Income Taxes

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

Income Taxes

17.    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	2018
United Kingdom	2019
Italy	2018

Consolidated Pretax Income (Loss)

U.S. and foreign components of pre-tax income (loss) were as follows:

Year Ended December 31,	2022		2021		2020
U.S.	$	511	$	(32)	$	(441)
Foreign	13		34		1
Total	$	525	$	2	$	(440)

Provision (Benefit) for Income Taxes

The components of the provision (benefit) for income taxes were as follows:

Year Ended December 31,	2022		2021		2020
Current taxes
U.S. state and local	$	—	$	2	$	—
Foreign	7		10		8
Total current taxes	6		12		8
Deferred taxes
Foreign	(4)		6		(10)
Total deferred taxes	$	(4)	$	6	$	(10)
Provision for income taxes	$	2	$	18	$	(3)

The total effect of income taxes on net income and stockholders’ equity for the years ended December 31, 2022, 2021 and 2020 is as follows:

Year Ended December 31,	2022		2021		2020
Total income taxes charged to net income	$	2	$	18	$	(3)
Income taxes charged (credited) to stockholders’ equity:
Unrealized gains (losses) on investment securities, including foreign exchange	(47)		(3)		3
Change in retirement benefits	—		—		—
Credit Risk Changes to Fair Value Options	—		—		—
Valuation allowance to equity	41		1		(3)
Total charged to stockholders’ equity:	(6)		(2)		1
Total effect of income taxes	$	(4)	$	16	$	(1)

Reconciliation of U.S. Federal Statutory Income Tax Rate to Actual Income Tax Rate

The tax provisions in the accompanying Consolidated Statements of Total Comprehensive Loss reflect effective tax rates differing from prevailing Federal corporate income tax rates. The following is a reconciliation of these differences:

Year Ended December 31,	2022				2021				2020
Tax on income (loss) at statutory rate	$	110	21	%	$	—	21	%	$	(92)	21	%
Changes in expected tax resulting from:
Tax-exempt interest	(1)		—	%	(2)		(114)	%	(2)		—	%
Foreign taxes	4		1	%	8		448	%	6		(1)	%
State Income Taxes	(1)		—	%	14		794	%	—		—	%
Substantiation adjustment	—		—	%	—		—	%	(29)		7	%
Variable Interest Entities	25		5	%	—		—	%	—		—	%
Valuation allowance	(131)		(25)	%	(4)		(230)	%	113		(26)	%
Other, net	(4)		(1)	%	1		72	%	2		—	%
Tax expense on income (loss)	$	2	1	%	$	18	991	%	$	(3)	1	%

Unrecognized Tax Positions

The Company had no material unrecognized tax benefits at December 31, 2021 and 2020.

Deferred Income Taxes

The tax effects of temporary differences that give rise to significant portions of the deferred tax liabilities and deferred tax assets at December 31, 2022 and 2021, are presented below:

December 31,	2022		2021
Deferred tax liabilities:
Insurance intangible	$	56	$	67
Unearned premiums and credit fees	24		32
Investments	—		14
Variable interest entities	4		15
Other	1		6
Total deferred tax liabilities	85		134
Deferred tax assets:
Net operating loss carryforward	725		736
Interest expense carryforward	66		50
Investments	6		—
Loss reserves	38		180
State capital loss carryforward	8		7
Debentures	15		7
Compensation	6		8
Other	4		4
Subtotal deferred tax assets	867		993
Valuation allowance	796		886
Total deferred tax assets	70		106
Net deferred tax liability	$	15	$	28

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. The remaining net deferred tax liability of $15 is attributable to Ambac U.K. and is classified in other liabilities on the Consolidated Balance Sheet.

NOL Usage & Investment Interest Carryforward

Pursuant to a 2013 Closing Agreement between Ambac and the United States Internal Revenue Service ("IRS"), AAC could have to pay as much as $8 to the IRS in the year utilized should AAC utilize $2,142 of NOLs and Interest Expense Limitation available to it as of December 31, 2022.

As of December 31, 2022, the Company has (i) $3,454 of NOLs, which if not utilized will begin expiring in 2030, and will fully expire in 2043, and (ii) $314 of interest expense tax deduction carryover, which has an indefinite carryforward period but is limited in any particular year based on certain provisions. Beginning in 2022, the Company is presenting these items separately in the deferred income tax table above with conforming display in 2021.

Schedule of Net Operating Loss And Tax Credit Carryovers

Pursuant to a 2013 Closing Agreement between Ambac and the United States Internal Revenue Service ("IRS"), AAC could have to pay as much as $8 to the IRS in the year utilized should AAC utilize $2,142 of NOLs and Interest Expense Limitation available to it as of December 31, 2022.As of December 31, 2022, the Company has (i) $3,454 of NOLs, which if not utilized will begin expiring in 2030, and will fully expire in 2043, and (ii) $314 of interest expense tax deduction carryover, which has an indefinite carryforward period but is limited in any particular year based on certain provisions. Beginning in 2022, the Company is presenting these items separately in the deferred income tax table above with conforming display in 2021.