AMBC-2014.09.30-10Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
 
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2014
¨
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)
Delaware
 
13-3621676
(State of incorporation)
 
(I.R.S. employer identification no.)
 
 
 
One State Street Plaza, New York, New York
 
10004
(Address of principal executive offices)
 
(Zip code)
 
 
 
212-658-7470
(Registrant’s telephone number, including area code)
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  x    No  ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  x    No  ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act): (Check one):
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨    No  x
As of November 6, 2014, 45,003,473 shares of common stock, par value $0.01 per share, of the Registrant were outstanding.


Table of Contents

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
 
 
 
PAGE
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

2

Table of Contents

PART I FINANCIAL INFORMATION
Item 1.     Financial Statements of Ambac Financial Group, Inc. and Subsidiaries
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except share data)
September 30,
2014
 
December 31,
2013
 
(Unaudited)
 
 
Assets:
 
 
 
Investments:
 
 
 
Fixed income securities, at fair value (amortized cost of $5,941,188 in 2014 and $5,927,254 in 2013)
$
6,156,228

 
$
5,885,316

Fixed income securities pledged as collateral, at fair value (amortized cost of $64,323 in 2014 and $126,196 in 2013)
64,031

 
126,223

Short-term investments, at fair value (amortized cost of $550,898 in 2014 and $271,118 in 2013)
550,900

 
271,119

Other investments (includes $270,791 at fair value in 2014 and $240,969 at fair value in 2013)
290,870

 
241,069

Total investments
7,062,029

 
6,523,727

Cash and cash equivalents
43,332

 
77,370

Receivable for securities
33,836

 
14,450

Investment income due and accrued
32,818

 
37,663

Premium receivables
1,266,632

 
1,453,021

Reinsurance recoverable on paid and unpaid losses
105,511

 
121,249

Deferred ceded premium
127,596

 
145,529

Subrogation recoverable
489,237

 
498,478

Loans
6,057

 
6,179

Derivative assets
91,320

 
77,711

Insurance intangible asset
1,475,012

 
1,597,965

Goodwill
514,511

 
514,511

Other assets
173,219

 
35,927

Variable interest entity assets:
 
 
 
Fixed income securities, at fair value
2,651,683

 
2,475,182

Restricted cash
7,337

 
17,498

Investment income due and accrued
4,192

 
1,365

Loans, at fair value
12,503,484

 
13,398,895

Intangible assets

 
76,140

Other assets
2,979

 
19,617

Total assets
$
26,590,785

 
$
27,092,477

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except share data)
September 30,
2014
 
December 31,
2013
 
(Unaudited)
 
 
Liabilities and Stockholders’ Equity:
 
 
 
Liabilities:
 
 
 
Unearned premiums
$
1,953,392

 
$
2,255,680

Loss and loss expense reserves
6,003,474

 
5,968,712

Ceded premiums payable
61,104

 
70,962

Obligations under investment agreements
160,515

 
359,070

Deferred taxes
2,176

 
2,199

Current taxes
785

 
738

Long-term debt
1,219,310

 
963,178

Accrued interest payable
376,773

 
294,817

Derivative liabilities
348,427

 
253,898

Other liabilities
66,101

 
67,377

Payable for securities purchased
27,263

 
4,654

Variable interest entity liabilities:
 
 
 
Accrued interest payable
6,141

 
722

Long-term debt, at fair value
13,159,174

 
14,091,753

Derivative liabilities
1,955,291

 
1,772,306

Other liabilities
169

 
7,989

Total liabilities
$
25,340,095

 
$
26,114,055

Commitments and contingencies (see Note 13)
 
 
 
Stockholders’ equity:

 

Preferred stock, par value $0.01 per share; authorized shares—20,000,000; issued and outstanding shares—none

 

Common stock, par value $0.01 per share; authorized shares—130,000,000; issued and outstanding shares—45,004,410 at September 30, 2014 and 45,003,461 at December 31, 2013
450

 
450

Additional paid-in capital
188,648

 
185,672

Accumulated other comprehensive income
250,865

 
11,661

Accumulated earnings
535,706

 
505,219

Common stock held in treasury at cost, 937 shares at September 30, 2014 and December 31, 2013
(19
)
 
(19
)
Total Ambac Financial Group, Inc. stockholders’ equity
975,650

 
702,983

Noncontrolling interest
275,040

 
275,439

Total stockholders’ equity
1,250,690

 
978,422

Total liabilities and stockholders’ equity
$
26,590,785

 
$
27,092,477

See accompanying Notes to Unaudited Consolidated Financial Statements

3

Table of Contents

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Total Comprehensive Income (Unaudited)
 
Period from July 1
 
Period from July 1
 
through
 
through
(Dollars in thousands, except share data)
September 30, 2014
 
September 30, 2013
Revenues:
 
 
 
Net premiums earned
$
64,831

 
$
70,949

Net investment income:
 
 
 
Securities available-for-sale and short-term
82,881

 
51,776

Other investments
700

 
350

Total net investment income
83,581

 
52,126

Other-than-temporary impairment losses:
 
 
 
Total other-than-temporary impairment losses
(6,997
)
 
(38,553
)
Portion of loss recognized in other comprehensive income
1,986

 
516

Net other-than-temporary impairment losses recognized in earnings
(5,011
)
 
(38,037
)
Net realized investment gains (losses)
10,045

 
(10,310
)
Change in fair value of credit derivatives:
 
 
 
Realized gains (losses) and other settlements
596

 
1,580

Unrealized gains (losses)
6,820

 
29,614

Net change in fair value of credit derivatives
7,416

 
31,194

Derivative products
(15,685
)
 
12,372

Other income (loss)
1,046

 
(1,751
)
Income (loss) on variable interest entities
9,116

 
55,109

Total revenues before expenses and reorganization items
155,339

 
171,652

Expenses:
 
 
 
Losses and loss expenses (benefit)
(28,698
)
 
(154,290
)
Insurance intangible amortization
41,908

 
37,473

Underwriting and operating expenses
25,513

 
25,047

Interest expense
31,841

 
31,817

Total expenses (benefit) before reorganization items
70,564

 
(59,953
)
Pre-tax income (loss) from continuing operations before reorganization items
84,775

 
231,605

Reorganization items
2

 
4

Pre-tax income (loss) from continuing operations
84,773

 
231,601

Provision for income taxes
2,344

 
594

Net income (loss)
82,429

 
231,007

Less: net (loss) gain attributable to noncontrolling interest
(21
)
 
32

Net income (loss) attributable to common shareholders
$
82,450

 
$
230,975

Other comprehensive income (loss), after tax:
 
 
 
Net income (loss)
$
82,429

 
$
231,007

Unrealized gains (losses) on securities, net of deferred income taxes of $0
(17,225
)
 
53,877

Gains (losses) on foreign currency translation, net of deferred income taxes of $0
(38,429
)
 
39,798

Changes to postretirement benefit, net of tax of $0
(204
)
 

Total other comprehensive (loss) income, net of tax
(55,858
)
 
93,675

Total comprehensive income (loss)
26,571

 
324,682

Less: comprehensive (loss) gain attributable to the noncontrolling interest:
 
 
 
Net (loss) gain
(21
)
 
32

Currency translation adjustments
(395
)
 
414

Total comprehensive income (loss) attributable to common shareholders
$
26,987

 
$
324,236

Net income (loss) per share attributable to common shareholders
$
1.83

 
$
5.13

Net income (loss) per diluted share attributable to common shareholders
$
1.77

 
$
4.98

See accompanying Notes to Unaudited Consolidated Financial Statements

4

Table of Contents

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Total Comprehensive Income (Unaudited)
 
