Sunteți pe pagina 1din 15

Ambac Financial Group September 2013

Mietek Biskupski, mietekbiskupski@yahoo.com

Overview Ambac Financial Group, Inc. (AFGI, Ambac or the Company) was founded in 1991 and insures public and structured finance obligations through its principal operating subsidiary, Ambac Assurance (AAC or the General Account). Ambac Assurance grew its premium volumes by moving into insured real-estate-based securities and student loans, increasing premiums over 250% between 1999 and 2008, and suffering heavy losses for their exposure starting in 2007. In September 2008 rating agencies started to downgrade Ambac, and Ambac Assurance stopped writing new insurance for municipal bonds the same year. Without a go-forward business model, suffering mounting losses in its structured finance portfolio and with a bond maturity looming in August 2011, Ambac filed for Chapter 11 bankruptcy in November 2010. Emerging from bankruptcy in May 2013, Ambac Assurance is currently in runoff, no longer writing new business and trying to minimize losses on its insured portfolio and maximize returns on its investment portfolio. The public finance book was given claims-paying priority and the structured finance division was split-off into a segregated account. With its insurance portfolio in run-off, Ambacs goal is its maximize its investment in AAC by reducing recoveries on R&W breaches, developing new business initiatives to maximize the value of its NOLs and potential policy commutations. As a back-end equity, Ambac has potentially significant sources of value: 1) favorable R&W putback recoveries, 2) policy commutations and bond repurchases, 3) NOL utilizations, 4) reserve releases, and 5) the recognition of the unearned premiums over time on their municipal book. Plan of Reorganization AFGI voluntarily filed Chapter 11 on November 8, 2010 in the United States Bankruptcy Court for the Southern District of New York. The Companys Fifth Amended Plan of Reorganization was confirmed by the Bankruptcy Court on March 14, 2012 As part of emerging from bankruptcy, Ambac executed a closing agreement with the IRS on April 30, 2013, to settle a dispute on accounting losses under CDS contracts and finalize the value of its NOLs. AFGI paid $1.9M and the segregated account paid $100M to the United States for back taxes and the IRS confirmed the Company to have $3.4B of NOLs available for carry-forward use. On May 1, 2013 (the Effective Date), the Reorganization Plan became effective and Ambac emerged from bankruptcy. Ambac distributed 45,000,000 shares of new common stock (AMBC) and 5,047,138 warrants (AMBCW) with an exercise price of $16.67 that can be exercised any time prior to April 30, 2023: 1) 43,946,750 shares to discharged senior debt of $1,246.1M; 2) 378,250 shares to discharged general unsecured claims of $14.3M; and 3) 675,000 shares to discharged subordinate debt of $444.2M. A further 10,000 shares can be issued to resolve remaining disputed general unsecured claims. Warrants of (1) 42,424 to allowed general unsecured claims and (2) 5,004,714 to subordinate debt securities were also issued. Ambacs old common stock received no recovery and was cancelled. Plan of Rehabilitation and the Segregated Account In March 2010, Ambac Assurance established the Segregated Account for an orderly run-off the Companys structured finance portfolio under the Wisconsin Office of the Commissioner of Insurance (OCI).

Ambac Financial Group September 2013

Mietek Biskupski, mietekbiskupski@yahoo.com

On the Effective Date (May 1, 2013) AAC transferred $30M from an escrow account to AFGI and the Segregated Account issued a Junior Surplus Note in the amount of $350M to AFGI. Via a secured note and a reinsurance agreement, all claims paying resources of AAC are rendered to pay liabilities at the Segregated Accountincluding Segregated Account Surplus Notes and Junior Surplus Notessubject to AAC maintaining a minimum policy holders surplus of $100M. In 2010, Ambac Assurance issued a 4.5% $2.0B Secured Note due in 2050 to the Segregated Account, on which the Segregated Account has the ability to demand payment to pay claims and other liabilities, though no payments can be made via the Secured Note if AACs policyholders surplus is below $100M. If liabilities exceed the $2.0B Secured Note, the Segregated Account can further demand payment under an excess of loss Reinsurance Agreement provided by AAC to pay claims, settlements or commutation payments, or surplus note payments, subject to $100M minimum policyholders surplus at AAC. In September 2012, the Segregated Account began paying policy claims in 25% cash and 75% Surplus Notes on the Segregated Account.

