000000000000000000000false--12-31Q3201900008745010849480000.010.011300000001300000004536517045571743453362785900002032-12-312029-12-310000400008200015000500000000625000121100077700068270003510490004181400000.010.01200000002000000000002889220483

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM						10-Q



☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, ~~2019~~

2020



☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



Commission File Number:						1-10777



AMBAC FINANCIAL GROUP, ~~INC~~INC.

(Exact name of Registrant as specified in its charter)

Delaware

13-3621676

(State of incorporation)

(I.R.S. employer identification no.)

One ~~State Street Plaza~~World Trade Center

New York

~~10004~~10007

(Address of principal executive offices)

(Zip code)



	~~(212)~~	~~658-7470~~
~~(Registrant's telephone number, including area code)~~



	(212)	658-7470
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common stock par value $0.01 per share

AMBC

~~NASDAQ~~New York Stock Exchange

Warrants

AMBC WS

New York Stock Exchange

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act): (Check one):

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒ No ☐

As of November ~~4, 2019, 45,553,840~~6, 2020, 45,809,139 shares of common stock, par value $0.01 per share, of the Registrant were outstanding.

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

TABLE OF CONTENTS


Item Number		Page	Item Number		Page
PART I. FINANCIAL INFORMATION			PART I (CONTINUED)
1	Unaudited Consolidated Financial Statements of Ambac Financial Group, Inc. and Subsidiaries		3	Quantitative and Qualitative Disclosures About Market Risk	76
	Consolidated Balance Sheets (Unaudited)	1	4	Controls and Procedures	77
	Consolidated Statements of Total Comprehensive Income (Loss) (Unaudited)	2
	Consolidated Statements of Stockholders' Equity (Unaudited)	3	PART II. OTHER INFORMATION
	Consolidated Statements of Cash Flows (Unaudited)	4	1	Legal Proceedings	78
	Notes to Unaudited Consolidated Financial Statements	5	1A	Risk Factors	78
2	Management's Discussion and Analysis of Financial Condition and Results of Operations	47	2	Unregistered Sales of Equity Securities and Use of Proceeds	79
	Cautionary Statement Pursuant To The Private Securities Litigation Reform Act Of 1995	47	3	Defaults Upon Senior Securities	79
	Executive Summary	48	5	Other Information	79
	Critical Accounting Policies and Estimates	51	6	Exhibits	79
	Financial Guarantees in Force	51	SIGNATURES		80
	Results of Operations	58
	Liquidity and Capital Resources	64
	Balance Sheet	66
	Variable Interest Entities	73
	Accounting Standards	73
	Ambac Assurance Statutory Basis Financial Results	73
	Ambac Assurance UK Limited Financial Results Under UK Accounting Principles	74
	Non-GAAP Financial Measures	74

Item Number Page Item Number Page
PART I. FINANCIAL INFORMATION PART I (CONTINUED)
1 Unaudited Consolidated Financial Statements of Ambac Financial Group, Inc. and Subsidiaries 3
Quantitative and Qualitative Disclosures About Market Risk
71

Consolidated Balance Sheets (Unaudited)
1
4
Controls and Procedures
72

Consolidated Statements of Total Comprehensive Income (Loss) (Unaudited)
2

Consolidated Statements of Stockholders' Equity (Unaudited)
3
PART II. OTHER INFORMATION

Consolidated Statements of Cash Flows (Unaudited)
4
1
Legal Proceedings
72

Notes to Unaudited Consolidated Financial Statements
5
1A
Risk Factors
72
2
Management's Discussion and Analysis of Financial Condition and Results of Operations
46
2
Unregistered Sales of Equity Securities and Use of Proceeds
74

Cautionary Statement Pursuant To The Private Securities Litigation Reform Act Of 1995
46
3
Defaults Upon Senior Securities
74

Executive Summary
47
6
Exhibits
75

Critical Accounting Policies and Estimates
49

Financial Guarantees in Force
49

SIGNATURES
75

Results of Operations
56

Liquidity and Capital Resources
60

Balance Sheet
62

Variable Interest Entities
68

Accounting Standards
68

Ambac Assurance Statutory Basis Financial Results
68

Ambac Assurance UK Limited Financial Results Under UK Accounting Principles
69

Non-GAAP Financial Measures
69

PART I. FINANCIAL INFORMATION

Item 1. Unaudited Financial Statements of Ambac Financial Group, Inc. and Subsidiaries

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets


								September 30,		December 31,
	September 30,			December 31,
(Dollars in thousands, except share data) (September 30, 2019 (Unaudited))	2019			2018
(Dollars in millions, except share data) (September 30, 2020 (Unaudited))							(Dollars in millions, except share data) (September 30, 2020 (Unaudited))	2020		2019
Assets:							Assets:
Investments:							Investments:
Fixed income securities, at fair value (amortized cost of $2,561,278 and $3,020,744)	$	2,727,305		$	3,115,675
Fixed income securities pledged as collateral, at fair value (amortized cost of $84,948 and $0)	84,948			—
Short-term investments, at fair value (amortized cost of $664,423 and $430,405)	664,441			430,331
Other investments (includes $418,140 and $351,049 at fair value)	462,427			391,217
Total investments	3,939,121			3,937,223
Fixed income securities, at fair value (amortized cost of $2,176 and $2,450)							Fixed income securities, at fair value (amortized cost of $2,176 and $2,450)	$	2,311	$	2,577
Short-term investments pledged as collateral, at fair value (amortized cost of $152 and $85)							Short-term investments pledged as collateral, at fair value (amortized cost of $152 and $85)	152		85
Short-term investments, at fair value (amortized cost of $586 and $653)							Short-term investments, at fair value (amortized cost of $586 and $653)	586		653
Other investments (includes $453 and $432 at fair value)							Other investments (includes $453 and $432 at fair value)	502		478
Total investments (net of allowance for credit losses of $0 at September 30, 2020)							Total investments (net of allowance for credit losses of $0 at September 30, 2020)	3,551		3,792
Cash and cash equivalents	51,951			63,089			Cash and cash equivalents	37		24
Restricted cash	12,561			19,405			Restricted cash	10		55
Premium receivables	414,744			495,391
Reinsurance recoverable on paid and unpaid losses	26,036			23,133

Premium receivables (net of allowance for credit losses of $18 at September 30, 2020)							Premium receivables (net of allowance for credit losses of $18 at September 30, 2020)	372		416
Reinsurance recoverable on paid and unpaid losses (net of allowance for credit losses of $0 at September 30, 2020)							Reinsurance recoverable on paid and unpaid losses (net of allowance for credit losses of $0 at September 30, 2020)	37		26
Deferred ceded premium	76,495			61,134			Deferred ceded premium	73		82
Subrogation recoverable	2,082,268			1,932,960			Subrogation recoverable	2,194		2,029

Derivative assets	82,162			59,468			Derivative assets	95		75
Current taxes	19,663			47,040			Current taxes	2		11
Insurance intangible asset	433,524			718,931			Insurance intangible asset	383		427

Other assets	113,189			137,628			Other assets	60		95
Variable interest entity assets:							Variable interest entity assets:
Fixed income securities, at fair value	3,158,608			2,737,286			Fixed income securities, at fair value	3,160		3,121
Restricted cash	3,168			999			Restricted cash	2		2

Loans, at fair value	2,965,539			4,287,664			Loans, at fair value	2,783		3,108

Derivative assets	67,921			66,302			Derivative assets	53		52
Other assets	4,154			1,058			Other assets	1		3
Total assets	$	13,451,104		$	14,588,711		Total assets	$	12,812	$	13,320
Liabilities and Stockholders’ Equity:							Liabilities and Stockholders’ Equity:
Liabilities:							Liabilities:

Unearned premiums	$	527,771		$	629,971		Unearned premiums	$	468	$	518
Loss and loss expense reserves	1,522,304			1,826,078			Loss and loss expense reserves	1,801		1,548
Ceded premiums payable	29,950			32,913			Ceded premiums payable	27		29

Deferred taxes	30,150			40,130			Deferred taxes	28		32

Long-term debt	2,954,929			2,928,929			Long-term debt	2,737		2,822
Accrued interest payable	423,815			375,808			Accrued interest payable	499		441
Derivative liabilities	103,314			76,699			Derivative liabilities	126		90
Other liabilities	95,267			63,792			Other liabilities	91		93

Variable interest entity liabilities:							Variable interest entity liabilities:
Accrued interest payable	2,656			556			Accrued interest payable	0		1
Long-term debt (includes $4,151,433 and $5,268,596 at fair value)	4,353,171			5,268,596
Long-term debt (includes $4,002 and $4,351 at fair value)							Long-term debt (includes $4,002 and $4,351 at fair value)	4,169		4,554
Derivative liabilities	1,779,077			1,712,062			Derivative liabilities	1,771		1,657
Other liabilities	36			30

Total liabilities	11,822,440			12,955,564			Total liabilities	11,718		11,783
Commitments and contingencies (See Note 12)
Commitments and contingencies (See Note 11)							Commitments and contingencies (See Note 11)
Stockholders’ equity:							Stockholders’ equity:
Preferred stock, par value $0.01 per share; 20,000,000 shares authorized shares; issued and outstanding shares—none	—			—
Common stock, par value $0.01 per share; 130,000,000 shares authorized; issued shares: 45,571,743 and 45,365,170	456			454
Preferred stock, par value $0.01 per share;20,000,000 shares authorized shares; issued and outstanding shares—NaN							Preferred stock, par value $0.01 per share;20,000,000 shares authorized shares; issued and outstanding shares—NaN	0		0
Common stock, par value $0.01 per share; 130,000,000 shares authorized; issued shares: 45,865,081 and 45,571,743							Common stock, par value $0.01 per share; 130,000,000 shares authorized; issued shares: 45,865,081 and 45,571,743	0		0
Additional paid-in capital	229,128			219,429			Additional paid-in capital	240		232
Accumulated other comprehensive income (loss)	26,407			(48,715		)	Accumulated other comprehensive income (loss)	22		42
Retained earnings	1,313,052			1,421,302			Retained earnings	773		1,203
Treasury stock, shares at cost: 20,483 and 28,892	(347		)	(473		)
Treasury stock, shares at cost: 55,942 and 16,343							Treasury stock, shares at cost: 55,942 and 16,343	(1)		0
Total Ambac Financial Group, Inc. stockholders’ equity	1,568,696			1,591,997			Total Ambac Financial Group, Inc. stockholders’ equity	1,035		1,477
Noncontrolling interest	59,968			41,150			Noncontrolling interest	60		60
Total stockholders’ equity	1,628,664			1,633,147			Total stockholders’ equity	1,095		1,536
Total liabilities and stockholders’ equity	$	13,451,104		$	14,588,711		Total liabilities and stockholders’ equity	$	12,812	$	13,320

See accompanying Notes to Unaudited Consolidated Financial Statements

| Ambac Financial Group, Inc. 1 ~~2019~~2020 Third Quarter FORM 10-Q|

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Total Comprehensive Income (Loss) (Unaudited)


														Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in millions, except share data)													(Dollars in millions, except share data)	2020		2019		2020		2019
Revenues:													Revenues:
Net premiums earned													Net premiums earned	$	15	$	10	$	36	46

	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands, except share data)	2019			2018			2019			2018
Revenues:
Net premiums earned	$	10,466		$	25,640		$	46,057		82,359
Net investment income	44,537			58,332			185,838			235,234			Net investment income	37		45		69		186
Other-than-temporary impairment losses:
Total other-than-temporary impairment losses	(42		)	(266		)	(71		)	(1,617		)
Portion of other-than-temporary impairment recognized in other comprehensive income	—			—			—			38
Net other-than-temporary impairment losses recognized in earnings	(42		)	(266		)	(71		)	(1,579		)

Net realized investment gains (losses)	18,471			30,201			71,564			82,211			Net realized investment gains (losses)	2		18		20		71

Net gains (losses) on derivative contracts	(9,890		)	17,583			(61,461		)	51,706			Net gains (losses) on derivative contracts	7		(10)		(61)		(61)
Net realized gains (losses) on extinguishment of debt	—			—			—			3,121

Other income	141,376			694			133,270			2,676			Other income	2		141		2		133
Income (loss) on variable interest entities	11,244			1,831			30,459			2,982			Income (loss) on variable interest entities	0		11		3		30
Total revenues	216,162			134,015			405,656			458,710			Total revenues	62		216		68		406
Expenses:													Expenses:
Losses and loss expenses (benefit)	37,139			33,501			(83,934		)	(181,315		)	Losses and loss expenses (benefit)	83		37		216		(84)
Insurance intangible amortization	17,421			26,421			279,941			78,299			Insurance intangible amortization	14		17		41		280
Operating expenses	25,622			28,368			79,627			90,865			Operating expenses	23		26		67		80
Interest expense	66,925			65,673			202,284			176,192			Interest expense	50		67		172		202

Total expenses	147,107			153,963			477,918			164,041			Total expenses	170		147		495		478

Pre-tax income (loss)	69,055			(19,948		)	(72,262		)	294,669			Pre-tax income (loss)	(108)		69		(427)		(72)
Provision for income taxes	2,939			2,211			33,252			6,811
Net income (loss)	66,116			(22,159		)	(105,514		)	287,858
Less: loss on exchange of auction market preferred shares	—			81,686			—			81,686
Provision (benefit) for income taxes													Provision (benefit) for income taxes	0		3		(5)		33

Net income (loss) attributable to common stockholders	$	66,116		$	(103,845	)	$	(105,514	)	$	206,172		Net income (loss) attributable to common stockholders	$	(108)	$	66	$	(423)	$	(106)
Other comprehensive income (loss), after tax:													Other comprehensive income (loss), after tax:
Net income (loss)	$	66,116		$	(22,159	)	$	(105,514	)	$	287,858		Net income (loss)	$	(108)	$	66	$	(423)	$	(106)
Unrealized gains (losses) on securities, net of income tax provision (benefit) of $777, $(625), $(6,827) and $(1,211)	31,285			60,807			102,686			183,686
Unrealized gains (losses) on securities, net of income tax provision (benefit) of $0, $1, $1 and $(7)													Unrealized gains (losses) on securities, net of income tax provision (benefit) of $0, $1, $1 and $(7)	42		31		1		103
Gains (losses) on foreign currency translation, net of income tax provision (benefit) of $0, $0, $0 and $0	(23,570		)	(8,873		)	(27,532		)	(29,806		)	Gains (losses) on foreign currency translation, net of income tax provision (benefit) of $0, $0, $0 and $0	29		(24)		(20)		(28)
Credit risk changes of fair value option liabilities, net of income tax provision (benefit) of $(15), $40, $50 and $82	(74		)	340			245			548
Credit risk changes of fair value option liabilities, net of income tax provision (benefit) of $0, $0, $0 and $0													Credit risk changes of fair value option liabilities, net of income tax provision (benefit) of $0, $0, $0 and $0	0		0		2		0
Changes to postretirement benefit, net of income tax provision (benefit) of $0, $0, $0 and $0	(322		)	(303		)	(277		)	(1,464		)	Changes to postretirement benefit, net of income tax provision (benefit) of $0, $0, $0 and $0	0		0		(3)		0
Total other comprehensive income, net of income tax	7,319			51,971			75,122			152,964
Less: loss on exchange of auction market preferred shares	—			81,686			—			81,686
Total other comprehensive income (loss), net of income tax													Total other comprehensive income (loss), net of income tax	71		7		(20)		75

Total comprehensive income (loss) attributable to common stockholders	$	73,435		$	(51,874	)	$	(30,392	)	$	359,136		Total comprehensive income (loss) attributable to common stockholders	$	(37)	$	73	$	(442)	$	(30)
Net income (loss) per share attributable to common stockholders:													Net income (loss) per share attributable to common stockholders:
Basic	$	1.44		$	(2.27	)	$	(2.30	)	$	4.52		Basic	$	(2.33)	$	1.44	$	(9.16)	$	(2.30)
Diluted	$	1.41		$	(2.27	)	$	(2.30	)	$	4.43		Diluted	$	(2.33)	$	1.41	$	(9.16)	$	(2.30)
Weighted average number of common shares outstanding:													Weighted average number of common shares outstanding:
Basic	45,997,694			45,749,252			45,939,284			45,635,483			Basic	46,178,730		45,997,694		46,135,399		45,939,284
Diluted	47,020,058			45,749,252			45,939,284			46,510,795			Diluted	46,178,730		47,020,058		46,135,399		45,939,284

See accompanying Notes to Unaudited Consolidated Financial Statements

| Ambac Financial Group, Inc. 2 ~~2019~~2020 Third Quarter FORM 10-Q|

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity (Unaudited)


			Ambac Financial Group, Inc.
(Dollars in millions)	Total		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Preferred Stock		Common Stock		Additional Paid-in Capital		Common Stock Held in Treasury, at Cost		Noncontrolling Interest
Balance at June 30, 2020	$	1,129	$	881	$	(48)	$	0	$	0	$	237	$	(1)	$	60
Total comprehensive income (loss)	(37)		(108)		71		0		0		0		0		0





Stock-based compensation	3		0		0		0		0		3		0		0
Cost of shares (acquired) issued under equity plan	0		0		0		0		0		0		0		0





Balance at September 30, 2020	$	1,095	$	773	$	22	$	0	$	0	$	240	$	(1)	$	60

Balance at June 30, 2019	$	1,553	$	1,247	$	19	$	0	$	0	$	227	$	0	$	60
Total comprehensive income (loss)	73		66		7		0		0		0		0		0





Stock-based compensation	2		0		0		0		0		2		0		0







Balance at September 30, 2019	$	1,629	$	1,313	$	26	$	0	$	0	$	229	$	0	$	60

Ambac Financial Group, Inc.
(Dollars in thousands) Total Retained
Earnings Accumulated
Other
Comprehensive
Income (Loss) Preferred
Stock Common
Stock Additional Paid-in
Capital Common
Stock Held
in Treasury,
at Cost Noncontrolling
Interest
Balance at June 30, 2019 $ 1,552,916
$ 1,246,990
$ 19,088
$ —
$ 456
$ 226,794
$ (380 ) $ 59,968
Total comprehensive income 73,435
66,116
7,319
—
—
—
—
—
Stock-based compensation 2,334
—
—
—
—
2,334
—
—
Cost of shares (acquired) issued under equity plan (21 ) (54 ) —
—
—
—
33
—
Balance at September 30, 2019 $ 1,628,664
$ 1,313,052
$ 26,407
$ —
$ 456
$ 229,128
$ (347 ) $ 59,968

Balance at June 30, 2018 $ 2,063,921
$ 1,545,702
$ 45,854
$ —
$ 454
$ 208,328
$ (527 ) $ 264,110
Total comprehensive income 29,812
(22,159 ) 51,971
—
—
—
—
—
Stock-based compensation 1,710
—
—
—
—
1,710
—
—
Exchange of auction market preferred shares (296,634 ) (81,686 ) —
—
—
8,012
—
(222,960 )
Balance at September 30, 2018 $ 1,798,809
$ 1,441,857
$ 97,825
$ —
$ 454
$ 218,050
$ (527 ) $ 41,150

Ambac Financial Group, Inc.
(Dollars in thousands) Total Retained
Earnings Accumulated
Other
Comprehensive
Income (Loss) Preferred
Stock Common
Stock Additional Paid-in
Capital Common
Stock Held
in Treasury,
at Cost Noncontrolling
Interest
Balance at January 1, 2019 $ 1,633,147
$ 1,421,302
$ (48,715 ) $ —
$ 454
$ 219,429
$ (473 ) $ 41,150
Total comprehensive income (30,392 ) (105,514 ) 75,122
—
—
—
—
—
Stock-based compensation 9,699
—
—
—
—
9,699
—
—
Cost of shares (acquired) issued under equity plan (2,610 ) (2,736 ) —
—
—
—
126
—
Issuance of common stock 2
—
—
—
2
—
—
—
Re-issuance of Ambac Assurance auction market preferred shares 18,818
—
—
—
—
—
—
18,818
Balance at September 30, 2019 $ 1,628,664
$ 1,313,052
$ 26,407
$ —
$ 456
$ 229,128
$ (347 ) $ 59,968

Balance at January 1, 2018 $ 1,645,258
$ 1,233,845
$ (52,239 ) $ —
$ 453
$ 199,560
$ (471 ) $ 264,110
Total comprehensive income 440,822
287,858
152,964
—
—
—
—
—
Adjustment to initially apply ASU 2016-01 —
2,900
(2,900 ) —
—
—
—
—
Stock-based compensation 10,475
—
—
—
—
10,475
—
—
Cost of shares (acquired) issued under equity plan (1,116 ) (1,060 ) —
—
—
—
(56 ) —
Issuance of common stock 1
—
—
—
1
—
—
—
Exchange of auction market preferred shares (296,634 ) (81,686 ) —
—
—
8,012
—
(222,960 )
Warrants exercised 3
—
—
—
—
3
—
—
Balance at September 30, 2018 $ 1,798,809
$ 1,441,857
$ 97,825
$ —
$ 454
$ 218,050
$ (527 ) $ 41,150



			Ambac Financial Group, Inc.
(Dollars in millions)	Total		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Preferred Stock		Common Stock		Additional Paid-in Capital		Common Stock Held in Treasury, at Cost		Noncontrolling Interest
Balance at January 1, 2020	$	1,536	$	1,203	$	42	$	0	$	0	$	232	$	0	$	60
Total comprehensive income (loss)	(442)		(423)		(20)		0		0		0		0		0

Adjustment to initially apply ASU 2016-13	(4)		(4)		0		—		—		—		—		—



Stock-based compensation	8		0		0		0		0		8		0		0
Cost of shares (acquired) issued under equity plan	(3)		(2)		0		0		0		0		(1)		0






Balance at September 30, 2020	$	1,095	$	773	$	22	$	0	$	0	$	240	$	(1)	$	60

Balance at January 1, 2019	$	1,633	$	1,421	$	(49)	$	0	$	0	$	219	$	0	$	41
Total comprehensive income (loss)	(30)		(106)		75		0		0		0		0		0





Stock-based compensation	10		0		0		0		0		10		0		0
Cost of shares (acquired) issued under equity plan	(3)		(3)		0		0		0		0		0		0


Exchange of auction market preferred shares	19		0		0		0		0		0		0		19


Balance at September 30, 2019	$	1,629	$	1,313	$	26	$	0	$	0	$	229	$	0	$	60

See accompanying Notes to Unaudited Consolidated Financial Statements

| Ambac Financial Group, Inc. 3 ~~2019~~2020 Third Quarter FORM 10-Q|

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)


								Nine Months Ended September 30,
(Dollars in millions)							(Dollars in millions)	2020		2019
Cash flows from operating activities:							Cash flows from operating activities:

	Nine Months Ended September 30,
(Dollars in thousands)	2019			2018
Cash flows from operating activities:
Net income (loss) attributable to common stockholders	$	(105,514	)	$	206,172
Exchange for auction market preferred shares	—			81,686
Net income (loss)	$	(105,514	)	$	287,858		Net income (loss)	$	(423)	$	(106)
Adjustments to reconcile net income to net cash used in operating activities:							Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization	356			531

Amortization of bond premium and discount	(59,291		)	(120,418		)	Amortization of bond premium and discount	(12)		(59)

Share-based compensation	9,699			10,475			Share-based compensation	8		10
Deferred income taxes	(3,292		)	(6,121		)	Deferred income taxes	(5)		(3)
Current income taxes	27,849			(20,977		)	Current income taxes	9		28

Unearned premiums, net	(118,035		)	(107,114		)	Unearned premiums, net	(40)		(118)
Losses and loss expenses, net	(460,585		)	(1,559,039		)	Losses and loss expenses, net	78		(461)
Ceded premiums payable	(2,963		)	(3,570		)	Ceded premiums payable	(2)		(3)

Premium receivables	81,373			69,827			Premium receivables	44		81
Accrued interest payable	64,847			(22,935		)	Accrued interest payable	69		65
Amortization of insurance intangible assets	279,941			78,299			Amortization of insurance intangible assets	41		280
Net mark-to-market (gains) losses	(1,037		)	609			Net mark-to-market (gains) losses	1		(1)
Net realized investment gains	(71,564		)	(82,211		)	Net realized investment gains	(20)		(71)
Other-than-temporary impairment charges	71			1,579
(Gain) loss on extinguishment of debt	—			(3,121		)

Variable interest entity activities	(30,459		)	(2,982		)	Variable interest entity activities	(3)		(30)
Derivative assets and liabilities	4,958			(38		)	Derivative assets and liabilities	15		5
Other, net	87,415			61,405			Other, net	72		87
Net cash used in operating activities	(296,231		)	(1,417,943		)	Net cash used in operating activities	(167)		(296)
Cash flows from investing activities:							Cash flows from investing activities:
Proceeds from sales of bonds	1,051,990			1,091,516			Proceeds from sales of bonds	974		1,052
Proceeds from matured bonds	316,818			292,395			Proceeds from matured bonds	105		317
Purchases of bonds	(866,087		)	(348,682		)	Purchases of bonds	(844)		(866)
Proceeds from sales of other invested assets	72,558			111,524			Proceeds from sales of other invested assets	377		73
Purchases of other invested assets	(134,948		)	(93,800		)	Purchases of other invested assets	(425)		(135)
Change in short-term investments	(235,486		)	(4,548		)	Change in short-term investments	67		(235)

Change in cash collateral receivable	75,018			10,953			Change in cash collateral receivable	(2)		75
Proceeds from paydowns of consolidated VIE assets	511,931			187,260			Proceeds from paydowns of consolidated VIE assets	142		512
Other, net	(360		)	2,742			Other, net	2		0
Net cash provided by investing activities	791,434			1,249,360
Net cash provided by (used in) investing activities							Net cash provided by (used in) investing activities	396		791
Cash flows from financing activities:							Cash flows from financing activities:
Net proceeds from issuance of Tier 2 notes	—			240,000

Proceeds from issuance of Ambac UK debt	12,180			—			Proceeds from issuance of Ambac UK debt	0		12
Proceeds from issuance of surplus notes	—			17,714

Paydowns of Ambac note	(28,730		)	(185,738		)	Paydowns of Ambac note	(115)		(29)
Paydowns of a secured borrowing	—			(73,993		)
Payments for extinguishment of surplus notes	—			(191,258		)
Payments for debt issuance costs	—			(9,221		)
Payments for auction market preferred shares	—			(11,048		)

Issuance of auction market preferred shares of Ambac Assurance	18,818			—			Issuance of auction market preferred shares of Ambac Assurance	0		19
Tax payments related to shares withheld for share-based compensation plans	(2,610		)	(1,116		)	Tax payments related to shares withheld for share-based compensation plans	(3)		(3)
Proceeds from warrant exercises	—			3

Payments of consolidated VIE liabilities	(510,228		)	(187,260		)	Payments of consolidated VIE liabilities	(143)		(510)
Net cash used in financing activities	(510,570		)	(401,917		)	Net cash used in financing activities	(260)		(511)
Effect of foreign exchange on cash, cash equivalents and restricted cash	(446		)	(652		)	Effect of foreign exchange on cash, cash equivalents and restricted cash	0		0
Net cash flow	(15,813		)	(571,152		)	Net cash flow	(31)		(16)
Cash, cash equivalents, and restricted cash at beginning of period	83,493			624,681			Cash, cash equivalents, and restricted cash at beginning of period	81		83
Cash, cash equivalents, and restricted cash at end of period	$	67,680		$	53,529		Cash, cash equivalents, and restricted cash at end of period	$	50	$	68

See accompanying Notes to Unaudited Consolidated Financial Statements

| Ambac Financial Group, Inc. 4 ~~2019~~2020 Third Quarter FORM 10-Q|

Table of Contents

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Dollar Amounts in ~~Thousands,~~Millions, Except Share Amounts)

1. BACKGROUND AND BUSINESS DESCRIPTION

The following description provides an update of Note 1. Background and Business Description in the Notes to Consolidated Financial Statements included Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December ~~2018,~~31, 2019, and should be read in conjunction with the complete descriptions provided in the Form 10-K. Capitalized terms used, but not defined herein, and in the other footnotes to the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q shall have the meanings ascribed thereto in the Company’s Annual Report on Form 10-K for the year ended December ~~2018.~~31, 2019.

Ambac Financial Group, Inc. (“~~Ambac” or the “Company”~~AFG”), headquartered in New York City, is a financial services holding company incorporated in the state of Delaware on April 29, ~~1991~~.1991. References to “Ambac,” the “Company,” “we,” “our,” and “us” are to AFG and its subsidiaries, as the context requires.

~~Ambac’s~~AFG’s insurance subsidiary, Ambac Assurance Corporation (“Ambac Assurance" or "AAC") and its subsidiary, Ambac Assurance UK Limited (“Ambac UK”), are both financial guarantee insurance companies in run-off. ~~Insurance policies issued by~~ Ambac Assurance and Ambac UKUK's outstanding insurance policies generally guarantee payment when due of the principal and interest on the obligations guaranteed. ~~Ambac Assurance also has another wholly-owned~~

During the three month period ended September 30, 2020, AFG acquired its insurance subsidiary, Everspan Insurance Company ~~which has been~~("Everspan"), from AAC repositioning it as a subsidiary of a new intermediary holding company that is directly owned by AFG. This was done in ~~runoff since its acquisition in 1997.~~an effort to optimize the legal organization structure to support potential new property and casualty insurance business initiatives.

Management reviews financial information, allocates resources and measures financial performance on a consolidated basis. As a result, the Company has a single reportable segment.

Strategies to Enhance Shareholder Value

~~Ambac’s~~The Company's primary goal is to maximize shareholder value through executing the following key strategies:

•Active runoff of Ambac Assurance and its subsidiaries through transaction terminations, policy commutations, reinsurance, settlements and restructurings, with a focus on our watch list credits and known and potential future adversely classified credits, that we believe will improve our risk profile, and maximizing the risk-adjusted return on invested assets;

•Ongoing rationalization of Ambac's ~~and its subsidiaries'~~ capital and liability structures;

•Loss recovery through active litigation management and exercise of contractual and legal rights;

•Ongoing review of the effectiveness and efficiency of Ambac's operating platform; and

•Evaluation of opportunities in certain business sectors that meet acceptable criteria that will generate long-term stockholder value with attractive risk-adjusted returns.

The execution of Ambac’s objective to increase the value of its investment in Ambac Assurance is subject to the rights of the Office of the Commissioner of Insurance for the State of Wisconsin (“OCI”) under the Stipulation and Order, which requires OCI to approve certain actions taken by or in respect of Ambac Assurance,

as well as restrictions in the Settlement Agreement and in the indenture for the Tier 2 Notes. Opportunities for remediating losses on poorly performing insured transactions also depend on market conditions, including the perception of Ambac Assurance’s and its subsidiaries' creditworthiness, the structure of the underlying risk and associated policy as well as other counterparty specific factors. Decisions by OCI could impair Ambac’s ability to execute certain of its strategies. Ambac Assurance's ability to commute policies or make certain investments may also be limited by available liquidity. Due to these factors, as well as uncertainties relating to the ability of Ambac Assurance to deliver value to Ambac, the value of our securities remains speculative.

With respect to our new business strategy, we ~~have identified certain business sectors adjacent~~continue to ~~Ambac's core business in which opportunities are being evaluated. We are actively evaluating~~evaluate and pursue strategic opportunities in insurance, credit, ~~insurance,~~ asset management and other financial services that we believe ~~are~~would be synergistic to Ambac and would leverage our core competencies. ~~We are being~~While we have increased our efforts in evaluating such potential opportunities, we continue to be measured and disciplined in our approach as we ~~consider and pursue opportunities~~seek to deploy our capital ~~with the goal of creating~~on opportunities that will generate sustainable long-term shareholder value. Although we are exploring new business opportunities for ~~Ambac,~~AFG, no assurance can be given that we will be able to identify or execute a suitable transaction and/or obtain the financial and other resources that may be required to finance ~~the~~an acquisition or ~~development of~~develop any new businesses or assets. As a consequence of the novel coronavirus disease 2019 ("COVID-19") pandemic, risks associated with our new businesses strategy have increased given uncertainties related to the resulting global recession, increase in business risk in our target sectors and disruption to the capital markets. Due to these factors, as well as uncertainties relating to the ability of Ambac Assurance to deliver value to Ambac, the value of our securities remains speculative.

The execution of AFG’s strategy to extract and increase the value of its investment in Ambac Assurance is subject to the restrictions set forth in the Settlement Agreement, dated as of June 7, 2010 (the "Settlement Agreement"), by and among Ambac Assurance, Ambac Credit Products LLC ("ACP"), AFG and certain counterparties to credit default swaps with ACP that were guaranteed by Ambac Assurance, as well as the Stipulation and Order among the OCI (as defined below), AFG and Ambac Assurance that became effective on February 12, 2018, as amended (the “Stipulation and Order”), and in the indenture for the Tier 2 Notes issued by Ambac Assurance on February 12, 2018, each of which requires the Office of the Commissioner of Insurance for the State of Wisconsin (“OCI”) and, under certain circumstances, holders of the debt instruments benefiting from such restrictions, to approve certain actions taken by or in respect of Ambac Assurance. In exercising its approval rights, OCI will act for the benefit of policyholders, and will not take into account the interests of AFG. AFG's strategy to extract and increase the value of its investment in Ambac Assurance is also subject to significantly more risk and uncertainty due to the consequences of the COVID-19 pandemic on the global economy, issuers of debt insured by Ambac, and issuers of debt and other investments owned by Ambac. These consequences may include material losses in Ambac's insured and investment portfolios, higher earnings volatility, increased liquidity demands and greater counterparty risk.

Opportunities for remediating losses on poorly performing insured transactions also depend on market conditions, including the perception of Ambac Assurance’s creditworthiness, the structure of the underlying risk and associated policy as well as

| Ambac Financial Group, Inc. 52020 Third Quarter FORM 10-Q |

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AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

other counterparty specific factors. Ambac Assurance's ability to commute policies or purchase certain investments may also be limited by available liquidity.

2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

The Company has disclosed its significant accounting policies in Note 2. Basis of Presentation and Significant Accounting Policies in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019. The following significant accounting policies provide an update to those included in the Company’s Annual Report on Form 10-K.

Consolidation:

The consolidated financial statements include the accounts of ~~Ambac~~AFG and all other entities in which ~~Ambac~~AFG (directly or through its subsidiaries) has a controlling financial interest, including variable interest entities (“VIEs”) for which ~~Ambac~~AFG or an ~~Ambac~~AFG subsidiary is deemed the primary beneficiary in accordance with the Consolidation Topic of the Accounting Standards Codification ("ASC"). All significant intercompany balances have been eliminated. The usual condition for a controlling financial interest is ownership of a majority of the voting interests of an entity. However, a controlling financial interest may also exist in entities, such as VIEs, through arrangements that do not involve controlling voting interests. A VIE is an entity: a) that lacks enough equity investment at risk to permit the entity to finance its activities without additional subordinated financial support from other parties; or b) where the group of equity holders does not have: (1) the power, through voting rights or similar rights, to direct the activities of an entity that most significantly impact the entity’s economic performance; (2) the obligation to absorb the entity’s expected losses; or (3) the right to receive the entity’s expected residual returns. The determination of whether a variable interest holder is

~~| Ambac Financial Group, Inc.~~ 5~~2019 Third Quarter FORM 10-Q~~ |

~~Table of Contents~~

~~AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES~~

~~Notes to Unaudited Consolidated Financial Statements~~

~~(Dollar Amounts in Thousands, Except Share Amounts)~~

the primary beneficiary involves performing a qualitative analysis of the VIE that includes, among other factors, its capital structure, contractual terms including the rights of each variable interest holder, the activities of the VIE, whether the variable interest holder has the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, whether the variable interest holder has the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE, related party relationships and the design of the VIE. An entity that is deemed the primary beneficiary of a VIE is required to consolidate the VIE. See Note 3. Variable Interest Entities, for a detailed discussion of Ambac’s involvement in VIEs, Ambac’s methodology for determining whether Ambac is required to consolidate a VIE and the effects of VIEs being consolidated and deconsolidated.

Basis of ~~Presentation~~Presentation:

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial reporting and with the instructions to Form 10-Q and Article 10 of

Regulation S-X. Accordingly, they do not include all of the information and disclosures required by GAAP for annual periods. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019. The accompanying consolidated financial statements have not been audited by an independent registered public accounting firm in accordance with the standards of the Public Company Accounting Oversight Board (U.S.), but in the opinion of management such financial statements include all adjustments necessary for the fair presentation of the Company’s consolidated financial position and results of operations. The results of operations for the three and nine months ended September 30, ~~2019~~2020, may not be indicative of the results that may be expected for the year ending December 31, ~~2019.~~2020. The December 31, ~~2018~~2019, consolidated balance sheet was derived from audited financial statements.

The election to use the fair value option is made on an instrument by instrument based under ASC 825-10. At December 31, 2018, all VIE invested assets and long-term debt were reported under the fair value option as disclosed in the notes to the consolidated financial statements included in the Annual Report on Form 10-K. During the nine months ended September 30, 2019, Ambac consolidated a new VIE that holds investments in fixed income securities that management has classified as available-for-sale under the Investments - Debt Securities Topic of the ASC. Long-term debt of the newly consolidated VIE is carried at par value less unamortized discount. See ~~Note 3. Variable Interest Entities, for further discussion of the accounting elections used and the presentation of VIEs in these unaudited consolidated financial statements.~~

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of

assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. As additional information becomes available or actual amounts become determinable, the recorded estimates are revised and reflected in operating results.

~~Certain amounts in the condensed consolidated financial statements and associated notes may not add due to rounding.~~

~~Noncontrolling Interest:~~

At September 30, 2019 and December 31, 2018, Ambac Assurance had 5,501 and 4,115 shares of issued and outstanding Auction Market Preferred Shares ("AMPS") with a liquidation preference of $137,525 and $102,875 (reported as noncontrolling interest of $59,968 and $41,150 on Ambac's balance sheet). The increase resulted from re-issuance of $1,386 shares from the sale of Ambac owned AMPS during 2019.

Foreign Currency:

Financial statement accounts expressed in foreign currencies are translated into U.S. dollars in accordance with the Foreign Currency Matters Topic of the ASC. The functional currencies of ~~Ambac's~~AFG's subsidiaries are the local currencies of the country where the respective subsidiaries are based, which are also the primary operating environments in which the subsidiaries operate.

Foreign currency translation: Functional currency assets and liabilities of ~~Ambac’s~~AFG’s foreign subsidiaries are translated into U.S. dollars using exchange rates in effect at the balance sheet dates and the related translation adjustments, net of deferred taxes, are included as a component of Accumulated Other Comprehensive Income in Stockholders' Equity. Functional currency operating results of foreign subsidiaries are translated using average exchange rates.

Foreign currency transactions: The impact of non-functional currency transactions and the remeasurement of non-functional currency assets and liabilities into the respective subsidiaries' functional currency (collectively "foreign currency transactions gains/(losses)") are ~~$19,368~~$2 and ~~$(5,211)~~$19 for the nine months ended September 30, 2020 and 2019, and 2018, of which $29,998 and $3,474 relate to investments, $(10,127) and $815 relate to premiums receivable and $(1,017) and $(9,549) relate to the remeasurement of loss reserves, classified in Net realized investment gains (losses), Other income and Losses and loss expenses, respectively. ~~The 2019 foreign currency transactions gains primarily relate to the Ballantyne restructuring and commutation.~~ Foreign currency transactions gains/(losses) are primarily the result of remeasuring Ambac UK's assets and liabilities denominated in currencies other than its functional currency, primarily the U.S. dollar and the Euro.

| Ambac Financial Group, Inc. 6 ~~2019~~2020 Third Quarter FORM 10-Q|

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AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Dollar Amounts in ~~Thousands,~~Millions, Except Share Amounts)


Supplemental Disclosure of Cash Flow Information	Nine Months Ended September 30,
	2020		2019
Cash paid during the period for:
Income taxes	$	11	$	11
Interest on long-term debt	83		110
Non-cash financing activities:

Exchange of investments in Puerto Rico COFINA bonds for new bonds issued in the Plan of Adjustment	$	��	$	510



	September 30,
	2020		2019
Reconciliation of cash, cash equivalents, and restricted cash reported within the Consolidated Balance Sheets to the Consolidated Statements of Cash Flows:
Cash and cash equivalents	$	37	$	52
Restricted cash	10		13
Variable Interest Entity Restricted cash	2		3
Total cash, cash equivalents, and restricted cash shown on the Consolidated Statements of Cash Flows	$	50	$	68

Supplemental Disclosure of Cash Flow Information Nine Months Ended September 30,
2019 2018
Cash paid during the period for:
Income taxes $ 11,387
$ 31,408
Interest on long-term debt 109,527
195,333
Non-cash financing activities:
Increase in long-term debt in exchange for auction market preferred shares $ —
$ 187,220
Exchange of investments in Puerto Rico COFINA bonds for new bonds issued in the Plan of Adjustment $ 510,215
$ —
Rehabilitation exit transaction discharge of all Deferred Amounts and cancellation of certain General Account Surplus Notes —
1,918,561

September 30,
2019 2018
Reconciliation of cash, cash equivalents, and restricted cash reported within the Consolidated Balance Sheets to the Consolidated Statements of Cash Flows:
Cash and cash equivalents $ 51,951
$ 52,505
Restricted cash 12,561
—
Variable Interest Entity Restricted cash 3,168
1,024
Total cash, cash equivalents, and restricted cash shown on the Consolidated Statements of Cash Flows $ 67,680
$ 53,529

~~Reclassifications:~~Reclassifications and Rounding

Reclassifications may have been made to prior years' amounts to conform to the current year's presentation. Certain amounts and tables in the consolidated financial statements and associated notes may not add due to rounding.

Adopted Accounting Standards:

Effective January 1, ~~2019, Ambac~~2020, the Company adopted the following accounting standards:

~~Equity-linked~~Measurement of Credit Losses on Financial Instruments ~~with Down Round Features~~(CECL)

In ~~July 2017, the FASB issued ASU 2017-11,~~ ~~Earnings Per Share (Topic 260) and Derivatives and Hedging (Topic 815) - Accounting for Certain Financial Instruments with Down Round Features~~. Equity-linked instruments, such as warrants and convertible instruments may contain down round features that result in the strike price being reduced on the basis of the pricing of future equity offerings. Under the ASU, a down round feature will no longer require a freestanding equity-linked instrument (or embedded conversion option) to be classified as a liability that is remeasured at fair value through the income statement (i.e. marked-to-market). However, other features of the equity-linked instrument (or embedded conversion option) must still be evaluated to determine whether liability or equity classification is appropriate. Equity classified instruments are not marked-to-market. For earnings per share ("EPS") reporting, the ASU requires companies to recognize the effect of the down round feature only when it is triggered by treating it as a dividend and as a reduction of income available to common stockholders in basic EPS. Adoption of this ASU did not impact Ambac's financial statements.

~~Premium Amortization on Callable Debt Securities~~

~~In March 2017, the FASB issued ASU 2017-08,~~ ~~Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20) - Premium Amortization on Purchased Callable Debt Securities~~. The ASU shortens the amortization period for the premium on callable debt securities to the earliest call date. Under previous GAAP, a reporting entity generally amortized the premium as a yield adjustment over

the contractual life (i.e. maturity) of the debt security and if that debt security is called, the entity would record a loss equal to the unamortized premium. The ASU does not change the accounting for callable debt securities held at a discount, which will continue to be amortized to maturity. Adoption of this ASU did not have a consequential impact on Ambac's financial statements.

~~Leases~~

~~In February~~June 2016, the FASB issued ASU ~~2016-02,~~2016-13, ~~Leases~~Financial Instruments-Credit Losses (Topic ~~842)~~326) - Measurement of Credit Losses on Financial Instruments, ~~. This ASU was~~ subsequently amended by ASU ~~2018-01,~~ 2018-19~~Land Easement Practical Expedient;~~, Codification Improvements to Topic 326, Financial Instruments - Credit Losses; ASU ~~2018-10,~~2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments; ASU 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief; and ASU 2019-11, Codification Improvements to Topic ~~842;~~326, Financial Instruments - Credit Losses (collectively the Current Expected Credit Loss standard or "CECL")

The new CECL standard affects how reporting entities measure credit losses for financial assets that are not accounted for at fair value through net income. For Ambac, these financial assets include available-for-sale debt securities and amortized cost assets, specifically premium receivables, reinsurance recoverables and loans. CECL does not apply to recoveries of previously paid losses on financial guarantee insurance contracts accounted for under ASC 944 nor does it apply to equity method investments accounted for under ASC 323.

For available-for-sale debt securities, the updated guidance was applied prospectively and for financial instruments measured at amortized cost, the updated guidance was applied by a cumulative effect adjustment to the opening balance of retained earnings at

January 1, 2020. This adjustment was not material to retained earnings or any individual balance sheet line item.

As a result of adopting CECL, management revised its policies and procedures around the credit impairment evaluation process. CECL also introduced new disclosures related to the credit impairment process, including certain accounting policy elections that Ambac made under the the new standard. Enhanced disclosures related to accounting policies for each type of asset impacted by CECL are discussed below. The disclosures below should be read in conjunction with disclosures in ~~ASU 2018-11~~Note 2. Basis of Presentation and Significant Accounting Policies, ~~Targeted Improvements;~~ ~~ASU 2018-20,~~ ~~Narrow-Scope Improvements for Lessors;~~ ~~and ASU 2019-01, Leases (Topic 842): Codification Improvements~~ ~~(collectively the "New Lease Standard")~~.Note 6. Financial Guarantee Insurance Contracts ~~The primary difference between previous U.S. GAAP~~ and Note 8. Investments in the ~~New Lease Standard is~~Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Available-for-Sale Debt Securities

For available-for-sale debt securities, credit losses under CECL are measured similarly to other-than-temporary impairments under prior GAAP. However, under CECL, the recognition of ~~lease assets and lease liabilities~~credit losses for ~~those leases classified~~available-for-sale debt securities will be recorded as ~~operating leases~~an allowance for credit losses with an offsetting charge to net income, rather than as a ~~term longer than 12 months. For those operating leases, a lessee is required to: 1) recognize a right-of-use asset ("ROU") and a lease liability, initially measured at the present value~~direct write-down of the ~~lease payments,~~security as was required under prior GAAP. As a result, improvements to estimated credit losses for available-for-sale debt securities will be recognized immediately in net income rather than as interest income over time. Furthermore, as required under CECL, Ambac no longer considers the length of time a security has continuously been in an unrealized loss in the credit impairment process.

Ambac has made certain accounting policy elections related to accrued interest receivable ("AIR") for available-for-sale investments under CECL, which are consistent with past practices under prior GAAP. Elections include: i) not measuring AIR for credit impairment, instead AIR is written off when it becomes 90 days past due; ii) writing off AIR by reversing interest income; iii) presenting AIR separately in Other Assets on the balance sheet ~~2) recognize a single lease~~and iv) excluding AIR from amortized cost ~~calculated so that the cost is allocated over the lease term generally on a straight-line basis and 3) classify all cash payments within operating activities~~balances in the statement of cash flows. For leases classified as finance leases under the New Lease Standard, the balance sheet presentation and expense recognition pattern is similar to capital leases under previous U.S. GAAP.

Under the transition guidance, a reporting entity must use a modified retrospective approach and may choose to initially apply the New Lease Standard either at (1) the beginning of the earliest comparative period presented, which is January 1, 2017 or (2) its effective date, which is January 1, 2019. If a reporting entity chooses the first option it must recast its comparative period financial statements and provide disclosures for those comparative periods. Ambac chose the second option and initially applied the New Lease Standard on January 1, 2019. Consequently financial information and

| Ambac Financial Group, Inc. 7 ~~2019~~2020 Third Quarter FORM 10-Q|

Table of Contents

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Dollar Amounts in ~~Thousands,~~Millions, Except Share Amounts)

required CECL disclosures found in Note 8. Investments. AIR at September 30, 2020 was $10.

Refer to Note 8. Investments for further credit impairment disclosures.

Amortized cost assets

~~disclosures~~For financial assets measured at amortized cost, CECL replaces the "incurred loss" model used for certain types of assets which generally delayed recognition of the full amount of credit losses until the loss was probable of occurring, with an "expected loss" model, which reflects an entity's current estimate of all expected lifetime credit losses. The estimate of expected lifetime credit losses should consider historical information, current information, as well as reasonable and supportable forecasts. Expected lifetime credit losses for amortized cost assets will be recorded as an allowance for credit losses, with subsequent increases or decreases in the allowance reflected in net income each period. The CECL measurement approach for Ambac's affected asset types were not ~~provided~~materially different than the approaches under prior GAAP. Refer to the discussion below for ~~dates~~each asset type.

Premium receivables.For financial guarantee contracts, the issuer's ability and ~~periods prior~~willingness to ~~January 1, 2019.~~pay its insured debt obligation impacts the payment of policy losses by Ambac as well as the receipt of premiums from the issuer. As such, management leverages its existing loss reserve estimation process to evaluate credit impairment for premium receivables. Key factors in assessing credit impairment include historical premium collection data, internal risk classifications, credit ratings and loss severities. For structured finance transactions involving special purpose entities, we further evaluate the priority of premiums paid to Ambac within the contractual waterfall, as required by bond indentures.

~~There~~Management utilizes either a discounted cash flow ("DCF") or probability of default/loss given default ("PD/LGD") approach to estimate credit impairment. The DCF approach utilizes expected cash flows developed by Ambac's Risk Management Group using the same (or similar) models used for estimating loss reserves where such models can identify shortfalls in premiums. Credit impairment using the DCF approach is equal to the difference between amortized cost and the present value of expected cash flows. Credit impairment under the PD/LGD approach is the product of (i) the premium receivable carrying value, (ii) internally developed default probability (considering internal ratings and average life), and (iii) internally developed loss severities.

Refer to Note 6. Financial Guarantee Insurance Contracts for further credit impairment disclosures.

Loans. The key factors in assessing credit impairment for loans are internal credit ratings and loss severities. Management utilizes a ~~number of optional practical expedients that were elected at transition. We~~PD/LGD approach, similar to the one described above for premium receivables, which is applied to the loan carrying value.

Reinsurance recoverables. Ambac has elected the ~~package of practical expedients, which permitted us not~~ to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We also elected the hindsight practical expedient allowing us to use the benefit of hindsight in determining the probability of exercising any lessee options to extend or terminate the lease, or purchase the underlying asset. We did not use the practical expedient ~~pertaining~~of considering the fair value of collateral posted by reinsurers when evaluating credit impairment. To determine the total unsecured recoverable to ~~land easements as it was not applicable to Ambac.~~be evaluated for

impairment, Ambac nets the reinsurance recoverable amount by ceded premiums payable and the fair value of collateral posted, if any.

The ~~new new lease standard did not have~~key factors in assessing credit impairment for reinsurance recoverables are independent rating agency credit ratings and loss severities. Management utilizes a ~~material effect on our financial statements. The most significant effects related~~PD/LGD approach, similar to ~~(1)~~ the ~~recognition of new ROU assets and lease liabilities on our balance sheet~~one described above for ~~our office and equipment operating leases of approximately $15,000 at transition and (2) providing significant new disclosures about our leasing activities.~~premium receivables, which is applied to the net unsecured reinsurance recoverable amount.

~~See~~Refer to Note ~~11. Leases~~6. Financial Guarantee Insurance Contracts for further ~~information.~~credit impairment disclosures.

~~Future Application~~Fair Value Measurement Disclosures

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The ASU modified various disclosure requirements on fair value measurements. Relevant disclosures that were removed, modified and added are as follows:

•Removals: 1) Amount of ~~Accounting Standards:~~and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, 2) Policy for timing of transfers between levels, and 3) Valuation processes for Level 3 fair value measurements.

•Modifications: 1) For investments in certain entities that calculate net asset value, disclosures are required for the timing of liquidation of an investee's assets and the date when restrictions from redemption might lapse, only if the investee has communicated the timing to the reporting entity or publicly announced it and 2) Clarification that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date and not possible future changes.

•Additions: 1) Changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and 2) Range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. Alternatively, an entity may disclose other quantitative information (such as the median or arithmetic average) if it determines that it is a more reasonable and rational method to reflect the distribution of unobservable inputs used.

Disclosure amendments related to changes in unrealized gains and losses included in other comprehensive income (loss) for Level 3 instruments, the range and weighted average of significant unobservable inputs, and the narrative description of measurement uncertainty were applied prospectively only for the most recent interim or annual period presented. All other disclosure amendments were applied retrospectively to all periods presented.

Refer to Note 7. Fair Value Measurements for further disclosures.

VIE Related Party Guidance

In October 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810) - Targeted Improvements to Related Party Guidance for Variable Interest Entities. To determine whether a ~~decision-making~~decision-

| Ambac Financial Group, Inc. 82020 Third Quarter FORM 10-Q |

Table of Contents

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

making fee is a variable interest, under the new guidance a reporting entity must consider indirect interests held through related parties under common control on a proportional basis rather than as a direct interest in its entirety (as ~~currently~~was previously required inunder prior GAAP). These amendments create alignment between determining whether a decision making fee is a variable interest and determining whether a reporting entity within a related party group is the primary beneficiary of a VIE. ~~ASU 2018-17 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. Ambac will adopt~~Adoption of this ASU ~~on January 1, 2020. The ASU is~~did not ~~expected to have a consequential~~ impact on Ambac's financial statements.

Cloud Computing Arrangement Service Contracts

In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other— Internal-Use Software (Subtopic 350-40) - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The new guidance requires a customer in a cloud computing arrangement that is a service contract to capitalize certain implementation costs as if the arrangement was an internal-use software project. The internal-use software guidance requires the capitalization of certain costs incurred only during the application development stage. That guidance also requires entities to expense costs during the preliminary project and post-implementation stages as they are incurred. Adoption of this ASU ~~2018-15 is effective~~did not impact Ambac's financial statements.

Future Application of Accounting Standards:

Reference Rate Reform

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU provides companies with optional guidance to ease the potential accounting burden related to transitioning away from reference rates, such as LIBOR, that are expected to be discontinued as a result of initiatives undertaken by various jurisdictions around the world. For example, under current GAAP, contract modifications which change a reference rate are required to be evaluated in determining whether the modifications result in the establishment of new contracts or the continuation of existing contracts. The amendments in this ASU provide optional expedients and exceptions for ~~fiscal years,~~applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The ASU can be applied prospectively as of the beginning of the interim ~~periods within those fiscal years, beginning~~period that includes March 12, 2020, (January 1, 2020 for calendar year companies) or any date thereafter, but does not apply to contract modifications and other transactions entered into or evaluated after December ~~15, 2019, with early adoption permitted. The ASU may be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Ambac~~31, 2022. Management has not determined if and when it will adopt this ASU, ~~on January 1, 2020 to prospective costs. The ASU is not expected to have a consequential~~and the impact on Ambac's financial ~~statements.~~

~~Defined Benefit and Other Postretirement Plans Disclosures~~

~~In August 2018, the FASB issued ASU 2018-14,~~ ~~Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20) - Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans~~. The ASU modifies various disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. Relevant disclosures that will be removed are: i) amounts in accumulated other comprehensive income expected to be recognized as net periodic benefit cost over the next fiscal year and ii) the effects of a one percentage point change in assumed health care cost trend rates on the (a) aggregate of the service and interest cost components of the net periodic pension cost and (b) benefit obligation for postretirement healthcare benefits. Relevant disclosures that will be added are an explanation of the reasons for significant gains and losses related to changes in the benefit obligations for the period. ASU 2018-14statements is effective for fiscal years ending after December 15, 2020, with early adoption permitted. The modified disclosures must be applied on a retrospective basis for all periods presented. Ambac will adopt this ASU on December 31, 2020. The ASU is not expected to have a consequential impact on Ambac's financial statements.being evaluated.

~~Fair Value Measurement Disclosures~~

~~In August 2018, the FASB issued ASU 2018-13,~~ ~~Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The ASU modifies various disclosure requirements on fair value measurements. Relevant disclosures that will be removed, modified and added are as follows:~~


•	~~Removals~~: 1) Amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, 2) Policy for timing of transfers between levels, and 3) Valuation processes for Level 3 fair value measurements.

•

~~Modifications~~: 1) For investments in certain entities that calculate net asset value, disclosures are only required for the timing of liquidation of an investee's assets and the date when restrictions from redemption might lapse, only if the investee has communicated the timing to the reporting entity or publicly announced it and 2) Clarification that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date and not possible future changes.

•

~~Additions~~: 1) Changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and 2) Range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. Alternatively, an entity may disclose other quantitative information (such as the median or arithmetic average) if it determines that it is a more reasonable and rational method to reflect the distribution of unobservable inputs used.

ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. Disclosure amendments related to changes in unrealized gains and losses included in other comprehensive income for Level 3 instruments, the range and weighted average of significant unobservable inputs, and the narrative description of measurement uncertainty should be applied prospectively only for

~~| Ambac Financial Group, Inc.~~ 8~~2019 Third Quarter FORM 10-Q~~ |

~~Table of Contents~~

~~AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES~~

~~Notes to Unaudited Consolidated Financial Statements~~

~~(Dollar Amounts in Thousands, Except Share Amounts)~~

the most recent interim or annual period presented. All other disclosure amendments should be applied retrospectively to all periods presented. Ambac will adopt this ASU on January 1, 2020. The ASU is not expected to have a consequential impact on Ambac's financial statements.

~~Measurement of Credit Losses on Financial Instruments~~

~~In June 2016, the FASB issued ASU 2016-13,~~ ~~Financial Instruments-Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments,~~ ~~subsequently amended by ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses;~~ ~~ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments; and ASU 2019-05,~~ ~~Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief~~ ~~(collectively "the ASU").~~

The ASU significantly affects how reporting entities will measure credit losses for financial assets that are not accounted for at fair value through net income, which include loans, debt securities, premium receivables, reinsurance recoverables, net investments in leases, and certain off-balance sheet credit exposures. The ASU does not apply to recoveries of previously paid losses on financial guarantee insurance contracts accounted for under ASC 944.

For financial assets measured at amortized cost, the ASU replaces the "incurred loss" model, which generally delayed recognition of the full amount of credit losses until the loss was probable of occurring, with an "expected loss" model, which reflects an entity's current estimate of all expected lifetime credit losses. Expected lifetime credit losses for amortized cost assets will be recorded as a valuation allowance, with subsequent increases or decreases in the allowance reflected in the Consolidated Statements of Total Comprehensive Income each period.

For available-for-sale debt securities, credit losses under the ASU will be measured similarly to current GAAP. However, under the ASU, credit losses for available-for-sale debt securities will be recorded as a valuation allowance (similar to the amortized cost assets approach described above), rather than as a direct write-down of the security as is required under current GAAP. As a result, improvements to estimated credit losses for available-for-sale debt securities will be recognized immediately in the Consolidated Statements of Total Comprehensive Income rather than as interest income over time.

The ASU is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. Ambac will adopt this ASU on January 1, 2020 and continue to evaluate its impact on Ambac's financial statements. We have identified the inventory of financial assets that will be affected by this standard. For assets measured at amortized cost, we are in the process of developing credit loss models, and identifying new data requirements and data sources for implementing those models. For all assets affected by this standard, both amortized cost assets and available-for-sale debt securities, we will evaluate potential changes to accounting processes, including related controls.

3. VARIABLE INTEREST ENTITIES

Ambac, with its subsidiaries, has engaged in transactions with variable interest entities ("VIEs,") in various capacities.

•Ambac provides financial guarantees, including credit derivative contracts, for various debt obligations issued by special purpose entities, including VIEs ("FG VIEs");

•Ambac sponsors special purpose entities that issued notes to investors for various purposes; and

•Ambac is an investor in collateralized debt obligations, mortgage-backed and other asset-backed securities issued by VIEs and its ownership interest is generally insignificant to the VIE and/or Ambac does not have rights that direct the activities that are most significant to such VIE.

FG VIEs:

Ambac’s subsidiaries provide financial guarantees in respect of assets held or debt obligations of VIEs. Ambac’s primary variable interest exists through this financial guarantee insurance or credit derivative contract. The transaction structures provide certain financial protection to Ambac. Generally, upon deterioration in the performance of a transaction or upon an event of default as specified in the transaction legal documents, Ambac will obtain certain control rights that enable Ambac to remediate losses. These rights may enable Ambac to direct the activities of the entity that most significantly impact the entity’s economic performance. Under a 2018 Stipulation and Order, the OCI requires Ambac Assurance to obtain their approval with respect to the exercise of certain significant control rights in connection with policies that had previously been allocated to the Segregated Account. Accordingly, Ambac Assurance does not have the right to direct the most significant activities of those FG VIEs.

•We determined that Ambac’s subsidiaries generally have the obligation to absorb a FG VIE's expected losses given that they have issued financial guarantees supporting certain liabilities (and in some cases certain assets). As further described below, Ambac consolidates certain FG VIEs in cases where we also have the power to direct the activities that most significantly impact the VIE’s economic performance due to one or more of the following: (i) the transaction experiencing deterioration and breaching performance triggers, giving Ambac the ability to exercise certain control rights, (ii) Ambac being involved in the design of the VIE and receiving control rights from its inception, such as may occur from loss remediation activities, or (iii) the transaction not experiencing deterioration, however due to the passive nature of the VIE, Ambac's contingent control rights upon a future breach of performance triggers is considered to be the power over the most significant activity. FG VIEs which are consolidated may include non-recourse assets or liabilities. FG VIEs' liabilities (and in some cases assets) that are insured by the Company are with recourse, because the Company guarantees the payment of principal and interest. FG VIEs' assets and liabilities that are not insured by the Company are without recourse, because Ambac has not issued a financial guarantee and is under no obligation for the payment of principal and interest of these instruments. The Company’s exposure to consolidated FG VIEs is limited to the

~~| Ambac Financial Group, Inc.~~ •9~~2019 Third Quarter FORM 10-Q~~ |

~~Table of Contents~~

~~AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES~~

~~Notes to Unaudited Consolidated Financial Statements~~

~~(Dollar Amounts in Thousands, Except Share Amounts)~~

~~financial guarantees issued for recourse assets and liabilities and any additional variable interests held by Ambac.~~

A VIE is deconsolidated in the period that Ambac no longer has such control rights, which could occur in connection with the execution of remediation activities on the transaction or amortization of insured exposure, either of which may reduce the degree of Ambac’s control over a VIE.

•Assets and liabilities of FG VIEs that are consolidated are reported within Variable interest entity assets or Variable interest entity liabilities on the Consolidated Balance Sheets.

•The election to use the fair value option is made on an instrument by instrument basis. Ambac has elected the fair value option for consolidated FG VIE financial assets and financial liabilities, except in cases where Ambac was involved in the design of the VIE and was granted control rights at its inception.

◦

When the fair value option is elected, changes in the fair value of the FG VIE's financial assets and liabilities are reported within Income (loss) on variable interest entities in the Consolidated Statements of Total Comprehensive Income (Loss), except for the portion of the total change in fair value of financial liabilities caused by changes in the instrument-specific credit risk which is presented separately in Other comprehensive income (loss).

◦

In cases where the fair value option has not been elected, the FG VIE's invested assets are fixed income securities and are considered available-for-sale as defined by the Investments - Debt Securities Topic of the ASC. These assets are reported in the financial statements at fair value with unrealized gains and losses reflected in Accumulated Other Comprehensive Income in Stockholders' Equity. The financial liabilities of these FG VIEs consist of long term debt obligations and are carried at par less unamortized discount. Income from the FG VIE's available-for-sale securities (including investment income, realized gains and losses and other-than-temporary impairments as applicable) and interest expense on long term debt are reported within Income (loss) on variable interest entities in the Consolidated Statements of Total Comprehensive Income (Loss).

◦When the fair value option is elected, changes in the fair value of the FG VIE's financial assets and liabilities

| Ambac Financial Group, Inc. 92020 Third Quarter FORM 10-Q |

Table of Contents

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

are reported within Income (loss) on variable interest entities in the Consolidated Statements of Total Comprehensive Income (Loss), except for the portion of the total change in fair value of financial liabilities caused by changes in the instrument-specific credit risk which is presented separately in Other comprehensive income (loss).

◦In cases where the fair value option has not been elected, the FG VIE's invested assets are fixed income securities and are considered available-for-sale as defined by the Investments - Debt Securities Topic of the ASC. These assets are reported in the financial statements at fair value with unrealized gains and losses reflected in Accumulated Other Comprehensive Income in Stockholders' Equity. The financial liabilities of these FG VIEs consist of long term debt obligations and are carried at par less unamortized discount. Income from the FG VIE's available-for-sale securities (including investment income, realized gains and losses and credit impairments as applicable) and interest expense on long term debt are reported within Income (loss) on variable interest entities in the Consolidated Statements of Total Comprehensive Income (Loss).

•Upon initial consolidation of a FG VIE, Ambac recognizes a gain or loss in earnings for the difference between: (i) the fair value of the consideration paid, the fair value of any non-controlling interests and the reported amount of any previously

held interests and (ii) the net amount, as measured on a fair value basis, of the assets and liabilities consolidated. Upon deconsolidation of a FG VIE, we recognize a gain or loss for the difference between: (i) the fair value of any consideration received, the fair value of any retained non-controlling investment in the VIE and the carrying amount of any non-controlling interest in the VIE and (ii) the carrying amount of the VIE’s assets and liabilities. Gains or losses from consolidation and deconsolidation that are reported in earnings are reported within Income (loss) on variable interest entities on the Consolidated Statements of Total Comprehensive Income (Loss).

•The impact of consolidating such FG VIEs on Ambac’s balance sheet is the elimination of transactions between the

consolidated FG VIEs and Ambac’s operating subsidiaries and the inclusion of the FG VIE’s third party assets and liabilities. For a financial guarantee insurance policy issued to a consolidated VIE, Ambac does not reflect the financial guarantee insurance policy in accordance with the related insurance accounting rules under the Financial Services – Insurance Topic of the ASC. Consequently, upon consolidation, Ambac eliminates the insurance assets and liabilities associated with the policy from the Consolidated Balance Sheets. Such insurance assets and liabilities may include premium receivables, reinsurance recoverable, deferred ceded premium, subrogation recoverable, unearned premiums, loss and loss expense reserves, ceded premiums payable and insurance intangible assets. For investment securities owned by Ambac that are debt instruments issued by the VIE, the investment securities balance is eliminated upon consolidation.

