AMBAC FINANCIAL : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

This Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") contains certain financial measures, in particular the
presentation of Adjusted Earnings and Adjusted Book Value, which are not
presented in accordance with accounting principles generally accepted in the
United States ("GAAP"). We are presenting these non-GAAP financial measures
because they provide greater transparency and enhanced visibility into the
underlying drivers of our business. We do not intend for these non-GAAP
financial measures to be a substitute for any GAAP financial measures and they
may differ from similar reporting provided by other companies. Readers of this
Form 10-K should use these non-GAAP financial measures only in conjunction with
the comparable GAAP financial measures. Adjusted Earnings and Adjusted Book
Value are non-GAAP financial measures that adjust for the impact of certain
non-recurring or non-economic GAAP accounting requirements and include the
addition of certain items that the Company has or expects to realize in the
future, but that are not reported under GAAP. We provide reconciliations to the
most directly comparable GAAP measures; Adjusted Earnings to Net income
attributable to common stockholders and Adjusted Book Value to Total Ambac
Financial Group, Inc. stockholders' equity.

                                COMPANY OVERVIEW

See Note 1. Background and Business Description for a description of the Company and our key strategies to achieve our primary goal to maximize shareholder value.

                               EXECUTIVE SUMMARY
Ambac Assurance and Subsidiaries
A key strategy for AFG is to increase the value of its investment in Ambac
Assurance by actively managing its assets and liabilities. Asset management
primarily entails maximizing the risk adjusted return on non-VIE invested assets
and managing liquidity to help ensure resources are available to meet
operational and strategic cash needs. These strategic cash needs include
activities associated with Ambac's liability management and loss mitigation
programs.

Asset Management
Investment portfolios are subject to internal investment guidelines, as well as
limits on types and quality of investments imposed by applicable insurance laws
and regulations. As part of its investment strategy, and in accordance with the
aforementioned guidelines, Ambac Assurance and Ambac Assurance UK Limited
("Ambac UK"), purchase distressed Ambac-insured securities based on their
relative risk/reward characteristics. The investment portfolios of Ambac
Assurance and Ambac UK also hold fixed income securities and various pooled
investment funds. Refer to Note 10. Investments to the Consolidated Financial
Statements, included in Part II, Item 8 in this Form 10-K for further details of
fixed income investments by asset category and pooled investment funds by
investment type.
During the year ended December 31, 2019, Ambac did not acquire a significant
amount of distressed Ambac-insured securities. At December 31, 2019, Ambac owned
$436 million of distressed


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Ambac-insured bonds, including $158 million of Puerto Rico bonds and excluding
Ambac's holdings of secured notes issued by Ambac LSNI (the "Secured Notes") in
connection with the Rehabilitation Exit Transactions (as defined in Note 1.
Background and Business Description to the Consolidated Financial Statements
included in Part II, Item 8 of this Annual Report on Form 10-K). Subject to
applicable internal and regulatory guidelines and other constraints, Ambac may
opportunistically purchase and sell Ambac-insured securities and Secured Notes
in the future. In the event that Ambac Assurance sells any of the Secured Notes
it owns, it must use the proceeds of such sale to redeem a like amount of
Secured Notes at par in accordance with the terms of the Indenture and related
security and collateral documents. The price at which Ambac Assurance sells the
Secured Notes may differ from the price at which it redeems the Secured Notes.
Liability and Insured Exposure Management
Ambac Assurance's Risk Management Group ("RMG") focuses on the analysis,
implementation and execution of risk reduction, loss mitigation and loss
recovery strategies. Analysts evaluate the estimated timing and severity of
projected policy claims as well as the potential impact of such strategies in
order to target and prioritize policies, or portions thereof, for commutation,
reinsurance, refinancing, restructuring or other risk reduction and loss
mitigation outcomes. For targeted policies, analysts will engage with
bondholders, issuers and other economic stakeholders to negotiate, structure and
execute such strategies. During 2019, successful risk reduction transactions
included:
•   The COFINA Plan of Adjustment ("POA"). On February 12, 2019, the POA,

including certain related commutation transactions, and subsequent

distributions, became effective, resulting in a reduction of Ambac

Assurance's insured net par exposure to COFINA by approximately 77% or $620

million. Subsequent redemptions of obligations of the COFINA Class 2 Trust

(as further described in the Financial Guarantees in Force section included

in Part II, Item 7 in the Company's Annual Report on Form 10-K for the year

ended December 31, 2019) brought COFINA net par outstanding down to $101

million as of December 31, 2019;

• An Irish scheme of arrangement (the "Arrangement") on June 17, 2019, for the

restructuring of Ballantyne Re plc ("Ballantyne"). This restructuring allowed

for the commutation of $900 million of Ambac UK's net par outstanding. See

below under Financial Guarantees in Force for further details of the

Arrangement;

• Purchasing quota share reinsurance in September 2019 to sculpt the risk

profile of the insured portfolio. This included ceding certain public finance

exposures totaling $1.2 billion of par exposure (principal and interest of

$2.4 billion), which were comprised of lease and tax-backed revenue ($616

million par), general obligation ($374 million par), transportation ($240

million par) and higher education ($4 million par) exposures and included

$509 million par of watch list and adversely classified credits;

• Purchasing quota share reinsurance in December 2019 for $228 million of par

exposure, including $153 million of watch list credits;

• Completing work in January 2019, with an issuer to refinance two watch list

asset-backed lease securitizations with net par outstanding of $95 million at

December 31, 2018;

• A commutation in February 2019, via a refunding, of an adversely classified

public finance transaction with net par outstanding of $350 million at

December 31, 2018;

• Working with an issuer and noteholders to negotiate the removal of the

guarantee from a tranche of notes on a Watch List credit in December 2019

with net par of $300 million outstanding at December 31, 2018;

• Working closely with servicers and owners of Master Servicing Rights to

exercise their clean-up call rights on several watch list and adversely

classified RMBS transactions with total net par outstanding of $200 million

at December 31, 2018; and

• The final paydown, refunding, or partial commutation of various watch list

exposures and adversely classified exposures that were subject to risk

remediation efforts with total net par outstanding at December 31, 2018 of

$463 million.

The following table provides a comparison of total, adversely classified credits
("ACC") and watch list net par outstanding in the insured portfolio at
December 31, 2019 and 2018. (See Note 2. Basis of Presentation and Significant
Accounting Policies to the Consolidated Financial Statements, included in Part
II, Item 8 in this Form 10-K for a description of adversely classified and watch
list credits.) Net par exposures within the U.S. public finance market includes
capital appreciation bonds which are reported at the par amount at the time of
issuance of the insurance policy as opposed to the current accreted value of the
bonds.
($ in billions)
December 31,      2019        2018           Variance
Total           $ 38,018    $ 46,927    $ (8,909 )   (19 )%
ACC                7,535      10,871      (3,336 )   (31 )%
Watch List         6,752       9,036      (2,284 )   (25 )%


The overall reduction in total net par outstanding was significantly impacted by
active de-risking initiatives at Ambac Assurance and Ambac UK, including the
transactions noted above, as well as scheduled maturities, amortizations,
refundings and calls.
The decrease in Watch List and ACC exposures is primarily due to active
de-risking and paydowns or calls by issuers, mostly related to Puerto Rico,
Ballantyne, international asset-backed, public finance, aircraft asset-backed
and residential mortgage-backed securities.
Although our insured portfolio generally performed satisfactorily in 2019, we
continue to experience stress in certain insured exposures, particularly within
our approximately $1,123 million of exposure to Puerto Rico, consisting of
several different issuing entities (all below investment grade). Each issuing
entity has its own credit risk profile attributable to, as applicable, discrete
revenue sources, direct general obligation pledges and/or general obligation
guarantees.
During 2019, Ambac made partial paydowns of the Ambac Note (as defined in Note
1. Background and Business Description to the Consolidated Financial Statements,
included in Part II, Item 8 in this Form 10-K) by $178 million.


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AFG

As of December 31, 2019 net assets of AFG were $483 million.
($ in millions)
Cash and short-term investments   $ 327
Other investments (1)               116
Other net assets (2)                 40
Total                             $ 483

(1) Includes surplus notes (fair value of $63) issued by Ambac Assurance that are

eliminated in consolidation.

(2) Includes accruals for tolling payments from Ambac Assurance in accordance

with the intercompany Tax Sharing Agreement of $28.

As a result of positive taxable income at Ambac Assurance in 2017, AFG has
accrued approximately $28 million in tax tolling payments. In May 2018, AFG
executed a waiver under the intercompany Tax Sharing Agreement pursuant to which
Ambac Assurance was relieved of the requirement to make this payment by June 1,
2018.  AFG also agreed to continue to defer the tolling payment for the use of
net operating losses in 2017 by Ambac Assurance until such time as OCI (as
defined in Note 1. Background and Business Description to the Consolidated
Financial Statements, included in Part II, Item 8 in this Form 10-K) consents to
the payment.
Ambac Assurance accrued $16 million of tolling payments for year ended December
31, 2018, which were paid to AFG in July of 2019. As a result of filing it's
2018 tax return, Ambac Assurance accrued an additional $2 million of tolling
payments during the year ended December 31, 2019, for 2018, which were paid to
AFG in December 2019.
Pursuant to the Stipulation and Order, Ambac's tax positions are subject to
review by the OCI, which may lead to the adoption of positions that reduce the
amount of tolling payments otherwise available to AFG.
                Financial Statement Impacts of Foreign Currency
The impact of foreign currency as reported in Ambac's Consolidated Statement of
Total Comprehensive Income (Loss) for the year ended December 31, 2019 included
the following:
($ in millions)
Net income (1)                                             $                   12
Changes in other comprehensive income(loss):
Gain (losses) on foreign currency translation                               

26

Unrealized gains (losses) on non-functional currency available-for-sale securities

                                                 (27 )
Total changes in other comprehensive income (loss)                             (1 )
Impact on total comprehensive income (loss)                $                

11

(1) A portion of Ambac UK's, and to a lesser extent Ambac Assurance's, assets and

liabilities are denominated in currencies other than its functional currency

and accordingly, we recognized net foreign currency transaction

gains/(losses) as a result of changes to foreign currency rates through our

Consolidated Statement of Total Comprehensive Income (Loss). Refer to Note 2.

Basis of Presentation and Significant Accounting Policies to the Consolidated

    Financial Statements included in Part II, Item 8 in this Form 10-K for
    further details on transaction gains and losses.



Future changes to currency rates, including as a result of a no deal Brexit, may
adversely affect our financial results. Refer to Part II, Item 7A "Quantitative
and Qualitative Disclosures about Market Risk" for further information on the
impact of future currency rate changes on Ambac's financial instruments.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Ambac's Consolidated Financial Statements have been prepared in accordance with
GAAP. This section highlights accounting estimates management views as critical
because they are most important to the portrayal of the Company's financial
condition; and require management to make difficult and subjective judgments
regarding matters that are inherently uncertain and subject to change. These
estimates are evaluated on an on-going basis based on historical developments,
market conditions, industry trends and other information that is reasonable
under the circumstances. There can be no assurance that actual results will
conform to estimates and that reported results of operations will not be
materially adversely affected by the need to make future accounting adjustments
to reflect changes in these estimates from time to time.
Management has identified the following critical accounting policies and
estimates: (i) valuation of loss and loss expense reserves, (ii) valuation of
certain financial instruments and (iii) valuation of deferred tax assets.
Management has discussed each of these critical accounting policies and
estimates with the Audit Committee, including the reasons why they are
considered critical and how current and anticipated future events impact those
determinations. Additional information about these policies can be found in Note
2. Basis of Presentation and Significant Accounting Policies to the Consolidated
Financial Statements included in Part II, Item 8 in this Form 10-K.
Valuation of Losses and Loss Expense Reserves (including Subrogation
Recoverables)
The loss and loss expense reserves and subrogation recoverable assets
(collectively defined as "loss reserves") discussed in this section relate only
to Ambac's non-derivative insurance policies issued to beneficiaries, including
unconsolidated VIEs. A loss reserve is recorded on the balance sheet on a
policy-by-policy basis based upon the present value ("PV") of expected net claim
cash outflows or expected net recovery cash inflows, discounted at risk-free
rates. The estimate for future net cash flows consider the likelihood of all
possible outcomes that may occur from missed principal and/or interest payments
on the insured obligation. This estimate also considers future recoveries
related to breaches of contractual representations and warranties by RMBS
transaction sponsors, remediation strategies, excess spread and other
contractual cash flows on public finance and structured finance transactions
(including RMBS). Ambac's approach to resolving disputes involving contractual
breaches by transaction sponsors or other third parties has included
negotiations and/or pursuing litigation. Ambac does not estimate recoveries for
litigations where its sole claim is for fraudulent inducement, since any
remedies under such claims would be non-contractual.
The evaluation process for expected future net cash flows is subject to certain
estimates and judgments regarding the probability of default by the issuer of
the insured security, probability of remediation and settlement outcomes (which
may include


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commutation, litigation settlements, refinancings and/or other settlement
outcomes), probability of a restructuring outcome (which may include payment
moratoriums, debt haircuts and/or subsequent recoveries) and the expected loss
severity of credits for each insurance contract.
As the probability of default for an individual credit increases and/or the
severity of loss given a default increases, our loss reserve for that insured
obligation will also increase. Political, economic, credit or other unforeseen
events could have an adverse impact on default probabilities and loss
severities.
The loss reserves for many transactions are derived from the issuer's
creditworthiness. For public finance issuers, loss reserves will consider not
only creditworthiness but also political dynamics and economic status and
prospects. The loss reserves for transactions which have no direct issuer
support, such as most structured finance exposures, including RMBS and student
loan exposures, are derived from the default activity and loss given default of
underlying collateral supporting the transactions. In

addition, many transactions have a combination of issuer/entity and collateral
support. Loss reserves reflect our assessment of the transaction's overall
structure, support and expected performance. Loss reserve volatility will be a
direct result of the credit performance of our insured portfolio, including the
number, size, bond types and quality of credits included in our loss reserves;
our ability to execute workout strategies and commutations; economic and market
conditions; and management's judgments with regards to the current performance
and future developments within the insured portfolio. The number and severity of
credits included in our loss reserves depend to a large extent on transaction
specific attributes, but will generally increase during periods of economic
stress and decline during periods of economic prosperity. Reinsurance contracts
mitigate our loss reserves but since Ambac currently has minimal exposure ceded
to reinsurers on credits with loss reserves, the existing reinsurance contracts
are unlikely to have a significant effect on loss reserve volatility. Loss
reserve volatility will also be materially impacted by changes in interest rates
from period to period.

The table below indicates the gross par outstanding and gross loss reserves (including loss expenses) related to policies in Ambac's loss and loss expense reserves at December 31, 2019 and 2018:

                                                             2019                                              2018
                                                                  Gross Loss and Loss                               Gross Loss and Loss
                                              Gross Par                 Expense                 Gross Par                 Expense
($ in millions) December 31               Outstanding(1)(2)        Reserves(1)(3)(4)        Outstanding(1)(2)        Reserves(1)(3)(4)
RMBS                                    $             3,027     $           (1,392 )      $             3,716     $           (1,313 )
Domestic Public Finance                               2,398                    627                      3,987                    639
Student Loans                                           472                    208                        530                    228
Ambac UK and Other Credits                              271                      3                      1,170                    273
Loss expenses                                             -                     73                          -                     66
Totals                                  $             6,168     $             (482 )      $             9,403     $             (107 )

(1) Ceded par outstanding on policies with loss reserves and ceded loss and loss

expense reserves are $511 and $26 respectively, at December 31, 2019 and $540

and $23, respectively at December 31, 2018. Ceded loss and loss expense

reserves are included in Reinsurance recoverable on paid and unpaid losses.

(2) Gross Par Outstanding includes capital appreciation bonds, which are reported

at the par amount at the time of issuance of the insurance policy as opposed

to the current accreted value of the bond.

(3) Loss and Loss Expense reserves at December 31, 2019 of $(482) are included in

the balance sheet in the following line items: Loss and loss expense

reserves: $1,548 and Subrogation recoverable: $2,029. Loss and Loss Expense

reserves at December 31, 2018 of $(107) are included in the balance sheet in

the following line items: Loss and loss expense reserves: $1,826 and

Subrogation recoverable: $1,933.

(4) Ambac records as a component of its loss and loss expense reserves, estimated

recoveries related to securitized loans in RMBS transactions that breached

certain representations and warranties. Ambac has recorded gross estimated

recoveries of $1,727 and $1,771 at December 31, 2019 and 2018, respectively.

See Note 2. Basis of Presentation and Significant Accounting Policies to the
Consolidated Financial Statements, included in Part II, Item 8 in this Form 10-K
for a description of the cash flow and statistical methodologies used to develop
loss reserves. Most of our reserved credits with large loss reserves utilize the
cash flow method of reserving. Alternative cash flow scenarios are developed to
represent the range of possible outcomes and resultant future claim payments and
timing. Scenarios and probabilities of each are adjusted regularly to reflect
changes in status, outlook and our analysis and views. Significant judgment is
used to develop the cash flow assumptions and related probabilities, and there
can be no certainty that the scenarios or probabilities will not deviate
materially from ultimate outcomes.
In some cases, such as RMBS and student loans, cash flow projections include the
modeling of an issuer or transaction's future

revenues and expenses to determine the resources available to pay debt service
on our insured obligations. With respect to RMBS, a component of our loss
reserve estimate includes subrogation recoveries related to securitized loans in
such transactions that breached certain representations and warranties ("R&W").
In other cases, such as many public finance exposures including our Puerto Rico
exposures, we consider the issuers' overall ability and willingness to pay, as
it relates to the existing fiscal, economic, legal, restructuring and/or
political framework relevant to a particular exposure or group of exposures. We
then develop multiple scenarios where issuer debt service is paid, missed and/or
haircut with claims paid then modeled for any recovery amount and timing. There
is no certainty our assumptions as to scenarios or probabilities will not be
subject to material changes as developments occur.


