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Item 1A. Risk Factors

2021-11-08 compared with 2021-08-05 · 45 added, 35 removed, 89 unchanged (47% of the section changed)

4 unchanged sentences

| Ambac Financial Group, Inc.

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References to the "Secured Notes" and the "Ambac Note" in the "Risk Factors” section, Item 1A to Part I in our Annual Report on Form 10-K for the year ended December 31, 2020, should be understood to refer to the LSNI Secured Notes and LSNI Ambac Note, respectively, for all times prior to the issuance of the Sitka Senior Secured Notes and Sitka AAC Note, respectively, on July 6, 2021 (as described in Note 1.

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However, generally the sponsors have not honored those obligations and have vigorously defended claims brought against them.

As of June 30, 2021, we have estimated RMBS R&W subrogation recoveries of $1,715 (net of reinsurance) included in our financial statements.

As of September 30, 2021, we have estimated RMBS R&W subrogation recoveries of $1,705 (net of reinsurance) included in our financial statements.

These estimated recoveries are based on the contractual claims brought in the aforementioned litigations and represent a probability-weighted estimate of amounts we expect to recover under various possible scenarios.

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Moreover, rulings that may be adverse to AAC (in any of its RMBS litigations, as well as in other RMBS cases in which it is not a party, including an unrelated RMBS case with an appeal currently pending at the New York Court of Appeals involving issues relevant to AAC’s breach of contract claims) could adversely affect AAC’s ability to pursue its claims or the amount or timing of any recovery, or negatively alter settlement dynamics with RMBS litigation defendants.

Any litigation award or settlement may be for an amount less than the amount necessary

(even when combined with other pledged collateral) to pay the Sitka Senior Secured Notes or the Tier 2 Notes, which could have a material adverse effect on our financial condition or results of operations and make it more difficult for AAC to repay the Sitka AAC Note (and therefore make it more difficult for the issuer of the Sitka Senior Secured Notes to repay the Sitka Senior Secured Notes) and/or the Tier 2 Notes and/or AAC’s outstanding surplus notes, on a timely basis or at all.

Any litigation award or

settlement may be for an amount less than the amount necessary (even when combined with other pledged collateral) to pay the Sitka Senior Secured Notes or the Tier 2 Notes, which could have a material adverse effect on our financial condition or results of operations and make it more difficult for AAC to repay the Sitka AAC Note (and therefore make it more difficult for the issuer of the Sitka Senior Secured Notes to repay the Sitka Senior Secured Notes) and/or the Tier 2 Notes and/or AAC’s outstanding surplus notes, on a timely basis or at all.

In the event that AAC is unable to satisfy its obligations with respect to the Sitka AAC Note (and therefore make it more difficult for the issuer of the Sitka Senior Secured Notes to satisfy its obligations in respect of the Sitka Senior Secured Notes) or the Tier 2 Notes, holders will have the right to foreclose on any available collateral and to sue AAC for failure to make required payments;

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The RMBS litigations could also be adversely affected if AAC does not have sufficient resources to actively prosecute its claims or becomes subject to rehabilitation, liquidation, conservation or dissolution, or otherwise impaired by actions of OCI.

Our ability to realize the estimated RMBS R&W subrogation recoveries included in our financial statements and the time of the recoveries, if any, is subject to significant uncertainty, including the risks described above and uncertainties inherent in the assumptions used in estimating such recoveries.

The amount of these subrogation recoveries is significant and if we were unable to recover all such amounts, our stockholders’ equity as of June 30, 2021 would decrease from $ 1,123 to $(592).

Our ability to realize the estimated RMBS R&W subrogation recoveries included in our financial statements and the timing of the recoveries, if any, is subject to significant uncertainty, including the risks described above and uncertainties inherent in the assumptions used in estimating such recoveries.

The amount of these subrogation recoveries is significant and if we were unable to recover all such amounts, our stockholders’ equity as of September 30, 2021, would decrease from $ 1,121 to $(585).

We expect to recover material amounts of claims payments through remediation measures including the litigation described above as well as through cash flows in the securitization structures of transactions that AAC insures.