~~Ambac is not primarily liable for, and generally does not guarantee all of the debt obligations issued~~FG VIEs which are consolidated may include non-recourse assets or liabilities. FG VIEs' liabilities (and in some cases assets) that are insured by the ~~VIEs. Ambac would only be required to make payments on~~Company are with recourse, because the ~~VIE debt obligations~~Company guarantees the payment of principal and interest in the event ~~that~~ the issuer defaults. FG VIEs' assets and liabilities that are not insured by the Company are without recourse, because Ambac has not issued a financial guarantee and is under no obligation for the payment of ~~such debt obligations defaults on~~principal and interest of these instruments. Therefore, the Company’s exposure to consolidated FG VIEs is limited to the financial guarantees issued for recourse assets and liabilities and any ~~principal or interest due and such obligation is guaranteed~~additional variable interests held by Ambac. Additionally, Ambac’s general creditors, other than those specific policy holders which own the VIE debt obligations, do not have rights with regard to the assets of the VIEs. Ambac evaluates the net income effects and earnings per share effects to determine attributions between Ambac and non-controlling interests as a result of consolidating a VIE. Ambac has determined that the net income and earnings per share effect of consolidated FG VIEs are attributable to Ambac’s interests through financial guarantee premium and loss payments with the VIE.

| Ambac Financial Group, Inc. 10 ~~2019~~2020 Third Quarter FORM 10-Q|

Table of Contents

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Dollar Amounts in ~~Thousands,~~Millions, Except Share Amounts)

The following table summarizes the carrying values of assets and liabilities, along with other supplemental information related to VIEs that are consolidated as a result of financial guarantees of Ambac UK and Ambac Assurance:


	September 30, 2020						December 31, 2019
	Ambac UK		Ambac Assurance		Total VIEs		Ambac UK		Ambac Assurance		Total VIEs
Fixed income securities, at fair value:
Corporate obligations, fair value option	$	3,029	$	0	$	3,029	$	2,957	$	0	$	2,957
Municipal obligations, available-for-sale (1)	0		131		131		0		164		164
Total FG VIE fixed income securities, at fair value	3,029		131		3,160		2,957		164		3,121
Restricted cash	1		1		2		1		1		2
Loans, at fair value (2)	2,783		0		2,783		3,108		0		3,108
Derivative assets	53		0		53		52		0		52
Other assets	0		1		1		1		2		3
Total FG VIE assets	$	5,865	$	133	$	5,998	$	6,119	$	167	$	6,286

Accrued interest payable	$	0	$	0	$	0	$	1	$	0	$	1
Long-term debt:
Long-term debt, at fair value (3)	4,002		0		4,002		4,351		0		4,351
Long-term debt, at par less unamortized discount	0		167		167		0		203		203
Total long-term debt	4,002		167		4,169		4,351		203		4,554
Derivative liabilities	1,771		0		1,771		1,657		0		1,657

Total FG VIE liabilities	$	5,773	$	167	$	5,940	$	6,009	$	203	$	6,212
Number of FG VIEs consolidated	5		1		6		6		1		7

September 30, 2019 December 31, 2018
Ambac UK Ambac Assurance Total VIEs Ambac UK Ambac Assurance Total VIEs
Fixed income securities, at fair value:
Corporate obligations, fair value option $ 2,995,894
$ —
$ 2,995,894
$ 2,737,286
$ —
$ 2,737,286
Municipal obligations, available-for-sale ⁽¹⁾
—
162,714
162,714
—
—
—
Total FG VIE fixed income securities, at fair value 2,995,894
162,714
3,158,608
2,737,286
—
2,737,286
Restricted cash 970
2,198
3,168
999
—
999
Loans, at fair value⁽²⁾
2,965,539
—
2,965,539
4,287,664
—
4,287,664
Derivative assets 67,921
—
67,921
66,302
—
66,302
Other assets 3,180
974
4,154
1,058
—
1,058
Total FG VIE assets $ 6,033,504
$ 165,886
$ 6,199,390
$ 7,093,309
$ —
$ 7,093,309

Accrued interest payable $ 2,656
$ —
$ 2,656
$ 556
$ —
$ 556
Long-term debt:
Long-term debt, at fair value ⁽³⁾
4,151,433
—
4,151,433
5,268,596
—
5,268,596
Long-term debt, at par less unamortized discount —
201,738
201,738
—
—
—
Total long-term debt 4,151,433
201,738
4,353,171
5,268,596
—
5,268,596
Derivative liabilities 1,779,077
—
1,779,077
1,712,062
—
1,712,062
Other liabilities 36
—
36
30
—
30
Total FG VIE liabilities $ 5,933,202
$ 201,738
$ 6,134,940
$ 6,981,244
$ —
$ 6,981,244
Number of FG VIEs consolidated 6
1
7
7
—
7

~~(1)~~

~~Available-for-sale FG VIE fixed income securities consist of municipal obligations with an amortized cost basis of $138,042 and aggregate gross unrealized gains and (losses) of $24,672at September 30, 2019.~~(1)Available-for-sale FG VIE fixed income securities consist of municipal obligations with an amortized cost basis of $112 and $139, and aggregate gross unrealized gains of $19and $25 at September 30, 2020 and December 31, 2019, respectively. All such securities had contractual maturities due after ten years as of September 30, 2020.

(2)The unpaid principal balances of loan assets carried at fair value were $2,450 as of September 30, 2020 and $2,618 as of December 31, 2019.

(3)The unpaid principal balances of long-term debt carried at fair value were $3,604 as of September 30, 2020 and $3,800 as of December 31, 2019.


~~(2)~~	~~The unpaid principal balances of loan assets carried at fair value were $2,478,571 as of September 30, 2019 and $3,418,044 as of December 31, 2018.~~


~~(3)~~	~~The unpaid principal balances of long-term debt carried at fair value were $3,576,046 as of September 30, 2019 and $4,552,643 as of December 31, 2018.~~

The following schedule details the components of Income (loss) on variable interest entities for the affected periods:

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Net change in fair value of VIE assets and liabilities reported under the fair value option $ 2,126
$ 7
$ 6,493
$ 1,158
Gain (loss) from de-consolidating FG VIEs (1,998 ) 1,824
(1,998 ) 1,824
Net change in fair value of VIE assets and liabilities reported in earnings 128
1,831
4,495
2,982
Investment income on available-for-sale securities 2,511
—
7,896
—
Net realized investment gains (losses) on available-for-sale securities 11,564
—
13,427
—
Interest expense on long-term debt carried at par less unamortized cost (2,840 ) —
(9,285 ) —
Other expenses (119 ) —
(938 ) —
Gain (loss) from consolidating FG VIEs —
—
14,864
—
Income (loss) on Variable Interest Entities $ 11,244
$ 1,831
$ 30,459
$ 2,982


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Net change in fair value of VIE assets and liabilities reported under the fair value option	$	(1)	$	2	$	(3)	$	7
Less: Credit risk changes of fair value option long-term debt reported through other comprehensive income (loss)	0		0		(2)		0
Net change in fair value of VIE assets and liabilities reported in earnings	0		2		(5)		6
Investment income on available-for-sale securities	2		3		5		8
Net realized investment gains (losses) on available-for-sale securities	0		12		8		13
Interest expense on long-term debt carried at par less unamortized cost	(1)		(3)		(5)		(9)
Other expenses	0		0		0		(1)
Gain (loss) from consolidating FG VIEs	0		0		0		15
Gain (loss) from de-consolidating FG VIEs	0		(2)		0		(2)
Income (loss) on variable interest entities	$	0	$	11	$	3	$	30

~~As further discussed in Note 6. Financial Guarantee Insurance Contracts, on February 12, 2019, in connection with~~Ambac did not consolidate any new VIE for the COFINA POA, the COFINA Class 2 Trust was established. Ambac was required to consolidate the COFINA Class 2 Trust, which resulted in a gain of $14,864. The 2019 balance sheet impact of this additional VIE on the date of consolidation was an increase to total consolidated assetsthree and ~~liabilities by $292,003 and $363,628, respectively.~~nine months ended September 30, 2020. Ambac deconsolidated 0 VIE for the three months ended September 30, 2020, 1 VIE for the nine months ended September 30, 2020, and 1 VIE for the three and nine months ended September 30, ~~2019, and 3 VIEs for the three and nine months ended September 30, 2018.~~2019. These VIEs were deconsolidated as a result of the financial guarantee policy termination or guaranteed bond ~~retirements or loss mitigation activities that eliminated or reduced Ambac's control rights that previously required Ambac to consolidate these entities,~~retirement, and resulted

in the gain (loss) on deconsolidation noted in the above table.

| Ambac Financial Group, Inc. 11 ~~2019~~2020 Third Quarter FORM 10-Q|

Table of Contents

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Dollar Amounts in ~~Thousands,~~Millions, Except Share Amounts)

in the gain (loss) on deconsolidation noted in the above table. The 2019 balance sheet impact of the deconsolidation was a decline in total consolidated assets and liabilities by $1,233,132 and $1,230,473 from December 31, 2018 to September 30, 2019.

The following table displays the carrying amount of the assets, liabilities and maximum exposure to loss of Ambac’s variable interests in non-consolidated VIEs resulting from financial guarantee and derivative contracts by major underlying asset classes, as of September 30, ~~2019~~2020 and December 31, ~~2018:~~2019:


	Carrying Value of Assets and Liabilities
	Maximum Exposure To Loss (1)		Insurance Assets (2)		Insurance Liabilities (3)		Net Derivative Assets (Liabilities) (4)
September 30, 2020:
Global structured finance:

Mortgage-backed—residential	$	4,535	$	2,063	$	604	$	0
Other consumer asset-backed	1,120		26		240		0
Other commercial asset-backed	52		3		1		0
Other	991		0		15		8
Total global structured finance	6,698		2,093		860		8
Global public finance	22,183		268		316		(1)
Total	$	28,881	$	2,361	$	1,177	$	7

December 31, 2019:
Global structured finance:

Mortgage-backed—residential	$	5,373	$	1,913	$	523	$	0
Other consumer asset-backed	1,373		31		216		0
Other commercial asset-backed	314		9		6		0
Other	1,107		7		18		8
Total global structured finance	8,165		1,961		762		8
Global public finance	23,341		287		321		0
Total	$	31,506	$	2,247	$	1,083	$	7

(1)Maximum exposure to loss represents the maximum future payments of principal and interest on insured obligations and derivative contracts. Ambac’s maximum exposure to loss does not include the benefit of any financial instruments (such as reinsurance or hedge contracts) that Ambac may utilize to mitigate the risks associated with these variable interests.

(2)Insurance assets represent the amount included in “Premium receivables” and “Subrogation recoverable” for financial guarantee insurance contracts on Ambac’s Consolidated Balance Sheets.

(3)Insurance liabilities represent the amount included in “Loss and loss expense reserves” and “Unearned premiums” for financial guarantee insurance contracts on Ambac’s Consolidated Balance Sheets.

(4)Net derivative assets (liabilities) represent the fair value recognized on credit derivative contracts and interest rate swaps on Ambac’s Consolidated Balance Sheets.

Carrying Value of Assets and Liabilities

Maximum
Exposure
To Loss ⁽¹⁾

Insurance
Assets ⁽²⁾

Insurance
Liabilities ⁽³⁾

Net Derivative
Assets (Liabilities) ⁽⁴⁾
September 30, 2019:
Global structured finance:
Collateralized debt obligations $ —
$ —
$ —
$ —
Mortgage-backed—residential 5,641,415
1,943,385
547,002
—
Other consumer asset-backed 1,450,873
19,829
210,512
—
Other commercial asset-backed 352,385
6,387
6,209
—
Other 998,018
7,739
19,187
7,934
Total global structured finance 8,442,691
1,977,340
782,910
7,934
Global public finance 23,058,272
317,692
320,883
(422 )
Total $ 31,500,963
$ 2,295,032
$ 1,103,793
$ 7,512

December 31, 2018:
Global structured finance:
Collateralized debt obligations $ 9,787
$ —
$ —
$ (2 )
Mortgage-backed—residential 6,713,437
1,859,121
546,682
—
Other consumer asset-backed 1,700,984
15,435
238,234
—
Other commercial asset-backed 873,343
20,735
12,264
—
Other 2,122,648
53,462
301,260
7,170
Total global structured finance 11,420,199
1,948,753
1,098,440
7,168
Global public finance 24,145,956
309,071
335,437
(1,457 )
Total $ 35,566,155
$ 2,257,824
$ 1,433,877
$ 5,711


~~(1)~~	Maximum exposure to loss represents the maximum future payments of principal and interest on insured obligations and derivative contracts. Ambac’s maximum exposure to loss does not include the benefit of any financial instruments (such as reinsurance or hedge contracts) that Ambac may utilize to mitigate the risks associated with these variable interests.


~~(2)~~	~~Insurance assets represent the amount included in “Premium receivables” and “Subrogation recoverable” for financial guarantee insurance contracts on Ambac’s Consolidated Balance Sheets.~~


~~(3)~~	Insurance liabilities represent the amount included in “Loss and loss expense reserves” and “Unearned premiums” for financial guarantee insurance contracts on Ambac’s Consolidated Balance Sheets.


~~(4)~~	~~Net derivative assets (liabilities) represent the fair value recognized on credit derivative contracts and interest rate swaps on Ambac’s Consolidated Balance Sheets.~~

Ambac Sponsored Non-consolidated VIEs:

In 1994, Ambac established a VIE to provide certain financial guarantee clients with funding for their debt obligations. This VIE was established as a separate legal entity, demonstrably distinct from Ambac and that Ambac, its affiliates or its agents could not unilaterally dissolve. The permitted activities of this entity are contractually limited to purchasing assets from Ambac, issuing medium-term notes ("MTNs") to fund such purchases, executing derivative hedges and obtaining financial guarantee policies with respect to indebtedness incurred. Ambac does not consolidate this entity because the exercise of related control rights in such policies remain subject to OCI approval under the Stipulation and Order, as

discussed above. Ambac elected to account for its equity interest in this entity at fair value under the fair value option in accordance with the Financial Instruments Topic of the ASC. We believe that the fair value of the investments in this entity provides for greater transparency for recording profit or loss as compared to the equity method under the Investments – Equity Method and Joint Ventures Topic of the ASC. ~~Refer to~~ ~~Note 7. Fair Value Measurements~~ ~~for further information on the valuation technique and inputs used to measure the fair value of Ambac’s equity interest in this entity.~~ At

September 30, ~~2019~~2020 and December 31, ~~2018~~2019, the fair value of this entity was ~~$3,388~~$2 and ~~$4,516,~~$3, respectively, and is reported within Other assets on the Consolidated Balance Sheets.

•Total principal amount of debt outstanding was ~~$379,360~~$392 and ~~$393,010~~$403 at September 30, ~~2019~~2020 and December 31, ~~2018,~~

~~| Ambac Financial Group, Inc.~~ 122019, ~~Third Quarter FORM 10-Q~~ |

~~Table of Contents~~

~~AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES~~

~~Notes to Unaudited Consolidated Financial Statements~~

~~(Dollar Amounts in Thousands, Except Share Amounts)~~

respectively. In each case, Ambac sold assets to this entity, which are composed of utility obligations with a weighted average rating of BBB+ at September 30, ~~2019~~2020, and weighted average life of ~~1.4~~0.4 years. The purchase by this entity of financial assets was financed through the issuance of MTNs, which are cross-collateralized by the purchased assets. The MTNs have the same expected weighted average life as the purchased assets. Derivative contracts (interest rate swaps) are used within the entity for economic hedging purposes only. Derivative positions were established at the time MTNs were issued to purchase financial assets. As of September 30, ~~2019~~2020, Ambac Assurance had financial

| Ambac Financial Group, Inc. 122020 Third Quarter FORM 10-Q |

Table of Contents

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

guarantee insurance policies issued for all assets, MTNs and derivative contracts owned and outstanding by the entity.

•Insurance premiums paid to Ambac Assurance by this entity are earned in a manner consistent with other insurance policies, over the risk period. Additionally, any losses incurred on such insurance policies are included in Ambac’s Consolidated Statements of Total Comprehensive Income (Loss). Under the terms of an Administrative Agency Agreement, Ambac provides certain administrative duties, primarily collecting amounts due on the obligations and making interest payments on the MTNs.

On August 28, 2014, Ambac monetized its ownership of the junior surplus note issued to it by ~~the Segregated Account~~Ambac Assurance by depositing the junior surplus note into a newly formed VIE trust in exchange for cash and an owner trust certificate, which represents Ambac's right to residual cash flows from the junior surplus note. Ambac does not consolidate the VIE since it does not have a variable interest in the trust. Ambac reports its owner trust certificate as an equity investment within Other investments

on the Consolidated Balance Sheets with associated results from operations included within Net investment ~~income:~~income (loss): Other investments on the Consolidated Statements of Total Comprehensive Income (Loss). The equity investment had a carrying value of ~~$44,287~~$49 and ~~$40,168~~$46 as of September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively.

On February 12, 2018, Ambac formed a VIE, Ambac LSNI, LLC ("Ambac LSNI"). Ambac LSNI issued Secured Notes in connection with the Rehabilitation Exit Transactions. Ambac does not consolidate the VIE since it does not have a variable interest in the trust. Ambac reports its holdings of Secured Notes within Fixed Income Securities in the Consolidated Balance Sheets. The carrying value of Secured Notes held by Ambac was ~~$578,831~~$470 and ~~$656,473~~$535 at September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively. Ambac's debt obligation to the VIE (the Ambac Note) had a carrying value of ~~$1,911,560~~$1,648 and ~~$1,940,289~~$1,763 at September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively, and is reported within Long-term debt on the Consolidated Balance Sheets.

~~| Ambac Financial Group, Inc.~~ 13~~2019 Third Quarter FORM 10-Q~~ |

~~Table of Contents~~

~~AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES~~

~~Notes to Unaudited Consolidated Financial Statements~~

~~(Dollar Amounts in Thousands, Except Share Amounts)~~

4. COMPREHENSIVE INCOME

The following tables detail the changes in the balances of each component of accumulated other comprehensive income for the affected periods:

Unrealized Gains
(Losses) on
Available for
Sale Securities ⁽¹⁾

Amortization of
Postretirement
Benefit ⁽¹⁾

Gain (Loss) on
Foreign Currency
Translation ⁽¹⁾

Credit Risk Changes of Fair Value Option Liabilities ^{(1) (2)}
Total
Three Months Ended September 30, 2019:
Beginning Balance $ 157,304
$ 8,919
$ (145,489 ) $ (1,646 ) $ 19,088
Other comprehensive income (loss) before reclassifications 49,714
—
(23,570 ) —
26,144
Amounts reclassified from accumulated other comprehensive income (loss) (18,429 ) (322 ) —
(74 ) (18,825 )
Net current period other comprehensive income (loss) 31,285
(322 ) (23,570 ) (74 ) 7,319
Balance at September 30, 2019 $ 188,589
$ 8,597
$ (169,059 ) $ (1,720 ) $ 26,407

Three Months Ended September 30, 2018:
Beginning Balance $ 153,634
$ 9,479
$ (114,567 ) $ (2,692 ) $ 45,854
Other comprehensive income (loss) before reclassifications 90,742
—
(8,873 ) —
81,869
Amounts reclassified from accumulated other comprehensive income (loss) (29,935 ) (303 ) —
340
(29,898 )
Net current period other comprehensive income (loss) 60,807
(303 ) (8,873 ) 340
51,971
Balance at September 30, 2018 $ 214,441
$ 9,176
$ (123,440 ) $ (2,352 ) $ 97,825

Nine Months Ended September 30, 2019:
Beginning Balance $ 85,903
$ 8,874
$ (141,527 ) $ (1,965 ) $ (48,715 )
Other comprehensive income (loss) before reclassifications 174,179
689
(27,532 ) —
147,336
Amounts reclassified from accumulated other comprehensive income (loss) (71,493 ) (966 ) —
245
(72,214 )
Net current period other comprehensive income (loss) 102,686
(277 ) (27,532 ) 245
75,122
Balance at September 30, 2019 $ 188,589
$ 8,597
$ (169,059 ) $ (1,720 ) $ 26,407

Nine Months Ended September 30, 2018:
Beginning Balance $ 30,755
$ 10,640
$ (93,634 ) $ —
$ (52,239 )
Adjustments to opening balance, net of taxes (3) —
—
—
(2,900 ) (2,900 )
Adjusted balance, beginning of period 30,755
10,640
(93,634 ) (2,900 ) (55,139 )
Other comprehensive income before reclassifications 264,318
(556 ) (29,806 ) —
233,956
Amounts reclassified from accumulated other comprehensive income (80,632 ) (908 ) —
548
(80,992 )
Net current period other comprehensive income $ 183,686
$ (1,464 ) $ (29,806 ) $ 548
$ 152,964
Balance at September 30, 2018 $ 214,441
$ 9,176
$ (123,440 ) $ (2,352 ) $ 97,825


~~(1)~~	~~All amounts are net of tax and noncontrolling interest. Amounts in parentheses indicate reductions to Accumulated Other Comprehensive Income.~~


~~(2)~~	~~Represents the changes in fair value attributable to instrument-specific credit risk of liabilities for which the fair value option is elected.~~


~~(3)~~	~~Beginning in 2018, credit risk changes of fair value option liabilities are reflected as a component of~~ ~~Accumulated Other Comprehensive Income~~ ~~pursuant to the adoption of ASU 2016-01.~~


	Unrealized Gains (Losses) on Available for Sale Securities (1)		Amortization of Postretirement Benefit (1)		Gain (Loss) on Foreign Currency Translation (1)		Credit Risk Changes of Fair Value Option Liabilities (1) (2)		Total
Three Months Ended September 30, 2020:
Beginning Balance	$	109	$	6	$	(164)	$	0	$	(48)


Other comprehensive income (loss) before reclassifications	45		0		29		0		74
Amounts reclassified from accumulated other comprehensive income (loss)	(2)		0		0		0		(3)


Net current period other comprehensive income (loss)	42		0		29		0		71
Balance at September 30, 2020	$	152	$	6	$	(135)	$	0	$	22

Three Months Ended September 30, 2019:
Beginning Balance	$	157	$	9	$	(145)	$	(2)	$	19


Other comprehensive income (loss) before reclassifications	50		0		(24)		0		26
Amounts reclassified from accumulated other comprehensive income (loss)	(18)		0		0		0		(19)


Net current period other comprehensive income (loss)	31		0		(24)		0		7
Balance at September 30, 2019	$	189	$	9	$	(169)	$	(2)	$	26

| Ambac Financial Group, Inc. 1413 ~~2019~~2020 Third Quarter FORM 10-Q|

Table of Contents

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Dollar Amounts in ~~Thousands,~~Millions, Except Share Amounts)



	Unrealized Gains (Losses) on Available for Sale Securities (1)		Amortization of Postretirement Benefit (1)		Gain (Loss) on Foreign Currency Translation (1)		Credit Risk Changes of Fair Value Option Liabilities (1) (2)		Total
Nine Months Ended September 30, 2020:
Beginning Balance	$	151	$	8	$	(116)	$	(2)	$	42


Other comprehensive income (loss) before reclassifications	20		(2)		(20)		0		(2)
Amounts reclassified from accumulated other comprehensive income (loss)	(19)		(1)		0		2		(18)


Net current period other comprehensive income (loss)	1		(3)		(20)		2		(20)
Balance at September 30, 2020	$	152	$	6	$	(135)	$	0	$	22

Nine Months Ended September 30, 2019:
Beginning Balance	$	86	$	9	$	(142)	$	(2)	$	(49)


Other comprehensive income before reclassifications	174		1		(28)		0		147
Amounts reclassified from accumulated other comprehensive income	(71)		(1)		0		0		(72)


Net current period other comprehensive income	$	103	$	0	$	(28)	$	0	$	75
Balance at September 30, 2019	$	189	$	9	$	(169)	$	(2)	$	26

(1)All amounts are net of tax and noncontrolling interest. Amounts in parentheses indicate reductions to Accumulated Other Comprehensive Income.

(2)Represents the changes in fair value attributable to instrument-specific credit risk of liabilities for which the fair value option is elected.

The following table details the significant amounts reclassified from each component of accumulated other comprehensive income, shown in the above rollforward tables, for the affected periods:


Details about Accumulated Other Comprehensive Income Components	Amount Reclassified from Accumulated Other Comprehensive Income								Affected Line Item in the Consolidated Statement of Total Comprehensive Income (Loss)
	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Unrealized Gains (Losses) on Available-for-Sale Securities
	$	(2)	$	(20)	$	(20)	$	(77)	Net realized investment gains (losses) and other-than-temporary impairment losses
	0		1		1		6		Provision for income taxes
	$	(2)	$	(18)	$	(19)	$	(71)	Net of tax and noncontrolling interest
Amortization of Postretirement Benefit
Prior service cost	$	0	$	0	$	(1)	$	(1)	Other income
Actuarial (losses)	0		0		0		0		Other income
	0		0		(1)		(1)		Total before tax
	0		0		0		0		Provision for income taxes
	$	0	$	0	$	(1)	$	(1)	Net of tax and noncontrolling interest
Credit risk changes of fair value option liabilities
	$	0	$	0	$	2	$	0	Credit Risk Changes of Fair Value Option Liabilities
	0		0		0		0		Provision for income taxes
	$	0	$	0	$	2	$	0	Net of tax and noncontrolling interest
Total reclassifications for the period	$	(3)	$	(19)	$	(18)	$	(72)	Net of tax and noncontrolling interest

Details about Accumulated
Other Comprehensive
Income Components

Amount Reclassified from Accumulated Other Comprehensive Income ⁽¹⁾
Affected Line Item in the
Consolidated Statement of
Total Comprehensive Income (Loss)
Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Unrealized Gains (Losses) on Available-for-Sale Securities
$ (19,884 ) $ (30,560 ) $ (77,460 ) $ (81,843 ) Net realized investment gains (losses) and other-than-temporary impairment losses
1,455
625
5,967
1,211
Provision for income taxes
$ (18,429 ) $ (29,935 ) $ (71,493 ) $ (80,632 ) Net of tax and noncontrolling interest
Amortization of Postretirement Benefit
Prior service cost $ (241 ) $ (241 ) $ (722 ) $ (723 )
Other income⁽²⁾
Actuarial (losses) (81 ) (62 ) (244 ) (185 )
Other income⁽²⁾
(322 ) (303 ) (966 ) (908 ) Total before tax
—
—
—
—
Provision for income taxes
$ (322 ) $ (303 ) $ (966 ) $ (908 ) Net of tax and noncontrolling interest
Credit risk changes of fair value option liabilities
$ (89 ) $ 380
$ 295
$ 630
Credit Risk Changes of Fair Value Option Liabilities
15
(40 ) (50 ) (82 ) Provision for income taxes
$ (74 ) $ 340
$ 245
$ 548
Net of tax and noncontrolling interest
Total reclassifications for the period $ (18,825 ) $ (29,898 ) $ (72,214 ) $ (80,992 ) Net of tax and noncontrolling interest


~~(1)~~	Amounts in parentheses indicate reductions to Accumulated Other Comprehensive Income with corresponding increases to the affected line items in the Consolidated Statement of Total Comprehensive Income.


~~(2)~~	~~These accumulated other comprehensive income components are included in the computation of net periodic benefit cost.~~

5. NET INCOME PER SHARE

As of September 30, ~~2019, 45,551,260~~2020, 45,809,139 shares of Ambac's common stock (par value $0.01) and warrants entitling holders to acquire up to ~~4,877,783~~4,877,749 shares of new common stock at an exercise price of $16.67 per share were issued and outstanding. Common shares outstanding increased by 253,739 during the nine

months ended September 30, ~~2019~~2020, primarily due to settlements of employee restricted and performance stock units.

Basic net income per share is computed by dividing net income attributable to common stockholders by the weighted-average

number of common shares outstanding and vested restricted stock units (together, "Basic Weighted Average Shares Outstanding").

| Ambac Financial Group, Inc. 142020 Third Quarter FORM 10-Q |

Table of Contents

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Diluted net income per share is computed by dividing net income attributable to common stockholders by the Basic Weighted Average Shares Outstanding plus all potential dilutive common shares outstanding during the period. All potential dilutive common shares outstanding consider common stock deliverable

pursuant to warrants, vested and unvested options, unvested restricted stock units and performance stock units granted under ~~employee and director~~existing compensation plans.

~~| Ambac Financial Group, Inc.~~ 15~~2019 Third Quarter FORM 10-Q~~ |

~~Table of Contents~~

~~AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES~~

~~Notes to Unaudited Consolidated Financial Statements~~

~~(Dollar Amounts in Thousands, Except Share Amounts)~~

The following table provides a reconciliation of the common shares used for basic net income per share to the diluted shares used for diluted net income per share:


	Three Months Ended September 30,		Nine Months Ended September 30,
	2020	2019	2020	2019
Basic weighted average shares outstanding	46,178,730	45,997,694	46,135,399	45,939,284
Effect of potential dilutive shares (1):
Stock options	0	0	0	0
Warrants	0	450,384	0	0
Restricted stock units	0	78,751	0	0
Performance stock units (2)	0	493,229	0	0
Diluted weighted average shares outstanding	46,178,730	47,020,058	46,135,399	45,939,284
Anti-dilutive shares excluded from the above reconciliation:
Stock options	16,667	16,667	16,667	16,667
Warrants	4,877,749	0	4,877,754	4,877,783
Restricted stock units	333,526	0	286,279	249,025
Performance stock units (2)	972,138	0	932,777	748,700

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Basic weighted average shares outstanding 45,997,694
45,749,252
45,939,284
45,635,483
Effect of potential dilutive shares ⁽¹⁾:

Stock options —
—
—
—
Warrants 450,384
—
—
454,150
Restricted stock units 78,751
—
—
72,615
Performance stock units ⁽²⁾
493,229
—
—
348,547
Diluted weighted average shares outstanding 47,020,058
45,749,252
45,939,284
46,510,795
Anti-dilutive shares excluded from the above reconciliation:
Stock options 16,667
126,667
16,667
126,667
Warrants —
4,877,783
4,877,783
—
Restricted stock units —
232,408
249,025
—
Performance stock units ⁽²⁾
—
521,394
748,700
—
(1) For the three and nine months ended September 30, 2020, and the nine months ended September 30, 2019, Ambac had a net loss and accordingly excluded all potentially dilutive securities from the determination of diluted loss per share as their impact was anti-dilutive.

(2) Performance stock units are reflected based on the performance metrics through the balance sheet date. Vesting of these units is contingent upon meeting certain performance metrics. Although a portion of these performance metrics have been achieved as of the respective period end, it is possible that awards may no longer meet the metric at the end of the performance period.


~~(1)~~	~~For the three months ended September 30, 2018~~ ~~and the~~ nine months ended September 30, 2019, Ambac had a net loss and accordingly excluded all potentially dilutive securities from the determination of diluted loss per share as their impact was anti-dilutive.


~~(2)~~	Performance stock units are reflected based on the performance metrics through the balance sheet date. Vesting of these units is contingent upon meeting certain performance metrics. Although a portion of these performance metrics have been achieved as of the respective period end, it is possible that awards may no longer meet the metric at the end of the performance period.

6. FINANCIAL GUARANTEE INSURANCE CONTRACTS

Amounts presented in this Note relate only to Ambac’s non-derivative insurance business for insurance policies issued to beneficiaries, including VIEs, for which we do not consolidate the VIE.

Net Premiums Earned:

Gross premiums are received either upfront or in installments. For premiums received upfront, an unearned premium revenue (“UPR”) liability is established, which is initially recorded as the cash amount received. For installment premium transactions, a premium receivable asset and offsetting UPR liability is initially established in an amount equal to: (i) the present value of future contractual premiums due (the “contractual” method) or (ii) if the assets underlying the insured obligation are homogenous pools which are contractually prepayable, the present value of premiums to be collected over the expected life of the transaction (the “expected” method). An appropriate risk-free rate corresponding to the weighted average life of each policy and currency is used to discount the future premiums contractually due or expected to be collected. For example, U.S. dollar exposures are discounted using U.S. Treasury rates. The weighted average risk-free rate at September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, was ~~2.4%~~2.2% and ~~2.7%~~2.4%, respectively, and the weighted average period of future premiums used to estimate the premium

receivable at September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, was ~~8.6~~8.5 years and ~~8.7~~8.5 years years, respectively.

In evaluating the credit quality of the premium receivables, management evaluates the obligor's ability to pay. For structured finance transactions, this evaluation will include a review of the priority for the payment of financial guarantee premiums to Ambac, as required by bond indentures, in the transaction's waterfall

structure. The financial guarantee premium is generally senior in the waterfall. Uncollectable premiums are determined on a policy basis and utilize a combination of historical premium collection data in addition to cash flow analysis to determine if an impairment in the related policy's premium receivables exist. At September 30, 2019 and December 31, 2018, $13,943 and $7,136 respectively, of premium receivables were deemed uncollectable. As of September 30, 2019 and December 31, 2018, approximately 14% and 20% of the premium receivables, net of uncollectable receivables, related to transactions with non-investment grade internal ratings, mainly structured finance transactions. Past due premiums on policies insuring non-investment grade obligations amounted to less than $100 at September 30, 2019.

Below is the gross premium receivable roll-forward for the ~~affected periods:~~respective periods, net of allowance for credit losses:


	Nine Months Ended September 30,
	2020		2019
Beginning premium receivable	$	416	$	495
Adjustment to initially apply ASU 2016-13	(3)		—

Premium receipts	(36)		(37)
Adjustments for changes in expected and contractual cash flows (1)	(4)		(33)
Accretion of premium receivable discount	7		9
Deconsolidation of certain VIEs	—		3
Changes to allowance for credit losses	(5)		(7)
Other adjustments (including foreign exchange)	(2)		(16)
Ending premium receivable (2)	$	372	$	415

(1) Adjustments for changes in expected and contractual cash flows primarily due to reductions in insured exposure as a result of early policy terminations and unscheduled principal paydowns.

(2) Premium receivable includes premiums to be received in foreign denominated currencies most notably in British Pounds and Euros.

Nine Months Ended September 30,
2019 2018
Beginning premium receivable $ 495,391
$ 586,312
Premium receipts (36,778 ) (42,660 )
Adjustments for changes in expected and contractual cash flows ⁽¹⁾
(32,593 ) (34,088 )
Accretion of premium receivable discount 8,775
11,211
Deconsolidation of certain VIEs
3,239
—
Changes to uncollectable premiums (6,921 ) 2,473
Other adjustments (including foreign exchange) (16,369 ) (6,051 )
Ending premium receivable⁽²⁾
$ 414,744
$ 517,197


~~(1)~~	~~Adjustments for changes in expected and contractual cash flows primarily due to reductions in insured exposure as a result of early policy terminations and unscheduled principal paydowns.~~

| Ambac Financial Group, Inc. 1615 ~~2019~~2020 Third Quarter FORM 10-Q|

Table of Contents

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Dollar Amounts in ~~Thousands,~~Millions, Except Share Amounts)


~~(2)~~	Premium receivable includes premiums to be received in foreign denominated currencies most notably in British Pounds and Euros. At September 30, 2019 and 2018, premium receivables include British Pounds of $124,406 (£101,168) and $136,925 (£104,988), respectively, and Euros of $22,091 (€20,264) and $32,613 (€28,085), respectively.

At September 30, 2020 and 2019, premium receivables include British Pounds of $112 (£87) and $124 (£101), respectively, and Euros of $21 (€18) and $22 (€20), respectively.

When a bond issue insured by Ambac Assurance has been retired early, typically due to an issuer call, any remaining UPR is recognized at that time to the extent the financial guarantee contract is legally extinguished, causing accelerated premium revenue. For installment premium paying transactions, we offset the recognition of any remaining UPR by the reduction of the related premium receivable to zero (as it will not be collected as a result of the retirement), which may cause negative accelerated premium revenue. Ambac’s accelerated premium revenue for retired obligations for the three and nine months ended September 30, ~~2019~~2020, was ~~$2,019~~$5 and ~~$8,073,~~$6, respectively and for the three and nine months ended September 30, ~~2018~~2019, was ~~$6,751~~$2 and ~~22,246, respectively.~~$8.

The effect of reinsurance on premiums written and earned for the respective periods was as follows:


	Three Months Ended September 30,
	2020				2019
	Written		Earned		Written		Earned
Direct	$	(13)	$	18	$	(13)	$	13
Assumed	0		0		0		0
Ceded	0		3		23		3
Net premiums	$	(13)	$	15	$	(36)	$	10

	Nine Months Ended September 30,
	2020				2019
	Written		Earned		Written		Earned
Direct	$	(2)	$	45	$	(31)	$	53
Assumed	0		1		0		0
Ceded	(1)		9		22		7
Net premiums	$	(2)	$	36	$	(53)	$	46

Three Months Ended September 30,
2019 2018
Written Earned Written Earned
Direct $ (13,480 ) $ 13,097
$ (22,954 ) $ 27,559
Assumed —
19
—
20
Ceded ⁽¹⁾
22,873
2,650
(789 ) 1,939
Net premiums $ (36,353 ) $ 10,466
$ (22,165 ) $ 25,640

Nine Months Ended September 30,
2019 2018
Written Earned Written Earned
Direct $ (30,739 ) $ 52,596
$ (19,304 ) $ 87,506
Assumed —
59
—
59
Ceded ⁽¹⁾
22,030
6,598
(1,832 ) 5,206
Net premiums $ (52,769 ) $ 46,057
$ (17,472 ) $ 82,359


~~(1)~~	~~Includes ceded premium activity related to the execution of a reinsurance transaction in the three and nine months ended September 30, 2019.~~

The following table summarizes net premiums earned by location of risk for the respective periods:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
United States	$	9	$	11	$	24	$	44
United Kingdom	7		4		15		13
Other international	(1)		(4)		(2)		(11)
Total	$	15	$	10	$	36	$	46

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
United States $ 10,588
$ 19,539
$ 44,457
$ 64,009
United Kingdom 4,354
4,523
12,769
14,337
Other international (4,476 ) 1,578
(11,169 ) 4,013
Total $ 10,466
$ 25,640
$ 46,057
$ 82,359

The table below summarizes the future gross undiscounted premiums to be collected and future premiums earned, net of reinsurance at September 30, ~~2019:~~2020:


	Future Premiums to be Collected (1)		Future Premiums to be Earned Net of Reinsurance (2)
Three months ended:



December 31, 2020	$	11	$	10
Twelve months ended:
December 31, 2021	36		35
December 31, 2022	34		33
December 31, 2023	33		30
December 31, 2024	31		29
Five years ended:
December 31, 2029	138		120
December 31, 2034	101		81
December 31, 2039	50		37
December 31, 2044	22		14
December 31, 2049	9		5
December 31, 2054	1		1


Total	$	467	$	395

(1)Future premiums to be collected are undiscounted, gross of allowance for credit losses, and are used to derive the discounted premium receivable asset recorded on Ambac's balance sheet.

(2)Future premiums to be earned, net of reinsurance relate to the unearned premiums liability and deferred ceded premium asset recorded on Ambac’s balance sheet. The use of contractual lives for many bond types which do not have homogeneous pools of underlying collateral is required in the calculation of the premium receivable, as further described in Note 2. Basis of Presentation and Significant Accounting Policies in the Notes to Consolidated Financial Statements included in Ambac's Annual Report on Form 10-K for the year ended December 31, 2019. This results in a different premium receivable balance than if expected lives were considered. If installment paying policies are retired or prepay early, premiums reflected in the premium receivable asset and amounts reported in the above table for such policies may not be collected. Future premiums to be earned also considers the use of contractual lives for many bond types which do not have homogeneous pools of underlying collateral, which may result in different unearned premium than if expected lives were considered. If those bonds types are retired early, premium earnings may be negative in the period of call or refinancing.

Credit impairment (Premium receivables and reinsurance recoverables):

Management evaluates premium receivables and reinsurance recoverables for expected credit losses ("credit impairment") in accordance with the CECL standard adopted January 1, 2020, which is further described in Note 2. Basis of Presentation and Significant Accounting Policies. Management's evaluation of credit impairment under prior GAAP rules was not materially different.

Most credit impairment disclosures below were only made prospectively from the CECL adoption date as they were not required previously under GAAP.

Future Premiums
to be
Collected ⁽¹⁾

Future
Premiums to
be Earned Net of
Reinsurance ⁽¹⁾
Three months ended:
December 31, 2019 $ 11,888
$ 10,507
Twelve months ended:
December 31, 2020 41,442
40,407
December 31, 2021 35,601
36,938
December 31, 2022 35,292
34,531
December 31, 2023 33,792
32,345
Five years ended:
December 31, 2028 147,828
135,566
December 31, 2033 108,291
90,347
December 31, 2038 57,282
46,459
December 31, 2043 24,772
16,205
December 31, 2048 11,298
6,637
December 31, 2053 2,251
1,314
December 31, 2058 31
20
Total $ 509,768
$ 451,276

~~(1)~~

Future premiums to be collected are undiscounted and are used to derive the discounted premium receivable asset recorded on Ambac's balance sheet. Future premiums to be earned, net of reinsurance relate to the unearned premiums liability and deferred ceded premium asset recorded on Ambac’s balance sheet. The use of contractual lives for many bond types which do not have homogeneous pools of underlying collateral is required in the calculation of the premium receivable, as further described in ~~Note 2. Basis of Presentation and Significant Accounting Policies~~ in the Notes to Consolidated Financial Statements included in Ambac's Annual Report on Form 10-K for the year ended December 31, 2018. This results in a different premium receivable balance than if expected lives were considered. If installment paying policies are retired or prepay early, premiums reflected in the premium receivable asset and amounts reported in the above table for such policies may not be collected. Future premiums to be earned also considers the use of contractual lives for many bond types which do not have homogeneous pools of underlying collateral, which may result in different unearned premium than if expected lives were considered. If those bonds types are retired early, premium earnings may be negative in the period of call or refinancing.

| Ambac Financial Group, Inc. 1716 ~~2019~~2020 Third Quarter FORM 10-Q|

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AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Dollar Amounts in ~~Thousands,~~Millions, Except Share Amounts)

As further discussed in Note 2. Basis of Presentation and Significant Accounting Policies, the key indicator management uses to assess the credit quality of premium receivables is Ambac's internal risk classifications for the insured obligation determined by the Risk Management Group. Below is the amortized cost basis of premium receivables by risk classification code and asset class as of September 30, 2020:


Surveillance Categories as of September 30, 2020
Type of Guaranteed Bond	I		IA		II		III		IV		Total
Public Finance:
Housing revenue	$	158	$	13	$	0	$	0	$	0	$	171
Other	2		13		0		0		0		16
Total Public Finance	160		26		0		0		0		186

Structured Finance:
Mortgage-backed and home equity	3				1		3		16		23
Structured insurance	16		0		0		0		0		16
Student loan	3		0		2		12		0		17
Other	7		0		0		0		0		7
Total Structured Finance	29		0		3		15		16		63

International:
Sovereign/sub-sovereign	78		13		0		15		0		105
Investor-owned and public utilities	29		0		0		0		0		29
Other	6		0		0		0		0		6
Total International	113		13		0		15		0		141
Total (1)	$	302	$	39	$	3	$	29	$	16	$	390

(1) The underwriting origination dates for all policies included are greater than five years prior to the current reporting date.

Below is a rollforward of the premium receivable allowance for credit losses as of September 30, 2020:


	Three Months Ended September 30, 2020		Nine Months Ended September 30, 2020
Beginning balance (1)	$	16	$	9
Current period provision (2)	2		9
Write-offs of the allowance	0		0
Recoveries of previously written-off amounts	0		0
Ending balance	$	18	$	18

(1)At December 31, 2019, $9 of premiums receivable were deemed uncollectible as determined under prior GAAP rules.

(2)The nine months ended September 30, 2020, includes $3 from the adoption of CECL.

At September 30, 2020, Ambac had past due premiums of $2, of which $2 was over 120 days past due and has been included in the allowance for credit losses.

The key indicator management uses to assess the credit quality of reinsurance recoverables is collateral posted by the reinsurers and independent rating agency credit ratings. For the majority of reinsurance contracts where Ambac has recorded a recoverable, the fair value of collateral posted by the reinsurer to Ambac Assurance exceeds Ambac Assurance's reinsurance recoverable carrying value, net of ceded premiums payable. Ambac Assurance has credit exposure of $1 and has recorded an allowance for credit losses of $0 dollars at September 30, 2020.

| Ambac Financial Group, Inc. 172020 Third Quarter FORM 10-Q |

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AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Loss and Loss Expense Reserves:

~~The~~Ambac’s loss and loss expense ~~reserve~~reserves (“loss ~~reserve”~~reserves”) policy for financial guarantee insurance relates only to Ambac’s non-derivative insurance business for insurance policies issued to beneficiaries, including VIEs, for which we do not consolidate the VIE. Ambac’s loss reserves are based on management’s on-going review of the financial guarantee credit portfolio. Below are the components of the ~~Loss and~~ loss ~~expense~~ reserves liability and the Subrogation recoverable asset at September 30, ~~2019~~2020 and December 31, ~~2018:~~2019:


	September 30, 2020:								December 31, 2019:
	Present Value of Expected Net Cash Flows				Unearned Premium Revenue		Gross Loss and Loss Expense Reserves		Present Value of Expected Net Cash Flows				Unearned Premium Revenue		Gross Loss and Loss Expense Reserves
Balance Sheet Line Item	Claims and Loss Expenses		Recoveries						Claims and Loss Expenses		Recoveries
Loss and loss expense reserves	$	2,116	$	(235)	$	(80)	$	1,801	$	1,835	$	(233)	$	(54)	$	1,548
Subrogation recoverable	109		(2,303)		0		(2,194)		131		(2,160)		0		(2,029)
Totals	$	2,225	$	(2,538)	$	(80)	$	(393)	$	1,966	$	(2,394)	$	(54)	$	(482)

Present Value of Expected
Net Cash Flows Unearned
Premium
Revenue Gross Loss and
Loss Expense
Reserves
Balance Sheet Line Item Claims and
Loss Expenses Recoveries
September 30, 2019:
Loss and loss expense reserves $ 1,803,743
$ (225,967 ) $ (55,472 ) $ 1,522,304
Subrogation recoverable 135,599
(2,217,867 ) —
(2,082,268 )
Totals $ 1,939,342
$ (2,443,834 ) $ (55,472 ) $ (559,964 )

December 31, 2018:
Loss and loss expense reserves $ 2,246,335
$ (313,595 ) $ (106,662 ) $ 1,826,078
Subrogation recoverable 175,694
(2,108,654 ) —
(1,932,960 )
Totals $ 2,422,029
$ (2,422,249 ) $ (106,662 ) $ (106,882 )

Below is the loss ~~and loss expense reserve~~reserves roll-forward, net of subrogation recoverable and reinsurance, for the affected periods:


	Nine Months Ended September 30,
	2020		2019
Beginning gross loss and loss expense reserves	$	(482)	$	(107)
Reinsurance recoverable	26		23
Beginning balance of net loss and loss expense reserves	(508)		(130)
Losses and loss expenses (benefit):
Current year	18		1
Prior years	198		(85)
Total (1) (2)	216		(84)
Loss and loss expenses paid (recovered):
Current year	1		0
Prior years	137		299
Total	138		299
Foreign exchange effect	1		(1)
Ending net loss and loss expense reserves	(429)		(514)
Impact of VIE consolidation	0		(72)
Reinsurance recoverable (3)	36		26
Ending gross loss and loss expense reserves	$	(393)	$	(560)

Nine Months Ended September 30,
2019 2018
Beginning gross loss and loss expense reserves $ (106,882 ) $ 4,113,802
Reinsurance recoverable 22,623
40,658
Beginning balance of net loss and loss expense reserves (129,505 ) 4,073,144
Losses and loss expenses (benefit):
Current year 659
976
Prior years (84,593 ) (182,291 )
Total ^{(1) (2) (3)}
(83,934 ) (181,315 )
Loss and loss expenses paid (recovered):
Current year 32
143
Prior years ⁽³⁾
298,909
3,937,561
Total 298,941
3,937,704
Foreign exchange effect (1,174 ) (9,578 )
Ending net loss and loss expense reserves (513,554 ) (55,453 )
Impact of VIE consolidation (72,159 ) —
Reinsurance recoverable ⁽⁴⁾
25,749
25,326
Ending gross loss and loss expense reserves $ (559,964 ) $ (30,127 )

(1)Total losses and loss expenses (benefit) includes $(14) and $(6) for the nine months ended September 30, 2020 and 2019, respectively, related to ceded reinsurance.


~~(1)~~	~~Total losses and loss expenses (benefit) includes $(5,999) and $(123) for the nine months ended September 30, 2019 and 2018, respectively, related to ceded reinsurance.~~

(2)Ambac records the impact of estimated recoveries related to securitized loans in RMBS transactions that breached certain representations and warranties ("R&W's) by transaction sponsors within losses and loss expenses (benefit). The losses and loss expense (benefit) incurred associated with changes in estimated R&W's for the nine months ended September 30, 2020 and 2019, was $(29) and $15, respectively.

(3)Represents reinsurance recoverable on future loss and loss expenses. Additionally, the Balance Sheet line "Reinsurance recoverable on paid and unpaid losses" includes reinsurance recoverables (payables) of $1 and $0 as of September 30, 2020 and 2019, respectively, related to previously presented loss and loss expenses and subrogation.

~~(2)~~

Ambac records the impact of estimated recoveries related to securitized loans in RMBS transactions that breached certain representations and warranties ("R&W"s) by transaction sponsors within losses and loss expenses (benefit). The losses and loss expense (benefit) incurred associated with changes in estimated R&Ws for the nine months ended September 30, 2019 and 2018 was $15,365 and $56,928, respectively.


~~(3)~~	On February 12, 2018, Deferred Amounts and Interest Accrued on Deferred Amounts in the amount of $3,000,158 and $856,834, respectively were settled in connection with the Rehabilitation Exit Transactions. 2018 includes a $288,204 loss and loss expense benefit on these settled Deferred Amounts.


~~(4)~~	Represents reinsurance recoverable on future loss and loss expenses. Additionally, the Balance Sheet line "Reinsurance recoverable on paid and unpaid losses" includes reinsurance recoverables (payables) of $287 and $185 as of September 30, 2019 and 2018, respectively, related to previously presented loss and loss expenses and subrogation.

For 2020, the adverse development in prior years was primarily a result of deterioration in Public Finance credits, primarily Puerto Rico as discussed below in the section, "Puerto Rico", partially offset by positive development in the RMBS portfolio.

For 2019, the positive development in prior years was primarily a result of the Ballantyne and Puerto Rico COFINA commutations and positive development in the RMBS portfolio, partially offset by deterioration in other Public Finance credits, primarily Puerto Rico credits other than COFINA.

For 2018, the net positive development in prior years was primarily a result of the discount recorded on the Rehabilitation Exit Transactions partially offset by negative development in the Public Finance and RMBS portfolios and interest accrued on Deferred Amounts prior to the Rehabilitation Exit Transactions.

| Ambac Financial Group, Inc. 18 ~~2019~~2020 Third Quarter FORM 10-Q|

Table of Contents

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Dollar Amounts in ~~Thousands,~~Millions, Except Share Amounts)

The tables below summarize information related to policies currently included in Ambac’s loss ~~and loss expense~~ reserves or subrogation recoverable at September 30, ~~2019~~2020 and December 31, ~~2018.~~2019. Gross par exposures include capital appreciation bonds which are reported at the par amount at the time of issuance of the insurance policy as opposed to the current accreted value of the bond. The weighted average risk-free rate used to discount loss reserves at September 30, ~~2019~~2020 and December 31, ~~2018~~ 2019,was ~~1.8%~~0.9% and ~~2.8%~~2.1%, respectively.


Surveillance Categories as of September 30, 2020
	I		IA		II		III		IV		V		Total
Number of policies	46		26		16		16		135		3		242
Remaining weighted-average contract period (in years) (1)	10		19		8		16		14		2		15
Gross insured contractual payments outstanding:
Principal	$	1,064	$	1,146	$	614	$	1,511	$	3,386	$	32	$	7,752
Interest	329		1,083		492		260		1,465		10		3,639
Total	$	1,393	$	2,229	$	1,106	$	1,771	$	4,851	$	41	$	11,391
Gross undiscounted claim liability	$	4	$	56	$	41	$	536	$	1,726	$	41	$	2,404
Discount, gross claim liability	0		(2)		(1)		(71)		(185)		0		(259)
Gross claim liability before all subrogation and before reinsurance	4		54		41		465		1,541		41		2,145
Less:
Gross RMBS subrogation (2)	0		0		0		0		(1,760)		0		(1,760)
Discount, RMBS subrogation	0		0		0		0		2		0		2
Discounted RMBS subrogation, before reinsurance	0		0		0		0		(1,757)		0		(1,757)
Less:
Gross other subrogation (3)	0		0		0		(37)		(749)		(13)		(799)
Discount, other subrogation	0		0		0		1		16		1		18
Discounted other subrogation, before reinsurance	0		0		0		(36)		(734)		(11)		(781)
Gross claim liability, net of all subrogation and discounts, before reinsurance	4		54		40		429		(950)		30		(393)
Less: Unearned premium revenue	(3)		(22)		(5)		(18)		(32)		0		(80)
Plus: Loss expense reserves	2		2		1		7		68		0		80
Gross loss and loss expense reserves	$	2	$	34	$	37	$	418	$	(913)	$	30	$	(393)
Reinsurance recoverable reported on Balance Sheet (4)	$	0	$	6	$	10	$	27	$	(6)	$	0	$	37

Surveillance Categories as of September 30, 2019
I IA II III IV V Total
Number of policies 34
20
11
17
136
3
221
Remaining weighted-average contract period (in years) ⁽¹⁾
8
18
10
17
15
3
15
Gross insured contractual payments outstanding:
Principal $ 748,982
$ 649,596
$ 137,345
$ 900,525
$ 3,890,338
$ 37,962
$ 6,364,748
Interest 371,462
582,864
74,611
398,722
1,692,337
12,413
3,132,409
Total $ 1,120,444
$ 1,232,460
$ 211,956
$ 1,299,247
$ 5,582,675
$ 50,375
$ 9,497,157
Gross undiscounted claim liability $ 2,037
$ 53,685
$ 12,569
$ 523,533
$ 1,710,357
$ 50,343
$ 2,352,524
Discount, gross claim liability (144 ) (5,129 ) (894 ) (134,783 ) (343,293 ) (2,090 ) (486,333 )
Gross claim liability before all subrogation and before reinsurance 1,893
48,556
11,675
388,750
1,367,064
48,253
1,866,191
Less:
Gross RMBS subrogation⁽²⁾
—
—
—
—
(1,784,421 ) —
(1,784,421 )
Discount, RMBS subrogation —
—
—
—
29,477
—
29,477
Discounted RMBS subrogation, before reinsurance —
—
—
—
(1,754,944 ) —
(1,754,944 )
Less:
Gross other subrogation⁽³⁾
(21 ) —
—
(41,723 ) (682,464 ) (12,758 ) (736,966 )
Discount, other subrogation 2
—
—
3,812
41,743
2,519
48,076
Discounted other subrogation, before reinsurance (19 ) —
—
(37,911 ) (640,721 ) (10,239 ) (688,890 )
Gross claim liability, net of all subrogation and discounts, before reinsurance 1,874
48,556
11,675
350,839
(1,028,601 ) 38,014
(577,643 )
Less: Unearned premium revenue (1,405 ) (9,307 ) (840 ) (7,902 ) (35,854 ) (164 ) (55,472 )
Plus: Loss expense reserves 837
341
975
5,236
65,762
—
73,151
Gross loss and loss expense reserves $ 1,306
$ 39,590
$ 11,810
$ 348,173
$ (998,693 ) $ 37,850
$ (559,964 )
Reinsurance recoverable reported on Balance Sheet ⁽⁴⁾
$ 140
$ 9,417
$ 3,962
$ 23,604
$ (11,087 ) $ —
$ 26,036

(1)Remaining weighted-average contract period is weighted based on projected gross claims over the lives of the respective policies.


~~(1)~~	~~Remaining weighted-average contract period is weighted based on projected gross claims over the lives of the respective policies.~~


~~(2)~~	~~RMBS subrogation represents Ambac’s estimate of subrogation recoveries from RMBS transaction sponsors for R&W breaches.~~


~~(3)~~	~~Other subrogation represents subrogation related to excess spread and other contractual cash flows on public finance and structured finance transactions, including RMBS.~~


~~(4)~~	Reinsurance recoverable reported on the Balance Sheet includes reinsurance recoverables of $25,749 related to future loss and loss expenses and $287 related to presented loss and loss expenses and subrogation.

(2)RMBS subrogation represents Ambac’s estimate of subrogation recoveries from RMBS transaction sponsors for R&W breaches.

(3)Other subrogation represents subrogation related to excess spread and other contractual cash flows on public finance and structured finance transactions, including RMBS.

(4)Reinsurance recoverable reported on the Balance Sheet includes reinsurance recoverables of $36 related to future loss and loss expenses and $1 related to presented loss and loss expenses and subrogation.

| Ambac Financial Group, Inc. 19 ~~2019~~2020 Third Quarter FORM 10-Q|

Table of Contents

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Dollar Amounts in ~~Thousands,~~Millions, Except Share Amounts)


Surveillance Categories as of December 31, 2019
	I		IA		II		III		IV		V		Total
Number of policies	34		18		11		16		139		3		221
Remaining weighted-average contract period (in years) (1)	8		21		9		17		14		3		15
Gross insured contractual payments outstanding:
Principal	$	668	$	510	$	277	$	857	$	3,819	$	37	$	6,168
Interest	340		507		128		366		1,678		11		3,029
Total	$	1,007	$	1,016	$	404	$	1,223	$	5,498	$	48	$	9,197
Gross undiscounted claim liability	$	2	$	44	$	21	$	541	$	1,778	$	48	$	2,434
Discount, gross claim liability	0		(5)		(1)		(152)		(381)		(2)		(541)
Gross claim liability before all subrogation and before reinsurance	2		39		20		389		1,397		46		1,893
Less:
Gross RMBS subrogation (2)	0		0		0		0		(1,777)		0		(1,777)
Discount, RMBS subrogation	0		0		0		0		49		0		49
Discounted RMBS subrogation, before reinsurance	0		0		0		0		(1,727)		0		(1,727)
Less:
Gross other subrogation (3)	0		0		0		(41)		(666)		(13)		(720)
Discount, other subrogation	0		0		0		4		47		3		53
Discounted other subrogation, before reinsurance	0		0		0		(37)		(620)		(10)		(666)
Gross claim liability, net of all subrogation and discounts, before reinsurance	2		39		20		353		(950)		36		(501)
Less: Unearned premium revenue	(1)		(9)		(1)		(7)		(35)		0		(54)
Plus: Loss expense reserves	1		1		1		4		67		0		73
Gross loss and loss expense reserves	$	1	$	30	$	20	$	349	$	(918)	$	36	$	(482)
Reinsurance recoverable reported on Balance Sheet (4)	$	0	$	6	$	7	$	24	$	(10)	$	0	$	26

(1)Remaining weighted-average contract period is weighted based on projected gross claims over the lives of the respective policies.

Surveillance Categories as of December 31, 2018
I IA II III IV V Total
Number of policies 21
28
18
16
145
3
231
Remaining weighted-average contract period (in years) ⁽¹⁾
9
19
9
22
14
3
16
Gross insured contractual payments outstanding:
Principal $ 916,530
$ 708,249
$ 622,820
$ 1,705,464
$ 5,407,202
$ 43,140
$ 9,403,405
Interest 487,702
631,708
293,293
6,979,130
2,177,539
13,401
10,582,773
Total $ 1,404,232
$ 1,339,957
$ 916,113
$ 8,684,594
$ 7,584,741
$ 56,541
$ 19,986,178
Gross undiscounted claim liability $ 4,019
$ 63,712
$ 36,000
$ 992,019
$ 2,295,968
$ 56,510
$ 3,448,228
Discount, gross claim liability (481 ) (13,008 ) (3,069 ) (433,709 ) (637,548 ) (4,143 ) (1,091,958 )
Gross claim liability before all subrogation and before reinsurance 3,538
50,704
32,931
558,310
1,658,420
52,367
2,356,270
Less:
Gross RMBS subrogation ⁽²⁾
—
—
—
—
(1,809,937 ) —
(1,809,937 )
Discount, RMBS subrogation —
—
—
—
39,391
—
39,391
Discounted RMBS subrogation, before reinsurance —
—
—
—
(1,770,546 ) —
(1,770,546 )
Less:
Gross other subrogation ⁽³⁾
—
(10,816 ) —
(136,541 ) (624,654 ) (12,880 ) (784,891 )
Discount, other subrogation —
7,318
—
67,008
55,088
3,774
133,188
Discounted other subrogation, before reinsurance —
(3,498 ) —
(69,533 ) (569,566 ) (9,106 ) (651,703 )
Gross claim liability, net of all subrogation and discounts, before reinsurance 3,538
47,206
32,931
488,777
(681,692 ) 43,261
(65,979 )
Less: Unearned premium revenue (943 ) (10,073 ) (5,085 ) (36,365 ) (53,987 ) (209 ) (106,662 )
Plus: Loss expense reserves 1,369
4,253
2,564
(5,926 ) 63,499
—
65,759
Gross loss and loss expense reserves $ 3,964
$ 41,386
$ 30,410
$ 446,486
$ (672,180 ) $ 43,052
$ (106,882 )
Reinsurance recoverable reported on Balance Sheet⁽⁴⁾
$ 367
$ 7,285
$ 4,223
$ 26,096
$ (14,838 ) $ —
$ 23,133
(2)RMBS subrogation represents Ambac’s estimate of subrogation recoveries from RMBS transaction sponsors for R&W breaches.


~~(1)~~	~~Remaining weighted-average contract period is weighted based on projected gross claims over the lives of the respective policies.~~


~~(2)~~	~~RMBS subrogation represents Ambac’s estimate of subrogation recoveries from RMBS transaction sponsors for R&W breaches.~~

~~(3)~~

(3)Other subrogation represents subrogation related to excess spread and other contractual cash flows on public finance and structured finance transactions, including RMBS.

(4)Reinsurance recoverable reported on Balance Sheet includes reinsurance recoverables of $26 related to future loss and loss expenses and $0 related ~~to excess spread and other contractual cash flows on public finance and structured finance transactions, including RMBS.~~


~~(4)~~	~~Reinsurance recoverable reported on Balance Sheet includes reinsurance recoverables of $22,623 related to future loss and loss expenses and $510 related~~

to presented loss and loss expenses and subrogation.

COVID-19:

As a result of the COVID-19 related economic impact on issuers and markets where Ambac provides financial guarantees, including lower tax, project, and business revenues, and increases in forbearances or delinquencies on mortgage and student loan payments, we have increased our loss reserves. The duration and depth of the recession; actions such as monetary policy and fiscal stimulus, including the CARES Act in the US that was signed into law on March 27, 2020; future fiscal stimulus programs; and our insured obligors' financial flexibility and ability to mitigate the operational and economic impact of the recession will determine the ultimate impact to Ambac's insured portfolio. Accordingly, our loss reserves may be under-estimated as a result of the ultimate scope, duration and magnitude of the effects of COVID-19.

Puerto Rico:

Ambac has exposure to the Commonwealth of Puerto Rico (the "Commonwealth") and its instrumentalities across several different issuing entities with total net par exposure of ~~$1,123,000.~~$1,070. Components of Puerto Rico net par outstanding include capital appreciation bonds, which 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. Each issuing entity has its own credit risk profile attributable to discrete revenue sources, direct general obligation pledges or general obligation guarantees. The Commonwealth of Puerto Rico and certain of its instrumentalities have defaulted and ~~may~~are expected to continue to default on debt service payments, including payments owed on bonds insured by Ambac Assurance. Ambac Assurance may 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 a material increase in permanent losses causing a material

adverse impact on our results of

| Ambac Financial Group, Inc. 202020 Third Quarter FORM 10-Q |

Table of Contents

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

operations and financial condition. Our exposure to Puerto Rico is impacted by the Commonwealth's willingness to make debt service payments as well as the amount of monies available for debt service, which is in turn affected by a number of factors including demographic trends, economic ~~growth,~~conditions (including the impact from the COVID-19 pandemic), tax policy and revenues, impact of reforms, fiscal plans, government actions, political instability, budgetary performance and flexibility, weather and seismic events, litigation outcomes, as well as federal funding of Commonwealth needs. In the near term, the financial and economic outlook for Puerto Rico is dependent upon a still fragile infrastructure in the wake of hurricanes and earthquakes, heightening its vulnerability to additional ~~weather events.~~natural disasters. The longer term recovery of the Commonwealth economy and its essential infrastructure will likely be dependent on, among other factors, the management, usage and efficacy of federal resources.

Also important to Puerto Rico's economic growth, government reform and creditor outcomes is the revised Fiscal Plan for the Commonwealth of Puerto Rico, certified by the Financial Oversight and Management Board for Puerto Rico ("Oversight Board") on

~~| Ambac Financial Group, Inc.~~ 20~~2019 Third Quarter FORM 10-Q~~ |

~~Table of Contents~~

~~AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES~~

~~Notes to Unaudited Consolidated Financial Statements~~

~~(Dollar Amounts in Thousands, Except Share Amounts)~~

May 9, 2019. The Commonwealth Fiscal Plan outlines a series of reforms, projects the fiscal and economic impact of those reforms, and provides forecasts of resulting budgetary surpluses over a fiscal year series. However, as was the case with prior Commonwealth Fiscal Plans, the Commonwealth Fiscal Plan certified on May 9, 2019 lacks a high degree of transparency regarding the underlying data, assumptions and rationales supporting those assumptions, making reconciliation and due diligence difficult. As a result, itIt is difficult to predict the long-term capacity and willingness of the Puerto Rico government and its instrumentalities to pay debt service on bonded debt and how their debt burden and financial flexibility might affect Ambac Assurance's claim potential, risk profile and long-term financial strength.

Substantial uncertainty exists with respect to the ultimate outcome for creditors in Puerto Rico, such as Ambac Assurance, due to, amongst other matters, legislation enacted by the Commonwealth and the federal government, including ~~PROMESA,~~PROMESA; actions taken pursuant to such laws, including the Title III ~~filings,~~filings; the economic consequences of the COVID-19 pandemic; as well as political uncertainty and leadership turnover. Ambac Assurance is involved in multiple litigations relating to ~~such~~ actions taken by the Commonwealth or the Financial Oversight and Management Board for Puerto Rico (the “Oversight Board”) pursuant to certain enacted legislation, court rulings and other issues and may not be successful in pursuing claims or protecting its interests. As a result of litigation or other aspects of the restructuring processes, the differences among the credits insured by Ambac Assurance may not be respected.

Ambac Assurance has participated and may continue to participate in mediation related to potential debt restructurings. Mediation may not be productive or may not resolve Ambac Assurance's claims in a manner that avoids significant losses. No assurances can be given that negotiations will be successfully concluded, that the Commonwealth, Oversight Board and creditor parties will reach definitive agreements on additional debt restructurings, that any additional negotiated transaction debt restructuring, definitive agreement or Plans of Adjustment will be approved by the Title III court and completed, or that any transaction or ~~Plans~~Plan of Adjustment will not have ana material adverse impact on Ambac's financial condition or ~~results.~~results of operations. It is possible that certain restructuring process solutions, together with associated legislation, budgetary, and/or public policy proposals could be adopted and could further impair our exposures, causing losses that could have a material adverse impact on our results of operations and financial condition.

While our reserving scenarios account for a wide range of possible outcomes, reflecting the significant uncertainty regarding future developments and outcomes, given our exposure to Puerto

Rico and the economic, fiscal, legal and political uncertainties associated therewith as well as the uncertainties emanating from the COVID-19 pandemic and the damage caused by ~~hurricanes Maria and Irma,~~natural disasters on the island, our loss reserves may ultimately prove to be insufficient to cover our losses, potentially having a material adverse effect on our results of operations and financial ~~position, and may be subject to material volatility.~~position.