Successor Ambac
 
 
Predecessor Ambac
 
Period from January 1
 
Period from May 1
 
 
Period from January 1
 
through
 
through
 
 
through
(Dollars in thousands, except share data)
September 30, 2014
 
September 30, 2013
 
 
April 30, 2013
Revenues:
 
 
 
 
 
 
Net premiums earned
$
212,391

 
$
128,988

 
 
$
130,000

Net investment income:
 
 
 
 
 
 
Securities available-for-sale and short-term
228,570

 
80,987

 
 
116,371

Other investments
5,905

 
(2,665
)
 
 
369

Total net investment income
234,475

 
78,322

 
 
116,740

Other-than-temporary impairment losses:
 
 
 
 
 
 
Total other-than-temporary impairment losses
(26,440
)
 
(40,557
)
 
 
(467
)
Portion of loss recognized in other comprehensive income
2,283

 
518

 
 

Net other-than-temporary impairment losses recognized in earnings
(24,157
)
 
(40,039
)
 
 
(467
)
Net realized investment gains (losses)
29,401

 
8,162

 
 
53,305

Change in fair value of credit derivatives:
 
 
 
 
 
 
Realized gains (losses) and other settlements
2,088

 
7,654

 
 
3,444

Unrealized gains (losses)
11,491

 
74,760

 
 
(63,828
)
Net change in fair value of credit derivatives
13,579

 
82,414

 
 
(60,384
)
Derivative products
(117,511
)
 
96,085

 
 
(33,735
)
Other income (loss)
8,206

 
428

 
 
8,363

Income (loss) on variable interest entities
(34,574
)
 
59,707

 
 
426,566

Total revenues before expenses and reorganization items
321,810

 
414,067

 
 
640,388

Expenses:
 
 
 
 
 
 
Losses and loss expenses (benefit)
6,608

 
(180,407
)
 
 
(38,056
)
Insurance intangible amortization
109,878

 
62,425

 
 

Underwriting and operating expenses
75,332

 
41,264

 
 
44,566

Interest expense
96,122

 
52,961

 
 
31,025

Total expenses (benefit) before reorganization items
287,940

 
(23,757
)
 
 
37,535

Pre-tax income (loss) from continuing operations before reorganization items
33,870

 
437,824

 
 
602,853

Reorganization items
211

 
428

 
 
(2,745,180
)
Pre-tax income (loss) from continuing operations
33,659

 
437,396

 
 
3,348,033

Provision for income taxes
3,414

 
1,107

 
 
755

Net income (loss)
30,245

 
436,289

 
 
3,347,278

Less: net (loss) gain attributable to noncontrolling interest
(242
)
 
(367
)
 
 
(1,771
)
Net income (loss) attributable to common shareholders
$
30,487

 
$
436,656

 
 
$
3,349,049

Other comprehensive income (loss), after tax:
 
 
 
 
 
 
Net income (loss)
$
30,245

 
$
436,289

 
 
$
3,347,278

Unrealized gains (losses) on securities, net of deferred income taxes of $0
256,660

 
(37,106
)
 
 
175,347

Gains (losses) on foreign currency translation, net of deferred income taxes of $0
(17,001
)
 
27,136

 
 
(428
)
Changes to postretirement benefit, net of tax of $0
(612
)
 

 
 
185

Total other comprehensive income (loss), net of tax
239,047

 
(9,970
)
 
 
175,104

Total comprehensive income (loss)
269,292

 
426,319

 
 
3,522,382

Less: comprehensive (loss) gain attributable to the noncontrolling interest:
 
 
 
 
 
 
Net (loss) gain
(242
)
 
(367
)
 
 
(1,771
)
Currency translation adjustments
(157
)
 
276

 
 
229

Total comprehensive income (loss) attributable to common shareholders
$
269,691

 
$
426,410

 
 
$
3,523,924

Net income (loss) per share attributable to common shareholders
$
0.68

 
$
9.70

 
 
$
11.07

Net income (loss) per diluted share attributable to common shareholders
$
0.65

 
$
9.40

 
 
$
11.07

See accompanying Notes to Unaudited Consolidated Financial Statements

5

Table of Contents

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity (Unaudited)
 
 
 
Ambac Financial Group, Inc.
 
 
(Dollars in thousands)
Total
 
Accumulated Earnings
 
Accumulated
Other
Comprehensive
Income
 
Preferred
Stock
 
Common
Stock
 
Additional Paid-in
Capital
 
Common
Stock Held
in Treasury,
at Cost
 
Noncontrolling
Interest
Successor Ambac
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2014
$
978,422

 
$
505,219

 
$
11,661

 
$

 
$
450

 
$
185,672

 
$
(19
)
 
$
275,439

Total comprehensive income
269,292

 
30,487

 
239,204

 

 

 

 

 
(399
)
Stock-based compensation
2,960

 

 

 

 

 
2,960

 

 

Shares issued under equity plans

 

 

 

 

 

 

 

Warrants exercised
16

 

 

 

 

 
16

 

 

Balance at September 30, 2014
$
1,250,690

 
$
535,706

 
$
250,865

 
$

 
$
450

 
$
188,648

 
$
(19
)
 
$
275,040

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ambac Financial Group, Inc.
 
 
(Dollars in thousands)
Total
 
Accumulated Earnings
 
Accumulated
Other
Comprehensive
Income
 
Preferred
Stock
 
Common
Stock
 
Additional Paid-in
Capital
 
Common
Stock Held
in Treasury,
at Cost
 
Noncontrolling
Interest
Successor Ambac
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at May 1, 2013
$
460,415

 
$

 
$

 
$

 
$
450

 
$
184,550

 
$

 
$
275,415

Total comprehensive income
426,319

 
436,656

 
(10,246
)
 

 

 

 

 
(91
)
Warrants exercised
16

 

 

 

 

 
16

 

 

Balance at September 30, 2013
$
886,750

 
$
436,656

 
$
(10,246
)
 
$

 
$
450

 
$
184,566

 
$

 
$
275,324

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ambac Financial Group, Inc.
 
 
(Dollars in thousands)
Total
 
Accumulated Earnings
 
Accumulated
Other
Comprehensive
Income
 
Preferred
Stock
 
Common
Stock
 
Additional Paid-in
Capital
 
Common
Stock Held
in Treasury,
at Cost
 
Noncontrolling
Interest
Predecessor Ambac
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2013
$
(3,246,967
)
 
$
(6,297,264
)
 
$
625,385

 
$

 
$
3,080

 
$
2,172,027

 
$
(410,755
)
 
$
660,560

Total comprehensive income
3,522,382

 
3,349,049

 
174,875

 

 

 

 

 
(1,542
)
Stock-based compensation
(60
)
 
(60
)
 

 

 

 

 

 

Shares issued under equity plans
60

 

 

 

 

 

 
60

 

Elimination of Predecessor Ambac Shareholder equity accounts and noncontrolling interest adjustment

 
2,948,275

 
(800,260
)
 

 
(3,080
)
 
(2,172,027
)
 
410,695

 
(383,603
)
Balance at April 30, 2013
$
275,415

 
$

 
$

 
$

 
$

 
$

 
$

 
$
275,415

See accompanying Notes to Unaudited Consolidated Financial Statements

6

Table of Contents

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
 
Successor Ambac
 
 
Predecessor Ambac
 
Period from January 1
 
Period from May 1
 
 
Period from January 1
 
through
 
through
 
 
through
(Dollars in thousands)
September 30, 2014
 
September 30, 2013
 
 
April 30, 2013
Cash flows from operating activities:
 