Recent Events The Rehabilitator may seek approval for the Segregated Account to make cash payments in excess of 25% on approx. 14 insured securities. This will allow cash flow in the related securitization trusts to reimburse AAC. Without making these full payments, AAC would realize lower levels of reimbursements as cash flow would be lost to uninsured holders. The Rehabilitator is seeking rulings from the IRS on amendments to the Segregated Account Rehabilitation Plan. The amendments would be for the Segregated Account to record permitted policy claims as outstanding policy obligations that accrue at 5.1%, rather than issue surplus notes.

Ambac Financial Group September 2013

Mietek Biskupski, mietekbiskupski@yahoo.com

FINANCIALS Until early 2007, nearly 50% of the new issue public finance market was insured, with approx. 25% market share to Ambac. For the full year 2006, public finance new issuance was $383B, with 48% of the new issue market receiving insurance and Ambac having 23% market share. Looking for growth outside its staid realm in municipal finance, Ambac moved into structured finance and grew its annual premiums nearly 3x from 1999 to 2008. Prior to this growth in premiums and exposures, Ambac enjoyed a loss ratio of approx. 4%-5% in 1999-2000 and was able to maintain a combined ratio of 23% or below until 2004. Starting in 2007 the loss ratio grew well over 100%, and reached over 600% in 2008 alone.
PREMIUM GROWTH and UNDERWRITING DECLINE
USD Millions

1999 Net premiums earned (financial g'tee)


Y/Y change

2000 311
18%

2001 379
22%

2002 472
25%

2003 620
31%

December 31, 2004 2005 717


16%

2006 811
(1%)

2007 841
4%

2008 1,023
22%

2009 797
(22%)

2010 546
(31%)

264

816
14%

Loss and loss expense ratio Underwriting expense ratio Combined ratio Source: Company reports

4.2% 18.2% 22.4%

4.8% 17.1% 21.9%

5.3% 17.0% 22.3%

6.5% 15.3% 21.8%

8.2% 13.8% 22.0%

9.1% 13.9% 23.0%

17.3% 13.6% 30.9%

2.3% 15.3% 17.6%

148.4% 15.2% 163.6%

619.0% 19.9% 638.9%

556.9% 20.8% 577.7%

194.4% 34.4% 228.8%

Ambacs Public, Structured and International Finance books have been in run-off since early 2007 and the Companys financial guarantee exposure has contracted significantly through the credit crisis. Run-off and policy commutations continue to dramatically reduce exposure, a source of considerable value for equity and junior security holders. Though Ambacs appearance in the market of increasing strength may complicate its commutation efforts, a 12% reduction in exposure in the first 6 months of 2013 alone is highly promising.

Ambac Financial Group September 2013


NET FINANCIAL GUARANTEE EXPOSURES
USD Millions Net Par Value

Mietek Biskupski, mietekbiskupski@yahoo.com

2004 Public Finance: Lease and tax backed General obligation Utility Transportation Higher education Housing Healthcare Other Total Public Finance
Y/Y % change

2005 82,584 57,982 36,877 23,718 20,203 26,994 10,152 5,556 264,066
10.2%

2006 89,042 62,834 38,313 24,979 22,068 27,849 10,996 6,181 282,262
6.9%

2007 88,147 63,977 37,976 25,466 20,685 11,531 27,161 6,010 280,953
(0.5%)

FYE 2008 77,060 58,296 32,166 22,306 17,959 10,862 15,115 4,457 238,221
(15.2%)

2009 73,081 54,047 30,835 22,501 16,577 10,247 11,987 3,892 223,167
(6.3%)

2010 65,843 48,241 26,360 20,722 15,279 9,878 9,603 3,423 199,349
(10.7%)

2011 59,864 42,959 22,529 18,945 13,618 8,823 7,824 2,255 176,817
(11.3%)

2012 50,415 34,623 18,651 13,892 10,382 8,176 5,266 1,613 143,018
(19.1%)

June 30, 2013 46,876 31,216 16,503 11,185 8,916 7,772 4,491 1,491 128,450
(10.2%)

Segregated Account June 30, 2013 -11 429 335 --94 -869

Percent held at Segregated Account -0% 2% 2% --2% -1%

76,007 49,394 36,326 21,188 18,056 23,977 9,163 5,588 239,699

Structured Finance: Mortgage-backed & home equity Investor-owned utilities Other CDOs Studen loan Asset-backed and conduits CDO of ABS >25% MBS Other Total Structured Finance
Y/Y % change

