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

Following this summary is a discussion addressing the consolidated results of
operations and financial condition of Ambac Financial Group, Inc. ("AFG") for
the periods indicated. References to "Ambac," the "Company," "we," "our," and
"us" are to AFG and its subsidiaries, as the context requires. This discussion
should be read in conjunction with Ambac's Annual Report on Form 10-K for the
year ended December 31, 2019, the Cautionary Statement Pursuant To The Private
Securities Litigation Reform Act Of 1995 below and Risk Factors set forth in
Part II, Item 1A of this Form 10-Q.
This Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") contains certain financial measures, in particular the
presentation of Adjusted Earnings and Adjusted Book Value, which are not
presented in accordance with U.S. generally accepted accounting principles
("GAAP"). We are presenting these non-GAAP financial measures because they
provide greater transparency and enhanced visibility into the underlying drivers
of our business. We do not intend for these non-GAAP financial measures to be a
substitute for any GAAP financial measures and they may differ from similar
reporting provided by other companies. Readers of this Form 10-Q should use
these non-GAAP financial measures only in conjunction with the comparable GAAP
financial measures. Adjusted Earnings and Adjusted Book Value are non-GAAP
financial measures that adjust for the impact of certain non-recurring or
non-economic GAAP accounting requirements and include the addition of certain
items that the Company has or expects to realize in the future, but that are not
reported under GAAP. We provide reconciliations to the most directly comparable
GAAP measures; Adjusted Earnings to Net income attributable to

common stockholders and Adjusted Book Value to Total Ambac Financial Group, Inc.
stockholders' equity.
CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
                                      1995
Management has included in Parts I and II of this Quarterly Report on Form 10-Q,
including this MD&A, statements that may constitute "forward-looking statements"
within the meaning of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Words such as "estimate," "project," "plan,"
"believe," "anticipate," "intend," "planned," "potential" and similar
expressions, or future or conditional verbs such as "will," "should," "would,"
"could," and "may," or the negative of those expressions or verbs, identify
forward-looking statements. We caution readers that these statements are not
guarantees of future performance. Forward-looking statements are not historical
facts but instead represent only our beliefs regarding future events, which may
by their nature be inherently uncertain and some of which may be outside our
control. These statements may relate to plans and objectives with respect to the
future, among other things which may change. We are alerting you to the
possibility that our actual results may differ, possibly materially, from the
expected objectives or anticipated results that may be suggested, expressed or
implied by these forward-looking statements. Important factors that could cause
our results to differ, possibly materially, from those indicated in the
forward-looking statements include, among others, those discussed under "Risk
Factors" in Part I, Item 1A of the 2019 Annual Report on Form 10-K and in Part
II, Item 1A of this quarterly Report on Form 10-Q.
Any or all of management's forward-looking statements here or in other
publications may turn out to be incorrect and are based on management's current
belief or opinions. Ambac's actual results may vary materially, and there are no
guarantees about the

| Ambac Financial Group, Inc. 42 2020 First Quarter FORM 10-Q | --------------------------------------------------------------------------------

performance of Ambac's securities. Among events, risks, uncertainties or factors
that could cause actual results to differ materially are: (1) the highly
speculative nature of AFG's common stock and volatility in the price of AFG's
common stock; (2) uncertainty concerning the Company's ability to achieve value
for holders of its securities, whether from Ambac Assurance Corporation ("Ambac
Assurance") and its subsidiaries or from transactions or opportunities apart
from Ambac Assurance and its subsidiaries, including new business initiatives;
(3) changes in Ambac's estimated representation and warranty recoveries or loss
reserves over time; (4) failure to recover claims paid on Puerto Rico exposures
or incurrence of losses in amounts higher than expected; (5) adverse effects on
AFG's share price resulting from future offerings of debt or equity securities
that rank senior to AFG's common stock; (6) potential of rehabilitation
proceedings against Ambac Assurance; (7) dilution of current shareholder value
or adverse effects on AFG's share price resulting from the issuance of
additional shares of common stock; (8) inadequacy of reserves established for
losses and loss expenses and possibility that changes in loss reserves may
result in further volatility of earnings or financial results; (9) increased
fiscal stress experienced by issuers of public finance obligations or an
increased incidence of Chapter 9 filings or other restructuring proceedings by
public finance issuers, including an increased risk of loss on revenue bonds of
distressed public finance issuers due to recent judicial decisions adverse to
revenue bond holders; (10) Ambac's inability to realize the expected recoveries
included in its financial statements; (11) insufficiency or unavailability of
collateral to pay secured obligations; (12) credit risk throughout Ambac's
business, including but not limited to credit risk related to residential
mortgage-backed securities, student loan and other asset securitizations, public
finance obligations (including obligations of the Commonwealth of Puerto Rico
and its instrumentalities and agencies) and exposures to reinsurers; (13) credit
risks related to large single risks, risk concentrations and correlated risks;
(14) the risk that the Ambac's risk management policies and practices do not
anticipate certain risks and/or the magnitude of potential for loss; (15) risks
associated with adverse selection as Ambac's insured portfolio runs off; (16)
adverse effects on operating results or the Company's financial position
resulting from measures taken to reduce risks in its insured portfolio; (17)
disagreements or disputes with Ambac's insurance regulators; (18) our inability
to mitigate or remediate losses, commute or reduce insured exposures or achieve
recoveries or investment objectives, or the failure of any transaction intended
to accomplish one or more of these objectives to deliver anticipated results;
(19) Ambac's substantial indebtedness could adversely affect its financial
condition and operating flexibility; (20) Ambac may not be able to obtain
financing or raise capital on acceptable terms or at all due to its substantial
indebtedness and financial condition; (21) Ambac may not be able to generate the
significant amount of cash needed to service its debt and financial obligations,
and may not be able to refinance its indebtedness; (22) restrictive covenants in
agreements and instruments may impair Ambac's ability to pursue or achieve its
business strategies; (23) loss of control rights in transactions for which we
provide insurance due to a finding that Ambac has defaulted; (24) the impact of
catastrophic environmental or natural events, including catastrophic public
health events like the COVID-19 pandemic, on significant portions of our insured
and investment portfolios; (25) adverse tax consequences or other costs
resulting from the characterization of Ambac Assurance's surplus notes or other
obligations as equity; (26) risks attendant to the

change in composition of securities in Ambac's investment portfolio; (27)
changes in prevailing interest rates; (28) the expected discontinuance of the
London Inter-Bank Offered Rate; (29) factors that may influence the amount of
installment premiums paid to Ambac; (30) default by one or more of Ambac 's
portfolio investments, insured issuers or counterparties; (31) market risks
impacting assets in the Ambac's investment portfolio or the value of our assets
posted as collateral in respect of interest rate swap transactions; (32) risks
relating to determinations of amounts of impairments taken on investments; (33)
the risk of litigation and regulatory inquiries or investigations, and the risk
of adverse outcomes in connection therewith, which could have a material adverse
effect on Ambac's business, operations, financial position, profitability or
cash flows; (34) actions of stakeholders whose interests are not aligned with
broader interests of Ambac's stockholders; (35) system security risks, data
protection breaches and cyber attacks; (36) changes in accounting principles or
practices that may impact Ambac's reported financial results; (37) the economic
and regulatory impact of "Brexit"; (38) operational risks, including with
respect to internal processes, risk and investment models, systems and
employees, and failures in services or products provided by third parties; (39)
Ambac's financial position that may prompt departures of key employees and may
impact the its ability to attract qualified executives and employees; (40)
fluctuations in foreign currency exchange rates could adversely impact the
insured portfolio in the event of loss reserves or claim payments denominated in
a currency other than US dollars and the value of non-US dollar denominated
securities in our investment portfolio; and (41) other risks and uncertainties
that have not been identified at this time.
                               EXECUTIVE SUMMARY
Company Overview:
See Note 1. Background and Business Description to the Unaudited Consolidated
Financial Statements, included in Part I, Item 1 in this Form 10-Q and Note 1.
Background and Business Description in the Notes to Consolidated Financial
Statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2019, for a description of the Company and our key strategic
priorities to achieve our primary goal to maximize stockholder value.
Ambac Assurance and Subsidiaries:
A key strategy for Ambac is to increase the value of its investment in Ambac
Assurance by actively managing its assets and liabilities. Asset management
primarily entails maximizing the risk adjusted return on non-VIE invested assets
and managing liquidity to help ensure resources are available to meet
operational and strategic cash needs. These strategic cash needs include
activities associated with Ambac's liability management and loss mitigation
programs.
Asset Management:
Investment portfolios are subject to internal investment guidelines, as well as
limits on types and quality of investments imposed by applicable insurance laws
and regulations. As part of its investment strategy, and in accordance with the
aforementioned guidelines, Ambac Assurance and Ambac UK, a subsidiary of Ambac
Assurance, purchase distressed Ambac-insured securities based on their relative
risk/reward characteristics. The investment portfolios of Ambac Assurance and
Ambac UK also hold fixed income securities and various pooled investment funds.
Refer to

| Ambac Financial Group, Inc. 43 2020 First Quarter FORM 10-Q | --------------------------------------------------------------------------------

Note 8. Investments to the Unaudited Consolidated Financial Statements, included
in Part I, Item 1 in this Form 10-Q for further details of fixed income
investments by asset category and pooled investment funds by investment type.
At March 31, 2020, Ambac and its subsidiaries owned $402 million of distressed
Ambac-insured bonds, including $164 million of Puerto Rico bonds and excluding
Ambac's holdings of secured notes issued by Ambac LSNI in connection with the
Rehabilitation Exit Transactions. Subject to applicable internal and regulatory
guidelines, market conditions and other constraints, Ambac will continue to
opportunistically purchase Ambac-insured securities.
Liability and Insured Exposure Management:
Ambac Assurance's Risk Management Group focuses on the analysis, implementation
and execution of commutations, risk reduction or defeasance, and loss recovery
strategies. Analysts evaluate the estimated timing and severity of projected
policy claims as well as the potential impact of loss mitigation or remediation
strategies in order to target and prioritize policies, or portions thereof, for
commutation, reinsurance, refinancing, restructuring or other risk reduction
strategies. For targeted policies, analysts will engage with issuers,
bondholders and other economic stakeholders to negotiate, structure and execute
such strategies. During 2020, successful risk reduction transactions included:
•   A commutation in January 2020, via a refunding, of a watch list public

finance transaction with net par outstanding of $171 million at December 31,

2019; and

• A refinancing in February 2020 of an adversely classified asset-backed

leasing transaction with net par outstanding of $86 million at December 31,

2019.

The following table provides a comparison of total, adversely classified credits
("ACC") and watch list credits net par outstanding in the insured portfolio at
March 31, 2020 and December 31, 2019. Net par exposure within the U.S. public
finance market includes capital appreciation bonds which are reported at the par
amount at the time of issuance of the insurance policy as opposed to the current
accreted value of the bonds.
                 March 31,      December 31,
($ in millions)     2020            2019              Variance
Total           $    36,186    $       38,018    $ (1,832 )    (5 )%
ACC                   8,376             7,535         841      11  %
Watch list            5,442             6,752      (1,310 )   (19 )%


The overall reduction in ACC and Watch List total net par outstanding resulted
from active de-risking initiatives at Ambac Assurance and Ambac UK, including
the transactions noted above, as well as scheduled maturities, amortizations,
refundings and calls. Additionally, total net par outstanding reduced as a
result of the weakening of British Pounds as compared to US Dollars.
The increase in ACC exposures is primarily due to the addition of credits
impacted by COVID-19 (including $970 million of net par outstanding from the
watch list category), such as hotel tax, convention center and public house
insured transactions, partially offset by active de-risking and paydowns or
calls by issuers. In addition, as a result of the economic impacts from the
COVID-19 pandemic, $2,635 million of net par outstanding in sectors such as

mass transit, toll roads, and private higher education, among others, have been
added to the Survey List. The Survey List is a categorization for enhanced
monitoring of currently performing credits.
We continue to experience stress in our exposure to Puerto Rico that consists of
several different issuing entities (all below investment grade). Each issuing
entity has its own credit risk profile attributable to discreet revenue sources,
direct general obligation pledges and general obligation guarantees. Refer to
Part 1, Item 1 in the Company's Annual Report on Form 10-K for the year ended
December 31, 2019, for additional information regarding the different issuing
entities that encompass Ambac's exposures to Puerto Rico.
COVID-19
In March 2020, the outbreak of COVID-19, caused by a novel strain of the
coronavirus, was recognized as a pandemic by the World Health Organization, and
the outbreak is now widespread globally, including in the markets in which we
operate. The COVID-19 outbreak has had a notable impact on general economic
conditions, including but not limited to a sharp spike in unemployment; a broad
based and significant decrease in asset valuations; closure or severe
curtailment of the operations of many businesses and enterprises to which we are
directly or indirectly exposed, such as hotels, restaurants, sports and
entertainment facilities, airports and other transportation facilities, and
retail establishments, mostly due to shelter-in-place orders, social distancing
guidelines, travel bans and restrictions, and business shutdowns. In addition,
in March 2020 a disagreement between Russia and Saudi Arabia over oil production
quotas led to a sudden and sharp decline in oil prices which have subsequently
fallen to historic lows. Accordingly, we are now in a global recession with most
large economies experiencing negative growth. In the U.S., monetary policy and
fiscal stimulus, particularly the Coronavirus Aid, Relief and Economic Security
("CARES") Act, have helped moderate the economic impact of COVID-19, along with
stimulus and other actions taken by governments outside the U.S.; however,
credit risk remains a concern given the uncertainty over the severity and
duration of the COVID-19 related disruption.
COVID-19 has impacted Ambac's operating environment. Ambac has implemented a
COVID-19 response plan designed to ensure the safety of our staff and business
continuity. Our employees have transitioned to working remotely while
maintaining full operational capabilities. We have not experienced and do not
anticipate incurring material incremental operating expenditures to maintain the
current remote operating environment. In addition to our own staff, Ambac's
critical third-party service providers are operating remotely and therefore we
have conducted a review of these service providers and have not presently
identified or experienced any limitations or operational constraints with
respect to services provided in the current environment. Ambac does not believe
that our current operating environment has resulted in a significant change to
our disclosure controls or internal controls over financial reporting.
COVID-19 has adversely impacted Ambac's financial position and results of
operations as credit risk in the insured and investment portfolios has
increased. Municipal, project finance, mortgage-backed and student loan sectors,
and other asset securitizations, in particular, could be materially adversely
impacted, and as a result

| Ambac Financial Group, Inc. 44 2020 First Quarter FORM 10-Q | --------------------------------------------------------------------------------

we have increased loss reserves across each of these and other sectors during
the three months ended March 31, 2020. We are continuously evaluating and
updating our view of the macro economic environment as well as our specific
credit view of each of our insured exposures considering the significant
uncertainties brought upon us by the COVID-19 pandemic. The overall financial
impact from COVID-19 has been and will be a function of (i) the ability of
issuers of insured obligations and other counterparties to pay their obligations
when due, whether due to operational or financial reasons; (ii) the impact of
changes to interest rates on policy and derivative payments and (iii) the
performance of the investment portfolio.
•   Ambac's insurance policies will be drawn in the event that the issuers of

insured obligations do not make payments on their obligations when due. As a

result of the COVID-19 related economic disruption on markets where Ambac

provides financial guarantees, including lower tax, project, and business

revenues and increases in forbearances or delinquencies on mortgage and

student loan payments, we have increased our loss reserves and may further

increase them in the future depending on the duration and severity of the

crisis. Ambac also has premiums due from issuers; we currently do not expect

any significant delay or increase in credit impairments with respect to

insurance premiums, but that is subject to change.

• Ambac has exposure to reinsurance counterparties for their portions of future

claim payments. Ambac has reinsured approximately 13.8% of its gross par

outstanding to four reinsurance counterparties. Each of these reinsurance

counterparties is experienced in the business of reinsuring and/or writing

financial guaranty insurance. All have ratings of A+ (by S&P) or better and

have sufficient collateralization or replacement triggers upon downgrade.

Ambac actively monitors each of these reinsurance entities and at present

believes they have the ability to perform under their respective reinsurance

policies, but that is subject to change.

• Ambac is exposed to the risk that contractual counterparties (including those

    under our RMBS litigations and derivative counterparties) may default in
    their financial obligations, whether as the result of insolvency, lack of

liquidity, operational failure, fraud or other reasons. At present, Ambac has

no concerns about the ability of our contractual counterparties, which

include certain regulated exchanges in the case of interest rate swaps and

futures, to perform under their contracts, but that is also subject to

change.

• Asset prices have declined substantially during the quarter, particularly in

directly affected industries such as tourism, airlines, hospitality,

commercial real estate and manufacturing. While Ambac does not have

significant investments in these asset classes, we did experience a negative

total return for the investment portfolio of approximately (4.4)% during the

three month period ending March 31, 2020. We evaluated and did not recognize

credit impairments on the investment portfolio as of such date. However, in

early April 2020, we decided to monetize a material portion of our

investments in certain assets classes; including corporate securities rated

below the 'A 'rated category, all directly owned CMBS (other than Military

Housing bonds and mostly 'AAA' rated), and approximately

50% of all CLOs (all rated investment grade). While these positions were sold at
a net gain, future investment losses and impairments may be possible.
Given the economic uncertainties associated with the COVID-19 pandemic it is
impossible to fully predict all of its consequences and, as a result, it is
possible that our future operating results and financial condition may be
materially adversely affected. Refer to "Financial Guarantees In Force",
"Results of Operations" and "Balance Sheet Commentary" for further financial
details on the current impact from COVID-19.
With regard to Ambac's new business strategic objective, we continue to evaluate
opportunities in a disciplined manner. Our evaluation process has been revised
to incorporate consideration of the impact of COVID-19 on new business prospects
as well as Ambac's existing business and operations. While we continue to pursue
new business opportunities, we believe that the COVID-19 pandemic has caused a
general slow down in activity as potential targets evaluate the financial and
strategic impact of the pandemic on their businesses and due to the practical
constraints of shelter-in-place orders, social distancing guidelines, travel
bans and restrictions, and business shutdowns.
AFG:
As of March 31, 2020 the net assets of AFG were $482 million.
($ in millions)
Cash and short-term investments   $ 317
Other investments (1)               157
Other net assets (2)                  8
Total                             $ 482

(1) Includes surplus notes (fair value of $59 million) issued by Ambac Assurance

that are eliminated in consolidation.

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

with the Amended Tax Sharing Agreement of $28 million. Refer to Note 10.

Income Taxes for discussion over the timing of collection.

Financial Statement Impact of Foreign Currency:
The impact of foreign currency as reported in Ambac's Unaudited Consolidated
Statement of Total Comprehensive Income for the three months ended March 31,
2020, included the following:
($ in millions)
Net income (1)                                             $                    1
Gain (loss) on foreign currency translation                                 

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

11

Impact on total comprehensive income (loss)                $                

(34 )

(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

Unaudited Consolidated Statement of Total Comprehensive Income (Loss). Refer

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

Unaudited Consolidated Financial Statements included in Part I, Item 1 in

    this Form 10-Q for further details on transaction gains and losses.

| Ambac Financial Group, Inc. 45 2020 First Quarter FORM 10-Q | --------------------------------------------------------------------------------

Future changes to currency rates may adversely affect our financial results.
Refer to Part II, Item 7A in the Company's Annual Report on Form 10-K for the
year ended December 31, 2019 for further information on the impact of future
currency rate changes on Ambac's financial instruments.
                   CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Ambac's Unaudited Consolidated Financial Statements have been prepared in
accordance with U.S. generally accepted accounting principles ("GAAP"), which
require the use of material estimates and assumptions. For a discussion of
Ambac's critical accounting policies and estimates, see "Critical Accounting
Policies and Estimates" in Part II, Item 7 "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included in Ambac's Annual
Report on Form 10-K for the year ended December 31, 2019.
                         FINANCIAL GUARANTEES IN FORCE
Financial guarantee products were sold in three principal markets: U.S. public
finance, U.S. structured finance and international finance. The following table
provides a breakdown of guaranteed net par outstanding by market at March 31,
2020 and December 31, 2019. Net par exposures within the U.S. public finance
market include capital appreciation bonds which are reported at the par amount
at the time of issuance of the insurance policy as opposed

to the current accreted value of the bonds. Guaranteed net par outstanding
includes the exposures of policies insuring variable interest entities ("VIEs")
consolidated in accordance with the Consolidation Topic of the ASC,
Consolidation. Guaranteed net par outstanding excludes the exposures of policies
that insure bonds which have been refunded or pre-refunded and excludes exposure
of the policy that insures the notes issued by Ambac LSNI as defined in Note 1.
Background and Business Description in the Notes to the Consolidated Financial
Statements included in Part II, Item 8 in the Company's Annual Report on Form
10-K for the year ended December 31, 2019:
                           March 31,      December 31,

($ in millions)               2020            2019
Public Finance (1) (2)    $    17,093    $       17,653
Structured Finance              7,139             7,508
International Finance          11,954            12,857
Total net par outstanding $    36,186    $       38,018

(1) Includes $5,636 and $5,654 of Military Housing net par outstanding at

March 31, 2020 and December 31, 2019, respectively.

(2) Includes $1,105 and $1,123 of Puerto Rico net par outstanding at March 31,

2020 and December 31, 2019, respectively. Components of Puerto Rico net par

outstanding include capital appreciation bonds which are reported at the par

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

the current accreted value of the bonds.

The table below shows Ambac's ten largest insured exposures, by repayment
source, as a percentage of total financial guarantee net par outstanding at
March 31, 2020:
                                                                                                                   % of Total
                                                                                 Ambac            Net Par            Net Par
($ in millions)  Risk Name                           Country-Bond Type        Ratings (1)     Outstanding (2)      Outstanding
IF     AUK       Mitchells & Butlers Finance         UK-Asset                     BBB       $             957           2.6 %
                 plc-UK Pub Securitisation           Securitizations
IF     AUK       Capital Hospitals plc (3)           UK-Infrastructure            A-                      830           2.3 %
IF     AUK       Aspire Defence Finance plc          UK-Infrastructure            A-                      802           2.2 %
                 New Jersey Transportation Trust     US-Lease and
PF     AAC       Fund Authority - Transportation     Tax-backed Revenue          BBB-                     778           2.2 %
                 System
IF     AUK       Anglian Water                       UK-Utility                   A-                      772           2.1 %
IF     AUK       National Grid Gas                   UK-Utility                   A-                      713           2.0 %
IF     AUK       Posillipo Finance II S.r.l          Italy-Sub-Sovereign          BIG                     698           1.9 %
IF     AUK       Ostregion Investmentgesellschaft    Austria-Infrastructure       BIG                     662           1.8 %
                 NR 1 SA (3)
PF     AAC       Mets Queens Baseball Stadium        US-Stadium Financing        BBB-                     540           1.5 %
                 Project, NY, Lease Revenue
IF     AUK       RMPA Services plc                   UK-Infrastructure           BBB+                     531           1.5 %
Total                                                                                       $           7,283          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 $357 million from December 31,
2019. Exposures are impacted by changes in foreign exchange rates, certain
indexation rates and scheduled and unscheduled paydowns. The decrease from 2019
was primarily related to foreign exchange

| Ambac Financial Group, Inc. 46 2020 First Quarter FORM 10-Q | --------------------------------------------------------------------------------

and scheduled paydowns. The concentration of net par amongst the top ten (as a
percentage of net par outstanding) remains at 20% at March 31, 2020, and
December 31, 2019, however certain credits within the top ten have had Ambac
rating downgrades since December 31, 2019, primarily related to the impact of
COVID-19, including Mitchells & Butlers Finance plc, New Jersey Transportation
Trust Fund Authority and Mets Queens Baseball Stadium Project. Aspire Defence
Finance plc's rating at March 31, 2020, improved since December 31, 2019. The
remaining insured portfolio of financial guarantees has an average net par
outstanding of $31 million per single risk, with insured exposures ranging up to
$493 million and a median net par outstanding of $5 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.
COVID-19
COVID-19 and the public health responses by the US federal and state governments
have shut down significant portions of the US economy, including areas that
Ambac's insured obligors rely upon to generate the revenues and cash flows
necessary to service debts we insure. Governments outside the US, in markets in
which Ambac operates, have implemented similar measures to the US. Ambac has
undertaken a detailed analysis of the potential impact of the closure of certain
portions of the US economy as well as certain other economies, including the UK,
Italy, and Australia, to assess the impact of the current global recession on
its insured financial guarantee portfolio. The duration and depth of the
recession; actions such as monetary policy and fiscal stimulus, including the
CARES Act in the US that was signed into law on March 27, 2020, and future
fiscal stimulus programs; and our insured obligors' financial flexibility and
ability to mitigate the operational and economic impact of the recession will
determine the ultimate impact to Ambac's insured portfolio.
CARES Act and Other Relief Measures:
The $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act ("CARES
Act") provides relief and stimulus funds for American consumers, businesses and
industries impacted by COVID-19.
The CARES Act has several measures that impacted US municipalities and other
borrowers, including consumers, such as mortgage and student loan borrowers,
represented in our insured portfolio, including:
•   $500 billion for direct lending, loans, loan guarantees and investments to

eligible businesses, states and municipalities, including $25 billion

dedicated to passenger airlines and $4 billion dedicated to cargo airlines;

• $659 billion for small business loans (Paycheck Protection Program, as

amended by the Paycheck Protection Program and Health Care Enhancement Act

("PPP & HCE Act"));

• $150 billion allocation of direct aid to state and local governments to

reimburse them for the costs of dealing with COVID-19;

• $175 billion to the Public Health and Social Services Fund for distribution

of grants to healthcare providers and hospitals (as amended by the PPP & HCE

Act);

• $25 billion of grants for transit agencies;

• $10 billion of grants for airport authorities; and

• direct payments to households and for unemployment insurance, estimated to

    cost $560 billion.



Despite the above provisions, which are designed to help mitigate the economic
impact of the COVID-19 pandemic generally, the CARES Act contains certain
provisions that may adversely affect Ambac.
The CARES Act temporarily suspended payments on all student loans held by the
Department of Education through September 30, 2020. Although it is unclear what
impact this CARES Act provision will have on the private student loans owned by
special purpose entities that have their securitized obligations guaranteed by
Ambac Assurance, we have incorporated into our loss reserves analysis
assumptions related to increased delinquencies for borrowers with private
student loans who often also have federal student loans and may elect not to pay
altogether. Despite the assumed increase in delinquencies and losses related to
this potential phenomena as well as the general deterioration in consumer credit
related to the economic downturn, Ambac Assurance does not anticipate making
substantial claim payments on insured student loan transactions for several
years due to the structures governing the insured bonds.
Additionally, the federal government has provided temporary relief measures to
which servicers of mortgage loans must adhere. The Federal Housing
Administration ("FHA") of the US Department of Housing and Urban Development and
the Federal Housing Finance Agency ("FHFA") are providing temporary relief
measures that require mortgage loan servicers to offer relief to borrowers who
suffer hardship as a result of COVID-19. The relief measures announced include a
60-day moratorium on foreclosures and evictions and the expansion of forbearance
and repayment options. Such servicers are generally applying these guidelines to
non-FHFA loans, including those loans owned by special purpose entities that
have their securitized obligations guaranteed by Ambac Assurance. Moreover,
several State agencies have issued similar guidance to mortgage loan servicers
concerning loan forbearances and other relief for borrowers. Depending on the
severity and length of the economic downturn, there may be increasing pressure
to extend the duration of forbearances and subsequently to offer generous
repayment plans. While the impact of these and other forbearance measures on
Ambac Assurance's insured RMBS obligations are unclear, we have assumed that
such measures, as well as the economic impact of the global recession, will have
an adverse impact on delinquencies and home price appreciation for the mortgages
that underlie our insured RMBS transactions. Consequently, we have anticipated
that we will experience an increase in claim payments for certain of our insured
RMBS obligations. However, we also anticipate that the significant decline in
interest rates experienced during the first quarter of 2020 will likely generate
additional excess spread recoveries on insured RMBS obligations that will likely
more than compensate for such adverse effects.

| Ambac Financial Group, Inc. 47 2020 First Quarter FORM 10-Q | --------------------------------------------------------------------------------

In addition to, as well as in connection with the CARES Act, the Federal Reserve
has implemented a number of programs to improve liquidity and the functioning of
the financial markets in an effort to help mitigate the impact of the COVID-19
pandemic on financial markets and the macro economy as well as certain displaced
sectors of the economy, including those in which Ambac operates, including, but
not limited to:
• $500 billion for the Municipal Liquidity Facility;

• $750 billion for the Primary Market Corporate Credit Facility and Secondary

Market Corporate Credit Facility; and

• The Money Market Mutual Fund Liquidity Facility.

In the UK, on March 20, 2020, the government announced the closure of all
non-essential leisure, food and retail operations, including public houses. This
closure remains in place with the date at which such operations may be permitted
to reopen being uncertain. The UK Government also announced a number of measures
to mitigate the impact of these enforced closures including rebating employers
80% of staff salaries (up to a £2,500 per month per employee cap), tax
deferrals, business loan schemes and property tax relief.
While Ambac expects the foregoing measures to help mitigate economic damage and
aid the functioning of the capital markets, Ambac's exposure to credit risk as a
result of the economic fallout from the COIVD-19 pandemic remains elevated, and
we could experience material losses that would adversely impact our future
results of operations and financial condition.
Insured Portfolio:
Ambac established a set of base case assumptions that includes a deep recession
during the first half of 2020 with a modest recovery in the second half of 2020,
including the loosening of business and travel restrictions. We expect that US
states and municipalities will face significant budget deficits as a result of
COVID-19 related costs and lower (and delayed) income, sales and other taxes. We
expect that monetary policy and federal stimulus through the CARES Act and other
programs will help moderate the depth of the recession and therefore the impact
on Ambac's insured portfolio.
As part of the detailed analysis of the insured portfolio, we have identified
certain Public Finance sectors that are most susceptible to potential claims or
impairments as a result of a prolonged recession caused by COVID-19. Our
near-term concerns are concentrated on exposures substantially reliant on
narrow, economically sensitive revenue streams. The ability of issuers of these
obligations to pay is expected to be impaired although several issuers expressed
a willingness to use their balance sheets to support their obligations and avoid
defaults in the near-term. Ambac's insured par outstanding, net of reinsurance
("NPO"), to these Public Finance sectors are as follows:

($ in millions)
Market / Sector              Total NPO    Total Debt Service Due Next Twelve Months
Hotels / Convention Centers $       258  $                                      36.7
Stadiums                            635                                         41.7
Airports                            124                                         22.4
Dedicated Tax                       622                                        290.1
Higher Education Auxiliary          252                                         27.0
Rail / Mass Transit                 329                                         30.2
Toll Roads / Bridges                502                                         37.6
Total Public Finance        $     2,722  $                                     485.7


The RMBS and student loan insured portfolios are expected to be adversely
impacted by the previously mentioned forbearances and the general economic
downturn. Offsetting such impact for RMBS exposures is the benefit to excess
spread within the securitization structures as a result of the significant
reduction in interest rates, which will result in higher recoveries.
Ambac insured exposure includes a number of international policies where the
revenue of the issuer is demand dependent.  Such transactions have been impacted
by the reduction of revenue due to the COVID-19 pandemic.  Ambac and its
advisors are working closely with impacted issuers to review their plans and
liquidity facilities in light of these events. Ambac's NPO with respect to these
demand dependent policies are as follows:
($ in millions)
Market / Sector        Total NPO    Total Debt Service Due for Twelve Months
Stadiums              $       204  $                                     23.7
Higher Education              162                                         8.7
Airports                      171                                         5.4
Asset Securitizations         957                                        78.5
Toll Roads / Bridges          717                                        56.2
Total                 $     2,211  $                                    172.5


At this time, there are significant uncertainties surrounding the ultimate
number of claims and scope of damage resulting from this pandemic. Actual losses
from these events may vary materially from Ambac's loss and loss expense
reserves due to several factors, including the inherent uncertainties in making
such determinations and the evolving nature of this pandemic. Potential losses
from the economic consequences of the COVID-19 pandemic could be material and
therefore may have a material adverse effect on our results of operations and
financial condition.
Puerto Rico
Ambac has exposure to the Commonwealth of Puerto Rico (the "Commonwealth") and
its instrumentalities across several different issuing entities with total net
par exposure of $1,105 million as of March 31, 2020. Each has its own credit
risk profile attributable to, as applicable, discrete revenue sources, direct
general obligation pledges and/or general obligation guarantees.

| Ambac Financial Group, Inc. 48 2020 First Quarter FORM 10-Q | --------------------------------------------------------------------------------

Fiscal Plans
On May 9, 2019, the Oversight Board certified its own version of a new
Commonwealth Fiscal Plan. In this current Commonwealth Fiscal Plan, the annual
Commonwealth budget surpluses are lower in the short term but larger in the long
term than the previous plan because of a longer than previously expected
roll-out of federal disaster spending. The surplus through fiscal 2024 is just
under $14 billion, whereas the previous plan was almost $18 billion. The current
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.
On May 3, 2020, the Government of Puerto Rico submitted a draft revised
Commonwealth Fiscal Plan to the Oversight Board. The Government's draft revised
Commonwealth Fiscal Plan purports to incorporate the impact of COVID-19 on the
Commonwealth economy, and projects diminished growth, surplus, and debt capacity
as compared to previous Fiscal Plans. The draft revised Commonwealth Fiscal Plan
also states that the Oversight Board's current Plan of Adjustment is likely not
feasible given the impact of the COVID-19 pandemic. The Oversight Board has not
certified the Government of Puerto Rico's draft revised Fiscal Plan, and may
modify the draft revised Commonwealth Fiscal Plan significantly before
certifying a revised fiscal plan. The Oversight Board has stated that it hopes
to certify a revised Commonwealth Fiscal Plan by the end of May 2020. The
Oversight Board's certified Fiscal Plan could be significantly different than
either the current Commonwealth Fiscal Plan or the Government of Puerto Rico's
draft revised Commonwealth Fiscal Plan.
On June 5, 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.
The Oversight Board will determine, in its sole discretion, when to certify the
updated fiscal plans given the uncertainty of the current situation. Moreover,
the schedule for development and certification of other instrumentalities'
fiscal plans could be adjusted as well.
No assurances can be given that Ambac's financial condition will not suffer a
materially negative impact as an ultimate result of the Commonwealth Fiscal
Plan, the Commonwealth Plan of Adjustment, or any future changes or revisions to
Commonwealth fiscal plans or future fiscal plans and/or plans of adjustment for
PRHTA or other Puerto Rico instrumentalities.

Commonwealth 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 an amended plan of adjustment ("Amended POA") reflecting the
terms of this agreement.
On February 28, 2020, the Oversight Board filed an amended disclosure statement
and 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.
On March 21, 2020, the Oversight Board announced that in light of the developing
COVID-19 crisis it was shifting its efforts to assisting the government of
Puerto Rico in preparing to face the crisis. As part of this shift, the
Oversight Board presented a motion in court to adjourn consideration of the
Amended POA's disclosure hearing, originally scheduled for June 2020, until
further notice. On May 1, 2020, the Oversight Board filed a status report before
the court indicating that it was not yet prepared to propose a revised timeline
for hearings related to the Amended POA or the disclosure statement related
thereto. The Oversight Board is scheduled to file a status report on July 15,
2020, at which time the Oversight Board has indicated it will propose a timeline
for such hearings.
In a radio interview on March 24, 2020, Oversight Board Chairman Jose Carrion
stated that the COVID-19 pandemic has had a material impact on Commonwealth
finances and that the Oversight Board is reviewing the Commonwealth Plan of
Adjustment, including the size of the proposed reduction in Commonwealth debt
and proposed cuts to pensions. Carrion went on to say he does not see the
Commonwealth Plan of Adjustment moving forward as currently structured. It is
unclear at this time how much timelines for the POA process may shift as a
result of the COVID-19 crisis.
The Amended POA, as is, disproportionately disadvantages claims against the
Commonwealth related to certain revenue bonds issued by Puerto Rico
instrumentalities, 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 revenues available to the
Puerto Rico instrumentalities addressed in the Amended POA or the recoveries on
claims against the Commonwealth by creditors of those instrumentalities,
including Ambac and Ambac-insured bondholders. However, if the Amended POA were
confirmed in its current form, Ambac's financial condition would suffer a
material negative impact. Refer to Note 6. Financial Guarantee Insurance
Contracts to the Unaudited Consolidated Financial

| Ambac Financial Group, Inc. 49 2020 First Quarter FORM 10-Q | --------------------------------------------------------------------------------

Statements included in Part I, Item 1 in this Form 10-Q for the possible
increase in loss reserves under stress or other adverse conditions, including
the impact of the Amended POA. There can be no assurance that losses may not
exceed such estimates.
Mediation
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 $48 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. To date, only about $15
billion has been disbursed. More than $20 billion of Community Development Block
Grants (CDBG) was appropriated by Congress for Puerto Rico for reconstruction
following Hurricane Maria, but very little has yet been drawn down. The
Department of Housing and Urban Development (HUD), which administers the CDBG
program, has 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.
The Oversight Board states, on their COVID-19 webpage, that Puerto Rico
residents, businesses, and government appear to be eligible for approximately
$10 billion in federal aid under the CARES Act. On April 22, 2020, the
Government of Puerto Rico announced that they had received $2.2 billion in
direct aid provided by the CARES Act for the territories, for necessary COVID-19
related expenditures and costs not previously budgeted for. In addition, all
U.S. citizens and residents (including in Puerto Rico) will receive one-time
cash payments of $1,200 for single taxpayers, $2,400 for married filers and $500
for each child, with payments gradually phasing out for individuals who earn
between $75,000 and $99,000 per year (or $150,000 and $198,000 for married
filers).

The Government of Puerto Rico's initial estimate is that eligible residents of
Puerto Rico will receive a total aggregate amount of $1.5 billion. Separately,
Commonwealth small businesses have received an estimated $757 million in loans
under the first portion of the Payroll Protection Fund (PPP) under the CARES
Act. Puerto Ricans who are unemployed will also benefit from federal funding in
the CARES Act that increases unemployment insurance benefits significantly for
several months.
The full extent of federal government support to Puerto Rico is still uncertain
as existing federal stimulus has not been fully implemented and additional
measures are likely to be enacted. While the previously allocated federal
disaster relief funds, Medicaid money, and the more recent COVID-19 crisis
related funds are all expected to support economic recovery and growth and in
Puerto Rico, there can be no assurances as to the certainty, timing, usage,
efficacy or magnitude of benefits to creditor outcomes related to disaster aid
and ensuing economic growth, if any.
Summary
Ambac has considered these developments and other factors in evaluating its
Puerto Rico loss reserves. During the quarter ended March 31, 2020, Ambac had
incurred losses associated with its Domestic Public Finance insured portfolio of
$178 million, which was impacted by lower discount rates as well as the
continued uncertainty and volatility of the situation in Puerto Rico, including
the potential impact of the COVID-19 crisis on the Commonwealth and the
developing potential impact of the COVID-19 crisis on other sectors in the
Domestic Public Finance insured portfolio. 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 and the overall uncertain impact of the COVID-19
crisis on the Commonwealth and the Domestic Public Finance Insured Portfolio in
general. Such additional losses may have a material adverse effect on Ambac's
results of operations and financial condition.
Exposure Currency
The table below shows the distribution by currency of Ambac Assurance's insured
exposure as of March 31, 2020:
                         Net Par Amount      Net Par Amount
Currency                 Outstanding in      Outstanding in
(Amounts in millions)     Base Currency       U.S. Dollars
U.S. Dollars            $         24,621    $        24,621
British Pounds          £          7,665              9,530
Euros                   €          1,543              1,700
Australian Dollars      A$           545                335
Total                                       $        36,186

| Ambac Financial Group, Inc. 50 2020 First Quarter FORM 10-Q | --------------------------------------------------------------------------------

Ratings Distribution
The following charts provide a rating distribution of net par outstanding based
upon internal Ambac credit ratings(1) and a distribution by bond type of Ambac's
below investment grade ("BIG") net par exposures at March 31, 2020 and December
31, 2019. BIG is defined as those exposures with an Ambac internal credit rating
below BBB-:
[[Image Removed: chart-839372e76f7d5a4393b.jpg]][[Image Removed: chart-6029d955762f5948b2c.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.



                                         Net Par Outstanding

Summary of Below Investment March 31, December 31, Grade Exposure ($ in millions) 2020

               2019
Public Finance:
Lease and tax-backed (1)         $     1,236          $       1,109
General obligation (1)                   354                    525
Housing (2)                              310                    311
Transportation                            27                     27
Other                                     42                     42
Total Public Finance                   1,969                  2,014
Structured Finance:
RMBS                                   3,204                  3,362
Student loans                            592                    620
Other                                     21                     33
Total Structured Finance               3,817                  4,015
International Finance:
Other                                  1,477                  1,455
Total International Finance            1,477                  1,455
Total                            $     7,263          $       7,484

(1) Lease and tax-backed revenue includes $996 and $1,014 of Puerto Rico net par

at March 31, 2020 and December 31, 2019, respectively. General obligation

includes $109 and $109 of Puerto Rico net par at March 31, 2020 and December

31, 2019, respectively. Components of Puerto Rico net par outstanding

includes capital appreciation bonds which are reported at the par amount at

the time of issuance of the related insurance policy as opposed to the

current accreted value of the bonds.

(2) Relates to military housing net par.

The decrease in below investment grade exposures is primarily due to the
commutation of certain general obligation exposures and the impact of foreign
exchange rates resulting from the strengthening of the US Dollar, partially
offset by the addition of certain lease and tax-baked exposures and an
international structured finance exposure driven by the COVID-19 pandemic.
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.
Accordingly, due to these and other factors, it is not unreasonable to expect
the proportion of below investment grade exposure in the guarantee portfolio to
increase in the future.
                             RESULTS OF OPERATIONS
Net loss attributable to common stockholders for the three months ended March
31, 2020, was $280 million compared to a net loss attributable to common
stockholders of $43 million for the three months ended March 31, 2019. The
decrease was primarily driven by: (i) net losses on investments, (ii) larger net
losses on derivative contracts, (iii) lower net premiums earned, (iv) lower
income on variable interest entities and (v) higher loss and loss expenses,
partially offset by lower insurance intangible amortization.

| Ambac Financial Group, Inc. 51 2020 First Quarter FORM 10-Q | --------------------------------------------------------------------------------

A summary of our financial results is shown below:

                                                              Three Months Ended March 31,
($ in millions)                                                2020                   2019
Revenues:
Net premiums earned                                     $            10         $            28
Net investment income (loss)                                        (21 )                    55
Net realized investment gains (losses)                                8                      17
Net gains (losses) on derivative contracts                          (70 )                   (16 )
Income (loss) on variable interest entities                           3                      16

Expenses:

Losses and loss expenses (benefit)                                  117                      12
Insurance intangible amortization                                    13                      36
Operating expenses                                                   24                      25
Interest expense                                                     63                      68
Provision for income taxes                                           (7 )                     2

Net income (loss) attributable to common stockholders $ (280 )

     $           (43 )


Ambac's results of operations and financial position have been adversely
impacted by the COVID-19 pandemic's effect on the global economy and financial
markets. Significant interest rate declines during the first quarter of 2020
drove a net increase to loss reserves and losses on interest rate derivative
contracts. Credit driven losses were recognized in both loss incurred (primarily
from public finance insurance policies) and losses in counterparty credit
adjustments on derivative asset valuations. Financial market disruptions are
reflected through lower valuations of certain fixed income securities (recorded
through other comprehensive income) and the majority of other investments
(recorded through net investment income (loss)). The scope, duration and
magnitude of the direct and indirect effects of COVID-19 are evolving rapidly
and in ways that are difficult or impossible to anticipate. As a result, it is
possible that Ambac's results of operations and financial condition may be
further adversely affected by the evolving affects of the COVID-19 pandemic. For
additional information on the risks posed by COVID-19, refer to "Part II, Item
1A-Risk Factors" in this Quarterly Report on Form 10-Q.
During 2019, Ambac executed on a number of restructuring / commutation
transactions that had significant impacts to the consolidated results of
operations. 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 three months ended March 31, 2020 and 2019. The
most significant transactions, which are more fully discussed in "Financial
Guarantees in Force" in Part II, Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in Ambac's Annual Report
on Form 10-K for the year ended December 31, 2019 were:
Puerto Rico COFINA Plan of Adjustment ("POA"). On February 12, 2019, the POA,
including certain related commutation transactions, and subsequent
distributions, became effective, resulting in a significant reduction of Ambac
Assurance's insured net par exposure to COFINA. Pursuant to the COFINA POA,
approximately 75% of holders of Ambac Assurance-insured senior COFINA bonds
(including Ambac) elected to commute their insurance policy.

Ballantyne Re plc ("Ballantyne") Restructuring. On April 25, 2019, Ballantyne
commenced, under Irish law, a restructuring transaction ("Restructuring") in
respect of its obligations, including obligations that were guaranteed by Ambac
UK. The arrangement was approved on June 17, 2019. With the successful
implementation of the Restructuring, Ambac UK has ceased to have any exposure
with respect to the obligations of Ballantyne.
The following paragraphs describe the consolidated results of operations of
Ambac and its subsidiaries for the three months ended March 31, 2020 and 2019,
respectively.
Net Premiums Earned. Net premiums earned primarily represent the amortization
into income of insurance premiums. We present accelerated premiums, which result
from calls and other accelerations of insured obligations separate from normal
net premiums earned. When an insured bond has been retired, any remaining
unearned premium revenue ("UPR") is recognized at that time to the extent the
financial guarantee contract is legally extinguished, causing accelerated
premium revenue. For installment premium paying transactions, we offset the
recognition of any remaining UPR by the reduction of the related premium
receivable to zero (as it will not be collected as a result of the retirement),
which may cause negative accelerated premium revenue.
Net premiums earned decreased $18 million for the three months ended March 31,
2020, compared to the same period in the prior year. Normal net premiums earned
and accelerated premiums are reconciled to total net premiums earned in the
table below. The following table provides a breakdown of normal premiums earned
by market:
                                       Three Months Ended March 31,
($ in millions)                               2020                    2019
Normal premiums earned
Public finance                 $           5                         $   8
Structured finance                         1                             3
International finance                      4                             5
Total normal premiums earned              10                            16
Accelerated earnings                       -                            12
Total net premiums earned      $          10                         $  28


The decrease in normal premiums earned in the three months ended March 31, 2020,
is primarily attributable to (i) the continued runoff of the insured portfolio
in all markets and (ii) changes to allowance for credit losses on premiums
receivables. Ambac adopted ASU 2016-13, Measurement of Credit Losses on
Financial Instruments ("CECL"), on January 1, 2020, and will assess the
allowance for credit losses on premium receivables on a quarterly basis. Prior
to adoption of ASU 2016-13, Ambac assessed collectability of premium receivables
in accordance with ASC 944 and recorded an allowance for uncollectible premiums.
The three months ended March 31, 2020, includes an increase in the allowance for
credit losses since adoption of CECL of $2 million as compared to an increase of
less than $1 million for the three months ended March 31, 2019. Terminations and
accelerations, including those which occurred in prior periods, result in lower
normal premiums earned in current and future periods. First quarter 2020 Public
Finance

| Ambac Financial Group, Inc. 52 2020 First Quarter FORM 10-Q | --------------------------------------------------------------------------------

normal earned premiums were also impacted by large reinsurance cessions in the
second half of 2019.
The decrease in accelerated earnings in the three months ended March 31, 2020,
as compared to the three months ended March 31, 2019, is primarily related to
the COFINA restructuring that occurred in February 2019.
Net Investment Income (Loss). Net investment income (loss) primarily consists of
interest and net discount accretion on fixed income securities classified as
available-for-sale and net gains (losses) on pooled investment funds which
include changes in fair value of the funds' net assets. Fixed income securities
include investments in Ambac-insured securities that are made opportunistically
based on their risk/reward and asset-liability management characteristics. As
described further below, investment income from holdings of Ambac-insured
securities (including Secured Notes issued by Ambac LSNI, LLC) for the periods
presented have primarily been affected by restructuring transactions involving
Puerto Rico and Ballantyne bonds. Investments in pooled investment funds and
certain other investments are either classified as trading securities with
changes in fair value recognized in earnings or are reported under the equity
method. These funds and other investments are reported in Other investments on
the Unaudited Consolidated Balance Sheets and consist primarily of pooled fund
investments in diversified asset classes. For further information about
investment funds held, refer to Note 8. Investments to the Unaudited
Consolidated Financial Statements, included in Part I, Item 1 in this Form 10-Q.
Net investment income (loss) from Ambac-insured securities; available-for-sale
and short-term securities, other than Ambac-insured; and Other investments is
summarized in the table below:
                                                           Three Months Ended March 31,
($ in millions)                                            2020             

2019

Securities available-for-sale: Ambac-insured
(including Secured Notes)                         $              16           $              29
Securities available-for-sale and short-term
other than Ambac-insured                                         15                          18
Other investments (includes trading securities)                 (52 )                         8
Net investment (loss) income                      $             (21 )         $              55


Net investment (loss) income was $(21) million for the three months ended March
31, 2020, a decrease of $76 million compared to the three months ended March 31,
2019. The decrease was primarily driven by unrealized losses on fund investments
resulting from the impact of the COVID-19 pandemic on financial markets, a
smaller allocation to higher yielding Ambac-insured securities and a lower
overall invested asset base.
Losses on Other investments reported for the three months ended March 31, 2020,
were in hedge and other fund investments focusing on asset-backed securities,
equities, high-yield, leveraged loans and private credit. These losses were
primarily driven by adverse changes in fair values, as opposed to realized
losses, stemming from an increase in risk premiums (including credit spreads) as
a consequence of the economic and financial market impact of the COVID-19
pandemic. These investment funds have begun to recover in value during the
second quarter of 2020. Ambac currently views these unrealized losses as
temporary

subject to any subsequent decisions to monetize certain investments in
connection with changes in investment strategy, market conditions, and/or other
circumstances. Other investment income for the three months ended March 31,
2019, was driven by gains on equity, high-yield and loan funds, partially offset
by losses on an insurance-linked security fund.
Income from Ambac-insured securities was lower due to the effects of 2019
de-risking transactions and ongoing redemptions of Secured Notes issued by Ambac
LSNI, LLC. Ambac's holdings of insured COFINA and Ballantyne bonds were settled
in connection with the February 2019 COFINA commutation and June 2019 Ballantyne
Restructuring, respectively, accounting for the majority of the decrease in
income from Ambac-insured securities. Additionally, income from Secured Notes is
down as a result of early redemptions as well as lower LIBOR indexed coupon
rates effective for the three months ended March 31, 2020 as compared to the
three months ended March 31, 2019.
Net investment income (loss) from available-for-sales securities other than
Ambac-insured securities decreased primarily as a result of the favorable impact
on income for the three months ended March 31, 2019, of high yielding uninsured
COFINA bonds received under the POA. All of these uninsured COFINA bonds were
sold from Ambac's non-VIE investment portfolio by December 31, 2019.
Additionally, income from available-for-sale securities for the three months
ended March 31, 2020, was down due to a smaller asset base and generally
declining reinvestment rates since first quarter 2019.
Net Realized Investment Gains (Losses). The following table provides a breakdown
of net realized gains (losses) for the periods presented:
                                                          Three Months Ended March 31,
($ in millions)                                              2020           

2019

Net gains (losses) on securities sold or called       $              6     $          20
Net foreign exchange gains (losses)                                  2                (3 )
Credit impairments                                                   -                 -
Intent / requirement to sell impairments                             -                 -
Total net realized gains (losses)                     $              8     

$ 17

Net realized gains on securities sold or called for the three months ended March
31, 2020, are primarily from sales in connection with routine portfolio
management. Net realized gains on securities sold or called for the three months
ended March 31, 2019, included $19 million of net gains related to the impact of
the COFINA Plan of Adjustment and sales of Ambac-insured Puerto Rico COFINA
bonds and new uninsured COFINA bonds received in the commutation.
Impairments are reported through earnings if management intends to sell
securities or it is more likely than not that the Company will be required to
sell before recovery of amortized cost. Credit impairments are recorded in
earnings only to the extent management does not intend to sell, and it is not
more likely than not that the Company will be required to sell the securities,
before recovery of their amortized cost. When credit impairments are recorded,
any non-credit related impairment amounts on the securities are recorded in
other comprehensive income.

| Ambac Financial Group, Inc. 53 2020 First Quarter FORM 10-Q | --------------------------------------------------------------------------------

Intent / requirement to sell impairments for the three month periods ended March
31, 2020, and 2019, related solely to management's intent to sell securities.
Net Gains (Losses) on Derivative Contracts. Net gains (losses) on derivative
contracts include results from the Company's interest rate derivatives portfolio
and its runoff credit derivatives portfolio. The interest rate derivatives
portfolio is positioned to benefit from rising rates as a partial economic hedge
against interest rate exposure in the financial guarantee and investment
portfolios. As forward rates and interest rate exposures elsewhere in the
company have declined over the course of 2019 into the first quarter 2020, the
economic hedge position has been reduced. Net gains (losses) on interest rate
derivatives generally reflect mark-to-market gains (losses) in the portfolio
caused by increases (declines) in forward interest rates during the periods, the
carrying cost of the portfolio, and the impact of counterparty credit
adjustments as discussed below. Results from credit derivatives were not
significant to the periods presented.
Net gains (losses) on interest rate derivatives for the three months ended March
31, 2020, were ($68) million, compared to ($17) million for the three months
ended March 31, 2019. The net loss for the three months ended March 31, 2020,
reflects significant declines in forward interest rates, triggered by the
COVID-19 pandemic, and losses from the application of counterparty credit
adjustments, described further below. The net losses for three months ended
March 31, 2019, were driven by the impact of declines in forward interest rates
during the period. Net carrying costs were not significant to the periods
presented.
Counterparty credit adjustments are generally applicable for uncollateralized
derivative assets that may not be offset by derivative liabilities under a
master netting agreement. Inclusion of counterparty credit adjustments in the
valuation of interest rate derivatives resulted in (losses) within Net gains
(losses) on derivative contracts of $(30) million for the three months ended
March 31, 2020, and $(1) million for the three months ended March 31, 2019. The
loss for the three months ended March 31, 2020, was driven by wider credit
spreads, including the effect of a credit rating downgrade of a derivative
counterparty by Ambac during the quarter, simultaneous with an increase in the
underlying asset value as interest rates declined.
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) 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
Ambac's insurance subsidiaries through insurance claim payments. Differences

between the net carrying value of the insurance accounts under the Financial
Services-Insurance Topic of the ASC and the carrying value of the consolidated
VIE's net assets or liabilities are recorded through income at the time of
consolidation or deconsolidation. 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 $3 million for the three months
ended March 31, 2020, compared to income of $16 million for the three months
ended March 31, 2019. Results for the three months ended March 31, 2020, were
due primarily to realized gains of $8 million on sales of assets from the COFINA
Trust partially offset by the lower valuation of net assets on another VIE
driven by the economic uncertainty caused by COVID-19. Results for the three
months ended March 31, 2019, were driven by the $15 million gain on
consolidation of the COFINA Trust.
Refer to Note 3. Variable Interest Entities to the Unaudited Consolidated
Financial Statements, included in Part I, Item 1 in this Form 10-Q for further
information on the accounting for VIEs.
Losses and Loss Expenses. Losses and loss expenses are based upon estimates of
the aggregate losses inherent in the non-derivative financial guarantee
portfolio for insurance policies issued to beneficiaries, including
unconsolidated VIEs.
Ambac records as a component of its loss reserve estimate subrogation recoveries
related to securitized loans in RMBS transactions with respect to which Ambac
Assurance is pursuing claims for breaches of representations and warranties.
Ambac does not include potential recoveries attributed solely to fraudulent
inducement claims in our litigations in our estimate of subrogation recoveries.
Generally, the sponsor of an RMBS transaction provided representations and
warranties with respect to the securitized loans, including representations with
respect to the loan characteristics, the absence of borrower fraud in the
underlying loan pools or other misconduct in the origination process and
attesting to the compliance of loans with the prevailing underwriting policies.
Ambac has recorded representation and warranty subrogation recoveries, net of
reinsurance, of approximately $1,738 and $1,702 at March 31, 2020, and
December 31, 2019, respectively. The increase in these recoveries was primarily
driven by lower discount rates used to discount estimated cash flows. Refer to
Note 2. Basis of Presentation and Significant Accounting Policies to the
Consolidated Financial Statements included in Part II, Item 8 in the Company's
Annual Report on Form 10-K for the year ended December 31, 2019, for more
information regarding the estimation process for R&W subrogation recoveries.

| Ambac Financial Group, Inc. 54 2020 First Quarter FORM 10-Q | --------------------------------------------------------------------------------

The following provides details, by bond type, for losses and loss expenses (benefit) incurred for the periods presented:

                                Three Months Ended March 31,
($ in millions)                    2020                2019
RMBS                         $        (83 )       $        (39 )
Domestic Public Finance               178                   69
Student Loans                          14                   (4 )
Ambac UK and Other Credits              7                  (15 )
Totals (1)                   $        117         $         12

(1) Includes loss expenses incurred (benefit) of $3 and $29 for the three months

ended March 31, 2020 and 2019, respectively.

Losses and loss expenses (benefit) for the three months ended March 31, 2020,
were driven by the following:
•   Higher projected losses in domestic public finance driven mostly by lower
    discount rates (primarily relating to Puerto Rico) and incurred losses
    related to transactions directly impacted by the economic impact from
    COVID-19; and

• An increase in student loan losses as a result of lower discount rates and

the impact from COVID-19; partially offset by

• Favorable RMBS development as a result of the positive impact of lower

interest rates on excess spread, reduced by the negative impact of lower

discount rates and expected losses from COVID-19 related

delinquencies/defaults.

Losses and loss expenses (benefit) for the three months ended March 31, 2019,
were driven by the following:
•   Higher projected losses in domestic public finance largely driven by

additions to Puerto Rico loss reserves; partially offset by

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

on excess spread from declines in interest rates reduced by an increase in

loss expenses;

• Favorable development within Ambac UK and Other Credits primarily from

certain Ambac UK credits; and

• A portion of Ambac UK's loss reserves are denominated in currencies other

than their functional currency of British Pounds resulting in incurred losses

(gains) when the British Pound depreciates (appreciates). Ambac recognized $6

million in foreign exchange gain for the three months ended March 31, 2019.

Insurance Intangible Amortization. Insurance intangible amortization for the
three months ended March 31, 2020, was $13 million, a decrease of $23 million
over the three months ended March 31, 2019, primarily due to accelerated
amortization related to the COFINA restructuring that occurred in February 2019.

Operating Expenses. Operating expenses consist of gross operating expenses plus
reinsurance commissions. The following table provides a summary of operating
expenses for the periods presented:
                                       Three Months Ended March 31,
($ in millions)                               2020                    2019
Compensation                   $          14                         $  14
Non-compensation                           9                            10
Gross operating expenses                  24                            25
Reinsurance commissions, net               -                             -
Total operating expenses       $          24                         $  25


Gross operating expense for the three months ended March 31, 2020, were $24
million, a decrease of $1 million from the three months ended March 31, 2019.
Operating expenses incurred relating to COVID-19 have been minimal for the three
months ended March 31, 2020.
The decrease in operating expenses was due to the following:
•   Lower compensation costs primarily due to lower salaries resulting from

continued right sizing of staffing levels during 2019, partially offset by

higher incentive compensation costs related to final performance metrics

impacting settlement of 2019 annual bonuses, and

• Lower non-compensation costs primarily due to a $1 million UK Value Added Tax

(VAT) refund recognized in the three months ended March 31, 2020.

Legal and consulting services provided for the benefit of OCI amounted to $0.5
million and $0.5 million during the three months ended March 31, 2020 and 2019,
respectively.
Interest Expense. Interest expense includes accrued interest on the Ambac Note,
Tier 2 Notes, surplus notes and other debt obligations. Additionally, interest
expense includes discount accretion when the debt instrument carrying value is
at a discount to par.
The following table provides details by type of obligation for the periods
presented:
                                 Three Months Ended March 31,
($ in millions)                         2020                    2019
Surplus notes (1)        $          26                         $  24
Ambac note                          31                            38
Tier 2 notes                         7                             6
Other                                -                             -
Total interest expense   $          63                         $  68

(1) Includes junior surplus notes.

The decrease in interest expense for the three months ended March 31, 2020, compared to the three months ended March 31, 2019, was primarily driven by optional redemptions and lower rate resets of the floating rate Ambac Note partially offset by interest compounding on the surplus notes and the Tier 2 Notes. The increase in interest expense also reflects the impact of applying the

| Ambac Financial Group, Inc. 55 2020 First Quarter FORM 10-Q | --------------------------------------------------------------------------------

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.
In April 2020, OCI declined the request of Ambac Assurance to pay the principal
amount of the surplus notes, plus all accrued and unpaid interest thereon, on
the scheduled maturity date of June 7, 2020. As a result, the scheduled payment
date for interest, and the scheduled maturity date for payment of principal of
the surplus notes, shall be extended until OCI grants approval to make the
payment. Interest will accrue, compounded on each anniversary of the original
scheduled payment date or scheduled maturity date, on any unpaid principal or
interest through the actual date of payment, at 5.1% per annum. Holders of
surplus notes will have no rights to enforce the payment of the principal of, or
interest on, surplus notes in the absence of OCI approval to pay such amount.
The interest on the outstanding surplus notes and junior surplus notes were
accrued for and Ambac Assurance is accruing interest on the interest amounts
following each scheduled payment date. Total accrued and unpaid interest for
surplus notes and junior surplus notes outstanding to third parties were $312
million and $152 million, respectively, at March 31, 2020.
Provision for Income Taxes. The provision for income taxes for the three months
ended March 31, 2020, was $(7) million, a decrease of $9 million compared to the
provision for income taxes reported for three months ended March 31, 2019. The
change for the three months ended March 31, 2020, compared to the prior year was
primarily attributable Ambac UK, which had a taxable loss, related to investment
losses on pooled funds, in 2020 as compared to taxable income in 2019.
                        LIQUIDITY AND CAPITAL RESOURCES
Ambac Financial Group, Inc. ("AFG") Liquidity. AFG's liquidity is primarily
dependent on its cash, investments, and net receivables totaling $482 million as
of March 31, 2020, and secondarily on its 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.
•   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. OCI approved this $4 million

reimbursement for 2019 expenses, which was paid in March 2020.

AFG's investments include securities directly and indirectly issued by and/or
insured by Ambac Assurance, some of which are eliminated in consolidation.
Securities issued or insured by Ambac Assurance are generally less liquid than
investment grade and other traded investments.
It is highly unlikely that Ambac Assurance will be able to make dividend
payments to AFG for the foreseeable future and therefore cash and investments,
payments under the intercompany cost allocation agreement and future tolling
payments, if any, will be 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 the Company's Annual Report on Form 10-K
for the year ended December 31, 2019, and Note 8. Insurance Regulatory
Restrictions to the Consolidated Financial Statements included in Part II,
Item 8, in the Company's Annual Report on Form 10-K for the year ended
December 31, 2019, 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.
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.
•   The COVID-19 pandemic had a negative impact on Ambac's available liquidity as

a consequence of the adverse reaction of the capital markets, which led to a

reduction in the value and marketability of our invested assets; derivative

losses, which required additional collateral posting; and higher credit risk

    within the insured portfolio, as further described below.

| Ambac Financial Group, Inc. 56 2020 First Quarter FORM 10-Q | --------------------------------------------------------------------------------

Nevertheless, Ambac has not yet experienced incremental demands on its liquidity, from higher claims or expenses, other than the aforementioned increase in collateral postings • Claim payments may increase during the global recession and COVID-19 pandemic

as issuers, particularly those with revenues that will be interrupted by

social distancing, other restrictions and the increase in unemployment, may

not have sufficient cash inflows to pay debt service on Ambac-insured debt.

Refer to "Financial Guarantees in Force" in this Management's Discussion and

Analysis for further discussion of the potential impact of the COVID-19

pandemic on claim payments.

• Interest and principal payments on surplus notes are subject to the approval

of OCI, which has full discretion over payments regardless of the liquidity

position of Ambac Assurance. Any such payment on surplus notes would require

either payment or collateralization of a portion of the Tier 2 Notes under

the terms of the Tier 2 Note indenture. See Note 13. Long-term Debt in the

Notes to Consolidated Financial Statements, included in Part II, Item 8, in

the Company's Annual Report on Form 10-K for the year ended December 31, 2019

for further discussion of the payment terms and conditions of the Tier 2

Notes. As discussed more fully in "Results of Operations" above in this

Management's Discussion and Analysis OCI declined Ambac Assurance's request

to pay the principal amount of the surplus notes, plus all accrued and unpaid

interest thereon, on June 7, 2020.

Ambac Assurance's intercompany loans are with Ambac Financial Services ("AFS").
AFS uses interest rate derivatives (primarily interest rated 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. Ambac Assurance is also subject
to additional restrictions on the payment of dividends pursuant to certain

contractual and regulatory restrictions. Refer to Part I, Item 1, "Insurance
Regulatory Matters - Dividend Restrictions, Including Contractual Restrictions"
in the Company's Annual Report on Form 10-K for the year ended December 31,
2019, and Note 8. Insurance Regulatory Restrictions to the Consolidated
Financial Statements included in Part II, Item 8, in the Company's Annual Report
on Form 10-K for the year ended December 31, 2019, for more information on
dividend payment restrictions.
Our ability to realize RMBS representation and warranty ("R&W") subrogation
recoveries is subject to significant uncertainty, including risks inherent in
litigation; collectability of such amounts from counterparties (and/or their
respective parents and affiliates); timing of receipt of any such recoveries,
including uncertainty due to delays in court proceedings as a result of the
COVID-19 pandemic; intervention by the OCI, which could impede our ability to
take actions required to realize such recoveries; 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, debt service and meet our other obligations
would be reduced materially. See Part I, Item 1A. Risk Factors in the Company's
Annual Report on Form 10-K for the year ended December 31, 2019 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.
                                                            Three Months Ended March 31,
($ in million)                                                2020                  2019
Cash provided by (used in):
Operating activities                                   $          (87 )       $          (95 )
Investing activities                                              244                    112
Financing activities                                             (146 )                  (76 )
Foreign exchange impact on cash and cash equivalents                -                      -
Net cash flow                                          $           10         $          (58 )


Operating activities
The following represents the significant cash activities during the three months
ended March 31, 2020 and 2019:
•   Cash used in operating activities relating to long-term debt on the Ambac

Note were $31 million and $38 million for the three months ended March 31,

2020 and 2019, respectively.

• Cash used in operating activities related to interest rate derivatives were

$25 million and $23 million for the three months ended March 31, 2020 and

2019, respectively.

• Cash provided by operating activities relating to the investment portfolio

were $30 million and $36 million for the three months ended March 31, 2020

and 2019, respectively.

• Net loss and loss expenses paid, including commutation payments, during the

    three months ended March 31, 2020 and 2019 are detailed below:

| Ambac Financial Group, Inc. 57 2020 First Quarter FORM 10-Q | --------------------------------------------------------------------------------

                                                Three Months Ended March 

31,

($ in million)                                    2020               2019
Net loss and loss expenses paid (recovered):
Net losses paid (1)                          $       44         $         123
Net subrogation received (2)                        (25 )                 (68 )
Net loss expenses paid                               20                    10
Net cash flow                                $       39         $          64

(1) Net losses paid include commutation payments of $2 and $66 for the three

months ended March 31, 2020 and 2019, respectively.

(2) For the three months ended March 31, 2019, subrogation received includes $23

related to the COFINA Plan of Adjustment.

Future operating cash flows will primarily be impacted by the level of premium
collections, investment coupon receipts and claim and expense payments.
Financing Activities
Financing activities for the three months ended March 31, 2020, include paydowns
of the Ambac Note of $77 million and paydowns / maturities of VIE debt
obligations of $66 million.
Financing activities for the three months ended March 31, 2019, include proceeds
$3 million from Ambac's issuance of 201 shares of AMPS, paydowns of the Ambac
Note of $13 million and paydowns / maturities of VIE debt obligations of $63
million.
Collateral
AFS hedges a portion of the interest rate risk in the financial guarantee and
investment portfolio, along with legacy customer interest rate swaps, with
standardized derivative contracts, including financial futures contracts, which
contain collateral or margin requirements. Under these hedge agreements, AFS is
required to post collateral or margin to its counterparties and futures
commission merchants to cover unrealized losses. In addition, AFS is required to
post collateral or margin in excess of the amounts needed to cover unrealized
losses. All AFS derivative contracts containing ratings-based downgrade triggers
that could result in collateral or margin posting or a termination have been
triggered. If terminations were to occur, AFS would be required to make
termination payments but would also receive a return of collateral or margin in
the form of cash or U.S. Treasury obligations with market values equal to or in
excess of market values of the swaps and futures contracts. AFS may look to
re-establish hedge positions that are terminated early, resulting in additional
collateral or margin obligations. The amount of additional collateral or margin
posted on derivatives contracts will depend on several variables including the
degree to which counterparties exercise their termination rights (or agreements
terminate automatically) and the terms on which hedges can be replaced. All
collateral and margin obligations are currently met. Collateral and margin
posted by AFS totaled a net amount of $165 million (cash and securities
collateral of $80 million and $85 million, respectively), including independent
amounts, under these contracts at March 31, 2020.
Ambac Credit Products ("ACP") is not required to post collateral under any of
its outstanding credit derivative contracts.

                                 BALANCE SHEET
Total assets decreased by approximately $542 million from December 31, 2019, to
$12,777 million at March 31, 2020, primarily due to the negative total return
for the non-VIE investment portfolio caused by the economic effects of the
COVID-19 pandemic and lower consolidated VIE assets as a result of currency
changes (strengthening of the US Dollar). Other significant changes during the
three months ended March 31, 2020, were higher subrogation recoverables
primarily related to increases in excess spread on RMBS as a result of lower
interest rates, higher collateral receivable from derivative counterparties
(within Other assets) and lower intangible assets from the continued runoff of
the financial guarantee insurance portfolio.
Total liabilities decreased by approximately $68 million from December 31, 2019,
to $11,716 million as of March 31, 2020, primarily due to lower consolidated VIE
liabilities as a result of currency changes, as noted above, and lower long-term
debt plus accrued interest payable due to partial redemption of the Ambac Note,
partially offset by higher loss reserves and increases in interest rate
derivative obligations as a result of reductions in forward interest rates.
As of March 31, 2020, total stockholders' equity was $1,062 million, compared
with total stockholders' equity of $1,536 million at December 31, 2019. This
decrease was primarily due to a Total Comprehensive Loss during 2020. The
Comprehensive Loss was primarily driven by the net loss attributable to common
stockholders for the three months ended March 31, 2020, of $280 million,
unrealized losses on investment securities of $146 million and translation
losses on the consolidation of AFG's foreign subsidiaries of $46 million.
Investment Portfolio. Ambac Assurance's investment objective is to achieve the
highest risk-adjusted after-tax return on a diversified portfolio of primarily
fixed income investments and pooled investment funds while employing
asset/liability management practices to satisfy operating and strategic
liquidity needs. Ambac Assurance's investment portfolio is subject to internal
investment guidelines and is subject to limits on 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

| Ambac Financial Group, Inc. 58 2020 First Quarter FORM 10-Q | --------------------------------------------------------------------------------

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.
AFG's investment portfolio's primary objective is to preserve capital and
liquidity for strategic uses while maximizing income.
Refer to Note 8. Investments to the Unaudited Consolidated Financial Statements
included in Part I, Item 1 in this Form 10-Q for information about Ambac's
consolidated investment portfolio. Ambac's investment policies and objectives do
not apply to the assets of VIEs consolidated as a result of financial guarantees
written by its insurance subsidiaries.
The following table summarizes the composition of Ambac's investment portfolio,
excluding VIE investments, at carrying value at March 31, 2020 and December 31,
2019:
                                                 March 31,      December 31,
($ in millions)                                     2020            2019
Fixed income securities                         $     2,367    $       2,577
Short-term                                              586              653
Other investments                                       363              478
Fixed income securities pledged as collateral            85               85
Total investments (1)                           $     3,400    $       3,792

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

value of £238 ($295) and €28.7 ($31.6) as of March 31, 2020, and £257 ($341)

and €2 ($2) as of December 31, 2019.

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 interests in pooled funds. Refer to Note 8. Investments to
the Unaudited Consolidated Financial Statements included in Part I, Item 1 in
this Form 10-Q for information about insured securities and fixed income and
pooled funds by asset class.
The following table represents the fair value of other asset-backed securities,
included in fixed income securities above, at March 31, 2020 and December 31,
2019 by classification:
                                       March 31,      December 31,
($ in millions)                           2020            2019
Other asset-backed securities
Military Housing                              224              237
Student Loans                                  27               32
Credit Cards                                   24               18
Auto                                            8                -

Total other asset-backed securities $ 283 $ 287

The following charts provide the ratings (1) distribution of the fixed income
investment portfolio based on fair value at March 31, 2020 and December 31,
2019:
[[Image Removed: chart-b7ce91b0f3ad5fa598a.jpg]][[Image Removed: chart-8a8e7afba5e85273a17.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 represent 34% and

33% of the 2020 and 2019 combined fixed income portfolio, respectively.

Premium Receivables. Ambac's premium receivables decreased to $403 million at
March 31, 2020, from $416 million at December 31, 2019. As further discussed in
Note 6. Financial Guarantee Insurance Contracts, the decrease is due to premium
receipts, changes to the allowance for credit losses and changes in foreign
currencies, partially offset by changes in expected and contractual cash flows
and accretion of premium receivable discount.

| Ambac Financial Group, Inc. 59 2020 First Quarter FORM 10-Q | --------------------------------------------------------------------------------

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            $                   250    $                   250
British Pounds          £                   103                        128
Euros                   €                    22                         24
Total                                              $                   403


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 March 31, 2020.  As of March 31, 2020 and December 31, 2019,
reinsurance recoverable on paid and unpaid losses were $36 million and $26
million, respectively. The increase was primarily a result of adverse
development in public finance and student loan 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. As of March 31, 2020 and December 31, 2019,
the net insurance intangible asset was $406 million and $427 million,
respectively. Other than through amortization, variance in the insurance
intangible asset is solely from translation gains (losses)

from the consolidation of Ambac's foreign subsidiary (Ambac UK).
Derivative Assets and Liabilities. The interest rate derivative portfolio is
positioned to benefit from rising rates as a partial economic hedge against
interest rate exposure in the financial guarantee and investment portfolios.
Derivative assets increased from $75 million at December 31, 2019, to $88
million as of March 31, 2020. Derivative liabilities increased from $90 million
at December 31, 2019, to $137 million as of March 31, 2020. The net increases
resulted primarily from lower interest rates during the three months ended March
31, 2019, with the effect on assets partially offset by higher counterparty
credit adjustments.
Loss and Loss Expense Reserves and Subrogation Recoverable. Loss and loss
expense reserves are based upon estimates of the ultimate aggregate losses
inherent in the non-derivative portfolio for insurance policies issued to
beneficiaries, including unconsolidated VIEs.
The evaluation process for determining the level of reserves is subject to
certain estimates and judgments. Refer to the "Critical Accounting Policies and
Estimates" and "Results of Operations" sections of Management's Discussion and
Analysis of Financial Condition and Results of Operations, in addition to Basis
of Presentation and Significant Accounting Policies and Loss Reserves sections
included in Note 2. Basis of Presentation and Significant Accounting Policies
and Note 6. Financial Guarantee Insurance Contracts, respectively, of the
Consolidated Financial Statements included in Part II, Item 8 in the Company's
Annual Report on Form 10-K for the year ended December 31, 2019 for further
information on loss and loss expenses.
The loss and loss expense reserves, net of subrogation recoverables and before
reinsurance as of March 31, 2020 and December 31, 2019, were $(395) million and
$(482) million, respectively.

Loss and loss expense reserves are included in the Unaudited Consolidated Balance Sheets as follows:

                                               Present Value of Expected
                                                    Net Cash Flows                             Gross Loss
                                             Claims and                          Unearned       and Loss
($ in millions)                                 Loss                             Premium         Expense
Balance Sheet Line Item                       Expenses       Recoveries (1)      Revenue        Reserves
March 31, 2020:
Loss and loss expense reserves             $      2,112     $         (245 )   $      (70 )   $     1,797
Subrogation recoverable                             135             (2,327 )            -          (2,192 )
Totals                                     $      2,247     $       (2,572 

) $ (70 ) $ (395 )

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 )

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

$1,764 and $1,727 at March 31, 2020 and December 31, 2019, respectively.

| Ambac Financial Group, Inc. 60 2020 First Quarter FORM 10-Q | --------------------------------------------------------------------------------

Ambac has exposure to various bond types issued in the debt capital markets. Our
experience has shown that, for the majority of bond types, we have not
experienced significant claims. The bond types that have experienced significant
claims, including through commutations, are residential mortgage-backed
securities ("RMBS"), student loan securities and public finance securities.
These bond types represent 94% of our ever-to-date insurance claims recorded,
with RMBS comprising 76%. 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 March 31, 2020 and December 31,
2019:
                                                           Present Value of Expected
                                                                 Net Cash Flows                             Gross Loss
                                         Gross             Claims and                       Unearned         and Loss
                                          Par                 Loss                          Premium           Expense
($ in millions)                   Outstanding (1)(2)        Expenses       Recoveries       Revenue       Reserves (1)(3)
March 31, 2020:
RMBS                             $             2,871     $        728     $    (2,183 )   $      (13 )   $        (1,468 )
Domestic Public Finance                        2,848            1,176            (353 )          (41 )               783
Student Loans                                    458              268             (37 )           (4 )               227
Ambac UK and Other Credits                       869               20               -            (12 )                 8
Loss expenses                                      -               55               -              -                  55
Totals                           $             7,046     $      2,247     $    (2,572 )   $      (70 )   $          (395 )


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 )

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

expense reserves are $750 and $35 respectively, at March 31, 2020, and $511

and $26, respectively at December 31, 2019. Ceded loss and loss expense

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

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

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

to the current accreted value of the bond.

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

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

liability or net recoverable position.

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 March 31, 2020, and assumes an inability to execute any
commutation transactions with issuers and/or investors. Such stress scenarios
are developed based on management's view about all possible outcomes relating to
losses and recoveries. In arriving at such view, management makes considerable
judgments about the possibility of various future events. Although we do not
believe it is possible to have stressed outcomes in all cases, it is possible
that we could have stress case outcomes in some or even many cases. See "Risk
Factors" in Part I, Item 1A as well as the descriptions of "RMBS Variability,"

"Public Finance Variability," "Student Loan Variability," and "Other Credits,
including Ambac UK, Variability," in Part II, Item 7 of the Company's 2019
Annual Report on Form 10-K for further discussion of the risks relating to
future losses and recoveries that could result in more highly stressed outcomes,
and "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q as
well as the descriptions of "RMBS Variability," "Public Finance Variability,"
"Student Loan Variability," and "Other Credits, including Ambac UK, Variability"
appearing below.
The occurrence of these stressed outcomes individually or collectively would
have a material adverse effect on our results of operations and financial
condition and may result in materially adverse consequence for the Company,
including (without limitation) impairing the ability of Ambac Assurance to honor
its financial obligations; the initiation of rehabilitation proceedings against
Ambac Assurance; decreased likelihood of Ambac Assurance delivering value to
AFG, through dividends or otherwise; and a significant drop in the value of
securities issued or insured by AFG or Ambac Assurance.

| Ambac Financial Group, Inc. 61 2020 First Quarter FORM 10-Q | --------------------------------------------------------------------------------

RMBS Variability:
Ambac has exposure to the U.S. mortgage market primarily through direct
financial guarantees of RMBS, including transactions collateralized by first and
second liens.
Changes to assumptions that could make our reserves under-estimated include an
increase in interest rates, deterioration in housing prices, poor servicing, the
effect of a weakened economy characterized by growing unemployment and wage
pressures. We utilize a model to project losses in our RMBS exposures and
changes to reserves, either upward or downward, are not unlikely if we used a
different model or methodology to project losses.
We established a representation and warranty subrogation recovery as further
discussed in Note 6. Financial Guarantee Insurance Contracts to the Unaudited
Consolidated Financial Statements included in Part I, Item 1 in this Form 10-Q.
Our ability to realize RMBS representation and warranty recoveries is subject to
significant uncertainty, including risks inherent in litigation; collectability
of such amounts from counterparties (and/or their respective parents and
affiliates); delays in realizing such recoveries, including as a result of trial
delays due to court closures related to COVID-19 or other events; intervention
by the OCI, which could impede our ability to take actions required to realize
such recoveries; 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 $1,738 million, net of reinsurance, as
of March 31, 2020, if the sponsors of these transactions: (i) fail to honor
their obligations to repurchase the mortgage loans, (ii) successfully dispute
our breach findings or claims for damages, (iii) no longer have the financial
means to fully satisfy their obligations under the transaction documents, or
(iv) our pursuit of recoveries is otherwise unsuccessful. 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
March 31, 2020 could be approximately $25 million. Combined with the absence of
any R&W subrogation recoveries, a possible increase in loss reserves for RMBS
could be approximately $1,763 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 $40 million. Additionally, the RMBS portfolio is
sensitive to the COVID-19 related forbearances and delinquencies caused by the
general economic downturn. Due to the uncertainties related to the economic
effects of the COVID-19 pandemic and other risks inherent associated with RMBS,
there can be no assurance that losses may not exceed our stress case estimates.
Public Finance Variability:
Ambac's U.S. public finance portfolio consists predominantly of municipal bonds
such as general and revenue obligations and lease and tax-backed obligations of
state and local government entities; however, the portfolio also includes a wide
array of non-municipal types of bonds, including financings for not-for-profit
entities and transactions with public and private elements, which generally
finance infrastructure, housing and other public purpose facilities and
interests. The increase in public finance gross loss reserves at March 31, 2020,
as compared to December 31, 2019, was primarily related to declines in discount
rates and the adverse impact on loss reserves from the global and
issuer-specific economic impact of the COVID-19 pandemic. Total public finance
gross loss reserves and related gross par outstanding on Ambac insured
obligations by bond type were as follows:
                                  March 31, 2020                    December 31, 2019
Issuer Type                  Gross Par         Gross Loss        Gross Par        Gross Loss
($ in millions)           Outstanding (1)       Reserves      Outstanding (1)      Reserves
Lease and tax-backed     $           1,380    $     694      $     1,075         $     561
General obligation                     636          (17 )            681               (16 )
Housing                                456           33              457                29
Transportation revenue                 232           47               88                42
Other                                  144           26               97                11
Total                    $           2,848    $     783      $     2,398         $     627

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

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

to the current accreted value of the bond.

It is possible our loss reserves for public finance credits may be
under-estimated if issuers are faced with prolonged exposure to adverse
political, judicial, economic, fiscal or socioeconomic events or trends.
Additionally, our loss reserves may be under-estimated as a result of the
ultimate scope, duration and magnitude of the effects of COVID-19. The COVID-19
related economic downturn has put a strain on municipal issuers dependent upon
narrow sources of revenues or dedicated taxes to support debt services, such as
hotel occupancy taxes, sales taxes, parking

revenues, tolls, licensing fees, etc. A prolonged recovery from the COVID-19
related economic downturn could put additional stresses on these issuers as well
as other types of municipal finance issuers and result in increased defaults and
potential additional losses for Ambac.
Our experience with the city of Detroit in 2013 in its bankruptcy proceeding was
not favorable and renders future outcomes with other public finance issuers even
more difficult to predict and may

| Ambac Financial Group, Inc. 62 2020 First Quarter FORM 10-Q | --------------------------------------------------------------------------------

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's school district, the State of New Jersey and many others. Less severe
treatment of pension obligations in bankruptcy may lead to worse outcomes for
traditional debt creditors.
Variability of outcomes applies to even what is generally considered more secure
municipal financings, such as dedicated sales tax revenue bonds that capture
sales tax revenues for debt service ahead of any 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.
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 as well as more recent
volatility in the municipal markets as a result of the COVID-19 related economic
downturn and the building budgetary pressures at the state and local level
related to the cost of fighting the virus could deprive issuers access to
funding at a level necessary to avoid defaulting on their obligations.
In addition, a judicial decision in connection with the PRHTA Title III
proceedings could cause the loss reserves on our public finance credits to be
underestimated. On January 13, 2020, the U.S. Supreme Court denied a petition
for certiorari arising out of an appeal to the March 26, 2019 ruling by the U.S.
Court of Appeals for the First Circuit. In the ruling, the First Circuit
affirmed the decision by the U.S. District Court overseeing the PROMESA Title
III proceedings for the PRHTA, which found that under Sections 928(a) and 922(d)
of the U.S. Bankruptcy Code, municipal issuers

of revenue bonds secured by special revenues are permitted, but not required, to
apply special revenues to pay debt service on such revenue bonds during the
pendency of bankruptcy proceedings for such municipal issuers. The 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 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.
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,
such as the developing COVID-19 related economic downturn.
Our exposures to the Commonwealth of Puerto Rico are under stress arising from
the Commonwealth's poor financial condition, weak economy, loss of capital
markets access and the severe damage caused by hurricanes Irma and Maria. 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 "Financial Guarantees in Force" section of Management's Discussion
and Analysis of Financial Condition and Results of Operations included in Part
II, Item 7 in the Company's Annual Report on Form 10-K for the year ended
December 31, 2019 for further details on the legal, economic and fiscal
developments that have impacted or may impact Ambac Assurance's insured Puerto
Rico bonds. In this Form 10-Q, refer to "Financial Guarantees in Force" in Part
I, Item 2 in Management's Discussion and Analysis of Financial Condition and
Results of Operation and Note 11. Commitments and Contingencies to the Unaudited
Consolidated Financial Statements for further updates related to Puerto Rico.
Material additional losses on our public finance credits caused by the
aforementioned factors and including the possibility of a protracted recovery
related to the COVID-19 crisis would have a material adverse effect on our
results of operations and financial condition. For the public finance credits,
including Puerto Rico, for which we have an estimate of expected loss at
March 31, 2020, the possible increase in loss reserves could be approximately
$1,220 million. However, there can be no assurance that losses may not exceed
such amount. Among other things, this estimate includes the possibility that the
amended Commonwealth plan of adjustment (as discussed above in the Financial
Guarantees in Force section of this Management Discussion and Analysis) were to
become effective.
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

| Ambac Financial Group, Inc. 63 2020 First Quarter FORM 10-Q | --------------------------------------------------------------------------------

or other factors, including the COVID-19 related economic downturn. Such factors
may include lower recoveries on defaulted loans or additional losses on
collateral or trust assets, including as a result of any enforcement actions by
the Consumer Finance Protection Bureau. For student loan credits for which we
have an estimate of expected loss at March 31, 2020, the possible increase in
loss reserves could be approximately $35 million. Additionally, an increase in
interest rates of 0.50% could increase our estimate of expected losses by
approximately $20 million. Additionally, the student loan portfolio is sensitive
to COVID-19 related payment moratoriums and delinquencies caused by the general
economic downturn. There can be no assurance that losses may not exceed our
stress case estimates.
Other Credits, including Ambac UK, Variability:
It is possible our loss reserves on other types of credits, including those
insured by Ambac UK, may be under-estimated because of 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 $400 million greater than the loss
reserves at March 31, 2020. Additionally, our loss reserves may be
under-estimated as a result of the ultimate scope, duration and magnitude of the
effects of COVID-19. There can be no assurance that losses may not exceed our
stress case estimates.
Long-term Debt:
Long-term debt consists of senior and junior surplus notes issued by Ambac
Assurance, the Ambac Note and Tier 2 Notes issued in connection with the
Rehabilitation Exit Transactions, and Ambac UK debt issued in connection with
the 2019 Ballantyne commutation. The carrying value of each of these as of
March 31, 2020 and December 31, 2019 is below:
                        March 31,
($ in millions)            2020        December 31, 2019
Surplus notes (1)      $       778    $               769
Ambac note                   1,685                  1,763
Tier 2 notes                   284                    278
Ambac UK debt                   13                     13
Total Long-term Debt   $     2,760    $             2,822

(1) Includes junior surplus notes.

The decrease in long-term debt from December 31, 2019 is primarily due to optional redemptions of $77 million of the Ambac Note, partially offset by the accretion on the carrying value of surplus notes, Tier 2 Notes and Ambac UK debt.

                           VARIABLE INTEREST ENTITIES
Please refer to Note 3. Variable Interest Entities to the Unaudited Consolidated
Financial Statements included in Part I, Item 1 in this Form 10-Q and Note 2.
Basis of Presentation and Significant Accounting Policies and Note 3. Variable
Interest Entities to the Consolidated Financial Statements, included in Part II,
Item 8 in the Company's Annual Report on Form 10-K for the year ended
December 31, 2019, for information regarding variable interest entities.

                              ACCOUNTING STANDARDS
The following accounting standards have been issued but have not yet been
adopted. We do not expect these standards to have a consequential impact on
Ambac's financial statements.
Defined Benefit and Other Postretirement Plans Disclosures
In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits
- Defined Benefit Plans - General (Subtopic 715-20) - Disclosure Framework -
Changes to the Disclosure Requirements for Defined Benefit Plans. The ASU
modifies various disclosure requirements for employers that sponsor defined
benefit pension or other postretirement plans. Relevant disclosures that will be
removed are: i) amounts in accumulated other comprehensive income expected to be
recognized as net periodic benefit cost over the next fiscal year and ii) the
effects of a one percentage point change in assumed health care cost trend rates
on the (a) aggregate of the service and interest cost components of the net
periodic pension cost and (b) benefit obligation for postretirement healthcare
benefits. Relevant disclosures that will be added are an explanation of the
reasons for significant gains and losses related to changes in the benefit
obligations for the period. The ASU is effective for fiscal years ending after
December 15, 2020, with early adoption permitted. The modified disclosures must
be applied on a retrospective basis for all periods presented. Ambac will adopt
this ASU on December 31, 2020
Simplifying Income Tax Accounting
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) -
Simplifying the Accounting for Income Taxes. The FASB issued this ASU as part of
its initiative to reduce complexity in accounting standards. The ASU removes
certain exceptions in the guidance related to investments, intraperiod
allocations and interim period allocations. It further adds new guidance related
to the allocation of consolidated income taxes and evaluating a step-up in the
tax basis of goodwill. The ASU is effective for fiscal years beginning after
December 15, 2020, with early adoption permitted. The modified disclosures must
be applied on a retrospective basis for all periods presented. Ambac will adopt
this ASU on January 1, 2021.
Please refer to Note 2. Basis of Presentation and Significant Accounting
Policies to the Consolidated Financial Statements, included in Part II, Item 8
in the Company's Annual Report on Form 10-K for the year ended December 31,
2019, for a discussion of the impact of other recent accounting pronouncements
on Ambac's financial condition and results of operations.

               AMBAC ASSURANCE STATUTORY BASIS FINANCIAL RESULTS
Ambac Assurance statutory financial statements are prepared on the basis of
accounting practices prescribed or permitted by the OCI. OCI recognizes only
statutory accounting practices prescribed or permitted by the State of Wisconsin
("SAP") for determining and reporting the financial condition and results of
operations of an insurance company for determining its solvency under Wisconsin
Insurance Law. The National Association of Insurance Commissioners ("NAIC")
Accounting Practices and Procedures manual ("NAIC SAP") has been adopted as a
component of prescribed practices by the State of Wisconsin. For further
information, see "Ambac Assurance Statutory Basis

| Ambac Financial Group, Inc. 64 2020 First Quarter FORM 10-Q | --------------------------------------------------------------------------------

Financial Results," in Part II, Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and Note 8. Insurance Regulatory
Restrictions to the Consolidated Financial Statements included in Part II, Item
8 in the Company's Annual Report on Form 10-K for the year ended December 31,
2019.
Ambac Assurance's statutory policyholder surplus and qualified statutory capital
(defined as the sum of policyholders surplus and mandatory contingency reserves)
were $930 million and $1,465 million at March 31, 2020, respectively, as
compared to $1,088 million and $1,618 million at December 31, 2019,
respectively.  As of March 31, 2020, 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 $489 million that is not recorded under statutory basis accounting
principles), preferred stock issued by Ambac Assurance and all other liabilities
(including insurance claims and debt 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 are primarily due to a
(i) statutory net loss of $93 million for the three months ended March 31, 2020;
(ii) decrease of $35 million from declines in the fair value of investment
securities that are recorded at the lower of amortized cost or fair value; (iii)
decrease of $21 million from net losses on pooled fund investments; and (iv)
contributions to contingency reserves of $5 million.
Ambac Assurance statutory surplus is sensitive to multiple factors, including:
(i) loss reserve development, (ii) approval by OCI of payments on surplus notes
and junior surplus notes, (iii) ongoing interest costs associated with the Ambac
Note and Tier 2 Notes, including changes to interest rates as the Ambac Note is
a floating rate obligation, (iv) deterioration in the financial position of
Ambac Assurance subsidiaries that have their obligations guaranteed by Ambac
Assurance, (v) first time payment defaults of insured obligations, which
increase statutory loss reserves, (vi) commutations of insurance policies or
credit derivative contracts at amounts that differ from the amount of
liabilities recorded, (vii) reinsurance contract terminations at amounts that
differ from net assets recorded, (viii) changes to the fair value of investments
carried at fair value and investment impairments, (ix) settlements of
representation and warranty breach claims at amounts that differ from amounts
recorded, including failures to collect such amounts or receive recoveries
sufficient to pay or redeem the Ambac Note and Tier 2 Notes, (x) realized gains
and losses, including losses arising from other than temporary impairments of
investment securities, and (xi) future changes to prescribed practices by the
OCI.
           AMBAC 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 £380 million at March 31, 2020, as compared to

£387 million at December 31, 2019. At March 31, 2020, the carrying value of cash
and investments was £464 million, a decrease from £470 million at December 31,
2019. The decrease in shareholders' funds and cash & investments was primarily
due to losses in the period within Ambac UK's investment portfolio, offset by
foreign exchange gains and the continued receipt of premiums.
Ambac UK is also required to prepare financial information in accordance with
the Solvency II Directive.  The basis of preparation of this information is
significantly different from both US GAAP and UK GAAP.
Available capital resources under Solvency II were a surplus of £163 million at
March 31, 2020, of which £149 million were eligible to meet solvency capital
requirements. This is a reduction from December 31, 2019, when available capital
resources were a surplus of £188 million of which £178 million were eligible to
meet solvency capital requirements. The eligible capital resources at March 31,
2020, and December 31, 2019, were in comparison to regulatory capital
requirements of £243 million and £208 million respectively. Ambac UK is
therefore deficient in terms of compliance with applicable regulatory capital
requirements by £94 million and £30 million at March 31, 2020, and December 31,
2019, respectively. The deficit increased as at March 31, 2020 due to an
increase in regulatory capital requirements for non-life insurers in the credit
and surety line of business and due to a reduction eligible assets mainly caused
by the fall over the period in long term discount rates. The regulators are
aware of the deficiency in capital resources as compared to capital requirements
and dialogue between Ambac UK management and its regulators remains ongoing with
respect to options for addressing the shortcoming, although such options remain
few.
                          NON-GAAP FINANCIAL MEASURES
In addition to reporting the Company's quarterly financial results in accordance
with GAAP, the Company currently reports two non-GAAP financial measures:
Adjusted Earnings and Adjusted Book Value. The most directly comparable GAAP
measures are net income attributable to common stockholders for Adjusted
Earnings and Total Ambac Financial Group, Inc. stockholders' equity for Adjusted
Book Value. A non-GAAP financial measure is a numerical measure of financial
performance or financial position that excludes (or includes) amounts that are
included in (or excluded from) the most directly comparable measure calculated
and presented in accordance with GAAP. We are presenting these non-GAAP
financial measures because they provide greater transparency and enhanced
visibility into the underlying drivers of our business. Adjusted Earnings and
Adjusted Book Value are not substitutes for the Company's GAAP reporting, should
not be viewed in isolation and may differ from similar reporting provided by
other companies, which may define non-GAAP measures differently.
Ambac has a significant U.S. tax net operating loss ("NOL") that is offset by a
full valuation allowance in the GAAP consolidated financial statements. As a
result of this and other considerations, we utilized a 0% effective tax rate for
non-GAAP adjustments; which is subject to change.
The following paragraphs define each non-GAAP financial measure and describe why
it is useful. A reconciliation of the non-

| Ambac Financial Group, Inc. 65 2020 First Quarter FORM 10-Q | --------------------------------------------------------------------------------

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

Ambac's emergence from bankruptcy and the implementation of Fresh Start

reporting. This adjustment ensures that all financial guarantee contracts are

    accounted for consistent with the provisions of the Financial Services -
    Insurance Topic of the ASC.

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

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

non-functional currencies. This adjustment eliminates the foreign exchange

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

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

the results without the impact of fluctuations in foreign currency exchange

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

performance.

The following table reconciles net income attributable to common stockholders to
the non-GAAP measure, Adjusted Earnings on a dollar amount and per diluted share
basis, for all periods presented:
                                                             Three Months 

Ended March 31,

                                                      2020                                  2019

($ in millions, except share data) $ Amount Per Diluted Share

    $ Amount       Per Diluted Share
Net income (loss) attributable to
common stockholders                    $      (280 )   $           (6.07 )   $       (43 )   $           (0.94 )

Adjustments:

Non-credit impairment fair value
(gain) loss on credit derivatives                2                  0.03               -                 (0.01 )
Insurance intangible amortization               13                  0.29              36                  0.79
Foreign exchange (gains) losses                  -                     -              (2 )               (0.04 )
Adjusted earnings (loss)               $      (265 )   $           (5.75 )   $        (9 )   $           (0.20 )


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

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

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

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

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

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

These adjustments allow for all financial guarantee contracts to be accounted

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

• Insurance intangible asset: Elimination of the financial guarantee insurance

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

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

all financial guarantee contracts are accounted for within Adjusted Book

Value consistent with the provisions of the Financial Services-Insurance

    Topic of the ASC.

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

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

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

adjustment presents the economics of UPR and expected losses for financial

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

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

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

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

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

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

guarantee contracts where expected losses are less than UPR.

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

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

investments that are recorded as a component of accumulated other

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

adjustment on the investment portfolio may differ from realized gains and

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

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

Book Value when realized.

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