 
 
 
 
 
Net income (loss) attributable to common shareholders
$
30,487

 
$
436,656

 
 
$
3,349,049

Noncontrolling interest in subsidiaries’ earnings
(242
)
 
(367
)
 
 
(1,771
)
Net income (loss)
30,245

 
436,289

 
 
3,347,278

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
 
 
 
Depreciation and amortization
2,223

 
1,243

 
 
974

Amortization of bond premium and discount
(50,432
)
 
(15,056
)
 
 
(60,146
)
Reorganization items
211

 
428

 
 
(2,745,180
)
Share-based compensation
2,960

 

 
 

Deferred income taxes
(23
)
 
31

 
 
(6
)
Current income taxes
47

 
821

 
 
(101,188
)
Deferred acquisition costs

 

 
 
14,207

Unearned premiums, net
(284,355
)
 
(164,551
)
 
 
(172,549
)
Losses and loss expenses, net
59,741

 
(158,706
)
 
 
(43,284
)
Ceded premiums payable
(9,858
)
 
(6,440
)
 
 
(2,059
)
Investment income due and accrued
4,845

 
3,846

 
 
1,781

Premium receivables
186,389

 
95,621

 
 
88,990

Accrued interest payable
81,956

 
37,454

 
 
23,953

Amortization of insurance intangible assets
109,878

 
62,425

 
 

Net mark-to-market (gains) losses
(11,491
)
 
(74,760
)
 
 
63,828

Net realized investment gains
(29,401
)
 
(8,162
)
 
 
(53,305
)
Other-than-temporary impairment charges
24,157

 
40,039

 
 
467

Variable interest entity activities
34,574

 
(59,707
)
 
 
(426,566
)
Other, net
106,703

 
(106,559
)
 
 
62,122

Net cash provided by (used in) operating activities
258,369

 
84,256

 
 
(683
)
Cash flows from investing activities:
 
 
 
 
 
 
Proceeds from sales of bonds
1,727,142

 
622,608

 
 
310,916

Proceeds from matured bonds
896,936

 
461,436

 
 
307,472

Purchases of bonds
(2,547,727
)
 
(1,400,547
)
 
 
(286,633
)
Proceeds from sales of other invested assets
40,173

 
59,449

 
 

Purchases of other invested assets
(54,768
)
 
(127,237
)
 
 
(164,368
)
Change in short-term investments
(279,781
)
 
177,385

 
 
(64,956
)
Loans, net
112

 
1,134

 
 
1,920

Change in swap collateral receivable
(105,354
)
 
10,889

 
 
(8,863
)
Other, net
6,553

 
(1,667
)
 
 
19,828

Net cash (used in) provided by investing activities
(316,714
)
 
(196,550
)

 
115,316

Cash flows from financing activities:
 
 
 
 
 
 
Proceeds from the sale of Junior Surplus Notes of the Segregated Account
224,262

 

 
 

Paydowns of variable interest entity secured borrowing

 
(7,566
)
 
 
(5,519
)
Proceeds from warrant exercise
15

 
16

 
 

Payments for investment agreement draws
(199,970
)
 
(4,556
)
 
 

Net cash provided by (used in) financing activities
24,307

 
(12,106
)
 
 
(5,519
)
Net cash flow
(34,038
)
 
(124,400
)
 
 
109,114

Cash and cash equivalents at beginning of period
77,370

 
152,951

 
 
43,837

Cash and cash equivalents end of period
$
43,332

 
$
28,551

 
 
$
152,951


7

Table of Contents

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
 
Successor Ambac
 
 
Predecessor Ambac
 
Period from January 1
 
Period from May 1
 
 
Period from January 1
 
through
 
through
 
 
through
(Dollars in thousands)
September 30, 2014
 
September 30, 2013
 
 
April 30, 2013
Supplemental disclosure of cash flow information:
 
 
 
 
 
 
Cash paid during the period for:
 
 
 
 
 
 
Income taxes
$
3,246

 
$
336

 
 
$
102,129

Interest on variable interest entity secured borrowing

 
163

 
 
276

Interest on investment agreements
459

 
640

 
 
444

Cash payments related to reorganization items:
 
 
 
 
 
 
Professional fees paid for services rendered in connection with the Chapter 11 proceeding
272

 
15,478

 
 
3,860

See accompanying Notes to Unaudited Consolidated Financial Statements

8

Table of Contents

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Amounts)
1.    BACKGROUND AND BUSINESS DESCRIPTION
These unaudited consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in Ambac’s 2013 Annual Report on Form 10-K. Certain reclassifications may have been made to prior periods’ amounts to conform to the current period’s presentation.
Ambac Financial Group, Inc.
Ambac Financial Group, Inc. (“Ambac” or the “Company”), headquartered in New York City, is a financial services holding company incorporated in the state of Delaware. Ambac's common stock and warrants are listed on NASDAQ and trade under the symbols “AMBC” and “AMBCW,” respectively.
Ambac’s primary goal is to maximize shareholder value through executing the following key strategies:
Increasing the value of its investment in Ambac Assurance Corporation ("Ambac Assurance") by actively managing its assets and liabilities with a focus on maximizing risk-adjusted investment portfolio returns and mitigating or remediating losses on poorly performing insured transactions through executing policy commutations, repurchasing liabilities at a discount, pursuing recoveries of losses through litigation and the exercise of contractual and legal rights, restructuring transactions, and other means; and
Pursuing new businesses, which may include financial services businesses such as advisory, asset servicing, asset management, and/or insurance.
As part of its asset/liability management strategy, Ambac Assurance is considering the possibility of entering into transactions whereby it would monetize certain assets and/or restructure or exchange its outstanding debt and insurance obligations.
Although we are exploring new business opportunities for Ambac, no assurance can be given that we will be able to identify or execute the acquisition or development of any new business. In addition, there can be no assurance that we will be able to generate or obtain the financial and other resources that may be required to finance the acquisition or development of any new business. 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 is speculative.
On August 28, 2014, Ambac sold $350,000 face amount of junior surplus notes (the "Junior Surplus Notes") issued to it by the Segregated Account (as defined below), plus accrued but unpaid interest thereon, into a newly formed Trust in exchange for cash of $224,262 and a subordinated owner trust certificate (the "Owner Trust Certificate") issued by the Trust in the face amount of $74,794 The Trust funded the cash portion of its purchase of the Junior Surplus Notes with proceeds of the private placement of $299,175 face amount of Notes to third party investors ("Notes"), which amount equates to approximately 80% of par plus accrued and unpaid interest on the Junior Surplus Notes. The Notes have final maturity of August 28, 2039. Interest on the Notes will accrue at 5.1% per annum and compound annually on June 7th of each year up to and including the maturity date. Payments on the Notes will be made when and to the extent that the Segregated Account makes payments on the Junior Surplus Notes. The Notes must be paid in full before any payments will be made on the Owner Trust Certificate. The Notes and Owner Trust Certificate are non-recourse to Ambac, Ambac Assurance Corporation and the Segregated Account, but will be collateralized by the Junior Surplus Notes. Ambac will record the Owner Trust Certificate as an equity investment and will reflect the activities of the non-consolidated Trust within Net investment income: Other investments on the Consolidated Statements of Total Comprehensive Income.
The execution of Ambac’s strategy to increase the value of its investment in Ambac Assurance is subject to the authority of the Rehabilitator (as defined below) to control the management of the Segregated Account (as defined below). In exercising such authority, the Rehabilitator will act for the benefit of policyholders, and will not take into account the interests of Ambac. Similarly, by operation of the contracts executed in connection with the establishment, and subsequent rehabilitation, of the Segregated Account, the Rehabilitator retains rights to oversee and approve certain actions taken in respect of Ambac Assurance. Ambac Assurance's ability to commute policies or purchase liabilities may also be limited by available liquidity.

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As a result of uncertainties associated with the aforementioned oversight by the Rehabilitator of the Segregated Account, management has concluded that there is substantial doubt about Ambac's ability to continue as a going concern. Ambac’s financial statements as of and for the nine and twelve month periods ending September 30, 2014 and December 31, 2013, respectively, are prepared assuming Ambac continues as a going concern and do not include any adjustment that might result from its inability to continue as a going concern.
Segregated Account of Ambac Assurance Corporation
In March 2010, Ambac Assurance established a Segregated Account pursuant to Wisc. Stat. §611.24 (2) (the “Segregated Account”) to segregate certain segments of Ambac Assurance’s liabilities, and the Office of the Commissioner of Insurance for the State of Wisconsin (“OCI” (which term shall be understood to refer to such office as regulator of Ambac Assurance and to refer to the Commissioner of Insurance for the State of Wisconsin as rehabilitator of the Segregated Account (the “Rehabilitator”), as the context requires)) commenced rehabilitation proceedings in the Dane County, Wisconsin Circuit Court (the “Rehabilitation Court”) with respect to the Segregated Account (the “Segregated Account Rehabilitation Proceedings”) in order to permit OCI to facilitate an orderly run-off and/or settlement of the liabilities allocated to the Segregated Account pursuant to the provisions of the Wisconsin Insurers Rehabilitation and Liquidation Act. Net par exposure as of September 30, 2014 for policies allocated to the Segregated Account was $19,650,823.
In 2010, Ambac Assurance issued a $2,000,000 secured note due in 2050 (the “Secured Note”) to the Segregated Account. Interest on the Secured Note accrued at the rate of 4.5% per annum, and accrued interest was capitalized and added to outstanding principal quarterly. The Segregated Account had the ability to demand payment under the Secured Note from time to time to pay claims and other liabilities. By June 30, 2014, the Secured Note, including capitalized interest since the date of issuance, was fully drawn, resulting in a balance of $0. Following the exhaustion of the Secured Note, the Segregated Account has the ability to demand payment from time to time under an aggregate excess of loss reinsurance agreement provided by Ambac Assurance (the “Reinsurance Agreement”) to pay claims and other liabilities. In addition, certain operating and administrative costs and expenses of the Segregated Account are now reimbursable by Ambac Assurance pursuant to the cooperation agreement between the Segregated Account and Ambac Assurance dated as of March 24, 2010, as amended (the “Cooperation Agreement”).
Ambac Assurance is not obligated to make payments under the Reinsurance Agreement or Cooperation Agreement if its surplus as regards to policyholders is less than $100,000 (the “Minimum Surplus Amount”). As long as the surplus as regards to policyholders is not less than the Minimum Surplus Amount, payments by Ambac Assurance to the Segregated Account under the Reinsurance Agreement and Cooperation Agreement are not capped. At September 30, 2014, Ambac Assurance’s surplus as regards to policyholders of $897,692 exceeded the Minimum Surplus Amount. In the event that Ambac Assurance does not maintain surplus in excess of the Minimum Surplus Amount, the Segregated Account would experience a shortfall in funds available to pay its liabilities. Any such shortfall would be a consideration for the Rehabilitator in the determination of whether any changes to the Segregated Account Rehabilitation Plan (as defined below) and/or the amount of partial policy claim payments are necessary or appropriate or whether to institute general rehabilitation proceedings against Ambac Assurance.
On October 8, 2010, OCI filed a plan of rehabilitation for the Segregated Account (the “Segregated Account Rehabilitation Plan”) in the Rehabilitation Court. The Rehabilitation Court confirmed the Segregated Account Rehabilitation Plan on January 24, 2011, although it did not become effective at such time. The confirmed Segregated Account Rehabilitation Plan also made permanent the injunctions issued by the Rehabilitation Court on March 24, 2010.
In 2013 the Rehabilitator received approval from the Rehabilitation Court to make cash payments in excess of 25% of the permitted policy claim amount (“Supplemental Payments”) with respect to certain policies so that cash flow in the related securitization trusts that would have been available to reimburse Ambac Assurance had it paid claims in full under such policies is not diverted to uninsured holders who would not have received such cash flow if claims had been paid in full. As a result, the Segregated Account began making Supplemental Payments on certain SP Policies in August 2013. In the first quarter of 2014, the Rehabilitator also received approval from the Rehabilitation Court for the Rehabilitator and the Segregated Account to disburse settlement proceeds from RMBS remediation claims as permitted policy claim payments, with such distributions to include (i) paying claims payments in excess of the then applicable claims cash payment percentage, and/or (ii) paying all or portions of unpaid permitted policy claims (such policy claim payments, “Special Policy Payments”).
On June 11, 2014, the Rehabilitation Court approved amendments to the Segregated Account Rehabilitation Plan that had been proposed by the Rehabilitator, and the Segregated Account Rehabilitation Plan, as amended, became effective on June 12, 2014. The amendments to the Segregated Account Rehabilitation Plan primarily modified the mechanism for handling claims. Instead of the combination of cash payments and interest-bearing surplus notes originally contemplated by the Segregated Account Rehabilitation Plan, under the amended Segregated Account Rehabilitation Plan holders of permitted policy claims have received and will receive an initial interim cash payment for a portion of such policy claim (“Interim Payment”), together with the right to

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receive a deferred payment equal to the balance of the unpaid policy claim, as may be adjusted from time to time pursuant to the terms of the amended Segregated Account Rehabilitation Plan (“Deferred Amount”). Payments of Deferred Amounts will be made at such times as the Rehabilitator deems appropriate in his sole discretion. The Segregated Account will also establish junior deferred amounts (“Junior Deferred Amounts”) with respect to permitted general claims instead of issuing junior surplus notes to the holders of such claims as contemplated under the original Segregated Account Rehabilitation Plan.
The amendments to the Segregated Account Rehabilitation Plan also require that Deferred Amounts and Junior Deferred Amounts will generally accrue and compound interest at an annual effective rate of 5.1%. However, in the case of insured bonds whose outstanding principal balance is not reduced by the unpaid portion of permitted policy claims (such bonds, “Undercollateralized Bonds”), the 5.1% effective annual interest rate on the Deferred Amount will be reduced by the bond interest rate applicable to such Undercollateralized Bonds. In the case of permitted policy claims relating to transactions that pay monthly, interest will begin to accrue on Deferred Amounts from the first distribution date (under the transaction documents for the relevant bond) after the date on which the Interim Payment in respect of such permitted policy claim was made. For permitted policy claims relating to transactions that do not pay monthly, interest will begin to accrue on Deferred Amounts from the first Payment Date (as defined in the Segregated Account Rehabilitation Plan, as amended) to occur after the date on which the Interim Payment in respect of such permitted policy claim was made.
Following the effective date of the Segregated Account Rehabilitation Plan, as amended, the percentage of the initial cash Interim Payment for permitted policy claims increased from 25% to 45% with effect from July 21, 2014. As with previously permitted policy claims, the remaining portion of the unpaid permitted policy claims (in this case, 55%) will remain outstanding as Deferred Amounts and, subject to the adjustment for Undercollateralized Bonds, will accrue interest at 5.1% per annum. These Deferred Amounts, together with interest thereon, may be paid from time to time in the future at the sole discretion of the Rehabilitator.
The Rehabilitator has also confirmed that a portion of Deferred Amounts outstanding as of July 20, 2014 (the “Reconciliation Date”) (together with interest thereon) will be paid, if still outstanding, on December 22, 2014 (the "Deferred Payment Date") in accordance with the Segregated Account Rehabilitation Plan, as amended, so that those policyholders that received 25% (and not 45%) cash Interim Payments in respect of their permitted policy claims will generally be entitled to receive equalizing payments in cash of 26.67% of their Deferred Amounts (including accrued interest thereon) outstanding as of the Reconciliation Date. Policyholders will be entitled to receive an equalizing payment of their Deferred Amounts equal to the lower of (i) their outstanding Deferred Amounts on December 22, 2014, and (ii) 26.67% of their Deferred Amounts as of the Reconciliation Date, even if they have received a Supplemental Payment (as defined in Note 1 to the Consolidated Financial Statements located in Part II, Item 8 of Ambac's 2013 Form 10-K) and/or a Special Policy Payment (as defined in Note 13). The aggregate amount of equalizing payments for Deferred Amounts is estimated to be approximately $1,137,500.
In addition, the Segregated Account will be required, pursuant to the terms of the amended Segregated Account Rehabilitation Plan, to early redeem a portion of its surplus notes (excluding junior surplus notes) on or about the Deferred Payment Date. The redemption amount of the Segregated Account surplus notes will be equal to 26.67% of the sum of par and accrued interest on such Segregated Account surplus notes, in each case, outstanding as at the Reconciliation Date. Pursuant to the terms of the Settlement Agreement, dated as of June 7, 2010 (the “Settlement Agreement”), by and among Ambac Assurance, Ambac Credit Products LLC (“ACP”), Ambac and counterparties to credit default swaps with ACP that were guaranteed by Ambac Assurance, Ambac Assurance will be required to make a proportionate redemption of its surplus notes when the Segregated Account redeems Segregated Account surplus notes (excluding junior surplus notes). Therefore, if the equalizing 26.67% payment of the Deferred Amounts specified above is made, the Segregated Account and Ambac Assurance will be required to make redemptions of surplus notes (excluding any junior surplus notes) on or about the Deferred Payment Date in an amount equal to 26.67% of the sum of par and accrued interest outstanding on such surplus notes as at the Reconciliation Date, which is estimated to be approximately $413,587 in respect of those surplus notes owned by third parties. Ambac Assurance, for and on behalf of itself and as the management services provider for the Segregated Account, sought and received the approval of the Commissioner of Insurance of the State of Wisconsin to effect these redemptions of surplus notes on November 20, 2014, rather than the Deferred Payment Date, to save interest expense. Such approval was granted on October 13, 2014.
2.     REORGANIZATION UNDER CHAPTER 11
We followed the accounting prescribed by the Reorganizations Topic of the Accounting Standards Codification (the “ASC”) while Ambac was in reorganization proceedings under Chapter 11 of the U.S. Bankruptcy Code. On April 30, 2013, Ambac executed a closing agreement with the United States Internal Revenue Service (the "IRS") to conclude the settlement of a dispute (“IRS Settlement"). On May 1, 2013 (the “Effective Date”), the Second Modified Fifth Amended Plan of Reorganization of Ambac Financial Group, Inc. (the "Reorganization Plan") became effective and Ambac emerged from bankruptcy.

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This IRS Settlement represented the final material contingency under the Reorganization Plan required for the adoption of fresh start financial statement reporting under the Reorganizations Topic of the ASC. As such, fresh start financial statement reporting ("Fresh Start") was adopted by the Company on April 30, 2013 (“Fresh Start Reporting Date”), incorporating, among other things, the discharge of debt obligations, issuance of new common stock and fair value adjustments. Adopting Fresh Start results in a new reporting entity with no beginning retained earnings or accumulated deficit. For periods after the Fresh Start Reporting Date, the Company will be referred to as Successor Ambac, whereas for all periods as of and preceding the Fresh Start Reporting Date, the Company will be referred to as Predecessor Ambac. Presentation of information for Successor Ambac represents the financial position and results of operations of Successor Ambac and is not comparable to Predecessor Ambac financial statements.
Reorganization items:
Professional advisory fees and other costs directly associated with our reorganization are reported separately as reorganization items pursuant to the Reorganizations Topic of the ASC. Reorganization items also include adjustments to reflect the carrying value of certain pre-petition liabilities at their allowable claim amounts, gain on the settlement of liabilities subject to compromise and fresh start reporting adjustments. The reorganization items in the Consolidated Statements of Total Comprehensive Income consisted of the following items:
 
Period from July 1
 
Period from July 1
 
through
 
through
 
September 30, 2014
 
September 30, 2013
U.S. Trustee fees
$

 
$
13

Professional fees
2

 
(9
)
Gain from cancellation and satisfaction of Predecessor Ambac debt

 

Fresh start reporting adjustments

 

Total reorganization items
$
2

 
$
4

 
Successor Ambac
 
 
Predecessor Ambac
 
Period from January 1
 
Period from May 1
 
 
Period from January 1
 
through
 
through
 
 
through
 
September 30, 2014
 
September 30, 2013
 
 
April 30, 2013
U.S. Trustee fees
$

 
$
13

 
 
$
23

Professional fees
211

 
415

 
 
4,483

Gain from cancellation and satisfaction of Predecessor Ambac debt

 

 
 
(1,521,435
)
Fresh start reporting adjustments

 

 
 
(1,228,251
)
Total reorganization items
$
211

 
$
428

 
 
$
(2,745,180
)
3.    SPECIAL PURPOSE ENTITIES, INCLUDING VARIABLE INTEREST ENTITIES ("VIEs")
Ambac, with its subsidiaries, has engaged in transactions with special purpose entities, including VIEs, in various capacities. Ambac most commonly provides financial guarantees, including credit derivative contracts, for various debt obligations issued by special purpose entities, including VIEs. Ambac has also sponsored two special purpose entities that issued medium-term notes to fund the purchase of certain financial assets. Ambac is also 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. As further described in Note 1 - Background and Business Description, on August 28, 2014, Ambac monetized its ownership of the Junior Surplus Notes issued to it by the Segregated Account by depositing the Junior Surplus Notes 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 Notes. Ambac does not consolidate the VIE. Ambac reports its interest in the VIE as an equity investment within Other investments on the Consolidated Balance Sheets with associated results included within Net investment income: Other investments on the Consolidated Statements of Total Comprehensive Income.
In 2011, Ambac Assurance entered into a secured borrowing transaction under which VIEs were created for the purpose of re-securitizing certain invested assets and collateralizing the borrowing. These VIEs were consolidated because Ambac Assurance was involved in their design and held a significant amount of the beneficial interests issued by the VIEs or guaranteed the assets held by the VIEs. There was no VIE debt outstanding to third parties under this secured borrowing transaction as of September 30, 2014 and December 31, 2013. The repaid debt represented the senior-most tranche of the securitization structure and was repaid

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from the non-insurance proceeds of certain RMBS securities which are guaranteed by Ambac Assurance. These VIEs were liquidated in August 2014.  Refer to Note 8 - Investments for further discussion of the restrictions on these securities.
Financial Guarantees:
Ambac’s subsidiaries provide financial guarantees in respect of assets held or debt obligations of special purpose entities, including 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. This financial protection can take several forms; however, the most common are over-collateralization, first loss and excess spread. In the case of over-collateralization (i.e., the principal amount of the securitized assets exceeds the principal amount of the debt obligations guaranteed), the structure allows the transaction to experience defaults among the securitized assets before a default is experienced on the debt obligations that have been guaranteed by Ambac’s subsidiaries. In the case of first loss, the financial guarantee insurance policy or credit derivative contract only covers a senior layer of losses on assets held or debt issued by special purpose entities, including VIEs. The first loss with respect to the assets is either retained by the asset seller or sold off in the form of equity or mezzanine debt to other investors. In the case of excess spread, the securitized assets contributed to special purpose entities, including VIEs, generate interest cash flows that are in excess of the interest payments on the related debt; such excess cash flow is applied to redeem debt, thus creating over-collateralization. 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 loss remediation rights. These rights may enable Ambac to direct the activities of the entity that most significantly impact the entity’s economic performance.
We determined that Ambac’s subsidiaries generally have the obligation to absorb a VIE's expected losses given that they have issued financial guarantees supporting the liabilities (and in certain cases assets). As further described below, we consolidated certain VIEs because: (i) we determined for certain transactions that experienced the aforementioned performance deterioration, that Ambac’s subsidiaries had the power, through voting rights or similar rights, to direct the activities of certain VIEs that most significantly impact the VIE’s economic performance because certain triggers had been breached in these transactions resulting in their ability to exercise certain loss remediation activities, or (ii) due to the passive nature of the VIEs’ activities, Ambac’s subsidiaries’ contingent loss remediation rights upon a breach of certain triggers in the future is considered to be the power to direct the activities that most significantly impact the VIEs’ economic performance. With respect to existing VIEs involving Ambac financial guarantees, Ambac is generally required to consolidate a VIE in the period that applicable triggers result in Ambac having control over the VIE’s most significant economic activities. A VIE is deconsolidated in the period that Ambac no longer has such control, which occurred in connection with insurance policies that were allocated to the Segregated Account, execution of remediation activities on the transaction or amortization of insured exposure, any of which may reduce the degree of Ambac’s control over a VIE.
Ambac Sponsored VIEs:
A subsidiary of Ambac transferred financial assets to two special purpose entities. The business purpose of these entities was to provide certain financial guarantee clients with funding for their debt obligations. These special purpose entities are legal entities that are demonstrably distinct from Ambac. Ambac, its affiliates or its agents cannot unilaterally dissolve these entities. The permitted activities of these entities are limited to those outlined below. Ambac does not consolidate these entities because Ambac Assurance’s policies issued to these entities have been allocated to the Segregated Account, thereby limiting Ambac’s control over the entities’ most significant economic activities. Ambac has elected to account for its equity interest in these entities 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. Refer to Note 7 for further information on the valuation technique and inputs used to measure the fair value of Ambac’s equity interest in these entities. At September 30, 2014 and December 31, 2013 the fair value of these entities are $12,401 and $13,384, respectively, and is reported within Other assets on the Consolidated Balance Sheets.
Since their inception, there have been 15 individual transactions with these entities, of which 3 transactions remain outstanding as of September 30, 2014. Total principal amount of debt outstanding was $461,355 and $461,355 at September 30, 2014 and December 31, 2013, respectively. In each case, Ambac sold assets to these entities. The assets are composed of utility obligations with a weighted average rating of BBB at September 30, 2014 and weighted average life of 7.8 years. The purchase by these entities of financial assets was financed through the issuance of medium-term notes (“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 entities for economic hedging purposes only. Derivative positions were established at the time MTNs were issued to purchase financial assets. The activities of these entities are contractually limited to purchasing assets from Ambac, issuing MTNs to fund such purchase, executing derivative hedges and obtaining financial guarantee policies with

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respect to indebtedness incurred. As of September 30, 2014 Ambac Assurance had financial guarantee insurance policies issued for all assets, MTNs and derivative contracts owned and outstanding by the entities.
Insurance premiums paid to Ambac Assurance by these entities 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. 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.
Ambac was not presented with claims on insurance policies issued to these entities during the nine months ended September 30, 2014, the four months ended April 30, 2013 or the five months ended September 30, 2013. Successor Ambac received recoveries of $988 for the three and nine months ended September 30, 2014, and $2,747 for the three and five months ended September 30, 2013, in respect of previously paid claims. Predecessor Ambac received recoveries of $1,455 for the four months ended April 30, 2013, in respect of previously paid claims.
Consolidation of VIEs:
Upon initial consolidation of a VIE, we recognize 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 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.
The variable interest in a VIE generally involves one or more of the following: a financial guarantee policy issued to the VIE, a written credit derivative contract that references liabilities of the VIE or an investment in securities issued by the VIE. The impact of consolidating such VIEs on Ambac’s balance sheet is the elimination of transactions between the consolidated VIEs and Ambac’s operating subsidiaries and the inclusion of the 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. Ambac did not consolidate any VIEs solely as a result of purchases of the VIE’s debt instruments.
As of September 30, 2014 consolidated VIE assets and liabilities relating to 15 consolidated entities were $15,169,675 and $15,120,775, respectively. As of December 31, 2013, consolidated VIE assets and liabilities relating to 18 consolidated entities were $15,988,697 and $15,872,770, respectively. Ambac is not primarily liable for, and does not guarantee all of the debt obligations issued by the VIEs. Ambac would only be required to make payments on the guaranteed debt obligations in the event that the issuer of such debt obligations defaults on any principal or interest due. Additionally, Ambac’s creditors do not have rights with regard to the assets of the VIEs. Ambac evaluates the net income statement 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 changes in fair value of most consolidated VIE assets and liabilities are attributable to Ambac due to Ambac’s interest through financial guarantee premium and loss payments with the VIE.
The financial reports of certain VIEs are prepared by outside trustees and are not available within the time constraints Ambac requires to ensure the financial accuracy of the operating results. As such, the financial results of certain VIEs are consolidated on a time lag that is no longer than 90 days.
The table below provides the fair value of fixed income securities, by asset-type, held by consolidated VIEs as of September 30, 2014 and December 31, 2013: 
 
September 30, 2014
 
December 31, 2013
Investments:
 
 
 
Corporate obligations
$
2,651,683

 
$
2,475,182

Total variable interest entity assets: fixed income securities
$
2,651,683

 
$
2,475,182


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The following table provides supplemental information about the loans held as assets and long-term debt associated with the VIEs for which the fair value option has been elected as of September 30, 2014 and December 31, 2013:
 
Estimated fair value
 
Unpaid principal balance
September 30, 2014
 
 
 
Loans
$
12,503,484

 
$
10,653,928

Long-term debt
13,159,174

 
12,661,349

December 31, 2013
 
 
 
Loans
13,398,895

 
12,226,481

Long-term debt
$
14,091,753

 
$
14,251,771

Effective April 30, 2013, Ambac was required to consolidate an additional VIE which resulted in a gain of $385,291 reported in Predecessor Ambac earnings. The assets of this VIE consisted primarily of identified intangible assets associated with its subsidiaries’ operations. The intangible assets recorded at fair value upon consolidation on April 30, 2013 were $164,520 and were considered held for use. The intangible assets were being amortized over their estimated useful lives resulting in a weighted-average amortization period at the consolidation date of 16 years. Amortization expense for intangible assets for the three and five months ended September 30, 2013 was $2,507 and $5,015, respectively, and is included in Income (loss) on variable interest entities on the Consolidated Statements of Total Comprehensive Income. During 2013, management approved plans to sell the VIE intangible assets. Such assets were reclassified as held for sale and their carrying value was reduced to fair value less costs to sell of $76,140 as of December 31, 2013. In 2014, such intangible assets were sold.
During the third quarter of 2014, Ambac deconsolidated three VIEs; one as a result of the termination of the associated financial guarantee exposure and two associated with a fully repaid secured borrowing transaction. There was no gain or loss resulting from these deconsolidations.

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Variable Interests in Non-Consolidated VIEs
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 credit derivative contracts by major underlying asset classes, as of September 30, 2014 and December 31, 2013:
 
Carrying Value of Assets and Liabilities
 
Maximum
Exposure
To Loss
(1)
 
Insurance
Assets
(2)
 
Insurance
Liabilities
(3)
 
Derivative
Liabilities 
(4)
September 30, 2014
 
 
 
 
 
 
 
Global structured finance:
 
 
 
 
 
 
 
Collateralized debt obligations
$
1,317,071

 
$
1,416

 
$
4,677

 
$
4,925

Mortgage-backed—residential
16,958,514

 
549,303

 
4,029,415

 

Other consumer asset-backed
5,191,120

 
66,556

 
907,591

 

Other commercial asset-backed
5,069,719

 
376,164

 
402,744

 
36,275

Other
4,195,483

 
99,350

 
579,036

 
2,736

Total global structured finance
32,731,907

 
1,092,789

 
5,923,463

 
43,936

Global public finance
32,471,073

 
465,923

 
545,760

 
26,625

Total
$
65,202,980

 
$
1,558,712

 
$
6,469,223

 
$
70,561

 
Carrying Value of Assets and Liabilities
 
Maximum
Exposure
To Loss
(1)
 
Insurance
Assets
(2)
 
Insurance
Liabilities
(3)
 
Derivative
Liabilities 
 (4)
December 31, 2013
 
 
 
 
 
 
 
Global structured finance:
 
 
 
 
 
 
 
Collateralized debt obligations
$
2,092,072

 
$
3,867

 
$
7,119

 
$
10,092

Mortgage-backed—residential
19,231,335

 
581,498

 
3,890,937

 

Other consumer asset-backed
5,425,583

 
68,511

 
992,177

 

Other commercial asset-backed
7,237,953

 
429,559

 
559,600

 
39,916

Other
4,347,287

 
113,468

 
608,213

 
4,312

Total global structured finance
38,334,230

 
1,196,903

 
6,058,046

 
54,320

Global public finance
35,732,858

 
531,519

 
604,339

 
27,112

Total
$
74,067,088

 
$
1,728,422

 
$
6,662,385

 
$
81,432

(1)
Maximum exposure to loss represents the gross maximum future payments of principal and interest on insured obligations and credit derivative contracts. Ambac’s maximum exposure to loss does not include accrued and unpaid interest on Deferred Amounts nor 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 recorded in “Premium receivables” and “Subrogation recoverable” for financial guarantee contracts on Ambac’s Consolidated Balance Sheets.
(3)
Insurance liabilities represent the amount recorded in “Loss and loss expense reserves” and “Unearned premiums” for financial guarantee contracts on Ambac’s Consolidated Balance Sheets.
(4)
Derivative liabilities represent the fair value recognized on credit derivative contracts on Ambac’s Consolidated Balance Sheets.

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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)
 
Total
 
Period from July 1
 
Period from July 1
 
Period from July 1
 
Period from July 1
 
Period from July 1
 
Period from July 1
 
Period from July 1
 
Period from July 1
 
through
 
through
 
through
 
through
 
through
 
through
 
through
 
through
 
September 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
Successor Ambac
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
231,975

 
$
(90,983
)
 
$
10,439

 
$

 
$
63,914

 
$
(12,524
)
 
$
306,328

 
$
(103,507
)
Other comprehensive income (loss) before reclassifications
(12,222
)
 
4,316

 

 

 
(38,034
)
 
39,384

 
(50,256
)
 
43,700

Amounts reclassified from accumulated other comprehensive income
(5,003
)
 
49,561

 
(204
)
 

 

 

 
(5,207
)
 
49,561

Net current period other comprehensive income (loss)
(17,225
)
 
53,877

 
(204
)
 

 
(38,034
)
 
39,384

 
(55,463
)
 
93,261

Balance at September 30
$
214,750

 
$
(37,106
)
 
$
10,235

 
$

 
$
25,880

 
$
26,860

 
$
250,865

 
$
(10,246
)
 
Unrealized Gains (Losses)
on Available-
for-Sale Securities
(1)
 
Amortization of
Postretirement
Benefit
(1)
 
Gain (Loss) on
Foreign Currency
Translation
(1)
 
Total
 
Period from January 1
 
Period from May 1
 
Period from January 1
 
Period from May 1
 
Period from January 1
 
Period from May 1
 
Period from January 1
 
Period from May 1
 
through
 
through
 
through
 
through
 
through
 
through
 
through
 
through
 
September 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
Successor Ambac
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
$
(41,910
)
 
$

 
$
10,847

 
$

 
$
42,724

 
$

 
$
11,661

 
$

Other comprehensive income (loss) before reclassifications
261,879

 
(70,195
)
 

 

 
(16,844
)
 
26,860

 
245,035

 
(43,335
)
Amounts reclassified from accumulated other comprehensive income
(5,219
)
 
33,089

 
(612
)
 

 

 

 
(5,831
)
 
33,089

Net current period other comprehensive income (loss)
256,660

 
(37,106
)
 
(612
)
 

 
(16,844
)
 
26,860

 
239,204

 
(10,246
)
Balance at September 30
$
214,750

 
$
(37,106
)
 
$
10,235

 
$

 
$
25,880

 
$
26,860

 
$
250,865

 
$
(10,246
)

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Table of Contents

 
Unrealized Gains (Losses)
on Available-for-Sale Securities
(1)
 
Changes to Postretirement Benefit (1)
 
Gain (Loss) on
Foreign Currency Translation
(1)
 
Total
 
Period from January 1
 
Period from January 1
 
Period from January 1
 
Period from January 1
 
through
 
through
 
through
 
through
 
April 30, 2013
 
April 30, 2013
 
April 30, 2013
 
April 30, 2013
Predecessor Ambac
 
 
 
 
 
 
 
Beginning Balance
$
651,272

 
$
(5,860
)
 
$
(20,027
)
 
$
625,385

Other comprehensive income (loss) before reclassifications
188,696

 

 
(657
)
 
188,039

Amounts reclassified from accumulated other comprehensive income
(13,349
)
 
185

 

 
(13,164
)
Elimination of Predecessor Ambac Shareholder Equity Accounts
(826,619
)
 
5,675

 
20,684

 
(800,260
)
Net current period other comprehensive income (loss)
(651,272
)
 
5,860

 
20,027

 
(625,385
)
Balance at April 30, 2013
$

 
$

 
$

 
$

(1)    All amounts are net of tax and noncontrolling interest. Amounts in parentheses indicate debits.
The following table details the significant amounts reclassified from each component of accumulated other comprehensive income for the affected periods:
 
 
Amount Reclassified from Accumulated
Other Comprehensive Income
(1)
 
 
 
 
Period from July 1
 
 
Period from July 1
 
Affected Line Item in the
Details about Accumulated Other
 
through
 
 
through
 
Consolidated Statement of
Comprehensive Income Components
 
September 30, 2014
 
 
September 30, 2013
 
Total Comprehensive Income
Unrealized Gains (Losses) on Available-for-Sale Securities
 
 
 
 
 
 
 
 
 
$
(5,003
)
 
 
$
49,561

 
Net realized investment gains
 
 

 
 

 
Tax (expense) benefit
 
 
$
(5,003
)
 
 
$
49,561

 
Net of tax and noncontrolling interest 
Amortization of Postretirement Benefit
 
 
 
 
 
 
 
Prior service cost
 
$
(166
)
 
 
$

 
Underwriting and operating expenses (2)
Actuarial gains (losses)
 
(38
)
 
 

 
Underwriting and operating expenses (2)
 
 
(204
)
 
 

 
Total before tax
 
 

 
 

 
Tax (expense) benefit
 
 
$
(204
)
 
 
$

 
Net of tax and noncontrolling interest 
Total reclassifications for the period
 
$
(5,207
)
 
 
$
49,561

 
Net of tax and noncontrolling interest 

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Amount Reclassified from Accumulated
Other Comprehensive Income
(1)
 
 
 
 
Successor Ambac –
 
 
Predecessor Ambac –
 
 
Details about Accumulated Other
 
Period from January 1
 
Period from May 1
 
 
Period from January 1
 
Affected Line Item in the
Comprehensive Income
 
through
 
through
 
 
through
 
Consolidated Statement of
Components
 
September 30, 2014
 
September 30, 2013
 
 
April 30, 2013
 
Total Comprehensive Income
Unrealized Gains (Losses) on Available-for-Sale Securities
 
 
 
 
 
 
 
 
 
 
 
$
(5,219
)
 
$
33,089

 
 
$
(13,349
)
 
Net realized investment gains
 
 

 

 
 

 
Tax (expense) benefit
 
 
$
(5,219
)
 
$
33,089

 
 
$
(13,349
)
 
Net of tax and noncontrolling interest 
Amortization of Postretirement Benefit
 
 
 
 
 
 
 
 
 
Prior service cost
 
$
(498
)
 
$

 
 
$
1,616

 
Underwriting and operating expenses (2)
Actuarial gains (losses)
 
(114
)
 

 
 
(727
)
 
Underwriting and operating expenses (2)
 
 
(612
)
 

 
 
889

 
Total before tax
 
 

 

 
 
(704
)
 
Tax (expense) benefit
 
 
$
(612
)
 
$

 
 
$
185

 
Net of tax and noncontrolling interest 
Total reclassifications for the period
 
$
(5,831
)
 
$
33,089

 
 
$
(13,164
)
 
Net of tax and noncontrolling interest 
(1)Amounts in parentheses indicate debits to the Consolidated Statement of Total Comprehensive Income.
(2)These accumulated other comprehensive income components are included in the computation of net periodic benefit cost.
5.     NET INCOME PER SHARE
Predecessor Ambac common stock (and related stock options and restricted stock units) was canceled upon emergence from bankruptcy on the Effective Date. Pursuant to the Reorganization Plan, 45,000,000 shares of new common stock at par value of $0.01 per share and 5,047,138 warrants were issued. Warrants entitle such holders to acquire up to 5,047,138 shares of new common stock at an exercise price of $16.67 per share at any time on or prior to April 30, 2023. For the three and nine months ended September 30, 2014, 898 and 949 warrants, respectively, were exercised, resulting in an issuance of 949 shares of common stock for the nine months ended September 30, 2014. As of September 30, 2014, Successor Ambac had 5,039,877 warrants outstanding. The earnings per share information for Predecessor Ambac is not meaningful to investors in Successor Ambac’s common stock and warrants.
Basic net income per share is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding and vested restricted stock units. Diluted net income per share is computed by dividing net income attributable to common stockholders by the weighted-average number of common 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 issued under the Reorganization Plan and unvested options, restricted stock units and performance stock units granted under employee and director compensation plans. The following table provides a reconciliation of the common shares used for basic earnings per share to the diluted shares used for diluted earnings per share:

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Table of Contents

 
Period from July 1
 
Period from July 1
 
through
 
through
 
September 30, 2014
 
September 30, 2013
Weighted average number of common shares used for basic earnings per share
45,115,882

 
45,002,463

Effect of potential dilutive shares:
 
 
 
Warrants
1,469,203

 
1,352,412

Stock options
8,220

 

Restricted stock units
31,384

 

Performance stock units

 

Weighted average number of common shares and potential dilutive shares used for diluted earnings per share
46,624,689

 
46,354,875

Anti-dilutive shares excluded from the above reconciliation:
 
 
 
Warrants

 

Stock options

 

Restricted stock units

 

 
Successor Ambac
 
 
Predecessor Ambac
 
Period from January 1
 
Period from May 1
 
 
Period from January 1
 
through
 
through
 
 
through
 
September 30, 2014
 
September 30, 2013
 
 
April 30, 2013
Weighted average number of common shares used for basic earnings per share
45,083,831

 
45,001,741

 
 
302,469,544

Effect of potential dilutive shares:

 

 
 

Warrants
1,892,211

 
1,443,874

 
 

Stock options
10,569

 

 
 

Restricted stock units
40,473

 

 
 
109,701

Performance stock units

 

 
 

Weighted average number of common shares and potential dilutive shares used for diluted earnings per share
47,027,084

 
46,445,615

 
 
302,579,245

Anti-dilutive shares excluded from the above reconciliation:
 
 
 
 
 
 
Warrants

 

 
 

Stock options

 

 
 
475,550

Restricted stock units

 

 
 

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 (typical of public finance obligations) or in installments (typical of structured finance obligations). 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 underlying insured obligation is a homogenous pool of assets 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 while exposures denominated in a foreign currency are discounted using the appropriate risk-free rate for the respective currency. The weighted average risk-free rate at September 30, 2014 and December 31, 2013, was 2.9% and 3.0%, respectively, and the weighted average period of future premiums used to estimate the premium receivable at September 30, 2014 and December 31, 2013, was 9.5 years and 9.6 years, respectively.
Insured obligations consisting of homogeneous pools for which Ambac uses expected future premiums to estimate the premium receivable and UPR include residential mortgage-backed securities. As prepayment assumptions change for homogenous pool

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transactions, or if there is an actual prepayment for a “contractual” method installment transaction, the related premium receivable and UPR are adjusted in equal and offsetting amounts with no immediate effect on earnings using new premium cash flows and the then current risk-free rate.
Generally, the priority for the payment of financial guarantee premiums to Ambac, as required by the bond indentures of the insured obligations, is very senior in the waterfall. Additionally, in connection with the allocation of certain liabilities to the Segregated Account, trustees are required under the Segregated Account Rehabilitation Plan and related court orders to continue to pay installment premiums, notwithstanding the Segregated Account Rehabilitation Proceedings. In evaluating the credit quality of the premium receivables, management evaluates the transaction waterfall structures and the internal ratings of the transactions underlying the premium receivables. As of September 30, 2014 and December 31, 2013, approximately 44% and 44% of the premium receivables related to transactions with non-investment grade internal ratings, comprised mainly of non-investment grade RMBS, student loan transactions and a certain asset-backed transaction, which comprised 6%, 6%, and 18% of the total premium receivables at September 30, 2014 and 7%, 7% and 17% of the total premium receivables at December 31, 2013, respectively. At September 30, 2014 and December 31, 2013, $16,063 and $15,262, respectively, of premium receivables were deemed uncollectable. Past due premiums on policies insuring non-investment grade obligations amounted to less than $500 at September 30, 2014.
Below is the gross premium receivable roll-forward (direct and assumed contracts) for the affected periods:
 
Successor Ambac
 
 
Predecessor Ambac
 
Period from January 1
 
Period from May 1
 
 
Period from January 1
 
through
 
through