Ambac has considered these developments and other factors in evaluating its Puerto Rico loss reserves. During the three and nine months ended September 30, ~~2019,~~2020, Ambac had incurred losses associated with its Domestic Public Finance insured portfolio of ~~$196,599,~~$43 and $263, respectively, which ~~was~~were primarily ~~impacted~~driven by strengthening of reserves related to the continued uncertainty and volatility of the situation in Puerto ~~Rico.~~Rico and, for the nine months ended September 30, 2020, lower discount rates. While management believes its reserves are adequate to cover losses in its Public Finance

insured portfolio, there can be no assurance that Ambac may not incur additional losses in the future, given the circumstances described herein. Such additional losses may have a material adverse effect on Ambac’s results of operations and financial condition and may result in adverse consequences such as impairing the ability of Ambac Assurance to honor its financial obligations; the initiation of rehabilitation proceedings against Ambac Assurance; decreased likelihood of Ambac Assurance delivering value to Ambac, through dividends or otherwise; and a significant drop in the value of securities issued or insured by Ambac or Ambac Assurance. For public finance credits, including Puerto Rico, ~~as well as other issuers,~~ for which Ambac has an estimate of expected loss at September 30, ~~2019,~~2020, the possible increase in loss reserves under stress or other adverse conditions and circumstances was estimated to be approximately ~~$1,100,000.~~$1,200. This possible increase in loss reserves under stress or other adverse conditions is significant and if we were to experience such incremental losses, our stockholders’ equity as of September 30, ~~2019~~2020, would decrease from ~~$1,628,664~~$1,095 to ~~$528,664. However, there~~$(105). There can be no assurance that losses may not exceed such amount.

~~COFINA Debt Restructuring~~

On January 16-17, 2019, the hearings for the confirmation of the COFINA Plan of Adjustment ("POA") and the Commonwealth 9019 motion were held. On February 4, 2019, the COFINA POA was confirmed and the Commonwealth 9019 motion was approved by the U.S. District Court for the District of Puerto Rico. On February 12, 2019, the COFINA POA went effective. Pursuant to the POA, all existing COFINA senior and subordinate bonds were discharged and exchanged for cash and new COFINA current interest and capital appreciation bonds ("new COFINA bonds"). The cash and new COFINA bonds allocated to COFINA senior bondholders equaled approximately 93% (considering the new COFINA bonds at par) of such senior bondholders’ allowed claim, in the amount of the COFINA senior bond accreted value, as of, but not including, May 5, 2017 (the COFINA Title III Petition Date).

As a result of the POA, and subsequent commutations, amendments, and redemptions of obligations of the COFINA Class 2 Trust, Ambac Assurance's net par outstanding was reduced to $101,584 as of September 30, 2019. Ambac Assurance's remaining policy obligation of $101,584 net par is an asset of the COFINA Class 2 Trust, which holds a ratable distribution of new COFINA bonds, the interest and principal from which can be used to partially offset Ambac’s remaining insurance liability. As further discussed in ~~Note 3. Variable Interest Entities, Ambac Assurance consolidates the COFINA Class 2 Trust.~~

~~At this time, it is unclear what impact the COFINA restructuring will have on the prospective recoveries of Ambac Assurance's other insured Puerto Rico instrumentalities.~~

Representation and Warranty Recoveries:

Ambac records estimated subrogation recoveries for breaches of R~~&Ws~~&W's by sponsors of certain RMBS transactions. For a discussion of the approach utilized to estimate R&W subrogation recoveries, see Note 2. Basis of Presentation and Significant Accounting Policies in the Notes to Consolidated Financial Statements included Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019.

~~| Ambac Financial Group, Inc.~~ 21~~2019 Third Quarter FORM 10-Q~~ |

~~Table of Contents~~

~~AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES~~

~~Notes to Unaudited Consolidated Financial Statements~~

~~(Dollar Amounts in Thousands, Except Share Amounts)~~

Ambac has recorded R&W subrogation recoveries of ~~$1,754,944~~$1,757 ($~~1,728,879~~1,731 net of reinsurance) and ~~$1,770,546~~$1,727 ($~~1,744,243~~1,702 net of reinsurance) at September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively. R&W recovery proceeds up to the first ~~$1,400,000~~$1,400 and above ~~$1,600,000~~$1,600 have been pledged as security on certain of Ambac's long-term debt obligations as described further in Note 1. Background and Business Description in the Notes to Consolidated Financial Statements included Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019.

| Ambac Financial Group, Inc. 212020 Third Quarter FORM 10-Q |

Table of Contents

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Below is the rollforward of R&W subrogation for the affected periods:


	Nine Months Ended September 30,
	2020		2019
Discounted R&W subrogation (gross of reinsurance) at beginning of period	$	1,727	$	1,771





All other changes (1)	30		(16)
Discounted R&W subrogation (gross of reinsurance) at end of period	$	1,757	$	1,755

Nine Months Ended September 30,
2019 2018
Discounted R&W subrogation (gross of reinsurance) at beginning of period $ 1,770,546
$ 1,834,387
Changes recognized during the period:
Impact of sponsor actions ⁽¹⁾
—
—
All other changes ⁽²⁾
(15,602 ) (58,139 )
Discounted R&W subrogation (gross of reinsurance) at end of period $ 1,754,944
$ 1,776,248
(1)All other changes which may impact RMBS R&W subrogation recoveries include changes in actual or projected collateral performance, changes in the creditworthiness of a sponsor and/or the projected timing of recoveries.


~~(1)~~	~~Sponsor actions include loan repurchases, direct payments to Ambac and other contributions from sponsors.~~


~~(2)~~	All other changes which may impact RMBS R&W subrogation recoveries include changes in actual or projected collateral performance, changes in the creditworthiness of a sponsor and/or the projected timing of recoveries.

Our ability to realize R&W subrogation recoveries is subject to significant uncertainty, including risks inherent in ~~litigation,~~litigation; collectability of such amounts from counterparties (and/or their respective parents and affiliates),; timing of receipt of any such ~~recoveries,~~recoveries; intervention by OCI, which could impede our ability to take actions required to realize such ~~recoveries,~~recoveries; and uncertainty inherent in the assumptions used in estimating such recoveries. Failure to realize R&W subrogation recoveries for any reason or the realization of R&W subrogation recoveries materially below the amount recorded on Ambac's consolidated balance sheet would have

a material adverse effect on our results of operations and financial ~~condition and~~condition. If we were unable to realize R&W subrogation recoveries recorded on Ambac's consolidated balance sheet, our stockholders’ equity as of September 30, 2020, would decrease from $1,095 to $(636). Additionally, failure to realize R&W subrogation recoveries may result in adverse consequences such as impairing the ability of Ambac Assurance to honor its financial obligations; the initiation of rehabilitation proceedings against Ambac Assurance; decreased likelihood of Ambac Assurance delivering value to Ambac, through dividends or otherwise; and a significant drop in the value of securities issued or insured by Ambac or Ambac Assurance.

Insurance intangible asset:

The insurance intangible amortization expense is included in ~~insurance intangible amortization on~~ the Consolidated Statements of Total Comprehensive Income (Loss). For the three and nine months ended September 30, 2019, the insurance intangible amortization expense was $17,421 and $279,941, respectively, and for the three and nine months ended September 30, 2018, the insurance intangible amortization expense was $26,421 and $78,299, respectively. As of September 30, 2019 and December 31, 2018, the gross carrying value of the, as shown below.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Insurance amortization expense	$	14	$	17	$	41	$	280

The insurance intangible asset ~~was $1,258,362~~ and ~~$1,551,576, respectively. Accumulated~~accumulated amortization ofare included in the ~~insurance intangible asset was $824,838 and $832,645,~~Consolidated Balance Sheets, as ~~of September 30, 2019 and December 31, 2018, respectively, resulting in a net insurance intangible asset of $433,524 and $718,931, respectively.~~shown below.


	September 30, 2020		December 31, 2019
Gross carrying value of insurance intangible asset	$	1,268	$	1,273
Accumulated amortization of insurance intangible asset	885		847
Net insurance intangible asset	$	383	$	427

The estimated future amortization expense for the net insurance intangible asset is as follows:


Amortization expense (1) (2)
2020 (three months)	$	11
2021	39
2022	35
2023	32
2024	29
Thereafter	239

(1)The insurance intangible asset will be amortized using a level-yield method based on par exposure of the related financial guarantee insurance or reinsurance contracts. Future amortization considers the use of contractual lives for many bond types which do not have homogeneous pools of underlying collateral. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay certain obligations. If those bonds types are retired early, amortization expense may differ in the period of call or refinancing.

(2)The weighted-average amortizations period is 7.6 years.

Amortization expense ⁽¹⁾

2019 (three months) $ 11,918
2020 44,390
2021 39,019
2022 35,425
2023 32,266
Thereafter 270,506


~~(1)~~	Future amortization considers the use of contractual lives for many bond types which do not have homogeneous pools of underlying collateral. Actual maturities will differ from contractual maturities because ~~borrowers may have the right to call or prepay certain obligations. If those bonds types are retired early, amortization expense may differ in the period of call or refinancing.~~

| Ambac Financial Group, Inc. 22 ~~2019~~2020 Third Quarter FORM 10-Q|

Table of Contents

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Dollar Amounts in ~~Thousands,~~Millions, Except Share Amounts)

7. FAIR VALUE MEASUREMENTS

The Fair Value Measurement Topic of the ASC establishes a framework for measuring fair value and disclosures about fair value measurements.

Fair Value Hierarchy:

The Fair Value Measurement Topic of the ASC specifies a fair value hierarchy based on whether the inputs to valuation techniques used to measure fair value are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect Company-based assumptions. The fair value hierarchy prioritizes model inputs into three broad levels as follows:



l	Level 1	Quoted prices for identical instruments in active markets. Assets and liabilities classified as Level 1 include US Treasury and other foreign government obligations traded in highly liquid and transparent markets, certain highly liquid pooled fund investments, exchange traded futures contracts, variable rate demand obligations and money market funds.

l	Level 2	Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Assets and liabilities classified as Level 2 generally include investments in fixed income securities representing municipal, asset-backed and corporate obligations, certain interest rate swap contracts and most long-term debt of variable interest entities consolidated under the Consolidation Topic of the ASC.

l	Level 3	Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. This hierarchy requires the use of observable market data when available. Assets and liabilities classified as Level 3 include credit derivative contracts, certain uncollateralized interest rate swap contracts, equity interests in Ambac sponsored special purpose entities and certain investments in fixed income securities. Additionally, Level 3 assets and liabilities generally include loan receivables, and certain long-term debt of variable interest entities consolidated under the Consolidation Topic of the ASC.

The Fair Value Measurement Topic of the ASC permits, as a practical expedient, the estimation of fair value of certain investments in funds using the net asset value per share of the investment or its equivalent (“NAV”). Investments in funds valued using NAV are not categorized as Level 1, 2 or 3 under the fair value hierarchy. The following table sets forth the carrying amount and fair value of Ambac’s financial assets and liabilities as of September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, including the level within the fair value hierarchy at which fair value measurements are categorized. As required by the Fair Value Measurement Topic of the ASC, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

| Ambac Financial Group, Inc. 23 ~~2019~~2020 Third Quarter FORM 10-Q|

Table of Contents

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Dollar Amounts in ~~Thousands,~~Millions, Except Share Amounts)


	Carrying Amount		Total Fair Value		Fair Value Measurements Categorized as:
September 30, 2020:					Level 1		Level 2		Level 3
Financial assets:
Fixed income securities:
Municipal obligations	$	351	$	351	$	0	$	351	$	0
Corporate obligations	1,091		1,091		2		1,089		0
Foreign obligations	77		77		77		0		0
U.S. government obligations	122		122		122		0		0

Residential mortgage-backed securities	296		296		0		296		0

Collateralized debt obligations	73		73		0		73		0
Other asset-backed securities	300		300		0		225		75
Fixed income securities, pledged as collateral:

Short-term	152		152		152		0		0
Short term investments	586		586		509		77		0
Other investments (1)	502		488		62		0		35
Cash, cash equivalents and restricted cash	48		48		39		9		0
Derivative assets:

Interest rate swaps—asset position	95		95		0		9		86


Other assets - equity in sponsored VIE	2		2		0		0		2
Other assets-Loans	3		3		0		0		3
Variable interest entity assets:

Fixed income securities: Corporate obligations	3,029		3,029		0		0		3,029
Fixed income securities: Municipal obligations	131		131		0		131		0
Restricted cash	2		2		2		0		0
Loans	2,783		2,783		0		0		2,783

Derivative assets: Currency swaps-asset position	53		53		0		53		0
Total financial assets	$	9,696	$	9,682	$	965	$	2,312	$	6,013
Financial liabilities:

Long term debt, including accrued interest	$	3,236	$	3,056	$	0	$	2,679	$	377
Derivative liabilities:
Credit derivatives	1		1		0		0		1

Interest rate swaps—liability position	125		125		0		125		0


Liabilities for net financial guarantees written (2)	(744)		436		0		0		436
Variable interest entity liabilities:
Long-term debt (includes $4,002 at fair value)	4,169		4,179		0		4,026		153

Derivative liabilities: Interest rate swaps—liability position	1,771		1,771		0		1,771		0

Total financial liabilities	$	8,558	$	9,569	$	0	$	8,601	$	968

Carrying
Amount Total Fair
Value Fair Value Measurements Categorized as:
September 30, 2019: Level 1 Level 2 Level 3
Financial assets:
Fixed income securities:
Municipal obligations $ 305,128
$ 305,128
$ —
$ 305,128
$ —
Corporate obligations 1,469,250
1,469,250
800
1,468,450
—
Foreign obligations 42,488
42,488
42,488
—
—
U.S. government obligations 156,060
156,060
156,060
—
—
Residential mortgage-backed securities 257,340
257,340
—
257,340
—
Collateralized debt obligations 147,835
147,835
—
147,835
—
Other asset-backed securities 349,204
349,204
—
269,783
79,421
Fixed income securities, pledged as collateral:
U.S. government obligations 84,948
84,948
84,948
—
—
Short term investments 664,441
664,441
603,435
61,006
—
Other investments ⁽¹⁾
462,427
435,820
130,393
—
17,680
Cash, cash equivalents and restricted cash 64,512
64,512
30,596
33,916
—
Derivative assets:
Interest rate swaps—asset position 81,769
81,769
—
8,617
73,152
Futures contracts 393
393
393
—
—
Other assets - equity in sponsored VIE 3,388
3,388
—
—
3,388
Other assets-Loans 9,770
13,032
—
—
13,032
Variable interest entity assets:
Fixed income securities: Corporate obligations 2,995,894
2,995,894
—
—
2,995,894
Fixed income securities: Municipal obligations 162,714
162,714
—
162,714
—
Restricted cash 3,168
3,168
3,168
—
—
Loans 2,965,539
2,965,539
—
—
2,965,539
Derivative assets: Currency swaps-asset position 67,921
67,921
—
67,921
—
Total financial assets $ 10,294,189
$ 10,270,844
$ 1,052,281
$ 2,782,710
$ 6,148,106
Financial liabilities:
Long term debt, including accrued interest $ 3,378,744
$ 3,364,780
$ —
$ 2,965,844
$ 398,936
Derivative liabilities:
Credit derivatives 422
422
—
—
422
Interest rate swaps—asset position (68 ) (68 ) —
(68 ) —
Interest rate swaps—liability position 102,960
102,960
—
102,960
—
Liabilities for net financial guarantees
written ⁽²⁾
(932,517 ) 179,352
—
—
179,352
Variable interest entity liabilities:
Long-term debt (includes $4,151,433 at fair value) 4,353,171
4,366,312
—
4,208,107
158,205
Derivative liabilities: Interest rate swaps—liability position 1,779,077
1,779,077
—
1,779,077
—
Total financial liabilities $ 8,681,789
$ 9,792,835
$ —
$ 9,055,920
$ 736,915

| Ambac Financial Group, Inc. 24 ~~2019~~2020 Third Quarter FORM 10-Q|

Table of Contents

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Dollar Amounts in ~~Thousands,~~Millions, Except Share Amounts)


	Carrying Amount		Total Fair Value		Fair Value Measurements Categorized as:
December 31, 2019:					Level 1		Level 2		Level 3
Financial assets:
Fixed income securities:
Municipal obligations	$	215	$	215	$	0	$	215	$	0
Corporate obligations	1,430		1,430		0		1,430		0
Foreign obligations	44		44		44		0		0
U.S. government obligations	156		156		156		0		0

Residential mortgage-backed securities	248		248		0		248		0
Commercial mortgage-backed securities	50		50		0		50		0
Collateralized debt obligations	146		146		0		146		0
Other asset-backed securities	287		287		0		215		72
Fixed income securities, pledged as collateral:

Short-term	85		85		85		0		0
Short term investments	653		653		598		55		0
Other investments (1)	478		493		136		0		61
Cash and cash equivalents and restricted cash	79		79		70		9		0
Derivative assets:

Interest rate swaps—asset position	75		75		0		8		67


Other assets - equity in sponsored VIE	3		3		0		0		3
Other assets-loans	10		13		0		0		13
Variable interest entity assets:

Fixed income securities: Corporate obligations	2,957		2,957		0		0		2,957
Fixed income securities: Municipal obligations	164		164		0		164		0
Restricted cash	2		2		2		0		0
Loans	3,108		3,108		0		0		3,108

Derivative assets: Currency swaps—asset position	52		52		0		52		0
Total financial assets	$	10,242	$	10,260	$	1,091	$	2,593	$	6,281
Financial liabilities:
Long term debt, including accrued interest	$	3,262	$	3,274	$	0	$	2,829	$	445
Derivative liabilities:


Interest rate swaps—liability position	89		89		0		89		0


Liabilities for net financial guarantees written (2)	(863)		284		0		0		284
Variable interest entity liabilities:
Long-term debt (includes $4,351 at fair value)	4,554		4,567		0		4,408		159

Derivative liabilities: Interest rate swaps—liability position	1,657		1,657		0		1,657		0

Total financial liabilities	$	8,699	$	9,872	$	0	$	8,983	$	889

(1)Excluded from the fair value measurement categories in the table above are investment funds of $391 and $296 as of September 30, 2020 and December 31, 2019, respectively, which are measured using NAV as a practical expedient.

(2)The carrying value of net financial guarantees written includes the following balance sheet items: Premium receivables; Reinsurance recoverable on paid and unpaid losses; Deferred ceded premium; Subrogation recoverable; Insurance intangible asset; Unearned premiums; Loss and loss expense reserves; Ceded premiums payable, premiums taxes payable and other deferred fees recorded in Other liabilities.

Carrying
Amount Total Fair
Value Fair Value Measurements Categorized as:
December 31, 2018: Level 1 Level 2 Level 3
Financial assets:
Fixed income securities:
Municipal obligations $ 879,919
$ 879,919
$ —
$ 879,919
$ —
Corporate obligations 1,278,122
1,278,122
—
1,278,122
—
Foreign obligations 30,834
30,834
29,922
912
—
U.S. government obligations 94,394
94,394
94,394
—
—
Residential mortgage-backed securities 258,607
258,607
—
258,607
—
Collateralized debt obligations 131,356
131,356
—
131,356
—
Other asset-backed securities 442,443
442,443
—
370,372
72,071
Short term investments 430,331
430,331
304,880
125,451
—
Other investments ⁽¹⁾
391,217
367,315
71,108
—
16,266
Cash and cash equivalents and restricted cash 82,494
82,494
52,661
29,833
—
Derivative assets:
Interest rate swaps—asset position 59,468
59,468
—
12,008
47,460
Other assets - equity in sponsored VIE 4,516
4,516
—
—
4,516
Other assets-loans 9,913
11,620
—
—
11,620
Variable interest entity assets:
Fixed income securities: Corporate obligations 2,737,286
2,737,286
—
—
2,737,286
Restricted cash 999
999
999
—
—
Loans 4,287,664
4,287,664
—
—
4,287,664
Derivative assets: Currency swaps—asset position 66,302
66,302
—
66,302
—
Total financial assets $ 11,185,865
$ 11,163,670
$ 553,964
$ 3,152,882
$ 7,176,883
Financial liabilities:
Long term debt, including accrued interest $ 3,304,737
$ 3,259,966
$ —
$ 2,909,272
$ 350,694
Derivative liabilities:
Credit derivatives 1,459
1,459
—
—
1,459
Interest rate swaps—liability position 71,861
71,861
—
71,861
—
Futures contracts 3,379
3,379
3,379
—

Liabilities for net financial guarantees written ⁽²⁾
(718,388 ) 558,824
—
—
558,824
Variable interest entity liabilities:
Long-term debt 5,268,596
5,268,596
—
5,051,504
217,092
Derivative liabilities: Interest rate swaps—liability position 1,712,062
1,712,062
—
1,712,062
—
Total financial liabilities $ 9,643,706
$ 10,876,147
$ 3,379
$ 9,744,699
$ 1,128,069

| Ambac Financial Group, Inc. 252020 Third Quarter FORM 10-Q |


~~(1)~~	Excluded from the fair value measurement categories in the table above are investment funds of $287,748 and $279,941 as of September 30, 2019 and December 31, 2018, respectively, which are measured using NAV as a practical expedient.

~~(2)~~

The carrying value of net financial guarantees written includes the following balance sheet items: Premium receivables; Reinsurance recoverable on paid and unpaid losses; Deferred ceded premium; Subrogation recoverable; Insurance intangible asset; Unearned premiums; Loss and loss expense reserves; Ceded premiums payable, premiums taxes payable and other deferred fees recorded in Other liabilities.

Table of Contents

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Determination of Fair Value:

When available, Ambac uses quoted active market prices specific to the financial instrument to determine fair value, and classifies such items within Level 1. The determination of fair value for financial instruments categorized in Level 2 or 3 involves judgment due to the complexity of factors contributing to the valuation. Third-party sources from which we obtain independent market quotes also use assumptions, judgments and estimates in determining financial instrument values and different third parties may use different methodologies or provide different values for financial instruments. In addition, the use of internal valuation models may require

assumptions about hypothetical or inactive markets. As a result of these factors, the actual trade value of a financial instrument in the market, or exit value of a financial instrument position by Ambac, may be significantly different from its recorded fair value.

Ambac’s financial instruments carried at fair value are mainly comprised of investments in fixed income securities, equity interests in pooled investment funds, derivative instruments, certain variable interest entity assets and liabilities and interests in Ambac sponsored special purpose entities. Valuation of financial instruments is performed by Ambac’s finance group using methods approved by senior financial management with consultation from risk

~~| Ambac Financial Group, Inc.~~ 25~~2019 Third Quarter FORM 10-Q~~ |

~~Table of Contents~~

~~AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES~~

~~Notes to Unaudited Consolidated Financial Statements~~

~~(Dollar Amounts in Thousands, Except Share Amounts)~~

management and portfolio managers as appropriate. Preliminary valuation results are discussed with portfolio managers quarterly to assess consistency with market transactions and trends as applicable. Market transactions such as trades or negotiated settlements of similar positions, if any, are reviewed to validate fair value model results. However, many of the financial instruments valued using significant unobservable inputs have very little or no observable market activity. Methods and significant inputs and assumptions used to determine fair values across portfolios are reviewed quarterly by senior financial management. Other valuation control procedures specific to particular portfolios are described further below.

We reflect Ambac’s own creditworthiness in the fair value of financial liabilities by including a credit valuation adjustment (“CVA”) in the determination of fair value. A decline (increase) in Ambac’s creditworthiness as perceived by market participants will generally result in a higher (lower) CVA, thereby lowering (increasing) the fair value of Ambac’s financial liabilities as reported.

Fixed Income Securities:

The fair values of fixed income investment securities are based primarily on market prices received from broker quotes or alternative pricing sources. Because many fixed income securities do not trade on a daily basis, pricing sources apply available market information through processes such as matrix pricing to calculate fair value. Such prices generally consider a variety of factors, including recent trades of the same and similar securities. In those cases, the items are classified within Level 2. For those fixed income investments where quotes were not available or cannot be reasonably corroborated, fair values are based on internal valuation models. Key inputs to the internal valuation models generally include maturity date, coupon and yield curves for asset-type and credit rating characteristics that closely match those characteristics of the specific investment securities being valued. Items valued using valuation models are classified according to the lowest level input or value driver that is significant to the valuation. Thus, an item may be classified in Level 3 even though there may be significant inputs that are readily observable. Longer (shorter) expected maturities or higher (lower) yields used in the valuation model will, in isolation, result in decreases (increases) in fair value. Generally, lower credit ratings or longer expected maturities will be

accompanied by higher yields used to value a security. At September 30, ~~2019,~~2020, approximately 4%, 94% and 2% of the fixed income investment portfolio (excluding variable interest entity investments) was valued using broker quotes, alternative pricing sources and internal valuation models, respectively. At December 31, ~~2018,~~2019, approximately 8%4%, ~~90%~~94% and 2% of the fixed income investment portfolio (excluding variable interest entity investments) was valued using broker quotes, alternative pricing sources and internal valuation models, respectively.

Ambac performs various review and validation procedures to quoted and modeled prices for fixed income securities, including price variance analyses, missing and static price reviews, overall valuation analysis by portfolio managers and finance managers and reviews associated with our ongoing impairment analysis. Unusual prices identified through these procedures will be evaluated further against alternative third party quotes (if available), internally modeled prices and/or ~~internally~~

~~modeled prices,~~other relevant data, and the pricing source values will be challenged as necessary. Price challenges generally result in the use of the pricing source’s quote as originally provided or as revised by the source following their internal diligence process. A price challenge may result in a determination by either the pricing source or Ambac management that the pricing source cannot provide a reasonable value for a security or cannot adequately support a quote, in which case Ambac would resort to using either other quotes or internal models. Results of price challenges are reviewed by portfolio managers and finance managers.

Information about the valuation inputs for fixed income securities classified as Level 3 is included below:

Other asset-backed securities: ~~These securities are~~This security is a subordinated tranche of a ~~resecuritization~~re-securitization collateralized by Ambac-insured military housing bonds. The fair value ~~of such securities~~ classified as Level 3 was ~~$79,421~~$75 and ~~$72,071~~$72 at September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively. Fair value was calculated using a discounted cash flow approach with expected future cash flows discounted using a yield consistent with the security type and rating. Significant inputs for the valuation at September 30, ~~2019~~2020 and December 31, ~~2018~~2019 include the ~~following weighted averages:~~following:


September 30, 2020:
a. Coupon rate:		5.98%
b. Average Life:		15.01 years
c. Yield:		11.00%

~~September 30,~~December 31, 2019:
a. Coupon rate:		~~5.98%~~5.97%
b. Average Life:		~~15.76~~15.58 years
c. Yield:		~~10.50%~~

~~December 31, 2018:~~
~~a. Coupon rate:~~	~~5.97%~~
~~b. Maturity:~~	~~16.29 years~~
~~c. Yield:~~	~~12.00%~~11.75%

Other Investments:

Other investments primarily relate to investments in pooled investment funds. The fair value of pooled investment funds is determined using dealer quotes or alternative pricing sources when such investments have readily determinable fair values. When fair value is not readily determinable, pooled investment

| Ambac Financial Group, Inc. 262020 Third Quarter FORM 10-Q |

Table of Contents

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

funds are valued using NAV as a practical expedient as permitted under the Fair Value Measurement Topic of the ASC. Refer to Note 8. Investments for additional information about such investments in pooled funds that are reported at fair value using NAV as a practical expedient.

Other investments also includes Ambac's equity interest in a non-consolidated VIE created in connection with Ambac's monetization of Ambac Assurance junior surplus notes. This equity interest is carried under the equity method. Fair value for the non-consolidated VIE equity interest is internally calculated using a ~~discounted cash flow~~market approach and is classified as Level 3.

Derivative Instruments:

Ambac’s derivative instruments primarily comprise interest rate swaps, credit default swaps and exchange traded futures contracts. Fair value is determined based upon market quotes from

~~| Ambac Financial Group, Inc.~~ 26~~2019 Third Quarter FORM 10-Q~~ |

~~Table of Contents~~

~~AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES~~

~~Notes to Unaudited Consolidated Financial Statements~~

~~(Dollar Amounts in Thousands, Except Share Amounts)~~

independent sources, when available. When independent quotes are not available, fair value is determined using valuation models. These valuation models require market-driven inputs, including contractual terms, credit spreads and ratings on underlying referenced obligations, yield curves and tax-exempt interest ratios. The valuation of certain ~~interest rate as well as all credit~~ derivative contracts also require the use of data inputs and assumptions that are determined by management and are not readily observable in the market. Under the Fair Value Measurement Topic of the ASC, Ambac is required to consider its own credit risk when measuring the fair value of derivatives and other liabilities. Factors considered in estimating the amount of any Ambac ~~CVA~~credit valuation adjustment ("CVA") on such contracts include collateral posting provisions, right of set-off with the counterparty, the period of time remaining on the derivative and the pricing of recent terminations. The fair value of credit derivative liabilities was reduced by ~~$35 and $138~~less than a million dollars at September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively, as a result of incorporating an Ambac CVA into the valuation model for these contracts. Interest rate swap liabilities are collateralized and are not adjusted with an Ambac CVA at September 30, ~~2019~~2020 and December 31, ~~2018.~~2019.

Interest rate swaps that are not centrally cleared are valued using vendor-developed models that incorporate interest rates and yield curves that are observable and regularly quoted. These models provide the net present value of the derivatives based on contractual terms and observable market data. Generally, the need for counterparty (or Ambac) CVAs on interest rate derivatives is mitigated by the existence of collateral posting agreements under which adequate collateral has been posted. Certain of these derivative contracts entered into with financial guarantee customers are not subject to collateral posting agreements. Counterparty credit risk related to such customer derivative assets is included in our determination of their fair value.

Ambac's ~~remaining~~ credit derivatives ("CDS") are valued using an internal model that uses traditional financial guarantee CDS pricing to calculate the fair value of the derivative contract based on the reference obligation's current pricing, remaining life and credit rating and Ambac's own credit risk. The model calculates the difference between the present value of the projected fees receivable under the CDS and our estimate of the fees a financial guarantor of comparable credit quality would charge to provide the same protection at the balance sheet date. Unobservable

inputs used include Ambac's internal reference obligation credit ratings and expected life, estimates of fees that would be charged to assume the credit derivative obligation and Ambac's CVA. Ambac is party to only one remaining credit derivative with internal credit rating of AA at September 30, ~~2019.~~2020. Ambac has not made any significant changes to its modeling techniques or related model inputs for the periods presented.

Financial Guarantees:

Fair value of net financial guarantees written represents our estimate of the cost to Ambac to completely transfer its insurance obligation to another market participant of comparable credit worthiness. In theory, this amount should be the same amount that another market participant of comparable credit worthiness would hypothetically charge in the market place, on a present value basis, to provide the same protection as of the balance sheet date. This fair value estimate

of financial guarantees is presented on a net basis and includes direct and assumed contracts written, net of ceded reinsurance contracts.

The fair value estimate of financial guarantees is computed by utilizing cash flows calculated at the policy level. For direct and assumed reinsurance contracts, net cash flows for each policy includes future: (i) installment premium receipts, (ii) gross claim payments, and (iii) subrogation receipts. For ceded reinsurance contracts, net cash flows for each policy includes future: (i) installment ceded premium payments, (ii) ceding commission receipts, (iii) ceded claim receipts, and (iv) ceded subrogation payments. For each assumed or ceded reinsurance contract, the respective undiscounted cash flow components are aggregated to determine if we are in a net asset or net liability position. U.S. GAAP requires that the nonperformance risk of a financial liability be included in the estimation of fair value, which includes considering Ambac Assurance’s own credit risk. Accordingly, for each contract in a net liability position, we estimate the fair value using internally developed discount rates and market pricing that incorporate Ambac’s own credit risk and subsequently apply a profit margin. This profit margin represents what another market participant would require to assume the financial guarantee contracts. A profit margin was developed based on discussions with the third-party institutions with valuation expertise and discussions with industry participants. The discount rates used for contracts in a net liability position are derived from the rates implicit in the fair value of Ambac guaranteed securities with future cash flows that are highly dependent upon Ambac financial guarantee payments. For each contract in a net asset position, we estimate the fair value using a discount rate that is commensurate with a hypothetical buyer’s cost of capital.

This methodology is based on management’s expectations of how a market participant would estimate net cash flows. Since no financial guarantor with Ambac Assurance’s credit quality is writing or otherwise obtaining financial guarantee business (e.g. reinsurance or novation of policies from other insurers) we do not have access to observable pricing data points and therefore fair or exit value may differ, perhaps materially.

Long-term Debt:

Long-term debt includes Ambac Assurance surplus notes and junior surplus notes, the Ambac Note and Tier 2 Notes issued in connection with the Rehabilitation Exit Transactions and the Ambac UK debt issued in connection with the Ballantyne commutation. The fair values of surplus notes, the Ambac Note and Tier 2 Notes are classified as Level 2. The fair value of junior surplus notes and Ambac UK debt are classified as Level 3.

Other Financial Assets and Liabilities:

Included in Other assets are Loans and Ambac’s equity interest in an Ambac sponsored VIE established to provide certain financial guarantee clients with funding for their debt obligations. The fair values of these financial assets are estimated based upon internal valuation models and are classified as Level 3.

Variable Interest Entity Assets and Liabilities:

The financial assets and liabilities of FG VIEs consolidated under the Consolidation Topic of the ASC consist primarily of fixed income securities and loans held by the VIEs, derivative ~~and debt~~ instruments and notes issued by the VIEs which are ~~generally carried at fair value. These consolidated~~reported as long-term debt. As described in Note 3. Variable Interest Entities, these FG VIEs are securitization

~~| Ambac Financial Group, Inc.~~ 27~~2019 Third Quarter FORM 10-Q~~ |

~~Table of Contents~~

~~AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES~~

~~Notes to Unaudited Consolidated Financial Statements~~

~~(Dollar Amounts in Thousands, Except Share Amounts)~~

entities which have liabilities and/or assets guaranteed by Ambac Assurance or Ambac UK.

The fair values of FG VIE long-term debt ~~instruments~~ are ~~determined using the same methodologies used to value Ambac’s fixed income securities in its investment portfolio as described above. VIE debt fair value is~~ based on ~~market prices~~price quotes received from independent market ~~sources.~~sources when available. Such quotes are considered Level 2 and generally consider a variety of factors, including recent trades of the same and similar securities. For those ~~VIE debt~~ instruments where quotes were not available ~~the debt instrument~~or cannot be reasonably corroborated, fair values ~~are considered Level 3 and~~ are based on internal ~~discounted cash flow~~valuation models. Comparable to the sensitivities of investments in fixed income securities described above, longer (shorter) expected maturities or higher (lower) yields used in the valuation model will, in isolation, result in decreases (increases) in fair value liability measurement for FG VIE long-term debt. VIE debt instruments carried at fair value and considered Level 3 included fixed rate notes secured by various European ABS. Information about the valuation inputs for VIE debt carried at fair value and classified as Level 3 is as follows:

~~European ABS transactions:~~ The fair value of such obligations classified as Level 3 was $0 and $217,092 at September 30, 2019 and December 31, 2018, respectively. Fair values were calculated by using a discounted cash flow approach. The discount rates used were based on the rates implied from the third party quoted values for comparable notes from the same securitization entity. As a result of reductions to Ambac's control rights, this VIE was deconsolidated at September 30, 2019. Significant inputs for the valuation at December 31, 2018 include the following weighted averages:



~~December 31, 2018:~~
~~a. Coupon rate:~~	~~2.20%~~
~~b. Maturity:~~	~~18.93 years~~
~~c. Yield:~~	~~3.18%~~

FG VIE derivative asset and liability fair values are determined using vendor-developed valuation ~~models. When~~models, which incorporate

| Ambac Financial Group, Inc. 272020 Third Quarter FORM 10-Q |

Table of Contents

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

observable market data related to specific derivative contractual terms ~~are available and may be valued primarily by reference to~~including interest rates, foreign exchange rates and yield curves that are observable and regularly quoted, the derivatives are valued using vendor-developed models. Other derivatives within the VIEs that include significant unobservable valuation inputs are valued using internally developed models. VIE derivative liability fair value balances at September 30, 2019 and December 31, 2018 were developed using vendor-developed models and do not use significant unobservable inputs.curves.

The fair value of FG VIE fixed income securities and loan assets are ~~obtained~~based on Level 2 market price quotes received from independent market ~~quotes~~sources when available. Typically, FG VIE asset fair values are not readily available from market quotes and are estimated internally. The consolidated VIEs are securitization entities in which net cash flows from assets and derivatives (after adjusting for financial guarantor cash flows and other expenses) will be paid out to note holders or equity interests. Internal ~~valuations~~valuation of ~~VIE assets (fixed~~each FG VIE’s fixed income securities or ~~loans), therefore,~~loan assets are ~~generally~~ derived from the fair ~~value~~values of the notes issued by the respective VIE and the VIE’s derivatives, determined as described above, adjusted for the fair ~~value~~values of ~~cash flows from~~ Ambac’s financial ~~guarantee.~~guarantees associated with the VIE. The fair value of financial ~~guarantee cash flows include:~~guarantees consist of: (i) estimated future ~~premiums~~premium cash flows discounted at a rate consistent with that implicit in the fair value of the VIE’s liabilities and (ii) ~~internal~~ estimates of future ~~loss~~claim payments ~~by Ambac~~ discounted at a rate that includes Ambac’s own credit risk. Estimated future premium payments to be paid by the VIEs were discounted at a ~~weighted~~par-weighted average rate of ~~2.6%~~3.3% and ~~3.1%~~2.7% at September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively. ~~The value~~At September 30, 2020, the range of ~~future loss payments to be paid by Ambac to the VIEs~~these discount rates was ~~adjusted to include an Ambac CVA appropriate for the term of expected Ambac claim payments.~~

between 2.1% and 5.5%.

| Ambac Financial Group, Inc. 28 ~~2019~~2020 Third Quarter FORM 10-Q|

Table of Contents

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Dollar Amounts in ~~Thousands,~~Millions, Except Share Amounts)

Additional Fair Value Information for Financial Assets and Liabilities Accounted for at Fair Value:

The following tables present the changes in the Level 3 fair value category for the periods presented in ~~2019~~2020 and ~~2018.~~2019. Ambac classifies financial instruments in Level 3 of the fair value hierarchy when there is reliance on at least one significant unobservable input to the valuation model. In addition to these unobservable inputs, the valuation models for Level 3 financial instruments typically also rely on a number of inputs that are readily observable either directly or indirectly. Thus, the gains and losses presented below include changes in the fair value related to both observable and unobservable inputs.


Level 3 - Financial Assets and Liabilities Accounted for at Fair Value
							VIE Assets and Liabilities
	Investments		Other Assets(1)		Derivatives		Investments		Loans		Long-term Debt		Total
Three Months Ended September 30, 2020:
Balance, beginning of period	$	66	$	2	$	86	$	2,907	$	2,787	$	0	$	5,848

Total gains/(losses) realized and unrealized:
Included in earnings	0		0		1		1		(43)		0		(40)
Included in other comprehensive income	9		—		—		121		116		0		246
Purchases	—		—		—		—		—		—		—
Issuances	—		—		—		—		—		—		—
Sales	—		—		—		—		—		—		—
Settlements	0		—		(2)		—		(78)		0		(80)



Balance, end of period	$	75	$	2	$	85	$	3,029	$	2,783	$	0	$	5,974
The amount of total gains/(losses) included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date	$	—	$	0	$	1	$	1	$	(43)	$	0	$	(41)
The amount of total gains/(losses) included in other comprehensive income attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date	$	9	$	0	$	0	$	121	$	116	$	0	$	246

Three Months Ended September 30, 2019:
Balance, beginning of period	$	74	$	4	$	62	$	2,882	$	4,289	$	(231)	$	7,080

Total gains/(losses) realized and unrealized:
Included in earnings	1		0		12		206		127		0		345
Included in other comprehensive income	5		—		—		(92)		(133)		7		(213)
Purchases	—		—		—		—		—		—		—
Issuances	—		—		—		—		—		—		—
Sales	—		—		—		—		—		—		—
Settlements	0		—		(1)		—		(466)		0		(467)


Deconsolidation of VIEs	0		0		0		—		(851)		223		(627)
Balance, end of period	$	79	$	3	$	73	$	2,996	$	2,966	$	0	$	6,117
The amount of total gains/(losses) included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date	$	—	$	0	$	12	$	206	$	115	$	0	$	332

Level 3 - Financial Assets and Liabilities Accounted for at Fair Value
VIE Assets and Liabilities
Investments
Other
Assets⁽¹⁾
Derivatives Investments Loans Long-term
Debt Total
Three Months Ended September 30, 2019:
Balance, beginning of period $ 74,318
$ 3,771
$ 62,270
$ 2,881,889
$ 4,288,572
$ (230,615 ) $ 7,080,205
Total gains/(losses) realized and unrealized:
Included in earnings 530
(383 ) 11,634
206,241
126,541
—
344,563
Included in other comprehensive income 4,926
—
—
(92,236 ) (133,131 ) 7,336
(213,105 )
Purchases —
—
—
—
—
—
—
Issuances —
—
—
—
—
—
—
Sales —
—
—
—
—
—
—
Settlements (353 ) —
(1,174 ) —
(465,838 ) —
(467,365 )
Deconsolidation of VIEs —
—
—
—
(850,605 ) 223,279
(627,326 )
Balance, end of period $ 79,421
$ 3,388
$ 72,730
$ 2,995,894
$ 2,965,539
$ —
$ 6,116,972
The amount of total gains/(losses) included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date $ —
$ (383 ) $ 11,543
$ 206,241
$ 114,825
$ —
$ 332,226

Three Months Ended September 30, 2018:
Balance, beginning of period $ 68,802
$ 5,255
$ 45,613
$ 2,756,924
$ 10,751,199
$ (2,517,638 ) $ 11,110,155
Total gains/(losses) realized and unrealized:
Included in earnings 376
(368 ) (2,080 ) (7,811 ) (29,439 ) 3,101
(36,221 )
Included in other comprehensive income 3,218
—
—
(30,736 ) (122,908 ) 28,064
(122,362 )
Purchases —
—
—
—
—
—
—
Issuances —
—
—
—
—
—
—
Sales —
—
—
—
—
—
—
Settlements (302 ) —
(1,296 ) —
(89,296 ) 17,841
(73,053 )
Deconsolidation of VIEs —
—
—
—
(5,946,465 ) 2,237,352
(3,709,113 )
Balance, end of period $ 72,094
$ 4,887
$ 42,237
$ 2,718,377
$ 4,563,091
$ (231,280 ) $ 7,169,406
The amount of total gains/(losses) included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date $ —
$ (368 ) $ (2,179 ) $ (7,811 ) $ (29,439 ) $ 3,101
$ (36,696 )


~~(1)~~	(1) Other assets carried at fair value and classified as Level 3 relate to an equity interest in an Ambac sponsored VIE.

| Ambac Financial Group, Inc. 29 ~~2019~~2020 Third Quarter FORM 10-Q|

Table of Contents

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Dollar Amounts in ~~Thousands,~~Millions, Except Share Amounts)



Level 3 - Financial Assets and Liabilities Accounted for at Fair Value
							VIE Assets and Liabilities
	Investments		Other Assets		Derivatives		Investments		Loans		Long-term Debt		Total
Nine Months Ended September 30, 2020:
Balance, beginning of period	$	72	$	3	$	66	$	2,957	$	3,108	$	0	$	6,207

Total gains/(losses) realized and unrealized:
Included in earnings	1		(1)		24		160		(22)		0		161
Included in other comprehensive income	3		0		0		(71)		(85)		0		(152)
Purchases	0		0		0		0		0		0		0
Issuances	0		0		0		0		0		0		0
Sales	0		0		0		0		0		0		0
Settlements	(1)		0		(5)		(17)		(219)		0		(242)



Balance, end of period	$	75	$	2	$	85	$	3,029	$	2,783	$	0	$	5,974
The amount of total gains/(losses) included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date	$	0	$	(1)	$	23	$	160	$	(22)	$	0	$	160
The amount of total gains/(losses) included in other comprehensive income attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date	$	3	$	0	$	0	$	(71)	$	(85)	$	0	$	(152)

Nine Months Ended September 30, 2019:
Balance, beginning of period	$	72	$	5	$	46	$	2,737	$	4,288	$	(217)	$	6,930

Total gains/(losses) realized and unrealized:
Included in earnings	1		(1)		30		382		301		(15)		698
Included in other comprehensive income	7		0		0		(106)		(151)		8		(241)
Purchases	0		0		0		0		0		0		0
Issuances	0		0		0		0		0		0		0
Sales	0		0		0		0		0		0		0
Settlements	(1)		0		(3)		(17)		(621)		0		(643)


Deconsolidation of VIEs	0		0		0		0		(851)		223		(627)
Balance, end of period	$	79	$	3	$	73	$	2,996	$	2,966	$	0	$	6,117
The amount of total gains/(losses) included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date	$	0	$	(1)	$	30	$	382	$	229	$	0	$	639

Level 3 - Financial Assets and Liabilities Accounted for at Fair Value
VIE Assets and Liabilities
Investments Other
Assets Derivatives Investments Loans Long-term
Debt Total
Nine Months Ended September 30, 2019:
Balance, beginning of period $ 72,071
$ 4,516
$ 46,001
$ 2,737,286
$ 4,287,664
$ (217,092 ) $ 6,930,446
Total gains/(losses) realized and unrealized:
Included in earnings 1,301
(1,128 ) 30,187
381,716
300,503
(14,603 ) 697,976
Included in other comprehensive income 7,040
—
—
(105,924 ) (150,535 ) 8,416
(241,003 )
Purchases —
—
—
—
—
—
—
Issuances —
—
—
—
—
—
—
Sales —
—
—
—
—
—
—
Settlements (991 ) —
(3,458 ) (17,184 ) (621,488 ) —
(643,121 )
Deconsolidation of VIEs —
—
—
—
(850,605 ) 223,279
(627,326 )
Balance, end of period $ 79,421
$ 3,388
$ 72,730
$ 2,995,894
$ 2,965,539
$ —
$ 6,116,972
The amount of total gains/(losses) included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date $ —
$ (1,128 ) $ 29,911
$ 381,716
$ 228,788
$ —
$ 639,287

Nine Months Ended September 30, 2018:
Balance, beginning of period $ 808,557
$ 5,979
$ 60,808
$ 2,914,145
$ 11,529,384
$ (2,757,688 ) $ 12,561,185
Total gains/(losses) realized and unrealized:
Included in earnings 35,842
(1,092 ) (14,137 ) (80,974 ) (204,561 ) 180,314
(84,608 )
Included in other comprehensive income (52,804 ) —
—
(97,199 ) (371,610 ) 85,837
(435,776 )
Purchases —
—
—
—
—
—
—
Sales —
—
—
—
—
—
—
Settlements (714,192 ) —
(4,434 ) (17,595 ) (443,657 ) 22,905
(1,156,973 )
Transfers out of Level 3 (5,309 ) —
—
—
—
—
(5,309 )
Deconsolidation of VIEs —
—
—
—
(5,946,465 ) 2,237,352
(3,709,113 )
Balance, end of period $ 72,094
$ 4,887
$ 42,237
$ 2,718,377
$ 4,563,091
$ (231,280 ) $ 7,169,406
The amount of total gains/(losses) included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date $ —
$ (1,092 ) $ (14,433 ) $ (80,974 ) $ (70,659 ) $ 37,637
$ (129,521 )

| Ambac Financial Group, Inc. 30 ~~2019~~2020 Third Quarter FORM 10-Q|

Table of Contents

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Dollar Amounts in ~~Thousands,~~Millions, Except Share Amounts)

The tables below provide roll-forward information by class of ~~investments and~~ derivatives measured using significant unobservable inputs.


Level 3 - Derivatives by Class
	Three Months Ended September 30, 2020						Three Months Ended September 30, 2019
	Interest Rate Swaps		Credit Derivatives		Total Derivatives		Interest Rate Swaps		Credit Derivatives		Total Derivatives
Balance, beginning of period	$	87	$	(1)	$	86	$	63	$	(1)	$	62

Total gains/(losses) realized and unrealized:
Included in earnings	1		0		1		11		1		12
Included in other comprehensive income	0		0		0		0		0		0
Purchases	0		0		0		0		0		0
Issuances	0		0		0		0		0		0
Sales	0		0		0		0		0		0
Settlements	(2)		0		(2)		(1)		0		(1)



Balance, end of period	$	86	$	(1)	$	85	$	73	$	0	$	73
The amount of total gains/(losses) included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date	$	1	$	0	$	1	$	11	$	0	$	12


Level 3 - Investments by Class:
Level 3 - Derivatives by Class																	Level 3 - Derivatives by Class
	Three Months Ended September 30, 2019								Three Months Ended September 30, 2018									Nine Months Ended September 30, 2020						Nine Months Ended September 30, 2019
	Other Asset Backed Securities			Non-Agency RMBS		Total Investments			Other Asset Backed Securities			Non-Agency RMBS		Total Investments				Interest Rate Swaps		Credit Derivatives		Total Derivatives		Interest Rate Swaps		Credit Derivatives		Total Derivatives
Balance, beginning of period	$	74,318		$	—	$	74,318		$	68,802		$	—	$	68,802		Balance, beginning of period	$	67	$	0	$	66	$	47	$	(1)	$	46

Total gains/(losses) realized and unrealized:																	Total gains/(losses) realized and unrealized:
Included in earnings	530			—		530			376			—		376			Included in earnings	24		(1)		24		29		1		30
Included in other comprehensive income	4,926			—		4,926			3,218			—		3,218			Included in other comprehensive income	0		0		0		0		0		0
Purchases	—			—		—			—			—		—			Purchases	0		0		0		0		0		0
Issuances	—			—		—			—			—		—			Issuances	0		0		0		0		0		0
Sales	—			—		—			—			—		—			Sales	0		0		0		0		0		0
Settlements	(353		)	—		(353		)	(302		)	—		(302		)	Settlements	(5)		0		(5)		(3)		0		(3)

Balance, end of period	$	79,421		$	—	$	79,421		$	72,094		$	—	$	72,094		Balance, end of period	$	86	$	(1)	$	85	$	73	$	0	$	73
The amount of total gains/(losses) included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date	$	—		$	—	$	—		$	—		$	—	$	—		The amount of total gains/(losses) included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date	$	24	$	(1)	$	23	$	29	$	1	$	30

Level 3 - Investments by Class:
Nine Months Ended September 30, 2019 Nine Months Ended September 30, 2018
Other Asset
Backed
Securities Non-Agency
RMBS Total
Investments Other Asset
Backed
Securities Non-Agency
RMBS Total
Investments
Balance, beginning of period $ 72,071
$ —
$ 72,071
$ 72,540
$ 736,017
$ 808,557
Total gains/(losses) realized and unrealized:

Included in earnings 1,301
—
1,301
1,115
34,727
35,842
Included in other comprehensive income 7,040
—
7,040
(666 ) (52,138 ) (52,804 )
Purchases —
—
—
—
—
—
Issuances —
—
—
—
—
—
Sales —
—
—
—
—
—
Settlements (991 ) —
(991 ) (895 ) (713,297 ) (714,192 )
Transfers out of Level 3 —
—
—
—
(5,309 ) (5,309 )
Balance, end of period $ 79,421
$ —
$ 79,421
$ 72,094
$ —
$ 72,094
The amount of total gains/(losses) included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date $ —
$ —
$ —
$ —
$ —
$ —

~~| Ambac Financial Group, Inc.~~ 31~~2019 Third Quarter FORM 10-Q~~ |

~~Table of Contents~~

~~AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES~~

~~Notes to Unaudited Consolidated Financial Statements~~

~~(Dollar Amounts in Thousands, Except Share Amounts)~~

Level 3 - Derivatives by Class:
Three Months Ended September 30, 2019 Three Months Ended September 30, 2018
Interest
Rate Swaps Credit
Derivatives Total
Derivatives Interest
Rate Swaps Credit
Derivatives Total
Derivatives
Balance, beginning of period $ 63,131
$ (861 ) $ 62,270
$ 46,939
$ (1,326 ) $ 45,613
Total gains/(losses) realized and unrealized:
Included in earnings 11,106
528
11,634
(2,330 ) 250
(2,080 )
Included in other comprehensive income —
—
—
—
—
—
Purchases —
—
—
—
—
—
Issuances —
—
—
—
—
—
Sales —
—
—
—
—
—
Settlements (1,085 ) (89 ) (1,174 ) (1,197 ) (99 ) (1,296 )
Balance, end of period $ 73,152
$ (422 ) $ 72,730
$ 43,412
$ (1,175 ) $ 42,237
The amount of total gains/(losses) included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date $ 11,106
$ 437
$ 11,543
$ (2,330 ) $ 151
$ (2,179 )

Level 3 - Derivatives by Class:
Nine Months Ended September 30, 2019 Nine Months Ended September 30, 2018
Interest
Rate Swaps Credit
Derivatives Total
Derivatives Interest
Rate Swaps Credit
Derivatives Total
Derivatives
Balance, beginning of period $ 47,460
$ (1,459 ) $ 46,001
$ 61,374
$ (566 ) $ 60,808
Total gains/(losses) realized and unrealized:
Included in earnings 28,876
1,311
30,187
(13,824 ) (313 ) (14,137 )
Included in other comprehensive income —
—
—
—
—
—
Purchases —
—
—
—
—
—
Issuances —
—
—
—
—
—
Sales —
—
—
—
—
—
Settlements (3,184 ) (274 ) (3,458 ) (4,138 ) (296 ) (4,434 )
Balance, end of period $ 73,152
$ (422 ) $ 72,730
$ 43,412
$ (1,175 ) $ 42,237
The amount of total gains/(losses) included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date $ 28,876
$ 1,035
$ 29,911
$ (13,824 ) $ (609 ) $ (14,433 )

Invested assets and VIE long-term debt are transferred into Level 3 when internal valuation models that include significant unobservable inputs are used to estimate fair value. All such securities that have internally modeled fair values have been

classified as Level 3. ~~Non-agency RMBS securities transferred out of Level 3 into Level 2 in 2018 consist of an Ambac-insured re-REMIC collateralized by distressed mortgage-backed securities.~~

Derivative instruments are transferred into Level 3 when the use of unobservable inputs becomes significant to the overall valuation. There were no0 transfers of ~~derivative~~financial instruments into or out of Level 3 in the periods disclosed.

~~There were no transfers between Level 1 and Level 2 for the periods presented. All transfers between fair value hierarchy Levels 1, 2 and 3 are recognized at the beginning of each accounting period.~~

| Ambac Financial Group, Inc. 3231 ~~2019~~2020 Third Quarter FORM 10-Q|

Table of Contents

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Dollar Amounts in ~~Thousands,~~Millions, Except Share Amounts)

Gains and losses (realized and unrealized) relating to Level 3 assets and liabilities included in earnings for the affected periods are reported as follows:


	Net Investment Income		Net Gains (Losses) on Derivative Contracts		Income (Loss) on Variable Interest Entities		Other Income or (Loss)
Three Months Ended September 30, 2020:
Total gains or losses included in earnings for the period	$	0	$	1	$	(41)	$	0
Changes in unrealized gains or losses included in earnings relating to the assets and liabilities still held at the reporting date	0		1		(41)		0

Three Months Ended September 30, 2019:
Total gains or losses included in earnings for the period	$	1	$	12	$	333	$	0
Changes in unrealized gains or losses included in earnings relating to the assets and liabilities still held at the reporting date	0		12		321		0

Nine Months Ended September 30, 2020:
Total gains or losses included in earnings for the period	$	1	$	24	$	137	$	(1)
Changes in unrealized gains or losses included in earnings relating to the assets and liabilities still held at the reporting date	0		23		137		(1)

Nine Months Ended September 30, 2019:
Total gains or losses included in earnings for the period	1		30		668		(1)
Changes in unrealized gains or losses included in earnings relating to the assets and liabilities still held at the reporting date	0		30		611		(1)

Net
Investment
Income
Net Gains
(Losses) on
Derivative
Contracts
Income
(Loss) on
Variable
Interest
Entities Other
Income
or (Loss)
Three Months Ended September 30, 2019:
Total gains or losses included in earnings for the period $ 530
$ 11,634
$ 332,782
$ (383 )
Changes in unrealized gains or losses relating to the assets and liabilities still held at the reporting date —
11,543
321,066
(383 )

Three Months Ended September 30, 2018:
Total gains or losses included in earnings for the period $ 376
$ (2,080 ) $ (34,149 ) $ (368 )
Changes in unrealized gains or losses relating to the assets and liabilities still held at the reporting date —
(2,179 ) (34,149 ) (368 )

Nine Months Ended September 30, 2019:
Total gains or losses included in earnings for the period $ 1,301
$ 30,187
$ 667,616
$ (1,128 )
Changes in unrealized gains or losses relating to the assets and liabilities still held at the reporting date —
29,911
610,504
(1,128 )

Nine Months Ended September 30, 2018:
Total gains or losses included in earnings for the period $ 35,842
$ (14,137 ) $ (105,221 ) $ (1,092 )
Changes in unrealized gains or losses relating to the assets and liabilities still held at the reporting date —
(14,433 ) (113,996 ) (1,092 )

~~| Ambac Financial Group, Inc.~~ 33~~2019 Third Quarter FORM 10-Q~~ |

~~Table of Contents~~

~~AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES~~

~~Notes to Unaudited Consolidated Financial Statements~~

~~(Dollar Amounts in Thousands, Except Share Amounts)~~

8. INVESTMENTS

Ambac’s non-VIE invested assets are primarily comprised of fixed income securities classified as available-for-sale and interests in pooled investment funds, which are reported within Other investments on the Consolidated Balance Sheets. Interests in pooled investment funds in the form of common stock or in-substance common stock are classified as trading securities, while limited partner interests in such funds are reported using the equity method. Other investments also include ~~Ambac's~~ equity ~~interest~~interests held by AFG, including in an unconsolidated trust created in connection with its sale of Segregated Account junior surplus notes on August 28, 2014.

Disclosures in this Note for the period ended September 30, 2020, are in accordance with the new CECL standard adopted January 1, 2020, which is more fully described in Note 2, Basis of Presentation and Significant Accounting Policies. To the extent disclosures for periods prior to January 1, 2020, made in accordance with prior GAAP rules differ from disclosures under the new CECL standard, such differences are explained below.

Fixed Income Securities:

The amortized cost and estimated fair value of available-for-sale investments, excluding VIE investments, at September 30, ~~2019~~2020 and December 31, ~~2018~~2019, were as follows:

Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Estimated
Fair Value
Non-credit
Other-than
temporary
Impairments ⁽¹⁾
September 30, 2019:
Fixed income securities:
Municipal obligations $ 268,455
$ 36,953
$ 280
$ 305,128
$ —
Corporate obligations ⁽²⁾
1,431,002
38,536
288
1,469,250
—
Foreign obligations 41,485
1,005
2
42,488
—
U.S. government obligations 151,744
4,390
74
156,060
—
Residential mortgage-backed securities 206,211
51,187
58
257,340
58
Collateralized debt obligations 148,385
23
573
147,835
—
Other asset-backed securities 313,996
35,259
51
349,204
—
2,561,278
167,353
1,326
2,727,305
58
Short-term 664,423
41
23
664,441
—
3,225,701
167,394
1,349
3,391,746
58
Fixed income securities pledged as collateral:
U.S. government obligations 84,948
—
—
84,948
—
Total fixed income securities pledged as collateral 84,948
—
—
84,948
—
Total available-for-sale investments $ 3,310,649
$ 167,394
$ 1,349
$ 3,476,694
$ 58

December 31, 2018:
Fixed income securities:
Municipal obligations $ 882,631
$ 14,364
$ 17,076
$ 879,919
$ 5
Corporate obligations ⁽²⁾
1,288,882
6,444
17,204
1,278,122
—
Foreign obligations 30,496
399
61
30,834
—
U.S. government obligations 93,636
1,371
613
94,394
—
Residential mortgage-backed securities 221,825
37,575
793
258,607
27
Collateralized debt obligations 133,075
8
1,727
131,356
—
Other asset-backed securities 370,199
72,868
624
442,443
—
3,020,744
133,029
38,098
3,115,675
32
Short-term 430,405
23
97
430,331
—
Total available-for-sale investments $ 3,451,149
$ 133,052
$ 38,195
$ 3,546,006
$ 32


~~(1)~~	Represents the amount of non-credit other-than-temporary impairment losses remaining in accumulated other comprehensive income on securities that also had a credit impairment. These losses are included in gross unrealized losses as of September 30, 2019 and December 31, 2018.


~~(2)~~	~~Includes Ambac's holdings of the secured notes issued by Ambac LSNI in connection with the Rehabilitation Exit Transactions.~~

| Ambac Financial Group, Inc. 3432 ~~2019~~2020 Third Quarter FORM 10-Q|

Table of Contents

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Dollar Amounts in ~~Thousands,~~Millions, Except Share Amounts)


	Amortized Cost		Allowance for Credit Losses		Gross Unrealized Gains in AOCI		Gross Unrealized Losses in AOCI		Estimated Fair Value
September 30, 2020:
Fixed income securities:
Municipal obligations	$	322	$	0	$	29	$	1	$	351
Corporate obligations (1)	1,066		0		28		3		1,091
Foreign obligations	76		0		1		0		77
U.S. government obligations	118		0		4		1		122

Residential mortgage-backed securities	251		0		45		0		296

Collateralized debt obligations	74		0		0		1		73
Other asset-backed securities	268		0		33		1		300
	2,176		0		140		6		2,311
Short-term	586		0		0		0		586
	2,761		0		141		6		2,896
Fixed income securities pledged as collateral:

Short-term	152		0		0		0		152
Total collateralized investments	152		0		0		0		152
Total available-for-sale investments	$	2,914	$	0	$	141	$	6	$	3,048


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Non-credit Other-than temporary Impairments (2)
December 31, 2019:
Fixed income securities:
Municipal obligations	$	194	$	22	$	0	$	215	$	0
Corporate obligations (1)	1,396		36		2		1,430		0
Foreign obligations	44		1		0		44		0
U.S. government obligations	157		2		2		156		0

Residential mortgage-backed securities	200		47		0		248		0
Commercial mortgage-backed securities	49		1		0		50		0
Collateralized debt obligations	147		0		1		146		0
Other asset-backed securities	263		24		0		287		0
	2,450		132		5		2,577		0
Short-term	653		0		0		653		0
	3,103		132		5		3,230		0
Fixed income securities pledged as collateral:

Short-term	85		0		0		85		0
Total collateralized investments	85		0		0		85		0
Total available-for-sale investments	$	3,187	$	132	$	5	$	3,314	$	0

(1)Includes Ambac's holdings of the secured notes issued by Ambac LSNI in connection with the Rehabilitation Exit Transactions.

(2)At December 31, 2019, represents the amount of non-credit other-than-temporary impairment losses remaining in accumulated other comprehensive income on securities that also had a credit impairment. These losses are included in gross unrealized losses at December 31, 2019.

| Ambac Financial Group, Inc. 332020 Third Quarter FORM 10-Q |

Table of Contents

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

The amortized cost and estimated fair value of available-for-sale investments, excluding VIE investments, at September 30, ~~2019,~~2020, by contractual maturity, were as follows:

Amortized
Cost Estimated
Fair Value
Due in one year or less $ 769,507
$ 769,767
Due after one year through five years 1,202,643
1,221,570
Due after five years through ten years 443,917
471,856
Due after ten years 225,990
259,122
2,642,057
2,722,315
Residential mortgage-backed securities 206,211
257,340
Collateralized debt obligations 148,385
147,835
Other asset-backed securities 313,996
349,204
Total $ 3,310,649
$ 3,476,694


	Amortized Cost		Estimated Fair Value
Due in one year or less	$	830	$	832
Due after one year through five years	876		888
Due after five years through ten years	432		453
Due after ten years	182		206
	2,320		2,379
Residential mortgage-backed securities	251		296

Collateralized debt obligations	74		73
Other asset-backed securities	268		300
Total	$	2,914	$	3,048

Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay certain obligations with or without call or prepayment penalties.

Unrealized Losses on Fixed Income Securities:

The following table shows gross unrealized losses and fair values of Ambac’s available-for-sale investments, excluding VIE investments, which at September 30, 2020, did not have an allowance for credit losses under the new CECL standard and, at December 31, 2019, did not have other-than-temporary impairments recorded in earnings under prior GAAP. This information is aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at September 30, ~~2019~~2020 and December 31, ~~2018:~~2019:


	Less Than 12 Months				12 Months or More				Total
	Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss
September 30, 2020:
Fixed income securities:
Municipal obligations	$	64	$	1	$	6	$	0	$	70	$	1
Corporate obligations	179		3		0		0		179		3
Foreign obligations	12		0		0		0		12		0
U.S. government obligations	11		1		0		0		11		1

Residential mortgage-backed securities	19		0		0		0		19		0

Collateralized debt obligations	53		1		15		0		67		1
Other asset-backed securities	1		0		4		1		5		1
	338		5		25		1		363		6
Short-term	152		0		0		0		152		0




Total securities	$	490	$	5	$	25	$	1	$	515	$	6

Less Than 12 Months 12 Months or More Total
Fair Value Gross
Unrealized
Loss Fair Value Gross
Unrealized
Loss Fair Value Gross
Unrealized
Loss
September 30, 2019:
Fixed income securities:
Municipal obligations $ —
$ —
$ 10,436
$ 280
$ 10,436
$ 280
Corporate obligations 63,985
267
4,987
21
68,972
288
Foreign obligations 1,122
1
312
1
1,434
2
U.S. government obligations 1,741
61
2,273
13
4,014
74
Residential mortgage-backed securities 4,112
58
—
—
4,112
58
Collateralized debt obligations 99,144
542
2,969
31
102,113
573
Other asset-backed securities 6,067
29
5,181
22
11,248
51
176,171
958
26,158
368
202,329
1,326
Short-term 137,514
23
—
—
137,514
23
Total temporarily impaired securities $ 313,685
$ 981
$ 26,158
$ 368
$ 339,843
$ 1,349

| Ambac Financial Group, Inc. 3534 ~~2019~~2020 Third Quarter FORM 10-Q|

Table of Contents

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Dollar Amounts in ~~Thousands,~~Millions, Except Share Amounts)


	Less Than 12 Months				12 Months or More				Total
	Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss
December 31, 2019:
Fixed income securities:
Municipal obligations	$	13	$	0	$	10	$	0	$	23	$	0
Corporate obligations	63		2		5		0		68		2
Foreign obligations	20		0		0		0		20		0
U.S. government obligations	36		2		2		0		38		2

Residential mortgage-backed securities	5		0		0		0		5		0
Commercial mortgage-backed securities	7		0		0		0		7		0
Collateralized debt obligations	53		0		63		1		116		1
Other asset-backed securities	2		0		7		0		10		0
	200		4		88		1		288		5
Short-term	201		0		0		0		201		0




Total securities	$	401	$	4	$	88	$	1	$	489	$	5

Less Than 12 Months 12 Months or More Total
Fair Value Gross
Unrealized
Loss Fair Value Gross
Unrealized
Loss Fair Value Gross
Unrealized
Loss
December 31, 2018:
Fixed income securities:
Municipal obligations $ 537,904
$ 15,878
$ 28,533
$ 1,198
$ 566,437
$ 17,076
Corporate obligations 306,506
8,634
190,273
8,570
496,779
17,204
Foreign obligations 1,161
1
5,163
60
6,324
61
U.S. government obligations 5,643
135
58,495
478
64,138
613
Residential mortgage-backed securities 34,852
793
—
—
34,852
793
Collateralized debt obligations 123,848
1,727
—
—
123,848
1,727
Other asset-backed securities 13,813
33
77,479
591
91,292
624
1,023,727
27,201
359,943
10,897
1,383,670
38,098
Short-term 115,374
97
—
—
115,374
97
Total temporarily impaired securities $ 1,139,101
$ 27,298
$ 359,943
$ 10,897
$ 1,499,044
$ 38,195

Management has determined that the ~~unrealized losses reflected~~securities in the ~~tables~~ above ~~are temporary in nature~~table do not have credit impairment as of September 30, ~~2019~~2020 and December 31, ~~2018~~2019, based upon various factors, including (i) no ~~unexpected~~actual or expected principal and interest payment defaults on these securities; (ii) analysis of the creditworthiness of the issuer and financial guarantor, as applicable, and ~~analysis of projected defaults on the underlying collateral;~~ (iii) no management intent to sell these investments in debt securities; and (iv) it is not more likely than not that Ambac will be required to sell these debt securities before the anticipated recovery of its amortized cost basis. To the extent that securities that management intends to sell are in an unrealized loss position, they would have already been considered other-than-temporarily impaired with the amortized cost written down to fair value. The assessment under (iv) is based on a comparison of future available liquidity from the investment portfolio against the projected net cash outflow from operating activities and debt service. For purposes of this assessment, available liquidity from the investment portfolio is comprised of the fair value of securities for which management has asserted its intent to sell, the fair value of other securities that are available for sale and in an unrealized gain position, trading securities plus the scheduled maturities and interest payments from the remaining securities in the portfolio. Principal payments on securities pledged as collateral are not considered to be available for other liquidity needs until the collateralized positions are projected to be settled. Because the above-described assessment indicates that future available liquidity exceeds projected net cash outflow, it is not more likely than not that we would be required to sell securities in an unrealized loss position before the recovery of their amortized cost basis.

~~As of September 30, 2019, for securities that have indications of possible other-than-temporary impairment but for which~~

management does not intend to sell and will not more likely than not be required to sell, management compared the present value of cash flows expected to be collected to the amortized cost basis of the securities to assess whether the amortized cost will be recovered. Cash flows were discounted at the effective interest rate implicit in the security at the date of acquisition (or Fresh Start Reporting Date of ~~April 30, 2013~~ ~~for securities purchased prior to that date) or~~ for debt securities that are non-highly rated beneficial interests in securitized financial assets, ~~at a rate equal to the current yield used to accrete the beneficial interest. For floating rate securities, future~~analysis of whether there was an adverse change in projected cash ~~flows and the discount rate used were both adjusted to reflect changes in the index rate applicable to each security as of the~~flows. Management's evaluation date. Of the securities that were in a gross unrealized loss position at September 30, 2019, $9,093 of the total fair value and $91 of the unrealized loss related to below investment grade and non-rated securities. The remainder of gross unrealized losses as of September 30, ~~2019, are primarily on investment grade fixed-rate securities purchased during periods of lower interest rates. Management believes~~2020, includes the expectation that ~~the timely receipt of~~ all principal and interest payments on ~~these positions is probable~~.securities guaranteed by Ambac Assurance or Ambac UK will be made timely and in full.

Ambac’s assessment about whether a decline in value is other-than-temporary reflects management’s current judgment regarding facts and circumstances specific to a security and ~~the factors noted above.~~other factors. If that judgment changes, Ambac may ~~ultimately~~ record a charge for ~~other-than-temporary~~credit impairment in future periods. ~~Future changes~~

Realized Gains and Losses including Impairments:

The following table details amounts included in ~~our estimated liquidity needs could result~~net realized gains (losses) and impairments included in ~~a determination~~earnings for the affected periods:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Gross realized gains on securities	$	5	$	12	$	32	$	46
Gross realized losses on securities	(1)		0		(12)		(5)
Net foreign exchange (losses) gains	(2)		7		0		30
Credit impairments (1)	0		0		0		0
Intent / requirement to sell impairments (2)	0		0		0		0
Net realized gains (losses)	$	2	$	18	$	20	$	71

(1)Includes securities which management does not intend to sell and it is not more likely than not that ~~Ambac no longer has~~ the ~~ability~~Company will be required to ~~hold~~sell before recovery of the amortized cost basis.

(2)Includes securities which management either intends sell or it is more likely than not that ~~are in an unrealized loss position, which could also result in additional other-than-temporary impairment charges.~~the Company will be required to sell before recovery of the amortized cost basis.

| Ambac Financial Group, Inc. 3635 ~~2019~~2020 Third Quarter FORM 10-Q|

Table of Contents

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Dollar Amounts in ~~Thousands,~~Millions, Except Share Amounts)

~~Realized Gains and Losses and Other-Than-Temporary Impairments:~~

~~The following table details amounts included in net realized gains (losses) and other-than-temporary impairments included in earnings for the affected periods:~~

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Gross realized gains on securities $ 11,993
$ 30,909
$ 46,430
$ 83,937
Gross realized losses on securities (365 ) (2,171 ) (4,864 ) (5,200 )
Net foreign exchange (losses) gains 6,843
1,463
29,998
3,474
Net realized gains (losses) $ 18,471
$ 30,201
$ 71,564
$ 82,211
Net other-than-temporary impairments ⁽¹⁾
$ (42 ) $ (266 ) $ (71 ) $ (1,579 )


~~(1)~~	Other-than-temporary impairments exclude impairment amounts recorded in other comprehensive income under ASC Paragraph 320-10-65-1, which comprise non-credit related amounts on securities that are credit impaired but which management does not intend to sell and it is not more likely than not that the company will be required to sell before recovery of the amortized cost basis.

The following table presents a roll-forward of Ambac’s cumulative credit losses on debt securities ~~held as of September 30, 2019 and 2018~~ for which a portion of an other-than-temporary impairment was recognized in other comprehensive ~~income:~~income under prior GAAP for the nine months ended September 30, 2019:


Balance, beginning of period	$	12



Reductions for credit impairments previously recognized on:
Securities that matured or were sold during the period	(1)

Balance, end of period	$	12

Nine Months Ended September 30,
2019 2018
Balance, beginning of period $ 12,454
$ 67,085
Additions for credit impairments recognized on:
Securities not previously impaired —
226
Securities previously impaired —
97
Reductions for credit impairments previously recognized on:
Securities that matured or were sold during the period (774 ) (53,222 )
Balance, end of period $ 11,680
$ 14,186
Ambac had 0 allowance for credit losses at September 30, 2020.

Ambac did not purchase any financial assets with credit deterioration for the nine months ended September 30, 2020.

Counterparty Collateral, Deposits with Regulators and Other Restrictions:

Ambac routinely pledges and receives collateral related to certain transactions. ~~Cash, cash equivalents and securities~~Securities held directly in Ambac’s investment portfolio with a fair value of ~~$135,258~~$152 and ~~$102,904~~$85 at September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively, were pledged to derivative counterparties. Ambac’s derivative counterparties have the right to re-pledge the investment

securities and as such, these pledged securities are separately classified on the Consolidated Balance Sheets as “Fixed income securities pledged as collateral, at fair value”. Refer to Note 9. Derivative Instruments for further information on cash collateral. There ~~was~~were no ~~cash or~~ securities received from other counterparties that were re-pledged by Ambac.

Securities carried at ~~$6,281~~$7 and ~~$5,975~~$6 at September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively, were deposited by Ambac Assurance and Everspan with governmental authorities or designated custodian banks as required by laws affecting insurance companies. Invested assets carried at ~~$1,421~~$1 at September 30, 2020 and December 31, 2019, were deposited as security in connection with a letter of credit issued for an office lease.

Securities with a fair value of ~~$205,882~~$181 and ~~$209,983~~$197 at September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively, were pledged as collateral and as sources of funding to repay the Secured Notes issued by Ambac LSNI. The securities may not be transferred or repledged by Ambac LSNI. Collateral may be sold to fund redemptions of the Secured Notes. Ambac Assurance also pledged for the benefit of the holders of Secured Notes (other than Ambac Assurance) the proceeds of interest payments and partial redemptions of the Secured Notes held by Ambac Assurance. The amount of such proceeds held by Ambac Assurance was ~~$12,561~~$10 and ~~$19,405~~$55 at September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively, and is included in Restricted cash on the Consolidated Balance Sheet. Ambac Assurance may, from time to time, sell all or a portion of the Secured Notes it owns. In the event that Ambac Assurance sells any of the Secured Notes it owns, the proceeds must be used to redeem a like amount of the Ambac Note at par. The price at which Ambac Assurance sells the Secured Notes may differ from the price at which it redeems the Secured Notes.

Guaranteed Securities:

Ambac’s fixed income portfolio includes securities covered by guarantees issued by Ambac Assurance and other financial guarantors (“insured securities”). The published rating agency ratings on these securities reflect the higher of the financial strength rating of the financial guarantor or the rating of the underlying issuer. Rating agencies do not always publish separate underlying ratings (those ratings excluding the insurance by the financial guarantor). In the event these underlying ratings are not available from the rating agencies, Ambac will assign an internal rating. The following table represents the fair value ~~including the value of the financial guarantee,~~ and weighted-average underlying rating ~~excluding the financial guarantee,~~ of ~~the~~ insured securities in Ambac's investment portfolio at September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively:


	Municipal Obligations		Corporate Obligations (2)		Mortgage and Asset- backed Securities		Total		Weighted Average Underlying Rating (1)
September 30, 2020:
Ambac Assurance Corporation	$	310	$	470	$	473	$	1,253	CCC+
National Public Finance Guarantee Corporation	6		0		—		6		BBB-
Assured Guaranty Municipal Corporation	1		0		—		1		C



Total	$	318	$	470	$	473	$	1,260	CCC+

December 31, 2019:
Ambac Assurance Corporation	$	176	$	535	$	442	$	1,153	B-
National Public Finance Guarantee Corporation	11		0		—		11		BBB-




Total	$	186	$	535	$	442	$	1,164	B-

Municipal
Obligations
Corporate
Obligations ⁽³⁾
Mortgage
and Asset-
backed
Securities Total
Weighted
Average
Underlying
Rating ⁽¹⁾
September 30, 2019:
Ambac Assurance Corporation⁽²⁾
$ 172,296
$ 578,831
$ 455,455
$ 1,206,582
CCC-
National Public Finance Guarantee Corporation 11,568
—
—
11,568
BBB-
Total $ 183,864
$ 578,831
$ 455,455
$ 1,218,150
CCC-

December 31, 2018:
Ambac Assurance Corporation ⁽²⁾
$ 833,241
$ 656,473
$ 599,185
$ 2,088,899
CC
National Public Finance Guarantee Corporation 15,600
—
—
15,600
BBB-
Total $ 848,841
$ 656,473
$ 599,185
$ 2,104,499
CC
(1)Ratings are based on the lower of Standard & Poor’s or Moody’s rating. If unavailable, Ambac’s internal rating is used.

(2)Represents Ambac's holdings of secured notes issued by Ambac LSNI in connection with the Rehabilitation Exit Transactions. These secured notes are insured by Ambac Assurance.

| Ambac Financial Group, Inc. 36 2020 Third Quarter FORM 10-Q |


~~(1)~~	~~Ratings are based on the lower of Standard & Poor’s or Moody’s rating. If unavailable, Ambac’s internal rating is used.~~


~~(2)~~	~~Includes asset-backed securities with a fair value of $0 and $144,672 at September 30, 2019 and December 31, 2018, respectively, insured by Ambac UK.~~


~~(3)~~	~~Represents Ambac's holdings of secured notes issued by Ambac LSNI in connection with the Rehabilitation Exit Transactions. These secured notes are insured by Ambac Assurance.~~

Table of Contents

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Other Investments:

Ambac's investment portfolio includes interests in various pooled investment funds. Fair value and additional information about investments in pooled funds, by investment type, is summarized in the table below. Except as noted in the table, fair value as reported is determined using net asset value ("NAV") as a practical expedient. In addition to these investments, Ambac has unfunded commitments of $48 to private credit and private equity funds at September 30, 2020.


	Fair Value
Class of Funds	September 30, 2020		December 31, 2019		Redemption Frequency	Redemption Notice Period
Real estate properties (1)	$	15	$	16	quarterly	10 business days
Hedge funds (2)	182		65		quarterly	90 days
High yields and leveraged loans (3) (10)	53		176		daily	0 - 30 days
Private credit (4)	57		51		quarterly	180 days if permitted
Insurance-linked investments (5)	2		3		fully redeemed	none
Equity market investments (6) (10)	33		55		daily	0 days
Investment grade floating rate income (7)	69		66		weekly	0 days
Private equity (8)	16		0		quarterly	90 days if permitted
Emerging markets debt (9) (10)	23		0		daily	0 days
Total equity investments in pooled funds	$	451	$	432

(1)Investments consist of UK property to generate income and capital growth.

(2)This class seeks to generate superior risk-adjusted returns through selective asset sourcing, active trading and hedging strategies across a range of asset types.

(3)This class of funds includes investments in a range of instruments including high-yield bonds, leveraged loans, CLOs, ABS and floating rate notes to generate income and capital appreciation.

(4)This class aims to obtain high long-term return primarily through credit and preferred equity investments with low liquidity and defined term.

(5)This class seeks to generate returns from insurance markets through investments in catastrophe bonds, life insurance and other insurance linked investments.

(6)This class of funds aim to achieve long term growth through diversified exposure to global equity markets.

(7)This class of funds includes investments in high quality floating rate debt securities including ABS and corporate floating rate notes as well as ultra-short term bonds and money market instruments.

(8)This class seeks to generate long-term capital appreciation through investments in private equity, equity-related and other instruments.

(9)This class seeks long-term income and growth through investments in the bonds of issuers in emerging markets.

(10)These categories include fair value amounts totaling $60 and $136 at September 30, 2020 and December 31, 2019, ~~of $9,827 to an investment fund~~respectively, that ~~focuses on middle-market enterprise~~are readily determinable and are priced through pricing vendors, including for High yield and leveraged loans products: $3 and $81; for Equity market investments: $33 and $55; and for Emerging markets debt $23 and ~~structured equity and $50,000 to an investment fund that focuses on tactical opportunities across global credit markets.~~$0

Fair Value
Class of Funds September 30,
2019 December 31,
2018 Redemption Frequency Redemption Notice Period
Real estate properties⁽¹⁾
$ 15,321
$ 16,123
quarterly 10 business days
Interest rate products ^{(2) (7)}
234,758
177,357
daily, weekly or monthly 0 - 30 days
Illiquid investments⁽³⁾
53,445
84,297
quarterly if permitted 180 days if permitted
Insurance-linked investments⁽⁴⁾
3,179
29,318
quarterly 90-120 days
Equity market investments^{(5) (7)}
50,342
43,954
daily 0 days
Credit products ⁽⁶⁾
61,095
—
quarterly 90 days
Total equity investments in pooled funds $ 418,140
$ 351,049


~~(1)~~	~~Investments consist of UK property to generate income and capital growth.~~

~~(2)~~

This class of funds includes investments in a range of instruments including leveraged loans, CLOs, asset-backed securities and floating rate notes to generate income and capital appreciation. Funds with less frequent redemption periods limit redemptions to as little as 15% per period. Funds with a same day redemption notice period are redeemable only weekly, while funds that may be redeemed any business day have notice periods of 15-30 days.

~~(3)~~

This class seeks to obtain high long-term total return through investments with low liquidity and defined term. Funds have stated termination dates ranging from 2025 to 2029, subject to earlier distributions at the discretion of the manager. Redemptions are either not permitted, or are permitted subject to the approval of the manager. Certain funds have expected capital distributions to subscribers starting in 2022.

~~(4)~~

This class aims to provide returns from the insurance and reinsurance markets through investments in catastrophe bonds, life insurance and other insurance linked investments. Redemption periods are quarterly, subject to 90-day notice for January/July redemption dates and 120-day notice for April/October redemption dates. Ambac has received all available voluntary redemptions of this class as of September 30, 2019, with the remaining balance representing Ambac's interest in a fund for which the ultimate amount and timing of distributions is pending settlement of past insured events.


~~(5)~~	~~Investments represent a diversified exposure to global equity market returns through holdings of various regional market index funds.~~

~~(6)~~

This class seeks to generate superior risk-adjusted returns through selective asset sourcing, active trading and hedging strategies within structured credit markets, including mortgage-backed securities, commercial real estate securities and loans, CLOs, REITs and asset-backed securities. Redemptions prior to June 30, 2020, or with 60 days’ notice are subject to a 5% fee. Aggregate fund-level redemptions may be limited to 25% of the fund’s assets per quarter.


~~(7)~~	Interest rate products include $50,342 at September 30, 2019 and $27,154 at December 31, 2018 and equity market investments include $80,050 at September 30, 2019 and $43,954 at December 31, 2018 that have readily determinable fair values priced through pricing vendors.

Ambac also holds andirect equity ~~interest~~interests, including in an unconsolidated trust created in connection with the 2014 sale of Segregated Account junior surplus notes, which is accounted for under the equity method.

Investment ~~Income:~~Income (loss):

Net investment income (loss) was comprised of the following for the affected periods:

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Fixed income securities $ 33,462
$ 49,372
$ 151,265
$ 219,222
Short-term investments 4,165
2,395
13,759
7,671
Loans 180
185
545
552
Investment expense (1,477 ) (1,967 ) (4,358 ) (5,167 )
Securities available-for-sale and short-term 36,330
49,985
161,211
222,278
Other investments 8,207
8,347
24,627
12,956
Total net investment income $ 44,537
$ 58,332
$ 185,838
$ 235,234


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Fixed income securities	$	24	$	33	$	79	$	151
Short-term investments	1		4		4		14
Loans	0		0		0		1
Investment expense	(1)		(1)		(4)		(4)
Securities available-for-sale and short-term	24		36		80		161
Other investments	14		8		(11)		25
Total net investment income (loss)	$	37	$	45	$	69	$	186

Net investment income (loss) from Other investments primarily represents changes in fair value on securities classified as trading or accounted for under the fair value option, income from investment limited partnerships accounted for under the equity method and the above noted equity interest in an unconsolidated trust accounted for under the equity method.

| Ambac Financial Group, Inc. 372020 Third Quarter FORM 10-Q |

Table of Contents

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

The portion of net unrealized gains (losses) related to trading securities still held at the end of each period is as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Net gains (losses) recognized during the period on trading securities	$	3	$	6	$	(12)	$	19
Less: net gains (losses) recognized during the reporting period on trading securities sold during the period	0		2		(19)		4
Unrealized gains (losses) recognized during the reporting period on trading securities still held at the reporting date	$	3	$	4	$	7	$	15

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Net gains (losses) recognized during the period on trading securities $ 5,532
$ 7,014
$ 19,245
$ 9,067
Less: net gains (losses) recognized during the reporting period on trading securities sold during the period 1,513
612
3,925
(2,067 )
Unrealized gains (losses) recognized during the reporting period on trading securities still held at the reporting date $ 4,019
$ 6,402
$ 15,320
$ 11,134

~~| Ambac Financial Group, Inc.~~ 37~~2019 Third Quarter FORM 10-Q~~ |

~~Table of Contents~~

~~AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES~~

~~Notes to Unaudited Consolidated Financial Statements~~

~~(Dollar Amounts in Thousands, Except Share Amounts)~~

9. DERIVATIVE INSTRUMENTS

The following tables summarize the gross fair values of individual derivative instruments and the impact of legal rights of offset as reported in the Consolidated Balance Sheets as of September 30, ~~2019~~2020 and December 31, ~~2018:~~2019:


												Gross Amounts of Recognized Assets / Liabilities		Gross Amounts Offset in the Consolidated Balance Sheet		Net Amounts of Assets/ Liabilities Presented in the Consolidated Balance Sheet		Gross Amount of Collateral Received / Pledged Not Offset in the Consolidated Balance Sheet		Net Amount
September 30, 2020:											September 30, 2020:
Derivative Assets:											Derivative Assets:
	Gross Amounts of Recognized Assets / Liabilities		Gross Amounts Offset in the Consolidated Balance Sheet		Net Amounts of Assets/ Liabilities Presented in the Consolidated Balance Sheet		Gross Amount of Collateral Received / Pledged Not Offset in the Consolidated Balance Sheet		Net Amount
September 30, 2019:
Derivative Assets:
Interest rate swaps	$	81,837	$	68	$	81,769	$	—	$	81,769	Interest rate swaps	$	95	$	0	$	94	$	—	$	94
Futures contracts	393		—		393		—		393

Total non-VIE derivative assets	$	82,230	$	68	$	82,162	$	—	$	82,162	Total non-VIE derivative assets	$	95	$	0	$	95	$	0	$	95
Derivative Liabilities:											Derivative Liabilities:
Credit derivatives	$	422	$	—	$	422	$	—	$	422	Credit derivatives	$	1	$	0	$	1	$	—	$	1
Interest rate swaps	102,960		68		102,892		102,076		816		Interest rate swaps	125		0		125		124		1

Total non-VIE derivative liabilities	$	103,382	$	68	$	103,314	$	102,076	$	1,238	Total non-VIE derivative liabilities	$	126	$	0	$	126	$	124	$	2
Variable Interest Entities Derivative Assets:											Variable Interest Entities Derivative Assets:

Currency swaps	$	67,921	$	—	$	67,921	$	—	$	67,921	Currency swaps	$	53	$	0	$	53	$	—	$	53
Total VIE derivative assets	$	67,921	$	—	$	67,921	$	—	$	67,921	Total VIE derivative assets	$	53	$	0	$	53	$	0	$	53
Variable Interest Entities Derivative Liabilities:											Variable Interest Entities Derivative Liabilities:
Interest rate swaps	$	1,779,077	$	—	$	1,779,077	$	—	$	1,779,077	Interest rate swaps	$	1,771	$	—	$	1,771	$	—	$	1,771

Total VIE derivative liabilities	$	1,779,077	$	—	$	1,779,077	$	—	$	1,779,077	Total VIE derivative liabilities	$	1,771	$	0	$	1,771	$	0	$	1,771

December 31, 2018:
Derivative Assets:
Interest rate swaps $ 59,768
$ 300
$ 59,468
$ —
$ 59,468
Total non-VIE derivative assets $ 59,768
$ 300
$ 59,468
$ —
$ 59,468
Derivative Liabilities:
Credit derivatives $ 1,459
$ —
$ 1,459
$ —
$ 1,459
Interest rate swaps 72,161
300
71,861
67,126
4,735
Futures contracts 3,379
—
3,379
3,379
—
Total non-VIE derivative liabilities $ 76,999
$ 300
$ 76,699
$ 70,505
$ 6,194
Variable Interest Entities Derivative Assets:
Currency swaps $ 66,302
$ —
$ 66,302
$ —
$ 66,302
Total VIE derivative assets $ 66,302
$ —
$ 66,302
$ —
$ 66,302
Variable Interest Entities Derivative Liabilities:
Interest rate swaps $ 1,712,062
$ —
$ 1,712,062
$ —
$ 1,712,062
Total VIE derivative liabilities $ 1,712,062
$ —
$ 1,712,062
$ —
$ 1,712,062



December 31, 2019:
Derivative Assets:

Interest rate swaps	$	75	$	0	$	75	$	0	$	75

Total non-VIE derivative assets	$	75	$	0	$	75	$	0	$	75
Derivative Liabilities:

Interest rate swaps	89		0		90		89		1


Total non-VIE derivative liabilities	$	90	$	0	$	90	$	89	$	1
Variable Interest Entities Derivative Assets:

Currency swaps	$	52	$	—	$	52	$	0	$	52
Total VIE derivative assets	$	52	$	0	$	52	$	0	$	52
Variable Interest Entities Derivative Liabilities:
Interest rate swaps	$	1,657	$	—	$	1,657	$	—	$	1,657

Total VIE derivative liabilities	$	1,657	$	0	$	1,657	$	0	$	1,657

Amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral are not offset against fair value amounts recognized for derivative instruments on the Unaudited Consolidated Balance Sheets. The amounts representing the right to reclaim cash collateral and posted margin, recorded in “Other assets” were ~~$50,310~~$1 and ~~$102,904~~$36 as of September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively. There were 0 amounts held representing an obligation to return cash collateral as of September 30, ~~2019~~2020 and December 31, ~~2018.~~

2019.

| Ambac Financial Group, Inc. 38 ~~2019~~2020 Third Quarter FORM 10-Q|

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AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Dollar Amounts in ~~Thousands,~~Millions, Except Share Amounts)

The following tables summarize the location and amount of gains and losses of derivative contracts in the Unaudited Consolidated Statements of Total Comprehensive Income (Loss) for the three and nine months ended September 30, ~~2019~~2020 and ~~2018:~~2019:


	Location of Gain or (Loss) Recognized in Consolidated Statements of Total Comprehensive Income (Loss)	Amount of Gain or (Loss) Recognized in Consolidated Statement of Total Comprehensive Income (Loss)
		Three Months Ended September 30,				Nine Months Ended September 30,
		2020		2019		2020		2019
Non-VIE derivatives:



Credit derivatives	Net gains (losses) on derivative contracts	$	0	$	1	$	(1)	$	1
Interest rate swaps	Net gains (losses) on derivative contracts	7		(1)		(20)		(11)

Futures contracts	Net gains (losses) on derivative contracts	0		(10)		(41)		(52)

Total Non-VIE derivatives		$	7	$	(10)	(61)		(61)
Variable Interest Entities:
Currency swaps	Income (loss) on variable interest entities	$	(10)	$	10	7		6
Interest rate swaps	Income (loss) on variable interest entities	(4)		(166)		(177)		(272)
Total Variable Interest Entities		(14)		(156)		(170)		(266)
Total derivative contracts		$	(7)	$	(166)	$	(231)	$	(327)

Location of Gain or (Loss)
Recognized in Consolidated
Statements of Total
Comprehensive Income (Loss)
Amount of Gain or (Loss) Recognized in Consolidated Statement of Total Comprehensive Income (Loss)
Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Non-VIE derivatives:
Credit derivatives Net gains (losses) on derivative contracts $ 528
$ 250
$ 1,311
$ (313 )
Interest rate swaps Net gains (losses) on derivative contracts (547 ) 3,157
(10,656 ) 9,320
Futures contracts Net gains (losses) on derivative contracts (9,871 ) 14,176
(52,116 ) 42,699
Total Non-VIE derivatives $ (9,890 ) $ 17,583
(61,461 ) 51,706
Variable Interest Entities:
Currency swaps Income (loss) on variable interest entities $ 9,618
$ 1,140
6,257
6,666
Interest rate swaps Income (loss) on variable interest entities (165,664 ) 335,054
(271,875 ) 548,092
Total Variable Interest Entities (156,046 ) 336,194
(265,618 ) 554,758
Total derivative contracts $ (165,936 ) $ 353,777
$ (327,079 ) $ 606,464

Credit Derivatives:

Credit derivatives, which are privately negotiated contracts, provide the counterparty with credit protection against the occurrence of a specific event such as a payment default or bankruptcy relating to an underlying obligation. Credit derivatives issued are insured by Ambac Assurance. ~~None of the~~The outstanding credit derivative ~~transactions~~transaction at September 30, ~~2019,~~2020, does not include ratings based collateral-posting triggers or otherwise require Ambac to post collateral regardless of Ambac’s ratings or the size of the mark to market exposure to Ambac.

~~The portfolio of our~~Our credit derivatives were written on a “pay-as-you-go” basis. Similar to an insurance policy, ~~execution,~~ pay-as-you-go provides that Ambac pays interest shortfalls on the referenced transaction as they are incurred on each scheduled payment date, but only pays principal shortfalls upon the earlier of (i) the date on which the assets designated to fund the referenced obligation have been disposed of and (ii) the legal final maturity date of the referenced obligation.

Ambac maintains internal credit ratings on its guaranteed obligations, including credit derivative contracts, solely to indicate management’s view of the underlying credit quality of the guaranteed obligations. The gross principal notional outstanding for ~~CDS~~credit derivative contracts was ~~$272,550~~$293 and ~~$295,342~~$280 as of September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively, all of which had internal Ambac ratings of AA in both periods.

Interest Rate Derivatives:

Ambac, through its subsidiary Ambac Financial Services (“AFS”), uses interest rate swaps, ~~and~~ US Treasury futures contracts and other derivatives, to provide a partial economic hedge against the effects of rising interest rates elsewhere in the Company, including on Ambac’s financial guarantee exposures. Additionally, AFS provided interest rate swaps to states, municipalities and their authorities, asset-backed issuers and other entities in connection with their financings. As of September 30, ~~2019~~2020 and December 31, ~~2018~~2019, the notional amounts of AFS’s derivatives ~~are~~were as follows:


	Notional
Type of Derivative	September 30, 2020		December 31, 2019
Interest rate swaps—receive-fixed/pay-variable	$	240	$	332
Interest rate swaps—pay-fixed/receive-variable	726		1,261

US Treasury futures contracts—short	240		755

Notional
Type of Derivative September 30,
2019 December 31,
2018
Interest rate swaps—receive-fixed/pay-variable $ 337,481
$ 493,368
Interest rate swaps—pay-fixed/receive-variable 1,265,895
1,121,532
US Treasury futures contracts—short 855,000
1,760,000

Derivatives of Consolidated Variable Interest Entities

Certain VIEs consolidated under the Consolidation Topic of the ASC entered into derivative contracts to meet specified purposes within the securitization structure. The notional for VIE derivatives outstanding as of September 30, ~~2019~~2020 and December 31, ~~2018 are~~2019, were as follows:


	Notional
Type of VIE Derivative	September 30, 2020		December 31, 2019
Interest rate swaps—receive-fixed/pay-variable	$	1,164	$	1,194
Interest rate swaps—pay-fixed/receive-variable	1,103		1,176
Currency swaps	298		329
Credit derivatives	0		9

Notional
Type of VIE Derivative September 30,
2019 December 31,
2018
Interest rate swaps—receive-fixed/pay-variable $ 1,103,656
$ 1,399,532
Interest rate swaps—pay-fixed/receive-variable 1,103,199
1,176,748
Currency swaps 312,264
344,992
Credit derivatives 8,676
10,254

Contingent Features in Derivatives Related to Ambac Credit Risk

Ambac’s over-the-counter interest rate swaps are centrally cleared when eligible. Certain interest rate swaps remain with professional swap-dealer counterparties and direct customer counterparties. These non-cleared swaps are generally executed under standardized derivative documents including collateral support and master netting agreements. Under these agreements, Ambac is required to post collateral in the event net unrealized losses exceed predetermined threshold levels. Additionally, given ~~that Ambac~~

| Ambac Financial Group, Inc. 39 ~~2019~~2020 Third Quarter FORM 10-Q|

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AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Dollar Amounts in ~~Thousands,~~Millions, Except Share Amounts)

that Ambac Assurance is no longer rated by an independent rating agency, counterparties have the right to terminate the swap positions.

As of September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the net liability fair value of derivative instruments with contingent features linked to Ambac’s own credit risk was ~~$102,147~~$124 and ~~$67,071,~~$89, respectively, related to which Ambac had posted cash and securities as collateral with a fair value of ~~$120,733~~$144 and ~~$83,700,~~$109, respectively. All such ratings-based contingent features have been triggered requiring maximum collateral levels to be posted by Ambac while preserving counterparties’ rights to terminate the contracts. Assuming all such contracts terminated on September 30, ~~2019,~~2020, settlement of collateral balances and net derivative liabilities would result in a net receipt of cash and/or securities by Ambac. If counterparties elect to exercise their right to terminate, the actual termination payment amounts will be determined in accordance with derivative contract terms, which may result in amounts that differ from market values as reported in Ambac’s financial statements.

10. INCOME TAXES

~~Ambac~~AFG files a consolidated Federal income tax return with its subsidiaries. ~~Ambac~~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			~~2015~~2016
United Kingdom			~~2015~~2016
Italy			~~2014~~2015

As of September 30, 2019 Ambac estimates it had U.S. federal ordinary net loss carryforwards totaling approximately $3,373,689, which, if not utilized, will begin expiring in 2029, and will fully expire in 2032.

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.

Consolidated Pretax Income (Loss)

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
U.S.	$	(106)	$	60	$	(412)	$	(61)
Foreign	(2)		9		(15)		(11)
Total	$	(108)	$	69	$	(427)	$	(72)

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
U.S. $ 59,608
$ (39,832 ) $ (61,204 ) $ 271,014
Foreign 9,447
19,884
(11,058 ) 23,655
Total $ 69,055
$ (19,948 ) $ (72,262 ) $ 294,669

Provision (Benefit) for Income Taxes

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

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Current taxes
U. S. federal $ —
$ —
$ —
$ —
U.S. state and local 358
424
(2,884 ) 2,106
Foreign 3,951
6,164
38,290
8,669
Current taxes 4,309
6,588
35,406
10,775
Deferred taxes
Foreign (1,370 ) (4,377 ) (2,154 ) (3,964 )
Deferred taxes (1,370 ) (4,377 ) (2,154 ) (3,964 )
Provision for income taxes $ 2,939
$ 2,211
$ 33,252
$ 6,811


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Current taxes
U. S. federal	$	0	$	0	$	0	$	0
U.S. state and local	0		0		0		(3)
Foreign	(1)		4		0		38
Current taxes	(1)		4		1		35
Deferred taxes

Foreign	1		(1)		(5)		(2)
Deferred taxes	1		(1)		(5)		(2)
Provision for income taxes	$	0	$	3	$	(5)	$	33

NOL Usage

Pursuant to ~~the~~an intercompany tax sharing agreement, to the extent Ambac Assurance generates taxable income after September 30, 2011, which is offset with "Allocated NOLs" of ~~$3,650,000,~~$3,650, it is obligated to make payments (“Tolling Payments”), subject to certain credits, to ~~Ambac~~AFG in accordance with the following NOL usage table, where the “Applicable Percentage” is applied to the aggregate amount of federal income tax liability that would have been paid if the Allocated NOLs were not available. Pursuant to the Closing Agreement between Ambac and the Internal Revenue Service ("IRS"), the IRS will receive 12.5% of Tier C and 17.5% of Tier D payments, if made.

NOL Usage Table

NOL Usage Tier

Allocated NOLs

Applicable
Percentage

The first

$479

15%

The next

$1,057

after Tier A

40%

The next

$1,057

after Tier B

10%

The next

$1,057

after Tier C

15%

NOL Usage Tier Allocated NOLs
Applicable
Percentage
A The first $479,000 15%
B The next $1,057,000 after Tier A 40%
C The next $1,057,000 after Tier B 10%
D The next $1,057,000 after Tier C 15%
As of December 31, 2018, Ambac Assurance generated cumulative taxable income of $1,508, leaving $2,142 of the $3,650 Allocated NOLs subject to Tolling Payments. For the year ended December 31, 2019, and nine months ended September 30, 2020, Ambac Assurance generated NOLs of approximately $143 and $197, respectively, which will need to be utilized before any new Tolling Payments will be generated.

If not utilized, the NOLs will begin expiring in 2029, and will fully expire in 2040, with the exception of the tax loss generated during the nine months ended September 30, 2020, of approximately $196, which if Ambac remains in a loss position at year end 2020, will expire in 2041.

As a result of positive income at Ambac Assurance in 2017, Ambac accrued ~~$27,868~~$28 of tax tolling payments. In May 2018, ~~Ambac~~AFG executed a waiver under the intercompany tax sharing agreement pursuant to which Ambac Assurance was relieved of the requirement to make the 2017 tax tolling payment by June 1, ~~2018. Ambac also agreed to continue to defer receipt of the 2017 tax tolling payment~~

| Ambac Financial Group, Inc. 40 ~~2019~~2020 Third Quarter FORM 10-Q|

Table of Contents

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Dollar Amounts in ~~Thousands,~~Millions, Except Share Amounts)

2018. AFG also agreed to continue to defer receipt of the 2017 tax tolling payment from Ambac Assurance until such time as OCI consents to the payment. ~~While OCI has not defined the conditions under which it will consent to the 2017 tax tolling payment,~~ OCI has indicated that it will consider a number of factors, including asset quality and loss and reserve ~~trends.~~trends when considering whether or not to consent to the 2017 tax tolling payment. We can provide no assurance as to whether, or when, OCI will consent to the 2017 tax tolling payment.

~~As a result of positive income at Ambac Assurance in 2018, Ambac accrued approximately $16,513 of tax tolling payments, which were paid in July 2019.~~

For the nine months ended September 30, 2019, Ambac Assurance generated $42,613 of taxable income resulting in additional accrued Tolling Payments of $3,579 which, assuming Ambac Assurance's full year 2019 taxable income does not change, will be paid to Ambac in 2020.

Ambac's tax positions are subject to review by the OCI, which may lead to the adoption of positions that reduce the amount of tolling payments otherwise available to Ambac.

As of September 30, ~~2019,~~2020, the remaining balance of the ~~$3,650,000~~$3,650 NOL allocated to Ambac Assurance, ~~was~~and new NOLs accrued during 2019 and 2020, totaled approximately ~~$2,120,508.~~$2,482. As of September 30, ~~2019~~2020, the consolidated group's NOL was approximately $3,731, of which Ambac's NOL was ~~approximately$1,253,181.~~approximately $1,249.

11. ~~LEASES~~

~~Ambac adopted the New Lease Standard as further described in Note 2,~~ ~~Basis of Presentation and Significant Accounting Policies~~. A contract contains a lease if it conveys the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. Ambac's evaluation of whether certain contracts contain leases may require judgment regarding what party controls the asset and whether the asset is physically distinct.

The New Lease Standard provides practical expedients that affect a reporting entity’s ongoing accounting. For contracts where Ambac is the lessee, we have elected the short-term lease recognition exemption for all leases that qualify. For those leases that qualify for that exemption, we will not recognize ROU assets or lease liabilities. For all contracts where Ambac is the lessee and lessor we have also elected the practical expedient to not separate lease and non-lease components.

~~Lessee information:~~

Ambac is the lessee in operating leases of corporate offices, a data center and equipment. Our leases, in effect at September 30, 2019, have remaining lease terms ranging from less than 1 year to 11 years. Our data center lease has an automatic renewal of one-year unless either party elects to terminate by providing 120 days notice prior to the renewal. This renewal feature is not recognized in the lease liability or right-of-use asset as it is not reasonably certain we will elect to renew. No other leases contain extension or termination provisions.

~~Lease costs are included in operating expenses on the consolidated statement of comprehensive income. The components of lease costs, net of sub-lessor income, is as follows:~~

Three Months Ended Nine Months Ended
September 30, 2019 September 30, 2019
Operating lease cost $ 2,208
$ 5,822
Variable Lease Cost 50
351
Sublease income (281 ) (626 )
Total lease cost $ 1,977
$ 5,547

~~Ambac is required to make variable lease payments under certain leases which primarily related to variable costs of the lessor. Such costs include taxes, insurance, maintenance and electricity.~~

~~Supplemental information related to leases is as follows:~~

Three Months Ended Nine Months Ended
Three Months Ended September 30, 2019 September 30, 2019
Cash paid for amounts included in the measurement of operating lease liabilities $ 1,641
$ 4,927
Right-of-use assets obtained in exchange for operating lease liabilities (non-cash)⁽¹⁾
588
29,887


⁽¹⁾	~~Includes new right-of-use assets of $14,360 for the nine months ended September 30, 2019 for leases which existed prior to the New Lease Standard implementation date of January 1, 2019.~~

~~Supplemental balance sheet information related to leases is as follows:~~

September 30, 2019
Operating leases:
Operating lease right of use assets $ 25,906
Operating lease liabilities 29,600
Weighted average remaining lease term:
Operating leases 10.0 years
Weighted average discount rate:
Operating leases 7.8 %

Operating lease right of use assets and operating lease liabilities are included in Other assets and Other liabilities, respectively, on the consolidated balance sheet. The discount rate used to initially measure the right of use assets and lease liabilities was based on Ambac's estimated secured borrowing rate. The Ambac Note, more fully described in Note 1. Background and Business Description in the Consolidated Financial Statements included Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, was a significant data point in estimating this rate.

~~| Ambac Financial Group, Inc.~~ 41~~2019 Third Quarter FORM 10-Q~~ |

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~~AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES~~

~~Notes to Unaudited Consolidated Financial Statements~~

~~(Dollar Amounts in Thousands, Except Share Amounts)~~

~~Future undiscounted lease payments, gross of sublease receipts, to be made are as follows:~~

As of 9/30/2019 Operating Leases
2019 (three months) $ 1,108
2020 4,138
2021 4,014
2022 4,014
2023 4,014
Thereafter 26,147
Total lease payments 43,435
Less: imputed interest (13,835 )
Total $ 29,600

~~Lessor information:~~

~~Ambac is the lessor in one operating sublease of corporate office space which has a remaining term of 10.3 years. There are no extension or termination provisions.~~

~~Future undiscounted lease payments to be received are as follows:~~

As of 9/30/2019 Operating Leases
2019 (three months) $ 172
2020 1,038
2021 1,051
2022 1,078
2023 1,131
Thereafter 7,571
Total lease receipts $ 12,041

~~12.~~ COMMITMENTS AND CONTINGENCIES

The following commitments and contingencies provide an update of those discussed in Note ~~18:~~17: Commitments and Contingencies in the Notes to Consolidated Financial Statements included Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, and should be read in conjunction with the complete descriptions provided in the aforementioned Form 10-K.

Litigation Against Ambac

~~Monterey Bay Military Housing, LLC, et al. v. Ambac Assurance Corporation, et al.~~ (United States District Court, Southern District of New York, Case No. 1:19-cv-09193-PGG, transferred on October 4, 2019 from the United States District Court, Northern District of California, San Jose Division, Case No. 17-cv-04992-BLF, filed August 28, 2017). On February 15, 2019, Ambac Assurance and the other defendants filed a motion to dismiss the second amended complaint (filed on December 17, 2018, following the court’s dismissal of the first amended complaint without prejudice on July 17, 2018). On April 16, 2019, Plaintiffs filed a brief in opposition to the defendants’ motion to dismiss the second amended complaint. Ambac Assurance and the other defendants filed reply briefs on May 16, 2019, and the court held a hearing on the motion to dismiss the second amended complaint on July 18, 2019. On September 26,

~~2019, the court issued a decision denying defendants’ motion to dismiss and~~ ~~sua sponte~~ reconsidering its previous denial of defendants’ motion to transfer venue to the Southern District of New York (“SDNY”). On October 4, 2019, the case was transferred to the SDNY. On October 10, 2019, the defendants filed motions in the SDNY to vacate or reconsider the decision by the Northern District of California on the defendants’ motion to dismiss. On October 24, 2019, plaintiffs filed their brief in opposition to defendants' motions to vacate or reconsider, and on October 31, 2019, defendants filed their reply briefs in further support of their motions.

Financial Oversight and Management Board for Puerto Rico, et al. v. Autonomy Master Fund Limited, et al. (United States District Court, District of Puerto Rico, No. 19-ap-00291, filed May 2, 2019). On May 2, 2019, the Financial Oversight and Management Board for Puerto Rico (the "Oversight Board"), together with the Official Committee of Unsecured Creditors for the Commonwealth (the "Committee")~~, as Plaintiffs,~~ filed an adversary proceeding against certain parties that filed proofs of claim on account of general obligation bonds issued by the Commonwealth of Puerto Rico, including Ambac Assurance. The complaint seeks declarations that the general obligation bonds are unsecured obligations and, in the alternative, seeks to avoid any security interests that holders of such bonds may have. On June 12, 2019, a group of general obligation bondholders moved to dismiss the complaint. On June 13, 2019, at the request of the Plaintiffs, the District Court stayed the case until September 1, 2019 as to all defendants; on July 24, 2019, the District Court referred this matter to mediation and ~~further~~ordered it stayed during the ~~case until November 30, 2019;~~pendency of such mediation. Ambac Assurance filed a statement of position and reservation of rights on ~~October 28, 2019,~~February 5, 2020; certain other defendants filed motions to dismiss on this same date. On February 9, 2020, the Oversight Board announced that it intends to file, and to seek to confirm, an amended plan of adjustment (the “Amended POA”). On March 10, 2020, the District Court ~~extended~~ordered that this case remain stayed while the ~~stay until December 31, 2019.~~Oversight Board attempts to confirm the Amended POA.

Financial Oversight and Management Board for Puerto Rico ~~et al.~~ v. Ambac Assurance ~~Corporation,~~Corp., et al. (United States District Court, District of Puerto Rico, No. ~~19-ap-00363,~~20-ap-00003, filed ~~May 20, 2019)~~Jan. 16, 2020). ~~On May 20, 2019,~~

Pursuant to an order of the District Court setting out an agreed schedule for litigation submitted by the team of mediators designated in the Commonwealth’s restructuring cases (the “Mediation Team“), on January 16, 2020, the Oversight Board ~~together with the Committee, as Plaintiffs,~~ filed an adversary proceeding against ~~certain parties that~~monoline insurers insuring bonds issued by the Puerto Rico Infrastructure Financing Authority (“PRIFA”) and the PRIFA bond trustee, all of which Defendants filed proofs of claim against the Commonwealth relating to PRIFA bonds. The complaint seeks to disallow Defendants’ proofs of claim against the Commonwealth in their entirety, including for lack of secured status. Oral argument on ~~account~~motions for summary judgment was held on September 23, 2020.

Financial Oversight and Management Board for Puerto Rico v. Ambac Assurance Corp., et al. (United States District Court, District of Puerto Rico, No. 20-ap-00004, filed Jan. 16, 2020). Pursuant to an order of the District Court setting out an agreed schedule for litigation submitted by the Mediation Team, on January 16, 2020, the Oversight Board filed an adversary proceeding against monoline insurers insuring bonds issued by the Puerto Rico Convention Center District Authority (“PRCCDA”) and the PRCCDA bond trustee, all of which Defendants filed proofs of claim against the Commonwealth relating to PRCCDA bonds. The complaint seeks to disallow Defendants’ proofs of claim against the Commonwealth in their entirety, including for lack of secured status. Oral argument on motions for summary judgment was held on September 23, 2020.

Financial Oversight and Management Board for Puerto Rico v. Ambac Assurance Corp., et al. (United States District Court, District of Puerto Rico, No. 20-ap-00005, filed Jan. 16, 2020). Pursuant to an order of the District Court setting out an agreed schedule for litigation submitted by the Mediation Team, on January 16, 2020, the Oversight Board filed an adversary proceeding against monoline insurers insuring bonds issued by the Puerto Rico Highways and Transportation Authority ("~~PRHTA"~~PRHTA“), ~~including Ambac Assurance.~~certain PRHTA bondholders, and the PRHTA fiscal agent for bondholders, all of which Defendants filed proofs of claim against the Commonwealth relating to PRHTA bonds. The complaint seeks ~~declarations that~~to disallow Defendants’ proofs of claim against the Commonwealth in their entirety, including for lack of secured status. Oral argument on motions for summary judgment was held on September 23, 2020.

Financial Oversight and Management Board for Puerto Rico v. Ambac Assurance Corp., et al. (United States District Court, District of Puerto Rico, No. 20-ap-00007, filed Jan. 16, 2020). Pursuant to an order of the District Court setting out an agreed schedule for litigation submitted by the Mediation Team, on January 16, 2020, the Oversight Board and the Committee filed an adversary proceeding against monoline insurers insuring bonds issued by PRHTA, certain PRHTA bondholders, and the PRHTA ~~bonds are only secured by revenues on deposit with the~~fiscal agent for bondholders, all of which Defendants filed proofs of claim against PRHTA ~~Fiscal Agent and that~~relating to PRHTA ~~bondholders have no security interest in any other property of PRHTA or the Commonwealth, and in the alternative, to the extent such other security interests exist, the~~bonds. The complaint seeks to ~~avoid other security interests that holders~~disallow portions of Defendants’ proofs of claim against the PRHTA, ~~bonds may have.~~including for lack of secured status. On ~~June 14, 2019, at the request of the Plaintiffs,~~March 10, 2020, the District Court stayed ~~the case until September 1, 2019 as to all defendants; on July 24, 2019, the District Court referred~~ this ~~matter to mediation and further stayed the case until November 30, 2019; on October 28, 2019, the District Court extended the stay until December 31, 2019.~~case.

NC Residuals Owners Trust, et al. v. Wilmington Trust Co., et al. (Delaware Court of Chancery, C.A. No. 2019-0880, filed Nov. 1, 2019). On November 1, 2019, Ambac Assurance became aware

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(Dollar Amounts in Millions, Except Share Amounts)

of a new declaratory judgment action filed by certain residual equity interest holders (“NC Owners” or “Plaintiffs”) in fourteen National Collegiate Student Loan Trusts (the “Trusts”) against Wilmington Trust Company, the Owner Trustee for the Trusts; U.S. Bank National Association, the Indenture Trustee; GSS Data Services, Inc., the Administrator; and Ambac Assurance. Through this action, Plaintiffs seek a number of judicial ~~determinations, including that~~determinations. On January 21, 2020, the presiding Vice Chancellor entered an order consolidating the action with previously filed litigation relating to the Trusts. On February 13, 2020, Ambac Assurance, the Owner Trustee, the Indenture Trustee, and ~~Administrator are required to follow~~other parties filed declaratory judgment counterclaims. Several parties, including Plaintiffs and Ambac Assurance, filed motions for judgment on the ~~NC Owners’ issuer~~

~~| Ambac Financial Group, Inc.~~ 42~~2019 Third Quarter FORM 10-Q~~ |

~~Table~~pleadings in support of ~~Contents~~

~~AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES~~

~~Notes to Unaudited Consolidated Financial Statements~~

~~(Dollar Amounts in Thousands, Except Share Amounts)~~

~~orders and cause~~their requested judicial determinations. On August 27, 2020, the ~~invoices of certain retained professional advisors to be paid from the assets~~Vice Chancellor issued an opinion addressing all of the ~~Trusts as Owner Trustee expenses~~pending motions for judgment on the pleadings, which granted certain of the parties’ requested judicial determinations and Administrator expenses. Plaintiffs also seek a declaration that, with respect to the Trusts, the Owner Trustee does not owe fiduciary or extracontractual duties to any party except the NC Owners. Finally, Plaintiffs request their costs and attorney’s fees incurred in connection with this action. Plaintiffs have filed a motion to expedite the proceedings to obtain a trial and adjudication of their declaratory claim within approximately four months.

From time to time, Ambac is subject to allegations concerning its corporate governance that may lead to litigation, including derivative litigation, and while the monetary impacts may not be material, the matters may distract management and the Board of Directors from their principal focusdenied others. He deferred judgment on ~~Ambac's business, strategy and objectives.~~still other declarations pending further factual development.

Ambac Assurance’s estimates of projected losses for RMBS transactions consider, among other things, the RMBS transactions’ payment waterfall structure, including the application of interest and principal payments and recoveries, and depend in part on our interpretations of contracts and other bases of our legal rights. From time to time, bond trustees and other transaction participants have employed different contractual interpretations and have commenced, or threatened to commence, litigation to resolve these differences. It is not possible to predict whether additional disputes will arise, nor the outcomes of any potential litigation. It is possible that there could be unfavorable outcomes in this or other disputes or proceedings and that our interpretations may prove to be incorrect, which could lead to changes to our estimate of loss reserves.

Ambac Assurance has periodically received various regulatory inquiries and requests for information with respect to investigations and inquiries that such regulators are conducting. Ambac Assurance has complied with all such inquiries and requests for information.

The Company is involved from time to time in various routine legal proceedings, including proceedings related to litigation with present or former employees. Although the Company’s litigation with present or former employees is routine and incidental to the conduct of its business, such litigation can result in large monetary awards when a civil jury is allowed to determine compensatory and/or punitive damages for, among other things, termination of employment that is wrongful or in violation of implied contracts.

It is not reasonably possible to predict whether additional suits will be filed or whether additional inquiries or requests for

information will be made, and it is also not possible to predict the outcome of litigation, inquiries or requests for information. It is possible that there could be unfavorable outcomes in these or other proceedings. Legal accruals for litigation against the Company which are probable and reasonably estimable, and management's estimated range of loss for such matters, are either not applicable or are not material to the operating results or financial position of the Company. For the litigation matters the Company is defending that do not meet the “probable and reasonably estimable” accrual threshold and where no loss estimates have been provided above, management is unable to make a meaningful estimate of the amount or range of loss that could result from unfavorable outcomes. Under some circumstances, adverse results in any such proceedings could be material to our business, operations, financial position, profitability or cash flows. The

Company believes that it has substantial defenses to the claims above and, to the extent that these actions proceed, the Company intends to defend itself vigorously; however, the Company is not able to predict the outcomes of these actions.

Litigation Filed or Joined by Ambac

In the ordinary course of their businesses, certain of Ambac’s subsidiaries assert claims in legal proceedings against third parties to recover losses already paid and/or mitigate future losses. The amounts recovered and/or losses avoided which may result from these proceedings is uncertain, although recoveries and/or losses avoided in any one or more of these proceedings during any quarter or fiscal year could be material to Ambac’s results of operations in that quarter or fiscal year.

Puerto ~~Rico:~~

~~Lex Claims, LLC et al. v. Alejandro Garcia Padilla et al.~~ ~~(United States District Court, District of Puerto~~ Rico No. 16-2374, filed July 20, 2016). Following confirmation of the COFINA Plan, several parties appealed the District Court’s confirmation order to the First Circuit Court of Appeals. On April 12, 2019, the Oversight Board and the Puerto Rico Fiscal Agency and Financial Advisory Authority ("AAFAF") moved to dismiss these appeals as equitably moot because the COFINA Plan has been consummated. On August 7 and October 4, 2019, the First Circuit denied the motions to dismiss, but without prejudice to reconsideration of the mootness issue by the panel that decides the appeals.

~~Ambac Assurance Corporation v. Bank of New York Mellon~~ (United States District Court, Southern District of New York. No. 1:17-cv-03804, filed May 2, 2017). Following confirmation of the COFINA Plan, several parties appealed the District Court’s confirmation order to the First Circuit Court of Appeals. On April 12, 2019, the Oversight Board and AAFAF moved to dismiss these appeals as equitably moot because the COFINA Plan has been consummated. On August 7 and October 4, 2019, the First Circuit denied the motions to dismiss, but without prejudice to reconsideration of the mootness issue by the panel that decides the appeals.

~~Bank of New York Mellon v. COFINA, et al.~~ (United States District Court, District of Puerto Rico, No. 1:17-ap-00133, filed May 16, 2017). Following confirmation of the COFINA Plan, several parties appealed the District Court’s confirmation order to the First Circuit Court of Appeals. On April 12, 2019, the Oversight Board and AAFAF moved to dismiss these appeals as equitably moot because the COFINA Plan has been consummated. On August 7 and October 4, 2019, the First Circuit denied the motions to dismiss, but without prejudice to reconsideration of the mootness issue by the panel that decides the appeals.

~~Official Committee of Unsecured Creditors v. Whyte~~ (United States District Court, District of Puerto Rico, No. 1:17-ap-00257, filed September 8, 2017) (the Commonwealth-COFINA Dispute). On February 21, 2019, on the joint motion of the agents for the Commonwealth and COFINA, the Oversight Board, AAFAF, and all participating interested parties, the District Court dismissed this case with prejudice. Following confirmation of the COFINA Plan, several parties appealed the District Court’s confirmation order to the First Circuit Court of Appeals. On April 12, 2019, the Oversight Board and AAFAF moved to dismiss these appeals as equitably moot

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~~AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES~~

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~~(Dollar Amounts in Thousands, Except Share Amounts)~~

because the COFINA Plan has been consummated. On August 7 and October 4, 2019, the First Circuit denied the motions to dismiss, but without prejudice to reconsideration of the mootness issue by the panel that decides the appeals.

~~Ambac Assurance Corporation v. Puerto Rico, et al.~~ (United States District Court, District of Puerto Rico, No. 1:17-ap-00159, filed June 8, 2017). On June 24, 2019, the First Circuit affirmed the District Court's dismissal of Ambac Assurance's claims for relief on the grounds that PROMESA deprives courts of jurisdiction to review the Oversight Board's certification determinations, and that PROMESA prohibits the Title III court from interfering with the political or governmental powers of the Commonwealth or the Commonwealth's property or revenues. On September 23, 2019, Ambac Assurance filed a petition for certiorari before the Supreme Court of the United States.

Financial Oversight and Management Board for Puerto Rico v. Public Buildings Authority (United States District Court, District of Puerto Rico, No. 1:18-ap-00149, filed December 21, 2018). On December 21, 2018, the Oversight Board, together with the Committee, as Plaintiffs, filed a complaint against the Puerto Rico Public Buildings Authority (“PBA”) seeking declaratory judgment that the leases between PBA and its lessees-many of whom are agencies and instrumentalities of the Commonwealth-are “disguised financings,” not true leases, and therefore should not be afforded administrative expense priority under the Bankruptcy Code. On March 12, 2019, Ambac Assurance and other interested parties were permitted to intervene in order to argue that the PBA leases are valid leases, and are entitled to administrative expense treatment under the Bankruptcy Code. ~~Certain intervenor-defendants filed counterclaims for declarations to this effect, and a motion for judgment on the pleadings.~~ On June 16, 2019, the Oversight Board announced that it had entered into a plan support agreement ("PSA") with certain general obligation and PBA bondholders that includes a proposed resolution of claim objections to and issues surrounding both general obligation and PBA bonds, including a proposed settlement of this adversary proceeding. On June 27, 2019, the Oversight Board moved to stay this adversary proceeding while it pursues confirmation of the plan contemplated in the PSA. On July 9, 2019, Ambac Assurance objected to the motion to stay. On July 24, 2019, the District Court referred this ~~case~~matter to mediation and ordered ~~this case~~it stayed ~~until November 30, 2019; on October 28,~~during the pendency of such mediation. On September 27, 2019, the Oversight Board filed a joint plan of adjustment and disclosure statement for the Commonwealth, PBA, and the Employees’ Retirement System for Puerto Rico. On February 9, 2020, the Oversight Board executed a new plan support agreement with additional creditors (the “New PSA”) and announced that it intends to file, and seek to confirm, the

| Ambac Financial Group, Inc. 422020 Third Quarter FORM 10-Q |

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Amended POA. On March 10, 2020, the District Court ~~extended~~ordered that this case remain stayed while the ~~stay until December 31, 2019.~~Oversight Board attempts to confirm the Amended POA.

In re Financial Oversight and Management Board for Puerto Rico ~~(United~~(United States District Court, District of Puerto Rico, No. 1:17-bk-03283), Omnibus Objection of (I) Financial Oversight and Management Board, Acting Through its Special Claims Committee, and (II) Official Committee of Unsecured Creditors, Pursuant to Bankruptcy Code Section 502 and Bankruptcy Rule 3007, to Claims Filed or Asserted by Holders of Certain Commonwealth General Obligation Bonds (Dkt. No. 4784, filed January 14, 2019) (“GO Bond Claim Objection Procedures”). On January 14, 2019, the Oversight Board and the Committee filed an omnibus claim objection in the Commonwealth’s Title III case challenging claims arising from certain general obligation bonds issued by the Commonwealth in 2012 and 2014 totaling approximately $6 billion, none of which are held or insured by Ambac Assurance. The court subsequently ordered certain consolidated procedures permitting parties in interest an opportunity

to participate in litigation of the objection. On April 11, 2019, Ambac Assurance filed a notice of participation in support of the objection, advancing the argument, among other things, that the PBA leases are true leases, but the associated debt nonetheless should be included in the Commonwealth’s debt ceiling calculation such that the 2012 and 2014 general obligation bond issuances are null and void and claims arising therefrom should be disallowed. On June 16, 2019, the Oversight Board announced that it had entered into a PSA with certain general obligation and PBA bondholders that includes a proposed resolution of claim objections to and issues surrounding both general obligation and PBA bonds, including a proposed settlement of this omnibus claim objection. On June 25, 2019, the Oversight Board moved to stay proceedings related to this omnibus claim objection while it pursues confirmation of the plan contemplated in the PSA. On July ~~9, 2019, Ambac Assurance objected to the motion to stay. On July~~ 24, 2019, the District Court referred this ~~case~~matter to mediation and ordered ~~this case~~it stayed ~~until November 30, 2019;~~during the pendency of such mediation. On February 5, 2020, certain parties filed motions to dismiss the claim objection. On February 9, 2020, the Oversight Board executed the New PSA and announced that it intends to file, and seek to confirm, the Amended POA. Additional motions to dismiss were filed on ~~October 28, 2019,~~February 19, 2020. On March 10, 2020, the District Court ~~extended~~ordered that this matter remain stayed while the Oversight Board attempts to confirm the Amended POA. On July 19, 2020, the Committee filed a motion to lift the stay on this claim objection in light of the changes to the fiscal plan and likely changes to the Commonwealth plan of adjustment in light of COVID-19. On September 1, 2020, Ambac Assurance filed a partial joinder to the Committee’s motion. On September 17, 2020, the District Court denied the Committee’s motion without prejudice, indicating that the stay likely would remain in place until ~~December 31, 2019.~~at least March 2021. On October 1, 2020, the Committee moved the District Court to reconsider its denial of the Committee’s motion to lift the stay in light of materials released by the parties to the New PSA that the Committee argued demonstrate a lack of agreement between those parties. On October 5, 2020, the District Court denied the Committee’s motion for consideration. On October 16, 2020, the Committee appealed to the First Circuit the District Court’s order denying the Committee’s motion to lift the stay on its claim objection.

In re Financial Oversight and Management Board for Puerto Rico (United States District Court, District of Puerto Rico, No. 1:17-bk-03283), Ambac Assurance Corporation’s Motion to Strike Certain Provisions of the Plan Support Agreement By and Among the Financial Oversight and Management Board for Puerto Rico, Certain GO Holders, and Certain PBA Holders (Dkt. No. 13573, filed July 7, 2020) (“Amended Motion to Strike PSA”). On June 16, 2019, the Oversight Board announced that it had entered into a PSA with certain general obligation and PBA bondholders that includes a proposed resolution of claim objections to and issues surrounding both general obligation and PBA bonds. On July 16, 2019, Ambac Assurance filed a motion to strike certain provisions of the PSA that it believes violate PROMESA, including the potential payment of a breakup fee to creditors who have supported the PSA (Dkt. No. 8020) (Original Motion to Strike PSA). On February 9, 2020, the Oversight Board executed the New PSA and on March 10, 2020, the District Court denied the Original Motion to Strike PSA without prejudice given the execution of the New PSA. On July 7, 2020, Ambac Assurance filed the Amended Motion to Strike PSA seeking similar relief with respect to the New PSA. Briefing on the Amended Motion to Strike PSA concluded on October 20, 2020, and the District Court has taken the matter on submission.

In re Financial Oversight and Management Board for Puerto Rico (United States District Court, District of Puerto Rico, No. 1:17-bk-03283), Ambac Assurance Corporation's Motion and Memorandum of Law in Support of Its Motion Concerning Application of the Automatic Stay to the Revenues Securing PRIFA Rum Tax Bonds (Dkt. No. 7176, filed May 30, 2019) (“PRIFA Stay Motion”). On May 30, 2019, Ambac Assurance filed a motion seeking an order that the automatic stay does not apply to certain lawsuits Ambac Assurance seeks to bring or to continue relating to bonds issued by ~~the Puerto Rico Infrastructure Financing Authority ("PRIFA"),~~PRIFA, or, in the alternative, for relief from the automatic stay to pursue such lawsuits or for adequate protection of Ambac Assurance's collateral. On July 24, 2019, the District Court referred this ~~case~~matter to mediation and ordered ~~this case~~it stayed ~~until November 30, 2019; on October 28, 2019,~~during the pendency of such mediation. On January 31, 2020, the District Court ~~extended the stay until December 31, 2019.~~

~~Student Loans Exposure:~~

~~Nat’l Collegiate Master Student Loan Trust v. Pa. Higher Education Assistance Agency (PHEAA)~~ ~~(Delaware Court of Chancery, C.A. No. 12111-VCS,~~granted a motion filed March 21, 2016). Plaintiffs purporting to act on behalf of fifteen National Collegiate Student Loan Trusts filed a lawsuit against PHEAA, a servicer of loans in the Trusts, alleging improprieties and deficiencies in servicing practices and seeking an order compelling PHEAA to submit to an emergency audit. Other matters that have been contested in this litigation include the appointment of a successor Owner Trustee of the Trusts, because Wilmington Trust Company has resigned from its role as Owner Trustee, citing irreconcilable differences with Plaintiffs.by Ambac Assurance, ~~guaranteed certain securities issued by three of~~together with Assured Guaranty Corporation, Assured Guaranty Municipal Corporation, and Financial Guaranty Insurance Company to amend the ~~Trusts~~PRIFA Stay Motion in order to allow the PRIFA bond trustee to join the amended motion and ~~indirectly insures certain securities in six other Trusts. On October 23, 2017,~~to allow movants to address recent, controlling precedent from the First Circuit, and Ambac Assurance filed athe amended motion the same day. On July 2, 2020, the Court denied the motion to ~~intervene in~~lift the ~~action for~~stay on certain grounds. Briefing regarding additional grounds on which Ambac Assurance and other movants seek stay relief concluded on August 5, 2020; on September 9, 2020, the ~~limited purpose of being heard regarding~~District Court denied the appointment of a successor Owner Trustee and regarding WTC’s contractual commitment and obligation to remain in that role until such appointment is made. On April 10, 2018, the court (Vice Chancellor Slights) granted Ambac Assurance’s motion to ~~intervene.~~lift the stay on the additional grounds. On ~~November 14, 2018,~~September 23, 2020, Ambac Assurance and the ~~court appointed Hon. Joseph~~other movants appealed this decision to the First Circuit. Briefing is expected to be completed by December 21, 2020, with argument heard in February 2021.

In re Financial Oversight and Management Board for Puerto Rico (United States District Court, District of Puerto Rico, No. 1:17-bk-03283), Motion of Assured Guaranty Corp., Assured Municipal Corp., Ambac Assurance Corporation, National Public Finance Guarantee Corporation, and Financial Guaranty

| Ambac Financial Group, Inc. 4443 ~~2019~~2020 Third Quarter FORM 10-Q|

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(Dollar Amounts in ~~Thousands,~~Millions, Except Share Amounts)

Insurance Company for Relief from the Automatic Stay, or, in the Alternative, Adequate Protection (Dkt. No. 10102, filed January 16, 2020) (“PRHTA Stay Motion”). Pursuant to an order of the District Court setting out an agreed schedule for litigation submitted by the Mediation Team, on January 16, 2020, Ambac Assurance, together with Assured Guaranty Corp., Assured Municipal Corp., National Public Finance Guarantee Corporation, and Financial Guaranty Insurance Company filed a motion seeking an order that the automatic stay does not apply to movants’ enforcement of the application of pledged revenues to the PRHTA bonds or the enforcement of movants’ liens on revenues pledged to such bonds, or, in the alternative, for adequate protection of movants’ interests in the revenues pledged to PRHTA bonds. On July 2, 2020, the Court denied the motion to lift the stay on certain grounds. Briefing regarding additional grounds on which Ambac Assurance and other movants seek stay relief concluded on August 5, 2020; on September 9, 2020, the District Court denied the motion to lift the stay on the additional grounds.On September 23, 2020, Ambac Assurance and the other movants appealed this decision to the First Circuit. Briefing is expected to be completed by December 21, 2020, with argument heard in February 2021.