Realization of such expected recoveries is subject to various risks and uncertainties, including the rights and defenses of other parties with interests that conflict with AAC’s interests, the performance of the collateral and assets backing the obligations that AAC insures, and the performance of servicers involved in securitizations in which AAC participates as insurer.

Additionally, our ability to

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realize recoveries in insured transactions may be impaired if the continuing orders of the Rehabilitation Court are not effective.

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which AAC participates as insurer.

Additionally, our ability to realize recoveries in insured transactions may be impaired if the continuing orders of the Rehabilitation Court are not effective.

Adverse developments with respect to any of the factors described above may cause our recoveries to fall below expectations, which could have a material adverse effect on our financial condition, including our capital and liquidity, and may result in adverse consequences such as impairing the ability of AAC to honor its financial obligations;

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The estimated fair market value of the Secured Notes Collateral and the estimated fair market value of the Tier 2 Notes Collateral are subject to fluctuations based on factors that include, among others, the ability to sell the collateral in an orderly sale, general economic conditions, the availability of buyers and other factors, including, in the case of the Secured Notes Collateral, the performance of Ambac UK’s portfolio of insured credits and the performance of its investment portfolio.

The amount to be received upon a sale of the Secured Notes Collateral (including a sale of the collateral securing the Sitka AAC Note) or Tier 2 Notes Collateral would be dependent on numerous factors, including, but not limited to, the actual fair market value of the collateral at such time and the timing and the manner of the sale,

and the amount that either the collateral agent or AAC receives may not equal or exceed the expected fair market value.

The amount to be received upon a sale of the Secured Notes Collateral (including a sale of the collateral securing the Sitka AAC Note) or Tier 2

Notes Collateral would be dependent on numerous factors, including, but not limited to, the actual fair market value of the collateral at such time and the timing and the manner of the sale, and the amount that either the collateral agent or AAC receives may not equal or exceed the expected fair market value.

Accordingly, there can be no assurance that the Secured Notes Collateral (including the collateral securing the Sitka AAC Note) or the Tier 2 Notes Collateral can be sold in a short period of time or at all or at acceptable prices to the applicable collateral agent or AAC.

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The ability of the holders of the Sitka Senior Secured Notes or Tier 2 Notes to realize upon any of the collateral securing the Sitka AAC Note and the Sitka Senior Secured Notes or Tier 2 Notes, as the case may be, may also be subject to bankruptcy and insolvency law limitations or similar limitations applicable in insurance company rehabilitation or liquidation proceedings.

In the event of rehabilitation, liquidation, conservation, dissolution or other insolvency proceeding of AAC, creditors and claimants of AAC other than holders of Sitka Senior Secured Notes will not be entitled to recoveries based on the value of Ambac UK to the extent the security interest of the holders of Sitka Senior Secured Notes in the capital stock of Ambac UK is

In the event of rehabilitation, liquidation, conservation, dissolution or other insolvency proceeding of AAC, creditors and claimants of AAC other than holders of Sitka Senior Secured

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respected and any recoveries based on the value of Ambac UK are fully applied for the benefit of the holders of Sitka Senior Secured Notes.

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Notes will not be entitled to recoveries based on the value of Ambac UK to the extent the security interest of the holders of Sitka Senior Secured Notes in the capital stock of Ambac UK is respected and any recoveries based on the value of Ambac UK are fully applied for the benefit of the holders of Sitka Senior Secured Notes.

As a result, creditors and claimants of AAC other than holders of Sitka Senior Secured Notes may suffer greater losses in a rehabilitation, liquidation, conservation, dissolution or other insolvency proceeding of AAC than they would have suffered in such a proceeding had the capital stock of Ambac UK not been pledged for the benefit of the holders of Sitka Senior Secured Notes.

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Each has its own credit risk profile attributable to, as applicable, discrete revenue sources, direct general obligation pledges and/or general obligation guarantees.

AAC had approximately $ 1,067 of net par exposure to the Commonwealth and these instrumentalities at June 30, 2021.

AAC had approximately $ 1,054 of net par exposure to the Commonwealth and these instrumentalities at September 30, 2021.

Components of the overall Puerto Rico net par outstanding include capital appreciation bonds that are reported at the par amount at the time of issuance of the related insurance policy as opposed to the current accreted value of the bonds.

