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AMBAC Financial (AMBC)

Filed: 9 Nov 20, 4:21pm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2020
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number:1-10777
AMBAC FINANCIAL GROUP, INC.
(Exact name of Registrant as specified in its charter)
Delaware13-3621676
(State of incorporation)(I.R.S. employer identification no.)
One World Trade CenterNew YorkNY10007
(Address of principal executive offices)(Zip code)
(212)658-7470
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common stock par value $0.01 per shareAMBCNew York Stock Exchange
WarrantsAMBC WSNew York Stock Exchange
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).    Yes     No  
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act): (Check one):
Large accelerated filerAccelerated filerNon-accelerated filerSmaller reporting companyEmerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes      No  
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes      No  
As of November 6, 2020, 45,809,139 shares of common stock, par value $0.01 per share, of the Registrant were outstanding.




AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS



PART I.    FINANCIAL INFORMATION
Item 1.     Unaudited Financial Statements of Ambac Financial Group, Inc. and Subsidiaries
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30,December 31,
(Dollars in millions, except share data) (September 30, 2020 (Unaudited))20202019
Assets:
Investments:
Fixed income securities, at fair value (amortized cost of $2,176 and $2,450)$2,311 $2,577 
Short-term investments pledged as collateral, at fair value (amortized cost of $152 and $85)152 85 
Short-term investments, at fair value (amortized cost of $586 and $653)586 653 
Other investments (includes $453 and $432 at fair value)502 478 
Total investments (net of allowance for credit losses of $0 at September 30, 2020)3,551 3,792 
Cash and cash equivalents37 24 
Restricted cash10 55 
Premium receivables (net of allowance for credit losses of $18 at September 30, 2020)372 416 
Reinsurance recoverable on paid and unpaid losses (net of allowance for credit losses of $0 at September 30, 2020)37 26 
Deferred ceded premium73 82 
Subrogation recoverable2,194 2,029 
Derivative assets95 75 
Current taxes2 11 
Insurance intangible asset383 427 
Other assets60 95 
Variable interest entity assets:
Fixed income securities, at fair value3,160 3,121 
Restricted cash2 
Loans, at fair value2,783 3,108 
Derivative assets53 52 
Other assets1 
Total assets$12,812 $13,320 
Liabilities and Stockholders’ Equity:
Liabilities:
Unearned premiums$468 $518 
Loss and loss expense reserves1,801 1,548 
Ceded premiums payable27 29 
Deferred taxes28 32 
Long-term debt2,737 2,822 
Accrued interest payable499 441 
Derivative liabilities126 90 
Other liabilities91 93 
Variable interest entity liabilities:
Accrued interest payable0 
Long-term debt (includes $4,002 and $4,351 at fair value)4,169 4,554 
Derivative liabilities1,771 1,657 
Total liabilities11,718 11,783 
Commitments and contingencies (See Note 11)
Stockholders’ equity:
Preferred stock, par value $0.01 per share;20,000,000 shares authorized shares; issued and outstanding shares—NaN0 
Common stock, par value $0.01 per share; 130,000,000 shares authorized; issued shares: 45,865,081 and 45,571,7430 
Additional paid-in capital240 232 
Accumulated other comprehensive income (loss)22 42 
Retained earnings773 1,203 
Treasury stock, shares at cost: 55,942 and 16,343(1)
Total Ambac Financial Group, Inc. stockholders’ equity1,035 1,477 
Noncontrolling interest60 60 
Total stockholders’ equity1,095 1,536 
Total liabilities and stockholders’ equity$12,812 $13,320 
See accompanying Notes to Unaudited Consolidated Financial Statements
| Ambac Financial Group, Inc. 1 2020 Third Quarter FORM 10-Q |



AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Total Comprehensive Income (Loss) (Unaudited)
Three Months Ended September 30,Nine Months Ended September 30,
(Dollars in millions, except share data)2020201920202019
Revenues:
Net premiums earned$15 $10 $36 46 
Net investment income37 45 69 186 
Net realized investment gains (losses)2 18 20 71 
Net gains (losses) on derivative contracts7 (10)(61)(61)
Other income2 141 2 133 
Income (loss) on variable interest entities0 11 3 30 
Total revenues62 216 68 406 
Expenses:
Losses and loss expenses (benefit)83 37 216 (84)
Insurance intangible amortization14 17 41 280 
Operating expenses23 26 67 80 
Interest expense50 67 172 202 
Total expenses170 147 495 478 
Pre-tax income (loss)(108)69 (427)(72)
Provision (benefit) for income taxes0 (5)33 
Net income (loss) attributable to common stockholders$(108)$66 $(423)$(106)
Other comprehensive income (loss), after tax:
Net income (loss)$(108)$66 $(423)$(106)
Unrealized gains (losses) on securities, net of income tax provision (benefit) of $0, $1, $1 and $(7)42 31 1 103 
Gains (losses) on foreign currency translation, net of income tax provision (benefit) of $0, $0, $0 and $029 (24)(20)(28)
Credit risk changes of fair value option liabilities, net of income tax provision (benefit) of $0, $0, $0 and $00 2 
Changes to postretirement benefit, net of income tax provision (benefit) of $0, $0, $0 and $00 (3)
Total other comprehensive income (loss), net of income tax71 (20)75 
Total comprehensive income (loss) attributable to common stockholders$(37)$73 $(442)$(30)
Net income (loss) per share attributable to common stockholders:
Basic$(2.33)$1.44 $(9.16)$(2.30)
Diluted$(2.33)$1.41 $(9.16)$(2.30)
Weighted average number of common shares outstanding:
Basic46,178,730 45,997,694 46,135,399 45,939,284 
Diluted46,178,730 47,020,058 46,135,399 45,939,284 
See accompanying Notes to Unaudited Consolidated Financial Statements
| Ambac Financial Group, Inc. 2 2020 Third Quarter FORM 10-Q |



AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity (Unaudited)
Ambac Financial Group, Inc.
(Dollars in millions)TotalRetained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Preferred
Stock
Common
Stock
Additional Paid-in
Capital
Common
Stock Held
in Treasury,
at Cost
Noncontrolling
Interest
Balance at June 30, 2020$1,129 $881 $(48)$0 $0 $237 $(1)$60 
Total comprehensive income (loss)(37)(108)71 0 0 0 0 0 
Stock-based compensation3 0 0 0 0 3 0 0 
Cost of shares (acquired) issued under equity plan0 0 0 0 0 0 0 0 
Balance at September 30, 2020$1,095 $773 $22 $0 $0 $240 $(1)$60 
Balance at June 30, 2019$1,553 $1,247 $19 $$$227 $$60 
Total comprehensive income (loss)73 66 
Stock-based compensation
Balance at September 30, 2019$1,629 $1,313 $26 $0 $0 $229 $0 $60 
Ambac Financial Group, Inc.
(Dollars in millions)TotalRetained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Preferred
Stock
Common
Stock
Additional Paid-in
Capital
Common
Stock Held
in Treasury,
at Cost
Noncontrolling
Interest
Balance at January 1, 2020$1,536 $1,203 $42 $0 $0 $232 $0 $60 
Total comprehensive income (loss)(442)(423)(20)0 0 0 0 0 
Adjustment to initially apply ASU 2016-13(4)(4)0      
Stock-based compensation8 0 0 0 0 8 0 0 
Cost of shares (acquired) issued under equity plan(3)(2)0 0 0 0 (1)0 
Balance at September 30, 2020$1,095 $773 $22 $0 $0 $240 $(1)$60 
Balance at January 1, 2019$1,633 $1,421 $(49)$$$219 $$41 
Total comprehensive income (loss)(30)(106)75 
Stock-based compensation10 10 
Cost of shares (acquired) issued under equity plan(3)(3)
Exchange of auction market preferred shares19 19 
Balance at September 30, 2019$1,629 $1,313 $26 $0 $0 $229 $0 $60 
See accompanying Notes to Unaudited Consolidated Financial Statements
| Ambac Financial Group, Inc. 3 2020 Third Quarter FORM 10-Q |



AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30,
(Dollars in millions)20202019
Cash flows from operating activities:
Net income (loss)$(423)$(106)
Adjustments to reconcile net income to net cash used in operating activities:
Amortization of bond premium and discount(12)(59)
Share-based compensation8 10 
Deferred income taxes(5)(3)
Current income taxes9 28 
Unearned premiums, net(40)(118)
Losses and loss expenses, net78 (461)
Ceded premiums payable(2)(3)
Premium receivables44 81 
Accrued interest payable69 65 
Amortization of insurance intangible assets41 280 
Net mark-to-market (gains) losses1 (1)
Net realized investment gains(20)(71)
Variable interest entity activities(3)(30)
Derivative assets and liabilities15 
Other, net72 87 
Net cash used in operating activities(167)(296)
Cash flows from investing activities:
Proceeds from sales of bonds974 1,052 
Proceeds from matured bonds105 317 
Purchases of bonds(844)(866)
Proceeds from sales of other invested assets377 73 
Purchases of other invested assets(425)(135)
Change in short-term investments67 (235)
Change in cash collateral receivable(2)75 
Proceeds from paydowns of consolidated VIE assets142 512 
Other, net2 
Net cash provided by (used in) investing activities396 791 
Cash flows from financing activities:
Proceeds from issuance of Ambac UK debt0 12 
Paydowns of Ambac note(115)(29)
Issuance of auction market preferred shares of Ambac Assurance0 19 
Tax payments related to shares withheld for share-based compensation plans(3)(3)
Payments of consolidated VIE liabilities(143)(510)
Net cash used in financing activities(260)(511)
Effect of foreign exchange on cash, cash equivalents and restricted cash0 
Net cash flow(31)(16)
Cash, cash equivalents, and restricted cash at beginning of period81 83 
Cash, cash equivalents, and restricted cash at end of period$50 $68 
See accompanying Notes to Unaudited Consolidated Financial Statements
| Ambac Financial Group, Inc. 4 2020 Third Quarter FORM 10-Q |


AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

1. BACKGROUND AND BUSINESS DESCRIPTION
The following description provides an update of Note 1. Background and Business Description in the Notes to Consolidated Financial Statements included Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, and should be read in conjunction with the complete descriptions provided in the Form 10-K. Capitalized terms used, but not defined herein, and in the other footnotes to the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q shall have the meanings ascribed thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
Ambac Financial Group, Inc. (“AFG”), headquartered in New York City, is a financial services holding company incorporated in the state of Delaware on April 29, 1991. References to “Ambac,” the “Company,” “we,” “our,” and “us” are to AFG and its subsidiaries, as the context requires.
AFG’s insurance subsidiary, Ambac Assurance Corporation (“Ambac Assurance" or "AAC") and its subsidiary, Ambac Assurance UK Limited (“Ambac UK”), are both financial guarantee insurance companies in run-off. Ambac Assurance and Ambac UK's outstanding insurance policies generally guarantee payment when due of the principal and interest on the obligations guaranteed.
During the three month period ended September 30, 2020, AFG acquired its insurance subsidiary, Everspan Insurance Company ("Everspan"), from AAC repositioning it as a subsidiary of a new intermediary holding company that is directly owned by AFG. This was done in an effort to optimize the legal organization structure to support potential new property and casualty insurance business initiatives.
Management reviews financial information, allocates resources and measures financial performance on a consolidated basis. As a result, the Company has a single reportable segment.
Strategies to Enhance Shareholder Value
The Company's primary goal is to maximize shareholder value through executing the following key strategies:
Active runoff of Ambac Assurance and its subsidiaries through transaction terminations, policy commutations, reinsurance, settlements and restructurings, with a focus on our watch list credits and known and potential future adversely classified credits, that we believe will improve our risk profile, and maximizing the risk-adjusted return on invested assets;
Ongoing rationalization of Ambac's capital and liability structures;
Loss recovery through active litigation management and exercise of contractual and legal rights;
Ongoing review of the effectiveness and efficiency of Ambac's operating platform; and
Evaluation of opportunities in certain business sectors that meet acceptable criteria that will generate long-term stockholder value with attractive risk-adjusted returns.
With respect to our new business strategy, we continue to evaluate and pursue strategic opportunities in insurance, credit, asset management and other financial services that we believe would be synergistic to Ambac and would leverage our core competencies. While we have increased our efforts in evaluating such potential opportunities, we continue to be measured and disciplined in our approach as we seek to deploy our capital on opportunities that will generate sustainable long-term shareholder value. Although we are exploring new business opportunities for AFG, no assurance can be given that we will be able to identify or execute a suitable transaction and/or obtain the financial and other resources that may be required to finance an acquisition or develop any new businesses or assets. As a consequence of the novel coronavirus disease 2019 ("COVID-19") pandemic, risks associated with our new businesses strategy have increased given uncertainties related to the resulting global recession, increase in business risk in our target sectors and disruption to the capital markets. Due to these factors, as well as uncertainties relating to the ability of Ambac Assurance to deliver value to Ambac, the value of our securities remains speculative.
The execution of AFG’s strategy to extract and increase the value of its investment in Ambac Assurance is subject to the restrictions set forth in the Settlement Agreement, dated as of June 7, 2010 (the "Settlement Agreement"), by and among Ambac Assurance, Ambac Credit Products LLC ("ACP"), AFG and certain counterparties to credit default swaps with ACP that were guaranteed by Ambac Assurance, as well as the Stipulation and Order among the OCI (as defined below), AFG and Ambac Assurance that became effective on February 12, 2018, as amended (the “Stipulation and Order”), and in the indenture for the Tier 2 Notes issued by Ambac Assurance on February 12, 2018, each of which requires the Office of the Commissioner of Insurance for the State of Wisconsin (“OCI”) and, under certain circumstances, holders of the debt instruments benefiting from such restrictions, to approve certain actions taken by or in respect of Ambac Assurance. In exercising its approval rights, OCI will act for the benefit of policyholders, and will not take into account the interests of AFG. AFG's strategy to extract and increase the value of its investment in Ambac Assurance is also subject to significantly more risk and uncertainty due to the consequences of the COVID-19 pandemic on the global economy, issuers of debt insured by Ambac, and issuers of debt and other investments owned by Ambac. These consequences may include material losses in Ambac's insured and investment portfolios, higher earnings volatility, increased liquidity demands and greater counterparty risk.
Opportunities for remediating losses on poorly performing insured transactions also depend on market conditions, including the perception of Ambac Assurance’s creditworthiness, the structure of the underlying risk and associated policy as well as
| Ambac Financial Group, Inc. 5 2020 Third Quarter FORM 10-Q |


AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
other counterparty specific factors. Ambac Assurance's ability to commute policies or purchase certain investments may also be limited by available liquidity.
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The Company has disclosed its significant accounting policies in Note 2. Basis of Presentation and Significant Accounting Policies 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. The following significant accounting policies provide an update to those included in the Company’s Annual Report on Form 10-K.
Consolidation:
The consolidated financial statements include the accounts of AFG and all other entities in which AFG (directly or through its subsidiaries) has a controlling financial interest, including variable interest entities (“VIEs”) for which AFG or an AFG subsidiary is deemed the primary beneficiary in accordance with the Consolidation Topic of the Accounting Standards Codification ("ASC"). All significant intercompany balances have been eliminated. The usual condition for a controlling financial interest is ownership of a majority of the voting interests of an entity. However, a controlling financial interest may also exist in entities, such as VIEs, through arrangements that do not involve controlling voting interests. A VIE is an entity: a) that lacks enough equity investment at risk to permit the entity to finance its activities without additional subordinated financial support from other parties; or b) where the group of equity holders does not have: (1) the power, through voting rights or similar rights, to direct the activities of an entity that most significantly impact the entity’s economic performance; (2) the obligation to absorb the entity’s expected losses; or (3) the right to receive the entity’s expected residual returns. The determination of whether a variable interest holder is the primary beneficiary involves performing a qualitative analysis of the VIE that includes, among other factors, its capital structure, contractual terms including the rights of each variable interest holder, the activities of the VIE, whether the variable interest holder has the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, whether the variable interest holder has the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE, related party relationships and the design of the VIE. An entity that is deemed the primary beneficiary of a VIE is required to consolidate the VIE. See Note 3. Variable Interest Entities, for a detailed discussion of Ambac’s involvement in VIEs, Ambac’s methodology for determining whether Ambac is required to consolidate a VIE and the effects of VIEs being consolidated and deconsolidated.
Basis of Presentation:
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial reporting and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and disclosures required by GAAP for annual periods. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2019. The accompanying consolidated financial statements have not been audited by an independent registered public accounting firm in accordance with the standards of the Public Company Accounting Oversight Board (U.S.), but in the opinion of management such financial statements include all adjustments necessary for the fair presentation of the Company’s consolidated financial position and results of operations. The results of operations for the three and nine months ended September 30, 2020, may not be indicative of the results that may be expected for the year ending December 31, 2020. The December 31, 2019, consolidated balance sheet was derived from audited financial statements.
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. As additional information becomes available or actual amounts become determinable, the recorded estimates are revised and reflected in operating results.
Foreign Currency:
Financial statement accounts expressed in foreign currencies are translated into U.S. dollars in accordance with the Foreign Currency Matters Topic of the ASC. The functional currencies of AFG's subsidiaries are the local currencies of the country where the respective subsidiaries are based, which are also the primary operating environments in which the subsidiaries operate.
Foreign currency translation: Functional currency assets and liabilities of AFG’s foreign subsidiaries are translated into U.S. dollars using exchange rates in effect at the balance sheet dates and the related translation adjustments, net of deferred taxes, are included as a component of Accumulated Other Comprehensive Income in Stockholders' Equity. Functional currency operating results of foreign subsidiaries are translated using average exchange rates.
Foreign currency transactions: The impact of non-functional currency transactions and the remeasurement of non-functional currency assets and liabilities into the respective subsidiaries' functional currency (collectively "foreign currency transactions gains/(losses)") are $2 and $19 for the nine months ended September 30, 2020 and 2019, respectively. Foreign currency transactions gains/(losses) are primarily the result of remeasuring Ambac UK's assets and liabilities denominated in currencies other than its functional currency, primarily the U.S. dollar and the Euro.
| Ambac Financial Group, Inc. 6 2020 Third Quarter FORM 10-Q |


AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Supplemental Disclosure of Cash Flow InformationNine Months Ended September 30,
20202019
Cash paid during the period for:
Income taxes$11 $11 
Interest on long-term debt83 110 
Non-cash financing activities:
Exchange of investments in Puerto Rico COFINA bonds for new bonds issued in the Plan of Adjustment$�� $510 
September 30,
20202019
Reconciliation of cash, cash equivalents, and restricted cash reported within the Consolidated Balance Sheets to the Consolidated Statements of Cash Flows:
Cash and cash equivalents$37 $52 
Restricted cash10 13 
Variable Interest Entity Restricted cash2 
Total cash, cash equivalents, and restricted cash shown on the Consolidated Statements of Cash Flows$50 $68 

Reclassifications and Rounding
Reclassifications may have been made to prior years' amounts to conform to the current year's presentation. Certain amounts and tables in the consolidated financial statements and associated notes may not add due to rounding.
Adopted Accounting Standards:
Effective January 1, 2020, the Company adopted the following accounting standards:
Measurement of Credit Losses on Financial Instruments (CECL)
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments, subsequently amended by ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses; ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments; ASU 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief; and ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses (collectively the Current Expected Credit Loss standard or "CECL")
The new CECL standard affects how reporting entities measure credit losses for financial assets that are not accounted for at fair value through net income. For Ambac, these financial assets include available-for-sale debt securities and amortized cost assets, specifically premium receivables, reinsurance recoverables and loans. CECL does not apply to recoveries of previously paid losses on financial guarantee insurance contracts accounted for under ASC 944 nor does it apply to equity method investments accounted for under ASC 323.
For available-for-sale debt securities, the updated guidance was applied prospectively and for financial instruments measured at amortized cost, the updated guidance was applied by a cumulative effect adjustment to the opening balance of retained earnings at
January 1, 2020. This adjustment was not material to retained earnings or any individual balance sheet line item.
As a result of adopting CECL, management revised its policies and procedures around the credit impairment evaluation process. CECL also introduced new disclosures related to the credit impairment process, including certain accounting policy elections that Ambac made under the the new standard. Enhanced disclosures related to accounting policies for each type of asset impacted by CECL are discussed below. The disclosures below should be read in conjunction with disclosures in Note 2. Basis of Presentation and Significant Accounting Policies, Note 6. Financial Guarantee Insurance Contracts and Note 8. Investments 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.
Available-for-Sale Debt Securities
For available-for-sale debt securities, credit losses under CECL are measured similarly to other-than-temporary impairments under prior GAAP. However, under CECL, the recognition of credit losses for available-for-sale debt securities will be recorded as an allowance for credit losses with an offsetting charge to net income, rather than as a direct write-down of the security as was required under prior GAAP. As a result, improvements to estimated credit losses for available-for-sale debt securities will be recognized immediately in net income rather than as interest income over time. Furthermore, as required under CECL, Ambac no longer considers the length of time a security has continuously been in an unrealized loss in the credit impairment process.
Ambac has made certain accounting policy elections related to accrued interest receivable ("AIR") for available-for-sale investments under CECL, which are consistent with past practices under prior GAAP. Elections include: i) not measuring AIR for credit impairment, instead AIR is written off when it becomes 90 days past due; ii) writing off AIR by reversing interest income; iii) presenting AIR separately in Other Assets on the balance sheet and iv) excluding AIR from amortized cost balances in
| Ambac Financial Group, Inc. 7 2020 Third Quarter FORM 10-Q |


AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
required CECL disclosures found in Note 8. Investments. AIR at September 30, 2020 was $10.
Refer to Note 8. Investments for further credit impairment disclosures.
Amortized cost assets
For financial assets measured at amortized cost, CECL replaces the "incurred loss" model used for certain types of assets which generally delayed recognition of the full amount of credit losses until the loss was probable of occurring, with an "expected loss" model, which reflects an entity's current estimate of all expected lifetime credit losses. The estimate of expected lifetime credit losses should consider historical information, current information, as well as reasonable and supportable forecasts. Expected lifetime credit losses for amortized cost assets will be recorded as an allowance for credit losses, with subsequent increases or decreases in the allowance reflected in net income each period. The CECL measurement approach for Ambac's affected asset types were not materially different than the approaches under prior GAAP. Refer to the discussion below for each asset type.
Premium receivables. For financial guarantee contracts, the issuer's ability and willingness to pay its insured debt obligation impacts the payment of policy losses by Ambac as well as the receipt of premiums from the issuer. As such, management leverages its existing loss reserve estimation process to evaluate credit impairment for premium receivables. Key factors in assessing credit impairment include historical premium collection data, internal risk classifications, credit ratings and loss severities. For structured finance transactions involving special purpose entities, we further evaluate the priority of premiums paid to Ambac within the contractual waterfall, as required by bond indentures.
Management utilizes either a discounted cash flow ("DCF") or probability of default/loss given default ("PD/LGD") approach to estimate credit impairment. The DCF approach utilizes expected cash flows developed by Ambac's Risk Management Group using the same (or similar) models used for estimating loss reserves where such models can identify shortfalls in premiums. Credit impairment using the DCF approach is equal to the difference between amortized cost and the present value of expected cash flows. Credit impairment under the PD/LGD approach is the product of (i) the premium receivable carrying value, (ii) internally developed default probability (considering internal ratings and average life), and (iii) internally developed loss severities.
Refer to Note 6. Financial Guarantee Insurance Contracts for further credit impairment disclosures.
Loans. The key factors in assessing credit impairment for loans are internal credit ratings and loss severities. Management utilizes a PD/LGD approach, similar to the one described above for premium receivables, which is applied to the loan carrying value.
Reinsurance recoverables. Ambac has elected the to use the practical expedient of considering the fair value of collateral posted by reinsurers when evaluating credit impairment. To determine the total unsecured recoverable to be evaluated for
impairment, Ambac nets the reinsurance recoverable amount by ceded premiums payable and the fair value of collateral posted, if any.
The key factors in assessing credit impairment for reinsurance recoverables are independent rating agency credit ratings and loss severities. Management utilizes a PD/LGD approach, similar to the one described above for premium receivables, which is applied to the net unsecured reinsurance recoverable amount.
Refer to Note 6. Financial Guarantee Insurance Contracts for further credit impairment disclosures.
Fair Value Measurement Disclosures
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The ASU modified various disclosure requirements on fair value measurements. Relevant disclosures that were removed, modified and added are as follows:
Removals: 1) Amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, 2) Policy for timing of transfers between levels, and 3) Valuation processes for Level 3 fair value measurements.
Modifications: 1) For investments in certain entities that calculate net asset value, disclosures are required for the timing of liquidation of an investee's assets and the date when restrictions from redemption might lapse, only if the investee has communicated the timing to the reporting entity or publicly announced it and 2) Clarification that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date and not possible future changes.
Additions: 1) Changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and 2) Range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. Alternatively, an entity may disclose other quantitative information (such as the median or arithmetic average) if it determines that it is a more reasonable and rational method to reflect the distribution of unobservable inputs used.
Disclosure amendments related to changes in unrealized gains and losses included in other comprehensive income (loss) for Level 3 instruments, the range and weighted average of significant unobservable inputs, and the narrative description of measurement uncertainty were applied prospectively only for the most recent interim or annual period presented. All other disclosure amendments were applied retrospectively to all periods presented.
Refer to Note 7. Fair Value Measurements for further disclosures.
VIE Related Party Guidance
In October 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810) - Targeted Improvements to Related Party Guidance for Variable Interest Entities. To determine whether a decision-
| Ambac Financial Group, Inc. 8 2020 Third Quarter FORM 10-Q |


AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
making fee is a variable interest, under the new guidance a reporting entity must consider indirect interests held through related parties under common control on a proportional basis rather than as a direct interest in its entirety (as was previously required under prior GAAP). These amendments create alignment between determining whether a decision making fee is a variable interest and determining whether a reporting entity within a related party group is the primary beneficiary of a VIE. Adoption of this ASU did not impact Ambac's financial statements.
Cloud Computing Arrangement Service Contracts
In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other— Internal-Use Software (Subtopic 350-40) - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The new guidance requires a customer in a cloud computing arrangement that is a service contract to capitalize certain implementation costs as if the arrangement was an internal-use software project. The internal-use software guidance requires the capitalization of certain costs incurred only during the application development stage. That guidance also requires entities to expense costs during the preliminary project and post-implementation stages as they are incurred. Adoption of this ASU did not impact Ambac's financial statements.
Future Application of Accounting Standards:
Reference Rate Reform
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU provides companies with optional guidance to ease the potential accounting burden related to transitioning away from reference rates, such as LIBOR, that are expected to be discontinued as a result of initiatives undertaken by various jurisdictions around the world. For example, under current GAAP, contract modifications which change a reference rate are required to be evaluated in determining whether the modifications result in the establishment of new contracts or the continuation of existing contracts. The amendments in this ASU provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The ASU can be applied prospectively as of the beginning of the interim period that includes March 12, 2020, (January 1, 2020 for calendar year companies) or any date thereafter, but does not apply to contract modifications and other transactions entered into or evaluated after December 31, 2022. Management has not determined if and when it will adopt this ASU, and the impact on Ambac's financial statements is being evaluated.
3. VARIABLE INTEREST ENTITIES
Ambac, with its subsidiaries, has engaged in transactions with variable interest entities ("VIEs,") in various capacities.
Ambac provides financial guarantees, including credit derivative contracts, for various debt obligations issued by special purpose entities, including VIEs ("FG VIEs");
Ambac sponsors special purpose entities that issued notes to investors for various purposes; and
Ambac is an investor in collateralized debt obligations, mortgage-backed and other asset-backed securities issued by VIEs and its ownership interest is generally insignificant to the VIE and/or Ambac does not have rights that direct the activities that are most significant to such VIE.
FG VIEs:
Ambac’s subsidiaries provide financial guarantees in respect of assets held or debt obligations of VIEs. Ambac’s primary variable interest exists through this financial guarantee insurance or credit derivative contract. The transaction structures provide certain financial protection to Ambac. Generally, upon deterioration in the performance of a transaction or upon an event of default as specified in the transaction legal documents, Ambac will obtain certain control rights that enable Ambac to remediate losses. These rights may enable Ambac to direct the activities of the entity that most significantly impact the entity’s economic performance. Under a 2018 Stipulation and Order, the OCI requires Ambac Assurance to obtain their approval with respect to the exercise of certain significant control rights in connection with policies that had previously been allocated to the Segregated Account. Accordingly, Ambac Assurance does not have the right to direct the most significant activities of those FG VIEs.
We determined that Ambac’s subsidiaries generally have the obligation to absorb a FG VIE's expected losses given that they have issued financial guarantees supporting certain liabilities (and in some cases certain assets). As further described below, Ambac consolidates certain FG VIEs in cases where we also have the power to direct the activities that most significantly impact the VIE’s economic performance due to one or more of the following: (i) the transaction experiencing deterioration and breaching performance triggers, giving Ambac the ability to exercise certain control rights, (ii) Ambac being involved in the design of the VIE and receiving control rights from its inception, such as may occur from loss remediation activities, or (iii) the transaction not experiencing deterioration, however due to the passive nature of the VIE, Ambac's contingent control rights upon a future breach of performance triggers is considered to be the power over the most significant activity.
A VIE is deconsolidated in the period that Ambac no longer has such control rights, which could occur in connection with the execution of remediation activities on the transaction or amortization of insured exposure, either of which may reduce the degree of Ambac’s control over a VIE.
Assets and liabilities of FG VIEs that are consolidated are reported within Variable interest entity assets or Variable interest entity liabilities on the Consolidated Balance Sheets.
The election to use the fair value option is made on an instrument by instrument basis. Ambac has elected the fair value option for consolidated FG VIE financial assets and financial liabilities, except in cases where Ambac was involved in the design of the VIE and was granted control rights at its inception.
When the fair value option is elected, changes in the fair value of the FG VIE's financial assets and liabilities
| Ambac Financial Group, Inc. 9 2020 Third Quarter FORM 10-Q |


AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
are reported within Income (loss) on variable interest entities in the Consolidated Statements of Total Comprehensive Income (Loss), except for the portion of the total change in fair value of financial liabilities caused by changes in the instrument-specific credit risk which is presented separately in Other comprehensive income (loss).
In cases where the fair value option has not been elected, the FG VIE's invested assets are fixed income securities and are considered available-for-sale as defined by the Investments - Debt Securities Topic of the ASC. These assets are reported in the financial statements at fair value with unrealized gains and losses reflected in Accumulated Other Comprehensive Income in Stockholders' Equity. The financial liabilities of these FG VIEs consist of long term debt obligations and are carried at par less unamortized discount. Income from the FG VIE's available-for-sale securities (including investment income, realized gains and losses and credit impairments as applicable) and interest expense on long term debt are reported within Income (loss) on variable interest entities in the Consolidated Statements of Total Comprehensive Income (Loss).
Upon initial consolidation of a FG VIE, Ambac recognizes a gain or loss in earnings for the difference between: (i) the fair value of the consideration paid, the fair value of any non-controlling interests and the reported amount of any previously held interests and (ii) the net amount, as measured on a fair value basis, of the assets and liabilities consolidated. Upon deconsolidation of a FG VIE, we recognize a gain or loss for the difference between: (i) the fair value of any consideration received, the fair value of any retained non-controlling investment in the VIE and the carrying amount of any non-controlling interest in the VIE and (ii) the carrying amount of the VIE’s assets and liabilities. Gains or losses from consolidation and deconsolidation that are reported in earnings are reported within Income (loss) on variable interest entities on the Consolidated Statements of Total Comprehensive Income (Loss).
The impact of consolidating such FG VIEs on Ambac’s balance sheet is the elimination of transactions between the
consolidated FG VIEs and Ambac’s operating subsidiaries and the inclusion of the FG VIE’s third party assets and liabilities. For a financial guarantee insurance policy issued to a consolidated VIE, Ambac does not reflect the financial guarantee insurance policy in accordance with the related insurance accounting rules under the Financial Services – Insurance Topic of the ASC. Consequently, upon consolidation, Ambac eliminates the insurance assets and liabilities associated with the policy from the Consolidated Balance Sheets. Such insurance assets and liabilities may include premium receivables, reinsurance recoverable, deferred ceded premium, subrogation recoverable, unearned premiums, loss and loss expense reserves, ceded premiums payable and insurance intangible assets. For investment securities owned by Ambac that are debt instruments issued by the VIE, the investment securities balance is eliminated upon consolidation.
FG VIEs which are consolidated may include non-recourse assets or liabilities. FG VIEs' liabilities (and in some cases assets) that are insured by the Company are with recourse, because the Company guarantees the payment of principal and interest in the event the issuer defaults. FG VIEs' assets and liabilities that are not insured by the Company are without recourse, because Ambac has not issued a financial guarantee and is under no obligation for the payment of principal and interest of these instruments. Therefore, the Company’s exposure to consolidated FG VIEs is limited to the financial guarantees issued for recourse assets and liabilities and any additional variable interests held by Ambac. Additionally, Ambac’s general creditors, other than those specific policy holders which own the VIE debt obligations, do not have rights with regard to the assets of the VIEs. Ambac evaluates the net income effects and earnings per share effects to determine attributions between Ambac and non-controlling interests as a result of consolidating a VIE. Ambac has determined that the net income and earnings per share effect of consolidated FG VIEs are attributable to Ambac’s interests through financial guarantee premium and loss payments with the VIE.
| Ambac Financial Group, Inc. 10 2020 Third Quarter FORM 10-Q |


AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

The following table summarizes the carrying values of assets and liabilities, along with other supplemental information related to VIEs that are consolidated as a result of financial guarantees of Ambac UK and Ambac Assurance:
September 30, 2020December 31, 2019
Ambac UKAmbac AssuranceTotal VIEsAmbac UKAmbac AssuranceTotal VIEs
Fixed income securities, at fair value:
Corporate obligations, fair value option$3,029 $0 $3,029 $2,957 $$2,957 
Municipal obligations, available-for-sale (1)
0 131 131 164 164 
Total FG VIE fixed income securities, at fair value3,029 131 3,160 2,957 164 3,121 
Restricted cash1 1 2 
Loans, at fair value (2)
2,783 0 2,783 3,108 3,108 
Derivative assets53 0 53 52 52 
Other assets0 1 1 
Total FG VIE assets$5,865 $133 $5,998 $6,119 $167 $6,286 
Accrued interest payable$0 $0 $0 $$$
Long-term debt:
Long-term debt, at fair value (3)
4,002 0 4,002 4,351 4,351 
Long-term debt, at par less unamortized discount0 167 167 203 203 
Total long-term debt4,002 167 4,169 4,351 203 4,554 
Derivative liabilities1,771 0 1,771 1,657 1,657 
Total FG VIE liabilities$5,773 $167 $5,940 $6,009 $203 $6,212 
Number of FG VIEs consolidated5 1 6 
(1)Available-for-sale FG VIE fixed income securities consist of municipal obligations with an amortized cost basis of $112 and $139, and aggregate gross unrealized gains of $19 and $25 at September 30, 2020 and December 31, 2019, respectively. All such securities had contractual maturities due after ten years as of September 30, 2020.
(2)The unpaid principal balances of loan assets carried at fair value were $2,450 as of September 30, 2020 and $2,618 as of December 31, 2019.
(3)The unpaid principal balances of long-term debt carried at fair value were $3,604 as of September 30, 2020 and $3,800 as of December 31, 2019.
The following schedule details the components of Income (loss) on variable interest entities for the affected periods:
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Net change in fair value of VIE assets and liabilities reported under the fair value option$(1)$$(3)$
Less: Credit risk changes of fair value option long-term debt reported through other comprehensive income (loss)0 (2)
Net change in fair value of VIE assets and liabilities reported in earnings0 (5)
Investment income on available-for-sale securities2 5 
Net realized investment gains (losses) on available-for-sale securities0 12 8 13 
Interest expense on long-term debt carried at par less unamortized cost(1)(3)(5)(9)
Other expenses0 0 (1)
Gain (loss) from consolidating FG VIEs0 0 15 
Gain (loss) from de-consolidating FG VIEs0 (2)0 (2)
Income (loss) on variable interest entities$0 $11 $3 $30 
Ambac did not consolidate any new VIE for the three and nine months ended September 30, 2020. Ambac deconsolidated 0 VIE for the three months ended September 30, 2020, 1 VIE for the nine months ended September 30, 2020, and 1 VIE for the three and nine months ended September 30, 2019. These VIEs were deconsolidated as a result of the financial guarantee policy termination or guaranteed bond retirement, and resulted in the gain (loss) on deconsolidation noted in the above table.
| Ambac Financial Group, Inc. 11 2020 Third Quarter FORM 10-Q |


AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
The following table displays the carrying amount of the assets, liabilities and maximum exposure to loss of Ambac’s variable interests in non-consolidated VIEs resulting from financial guarantee and derivative contracts by major underlying asset classes, as of September 30, 2020 and December 31, 2019:
Carrying Value of Assets and Liabilities
Maximum
Exposure
To Loss
(1)
Insurance
Assets
(2)
Insurance
Liabilities
(3)
Net Derivative
Assets (Liabilities) 
(4)
September 30, 2020:
Global structured finance:
Mortgage-backed—residential$4,535 $2,063 $604 $0 
Other consumer asset-backed1,120 26 240 0 
Other commercial asset-backed52 3 1 0 
Other991 0 15 8 
Total global structured finance6,698 2,093 860 8 
Global public finance22,183 268 316 (1)
Total$28,881 $2,361 $1,177 $7 
December 31, 2019:
Global structured finance:
Mortgage-backed—residential$5,373 $1,913 $523 $
Other consumer asset-backed1,373 31 216 
Other commercial asset-backed314 
Other1,107 18 
Total global structured finance8,165 1,961 762 
Global public finance23,341 287 321 
Total$31,506 $2,247 $1,083 $7 
(1)Maximum exposure to loss represents the maximum future payments of principal and interest on insured obligations and derivative contracts. Ambac’s maximum exposure to loss does not include the benefit of any financial instruments (such as reinsurance or hedge contracts) that Ambac may utilize to mitigate the risks associated with these variable interests.
(2)Insurance assets represent the amount included in “Premium receivables” and “Subrogation recoverable” for financial guarantee insurance contracts on Ambac’s Consolidated Balance Sheets.
(3)Insurance liabilities represent the amount included in “Loss and loss expense reserves” and “Unearned premiums” for financial guarantee insurance contracts on Ambac’s Consolidated Balance Sheets.
(4)Net derivative assets (liabilities) represent the fair value recognized on credit derivative contracts and interest rate swaps on Ambac’s Consolidated Balance Sheets.

Ambac Sponsored Non-consolidated VIEs:
In 1994, Ambac established a VIE to provide certain financial guarantee clients with funding for their debt obligations. This VIE was established as a separate legal entity, demonstrably distinct from Ambac and that Ambac, its affiliates or its agents could not unilaterally dissolve. The permitted activities of this entity are contractually limited to purchasing assets from Ambac, issuing medium-term notes ("MTNs") to fund such purchases, executing derivative hedges and obtaining financial guarantee policies with respect to indebtedness incurred. Ambac does not consolidate this entity because the exercise of related control rights in such policies remain subject to OCI approval under the Stipulation and Order, as discussed above. Ambac elected to account for its equity interest in this entity at fair value under the fair value option in accordance with the Financial Instruments Topic of the ASC. We believe that the fair value of the investments in this entity provides for greater transparency for recording profit or loss as compared to the equity method under the Investments – Equity Method and Joint Ventures Topic of the ASC. At
September 30, 2020 and December 31, 2019, the fair value of this entity was $2 and $3, respectively, and is reported within Other assets on the Consolidated Balance Sheets.
Total principal amount of debt outstanding was $392 and $403 at September 30, 2020 and December 31, 2019, respectively. In each case, Ambac sold assets to this entity, which are composed of utility obligations with a weighted average rating of BBB+ at September 30, 2020, and weighted average life of 0.4 years. The purchase by this entity of financial assets was financed through the issuance of MTNs, which are cross-collateralized by the purchased assets. The MTNs have the same expected weighted average life as the purchased assets. Derivative contracts (interest rate swaps) are used within the entity for economic hedging purposes only. Derivative positions were established at the time MTNs were issued to purchase financial assets. As of September 30, 2020, Ambac Assurance had financial
| Ambac Financial Group, Inc. 12 2020 Third Quarter FORM 10-Q |


AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
guarantee insurance policies issued for all assets, MTNs and derivative contracts owned and outstanding by the entity.
Insurance premiums paid to Ambac Assurance by this entity are earned in a manner consistent with other insurance policies, over the risk period. Additionally, any losses incurred on such insurance policies are included in Ambac’s Consolidated Statements of Total Comprehensive Income (Loss). Under the terms of an Administrative Agency Agreement, Ambac provides certain administrative duties, primarily collecting amounts due on the obligations and making interest payments on the MTNs.
On August 28, 2014, Ambac monetized its ownership of the junior surplus note issued to it by Ambac Assurance by depositing the junior surplus note into a newly formed VIE trust in exchange for cash and an owner trust certificate, which represents Ambac's right to residual cash flows from the junior surplus note. Ambac does not consolidate the VIE since it does not have a variable interest in the trust. Ambac reports its owner trust certificate as an equity investment within Other investments
on the Consolidated Balance Sheets with associated results from operations included within Net investment income (loss): Other investments on the Consolidated Statements of Total Comprehensive Income (Loss). The equity investment had a carrying value of $49 and $46 as of September 30, 2020 and December 31, 2019, respectively.
On February 12, 2018, Ambac formed a VIE, Ambac LSNI, LLC ("Ambac LSNI"). Ambac LSNI issued Secured Notes in connection with the Rehabilitation Exit Transactions. Ambac does not consolidate the VIE since it does not have a variable interest in the trust. Ambac reports its holdings of Secured Notes within Fixed Income Securities in the Consolidated Balance Sheets. The carrying value of Secured Notes held by Ambac was $470 and $535 at September 30, 2020 and December 31, 2019, respectively. Ambac's debt obligation to the VIE (the Ambac Note) had a carrying value of $1,648 and $1,763 at September 30, 2020 and December 31, 2019, respectively, and is reported within Long-term debt on the Consolidated Balance Sheets.
4. COMPREHENSIVE INCOME
The following tables detail the changes in the balances of each component of accumulated other comprehensive income for the affected periods:
Unrealized Gains
(Losses) on
Available for
Sale Securities
(1)
Amortization of
Postretirement
Benefit
(1)
Gain (Loss) on
Foreign Currency
Translation
(1)
Credit Risk Changes of Fair Value Option Liabilities (1) (2)
Total
Three Months Ended September 30, 2020:
Beginning Balance$109 $6 $(164)$0 $(48)
Other comprehensive income (loss) before reclassifications45 0 29 0 74 
Amounts reclassified from accumulated other comprehensive income (loss)(2)0 0 0 (3)
Net current period other comprehensive income (loss)42 0 29 0 71 
Balance at September 30, 2020$152 $6 $(135)$0 $22 
Three Months Ended September 30, 2019:
Beginning Balance$157 $$(145)$(2)$19 
Other comprehensive income (loss) before reclassifications50 (24)26 
Amounts reclassified from accumulated other comprehensive income (loss)(18)(19)
Net current period other comprehensive income (loss)31 (24)
Balance at September 30, 2019$189 $9 $(169)$(2)$26 
| Ambac Financial Group, Inc. 13 2020 Third Quarter FORM 10-Q |


AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Unrealized Gains
(Losses) on
Available for
Sale Securities
(1)
Amortization of
Postretirement
Benefit
(1)
Gain (Loss) on
Foreign Currency
Translation
(1)
Credit Risk Changes of Fair Value Option Liabilities (1) (2)
Total
Nine Months Ended September 30, 2020:
Beginning Balance$151 $8 $(116)$(2)$42 
Other comprehensive income (loss) before reclassifications20 (2)(20)0 (2)
Amounts reclassified from accumulated other comprehensive income (loss)(19)(1)0 2 (18)
Net current period other comprehensive income (loss)1 (3)(20)2 (20)
Balance at September 30, 2020$152 $6 $(135)$0 $22 
Nine Months Ended September 30, 2019:
Beginning Balance$86 $$(142)$(2)$(49)
Other comprehensive income before reclassifications174 (28)147 
Amounts reclassified from accumulated other comprehensive income(71)(1)(72)
Net current period other comprehensive income$103 $$(28)$$75 
Balance at September 30, 2019$189 $9 $(169)$(2)$26 
(1)All amounts are net of tax and noncontrolling interest. Amounts in parentheses indicate reductions to Accumulated Other Comprehensive Income.
(2)Represents the changes in fair value attributable to instrument-specific credit risk of liabilities for which the fair value option is elected.

The following table details the significant amounts reclassified from each component of accumulated other comprehensive income, shown in the above rollforward tables, for the affected periods:
Details about Accumulated
Other Comprehensive
Income Components
Amount Reclassified from Accumulated Other Comprehensive IncomeAffected Line Item in the
Consolidated Statement of
Total Comprehensive Income (Loss)
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Unrealized Gains (Losses) on Available-for-Sale Securities
$(2)$(20)$(20)$(77)Net realized investment gains (losses) and other-than-temporary impairment losses
0 1 Provision for income taxes
$(2)$(18)$(19)$(71)Net of tax and noncontrolling interest
Amortization of Postretirement Benefit
Prior service cost$0 $$(1)$(1)
Other income 
Actuarial (losses)0 0 
Other income 
0 (1)(1)Total before tax
0 0 Provision for income taxes
$0 $0 $(1)$(1)Net of tax and noncontrolling interest
Credit risk changes of fair value option liabilities
$0 $$2 $Credit Risk Changes of Fair Value Option Liabilities
0 0 Provision for income taxes
$0 $$2 $Net of tax and noncontrolling interest
Total reclassifications for the period$(3)$(19)$(18)$(72)Net of tax and noncontrolling interest 

5. NET INCOME PER SHARE
As of September 30, 2020, 45,809,139 shares of Ambac's common stock (par value $0.01) and warrants entitling holders to acquire up to 4,877,749 shares of new common stock at an exercise price of $16.67 per share were issued and outstanding. Common shares outstanding increased by 253,739 during the nine
months ended September 30, 2020, primarily due to settlements of employee restricted and performance stock units.
Basic net income per share is computed by dividing net income attributable to common stockholders by the weighted-average number of common shares outstanding and vested restricted stock units (together, "Basic Weighted Average Shares Outstanding").
| Ambac Financial Group, Inc. 14 2020 Third Quarter FORM 10-Q |


AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Diluted net income per share is computed by dividing net income attributable to common stockholders by the Basic Weighted Average Shares Outstanding plus all potential dilutive common shares outstanding during the period. All potential dilutive common shares outstanding consider common stock deliverable
pursuant to warrants, vested and unvested options, unvested restricted stock units and performance stock units granted under existing compensation plans.

The following table provides a reconciliation of the common shares used for basic net income per share to the diluted shares used for diluted net income per share:
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Basic weighted average shares outstanding46,178,730 45,997,694 46,135,399 45,939,284 
Effect of potential dilutive shares (1):
Stock options0 0 
Warrants0 450,384 0 
Restricted stock units0 78,751 0 
Performance stock units (2)
0 493,229 0 
Diluted weighted average shares outstanding46,178,730 47,020,058 46,135,399 45,939,284 
Anti-dilutive shares excluded from the above reconciliation:
Stock options16,667 16,667 16,667 16,667 
Warrants4,877,749 4,877,754 4,877,783 
Restricted stock units333,526 286,279 249,025 
Performance stock units (2)
972,138 932,777 748,700 
(1)    For the three and nine months ended September 30, 2020, and the nine months ended September 30, 2019, Ambac had a net loss and accordingly excluded all potentially dilutive securities from the determination of diluted loss per share as their impact was anti-dilutive.
(2)    Performance stock units are reflected based on the performance metrics through the balance sheet date. Vesting of these units is contingent upon meeting certain performance metrics. Although a portion of these performance metrics have been achieved as of the respective period end, it is possible that awards may no longer meet the metric at the end of the performance period.
6. FINANCIAL GUARANTEE INSURANCE CONTRACTS
Amounts presented in this Note relate only to Ambac’s non-derivative insurance business for insurance policies issued to beneficiaries, including VIEs, for which we do not consolidate the VIE.
Net Premiums Earned:
Gross premiums are received either upfront or in installments. For premiums received upfront, an unearned premium revenue (“UPR”) liability is established, which is initially recorded as the cash amount received. For installment premium transactions, a premium receivable asset and offsetting UPR liability is initially established in an amount equal to: (i) the present value of future contractual premiums due (the “contractual” method) or (ii) if the assets underlying the insured obligation are homogenous pools which are contractually prepayable, the present value of premiums to be collected over the expected life of the transaction (the “expected” method). An appropriate risk-free rate corresponding to the weighted average life of each policy and currency is used to discount the future premiums contractually due or expected to be collected. For example, U.S. dollar exposures are discounted using U.S. Treasury rates. The weighted average risk-free rate at September 30, 2020 and December 31, 2019, was 2.2% and 2.4%, respectively, and the weighted average period of future premiums used to estimate the premium
receivable at September 30, 2020 and December 31, 2019, was 8.5 years and 8.5 years years, respectively.
Below is the gross premium receivable roll-forward for the respective periods, net of allowance for credit losses:
Nine Months Ended September 30,
20202019
Beginning premium receivable$416 $495 
Adjustment to initially apply ASU 2016-13(3)— 
Premium receipts(36)(37)
Adjustments for changes in expected and contractual cash flows (1)
(4)(33)
Accretion of premium receivable discount7 
Deconsolidation of certain VIEs 
Changes to allowance for credit losses(5)(7)
Other adjustments (including foreign exchange)(2)(16)
Ending premium receivable (2)
$372 $415 
(1)    Adjustments for changes in expected and contractual cash flows primarily due to reductions in insured exposure as a result of early policy terminations and unscheduled principal paydowns.
(2)    Premium receivable includes premiums to be received in foreign denominated currencies most notably in British Pounds and Euros.
| Ambac Financial Group, Inc. 15 2020 Third Quarter FORM 10-Q |


AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
At September 30, 2020 and 2019, premium receivables include British Pounds of $112 (£87) and $124 (£101), respectively, and Euros of $21 (€18) and $22 (€20), respectively.
When a bond issue insured by Ambac Assurance has been retired early, typically due to an issuer call, any remaining UPR is recognized at that time to the extent the financial guarantee contract is legally extinguished, causing accelerated premium revenue. For installment premium paying transactions, we offset the recognition of any remaining UPR by the reduction of the related premium receivable to zero (as it will not be collected as a result of the retirement), which may cause negative accelerated premium revenue. Ambac’s accelerated premium revenue for retired obligations for the three and nine months ended September 30, 2020, was $5 and $6, respectively and for the three and nine months ended September 30, 2019, was $2 and $8.
The effect of reinsurance on premiums written and earned for the respective periods was as follows:
Three Months Ended September 30,
20202019
WrittenEarnedWrittenEarned
Direct$(13)$18 $(13)$13 
Assumed0 0 
Ceded0 3 23 
Net premiums$(13)$15 $(36)$10 
Nine Months Ended September 30,
20202019
WrittenEarnedWrittenEarned
Direct$(2)$45 $(31)$53 
Assumed0 1 
Ceded(1)9 22 
Net premiums$(2)$36 $(53)$46 

The following table summarizes net premiums earned by location of risk for the respective periods:
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
United States$9 $11 $24 $44 
United Kingdom7 15 13 
Other international(1)(4)(2)(11)
Total$15 $10 $36 $46 
The table below summarizes the future gross undiscounted premiums to be collected and future premiums earned, net of reinsurance at September 30, 2020:
Future Premiums
to be
Collected (1)
Future
Premiums to
be Earned Net of
Reinsurance
(2)
Three months ended:
December 31, 2020$11 $10 
Twelve months ended:
December 31, 202136 35 
December 31, 202234 33 
December 31, 202333 30 
December 31, 202431 29 
Five years ended:
December 31, 2029138 120 
December 31, 2034101 81 
December 31, 203950 37 
December 31, 204422 14 
December 31, 20499 5 
December 31, 20541 1 
Total$467 $395 
(1)Future premiums to be collected are undiscounted, gross of allowance for credit losses, and are used to derive the discounted premium receivable asset recorded on Ambac's balance sheet.
(2)Future premiums to be earned, net of reinsurance relate to the unearned premiums liability and deferred ceded premium asset recorded on Ambac’s balance sheet. The use of contractual lives for many bond types which do not have homogeneous pools of underlying collateral is required in the calculation of the premium receivable, as further described in Note 2. Basis of Presentation and Significant Accounting Policies in the Notes to Consolidated Financial Statements included in Ambac's Annual Report on Form 10-K for the year ended December 31, 2019. This results in a different premium receivable balance than if expected lives were considered. If installment paying policies are retired or prepay early, premiums reflected in the premium receivable asset and amounts reported in the above table for such policies may not be collected. Future premiums to be earned also considers the use of contractual lives for many bond types which do not have homogeneous pools of underlying collateral, which may result in different unearned premium than if expected lives were considered. If those bonds types are retired early, premium earnings may be negative in the period of call or refinancing.

Credit impairment (Premium receivables and reinsurance recoverables):
Management evaluates premium receivables and reinsurance recoverables for expected credit losses ("credit impairment") in accordance with the CECL standard adopted January 1, 2020, which is further described in Note 2. Basis of Presentation and Significant Accounting Policies. Management's evaluation of credit impairment under prior GAAP rules was not materially different.
Most credit impairment disclosures below were only made prospectively from the CECL adoption date as they were not required previously under GAAP.
| Ambac Financial Group, Inc. 16 2020 Third Quarter FORM 10-Q |


AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
As further discussed in Note 2. Basis of Presentation and Significant Accounting Policies, the key indicator management uses to assess the credit quality of premium receivables is Ambac's internal risk classifications for the insured obligation determined by the Risk Management Group. Below is the amortized cost basis of premium receivables by risk classification code and asset class as of September 30, 2020:
Surveillance Categories as of September 30, 2020
Type of Guaranteed BondIIAIIIIIIVTotal
Public Finance:
Housing revenue$158 $13 $0 $0 $0 $171 
Other2 13 0 0 0 16 
Total Public Finance160 26 0 0 0 186 
Structured Finance:
Mortgage-backed and home equity3 1 3 16 23 
Structured insurance16 0 0 0 0 16 
Student loan3 0 2 12 0 17 
Other7 0 0 0 0 7 
Total Structured Finance29 0 3 15 16 63 
International:
Sovereign/sub-sovereign78 13 0 15 0 105 
Investor-owned and public utilities29 0 0 0 0 29 
Other6 0 0 0 0 6 
Total International113 13 0 15 0 141 
Total (1)
$302 $39 $3 $29 $16 $390 
(1)    The underwriting origination dates for all policies included are greater than five years prior to the current reporting date.
Below is a rollforward of the premium receivable allowance for credit losses as of September 30, 2020:
Three Months Ended September 30, 2020Nine Months Ended September 30, 2020
Beginning balance (1)
$16 $9 
Current period provision (2)
2 9 
Write-offs of the allowance0 0 
Recoveries of previously written-off amounts0 0 
Ending balance$18 $18 

(1)At December 31, 2019, $9 of premiums receivable were deemed uncollectible as determined under prior GAAP rules.
(2)The nine months ended September 30, 2020, includes $3 from the adoption of CECL.
At September 30, 2020, Ambac had past due premiums of $2, of which $2 was over 120 days past due and has been included in the allowance for credit losses.
The key indicator management uses to assess the credit quality of reinsurance recoverables is collateral posted by the reinsurers and independent rating agency credit ratings. For the majority of reinsurance contracts where Ambac has recorded a recoverable, the fair value of collateral posted by the reinsurer to Ambac Assurance exceeds Ambac Assurance's reinsurance recoverable carrying value, net of ceded premiums payable. Ambac Assurance has credit exposure of $1 and has recorded an allowance for credit losses of $0 dollars at September 30, 2020.
| Ambac Financial Group, Inc. 17 2020 Third Quarter FORM 10-Q |


AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Loss and Loss Expense Reserves:
Ambac’s loss and loss expense reserves (“loss reserves”) are based on management’s on-going review of the financial guarantee credit portfolio. Below are the components of the loss reserves liability and the Subrogation recoverable asset at September 30, 2020 and December 31, 2019:
September 30, 2020:December 31, 2019:
Present Value of Expected
Net Cash Flows
Unearned
Premium
Revenue
Gross Loss and
Loss Expense
Reserves
Present Value of Expected
Net Cash Flows
Unearned
Premium
Revenue
Gross Loss and
Loss Expense
Reserves
Balance Sheet Line ItemClaims and
Loss Expenses
RecoveriesClaims and
Loss Expenses
Recoveries
Loss and loss expense reserves$2,116 $(235)$(80)$1,801 $1,835 $(233)$(54)$1,548 
Subrogation recoverable109 (2,303)0 (2,194)131 (2,160)(2,029)
Totals$2,225 $(2,538)$(80)$(393)$1,966 $(2,394)$(54)$(482)

Below is the loss reserves roll-forward, net of subrogation recoverable and reinsurance, for the affected periods:
Nine Months Ended September 30,
20202019
Beginning gross loss and loss expense reserves$(482)$(107)
Reinsurance recoverable26 23 
Beginning balance of net loss and loss expense reserves(508)(130)
Losses and loss expenses (benefit):
Current year18 
Prior years198 (85)
Total (1) (2)
216 (84)
Loss and loss expenses paid (recovered):
Current year1 
Prior years137 299 
Total138 299 
Foreign exchange effect1 (1)
Ending net loss and loss expense reserves(429)(514)
Impact of VIE consolidation0 (72)
Reinsurance recoverable (3)
36 26 
Ending gross loss and loss expense reserves$(393)$(560)
(1)Total losses and loss expenses (benefit) includes $(14) and $(6) for the nine months ended September 30, 2020 and 2019, respectively, related to ceded reinsurance.
(2)Ambac records the impact of estimated recoveries related to securitized loans in RMBS transactions that breached certain representations and warranties ("R&W's) by transaction sponsors within losses and loss expenses (benefit). The losses and loss expense (benefit) incurred associated with changes in estimated R&W's for the nine months ended September 30, 2020 and 2019, was $(29) and $15, respectively.
(3)Represents reinsurance recoverable on future loss and loss expenses. Additionally, the Balance Sheet line "Reinsurance recoverable on paid and unpaid losses" includes reinsurance recoverables (payables) of $1 and $0 as of September 30, 2020 and 2019, respectively, related to previously presented loss and loss expenses and subrogation.
For 2020, the adverse development in prior years was primarily a result of deterioration in Public Finance credits, primarily Puerto Rico as discussed below in the section, "Puerto Rico", partially offset by positive development in the RMBS portfolio.
For 2019, the positive development in prior years was primarily a result of the Ballantyne and Puerto Rico COFINA commutations and positive development in the RMBS portfolio, partially offset by deterioration in other Public Finance credits, primarily Puerto Rico credits other than COFINA.
| Ambac Financial Group, Inc. 18 2020 Third Quarter FORM 10-Q |


AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
The tables below summarize information related to policies currently included in Ambac’s loss reserves or subrogation recoverable at September 30, 2020 and December 31, 2019. Gross par exposures 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 bond. The weighted average risk-free rate used to discount loss reserves at September 30, 2020 and December 31, 2019,was 0.9% and 2.1%, respectively.
Surveillance Categories as of September 30, 2020
IIAIIIIIIVVTotal
Number of policies46 26 16 16 135 3 242 
Remaining weighted-average contract period (in years) (1)
101981614215
Gross insured contractual payments outstanding:
Principal$1,064 $1,146 $614 $1,511 $3,386 $32 $7,752 
Interest329 1,083 492 260 1,465 10 3,639 
Total$1,393 $2,229 $1,106 $1,771 $4,851 $41 $11,391 
Gross undiscounted claim liability$4 $56 $41 $536 $1,726 $41 $2,404 
Discount, gross claim liability0 (2)(1)(71)(185)0 (259)
Gross claim liability before all subrogation and before reinsurance4 54 41 465 1,541 41 2,145 
Less:
Gross RMBS subrogation (2)
0 0 0 0 (1,760)0 (1,760)
Discount, RMBS subrogation0 0 0 0 2 0 2 
Discounted RMBS subrogation, before reinsurance0 0 0 0 (1,757)0 (1,757)
Less:
Gross other subrogation (3)
0 0 0 (37)(749)(13)(799)
Discount, other subrogation0 0 0 1 16 1 18 
Discounted other subrogation, before reinsurance0 0 0 (36)(734)(11)(781)
Gross claim liability, net of all subrogation and discounts, before reinsurance4 54 40 429 (950)30 (393)
Less: Unearned premium revenue(3)(22)(5)(18)(32)0 (80)
Plus: Loss expense reserves2 2 1 7 68 0 80 
Gross loss and loss expense reserves$2 $34 $37 $418 $(913)$30 $(393)
Reinsurance recoverable reported on Balance Sheet (4)
$0 $6 $10 $27 $(6)$0 $37 
(1)Remaining weighted-average contract period is weighted based on projected gross claims over the lives of the respective policies.
(2)RMBS subrogation represents Ambac’s estimate of subrogation recoveries from RMBS transaction sponsors for R&W breaches.
(3)Other subrogation represents subrogation related to excess spread and other contractual cash flows on public finance and structured finance transactions, including RMBS.
(4)Reinsurance recoverable reported on the Balance Sheet includes reinsurance recoverables of $36 related to future loss and loss expenses and $1 related to presented loss and loss expenses and subrogation.
| Ambac Financial Group, Inc. 19 2020 Third Quarter FORM 10-Q |


AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Surveillance Categories as of December 31, 2019
IIAIIIIIIVVTotal
Number of policies34 18 11 16 139 3 221 
Remaining weighted-average contract period (in years) (1)
82191714315
Gross insured contractual payments outstanding:
Principal$668 $510 $277 $857 $3,819 $37 $6,168 
Interest340 507 128 366 1,678 11 3,029 
Total$1,007 $1,016 $404 $1,223 $5,498 $48 $9,197 
Gross undiscounted claim liability$$44 $21 $541 $1,778 $48 $2,434 
Discount, gross claim liability(5)(1)(152)(381)(2)(541)
Gross claim liability before all subrogation and before reinsurance2 39 20 389 1,397 46 1,893 
Less:
Gross RMBS subrogation (2)
(1,777)(1,777)
Discount, RMBS subrogation49 49 
Discounted RMBS subrogation, before reinsurance0 0 0 0 (1,727)0 (1,727)
Less:
Gross other subrogation (3)
(41)(666)(13)(720)
Discount, other subrogation47 53 
Discounted other subrogation, before reinsurance0 0 0 (37)(620)(10)(666)
Gross claim liability, net of all subrogation and discounts, before reinsurance2 39 20 353 (950)36 (501)
Less: Unearned premium revenue(1)(9)(1)(7)(35)(54)
Plus: Loss expense reserves67 73 
Gross loss and loss expense reserves$1 $30 $20 $349 $(918)$36 $(482)
Reinsurance recoverable reported on Balance Sheet (4)
$0 $6 $7 $24 $(10)$0 $26 
(1)Remaining weighted-average contract period is weighted based on projected gross claims over the lives of the respective policies.
(2)RMBS subrogation represents Ambac’s estimate of subrogation recoveries from RMBS transaction sponsors for R&W breaches.
(3)Other subrogation represents subrogation related to excess spread and other contractual cash flows on public finance and structured finance transactions, including RMBS.
(4)Reinsurance recoverable reported on Balance Sheet includes reinsurance recoverables of $26 related to future loss and loss expenses and $0 related to presented loss and loss expenses and subrogation.
COVID-19:
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. The duration and depth of the recession; actions such as monetary policy and fiscal stimulus, including the CARES Act in the US that was signed into law on March 27, 2020; 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. Accordingly, our loss reserves may be under-estimated as a result of the ultimate scope, duration and magnitude of the effects of COVID-19.
Puerto Rico:
Ambac has exposure to the Commonwealth of Puerto Rico (the "Commonwealth") and its instrumentalities across several different issuing entities with total net par exposure of $1,070. 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. Each issuing entity has its own credit risk profile attributable to discrete revenue sources, direct general obligation pledges or general obligation guarantees. The Commonwealth of Puerto Rico and certain of its instrumentalities have defaulted and are expected to continue to default on debt service payments, including payments owed on bonds insured by Ambac Assurance. Ambac Assurance may be required to make significant amounts of policy payments over the next several years, the recoverability of which is subject to great uncertainty, which may lead to a material increase in permanent losses causing a material adverse impact on our results of
| Ambac Financial Group, Inc. 20 2020 Third Quarter FORM 10-Q |


AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
operations and financial condition. Our exposure to Puerto Rico is impacted by the Commonwealth's willingness to make debt service payments as well as the amount of monies available for debt service, which is in turn affected by a number of factors including demographic trends, economic conditions (including the impact from the COVID-19 pandemic), tax policy and revenues, impact of reforms, fiscal plans, government actions, political instability, budgetary performance and flexibility, weather and seismic events, litigation outcomes, as well as federal funding of Commonwealth needs. In the near term, the financial and economic outlook for Puerto Rico is dependent upon a still fragile infrastructure in the wake of hurricanes and earthquakes, heightening its vulnerability to additional natural disasters. The longer term recovery of the Commonwealth economy and its essential infrastructure will likely be dependent on, among other factors, the management, usage and efficacy of federal resources.
It is difficult to predict the long-term capacity and willingness of the Puerto Rico government and its instrumentalities to pay debt service on bonded debt and how their debt burden and financial flexibility might affect Ambac Assurance's claim potential, risk profile and long-term financial strength.
Substantial uncertainty exists with respect to the ultimate outcome for creditors in Puerto Rico, such as Ambac Assurance, due to, amongst other matters, legislation enacted by the Commonwealth and the federal government, including PROMESA; actions taken pursuant to such laws, including the Title III filings; the economic consequences of the COVID-19 pandemic; as well as political uncertainty and leadership turnover. Ambac Assurance is involved in multiple litigations relating to actions taken by the Commonwealth or the Financial Oversight and Management Board for Puerto Rico (the “Oversight Board”) pursuant to certain enacted legislation, court rulings and other issues and may not be successful in pursuing claims or protecting its interests. As a result of litigation or other aspects of the restructuring processes, the differences among the credits insured by Ambac Assurance may not be respected.
Ambac Assurance has participated and may continue to participate in mediation related to potential debt restructurings. Mediation may not be productive or may not resolve Ambac Assurance's claims in a manner that avoids significant losses. No assurances can be given that negotiations will be successfully concluded, that the Commonwealth, Oversight Board and creditor parties will reach definitive agreements on additional debt restructurings, that any additional negotiated transaction debt restructuring, definitive agreement or Plans of Adjustment will be approved by the Title III court and completed, or that any transaction or Plan of Adjustment will not have a material adverse impact on Ambac's financial condition or results of operations. It is possible that certain restructuring process solutions, together with associated legislation, budgetary, and/or public policy proposals could be adopted and could further impair our exposures, causing losses that could have a material adverse impact on our results of operations and financial condition.
While our reserving scenarios account for a wide range of possible outcomes, reflecting the significant uncertainty regarding future developments and outcomes, given our exposure to Puerto
Rico and the economic, fiscal, legal and political uncertainties associated therewith as well as the uncertainties emanating from the COVID-19 pandemic and the damage caused by natural disasters on the island, our loss reserves may ultimately prove to be insufficient to cover our losses, potentially having a material adverse effect on our results of operations and financial position.
Ambac has considered these developments and other factors in evaluating its Puerto Rico loss reserves. During the three and nine months ended September 30, 2020, Ambac had incurred losses associated with its Domestic Public Finance insured portfolio of $43 and $263, respectively, which were primarily driven by strengthening of reserves related to the continued uncertainty and volatility of the situation in Puerto Rico and, for the nine months ended September 30, 2020, lower discount rates. 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, given the circumstances described herein. Such additional losses may have a material adverse effect on Ambac’s results of operations and financial condition and may result in adverse consequences such as impairing the ability of Ambac Assurance to honor its financial obligations; the initiation of rehabilitation proceedings against Ambac Assurance; decreased likelihood of Ambac Assurance delivering value to Ambac, through dividends or otherwise; and a significant drop in the value of securities issued or insured by Ambac or Ambac Assurance. For public finance credits, including Puerto Rico, for which Ambac has an estimate of expected loss at September 30, 2020, the possible increase in loss reserves under stress or other adverse conditions and circumstances was estimated to be approximately $1,200. This possible increase in loss reserves under stress or other adverse conditions is significant and if we were to experience such incremental losses, our stockholders’ equity as of September 30, 2020, would decrease from $1,095 to $(105). There can be no assurance that losses may not exceed such amount.
Representation and Warranty Recoveries:
Ambac records estimated subrogation recoveries for breaches of R&W's by sponsors of certain RMBS transactions. For a discussion of the approach utilized to estimate R&W subrogation recoveries, see Note 2. Basis of Presentation and Significant Accounting Policies in the Notes to Consolidated Financial Statements included Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
Ambac has recorded R&W subrogation recoveries of $1,757 ($1,731 net of reinsurance) and $1,727 ($1,702 net of reinsurance) at September 30, 2020 and December 31, 2019, respectively. R&W recovery proceeds up to the first $1,400 and above $1,600 have been pledged as security on certain of Ambac's long-term debt obligations as described further in Note 1. Background and Business Description in the Notes to Consolidated Financial Statements included Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
| Ambac Financial Group, Inc. 21 2020 Third Quarter FORM 10-Q |


AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Below is the rollforward of R&W subrogation for the affected periods:
Nine Months Ended September 30,
20202019
Discounted R&W subrogation (gross of reinsurance) at beginning of period$1,727 $1,771 
All other changes (1)
30 (16)
Discounted R&W subrogation (gross of reinsurance) at end of period$1,757 $1,755 
(1)All other changes which may impact RMBS R&W subrogation recoveries include changes in actual or projected collateral performance, changes in the creditworthiness of a sponsor and/or the projected timing of recoveries.
Our ability to realize R&W subrogation recoveries is subject to significant uncertainty, including risks inherent in litigation; collectability of such amounts from counterparties (and/or their respective parents and affiliates); timing of receipt of any such recoveries; intervention by OCI, which could impede our ability to take actions required to realize such recoveries; and uncertainty inherent in the assumptions used in estimating such recoveries. Failure to realize R&W subrogation recoveries for any reason or the realization of R&W subrogation recoveries materially below the amount recorded on Ambac's consolidated balance sheet would have a material adverse effect on our results of operations and financial condition. If we were unable to realize R&W subrogation recoveries recorded on Ambac's consolidated balance sheet, our stockholders’ equity as of September 30, 2020, would decrease from $1,095 to $(636). Additionally, failure to realize R&W subrogation recoveries may result in adverse consequences such as impairing the ability of Ambac Assurance to honor its financial obligations; the initiation of rehabilitation proceedings against Ambac Assurance; decreased likelihood of Ambac Assurance delivering value to Ambac, through dividends or otherwise; and a significant drop in the value of securities issued or insured by Ambac or Ambac Assurance.
Insurance intangible asset:
The insurance intangible amortization expense is included in the Consolidated Statements of Total Comprehensive Income (Loss), as shown below.
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Insurance amortization expense$14 $17 $41 $280 
The insurance intangible asset and accumulated amortization are included in the Consolidated Balance Sheets, as shown below.
September 30,
2020
December 31,
2019
Gross carrying value of insurance intangible asset$1,268 $1,273 
Accumulated amortization of insurance intangible asset885 847 
Net insurance intangible asset$383 $427 

The estimated future amortization expense for the net insurance intangible asset is as follows:
Amortization expense (1) (2)
2020 (three months)$11 
202139 
202235 
202332 
202429 
Thereafter239 
(1)The insurance intangible asset will be amortized using a level-yield method based on par exposure of the related financial guarantee insurance or reinsurance contracts. Future amortization considers the use of contractual lives for many bond types which do not have homogeneous pools of underlying collateral. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay certain obligations. If those bonds types are retired early, amortization expense may differ in the period of call or refinancing.
(2)The weighted-average amortizations period is 7.6 years.
| Ambac Financial Group, Inc. 22 2020 Third Quarter FORM 10-Q |


AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
7. FAIR VALUE MEASUREMENTS
The Fair Value Measurement Topic of the ASC establishes a framework for measuring fair value and disclosures about fair value measurements.
Fair Value Hierarchy:
The Fair Value Measurement Topic of the ASC specifies a fair value hierarchy based on whether the inputs to valuation techniques used to measure fair value are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect Company-based assumptions. The fair value hierarchy prioritizes model inputs into three broad levels as follows:
lLevel 1Quoted prices for identical instruments in active markets. Assets and liabilities classified as Level 1 include US Treasury and other foreign government obligations traded in highly liquid and transparent markets, certain highly liquid pooled fund investments, exchange traded futures contracts, variable rate demand obligations and money market funds.
lLevel 2Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Assets and liabilities classified as Level 2 generally include investments in fixed income securities representing municipal, asset-backed and corporate obligations, certain interest rate swap contracts and most long-term debt of variable interest entities consolidated under the Consolidation Topic of the ASC.
lLevel 3Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. This hierarchy requires the use of observable market data when available. Assets and liabilities classified as Level 3 include credit derivative contracts, certain uncollateralized interest rate swap contracts, equity interests in Ambac sponsored special purpose entities and certain investments in fixed income securities. Additionally, Level 3 assets and liabilities generally include loan receivables, and certain long-term debt of variable interest entities consolidated under the Consolidation Topic of the ASC.
The Fair Value Measurement Topic of the ASC permits, as a practical expedient, the estimation of fair value of certain investments in funds using the net asset value per share of the investment or its equivalent (“NAV”). Investments in funds valued using NAV are not categorized as Level 1, 2 or 3 under the fair value hierarchy. The following table sets forth the carrying amount and fair value of Ambac’s financial assets and liabilities as of September 30, 2020 and December 31, 2019, including the level within the fair value hierarchy at which fair value measurements are categorized. As required by the Fair Value Measurement Topic of the ASC, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
| Ambac Financial Group, Inc. 23 2020 Third Quarter FORM 10-Q |


AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Carrying
Amount
Total Fair
Value
Fair Value Measurements Categorized as:
September 30, 2020:Level 1Level 2Level 3
Financial assets:
Fixed income securities:
Municipal obligations$351 $351 $0 $351 $0 
Corporate obligations1,091 1,091 2 1,089 0 
Foreign obligations77 77 77 0 0 
U.S. government obligations122 122 122 0 0 
Residential mortgage-backed securities296 296 0 296 0 
Collateralized debt obligations73 73 0 73 0 
Other asset-backed securities300 300 0 225 75 
Fixed income securities, pledged as collateral:
Short-term152 152 152 0 0 
Short term investments586 586 509 77 0 
Other investments (1)
502 488 62 0 35 
Cash, cash equivalents and restricted cash48 48 39 9 0 
Derivative assets:
Interest rate swaps—asset position95 95 0 9 86 
Other assets - equity in sponsored VIE2 2 0 0 2 
Other assets-Loans3 3 0 0 3 
Variable interest entity assets:
Fixed income securities: Corporate obligations3,029 3,029 0 0 3,029 
Fixed income securities: Municipal obligations131 131 0 131 0 
Restricted cash2 2 2 0 0 
Loans2,783 2,783 0 0 2,783 
Derivative assets: Currency swaps-asset position53 53 0 53 0 
Total financial assets$9,696 $9,682 $965 $2,312 $6,013 
Financial liabilities:
Long term debt, including accrued interest$3,236 $3,056 $0 $2,679 $377 
Derivative liabilities:
Credit derivatives1 1 0 0 1 
Interest rate swaps—liability position125 125 0 125 0 
Liabilities for net financial guarantees written (2)
(744)436 0 0 436 
Variable interest entity liabilities:
Long-term debt (includes $4,002 at fair value)4,169 4,179 0 4,026 153 
Derivative liabilities: Interest rate swaps—liability position1,771 1,771 0 1,771 0 
Total financial liabilities$8,558 $9,569 $0 $8,601 $968 
| Ambac Financial Group, Inc. 24 2020 Third Quarter FORM 10-Q |


AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Carrying
Amount
Total Fair
Value
Fair Value Measurements Categorized as:
December 31, 2019:Level 1Level 2Level 3
Financial assets:
Fixed income securities:
Municipal obligations$215 $215 $$215 $
Corporate obligations1,430 1,430 1,430 
Foreign obligations44 44 44 
U.S. government obligations156 156 156 
Residential mortgage-backed securities248 248 248 
Commercial mortgage-backed securities50 50 50 
Collateralized debt obligations146 146 146 
Other asset-backed securities287 287 215 72 
Fixed income securities, pledged as collateral:
Short-term85 85 85 
Short term investments653 653 598 55 
Other investments (1)
478 493 136 61 
Cash and cash equivalents and restricted cash79 79 70 
Derivative assets:
Interest rate swaps—asset position75 75 67 
Other assets - equity in sponsored VIE
Other assets-loans10 13 13 
Variable interest entity assets:
Fixed income securities: Corporate obligations2,957 2,957 2,957 
Fixed income securities: Municipal obligations164 164 164 
Restricted cash
Loans3,108 3,108 3,108 
Derivative assets: Currency swaps—asset position52 52 52 
Total financial assets$10,242 $10,260 $1,091 $2,593 $6,281 
Financial liabilities:
Long term debt, including accrued interest$3,262 $3,274 $$2,829 $445 
Derivative liabilities:
Interest rate swaps—liability position89 89 89 
Liabilities for net financial guarantees written (2)
(863)284 284 
Variable interest entity liabilities:
Long-term debt (includes $4,351 at fair value)4,554 4,567 4,408 159 
Derivative liabilities: Interest rate swaps—liability position1,657 1,657 1,657 
Total financial liabilities$8,699 $9,872 $0 $8,983 $889 
(1)Excluded from the fair value measurement categories in the table above are investment funds of $391 and $296 as of September 30, 2020 and December 31, 2019, respectively, which are measured using NAV as a practical expedient.
(2)The carrying value of net financial guarantees written includes the following balance sheet items: Premium receivables; Reinsurance recoverable on paid and unpaid losses; Deferred ceded premium; Subrogation recoverable; Insurance intangible asset; Unearned premiums; Loss and loss expense reserves; Ceded premiums payable, premiums taxes payable and other deferred fees recorded in Other liabilities.
| Ambac Financial Group, Inc. 25 2020 Third Quarter FORM 10-Q |


AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Determination of Fair Value:
When available, Ambac uses quoted active market prices specific to the financial instrument to determine fair value, and classifies such items within Level 1. The determination of fair value for financial instruments categorized in Level 2 or 3 involves judgment due to the complexity of factors contributing to the valuation. Third-party sources from which we obtain independent market quotes also use assumptions, judgments and estimates in determining financial instrument values and different third parties may use different methodologies or provide different values for financial instruments. In addition, the use of internal valuation models may require assumptions about hypothetical or inactive markets. As a result of these factors, the actual trade value of a financial instrument in the market, or exit value of a financial instrument position by Ambac, may be significantly different from its recorded fair value.
Ambac’s financial instruments carried at fair value are mainly comprised of investments in fixed income securities, equity interests in pooled investment funds, derivative instruments, certain variable interest entity assets and liabilities and interests in Ambac sponsored special purpose entities. Valuation of financial instruments is performed by Ambac’s finance group using methods approved by senior financial management with consultation from risk management and portfolio managers as appropriate. Preliminary valuation results are discussed with portfolio managers quarterly to assess consistency with market transactions and trends as applicable. Market transactions such as trades or negotiated settlements of similar positions, if any, are reviewed to validate fair value model results. However, many of the financial instruments valued using significant unobservable inputs have very little or no observable market activity. Methods and significant inputs and assumptions used to determine fair values across portfolios are reviewed quarterly by senior financial management. Other valuation control procedures specific to particular portfolios are described further below.
Fixed Income Securities:
The fair values of fixed income investment securities are based primarily on market prices received from broker quotes or alternative pricing sources. Because many fixed income securities do not trade on a daily basis, pricing sources apply available market information through processes such as matrix pricing to calculate fair value. Such prices generally consider a variety of factors, including recent trades of the same and similar securities. In those cases, the items are classified within Level 2. For those fixed income investments where quotes were not available or cannot be reasonably corroborated, fair values are based on internal valuation models. Key inputs to the internal valuation models generally include maturity date, coupon and yield curves for asset-type and credit rating characteristics that closely match those characteristics of the specific investment securities being valued. Items valued using valuation models are classified according to the lowest level input or value driver that is significant to the valuation. Thus, an item may be classified in Level 3 even though there may be significant inputs that are readily observable. Longer (shorter) expected maturities or higher (lower) yields used in the valuation model will, in isolation, result in decreases (increases) in fair value. Generally, lower credit ratings or longer expected maturities will be
accompanied by higher yields used to value a security. At September 30, 2020, approximately 4%, 94% and 2% of the fixed income investment portfolio (excluding variable interest entity investments) was valued using broker quotes, alternative pricing sources and internal valuation models, respectively. At December 31, 2019, approximately 4%, 94% and 2% of the fixed income investment portfolio (excluding variable interest entity investments) was valued using broker quotes, alternative pricing sources and internal valuation models, respectively.
Ambac performs various review and validation procedures to quoted and modeled prices for fixed income securities, including price variance analyses, missing and static price reviews, overall valuation analysis by portfolio managers and finance managers and reviews associated with our ongoing impairment analysis. Unusual prices identified through these procedures will be evaluated further against alternative third party quotes (if available), internally modeled prices and/or other relevant data, and the pricing source values will be challenged as necessary. Price challenges generally result in the use of the pricing source’s quote as originally provided or as revised by the source following their internal diligence process. A price challenge may result in a determination by either the pricing source or Ambac management that the pricing source cannot provide a reasonable value for a security or cannot adequately support a quote, in which case Ambac would resort to using either other quotes or internal models. Results of price challenges are reviewed by portfolio managers and finance managers.
Information about the valuation inputs for fixed income securities classified as Level 3 is included below:
Other asset-backed securities: This security is a subordinated tranche of a re-securitization collateralized by Ambac-insured military housing bonds. The fair value classified as Level 3 was $75 and $72 at September 30, 2020 and December 31, 2019, respectively. Fair value was calculated using a discounted cash flow approach with expected future cash flows discounted using a yield consistent with the security type and rating. Significant inputs for the valuation at September 30, 2020 and December 31, 2019 include the following:
September 30, 2020:
a. Coupon rate:5.98%
b. Average Life:15.01 years
c. Yield:11.00%
December 31, 2019:
a. Coupon rate:5.97%
b. Average Life:15.58 years
c. Yield:11.75%
Other Investments:
Other investments primarily relate to investments in pooled investment funds. The fair value of pooled investment funds is determined using dealer quotes or alternative pricing sources when such investments have readily determinable fair values. When fair value is not readily determinable, pooled investment
| Ambac Financial Group, Inc. 26 2020 Third Quarter FORM 10-Q |


AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
funds are valued using NAV as a practical expedient as permitted under the Fair Value Measurement Topic of the ASC. Refer to Note 8. Investments for additional information about such investments in pooled funds that are reported at fair value using NAV as a practical expedient.
Other investments also includes Ambac's equity interest in a non-consolidated VIE created in connection with Ambac's monetization of Ambac Assurance junior surplus notes. This equity interest is carried under the equity method. Fair value for the non-consolidated VIE equity interest is internally calculated using a market approach and is classified as Level 3.
Derivative Instruments:
Ambac’s derivative instruments primarily comprise interest rate swaps, credit default swaps and exchange traded futures contracts. Fair value is determined based upon market quotes from independent sources, when available. When independent quotes are not available, fair value is determined using valuation models. These valuation models require market-driven inputs, including contractual terms, credit spreads and ratings on underlying referenced obligations, yield curves and tax-exempt interest ratios. The valuation of certain derivative contracts also require the use of data inputs and assumptions that are determined by management and are not readily observable in the market. Under the Fair Value Measurement Topic of the ASC, Ambac is required to consider its own credit risk when measuring the fair value of derivatives and other liabilities. Factors considered in estimating the amount of any Ambac credit valuation adjustment ("CVA") on such contracts include collateral posting provisions, right of set-off with the counterparty, the period of time remaining on the derivative and the pricing of recent terminations. The fair value of credit derivative liabilities was reduced by less than a million dollars at September 30, 2020 and December 31, 2019, respectively, as a result of incorporating an Ambac CVA into the valuation model for these contracts. Interest rate swap liabilities are collateralized and are not adjusted with an Ambac CVA at September 30, 2020 and December 31, 2019.
Interest rate swaps that are not centrally cleared are valued using vendor-developed models that incorporate interest rates and yield curves that are observable and regularly quoted. These models provide the net present value of the derivatives based on contractual terms and observable market data. Generally, the need for counterparty (or Ambac) CVAs on interest rate derivatives is mitigated by the existence of collateral posting agreements under which adequate collateral has been posted. Certain of these derivative contracts entered into with financial guarantee customers are not subject to collateral posting agreements. Counterparty credit risk related to such customer derivative assets is included in our determination of their fair value.
Ambac's credit derivatives ("CDS") are valued using an internal model that uses traditional financial guarantee CDS pricing to calculate the fair value of the derivative contract based on the reference obligation's current pricing, remaining life and credit rating and Ambac's own credit risk. The model calculates the difference between the present value of the projected fees receivable under the CDS and our estimate of the fees a financial guarantor of comparable credit quality would charge to provide the same protection at the balance sheet date. Unobservable
inputs used include Ambac's internal reference obligation credit ratings and expected life, estimates of fees that would be charged to assume the credit derivative obligation and Ambac's CVA. Ambac is party to only one remaining credit derivative with internal credit rating of AA at September 30, 2020. Ambac has not made any significant changes to its modeling techniques or related model inputs for the periods presented.
Financial Guarantees:
Fair value of net financial guarantees written represents our estimate of the cost to Ambac to completely transfer its insurance obligation to another market participant of comparable credit worthiness. In theory, this amount should be the same amount that another market participant of comparable credit worthiness would hypothetically charge in the market place, on a present value basis, to provide the same protection as of the balance sheet date. This fair value estimate of financial guarantees is presented on a net basis and includes direct and assumed contracts written, net of ceded reinsurance contracts.
Long-term Debt:
Long-term debt includes Ambac Assurance surplus notes and junior surplus notes, the Ambac Note and Tier 2 Notes issued in connection with the Rehabilitation Exit Transactions and the Ambac UK debt issued in connection with the Ballantyne commutation. The fair values of surplus notes, the Ambac Note and Tier 2 Notes are classified as Level 2. The fair value of junior surplus notes and Ambac UK debt are classified as Level 3.
Other Financial Assets and Liabilities:
Included in Other assets are Loans and Ambac’s equity interest in an Ambac sponsored VIE established to provide certain financial guarantee clients with funding for their debt obligations. The fair values of these financial assets are estimated based upon internal valuation models and are classified as Level 3.
Variable Interest Entity Assets and Liabilities:
The financial assets and liabilities of FG VIEs consolidated under the Consolidation Topic of the ASC consist primarily of fixed income securities and loans held by the VIEs, derivative instruments and notes issued by the VIEs which are reported as long-term debt. As described in Note 3. Variable Interest Entities, these FG VIEs are securitization entities which have liabilities and/or assets guaranteed by Ambac Assurance or Ambac UK.
The fair values of FG VIE long-term debt are based on price quotes received from independent market sources when available. Such quotes are considered Level 2 and generally consider a variety of factors, including recent trades of the same and similar securities. For those instruments where quotes were not available or cannot be reasonably corroborated, fair values are based on internal valuation models. Comparable to the sensitivities of investments in fixed income securities described above, longer (shorter) expected maturities or higher (lower) yields used in the valuation model will, in isolation, result in decreases (increases) in fair value liability measurement for FG VIE long-term debt.
FG VIE derivative asset and liability fair values are determined using vendor-developed valuation models, which incorporate
| Ambac Financial Group, Inc. 27 2020 Third Quarter FORM 10-Q |


AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
observable market data related to specific derivative contractual terms including interest rates, foreign exchange rates and yield curves.
The fair value of FG VIE fixed income securities and loan assets are based on Level 2 market price quotes received from independent market sources when available. Typically, FG VIE asset fair values are not readily available from market quotes and are estimated internally. Internal valuation of each FG VIE’s fixed income securities or loan assets are derived from the fair values of the notes issued by the respective VIE and the VIE’s derivatives, determined as described above, adjusted for the fair values of Ambac’s financial guarantees associated with the VIE. The fair value of financial guarantees consist of: (i) estimated future premium cash flows discounted at a rate consistent with that implicit in the fair value of the VIE’s liabilities and (ii) estimates of future claim payments discounted at a rate that includes Ambac’s own credit risk. Estimated future premium payments to be paid by the VIEs were discounted at a par-weighted average rate of 3.3% and 2.7% at September 30, 2020 and December 31, 2019, respectively. At September 30, 2020, the range of these discount rates was between 2.1% and 5.5%.
| Ambac Financial Group, Inc. 28 2020 Third Quarter FORM 10-Q |


AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Additional Fair Value Information for Financial Assets and Liabilities Accounted for at Fair Value:
The following tables present the changes in the Level 3 fair value category for the periods presented in 2020 and 2019. Ambac classifies financial instruments in Level 3 of the fair value hierarchy when there is reliance on at least one significant unobservable input to the valuation model. In addition to these unobservable inputs, the valuation models for Level 3 financial instruments typically also rely on a number of inputs that are readily observable either directly or indirectly. Thus, the gains and losses presented below include changes in the fair value related to both observable and unobservable inputs.
Level 3 - Financial Assets and Liabilities Accounted for at Fair Value
VIE Assets and Liabilities
Investments
Other
Assets
(1)
DerivativesInvestmentsLoansLong-term
Debt
Total
Three Months Ended September 30, 2020:
Balance, beginning of period$66 $2 $86 $2,907 $2,787 $0 $5,848 
Total gains/(losses) realized and unrealized:
Included in earnings0 0 1 1 (43)0 (40)
Included in other comprehensive income9   121 116 0 246 
Purchases       
Issuances       
Sales       
Settlements0  (2) (78)0 (80)
Balance, end of period$75 $2 $85 $3,029 $2,783 $0 $5,974 
The amount of total gains/(losses) included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date$ $0 $1 $1 $(43)$0 $(41)
The amount of total gains/(losses) included in other comprehensive income attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date$9 $0 $0 $121 $116 $0 $246 
Three Months Ended September 30, 2019:
Balance, beginning of period$74 $$62 $2,882 $4,289 $(231)$7,080 
Total gains/(losses) realized and unrealized:
Included in earnings12 206 127 345 
Included in other comprehensive income— — (92)(133)(213)
Purchases— — — — — — — 
Issuances— — — — — — — 
Sales— — — — — — — 
Settlements— (1)— (466)(467)
Deconsolidation of VIEs— (851)223 (627)
Balance, end of period$79 $3 $73 $2,996 $2,966 $0 $6,117 
The amount of total gains/(losses) included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date$— $$12 $206 $115 $$332 
(1)     Other assets carried at fair value and classified as Level 3 relate to an equity interest in an Ambac sponsored VIE.
| Ambac Financial Group, Inc. 29 2020 Third Quarter FORM 10-Q |


AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Level 3 - Financial Assets and Liabilities Accounted for at Fair Value
VIE Assets and Liabilities
InvestmentsOther
Assets
DerivativesInvestmentsLoansLong-term
Debt
Total
Nine Months Ended September 30, 2020:
Balance, beginning of period$72 $3 $66 $2,957 $3,108 $0 $6,207 
Total gains/(losses) realized and unrealized:
Included in earnings1 (1)24 160 (22)0 161 
Included in other comprehensive income3 0 0 (71)(85)0 (152)
Purchases0 0 0 0 0 0 0 
Issuances0 0 0 0 0 0 0 
Sales0 0 0 0 0 0 0 
Settlements(1)0 (5)(17)(219)0 (242)
Balance, end of period$75 $2 $85 $3,029 $2,783 $0 $5,974 
The amount of total gains/(losses) included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date$0 $(1)$23 $160 $(22)$0 $160 
The amount of total gains/(losses) included in other comprehensive income attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date$3 $0 $0 $(71)$(85)$0 $(152)
Nine Months Ended September 30, 2019:
Balance, beginning of period$72 $$46 $2,737 $4,288 $(217)$6,930 
Total gains/(losses) realized and unrealized:
Included in earnings(1)30 382 301 (15)698 
Included in other comprehensive income(106)(151)(241)
Purchases
Issuances
Sales
Settlements(1)(3)(17)(621)(643)
Deconsolidation of VIEs(851)223 (627)
Balance, end of period$79 $3 $73 $2,996 $2,966 $0 $6,117 
The amount of total gains/(losses) included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date$$(1)$30 $382 $229 $$639 
| Ambac Financial Group, Inc. 30 2020 Third Quarter FORM 10-Q |


AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
The tables below provide roll-forward information by class of derivatives measured using significant unobservable inputs.
Level 3 - Derivatives by Class
Three Months Ended September 30, 2020Three Months Ended September 30, 2019
Interest
Rate Swaps
Credit
Derivatives
Total
Derivatives
Interest
Rate Swaps
Credit
Derivatives
Total
Derivatives
Balance, beginning of period$87 $(1)$86 $63 $(1)$62 
Total gains/(losses) realized and unrealized:
Included in earnings1 0 1 11 12 
Included in other comprehensive income0 0 0 
Purchases0 0 0 
Issuances0 0 0 
Sales0 0 0 
Settlements(2)0 (2)(1)(1)
Balance, end of period$86 $(1)$85 $73 $0 $73 
The amount of total gains/(losses) included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date$1 $0 $1 $11 $$12 
Level 3 - Derivatives by Class
Nine Months Ended September 30, 2020Nine Months Ended September 30, 2019
Interest
Rate Swaps
Credit
Derivatives
Total
Derivatives
Interest
Rate Swaps
Credit
Derivatives
Total
Derivatives
Balance, beginning of period$67 $0 $66 $47 $(1)$46 
Total gains/(losses) realized and unrealized:
Included in earnings24 (1)24 29 30 
Included in other comprehensive income0 0 0 
Purchases0 0 0 
Issuances0 0 0 
Sales0 0 0 
Settlements(5)0 (5)(3)(3)
Balance, end of period$86 $(1)$85 $73 $0 $73 
The amount of total gains/(losses) included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date$24 $(1)$23 $29 $$30 

Invested assets and VIE long-term debt are transferred into Level 3 when internal valuation models that include significant unobservable inputs are used to estimate fair value. All such securities that have internally modeled fair values have been
classified as Level 3. Derivative instruments are transferred into Level 3 when the use of unobservable inputs becomes significant to the overall valuation. There were 0 transfers of financial instruments into or out of Level 3 in the periods disclosed.
| Ambac Financial Group, Inc. 31 2020 Third Quarter FORM 10-Q |


AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Gains and losses (realized and unrealized) relating to Level 3 assets and liabilities included in earnings for the affected periods are reported as follows:
Net
Investment
Income
Net Gains
(Losses) on
Derivative
Contracts
Income
(Loss) on
Variable
Interest
Entities
Other
Income
or (Loss)
Three Months Ended September 30, 2020:
Total gains or losses included in earnings for the period$0 $1 $(41)$0 
Changes in unrealized gains or losses included in earnings relating to the assets and liabilities still held at the reporting date0 1 (41)0 
Three Months Ended September 30, 2019:
Total gains or losses included in earnings for the period$$12 $333 $
Changes in unrealized gains or losses included in earnings relating to the assets and liabilities still held at the reporting date12 321 
Nine Months Ended September 30, 2020:
Total gains or losses included in earnings for the period$1 $24 $137 $(1)
Changes in unrealized gains or losses included in earnings relating to the assets and liabilities still held at the reporting date0 23 137 (1)
Nine Months Ended September 30, 2019:
Total gains or losses included in earnings for the period30 668 (1)
Changes in unrealized gains or losses included in earnings relating to the assets and liabilities still held at the reporting date30 611 (1)

8. INVESTMENTS
Ambac’s non-VIE invested assets are primarily comprised of fixed income securities classified as available-for-sale and interests in pooled investment funds, which are reported within Other investments on the Consolidated Balance Sheets. Interests in pooled investment funds in the form of common stock or in-substance common stock are classified as trading securities, while limited partner interests in such funds are reported using the equity method. Other investments also include equity interests held by AFG, including in an unconsolidated trust created in connection with its sale of Segregated Account junior surplus notes on August 28, 2014.
Disclosures in this Note for the period ended September 30, 2020, are in accordance with the new CECL standard adopted January 1, 2020, which is more fully described in Note 2, Basis of Presentation and Significant Accounting Policies. To the extent disclosures for periods prior to January 1, 2020, made in accordance with prior GAAP rules differ from disclosures under the new CECL standard, such differences are explained below.
Fixed Income Securities:
The amortized cost and estimated fair value of available-for-sale investments, excluding VIE investments, at September 30, 2020 and December 31, 2019, were as follows:
| Ambac Financial Group, Inc. 32 2020 Third Quarter FORM 10-Q |


AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Amortized
Cost
Allowance for Credit LossesGross
Unrealized
Gains in AOCI
Gross
Unrealized
Losses in AOCI
Estimated
Fair Value
September 30, 2020:
Fixed income securities:
Municipal obligations$322 $0 $29 $1 $351 
Corporate obligations (1)
1,066 0 28 3 1,091 
Foreign obligations76 0 1 0 77 
U.S. government obligations118 0 4 1 122 
Residential mortgage-backed securities251 0 45 0 296 
Collateralized debt obligations74 0 0 1 73 
Other asset-backed securities268 0 33 1 300 
2,176 0 140 6 2,311 
Short-term586 0 0 0 586 
2,761 0 141 6 2,896 
Fixed income securities pledged as collateral:
Short-term152 0 0 0 152 
Total collateralized investments152 0 0 0 152 
Total available-for-sale investments$2,914 $0 $141 $6 $3,048 
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
Non-credit
Other-than
temporary
Impairments 
(2)
December 31, 2019:
Fixed income securities:
Municipal obligations$194 $22 $$215 $
Corporate obligations (1)
1,396 36 1,430 
Foreign obligations44 44 
U.S. government obligations157 156 
Residential mortgage-backed securities200 47 248 
Commercial mortgage-backed securities49 50 
Collateralized debt obligations147 146 
Other asset-backed securities263 24 287 
2,450 132 2,577 
Short-term653 653 
3,103 132 3,230 
Fixed income securities pledged as collateral:
Short-term85 85 
Total collateralized investments85 85 
Total available-for-sale investments$3,187 $132 $5 $3,314 $0 
(1)Includes Ambac's holdings of the secured notes issued by Ambac LSNI in connection with the Rehabilitation Exit Transactions.
(2)At December 31, 2019, represents the amount of non-credit other-than-temporary impairment losses remaining in accumulated other comprehensive income on securities that also had a credit impairment. These losses are included in gross unrealized losses at December 31, 2019.
| Ambac Financial Group, Inc. 33 2020 Third Quarter FORM 10-Q |


AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
The amortized cost and estimated fair value of available-for-sale investments, excluding VIE investments, at September 30, 2020, by contractual maturity, were as follows:
Amortized
Cost
Estimated
Fair Value
Due in one year or less$830 $832 
Due after one year through five years876 888 
Due after five years through ten years432 453 
Due after ten years182 206 
2,320 2,379 
Residential mortgage-backed securities251 296 
Collateralized debt obligations74 73 
Other asset-backed securities268 300 
Total$2,914 $3,048 
Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay certain obligations with or without call or prepayment penalties.
Unrealized Losses on Fixed Income Securities:
The following table shows gross unrealized losses and fair values of Ambac’s available-for-sale investments, excluding VIE investments, which at September 30, 2020, did not have an allowance for credit losses under the new CECL standard and, at December 31, 2019, did not have other-than-temporary impairments recorded in earnings under prior GAAP. This information is aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at September 30, 2020 and December 31, 2019:
Less Than 12 Months12 Months or MoreTotal
Fair ValueGross
Unrealized
Loss
Fair ValueGross
Unrealized
Loss
Fair ValueGross
Unrealized
Loss
September 30, 2020:
Fixed income securities:
Municipal obligations$64 $1 $6 $0 $70 $1 
Corporate obligations179 3 0 0 179 3 
Foreign obligations12 0 0 0 12 0 
U.S. government obligations11 1 0 0 11 1 
Residential mortgage-backed securities19 0 0 0 19 0 
Collateralized debt obligations53 1 15 0 67 1 
Other asset-backed securities1 0 4 1 5 1 
338 5 25 1 363 6 
Short-term152 0 0 0 152 0 
Total securities$490 $5 $25 $1 $515 $6 
| Ambac Financial Group, Inc. 34 2020 Third Quarter FORM 10-Q |


AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Less Than 12 Months12 Months or MoreTotal
Fair ValueGross
Unrealized
Loss
Fair ValueGross
Unrealized
Loss
Fair ValueGross
Unrealized
Loss
December 31, 2019:
Fixed income securities:
Municipal obligations$13 $$10 $$23 $
Corporate obligations63 68 
Foreign obligations20 20 
U.S. government obligations36 38 
Residential mortgage-backed securities
Commercial mortgage-backed securities
Collateralized debt obligations53 63 116 
Other asset-backed securities10 
200 88 288 
Short-term201 201 
Total securities$401 $4 $88 $1 $489 $5 

Management has determined that the securities in the above table do not have credit impairment as of September 30, 2020 and December 31, 2019, based upon various factors, including (i) no actual or expected principal and interest payment defaults on these securities; (ii) analysis of the creditworthiness of the issuer and financial guarantor, as applicable, and (iii) for debt securities that are non-highly rated beneficial interests in securitized financial assets, analysis of whether there was an adverse change in projected cash flows. Management's evaluation as of September 30, 2020, includes the expectation that all principal and interest payments on securities guaranteed by Ambac Assurance or Ambac UK will be made timely and in full.
Ambac’s assessment about whether a decline in value is other-than-temporary reflects management’s current judgment regarding facts and circumstances specific to a security and other factors. If that judgment changes, Ambac may record a charge for credit impairment in future periods.

Realized Gains and Losses including Impairments:
The following table details amounts included in net realized gains (losses) and impairments included in earnings for the affected periods:
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Gross realized gains on securities$5 $12 $32 $46 
Gross realized losses on securities(1)(12)(5)
Net foreign exchange (losses) gains(2)0 30 
Credit impairments (1)
0 0 0 0 
Intent / requirement to sell impairments (2)
0 0 0 0 
Net realized gains (losses)$2 $18 $20 $71 
(1)Includes securities which management does not intend to sell and it is not more likely than not that the Company will be required to sell before recovery of the amortized cost basis.
(2)Includes securities which management either intends sell or it is more likely than not that the Company will be required to sell before recovery of the amortized cost basis.
| Ambac Financial Group, Inc. 35 2020 Third Quarter FORM 10-Q |


AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
The following table presents a roll-forward of Ambac’s cumulative credit losses on debt securities for which a portion of an other-than-temporary impairment was recognized in other comprehensive income under prior GAAP for the nine months ended September 30, 2019:
Balance, beginning of period$12 
Reductions for credit impairments previously recognized on:
Securities that matured or were sold during the period(1)
Balance, end of period$12 
Ambac had 0 allowance for credit losses at September 30, 2020.
Ambac did not purchase any financial assets with credit deterioration for the nine months ended September 30, 2020.
Counterparty Collateral, Deposits with Regulators and Other Restrictions:
Ambac routinely pledges and receives collateral related to certain transactions. Securities held directly in Ambac’s investment portfolio with a fair value of $152 and $85 at September 30, 2020 and December 31, 2019, respectively, were pledged to derivative counterparties. Ambac’s derivative counterparties have the right to re-pledge the investment securities and as such, these pledged securities are separately classified on the Consolidated Balance Sheets as “Fixed income securities pledged as collateral, at fair value”. Refer to Note 9. Derivative Instruments for further information on cash collateral. There were no securities received from other counterparties that were re-pledged by Ambac.

Securities carried at $7 and $6 at September 30, 2020 and December 31, 2019, respectively, were deposited by Ambac Assurance and Everspan with governmental authorities or designated custodian banks as required by laws affecting insurance companies. Invested assets carried at $1 at September 30, 2020 and December 31, 2019, were deposited as security in connection with a letter of credit issued for an office lease.
Securities with a fair value of $181 and $197 at September 30, 2020 and December 31, 2019, respectively, were pledged as collateral and as sources of funding to repay the Secured Notes issued by Ambac LSNI. The securities may not be transferred or repledged by Ambac LSNI. Collateral may be sold to fund redemptions of the Secured Notes. Ambac Assurance also pledged for the benefit of the holders of Secured Notes (other than Ambac Assurance) the proceeds of interest payments and partial redemptions of the Secured Notes held by Ambac Assurance. The amount of such proceeds held by Ambac Assurance was $10 and $55 at September 30, 2020 and December 31, 2019, respectively, and is included in Restricted cash on the Consolidated Balance Sheet. Ambac Assurance may, from time to time, sell all or a portion of the Secured Notes it owns. In the event that Ambac Assurance sells any of the Secured Notes it owns, the proceeds must be used to redeem a like amount of the Ambac Note at par. The price at which Ambac Assurance sells the Secured Notes may differ from the price at which it redeems the Secured Notes.

Guaranteed Securities:
Ambac’s fixed income portfolio includes securities covered by guarantees issued by Ambac Assurance and other financial guarantors (“insured securities”). The published rating agency ratings on these securities reflect the higher of the financial strength rating of the financial guarantor or the rating of the underlying issuer. Rating agencies do not always publish separate underlying ratings (those ratings excluding the insurance by the financial guarantor). In the event these underlying ratings are not available from the rating agencies, Ambac will assign an internal rating. The following table represents the fair value and weighted-average underlying rating of insured securities in Ambac's investment portfolio at September 30, 2020 and December 31, 2019, respectively: 
Municipal
Obligations
Corporate
Obligations
(2)
Mortgage
and Asset-
backed
Securities
Total
Weighted
Average
Underlying
Rating 
(1)
September 30, 2020:
Ambac Assurance Corporation$310 $470 $473 $1,253 CCC+
National Public Finance Guarantee Corporation6 0  6 BBB-
Assured Guaranty Municipal Corporation1 0  1 C
Total$318 $470 $473 $1,260 CCC+
December 31, 2019:
Ambac Assurance Corporation$176 $535 $442 $1,153 B-
National Public Finance Guarantee Corporation11 — 11 BBB-
Total$186 $535 $442 $1,164 B-
(1)Ratings are based on the lower of Standard & Poor’s or Moody’s rating. If unavailable, Ambac’s internal rating is used.
(2)Represents Ambac's holdings of secured notes issued by Ambac LSNI in connection with the Rehabilitation Exit Transactions. These secured notes are insured by Ambac Assurance.
| Ambac Financial Group, Inc. 36 2020 Third Quarter FORM 10-Q |


AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Other Investments:
Ambac's investment portfolio includes interests in various pooled investment funds. Fair value and additional information about investments in pooled funds, by investment type, is summarized in the table below. Except as noted in the table, fair value as reported is determined using net asset value ("NAV") as a practical expedient. In addition to these investments, Ambac has unfunded commitments of $48 to private credit and private equity funds at September 30, 2020.
Fair Value
Class of FundsSeptember 30,
2020
December 31,
2019
Redemption FrequencyRedemption Notice Period
Real estate properties (1)
$15 $16 quarterly10 business days
Hedge funds (2)
182 65 quarterly90 days
High yields and leveraged loans (3) (10)
53 176 daily0 - 30 days
Private credit (4)
57 51 quarterly180 days if permitted
Insurance-linked investments (5)
2 fully redeemednone
Equity market investments (6) (10)
33 55 daily0 days
Investment grade floating rate income (7)
69 66 weekly0 days
Private equity (8)
16 quarterly90 days if permitted
Emerging markets debt (9) (10)
23 daily0 days
Total equity investments in pooled funds$451 $432 
(1)Investments consist of UK property to generate income and capital growth.
(2)This class seeks to generate superior risk-adjusted returns through selective asset sourcing, active trading and hedging strategies across a range of asset types.
(3)This class of funds includes investments in a range of instruments including high-yield bonds, leveraged loans, CLOs, ABS and floating rate notes to generate income and capital appreciation.
(4)This class aims to obtain high long-term return primarily through credit and preferred equity investments with low liquidity and defined term.
(5)This class seeks to generate returns from insurance markets through investments in catastrophe bonds, life insurance and other insurance linked investments.
(6)This class of funds aim to achieve long term growth through diversified exposure to global equity markets.
(7)This class of funds includes investments in high quality floating rate debt securities including ABS and corporate floating rate notes as well as ultra-short term bonds and money market instruments.
(8)This class seeks to generate long-term capital appreciation through investments in private equity, equity-related and other instruments.
(9)This class seeks long-term income and growth through investments in the bonds of issuers in emerging markets.
(10)These categories include fair value amounts totaling $60 and $136 at September 30, 2020 and December 31, 2019, respectively, that are readily determinable and are priced through pricing vendors, including for High yield and leveraged loans products: $3 and $81; for Equity market investments: $33 and $55; and for Emerging markets debt $23 and $0
Ambac also holds direct equity interests, including in an unconsolidated trust created in connection with the 2014 sale of Segregated Account junior surplus notes, which is accounted for under the equity method.
Investment Income (loss):
Net investment income (loss) was comprised of the following for the affected periods:
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Fixed income securities$24 $33 $79 $151 
Short-term investments1 4 14 
Loans0 0 
Investment expense(1)(1)(4)(4)
Securities available-for-sale and short-term24 36 80 161 
Other investments14 (11)25 
Total net investment income (loss)$37 $45 $69 $186 
Net investment income (loss) from Other investments primarily represents changes in fair value on securities classified as trading or accounted for under the fair value option, income from investment limited partnerships accounted for under the equity method and the above noted equity interest in an unconsolidated trust accounted for under the equity method.
| Ambac Financial Group, Inc. 37 2020 Third Quarter FORM 10-Q |


AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
The portion of net unrealized gains (losses) related to trading securities still held at the end of each period is as follows:
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Net gains (losses) recognized during the period on trading securities$3 $$(12)$19 
Less: net gains (losses) recognized during the reporting period on trading securities sold during the period0 (19)
Unrealized gains (losses) recognized during the reporting period on trading securities still held at the reporting date$3 $4 $7 $15 

9. DERIVATIVE INSTRUMENTS
The following tables summarize the gross fair values of individual derivative instruments and the impact of legal rights of offset as reported in the Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019:
Gross
Amounts of
Recognized
Assets /
Liabilities
Gross
Amounts
Offset in the
Consolidated
Balance Sheet
Net Amounts
of Assets/
Liabilities
Presented in the Consolidated
Balance Sheet
Gross Amount
of Collateral
Received /
Pledged Not
Offset in the
Consolidated
Balance Sheet
Net
Amount
September 30, 2020:
Derivative Assets:
Interest rate swaps$95 $0 $94 $ $94 
Total non-VIE derivative assets$95 $0 $95 $0 $95 
Derivative Liabilities:
Credit derivatives$1 $0 $1 $ $1 
Interest rate swaps125 0 125 124 1 
Total non-VIE derivative liabilities$126 $0 $126 $124 $2 
Variable Interest Entities Derivative Assets:
Currency swaps$53 $0 $53 $ $53 
Total VIE derivative assets$53 $0 $53 $0 $53 
Variable Interest Entities Derivative Liabilities:
Interest rate swaps$1,771 $ $1,771 $ $1,771 
Total VIE derivative liabilities$1,771 $0 $1,771 $0 $1,771 
December 31, 2019:
Derivative Assets:
Interest rate swaps$75 $$75 $$75 
Total non-VIE derivative assets$75 $0 $75 $0 $75 
Derivative Liabilities:
Interest rate swaps89 90 89 
Total non-VIE derivative liabilities$90 $0 $90 $89 $1 
Variable Interest Entities Derivative Assets:
Currency swaps$52 $— $52 $$52 
Total VIE derivative assets$52 $0 $52 $0 $52 
Variable Interest Entities Derivative Liabilities:
Interest rate swaps$1,657 $— $1,657 $— $1,657 
Total VIE derivative liabilities$1,657 $0 $1,657 $0 $1,657 
Amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral are not offset against fair value amounts recognized for derivative instruments on the Unaudited Consolidated Balance Sheets. The amounts representing the right to reclaim cash collateral and posted margin, recorded in “Other assets” were $1 and $36 as of September 30, 2020 and December 31, 2019, respectively. There were 0 amounts held representing an obligation to return cash collateral as of September 30, 2020 and December 31, 2019.
| Ambac Financial Group, Inc. 38 2020 Third Quarter FORM 10-Q |


AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
The following tables summarize the location and amount of gains and losses of derivative contracts in the Unaudited Consolidated Statements of Total Comprehensive Income (Loss) for the three and nine months ended September 30, 2020 and 2019:
Location of Gain or (Loss)
Recognized in Consolidated
Statements of Total
Comprehensive Income (Loss)
Amount of Gain or (Loss) Recognized in Consolidated Statement of Total Comprehensive Income (Loss)
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Non-VIE derivatives:
Credit derivativesNet gains (losses) on derivative contracts$0 $$(1)$
Interest rate swapsNet gains (losses) on derivative contracts7 (1)(20)(11)
Futures contractsNet gains (losses) on derivative contracts0 (10)(41)(52)
Total Non-VIE derivatives$7 $(10)(61)(61)
Variable Interest Entities:
Currency swapsIncome (loss) on variable interest entities$(10)$10 7 
Interest rate swapsIncome (loss) on variable interest entities(4)(166)(177)(272)
Total Variable Interest Entities(14)(156)(170)(266)
Total derivative contracts$(7)$(166)$(231)$(327)

Credit Derivatives:
Credit derivatives, which are privately negotiated contracts, provide the counterparty with credit protection against the occurrence of a specific event such as a payment default or bankruptcy relating to an underlying obligation. Credit derivatives issued are insured by Ambac Assurance. The outstanding credit derivative transaction at September 30, 2020, does not include ratings based collateral-posting triggers or otherwise require Ambac to post collateral regardless of Ambac’s ratings or the size of the mark to market exposure to Ambac.
Our credit derivatives were written on a “pay-as-you-go” basis. Similar to an insurance policy, pay-as-you-go provides that Ambac pays interest shortfalls on the referenced transaction as they are incurred on each scheduled payment date, but only pays principal shortfalls upon the earlier of (i) the date on which the assets designated to fund the referenced obligation have been disposed of and (ii) the legal final maturity date of the referenced obligation.
Ambac maintains internal credit ratings on its guaranteed obligations, including credit derivative contracts, solely to indicate management’s view of the underlying credit quality of the guaranteed obligations. The gross principal notional outstanding for credit derivative contracts was $293 and $280 as of September 30, 2020 and December 31, 2019, respectively, all of which had internal Ambac ratings of AA in both periods.
Interest Rate Derivatives:
Ambac, through its subsidiary Ambac Financial Services (“AFS”), uses interest rate swaps, US Treasury futures contracts and other derivatives, to provide a partial economic hedge against the effects of rising interest rates elsewhere in the Company, including on Ambac’s financial guarantee exposures. Additionally, AFS provided interest rate swaps to states, municipalities and their authorities, asset-backed issuers and other entities in connection with their financings. As of September 30, 2020 and December 31, 2019, the notional amounts of AFS’s derivatives were as follows:
Notional
Type of DerivativeSeptember 30,
2020
December 31,
2019
Interest rate swaps—receive-fixed/pay-variable$240 $332 
Interest rate swaps—pay-fixed/receive-variable726 1,261 
US Treasury futures contracts—short240 755 

Derivatives of Consolidated Variable Interest Entities
Certain VIEs consolidated under the Consolidation Topic of the ASC entered into derivative contracts to meet specified purposes within the securitization structure. The notional for VIE derivatives outstanding as of September 30, 2020 and December 31, 2019, were as follows:
Notional
Type of VIE DerivativeSeptember 30,
2020
December 31,
2019
Interest rate swaps—receive-fixed/pay-variable$1,164 $1,194 
Interest rate swaps—pay-fixed/receive-variable1,103 1,176 
Currency swaps298 329 
Credit derivatives0 

Contingent Features in Derivatives Related to Ambac Credit Risk
Ambac’s over-the-counter interest rate swaps are centrally cleared when eligible. Certain interest rate swaps remain with professional swap-dealer counterparties and direct customer counterparties. These non-cleared swaps are generally executed under standardized derivative documents including collateral support and master netting agreements. Under these agreements, Ambac is required to post collateral in the event net unrealized losses exceed predetermined threshold levels. Additionally, given
| Ambac Financial Group, Inc. 39 2020 Third Quarter FORM 10-Q |


AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
that Ambac Assurance is no longer rated by an independent rating agency, counterparties have the right to terminate the swap positions.
As of September 30, 2020 and December 31, 2019, the net liability fair value of derivative instruments with contingent features linked to Ambac’s own credit risk was $124 and $89, respectively, related to which Ambac had posted cash and securities as collateral with a fair value of $144 and $109, respectively. All such ratings-based contingent features have been triggered requiring maximum collateral levels to be posted by Ambac while preserving counterparties’ rights to terminate the contracts. Assuming all such contracts terminated on September 30, 2020, settlement of collateral balances and net derivative liabilities would result in a net receipt of cash and/or securities by Ambac. If counterparties elect to exercise their right to terminate, the actual termination payment amounts will be determined in accordance with derivative contract terms, which may result in amounts that differ from market values as reported in Ambac’s financial statements.
10. INCOME TAXES
AFG files a consolidated Federal income tax return with its subsidiaries. AFG and its subsidiaries also file separate or combined income tax returns in various states, local and foreign jurisdictions. The following are the major jurisdictions in which Ambac and its subsidiaries operate and the earliest tax years subject to examination:
JurisdictionTax Year
United States2010
New York State2013
New York City2016
United Kingdom2016
Italy2015
In accordance with the Income Tax Topic of the ASC, a valuation allowance is recognized if, based on the weight of available evidence, it is more-likely-than-not that some, or all, of the deferred tax asset will not be realized. As a result of the risks and uncertainties associated with future operating results, management believes it is more likely than not that the Company will not generate sufficient U.S. federal, state and/or local taxable income to recover the deferred tax operating assets and therefore maintains a full valuation allowance.
Consolidated Pretax Income (Loss)
U.S. and foreign components of pre-tax income (loss) were as follows:
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
U.S.$(106)$60 $(412)$(61)
Foreign(2)(15)(11)
Total$(108)$69 $(427)$(72)
Provision (Benefit) for Income Taxes
The components of the provision for income taxes were as follows:
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Current taxes
U. S. federal$0 $$0 $
U.S. state and local0 0 (3)
Foreign(1)0 38 
Current taxes(1)1 35 
Deferred taxes
Foreign1 (1)(5)(2)
Deferred taxes1 (1)(5)(2)
Provision for income taxes$0 $3 $(5)$33 
NOL Usage
Pursuant to an intercompany tax sharing agreement, to the extent Ambac Assurance generates taxable income after September 30, 2011, which is offset with "Allocated NOLs" of $3,650, it is obligated to make payments (“Tolling Payments”), subject to certain credits, to AFG in accordance with the following NOL usage table, where the “Applicable Percentage” is applied to the aggregate amount of federal income tax liability that would have been paid if the Allocated NOLs were not available. Pursuant to the Closing Agreement between Ambac and the Internal Revenue Service ("IRS"), the IRS will receive 12.5% of Tier C and 17.5% of Tier D payments, if made.
NOL Usage Table
NOL Usage TierAllocated NOLsApplicable
Percentage
AThe first$47915%
BThe next$1,057after Tier A40%
CThe next$1,057after Tier B10%
DThe next$1,057after Tier C15%
As of December 31, 2018, Ambac Assurance generated cumulative taxable income of $1,508, leaving $2,142 of the $3,650 Allocated NOLs subject to Tolling Payments. For the year ended December 31, 2019, and nine months ended September 30, 2020, Ambac Assurance generated NOLs of approximately $143 and $197, respectively, which will need to be utilized before any new Tolling Payments will be generated.
If not utilized, the NOLs will begin expiring in 2029, and will fully expire in 2040, with the exception of the tax loss generated during the nine months ended September 30, 2020, of approximately $196, which if Ambac remains in a loss position at year end 2020, will expire in 2041.
As a result of positive income at Ambac Assurance in 2017, Ambac accrued $28 of tax tolling payments. In May 2018, AFG executed a waiver under the intercompany tax sharing agreement pursuant to which Ambac Assurance was relieved of the requirement to make the 2017 tax tolling payment by June 1,
| Ambac Financial Group, Inc. 40 2020 Third Quarter FORM 10-Q |


AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
2018.  AFG also agreed to continue to defer receipt of the 2017 tax tolling payment from Ambac Assurance until such time as OCI consents to the payment. OCI has indicated that it will consider a number of factors, including asset quality and loss and reserve trends when considering whether or not to consent to the 2017 tax tolling payment. We can provide no assurance as to whether, or when, OCI will consent to the 2017 tax tolling payment.
Ambac's tax positions are subject to review by the OCI, which may lead to the adoption of positions that reduce the amount of tolling payments otherwise available to Ambac.
As of September 30, 2020, the remaining balance of the $3,650 NOL allocated to Ambac Assurance, and new NOLs accrued during 2019 and 2020, totaled approximately $2,482. As of September 30, 2020, the consolidated group's NOL was approximately $3,731, of which Ambac's NOL was approximately $1,249.
11. COMMITMENTS AND CONTINGENCIES
The following commitments and contingencies provide an update of those discussed in Note 17: Commitments and Contingencies in the Notes to Consolidated Financial Statements included Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, and should be read in conjunction with the complete descriptions provided in the aforementioned Form 10-K.
Litigation Against Ambac
Financial Oversight and Management Board for Puerto Rico, et al. v. Autonomy Master Fund Limited, et al. (United States District Court, District of Puerto Rico, No. 19-ap-00291, filed May 2, 2019). On May 2, 2019, the Financial Oversight and Management Board for Puerto Rico (the "Oversight Board"), together with the Official Committee of Unsecured Creditors for the Commonwealth (the "Committee") filed an adversary proceeding against certain parties that filed proofs of claim on account of general obligation bonds issued by the Commonwealth of Puerto Rico, including Ambac Assurance. The complaint seeks declarations that the general obligation bonds are unsecured obligations and, in the alternative, seeks to avoid any security interests that holders of such bonds may have. On June 12, 2019, a group of general obligation bondholders moved to dismiss the complaint. On June 13, 2019, at the request of the Plaintiffs, the District Court stayed the case until September 1, 2019 as to all defendants; on July 24, 2019, the District Court referred this matter to mediation and ordered it stayed during the pendency of such mediation. Ambac Assurance filed a statement of position and reservation of rights on February 5, 2020; certain other defendants filed motions to dismiss on this same date. On February 9, 2020, the Oversight Board announced that it intends to file, and to seek to confirm, an amended plan of adjustment (the “Amended POA”). On March 10, 2020, the District Court ordered that this case remain stayed while the Oversight Board attempts to confirm the Amended POA.
Financial Oversight and Management Board for Puerto Rico v. Ambac Assurance Corp., et al. (United States District Court, District of Puerto Rico, No. 20-ap-00003, filed Jan. 16, 2020).
Pursuant to an order of the District Court setting out an agreed schedule for litigation submitted by the team of mediators designated in the Commonwealth’s restructuring cases (the “Mediation Team“), on January 16, 2020, the Oversight Board filed an adversary proceeding against monoline insurers insuring bonds issued by the Puerto Rico Infrastructure Financing Authority (“PRIFA”) and the PRIFA bond trustee, all of which Defendants filed proofs of claim against the Commonwealth relating to PRIFA bonds. The complaint seeks to disallow Defendants’ proofs of claim against the Commonwealth in their entirety, including for lack of secured status. Oral argument on motions for summary judgment was held on September 23, 2020.
Financial Oversight and Management Board for Puerto Rico v. Ambac Assurance Corp., et al. (United States District Court, District of Puerto Rico, No. 20-ap-00004, filed Jan. 16, 2020). Pursuant to an order of the District Court setting out an agreed schedule for litigation submitted by the Mediation Team, on January 16, 2020, the Oversight Board filed an adversary proceeding against monoline insurers insuring bonds issued by the Puerto Rico Convention Center District Authority (“PRCCDA”) and the PRCCDA bond trustee, all of which Defendants filed proofs of claim against the Commonwealth relating to PRCCDA bonds. The complaint seeks to disallow Defendants’ proofs of claim against the Commonwealth in their entirety, including for lack of secured status. Oral argument on motions for summary judgment was held on September 23, 2020.
Financial Oversight and Management Board for Puerto Rico v. Ambac Assurance Corp., et al. (United States District Court, District of Puerto Rico, No. 20-ap-00005, filed Jan. 16, 2020). Pursuant to an order of the District Court setting out an agreed schedule for litigation submitted by the Mediation Team, on January 16, 2020, the Oversight Board filed an adversary proceeding against monoline insurers insuring bonds issued by the Puerto Rico Highways and Transportation Authority ("PRHTA“), certain PRHTA bondholders, and the PRHTA fiscal agent for bondholders, all of which Defendants filed proofs of claim against the Commonwealth relating to PRHTA bonds. The complaint seeks to disallow Defendants’ proofs of claim against the Commonwealth in their entirety, including for lack of secured status. Oral argument on motions for summary judgment was held on September 23, 2020.
Financial Oversight and Management Board for Puerto Rico v. Ambac Assurance Corp., et al. (United States District Court, District of Puerto Rico, No. 20-ap-00007, filed Jan. 16, 2020). Pursuant to an order of the District Court setting out an agreed schedule for litigation submitted by the Mediation Team, on January 16, 2020, the Oversight Board and the Committee filed an adversary proceeding against monoline insurers insuring bonds issued by PRHTA, certain PRHTA bondholders, and the PRHTA fiscal agent for bondholders, all of which Defendants filed proofs of claim against PRHTA relating to PRHTA bonds. The complaint seeks to disallow portions of Defendants’ proofs of claim against the PRHTA, including for lack of secured status. On March 10, 2020, the District Court stayed this case.
NC Residuals Owners Trust, et al. v. Wilmington Trust Co., et al. (Delaware Court of Chancery, C.A. No. 2019-0880, filed Nov. 1,  2019).  On November 1, 2019, Ambac Assurance became aware
| Ambac Financial Group, Inc. 41 2020 Third Quarter FORM 10-Q |


AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
of a new declaratory judgment action filed by certain residual equity interest holders (“NC Owners” or “Plaintiffs”) in fourteen National Collegiate Student Loan Trusts (the “Trusts”) against Wilmington Trust Company, the Owner Trustee for the Trusts; U.S. Bank National Association, the Indenture Trustee; GSS Data Services, Inc., the Administrator; and Ambac Assurance.  Through this action, Plaintiffs seek a number of judicial determinations.  On January 21, 2020, the presiding Vice Chancellor entered an order consolidating the action with previously filed litigation relating to the Trusts. On February 13, 2020, Ambac Assurance, the Owner Trustee, the Indenture Trustee, and other parties filed declaratory judgment counterclaims. Several parties, including Plaintiffs and Ambac Assurance, filed motions for judgment on the pleadings in support of their requested judicial determinations. On August 27, 2020, the Vice Chancellor issued an opinion addressing all of the pending motions for judgment on the pleadings, which granted certain of the parties’ requested judicial determinations and denied others. He deferred judgment on still other declarations pending further factual development.
Ambac Assurance’s estimates of projected losses for RMBS transactions consider, among other things, the RMBS transactions’ payment waterfall structure, including the application of interest and principal payments and recoveries, and depend in part on our interpretations of contracts and other bases of our legal rights. From time to time, bond trustees and other transaction participants have employed different contractual interpretations and have commenced, or threatened to commence, litigation to resolve these differences. It is not possible to predict whether additional disputes will arise, nor the outcomes of any potential litigation. It is possible that there could be unfavorable outcomes in this or other disputes or proceedings and that our interpretations may prove to be incorrect, which could lead to changes to our estimate of loss reserves.
Ambac Assurance has periodically received various regulatory inquiries and requests for information with respect to investigations and inquiries that such regulators are conducting. Ambac Assurance has complied with all such inquiries and requests for information.
The Company is involved from time to time in various routine legal proceedings, including proceedings related to litigation with present or former employees. Although the Company’s litigation with present or former employees is routine and incidental to the conduct of its business, such litigation can result in large monetary awards when a civil jury is allowed to determine compensatory and/or punitive damages for, among other things, termination of employment that is wrongful or in violation of implied contracts.
From time to time, Ambac is subject to allegations concerning its corporate governance that may lead to litigation, including derivative litigation, and while the monetary impacts may not be material, the matters may distract management and the Board of Directors from their principal focus on Ambac's business, strategy and objectives.
It is not reasonably possible to predict whether additional suits will be filed or whether additional inquiries or requests for
information will be made, and it is also not possible to predict the outcome of litigation, inquiries or requests for information. It is possible that there could be unfavorable outcomes in these or other proceedings. Legal accruals for litigation against the Company which are probable and reasonably estimable, and management's estimated range of loss for such matters, are either not applicable or are not material to the operating results or financial position of the Company. For the litigation matters the Company is defending that do not meet the “probable and reasonably estimable” accrual threshold and where no loss estimates have been provided above, management is unable to make a meaningful estimate of the amount or range of loss that could result from unfavorable outcomes. Under some circumstances, adverse results in any such proceedings could be material to our business, operations, financial position, profitability or cash flows. The Company believes that it has substantial defenses to the claims above and, to the extent that these actions proceed, the Company intends to defend itself vigorously; however, the Company is not able to predict the outcomes of these actions.
Litigation Filed or Joined by Ambac
In the ordinary course of their businesses, certain of Ambac’s subsidiaries assert claims in legal proceedings against third parties to recover losses already paid and/or mitigate future losses. The amounts recovered and/or losses avoided which may result from these proceedings is uncertain, although recoveries and/or losses avoided in any one or more of these proceedings during any quarter or fiscal year could be material to Ambac’s results of operations in that quarter or fiscal year.
Puerto Rico
Financial Oversight and Management Board for Puerto Rico v. Public Buildings Authority (United States District Court, District of Puerto Rico, No. 1:18-ap-00149, filed December 21, 2018). On December 21, 2018, the Oversight Board, together with the Committee, as Plaintiffs, filed a complaint against the Puerto Rico Public Buildings Authority (“PBA”) seeking declaratory judgment that the leases between PBA and its lessees-many of whom are agencies and instrumentalities of the Commonwealth-are “disguised financings,” not true leases, and therefore should not be afforded administrative expense priority under the Bankruptcy Code. On March 12, 2019, Ambac Assurance and other interested parties were permitted to intervene in order to argue that the PBA leases are valid leases, and are entitled to administrative expense treatment under the Bankruptcy Code. On June 16, 2019, the Oversight Board announced that it had entered into a plan support agreement ("PSA") with certain general obligation and PBA bondholders that includes a proposed resolution of claim objections to and issues surrounding both general obligation and PBA bonds, including a proposed settlement of this adversary proceeding. On July 24, 2019, the District Court referred this matter to mediation and ordered it stayed during the pendency of such mediation. On September 27, 2019, the Oversight Board filed a joint plan of adjustment and disclosure statement for the Commonwealth, PBA, and the Employees’ Retirement System for Puerto Rico. On February 9, 2020, the Oversight Board executed a new plan support agreement with additional creditors (the “New PSA”) and announced that it intends to file, and seek to confirm, the
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Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Amended POA. On March 10, 2020, the District Court ordered that this case remain stayed while the Oversight Board attempts to confirm the Amended POA.
In re Financial Oversight and Management Board for Puerto Rico (United States District Court, District of Puerto Rico, No. 1:17-bk-03283), Omnibus Objection of (I) Financial Oversight and Management Board, Acting Through its Special Claims Committee, and (II) Official Committee of Unsecured Creditors, Pursuant to Bankruptcy Code Section 502 and Bankruptcy Rule 3007, to Claims Filed or Asserted by Holders of Certain Commonwealth General Obligation Bonds (Dkt. No. 4784, filed January 14, 2019) (“GO Bond Claim Objection Procedures”). On January 14, 2019, the Oversight Board and the Committee filed an omnibus claim objection in the Commonwealth’s Title III case challenging claims arising from certain general obligation bonds issued by the Commonwealth in 2012 and 2014 totaling approximately $6 billion, none of which are held or insured by Ambac Assurance. The court subsequently ordered certain consolidated procedures permitting parties in interest an opportunity to participate in litigation of the objection. On April 11, 2019, Ambac Assurance filed a notice of participation in support of the objection, advancing the argument, among other things, that the PBA leases are true leases, but the associated debt nonetheless should be included in the Commonwealth’s debt ceiling calculation such that the 2012 and 2014 general obligation bond issuances are null and void and claims arising therefrom should be disallowed. On June 16, 2019, the Oversight Board announced that it had entered into a PSA with certain general obligation and PBA bondholders that includes a proposed resolution of claim objections to and issues surrounding both general obligation and PBA bonds, including a proposed settlement of this omnibus claim objection. On June 25, 2019, the Oversight Board moved to stay proceedings related to this omnibus claim objection while it pursues confirmation of the plan contemplated in the PSA. On July 24, 2019, the District Court referred this matter to mediation and ordered it stayed during the pendency of such mediation. On February 5, 2020, certain parties filed motions to dismiss the claim objection. On February 9, 2020, the Oversight Board executed the New PSA and announced that it intends to file, and seek to confirm, the Amended POA. Additional motions to dismiss were filed on February 19, 2020. On March 10, 2020, the District Court ordered that this matter remain stayed while the Oversight Board attempts to confirm the Amended POA. On July 19, 2020, the Committee filed a motion to lift the stay on this claim objection in light of the changes to the fiscal plan and likely changes to the Commonwealth plan of adjustment in light of COVID-19. On September 1, 2020, Ambac Assurance filed a partial joinder to the Committee’s motion. On September 17, 2020, the District Court denied the Committee’s motion without prejudice, indicating that the stay likely would remain in place until at least March 2021. On October 1, 2020, the Committee moved the District Court to reconsider its denial of the Committee’s motion to lift the stay in light of materials released by the parties to the New PSA that the Committee argued demonstrate a lack of agreement between those parties. On October 5, 2020, the District Court denied the Committee’s motion for consideration. On October 16, 2020, the Committee appealed to the First Circuit the District Court’s order denying the Committee’s motion to lift the stay on its claim objection.
In re Financial Oversight and Management Board for Puerto Rico (United States District Court, District of Puerto Rico, No. 1:17-bk-03283), Ambac Assurance Corporation’s Motion to Strike Certain Provisions of the Plan Support Agreement By and Among the Financial Oversight and Management Board for Puerto Rico, Certain GO Holders, and Certain PBA Holders (Dkt. No. 13573, filed July 7, 2020) (“Amended Motion to Strike PSA”). On June 16, 2019, the Oversight Board announced that it had entered into a PSA with certain general obligation and PBA bondholders that includes a proposed resolution of claim objections to and issues surrounding both general obligation and PBA bonds. On July 16, 2019, Ambac Assurance filed a motion to strike certain provisions of the PSA that it believes violate PROMESA, including the potential payment of a breakup fee to creditors who have supported the PSA (Dkt. No. 8020) (Original Motion to Strike PSA). On February 9, 2020, the Oversight Board executed the New PSA and on March 10, 2020, the District Court denied the Original Motion to Strike PSA without prejudice given the execution of the New PSA. On July 7, 2020, Ambac Assurance filed the Amended Motion to Strike PSA seeking similar relief with respect to the New PSA. Briefing on the Amended Motion to Strike PSA concluded on October 20, 2020, and the District Court has taken the matter on submission.
In re Financial Oversight and Management Board for Puerto Rico (United States District Court, District of Puerto Rico, No. 1:17-bk-03283), Ambac Assurance Corporation's Motion and Memorandum of Law in Support of Its Motion Concerning Application of the Automatic Stay to the Revenues Securing PRIFA Rum Tax Bonds (Dkt. No. 7176, filed May 30, 2019) (“PRIFA Stay Motion”). On May 30, 2019, Ambac Assurance filed a motion seeking an order that the automatic stay does not apply to certain lawsuits Ambac Assurance seeks to bring or to continue relating to bonds issued by PRIFA, or, in the alternative, for relief from the automatic stay to pursue such lawsuits or for adequate protection of Ambac Assurance's collateral. On July 24, 2019, the District Court referred this matter to mediation and ordered it stayed during the pendency of such mediation. On January 31, 2020, the District Court granted a motion filed by Ambac Assurance, together with Assured Guaranty Corporation, Assured Guaranty Municipal Corporation, and Financial Guaranty Insurance Company to amend the PRIFA Stay Motion in order to allow the PRIFA bond trustee to join the amended motion and to allow movants to address recent, controlling precedent from the First Circuit, and Ambac Assurance filed the amended motion the same day. On July 2, 2020, the Court denied the motion to lift the stay on certain grounds. Briefing regarding additional grounds on which Ambac Assurance and other movants seek stay relief concluded on August 5, 2020; on September 9, 2020, the District Court denied the motion to lift the stay on the additional grounds. On September 23, 2020, Ambac Assurance and the other movants appealed this decision to the First Circuit. Briefing is expected to be completed by December 21, 2020, with argument heard in February 2021.
In re Financial Oversight and Management Board for Puerto Rico (United States District Court, District of Puerto Rico, No. 1:17-bk-03283), Motion of Assured Guaranty Corp., Assured Municipal Corp., Ambac Assurance Corporation, National Public Finance Guarantee Corporation, and Financial Guaranty
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Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
Insurance Company for Relief from the Automatic Stay, or, in the Alternative, Adequate Protection (Dkt. No. 10102, filed January 16, 2020) (“PRHTA Stay Motion”). Pursuant to an order of the District Court setting out an agreed schedule for litigation submitted by the Mediation Team, on January 16, 2020, Ambac Assurance, together with Assured Guaranty Corp., Assured Municipal Corp., National Public Finance Guarantee Corporation, and Financial Guaranty Insurance Company filed a motion seeking an order that the automatic stay does not apply to movants’ enforcement of the application of pledged revenues to the PRHTA bonds or the enforcement of movants’ liens on revenues pledged to such bonds, or, in the alternative, for adequate protection of movants’ interests in the revenues pledged to PRHTA bonds. On July 2, 2020, the Court denied the motion to lift the stay on certain grounds. Briefing regarding additional grounds on which Ambac Assurance and other movants seek stay relief concluded on August 5, 2020; on September 9, 2020, the District Court denied the motion to lift the stay on the additional grounds. On September 23, 2020, Ambac Assurance and the other movants appealed this decision to the First Circuit. Briefing is expected to be completed by December 21, 2020, with argument heard in February 2021.
In re Financial Oversight and Management Board for Puerto Rico (United States District Court, District of Puerto Rico, No. 1:17-bk-03283), Ambac Assurance Corporation, Financial Guaranty Insurance Company, Assured Guaranty Corp., Assured Municipal Corp., and the Bank of New York Mellon’s Motion Concerning Application of the Automatic Stay to the Revenues Securing the CCDA Bonds (Dkt. No. 10104, filed January 16, 2020) (“PRCCDA Stay Motion”). Pursuant to an order of the District Court setting out an agreed schedule for litigation submitted by the Mediation Team, on January 16, 2020, Ambac Assurance, together with Financial Guaranty Insurance Company, Assured Guaranty Corp., Assured Municipal Corp., and the PRCCDA bond trustee, filed a motion seeking an order either (i) that the automatic stay does not apply to movants’ enforcement of their rights to revenues pledged to PRCCDA bonds by bringing an enforcement action against PRCCDA; or, in the alternative, (ii) lifting the automatic stay to enable movants to pursue an enforcement action against PRCCDA; or, in the further alternative, (iii) ordering adequate protection of movants’ interests in the PRCCDA pledged to PRCCDA bonds. On July 2, 2020, the Court denied the motion to lift the stay on certain grounds, but found that the movants had stated a colorable claim that a certain account was the “Transfer Account” on which movants hold a lien. Briefing regarding additional grounds on which Ambac Assurance and other movants seek stay relief concluded on August 5, 2020; on September 9, 2020, the District Court denied the motion to lift the stay on the additional grounds, and found that a final determination on issues related to the identity of the Transfer Account would be made in the decision on the motions for summary judgment issued in the CCDA-related adversary proceeding, No. 20-ap-00004.
Ambac Assurance Corporation v. Merrill Lynch, Pierce, Fenner & Smith Incorporated, Goldman Sachs & Co. LLC, Citigroup Global Markets Inc., J.P. Morgan Securities LLC, Morgan Stanley & Co. LLC, Samuel A. Ramirez & Co. Inc., Raymond James & Associates, Inc., and UBS Financial Services Inc.
(Commonwealth of Puerto Rico, Court of First Instance, San Juan Superior Court, Case No. CV-000248923, filed February 19, 2020). On February 19, 2020, Ambac Assurance filed a complaint in the Commonwealth of Puerto Rico, Court of First Instance, San Juan Superior Court, against certain underwriters of Ambac-insured bonds issued by PRIFA and PRCCDA, with causes of action under the Puerto Rico civil law doctrines of actos proprios and Unilateral Declaration of Will. Ambac Assurance alleges defendants engaged in inequitable conduct in underwriting Ambac-insured bonds issued by PRIFA and PRCCDA, including failing to investigate and adequately disclose material information in the official statements for the bonds that defendants provided to Ambac Assurance regarding systemic deficiencies in the Commonwealth’s financial reporting. Ambac Assurance seeks damages in compensation for claims paid by Ambac Assurance on its financial guaranty insurance policies insuring such bonds, pre-judgment and post-judgment interest, and attorneys’ fees. On March 20, 2020, Defendants removed this case to the Title III Court. On April 20, 2020, Ambac moved to remand the case back to the Court of First Instance. On July 29, 2020, the District Court granted Ambac Assurance’s motion to remand the case to the Commonwealth court. Ambac Assurance filed an amended complaint in the Commonwealth court on October 28, 2020.
Ambac Assurance Corporation v. Autopistas Metropolitanas de Puerto Rico, LLC (United States District Court, District of Puerto Rico, No. 3:20-cv-01094, filed February 19, 2020). On February 19, 2020, Ambac Assurance filed a complaint in the U.S. District Court for the District of Puerto Rico, against Autopistas Metropolitanas de Puerto Rico, LLC (“Metropistas”), which holds a concession from PRHTA for two Puerto Rico highways, PR-5 and PR-22, in connection with a 10-year extension of the concession that was entered into in April 2016. The complaint includes claims for fraudulent conveyance and unjust enrichment, alleging that the consideration paid by Metropistas for the extension was less than reasonably equivalent value and most of the benefit of such payment was received by the Commonwealth instead of PRHTA. Ambac Assurance also seeks a declaratory judgment that it has a valid and continuing lien on certain toll revenues that are being collected by Metropistas. On March 31, 2020, the Oversight Board filed a motion before the Title III Court seeking an order directing Ambac to withdraw its complaint. On April 20, 2020, the District Court ordered this case stayed pending briefing before the Title III Court on the Oversight Board’s motion to withdraw. On June 16, 2020, the Title III Court ordered Ambac Assurance to withdraw its complaint. Ambac Assurance withdrew its complaint on June 23, 2020, and noticed an appeal from the Title III Court’s order to withdraw on June 30, 2020. Ambac Assurance’s opening appeal brief was filed before the First Circuit on October 19, 2020; opposition briefs are due to be filed on December 18, 2020.
Ambac Assurance Corporation v. Financial Oversight and Management Board for Puerto Rico (United States District Court, District of Puerto Rico, No. 3:20-bk-00068, filed May 26, 2020). On May 26, 2020, Ambac Assurance filed an adversary complaint before the Title III Court seeking (i) a declaration that titles I, II, and III of PROMESA are unconstitutional because they violate the Bankruptcy Clause of the U.S. Constitution (which requires all bankruptcy laws to be uniform) and (ii) dismissal of
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Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
the pending Title III petitions. On August 17, 2020, the Oversight Board filed a motion to dismiss the complaint; on August 18, 2020, the Official Committee of Retired Employees of the Commonwealth of Puerto Rico (the “Retiree Committee”) and the Puerto Rico Fiscal Agency and Financial Advisory Authority (“AAFAF”) filed joinders to the motion to dismiss. The United States filed a motion to dismiss on October 2, 2020. Briefing on the motions to dismiss are expected to conclude on November 23, 2020, with a hearing on January 12, 2021.
In re Financial Oversight and Management Board for Puerto Rico (United States District Court, District of Puerto Rico, No. 1:17-bk-03283), Urgent Motion for Bridge Order, and Motion for Appointment as Trustees Under 11 U.S.C. § 926, of Ambac Assurance Corporation, Assured Guaranty Corp., Assured Guaranty Municipal Corp., Financial Guaranty Insurance Company, and National Public Finance Guarantee Corporation (Dkt. No. 13708, filed July 17, 2020) (“HTA Trustee Motion”). On July 17, 2020, Ambac Assurance, together with Assured Guaranty Corporation, Assured Guaranty Municipal Corporation, and Financial Guaranty Insurance Company, filed a motion seeking appointment as trustees under Section 926 of the Bankruptcy Code to pursue certain avoidance actions on behalf of HTA against the Commonwealth of Puerto Rico. The HTA Trustee Motion attached a proposed complaint detailing the avoidance claims that movants would pursue. On August 11, 2020, the District Court denied the HTA Trustee Motion; on August 24, 2020, movants noticed an appeal of the denial of the HTA Trustee Motion to the First Circuit. On September 30, 2020, movants filed a motion with the First Circuit to hold this appeal in abeyance pending the First Circuit’s resolution of the appeal from the District Court’s denial of the HTA Lift-Stay Motion. On October 13, 2020, the Oversight Board opposed the motion to hold the appeal in abeyance and cross-moved to dismiss the appeal as moot, arguing that the statute of limitations on the avoidance actions movants wish to pursue has expired. On October 20, 2020, movants filed a reply in support of their motion to hold the appeal in abeyance, and opposed the Oversight Board’s cross-motion to dismiss the appeal as moot. On October 27, 2020, the Oversight Board filed a reply in support of its cross-motion to dismiss the appeal as moot.
Student Loans Exposure
CFPB v. Nat’l Collegiate Master Student Loan Trust (United States District Court, District of Delaware, Case No. 1:17-cv-01323, filed September 18, 2017). The Consumer Financial Protection Bureau (“CFPB”) filed a complaint against fifteen National Collegiate Student Loan Trusts, regarding alleged improprieties and deficiencies in servicing practices.   Simultaneous with the filing of its complaint, CFPB also filed a motion to approve a proposed consent judgment that would have granted monetary damages and injunctive relief against the Trusts. Ambac Assurance guaranteed certain securities issued by three of the Trusts and indirectly insures six other Trusts.  On September 20, 2017, Ambac Assurance filed a motion to intervene in the action, which motion was granted on October 19, 2018. Following discovery and briefing, on May 31, 2020, the District Court denied the CFPB’s motion to approve the proposed consent judgment.
On March 19, 2020, Intervenor Transworld Systems Inc. filed a motion to dismiss the action for lack of subject matter jurisdiction. On July 10, 2020, Ambac Assurance and several other intervenors filed a motion to dismiss the action for lack of subject matter jurisdiction and for failure to state a claim. Briefing on both motions to dismiss is complete. Additionally, on July 2, 2020, the CFPB submitted an application for entry of default against the Trusts.  Ambac Assurance and the Owner Trustee opposed the CFPB’s application, which remains pending.
RMBS Litigation
In connection with Ambac Assurance’s efforts to seek redress for breaches of representations and warranties and fraud related to the information provided by both the underwriters and the sponsors of various transactions and for failure to comply with the obligation by the sponsors to repurchase ineligible loans, Ambac Assurance has filed various lawsuits:
Ambac Assurance Corporation and The Segregated Account of Ambac Assurance Corporation v. Countrywide Securities Corp., Countrywide Financial Corp. (a.k.a. Bank of America Home Loans) and Bank of America Corp. (Supreme Court of the State of New York, County of New York, Case No. 651612/2010, filed on September 28, 2010). Ambac Assurance’s Second Amended Complaint, filed on May 28, 2013, asserted claims against Countrywide and Bank of America (as successor to Countrywide’s liabilities) for, among other things, breach of contract and fraudulent inducement. In August and October 2018, Defendants filed various pre-trial motions. On December 30, 2018, the court denied all of these pre-trial motions in their entirety and Defendants appealed. On September 17, 2019, the First Department affirmed in part and reversed in part the trial court’s rulings. On October 17, 2019, Countrywide filed a motion for leave to appeal certain issues to the New York Court of Appeals and for reargument or leave to appeal certain other issues. On January 16, 2020, the First Department recalled and vacated its September 17, 2019 decision and order and substituted a new decision and order. On the same date, the First Department denied Countrywide’s motion seeking leave to appeal, without prejudice to seeking such leave from the reissued decision and order. On January 30, 2020, Countrywide filed a new motion for leave to appeal the First Department’s denial of its motions, which Ambac Assurance opposed. On June 11, 2020, the First Department denied Countrywide’s motion for leave to appeal. On January 14, 2020, the trial court granted Ambac Assurance’s motion to supplement and amend certain of its expert reports, and expert discovery is ongoing. On June 25, 2020, the trial court scheduled trial to commence on February 22, 2021 (which could be rescheduled if the COVID-19 pandemic prevents the court system from holding jury trials or there are other intervening causes of delay). On August 12, 2020, Countrywide filed a motion to dismiss Ambac’s fraud claim. The court has scheduled oral argument on that motion for November 13, 2020.
Ambac Assurance Corporation v. U.S. Bank National Association (United States District Court, Southern District of New York, Docket No. 18-cv-5182 (LGS), filed June 8,
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Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)
2018 (the “SDNY Action”)); In the matter of HarborView Mortgage Loan Trust 2005-10 (Minnesota state court, Docket No. 27-TR-CV-17-32 (the “Minnesota Action”)). These two actions relate to U.S. Bank National Association’s (“U.S. Bank”) acceptance of a proposed settlement in a separate litigation that U.S. Bank is prosecuting, as trustee, related to the Harborview Mortgage Loan Trust, Series 2005-10 (“Harborview 2005-10”), a residential mortgage-backed securitization for which Ambac Assurance issued an insurance policy. On March 6, 2017, U.S. Bank filed a petition commencing the Minnesota Action, a trust instruction proceeding in Minnesota state court concerning the proposed settlement, and on June 12, 2017, U.S. Bank filed an amended petition.  Ambac Assurance filed a motion to dismiss the Minnesota Action, which was denied on November 13, 2017, and the denial was affirmed on appeal. On September 6, 2018, U.S. Bank filed its Second Amended Petition, and Ambac Assurance and certain other certificateholders objected to, or otherwise responded to, the petition. Trial, which was previously scheduled to begin October 14, 2020, has been rescheduled to February 1 through 5, 2021. On June 8, 2018, Ambac Assurance filed the SDNY Action asserting claims arising out of U.S. Bank’s acceptance of the proposed settlement and treatment of trust recoveries. Ambac Assurance asserted claims for declaratory judgment, breach of contract, and breach of fiduciary duty. On July 16, 2019, the court dismissed Ambac Assurance's breach-of-contract and breach-of-fiduciary-duty claims based on U.S. Bank's acceptance of the settlement; and dismissed Ambac Assurance's declaratory judgment claims regarding the occurrence of an Event of Default and U.S. Bank's future distribution of trust recoveries through the waterfall. The court denied the motion to dismiss Ambac Assurance's breach-of-contract claims based on U.S. Bank's past distribution of trust recoveries through the waterfall. On January 17, 2020, U.S. Bank moved for summary judgment regarding the remaining claim relating to distributions. On February 7, 2020, Ambac Assurance cross-moved for summary judgment. These summary judgment motions are fully briefed.

In re application of Deutsche Bank National Trust Company as Trustee of the Harborview Mortgage Loan Trust Mortgage Loan Pass-Through Certificates, Series 2006-9 (Supreme Court of the State of New York, County of New York, No. 654208/2018), filed August 23, 2018 (the “Trust Instruction Proceeding”). This action relates to Deutsche Bank National Trust Company’s (“DBNT”) proposed settlement of claims related to the Harborview Mortgage Loan Trust Series 2006-9 (“Harborview 2006-9”). On August 23, 2018, DBNT filed a Petition commencing the Trust Instruction Proceeding, seeking judicial instruction pursuant to CPLR Article 77, inter alia, to accept the proposed settlement with respect of claims relating to Harborview 2006-9.  On November 2, 2018, Ambac Assurance and other interested persons filed notices of intention to appear and answers to DBNT’s  petition. Ambac Assurance sought a period of discovery before resolution on the merits. Discovery is now complete. Under the current case schedule merits briefing is to be completed by November 23, 2020. The parties have submitted a stipulation and proposed scheduling order pursuant to which merits briefing would be completed by January 12, 2021.
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Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations
Following this summary is a discussion addressing the consolidated results of operations and financial condition of Ambac Financial Group, Inc. (“AFG”) for the periods indicated. References to “Ambac,” the “Company,” “we,” “our,” and “us” are to AFG and its subsidiaries, as the context requires. This discussion should be read in conjunction with Ambac’s Annual Report on Form 10-K for the year ended December 31, 2019, the Cautionary Statement Pursuant To The Private Securities Litigation Reform Act Of 1995 below and Risk Factors set forth in Part II, Item 1A of this Form 10-Q and in Ambac’s Annual Report on Form 10-K for the year ended December 31, 2019.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) contains certain financial measures, in particular the presentation of Adjusted Earnings and Adjusted Book Value, which are not presented in accordance with U.S. generally accepted accounting principles (“GAAP”). We are presenting these non-GAAP financial measures because they provide greater transparency and enhanced visibility into the underlying drivers of our business. We do not intend for these non-GAAP financial measures to be a substitute for any GAAP financial measure and they may differ from similar reporting provided by other companies. Readers of this Form 10-Q should use these non-GAAP financial measures only in conjunction with the comparable GAAP financial measures. Adjusted Earnings and Adjusted Book Value are non-GAAP financial measures that adjust for the impact of certain non-recurring or non-economic GAAP accounting requirements and include the addition of certain items that the Company has or expects to realize in the future, but that are not reported under GAAP. We provide reconciliations to the most directly comparable GAAP measures; Adjusted Earnings to Net income attributable to common stockholders and Adjusted Book Value to Total Ambac Financial Group, Inc. stockholders’ equity.
CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Management has included in Parts I and II of this Quarterly Report on Form 10-Q, including this MD&A, statements that may constitute “forward-looking statements” within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Words such as “estimate,” “project,” “plan,” “believe,” “anticipate,” “intend,” “planned,” “potential” and similar expressions, or future or conditional verbs such as “will,” “should,” “would,” “could,” and “may,” or the negative of those expressions or verbs, identify forward-looking statements. We caution readers that these statements are not guarantees of future performance. Forward-looking statements are not historical facts but instead represent only our beliefs regarding future events, which may by their nature be inherently uncertain and some of which may be outside our control. These statements may relate to plans and objectives with respect to the future, among other things which may change. We are alerting you to the possibility that our actual results may differ, possibly materially, from the expected objectives or anticipated results that may be suggested, expressed or implied by these forward-
looking statements. Important factors that could cause our results to differ, possibly materially, from those indicated in the forward-looking statements include, among others, those discussed under “Risk Factors” in Part I, Item 1A of the 2019 Annual Report on Form 10-K and in Part II, Item 1A of this quarterly Report on Form 10-Q.
Any or all of management’s forward-looking statements here or in other publications may turn out to be incorrect and are based on management’s current belief or opinions. Ambac’s actual results may vary materially, and there are no guarantees about the performance of Ambac’s securities. Among events, risks, uncertainties or factors that could cause actual results to differ materially are: (1) the highly speculative nature of AFG’s common stock and volatility in the price of AFG’s common stock; (2) uncertainty concerning the Company’s ability to achieve value for holders of its securities, whether from Ambac Assurance Corporation ("Ambac Assurance") and its subsidiaries or from transactions or opportunities apart from Ambac Assurance and its subsidiaries, including new business initiatives; (3) changes in Ambac’s estimated representation and warranty recoveries or loss reserves over time; (4) failure to recover claims paid on Puerto Rico exposures or incurrence of losses in amounts higher than expected; (5) adverse effects on AFG’s share price resulting from future offerings of debt or equity securities that rank senior to AFG’s common stock; (6) potential of rehabilitation proceedings against Ambac Assurance; (7) dilution of current shareholder value or adverse effects on AFG’s share price resulting from the issuance of additional shares of common stock; (8) inadequacy of reserves established for losses and loss expenses and possibility that changes in loss reserves may result in further volatility of earnings or financial results; (9) increased fiscal stress experienced by issuers of public finance obligations or an increased incidence of Chapter 9 filings or other restructuring proceedings by public finance issuers, including an increased risk of loss on revenue bonds of distressed public finance issuers due to judicial decisions adverse to revenue bond holders; (10) Ambac's inability to realize the expected recoveries included in its financial statements; (11) insufficiency or unavailability of collateral to pay secured obligations; (12) credit risk throughout Ambac’s business, including but not limited to credit risk related to residential mortgage-backed securities, student loan and other asset securitizations, public finance obligations (including obligations of the Commonwealth of Puerto Rico and its instrumentalities and agencies) and exposures to reinsurers; (13) credit risks related to large single risks, risk concentrations and correlated risks; (14) the risk that the Ambac’s risk management policies and practices do not anticipate certain risks and/or the magnitude of potential for loss; (15) risks associated with adverse selection as Ambac’s insured portfolio runs off; (16) adverse effects on operating results or the Company’s financial position resulting from measures taken to reduce risks in its insured portfolio; (17) disagreements or disputes with Ambac's insurance regulators; (18) our inability to mitigate or remediate losses, commute or reduce insured exposures or achieve recoveries or investment objectives, or the failure of any transaction intended to accomplish one or more of these objectives to deliver anticipated results; (19) Ambac’s substantial indebtedness could adversely affect its financial condition and operating flexibility; (20) Ambac may not be able to obtain financing or raise capital on acceptable terms or at all
| Ambac Financial Group, Inc. 47 2020 Third Quarter FORM 10-Q |



due to its substantial indebtedness and financial condition; (21) Ambac may not be able to generate the significant amount of cash needed to service its debt and financial obligations, and may not be able to refinance its indebtedness; (22) restrictive covenants in agreements and instruments may impair Ambac's ability to pursue or achieve its business strategies; (23) loss of control rights in transactions for which we provide insurance due to a finding that Ambac has defaulted; (24) the impact of catastrophic environmental or natural events, including catastrophic public health events like the COVID-19 pandemic, on significant portions of our insured and investment portfolios; (25) adverse tax consequences or other costs resulting from the characterization of Ambac Assurance’s surplus notes or other obligations as equity; (26) risks attendant to the change in composition of securities in Ambac’s investment portfolio; (27) changes in prevailing interest rates; (28) the expected discontinuance of the London Inter-Bank Offered Rate; (29) factors that may influence the amount of installment premiums paid to Ambac; (30) default by one or more of Ambac's portfolio investments, insured issuers or counterparties; (31) market risks impacting assets in the Ambac’s investment portfolio or the value of our assets posted as collateral in respect of interest rate swap transactions; (32) risks relating to determinations of amounts of impairments taken on investments; (33) the risk of litigation and regulatory inquiries or investigations, and the risk of adverse outcomes in connection therewith, which could have a material adverse effect on Ambac’s business, operations, financial position, profitability or cash flows; (34) actions of stakeholders whose interests are not aligned with broader interests of Ambac's stockholders; (35) system security risks, data protection breaches and cyber attacks; (36) changes in accounting principles or practices that may impact Ambac’s reported financial results; (37) the economic and regulatory impact of “Brexit”; (38) operational risks, including with respect to internal processes, risk and investment models, systems and employees, and failures in services or products provided by third parties; (39) Ambac’s financial position that may prompt departures of key employees and may impact the its ability to attract qualified executives and employees; (40) fluctuations in foreign currency exchange rates could adversely impact the insured portfolio in the event of loss reserves or claim payments denominated in a currency other than US dollars and the value of non-US dollar denominated securities in our investment portfolio; and (41) other risks and uncertainties that have not been identified at this time.
EXECUTIVE SUMMARY
Company Overview:
See Note 1. Background and Business Description to the Unaudited Consolidated Financial Statements, included in Part I, Item 1 in this Form 10-Q and Note 1. Background and Business Description in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, for a description of the Company and our key strategic priorities to achieve our primary goal to maximize stockholder value.
Ambac Assurance and Subsidiaries:
A key strategy for Ambac is to increase the value of its investment in Ambac Assurance by actively managing its assets and liabilities. Asset management primarily entails maximizing
the risk adjusted return on non-VIE invested assets and managing liquidity to help ensure resources are available to meet operational and strategic cash needs. These strategic cash needs include activities associated with Ambac's liability management and loss mitigation programs.
Asset Management:
Investment portfolios are subject to internal investment guidelines, as well as limits on types and quality of investments imposed by applicable insurance laws and regulations. The investment portfolios of Ambac Assurance and Ambac UK hold fixed income securities, including distressed Ambac-insured securities, and various pooled investment funds. Refer to Note 8. Investments to the Unaudited Consolidated Financial Statements, included in Part I, Item 1 in this Form 10-Q for further details of fixed income investments by asset category and pooled investment funds by investment type.
At September 30, 2020, Ambac and its subsidiaries owned $603 million of distressed Ambac-insured bonds, including significant concentrations of insured Puerto Rico and RMBS bonds, and excluding Ambac's holdings of secured notes issued by Ambac LSNI. Subject to applicable internal and regulatory guidelines, market conditions and other constraints, Ambac may continue to opportunistically purchase or sell Ambac-insured securities.
Liability and Insured Exposure Management:
Ambac Assurance's Risk Management Group focuses on the implementation and execution of risk reduction, defeasance and loss recovery strategies. Analysts evaluate the estimated timing and severity of projected policy claims as well as the potential impact of loss mitigation or remediation strategies in order to target and prioritize policies, or portions thereof, for commutation, reinsurance, refinancing, restructuring or other risk reduction strategies. For targeted policies, analysts will engage with issuers, bondholders and other economic stakeholders to negotiate, structure and execute such strategies. During 2020, successful risk reduction transactions included:
A commutation in January 2020, via a refunding, of a watch list public finance transaction with net par outstanding of $171 million at December 31, 2019;
A refinancing in February 2020 of an adversely classified asset-backed leasing transaction with net par outstanding of $86 million at December 31, 2019;
Purchasing quota share reinsurance in June 2020 on a transportation revenue credit with net par outstanding of $33 million at December 31, 2019;
A refinancing in August 2020 of an international stadium transaction with net par outstanding of $217 million at December 31, 2019; and
Partial commutations of $32 million of adversely classified credits over the course of 2020.
The following table provides a comparison of total, adversely classified ("ACC") and watch list credit net par outstanding in the insured portfolio at September 30, 2020 and December 31, 2019. Net par exposure within the U.S. public finance market includes capital appreciation bonds which are reported at the par amount at the time of issuance of the insurance policy as opposed to the current accreted value of the bonds.
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($ in millions)September 30,
2020
December 31,
2019
Variance
Total$34,751 $38,018 $(3,267)(9)%
ACC8,576 7,535 1,041 14 %
Watch list4,961 6,752 (1,791)(27)%
The decrease in total net par outstanding resulted from active de-risking initiatives, including the transactions noted above, as well as scheduled maturities, amortizations, refundings and calls. Additionally, total net par outstanding reduced as a result of the weakening of British Pounds as compared to US Dollars.
The increase in ACC exposures is primarily due to the addition of credits impacted by COVID-19 (including $975 million of net par outstanding from the Watch List category), such as hotel tax, stadium, convention center and public house insured transactions, partially offset by active de-risking and issuer paydowns and calls.
The decrease in Watch List net par outstanding resulted from active de-risking initiatives (including the transactions noted above), downgrades to ACC due to COVID-19, and scheduled maturities, amortizations, refundings and calls.
In addition, as a result of the economic impacts from the COVID-19 pandemic, $2,651 million of net par outstanding in sectors such as mass transit, toll roads, and private higher education, among others, have been added to the Survey List. The Survey List is a categorization for enhanced monitoring of currently performing credits.
We also continue to experience stress in our exposure to Puerto Rico that consists of several different issuing entities (all below investment grade). Each issuing entity has its own credit risk profile attributable to discreet revenue sources, direct general obligation pledges and general obligation guarantees. Refer to Part 1, Item 1 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, for additional information regarding the different issuing entities that encompass Ambac's exposures to Puerto Rico.
COVID-19
In March 2020, the outbreak of COVID-19, caused by a novel strain of the coronavirus, was recognized as a pandemic by the World Health Organization, and the outbreak is widespread globally, including in the markets in which we operate. The COVID-19 outbreak had and continues to have a notable impact on general economic conditions, including but not limited to higher unemployment; volatility in the capital markets; closure or severe curtailment of the operations and hence, revenues, of many businesses and public and private enterprises to which we are directly or indirectly exposed, such as hotels, restaurants, sports and entertainment facilities, airports and other transportation facilities, and retail establishments, mostly due to social distancing guidelines, travel bans and restrictions, and business restrictions and shutdowns. While many U.S. states and territories have eased restrictions more recently and provided clear social distancing guidelines to support businesses, challenges remain, including the recent rise of new COVID-19 cases.
In the U.S., monetary policy and fiscal stimulus, particularly the Coronavirus Aid, Relief and Economic Security ("CARES")
Act, have temporarily helped moderate the economic impact of COVID-19, along with stimulus and other actions taken by governments outside the U.S.
Nonetheless, the U.S. and most large global economies materially contracted through the third quarter of the year. While a recovery is currently underway led by an increase in retail sales in North America and the Eurozone since May, the trajectory and sustainability of the economic recovery is uncertain due to, among other things, the magnitude of job losses, cooler weather that will curb outdoor activity, uncertainty regarding continued government support measures, the recent rise of new COVID-19 cases and uncertainty related to the timing and efficacy of a vaccine. For the Ambac insured portfolio, credit risk remains elevated due to the historical and future economic and financial impact related to the COVID-19 crisis.
COVID-19 has also impacted Ambac's operating environment. Ambac has implemented a COVID-19 response plan designed to ensure the safety of our staff and business continuity. Our employees have transitioned to working remotely while maintaining full operational capabilities. Since July 2020, Ambac opened certain of its offices to allow a portion of the workforce to safely return on a voluntary basis. We have not experienced and do not anticipate incurring material net incremental operating expenditures to maintain the current operating environment. Although many of Ambac's critical third-party service providers are operating with employees working remotely, we have not presently identified or experienced any limitations or operational constraints with respect to services provided. Ambac does not believe that our current operating environment has resulted in a significant change to our disclosure controls or internal controls over financial reporting.
COVID-19 has adversely impacted Ambac's financial position and results of operations as credit risk in the insured and investment portfolios has increased. The municipal, project finance, mortgage-backed and student loan sectors, as well as other asset securitizations, in particular, could be materially adversely impacted, and as a result, with the exception of the mortgage-backed sector, we have increased loss reserves across each of these and other sectors during the nine months ended September 30, 2020. In the mortgage-backed sector, much lower interest rates have increased excess spread recoveries on previously paid claims and largely offset the impact of higher projected mortgage delinquencies and losses resulting from the COVID-19 pandemic. We are continuously evaluating and updating our view of the macro economic environment as well as our specific credit view of each of our insured exposures considering the significant uncertainties brought upon us by the COVID-19 pandemic. The overall financial impact from COVID-19 has been and will be a function of (i) the willingness and ability of issuers of insured obligations and other counterparties to pay their obligations when due, whether due to operational or financial reasons; (ii) the impact of changes to interest rates on policy and derivative payments; and (iii) the performance of the investment portfolio.
Ambac’s insurance policies will be drawn in the event that the issuers of insured obligations do not make payments on
| Ambac Financial Group, Inc. 49 2020 Third Quarter FORM 10-Q |



their obligations when due. As a result of the COVID-19 related economic impact on issuers and markets where Ambac provides financial guarantees; including lower tax, project, and business revenues and increases in forbearances or delinquencies on mortgage and student loan payments, we have increased our loss reserves and may further increase them in the future depending on the duration and severity of the crisis. The crisis may also impair certain issuers' ability to pay premiums owed to Ambac; however, we believe such issuers currently have the ability to continue to pay such premiums timely, but this is subject to change.
Ambac has exposure to reinsurance counterparties for their portions of future claim payments. Ambac has reinsured approximately 13.3% of its gross par outstanding to four reinsurance counterparties. Each of these reinsurance counterparties is experienced in the business of reinsuring and/or writing financial guaranty insurance. All have current ratings of A+ (by S&P) or better and have sufficient collateralization or replacement triggers upon downgrade. Ambac actively monitors each of these reinsurance entities and currently believes they have the ability to perform under their respective reinsurance policies, but this is subject to change.
Ambac is exposed to the risk that contractual counterparties (including those under our RMBS litigations and derivative counterparties) may default in their financial obligations, whether as the result of insolvency, lack of liquidity, operational failure, fraud or other reasons. At present, Ambac has no concerns about the ability of our contractual counterparties, which include certain regulated exchanges in the case of interest rate swaps and futures, to perform under their contracts, but this is subject to change.
Asset prices declined substantially during the first quarter, particularly in directly affected industries such as tourism, airlines, hospitality, commercial real estate and manufacturing. While Ambac does not have significant investments in these asset classes, we did experience a negative total return for the investment portfolio of approximately (4.4)% during the three month period ending March 31, 2020.  We evaluated and did not recognize credit impairments on the investment portfolio as of such date. However, in early April 2020, we monetized a material portion of our investments in certain assets classes; including corporate securities rated below the 'A' rated category, all directly owned CMBS (other than Military Housing bonds), and approximately 50% of all CLOs (all rated investment grade). While these positions were sold at a net gain, future investment losses and impairments may be possible. Asset prices partially recovered during the second and third quarters of 2020. Ambac recognized a total return for the investment portfolio of approximately 2.4% and 2.3% for the three and nine months ended September 30, 2020, respectively.
Given the economic uncertainties associated with the duration and effects of the COVID-19 pandemic, it is impossible to fully predict all of its consequences and, as a result, it is possible that our future operating results and financial condition may be
materially adversely affected. Refer to "Financial Guarantees In Force," "Results of Operations" and "Balance Sheet Commentary" for further financial details on the current impact from COVID-19.
With regard to Ambac's new business strategic objective, we continue to evaluate opportunities in a disciplined manner. Our evaluation process has been revised to incorporate consideration of the impact of COVID-19 on new business prospects as well as Ambac's existing business and operations. While we continue to pursue new business opportunities, we believe that the COVID-19 pandemic has caused a general slow down in activity as potential targets evaluate the financial and strategic impact of the pandemic on their businesses and due to the practical constraints of shelter-in-place orders, social distancing guidelines, travel bans and restrictions, and business shutdowns.
AFG:
As of September 30, 2020 the net assets of AFG, excluding its equity investments in subsidiaries, were $465 million.
($ in millions)
Cash and short-term investments (1)
$313 
Other investments (2)
114 
Other net assets (3)
38 
Total$465 
(1)    During the three months ended September 30, 2020, AFG purchased Everspan Insurance Company, from Ambac Assurance and repositioned it as a subsidiary of a new intermediary holding company that is directly owned by AFG. This acquisition required a cash payment from AFG to Ambac Assurance of approximately $14 million.
(2)     Includes surplus notes (fair value of $59 million) issued by Ambac Assurance that are eliminated in consolidation.
(3)    Includes accruals for tolling payments from Ambac Assurance in accordance with the Amended Tax Sharing Agreement of $28 million. Refer to Note 10. Income Taxes for discussion over the timing of collection.
Financial Statement Impact of Foreign Currency:
The impact of foreign currency as reported in Ambac's Unaudited Consolidated Statement of Total Comprehensive Income for the nine months ended September 30, 2020, included the following:
($ in millions)
Net income (1)
$2 
Gain (loss) on foreign currency translation (net of tax)(20)
Unrealized gains (losses) on non-functional currency available-for-sale securities (net of tax)5 
Impact on total comprehensive income (loss)$(13)
(1)    A portion of Ambac UK's, and to a lesser extent Ambac Assurance's, assets and liabilities are denominated in currencies other than its functional currency and accordingly, we recognized net foreign currency transaction gains/(losses) as a result of changes to foreign currency rates through our Unaudited Consolidated Statement of Total Comprehensive Income (Loss). Refer to Note 2. Basis of Presentation and Significant Accounting Policies to the Unaudited Consolidated Financial Statements
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included in Part I, Item 1 in this Form 10-Q for further details on transaction gains and losses.
Future changes to currency rates may adversely affect our financial results. Refer to Part II, Item 7A in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, for further information on the impact of future currency rate changes on Ambac's financial instruments.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Ambac’s Unaudited Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), which require the use of material estimates and assumptions. For a discussion of Ambac’s critical accounting policies and estimates, see “Critical Accounting Policies and Estimates” in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Ambac’s Annual Report on Form 10-K for the year ended December 31, 2019.

FINANCIAL GUARANTEES IN FORCE
Financial guarantee products were sold in three principal markets: U.S. public finance, U.S. structured finance and international finance. The following table provides a breakdown of guaranteed net par outstanding by market at September 30, 2020 and December 31, 2019. Net par exposures within the U.S. public finance market include capital appreciation bonds which are reported at the par amount at the time of issuance of the
insurance policy as opposed to the current accreted value of the bonds. Guaranteed net par outstanding includes the exposures of policies insuring variable interest entities (“VIEs”) consolidated in accordance with the Consolidation Topic of the ASC. Guaranteed net par outstanding excludes the exposures of policies that insure bonds which have been refunded or pre-refunded and excludes exposure of the policy that insures the notes issued by Ambac LSNI as defined in Note 1. Background and Business Description in the Notes to the Consolidated Financial Statements included in Part II, Item 8 in the Company's Annual Report on Form 10-K for the year ended December 31, 2019:
($ in millions)September 30,
2020
December 31,
2019
Public Finance (1) (2)
$16,041 $17,653 
Structured Finance6,614 7,508 
International Finance12,096 12,857 
Total net par outstanding$34,751 $38,018 
(1)Includes $5,596 and $5,654 of Military Housing net par outstanding at September 30, 2020 and December 31, 2019, respectively.
(2)Includes $1,070 and $1,123 of Puerto Rico net par outstanding at September 30, 2020 and December 31, 2019, respectively. Components of Puerto Rico net par outstanding include capital appreciation bonds which are reported at the par amount at the time of issuance of the related insurance policy as opposed to the current accreted value of the bonds.

The table below shows Ambac’s ten largest insured exposures, by repayment source, as a percentage of total financial guarantee net par outstanding at September 30, 2020:
($ in millions)Risk NameCountry-Bond Type
Ambac
Ratings (1)
Net Par
Outstanding
(2)
% of Total
Net Par
Outstanding
IFAUKMitchells & Butlers Finance plc-UK Pub SecuritisationUK-Asset SecuritizationsBBB$950 2.7 %
IFAUK
Capital Hospitals plc (3)
UK-InfrastructureA-851 2.4 %
IFAUKAspire Defence Finance plcUK-InfrastructureA-821 2.4 %
IFAUKAnglian WaterUK-UtilityA-805 2.3 %
PFAACNew Jersey Transportation Trust Fund Authority - Transportation SystemUS-Lease and Tax-backed RevenueBBB-772 2.2 %
IFAUKNational Grid GasUK-UtilityA-743 2.1 %
IFAUKPosillipo Finance II S.r.lItaly-Sub-SovereignBIG728 2.1 %
IFAUK
Ostregion Investmentgesellschaft NR 1 SA (3)
Austria-InfrastructureBIG691 2.0 %
IFAUKRMPA Services plcUK-InfrastructureBBB+542 1.6 %
PFAACMets Queens Baseball Stadium Project, NY, Lease RevenueUS-Stadium FinancingBIG540 1.6 %
Total$7,443 21.4 %
PF = Public Finance, SF = Structured Finance, IF = International Finance
AAC = Ambac Assurance, AUK = Ambac UK
(1)    Internal credit ratings are provided solely to indicate the underlying credit quality of guaranteed obligations based on the view of Ambac. In cases where Ambac has insured multiple tranches of an issue with varying internal ratings, or more than one obligation of an issuer with varying internal ratings, a weighted average rating is used. Ambac credit ratings are subject to revision at any time and do not constitute investment advice. BIG denotes credits deemed below investment grade.
(2)    Net Par includes capital appreciation bonds, which are reported at the par amount at the time of issuance of the insurance policy as opposed to the current accreted value of the bonds.
(3)    A portion of this transaction is insured by an insurance policy issued by Ambac Assurance. Ambac Assurance has issued policies for these transactions that will only pay in the event that Ambac UK does not pay under its insurance policies ("second to pay policies").
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Net par related to the top ten exposures reduced $197 from December 31, 2019. Exposures are impacted by changes in foreign exchange rates, certain indexation rates and scheduled and unscheduled paydowns. The decrease from 2019 was primarily related to foreign exchange and scheduled paydowns. The concentration of net par amongst the top ten (as a percentage of net par outstanding) increased slightly to 21% at September 30, 2020, from 20% at December 31, 2019. However, certain credits within the top ten have had Ambac rating downgrades since December 31, 2019, primarily related to the impact of COVID-19, including Mitchells & Butlers Finance plc, New Jersey Transportation Trust Fund Authority and Mets Queens Baseball Stadium Project. Aspire Defence Finance plc's rating at September 30, 2020, improved since December 31, 2019. The remaining insured portfolio of financial guarantees has an average net par outstanding of $32 million per single risk, with insured exposures ranging up to $504 million and a median net par outstanding of $5 million.
Given that Ambac has not written any new insurance policies since 2008, the risk exists that the insured portfolio becomes increasingly concentrated to large and/or below investment grade exposures.
COVID-19
COVID-19 and the public health responses by the US federal and state governments at the onset of the pandemic resulted in a shut down for several months of significant portions of the US economy, including areas that Ambac's insured obligors rely upon to generate the revenues and cash flows necessary to service debts we insure. Governments outside the US, in markets in which Ambac operates, also implemented similar measures to the US. Ambac undertook a detailed analysis of the potential impact of the closure of certain portions of the US economy and certain other economies, including the UK, Italy, and Australia, to assess the impact of the resulting global economic contraction on its insured financial guarantee portfolio. The economic contraction and the subsequent but still uncertain recovery; actions such as monetary policy and fiscal stimulus, including the CARES Act in the US that was signed into law on March 27, 2020, and future fiscal stimulus programs; and our insured obligors' financial flexibility and ability to mitigate the operational and economic impact of the recession will determine the ultimate impact to Ambac's insured portfolio.
CARES Act and Other Relief Measures:
The $2.4 trillion Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") provides relief and stimulus funds for American consumers, businesses and industries impacted by COVID-19.
The CARES Act has several measures that impacted US municipalities and other borrowers, including consumers, such as mortgage and student loan borrowers, represented in our insured portfolio, including:
A program for direct lending, loans, loan guarantees and investments to eligible businesses, states and municipalities, including to passenger airlines and cargo airlines;
A program for small business loans (Paycheck Protection Program, as amended by the Paycheck Protection Program and Health Care Enhancement Act (“PPP & HCE Act”));
Business tax breaks, including payroll tax deferral
An allocation of direct aid to state and local governments to reimburse them for the costs of dealing with COVID-19;
The Public Health and Social Services Fund for distribution of grants to healthcare providers and hospitals (as amended by the PPP & HCE Act);
Grants for transit agencies;
Grants for airport authorities; and
Direct payments to households and for unemployment insurance.
Despite the above provisions, which are designed to help mitigate the economic impact of the COVID-19 pandemic generally, the CARES Act contains certain provisions that may adversely affect Ambac.
The CARES Act temporarily suspended payments on all student loans held by the Department of Education through September 30, 2020. Although the CARES Act provision did not include the private student loans owned by special purpose entities that have their securitized obligations guaranteed by Ambac Assurance, we have incorporated into our loss reserves analysis assumptions related to increased delinquencies for borrowers with private student loans who often also have federal student loans and have elected not to pay altogether. Despite the assumed increase in delinquencies and losses related to this phenomena as well as the general deterioration in consumer credit related to the economic downturn, Ambac Assurance does not anticipate making substantial claim payments on insured student loan transactions for several years due to the structures governing the insured bonds.
Additionally, the federal government has provided temporary relief measures to which servicers of mortgage loans must adhere. The Federal Housing Administration ("FHA") of the US Department of Housing and Urban Development and the Federal Housing Finance Agency ("FHFA") are providing temporary relief measures that require mortgage loan servicers to offer relief to borrowers who suffer hardship as a result of COVID-19. The relief measures include moratoriums on foreclosures and evictions as well as the expansion of forbearance and subsequent repayment options. Such servicers are generally applying these guidelines to non-FHFA loans, including those loans owned by special purpose entities that have their securitized obligations guaranteed by Ambac Assurance. Moreover, several State agencies have issued similar guidance to mortgage loan servicers concerning loan forbearances and other relief for borrowers. Depending on the trajectory and strength of the economic recovery, there may still be pressure to extend the duration of forbearances and subsequently to offer generous repayment plans. Forbearances increased sharply across the Ambac Assurance's insured first lien RMBS obligations during the second quarter of 2020 and early in the third quarter of 2020, but then dropped later in the third quarter of 2020, albeit to still elevated levels. The ultimate impact of forbearances and other relief measures, such as foreclosure and eviction moratoriums,
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on Ambac Assurance's insured RMBS obligations are still unclear. However, we have assumed that such measures, as well as the residual impact of the global recession, will have an adverse impact on our insured RMBS transactions. Consequently, we have anticipated that we will experience an increase in claim payments for certain of our insured RMBS obligations. However, we also anticipate that the significant decline in interest rates experienced during 2020 will likely generate additional excess spread recoveries on insured RMBS obligations that will mostly compensate for such adverse effects.
In addition to, as well as in connection with, the CARES Act, the Federal Reserve has implemented a number of programs to improve liquidity and the functioning of the financial markets in an effort to help mitigate the impact of the COVID-19 pandemic on financial markets and the macro economy as well as certain displaced sectors of the economy, including those in which Ambac operates, including, but not limited to:
$500 billion for the Municipal Liquidity Facility;
$750 billion for the Primary Market Corporate Credit Facility and Secondary Market Corporate Credit Facility; and
$100 billion in loans for the Term Asset-backed Securities Facility
In the UK all non-essential leisure, food and retail operations, including public houses were closed from March 20, 2020, as a consequence of the COVID-19 pandemic. Premises were allowed to gradually reopen from June 1, 2020, such that by July 4, 2020, the majority of outlets were permitted to reopen. The UK Government introduced a number of measures to mitigate the impact of these enforced closures including rebating employers 80% of staff salaries (up to a £2,500 per month per employee cap), tax deferrals, business loan schemes and property tax relief. On November 5, 2020 the UK Government reimposed the closure the closure of non-essential leisure food and retail operations with the expectation that this closure will continue for the four weeks to December 2, 2020. The mitigating measures noted above will continue through this period before then being slowly withdrawn by March 31, 2021.
While Ambac expects the foregoing measures to help mitigate economic damage and aid the functioning of the capital markets, Ambac's exposure to credit risk as a result of the economic fallout from the COVID-19 pandemic remains elevated, and we could experience material losses that would adversely impact our future results of operations and financial condition.
Insured Portfolio:
Ambac establishe