In re Financial Oversight and Management Board for Puerto Rico (United States District Court, District of Puerto Rico, No. 1:17-bk-03283), Ambac Assurance Corporation, Financial Guaranty Insurance Company, Assured Guaranty Corp., Assured Municipal Corp., and the Bank of New York Mellon’s Motion Concerning Application of the Automatic Stay to the Revenues Securing the CCDA Bonds (Dkt. No. 10104, filed January 16, 2020) (“PRCCDA Stay Motion”). Pursuant to an order of the District Court setting out an agreed schedule for litigation submitted by the Mediation Team, on January 16, 2020, Ambac Assurance, together with Financial Guaranty Insurance Company, Assured Guaranty Corp., Assured Municipal Corp., and the PRCCDA bond trustee, filed a motion seeking an order either (i) that the automatic stay does not apply to movants’ enforcement of their rights to revenues pledged to PRCCDA bonds by bringing an enforcement action against PRCCDA; or, in the alternative, (ii) lifting the automatic stay to enable movants to pursue an enforcement action against PRCCDA; or, in the further alternative, (iii) ordering adequate protection of movants’ interests in the PRCCDA pledged to PRCCDA bonds. On July 2, 2020, the Court denied the motion to lift the stay on certain grounds, but found that the movants had stated a colorable claim that a certain account was the “Transfer Account” on which movants hold a lien. Briefing regarding additional grounds on which Ambac Assurance and other movants seek stay relief concluded on August 5, 2020; on September 9, 2020, the District Court denied the motion to lift the stay on the additional grounds, and found that a final determination on issues related to the identity of the Transfer Account would be made in the decision on the motions for summary judgment issued in the CCDA-related adversary proceeding, No. 20-ap-00004.

Ambac Assurance Corporation v. Merrill Lynch, Pierce, Fenner & Smith Incorporated, Goldman Sachs & Co. LLC, Citigroup Global Markets Inc., J.P. Morgan Securities LLC, Morgan Stanley & Co. LLC, Samuel A. Ramirez & Co. Inc., Raymond James & Associates, Inc., and UBS Financial Services Inc.

(Commonwealth of Puerto Rico, Court of First Instance, San Juan Superior Court, Case No. CV-000248923, filed February 19, 2020). On February 19, 2020,Ambac Assurance filed a complaint in the Commonwealth of Puerto Rico, Court of First Instance, San Juan Superior Court, against certain underwriters of Ambac-insured bonds issued by PRIFA and PRCCDA, with causes of action under the Puerto Rico civil law doctrines of actos proprios and Unilateral Declaration of Will. Ambac Assurance alleges defendants engaged in inequitable conduct in underwriting Ambac-insured bonds issued by PRIFA and PRCCDA, including failing to investigate and adequately disclose material information in the official statements for the bonds that defendants provided to Ambac Assurance regarding systemic deficiencies in the Commonwealth’s financial reporting. Ambac Assurance seeks damages in compensation for claims paid by Ambac Assurance on its financial guaranty insurance policies insuring such bonds, pre-judgment and post-judgment interest, and attorneys’ fees. On March 20, 2020, Defendants removed this case to the Title III Court. On April 20, 2020, Ambac moved to remand the case back to the Court of First Instance. On July 29, 2020, the District Court granted Ambac Assurance’s motion to remand the case to the Commonwealth court.Ambac Assurance filed an amended complaint in the Commonwealth court on October 28, 2020.

Ambac Assurance Corporation v. Autopistas Metropolitanas de Puerto Rico, LLC (United States District Court, District of Puerto Rico, No. 3:20-cv-01094, filed February 19, 2020). On February 19, 2020, Ambac Assurance filed a complaint in the U.S. District Court for the District of Puerto Rico, against Autopistas Metropolitanas de Puerto Rico, LLC (“Metropistas”), which holds a concession from PRHTA for two Puerto Rico highways, PR-5 and PR-22, in connection with a 10-year extension of the concession that was entered into in April 2016. The complaint includes claims for fraudulent conveyance and unjust enrichment, alleging that the consideration paid by Metropistas for the extension was less than reasonably equivalent value and most of the benefit of such payment was received by the Commonwealth instead of PRHTA. Ambac Assurance also seeks a declaratory judgment that it has a valid and continuing lien on certain toll revenues that are being collected by Metropistas. On March 31, 2020, the Oversight Board filed a motion before the Title III Court seeking an order directing Ambac to withdraw its complaint. On April 20, 2020, the District Court ordered this case stayed pending briefing before the Title III Court on the Oversight Board’s motion to withdraw. On June 16, 2020, the Title III Court ordered Ambac Assurance to withdraw its complaint. Ambac Assurance withdrew its complaint on June 23, 2020, and noticed an appeal from the Title III Court’s order to withdraw on June 30, 2020. Ambac Assurance’s opening appeal brief was filed before the First Circuit on October 19, 2020; opposition briefs are due to be filed on December 18, 2020.

Ambac Assurance Corporation v. Financial Oversight and Management Board for Puerto Rico (United States District Court, District of Puerto Rico, No. 3:20-bk-00068, filed May 26, 2020). On May 26, 2020, Ambac Assurance filed an adversary complaint before the Title III Court seeking (i) a declaration that titles I, II, and III of PROMESA are unconstitutional because they violate the Bankruptcy Clause of the U.S. Constitution (which requires all bankruptcy laws to be uniform) and (ii) dismissal of

~~J. Farnan, Jr. as Special Master~~| Ambac Financial Group, Inc. 442020 Third Quarter FORM 10-Q |

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AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

the pending Title III petitions. On August 17, 2020, the Oversight Board filed a motion to dismiss the complaint; on August 18, 2020, the Official Committee of Retired Employees of the Commonwealth of Puerto Rico (the “Retiree Committee”) and ~~granted him authority to resolve non-dispositive disputes among~~ the ~~parties, including disputes concerning instructions~~Puerto Rico Fiscal Agency and Financial Advisory Authority (“AAFAF”) filed joinders to the ~~Owner Trustee.~~motion to dismiss. The ~~order appointing~~United States filed a motion to dismiss on October 2, 2020. Briefing on the ~~Special Master also raises~~motions to dismiss are expected to conclude on November 23, 2020, with a hearing on January 12, 2021.

In re Financial Oversight and Management Board for Puerto Rico (United States District Court, District of Puerto Rico, No. 1:17-bk-03283), Urgent Motion for Bridge Order, and Motion for Appointment as Trustees Under 11 U.S.C. § 926, of Ambac Assurance Corporation, Assured Guaranty Corp., Assured Guaranty Municipal Corp., Financial Guaranty Insurance Company, and National Public Finance Guarantee Corporation (Dkt. No. 13708, filed July 17, 2020) (“HTA Trustee Motion”). On July 17, 2020, Ambac Assurance, together with Assured Guaranty Corporation, Assured Guaranty Municipal Corporation, and Financial Guaranty Insurance Company, filed a motion seeking appointment as trustees under Section 926 of the ~~annual expense caps~~Bankruptcy Code to pursue certain avoidance actions on behalf of HTA against the Commonwealth of Puerto Rico. The HTA Trustee Motion attached a proposed complaint detailing the avoidance claims that ~~apply~~movants would pursue. On August 11, 2020, the District Court denied the HTA Trustee Motion; on August 24, 2020, movants noticed an appeal of the denial of the HTA Trustee Motion to the ~~Owner Trustee~~First Circuit. On September 30, 2020, movants filed a motion with the First Circuit to hold this appeal in abeyance pending the First Circuit’s resolution of the appeal from the District Court’s denial of the HTA Lift-Stay Motion. On October 13, 2020, the Oversight Board opposed the motion to hold the appeal in abeyance and ~~Indenture Trustee.~~cross-moved to dismiss the appeal as moot, arguing that the statute of limitations on the avoidance actions movants wish to pursue has expired. On ~~June 21, 2019,~~October 20, 2020, movants filed a reply in support of their motion to hold the ~~Special Master denied an application by certain residual equity interest holders~~appeal in abeyance, and opposed the ~~Trusts, which sought~~Oversight Board’s cross-motion to ~~compel~~dismiss the ~~Owner Trustee~~appeal as moot. On October 27, 2020, the Oversight Board filed a reply in support of its cross-motion to ~~appoint certain counsel for~~dismiss the ~~Trusts in~~ appeal as moot.

Student Loans Exposure

CFPB v. Nat’l Collegiate Master Student Loan Trust (United States District Court, District of Delaware, Case No. 1:17-cv-01323, filed September 18, 2017). The ~~residual equity interest holders~~Consumer Financial Protection Bureau (“CFPB”) filed a complaint against fifteen National Collegiate Student Loan Trusts, regarding alleged improprieties and deficiencies in servicing practices. Simultaneous with the filing of its complaint, CFPB also filed a motion to approve a proposed consent judgment that would have ~~appealed~~granted monetary damages and injunctive relief against the ~~Special Master’s ruling~~Trusts. Ambac Assurance guaranteed certain securities issued by three of the Trusts and indirectly insures six other Trusts. On September 20, 2017, Ambac Assurance filed a motion to ~~Vice Chancellor Slights. Oral argument on that appeal~~intervene in the action, which motion was ~~held~~granted on October ~~1, 2019.~~ 19, 2018. Following discovery and briefing, on May 31, 2020, the District Court denied the CFPB’s motion to approve the proposed consent judgment.

On ~~October 11, 2019, Vice Chancellor Slights issued~~March 19, 2020, Intervenor Transworld Systems Inc. filed a ~~decision affirming~~motion to dismiss the ~~Special Master’s ruling.~~action for lack of subject matter jurisdiction. On July 10, 2020, Ambac Assurance and several other intervenors filed a motion to dismiss the action for lack of subject matter jurisdiction and for failure to state a claim. Briefing on both motions to dismiss is complete. Additionally, on July 2, 2020, the CFPB submitted an application for entry of default against the Trusts. Ambac Assurance and the Owner Trustee opposed the CFPB’s application, which remains pending.

RMBS ~~Litigation:~~Litigation

In connection with Ambac Assurance’s efforts to seek redress for breaches of representations and warranties and fraud related to the information provided by both the underwriters and the sponsors of various transactions and for failure to comply with the obligation by the sponsors to repurchase ineligible loans, Ambac Assurance has filed various lawsuits:

•

Ambac Assurance Corporation and the Segregated Account of Ambac Assurance Corporation v. Countrywide Home Loans, Inc., Countrywide Securities Corp., Countrywide Financial Corp., and Bank of America Corp. (Supreme Court of the State of New York, County of New York, Case No. 653979/2014, filed on December 30, 2014). Discovery has been completed. The court has not yet set a schedule for summary judgment or for trial.

•

Ambac Assurance Corporation and The Segregated Account of Ambac Assurance Corporation v. Countrywide Securities Corp., Countrywide Financial Corp. (a.k.a. Bank of America Home Loans) and Bank of America Corp. (Supreme Court of the State of New York, County of New York, Case No. 651612/2010, filed on September 28, 2010). In August and October 2018, Defendants filed pre-trial motions seeking to (1) strike Ambac Assurance’s jury demand for its fraudulent-inducement claim; (2) strike Ambac Assurance’s jury demand for its successor-liability claim; (3) sever the trials for Ambac Assurance’s primary- and successor-liability claims; (4) limit the loans for which Ambac Assurance may seek to recover damages; (5) preclude Ambac Assurance from using sampling to prove liability or damages for breach of contract; and (6) dismiss Ambac Assurance’s fraudulent-inducement claim as duplicative of its contract claim. On December 30, 2018, the court denied all six of these pre-trial motions in their entirety and Defendants appealed. On January 24, 2019, the court ordered that trial be put off until the First Department resolves Defendants’ appeals, provided that Defendants perfected the appeals for the May 2019 Term at the First Department. ~~Defendants perfected their appeals for the May Term by~~ ~~filing their opening appeal briefs in the First Department on February 19, 2019~~; Ambac Assurance filed its opposition brief on March 20, 2019; and Defendants filed their reply briefs on March 29, 2019. Oral argument on Defendants’ appeals of these six pre-trial motions was held in the First Department on May 2, 2019. ~~On September 17, 2019, the First Department issued a decision~~

~~on Defendants’ appeals, affirming Justice Bransten’s ruling in the following respects: (1) denying Countrywide’s motion to strike~~ Ambac Assurance’s ~~jury demand~~Second Amended Complaint, filed on May 28, 2013, asserted claims against Countrywide and Bank of America (as successor to Countrywide’s liabilities) for, its fraudulent-inducement claim; (2) denying Countrywide’s motion to limit the loans for which Ambac Assurance may seek to recover damages; (3) denying Countrywide’s motion to preclude Ambac Assurance from using sampling to prove liability or damages foramong other things, breach of ~~contract;~~contract and ~~(4) denying Countrywide’s motion to dismiss Ambac Assurance’s fraudulent-inducement claim as duplicative~~fraudulent inducement. In August and October 2018, Defendants filed various pre-trial motions. On December 30, 2018, the court denied all of ~~its contract claim, but subject to a potential motion by Countrywide to renew. The~~these pre-trial motions in their entirety and Defendants appealed. On September 17, 2019, the First Department ~~modified Justice Bransten’s ruling~~affirmed in part and reversed in part the following respects: (1) granting Bank of America’s motion to strike Ambac Assurance’s jury demand for its successor-liability claim; and (2) granting Defendants’ motion to sever the trials for Ambac Assurance’s primary- and successor-liability claims.trial court’s rulings. On October 17, 2019, Countrywide filed a motion ~~before the First Department~~ for leave to appeal certain issues to the New York Court of Appeals and for reargument or leave to appeal certain other ~~issues, as follows:~~issues. On January 16, 2020, the First Department recalled and vacated its September 17, 2019 decision and order and substituted a new decision and order. On the same date, the First Department denied Countrywide’s motion seeking leave to appeal, without prejudice to seeking such leave from the reissued decision and order. On January 30, 2020, Countrywide ~~seeks~~filed a new motion for leave to appeal the First Department’s denial of its motions, ~~(1) to limit the loans for~~ which Ambac Assurance may seek to recover damages; (2) to preclude Ambac Assurance from using sampling to prove liability or damages for breach of contract; and (3) to dismiss Ambac Assurance’s fraudulent-inducement claim as duplicative of its contract claim; Countrywide seeks reargument of, or leave to appeal, (1) its motion to strike Ambac Assurance’s jury demand for its fraudulent-inducement claim and (2)opposed. On June 11, 2020, the First ~~Department’s ruling that Countrywide is liable for loans that it knew or should have known were in breach. Ambac Assurance filed its opposition to~~Department denied Countrywide’s motion for leave to appeal. On January 14, 2020, the trial court granted Ambac Assurance’s motion to supplement and ~~for reargument~~amend certain of its expert reports, and expert discovery is ongoing. On June 25, 2020, the trial court scheduled trial to commence on ~~October 25, 2019.~~February 22, 2021 (which could be rescheduled if the COVID-19 pandemic prevents the court system from holding jury trials or there are other intervening causes of delay). On ~~October 28, 2019,~~August 12, 2020, Countrywide filed a ~~reply brief, which~~ motion to dismiss Ambac’s fraud claim. The court has scheduled oral argument on that motion for November 13, 2020.

•Ambac Assurance ~~has challenged as being procedurally improper.~~

•

~~Ambac Assurance~~ Corporation v. U.S. Bank National Association (United States District Court, Southern District of New York, Docket No. 18-cv-5182 (LGS), filed June 8, ~~2018 (the “SDNY Action”));~~ ~~In the matter of HarborView Mortgage Loan Trust 2005-10~~ (Minnesota state court, Docket No. 27-TR-CV-17-32 (the “Minnesota Action”)). On February 11, 2019, Ambac Assurance filed a petition for certiorari with the United States Supreme Court for review of the denial of Ambac Assurance’s motion to dismiss the Minnesota Action. On March 21, 2019, the United States Supreme Court directed U.S. Bank to respond to this petition for certiorari, which U.S. Bank did on May 22, 2019. Ambac Assurance filed a reply brief on June 5, 2019. On October 4, 2019, the Supreme Court denied Ambac Assurance’s petition for certiorari. On October 9, 2019, the court in the Minnesota Action set April 27, 2020 as the date for the start of the trial. On July 16, 2019, the court in the SDNY Action granted in part and denied in part U.S. Bank's motion to dismiss Ambac Assurance's claims. The court dismissed Ambac Assurance's breach-of-contract and breach-of-fiduciary-duty claims based on U.S. Bank's acceptance of the settlement; and dismissed Ambac Assurance's declaratory judgment claims regarding the occurrence of an Event of Default and U.S. Bank's future distribution of trust recoveries through the waterfall. The court denied the motion to dismiss Ambac Assurance's breach-of-contract claims based on U.S.

| Ambac Financial Group, Inc. 45 ~~2019~~2020 Third Quarter FORM 10-Q|

Table of Contents

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Dollar Amounts in ~~Thousands,~~Millions, Except Share Amounts)

2018 (the “SDNY Action”)); In the matter of HarborView Mortgage Loan Trust 2005-10 (Minnesota state court, Docket No. 27-TR-CV-17-32 (the “Minnesota Action”)). These two actions relate to U.S. Bank National Association’s (“U.S. Bank”) acceptance of a proposed settlement in a separate litigation that U.S. Bank is prosecuting, as trustee, related to the Harborview Mortgage Loan Trust, Series 2005-10 (“Harborview 2005-10”), a residential mortgage-backed securitization for which Ambac Assurance issued an insurance policy. On March 6, 2017, U.S. Bank filed a petition commencing the Minnesota Action, a trust instruction proceeding in Minnesota state court concerning the proposed settlement, and on June 12, 2017, U.S. Bank filed an amended petition. Ambac Assurance filed a motion to dismiss the Minnesota Action, which was denied on November 13, 2017, and the denial was affirmed on appeal. On September 6, 2018, U.S. Bank filed its Second Amended Petition, and Ambac Assurance and certain other certificateholders objected to, or otherwise responded to, the petition. Trial, which was previously scheduled to begin October 14, 2020, has been rescheduled to February 1 through 5, 2021. On June 8, 2018, Ambac Assurance filed the SDNY Action asserting claims arising out of U.S. Bank’s acceptance of the proposed settlement and treatment of trust recoveries. Ambac Assurance asserted claims for declaratory judgment, breach of contract, and breach of fiduciary duty. On July 16, 2019, the court dismissed Ambac Assurance's breach-of-contract and breach-of-fiduciary-duty claims based on U.S. Bank's acceptance of the settlement; and dismissed Ambac Assurance's declaratory judgment claims regarding the occurrence of an Event of Default and U.S. Bank's future distribution of trust recoveries through the waterfall. The court denied the motion to dismiss Ambac Assurance's breach-of-contract claims based on U.S. Bank's past distribution of trust recoveries through the waterfall. On January 17, 2020, U.S. Bank moved for summary judgment regarding the remaining claim relating to distributions. On February 7, 2020, Ambac Assurance cross-moved for summary judgment. These summary judgment motions are fully briefed.

•

•In re application of Deutsche Bank National Trust Company as Trustee of the Harborview Mortgage Loan Trust Mortgage Loan Pass-Through Certificates, Series 2006-9 (Supreme Court of the State of New York, County of New York, No. 654208/2018), filed August 23, 2018. In opposing DBNT’s request for an order instructing it to accept the proposed settlement concerning Harborview 2006-9, Ambac Assurance sought a period of discovery before resolution on the merits. Ambac Assurance has issued document requests to DBNT and subpoenas for documents to Countrywide Home Loans and Bank of America N.A. and DBNT has issued document requests to Ambac Assurance. The parties have exchanged documents. DBNT and Ambac Assurance have each served a notice of corporate deposition upon the other. On October 30, 2019, the court ruled that Ambac Assurance does not need to present a witness for deposition. On November 6, 2019, the parties submitted a proposed stipulated case schedule pursuant to which discovery would be completed by March 4, 2020 and merits briefing would be completed by April 8, 2020.

~~Other Litigation~~

~~U.S. Securities and Exchange Commission (the “SEC”) v. Citigroup Global Markets Inc. (“Citigroup”)~~ ~~(United States District Court Southern District~~ of New York, ~~Docket~~County of New York, No. ~~11-CV-7387,~~654208/2018), filed ~~in October 2011)~~August 23, 2018 (the “Trust Instruction Proceeding”). This ~~suit~~action relates to Deutsche Bank National Trust Company’s (“DBNT”) proposed settlement of claims related to the Harborview Mortgage Loan Trust Series 2006-9 (“Harborview 2006-9”). On August 23, 2018, DBNT filed a ~~collateralized debt obligation transaction arranged by Citigroup in which Ambac Credit Products, LLC ("ACP") (insured by Ambac Assurance) provided credit protection through a credit default swap~~Petition commencing the Trust Instruction Proceeding, seeking judicial instruction pursuant to ~~a bank counterparty that was exposed~~CPLR Article 77, inter alia, to accept the ~~transaction. Citigroup was found~~proposed settlement with respect of claims relating to have misled ACP and the other parties to the transaction, and the SEC and Citigroup reached a settlement of this action for $285,000. The presiding judge approved the settlement in August of 2014. A fair fund has been established to distribute the $285,000 (plus interest and $2,550 received from a related proceeding less costs and taxes). RCB Fund Services (the “Distribution Agent”) was appointed as distribution agent for the fund and invited participants in the CDO transaction to provide information regarding their investments in the CDO transaction.Harborview 2006-9. On November 2, 2018, Ambac Assurance and other interested persons filed notices of intention to appear and answers to DBNT’s petition. Ambac Assurance sought a submission with the requested information on February 28, 2018. The Distribution Agent, in consultation with the SEC, developed a distribution plan for the fair fund, which was filed with the Court on July 1, 2019. On the same day, the SEC filed with the Court a memorandum in support for an order to approve the distribution plan. The Court approved the distribution plan at the conclusionperiod of the hearing on August 8, 2019. In September 2019, Ambac received approximately $142,225 from the fair fund. Ambac had not previously recorded any receivable for its estimated portion of these settlement proceeds and recorded such amounts in the third quarter of 2019 within other incomediscovery before resolution on the ~~Consolidated Statements~~merits. Discovery is now complete. Under the current case schedule merits briefing is to be completed by November 23, 2020. The parties have submitted a stipulation and proposed scheduling order pursuant to which merits briefing would be completed by January 12, 2021.

| Ambac Financial Group, Inc. 462020 Third Quarter FORM 10-Q |

Item 2. Management’s Discussion and Analysis of ~~Comprehensive Income.~~Financial Condition and Results of Operations


~~Item 2.~~	~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~

Following this summary is a discussion addressing the consolidated results of operations and financial condition of Ambac Financial Group, Inc. (“~~Ambac” or “the Company”~~AFG”) for the periods indicated. References to “Ambac,” the “Company,” “we,” “our,” and “us” are to AFG and its subsidiaries, as the context requires. This discussion should be read in conjunction with Ambac’s Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, the Cautionary Statement Pursuant To The Private Securities Litigation Reform Act Of 1995 below and Risk Factors set forth in Part II, Item 1A of this Form ~~10-Q.~~10-Q and in Ambac’s Annual Report on Form 10-K for the year ended December 31, 2019.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) contains certain financial measures, in particular the presentation of Adjusted Earnings and Adjusted Book Value, which are not presented in accordance with U.S. generally accepted accounting principles (“GAAP”). We are presenting these non-GAAP financial measures because they provide greater transparency and enhanced visibility into the underlying drivers of our business. We do not intend for these non-GAAP financial measures to be a substitute for any GAAP financial ~~measures~~measure and they may differ from similar reporting provided by other companies. Readers of this Form 10-Q should use these non-GAAP financial measures only in conjunction with the comparable GAAP financial measures. Adjusted Earnings and Adjusted Book Value are non-GAAP financial measures that adjust for the impact of certain non-recurring or non-economic GAAP accounting requirements and include the addition of certain items that the Company has or expects to realize in the future, but that are not reported under GAAP. We provide reconciliations to the most directly comparable GAAP measures; Adjusted Earnings to Net income attributable to common stockholders and Adjusted Book Value to Total Ambac Financial Group, Inc. stockholders’ equity.

CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Management has included in Parts I and II of this Quarterly Report on Form 10-Q, including this MD&A, 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~~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 Part I, Item 1A of the ~~2018~~2019 Annual Report on Form 10-K and in Part II, Item 1A of this quarterly Report on Form 10-Q.

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 ~~Ambac’s~~AFG’s common stock and volatility in the price of ~~Ambac’s~~AFG’s common stock; (2) uncertainty concerning the Company’s ability to achieve value for holders of its securities, whether from Ambac Assurance Corporation ("Ambac Assurance") and its subsidiaries or from transactions or opportunities apart from Ambac ~~Assurance;~~Assurance and its subsidiaries, including new business initiatives; (3) changes in ~~Ambac Assurance’s~~Ambac’s estimated representation and warranty recoveries or loss reserves over time; (4) failure to recover claims paid on Puerto Rico exposures or incurrence of losses in amounts higher than expected; (5) adverse effects on ~~Ambac’s~~AFG’s share price resulting from future offerings of debt or equity securities that rank senior to ~~Ambac’s~~AFG’s common stock; (6) potential of rehabilitation proceedings against Ambac Assurance; (7) dilution of current shareholder value or adverse effects on ~~Ambac’s~~AFG’s share price resulting from the issuance of additional shares of common stock; (8) 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; (9) increased 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 ~~a recent~~ judicial ~~decision~~decisions adverse to revenue bond holders; (10) ~~the Company's~~Ambac's inability to realize the expected recoveries included in its financial statements; (11) insufficiency or unavailability of collateral to pay secured obligations; (12) credit risk throughout ~~the Company’s~~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 (including obligations of the Commonwealth of Puerto Rico and its instrumentalities and ~~agencies as well as obligations relating to privatized military housing projects)~~agencies) and exposures to reinsurers; (13) credit risks related to large single risks, risk concentrations and correlated risks; (14) the risk that the ~~Company’s~~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 ~~the Company’s~~Ambac’s insured portfolio runs off; (16) adverse effects on operating results or the Company’s financial position resulting from measures taken to reduce risks in its insured

~~| Ambac Financial Group, Inc.~~ 46~~2019 Third Quarter FORM 10-Q~~ |

portfolio; (17) disagreements or disputes with ~~Ambac Assurance's primary~~Ambac's insurance ~~regulator;~~regulators; (18) 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; (19) ~~the Company’s~~Ambac’s substantial indebtedness could adversely affect its financial condition and operating flexibility; (20) ~~the Company~~Ambac may not be able to obtain financing or raise capital on acceptable terms or at all

| Ambac Financial Group, Inc. 472020 Third Quarter FORM 10-Q |

due to its substantial indebtedness and financial condition; (21) ~~the Company~~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; (22) restrictive covenants in agreements and instruments may impair ~~the Company’s~~Ambac's ability to pursue or achieve its business strategies; (23) loss of control rights in transactions for which we provide insurance due to a finding that Ambac ~~Assurance~~ has defaulted; (24) the ~~Company’s results~~impact of ~~operation may be adversely affected by~~catastrophic environmental or natural events, ~~or circumstances that result in~~including catastrophic public health events like the ~~accelerated amortization~~COVID-19 pandemic, on significant portions of ~~the Company’s insurance intangible asset;~~our insured and investment portfolios; (25) adverse tax consequences or other costs resulting from the characterization of ~~the Company’s~~Ambac Assurance’s surplus notes or other obligations as equity; (26) risks attendant to the change in composition of securities in ~~the Company’s~~Ambac’s investment portfolio; (27) changes in ~~tax law; (28) changes in~~ prevailing interest rates; ~~(29)~~(28) the expected discontinuance of the London Inter-Bank Offered Rate; ~~(30)~~(29) factors that may influence the amount of installment premiums paid to ~~the Company; (31)~~Ambac; (30) default by one or more of ~~Ambac Assurance's~~Ambac's portfolio investments, insured issuers or counterparties; ~~(32)~~(31) market risks impacting assets in the ~~Company’s~~Ambac’s investment portfolio or the value of our assets posted as collateral in respect of interest rate swap transactions; ~~(33)~~(32) risks relating to determinations of amounts of impairments taken on investments; ~~(34)~~(33) 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 ~~the Company’s~~Ambac’s business, operations, financial position, profitability or cash flows; ~~(35)~~(34) actions of stakeholders whose interests are not aligned with broader interests of ~~the Company's~~Ambac's stockholders; ~~(36) the Company’s inability to realize value from Ambac UK or other subsidiaries of Ambac Assurance; (37)~~(35) system security ~~risks; (38) market spreads~~risks, data protection breaches and ~~pricing on interest rate derivatives insured or issued by the Company; (39) the risk of volatility in income and earnings, including volatility due to the application of fair value accounting; (40)~~cyber attacks; (36) changes in accounting principles or practices that may impact ~~the Company’s~~Ambac’s reported financial results; ~~(41) legislative~~(37) the economic and regulatory ~~developments, including intervention by regulatory authorities; (42) the economic~~ impact of “Brexit”; ~~(43)~~(38) 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; ~~(44) the Company’s~~(39) Ambac’s financial position that may prompt departures of key employees and may impact the ~~Company’s~~its ability to attract qualified executives and employees; ~~(45)~~(40) 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; and ~~(46)~~(41) other risks and uncertainties that have not been identified at this time.

EXECUTIVE SUMMARY

Company Overview:

See Note 1. Background and Business Description to the Unaudited Consolidated Financial Statements, included in Part I, Item 1 in this Form 10-Q and Note 1. Background and Business Description in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018~~2019, for a description of the Company and our key strategic priorities to achieve our primary goal to maximize stockholder value.

Ambac Assurance and Subsidiaries:

A key strategy for Ambac is to increase the value of its investment in Ambac Assurance by actively managing its assets and liabilities. Asset management primarily entails maximizing

the risk adjusted return on non-VIE invested assets and managing liquidity to help ensure resources are available to meet operational and strategic cash needs. These strategic cash needs include activities associated with Ambac's liability management and loss mitigation programs.

Asset Management:

Investment portfolios are subject to internal investment guidelines, as well as limits on types and quality of investments imposed by applicable insurance laws and regulations. As part of its investment strategy, and in accordance with the aforementioned guidelines, Ambac Assurance and Ambac Assurance UK Limited ("Ambac UK"), a subsidiary of Ambac Assurance, purchase distressed Ambac-insured securities based on their relative risk/reward characteristics. The investment portfolios of Ambac Assurance and Ambac UK ~~also~~ hold fixed income securities, including distressed Ambac-insured securities, and funds that include a variety of other assets including, but not limited to, corporate bonds, asset-backed and mortgage backed securities, municipal bonds, high yield bonds, leveraged loans, equities, real estate and hedgevarious pooled investment funds. Refer to Note 8. Investments to the Unaudited Consolidated Financial Statements, included in Part I, Item 1 in this Form 10-Q for further details of fixed income investments by asset ~~class.~~category and pooled investment funds by investment type.

At September 30, ~~2019,~~2020, Ambac and its subsidiaries owned ~~$441~~$603 million of distressed Ambac-insured bonds, including ~~$154 million~~significant concentrations of insured Puerto Rico and RMBS bonds, and excluding Ambac's holdings of secured notes issued by Ambac ~~LSNI in connection with the Rehabilitation Exit Transactions.~~LSNI. Subject to applicable internal and regulatory guidelines, market conditions and other constraints, Ambac ~~will~~may continue to opportunistically purchase or sell Ambac-insured securities.

Liability and Insured Exposure Management:

Ambac Assurance's Risk Management Group focuses on the ~~analysis,~~ implementation and execution of ~~commutations,~~ risk reduction, or defeasance and loss recovery strategies. Analysts evaluate the estimated timing and severity of projected policy claims as well as the potential impact of loss mitigation or remediation strategies in order to target and prioritize policies, or portions thereof, for commutation, reinsurance, refinancing, restructuring or other risk reduction strategies. For targeted policies, analysts will engage with issuers, bondholders ~~issuers~~ and other economic stakeholders to negotiate, structure and execute such strategies. During ~~2019,~~2020, successful risk reduction transactions included:

~~| Ambac Financial Group, Inc.~~ •47~~2019 Third Quarter FORM 10-Q~~ |

•

The COFINA Plan of Adjustment ("POA"). On February 12, 2019, the POA, including certain related commutation transactions, and subsequent distributions, became effective resulting in a reduction of Ambac Assurance's insured net par exposure to COFINA by approximately 77% or $620 million to $185 million and a reduction in overall Puerto Rico net par exposure from $1.9 billion to $1.3 billion. Subsequent redemptions of obligations of the COFINA Class 2 Trust (as further described in the ~~Financial Guarantees in Force~~ ~~section included in Part II, Item 7 in the Company’s Annual Report on Form 10-K for the year ended December 2018) brought COFINA net par outstanding down to $102 million as of September 30, 2019;~~

An Irish scheme of arrangement (the "Arrangement") on June 17, 2019, for the restructuring of Ballantyne Re plc ("Ballantyne"). This restructuring allowed for the commutation of $900 million of Ambac UK's net par outstanding. See below under Financial Guarantees in Force for further details of the Arrangement;

Purchasing quota share reinsurance in September 2019 to sculpt the risk profile of the insured portfolio. This included ceding certain public finance exposures totaling $1.2 billion of par exposure (principal and interest of $2.4 billion), which were comprised of lease and tax-backed revenue ($616 million par), general obligation ($374 million par), transportation ($240 million par) and higher education ($4 million par) exposures and included $509 million par of watch list and adversely classified credits;

~~Completing work in January 2019, with an issuer to refinance two watch list asset-backed lease securitizations with net par outstanding of $95 million at December 31, 2018;~~

A commutation in ~~February 2019,~~January 2020, via a refunding, of ~~an adversely classified~~a watch list public finance transaction with net par outstanding of ~~$350~~$171 million at December 31, ~~2018;~~2019;

~~Working closely with servicers and owners~~•A refinancing in February 2020 of ~~Master Servicing Rights to exercise their clean-up call rights on several watch list and~~an adversely classified ~~RMBS transactions~~asset-backed leasing transaction with ~~total~~ net par outstanding of ~~$200~~$86 million at December 31, ~~2018; and~~2019;

~~The final paydown, refunding, or partial commutation of various watch list exposures and adversely classified exposures that were subject to risk remediation efforts~~•Purchasing quota share reinsurance in June 2020 on a transportation revenue credit with ~~total~~ net par outstanding of $33 million at December 31, ~~2018~~2019;

•A refinancing in August 2020 of ~~$332 million.~~an international stadium transaction with net par outstanding of $217 million at December 31, 2019; and

•Partial commutations of $32 million of adversely classified credits over the course of 2020.

The following table provides a comparison of total, adversely classified ~~credits~~ ("ACC") and watch list ~~credits~~credit net par outstanding in the insured portfolio at September 30, ~~2019~~2020 and December 31, ~~2018.~~2019. Net par exposure within the U.S. public finance market includes capital appreciation bonds which are reported at the par amount at the time of issuance of the insurance policy as opposed to the current accreted value of the bonds.

($ in billions) September 30,
2019 December 31,
2018 Variance
Total $ 39.0
$ 46.9
$ (8.0 ) (17 )%
ACC 7.7
10.9
(3.1 ) (29 )%
Watch list 8.0
9.0
(1.1 ) (12 )%

| Ambac Financial Group, Inc. 482020 Third Quarter FORM 10-Q |


($ in millions)	September 30, 2020		December 31, 2019		Variance
Total	$	34,751	$	38,018	$	(3,267)	(9)	%
ACC	8,576		7,535		1,041		14	%
Watch list	4,961		6,752		(1,791)		(27)	%

The ~~overall reduction~~decrease in total net par outstanding resulted from active de-risking initiatives, ~~at Ambac Assurance and Ambac UK,~~ including the transactions noted above, as well as scheduled maturities, amortizations, ~~commutations,~~ refundings and calls. Additionally, total net par outstanding reduced as a result of the weakening of British Pounds as compared to US Dollars.

The increase in ACC exposures is primarily due to the addition of credits impacted by COVID-19 (including $975 million of net par outstanding from the Watch List category), such as hotel tax, stadium, convention center and public house insured transactions, partially offset by active de-risking and issuer paydowns and calls.

The decrease in ~~adversely classified credit exposures is primarily~~Watch List net par outstanding resulted from active de-risking initiatives (including the transactions noted above), downgrades to ACC due to ~~active de-risking~~COVID-19, and ~~paydowns or calls by issuers, mostly related~~scheduled maturities, amortizations, refundings and calls.

In addition, as a result of the economic impacts from the COVID-19 pandemic, $2,651 million of net par outstanding in sectors such as mass transit, toll roads, and private higher education, among others, have been added to ~~Puerto Rico, Ballantyne, public finance, aircraft asset-backed and residential mortgage-backed securities.~~the Survey List. The Survey List is a categorization for enhanced monitoring of currently performing credits.

~~Although our insured portfolio has generally performed satisfactorily in 2019, we~~We also continue to experience stress in ~~certain insured exposures, particularly related to~~ our exposure to Puerto Rico ~~consisting~~that consists of several different issuing entities (all below investment grade). Each issuing entity has its own credit risk profile attributable to discreet revenue sources, direct general obligation pledges and general obligation guarantees. Refer to Part 1, Item 1 in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, for additional information regarding the different issuing entities that encompass Ambac's exposures to Puerto Rico.

~~Ambac:~~COVID-19

AsIn March 2020, the outbreak of ~~September 30, 2019 cash, investments~~COVID-19, caused by a novel strain of the coronavirus, was recognized as a pandemic by the World Health Organization, and ~~receivables~~the outbreak is widespread globally, including in the markets in which we operate. The COVID-19 outbreak had and continues to have a notable impact on general economic conditions, including but not limited to higher unemployment; volatility in the capital markets; closure or severe curtailment of ~~Ambac were $473 million.~~the operations and hence, revenues, of many businesses and public and private enterprises to which we are directly or indirectly exposed, such as hotels, restaurants, sports and entertainment facilities, airports and other transportation facilities, and retail establishments, mostly due to social distancing guidelines, travel bans and restrictions, and business restrictions and shutdowns. While many U.S. states and territories have eased restrictions more recently and provided clear social distancing guidelines to support businesses, challenges remain, including the recent rise of new COVID-19 cases.

In the U.S., monetary policy and fiscal stimulus, particularly the Coronavirus Aid, Relief and Economic Security ("CARES")

Act, have temporarily helped moderate the economic impact of COVID-19, along with stimulus and other actions taken by governments outside the U.S.

($ in millions)
Cash and short-term investments $ 327
Other investments ⁽¹⁾
114
Receivables ⁽²⁾
32
Total $ 473
Nonetheless, the U.S. and most large global economies materially contracted through the third quarter of the year. While a recovery is currently underway led by an increase in retail sales in North America and the Eurozone since May, the trajectory and sustainability of the economic recovery is uncertain due to, among other things, the magnitude of job losses, cooler weather that will curb outdoor activity, uncertainty regarding continued government support measures, the recent rise of new COVID-19 cases and uncertainty related to the timing and efficacy of a vaccine. For the Ambac insured portfolio, credit risk remains elevated due to the historical and future economic and financial impact related to the COVID-19 crisis.


~~(1)~~	~~Includes surplus notes (fair value of $62 million) issued by Ambac Assurance that are eliminated in consolidation.~~


~~(2)~~	~~Includes accruals for tolling payments from Ambac Assurance in accordance with the Amended Tax Sharing Agreement ($31 million), investment income due and accrued and other receivables.~~

~~For~~COVID-19 has also impacted Ambac's operating environment. Ambac has implemented a COVID-19 response plan designed to ensure the safety of our staff and business continuity. Our employees have transitioned to working remotely while maintaining full operational capabilities. Since July 2020, Ambac opened certain of its offices to allow a portion of the workforce to safely return on a voluntary basis. We have not experienced and do not anticipate incurring material net incremental operating expenditures to maintain the current operating environment. Although many of Ambac's critical third-party service providers are operating with employees working remotely, we have not presently identified or experienced any limitations or operational constraints with respect to services provided. Ambac does not believe that our current operating environment has resulted in a significant change to our disclosure controls or internal controls over financial reporting.

COVID-19 has adversely impacted Ambac's financial position and results of operations as credit risk in the insured and investment portfolios has increased. The municipal, project finance, mortgage-backed and student loan sectors, as well as other asset securitizations, in particular, could be materially adversely impacted, and as a result, with the exception of the mortgage-backed sector, we have increased loss reserves across each of these and other sectors during the nine months ended September 30, ~~2019,~~2020. In the mortgage-backed sector, much lower interest rates have increased excess spread recoveries on previously paid claims and largely offset the impact of higher projected mortgage delinquencies and losses resulting from the COVID-19 pandemic. We are continuously evaluating and updating our view of the macro economic environment as well as our specific credit view of each of our insured exposures considering the significant uncertainties brought upon us by the COVID-19 pandemic. The overall financial impact from COVID-19 has been and will be a function of (i) the willingness and ability of issuers of insured obligations and other counterparties to pay their obligations when due, whether due to operational or financial reasons; (ii) the impact of changes to interest rates on policy and derivative payments; and (iii) the performance of the investment portfolio.

•Ambac’s insurance policies will be drawn in the event that the issuers of insured obligations do not make payments on

| Ambac Financial Group, Inc. 492020 Third Quarter FORM 10-Q |

their obligations when due. As a result of the COVID-19 related economic impact on issuers and markets where Ambac provides financial guarantees; including lower tax, project, and business revenues and increases in forbearances or delinquencies on mortgage and student loan payments, we have increased our loss reserves and may further increase them in the future depending on the duration and severity of the crisis. The crisis may also impair certain issuers' ability to pay premiums owed to Ambac; however, we believe such issuers currently have the ability to continue to pay such premiums timely, but this is subject to change.

•Ambac has exposure to reinsurance counterparties for their portions of future claim payments. Ambac has reinsured approximately 13.3% of its gross par outstanding to four reinsurance counterparties. Each of these reinsurance counterparties is experienced in the business of reinsuring and/or writing financial guaranty insurance. All have current ratings of A+ (by S&P) or better and have sufficient collateralization or replacement triggers upon downgrade. Ambac actively monitors each of these reinsurance entities and currently believes they have the ability to perform under their respective reinsurance policies, but this is subject to change.

•Ambac is exposed to the risk that contractual counterparties (including those under our RMBS litigations and derivative counterparties) may default in their financial obligations, whether as the result of insolvency, lack of liquidity, operational failure, fraud or other reasons. At present, Ambac has no concerns about the ability of our contractual counterparties, which include certain regulated exchanges in the case of interest rate swaps and futures, to perform under their contracts, but this is subject to change.

•Asset prices declined substantially during the first quarter, particularly in directly affected industries such as tourism, airlines, hospitality, commercial real estate and manufacturing. While Ambac does not have significant investments in these asset classes, we did experience a negative total return for the investment portfolio of approximately (4.4)% during the three month period ending March 31, 2020. We evaluated and did not recognize credit impairments on the investment portfolio as of such date. However, in early April 2020, we monetized a material portion of our investments in certain assets classes; including corporate securities rated below the 'A' rated category, all directly owned CMBS (other than Military Housing bonds), and approximately 50% of all CLOs (all rated investment grade). While these positions were sold at a net gain, future investment losses and impairments may be possible. Asset prices partially recovered during the second and third quarters of 2020. Ambac recognized a total return for the investment portfolio of approximately 2.4% and 2.3% for the three and nine months ended September 30, 2020, respectively.

Given the economic uncertainties associated with the duration and effects of the COVID-19 pandemic, it is impossible to fully predict all of its consequences and, as a result, it is possible that our future operating results and financial condition may be

materially adversely affected. Refer to "Financial Guarantees In Force," "Results of Operations" and "Balance Sheet Commentary" for further financial details on the current impact from COVID-19.

With regard to Ambac's new business strategic objective, we continue to evaluate opportunities in a disciplined manner. Our evaluation process has been revised to incorporate consideration of the impact of COVID-19 on new business prospects as well as Ambac's existing business and operations. While we continue to pursue new business opportunities, we believe that the COVID-19 pandemic has caused a general slow down in activity as potential targets evaluate the financial and strategic impact of the pandemic on their businesses and due to the practical constraints of shelter-in-place orders, social distancing guidelines, travel bans and restrictions, and business shutdowns.

AFG:

As of September 30, 2020 the net assets of AFG, excluding its equity investments in subsidiaries, were $465 million.


($ in millions)
Cash and short-term investments (1)	$	313
Other investments (2)	114
Other net assets (3)	38
Total	$	465

(1) During the three months ended September 30, 2020, AFG purchased Everspan Insurance Company, from Ambac Assurance ~~generated $43 million,~~and repositioned it as a subsidiary of ~~taxable income, resulting in additional accrued Tolling Payments of $4 million which, assuming Ambac Assurance's full year 2019 does not change, will be paid~~a new intermediary holding company that is directly owned by AFG. This acquisition required a cash payment from AFG to Ambac Assurance of approximately $14 million.

(2) Includes surplus notes (fair value of $59 million) issued by Ambac Assurance that are eliminated in ~~2020. Ambac Assurance's tax positions are subject to review by the Office of the Commissioner of Insurance~~consolidation.

(3) Includes accruals for ~~the State of Wisconsin (“OCI”), which may lead to the adoption of positions that reduce the amount of~~ tolling payments ~~otherwise available~~from Ambac Assurance in accordance with the Amended Tax Sharing Agreement of $28 million. Refer to ~~Ambac.~~Note 10. Income Taxes for discussion over the timing of collection.

Financial Statement Impact of Foreign Currency:

The impact of foreign currency as reported in Ambac's Unaudited Consolidated Statement of Total Comprehensive Income for the nine months ended September 30, ~~2019~~2020, included the following:

($ in millions)
Net income ⁽¹⁾
$ 19
Gain (loss) on foreign currency translation (28 )
Unrealized (losses) on non-functional currency available-for-sale securities (17 )
Impact on total comprehensive income (loss) $ (26 )


~~(1)~~($ in millions)	~~A portion~~
Net income (1)		$	2
Gain (loss) on foreign currency translation (net of ~~Ambac UK's, and to a lesser extent Ambac Assurance's, assets and liabilities are denominated in currencies other than its~~tax)		(20)
Unrealized gains (losses) on non-functional currency available-for-sale securities (net of tax)		5
Impact on total comprehensive income (loss)		$	(13)

|(1) A portion of Ambac ~~Financial Group, Inc.~~ 48~~2019 Third Quarter FORM 10-Q~~ |

UK's, and to a lesser extent Ambac Assurance's, assets and liabilities are denominated in currencies other than its functional currency and accordingly, we recognized net foreign currency transaction gains/(losses) as a result of changes to foreign currency rates through our Unaudited Consolidated Statement of Total Comprehensive Income (Loss). Refer to Note 2. Basis of Presentation and Significant Accounting Policies to the Unaudited Consolidated Financial Statements

| Ambac Financial Group, Inc. 502020 Third Quarter FORM 10-Q |

included in Part I, Item 1 in this Form 10-Q for further details on transaction gains and losses.

Future changes to currency rates may adversely affect our financial results. Refer to Part II, Item 7A in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018~~2019, for further information on the impact of future currency rate changes on Ambac's financial instruments.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Ambac’s Unaudited Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), which require the use of material estimates and assumptions. For a discussion of Ambac’s critical accounting policies and estimates, see “Critical Accounting Policies and Estimates” in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Ambac’s Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019.

FINANCIAL GUARANTEES IN FORCE

Financial guarantee products were sold in three principal markets: U.S. public finance, U.S. structured finance and international finance. The following table provides a breakdown of guaranteed net par outstanding by market at September 30, ~~2019~~2020 and December 31, ~~2018.~~2019. Net par exposures within the U.S. public finance market include capital appreciation bonds which are reported at the par amount at the time of issuance of the

insurance policy as opposed to the current accreted value of the bonds. Guaranteed net par outstanding includes the exposures of policies insuring variable interest entities (“VIEs”) consolidated in accordance with the Consolidation Topic of the ~~ASC,~~ ~~Consolidation.~~ASC. Guaranteed net par outstanding excludes the exposures of policies that insure bonds which have been refunded or pre-refunded and excludes exposure of the policy that insures the notes issued by Ambac LSNI as defined in Note 1. Background and Business Description in the Notes to the Consolidated Financial Statements included in Part II, Item 8 in the Company's Annual Report on Form 10-K for the year ended December 31, ~~2018:~~2019:


($ in millions)	September 30, 2020		December 31, 2019
Public Finance (1) (2)	$	16,041	$	17,653
Structured Finance	6,614		7,508
International Finance	12,096		12,857
Total net par outstanding	$	34,751	$	38,018

($ in millions) September 30,
2019 December 31,
2018
Public Finance ^{(1) (2)}
$ 18,760
$ 23,442
Structured Finance 7,804
9,947
International Finance 12,397
13,538
Total net par outstanding $ 38,960
$ 46,927

(1)


~~(1)~~	~~Includes $5,704 and $5,759~~Includes $5,596 and $5,654 of Military Housing ~~net par outstanding at September 30, 2019 and December 31, 2018, respectively.~~


~~(2)~~	Includes $1,123 and $1,880 of Puerto Rico net par outstanding at September 30, 2019 and December 31, 2018, respectively. Components of Puerto Rico net par outstanding include capital appreciation bonds which 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.

~~Total~~ net par outstanding ~~decreased $7,967 million~~at September 30, 2020 and December 31, 2019, respectively.

(2)Includes $1,070 and $1,123 of Puerto Rico net par outstanding at September 30, 2020 and December 31, 2019, respectively. Components of Puerto Rico net par outstanding include capital appreciation bonds which 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 table below shows Ambac’s ten largest insured exposures, by repayment source, as a percentage of total financial guarantee net par outstanding at September 30, 2020:

($ in millions)

Risk Name

Country-Bond Type

Ambac

Ratings (1)

Net Par
Outstanding (2)

% of Total

Net Par

Outstanding

AUK

Mitchells & Butlers Finance plc-UK Pub Securitisation

UK-Asset Securitizations

BBB

950

2.7

AUK

Capital Hospitals plc (3)

UK-Infrastructure

A-

851

2.4

AUK

Aspire Defence Finance plc

UK-Infrastructure

A-

821

2.4

AUK

Anglian Water

UK-Utility

A-

805

2.3

AAC

New Jersey Transportation Trust Fund Authority - Transportation System

US-Lease and Tax-backed Revenue

BBB-

772

2.2

AUK

National Grid Gas

UK-Utility

A-

743

2.1

AUK

Posillipo Finance II S.r.l

Italy-Sub-Sovereign

BIG

728

2.1

AUK

Ostregion Investmentgesellschaft NR 1 SA (3)

Austria-Infrastructure

BIG

691

2.0

AUK

RMPA Services plc

UK-Infrastructure

BBB+

542

1.6

AAC

Mets Queens Baseball Stadium Project, NY, Lease Revenue

US-Stadium Financing

BIG

540

1.6

Total

7,443

21.4

PF = Public Finance, SF = Structured Finance, IF = International Finance

AAC = Ambac Assurance, AUK = Ambac UK

(1) Internal credit ratings are provided solely to indicate the underlying credit quality of guaranteed obligations based on the view of Ambac. In cases where Ambac has insured multiple tranches of an issue with varying internal ratings, or more than one obligation of an issuer with varying internal ratings, a weighted average rating is used. Ambac credit ratings are subject to revision at any time and do not constitute investment advice. BIG denotes credits deemed below investment grade.

(2) Net Par includes capital appreciation bonds, which are reported at the par amount at the time of issuance of the insurance policy as opposed to the current accreted value of the bonds.

(3) A portion of this transaction is insured by an insurance policy issued by Ambac Assurance. Ambac Assurance has issued policies for these transactions that will only pay in the event that Ambac UK does not pay under its insurance policies ("second to pay policies").

| Ambac Financial Group, Inc. 512020 Third Quarter FORM 10-Q |

Net par related to the top ten exposures reduced $197 from December 31, ~~2018.~~

Reductions in public finance net par outstanding included $1,235 million from a quota share reinsurance transaction, $1,116 million from calls of insured exposures, $703 million relating to COFINA, $389 million relating to commutations via refunding of adversely classified public finance general obligations, healthcare and transportation transactions, $60 million relating to remediation related refundings of watch list public finance transportation and stadium transactions, and $1,179 million from scheduled paydown activity.

Reductions in structured finance net par were primarily due to the commutation of Ballantyne, an adversely classified structured insurance transaction, totaling $900 million, RMBS commutations and paydowns of $874 million and refundings of two watch list asset-backed securitizations totaling $95 million.

Decreases in international finance were primarily due to policy runoff including paydowns, including a maturity of an investor owned utility totaling $243 million and a risk remediation related reduction to aircraft asset-backed securitizations totaling $212 million and a decrease2019. Exposures are impacted by changes in foreign exchange rates, ~~of $472 million,~~certain indexation rates and scheduled and unscheduled paydowns. The decrease from 2019 was primarily related to ~~changes in~~foreign exchange and scheduled paydowns. The concentration of net par amongst the ~~British Pound.~~

~~Although~~top ten (as a percentage of net par outstanding) increased slightly to 21% at September 30, 2020, from 20% at December 31, 2019. However, certain credits within the top ten have had Ambac rating downgrades since December 31, 2019, primarily related to the impact of COVID-19, including Mitchells & Butlers Finance plc, New Jersey Transportation Trust Fund Authority and Mets Queens Baseball Stadium Project. Aspire Defence Finance plc's rating at September 30, 2020, improved since December 31, 2019. The remaining insured portfolio of financial guarantees has an average net par outstanding of $32 million per single risk, with insured exposures ranging up to $504 million and a median net par outstanding of $5 million.

Given that Ambac has ~~decreased during 2019,~~not written any new insurance policies since 2008, the ~~size of the portfolio is significantly greater than the equity of Ambac. Accordingly, financial stress in~~risk exists that the insured portfolio becomes increasingly concentrated to large and/or below investment grade exposures.

COVID-19

COVID-19 and the public health responses by the US federal and state governments at the onset of the pandemic resulted in a shut down for several months of significant portions of the US economy, including areas that Ambac's insured obligors rely upon to generate the revenues and cash flows necessary to service debts we insure. Governments outside the US, in markets in which Ambac operates, also implemented similar measures to the US. Ambac undertook a detailed analysis of the potential impact of the closure of certain portions of the US economy and certain other economies, including the UK, Italy, and Australia, to assess the impact of the resulting global economic contraction on its insured financial guarantee portfolio. The economic contraction and the subsequent but still uncertain recovery; actions such as monetary policy and fiscal stimulus, including the CARES Act in the US that was signed into law on March 27, 2020, and future fiscal stimulus programs; and our insured obligors' financial flexibility and ability to mitigate the operational and economic impact of the recession will determine the ultimate impact to Ambac's insured portfolio.

CARES Act and Other Relief Measures:

The $2.4 trillion Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") provides relief and stimulus funds for American consumers, businesses and industries impacted by COVID-19.

The CARES Act has several measures that impacted US municipalities and other borrowers, including consumers, such as mortgage and student loan borrowers, represented in our insured portfolio, including:

•A program for direct lending, loans, loan guarantees and investments to eligible businesses, states and municipalities, including to passenger airlines and cargo airlines;

•A program for small business loans (Paycheck Protection Program, as amended by the Paycheck Protection Program and Health Care Enhancement Act (“PPP & HCE Act”));

•Business tax breaks, including payroll tax deferral

•An allocation of direct aid to state and local governments to reimburse them for the costs of dealing with COVID-19;

•The Public Health and Social Services Fund for distribution of grants to healthcare providers and hospitals (as amended by the PPP & HCE Act);

•Grants for transit agencies;

•Grants for airport authorities; and

•Direct payments to households and for unemployment insurance.

Despite the above provisions, which are designed to help mitigate the economic impact of the COVID-19 pandemic generally, the CARES Act contains certain provisions that may adversely affect Ambac.

The CARES Act temporarily suspended payments on all student loans held by the Department of Education through September 30, 2020. Although the CARES Act provision did not include the private student loans owned by special purpose entities that have their securitized obligations guaranteed by Ambac Assurance, we have incorporated into our loss reserves analysis assumptions related to increased delinquencies for borrowers with private student loans who often also have federal student loans and have elected not to pay altogether. Despite the assumed increase in delinquencies and losses related to this phenomena as well as the general deterioration in consumer credit related to the economic downturn, Ambac Assurance does not anticipate making substantial claim payments on insured student loan transactions for several years due to the structures governing the insured bonds.

Additionally, the federal government has provided temporary relief measures to which servicers of mortgage loans must adhere. The Federal Housing Administration ("FHA") of the US Department of Housing and Urban Development and the Federal Housing Finance Agency ("FHFA") are providing temporary relief measures that require mortgage loan servicers to offer relief to borrowers who suffer hardship as a result of COVID-19. The relief measures include moratoriums on foreclosures and evictions as well as the expansion of forbearance and subsequent repayment options. Such servicers are generally applying these guidelines to non-FHFA loans, including those loans owned by special purpose entities that have their securitized obligations guaranteed by Ambac Assurance. Moreover, several State agencies have issued similar guidance to mortgage loan servicers concerning loan forbearances and other relief for borrowers. Depending on the trajectory and strength of the economic recovery, there may still be pressure to extend the duration of forbearances and subsequently to offer generous repayment plans. Forbearances increased sharply across the Ambac Assurance's insured first lien RMBS obligations during the second quarter of 2020 and early in the third quarter of 2020, but then dropped later in the third quarter of 2020, albeit to still elevated levels. The ultimate impact of forbearances and other relief measures, such as foreclosure and eviction moratoriums,

| Ambac Financial Group, Inc. 522020 Third Quarter FORM 10-Q |

on Ambac Assurance's insured RMBS obligations are still unclear. However, we have assumed that such measures, as well as the residual impact of the global recession, will have an adverse impact on our insured RMBS transactions. Consequently, we have anticipated that we will experience an increase in claim payments for certain of our insured RMBS obligations. However, we also anticipate that the significant decline in interest rates experienced during 2020 will likely generate additional excess spread recoveries on insured RMBS obligations that will mostly compensate for such adverse effects.

In addition to, as well as in connection with, the CARES Act, the Federal Reserve has implemented a number of programs to improve liquidity and the functioning of the financial markets in an effort to help mitigate the impact of the COVID-19 pandemic on financial markets and the macro economy as well as certain displaced sectors of the economy, including those in which Ambac operates, including, but not limited to:

•$500 billion for the Municipal Liquidity Facility;

•$750 billion for the Primary Market Corporate Credit Facility and Secondary Market Corporate Credit Facility; and

•$100 billion in loans for the Term Asset-backed Securities Facility

In the UK all non-essential leisure, food and retail operations, including public houses were closed from March 20, 2020, as a consequence of the COVID-19 pandemic. Premises were allowed to gradually reopen from June 1, 2020, such that by July 4, 2020, the majority of outlets were permitted to reopen. The UK Government introduced a number of measures to mitigate the impact of these enforced closures including rebating employers 80% of staff salaries (up to a £2,500 per month per employee cap), tax deferrals, business loan schemes and property tax relief. On November 5, 2020 the UK Government reimposed the closure the closure of non-essential leisure food and retail operations with the expectation that this closure will continue for the four weeks to December 2, 2020. The mitigating measures noted above will continue through this period before then being slowly withdrawn by March 31, 2021.

While Ambac expects the foregoing measures to help mitigate economic damage and aid the functioning of the capital markets, Ambac's exposure to credit risk as a result of the economic fallout from the COVID-19 pandemic remains elevated, and we could experience material losses that would adversely impact our future results of operations and financial condition.

Insured Portfolio:

Ambac established a set of base case assumptions that included a deep recession during the first half of 2020 with a modest recovery in the second half of 2020 that still leaves the U.S. with an overall contraction in GDP for the full year. Economic growth for 2021, while positive, is expected to be tempered by the continued uncertainty related to the rising infection rate of COVID-19 in the U.S. Recovery to 2019 levels of economic output are not expected until 2022. Consequently, we expect pressure will remain on U.S. states and local governments which are currently facing significant budget deficits as tax revenues have faltered as a result of COVID-19 related shutdowns, job losses and travel restrictions. State and local governments have

shed an estimated 1.5 million jobs and are facing tough choices to close budget gaps, including tax increases, furloughs, public safety cuts, planned capital expenditure cuts, pension funding holidays, and other measures. In addition states may need to cut aid to local municipalities that are also under pressure from lost revenues. Monetary policy and federal stimulus through the CARES Act (and potential subsequent CARES Act programs) and other programs has benefited and is expected to continue to benefit in the overall economic recovery and more specifically provide some relief to state and local governments, including to issuers of municipal debt insured by Ambac, although the sufficiency of such benefits remains uncertain.

As part of the detailed analysis of the insured portfolio, we have identified certain Public Finance sectors that are most susceptible to potential claims or impairments as a result of a prolonged or uneven recovery from the COVID-19 crisis. Our near-term concerns are concentrated on exposures substantially reliant on narrow, economically sensitive revenue streams. The ability of issuers of these obligations to pay is expected to be stressed although several issuers expressed a willingness to use their balance sheets to support their obligations and avoid defaults in the near-term. Ambac's insured par outstanding, net of reinsurance ("NPO"), to these Public Finance sectors are as follows:


($ in millions) Market / Sector	Total NPO		Total Debt Service Due Next Twelve Months

Hotels / Convention Centers	$	247	$	43.1
Stadiums	634		41.4
Airports	124		21.8
Dedicated Tax	384		69.8
Higher Education Auxiliary	241		25.0
Rail / Mass Transit	328		30.3
Toll Roads / Bridges	457		42.8
Total Public Finance	$	2,415	$	274.2

The RMBS and student loan insured portfolios are expected to be adversely impacted by the previously mentioned forbearances and the general economic downturn in the first half of the year and the developing but uncertain recovery in the second half of the year where unemployment is still elevated and job participation rates are depressed. Expected to offset such impact for RMBS exposures is the benefit to excess spread within the securitization structures as a result of the significant reduction in interest rates, which will result in higher recoveries.

Ambac insured exposure includes a number of international policies where the revenue of the issuer is demand dependent. Such transactions have been impacted by the reduction of revenue due to the COVID-19 pandemic. Ambac and its advisors are working closely with impacted issuers to review their plans and liquidity facilities in light of these events. In connection with these efforts Ambac de-risked an international stadium transaction in the three months ended September 30, 2020 with $217 million of NPO at December 31, 2019. Ambac's remaining NPO with respect to these international demand dependent policies are as follows:

| Ambac Financial Group, Inc. 532020 Third Quarter FORM 10-Q |


($ in millions) Market / Sector	Total NPO		Total Debt Service Due for Twelve Months


Higher Education	$	168	$	9.0
Airports	200		6.2
Asset Securitizations	949		81.9
Toll Roads / Bridges	750		59.5
Total	$	2,067	$	156.6

At this time, there are significant uncertainties surrounding the ultimate number of claims and scope of damage resulting from this pandemic. Actual losses from these events may vary materially from Ambac's loss and loss expense reserves due to several factors, including the inherent uncertainties in making such determinations and the evolving nature of this pandemic. Potential losses from the economic consequences of the COVID-19 pandemic could be material and therefore may have a material adverse effect on ~~Ambac's financial condition and~~our results of ~~operations.~~

~~Exposure Currency~~

~~The table below shows the distribution by currency of Ambac Assurance’s insured exposure as of September 30, 2019:~~

Currency
(Amounts in millions)

Net Par Amount
Outstanding in
Base Currency

Net Par Amount
Outstanding in
U.S. Dollars
U.S. Dollars $ 26,967
$ 26,967
British Pounds £ 8,064
9,916
Euros € 1,567
1,709
Australian Dollars A$ 545
368
Total $ 38,960

Ambac discloses its exposures by currency to help interested parties understand its insured book of business. These insured exposures do not represent the cash outflows that may result from such insurance policies.operations and financial condition.

Puerto Rico

Ambac has exposure to the Commonwealth of Puerto Rico (the "Commonwealth") and its instrumentalities across several different issuing entities with total net par exposure of ~~$1.1 billion~~$1,070 as of September 30, ~~2019.~~2020. Each has its own credit risk profile attributable to, as applicable, discrete revenue sources, direct general obligation pledges and/or general obligation guarantees. Refer to Part II, Item 7 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, for additional information regarding the different issuing entities that encompass Ambac's exposures to Puerto Rico.

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~~Financial Developments~~

~~COFINA Debt Restructuring~~

On February 4, 2019, the COFINA Plan of Adjustment ("POA") was confirmed and the Commonwealth 9019 motion was approved by the U.S. District Court for the District of Puerto Rico. On February 12, 2019, the COFINA POA went effective. As a result of the POA, commutations, amendments, and subsequent redemptions of obligations of the COFINA Class 2 Trust (as further described in the ~~Financial Guarantees in Force~~ section included in Part II, Item 7 in the Company’s Annual Report on Form 10-K for the year ended December 2018), COFINA net par outstanding decreased to $102 million as of September 30, 2019. Ambac Assurance's remaining policy obligation of $102 million net par is an asset of the COFINA Class 2 Trust, which also holds a ratable distribution of cash and new COFINA bonds, the interest and principal from which can be used to partially offset Ambac’s remaining insurance liability.COVID-19

At this time, it remains very difficult to predict what the shape and timing of the post COVID-19 recovery will be for the Commonwealth of Puerto Rico, not least because the depth and length of COVID-19's impact is still uncertain. In the short-term, it is known that tax revenue to the Commonwealth’s general fund collections lagged projections by nearly $1.8 billion, or 16.8%, in fiscal year 2020 and were roughly $2.5 billion below fiscal year 2019 collections, according to the Puerto Rico Fiscal Agency and Financial Advisory Authority’s June 26, 2020, Treasury Single Account report. However, general fund net revenues totaled $1.259 billion in July and August 2020, outpacing projections for the first two months of fiscal year 2021 by $255 million, or 25.5%. It is unclear if this trend will hold, what ~~impact~~this implies for the ~~COFINA restructuring~~Commonwealth’s ability to pay debt service, and what if any lasting effects COVID-19 will have on ~~Ambac Assurance's other insured~~the economic and financial profile of Puerto Rico.

Over the longer-term, Puerto Rico's recovery profile will be impacted by a wide range of factors as well as financial considerations including, but not limited to:

•the fiscal and monetary policies of the federal government which will shape the trajectory of the U.S. economy;

•the speed and efficacy of targeted federal aid packages to (1) help Puerto Rico ~~instrumentality exposures, if any.~~address the negative economic effects of the pandemic and (2) rebuild better and more resilient infrastructure post-Hurricanes Irma and Maria in 2017 and earthquakes in 2020;

•supplemental Medicaid funding relief; and

•the willingness and ability of the Commonwealth government to implement much needed fiscal and structural reforms.

