UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended March 31, 2013

¨ 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.

(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 New York, New York	10004
(Address of principal executive offices)	(Zip code)

(212) 668-0340

(Registrant’s telephone number, including area code)

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  x    No  ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  x    No  ¨

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

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	x

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

As of May 9, 2013, 45,000,000 shares of common stock, par value $0.01 per share, of the Registrant were outstanding.

Ambac Financial Group, Inc. and Subsidiaries

TABLE OF CONTENTS

		PAGE
PART I FINANCIAL INFORMATION
Item 1.	Financial Statements of Ambac Financial Group, Inc. and Subsidiaries
	Consolidated Balance Sheets – March 31, 2013 (unaudited) and December 31, 2012		3
	Consolidated Statements of Total Comprehensive Income (unaudited) – three months ended March 31, 2013 and 2012		4
	Consolidated Statements of Stockholders’ Equity (unaudited) – three months ended March 31, 2013 and 2012		5
	Consolidated Statements of Cash Flows (unaudited) – three months ended March 31, 2013 and 2012		6
	Notes to Unaudited Consolidated Financial Statements		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		59
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		88
Item 4.	Controls and Procedures		88
PART II OTHER INFORMATION
Item 1.	Legal Proceedings		89
Item 1A.	Risk Factors		89
Item 6.	Exhibits		91
SIGNATURES			92
INDEX TO EXHIBITS			93

2

Part I Financial Information

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

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

Consolidated Balance Sheets

(Dollars in Thousands)	March 31, 2013			December 31, 2012
	(Unaudited)
Assets:
Investments:
Fixed income securities, at fair value (amortized cost of $4,657,096 in 2013 and $4,751,824 in 2012)	$	5,402,290		$	5,402,395
Fixed income securities pledged as collateral, at fair value (amortized cost of $228,066 in 2013 and $265,517 in 2012)		228,228			265,779
Short-term investments, at fair value (amortized cost of $767,919 in 2013 and $661,219 in 2012)		767,932			661,658
Other investments, at fair value		113,812			100
Total investments		6,512,262			6,329,932
Cash		53,135			43,837
Receivable for securities		40,822			761
Investment income due and accrued		33,944			39,742
Premium receivables		1,543,098			1,620,621
Reinsurance recoverable on paid and unpaid losses		160,682			159,086
Deferred ceded premium		170,032			177,893
Subrogation recoverable		545,007			497,346
Deferred acquisition costs		192,306			199,160
Loans		8,691			9,203
Derivative assets		112,811			126,106
Other assets		40,365			39,715
Variable interest entity assets:
Fixed income securities, at fair value		2,414,607			2,261,294
Restricted cash		2,258			2,290
Investment income due and accrued		1,338			4,101
Loans (includes $14,116,811 and $15,359,073 at fair value)		14,327,840			15,568,711
Other assets		5,462			5,467
Total assets	$	26,164,660		$	27,085,265
Liabilities and Stockholders’ Equity:
Liabilities:
Liabilities subject to compromise	$	1,704,641		$	1,704,904
Unearned premiums		2,623,445			2,778,401
Losses and loss expense reserve		6,590,216			6,619,486
Ceded premiums payable		92,085			94,527
Obligations under investment agreements		357,371			356,091
Obligations under investment repurchase agreements		5,926			5,926
Deferred taxes		1,540			1,586
Current taxes		97,274			96,778
Long-term debt		153,873			150,170
Accrued interest payable		246,378			228,835
Derivative liabilities		505,746			531,315
Other liabilities		91,057			102,488
Payable for securities purchased		17,051			25
Variable interest entity liabilities:
Accrued interest payable		828			3,618
Long-term debt (includes $13,996,531 and $15,200,538 at fair value)		14,229,373			15,436,008
Derivative liabilities		2,317,625			2,221,781
Other liabilities		301			293
Total liabilities		29,034,730			30,332,232
Stockholders’ deficit:
Preferred stock		—			—
Common stock		3,080			3,080
Additional paid-in capital		2,172,027			2,172,027
Accumulated other comprehensive income		720,071			625,385
Accumulated deficit		(6,015,025	)		(6,297,264	)
Common stock held in treasury at cost		(410,695	)		(410,755	)
Total Ambac Financial Group, Inc. stockholders’ deficit		(3,530,542	)		(3,907,527	)
Noncontrolling interest		660,472			660,560
Total stockholders’ deficit		(2,870,070	)		(3,246,967	)
Total liabilities and stockholders’ deficit	$	26,164,660		$	27,085,265

See accompanying Notes to Unaudited Consolidated Financial Statements.

3

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

Consolidated Statements of Total Comprehensive Income (Unaudited)

(Dollars in Thousands, Except Share Data)	Three Months March 31,
	2013			2012
Revenues:
Net premiums earned	$	100,256		$	94,950
Net investment income:
Securities available-for-sale and short-term		85,612			112,117
Other investments		(543	)		—
Total net investment income		85,069			112,117
Other-than-temporary impairments:
Total other-than-temporary impairment losses		—			(4,604	)
Portion of loss recognized in other comprehensive income		—			1,533
Net other-than-temporary impairment losses recognized in earnings		—			(3,071	)
Net realized investment gains		46,060			392
Change in fair value of credit derivatives:
Realized gains and other settlements		2,509			3,254
Unrealized gains (losses)		10,278			(10,476	)
Net change in fair value of credit derivatives		12,787			(7,222	)
Derivative products		(569	)		46,957
Other income		9,498			64,793
Income on variable interest entities		38,326			15,220
Total revenues before expenses and reorganization items		291,427			324,136
Expenses:
Losses and loss expenses		(51,135	)		(2,320	)
Underwriting and operating expenses		34,429			36,534
Interest expense		23,165			33,839
Total expenses before reorganization items		6,459			68,053
Pre-tax income from continuing operations before reorganization items		284,968			256,083
Reorganization items		2,059			2,461
Pre-tax income from continuing operations		282,909			253,622
Provision for income taxes		657			300
Net income	$	282,252		$	253,322
Less: net (loss) income attributable to the noncontrolling interest		(47	)		2
Net income attributable to common shareholders	$	282,299		$	253,320
Other comprehensive income, after tax:
Net income	$	282,252		$	253,322
Unrealized gain (loss) on securities, net of deferred income taxes of $0		94,098			(16,852	)
(Loss) gain on foreign currency translation, net of deferred income taxes of $0		(261	)		3,213
Amortization of postretirement benefit, net of tax of $0		808			(3,792	)
Total other comprehensive income (loss), net of tax		94,645			(17,431	)
Total comprehensive income		376,897			235,891
Less: comprehensive (loss) income attributable to the noncontrolling interest:
Net (loss) income		(47	)		2
Currency translation adjustments		(41	)		31
Total comprehensive income attributable to Ambac Financial Group, Inc.		376,985			235,858
Net income per share attributable to Ambac Financial Group, Inc. common shareholders	$	0.93		$	0.84
Net income per diluted share attributable to Ambac Financial Group, Inc. common shareholders	$	0.93		$	0.84
Weighted-average number of common shares outstanding:
Basic		302,469,516			302,466,328
Diluted		302,579,254			302,580,597

See accompanying Notes to Unaudited Consolidated Financial Statements.

4

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

Consolidated Statements of Stockholders’ Equity (Unaudited)

				Ambac Financial Group, Inc.
(Dollars in Thousands)	Total			Accumulated Deficit			Accumulated Other Comprehensive Income			Preferred Stock		Common Stock		Paid-in Capital		Common Stock Held in Treasury, at Cost			Noncontrolling Interest
Balance at January 1, 2012	($	3,149,533	)	($	6,039,922	)	$	463,259		$	—	$	3,080	$	2,172,027	($	411,419	)	$	663,442
Total comprehensive income		235,891			253,320			(17,462	)											33
Stock-based compensation		(338	)		(338	)
Shares issued under equity plans		338															338
Balance at March 31, 2012	($	2,913,642	)	($	5,786,940	)	$	445,797		$	—	$	3,080	$	2,172,027	($	411,081	)	$	663,475

				Ambac Financial Group, Inc.
(Dollars in Thousands)	Total			Accumulated Deficit			Accumulated Other Comprehensive Income		Preferred Stock		Common Stock		Paid-in Capital		Common Stock Held in Treasury, at Cost			Noncontrolling Interest
Balance at January 1, 2013	($	3,246,967	)	($	6,297,264	)	$	625,385	$	—	$	3,080	$	2,172,027	($	410,755	)	$	660,560
Total comprehensive income		376,897			282,299			94,686											(88	)
Stock-based compensation		(60	)		(60	)
Shares issued under equity plans		60														60
Balance at March 31, 2013	($	2,870,070	)	($	6,015,025	)	$	720,071	$	—	$	3,080	$	2,172,027	($	410,695	)	$	660,472

See accompanying Notes to Unaudited Consolidated Financial Statements.

5

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

Consolidated Statements of Cash Flows (Unaudited)

	Three Months Ended March 31,
	2013			2012
(Dollars in Thousands)
Cash flows from operating activities:
Net income attributable to common shareholders	$	282,299		$	253,320
Noncontrolling interest in subsidiaries’ earnings		(47	)		2
Net income	$	282,252		$	253,322
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		727			820
Amortization of bond premium and discount		(42,421	)		(64,542	)
Reorganization items		2,059			2,461
Deferred income taxes		(46	)		—
Current income taxes		496			300
Deferred acquisition costs		6,854			4,509
Unearned premiums, net		(147,095	)		(146,928	)
Losses and loss expenses, net		(78,527	)		9,785
Ceded premiums payable		(2,442	)		(15,912	)
Investment income due and accrued		5,798			5,497
Premium receivables		77,523			110,943
Accrued interest payable		17,543			26,684
Net mark-to-market (gains) losses		(10,278	)		10,476
Net realized investment gains		(46,060	)		(392	)
Other-than-temporary impairment charges		—			3,071
Variable interest entity activities		(38,326	)		(15,220	)
Other, net		49,273			(144,524	)
Net cash provided by operating activities		77,330			40,350
Cash flows from investing activities:
Proceeds from sales of bonds		120,603			35,024
Proceeds from matured bonds		255,664			208,133
Purchases of bonds		(243,006	)		(182,008	)
Other investments, net		(113,712	)		—
Change in short-term investments		(106,274	)		(110,751	)
Loans, net		512			(247	)
Change in swap collateral receivable		1,740			41,046
Other, net		20,508			85
Net cash used in investing activities		(63,965	)		(8,718	)
Cash flows from financing activities:
Paydowns of variable interest entity secured borrowing		(4,067	)		(7,280	)
Payments for investment and repurchase agreement draws		—			(420	)
Net cash used in financing activities		(4,067	)		(7,700	)
Net cash flow		9,298			23,932
Cash at January 1		43,837			15,999
Cash at March 31	$	53,135		$	39,931
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes	$	229		$	—
Interest on variable interest entity secured borrowing	$	218		$	429
Interest on investment agreements	$	1,724		$	3,072
Cash receipts and payments related to reorganization items:
Professional fees paid for services rendered in connection with the Chapter 11 proceeding	$	3,246		$	1,641

See accompanying Notes to Unaudited Consolidated Financial Statements.

6

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

DEBTOR-IN-POSSESSION

Notes to Consolidated Financial Statements

(Dollar Amounts in Thousands, Except Share Amounts)

1. BACKGROUND AND BUSINESS DESCRIPTION

These unaudited consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in Ambac’s 2012 Annual Report on Form 10-K. Certain reclassifications may have been made to prior periods’ amounts to conform to the current period’s presentation.

Ambac Financial Group, Inc.

Ambac Financial Group, Inc. (“Ambac” or the “Company”), headquartered in New York City, is a financial services holding company incorporated in the state of Delaware. On November 8, 2010, Ambac filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code (“Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of New York (“Bankruptcy Court”). The Company, as debtor and debtor-in-possession, filed a Fifth Amended Plan of Reorganization on March 12, 2012, which was confirmed by order of the Bankruptcy Court on March 14, 2012 and modified in accordance with orders entered by the Bankruptcy Court on April 29, 2013 (such Fifth Amended Plan of Reorganization, as so modified, the “Reorganization Plan”). On April 30, 2013, Ambac executed a closing agreement with the United States Internal Revenue Service (the “IRS”) to conclude the settlement of a dispute with the IRS (the “IRS Settlement”), and concurrently paid $1,900, while the Segregated Account (as defined below) paid $100,000, to the United States in connection with such settlement. This closing agreement represented the final material contingency under the Reorganization Plan required for the adoption of fresh start reporting. On May 1, 2013 (the “Effective Date”), the Reorganization Plan became effective and Ambac emerged from bankruptcy.

Pursuant to the Reorganization Plan, Ambac distributed 45,000,000 shares of new common stock on May 1, 2013, consisting of (1) 43,946,750 shares to holders of senior debt securities outstanding prior to the Effective Date with claims against the Company of approximately $1,246,129 that were discharged in the bankruptcy case; (2) 378,250 shares to holders of allowed general unsecured claims against the Company in the aggregate amount of approximately $14,328 that were discharged in the bankruptcy case; and (3) 675,000 shares to holders of subordinate debt securities outstanding prior to the Effective Date with claims against the Company of approximately $444,183 that were discharged in the bankruptcy case. We have reserved approximately 10,000 shares for possible future distributions to holders of disputed general unsecured claims when such claims are resolved. Under the Reorganization Plan Ambac also distributed warrants to (1) the aforementioned holders of allowed general unsecured claims, which entitle such holders to acquire an additional 42,424 shares of new common stock of the Company at an exercise price of $16.67 per share at any time on or prior to April 30, 2023 and (2) the aforementioned holders of subordinate debt securities, which entitle such holders to acquire an additional 5,004,714 shares of new common stock of the Company at an exercise price of $16.67 per share at any time on or prior to April 30, 2023. The new common stock and warrants were listed on NASDAQ and began trading under the symbols “AMBC” and “AMBCW,” respectively, on May 1, 2013. All such common stock and warrants were issued without registration under the Securities Act of 1933, as amended, or state securities laws, in reliance on Section 1145 of the Bankruptcy Code. The common stock of the Company in existence prior to the Effective Date was cancelled on the Effective Date and the holders of such stock did not receive, and will not receive, any distributions under the Reorganization Plan.

In addition to the distributions described above, the Company may be required to distribute additional new common stock and warrants to claimholders in its Chapter 11 case and will need to make cash payments in respect of allowed administrative claims and professional fees relating to its bankruptcy. On or before the date that is thirty (30) days after the Effective Date, all entities holding claims arising from the rejection of executory contracts or unexpired leases must file such claims in accordance with the procedures prescribed by the Bankruptcy Court. Any allowed claims arising from the rejection of the Company’s executory contracts or unexpired leases would be classified as general unsecured claims, entitling the holders thereof to receive new common stock as warrants in accordance with the Reorganization Plan. On or before the date that is forty-five (45) days after the Effective Date, requests for the payment of certain administrative claims must be filed and served on the Company pursuant to the procedures prescribed by the Bankruptcy Court. The Company will pay any such allowed claims in cash. On or before the date that is sixty (60) days after the Effective Date, all entities holding claims for accrued professional compensation, must file and serve on the Company and certain other parties a final application for the allowance of such claims. The Company will pay any such allowed claims in cash.

7

Pursuant to the Mediation Agreement, dated September 21, 2011 (the “Mediation Agreement”) among the Company, the statutory committee of creditors appointed by the United States Trustee on November 17, 2010 (the “Creditors’ Committee”), Ambac Assurance Corporation (“Ambac Assurance”), the Segregated Account of Ambac Assurance Corporation (the “Segregated Account”), the Commissioner of Insurance of the State of Wisconsin, as the court-appointed rehabilitator of the Segregated Account (the “Rehabilitator”), and the Wisconsin Office of the Commissioner of Insurance (“OCI”), the terms of which formed an integral part of the Reorganization Plan, Ambac Assurance transferred $30,000 from an escrow account to Ambac on the Effective Date. Additionally, the Segregated Account issued a Junior Surplus Note in the amount of $350,000 to Ambac on the Effective Date in accordance with the Mediation Agreement. No payment of interest on or principal of Segregated Account Junior Surplus Notes may be made until all existing and future indebtedness of the Segregated Account, including Segregated Account Surplus Notes, policy claims and claims having statutory priority have been paid in full. All payments of principal and interest on Segregated Account Junior Surplus Notes are subject to the prior approval of the OCI. If the OCI does not approve the payment of interest on the Segregated Account Junior Surplus Notes, such interest will accrue and compound annually until paid.

As of the Effective Date, the Company was generally discharged and released from all pre-Effective Date debts, liabilities, claims, causes of action and interests in accordance with the provisions of the Reorganization Plan. Holders of claims and equity interests are also generally barred from commencing or continuing any action or proceeding relating to such claims, causes of action or interests. The Reorganization Plan also provides for broad exculpation and releases of the Company, Ambac Assurance, the Segregated Account, OCI, the Rehabilitator, the board of directors and board committees of the Company and Ambac Assurance, all individual directors, officers and employees of the Company and Ambac Assurance, the Creditors’ Committee and the individual members thereof, and each of the respective representatives of such parties, for actions or omissions that occurred on or prior to the Effective Date.

As provided for in the Reorganization Plan, Ambac’s Amended and Restated Certificate of Incorporation and revised Bylaws became effective on the Effective Date. Pursuant to the Amended and Restated Certificate of Incorporation of Ambac, Ambac is authorized to issue 150,000,000 shares of capital stock, consisting of 130,000,000 shares of common stock, par value $0.01 per share and 20,000,000 shares of preferred stock, par value $0.01 per share. In accordance with the Reorganization Plan and the bylaws of the reorganized Company, the Board of Directors of Ambac now consists of Ambac’s Chief Executive Officer and three other Directors selected by the pre-Effective Date creditors of the Company. The Reorganization Plan provides for a fifth Director to be selected by the Creditors’ Committee within 60 days of the Effective Date.

Ambac’s Amended and Restated Certificate of Incorporation limits voting and transfer rights of shareholders in significant ways. Article IV contains voting restrictions applicable to any person owning at least 10% of Ambac’s common stock so that such person shall not be entitled to cast votes in excess of one vote less than 10% of the votes entitled to be cast by all common stock holders, except as otherwise approved by OCI. Article XII generally prohibits transfers of common stock to the extent that, as a result of such transfer, either (i) the transferee would become the beneficial owner of 5% or more of the Company’s outstanding stock or (ii) the percentage stock ownership interest in the Company of any existing beneficial owner of 5% or more of the Company’s outstanding stock would be increased. A purported transferee of such a prohibited transfer shall not be recognized as a shareholder of Ambac for any purpose whatsoever in respect of the shares of common stock which comprise the prohibited transfer. The Board of Directors of Ambac may grant exceptions to the restrictions of Article XII. Furthermore, on September 27, 2012, the Bankruptcy Court entered an order (the “Trading Order”), amending and restating an order entered on November 30, 2010, establishing procedures for certain pre-Effective Date transfers or acquisitions of equity interests in and claims (including debt securities) against the Company. The Bankruptcy Court retains jurisdiction after the Effective Date to enforce the Trading Order with respect to pre-Effective Date violations of the Trading Order.

Upon emergence from bankruptcy the Company will adopt fresh start reporting, as described more fully in Note 14. The adoption of fresh start accounting principles reflects the Company’s becoming a new entity for financial reporting purposes. Accordingly, the financial statements as of the Fresh Start Reporting Date (as defined in Note 14) and for subsequent periods will report the results of the new entity with no beginning retained earnings. Such financial statements will not be comparable to the financial statements prior to emergence.

8

Segregated Account of Ambac Assurance Corporation

Ambac Assurance is Ambac’s principal operating subsidiary. In March 2010, Ambac Assurance established the Segregated Account pursuant to Wisc. Stat. §611.24(2) to segregate certain segments of Ambac Assurance’s liabilities, and OCI commenced rehabilitation proceedings in the Dane County, Wisconsin Circuit Court (the “Rehabilitation Court”) with respect to the Segregated Account (the “Segregated Account Rehabilitation Proceedings”) in order to permit OCI to facilitate an orderly run-off and/or settlement of the liabilities allocated to the Segregated Account pursuant to the provisions of the Wisconsin Insurers Rehabilitation and Liquidation Act. Net par exposure as of March 31, 2013 for policies allocated to the Segregated Account is $26,122,693.

In 2010, Ambac Assurance issued a $2,000,000 secured note due in 2050 (the “Secured Note”) to the Segregated Account. Interest on the Secured Note accrues at the rate of 4.5% per annum, and accrued interest will be added to principal quarterly. The Segregated Account has the ability to demand payment from time to time to pay claims and other liabilities. The balance of the Secured Note is $358,568 at March 31, 2013, including capitalized interest since the date of issuance. In addition, once the Secured Note has been exhausted, the Segregated Account has the ability to demand payment from time to time under an aggregate excess of loss reinsurance agreement provided by Ambac Assurance (the “Reinsurance Agreement”) to pay claims and other liabilities.

Ambac Assurance is not obligated to make payments on the Secured Note or under the Reinsurance Agreement if its surplus as regards to policyholders is less than $100,000 (the “Minimum Surplus Amount”). As long as the surplus as regards to policyholders is not less than the Minimum Surplus Amount, payments by Ambac Assurance to the Segregated Account under the Reinsurance Agreement are not capped. At March 31, 2013, insurance liabilities for policies allocated to the Segregated Account were $6,211,471. At March 31, 2013, Ambac Assurance’s surplus as regards to policyholders of $159,451 exceeds the Minimum Surplus Amount.

On October 8, 2010, the Rehabilitator filed a plan of rehabilitation for the Segregated Account (the “Segregated Account Rehabilitation Plan”) in the Circuit Court of Dane County, Wisconsin in which the Segregated Account Rehabilitation Proceedings are pending (the “Rehabilitation Court”). The Rehabilitation Court confirmed the Segregated Account Rehabilitation Plan on January 24, 2011. The confirmed Segregated Account Rehabilitation Plan also makes permanent the injunctions issued by the Rehabilitation Court on March 24, 2010.

The Segregated Account Rehabilitation Plan has not been made effective and is subject to modification. On June 4, 2012, the Rehabilitation Court approved a motion made by the Rehabilitator to make partial interim policy claim payments to Segregated Account policyholders. In accordance with such approval, on August 1, 2012, the Rehabilitator promulgated Rules Governing the Submission, Processing and Partial Payment of Policy Claims in accordance with the June 4, 2012 Interim Cash Payment Order (the “Policy Claim Rules”). Pursuant to the Policy Claim Rules, with effect from August 1, 2012, holders of policies allocated to the Segregated Account were, and continue to be, allowed to submit policy claims for review and partial payment equating to 25% of the permitted policy claim amount. The Rehabilitator is considering seeking approval from the Rehabilitation Court for the Segregated Account to make cash payments in excess of 25% of the permitted policy claim amount (“Supplemental Payments”) with respect to certain insured securities so that cash flow in the related securitization trusts that would have been available to reimburse Ambac Assurance had it paid claims in full is not diverted to uninsured holders who would not have received such cash flow if claims had been paid in full. Without making such Supplemental Payments, Ambac Assurance would likely realize lower levels of reimbursements than currently contemplated by our reserves in the relevant transactions as cash flow that would have been available for the benefit of Ambac Assurance would be lost to such uninsured holders. It is presently anticipated that the Rehabilitator will initially identify approximately 14 transactions on which the Segregated Account would make Supplemental Payments.

The Rehabilitator has informed the Company that it intends to seek rulings from the IRS as to certain tax issues associated with potential amendments to the Segregated Account Rehabilitation Plan. Pursuant to such amendments, surplus notes would not be issued with respect to the unpaid balance of permitted policy claims, but such balance would be recorded by the Segregated Account as outstanding policy obligations which would accrue interest at a rate of 5.1%, compounded annually until paid (any such outstanding policy obligation, including accrued interest thereon, being a “Deferred Amount”). If favorable rulings are received by the Rehabilitator from the IRS as to such tax issues, then the Rehabilitator would likely file amendments to the Segregated Account Rehabilitation Plan to provide for Deferred Amounts to be established, rather than for surplus notes to be issued, with respect to the unpaid portion of permitted policy claims. The timing and likelihood of such amendments to the Segregated Account Rehabilitation Plan are presently unclear, but such amendments would result in a material change to our financial results.

2. DEBTOR IN POSSESSION FINANCIAL INFORMATION

Entities operating in bankruptcy and expecting to reorganize under Chapter 11 of the Bankruptcy Code are subject to the additional accounting and financial reporting guidance in ASC Topic 852 “Reorganizations”. In accordance with ASC Topic 852, following the date Ambac filed its Chapter 11 petition, we discontinued recording interest expense on debt classified as Liabilities subject to compromise, which amounted to $232,556 as of March 31, 2013. The stated contractual interest on debt classified as Liabilities subject to compromise amounted to $20,660 and $24,162 for the three months ended as of March 31, 2013 and March 31, 2012, respectively. As required by ASC Topic 852, the amount of the Liabilities subject to compromise represents our estimate of known or potential pre-petition claims to be addressed in connection with the bankruptcy. The Liabilities subject to compromise in the Consolidated Balance Sheets consists of the following:

	March 31, 2013		December 31, 2012
Debt obligations and accrued interest payable	$	1,690,312	$	1,690,312
Accounts payable		14,329		14,592
Consolidated liabilities subject to compromise		1,704,641		1,704,904
Payable to non-debtor subsidiaries		—		35
Debtor’s Liabilities subject to compromise	$	1,704,641	$	1,704,939

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Professional advisory fees and other costs directly associated with our reorganization are reported separately as reorganization items pursuant to ASC Topic 852. Reorganization items also include adjustments to reflect the carrying value of certain pre-petition liabilities at their allowable claim amounts. The reorganization items in the Consolidated Statements of Total Comprehensive Income for the three months ended March 31, 2013 and 2012 consisted of the following items:

	Three months ended March 31, 2013		Three months ended March 31, 2012
U.S. Trustee fees	$	10	$	20
Professional fees		2,049		2,441
Total reorganization items	$	2,059	$	2,461

3. SPECIAL PURPOSE ENTITIES, INCLUDING VARIABLE INTEREST ENTITIES

Ambac, through its subsidiaries, has engaged in transactions with special purpose entities, including variable interest entities (“VIEs”), in various capacities. Ambac most commonly has provided financial guarantees, including credit derivative contracts, for various debt obligations issued by special purpose entities, including VIEs. Ambac has also sponsored two special purpose entities that issued medium-term notes to fund the purchase of certain financial assets. Ambac is also 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. In 2011, Ambac Assurance entered into a secured borrowing transaction under which two VIEs were created for the purpose of resecuritizing certain invested assets and collateralizing the borrowing. These VIEs are consolidated because Ambac Assurance was involved in their design and holds a significant amount of the beneficial interests issued by the VIEs or guarantees the assets held by the VIEs. VIE debt outstanding to third parties under this secured borrowing transaction was $10,521 and $14,588 as of March 31, 2013 and December 31, 2012, respectively. The debt represents the senior-most tranche of the securitization structure and is to be repaid from the non-insurance proceeds of certain RMBS securities which are guaranteed by Ambac Assurance. Such securities had a fair value of $218,735 and $201,329 as of March 31, 2013 and December 31, 2012, respectively. Refer to Note 8, Investments for further discussion of the restrictions on these securities.

Financial Guarantees:

Ambac’s subsidiaries provided financial guarantees in respect of assets held or debt obligations of special purpose entities, including VIEs. Ambac’s primary variable interest exists through this financial guarantee insurance or credit derivative contract. The transaction structure provides certain financial protection to Ambac. This financial protection can take several forms; however, the most common are over-collateralization, first loss and excess spread. In the case of over-collateralization (i.e., the principal amount of the securitized assets exceeds the principal amount of the debt obligations guaranteed), the structure allows the transaction to experience defaults among the securitized assets before a default is experienced on the debt obligations that have been guaranteed by Ambac’s subsidiaries. In the case of first loss, the financial guarantee insurance policy or credit derivative contract only covers a senior layer of losses on assets held or debt issued by special purpose entities, including VIEs. The first loss with respect to the assets is either retained by the asset seller or sold off in the form of equity or mezzanine debt to other investors. In the case of excess spread, the securitized assets contributed to special purpose entities, including VIEs, generate interest cash flows that are in excess of the interest payments on the related debt; such excess cash flow is applied to redeem debt, thus creating over-collateralization. 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 loss remediation rights. These rights may enable Ambac to direct the activities of the entity that most significantly impact the entity’s economic performance.

We determined that Ambac’s subsidiaries generally have the obligation to absorb the VIE’s expected losses given that they have issued financial guarantees supporting the liabilities (and in certain cases assets) of a VIE. As further described below, we consolidated certain VIEs because: a) we determined for certain transactions that experienced the aforementioned performance deterioration, that Ambac’s subsidiaries had the power, through voting rights or similar rights, to direct the activities of certain VIEs that most significantly impact the VIE’s economic performance because certain triggers had been breached in these transactions resulting in their ability to exercise certain loss remediation activities, or b) due to the passive nature of the VIEs’ activities, Ambac’s subsidiaries’ contingent loss remediation rights upon a breach of certain triggers in the future is considered to be the power to direct the activities that most significantly impact the VIEs’ economic performance. With respect to existing VIEs involving Ambac financial guarantees, Ambac is generally required to

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consolidate a VIE in the period that applicable triggers result in Ambac having control over the VIE’s most significant economic activities. A VIE is deconsolidated in the period that Ambac no longer has such control, which occurred in connection with insurance policies that were allocated to the Segregated Account, execution of remediation activities on the transaction or amortization of insured exposure, any of which may reduce the degree of Ambac’s control over a VIE.

Ambac Sponsored VIEs:

A subsidiary of Ambac has transferred financial assets to two special purpose entities. The business purpose of these entities is to provide certain financial guarantee clients with funding for their debt obligations. These special purpose entities are legal entities that are demonstrably distinct from Ambac. Ambac, its affiliates or its agents cannot unilaterally dissolve these entities. The permitted activities of these entities are limited to those outlined below. Ambac does not consolidate these entities because Ambac Assurance’s policies issued to these entities have been allocated to the Segregated Account, thereby limiting Ambac’s control over the entities’ most significant economic activities. Ambac has elected to account for its equity interest in these entities at fair value under the fair value option in accordance with ASC Topic 825, Financial Instruments. 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 ASC Topic 323, Investments—Equity Method in Joint Ventures. Refer to Note 7 for further information on the valuation technique and inputs used to measure the fair value of Ambac’s equity interest in these entities. At March 31, 2013 and December 31, 2012 the fair value of these entities is $14,230 and $14,557, respectively, and is reported within Other assets on the Consolidated Balance Sheets. The change in fair value of these entities is ($327) and ($756) for the three months ended March 31, 2013 and 2012, respectively.

