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 and in Ambac's Annual Report on Form 10-K for
the year ended December 31, 2019.
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 measure 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 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 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
        | Ambac Financial Group, Inc. 47 2020 Third Quarter FORM 10-Q |

--------------------------------------------------------------------------------

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. The investment portfolios of Ambac Assurance and Ambac UK hold
fixed income securities, including distressed Ambac-insured securities, and
various pooled investment funds. Refer to 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 September 30, 2020, Ambac and its subsidiaries owned $603 million of
distressed Ambac-insured bonds, including significant concentrations of insured
Puerto Rico and RMBS bonds, and excluding Ambac's holdings of secured notes
issued by Ambac LSNI. Subject to applicable internal and regulatory guidelines,
market conditions and other constraints, Ambac may continue to opportunistically
purchase or sell Ambac-insured securities.
Liability and Insured Exposure Management:
Ambac Assurance's Risk Management Group focuses on the implementation and
execution of risk reduction, 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;
•A refinancing in February 2020 of an adversely classified asset-backed leasing
transaction with net par outstanding of $86 million at December 31, 2019;
•Purchasing quota share reinsurance in June 2020 on a transportation revenue
credit with net par outstanding of $33 million at December 31, 2019;
•A refinancing in August 2020 of an international stadium transaction with net
par outstanding of $217 million at December 31, 2019; and
•Partial commutations of $32 million of adversely classified credits over the
course of 2020.
The following table provides a comparison of total, adversely classified ("ACC")
and watch list credit net par outstanding in the insured portfolio at
September 30, 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.
        | Ambac Financial Group, Inc. 48 2020 Third Quarter FORM 10-Q |

--------------------------------------------------------------------------------

                   September 30,       December 31,
($ in millions)         2020               2019                Variance
Total             $       34,751      $      38,018      $ (3,267)       (9) %
ACC                        8,576              7,535         1,041        14  %
Watch list                 4,961              6,752        (1,791)      (27) %


The decrease in total net par outstanding resulted from active de-risking
initiatives, 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 $975 million of net par outstanding from the
Watch List category), such as hotel tax, stadium, convention center and public
house insured transactions, partially offset by active de-risking and issuer
paydowns and calls.
The decrease in Watch List net par outstanding resulted from active de-risking
initiatives (including the transactions noted above), downgrades to ACC due to
COVID-19, and scheduled maturities, amortizations, refundings and calls.
In addition, as a result of the economic impacts from the COVID-19 pandemic,
$2,651 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 also 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 widespread globally, including in the markets in which we
operate. The COVID-19 outbreak had and continues to have a notable impact on
general economic conditions, including but not limited to higher unemployment;
volatility in the capital markets; closure or severe curtailment of the
operations and hence, revenues, of many businesses and public and private
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 social
distancing guidelines, travel bans and restrictions, and business restrictions
and shutdowns. While many U.S. states and territories have eased restrictions
more recently and provided clear social distancing guidelines to support
businesses, challenges remain, including the recent rise of new COVID-19 cases.
In the U.S., monetary policy and fiscal stimulus, particularly the Coronavirus
Aid, Relief and Economic Security ("CARES")
Act, have temporarily helped moderate the economic impact of COVID-19, along
with stimulus and other actions taken by governments outside the U.S.
Nonetheless, the U.S. and most large global economies materially contracted
through the third quarter of the year. While a recovery is currently underway
led by an increase in retail sales in North America and the Eurozone since May,
the trajectory and sustainability of the economic recovery is uncertain due to,
among other things, the magnitude of job losses, cooler weather that will curb
outdoor activity, uncertainty regarding continued government support measures,
the recent rise of new COVID-19 cases and uncertainty related to the timing and
efficacy of a vaccine. For the Ambac insured portfolio, credit risk remains
elevated due to the historical and future economic and financial impact related
to the COVID-19 crisis.
COVID-19 has also 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. Since July 2020, Ambac opened certain
of its offices to allow a portion of the workforce to safely return on a
voluntary basis. We have not experienced and do not anticipate incurring
material net incremental operating expenditures to maintain the current
operating environment. Although many of Ambac's critical third-party service
providers are operating with employees working remotely, we have not presently
identified or experienced any limitations or operational constraints with
respect to services provided. 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. The municipal, project finance, mortgage-backed and student loan
sectors, as well as other asset securitizations, in particular, could be
materially adversely impacted, and as a result, with the exception of the
mortgage-backed sector, we have increased loss reserves across each of these and
other sectors during the nine months ended September 30, 2020. In the
mortgage-backed sector, much lower interest rates have increased excess spread
recoveries on previously paid claims and largely offset the impact of higher
projected mortgage delinquencies and losses resulting from the COVID-19
pandemic. 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 willingness and 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
        | Ambac Financial Group, Inc. 49 2020 Third Quarter FORM 10-Q |

--------------------------------------------------------------------------------

their obligations when due. As a result of the COVID-19 related economic impact
on issuers and 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. The crisis may also impair certain issuers' ability
to pay premiums owed to Ambac; however, we believe such issuers currently have
the ability to continue to pay such premiums timely, but this is subject to
change.
•Ambac has exposure to reinsurance counterparties for their portions of future
claim payments. Ambac has reinsured approximately 13.3% 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 current 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 currently
believes they have the ability to perform under their respective reinsurance
policies, but this 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 this is subject to change.
•Asset prices declined substantially during the first 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
monetized 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 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. Asset prices
partially recovered during the second and third quarters of 2020. Ambac
recognized a total return for the investment portfolio of approximately 2.4% and
2.3% for the three and nine months ended September 30, 2020, respectively.
Given the economic uncertainties associated with the duration and effects of 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 September 30, 2020 the net assets of AFG, excluding its equity investments
in subsidiaries, were $465 million.
($ in millions)
Cash and short-term investments (1)       $ 313
Other investments (2)                       114
Other net assets (3)                         38
Total                                     $ 465


(1)  During the three months ended September 30, 2020, AFG purchased Everspan
Insurance Company, from Ambac Assurance and repositioned it as a subsidiary of a
new intermediary holding company that is directly owned by AFG. This acquisition
required a cash payment from AFG to Ambac Assurance of approximately $14
million.
(2)   Includes surplus notes (fair value of $59 million) issued by Ambac
Assurance that are eliminated in consolidation.
(3)  Includes accruals for tolling payments from Ambac Assurance in accordance
with the Amended Tax Sharing Agreement of $28 million. Refer to Note 10. Income
Taxes for discussion over the timing of collection.
Financial Statement Impact of Foreign Currency:
The impact of foreign currency as reported in Ambac's Unaudited Consolidated
Statement of Total Comprehensive Income for the nine months ended September 30,
2020, included the following:
($ in millions)
Net income (1)                                                             $                   2
Gain (loss) on foreign currency translation (net of tax)                                     (20)

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

                                                     5
Impact on total comprehensive income (loss)                                $                 (13)


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

--------------------------------------------------------------------------------

included in Part I, Item 1 in this Form 10-Q for further details on transaction
gains and losses.
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
September 30, 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. 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:
                             September 30,       December 31,
($ in millions)                   2020               2019
Public Finance (1) (2)      $       16,041      $      17,653
Structured Finance                   6,614              7,508
International Finance               12,096             12,857

Total net par outstanding $ 34,751 $ 38,018

(1)Includes $5,596 and $5,654 of Military Housing net par outstanding at
September 30, 2020 and December 31, 2019, respectively.
(2)Includes $1,070 and $1,123 of Puerto Rico net par outstanding at
September 30, 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
September 30, 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 plc-UK Pub UK-Asset Securitizations

                   BBB              $            950                        2.7  %
                      Securitisation
IF          AUK       Capital Hospitals plc (3)                        UK-Infrastructure                          A-                            851                        2.4  %
IF          AUK       Aspire Defence Finance plc                       UK-Infrastructure                          A-                            821                        2.4  %
IF          AUK       Anglian Water                                    UK-Utility                                 A-                            805                        2.3  %
PF          AAC       New Jersey Transportation Trust Fund             US-Lease and Tax-backed                   BBB-                           772                        2.2  %
                      Authority - Transportation System                Revenue
IF          AUK       National Grid Gas                                UK-Utility                                 A-                            743                        2.1  %
IF          AUK       Posillipo Finance II S.r.l                       Italy-Sub-Sovereign                        BIG                           728                        2.1  %

IF AUK Ostregion Investmentgesellschaft NR 1 SA Austria-Infrastructure

                     BIG                           691                        2.0  %
                      (3)
IF          AUK       RMPA Services plc                                UK-Infrastructure                         BBB+                           542                        1.6  %
PF          AAC       Mets Queens Baseball Stadium Project, NY,        US-Stadium Financing                       BIG                           540                        1.6  %
                      Lease Revenue
Total                                                                                                                              $          7,443                       21.4  %

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").
        | Ambac Financial Group, Inc. 51 2020 Third Quarter FORM 10-Q |

--------------------------------------------------------------------------------

Net par related to the top ten exposures reduced $197 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 and scheduled paydowns. The concentration
of net par amongst the top ten (as a percentage of net par outstanding)
increased slightly to 21% at September 30, 2020, from 20% at 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
September 30, 2020, improved since December 31, 2019. The remaining insured
portfolio of financial guarantees has an average net par outstanding of $32
million per single risk, with insured exposures ranging up to $504 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
at the onset of the pandemic resulted in a shut down for several months of
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,
also implemented similar measures to the US. Ambac undertook a detailed analysis
of the potential impact of the closure of certain portions of the US economy and
certain other economies, including the UK, Italy, and Australia, to assess the
impact of the resulting global economic contraction on its insured financial
guarantee portfolio. The economic contraction and the subsequent but still
uncertain recovery; 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 $2.4 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:
•A program for direct lending, loans, loan guarantees and investments to
eligible businesses, states and municipalities, including to passenger airlines
and cargo airlines;
•A program for small business loans (Paycheck Protection Program, as amended by
the Paycheck Protection Program and Health Care Enhancement Act ("PPP & HCE
Act"));
•Business tax breaks, including payroll tax deferral
•An allocation of direct aid to state and local governments to reimburse them
for the costs of dealing with COVID-19;
•The Public Health and Social Services Fund for distribution of grants to
healthcare providers and hospitals (as amended by the PPP & HCE Act);
•Grants for transit agencies;
•Grants for airport authorities; and
•Direct payments to households and for unemployment insurance.
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 the CARES Act
provision did not include 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 have elected not to pay altogether. Despite the
assumed increase in delinquencies and losses related to this 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 include moratoriums
on foreclosures and evictions as well as the expansion of forbearance and
subsequent 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 trajectory and strength of the economic recovery, there may still be
pressure to extend the duration of forbearances and subsequently to offer
generous repayment plans. Forbearances increased sharply across the Ambac
Assurance's insured first lien RMBS obligations during the second quarter of
2020 and early in the third quarter of 2020, but then dropped later in the third
quarter of 2020, albeit to still elevated levels. The ultimate impact of
forbearances and other relief measures, such as foreclosure and eviction
moratoriums,
        | Ambac Financial Group, Inc. 52 2020 Third Quarter FORM 10-Q |

--------------------------------------------------------------------------------

on Ambac Assurance's insured RMBS obligations are still unclear. However, we
have assumed that such measures, as well as the residual impact of the global
recession, will have an adverse impact on 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
2020 will likely generate additional excess spread recoveries on insured RMBS
obligations that will mostly compensate for such adverse effects.
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
•$100 billion in loans for the Term Asset-backed Securities Facility
In the UK all non-essential leisure, food and retail operations, including
public houses were closed from March 20, 2020, as a consequence of the COVID-19
pandemic. Premises were allowed to gradually reopen from June 1, 2020, such that
by July 4, 2020, the majority of outlets were permitted to reopen. The UK
Government introduced 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. On November 5, 2020 the UK Government reimposed the closure
the closure of non-essential leisure food and retail operations with the
expectation that this closure will continue for the four weeks to December 2,
2020. The mitigating measures noted above will continue through this period
before then being slowly withdrawn by March 31, 2021.
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 COVID-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 included a deep recession
during the first half of 2020 with a modest recovery in the second half of 2020
that still leaves the U.S. with an overall contraction in GDP for the full year.
Economic growth for 2021, while positive, is expected to be tempered by the
continued uncertainty related to the rising infection rate of COVID-19 in the
U.S. Recovery to 2019 levels of economic output are not expected until 2022.
Consequently, we expect pressure will remain on U.S. states and local
governments which are currently facing significant budget deficits as tax
revenues have faltered as a result of COVID-19 related shutdowns, job losses and
travel restrictions. State and local governments have
shed an estimated 1.5 million jobs and are facing tough choices to close budget
gaps, including tax increases, furloughs, public safety cuts, planned capital
expenditure cuts, pension funding holidays, and other measures. In addition
states may need to cut aid to local municipalities that are also under pressure
from lost revenues. Monetary policy and federal stimulus through the CARES Act
(and potential subsequent CARES Act programs) and other programs has benefited
and is expected to continue to benefit in the overall economic recovery and more
specifically provide some relief to state and local governments, including to
issuers of municipal debt insured by Ambac, although the sufficiency of such
benefits remains uncertain.
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 or uneven recovery from the COVID-19
crisis. 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 stressed 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   $      247      $                                     43.1
Stadiums                             634                                            41.4
Airports                             124                                            21.8
Dedicated Tax                        384                                            69.8
Higher Education Auxiliary           241                                            25.0
Rail / Mass Transit                  328                                            30.3
Toll Roads / Bridges                 457                                            42.8
Total Public Finance          $    2,415      $                                    274.2



The RMBS and student loan insured portfolios are expected to be adversely
impacted by the previously mentioned forbearances and the general economic
downturn in the first half of the year and the developing but uncertain recovery
in the second half of the year where unemployment is still elevated and job
participation rates are depressed. Expected to offset 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. In connection with these efforts
Ambac de-risked an international stadium transaction in the three months ended
September 30, 2020 with $217 million of NPO at December 31, 2019. Ambac's
remaining NPO with respect to these international demand dependent policies are
as follows:
        | Ambac Financial Group, Inc. 53 2020 Third Quarter FORM 10-Q |

--------------------------------------------------------------------------------

($ in millions)
Market / Sector           Total NPO       Total Debt Service Due for Twelve Months

Higher Education         $      168      $                                     9.0
Airports                        200                                            6.2
Asset Securitizations           949                                           81.9
Toll Roads / Bridges            750                                           59.5
Total                    $    2,067      $                                   156.6


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 $1,070 as of September 30, 2020. Each has its own credit risk
profile attributable to, as applicable, discrete revenue sources, direct general
obligation pledges and/or general obligation guarantees.
COVID-19
At this time, it remains very difficult to predict what the shape and timing of
the post COVID-19 recovery will be for the Commonwealth of Puerto Rico, not
least because the depth and length of COVID-19's impact is still uncertain. In
the short-term, it is known that tax revenue to the Commonwealth's general fund
collections lagged projections by nearly $1.8 billion, or 16.8%, in fiscal year
2020 and were roughly $2.5 billion below fiscal year 2019 collections, according
to the Puerto Rico Fiscal Agency and Financial Advisory Authority's June 26,
2020, Treasury Single Account report. However, general fund net revenues totaled
$1.259 billion in July and August 2020, outpacing projections for the first two
months of fiscal year 2021 by $255 million, or 25.5%. It is unclear if this
trend will hold, what this implies for the Commonwealth's ability to pay debt
service, and what if any lasting effects COVID-19 will have on the economic and
financial profile of Puerto Rico.
Over the longer-term, Puerto Rico's recovery profile will be impacted by a wide
range of factors as well as financial considerations including, but not limited
to:
•the fiscal and monetary policies of the federal government which will shape the
trajectory of the U.S. economy;
•the speed and efficacy of targeted federal aid packages to (1) help Puerto Rico
address the negative economic effects of the pandemic and (2) rebuild better and
more resilient infrastructure post-Hurricanes Irma and Maria in 2017 and
earthquakes in 2020;
•supplemental Medicaid funding relief; and
•the willingness and ability of the Commonwealth government to implement much
needed fiscal and structural reforms.
Fiscal Plans
Commonwealth Fiscal Plan
On May 27, 2020, the Oversight Board certified its own version of a new
Commonwealth Fiscal Plan. The Oversight Board's new Commonwealth Fiscal Plan
purports to incorporate the impact of COVID-19 on the Commonwealth economy, and
projects diminished growth, budget surplus, and debt capacity as compared to
previous versions of the Commonwealth Fiscal Plan. The positive $19.7 billion
30-year cumulative surplus from the May 2019 Fiscal Plan is now a negative $22.2
billion in the new Fiscal Plan base case and negative $40 billion in the
downside case. This is due to the Oversight Board's projected impact of COVID-19
on the Puerto Rico economy and tax collections as well as related general
uncertainty on the economic outlook. The Commonwealth Fiscal Plan will
significantly inform the Commonwealth Plan of Adjustment, and the diminished
economic performance described in the new Fiscal Plan implies worse outcomes
than had been previously disclosed for creditors under the Commonwealth's Plan
of Adjustment.
The Oversight Board asked the Title III court in September 2020 to allow it to
provide a status update in late October 2020, which was granted. The period
until late October is needed to assess the assumptions of the Commonwealth
Fiscal Plan, according to the Oversight Board's status report filed in September
2020. Both the Oversight Board and mediation team "will realize in short order"
if a modified Plan can be negotiated, and the additional time will also enable
the Oversight Board and AAFAF to know "whether any remaining hurdles of such
plan can be overcome or if the electoral process will need to be completed
before that might occur".
In the October 2020 status update the Oversight Board indicated that it was
premature to schedule consideration of the Disclosure Statement and Commonwealth
Plan of Adjustment, as the Fiscal Plan assumptions continue to be tested and
conversations are ongoing with the Puerto Rico Fiscal Agency and Financial
Advisory Authority concerning amending the current Commonwealth Plan of
Adjustment. The next status update is due December 4, 2020. On October 28, 2020,
the Court ordered the Oversight Board to file, by February 10, 2021, either (i)
an informative motion with a term sheet disclosing the economic and structural
terms and features of a proposed amended Commonwealth Plan of Adjustment, or
(ii) the proposed amended Commonwealth Plan of Adjustment itself, together with
a proposed timeline for disclosure statement and confirmation hearings.
PRHTA Fiscal Plan
On June 26, 2020, the Oversight Board certified its own version of the Fiscal
Plan for PRHTA. The PRHTA Fiscal Plan states agency reform measures are critical
to PRHTA's sustainability, and that in fiscal year 2020, implementation
significantly fell behind the performance goals for fiscal measures established
by the 2019 PRHTA Fiscal Plan. The 2020 PRHTA Fiscal Plan shows the improvements
in PRHTA's operating and capital performance over various revenue and expense
categories due to
        | Ambac Financial Group, Inc. 54 2020 Third Quarter FORM 10-Q |

--------------------------------------------------------------------------------

the $4.7 billion benefit that would be achieved if PRHTA fully and timely
implements the outlined fiscal measures. Implementing these measures would
reduce PRHTA's projected pre-Commonwealth transfer deficit to approximately $1.7
billion from approximately $6.4 billion projected in the baseline scenario. An
annual transfer of approximately $2.2 billion from the Commonwealth to PRHTA
would fund the capital deficit not covered by the operating surplus, resulting
in a net 30-year budget surplus of $461 million - which would presumably be the
starting point for recoveries to PRHTA creditors.
The cumulative and annual budget surplus post-measures in the 2020 PRHTA Fiscal
Plan is drastically lower than the budget surplus post-measures in the 2019
PRHTA Fiscal Plan: fiscal year 2022 surplus of $33 million vs. $120 million and
fiscal year 2023 surplus of $1 million vs. $154 million. Since the document form
and projection structure/line items are different in the 2020 PRHTA Fiscal Plan
vs. 2019 PRHTA Fiscal Plan, comparability and reconciliation between the two
versions is difficult and as such understanding the full extent of the decrease
in the budget surplus in the latest plan remains challenging. COVID-19 is likely
a driver, but it also appears that the 2020 PRHTA Fiscal Plan may not include
Act 30 license fees ($130 million annually) or all of the $400 to $500 million
in annual revenues that come from various excise taxes that also support the
PRHTA debt insured by Ambac Assurance (e.g. gas tax, diesel tax, petroleum
products tax, cigarette tax, motor vehicle license fees). Without these
revenues, it unlikely PRHTA will be able to service its existing debt in any
meaningful way.
PRHTA has defaulted on its debt service payments since 2016, and based on the
2020 PRHTA Fiscal Plan projections of cash flow, the existing PRHTA debt service
may need to be reduced through a Title III plan of adjustment, unless the PRHTA
Fiscal Plan projections change again. The amount of net revenues available for
other needs in the 2020 PRHTA Fiscal Plan besides implementation of the capital
improvement program, such as the payment of debt service, are highly dependent
on PRHTA achieving additional positive cash flow to enable PRHTA eventually to
operate at a surplus without the need for projected Commonwealth financial
support to meet HTA budget gaps. However, the 2020 PRHTA Fiscal Plan projects a
declining subsidy from the Commonwealth over the next 30 years. If the Act 30
licenses fees and/or the various excise taxes were re-incorporated into the 2020
Fiscal Plan, recoveries for Ambac Assurance insured debt may be materially
higher than inferred from the current version of the 2020 PRHTA Fiscal Plan.
It is unknown if and when a PRHTA Plan of Adjustment will be filed by the
Oversight Board or confirmed by the court overseeing the Title III proceedings
of PRHTA. It is also unknown if and when other Puerto Rico instrumentalities,
which have debt outstanding insured by Ambac Assurance, will be filed under
Title III and what effect their fiscal plans and/or plans of adjustment may have
on Ambac's financial position.
No assurances can be given that Ambac's financial condition will not suffer a
materially negative impact as an ultimate result of the Commonwealth 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 Commonwealth Plan of Adjustment ("Amended POA")
reflecting the terms of this agreement. On February 28, 2020, the Oversight
Board filed an Amended POA and an amended Disclosure Statement to restructure
approximately $35 billion of debt and other claims against the Commonwealth of
Puerto Rico, PBA, ERS, and other issuers 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% haircut and would also
reduce the Commonwealth's annual debt service by 56%. Treatment for pension
claims would include a reduction in pension payments by as much as 8.5% for
retirees who currently receive at least $1,200 a month, such that approximately
75% of current and future retirees would not face any cuts, and the
establishment of a pension reserve fund to help support retirement payments in
future years. The Amended POA disproportionately disadvantaged claims against
the Commonwealth related to certain revenue bonds issued by Puerto Rico
instrumentalities, including those insured by Ambac Assurance, providing for an
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.
On September 20, 2020, the Oversight Board announced that it and principal
creditor parties to the Plan Support Agreement agreed to release documents
related to the ongoing debt restructuring negotiations under Title III of
PROMESA. The materials include an August 18, 2020, fiscal plan macroeconomic
overview and revised Plan of Adjustment proposal from the Oversight Board and an
August 24, 2020, Plan Support Agreement counterproposal from creditors.
According to a press release from the Oversight Board, notwithstanding the
information release, the Oversight Board and related creditors continue to
negotiate and the Plan Support Agreement has not been terminated.
The revised Commonwealth Plan of Adjustment proposed by the Oversight Board and
a counterproposal by the principal creditor parties to the Commonwealth Plan
Support Agreement both call for a $2 billion increase in cash consideration for
general obligation/Public Buildings Authority bondholders and lower caps on
maximum annual debt service compared with the current Plan Support Agreement.
The blended general obligation/Public Buildings Authority bond recovery under
the Oversight Board's proposal (which appears to have been offered to related
creditors on July 30, 2020) would range from 52.7% to 58.4%, while the PSA
creditors' counterproposal contemplates a blended recovery based on such claims
at 73.6%. Implied recoveries related to certain revenue bonds insured by Ambac
Assurance would be below 3%.
It is unclear if and how the Commonwealth Plan of Adjustment will be ultimately
modified or how the final adjustments will impact revenues available to the
Puerto Rico instrumentalities addressed in the Amended POA or the recoveries on
claims
        | Ambac Financial Group, Inc. 55 2020 Third Quarter FORM 10-Q |

--------------------------------------------------------------------------------

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 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.
Political Developments
On August 31, 2020, the terms of Oversight Board members Carlos M. García and
José Ramón González expired, and on October 5, 2020, the term of Oversight Board
Chairman José Carrión expired.
On October 6, 2020, the four remaining members of the Oversight Board at that
time (David A. Skeel, Arthur J. González, Ana J. Matosantos and Andrew Biggs)
voted unanimously to designate Skeel as the new Oversight Board Chairman. On
October 7, 2020, President Donald J. Trump appointed Justin Peterson to replace
Arthur J. González as member of the Oversight Board.
The four current members of the Oversight Board continue to carry out all
functions and duties while awaiting the potential appointment of additional or
replacement members. However, under section 206(b) of PROMESA, an affirmative
vote of no fewer than five members of the board is required to issue a
restructuring certification.
On August 16, 2020, Governor Wanda Vázquez acknowledged losing the primary of
her pro-statehood party to Pedro Pierluisi, who briefly served as the governor
last year amid political turmoil. Pierluisi faced Mayor Carlos Delgado among
other candidates during the gubernatorial election held on November 3, 2020. No
winner has been declared.
It is unclear how the Oversight Board member turnover and local elections will
impact the debt restructuring process, negotiations, timing and ultimate outcome
for Ambac.
Ambac Title III Litigation Update
Ambac Assurance is party to a number of litigations related to its Puerto Rico
exposures, and actively participates in the Commonwealth's Title III proceedings
before the United States District Court for the District of Puerto Rico.
On January 16, 2020, Ambac Assurance, together with other monoline insurers,
filed motions which sought to lift the automatic stay and allow Ambac and others
to enforce their rights related to HTA, CCDA and PRIFA in an alternative forum.
Through orders issued on July 2 and September 9, 2020, Judge Swain largely
denied the motions, while holding in abeyance further proceedings in the CCDA
motion relating to a particular account over which it is undisputed the
monolines have a lien. Ambac Assurance and the other movants have appealed the
HTA and PRIFA decisions. Briefing is expected to be completed by December 21,
2020, with argument heard in February 2021. Ambac is unable to predict when and
how the issues raised in these cases will be resolved. If Ambac
Assurance is unsuccessful in any of these proceedings, Ambac's financial
condition, including liquidity, loss reserves and capital resources may suffer a
material negative impact.
On January 16, 2020 the Oversight Board filed four adversary proceeding
complaints against Ambac Assurance, and other monoline insurers, seeking to
disallow their proofs of claim against the Commonwealth as they relate to HTA,
CCDA, and PRIFA bonds. On April 28, 2020, the Oversight Board filed partial
motions for summary judgment. Briefing has concluded on those motions for
summary judgment and oral argument was held on September 23, 2020. A decision is
pending.
Ambac Assurance, along with other monoline insurers, filed a motion seeking
appointment as trustees under Section 926 of the Bankruptcy Code to pursue
certain avoidance actions on behalf of HTA against the Commonwealth of Puerto
Rico. The motion attached a proposed complaint detailing the avoidance claims
that movants would pursue. On August 11, 2020 the Court denied the motion and
Ambac Assurance and the other movants have appealed that denial. Ambac Assurance
and the other movants filed a motion to hold that appeal in abeyance pending the
First Circuit's resolution of the appeal from the Court's denial of the HTA
Lift-Stay Motion. Briefing has concluded on the motion to hold the appeal in
abeyance and a decision is pending.
Refer to "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 and Note 11. Commitments and Contingencies to the Consolidated Financial
Statements, included in Part I, Item 1 of this Form 10-Q for further information
about Ambac's litigation relating to Puerto Rico.
Mediation
The status, timing and subject of any subsequent or future mediation discussion
has not yet been publicly disclosed. However, Judge Swain issued a scheduling
order on June 30, 2020, setting monthly omnibus hearings through the end of
2021. On October 28, 2020, Judge Swain ordered the Oversight Board to engage
with all relevant parties in responsible and meaningful negotiations in an
effort to arrive at a substantially consensual Plan of Adjustment. The timeline
for resolution of Puerto Rico's debt restructuring process is uncertain and will
extend into 2021.
The Oversight Board disclosed, in a status report filed with the Title III court
in September 2020, that it has resumed formal discussions with creditors with
the guidance of the mediation team led by Judge Houser. Prior to the talks with
creditors, the Oversight Board held discussions with AAFAF concerning the terms
of a Commonwealth Plan of Adjustment and what, if any, modifications or
amendments needed to be proposed. The status report also said that the Oversight
Board considered it premature to propose a schedule for consideration of the
Commonwealth Plan of Adjustment and Disclosure Statement due to several factors,
including the upcoming November election. More specifically, the report states
the Oversight Board "and its advisors have engaged in active dialogue with
individual creditors and their respective advisors, both those party to the
        | Ambac Financial Group, Inc. 56 2020 Third Quarter FORM 10-Q |

--------------------------------------------------------------------------------

Plan Support Agreement as well as other notable parties in interest. While
parties have re-engaged, both formally and informally, in light of (a) the
nascent stage of such discussions, (b) the current state of material litigations
before the court, the determinations of which shall influence the tenor of such
discussions, and (c) the political and electoral process on-Island, the
Oversight Board submits it is premature to propose a schedule for consideration
of the Commonwealth Plan of Adjustment and Disclosure Statement." The Oversight
Board filed an updated status report in October 2020 which also indicated that
it was premature to propose a schedule for consideration of the Commonwealth
Plan of Adjustment and Disclosure Statement due to several factors, including
the upcoming November election. On October 28, 2020, the Court ordered the
Oversight Board to file, by February 10, 2021, either (i) an informative motion
with a term sheet disclosing the economic and structural terms and features of a
proposed amended Commonwealth Plan of Adjustment, or (ii) the proposed amended
Commonwealth Plan of Adjustment itself, together with a proposed timeline for
disclosure statement and confirmation hearings.
No assurances can be given that debt restructuring negotiations will be
successfully concluded, that the 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 a materially adverse impact on
Ambac's financial condition or results of operations.
Federal Aid
The Commonwealth of Puerto Rico is projected to benefit from over $60 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.
On September 18, 2020, the White House announced plans for FEMA to award almost
$13 billion in new disaster aid, primarily for rebuilding Puerto Rico's
electrical grid that was damaged by hurricanes Maria and Irma three years ago.
The majority of the grants ($9.6 billion) will flow to the Puerto Rico Electric
Power Authority to repair and replace transmission and distribution lines,
substations, generation systems and general grid improvements as part of its
strategic transformation. About $2.3 billion in grants will flow to the Puerto
Rico's Department of Education for school construction projects. This aid
allocation will raise the amount the federal government has obligated to Puerto
Rico to approximately $38 billion for Puerto Rico's recovery. However,
distribution of disaster aid to date post-hurricanes has been slower than
expected. Only one-third, or $16.9 billion, of previously allocated funds have
been disbursed to the Commonwealth, according to COR (the Puerto Rico
government's Central Recovery and Reconstruction Office).
The slow pace of distribution, primarily for HUD grants, reflects a complicated
project approval process but also increased oversight of funds following
allegations of Puerto Rico's mismanagement of aid last year. To date, HUD has
only distributed a fraction of disaster relief funds to Puerto Rico,
about 0.5% of funds previously approved by Congress. Of the funds received by
the Commonwealth, the bulk flowing from FEMA include monies for public
assistance projects, including rebuilding roads, bridges, police stations and
hospitals damaged during the hurricanes. Individuals have also received close to
$3 billion in FEMA assistance to date, including funding housing assistance for
residents that have lost their homes as a result of the disaster, but also for
certain home repair, medical, child care and clean-up expenses.
The full extent of federal government support to Puerto Rico is still uncertain
as existing federal stimulus has not been fully disbursed and additional
measures are likely to be enacted. A new U.S. President, Puerto Rico governor,
or Oversight Board makeup could accelerate the aid distribution process if there
was a higher comfort level from the federal government regarding the local
management and efficacy of federal disaster resources. 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 nine months ended September 30, 2020,
Ambac had incurred losses associated with its Domestic Public Finance insured
portfolio of $263 million, which was impacted by lower discount rates, 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; and loss adjustment expenses related
to the cost of defending our rights and pursuing recoveries. 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 September 30, 2020:
                            Net Par Amount       Net Par Amount
Currency                    Outstanding in       Outstanding in
(Amounts in millions)        Base Currency        U.S. Dollars
U.S. Dollars               $        23,033      $        23,033
British Pounds             £         7,403                9,550
Euros                      €         1,518                1,778
Australian Dollars         A$          545                  390

Total                                           $        34,751

        | Ambac Financial Group, Inc. 57 2020 Third 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 September 30, 2020 and
December 31, 2019. BIG is defined as those exposures with an Ambac internal
credit rating below BBB-:
[[Image Removed: ambc-20200930_g1.jpg]][[Image Removed: ambc-20200930_g2.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           September 30,        December 31,
Grade Exposure ($ in millions)             2020                2019
Public Finance:
Lease and tax-backed (1)            $     1,199           $       1,109
General obligation (1)                      336                     525
Housing (2)                                 309                     311
Stadium                                     540                       -
Transportation                               30                      27

Other                                        38                      42
Total Public Finance                      2,452                   2,014
Structured Finance:
RMBS                                      2,941                   3,362

Student loans                               540                     620
Other                                         1                      33
Total Structured Finance                  3,482                   4,015
International Finance:
Other                                     1,537                   1,455
Total International Finance               1,537                   1,455
Total                               $     7,471           $       7,484



(1)Lease and tax-backed revenue includes $969 and $1,014 of Puerto Rico net par
at September 30, 2020 and December 31, 2019, respectively. General obligation
includes $101 and $109 of Puerto Rico net par at September 30, 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 net decline in below investment grade exposures is primarily due to
commutation of certain general obligation exposures, the partial commutation of
a structured finance transaction mostly offset by the addition of certain
exposures driven by the COVID-19 pandemic (lease and tax-backed, stadiums and an
international structured finance exposure).
Below investment grade 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 continue to increase in the future.
                             RESULTS OF OPERATIONS
Net loss attributable to common stockholders for the three months ended
September 30, 2020, was $108 million compared to net income attributable to
common stockholders of $66 million for the three months ended September 30,
2019. The decrease in net income was primarily driven by (i) receipt of $142
million arising from the settlement between the SEC and Citigroup which was
recognized as a gain in Other income for the three months ended September 30,
2019, (ii) higher losses and loss expenses, (iii) lower net realized investment
gains, (iv) lower income on variable interest entities, and (v) lower net
investment income, partially offset by: (a) lower
        | Ambac Financial Group, Inc. 58 2020 Third Quarter FORM 10-Q |

--------------------------------------------------------------------------------

interest and operating expenses and (b) higher net gains on derivative
contracts.
Net loss attributable to common stockholders for the nine months ended September
30, 2020, was $423 million compared to a net loss attributable to common
stockholders of $106 million for the nine months ended September 30, 2019. The
increase in loss was primarily driven by: (i) higher loss and loss expenses,
(ii) receipt of $142 million arising from the settlement between the SEC and
Citigroup which was recognized as a gain in Other income for the nine months
ended September 30, 2019, (iii) lower net investment income, (iv) lower net
realized investment gains, and (v) lower income on variable interest entities,
partially offset by (a) lower insurance intangible amortization and (b) lower
interest and operating expenses.
A summary of our financial results is shown below:
                                           Three Months Ended September 30,                  Nine Months Ended September 30,
($ in millions)                               2020                      2019                    2020                    2019
Revenues:
Net premiums earned                  $                 15          $         10          $             36          $        46
Net investment income                                  37                    45                        69                  186

Net realized investment gains
(losses)                                                2                    18                        20                   71

Net gains (losses) on
derivative contracts                                    7                   (10)                      (61)                 (61)

Other income (expense)                                  2                   141                         2                  133
Income (loss) on variable
interest entities                                       -                    11                         3                   30
Expenses:
Losses and loss expenses
(benefit)                                              83                    37                       216                  (84)
Insurance intangible
amortization                                           14                    17                        41                  280
Operating expenses                                     23                    26                        67                   80
Interest expense                                       50                    67                       172                  202

Provision for income taxes                              -                     3                        (5)                  33

Net income (loss) attributable
to common stockholders               $               (108)         $         66          $           (423)         $      (106)



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
contributed materially to a net increase in loss reserves and losses on interest
rate derivative contracts. Credit driven losses were also recognized in the
three months ended March 31, 2020, within losses incurred (primarily from public
finance insurance policies) and losses in counterparty credit adjustments on
derivative asset valuations. Financial market disruptions were 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). During the second and third quarters of 2020, credit
spreads partially
recovered (favorably impacting counterparty credit adjustments on derivative
assets and valuations of investment securities). The scope, duration and
magnitude of the direct and indirect effects of COVID-19 are evolving 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, intangible
assets, loss reserves and debt of the Company, had a significant impact on the
comparability of the results of operation for the nine months ended September
30, 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 and nine months ended September 30,
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 increased $5 million and decreased $10 million for the three
and nine months ended September 30,
        | Ambac Financial Group, Inc. 59 2020 Third Quarter FORM 10-Q |

--------------------------------------------------------------------------------

2020, respectively, compared to the same periods 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 September 30,                    Nine Months Ended September 30,
($ in millions)                                         2020                      2019                      2020                      2019
Normal premiums earned
Public finance                                 $              5              $          7          $             15              $        21
Structured finance                                            2                         2                         6                        8
International finance                                         3                         -                         9                        9
Total normal premiums earned                                 10                         8                        30                       38

Accelerated earnings                                          5                         2                         6                        8
Total net premiums earned                      $             15              $         10          $             36              $        46



The increase in normal premiums earned for the three months ended September 30,
2020, is primarily due to changes in allowances for credit losses on premium
receivables, partially offset by the continued runoff of the insured portfolio
in all markets. The decrease in normal premiums earned for the nine months ended
September 30, 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 assesses 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 and nine months ended September 30, 2020, includes an increase in the
allowance for credit losses since adoption of CECL of $2 million and $5 million,
respectively, as compared to an increase of $6 million and $7 million for the
three and nine months ended September 30, 2019, respectively. Terminations and
accelerations, including those which occurred in prior periods, result in lower
normal premiums earned in current and future periods. Public Finance normal
earned premiums for the three and nine months ended September 30, 2020, were
also impacted by reinsurance cessions in the second half of 2019.
The increase in accelerated earnings in the three months ended September 30,
2020, as compared to the three months ended September 30, 2019, is primarily
driven by the termination of an international credit. The decrease in
accelerated earnings in the nine months ended September 30, 2020, as compared to
the nine months ended September 30, 2019, is primarily related to the COFINA
restructuring, partially offset by negative accelerations related to the
Ballantyne commutation and two international commercial asset-backed exposures,
all of which occurred in 2019.
Net Investment Income. Net investment income 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, which consists 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 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 September 30,                     Nine Months Ended September 30,
($ in millions)                           2020                       2019                      2020                      2019
Securities available-for-sale:
Ambac-insured (including Secured
Notes)                           $             15              $          18          $             47             $         104
Securities available-for-sale
and short-term other than
Ambac-insured                                   9                         19                        33                        57
Other investments (includes
trading securities)                            14                          8                       (12)                       25
Net investment income            $             37              $          45          $             69             $         186



Net investment income decreased $7 million and $117 million for the three and
nine months ended September 30, 2020, respectively, compared to the same periods
in the prior year. As described further below, the variances were primarily
driven by pricing volatility within fund investments resulting from the impact
of the COVID-19 pandemic on financial markets and the impact of de-risking
transactions in 2019, including lower subsequent allocations to higher yielding
Ambac-insured securities and a lower overall invested asset base.
•Other investments income (loss) increased $6 million and decreased $37 million
for the three and nine months ended September 30, 2020, respectively, compared
to the
        | Ambac Financial Group, Inc. 60 2020 Third Quarter FORM 10-Q |

--------------------------------------------------------------------------------

same periods in the prior year. The increase in other investment income (loss)
for the three months ended September 30, 2020, compared to the prior year
period, resulted from stronger average performance and a larger allocation to
this sector. Third quarter 2020 gains reflect the continued price recovery on
asset classes most significantly impacted by fair value losses in the first
quarter of 2020, including hedge funds and funds investing in high-yield bonds,
leveraged loans and equities. Other investment income for the three months ended
September 30, 2020, also reflected gains on additional hedge fund investments
made during the period. The loss for the nine months ended September 30, 2020,
was driven by adverse changes in fair values experienced in the first quarter of
the year 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, partially offset by fair value recoveries and gains on new investments
in subsequent quarters. Other investment income for the three and nine months
ended September 30, 2019, was driven primarily by gains on equity and high-yield
and loan funds, partially offset by losses on insurance-linked securities.
•Investment income from Ambac-insured securities was lower in both the three and
nine month periods ended September 30, 2020, compared to the prior year periods
due primarily to the effects of 2019 de-risking activities, ongoing early
redemptions of Secured Notes issued by Ambac LSNI, LLC and the effects of
declining interest rates. The decline of income from Ambac-insured securities
for the three months ended September 30, 2020, was driven by redemptions and
lower LIBOR indexed coupon rates on the Secured Notes compared to the three
months ended September 30, 2019. Lower income from Ambac-insured securities for
the nine months ended September 30, 2020 compared to the same period of 2019,
primarily resulted from accelerated discount accretion on Ballantyne bonds,
recognized in connection with the Restructuring in the second quarter of 2019.
Other contributing factors to the decrease from the first nine months of 2019
are redemptions and lower rates on the Secured Notes and lower holdings of Ambac
insured-RMBS.
•Net investment income from available-for-sales securities other than
Ambac-insured securities decreased as a result of the favorable impact on income
for the three and nine months ended September 30, 2019, of high yielding
uninsured COFINA bonds received under the POA, as well as the impact of a
smaller asset base and lower average yields in 2020. All of the uninsured COFINA
bonds were sold from Ambac's non-VIE investment portfolio by December 31, 2019.
Use of funds for early debt redemptions and operating cash needs, combined with
portfolio allocation toward other investments and Ambac-insured bonds from lower
rated investment grade corporates, commercial mortgage backed securities and
certain CLOs in 2020 resulted in a lower asset base in this portion of the
portfolio. This reallocation along with steadily declining reinvestment
rates on short-term holdings resulted in lower averages yields on
available-for-sale securities other than Ambac-insured compared to the prior
year periods.
Net Realized Investment Gains (Losses). The following table provides a breakdown
of net realized gains (losses) for the periods presented:
                                            Three Months Ended September 30,                    Nine Months Ended September 30,
($ in millions)                                2020                      2019                      2020                      2019
Net gains (losses) on
securities sold or called            $              4               $         12          $             20              $        42
Net foreign exchange gains
(losses)                                           (2)                         7                         -                       30
Credit impairments                                  -                          -                         -                        -
Intent / requirement to sell
impairments                                         -                          -                         -                        -
Total net realized gains
(losses)                             $              2               $         18          $             20              $        71


Net realized gains on securities sold or called for the three and nine months
ended September 30, 2020, are primarily from sales in connection with routine
portfolio management. Net realized gains on securities sold or called for the
three and nine months ended September 30, 2019, included $7 million and $33
million, respectively, of net gains related to the impact of the COFINA Plan of
Adjustment, including sales of Ambac-insured Puerto Rico COFINA bonds and new
uninsured COFINA bonds received in the commutation. Also included in realized
gains for the nine months ended September 30, 2019, are $23 million of realized
foreign exchange gains arising from the settlement of Ballantyne bonds held in
the investment portfolio.
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.
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 half of 2020, the
economic hedge position has been adjusted. 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.
        | Ambac Financial Group, Inc. 61 2020 Third Quarter FORM 10-Q |

--------------------------------------------------------------------------------

Net gains (losses) on interest rate derivatives for the three and nine months
ended September 30, 2020, were $6 million and $(61) million, respectively,
compared to ($10) million and $(63) million for the three and nine months ended
September 30, 2019, respectively. The net gain for the three months ended
September 30, 2020, reflects a gain from reduced counterparty credit
adjustments. The net loss for nine months ended September 30, 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 and nine months ended
September 30, 2019, reflect the impact of declines in forward interest rates,
partially offset by negative net carrying costs driven by an inverted yield
curve.
•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 gains (losses) within Net
gains (losses) on derivative contracts of $6 million and $(15) million for the
three and nine months ended September 30, 2020, respectively, and $(5) million
and $(8) million for the three and nine months ended September 30, 2019,
respectively. The gain for the three months ended September 30, 2020, was driven
by narrower credit spreads and a decrease in the underlying net asset value of
the derivative assets as long term interest rates began to rise. The loss for
the nine months ended September 30, 2020, was driven by wider credit spreads,
including the effect of a credit rating downgrade of a derivative counterparty
by Ambac during the first quarter, simultaneous with an increase in the
underlying asset value as interest rates declined. The losses on counterparty
credit adjustments for the 2019 periods are primarily due to increases in the
underlying asset values as interest rates declined.
Other income (expense). Other income (expense) includes various fees, primarily
consent and waiver fees, as well as foreign exchange gains/(losses) unrelated to
investments or loss reserves. For the three and nine months ended September 30,
2020, other income (expense) included foreign exchange gains and amortization of
fee income. Other income also includes proceeds received by Ambac Assurance in
September 2019 in connection with an SEC action against Citigroup Global Markets
Inc. in the amount of $142 million.
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. 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 a loss of less than a million
and income of $3 million for the three and nine months ended September 30, 2020,
respectively, compared to income of $11 million and $30 million for the three
and nine months ended September 30, 2019, respectively. Results for the three
months ended September 30, 2020, reflect a modest reduction in value of net
assets of a VIE related to the ongoing shut-down of parts of the UK economy
resulting from COVID-19. Results for the nine months ended September 30, 2020,
were due primarily to realized gains of $8 million on sales of assets from one
VIE (the COFINA Trust) partially offset by the lower valuation of net assets on
a VIE impacted by COVID-19. Results for the three and nine months ended
September 30, 2019, were driven by the impact of the COFINA Trust created in
connection with the restructuring of Puerto Rico COFINA debt. Income from COFINA
Trust for the three months ended September 30, 2019, was $11 million, primarily
from realized gains on sales of assets from the trust used for early redemptions
of debt. Income from COFINA Trust for nine months ended September 30, 2019, was
$26 million, including $15 million from consolidation and $13 million from
realized investment gains, partially offset by net interest expense and fees.
The three and nine months ended September 30, 2019, also included a $2 million
loss from deconsolidation of a VIE.
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
        | Ambac Financial Group, Inc. 62 2020 Third Quarter FORM 10-Q |

--------------------------------------------------------------------------------

reinsurance, of $1,731 million and $1,702 million at September 30, 2020, and
December 31, 2019, respectively. The increase in these recoveries was primarily
driven by lower discount rates used to discount estimated cash flows. Refer to
Note 2. Basis of Presentation and Significant Accounting Policies to the
Consolidated Financial Statements included in Part II, Item 8 in the Company's
Annual Report on Form 10-K for the year ended December 31, 2019, for more
information regarding the estimation process for R&W subrogation recoveries.
The following provides details, by bond type, for losses and loss expenses
(benefit) incurred for the periods presented:
                                             Three Months Ended September 30,                 Nine Months Ended September 30,
($ in millions)                                 2020                     2019                    2020                   2019
RMBS                                    $            27             $        (25)         $           (91)         $      (133)
Domestic Public Finance                              43                       77                      263                  197
Student Loans                                         6                      (16)                      24                  (23)
Ambac UK and Other Credits                            8                        -                       20                 (125)

Totals (1)                              $            83             $         37          $           216          $       (84)


(1)  Includes loss expenses incurred of $46 and $83 for the three and nine
months ended September 30, 2020, respectively, and $23 and $52 for the three and
nine months ended September 30, 2019, respectively.
Losses and loss expenses (benefit) for the three and nine months ended September
30, 2020, were driven by the following:
•Higher projected losses in domestic public finance driven by lower discount
rates (primarily relating to Puerto Rico), loss expenses incurred and incurred
losses related to transactions directly impacted by the economic impact from
COVID-19;
•An increase in student loan losses as a result of lower discount rates and the
impact from COVID-19; and
•Increased RMBS losses for the three months ended September 30, 2020, related to
expected losses from COVID-19 related delinquencies and improved RMBS losses for
the nine months ended September 30, 2020, as a result of the positive impact of
lower interest rates on excess spread, reduced by lower discount rates and
expected losses from COVID-19 related delinquencies.
Losses and loss expenses (benefit) for the three and nine months ended September
30, 2019, were driven by the following:
•For the nine months ended September 30, 2019, favorable development within
Ambac UK and Other Credits primarily due to the Ballantyne commutation completed
in June 2019;
•Favorable RMBS development as a result of credit improvement, the impact on
excess spread from declines in interest rates, and additionally for the nine
months ended September 30, 2019, a trustee settlement related to Lehman
sponsored transactions partially offset by,
•Higher projected losses in domestic public finance driven mostly by a lower
discount rates and additions to Puerto Rico loss reserves.
Insurance Intangible Amortization. Insurance intangible amortization for the
three and nine months ended September 30, 2020, was $14 million and $41 million,
respectively, a decrease of $4 million and $239 million over the three and nine
months ended September 30, 2019, respectively. The decrease from the nine months
ended September 30, 2019, is primarily due to accelerated amortization as a
result of the Ballantyne commutation that occurred in the second quarter of
2019.
Operating Expenses. Operating expenses consist of gross operating expenses plus
reinsurance commissions. The following table provides a summary of operating
expenses for the periods presented:
                                                      Three Months Ended September 30,                    Nine Months Ended September 30,
($ in millions)                                          2020                      2019                      2020                      2019
Compensation                                    $             13              $         14          $             38              $        46
Non-compensation                                              10                        11                        29                       33
Gross operating expenses                                      23                        26                        67                       80
Reinsurance commissions, net                                   -                         -                         -                        -

Total operating expenses                        $             23              $         26          $             67              $        80



Gross operating expenses decreased $3 million and $13 million for the three and
nine months ended September 30, 2020, respectively, compared to the same periods
in the prior year. Operating expenses incurred relating to COVID-19 have not
been significant for the three and nine months ended September 30, 2020.
The decrease in operating expenses during the three months ended September 30,
2020, as compared to the three months ended September 30, 2019, was due to the
following:
•Lower compensation costs primarily related to lower salaries resulting from
continued right sizing of staffing levels and
•Lower non-compensation costs primarily due to reduced premises costs as a
result of re-locating our corporate headquarters.
The decrease in operating expenses during the nine months ended September 30,
2020, as compared to the nine months ended September 30, 2019, was due to the
following:
•Lower compensation costs primarily due to lower salaries and severance
resulting from continued right sizing of staffing levels and lower incentive
compensation costs primarily related to the Ballantyne restructuring in 2019 and
•Lower non-compensation costs primarily due to a UK Value Added Tax (VAT) refund
recognized in the nine months ended September 30, 2020, reduced consulting
services and lower premises costs as a result of re-locating our corporate
headquarters, offset by increased legal fees.
Legal and consulting services provided for the benefit of OCI were flat at $2
million during the nine months ended September 30, 2020 and 2019.
        | Ambac Financial Group, Inc. 63 2020 Third Quarter FORM 10-Q |

--------------------------------------------------------------------------------

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 September 30,                   Nine Months Ended September 30,
($ in millions)                                    2020                      2019                     2020                    2019
Surplus notes (1)                         $             17              $         25          $              67          $         73

Ambac note                                              25                        35                         83                   110
Tier 2 notes                                             7                         7                         21                    19
Other                                                    -                         -                          1                     -

Total interest expense                    $             50              $         67          $             172          $        202


(1)Includes junior surplus notes
The decrease in interest expense for the three and nine months ended September
30, 2020, compared to the three and nine months ended September 30, 2019, was
primarily driven by optional redemptions and lower rate resets of the floating
rate Ambac Note and lower discount accretion on surplus notes, partially offset
by interest compounding on the surplus notes and the Tier 2 Notes.
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.
In accordance with their terms, 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 $334
million and $165 million, respectively, at September 30, 2020.
Provision for Income Taxes. The provision for income taxes for the three and
nine months ended September 30, 2020, was $0 million and a benefit of $5
million, a decrease of $3 million and $38 million compared to the provision for
income taxes reported for three and nine months ended September 30, 2019. The
change for the three and nine months ended September 30, 2020, as compared to
the three and nine months ended September 30, 2019, was primarily attributable
to Ambac UK, which had higher taxable income in 2019 due to the Ballantyne
restructuring and commutation.
                        LIQUIDITY AND CAPITAL RESOURCES
Ambac Financial Group, Inc. ("AFG") Liquidity. AFG's liquidity is primarily
dependent on its cash, investments (excluding equity investments in
subsidiaries), and net receivables totaling $465 million as of September 30,
2020, and secondarily on its expense sharing and other arrangements with Ambac
Assurance.
•During the three months ended September 30, 2020, AFG purchased Everspan
Insurance Company, from Ambac Assurance and repositioned it as a subsidiary of a
new intermediary holding company that is directly owned by AFG. This acquisition
required a cash payment from AFG to AAC of approximately $14 million.
•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 tolling payments,
if any, will be AFG's principal sources 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
        | Ambac Financial Group, Inc. 64 2020 Third Quarter FORM 10-Q |

--------------------------------------------------------------------------------

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, which may include securities issued or insured by Ambac Assurance
or Ambac UK and other less liquid investments. Additional 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 notes and Tier 2 Notes; 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 has had a negative impact on Ambac's liquidity resources
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 either timely settlement or additional collateral
posting; and higher credit risk within the insured portfolio, as further
described below. Nevertheless, Ambac has not yet experienced incremental demands
on its liquidity, from higher claims or expenses, other than the aforementioned
impact of derivatives.
•Claim payments may increase during the global recession and COVID-19 pandemic
as issuers, particularly those with revenues that will be interrupted by the
effects of the pandemic, including social distancing, other restrictions on
activities 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 rate swaps and US
Treasury futures) as an economic hedge against the effects of rising interest
rates elsewhere in the Company, including on Ambac Assurance's financial
guarantee exposures. AFS's derivatives include interest rate swaps previously
provided to asset-backed issuers and other entities in connection with their
financings. Ambac Assurance loans cash and securities to AFS as needed to fund
payments under these derivative contracts, collateral posting requirements and
operating expenses. Intercompany loans are governed by an established lending
agreement with defined borrowing limits that has received non-disapproval from
OCI.
Ambac Assurance manages its liquidity risk by maintaining comprehensive analyses
of projected cash flows and maintaining specified levels of cash and short-term
investments at all times.
Ambac Assurance is limited in its ability to pay dividends pursuant to the terms
of its Auction Market Preferred Shares ("AMPS"), which state that dividends may
not be paid on the common stock of Ambac Assurance unless all accrued and unpaid
dividends on the AMPS for the then current dividend period have been paid,
provided that dividends on the common stock may be made at all times for the
purpose of, and only in such amounts as are necessary for enabling AFG (i) to
service its indebtedness for borrowed money as such payments become due or
(ii) to pay its operating expenses. If dividends are paid on the common stock
for such purposes, dividends on the AMPS become cumulative until the date that
all accumulated and unpaid dividends have been paid on the AMPS. Ambac Assurance
has not paid dividends on the AMPS since 2010. 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
        | Ambac Financial Group, Inc. 65 2020 Third Quarter FORM 10-Q |

--------------------------------------------------------------------------------

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.
                                                                 Nine Months Ended September 30,
($ in million)                                                      2020                    2019
Cash provided by (used in):
Operating activities                                         $           (167)         $      (296)
Investing activities                                                      396                  791
Financing activities                                                     (260)                (511)
Foreign exchange impact on cash and cash equivalents                        -                    -
Net cash flow                                                $            (31)         $       (16)


Operating activities
The following represents the significant cash operating activity during the nine
months ended September 30, 2020 and 2019:
•Debt service on the Ambac Note was $83 million and $110 million for the nine
months ended September 30, 2020 and 2019, respectively.
•In September 2019, Ambac Assurance received $142.2 million in connection with
an SEC settlement with Citibank Global Markets Inc.
•Cash used related to interest rate derivatives was $20 million and $81 million
for the nine months ended September 30, 2020 and 2019, respectively.
•Operating expenses was $60 million and $66 million for the nine months ended
September 30, 2020 and 2019, respectively.
•Cash provided by the investment portfolio was $82 million and $110 million for
the nine months ended September 30, 2020 and 2019, respectively.
•Net loss and loss expenses paid, including commutation payments, during the
nine months ended September 30, 2020 and 2019 are detailed below:
                                                                  Nine Months Ended September 30,
($ in million)                                                       2020                    2019
Net loss and loss expenses paid (recovered):
Net losses paid (1)                                          $             149          $       398
Net subrogation received (2)                                               (88)                (142)
Net loss expenses paid                                                      77                   43
Net cash flow                                                $             138          $       299


(1)Net losses paid include commutation payments of $13 and $214 for the nine
months ended September 30, 2020 and 2019, respectively.
(2)For or the nine months ended September 30, 2019, subrogation received
includes $36 of settlement proceeds related to Lehman sponsored RMBS
transactions and $23 related to the COFINA Plan of Adjustment.
Future operating cash flows will primarily be impacted by interest payments on
outstanding debt, claim and expense payments, investment coupon receipts and
premium collections.
Financing Activities
Financing activities for the nine months ended September 30, 2020, include
paydowns of the Ambac Note of $115 million and paydowns / maturities of VIE debt
obligations of $143 million.
Financing activities for the nine months ended September 30, 2019, include
paydowns of the Ambac Note of $29 million and paydowns of VIE debt obligations
of $510 million, proceeds of $19 million from the re-issuance of 1,386 shares of
Ambac owned AMPS and proceeds of $12 million from issuance of Ambac UK debt.
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 $154 million (cash and securities
collateral of $1 million and $152 million, respectively), including independent
amounts, under these contracts at September 30, 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 $507 million from December 31, 2019, to
$12,812 million at September 30, 2020, primarily due to the payment of loss and
loss adjustment expenses; interest and operating expenses; redemptions of
long-term debt; and lower VIE assets caused by redemptions, the economic effects
of the COVID-19 pandemic on certain consolidated VIEs and the impact of currency
changes (weakening of pound sterling). Other significant changes during the nine
months ended September 30, 2020, were higher subrogation recoverables primarily
related to increases in excess
        | Ambac Financial Group, Inc. 66 2020 Third Quarter FORM 10-Q |

--------------------------------------------------------------------------------

spread on RMBS, as a result of lower interest rates, and lower premium
receivables and intangible assets from the continued runoff of the financial
guarantee insurance portfolio.
Total liabilities decreased by approximately $66 million from December 31, 2019,
to $11,718 million as of September 30, 2020, primarily due to lower long-term
debt from partial redemptions of the Ambac Note and lower consolidated VIE
liabilities, resulting from redemptions, fair value and currency changes (as
noted above), partially offset by higher loss reserves and increases in interest
rate derivative obligations, as a result of reductions in forward interest
rates.
As of September 30, 2020, total stockholders' equity was $1,095 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 nine months ended September 30, 2020, of $423 million and
translation losses on the consolidation of AFG's foreign subsidiaries of $20
million.
Investment Portfolio. Ambac Assurance's investment objective is to achieve the
highest risk-adjusted after-tax return on a diversified portfolio of 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 the 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 and sells Ambac Assurance and Ambac UK 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 diversified fixed income securities and pooled investment funds.
The portfolio is subject to internal investment guidelines and may be subject to
limits on types and quality of investments imposed by the PRA as regulator of
Ambac UK. Ambac UK's investment policy sets forth minimum credit rating
requirements and concentration limits, among other restrictions. The Board of
Directors of Ambac UK approves any changes or exceptions to Ambac UK's
investment policy.
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.
In the second quarter of 2020, Ambac monetized a material portion of its
investments in certain assets classes; including corporate securities rated
below the 'A' rated category, all directly owned CMBS (other than Military
Housing bonds), and approximately 50% of all CLOs (all rated investment grade)
and acquired additional distressed Ambac-insured securities. In the third
quarter of 2020, Ambac began acquiring corporate securities rated below 'A'
again. These actions resulted in changes to the credit rating distribution of
available-for-sale investments from December 31, 2019, to September 30, 2020,
illustrated in the charts below.
The following table summarizes the composition of Ambac's investment portfolio,
excluding VIE investments, at carrying value at September 30, 2020 and December
31, 2019:
                                                    September 30,       December 31,
($ in millions)                                          2020               2019
Fixed income securities                            $        2,311      $       2,577
Short-term                                                    586                653
Other investments                                             502                478
Fixed income securities pledged as collateral                 152                 85
Total investments (1)                              $        3,551      $       3,792


(1)  Includes investments denominated in non-US dollar currencies with a fair
value of £287 ($370) and €38.7 ($45.3) as of September 30, 2020, and £257 ($341)
and €2 ($2) as of December 31, 2019.
Ambac invests in various asset classes in its fixed income securities portfolio,
including securities covered by guarantees issued by Ambac Assurance, Ambac UK
and other financial guarantors ("insured securities"). Other investments include
diversified interests in pooled funds. Refer to Note 8. Investments to the
Unaudited Consolidated Financial Statements included in Part I, Item 1 in this
Form 10-Q for information about insured securities and fixed income and pooled
funds by asset class.
The following table represents the fair value of other asset-backed securities,
included in fixed income securities above, at September 30, 2020 and December
31, 2019, by classification:
                                           September 30,       December 31,
($ in millions)                                 2020               2019

Other asset-backed securities
Military Housing                          $          240      $         237

Other                                                 60                 50

Total other asset-backed securities $ 300 $ 287

| Ambac Financial Group, Inc. 67 2020 Third Quarter FORM 10-Q |

--------------------------------------------------------------------------------

The following charts provide the ratings (1) distribution of the fixed income
investment portfolio based on fair value at September 30, 2020 and December 31,
2019:
[[Image Removed: ambc-20200930_g3.jpg]][[Image Removed: ambc-20200930_g4.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 39% and
33% of the September 30, 2020 and December 31, 2019 combined fixed income
portfolio, respectively.
Premium Receivables. Ambac's premium receivables decreased to $372 million at
September 30, 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 and increases to the allowance for credit losses, partially
offset by accretion of the premium receivable discount.
Premium receivables by payment currency were as follows:
Currency                    Premium Receivable in       Premium Receivable in
(Amounts in millions)          Payment Currency              U.S. Dollars
U.S. Dollars               $                  239      $                  239
British Pounds             £                   87                         112
Euros                      €                   18                          21

Total                                                  $                  372



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 $132 million from its
reinsurers at September 30, 2020.  As of September 30, 2020 and December 31,
2019, reinsurance recoverable on paid and unpaid losses were $37 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 September 30, 2020 and December 31,
2019, the net insurance intangible asset was $383 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 $95
million as of September 30, 2020. Derivative liabilities increased from $90
million at December 31, 2019, to $126 million as of September 30, 2020. The net
increases resulted primarily from lower interest rates during the nine months
ended September 30, 2020, 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
        | Ambac Financial Group, Inc. 68 2020 Third Quarter FORM 10-Q |

--------------------------------------------------------------------------------

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 September 30, 2020 and December 31, 2019, were $(393) 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            Revenue    Recoveries (1)     Reserves
September 30, 2020:
Loss and loss expense reserves                                   $     2,116          $   (235)                     $      (80)         $ 1,801
Subrogation recoverable                                                  109            (2,303)                              -           (2,194)
Totals                                                           $     2,225          $ (2,538)                     $      (80)         $  (393)

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
$1,757 and $1,727 at September 30, 2020 and December 31, 2019, respectively.
Ambac has exposure to various bond types issued in the debt capital markets. Our
experience has shown that, for the majority of bond types, we have not
experienced significant claims. The bond types that have experienced significant
claims, including through commutations, are residential mortgage-backed
securities ("RMBS"), student loan securities and public finance securities.
These bond types represent 94% of our ever-to-date insurance claims recorded,
with RMBS comprising 75%. The table below indicates gross par outstanding and
the components of gross loss and loss expense reserves related to policies in
Ambac's gross loss and loss expense reserves at September 30, 2020 and December
31, 2019:
                                                                          Present Value of
                                                                              Expected
                                                Gross                      Net Cash Flows                                          Gross Loss
                                                 Par                             Claims and          Unearned                       and Loss
                                             Outstanding                            Loss              Premium                       Expense
($ in millions)                                 (1)(2)                            Expenses            Revenue     Recoveries    Reserves (1)(3)
September 30, 2020:
RMBS                                       $       2,672                       $       702          $ (2,151)                  $           (13)         $ (1,462)
Domestic Public Finance                            3,783                             1,140              (352)                              (52)              736
Student Loans                                        431                               272               (35)                               (4)              233
Ambac UK and Other Credits                           866                                31                 -                               (11)               20

Loss expenses                                          -                                80                 -                                 -                80
Totals                                     $       7,752                       $     2,225          $ (2,538)                  $           (80)         $   (393)


        | Ambac Financial Group, Inc. 69 2020 Third Quarter FORM 10-Q |

--------------------------------------------------------------------------------

                                                                             Present Value of
                                                                                 Expected
                                                   Gross                      Net Cash Flows                                          Gross Loss
                                                    Par                             Claims and          Unearned                       and Loss
                                                Outstanding                            Loss              Premium                       Expense
($ in millions)                                    (1)(2)                            Expenses            Revenue     Recoveries    Reserves (1)(3)
December 31, 2019:
RMBS                                          $       3,027                       $       634          $ (2,013)                  $           (13)         $ (1,392)
Domestic Public Finance                               2,398                             1,007              (344)                              (36)              627
Student Loans                                           472                               248               (36)                               (4)              208
Ambac UK and Other Credits                              271                                 4                 -                                (1)                3

Loss expenses                                             -                                73                 -                                 -                73
Totals                                        $       6,168                       $     1,966          $ (2,394)                  $           (54)         $   (482)


(1)  Ceded par outstanding on policies with loss reserves and ceded loss and
loss expense reserves are $859 and $36 respectively, at September 30, 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 September 30, 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.
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,
government intervention into the functioning of the mortgage market and 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 $1,731 million, net of reinsurance, as
of September 30, 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.
        | Ambac Financial Group, Inc. 70 2020 Third Quarter FORM 10-Q |

--------------------------------------------------------------------------------

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
September 30, 2020, could be approximately $40 million. Combined with the
absence of any R&W subrogation recoveries, a possible increase in loss reserves
for RMBS could be approximately $1,771 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 $35 million. Additionally, the RMBS portfolio
is sensitive to the COVID-19 related forbearances and delinquencies caused by
the general economic downturn. Due to the uncertainties related to the economic
effects of the COVID-19 pandemic and other
risks associated with RMBS, there can be no assurance that losses may not exceed
our stress case estimates.
Public Finance Variability:
Ambac's U.S. public finance portfolio consists predominantly of municipal bonds
such as general and revenue obligations and lease and tax-backed obligations of
state and local government entities; however, the portfolio also includes a wide
array of non-municipal types of bonds, including financings for not-for-profit
entities and transactions with public and private elements, which generally
finance infrastructure, housing and other public purpose facilities and
interests. The increase in public finance gross loss reserves at September 30,
2020, as compared to December 31, 2019, was primarily related to declines in
discount rates; changes in assumptions on certain credits, particularly Puerto
Rico; and the adverse impact on loss reserves from the global and
issuer-specific economic impact of the COVID-19 pandemic. Total public finance
gross loss reserves and related gross par outstanding on Ambac insured
obligations by bond type were as follows:
                                    September 30, 2020                     December 31, 2019
Issuer Type                      Gross Par          Gross Loss         Gross Par          Gross Loss
($ in millions)               Outstanding (1)        Reserves       Outstanding (1)        Reserves

Lease and tax-backed        $     1,497            $      693      $     1,075           $      561
General obligation                  603                   (29)             681                  (16)
Housing                             454                    28              457                   29
Transportation revenue              307                    31               88                   42
Other                               922                    13               97                   11
Total                       $     3,783            $      736      $     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, particularly
those dependent upon narrow sources of revenues or dedicated taxes to support
debt service, 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 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.
        | Ambac Financial Group, Inc. 71 2020 Third Quarter FORM 10-Q |

--------------------------------------------------------------------------------

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 changes
in tax law that could reduce certain municipal investors' appetite for
tax-exempt municipal bonds or put 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 of 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 and
other natural disasters. These factors, taken together with the payment
moratorium on debt service 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, 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
September 30, 2020, the possible increase in loss reserves could be
approximately $1,200 million. However, there can be no assurance that losses may
not exceed our stress case estimates. 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 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
September 30, 2020, the possible increase in loss reserves could be
approximately $30 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 $375 million greater than the loss
reserves at September 30, 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.
        | Ambac Financial Group, Inc. 72 2020 Third Quarter FORM 10-Q |

--------------------------------------------------------------------------------

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
September 30, 2020 and December 31, 2019 is below:
                            September 30,
($ in millions)                  2020           December 31, 2019
Surplus notes (1)          $          777      $              769

Ambac note                          1,648                   1,763
Tier 2 notes                          299                     278
Ambac UK debt                          13                      13

Total Long-term Debt       $        2,737      $            2,822


(1)Includes junior surplus notes.
The decrease in long-term debt from December 31, 2019, is primarily due to
optional redemptions of $115 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.
Convertible Instruments and Contracts in an Entity's Own Equity
In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible
Instruments and Contracts in an Entity's Own Equity. The ASU i) simplifies the
accounting for convertible debt and convertible preferred stock by reducing the
number of accounting models, and amends certain disclosures, ii) amends and
simplifies the derivative scope exception guidance for contracts in an entity's
own equity, including share-based compensation, and iii) amends the diluted
earnings per share calculations for convertible instruments and contracts in an
entity's own equity. The ASU is effective for fiscal years ending after December
15, 2021, with early adoption permitted. Ambac will adopt this ASU on January 1,
2022.
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 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 $933 million and $1,477 million at September 30, 2020, respectively, as
compared to $1,088 million and $1,618 million at December 31, 2019,
        | Ambac Financial Group, Inc. 73 2020 Third Quarter FORM 10-Q |

--------------------------------------------------------------------------------

respectively.  As of September 30, 2020, statutory policyholder surplus and
qualified statutory capital included $573 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 $526 million that is not recorded under statutory basis accounting
principles), preferred stock 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 significant drivers to the net decrease in policyholder surplus are
statutory net losses of $133 million for the nine months ended September 30,
2020, (excluding dividends from subsidiaries) and contributions to contingency
reserves of $14 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 pooled fund
and other investments carried at fair value, (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 £391 million at September 30,
2020, as compared to £387 million at December 31, 2019. At September 30, 2020,
the carrying value of cash and investments was £473 million, an increase from
£470 million at December 31, 2019. The increase in shareholders' funds and cash
and investments was primarily due to the continued receipt of premiums and
foreign exchange gains, partially offset by insurance losses, losses within
Ambac UK's investment portfolio (excluding foreign exchange) and operating
expense payments.
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 £183 million at
September 30, 2020, of which £170 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. Eligible capital resources at September 30,
2020, and December 31, 2019, were in comparison to regulatory capital
requirements of £234 million and £208 million, respectively. Therefore, Ambac UK
was deficient in terms of compliance with applicable regulatory capital
requirements by £64 million and £30 million at September 30, 2020, and
December 31, 2019, respectively. The deficit increased as at September 30, 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 in eligible
capital resources 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-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
        | Ambac Financial Group, Inc. 74 2020 Third Quarter FORM 10-Q |

--------------------------------------------------------------------------------

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 (loss) on a dollar amount and per
diluted share basis, for all periods presented:
                                                                    Three Months Ended September 30,
                                                              2020                                      2019
                                                                       Per Diluted                            Per Diluted
($ in millions, except share data)                $ Amount                Share             $ Amount             Share
Net income (loss) attributable to common
stockholders                                  $    (108)              $    (2.33)         $      66          $     1.41
Adjustments:
Non-credit impairment fair value (gain) loss
on credit derivatives                                 -                        -                  -               (0.01)

Insurance intangible amortization                    14                     0.29                 17                0.37

Foreign exchange (gains) losses                       1                     0.03                 (6)              (0.14)

Adjusted earnings (loss)                      $     (93)              $    (2.01)         $      77          $     1.63

                                                                    Nine Months Ended September 30,
                                                              2020                                      2019
                                                                       Per Diluted                            Per Diluted
($ in millions, except share data)                $ Amount                Share             $ Amount             Share
Net income (loss) attributable to common
stockholders                                  $    (423)              $    (9.16)         $    (106)         $    (2.30)
Adjustments:
Non-credit impairment fair value (gain) loss
on credit derivatives                                 1                     0.02                 (1)              (0.02)

Insurance intangible amortization                    41                     0.88                280                6.09

Foreign exchange (gain) loss                          -                    (0.01)               (19)              (0.42)

Adjusted earnings (loss)                      $    (382)              $    (8.27)         $     154          $     3.35



Adjusted Book Value. Adjusted Book Value is defined as Total Ambac Financial
Group, Inc. stockholders' equity as reported under GAAP, adjusted for after-tax
impact of the following:
•Non-credit impairment fair value losses on credit derivatives: Elimination of
the non-credit impairment fair value loss on credit derivatives, which is the
amount in excess of the present value of the expected estimated economic credit
loss. GAAP fair values are affected by, and in part fluctuate with, changes in
market factors such as interest rates, credit spreads, including Ambac's CVA
that are not expected to result in an economic gain or loss. These adjustments
allow for all financial guarantee contracts to be accounted for within Adjusted
Book Value consistent with the provisions of the Financial Services-Insurance
Topic of the ASC, whether or not they are subject to derivative accounting
rules.
•Insurance intangible asset: Elimination of the financial guarantee insurance
intangible asset that arose as a result of Ambac's emergence from bankruptcy and
the implementation of Fresh Start reporting. This adjustment ensures that all
financial guarantee contracts are accounted for within Adjusted Book Value
consistent with the provisions of the Financial Services-Insurance Topic of the
ASC.
        | Ambac Financial Group, Inc. 75 2020 Third Quarter FORM 10-Q |

--------------------------------------------------------------------------------

•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.

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

© Edgar Online, source Glimpses