AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Reorganized Condensed Consolidated Balance Sheet

As of April 30, 2013



(Dollars in Thousands)	Predecessor Ambac		Reorganization Item Adjustments				Fresh Start Adjustments				Successor Ambac
Assets:
Investments	$	6,457,264	$	—			$	—			$	6,457,264
Cash	254,851		(101,900		)	^(A)					152,951
Receivable for securities sold	682										682
Investment income due and accrued	37,961										37,961
Premium receivables	1,531,631										1,531,631
Reinsurance recoverable on paid and unpaid losses	151,311										151,311
Deferred ceded premium	166,212										166,212
Subrogation recoverable	533,673										533,673
Deferred acquisition costs	184,953						(184,953		)	^(C)	—
Loans	8,857						(1,575		)	^(C)	7,282
Derivative assets	121,643										121,643
Current taxes	—		4,410			^(A)					4,410
Insurance intangible asset	—						1,658,972			^(C)	1,658,972
Goodwill	—						514,511			^(C)	514,511
Other assets	54,821										54,821
Variable interest entity assets:											—
Fixed income securities, at fair value	2,500,565										2,500,565
Restricted cash	24,150										24,150
Investment income due and accrued	4,851										4,851
Loans	14,758,077						(6,024		)	^(C)	14,752,053
Intangible assets	164,520										164,520
Other assets	13,972										13,972
Total assets	$	26,969,994	$	(97,490	)		$	1,980,931			$	28,853,435
Liabilities and Stockholders’ Equity:
Liabilities:
Liabilities subject to compromise	$	1,704,641	$	(1,704,641	)	^(B)	$	—			$	—
Unearned premiums	2,482,314										2,482,314
Losses and loss expense reserve	6,106,345										6,106,345
Ceded premiums payable	92,468										92,468
Obligations under investment agreements	357,373						1,505			^(C)	358,878
Obligations under investment repurchase agreements	5,926										5,926
Deferred taxes	1,580										1,580
Current taxes	97,490		(97,490		)	^(A)					—
Long-term debt	155,271		(973		)	^(B)	786,015			^(C)	940,313
Accrued interest payable	252,788		(821		)	^(B)	(18,091		)	^(C)	233,876
Derivative liabilities	621,645										621,645
Other liabilities	88,908						1,837			^(C)	90,745
Payable for securities purchased	27										27
Variable interest entity liabilities:											—
Accrued interest payable	4,318										4,318
Long-term debt	15,041,624						(18,586		)	^(C)	15,023,038
Derivative liabilities	2,425,517										2,425,517
Other liabilities	6,030										6,030
Total liabilities	$	29,444,265	$	(1,803,925	)		$	752,680			$	28,393,020



(Dollars in Thousands)	Predecessor Ambac			Reorganization Item Adjustments				Fresh Start Adjustments				Successor Ambac
Stockholders’ (deficit) equity:
Preferred stock	$	—		$	—			$	—			$	—
Common stock-Predecessor Ambac	3,080							(3,080		)	^(D)	—
Common stock-Successor Ambac	—			450			^(B)					450
Additional paid-in capital-Predecessor Ambac	2,172,027							(2,172,027		)	^(D)	—
Additional paid-in capital-Successor Ambac	—			184,550			^(B)					184,550
Accumulated other comprehensive income	800,260							(800,260		)	^(D)	—
Accumulated deficit	(5,697,961		)	1,521,435			^(B)	4,176,526			^{(C) (D)}	—
Common stock held in treasury at cost	(410,695		)					410,695			^(D)	—
Total Ambac Financial Group, Inc. stockholders’ (deficit) equity	(3,133,289		)	1,706,435				1,611,854				185,000
Noncontrolling interest	659,018							(383,603		)	^(D)	275,415
Total stockholders’ (deficit) equity	(2,474,271		)	1,706,435				1,228,251				460,415
Total liabilities and stockholders’ (deficit) equity	$	26,969,994		$	(97,490	)		$	1,980,931			$	28,853,435

Reorganization Item Adjustments:

Items shown in the Reorganization Items column of the Reorganized Condensed Consolidated Balance Sheet above represent amounts recorded for the implementation of the Reorganization Plan on the Effective Date as described below:


(A)	Reflects the cash payment of $101,900 to the IRS under a settlement with the IRS on the Fresh Start Reporting Date pursuant to the Reorganization Plan.

(B)

Reflects the discharge of liabilities subject to the Reorganization Plan, issuance of 45,000,000 and 5,047,138 shares of Successor Ambac common stock and warrants, respectively, to certain claim holders, resulting in a pre-tax gain of $1,521,435 on extinguishment of obligations pursuant to the Reorganization Plan. The following reflects the calculation of the pre-tax gain, which was recorded as a Reorganization item on Predecessor Ambac’s Consolidated Statements of Total Comprehensive Income (Loss):



Liabilities subject to compromise	$	1,704,641
Long-term debt	973			⁽¹⁾
Accrued interest payable	821			⁽¹⁾
Total debt discharged	1,706,435
Less: Successor Ambac common stock	(450		)	⁽²⁾
Successor Ambac additional paid-in capital	(184,550		)	⁽²⁾
Pre-tax gain from cancellation and satisfaction of Predecessor Ambac debt	$	1,521,435

(1)

Represents the proportional reduction in the carrying value of long-term debt and associated accrued interest payable upon the discharge of $8,043 par value of Segregated Account junior surplus notes that were issued to a pre-petition creditor, One State Street, LLC (“OSS”). Pursuant to a settlement agreement (the “OSS Settlement Agreement”) to terminate the Company’s office lease with OSS and to settle all claims among the parties, the outstanding principal amount of the Segregated Account junior surplus notes issued to OSS were reduced based on the value of distribution that OSS received on account of its allowed claim in Ambac’s bankruptcy case. Refer to Note 14. Long-term Debt for additional information on the OSS Settlement Agreement.

(2)

Warrants issued in connection with the Reorganization Plan are classified as equity and initially measured at fair value. The enterprise value of $185,000 is allocated between common stock and warrants based on their relative fair values as quoted on the Effective Date. Successor Ambac common stock of $450 represents the par value of 45,000,000 shares of common stock issued at $0.01 per share. Included in the Successor Ambac additional paid-in capital of $184,550, $11,437 was allocated to 5,047,138 warrants at their initial fair value, with the remaining $173,113 additional paid-in capital attributable to common stock.

Fresh Start Adjustments:

Items shown in the Fresh Start Adjustments column of the Reorganized Condensed Consolidated Balance Sheet above reflects (i) the fair value adjustments to assets and liabilities which are not already reported at fair value under U.S. GAAP accounting rules, including the re-measurement of deferred tax assets and liabilities, if any, which result from such adjustments and (ii) the cancellation of Predecessor Ambac equity accounts attributable to its common shareholders, including the fair value adjustment to noncontrolling interests. These adjustments are described below:


(C)	The following table summarizes the impact of the fresh start adjustments, which in the aggregate was recorded as a Reorganization item gain on Predecessor Ambac’s Consolidated Statements of Total Comprehensive Income (Loss):



Deferred acquisition costs	$	(184,953	)
Loans (non-VIE)	(1,575		)
Insurance intangible asset	1,658,972
Goodwill	514,511
Obligations under investment agreements	(1,505		)
Long-term debt and accrued interest payable	(767,924		)
Other liabilities	(1,837		)
Variable Interest Entities:
VIE loans and long-term debt	12,562
Asset/liability fair value adjustments impacting Reorganization items	1,228,251
Adjustment to deferred tax provision	—
Gain on fresh start adjustments	$	1,228,251


•	Deferred acquisition costs-These deferred costs do not represent future cash flows and therefore the fair value is zero at the Fresh Start Reporting Date.

•

Loans-The fair value adjustment for this line item relates to non-VIE loans that have historically been reported at their outstanding principal balance. Refer to Note 10. Fair Value Measurements for a discussion of the valuation methodology used to estimate fair value for each of these financial instruments. Subsequent to the Fresh Start Reporting Date, the fair value discounts are accretable to interest income using the effective interest method over the remaining lives of the loans. Fair value as of April 30, 2013 was calculated using a discounted cash flow approach. As of April 30, 2013, the loans had a principal-weighted average life of 6.81 years and a coupon rate of 5.01%. Discount rates used to determine the fair value of the loans at April 30, 2013 were consistent with the credit quality of the borrowers and had a weighted average of 9.71%.


•	Insurance intangible asset-Pursuant to the business combinations guidance for insurance entities in the Financial Services-Insurance Topic of the ASC, Successor Ambac accounted for the insurance and reinsurance assets and liabilities acquired as new contracts, and measured them at fair value in two components as follows:

Insurance and reinsurance assets and liabilities measured in accordance with Successor Ambac’s accounting policies for insurance and reinsurance contracts that it issues or holds, as further described in Note 2. Basis of Presentation and Significant Accounting Policies. These insurance and reinsurance assets and liabilities primarily comprise premium receivables, reinsurance recoverable on paid and unpaid losses, deferred ceded premium, subrogation recoverable, losses and loss expense reserve, unearned premiums and ceded premiums payable; and


b.	An insurance intangible asset representing the difference between: 1) the fair value of the contractual insurance and reinsurance assets acquired and liabilities assumed and 2) the amounts described in (a) above. Refer to Note 2. Basis of Presentation and Significant Accounting Policies for the subsequent accounting treatment of the insurance intangible asset.

The significant differences between the measurement methods used for fair value and Successor Ambac’s accounting policies for insurance and reinsurance contracts which impact the magnitude of the insurance intangible asset are as follows:



Measurement input	Fair value methodology (Refer to Note 10)	Successor Ambac accounting policy (Refer to Note 2)
Cash flows	All projected cash flows to be paid and/or received under the insurance contract are based on management’s expectations of how a market participant would make such estimates.	Premium receipts are projected based on management’s expectations if the insured obligation is a homogenous pool of assets. For non-homogenous contracts, premium projections are based on contractual cash flows. Loss payments, including subrogation recoveries, are projected using a probability-weighted average of all possible outcomes.

Discount rates	Discount rates are applied to net cash flows at the policy level as follows: Insurance policies which are in a liability (i.e. net cash outflow) position are discounted using rates which incorporate Ambac’s own credit risk, under the assumption we will be transferring the policies to a market participant with similar credit risk. Insurance policies which are in an asset (i.e. net cash inflow) position are discounted using a hypothetical buyer’s cost of capital and does not assume we would be transferring the policies to a party with similar credit risk.	Discount rates are applied to gross cash flows at the policy level as follows: Premiums are discounted at the relevant risk-free rate based on the remaining expected or contractual weighted-average life of the exposure, as applicable. Losses, including subrogation recoveries, are discounted at the relevant risk-free rate.

Profit margin	For insurance policies in a net liability position (i.e. net cash outflow) a profit margin is applied to the discounted value, which represents the additional consideration another market participant would require from Ambac to assume the contract. At April 30, 2013, a profit margin of 17% was applied to the discounted value of insurance policies in a net liability position.	No profit margin is applied.

•

Goodwill-This amount represented the excess of the reorganization value over the fair value of identified tangible and intangible assets of the emerging company. Changes in the fair values of these assets and liabilities from the current estimated values, as well as changes in assumptions, could significantly impact the amount of recorded goodwill. Accordingly, there can be no assurance that the estimates, assumptions, and values reflected in the valuations will be realized, and actual results could vary materially. Please refer to the above table located immediately prior to the Reorganized Condensed Consolidated Balance Sheet which indicates how goodwill was determined. Refer to Note 2. Basis of Presentation and Significant Accounting Policies for the subsequent accounting treatment of goodwill.