Fiscal Plans

Commonwealth Fiscal Plan

On May ~~9, 2019,~~27, 2020, the Oversight Board certified its own version of a new Commonwealth Fiscal Plan, which supersedes the previous Commonwealth Fiscal Plan certified on October 23, 2018. In the latest Commonwealth Fiscal Plan, the annual Commonwealth budget surpluses are lower in the short term but larger in the long term because of a longer than previously expected rollout of federal disaster spending.Plan. The new surplus through fiscal 2024 is just under $14 billion, whereas the previous plan was almost $18 billion. The plan projects a 30-year surplus of $19.7 billion, but $5.4 billion of that money may not be available to the Commonwealth because it is being generated by public corporations. This compares to a 30-year surplus of just under $13 billion under the previous fiscal plan.

~~As was the case with prior fiscal plans for the Commonwealth of Puerto Rico, the~~Oversight Board’s new Commonwealth Fiscal Plan ~~lacks~~purports to incorporate the impact of COVID-19 on the Commonwealth economy, and projects diminished growth, budget surplus, and debt capacity as compared to previous versions of the Commonwealth Fiscal Plan. The positive $19.7 billion 30-year cumulative surplus from the May 2019 Fiscal Plan is now a ~~high degree~~negative $22.2 billion in the new Fiscal Plan base case and negative $40 billion in the downside case. This is due to the Oversight Board’s projected impact of ~~transparency regarding~~COVID-19 on the ~~underlying data, assumptions~~Puerto Rico economy and ~~rationales supporting those assumptions, making reconciliation~~tax collections as well as related general uncertainty on the economic outlook. The Commonwealth Fiscal Plan will significantly inform the Commonwealth Plan of Adjustment, and ~~due diligence difficult. As~~the diminished economic performance described in the new Fiscal Plan implies worse outcomes than had been previously disclosed for creditors under the Commonwealth's Plan of Adjustment.

The Oversight Board asked the Title III court in September 2020 to allow it to provide a ~~result, it~~status update in late October 2020, which was granted. The period until late October is ~~difficult~~needed to assess the ~~possible impact that~~assumptions of the Commonwealth Fiscal Plan, ~~changes may have on creditor outcomes~~according to the Oversight Board's status report filed in September 2020. Both the Oversight Board and mediation team “will realize in short order” if a modified Plan can be negotiated, and the additional time will also enable the Oversight Board and AAFAF to know “whether any remaining hurdles of such plan can be overcome or ~~Ambac's financial condition, including liquidity, loss reserves~~if the electoral process will need to be completed before that might occur”.

In the October 2020 status update the Oversight Board indicated that it was premature to schedule consideration of the Disclosure Statement and ~~capital resources.~~Commonwealth Plan of Adjustment, as the Fiscal Plan assumptions continue to be tested and conversations are ongoing with the Puerto Rico Fiscal Agency and Financial Advisory Authority concerning amending the current Commonwealth Plan of Adjustment. The next status update is due December 4, 2020. On October 28, 2020, the Court ordered the Oversight Board to file, by February 10, 2021, either (i) an informative motion with a term sheet disclosing the economic and structural terms and features of a proposed amended Commonwealth Plan of Adjustment, or (ii) the proposed amended Commonwealth Plan of Adjustment itself, together with a proposed timeline for disclosure statement and confirmation hearings.

PRHTA Fiscal Plan

On June ~~7, 2019,~~26, 2020, the Oversight Board certified its own version of the Fiscal Plan for PRHTA. The PRHTA Fiscal Plan states agency reform measures are critical to PRHTA’s sustainability, and that in fiscal year 2020, implementation significantly fell behind the ~~Puerto Rico Highways~~performance goals for fiscal measures established by the 2019 PRHTA Fiscal Plan. The 2020 PRHTA Fiscal Plan shows the improvements in PRHTA’s operating and ~~Transportation Authority ("PRHTA")~~capital performance over various revenue and expense categories due to

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the $4.7 billion benefit that would be achieved if PRHTA fully and timely implements the outlined fiscal measures. Implementing these measures would reduce PRHTA’s projected pre-Commonwealth transfer deficit to approximately $1.7 billion from approximately $6.4 billion projected in the baseline scenario. An annual transfer of approximately $2.2 billion from the Commonwealth to PRHTA would fund the capital deficit not covered by the operating surplus, resulting in a net 30-year budget surplus of $461 million – which would presumably be the starting point for recoveries to PRHTA creditors.

The cumulative and annual budget surplus post-measures in the 2020 PRHTA Fiscal Plan is drastically lower than the budget surplus post-measures in the 2019 PRHTA Fiscal Plan: fiscal year 2022 surplus of $33 million vs. $120 million and fiscal year 2023 surplus of $1 million vs. $154 million. Since the document form and projection structure/line items are different in the 2020 PRHTA Fiscal Plan vs. 2019 PRHTA Fiscal Plan, comparability and reconciliation between the two versions is difficult and as such understanding the full extent of the decrease in the budget surplus in the latest plan remains challenging. COVID-19 is likely a driver, but it also appears that the 2020 PRHTA Fiscal Plan may not include Act 30 license fees ($130 million annually) or all of the $400 to $500 million in annual revenues that come from various excise taxes that also support the PRHTA debt insured by Ambac Assurance (e.g. gas tax, diesel tax, petroleum products tax, cigarette tax, motor vehicle license fees). Without ~~considering~~these revenues, it unlikely PRHTA will be able to service its existing debt in any meaningful way.

PRHTA has defaulted on its debt service payments since 2016, and based on the 2020 PRHTA Fiscal Plan ~~measures,~~projections of cash flow, the ~~PRHTA’s total~~existing PRHTA debt service may need to be reduced through a Title III plan of adjustment, unless the PRHTA Fiscal Plan projections change again. The amount of net revenues available for other needs in the 2020 PRHTA Fiscal Plan besides implementation of the capital improvement program, such as the payment of debt service, are highly dependent on PRHTA achieving additional positive cash flow to enable PRHTA eventually to operate at a surplus without the need for projected Commonwealth financial ~~surplus~~support to meet HTA budget gaps. However, the 2020 PRHTA Fiscal Plan projects a declining subsidy from the Commonwealth over the ~~six-year plan period is projected to be $31million. However, after taking~~next 30 years. If the Act 30 licenses fees and/or the various excise taxes were re-incorporated into ~~account~~ the ~~measures set forth in the~~2020 Fiscal Plan, recoveries for Ambac Assurance insured debt may be materially higher than inferred from the ~~Oversight Board states that~~current version of the ~~cumulative surplus over that six-year period would grow to $493 million.~~2020 PRHTA Fiscal Plan.

It is unknown if and when a PRHTA Plan of Adjustment will be filed by the Oversight Board or confirmed by the court overseeing the Title III ~~proceedings.~~proceedings of PRHTA. It is also unknown if and when other Puerto Rico instrumentalities, which have debt outstanding insured by Ambac Assurance, will be filed under Title III and what effect their ~~Fiscal Plans~~fiscal plans and/or ~~Plans~~plans of ~~Adjustment~~adjustment may have on Ambac's financial position.

No assurances can be given that Ambac's financial condition will not suffer a materially negative impact as an ultimate result of the Commonwealth Fiscal Plan, a

the Commonwealth Plan of Adjustment, or any future changes or revisions to ~~the~~ Commonwealth ~~Fiscal Plan~~fiscal plans or ~~Fiscal Plans~~future fiscal plans and/or ~~Plans~~plans of ~~Adjustment~~adjustment for PRHTA or other Puerto Rico instrumentalities.

Commonwealth Plan of Adjustment

On ~~October 17, 2019, AAFAF released~~February 9, 2020, the Oversight Board announced it reached an agreement in principle ("Plan Support Agreement") with certain ~~mediation-related cleansing~~creditors supporting the restructuring of the Commonwealth's General Obligation and PBA debt, and intended to file an amended Commonwealth Plan of Adjustment ("Amended POA") reflecting the terms of this agreement. On February 28, 2020, the Oversight Board filed an Amended POA and an amended Disclosure Statement to restructure approximately $35 billion of debt and other claims against the Commonwealth of Puerto Rico, PBA, ERS, and other issuers as well as more than $50 billion in pension liabilities. The Amended POA would reduce Commonwealth debt and other claims from $35 billion to less than $11 billion, a 70% haircut and would also reduce the Commonwealth’s annual debt service by 56%. Treatment for pension claims would include a reduction in pension payments by as much as 8.5% for retirees who currently receive at least $1,200 a month, such that approximately 75% of current and future retirees would not face any cuts, and the establishment of a pension reserve fund to help support retirement payments in future years. The Amended POA disproportionately disadvantaged claims against the Commonwealth related to certain revenue bonds issued by Puerto Rico instrumentalities, including those insured by Ambac Assurance, providing for an estimated recovery of 3.9% on claims against the Commonwealth related to PRHTA bonds, Puerto Rico Infrastructure Financing Authority (PRIFA) Special Tax Revenue (Rum Tax) bonds, and Puerto Rico Convention Center District Authority (PRCCDA) bonds.

On September 20, 2020, the Oversight Board announced that it and principal creditor parties to the Plan Support Agreement agreed to release documents ~~which were prepared~~related to the ongoing debt restructuring negotiations under Title III of PROMESA. The materials include an August 18, 2020, fiscal plan macroeconomic overview and revised Plan of Adjustment proposal from the Oversight Board and an August 24, 2020, Plan Support Agreement counterproposal from creditors. According to a press release from the Oversight Board, notwithstanding the information release, the Oversight Board and related creditors continue to negotiate and the Plan Support Agreement has not been terminated.

The revised Commonwealth Plan of Adjustment proposed by the Oversight Board ~~including~~and a ~~presentation on Commonwealth Fiscal Plan risks, dated September 17, 2019. While~~counterproposal by the ~~presentation discusses and reviews some uncertainties related~~principal creditor parties to the Commonwealth ~~Fiscal~~ Plan ~~projections, including macroeconomic~~Support Agreement both call for a $2 billion increase in cash consideration for general obligation/Public Buildings Authority bondholders and lower caps on maximum annual debt service compared with the current Plan Support Agreement. The blended general obligation/Public Buildings Authority bond recovery under the Oversight Board’s proposal (which appears to have been offered to related creditors on July 30, 2020) would range from 52.7% to 58.4%, while the PSA creditors’ counterproposal contemplates a blended recovery based on such claims at 73.6%. Implied recoveries related to certain revenue estimates as well as the implementation of structural reforms and fiscal measures, the presentation does not address longstanding creditor concerns, including that the Commonwealth Fiscal Plan lacks a high degree of transparency, fails to respect lawful creditor rights and liens, and features a series of deficiencies that have already been called into question in the past.bonds insured by Ambac Assurance would be below 3%.

It is unclear if ~~there~~and how the Commonwealth Plan of Adjustment will be ~~subsequent Fiscal Plan revisions and re-certifications by~~ultimately modified or how the ~~Oversight Board, and what the related implications may be for Ambac's insured exposures.~~

~~Commonwealth Liquidity~~

~~As of the August 30, 2019 bank account report published by AAFAF, the balances of bank accounts for various Puerto Rico government entities and instrumentalities totaled $15.5 billion. According~~final adjustments will impact revenues available to the report, various account balances are considered restricted for different government entities or due to Title III proceedings. However, it is unclear if these restricted designations are accurate as any legal analysis that may have been conducted to determine the restricted or unrestricted nature of funds in non-Treasury Single Account bank accounts has not been made publicly available. Consequently, the purported lack of access to restricted funds could limit the financial flexibility of the Commonwealth and its instrumentalities to provide essential and non-essential services. More generally, the lack of clear, consistent and complete information regarding account balances could further strain debt resolution timelines and potential severities for creditors, including Ambac Assurance.

On October 17, 2019, AAFAF released certain mediation-related cleansing documents, which were prepared by the Oversight Board, including a summary of cash restriction analysis, dated October 2, 2019. On October 18, 2019, AAFAF released additional information from the mediation process in the form of a bank account analysis also prepared by the Oversight Board. The report, dated October 2, 2019, focuses on bank account balances as of June 30, 2019.

~~As of October 18, 2019, the Treasury Single Account cash position, as reported by~~ the Puerto Rico ~~Treasury Department, was $8.255 billion~~instrumentalities addressed in the Amended POA or the recoveries on claims

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against the Commonwealth by creditors of those instrumentalities, including Ambac and ~~still exceeds~~Ambac-insured bondholders. However, if the ~~$1.1 billion threshold~~Amended POA were confirmed in its current form, Ambac's financial condition would suffer a material negative impact. Refer to ~~access Community Disaster Loan financing.~~Note 6. Financial Guarantee Insurance Contracts to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Form 10-Q for the possible increase in loss reserves under stress or other adverse conditions, including the impact of the Amended POA. There can be no assurance that losses may not exceed such estimates.

Political Developments

~~Resignation~~On August 31, 2020, the terms of ~~Governor Ricardo Rosselló~~Oversight Board members Carlos M. García and José Ramón González expired, and on October 5, 2020, the term of Oversight Board Chairman José Carrión expired.

On ~~July 24, 2019, Governor Ricardo Rosselló announced his resignation as Governor~~October 6, 2020, the four remaining members of the ~~Commonwealth~~Oversight Board at that time (David A. Skeel, Arthur J. González, Ana J. Matosantos and Andrew Biggs) voted unanimously to designate Skeel as the new Oversight Board Chairman. On October 7, 2020, President Donald J. Trump appointed Justin Peterson to replace Arthur J. González as member of ~~Puerto Rico effective August 2, 2019. Rosselló stepped-down following~~the Oversight Board.

The four current members of the Oversight Board continue to carry out all functions and duties while awaiting the potential appointment of additional or replacement members. However, under section 206(b) of PROMESA, an affirmative vote of no fewer than five members of the board is required to issue a ~~number of resignations of cabinet and administration officials, the arrest of two of those officials, former Puerto Rico Education Secretary Julia Keleher and former Puerto Rico Health Insurance~~

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Administration Executive Director Angela Aviles, in connection with a federal probe targeting corruption, and the disclosure of nearly 900 pages of exchanges leaked and published by The Center for Investigative Journalism showing inflammatory remarks in a group text between Rosselló, his top aides, his Cabinet members and others.restructuring certification.

On ~~July 31, 2019,~~August 16, 2020, Governor Rosselló issued a press release announcing he had selected Pedro R. Pierluisi, a former Puerto Rico Secretary of Justice and Resident Commissioner, to serve as the Secretary of State (next in succession order from the governor). On August 2, 2019, Rosselló stepped down and Pierluisi was sworn in as Governor following Pierluisi’s confirmation as Secretary of State by the House of Representatives of Puerto Rico. However, on August 7, 2019, the Supreme Court of Puerto Rico ruled that Pierluisi’s swearing-in was unconstitutional given that he had only been approved as Secretary of State by only one chamber of Puerto Rico’s congress. On the same date, Pierluisi was removed from office and Secretary of Justice Wanda Vázquez ~~(next in succession order after Secretary~~acknowledged losing the primary of ~~State) was sworn in~~her pro-statehood party to Pedro Pierluisi, who briefly served as the ~~new Governor, per Act 7-1952.~~

~~The level of governmental uncertainty and leadership turnover occurring in Puerto Rico is unprecedented. Increased~~governor last year amid political ~~uncertainty at~~turmoil. Pierluisi faced Mayor Carlos Delgado among other candidates during the ~~local level may have a potential impact~~gubernatorial election held on federal support of Commonwealth needs going forward. In addition, appointing new or inexperienced public officials at the cabinet or agency level could result in poor public policy or financial management and performance, which may in turn negatively impact creditor outcomes and Ambac's results of operations and financial condition.

~~The political turmoil in Puerto Rico~~November 3, 2020. No winner has already affected the administration of federal aid as evidenced by FEMA issuing a press release on July 25, 2019 stating that FEMA has reinstated the manual drawdown process for the Commonwealth of Puerto Rico requiring the Puerto Rico government to first receive approval from FEMA to draw down grant funds for Hurricanes Irma and Maria recovery due to the ongoing leadership changes within the Puerto Rican government, combined with continued concern over Puerto Rico’s history of fiscal irregularities and mismanagement; and Housing and Urban Development ("HUD") Secretary Ben Carson issuing a press release on August 2, 2019 stating that HUD will appoint a federal financial monitor to oversee the disbursement of disaster recovery dollars to Puerto Rico to address Puerto Rico’s alleged corruption, fiscal irregularities and mismanagement.been declared.

It is unclear how the political situation in Puerto Rico will be stabilized, if and how it may further impact or delay distribution of federal aid, and how creditors of the Commonwealth of Puerto Rico will be ultimately affected.

~~Commonwealth Plan of Adjustment~~

~~On September 27, 2019, the~~ Oversight Board ~~filed its disclosure statement~~member turnover and ~~Commonwealth Plan of Adjustment ("POA") to restructure $35 billion of~~local elections will impact the debt restructuring process, negotiations, timing and other claims against the Commonwealth of Puerto Rico, the Public Building Authority ("PBA"), and the Employee Retirement System ("ERS") as well as more than $50 billion of pension liabilities. (On the same day, PBA filed a petitionultimate outcome for a Title III restructuring.) The Plan of Adjustment would reduce Commonwealth debt and other claims from $35 billion to $12 billion, a 60% cut. Combined with the restructuring of COFINA debt earlier this year, the POA reduces

the Commonwealth’s annual debt service to just under 9% of own-source revenues, down from almost 30% of government revenues prior to PROMESA. The proposed pension changes, first announced in June, included in the POA would reduce pension payments by as much as 8.5% for retirees who currently receive at least $1,200 a month, such that 60% of retirees would not face any cuts. The Plan of Adjustment also would establish a pension reserve fund to help support retirement payments in future years. Governor Wanda Vázquez said that her administration will "do everything possible to avoid a cut in pensions" but stopped short of saying her administration would not support a POA that includes such cuts. On October 21, 2019, Puerto Rico's House of Representatives approved a resolution rejecting the POA to express opposition against the proposed 8.5% cut to the pensions of retired public workers. The bill states that the Puerto Rico legislature will not approve any legislation that may be required to implement the POA.

The POA, as is, disproportionately disadvantages claims related to the Commonwealth revenue bonds, including those insured by Ambac Assurance. The POA provides for estimated recovery on claims against the Commonwealth related to PRHTA, Puerto Rico Infrastructure Financing Special Tax Revenue (Rum Tax), and Convention Center bonds of 3.1%, 3.4%, and 0.4%, respectively. It is unknown if and how the POA may be modified or what the final adjustment will be to the Commonwealth instrumentalities addressed in the Commonwealth POA. However, if the POA were confirmed in its current form, Ambac's financial condition would suffer a material negative impact.

~~Stay on Litigation~~

On July 24, 2019, Judge Swain ordered a 120-day stay on claims objections and adversary proceedings, originally set to expire on November 30, 2019 and later extended until December 31, 2019. The purpose of the stay is to identify efficiently the issues that must be litigated or otherwise resolved to achieve confirmation of a plan of adjustment for the Commonwealth (and other debtors and potential debtors in Title III proceedings) and prioritize such issues and develop efficient approaches to the resolution of such issues. In mediation, parties in the cases and the court-appointed mediation team led by Judge Barbara Houser will focus on identifying key and gating issues, assess their crosscutting and collateral implications, seek to reach substantial consensus as to the prioritization of matters for litigation or mediation, and formulate a proposed schedule and appropriate notice and participation mechanisms that are as standardized and comprehensive as possible. The terms of the order require participation by the following parties:

~~The Oversight Board;~~

~~AAFAF;~~

~~The official committee of unsecured creditors;~~

~~The official committee of retired employees;~~

~~The movants or plaintiffs in each of the adversary proceedings and contested matters that are listed in the appendix attached to the motion, and the applicable defendants and respondents; and~~

~~Parties in interest who have appeared in such proceedings to date (or appropriate representatives of such groups).~~

~~At the Omnibus hearing, also on July 24, 2019, Judge Houser stated she hopes that working with the various parties would result in~~

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successfully coming to agreed or substantially agreed scheduling orders, and then, in addition, through substantive mediation, a substantially consensual plan or plans for the Title III debtors in these cases.

On October 24, 2019, the Oversight Board filed an emergency motion seeking to extend the stay of certain adversary proceedings and contested matters set forth in Appendix I of the court's July 24, 2019 order. On October 28, 2019, Judge Swain granted the emergency motion, extending the stay until December 31, 2019, and extending the deadline for the mediation team to file a report to November 27, 2019 from October 28, 2019.Ambac.

Ambac ~~Post-COFINA~~ Title III Litigation Update

Ambac Assurance is ~~or was a~~ party to a number of litigations related to its Puerto Rico exposures, and actively participates in the Commonwealth’s Title III proceedings before the United States District Court for the District of Puerto Rico. ~~Four of these litigations are COFINA-related cases that~~

On January 16, 2020, Ambac Assurance, together with other monoline insurers, filed motions which sought to lift the automatic stay and allow Ambac and others to enforce their rights related to HTA, CCDA and PRIFA in an alternative forum. Through orders issued on July 2 and September 9, 2020, Judge Swain largely denied the motions, while holding in abeyance further proceedings in the CCDA motion relating to a particular account over which it is undisputed the monolines have ~~been, or are~~a lien. Ambac Assurance and the other movants have appealed the HTA and PRIFA decisions. Briefing is expected to be ~~dismissed~~completed by ~~operation of the COFINA Plan of Adjustment (“POA”) that was confirmed on~~December 21, 2020, with argument heard in February 4, 2019, and became effective on February 12, 2019. Several parties are presently appealing the confirmation of the COFINA POA. On August 7 and October 4, 2019, the U.S. Court of Appeals for the First Circuit entered an order denying without prejudice the Oversight Board’s, Puerto Rico Fiscal Agency and Financial Authority’s and Puerto Rico Sales Tax Financing Corp.’s motions to dismiss as equitably moot certain appeals from the district court’s orders confirming the COFINA Plan of Adjustment and denying the credit unions’ motion for reconsideration of the confirmation order. It is unclear if and how future developments in these proceedings could alter the COFINA POA, the commutations and related actions taken pursuant to the COFINA POA, or how materially any such developments would impact Ambac’s financial condition and results of operations. Any alteration of the COFINA POA, the commutations or related actions taken pursuant to the COFINA POA could have material adverse consequences for Ambac.

A fifth litigation related to Ambac Assurance's Puerto Rico exposures is another COFINA-related case that had been stayed pending resolution of an interpleader action related to COFINA funds, but which is now permitted to proceed by operation of the POA resolving the interpleader action. Four additional litigations are stayed under Title III of PROMESA. Active litigations and matters include an appeal relating to the Puerto Rico Highways and Transportation Authority that Ambac Assurance has petitioned the United States Supreme Court to review; an adversary proceeding relating to the Puerto Rico Public Buildings Authority pending before the United States District Court for the District of Puerto Rico; and several matters pending in the Commonwealth’s Title III case before the United States District Court for the District of Puerto Rico. These Title III matters include an omnibus claim objection to claims premised on certain Commonwealth general obligation bonds; a motion seeking a determination that the automatic stay does not apply to certain actions Ambac contemplates taking with respect to the diversion of rum taxes from PRIFA, or that any such stay should be lifted for cause; a motion to strike portions of a Plan Support Agreement between the Oversight Board and certain GO and PBA creditor parties who agree to support the current Commonwealth POA; and a number of requests for information from the Commonwealth.2021. Ambac is unable to predict when and how the issues raised in these cases

~~(other than those already dismissed by operation of the POA)~~ will be resolved. If Ambac

Assurance is unsuccessful in any of these proceedings, Ambac’s financial condition, including liquidity, loss reserves and capital resources may suffer a material negative impact.

On January 16, 2020 the Oversight Board filed four adversary proceeding complaints against Ambac Assurance, and other monoline insurers, seeking to disallow their proofs of claim against the Commonwealth as they relate to HTA, CCDA, and PRIFA bonds. On April 28, 2020, the Oversight Board filed partial motions for summary judgment. Briefing has concluded on those motions for summary judgment and oral argument was held on September 23, 2020. A decision is pending.

Ambac Assurance, along with other monoline insurers, filed a motion seeking appointment as trustees under Section 926 of the Bankruptcy Code to pursue certain avoidance actions on behalf of HTA against the Commonwealth of Puerto Rico. The motion attached a proposed complaint detailing the avoidance claims that movants would pursue. On August 11, 2020 the Court denied the motion and Ambac Assurance and the other movants have appealed that denial. Ambac Assurance and the other movants filed a motion to hold that appeal in abeyance pending the First Circuit’s resolution of the appeal from the Court’s denial of the HTA Lift-Stay Motion. Briefing has concluded on the motion to hold the appeal in abeyance and a decision is pending.

Refer to ~~Note 16. Commitments and Contingencies to~~ ~~the Consolidated Financial Statements, included~~"Financial Guarantees in Force" in Part II, Item 87 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in ~~this~~Ambac’s Annual Report on Form 10-K for the year ended December 31, 2019 and Note ~~12.~~11. Commitments and Contingencies to the Consolidated Financial Statements, included in Part I, Item 1 inof this Form 10-Q for further information about Ambac's ~~litigations~~litigation relating to Puerto Rico.

~~Other Legal Developments~~Mediation

The status, timing and subject of any subsequent or future mediation discussion has not yet been publicly disclosed. However, Judge Swain issued a scheduling order on June 30, 2020, setting monthly omnibus hearings through the end of 2021. On ~~February 15, 2019, the United States Court of Appeals for the First Circuit issued an opinion in the consolidated appeals brought by certain parties who argued that the members of~~October 28, 2020, Judge Swain ordered the Oversight Board ~~were appointed~~to engage with all relevant parties in ~~violation~~responsible and meaningful negotiations in an effort to arrive at a substantially consensual Plan of Adjustment. The timeline for resolution of Puerto Rico’s debt restructuring process is uncertain and will extend into 2021.

The Oversight Board disclosed, in a status report filed with the Title III court in September 2020, that it has resumed formal discussions with creditors with the guidance of the ~~U.S. Constitution’s Appointments Clause.~~mediation team led by Judge Houser. Prior to the talks with creditors, the Oversight Board held discussions with AAFAF concerning the terms of a Commonwealth Plan of Adjustment and what, if any, modifications or amendments needed to be proposed. The ~~First Circuit ruled~~status report also said that the Oversight Board ~~members (other than~~considered it premature to propose a schedule for consideration of the ~~ex-officio Member) must be,~~Commonwealth Plan of Adjustment and ~~were not, appointed in compliance with~~Disclosure Statement due to several factors, including the ~~Appointments Clause. The First Circuit declined to dismiss~~upcoming November election. More specifically, the ~~Oversight Board’s Title III petitions and did not render ineffective any otherwise valid actions of~~report states the Oversight Board ~~prior~~“and its advisors have engaged in active dialogue with individual creditors and their respective advisors, both those party to the ~~issuance~~

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Plan Support Agreement as well as other notable parties in interest. While parties have re-engaged, both formally and informally, in light of (a) the ~~ruling. The First Circuit stated that~~nascent stage of such discussions, (b) the ~~ruling will not take effect for 90 days, “so as to allow~~current state of material litigations before the ~~President~~court, the determinations of which shall influence the tenor of such discussions, and (c) the ~~Senate to validate the currently defective appointments or reconstitute the Board in accordance with the Appointments Clause." The First Circuit held that during the 90-day stay period,~~political and electoral process on-Island, the Oversight Board ~~may continue~~submits it is premature to ~~operate as it had prior to the ruling. The First Circuit subsequently extended the stay period until final disposition~~propose a schedule for consideration of the ~~case before~~Commonwealth Plan of Adjustment and Disclosure Statement.” The Oversight Board filed an updated status report in October 2020 which also indicated that it was premature to propose a schedule for consideration of the ~~United States Supreme Court.~~Commonwealth Plan of Adjustment and Disclosure Statement due to several factors, including the upcoming November election. On October ~~15, 2019,~~28, 2020, the ~~Supreme~~ Court ordered the Oversight Board to file, by February 10, 2021, either (i) an informative motion with a term sheet disclosing the economic and structural terms and features of a proposed amended Commonwealth Plan of Adjustment, or (ii) the proposed amended Commonwealth Plan of Adjustment itself, together with a proposed timeline for disclosure statement and confirmation hearings.

No assurances can be given that debt restructuring negotiations will be successfully concluded, that the Commonwealth, Oversight Board and creditor parties will reach definitive agreements on debt restructurings, that any additional negotiated transaction, debt restructuring, definitive agreement or Plan of Adjustment will be approved by the court and completed, or that any transaction or Plan of Adjustment will not have a materially adverse impact on Ambac's financial condition or results of operations.

Federal Aid

The Commonwealth of Puerto Rico is projected to benefit from over $60 billion of federal disaster aid for infrastructure improvement initiatives or recovery efforts, as a result of the ~~United States heard oral argument regarding~~damage cause by hurricanes Irma and Maria as well as the ~~constitutionality~~earthquakes that began in late December 2019.

On September 18, 2020, the White House announced plans for FEMA to award almost $13 billion in new disaster aid, primarily for rebuilding Puerto Rico's electrical grid that was damaged by hurricanes Maria and Irma three years ago. The majority of the appointment of the Oversight Board’s members and the validity and effect of its actions. The Supreme Court did not indicate when it would be issuing a ruling on the matter. It is unclear how the Supreme Court’s eventual rulinggrants ($9.6 billion) will ~~impact~~flow to the Puerto Rico ~~restructuring process, mediation discussions~~Electric Power Authority to repair and ~~relevant litigation with respect~~replace transmission and distribution lines, substations, generation systems and general grid improvements as part of its strategic transformation. About $2.3 billion in grants will flow to ~~Ambac's~~the Puerto Rico’s Department of Education for school construction projects. This aid allocation will raise the amount the federal government has obligated to Puerto Rico ~~exposures.~~to approximately $38 billion for Puerto Rico’s recovery. However, distribution of disaster aid to date post-hurricanes has been slower than expected. Only one-third, or $16.9 billion, of previously allocated funds have been disbursed to the Commonwealth, according to COR (the Puerto Rico government's Central Recovery and Reconstruction Office).

The slow pace of distribution, primarily for HUD grants, reflects a complicated project approval process but also increased oversight of funds following allegations of Puerto Rico’s mismanagement of aid last year. To date, HUD has only distributed a fraction of disaster relief funds to Puerto Rico,

about 0.5% of funds previously approved by Congress. Of the ~~extent~~funds received by the Commonwealth, the bulk flowing from FEMA include monies for public assistance projects, including rebuilding roads, bridges, police stations and hospitals damaged during the hurricanes. Individuals have also received close to $3 billion in FEMA assistance to date, including funding housing assistance for residents that have lost their homes as a ~~Supreme Court decision would disrupt the effectiveness~~result of the ~~COFINA POA~~disaster, but also for certain home repair, medical, child care and clean-up expenses.

The full extent of federal government support to Puerto Rico is still uncertain as existing federal stimulus has not been fully disbursed and additional measures are likely to be enacted. A new U.S. President, Puerto Rico governor, or Oversight Board makeup could accelerate the aid distribution process if there was a higher comfort level from the federal government regarding the local management and efficacy of federal disaster resources. While the previously allocated federal disaster relief funds, Medicaid money, and the more recent COVID-19 crisis related ~~commutations~~funds are all expected to support economic recovery and growth and in Puerto Rico, there can be no assurances as to the certainty, timing, usage, efficacy or ~~other actions, Ambac's financial condition could suffer materially.~~magnitude of benefits to creditor outcomes related to disaster aid and ensuing economic growth, if any.

Summary

Ambac has considered these developments and other factors in evaluating its Puerto Rico loss reserves. During the ~~quarter~~nine months ended September 30, ~~2019,~~2020, Ambac had incurred losses associated with its Domestic Public Finance insured portfolio of ~~$77~~$263 million, which was impacted by lower discount rates, the continued uncertainty and volatility of the situation in Puerto ~~Rico.~~Rico, including the potential impact of the COVID-19 crisis on the Commonwealth and the developing potential impact of the COVID-19 crisis on other sectors in the Domestic Public Finance insured portfolio; and loss adjustment expenses related to the cost of defending our rights and pursuing recoveries. While management believes its reserves are adequate to cover losses in its Public Finance insured portfolio, there can be no assurance that Ambac may not incur additional losses in the future, particularly given the developing economic, political, and legal circumstances in Puerto ~~Rico.~~Rico and the overall uncertain impact of the COVID-19 crisis on the Commonwealth and the Domestic Public Finance Insured Portfolio in general. Such additional losses may have a material adverse effect on Ambac’s results of operations and financial condition.

~~Ballantyne Re Plc~~Exposure Currency

~~Following entry into a lock-up agreement with Ballantyne Re plc ("Ballantyne"), Assured Guaranty Europe plc and Assured Guaranty Corp., certain Ballantyne Class A Noteholders, Security Life~~The table below shows the distribution by currency of ~~Denver Insurance Company ("SLD") and Swiss Re Life~~Ambac Assurance’s insured exposure as of September 30, 2020:


Currency (Amounts in millions)	Net Par Amount Outstanding in Base Currency		Net Par Amount Outstanding in U.S. Dollars
U.S. Dollars	$	23,033	$	23,033
British Pounds	£	7,403	9,550
Euros	€	1,518	1,778
Australian Dollars	A$	545	390

Total			$	34,751

| Ambac Financial Group, Inc. 5257 ~~2019~~2020 Third Quarter FORM 10-Q|

and Health America Inc. ("SRLHA") Ballantyne commenced, under Irish law, a restructuring transaction ("Restructuring") in respect of its obligations under its Class A-1 Notes, Class A-2a Notes, Class A-2b Notes, Class A-3a Notes, Class A-3b Notes, Class A-3c Notes and Class A-3d Notes (together, the "Scheme Notes") (the "Restructuring"). The Class A-2a Notes, the Class A-3a Notes, the Class A-3b Notes, the Class A-3c Notes and the Class A-3d Notes had a guarantee from Ambac UK (the "Ambac UK Guaranteed Notes").

The Restructuring was commenced by Ballantyne on April 25, 2019 and was implemented through an Irish scheme of arrangement (the "Arrangement") under Part 9 of the Irish Companies Act 2014 which required the consent of the requisite majorities of the relevant Class A Noteholders at each Arrangement meeting. The Arrangement was approved on June 17, 2019 and the Restructuring was implemented on the terms proposed.

~~The key features of the Restructuring were as follows:~~

~~the novation of the indemnity reinsurance agreement between Ballantyne and SLD dated November 19, 2008 (as amended) to SRLHA (the "Novation");~~

the disbursement of the assets from Ballantyne's reinsurance trust account to effectuate the Novation and make payment to the holders of Scheme Notes in full and final satisfaction of their claims against Ballantyne; and

~~the commutation of the obligations of Ambac UK in respect of the Ambac UK Guaranteed Notes.~~

~~With the successful implementation of the Restructuring, Ambac UK has ceased to have any exposure with respect to the obligations of Ballantyne.~~

~~Exposure Concentrations within each Market~~

~~The table below shows Ambac’s ten largest U.S. public finance exposures, by repayment source, as a percentage of total financial guarantee net par outstanding at September 30, 2019:~~

($ in millions) Bond Type
Ambac
Ratings ⁽¹⁾

Net Par
Outstanding ⁽²⁾

% of Total
Net Par
Outstanding
New Jersey Transportation Trust Fund Authority - Transportation System Lease and Tax-backed Revenue BBB+ $ 778
2.0 %
Massachusetts Commonwealth - GO General Obligation AA 586
1.5 %
Mets Queens Baseball Stadium Project, NY, Lease Revenue Stadium BBB 549
1.4 %
Hickam Community Housing LLC Housing Revenue BBB 466
1.2 %
Bragg Communities, LLC Housing Revenue A- 416
1.1 %
Puerto Rico Highways & Transportation Authority, Transportation Revenue Lease and Tax-backed Revenue BIG 409
1.0 %
Puerto Rico Infrastructure Financing Authority, Special Tax Revenue Lease and Tax-backed Revenue BIG 403
1.0 %
New Jersey Economic Development Authority - School Facilities Construction Lease and Tax-backed Revenue BBB+ 400
1.0 %
Monterey Bay, CA - Military Housing Housing Revenue BBB+ 324
0.8 %
Fort Bliss/White Sand Missile Range Housing LP Housing Revenue BBB+ 307
0.8 %
Total $ 4,638
11.9 %

~~(1)~~

Internal credit ratings are provided solely to indicate the underlying credit quality of guaranteed obligations based on the view of Ambac. In cases where Ambac has insured multiple tranches of an issue with varying internal ratings, or more than one obligation of an issuer with varying internal ratings, a weighted average rating is used. Ambac credit ratings are subject to revision at any time and do not constitute investment advice. BIG denotes credits deemed below investment grade.


~~(2)~~	~~Net Par includes capital appreciation bonds, which are reported at the par amount at the time of issuance of the insurance policy as opposed to the current accreted value of the bonds.~~

Net par related to the top ten U.S. public finance exposures reduced $551 million from December 31, 2018. Changes in these exposure amounts will occur due to scheduled paydowns, calls and refundings executed during the period. During 2019, due to a deal restructuring and commutation, Puerto Rico Sales Tax Financing Corporation Senior Sales Tax Revenue (COFINA) and Massachusetts Port Authority Special Facility Revenue Bonds, respectively, were removed from the top ten largest U.S. public finance exposures offset by the addition of Monterey Bay, CA - Military Housing and Fort Bliss/White Sand Missile Range Housing LP.

~~| Ambac Financial Group, Inc.~~ 53~~2019 Third Quarter FORM 10-Q~~ |

~~The table below shows Ambac’s ten largest structured finance transactions, as a percentage of total financial guarantee net par outstanding at September 30, 2019:~~

($ in millions) Bond Type
Ambac
Rating⁽¹⁾

Net Par
Outstanding

% of Total
Net Par
Outstanding
Progress Energy Carolinas, Inc. Investor Owned Utility A- $ 450
1.2 %
Timberlake Financial, LLC Structured Insurance BBB 414
1.1 %
Wachovia Asset Securitization Issuance II, LLC 2007-HE2 Mortgage Backed Securities BBB 406
1.0 %
Wachovia Asset Securitization Issuance II, LLC 2007-HE1 Mortgage Backed Securities BBB 275
0.7 %
Option One Mortgage Loan Trust 2007-FXD1 Mortgage Backed Securities BIG 215
0.6 %
Terwin Mortgage Trust Asset-Backed Certificates, Series 2006-6 Mortgage Backed Securities BIG 210
0.5 %
Impac CMB Trust Series 2005-7 Mortgage Backed Securities BIG 182
0.5 %
Ownit Mortgage Trust 2006-OT1 Mortgage Backed Securities BIG 180
0.5 %
Countrywide Asset-Backed Certificates Trust 2005-16 Mortgage Backed Securities BIG 178
0.5 %
Basin Electric Power Cooperative Investor Owned Utility A- 168
0.4 %
Total $ 2,678
6.9 %

~~(1)~~

Net par related to the top ten U.S. structured finance exposures reduced $945 million from December 31, 2018. The change in top U.S. structured finance exposures primarily relates to the Ballantyne commutation and paydowns of RMBS during the nine months ended September 30, 2019. As a result of the commutation, Ballantyne Re Plc was removed from the top ten largest U.S. structured finance exposures offset by the addition of Basin Electric Power Cooperative.

The table below shows our ten largest international finance transactions as a percentage of total financial guarantee net par outstanding at September 30, 2019. Except where noted, all international finance transactions included in the table below are insured by Ambac UK:

($ in millions) Country-Bond Type
Ambac
Rating⁽¹⁾

Net Par
Outstanding

% of Total
Net Par
Outstanding
Mitchells & Butlers Finance plc-UK Pub Securitisation UK-Asset Securitizations A+ $ 1,246
3.2 %
Capital Hospitals plc ⁽²⁾
UK-Infrastructure A- 834
2.1 %
Aspire Defence Finance plc UK-Infrastructure BBB+ 804
2.1 %
Anglian Water UK-Utility A- 763
2.0 %
National Grid Gas UK-Utility A- 704
1.8 %
Posillipo Finance II S.r.l Italy-Sub-Sovereign BIG 704
1.8 %
Ostregion Investmentgesellschaft NR 1 SA ⁽²⁾
Austria-Infrastructure BIG 666
1.7 %
RMPA Services plc UK-Infrastructure BBB+ 534
1.4 %
Catalyst Healthcare (Manchester) Financing plc ⁽²⁾
UK-Infrastructure BBB- 499
1.3 %
National Grid Electricity Transmission UK-Utility A- 474
1.2 %
Total $ 7,228
18.6 %

~~(1)~~


~~(2)~~	~~A portion of this transaction is insured by an insurance policy issued by Ambac Assurance.~~

Net par related to the top ten international finance exposures reduced $358 million from December 31, 2018. International exposures are impacted by changes in foreign exchange rates, certain indexation rates and scheduled and unscheduled paydowns. During 2019, there was no change in the listing of exposures included within the top ten largest international exposures.

The concentration of net par amongst the top categories noted above (as a percentage of net par outstanding) has decreased since December 31, 2018 for structured finance exposures and increased since December 31, 2018 for both public finance and international exposures. Given that Ambac has not written any new insurance policies since 2008, the risk exists that the insured portfolio becomes increasingly concentrated to large and/or below investment grade exposures.

~~| Ambac Financial Group, Inc.~~ 54~~2019 Third Quarter FORM 10-Q~~ |

Ratings Distribution

The following charts provide a rating distribution of net par outstanding based upon internal Ambac credit ratings⁽¹⁾ and a distribution by bond type of Ambac's below investment grade ("BIG") net par exposures at September 30, ~~2019~~2020 and December 31, ~~2018. Below investment grade~~2019. BIG is defined as those exposures with an Ambac internal credit rating below BBB-:

Note: AAA is less than 1% in both periods.


~~(1)~~	Internal credit ratings are provided solely to indicate the underlying credit quality of guaranteed obligations based on the view of Ambac. Ambac credit ratings are subject to revision at any time and do not constitute investment advice.

(1)Internal credit ratings are provided solely to indicate the underlying credit quality of guaranteed obligations based on the view of Ambac. In cases where Ambac has insured multiple tranches of an issue with varying internal ratings, or more than one obligation of an issuer with varying internal ratings, a weighted average rating is used. Ambac credit ratings are subject to revision at any time and do not constitute investment advice.


	Net Par Outstanding
Summary of Below Investment Grade Exposure ($ in millions)	September 30, 2020		December 31, 2019
Public Finance:
Lease and tax-backed (1)	$	1,199	$	1,109
General obligation (1)	336		525
Housing (2)	309		311
Stadium	540		—
Transportation	30		27

Other	38		42
Total Public Finance	2,452		2,014
Structured Finance:
RMBS	2,941		3,362

Student loans	540		620
Other	1		33
Total Structured Finance	3,482		4,015
International Finance:
Other	1,537		1,455
Total International Finance	1,537		1,455
Total	$	7,471	$	7,484

Net Par Outstanding
Summary of Below Investment
Grade Exposure ($ in millions)
September 30,
2019 December 31,
2018
Public Finance:
Lease and tax-backed ⁽¹⁾
$ 1,116
$ 2,025
General obligation ⁽¹⁾
364
434
Housing ⁽²⁾
191
314
Transportation 27
378
Health care —
25
Other 134
146
Total Public Finance 1,832
3,322
Structured Finance:
RMBS 3,507
4,205
Structured Insurance —
900
Student loans 643
714
Other 33
53
Total Structured Finance 4,183
5,872
International Finance:
Other 1,437
924
Total International Finance 1,437
924
Total $ 7,452
$ 10,118

(1)Lease and tax-backed revenue includes $969 and $1,014 of Puerto Rico net par at September 30, 2020 and December 31, 2019, respectively. General obligation includes $101 and $109 of Puerto Rico net par at September 30, 2020 and December 31, 2019, respectively. Components of Puerto Rico net par outstanding includes capital appreciation bonds which 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.

~~(1)~~

Lease and tax-backed revenue includes $1,014 and $1,735 of Puerto Rico net par at September 30, 2019 and December 31, 2018, respectively. General obligation includes $109 and $145 of Puerto Rico net par at September 30, 2019 and December 31, 2018, respectively. Components of Puerto Rico net par outstanding includes capital appreciation bonds which 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.


~~(2)~~	~~Relates to military housing net par.~~

(2)Relates to military housing net par.

The ~~decrease~~net decline in below investment grade exposures is primarily due to ~~(i) the~~ commutation ~~or restructuring~~ of certain general obligation exposures, the partial commutation of a structured insurance, lease and tax-backed and transportation transactions (including the Ballantyne and COFINA commutations), (ii) upgrades of certain military housing exposure, (iii) paydowns or calls by issuers,finance transaction mostly ~~related to residential mortgage-backed and other asset-backed securities and (iv) a termination of an international aircraft asset-backed transaction. This decrease is~~ offset by the addition of certain exposures driven by the COVID-19 pandemic (lease and tax-backed, stadiums and an ~~Italian sub-sovereign exposure. Despite the decrease in below~~international structured finance exposure).

Below investment grade ~~exposures, such~~ exposures could increase as a relative proportion of the guarantee portfolio given that stressed borrowers generally have less ability to prepay or refinance their debt. Accordingly, due to these and other factors, it is not unreasonable to expect the proportion of below investment grade exposure in the guarantee portfolio to continue to increase in the future.

~~| Ambac Financial Group, Inc.~~ 55~~2019 Third Quarter FORM 10-Q~~ |

RESULTS OF OPERATIONS

Net ~~income~~loss attributable to common stockholders for the three months ended September 30, ~~2019~~2020, was ~~$66~~$108 million compared to net ~~loss~~income attributable to common stockholders of ~~$104~~$66 million for the three months ended September 30, ~~2018.~~2019. The ~~increase~~decrease in net income was primarily ~~due to~~driven by (i) receipt of $142 million arising from the settlement between the SEC and Citigroup which was recognized as a gain in Other income for the three months ended September 30, 2019, (ii) ~~the $82 million reduction to Net~~higher losses and loss expenses, (iii) lower net realized investment gains, (iv) lower income ~~attributable to common stockholders for the three months ended September 30, 2018 related to the AMPS Exchange,~~on variable interest entities, and (v) lower net investment income, partially offset ~~by (i)~~by: (a) lower

| Ambac Financial Group, Inc. 582020 Third Quarter FORM 10-Q |

interest and operating expenses and (b) higher net ~~premiums earned, (ii) lower investment income and realized~~ gains ~~and (iii)~~on derivative ~~losses for the three months ended September 30, 2019 compared to gains in the third quarter of 2018.~~contracts.

Net loss attributable to common stockholders for the nine months ended September 30, ~~2019,~~2020, was ~~$106~~$423 million compared to a net ~~income~~loss attributable to common stockholders of ~~$206~~$106 million for the nine months ended September 30, 2018. The decrease was primarily driven by, (i) higher insurance intangible amortization (variance primarily driven by the Ballantyne commutation), (ii) a lower losses and loss expenses benefit for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018, (iii) lower net premiums earned, (iv) lower net investment income, (v) net losses on derivative contracts compared to net gains for the nine months ended September 30, 2018, (vi) higher interest expense and (vii) higher provision for income taxes, partially offset by (i) the $142 million settlement gain noted above for the nine months ended September 30, 2019, (ii) the impact of the AMPS exchange on the nine months ended September 30, 2018, (iii) higher gains on consolidated VIEs and (iv) lower operating expenses.

~~The Ballantyne restructuring transactions completed in June 2019, resulted in an aggregate loss of $83 million included in net loss attributable to common stockholders~~ for the nine months ended September 30, 2019. The ~~COFINA restructuring completed~~increase in ~~February 2019 resulted~~loss was primarily driven by: (i) higher loss and loss expenses, (ii) receipt of $142 million arising from the settlement between the SEC and Citigroup which was recognized as a gain in ~~an aggregate gain of $30 million included in net loss attributable to common stockholders~~Other income for the nine months ended September 30, 2019. As described further below, these transactions, along with the impact of the February 2018 Rehabilitation Exit Transactions, significantly impact the comparability of the results of operations for the periods presented.2019, (iii) lower net investment income, (iv) lower net realized investment gains, and (v) lower income on variable interest entities, partially offset by (a) lower insurance intangible amortization and (b) lower interest and operating expenses.

A summary of our financial results is shown below:


	Three Months Ended September 30,				Nine Months Ended September 30,
($ in millions)	2020		2019		2020		2019
Revenues:
Net premiums earned	$	15	$	10	$	36	$	46
Net investment income	37		45		69		186

Net realized investment gains (losses)	2		18		20		71

Net gains (losses) on derivative contracts	7		(10)		(61)		(61)

Other income (expense)	2		141		2		133
Income (loss) on variable interest entities	—		11		3		30
Expenses:
Losses and loss expenses (benefit)	83		37		216		(84)
Insurance intangible amortization	14		17		41		280
Operating expenses	23		26		67		80
Interest expense	50		67		172		202


Provision for income taxes	—		3		(5)		33



Net income (loss) attributable to common stockholders	$	(108)	$	66	$	(423)	$	(106)

Ambac's results of operations and financial position have been adversely impacted by the COVID-19 pandemic's effect on the global economy and financial markets. Significant interest rate declines during the first quarter of 2020 contributed materially to a net increase in loss reserves and losses on interest rate derivative contracts. Credit driven losses were also recognized in the three months ended March 31, 2020, within losses incurred (primarily from public finance insurance policies) and losses in counterparty credit adjustments on derivative asset valuations. Financial market disruptions were reflected through lower valuations of certain fixed income securities (recorded through other comprehensive income) and the majority of other investments (recorded through net investment income). During the second and third quarters of 2020, credit spreads partially

Three Months Ended September 30, Nine Months Ended September 30,
($ in millions) 2019 2018 2019 2018
Revenues:
Net premiums earned $ 10
$ 26
$ 46
$ 82
Net investment income 45
58
186
235
Net other-than-temporary impairment losses —
—
—
(2 )
Net realized investment gains (losses) 18
30
72
82
Net gains (losses) on derivative contracts (10 ) 18
(61 ) 52
Net realized gains (losses) on extinguishment of debt —
—
—
3
Other income (expense) 141
1
133
3
Income (loss) on variable interest entities 11
2
30
3
Expenses:
Losses and loss expenses (benefit) 37
34
(84 ) (181 )
Insurance intangible amortization 17
26
280
78
Operating expenses 26
28
80
91
Interest expense 67
66
202
176
Provision for income taxes 3
2
33
7
Net income (loss) 66
(22 ) (106 ) 288
Less: exchange of auction market preferred shares —
82
—
82
Net income (loss) attributable to common stockholders $ 66
$ (104 ) $ (106 ) $ 206

recovered (favorably impacting counterparty credit adjustments on derivative assets and valuations of investment securities). The ~~following paragraphs describe~~scope, duration and magnitude of the direct and indirect effects of COVID-19 are evolving in ways that are difficult or impossible to anticipate. As a result, it is possible that Ambac's results of operations and financial condition may be further adversely affected by the evolving affects of the COVID-19 pandemic. For additional information on the risks posed by COVID-19, refer to “Part II, Item 1A-Risk Factors” in this Quarterly Report on Form 10-Q.

During 2019, Ambac executed on a number of restructuring/commutation transactions that had significant impacts to the consolidated results of ~~operations of Ambac and its subsidiaries for the three and nine months ended September 30, 2019 and 2018, respectively.~~

~~Rehabilitation Exit Transactions.~~On February 12, 2018, Ambac Assurance executed the Rehabilitation Exit Transactions under which Deferred Amounts and a substantial portion of Ambac Assurance senior surplus notes were settled at a discount, with holders (other than Ambac) receiving in exchange, a consideration package of cash and debt securities (as more fully discussed in ~~Note 1. Background and Business Description~~ ~~in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018).~~operations. As described further below, the completion of the ~~Rehabilitation Exit Transactions,~~these transactions, including the related changes to invested assets, intangible assets, loss reserves and debt of the Company, had a significant impact on the comparability of the results of operation for the nine months ended September 30, 2020 and 2019. The most significant transactions, which are more fully discussed in "Financial Guarantees in Force" in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Ambac’s Annual Report on Form 10-K for the year ended December 31, 2019 ~~as compared~~were:

Puerto Rico COFINA Plan of Adjustment ("POA").On February 12, 2019, the POA, including certain related commutation transactions, and subsequent distributions, became effective, resulting in a significant reduction of Ambac Assurance's insured net par exposure to COFINA. Pursuant to the COFINA POA, approximately 75% of holders of Ambac Assurance-insured senior COFINA bonds (including Ambac) elected to commute their insurance policy.

Ballantyne Re plc ("Ballantyne") Restructuring. On April 25, 2019, Ballantyne commenced, under Irish law, a restructuring transaction ("Restructuring") in respect of its obligations, including obligations that were guaranteed by Ambac UK. The arrangement was approved on June 17, 2019. With the successful implementation of the Restructuring, Ambac UK has ceased to have any exposure with respect to the obligations of Ballantyne.

The following paragraphs describe the consolidated results of operations of Ambac and its subsidiaries for the three and nine months ended September 30, ~~2018.~~2020 and 2019, respectively.

Net Premiums Earned. Net premiums earned primarily represent the amortization into income of insurance premiums. We present accelerated premiums, which result from calls and other accelerations of insured obligations separate from normal net premiums earned. When an insured bond has been retired, any

~~| Ambac Financial Group, Inc.~~ 56~~2019 Third Quarter FORM 10-Q~~ |

remaining unearned premium revenue ("UPR") is recognized at that time to the extent the financial guarantee contract is legally extinguished, causing accelerated premium revenue. For installment premium paying transactions, we offset the recognition of any remaining UPR by the reduction of the related premium receivable to zero (as it will not be collected as a result of the retirement), which may cause negative accelerated premium revenue.

Net premiums earned ~~decreased $16~~increased $5 million and ~~$36~~decreased $10 million for the three and nine months ended September 30, ~~2019,~~

| Ambac Financial Group, Inc. 592020 Third Quarter FORM 10-Q |

2020, respectively, compared to the same periods in the prior year. Normal net premiums earned and accelerated premiums are reconciled to total net premiums earned in the table below. The following table provides a breakdown of ~~net~~normal premiums earned by market:


	Three Months Ended September 30,				Nine Months Ended September 30,
($ in millions)	2020		2019		2020		2019
Normal premiums earned
Public finance	$	5	$	7	$	15	$	21
Structured finance	2		2		6		8
International finance	3		—		9		9
Total normal premiums earned	10		8		30		38




Accelerated earnings	5		2		6		8
Total net premiums earned	$	15	$	10	$	36	$	46

Three Months Ended September 30, Nine Months Ended September 30,
($ in millions) 2019 2018 2019 2018
Normal Premium Earned:
Public finance $ 7
$ 9
$ 21
$ 29
Structured finance 2
4
8
14
International finance —
6
9
18
Total normal premiums earned 8
19
38
60
Accelerated Earnings:
Public finance 2
4
23
18
Structured Finance —
2
(7 ) 3
International finance —
1
(8 ) 1
Accelerated earnings 2
7
8
22
Total net premiums earned $ 10
$ 26
$ 46
$ 82

The increase in normal premiums earned for the three months ended September 30, 2020, is primarily due to changes in allowances for credit losses on premium receivables, partially offset by the continued runoff of the insured portfolio in all markets. The decrease in normal premiums earned infor the ~~three and~~ nine months ended September 30, ~~2019,~~2020, is primarily attributable to (i) the continued runoff of the insured portfolio in all markets and (ii) changes to ~~uncollectible~~allowance for credit losses on premiums ~~in international policies.~~receivables. Ambac ~~reviews~~adopted ASU 2016-13, Measurement of Credit Losses on Financial Instruments ("CECL"), on January 1, 2020, and assesses the ~~collectability of its premiums~~allowance for credit losses on premium receivables on a quarterly ~~basis~~basis. Prior to adoption of ASU 2016-13, Ambac assessed collectability of premium receivables in accordance with ASC 944 and ~~has~~ recorded an ~~increase to~~allowance for uncollectible ~~premiums of $6 million and $7 million in the~~premiums. The three and nine months ended September 30, ~~2019,~~2020, includes an increase in the allowance for credit losses since adoption of CECL of $2 million and $5 million, respectively, as compared to ~~a decrease~~an increase of ~~less than $1~~$6 million and $7 million for the three and nine months ended September 30, ~~2018. The majority of the increase in uncollectible premiums during~~ 2019, ~~was driven by an international transaction that has been impacted by the low interest rate environment in Europe.~~respectively. Terminations and accelerations, including those which occurred in prior periods, result in lower normal premiums earned in current and future periods. Public Finance normal earned premiums for the three and nine months ended September 30, 2020, were also impacted by ~~large~~ reinsurance cessions in ~~both~~ the ~~fourth quarter of 2018 and in the third quarter~~second half of 2019.

The increase in ~~public finance~~accelerated earnings in the three months ended September 30, 2020, as compared to the three months ended September 30, 2019, is primarily driven by the termination of an international credit. The decrease in accelerated earnings in the nine months ended September 30, ~~2019, is primarily related~~2020, as compared to ~~de-risking activity including the COFINA restructuring that occurred in February 2019. Structured finance negative accelerated earnings in~~ the nine months ended September 30, 2019, is primarily related to the ~~Ballantyne commutation. International~~COFINA restructuring, partially offset by negative ~~accelerated~~

~~earnings in the nine months ended September 30, 2019, is~~accelerations related to the ~~termination of~~Ballantyne commutation and two international commercial asset-backed ~~exposures.~~exposures, all of which occurred in 2019.

Net Investment Income. Net investment income primarily consists of interest and net discount accretion on fixed income securities classified as available-for-sale ~~including~~and net gains (losses) on pooled investment funds which include changes in fair value of the funds' net assets. Fixed income securities include investments in Ambac-insured ~~securities. Investments in Ambac-insured~~ securities that are made opportunistically based on their risk/reward and asset-liability management characteristics. As described further below, investment income from holdings of Ambac-insured securities (including Secured Notes issued by Ambac LSNI, LLC) for the periods presented have primarily been ~~driven~~affected by restructuring transactions involving ~~RMBS,~~ Puerto Rico and Ballantyne bonds. ~~Also, included~~Investments in ~~net investment income are net gains and (losses) on~~ pooled investment funds and certain other investments ~~that~~ are either classified as trading securities with changes in fair value recognized in ~~earnings. Funds~~earnings or are reported under the equity method. These funds and ~~trading securities~~other investments are reported in Other investments on the Unaudited Consolidated Balance Sheets, ~~and consist~~which consists primarily of pooled fund investments in diversified asset classes. For further information about investment funds held, refer to Note 8. Investments to the Unaudited Consolidated Financial Statements, included in Part I, Item 1 in this Form 10-Q.

Net investment income from Ambac-insured ~~securities, available for sale~~securities; available-for-sale and short-term securities, other than ~~Ambac-insured~~Ambac-insured; and Other investments is summarized in the table below:


	Three Months Ended September 30,				Nine Months Ended September 30,
($ in millions)	2020		2019		2020		2019
Securities available-for-sale: Ambac-insured (including Secured Notes)	$	15	$	18	$	47	$	104
Securities available-for-sale and short-term other than Ambac-insured	9		19		33		57
Other investments (includes trading securities)	14		8		(12)		25
Net investment income	$	37	$	45	$	69	$	186

Three Months Ended September 30, Nine Months Ended September 30,
($ in millions) 2019 2018 2019 2018
Securities available-for-sale: Ambac-insured (including Secured Notes) $ 18
$ 38
$ 104
$ 185
Securities available-for-sale and short-term other than Ambac-insured 19
12
57
37
Other investments (includes trading securities) 8
8
25
13
Net investment income $ 45
$ 58
$ 186
$ 235

Net investment income decreased ~~$13~~$7 million and $117 million for the three ~~months ended September 30, 2019,~~ and ~~decreased $49 million for the~~ nine months ended September 30, ~~2019,~~2020, respectively, compared to the same periods in the prior year. As described further below, the variances were primarily driven by pricing volatility within fund investments resulting from the impact of the COVID-19 pandemic on financial markets and the impact of de-risking transactions in 2019, including lower subsequent allocations to higher yielding Ambac-insured securities and a lower overall invested asset base.

•Other investments income (loss) increased $6 million and decreased $37 million for the three and nine months ended September 30, 2020, respectively, compared to the

| Ambac Financial Group, Inc. 602020 Third Quarter FORM 10-Q |

same periods in the prior year. The ~~decrease~~increase in other investment income (loss) for the three months ended September 30, ~~2019,~~2020, compared to the prior year period, resulted ~~primarily~~ from ~~smaller positions~~stronger average performance and a larger allocation to this sector. Third quarter 2020 gains reflect the continued price recovery on asset classes most significantly impacted by fair value losses in the first quarter of ~~higher yielding Ambac-insured securities, partially offset by~~2020, including hedge funds and funds investing in high-yield bonds, leveraged loans and equities. Other investment income for the three months ended September 30, 2020, also reflected gains on additional ~~allocations to other asset classes including corporates and asset-backed securities. Ambac-insured RMBS declined over~~hedge fund investments made during the course of 2018 with sales subsequent to the 2018 Rehabilitation Exit Transactions, Ambac-insured COFINA bonds were settled through the restructuring of February 2019 and Ballantyne bonds were settled in the June 2019 restructuring.

period. The ~~decrease in net investment income~~loss for the nine months ended September 30, ~~2019, compared to the same period~~2020, was driven by adverse changes in fair values experienced in the ~~prior~~first quarter of the year ~~is due primarily to~~stemming from an increase in risk premiums (including credit spreads) as a consequence of the ~~reduced amount of Ambac-insured RMBS~~economic and ~~COFINA bonds following their respective restructuring transactions noted above. The~~financial market impact of ~~lower RMBS and COFINA bonds was~~the COVID-19 pandemic, partially offset by ~~increased income from~~

~~| Ambac Financial Group, Inc.~~ 57~~2019 Third Quarter FORM 10-Q~~ |

~~Secured Notes, uninsured COFINA bonds received in the restructurings, additional~~fair value recoveries and gains on new investments in ~~non-insured bonds, accelerated accretion on Ballantyne bonds in connection with~~subsequent quarters. Other investment income for the ~~Ballantyne restructuring in June 2019,~~three and ~~stronger overall market performance on funds.~~

~~Income from other investments was higher for the~~ nine months ended September 30, 2019, ~~due to 2018 losses from Ambac UK hedge fund positions no longer held in 2019 and stronger~~was driven primarily by gains on equity ~~index~~and high-yield and loan funds, ~~for the nine months ended September 30, 2019. Results~~partially offset by losses on insurance-linked securities.

•Investment income from ~~other asset classes were mixed.~~

~~Net Other-Than-Temporary Impairment Losses.~~ ~~Net other-than-temporary impairment losses recorded~~Ambac-insured securities was lower in earnings include only credit related impairment amounts to the extent management does not intend to sell and it is not more likely than not that the Company will be required to sell before recovery of the amortized cost basis. Non-credit related impairment amounts are recorded in other comprehensive income. Alternatively, non-credit related impairment is reported through earnings as part of net other-than-temporary impairment losses if management intends to sell securities or it is more likely than not that the Company will be required to sell before recovery of amortized cost less any current period credit impairment.

~~Net other-than-temporary impairments for~~both the three and nine month periods ended September 30, 2020, compared to the prior year periods due primarily to the effects of 2019 ~~related to management's intent to sell securities. For~~de-risking activities, ongoing early redemptions of Secured Notes issued by Ambac LSNI, LLC and the effects of declining interest rates. The decline of income from Ambac-insured securities for the three ~~month and nine month periods~~months ended September 30, ~~2018, net other-than-temporary impairments included credit related impairments~~2020, was driven by redemptions and lower LIBOR indexed coupon rates on ~~certain~~the Secured Notes compared to the three months ended September 30, 2019. Lower income from Ambac-insured securities for the nine months ended September 30, 2020 compared to the same period of 2019, primarily resulted from accelerated discount accretion on Ballantyne bonds, recognized in connection with the Restructuring in the second quarter of 2019. Other contributing factors to the decrease from the first nine months of 2019 are redemptions and lower rates on the Secured Notes and lower holdings of Ambac insured-RMBS.

•Net investment income from available-for-sales securities other than Ambac-insured securities decreased as a result of the favorable impact on income for the three and nine months ended September 30, 2019, of high yielding uninsured COFINA bonds received under the POA, as well as the impact of a smaller asset base and lower average yields in 2020. All of the uninsured COFINA bonds were sold from Ambac's non-VIE investment portfolio by December 31, 2019. Use of funds for early debt redemptions and operating cash needs, combined with portfolio allocation toward other investments and Ambac-insured bonds from lower rated investment grade corporates, commercial mortgage backed securities and ~~also included some losses due~~certain CLOs in 2020 resulted in a lower asset base in this portion of the portfolio. This reallocation along with steadily declining reinvestment

rates on short-term holdings resulted in lower averages yields on available-for-sale securities other than Ambac-insured compared to ~~management's intent to sell securities.~~the prior year periods.

Net Realized Investment Gains (Losses). The following table provides a breakdown of net realized gains (losses) for the periods presented:


	Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
($ in millions)	2019		2018		2019		2018		($ in millions)	2020		2019		2020		2019
Net gains on securities sold or called	$	12	$	29	$	42	$	79
Net gains (losses) on securities sold or called									Net gains (losses) on securities sold or called	$	4	$	12	$	20	$	42
Net foreign exchange gains (losses)	7		2		30		4		Net foreign exchange gains (losses)	(2)		7		—		30
Credit impairments									Credit impairments	—		—		—		—
Intent / requirement to sell impairments									Intent / requirement to sell impairments	—		—		—		—
Total net realized gains (losses)	$	19	$	30	$	72	$	82	Total net realized gains (losses)	$	2	$	18	$	20	$	71

Net realized gains on securities sold or called for the three and nine months ended September 30, 2020, are primarily from sales in connection with routine portfolio management. Net realized gains on securities sold or called for the three and nine months ended September 30, 2019, included $7 million and $33 million, respectively, of net gains related to the impact of the COFINA ~~restructuring,~~Plan of Adjustment, including sales of Ambac-insured Puerto Rico COFINA bonds and ~~sales of~~ new uninsured COFINA bonds received in the ~~restructuring.~~commutation. Also included in realized gains for the nine months ended September 30, 2019, are $23 million of realized foreign exchange gains arising from the settlement of Ballantyne bonds held in the investment portfolio.

Impairments are reported through earnings if management intends to sell securities or it is more likely than not that the Company will be required to sell before recovery of amortized cost. Credit impairments are recorded in earnings only to the extent management does not intend to sell, and it is not more likely than not that the Company will be required to sell the securities, before recovery of their amortized cost. When credit impairments are recorded, any non-credit related impairment amounts on the securities are recorded in other comprehensive income.

Net Gains (Losses) on Derivative ~~Contracts~~Contracts.. Net gains (losses) on derivative contracts include results from the Company's interest rate derivatives portfolio and its runoff credit derivatives portfolio. The interest rate derivatives portfolio is positioned to benefit from rising rates as a partial economic hedge against interest rate exposure in the financial guarantee and investment portfolios. As forward rates and interest rate exposures elsewhere in the company have declined over the course of 2019 into the first half of 2020, the economic hedge position has been adjusted. Net gains (losses) on interest rate derivatives generally reflect mark-to-market gains (losses) in the portfolio caused by increases (declines) in forward interest rates during the periods, the carrying cost of the

portfolio, and the impact of ~~the Ambac CVA and~~ counterparty credit adjustments as discussed below. Results from credit derivatives were not significant to the periods presented.

| Ambac Financial Group, Inc. 612020 Third Quarter FORM 10-Q |

Net gains (losses) on interest rate derivatives for the three and nine months ended September 30, ~~2019,~~2020, were $6 million and $(61) million, respectively, compared to ($10) million and $(63) ~~million, compared to $17 million and $52~~ million for the three and nine months ended September 30, ~~2018.~~2019, respectively. The net gain for the three months ended September 30, 2020, reflects a gain from reduced counterparty credit adjustments. The net loss for nine months ended September 30, 2020, reflects significant declines in forward interest rates, triggered by the COVID-19 pandemic, and losses from the application of counterparty credit adjustments, described further below. The net losses for three and nine months ended September 30, 2019, ~~reflects~~reflect the impact of declines in forward interest rates, partially offset by negative net carrying costs driven by ~~the partially~~an inverted yield curve. ~~The gains for three and nine months ended September 30, 2018, reflect the impact of rising rates during the periods net of carrying costs.~~

The fair value of derivatives include valuation adjustments to reflect Ambac’s own credit risk and counterparty credit risk. Within the interest rate derivatives portfolio, an Ambac CVA is generally applicable for uncollateralized derivative liabilities that may not be offset by derivative assets under a master netting agreement. There was no Ambac CVA included in the fair value of interest rate derivatives for the periods presented. •Counterparty credit adjustments are generally applicable for uncollateralized derivative assets that may not be offset by derivative liabilities under a master netting agreement. Inclusion of counterparty credit adjustments in the valuation of interest rate derivatives resulted in gains (losses) within Net gains (losses) on derivative contracts of $6 million and $(15) million for the three and nine months ended September 30, 2020, respectively, and $(5) million and $(8) million for the three and nine months ended September 30, 2019, ~~respectively, compared to gains of $2 million~~respectively. The gain for ~~both~~ the three ~~and nine~~ months ended September 30, ~~2018.~~

~~Net Realized Gains (Losses) on Extinguishment~~2020, was driven by narrower credit spreads and a decrease in the underlying net asset value of ~~Debt.~~ ~~There was no net realized gains (losses) on extinguishment of debt for~~ the ~~three and nine months ended September 30, 2019, compared~~derivative assets as long term interest rates began to ~~net realized gains of $0 million and $3 million for the three and nine months ended September 30, 2018, respectively.~~rise. The ~~gains~~loss for the nine months ended September 30, ~~2018, related to surplus notes received~~2020, was driven by wider credit spreads, including the effect of a credit rating downgrade of a derivative counterparty by Ambac ~~Assurance~~during the first quarter, simultaneous with an increase in ~~settlement of Deferred Amounts held~~the underlying asset value as interest rates declined. The losses on counterparty credit adjustments for the 2019 periods are primarily due to increases in ~~its investment portfolio in connection with~~ the ~~Rehabilitation Exit Transactions.~~underlying asset values as interest rates declined.

Other income (expense). Other income (expense) includes various fees, primarily consent and waiver fees, as well as foreign exchange gains/(losses) unrelated to investments or loss reserves. For the three and nine months ended September 30, 2020, other income (expense) included foreign exchange gains and amortization of fee income. Other income also includes proceeds received by Ambac Assurance in September 2019 in connection with an SEC action against Citigroup Global Markets Inc. in the amount of ~~$142.2~~$142 million. Refer to Note 12. Commitments and Contingencies located in Part I Item 1 in this Form 10-Q for further details on the SEC action. For the three and nine months ended September 30, 2018, other income (expense) included foreign exchange gains and amortization of fee income.

Income ~~(loss)~~(Loss) on Variable Interest Entities. Included within Income (loss) on variable interest entities are income statement amounts relating to VIEs, consolidated under the Consolidation Topic of the ASC as a result of Ambac's variable interest arising from financial guarantees written by Ambac's subsidiaries, including gains or losses attributable to consolidating or deconsolidating VIEs during the periods reported. Generally, the Company’s consolidated VIEs are entities for which Ambac has provided financial guarantees on all of or a portion of its assets or liabilities. In consolidation, assets and liabilities of the VIEs are initially reported at fair value and the related insurance assets and liabilities are eliminated. However, the amount of VIE net assets (liabilities) that remain in consolidation generally result from the net positive (negative) projected cash flows from (to) the VIEs which are attributable to Ambac’s insurance

subsidiaries in the form

~~| Ambac Financial Group, Inc.~~ 58~~2019 Third Quarter FORM 10-Q~~ |

of financial guarantee insurance premiums, fees and losses. In the case of VIEs with net negative projected cash flows, the net liability is generally to be funded by Ambac’s insurance subsidiaries through insurance claim payments. Differences between the net carrying value of the insurance accounts under the Financial Services—Insurance Topic of the ASC and the carrying value of the consolidated VIE’s net assets or liabilities are recorded through income at the time of ~~consolidation or deconsolidation.~~consolidation. Additionally, terminations or other changes to Ambac's financial guarantee insurance policies that impact projected cash flows between a consolidated VIE and Ambac could result in gains or losses, even if such policy changes do not result in deconsolidation of the VIE.

Income (loss) on variable interest entities was a loss of less than a million and income of $3 million for the three and nine months ended September 30, 2020, respectively, compared to income of $11 million and $30 million for the three and nine months ended September 30, 2019, ~~compared to income of $2 million and $3 million~~respectively. Results for the three ~~and~~months ended September 30, 2020, reflect a modest reduction in value of net assets of a VIE related to the ongoing shut-down of parts of the UK economy resulting from COVID-19. Results for the nine months ended September 30, ~~2018.~~2020, were due primarily to realized gains of $8 million on sales of assets from one VIE (the COFINA Trust) partially offset by the lower valuation of net assets on a VIE impacted by COVID-19. Results for the three and nine months ended September 30, 2019, were driven by the impact of ~~a VIE~~the COFINA Trust created in connection with the restructuring of Puerto Rico COFINA debt. Under the restructuring, Ambac-insured COFINA bonds that were not commuted were deposited into a newly formed trust called the COFINA Class 2 Trust ("COFINA Trust"), which Ambac has determined must be consolidated. Refer to Part I, Item 2, “Management's Discussion and Analysis — Financial Guarantees in Force" in this Quarterly Report on Form 10-Q for further discussion of the COFINA Debt Restructuring. Income from COFINA Trust for the three months ended September 30, 2019, was $11 million, primarily from realized gains on sales of assets from the trust used for early redemptions of debt. Income from COFINA Trust for ~~the~~ nine months ended September 30, 2019, was $26 million, including $15 million from consolidation and $13 million from realized investment gains, partially offset by net interest expense and fees. The three and nine months ended September 30, 2019, also included a $2 million loss from deconsolidation of a ~~VIE, compared~~VIE.

Refer to ~~net gains of $2 million from deconsolidations~~Note 3. Variable Interest Entities to the Unaudited Consolidated Financial Statements, included in Part I, Item 1 in this Form 10-Q for further information on the ~~three and nine months ended September 30, 2018. In addition, income (loss) on variable interest entities~~accounting for ~~all periods presented includes net gains from the fair value appreciation of other consolidated VIEs' net assets.~~VIEs.

Losses and Loss Expenses. Losses and loss expenses are based upon estimates of the aggregate losses inherent in the non-derivative financial guarantee portfolio for insurance policies issued to beneficiaries, including unconsolidated VIEs. Losses and loss expenses for the nine months ended September 30, 2018, included interest on Deferred Amounts pursuant to the Segregated Account Rehabilitation Plan that were discharged on February 12, 2018.

Ambac records as a component of its loss reserve estimate subrogation recoveries related to securitized loans in RMBS transactions with respect to which Ambac Assurance is pursuing claims for breaches of representations and warranties. Ambac does not include potential recoveries attributed solely to fraudulent inducement claims in our litigations in our estimate of subrogation recoveries. Generally, the sponsor of an RMBS transaction provided representations and warranties with respect to the securitized loans, including representations with respect to the loan characteristics, the absence of borrower fraud in the underlying loan pools or other misconduct in the origination process and attesting to the compliance of loans with the prevailing underwriting policies. Ambac has recorded representation and warranty subrogation recoveries, net of

| Ambac Financial Group, Inc. 622020 Third Quarter FORM 10-Q |

reinsurance, of ~~approximately $1.729 billion~~$1,731 million and ~~$1.744 billion~~$1,702 million at September 30, ~~2019~~2020, and December 31, ~~2018,~~2019, respectively. The increase in these recoveries was primarily driven by lower discount rates used to discount estimated cash flows. Refer to Note 2. Basis

of Presentation and Significant Accounting Policies to the Consolidated Financial Statements included in Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, for more information regarding the estimation process for R&W subrogation recoveries.

The following provides details, by bond type, for losses and loss expenses (benefit) incurred for the periods presented:


	Three Months Ended September 30,				Nine Months Ended September 30,
($ in millions)	2020		2019		2020		2019
RMBS	$	27	$	(25)	$	(91)	$	(133)
Domestic Public Finance	43		77		263		197
Student Loans	6		(16)		24		(23)
Ambac UK and Other Credits	8		—		20		(125)



Totals (1)	$	83	$	37	$	216	$	(84)

Three Months Ended September 30, Nine Months Ended September 30,
($ in millions) 2019 2018 2019 2018
RMBS ⁽¹⁾
$ (25 ) $ 19
$ (133 ) $ 39
Domestic Public Finance 77
9
197
42
Student Loans (16 ) 4
(23 ) 3
Ambac UK and Other Credits —
1
(125 ) 3
Interest on Deferred Amounts —
—
—
21
Discount on Rehabilitation Exit Transactions —
—
—
(288 )
Totals ⁽²⁾
$ 37
$ 34
$ (84 ) $ (181 )
(1) Includes loss expenses incurred of $46 and $83 for the three and nine months ended September 30, 2020, respectively, and $23 and $52 for the three and nine months ended September 30, 2019, respectively.


~~(1)~~	The losses and loss expense (benefit) associated with changes in estimated representation and warranties was $7 and $15 for the three and nine months ended September 30, 2019, respectively, and $39 and $57 for the three and nine months ended September 30, 2018, respectively.


~~(2)~~	Includes loss expenses incurred (benefit) of $23 and $52 for the three and nine months ended September 30, 2019, respectively, and $53 and $100 for the three and nine months ended September 30, 2018, respectively.

Losses and loss expenses (benefit) for the three and nine months ended September 30, 2020, were driven by the following:

•Higher projected losses in domestic public finance driven by lower discount rates (primarily relating to Puerto Rico), loss expenses incurred and incurred losses related to transactions directly impacted by the economic impact from COVID-19;

•An increase in student loan losses as a result of lower discount rates and the impact from COVID-19; and

•Increased RMBS losses for the three months ended September 30, 2020, related to expected losses from COVID-19 related delinquencies and improved RMBS losses for the nine months ended September 30, 2020, as a result of the positive impact of lower interest rates on excess spread, reduced by lower discount rates and expected losses from COVID-19 related delinquencies.

Losses and loss expenses (benefit) for the three and nine months ended September 30, 2019, were driven by the following:

•For the nine months ended September 30, 2019, favorable development within Ambac UK and Other Credits primarily due to the Ballantyne commutation completed in June 2019;

•Favorable RMBS development as a result of credit improvement, the impact on excess spread from declines in interest rates, and additionally for the nine months ended September 30, 2019, a trustee settlement related to Lehman sponsored transactions partially offset by,

•Higher projected losses in domestic public finance driven mostly by a lower discount rates and additions to Puerto Rico loss reserves.

~~Losses and loss expenses (benefit) for the three and nine months ended September 30, 2018, were driven by the following:~~

~~For the nine months ended September 30, 2018, higher projected losses in domestic public finance largely driven by Military Housing loss expenses incurred and additions to Puerto Rico loss reserves;~~

A portion of Ambac UK's loss reserves are denominated in currencies other than their functional currency of British Pounds resulting in incurred losses (gains) when the British Pound depreciates (appreciates). Ambac recognized $3 and $10 million in foreign exchange losses for the three and nine months ended September 30, 2018:

For the three and nine months ended September 30, 2018, there was adverse RMBS development as a result of a decrease in R&W subrogation recoveries and loss expenses incurred partially offset by favorable credit developments;

Discount achieved pursuant to the Rehabilitation Exit Transactions for the nine months ended September 30, 2018, partially offset by interest on Deferred Amounts through the Rehabilitation Exit Transactions date.

Insurance Intangible ~~Amortization~~Amortization.. Insurance intangible amortization for the three and nine months ended September 30, ~~2019,~~2020, was ~~$17~~$14 million and ~~$280~~$41 million, respectively, a decrease of $9$4 million and ~~an increase of $202~~$239 million over the three and nine months ended September 30, ~~2018,~~2019, respectively. The ~~increase~~decrease from the nine months ended September 30, ~~2018,~~2019, is primarily due to accelerated amortization as a result of the Ballantyne commutation that occurred in the second quarter of 2019.

Operating ~~Expenses~~.Expenses. Operating expenses consist of gross operating expenses plus reinsurance commissions. The following table provides ~~details~~a summary of operating expenses for the periods presented:


	Three Months Ended September 30,				Nine Months Ended September 30,
($ in millions)	2020		2019		2020		2019
Compensation	$	13	$	14	$	38	$	46
Non-compensation	10		11		29		33
Gross operating expenses	23		26		67		80
Reinsurance commissions, net	—		—		—		—

Total operating expenses	$	23	$	26	$	67	$	80

Three Months Ended September 30, Nine Months Ended September 30,
($ in millions) 2019 2018 2019 2018
Compensation $ 14
$ 14
$ 46
$ 44
Non-compensation 11
14
33
47
Gross operating expenses 26
28
80
90
Reinsurance commissions, net —
1
—
1
Total operating expenses $ 26
$ 28
$ 80
$ 91

Gross operating ~~expense~~expenses decreased $3 million and $13 million for the three and nine months ended September 30, 2020, respectively, compared to the same periods in the prior year. Operating expenses incurred relating to COVID-19 have not been significant for the three and nine months ended September 30, 2020.

The decrease in operating expenses during the three months ended September 30, 2020, as compared to the three months ended September 30, 2019, ~~were $26 million, a decrease of $2 million from the three months ended September 30, 2018. The decrease~~ was due to the following:

~~Higher severance~~•Lower compensation costs primarily related to lower salaries resulting from continued right sizing of staffing levels ~~partially offset by lower salaries~~and

•Lower non-compensation costs primarily due to reduced premises costs as a result of ~~reduced headcount.~~re-locating our corporate headquarters.

•

Lower non-compensation costs primarily due to (i) $5.9 million of consulting, legal and advisory fees related to the AMPS Exchange incurred during the three months ended September 30, 2018 and (ii) a $0.2 million

The decrease ~~of legal, consulting and advisory fees~~ in connection with the exit from rehabilitation of the Segregated Account, partially offset by (a) higher strategy and corporate development fees of $1.5 million and (b) higher rent expense of $1.1 million driven by the extinguishment of lease reducing junior surplus notes which previously reduced rent expense. Refer to Note 13. ~~Long-term Debt~~ ~~in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, for further information on the Junior Surplus Notes.~~

~~Gross~~ operating expenses ~~for~~during the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019, ~~were $80 million,~~was due to the following:

•Lower compensation costs primarily due to lower salaries and severance resulting from continued right sizing of staffing levels and lower incentive compensation costs primarily related to the Ballantyne restructuring in 2019 and

•Lower non-compensation costs primarily due to a ~~decrease of $10 million from~~UK Value Added Tax (VAT) refund recognized in the nine months ended September 30, ~~2018. The decrease was due to the following:~~

~~Higher compensation~~2020, reduced consulting services and lower premises costs ~~primarily due to increased incentive compensation driven by an improvement in performance metrics, mostly related to Ambac UK incentive compensation, partially offset by (i) lower salaries~~ as a result of ~~reduced headcount and (ii) a decrease of awards granted related to the Rehabilitation Exit Transactions totaling $3.3 million.~~

Lower non-compensation costs primarily due to (i) $14 million of lower legal, consulting and advisory fees in connection with the exit from rehabilitation of the Segregated Account, of which $5 million relates to advisory services provided for the benefit of OCI and (ii) $8 million of costs associated with the August 2018 AMPS Exchange. These decreases were partiallyre-locating our corporate headquarters, offset by ~~(a) higher~~increased legal consulting and advisory fees associated with various initiatives of $7 million and (b) higher rent expense of $2 million driven by the extinguishment of lease reducing junior surplus notes which previously offset rent expense and the addition of the One World Trade Center lease which became effective in April 2019.fees.

~~With the conclusion of the Segregated Account rehabilitation in February 2018, the duties of the Wisconsin Insurance Commissioner as rehabilitator of the Segregated Account have been discharged.~~ Legal and consulting services provided for the benefit of OCI ~~amounted to $0.6 million and $1.6~~were flat at $2 million during the ~~three and~~ nine months ended September 30, ~~2019, respectively,~~2020 and ~~$0.5 million and $6.3 million during the three and nine months ended September 30, 2018, respectively.~~2019.

| Ambac Financial Group, Inc. 632020 Third Quarter FORM 10-Q |

Interest Expense. Interest expense includes accrued interest on the Ambac ~~note,~~Note, Tier 2 notes, surplus notes and other debt obligations. Additionally, interest expense includes discount accretion when the debt instrument carrying value is at a discount to par.

The following table provides details by type of obligation for the periods presented:


	Three Months Ended September 30,				Nine Months Ended September 30,
($ in millions)	2020		2019		2020		2019
Surplus notes (1)	$	17	$	25	$	67	$	73

Ambac note	25		35		83		110
Tier 2 notes	7		7		21		19
Other	—		—		1		—

Total interest expense	$	50	$	67	$	172	$	202

Three Months Ended September 30, Nine Months Ended September 30,
($ in millions) 2019 2018 2019 2018
Surplus notes ⁽¹⁾
$ 25
$ 20
$ 73
$ 57
Ambac note 35
40
110
102
Tier 2 notes ⁽²⁾
7
6
19
16
Other —
—
—
1
Total interest expense $ 67
$ 66
$ 202
$ 176
(1)Includes junior surplus notes


~~(1)~~	~~The amounts include junior surplus notes.~~


~~(2)~~	~~The amounts include unfunded commitment fees applicable prior to the issuance of the Tier 2 notes of $1 million in the nine months ended September 30, 2018.~~

The ~~increase~~decrease in interest expense for the three and nine months ended September 30, ~~2019,~~2020, compared to the three and nine months ended September 30, ~~2018,~~2019, was primarily ~~reflects the impact~~driven by optional redemptions and lower rate resets of the ~~Rehabilitation Exit Transactions that resulted in the issuance of the~~floating rate Ambac Note and lower discount accretion on surplus notes, partially offset by interest compounding on the surplus notes and the Tier 2 Notes. Additionally, surplus notes outstanding increased in the third quarter of 2018 due to surplus notes issued by Ambac Assurance in connection with the AMPS Exchange and resales of notes by Ambac to the market. Refer to Note 13. ~~Long-term Debt~~ in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 for further information on the Ambac Note and Tier 2 Notes.

Surplus note principal and interest payments require the approval of OCI. ~~Except for~~Since the issuance of the surplus notes in 2010, OCI has declined to approve regular payments of interest on surplus notes, although the OCI has permitted exceptional payments in connection with (a) increasing the percentage of deferred policy payments of the Segregated Account of Ambac Assurance from 25% to 45% in 2014 and (b) a one-time payment of approximately six months of interest on the surplus notes (other than junior surplus notes) outstanding immediately after consummation of the Rehabilitation Exit Transactions annually from 2011 through 2019, OCI issued its disapproval of the requests of Ambac Assurance to pay the full interest on outstanding surplus notes on the annual scheduled interest payment date of June 7th.in 2018. In accordance with their terms, Ambac Assurance has not requested to pay interest on any junior surplus notes since their issuance.

In April 2020, OCI declined the request of Ambac Assurance to pay the principal amount of the surplus notes, plus all accrued and unpaid interest thereon, on the scheduled maturity date of June 7, 2020. As a result, the scheduled payment date for interest, and the scheduled maturity date for payment of principal of the surplus notes, shall be extended until OCI grants approval to make the payment. Interest will accrue, compounded on each anniversary of the original scheduled payment date or scheduled maturity date, on any unpaid principal or interest through the actual date of payment, at 5.1% per annum. Holders of surplus notes will have no rights to enforce the payment of the principal of, or interest on, surplus notes in the absence of OCI approval to pay such amount. The interest on the outstanding surplus notes and junior surplus notes were accrued for and Ambac Assurance is accruing interest on the interest amounts following each scheduled ~~interest~~ payment date. Total accrued and unpaid interest for surplus notes and junior surplus notes outstanding to third parties were ~~$292~~$334 million and ~~$140~~$165 million, respectively, at September 30, ~~2019.~~2020.

Provision for Income Taxes. The provision for income taxes for the three and nine months ended September 30, ~~2019,~~2020, was $0 million and a benefit of $5 million, a decrease of $3 million and ~~$33~~$38 million ~~respectively, an increase of $1 million and $26 million, respectively,~~ compared to the provision for income taxes reported for three and nine months ended September 30, ~~2018.~~2019. The change for the three and nine months ended September 30, 2020, as compared to the three and nine months ended September 30, 2019, ~~compared to the prior year~~ was primarily attributable to ~~the~~Ambac UK, which had higher taxable income ~~at Ambac UK associated with~~in 2019 due to the Ballantyne ~~restructuring.~~restructuring and commutation.

~~| Ambac Financial Group, Inc.~~ 59~~2019 Third Quarter FORM 10-Q~~ |

LIQUIDITY AND CAPITAL RESOURCES

Ambac Financial Group, Inc. ("AFG") Liquidity. ~~Ambac’s~~AFG's liquidity is primarily dependent on its cash, investments (excluding equity investments in subsidiaries), and net receivables totaling ~~$473~~$465 million as of September 30, ~~2019,~~2020, and secondarily on its expense sharing and other arrangements with Ambac Assurance.

~~Ambac's investments include securities directly and indirectly issued by and/or insured by~~•During the three months ended September 30, 2020, AFG purchased Everspan Insurance Company, from Ambac Assurance ~~some~~and repositioned it as a subsidiary of ~~which are eliminated in consolidation. Securities issued or insured~~a new intermediary holding company that is directly owned by ~~Ambac Assurance are generally less liquid than investment grade and other traded investments.~~AFG. This acquisition required a cash payment from AFG to AAC of approximately $14 million.

•Pursuant to the amended and restated tax sharing agreement among ~~Ambac,~~AFG, Ambac Assurance and certain affiliates (the "Amended TSA"), Ambac Assurance is required to make payments ("tolling payments") to ~~Ambac~~AFG with respect to the utilization of net operating loss carry-forwards (“NOLs”). ~~Ambac~~AFG has accrued ~~$31~~$28 million of tolling payments based on NOLs used by Ambac Assurance ~~on its 2017 tax return, as filed.~~in 2017. In May 2018, ~~Ambac~~AFG executed a waiver under the intercompany tax sharing agreement pursuant to which Ambac Assurance was relieved of the requirement to make this payment by June 1, ~~2018, and has~~2018. AFG also agreed to defer ~~this~~the tolling payment for the use of net operating losses by Ambac Assurance in 2017 until such time as OCI consents to the payment. While OCI has not defined the conditions under which its consent would be provided, OCI has indicated that it has considered, and will continue to consider, a number of factors, including asset quality and loss and reserve trends, in relation to the 2017 tolling payment. We can provide no assurance as to whether, or when, OCI will consent to the 2017 tolling payment. Ambac accrued $16 million of tolling payments based on NOLs used by Ambac Assurance in 2018, which was paid in July 2019. For the nine months ended September 30, 2019, Ambac accrued $4 million of tolling payments which, assuming Ambac Assurance's full year 2019 NOL usage does not change, will be paid to Ambac in 2020. Ambac's tax positions are subject to review by the OCI, which may lead to the adoption of positions that reduce the amount of tolling payments otherwise available to Ambac.

•Under an inter-company cost allocation agreement, ~~Ambac~~AFG is reimbursed by Ambac Assurance for a portion of certain operating costs and expenses and, if approved by OCI, entitled to an additional payment of up to $4 million per year to cover expenses not otherwise reimbursed. OCI approved this $4 million reimbursement for 2019 expenses, which was paid in ~~April 2019.~~March 2020.

AFG's investments include securities directly and indirectly issued by and/or insured by Ambac Assurance, some of which are eliminated in consolidation. Securities issued or insured by Ambac Assurance are generally less liquid than investment grade and other traded investments.

It is highly unlikely that Ambac Assurance will be able to make dividend payments to ~~Ambac~~AFG for the foreseeable future and therefore cash and investments, payments under the intercompany cost allocation agreement and ~~future~~ tolling payments, if any, will be ~~Ambac’s~~AFG’s principal ~~source~~sources of liquidity in the near term. Refer to Part I, Item 1, “Insurance Regulatory Matters — Dividend Restrictions, Including Contractual Restrictions” in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, and Note 8. Insurance Regulatory Restrictions to the Consolidated Financial Statements included

| Ambac Financial Group, Inc. 642020 Third Quarter FORM 10-Q |

in Part II, Item 8, in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, for more information on dividend payment restrictions.

The principal ~~use~~uses of liquidity ~~at Ambac is~~are the payment of operating expenses, including costs to explore ~~mergers, acquisitions~~opportunities to grow and ~~strategic investments~~diversify Ambac; and the ~~purchase~~making of ~~short~~investments, which may include securities issued or insured by Ambac Assurance or Ambac UK and ~~long-term securities.~~other less liquid investments. Additional uses of liquidity may include the acquisition or capitalization of new businesses. Contingencies could cause material liquidity strains.

Ambac Assurance Liquidity. Ambac Assurance’s liquidity is dependent on ~~its~~the balance of liquid investments and, over time, the net impact of sources and uses of funds. The principal sources of Ambac Assurance’s liquidity are gross installment premiums on insurance ~~policies,~~policies; principal and interest ~~receipts~~payments from ~~investments,~~investments; sales of ~~investments,~~investments; proceeds from repayment of affiliate ~~loans,~~loans; and recoveries on claim payments, including from litigation and reinsurance recoveries. Termination of installment premium policies on an accelerated basis may adversely impact Ambac Assurance’s liquidity. In September 2019, Ambac Assurance received $142.2 million in connection with an SEC settlement with Citigroup Global Markets Inc. Ambac Assurance intends to use these funds to partially redeem the Ambac Note in December 2019. Refer to Note 12. Commitments and Contingencies located in Part I Item 1 in this Form 10-Q for further details on the SEC action.

The principal uses of Ambac Assurance’s liquidity are the payment of operating and loss adjustment expenses; ~~claim,~~claims; commutation and related expense payments on insurance policies; ceded reinsurance premiums; ~~purchases of investments;~~ principal and interest payments on the Ambac ~~Note;~~Note, surplus ~~note principal~~notes and ~~interest payments;~~ Tier 2 ~~Notes payments;~~Notes; additional loans to ~~affiliates and~~affiliates; tolling payments due to ~~Ambac~~AFG under the Amended ~~TSA.~~ TSA; and purchases of securities and other investments that may not be immediately converted into cash.

•The COVID-19 pandemic has had a negative impact on Ambac's liquidity resources as a consequence of the adverse reaction of the capital markets, which led to a reduction in the value and marketability of our invested assets; derivative losses, which required either timely settlement or additional collateral posting; and higher credit risk within the insured portfolio, as further described below. Nevertheless, Ambac has not yet experienced incremental demands on its liquidity, from higher claims or expenses, other than the aforementioned impact of derivatives.

•Claim payments may increase during the global recession and COVID-19 pandemic as issuers, particularly those with revenues that will be interrupted by the effects of the pandemic, including social distancing, other restrictions on activities and the increase in unemployment, may not have sufficient cash inflows to pay debt service on Ambac-insured debt. Refer to "Financial Guarantees in Force" in this Management's Discussion and Analysis for further discussion of the potential impact of the COVID-19 pandemic on claim payments.

•Interest and principal payments on surplus notes are subject to the approval of OCI, which has full discretion over payments regardless of the liquidity position of Ambac Assurance. Any such payment on surplus notes would require either payment or collateralization of a portion of the Tier 2 Notes under the terms of the Tier 2 Note indenture. See Note 13. Long-term Debt in the Notes to Consolidated Financial Statements, included in Part II, Item 8, in the Company's Annual Report on Form 10-K for

the year ended December 31, ~~2018~~2019, for further discussion of the payment terms and conditions of the Tier 2 Notes. As discussed more fully in "Results of Operations" above in this Management's Discussion and Analysis, OCI declined Ambac Assurance's request to pay the principal amount of the surplus notes, plus all accrued and unpaid interest thereon, on June 7, 2020.

Ambac Assurance's intercompany loans are with Ambac Financial Services ("AFS"). AFS uses interest rate derivatives (primarily interest rate swaps and US Treasury futures) as an economic hedge against the effects of rising interest rates elsewhere in the Company, including on Ambac Assurance’s financial guarantee exposures. AFS's derivatives include interest rate swaps previously provided to asset-backed issuers and other entities in connection with their financings. Ambac Assurance loans cash and securities to AFS as needed to fund payments under these derivative contracts, collateral posting requirements and operating expenses. Intercompany loans are governed by an established lending agreement with defined borrowing limits that has received non-disapproval from OCI.

Ambac Assurance manages its liquidity risk by maintaining comprehensive analyses of projected cash flows and maintaining specified levels of cash and short-term investments at all times.

Ambac Assurance is limited in its ability to pay dividends pursuant to the terms of its Auction Market Preferred Shares (“AMPS”), which state that dividends may not be paid on the common stock of Ambac Assurance unless all accrued and unpaid dividends on the AMPS for the then current dividend period have been paid, provided that dividends on the common stock may be made at all times for the purpose of, and only in such amounts as are necessary for enabling ~~Ambac~~AFG (i) to service its indebtedness for borrowed money as such payments become due or (ii) to pay its operating expenses. If dividends are paid on the common stock for such purposes, dividends on the AMPS become cumulative until the date that all accumulated and unpaid dividends have been paid on the AMPS. Ambac Assurance has not paid dividends on the AMPS since 2010. Ambac Assurance is also subject to additional restrictions on the payment of dividends pursuant to certain contractual and regulatory restrictions. Refer to Part I, Item 1, “Insurance Regulatory Matters - Dividend Restrictions, Including Contractual Restrictions” in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, and Note 8. Insurance Regulatory Restrictions to the Consolidated Financial Statements included in Part II, Item 8, in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, for more information on dividend payment restrictions.

Our ability to realize RMBS representation and warranty ("R&W") subrogation recoveries is subject to significant uncertainty, including risks inherent in ~~litigation,~~litigation; collectability of such amounts from counterparties (and/or their respective parents and affiliates),; timing of receipt of any such recoveries, including uncertainty due to delays in court proceedings as a result of the COVID-19 pandemic; intervention by the OCI, which could impede our ability to take actions required to realize such ~~recoveries,~~recoveries; and uncertainty inherent in the assumptions used

~~| Ambac Financial Group, Inc.~~ 60~~2019 Third Quarter FORM 10-Q~~ |

in estimating the amount of such recoveries. The amount of these subrogation recoveries is significant and if we are unable to recover any amounts or recover materially less

| Ambac Financial Group, Inc. 652020 Third Quarter FORM 10-Q |

than our estimated recoveries, our future available liquidity to pay claims, debt service and meet our other obligations would be reduced materially. See Part I, Item 1A. Risk Factors in the Company's Annual Report on Form 10-K for the year ended December 31, ~~2018~~2019, for more information about risks relating to our RMBS R&W subrogation ~~recoveries~~

~~Ambac Financial Services ("AFS") Liquidity~~. AFS uses interest rate derivatives as an economic hedge against the effects of rising interest rates elsewhere in the Company, including on Ambac’s financial guarantee exposures. These derivatives include interest rate swaps previously provided to states, municipalities and their authorities, asset-backed issuers and other entities in connection with their financings. The principal uses of liquidity by AFS are payments on intercompany loans, payments under derivative contracts (primarily interest rate swaps and US Treasury futures), collateral posting and operating expenses. AFS borrows cash and securities from Ambac Assurance to meet liquidity needs under an established lending agreement with defined borrowing limits that has received non-disapproval from OCI.recoveries.

Cash Flow Statement Discussion. The following table summarizes the net cash flows for the periods presented.


	Nine Months Ended September 30,							Nine Months Ended September 30,
($ in million)	2019			2018			($ in million)	2020		2019
Cash provided by (used in):							Cash provided by (used in):
Operating activities	$	(296	)	$	(1,418	)	Operating activities	$	(167)	$	(296)
Investing activities	791			1,249			Investing activities	396		791
Financing activities	(511		)	(402		)	Financing activities	(260)		(511)
Foreign exchange impact on cash and cash equivalents	—			(1		)	Foreign exchange impact on cash and cash equivalents	—		—
Net cash flow	$	(16	)	$	(571	)	Net cash flow	$	(31)	$	(16)

Operating activities

The following represents the significant cash ~~activities~~operating activity during the nine months ended September 30, ~~2019~~2020 and ~~2018:~~2019:

~~During~~•Debt service on the Ambac Note was $83 million and $110 million for the nine months ended September 30, ~~2018, the cash outflow from the Rehabilitation Exit Transactions to third parties was $1,354 million of which $1,162 million is included in operating activities~~2020 and $191 million is included in financing activities as it related to payments for surplus note principal. Refer to Note 1. Background and Business Description in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 for details regarding the Rehabilitation Exit Transactions.2019, respectively.

•In September 2019, Ambac Assurance received $142.2 million in connection with an SEC settlement with ~~Citigroup~~Citibank Global Markets Inc.

•Cash ~~provided by (used in) operating activities~~used related to interest rate derivatives ~~were $(81)~~was $20 million and $81 million for the nine months ended September 30, 2020 and 2019, respectively.

•Operating expenses was $60 million and ~~$64~~$66 million for the nine months ended September 30, ~~2018.~~2020 and 2019, respectively.

•Cash ~~used in operating activities related to income taxes (primarily in Ambac UK) were $11~~provided by the investment portfolio was $82 million and $110 million for the nine months ended September 30, 2020 and 2019, ~~and $31 million for the nine months ended September 30, 2018.~~

respectively.

During the nine months ended September 30, 2019, Ambac made payments of interest on long-term debt of $110 million on the Ambac Note. During the nine months ended September 30, 2018, Ambac made payments of interest on long-term debt of $106 million, including $94 million on the Ambac Note, $11 million on surplus notes made in connection with the Rehabilitation Exit Transactions and $2 million on the secured borrowing which has been fully repaid in June 2018.

•Net loss and loss expenses paid, including commutation payments, during the nine months ended September 30, ~~2019~~2020 and ~~2018~~2019 are detailed below:


	Nine Months Ended September 30,
($ in million)	2020		2019
Net loss and loss expenses paid (recovered):
Net losses paid (1)	$	149	$	398
Net subrogation received (2)	(88)		(142)
Net loss expenses paid	77		43
Net cash flow	$	138	$	299

(1)Net losses paid include commutation payments of $13 and $214 for the nine months ended September 30, 2020 and 2019, respectively.

(2)For or the nine months ended September 30, 2019, subrogation received includes $36 of settlement proceeds related to Lehman sponsored RMBS transactions and $23 related to the COFINA Plan of Adjustment.

Nine Months Ended September 30,
($ in million) 2019 2018
Net loss and loss expenses paid (recovered):
Net losses paid ⁽¹⁾
$ (398 ) $ (319 )
Net subrogation received ⁽²⁾
142
110
Net loss expenses paid (43 ) (86 )
Net cash flow $ (299 ) $ (295 )


~~(1)~~	~~Net losses paid include commutation payments of $214 and $87 for the nine months ended September 30, 2019 and 2018, respectively.~~


~~(2)~~	~~For the nine months ended September 30, 2019, subrogation received includes $36 of settlement proceeds related to Lehman sponsored RMBS transactions and $23 related to the COFINA Plan of Adjustment.~~

Future operating cash flows will primarily be impacted by ~~the level of premium collections,~~interest payments on outstanding debt, claim and expense payments, investment coupon receipts and ~~claim and expense payments.~~premium collections.

Financing Activities

Financing activities for the nine months ended September 30, 2020, include paydowns of the Ambac Note of $115 million and paydowns / maturities of VIE debt obligations of $143 million.

Financing activities for the nine months ended September 30, 2019, include paydowns of the Ambac Note of $29 million and paydowns ~~/ maturities~~ of VIE debt obligations of $510 million, proceeds of $19 million from the re-issuance of 1,386 shares of Ambac owned AMPS and proceeds of $12 million from ~~the~~ issuance of Ambac UK ~~debt in connection with the Ballantyne commutation.~~

Financing activities for the nine months ended September 30, 2018, include proceeds from the issuance of Tier 2 Notes of $240 million, paydowns of the Ambac Note of $186 million, repayments of a secured borrowing of $74 million, payments for the extinguishment of surplus notes of $191 million, paydowns / maturities of VIE debt obligations of $187 million and $9 million of debt issuance costs.debt.

Collateral

AFS hedges a portion of the interest rate risk in the financial guarantee and investment portfolio, along with legacy customer interest rate swaps, with standardized derivative contracts, including financial futures contracts, which contain collateral or margin requirements. Under these hedge agreements, AFS is required to post collateral or margin to its counterparties and futures commission merchants to cover unrealized losses. In addition, AFS is required to post collateral or margin in excess of the amounts needed to cover unrealized losses. All AFS derivative contracts containing ratings-based downgrade triggers that could result in collateral or margin posting or a termination have been triggered. If terminations were to occur, AFS would be required to make termination payments but would also receive a return of collateral or margin in the form of cash or U.S. Treasury obligations with market values equal to or in excess of market values of the swaps

~~| Ambac Financial Group, Inc.~~ 61~~2019 Third Quarter FORM 10-Q~~ |

and futures contracts. AFS may look to re-establish hedge positions that are terminated early, resulting in additional collateral or margin obligations. The amount of additional collateral or margin posted on derivatives contracts will depend on several variables including the degree to which counterparties exercise their termination rights (or agreements terminate automatically) and the terms on which hedges can be replaced. All collateral and margin obligations are currently met. Collateral and margin posted by AFS totaled a net amount of ~~$135~~$154 million (cash and securities collateral of ~~$50~~$1 million and ~~$85~~$152 million, respectively), including independent amounts, under these contracts at September 30, ~~2019.~~2020.

Ambac Credit Products (“ACP”) is not required to post collateral under any of its outstanding credit derivative contracts.

BALANCE SHEET

Total assets decreased by approximately ~~$1,138~~$507 million from December 31, ~~2018~~2019, to ~~$13,451~~$12,812 million at September 30, ~~2019,~~2020, primarily due to ~~changes in VIEs consolidated as a result~~the payment of ~~financial guarantees provided by Ambac. During the nine months ended September 30, 2019, Ambac de-consolidated one VIE (causing a decrease in~~loss and loss adjustment expenses; interest and operating expenses; redemptions of long-term debt; and lower VIE assets caused by redemptions, the economic effects of ~~$1,233 million) partially offset by~~ the ~~consolidation~~COVID-19 pandemic on certain consolidated VIEs and the impact of ~~another VIE (causing an increase in assets~~currency changes (weakening of ~~$166 million)~~pound sterling). Other significant changes during the nine months ended September 30, ~~2019~~2020, were ~~the receipt~~higher subrogation recoverables primarily related to increases in excess

| Ambac Financial Group, Inc. 662020 Third Quarter FORM 10-Q |

spread on RMBS, as a result of ~~$142 million arising from the settlement of litigation between the SEC~~lower interest rates, and ~~Citigroup,~~ lower premium receivables and ~~lower~~ intangible assets from the continued runoff of the financial guarantee insurance ~~portfolio, particularly the Ballantyne commutation.~~portfolio.

Total liabilities decreased by approximately ~~$1,133~~$66 million from December 31, ~~2018~~2019, to ~~$11,822~~$11,718 million as of September 30, ~~2019,~~2020, primarily due to changes in VIEs consolidated as a result of financial guarantees provided by Ambac, as noted above. The net impact of these VIE changes to liabilities was a net decrease of $1,029 million. Other significant changes during the nine months ended September 30, 2019, were lower ~~unearned premiums~~long-term debt from ~~the runoff~~partial redemptions of the ~~insured portfolio~~Ambac Note and lower ~~loss reserves (from both claim payments, including commutation payments on Ballantyne,~~consolidated VIE liabilities, resulting from redemptions, fair value and ~~the elimination of loss reserves from the COFINA VIE consolidated)~~currency changes (as noted above), partially offset by higher ~~long-term debt plus accrued interest payable (including the issuance of debt by Ambac UK of $12 million in connection with the Ballantyne commutation)~~loss reserves and increases in interest rate derivative obligations, as a result of reductions in forward interest rates.

As of September 30, ~~2019,~~2020, total stockholders’ equity was ~~$1,629~~$1,095 million, compared with total stockholders’ equity of ~~$1,633~~$1,536 million at December 31, ~~2018.~~2019. This decrease was primarily due to a Total Comprehensive Loss during ~~2019 partially offset by an increase of $19 million as a result of the re-issuance of 1,386 shares of Ambac owned Ambac Assurance AMPS (reported in noncontrolling interests).~~2020. The Comprehensive Loss was primarily driven by the net loss attributable to common stockholders for the nine months ended September 30, ~~2019~~2020, of ~~$106~~$423 million and translation losses on the consolidation of ~~Ambac's~~AFG's foreign subsidiaries of ~~$28 million, partially offset by unrealized gains on investment securities of $103~~$20 million.

Investment Portfolio. Ambac Assurance’s investment objective is to achieve the highest risk-adjusted after-tax return on a diversified portfolio of ~~primarily~~ fixed income investments and pooled investment funds while employing asset/liability management practices to satisfy operating and strategic liquidity needs. Ambac Assurance’s investment portfolio is subject to internal investment guidelines and is subject to limits on the types and quality of investments imposed by the insurance laws and regulations of the jurisdictions in which it is licensed, primarily the States of Wisconsin and New York. Such guidelines set forth minimum credit rating requirements and credit risk concentration limits. Within these guidelines, which in certain instances may be exceeded with the approval of the applicable regulatory authority, Ambac Assurance opportunistically purchases and sells Ambac Assurance and Ambac UK insured securities given their relative risk/reward characteristics. Ambac Assurance’s investment policies are subject to oversight by OCI pursuant to the Settlement Agreement, the Stipulation and Order and the indenture for the Tier 2 Notes. The Board of Directors of Ambac Assurance approves any changes to Ambac Assurance's investment policy.

Ambac UK’s investment policy is designed with the primary objective of ensuring that Ambac UK is able to meet its financial obligations as they fall due, in particular with respect to policyholder claims. Ambac UK’s investment portfolio is primarily diversified fixed income ~~investments~~securities and ~~diversified holdings of~~ pooled investment funds. The portfolio is subject to internal investment guidelines and may be subject to limits on types and quality of investments imposed by the PRA as regulator of Ambac UK. Ambac UK’s investment policy sets forth minimum credit rating requirements and concentration limits, among other restrictions. The Board of Directors of Ambac UK approves any changes or exceptions to Ambac UK’s investment policy.

~~Ambac Financial Group, Inc.'s~~AFG's investment portfolio's primary objective is to preserve capital and liquidity for strategic uses while maximizing income. ~~In connection with its investment objective and other strategic objectives, Ambac has invested in securities issued by or guaranteed by Ambac Assurance.~~

Refer to Note 8. Investments to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Form 10-Q for information about Ambac's consolidated investment

portfolio. Ambac's investment policies and objectives do not apply to the assets of VIEs consolidated as a result of financial guarantees written by its insurance subsidiaries.

|In the second quarter of 2020, Ambac ~~Financial Group, Inc.~~ 62monetized a material portion of its investments in certain assets classes; including corporate securities rated below the 'A' rated category, all directly owned CMBS (other than Military Housing bonds), and approximately 50% of all CLOs (all rated investment grade) and acquired additional distressed Ambac-insured securities. In the third quarter of 2020, Ambac began acquiring corporate securities rated below 'A' again. These actions resulted in changes to the credit rating distribution of available-for-sale investments from December 31, 2019, ~~Third Quarter FORM 10-Q~~ |to September 30, 2020, illustrated in the charts below.

The following table summarizes the composition of Ambac’s investment portfolio, excluding VIE investments, at carrying value at September 30, ~~2019~~2020 and December 31, ~~2018:~~2019:


($ in millions)	September 30, 2020		December 31, 2019
Fixed income securities	$	2,311	$	2,577
Short-term	586		653
Other investments	502		478
Fixed income securities pledged as collateral	152		85
Total investments (1)	$	3,551	$	3,792

($ in millions) September 30,
2019 December 31,
2018
Fixed income securities $ 2,727
$ 3,116
Short-term 664
430
Other investments 462
391
Fixed income securities pledged as collateral 85
—
Total investments ⁽¹⁾
$ 3,939
$ 3,937
(1) Includes investments denominated in non-US dollar currencies with a fair value of £287 ($370) and €38.7 ($45.3) as of September 30, 2020, and £257 ($341) and €2 ($2) as of December 31, 2019.


~~(1)~~	Includes investments denominated in non-US dollar currencies with a fair value of £207 ($255) and €0.9 ($1.0) as of September 30, 2019, and £204 ($259) and €14.0 ($16.0) as of December 31, 2018.

Ambac invests in various asset classes in its fixed income securities portfolio, including securities covered by guarantees issued by Ambac Assurance, Ambac UK and ~~Ambac UK.~~other financial guarantors ("insured securities"). Other investments include diversified ~~equity~~ interests in pooled funds. Refer to Note 8. Investments to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Form 10-Q for information about ~~securities~~ insured ~~by Ambac's subsidiaries~~securities and fixed income and ~~equity interests~~pooled funds by asset class.

The following table represents the fair value of ~~mortgage and~~ other asset-backed securities, included in fixed income securities above, at September 30, ~~2019~~2020 and December 31, ~~2018~~2019, by classification:


($ in millions)	September 30, 2020		December 31, 2019








Other asset-backed securities
Military Housing	$	240	$	237





Other	60		50
Total other asset-backed securities	$	300	$	287

($ in millions) September 30,
2019 December 31,
2018
Residential mortgage-backed securities:
RMBS—Second Lien $ 140
$ 136
RMBS—First-lien—Alt-A 86
93
RMBS—First Lien—Sub Prime 31
31
Total residential mortgage-backed securities 257
259
Other asset-backed securities
Military Housing $ 248
241
Commercial mortgage-backed 51
—
Student Loans 32
32
Credit Cards 18
5
Auto —
20
Structured Insurance —
145
Total other asset-backed securities 349
442
Total ⁽¹⁾
$ 606
$ 701


~~(1)~~	~~Includes investments guaranteed by Ambac Assurance and Ambac UK. Refer to Note 8. Investments to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Form 10-Q for further details of Ambac insured securities held in the investment portfolio.~~

~~The weighted average rating, which is based on the lower of Standard & Poor’s or Moody’s ratings, of the mortgage and asset-backed securities is CC and B- as of September 30, 2019, and~~| Ambac Financial Group, Inc. CC67 ~~and~~ ~~CCC-~~2020 Third Quarter FORM 10-Q ~~as of December 31, 2018, respectively.~~|

The following charts provide the ratings ⁽¹⁾ distribution of the fixed income investment portfolio based on fair value at September 30, ~~2019~~2020 and December 31, ~~2018:~~2019:


~~(1)~~	Ratings are based on the lower of Moody’s or S&P ratings. If ratings are unavailable from Moody's or S&P, Fitch ratings are used. If guaranteed, rating represents the higher of the underlying or guarantor’s financial strength rating.

~~(2)~~

Below investment grade and not rated bonds insured by Ambac represent 33% and 57% of the 2019 and 2018 combined fixed income portfolio, respectively. The decrease in the percentage of below investment grade and increases in the percentages of AAA-rated holdings since December 31, 2018 were driven by the COFINA restructuring where below investment grade Ambac-insured bonds were exchanged for new COFINA non-rated bonds and cash, with a majority of the new non-rated bonds being sold prior to September 30, 2019. Cash proceeds from the restructuring and sales resulted in the higher percentage of AAA-rated short-term investments at September 30, 2019.

|(1)Ratings are based on the lower of Moody’s or S&P ratings. If ratings are unavailable from Moody's or S&P, Fitch ratings are used. If guaranteed, rating represents the higher of the underlying or guarantor’s financial strength rating.

(2)Below investment grade and not rated bonds insured by Ambac ~~Financial Group, Inc.~~ 63represent 39% and 33% of the September 30, 2020 and December 31, 2019 ~~Third Quarter FORM 10-Q~~ |combined fixed income portfolio, respectively.

Premium Receivables. Ambac's premium receivables decreased to ~~$415~~$372 million at September 30, ~~2019,~~2020, from ~~$495~~$416 million at December 31, ~~2018.~~2019. As further discussed in Note 6. Financial Guarantee Insurance Contracts, the decrease is due to premium receipts and increases to the ~~impact of commutations and other policy terminations, changes to uncollectible premiums and changes in foreign currencies,~~allowance for credit losses, partially offset by accretion of the premium receivable discount.

Premium receivables by payment currency were as follows:


Currency (Amounts in millions)	Premium Receivable in Payment Currency		Premium Receivable in U.S. Dollars
U.S. Dollars	$	239	$	239
British Pounds	£	87	112
Euros	€	18	21


Total			$	372

Currency
(Amounts in millions) Premium Receivable in
Payment Currency Premium Receivable in
U.S. Dollars
U.S. Dollars $ 268
$ 268
British Pounds £ 101
124
Euros € 20
22
Total $ 415

Reinsurance Recoverable on Paid and Unpaid Losses. Ambac Assurance has reinsurance in place pursuant to surplus share treaty and facultative agreements. To minimize its exposure to losses from reinsurers, Ambac Assurance (i) monitors the financial condition of its reinsurers; (ii) is entitled to receive collateral from its reinsurance counterparties under certain reinsurance contracts; and (iii) has certain cancellation rights that can be exercised by Ambac Assurance in the event of rating agency downgrades of a reinsurer (among other events and circumstances). Ambac Assurance benefited from letters of credit and collateral amounting to approximately ~~$120~~$132 million from its reinsurers at September 30, ~~2019.~~2020. As of September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, reinsurance recoverable on paid and unpaid losses were ~~$26~~$37 million and ~~$23~~$26 million, respectively. The increase was primarily a result of adverse development in public finance and student loan insured exposures.

Insurance Intangible Asset. ~~Upon Ambac's exit from Chapter 11 bankruptcy on May 1, 2013 (the~~At the Fresh Start Reporting ~~Date),~~Date, an insurance intangible asset was recorded which represented the difference between the fair value and aggregate carrying value of

the financial guarantee insurance and reinsurance assets and liabilities. As of September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the net insurance intangible asset was ~~$434~~$383 million and ~~$719~~$427 million, respectively. Other than through amortization, variance in the insurance intangible asset is solely from translation gains (losses) from the consolidation of Ambac's foreign subsidiary (Ambac UK).

Derivative Assets and Liabilities. The interest rate derivative portfolio is positioned to benefit from rising rates as a partial economic hedge against interest rate exposure in the financial guarantee and investment portfolios. Derivative assets increased from ~~$59~~$75 million at December 31, ~~2018,~~2019, to ~~$82~~$95 million as of September 30, ~~2019.~~2020. Derivative liabilities increased from ~~$77~~$90 million at December 31, ~~2018,~~2019, to ~~$103~~$126 million as of September 30, ~~2019.~~2020. The net increases resulted primarily from lower interest rates during the nine months ended September 30, ~~2019.~~2020, with the effect on assets partially offset by higher counterparty credit adjustments.

Loss and Loss Expense Reserves and Subrogation Recoverable.Loss and loss expense reserves are based upon estimates of the ultimate aggregate losses inherent in the non-derivative portfolio for insurance policies issued to beneficiaries, including unconsolidated VIEs.

The evaluation process for determining the level of reserves is subject to certain estimates and judgments. Refer to the "Critical Accounting Policies and Estimates" and “Results of Operations” sections of Management’s Discussion and Analysis of Financial

| Ambac Financial Group, Inc. 682020 Third Quarter FORM 10-Q |

Condition and Results of Operations, in addition to Basis of Presentation and Significant Accounting Policies and Loss Reserves sections included in Note 2. Basis of Presentation and Significant Accounting Policies and Note 6. Financial Guarantee Insurance Contracts, respectively, of the Consolidated Financial Statements included in Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018~~2019, for further information on loss and loss expenses.

The loss and loss expense reserves, net of subrogation recoverables and before reinsurance as of September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, were ~~$(560)~~$(393) million and ~~$(107)~~$(482) million, respectively.

Loss and loss expense reserves are included in the Unaudited Consolidated Balance Sheets as follows:

Present Value of Expected
Net Cash Flows Unearned
Premium
Revenue Gross Loss
and Loss
Expense
Reserves
($ in millions)
Balance Sheet Line Item Claims and
Loss
Expenses
Recoveries ⁽¹⁾

September 30, 2019:
Loss and loss expense reserves $ 1,803
$ (226 ) $ (55 ) $ 1,522
Subrogation recoverable 136
(2,218 ) —
(2,082 )
Totals $ 1,939
$ (2,444 ) $ (55 ) $ (560 )

December 31, 2018:
Loss and loss expense reserves $ 2,246
$ (313 ) $ (107 ) $ 1,826
Subrogation recoverable 176
(2,109 ) —
(1,933 )
Totals $ 2,422
$ (2,422 ) $ (107 ) $ (107 )


~~(1)~~	~~Present value of future recoveries includes R&W subrogation recoveries of $1,755 and $1,771 at September 30, 2019 and December 31, 2018, respectively.~~


	Present Value of Expected Net Cash Flows			Unearned Premium Revenue			Gross Loss and Loss Expense Reserves
($ in millions) Balance Sheet Line Item		Claims and Loss Expenses				Recoveries (1)
September 30, 2020:
Loss and loss expense reserves		$	2,116	$	(235)		$	(80)	$	1,801
Subrogation recoverable		109		(2,303)			—		(2,194)
Totals		$	2,225	$	(2,538)		$	(80)	$	(393)

December 31, 2019:
Loss and loss expense reserves		$	1,835	$	(233)		$	(54)	$	1,548
Subrogation recoverable		131		(2,160)			—		(2,029)
Totals		$	1,966	$	(2,394)		$	(54)	$	(482)

~~| Ambac Financial Group, Inc.~~ (1)64Present value of future recoveries includes R&W subrogation recoveries of $1,757 and $1,727 at September 30, 2020 and December 31, 2019, ~~Third Quarter FORM 10-Q~~respectively. |

Ambac has exposure to various bond types issued in the debt capital markets. Our experience has shown that, for the majority of bond types, we have not experienced significant claims. The bond types that have experienced significant claims, including through commutations, are residential mortgage-backed securities (“RMBS”), student loan securities and public finance securities. These bond types represent 94% of our ever-to-date insurance claims recorded, with RMBS comprising ~~77%~~75%. The table below indicates gross par outstanding and the components of gross loss and loss expense reserves related to policies in Ambac’s gross loss and loss expense reserves at September 30, ~~2019~~2020 and December 31, ~~2018:~~2019:


	Gross Par Outstanding (1)(2)		Present Value of Expected Net Cash Flows			Unearned Premium Revenue			Gross Loss and Loss Expense Reserves (1)(3)
($ in millions)				Claims and Loss Expenses				Recoveries
September 30, 2020:
RMBS	$	2,672		$	702	$	(2,151)		$	(13)	$	(1,462)
Domestic Public Finance	3,783			1,140		(352)			(52)		736
Student Loans	431			272		(35)			(4)		233
Ambac UK and Other Credits	866			31		—			(11)		20

Loss expenses	—			80		—			—		80
Totals	$	7,752		$	2,225	$	(2,538)		$	(80)	$	(393)

| Ambac Financial Group, Inc. 692020 Third Quarter FORM 10-Q |


	Gross Par Outstanding ⁽¹⁾⁽²⁾			Present Value of Expected Net Cash Flows						Unearned Premium Revenue				Gross Loss and Loss Expense Reserves⁽¹⁾⁽³⁾				Gross Par Outstanding (1)(2)			Present Value of Expected Net Cash Flows						Unearned Premium Revenue			Gross Loss and Loss Expense Reserves (1)(3)
($ in millions)			Claims and Loss Expenses			Recoveries							($ in millions)									Claims and Loss Expenses				Recoveries
September 30, 2019:
December 31, 2019:																	December 31, 2019:
RMBS	$	3,136		$	670		$	(2,075	)	$	(14	)		$	(1,419	)	RMBS		$	3,027				$	634			$	(2,013)			$	(13)			$	(1,392)
Domestic Public Finance	2,541			948			(332		)	(36		)		580			Domestic Public Finance	2,398					1,007				(344)				(36)				627
Student Loans	485			243			(37		)	(4		)		202			Student Loans	472					248				(36)			(4)				208
Ambac UK and Other Credits	203			5			—			(1		)		4			Ambac UK and Other Credits	271					4				—			(1)				3

Loss expenses	—			73			—			—				73			Loss expenses	—					73				—			—				73
Totals	$	6,365		$	1,939		$	(2,444	)	$	(55	)		$	(560	)	Totals	$	6,168				$	1,966			$	(2,394)		$	(54)			$	(482)

(1) Ceded par outstanding on policies with loss reserves and ceded loss and loss expense reserves are $859 and $36 respectively, at September 30, 2020, and $511 and $26, respectively at December 31, 2019. Ceded loss and loss expense reserves are included in Reinsurance recoverable on paid and unpaid losses.

(2) Gross Par Outstanding includes capital appreciation bonds, which are reported at the par amount at the time of issuance of the insurance policy as opposed to the current accreted value of the bond.

(3) Loss reserves are included in the balance sheet as Loss and loss expense reserves or Subrogation recoverable dependent on if a policy is in a net liability or net recoverable position.

December 31, 2018:
RMBS $ 3,716
$ 696
$ (1,995 ) $ (14 ) $ (1,313 )
Domestic Public Finance 3,987
1,095
(383 ) (73 ) 639
Student Loans 530
271
(39 ) (4 ) 228
Ambac UK and Other Credits 1,170
294
(5 ) (16 ) 273
Loss expenses —
66
—
—
66
Totals $ 9,403
$ 2,422
$ (2,422 ) $ (107 ) $ (107 )


~~(1)~~	Ceded par outstanding on policies with loss reserves and ceded loss and loss expense reserves are $615 and $26, respectively, at September 30, 2019, and $540 and $23, respectively at December 31, 2018. Ceded loss and loss expense reserves are included in Reinsurance recoverable on paid and unpaid losses.


~~(2)~~	~~Gross Par Outstanding includes capital appreciation bonds, which are reported at the par amount at the time of issuance of the insurance policy as opposed to the current accreted value of the bond.~~


~~(3)~~	~~Loss reserves are included in the balance sheet as Loss and loss expense reserves or Subrogation recoverable dependent on if a policy is in a net liability or net recoverable position.~~

Variability of Expected Losses and Recoveries

Ambac’s management believes that the estimated future loss component of loss reserves (present value of expected net cash flows) are adequate to cover future claims presented, but there can be no assurance that the ultimate liability will not be higher than such estimates.

It is possible that our estimated future losses for insurance policies discussed above could be understated or that our estimated future recoveries could be overstated. We have attempted to identify possible cash flows related to losses and recoveries using more stressful assumptions than the probability-weighted outcome recorded. The possible net cash flows consider the highest stress scenario that was utilized in the development of our probability-weighted expected loss at September 30, ~~2019,~~2020, and assumes an inability to execute any commutation transactions with issuers and/or investors. Such stress scenarios are developed based on management’s view about all possible outcomes relating to losses and recoveries. In arriving at such view, management makes considerable judgments about the possibility of various future events. Although we do not believe it is possible to have stressed outcomes in all cases, it is possible that we could have stress case outcomes in some or even many cases. See “Risk Factors” in Part

I, Item 1A as well as the ~~following~~ descriptions of "RMBS Variability," "Public Finance Variability," "Student Loan Variability," and "Other Credits, including Ambac UK, Variability," in Part II, Item 7 of the Company's ~~2018~~2019 Annual Report on Form 10-K for further discussion of the risks relating to future losses and recoveries that could result in more highly stressed outcomes, and in "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form ~~10-Q.~~10-Q as well as the descriptions of "RMBS Variability," "Public Finance Variability," "Student Loan Variability," and "Other Credits, including Ambac UK, Variability" appearing below.

The occurrence of these stressed outcomes individually or collectively would have a material adverse effect on our results of operations and financial condition and may result in materially adverse consequence for the Company, including (without limitation) impairing the ability of Ambac Assurance to

honor its financial obligations; the initiation of rehabilitation proceedings against Ambac Assurance; decreased likelihood of Ambac Assurance delivering value to ~~Ambac,~~AFG, through dividends or otherwise; and a significant drop in the value of securities issued or insured by ~~Ambac~~AFG or Ambac Assurance.

~~| Ambac Financial Group, Inc.~~ 65~~2019 Third Quarter FORM 10-Q~~ |

RMBS Variability:

Ambac has exposure to the U.S. mortgage market primarily through direct financial guarantees of RMBS, including transactions collateralized by first and second liens.

Changes to assumptions that could make our reserves under-estimated include an increase in interest rates, deterioration in housing prices, poor servicing, government intervention into the functioning of the mortgage market and the effect of a weakened economy characterized by growing unemployment and wage pressures. We utilize a model to project losses in our RMBS exposures and changes to reserves, either upward or downward, are not unlikely if we used a different model or methodology to project losses.

We established a representation and warranty subrogation recovery as further discussed in Note 6. Financial Guarantee Insurance Contracts to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Form 10-Q. Our ability to realize RMBS representation and warranty recoveries is subject to significant uncertainty, including risks inherent in ~~litigation,~~litigation; collectability of such amounts from counterparties (and/or their respective parents and affiliates)~~, timing~~; delays in realizing such recoveries, including as a result of ~~receipt of any such recoveries,~~trial delays due to court closures related to COVID-19 or other events; intervention by the OCI, which could impede our ability to take actions required to realize such ~~recoveries~~recoveries; and uncertainty inherent in the assumptions used in estimating such recoveries.

Changes to assumptions that could make our reserves under-estimated include an increase in interest rates, deterioration in housing prices, poor servicing, the effect of a weakened economy characterized by growing unemployment and wage pressures. We utilize a model to project losses in our RMBS exposures and changes to reserves, either upward or downward, are not unlikely if we used a different model or methodology to project losses. Additionally, our R&W actual subrogation recoveries could be significantly lower than our estimate of ~~$1,729~~$1,731 million, net of reinsurance, as of September 30, ~~2019,~~2020, if the sponsors of these transactions: (i) fail to honor their obligations to repurchase the mortgage loans, (ii) successfully dispute our breach findings or claims for damages, (iii) no longer have the financial means to fully satisfy their obligations under the transaction documents, or (iv) our pursuit of recoveries is otherwise unsuccessful.

| Ambac Financial Group, Inc. 702020 Third Quarter FORM 10-Q |

Failure to realize R&W subrogation recoveries for any reason or the realization of R&W subrogation recoveries materially below the

amount recorded on Ambac's consolidated balance sheet would have a material adverse effect on our results of operations and financial condition.

In the case of both first and second-lien exposures, the possible stress case assumes a lower housing price appreciation projection, which in turn drives higher defaults and severities. Using this approach, the possible increase in loss reserves for RMBS credits for which we have an estimate of expected loss at September 30, ~~2019~~2020, could be approximately ~~$20~~$40 million. Combined with the absence of any R&W subrogation recoveries, a possible increase in loss reserves for RMBS could be approximately ~~$1.75 billion.~~$1,771 million. Additionally, loss payments are sensitive to changes in interest rates, increasing as interest rates rise. For example, an increase in interest rates of 0.50% could increase our estimate of expected losses by approximately ~~$45~~$35 million. ~~There~~Additionally, the RMBS portfolio is sensitive to the COVID-19 related forbearances and delinquencies caused by the general economic downturn. Due to the uncertainties related to the economic effects of the COVID-19 pandemic and other

risks associated with RMBS, there can be no assurance that losses may not exceed ~~such amounts.~~our stress case estimates.

Public Finance Variability:

Ambac’s U.S. public finance portfolio consists predominantly of municipal bonds such as general and revenue obligations and lease and tax-backed obligations of state and local government entities; however, the portfolio also ~~comprises~~includes a wide array of non-municipal types of bonds, including financings for not-for-profit entities and transactions with public and private elements, which generally finance infrastructure, housing and other public purpose facilities and interests. The ~~decline~~increase in public finance gross loss reserves at September 30, ~~2019,~~2020, as compared to December 31, ~~2018,~~2019, was primarily related to ~~the COFINA debt restructuring, payments of claims~~declines in discount rates; changes in assumptions on certain credits, particularly Puerto Rico; and the ~~commutation~~adverse impact on loss reserves from the global and issuer-specific economic impact of ~~a transportation credit, partially offset by increases in Puerto Rico loss reserves.~~the COVID-19 pandemic. Total public finance gross loss reserves and related gross par outstanding on Ambac insured obligations by bond type were as follows:


	September 30, 2020				December 31, 2019
Issuer Type ($ in millions)	Gross Par Outstanding (1)		Gross Loss Reserves		Gross Par Outstanding (1)		Gross Loss Reserves
Lease and tax-backed	$	1,497	$	693	$	1,075	$	561
General obligation	603		(29)		681		(16)
Housing	454		28		457		29
Transportation revenue	307		31		88		42
Other	922		13		97		11
Total	$	3,783	$	736	$	2,398	$	627

September 30, 2019 December 31, 2018
Issuer Type
($ in millions)
Gross Par
Outstanding ⁽¹⁾
Gross Loss
Reserves
Gross Par
Outstanding ⁽¹⁾
Gross Loss
Reserves
Lease and tax-backed $ 1,081
$ 515
$ 2,062
$ 528
General obligation 838
(20 ) 904
24
Housing 441
30
445
26
Transportation revenue 88
44
471
49
Other 92
10
105
12
Total $ 2,541
$ 580
$ 3,987
$ 639
(1)Gross Par Outstanding includes capital appreciation bonds, which are reported at the par amount at the time of issuance of the insurance policy as opposed to the current accreted value of the bond.


~~(1)~~	~~Gross Par Outstanding includes capital appreciation bonds, which are reported at the par amount at the time of issuance of the insurance policy as opposed to the current accreted value of the bond.~~

It is possible our loss reserves for public finance credits may be under-estimated if issuers are faced with prolonged exposure to adverse political, judicial, economic, fiscal or socioeconomic events or trends. Additionally, our loss reserves may be under-estimated as a result of the ultimate scope, duration and magnitude of the effects of COVID-19. The COVID-19 related economic downturn has put a strain on municipal issuers, particularly those dependent upon narrow sources of revenues or dedicated taxes to support debt service, such as hotel occupancy taxes, sales taxes, parking revenues, tolls, licensing fees, etc. A prolonged recovery from the COVID-19 related economic downturn could put additional stresses on these issuers as well as other types of municipal finance issuers and result in increased defaults and potential additional losses for Ambac.

Our experience with the city of Detroit in 2013 in its bankruptcy proceeding was not favorable and renders future outcomes with other public finance issuers even more difficult to predict and may increase the risk that we may suffer losses that could be sizable. We agreed to settlements regarding our insured Detroit general obligation bonds that provide better treatment of our exposures than the city planned to include in its plan of adjustment, but nevertheless required us to incur a loss for a significant portion of

our exposure. An additional troubling precedent in the Detroit case, as well as other municipal bankruptcies, is the preferential treatment of certain creditor

classes, especially the public pensions. The cost of pensions and the need to address frequently sizable unfunded or underfunded pensions is often a key driver of stress for many municipalities and their related authorities, including entities to whom we have significant exposure, such as ~~Chicago, its~~Chicago's school district, the State of New Jersey and many others. Less severe treatment of pension obligations in bankruptcy may lead to worse outcomes for traditional debt creditors.

Variability of outcomes applies to even what is generally considered more secure municipal financings, such as dedicated sales tax revenue bonds that capture sales tax revenues for debt service ahead of any

~~| Ambac Financial Group, Inc.~~ 66~~2019 Third Quarter FORM 10-Q~~ |

amounts being deposited into the general fund of an issuer. In the case of the Puerto Rico COFINA sales tax bonds that were part of the Commonwealth of Puerto Rico's Title III proceedings, Ambac Assurance and other creditors agreed to settle at a recovery rate equal to about 93% of pre-petition amounts owed on the Ambac insured senior COFINA bonds. In the COFINA case, the senior bonds still received a reduction or "haircut" despite the existence of junior COFINA bonds, which received a recovery rate equal to about 56% of pre-petition amounts owed. ~~The amounts were confirmed as part of the COFINA Plan of Adjustment on February 4, 2019.~~

In addition, municipal entities may be more inclined to use bankruptcy to resolve their financial stresses if they believe preferred outcomes for various creditor groups can be achieved.

| Ambac Financial Group, Inc. 712020 Third Quarter FORM 10-Q |

We expect municipal bankruptcies and defaults to continue to be challenging to project given the unique political, economic, fiscal, legal, governance and public policy differences among municipalities as well as the complexity, long duration and relative infrequency of the cases themselves in forums with a scarcity of legal precedent.

Another potentially adverse development that could cause the loss reserves on our public finance credits to be underestimated is deterioration in the municipal bond market, resulting from reduced or limited access to alternative forms of credit (such as bank loans) or other exogenous factors, such as ~~the Tax Cuts and Jobs Act~~changes in tax law that ~~was signed into law on December 22, 2017, which~~ could reduce certain municipal investors' appetite for tax-exempt municipal bonds ~~and over the longer term could potentially~~or put ~~additional~~ pressure on issuers in states with high state and local taxes. These factors as well as more recent volatility in the municipal markets as a result of the COVID-19 related economic downturn and the building budgetary pressures at the state and local level related to the cost of fighting the virus could deprive issuers access to funding at a level necessary to avoid defaulting on their obligations.

In addition, a ~~more recent~~ judicial decision in connection with the PRHTA Title III proceedings could cause the loss reserves on our public finance credits to be underestimated. On January 13, 2020, the U.S. Supreme Court denied a petition for certiorari arising out of an appeal of the March 26, 2019 ruling by the U.S. Court of Appeals for the First Circuit. In the ruling, the First Circuit ~~affirming a~~affirmed the decision by the U.S. District Court overseeing the PROMESA Title III proceedings for the PRHTA, which found that under Sections 928(a) and 922(d) of the U.S. Bankruptcy Code, municipal issuers of revenue bonds secured by special revenues are permitted, but not required, to apply special revenues to pay debt service on such revenue bonds during the pendency of bankruptcy proceedings for such municipal issuers. The complainants had sought an order compelling PRHTA, as the debtor, to continue to make debt service payments on its revenue bonds from pledged special revenues during the pendency of its Title III case, but the First Circuit affirmed the District Court’s dismissal of the complaint, holding that it could not compel the issuer to make such payments. The First Circuit's decision challenges what had been a commonly understood notion in the municipal finance marketplace that municipal revenues bondholders secured by special revenues (as defined in Chapter 9 of the U.S. Bankruptcy Code) would continue to receive payment during a bankruptcy of the municipal issuer. This decision introduces ~~significant~~ uncertainty into the public finance market and it may make it more difficult for municipal instrumentalities to procure revenue bond financings in the future and increases the credit risk to bondholders of existing special revenue bonds, particularly those from weaker issuers. ~~In the wake of the decision, rating agencies have already taken ratings actions on, or announced their intention to review ratings given to, bonds issued across the~~

~~country highlighting the potential contagion effect of the various Puerto Rico proceedings under PROMESA.~~

While our loss reserves consider our judgment regarding issuers’ financial flexibility to adapt to adverse markets, they may not adequately capture sudden, unexpected or protracted uncertainty that adversely affects market ~~conditions.~~conditions, such as the developing COVID-19 related economic downturn.

Our exposures to the Commonwealth of Puerto Rico are under stress arising from the Commonwealth’s poor financial condition, weak economy, loss of capital markets access and the severe damage caused by hurricanes Irma and ~~Maria.~~Maria and other natural disasters. These factors, taken together with the payment moratorium on debt ~~payments~~service of the Commonwealth and its instrumentalities, ongoing PROMESA Title III proceedings, and certain other provisions under PROMESA, the potential for restructurings of debt insured by Ambac Assurance, either with or without its consent, and the possibility of protracted litigation

as a result of which its rights may be materially impaired, may cause losses to exceed current reserves in a material manner. See "Financial Guarantees in Force" section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Part II, Item 7 in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018~~2019, for further details on the legal, economic and fiscal developments that have impacted or may impact Ambac Assurance’s insured Puerto Rico bonds. In this Form 10-Q, refer to "Financial Guarantees in Force" in Part I, Item 2 in Management's Discussion and Analysis of Financial Condition and Results of Operation and Note ~~12.~~11. Commitments and Contingencies to the Unaudited Consolidated Financial Statements for further updates related to Puerto Rico.

Material additional losses on our public finance credits caused by the ~~above-described~~aforementioned factors, including the possibility of a protracted recovery related to the COVID-19 crisis would have a material adverse effect on our results of operations and financial condition. For the public finance credits, including Puerto Rico, ~~as well as other issuers,~~ for which we have an estimate of expected loss at September 30, ~~2019,~~2020, the possible increase in loss reserves could be approximately ~~$1,100~~$1,200 million. However, there can be no assurance that losses may not exceed our stress case estimates. Among other things, this estimate includes the possibility that the ~~current Plan Support Agreement~~amended Commonwealth plan of adjustment (as discussed above in the Financial Guarantees in Force section of this Management Discussion and Analysis) were to become effective. ~~However, there can be no assurance that losses may not exceed such amount.~~

Student Loan Variability:

Changes to assumptions that could make our reserves under-estimated include, but are not limited to, increases in interest rates, default rates and loss severities on the collateral due to economic or other ~~factors.~~factors, including the COVID-19 related economic downturn. Such factors may include lower recoveries on defaulted loans or additional losses on collateral or trust assets, including as a result of any enforcement actions by the Consumer Finance Protection Bureau. For student loan credits for which we have an estimate of expected loss at September 30, ~~2019,~~2020, the possible increase in loss reserves could be approximately ~~$15~~$30 million. Additionally, an increase in interest rates of 0.50% could increase our estimate of expected losses by approximately $20 million. ~~However, there~~Additionally, the student loan portfolio is sensitive to COVID-19 related payment moratoriums and delinquencies caused by the general economic downturn. There can be no assurance that losses may not exceed ~~such amounts.~~our stress case estimates.

Other Credits, including Ambac UK, Variability:

It is possible our loss reserves on other types of credits, including those insured by Ambac UK, may be under-estimated because of

~~| Ambac Financial Group, Inc.~~ 67~~2019 Third Quarter FORM 10-Q~~ |

various risks that vary widely, including the risk that we may not be able to recover or mitigate losses through our remediation processes. For all other credits, including Ambac UK, for which we have an estimate of expected loss, the sum of all the highest stress case loss scenarios is approximately ~~$30~~$375 million greater than the loss reserves at September 30, ~~2019. However, there~~2020. Additionally, our loss reserves may be under-estimated as a result of the ultimate scope, duration and magnitude of the effects of COVID-19. There can be no assurance that losses may not exceed ~~such amount. The highest~~our stress case ~~losses at September 30, 2019, are $140 million lower than the December 31, 2018, estimate primarily as a result of the Ballantyne commutation.~~estimates.

| Ambac Financial Group, Inc. 722020 Third Quarter FORM 10-Q |

Long-term Debt:

Long-term debt consists of senior and junior surplus notes issued by Ambac Assurance, the Ambac Note and Tier 2 Notes issued in connection with the Rehabilitation Exit Transactions, and Ambac UK debt issued in connection with the 2019 Ballantyne commutation. The carrying value of each of these as of September 30, ~~2019~~2020 and December 31, ~~2018~~2019 is below:


($ in millions)	September 30, 2020		December 31, 2019
Surplus notes (1)	$	777	$	769

Ambac note	1,648		1,763
Tier 2 notes	299		278
Ambac UK debt	13		13


Total Long-term Debt	$	2,737	$	2,822

($ in millions) September 30,
2019 December 31, 2018
Surplus notes ⁽¹⁾
$ 760
$ 737
Ambac note 1,912
1,940
Tier 2 notes 271
252
Ambac UK debt 12
—
Total Long-term Debt $ 2,955
$ 2,929
(1)Includes junior surplus notes.


~~(1)~~	~~Amounts include junior surplus notes.~~

The ~~increase~~decrease in long-term debt from December 31, ~~2018~~2019, is primarily due to optional redemptions of $115 million of the Ambac Note, partially offset by the accretion on the carrying value of surplus notes, ~~and~~ Tier 2 Notes and ~~issuance of~~ Ambac UK ~~debt, partially offset by optional redemptions of $29 million of the Ambac Note.~~debt.

VARIABLE INTEREST ENTITIES

Please refer to Note 3. Variable Interest Entities to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Form 10-Q and Note 2. Basis of Presentation and Significant Accounting Policies and Note 3. ~~Special Purpose Entities, Including~~ Variable Interest Entities to the Consolidated Financial Statements, included in Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, for information regarding ~~special purpose and~~ variable interest entities.

ACCOUNTING STANDARDS

The following accounting standards have been issued but have not yet been adopted. We do not expect these standards to have a consequential impact on Ambac's financial statements.

Convertible Instruments and Contracts in an Entity's Own Equity

In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity's Own Equity. The ASU i) simplifies the accounting for convertible debt and convertible preferred stock by reducing the number of accounting models, and amends certain disclosures, ii) amends and simplifies the derivative scope exception guidance for contracts in an entity's own equity, including share-based compensation, and iii) amends the diluted earnings per share calculations for convertible instruments and contracts in an entity's own equity. The ASU is effective for fiscal years ending after December 15, 2021, with early adoption permitted. Ambac will adopt this ASU on January 1, 2022.

Defined Benefit and Other Postretirement Plans Disclosures

In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20) - Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans. The ASU modifies various disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. Relevant disclosures that will be removed are: i) amounts in

accumulated other comprehensive income expected to be recognized as net periodic benefit cost over the next fiscal year and ii) the effects of a one percentage point change in assumed health care cost trend rates on the (a) aggregate of the service and interest cost components of the net periodic pension cost and (b) benefit obligation for postretirement healthcare benefits. Relevant disclosures that will be added are an explanation of the reasons for significant gains and losses related to changes in the benefit obligations for the period. The ASU is effective for fiscal years ending after December 15, 2020, with early adoption permitted. The modified disclosures must be applied on a retrospective basis for all periods presented. Ambac will adopt this ASU on December 31, 2020.

Simplifying Income Tax Accounting

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes. The FASB issued this ASU as part of its initiative to reduce complexity in accounting standards. The ASU removes certain exceptions in the guidance related to investments, intraperiod allocations and interim period allocations. It further adds new guidance related to the allocation of consolidated income taxes and evaluating a step-up in the tax basis of goodwill. The ASU is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. The modified disclosures must be applied on a retrospective basis for all periods presented. Ambac will adopt this ASU on January 1, 2021.

Please refer to Note 2. Basis of Presentation and Significant Accounting Policies to the ~~Unaudited~~ Consolidated Financial Statements, included in Part I,II, Item 18 in ~~this~~the Company’s Annual Report on Form ~~10-Q,~~10-K for the year ended December 31, 2019, for a discussion of the impact of other recent accounting pronouncements on Ambac’s financial condition and results of operations.

AMBAC ASSURANCE STATUTORY BASIS FINANCIAL RESULTS

Ambac Assurance statutory financial statements are prepared on the basis of accounting practices prescribed or permitted by the OCI. OCI recognizes only statutory accounting practices prescribed or permitted by the State of Wisconsin (“SAP”) for determining and reporting the financial condition and results of operations of an insurance company for determining its solvency under Wisconsin Insurance Law. The National Association of

Insurance Commissioners (“NAIC”) Accounting Practices and Procedures manual (“NAIC SAP”) has been adopted as a component of prescribed practices by the State of Wisconsin. For further information, see "Ambac Assurance Statutory Basis Financial Results," in Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Note 8. Insurance Regulatory Restrictions to the Consolidated Financial Statements included in Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019.

Ambac Assurance’s statutory policyholder surplus and qualified statutory capital (defined as the sum of policyholders surplus and mandatory contingency reserves) were ~~$1,249~~$933 million and ~~$1,773~~$1,477 million at September 30, ~~2019,~~2020, respectively, as compared to ~~$1,152~~$1,088 million and ~~$1,648~~$1,618 million at December 31, ~~2018,~~ 2019,

| Ambac Financial Group, Inc. 732020 Third Quarter FORM 10-Q |

respectively. ~~The drivers to the net increase in~~As of September 30, 2020, statutory policyholder surplus ~~were:~~

~~Surplus benefits for (i) Ambac Assurance's receipt in September 2019, in connection with an SEC action against Citibank Global Markets Inc.,~~and qualified statutory capital included $573 million principal balance of ~~$142.2~~surplus notes outstanding, $365 million ~~(ii) the recognition~~principal balance of ~~a previous deferred gain from the 2015 sale~~junior surplus notes outstanding and $138 million liquidation preference of Ballantyne bonds to Ambac UK of $28.1 million and (iii) an increase of $17.4 million in the fair value of investment securities that are recorded at the lower of amortized cost or fair value; partially offset by

Statutory net loss of $67 million for the nine months ended September 30, 2019 primarily due to loss and loss expenses from adverse development on Puerto Rico credits, including the COFINA settlement, partially offset by investment income and premiums earned; and

~~Contributions to contingency reserves of $29 million;~~

~~Surplus notes, the Ambac Note, the Tier 2 Notes and~~ preferred stock outstanding. These surplus and junior surplus notes (including related accrued interest of $526 million that is not recorded under statutory basis accounting principles), preferred stock and all other liabilities (including insurance claims and debt issued by Ambac ~~Assurance,~~Assurance) are obligations that have claims on the resources of Ambac Assurance ~~which~~that are senior to AFG's equity and therefore impact ~~Ambac's~~AFG's ability to realize residual value or receive dividends from ~~its equity in~~ Ambac Assurance.

The significant drivers to the net decrease in policyholder surplus are statutory net losses of $133 million for the nine months ended September 30, 2020, (excluding dividends from subsidiaries) and contributions to contingency reserves of $14 million.

Ambac Assurance statutory surplus is sensitive to multiple factors, including: (i) loss reserve development, (ii) approval by OCI of payments on surplus notes and junior surplus notes, (iii) ongoing interest costs associated with the Ambac Note and Tier 2 Notes, including changes to interest rates as the Ambac Note is a floating rate obligation, (iv) deterioration in the financial position of Ambac Assurance subsidiaries that have their obligations guaranteed by Ambac Assurance, (v) first time payment defaults of insured obligations, which increase statutory loss reserves, (vi) commutations of insurance policies or credit derivative contracts at amounts that differ from the amount of liabilities recorded, (vii) reinsurance contract terminations at amounts that differ from net assets recorded, (viii) changes to the fair value of pooled fund and other investments carried at fair value, (ix) settlements of representation and warranty breach claims at amounts that differ from amounts recorded, including failures to collect such amounts or receive recoveries sufficient to pay or redeem the Ambac Note and Tier 2 Notes, (x) realized gains and losses, including losses arising from other than temporary impairments of investment securities, and (xi) future changes to prescribed practices by the OCI.

~~| Ambac Financial Group, Inc.~~ 68~~2019 Third Quarter FORM 10-Q~~ |

AMBAC UK FINANCIAL RESULTS UNDER UK ACCOUNTING PRINCIPLES

Ambac UK is required to prepare financial statements under FRS 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland." Ambac UK’s shareholder funds under UK GAAP were ~~£392~~£391 million at September 30, ~~2019~~2020, as compared to ~~£263~~£387 million at December 31, 2018. The increase in shareholders’ funds was primarily due to the loss and loss expenses benefit in the period following the restructuring and commutation of Ballantyne coupled with the receipt of premiums and return on investments.2019. At September 30, ~~2019,~~2020, the carrying value of cash and investments was ~~£487~~£473 million, ~~a decrease~~an increase from ~~£499~~£470 million at December 31, ~~2018.~~2019. The ~~decrease~~increase in shareholders’ funds and cash and investments was primarily due to the ~~impact of the restructuring and commutation of Ballantyne as noted above partially offset by~~ continued receipt of premiums and ~~net~~foreign exchange gains, partially offset by insurance losses, losses within Ambac UK's investment ~~income.~~portfolio (excluding foreign exchange) and operating expense payments.

Ambac UK is also required to prepare financial information in accordance with the Solvency II Directive. The basis of preparation of this information is significantly different from both US GAAP and UK GAAP.

Available capital resources under Solvency II were a surplus of ~~£147~~£183 million at September 30, ~~2019,~~2020, of which ~~£144~~£170 million were eligible to meet solvency capital requirements. This is ~~an improvement~~a reduction from December 31, ~~2018~~2019, when available capital resources were a surplus of ~~£95~~£188 million of which ~~£90~~£178 million were eligible to meet solvency capital requirements. ~~The eligible~~Eligible capital resources at September 30, ~~2019~~2020, and December 31, ~~2018,~~2019, were in comparison to regulatory capital requirements of ~~£327~~£234 million and ~~£357~~£208 million, respectively. Therefore, Ambac UK ~~is therefore~~was deficient in terms of compliance with applicable regulatory capital requirements by ~~£183~~£64 million and ~~£267~~£30 million at September 30, ~~2019~~2020, and December 31, ~~2018,~~2019, respectively. The deficit increased as at September 30, 2020, due to an increase in regulatory capital requirements for non-life insurers in the credit and surety line of business and due to a reduction in eligible capital resources mainly caused by the fall over the period in long term discount rates. The regulators are aware of the deficiency in capital resources as compared to capital requirements and dialogue between Ambac UK management and its regulators remains ongoing with respect to options for addressing the shortcoming, although such options remain few.

NON-GAAP FINANCIAL MEASURES

In addition to reporting the Company’s quarterly financial results in accordance with GAAP, the Company currently reports two non-GAAP financial measures: Adjusted Earnings and Adjusted Book Value. The most directly comparable GAAP measures are net income attributable to common stockholders for Adjusted 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 significant U.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

•

~~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 of Ambac’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 Ambac’s emergence from bankruptcy and the 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 results without the impact of fluctuations in foreign currency exchange rates and facilitates period-to-period comparisons of Ambac's operating performance.

| Ambac Financial Group, Inc. 6974 ~~2019~~2020 Third Quarter FORM 10-Q|

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 of Ambac’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 Ambac’s emergence from bankruptcy and the 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 results without the impact of fluctuations in foreign currency exchange rates and facilitates period-to-period comparisons of Ambac's operating performance.

The following table reconciles net income attributable to common stockholders to the non-GAAP measure, Adjusted Earnings (loss) on a dollar amount and per diluted share basis, for all periods presented:


	Three Months Ended September 30,
	2020				2019
($ in millions, except share data)	$ Amount		Per Diluted Share		$ Amount		Per Diluted Share
Net income (loss) attributable to common stockholders	$	(108)	$	(2.33)	$	66	$	1.41
Adjustments:
Non-credit impairment fair value (gain) loss on credit derivatives	—		—		—		(0.01)

Insurance intangible amortization	14		0.29		17		0.37


Foreign exchange (gains) losses	1		0.03		(6)		(0.14)




Adjusted earnings (loss)	$	(93)	$	(2.01)	$	77	$	1.63

	Nine Months Ended September 30,
	2020				2019
($ in millions, except share data)	$ Amount		Per Diluted Share		$ Amount		Per Diluted Share
Net income (loss) attributable to common stockholders	$	(423)	$	(9.16)	$	(106)	$	(2.30)
Adjustments:
Non-credit impairment fair value (gain) loss on credit derivatives	1		0.02		(1)		(0.02)

Insurance intangible amortization	41		0.88		280		6.09


Foreign exchange (gain) loss	—		(0.01)		(19)		(0.42)




Adjusted earnings (loss)	$	(382)	$	(8.27)	$	154	$	3.35

Three Months Ended September 30,
2019 2018
($ in millions, except share data) $ Amount Per Diluted Share $ Amount Per Diluted Share
Net income (loss) attributable to common stockholders $ 66
$ 1.41
$ (104 ) $ (2.27 )
Adjustments:
Non-credit impairment fair value (gain) loss on credit derivatives —
(0.01 ) —
—
Insurance intangible amortization 17
0.37
26
0.58
Foreign exchange (gains) losses (6 ) (0.14 ) 2
0.03
Adjusted earnings (loss) $ 77
$ 1.63
$ (76 ) $ (1.66 )

Nine Months Ended September 30,
2019 2018
($ in millions, except share data) $ Amount Per Diluted Share $ Amount Per Diluted Share
Net income (loss) attributable to common stockholders $ (106 ) $ (2.30 ) $ 206
$ 4.43
Adjustments:
Non-credit impairment fair value (gain) loss on credit derivatives (1 ) (0.02 ) 1
0.01
Insurance intangible amortization 280
6.09
78
1.68
Foreign exchange (gain) loss (19 ) (0.42 ) 5
0.12
Adjusted earnings (loss) $ 154
$ 3.35
$ 290
$ 6.24

Adjusted Book Value. Adjusted Book Value is defined as Total 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, including Ambac’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 the Financial 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 of Ambac’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.

•Insurance intangible asset: Elimination of the financial guarantee insurance intangible asset that arose as a result of Ambac’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.

| Ambac Financial Group, Inc. 7075 ~~2019~~2020 Third Quarter FORM 10-Q|

•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.

The following table reconciles Total 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:


	September 30, 2020				December 31, 2019
($ in millions, except share data)	$ Amount		Per Share		$ Amount		Per Share
Total Ambac Financial Group, Inc. stockholders’ equity	$	1,035	$	22.59	$	1,477	$	32.41
Adjustments:
Non-credit impairment fair value losses on credit derivatives	1		0.02		—		0.01

Insurance intangible asset	(383)		(8.36)		(427)		(9.37)


Net unearned premiums and fees in excess of expected losses	389		8.50		414		9.09
Net unrealized investment (gains) losses in Accumulated Other Comprehensive Income	(152)		(3.31)		(151)		(3.31)

Adjusted book value	$	891	$	19.44	$	1,313	$	28.83

September 30, 2019 December 31, 2018
($ in millions, except share data) $ Amount Per Share $ Amount Per Share
Total Ambac Financial Group, Inc. stockholders’ equity $ 1,569
$ 34.44
$ 1,592
$ 35.12
Adjustments:
Non-credit impairment fair value losses on credit derivatives —
0.01
1
0.03
Insurance intangible asset (434 ) (9.52 ) (719 ) (15.87 )
Net unearned premiums and fees in excess of expected losses 434
9.52
462
10.19
Net unrealized investment (gains) losses in Accumulated Other Comprehensive Income (189 ) (4.14 ) (86 ) (1.89 )
Adjusted book value $ 1,381
$ 30.31
$ 1,251
$ 27.58

The ~~increase~~decrease in Adjusted Book Value was primarily attributable to the Adjusted ~~Earnings~~Loss for the nine months ended September 30, ~~2019, and the impact of lower interest rates on the value of expected installment premiums partially offset by premiums ceded under a quota share reinsurance agreement executed~~2020, excluding earned premium previously included in ~~the third quarter of 2019.~~ Adjusted ~~earnings in the nine months ended September 30, 2019, were positively impacted by the Ballantyne commutation.~~Book Value.

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,~~passage), (ii) changes to expected losses for policies which do not exceed their related unearned premiums and (iii) new reinsurance transactions.


~~Item 3.~~	~~Quantitative and Qualitative Disclosures about Market Risk~~

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk represents the potential for losses that may result from changes in the value of a financial instrument as a result of changes in market conditions. The primary market risks that would impact the value of Ambac’s financial instruments are interest rate risk, credit spread risk and foreign currency risk. As a result of declines in interest rates and increases in credit spreads during the ~~Ballantyne and COFINA commutations, as of~~nine months ended September 30, ~~2019 Ambac's investment portfolio contains a lower amount of Ambac-insured securities. Reallocation~~2020, related to the impact of the COVID-19 pandemic, along with portfolio ~~composition following these transactions has changed our disclosures relating to~~adjustments during the period, the sensitivities of ~~interest rates compared to that~~

Ambac's financial instruments have changed from those disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019.

Interest Rate Risk:

Financial instruments for which fair value may be affected by changes in interest rates consist primarily of fixed income investment securities, long-term debt and interest rate derivatives. Fixed income investment securities that are guaranteed by Ambac have interest rate risk characteristics that behave inversely to those associated with future financial guarantee claim payments. Accordingly, such securities are excluded from the interest rate sensitivity table that follows. Financial instruments of VIEs that

are consolidated as a result of Ambac financial guarantees are also excluded from Ambac's measures of interest rate risk. Changes in fair value resulting from changes in interest rates are driven primarily by the impact of interest rate shifts on the fixed income investment portfolio (which produce net fair value losses as rates increase), long-term debt and the interest rate derivatives portfolio (which produce net fair value gains as rates increase). 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 ~~credits.~~policies. 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.

| Ambac Financial Group, Inc. 762020 Third Quarter FORM 10-Q |

The interest rate derivatives portfolio is managed as a partial economic hedge against the effects of rising interest rates elsewhere in the Company, including on Ambac's financial guarantee exposures (the "macro-hedge"). ~~The~~At September 30, 2020, the interest rate sensitivity of the interest rate derivatives portfolio attributable to the macro-hedge position would produce mark-to-market gains or losses of approximately ~~$0.4~~$0.2 million for a 1 basis point parallel shift in USD benchmark interest rates up or down. This sensitivity is down from $0.4 million per 1 basis point shift at ~~September 30,~~December 31, 2019.

The following table summarizes the estimated change in fair value (based primarily on the valuation methodology discussed in Note 7. Fair Value Measurements to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Form 10-Q) on these financial instruments, assuming immediate changes in interest rates at specified levels at September 30, ~~2019:~~2020:

($ in millions) Estimated Change in Net Fair Value Estimated Net Fair Value
300 basis point rise $ 81
$ (267 )
200 basis point rise 51
(297 )
100 basis point rise 25
(323 )
Base scenario —
(348 )
100 basis point decline⁽¹⁾
(24 ) (372 )
200 basis point decline⁽¹⁾
(20 ) (368 )


~~(1)~~	~~Incorporates an interest rate floor of 0%.~~


($ in millions)	Estimated Change in Net Fair Value		Estimated Net Fair Value
300 basis point rise	$	20	$	(620)
200 basis point rise	16		(624)
100 basis point rise	13		(627)
Base scenario	—		(640)
100 basis point decline(1)	8		(632)
200 basis point decline(1)	10		(630)

~~| Ambac Financial Group, Inc.~~ (1)71~~2019 Third Quarter FORM 10-Q~~ |Incorporates an interest rate floor of 0%.

Due to the low interest rate environment as of September 30, ~~2019,~~2020, stress scenarios involving interest rate declines greater than 200 basis points are not meaningful to Ambac's portfolios.

Credit Spread Risk


~~Item 4.~~	~~Controls and Procedures.~~

Financial instruments that may be adversely affected by changes in credit spreads include Ambac’s outstanding credit derivative contracts, certain interest rate derivatives and investment assets. Changes in spreads are generally caused by changes in the market’s perception of the credit quality of the underlying obligor. Market liquidity and prevailing risk premiums demanded by market participants are also reflected in spreads and impact valuations.

The following table summarizes the estimated change in fair values on Ambac’s net derivative liabilities assuming immediate parallel shifts in reference obligation credit spreads related to written credit derivatives and counterparty credit spreads related to uncollateralized interest rate derivatives at September 30, 2020. It is more likely that actual changes in credit spreads will vary by obligor:


($ in millions)	Estimated Change in Net Fair Value		Estimated Net Fair Value
250 Basis Point Widening	$	(22)	$	(53)
50 Basis Point Widening	(5)		(36)
Base Scenario	—		(31)
50 basis Point Narrowing	5		(26)
250 basis Point Narrowing	24		(7)

Also included in the fair value of derivatives is the effect of Ambac’s creditworthiness, which reflects market perception of Ambac’s ability to meet its obligations. Generally, the need for an Ambac credit valuation adjustment is mitigated by the existence of collateral posting agreements under which adequate collateral has been posted. Derivative contracts entered into with credit exposure to financial guarantee customers are not typically subject to collateral posting agreements. As a result of runoff of uncollateralized interest rate and credit default swap liabilities, Ambac’s credit valuation adjustment included in the determination of fair value has resulted in $0.1 million reduction to derivative liabilities as of September 30, 2020. Refer to Note 7. Fair Value Measurements to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Form 10-Q for further information on measurement of the credit valuation adjustment.

Ambac’s fixed income investment portfolio contains securities with different sensitivities to and volatility of credit spreads. Fixed income securities that are guaranteed by Ambac and were purchased in Ambac's investment portfolio have credit spread risk characteristics that behave inversely to those associated with future financial guarantee claim payments. Accordingly such securities are excluded from the company's spread sensitivity measures. The following table summarizes the estimated change in fair values of Ambac’s fixed income investment portfolio assuming immediate shifts in credit spreads across all holdings other than Ambac guaranteed securities at September 30, 2020. It is more likely that actual changes in credit spreads will vary by security:


($ in millions)	Estimated Change in Net Fair Value		Estimated Net Fair Value
250 Basis Point Widening	$	(159)	$	1,817
50 Basis Point Widening	(32)		1,944
Base Scenario	—		1,976
50 Basis Point Narrowing	30		2,006
250 Basis Point Narrowing	94		2,070

Item 4. Controls and Procedures.

In connection with the preparation of this third quarter Form 10-Q, an evaluation was carried out by Ambac’s management, with the participation of Ambac’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of Ambac’s disclosure controls and procedures (as defined in rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Quarterly Report on Form 10-Q. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives. Based on its evaluation, Ambac’s Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, ~~2019,~~2020, Ambac’s disclosure controls and procedures were effective.

There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, ~~2019~~2020, that materially affected, or are reasonably

| Ambac Financial Group, Inc. 772020 Third Quarter FORM 10-Q |

likely to materially affect, the Company’s internal control over financial reporting. We have not experienced any significant change to our internal controls over financial reporting despite the fact that our employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the COVID-19 situation on our internal controls to minimize the impact on their design and operating effectiveness.

PART II. OTHER INFORMATION


~~Item 1.~~	~~Legal Proceedings~~

Item 1. Legal Proceedings

Please refer to Note ~~12.~~11. Commitments and Contingencies of the Unaudited Consolidated Financial Statements located in Part I, Item 1 in this Form 10-Q and Note ~~16.~~17: Commitments and Contingencies in Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018~~2019 for a discussion on legal proceedings against Ambac and its subsidiaries.

Item 1A. Risk Factors

You should carefully consider the risk factors set forth in the “Risk Factors” section, Item 1A to Part I in our Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, which are hereby incorporated by reference. These important factors may cause our actual results to differ materially from those indicated by our forward-looking statements, including those contained in this report. Please also see the section entitled “Cautionary Statement Pursuant to the Private Securities Litigation Reform Act of 1995” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this quarterly report on Form 10-Q. There have been no material changes to the risk factors we have disclosed in the “Risk Factors” section of our aforementioned Annual Report on Form 10-K, other than as described ~~below:~~below.

Risks Related to Insured Portfolio Losses

~~Certain judicial decisions related~~Catastrophic public health events, like the COVID-19 pandemic, that result in material disruption of economic activity can have a materially negative impact on the financial performance of issuers of public finance obligations and issuers of structured finance obligations. Such stresses could result in liquidity claims and/or permanent losses on obligations of those issuers insured by Ambac.

The emergence of the COVID-19 pandemic and the resulting containment measures have caused economic and financial disruptions that have adversely affected, and are expected to ~~the Commonwealth of Puerto Rico's PROMESA Title III proceedings may~~continue to materially adversely affect, our ~~Public Finance insured portfolio~~

~~On March 26, 2019~~business and ~~June 24, 2019,~~results of operations. Ambac insures the ~~U.S. Court~~obligations of ~~Appeals for~~a number of issuers that have been, or may in the ~~First Circuit, affirming decisions~~future be, substantially affected by the ~~U.S. District Court overseeing the PROMESA Title III proceedings for the Puerto Rico Highways~~economic effects of COVID-19, such as municipalities and ~~Transportation Authority (“PRHTA”), found that under Sections 928(a)~~securitizations, including those backed by consumer loans such as mortgages or student loans. As described more fully in Management's Discussion and ~~922(d)~~Analysis of ~~the U.S. Bankruptcy Code, municipal issuers~~Financial Condition and Results of Operations, municipalities and their authorities, agencies and instrumentalities, especially those dependent on narrow revenue ~~bonds secured by special revenues~~

streams flowing from particular economic activities, have suffered, and are permitted, but not required, to apply special revenues to pay debt service on such revenue bonds during the pendency of bankruptcy proceedings for such municipal issuers. The complainants, including Ambac Assurance, had sought an order compelling PRHTA, as the debtor,expected to continue to ~~make~~suffer, from severely depressed revenues due to shelter-in-place orders, social distancing guidelines, travel bans and restrictions, and business shutdowns as well as an economic recession brought about by the COVID-19 pandemic.

Furthermore, securitizations dependent on cash flows from payments on mortgage loans, student loans or other assets have experienced, and are expected to continue to experience, shortfalls in receipts due to borrower nonpayments. See Part I, Item 2 of this Form 10-Q, Management's Discussion and Analysis of Financial Condition and Results of Operations,Executive Summary, Financial Guarantees in Force, and Balance Sheet Commentary for further detail.

The U.S. Federal government and other governments globally have taken certain measures to aid consumers, businesses, state and local governments, and the financial markets, but the impact of such aid remains unclear. U.S. Federal and State governments and their agencies have also adopted policies or guidelines to provide emergency relief to consumers, such as limiting debt collection efforts and encouraging or requiring extensions, modifications or forbearance, with respect to certain loans and fees. Such policies or guidelines may be expanded over time as the economic effects of the pandemic become more well known. To the extent such measures cause greater incidences of missed mortgage loan, student loan or other debt service payments than would have occurred without governmental intervention, Ambac may experience higher losses in its insured portfolio of asset-backed securities.

The ultimate impact of a catastrophic public health event like COVID-19 on issuers and their obligations, and the economy in general, is by its ~~revenue bonds from pledged special revenues during~~very nature uncertain, and will be determined by a number of factors including, but not limited to, the ~~pendency of its Title III case, but the First Circuit affirmed the District Court’s dismissals~~depth and duration of the ~~complaints, holding that it~~crisis; the extent to which affected consumers, businesses, municipal entities and other debtors or sources of revenues recover from depressed economic circumstances, and the timelines for such recoveries; the level and efficacy of government support for municipal entities, consumers, businesses and the financial markets via emergency relief measures; the level and efficacy of state and local government support for consumers and businesses; the impact of governmental intervention; management of public health crisis remediation efforts; and certain socio-economic variables, such as unemployment levels. Consequently, if issuers do not have sufficient resources or financial flexibility, receive adequate measures of support or realize the appropriate level of economic recovery, their ultimate ability to service the debt insured by Ambac could ~~not compel~~be materially impaired and Ambac could suffer material permanent losses.

At this time, there are significant uncertainties surrounding the ~~issuer to make such payments. The First Circuit's decisions challenge what had been~~ultimate number of claims and the extent of losses Ambac will face as a ~~commonly understood notion in the municipal finance marketplace that municipal revenue bondholders secured by special revenues (as defined in Chapter 9~~result of the ~~U.S. Bankruptcy Code) would continue to receive payment during a bankruptcy~~economic effects of the ~~municipal issuer. Although~~COVID-19 pandemic. Actual losses may vary materially from Ambac's loss and loss expense reserves due to the ~~First Circuit’s decisions are binding only on federal district~~factors described above and ~~bankruptcy courts~~the inherent uncertainties in ~~Maine, Massachusetts, New Hampshire, Puerto Rico and Rhode Island, they introduce significant uncertainty into~~estimating losses given the public finance market, may make it more difficult for municipal instrumentalities to procure revenue bond financings in the future and increase the credit risk to bondholders of existing special revenue bonds, particularly those from weaker issuers. In the wakeevolving nature of the ~~decisions, rating agencies have taken ratings actions~~pandemic and its impact on ~~or announced their intention to review ratings given to, bonds issued across~~issuers of Ambac insured debt and the ~~country highlighting~~economy in general. Potential ultimate losses from the ~~potential contagion effect~~economic consequences of the ~~various Puerto Rico proceedings under PROMESA.~~

~~It is unclear how these rulings may ultimately impact Ambac's revenue bond municipal exposures, inclusive of Puerto Rico. However, potential impacts~~COVID-19 pandemic could ~~include ratings downgrades, decreased or more costly access to capital markets to certain issuers to refinance the insured debt or raise new debt,~~be material and lower recoveries in a restructuring or bankruptcy. At September 30, 2019, Ambac Assurance insured approximately $4.3 billion of net par of bonds of special revenue issuers, including $376 million net par of watch list exposure and $615 million net par of adversely classified exposure, $503 million of which was Puerto Rico exposure.

~~Risk Related to International Business~~

~~Uncertainty regarding the economic impact of "Brexit"~~therefore may have an adverse effect on ~~Ambac's insured international portfolio~~our results of operations and ~~the value of its foreign investment, both of which primarily reside with its subsidiary Ambac UK~~

The Government of the United Kingdom (“UK”) continues to contend with inconclusively finding resolution in the UK Parliament and with the European Union (“EU”) for the terms of the UK’s departure from the EU (“Brexit”). Current Brexit discussions do not include details of future post-Brexit trade relations. Current negotiations are designed to reach agreement on transitional arrangements covering the UK’s exit from the EU. Assuming a transition agreement is reached, a further, separate, negotiation on a future post-transition trade framework must then begin. It is envisaged that negotiation on the future trade framework would be concluded during the transitional phase, and would be influenced by the nature of the transitional arrangements agreed between the parties.

On April 10, 2019, the EU agreed to a UK Government request to extend the deadline for the occurrence in law of Brexit, being the date on which the UK leaves the European Union (the "Exit Date'). The revised Exit Date was October 31, 2019. However on September 9, 2019 the UK Parliament instructed the UKfinancial condition.

| Ambac Financial Group, Inc. 7278 ~~2019~~2020 Third Quarter FORM 10-Q|

~~Government via legislation to apply to~~Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a) Unregistered Sales of Equity Securities — No matters require disclosure.

(b) Purchases of Equity Securities By the EU for a further three month extension to the Exit Date, which the UK Government has done notwithstanding its political opposition to this Parliamentary instruction. The EU has now granted this request as a so-called 'flextension', meaning that the Exit Date is revised to January 31, 2020, however in the event Parliament approves a deal with the EU on an earlier date, then the Exit Date will be when that deal approval is granted.

Notwithstanding the political maneuvering around the Exit Date extension request, the UK Government has been attempting to build a majority in Parliament in support of a new Brexit 'deal' recently agreed between the new Prime Minister Boris Johnson's GovernmentIssuer and the EU. There has been extensive political posturing between the UK Government and Parliament in terms of that support, which on October 29, 2019 led Parliament to agree to a Government request for an election to take place on December 12, 2019. The hope is that an election will change the Parliamentary voting arithmetic such that a way forward may then be possible, however at present uncertainty continues as to likely outcomes.Affiliated Purchasers

There continues to be a material risk that transitional Brexit negotiations are inconclusive so that on the Exit Date the UK automatically exits the EU without any transitional arrangement (a “no deal Brexit”), and also with no certain path to negotiating a future trade relationship with the EU.

Absent action by the EU or member states, in the event of a no deal Brexit, the activities in the European Economic Area (“EEA”) of UK passporting insurers, including Ambac UK, will become unlawful on the Exit Date. They will lose their legal authorization to serve clients who benefit from policies issued by UK incorporated insurers under freedom of services passporting rights (and thereby may be unable to legally collect premiums or pay claims).

At September 30, 2019, Ambac UK’s insured portfolio included four policies in the EU written under current passporting rights, with an aggregate par value of $1.5 billion. In respect of these four policies, there is premium receivable of $23 million and loss and loss expense reserves (net of subrogation recoverable) of $3 million. Absent legally binding transitional arrangements, Ambac UK may be unable to collect these premiums or pay the claims to which these premiums receivable and loss and loss expense reserves relate after the Exit Date. Ambac UK’s ability to restructure these policies to mitigate this risk is limited. Nonpayment of claims under any of the affected policies could lead to the loss of control rights in the related transaction(s), which would expose Ambac UK to greater risk of loss. In addition, under applicable English law, a court may hold that Ambac UK has an enforceable obligation to pay claims irrespective of the EU regulatory position in law. Consequently Ambac UK could find itself in a position where it was not in receipt of premium on a relevant policy, but chose to pay claims to avoid loss of control rights and/or other consequences of non-payment, notwithstanding the EU regulatory characterization in law.

Additionally, if UK insurers have branches in EEA Member States they may be legally obliged to either capitalize them, as a so-called third country branch from an institution whose home state is outside the EEA, or close them down and no longer be legally represented in those EU jurisdictions. Ambac UK has a branch in Italy, with one remaining policy issued from the branch. The branch

is not capitalized separately from Ambac UK. In the event of a no-deal Brexit, the future nature and status of the branch is unclear, particularly with respect to the need for capitalization to support the one remaining branch policy. Given that Ambac UK is undercapitalized in terms of applicable regulatory capital rules it will be difficult for the UK regulator to agree to assets leaving the company for this purpose.

There is a risk that absent agreement with the Italian regulator regarding the future of the branch, under law the Italian regulator could institute insolvent winding up proceedings against the branch as an unlicensed insurance business. In this scenario the one branch policy would then be terminated by operation of law notwithstanding the prejudicial outcome to policy holders. This chain of events could in turn trigger cross defaults with a consequential loss by Ambac UK of its controlling creditor rights in many or all transactions. This would greatly inhibit Ambac UK’s ability to exercise its rights in transactions generally, and in particular with respect to mitigating potential or actual loss in those transactions.

The European Insurance and Occupational Pensions Authority (“EIOPA”) has made a series of recommendations to EU insurance regulators in light of Brexit. Acting on these recommendations European regulatory authorities have put in place (or are putting in place) legal frameworks that facilitate the orderly run off of branch operations and of insurance policies issued in EEA member states by UK insurers. The effect of these legal frameworks is to allow the continued run off of insurance policies issued in EEA member states by UK insurers prior to Exit Date that terminate after this date in the event that the draft departure agreement has not been approved prior to Exit Date.

In light of no deal Brexit risk, the UK financial regulatory authority has been actively encouraging regulated firms to put into place contingency plans, as have been EU and EU member states’ financial regulatory bodies. The Company is in discussion with the PRA and other relevant regulatory authorities to enable the continued orderly run off of its policies issued in the EEA under passporting rights as well as the Italian branch operation in line with the EIOPA recommendations and legal frameworks which have been, or are planned to be, put in place by EEA member states.

In addition to the direct impact on insurers cited above, general uncertainty and the perceptions as to the ultimate impact of Brexit may adversely affect business activity, political stability, foreign exchange rates and economic conditions in the UK, the Eurozone, and the EU, which may result in additional credit stress on Ambac UK's insured portfolio and may ultimately adversely impact Ambac's results of operations and financial condition.

~~Uncertainties regarding the expected discontinuance of the London Inter-Bank Offered Rate or any other interest rate benchmark could have adverse consequences.~~

In 2017, the U.K. Financial Conduct Authority (“FCA”), which regulates the London Interbank Offered Rate ("LIBOR"), announced that it will no longer persuade or compel banks to submit rates for the calculation of LIBOR after 2021. As a result, LIBOR and certain other indices which are utilized as benchmarks are not expected to be published after 2021. Ambac Assurance and Ambac UK insure securities, own assets and are party to certain derivative contracts and have issued debt and other obligations that

~~| Ambac Financial Group, Inc.~~ 73~~2019 Third Quarter FORM 10-Q~~ |

reference LIBOR. While regulators and market participants have suggested substitute rates for LIBOR, such as the Secured Overnight Financing Rate, the impact of the discontinuance of LIBOR is uncertain. Differences in contractual provisions of certain legacy assets and liabilities and other factors, may cause the consequences of the discontinuance of LIBOR to vary by instrument. As a result, the value of our assets, derivatives and liabilities; our costs to operate our business; and the losses associated with our insured portfolio may be effected in a way that may ultimately adversely impact Ambac’s results of operations and financial condition.


~~Item 2.~~	~~Unregistered Sales of Equity Securities and Use of Proceeds~~


~~(a)~~	~~Unregistered Sales of Equity Securities~~ — ~~No matters require disclosure~~.


~~(b)~~	~~Purchases of Equity Securities By the Issuer and Affiliated Purchasers~~

The following table summarizes Ambac's share purchases during the third quarter of ~~2019.~~2020. When restricted stock unit awards issued by Ambac vest or settle, they become taxable compensation to employees. For certain awards, shares may be withheld to cover the employee's portion of withholding taxes. In the third quarter of ~~2019,~~2020, Ambac purchased shares from employees that settled restricted stock units to meet employee tax withholdings.


	July 2020		August 2020		September 2020		Third Quarter 2020
Total Shares Purchased (1)	453		—		—		453
Average Price Paid Per Share	$	13.83	$	—	$	—	$	13.83
Total Number of Shares Purchased as Part of Publicly Announced Plan (1)	—		—		—		—
Maximum Number of Shares That may Yet be Purchased Under the Plan	—		—		—		—

July 2019 August 2019 September 2019 Third Quarter 2019
Total Shares Purchased ⁽¹⁾
54
1,136
—
1,190
Average Price Paid Per Share $ 16.85
$ 18.22
$ —
$ 18.16
Total Number of Shares Purchased as Part of Publicly Announced Plan ⁽¹⁾
—
—
—
—
Maximum Number of Shares That may Yet be Purchased Under the Plan —
—
—
—

(1) There were no other repurchases of equity securities made during the three months ended September 30, 2020. Ambac does not have a stock repurchase program.

Item 3. Defaults Upon Senior Securities — No matters require disclosure.

Item 5. Other Information

Human Capital Management

As of September 30, 2020, Ambac had 93 employees in the United States and 10 employees in the United Kingdom. Our year-to-date voluntary turnover rate has been approximately 5.2%. Ambac considers its employee relations to be satisfactory. Ambac’s focus has been on identifying and retaining key talent through individual development programs following skills assessments. Ambac’s succession planning has identified internal candidates that could fill senior management and mid-level management positions as the need arises. The Company has established a senior advisory team to work with, and advise, senior management on key initiatives, and invested in both personal and professional growth programs to identify and prepare executives for promotion within the Company. The Company continues to rely on compensation components (such as salary, long-term incentive plan awards, deferred cash awards and short-term incentive plan awards) to support employee retention. The Company incorporates performance metrics as part of the annual short-term incentive bonus offering with increased bonus potential for exceptional results. We utilize third-party benchmark data to establish market-based compensation levels. We believe that our current compensation and incentive levels reflect high performance expectations as part of our merit pay philosophy. The targeted use of long-term incentive plan awards for key talent is an important element of Ambac’s long-term retention strategy.

Item 6. Exhibits


~~(1)~~	~~There were no other repurchases of equity securities made during the three months ended September 30, 2019. Ambac does not have a stock repurchase program.~~

~~Warrants~~

Each warrant represents the right to purchase one share of Ambac common stock. The warrants are exercisable for cash at any time on or prior to April 30, 2023, at an exercise price of $16.67 per share. The warrants also have a cashless exercise provision.

On November 3, 2016, the Board of Directors of Ambac authorized a $10 million increase to the previously established warrant repurchase program. As of September 30, 2019, Ambac had repurchased 985,331 warrants totaling $8.1 million. In connection with the AMPS Exchange, Ambac issued 824,307 of the repurchased warrants on August 3, 2018, leaving 4,877,783 warrants outstanding. The remaining aggregate repurchase authorization at September 30, 2019 is $11.9 million. Refer to Note 1. Background and Business Description to the Consolidated Financial Statements included in Part II, Item 8 in the Company's Form 10-K for the year ended December 31, 2018 for further discussion of the AMPS Exchange.


~~Item 3.~~	~~Defaults Upon Senior Securities —~~ ~~No matters require disclosure~~.


~~Item 5.~~	~~Other Information —~~ ~~No matters require disclosure~~.

~~| Ambac Financial Group, Inc.~~ 74~~2019 Third Quarter FORM 10-Q~~ |


~~Item 6.~~	~~Exhibits~~



Exhibit Number						Description
Other exhibits, filed or furnished, as indicated:
~~31.1+~~10.1+						Revised form of 2020 Restricted Stock Unit Award Agreement between Ambac Financial Group, Inc. and Messrs. LeBlanc, Trick and Ksenak.
10.2+						Revised form of 2020 Performance Stock Unit Award Agreement between Ambac Financial Group, Inc. and Messrs. LeBlanc, Trick and Ksenak.
31.1+						Certification of Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) Promulgated under the Securities Exchange Act of 1934, as amended.
31.2+						Certification of Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) Promulgated under the Securities Exchange Act of 1934, as amended.
32.1++						Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS						XBRL Instance Document - the instance document does not appear in the interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH						XBRL Taxonomy Extension Schema Document.
101.CAL						XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB						XBRL Taxonomy Extension Label Linkbase Document.
101.PRE						XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF						XBRL Taxonomy Extension Definition Linkbase Document.
104						Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags or embedded within the Inline XBRL document

						+ Filed herewith. ++ Furnished herewith.

| Ambac Financial Group, Inc. 792020 Third Quarter FORM 10-Q |

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


				AMBAC FINANCIAL GROUP, INC.

Dated:			November 9, 2020	~~AMBAC FINANCIAL GROUP, INC.~~
By:
~~Dated:~~	~~November 7, 2019~~	~~By:~~	/S/ DAVID TRICK
				Name:	David Trick
				Title:	Chief Financial Officer and Treasurer (Duly Authorized Officer and Principal Financial Officer)

| Ambac Financial Group, Inc. 7580 ~~2019~~2020 Third Quarter FORM 10-Q|



	September 30, 2019						December 31, 2018
	Ambac UK		Ambac Assurance		Total VIEs		Ambac UK		Ambac Assurance		Total VIEs
Fixed income securities, at fair value:
Corporate obligations, fair value option	$	2,995,894	$	—	$	2,995,894	$	2,737,286	$	—	$	2,737,286
Municipal obligations, available-for-sale ⁽¹⁾	—		162,714		162,714		—		—		—
Total FG VIE fixed income securities, at fair value	2,995,894		162,714		3,158,608		2,737,286		—		2,737,286
Restricted cash	970		2,198		3,168		999		—		999
Loans, at fair value⁽²⁾	2,965,539		—		2,965,539		4,287,664		—		4,287,664
Derivative assets	67,921		—		67,921		66,302		—		66,302
Other assets	3,180		974		4,154		1,058		—		1,058
Total FG VIE assets	$	6,033,504	$	165,886	$	6,199,390	$	7,093,309	$	—	$	7,093,309

Accrued interest payable	$	2,656	$	—	$	2,656	$	556	$	—	$	556
Long-term debt:
Long-term debt, at fair value ⁽³⁾	4,151,433		—		4,151,433		5,268,596		—		5,268,596
Long-term debt, at par less unamortized discount	—		201,738		201,738		—		—		—
Total long-term debt	4,151,433		201,738		4,353,171		5,268,596		—		5,268,596
Derivative liabilities	1,779,077		—		1,779,077		1,712,062		—		1,712,062
Other liabilities	36		—		36		30		—		30
Total FG VIE liabilities	$	5,933,202	$	201,738	$	6,134,940	$	6,981,244	$	—	$	6,981,244
Number of FG VIEs consolidated	6		1		7		7		—		7



	Carrying Value of Assets and Liabilities
	Maximum Exposure To Loss ⁽¹⁾		Insurance Assets ⁽²⁾		Insurance Liabilities ⁽³⁾		Net Derivative Assets (Liabilities) ⁽⁴⁾
September 30, 2019:
Global structured finance:
Collateralized debt obligations	$	—	$	—	$	—	$	—
Mortgage-backed—residential	5,641,415		1,943,385		547,002		—
Other consumer asset-backed	1,450,873		19,829		210,512		—
Other commercial asset-backed	352,385		6,387		6,209		—
Other	998,018		7,739		19,187		7,934
Total global structured finance	8,442,691		1,977,340		782,910		7,934
Global public finance	23,058,272		317,692		320,883		(422		)
Total	$	31,500,963	$	2,295,032	$	1,103,793	$	7,512

December 31, 2018:
Global structured finance:
Collateralized debt obligations	$	9,787	$	—	$	—	$	(2	)
Mortgage-backed—residential	6,713,437		1,859,121		546,682		—
Other consumer asset-backed	1,700,984		15,435		238,234		—
Other commercial asset-backed	873,343		20,735		12,264		—
Other	2,122,648		53,462		301,260		7,170
Total global structured finance	11,420,199		1,948,753		1,098,440		7,168
Global public finance	24,145,956		309,071		335,437		(1,457		)
Total	$	35,566,155	$	2,257,824	$	1,433,877	$	5,711



	Unrealized Gains (Losses) on Available for Sale Securities ⁽¹⁾			Amortization of Postretirement Benefit ⁽¹⁾			Gain (Loss) on Foreign Currency Translation ⁽¹⁾			Credit Risk Changes of Fair Value Option Liabilities ^{(1) (2)}			Total
Three Months Ended September 30, 2019:
Beginning Balance	$	157,304		$	8,919		$	(145,489	)	$	(1,646	)	$	19,088
Other comprehensive income (loss) before reclassifications	49,714			—			(23,570		)	—			26,144
Amounts reclassified from accumulated other comprehensive income (loss)	(18,429		)	(322		)	—			(74		)	(18,825		)
Net current period other comprehensive income (loss)	31,285			(322		)	(23,570		)	(74		)	7,319
Balance at September 30, 2019	$	188,589		$	8,597		$	(169,059	)	$	(1,720	)	$	26,407

Three Months Ended September 30, 2018:
Beginning Balance	$	153,634		$	9,479		$	(114,567	)	$	(2,692	)	$	45,854
Other comprehensive income (loss) before reclassifications	90,742			—			(8,873		)	—			81,869
Amounts reclassified from accumulated other comprehensive income (loss)	(29,935		)	(303		)	—			340			(29,898		)
Net current period other comprehensive income (loss)	60,807			(303		)	(8,873		)	340			51,971
Balance at September 30, 2018	$	214,441		$	9,176		$	(123,440	)	$	(2,352	)	$	97,825

Nine Months Ended September 30, 2019:
Beginning Balance	$	85,903		$	8,874		$	(141,527	)	$	(1,965	)	$	(48,715	)
Other comprehensive income (loss) before reclassifications	174,179			689			(27,532		)	—			147,336
Amounts reclassified from accumulated other comprehensive income (loss)	(71,493		)	(966		)	—			245			(72,214		)
Net current period other comprehensive income (loss)	102,686			(277		)	(27,532		)	245			75,122
Balance at September 30, 2019	$	188,589		$	8,597		$	(169,059	)	$	(1,720	)	$	26,407

Nine Months Ended September 30, 2018:
Beginning Balance	$	30,755		$	10,640		$	(93,634	)	$	—		$	(52,239	)
Adjustments to opening balance, net of taxes (3)	—			—			—			(2,900		)	(2,900		)
Adjusted balance, beginning of period	30,755			10,640			(93,634		)	(2,900		)	(55,139		)
Other comprehensive income before reclassifications	264,318			(556		)	(29,806		)	—			233,956
Amounts reclassified from accumulated other comprehensive income	(80,632		)	(908		)	—			548			(80,992		)
Net current period other comprehensive income	$	183,686		$	(1,464	)	$	(29,806	)	$	548		$	152,964
Balance at September 30, 2018	$	214,441		$	9,176		$	(123,440	)	$	(2,352	)	$	97,825



	Future Premiums to be Collected ⁽¹⁾		Future Premiums to be Earned Net of Reinsurance ⁽¹⁾
Three months ended:
December 31, 2019	$	11,888	$	10,507
Twelve months ended:
December 31, 2020	41,442		40,407
December 31, 2021	35,601		36,938
December 31, 2022	35,292		34,531
December 31, 2023	33,792		32,345
Five years ended:
December 31, 2028	147,828		135,566
December 31, 2033	108,291		90,347
December 31, 2038	57,282		46,459
December 31, 2043	24,772		16,205
December 31, 2048	11,298		6,637
December 31, 2053	2,251		1,314
December 31, 2058	31		20
Total	$	509,768	$	451,276



Amortization expense ⁽¹⁾
2019 (three months)	$	11,918
2020	44,390
2021	39,019
2022	35,425
2023	32,266
Thereafter	270,506



Level 3 - Investments by Class:
	Nine Months Ended September 30, 2019								Nine Months Ended September 30, 2018
	Other Asset Backed Securities			Non-Agency RMBS		Total Investments			Other Asset Backed Securities			Non-Agency RMBS			Total Investments
Balance, beginning of period	$	72,071		$	—	$	72,071		$	72,540		$	736,017		$	808,557
Total gains/(losses) realized and unrealized:
Included in earnings	1,301			—		1,301			1,115			34,727			35,842
Included in other comprehensive income	7,040			—		7,040			(666		)	(52,138		)	(52,804		)
Purchases	—			—		—			—			—			—
Issuances	—			—		—			—			—			—
Sales	—			—		—			—			—			—
Settlements	(991		)	—		(991		)	(895		)	(713,297		)	(714,192		)
Transfers out of Level 3	—			—		—			—			(5,309		)	(5,309		)
Balance, end of period	$	79,421		$	—	$	79,421		$	72,094		$	—		$	72,094
The amount of total gains/(losses) included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date	$	—		$	—	$	—		$	—		$	—		$	—



Level 3 - Derivatives by Class:
	Three Months Ended September 30, 2019									Three Months Ended September 30, 2018
	Interest Rate Swaps			Credit Derivatives			Total Derivatives			Interest Rate Swaps			Credit Derivatives			Total Derivatives
Balance, beginning of period	$	63,131		$	(861	)	$	62,270		$	46,939		$	(1,326	)	$	45,613
Total gains/(losses) realized and unrealized:
Included in earnings	11,106			528			11,634			(2,330		)	250			(2,080		)
Included in other comprehensive income	—			—			—			—			—			—
Purchases	—			—			—			—			—			—
Issuances	—			—			—			—			—			—
Sales	—			—			—			—			—			—
Settlements	(1,085		)	(89		)	(1,174		)	(1,197		)	(99		)	(1,296		)
Balance, end of period	$	73,152		$	(422	)	$	72,730		$	43,412		$	(1,175	)	$	42,237
The amount of total gains/(losses) included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date	$	11,106		$	437		$	11,543		$	(2,330	)	$	151		$	(2,179	)



	Municipal Obligations		Corporate Obligations ⁽³⁾		Mortgage and Asset- backed Securities		Total		Weighted Average Underlying Rating ⁽¹⁾
September 30, 2019:
Ambac Assurance Corporation⁽²⁾	$	172,296	$	578,831	$	455,455	$	1,206,582	CCC-
National Public Finance Guarantee Corporation	11,568		—		—		11,568		BBB-
Total	$	183,864	$	578,831	$	455,455	$	1,218,150	CCC-

December 31, 2018:
Ambac Assurance Corporation ⁽²⁾	$	833,241	$	656,473	$	599,185	$	2,088,899	CC
National Public Finance Guarantee Corporation	15,600		—		—		15,600		BBB-
Total	$	848,841	$	656,473	$	599,185	$	2,104,499	CC



	Fair Value
Class of Funds	September 30, 2019		December 31, 2018		Redemption Frequency	Redemption Notice Period
Real estate properties⁽¹⁾	$	15,321	$	16,123	quarterly	10 business days
Interest rate products ^{(2) (7)}	234,758		177,357		daily, weekly or monthly	0 - 30 days
Illiquid investments⁽³⁾	53,445		84,297		quarterly if permitted	180 days if permitted
Insurance-linked investments⁽⁴⁾	3,179		29,318		quarterly	90-120 days
Equity market investments^{(5) (7)}	50,342		43,954		daily	0 days
Credit products ⁽⁶⁾	61,095		—		quarterly	90 days
Total equity investments in pooled funds	$	418,140	$	351,049



	Three Months Ended			Nine Months Ended
	September 30, 2019			September 30, 2019
Operating lease cost	$	2,208		$	5,822
Variable Lease Cost	50			351
Sublease income	(281		)	(626		)
Total lease cost	$	1,977		$	5,547



	September 30, 2019
Operating leases:
Operating lease right of use assets	$	25,906
Operating lease liabilities	29,600
Weighted average remaining lease term:
Operating leases	10.0 years
Weighted average discount rate:
Operating leases	7.8		%



As of 9/30/2019	Operating Leases
2019 (three months)	$	1,108
2020	4,138
2021	4,014
2022	4,014
2023	4,014
Thereafter	26,147
Total lease payments	43,435
Less: imputed interest	(13,835		)
Total	$	29,600



($ in billions)	September 30, 2019		December 31, 2018		Variance
Total	$	39.0	$	46.9	$	(8.0	)	(17	)%
ACC	7.7		10.9		(3.1		)	(29	)%
Watch list	8.0		9.0		(1.1		)	(12	)%



($ in millions)
Cash and short-term investments	$	327
Other investments ⁽¹⁾	114
Receivables ⁽²⁾	32
Total	$	473



($ in millions)
Net income ⁽¹⁾	$	19
Gain (loss) on foreign currency translation	(28		)
Unrealized (losses) on non-functional currency available-for-sale securities	(17		)
Impact on total comprehensive income (loss)	$	(26	)



($ in millions)	Bond Type	Ambac Ratings ⁽¹⁾	Net Par Outstanding ⁽²⁾		% of Total Net Par Outstanding
New Jersey Transportation Trust Fund Authority - Transportation System	Lease and Tax-backed Revenue	BBB+	$	778	2.0	%
Massachusetts Commonwealth - GO	General Obligation	AA	586		1.5	%
Mets Queens Baseball Stadium Project, NY, Lease Revenue	Stadium	BBB	549		1.4	%
Hickam Community Housing LLC	Housing Revenue	BBB	466		1.2	%
Bragg Communities, LLC	Housing Revenue	A-	416		1.1	%
Puerto Rico Highways & Transportation Authority, Transportation Revenue	Lease and Tax-backed Revenue	BIG	409		1.0	%
Puerto Rico Infrastructure Financing Authority, Special Tax Revenue	Lease and Tax-backed Revenue	BIG	403		1.0	%
New Jersey Economic Development Authority - School Facilities Construction	Lease and Tax-backed Revenue	BBB+	400		1.0	%
Monterey Bay, CA - Military Housing	Housing Revenue	BBB+	324		0.8	%
Fort Bliss/White Sand Missile Range Housing LP	Housing Revenue	BBB+	307		0.8	%
Total			$	4,638	11.9	%



($ in millions)	Bond Type	Ambac Rating⁽¹⁾	Net Par Outstanding		% of Total Net Par Outstanding
Progress Energy Carolinas, Inc.	Investor Owned Utility	A-	$	450	1.2	%
Timberlake Financial, LLC	Structured Insurance	BBB	414		1.1	%
Wachovia Asset Securitization Issuance II, LLC 2007-HE2	Mortgage Backed Securities	BBB	406		1.0	%
Wachovia Asset Securitization Issuance II, LLC 2007-HE1	Mortgage Backed Securities	BBB	275		0.7	%
Option One Mortgage Loan Trust 2007-FXD1	Mortgage Backed Securities	BIG	215		0.6	%
Terwin Mortgage Trust Asset-Backed Certificates, Series 2006-6	Mortgage Backed Securities	BIG	210		0.5	%
Impac CMB Trust Series 2005-7	Mortgage Backed Securities	BIG	182		0.5	%
Ownit Mortgage Trust 2006-OT1	Mortgage Backed Securities	BIG	180		0.5	%
Countrywide Asset-Backed Certificates Trust 2005-16	Mortgage Backed Securities	BIG	178		0.5	%
Basin Electric Power Cooperative	Investor Owned Utility	A-	168		0.4	%
Total			$	2,678	6.9	%



December 31, 2018:
RMBS	$	3,716	$	696	$	(1,995	)	$	(14	)	$	(1,313	)
Domestic Public Finance	3,987		1,095		(383		)	(73		)	639
Student Loans	530		271		(39		)	(4		)	228
Ambac UK and Other Credits	1,170		294		(5		)	(16		)	273
Loss expenses	—		66		—			—			66
Totals	$	9,403	$	2,422	$	(2,422	)	$	(107	)	$	(107	)



	July 2019		August 2019		September 2019		Third Quarter 2019
Total Shares Purchased ⁽¹⁾	54		1,136		—		1,190
Average Price Paid Per Share	$	16.85	$	18.22	$	—	$	18.16
Total Number of Shares Purchased as Part of Publicly Announced Plan ⁽¹⁾	—		—		—		—
Maximum Number of Shares That may Yet be Purchased Under the Plan	—		—		—		—