Since their inception, there have been 15 individual transactions with these entities, of which 3 transactions were outstanding as of March 31, 2013. Total principal amount of debt outstanding was $464,495 and $466,938 at March 31, 2013 and December 31, 2012, respectively. In each case, Ambac sold assets to these entities. The assets are composed of utility obligations with a weighted average rating of BBB+ at March 31, 2013 and weighted average life of 8.7 years. The purchase by these entities was financed through the issuance of medium-term notes (“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 entities for economic hedging purposes only. Derivative positions were established at the time MTNs were issued to purchase financial assets. The activities of these entities are contractually limited to purchasing assets from Ambac, issuing MTNs to fund such purchase, executing derivative hedges and obtaining financial guarantee policies with respect to indebtedness incurred. As of March 31, 2013 Ambac Assurance had financial guarantee insurance policies issued for all assets, MTNs and derivative contracts owned and outstanding by the entities.

Insurance premiums paid to Ambac Assurance by these entities 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. 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.

There were no assets sold to these entities during the three months ended March 31, 2013 and 2012. Ambac Assurance earned premiums for issuing the financial guarantee policies on the assets, MTNs and derivative contracts of $30 and $145 for the three months ended March 31, 2013 and 2012, respectively. Ambac was not presented with claims on insurance policies issued to these entities during the three months ended March 31, 2013 and 2012, but did receive recoveries of $1,455 and $134 in respect of previously paid claims for the three months ended March 31, 2013 and 2012, respectively. Ambac also earned fees for providing other services amounting to $2 and $11 for the three months ended March 31, 2013 and 2012, respectively.

Derivative contracts are provided by Ambac Financial Services (“AFS”), Ambac’s derivative products subsidiary, to these entities. Ambac accounts for these contracts on a trade date basis at fair value. AFS paid $93 and $138 for the three months ended March 31, 2013 and 2012, respectively, under these derivative contracts.

Consolidation of VIEs:

Upon initial consolidation of a VIE, we recognize 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 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 on variable interest entities.

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The variable interest in a VIE generally involves one or more of the following: a financial guarantee policy issued to the VIE, a written credit derivative contract that references liabilities of the VIE or an investment in securities issued by the VIE. The impact of consolidating such VIEs on Ambac’s balance sheet is the elimination of transactions between the consolidated VIEs and Ambac’s operating subsidiaries and the inclusion of the VIE’s third party assets and liabilities. For a financial guarantee policy issued to a consolidated VIE, Ambac does not reflect the financial guarantee insurance policy in accordance with the related insurance accounting rules under ASC Topic 944, Financial Services—Insurance. Consequently, Ambac eliminates insurance assets (premium receivables, reinsurance recoverable, deferred ceded premium, subrogation recoverable and deferred acquisition costs) and insurance liabilities (unearned premiums, loss and loss expense reserves and ceded premiums payable) from the Consolidated Balance Sheets. For investment securities owned by Ambac that are debt instruments issued by the VIE, the investment securities balance is eliminated upon consolidation. Ambac did not consolidate any VIEs solely as a result of purchases of the VIE’s debt instruments.

As of March 31, 2013 consolidated VIE assets and liabilities relating to 18 consolidated entities were $16,751,505 and $16,548,127, respectively. As of December 31, 2012, consolidated VIE assets and liabilities relating to 18 consolidated entities were $17,841,863 and $17,661,700, respectively. Ambac is not primarily liable for, and does not guarantee all of the debt obligations issued by the VIEs. Ambac would only be required to make payments on the guaranteed debt obligations in the event that the issuer of such debt obligations defaults on any principal or interest due. Additionally, Ambac’s creditors do not have rights with regard to the assets of the VIEs. Ambac evaluates the net income statement 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 changes in fair value of most consolidated VIE assets and liabilities are attributable to Ambac due to Ambac’s interest through financial guarantee premium and loss payments with the VIE.

The financial reports of certain VIEs are prepared by outside trustees and are not available within the time constraints Ambac requires to ensure the financial accuracy of the operating results. As such, the financial results of certain VIEs are consolidated on a time lag that is no longer than 90 days.

The table below provides the fair value of fixed income securities, by asset-type, held by consolidated VIEs as of March 31, 2013 and December 31, 2012:

	March 31, 2013		December 31, 2012
Investments:
Corporate obligations	$	2,414,607	$	2,261,294
Total variable interest entity assets: Fixed income securities	$	2,414,607	$	2,261,294

The following table provides supplemental information about the loans held as assets and long-term debt associated with the VIEs for which the fair value option has been elected as of March 31, 2013 and December 31, 2012:

	Estimated fair value		Unpaid principal balance
March 31, 2013:
Loans	$	14,116,811	$	12,522,933
Long-term debt	$	13,996,531	$	13,893,522
December 31, 2012:
Loans	$	15,359,073	$	13,995,141
Long-term debt	$	15,200,538	$	15,460,530

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Variable Interests in Non-Consolidated VIEs

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 credit derivative contracts by major underlying asset classes, as of March 31, 2013 and December 31, 2012:

	Carrying Value of Assets and Liabilities
	Maximum Exposure To Loss(1)		Insurance Assets(2)		Insurance Liabilities(3)		Derivative Liabilities(4)
March 31, 2013:
Global Structured Finance:
Collateralized debt obligations	$	8,880,445	$	7,656	$	10,922	$	104,544
Mortgage-backed—residential		21,936,226		645,742		3,875,478		—
Mortgage-backed—commercial		610,872		—		—		2,788
Other consumer asset-backed		5,755,161		98,185		1,120,657		38,018
Other commercial asset-backed		9,611,024		420,513		1,196,286		9,427
Other		5,257,351		129,485		607,600		5,475
Total Global Structured Finance		52,051,079		1,301,581		6,810,943		160,252
Global Public Finance		35,730,898		524,309		606,981		29,470
Total	$	87,781,977	$	1,825,890	$	7,417,924	$	189,722

	Carrying Value of Assets and Liabilities
	Maximum Exposure To Loss(1)		Insurance Assets(2)		Insurance Liabilities(3)		Derivative Liabilities(4)
December 31, 2012:
Global Structured Finance:
Collateralized debt obligations	$	10,176,522	$	9,673	$	13,328	$	113,057
Mortgage-backed—residential		24,008,616		603,867		3,969,336		—
Mortgage-backed—commercial		643,387		—		—		2,418
Other consumer asset-backed		5,895,377		101,494		1,042,522		45,610
Other commercial asset-backed		10,192,858		451,048		1,215,074		7,293
Other		5,505,007		132,004		590,017		4,393
Total Global Structured Finance		56,421,767		1,298,086		6,830,277		172,771
Global Public Finance		37,096,228		542,179		633,358		28,663
Total	$	93,517,995	$	1,840,265	$	7,463,635	$	201,434

(1) Maximum exposure to loss represents the gross maximum future payments of principal and interest on insured obligations and credit 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 recorded in “Premium receivables” and “Subrogation recoverable” for financial guarantee contracts on Ambac’s Consolidated Balance Sheets.

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

(4) Derivative liabilities represent the fair value recognized on credit derivative contracts on Ambac’s Consolidated Balance Sheets.

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4. COMPREHENSIVE INCOME

The following table displays the changes in the balances of each component of accumulated other comprehensive income for the three months ended March 31, 2013:

	Unrealized Gains (Losses) on Available- for-Sale Securities (1)			Loss on Foreign Currency Translation (1)			Amortization of Postretirement Benefit (1)			Total
Balance at December 31, 2012	$	651,272		$	(20,027	)	$	(5,860	)	$	625,385
Other comprehensive income before reclassifications		100,180			(220	)		—			99,960
Amounts reclassified from accumulated other comprehensive income		(6,082	)		—			808			(5,274	)
Net current period other comprehensive income		94,098			(220	)		808			94,686
Balance at March 31, 2013	$	745,370		$	(20,247	)	$	(5,052	)	$	720,071

(1) All amounts are net of tax and noncontrolling interest. Amounts in parentheses indicate debits.

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The following table displays the significant amounts reclassed out of each component of accumulated other comprehensive income for the three months ended March 31, 2013:

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
Unrealized Gains (Losses) on Available-for-Sale Securities
	$	6,082		Net realized investment gains
		—		Tax (expense) benefit
	$	6,082		Net of tax and noncontrolling interest (3)
Amortization of Postretirement Benefit
Prior service cost	$	(1,707	)	Underwriting and operating expenses (2)
Actuarial gains (losses)		899		Underwriting and operating expenses (2)
		(808	)	Total before tax
		—		Tax (expense) benefit
	$	(808	)	Net of tax and noncontrolling interest (3)
Total reclassifications for the period	$	5,274		Net of tax and noncontrolling interest (3)

(1) Amounts in parentheses indicate debits to profit/loss.

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

(3) Amount agrees with amount reported as reclassifications from AOCI in the disclosure about changes in AOCI balances.

5. NET INCOME PER SHARE

Basic net income per share is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding. Common shares outstanding includes common stock issued plus restricted stock units for which no future service is required as a condition to the delivery of the underlying common stock less treasury shares. Diluted net income per share is computed by dividing net income attributable to common stockholders by the weighted-average number of common shares outstanding plus all dilutive potential common shares outstanding during the period. All dilutive potential common shares outstanding consider common stock deliverable pursuant to nonvested restricted stock units. These dilutive shares totaled 109,738 and 114,269 from the assumed settlement of diluted nonvested restricted stock units at March 31, 2013 and 2012, respectively. The following table presents securities outstanding that could potentially dilute basic EPS in the future that were not included in the computation of diluted EPS because they were antidilutive for years ended March 31, 2013 and 2012:

	Three Months Ended March  31, 2013		Three Months Ended March  31, 2012
Stock options		480,350		887,672

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In connection with Ambac’s emergence from bankruptcy in the second quarter of 2013, Ambac’s pre-Effective Date common stock and equity interests, including stock options, warrants and other rights to acquire shares, have been cancelled. Accordingly, the stock options and restricted stock units referenced in the table above will not be antidilutive to the new common stock that was issued in May 2013.

6. FINANCIAL GUARANTEE INSURANCE CONTRACTS

Net Premiums Earned:

Amounts presented in this Note 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.

Gross premiums are received either upfront (typical of public finance obligations) or in installments (typical of structured finance obligations). 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 underlying insured obligation is a homogenous pool of assets 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 while exposures denominated in a foreign currency are discounted using the appropriate risk-free rate for the respective currency. The weighted average risk-free rate at March 31, 2013 and December 31, 2012, were 2.7% and 2.6%, respectively, and the weighted average period of future premiums used to estimate the premium receivable at March 31, 2013 and December 31, 2012, were 9.8 years and 9.6 years, respectively.

Insured obligations consisting of homogeneous pools for which Ambac uses expected future premiums to estimate the premium receivable and UPR include residential mortgage-backed securities. As prepayment assumptions change for homogenous pool transactions, or if there is an actual prepayment for a “contractual” method installment transaction, the related premium receivable and UPR are adjusted in equal and offsetting amounts with no immediate effect on earnings using new premium cash flows and the then current risk-free rate.

Generally, the priority for the payment of financial guarantee premiums to Ambac, as required by the bond indentures of the insured obligations, is very senior in the waterfall. Additionally, in connection with the allocation of certain liabilities to the Segregated Account, trustees are required under the Segregated Account Rehabilitation Plan and related court orders to continue to pay installment premiums, notwithstanding the Segregated Account Rehabilitation Proceedings. In evaluating the credit quality of the premiums receivable, management evaluates the internal ratings of the transactions underlying the premiums receivable. As of March 31, 2013 and December 31, 2012, approximately 40% of the premiums receivable related to transactions with non-investment grade internal ratings, comprised mainly of non-investment grade MBS, student loan transactions and a certain asset-backed transaction, which comprised 7%, 9%, and 15% of the total premiums receivable at March 31, 2013 and December 31, 2012, respectively. As of March 31, 2013 and December 31, 2012, $119,162 and $118,961, respectively, of premium receivables relating to a non-investment obligation were deemed uncollectable. Past due premiums on policies insuring non-investment grade obligations amounted to less than $500 at March 31, 2013.

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Below is the gross premium receivable roll-forward (direct and assumed contracts) for the periods ended March 31, 2013 and December 31, 2012:

	March 31, 2013			December 31, 2012
Beginning premium receivable	$	1,620,621		$	2,028,479
Premium payments received		(35,115	)		(155,626	)
Adjustments for changes in expected life of homogeneous pools and actual changes to contractual cash flows		(14,524	)		(299,906	)
Accretion of premium receivable discount		11,190			50,407
Uncollectible premiums		(201	)		(28,031	)
Other adjustments (including foreign exchange)		(38,873	)		25,298
Ending premium receivable	$	1,543,098		$	1,620,621

Similar to gross premiums, premiums ceded to reinsurers are paid either upfront or in installments. Premiums ceded to reinsurers reduce the amount of premiums earned by Ambac from its financial guarantee insurance policies.

When a bond issue insured by Ambac Assurance has been retired, including those retirements due to refundings or calls, 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. Accelerated premium revenue for retired obligations for the three months ended March 31, 2013 and 2012 were $29,360 and $15,790, respectively. Certain obligations insured by Ambac have been legally defeased whereby government securities are purchased by the issuer with the proceeds of a new bond issuance, or less frequently with other funds of the issuer, and held in escrow (a pre-refunding). The principal and interest received from the escrowed securities are then used to retire the Ambac-insured obligations at a future date either to their maturity date or a specified call date. Ambac has evaluated the provisions in certain financial guarantee insurance policies issued on legally defeased obligations and determined those insurance policies have not been legally extinguished and, therefore, premium revenue recognition has not been accelerated. The effect of reinsurance on premiums written and earned was as follows:

	Three Months Ended March 31,
	2013						2012
	Written			Earned			Written			Earned
Direct	($	3,530	)	$	107,079		($	92,594	)	$	97,148
Assumed		—			24			—			25
Ceded		1,014			(6,847	)		16,854			(2,223	)
Net premiums	($	2,516	)	$	100,256		($	75,740	)	$	94,950

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The table below summarizes the future gross undiscounted premiums expected to be collected, and future expected premiums earned, net of reinsurance at March 31, 2013:

	Future premiums expected to be collected (1)		Future expected premiums to be earned, net of reinsurance (1)
Three months ended:
June 30, 2013	$	34,028	$	58,929
September 30, 2013		32,009		55,616
December 31, 2013		30,709		52,685
Twelve months ended:
December 31, 2014		132,258		194,154
December 31, 2015		126,751		177,515
December 31, 2016		120,311		165,528
December 31, 2017		114,183		154,685
Five years ended:
December 31, 2022		502,819		639,948
December 31, 2027		396,110		452,156
December 31, 2032		283,899		290,129
December 31, 2037		149,835		149,612
December 31, 2042		51,437		42,639
December 31, 2047		15,846		14,828
December 31, 2052		3,639		4,692
December 31, 2057		92		297
Total	$	1,993,926	$	2,453,413

(1) The future premiums expected to be collected and future premiums expected to be earned, net of reinsurance disclosed in the above table relate to the discounted premium receivable asset and unearned premium liability 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 described above, which results in a higher premium receivable balance than if expected lives were considered. If installment paying policies are retired early premiums reflected in the premium receivable asset and amounts reported in the above table for such policies may not be collected in the future.

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Loss and Loss Expense Reserves:

A loss reserve is recorded on the balance sheet on a policy-by-policy basis for the excess of: (a) the present value of expected net cash flows required to be paid under an insurance contract, over (b) the UPR for that contract. Below is the loss reserve roll-forward, net of subrogation recoverable and reinsurance for the three months ended March 31, 2013 and the year ended December 31, 2012:

	Three Months Ended March  31, 2013			Year Ended December 31, 2012
Beginning balance of loss and loss expense reserves, net of subrogation recoverable and reinsurance	$	5,974,731		$	6,230,780
Changes in the loss and loss expense reserves due to:
Current year:
Establishment of new loss and loss expense reserves, gross of RMBS subrogation and net of reinsurance		4,083			464,058
Paid claims and loss expenses, net of subrogation and reinsurance		(58	)		(20,765	)
Establishment of RMBS subrogation recoveries, net of reinsurance		(188	)		—
Total current year		3,837			443,293
Prior years:
Change in previously established loss and loss expense reserves, gross of RMBS subrogation and net of reinsurance		(129,090	)		72,700
Paid claims and loss expenses, net of subrogation and reinsurance		12,365			(944,860	)
Change in previously established RMBS subrogation recoveries, net of reinsurance		34,617			172,818
Total prior years		(82,108	)		(699,342	)
Net change in loss and loss expense reserves		(78,271	)		(256,049	)
Ending loss and loss expense reserves, net of subrogation recoverable and reinsurance	$	5,896,460		$	5,974,731

The positive development in loss reserves established in prior years for the three months ended March 31, 2013 was primarily due to the strengthening of collateral supporting sub-prime RMBS exposures which resulted in lower expected ultimate losses and lower expected subrogation recoveries related to representation and warranty breaches (“RMBS subrogation recoveries”) on insured RMBS securitizations.

The change in net loss and loss expense reserves of ($78,271) and ($256,049) for the three months ended March 31, 2013 and year ended December 31, 2012, respectively, are included in loss and loss expenses in the Consolidated Statement of Total Comprehensive Income. Loss expense reserves are established for surveillance, legal and other mitigation expenses associated with adversely classified credits. Total net loss expense reserves, included in the above table, were $134,477 and $136,790 at March 31, 2013 and December 31, 2012, respectively. Total loss and loss expense of ($51,135) and ($2,320) for the three month periods ended March 31, 2013 and 2012, respectively, are included in loss and loss expenses in the Consolidated Statement of Total Comprehensive Income. During the three month periods ended March 31, 2013 and 2012, respectively, reinsurance recoveries of losses included in loss and loss expenses in the Consolidated Statements of Total Comprehensive Income were $3,881 and $12,518, respectively.

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The tables below summarize information related to policies currently included in Ambac’s loss reserves or subrogation recoverable at at March 31, 2013 and December 31, 2012. The weighted average risk-free rate used to discount loss reserves at March 31, 2013 and December 31, 2012 was 2.2% and 1.6%, respectively.

Surveillance Categories (at March 31, 2013)

	I/SL			IA			II			III			IV			V			Total
Number of policies		13			19			23			100			149			1			305
Remaining weighted-average contract period (in years)		13			19			20			19			7			6			12
Gross insured contractual payments outstanding:
Principal	$	375,901		$	1,720,891		$	1,204,275		$	7,567,920		$	12,001,394		$	47		$	22,870,428
Interest		217,054			1,286,857			535,433			3,574,483			2,421,012			18			8,034,857
Total	$	592,955		$	3,007,748		$	1,739,708		$	11,142,403		$	14,422,406		$	65		$	30,905,285
Gross undiscounted claim liability	$	6,442		$	56,453		$	42,156		$	4,036,278		$	7,973,957		$	65		$	12,115,351
Discount, gross claim liability		(525	)		(4,740	)		(8,465	)		(1,367,508	)		(900,496	)		(2	)		(2,281,736	)
Gross claim liability before all subrogation and before reinsurance	$	5,917		$	51,713		$	33,691		$	2,668,770		$	7,073,461		$	63		$	9,833,615
Less:
Gross RMBS subrogation(1)		—			(93	)		—			(6,417	)		(2,490,885	)		—			(2,497,395	)
Discount, RMBS subrogation		—			1			—			18			10,007			—			10,026
Discounted RMBS subrogation, before reinsurance		—			(92	)		—			(6,399	)		(2,480,878	)		—			(2,487,369	)
Less:
Gross other subrogation(2)		—			—			(20,043	)		(139,834	)		(779,446	)		—			(939,323	)
Discount, other subrogation		—			—			7,644			22,212			36,059			—			65,915
Discounted other subrogation, before reinsurance		—			—			(12,399	)		(117,622	)		(743,387	)		—			(873,408	)
Gross claim liability, net of all subrogation and discounts, before reinsurance	$	5,917		$	51,621		$	21,292		$	2,544,749		$	3,849,196		$	63		$	6,472,838
Less: Unearned premium reserves		(3,931	)		(30,958	)		(10,341	)		(413,644	)		(104,597	)		—			(563,471	)
Plus: Loss adjustment expenses reserves		—			32			3,300			5,593			126,917			—			135,842
Claim liability reported on Balance Sheet, before reinsurance(3)	$	1,986		$	20,695		$	14,251		$	2,136,698		$	3,871,516		$	63		$	6,045,209
Reinsurance recoverable reported on Balance Sheet	$	—		$	2,781		$	2,465		$	137,915		$	17,521		$	—		$	160,682

(1) RMBS subrogation represents Ambac’s estimate of subrogation recoveries from RMBS transaction sponsors for representation and warranty breaches.

(2) Other subrogation represents subrogation, including subrogation from RMBS transactions, other than subrogation as defined in (1) above.

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(3) Claim liability reported on the Balance Sheet, before reinsurance is included in the Consolidated Balance Sheets as follows:

Loss and loss expense reserve (net of potential subrogation recoveries of $2,482,302)	$	6,590,216
Subrogation recoverable (includes gross potential recovery of $878,475)		(545,007	)
	$	6,045,209

Surveillance Categories (at December 31, 2012)

	I/SL			IA			II			III			IV			V			Total
Number of policies		14			12			28			114			147			1			316
Remaining weighted-average contract period (in years)		15			21			18			20			8			6			13
Gross insured contractual payments outstanding:
Principal	$	311,157		$	786,998		$	1,245,793		$	9,161,747		$	12,554,628		$	47		$	24,060,370
Interest		166,276			715,129			379,237			4,905,775			3,076,746			20			9,243,183
Total	$	477,433		$	1,502,127		$	1,625,030		$	14,067,522		$	15,631,374		$	67		$	33,303,553
Gross undiscounted claim liability	$	2,135		$	40,898		$	49,521		$	4,051,076		$	7,976,765		$	67		$	12,120,462
Discount, gross claim liability		(219	)		(3,532	)		(3,247	)		(1,342,910	)		(788,720	)		(3	)		(2,138,631	)
Gross claim liability before all subrogation and before reinsurance	$	1,916		$	37,366		$	46,274		$	2,708,166		$	7,188,045		$	64		$	9,981,831
Less:
Gross RMBS subrogation(1)		—			—			—			(16,170	)		(2,544,993	)		—			(2,561,163	)
Discount, RMBS subrogation		—			—			—			312			37,626			—			37,938
Discounted RMBS subrogation, before reinsurance		—			—			—			(15,858	)		(2,507,367	)		—			(2,523,225	)
Less:
Gross other subrogation(2)		—			—			—			(141,012	)		(766,717	)		—			(907,729	)
Discount, other subrogation		—			—			—			21,238			15,711			—			36,949
Discounted other subrogation, before reinsurance		—			—			—			(119,774	)		(751,006	)		—			(870,780	)
Gross claim liability, net of all subrogation and discounts, before reinsurance	$	1,916		$	37,366		$	46,274		$	2,572,534		$	3,929,672		$	64		$	6,587,826
Less: Unearned premium reserves		(1,179	)		(21,626	)		(17,120	)		(450,247	)		(113,622	)		—			(603,794	)
Plus: Loss adjustment expenses reserves	$	—		$	—		$	—		$	—		$	138,108		$	—		$	138,108
Claim liability reported on Balance Sheet, before reinsurance(3)	$	737		$	15,740		$	29,154		$	2,122,287		$	3,954,158		$	64		$	6,122,140
Reinsurance recoverable reported on Balance Sheet	$	—		$	1,078		$	7,085		$	128,333		$	22,590		$	—		$	159,086

(1) RMBS subrogation represents Ambac’s estimate of subrogation recoveries from RMBS transaction sponsors for representation and warranty breaches.

(2) Other subrogation represents subrogation, including subrogation from RMBS transactions, other than subrogation as defined in (1) above.

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(3) Claim liability reported on the Balance Sheet, before reinsurance is included in the Consolidated Balance Sheets as follows:

Loss and loss expense reserve (net of potential subrogation recoveries of $2,611,430)	$	6,619,486
Subrogation recoverable (includes gross potential recovery of $782,575)		(497,346	)
	$	6,122,140

Loss and loss expense reserves ceded to reinsurers at March 31, 2013 and December 31, 2012 were $148,749 and $147,409, respectively. Amounts were included in reinsurance recoverable on the Consolidated Balance Sheets.

Ambac records estimated subrogation recoveries for breaches of representations and warranties by sponsors of certain RMBS transactions utilizing an Adverse and Random Sample approach. Ambac has recorded RMBS subrogation recoveries of $2,487,369 ($2,460,389 net of reinsurance) and $2,523,225 ($2,497,233 net of reinsurance) at March 31, 2013 and December 31, 2012, respectively. The balance of RMBS subrogation recoveries and the related claim liabilities, by estimation approach, at March 31, 2013 and December 31, 2012, are as follows:

	March 31, 2013
Approach	Count		Gross loss reserve before subrogation recoveries		Subrogation recoveries(1) (2)			Gross loss reserve after subrogation recoveries
Adverse samples		29	$	2,424,630	$	(1,483,726	)	$	940,904
Random samples		20		1,015,011		(1,003,643	)		11,368
Totals		49	$	3,439,641	$	(2,487,369	)	$	952,272
	December 31, 2012
Approach	Count		Gross loss reserve before subrogation recoveries		Subrogation recoveries  (1) (2)			Gross loss reserve after subrogation recoveries
Adverse samples		27	$	2,331,878	$	(1,442,817	)	$	889,061
Random samples		22		1,231,466		(1,080,408	)		151,058
Totals		49	$	3,563,344	$	(2,523,225	)	$	1,040,119

(1) The amount of recorded subrogation recoveries related to each securitization is limited to ever-to-date paid losses plus projected future paid losses for each policy. To the extent significant losses have been paid but not yet recovered, the recorded amount of RMBS subrogation recoveries may exceed the expected future claims for a given policy. The net cash inflow for these policies is recorded as a “Subrogation recoverable” asset. For those transactions where the subrogation recovery is less than expected future claims, the net cash outflow for these policies is recorded as a “Loss and loss expense reserve” liability.

(2) The sponsor’s repurchase obligation may differ depending on the terms of the particular transaction and the status of the specific loan, such as whether it is performing or has been liquidated or charged off. The estimated subrogation recovery for these transactions is based primarily on loan level data provided through trustee reports received in the normal course of our surveillance activities or provided by the sponsor. While this data may not include all the components of the sponsor’s contractual repurchase obligation we believe it is the best information available to estimate the subrogation recovery.

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Below is the rollforward of RMBS subrogation, by estimation approach, for the period December 31, 2012 through March 31, 2013:

	Random sample			Number of transactions			Adverse sample		Number of transactions		Total
Rollforward:
Discounted RMBS subrogation (gross of reinsurance) at December 31, 2012	$	1,080,408			22		$	1,442,817		27	$	2,523,225
Changes recognized in 2013:
Additional transactions reviewed		—			n/a			—		n/a		—
Additional adverse sample loans reviewed		—			n/a			—		n/a		—
Impact of sponsor actions (1)		(54,195	)		(2	)		—		n/a		(54,195	)
All other changes (2)		(22,570	)		n/a			40,909		2		18,339
Discounted RMBS subrogation (gross of reinsurance) at March 31, 2013	$	1,003,643			20		$	1,483,726		29	$	2,487,369

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

(2) Other changes which may impact RMBS subrogation recoveries include changes in actual or projected collateral performance, changes in the creditworthiness of a sponsor, and/or the projected timing of recoveries. For the three months ended March 31, 2013, an additional two transactions were added to the Adverse Sample subrogation population; however, the impacts on RMBS subrogation disclosed in the Adverse Sample column relate to those, as well as other, transactions.

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7. FAIR VALUE MEASUREMENTS

ASC Topic 820, Fair Value Measurements and Disclosures, establishes a framework for measuring fair value and disclosures about fair value measurements.

Fair value Hierarchy:

ASC Topic 820 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. In accordance with ASC Topic 820, the fair value hierarchy prioritizes model inputs into three broad levels as follows:

•   Level 1	–	Quoted prices for identical instruments in active markets. Assets and liabilities classified as Level 1 include US Treasury securities, exchange traded futures contracts, variable rate demand obligations, money market funds and mutual funds.
•   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 direct investments in fixed income securities representing municipal, asset-backed and corporate obligations, financial services derivatives (including certain interest rate derivatives), and most long-term debt of variable interest entities consolidated under ASC Topic 810. Also included are equity interests in pooled investment funds measured at fair value where the investment can be redeemed in the near term at a value based on the net asset value.
•   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 written as part of the financial guarantee business, certain financial services interest rate swap contracts, call options on long-term debt, equity interests in Ambac sponsored special purpose entities and certain investments in fixed income securities. Additionally, Level 3 assets and liabilities generally include fixed income securities, loan receivables, and certain long-term debt of variable interest entities consolidated under ASC Topic 810.

