AMBAC FINANCIAL GROUP INC | 2013 | FY |

Assets:

Investments

Cash

Receivable for securities sold

Investment income due and accrued

Premium receivables

Reinsurance recoverable on paid and unpaid losses

Deferred ceded premium

Subrogation recoverable

Deferred acquisition costs

Loans

Derivative assets

Current taxes

Insurance intangible asset

Goodwill

Other assets

Variable interest entity assets:

Fixed income securities, at fair value

Restricted cash

Investment income due and accrued

Loans

Intangible assets

Other assets

Total assets

Liabilities and Stockholders’ Equity:

Liabilities:

Liabilities subject to compromise

Unearned premiums

Losses and loss expense reserve

Ceded premiums payable

Obligations under investment agreements

Obligations under investment repurchase agreements

Deferred taxes

Current taxes

Long-term debt

Accrued interest payable

Derivative liabilities

Other liabilities

Payable for securities purchased

Variable interest entity liabilities:

Accrued interest payable

Long-term debt

Derivative liabilities

Other liabilities

Total liabilities

Stockholders’ (deficit) equity:

Preferred stock

Common stock—Predecessor Ambac

Common stock—Successor Ambac

Additional paid-in capital—Predecessor Ambac

Additional paid-in capital—Successor Ambac

Accumulated other comprehensive income

Accumulated deficit

Common stock held in treasury at cost

Total Ambac Financial Group, Inc. stockholders’ (deficit) equity

Noncontrolling interest

Total stockholders’ (deficit) equity

Total liabilities and stockholders’ (deficit) equity

Liabilities subject to compromise

Long-term debt

Accrued interest payable

Total debt discharged

Less: Successor Ambac common stock

Successor Ambac additional paid-in capital

Pre-tax gain from cancellation and satisfaction of Predecessor Ambac debt

Deferred acquisition costs

Loans (non-VIE)

Insurance intangible asset

Goodwill

VIE loans and long-term debt

Obligations under investment agreements

Long-term debt and accrued interest payable

Other liabilities

Asset/liability fair value adjustments impacting Reorganization items

Adjustment to deferred tax provision

Gain on fresh start adjustments

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

Loans—The fair value adjustment for this line item relates to non-VIE loans that have historically been reported at their outstanding principal balance. Refer to Note 10 for a discussion of the valuation methodology used to estimate fair value for each of these financial instruments. Subsequent to the Fresh Start Reporting Date, the fair value discounts are accretable to interest income using the effective interest method over the remaining lives of the loans. Fair value as of April 30, 2013 was calculated using a discounted cash flow approach. As of April 30, 2013, the loans had a principal-weighted average life of 6.81 years and coupon of 5.01%. Discount rates used to determine the fair value of the loans at April 30, 2013 were consistent with the credit quality of the borrowers and had a weighted average of 9.71%.

Insurance intangible asset—Pursuant to the business combinations guidance for insurance entities in the Financial Services—Insurance Topic of the ASC, Successor Ambac accounted for the insurance and reinsurance assets and liabilities acquired as new contracts, and measured them at fair value in two components as follows:

Measurement input

Fair value methodology

(Refer to Note 10)

Successor Ambac accounting policy

(Refer to Note 2)

Premium receipts are projected based on management’s expectations if the insured obligation is a homogenous pool of assets. For non-homogenous contracts, premium projections are based on contractual cash flows.

Loss payments, including subrogation recoveries, are projected using a probability-weighted average of all possible outcomes.

Discount rates are applied to net cash flows at the policy level as follows:

Insurance policies which are in a liability (i.e. net cash outflow) position are discounted using rates which incorporate Ambac’s own credit risk, under the assumption we will be transferring the policies to a market participant with similar credit risk.

Insurance policies which are in an asset (i.e. net cash inflow) position are discounted using a hypothetical buyer’s cost of capital and does not assume we would be transferring the policies to a party with similar credit risk.

Discount rates are applied to gross cash flows at the policy level as follows:

Premiums are discounted at the relevant risk-free rate based on the remaining expected or contractual weighted-average life of the exposure, as applicable.

Losses, including subrogation recoveries, are discounted at the relevant risk-free rate.

Goodwill—This amount represents the excess of the reorganization value over the fair value of identified tangible and intangible assets of the emerging company. Changes in the fair values of these assets and liabilities from the current estimated values, as well as changes in assumptions, could significantly impact the amount of recorded goodwill. Accordingly, there can be no assurance that the estimates, assumptions, and values reflected in the valuations will be realized, and actual results could vary materially. Please refer to the above table located immediately prior to the Reorganized Condensed Consolidated Balance Sheet which indicates how goodwill was determined. Refer to Note 2 for the subsequent accounting treatment of goodwill.

VIE loans and long-term debt—The portion of VIE loans and long-term debt that had not been carried at fair value have been adjusted to fair value for fresh start reporting. Refer to Note 10 for a discussion of the valuation methodology used to estimate fair value for VIE assets and liabilities. Subsequent to the Fresh Start Reporting Date, we have elected to continue accounting for these VIEs at fair value under the fair value option in accordance with the Financial Instruments Topic of the ASC. We believe that the fair value of the investments in these entities provides for greater transparency for recording profit or loss as compared to the equity method under the Investments—Equity Method and Joint Ventures Topic of the ASC. As a result, subsequent changes to fair value will be recorded as (Loss) income on variable interest entities on the Statements of Total Comprehensive Income. Valuation of the long-term debt not previously reported at fair value was determined from third-party quotes. The related VIE loans were valued at April 30, 2013 using a discounted cash flow approach with a discount rate of 5.7%, consistent with the rate implied from the fair value of the VIE’s debt.

Obligations under investment agreements—These instruments have previously been reported at their principal value less unamortized discount. We have adjusted these items to fair value for fresh start reporting. Refer to Note 10 for a discussion of the valuation methodology used to estimate fair value for obligations under investment agreements and investment repurchase agreements. The fair value discounts and premiums to principal will be amortized into interest expense using the effective interest method over the lives of the respective contracts. Fair values were determined using discounted cash flows at April 30, 2013. Valuation of collateralized obligations represents projected cash flows discounted at LIBOR. Valuation of uncollateralized obligations were discounted using a weighted average discount rate of 9.4% consistent with the credit adjusted discount rate of Ambac Assurance, which provides a financial guarantee for all investment and repurchase agreements.

Long-term debt and accrued interest payable—All debt liabilities subject to the Reorganization Plan were discharged. The remaining long-term debt is primarily related to surplus notes and junior surplus notes issued by Ambac Assurance and the Segregated Account, which were carried at their face value less unamortized discount. The notes have been adjusted to estimated fair value for fresh start reporting. Refer to Note 10 for a discussion of the valuation methodology used to estimate fair value. The fair value discount will be amortized into interest expense using the effective interest method over the lives of the respective debt. Surplus notes issued in June 2010 were valued at April 30, 2013 using a discounted cash flow approach corroborated by third party quotes. Internally estimated cash flows were discounted at 10.6%. To the extent that the remaining surplus notes rank pari passu with the June 2010 notes, valuations were determined using projected cash flows discounted at the same 10.6%. Junior surplus notes which cannot be paid until all principal and interest is paid on the other surplus notes were valued with projected cash flows discounted at 16.6%. In all cases, projected cash flows assumed full and timely payment under the respective contracts commencing with the next scheduled interest payments date in June 2014.

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

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

Common stock

Additional paid-in-capital

Accumulated other comprehensive income

Accumulated deficit

Common stock held in treasury at cost

Noncontrolling interest fair value adjustment

Net adjustment