53,148 28,858 900 15,135 14,646 15,449 4,318 132,454

48,869 32,505 7,533 18,213 16,538 16,398 4,296 144,352


9.0%

46,239 34,815 20,145 20,423 18,404 17,345 5,212 162,583


12.6%

43,078 22,174 18,372 17,055 36,407 29,127 4,485 170,698


5.0%

36,995 19,988 16,644 14,650 25,443 23,190 3,499 140,409


(17.7%)

32,407 13,212 18,313 14,518 16,455 16,718 3,092 114,715


(18.3%)

27,488 10,685 11,463 11,408 10,005 -2,750 73,799


(35.7%)

23,164 9,049 8,060 7,824 4,732 -2,316 55,145


(25.3%)

19,117 7,071 5,941 5,411 2,905 -1,914 42,359


(23.2%)

17,447 6,299 4,874 2,603 2,259 -1,905 35,387


(16.5%)

17,447 59 363 4,810 --317 22,996

91% 1% 6% 89% --17% 54%

International Finance: Investor-owned and public utilities Asset-backed and conduits Sovereign/sub-sovereign Transportation Other CDOs Mortgate-backed & home equity Other Total International Finance
Y/Y % change

15,553 35,831 5,965 5,157 4,110 19,644 1,019 87,279

15,151 23,427 8,052 5,156 3,585 14,627 669 70,667


(19.0%)

17,642 19,978 10,531 6,524 6,344 11,951 1,228 74,198


5.0%

10,384 19,290 7,347 15,572 7,784 10,106 1,891 72,374


(2.5%)

8,492 16,383 5,980 12,784 6,870 3,669 1,502 55,680


(23.1%)

10,388 13,691 6,859 7,584 9,083 3,386 1,533 52,524


(5.7%)

10,861 10,738 7,119 6,744 6,775 1,898 1,571 45,706


(13.0%)

10,510 9,560 7,282 5,914 4,375 1,397 1,504 40,542


(11.3%)

10,314 8,702 7,289 6,002 3,191 1,268 1,490 38,256


(5.6%)

9,080 7,940 6,868 5,049 1,388 954 1,325 32,604


(14.8%)

---238 616 --854

---4% 19% --2%

Grand Total
% change from prior period

459,432
na

479,085
4.3%

519,043
8.3%

524,025
1.0%

434,310
(17.1%)

390,406
(10.1%)

318,854
(18.3%)

272,504
(14.5%)

223,633
(17.9%)

196,441
(12.2%)

24,719

11%

Source: Company reports

Ambac Financial Group September 2013

Mietek Biskupski, mietekbiskupski@yahoo.com

SOURCES OF VALUE While unable to write new business and largely unable to dividend cash to the holding company, Ambac maintains several sources of value that could provide value significantly above current book equity, including: R&W claims, NOLs, potential reserve releases, and unearned premium revenue.

1. R&W Claims Ambac records its recoveries on representation & warranty claims on RMBS transactions as either subrogation recoveries against loss reserves (when R&W recoveries are expected to be less than paid claims) or as a subrogation recoverable (R&W recoveries are expected to exceed paid claims). Prior settlements by insurers (eg, MBIA, Assured Guaranty) against mortgage underwriters provide an opportune path for Ambac to follow, and recent case law has strengthened the bargaining position for monoline insurers. As of 2Q13, Ambac records $2.8B of R&W recoveries on the balance sheet and is pursuing judgments against Bank of America, JP Morgan, EMC Mortgage Corporation and First Franklin Financial, among others.
SUBROGATION RECOVERIES
2Q13 USD Millions

Loss and loss expense reserve (net of potential subrogation recoveries of $2,313.5M) Subrogation recoverable (includes gross potential recovery of $865.7M) Claim liability Subrogation recoveries Subrogation recoverable Total subrogation recovery
2Q13 10-Q, p34