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The following table sets forth the carrying amount and fair value of Ambac’s financial assets and liabilities as of March 31, 2013 and December 31, 2012, including the level within the fair value hierarchy at which fair value measurements are categorized. As required by ASC Topic 820, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

	Carrying Amount			Total Fair Value			Fair Value Measurements Categorized as:
							Level 1		Level 2			Level 3
March 31, 2013
Financial assets:
Fixed income securities:
Municipal obligations	$	1,794,355		$	1,794,355		$	—	$	1,794,355		$	—
Corporate obligations		1,069,073			1,069,073			—		1,065,421			3,652
Foreign obligations		11,878			11,878			—		11,878			—
U.S. government obligations		98,312			98,312			98,312		—			—
U.S. agency obligations		53,975			53,975			—		53,975			—
Residential mortgage-backed securities		1,536,889			1,536,889			—		1,536,889			—
Collateralized debt obligations		27,357			27,357			—		23,452			3,905
Other asset-backed securities		810,451			810,451			—		760,217			50,234
Fixed income securities, pledged as collateral:
U.S. government obligations		228,228			228,228			228,228		—			—
Short term investments		767,932			767,932			765,379		2,553			—
Other investments		113,812			113,812			—		113,712			100
Cash		53,135			53,135			53,135		—			—
Loans		8,691			7,119			—		—			7,119
Derivative assets:
Interest rate swaps—asset position		112,811			112,811			—		112,811			—
Interest rate swaps—liability position		—			—			—		—			—
Futures contracts		—			—			—		—			—
Other assets		14,230			14,230			—		—			14,230
Variable interest entity assets:
Fixed income securities:
Corporate obligations		2,414,607			2,414,607			—		—			2,414,607
Restricted cash		2,258			2,258			2,258		—			—
Loans		14,327,840			14,318,834			—		202,023			14,116,811
Total financial assets	$	23,445,834		$	23,435,256		$	1,147,312	$	5,677,286		$	16,610,658
Financial liabilities:
Obligations under investment and repurchase agreements	$	363,297		$	362,208		$	—	$	—		$	362,208
Liabilities subject to compromise		1,690,312			909,138			—		909,138			—
Long term debt, including accrued interest		399,505			1,110,259			—		—			1,110,259
Derivative liabilities:
Credit derivatives		203,307			203,307			—		—			203,307
Interest rate swaps—asset position		(65,636	)		(65,636	)		—		(65,636	)		—
Interest rate swaps—liability position		366,949			366,949			—		241,567			125,382
Futures contracts		911			911			911		—			—
Other contracts		215			215			—		215			—
Liabilities for net financial guarantees written		6,921,299			4,576,031			—		—			4,576,031
Variable interest entity liabilities:
Long-term debt		14,229,373			14,207,206			—		12,296,617			1,910,589
Derivative liabilities:
Interest rate swaps—liability position		2,231,863			2,231,863			—		2,231,863			—
Currency swaps—liability position		85,762			85,762			—		85,762			—
Total financial liabilities	$	26,427,157		$	23,988,213		$	911	$	15,699,526		$	8,287,776

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	Carrying Amount			Total Fair Value			Fair Value Measurements Categorized as:
							Level 1		Level 2			Level 3
December 31, 2012
Financial assets:
Fixed income securities:
Municipal obligations	$	1,848,932		$	1,848,932		$	—	$	1,848,932		$	—
Corporate obligations		1,077,972			1,077,972			—		1,074,316			3,656
Foreign obligations		70,112			70,112			—		70,112			—
U.S. government obligations		127,283			127,283			127,283		—			—
U.S. agency obligations		82,535			82,535			—		82,535			—
Residential mortgage-backed securities		1,455,582			1,455,582			—		1,455,582			—
Collateralized debt obligations		33,342			33,342			—		26,860			6,482
Other asset-backed securities		706,637			706,637			—		656,373			50,264
Fixed income securities, pledged as collateral:
U.S. government obligations		265,779			265,779			265,779		—			—
Short term investments		661,658			661,658			657,886		3,772			—
Other investments		100			100			—		—			100
Cash		43,837			43,837			43,837		—			—
Loans		9,203			7,387			—		—			7,387
Derivative assets:
Interest rate swaps—asset position		124,853			124,853			—		124,853			—
Interest rate swaps—liability position		—			—			—		—			—
Futures contracts		1,253			1,253			1,253		—			—
Other assets		14,557			14,557			—		—			14,557
Variable interest entity assets:
Fixed income securities:
Corporate obligations		2,261,294			2,261,294			—		—			2,261,294
Restricted cash		2,290			2,290			2,290		—			—
Loans		15,568,711			15,560,051			—		200,978			15,359,073
Total financial assets	$	24,355,930		$	24,345,454		$	1,098,328	$	5,544,313		$	17,702,813
Financial liabilities:
Obligations under investment and repurchase agreements	$	362,017		$	361,905		$	—	$	—		$	361,905
Liabilities subject to compromise		1,690,312			434,823			—		434,823			—
Long term debt, including accrued interest		377,524			801,277			—		—			801,277
Derivative liabilities:
Credit derivatives		213,585			213,585			—		—			213,585
Interest rate swaps—asset position		(73,264	)		(73,264	)		—		(73,264	)		—
Interest rate swaps—liability position		390,774			390,774			—		282,022			108,752
Futures contracts		—			—			—		—			—
Other contracts		220			220			—		220			—
Liabilities for net financial guarantees written		7,074,808			3,091,257			—		—			3,091,257
Variable interest entity liabilities:
Long-term debt		15,436,008			15,414,233			—		12,457,732			2,956,501
Derivative liabilities:
Interest rate swaps—liability position		2,131,315			2,131,315			—		2,131,315			—
Currency swaps—liability position		90,466			90,466			—		90,466			—
Total financial liabilities	$	27,693,765		$	22,856,591		$	—	$	15,323,314		$	7,533,277

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Determination of Fair Value:

When available, the Company generally uses quoted active market prices specific to the financial instrument to determine fair value, and classifies such items within Level 1. Because many fixed income securities do not trade on a daily basis, pricing sources apply available information through processes such as matrix pricing to calculate fair value. In those cases the items are classified within Level 2. If quoted market prices are not available, fair value is based upon models that use, where possible, current market-based or independently-sourced market parameters. 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.

The determination of fair value for financial instruments categorized in Level 2 or 3 involves significant 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 prices for securities. We believe the potential for differences in third-party pricing levels is particularly significant with respect to residential mortgage-backed and certain other asset-backed securities held in our investment portfolio and referenced in our credit derivative portfolio, due to the low levels of trading activity for such securities. 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, most variable interest entity assets and liabilities and equity 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 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 quarterly 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. Additionally, changes to fair value methods and assumptions are reviewed with the CEO and the Audit and Risk Management Committee when such changes may be material to the company’s financial position or results. 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 held by Ambac and its operating subsidiaries are based primarily on market prices received from dealer quotes or alternative pricing sources with reasonable levels of price transparency. Such quotes generally consider a variety of factors, including recent trades of the same and similar securities. For those fixed income investments where quotes were not available, fair values are based on internal valuation models. Key inputs to the internal valuation models 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. 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 March 31, 2013, approximately 9%, 90%, and 1% of the investment portfolio (excluding variable interest entity investments) was valued using dealer quotes, alternative pricing sources with reasonable levels of price transparency and internal valuation models, respectively. At December 31, 2012, approximately 10%, 89%, and 1% of the investment portfolio (excluding variable interest entity investments) was valued using dealer quotes, alternative pricing sources with reasonable levels of price transparency and internal valuation models, respectively.

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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 analyses by senior traders and finance managers and reviews associated with our ongoing impairment analysis. Unusual prices identified through these procedures will be evaluated further against separate broker quotes (if available) or internally modeled prices, 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 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 and approved by senior traders and finance managers.

Third party quotes represent the only input to the reported fair value of Level 2 fixed income securities. Information about the valuation inputs for fixed income securities classified as Level 3 is included below:

Corporate obligations: These securities represent interest only strips of investment grade corporate obligations. The fair value of such securities classified as Level 3 was $3,652 and $3,656 at March 31, 2013 and December 31, 2012, respectively. Fair value was calculated using a discounted cash flow approach with the discount rate determined from the yields of corporate bonds from the same issuers. Significant inputs for the interest only strips valuation at March 31, 2013 and December 31, 2012 include the following weighted averages:

March 31, 2013

a. Coupon rate: 0.345%

b. Maturity: 20.89 years

c. Yield: 6.03%

December 31, 2012

a. Coupon rate: 0.345%

b. Maturity: 21.14 years

c. Yield: 6.08%

Collateralized debt obligations (“CDO”): Securities are floating rate senior notes where the underlying securities of the CDO consist of subordinated bank perpetual preferred securities. The fair value of such securities classified as Level 3 was $3,905 and $6,482 at March 31, 2013 and December 31, 2012, respectively. Fair value was calculated using a discounted cash flow approach with expected future cash flows discounted using a yield curve consistent with the security type and rating. Significant inputs for the valuation at March 31, 2013 and December 31, 2012 include the following weighted averages:

March 31, 2013

a. Coupon rate: 0.85%

b. Maturity: 1.24 years

c. Yield: 3.85%

December 31, 2012

a. Coupon rate: 1.05%

b. Maturity: 1.51 years

c. Yield: 5.92%

Other asset-backed securities: These securities are floating rate investment grade notes collateralized by various asset types. The fair value of such securities classified as Level 3 was $50,234 and $50,264 at March 31, 2013 and December 31, 2012, respectively. Fair value was calculated using a discounted cash flow approach with expected future cash flows discounted using a yield curve consistent with the security type and rating. Significant inputs for the valuation at March 31, 2013 and December 31, 2012 include the following weighted averages:

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March 31, 2013

a. Coupon rate: 0.69%

b. Maturity: 7.62 years

c. Yield: 7.50%

December 31, 2012

a. Coupon rate: 0.71%

b. Maturity: 7.86 years

c. Yield: 7.50%

Equity Interests in Pooled Investment Funds:

Investments in pooled investment funds are valued using the NAV per share, calculated on at least a monthly basis where NAV is the basis for determining the redemption value of the investment. These investments are classified as Level 2 as redemptions may be made in the near term (within 90 days) without significant impediments or restrictions. Ambac assesses impediments to redemption and other factors that may restrict the ability to redeem investments in the near term or at values approximating the NAV and may classify the investments as Level 3 if such factors exist.

Derivative Instruments:

Ambac’s derivative instruments primarily comprise interest rate and credit default swaps, and exchange traded futures contracts. All call options to repurchase surplus notes were exercised or expired in June 2012. Fair value is determined based upon market quotes from 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 ASC Topic 820, Ambac is required to consider its own credit risk when measuring the fair value of derivative and other liabilities. The fair value of credit derivative liabilities was reduced by $191,683 and $261,203 at March 31, 2013 and December 31, 2012, as a result of incorporating a CVA into the valuation model for these transactions. Interest rate swaps and other derivative liabilities may also require an adjustment to fair value to reflect Ambac’s credit risk. Factors considered in estimating the amount of any Ambac CVA on such contracts include collateral posting provisions, right of set-off with the counterparty, the period of time remaining on the derivatives and the pricing of recent terminations and amendments. Derivative liabilities were reduced by $91,781 and $121,928 at March 31, 2013 and December 31, 2012, as a result of Ambac CVA adjustments to derivative contracts other than credit derivatives.

As described further below, certain valuation models require other inputs that are not readily observable in the market. The selection of a model to value a derivative depends on the contractual terms of, and specific risks inherent in the instrument as well as the availability of pricing information in the market.

For derivatives that are less complex and trade in liquid markets or may be valued primarily by reference to interest rates and yield curves that are observable and regularly quoted, such as interest rate swaps, we utilize vendor-developed models. These models provide the net present value of the derivatives based on contractual terms and observable market data. Downgrades of Ambac Assurance, as guarantor of the financial services derivatives, have increased collateral requirements and triggered termination provisions in certain interest rate swaps. Increased termination activity since the initial rating downgrades of Ambac Assurance provided additional information about the replacement and/or exit value of certain financial services derivatives, which has been incorporated into the fair value of these derivatives as appropriate. Generally, the need for counterparty (or Ambac) CVAs is mitigated by the existence of collateral posting agreements under which adequate collateral has been posted. Derivative contracts entered into with financial guarantee customers are not typically subject to collateral posting agreements. Counterparty credit risk related to such customer derivative assets is included in our fair value adjustments.

For derivatives that do not trade, or trade in less liquid markets such as credit derivatives, a proprietary model is used because such instruments tend to be unique, contain complex or heavily modified and negotiated terms, and pricing information is not readily available in the market. Derivative fair value models and the related assumptions are continuously re-evaluated by management and enhanced, as appropriate, based on improvements in modeling techniques. Ambac has not made any significant changes to its modeling techniques or related model inputs for the periods presented.

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Credit Derivatives (“CDS”):

Fair value of Ambac’s CDS is determined using internal valuation models and represents the net present value of the difference between the fees Ambac originally charged for the credit protection and our estimate of what a financial guarantor of comparable credit worthiness would hypothetically charge to provide the same protection at the balance sheet date. Ambac competed in the financial guarantee market, which differs from the credit markets where Ambac-insured obligations may trade. As a financial guarantor, Ambac assumes only credit risk; we do not assume other risks and costs inherent in direct ownership of the underlying reference securities. Additionally, as a result of having the ability to influence our CDS counterparty in certain investor decisions, financial guarantors generally have the ability to actively remediate the credit, potentially reducing the loss given a default. Financial guarantee contracts, including CDS, issued by Ambac and its competitors are typically priced to capture some portion of the spread that would be observed in the capital markets for the underlying (insured) obligation, with minimum pricing constrained by objective estimates of expected loss and financial guarantor required rates of return. Such pricing was well established by historical financial guarantee fees relative to capital market spreads as observed and executed in competitive markets, including in financial guarantee reinsurance and secondary market transactions. Because of this relationship and in the absence of severe credit deterioration, changes in the fair value of our credit default swaps will generally be less than changes in the fair value of the underlying reference obligations.

Key variables used in our valuation of substantially all of our credit derivatives include the balance of unpaid notional, expected term, fair values of the underlying reference obligations, reference obligation credit ratings, assumptions about current financial guarantee CDS fee levels relative to reference obligation spreads and the CVA applied against Ambac Assurance liabilities by market participants. Notional balances, expected remaining term and reference obligation credit ratings are monitored and determined by Ambac’s Risk Group. Fair values of the underlying reference obligations are obtained from broker quotes when available, or are derived from other market indications such as new issuance spreads and quoted values for similar transactions. Implicit in the fair values we obtain on the underlying reference obligations are the market’s assumptions about default probabilities, default timing, correlation, recovery rates and collateral values.

Broker quotes on the reference obligations named in our CDS contracts represent an input to determine the estimated fair value of the CDS contract. Broker quotes are indicative values for the reference obligation and generally do not represent a bid or doing-business quote for the reference instrument. Such quotes follow methodologies that are generally consistent with those used to value similar assets on the quote providers’ own books. Methodologies may differ among brokers but are understood to reflect observable trading activity (when available) and modeling that relies on empirical data and reasonable assumptions. For certain CDS contracts referencing unsecuritized pools of assets, we will obtain counterparty quotes on the credit derivative itself. Such quotes are adjusted to reflect Ambac’s own credit risk when determining the fair value of credit derivative liabilities. Third party reference obligation values or specific credit derivative quotes were used in the determination of CDS fair values related to transactions representing 80% of CDS gross par outstanding and 76% of the CDS derivative liability as of March 31, 2013.

When broker quotes for reference obligations are not available, reference obligation prices used in the valuation model are estimated internally based on averages of the quoted prices for other transactions of the same bond type and Ambac rating as well as changes in published credit spreads for securities with similar collateral and ratings characteristics. When price quotes of a similar bond type vary significantly or the number of similar transactions is small, management will consider additional factors, such as specific collateral composition and performance and contractual subordination, to identify similar transactions. Reference obligation prices derived internally as described above were used in the determination of CDS fair values related to transactions representing 20% of CDS gross par outstanding and 24% of the CDS derivative liability as of March 31, 2013.

Ambac’s CDS fair value calculations are adjusted for changes in our estimates of expected loss on the reference obligations and observable changes in financial guarantee market pricing. If no adjustment is considered necessary, Ambac maintains the same percentage of the credit spread (over LIBOR) demanded in the market for the reference obligation as existed at the inception of the CDS. Therefore, absent changes in expected loss on the reference obligations or financial guarantee CDS market pricing, the financial guarantee CDS fee used for a particular contract in Ambac’s fair value calculations represent a consistent percentage, period to period, of the credit spread determinable from the reference obligation value at the balance sheet date. This results in a CDS fair value balance that fluctuates in proportion with the reference obligation value.

The amount of expected loss on a reference obligation is a function of the probability that the obligation will default and severity of loss in the event of default. Ambac’s CDS transactions were all originally underwritten with extremely low expected losses. Both the reference obligation spreads and Ambac’s CDS fees at the inception of these transactions reflect these low expected losses. When reference obligations experience credit deterioration, there is an increase in the probability of default on the obligation and, therefore, an increase in expected loss. Ambac reflects the effects of changes in expected loss on the fair value of its CDS contracts by increasing the percentage of the reference obligation spread (over LIBOR) which would be captured as a CDS fee (“relative change ratio”) at the valuation date, resulting in a higher mark-to-market

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loss on our CDS relative to any price decline on the reference obligation. The fundamental assumption is that financial guarantee CDS fees will increase relative to reference obligation spreads as the underlying credit quality of the reference obligation deteriorates and approaches payment default. For example, if the credit spread of an underlying reference obligation was 80 basis points at the inception of a transaction and Ambac received a 20 basis point fee for issuing a CDS on that obligation, the relative change ratio, which represents the CDS fee to cash market spread Ambac would utilize in its valuation calculation, would be 25%. If the reference obligation spread increased to 100 basis points in the current reporting period, absent any observable changes in financial guarantee CDS market pricing or credit deterioration, Ambac’s current period CDS fee would be computed by multiplying the current reference obligation spread of 100 basis points by the relative change ratio of 25%, resulting in a 25 basis point fee. Thus, the model indicates we would need to receive an additional 5 basis points (25 basis points currently less the 20 basis points contractually received) for issuing a CDS in the current reporting period for this reference obligation. We would then discount the product of the notional amount of the CDS and the 5 basis point hypothetical CDS fee increase, over the weighted average life of the reference obligation to compute the current period mark-to-market loss. Using the same example, if the reference obligation spread increased to 100 basis points and there was credit deterioration as evidenced by an internal rating downgrade which increased the relative change ratio from 25% to 35%, we would estimate a 15 basis point CDS fee increase in our model (35% of 100 basis points reference obligation spread, or 35 basis points currently, less the 20 basis points contractually received). Therefore, we would record a higher mark-to-market loss based on the computations described above absent any observable changes in financial guarantee CDS market pricing.

We do not adjust the relative change ratio until an actual internal rating downgrade has occurred unless we observe new pricing on financial guarantee CDS contracts. However, because we have active surveillance procedures in place for our entire CDS portfolio, particularly for transactions at or near a below investment grade threshold, we believe it is unlikely that an internal downgrade would lag the actual credit deterioration of a transaction for any meaningful time period. The factors used to increase the relative change ratio are based on rating agency probability of default percentages determined by management to be appropriate for the relevant bond type. That is, the probability of default associated with the respective tenor and internal rating of each CDS transaction is utilized in the computation of the relative change ratio in our CDS valuation model. The new relative change ratio in the event of an internal downgrade of the reference obligation is calculated as the weighted average of: (i) a given transaction’s inception relative change ratio and (ii) a ratio of 100%. The weight given to the inception relative change ratio is 100% minus the current probability of default (the probability of non-default) and the weight given to using a 100% relative change ratio is the probability of default. For example, assume a transaction having an inception relative change ratio of 33% is downgraded to B-during the period, at which time it has an estimated remaining life of 8 years. If the estimated probability of default for an 8 year, B-rated credit of this type is 60% then the revised relative change ratio will be 73.2%. The revised relative change ratio can be calculated as 33% x (100%-60%) + 100% x 60% = 73.2%.

As noted above, reference obligation spreads incorporate market perceptions of default probability and loss severity, as well as liquidity risk and other factors. Loss severities are generally correlated to default probabilities during periods of economic stress. By increasing the relative change ratio in our calculations proportionally to default probabilities, Ambac incorporates into its CDS fair value the higher expected loss on the reference obligation (probability of default x loss severity), by increasing the portion of reference obligation spread that should be paid to the CDS provider.

Ambac incorporates its own credit risk into the valuation of its CDS liabilities by applying a CVA to the calculations described above. Under our methodology, determination of the CDS fair value requires estimating hypothetical financial guarantee CDS fees for a given credit at the valuation date and estimating the present value of those fees. Our approach begins with pricing in the risk of default of the reference obligation using that obligation’s credit spread. The widening of the reference obligation spread results in a mark-to-market loss to Ambac, as the credit protection seller, and a gain to the credit protection buyer because the cost of credit protection on the reference obligation (ignoring CDS counterparty credit risk) will be greater than the amount of the actual contractual CDS fees. The Ambac CVA represents the difference between the present value of the hypothetical fees discounted at Libor compared to rates that incorporate Ambac credit risk. The discount rates used to determine the Ambac CVA are estimated using relevant data points, including quoted prices of securities guaranteed by Ambac Assurance which indicate the value placed by market participants on Ambac Assurance’s insurance obligations and the fair value of Ambac Assurance surplus notes. The resulting Ambac CVA, as a percentage of the CDS mark-to-market liability determined by discounting at Libor, was 48.5% and 55.0% as of March 31, 2013 and December 31, 2012, respectively. In instances where narrower reference obligation spreads result in a CDS asset to Ambac, those hypothetical future CDS fees are discounted at a rate which incorporates our counterparty’s credit spread (i.e. the discount rate used is LIBOR plus the current credit spread of the counterparty).

In addition, when there are sufficient numbers of new observable transactions, negotiated settlements or other market indications of a general change in market pricing trends for CDS on a given bond type, management will adjust its assumptions about the percentage of reference obligation spreads captured as CDS fees to match the current market. No such adjustments were made during the periods presented. Ambac is not transacting CDS business currently and other guarantors have stated they have exited this product. Additionally, there have been no negotiated settlements of CDS contracts during the periods presented.

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Key variables which impact the “Realized gains and losses and other settlements” component of “Net change in fair value of credit derivatives” in the Consolidated Statements of Total Comprehensive Income are the most readily observable variables since they are based solely on the CDS contractual terms and cash settlements. Those variables include premiums received and accrued and losses paid and payable on written credit derivative contracts for the appropriate accounting period. Losses paid and payable reported in “Realized gains and losses and other settlements” include those arising after a credit event that requires a payment under the contract terms has occurred or in connection with a negotiated termination of a contract. The remaining key variables described above impact the “Unrealized gains (losses)” component of “Net change in fair value of credit derivatives.”

The net notional outstanding of Ambac’s CDS contracts were $10,204,738 and $11,281,777 at March 31, 2013 and December 31, 2012, respectively. Credit derivative liabilities at March 31, 2013 and December 31, 2012 had a combined fair value of $203,307 and $213,585, respectively, and related to underlying reference obligations that are classified as either collateralized loan obligations (“CLOs”) or Other. Information about the above described model inputs used to determine the fair value of each class of credit derivatives, including the CVA as a percentage of the gross mark-to-market liability before considering Ambac credit risk (“CVA percentage”), as of March 31, 2013 and December 31, 2012 is summarized below:

As of March 31, 2013

	CLOs			Other(1)
Notional outstanding	$	5,702,366		$	3,238,742
Weighted average reference obligation price		97.4			86.9
Weighted average life (WAL) in years		2.1			4.5
Weighted average credit rating		AA-			A
Weighted average relative change ratio		34.5	%		37.8	%
CVA percentage		41.4	%		49.4	%
Fair value of derivative liabilities	$	(30,736	)	$	(115,014	)

As of December 31, 2012

	CLOs			Other(1)
Notional outstanding	$	6,155,767		$	3,701,387
Weighted average reference obligation price		96.5			86.9
Weighted average life (WAL) in years		2.2			4.2
Weighted average credit rating		AA-			A
Weighted average relative change ratio		34.4	%		38.2	%
CVA percentage		55.0	%		55.0	%
Fair value of derivative liabilities	$	(34,645	)	$	(116,086	)

(1) Excludes contracts for which fair values are based on credit derivative quotes rather than reference obligation quotes. Such contracts have a combined notional outstanding of $1,263,630, WAL of 7.5 years and liability fair value of ($57,557) as of March 31, 2013. Other inputs to the valuation of these transactions at March 31, 2013 include weighted average quotes of 9% of notional, weighted average rating of A and Ambac CVA percentage of 50.0%. As of December 31, 2012, these contracts had a combined notional outstanding of $1,424,623, WAL of 7.9 years and liability fair value of ($62,854). Other inputs to the valuation of these transactions at December 31, 2012 include weighted average quotes of 10% of notional, weighted average rating of A and Ambac CVA percentage of 55.0%.

Significant unobservable inputs for credit derivatives include WAL, internal credit rating, relative change ratio and CVA percentage. A longer (shorter) WAL, lower (higher) reference obligation credit rating, higher (lower) relative change ratio or lower (higher) CVA, in isolation, would result in an increase (decrease) in the fair value liability measurement. A change in an internal credit rating of a reference obligation in our model will generally result in a directionally opposite change in the relative change ratio. Also, a shorter (longer) WAL will generally correspond with a lower (higher) CVA percentage.

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Call options on long-term debt:

The fair value of Ambac Assurance’s options to repurchase Ambac Assurance surplus notes at a discount to par was estimated based on a combination of internal discounted cash flow analysis and market observations. The discounted cash flow analysis used multiple discount rate scenarios to determine the present value of the surplus notes assuming exercise and non-exercise of the options, with the difference representing the option value under that scenario. The results were probability weighted to determine the recorded option value. All options to repurchase Ambac Assurance surplus notes that were stand-alone derivatives and reported at fair value on the Consolidated Balance Sheets were exercised in June 2012.

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.

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. As a result, because the aggregate balances related to direct contracts written and assumed were in a net liability (cash outflow) position, we included an Ambac CVA in the fair value estimate to reflect Ambac’s credit risk, consistent with that used for credit derivative contracts guaranteed by Ambac Assurance. Refer to “Credit Derivatives” above for additional information on the determination of the CVA. The aggregate balances related to ceded reinsurance contracts were in a net asset (cash inflow) position and therefore we included adjustments in the discount rate to reflect reinsurer counterparty credit risk.

The fair value estimate of financial guarantees is computed by utilizing cash flows calculated at the policy level. For direct and assumed contracts, projected net cash flows for each policy included: (i) installment premium receipts, (ii) estimated gross claim payments, and (iii) subrogation receipts. For ceded reinsurance contracts, projected net cash flows for each policy included: (i) installment ceded premium payments, (ii) ceding commission receipts, (iii) ceded claim receipts, and iv) ceded subrogation payments. For each individual direct, assumed, and ceded reinsurance contract, the respective undiscounted cash flow components are aggregated to determine if we are in a net asset or net liability position. For each contract in a net liability position, we estimate the fair value using internally developed discount rates 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. Given the unique nature of financial guarantees and current inactive state of the industry there is a lack of observable market information to make this estimate. A profit margin of 20% was developed based on discussions with the third-party institutions with valuation expertise, discussions with industry participants and yields on Ambac Assurance surplus notes. The discount rates used for contracts in a net liability position are derived from the rates implicit in the fair value of surplus notes and 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 market participant’s cost of capital.

There are a number of factors that limit our ability to accurately estimate the fair value of our financial guarantees. The first limitation is the lack of observable pricing data points as a result of Ambac no longer writing new financial guarantee business. Additionally, although the fair value accounting guidance for liabilities requires a company to consider the cost to completely transfer its obligation to another party of comparable credit worthiness, our primary insurance obligation is irrevocable and thus there is no established active market for transferring such obligations.

The fair value of liabilities for net financial guarantees written presented above is as of March 31, 2013, which differs from our Fresh Start Reporting Date (as defined in Note 14). Further revisions and adjustments, based on any updated valuations, actual amounts, applicable economic conditions as of the Fresh Start Reporting Date and results of operations through the Fresh Start Reporting Date could result in a significant difference between the financial guarantee fair value estimate disclosed in this Note at March 31, 2013 and the aggregate fair value of the insurance assets and liabilities to be reported on our balance sheet at Ambac’s bankruptcy emergence date.

Liabilities Subject to Compromise:

The fair value of Ambac’s debt included in Liabilities Subject to Compromise is based on quoted market prices.

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Long-term Debt:

The fair value of surplus notes issued by Ambac Assurance and classified as long-term debt is internally estimated considering market transactions when available and internally developed discounted cash flow models. Surplus notes were initially recorded at fair value at the date of issuance. In subsequent periods, surplus notes are carried at their face value less unamortized discount.

Other Financial Assets and Liabilities:

The fair values of Ambac’s equity interest in Ambac sponsored special purpose entities (included in Other assets), Loans, and Obligations under investment and repurchase agreements are estimated based upon internal valuation models that discount expected cash flows using discount rates consistent with the credit quality of the obligor after considering collateralization.

Variable Interest Entity Assets and Liabilities:

The financial assets and liabilities of VIEs consolidated under ASC Topic 810 consist primarily of fixed income securities, loans, and derivative and debt instruments and are generally carried at fair value. These consolidated VIEs are securitization entities which have liabilities and/or assets guaranteed by Ambac Assurance. The fair values of VIE 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 received from dealer quotes or alternative pricing sources with reasonable levels of price transparency. 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 fair values are considered Level 3 and are based on internal discounted cash flow 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 VIE debt. VIE debt instruments considered Level 3 include fixed rate, floating rate and zero coupon notes secured by various asset types, primarily European ABS. Information about the valuation inputs for the various VIE debt categories classified as Level 3 is as follows:

European ABS transactions: The fair value of such obligations classified as Level 3 was $1,910,589 and $2,956,501 at March 31, 2013 and December 31, 2012, 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 (Level 2) for comparable notes from the same securitization. Significant inputs for the valuation at March 31, 2013 and December 31, 2012 include the following weighted averages:

March 31, 2013

a. Coupon rate: 1.59%

b. Maturity: 18.26 years

c. Yield: 3.98%

December 31, 2012

a. Coupon rate: 1.64%

b. Maturity: 12.34 years

c. Yield: 4.02%

VIE derivative asset and liability fair values are determined using valuation models. When specific derivative contractual terms are available and may be valued primarily by reference to 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 fair value balances at March 31, 2013 and December 31, 2012 were developed using vendor-developed models and do not use significant unobservable inputs.

The fair value of VIE assets are obtained from market quotes when available. Typically the 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. Our valuation of VIE assets (fixed income securities or loans), therefore, are derived from the fair value of notes and derivatives, as described above, adjusted for the fair value of cash flows from Ambac’s financial guarantee. The fair value of financial guarantee cash flows include: (i) estimated future premiums discounted at a rate consistent with that implicit in the fair value of the VIE’s liabilities and (ii) internal estimates of future

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loss 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 average rate of 4.8% and 7.6% at March 31, 2013 and December 31, 2012, respectively. The value of future loss payments to be paid by Ambac to the VIEs was adjusted to include an Ambac CVA appropriate for the term of expected Ambac claim payments.

