodwill that was recorded in connection with
Ambac's acquisition of 80% of the membership interests of Xchange; (28) risks
associated with the expected discontinuance of the London Inter-Bank Offered
Rate; (29) factors that may negatively influence the amount of installment
premiums paid to the Ambac ; (30) market risks impacting assets in the Ambac's
investment portfolio or the value of our assets posted as collateral in respect
of interest rate swap transactions; (31) risks relating to determinations of
amounts of impairments taken on investments; (32) the risk of litigation and
regulatory inquiries or investigations, and the risk of adverse outcomes in
connection therewith, which could have a material adverse effect on Ambac's
business, operations, financial position, profitability or cash flows; (33)
actions of stakeholders whose interests are not aligned with broader interests
of the Ambac's stockholders; (34) system security risks, data protection
breaches and cyber attacks; (35) changes in accounting principles or practices
that may impact Ambac's reported financial results; (36) regulatory oversight of
Ambac Assurance UK Limited ("Ambac UK ") and applicable regulatory restrictions
may adversely affect our ability to realize value from Ambac UK or the amount of
value we ultimately realize; (37) operational risks, including with respect to
internal processes, risk and investment models, systems and employees, and
failures in services or products provided by third parties; (38) Ambac's
financial position that may prompt departures of key employees and may impact
the its ability to attract qualified executives and employees; (39) fluctuations
in foreign currency exchange rates could adversely impact the insured portfolio
in the event of loss reserves or claim payments denominated in a currency other
than US dollars and the value of non-US dollar denominated securities in our
investment portfolio; (40) disintermediation within the insurance industry that
negatively impacts our managing general agency/underwriting business; (41)
changes in law or in the functioning of the healthcare market that impair the
business model of our accident and health managing general underwriter; and (42)
other risks and uncertainties that have not been identified at this time.
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