6,042.6 (501.1) 5,541.6 2,313.5 501.1 2,814.5

Source: Company reports

Precedents MBIA. On May 7, 2013, BAC entered into a settlement with MBIA to resolve R&W litigation. As of 1Q13, the mortgages (1st and 2nd lien) in RMBS trusts covered by the settlement had an original principal balance of $54.8B and an unpaid principal balance of $19.2B. BAC will give MBIA consideration of $1.565B in cash, transfer $95M of MBIA notes, and terminate CDS contracts guaranteed by MBIA. BAC will also provide MBIA with a $500M secured credit facility and receive warrants to purchase 4.9% of MBIAs stock at $9.59 per share. Credit Suisse estimates (May 2013) the settlement amount to be $3B or approx. 70% of MBIAs estimated claims. Syncora. In July 2012, BAC settled with Syncora Guarantee for $375M. As of May, 2010, Syncora paid more than $145M in claims and had been given notice of another $257M, so the settlement represents approx. 90% of Syncoras losses. Assured Guaranty. In April, 2011, BAC agreed to pay $1.1B to Assured Guaranty to resolve R&W claims on 29 RMBS trusts. In addition, BAC entered into a loss-sharing agreement to reimburse Assured Guaranty for 80% of all paid losses on 21 first lien RMBS transactions, up to $6.6B of aggregate losses. In May, 2013 Assured Guaranty settled with UBS on RMBS R&W claims, receiving an initial cash payment of $358M and a loss-sharing reinsurance agreement, where UBS will reimburse Assured Guaranty for 85% of all future losses on specified RMBS transactions.

Ambac Financial Group September 2013

Mietek Biskupski, mietekbiskupski@yahoo.com

Assured Guaranty has so far (1Q13) received $3.4B in R&W put-back receipts for past and future recoveries and is pursuing additional litigation. AGOs 1Q13 RMBS outstanding of $17.1B compares to Ambacs $13.5B. The Companys current estimates consider they will receive subrogation recoveries of $1,488M in 2014 and $1,009M in 2015. A change in ultimate recoveries would have a significant impact on adjusted book value and ability to pay claims. Recent Case law improves environment for R&W settlements. On 2 April 2013, a New York intermediate appellate court ruled that an RMBS loan need not be in default to trigger [a banks] obligation to repurchase it from an RMBS or CMBS trust. The defendant, Countrywide Home Loans, Inc., argued that the repurchase obligation is only triggered when a loan defaults. MBIA Insurance Corporation argued that the repurchase obligation is triggered not only at the time of default, but if the originator inaccurately represented the credit quality of the loan and if that loan had a higher risk of loss than originally disclosed. The court ruled favorably with the monolines view. 2. NOLs According to an August 2013 CreditSights report, $166M of free NOLs ($245M of free NOLs were available at AAC as of 1Q13). These NOLs were generated by AAC after September, 2011 and will be used by AAC prior to any NOLs requiring tolling payments. $3.65B of NOLs were allocated to AAC as part of the IRS agreement, subject to tolling payments to AFGI on the below scale. The IRS will collect approx. 15% of these payments to AFGI from AAC for use of these NOLs.
NOL Usage Tier A B C D NOL TOLLING AGREEMENT Allocated AAC NOL Amount First $479M Next $1,057M after Tier A Next $1,057M after Tier B Next $1,057M after Tier C Percentage 15% 40% 10% 15% 21%

Average rate for all NOLs: Total: $3,650M Source: Company reports

AFGI currently has an additional ~$1.3B of NOLs, and the Company expects to receive additional NOLs from IRS Rule 166 relating to the cost basis of impaired securities. While the Company has not disclosed the expected amount, it wont be huge, likely somewhere less than $1B, and would be split between AFGI and AAC without tolling payments.
NOL VALUATION

2Q13 USD Millions

NOL balance Taxes per year 250 300 350


Discount rate:

Years to use 7.2 6.0 5.2


10.0%

5,151 NPV 1,279 1,354 1,411

Subject to 18 year maximum use due to NOL expiries 2029-2034.

Source: Estimates

Protecting NOLs. The Company considers its NOLs to be a valuable asset, which would be endangered by an ownership change if shareholders owning 5% or more of Ambacs stock increased their holdings by 50% or more over a rolling three year period. Ambacs Amended and Restated Certificate of Incorporation prohibits

Ambac Financial Group September 2013

Mietek Biskupski, mietekbiskupski@yahoo.com

transfers of common stock where (i) the transferee would become the beneficial owner of 5% or more of the Companys outstanding stock or (ii) the percentage stock ownership interest in the Company of any existing beneficial owner of 5% or more of the Companys outstanding stock would be increased. 3. Positive Optionality on Reserve Releases
TOTAL LOSS RESERVES
2Q13 USD Millions Number of Gross par Gross Loss Reserves Reserves % of Par Credits Outstanding

RMBS Student Loans Domestic Public Finance Other credits Loss adjustment expenses Total

182 40 82 9 -313

12,889 3,020 3691 2,032 -21,632

3,448 1,064 237 679 114 5,542

27% 35% 6% 33% -26%

Gross loss reserves of $5,542M are included in the balance sheet as Loss and loss expense reserve ($6,043M) and Subrogation recoverable ($501M). Gross loss reserves are net of subrogation recoveries Included in Gross Loss Reserves are $3,752M of unpaid claims to policies allocated to the Segregated Account. 2Q13 10-Q, p 107 Source: Company reports

Ambac has reserved a full 26% of its par exposure, including 27% of its RMBS exposure and 35% of its Student Loan exposure. Even though its gross par exposure has declined in 1H13 and the Company has recorded reserve releases to bolster its income, reserve levels have actually gained in conservatism due to the pace of commutations, increasing a full 2% of exposure in 1H13.
Ambac RMBS RESERVES

2Q13
USD Millions Gross par Gross reserve Reserves before subrogation Subrogation recoveries Loss reserve Reserves Outstanding before subrogation net of subrogation net of subrogation

Second-lien First-lien Mid-prime First-lien Sub-prime Other Total 4Q12


USD Millions

4,997 4,278 3,274 340 12,889

1,887 2,623 1,176 157 5,843

38% 61% 36% 46% 45%

(1,509) (456) (430) -(2,395)

378 2,167 746 157 3,448

8% 51% 23% 46% 27%

Gross par

Gross reserve

Reserves before subrogation

Subrogation recoveries

Loss reserve

Reserves

Outstanding before subrogation

net of subrogation net of subrogation

Second-lien First-lien Mid-prime First-lien Sub-prime Other Total


2Q13 10-Q, p 109

5,415 4,930 3,478 304 14,127

1,930 2,655 1,305 193 6,083

36% 54% 38% 63% 43%

(1,515) (528) (480) -(2,523)

415 2,127 825 193 3,560

8% 43% 24% 63% 25%

Source: Company reports

A decline in housing starts since 2007 has eaten through the excess inventory built up in the 2003-2006 housing overbuild years, which should lead to home price increases and lower reserve requirements, closer in line with monoline peer Assured Guaranty.

Ambac Financial Group September 2013


US Housing Starts

Mietek Biskupski, mietekbiskupski@yahoo.com

2500
2000 1500 1000 500

SAAR, in thousands of units. Source: Bloomberg.

The long-run average of 1.5M new homes per year to meet population growth was exceeded due to cheap financing, but an underbuild since the recession has led to this excess inventory being worked through and an uptick in housing construction has occurred. Housing starts in April 2013 have increased 13.1% Y/Y to 853k units.

S&P/Case-Shiller 20 Home Price Index


250

200

150

100

50

Source: Bloomberg.

The S&P/Case-Shiller Composite-20 Home Price Index implies home prices have stabilized after the housing boom/bust and are starting to rebound from current levels. The Mar-13 index value has increased 10.9% Y/Y, signaling a recovery in home prices and the housing market. Every 1% incremental RMBS reserve release, due to a recovery in the housing market or expectations closer to Assured Guaranty, will yield an additional $230M of equity value.

Ambac Financial Group September 2013


POTENTIAL RESERVE RELEASES
2Q13 USD Millions Reserves % of Par Gross Loss

Mietek Biskupski, mietekbiskupski@yahoo.com

Gross par

Reserves Outstanding

Total

26%
Reserves % of Par

5,542
Gross Loss Reserves

21,632
Reserve Releases

26% 24% 22%


Source: Company reports and estimates

5,542 5,109 4,677

-433 865

4. Realization of Unearned Premium Revenue Insurance premiums in the municipal market are paid in the form of non-refundable upfront premiums, collected at issuance, and are recognized over time. Before the underlying municipal bonds mature or are called, the upfront premiums received are recorded as a liability on the balance sheet as unearned revenue. Multiplying the balance sheet value of $2.6B in unearned premiums by the combined ratio of ~24% the Company experienced before it grew its premium volume outside of the municipal business provides $1.9B$2.0B of additional equity value to be recognized over the life of these policies. As of 2Q12, the Company records $1.7B of net unearned premiums in excess of expected losses, which may prove conservative if the post-2000 recession is an accurate guide to loss ratios. The fate of Detroit municipal obligations will be a critical factor.
UNEARNED PREMIUMS
2Q13 USD Millions

Unearned premiums Loss and loss expense ratio Underwriting expense ratio Combined ratio Value of Unearned Premiums ABV expected value of unearned premiums Additional Value
Source: Estimates

2,373 8.0% 18.0% 26.0% 1,756 1690 66

2,373 7.0% 17.0% 24.0% 1,803 1690 113

2,373 6.0% 16.0% 22.0% 1,851 1690 160

Ambac Financial Group September 2013


Simplified Corporate Structure

Mietek Biskupski, mietekbiskupski@yahoo.com

Ambac Financial Group, Inc. (AFGI)

Ambac Assurance Corporation Segregated Account State of Domicile: WI

Ambac Assurance Corporation (AAC) State of Domicile: WI

Ambac (Bermuda) Ltd.

Ambac Assurance UK Limited

Ambac Capital Corporation

Ambac Financial Services, LLC

Connie Lee Holdings

Everspan Financial Guarantee Corp. State of Domicile: WI

Source: Company reports

New Initiatives Ambac is looking to develop or acquire a new business to make use of its NOLs, possibly advisory, asset servicing, asset management and insurance. Mentioning something financial guaranty related (eg servicing, investment management), Michael Fitzgerald IR gave no notice of timing but said Ambac is currently working on some things (6/10/13). The Company could raise capital via a potential rights offering to maintain proportionate equity ownership and protect NOLs. In the 2Q13 10-Q, the Company wants to raise $135M-$190M of equity capital to invest in portfolios similar in nature to Ambac Assurance. MANAGEMENT Diana N. Adams - President and CEO since July 2011. From August 2010 until June 2011, Ms. Adams served as the Chief Administrative Officer for Ambac. From June 2008 to June 2011, Ms. Adams served as a Senior Managing Director with executive responsibility for Ambacs International business and for the Structured Finance business which she wound down in 2009. Ms. Adams joined Ambac in 2000 as the head of Emerging Markets following the winding down of the international joint venture between Ambac and MBIA. From 1993-1999, Ms. Adams worked at JP Morgan first in the Capital Markets division and then in the Structured Products division. From 1990-1993 Ms. Adams worked for Mitsubishi Bank in Leveraged and Acquisition Finance. From 1988-1990 Ms. Adams worked at Merrill Lynch in the Investment Banking division. David Trick - CFO and Treasurer since January 2010. Mr. Trick has executive responsibility for managing Ambacs financial affairs, including financial reporting, asset and liability management, financial planning, tax strategy, capital resources, operations, capital markets, liquidity, and investor relations. Mr. Trick joined Ambac in 2005 from The Bank of New York Mellon, where he was a senior banker for insurance industry clients, including those in the financial guarantee industry. Robert Eisman CAO since January 2010. Mr. Eisman has executive responsibility for managing Ambacs financial reporting in compliance with SEC and other legal and regulatory requirements and establishing Ambacs GAAP and statutory accounting policies. Since August 2010, Mr. Eisman has served as a Director of Ambac Assurance UK Limited, Ambacs international financial guarantee subsidiary. Mr. Eisman joined Ambac Assurance in 1995 from KPMG LLP where he was a Manager, responsible for providing audit services, primarily to its insurance clients.

10

Ambac Financial Group September 2013

Mietek Biskupski, mietekbiskupski@yahoo.com

AFGI Sources of Value Tolling payments on NOLs $350M junior surplus note issued by AAC (could be sold in the 70s). $5M payments pa from AAC for operating expenses until 2017, $4M pa thereafter $30M of upfront cash received upon emergence from bankruptcy, which credits against up to $15M of tolling payments Long-dated call on AAC AMPS and OCI otherwise restrict dividend payments from AAC to AFGI Balance Sheet AACs statutory financial statements include the results of AACs general account and the Segregated Account (formed on March 24, 2010).

11

Ambac Financial Group September 2013

Mietek Biskupski, mietekbiskupski@yahoo.com

BALANCE SHEET Ambac Financial Group, Inc. and Subsidiaries


USD Millions

Assets Investments Cash Receivables for securities sold Investment income due and accrued Premium receivables Reinsurance recoverable on paid and unpaid losses Deferred ceded premium Subrogation recoverable Deferred acquisition costs Loans Derivative assets Curent taxes Insurance intangible Goodwill Other assets Variable interest entity assets: Fixed income securities, at fair value Restricted cash Investment income due and accrued Loans Intangible assets Other assets Total assets Liabilities Liabilities subject to compromise Unearned premiums Loss and loss expense reserve Ceded premiums payable Obligations under investment agreements Obligations under investment repurchase agreements Deferred taxes Current taxes Long-term debt Accrued interest payable Derivative liabilities Other liabilities Payable for securities purchased Variable interest entity liabilities: Accrued interest payable Long-term debt Derivative liabilities Other liabilties Total liabilities Equity Preferred stock Common stock-Predecessor Ambac Common stock-Successor Ambac Additional paid-in capital-Predecessor Ambac Additional paid-in capital-Successor Ambac Accumulated other comprehensive income Retained earnings (accumulated deficit) Treasury stock Total Ambac Financial Group, Inc. stockholders' equity Noncontrolling interest Total stockholder's equity Total liabilities and stockholders' equity

Dec-11 6,877.0 18.5 38.2 45.3 2,028.5 159.9 221.3 659.8 223.5 19.0 175.2 ---104.3 2,199.3 2.1 4.0 14,329.5 -8.2 27,113.7

Predecessor Dec-12 6,329.9 43.8 0.8 39.7 1,620.6 159.1 177.9 497.3 199.2 9.2 48.0 ---39.7 2,261.3 2.3 4.1 15,568.7 -5.5 27,007.2

Mar-13 6,512.3 53.1 40.8 33.9 1,543.1 160.7 170.0 545.0 192.3 8.7 112.8 ---40.4 2,414.6 2.3 1.3 14,327.8 -5.5 26,164.7

Successor Mar-13 Jun-13 6,410.4 6,601.2 53.1 20.5 40.8 2.2 33.9 35.7 1,543.1 1,464.9 160.7 155.0 170.0 159.2 545.0 501.1 --7.1 7.1 112.8 91.2 4.6 4.2 2,345.3 1,621.6 287.0 514.5 40.4 33.7 2,414.6 2.3 1.3 14,318.8 -5.5 28,496.7 2,243.0 23.0 1.2 13,820.9 162.0 13.2 27,475.4

1,707.4 3,457.2 7,044.1 115.6 523.0 23.5 -95.7 223.6 170.2 414.5 107.4 1.7 3.5 14,288.5 2,087.1 0.3 30,263.2

1,704.9 2,778.4 6,619.5 94.5 356.1 5.9 1.6 96.8 150.2 228.8 453.2 102.5 0.0 3.6 15,436.0 2,221.8 0.3 30,254.1

1,704.6 2,623.4 6,590.2 92.1 357.4 5.9 1.5 97.3 153.9 246.4 505.7 91.1 17.1 0.8 14,229.4 2,317.6 0.3 29,034.7

-2,623.4 6,590.2 92.1 356.2 6.0 169.9 -886.8 224.2 505.7 91.1 17.1 0.8 14,207.2 2,317.6 0.3 28,088.7

-2,372.8 6,042.6 89.4 358.6 5.9 1.6 -945.9 249.4 451.8 86.7 42.9 0.7 14,268.5 1,989.8 6.6 26,913.3

-3.1 2,172.0 -463.3 (6,039.9) (411.4) (3,813.0) 663.4 (3,149.5) 27,113.7

-3.1 -2,172.0 -625.4 (6,297.3) (410.8) (3,907.5) 660.6 (3,247.0) 27,007.2

-3.1 -2,172.0 -720.1 (6,015.0) (410.7) (3,530.5) 660.5 (2,870.1) 26,164.7

--0.5 -184.6 ---185.0 223.0 408.0 28,496.7

--0.5 -184.6 (103.5) 205.7 -287.2 274.9 562.1 27,475.3

12

Ambac Financial Group September 2013

Mietek Biskupski, mietekbiskupski@yahoo.com

OPERATING EARNINGS Reconciliation of Net Income to Operating Earnings, a reported Non-GAAP measure USD Millions Predeccessor 2Q13 3 months to April 1 June 30, 2012 April 30, 2013 Net income attributable to common shareholders (811.1) 3,066.8 Adjustments: Non-credit impairment FV (gain) loss on credit derivatives 21.7 77.5 Effect of consolidating financial guarantee VIEs 4.5 (386.6) Insurance intangible amortization --FX (gain) loss from re-measurement of premium receivables and loss and loss expense reserves (0.7) (6.7) FV (gain) loss on derivatives from Ambac CVA (28.9) (3.4) Mark-to-mark (gain) loss on stand alone derivative surplus note calls (39.0) -Fresh start accounting adjustments -(2,749.7) Operating Earnings (853.5) (2.1) Source: Company reports

Successor May 1 June 30, 2013 205.7 (50.1) (15.3) 25.0 7.3 30.5 --203.1

ADJUSTED BOOK VALUE Company reported adjusted book value


USD Millions 2Q13

Total Ambac Financial Group, Inc. stockholders equity Adjustments: Non-credit impairment FV losses on credit derivatives Effect of consolidating financial guarantee VIEs Insurance intangible asset and goodwill Ambac CVA on deriviative liabilities (excl credit derivs) Net unearned premiums in excess of expected losses Net unrealized investment (gains) losses in AOCI Adjusted Book Value Accounting for Mark-to-Market Adjustments: Non-credit impairment FV losses on credit derivatives Net unrealized investment (gains) losses in AOCI Mark-to-Market Adj Book Value
Source: Company reports and estimates

Predecessor Dec-12 (3,907.5) 167.1 (146.6) -(121.9) 1,818.7 (651.3) (2,841.5)

Successor Jun-13 287.2 188.5 (481.2) (2,136.1) (64.6) 1,690.3 91.0 (424.9)

(167.1) 651.3 (2,357.3)

(188.5) (91.0) (704.4)

13

Ambac Financial Group September 2013

Mietek Biskupski, mietekbiskupski@yahoo.com

Mark-to-Market Adj Book Value Additions: NOLs Reserve Releases Add'l unearned premiums Value of commutations Subtractions: AMPS face value over carrying value LT debt face value over carrying value Intrinsic Equity Value Effective Shares Value per Share upside % Warrants at $16.67 strike Value per Warrant upside %
Source: Estimates

Worst Case Base Case Better Case Best Case (704) (704) (704) (704)

----

1,279 -66

1,354 433 113

1,411 865 160

(386) (354) (1,444.0) 45.0 ($32.09) -247% 5.0 $0.00 na

(386) (354) (99.8) 50.0 ($1.99) -109% 5.0 ($18.66) -246%

(386) (354) 455.7 50.0 $9.11 -58% 5.0 ($7.56) -159%

(386) (354) 992.3 50.0 $19.83 -9% 5.0 $3.16 -75%

Further Potential Upside Commutations on policies Subrogation recoveries beyond balance sheet assets Risks Municipal default risk Municipal defaults and bondholder haircuts may prove more popular now than during the post-2000 recession, with potentially higher loss ratios than during that period of market stress. This would lower the unearned premium revenue ultimately ascribed to equity in ABV. Current reserves prove inadequate For 1Q13 the highest stress scenario reasonably possible would require additional reserve of a) $1,058M for RMBS, b) $858M for student loans, and c) $1,373M for all credits. Unable to develop or acquire a new business Ambacs NOL value is affected by its ability to use them by acquiring or developing a profitable business, which it may be unable to do successfully. Interest rates AFGIs assets include a $350M junior surplus note with a 2020 maturity, and equity interest in AAC, which is similar to a long-dated call option as it is the residual value in the insurance subsidiary. Both the junior surplus notes and call-like equity interest would be sensitive to interest rates. R&W claims Ambac fails to achieve recoveries on R&W breaches as successfully as peers, which are already recorded as assets on the balance sheet.

14

Ambac Financial Group September 2013

Mietek Biskupski, mietekbiskupski@yahoo.com


CAPITAL STRUCTURE

USD Millions Security Secured Note Amount 279 Coupon Maturity 4.5% Mar-50 Issued by AAC to Seg Acct (intercompany) Cash Payment Total Payment Description $2.0B Promissory note from AAC into the Seg Account claim, commutations and other payments Subject to min. $100M policyholder's surplus at AAC To make additional claims payments beyond the $2.0B Secured Note from AAC into Seg Account Subject to min. $100M policyholder's surplus at AAC Isssued on the effective date, May 1, 2013 No payments may be made until all existing and future indebtness of the Seg Acct is paid in full 25.0% 23.2% 24.5% 100.0% 40.9% 43.3% Pari passu with Weinstein & Bank Settlement Notes Pari Passu with Surplus Notes Pari Passu with Surplus Notes

Reinsurance Agreement

Unlimited

AAC to Seg Acct (intercompany)

Segregated Account Junior Surplus Notes

350

Seg Acct to AFGI (intercompany)

Surplus Notes Weinstein Notes Bank Settlement Notes Total Surplus Notes Junior Surplus Notes Total Notes AMBC AMBCW Total Equity Total Capitalization Market prices as of 9/4/13

1,211 51 2 1,264 36 1,300 986 149 1,134 2,434

5.1%

Jun-20

Segregated Account Segregated Account AAC

5.1%

Jun-20

Segregated Account

Issued for general claims to OSS P & I subordinate to Surplus Notes and policy claims.

$21.90 $12.77

shares shares

45.0 M 5.0 M strike $16.67

15