The implementation of the Reorganization Plan and the adoption of Fresh Start in the Company’s condensed consolidated balance sheet as of the Fresh Start Reporting Date are as follows:

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Reorganized Condensed Consolidated Balance Sheet

As of April 30, 2013


	Predecessor Ambac			Reorganization Item Adjustments			Fresh Start Adjustments			Successor Ambac
*(Dollars in Thousands)*	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Assets:
Investments	$	6,457,264		$	—		$	—		$	6,457,264
Cash		254,851			(101,900	) (A)					152,951
Receivable for securities sold		682									682
Investment income due and accrued		37,961									37,961
Premium receivables		1,531,631									1,531,631
Reinsurance recoverable on paid and unpaid losses		151,311									151,311
Deferred ceded premium		166,212									166,212
Subrogation recoverable		533,673									533,673
Deferred acquisition costs		184,953						(184,953	) (C)		—
Loans		8,857						(1,575	) (C)		7,282
Derivative assets		121,643									121,643
Current taxes		—			4,410	(A)					4,410
Insurance intangible asset		—						1,658,972	(C)		1,658,972
Goodwill		—						514,511	(C)		514,511
Other assets		54,821									54,821
Variable interest entity assets:
Fixed income securities, at fair value		2,500,565									2,500,565
Restricted cash		24,150									24,150
Investment income due and accrued		4,851									4,851
Loans		14,758,077						(6,024	) (C)		14,752,053
Intangible assets		164,520									164,520
Other assets		13,972									13,972

Total assets	$	26,969,994		$	(97,490	)	$	1,980,931		$	28,853,435

Liabilities and Stockholders’ Equity:
Liabilities:
Liabilities subject to compromise	$	1,704,641		$	(1,704,641	) (B)	$	—		$	—
Unearned premiums		2,482,314									2,482,314
Losses and loss expense reserve		6,106,345									6,106,345
Ceded premiums payable		92,468									92,468
Obligations under investment agreements		357,373						1,505	(C)		358,878
Obligations under investment repurchase agreements		5,926									5,926
Deferred taxes		1,580									1,580
Current taxes		97,490			(97,490	) (A)					—
Long-term debt		155,271			(973	) (B)		786,015	(C)		940,313
Accrued interest payable		252,788			(821	) (B)		(18,091	) (C)		233,876
Derivative liabilities		621,645									621,645
Other liabilities		88,908						1,837	(C)		90,745
Payable for securities purchased		27									27
Variable interest entity liabilities:
Accrued interest payable		4,318									4,318
Long-term debt		15,041,624						(18,586	) (C)		15,023,038
Derivative liabilities		2,425,517									2,425,517
Other liabilities		6,030									6,030

Total liabilities	$	29,444,265		$	(1,803,925	)	$	752,680		$	28,393,020

Stockholders’ (deficit) equity:
Preferred stock	$	—		$	—		$	—		$	—
Common stock—Predecessor Ambac		3,080						(3,080	) (D)		—
Common stock—Successor Ambac		—			450	(B)					450
Additional paid-in capital—Predecessor Ambac		2,172,027						(2,172,027	) (D)		—
Additional paid-in capital—Successor Ambac		—			184,550	(B)		—			184,550
Accumulated other comprehensive income		800,260						(800,260	) (D)		—
Accumulated deficit		(5,697,961	)		1,521,435	(B)		4,176,526	(C)(D)		—
Common stock held in treasury at cost		(410,695	)					410,695	(D)		—

Total Ambac Financial Group, Inc. stockholders’ (deficit) equity		(3,133,289	)		1,706,435			1,611,854			185,000
Noncontrolling interest		659,018						(383,603	) (D)		275,415

Total stockholders’ (deficit) equity		(2,474,271	)		1,706,435			1,228,251			460,415

Total liabilities and stockholders’ (deficit) equity	$	26,969,994		$	(97,490	)	$	1,980,931		$	28,853,435

Reorganization Item Adjustments:

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

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

(B)

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


Liabilities subject to compromise	$	1,704,641
Long-term debt		973	⁽¹⁾
Accrued interest payable		821	⁽¹⁾

Total debt discharged		1,706,435
Less: Successor Ambac common stock		(450	) ⁽²⁾
Successor Ambac additional paid-in capital		(184,550	) ⁽²⁾

Pre-tax gain from cancellation and satisfaction of Predecessor Ambac debt	$	1,521,435

⁽¹⁾

Represents the proportional reduction in the carrying value of long-term debt and associated accrued interest payable upon the partial discharge of $8,043 par value of Segregated Account junior surplus notes that were issued to a pre-petition creditor, One State Street, LLC (“OSS”). Pursuant to a settlement agreement (the “OSS Settlement Agreement”) to terminate the Company’s office lease with OSS and to settle all claims among the parties, the outstanding principal amount of the Segregated Account junior surplus notes issued to OSS were reduced based on the value of distribution that OSS received on account of its allowed claim in Ambac’s bankruptcy case. Refer to Note 11—Long-Term Debt, included in Ambac’s 2012 Annual Report on Form 10-K, for additional information on the OSS Settlement Agreement.

⁽²⁾

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

Fresh Start Adjustments:

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

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


Deferred acquisition costs	$	(184,953	)
Loans (non-VIE)		(1,575	)
Insurance intangible asset		1,658,972
Goodwill		514,511
VIE loans and long-term debt		12,562
Obligations under investment agreements		(1,505	)
Long-term debt and accrued interest payable		(767,924	)
Other liabilities		(1,837	)

Asset/liability fair value adjustments impacting Reorganization items		1,228,251

Adjustment to deferred tax provision		—

Gain on fresh start adjustments	$	1,228,251

•

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

•

Loans—The fair value adjustment for this line item relates to non-VIE loans that have historically been reported at their outstanding principal balance. Refer to Note 8—Fair Value Measurements, for a discussion of the valuation methodology used to estimate fair value for each of these financial instruments. Subsequent to the Fresh Start Reporting Date, the fair value discounts are accretable to interest income using the effective interest method over the remaining lives of the loans. Fair value as of April 30, 2013 was calculated using a discounted cash flow approach. As of April 30, 2013, the loans had a principal-weighted average life of 6.81 years and coupon of 5.01%. Discount rates used to determine the fair value of the loans at April 30, 2013 were consistent with the credit quality of the borrowers and had a weighted average of 9.71%.

•

Insurance intangible asset—The insurance intangible asset represents the fair value adjustment for financial guarantee insurance and reinsurance contracts. Pursuant to the business combinations guidance for insurance entities in the Financial Services—Insurance Topic of the ASC, insurance and reinsurance assets and liabilities continue to be measured in accordance with existing accounting policies and an intangible asset is recorded representing the difference between the fair value and carrying value of these insurance and reinsurance assets and liabilities. As a result, the balance sheet carrying values of our financial guarantee insurance and reinsurance contracts have not been adjusted; these line items primarily comprise premium receivables, reinsurance recoverable on paid and unpaid losses, deferred ceded premium, subrogation recoverable, losses and loss expense reserve, unearned premiums and ceded premiums payable. The significant differences between the measurement methods used for fair value and U.S. GAAP carrying values for financial guarantee contracts, which impact the magnitude of the insurance intangible asset are as follows:


Measurement input	Fair value methodology (Refer to Note 8 – Fair Value Measurements)	U.S. GAAP carrying value (Refer to Note 7 – Financial Guarantee Insurance Contracts)

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

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

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

Refer to Note 3—Significant Accounting Policies for the subsequent accounting treatment of the insurance intangible asset.

•

Goodwill—This amount represents the excess of the reorganization value over the fair value of identified tangible and intangible assets of the emerging company. No other intangible assets of a material nature were identified, other than the insurance intangible asset related to financial guarantees described above. Changes in the fair values of these assets and liabilities from the current estimated values, as well as changes in assumptions, could significantly impact the amount of recorded goodwill. Accordingly, there can be no assurance that the estimates, assumptions, and values reflected in the valuations will be realized, and actual results could vary materially. Please refer to the above table located immediately prior to the Reorganized Condensed Consolidated Balance Sheet which indicates how goodwill was determined. Refer to Note 3—Significant Accounting Policies for the subsequent accounting treatment of goodwill.

•

VIE loans and long-term debt—The portion of VIE loans and long-term debt that had not been carried at fair value have been adjusted to fair value for fresh start reporting. Refer to Note 8—Fair Value Measurements for a discussion of the valuation methodology used to estimate fair value for VIE assets and liabilities. Subsequent to the Fresh Start Reporting Date, we have elected to continue accounting for these VIEs at fair value under the fair value option in accordance with the Financial Instruments Topic of the ASC. We believe that the fair value of the investments in these entities provides for greater transparency for recording profit or loss as compared to the equity method under the Investments—Equity Method and Joint Ventures Topic of the ASC. As a result, subsequent changes to fair value will be recorded as Income on variable interest entities on the Statements of Total Comprehensive Income. Valuation of the long-term debt not previously reported at fair value was determined from third-party quotes. The related loans were valued at April 30, 2013 using a discounted cash flow approach with a discount rate of 5.7%, consistent with the rate implied from the fair value of the VIE’s debt.

•

Obligations under investment agreements—These instruments have previously been reported at their principal value less unamortized discount. We have adjusted these items to fair value for fresh start reporting. Refer to Note 8—Fair Value Measurements, for a discussion of the valuation methodology used to estimate fair value for obligations under investment agreements and investment repurchase agreements. The fair value discounts and premiums to principal will be amortized into interest expense using the effective interest method over the lives of the respective contracts. Fair values were determined using discounted cash flows at April 30, 2013. Valuation of collateralized obligations represents projected cash flows discounted at LIBOR. Valuation of uncollateralized obligations were discounted using a weighted average discount rate of 9.4% consistent with the credit adjusted discount rate of Ambac Assurance, which provides a financial guarantee for all investment and repurchase agreements.

•

Long-term debt and accrued interest payable—All debt liabilities subject to the Reorganization Plan were discharged. The remaining long-term debt is primarily related to surplus notes and junior surplus notes issued by Ambac Assurance and the Segregated Account, which were carried at their face value less unamortized discount. The notes have been adjusted to estimated fair value for fresh start reporting. Refer to Note 8—Fair Value Measurements for discussion of the valuation methodology used to estimate fair value. The fair value discount will be amortized into interest expense using the effective interest method over the lives of the respective debt. Surplus notes issued in June 2010 were valued at April 30, 2013 using a discounted cash flow approach corroborated by third party quotes. Internally estimated cash flows were discounted at 10.6%. To the extent that the remaining surplus notes rank pari passu with the June 2010 notes, valuations were determined using projected cash flows discounted at the same 10.6%. Junior surplus notes which cannot be paid until all principal and interest is paid on the other surplus notes were valued with projected cash flows discounted at 16.6%. In all cases, projected cash flows assumed full and timely payment under the respective contracts commencing with the next scheduled interest payments date in June 2014.

•

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

•

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

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


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

Net adjustment	$	—

⁽¹⁾

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

The following reflects the calculation of the pre-tax gain, which was recorded as a Reorganization item on Predecessor Ambac’s Consolidated Statements of Total Comprehensive Income:


Liabilities subject to compromise	$	1,704,641
Long-term debt		973	⁽¹⁾
Accrued interest payable		821	⁽¹⁾

Total debt discharged		1,706,435
Less: Successor Ambac common stock		(450	) ⁽²⁾
Successor Ambac additional paid-in capital		(184,550	) ⁽²⁾

Pre-tax gain from cancellation and satisfaction of Predecessor Ambac debt	$	1,521,435

⁽¹⁾

⁽²⁾

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


Deferred acquisition costs	$	(184,953	)
Loans (non-VIE)		(1,575	)
Insurance intangible asset		1,658,972
Goodwill		514,511
VIE loans and long-term debt		12,562
Obligations under investment agreements		(1,505	)
Long-term debt and accrued interest payable		(767,924	)
Other liabilities		(1,837	)

Asset/liability fair value adjustments impacting Reorganization items		1,228,251

Adjustment to deferred tax provision		—

Gain on fresh start adjustments	$	1,228,251

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


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

Net adjustment	$	—