Additional Fair Value Information:

The following tables present the changes in the Level 3 fair value category for the three months ended March 31, 2013 and 2012. 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
Three months ended March 31, 2013	Investments			Other assets			Derivatives			Investments			Loans			Long-term debt			Total
Balance, beginning of period	$	60,402		$	14,557		$	(322,337	)	$	2,261,294		$	15,359,073		$	(2,956,501	)	$	14,416,488
Additions of VIEs consolidated		—			—			—			—			—			—			—
Total gains/(losses) realized and unrealized:
Included in earnings		(23	)		(327	)		(3,162	)		297,294			400,456			(127,393	)		566,845
Included in other comprehensive income		698			—			—			(143,981	)		(955,455	)		193,905			(904,833	)
Purchases		—			—			—			—			—			—			—
Issuances		—			—			—			—			—			—			—
Sales		—			—			—			—			—			—			—
Settlements		(3,286	)		—			(3,190	)		—			(687,263	)		4,864			(688,875	)
Transfers in Level 3		—			—			—			—			—			—			—
Transfers out of Level 3		—			—			—			—			—			974,536			974,536
Deconsolidation of VIEs		—			—			—			—			—			—			—
Balance, end of period	$	57,791		$	14,230		$	(328,689	)	$	2,414,607		$	14,116,811		$	(1,910,589	)	$	14,364,161
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	$	—		$	(327	)	$	(5,684	)	$	297,294		$	400,456		$	(127,393	)	$	564,346

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										VIE Assets and Liabilities
Three months ended March 31, 2012	Investments			Other assets			Derivatives			Investments			Loans			Long-term debt			Total
Balance, beginning of period	$	97,522		$	16,779		$	(486,775	)	$	2,199,338		$	14,126,994		$	(1,934,642	)	$	14,019,216
Additions of VIEs consolidated		—			—			—			—			—			—			—
Total gains/(losses) realized and unrealized:
Included in earnings		(49	)		(756	)		122,327			(82,816	)		166,665			(136,563	)		68,808
Included in other comprehensive income		7,814			—			—			68,143			415,857			(63,205	)		428,609
Purchases		—			—			—			—			—			—			—
Issuances		—			—			—			—			—			—			—
Sales		—			—			—			—			—			—			—
Settlements		(2,742	)		—			8,832			—			(249,439	)		13,030			(230,319	)
Transfers in Level 3		58,905			—			—			—			—			(665,264	)		(606,359	)
Transfers out of Level 3		—			—			—			—			—			—			—
Deconsolidation of VIEs		—			—			—			—			—			—			—
Balance, end of period	$	161,450		$	16,023		$	(355,616	)	$	2,184,665		$	14,460,077		$	(2,786,644	)	$	13,679,955
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	$	—		$	(756	)	$	107,245		$	(82,816	)	$	167,146		$	(136,563	)	$	54,256

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

Level-3 Investments by class

Three months ended March 31, 2013	Collateralized Debt Obligations			Other Asset Backed Securities			Corporate Obligations			U.S. Agency Obligations		Total Investments
Balance, beginning of period	$	6,482		$	50,264		$	3,656		$	—	$	60,402
Total gains/(losses) realized and unrealized:
Included in earnings		(3	)		—			(20	)		—		(23	)
Included in other comprehensive income		113			569			16			—		698
Purchases		—			—			—			—		—
Issuances		—			—			—			—		—
Sales		—			—			—			—
Settlements		(2,687	)		(599	)		—			—		(3,286	)
Transfers in Level 3		—			—			—			—		—
Transfers out of Level 3		—			—			—			—		—
Balance, end of period	$	3,905		$	50,234		$	3,652		$	—	$	57,791
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	$	—		$	—		$	—		$	—	$	—

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Level-3 Investments by class

Three months ended March 31, 2012	Collateralized Debt Obligations			Other Asset Backed Securities		Corporate Obligations			U.S. Agency Obligations			Total Investments
Balance, beginning of period	$	12,482		$	75,886	$	7,930		$	1,224		$	97,522
Total gains/(losses) realized and unrealized:
Included in earnings		(2	)		—		(46	)		(1	)		(49	)
Included in other comprehensive income		101			8,072		(354	)		(5	)		7,814
Purchases		—			—		—			—			—
Issuances		—			—		—			—			—
Sales		—			—		—			—			—
Settlements		(2,742	)		—		—			—			(2,742	)
Transfers in Level 3		—			53,068		5,837			—			58,905
Transfers out of Level 3		—			—		—			—			—
Balance, end of period	$	9,839		$	137,026	$	13,367		$	1,218		$	161,450
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 March 31, 2013	Interest Rate Swaps			Credit Derivatives			Call Options on Long-term debt		Total Derivatives
Balance, beginning of period	$	(108,752	)	$	(213,585	)	$	—	$	(322,337	)
Additions of VIEs consolidated
Total gains/(losses) realized and unrealized:
Included in earnings		(15,949	)		12,787			—		(3,162	)
Included in other comprehensive income		—			—			—		—
Purchases		—			—			—		—
Issuances		—			—			—		—
Sales		—			—			—		—
Settlements		(681	)		(2,509	)		—		(3,190	)
Transfers in Level 3		—			—			—		—
Transfers out of Level 3		—			—			—		—
Deconsolidation of VIEs		—			—			—		—
Balance, end of period	$	(125,382	)	$	(203,307	)	$	—	$	(328,689	)
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	$	(15,949	)	$	10,265		$	—	$	(5,684	)

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Level-3 Derivatives by class

Three months ended March 31, 2012	Interest Rate Swaps			Credit Derivatives			Call Options on Long-term debt		Total Derivatives
Balance, beginning of period	$	(302,177	)	$	(190,653	)	$	6,055	$	(486,775	)
Additions of VIEs for ASC 2009-17
Total gains/(losses) realized and unrealized:
Included in earnings		67,869			(7,222	)		61,680		122,327
Included in other comprehensive income		—			—			—		—
Purchases		—			—			—		—
Issuances		—			—			—		—
Sales		—			—			—		—
Settlements		12,086			(3,254	)		—		8,832
Transfers in Level 3		—			—			—		—
Transfers out of Level 3		—			—			—		—
Deconsolidation of VIEs		—			—			—		—
Balance, end of period	$	(222,222	)	$	(201,129	)	$	67,735	$	(355,616	)
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	$	61,598		$	(16,033	)	$	61,680	$	107,245

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 as of March 31, 2013 and 2012. Derivative instruments are transferred into Level 3 when the use of unobservable inputs becomes significant to the overall valuation. Certain interest rate swaps were transferred out of Level 3 in 2012 when appropriate observable market discount rates replaced internal estimates of such rates in the determination of fair value. All transfers into and out of Level 3 represent transfers between Level 3 and Level 2. 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.

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Gains and losses (realized and unrealized) relating to Level 3 assets and liabilities included in earnings for the three months ended March 31, 2013 and 2012 are reported as follows:

	Net investment income			Realized gains or (losses) and other settlements on credit derivative contracts		Unrealized gains or (losses) on credit derivative contracts			Derivative products revenues (interest rate swaps)			Income on variable interest entities			Other income
Three months ended 2013
Total gains or losses included in earnings for the period	$	(23	)	$	2,509	$	10,278		$	(15,949	)	$	570,357		$	(327	)
Changes in unrealized gains or losses relating to the assets and liabilities still held at the reporting date		—			—		10,266			(15,949	)		570,357			(327	)
Three months ended 2012
Total gains or losses included in earnings for the period	$	(49	)	$	3,254	$	(10,476	)	$	67,869		$	(52,714	)	$	60,924
Changes in unrealized gains or losses relating to the assets and liabilities still held at the reporting date		—			—		(16,033	)		61,598			(52,233	)		60,924

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8. INVESTMENTS

Ambac’s invested assets are primarily comprised of fixed income securities classified as available-for-sale. Beginning the first quarter of 2013, Ambac’s long-term portfolio also included equity interests in pooled investment funds. Such equity interests in the form of common stock or in-substance common stock are classified as trading securities. Equity interests in pooled funds organized as limited liability companies are recorded under the fair value option. Investments classified either as trading or fair value option securities are reported as Other investments on the Consolidated Balance Sheet at fair value with changes in fair value reported through Net investment income on the Statement of Comprehensive Income. Ambac’s investments in pooled funds as of March 31, 2013 are part of the company’s long-term financial guarantee investment strategy. These investments are accumulating funds, meaning that regular distributions of earnings are not anticipated but will be reflected in the NAV reported by the respective fund managers. These securities have been classified as trading or fair value option securities so that undistributed earnings of the funds may be reflected in Net investment income as they occur.

The amortized cost and estimated fair value of available-for-sale investments, excluding VIE investments, at March 31, 2013 and December 31, 2012 were as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Non-credit other- than-temporary Impairments(1)
March 31, 2013
Fixed income securities:
Municipal obligations	$	1,606,136	$	188,861	$	642	$	1,794,355	$	—
Corporate obligations		986,866		89,231		7,024		1,069,073		—
Foreign obligations		10,796		1,082		—		11,878		—
U.S. government obligations		96,526		1,786		—		98,312		—
U.S. agency obligations		51,255		2,720		—		53,975		—
Residential mortgage-backed securities		1,085,177		466,111		14,399		1,536,889		6,590
Collateralized debt obligations		26,598		983		224		27,357		—
Other asset-backed securities		793,742		61,285		44,576		810,451		—
		4,657,096		812,059		66,865		5,402,290		6,590
Short-term		767,919		13		—		767,932		—
		5,425,015		812,072		66,865		6,170,222		6,590
Fixed income securities pledged as collateral:
U.S. government obligations		228,066		162		—		228,228		—
Total collateralized investments		228,066		162		—		228,228		—
Total available-for-sale investments	$	5,653,081	$	812,234	$	66,865	$	6,398,450	$	6,590
December 31, 2012
Fixed income securities:
Municipal obligations	$	1,662,124	$	187,191	$	383	$	1,848,932	$	—
Corporate obligations		999,554		87,535		9,117		1,077,972		—
Foreign obligations		67,347		2,765		—		70,112		—
U.S. government obligations		127,037		872		626		127,283		—
U.S. agency obligations		79,295		3,240		—		82,535		—
Residential mortgage-backed securities		1,096,202		379,935		20,555		1,455,582		6,892
Collateralized debt obligations		32,855		1,015		528		33,342		—
Other asset-backed securities		687,410		65,733		46,506		706,637		—
		4,751,824		728,286		77,715		5,402,395		6,892
Short-term		661,219		439		—		661,658		—
		5,413,043		728,725		77,715		6,064,053		6,892
Fixed income securities pledged as collateral:
U.S. government obligations		265,517		262		—		265,779		—
Total collateralized investments		265,517		262		—		265,779		—
Total available-for-sale investments	$	5,678,560	$	728,987	$	77,715	$	6,329,832	$	6,892

(1) Represents the amount of non-credit other-than-temporary impairment losses remaining in accumulated other comprehensive loss on securities that also had a credit impairment. These losses are included in gross unrealized losses as of March 31, 2013 and December 31, 2012.

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The amortized cost and estimated fair value of available-for-sale investments, excluding VIE investments, at March 31, 2013, by contractual maturity, were as follows:

	Amortized Cost		Estimated Fair Value
Due in one year or less	$	906,835	$	910,005
Due after one year through five years		916,863		979,204
Due after five years through ten years		1,035,633		1,156,493
Due after ten years		888,233		978,051
		3,747,564		4,023,753
Residential mortgage-backed securities		1,085,177		1,536,889
Collateralized debt obligations		26,598		27,357
Other asset-backed securities		793,742		810,451
	$	5,653,081	$	6,398,450

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

Unrealized Losses:

The following table shows gross unrealized losses and fair values of Ambac’s available-for-sale investments, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at March 31, 2013 and December 31, 2012:

	Less Than 12 Months				12 Months or More				Total
	Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss
March 31, 2013:
Fixed income securities:
Municipal obligations	$	42,336	$	627	$	3,958	$	15	$	46,294	$	642
Corporate obligations		16,506		156		85,494		6,868		102,000		7,024
U.S. government obligations		—		—		—		—		—		—
Residential mortgage-backed securities		43,511		4,071		111,909		10,328		155,420		14,399
Collateralized debt obligations		860		152		3,905		72		4,765		224
Other asset-backed securities		118,080		150		149,809		44,426		267,889		44,576
		221,293		5,156		355,075		61,709		576,368		66,865
Short-term		2,003		—		—		—		2,003		—
Total temporarily impaired securities	$	223,296	$	5,156	$	355,075	$	61,709	$	578,371	$	66,865
December 31, 2012:
Fixed income securities:
Municipal obligations	$	42,503	$	354	$	4,303	$	29	$	46,806	$	383
Corporate obligations		69,727		1,081		132,916		8,036		202,643		9,117
U.S. government obligations		26,081		626		—		—		26,081		626
Residential mortgage-backed securities		88,504		5,319		116,146		15,236		204,650		20,555
Collateralized debt obligations		253		168		13,429		360		13,682		528
Other asset-backed securities		180		3		188,832		46,503		189,012		46,506
		227,248		7,551		455,626		70,164		682,874		77,715
Short-term		1,194		—		—		—		1,194		—
Total temporarily impaired securities	$	228,442	$	7,551	$	455,626	$	70,164	$	684,068	$	77,715

Management has determined that the unrealized losses reflected in the tables above are temporary in nature as of March 31, 2013 and December 31, 2012 based upon (i) no unexpected 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) management has no 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. 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

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asserted its intent to sell plus the scheduled maturities and interest payments from the remaining securities in the portfolio. 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. As of March 31, 2013 and December 31, 2012, management has not asserted an intent to sell any securities in an unrealized loss position. 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 before the recovery of their amortized cost basis. In the liquidity assessment described above, 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. Projected interest receipts on securities pledged as collateral generally belong to Ambac and are considered to be sources of available liquidity from the investment portfolio. As of March 31, 2013, for securities that have indications of possible other-than-temporary impairment but 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 for debt securities that are 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 cash flows and the discount rate used were both adjusted to reflect changes in the index rate applicable to each security as of the evaluation date. Of the securities that were in a gross unrealized loss position at March 31, 2013, $143,145 of the total fair value and $38,994 of the unrealized loss related to below investment grade securities and non-rated securities. Of the securities that were in a gross unrealized loss position at December 31, 2012, $192,190 of the total fair value and $43,934 of the unrealized loss related to below investment grade securities and non-rated securities. With respect to Ambac-wrapped securities guaranteed under policies that have been allocated to the Segregated Account, future cash flows used to measure credit impairment represents the sum of (i) the bond’s intrinsic cash flows and (ii) the estimated fair value of Ambac claim payments. The Segregated Account has been making interim cash payments in amounts equal to 25% of permitted Segregated Account policy claims since September 2012. No final decision has been announced by the Rehabilitator with respect to effectuating or amending the Segregated Account Rehabilitation Plan although the Rehabilitator may seek (a) to amend the Segregated Account Rehabilitation Plan to provide for Deferred Amounts to be established, rather than surplus notes to be issued, with respect to the unpaid portion of permitted policy claims and (b) approval from the Rehabilitation Court to make Supplemental Payments with respect to certain insured securities, as described in Note 1. Possible modifications to the Segregated Account Rehabilitation Plan, or additional orders from the Rehabilitation Court, with respect to the form, amount and timing of satisfying permitted policy claims could have a material effect on the recognition of other-than-temporary impairment for, and the fair value of, Ambac-wrapped securities.

Corporate Obligations

The gross unrealized losses on corporate obligations as of March 31, 2013 is primarily the result of an increase in credit spreads on life insurers. Of the $6,868 of unrealized losses on corporate obligations greater than 12 months, one security comprises $3,431 of the total. This security, which was purchased in multiple lots, is a closed-block life insurance issuance that is insured by Assured Guaranty Municipal Corporation, has been in an unrealized loss position for 45-63 months. Another security comprises $2,375 of the total. This security, which is an issuance by a large diversified financial services company that has a credit support agreement from its AA-rated parent, has been in an unrealized loss position for 69 months. The unrealized losses on these securities are the result of general credit spread widening since the date of purchase. Given the investment grade ratings, management believes that timely receipt of all principal and interest is probable.

Residential mortgage-backed securities

The gross unrealized loss on mortgage-backed securities as of March 31, 2013 is primarily related to Alt-A residential mortgage-backed securities. The $10,328 of unrealized losses on mortgage-backed securities for greater than 12 months is attributable to 15 individual Alt-A securities. These individual securities have been in an unrealized loss position for 63 months. All of these Alt-A securities have very similar characteristics such as vintage of the underlying collateral (2004-2007) and placement in the structure (generally class-A tranche rated triple-A at issuance). The declines in fair value relate to the effects of declining U.S. housing prices, the recession and weak economic conditions in general on the performance of collateral underlying residential mortgage backed securities. This has been reflected in decreased liquidity for RMBS securities and increased risk premiums demanded by investors resulting in a required return on investment that is significantly higher than at the time the securities were purchased. As part of the quarterly impairment review process, management estimates expected future cash flows from residential mortgage-backed securities, considering the likelihood of a wide dispersion of possible outcomes to develop cash flow scenarios. Management has contracted consultants to model each of the securities in our portfolio. This approach includes the utilization of market accepted software models in conjunction with detailed data of the historical performance of the collateral pools, which assists in the determination of assumptions such as defaults, severity and voluntary prepayment rates that are largely driven by home price forecasts as well as other macro-economic factors. These assumptions are used to project various future cash flow scenarios for each security. The expected future cash flows used to assess impairment are derived by probability-weighting the various cash flow scenarios. Management considered this analysis in making our determination that non-receipt of contractual cash flows is not probable on these transactions.

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Other asset-backed securities

The gross unrealized losses on other asset-backed securities as of March 31, 2013 is the result of limited market demand for illiquid positions in the secondary market. Of the $44,426 of unrealized losses on other asset-backed securities greater than 12 months, one security comprises $28,912 of the total. This security, which is secured by lease payments on an IRS facility and is insured by Ambac Assurance, has been in an unrealized loss position for 63 months. The unrealized loss on this security is largely due to the illiquid nature of this structured transaction which does not trade in the secondary market. Management believes that the timely receipt of all principal and interest on this position as well as on other asset-backed securities is probable.

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

The following table details amounts included in net realized gains and other-than-temporary impairments included in earnings for the three month period ended March 31, 2013 and 2012:

	Three months ended March 31,
	2013			2012
Gross realized gains on securities	$	41,578		$	824
Gross realized losses on securities		(318	)		(321	)
Foreign exchange gains		4,800			(111	)
Net realized gains	$	46,060		$	392
Net other–than-temporary impairments(1)	$	—		$	(3,071	)

(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.

During 2002 and 2003 Ambac recognized investment realized losses of $150,201 relating to its $174,500 investment in asset-backed notes issued by National Century Financial Enterprises, Inc. (“NCFE”). These notes, which were backed by health care receivables and rated triple-A until October 25, 2002, defaulted and NCFE filed for protection under Chapter 11 of the U.S. Bankruptcy Code in November 2002. In connection with a full and final settlement of a lawsuit brought by NCFE bondholders against Credit Suisse Securities LLC, a subsidiary of Ambac Assurance recorded cash recoveries of $39,978 in the three months ended March 31, 2013.

Since commencement of the Segregated Account Rehabilitation Proceedings, changes in the estimated timing of claim payments have resulted in adverse changes in projected cash flows on certain impaired Ambac-wrapped securities. Such changes in estimated claim payments on Ambac-wrapped securities contributed to net other-than-temporary impairments for the three months ended March 31, 2012. Further changes to estimated claim payments could result in additional other-than-temporary impairment charges in the future. Additionally, the three months ended March 31, 2012 included credit impairments on certain other non-agency RMBS securities. As of March 31, 2013, management has not asserted an intent to sell any securities in an unrealized loss position from its portfolio. Future changes in our estimated liquidity needs could result in a determination that Ambac no longer has the ability to hold such securities, which could result in additional other-than-temporary impairment charges.

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The following table presents a roll-forward of Ambac’s cumulative credit impairments that were recognized in earnings on securities held as of March 31, 2013 and 2012:

	Credit Impairment
	2013			2012
Balance as of January 1	$	183,300		$	201,317
Additions for credit impairments recognized on:
Securities not previously impaired		—			2,609
Securities previously impaired		—			462
Reductions for credit impairments previously recognized on:
Securities that matured or were sold during the period		(9	)		—
Balance as of March 31	$	183,291		$	204,388

Counterparty Collateral, Deposits with Regulators and Other Restrictions:

Ambac routinely pledges and receives collateral related to certain business lines and/or transactions. The following is a description of those arrangements by collateral source:

(1) Cash and securities held in Ambac’s investment portfolio—Ambac pledges assets it holds in its investment portfolio to investment and repurchase agreement and derivative counterparties. Securities pledged to investment agreement counterparties may not then be re-pledged to another entity. Ambac’s counterparties under derivative agreements have the right to pledge or rehypothecate the securities and as such, pledged securities are separately classified on the Consolidated Balance Sheets as “Fixed income securities pledged as collateral, at fair value”.

(2) Cash and securities pledged to Ambac under derivative agreements—Ambac may re-pledge securities it holds from certain derivative counterparties to other derivative counterparties in accordance with its rights and obligations under those agreements.

The following table presents (i) the sources of collateral either received from various counterparties where Ambac is permitted to sell or re-pledge or held directly in the investment portfolio and (ii) how that collateral was pledged to various investment agreement, derivative and repurchase agreement counterparties at March 31, 2013 and December 31, 2012:

	Fair Value of Cash and Underlying Securities		Fair Value of Cash and Securities Pledged to Investment and Repurchase Agreement Counterparties		Fair Value of Cash and Securities Pledged to Derivative Counterparties
March 31, 2013:
Sources of Collateral:
Cash and securities pledged directly from the investment portfolio	$	609,439	$	376,014	$	233,425
Cash and securities pledged from derivative counterparties		—		—		—
December 31, 2012:
Sources of Collateral:
Cash and securities pledged directly from the investment portfolio	$	646,663	$	375,412	$	271,251
Cash and securities pledged from derivative counterparties		—		—		—

Securities carried at $6,929 and $6,945 at March 31, 2013 and December 31, 2012, respectively, were deposited by Ambac Assurance and Everspan with governmental authorities or designated custodian banks as required by laws affecting insurance companies.

Securities with fair value of $218,735 and $201,329 at March 31, 2013 and December 31, 2012, respectively, were held by a bankruptcy remote trust to collateralize and fund repayment of debt issued through a resecuritization transaction. The securities may not be sold or repledged by the trust. These assets are held and the secured debt is issued by entities that qualify as VIEs and are consolidated in Ambac’s unaudited consolidated financial statements. Refer to Note 3, Special Purpose Entities, Including Variable Interest Entities for a further description of this transaction.

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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) because the insurance cannot be legally separated from the underlying security by the insurer. Ambac obtains underlying ratings through ongoing dialogue with rating agencies and other sources. 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 at March 31, 2013 and December 31, 2012, respectively:

	Municipal obligations		Corporate obligations		Mortgage and asset- backed securities		Short-term		Total		Weighted Average Underlying Rating(1)
March 31, 2013:
Ambac Assurance Corporation (2)	$	70,201	$	4,672	$	1,426,787	$	—	$	1,501,660		B
National Public Finance Guarantee Corporation		672,420		43,111		—		—		715,531		AA-
Assured Guaranty Municipal Corporation		452,147		169,004		2,833		—		623,984		A
Financial Guarantee Insurance Corporation		17,378		—		3,264		—		20,642		A-
MBIA Insurance Corporation		—		18,366		1,072		—		19,438		BBB-
Assured Guaranty Corporation		—		—		14,641		—		14,641		D
Total	$	1,212,146	$	235,153	$	1,448,597	$	—	$	2,895,896		BBB-
December 31, 2012:
Ambac Assurance Corporation (2)	$	66,270	$	4,717	$	1,344,289	$	—	$	1,415,276		B
National Public Finance Guarantee Corporation		720,904		43,010		—		—		763,914		AA-
Assured Guaranty Municipal Corporation		448,241		169,245		4,923		—		622,409		A
Financial Guarantee Insurance Corporation		17,599		—		4,182		—		21,781		A-
MBIA Insurance Corporation		—		19,733		2,143		—		21,876		BBB-
Assured Guaranty Corporation		—		—		14,743		—		14,743		D
Total	$	1,253,014	$	236,705	$	1,370,280	$	—	$	2,859,999		BBB-

(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 securities insured by Ambac Assurance and Ambac Assurance UK Limited.

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Investment Income:

Net investment income was comprised of the following:

	March 31,
	2013			2012
Fixed income securities	$	86,331		$	112,652
Short-term investments		595			313
Loans		108			216
Investment expense		(1,422	)		(1,064	)
Securities available-for-sale and short-term		85,612			112,117
Other investments		(543	)		—
Total net investment income	$	85,069		$	112,117

Net investment income from Other investments represents changes in fair value on securities classified as trading or under the fair value option. The amount of loss for the three months ended March 31, 2013 on securities still held at the reporting date is $543.

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 March 31, 2013 and December 31, 2012.

	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
March 31, 2013
Derivative Assets:
Interest rate swaps	$	178,447	$	65,636	$	112,811	$	—	$	112,811
Futures contracts		—		—		—		—		—
Total non-VIE derivative assets	$	178,447	$	65,636	$	112,811	$	—	$	112,811
Derivative Liabilities:
Credit derivatives	$	203,307	$	—	$	203,307	$	—	$	203,307
Interest rate swaps		366,949		65,636		301,313		147,925		153,388
Futures contracts		911		—		911		911		—
Other contracts		215		—		215		—		215
Total non-VIE derivative liabilities	$	571,382	$	65,636	$	505,746	$	148,836	$	356,910
Variable Interest Entities
Interest rate swaps	$	2,231,863	$	—	$	2,231,863	$	—	$	2,231,863
Currency swaps		85,762		—		85,762		—		85,762
Total VIE derivative liabilities	$	2,317,625	$	—	$	2,317,625	$	—	$	2,317,625

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	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
December 31, 2012
Derivative Assets:
Interest rate swaps	$	198,117	$	73,264	$	124,853	$	—	$	124,853
Futures contracts		1,253		—		1,253		—		1,253
Total non-VIE derivative assets	$	199,370	$	73,264	$	126,106	$	—	$	126,106
Derivative Liabilities:
Credit derivatives	$	213,585	$	—	$	213,585	$	—	$	213,585
Interest rate swaps		390,774		73,264		317,510		180,113		137,397
Futures contracts		0		—		0		—		0
Other contracts		220		—		220		—		220
Total non-VIE derivative liabilities	$	604,579	$	73,264	$	531,315	$	180,113	$	351,202
Variable Interest Entities
Interest rate swaps	$	2,131,315	$	—	$	2,131,315	$	—	$	2,131,315
Currency swaps		90,466		—		90,466		—		90,466
Total VIE derivative liabilities	$	2,221,781	$	—	$	2,221,781	$	—	$	2,221,781

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 Consolidated Balance Sheets. The amounts representing the right to reclaim cash collateral and posted margin, recorded in “Other assets” were $5,197 and $5,472 as of March 31, 2013 and December 31, 2012, respectively. The amounts representing the obligation to return cash collateral recorded in “Other liabilities” were $0 and $0 as of March 31, 2013 and December 31, 2012.

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The following tables summarize the location and amount of gains and losses of derivative contracts in the Consolidated Statements of Total Comprehensive Loss for the three month periods ended March 31, 2013 and 2012, respectively:

	Location of Gain or (Loss) Recognized in Consolidated Statement of Total Comprehensive Income	Amount of Gain or (Loss) Recognized in Consolidated Statement of Total Comprehensive Income
		March 31, 2013			March 31, 2012
Financial Guarantee:
Credit derivatives	Net change in fair value of credit derivatives	$	12,787		$	(7,222	)
Financial Services derivatives products:
Interest rate swaps	Derivative products		(1,022	)		42,185
Currency swaps	Derivative products		0			156
Futures contracts	Derivative products		455			4,308
Other derivatives	Derivative products		(2	)		308
Total Financial Services derivative products			(569	)		46,957
Call options on long-term debt	Other income		—			61,680
Variable Interest Entities:
Currency swaps	Income on variable interest entities		4,704			(11,207	)
Interest rate swaps	Income on variable interest entities		(100,548	)		93,715
Total Variable Interest Entities			(95,844	)		82,508
Total derivative contracts		($	83,626	)	$	183,923

Financial Guarantee 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. Upon a credit event, Ambac is generally required to make payments equal to the difference between the scheduled debt service payment and the actual payment made by the issuer. Substantially all of Ambac’s credit derivative contracts relate to structured finance transactions. Credit derivatives issued are insured by Ambac Assurance. None of our outstanding credit derivative transactions at March 31, 2013, 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 majority of our credit derivatives are 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. In a small number of transactions, Ambac is required to (i) make a payment equal to the difference between the par value and market value of the underlying obligation or (ii) purchase the underlying obligation at its par value and a loss is realized for the difference between the par and market value of the underlying obligation. There are two transactions, which are not “pay-as-you-go”, with a combined notional of approximately $57,154 and a net liability fair value of $76 as of March 31, 2013. These transactions are CLOs written prior to 2004.

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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. Independent rating agencies may have assigned different ratings on the credits in Ambac’s portfolio than Ambac’s internal ratings. The following tables summarize the net par outstanding for CDS contracts, by Ambac rating, for each major category as of March 31, 2013 and December 31, 2012:

March 31, 2013 Ambac Rating	CLO		Other		Total
AAA	$	272,685	$	483,486	$	756,171
AA		4,187,258		1,220,571		5,407,829
A		1,242,423		1,840,701		3,083,124
BBB (1)		—		665,792		665,792
Below investment grade (2)		—		291,822		291,822
	$	5,702,366	$	4,502,372	$	10,204,738

December 31, 2012 Ambac Rating	CLO		Other		Total
AAA	$	166,200	$	512,283	$	678,483
AA		4,676,362		1,278,756		5,955,118
A		1,313,205		2,370,988		3,684,193
BBB(1)		—		672,293		672,293
Below investment grade (2)		—		291,690		291,690
	$	6,155,767	$	5,126,010	$	11,281,777

(1) BBB internal rating reflects bonds which are of medium grade credit quality with adequate capacity to pay interest and repay principal. Certain protective elements and margins may weaken under adverse economic conditions and changing circumstances. These bonds are more likely than higher rated bonds to exhibit unreliable protection levels over all cycles.

(2) Below investment grade (“BIG”) internal ratings reflect bonds which are of speculative grade credit quality with the adequacy of future margin levels for payment of interest and repayment of principal potentially adversely affected by major ongoing uncertainties or exposure to adverse conditions.

The tables below summarize information by major category as of March 31, 2013 and December 31, 2012:

	CLO			Other			Total
March 31, 2013
Number of CDS transactions		28			21			49
Remaining expected weighted-average life of obligations (in years)		2.1			5.3			3.5
Gross principal notional outstanding	$	5,702,366		$	4,502,372		$	10,204,738
Net derivative liabilities at fair value	$	(30,736	)	$	(172,571	)	$	(203,307	)

	CLO			Other			Total
December 31, 2012
Number of CDS transactions		30			21			51
Remaining expected weighted-average life of obligations (in years)		2.2			5.2			3.6
Gross principal notional outstanding	$	6,155,767		$	5,126,010		$	11,281,777
Net derivative liabilities at fair value	$	(34,645	)	$	(178,940	)	$	(213,585	)

The maximum potential amount of future payments under Ambac’s credit derivative contracts written on a “pay-as-you-go” basis is generally the gross principal notional outstanding amount included in the above table plus future interest payments payable by the derivative reference obligations. For contracts that are not written with pay-as-you-go terms, the maximum potential future payment is represented by the principal notional only. Since Ambac’s credit derivatives typically reference obligations of or assets held by SPEs that meet the definition of a VIE, the amount of maximum potential future payments for credit derivatives is included in the table in Note 3, Special Purpose Entities, Including Variable Interest Entities.

Changes in fair value of Ambac’s credit derivative contracts are accounted for at fair value since they do not qualify for the financial guarantee scope exception under ASC Topic 815. Changes in fair value are recorded in “Net change in fair value of credit derivatives” on the Consolidated Statements of Total Comprehensive Income. Although CDS contracts are accounted for at fair value, they are surveilled similar to non-derivative financial guarantee contracts. As with financial

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guarantee insurance policies, Ambac’s surveillance group tracks credit migration of CDS contracts’ reference obligations from period to period. Adversely classified credits are assigned risk classifications by the surveillance group. As of March 31, 2013, there are four CDS contracts on Ambac’s adversely classified credit listing, with a net derivative liability fair value of $60,791 and total notional principal outstanding of $291,822. As of December 31, 2012, there were four CDS contracts on Ambac’s adversely classified credit listing, with a net derivative liability fair value of $67,219 and total notional principal outstanding of $291,690.