The outstanding net insured amount including accretion on capital appreciation bonds is approximately $1,287 at June 30, 2021.

Total net insured debt service outstanding (net par and interest) to the Commonwealth and its instrumentalities was approximately $2,486 at June 30, 2021.

The outstanding net insured amount including accretion on capital appreciation bonds is approximately $1,275 at September 30, 2021.

Total net insured debt service outstanding (net par and interest) to the Commonwealth and its instrumentalities was approximately $2,423 at September 30, 2021.

As a result of the developments described in this Risk Factor and elsewhere in this Quarterly Report on Form 10-Q (see Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations - Financial Guarantees in Force, and Note 6.

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AAC has made, and may continue to be required to make, significant amounts of policy payments over the next several years, the recoverability of which is subject to great uncertainty, which may lead to material permanent losses.

Our exposure to Puerto Rico is impacted by the amount of monies available for debt service, which is in turn affected by a number of factors including variability in economic growth and demographic trends, tax revenues, changes in law or the effects

thereof, essential services expense, federal funding of Commonwealth needs as well as interpretation of legislation, legal documents, and updated financial information (when available).

Substantial uncertainty also exists with respect to the ultimate outcome for creditors in Puerto Rico due to the July 30, 2021, Seventh Amended Title III Joint Plan of Adjustment of the Commonwealth ("Seventh Amended POA") or changes thereto, including whether or not the plan is confirmed and implemented and as to the ultimate recovery value of the consideration made available to creditors under various plan support agreements underpinning the Seventh Amended POA, which include contingent value instruments or CVI, the value which is entirely dependent upon the outperformance of certain tax revenues versus projections in the Commonwealth fiscal plans.

Our exposure to Puerto Rico is impacted by the amount of monies

available for debt service, which is in turn affected by a number of factors including variability in economic growth and demographic trends, tax revenues, changes in law or the effects thereof, essential services expense, federal funding of Commonwealth needs as well as interpretation of legislation, legal documents, and updated financial information (when available).

Substantial uncertainty also exists with respect to the ultimate outcome for creditors in Puerto Rico due to the November 3, 2021, Eighth Amended Title III Joint Plan of Adjustment of the Commonwealth ("Eight Amended POA"), including whether or not the plan is confirmed and implemented and as to the ultimate recovery value of the consideration made available to creditors under various plan support agreements underpinning the Eighth Amended POA, which include contingent value instruments or CVI, the value which is entirely dependent upon the outperformance of certain tax revenues versus projections in the Commonwealth fiscal plans.

In addition, uncertainty exists as it relates to legislation enacted by the Commonwealth and the United States, including PROMESA, as well as actions taken in reliance on such laws, including Title III filings.

Given the numerous uncertainties and risks existing with respect to the restructuring process, outcomes associated with the Seventh Amended POA, the July 27, 2021 PRIFA Related Plan Support Agreement (“PRIFA PSA”), the July 12, 2021, Amended and Restated Plan Support Agreement (“Amended and Restated GO/PBA PSA”), and the May 5, 2021, the PRHTA/CCDA Related Plan Support Agreement (“PRHTA/CCDA PSA”), no assurance can be given that ultimate debt service discounts will not be more severe than those implied by the Seventh Amended POA and cause AAC to experience losses materially exceeding current reserves.

Given the numerous uncertainties and risks existing with respect to the restructuring process, outcomes associated with the Eighth Amended POA, the October 8, 2021 proposed Qualifying Modification for CCDA ("CCDA QM"), the October 8, 2021 proposed Qualifying Modification for PRIFA ("PRIFA QM"), the July 27, 2021 PRIFA Related Plan Support Agreement (“PRIFA PSA”), the July 12, 2021, Amended and Restated Plan Support Agreement (“Amended and Restated GO/PBA PSA”), and the May 5, 2021, the PRHTA/CCDA Related Plan Support Agreement (“PRHTA/CCDA PSA”), no assurance can be given that ultimate debt service discounts will not be more severe than those implied by the Eighth Amended POA and cause AAC to experience losses materially exceeding current reserves.

As of July 27, 2021, AAC had signed on to the PRIFA PSA, the Amended and Restated GO/PBA PSA and the PRHTA/CCDA PSA.

It is possible that certain restructuring process solutions, together with associated legislation, budgetary, and/or public policy proposals could be adopted and could significantly further impair our exposures or impact the value of the creditor consideration, including new GO and PRHTA bonds and CVI, proposed in the Seventh Amended POA and various plan support agreements.

As of the October 18, 2021 voting deadline, AAC had voted to support the amended plan of adjustment and as of the November 3, 2021 voting deadline, AAC had voted to support both the CCDA QM and PRIFA QM.

It is possible that certain restructuring process solutions, together with associated legislation, budgetary, and/or public policy proposals could be adopted and could significantly further impair our exposures or impact the value of the creditor consideration, including new GO and PRHTA bonds and CVI, proposed in the Eighth Amended POA, the CCDA QM, the PRIFA QM and various plan support agreements.

In addition, there are possible final legal determinations that could result in losses exceeding our current reserves by a material amount and further increases to our loss reserves.

In particular, in a Title III process, should court-approved plans of adjustment for the Commonwealth, the Puerto Rico Highways and Transportation Authority ("PRHTA"), the Puerto Rico Public Buildings Authority ("PBA") or any other issuers of AAC’s insured debt that may or may not file for Title III protection contemplate discounts to debt service implied by, or even worse than, the most recently certified Commonwealth fiscal plan (April 23, 2021) (the “Commonwealth Fiscal Plan”) or should AAC receive unfavorable judgments in the litigations to which it is a party (though most are currently stayed), AAC’s financial condition would be materially adversely affected.

For example, under the PRIFA PSA that was signed on July 27, 2021, by the Oversight Board, as representative of the Commonwealth of Puerto Rico, AAC, FGIC, and other holders of

| Ambac Financial Group, Inc.

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PRIFA bonds, PRIFA creditors will receive, on account of approximately $1,900 of allowed claims arising from PRIFA bonds, consideration in the form of (a) $193.5 in cash and (ii) a CVI premised on outperformance of general fund rum tax collections relative to the certified 2021 Commonwealth Fiscal Plan's projection (the "Rum Tax CVI").

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should AAC receive unfavorable judgments in the litigations to which it is a party (though most are currently stayed), AAC’s financial condition would be materially adversely affected.

For example, under the PRIFA PSA that was signed on July 27, 2021, by the Oversight Board, as representative of the Commonwealth of Puerto Rico, AAC, FGIC, and other holders of PRIFA bonds, PRIFA creditors will receive, on account of approximately $1,900 of allowed claims arising from PRIFA bonds, consideration in the form of (a) $193.5 in cash and (ii) a CVI premised on outperformance of general fund rum tax collections relative to the certified 2021 Commonwealth Fiscal Plan's projection (the "Rum Tax CVI").

The Rum Tax CVI is subject to a lifetime nominal cap of about $1,300, and is also subject to various permitted rum tax waterfall deductions and caps on distributions.

Both the cash consideration and the Rum Tax CVI will be deposited into a trust held for the benefit of PRIFA bondholders (the "PRIFA Trust");

the PRIFA Trust will also be funded with an approximately 27% share of the Clawback CVI (described below), which is tied to potential cash payments related to the outperformance of the Commonwealth's sales and use tax ("SUT") against the certified 2020 Commonwealth Fiscal Plan's projections.

The lifetime sum of Rum Tax CVI and the Clawback CVI cannot exceed the $1,300 lifetime nominal cap.

The Rum Tax CVI will be deposited into a CVI master trust (the "CVI Master Trust") and into sub trust (the "PRIFA CVI Sub Trust") within the CVI Master Trust and will held for the benefit of PRIFA bondholders;

the PRIFA CVI Sub Trust will also be funded with an approximately 27% share of the Clawback CVI (described below), which is tied to potential cash payments related to the outperformance of the Commonwealth's sales and use tax ("SUT") against the certified 2020 Commonwealth Fiscal Plan's projections.

The value of the PRIFA Trust is highly uncertain given the contingent, outperformance-driven structure of the instrument coupled with the likely back-ended nature of most of the potential cash flows.

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Recovery derived from fixed consideration is estimated to vary between approximately 67% and 77% (as of the petition date) for GO creditors, and between approximately 75% and 80% (as of the petition date) for PBA creditors.

The PRHTA/CCDA PSA, dated May 5, 2021, between the Oversight Board as representative of the Commonwealth of Puerto Rico and PRHTA, Assured, National, and certain holders of PRHTA and CCDA bonds, which AAC joined on July 15, 2021, provides consideration for holders of PRHTA and CCDA bonds on account of their claims against the Commonwealth consists of interests of approximately 69% and 4%, respectively, of a contingent value instrument tied to the outperformance of the SUT against the certified 2020 Commonwealth Fiscal Plan's projections (the "Clawback CVI").

projections (the "Clawback CVI").

The Clawback CVI outperformance measures are subject to a lifetime nominal cap of 75% of the allowed PRHTA and CCDA claims under the Commonwealth plan of adjustment.

The value of the Clawback CVI is highly uncertain given the contingent, outperformance-

driven structure of the instrument coupled with the likelihood that cash flows in later years (years 23 through 30) will significantly exceed those in earlier years.

The value of the Clawback CVI is highly uncertain given the contingent, outperformance-driven structure of the instrument coupled with the likelihood that cash flows in later years (years 23 through 30) will significantly exceed those in earlier years.

In addition, under the PRHTA/CCDA PSA, the PRHTA creditors will also receive new PRHTA bonds with a face amount of $1,245 and $389 of cash proceeds, including a $264 interim distribution, payable at the effective date of the Commonwealth plan of adjustment.

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It is unclear how details under the agreements and plans described above may change.

If the Seventh Amended POA is not confirmed in its current or similar form or a PRHTA plan of adjustment or PRIFA or CCDA plans of adjustment or Title VI agreements differ substantially from existing plan support agreements or are not confirmed or approved, AAC’s financial condition could be materially adversely affected.

Additionally, no assurances can be given as to the outcomes of litigations filed, or that may be filed, in connection with the status and priority of HTA bonds, the Seventh Amended POA, a PRHTA plan of adjustment, or PRIFA or CCDA plans of adjustment or Title VI agreements, including but not limited to litigations to which AAC is a party.

If the Eighth Amended POA is not confirmed in its current or similar form, the CCDA QM and PRIFA QM are not confirmed or approved, or the PRHTA plan of adjustment differs substantially from the existing plan support agreement, AAC’s financial condition could be materially adversely affected.

Additionally, no assurances can be given as to the outcomes of litigations filed, or that may be filed, in connection with the Eighth Amended POA, a PRHTA plan of adjustment, or the CCDA QM and PRIFA QM, including but not limited to litigations to which AAC is a party.

As a result of such outcomes, consideration received by AAC or holders of AAC-insured bonds under such plans or agreements, and AAC's financial condition, may be materially and adversely affected.

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Changes to our loss reserves may have a material adverse impact on AAC’s results of operations and financial condition.

Everspan Group may not be successful in executing its business plans or may experience greater than expected insurance underwriting losses and/or reinsurance counterparty losses,

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which could result in losses material to Everspan's capital position, a downgrade of its AM Best rating and a loss of its franchise value.

Such events could have a material adverse impact on the value of AFG's shares.

Everspan Group is in the nascent stage of the specialty insurance program business.

Its business plans envision the establishment of programs with managing general agents ("MGAs") and managing general underwriters ("MGUs") over time.

The success of these programs is dependent upon the quality of business sourced by the MGAs and MGUs, the effectiveness of the management of programs by MGAs and MGUs, the quality and creditworthiness of reinsurance obtained with respect to the risks underwritten by Everspan Group, the dependability of underwriting performed by Everspan Group with respect to its specialty insurance programs, loss experience over time, premium levels, competition and other factors, some of which will be outside the control of Everspan Group.

Should Everspan Group fail in executing its business plans or experience greater than expected losses due to shortcomings in the management of programs by MGAs or MGUs, Everspan Group's underwriting of risks, the performance of reinsurers or other factors, Everspan Group may suffer losses that are material to its capital position, a downgrade in its AM Best rating and/or a loss of its franchise value.

Any such outcomes could have a material adverse impact on the value of AFG's shares.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1A. Risk Factors