•

VIE loans and long-term debt-The portion of VIE loans and long-term debt that had not been carried at fair value have been adjusted to fair value for fresh start reporting. Refer to Note 10. Fair Value Measurements for a discussion of the valuation methodology used to estimate fair value for VIE assets and liabilities. Subsequent to the Fresh Start Reporting Date, we have elected to continue accounting for these VIEs 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 these entities 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. As a result, subsequent changes to fair value will be recorded as Income (loss) on variable interest entities on the Consolidated Statements of Total Comprehensive Income (Loss). Valuation of the long-term debt not previously reported at fair value was determined from third-party quotes. The related VIE loans were valued at April 30, 2013 using a discounted cash flow approach with a discount rate of 5.7%, consistent with the rate implied from the fair value of the VIE’s debt.

•

Obligations under investment agreements-These instruments had previously been reported at their principal value less unamortized discount. We have adjusted these items to fair value for fresh start reporting. Refer to Note 10. Fair Value Measurements for a discussion of the valuation methodology used to estimate fair value for obligations under investment agreements. The fair value discounts and premiums to principal will be amortized into interest expense using the effective interest method over the lives of the respective contracts. Fair values were determined using discounted cash flows at April 30, 2013. Valuation of collateralized obligations represents projected cash flows discounted at LIBOR. Valuation of uncollateralized obligations were discounted using a weighted average discount rate of 9.4% consistent with the credit adjusted discount rate of Ambac Assurance, which provides a financial guarantee for all investment and repurchase agreements.

•

Long-term debt and accrued interest payable-All debt liabilities subject to the Reorganization Plan were discharged. The remaining long-term debt is primarily related to surplus notes and junior surplus notes issued by Ambac Assurance and the Segregated Account, which were carried at their face value less unamortized discount. The notes have been adjusted to estimated fair value for fresh start reporting. Refer to Note 10. Fair Value Measurements for a discussion of the valuation methodology used to estimate fair value. The fair value discount will be amortized into interest expense using the effective interest method over the lives of the respective debt. Surplus notes issued in June 2010 were valued at April 30, 2013 using a discounted cash flow approach corroborated by third party quotes. Internally estimated cash flows were discounted at 10.6%. To the extent that the remaining surplus notes rank pari passu with the June 2010 notes, valuations were determined using projected cash flows discounted at the same 10.6%. Junior surplus notes which cannot be paid until all principal and interest is paid on the other surplus notes were valued with projected cash flows discounted at 16.6%.


•	Other liabilities-This amount reflects an adjustment, based on actuarial evaluation, to re-measure the accumulated postretirement benefit obligation as of the Effective Date, as a result of application of fresh start reporting. This adjustment primarily reflects changes in mortality assumptions.

•

Deferred taxes-Deferred taxes were determined in conformity with the accounting requirements for the Income Tax Topic of the ASC. As a result of Fresh Start, a new deferred tax liability was established to recognize the tax effect of the fair value adjustments to identified tangible and intangible assets of the emerging company. This deferred tax liability adjustment was offset by a reduction in the deferred tax valuation allowance, resulting in no change to the deferred tax provision.


(D)	Reflects the cancellation of Predecessor Ambac equity accounts attributable to its common shareholders and the fair value adjustment of noncontrolling interests, as follows:



Common stock	$	(3,080	)
Additional paid-in-capital	(2,172,027		)
Accumulated other comprehensive income	(800,260		)
Accumulated deficit	2,948,275
Common stock held in treasury at cost	410,695
Noncontrolling interest fair value adjustment	(383,603		)	⁽¹⁾
Net adjustment	$	—


(1)	Non-controlling interest is primarily related to Ambac Assurance preferred stock issued to third parties. Non-controlling interest was adjusted to fair value based on current quotes from market sources. Noncontrolling interest is a component of equity and as a result, the fair value adjustment is a permanent item that will not be accreted into income.