Financial Services Derivative Products:

Ambac, through its subsidiary Ambac Financial Services (“AFS”), provided interest rate and currency swaps to states, municipalities and their authorities, asset-backed issuers and other entities in connection with their financings. AFS manages its interest rate swaps business with the goal of retaining some basis risk and excess interest rate sensitivity as an economic hedge against the effects of rising interest rates elsewhere in the Company, including on Ambac’s financial guarantee exposures. As of March 31, 2013 and December 31, 2012 the notional amounts of AFS’s trading derivative products are as follows:

	Notional
Type of derivative	March 31, 2013		December 31, 2012
Interest rate swaps—receive-fixed/pay-variable	$	704,272	$	727,926
Interest rate swaps—pay-fixed/receive-variable		1,576,832		1,657,382
Interest rate swaps—basis swaps		161,690		161,690
Futures contracts		161,500		161,500
Other contracts		75,651		75,651

Derivatives of Consolidated Variable Interest Entities

Certain VIEs consolidated under ASC Topic 810 entered into derivative contracts to meet specified purposes within the securitization structure. The notional for VIE derivatives outstanding as of March 31, 2013 and December 31, 2012 are as follows:

Type of VIE derivative	Notional
	March 31, 2013		December 31, 2012
Interest rate swaps—receive-fixed/pay-variable	$	1,667,651	$	1,782,999
Interest rate swaps—pay-fixed/receive-variable		4,372,613		4,707,454
Currency swaps		706,568		755,438
Credit derivatives		18,939		20,885

Call Option on Long-Term Debt

Ambac Assurance had certain contractual options to repurchase $500,000 of its surplus notes at a discount to their par value which were considered stand-alone derivatives. Surplus notes are classified under Long-term debt on the Consolidated Balance Sheets. These call options were exercised in June 2012. Gains of $61,680 from the change in fair value of the call options were recognized within Other income in the Consolidated Statements of Total Comprehensive Income for the three month period ended March 31, 2012.

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Contingent Features in Derivatives Related to Ambac Credit Risk

Ambac’s interest rate swaps with professional swap-dealer counterparties and certain front-end counterparties 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 Assurance is no longer rated by an independent rating agency, counterparties have the right to terminate the swap positions.

As of March 31, 2013 and December 31, 2012, the aggregate fair value of all derivative instruments with contingent features linked to Ambac’s own credit risk that are in a net liability position after considering legal rights of offset was $147,925 and $180,113, respectively, related to which Ambac had posted assets as collateral with a fair value of $233,425 and $271,251, respectively. All such ratings-based contingent features have been triggered as requiring maximum collateral levels to be posted by Ambac while preserving counterparties’ rights to terminate the contracts. Assuming all contracts terminated on March 31, 2013, 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 files a consolidated Federal income tax return with its subsidiaries. Ambac 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 affiliates operate and the earliest tax years subject to examination:

Jurisdiction	Tax Year
United States		2010
New York State		2008
New York City		2011
United Kingdom		2006
Italy		2007

On February 24, 2012, Ambac, the Creditors’ Committee, Ambac Assurance, the Segregated Account, OCI, and the Rehabilitator submitted to the United States Internal Revenue Service (“IRS”) and the Department of Justice a proposal to settle Ambac’s dispute with the IRS and related proceedings which included the following terms: (i) a payment by Ambac Assurance and/or the Segregated Account of $100,000; (ii) a payment by Ambac of $1,900; (iii) Ambac Consolidated Group relinquished its claim to all loss carry-forwards resulting from losses on credit default swap contracts and arising on or before December 31, 2010 to the extent such loss carry-forwards exceed $3,400,000; and (iv) paying the IRS 12.5% and 17.5% of certain payments to Ambac by Ambac Assurance under the Amended TSA. On April 30, 2013, the parties concluded the settlement on such terms (the “IRS Settlement”).

As a result of the development of additional losses and the related impact on the Company’s cash flows, management believes it is more likely than not that the Company will not generate sufficient taxable income to recover the deferred tax operating asset. As of March 31, 2013, the company had a valuation allowance of $3,134,054.

As of March 31, 2013 Ambac has an ordinary U. S. federal net operating tax carryforward of approximately $7,107,171, which if not utilized, will begin expiring in 2029 and will fully expire in 2034. As disclosed above, as part of the IRS Settlement, Ambac has relinquished its claim to all net operating loss carry-forwards resulting from losses on credit default swap contracts arising on or before December 31, 2010 to the extent such net operating loss carry-forwards exceed $3,400,000. The exact amount of the loss carry-forward relinquishment is $1,059,988.

Upon emergence from bankcruptcy, approximately $816,380 of the NOL will be reduced for cancellation of indebtedness income and reduction of interest expense pursuant to IRC Section 382 (l)(5).

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11. COMMITMENTS AND CONTINGENCIES

The following commitments and contingencies provide an update of those discussed in “Note 15: Commitments and Contingencies” in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, and should be read in conjunction with the complete descriptions provided in the aforementioned Form 10-K.

Chapter 11 Reorganization

Under the Bankruptcy Code, the filing of our petition on November 8, 2010 automatically stayed most actions against Ambac. Substantially all of Ambac’s pre-petition liabilities were addressed under the Reorganization Plan, if not otherwise addressed pursuant to orders of the Bankruptcy Court. As further described in Note 1, the Reorganization Plan was substantially consummated on May 1, 2013, primarily through the distribution of new common stock and warrants.

In addition to the distributions made on May 1, 2013 pursuant to the Reorganization Plan, the Company may be required to distribute additional new common stock and warrants to claimholders in its Chapter 11 case and will need to make cash payments in respect of allowed administrative claims and professional fees relating to its bankruptcy. See Note 1 for further details.

The Segregated Account and Wisconsin Rehabilitation Proceeding

The Rehabilitation Court entered an order approving the transactions contemplated in the Mediation Agreement on November 10, 2011 and certain parties appealed such order. On March 1, 2013, the Wisconsin Court of Appeals entered an order dismissing this appeal for lack of standing. The time for appellants to appeal that order to the Wisconsin Supreme Court has expired and appellants have not made such further appeal. Therefore, the order entered by the Rehabilitation Court approving the transactions contemplated in the Mediation Agreement has become final and non-appealable.

On June 4, 2012, the Rehabilitation Court issued an order approving Ambac Assurance’s purchase of surplus notes pursuant to the exercise of call options (“Surplus Notes Order”). Fannie Mae filed both a Petition for Leave to Appeal and a Notice of Appeal of the Surplus Notes Order. On March 7, 2013, the Wisconsin Court of Appeals denied Fannie Mae’s Petition for Leave to Appeal the Surplus Notes Order and extended Fannie Mae’s time to respond to the Commissioner’s pending motion to dismiss Fannie Mae’s appeal for lack of jurisdiction and lack of standing to March 25, 2013. On March 21, 2013 Fannie Mae filed a Notice of Voluntary Dismissal of Appeal and on April 1, 2013 the Wisconsin Court of Appeals dismissed Fannie Mae’s appeal of the Surplus Notes Order.

Tax Treatment of Ambac Assurance’s CDS Portfolio

On April 3, 2013, Ambac, the Creditors’ Committee, Ambac Assurance, the Segregated Account, OCI and the Rehabilitator submitted to the IRS and the Department of Justice, Tax Division, a letter which modified and supplemented the terms of the Offer Letter to settle the IRS Dispute and related proceedings. On April 4, 2013, the Department of Justice, Tax Division, accepted the Offer Letter as supplemented and modified. On April 8, 2013, Ambac filed a motion with the United States Bankruptcy Court for the Southern District of New York seeking approval of the terms of the IRS Settlement. On April 29, 2013, the Bankruptcy Court approved in all respects the IRS Settlement, which settled the IRS Claim, and authorized and directed Ambac, in part, to effectuate the IRS Settlement and to take any other actions as may be reasonably necessary to consummate the settlement, including, without limitation, the execution of a closing agreement with the IRS, and entry of a stipulation dismissing the IRS adversary proceeding with prejudice. On April 30, 2013, Ambac paid to the United States Department of the Treasury $1,900 and the Segregated Account paid the United States Department of Treasury $100,000. Upon confirmation of payment, Ambac and the Internal Revenue Service entered into a closing agreement on April 30, 2013 which resolved with finality all federal income tax liability of Ambac for the 2003 through 2009 tax years and resolved with finality the federal income tax liability of Ambac for the 2010 tax year solely with respect to items of income, gain, deductions or loss related to the CDS contracts. The closing agreement does not resolve the tax treatment of CDS contracts for tax years subsequent to 2010.

On May 7, 2013, following execution of the closing agreement and payment of the settlement consideration by Ambac and the Segregated Account, the Bankruptcy Court issued an order dismissing with prejudice the adversary proceeding against the IRS. On the same day, Ambac, the United States and the Creditors’ Committee filed a stipulation withdrawing and dismissing with prejudice the motion to withdraw the reference pending before the United States District Court for the Southern District of New York. In accordance with the terms of the settlement, the parties also intend to dismiss with prejudice the appeals pending in the Seventh Circuit Court of Appeals.

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Litigation Filed Against Ambac

County of Alameda et al. v. Ambac Assurance Corporation et al. (Superior Court of the State of California, County of San Francisco, second amended complaint filed on or about August 23, 2011); Contra Costa County et al. v. Ambac Assurance Corporation et al. (Superior Court of the State of California, County of San Francisco, third amended complaint filed on or about October 21, 2011); The Olympic Club v. Ambac Assurance Corporation et al. (Superior Court of the State of California, County of San Francisco, fourth amended complaint filed on or about October 21, 2011). After oral argument on March 21, 2013, the court dismissed claims related to the conspiracy branch of the complaint under the California Antitrust Law (the Cartwright Act) and after oral argument on April 22, 2013 denied defendants’ motion to dismiss claims under the California Unfair Competition Law.

Broadbill Partners LP et al. v. Ambac Assurance Corporation (Supreme Court of the State of New York, County of New York, filed November 8, 2012). Ambac Assurance filed a motion to dismiss on January 15, 2013. The court has not yet decided the motion.

Water Works Board of the City of Birmingham v. Ambac Financial Group, Inc. and Ambac Assurance Corporation (United States District Court, Northern District of Alabama, Southern Division, filed on November 10, 2009). The plaintiff appealed the dismissal of its claims to the U.S. Court of Appeals for the Eleventh Circuit and on January 25, 2011, the Circuit Court stayed the appeal in light of Ambac’s bankruptcy proceedings. Ambac has informed the Circuit Court that Second Modified Fifth Amended Plan of Reorganization has taken effect and that the automatic stay imposed pursuant to section 362 of the Bankruptcy Code (11 U.S.C. § 362) is no longer in effect.

Litigation Filed by Ambac

Ambac Assurance Corporation v. Adelanto Public Utility Authority (United States District Court, Southern District of New York, filed on June 1, 2009). On January 11, 2013 the court granted Ambac Assurance’s motion for summary judgment and denied defendant’s motion. At a March 13, 2013 conference, the court requested that the parties prepare submissions regarding the amount of damages and fees Ambac Assurance is entitled to recover, and Ambac Assurance served its submissions upon the defendant on April 23, 2013.

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, which are listed and described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, as supplemented and updated below:

• Ambac Assurance Corporation and The Segregated Account of Ambac Assurance Corporation v. EMC Mortgage LLC (formerly known as EMC Mortgage Corporation), J.P. Morgan Securities, Inc. (formerly known as Bear, Stearns & Co. Inc.), and JP Morgan Chase Bank, N.A. (Supreme Court of the State of New York, County of New York, filed March 30, 2012 and amended on August 14, 2012). Oral argument on defendants’ motion to dismiss was held on February 21, 2013. The court has not yet decided the motion.

• Ambac Assurance Corporation and The Segregated Account of Ambac Assurance Corporation v. First Franklin Financial Corporation, Bank of America, N.A., Merrill Lynch, Pierce, Fenner & Smith Inc., Merrill Lynch Mortgage Lending, Inc., and Merrill Lynch Mortgage Investors, Inc. (Supreme Court of the State of New York, County of New York, filed April 16, 2012). Oral argument on the defendants’ motion to dismiss was held on May 6, 2013. The court has not yet decided the motion.

• Ambac Assurance Corporation and the Segregated Account of Ambac Assurance Corporation v. DLJ Mortgage Capital, Inc. and Credit Suisse Securities (USA) LLC (Supreme Court of the State of New York, County of New York, filed on January 12, 2010). On March 1, 2013, the parties filed a stipulation discontinuing the litigation with prejudice.

• Ambac Assurance Corporation and The Segregated Account of Ambac Assurance Corporation v. Capital One, N.A., as successor by merger to Chevy Chase Bank, F.S.B. (United States District Court for the Southern District of New York, filed on October 24, 2012). Defendants filed a motion to dismiss on February 6, 2013, which Ambac Assurance opposed in a brief filed on February 20, 2013. The motion was fully briefed and filed on March 5, 2013. The court held oral argument on March 7, 2013 and has not yet decided the motion.

• Ambac Assurance Corporation and The Segregated Account of Ambac Assurance Corporation v. Nomura Credit & Capital, Inc. and Nomura Holding America Inc. (Supreme Court of the State of New York, County of New York, filed on April 15, 2013). Ambac Assurance alleges claims for material breach of contract and for the repurchase of loans that breach representations and warranties under the contracts, as well as damages. Ambac has also asserted alter ego claims against Nomura Holding America Inc. Defendants have not yet answered or otherwise responded to the complaint.

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12. SEGMENT INFORMATION

Ambac has two reportable segments, as follows: (1) Financial Guarantee, which provided financial guarantees (including credit derivatives) for public finance, structured finance and other obligations; and (2) Financial Services, which provided investment agreements, funding conduits, interest rate and currency swaps, principally to clients of the financial guarantee business. Ambac’s reportable segments were strategic business units that offer different products and services. They are managed separately because each business required different marketing strategies, personnel skill sets and technology.

Ambac Assurance guarantees the swap and investment agreement obligations of its Financial Services affiliates. Additionally, Ambac Assurance provides loans to the Financial Services businesses. Inter-segment revenues include the premiums and investment income earned under those agreements. Such premiums are determined as if they were premiums paid by third parties, that is, at current market prices.

Information provided below for “Corporate and Other” primarily relates to corporate activities, including interest income on the investment portfolio. Corporate and Other intersegment revenue relates to receipts under the Mediation Agreement between Ambac Financial Group and Ambac Assurance. The following table is a summary of financial information by reportable segment as of and for the three months ended March 31, 2013 and 2012:

Three months ended March 31,	Financial Guarantee			Financial Services			Corporate and Other			Intersegment Eliminations			Total Consolidated
2013:
Revenues:
Unaffiliated customers	$	250,793		$	40,605		$	29		$	—		$	291,427
Intersegment		726			(684	)		—			(42	)		—
Total revenues	$	251,519		$	39,921		$	29		($	42	)	$	291,427
Pre-tax loss from continuing operations:
Unaffiliated customers	$	246,700		$	38,847		($	2,638	)	$	—		$	282,909
Intersegment		(72	)		(849	)		921			—			—
Pre-tax loss from continuing operations	$	246,628		$	37,998		($	1,717	)	$	—		$	282,909
Total assets	$	25,573,998		$	558,593		$	32,069		$	—		$	26,164,660
2012:
Revenues:
Unaffiliated customers	$	269,827		$	54,252		$	57		$	—		$	324,136
Intersegment		1,499			(1,443	)		645			(701	)		—
Total revenues	$	271,326		$	52,809		$	702		$	(701	)	$	324,136
Pre-tax loss from continuing operations:
Unaffiliated customers	$	206,287		$	51,670		$	(4,335	)	$	—		$	253,622
Intersegment		1,027			(1,355	)		328			—			—
Pre-tax loss from continuing operations	$	207,314		$	50,315		$	(4,007	)	$	—		$	253,622
Total assets	$	26,183,305		$	1,146,877		$	42,702		$	—		$	27,372,884

Included in the table above are revenues from unaffiliated customers for the three months ended March 31, 2013 relating to net investment income of $83,829 for Financial Guarantee, $1,211 for Financial Services and $29 for Corporate and Other, compared to the three months ended March 31, 2012 relating to net investment income of $105,261 for Financial

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Guarantee, $6,799 for Financial Services and $57 for Corporate and Other, respectively. Included in the line item pre-tax loss from continuing operations—unaffiliated customers for the three months ended March 31, 2013 is interest expense, of which $22,176 is for Financial Guarantee, $989 for Financial Services and $0 for Corporate and Other, compared to the first quarter of 2012 with $32,049 for Financial Guarantee, $1,790 for Financial Services and $0 for Corporate and Other, respectively. Interest expense for Financial Guarantee relates to the interest accrued on surplus notes and interest from a secured borrowing on a variable interest entity, and Financial Services relates to the interest on investment agreements.

The following tables summarize gross premiums written, net premiums earned and the net change in fair value of credit derivatives included in the Financial Guarantee segment, by location of risk for the three months ended March 31, 2013 and 2012:

Three months ended March 31,	Gross Premiums Written			Net Premiums Earned		Net change in fair value of credit derivatives
2013
United States	$	(8,716	)	$	81,057	$	16,530
United Kingdom		8,507			13,754		(2,175	)
Other international		(3,321	)		5,445		(1,568	)
Total	($	3,530	)	$	100,256	$	12,787
2012
United States	$	(92,724	)	$	72,985	$	(3,451	)
United Kingdom		6,414			15,041		(3,624	)
Other international		(6,284	)		6,924		(147	)
Total	$	(92,594	)	$	94,950	$	(7,222	)

13. FUTURE APPLICATION OF ACCOUNTING STANDARDS AND ADOPTION OF NEW ACCOUNTING STANDARDS

Effective January 1, 2013, Ambac adopted ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities, and ASU No. 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities retrospectively for all periods presented. Upon the adoption of these ASUs, Ambac presented the offsetting disclosure requirements in Note 9, Derivative Instruments.

Effective January 1, 2013, Ambac adopted ASU No. 2013-02, Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income. Upon the adoption of this ASU, Ambac presented the changes in the accumulated balances by component of other comprehensive income and the corresponding effects on net income by line item for the reclassifications out of accumulated other comprehensive income, in Note 4, Comprehensive Income.

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14. REORGANIZATION AND FRESH START ACCOUNTING PRO-FORMA ADJUSTMENTS (UNAUDITED)

Pursuant to ASC Topic 852 – Reorganizations, fresh start financial statement reporting is to be applied, once the Reorganization Plan is confirmed by the Bankruptcy Court and there are no remaining material contingencies to complete implementation of the Reorganization Plan. All conditions required for the adoption of fresh start accounting principles were satisfied by Ambac on April 30, 2013 (“Fresh Start Reporting Date”). The financial statements as of May 1, 2013 and for subsequent periods will report the results of the new entity (“successor”) with no beginning retained earnings. Presentation of the successor represents the financial position and results of operations of the successor and is not comparable to our previously issued financial statements.

For purposes of presenting the following pro-forma balance sheet as of March 31, 2013, Ambac has estimated its reorganization value to be $28,496,726, as further described below. Fresh start accounting requires the Company to adjust the basis of its assets, liabilities and non-controlling interest to their fair value and allocate the reorganization value to the Company’s assets in conformity with the purchase method of accounting for business combinations in ASC 805, including the business combinations guidance applicable to insurance entities in ASC 944-805. The valuations required to determine the fair value of Ambac’s assets, liabilities and non-controlling interests presented below represent the Company’s preliminary estimates.

Ambac’s estimated reorganization value of $28,496,726 approximates the fair value of the Company’s assets. The reorganization value equals the sum of the estimated fair values of: (1) total liabilities of $28,088,686, (2) noncontrolling interests of $223,040 and (3) the enterprise value of $185,000, which also represents the Company’s estimated equity value attributable to Ambac’s stockholders. In conjunction with formulating the Reorganization Plan, Ambac directed a third-party financial advisor to prepare a valuation analysis to determine Ambac’s estimated enterprise value. The estimated enterprise value was included in the Disclosure Statement filed by Ambac with the Bankruptcy Court in September 2011. The enterprise value was based primarily on a discounted cash flow analysis using projected financial information. The enterprise value relied on a number of estimates and assumptions, which are inherently subject to significant uncertainties and contingencies beyond the control of the Company.

The adjustments presented below are presented on an unaudited pro-forma basis as of March 31, 2013, which differs from our Fresh Start Reporting Date. Accordingly, these estimates are preliminary and subject to further revisions and adjustments, based on any updated valuations, actual amounts, applicable economic conditions as of the Fresh Start Reporting Date and results of operations through the Fresh Start Reporting Date. Ambac’s actual fresh start accounting adjustments may vary materially from those presented below. The unaudited pro-forma adjustments presented below summarize the impact of the Reorganization Plan and adoptions of fresh start accounting as if the Fresh Start Reporting Date had occurred on March 31, 2013.

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AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Pro-Forma Fresh Start Consolidated Balance Sheet

	Predecessor March  31, 2013			Reorganization Items (1)			Fresh Start Adjustments (2)			Successor Pro-Forma March 31, 2013
(Dollars in Thousands, Except per Share Data)	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Assets:
Investments	$	6,512,262		$	(101,900	)	$	—		$	6,410,362
Cash		53,135									53,135
Receivable for securities sold		40,822									40,822
Investment income due and accrued		33,944									33,944
Premium receivables		1,543,098									1,543,098
Reinsurance recoverable on paid and unpaid losses		160,682									160,682
Deferred ceded premium		170,032									170,032
Subrogation recoverable		545,007									545,007
Deferred acquisition costs		192,306						(192,306	)		—
Loans		8,691						(1,572	)		7,119
Derivative assets		112,811									112,811
Current taxes		—			4,626						4,626
Insurance intangible		—						2,345,268			2,345,268
Goodwill		—						286,956			286,956
Other assets		40,365									40,365
Variable interest entity assets:
Fixed income securities, at fair value		2,414,607									2,414,607
Restricted cash		2,258									2,258
Investment income due and accrued		1,338									1,338
Loans		14,327,840						(9,006	)		14,318,834
Other assets		5,462									5,462
Total assets	$	26,164,660		$	(97,274	)	$	2,429,340		$	28,496,726
Liabilities and Stockholders’ Equity:
Liabilities:
Liabilities subject to compromise	$	1,704,641		$	(1,704,641	)	$	—		$	—
Unearned premiums		2,623,445									2,623,445
Loss and loss expense reserve		6,590,216									6,590,216
Ceded premiums payable		92,085									92,085
Obligations under investment agreements		357,371						(1,144	)		356,227
Obligations under investment repurchase agreements		5,926						55			5,981
Deferred taxes		1,540						168,373			169,913
Current taxes		97,274			(97,274	)					—
Long-term debt		153,873						732,938			886,811
Accrued interest payable		246,378						(22,184	)		224,194
Derivative liabilities		505,746									505,746
Other liabilities		91,057									91,057
Payable for securities purchased		17,051									17,051
Variable interest entity liabilities:
Accrued interest payable		828									828
Long-term debt		14,229,373						(22,167	)		14,207,206
Derivative liabilities		2,317,625									2,317,625
Other liabilities		301									301
Total liabilities	$	29,034,730		$	(1,801,915	)	$	855,871		$	28,088,686
Stockholders’ deficit:
Preferred stock	$	—		$	—		$	—		$	—
Common stock – Predecessor Ambac		3,080						(3,080	)		—
Common stock – Successor Ambac		—			450						450
Additional paid-in capital – Predecessor Ambac		2,172,027						(2,172,027	)		—
Additional paid-in capital – Successor Ambac		—			184,550			—			184,550
Accumulated other comprehensive income		720,071						(720,071	)		—
Accumulated deficit		(6,015,025	)		1,519,641			4,495,384			—
Common stock held in treasury at cost		(410,695	)					410,695			—
Total Ambac Financial Group, Inc. stockholders’ deficit		(3,530,542	)		1,704,641			2,010,901			185,000
Noncontrolling interest		660,472						(437,432	)		223,040
Total stockholders’ deficit		(2,870,070	)		1,704,641			1,573,469			408,040
Total liabilities and stockholders’ deficit	$	26,164,660		$	(97,274	)	$	2,429,340		$	28,496,726

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(1) Reorganization items: Represents amounts recorded for the implementation of the Reorganization Plan on the Fresh Start Reporting Date. This includes the settlement of pre-petition liabilities, cash payments to the IRS under the IRS Settlement, and the distribution of new shares of Ambac common stock and warrants to pre-petition creditors.

(2) Fresh start adjustments: Represents the following fresh start adjustments:

• Adjusting the basis of all assets, liabilities and non-controlling interests to fair value for those items which are not already reported at fair value under U.S. GAAP accounting rules:

• Loans, Obligations under investment agreements, Long-term debt, VIE Loans and VIE Long-term debt: Refer to Note 7—Fair Value Measurements, for a discussion of the valuation methodologies used to estimate fair value for these line items.

• Insurance intangible: Represents the fair value adjustment for financial guarantee insurance and reinsurance contracts. Pursuant to the business combinations guidance for insurance entities in ASC Topic 944-805, insurance and reinsurance assets and liabilities continue to be measured in accordance with existing accounting policies and an intangible asset is recorded representing the difference between the fair value and carrying value of these insurance and reinsurance assets and liabilities. As a result, the carrying value of our financial guarantee insurance and reinsurance contracts will continue to be reported and measured in accordance with ASC Topic 944. These line items primarily comprise Premiums receivable, Reinsurance recoverable on paid and unpaid losses, Deferred ceded premium, Subrogation recoverable, Loss and loss expense reserve, and Ceded premiums payable. Refer to Note 7—Fair Value Measurements, for a discussion of the valuation methodology used to estimate fair value for financial guarantee insurance contracts. Also note that certain insurance-related balance sheet items that do not represent future cash cash flows, such as deferred acquisitions costs, are written off at the Fresh Start Reporting Date.

• Non-controlling interests: The fair value adjustment is based on current quotes from market sources.

• Recording the deferred tax impact of the above fair value adjustments in accordance with ASC Topic 852.

• Recording goodwill for the excess of the reorganization value over the fair value of the identifiable assets.

• Cancelling the predecessor’s common and preferred stock and eliminating the predecessor’s additional paid-in capital, accumulated other comprehensive income, accumulated deficit and treasury stock.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

In this Quarterly Report, we have included 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 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 2012 Annual Report on Form 10-K.

Any or all of management’s forward-looking statements here or in other publications may turn out to be incorrect and are based on Ambac Financial Group, Inc. (“Ambac” or the “Company”) 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 inability of Ambac Assurance Corporation (“Ambac Assurance”) to pay dividends to Ambac; (2) adverse events arising from the rehabilitation proceedings for the Segregated Account of Ambac Assurance Corporation (the “Segregated Account”), including the failure of the injunctions issued by the Wisconsin rehabilitation court to protect the Segregated Account and Ambac Assurance from certain adverse actions; (3) litigation arising from the Segregated Account rehabilitation proceedings; (4) decisions made by the rehabilitator of the Segregated Account for the benefit of policyholders may result in material adverse consequences for Ambac’s security holders; (5) intercompany disputes or disputes with the rehabilitator of the Segregated Account; (6) uncertainty concerning our ability to achieve value for holders of Ambac securities; (7) potential of a full rehabilitation proceeding against Ambac Assurance; (8) material changes to the Segregated Account rehabilitation plan or to current rules and procedures governing the payment of permitted policy claims, with resulting adverse impacts; (9) inadequacy of reserves established for losses and loss expenses, including our inability to realize the recoveries or future commutations included in our reserves; (10) market risks impacting assets in our investment portfolio or the value of our assets posted as collateral in respect of investment agreements and interest rate swap transactions; (11) risks relating to determination of amount of impairments taken on investments; (12) credit and liquidity risks due to unscheduled and unanticipated withdrawals on investment agreements; (13) market spreads and pricing on insured CLOs and other derivative products insured or issued by Ambac or its subsidiaries; (14) Ambac’s financial position and the Segregated Account rehabilitation proceedings may prompt departures of key employees and may impact our ability to attract qualified executives and employees; (15) 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 our business, operations, financial position, profitability or cash flows; (16) credit risk throughout our business, including but not limited to credit risk related to residential mortgage-backed securities, student loan and other asset securitizations, CLOs, public finance obligations and exposures to reinsurers; (17) default by one or more of Ambac Assurance’s portfolio investments, insured issuers, counterparties or reinsurers; (18) the risk that our risk management policies and practices do not anticipate certain risks and/or the magnitude of potential for loss as a result of unforeseen risks; (19) factors that may influence the amount of installment premiums paid to Ambac, including the Segregated Account rehabilitation proceedings; (20) changes in prevailing interest rates; (21) the risk of volatility in income and earnings, including volatility due to the application of fair value accounting, required under the relevant derivative accounting guidance; (22) changes in accounting principles or practices that may impact Ambac’s reported financial results; (23) legislative and regulatory developments; (24) operational risks, including with respect to internal processes, risk models, systems and employees; (25) changes in tax laws, tax disputes and other tax-related risks; and (26) other risks and uncertainties that have not been identified at this time.

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OVERVIEW

Ambac Financial Group, Inc. (“Ambac” or the “Company”), headquartered in New York City, is a holding company incorporated in the state of Delaware. On November 8, 2010, Ambac filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York (“Bankruptcy Court”). The Company, as debtor and debtor-in-possession, filed a Fifth Amended Plan of Reorganization on March 12, 2012, which was confirmed by order of the Bankruptcy Court on March 14, 2012 and modified in accordance with orders entered by the Bankruptcy Court on April 29, 2013 (such Fifth Amended Plan of Reorganization, as so modified, the “Reorganization Plan”). On April 30, 2013, Ambac executed a closing agreement with the United States Internal Revenue Service (the “IRS”) to conclude the settlement of a dispute with the IRS, and concurrently paid $1,900, while the Segregated Account (as defined below) paid $100,000, to the United States in connection with such settlement. On May 1, 2013, the Reorganization Plan became effective and Ambac emerged from bankruptcy. Refer to Note 1 to the Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q for further discussion of Ambac’s emergence from bankruptcy.

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

• Increasing the value of its investment in Ambac Assurance Corporation (“Ambac Assurance”) by actively managing its assets and liabilities with a focus on maximizing investment portfolio returns and mitigating or remediating losses on poorly performing transactions, including through executing policy commutations, repurchasing liabilities at a discount, pursuing recoveries of losses through litigation and the exercise of contractual and legal rights, and restructuring transactions; and

• Pursuing new financial services businesses, apart from Ambac Assurance and Everspan Financial Guarantee Corp. These new businesses may include advisory, asset servicing, asset management and/or insurance.

