Income Taxes

12 Months Ended

Dec. 31, 2020

14. 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			2016
United Kingdom			2017
Italy			2016

Consolidated Pretax Income (Loss)

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


Year Ended December 31,	2020		2019		2018
U.S.	$	(441)	$	(174)	$	264
Foreign	1		(9)		8
Total	$	(440)	$	(183)	$	273

Provision (Benefit) for Income Taxes

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


Year Ended December 31,	2020		2019		2018
Current taxes
U. S. federal	$	—	$	—	$	(2)
U.S. state and local	—		(3)		2
Foreign	8		37		(1)
Total current taxes	8		34		—
Deferred taxes

Foreign	(10)		(1)		5
Total deferred taxes	$	(10)	$	(1)	$	5
Provision for income taxes	$	(3)	$	32	$	5

The total effect of income taxes on net income and stockholders’ equity for the years ended December 31, 2020, 2019 and 2018 is as follows:


Year Ended December 31,	2020		2019		2018
Total income taxes charged to net income	$	(3)	$	32	$	5
Income taxes charged (credited) to stockholders’ equity:
Unrealized gains (losses) on investment securities	3		14		12
Unrealized gains (losses) on foreign currency translations	—		—		—


Valuation allowance to equity	(3)		(23)		(9)
Total charged to stockholders’ equity:	1		(8)		3
Total effect of income taxes	$	(1)	$	24	$	8

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:


	2020				2019				2018
Year Ended December 31,	Amount		%		Amount		%		Amount		%
Tax on income (loss) at statutory rate	$	(92)	21.0	%	$	(38)	21.0	%	$	57	21.0	%
Changes in expected tax resulting from:
Tax-exempt interest	(2)		0.4	%	(3)		1.8	%	(7)		(2.5)	%

Foreign taxes	6		(1.4)	%	40		(22.1)	%	10		3.9	%
Substantiation adjustment	(29)		6.7	%	28		(15.3)	%	(60)		(22.0)	%
Valuation allowance	113		(25.6)	%	8		(4.4)	%	5		1.9	%

Change in Tax Law	—		—	%	—		—	%	(2)		(0.7)	%

Other, net	—		—	%	(2)		1.3	%	1		0.4	%
Tax expense on income (loss)	$	(3)	0.7	%	$	32	(17.7)	%	$	5	2.0	%

Unrecognized Tax Positions

A reconciliation of the beginning and ending amounts of material unrecognized tax benefits for 2020, 2019 and 2018 is as follows:


Year Ended December 31,	2020		2019		2018
Balance, beginning of period	$	—	$	—	$	—
Increases related to prior year tax positions	—		—		—
Decreases related to prior year tax positions	—		—		—
Balance, end of period	$	—	$	—	$	—

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, 2020 and 2019, are presented below:


December 31,	2020		2019
Deferred tax liabilities:
Insurance intangible	$	78	$	90

Unearned premiums and credit fees	32		42
Investments	22		32
Variable interest entities	13		12

Other	7		8
Total deferred tax liabilities	152		183
Deferred tax assets:

Net operating loss and capital carryforward	764		742
Loss reserves	218		148
Debentures	22		29
Compensation	9		7
Other	5		1
Subtotal deferred tax assets	1,019		927
Valuation allowance	891		777
Total deferred tax assets	128		151
Net deferred tax liability	$	24	$	32

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 $24 is attributable to Ambac U.K.

NOL Usage

In December 2020, AFG and certain subsidiaries and affiliates amended their existing tax sharing agreement (the "Third TSA Amendment"). Under the Third TSA Amendment, AAC and AFG agreed to reallocate $210 of net operating loss carry-forwards (“NOLs”) from AAC to AFG and to eliminate AAC's requirement to make future payments based on its utilization of NOLs ("tolling payments") for any taxable year beginning on or after January 1, 2019. In connection with the Third TSA Amendment, AAC paid to AFG approximately $28 of accrued tolling payments based on NOLs used by AAC in 2017. The Third TSA Amendment did not affect the NOL tolling payments AAC would be required to make in connection with the 2013 Closing Agreement between Ambac and the United States Internal Revenue Service, which could amount to as much as $8.

As of December 31, 2020, the Company has $3,639 of NOLs, which if not utilized will begin expiring in 2029, and will fully expire in 2041.