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In estimating loss reserves, we also incorporate scenarios which represent the
potential outcome of remediation strategies. Remediation scenarios may include
(i) a potential refinancing of the transaction by the issuer; (ii) the issuer's
ability to redeem outstanding securities at a discount, thereby increasing the
structure's ability to absorb future losses; and (iii) our ability to terminate,
restructure or commute the policy in whole or in part. The remediation scenarios
and the related probabilities of occurrence vary by policy depending on ongoing
and expected discussions and negotiations with issuers and/or investors. In
addition to commutation negotiations that are underway with various
counterparties in various forms, our reserve estimates may also include
scenarios which incorporate our ability and/or expectation to commute additional
exposure with other counterparties.
Valuation of Certain Financial Instruments
The Fair Value Measurement Topic of the ASC requires financial instruments to be
classified within a three-level fair value hierarchy. The fair value hierarchy,
the financial instruments classified within each level, our valuation methods,
inputs, assumptions and the review and validation procedures over quoted and
modeled pricing are further detailed in Note 9. Fair Value Measurements to the
Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K.
The level of judgment in estimating fair value is largely dependent on the
amount of observable market information available to fair value a financial
instrument, which is also determinative of where the financial instrument is
classified in the fair value hierarchy. Level 3 instruments are valued using
models which use one or more significant inputs or value drivers that are
unobservable and therefore require significant judgment. Level 3 financial
instruments which are material include certain invested assets, uncollateralized
interest rate swaps and investments and loan receivables of consolidated VIEs.
Model-derived valuations of Level 3 financial instruments incorporate estimates
of the effects of Ambac's own credit risk and/or counterparty credit risk, which
can be complex and judgmental. Furthermore, Level 3 loan receivables of
consolidated VIEs incorporate estimates of Ambac's financial guarantee cash
flows, including future premiums and losses. Such cash flow estimates require
judgments regarding prepayments of VIE debt, loss probabilities and loss
severities, all of which are inherently uncertain.
All models and related assumptions are continuously re-evaluated by management
and enhanced, as appropriate, based on improvements in information and modeling
techniques. The re-evaluation process includes a quarterly meeting of senior
Finance and Risk personnel to review and approve changes to models and key
assumptions.
As a result of the significant judgment for the above-described instruments, the
actual trade value of the financial instrument in the market, or exit value of
the financial instrument owned by Ambac, may be significantly different from its
recorded fair value.
Valuation of Deferred Tax Assets
Our provision for taxes is based on our income, statutory tax rates and tax
planning opportunities available to us in the jurisdictions in which we operate.
Tax laws are complex and subject to different interpretations by the taxpayer
and respective governmental taxing

authorities. Significant judgment is required in determining our tax expense and
in evaluating our tax positions. We review our tax positions quarterly and
adjust the balances as new information becomes available. Deferred tax assets
arise because of temporary differences between the financial reporting and tax
bases of assets and liabilities, as well as from net operating loss ("NOL") and
tax credit carry forwards. More specifically, deferred tax assets represent a
future tax benefit (or receivable) that results from losses recorded under GAAP
in a current period which are only deductible for tax purposes in future periods
and NOL carry forwards.
Valuation allowances are established to reduce deferred tax assets to an amount
that "more likely than not" will be realized. On a quarterly basis, management
identifies and considers all available evidence, both positive and negative, in
making the determination with significant weight given to evidence that can be
objectively verified. Negative evidence includes the potential for unrecognized
future insurance tax losses; cumulative pre-tax losses in recent years;
uncertainty regarding timing and magnitude of RMBS R&W litigation recoveries; no
new financial guarantee business and execution risk of any new business venture.
The level of deferred tax asset recognition is influenced by management's
assessment of future expected taxable income, which depends on the existence of
sufficient taxable income within the carry forward periods available under the
tax law. As a result of the above-described risks and uncertainties associated
with future operating results, management believes it is more likely than not
that the Company will not generate sufficient taxable income to recover the U.S.
deferred tax asset and therefore has a full valuation allowance. To the extent
such risks and uncertainties are resolved, Ambac may have the ability to
establish a history of making reliable estimates of future income which could
ultimately result in a reduction to the deferred tax asset valuation allowance.
See Note 14. Income Taxes to the Consolidated Financial Statements, included in
Part II, Item 8 in this Form 10-K for additional information on the Company's
deferred income taxes.
                         FINANCIAL GUARANTEES IN FORCE
The following table provides a breakdown of guaranteed net par outstanding by
market sector at December 31, 2019 and 2018. Net par exposures within the U.S.
public finance market include capital appreciation bonds which are reported at
the par amount at the time of issuance of the insurance policy as opposed to the
current accreted value of the bonds. Guaranteed net par outstanding includes the
exposures of policies that insure variable interest entities ("VIEs")
consolidated by Ambac in accordance with the Consolidation Topic of the ASC,
Consolidation. Guaranteed net par outstanding excludes the exposures of policies
that insure bonds which have been refunded or pre-refunded and excludes exposure
of the policy that insures the notes issued by Ambac LSNI as defined in Note 1.
Background and Business Description to the Consolidated Financial Statements
included in Part II, Item 8 in this Form 10-K.
($ in millions) December 31,   2019        2018
Public Finance (1)(2)        $ 17,653    $ 23,442
Structured Finance              7,508       9,947
International Finance          12,857      13,538
Total net par outstanding    $ 38,018    $ 46,927

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(1) Includes $5,654 and $5,759 of Military Housing net par outstanding at

December 31, 2019 and 2018, respectively.

(2) Includes $1,123 and $1,880 of Puerto Rico net par outstanding at December 31,

2019 and 2018, respectively. Components of Puerto

Rico net par outstanding include capital appreciation bonds which are reported
at the par amount at the time of issuance of the related insurance policy as
opposed to the current accreted value of the bonds.

The table below shows Ambac's ten largest exposures, by repayment source, as a
percentage of total financial guarantee net par outstanding at December 31, 2019
(in millions):
                                                                                                                      % of Total
                                                                                    Ambac            Net Par            Net Par
($ in millions)  Risk Name                                    Bond Type          Ratings (1)     Outstanding (2)      Outstanding
IF        AUK    Mitchells & Butlers Finance plc-UK            UK-Asset              A+        $           1,017           2.7 %
                 Pub Securitisation                        Securitizations
IF        AUK    Capital Hospitals plc (3)                UK-Infrastructure          A-                      896           2.4 %
IF        AUK    Aspire Defence Finance plc               UK-Infrastructure         BBB+                     865           2.3 %
IF        AUK    Anglian Water                                UK-Utility             A-                      819           2.2 %
PF        AAC    New Jersey Transportation Trust Fund    Lease and Tax-backed        A-                      778           2.0 %
                 Authority - Transportation System             Revenue
IF        AUK    National Grid Gas                            UK-Utility             A-                      757           2.0 %
IF        AUK    Posillipo Finance II S.r.l              Italy-Sub-Sovereign         BIG                     710           1.9 %

IF AUK Ostregion Investmentgesellschaft NR Austria-Infrastructure BIG

                     674           1.8 %
                 1 SA (3)
IF        AUK    RMPA Services plc                        UK-Infrastructure         BBB+                     575           1.5 %
PF        AAC    Mets Queens Baseball Stadium             General Obligation         BBB                     549           1.4 %
                 Project, NY, Lease Revenue
Total                                                                                          $           7,640          20.1 %

PF = Public Finance, SF = Structured Finance, IF = International Finance AAC = Ambac Assurance, AUK = Ambac UK

(1) Internal credit ratings are provided solely to indicate the underlying credit

quality of guaranteed obligations based on the view of Ambac. In cases where

Ambac has insured multiple tranches of an issue with varying internal

ratings, or more than one obligation of an issuer with varying internal

ratings, a weighted average rating is used. Ambac credit ratings are subject

to revision at any time and do not constitute investment advice. BIG denotes

credits deemed below investment grade.

(2) Net Par includes capital appreciation bonds, which are reported at the par

amount at the time of issuance of the insurance policy as opposed to the

current accreted value of the bonds.

(3) A portion of this transaction is insured by an insurance policy issued by

Ambac Assurance. Ambac Assurance has issued policies for these transactions

    that will only pay in the event that Ambac UK does not pay under its
    insurance policies ("second to pay policies").



Net par related to the top ten exposures reduced $862 million from December 31,
2018. Exposures are impacted by changes in foreign exchange rates, certain
indexation rates and scheduled and unscheduled paydowns. The decrease from 2018
was primarily related to the Ballantyne commutation, the COFINA Plan of
Adjustment, and refundings, partially offset by the addition of RMPA Services
plc and Mets Queens Baseball Stadium Project. The concentration of net par
amongst the top ten (as a percentage of net par outstanding) has increased to
20% from 18% at December 31, 2018. The remaining insured portfolio of financial
guarantees has an average net par outstanding of $32 million per single risk,
with insured exposures ranging up to $536 million and a median net par
outstanding of $6 million.
Given that Ambac has not written any new insurance policies since 2008, the risk
exists that the insured portfolio becomes increasingly concentrated to large
and/or below investment grade exposures.

U.S. Public Finance Insured Portfolio
Ambac's portfolio of U.S. public finance exposures is $17,653 million,
representing 46% of Ambac's net par outstanding as of December 31, 2019 and a
25% reduction from the amount outstanding at December 31, 2018. This reduction
in exposure was due to additional reinsurance acquired, the COFINA Plan of
Adjustment, restructuring and related commutation transactions, commutations,
exposure runoff, and early terminations (calls, refundings and pre-refundings).
While Ambac's U.S. public finance portfolio consists predominantly of municipal
bonds such as general obligation, revenue, and lease and tax-backed obligations
of state and local government entities, the portfolio also comprises a wide
array of non-municipal types of bonds,

including financings for not-for-profit entities and transactions with public
and private elements, which generally finance infrastructure, housing and other
public interests. See Note 6. Financial Guarantees in Force to the Consolidated
Financial Statements, included in Part II, Item 8 in this Form 10-K for
exposures by bond type.
Municipal bonds are generally supported directly or indirectly by the issuer's
taxing authority or by public sector fees and assessments which may or may not
be specifically pledged. Risk factors in these transactions derive from the
municipal issuer, including its fiscal management, politics, and economic
position, as well as its ability and willingness to continue to pay its debt


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service. Municipal bankruptcies and similar proceedings, while still relatively
uncommon, have occurred, exposing Ambac to the risk of liquidity claims and
ultimate losses if issuers cannot successfully adjust their liabilities without
impairing creditors.
Not-for-profit transactions are generally supported by the not-for-profit
entities' net revenues and may also include specific pledges, liens and/or
mortgages. The entity typically serves a well-defined market and promulgates a
public purpose mission. These transactions may afford Ambac contractual
protections such as financial covenants and control rights in the event of
issuer breaches and defaults. Risk factors in these transactions derive from the
creditworthiness of the issuer, including but not limited to, its financial
condition, leverage, management, business mix, competitive position, industry
and socioeconomic trends, government programs and other factors. Examples of
these types of transactions include not-for-profit hospitals, universities,
associations and charities.
Public/private transactions are generally structured to achieve their targeted
public interest objective without direct support from the public sector. Some
examples of this type of financing include affordable housing, private
education, privatized military housing and student housing. Protections within
these financings provided to Ambac usually include the strength of the financed
asset's essentiality and public purpose and may include financial covenants,
collateral and control rights. Risk factors include financial underperformance,
event risk and a shift in the asset's mission or essentiality. One example of
this type of financing is U.S. military housing.
•   Ambac insures approximately $5,654 million net par of privatized military

housing debt. The debt was issued to finance the construction and/or

renovation of housing units for military personnel and their families on

domestic U.S. military bases. Debt service is not directly paid or guaranteed

by the U.S. Government. Rather, the bonds are serviced from the cash flow

generated in most cases by rental payments deposited by the military directly

into lockbox accounts as part of each service personnel's Basic Allowance for

Housing (BAH). In a small number of cases rental payments also come from

civilians, including retired service personnel, living on a particular base.

Collateral for these transactions includes the BAH payments as well as an

interest in the ground lease. Risk factors affecting these transactions

include ongoing base essentiality, military deployments, the U.S.

government's commitment to fund the BAH, marketability/attractiveness of the

on-base housing units versus off-base housing, construction completion,

environmental remediation, utility and other operating costs and housing

management. Ambac's exposure to privatized military housing debt is a growing

concentration given the long-dated maturity profile of the exposure relative

to faster run-off of other parts of Ambac's insured portfolio. As of December

31, 2019, privatized military housing represented approximately 15% of net

    par outstanding.


Puerto Rico
Ambac has exposure to the Commonwealth of Puerto Rico (the "Commonwealth") and
its instrumentalities across several different issuing entities with total net
par exposure of $1,123 million as of December 31, 2019. Each has its own credit
risk

profile attributable to, as applicable, discrete revenue sources, direct general
obligation pledges and/or general obligation guarantees.
Fiscal Plans
On May 9, 2019, the Oversight Board certified its own version of a new
Commonwealth Fiscal Plan ("Revised Fiscal Plan"), which superseded the previous
Commonwealth Fiscal Plan certified on October 23, 2018. In the Commonwealth
Revised Fiscal Plan, the annual Commonwealth budget surpluses are lower in the
short term but larger in the long term because of a longer than previously
expected roll-out of federal disaster spending. The new surplus through fiscal
2024 is just under $14 billion, whereas the previous plan was almost $18
billion. The plan projects a 30-year surplus of $19.7 billion, but $5.4 billion
of that money may not be available to the Commonwealth because it is being
generated by public corporations. This compares to a 30-year surplus of just
under $13 billion under the previous fiscal plan.
As was the case with prior fiscal plans for the Commonwealth of Puerto Rico, the
Commonwealth Revised Fiscal Plan lacks a high degree of transparency regarding
the underlying data, assumptions and rationales supporting those assumptions,
making reconciliation and due diligence difficult. As a result, it is difficult
to assess the possible impact that Commonwealth Revised Fiscal Plan changes may
have on creditor outcomes or Ambac's financial condition, including liquidity,
loss reserves and capital resources.
On June 7, 2019, the Oversight Board certified its own version of the Fiscal
Plan for the Puerto Rico Highways and Transportation Authority ("PRHTA").
Without considering PRHTA Fiscal Plan measures, the PRHTA's total financial
surplus over the six-year plan period is projected to be $31 million. However,
after taking into account the measures set forth in the PRHTA Fiscal Plan, the
Oversight Board states that the cumulative surplus over that six-year period
would grow to $493 million.
It is unknown if and when a PRHTA Plan of Adjustment will be filed by the
Oversight Board or confirmed by the court overseeing the Title III proceedings
of PRHTA. It is also unknown if and when other Puerto Rico instrumentalities,
which have debt outstanding insured by Ambac Assurance, will be filed under
Title III and what effect their fiscal plans and/or plans of adjustment may have
on Ambac's financial position. No assurances can be given that Ambac's financial
condition will not suffer a materially negative impact as an ultimate result of
the Commonwealth Revised Fiscal Plan, the Commonwealth Plan of Adjustment, or
any future changes or revisions to Commonwealth fiscal plans or fiscal plans
and/or plans of adjustment for PRHTA or other Puerto Rico instrumentalities.
Commonwealth Plan of Adjustment
On September 27, 2019, the Oversight Board filed a disclosure statement and plan
of adjustment (the "Initial POA") to restructure $35 billion of debt and other
claims against the Commonwealth of Puerto Rico, PBA, and the Employee Retirement
System ("ERS"), as well as more than $50 billion of pension liabilities. (On the
same day, PBA filed a petition for a Title III restructuring.)
On October 21, 2019, Puerto Rico's House of Representatives unanimously passed
Concurrent Resolution 114 (which was subsequently passed by the Puerto Rico
Senate on November 7,


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2019) which rejected the Initial POA due to its proposed 8.5% cut to the
pensions of retired public workers. The resolution states that the Puerto Rico
legislature will not approve any legislation that may be required to implement
the Initial POA and authorizes the Speaker of the House and the Senate President
to take the actions they deem pertinent, as well as the use of the resources of
the Legislative Assembly, to defend against those actions of the Oversight Board
that are detrimental to the best interests of Puerto Ricans.
On February 28, 2020, the Oversight Board filed an amended disclosure statement
and amended plan of adjustment (the "Amended POA") to restructure $35 billion of
debt and other claims against the Commonwealth of Puerto Rico, PBA, and ERS, as
well as more than $50 billion in pension liabilities. The Amended POA would
reduce Commonwealth debt and other claims from $35 billion to less than $11
billion, a 70% cut. The Amended POA would reduce the Commonwealth's annual debt
service by 56%. Treatment for pension claims is the same as contained in the
Initial POA, which is a reduction in pension payments by as much as 8.5% for
retirees who currently receive at least $1,200 a month, such that 60% of
retirees would not face any cuts, and the establishment of a pension reserve
fund to help support retirement payments in future years.
The Amended POA, as is, disproportionately disadvantages claims related to the
Commonwealth revenue bonds, including those insured by Ambac Assurance. The
Amended POA provides for estimated recovery of 3.9% on claims against the
Commonwealth related to PRHTA bonds, Puerto Rico Infrastructure Financing
Authority (PRIFA) Special Tax Revenue (Rum Tax) bonds, and Puerto Rico
Convention Center District Authority (PRCCDA) bonds. It is unknown if and how
the Amended POA may be modified or what the final adjustments will be to the
obligations of Commonwealth instrumentalities addressed in the Amended POA.
However, if the Amended POA were confirmed in its current form, Ambac's
financial condition would suffer a material negative impact. Refer to Note 7.
Financial Guarantee Insurance Contracts, in this Form 10-K located in Part II.
Item 8 for the possible increase in loss reserves under stress or other adverse
conditions, including the impact of the Amended POA. There can be no assurance
that losses may not exceed such estimates.
Mediation
On November 27, 2019, the court-appointed mediation team (the "Mediation Team")
filed an interim report and set of recommendations regarding the scheduling and
sequencing of litigation matters. In the report, the Mediation Team provided an
update on the status of mediation stating the Oversight Board, "...the
Government of Puerto Rico, and various creditor parties...have been and remain
engaged in substantive, and delicately poised, negotiations facilitated by the
Mediation Team regarding the terms of a possible amended Plan of Adjustment that
would be acceptable to those creditors. If successful, these negotiations could
result in the filing of an amended Plan of Adjustment that differs from, and has
materially more creditor support than, the current Plan [of Adjustment]."
On February 9, 2020, the Oversight Board announced it reached an agreement in
principle ("Plan Support Agreement") with certain creditors supporting the
restructuring of the Commonwealth's

General Obligation and PBA debt, and intended to file the Amended POA reflecting
the terms of this agreement.
On February 10, 2020, following the Oversight Board's announcement regarding the
Plan Support Agreement, the Mediation Team filed a report with the Title III
court recommending a schedule for continuation of certain litigation matters and
recommending that other litigation matters be stayed while the Oversight Board
pursued confirmation of the Amended POA. The court has not yet ruled on these
recommendations. The status, timing and subject of any subsequent or future
mediation discussion has not yet been publicly disclosed.
No assurances can be given that negotiations will be successfully concluded,
that Commonwealth, Oversight Board and creditor parties will reach definitive
agreements on debt restructurings, that any additional negotiated transaction,
debt restructuring, definitive agreement or Plan of Adjustment will be approved
by the court and completed, or that any transaction or Plan of Adjustment will
not have an adverse impact on Ambac's financial conditions or results.
Federal Aid
The Commonwealth of Puerto Rico is projected to benefit from over $45 billion of
federal disaster aid for infrastructure improvement initiatives or recovery
efforts, as a result of the damage cause by hurricanes Irma and Maria as well as
the earthquakes that began in late December 2019. More than $20 billion of
Community Development Block Grants (CDBG) was appropriated by Congress for
Puerto Rico for reconstruction following Hurricane Maria, but to date very
little has been drawn down. The Department of Housing and Urban Development
(HUD), which administers the CDBG program, recently approved release of a second
tranche of CDBG funds totaling $8.2 billion, which brings the total amount
available for drawdown to nearly $10 billion (an additional roughly $10 billion
has not yet been approved by HUD for release).
In order to ensure federal taxpayer dollars are spent effectively and
efficiently, HUD has conditioned release of the $8.2 billion on various
requirements that Puerto Rico must meet. Governor Wanda Vasquez has agreed to
these requirements, which includes a prohibition on any of the funds from being
used to rebuild the electric grid until (and unless) HUD publishes additional
requirements on such spending; overturns an executive order establishing a $15
minimum wage for government construction projects using CDBG; requires greater
Puerto Rico to provide greater transparency and implement enhanced financial
controls; and requires CDFBG spending plans to be submitted to the Oversight
Board for determination that they are in accordance with its certified budgets
and fiscal plans. Consequently, it is anticipated that drawdown of funds will
begin soon. HUD has also appointed a federal monitor to oversee use of CDBG
funds.
In addition to CDBG and several billion in additional federal Medicaid money for
Puerto Rico that was recently approved, Puerto Rico is receiving additional
federal assistance in the wake of the earthquakes that have occurred on parts of
the island through FEMA. In addition, it is possible that Congress will
appropriate more federal funds to Puerto Rico. The House of Representatives has
passed legislation providing $4.7 billion (most of which is CDBG as well as
highway funds) but the Senate has not taken that


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legislation up yet, and the White House has threatened to veto the legislation
in its current form.
While these federal funds are expected to support economic recovery and growth
in Puerto Rico, there can be no assurances as to the certainty, timing, usage,
efficacy or magnitude of benefits to creditor outcomes related to disaster aid
and ensuing economic growth, if any.
COFINA Debt Restructuring
On January 16-17, 2019, hearings for the confirmation of the COFINA Plan of
Adjustment (the "COFINA POA") and the Commonwealth 9019 motion (to approve the
settlement of the Commonwealth-COFINA dispute) were held. On February 4, 2019,
the COFINA POA was confirmed and the Commonwealth 9019 motion was approved by
Judge Laura Taylor Swain of the U.S. District Court for the District of Puerto
Rico. On February 12, 2019, the COFINA POA went effective, concurrent with the
completion of the commutation described above in the "Executive Summary" section
of this Management Discussion and Analysis. As a result, Ambac Assurance's
insured COFINA bond exposure decreased by $620 million net par to approximately
$185 million net par. Subsequent redemptions of obligations of the COFINA Class
2 Trust brought COFINA net par outstanding down to $101 million as of
December 31, 2019.
Ambac Assurance's remaining policy obligation of $101 million net par is an
asset of the COFINA Class 2 Trust, which holds a ratable distribution of cash
and new COFINA bonds, which can be used to partially offset Ambac's remaining
insurance liability.
Several parties are presently appealing the confirmation of the POA and no
assurances can be given regarding the results of such appeals. At this time, it
is unclear what impact the COFINA restructuring will have on the prospective
recoveries of Ambac Assurance's other insured Puerto Rico instrumentalities.
Other Developments
On February 15, 2019, the United States Court of Appeals for the First Circuit
issued an opinion in the consolidated appeals brought by certain parties who
argued that the members of the Financial Oversight and Management Board for
Puerto Rico (the "Oversight Board") were appointed in violation of the U.S.
Constitution's Appointments Clause. The First Circuit ruled that the Oversight
Board members (other than the ex-officio Member) must be, and were not,
appointed in compliance with the Appointments Clause. The First Circuit declined
to dismiss the Oversight Board's Title III petitions, did not render ineffective
any otherwise valid actions of the Oversight Board prior to the issuance of the
ruling and stayed its ruling until the Supreme Court rendered a decision in the
case.
On June 18, 2019, President Trump sent to the U.S. Senate for confirmation the
nominations of the seven members of the Oversight Board for the remainder of
their term. It is unclear if and when President Trump will send new nominations
to the U.S. Senate following the Oversight Board term expiration on August

30, 2019.
The Supreme Court heard argument on October 15, 2019. It is unclear how the
Supreme Court will rule and how the ruling will impact the restructuring
process, mediation discussions and relevant litigation with respect to
Ambac-insured Puerto Rico exposures.
Ambac Title III Litigation Update
Ambac Assurance is party to a number of litigations related to its Puerto Rico
exposures, and actively participates in the Commonwealth's Title III proceedings
before the United States District Court for the District of Puerto Rico.
The Oversight Board has filed five adversary proceedings related to Ambac
Assurance's Puerto Rico exposures within the Title III cases. Ambac Assurance
has several active matters before the District Court within the Commonwealth's
Title III case, including motions seeking a determination that the automatic
stay does not apply to certain actions Ambac Assurance contemplates taking with
respect to the pledged revenues from PRIFA, PRHTA, and PRCCDA, or that any such
stay should be lifted for cause. Four litigations are COFINA-related cases that
have been, or will soon be, dismissed by operation of the COFINA POA that was
confirmed on February 4, 2019, and became effective on February 12, 2019.
Several parties are presently appealing the confirmation of the COFINA POA. A
fifth is another COFINA-related case that had been stayed pending resolution of
an interpleader action related to COFINA funds, but which will be permitted to
proceed by operation of the POA now that the interpleader action has been
resolved. A number of other Puerto Rico-related litigations predating the Title
III cases are stayed under Title III of PROMESA and certain other matters within
the Title III cases are stayed as well. Ambac is unable to predict when and how
the issues raised in these cases (other than those already dismissed by
operation of the COFINA POA) will be resolved. If Ambac Assurance is
unsuccessful in any of these proceedings, Ambac's financial condition, including
liquidity, loss reserves and capital resources may suffer a material negative
impact.
Refer to Note 17. Commitments and Contingencies to the Consolidated Financial
Statements, included in Part II, Item 8 in this Form 10-K, for further
information about Ambac's litigation relating to Puerto Rico.
Summary
Ambac has considered these developments and other factors in evaluating its
Puerto Rico loss reserves. During the year ended December 31, 2019, Ambac had
incurred losses associated with its Domestic Public Finance insured portfolio of
$250 million, which was significantly impacted by the continued uncertainty and
volatility of the situation in Puerto Rico. While management believes its
reserves are adequate to cover losses in its Public Finance insured portfolio,
there can be no assurance that Ambac may not incur additional losses in the
future, particularly given the developing economic, political, and legal
circumstances in Puerto Rico. Such additional losses may have a material adverse
effect on Ambac's results of operations and financial condition.


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The following table shows Ambac's insured exposure to each issuer segregated by
whether such debt obligation is subject to the Priority Debt Provision or
"clawback." Ambac has initiated litigation challenging the application of the
"clawback" announced by Governor Padilla, Puerto Rico's former governor, on
December 1, 2015. A description of Ambac's legal challenge is provided in Note
17. Commitments and Contingencies in the Consolidated Financial Statements,
included in Part II, Item 8 in this Form 10-K.
                                                                                      Net Par           Ever-to-Date
                               Range of       Ambac            Net Par             and Interest          Net Claims
($ in millions)                Maturity    Ratings (1)     Outstanding (2)      Outstanding (3)(8)         Paid(4)
Exposures Subject to
Priority Debt Provision (5)
PR Highways and
Transportation Authority
(1968 Resolution - Highway
Revenue) (6)                   2021-2027       BIG       $               4     $                10     $          23
PR Highways and
Transportation Authority
(1998 Resolution - Senior
Lien Transportation Revenue)
(6)                            2020-2042       BIG                     405                     677               106
PR Infrastructure Financing
Authority (Special Tax
Revenue) (7)                   2020-2044       BIG                     404                     903               172
PR Convention Center
District Authority (Hotel
Occupancy Tax)                 2020-2031       BIG                     100                     146                49
Total                                                                  913                   1,736               350
Exposures Not Subject to
Priority Debt Provision
Commonwealth of Puerto Rico
- General Obligation Bonds     2020-2023       BIG                      25                      27                41
PR Public Buildings
Authority - Guaranteed by
the Commonwealth of Puerto
Rico                           2020-2035       BIG                      84                     150                79
PR Sales Tax Financing
Corporation - Senior Sales
Tax Revenue (COFINA)           2047-2054       BIG                     101                     900                37
Total                                                                  210                   1,077               157
Total Net Exposure to The
Commonwealth of
Puerto Rico and Related
Entities                                                 $           1,123     $             2,813     $         507

(1) Internal credit ratings are provided solely to indicate the underlying credit

quality of guaranteed obligations based on the view of Ambac. In cases where

Ambac has insured multiple tranches of an issue with varying internal

ratings, or more than one obligation of an issuer with varying internal

ratings, a weighted average rating is used. Ambac credit ratings are subject

to revision at any time and do not constitute investment advice. BIG denotes

credits deemed below investment grade.

(2) Net Par includes capital appreciation bonds, which are reported at the par

amount at the time of issuance of the insurance policy as opposed to the

current accreted value of the bonds. Accretion of the capital appreciation

bonds would increase the related net par by $220 at December 31, 2019.

(3) Net Par and Interest Outstanding ("P&I") represents the total insured future

    debt service remaining over the lifetime of the bonds. P&I for capital
    appreciation bonds does not represent the accreted amount as noted in
    footnote (2) but rather the amount due at respective maturity dates.

(4) In addition to ever-to-date net claims paid, Ambac made net claim payments of

$23 in January 2020.

(5) Commonly known as "clawback," provision pursuant to Section 8 of Article VI

of the Constitution of the Commonwealth of Puerto Rico. Under this provision,

in the event Commonwealth available revenues and any surplus for any fiscal

year are insufficient to meet the appropriations made for that year, interest

on the public debt and amortization thereof shall first be paid and other

disbursements, including debt service on the obligations subject to such

provision as described above (to the extent payable from such revenues),

shall thereafter be made in accordance with the order of priorities

established by law. These exposures are also subject to Act No. 5-2017, as

amended, also known as the Financial Emergency and Fiscal Responsibility Act

of 2017, which declares an emergency period that has been subsequently

re-extended until June 30, 2020, from its prior December 31, 2019, deadline.

Pursuant to Act 5-2017, all executive orders issued under Act No. 21-2016 (as

amended, known as the Puerto Rico Emergency Moratorium and Financial

Rehabilitation Act), shall continue in full force and effect until amended,

rescinded or superseded.

(6) Certain Pledged Revenues for Highways and Transportation Revenue Bonds such

as Toll Revenues and Investment Earnings are not subject to the Priority Debt

Provision.

(7) Payable from and secured by proceeds from a federal excise tax imposed on all

items produced in Puerto Rico and sold on the mainland of the United States.

Currently, rum is the only product from Puerto Rico subject to this federal

excise tax.

(8) Net Par and Interest Outstanding excludes the effects of a 10% current

interest rate on $60 net par of PR Public Building Authority ("PBA") bonds

with a maturity date of July 1, 2035, resulting from the absence of a

remarketing. Should a remarketing not occur before the maturity of the bonds,

the Net Par

and Interest Outstanding for PBA exposure would increase by $42.

U.S. Structured Finance Portfolio
Ambac's portfolio of U.S. structured finance exposures is $7,508 million,
representing 20% of Ambac's net par outstanding as of December 31, 2019, and a
25% reduction from the amount outstanding at December 31, 2018. This reduction
in exposure was primarily related to residential mortgage-backed securities
("RMBS") policies, which continued to prepay; claims presented on insured RMBS
bonds; commutations and clean-up calls of

certain RMBS transactions, with less than 10% of their original mortgage pool
balances remaining and the commutation of $900 million of Ambac UK's exposure to
Ballantyne Re Plc, as discussed further below.
Current insured exposures include securitizations of mortgage loans, home equity
loans, student loans, leases, operating assets, collateralized loan obligations
("CLO"), and other asset-backed financings, in each case where the majority of
the underlying collateral risk is situated in the United States. Additionally,
Ambac's structured finance insured portfolio includes secured and


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unsecured debt issued by investor-owned utilities. It also includes structured
insurance transactions, including transactions providing insurance on the notes
of trusts that were established in connection with the reinsurance of defined
blocks of life insurance and that were used to fund regulatory reserves
associated with level premium term life insurance policies (commonly referred to
as Regulation XXX reserves).
See Note 6. Financial Guarantees in Force to the Consolidated Financial
Statements, included in Part II, Item 8 included in this Form 10-K, for
exposures by bond type as of December 31, 2019.
Structured finance securitization exposures generally entail three forms of
risk: (i) asset risk, which relates to the amount and quality of the underlying
assets; (ii) structural risk, which relates to the extent to which the
transaction's legal structure and credit support provide protection from loss;
and (iii) servicer risk, which is the risk that poor performance at the servicer
or manager level contributes to a decline in cash flow available to the
transaction. Ambac Assurance seeks to mitigate and manage these risks through
its risk management practices.
Securitized securities are usually designed to help protect the investors and,
therefore, the guarantor from the bankruptcy or insolvency of the entity that
originated the underlying assets as well as from the bankruptcy or insolvency of
the servicer of those assets. The servicer of the assets is typically
responsible for collecting cash payments on the underlying assets and forwarding
such payments, net of servicing fees, to a trustee for the benefit of the
issuer. One potential issue is whether the sale of the assets by the originator
to the issuer would be upheld in the event of the bankruptcy or insolvency of
the originator and whether the servicer of the assets may be permitted or stayed
from remitting to investors cash collections held by it or received by it after
the servicer or the originator becomes subject to bankruptcy or insolvency
proceedings. Another potential issue is whether the originator sold ineligible
assets to the securitization transaction that subsequently deteriorated, and, if
so, whether the originator has the willingness or financial wherewithal to meet
its contractual obligations to repurchase those assets out of the transaction.
Structural protection in a transaction, such as control rights that are
typically held by the senior note holders, or guarantor in insured transactions,
will determine the extent to which underlying asset performance can be
influenced upon non-performance to improve the revenues available to cover debt
service.
Ambac has exposure to the U.S. mortgage market primarily through direct
financial guarantees of RMBS, including transactions that contain risks to first
and second lien mortgages. Ambac's total net par exposure to RMBS at
December 31, 2019, was approximately $4,423 million ($2,572 million, $1,720
million, $130 million are first lien, second lien and other respectively), a
decrease of 20% during 2019. At December 31, 2019, 87% of RMBS net par exposure
relates to securitizations issued during 2005 through 2007.
Ballantyne Re Plc
Following entry into a lock-up agreement with Ballantyne Re plc ("Ballantyne"),
Assured Guaranty Europe plc and Assured Guaranty Corp., certain Ballantyne Class
A Noteholders, Security Life of Denver Insurance Company ("SLD") and Swiss Re
Life

and Health America Inc. ("SRLHA") Ballantyne commenced, under Irish law, a
restructuring transaction ("Restructuring") in respect of its obligations under
its Class A-1 Notes, Class A-2a Notes, Class A-2b Notes, Class A-3a Notes, Class
A-3b Notes, Class A-3c Notes and Class A-3d Notes (together, the "Scheme Notes")
(the "Restructuring"). The Class A-2a Notes, the Class A-3a Notes, the Class
A-3b Notes, the Class A-3c Notes and the Class A-3d Notes had a guarantee from
Ambac UK (the "Ambac UK Guaranteed Notes").
The Restructuring was commenced by Ballantyne on April 25, 2019 and was
implemented through an Irish scheme of arrangement (the "Arrangement") under
Part 9 of the Irish Companies Act 2014 which required the consent of the
requisite majorities of the relevant Class A Noteholders at each Arrangement
meeting. The Arrangement was approved on June 17, 2019, and the Restructuring
was implemented on the terms proposed.
The key features of the Restructuring were as follows:
•   the novation of the indemnity reinsurance agreement between Ballantyne and

SLD dated November 19, 2008, (as amended) to SRLHA (the "Novation");

• the disbursement of the assets from Ballantyne's reinsurance trust account to

effectuate the Novation and make payment to the holders of Scheme Notes in

full and final satisfaction of their claims against Ballantyne; and

• the commutation of the obligations of Ambac UK in respect of the Ambac UK

Guaranteed Notes.

With the successful implementation of the Restructuring, Ambac UK has ceased to
have any exposure with respect to the obligations of Ballantyne.
International Finance Insured Portfolio
Ambac's portfolio of international finance insured exposures is $12,857 million,
representing 34% of Ambac's net par outstanding as of December 31, 2019, and a
5% reduction from the amount outstanding at December 31, 2018. This reduction in
exposure was primarily the result of policy terminations within asset-backed
securities and investor-owned utilities partially offset by a weakening of the
US dollar versus the British pound. Ambac's international finance insured
exposures include a wide array of obligations in the international markets,
including infrastructure financings, asset-securitizations, utility obligations,
whole business securitizations (e.g., securitizations of substantially all of
the operating assets of a corporation) and sub-sovereign credit. Ambac has no
insured exposure related to emerging markets. See Note 6. Financial Guarantees
in Force to the Consolidated Financial Statements, included in Part II, Item 8
included in this Form 10-K, for exposures by bond type as of December 31, 2019.
When underwriting transactions in the international markets, Ambac considered
the specific risks related to the particular country and region that could
impact the credit of the issuer. These risks include the legal and political
environment, capital markets dynamics, foreign exchange issues and the degree of
governmental support. Ambac continues to assess these risks through its ongoing
risk management.
Ambac UK, which is regulated in the United Kingdom ("UK"), had been Ambac
Assurance's primary vehicle for directly issuing financial guarantee policies in
the UK and the European Union


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with $11,862 million net par outstanding in those markets at December 31, 2019.
The portfolio of insured exposures underwritten by Ambac UK is financially
supported exclusively by the assets of Ambac UK and no capital support
arrangements are in place with any other Ambac affiliate.
Other European Union Exposures ("EU")
Ambac's international net par exposures are principally in the United Kingdom
($10,593 million); however, we also have exposures with credit risk based in
various other EU member states, including Austria, France, Germany and Italy
($1,756 million).  Italy, with net par exposure of $767 million, in particular
has experienced economic, fiscal and political strains since the 2008 global
financial crisis such that the likelihood of default on an insured sub-sovereign
obligation in that country is higher than when the policy was underwritten.
Ambac does not guarantee any sovereign bonds of the above EU countries.
Brexit:
In March 2017 the UK government gave the European Union ("EU") formal
notification of its intention to leave the EU ("Brexit"). In January 2020 the UK
Government and EU ratified the terms of a legal binding treaty ("Withdrawal
Agreement") setting out the terms of a transition period to apply to the UK
until December 31, 2020. The effect of the withdrawal agreement is to retain the
rights and obligations between the UK and the EU from the date of the UK's exit
from the EU on January 31, 2020 ("Exit Day") to the end of this transition
period.
The UK and EU are currently negotiating a free trade agreement which is expected
to come into force at the end of the transition period. It is currently unclear
what regulations may apply to the activities in the EEA of passporting insurers
as part of this free trade agreement. They may lose their legal authorization to
serve clients who benefit from policies issued by a UK incorporated insurer
under freedom of services and freedom of establishment passporting rights (and
thereby maybe unable to legally collect premiums or pay claims) and if they have
branches in EEA Member States they may be legally obliged to close them down and
no longer be legally represented in those jurisdictions.
However on February 19, 2019, the European Insurance and Occupational Pensions
Authority ("EIOPA") made a series of recommendations to EU insurance regulators
in light of Brexit.  These recommendations include the recommendation that
regulatory authorities apply legal frameworks that facilitate the orderly run
off (without time limit) of branch operations and of insurance policies issued
in EEA member states by UK insurers prior to Exit Day that terminate after this
date.  The recommendations will require to be incorporated into EEA member
states legal and regulatory frameworks in an appropriate manner to bring them
into effect.  If introduced as expected, these measures will retain Ambac UK's
right to collect premium and pay claims on policies issued under EU passporting
rights.
As of December 31, 2019 Ambac UK's insured portfolio included 4 financial
guarantee obligations with a gross par outstanding of

$1,407 million issued under EU passporting rules.
Additional Insured Portfolio Information
Average Life of Insured Portfolio
Ambac underwrote and priced financial guarantees based on the assumption that
the guarantees would remain in force until the maturity of the underlying bonds.
Ambac estimates that the average life of its guarantees on par in force at
December 31, 2019 is approximately 10 years. The average life is determined by
applying a weighted average calculation, using the remaining years to expected
maturity of each guaranteed bond, and weighting them on the basis of the
remaining net par guaranteed. Except for RMBS policies, no assumptions are made
for non-contractual reductions, refundings or terminations of insured issues.
RMBS policies incorporate assumptions on expected prepayments over the remaining
life of the insured obligation.
The following table depicts amortization of existing guaranteed net par
outstanding:
Net Par Outstanding Amortization (1)    Estimated Net
($ in millions)                          Amortization
2020                                   $         3,092
2021                                             2,857
2022                                             2,750
2023                                             1,749
2024                                             2,107

2020-2024                              $        12,555
2025-2029                                        7,755
2030-2034                                        5,996
2035-2039                                        7,834
After 2039                                       3,878
                               Total   $        38,018

(1) Depicts amortization of existing guaranteed portfolio, assuming no advance

refundings, as of December 31, 2019. Expected maturities will differ from

contractual maturities because borrowers may have the right to call or prepay

    guaranteed obligations.




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Geographic Area
The following table sets forth the geographic distribution of Ambac's existing
guaranteed net par outstanding as of December 31, 2019:
                                 Net Par          % of Total
Geographic Area                   Amount        Net Par Amount
($ in millions)                Outstanding       Outstanding

Domestic:

Mortgage and asset-backed (1) $       4,531            11.9 %
California                            2,556             6.7 %
Colorado                              2,396             6.3 %
New York                              2,331             6.1 %
New Jersey                            1,487             3.9 %
Texas                                 1,289             3.4 %
Puerto Rico                           1,123             3.0 %
Pennsylvania                            916             2.4 %
Washington                              833             2.2 %
Florida                                 754             2.0 %
Illinois                                709             1.9 %
Other domestic                        6,236            16.4 %
Total Domestic                       25,161            66.2 %
International:
United Kingdom                       10,593            27.9 %
Italy                                   767             2.0 %
Austria                                 674             1.8 %
Australia                               382             1.0 %
France                                  303             0.8 %
Other international (2)                 138             0.4 %
Total International Finance          12,857            33.8 %
Total                         $      38,018           100.0 %

(1) Mortgage and asset-backed obligations includes guarantees with multiple

locations of risk within the United States and is primarily comprised of

residential mortgage and commercial asset-backed securitizations.

(2) Other international may include components of U.S. exposure.

Exposure Currency The table below shows the distribution by currency of Ambac's existing guaranteed net par outstanding as of December 31, 2019:

                      Net Par          Net Par
                       Amount           Amount        Percentage
                    Outstanding      Outstanding      of Net Par
Currency              in Base          in U.S.          Amount
($ in millions)       Currency         Dollars       Outstanding
U.S. Dollars       $      25,559    $      25,559          67.2 %
British Pounds     £       7,813           10,344          27.2 %
Euros              €       1,545            1,733           4.6 %
Australian Dollars A$        545              382           1.0 %
Total                               $      38,018         100.0 %


Ratings Distribution
The following tables provide a rating distribution of existing net par
outstanding based upon internal Ambac credit ratings at December 31, 2019 and
2018 and a distribution by bond type of

Ambac's below investment grade ("BIG") net par exposures at December 31, 2019
and 2018. BIG is defined as those exposures with an internal credit rating below
BBB-:

                [[Image Removed: chart-d0580bf9e35a5adbbc2.jpg]]
                [[Image Removed: chart-721c65e040b75130b00.jpg]]
                   Note: AAA is less than 1% in both periods.

(1) Internal credit ratings are provided solely to indicate the underlying credit

quality of guaranteed obligations based on the view of Ambac. In cases where

Ambac has insured multiple tranches of an issue with varying internal

ratings, or more than one obligation of an issuer with varying internal

ratings, a weighted average rating is used. Ambac credit ratings are subject

to revision at any time and do not constitute investment advice. BIG denotes

    credits deemed below investment grade.




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Summary of Below Investment Grade Exposure:

                                    Net Par Outstanding - December 31,
Bond Type ($ in millions)                    2019                      2018
Public Finance:
Lease and tax-backed (1)    $           1,109                        $  2,025
General obligation (1)                    525                             434
Housing (2)                               311                             314
Transportation                             27                             378
Health care                                 -                              25
Other                                      42                             146
Total Public Finance                    2,014                           3,322
Structured Finance:
RMBS                                    3,362                           4,205
Structured Insurance                        -                             900
Student loans                             620                             714
Other                                      33                              53
Total Structured Finance                4,015                           5,872
International Finance:
Other                                   1,455                             924
Total International Finance             1,455                             924
Total                       $           7,484                        $ 10,118

(1) Lease and tax-backed includes $1,014 and $1,735 of Puerto Rico net par at

December 31, 2019 and 2018, respectively. General obligation includes $109

and $145 of Puerto Rico net par at December 31, 2019 and 2018, respectively.

Puerto Rico net par outstanding includes capital appreciation bonds which are

reported at the par amount at the time of issuance of the related insurance

policy as opposed to the current accreted value of the bonds.

(2) Includes $311 and $314 of military housing net par at December 31, 2019 and

2018, respectively.

The decrease in below investment grade exposures is primarily due to (i) the
commutation or restructuring of certain structured insurance, lease and
tax-backed and transportation transactions (including the Ballantyne and COFINA
commutations), (ii) paydowns or calls by issuers, mostly related to residential
mortgage-backed and other asset-backed securities, and (iii) a termination of an
international aircraft asset-backed transaction. This decrease is offset by the
addition of an Italian sub-sovereign exposure. Despite the decrease in below
investment grade exposures, such exposures could increase as a relative
proportion of the guarantee portfolio given that stressed borrowers generally
have less ability to prepay or refinance their debt and therefore Ambac is
subject to the risk that its insured portfolio will increasingly become
concentrated in higher risk below investment grade exposures. This risk may
result in greater volatility in our results from operations and have adverse
effects on our financial condition.
Ceded Reinsurance
Ambac Assurance has reinsurance in place pursuant to surplus share treaties and
facultative agreements. As a primary financial guarantor, Ambac Assurance is
required to honor its obligations to its policyholders whether or not its
reinsurers perform their obligations under these reinsurance agreements. For
exposures reinsured, Ambac Assurance generally withholds a ceding

commission to defray its underwriting and operating expenses. 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 $124 million from its reinsurers at December 31, 2019. As of December 31,
2019, the aggregate amount of insured par ceded by Ambac Assurance to reinsurers
under reinsurance agreements was $5,890 million, with the largest reinsurer
accounting for $2,746 million or 6.3% of gross par outstanding at December 31,
2019.
The following table shows the distribution, by bond type, of Ambac Assurance's
ceded guaranteed portfolio at December 31, 2019:
                                      Ceded Par
                                        Amount        % of Gross
Bond Type ($ in millions)            Outstanding      Par Ceded
Public Finance:
General obligation                  $       1,571         34 %
Lease and tax-backed revenue                1,422         22 %
Housing revenue                               945         14 %
Transportation revenue                        564         40 %
Utility revenue                               249         25 %
Higher education                              182         17 %
Other                                         102         14 %
Total Public Finance                        5,035         22 %
Structured Finance:
Student loan                                  281         27 %
Investor-owned utilities                      225         12 %
Structured insurance                          147         27 %
Asset-backed and other                        106         49 %
Mortgage-backed and home equity                49          1 %
Total Structured Finance                      808         10 %
Total Domestic                              5,843         19 %
International Finance:
Investor-owned and public utilities            24          1 %
Transportation                                 22          1 %
Asset-backed                                    1          - %
Total International Finance                    47          - %
Total                               $       5,890         13 %



                             RESULTS OF OPERATIONS
The following discussion should be read along with the financial statements
included in this Form 10-K, as well as Part II, "Item 7, Management's Discussion
and Analysis's of Financial Condition and Results of Operations" of our Form
10-K for the year ended December 31, 2018, which provides additional information
on comparisons of years 2018 and 2017.
Certain amounts in the tables that follow may not add due to rounding.


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($ in millions)
Year Ended December 31,                                 2019      2018       2017
Revenues:
Net premiums earned                                   $   66     $ 111     $  175
Net investment income                                    227       273        361
Net other-than-temporary impairment losses                 -        (3 )      (20 )
Net realized investment gains (losses)                    81       112      

5

Net gains (losses) on derivative contracts               (50 )       7      

76

Other income (expense) (2)                               134         8      

5

Income (loss) on variable interest entities               38         3      

20

Expenses:

Losses and loss expenses (benefit)                        13      (224 )    

513

Insurance intangible amortization                        295       107        151
Operating expenses                                       103       112        122
Interest expense                                         269       242        120
Provision for income taxes                                32         5         44
Net income (loss)                                       (216 )     267       (329 )
Less: exchange of auction market preferred shares (1)      -        82      

-

Net income (loss) attributable to common stockholders $ (216 ) $ 186 $ (329 )

(1) In connection with the AMPS Exchange, the difference between the fair value

of consideration provided to AMPS holders and the carrying amount of the AMPS

has been reflected as a reduction to Net income attributable to common

stockholders in 2018 for approximately $82. Refer to Note 1. Background and

Business Description for a discussion of the AMPS Exchange.

(2) 2019 includes proceeds received in connection with an SEC action against

Citigroup Global Markets Inc. in the amount of $142 million. 2018 and 2017

include net realized gains on extinguishment of debt.

During 2018 and 2019, Ambac executed on a number of restructuring / commutation
transactions that had significant impacts to the consolidated results of
operations. As described further below, the completion of the these
transactions, including the related changes to invested assets, loss reserves
and debt of the Company, had a significant impact on the comparability of the
results of operation for the years ended December 31,2019 and 2018. The most
significant transactions, which are more fully discussed in the "Financial
Guarantees in Force" section of this Form 10-K were:
Rehabilitation Exit Transactions. On February 12, 2018, Ambac Assurance executed
the Rehabilitation Exit Transactions under which Deferred Amounts (as defined in
Note 1. Background and Business Description to the Consolidated Financial
Statements included in Part II, Item 8 of this Annual Report on Form 10-K) and a
substantial portion of Ambac Assurance senior surplus notes were settled at a
discount, with holders (other than Ambac) receiving in exchange, a consideration
package of cash and debt securities.
Puerto Rico COFINA Plan of Adjustment ("POA"). On February 12, 2019, the POA,
including certain related commutation

transactions, and subsequent distributions, became effective, resulting in a
significant reduction of Ambac Assurance's insured net par exposure to COFINA.
Pursuant to the COFINA POA, approximately 75% of holders of Ambac
Assurance-insured senior COFINA bonds (including Ambac) elected to commute their
insurance policy.
Ballantyne Re plc ("Ballantyne") Restructuring. On April 25, 2019, Ballantyne
commenced, under Irish law, a restructuring transaction ("Restructuring") in
respect of its obligations, including obligations that were guaranteed by Ambac
UK. The Arrangement was approved on June 17, 2019. With the successful
implementation of the Restructuring, Ambac UK has ceased to have any exposure
with respect to the obligations of Ballantyne.
The following paragraphs describe the consolidated results of operations of
Ambac for 2019 and 2018. Some tables may not add due to rounding.
Net Premiums Earned. Net premiums earned primarily represent the amortization
into income of insurance premiums. Net premiums earned for the year ended
December 31, 2019, decreased by $45 million or 41% as compared to net premiums
earned for the year ended December 31, 2018.
We present accelerated premiums, which result from calls and other accelerations
of insured obligations separate from normal net premiums earned. When an insured
bond has been retired, any remaining unearned premium revenue ("UPR") is
recognized at that time to the extent the financial guarantee contract is
legally extinguished, causing accelerated premium revenue. For installment
premium paying transactions, we offset the recognition of any remaining UPR by
the reduction of the related premium receivable to zero (as it will not be
collected as a result of the retirement), which may cause negative accelerated
premium revenue.
Normal net premiums earned are impacted by the following:
•   The runoff of the insured portfolio occurring through transaction

terminations, calls and scheduled maturities, which reduce normal net

premiums earned.

• Pre-refundings of insured securities, primarily Public Finance transactions.

Since the maturity date of pre-refunded securities is shortened (to a

specified call date from its previous legal maturity), normal net premiums

earned will increase over the remaining period of the related policy.

• New ceded reinsurance of insurance risk which reduces normal net premiums

earned over the remaining period of the related policies.

• Changes to allowance for uncollectible premiums on premium receivable asset.

• The strengthening or weakening of the U.S. dollar relative to the British

Pound since Ambac's wholly-owned UK subsidiary, Ambac UK, operates in the

United Kingdom and the British Pound is its functional currency.

Normal net premiums earned and accelerated premiums are reconciled to total net
premiums earned in the table below, including a breakdown of net premiums earned
by market:


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($ in millions)
Year Ended December 31,           2019     2018     2017
Public finance                   $ 27     $  37    $  62
Structured finance                 10        17       22
International finance              19        23       27

Total net normal premiums earned $ 56 $ 77 $ 111 Public Finance

$ 25     $  29    $  47
Structured Finance                 (7 )       5        3
International Finance              (8 )       1       15

Total net accelerated earnings $ 10 $ 35 $ 65 Total net premiums earned $ 66 $ 111 $ 175

Net Investment Income. Net investment income primarily consists of interest and
net discount accretion on fixed income securities classified as
available-for-sale, including investments in Ambac-insured securities.
Investments in Ambac-insured securities are made opportunistically based on
their risk/reward characteristics. As described further below, investment income
from holdings of Ambac-insured securities (including Secured Notes issued by
Ambac LSNI, LLC) for the periods presented have primarily been driven by
restructuring transactions involving RMBS, Puerto Rico and Ballantyne bonds.
Also, included in net investment income are net gains and (losses) on pooled
investment funds and certain other investments that are either classified as
trading securities with changes in fair value recognized in earnings or are
reported under the equity method. These pooled investment funds and other
investments are included in Other investments on the Consolidated Balance Sheets
and consist primarily of pooled fund investments in diversified asset classes.
For further information about investment funds held, refer to Note 10.
Investments to the Consolidated Financial Statements, included in this Annual
Report.
Net investment income from Ambac-insured securities, available for sale and
short-term securities other than Ambac-insured and Other investments is
summarized the table below:
($ in millions)
Year Ended December 31,                 2019               2018             

2017

Securities available-for-sale:
Ambac-insured (including Secured
Notes)                            $          121     $          220     $   

262

Securities available-for-sale and
short-term other than
Ambac-insured                                 75                 51                 76
Other investments (includes
trading securities)                           32                  2                 23
Net investment income             $          227     $          273     $          361


Net investment income decreased $46 million for the year ended December 31, 2019
compared to 2018. The $99 million decrease in net investment income from
Ambac-insured securities for 2019 compared to 2018 is due primarily to the
reduced amount of Ambac-insured RMBS and COFINA bonds held following their
restructuring transactions in February of 2018 and 2019, respectively. The
impact of lower insured RMBS and COFINA bond holdings was partially offset by
increased income from accelerated accretion on Ballantyne bonds in connection
with the

Ballantyne restructuring in June 2019. Net investment income from Secured Notes
was slightly lower in 2019 than 2018 as a result of early redemptions and AFG's
divestiture of its holdings completed in early 2019.
Net investment income from available-for-sale securities other than
Ambac-insured increased $24 million in 2019, reflecting the effects of uninsured
COFINA bonds received under the POA; higher allocations towards other
non-insured bonds including investment grade corporates, CMBS and CLOs; and
higher interest rates on short-term positions.
Net investment income from Other investments increased $30 million from 2018,
due to strong equity and credit market performance, including gains on
investments in high-yield and an asset-backed focused hedge fund by Ambac
Assurance as well as gains on investments in high yield funds held by Ambac UK.
Additionally, 2018 included losses on hedge fund, equity and insurance
linked-security fund investments of Ambac UK.
Net Other-Than-Temporary Impairment Losses. Net other-than-temporary impairment
losses recorded in earnings include only credit related impairment amounts on
securities to the extent management does not intend to sell and it is not more
likely than not that the Company will be required to sell before recovery of the
amortized cost basis. Non-credit related impairment amounts are recorded in
other comprehensive income (loss). Alternatively, non-credit related impairment
is reported through earnings as part of net other-than-temporary impairment
losses if management intends to sell securities or it is more likely than not
that the Company will be required to sell before recovery of amortized cost less
any current period credit impairment.
Net other-than-temporary impairments for the year ended December 31, 2019
related to management's intent to sell securities. Net other-than-temporary
impairments for the year ended December 31, 2018 related to credit losses on
certain securities and to management's intent to sell securities.
Net Realized Investment Gains. The following table provides a breakdown of net
realized gains, for the periods presented:
($ in millions)
Year Ended December 31,                 2019     2018     2017

Net gains on securities sold or called $ 59 $ 105 $ 10 Foreign exchange gains (losses)

           22        7      (5 )
Total net realized gains               $  81    $ 112    $  5


Net realized gains on securities sold or called during the year ended
December 31, 2019 included $50 million of net gains arising directly or
indirectly from the COFINA restructuring, including sales of Ambac-insured
COFINA bonds and sales of new uninsured COFINA bonds received in the
restructuring. Also included in realized gains for the year ended December 31,
2019 are $23 million of realized foreign exchange gains arising from the
settlement of Ballantyne bonds held in the investment portfolio.
Net gains during the year ended December 31, 2018 were primarily from sales of
Ambac-insured RMBS. Additionally, 2018 gains included a $27 million recovery
from a class-action settlement


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relating to certain RMBS securities previously held in the investment portfolio.
Net Gains (Losses) on Derivative Contracts. Net gains (losses) on derivative
contracts includes results from the Company's interest rate derivatives
portfolio and its legacy credit derivative positions as presented in the
following table:
($ in millions)
Year Ended December 31,                          2019      2018     2017

Net gains (losses) on interest rate derivatives $ (51 ) $ 7 $ 60 Net gains (losses) on credit derivatives

            2       (1 )      16
Total net gains (losses)                        $ (50 )   $  7     $  76


The interest rate derivatives portfolio is positioned to benefit from rising
rates as a partial economic hedge against interest rate exposure in the
financial guarantee and investment portfolios. Results in Net gain (loss) on
interest rate derivatives generally reflect mark-to-market gains (losses) in the
portfolio caused by increases (declines) in forward interest rates during the
periods, the carrying cost of the net liability position of the portfolio, and
the impact of counterparty credit adjustments as discussed below.
Net losses on interest rate derivatives for the year ended December 31, 2019
were $51 million, compared to the net gain of $7 million for the year ended
December 31, 2018. The net loss for the year ended December 31, 2019, reflects
declines in forward interest rates, partially offset by negative net carrying
costs driven by the partially inverted yield curve in place for most of the
year. Net gains for 2018 were primarily the result of rising forward interest
rates offset by carrying costs.
Counterparty credit adjustments are generally applicable for uncollateralized
derivative assets that may not be offset by derivative liabilities under a
master netting agreement. Inclusion of counterparty credit adjustments in the
valuation of interest rate derivatives resulted in losses within Net gain (loss)
on interest rate derivatives of $(2) million in both 2019 and 2018.
The net gain/(loss) from change in fair value of credit derivatives for the year
ended December 31, 2019 was a gain of $2 million, as compared to the loss of
$(1) million for the year ended December 31, 2018. Changes in fair value of
credit derivatives are driven by price changes on the underlying reference
obligations of remaining legacy positions plus continued accretion of fees.
Net Realized Gains (Losses) on Extinguishment of Debt. Net realized gains on
extinguishment of debt was $0 million for the year ended December 31, 2019,
compared to gains of $3 million for the year ended December 31, 2018. The gains
for the year ended December 31, 2018 related to surplus notes received by Ambac
Assurance in settlement of Deferred Amounts held in its investment portfolio in
connection with the Rehabilitation Exit Transactions.
Income (loss) on Variable Interest Entities. Included within Income (loss) on
variable interest entities are income statement amounts relating to VIEs
consolidated under the Consolidation Topic of the ASC as a result of Ambac's
variable interest arising from financial guarantees written by Ambac's
subsidiaries, including gains or losses attributable to consolidating or
deconsolidating VIEs during the periods reported. Generally, the

Company's consolidated VIEs are entities for which Ambac has provided financial
guarantees on all of or a portion of its assets or liabilities. In
consolidation, assets and liabilities of the VIEs are initially reported at fair
value and the related insurance assets and liabilities are eliminated. However,
the amount of VIE net assets (liabilities) that remain in consolidation
generally result from the net positive (negative) present value of projected
cash flows from (to) the VIEs which are attributable to Ambac's insurance
subsidiaries in the form of financial guarantee insurance premiums, fees and
losses. In the case of VIEs with net negative projected cash flows, the net
liability is generally to be funded by AFG's insurance subsidiaries through
insurance claim payments. Differences between the net carrying value of the
insurance accounts under the Financial Services-Insurance Topic of the ASC and
the carrying value of the consolidated VIE's net assets or liabilities are
recorded through income at the time of consolidation or deconsolidation.
Additionally, terminations or other changes to Ambac's financial guarantee
insurance policies that impact projected cash flows between a consolidated VIE
and Ambac could result in gains or losses, even if such policy changes do not
result in deconsolidation of the VIE.
Income (loss) on variable interest entities was $38 million and $3 million for
the years ended December 31, 2019 and 2018, respectively.
•   Income on variable interest entities for the year ended December 31, 2019,

was driven by the impact of a VIE created in connection with the

restructuring of Puerto Rico COFINA debt. Under the restructuring,

Ambac-insured COFINA bonds that were not commuted were deposited into a newly

formed trust called the COFINA Class 2 Trust ("COFINA Trust"), which Ambac

has determined must be consolidated. Refer to Part II, Item 7, "Management's

Discussion and Analysis - Financial Guarantees in Force" in this report on

Form 10-K for further discussion of the COFINA Debt Restructuring. Income

from COFINA Trust for the the year ended December 31, 2019, was $26 million,

including $15 million from consolidation and $13 million from realized

investment gains on sales of assets from the trust used for early redemptions

of debt, partially offset by net interest expense and fees. Income for the

year ended December 31, 2019, also included a gain on the fair value of net

assets of a VIE arising from an increase in projected cash flows on the VIE's

assets related to higher financial guarantee insurance premiums. Results for

2019 also included a loss of $2 million from deconsolidation of a VIE.

• Income on variable interest entities for the year ended December 31, 2018,

included gains of $2 million on deconsolidation of VIEs as a result of

financial guarantee policy terminations and discount accretion on remaining

VIE net assets.

Refer to Note 3. Variable Interest Entities to the Consolidated Financial
Statements included in this Form 10-K for further information on the accounting
for VIEs.
Other income (expense). Other income (expense) includes various fees, primarily
consent and waiver fees, as well as foreign exchange gains/(losses) unrelated to
investments or loss reserves. Other income also includes proceeds received by
Ambac Assurance in September 2019 in connection with an SEC action against
Citigroup Global Markets Inc. in the amount of $142 million. For


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the year ended December 31, 2018, other income (expense) included foreign
exchange gains and amortization of fee income.
Losses and Loss Expenses (Benefit). Losses and loss expenses are based upon
estimates of the aggregate losses inherent in the non-derivative financial
guarantee portfolio for insurance policies issued to beneficiaries, including
unconsolidated VIEs. Losses and loss expenses for the year ended December 31,
2018, included interest on Deferred Amounts pursuant to the Segregated Account
Rehabilitation Plan (as defined in Note 1. Background and Business Description
to the Consolidated Financial Statements included in Part II, Item 8 of this
Annual Report on Form 10-K) that were discharged on February 12, 2018.
Ambac records as a component of its loss reserve estimate subrogation recoveries
related to securitized loans in RMBS transactions with respect to which Ambac
Assurance is pursuing claims for breaches of representations and warranties
described herein. Ambac does not estimate an RMBS R&W subrogation recovery where
its sole claim is for fraudulent inducement. Generally, the sponsor of an RMBS
transaction provided representations and warranties with respect to the
securitized loans, including representations with respect to the loan
characteristics, the absence of borrower fraud in the underlying loan pools or
other misconduct in the origination process and attesting to the compliance of
loans with the prevailing underwriting policies. Ambac has recorded RMBS R&W
subrogation recoveries, net of reinsurance, of $1,702 million and $1,744 million
at December 31, 2019 and 2018, respectively. Refer to Note 2. Basis of
Presentation and Significant Accounting Policies to the Consolidated Financial
Statements included in Part II, Item 8 in this Form 10-K for more information
regarding the estimation process for RMBS R&W subrogation recoveries.
Losses and loss expenses (benefit) for the year ended December 31, 2019 and 2018
were $13 million and $(224) million, respectively. The following table provides
details, by bond type, for losses and loss expenses (benefit) incurred for the
periods presented:
($ in millions)
Year Ended December 31,                      2019       2018      2017
RMBS (1)                                    $ (93 )   $   (8 )   $ (41 )
Domestic Public Finance                       250         37       476
Student Loans                                 (17 )       (4 )      25
Ambac UK and Other Credits                   (127 )       19      (125 )
Interest on Deferred Amounts                    -         21       178

Discount on Rehabilitation Exit Transaction - (288 ) - Totals (2)

$  13     $ (224 )   $ 513

(1) The loss and loss expense (benefit) associated with changes in estimated

representation and warranties for the year ended December 31, 2019 and 2018

was $42 and $62, respectively.

(2) Includes loss expenses incurred of $78 and $92 for the year ended

December 31, 2019 and 2018, respectively.

Losses and loss expenses for 2019 were driven by the following: • Higher projected losses in domestic public finance driven mostly by lower

discount rates and additions to Puerto Rico loss reserves, partially offset

by;

• Favorable development within Ambac UK and Other Credits primarily due to the

Ballantyne commutation;

• Favorable RMBS development as a result of credit improvement, the impact on

    excess spread from declines in interest rates and a trustee settlement
    related to Lehman sponsored transactions, partially offset by RMBS R&W
    litigation loss expenses incurred and a reduction to estimated RMBS R&W
    subrogation recoveries.

Losses and loss expenses for 2018 were driven by the following: • Discount achieved pursuant to the Rehabilitation Exit Transactions, partially

offset by interest on Deferred Amounts through the Rehabilitation Exit

Transactions effective date;

• Higher projected losses in domestic public finance largely driven by Military

Housing loss expenses incurred and adverse development on a certain general

obligation and transportation risks;

• Favorable RMBS credit development, which was more than offset by a decrease

in RMBS R&W subrogation recoveries and loss expenses incurred;

• $15 million of foreign exchange losses related to Ambac UK loss reserves

    denominated in currencies other than its functional currency of British
    Pounds, resulting in incurred losses (gains) when the British Pound
    depreciates (appreciates).


Insurance Intangible Amortization. Insurance intangible amortization was $295
million and $107 million for the years ended December 31, 2019 and 2018,
respectively. The increase in intangible amortization for the year ended
December 31, 2019, compared to 2018, is primarily due to accelerated
amortization as a result of the Ballantyne commutation that occurred in 2019.
Operating Expenses. Operating expenses consist of gross operating expenses plus
reinsurance commissions. The following table provides details of operating
expenses for the periods presented:
($ in millions)
Year Ended December 31,       2019     2018     2017
Compensation                 $  58    $  55    $  54
Non-compensation                44       56       68

Gross operating expenses 103 111 122 Reinsurance commissions, net - 1 - Total operating expenses $ 103 $ 112 $ 122

Gross operating expenses for the year ended December 31, 2019 are $103 million, a decrease of $9 million from gross operating expenses for the year ended December 31, 2018. The decrease was primarily due to the following: • Lower non-compensation costs primarily due to reduced advisory costs of $15

    million, of which $5 million relates to




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services provided for the benefit of OCI; partially offset by increased premises costs of $3 million, primarily due to the extinguishment of lease reducing Junior Surplus Notes which previously reduced rent expense. • Higher compensation costs related to higher incentive compensation driven by

(i) improvements in performance metrics, mostly related to Ambac UK incentive

compensation and (ii) higher severance and post employment costs related to

staff right-sizing.

With the conclusion of the Segregated Account rehabilitation, the duties of the
Wisconsin Insurance Commissioner as rehabilitator of the Segregated Account have
been discharged. Legal and consulting services provided for the benefit of OCI
amounted to $2 million and $7 million for the years ended December 31, 2019 and
2018, respectively. Subsequent to the Segregated Account's exit from
rehabilitation, advisory services for the benefit of OCI continue, but at a
reduced level.
Interest Expense. Interest expense primarily includes accrued interest on the
Ambac Note, Tier 2 Notes and surplus notes issued by Ambac Assurance.
Additionally, interest expense includes discount accretion when the debt
instrument carrying value is at a discount to par.
The following table provides details by type of obligation for the periods
presented:
($ in millions)
Year Ended December 31,  2019     2018     2017
Surplus notes (1)       $  99    $  80    $ 113
Ambac note                143      139        -
Tier 2 notes               26       22        2
Other                       -        1        4
Total interest expense  $ 269    $ 242    $ 120

(1) Includes junior surplus notes.

• The increase in interest expense for the year ended December 31, 2019,

compared to 2018 primarily reflects the higher average balance of surplus

notes outstanding in 2019 and compounding of interest on surplus notes.

Although the amount of surplus notes outstanding decreased in connection with

the Rehabilitation Exit Transactions, the amount outstanding increased in the

third quarter of 2018 due to surplus notes issued by Ambac Assurance in

connection with the AMPS Exchange (as defined in Note 1. Background and

Business Description to the Consolidated Financial Statements included in

Part II, Item 8 in this Form 10-K) and resales of notes by Ambac to the

market.

• Increased interest expense on the floating rate Ambac note was driven by

higher reset rates in 2019 and the impact of the notes being outstanding for

the full year, partially offset by optional redemptions and full amortization

of deferred debt issuance costs through interest expense in 2018.

• Interest expense increased on the Tier 2 notes due primarily to interest

compounding. The increase in interest expense also reflects the impact of

applying the level yield method on surplus notes and Tier 2 notes as the

discount to the face value of the long-term debt accretes over time.

Surplus note principal and interest payments require the approval of OCI. Since the issuance of the surplus notes in 2010, OCI has

declined to approve regular payments of interest on surplus notes, although the
OCI has permitted exceptional payments in connection with (a) increasing the
percentage of deferred policy payments of the Segregated Account of Ambac
Assurance from 25% to 45% in 2014 and (b) a one-time payment of approximately
six months of interest on the surplus notes (other than junior surplus notes)
outstanding immediately after consummation of the Rehabilitation Exit
Transactions in 2018. Ambac Assurance has not requested to pay interest on any
junior surplus notes since their issuance. Ambac Assurance may not receive
approval from OCI to make payments as and when scheduled, including the payment
of the surplus notes on their scheduled maturity date of June 7, 2020. If the
OCI does not approve the making of any payment of principal of or interest on
surplus notes on the scheduled payment date or scheduled maturity date thereof,
the scheduled payment date or scheduled maturity date, as the case may be, shall
be extended until OCI grants approval to make the payment. Interest will accrue,
compounded on each anniversary of the original scheduled payment date or
scheduled maturity date, on any unpaid principal or interest through the actual
date of payment, at 5.1% per annum. Holders of surplus notes will have no rights
to enforce the payment of the principal of, or interest on, surplus notes in the
absence of OCI approval to pay such amount. The interest on the outstanding
surplus notes and junior surplus notes were accrued for and Ambac Assurance is
accruing interest on the interest amounts following each scheduled interest
payment date. Total accrued and unpaid interest for surplus notes and junior
surplus notes outstanding to third parties were $302 million and $146 million,
respectively, at December 31, 2019.
Provision for Income Taxes. The provision for income taxes for the year ended
December 31, 2019 and 2018, was $32 million and $5 million, respectively. The
income tax for the year ended December 31, 2019 and 2018, includes provisions
for income tax due in respect of Ambac UK of $36 million and $5 million,
respectively.
At December 31, 2019 the Company had approximately $3,535 million of U.S.
Federal net ordinary operating loss carryforwards, including approximately
$1,250 million at AFG and $2,285 million at Ambac Assurance.
                        LIQUIDITY AND CAPITAL RESOURCES
AFG Liquidity. AFG's liquidity is dependent on its cash, investments, and net
receivables, totaling $483 million as of December 31, 2019, and expense sharing
and other arrangements with Ambac Assurance.
•   Pursuant to the amended and restated tax sharing agreement among AFG, Ambac

Assurance and certain affiliates (the "Amended TSA"), Ambac Assurance is

required to make payments ("tolling payments") to AFG with respect to the

utilization of net operating loss carry-forwards ("NOLs"). AFG has accrued

$28 million of tolling payments based on NOLs used by Ambac Assurance in

2017. In May 2018, AFG executed a waiver under the intercompany tax sharing

agreement pursuant to which Ambac Assurance was relieved of the requirement

to make this payment by June 1, 2018. AFG also agreed to defer the tolling

payment for the use of net operating losses by Ambac Assurance in 2017 until

    such time as OCI consents to the payment.




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• Under an inter-company cost allocation agreement, AFG is reimbursed by Ambac

Assurance for a portion of certain operating costs and expenses and, if

approved by OCI, entitled to an additional payment of up to $4 million per

year to cover expenses not otherwise reimbursed. AFG has not accrued any

receivable related to this payment as of December 31, 2019.

AFG's investments include securities directly and indirectly issued by Ambac
Assurance some of which are eliminated in consolidation. Securities issued by
Ambac Assurance are generally less liquid than investment grade and other traded
investments.
It is highly unlikely that Ambac Assurance will be able to make dividend
payments to AFG for the foreseeable future and therefore cash and investments
and payments under the intercompany cost

allocation agreement will be AFG's principal source of liquidity in the near
term. Refer to Part I, Item 1, "Insurance Regulatory Matters - Dividend
Restrictions, Including Contractual Restrictions" in this Annual Report on Form
10-K, and Note 8. Insurance Regulatory Restrictions to the Consolidated
Financial Statements included in Part II, Item 8, in this Annual Report on Form
10-K, for more information on dividend payment restrictions.
The principal uses of liquidity are the payment of operating expenses, including
costs to explore opportunities to grow and diversify Ambac, and the making of
investments, including securities issued or insured by Ambac Assurance. Future
uses of liquidity may include the acquisition or capitalization of new
businesses. Contingencies could cause material liquidity strains.

The following table includes aggregated information about contractual
obligations for AFG and its subsidiaries at December 31, 2019, excluding
variable interest entities consolidated as a result of Ambac Assurance's and
Ambac UK's financial guarantee contracts. These obligations include payments due
under specified contractual obligations, aggregated by type of contractual
obligation, including claim payments, principal and interest payments under
Ambac Assurance's surplus notes, the Ambac Note, Tier 2 Notes and Ambac UK debt,
and payments due under operating leases. The table and commentary below reflect
scheduled payments and maturities based on the original payment terms specified
in the underlying agreements and contracts, or expected required payment dates
if earlier.
                                                       Payments Due by Period
                                         Less Than 1                                          More Than 5
($ in millions)             Total            Year          1 - 3 Years       3 - 5 Years         Years
Surplus note
obligations(1)           $    3,841     $        851     $           -     $           -     $      2,990
Ambac note
obligations(2)                2,144              122               245             1,777                -
Tier 2 note
obligations(3)                5,394                -                 -                 -            5,394
Ambac UK debt
obligations(4)                   41                -                 -                 -               41
Operating lease
obligations(5)                   46                4                 9                 9               24
Purchase obligations(6)           9                8                 -                 -                -
Postretirement
benefits(7)                       5                -                 1                 1                3
Loss and loss
expenses(8)                   2,434              159               139               172            1,964
Income taxes                      -                -                 -                 -                -
Total                    $   13,914     $      1,144     $         394     $       1,959     $     10,416

(1) Amounts on surplus notes (excluding junior surplus notes) include principal

on their scheduled maturity date and interest on scheduled payment dates,

including payment of previously deferred interest totaling $279 million on

the next scheduled payment date of June 7, 2020. Also includes all principal

and interest on junior surplus notes on the date all future and existing

senior indebtedness of Ambac Assurance, policy and other priority claims

against Ambac Assurance have been paid in full (included in the more than 5

years column). All payments of principal and interest on surplus notes are

subject to the prior approval of the OCI. Since the issuance of the surplus

notes in 2010, OCI has declined to approve regular payments of interest on

surplus notes annually from 2011 through 2019, although the OCI has permitted

exceptional payments in connection with (a) increasing the percentage of

deferred policy payments of the Segregated Account from 25% to 45% in 2014

and (b) a one-time payment of approximately six months of interest on the

surplus notes outstanding immediately after the Rehabilitation Exit

Transactions in 2018. Ambac Assurance may not receive approval from OCI to

make payments as and when scheduled, including the payment of the surplus

notes on their scheduled maturity date of June 7, 2020. If the OCI does not

approve the making of any payment of principal of or interest on surplus

notes on the scheduled payment date or scheduled maturity date thereof, the

scheduled payment date or scheduled maturity date, as the case may be, shall

be extended until OCI grants approval to make the payment. Interest will

accrue, compounded on each anniversary of the original scheduled payment date

    or scheduled



maturity date, on any unpaid principal or interest through the actual date of
payment, at 5.1% per annum.
(2) Includes principal on Ambac Note as of December 31, 2019 to be paid on its

legal maturity date of February 12, 2023, and scheduled interest payments.

Interest amounts on this variable rate debt are projected at a rate of 6.95%

which is based on the index rate in effect at the balance sheet date. These

notes are subject to mandatory redemption provisions that could significantly

accelerate the timing of required payments, as described further in Note 13.

Long-Term Debt to the Consolidated Financial Statements included in Part II,

Item 8 in this Form 10-K.

(3) Includes principal and compounded paid-in-kind interest on Tier 2 notes to be

paid on their legal maturity date of February 12, 2055. These notes are

subject to mandatory redemption provisions that could significantly

accelerate the timing of required payments, as described further in Note 13.

Long-Term Debt to the Consolidated Financial Statements included in Part II,

Item 8 in this Form 10-K.

(4) Includes principal on the zero coupon note payable on its legal maturity date

of May 2, 2036.

(5) Amount represents future lease payments on lease agreements existing as of

December 31, 2019. Includes fixed costs, such as base rent, and estimated

    variable costs, such as real estate taxes and electricity.




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(6) Purchase obligations represent future expenditures for contractually

scheduled fixed terms and amounts due for various technology-related

maintenance agreements and other outside services.

(7) Amount represents future payments relating to Ambac Assurance's

postretirement medical reimbursements to current retirees over the next 10

years.

(8) The timing of expected claim payments is based on deal specific cash flows,

excluding expected recoveries. These deal specific cash flows are based on

the expected cash flows of the underlying transactions. The timing of

expected claim payments for credits with reserves that were established using

our statistical loss reserve method is determined based on the weighted

average expected life of the exposure. Refer to the Loss Reserves section in

Note 2. Basis of Presentation and Significant Accounting Policies to the

Consolidated Financial Statements included in Part II, Item 8 in this Form

10-K for further discussion of our statistical loss reserve method. The

timing of these payments may vary significantly from the amounts shown above,

especially for credits that are based on our statistical loss reserve method.

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 policies; principal and interest payments from
investments; sales of investments; proceeds from repayment of affiliate loans;
and recoveries on claim payments, including from litigation and reinsurance
recoveries. Termination of installment premium policies on an accelerated basis
may adversely impact Ambac Assurance's liquidity.
The principal uses of Ambac Assurance's liquidity are the payment of operating
and loss adjustment expenses, claims, commutation and related expense payments
on insurance policies, ceded reinsurance premiums, principal and interest
payments on the Ambac Note, surplus note principal and interest payments, Tier 2
Note payments, additional loans to affiliates, tolling payments due to AFG under
the Amended TSA, and purchases of securities and other investments that may not
be immediately converted into cash. Interest and principal payments on surplus
notes are subject to the approval of OCI, which has full discretion over
payments regardless of the liquidity position of Ambac Assurance. Any such
payment on surplus notes would require either payment or collateralization of a
portion of the Tier 2 Notes under the terms of the Tier 2 Note indenture. See
Note 13. Long-term Debt to the Consolidated Financial Statements, included in
Part II, Item 8 in this Form 10-K for further discussion of the payment terms
and conditions of the Tier 2 Notes.
Ambac Assurance's intercompany loans are with Ambac Financial Services ("AFS").
AFS uses interest rate derivatives (primarily interest rate swaps and US
Treasury futures) as an economic hedge against the effects of rising interest
rates elsewhere in the Company, including on Ambac Assurance's financial
guarantee exposures. AFS's derivatives include, interest rate swaps previously
provided to asset-backed issuers and other entities in connection with their
financings. Ambac Assurance loans cash and securities to AFS as needed to fund
payments under these derivative contracts, collateral posting requirements and
operating expenses. Intercompany loans are governed by an established lending
agreement with defined borrowing limits that has received non-disapproval from
OCI.

Ambac Assurance manages its liquidity risk by maintaining comprehensive analyses
of projected cash flows and maintaining specified levels of cash and short-term
investments at all times.
Ambac Assurance is limited in its ability to pay dividends pursuant to the terms
of its Auction Market Preferred Shares ("AMPS"), which state that dividends may
not be paid on the common stock of Ambac Assurance unless all accrued and unpaid
dividends on the AMPS for the then current dividend period have been paid,
provided that dividends on the common stock may be made at all times for the
purpose of, and only in such amounts as are necessary for enabling AFG (i) to
service its indebtedness for borrowed money as such payments become due or
(ii) to pay its operating expenses. If dividends are paid on the common stock
for such purposes, dividends on the AMPS become cumulative until the date that
all accumulated and unpaid dividends have been paid on the AMPS. Ambac Assurance
has not paid dividends on the AMPS since 2010. Refer to Part I, Item 1,
"Insurance Regulatory Matters - Dividend Restrictions, Including Contractual
Restrictions" in this Annual Report on Form 10-K, and Note 8. Insurance
Regulatory Restrictions to the Consolidated Financial Statements included in
Part II, Item 8, in this Annual Report on Form 10-K, for more information on
dividend payment restrictions.
Our ability to realize RMBS R&W 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, intervention by the OCI, which could
impede our ability to take actions required to realize such recoveries, and
uncertainty inherent in the assumptions used in estimating the amount of such
recoveries. The amount of these subrogation recoveries is significant and if we
are unable to recover any amounts or recover materially less than our estimated
recoveries, our future available liquidity to pay claims and meet our other
obligations would be reduced materially. See Part I, Item 1A. Risk Factors in
this Annual Report on Form 10-K for more information about risks relating to our
RMBS R&W subrogation recoveries.
Cash Flow Statement Discussion. The following table summarizes the net cash
flows for the periods presented.
($ in million)
Year Ended December 31,                                   2019        2018        2017
Cash provided by (used in):
Operating activities                                    $ (311 )   $ (1,543 )   $ (221 )
Investing activities                                     1,000        1,588      1,163
Financing activities                                      (691 )       (585 )     (412 )
Effect of foreign exchange on cash and cash equivalents      -            -         (1 )
Net cash flow                                           $   (2 )   $   (541 )   $  529


Operating activities
The following represents the significant operating cash activities during the
years ended December 31, 2019 and 2018:
•   During the year ended December 31, 2019, Ambac Assurance received $142

million in connection with an SEC settlement with Citigroup Global Markets

Inc.

• During the year ended December 31, 2019, Ambac made interest payments on the

    Ambac Note of $143 million. During




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the year ended December 31, 2018, Ambac made interest payments on long-term debt
of $143 million, including $11 million on surplus notes made in connection with
the Rehabilitation Exit Transactions, $130 million on the Ambac Note and $2
million on the secured borrowing which was fully repaid in June 2018; and
•   Cash outflow in 2018 from the Rehabilitation Exit Transactions to third

parties was $1,354 million of which $1,162 million is included in operating

activities and $191 million is included in financing activities as it related

to payments for surplus note principal;

•   Net loss and loss expenses paid, including commutation payments are detailed
    below:


($ in million)
Year Ended
December 31,              2019      2018      2017

Net losses paid (1) $ 416 $ 344 $ 311 Net subrogation received (168 ) (140 ) (244 ) Net loss expenses paid 70 117 67 Net cash flow

$ 318     $ 321     $ 134

(1) Net losses paid include commutation payments of $214, $87 and $21 for the

years ended December 31, 2019, 2018 and 2017, respectively.

(2) For the year ended December 31, 2019, subrogation received includes $36 of

settlement proceeds related to Lehman sponsored RMBS transactions and $23

related to the COFINA Plan of Adjustment.

• During the year ended December 31, 2019 and 2018 tax payments, primarily at

Ambac UK, amounted to $21 million and $35 million, respectively.

Future operating cash flows will primarily be impacted by the level of premium
collections, investment coupon receipts and claim or commutation payments.
Financing Activities
Financing activities for the year ended December 31, 2019, included paydowns of
Ambac Note of $178 million, paydowns of VIE debt obligations of $542 million,
proceeds of $19 million from the re-issuance of 1,386 shares of Ambac owned AMPS
and proceeds of $12 million from the issuance of Ambac UK debt in connection
with the Ballantyne restructuring.
Financing activities for the year ended December 31, 2018, included proceeds
from the issuance of Tier 2 notes of $240 million, paydowns of Ambac Note of
$214 million, repayments of the Secured Borrowing of $74 million, payments for
the extinguishment of surplus notes of $191 million (in connection with the
Rehabilitation Exit Transactions) and paydowns of VIE debt obligations of $349
million.
Principal and interest due on the debt issued in connection with the
Rehabilitation Exit Transactions as well as future payments on the remaining
surplus notes will impact Ambac's future cash flows.
Collateral
AFS hedges a portion of the interest rate risk in the financial guarantee and
investment portfolio, along with legacy customer interest rate swaps with
standardized derivative contracts,

including financial futures contracts, which contain collateral or margin
requirements. Under these contracts, AFS is required to post collateral or
margin to its counterparties and futures commission merchants to cover
unrealized losses. In addition, AFS is required to post collateral or margin in
excess of the amounts needed to cover unrealized losses. All AFS derivative
contracts containing ratings-based downgrade triggers that could result in
collateral or margin posting or a termination have been triggered. If
terminations were to occur, AFS would be required to make termination payments
but would also receive a return of collateral or margin in the form of cash or
U.S. Treasury obligations with market values equal to or in excess of market
values of the swaps and futures contracts. AFS may look to re-establish hedge
positions that are terminated early, resulting in additional collateral or
margin obligations. The amount of additional collateral or margin posted on
derivatives contracts will depend on several variables including the degree to
which counterparties exercise their termination rights (or agreements terminate
automatically) and the terms on which hedges can be replaced. All collateral and
margin obligations are currently met. Collateral and margin posted by AFS
totaled $121 million (cash and securities), including independent amounts, under
these contracts at December 31, 2019.
Ambac Credit Products LLC ("ACP") is not required to post collateral under any
of its outstanding derivative contracts.
                                 BALANCE SHEET
Total assets decreased by approximately $1,269 million from December 31, 2018 to
$13,320 million at December 31, 2019, primarily due to lower VIE assets from the
deconsolidation of a VIE during 2019 (causing a reduction in assets of $1,233
million) partially offset by the consolidation of another VIE (causing an
increase in assets of $167 million) and increases from currency changes
(strengthening of the British Pound). Other significant changes during 2019 were
lower premium receivables and intangible assets from the continued runoff of the
financial guarantee insurance portfolio, particularly the Ballantyne
commutation, and lower invested assets due to claim payments and debt
redemptions.
Total liabilities decreased by approximately $1,172 million from December 31,
2018 to $11,783 million as of December 31, 2019, primarily due to changes in
VIEs consolidated as a result of financial guarantees provided by Ambac, as
noted above. The net impact of these VIE changes to liabilities was a net
decrease of $1,028 million. Other significant changes during 2019 were (i) lower
unearned premiums from the runoff of the insured portfolio, (ii) lower loss
reserves (from claim and commutation payments, including commutation payments on
Ballantyne, and the elimination of loss reserves from the COFINA VIE
consolidated), and (iii) lower long-term debt due to partial paydowns on the
Ambac Note (net of of debt issued by Ambac UK of $12 million in connection with
the Ballantyne commutation). Such declines are partially offset by an increases
in accrued interest payable on long-term debt and increases in interest rate
derivative obligations as a result of reductions in forward interest rates.
As of December 31, 2019, total stockholders' equity was $1,536 million, compared
with total stockholders' equity of $1,633 million at December 31, 2018. This
decrease was primarily driven by the net loss for 2019 partially offset by
translation gains related to


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Ambac's foreign subsidiaries and unrealized gains on investment securities.
Investment Portfolio. Ambac Assurance's investment objective is to achieve the
highest risk-adjusted after-tax return on a diversified portfolio of primarily
fixed income investments and pooled investment funds while employing
asset/liability management practices to satisfy operating and strategic
liquidity needs. Ambac Assurance's investment portfolio is subject to internal
investment guidelines and is subject to limits on types and quality of
investments imposed by the insurance laws and regulations of the jurisdictions
in which it is licensed, primarily the States of Wisconsin and New York. Such
guidelines set forth minimum credit rating requirements and credit risk
concentration limits. Within these guidelines, which in certain instances may be
exceeded with the approval of the applicable regulatory authority, Ambac
Assurance opportunistically purchases Ambac Assurance insured securities given
their relative risk/reward characteristics. Ambac Assurance's investment
policies are subject to oversight by OCI pursuant to the Settlement Agreement,
the Stipulation and Order and the indenture for the Tier 2 Notes. The Board of
Directors of Ambac Assurance approves any changes to Ambac Assurance's
investment policy.
Ambac UK's investment policy is designed with the primary objective of ensuring
that Ambac UK is able to meet its financial obligations as they fall due, in
particular with respect to policyholder claims. Ambac UK's investment portfolio
is primarily fixed income investments and diversified holdings of pooled
investment funds. The portfolio is subject to internal investment guidelines and
may be subject to limits on types and quality of investments imposed by the PRA
as regulator of Ambac UK. Ambac UK's investment policy sets forth minimum credit
rating requirements and concentration limits, among other restrictions. The
Board of Directors of Ambac UK approves any changes or exceptions to Ambac UK's
investment policy.
Ambac Financial Group, Inc.'s investment portfolio's primary objective is to
preserve capital and liquidity for strategic uses while maximizing income.
Refer to Note 10. Investments in this Form 10-K located in Part II. Item 8 for
information about Ambac's consolidated investment portfolio. Ambac's investment
polices and objectives do not apply to the assets of VIEs consolidated as a
result of financial guarantees written by its insurance subsidiaries.
The following table summarizes the composition of Ambac's investment portfolio,
excluding VIE investments, at carrying value at December 31, 2019 and 2018:
($ in millions)
December 31,                                    2019       2018
Fixed income securities                       $ 2,577    $ 3,116
Short-term                                        653        430
Other investments                                 478        391

Fixed income securities pledged as collateral 85 - Total investments (1)

$ 3,792    $ 3,937

(1) Includes investments denominated in non-US dollar currencies with a fair

value of £257 ($341) and €2 ($2) as of December 31, 2019 and £204 ($259) and

€14 ($16) as of December 31, 2018.

Ambac invests in various asset classes in its fixed income securities portfolio,
including securities covered by guarantees issued by Ambac Assurance and Ambac
UK and other financial guarantors ("insured securities"). Other investments
include diversified equity interests in pooled funds. Refer to Note 10.
Investments in this 10-K located in Part II. Item 8 for information about
insured securities by guarantor and fixed income and equity interests by asset
class. The following table provides additional details of the composition of the
fair value of other asset-backed securities at December 31, 2019 and 2018 by
classification:
($ in millions)
December 31,                         2019     2018
Other asset-backed securities
Military Housing                    $ 237    $ 241
Structured Insurance                    -      145
Student Loans                          32       32
Auto                                    -       20
Credit Cards                           18        5

Total other asset-backed securities $ 287 $ 442

(1) Includes investments guaranteed by Ambac Assurance and Ambac UK. Refer to

Note 10. Investments in this 10-K located in Part II. Item 8 for further

    details of Ambac-insured securities held in the investment portfolio.




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The following tables provide the ratings(1) distribution of the fixed income
investment portfolio based on fair value at December 31, 2019 and 2018.
[[Image Removed: chart-3d446dc8c17451e1ae6.jpg]]  [[Image Removed: chart-3af475be8f4e57eb910.jpg]]
(1) Ratings are based on the lower of Moody's or S&P ratings. If ratings are
    unavailable from Moody's or S&P, Fitch ratings are used. If guaranteed,
    rating represents the higher of the underlying or guarantor's financial
    strength rating.

(2) Below investment grade and not rated bonds insured by Ambac represented 33%

and 57% of the 2019 and 2018 combined investment portfolios, respectively.

The decrease in the percentage of below investment grade and increase in the

percentage of AAA-rated holdings since December 31, 2018, was driven by the

COFINA restructuring where below investment grade Ambac-insured bonds were

exchanged for new COFINA non-rated bonds and cash, with a majority of the new

non-rated bonds being sold prior to December 31, 2019. Cash proceeds from the

restructuring and bond sales throughout the year were invested in, amongst

other things, AAA-rated short-term investments, commercial mortgage-backed

securities and collateralized debt obligations at December 31, 2019.

Premium Receivables. Ambac either received premium upfront at time of issuance
of the insurance policy or in installments over the policy term. For installment
premium transactions, a premium

receivable asset is established equal to the (i) present value of future
contractual premiums due 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. Ambac's
premium receivables decreased to $416 million at December 31, 2019 from $495
million at December 31, 2018. As further discussed in Note 7. Financial
Guarantee Insurance Contracts, in this Form 10-K located in Part II. Item 8, the
decrease is due to premium receipts, adjustments for changes in expected and
contractual cash flows and the impact of currency exchange rates, partially
offset by accretion of premium receivable discount.
Premium receivables by payment currency were as follows:
Currency                                    Premium Receivable in    Premium Receivable in
(Amounts in millions)                          Payment Currency           U.S. dollars
U.S. Dollars                                $                261     $                261
British Pounds                              £                 97                      129
Euros                                       €                 23                       26
Total                                                                $                416


Reinsurance Recoverable on Paid and Unpaid Losses. Ambac Assurance has
reinsurance in place pursuant to surplus share treaty and facultative
agreements. To minimize its exposure to losses from reinsurers, Ambac Assurance
(i) monitors the financial condition of its reinsurers; (ii) is entitled to
receive collateral from its reinsurance counterparties under certain reinsurance
contracts; and (iii) has certain cancellation rights that can be exercised by
Ambac Assurance in the event of rating agency downgrades of a reinsurer (among
other events and circumstances). Ambac Assurance benefited from letters of
credit and collateral amounting to approximately $124 million from its
reinsurers at December 31, 2019.  Collateral is based on reinsurance contracts,
but generally includes reinsurers share of loss and loss expense reserves and
statutory unearned premiums and contingency reserves, amongst other
considerations. As of December 31, 2019 and 2018, reinsurance recoverable on
paid and unpaid losses were $26 million and $23 million, respectively. The
increase was primarily a result of adverse development in public finance insured
exposures.
Insurance Intangible Asset. At the Fresh Start Reporting Date, an insurance
intangible asset was recorded which represented the difference between the fair
value and aggregate carrying value of the financial guarantee insurance and
reinsurance assets and liabilities. The net intangible asset at December 31,
2019 and 2018 was $427 million and $719 million, respectively. The decrease was
primarily driven by amortization expense of $295 million.
Loss and Loss Expense Reserves and Subrogation Recoverable. Loss and loss
expense reserves are based upon estimates of the ultimate aggregate losses
inherent in the non-derivative portfolio for insurance policies issued to
beneficiaries, including unconsolidated VIEs. The loss and loss expense reserves
net of subrogation recoverables and before reinsurance as of December 31, 2019
and 2018 were $(482) million and $(107) million, respectively. Loss and loss
expense reserves are included in the Consolidated Balance Sheets as follows:


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                                                  Present Value of Expected
                                                       Net Cash Flows                            Gross Loss
                                                Claims and                         Unearned       and Loss
($ in millions)                                    Loss                             Premium        Expense
Balance Sheet Line Item                          Expenses       Recoveries (1)      Revenue       Reserves
December 31, 2019:
Loss and loss expense reserves                $      1,835     $         (233 )   $     (54 )   $     1,548
Subrogation recoverable                                131             (2,160 )           -          (2,029 )
Totals                                        $      1,966     $       (2,394 )   $     (54 )   $      (482 )

December 31, 2018:
Loss and loss expense reserves                $      2,246     $         (313 )   $    (107 )   $     1,826
Subrogation recoverable                                176             (2,109 )           -          (1,933 )
Totals                                        $      2,422     $       (2,422 )   $    (107 )   $      (107 )

(1) Present value of future recoveries include R&W subrogation recoveries of

$1,727 and $1,771 at December 31, 2019 and 2018, respectively.

The evaluation process for determining the level of reserves is subject to certain estimates and judgments. Please refer to the "Critical Accounting Policies and Estimates" and "Results of Operations" sections of this Management's Discussion and Analysis of Financial Condition and Results of Operations in addition to Note 2. Basis of Presentation and Significant Accounting Policies and Note 7. Financial Guarantee Insurance Contracts, respectively of the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K for further information on loss and loss expenses.

Ambac has exposure to various bond types issued in the debt capital markets. Our
experience has shown that, for the majority of bond types, we have not
experienced significant claims. The bond types that have experienced significant
claims, including through commutations, are residential mortgage-backed
securities ("RMBS"), student loan securities and public finance bond types.
These bond types represent 94% of our ever-to-date insurance claims recorded
with RMBS comprising 77%.
The table below indicates gross par outstanding and the components of gross loss
and loss expense reserves related to policies in Ambac's gross loss and loss
expense reserves at December 31, 2019 and 2018:
                                                              Present Value of Expected
                                                                    Net Cash Flows                              Gross Loss
                                                              Claims and                      Unearned           and Loss
                                          Gross Par              Loss                          Premium           Expense
($ in millions)                      Outstanding (1)(2)        Expenses       Recoveries       Revenue       Reserves (1)(3)
December 31, 2019:
RMBS                                $             3,027     $        634     $    (2,013 )   $     (13 )   $         (1,392 )
Domestic Public Finance                           2,398            1,007            (344 )         (36 )                627
Student Loans                                       472              248             (36 )          (4 )                208
Ambac UK and Other Credits                          271                4               -            (1 )                  3
Loss expenses                                         -               73               -             -                   73
Totals                              $             6,168     $      1,966     $    (2,394 )   $     (54 )   $           (482 )

December 31, 2018:
RMBS                                $             3,716     $        696     $    (1,995 )   $     (14 )   $         (1,313 )
Domestic Public Finance                           3,987            1,095            (383 )         (73 )                639
Student Loans                                       530              271             (39 )          (4 )                228
Ambac UK and Other Credits                        1,170              294              (5 )         (16 )                273
Loss expenses                                         -               66               -             -                   66
Totals                              $             9,403     $      2,422     $    (2,422 )   $    (107 )   $           (107 )

(1) Ceded par outstanding on policies with loss reserves and ceded loss and loss

expense reserves are $511 and $26 respectively, at December 31, 2019 and $540

and $23, respectively at December 31, 2018. Ceded loss and loss expense

reserves are included in Reinsurance recoverable on paid and unpaid losses.

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(2) Gross Par Outstanding includes capital appreciation bonds, which are reported

at the par amount at the time of issuance of the insurance policy as opposed

to the current accreted value of the bond.

(3) Loss reserves are included in the balance sheet as Loss and loss expense

reserves or Subrogation recoverable dependent on if a policy is in a net

liability or net recoverable position.

Variability of Expected Losses and Recoveries
Ambac's management believes that the estimated future loss component of loss
reserves (present value of expected net cash flows) are adequate to cover future
claims presented, but there can be no assurance that the ultimate liability will
not be higher than such estimates.
It is possible that our estimated future losses for insurance policies discussed
above could be understated or that our estimated future recoveries could be
overstated. We have attempted to identify possible cash flows related to losses
and recoveries using more stressful assumptions than the probability-weighted
outcome recorded. The possible net cash flows consider the highest stress
scenario that was utilized in the development of our probability-weighted
expected loss at December 31, 2019, and assumes an inability to execute any
commutation transactions with issuers and/or investors. Such stress scenarios
are developed based on management's view about all possible outcomes relating to
losses and recoveries. In arriving at such view, management makes considerable
judgments about the possibility of various future events. Although we do not
believe it is possible to have stressed outcomes in all cases, it is possible
that we could have stress case outcomes in some or even many cases. See "Risk
Factors" in Part I, Item 1A as well as the following descriptions of "RMBS
Variability," "Public Finance Variability," "Student Loan Variability," and
"Other Credits, including Ambac UK, Variability," for further discussion of the
risks relating to future losses and recoveries that could result in more highly
stressed outcomes.
The occurrence of these stressed outcomes individually or collectively would
have a material adverse effect on our results of operations and financial
condition and may result in materially adverse consequence for the Company,
including (without limitation) impairing the ability of Ambac Assurance to honor
its financial obligations; the initiation of rehabilitation proceedings against
Ambac Assurance; decreased likelihood of Ambac Assurance delivering value to
AFG, through dividends or otherwise; and a significant drop in the value of
securities issued or insured by AFG or Ambac Assurance.
RMBS Variability
Ambac has exposure to the U.S. mortgage market primarily through direct
financial guarantees of RMBS, including transactions collateralized by first and
second liens.
Changes to assumptions that could make our reserves under-estimated include an
increase in interest rates, deterioration in housing prices, poor servicing, the
effect of a weakened economy characterized by growing unemployment and wage
pressures. We utilize a model to project losses in our RMBS exposures and
changes to reserves, either upward or downward, are not unlikely if we used a
different model or methodology to project losses.

We established a representation and warranty subrogation recovery as further
discussed in Note 7. Financial Guarantee Insurance Contracts to the Consolidated
Financial Statements included in this Form 10-K. Our ability to realize RMBS
representation and warranty 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, intervention by the OCI, which could impede our
ability to take actions required to realize such recoveries and uncertainty
inherent in the assumptions used in estimating such recoveries. Additionally,
our R&W actual subrogation recoveries could be significantly lower than our
estimate of $1,702 million, net of reinsurance, as of December 31, 2019, if the
sponsors of these transactions: (i) fail to honor their obligations to
repurchase the mortgage loans, (ii) successfully dispute our breach findings or
claims for damages, (iii) no longer have the financial means to fully satisfy
their obligations under the transaction documents, or (iv) our pursuit of
recoveries is otherwise unsuccessful. Failure to realize R&W subrogation
recoveries for any reason or the realization of R&W subrogation recoveries
materially below the amount recorded on Ambac's consolidated balance sheet would
have a material adverse effect on our results of operations and financial
condition.
In the case of both first and second-lien exposures, the possible stress case
assumes a lower housing price appreciation projection, which in turn drives
higher defaults and severities. Using this approach, the possible increase in
loss reserves for RMBS credits for which we have an estimate of expected loss at
December 31, 2019 could be approximately $20 million. Combined with the absence
of any R&W subrogation recoveries, a possible increase in loss reserves for RMBS
could be approximately $1,722 million. Additionally, loss payments are sensitive
to changes in interest rates, increasing as interest rates rise. For example an
increase in interest rates of 0.50% could increase our estimate of expected
losses by approximately $45 million. There can be no assurance that losses may
not exceed such amounts.
Public Finance Variability
Ambac's U.S. public finance portfolio consists predominantly of municipal bonds
such as general and revenue obligations and lease and tax-backed obligations of
state and local government entities; however, the portfolio also comprises a
wide array of non-municipal types of bonds, including financings for
not-for-profit entities and transactions with public and private elements, which
generally finance infrastructure, housing and other public purpose facilities
and interests. The decline in public finance gross loss reserves at December 31,
2019, as compared to December 31, 2018, was primarily related to the Puerto Rico
COFINA debt restructuring, payments of claims and commutations, substantially
offset by increases in other Puerto Rico loss reserves. Total public finance
gross loss reserves and related gross par outstanding on Ambac insured
obligations by bond type were as follows:


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($ in millions)                      2019                                 2018
Issuer Type                Gross Par         Gross Loss        Gross Par         Gross Loss
December 31,            Outstanding (1)       Reserves      Outstanding (1)       Reserves
Lease and tax-backed   $           1,075    $     561      $           2,062    $        528
General obligation                   681          (16 )                  904              24
Housing                              457           29                    445              26
Transportation revenue                88           42                    471              49
Other                                 97           11                    105              12
Total                  $           2,398    $     627      $           3,987    $        639

(1) Gross Par Outstanding includes capital appreciation bonds, which are reported

at the par amount at the time of issuance of the insurance policy as opposed

to the current accreted value of the bond.

It is possible our loss reserves for public finance credits may be
under-estimated if issuers are faced with prolonged exposure to adverse
political, judicial, economic, fiscal or socioeconomic events or trends.
Our experience with the city of Detroit in 2013 in its bankruptcy proceeding was
not favorable and renders future outcomes with other public finance issuers even
more difficult to predict and may increase the risk that we may suffer losses
that could be sizable. We agreed to settlements regarding our insured Detroit
general obligation bonds that provide better treatment of our exposures than the
city planned to include in its plan of adjustment, but nevertheless required us
to incur a loss for a significant portion of our exposure. An additional
troubling precedent in the Detroit case, as well as other municipal
bankruptcies, is the preferential treatment of certain creditor classes,
especially the public pensions. The cost of pensions and the need to address
frequently sizable unfunded or underfunded pensions is often a key driver of
stress for many municipalities and their related authorities, including entities
to whom we have significant exposure, such as Chicago Public Schools, the State
of New Jersey and many others. Less severe treatment of pension obligations in
bankruptcy may lead to worse outcomes for traditional debt creditors.
Variability of outcomes applies to even what is generally considered more secure
municipal financings, such as dedicated sales tax revenue bonds that capture
sales tax revenues for debt service ahead of any amounts being deposited into
the general fund of an issuer. In the case of the Puerto Rico COFINA sales tax
bonds that were part of the Commonwealth of Puerto Rico's Title III proceedings,
Ambac Assurance and other creditors agreed to settle at a recovery rate equal to
about 93% of pre-petition amounts owed on the Ambac insured senior COFINA bonds.
In the COFINA case, the senior bonds still received a reduction or "haircut"
despite the existence of junior COFINA bonds, which received a recovery rate
equal to about 56% of pre-petition amounts owed. The amounts were confirmed as
part of the COFINA Plan of Adjustment on February 4, 2019.
In addition, municipal entities may be more inclined to use bankruptcy to
resolve their financial stresses if they believe preferred outcomes for various
creditor groups can be achieved. We expect municipal bankruptcies and defaults
to continue to be challenging to project given the unique political, economic,
fiscal, legal, governance and public policy differences among municipalities as
well as the complexity, long duration and relative infrequency of the cases
themselves in forums with a scarcity of legal precedent.

Another potentially adverse development that could cause the loss reserves on
our public finance credits to be underestimated is deterioration in the
municipal bond market, resulting from reduced or limited access to alternative
forms of credit (such as bank loans) or other exogenous factors, such as the Tax
Cuts and Jobs Act that was signed into law on December 22, 2017, which could
reduce certain municipal investors' appetite for tax-exempt municipal bonds and
over the longer term could potentially put additional pressure on issuers in
states with high state and local taxes. These factors could deprive issuers
access to funding at a level necessary to avoid defaulting on their obligations.
In addition, a more recent judicial decision in connection with the PRHTA Title
III proceedings could cause the loss reserves on our public finance credits to
be underestimated. On March 26, 2019, the U.S. Court of Appeals for the First
Circuit, affirming a decision by the U.S. District Court overseeing the PROMESA
Title III proceedings for the PRHTA, found that under Sections 928(a) and 922(d)
of the U.S. Bankruptcy Code, municipal issuers of revenue bonds secured by
special revenues are permitted, but not required, to apply special revenues to
pay debt service on such revenue bonds during the pendency of bankruptcy
proceedings for such municipal issuers. The complainants had sought an order
compelling PRHTA, as the debtor, to continue to make debt service payments on
its revenue bonds from pledged special revenues during the pendency of its Title
III case, but the First Circuit affirmed the District Court's dismissal of the
complaint, holding that it could not compel the issuer to make such payments.
The First Circuit's decision challenges what had been a commonly understood
notion in the municipal finance marketplace that municipal revenues bondholders
secured by special revenues (as defined in Chapter 9 of the U.S. Bankruptcy
Code) would continue to receive payment during a bankruptcy of the municipal
issuer. This decision introduces significant uncertainty into the public finance
market and it may make it more difficult for municipal instrumentalities to
procure revenue bond financings in the future and increases the credit risk to
bondholders of existing special revenue bonds, particularly those from weaker
issuers. In the wake of the decision, rating agencies have already taken ratings
actions on, or announced their intention to review ratings given to, bonds
issued across the country highlighting the potential contagion effect of the
various Puerto Rico proceedings under PROMESA.
While our loss reserves consider our judgment regarding issuers' financial
flexibility to adapt to adverse markets, they may not adequately capture sudden,
unexpected or protracted uncertainty that adversely affects market conditions.


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Our exposures to the Commonwealth of Puerto Rico are under stress arising from
the Commonwealth's poor financial condition, uncertain willingness and ability
to pay, weak economy, loss of capital markets access, weakened infrastructure
and severe damage caused by hurricanes Irma and Maria in 2017 as well as the
earthquakes that began in late December 2019. These factors, taken together with
the payment moratorium on debt payments of the Commonwealth and its
instrumentalities, ongoing PROMESA Title III proceedings, and certain other
provisions under PROMESA, the potential for restructurings of debt insured by
Ambac Assurance, either with or without its consent, and the possibility of
protracted litigation as a result of which its rights may be materially
impaired, may cause losses to exceed current reserves in a material manner. See
Note 17. Commitments and Contingencies to the Consolidated Financial Statements
in Part II, Item 8 and "Financial Guarantees in Force" section of Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in Part II, Item 7 in this Annual Report on Form 10-K for further
updates relating to Puerto Rico and details on the legal, economic and fiscal
developments that have impacted or may impact Ambac Assurance's insured Puerto
Rico bonds.
Material additional losses caused by the above-described factors would have a
material adverse effect on our results of operations and financial condition.
For public finance credits, including Puerto Rico as well as other issuers, for
which we have an estimate of expected loss at December 31, 2019, the possible
increase in loss reserves could be approximately $1,000 million. Among other
things, this estimate includes the possibility that the current Plan Support
Agreement (as discussed above in the Financial Guarantees in Force section of
this Management Discussion and Analysis) were to become effective. However,
there can be no assurance that losses may not exceed such amount.
Student Loan Variability
Changes to assumptions that could make our reserves under-estimated include, but
are not limited to, increases in interest rates, default rates and loss
severities on the collateral due to economic or other factors. Such factors may
include lower recoveries on defaulted loans or additional losses on collateral
or trust assets, including as a result of any enforcement actions by the
Consumer Finance Protection Bureau. For student loan credits for which we have
an estimate of expected loss at December 31, 2019, the possible increase in loss
reserves could be approximately $15 million. Additionally, an increase in
interest rates of 0.50% could increase our estimate of expected losses by
approximately $20 million. However, there can be no assurance that losses may
not exceed such amounts.
Other Credits, including Ambac UK, Variability
It is possible our loss reserves on other types of credits, including those
insured by Ambac UK, may be under-estimated because of various risks that vary
widely, including the risk that we may not be able to recover or mitigate losses
through our remediation processes. For all other credits, including Ambac UK,
for which we have an estimate of expected loss, the sum of all the highest
stress case loss scenarios is approximately $50 million greater than the loss
reserves at December 31, 2019. However, there can be no assurance that losses
may not exceed such amount. The highest stress case losses at December 31, 2019,
are $120 million lower

than the December 31, 2018, estimate primarily as a result of the Ballantyne
commutation.
Long-term Debt. Long-term debt consists of senior and junior surplus notes
issued by Ambac Assurance, the Ambac Note and Tier 2 Notes issued in connection
with the Rehabilitation Exit Transactions, and Ambac UK debt issued in
connection with the Ballantyne commutation. The carrying value of each of these
as of December 31, 2019 and 2018 is below:
                        December 31,
($ in millions)             2019         December 31, 2018
Surplus notes          $         769    $               737
Ambac note                     1,763                  1,940
Tier 2 notes                     278                    252
Ambac UK debt                     13                      -
Total Long-term Debt   $       2,822    $             2,929


The decrease in long-term debt from December 31, 2018 is primarily due to
optional redemptions of the Ambac Note by $178 million, partially offset by
increase in the Tier 2 notes balance due to paid-in-kind interest and discount
accretion, together with issuance of Ambac UK debt. Increase in Surplus notes
was due to the accretion on the carrying value of the notes.
                 SPECIAL PURPOSE AND VARIABLE INTEREST ENTITIES

Please refer to Note 2. Basis of Presentation and Significant Accounting Policies and Note 3. Variable Interest Entities to the Consolidated Financial Statements, included in Part II, Item 8 in this Form 10-K, for information regarding special purpose and variable interest entities.

                              ACCOUNTING STANDARDS
The following accounting standards have been issued but have not yet been
adopted. We do not expect these accounting standards to have a consequential
impact on Ambac's financial statements.
VIE Related Party Guidance
In October 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810) -
Targeted Improvements to Related Party Guidance for Variable Interest Entities.
To determine whether a decision-making fee is a variable interest, under the new
guidance a reporting entity must consider indirect interests held through
related parties under common control on a proportional basis rather than as a
direct interest in its entirety (as currently required in GAAP). These
amendments create alignment between determining whether a decision making fee is
a variable interest and determining whether a reporting entity within a related
party group is the primary beneficiary of a VIE. ASU 2018-17 is effective for
fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2019, with early adoption permitted. Ambac will adopt this ASU on
January 1, 2020.
Cloud Computing Arrangement Service Contracts
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-
Internal-Use Software (Subtopic 350-40) - Customer's Accounting for
Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service
Contract. The


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new guidance requires a customer in a cloud computing arrangement that is a
service contract to capitalize certain implementation costs as if the
arrangement was an internal-use software project. The internal-use software
guidance requires the capitalization of certain costs incurred only during the
application development stage. That guidance also requires entities to expense
costs during the preliminary project and post-implementation stages as they are
incurred. ASU 2018-15 is effective for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2019, with early adoption
permitted. The ASU may be applied either retrospectively or prospectively to all
implementation costs incurred after the date of adoption. Ambac will adopt this
ASU on January 1, 2020 to prospective costs.
Defined Benefit and Other Postretirement Plans Disclosures
In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits
- Defined Benefit Plans - General (Subtopic 715-20) - Disclosure Framework -
Changes to the Disclosure Requirements for Defined Benefit Plans. The ASU
modifies various disclosure requirements for employers that sponsor defined
benefit pension or other postretirement plans. Relevant disclosures that will be
removed are: i) amounts in accumulated other comprehensive income expected to be
recognized as net periodic benefit cost over the next fiscal year and ii) the
effects of a one percentage point change in assumed health care cost trend rates
on the (a) aggregate of the service and interest cost components of the net
periodic pension cost and (b) benefit obligation for postretirement healthcare
benefits. Relevant disclosures that will be added are an explanation of the
reasons for significant gains and losses related to changes in the benefit
obligations for the period. ASU 2018-14 is effective for fiscal years ending
after December 15, 2020, with early adoption permitted. The modified disclosures
must be applied on a retrospective basis for all periods presented. Ambac will
adopt this ASU on December 31, 2020.
Fair Value Measurement Disclosures
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820)
- Disclosure Framework - Changes to the Disclosure Requirements for Fair Value
Measurement. The ASU modifies various disclosure requirements on fair value
measurements. Relevant disclosures that will be removed, modified and added are
as follows:
•   Removals: 1) Amount of and reasons for transfers between Level 1 and Level 2

of the fair value hierarchy, 2) Policy for timing of transfers between

levels, and 3) Valuation processes for Level 3 fair value measurements.

• Modifications: 1) For investments in certain entities that calculate net

asset value, disclosures are only required for the timing of liquidation of

an investee's assets and the date when restrictions from redemption might

lapse, only if the investee has communicated the timing to the reporting

entity or publicly announced it and 2) Clarification that the measurement

uncertainty disclosure is to communicate information about the uncertainty in

measurement as of the reporting date and not possible future changes.

• Additions: 1) Changes in unrealized gains and losses for the period included

in other comprehensive income for recurring Level 3 fair value measurements

held at the end of the reporting period and 2) Range and weighted average of

significant unobservable inputs used to develop Level 3 fair value measurements.
Alternatively, an entity may disclose other quantitative information (such as
the median or arithmetic average) if it determines that it is a more reasonable
and rational method to reflect the distribution of unobservable inputs used.
ASU 2018-13 is effective for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2019, with early adoption permitted.
Disclosure amendments related to changes in unrealized gains and losses included
in other comprehensive income (loss) for Level 3 instruments, the range and
weighted average of significant unobservable inputs, and the narrative
description of measurement uncertainty should be applied prospectively only for
the most recent interim or annual period presented. All other disclosure
amendments should be applied retrospectively to all periods presented. Ambac
will adopt this ASU on January 1, 2020.
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses
(Topic 326) - Measurement of Credit Losses on Financial Instruments,
subsequently amended by ASU 2018-19, Codification Improvements to Topic 326,
Financial Instruments - Credit Losses; ASU 2019-04, Codification Improvements to
Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and
Hedging, and Topic 825, Financial Instruments; ASU 2019-05, Financial
Instruments-Credit Losses (Topic 326): Targeted Transition Relief ; and ASU
2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit
Losses (collectively "the ASU").
The ASU significantly affects how reporting entities will measure credit losses
for financial assets that are not accounted for at fair value through net
income, which include loans, debt securities, premium receivables, reinsurance
recoverables, net investments in leases and certain off-balance sheet credit
exposures. The ASU does not apply to recoveries of previously paid losses on
financial guarantee insurance contracts accounted for under ASC 944 nor does it
apply to equity method investments accounted for under ASC 323.
•   For financial assets measured at amortized cost, the ASU replaces the

"incurred loss" model, which generally delayed recognition of the full amount

of credit losses until the loss was probable of occurring, with an "expected

loss" model, which reflects an entity's current estimate of all expected

lifetime credit losses. Expected lifetime credit losses for amortized cost

assets will be recorded as a valuation allowance, with subsequent increases

or decreases in the allowance reflected in net income each period.

• For available-for-sale debt securities, credit losses under the ASU will be

measured similarly to current GAAP. However, under the ASU, credit losses for

available-for-sale debt securities will be recorded as a valuation allowance

(similar to the amortized cost assets approach described above), rather than

as a direct write-down of the security as is required under current GAAP. As

a result, improvements to estimated credit losses for available-for-sale debt

    securities will be recognized immediately in net income rather than as
    interest income over time.




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For both amortized cost assets and available-for-sale debt securities, our
implementation process included updates to our allowance documentation,
reporting processes and related internal controls.
Given the more significant changes to the amortized cost asset credit model, the
implementation process further included identifying the inventory of assets
impacted by this standard; design and selection of a credit loss model; and
identification of new data requirements and data sources for model
implementation. Depending on the asset type, either a discounted cash flow or
probability of default/loss given default model will be used for estimating the
effect of lifetime losses and will incorporate any necessary qualitative
adjustments for model limitations.
The ASU is effective for SEC filers that are not eligible to be smaller
reporting companies for interim and annual periods beginning after December 15,
2019. Ambac will adopt this ASU effective January 1, 2020, using a modified
retrospective approach. While we do not expect the ASU to have a consequential
impact on Ambac's financial statements, we continue to assess all the effects of
adoption. We currently believe the most significant effect will be increased
disclosure requirements.
               AMBAC ASSURANCE STATUTORY BASIS FINANCIAL RESULTS
Ambac Assurance and Everspan'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. OCI has prescribed or permitted additional accounting practices for
Ambac Assurance and Everspan which are described in Note 8. Insurance Regulatory
Restrictions to the Consolidated Financial Statements included in Part II,
Item 8 in this Form 10-K. As a result of these prescribed and permitted
practices, Ambac Assurance's policyholder surplus at December 31, 2019 and 2018
was less than NAIC SAP by $12 million and less than $42 million, respectively.
Ambac Assurance's statutory policyholder surplus and qualified statutory capital
(defined as the sum of policyholders surplus and mandatory contingency reserves)
were $1,088 million and $1,618 million at December 31, 2019, respectively, as
compared to $1,152 million and $1,648 million at December 31, 2018,
respectively. As of December 31, 2019, statutory policyholder surplus and
qualified statutory capital included $574 million principal balance of surplus
notes outstanding, $365 million principal balance of junior surplus notes
outstanding and $138 million liquidation preference of preferred stock
outstanding. These surplus and junior surplus notes (including related accrued
interest of $472 million that is not recorded under statutory basis accounting
principles) and preferred stock issued by Ambac Assurance are obligations that
have claims on the resources of Ambac Assurance that are senior to AFG's equity
and therefore impact AFG's ability to realize residual value or receive
dividends from Ambac Assurance.

The drivers to the net decrease in policyholder surplus were: • Statutory net loss of $225 million for the year ended December 31, 2019,

primarily due to loss and loss expenses from net adverse development on the

insured portfolio, operating expenses and impairment charges on loans to

subsidiaries, partially offset by net investment gains and premiums earned;

• Contributions to contingency reserves of $35 million; partially offset by


•   Surplus benefits for (i) Ambac Assurance's receipt in September 2019, in

connection with an SEC action against Citibank Global Markets Inc., of $142

million, (ii) the recognition of a previous deferred gain from the 2015 sale

of Ballantyne bonds to Ambac UK of $28 million and (iii) an increase of $17

million in the fair value of investment securities that are recorded at the

lower of amortized cost or fair value.

As further discussed in "Financial Guarantees in Force" above in the Management
Discussion and Analysis section of this Form 10-K, pursuant to the COFINA Plan
of Adjustment that was effective on February 12. 2019, Ambac Assurance commuted
a significant portion of its COFINA insured exposure. The commutation
transactions resulted in a reduction of Ambac Assurance's insured exposure to
COFINA by approximately 75% and an incurred loss of $37 million in 2019, which
was offset by accelerated earned premiums of $31 million on the insured
exposures being commuted.
Ambac Assurance's statutory surplus is sensitive to multiple factors, including:
(i) loss reserve development, (ii) approval by OCI of principal or interest
payments on existing surplus notes, (iii) approval by OCI of principal or
interest payments on existing junior surplus notes, (iv) deterioration in the
financial position of Ambac Assurance subsidiaries that have their obligations
guaranteed by Ambac Assurance, (v) first time payment defaults of insured
obligations, which increase statutory loss reserves, (vi) commutations of
insurance policies or credit derivative contracts at amounts that differ from
the amount of liabilities recorded, (vii) reinsurance contract terminations at
amounts that differ from net assets recorded, (viii) changes to the fair value
of investments carried at fair value, (ix) settlements or resolutions of
representation and warranty breach claims at amounts that differ from amounts
recorded, including failures to collect such amounts, (x) realized gains and
losses, including losses arising from other than temporary impairments of
investment securities, and (xi) future changes to prescribed SAP practices by
the OCI.
Under SAP, these amounts will be recorded as a liability once approval for
payment has been granted by OCI.
The significant differences between GAAP and SAP are that under SAP:
•   Loss reserves are only established for losses on guaranteed obligations that

have experienced a payment default in an amount that is sufficient to cover

the present value of the anticipated defaulted debt service payments over the

    expected period of default, less estimated recoveries under subrogation
    rights (5.1% as prescribed by OCI). Under GAAP, in addition to the
    establishment of loss reserves for defaulted obligations,




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loss reserves are established (net of GAAP basis unearned premium revenue) for
obligations that have experienced credit deterioration, but have not yet
defaulted using a weighted-average risk-free discount rate, currently at 2.1%.
•   Mandatory contingency reserves are required based upon the type of obligation

insured, whereas GAAP does not require such a reserve. Releases of the

contingency reserves are generally subject to OCI approval and relate to a

determination that the held reserves are deemed excessive.

• Investment grade fixed income investments are stated at amortized cost and

certain below investment grade fixed income investments are reported at the

lower of amortized cost or fair value. Under GAAP, all fixed income

investments are reported at fair value.

• Wholly owned subsidiaries are not consolidated; rather, the equity basis of

accounting is utilized and the carrying values of these investments are

subject to admissibility tests.

• Variable interest entities ("VIE") are not required to be assessed for

consolidation. Under GAAP, a reporting entity that has both the following

characteristics is required to consolidate the VIE: a) the power to direct

the activities of the VIE that most significantly impact the VIE's economic

performance and b) the obligation to absorb losses of the VIE or the right to

receive benefits from the VIE that could potentially be significant to the

VIE. Ambac Assurance generally has the obligation to absorb losses of VIEs

that could potentially be significant to the VIE as the result of its

guarantee of insured obligations issued by VIEs. For certain VIEs Ambac

Assurance has the power to direct the most significant activities of the VIE

and accordingly consolidates the related VIEs under GAAP.

• All payments of principal and interest on the surplus notes are subject to

the approval of the OCI. Unpaid interest due on the surplus notes is expensed

when the approval for payment of interest has been granted by the OCI. Under

GAAP, interest on surplus notes is accrued regardless of OCI approval.

• Upfront premiums written are earned on a basis proportionate to the remaining

scheduled debt service to the original total principal and interest insured.

Installment premiums are reflected in income pro-rata over the period covered

by the premium payment. When an insurance policy has been legally defeased,

the related portion of unearned premium revenue is accelerated and recognized

as premiums earned. Under GAAP, premium revenues for both upfront and

installment premiums are earned over the life of the financial guarantee

contract in proportion to the insured principal amount outstanding at each

reporting date.

• Insurance intangibles that arose as a result of the implementation of Fresh

Start reporting is not a concept within SAP. This insurance intangible asset

    is amortized as an expense on a level yield basis over the life of the
    related insurance risks.


           AMBAC UK FINANCIAL RESULTS UNDER UK ACCOUNTING PRINCIPLES
Ambac UK is required to prepare financial statements under FRS 102 "The
Financial Reporting Standard applicable in the UK and Republic of Ireland."
Ambac UK's shareholder funds under UK GAAP were £387 million at December 31,
2019, as compared to £263 million at December 31, 2018.  The increase in Ambac
UK's shareholders' funds was primarily due to the loss and loss expenses benefit
in the period following the restructuring and commutation of Ballantyne coupled
with the receipt of premiums and return on investments. At December 31, 2019,
the carrying value of cash and investments was £470 million, a decrease from
£498 million at December 31, 2018. The decrease in cash and investments is due
to the impact of the restructuring and commutation of Ballantyne as noted above,
tax payments and operating expenses partially offset by continued receipt of
premiums and net investment income in the period.
The significant differences between U.S. GAAP and UK GAAP are that under UK
GAAP:
•   Loss reserves are only established for losses on guaranteed obligations when,

in the judgment of management, a monetary default in the timely payment of

debt service is likely to occur, which would result in Ambac UK incurring a

loss. A loss provision is established in an amount that is sufficient to

cover the present value (currently using a discount rate of 5.23%) of the

anticipated defaulted debt service payments over the expected period of

default, less estimated recoveries under subrogation rights. The discount

rate is equal to the lower of the rate of return on invested assets for

either the current year or the period covering the current year plus the four

previous years. Under U.S. GAAP, loss reserves are established (net of U.S.

GAAP basis unearned premium revenue) for obligations that have experienced

credit deterioration, but have not yet defaulted using a weighted-average

risk-free discount rate.

• Investments in fixed income securities are stated at amortized cost, subject

to an other-than-temporary impairment evaluation. Under U.S. GAAP, all bonds

are reported at fair value, also subject to an other-than-temporary

impairment evaluation.

• Purchases of Ambac UK insured securities are bifurcated into an intrinsic and

an Ambac UK claim based value. The intrinsic value is recorded as an

investment whereas the Ambac UK claim based value is recorded as a claim

payment with an accompanying reduction in Ambac UK loss reserves. Under U.S.

GAAP, investments in Ambac UK insured securities are reported as investments

and do not reduce loss reserves.

• Variable interest entities ("VIE") are not required to be assessed for

consolidation. Under U.S. GAAP, a reporting entity that has both the

following characteristics is required to consolidate the VIE: a) the power to

    direct the activities of the VIE that most significantly impact the VIE's
    economic




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performance; and b) the obligation to absorb losses of the VIE or the right to
receive benefits from the VIE that could potentially be significant to the VIE.
Ambac generally has the obligation to absorb losses of VIEs that could
potentially be significant to the VIE as the result of its guarantee of insured
obligations issued by VIEs. For certain VIEs Ambac UK has the power to direct
the most significant activities of the VIE and accordingly consolidates the
related VIEs under U.S. GAAP.
•   Upfront premiums written are earned on a basis proportionate to the remaining

scheduled debt service to the total principal and interest insured.

Installment premiums are reflected in income pro-rata over the period covered

by the premium payment. Under U.S. GAAP, premium revenues for both upfront

and installment premiums are earned over the life of the financial guarantee

contract in proportion to the insured principal amount outstanding at each

reporting date.

• Insurance intangibles that arose as a result of the implementation of Fresh

Start reporting is not a concept within UK GAAP. Under U.S. GAAP, this

insurance intangible asset is amortized as an expense on a level yield basis

over the life of the related insurance risks.

Ambac UK is also required to prepare financial information in accordance with
the Solvency II Directive.  The basis of preparation of this information is
significantly different from both US GAAP and UK GAAP.  The calculation of
capital resources, regulatory capital requirements and regulatory capital
deficits under Solvency II at December 31, 2019, will be be published on Ambac's
website during March. Final annual Solvency II data and Ambac UK's annual
Solvency and Financial Condition Report will be published on Ambac's website on
April 22, 2019.
Available capital resources under Solvency II were a surplus of £187.5 million
at December 31, 2019, (based on the quarterly Solvency II filing made on
February 11, 2019, which may be subject to update in the final annual Solvency
II filing noted above) an improvement from a surplus of £94.9 million at
December 31, 2018. Of these available capital resources the value eligible to
meet solvency capital requirements at December 31, 2019, was £178 million in
comparison to £90 million as at December 31, 2018. Eligible capital resources at
December 31, 2019 and December 31, 2018, are in comparison to regulatory capital
requirements of £208 million and £357 million, respectively. Ambac UK is
therefore deficient in terms of compliance with applicable regulatory capital
requirements by £30 million and £267 million at December 31, 2019 and
December 31, 2018, respectively. The regulators are aware of the deficiency in
capital resources as compared to capital requirements and dialogue between Ambac
UK management and its regulators remains ongoing with respect to options for
addressing the shortcoming, although such options remain few.
                          NON-GAAP FINANCIAL MEASURES
In addition to reporting the Company's quarterly financial results in accordance
with GAAP, the Company reports two non-GAAP financial measures: Adjusted
Earnings and Adjusted Book Value. The most directly comparable GAAP measures are
net income attributable to common stockholders for Adjusted earnings and Total
Ambac Financial Group, Inc. stockholders' equity for Adjusted Book value. A
non-GAAP financial measure is a numerical measure of financial performance or
financial position

that excludes (or includes) amounts that are included in (or excluded from) the
most directly comparable measure calculated and presented in accordance with
GAAP. We are presenting these non-GAAP financial measures because they provide
greater transparency and enhanced visibility into the underlying drivers of our
business. Adjusted Earnings and Adjusted Book Value are not substitutes for the
Company's GAAP reporting, should not be viewed in isolation and may differ from
similar reporting provided by other companies, which may define non-GAAP
measures differently.
Ambac has a significant U.S. tax net operating loss ("NOL") that is offset by a
full valuation allowance in the GAAP consolidated financial statements. As a
result of this and other considerations, we utilized a 0% effective tax rate for
non-GAAP adjustments; which is subject to change.
The following paragraphs define each non-GAAP financial measure and describe why
it is useful. A reconciliation of the non-GAAP financial measure and the most
directly comparable GAAP financial measure is also presented below.
Adjusted Earnings (Loss). Adjusted Earnings (Loss) is defined as net income
(loss) attributable to common stockholders, as reported under GAAP, adjusted on
an after-tax basis for the following:
•   Non-credit impairment fair value (gain) loss on credit derivatives:

Elimination of the non-credit impairment fair value gains (losses) on credit

derivatives, which is the amount in excess of the present value of the

expected estimated credit losses. Such fair value adjustments are affected

by, and in part fluctuate with, changes in market factors such as interest

rates and credit spreads, including the market's perception of Ambac's credit

risk ("Ambac CVA"), and are not expected to result in an economic gain or

loss. These adjustments allow for all financial guarantee contracts to be

accounted for consistent with the Financial Services - Insurance Topic of

ASC, whether or not they are subject to derivative accounting rules.

• Insurance intangible amortization: Elimination of the amortization of the

financial guarantee insurance intangible asset that arose as a result of the

implementation of Fresh Start reporting. These adjustments ensure that all

financial guarantee contracts are accounted for consistent with the

provisions of the Financial Services - Insurance Topic of the ASC.

• Foreign exchange (gains) losses: Elimination of the foreign exchange gains

(losses) on the re-measurement of assets, liabilities and transactions in

non-functional currencies. This adjustment eliminates the foreign exchange

gains (losses) on all assets, liabilities and transactions in non-functional

currencies, which enables users of our financial statements to better view

the business results without the impact of fluctuations in foreign currency

exchange rates and facilitates period-to-period comparisons of Ambac's

operating performance.

• Fair value (gain) loss on interest rate derivative from Ambac CVA:

Elimination of the gains (losses) relating to Ambac's CVA on interest rate

derivative contracts. Similar to credit derivatives, fair values include the

    market's perception of




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Ambac's credit risk and this adjustment only allows for such gain or loss when realized.

The following table reconciles net income attributable to common stockholders to
the non-GAAP measure, Adjusted Earnings on a total dollar amount and per diluted
share basis, for all periods presented:
                                        2019                         2018                          2017
($ in millions, except per
share data)                                Per Diluted                   Per Diluted                  Per Diluted
Year Ended December 31,       $ Amount        Share        $ Amount         Share        $ Amount        Share
Net income (loss)
attributable to common
stockholders                 $    (216 )   $    (4.69 )   $     186     $      3.99     $    (329 )   $    (7.25 )
Adjustments:
Non-credit impairment fair
value (gain) loss on credit
derivatives                         (1 )        (0.03 )           1            0.02           (11 )        (0.24 )
Insurance intangible
amortization                       295           6.43           107            2.30           151           3.33
Foreign exchange (gains)
losses                             (12 )        (0.26 )           7            0.15           (21 )        (0.47 )
Fair value (gain) loss on
interest rate derivatives
from Ambac CVA                       -              -             -               -            45           0.99

Adjusted Earnings (Loss) $ 66 $ 1.44 $ 301 $

6.47 $ (165 ) $ (3.64 )

Adjusted Book Value. Adjusted Book Value is defined as Total Ambac Financial
Group, Inc. stockholders' equity as reported under GAAP, adjusted for after-tax
impact of the following:
•   Non-credit impairment fair value losses on credit derivatives: Elimination of

the non-credit impairment fair value loss on credit derivatives, which is the

amount in excess of the present value of the expected estimated economic

credit loss. GAAP fair values are affected by, and in part fluctuate with,

changes in market factors such as interest rates, credit spreads, including

Ambac's CVA that are not expected to result in an economic gain or loss.

These adjustments allow for all financial guarantee contracts to be accounted

    for within Adjusted Book Value consistent with the provisions of the
    Financial Services-Insurance Topic of the ASC, whether or not they are
    subject to derivative accounting rules.

• Insurance intangible asset: Elimination of the financial guarantee insurance

intangible asset that arose as a result of Ambac's emergence from bankruptcy

and the implementation of Fresh Start reporting. This adjustment ensures that

all financial guarantee contracts are accounted for within Adjusted Book

Value consistent with the provisions of the Financial Services-Insurance

Topic of the ASC.

• Ambac CVA on interest rate derivative liabilities: Elimination of the gain

relating to Ambac's CVA on interest rate derivative contracts. Similar to

credit derivatives, fair values include the market's perception of Ambac's

credit risk and this adjustment only allows for such gain when realized.

• Net unearned premiums and fees in excess of expected losses: Addition of the

value of the unearned premium revenue ("UPR") on financial guarantee

contracts, in excess of expected losses, net of reinsurance. This non-GAAP

adjustment presents the economics of UPR and expected losses for financial

guarantee contracts on a consistent basis. In accordance with GAAP,

stockholders' equity reflects a reduction for expected losses only to the

extent they exceed UPR. However, when expected losses are less than UPR for a

financial guarantee contract, neither expected losses nor UPR have an impact

on stockholders' equity. This non-GAAP adjustment adds UPR in excess of

expected losses, net of reinsurance, to stockholders' equity for financial

guarantee contracts where expected losses are less than UPR.

• Net unrealized investment (gains) losses in Accumulated Other Comprehensive

Income: Elimination of the unrealized gains and losses on the Company's

investments that are recorded as a component of accumulated other

comprehensive income ("AOCI"). The AOCI component of the fair value

adjustment on the investment portfolio may differ from realized gains and

losses ultimately recognized by the Company based on the Company's investment

strategy. This adjustment only allows for such gains and losses in Adjusted

    Book Value when realized.




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The following table reconciles Total Ambac Financial Group, Inc. stockholders'
equity to the non-GAAP measure Adjusted Book Value on a total dollar amount and
per share basis, for all periods presented:
                                                         2019               

2018

($ in millions, except per share data)
December 31,                                   $ Amount      Per Share      $ Amount      Per Share
Total Ambac Financial Group, Inc.
stockholders' equity                          $   1,477     $    32.41     $   1,592     $    35.12
Adjustments:
Non-credit impairment fair value losses on
credit derivatives                                    -           0.01             1           0.03
Insurance intangible asset                         (427 )        (9.37 )        (719 )       (15.87 )
Net unearned premiums and fees in excess of
expected losses                                     414           9.09           462          10.19
Net unrealized investment (gains) losses in
Accumulated Other Comprehensive Income (Loss)      (151 )        (3.31 )         (86 )        (1.89 )
Adjusted Book Value                           $   1,313     $    28.83     $   1,251     $    27.58


Factors that impact changes to Adjusted Book Value include many of the same
factors that impact Adjusted Earnings, including the majority of revenues and
expenses, but generally exclude components of premium earnings since they are
embedded in prior period's Adjusted Book Value through the net unearned premiums
and fees in excess of expected losses adjustment. Net unearned premiums and fees
in excess of expected losses will affect Adjusted Book Value for (i) changes to
future premium assumptions (e.g. expected term, interest rates, foreign currency
rates, time passage) and (ii) changes to expected losses for policies which do
not exceed their related unearned premiums. The Adjusted Book Value increase
from December 31, 2018 to December 31, 2019 was primarily driven by Adjusted
earnings.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk


Market risk represents the potential for losses that may result from changes in
the value of a financial instrument as a result of changes in market conditions.
The primary market risks that would impact the value of Ambac's financial
instruments are interest rate risk, credit spread risk and foreign currency
risk. Below we discuss each of these risks and the specific types of financial
instruments impacted. Senior managers are responsible for developing and
applying methods to measure risk. Ambac utilizes various systems, models and
sensitivity scenarios to monitor and manage market risk. 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. Financial
instruments of VIEs that are consolidated as a result of Ambac's financial
guarantees are excluded from the market risk measures below.
Interest Rate Risk
Financial instruments for which fair value may be affected by changes in
interest rates consist primarily of fixed income investment securities,
long-term debt and interest rate derivatives. Fixed income investment securities
that are guaranteed by Ambac have interest rate risk characteristics that behave
inversely to those associated with future financial guarantee claim payments.
Accordingly, such securities are excluded from the interest rate sensitivity
table below.
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 produce net fair value losses as rates

increase) and long-term debt and the interest rate derivatives portfolio (which
produce net fair value gains as rates increase). Ambac performs scenario testing
to measure the potential for losses in volatile markets. These scenario tests
include parallel and non-parallel shifts in the benchmark interest rate curve.
The interest rate derivatives portfolio is managed 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 of the interest rate derivatives portfolio attributable to the
macro-hedge position would produce mark-to-market gains or losses of
approximately $0.4 million for a 1 basis point parallel shift in USD benchmark
interest rates up or down at December 31, 2019.
The following table summarizes the estimated change in fair value (based
primarily on the valuation methodology discussed in Note 9. Fair Value
Measurements to the Consolidated Financial Statements included in Part II,
Item 8 in this Form 10-K) on these financial instruments, assuming immediate
changes in interest rates at specified levels at December 31, 2019:
                                            Estimated Change in Net
($ in millions)                                   Fair Value           Estimated Net Fair Value
300 Basis Point Rise                        $                  30     $                (380 )
200 Basis Point Rise                                           17                      (393 )
100 Basis Point Rise                                            7                      (403 )
Base Scenario                                                   -                      (410 )
100 Basis Point Decline(1)                                     (2 )                    (412 )
200 Basis Point Decline(1)                                     15                      (395 )

(1) Incorporates an interest rate floor of 0%

Due to the low interest rate environment as of December 31, 2019, stress
scenarios involving interest rate declines greater than 200 basis points are not
meaningful to Ambac's portfolios.
Interest rate increases would also have a negative economic impact on expected
future claim payments within the financial guarantee portfolio, most notably for
RMBS and student loan policies. An increase in interest rates of 0.50% could
increase our estimate of expected losses for RMBS and student loans by
approximately $45 million and $20 million, respectively.


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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 derivatives and investment assets. Changes in spreads are
generally caused by changes in the market's perception of the credit quality of
the underlying obligor. Market liquidity and prevailing risk premiums demanded
by market participants are also reflected in spreads and impact valuations.
The following table summarizes the estimated change in fair values on Ambac's
net derivative liabilities assuming immediate parallel shifts in reference
obligation credit spreads related to written credit derivatives and counterparty
credit spreads related to uncollateralized interest rate derivatives at
December 31, 2019. It is more likely that actual changes in credit spreads will
vary by obligor:
                                             Estimated Change in Net Fair
($ in millions)                                          Value                  Estimated Net Fair Value
250 Basis Point Widening                    $                         (20 )   $                  (35 )
50 Basis Point Widening                                                (4 )                      (19 )
Base Scenario                                                           -                        (15 )
50 basis Point Narrowing                                                4                        (11 )
250 basis Point Narrowing                                              13                         (2 )


Also included in the fair value of derivatives is the effect of Ambac's
creditworthiness, which reflects market perception of Ambac's ability to meet
its obligations. Generally, the need for an Ambac credit valuation adjustment is
mitigated by the existence of collateral posting agreements under which adequate
collateral has been posted. Derivative contracts entered into with credit
exposure to financial guarantee customers are not typically subject to
collateral posting agreements. As a result of runoff of uncollateralized
interest rate and credit default swap liabilities, Ambac's credit valuation
adjustment included in the determination of fair value has resulted in $0.1
million reduction to derivative liabilities as of December 31, 2019. An increase
in Ambac credit spreads as much as 250 basis points would result in less than a
$1 million impact to the fair value of derivatives at December 31, 2019. Refer
to Note 9. Fair Value Measurements to the Consolidated Financial Statements
included in Part II, Item 8 in this Form 10-K for further information on
measurement of the credit valuation adjustment.

Ambac's fixed income investment portfolio contains securities with different
sensitivities to and volatility of credit spreads. Fixed income securities that
are guaranteed by Ambac and were purchased in Ambac's investment portfolio have
credit spread risk characteristics that behave inversely to those associated
with future financial guarantee claim payments. Accordingly such securities are
excluded from the company's spread sensitivity measures. The following table
summarizes the estimated change in fair values of Ambac's fixed income
investment portfolio assuming immediate shifts in credit spreads across all
holdings other than Ambac guaranteed securities at December 31, 2019. It is more
likely that actual changes in credit spreads will vary by security:
                                             Estimated Change in Net Fair
($ in millions)                                         Value                 Estimated Net Fair Value
250 Basis Point Widening                    $                  (155 )        $                   2,189
50 Basis Point Widening                                         (31 )                            2,313
Base Scenario                                                     -                              2,344
50 Basis Point Narrowing                                         30                              2,374
250 Basis Point Narrowing                                        71                              2,415


Foreign Currency 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 of Ambac UK. The following table summarizes the
estimated net change in fair value of these financial instruments assuming
immediate shifts in spot foreign exchange rates to U.S. dollars as of
December 31, 2019.
($ in millions)                                                 Estimated change in fair value
Change in Foreign Exchange Rates Against U.S. Dollar
20% Decrease                                                   $                     (72 )
10% Decrease                                                                         (36 )
10% Increase                                                                          36
20% Increase                                                                          72




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