Although we are exploring new business opportunities for Ambac, it is not possible at this time to predict the operating results or prospects of any future business. Our efforts to pursue new business opportunities may be unsuccessful or require significant financial or other resources. No assurance can be given that we will be able to identify or execute the acquisition or development of any new business. 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 is speculative. For additional risks and uncertainties concerning Ambac, please refer to Part I, Item 1A of Ambac’s 2012 Form 10-K.

Ambac has two reportable business segments: Financial Guarantee and Financial Services.

Ambac’s financial guarantee business was executed through its primary operating subsidiary, Ambac Assurance. Ambac Assurance provided financial guarantees and financial services to clients in both the public and private sectors globally. The deterioration of Ambac Assurance’s financial condition resulting from losses in its insured portfolio caused downgrades and ultimately rating withdrawals of Ambac Assurance’s financial strength ratings from the independent rating agencies. These losses have prevented Ambac Assurance from being able to write new business. An inability to write new business has and will continue to negatively impact Ambac Assurance’s future operations and financial results. Ambac Assurance is unable to pay dividends, and as a result Ambac’s liquidity has been restricted.

In March 2010, Ambac Assurance established a segregated account pursuant to Wisc. Stat. §611.24(2) (the “Segregated Account”) to segregate certain segments of Ambac Assurance’s liabilities. As of March 31, 2013, insurance liabilities for policies allocated to the Segregated Account were $6,211.5 million. These insurance liabilities include loss reserves and loss expense reserves, gross of remediation and reinsurance recoveries. In March 2010, the Office of the Commissioner of Insurance for the State of Wisconsin (“OCI” (which term shall be understood to refer to such office as regulator of Ambac Assurance and to the Commissioner of Insurance for the State of Wisconsin as rehabilitator of the Segregated Account (the “Rehabilitator”), as the context requires)) commenced rehabilitation proceedings with respect to the Segregated Account (the “Segregated Account Rehabilitation Proceedings”) in order to permit the OCI to facilitate an orderly run-off and/or settlement of the liabilities allocated to the Segregated Account pursuant to the provisions of the Wisconsin Insurers Rehabilitation and Liquidation Act. The Rehabilitator is Theodore Nickel, the Commissioner of Insurance of the State of Wisconsin. Refer to Note 1 to the Consolidated Financial Statements in Part II, Item 8 of Ambac’s 2012 Form 10-K and to Note 1 to the Consolidated Financial Statements in Part I, Item I of this Form 10-Q for further discussion of the creation and rehabilitation of the Segregated Account.

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Ambac’s existing financial services segment is operated by subsidiaries of Ambac Assurance. This segment provided financial and investment products, including investment agreements, funding conduits, and interest rate swaps, principally to the clients of its financial guarantee business. Ambac Assurance insured all of the obligations of its financial services subsidiaries. The interest rate swap and investment agreement businesses are in active runoff, which is being effectuated by means of transaction terminations, settlements, assignments and scheduled amortization of contracts.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Ambac’s Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), which require the use of estimates and assumptions. Management has discussed and reviewed the development, selection and disclosure of critical accounting policies and estimates with Ambac’s Audit Committee. Management believes that the most critical accounting estimates, since these estimates require significant judgement, are the accounting for loss and loss expenses of non-derivative financial guarantees, the valuation of financial instruments, including the determination of whether an investment impairment is other-than-temporary and the valuation allowance on deferred tax assets. Financial results could be materially different if other methodologies were used or if management modified its 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, 2012.

FINANCIAL GUARANTEES IN FORCE

Financial guarantee products were sold in three principal markets: the U.S. public finance market, the U.S. structured finance and asset-backed market and the international finance market. The following table provides a breakdown of guaranteed net par outstanding by market sector at March 31, 2013 and December 31, 2012. Guaranteed net par outstanding includes the exposures of policies that insure variable interest entities (“VIEs”) consolidated in accordance with ASC Topic 810, Consolidation. Guaranteed net par outstanding excludes the exposures of policies that insure bonds which have been refunded or pre-refunded:

($ in millions)	March 31, 2013		December 31, 2012
Public Finance	$	135,641	$	143,018
Structured Finance		40,009		42,359
International Finance		35,313		38,256
Total net par outstanding	$	210,963	$	223,633

Included in the above net par exposures at March 31, 2013 and December 31, 2012 are $10,205 and $11,282, respectively, of exposures that were executed in the form of credit derivatives.

Ratings Distribution

The following tables provide a rating distribution of guaranteed total net par outstanding based upon internal Ambac Assurance credit ratings at March 31, 2013 and December 31, 2012 and a distribution by bond type of Ambac Assurance’s below investment grade net par exposures at March 31, 2013 and December 31, 2012. Below investment grade is defined as those exposures with a credit rating below BBB-:

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Percentage of Guaranteed Portfolio

Ambac Rating(1)	March 31, 2013			December 31, 2012
AAA		1	%		1	%
AA		22			22
A		44			44
BBB		18			18
Below investment grade		15			15
Total		100	%		100	%

(1) Internal credit ratings are provided solely to indicate the underlying credit quality of guaranteed obligations based on the view of Ambac Assurance, and for Ambac UK related transactions, based on the view of Ambac UK. In cases where Ambac Assurance or Ambac UK 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 Assurance and Ambac UK credit ratings are subject to revision at any time and do not constitute investment advice.

Summary of Below Investment Grade Exposure

Bond Type	March 31, 2013		December 31, 2012
($ in millions)
Public Finance:
Housing (1)	$	761	$	775
Tax-backed		729		741
Transportation		519		533
General obligation		390		392
Health care		11		11
Other		1,316		1,436
Total Public Finance		3,726		3,888
Structured Finance:
Residential mortgage-backed and home equity—first lien		9,158		9,592
Residential mortgage-backed and home equity—second lien		7,253		7,533
Student loans		5,160		5,331
Structured Insurance		1,657		1,657
Mortgage-backed and home equity—other		389		403
Other		549		554
Total Structured Finance		24,166		25,070
International Finance:
Airports		—		1,504
Other		3,272		3,452
Total International Finance		3,272		4,956
Total	$	31,164	$	33,914

(1) Includes $488 of military housing net par at March 31, 2013 and December 31, 2012.

The decrease in below investment grade exposures are primarily due to (i) reductions to residential mortgage-backed securities during the year as a result of both voluntary prepayments by issuers and claims presented to Ambac Assurance; and (ii) maturity of a portion of an international airport exposure resulting in an overall improvement in the credit quality of the remaining exposures.

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RESULTS OF OPERATIONS

We follow the accounting prescribed by ASC Topic 852, “Reorganizations.” Entities operating in bankruptcy and expecting to reorganize under Chapter 11 of the Bankruptcy Code are subject to the additional accounting and financial reporting guidance in ASC Topic 852. While ASC Topic 852 provides specific guidance for certain matters, other portions of US GAAP continue to apply so long as the guidance does not conflict with ASC Topic 852. This accounting literature provides guidance for periods subsequent to a Chapter 11 filing for, among other things, the presentation of liabilities that are and are not subject to compromise by the Bankruptcy Court proceedings, as well as the treatment of interest expense and presentation of costs associated with the proceedings. Accordingly, the financial results in the prior periods or filed in future filings may not be comparable.

Ambac’s net income was $282.3 million or $0.93 per share, compared to $253.3 million or $0.84 per share, for the three months ended March 31, 2013 and 2012, respectively. The quarter ended March 31, 2013 financial results compared to 2012 were favorably impacted primarily by (i) a lower provision for loss and loss expenses; (ii) higher net realized investment gains; (iii) higher net gains related to consolidated variable interest entities; (iv) income related to the net change in fair value of credit derivatives compared to a loss in 2012; and (v) lower interest expense, partially offset by (i) lower other income; (ii) lower derivative product revenue; and (iii) lower net investment income.

The valuation of derivative liabilities (credit derivatives and interest rate swaps) is impacted by the market’s view of Ambac Assurance’s creditworthiness. We reflect Ambac’s own creditworthiness in the fair value of such liabilities by including a credit valuation adjustment (“CVA”) in the determination of fair value. During the three months ended March 31, 2013 and 2012, Ambac Assurance’s creditworthiness as perceived by market participants improved. Accordingly, as further described under Change in Fair Value of Credit Derivatives and Derivative Products Reserve below, Ambac’s net income included losses of $99.6 million and $138.1 million for the three months ended March 31, 2013 and 2012, respectively, related to changes of the CVA on derivative liabilities.

The following paragraphs describe the consolidated results of operations of Ambac and its subsidiaries for the three months ended March 31, 2013 and 2012 and its financial condition as of March 31, 2013 and December 31, 2012.

De-risking and other Settlements of Financial Guarantee Contracts. As part of its efforts to increase the residual value of its financial guarantee business, Ambac Assurance pursues loss mitigation strategies, including seeking recovery of paid claims, commencing litigation to recover losses or mitigate future losses, entering into commutations of policies at discounts to their expected losses and purchasing Ambac-insured securities (collectively “de-risking”). Ambac Assurance considers the cash payment, if any, as well as the potential for lost future premium receipts in its review of the economic impact of executing such de-risking transactions.

In the three months ended March 31, 2013, Ambac did not execute any commutations of insurance policies. In the three months ended March 31, 2012, the Segregated Account of Ambac Assurance made a gross cash payment of $17.5 million to commute $341 million of gross par exposure relating to two student loan transactions. There were no Surplus Notes issued by Ambac Assurance or the Segregated Account during the three months ended March 31, 2013 or 2012 related to commutations, terminations or settlements of financial guarantee or credit derivative transactions.

Net Premiums Earned. Net premiums earned during the three months ended March 31, 2013 were $100.3 million, an increase of 5.6% from $95.0 million for the three months ended March 31, 2012. Net premiums earned include accelerated premiums, which result from refunding, calls and other accelerations. Ambac had accelerated earnings of $29.4 million during the first quarter of 2013 versus $15.8 million in the first quarter of 2012. The net increase in accelerated earnings was driven by a large negative acceleration on a structured finance policy as of the three months ended March 31, 2012. Ambac recognizes negative accelerations on policies when the GAAP premiums receivable for the policy exceeds the policy’s unearned premium reserve at termination. Normal net premiums earned, which exclude accelerated premiums, have been negatively impacted by the runoff of the insured portfolio either via transaction terminations, refundings or scheduled maturities. Normal net premiums earned and accelerated premiums are reconciled to total net premiums earned in the table below and are included in the Financial Guarantee segment. The following table provides a breakdown of net premiums earned by market sector:

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	Three Months Ended March 31,
($ in millions)	2013		2012
Public Finance	$	36.1	$	39.0
Structured Finance		15.7		18.3
International Finance		19.1		21.9
Total normal premiums earned		70.9		79.2
Accelerated earnings		29.4		15.8
Total net premiums earned	$	100.3	$	95.0

The following table provides a breakdown of accelerated earnings by market sector:

	Three Months Ended March 31,
($ in millions)	2013		2012
Public Finance	$	26.0	$	23.0
Structured Finance		3.4		(7.3	)
International Finance		—		0.1
Total accelerated earnings	$	29.4	$	15.8

Net Investment Income. Net investment income for the three months ended March 31, 2013 was $85.1 million, a decrease of 24% from $112.1 million for the three months ended March 31, 2012. The following table provides details by segment for the three months ended March 31, 2013 and 2012:

	Three Months Ended March 31,
($ in millions)	2013		2012
Financial Guarantee	$	83.9	$	105.2
Financial Services		1.2		6.8
Corporate		—		0.1
Total net investment income	$	85.1	$	112.1

The decrease in Financial Guarantee net investment income in the first quarter of 2013 primarily reflects a lower average invested asset base compared to 2012 and the favorable impact of actual and projected cash flows on Ambac-wrapped securities in the 2012 period. Partially offsetting these factors, portfolio yields benefitted from the continued shift toward higher yielding assets, including Ambac-wrapped securities purchased as part of the company’s loss remediation strategy, as tax-exempt municipals mature. The amortized cost basis of Ambac-wrapped securities as of March 31, 2013 was $648 million compared to $528 million at March 31, 2012. The average invested asset base for the three months ended March 31, 2013 was lower than for the comparable 2012 period as receipts of installment premiums and investment receipts were more than offset by the resumption of partial claim payments on Segregated Account policies, payments made to commute certain financial guarantee exposures and the repurchase of surplus notes in the second quarter of 2012. As described in Note 1 in Part II, Item 8 of Ambac’s 2012 Form 10-K, effective March 24, 2010 claim payments on policies allocated to the Segregated Account had been enjoined pursuant to an order of the Rehabilitation Court. However, the Rehabilitation Court subsequently approved rules under which, effective August 1, 2012 holders of policies allocated to the Segregated Account were, and continue to be, allowed to submit policy claims for review and partial payment equating to 25% of the permitted policy claim amount. As described in Note 1, the Rehabilitator may seek approval from the Rehabilitation Court to make Supplemental Payments with respect to certain insured securities.

The Financial Services decrease in investment income for the three months ended March 31, 2013 was driven primarily by a smaller portfolio of investments in the investment agreement business. The portfolio decreased as a result of sales of securities to fund repayment of investment agreements and the partial repayment of intercompany loans from Ambac Assurance.

Corporate investment income relates to the investments from Ambac’s investment portfolio.

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Net Other-Than-Temporary Impairment Losses. Net other-than-temporary impairment losses recorded in the statement of operations include only the 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 less any current period credit impairment. Non-credit related impairment amounts are recorded in accumulated other comprehensive income on the balance sheet. Alternatively, the non-credit related impairment would be recorded in net other-than-temporary impairment losses in the statement of operations if management intends to sell the 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. Charges for net other-than-temporary impairment losses were $0.0 million and $3.1 million for the three months ended March 31, 2013 and 2012, respectively.

Since commencement of the Segregated Account Rehabilitation Proceedings, changes in the estimated effective date of the Segregated Account Rehabilitation Plan and the resumption of claim payments with respect to Segregated Account policies have resulted in adverse changes in projected cash flows on certain impaired Ambac-wrapped securities. Net other-than-temporary impairments for the three months ended March 31, 2012 resulted primarily from such adverse changes to projected cash flows on Ambac-wrapped securities and from credit impairments on certain other non-agency RMBS securities. As of March 31, 2013, management has not asserted an intent to sell any securities from its portfolio that are in an unrealized loss position. Future changes in our estimated liquidity needs could result in a determination that Ambac no longer has the ability to hold such securities, which could result in additional other-than-temporary impairment charges.

Net Realized Investment Gains. The following table provides a breakdown of net realized gains for the three months ended March 31, 2013 and 2012:

($ in millions)	Financial Guarantee			Financial Services		Corporate		Total
March 31, 2013:
Net gains on securities sold or called	$	1.3		$	40.0	$	—	$	41.3
Foreign exchange		4.8			—		—		4.8
Total net realized gains	$	6.1		$	40.0	$	—	$	46.1
March 31, 2012:
Net gains on securities sold or called	$	—		$	0.5	$	—	$	0.5
Foreign exchange (losses)		(0.1	)		—		—		(0.1	)
Total net realized gains	$	(0.1	)	$	0.5	$	—	$	0.4

The net gains during the three months ended March 31, 2013 are primarily the result of recoveries from the settlement of litigation associated with investment securities that were written-off in 2002 and 2003. No significant future recoveries on these securities are expected.

Change in Fair Value of Credit Derivatives. The net change in fair value of credit derivatives was a gain of $12.8 million for the three months ended March 31, 2013, compared to a loss of $7.2 million for the three months ended March 31, 2012. The net gain for the first quarter of 2013 resulted from net mark-to-market gains from improvement in average reference obligation prices and the reversal of unrealized losses associated with runoff of the portfolio, partially offset by a reduction of the Ambac Assurance credit valuation adjustment (“CVA”) during the period. Results for the three months ended March 31, 2012 included a reduction of the CVA which exceeded the impact of price improvements and runoff of underlying reference obligations. Reductions to the CVA resulted in losses within the overall change in fair value of credit derivative liabilities of $69.5 million and $102.8 million for the three months ended March 31, 2013 and 2012, respectively. In addition, 2013 realized gains from credit derivative fees were lower than 2012, reflecting runoff of the portfolio. The CVA has been lowered periodically to reflect observed increases in the market value of Ambac Assurance’s direct and guaranteed obligations as they occur. See Note 7 to the Consolidated Financial Statements located in Item 1 of this Form 10-Q for a further description of Ambac’s methodology for determining the fair value of credit derivatives. The table below indicates the impact of incorporating Ambac’s own credit risk into the fair value of credit derivatives as of March 31, 2013 and December 31, 2012:

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($ in millions)	March 31, 2013			December 31, 2012
Mark-to-market liability of credit derivatives, excluding CVA	$	395.0		$	474.8
CVA on credit derivatives		(191.7	)		(261.2	)
Net credit derivative liability at fair value	$	203.3		$	213.6

Realized gains and other settlements on credit derivative contracts were $2.5 million and $3.3 million for the three months March 31, 2013 and 2012, respectively. These amounts represent premiums received and accrued on written contracts. There were no losses and settlements included in net realized gains for the three months March 31, 2013 and 2012.

Unrealized gains (losses) on credit derivative contracts were $10.3 million and ($10.5) million in the three months ended March 31, 2013 and 2012, respectively. The net unrealized gains (losses) in fair value of credit derivatives reflect the same factors as the overall change in fair value of credit derivatives as noted above, excluding the impact of realized gains and other settlements.

Derivative Product Revenues. Net losses reported in derivative product revenues for the three months ended March 31, 2013 were $0.6 million compared to net gains of $47.0 million for the three months ended March 31, 2012. Results in derivative product revenues for both periods were primarily driven by mark-to-market gains in the portfolio caused by rising interest rates, offset by declines in the Ambac CVA on certain liabilities. The derivative products portfolio is positioned to benefit from rising rates as an economic hedge against interest rate exposure in the financial guarantee portfolio (the “macro-hedge”). This additional interest rate sensitivity contributed gains of $19.6 million for the three months ended March 31, 2013, down from $50.9 million for the three months ended March 31, 2012 as a result of a lesser increase in interest rates and a lower portfolio sensitivity to rate changes in the first quarter 2013 compared to 2012. In addition to the impact of the macro-hedge, derivative products revenue included mark-to-market gains on financial guarantee customer swaps, net of the negative impact of adjustments to the Ambac CVA as described below.

The fair value of derivatives includes a valuation adjustment to reflect Ambac’s own credit risk when appropriate. Within the financial services 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. Inclusion of an Ambac CVA in the valuation of financial services derivatives resulted in losses within derivative products revenues of $30.1 million and $35.3 million for the three months ended March 31, 2013 and 2012, respectively. Changes to the discount rates used to determine the CVA reflect observed increases in the market value of Ambac Assurance’s direct and indirect obligations. The table below indicates the impact of incorporating Ambac’s own credit risk into the fair value of the derivative products portfolio (excludes credit derivatives) as of March 31, 2013 and December 31, 2012:

($ in millions)	March 31, 2013			December 31, 2012
Derivative products mark-to-market liability, excluding CVA	$	281.4		$	313.5
CVA on derivative products portfolio		(91.8	)		(121.9	)
Net derivative products portfolio liability at fair value	$	189.6		$	191.6

Other Income. Other income for the three months ended March 31, 2013 was $9.5 million, as compared to $64.8 million for the three months ended March 31, 2012. Other income is primarily comprised of non-investment related foreign exchange gains and losses, deal structuring, commitment, consent and waiver fees. In the three months ended March 31, 2012, Other income also included mark-to-market gains and losses relating to options to call certain Ambac Assurance surplus notes. These call options were exercised during 2012. Other income for the three months ended March 31, 2013 primarily resulted from foreign exchange gains in addition to deal related fees. Other income for the three months ended March 31, 2012 primarily resulted from mark-to-market gains of $61.7 million related to Ambac’s option to call up to $500 million par of bank surplus notes.

Income on Variable Interest Entities. Income on variable interest entities for the three months ended March 31, 2013 and 2012 was $38.3 million and $15.2 million, respectively. Included within Income on variable interest entities are income statement amounts relating to VIEs consolidated under ASC Topic 810, including gains or losses attributable to

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consolidating or deconsolidating VIEs during the period reported. Generally, the Company’s consolidated VIEs are entities for which Ambac has provided financial guarantees on its assets or liabilities. In consolidation, most assets and liabilities of the VIEs are reported at fair value and the related insurance assets and liabilities are eliminated. However, the amount of VIE net assets that remain in consolidation are attributable to net positive projected cash flows within the VIEs which is generally payable to Ambac’s insurance subsidiaries in the form of financial guarantee insurance premiums and fees. 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 ASC Topic 944 and the carrying value of the consolidated VIE’s net assets are recorded through income at the time of consolidation or deconsolidation.

Income on variable interest entities for the three months ended March 31, 2013 reflects increases to the fair value of net assets related primarily to longer estimated lives of certain transactions and the resultant increase in projected positive net cash flows. Income on variable interest entities for the three months ended March 31, 2012 reflects the positive change in the fair value of net assets of one VIE resulting from a larger portion of projected VIE asset cash flows serving to fund financial guarantee insurance premiums following credit downgrade of the transaction. Refer to Note 3 to the Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q for further information on the accounting for 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. Loss and loss expenses for the three months ended March 31, 2013 and 2012 were benefits of $51.1 million and $2.3 million, respectively. The net benefit realized for the three months ended March 31, 2013 was driven by lower estimated losses in the first-lien RMBS portfolio. The net benefit realized for the three months ended March 31, 2012 was driven by lower estimated losses in the first-lien RMBS and student loan portfolios, partially offset by higher estimated losses for public finance credits and loss expense reserves for RMBS policies.

Please refer to the Loss Reserves section located in Note 6 of the Consolidated Financial Statements located in Item 1 of this Form 10-Q for further background information on loss reserves.

The following table summarizes the changes in the total net loss and loss expense reserves for the three months ended March 31, 2013 and the year ended December 31, 2012:

($ in millions)	Three Months Ended March 31, 2013			Year Ended December 31, 2012
Beginning balance of loss and loss expense reserves, net of subrogation recoverable and reinsurance	$	5,974.7		$	6,230.8
Provision for losses and loss expenses		(51.1	)		683.6
Gross recovered (paid) claims and loss expenses (1)		9.8			(982.8	)
Recoveries of losses and loss expenses paid from reinsurers		2.5			18.8
Other adjustments (including foreign exchange)		(39.4	)		24.3
Ending balance of net loss and loss expense reserves, net of subrogation recoverable and reinsurance	$	5,896.5		$	5,974.7

(1) On September 20, 2012, in accordance with published Policy Claim Rules, the Segregated Account commenced paying 25% of each permitted policy claim that arose since the commencement of the Segregated Account Rehabilitation Proceedings. The Segregated Account will continue to make cash payments of 25% of each policy claim submitted and permitted in accordance with such Policy Claim Rules, subject to any further orders of the Rehabilitation Court. As described in Note 1, the Rehabilitator may seek approval from the Rehabilitation Court to make Supplemental Payments with respect to certain insured securities.

The losses and loss expense reserves, net of reinsurance as of March 31, 2013 and December 31, 2012 are net of estimated recoveries under representation and warranty breaches for certain RMBS transactions in the amount of $2,460.4 million and $2,497.2 million, respectively. Please refer to “Balance Sheet” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations and to Note 6 of the Consolidated Financial Statements in Item 1 of this Form 10-Q for further background information on the change in estimated recoveries.

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The following table provides details of net claims recorded, net of recoveries received for the three months ended March 31, 2013 and 2012:

	Three Months Ended March 31,
($ in millions)	2013			2012
Net claims recorded (1):
Public Finance	$	6.0		$	19.0
Structured Finance		180.2			363.5
International Finance		(1.5	)		—
Total	$	184.7		$	382.5

(1) Claims recorded include (i) claims paid (recovered) and (ii) changes to claims presented and unpresented through the balance sheet date for policies which were allocated to the Segregated Account. Item (ii) includes permitted policy claims for policies allocated to the Segregated Account that were presented through to the balance sheet date and approved by the Rehabilitator of the Segregated Account in accordance with the Policy Claim Rules as discussed in Note 1 in Part II, Item 8 of Ambac’s 2012 Form 10-K. Amounts recorded for claims not yet permitted are based on management’s judgment.

Claims permitted in accordance with the Policy Claim Rules in 2013 were $418.6 million, including $89.5 million related to the moratorium period, March 24, 2010 through July 31, 2012. Claims permitted in accordance with the Policy Claim Rules in 2012 were $4,246.7 million, including $3,712.9 million related to the moratorium period, March 24, 2010 through July 31, 2012. As of March 31, 2013 and December 31, 2012, respectively, $3,594.1 million and $3,388.1 million of claims remain unpaid.

Underwriting and Operating Expenses. Underwriting and operating expenses for the three months ended March 31, 2013 and 2012 were $34.4 million and $36.5 million, respectively, a decrease of 6%. Underwriting and operating expenses consist of gross underwriting and operating expenses plus the amortization of previously deferred expenses (included in Financial Guarantee segment). The following table provides details of underwriting and operating expenses by segment for the three months ended March 31, 2013 and 2012:

	Three Months Ended March 31,
($ in millions)	2013		2012
Underwriting and operating:
Financial Guarantee	$	33.0	$	33.8
Financial Services		0.8		0.8
Corporate		0.6		1.9
Total	$	34.4	$	36.5

The decrease in Financial Guarantee underwriting and operating expenses for the three months ended March 31, 2013 were primarily due to lower consulting, legal expenses and reinsurance commissions, partially offset by higher premium tax and compensation expenses.

As a consequence of the Segregated Account Rehabilitation Proceedings, the Rehabilitator retains operational control and decision-making authority with respect to all matters related to the Segregated Account, including the hiring of advisors. During the three months ended March 31, 2013 and 2012 expenses incurred in connection with legal and consulting services provided for the benefit of OCI amounted to $2.4 million and $3.1 million. Future expenses may include a significant amount of advisory costs for the benefit of OCI that are outside the control of Ambac’s management.

Corporate expenses include the operating expenses of Ambac. The decrease is primarily due to the provisions of the new expense sharing agreement where Ambac Assurance reimburses Ambac for certain operating expenses.

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Interest Expense. Interest expense includes accrued interest and accretion of the discount on surplus notes issued by Ambac Assurance and the Segregated Account, interest expense relating to investment agreements, and interest expense related to a secured borrowing transaction. The following table provides details for the three months ended March 31, 2013 and 2012:

	Three Months Ended March  31,
($ in millions)	2013		2012
Interest expense:
Surplus notes	$	22.0	$	31.5
Investment agreements		1.0		1.8
Secured borrowing		0.2		0.5
Total	$	23.2	$	33.8

The decrease in interest expense on surplus notes for the three months ended March 31, 2013 resulted primarily from the lower average par amount of surplus notes outstanding compared with the three months ended March 31, 2012. The lower par balance of surplus notes outstanding resulted from the exercise of certain options to repurchase surplus notes in June 2012. The impact of the lower outstanding balance was partially offset by compounding of unpaid interest and the effect of applying the level yield method as the discount to the face value of the surplus notes accretes over time. Surplus note interest payments require the approval of OCI. On June 1, 2011, May 15, 2012 and April 17, 2013, OCI issued its disapproval of the requests of Ambac Assurance and the Rehabilitator of the Segregated Account, acting for and on behalf of the Segregated Account, to pay interest on all outstanding surplus notes issued by Ambac and the Segregated Account on scheduled interest payment dates of June 7, 2011, June 7, 2012 and June 7, 2013, respectively. Such interest was accrued for and the Company is accruing interest on these additional amounts following each scheduled interest payment date.

The decline in interest expense related to investment agreements stemmed primarily from reductions on outstanding investment agreements, as the carrying value declined to $363.3 million at March 31, 2013 from $547.3 million at March 31, 2012.

Reorganization Items. Reorganization items are primarily expenses directly attributed to our Chapter 11 reorganization process. Reorganization items in three months ended March 31, 2013 and 2012 were $2.1 million and $2.5 million, respectively, primarily relating to professional advisory fees.

Provision for Income Taxes. Income tax expense was $0.7 million and $0.3 million for the three months ended March 31, 2013 and 2012, respectively. The income tax expense for the three months ended March 31, 2013 and 2012 relates predominantly to profits in Ambac UK’s Italian branch, which income cannot be offset by losses in other jurisdictions. The income tax for 2013 also includes a provision for New York State/New York City alternative minimum tax obligations.

Ambac Assurance Statutory Basis Financial Results

Ambac Assurance’s and the Segregated Account’s 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.

The total assets, total liabilities, and total surplus of the Segregated Account are reported as discrete components of Ambac Assurance’s assets, liabilities, and surplus reported in Ambac Assurance’s statutory basis financial statements. Accordingly, Ambac Assurance’s statutory financial statements include the results of Ambac Assurance’s general account and, to the extent allowable under a prescribed accounting practice by OCI, the Segregated Account. Pursuant to this prescribed practice, the results of the Segregated Account are not included in Ambac Assurance’s financial statements if Ambac Assurance’s surplus is (or would be) less than $100 million (“Minimum Surplus Amount”). Maintaining the Minimum Surplus Amount will result in a reduction in the liabilities assumed by Ambac Assurance from the Segregated Account. Please refer to Note 1 in Part II, Item 8 of Ambac’s 2012 Form 10-K for additional information on the establishment of the Segregated Account as well as the operative funding documents between Ambac Assurance and the Segregated Account.

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Ambac Assurance’s statutory policyholder surplus and qualified statutory capital were $159.5 million and $687.8 million at March 31, 2013, respectively, as compared to $100.0 million and $628.3 million at December 31, 2012, respectively. The Segregated Account reported statutory policyholder surplus of $101.5 million and $(61.8) million as of March 31, 2013 and December 31, 2012, respectively. At December 31, 2012, Ambac Assurance’s surplus as regards to policyholders was at the Minimum Surplus Amount and therefore $163.7 million of the Segregated Account’s insurance liabilities were not assumed by Ambac Assurance under the Reinsurance Agreement. In the event that Ambac Assurance does not maintain surplus in excess of the Minimum Surplus Amount, the Segregated Account would experience a shortfall in funds available to pay its liabilities to the extent that such liabilities exceed amounts available under the Secured Note and Reinsurance Agreement. Any such shortfall would be a consideration for the Rehabilitator in the determination of whether any changes to the Segregated Account Rehabilitation Plan and/or the amount of partial policy claim payments are necessary or appropriate or whether to institute general rehabilitation proceedings against Ambac Assurance.

Ambac Assurance’s increase in policyholder surplus was primarily due to (i) earned premiums, (ii) net investment income, and (iii) a benefit in insurance loss and loss expenses. These improvements in policyholders surplus were partially offset by an increase in the liabilities assumed by Ambac Assurance from the Segregated Account for losses on policies allocated to the Segregated Account due to Ambac Assurance exceeding the Minimum Surplus Amount.

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LIQUIDITY AND CAPITAL RESOURCES

Ambac Financial Group, Inc. Liquidity. Ambac’s liquidity is dependent on its current cash and investments of $30.6 million at March 31, 2013, $30 million cash received from Ambac Assurance on May 1, 2013, as well as expense sharing and other arrangements with Ambac Assurance as described below. Pursuant to the Mediation Agreement, Amended TSA and Cost Allocation Agreement (as each such term is defined in Note 1 in Part II, Item 8 of Ambac’s 2012 Form 10-K), Ambac Assurance is required, under certain circumstances, to make payments to the Company with respect to the utilization of net operating loss carry-forwards (“NOLs”) and to reimburse certain costs and expenses. Any expected receipts with regards to the utilization of NOLs will only occur after Ambac Assurance utilizes NOLs generated after September 30, 2011, which amount to approximately $245.0 million as of March 31, 2013. See Note 1 in Part II, Item 8 of Ambac’s 2012 Form 10-K for descriptions of the Mediation Agreement, the Amended TSA and the Cost Allocation Agreement. It is highly unlikely that Ambac Assurance will be able to make dividend payments to Ambac for the foreseeable future and therefore the aforementioned payments and reimbursements will be Ambac’s principal source of funds in the near term. The principal uses of liquidity are the payment of operating expenses, professional advisory fees incurred in connection with the bankruptcy, and amounts related to IRS Settlement. Ambac’s liquidity requirements are primarily being funded by cash on hand and reimbursements of certain expenses from Ambac Assurance, and any contingencies could cause material additional liquidity strains.

Ambac Assurance Liquidity. Ambac Assurance’s liquidity is dependent on 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 and credit default swap contracts, principal and interest payments from investments, sales of investment securities, proceeds from repayment of affiliate loans, claim and reinsurance recoveries, and RMBS subrogation recoveries. Termination of installment premium policies on an accelerated basis may adversely impact Ambac Assurance’s liquidity. The principal uses of Ambac Assurance’s liquidity are the payment of operating expenses, claim and commutation payments on both insurance and credit derivative contracts, ceded reinsurance premiums, surplus notes principal and interest payments, additional loans to affiliates and tax payments to Ambac. Interest and principal payments on surplus notes, as well as the level of claims paid, are subject to the judgement and approval of Ambac Assurance’s insurance regulator, which has full discretion over deferral of payments regardless of the liquidity position of Ambac Assurance.

In April 2013, the Segregated Account made a $100 million payment to the IRS in connection with the IRS Settlement. Refer to Note 1 to the Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q for further discussion of the IRS Settlement.

Ambac Assurance manages its liquidity risk by maintaining a comprehensive analysis of projected cash flows. Additionally, the financial guarantee business maintains a specified level of cash and short-term investments at all times.

Pursuant to the injunctions issued by the Rehabilitation Court, claims on policies allocated to the Segregated Account were not paid from the commencement of the Segregated Account Rehabilitation Proceedings until the third quarter of 2012. As further described in Note 1 in Part II, Item 8 of Ambac’s 2012 Form 10-K, on or about September 20, 2012, in accordance with published Policy Claim Rules, the Segregated Account commenced paying 25% of each permitted policy claim that arose since the commencement of the Segregated Account Rehabilitation Proceedings. The Segregated Account will continue to make cash payments of 25% of each policy claim submitted and permitted in accordance with such Policy Claim Rules, subject to any further orders of the Rehabilitation Court. As described in Note 1, the Rehabilitator may seek approval from the Rehabilitation Court to make Supplemental Payments with respect to certain insured securities. During the period ended March 31, 2013, the Segregated Account paid $104.6 million, which represents 25% of claims permitted in accordance with the Policy Claim Rules. Permitted policy claims will be a future use of liquidity. Requests of Ambac Assurance and the Rehabilitator of the Segregated Account, acting for and on behalf of the Segregated Account, to pay interest on all outstanding surplus notes issued by Ambac and the Segregated Account on the first three scheduled interest payment dates of June 7, 2011, 2012 and 2013 were disapproved by OCI.

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 (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 as provided above, 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 AMPS since 2010.

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Our ability to recover RMBS subrogation recoveries is subject to significant uncertainty, including risks inherent in litigation, collectability of such amounts from counterparties (and/or their respective parents and affiliates), timing of receipt of any such recoveries, regulatory intervention which could impede our ability to take actions required to realize such recoveries and uncertainty inherent in the assumptions used in estimating such recoveries. Our current estimate considers that we will receive subrogation recoveries of $1,488 million and $1,009 million in 2014 and 2015, respectively. The amount of these subrogation recoveries is significant and if we are unable to recover any amounts our future available liquidity to pay claims would be reduced materially.

A wholly-owned subsidiary of Ambac Assurance is a party to credit default swaps (“CDS”) with various commercial counterparties. Ambac Assurance guarantees its subsidiary’s payment obligations under such CDS. The terms of such CDS include events of default or termination events based on the occurrence of certain events, or the existence of certain circumstances, relating to the financial condition of Ambac Assurance, including the commencement of an insolvency, rehabilitation or like proceeding. If such an event of default or termination event were to occur, the CDS counterparties could claim the contractual right to terminate the CDS and require Ambac Assurance, as financial guarantor, to make termination payments. Ambac Assurance estimates that such potential termination payments amounted to $681.2 million as of March 31, 2013. However, the court supervising the rehabilitation of the Segregated Account has issued an injunction barring the early termination of contracts based on the occurrence of events or the existence of circumstances like those described above. As a result, Ambac Assurance does not expect to make early termination payments in respect of CDS where such amounts are claimed based on the occurrence of events, or the existence of circumstances, relating to the financial condition of Ambac Assurance.

Financial Services Liquidity. The principal uses of liquidity by Financial Services subsidiaries are payments on investment and repurchase agreement obligations; payments on intercompany loans; payments under derivative contracts (primarily interest rate swaps and US Treasury futures); collateral posting; and operating expenses. Management believes that its Financial Services’ short and long-term liquidity needs can be funded from net investment income; the maturity of invested assets; sales of invested assets; intercompany loans from Ambac Assurance; and receipts from derivative contracts.

While meaningful progress has been made in unwinding the Financial Services businesses, multiple sources of risk continue to exist. These include further deterioration in investment security market values, additional unexpected draws on outstanding investment agreements, the settlement of potential swap terminations and the inability to replace or establish new hedge positions, and interest rate volatility.

Investment agreements subject Ambac to liquidity risk associated with unanticipated withdrawals of principal as allowed by the terms of contingent withdrawal provisions within all remaining outstanding investment agreements. Investment agreements outstanding as of March 31, 2013 were issued in connection with either municipal bonds or structured credit-linked notes (“CLNs”). The investment agreements contain contingent withdrawal risk in the event of either an early redemption of the related bond issue or certain credit events pertaining to the underlying borrower. As of March 31, 2013, Ambac had $314.4 million of contingent withdrawal investment agreements related to CLNs and $49.0 million related to municipal bonds. The investment agreement business manages liquidity risk by closely matching the maturity schedules of its invested assets with the maturity schedules of its investment agreement liabilities. Additionally, management performs regular surveillance of the related transactions. This surveillance process is customized for each investment agreement transaction and includes a review of past activity, recently issued trustee reports, reference name performance characteristics and third party tools to analyze early withdrawal risk.

The interest rate swap business maintains cash and short-term investments and closely matches the date swap payments are made and received. Liquidity risk also exists in the derivative contract and investment agreement portfolios due to contract provisions which may require collateral posting or early termination of contracts. Both the investment agreement swap businesses borrow cash and securities from Ambac Assurance to meet liquidity needs when such borrowing is determined to be most economically beneficial to Ambac Assurance. Intercompany loans are made under established lending agreements with defined borrowing limits that have received non-disapproval from Ambac Assurance’s insurance regulator.

Credit Ratings and Collateral. Ambac Assurance is no longer rated by Moody’s and S&P, which resulted in the triggering of required cure provisions in nearly all of the investment agreements issued. In many cases, Ambac chose to terminate investment agreements, particularly when it was able to do so at levels that resulted in meaningful discounts to book value. In addition, Ambac posted collateral of $376.0 million in connection with its outstanding investment agreements, including accrued interest, at March 31, 2013.

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Ambac Financial Services (“AFS”) provided interest rate and currency swaps for states, municipalities, asset-backed issuers and other entities in connection with their financings. AFS hedges most of the related risks of these instruments with standardized derivative contracts, which include collateral support agreements. Under these agreements, AFS is required to post collateral to a swap dealer to cover unrealized losses. In addition, AFS is often required to post independent amounts of collateral in excess of the amounts needed to cover unrealized losses. AFS also hedges part of its interest rate risk with financial futures contracts which require it to post margin with its futures clearing merchant. All AFS derivative contracts possessing rating-based downgrade triggers that could result in collateral posting or a termination have been triggered. If additional terminations were to occur, AFS would be required to make termination payment but would also receive a return of collateral in the form of cash, U.S. Treasury or U.S. government agency obligations with market values approximately equal to or in excess of market values of the swaps. In most cases, AFS will look to re-establish the hedge positions that are terminated early. This may result in additional collateral posting obligations or the use of futures contracts or other derivative instruments which could require AFS to post margin amounts. The amount of additional collateral required or margin posted on futures contracts will depend on several variables including the degree to which counterparties exercise their termination rights and the ability to replace these contracts with existing counterparties under existing documents and credit support arrangements. All contracts that require collateral posting are currently collateralized. Collateral and margin posted by AFS totaled a net amount of $232.3 million, including independent amounts, under these contracts at March 31, 2013.

Ambac Credit Products (“ACP”) entered into credit derivative contracts. ACP is not required to post collateral under any of its contracts.

BALANCE SHEET

Total assets decreased by approximately $921 million to $26.16 billion during the quarter ended March 31, 2013, primarily as a result of (i) lower variable interest entity assets; (ii) lower premium receivables; and (iii) and lower derivative assets, partially offset by (i) higher invested assets at fair value; (ii) higher subrogation recoverables; and (iii) higher receivable for securities. Total liabilities decreased by approximately $1.3 billion to $29.03 billion during the quarter ended March 31, 2013, primarily as a result of (i) lower variable interest entity liabilities and (ii) lower unearned premium reserves. As of March 31, 2013, total stockholders’ deficit was $2.87 billion; compared with total stockholders’ deficit of $3.25 billion at December 31, 2012. This lower deficit was primarily due to the net income for the period ended March 31, 2013 and by unrealized gains on investment securities during the period.

Investment Portfolio. Ambac Assurance’s non-VIE investment objective is to achieve the highest after-tax yield on a diversified portfolio of primarily fixed income investments while employing asset/liability management practices to satisfy all operating and strategic liquidity needs. Ambac Assurance’s investment portfolio is subject to internal investment guidelines and is subject to limits on types and quality of investments imposed by the insurance laws and regulations of the States of Wisconsin and New York. Such guidelines set forth minimum credit rating requirements and credit risk concentration limits. Within these guidelines, Ambac Assurance opportunistically purchases Ambac Assurance insured securities in the open market given their relative risk/reward characteristics and to mitigate the effect of potential future adverse development in the insured portfolio. Ambac Assurance’s investment policies are subject to oversight by the Rehabilitator of the Segregated Account pursuant to contracts entered into between Ambac Assurance and the Segregated Account.

Ambac UK’s non-VIE 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 policy holders and meeting their claims. Ambac UK’s investment portfolio is primarily fixed income investments and pooled investment funds with diversified holdings. The portfolio is subject to internal investment guidelines and may be subject to limits on types and quality of investments imposed by the FSA 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.

The Financial Services non-VIE investment portfolio consists primarily of assets funded with proceeds from the issuance of investment agreement liabilities. The primary investment objective is to invest in a diversified portfolio of high-grade securities that produce sufficient cash flow to satisfy all investment agreement liabilities and their collateral requirements. The investment portfolio is subject to internal investment guidelines. Such guidelines set forth minimum credit rating requirements and credit risk concentration limits.

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The following table summarizes the composition of Ambac’s investment portfolio, excluding VIE investments, at fair value by segment at March 31, 2013 and December 31, 2012:

($ in millions)	Financial Guarantee			Financial Services			Corporate			Total
March 31, 2013:
Fixed income securities:
Municipal obligations (1)	$	1,794.4		$	—		$	—		$	1,794.4
Corporate obligations		1,069.1			—			—			1,069.1
Foreign obligations		11.9			—			—			11.9
U.S. government obligations		76.2			22.1			—			98.3
U.S. agency obligations		49.9			4.1			—			54.0
Residential mortgage-backed securities (2)		1,453.2			83.7			—			1,536.9
Collateralized debt obligations		17.4			9.9			—			27.3
Other asset-backed securities		550.9			259.5			—			810.4
		5,023.0			379.3			—			5,402.3
Short-term (1)		734.3			3.1			30.6			768.0
Other investments		113.8			—			—			113.8
		5,871.1			382.4			30.6			6,284.1
Fixed income securities pledged as collateral:
U.S. government obligations		228.2			—			—			228.2
		228.2			—			—			228.2
Total investments	$	6,099.3		$	382.4		$	30.6		$	6,512.3
Percent total		93.6	%		5.9	%		0.5	%		100	%
December 31, 2012:
Fixed income securities:
Municipal obligations (1)	$	1,848.9		$	—		$	—		$	1,848.9
Corporate obligations		1,013.2			64.8			—			1,078.0
Foreign obligations		70.1			—			—			70.1
U.S. government obligations		105.2			22.1			—			127.3
U.S. agency obligations		78.4			4.1			—			82.5
Residential mortgage-backed securities (2)		1,362.5			93.1			—			1,455.6
Collateralized debt obligations		22.3			11.0			—			33.3
Other asset-backed securities		520.0			186.6			—			706.6
		5,020.6			381.7			—			5,402.3
Short-term (1)		629.7			1.7			30.3			661.7
Other investments		0.1			—			—			0.1
		5,650.4			383.4			30.3			6,064.1
Fixed income securities pledged as collateral:
U.S. government obligations		265.8			—			—			265.8
		265.8			—			—			265.8
Total investments	$	5,916.2		$	383.4		$	30.3		$	6,329.9
Percent total		93.4	%		6.1	%		0.5	%		100	%

(1) Includes taxable and tax exempt securities.

(2) Includes RMBS insured by Ambac Assurance.

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The following table represents the fair value of mortgage and asset-backed securities at March 31, 2013 and December 31, 2012 by classification:

($ in millions)	Financial Guarantee		Financial Services		Corporate		Total
March 31, 2013:
Residential mortgage-backed securities:
RMBS—First-lien—Alt-A	$	602.5	$	0.2	$	—	$	602.7
RMBS—Second Lien		546.5		—		—		546.5
RMBS—First Lien—Sub Prime		204.0		—		—		204.0
U.S. Government Sponsored Enterprise Mortgages		59.8		80.6		—		140.4
RMBS—First Lien—Prime		38.6		—		—		38.6
Government National Mortgage Association		1.8		2.9		—		4.7
Total residential mortgage-backed securities		1,453.2		83.7		—		1,536.9
Other asset-backed securities
Military Housing		375.0		—		—		375.0
Credit Cards		15.0		209.7		—		224.7
Auto		36.6		49.9		—		86.5
Structured Insurance		57.0		—		—		57.0
Student Loans		16.4		—		—		16.4
Other		50.8		—		—		50.8
Total other asset-backed securities		550.8		259.6		—		810.4
Total	$	2,004.0	$	343.3	$	—	$	2,347.3
December 31, 2012
Residential mortgage-backed securities:
RMBS—First-lien—Alt-A	$	582.5	$	0.2	$	—	$	582.7
RMBS—Second Lien		502.9		—		—		502.9
RMBS—First Lien—Sub Prime		177.9		—		—		177.9
U.S. Government Sponsored Enterprise Mortgages		66.9		89.6		—		156.5
RMBS—First Lien—Prime		30.2		—		—		30.2
Government National Mortgage Association		2.1		3.3		—		5.4
Total residential mortgage-backed securities		1,362.5		93.1		—		1,455.6
Other asset-backed securities
Military Housing		379.7		—		—		379.7
Credit Cards		—		154.4		—		154.4
Auto		13.1		32.2		—		45.3
Structured Insurance		56.9		—		—		56.9
Student Loans		16.7		—		—		16.7
Other		53.6		—		—		53.6
Total other asset-backed securities		520.0		186.6		—		706.6
Total	$	1,882.5	$	279.7	$	—	$	2,162.2

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 B+, as of March 31, 2013 and December 31, 2012.

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The following table provides the fair value of residential mortgage-backed securities (excluding U.S. Government Sponsored Enterprises and Government National Mortgage Association Mortgages) by vintage and type at March 31, 2013 and December 31, 2012:

Year of Issue	First-lien Alt-A		Second- lien		First-lien Prime		First-lien Sub- Prime		Total
($ in millions)
March 31, 2013
2003 and prior	$	—	$	4.1	$	—	$	5.3	$	9.4
2004		30.7		14.8		—		1.7		47.2
2005		165.6		125.4		14.0		32.8		337.8
2006		211.4		328.9		5.1		101.4		646.8
2007		195.0		73.3		19.5		62.8		350.6
Total	$	602.7	$	546.5	$	38.6	$	204.0	$	1,391.8
December 31, 2012
2003 and prior	$	—	$	4.5	$	—	$	3.8	$	8.3
2004		31.3		14.1		—		1.6		47.0
2005		158.0		119.3		11.9		25.1		314.3
2006		206.5		303.4		3.8		88.6		602.3
2007		186.9		61.6		14.5		58.8		321.8
Total	$	582.7	$	502.9	$	30.2	$	177.9	$	1,293.7

Ambac’s fixed income portfolio includes securities covered by guarantees issued by Ambac Assurance and other financial guarantors (“insured securities”). The published Moody’s and S&P ratings on these securities reflect the higher of the financial strength rating of the financial guarantor or the rating of the underlying issuer. In the event these underlying ratings are not available from the rating agencies, Ambac will assign an internal rating. Since the insurance cannot be legally separated from the underlying security, the fair value of the insured securities in the investment portfolio includes the value of any financial guarantee embedded in such securities, including guarantees written by Ambac Assurance. In addition, a hypothetical fair value assuming the absence of the insurance is not readily available from our independent pricing sources.

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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 at March 31, 2013 and December 31, 2012, respectively:

($ in millions)	Municipal obligations		Corporate obligations		Mortgage and asset- backed securities		Short term		Total		Weighted Average Underlying Rating (1)
March 31, 2013
Ambac Assurance Corporation (2)	$	70.2	$	4.7	$	1,426.8	$	—	$	1,501.7		B
National Public Finance Guarantee Corporation		672.4		43.1		—		—		715.5		AA-
Assured Guaranty Municipal Corporation		452.1		169.0		2.9		—		624.0		A
Financial Guarantee Insurance Corporation		17.4		—		3.3		—		20.7		A-
MBIA Insurance Corporation		—		18.4		1.0		—		19.4		BBB-
Assured Guaranty Corporation		—		—		14.6		—		14.6		D
Total	$	1,212.1	$	235.2	$	1,448.6	$	—	$	2,895.9		BBB-
December 31, 2012
Ambac Assurance Corporation (2)	$	66.3	$	4.7	$	1,344.3	$	—	$	1,415.3		B
National Public Finance Guarantee Corporation		720.9		43.0		—		—		763.9		AA-
Assured Guaranty Municipal Corporation		448.2		169.3		4.9		—		622.4		A
Financial Guarantee Insurance Corporation		17.6		—		4.2		—		21.8		A-
MBIA Insurance Corporation		—		19.7		2.1		—		21.8		BBB-
Assured Guaranty Corporation		—		—		14.8		—		14.8		D
Total	$	1,253.0	$	236.7	$	1,370.3	$	—	$	2,860.0		BBB-

(1) Ratings represent the lower underlying rating assigned by S&P or Moody’s. If unavailable, Ambac’s internal rating is used.

(2) Includes securities insured by Ambac Assurance and Ambac Assurance UK Limited.

The following table provides the ratings distribution of the fixed income investment portfolio at March 31, 2013 and December 31, 2012 by segment:

Rating ⁽¹⁾:

	Financial Guarantee(2)			Financial Services			Combined
March 31, 2013:
AAA		23	%		99	%		28	%
AA		26			1			25
A		17			—			16
BBB		10			—			9
Below investment grade		18			—			17
Not rated		6			—			5
		100	%		100	%		100	%
December 31, 2012:
AAA		27	%		81	%		31	%
AA		27			19			26
A		13			—			12
BBB		11			—			10
Below investment grade		17			—			16
Not rated		5			—			5
		100	%		100	%		100	%

(1) Ratings are based on the lower of Moody’s or S&P ratings. If guaranteed, rating represents the higher of the underlying or guarantor’s financial strength rating.

(2) Below investment grade insured bonds purchased as part of the loss remediation strategy represent 12% of the 2013 and 2012 Financial Guarantee portfolio.

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The following table summarizes, for all available-for-sale securities in an unrealized loss position as of March 31, 2013 and December 31, 2012, the aggregate fair value and gross unrealized loss by length of time those securities have been continuously in an unrealized loss position:

	March 31, 2013				December 31, 2012
($ in millions)	Estimated Fair Value (1)		Gross Unrealized Losses		Estimated Fair Value (1)		Gross Unrealized Losses
Municipal obligations in continuous unrealized loss for:
0—6 months	$	31.3	$	0.6	$	42.4	$	0.4
7—12 months		11.0		0.1		0.1		—
Greater than 12 months		4.0		—		4.3		—
		46.3		0.7		46.8		0.4
Corporate obligations in continuous unrealized loss for:
0—6 months		16.5		0.1		64.0		0.9
7—12 months		—		—		5.7		0.2
Greater than 12 months		85.5		6.9		132.9		8.0
		102.0		7.0		202.6		9.1
U.S. treasury obligations in continuous unrealized loss for:
0—6 months		—		—		16.6		0.3
7—12 months		—		—		9.5		0.4
Greater than 12 months		—		—		—		—
		—		—		26.1		0.7
Residential mortgage-backed securities in continuous unrealized loss for:
0—6 months		40.1		4.1		85.8		5.3
7—12 months		3.4		—		2.7		—
Greater than 12 months		111.9		10.3		116.2		15.2
		155.4		14.4		204.7		20.5
Collateralized debt obligations in continuous unrealized loss for:
0—6 months		0.7		—		—		0.1
7—12 months		0.2		0.1		0.2		0.1
Greater than 12 months		3.9		0.1		13.5		0.3
		4.8		0.2		13.7		0.5
Other asset-backed securities in continuous unrealized loss for:
0—6 months		118.1		0.2		0.2		—
7—12 months		—		—		—		—
Greater than 12 months		149.8		44.4		188.8		46.5
		267.9		44.6		189.0		46.5
Short term securities in continuous unrealized loss for:
0—6 months		2.0		—		1.2		—
7—12 months		—		—		—		—
Greater than 12 months		—		—		—		—
		2.0		—		1.2		—
Total	$	578.4	$	66.9	$	684.1	$	77.7

(1) Since the table is presented in millions, securities with market values and unrealized losses that are less than $0.1 will be shown as zero.

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Management has determined that the unrealized losses in available-for-sale securities at March 31, 2013 are primarily driven by the uncertainty in the structured finance market, primarily with respect to non-agency residential mortgage backed securities, including those guaranteed by Ambac Assurance, and a general increase in risk and liquidity premiums demanded by fixed income investors. Ambac has concluded that unrealized losses reflected in the table above are temporary in nature based upon (a) no unexpected principal and interest payment defaults on these securities; (b) analysis of the creditworthiness of the issuer and financial guarantor, as applicable, and analysis of projected defaults on the underlying collateral; (c) management has no intent to sell these securities; and (d) 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.

The following table summarizes amortized cost and fair value for all available-for-sale securities in an unrealized loss position as of March 31, 2013 and December 31, 2012, by contractual maturity date:

	March 31, 2013				December 31, 2012
($ in millions)	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Municipal obligations:
Due in one year or less	$	—	$	—	$	—	$	—
Due after one year through five years		2.3		2.2		2.7		2.7
Due after five years through ten years		37.7		37.2		44.2		43.8
Due after ten years		7.0		6.9		0.3		0.3
		47.0		46.3		47.2		46.8
Corporate obligations:
Due in one year or less		—		—		18.0		17.5
Due after one year through five years		44.8		41.4		140.6		136.5
Due after five years through ten years		39.2		38.0		28.1		27.0
Due after ten years		25.0		22.6		25.0		21.6
		109.0		102.0		211.7		202.6
U.S. treasury obligations:
Due in one year or less		—		—		16.7		16.2
Due after one year through five years		—		—		9.9		9.7
Due after five years through ten years		—		—		0.2		0.2
Due after ten years		—		—		—		—
		—		—		26.8		26.1
Residential mortgage-backed securities		169.8		155.4		225.2		204.7
Collateralized debt obligations		5.0		4.8		14.2		13.7
Other asset-backed securities		312.5		267.9		235.5		189.0
Short term securities		2.0		2.0		1.2		1.2
Total	$	645.3	$	578.4	$	761.8	$	684.1

Losses and Loss Expense Reserve. Losses and loss expenses are based upon estimates of the aggregate losses inherent in the financial guarantee portfolio for insurance policies issued to beneficiaries. The loss and loss expense reserves for financial guarantee insurance discussed herein relates only to Ambac’s non-derivative insurance business for insurance policies for which we do not consolidate the VIE. Losses and loss expenses are based upon estimates of the ultimate aggregate losses inherent in the non-derivative financial guarantee portfolio as of the reporting date. The evaluation process for determining the level of reserves is subject to certain estimates and judgments.

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. We have observed that, with respect to certain bond types, it is reasonably possible that a material change in actual loss severities and defaults could occur over time. In the future, our experience may differ with respect to the types of guaranteed bonds affected or the magnitude of the effect. The bond types that have experienced significant claims are residential mortgage-backed securities (“RMBS”) and student loan securities. These two bond types represent 93% of our ever-to-date insurance claims recorded with RMBS comprising 90% of our ever-to-date claims payments.

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The table below indicates the number of credits, gross par outstanding and gross loss reserves (including loss adjustment expenses) related to policies in Ambac’s loss reserves on credits at March 31, 2013:

($ in millions)	Number of credits		Gross  par outstanding(1)		Gross Loss Reserves  (1) (2) (3)
RMBS		176	$	13,498	$	3,425
Student Loans		38		3,110		1,081
All other credits		91		6,262		1,403
Loss adjustment expenses		—		—		136
Totals		305	$	22,870	$	6,045

(1) Ceded Par Outstanding and ceded loss and loss expense reserves are $1,073 and $149, respectively. Ceded loss reserves are included in Reinsurance Recoverable on paid and unpaid losses.

(2) Loss reserves of $6,045 are included in the balance sheet in the following line items: Loss and loss expense reserve—$6,590 and Subrogation recoverable—$545.

(3) Included in Gross Loss Reserves are unpaid claims of $3,594 million related to policies allocated to the Segregated Account.

RMBS:

Ambac insures RMBS transactions that contain first-lien mortgages. Ambac classifies its insured first-lien RMBS exposure principally into two broad credit risk classes: mid-prime (including Alt-A, interest only, and negative amortization) and sub-prime. Mid-prime loans were typically made to borrowers who had stronger credit profiles relative to sub-prime loans, but weaker than prime loans. Compared with mid-prime loans, sub-prime loans typically had higher loan-to-value ratios, reflecting the greater difficulty that sub-prime borrowers have in making down payments and the propensity of these borrowers to extract equity during refinancing. The mid-prime category includes:

• Loans with specific payment features that afforded borrowers the option to have lower payments in the early years with potential resets after several years. For example, so-called interest only loans have monthly payments comprised of interest but no principal. So called negative amortization loans permit borrowers to defer interest and principal in the early years and then make higher payments in the period after the reset. Both types may also have lower interest rates in the early years. Future increases in monthly payments, commonly called payment shock, raise the probability of delinquencies and defaults given the decline in house prices that has caused many borrowers’ loan balances to exceed their homes’ market value.

• Loans backed by borrowers who typically did not meet standard agency guidelines for documentation requirement, property type or loan-to-value ratio. These are typically higher-balance loans made to individuals who might have past credit problems that were not severe enough to warrant “sub-prime” classification, or borrowers who chose not to obtain a prime mortgage due to documentation requirements.

Ambac has also insured RMBS transactions that contain predominantly second-lien mortgage loans such as closed-end seconds and home equity lines of credit. A second-lien mortgage loan is a type of loan in which the borrower uses the equity in their home as collateral and the second-lien loan is subordinate to the first-lien loan outstanding on the home. The borrower is obligated to make monthly payments on both their first and second-lien loans. If the borrower defaults on the payments due under these loans and the property is subsequently liquidated, the liquidation proceeds are first utilized to pay off the first-lien loan (as well as costs due the servicer) and any remaining funds are applied to pay off the second-lien loan. As a result of this subordinate position to the first-lien loan, second-lien loans carry a significantly higher severity in the event of a loss, typically at or above 100% in the current housing market.

RMBS Representation and Warranty Subrogation Recoveries:

In an effort to better understand the unprecedented levels of delinquencies, Ambac or its counsel engaged consultants with significant mortgage underwriting experience to review the underwriting documentation for mortgage loans underlying certain insured RMBS transactions. Transactions which exhibited exceptionally poor performance were chosen for further examination of the underwriting documentation supporting the underlying loans. Factors which Ambac believes to be indicative of poor performance include (i) high levels of early payment defaults, (ii) significant number of loan liquidations or charge-offs and resulting high levels of losses, and (iii) rapid elimination of credit protections inherent in the transactions’ structures. Generally, the sponsor of the transaction provided representations and warranties with respect to the securitized loans, including representations with respect to the loan characteristics, the absence of fraud or other misconduct in the origination process, and attesting to the compliance of loans with the prevailing underwriting policies. In such cases, the sponsor of the transaction is contractually obligated to repurchase, cure or substitute collateral for any loan that breaches the representations and warranties.

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The table below distinguishes between RMBS credits for which we have not established a representation and warranty subrogation recovery and those for which we have, providing in both cases the number of policies, gross par outstanding, gross loss reserves before subrogation recoveries, subrogation recoveries, and gross loss reserves net of subrogation for all RMBS exposures for which Ambac established reserves at March 31, 2013:

($ in millions)	Number of policies		Gross par outstanding		Gross loss reserve before subrogation recoveries		Subrogation recoveries			Gross loss reserve net of subrogation recoveries (1)
Second-lien		21	$	2,398	$	580	$	—		$	580
First-lien Mid-prime		58		3,219		1,537		—			1,537
First-lien Sub-prime		36		1,415		188		—			188
Other		12		293		168		—			168
Total Credits Without Subrogation		127		7,325		2,473		—			2,473
Second-lien		21		2,838		1,394		(1,523	)		(129	)
First-lien Mid-prime		22		1,360		1,021		(515	)		506
First-lien Sub-prime		6		1,975		1,024		(449	)		575
Total Credits With Subrogation		49		6,173		3,439		(2,487	)		952
Total		176	$	13,498	$	5,912	$	(2,487	)	$	3,425

(1) Included in Gross Loss Reserves are unpaid claims of $3,594 related to policies allocated to the Segregated Account.

The following tables provide, by vintage and type, current gross par outstanding, gross loss reserves, and subrogation recoveries, of Ambac’s affected U.S. RMBS book of business:

	Total Gross Par Outstanding At March 31, 2013 ($ in millions)
Year of Issue	Second Lien			First-lien Sub-prime			First-lien Mid-prime			Other (1)
1998-2001	$	60		$	563		$	4		$	440
2002		31			500			53			14
2003		24			757			340			162
2004		1,008			415			620			31
2005		1,003			961			1,843			58
2006		2,576			662			981			96
2007		2,762			471			1,849			219
Total	$	7,464		$	4,329		$	5,690		$	1,020
% of Total RMBS Portfolio		40.3	%		23.4	%		30.8	%		5.5	%
% of Related Par Outstanding rated below investment grade (2)		98.3	%		89.0	%		94.7	%		41.8	%

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	Gross Loss Reserves before Subrogation Recoveries At March 31, 2013 ($ in millions)
Year of Issue	Second Lien		First-lien Sub-prime		First-lien Mid-prime		Other (1)
1998-2001	$	—	$	64	$	—	$	—
2002		—		63		1		—
2003		—		24		2		—
2004		83		33		28		1
2005		281		427		836		14
2006		1,318		414		720		104
2007		292		187		971		49
Total	$	1,974	$	1,212	$	2,558	$	168

	Gross Subrogation Recoveries At March 31, 2013 ($ in millions)
Year of Issue	Second Lien			First-lien Sub-prime			First-lien Mid-prime			Other (1)
1998-2001	$	—		$	—		$	—		$	—
2002		—			—			—			—
2003		—			—			—			—
2004		(37	)		—			—			—
2005		(154	)		(210	)		(242	)		—
2006		(794	)		(207	)		(117	)		—
2007		(538	)		(32	)		(156	)		—
Total	$	(1,523	)	$	(449	)	$	(515	)	$	—

(1) Other primarily includes manufactured housing and lot loan exposures.

(2) Ambac’s below investment grade internal ratings reflect bonds which are of speculative grade credit quality with the adequacy of future margin levels for payment of interest and repayment of principal potentially adversely affected by major ongoing uncertainties or exposure to adverse conditions. Ambac Assurance’s below investment grade category includes transactions on which claims have been submitted.

Student Loans

Our student loan portfolio consists of credits collateralized by (i) federally guaranteed loans under the Federal Family Education Loan Program (“FFELP”) and (ii) private student loans. Whereas FFELP loans are guaranteed for a minimum of 97% of defaulted principal and interest, private loans have no government guarantee and therefore are subject to credit risk as with other types of unguaranteed credits. Default data has shown that since origination, a significant deterioration in the performance of private student loans underlying some of our transactions. Additionally, due to the failure of the auction rate markets, the interest rates on some of student loan securities have increased significantly to punitive levels pursuant to the transaction terms. Such increases have caused the collateralization ratio in these transactions to deteriorate on an accelerated basis due to negative excess spread and/or the use of principal receipts to pay current interest. Rating agency downgrades of outstanding auction rate notes have resulted in step-ups of the interest rate payable on such securities which, in certain cases, has further accelerated the erosion of the trust estate.

Student loan gross par outstanding and gross loss reserves, excluding debt service reserve funds on Ambac insured obligations were as follows:

	March 31, 2013				December 31, 2012
Issuer Type ($ in millions)	Gross Par Outstanding		Gross Loss Reserves		Gross Par Outstanding		Gross Loss Reserves
For-Profit Issuers	$	3,470	$	1,033	$	3,514	$	950
Not-For-Profit Issuers		2,699		48		2,858		91
Total	$	6,169	$	1,081	$	6,372	$	1,041

Collateral for the For-Profit Issuers consists of private loans which do not have any federal guarantee as to defaulted principal and interest. Collateral for the Not-For-Profit Issuers consists of both FFELP and private student loans. Approximately 71% of the collateral backing the Not-For-Profit Issuers consists of FFELP loans while the remaining 29% consists of private loans. Private loan defaults have been on the rise since the credit crisis in 2008 began. Elevated unemployment rates, combined with high student loan debt levels will continue to put pressure on borrower’s ability to pay their loans.

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Reasonably Possible Additional Losses:

RMBS

It is possible that our loss estimate assumptions for the RMBS insurance policies discussed above could be materially under-estimated as a result of deterioration in housing prices, poor servicing, the effects of a weakened economy marked by growing unemployment and wage pressures, inability to execute commutation transactions with insurers and/or investors and/or continued illiquidity of the mortgage market. Additionally, our actual subrogation recoveries could be significantly lower than our current estimates of $2,487 million if the sponsors of these transactions: (i) fail to honor their obligations to repurchase the mortgage loans, (ii) successfully dispute our breach findings, or (iii) no longer have the financial means to fully satisfy their obligations under the transaction documents.

We have attempted to identify the reasonably possible additional losses using more stressful assumptions. Different methodologies, assumptions and models could produce different base and reasonably possible additional losses and actual results may differ materially from any of these various modeled results.

In the case of both first and second-lien exposures, the regression model’s reasonably possible stress case assumes a significantly harsher HPA projection, which in turn drives higher defaults and severities. Using this approach, the reasonably possible increase in loss reserves for RMBS credits for which we have an estimate of expected loss at March 31, 2013 could be approximately $1,058 million. The reasonably possible scenario considers the highest stress scenario that was utilized in the development of our probability-weighted expected loss at March 31, 2013 and assumes an inability to execute commutation transactions with issuers and/or investors.

Student Loans

It is possible that our loss estimate assumptions for student loan credits could be materially under-estimated as a result of various uncertainties including but not limited to, the interest rate environment, an increase in default rates and loss severities on the collateral due to economic factors, as well as a failure of issuers to refinance insured bonds which have a failed debt structure, such as auction rate securities. For student loan credits for which we have an estimate of expected loss at March 31, 2013, the reasonably possible increase in loss reserves could be approximately $858 million. The reasonably possible scenario considers the highest stress scenario that was utilized in the development of our probability-weighted expected loss at March 31, 2013 and assumes an inability to execute commutation transactions with issuers and/or investors.

Other Credits

It is possible our loss reserves on other types of credits may be materially under-estimated because most credits have possible outcomes more adverse than the recorded probability weighted loss reserve. Although we do not believe it is reasonably possible to have worst case outcomes in all cases, it is reasonably possible we could have worst case outcomes in some or even many cases. Similarly, it is also reasonably possible we will achieve better outcomes than our recorded probability weighted loss reserve. For all credits with loss reserves at March 31, 2013, the sum of all the highest stress case loss scenarios is $1,373 million greater than the current loss reserve. The reasonably possible scenario assumes an inability to execute commutation transactions.

Ambac’s management believes that the reserves for losses and loss expenses and unearned premium reserves are adequate to cover the ultimate net cost of claims, but reserves for losses and loss expenses are based on estimates and there can be no assurance that the ultimate liability for losses will not exceed such estimates.

Taxes. Ambac considers its U.S. federal net operating loss tax carry forward (“NOLs”) to be a valuable asset. However, Ambac’s ability to use the NOLs could be substantially limited if Ambac were to experience an “ownership change” as defined under Section 382 of the Internal Revenue Code of 1986, as amended (an “Ownership Change”). In general, an Ownership Change would occur if shareholders owning 5% or more of Ambac’s stock increased their percentage ownership in Ambac by 50% or more, as measured generally over a rolling three year period beginning with the last Ownership Change. These provisions can be triggered by new issuances of stock, merger and acquisition activity or normal market trading. As described in Note 1, Ambac’s Amended and Restated Certificate of Incorporation limits transfer rights of shareholders in significant ways to preserve the NOLs. Article XII generally prohibits transfers of common stock to the extent that, as a result of such transfer, either (i) the transferee would become the beneficial owner of 5% or more of the Company’s outstanding stock or (ii) the percentage stock ownership interest in the Company of any existing beneficial owner of 5% or more of the Company’s outstanding stock would be increased. A purported transferee of such a prohibited

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transfer shall not be recognized as a shareholder of Ambac for any purpose whatsoever in respect of the shares of common stock which comprise the prohibited transfer. The Board of Directors of Ambac may grant exceptions to the restrictions of Article XII. In addition, on September 27, 2012, the Bankruptcy Court entered an order (the “Trading Order”), amending and restating an order entered on November 30, 2010, establishing procedures for certain pre-Effective Date transfers or acquisitions of equity interests in and claims (including debt securities) against the Company. The Bankruptcy Court retains jurisdiction after the Effective Date to enforce the Trading Order with respect to pre-Effective Date violations of the Trading Order.

Cash Flows. Net cash provided by operating activities was $77.3 million and $40.3 million during the three months ended March 31, 2013 and 2012, respectively. Operating cash flows increased for the period ended March 31, 2013 primarily due to lower net loss and loss expense payments. During the three months ended March 31, 2013 Ambac Assurance had net loss recoveries of $19 million, whereas in the three months ended March 31, 2012 Ambac had net loss recoveries of $2 million, net of commutation payments. Additionally, operating cash flows increased for the period ended March 31, 2013 due to lower interest rate swap payments during the period. Future operating cash flows will primarily be impacted by the level of premium collections, surplus note interest payments (subject to approval by OCI) and claim payments (including the ultimate payment of presented but unpaid claims), including payments under credit default swap contracts. In connection with the Settlement Agreement with the IRS, Ambac paid $101.9 million to the US Treasury in May 2013.

Net cash used in financing activities was ($4.0) million and ($7.7) million during the three months ended March 31, 2013 and 2012, respectively. Financing activities for the three months ended March 31, 2013 and 2012 included paydowns of $4.1 million and $7.3 million, respectively, on variable interest entity secured borrowing.

Net cash provided by (used in) investing activities was ($49.7) million and ($8.7) million during the three months ended March 31, 2013 and 2012, respectively.

RISK MANAGEMENT

The Risk Management group is primarily responsible for the development, implementation and oversight of loss mitigation strategies. As a consequence of the Segregated Account Rehabilitation Proceedings, the Rehabilitator retains operational control and decision-making authority with respect to all matters related to the Segregated Account, including surveillance, remediation and loss mitigation. Similarly, by virtue of the contracts executed between Ambac Assurance and the Segregated Account in connection with the establishment, and subsequent rehabilitation, of the Segregated Account, the Rehabilitator retains the discretion to oversee and approve certain actions taken by Ambac Assurance in respect of assets and liabilities which remain in Ambac Assurance. As such, Ambac’s risk management practices are qualified by reference to the Rehabilitator’s exercise of its discretion to alter or eliminate any of these risk management practices. By virtue of a management services contract executed between Ambac Assurance and the Segregated Account in connection with the establishment, and subsequent rehabilitation, of the Segregated Account, the Risk Management group is responsible for all surveillance, remediation and mitigation services provided to the Segregated Account under the supervision of the OCI.

Credit Risk

Ambac is exposed to credit risk in various capacities including as an issuer of financial guarantees, including credit default swaps, as counterparty to reinsurers, derivative and other financial contracts and as a holder of investment securities.

Financial Guarantees—Risk Management’s focus is on surveillance, remediation, loss mitigation and risk reduction. Surveillance analysts review, on a regular and ad hoc basis, credits in the financial guarantee book of business. Risk-adjusted surveillance strategies have been developed for each bond type. The monitoring activities are designed to detect deterioration in credit quality or changes in the economic, regulatory or political environment which could adversely impact the portfolio. Active surveillance enables Portfolio Risk Management to track single credit migration and industry credit trends. In some cases, Portfolio Risk Management will engage workout experts, attorneys and other consultants with appropriate expertise in the targeted loss mitigation to assist management in examining the underlying contracts or collateral, providing industry specific advice and/or executing strategies.

Investment Securities—Ambac manages credit risk associated with its investment portfolio through adherence to specific investment guidelines. These guidelines establish limits based upon single risk concentration, asset type, and minimum credit rating standards. Additionally, senior credit personnel monitor the portfolio on a continuous basis. Credit monitoring of the investment portfolio includes procedures on residential mortgage-backed securities consistent with those utilized to assess the risk of our insured RMBS exposures.

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Derivatives—Credit risks relating to derivative positions primarily concern the default of a counterparty. Counterparty default exposure on derivatives (other than credit derivatives) is mitigated through the use of industry standard collateral posting agreements. For counterparties subject to such collateral posting agreements, collateral is posted when a derivative counterparty’s credit exposure exceeds contractual limits. Derivative contracts entered into with financial guarantee customers are not subject to collateral posting agreements. Credit risk associated with such customer derivatives, including credit derivatives, is managed through the financial guarantee portfolio risk management processes described above. In some cases, derivatives between Ambac and financial guarantee customers are placed through a third party financial intermediary and do not require collateral posting. These transactions include structural mechanisms such as separate trust accounts to mitigate credit exposure to the intermediary.

Reinsurance—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 in 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 held letters of credit and collateral amounting to approximately $329.8 million from its reinsurers at March 31, 2013. As of March 31, 2013, the aggregate amount of insured par ceded by Ambac Assurance to reinsurers under reinsurance agreements was $20,576 million, with the largest reinsurer accounting for $18,155 million or 7.8% of gross par outstanding at March 31, 2013. The following table represents the percentage ceded to reinsurers and reinsurance recoverable at March 31, 2013 and the reinsurers’ rating levels as of May 4, 2013:

Reinsurers	Moody’s Rating		Moody’s Outlook		Percentage ceded Par			Net unsecured reinsurance recoverable (in thousands)(1)
Assured Guaranty Re Ltd (2)		Baa1		Stable		88.23	%	$	—
Sompo Japan Insurance Inc		A1		Stable		6.62			—
Assured Guaranty Corporation (2)		A3		Stable		5.15			10,663
Total						100.00	%	$	10,663

(1) Represents reinsurance recoverables on paid and unpaid losses and deferred ceded premiums, net of ceded premium payables due to reinsurers, letters of credit, and collateral posted for the benefit of the Company.

(2) In January 2013, Moody’s downgraded Assured Guaranty Corporation to A3 from Aa3 and Assured Guaranty Re Ltd to Baa1 from A1. The downgrade provides Ambac Assurance with termination rights on certain reinsurance contracts and requires an increase to the collateral currently provided by Assured Guaranty Re Ltd.

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 exchange risk. Below we discuss each of these risks and the specific types of financial instruments impacted. Senior managers in Ambac’s Risk Management group are responsible for developing and applying methods to measure risk. The estimation of potential losses arising from adverse changes in market conditions is a key element in managing market risk. Ambac utilizes various systems, models and stress test scenarios to monitor and manage market risk. This process includes frequent analyses of both parallel and non-parallel shifts in the benchmark interest rate curve and “Value-at-Risk” (“VaR”) measures. These models include estimates, made by management, which utilize current and historical market information. The valuation results from these models could differ materially from amounts that would actually be realized in the market.

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Interest Rate Risk:

Financial instruments for which fair value may be affected by changes in interest rates consist primarily of fixed income investment securities, loans, investment agreement and repurchase agreements, long-term debt and interest rate derivatives. The following table summarizes the estimated change in fair value (based primarily on the valuation methodology discussed in Note 7 to the Consolidated Financial Statements located in Item 1 of this Form 10-Q) on these financial instruments, assuming immediate changes in interest rates at specified levels at March 31, 2013:

Change in Interest Rates	Estimated Change in Net Fair Value			Estimated Net Fair Value
($ in millions)
300 basis point rise	$	(22	)	$	4,641
200 basis point rise		65			4,728
100 basis point rise		51			4,714
Base scenario		—			4,663
100 basis point decline (1)		(121	)		4,542

(1) Incorporates an interest rate floor of 0%

Due to the low interest rate environment as of March 31, 2013, stress scenarios involving interest rate declines greater than 100 basis points are not meaningful to the Company’s portfolios.

Changes in fair value resulting from changes in interest rates are driven primarily by the impact of interest rate shifts on the investment portfolio (which declines in value as rates increase) and the interest rate swap portfolio (which is generally positioned to increase in value as rates increase). Interest rate increases would also have a negative economic impact on expected future claim payments on the financial guarantee portfolio.

Ambac Financial Services (“AFS”) manages its derivatives portfolio with the goal of retaining some interest rate sensitivity as an economic hedge against the effects of rising interest rates elsewhere in the Company, including on Ambac’s financial guarantee exposures (the “macro-hedge”). The interest rate sensitivity in the AFS derivatives portfolio has been reduced over the course of the first quarter of 2013 as interest rate exposure in the financial guarantee business has declined. The incremental interest rate sensitivity of the interest rate swap portfolio attributable to the macro-hedge position would produce mark-to-market gains or losses of approximately $1.0 million for a 1 basis point parallel shift in USD swap rates up or down, respectively, at March 31, 2013.

The estimation of potential losses arising from adverse changes in market relationships, known as VaR, is a consideration in management’s monitoring of interest rate risk for the interest rate swap portfolio. Ambac has developed a VaR methodology to estimate potential losses using a one day time horizon and a 99% confidence level. This means that Ambac would expect to incur losses due to changes in interest rates greater than that predicted by VaR estimates only once in every 100 trading days, or about 2.5 times a year. Ambac’s methodology estimates VaR using a 300-day historical “look back” period. This means that changes in market values are simulated using market inputs from the past 300 days. For the period ended March 31, 2013, Ambac’s VaR, for its interest rate derivative portfolio averaged approximately $25.4 million. Ambac’s VaR ranged from a high of $28.3 million to a low of $21.3 million for the three month period ended March 31, 2013. These VaR measures are intended to focus on the impact of observable market rates and therefore exclude fair value adjustments made by management to incorporate Ambac or counterparty credit risk. Ambac supplements its VaR methodology, which it believes is a good risk management tool in normal markets, by performing stress testing to measure the potential for losses in volatile markets. These stress tests include parallel and non-parallel shifts in the benchmark interest rate curve.

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Credit Spread Risk:

Financial instruments that may be adversely affected by changes in credit spreads include Ambac’s outstanding credit derivative contracts, certain interest rate swap contracts and investment assets. Changes in credit 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 credit spreads and impact valuations.

The following table summarizes the estimated change in fair values on Ambac’s credit derivative contracts assuming immediate parallel shifts in reference obligation spreads at March 31, 2013:

($ in millions) Change in Underlying Spreads	Estimated Change in Fair Value			Fair Value
250 basis point widening	$	(179	)	$	(382	)
50 basis point widening		(36	)		(239	)
Base scenario		—			(203	)
50 basis point narrowing		36			(167	)
250 basis point narrowing		142			(61	)

Also included in the fair value of credit derivative liabilities is the effect of Ambac’s creditworthiness, which reflects market perception of Ambac’s ability to meet its obligations. Incorporating estimates of Ambac’s credit valuation adjustment into the determination of fair value has resulted in a $191.7 million reduction to the credit derivatives liability as of March 31, 2013. At March 31, 2013 the credit valuation adjustment resulted in a 48.5% reduction of the credit derivative liability as measured before considering Ambac credit risk. Refer to Note 7 to the Audited Consolidated Financial Statements located in Part I, Item 1 of this Form 10-Q for further information on measurement of the credit valuation adjustment.

The fair value of interest rate swaps may be affected by changes to the credit valuation adjustment attributable to the risk of counterparty or Ambac non-performance. Generally, the need for a counterparty (or 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 financial guarantee customers are not typically subject to collateral posting agreements. Valuation adjustments for counterparty credit risk were not significant as of March 31, 2013. Estimates of Ambac’s credit valuation adjustment included in the fair value of interest rate swaps reduced the derivative liability fair value by $91.8 million as of March 31, 2013.

Ambac’s fixed income investment portfolio contains securities with different sensitivities to and volatility of credit spreads. The most significant changes to credit spreads have generally related to Alt-A and subprime residential mortgage-backed securities, some of which are guaranteed by Ambac Assurance. Credit spreads may reflect the non-payment risk of the underlying mortgages, the guarantor or both. 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 at March 31, 2013:

Change in Credit Spreads	Estimated Change in Fair Value			Fair Value
($ in millions)
250 basis point widening	$	(597	)	$	5,801
50 basis point widening		(121	)		6,277
Base scenario		—			6,398
50 basis point narrowing		121			6,519
250 basis point narrowing		646			7,044

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Foreign Exchange Risk:

Ambac has financial instruments denominated in currencies other than the U.S. dollar, primarily pounds sterling and euros. These financial instruments are primarily invested assets, and assets and liabilities of Ambac UK and Ambac’s consolidated VIEs. The following table summarizes the estimated net change in fair value of these financial instruments assuming immediate shifts in foreign exchange rates as of March 31, 2013.

($ in millions)	Change in Foreign Exchange Rates Against U.S. Dollar
	20% Decrease			10% Decrease			10% Increase		20% Increase
Estimated change in fair value	$	(137.5	)	$	(68.7	)	$	68.7	$	137.5

SPECIAL PURPOSE AND VARIABLE INTEREST ENTITIES

Please refer to Note 3, “Special Purpose Entities, Including Variable Interest Entities” of the Unaudited Consolidated Financial Statements, located in Item 1 of this Form 10-Q, for information regarding special purpose and variable interest entities.

ACCOUNTING STANDARDS

Please refer to Note 13, “Future Applications of Accounting Standards and Adoption of New Accounting Standards” of the Consolidated Financial Statements, located in Item 1 of this Form 10-Q, for a discussion of the impact of recent accounting pronouncements on Ambac’s financial condition and results of operations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

For a discussion of the quantitative and qualitative disclosures about market risk, see the Market Risk Management section of the Management’s Discussion and Analysis of this Form 10-Q. For a detailed discussion of Ambac’s Quantitative and Qualitative Disclosures About Market Risk, see Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” included in Ambac’s Annual Report on Form 10-K for the year ended December 31, 2012.

Item 4. Controls and Procedures.

In connection with the preparation of this First 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 (Exchange Act)) 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 and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Disclosure controls and procedures are designed to ensure that the information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures. Ambac management is committed to maintaining an effective internal control environment over financial reporting. Based on its evaluation, Ambac’s Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2013, Ambac’s disclosure controls and procedures were effective.

Ambac believes that the Unaudited Consolidated Financial Statements in this Quarterly Report on Form 10-Q fairly present, in all material respects, Ambac’s consolidated financial condition as of March 31, 2013 and December 31, 2012 and consolidated results of operations for the three month periods ended March 31, 2013 and 2012 and consolidated cash flows for the three month periods ended March 31, 2013 and 2012, in conformity with U.S. generally accepted accounting principles. There has not been any changes in Ambac’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the three month periods ended March 31, 2013 that has materially affected, or is reasonably likely to materially affect, Ambac’s internal control over financial reporting.

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Part II Other Information

Item 1. Legal Proceedings.

Please refer to Note 11 “Commitments and Contingencies” of the Unaudited Consolidated Financial Statements located in Part I, Item 1 in this Form 10-Q, and Note 15 “Commitments and Contingencies” in Part II, Item 8 of Ambac’s 2012 Form 10-K 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, 2012, which are hereby incorporated by reference, as well as the additional risk factor information appearing below in this section and elsewhere in this report. 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. Other than as set forth below, 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.

Our shares of common stock have recently started to trade on the NASDAQ Global Market and the price per share of our common stock may be subject to a high degree of volatility, including significant price declines.

Our new shares of common stock, which were issued pursuant to our Reorganization Plan, began trading on the NASDAQ Global Market on May 1, 2013. Although our common stock is listed on NASDAQ, there can be no assurance as to the liquidity of the trading market for our shares of common stock or the price at which such shares can be sold. The initial market price of our shares was determined by investors based upon the number of shares which were issued. The price of the shares may decline substantially in response to a number of events or circumstances, including but not limited to:

• changes in investors’ or analysts’ valuation measures for our stock and market trends unrelated to our stock;

• market and industry perception of our success, or lack thereof, in pursuing our business strategy; and

• results and actions of other participants in our industry.

In addition, the price of our shares will be affected by the additional risks described below and the risks referenced above which are set forth in our Form 10-K for the year ended December 31, 2012, including but not limited to, our ability to achieve substantial recoveries, including RMBS subrogation recoveries, and our ability to mitigate losses in our insured portfolio.

Because the Company is a holding company, the value of our stock is dependent upon the residual value of our main operating subsidiary, Ambac Assurance, the receipt of payments to be made by Ambac Assurance pursuant to the Mediation Agreement, the Amended TSA and the Cost Allocation Agreement, and the receipt of dividends from Ambac Assurance. There can be no assurance that we will be able to realize residual value in Ambac Assurance, which is in run-off. In addition, the Segregated Account of Ambac Assurance is subject to rehabilitation proceedings and under the control of the Rehabilitator. It is unclear whether Ambac Assurance and the Segregated Account will be able to satisfy all of their respective obligations to policyholders, holders of their respective surplus notes and holders of Ambac Assurance’s preferred stock, even if Ambac Assurance and the Segregated Account are successful in achieving recoveries and mitigating losses. Due to these factors, as well as applicable legal and contractual restrictions, it is highly unlikely that Ambac Assurance will be able to pay the Company any dividends for the foreseeable future. Furthermore, the payments to be made to the Company under the Mediation Agreement, the Amended TSA and the Cost Allocation Agreement are subject to contingencies that are difficult to predict, making the amount and timing, if any, of such payments uncertain. Payments to be made under the Amended TSA, in particular, depend on the generation of taxable income by Ambac Assurance and the amount of NOLs that can be utilized by Ambac Assurance prior to the utilization of NOLs that require payment to the Company. Ambac Assurance’s ability to generate taxable income is uncertain. Moreover, losses incurred by Ambac Assurance since the Amended TSA was executed have increased the amount of NOLs that can be utilized by Ambac Assurance without payment to the Company. Due to these factors, there can be no assurance as to the amounts, if any, that the Company will receive from Ambac Assurance under the Amended TSA.

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The value of our common stock may also depend upon the ability of the Company to generate earnings apart from Ambac Assurance. As noted below, we are exploring new business opportunities, but there are no assurances regarding our ability to establish new businesses or the prospects of any such new businesses.

We are exploring new business opportunities which may not be not be consummated, or if consummated, may not create value and may negatively impact our financial results.

We are exploring new business opportunities for Ambac, which may involve the acquisition of assets or existing businesses or the development of businesses through new or existing subsidiaries. It is not possible at this time to predict the future prospects or other characteristics of any such new business. Our efforts to pursue a new business opportunity may be unsuccessful or require significant financial or other resources, which could have a negative impact on our financial results and condition. No assurance can be given that we will be able to locate or complete the acquisition or development of any business or, if acquired or developed, generate any earnings or be able to successfully integrate such business into our current operating structure.

Our actual financial results and financial condition may vary significantly from the projections and other financial information provided to the Bankruptcy Court and may be substantially lower from those reflected in the projections; investors should not rely on such information in making investment decisions.

In connection with the Reorganization Plan, in September 2011 we filed with the Bankruptcy Court a disclosure statement containing financial projections and other financial information, including estimates regarding our reorganization value. The projections and other financial information provided were based on information available to us at that time and we have not and do not intend to update such information. Projections are inherently subject to uncertainties and risks and such projections and other financial information reflect numerous assumptions as of the date of the disclosure statement. Our actual results and financial condition may vary significantly from those contemplated by the projections and other financial information provided to the Bankruptcy Court. Our actual results may be substantially lower than what was projected or implied in the disclosure statement. The projections and other financial information provided to the Bankruptcy Court are neither included in this quarterly report nor incorporated by reference. Accordingly, investors should not rely on such projections or information in making investment decisions.

The Rehabilitator is considering amendments to the Segregated Account Rehabilitation Plan which could have adverse consequences to holders of Ambac securities and to holders of securities insured by Ambac Assurance, and would have a material impact on our financial condition and results of operation.

As described elsewhere herein and subject to desired tax treatment, the Rehabilitator will likely seek to implement amendments to the Segregated Account Rehabilitation Plan that would eliminate the issuance of surplus notes by the Segregated Account with respect to the unpaid portion of permitted policy claims. Such amendments would instead provide for the unpaid balance of permitted policy claims to be recorded by the Segregated Account as outstanding policy obligations which would accrue interest at a rate of 5.1%, compounded annually until paid (any such outstanding policy obligation, including accrued interest thereon, being a “Deferred Amount”). The timing and likelihood of such amendments to the Segregated Account Rehabilitation Plan are presently unclear.

Notwithstanding that such amendments would be designed to preserve tax attributes for the ultimate benefit of policyholders, such amendments could adversely affect the interests of Ambac security holders and holders of securities insured by Ambac Assurance, including, without limitation, by the absence of tradable surplus notes. Furthermore, if surplus notes were eliminated from the Segregated Account Rehabilitation Plan in favor of the establishment of Deferred Amounts, then Ambac Assurance would, in certain transactions, suffer a reduction in reimbursements that would have been payable to it had such claims been (or been deemed to be) fully satisfied by the issuance of surplus notes, although such reduction in reimbursements could be mitigated by the making of Supplemental Payments discussed elsewhere herein. Also, Ambac Assurance would be exposed to incremental interest liability on those securities whose outstanding balance would not be reduced by the amount of unpaid claims, which was expected to be the case if surplus notes were issued in satisfaction (or deemed satisfaction) of such claims. Ambac has estimated that the aggregate amount of such incremental interest liability may be approximately $600 million, subject to certain assumptions. Pending the outcome of the ruling requests to the IRS, as more fully described in Note 1 to the Unaudited Consolidated Financial Statements included in Part 1 Item 1 of the Form 10-Q, the establishment of Deferred Amounts instead of the issuance of surplus notes with respect to the unpaid portion of permitted policy claims is also likely to reduce NOL usage payments by Ambac Assurance to Ambac under the Amended TSA. As a result of such factors, the establishment of Deferred Amounts instead of the issuance of surplus notes with respect to the unpaid portion of permitted policy claims would result in a material change in our financial results.

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Part IV

Item 6. Exhibits, Financial Statement Schedules.

(a) Documents filed as a part of this report:

1. Financial Statements

The Unaudited Consolidated Financial Statements included in Part I, Item 1 above are filed as part of this Form 10-Q.

2. Exhibits

The following items are annexed as exhibits:

Exhibit Number	Description
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 Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2++	Certification of 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.
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.

+ Filed herewith.

++ Furnished herewith.

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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: May 15, 2013	By:	/S/ DAVID TRICK
	Name:	David Trick
	Title:	Chief Financial Officer and Treasurer (Duly Authorized Officer and Principal Financial Officer)

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INDEX TO EXHIBITS

Exhibit Number	Description
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 Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of 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.
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.

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