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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2025-03-06 compared with 2024-02-27 · 53 added, 27 removed, 65 unchanged (55% of the section changed)

Quantitative and Qualitative Disclosures about Market Risk

($ in millions)

Quantitative and Qualitative Disclosures about Market Risk ($ in thousands)

Market risk represents the potential for loss due to adverse changes in the fair value of financial instruments, as a result of changes in market rates and prices, such as interest rates (inclusive of credit spreads), foreign currency exchange rates and other relevant market rate or price changes.

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As discussed further below, the Company’s primary market risk exposures include those from changes in interest rates, foreign currency exchange rates and equity values of limited partnership and other alternative investments.

• The primary market risks for fixed maturity investment securities are interest rate risk and foreign exchange rate risk.

Ambac’s fixed maturity investment portfolio includes securities denominated both in U.S.

The nature and extent of the Company's exposures to these market risks vary significantly between AAC and its subsidiaries, which are presented as discontinued operations, and the continuing operations of the Company.

• The primary market risks for fixed maturity and short-term investment securities are interest rate risk and foreign exchange rate risk.

Ambac’s investment portfolio includes securities denominated both in U.S.

dollars and foreign currencies, which are sensitive to changes in interest rates and foreign currency exchange rates.

Our fixed maturity investments are generally classified as available for sale, with the effect of market movements recognized immediately through Other comprehensive income, or through Net income when securities are sold or when an impairment charge is recorded, although certain securities held at December 31, 2023, are classified as trading with changes in fair value reported through Net income as they occur.

• Ambac also invests in limited partnerships and other alternative investments, primarily consisting of diversified pooled investment funds, which are reported as Other investments.

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Ambac’s share of the changes of the equity value of the funds is reported through Net income.

For additional information about Ambac’s investments, see Note 4.

Investments in this Annual Report on Form 10-K located in Part II.

• As of December 31, 2022, the interest rate derivatives portfolio was managed as a partial hedge against the effects of rising interest rates elsewhere in the Company, including on Ambac's financial guarantee exposures.

As of December 31, 2023, the interest rate derivatives portfolio contains only legacy interest rate swaps with financial guarantee counterparties and associated hedges.

Changes in fair value of interest rate derivatives are recognized immediately through Net income.

For additional information about Ambac’s interest rate derivatives, see Note 9.

Derivative Instruments to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K.

• Although our long-term debt obligations are reported at amortized cost and not adjusted for fair value changes, changes in interest rates could have a material impact on their fair value, though with no direct impact on our consolidated financial statements.

For additional information about Ambac’s debt obligations, see Note 12.

Long-term Debt to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K.

Fixed maturity investment securities that are distressed Ambac-insured bonds have market risk characteristics that behave inversely to those associated with future financial guarantee claim payments.

Accordingly, such securities are excluded from the market risk sensitivity measures below.

Financial instruments of VIEs that are consolidated as a result of Ambac financial guarantees are also excluded from Ambac's measures of market risk.

Ambac’s exposure to such consolidated VIEs is generally limited to financial guarantees outstanding on the VIEs’ liabilities or assets.

Variable Interest Entities to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K for further information about VIEs consolidated as a result of Ambac’s financial guarantees.

• Although the long-term debt obligations of AAC and Ambac UK are reported at amortized cost and not adjusted for fair value changes, changes in interest rates could have a material impact on their fair value, though with no direct impact on our consolidated financial statements.

For additional information about Ambac’s long-term debt obligations, Note 5.

Discontinued Operation to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K.

Ambac utilizes various systems, models and sensitivity scenarios to monitor and manage market risk.

These models include estimates, made by management, which utilize current and historical market information.

These models include estimates, made by management, which utilize current

and historical market information.

This market information is considered in management’s judgments about adverse sensitivity scenarios that are reasonably possible to occur in the near-term.

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For these reasons, the valuation results from these models could differ materially from amounts actually realized in the market.

Market Risk Sensitivities

Market Risk Sensitivities — Continuing Operations

Interest Rate Risk.

Financial instruments for which fair value may be affected by changes in interest rates consist primarily of fixed maturity investment securities, long-term debt and interest rate derivatives.

Financial instruments within Ambac's continuing operations for which fair value may be affected by changes in interest rates consist primarily of fixed maturity investment securities.

Increases to interest rates would result in declines in the fair value of our fixed maturity investment portfolio.

Interest rate increases would also have a negative economic impact on expected future claim payments within the financial guarantee portfolio, primarily related to RMBS and student loan policies.

Conversely, interest rate increases would generally lower the fair value of our debt obligations and (at December 31, 2022) result in net fair value gains on interest rate derivatives.

Interest rate changes do not have a significant impact on Ambac's net interest rate derivatives position at December 31, 2023.

Ambac performs scenario testing to measure the potential for losses in volatile markets.

These scenario tests include parallel and non-parallel shifts in the benchmark interest rate curve.

We also monitor our interest rates exposure through periodic reviews of projected cash flows and durations of our asset and liability positions.

The fair value sensitivity of Ambac's short-term debt is not material due to its floating rate coupon and maturity of July 31, 2025.

For additional information about Ambac’s short-term debt see Note 12.

Debt to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K.

The following table summarizes the estimated change in fair value of our fixed maturity investment portfolio from a hypothetical immediate increase in interest rates of 100 basis points across the yield curve as of December 31, 2024 and 2023:

December 31, 2024 2023

Fair value of fixed maturity and short-term investments $ 284,621 $ 335,735

Pre-tax impact of 100 basis point increase in interest rates

Decrease in dollars $ (4,952) $ (3,558)

As a percent of fair value 2 % 1 %

Foreign Currency Risk.

Ambac's Insurance Distribution subsidiary, Beat Capital Partners Limited, has short-term investments denominated in British pounds sterling and is a party to foreign exchange forward contracts at December 31, 2024.

These financial instruments would experience fair value losses if the U.S.

dollar strengthened relative to the British pounds sterling.

The following table summarizes the estimated decrease in fair value of these financial instruments assuming immediate 20% strengthening of the U.S.

dollar relative to the British pounds sterling as of December 31, 2024 and 2023:

Ambac Financial Group, Inc.

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Table of Contents ,

December 31, 2024 2023

Fair value of investments denominated in currencies other than the U.S.

dollar $ 16,604 $ —

Pre-tax loss from 20% strengthening of the U.S.

dollar $ (3,321) $ —

Fair value of FX forward contracts $ (317) $ —

Pre-tax loss from 20% strengthening of the U.S.

dollar $ (3,936) $ —

Equity Sensitivity.

Ambac’s investment portfolio includes a partnership interest in a private equity fund.

The table below summarizes the decrease in fair value of Ambac’s pooled fund investment that would occur assuming an immediate and uniform 10% decline in NAV of the fund.

The selection of a 10% fair value stress is made only as an illustration of the hypothetical impact of adverse market movements on Ambac’s investments with equity value sensitivity.

Actual market shocks could have materially different results.

December 31, 2024 2023

Fair value of investments in pooled funds $ 7,499 $ 5,817

Pre-tax impact of 10% decline in NAV of the funds $ (750) $ (582)

Market Risk Sensitivities — Discontinued Operations

Interest Rate Risk.

Financial instruments for which fair value may be affected by changes in interest rates consist primarily of fixed maturity investment securities, long-term debt and interest rate derivatives.

Increases to interest rates would result in declines in the fair value of our fixed maturity investment portfolio.

Interest rate increases would also have a negative economic impact on expected future claim payments within the financial guarantee portfolio, primarily related to RMBS and student loan policies.

Conversely, interest rate increases would generally lower the fair value of our long-term debt obligations.

Ambac performs scenario testing to measure the potential for losses in volatile markets.

These scenario tests include parallel and non-parallel shifts in the benchmark interest rate curve.

We also monitor our interest rates exposure through periodic reviews of projected cash flows and durations of our asset and liability positions.

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Fair value of investments denominated in currencies other than the U.S.

$ 344,513 $ 463,336

Pre-tax impact of 20% strengthening of the U.S.

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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-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk