What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-06 compared with 2020-05-11 · 459 added, 377 removed, 738 unchanged (53% of the section changed)

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References to “Ambac,” the “Company,” “we,” “our,” and “us” are to AFG and its subsidiaries, as the context requires.

This discussion should be read in conjunction with Ambac’s Annual Report on Form 10-K for the year ended December 31, 2019 , the Cautionary Statement Pursuant To The Private Securities Litigation Reform Act Of 1995 below and Risk Factors set forth in Part II, Item 1A of this Form 10-Q.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) contains certain financial measures, in particular the presentation of Adjusted Earnings and Adjusted Book Value, which are not presented in accordance with U.S.

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We are presenting these non-GAAP financial measures because they provide greater transparency and enhanced visibility into the underlying drivers of our business.

We do not intend for these non-GAAP financial measures to be a substitute for any GAAP financial measures and they may differ from similar reporting provided by other companies.

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.

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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.

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.

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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.

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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

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performance of Ambac’s securities.

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:

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(8) inadequacy of reserves established for losses and loss expenses and possibility that changes in loss reserves may result in further volatility of earnings or financial results;

(9) increased fiscal stress experienced by issuers of public finance obligations or an increased incidence of Chapter 9 filings or other restructuring proceedings by public finance issuers, including an increased risk of loss on revenue bonds of distressed public finance issuers due to recent judicial decisions adverse to revenue bond holders;

(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;

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(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;

(14) the risk that the Ambac’s risk management policies and practices do not anticipate certain risks and/or the magnitude of potential for

(15) risks associated with adverse selection as Ambac’s insured portfolio runs off;

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(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;

(26) risks attendant to the change in composition of securities in Ambac’s investment portfolio;

(27) changes in prevailing interest rates;

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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.

Background and Business Description

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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:

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Investment portfolios are subject to internal investment guidelines, as well as limits on types and quality of investments imposed by applicable insurance laws and regulations.

As part of its investment strategy, and in accordance with the aforementioned guidelines, Ambac Assurance and Ambac UK, a subsidiary of Ambac Assurance, purchase distressed Ambac-insured securities based on their relative risk/reward characteristics.

The investment portfolios of Ambac Assurance and Ambac UK also hold fixed income securities and various pooled investment funds.

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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 March 31, 2020 , Ambac and its subsidiaries owned $402 million of distressed Ambac-insured bonds, including $164 million of Puerto Rico bonds and excluding Ambac's holdings of secured notes issued by Ambac LSNI in connection with the Rehabilitation Exit Transactions.

Subject to applicable internal and regulatory guidelines, market conditions and other constraints, Ambac will continue to opportunistically purchase Ambac-insured securities.

At June 30, 2020 , Ambac and its subsidiaries owned $574 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 analysis, implementation and execution of commutations, risk reduction or defeasance, and loss recovery strategies.

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.

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A refinancing in February 2020 of an adversely classified asset-backed leasing transaction with net par outstanding of $86 million at December 31, 2019;

The following table provides a comparison of total, adversely classified credits ("ACC") and watch list credits net par outstanding in the insured portfolio at March 31, 2020 and December 31, 2019 .

Purchasing quota share reinsurance in June 2020 on a transportation revenue credit with net par outstanding of $33 million at December 31, 2019.

The following table provides a comparison of total, adversely classified ("ACC") and watch list credit net par outstanding in the insured portfolio at June 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 .

public finance market includes capital

appreciation bonds which are reported at the par amount at the time of issuance of the insurance policy as opposed to the current accreted value of the bonds .

($ in millions)

The overall reduction in ACC and Watch List total net par outstanding resulted from active de-risking initiatives at Ambac Assurance and Ambac UK, including the transactions noted above, as well as scheduled maturities, amortizations, refundings and calls.

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 $970 million of net par outstanding from the watch list category), such as hotel tax, convention center and public house insured transactions, partially offset by active de-risking and paydowns or calls by issuers.

In addition, as a result of the economic impacts from the COVID-19 pandemic, $2,635 million of net par outstanding in sectors such as

mass transit, toll roads, and private higher education, among others, have been added to the Survey List.

The increase in ACC exposures is primarily due to the addition of credits impacted by COVID-19 (including $1,002 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 paydowns or calls by issuers.

The decrease in Watch List net par outstanding resulted from active de-risking initiatives, including the transactions noted above, $970 million of net par outstanding downgraded to ACC due to COVID-19, as well as scheduled maturities, amortizations, refundings and calls.

In addition, as a result of the economic impacts from the COVID-19 pandemic, $2,686 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.

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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.

In March 2020, the outbreak of COVID-19, caused by a novel strain of the coronavirus, was recognized as a pandemic by the World Health Organization, and the outbreak is now widespread globally, including in the markets in which we operate.

The COVID-19 outbreak has had a notable impact on general economic conditions, including but not limited to a sharp spike in unemployment;

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;

a broad based and significant decrease in asset valuations;

closure or severe curtailment of the operations of many businesses and enterprises to which we are directly or indirectly exposed, such as hotels, restaurants, sports and entertainment facilities, airports and other transportation facilities, and retail establishments, mostly due to shelter-in-place orders, social distancing guidelines, travel bans and restrictions, and business shutdowns.

In addition, in March 2020 a disagreement between Russia and Saudi Arabia over oil production quotas led to a sudden and sharp decline in oil prices which have subsequently fallen to historic lows.

Accordingly, we are now in a global recession with most large economies experiencing negative growth.

In the U.S., monetary policy and fiscal stimulus, particularly the Coronavirus Aid, Relief and Economic Security ("CARES") Act, have helped moderate the economic impact of COVID-19, along with stimulus and other actions taken by governments outside the U.S.;

however, credit risk remains a concern given the uncertainty over the severity and duration of the COVID-19 related disruption.

COVID-19 has impacted Ambac's operating environment.

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 shelter-in-place orders, social distancing guidelines, travel bans and restrictions, and business shutdowns.

While many states eased restrictions during the later portion of the second quarter of 2020,

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States reversed course in late June to impose or reimpose social distancing guidelines and close down businesses that had begun opening as a result of a rise in new confirmed cases of COVID-19, raising the prospect of a delayed recovery.

In addition, in March 2020 a disagreement between Russia and Saudi Arabia over oil production quotas coupled with lower global demand as a result of the COVID-19 crisis led to volatility and overall lower oil prices which continued through the second quarter of 2020.

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 second quarter of the year.

While a recovery is currently underway led by a sharp increase in retail sales in North America and the Eurozone in May and June, the trajectory and sustainability of the economic recovery is uncertain due to, among other things, the magnitude of job losses, the uncertainty or scaling back of government support measures and the rise of new COVID-19 cases in the U.S.

For the Ambac insured portfolio, credit risk continues to remain elevated due to the uncertain economic recovery from 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.

We have not experienced and do not anticipate incurring material incremental operating expenditures to maintain the current remote operating environment.

In addition to our own staff, Ambac's critical third-party service providers are operating remotely and therefore we have conducted a review of these service providers and have not presently identified or experienced any limitations or operational constraints with respect to services provided in the current environment.

In 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.

Ambac does not believe that our current operating environment has resulted in a significant change to our disclosure controls or internal controls over financial reporting.

COVID-19 has adversely impacted Ambac's financial position and results of operations as credit risk in the insured and investment portfolios has increased.

Municipal, project finance, mortgage-backed and student loan sectors, and other asset securitizations, in particular, could be materially adversely impacted, and as a result

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we have increased loss reserves across each of these and other sectors during the three months ended March 31, 2020.

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 six months ended June 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 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.

The overall financial impact from COVID-19 has been and will be a function of (i) the

ability of issuers of insured obligations and other counterparties to pay their obligations when due, whether due to operational or financial reasons;

(ii) the impact of changes to interest rates on policy and derivative payments;

and (iii) the performance of the investment portfolio.

Ambac’s insurance policies will be drawn in the event that the issuers of insured obligations do not make payments on their obligations when due.

As a result of the COVID-19 related economic disruption on markets where Ambac provides financial guarantees, including lower tax, project, and business revenues and increases in forbearances or delinquencies on mortgage and student loan payments, we have increased our loss reserves and may further increase them in the future depending on the duration and severity of the crisis.

Ambac also has premiums due from issuers;

we currently do not expect any significant delay or increase in credit impairments with respect to insurance premiums, but that is subject to change.

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.

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Each of these reinsurance counterparties is experienced in the business of reinsuring and/or writing financial guaranty insurance.

All have ratings of A+ (by S&P) or better and have sufficient collateralization or replacement triggers upon downgrade.

Ambac actively monitors each of these reinsurance entities and at present believes they have the ability to perform under their respective reinsurance policies, but that is subject to change.

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 that is also subject to change.

Asset prices have declined substantially during the quarter, particularly in directly affected industries such as tourism, airlines, hospitality, commercial real estate and manufacturing.

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 decided to monetize a material portion of our investments in certain assets classes;

including corporate securities rated below the 'A 'rated category, all directly owned CMBS (other than Military Housing bonds and mostly 'AAA' rated), and approximately

50% of all CLOs (all rated investment grade).

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.

Given the economic uncertainties associated with the COVID-19 pandemic it is impossible to fully predict all of its consequences and, as a result, it is possible that our future operating results and financial condition may be materially adversely affected.

Asset prices partially recovered during the second quarter of 2020.

Ambac recognized a total return for the investment portfolio of approximately 4.7% during the three months ended June 30, 2020.

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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.

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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.

As of March 31, 2020 the net assets of AFG were $482 million .

As of June 30, 2020 the net assets of AFG were $481 million .

($ in millions)

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Financial Statement Impact of Foreign Currency:

The impact of foreign currency as reported in Ambac's Unaudited Consolidated Statement of Total Comprehensive Income for the three months ended March 31, 2020 , included the following:

The impact of foreign currency as reported in Ambac's Unaudited Consolidated Statement of Total Comprehensive Income for the six months ended June 30, 2020 , included the following:

($ in millions)

Net income (1)

Gain (loss) on foreign currency translation

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

Gain (loss) on foreign currency translation (net of tax)

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

Impact on total comprehensive income (loss)

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Refer to Note 2.

Basis of Presentation and Significant Accounting Policies to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Form 10-Q for further details on transaction gains and losses.

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Basis of Presentation and Significant Accounting Policies to the Unaudited

Consolidated Financial Statements included in Part I, Item 1 in this Form 10-Q for further details on transaction gains and losses.

Future changes to currency rates may adversely affect our financial results.

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structured finance and international finance.

The following table provides a breakdown of guaranteed net par outstanding by market at March 31, 2020 and December 31, 2019 .

The following table provides a breakdown of guaranteed net par outstanding by market at June 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, Consolidation.

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.

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Total net par outstanding

Includes $5,636 and $5,654 of Military Housing net par outstanding at March 31, 2020 and December 31, 2019 , respectively.

Includes $1,105 and $1,123 of Puerto Rico net par outstanding at March 31, 2020 and December 31, 2019 , respectively.

Includes $5,615 and $5,654 of Military Housing net par outstanding at June 30, 2020 and December 31, 2019 , respectively.

Includes $1,105 and $1,123 of Puerto Rico net par outstanding at June 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 March 31, 2020 :

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The table below shows Ambac’s ten largest insured exposures, by repayment source, as a percentage of total financial guarantee net par outstanding at June 30, 2020 :

($ in millions)

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Ambac Assurance has issued policies for these transactions that will only pay in the event that Ambac UK does not pay under its insurance policies ("second to pay policies").

Net par related to the top ten exposures reduced $357 million from December 31, 2019 .

Net par related to the top ten exposures reduced $392 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

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and scheduled paydowns.

The concentration of net par amongst the top ten (as a percentage of net par outstanding) remains at 20% at March 31, 2020 , and December 31, 2019 , however certain credits within the top ten have had Ambac rating downgrades since December 31, 2019, primarily related to the impact of COVID-19, including Mitchells & Butlers Finance plc, New Jersey Transportation Trust Fund Authority and Mets Queens Baseball Stadium Project.

Aspire Defence Finance plc's rating at March 31, 2020 , improved since December 31, 2019 .

The 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 June 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 June 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 $492 million and a median net par outstanding of $6 million .

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Governments outside the US, in markets in which Ambac operates, have implemented similar measures to the US.

Ambac has undertaken a detailed analysis of the potential impact of the closure of certain portions of the US economy as well as certain other economies, including the UK, Italy, and Australia, to assess the impact of the current global recession on its insured financial guarantee portfolio.

The duration and depth of the recession;

Ambac has undertaken 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 current global economic contraction on its insured financial guarantee portfolio.

The duration and depth of the economic contraction;

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.

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:

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The CARES Act has several measures that impacted US municipalities and other borrowers, including consumers, such as mortgage and student loan borrowers, represented in our insured portfolio, including:

$500 billion for direct lending, loans, loan guarantees and investments to eligible businesses, states and municipalities, including $25 billion dedicated to passenger airlines and $4 billion dedicated to cargo airlines;

$659 billion for small business loans (Paycheck Protection Program, as amended by the Paycheck Protection Program and Health Care Enhancement Act (“PPP & HCE Act”));

$150 billion allocation of direct aid to state and local governments to reimburse them for the costs of dealing with COVID-19;

$175 billion to the Public Health and Social Services Fund for distribution of grants to healthcare providers and hospitals (as amended by the PPP & HCE Act);

$25 billion of grants for transit agencies;

$10 billion of grants for airport authorities;

direct payments to households and for unemployment insurance, estimated to cost $560 billion.

A program for direct lending, loans, loan guarantees and investments to eligible businesses, states and municipalities, including to passenger airlines and cargo airlines;

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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;

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 it is unclear what impact this CARES Act provision will have on the private student loans owned by special purpose entities that have their securitized obligations guaranteed by Ambac Assurance, we have incorporated into our loss reserves analysis assumptions related to increased delinquencies for borrowers with private student loans who often also have federal student loans and may elect not to pay altogether.

Despite the assumed increase in delinquencies and losses related to this potential phenomena as well as the general deterioration in consumer credit related to the economic downturn, Ambac Assurance does not anticipate making substantial claim payments on insured student loan transactions for several years due to the structures governing the insured bonds.

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 announced include a 60-day moratorium on foreclosures and evictions and the expansion of forbearance and repayment options.

The relief measures announced 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.

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Consequently, we have anticipated that we will experience an increase in claim payments for certain of our insured RMBS obligations.

However, we also anticipate that the significant decline in interest rates experienced during the first quarter of 2020 will likely generate additional excess spread recoveries on insured RMBS obligations that will likely more than compensate for such adverse effects.

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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 likely more than 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:

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

The Money Market Mutual Fund Liquidity Facility.

In the UK, on March 20, 2020, the government announced the closure of all non-essential leisure, food and retail operations, including public houses.

This closure remains in place with the date at which such operations may be permitted to reopen being uncertain.

The UK Government also announced a number of measures to mitigate the impact of these enforced closures including rebating employers 80% of staff salaries (up to a £2,500 per month per employee cap), tax deferrals, business loan schemes and property tax relief.

While Ambac expects the foregoing measures to help mitigate economic damage and aid the functioning of the capital markets, Ambac's exposure to credit risk as a result of the economic fallout from the COIVD-19 pandemic remains elevated, and we could experience material losses that would adversely impact our future results of operations and financial condition.

$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.

These measures are slowly being withdrawn between August 1, 2020 and the end of the year.

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 includes a deep recession during the first half of 2020 with a modest recovery in the second half of 2020, including the loosening of business and travel restrictions.

We expect that US states and municipalities will face significant budget deficits as a result of COVID-19 related costs and lower (and delayed) income, sales and other taxes.

We expect that monetary policy and federal stimulus through the CARES Act and other programs will help moderate the depth of the recession and therefore the impact on Ambac's insured portfolio.

As part of the detailed analysis of the insured portfolio, we have identified certain Public Finance sectors that are most susceptible to potential claims or impairments as a result of a prolonged recession caused by COVID-19.

Ambac established a set of base case assumptions that includes a deep recession during the first half of 2020 with a modest recovery in the second half of 2020 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 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.

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Our near-term concerns are concentrated on exposures substantially reliant on narrow, economically sensitive revenue streams.

The ability of issuers of these obligations to pay is expected to be impaired although several issuers expressed a willingness to use their balance sheets to support their obligations and avoid defaults in the near-term.

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:

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The RMBS and student loan insured portfolios are expected to be adversely impacted by the previously mentioned forbearances and the general economic downturn.

Offsetting such impact for RMBS exposures is the benefit to excess spread within the securitization structures as a result of the significant reduction in interest rates, which will result in higher recoveries.

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.

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Ambac and its advisors are working closely with impacted issuers to review their plans and liquidity facilities in light of these events.

Ambac's NPO with respect to these demand dependent policies are as follows:

Ambac's NPO with respect to these international demand dependent policies are as follows:

($ in millions)

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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.

Ambac has exposure to the Commonwealth of Puerto Rico (the "Commonwealth") and its instrumentalities across several different issuing entities with total net par exposure of $1,105 million as of March 31, 2020 .

Each has its own credit risk profile attributable to, as applicable, discrete revenue sources, direct general obligation pledges and/or general obligation guarantees.

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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 Treasury Single Account report, which is as of June 26, 2020.

General fund collections slowed due to the COVID-19 outbreak and imposed lockdown.

Separately, Puerto Rico Highways and Transportation Authority's ("PRHTA") total consolidated fiscal year 2020 revenues were $404.3 million, 36.3% lower than the $634.8 million budget projection.

The underperformance was due to a variety of factors including a reduction in the traffic and toll collections due to COVID-19.

Over the longer-term, Puerto Rico's recovery profile will be impacted by a wide range of factors including, but not limited to:

t he fiscal and monetary policies of the federal government which will shape the trajectory of the U.S.

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;

the willingness and ability of the Commonwealth government to implement much needed fiscal and structural reforms.

On May 27, 2020, the Oversight Board certified its own version of a new Commonwealth Fiscal Plan.

In this current Commonwealth Fiscal Plan, the annual Commonwealth budget surpluses are lower in the short term but larger in the long term than the previous plan because of a longer than previously expected roll-out of federal disaster spending.

The surplus through fiscal 2024 is just under $14 billion, whereas the previous plan was almost $18 billion.

The current plan projects a 30-year surplus of $19.7 billion, but $5.4 billion of that money may not be available to the Commonwealth because it is being generated by public corporations.

On May 3, 2020, the Government of Puerto Rico submitted a draft revised Commonwealth Fiscal Plan to the Oversight Board.

The Government’s draft revised Commonwealth Fiscal Plan purports to incorporate the impact of COVID-19 on the Commonwealth economy, and projects diminished growth, surplus, and debt capacity as compared to previous Fiscal Plans.

The draft revised Commonwealth Fiscal Plan also states that the Oversight Board’s current Plan of Adjustment is likely not feasible given the impact of the COVID-19 pandemic.

The Oversight Board has not certified the Government of Puerto Rico’s draft revised Fiscal Plan, and may modify the draft revised Commonwealth Fiscal Plan significantly before certifying a revised fiscal plan.

The Oversight Board has stated that it hopes to certify a revised Commonwealth Fiscal Plan by the end of May 2020.

The Oversight Board’s certified Fiscal Plan could be significantly different than either the current Commonwealth Fiscal Plan or the Government of Puerto Rico’s draft revised Commonwealth Fiscal Plan.

On June 5, 2019, the Oversight Board certified its own version of the Fiscal Plan for the Puerto Rico Highways and Transportation Authority ("PRHTA").

Without considering PRHTA Fiscal Plan measures, the PRHTA’s total financial surplus over the six-year plan period is projected to be $31 million.

However, after taking into account the measures set forth in the PRHTA Fiscal Plan, the Oversight Board states that the cumulative surplus over that six-year period would grow to $493 million.

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.

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On June 26, 2020, the Oversight Board certified its own version of the Fiscal Plan for PRHTA.

The PRHTA Fiscal Plan states that based on cash flow projections, the existing PRHTA debt service will require significant restructuring and PRHTA’s full commitment to reforms.

It's currently unclear what the Oversight Board's scope of debt restructuring will be.

As for reforms, the PRHTA Fiscal Plan requires PRHTA to establish an independent board with experienced and knowledgeable directors, and requires six measures to improve revenue, including increases in toll fine collections, tolls, introduction of congestion pricing, and four measures to cut expenses, including reducing pension and employee healthcare costs.

It is unknown if and when a PRHTA Plan of Adjustment will be filed by the Oversight Board or confirmed by the court overseeing the Title III proceedings of PRHTA.

It is also unknown if and when other Puerto Rico instrumentalities, which have debt outstanding insured by Ambac Assurance, will be filed under Title III and what effect their fiscal plans and/or plans of adjustment may have on Ambac's financial position.

The Oversight Board will determine, in its sole discretion, when to certify the updated fiscal plans given the uncertainty of the current situation.

Moreover, the schedule for development and certification of other instrumentalities’ fiscal plans could be adjusted as well.

No assurances can be given that Ambac's financial condition will not suffer a materially negative impact as an ultimate result of the Commonwealth Fiscal Plan, the Commonwealth Plan of Adjustment, or any future changes or revisions to Commonwealth fiscal plans or future fiscal plans and/or plans of adjustment for PRHTA or other Puerto Rico instrumentalities.

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On February 9, 2020, the Oversight Board announced it reached an agreement in principle ("Plan Support Agreement") with certain creditors supporting the restructuring of the Commonwealth's General Obligation and PBA debt, and intended to file an amended Plan of Adjustment ("Amended POA") reflecting the terms of this agreement.

On February 28, 2020, the Oversight Board filed an amended disclosure statement and Amended POA to restructure $35 billion of debt and other claims against the Commonwealth of Puerto Rico, PBA, and ERS, as well as more than $50 billion in pension liabilities.

The Amended POA would reduce Commonwealth debt and other claims from $35 billion to less than $11 billion, a 70% cut.

The Amended POA would reduce the Commonwealth’s annual debt service by 56%.

Treatment for pension claims is the same as contained in the Initial POA, which is a reduction in pension payments by as much as 8.5% for retirees who currently receive at least $1,200 a month, such that 60% of retirees would not face any cuts, and the establishment of a pension reserve fund to help support retirement payments in future years.

On March 21, 2020, the Oversight Board announced that in light of the developing COVID-19 crisis it was shifting its efforts to assisting the government of Puerto Rico in preparing to face the crisis.

As part of this shift, the Oversight Board presented a motion in court to adjourn consideration of the Amended POA's disclosure hearing, originally scheduled for June 2020, until further notice.

On May 1, 2020, the Oversight Board filed a status report before the court indicating that it was not yet prepared to propose a revised timeline for hearings related to the Amended POA or the disclosure statement related thereto.

The Oversight Board is scheduled to file a status report on July 15, 2020, at which time the Oversight Board has indicated it will propose a timeline for such hearings.

In a radio interview on March 24, 2020, Oversight Board Chairman Jose Carrion stated that the COVID-19 pandemic has had a material impact on Commonwealth finances and that the Oversight Board is reviewing the Commonwealth Plan of Adjustment, including the size of the proposed reduction in Commonwealth debt and proposed cuts to pensions.

Carrion went on to say he does not see the Commonwealth Plan of Adjustment moving forward as currently structured.

It is unclear at this time how much timelines for the POA process may shift as a result of the COVID-19 crisis.

On February 28, 2020, the Oversight Board filed an Amended POA and an amended Disclosure Statement to restructure $35 billion of debt and other claims against the Commonwealth of Puerto Rico, PBA, and ERS, as well as more than $50 billion in pension liabilities.

The Amended POA would reduce Commonwealth debt and other claims from $35 billion to less than $11 billion, a 70% cut 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 60% of retirees would not face any cuts, and the establishment of a pension reserve fund to help support retirement payments in future years.

The Amended POA, as is, disproportionately disadvantages claims against the Commonwealth related to certain revenue bonds issued by Puerto Rico instrumentalities, including those insured by Ambac Assurance.

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It is unknown if and how the Amended POA may be modified or what the final adjustments will be to the revenues available to the Puerto Rico instrumentalities addressed in the Amended POA or the recoveries on claims against the Commonwealth by creditors of those instrumentalities, including Ambac and Ambac-insured bondholders.

However, if the Amended POA were confirmed in its current form, Ambac's financial condition would suffer a material negative impact.

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

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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.

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.

Currently, the schedule for confirmation proceedings regarding the Amended POA, and the hearings regarding the Disclosure Statement that must precede confirmation hearings, is not yet set.

However, on July 15, 2020, the Oversight Board filed a status report in Court that included a request to provide the Court with an updated status report regarding the timeline for the debtors’ Plan of Adjustment and Disclosure Statement process by September 11, 2020.

Judge Swain subsequently granted the request and directed the Oversight Board to file an updated status report, including a proposal for the debtors’ Plan and Disclosure Statement process, by September 9, 2020.

Political Developments

On July 1, 2020, Oversight Board Chairman Jose Carrion and Board member Carlos Garcia announced that they informed the White House they will not be available for re-nomination to serve another three-year term on the Oversight Board.

Carrion said he is stepping down by October 5, and Garcia said he is resigning his post effective August 31.

In a press conference, Carrion said he knows of “at least” one additional board member who does not intend to serve an additional term but said it is not up to him to make the announcement.

It is unclear how the resignations will impact the debt restructuring process, negotiations, timing and ultimate outcome for Ambac.

Governor Vazquez has recently come under fire for her termination (on July 3, 2020) of the Secretary of the Department of Justice, which was conducting various investigations into Vazquez and her advisors.

The Governor’s replacement halted all such investigations and subsequently resigned on July 8, 2020 succumbing to political pressure.

On July 20, 2020 it was announced that Governor Vazquez and five officials will be subject to investigation by a special independent prosecutor regarding emergency supplies management during the series of earthquakes that occurred in early 2020.

Governor Vazquez may also face an investigation into recent government contracts and related procurement of COVID-19 tests.

It is unclear how these investigations may affect the outcome of the August 2020 primary, where Vazquez is competing for the party gubernatorial ticket against former Resident Commissioner Pedro Pierluisi.

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 filed motions which sought to lift the stay and allow Ambac and others to enforce their rights related to HTA, CCDA and PRIFA in an alternative forum.

On July 2, 2020, Judge Swain issued orders denying, in large part, these motions.

Supplemental briefing on the motions to lift the stay has concluded and a final decision is expected this fall.

Ambac is unable to predict when and how the issues raised in these cases

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will be resolved.

If Ambac Assurance is unsuccessful in any of these proceedings, Ambac’s financial condition, including liquidity, loss reserves and capital resources may suffer a material negative impact.

Refer to "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.

The status, timing and subject of any subsequent or future mediation discussion has not yet been publicly disclosed.

No assurances can be given that negotiations will be successfully concluded, that Commonwealth, Oversight Board and creditor parties will reach definitive agreements on debt restructurings, that any additional negotiated transaction, debt restructuring, definitive agreement or Plan of Adjustment will be approved by the court and completed, or that any transaction or Plan of Adjustment will not have an adverse impact on Ambac's financial conditions or results.

The Commonwealth of Puerto Rico is projected to benefit from over $48 billion of federal disaster aid for infrastructure improvement initiatives or recovery efforts, as a result of the damage cause by hurricanes Irma and Maria as well as the earthquakes that began in late December 2019.

To date, only about $15 billion has been disbursed.

However, Judge Swain issued a scheduling order on June 15, 2020, setting monthly omnibus hearings through the end of 2021.

The timeline for resolution of Puerto Rico’s debt restructuring process is uncertain but may extend into 2021.

It appears the Oversight Board will attempt to move forward with the Amended POA and Plan Support Agreement in some modified form over the intermediate term.

The debt restructuring process status report the Oversight Board filed with the Court on July 15, 2020 stated, “Having completed the process of certifying the Commonwealth Fiscal Plan and corresponding Budget, the Oversight Board has resumed discussions with AAFAF concerning the terms of a Plan of Adjustment and what, if any, modifications or amendments need to be proposed to the Plan of Adjustment and Disclosure Statement filed with the Court on February 28, 2020.

The Oversight Board anticipates that, in the coming weeks, the Oversight Board and AAFAF shall entertain discussions with creditors (those party to the Plan Support Agreement, as amended on March 13, 2020 and April 1, 2020, as well as other parties in interest), with the guidance of the mediation team led by the Judge Barbara J.

Houser, to address the new reality created by the COVID-19 pandemic.

The discussions with creditors will take into account, among other things, this Court’s July 2, 2020 decisions in connection with certain motions for relief from the automatic stay filed by holders and insurers of HTA bonds, CCDA bonds, and PRIFA Rum Tax Bonds.

Furthermore, the outcome of the ongoing litigation regarding the ERS bonds will guide the parties with respect to claims, if any, that may impact the revision of the Commonwealth’s proposed Plan of Adjustment.

While the Oversight Board has resumed Plan discussions, because of the fluid situation on the Island, the Oversight Board is unprepared at this time to propose a schedule for the Debtors’ Plan of Adjustment and Disclosure Statement processes."

No assurances can be given that debt restructuring negotiations will be successfully concluded, that Commonwealth, Oversight Board and creditor parties will reach definitive agreements on debt restructurings, that any additional negotiated transaction, debt restructuring, definitive agreement or Plan of Adjustment will be approved by the court and completed, or that any transaction or Plan of Adjustment will not have a materially adverse impact on Ambac's financial condition or results of operations.

The Commonwealth of Puerto Rico is projected to benefit from over $49 billion of federal disaster aid for infrastructure

improvement initiatives or recovery efforts, as a result of the damage cause by hurricanes Irma and Maria as well as the earthquakes that began in late December 2019.

To date, only about $16.5 billion of the total has been disbursed.

More than $20 billion of Community Development Block Grants (CDBG) was appropriated by Congress for Puerto Rico for reconstruction following Hurricane Maria, but very little has yet been drawn down.

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In order to ensure federal taxpayer dollars are spent effectively and efficiently, HUD has conditioned release of the $8.2 billion on various requirements that Puerto Rico must meet.

Governor Wanda Vasquez has agreed to these requirements, which includes a prohibition on any of the funds from being used to rebuild the electric grid until (and unless) HUD publishes additional requirements on such spending;

Governor Wanda Vasquez has agreed to these requirements, which include a prohibition on any of the funds from being used to rebuild the electric grid until (and unless) HUD publishes additional requirements on such spending;

overturns an executive order establishing a $15 minimum wage for government construction projects using CDBG;

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and requires CDFBG spending plans to be submitted to the Oversight Board for determination that they are in accordance with its certified budgets and fiscal plans.

Consequently, it is anticipated that drawdown of funds will begin soon.

HUD has also appointed a federal monitor to oversee use of CDBG funds.

The Oversight Board states, on their COVID-19 webpage, that Puerto Rico residents, businesses, and government appear to be eligible for approximately $14 billion in federal aid under the CARES Act.

On April 22, 2020, the Government of Puerto Rico announced that they had received $2.2 billion in direct aid provided by the CARES Act for the territories, for necessary COVID-19 related expenditures and costs not previously budgeted for.

In addition, all U.S.

citizens and residents (including in Puerto Rico) will receive one-time cash payments of $1,200 for single taxpayers, $2,400 for married filers and $500 for each child, with payments gradually phasing out for individuals who earn between $75,000 and $99,000 per year (or $150,000 and $198,000 for married filers).

The Government of Puerto Rico's initial estimate is that eligible residents of Puerto Rico will receive a total aggregate amount of $1.5 billion.

Separately, Commonwealth small businesses have received an estimated $757 million in loans under the first portion of the Payroll Protection Fund (PPP) under the CARES Act.

Puerto Ricans who are unemployed will also benefit from federal funding in the CARES Act that increases unemployment insurance benefits significantly for several months.

The full extent of federal government support to Puerto Rico is still uncertain as existing federal stimulus has not been fully implemented and additional measures are likely to be enacted.

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Ambac has considered these developments and other factors in evaluating its Puerto Rico loss reserves.

During the quarter ended March 31, 2020 , Ambac had incurred losses associated with its Domestic Public Finance insured portfolio of $178 million , which was impacted by lower discount rates as well as the continued uncertainty and volatility of the situation in Puerto Rico, including the potential impact of the COVID-19 crisis on the Commonwealth and the developing potential impact of the COVID-19 crisis on other sectors in the Domestic Public Finance insured portfolio.

While management believes its reserves are adequate to cover losses in its Public Finance insured portfolio, there can be no assurance that Ambac may not incur additional losses in the future, particularly given the developing economic, political, and legal circumstances in Puerto Rico and the overall uncertain impact of the COVID-19 crisis on the Commonwealth and the Domestic Public Finance Insured Portfolio in general.

During the six months ended June 30, 2020 , Ambac had incurred losses associated with its Domestic Public Finance insured portfolio of $220 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.

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Commonwealth and the Domestic Public Finance Insured Portfolio in general.

Such additional losses may have a material adverse effect on Ambac’s results of operations and financial condition.

Exposure Currency

The table below shows the distribution by currency of Ambac Assurance’s insured exposure as of March 31, 2020 :

The table below shows the distribution by currency of Ambac Assurance’s insured exposure as of June 30, 2020 :

(Amounts in millions)

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Australian Dollars

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Ratings Distribution

The following charts provide a rating distribution of net par outstanding based upon internal Ambac credit ratings (1) and a distribution by bond type of Ambac's below investment grade ("BIG") net par exposures at March 31, 2020 and December 31, 2019 .

BIG is defined as those exposures with an Ambac internal credit rating below BBB-:

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Ambac credit ratings are subject to revision at any time and do not constitute investment advice.

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Net Par Outstanding

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Total International Finance

Lease and tax-backed revenue includes $996 and $1,014 of Puerto Rico net par at March 31, 2020 and December 31, 2019 , respectively.

General obligation includes $109 and $109 of Puerto Rico net par at March 31, 2020 and December 31, 2019 , respectively.

Lease and tax-backed revenue includes $996 and $1,014 of Puerto Rico net par at June 30, 2020 and December 31, 2019 , respectively.

General obligation includes $109 and $109 of Puerto Rico net par at June 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.

Relates to military housing net par.

The decrease in below investment grade exposures is primarily due to the commutation of certain general obligation exposures and the impact of foreign exchange rates resulting from the strengthening of the US Dollar, partially offset by the addition of certain lease and tax-baked exposures and an international structured finance exposure driven by the COVID-19 pandemic.

Despite the decrease in below investment grade exposures, such exposures could increase as a relative proportion of the guarantee portfolio given that stressed borrowers generally have less ability to prepay or refinance their debt.

Accordingly, due to these and other factors, it is not unreasonable to expect the proportion of below investment grade exposure in the guarantee portfolio to increase in the future.

The increase in below investment grade exposures is primarily due the addition of certain exposures driven by the COVID-19 pandemic (lease and tax-backed, stadiums and an international structured finance exposure) partially offset by the commutation of certain general obligation exposures and the impact of foreign exchange rates resulting from the strengthening of the US Dollar.

Below investment grade exposures could continue to 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 March 31, 2020 , was $280 million compared to a net loss attributable to common stockholders of $43 million for the three months ended March 31, 2019 .

The decrease was primarily driven by:

(i) net losses on investments, (ii) larger net losses on derivative contracts, (iii) lower net premiums earned, (iv) lower income on variable interest entities and (v) higher loss and loss expenses, partially offset by lower insurance intangible amortization.

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Net loss attributable to common stockholders for the three months ended June 30, 2020 , was $35 million compared to a net loss attributable to common stockholders of $128 million for the three months ended June 30, 2019 .

The decreased loss was primarily driven by (i) lower insurance intangible amortization, (ii) net gain on derivative contracts in the current quarter, (iii) lower provision for income taxes, and (iv) lower operating and interest expenses, partially offset by:

(a) increased losses and loss expenses, primarily due to the loss benefit in the three months ended June 30, 2019, driven by the Ballantyne commutation , (b) lower net investment income, and (c) lower net realized investment gains.

Net loss attributable to common stockholders for the six months ended June 30, 2020 , was $315 million compared to a net loss attributable to common stockholders of $172 million for the six months ended June 30, 2019 .

The increase in loss was primarily driven by:

(i) lower net investment income, (ii) lower net realized investment gains, (iii) larger net losses on derivative contracts, (iii) lower net premiums earned, (iv) lower income on variable interest entities and (v) higher loss and loss expenses, partially offset by (a) lower insurance intangible amortization, (b) lower interest and operating expenses.

A summary of our financial results is shown below:

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

($ in millions)

Net premiums earned

Net investment income (loss)

Net investment income

Net realized investment gains (losses)

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Significant interest rate declines during the first quarter of 2020 drove a net increase to loss reserves and losses on interest rate derivative contracts.

Credit driven losses were recognized in both loss incurred (primarily from public finance insurance policies) and losses in counterparty credit adjustments on derivative asset valuations.

Financial market disruptions are reflected through lower valuations of certain fixed income securities (recorded through other comprehensive income) and the majority of other investments (recorded through net investment income (loss)).

The scope, duration and magnitude of the direct and indirect effects of COVID-19 are evolving rapidly and in ways that are difficult or impossible to anticipate.

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 quarter of 2020, credit spreads partially recovered (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.

For additional information on the risks posed by

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COVID-19, refer to “Part II, Item 1A-Risk Factors” in this Quarterly Report on Form 10-Q.

During 2019, Ambac executed on a number of restructuring/commutation transactions that had significant impacts to the consolidated results of operations.

As described further below, the completion of the these transactions, including the related changes to invested assets, loss reserves and debt of the Company, had a significant impact on the comparability of the results of operation for the three months ended March 31, 2020 and 2019 .

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 three and six months ended June 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:

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With the successful implementation of the Restructuring, Ambac UK has ceased to have any exposure with respect to the obligations of Ballantyne.

The following paragraphs describe the consolidated results of operations of Ambac and its subsidiaries for the three months ended March 31, 2020 and 2019 , respectively.

The following paragraphs describe the consolidated results of operations of Ambac and its subsidiaries for the three and six months ended June 30, 2020 and 2019 , respectively.

Net Premiums Earned .

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For installment premium paying transactions, we offset the recognition of any remaining UPR by the reduction of the related premium receivable to zero (as it will not be collected as a result of the retirement), which may cause negative accelerated premium revenue.

Net premiums earned decreased $18 million for the three months ended March 31, 2020 , compared to the same period in the prior year.

Net premiums earned increased $3 million and decreased $14 million for the three and six months ended June 30, 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 March 31,

Three Months Ended June 30,

Six Months Ended June 30,

($ in millions)

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Total net premiums earned

The decrease in normal premiums earned in the three months ended March 31, 2020 , is primarily attributable to (i) the continued runoff of the insured portfolio in all markets and (ii) changes to allowance for credit losses on premiums receivables.

The decrease in normal premiums earned in the three and six months ended June 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 will assess the allowance for credit losses on premium receivables on a quarterly basis.

Prior to adoption of ASU 2016-13, Ambac assessed collectability of premium receivables in accordance with ASC 944 and recorded an allowance for uncollectible premiums.

The three months ended March 31, 2020 , includes an increase in the allowance for credit losses since adoption of CECL of $2 million as compared to an increase of less than $1 million for the three months ended March 31, 2019 .

The three and six months ended June 30, 2020 , includes an increase in the allowance for credit losses since adoption of CECL of $2 million and $4 million, respectively, as compared to an increase of $1 million for the three and six months ended June 30, 2019 .

Terminations and accelerations, including those which occurred in prior periods, result in lower normal premiums earned in current and future periods.

First quarter 2020 Public Finance

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52 2020 First Quarter FORM 10-Q |

normal earned premiums were also impacted by large reinsurance cessions in the second half of 2019.

The decrease in accelerated earnings in the three months ended March 31, 2020 , as compared to the three months ended March 31, 2019 , is primarily related to the COFINA restructuring that occurred in February 2019.

Net Investment Income (Loss).

Net investment income (loss) primarily consists of interest and net discount accretion on fixed income securities classified as available-for-sale and net gains (losses) on pooled investment funds which include changes in fair value of the funds' net assets.

Public Finance normal earned premiums for the three and six months ended June 30, 2020 , were also impacted by reinsurance cessions in the second half of 2019.

The increase in accelerated earnings in the three months ended June 30, 2020 , as compared to the three months ended June 30, 2019 , is primarily driven by negative accelerations related to the Ballantyne commutation that occurred in June 2019.

The decrease in accelerated earnings in the six months ended June 30, 2020 , as compared to the six months ended June 30, 2019 , is primarily related to the COFINA restructuring that occurred in February 2019, partially offset by negative accelerations related to the Ballantyne commutation that occurred in June 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.

Investments in pooled investment funds and certain other investments are either classified

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as trading securities with changes in fair value recognized in earnings or are reported under the equity method.

These funds and other investments are reported in Other investments on the Unaudited Consolidated Balance Sheets and consist primarily of pooled fund investments in diversified asset classes.

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Investments to the Unaudited Consolidated Financial Statements, included in Part I, Item 1 in this Form 10-Q.

Net investment income (loss) from Ambac-insured securities;

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 March 31,

Three Months Ended June 30,

Six Months Ended June 30,

($ in millions)

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Other investments (includes trading securities)

Net investment (loss) income

Net investment (loss) income was $(21) million for the three months ended March 31, 2020, a decrease of $76 million compared to the three months ended March 31, 2019.

The decrease was primarily driven by unrealized losses on fund investments resulting from the impact of the COVID-19 pandemic on financial markets, a smaller allocation to higher yielding Ambac-insured securities and a lower overall invested asset base.

Losses on Other investments reported for the three months ended March 31, 2020, were in hedge and other fund investments focusing on asset-backed securities, equities, high-yield, leveraged loans and private credit.

These losses were primarily driven by adverse changes in fair values, as opposed to realized losses, stemming from an increase in risk premiums (including credit spreads) as a consequence of the economic and financial market impact of the COVID-19 pandemic.

These investment funds have begun to recover in value during the second quarter of 2020.

Ambac currently views these unrealized losses as temporary

subject to any subsequent decisions to monetize certain investments in connection with changes in investment strategy, market conditions, and/or other circumstances.

Other investment income for the three months ended March 31, 2019, was driven by gains on equity, high-yield and loan funds, partially offset by losses on an insurance-linked security fund.

Income from Ambac-insured securities was lower due to the effects of 2019 de-risking transactions and ongoing redemptions of Secured Notes issued by Ambac LSNI, LLC.

Ambac's holdings of insured COFINA and Ballantyne bonds were settled in connection with the February 2019 COFINA commutation and June 2019 Ballantyne Restructuring, respectively, accounting for the majority of the decrease in income from Ambac-insured securities.

Additionally, income from Secured Notes is down as a result of early redemptions as well as lower LIBOR indexed coupon rates effective for the three months ended March 31, 2020 as compared to the three months ended March 31, 2019 .

Net investment income (loss) from available-for-sales securities other than Ambac-insured securities decreased primarily as a result of the favorable impact on income for the three months ended March 31, 2019 , of high yielding uninsured COFINA bonds received under the POA.

All of these uninsured COFINA bonds were sold from Ambac's non-VIE investment portfolio by December 31, 2019.

Additionally, income from available-for-sale securities for the three months ended March 31, 2020 , was down due to a smaller asset base and generally declining reinvestment rates since first quarter 2019.

Net investment income

Net investment income decreased $34 million and $110 million for the three and six months ended June 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, a smaller allocation to higher yielding Ambac-insured securities and a lower overall invested asset base.

Other investments income (loss) increased $19 million and decreased $41 million for the three and six months ended June 30, 2020 , respectively, compared to the same periods in the prior year.

Other investment income (loss) for the three months ended June 30, 2020, reflects the partial recovery of fair value losses reported in the first quarter of 2020, which were primarily in hedge and other fund investments focusing on asset-backed securities, equities, high-yield, leveraged loans and private credit.

The first quarter 2020 losses were driven by adverse changes in fair values 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.

The extent of market recovery on Ambac's investments in these funds varied during the second quarter of 2020, but in aggregate returned over half of first quarter losses.

Ambac currently views year-to-date unrealized losses on its fund investments as temporary, subject to any subsequent decisions to monetize certain investments in connection with changes in liquidity needs, investment strategy, market conditions, and/or other circumstances.

Other investment income for the three and six months ended June 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 six month periods ended June 30, 2020, compared to the prior year periods due primarily to the effects of 2019 de-risking activities and ongoing redemptions of Secured Notes issued by Ambac LSNI, LLC.

Ambac's holdings of insured COFINA and Ballantyne bonds were settled in connection with the February 2019 COFINA commutation and June 2019 Ballantyne commutation, respectively.

In addition to the reduced amount of holdings subsequent to these settlements, the Ballantyne transaction resulted in accelerated accretion on the bonds in the three months ended June 30, 2019, accounting for the majority of the decrease in income from Ambac-insured securities for both comparative periods.

Additionally, income from Secured Notes is down as a result of early redemptions as well as lower LIBOR indexed coupon rates effective for the three and six months ended June 30, 2020 , as compared to the three and six months ended June 30, 2019 .

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 six months ended June 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.

Portfolio repositioning away from BBB rated corporates, commercial mortgage backed securities and certain CLOs in the second quarter of 2020 also contributed to lower net investment income from available-for-sale securities for the three months ended June 30, 2020.

Net Realized Investment Gains (Losses).

The following table provides a breakdown of net realized gains (losses) for the periods presented:

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

($ in millions)

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Total net realized gains (losses)

Net realized gains on securities sold or called for the three months ended March 31, 2020 , are primarily from sales in connection with routine portfolio management.

Net realized gains on securities sold or called for the three months ended March 31, 2019 , included $19 million of net gains related to the impact of the COFINA Plan of Adjustment and sales of Ambac-insured Puerto Rico COFINA bonds and new uninsured COFINA bonds received in the commutation.

Net realized gains on securities sold or called for the three and six months ended June 30, 2020 , are primarily from sales in connection with routine portfolio management.

Net realized gains on securities sold or called for the three and six months ended June 30, 2019 , included $7 million and $26 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 three and six months ended June

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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.

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When credit impairments are recorded, any non-credit related impairment amounts on the securities are recorded in other comprehensive income.

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Intent / requirement to sell impairments for the three month periods ended March 31, 2020, and 2019, related solely to management's intent to sell securities.

Net Gains (Losses) on Derivative Contracts.

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The interest rate derivatives portfolio is positioned to benefit from rising rates as a partial economic hedge against interest rate exposure in the financial guarantee and investment portfolios.

As forward rates and interest rate exposures elsewhere in the company have declined over the course of 2019 into the first quarter 2020, the economic hedge position has been reduced.

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.

Net gains (losses) on interest rate derivatives for the three months ended March 31, 2020 , were ($68) million , compared to ($17) million for the three months ended March 31, 2019 .

The net loss for the three months ended March 31, 2020 , reflects significant declines in forward interest rates, triggered by the COVID-19 pandemic, and losses from the application of counterparty credit adjustments, described further below.

The net losses for three months ended March 31, 2019 , were driven by the impact of declines in forward interest rates during the period.

Net gains (losses) on interest rate derivatives for the three and six months ended June 30, 2020 , were $1 million and $(67) million , respectively, compared to ($36) million and $(52) million for the three and six months ended June 30, 2019 , respectively.

The net gain for the three months ended June 30, 2020, reflects a gain from reduced counterparty credit adjustments, partially offset by the impact of interest rate movements on the portfolio.

The net loss for six months ended June 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 six months ended June 30, 2019 , were driven by the impact of declines in forward interest rates during the period.

Net carrying costs were not significant to the periods presented.

Counterparty credit adjustments are generally applicable for uncollateralized derivative assets that may not be offset by derivative liabilities under a master netting agreement.

Inclusion of counterparty credit adjustments in the valuation of interest rate derivatives resulted in (losses) within Net gains (losses) on derivative contracts of $(30) million for the three months ended March 31, 2020 , and $(1) million for the three months ended March 31, 2019 .

The loss for the three months ended March 31, 2020, was driven by wider credit spreads, including the effect of a credit rating downgrade of a derivative counterparty by Ambac during the quarter, simultaneous with an increase in the underlying asset value as interest rates declined.

Inclusion of counterparty credit adjustments in the valuation of interest rate derivatives resulted in gains (losses) within Net gains (losses) on derivative contracts of $8 million and $(21) million for the three and six months ended June 30, 2020 , respectively, and $(3) million for the three and six months ended June 30, 2019 .

The gain for the three months ended June 30, 2020, was driven by narrower credit spreads, in a partial reversal of first quarter 2020 results.

The loss for the six months ended June 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.

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.

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.

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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.

between the net carrying value of the insurance accounts under the Financial Services—Insurance Topic of the ASC and the carrying value of the consolidated VIE’s net assets or liabilities are recorded through income at the time of consolidation or deconsolidation.

Differences between the net carrying value of the insurance accounts under the Financial Services—Insurance Topic of the ASC and the carrying value of the consolidated VIE’s net assets or liabilities are recorded through income at the time of consolidation or deconsolidation.

Additionally, terminations or other changes to Ambac's financial guarantee insurance policies that impact projected cash flows between a consolidated VIE and Ambac could result in gains or losses, even if such policy changes do not result in deconsolidation of the VIE.

Income (loss) on variable interest entities was $3 million for the three months ended March 31, 2020 , compared to income of $16 million for the three months ended March 31, 2019 .

Results for the three months ended March 31, 2020 , were due primarily to realized gains of $8 million on sales of assets from the COFINA Trust partially offset by the lower valuation of net assets on another VIE driven by the economic uncertainty caused by COVID-19.

Results for the three months ended March 31, 2019 , were driven by the $15 million gain on consolidation of the COFINA Trust.

Income (loss) on variable interest entities was a loss of less than a million and income of $3 million for the three and six months ended June 30, 2020 , respectively, compared to income of $3 million and $19 million for the three and six months ended June 30, 2019 , respectively.

Results for the three months ended June 30, 2020 , reflect the further reduction in value of net assets of a VIE driven by the ongoing shut-down of parts of the economy resulting from COVID-19.

Results for the six months ended June 30, 2020 , were due primarily to realized gains of $8 million on sales of assets from the COFINA Trust partially offset by the lower valuation of net assets on a VIE driven by the economic uncertainty caused by COVID-19.

Results for the six months ended June 30, 2019, were driven by the $15 million gain on consolidation of the COFINA Trust.

Refer to Note 3.

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Generally, the sponsor of an RMBS transaction provided representations and warranties with respect to the securitized loans, including representations with respect to the loan characteristics, the absence of borrower fraud in the underlying loan pools or other misconduct in the origination process and attesting to the compliance of loans with the prevailing underwriting policies.

Ambac has recorded representation and warranty subrogation recoveries, net of reinsurance, of approximately $1,738 and $1,702 at March 31, 2020 , and December 31, 2019 , respectively.

Ambac has recorded representation and

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warranty subrogation recoveries, net of reinsurance, of $1,731 million and $1,702 million at June 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.

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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.

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

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

($ in millions)

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Ambac UK and Other Credits

Includes loss expenses incurred (benefit) of $3 and $29 for the three months ended March 31, 2020 and 2019 , respectively.

Losses and loss expenses (benefit) for the three months ended March 31, 2020 , were driven by the following:

Includes loss expenses incurred (benefit) of $34 and $37 for the three and six months ended June 30, 2020 , respectively, and ($1) and $28 for the three and six months ended June 30, 2019 , respectively.

Losses and loss expenses (benefit) for the three and six months ended June 30, 2020 , were driven by the following:

Higher projected losses in domestic public finance driven mostly by lower discount rates (primarily relating to Puerto Rico) and incurred losses related to transactions directly impacted by the economic impact from COVID-19;

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Favorable RMBS development as a result of the positive impact of lower interest rates on excess spread, reduced by the negative impact of lower discount rates and expected losses from COVID-19 related delinquencies/defaults.

Losses and loss expenses (benefit) for the three months ended March 31, 2019 , were driven by the following:

Higher projected losses in domestic public finance largely driven by additions to Puerto Rico loss reserves;

Losses and loss expenses (benefit) for the three and six months ended June 30, 2019 , were driven by the following:

Favorable development within Ambac UK and Other Credits primarily due to the Ballantyne commutation;

Favorable RMBS development as a result of credit improvement, a trustee settlement related to Lehman sponsored transactions of $19 million and the impact on excess spread from declines in interest rates;

partially offset by,

Favorable RMBS development as a result of credit improvement and the impact on excess spread from declines in interest rates reduced by an increase in loss expenses;

Favorable development within Ambac UK and Other Credits primarily from certain Ambac UK credits;

A portion of Ambac UK's loss reserves are denominated in currencies other than their functional currency of British Pounds resulting in incurred losses (gains) when the British Pound depreciates (appreciates).

Ambac recognized $6 million in foreign exchange gain for the three months ended March 31, 2019 .

Higher projected losses in domestic public finance driven mostly by lower discount rates and additions to Puerto Rico loss reserves.

Insurance Intangible Amortization.

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

Insurance intangible amortization for the three and six months ended June 30, 2020 , was $14 million and $27 million, respectively, a decrease of $213 million and $236 million over the three and six months ended June 30, 2019 , respectively.

The decrease is primarily due to accelerated amortization as a result of the Ballantyne commutation that occurred in the second quarter of 2019.

Operating Expenses.

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The following table provides a summary of operating expenses for the periods presented:

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

($ in millions)

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Total operating expenses

Gross operating expense for the three months ended March 31, 2020 , were $24 million , a decrease of $1 million from the three months ended March 31, 2019 .

Operating expenses incurred relating to COVID-19 have been minimal for the three months ended March 31, 2020 .

The decrease in operating expenses was due to the following:

Lower compensation costs primarily due to lower salaries resulting from continued right sizing of staffing levels during 2019, partially offset by higher incentive compensation costs related to final performance metrics impacting settlement of 2019 annual bonuses, and

Lower non-compensation costs primarily due to a $1 million UK Value Added Tax (VAT) refund recognized in the three months ended March 31, 2020 .

Legal and consulting services provided for the benefit of OCI amounted to $0.5 million and $0.5 million during the three months ended March 31, 2020 and 2019 , respectively.

Gross operating expenses decreased $9 million and $10 million for the three and six months ended June 30, 2020 , respectively, compared to the same periods in the prior year.

Operating expenses incurred relating to COVID-19 have been minimal for the three and six months ended June 30, 2020 .

The decrease in operating expenses during the three months ended June 30, 2020 as compared to the three months ended June 30, 2019 was due to the following:

Lower compensation costs primarily related to lower salaries resulting from continued right sizing of staffing levels and incentive compensation costs related to changes in performance metrics primarily impacted by the Ballantyne restructuring and

Lower non-compensation costs primarily due to reduced legal and consulting services.

The decrease in operating expenses during the six months ended June 30, 2020 as compared to the six months ended June 30, 2019, was due to the following:

Lower compensation costs primarily due to lower salaries resulting from continued right sizing of staffing levels and incentive compensation costs related to changes in performance metrics primarily impacted by the Ballantyne restructuring and

Lower non-compensation costs primarily due to a UK Value Added Tax (VAT) refund recognized in the six months ended June 30, 2020 , and reduced consulting services.

Legal and consulting services provided for the benefit of OCI amounted to $1 million and $1 million during the six months ended June 30, 2020 and 2019 , respectively.

Interest Expense.

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Additionally, interest expense includes discount accretion when the debt instrument carrying value is at a discount to par.

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The following table provides details by type of obligation for the periods presented:

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

($ in millions)

2 unchanged sentences

Includes junior surplus notes

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

The increase in interest expense also reflects the impact of applying the

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level yield method on surplus notes and Tier 2 Notes as the discount to the face value of the long-term debt accretes over time.

The decrease in interest expense for the three and six months ended June 30, 2020 , compared to the three and six months ended June 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.

Ambac Assurance has not requested to pay interest on any junior surplus notes since their issuance.

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.

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The interest on the outstanding surplus notes and junior surplus notes were accrued for and Ambac Assurance is accruing interest on the interest amounts following each scheduled payment date.

Total accrued and unpaid interest for surplus notes and junior surplus notes outstanding to third parties were $312 million and $152 million , respectively, at March 31, 2020 .

Total accrued and unpaid interest for surplus notes and junior surplus notes outstanding to third parties were $323 million and $159 million , respectively, at June 30, 2020 .

Provision for Income Taxes .

The provision for income taxes for the three months ended March 31, 2020 , was $(7) million , a decrease of $9 million compared to the provision for income taxes reported for three months ended March 31, 2019 .

The change for the three months ended March 31, 2020 , compared to the prior year was primarily attributable Ambac UK, which had a taxable loss, related to investment losses on pooled funds, in 2020 as compared to taxable income in 2019.

The provision for income taxes for the three and six months ended June 30, 2020 , was $2 million and a benefit of $4 million , a decrease of $26 million and $35 million compared to the provision for income taxes reported for three and six months ended June 30, 2019 .

The change for the three and six months ended June 30, 2020 , as compared to the three and six months ended June 30, 2019 , was primarily attributable to Ambac UK, which had higher taxable income in 2019 due to the Ballantyne restructuring and commutation, and a taxable loss, related to

investment losses on pooled funds, in the three months ended March 31, 2020.

LIQUIDITY AND CAPITAL RESOURCES

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("AFG") Liquidity .

AFG's liquidity is primarily dependent on its cash, investments, and net receivables totaling $482 million as of March 31, 2020 , and secondarily on its expense sharing and other arrangements with Ambac Assurance.

AFG's liquidity is primarily dependent on its cash, investments, and net receivables totaling $481 million as of June 30, 2020 , and secondarily on its expense sharing and other arrangements with Ambac Assurance.

Pursuant to the amended and restated tax sharing agreement among AFG, Ambac Assurance and certain affiliates (the "Amended TSA"), Ambac Assurance is required to make payments ("tolling payments") to AFG with respect to the utilization of net operating loss carry-forwards (“NOLs”).

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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.

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.

OCI approved this $4 million reimbursement f or 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.

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sales of investments;

proceeds from repayment of affiliate loans;

proceeds from repayment of

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affiliate loans;

and recoveries on claim payments, including from litigation and reinsurance recoveries.

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The principal uses of Ambac Assurance’s liquidity are the payment of operating and loss adjustment expenses, claims, commutation and related expense payments on insurance policies, ceded reinsurance premiums, principal and interest payments on the Ambac Note, surplus note principal and interest payments, Tier 2 Note payments, additional loans to affiliates, tolling payments due to AFG under the Amended TSA, and purchases of securities and other investments that may not be immediately converted into cash.

The COVID-19 pandemic had a negative impact on Ambac's available liquidity as a consequence of the adverse reaction of the capital markets, which led to a reduction in the value and marketability of our invested assets;

derivative losses, which required additional collateral posting;

The COVID-19 pandemic has had a negative impact on Ambac's available liquidity as a consequence of the adverse reaction of the capital markets, which led to a reduction in the value and marketability of our invested assets;

derivative losses, which required either timely settlement or additional collateral posting;

and higher credit risk within the insured portfolio, as further described below.

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Nevertheless, Ambac has not yet experienced incremental demands on its liquidity, from higher claims or expenses, other than the aforementioned increase in collateral postings

Claim payments may increase during the global recession and COVID-19 pandemic as issuers, particularly those with revenues that will be interrupted by social distancing, other restrictions and the increase in unemployment, may not have sufficient cash inflows to pay debt service on Ambac-insured debt.

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.

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Ambac Assurance's intercompany loans are with Ambac Financial Services ("AFS").

AFS uses interest rate derivatives (primarily interest rated swaps and US Treasury futures) as an economic hedge against the effects of rising interest rates elsewhere in the Company, including on Ambac Assurance’s financial guarantee exposures.

AFS 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.

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.

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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.

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.

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The following table summarizes the net cash flows for the periods presented.

Three Months Ended March 31,

Six Months Ended June 30,

($ in million)

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Net cash flow

Operating activities

The following represents the significant cash activities during the three months ended March 31, 2020 and 2019 :

Cash used in operating activities relating to long-term debt on the Ambac Note were $31 million and $38 million for the three months ended March 31, 2020 and 2019 , respectively.

Cash used in operating activities related to interest rate derivatives were $25 million and $23 million for the three months ended March 31, 2020 and 2019 , respectively.

Cash provided by operating activities relating to the investment portfolio were $30 million and $36 million for the three months ended March 31, 2020 and 2019 , respectively.

Net loss and loss expenses paid, including commutation payments, during the three months ended March 31, 2020 and 2019 are detailed below:

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Three Months Ended March 31,

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Operating activities

The following represents the significant cash activities during the six months ended June 30, 2020 and 2019 :

Cash used in operating activities relating to debt service on the Ambac Note was $58 million and $74 million for the six months ended June 30, 2020 and 2019 , respectively.

Cash used in operating activities related to interest rate derivatives was $19 million and $51 million for the six months ended June 30, 2020 and 2019 , respectively.

Cash used by operating activities relating to operating expenses was $44 million and $46 million for the six months ended June 30, 2020 and 2019 , respectively.

Cash provided by operating activities relating to the investment portfolio was $58 million and $73 million for the six months ended June 30, 2020 and 2019 , respectively.

Net loss and loss expenses paid, includin g commutation payments, during the six months ended June 30, 2020 and 2019 are detailed below:

Six Months Ended June 30,

($ in million)

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Net cash flow

Net losses paid include commutation payments of $2 and $66 for the three months ended March 31, 2020 and 2019 , respectively.

For the three months ended March 31, 2019 , subrogation received includes $23 related to the COFINA Plan of Adjustment.

Net losses paid include commutation payments of $2 and $213 for the six months ended June 30, 2020 and 2019 , respectively.

For or the six months ended June 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 the level of premium collections, investment coupon receipts and claim and expense payments.

Financing Activities

Financing activities for the three months ended March 31, 2020 , include paydowns of the Ambac Note of $77 million and paydowns / maturities of VIE debt obligations of $66 million .

Financing activities for the three months ended March 31, 2019 , include proceeds $3 million from Ambac's issuance of 201 shares of AMPS, paydowns of the Ambac Note of $13 million and paydowns / maturities of VIE debt obligations of $63 million .

Financing activities for the six months ended June 30, 2020 , include paydowns of the Ambac Note of $103 million and paydowns / maturities of VIE debt obligations of $99 million .

Financing activities for the six months ended June 30, 2019 , include paydowns of the Ambac Note of $22 million and paydowns of VIE debt obligations of $92 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.

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.

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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.

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.

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All collateral and margin obligations are currently met.

Collateral and margin posted by AFS totaled a net amount of $165 million (cash and securities collateral of $80 million and $85 million , respectively), including independent amounts, under these contracts at March 31, 2020 .

Collateral and margin posted by AFS totaled a net amount of $165 million (cash and securities collateral of $10 million and $155 million , respectively), including independent amounts, under these contracts at June 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 $542 million from December 31, 2019 , to $12,777 million at March 31, 2020 , primarily due to the negative total return for the non-VIE investment portfolio caused by the economic effects of the COVID-19 pandemic and lower consolidated VIE assets as a result of currency changes (strengthening of the US Dollar).

Other significant changes during the three months ended March 31, 2020 , were higher subrogation recoverables primarily related to increases in excess spread on RMBS as a result of lower interest rates, higher collateral receivable from derivative counterparties (within Other assets) and lower intangible assets from the continued runoff of the financial guarantee insurance portfolio.

Total liabilities decreased by approximately $68 million from December 31, 2019 , to $11,716 million as of March 31, 2020 , primarily due to lower consolidated VIE liabilities as a result of currency changes, as noted above, and lower long-term debt plus accrued interest payable due to partial redemption of the Ambac Note, partially offset by higher loss reserves and increases in interest rate derivative obligations as a result of reductions in forward interest rates.

As of March 31, 2020 , total stockholders’ equity was $1,062 million , compared with total stockholders’ equity of $1,536 million at December 31, 2019 .

Total assets decreased by approximately $558 million from December 31, 2019 , to $12,761 million at June 30, 2020 , primarily due to the negative total return for the non-VIE investment portfolio, payment of loss and loss adjustment expenses, and interest and operating expenses, lower valuation of certain VIE assets caused by the economic effects of the COVID-19 pandemic, as well as the decrease to consolidated VIE assets as a result of currency changes (strengthening of the US Dollar).

Other significant changes during the six months ended June 30, 2020 , were higher subrogation recoverables primarily related to increases in excess 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 $151 million from December 31, 2019 , to $11,632 million as of June 30, 2020 , primarily due to lower consolidated VIE liabilities as a result of price and currency changes, as noted above, and lower long-term debt due to partial redemption of the Ambac Note, partially offset by higher loss reserves and increases in interest rate derivative obligations as a result of reductions in forward interest rates.

As of June 30, 2020 , total stockholders’ equity was $1,129 million , compared with total stockholders’ equity of $1,536 million at December 31, 2019 .

This decrease was primarily due to a Total Comprehensive Loss during 2020 .

The Comprehensive Loss was primarily driven by the net loss attributable to common stockholders for the three months ended March 31, 2020 , of $280 million , unrealized losses on investment securities of $146 million and translation losses on the consolidation of AFG's foreign subsidiaries of $46 million.

The Comprehensive Loss was primarily driven by the net loss attributable to common stockholders for the six months ended June 30, 2020 , of $315 million , unrealized losses on available-for-sale investment securities of $42 million and translation losses on the consolidation of AFG's foreign subsidiaries of $48 million.

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Investment Portfolio .

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Such guidelines set forth minimum credit rating requirements and credit risk concentration limits.

Within these guidelines, which in certain instances may be exceeded with the approval of the applicable regulatory authority, Ambac Assurance opportunistically purchases Ambac Assurance insured securities given their relative risk/reward characteristics.

Within these guidelines, which in certain instances may be exceeded with the approval of the applicable regulatory authority, Ambac Assurance opportunistically purchases or sells Ambac Assurance insured securities given their relative risk/reward characteristics.

Ambac Assurance’s investment policies are subject to oversight by OCI pursuant to the Settlement Agreement, the Stipulation and Order and the indenture for the Tier 2 Notes.

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Ambac UK’s investment portfolio is primarily fixed income investments and diversified holdings of pooled investment funds.

The portfolio is subject to internal investment guidelines and may be subject to limits on types and quality of investments imposed by the PRA as regulator of Ambac

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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.

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Ambac's investment policies and objectives do not apply to the assets of VIEs consolidated as a result of financial guarantees written by its insurance subsidiaries.

The following table summarizes the composition of Ambac’s investment portfolio, excluding VIE investments, at carrying value at March 31, 2020 and December 31, 2019 :

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.

These actions resulted in changes to the credit rating distribution of available-for-sale investments from December 31, 2019, to June 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 June 30, 2020 and December 31, 2019 :

($ in millions)

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Total investments (1)

Includes investments denominated in non-US dollar currencies with a fair value of £238 ( $295 ) and €28.7 ( $31.6 ) as of March 31, 2020 , and £257 ( $341 ) and €2 ( $2 ) as of December 31, 2019 .

Includes investments denominated in non-US dollar currencies with a fair value of £278 ( $344 ) and €28.3 ( $31.8 ) as of June 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 and Ambac UK and other financial guarantors ("insured securities").

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Investments to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Form 10-Q for information about insured securities and fixed income and pooled funds by asset class.

The following table represents the fair value of other asset-backed securities, included in fixed income securities above, at March 31, 2020 and December 31, 2019 by classification:

The following table represents the fair value of other asset-backed securities, included in fixed income securities above, at June 30, 2020 and December 31, 2019 , by classification:

($ in millions)

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Military Housing

Student Loans

Total other asset-backed securities

The following charts provide the ratings (1) distribution of the fixed income investment portfolio based on fair value at March 31, 2020 and December 31, 2019 :

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The following charts provide the ratings (1) distribution of the fixed income investment portfolio based on fair value at June 30, 2020 and December 31, 2019 :

Ratings are based on the lower of Moody’s or S&P ratings.

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If guaranteed, rating represents the higher of the underlying or guarantor’s financial strength rating.

Below investment grade and not rated bonds insured by Ambac represent 34% and 33% of the 2020 and 2019 combined fixed income portfolio, respectively.

Below investment grade and not rated bonds insured by Ambac represent 38% and 33% of the June 30, 2020 and December 31, 2019 combined fixed income portfolio, respectively.

Premium Receivables .

Ambac's premium receivables decreased to $403 million at March 31, 2020 , from $416 million at December 31, 2019 .

Ambac's premium receivables decreased to $392 million at June 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, changes to the allowance for credit losses, and changes in foreign currencies, partially offset by changes in expected and contractual cash flows and accretion of premium receivable discount.

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Premium receivables by payment currency were as follows:

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and (iii) has certain cancellation rights that can be exercised by Ambac Assurance in the event of rating agency downgrades of a reinsurer (among other events and circumstances).

Ambac Assurance benefited from letters of credit and collateral amounting to approximately $124 million from its reinsurers at March 31, 2020 .

As of March 31, 2020 and December 31, 2019 , reinsurance recoverable on paid and unpaid losses were $36 million and $26 million , respectively.

Ambac Assurance benefited from letters of credit and collateral amounting to approximately $129 million from its reinsurers at June 30, 2020 .

As of June 30, 2020 and December 31, 2019 , reinsurance recoverable on paid and unpaid losses were $36 million and $26 million , respectively.

The increase was primarily a result of adverse development in public finance and student loan insured exposures.

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At the Fresh Start Reporting Date, an insurance intangible asset was recorded which represented the difference between the fair value and aggregate carrying value of the financial guarantee insurance and reinsurance assets and liabilities.

As of March 31, 2020 and December 31, 2019 , the net insurance intangible asset was $406 million and $427 million , respectively.

Other than through amortization, variance in the insurance intangible asset is solely from translation gains (losses)

from the consolidation of Ambac's foreign subsidiary (Ambac UK).

As of June 30, 2020 and December 31, 2019 , the net insurance intangible asset was $392 million and $427 million , respectively.

Other than through amortization, variance in the insurance intangible asset is solely from translation gains (losses) from the consolidation of Ambac's foreign subsidiary (Ambac UK).

Derivative Assets and Liabilities.

The interest rate derivative portfolio is positioned to benefit from rising rates as a partial economic hedge against interest rate exposure in the financial guarantee and investment portfolios.

Derivative assets increased from $75 million at December 31, 2019, to $88 million as of March 31, 2020 .

Derivative liabilities increased from $90 million at December 31, 2019 , to $137 million as of March 31, 2020 .

The net increases resulted primarily from lower interest rates during the three months ended March 31, 2019, with the effect on assets partially offset by higher counterparty credit adjustments.

Derivative assets increased from $75 million at December 31, 2019, to $97 million as of June 30, 2020 .

Derivative liabilities increased from $90 million at December 31, 2019 , to $134 million as of June 30, 2020 .

The net increases resulted primarily from lower interest rates during the six months ended June 30, 2020, with the effect on assets partially offset by higher counterparty credit adjustments.

Loss and Loss Expense Reserves and Subrogation Recoverable .

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Refer to the "Critical Accounting Policies and Estimates" and “Results of Operations” sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations, in addition to Basis of Presentation and Significant Accounting Policies and Loss Reserves sections included in Note 2.

Basis of Presentation and Significant Accounting Policies and Note 6.

Basis of Presentation and

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Significant Accounting Policies and Note 6.

Financial Guarantee Insurance Contracts , respectively, of the Consolidated Financial Statements included in Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 , for further information on loss and loss expenses.

The loss and loss expense reserves, net of subrogation recoverables and before reinsurance as of March 31, 2020 and December 31, 2019 , were $(395) million and $(482) million , respectively.

The loss and loss expense reserves, net of subrogation recoverables and before reinsurance as of June 30, 2020 and December 31, 2019 , were $(401) million and $(482) million , respectively.

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

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Recoveries (1)

March 31, 2020:

June 30, 2020:

Loss and loss expense reserves

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Subrogation recoverable

Present value of future recoveries includes R&W subrogation recoveries of $1,764 and $1,727 at March 31, 2020 and December 31, 2019 , respectively.

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Present value of future recoveries includes R&W subrogation recoveries of $1,757 and $1,727 at June 30, 2020 and December 31, 2019 , respectively.

Ambac has exposure to various bond types issued in the debt capital markets.

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These bond types represent 94% of our ever-to-date insurance claims recorded, with RMBS comprising 76%.

The table below indicates gross par outstanding and the components of gross loss and loss expense reserves related to policies in Ambac’s gross loss and loss expense reserves at March 31, 2020 and December 31, 2019 :

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 June 30, 2020 and December 31, 2019 :

Outstanding (1)(2)

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($ in millions)

March 31, 2020:

June 30, 2020:

Domestic Public Finance

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Loss expenses

Ceded par outstanding on policies with loss reserves and ceded loss and loss expense reserves are $750 and $35 respectively, at March 31, 2020 , and $511 and $26, respectively at December 31, 2019 .

Ceded par outstanding on policies with loss reserves and ceded loss and loss expense reserves are $866 and $35 respectively, at June 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.

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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.

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Variability of Expected Losses and Recoveries

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We have attempted to identify possible cash flows related to losses and recoveries using more stressful assumptions than the probability-weighted outcome recorded.

The possible net cash flows consider the highest stress scenario that was utilized in the development of our probability-weighted expected loss at March 31, 2020 , and assumes an inability to execute any commutation transactions with issuers and/or investors.

The possible net cash flows consider the highest stress scenario that was utilized in the development of our probability-weighted expected loss at June 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.

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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.

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;

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and a significant drop in the value of securities issued or insured by AFG or Ambac Assurance.

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RMBS Variability:

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mortgage market primarily through direct financial guarantees of RMBS, including transactions collateralized by first and second liens.

Changes to assumptions that could make our reserves under-estimated include an increase in interest rates, deterioration in housing prices, poor servicing, the effect of a weakened economy characterized by growing unemployment and wage pressures.

Changes to assumptions that could make our reserves under-estimated include an increase in interest rates, deterioration in housing prices, poor servicing, 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.

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;

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and uncertainty inherent in the assumptions used in estimating such recoveries.

Additionally, our R&W actual subrogation recoveries could be significantly lower than our estimate of $1,738 million , net of reinsurance, as of March 31, 2020 , if the sponsors of these transactions:

Additionally, our R&W actual subrogation recoveries could be significantly lower than our estimate of $1,731 million , net of reinsurance, as of June 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.

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In the case of both first and second-lien exposures, the possible stress case assumes a lower housing price appreciation projection, which in turn drives higher defaults and severities.

Using this approach, the possible increase in loss reserves for RMBS credits for which we have an estimate of expected loss at March 31, 2020 could be approximately $25 million .

Using this approach, the possible increase in loss reserves for RMBS credits for which we have an estimate of expected loss at June 30, 2020 , could be approximately $35 million .

Combined with the absence of any R&W subrogation recoveries, a possible increase in loss reserves for RMBS could be approximately $1,766 million .

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Additionally, the RMBS portfolio is sensitive to the COVID-19 related forbearances and delinquencies caused by the general economic downturn.

Due to the uncertainties related to the economic effects of the COVID-19 pandemic and other risks inherent associated with RMBS, there can be no assurance that losses may not exceed our stress case estimates.

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:

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however, the portfolio also includes a wide array of non-municipal types of bonds, including financings for not-for-profit entities and transactions with public and private elements, which generally finance infrastructure, housing and other public purpose facilities and interests.

The increase in public finance gross loss reserves at March 31, 2020 , as compared to December 31, 2019 , was primarily related to declines in discount rates and the adverse impact on loss reserves from the global and issuer-specific economic impact of the COVID-19 pandemic.

The increase in public finance gross loss reserves at June 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:

March 31, 2020

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June 30, 2020

December 31, 2019

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Additionally, our loss reserves may be under-estimated as a result of the ultimate scope, duration and magnitude of the effects of COVID-19.

The COVID-19 related economic downturn has put a strain on municipal issuers dependent upon narrow sources of revenues or dedicated taxes to support debt services, such as hotel occupancy taxes, sales taxes, parking

revenues, tolls, licensing fees, etc.

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 services, such as hotel occupancy taxes, sales taxes, parking revenues, tolls, licensing fees, etc.

A prolonged recovery from the COVID-19 related economic downturn could put additional stresses on these issuers as well as other types of municipal finance issuers and result in increased defaults and potential additional losses for Ambac.

Our experience with the city of Detroit in 2013 in its bankruptcy proceeding was not favorable and renders future outcomes with other public finance issuers even more difficult to predict and may

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increase the risk that we may suffer losses that could be sizable.

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.

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We expect municipal bankruptcies and defaults to continue to be challenging to project given the unique political, economic, fiscal, legal, governance and public policy differences among municipalities as well as the complexity, long duration and relative infrequency of the cases themselves in forums with a scarcity of legal precedent.

Another potentially adverse development that could cause the loss reserves on our public finance credits to be underestimated is deterioration in the municipal bond market, resulting from reduced or limited access to alternative forms of credit (such as bank loans) or other exogenous factors, such as the Tax Cuts and Jobs Act that was signed into law on December 22, 2017, which could reduce certain municipal investors' appetite for tax-exempt municipal bonds and over the longer term could potentially put additional pressure on issuers in states with high state and local taxes.

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.

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On January 13, 2020, the U.S.

Supreme Court denied a petition for certiorari arising out of an appeal to the March 26, 2019 ruling by the U.S.

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.

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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.

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.

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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.

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While our loss reserves consider our judgment regarding issuers’ financial flexibility to adapt to adverse markets, they may not adequately capture sudden, unexpected or protracted uncertainty that adversely affects market conditions, such as the developing COVID-19 related economic downturn.

Our exposures to the Commonwealth of Puerto Rico are under stress arising from the Commonwealth’s poor financial condition, weak economy, loss of capital markets access and the severe damage caused by hurricanes Irma and Maria.

These factors, taken together with the payment moratorium on debt payments of the Commonwealth and its instrumentalities, ongoing PROMESA Title III proceedings, and certain other provisions under PROMESA, the potential for restructurings of debt insured by Ambac Assurance, either with or without its consent, and the possibility of protracted litigation as a result of which its rights may be materially impaired, may cause losses to exceed current reserves in a material manner.

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.

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Material additional losses on our public finance credits caused by the aforementioned factors and including the possibility of a protracted recovery related to the COVID-19 crisis would have a material adverse effect on our results of operations and financial condition.

For the public finance credits, including Puerto Rico, for which we have an estimate of expected loss at March 31, 2020 , the possible increase in loss reserves could be approximately $1,220 million .

However, there can be no assurance that losses may not exceed such amount.

For the public finance credits, including Puerto Rico, for which we have an estimate of expected loss at June 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

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or other factors, including the COVID-19 related economic downturn.

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 March 31, 2020 , the possible increase in loss reserves could be approximately $35 million .

For student loan credits for which we have an estimate of expected loss at June 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.

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It is possible our loss reserves on other types of credits, including those insured by Ambac UK, may be under-estimated because of various risks that vary widely, including the risk that we may not be able to recover or mitigate losses through our remediation processes.

For all other credits, including Ambac UK, for which we have an estimate of expected loss, the sum of all the highest stress case loss scenarios is approximately $400 million greater than the loss reserves at March 31, 2020 .

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 $370 million greater than the loss reserves at June 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.

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Long-term debt consists of senior and junior surplus notes issued by Ambac Assurance, the Ambac Note and Tier 2 Notes issued in connection with the Rehabilitation Exit Transactions, and Ambac UK debt issued in connection with the 2019 Ballantyne commutation.

The carrying value of each of these as of March 31, 2020 and December 31, 2019 is below:

The carrying value of each of these as of June 30, 2020 and December 31, 2019 is below:

($ in millions)

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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.

i) amounts in accumulated other comprehensive income expected to be recognized as net

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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.

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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

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Financial Results," in Part II, Item 7.

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 $930 million and $1,465 million at March 31, 2020 , respectively, as compared to $1,088 million and $1,618 million at December 31, 2019 , respectively.

As of March 31, 2020 , statutory policyholder surplus and qualified statutory capital included $574 million principal balance of surplus notes outstanding, $365 million principal balance of junior surplus notes outstanding and $138 million liquidation preference of preferred stock outstanding.

These surplus and junior surplus notes (including related accrued interest of $489 million that is not recorded under statutory basis accounting principles), preferred stock issued by Ambac Assurance and all other liabilities (including insurance claims and debt issued by Ambac Assurance) are obligations that have claims on the resources of Ambac Assurance that are senior to AFG's equity and therefore impact AFG's ability to realize residual value or receive dividends from Ambac Assurance.

The drivers to the net decrease in policyholder surplus are primarily due to a (i) statutory net loss of $93 million for the three months ended March 31, 2020;

(ii) decrease of $35 million from declines in the fair value of investment securities that are recorded at the lower of amortized cost or fair value ;

(iii) decrease of $21 million from net losses on pooled fund investments;

and (iv) contributions to contingency reserves of $5 million.

Ambac Assurance’s statutory policyholder surplus and qualified statutory capital (defined as the sum of policyholders surplus and mandatory contingency reserves) were $987 million and $1,527 million at June 30, 2020 , respectively, as compared to $1,088 million and $1,618 million at December 31, 2019 , respectively.

As of June 30, 2020 , statutory policyholder surplus and qualified statutory capital included $574 million principal balance of surplus notes outstanding, $365 million principal balance of junior surplus

notes outstanding and $138 million liquidation preference of preferred stock outstanding.

These surplus and junior surplus notes (including related accrued interest of $507 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 primarily due to a (i) statutory net loss of $58 million for the six months ended June 30, 2020 (excluding dividends from subsidiaries);

(ii) a decrease of $28 million in the fair value of pooled fund investments and investment securities that are recorded at the lower of amortized cost or fair value ;

and (iii) contributions to contingency reserves of $9 million.

Ambac Assurance statutory surplus is sensitive to multiple factors, including:

(i) loss reserve development, (ii) approval by OCI of payments on surplus notes and junior surplus notes, (iii) ongoing interest costs associated with the Ambac Note and Tier 2 Notes, including changes to interest rates as the Ambac Note is a floating rate obligation, (iv) deterioration in the financial position of Ambac Assurance subsidiaries that have their obligations guaranteed by Ambac Assurance, (v) first time payment defaults of insured obligations, which increase statutory loss reserves, (vi) commutations of insurance policies or credit derivative contracts at amounts that differ from the amount of liabilities recorded, (vii) reinsurance contract terminations at amounts that differ from net assets recorded, (viii) changes to the fair value of investments carried at fair value and investment impairments, (ix) settlements of representation and warranty breach claims at amounts that differ from amounts recorded, including failures to collect such amounts or receive recoveries sufficient to pay or redeem the Ambac Note and Tier 2 Notes, (x) realized gains and losses, including losses arising from other than temporary impairments of investment securities, and (xi) future changes to prescribed practices by the OCI.

(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 £380 million at March 31, 2020 , as compared to

£387 million at December 31, 2019 .

At March 31, 2020 , the carrying value of cash and investments was £464 million , a decrease from £470 million at December 31, 2019 .

The decrease in shareholders’ funds and cash & investments was primarily due to losses in the period within Ambac UK's investment portfolio, offset by foreign exchange gains and the continued receipt of premiums.

At June 30, 2020 , the carrying value of cash and investments was £471 million , an increase from £470 million at December 31, 2019 .

The increase in shareholders’ funds and cash & investments was primarily due to the continued receipt of premiums and foreign exchange gains, partially offset by losses within Ambac UK's investment portfolio and tax and other 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 £163 million at March 31, 2020 , of which £149 million were eligible to meet solvency capital requirements.

This is a reduction from December 31, 2019 , when available capital resources were a surplus of £188 million of which £178 million were eligible to meet solvency capital requirements.

The eligible capital resources at March 31, 2020 , and December 31, 2019 , were in comparison to regulatory capital requirements of £243 million and £208 million respectively.

Ambac UK is therefore deficient in terms of compliance with applicable regulatory capital requirements by £94 million and £30 million at March 31, 2020 , and December 31, 2019 , respectively.

The deficit increased as at March 31, 2020 due to an increase in regulatory capital requirements for non-life insurers in the credit and surety line of business and due to a reduction eligible assets mainly caused by the fall over the period in long term discount rates.

Available capital resources under Solvency II were a surplus of £180 million at June 30, 2020 , of which £166 million were eligible to meet solvency capital requirements.

This is a reduction from

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December 31, 2019 , when available capital resources were a surplus of £188 million of which £178 million were eligible to meet solvency capital requirements.

The eligible capital resources at June 30, 2020 , and December 31, 2019 , were in comparison to regulatory capital requirements of £242 million and £208 million respectively.

Ambac UK is therefore deficient in terms of compliance with applicable regulatory capital requirements by £76 million and £30 million at June 30, 2020 , and December 31, 2019 , respectively.

The deficit increased as at June 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.

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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;

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-

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GAAP financial measure and the most directly comparable GAAP financial measure is also presented below.

A reconciliation of the non-GAAP financial measure and the most directly comparable GAAP financial measure is also presented below.

Adjusted Earnings (Loss).

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This adjustment eliminates the foreign exchange gains (losses) on all assets, liabilities and transactions in non-functional currencies, which enables users of our financial statements to better view the results without the impact of fluctuations in foreign currency exchange rates and facilitates period-to-period comparisons of Ambac's operating performance.

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

Three Months Ended March 31,

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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 June 30,

($ in millions, except share data)

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Adjusted earnings (loss)

Six Months Ended June 30,

($ in millions, except share data)

Per Diluted Share

Net income (loss) attributable to common stockholders

Non-credit impairment fair value (gain) loss on credit derivatives

Insurance intangible amortization

Foreign exchange (gain) loss

Adjusted earnings (loss)

Adjusted Book Value.

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The following table reconciles Total Ambac Financial Group, Inc.

stockholders’ equity to the non-GAAP measure Adjusted Book Value on a dollar amount and per share basis, for all periods presented:

March 31, 2020

June 30, 2020

December 31, 2019

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Adjusted book value

The decrease in Adjusted Book Value was primarily attributable to Adjusted Earnings for the three months ended March 31, 2020 , and the impact of changes in foreign exchange rates resulting from the strengthening of the US Dollar.

The decrease in Adjusted Book Value was primarily attributable to the Adjusted Loss for the six months ended June 30, 2020 , excluding earned premium previously included in Adjusted Book Value, and the impact of changes in foreign exchange rates resulting from the strengthening of the U.S.

Factors that impact changes to Adjusted Book Value include many of the same factors that impact Adjusted Earnings, including the majority of revenues and expenses, but generally exclude components of premium earnings since they are embedded in prior period's Adjusted Book Value through the net unearned premiums and fees in excess of expected losses adjustment.

2 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis