10-K
Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2015
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No x
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 Website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III in this Form 10-K or any amendment to this Form 10-K. x
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 “accelerated filer and large accelerated filer” 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 Act). Yes ¨ No x
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 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 x No ¨
The aggregate market value of voting stock held by non-affiliates of the Registrant as of the close of business on June 30, 2015 was $748,861,235. As of February 25, 2016, there were 45,046,996 shares of Common Stock, par value $0.01 per share, were outstanding.
Documents Incorporated By Reference
Portions of the Registrant’s proxy statement for its 2016 annual meeting of stockholders are incorporated by reference in this Form 10-K in response to Part III Items 10, 11, 12, 13, and 14.


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AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
 
 
 
PAGE
 
 
Cautionary Statement Pursuant to the Private Securities Litigation Reform Act of 1995
 
PART I
 
 
Item 1.
Business
 
 
 
Introduction
 
 
 
Financial Guaranty Segment
 
 
 
Financial Services Segment
 
 
 
Investments and Investment Policy
 
 
 
Employees
 
 
Item 1A.
Risk Factors
 
 
Item 1B.
Unresolved Staff Comments
 
 
Item 2.
Properties
 
 
Item 3.
Legal Proceedings
 
 
Item 4.
Mine Safety Disclosures
 
 
 
 
 
 
PART II
 
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
 
Item 6.
Selected Financial Data
 
 
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
Company Overview
 
 
 
Critical Accounting Policies and Estimates
 
 
 
Results of Operations
 
 
 
Liquidity and Capital Resources
 
 
 
Balance Sheet
 
 
 
Special Purpose Entities Including Variable Interest Entities
 
 
 
Accounting Standards
 
 
 
Ambac Assurance Statutory Basis Financial Results
 
 
 
Ambac Assurance UK Limited Financial Results Under UK Accounting Principles
 
 
 
Non-GAAP Financial Measures
 
 
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
 
 
Item 8.
Financial Statements and Supplementary Data
 
 
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
 
 
Item 9A.
Controls and Procedures
 
 
Item 9B.
Other Information
 
 
 
 
 
 
PART III
 
 
Item 10.
Directors, Executive Officers and Corporate Governance
 
 
Item 11.
Executive Compensation
 
 
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
 
Item 13.
Certain Relationships and Related Transactions, and Director Independence
 
 
Item 14.
Principal Accountant Fees and Services
 
 
 
 
 
 
PART IV
 
 
Item 15.
Exhibits, Financial Statement Schedules
 
 
 
Schedule I—Summary of Investments Other Than Investments in Related Parties
 
 
 
Schedule II—Condensed Financial Information of Registrant (Parent Company Only)
 
 
 
Schedule IV—Reinsurance
 
 
 
 
 
 
SIGNATURES
 


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CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
In this Annual Report, we have included 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 this Annual Report on Form 10-K.
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) volatility in the price of Ambac’s common stock; (2) uncertainty concerning our ability to achieve value for holders of Ambac securities, whether from Ambac Assurance Corporation (“Ambac Assurance”) or from new business opportunities; (3) dilution of current shareholder value or adverse effects on our share price resulting from the issuance of additional shares of common stock; (4) adverse effects on our share price resulting from future offerings of debt or equity securities that rank senior to our common stock; (5) potential of rehabilitation proceedings against Ambac Assurance; (6) decisions made by the rehabilitator of the Segregated Account of Ambac Assurance Corporation (the “Segregated Account”) for the benefit of policyholders that may result in material adverse consequences for Ambac’s security holders; (7) our inability to realize the expected recoveries included in our financial statements; (8) intercompany disputes or disputes with the rehabilitator of the Segregated Account; (9) our inability to monetize assets or purchase, restructure or exchange outstanding debt and insurance obligations, or the failure of any such transaction to deliver anticipated results; (10) our results of operation may be adversely affected by events or circumstances that result in the accelerated amortization of our insurance intangible asset; (11) increased fiscal stress experienced by issuers of public finance obligations or an increased incidence of Chapter 9 filings by municipal issuers; (12) adverse tax consequences or other costs resulting from the Segregated Account rehabilitation plan, from rules and procedures governing the payment of permitted policy claims, or from the characterization of our surplus notes as equity; (13) credit risk throughout our business, including but not limited to credit risk related to residential mortgage-backed securities, student loan and other asset securitizations, collateralized loan
 
obligations, public finance obligations and exposures to reinsurers; (14) risks attendant to the change in composition of securities in our investment portfolio; (15) inadequacy of reserves established for losses and loss expenses; (16) the risk that our risk management policies and practices do not anticipate certain risks and/or the magnitude of potential for loss as a result of unforeseen risks; (17) changes in prevailing interest rates; (18) factors that may influence the amount of installment premiums paid to Ambac, including the Segregated Account rehabilitation proceedings; (19) default by one or more of Ambac Assurance’s portfolio investments, insured issuers or counterparties; (20) market risks impacting assets in our investment portfolio or the value of our assets posted as collateral in respect of investment agreements and interest rate swap transactions; (21) risks relating to determinations of amounts of impairments taken on investments; (22) 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 our business, operations, financial position, profitability or cash flows; (23) our inability to realize value from Ambac Assurance UK Limited; (24) system security risks; (25) market spreads and pricing on derivative products insured or issued by Ambac or its subsidiaries; (26) the risk of volatility in income and earnings, including volatility due to the application of fair value accounting; (27) changes in accounting principles or practices that may impact Ambac’s reported financial results; (28) legislative and regulatory developments; (29) operational risks, including with respect to internal processes, risk models, systems and employees, and failures in services or products provided by third parties; (30) Ambac’s financial position and the Segregated Account rehabilitation proceedings that may prompt departures of key employees and may impact our ability to attract qualified executives and employees; and (31) other risks and uncertainties that have not been identified at this time.
PART I
Item 1.    Business
INTRODUCTION
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 on April 29, 1991.
Following its emergence from bankruptcy in 2013, 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
Selectively growing and diversifying Ambac, through the development or acquisition of financial services businesses such as advisory, asset servicing, asset management, and/or insurance.



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Ambac Assurance is evaluating possibilities for successfully concluding the Segregated Account Rehabilitation Proceedings (as defined below). In pursuing this objective, Ambac Assurance is considering the possibility of entering into transactions whereby it would monetize certain assets and/or purchase, restructure or exchange certain outstanding debt and insurance obligations. Ambac Assurance is also discussing with OCI (as defined below)potential options for addressing outstanding Deferred Amounts (as defined below), including accrued interest and surplus notes (other than junior surplus notes). From time to time Ambac Assurance has also discussed with several counterparty creditors a potential exchange pursuant to which outstanding Deferred Amounts, including accrued interest, and surplus notes (other than junior surplus notes) would be exchanged for new securities and/or cash. As of the date of this filing, Ambac Assurance has not reached any agreement on the terms of a potential transaction, and we cannot provide assurance that any such transaction will be entered into by Ambac Assurance in the future, or if it is, as to the timing, terms or conditions of any such transaction. Any such transaction would remain subject to the prior approval of the board of Ambac Assurance, OCI and potentially the Rehabilitation Court (as defined below).
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. 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 by or in respect of Ambac Assurance. 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 other counterparty specific factors. Oversight by the Rehabilitator could impair Ambac’s ability to execute certain of its strategies. Ambac Assurance's ability to commute policies or purchase certain investments may also be limited by available liquidity.
In October 2015, Ambac Assurance introduced a new program to invest in residential real estate owned properties sourced from Ambac Assurance insured transactions.  We are working with third-party vendors for necessary expertise and infrastructure related to this initiative. This program will be rolled out gradually to validate out internal investment thesis. While this program was initiated in order to help remediate losses in the insured portfolio, it has the potential to evolve into a new business opportunity for Ambac.
Although we are exploring new business opportunities for Ambac, no assurance can be given that we will be able to execute the acquisition or development of any new business. In addition, there can be no assurance that we will be able to obtain the financial and other resources that may be required to finance the acquisition or development of new businesses. 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. For additional risks and uncertainties, please refer to Part I, Item 1A in this Form 10-K.
 
Ambac has two reportable business segments: Financial Guarantee and Financial Services.
Ambac’s Financial Guarantee business segment is conducted through its primary operating subsidiary, Ambac Assurance and its wholly owned subsidiary Ambac Assurance UK Limited (“Ambac UK”), both of which have been in runoff since 2008. Insurance policies insured by Ambac Assurance and Ambac UK generally guarantee payment when due of the principal and interest on the obligations guaranteed. Ambac Assurance also has another wholly-owned financial guarantee subsidiary, Everspan Financial Guarantee Corp. (“Everspan”), which has been in runoff since its acquisition in 1997. The deterioration of the financial condition of Ambac Assurance and Ambac UK has prevented these companies from being able to write new business. An inability to write new business has and will continue to negatively impact Ambac’s future operations and financial results. Ambac Assurance’s ability to pay dividends and, as a result, Ambac’s liquidity, have been significantly restricted by the deterioration of Ambac Assurance’s financial condition, by the rehabilitation of the Segregated Account (defined below) and by 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 certain counterparties to credit default swaps with ACP that were guaranteed by Ambac Assurance. Ambac Assurance is also restricted in its ability to pay dividends pursuant to the terms of its Auction Market Preferred Shares. It is highly unlikely that Ambac Assurance will be able to make dividend payments to Ambac for the foreseeable future. Refer to "Dividend Restrictions, Including Contractual Restrictions" below and Note 9. Insurance Regulatory Restrictions to the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K, for more information on dividend payment restrictions.
In March 2010, Ambac Assurance established a segregated account pursuant to Wisconsin Stat. §611.24(2) (the “Segregated Account”) to segregate certain segments of Ambac Assurance’s liabilities. 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 Wisconsin Circuit Court for Dane County (the “Rehabilitation Court”) with respect to the Segregated Account (the “Segregated Account Rehabilitation Proceedings”) in order to permit the 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. Ambac Assurance is not, itself, in rehabilitation proceedings. Refer to Note 1. Background and Business Description to the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K, for more information on the Segregated Account.
Ambac’s Financial Services business segment is operated by subsidiaries of Ambac Assurance. This segment provides financial and investment products, including investment agreements, funding conduits and interest rate swaps, principally to the clients of its financial guarantee business. Ambac Assurance insured all of the obligations of its financial services subsidiaries. The financial services businesses are in runoff, which is being effectuated by transaction terminations, settlements, assignments and scheduled



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amortization of contracts. The Financial Services business also maintains interest rate derivatives to mitigate exposure to floating rate insured obligations in the Financial Guarantee segment.
Common Stock Restrictions
There are substantial restrictions on the ability to transfer Ambac’s common stock set forth in Article XII of Ambac’s Amended and Restated Certificate of Incorporation. In order to preserve certain tax benefits, subject to limited exceptions, any attempted transfer of common stock shall be prohibited and void to the extent that, as a result of such transfer (or any series of transfers of which such transfer is a part), either (i) any person or group of persons shall become a holder of 5% or more of the Company’s common stock or (ii) the percentage stock ownership interest in Ambac of any holder of 5% or more of the Company’s common stock shall be increased (a “Prohibited Transfer”). These restrictions shall not apply to an attempted transfer if the transferor or the transferee obtains the written approval of Ambac’s Board of Directors to such transfer. A purported transferee of a Prohibited Transfer shall not be recognized as a stockholder of Ambac for any purpose whatsoever in respect of the securities which are the subject of the Prohibited Transfer (the “Excess Securities”). Until the Excess Securities are acquired by another person in a transfer that is not a Prohibited Transfer, the purported transferee of a Prohibited Transfer shall not be entitled with respect to such Excess Securities to any rights of stockholders of Ambac, including, without limitation, the right to vote such Excess Securities and to receive dividends or distributions, whether liquidating or otherwise, in respect thereof, if any. Once the Excess Securities have been acquired in a transfer that is not a Prohibited Transfer, the securities shall cease to be Excess Securities. If the Board determines that a transfer of securities constitutes a Prohibited Transfer then, upon written demand by Ambac, the purported transferee shall transfer or cause to be transferred any certificate or other evidence of ownership of the Excess Securities within the purported transferee’s possession or control, together with any distributions paid by Ambac with respect to such Excess Securities, to an agent designated by Ambac. Such agent shall thereafter sell such Excess Securities and the proceeds of such sale shall be distributed as set forth in the Amended and Restated Certificate of Incorporation. If the purported transferee of a Prohibited Transfer has resold the Excess Securities before receiving such demand, such person shall be deemed to have sold the Excess Securities to Ambac’s agent and shall be required to transfer to such agent the proceeds of such sale, which shall be distributed as set forth in the Amended and Restated Certificate of Incorporation.
Available Information
Our Internet address is www.ambac.com. We make available free of charge, through the investor relations section of our web site, annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and any amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as well as proxy statements, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the U.S. Securities and Exchange Commission. Our Investor Relations Department can be contacted at Ambac Financial Group, Inc., One State Street Plaza, New York, New York 10004, Attn: Investor Relations, telephone: 212-208-3222. The reference to our website address does not constitute inclusion or incorporation by reference of the information contained on our website in this Form 10-K or other filings with the
 
SEC, and the information contained on our website is not part of this document.
Financial information concerning our business segments for each of 2015, 2014 and 2013 is set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Quantitative and Qualitative Disclosures About Market Risk,” and the Consolidated Financial Statements and the Notes thereto, included elsewhere in this Form 10-K.
FINANCIAL GUARANTEE SEGMENT
The Financial Guarantee segment includes insurance policies and credit derivative contracts. Generally, financial guarantees provide an unconditional and irrevocable guarantee which protects the holder of a debt obligation against non-payment when due. Pursuant to such guarantees, Ambac Assurance and its subsidiaries make payments if the obligor responsible for making payments fails to do so when scheduled. Credit derivatives permit certain counterparties to assert mark-to-market termination claims; however, the assertion of such mark-to-market claims has been enjoined by the Rehabilitation Court. See discussion of “Ambac Assurance Liquidity” in Part II, Item 7 included in this Form 10-K for further information.
Ambac’s financial guarantee insurance policies and credit derivative contracts expose the Company to the direct credit risk of the assets and/or obligor supporting the guaranteed obligation. In addition, insured transactions expose Ambac to indirect risks that may increase our overall risk, such as credit risk separate from, but correlated with, our direct credit risk, market, model, economic, natural disaster and mortality or other non-credit type risks.
Ambac Assurance derives financial guarantee revenues from: (i) premiums earned from insurance contracts, net of reinsurance; (ii) net investment income; (iii) fees from credit derivative transactions; (iv) net realized gains and losses from sales of investment securities; and (v) amendment and consent fees. Financial guarantee expenditures include (i) loss and commutation payments for credit exposures; (ii) loss-related expenses, including those relating to the remediation of problem credits, and (iii) operating expenses. Premiums for financial guarantees were received either upfront (typical of public finance obligations) or on an installment basis from the cash flows generated by the underlying assets (typical of structured finance obligations). Despite not underwriting new business, Ambac continues to collect premiums on its existing portfolio of guarantees that pay premiums on an installment basis. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part II, Item 7 in this Form 10-K for further information.
Risk Management
As part of Ambac's enterprise risk management framework, Ambac has an Asset Liability Management Committee (“ALCO”). ALCO is a multidisciplinary committee with the objective to implement and foster an enterprise wide culture and approach to liquidity management, asset valuation, hedging, and risk remediation. Members of ALCO include the Chief Executive Officer, Chief Financial Officer and senior managers from investment management, capital markets and risk management. ALCO has scheduled monthly meetings and will also meet on an ad hoc basis to consider, for example, the commutation of distressed financial



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guarantee exposures. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part II, Item 7 in this Form 10-K for further information on Ambac's enterprise risk management framework.
The Risk Management group is primarily responsible for the development, implementation and oversight of loss mitigation strategies, surveillance and remediation of the insured financial guarantee portfolio (including through the pursuit of recoveries in respect of paid claims and commutations of policies). These activities are integral to Ambac’s strategy of mitigating losses on poorly performing transactions. As a consequence of the Segregated Account Rehabilitation Proceedings, the Rehabilitator retains operational control and decision-making authority with respect to all matters related to the Segregated Account, including surveillance, remediation and loss mitigation. The Rehabilitator operates the Segregated Account through a management services contract executed between Ambac Assurance and the Segregated Account pursuant to which the Risk Management group and other personnel provide surveillance, remediation and loss mitigation services to the Segregated Account. Furthermore, by virtue of the contracts executed between Ambac Assurance and the Segregated Account, the Rehabilitator retains the discretion to oversee and approve certain actions taken by Ambac Assurance in respect of assets and liabilities that have not been allocated to the Segregated Account. Refer to Note 1. Background and Business Description to the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K, for more information on the contracts between Ambac Assurance and the Segregated Account. As such, the following discussion of Ambac’s risk management practices is qualified by reference to the Rehabilitator’s exercise of any of its rights to alter or eliminate any of these risk management practices.
Ambac’s Risk Management group has an organizational structure designed around the three areas of focus: Portfolio Risk Management and Analysis, Risk Restructuring and Credit Risk Management. The senior managers responsible for these groups report directly to Ambac Assurance's Chief Executive Officer and regularly informs and updates the Audit Committees of the Board of Directors of Ambac and Ambac Assurance with respect to risk-related topics in the insured portfolio.
Portfolio Risk Management and Analysis ("PRM")
This group’s focus is on remediation, loss mitigation, risk reduction and surveillance. Proactive credit remediation can help to reduce exposure and/or reduce risk in the insured portfolio by securing rights and remedies, both of which help to mitigate losses in the event of default. The emphasis on reducing risk is centered on reducing enterprise-wide exposure on a prioritized basis.
PRM personnel perform periodic surveillance reviews of exposures according to a schedule based on the risk profile of the guaranteed obligations or as necessitated by specific credit events or other macro-economic variables. Risk-adjusted surveillance strategies have been developed for each bond type with review periods and scope of review based upon each bond type’s risk profile. The risk profile is assessed regularly in response to our own experience and judgments or external factors such as the economic environment and industry trends. Monitoring activities are designed to detect deterioration in credit quality or changes in the economic, regulatory or political environment which could adversely impact the portfolio. Active surveillance enables PRM to track single credit migration and industry credit and performance trends. The focus of the surveillance review is to assess performance, identify credit trends and recommend appropriate credit classifications, ratings and
 
changes to a transaction or bond type’s review period and surveillance requirements. If a problem is detected, the group focuses on loss mitigation by recommending appropriate action and working with the issuer, trustee, bond counsel, servicer and other interested parties in an attempt to remediate the problem and minimize Ambac Assurance’s exposure to potential loss. Those credits that are either in default or have developed problems that eventually may lead to a default or claim payment are tracked closely by the appropriate surveillance team and senior risk managers and discussed at regularly scheduled meetings with Credit Risk Management (see discussion following in “Credit Risk Management”). In some cases, PRM will engage workout experts or attorneys and other consultants with appropriate expertise in the targeted loss mitigation area to assist management in examining the underlying contracts or collateral, providing industry specific advice and/or executing strategies.
In structured transactions, including structured public finance transactions, Ambac Assurance often is the control party as a result of insuring the transaction’s senior class or tranche. The control party may direct specified parties, usually the trustee, to take or not take certain actions following contractual defaults or trigger events. Control rights and the scope of direction and remedies vary considerably among our insured transactions. Because Ambac Assurance is party to and/or has certain rights in documents supporting transactions in the insured portfolio, Ambac Assurance frequently receives requests for amendments, waivers and consents (“AWCs”). As discussed below under “Credit Risk Management,” Ambac Assurance’s risk management personnel review, analyze and process all requests for AWCs. As a part of the Segregated Account Rehabilitation Proceedings, the Rehabilitation Court enjoined certain actions by other parties to preserve Ambac Assurance’s control rights that could otherwise have lapsed or been compromised.
Surveillance for collateral dependent transactions, including, but not limited to, residential mortgage-backed securities (“RMBS”), asset-backed securities (“ABS”) and student loan transactions, focuses on review of the underlying asset cash flows and, if applicable, the performance of servicers or collateral managers. Ambac Assurance generally receives periodic reporting of transaction performance from issuers or trustees. Risk analysts review these reports to monitor performance and, if necessary, seek legal or accounting advice to ensure that reporting and application of cash flows comply with transaction requirements.
Cross-functional teams have been established, either within PRM or including PRM and others as appropriate given the targeted strategy, to promote the active mitigation and/or remediation of credits or sectors in the insured portfolio. Examples of such teams include teams of professionals focused on (i) the review and enforcement of contractual representations and warranties in RMBS policies, (ii) RMBS servicing oversight and (iii) the analysis and prioritization of policies to target and execute risk reduction and commutation strategies. The establishment and purview of cross-functional teams is targeted to address our highest risk exposures. Members of such teams work with both internal and external experts in the pursuit of risk reduction on all fronts.
The RMBS servicing oversight team focuses on servicer oversight and remediation. Analysts monitor the performance of servicers through a combination of (i) regular reviews of servicer performance; (ii) compliance certificates received from servicer management; (iii) independent rating agency information; (iv)  reviews of servicer financial information; and (v) onsite servicing



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diligence. Servicer performance reviews typically include a review of collateral performance, including comparisons against benchmarks, as well as the processes of collection, default management, and loss mitigation. Ambac Assurance may require a back-up servicer or require “term-to-term” servicing which provides for limited, renewable servicing terms in order to provide greater flexibility regarding the servicing arrangements of a particular transaction.
In some transactions, Ambac Assurance has the right to direct a transfer of RMBS and other servicing to an alternative servicer, upon certain events and subject to certain conditions. The decision to exercise this right is made based on various factors, including an assessment of the performance of the existing servicer as outlined above, and an assessment of whether a transfer of servicing may improve the performance of the collateral and reduce risk to Ambac Assurance. In the case of RMBS, Ambac Assurance has developed relationships with preferred servicers. Preferred servicers are selected through a formalized servicer review process that determines, among other key factors, the servicer’s ability and willingness to actively manage intense and proven loss mitigation activities on RMBS. Ambac Assurance may decide to exercise its rights to direct the transfer of servicing to a preferred servicer where such rights are available. The transfer of servicing is done with the objectives of (i) minimizing losses and distress levels by deploying targeted and enhanced loss mitigation programs; (ii) increasing visibility to Ambac Assurance of all servicing activities that impact overall deal performance; (iii) better aligning the servicer’s financial interest to the performance of the underlying deal through the utilization of performance based incentives; and (iv) reducing the risk of servicer underperformance due to servicer financial difficulty.
Ambac Assurance believes that the improved loss mitigation activities, alignment of interests and close monitoring of servicers constitute credible means of minimizing risks and losses related to insured RMBS.
A team of professionals is focused on recoveries from sponsors where Ambac Assurance believes material breaches of representations and warranties has occurred with respect to certain RMBS policies.  The team engages with experienced consultants to perform the re-underwriting of loan files and consults with internal and external legal counsel with regard to loan putbacks as well as settlement and litigation strategies (refer to Note 8. Financial Guarantee Insurance Contracts to the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K for further discussion on this topic).

Risk Restructuring Group ("RRG")
RRG focuses on the analysis, implementation and execution of commutation and related claims reduction or defeasance strategies primarily for policies allocated to the Segregated Account. Analysts evaluate the estimated timing and severity of projected policy claims as well as the potential impact of other loss mitigation strategies in order to target and prioritize policies, or portions thereof, for commutation, bond purchase, refinancing or other claims reduction or defeasance strategies. For targeted policies, analysts will engage with bondholders, issuers and other economic stakeholders to negotiate, structure, and execute such strategies.
Credit Risk Management ("CRM")
CRM manages the decision process for all material matters that affect credit exposures within the insured portfolio. While PRM and RRG are responsible for the credit analysis and the recommendation
 
and execution of credit remediation strategies, CRM provides a forum for independent assessments and approvals and drives consistency and timeliness. Strategic level credit and restructuring issues may also involve the CEO and other executive management to augment the CRM process in the interest of achieving best outcomes. The scope of credit matters under the purview of CRM includes material amendments, waivers and consents, remediation plans, credit review scheduling, adverse credit classification and below investment grade rating designations, adversely classified credit reviews, sector reviews and overall portfolio review. The CRM decision process may involve a review of structural, legal, political and credit issues and also includes determining the proper level of approval, which varies based on the nature and materiality of the matter. Decisions that also have material asset, liability, and liquidity implications, such as commutations, bond purchases and refinancing's may also require ALCO approval. Please refer to Note 2. Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K for further discussion of the various credit classifications.
Adversely Classified Credit Review
Credits that are either in default or have developed problems that eventually may lead to a default are tracked closely by the appropriate PRM surveillance team and discussed at meetings with CRM. Adversely classified credit meetings include members of CRM, PRM and legal, as necessary. As part of the review, relevant information, along with the plan for corrective actions and a reassessment of the credit’s rating and credit classification is considered. Internal and/or external counsel generally review the documents underlying any problem credit and, if applicable, an analysis is prepared outlining Ambac Assurance’s rights and potential remedies, the duties of all parties involved and recommendations for corrective actions. Ambac Assurance also meets with relevant parties to the transaction as necessary. The review schedule for adversely classified credits is tailored to the remediation plan to track and prompt timely action and proper internal and external resourcing. A summary of developments regarding adversely classified credits and credit trends is also provided to Ambac’s and Ambac Assurance’s Board of Directors no less than on a quarterly basis.
The insured portfolio contains exposures that are correlated and/or concentrated. Ambac’s surveillance includes identifying these types of exposures and identifying the risks that would or could trigger credit deterioration across the related exposures. When such risks occur, adverse credit classification may be warranted across many of the correlated and/or concentrated exposures. This is the case with student loans and RMBS, for example, which have several correlations including those associated with consumer lending, unemployment, and home prices. In the past, our not-for-profit healthcare and our leveraged lease exposures experienced periods of stress arising from their concentrated and/or correlated risks, when there were major changes to healthcare reimbursement programs especially Medicaid, or significant weakness in consumer and business travel, in the case of the former and the latter, respectively. In the future, Ambac’s portfolio may be subject to similar credit deterioration arising from concentrated and/or correlated risks. Examples of other such risks that could impact our portfolio, and that our surveillance is designed to monitor include the impact of potential municipal bankruptcy contagion or the impact of large scale domestic military cutbacks on our military housing portfolio or event risk such as natural disasters or other regional stresses. Most such risks cannot be predicted, and may materialize unexpectedly or develop rapidly. Although our



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surveillance allows us to connect the event and stress to the related exposures and assign an adverse credit classification and estimate losses across the affected credits, when necessary, we may not have adequate resources or contractual rights and remedies to mitigate loss arising from such risks.
Amendment, Waiver and Consent Review / Approval
The decision to approve or reject AWCs is based upon certain credit factors, such as the issuer’s ability to repay the bonds and the bond’s security features and structure. Members of Ambac Assurance’s PRM group review, analyze and process all requests for AWCs. All AWCs are initially screened for materiality in the surveillance groups. Non-material AWCs require the approval of at least a PRM surveillance analyst and a portfolio risk manager. Material AWCs are within the purview of CRM, as noted above. For material AWCs, CRM has established minimum requirements that may be modified to require more or varied approvals depending upon the matter’s complexity, size or other characteristics.
Ambac Assurance assigns internal credit ratings to individual exposures as part of the AWC process and at surveillance reviews. These internal credit ratings, which represent Ambac Assurance’s independent judgments, are based upon underlying credit parameters consistent with the exposure type.
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 sector at December 31, 2015 and 2014. 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. Guaranteed net par outstanding includes the exposures of policies that insure variable interest entities (“VIEs”) consolidated in accordance with ASC Topic 810, Consolidation. Guaranteed net par outstanding excludes the exposures of policies that insure bonds which have been refunded or pre-refunded:
December 31 ($ in millions)
2015
 
2014
Public Finance
$
65,436

 
$
93,448

Structured Finance
21,814

 
26,334

International Finance
21,049

 
24,952

Total net par outstanding
$
108,299

 
$
144,734

Included in the above net par exposures at December 31, 2015 and 2014 are $971 and $1,530, respectively, of exposures that were executed in the form of credit derivatives, primarily collateralized loan exposures. See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8, “Financial Statements and Supplementary Data” for further discussion of credit derivative exposures.
U.S. Public Finance Insured Portfolio
Ambac’s portfolio of U.S. public finance exposures is $65,436 million, representing 60% of Ambac’s net par outstanding as of December 31, 2015 and a 30% reduction from the amount outstanding at December 31, 2014. This reduction in exposure was mainly due to normal exposure runoff in addition to early terminations, primarily related to lease and tax-backed exposures. While Ambac’s U.S. public finance portfolio consists predominantly of municipal bonds such as general and revenue obligations and lease and tax-backed obligations of state and local
 
government entities, the portfolio also comprises a wide array of non-municipal types of bonds, including financings for not-for-profit entities and transactions with public and private elements, which generally finance infrastructure, housing and other public interests. See Note 7. Financial Guarantees in Force to the Consolidated Financial Statements, included in Part II, Item 8 in this Form 10-K for exposures by bond type.
Municipal bonds are generally supported directly or indirectly by the issuer’s taxing authority or by public sector fees and assessments which may or may not be specifically pledged. Risk factors in these transactions derive from the municipal issuer, including its fiscal management, politics, and economic position, as well as its ability and willingness to continue to pay its debt service while undergoing severe stress. Municipal bankruptcies, while still relatively uncommon, have occurred, exposing Ambac to the risk of liquidity claims and ultimate losses if issuers cannot successfully adjust their liabilities without impairing creditors.
Not-for-profit transactions are generally supported by the not-for-profit entities’ net revenues and may also include specific pledges, liens and/or mortgages. The entity typically serves a well-defined market and promulgates a public purpose mission. These transactions may afford Ambac contractual protections such as financial covenants and control rights in the event of issuer breaches and defaults. Risk factors in these transactions derive from the creditworthiness of the issuer, including but not limited to its financial condition, leverage, management, business mix, competitive position, industry and socioeconomic trends, government programs, etc. Examples of these types of transactions include not-for-profit hospitals, universities, associations and charities.
Certain issuers in our public finance portfolio have issued floating rate debt, which may introduce interest rate risk to Ambac Assurance. Refer to Auction Rate Securities and Variable Rate Demand Obligation Exposures below for further discussion.
Public/private transactions are generally structured to achieve their targeted public interest objective without direct support from the public sector. Some examples of this type of financing include affordable housing, private education, and privatized military and student housing. Protections within these financings provided to Ambac usually include the strength of the financed asset’s essentiality and public purpose and may include financial covenants, collateral and control rights. Risk factors include financial underperformance, event risk and a shift in the asset’s mission or essentiality. One example of this type of financing is U.S. military housing. Ambac insures approximately $6.0 billion of privatized military housing debt. The debt was issued to finance the construction and/or renovation of housing units for military personnel and their families on domestic U.S. military bases. Debt service is not directly paid or guaranteed by the U.S. Government. Rather, the bonds are serviced from the cash flow generated by rental payments deposited by the military directly into lockbox accounts as part of each service personnel’s Basic Allowance for Housing (BAH). Collateral for these transactions includes the BAH payments as well as an interest in the ground lease. Risk factors affecting these transactions include the ongoing base essentiality, military deployments, the U.S. government’s commitment to fund the BAH, the marketability/attractiveness of the on-base housing units versus off base housing, construction completion, environmental remediation, utility and other operating costs, and housing management.



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Puerto Rico
Ambac has exposure to Puerto Rico across several different issuing entities. Each has its own credit risk profile attributable to discreet revenue sources, direct general obligation pledges and general obligation guarantees. The following table shows Ambac's insured exposure to each issuer segregated by whether such debt obligation is subject to the Priority Debt Provision or "clawback." Ambac has initiated litigation around the application of the "clawback" announced by Puerto Rico's Governor Padilla on December 1, 2015. A description of Ambac's legal challenge is provided in Note 18. Commitments and Contingencies in the Consolidated Financial Statements, included in Part II, Item 8 in this Form 10-K.
 
For most Puerto Rico bonds insured by Ambac Assurance, such bonds are not subject to acceleration. For the Ambac-insured Puerto Rico Convention Center District Authority (Hotel Occupancy Tax) bonds, such bonds may be accelerated only with the consent of, or at the direction of, Ambac Assurance. For the Ambac-insured Puerto Rico Sales Tax Financing Corporation - Senior Sales Tax Revenue bonds, such bonds may not be accelerated without the consent of Ambac Assurance, subject to the Ambac financial guaranty insurance policy being in full force and effect.

($ in millions)
 
Ambac
Ratings
(1)
 
Net Par
Outstanding
(2)
 
Net Par and Interest Outstanding (2)
Exposures Subject to Priority Debt Provision (3)
 
 
 
 
 
 
PR Highways and Transportation Authority (1968 Resolution - Highway Revenue) (4)
 
BIG
 
$
26

 
$
35

PR Highways and Transportation Authority (1998 Resolution - Senior Lien Transportation Revenue) (4)
 
BIG
 
445

 
852

PR Infrastructure Financing Authority (Special Tax Revenue) (5)
 
BIG
 
503

 
1,074

PR Convention Center District Authority (Hotel Occupancy Tax)
 
BIG
 
137

 
209

Total
 
 
 
1,111

 
2,170

Exposures Not Subject to Priority Debt Provision
 
 
 
 
 
 
Commonwealth of Puerto Rico - General Obligation Bonds
 
BIG
 
56

 
73

PR Public Buildings Authority - Guaranteed by the Commonwealth of Puerto Rico
 
BIG
 
191

 
299

PR Sales Tax Financing Corporation - Senior Sales Tax Revenue
 
BIG
 
805

 
7,321

Total
 
 
 
1,052

 
7,693

Total Net Exposure to The Commonwealth of Puerto Rico and Related Entities
 
 
 
$
2,163

 
$
9,863

(1)
Internal credit ratings are provided solely to indicate the underlying credit quality of guaranteed obligations based on the view of Ambac Assurance. In cases where Ambac Assurance 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 Assurance credit ratings are subject to revision at any time and do not constitute investment advice. Ambac Assurance, or one of its affiliates, has guaranteed the obligations listed and may also provide other products or services to the issuers of these obligations for which Ambac Assurance may have received premiums or fees. “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.
(3)
Commonly known as "clawback" provision pursuant to Section 8 of Article VI of the Constitution of the Commonwealth of Puerto Rico.
(4)
Pledged Revenues for Highway and Transportation Revenue Bonds include Toll Revenues and Investment Earnings which are not subject to the Priority Debt Provision.
(5)
Payable from and secured by proceeds from a federal excise tax imposed on all items produced in Puerto Rico and sold on the mainland of the United States. Currently, rum is the only product from Puerto Rico subject to this federal excise tax.
The table below shows Ambac’s ten largest U.S. public finance exposures, by repayment source, as a percentage of total financial guarantee net par outstanding at December 31, 2015:
($ in millions)
Ambac
Ratings(1)
 
Net Par
Outstanding
 
% of Total
Net Par
Outstanding
New Jersey Transportation Trust Fund Authority - Transportation System
BBB+
 
$
1,650

 
1.5
%
California State - GO
A
 
1,623

 
1.5
%
NYS Thruway Authority, Highway & Bridge Revenue
AA-
 
834

 
0.8
%
Puerto Rico Sales Tax Financing Corporation - Senior Sales Tax Revenue
BIG
 
805

 
0.7
%
Massachusetts Commonwealth - GO
AA
 
802

 
0.7
%
Chicago, IL - GO
BBB-
 
625

 
0.6
%
Mets Queens Baseball Stadium Project, NY, Lease Revenue
BIG
 
579

 
0.5
%
Alameda Corridor Transportation Authority, Transportation Revenue
BBB
 
508

 
0.5
%
Puerto Rico Infrastructure Financing Authority, Special Tax Revenue
BIG
 
503

 
0.5
%
Hickam Community Housing LLC
BBB
 
480

 
0.4
%
Total
 
 
$
8,409

 
7.8
%
(1)
Internal credit ratings are provided solely to indicate the underlying credit quality of guaranteed obligations based on the view of Ambac Assurance. In cases where Ambac Assurance has insured multiple tranches of an issue with varying internal ratings, or more than one obligation of an issuer with varying internal


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ratings, a weighted average rating is used. Ambac Assurance credit ratings are subject to revision at any time and do not constitute investment advice. Ambac Assurance, or one of its affiliates, has guaranteed the obligations listed and may also provide other products or services to the issuers of these obligations for which Ambac Assurance may have received premiums or fees. “BIG” denotes credits deemed below investment grade.

U.S. Structured Finance Portfolio
Ambac’s portfolio of U.S. structured finance exposures is $21,814 million, representing 20% of Ambac’s net par outstanding as of December 31, 2015 and a 17% reduction from the amount outstanding at December 31, 2014. This reduction in exposure was the result of normal exposure runoff, primarily related to residential mortgage-backed policies, in addition to terminations and commutations of student loan and asset backed policies. Insured exposures include securitizations of mortgage loans, home equity loans, student loans, leases, operating assets, collateralized debt obligations ("CDO"), collateralized loan obligations (“CLO”), and other asset-backed financings, in each case where the majority of the underlying collateral risk is situated in the United States. Included within the lease securitization sector are pooled aircraft and railcar transactions. Additionally, Ambac’s structured finance insured portfolio includes secured and unsecured debt issued by investor-owned utilities, structured insurance transactions and aircraft equipment trust certificates. See Note 7. Financial Guarantees in Force to the Consolidated Financial Statements, included in Part II, Item 8 included in this Form 10-K, for exposures by bond type as of December 31, 2015.
Structured finance exposures generally entail three forms of risks: (i) asset risk, which relates to the amount and quality of the underlying assets; (ii) structural risk, which relates to the extent to which the transaction’s legal structure and credit support provide protection from loss; and (iii) servicer risk, which is the risk that poor performance at the servicer or manager level contributes to a decline in cash flow available to the transaction. Ambac Assurance seeks to mitigate and manage these risks through its risk management practices.
 
Structured securities are usually designed to help protect the investors and, therefore, the guarantor from the bankruptcy or insolvency of the entity that originated the underlying assets as well as from the bankruptcy or insolvency of the servicer of those assets. The servicer of the assets is typically responsible for collecting cash payments on the underlying assets and forwarding such payments, net of servicing fees, to a trustee for the benefit of the issuer. One potential issue is whether the sale of the assets by the originator to the issuer would be upheld in the event of the bankruptcy or insolvency of the originator and whether the servicer of the assets may be permitted or stayed from remitting to investors cash collections held by it or received by it after the servicer or the originator becomes subject to bankruptcy or insolvency proceedings. Another potential issue is whether the originator sold ineligible assets to the securitization transaction that subsequently deteriorated, and, if so, whether the originator has the willingness or financial wherewithal to meet its contractual obligations to repurchase those assets out of the transaction. Structural protection in a transaction, such as control rights that are typically held by the senior note holders, or guarantor in insured transactions, will determine the extent to which underlying asset performance can be influenced upon non-performance to improve the revenues available to cover debt service.
The following table presents the top five servicers by net par outstanding at December 31, 2015 for U.S. structured finance exposures:

Servicer
($ in millions)
Bond Type
 
Net Par
Outstanding
 
% of Total
Net Par
Outstanding
Specialized Loan Servicing, LLC
Mortgage-backed
 
$
2,621

 
2.4
%
Bank of America N.A.
Mortgage-backed
 
2,608

 
2.4
%
Ocwen Loan Servicing, LLC
Mortgage-backed
 
1,581

 
1.5
%
Pennsylvania Higher Education Assistance Agency
Student Loan
 
1,522

 
1.4
%
Wells Fargo Bank
Mortgage-backed
 
1,374

 
1.3
%


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The table below shows Ambac’s ten largest structured finance transactions, as a percentage of total financial guarantee net par outstanding at December 31, 2015:
($ in millions)
Bond Type
 
Ambac
Rating(1)
 
Net Par
Outstanding
 
% of Total
Net Par
Outstanding
Ballantyne Re Plc (2)
Structured Insurance
 
BIG
 
$
900

 
0.8
%
Wachovia Asset Securitization Issuance II, LLC 2007-HE2 (3)
Mortgage Backed Securities
 
BIG
 
740

 
0.7
%
Timberlake Financial, LLC
Structured Insurance
 
BBB
 
606

 
0.6
%
The National Collegiate Student Loan Trust 2007-4 (3)
Student Loans
 
BIG
 
581

 
0.5
%
Progress Energy Carolinas, Inc.
Investor Owned Utility
 
A-
 
558

 
0.5
%
Wachovia Asset Securitization Issuance II, LLC 2007-HE1 (3)
Mortgage Backed Securities
 
BIG
 
524

 
0.5
%
Local Insight Media Finance LLC
Asset Backed
 
BIG
 
489

 
0.5
%
CenterPoint Energy Inc.
Investor Owned Utility
 
BBB+
 
376

 
0.3
%
Consolidated Edison Company of New York
Investor Owned Utility
 
A
 
347

 
0.3
%
Option One Mortgage Loan Trust 2007-FXD1 (3)
Mortgage Backed Securities
 
BIG
 
336

 
0.3
%
Total
 
 
 
 
$
5,457

 
5.0
%
(1)
Internal credit ratings are provided solely to indicate the underlying credit quality of guaranteed obligations based on the view of Ambac Assurance, and for Ambac UK related transactions, based on the view of Ambac UK. In cases where Ambac Assurance or Ambac UK 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 Assurance and Ambac UK credit ratings are subject to revision at any time and do not constitute investment advice. Ambac Assurance, or one of its affiliates, has guaranteed the obligations listed and may also provide other products or services to the issuers of these obligations for which Ambac may have received premiums or fees. “BIG” denotes credits deemed below investment grade.
(2)
Insurance policy issued by Ambac UK.
(3)
Ambac Assurance has allocated this transaction to the Segregated Account.

International Finance Insured Portfolio
Ambac’s portfolio of international finance insured exposures is $21,049 million, representing 20% of Ambac’s net par outstanding as of December 31, 2015 and a 16% reduction from the amount outstanding at December 31, 2014. This reduction in exposure was primarily the result of terminations of asset-backed and transportation policies, exposure runoff and the impact of the strengthening of the US dollar. Ambac’s international finance insured exposures include a wide array of obligations in the international markets, including infrastructure financings, asset-securitizations, CDOs, utility obligations, and whole business securitizations (e.g. securitizations of substantially all of the operating assets of a corporation). Ambac no longer has insured exposure related to emerging markets. See Note 7. Financial Guarantees in Force to the Consolidated Financial Statements, included in Part II, Item 8 included in this Form 10-K, for exposures by bond type as of December 31, 2015.
When underwriting transactions in the international markets, Ambac considered the specific risks related to the particular country and region that could impact the credit of the issuer. These risks include the legal and political environment, capital markets
 
dynamics, foreign exchange issues and the degree of governmental support. Ambac continues to assess these risks through its ongoing risk management.
Ambac UK, which is regulated in the United Kingdom (“UK”), had been Ambac Assurance’s primary vehicle for directly issuing financial guarantee policies in the UK and the European Union with $17,847 million net par outstanding at December 31, 2015. Geographically, Ambac UK’s exposures are principally in the UK and continental Europe. The portfolio of insured exposures underwritten by Ambac UK is financially supported exclusively by the assets of Ambac UK and no capital support arrangements are in place with any other Ambac affiliate. See Additional Insured Portfolio Information - European Union for further details of non-UK exposures.
The table below shows our ten largest international finance transactions as a percentage of total financial guarantee net par outstanding at December 31, 2015. Except where noted, all international finance transactions included in the table below are insured by Ambac UK:



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($ in millions)
 
Country-Bond Type
 
Ambac
Rating(1)
 
Net Par
Outstanding
 
% of Total
Net Par
Outstanding
Mitchells & Butlers Finance plc-UK Pub Securitisation
 
UK-Asset Securitizations
 
A+
 
$
1,728

 
1.6
%
National Grid Electricity Transmission
 
UK-Utility
 
A-
 
1,168

 
1.1
%
Aspire Defence Finance plc
 
UK-Infrastructure
 
BBB+
 
1,052

 
1.0
%
Capital Hospitals plc (2)
 
UK-Infrastructure
 
BBB
 
989

 
0.9
%
Telereal Securitisation plc
 
UK-Asset Securitizations
 
AA
 
928

 
0.9
%
Anglian Water
 
UK-Utility
 
A-
 
814

 
0.8
%
Posillipo Finance II S.r.l.
 
Italy-Sub-Sovereign
 
BBB-
 
785

 
0.7
%
National Grid Gas
 
UK-Utility
 
A-
 
751

 
0.7
%
Ostregion Investmentgesellschaft NR 1 SA (2)
 
Austria-Infrastructure
 
BIG
 
737

 
0.7
%
RMPA Services plc
 
UK-Infrastructure
 
BBB+
 
710

 
0.7
%
Total
 
 
 
 
 
$
9,662

 
8.9
%
(1)
Internal credit ratings are provided solely to indicate the underlying credit quality of guaranteed obligations based on the view of Ambac Assurance, and for Ambac UK related transactions, based on the view of Ambac UK. In cases where Ambac Assurance or Ambac UK 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 Assurance and Ambac UK credit ratings are subject to revision at any time and do not constitute investment advice. Ambac Assurance, or one of its affiliates, has guaranteed the obligations listed and may also provide other products or services to the issuers of these obligations for which Ambac may have received premiums or fees. “BIG” denotes credits deemed below investment grade.
(2)
A portion of this transaction is insured by an insurance policy issued by Ambac Assurance.
Additional Insured Portfolio Information
Average Life of Insured Portfolio
Ambac Assurance underwrote and priced financial guarantees based on the assumption that the guarantees would remain in force until the maturity of the underlying bonds. Ambac Assurance estimates that the average life of its guarantees on par in force at December 31, 2015 is approximately 11 years. The average life is determined by applying a weighted average calculation, using the remaining years to expected maturity of each guaranteed bond, and weighting them on the basis of the remaining net par guaranteed. Except for RMBS policies, no assumptions are made for non-contractual reductions,
 
refundings or terminations of insured issues. RMBS policies incorporate assumptions on expected voluntary and involuntary prepayments over the remaining life of the insured obligation.
Issue Size
Ambac Assurance’s financial guarantee exposure in the U.S. public finance market reflects the historical participation across the whole range of deal sizes. U.S. structured finance and international finance transactions generally involved larger transaction sizes. The following table sets forth the distribution of Ambac’s guaranteed portfolio as of December 31, 2015 with respect to the current size of each guaranteed issue:

 
 
 
 
 
Net Par Amount as of
December 31, 2015
Current Par Amount
($ in millions)
Number of
Issues
 
% of Total
Number of Issues
 
Amount
Outstanding
 
% of Total
Less than $10 million
3,443

 
68
%
 
$
9,119

 
8
%
$10—less than $50 million
1,114

 
22
%
 
24,959

 
23
%
$50—$250 million
409

 
8
%
 
42,756

 
40
%
Greater than $250 million
79

 
2
%
 
31,465

 
29
%
Total
5,045

 
100
%
 
$
108,299

 
100
%


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Geographic Area
The following table sets forth the geographic distribution of Ambac Assurance’s insured exposure as of December 31, 2015:
Geographic Area
($ in millions)
Net Par
Amount
Outstanding
 
% of Total
Net Par Amount
Outstanding
Domestic:
 
 
 
California
$
15,461

 
14.3
%
New York
5,719

 
5.3
%
Florida
4,481

 
4.1
%
New Jersey
4,422

 
4.1
%
Texas
3,916

 
3.6
%
Illinois
3,599

 
3.3
%
Colorado
3,313

 
3.1
%
Pennsylvania
2,414

 
2.2
%
Puerto Rico
2,163

 
2.0
%
Massachusetts
2,157

 
2.0
%
Mortgage and asset-backed (1)
12,527

 
11.6
%
Other domestic
27,078

 
25.0
%
Total Domestic
87,250

 
80.5
%
International:
 
 
 
United Kingdom
15,494

 
14.3
%
Australia
1,851

 
1.7
%
Italy
948

 
0.9
%
Austria
737

 
0.7
%
France
288

 
0.3
%
Internationally diversified (2)
974

 
0.9
%
Other international
757

 
0.7
%
Total International Finance
21,049

 
19.5
%
Total
$
108,299

 
100.0
%
(1)
Mortgage and asset-backed obligations includes guarantees with multiple locations of risk within the United States and is primarily comprised of residential mortgage and commercial asset-backed securitizations.
(2)
Internationally diversified may include components of U.S. exposure.
Other European Union Exposures (“EU”)
Ambac's international exposures are principally in the United Kingdom; however, we also have exposures with credit risk based in various other EU member states, including Austria, France, Germany, Ireland, Italy and Spain.  The company also has limited indirect exposures to these countries through its CDO and CLO debt obligations. These obligations were structured to limit exposures
 
to any given obligor and any given non-US country or region. Several of these countries have experienced significant economic, fiscal and/or political strains such that the likelihood of default on such obligations is higher than when the policies were underwritten. The Company’s exposures, net of reinsurance, to these countries are shown in the following table:

($ in Millions)
 
Austria
 
France
 
Germany
 
Ireland
 
Italy
 
Spain
 
Total
Sub-sovereign
 
$

 
$
35

 
$

 
$

 
$
785

 
$

 
$
820

Infrastructure / operating ABS
 
737

 
253

 

 

 
163

 

 
1,153

Structured insurance
 

 

 

 
79

 

 

 
79

Investor-owned utility
 

 

 
50

 

 

 
43

 
93

Total
 
$
737

 
$
288

 
$
50

 
$
79

 
$
948

 
$
43

 
$
2,145

Total below investment grade
 
$
737

 
$

 
$
50

 
$

 
$

 
$
43

 
$
830

Ambac does not guarantee any sovereign bonds of the above EU countries. However, the exposures classified as sub sovereign may be impacted should there be adverse financial developments in the EU. Those exposures classified as infrastructure/operating asset backed are concession based where the underlying assets independently generate cash flow without operational reliance on the sovereign. Of the below investment grade exposures, the
 
investor-owned utilities (wind farm and mini hydro-electric plant) are undergoing restructuring processes designed to address their performance issues. The other below investment grade exposure is a road transaction, where performance has been poorer than anticipated due to lower than forecast traffic volumes, however performance is improving. Below investment grade is defined as those exposures with a credit rating below BBB-.



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Exposure Currency
The table below shows the distribution by currency of Ambac Assurance’s insured exposure as of December 31, 2015:
Currency
($ in millions)
Net Par Amount
Outstanding in
Base Currency
 
Net Par Amount
Outstanding in
U.S. Dollars
U.S. Dollars
$
89,114

 
$
89,114

British Pounds
£
10,295

 
15,162

Euros
1,943

 
2,110

Australian Dollars
A$
2,261

 
1,648

New Zealand Dollars
NZ$
389

 
265

Total
 
 
$
108,299

Ratings Distribution
The following tables provide a rating distribution of guaranteed total net par outstanding based upon internal Ambac Assurance credit ratings at December 31, 2015 and 2014 and a distribution by bond type of Ambac Assurance’s below investment grade net par exposures at December 31, 2015 and 2014. Below investment grade
 
is defined as those exposures with an internal credit rating below BBB-:
December 31
2015
 
2014
Ambac Rating(1)
 
 
 
AAA
<1%

 
<1%

AA
16

 
19

A
39

 
42

BBB
27

 
22

BIG
18

 
17

Total
100
%
 
100
%
(1)
Internal credit ratings are provided solely to indicate the underlying credit quality of guaranteed obligations based on the view of Ambac Assurance, and for Ambac UK related transactions, based on the view of Ambac UK. In cases where Ambac Assurance or Ambac UK 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 Assurance and Ambac UK credit ratings are subject to revision at any time and do not constitute investment advice.


Summary of Below Investment Grade Exposure:
Bond Type
Net Par Outstanding - December 31,
($ in millions)
2015
 
2014
Public Finance:
 
 
 
Tax-backed (1)
$
2,017

 
$
2,512

General obligation (1)
746

 
564

Transportation
432

 
453

Housing (2)
126

 
841

Health care
6

 
27

Other
917

 
1,293

Total Public Finance
4,244

 
5,690

Structured Finance:
 
 
 
Residential mortgage-backed and home equity—first lien
6,055

 
7,003

Residential mortgage-backed and home equity—second lien
4,374

 
5,466

Student loans
1,426

 
3,092

Structured Insurance
1,037

 
1,037

Mortgage-backed and home equity—other
251

 
299

Other
525

 
536

Total Structured Finance
13,668

 
17,433

International Finance:
 
 
 
Other
1,880

 
2,214

Total International Finance
1,880

 
2,214

Total
$
19,792

 
$
25,337

(1)
Tax-backed includes $1,916 and $2,187 of Puerto Rico net par at December 31, 2015 and 2014, respectively. General obligation includes $247 and $250 of Puerto Rico net par at December 31, 2015 and 2014, respectively. Puerto Rico net par outstanding includes capital appreciation bonds which are reported at the par amount at the time of issuance of the related insurance policy.
(2)
Includes $125 and $609 of military housing net par at December 31, 2015 and 2014, respectively.
The decrease in below investment grade exposures is primarily due to (i) ratings upgrades and commutations of student loan policies, (ii) reductions to residential mortgage-backed securities during the year as a result of both prepayments by issuers and claims presented to Ambac Assurance and (iii) upgrades of housing credits to investment grade.

 
U.S. residential mortgage-backed securities exposure
Ambac has exposure to the U.S. mortgage market primarily through direct financial guarantees of RMBS, including transactions that contain risks to first and second liens.
Ambac classifies its insured first-lien RMBS exposure principally into two broad credit risk classes: mid-prime (including Alt-A, interest only, and negative amortization) and sub-prime. Mid-prime loans were typically made to borrowers who had stronger credit



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profiles relative to sub-prime loans, but weaker than prime loans. Compared with mid-prime loans, sub-prime loans typically had higher loan-to-value ratios, reflecting the greater difficulty that sub-prime borrowers have in making down payments and the propensity of these borrowers to extract equity during refinancing. The mid-prime category includes:
Loans with specific payment features that afforded borrowers the option to have lower payments in the early years with potential resets after several years. For example, so-called interest only loans have monthly payments comprised of interest but no principal. So called negative amortization loans permit borrowers to defer interest and principal in the early years and then make higher payments in the period after the reset. Both types may also have lower interest rates in the early years. Increases in monthly payments, commonly called payment shock, raise the probability of delinquencies and defaults given the decline in house prices that has caused many borrowers’ loan balances to exceed their homes’ market value.
Loans backed by borrowers who typically did not meet standard agency guidelines for documentation requirement,
 
property type or loan-to-value ratio. These are typically higher-balance loans made to individuals who might have past credit problems that were not severe enough to warrant “sub-prime” classification, or borrowers who chose not to obtain a prime mortgage due to documentation requirements.
Ambac's second lien insured RMBS transactions are collateralized predominantly by second-lien mortgage loans such as closed-end seconds and home equity lines of credit. A second-lien mortgage loan is a type of loan in which the borrower uses the equity in their home as collateral and the second-lien loan is subordinate to the first-lien loan outstanding on the home. The borrower is obligated to make monthly payments on both their first and second-lien loans. If the borrower defaults on the payments due under these loans and the property is subsequently liquidated, the liquidation proceeds are first utilized to pay off the first-lien loan (as well as costs due the servicer) and any remaining funds are applied to pay off the second-lien loan. As a result of this subordinate position to the first-lien loan, second-lien loans carry a significantly higher severity in the event of a loss, typically at or above 100% in the current housing market.


The following tables provide, by vintage and type current net par outstanding of Ambac’s U.S. RMBS book of business:
 
Total Net Par Outstanding - December 31, 2015
 
Total Net Par Outstanding - December 31, 2014
Year of Issue
($ in millions)
Second
Lien
 
First-lien
Sub-prime
 
First-lien
Mid-prime
 
Other(1)
 
Total
 
Second 
Lien
 
First-lien
Sub-prime
 
First-lien
Mid-prime
 
Other(1)
 
Total
1998-2001
$
11

 
$
386

 
$
1

 
$
236

 
$
634

 
$
23

 
$
450

 
$
2

 
$
293

 
$
768

2002
7

 
340

 
31

 
5

 
383

 
14

 
391

 
39

 
8

 
452

2003
10

 
488

 
187

 
104

 
789

 
13

 
565

 
227

 
127

 
932

2004
451

 
289

 
336

 
7

 
1,083

 
625

 
329

 
408

 
15

 
1,377

2005
544

 
664

 
1,211

 
44

 
2,463

 
724

 
767

 
1,394

 
49

 
2,934

2006
1,615

 
438

 
617

 
65

 
2,735

 
2,042

 
518

 
700

 
75

 
3,335

2007
1,765

 
336

 
1,055

 
144

 
3,300

 
2,070

 
398

 
1,252

 
168

 
3,888

Total
$
4,403

 
$
2,941

 
$
3,438

 
$
605

 
$
11,387

 
$
5,511

 
$
3,418

 
$
4,022

 
$
735

 
$
13,686

% of Total RMBS Portfolio
38.7
%
 
25.8
%
 
30.2
%
 
5.3
%
 
100.0
%
 
40.2
%
 
25.0
%
 
29.4
%
 
5.4
%
 
100.0
%
% of Related Par Outstanding rated below investment grade (2)
99.4
%
 
93.1
%
 
95.9
%
 
45.1
%
 
93.8
%
 
99.2
%
 
91.7
%
 
95.6
%
 
43.9
%
 
93.3
%
(1)
Other primarily includes manufactured housing and lot loan exposures
(2)
Ambac’s below investment grade internal ratings reflect bonds which are of speculative grade credit quality with the adequacy of future margin levels for payment of interest and repayment of principal potentially adversely affected by major ongoing uncertainties or exposure to adverse conditions. Ambac Assurance’s below investment grade category includes transactions on which claims have been submitted.

Student Loans
Ambac Assurance’s student loan portfolio consists primarily of securitized private student loans in addition to a minimal amount of federally guaranteed loans under the Federal Family Education Loan Program (“FFELP”). Whereas FFELP loans are guaranteed for a minimum of 97% of defaulted principal and interest, private loans have no government guarantee and, therefore, are subject to credit risk as with other types of unguaranteed credits. Higher than expected defaults of private student loans have contributed to the significant deterioration in the performance of some of our transactions. Additionally, due to the failure of the auction rate
 
markets, the interest rates on some student loan securities have increased significantly to punitive levels pursuant to the transaction terms. Such increases have contributed to the collateralization ratio in these transactions deteriorating on an accelerated basis due to negative excess spread and/or the use of principal receipts to pay current interest. The combined increase in defaults and the penalty rate on the auction rate securities continue to erode the collateralization levels in many of the trusts we insure. This impact has been offset modestly by the current low interest rate environment.




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New private student loan capital market transactions require a significant amount of equity which makes the refinancing of Ambac insured transactions backed by private loans difficult for issuers. As such, we do not expect that our student loan exposure will be significantly reduced via refinancing in the near term.
 
Student loan net par outstanding on Ambac insured obligations by underlying debt-type are as follows:

December 31 ($ in million)
2015
 
2014
Debt Type
Net Par
 
% of Net Par
 
Net Par
 
% of Net Par
Auction Rate
$
464

 
20
%
 
$
1,022

 
30
%
Fixed Rate
139

 
6
%
 
181

 
5
%
Floating Rate Notes
1,715

 
74
%
 
2,163

 
64
%
Debt Service Reserve
5

 
%
 
24

 
1
%
Total
$
2,323

 
100
%
 
$
3,390

 
100
%
All of the Auction Rate debt is paying interest at the maximum auction rate or the “penalty rate” pursuant to the transaction documents, reflecting both the failure of the auction rate market as well as the below investment grade credit ratings of the deals.
Auction Rate Securities (“ARS”) and Variable Rate Demand Obligations (“VRDO”):
Ambac insures variable rate obligations including ARS and VRDOs, both of which have rate resets and may have experienced liquidity and / or credit stress during the financial crisis.  While market conditions have improved and most of Ambac’s exposures have stabilized or been refinanced away, there are still some issuers paying higher rates, and in the case of some VRDOs, both higher rates and faster amortization than expected due to failed remarketings.  Many of Ambac’s ARS exposures are paying at failed auction rates that are relatively low in the current market and remain attractive to issuers.  The following table sets forth Ambac Assurance’s financial guarantee net par exposure outstanding, by bond type, relating to such variable rate exposures at December 31, 2015 and 2014:
December 31 ($ in millions)
2015
 
2014
Investor-owned utilities
$
2,277

 
$
2,403

Student Loans
464

 
1,022

Healthcare
533

 
825

Lease and Tax-backed
500

 
570

Transportation
459

 
403

Utility
293

 
304

General Obligation
49

 
107

Other
375

 
403

Total
$
4,950

 
$
6,037

Reinsurance
Ceded Reinsurance:
Ambac Assurance has reinsurance in place pursuant to surplus share treaties and facultative agreements. As a primary financial guarantor, Ambac Assurance is required to honor its obligations to its policyholders whether or not its reinsurers perform their obligations under these reinsurance agreements. For exposures reinsured, Ambac Assurance withholds a ceding commission to defray its underwriting and operating expenses. To minimize its exposure to losses from reinsurers, Ambac Assurance (i) monitors the financial condition of its reinsurers; (ii) is entitled to receive collateral from its reinsurance counterparties in certain reinsurance contracts; and (iii) has certain cancellation rights that can be exercised by Ambac Assurance in the event of rating agency
 
downgrades of a reinsurer (among other events and circumstances). Ambac Assurance held letters of credit and collateral amounting to $136.2 million from its reinsurers at December 31, 2015. As of December 31, 2015, the aggregate amount of insured par ceded by Ambac Assurance to reinsurers under reinsurance agreements was $10,936 million, with the largest reinsurer accounting for $9,711 million or 8.1% of gross par outstanding at December 31, 2015.
The following table shows the distribution, by bond type, of Ambac Assurance’s ceded guaranteed portfolio at December 31, 2015:
Bond Type
($ in millions)
Ceded Par
Amount
Outstanding
 
% of Gross
Par Ceded
Public Finance:
 
 
 
General obligation
$
2,244

 
12
%
Lease and tax-backed revenue
2,235

 
9
%
Utility revenue
1,272

 
13
%
Transportation revenue
1,091

 
16
%
Housing revenue
986

 
13
%
Higher education
409

 
11
%
Health care revenue
248

 
10
%
Other
107

 
9
%
Total Public Finance
8,592

 
12
%
Structured Finance:
 
 
 
Student loan
712

 
23
%
Investor-owned utilities
581

 
11
%
Mortgage-backed and home equity
143

 
1
%
Asset-backed
64

 
5
%
Other
259

 
11
%
Total Structured Finance
1,759

 
7
%
Total Domestic
10,351

 
11
%
International Finance:
 
 
 
Investor-owned and public utilities
388

 
5
%
Asset-backed
83

 
2
%
Transportation
75

 
3
%
CDOs
39

 
17
%
Total International Finance
585

 
3
%
Total
$
10,936

 
9
%
Assumed Reinsurance:
At December 31, 2015, assumed par outstanding was $243.6 million. On March 24, 2010, all assumed reinsurance agreements



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with third parties were allocated to the Segregated Account, which will not allow for cancellations without the approval of the Rehabilitator.
Rating Agencies
Ambac Assurance’s financial strength ratings had been downgraded and subsequently withdrawn by Moody’s and S&P. Ambac Assurance requested such withdrawals upon a review of the value of such ratings relative to the cost.
Insurance Regulatory Matters
United States
Ambac Assurance and Everspan are domiciled in the State of Wisconsin and, as such, are subject to the insurance laws and regulations of the State of Wisconsin (the “Wisconsin Insurance Laws”) and are regulated by the OCI. In addition, Ambac Assurance and Everspan are subject to the insurance laws and regulations of the other jurisdictions in which they are licensed. Under Wisconsin insurance law, the Segregated Account is a separate insurer for purposes of the Segregated Account Rehabilitation Proceedings. The Segregated Account is separately licensed in the State of Wisconsin but not elsewhere, and is under the control of, and is overseen by, the Rehabilitator.
Insurance laws and regulations applicable to financial guarantee insurers vary by jurisdiction. The laws and regulations generally require financial guarantors to maintain minimum standards of business conduct and solvency; to meet certain financial tests; and to file policy forms, premium rate schedules and certain reports with regulatory authorities, including information concerning capital structure, ownership and financial condition. Regulated insurance companies are also required to file quarterly and annual statutory financial statements with the National Association of Insurance Commissioners (“NAIC”), and in each jurisdiction in which they are licensed. The level of supervisory authority that may be exercised by non-domiciliary insurance regulators varies by jurisdiction. Generally, however, non-domiciliary regulators are authorized to suspend or revoke insurance licenses and to impose license restrictions in the event that laws or regulations are breached by a regulated insurance company or in the event that continued or unrestricted licensure of the regulated insurance company constitutes a “hazardous condition” in the opinion of the regulator. As a result of losses from its insured portfolio, Ambac Assurance is no longer able to write new business.
As the principal, or domiciliary, regulator of Ambac Assurance, the Segregated Account and Everspan, OCI has primary regulatory authority, including with respect to the initiation and administration of rehabilitation or liquidation proceedings. Additionally, the accounts and operations of Ambac Assurance and Everspan are subject to periodic comprehensive examinations by the OCI. Wisconsin Insurance Laws require regulated insurance companies to maintain minimum standards of business conduct, maintain minimum surplus to policyholders, meet certain financial tests, and file certain reports, including information concerning their capital structure, ownership and financial condition. Ambac Assurance, the Segregated Account, and Everspan are not subject to risk-based capital requirements, since they are financial guarantee insurers. Ambac Assurance, the Segregated Account and Everspan are in compliance with minimum surplus levels. Wisconsin Insurance Laws also require prior approval by OCI of certain transactions between Ambac Assurance or Everspan and their respective affiliates. As described in Note 1. Background and Business Description to the Consolidated Financial Statements included in
 
Part II, Item 8 in this Form 10-K, the Rehabilitator of the Segregated Account has imposed certain constraints upon Ambac Assurance through contractual covenants made for the benefit of the Segregated Account and has assumed the authority to control the management of the Segregated Account.
In addition, pursuant to the terms of the Settlement Agreement, Ambac Assurance must seek prior approval by OCI of certain corporate actions. The Settlement Agreement includes covenants which generally restrict the operations of Ambac Assurance and remain in force until the surplus notes that were issued to the counterparties by Ambac Assurance pursuant to the Settlement Agreement have been redeemed, repurchased or repaid in full. Certain of these restrictions may be waived with the approval of a majority of Unaffiliated Qualified Directors (described below) and/or the OCI. Pursuant to the Settlement Agreement, Ambac Assurance amended its articles of incorporation to require that at least one-third (and, in any event, not less than three members) of the board of directors of Ambac Assurance must be Unaffiliated Qualified Directors (as defined in the Settlement Agreement). If at any time Ambac Assurance does not have the requisite number of Unaffiliated Qualified Directors to authorize an action that is otherwise restricted by the Settlement Agreement, it will need to seek the approval of OCI to take such action.
New York’s comprehensive financial guarantee insurance law defines the scope of permitted financial guarantee insurance and governs the conduct of business of all financial guarantors licensed to do business in New York, including Ambac Assurance and Everspan. The New York financial guarantee insurance law also establishes single risk and aggregate limits with respect to insured obligations insured by financial guarantee insurers. Such single risk limits are specific to the type of insured obligation (for example, municipal or asset-backed). Under the aggregate limits, policyholders’ surplus and contingency reserves must at least equal a percentage of aggregate net liability that is equal to the sum of various percentages of aggregate net liability for various categories of specified obligations. Wisconsin laws and regulations applicable to financial guarantors, as well as the laws of several other states, are less comprehensive than New York law and relate primarily to single and aggregate risk limits. As a result of the increased statutory capital at December 31, 2015, Ambac Assurance is in compliance with applicable aggregate risk limits but not in compliance with applicable single risk limits. Through run-off of the portfolio, Ambac Assurance will continue to seek the reduction in its exposure to maintain its compliance with applicable single and aggregate risk limits, but may not be able to do so. Everspan is in compliance with all of such limits.
United Kingdom
The Prudential Regulatory Authority ("PRA") and Financial Conduct Authority ("FCA") (and their predecessor regulator the Financial Services Authority (“FSA”)) have exercised significant oversight of Ambac UK since 2008, after Ambac, Ambac Assurance and Ambac UK began experiencing financial stress. In 2009, Ambac UK’s license to write new business was curtailed by the FSA and the insurance license was limited to undertaking only run-off related activity. As such, Ambac UK is authorized to run-off its insurance portfolio in the United Kingdom, and to do the same through a branch in Milan, Italy, and a number of other EU countries. EU legislation has allowed Ambac UK to conduct business in EU states other than the United Kingdom through a “passporting” arrangement, which eliminates the necessity of additional licensing or authorization in those other EU jurisdictions.



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Ambac UK remains subject to regulation by the PRA and FCA in the conduct of its business. The PRA and FCA are the dual statutory regulators responsible for regulating the financial services industry in the United Kingdom, with the purpose of maintaining confidence in the U.K. financial system, providing public understanding of the system, securing the proper degree of protection for consumers and helping to reduce financial crime. In addition, the regulatory regime in the United Kingdom must comply with certain EU legislation binding on all EU member states.
Applicable rules require that non-life insurance companies such as Ambac UK maintain a margin of solvency at all times in respect of the liabilities of the insurance company, the calculation of which depends on the type and amount of insurance business a company writes. These solvency requirements have been amended in order to implement the European Union’s “Solvency II” directive on risk-based capital. The requirements of the Solvency II directive became effective on January 1, 2016 and, during the course of 2015, Ambac UK has been required to make certain transitional Solvency II-compliant regulatory filings with the PRA, which it has done.
Notwithstanding the foregoing, Ambac UK is deficient in terms of compliance with the applicable regulatory capital requirements as of December 31, 2015, and as at January 1, 2016 remains deficient in applicable regulatory requirements under the Solvency II directive effective from that date. The PRA and FCA are aware of the same, and dialogue between Ambac UK management and its regulators remains ongoing with respect to options for addressing the shortcoming, although such options remain few.
Regulations over change in control
Under Wisconsin law applicable to insurance holding companies, any acquisition of control of Ambac, and any other direct or indirect control of Ambac Assurance and Everspan, requires the prior approval of the OCI. “Control” is defined as the direct or indirect power to direct or cause the direction of the management and policies of a person. Any purchaser of more than 10% of the outstanding voting stock of a corporation is presumed to have acquired control of that corporation and its subsidiaries unless the OCI, upon application, determines otherwise. For purposes of this test, Ambac believes that a holder of common stock having the right to cast more than 10% of the votes which may be cast by the holders of all shares of common stock of Ambac would be deemed to have control of Ambac Assurance and Everspan within the meaning of the Wisconsin Insurance Laws. The United Kingdom has similar requirements applicable in respect of Ambac, as the ultimate holding company of Ambac UK.
Dividend Restrictions, Including Contractual Restrictions
Due to losses experienced by Ambac Assurance, Ambac Assurance has been unable to pay common dividends to Ambac since 2008 and will be unable to pay common dividends in 2016 without the prior consent of the OCI, which is unlikely. See Note 9. Insurance Regulatory Restrictions to the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K for further information on dividends.
Ambac Assurance’s ability to pay dividends is further restricted by the Settlement Agreement and by certain covenants made for the benefit of the Segregated Account. See Note 1. Background and Business Description to the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K for further information.
 
As a result of these restrictions, Ambac Assurance is not expected to pay dividends to Ambac for the foreseeable future.
Ambac UK is not expected to pay any dividends to Ambac Assurance for the foreseeable future. While the UK insurance regulatory laws impose no statutory restrictions on a general insurer’s ability to declare a dividend, the PRA’s and FCA’s capital requirements in practice act as a restriction on the payment of dividends, where a firm has a lower level of regulatory capital than its regulatory capital requirement as is the case for Ambac UK. Further, the FSA amended Ambac UK’s license in 2010 such that the PRA must specifically approve (“non-objection”) any transfer of value and/or assets from Ambac UK to Ambac Assurance or any other Ambac group company, other than in respect of certain disclosed contracts between the two parties (such as in respect of a management services agreement between Ambac Assurance and Ambac UK).
Pursuant to the Settlement Agreement Ambac Assurance may not make any “Restricted Payment” (which includes dividends from Ambac Assurance to Ambac) in excess of $5 million in the aggregate per annum, other than Restricted Payments from Ambac Assurance to Ambac in an amount up to $7.5 million per annum solely to pay operating expenses of Ambac. Concurrent with making any such Restricted Payment, a pro-rata amount of the surplus notes issued by Ambac Assurance under the Settlement Agreement would also need to be redeemed at par.
Under the terms of Ambac Assurance’s Auction Market Preferred Shares (“AMPS”), dividends may not be paid on the common stock of Ambac Assurance unless all accrued and unpaid dividends on the AMPS for the then current dividend period have been paid, provided, that dividends on the common stock may be made at all times for the purpose of, and only in such amounts as are necessary for, enabling Ambac (i) to service its indebtedness for borrowed money as such payments become due or (ii) to pay its operating expenses. If dividends are paid on the common stock as provided in the prior sentence, dividends on the AMPS become cumulative until the date that all accumulated and unpaid dividends have been paid on the AMPS.
FINANCIAL SERVICES SEGMENT
Ambac’s Financial Services business segment is conducted through subsidiaries of Ambac Assurance, which provide financial and investment products, including investment agreements, funding conduits and interest rate swaps, principally to the clients of its financial guarantee business. Ambac Assurance insures all of the obligations of its financial services subsidiaries. These businesses are in active runoff, which is being effectuated by transaction terminations, settlements, and scheduled amortization of contracts. The Financial Services business also maintains interest rate derivatives to mitigate exposure to floating rate insured obligations in the Financial Guarantee segment.
The principal factors that may affect the Financial Services Segment results include: (1) availability of counterparties for hedging transactions; (2) investment returns; (3) the value of future contract terminations or settlements which may differ from carrying value of the those contracts; (4) collateral posting requirements; (5) the availability of liquidity from Ambac Assurance; (6) changes in the fair value of the derivatives portfolio resulting from interest rate fluctuations; (7) timing of investment agreement withdrawals; and (8) restrictions imposed upon Ambac Assurance by the contracts executed with the Segregated Account and the Settlement



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Agreement, and, to the extent that policies allocated to the Segregated Account are implicated, the authority of the Rehabilitator of the Segregated Account to control the management of the Segregated Account.
Investment Agreements
Ambac’s investment agreements were issued to structured finance and municipal issuers through its wholly-owned subsidiary, Ambac Capital Funding. Investment agreements were customized for each investor to provide guaranteed interest and return of principal in accordance with their requirements. Each investment agreement was insured by Ambac Assurance through a financial guarantee insurance policy.
Liquidity risk exists in the business due to contract provisions which require collateral posting and allow for early termination of investment agreements. As of December 31, 2015, all investment agreement principal and accrued interest outstanding of $100.4 million was collateralized. Funding for the collateral and previous early terminations was supported in part through loans between Ambac Capital Funding and Ambac Assurance. At December 31, 2015, Ambac Capital Funding was indebted to Ambac Assurance in the amount of $195.1 million.
See “Liquidity and Capital Resources” of the Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part II, Item 7 and Note 15. Obligations Under Investment Agreements to the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K for further information on investment agreements.
Derivative Products
The primary activities in the derivative products business are to manage the runoff of derivatives with financial guarantee clients and to facilitate the mitigation of interest rate exposure for the Financial Guarantee segment via swaps and exchange traded U.S. treasury futures. Derivative transactions are executed through Ambac Financial Services (“AFS”), a wholly-owned subsidiary of Ambac Assurance. The derivative products portfolio is positioned to benefit from rising rates as an economic hedge against interest rate exposure in the financial guarantee insurance portfolio. This hedge position may have a significant impact on the results of the Financial Services segment. Under the agreements governing the derivative positions, AFS generally must post collateral or margin in excess of the market value of the swaps and futures contracts. In addition, most of AFS’s counterparties currently possess the right to terminate their transactions with AFS and in the event of a full rehabilitation of Ambac Assurance, some of AFS’s swaps could automatically terminate. A sudden termination of AFS’s derivatives, whether voluntarily or automatically, could result in losses. AFS has borrowed cash and securities from Ambac Assurance, to help support its incremental collateral and margin posting requirements, previous termination payments and other cash needs. At December 31, 2015, AFS was indebted to Ambac Assurance in the amounts of $680.6 million in cash loans and $64.6 million in borrowed securities.
Credit risks relating to derivative positions primarily concern the default of a counterparty. Counterparty default exposure is mitigated through the use of industry standard collateral posting agreements. For counterparties subject to such collateral posting agreements, collateral is posted when a derivative counterparty’s credit exposure
 
exceeds contractual limits. Derivative contracts entered into with financial guarantee customers are not subject to collateral posting agreements. Credit risk associated with such customer derivatives, including credit derivatives, is managed through the financial guarantee portfolio risk management processes described in the Financial Guarantee Segment noted above. In some cases, derivatives between Ambac and financial guarantee customers are placed through a third party financial intermediary and similarly do not require collateral posting.
AFS manages a variety of market risks inherent in its businesses, including credit, market, liquidity, operational and legal. These risks are identified, measured, and monitored through a variety of control mechanisms, which are in place at different levels throughout the organization. See “Quantitative and Qualitative Disclosures About Market Risk” included in Part II, Item 7A in this Form 10-K for further information.
Funding Conduits
A subsidiary of Ambac has previously 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. The activities of the special purpose entities 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. As of December 31, 2015, Ambac Assurance had financial guarantee insurance policies issued for all assets, MTNs and derivative contracts owned and outstanding by the entities. Ambac does not consolidate these entities under the relevant accounting guidance for consolidation of variable interest entities. See Note 2. Basis of Presentation and Significant Accounting Policies and Note 4. Special Purpose Entities, Including Variable Interest Entities to the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K for further information.
INVESTMENTS AND INVESTMENT POLICY
As of December 31, 2015, the consolidated non-VIE investments of Ambac had an aggregate fair value of approximately $5.6 billion. Investments are managed internally by officers of Ambac, who are experienced investment managers, and by external investment managers. All investments are made in accordance with the general objectives and guidelines for investments reviewed or overseen by Ambac Assurance and Ambac UK’s respective Boards of Directors. These guidelines include liquidity, credit quality, diversification and duration objectives, and are periodically reviewed and revised as appropriate. Additionally, senior credit personnel monitor the portfolio on a continuous basis. Credit monitoring of the investment portfolio includes procedures on residential mortgage-backed securities consistent with those utilized to assess the risk of our insured RMBS exposures.
As of December 31, 2015, the Ambac Assurance and Everspan non-VIE investment portfolio had an aggregate fair value of approximately $4.7 billion. Ambac Assurance’s and Everspan’s investment objectives are to achieve the highest risk-adjusted after-tax return on a diversified portfolio consistent with Ambac Assurance’s and Everspan’s risk tolerance while employing active asset/liability management practices to satisfy all operating and strategic liquidity needs. Ambac Assurance’s investment portfolio is subject to internal investment guidelines and is subject to limits



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on types and quality of investments imposed by applicable insurance laws and regulations. Ambac Assurance purchases Ambac Assurance insured securities given their relative risk/reward characteristics. Ambac Assurance financial guarantee policies related to most of these securities have been allocated to the Segregated Account. As described in Note 1. Background and Business Description to the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K, Ambac Assurance’s investment policies are subject to certain covenants made for the benefit of the Segregated Account and, therefore, such policies may be subject to restrictions outside the control of management. Such covenants could adversely impact the performance of the investment portfolio.
As of December 31, 2015, the non-VIE Ambac UK investment portfolio had an aggregate fair value of approximately $0.6 billion. Ambac UK’s investment policy is designed with the primary objective of ensuring that Ambac UK is able to meet its financial obligations as they fall due, in particular with respect to policy holders and meeting their claims. Ambac UK’s investment portfolio is subject to internal investment guidelines and may be subject to limits on types and quality of investments imposed by its regulator. The Board of Directors of Ambac UK approves any changes or exceptions to Ambac UK’s investment policy.
 
As of December 31, 2015, the non-VIE Financial Services investment portfolio had an aggregate fair value of approximately $0.1 billion. The primary investment objective is to invest in a diversified portfolio of high-grade securities that produce sufficient cash flow to satisfy all investment agreement liabilities while meeting the related collateral requirements. The investment portfolio is subject to internal investment guidelines. Such guidelines set forth minimum credit rating requirements and credit risk concentration limits.
As of December 31, 2015, the non-VIE Corporate investment portfolio had an aggregate fair value of approximately $0.2 billion. The primary investment objective is to preserve capital for strategic uses while maximizing income. The investment portfolio is subject to internal investment guidelines. Such guidelines set forth minimum credit rating requirements and credit risk concentration limits.
The following tables provide certain information concerning the investments of Ambac:

 
2015
 
2014
Investment Category
($ in thousands) December 31
Carrying
Value (1)
 
Weighted
Average
Yield (2)
 
Carrying
Value
 (1)
 
Weighted
Average
Yield (2)
Long-term investments:
 
 
 
 
 
 
 
Taxable bonds
$
4,998,076

 
5.76
%
 
$
4,666,727

 
5.27
%
Tax-exempt bonds
110,255

 
4.08
%
 
123,226

 
4.15
%
Total long-term investments
5,108,331

 
5.72
%
 
4,789,953

 
5.24
%
Short-term investments
225,789

 
0.28
%
 
360,065

 
0.04
%
Other investments (3)
310,600

 

 
357,016

 

Total
$
5,644,720

 
5.49
%
 
$
5,507,034

 
4.86
%
(1)
Includes investments guaranteed by Ambac Assurance and Ambac UK. Refer to Note 11. Investments of the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K for further discussion of Ambac insured securities held in the investment portfolio.
(2)
Yields are stated on a pre-tax basis, based on average amortized cost for both long and short term investments.
(3)
Other investments include equity interests in pooled investment funds which are classified as trading securities and Ambac's equity interest in an unconsolidated trust created in connection with its sale of Segregated Account junior surplus notes on August 28, 2014.
 
2015
 
2014
Investment Category
($ in thousands) December 31
Carrying
Value
 
Weighted
Average
Yield (1)
 
Carrying
Value
 
Weighted
Average
Yield (1)
Municipal obligations (2)
$
420,770

 
3.71
%
 
$
525,792

 
3.65
%
Corporate securities
1,593,669

 
2.81
%
 
1,385,594

 
2.54
%
Foreign obligations
96,306

 
1.07
%
 
127,757

 
1.86
%
U.S. government obligations
91,242

 
1.06
%
 
107,246

 
1.14
%
U.S. agency obligations
4,212

 
0.58
%
 
29,486

 
0.30
%
Residential mortgage-backed securities
1,977,338

 
10.07
%
 
1,710,955

 
9.70
%
Asset-backed securities
924,794

 
3.46
%
 
903,123

 
3.65
%
Total long-term investments
5,108,331

 
5.72
%
 
4,789,953

 
5.24
%
Short-term investments (2)
225,789

 
0.28
%
 
360,065

 
0.04
%
Other investments (3)
310,600

 

 
357,016

 

Total
$
5,644,720

 
5.49
%
 
$
5,507,034

 
4.86
%


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(1)
Yields are stated on a pre-tax basis, based on average amortized cost for both long and short term investments.
(2)
Includes taxable and tax-exempt investments.
(3)
Other investments include equity interests in pooled investment funds which are classified as trading securities and Ambac's equity interest in an unconsolidated trust created in connection with its sale of Segregated Account junior surplus notes on August 28, 2014
Ambac has RMBS exposure in its investment portfolios. Please refer to the tables in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Balance Sheet” section below for a discussion of the fair value of mortgage and asset-backed securities by classification.
EMPLOYEES
As of December 31, 2015, Ambac had 158 employees in the United States and 13 employees in the UK. Ambac considers its employee relations to be satisfactory.

Item 1A.    Risk Factors
References in the risk factors to “Ambac” are to Ambac Financial Group, Inc. References to “we,” “our,” “us” and “Company” are to Ambac and its subsidiaries, as the context requires. Capitalized terms used but not defined in this section shall have the meanings ascribed thereto in Part I, Item 1 in this Form 10-K or in Note 1. Background and Business Description to the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K unless otherwise indicated.
Risks Related to AMBC Common Shares
The price per share of Ambac's common stock may be subject to a high degree of volatility, including significant price declines.
Ambac's common stock, which was issued pursuant to its Reorganization Plan, began trading on the NASDAQ Global Market on May 1, 2013. Although Ambac's common stock is listed on NASDAQ, there can be no assurance as to the liquidity of the trading market or the price at which such shares can be sold. The price of the shares may decline substantially in response to a number of events or circumstances, including but not limited to:
changes in investors’ or analysts’ valuation measures for our stock;
market trends unrelated to our stock;
market and industry perception of our success, or lack thereof, in pursuing our business strategy;
results and actions of other participants in our industry;
changes in the perceived risk within our insured portfolio; and
adverse developments in our financial condition or results of operation.
In addition, the price of Ambac's shares will be affected by the additional risks described below, including risks associated with Ambac Assurance’s ability to deliver value to Ambac.
Ambac may not be able to realize value from Ambac Assurance.
Because Ambac is a holding company, the value of its stock is dependent upon the residual value of its main operating subsidiary,
 
Ambac Assurance, the receipt of payments to be made by Ambac Assurance pursuant to the Amended TSA and the Cost Allocation Agreement, the receipt of payments on the Owner Trust Certificate issued to Ambac by Corolla Trust (the "Owner Trust Certificate"), and the receipt of dividends from Ambac Assurance. There can be no assurance that Ambac will be able to realize residual value in Ambac Assurance, which is in run-off. In addition, the Segregated Account of Ambac Assurance Corporation is subject to rehabilitation proceedings and under the control of the Rehabilitator, as further described below. It is unclear whether Ambac Assurance and the Segregated Account will be able to satisfy all of their respective obligations to policyholders, holders of their respective surplus notes and holders of Ambac Assurance’s preferred stock, even if Ambac Assurance and the Segregated Account are successful in achieving recoveries and mitigating losses. Our ability to achieve recoveries and mitigate losses is subject to significant risks and uncertainties, including perceptions of the value of Ambac’s guarantees and securities.
Due to the above considerations, as well as applicable legal and contractual restrictions described elsewhere herein, it is highly unlikely that Ambac Assurance will be able to pay Ambac any dividends for the foreseeable future. Furthermore, the payments to be made to Ambac under the Amended TSA and the Cost Allocation Agreement are subject to contingencies that are difficult to predict, making the amount and timing, if any, of such payments uncertain. Payments to be made under the Amended TSA, in particular, depend on the generation of taxable income by Ambac Assurance above certain thresholds. Ambac Assurance’s ability to generate taxable income above such thresholds is uncertain. Due to these factors, there can be no assurance as to the amounts that Ambac will receive from Ambac Assurance under the Amended TSA.
It is also uncertain whether and to what extent Ambac will realize value from the Owner Trust Certificate. The Owner Trust Certificate is subordinated to $299.2 million of senior secured notes issued by Corolla Trust. Such notes and the Owner Trust Certificate are collateralized by and payable solely from a $350.0 million face amount Segregated Account junior surplus note plus accrued and unpaid interest thereon. No payment of interest on or principal of a Segregated Account junior surplus note may be made until all existing and future indebtedness of the Segregated Account, including Segregated Account surplus notes, policy claims and claims having statutory priority, and all existing and future senior ranking surplus notes, contribution notes or similar obligations of Ambac Assurance, have been paid in full. All payments of principal and interest on Segregated Account junior surplus notes are subject to the prior approval of the OCI. If the OCI does not approve the payment of interest on Segregated Account junior surplus notes, such interest will accrue and compound annually until paid. Payments on the senior secured notes issued by Corolla Trust will be only made when and to the extent that the Segregated Account makes payments on the junior surplus note held by Corolla Trust. The senior secured notes must be paid in full before any payments will be made on the Owner Trust Certificate. If Corolla Trust has failed to pay all interest and principal outstanding on the senior



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secured notes within three business days of August 28, 2039, the senior secured noteholders may also take possession of and sell the junior surplus note. If such a sale were to occur, it is uncertain whether and to what extent there would be any value for the Owner Trust Certificate after satisfaction of the senior secured notes.
The value of Ambac's common stock may also depend upon the ability of Ambac to generate earnings apart from Ambac Assurance. As noted below, Ambac is exploring new business opportunities, but there are no assurances regarding its ability to enter new businesses or the prospects of any such new businesses.
The issuance of new common stock may dilute current shareholder value or have adverse effects on the market price of Ambac's common stock.
If Ambac raises capital through the issuance of additional shares of common stock, whether for a new business, general corporate purposes, or in exchange for other securities, the value of current shareholders’ interests may be diluted as Ambac is not required to offer any such shares to existing stockholders on a preemptive basis.
Ambac cannot predict the effect, if any, of future sales of its common stock, or the availability of shares for future sales, on the market price of its common stock. Sales of substantial amounts of common stock or the perception that such sales could occur may adversely affect the prevailing market price for its common stock.
Future offerings of debt or equity securities that rank senior to Ambac's common stock may adversely affect the market price of its common stock.
If Ambac decides to issue debt or additional equity securities in the future that rank senior to its common stock, it is likely that they will be governed by an indenture or other instrument containing covenants restricting its operating flexibility. Additionally, any convertible or exchangeable securities issued in the future may have rights, preferences and privileges more favorable than those of common stock and may result in dilution to owners of common stock. Because Ambac's decision to issue debt or equity securities in any future offering will depend on market conditions and other factors beyond its control, it cannot predict or estimate the amount, timing or nature of future offerings. Holders of common stock bear the risk of future offerings reducing the market price of Ambac's common stock and diluting the value of their stock holdings in the Company.
The occurrence of certain events could result in the initiation of rehabilitation proceedings against Ambac Assurance, with resulting adverse consequences to holders of Ambac securities.
Increased loss development in the General Account of Ambac Assurance or significant losses resulting from litigation against Ambac Assurance may prompt OCI to determine that it is in the best interests of policyholders to initiate rehabilitation proceedings with respect to Ambac Assurance, either preemptively or in response to any such event.
If, as a result of the occurrence of any such event(s), OCI decides to initiate rehabilitation proceedings with respect to Ambac Assurance, adverse consequences may result, including, without limitation, the assertion of damages by counterparties (including mark-to-market claims with respect to insured transactions executed in ISDA format) and the acceleration of losses based on early
 
termination triggers and the loss of control rights in insured transactions, thereby reducing the residual value of Ambac Assurance. Additionally, the Rehabilitator would assume control of all of Ambac Assurance’s assets and management of Ambac Assurance. In exercising control, the Rehabilitator will act for the benefit of policyholders, and will not take into account the interests of securityholders of Ambac. Such actions may result in material adverse consequences for Ambac’s securityholders.
Risks Related to Insured Portfolio Losses
Some issuers of public finance obligations we insure are experiencing fiscal stress that could result in increased losses on those obligations or increased liquidity claims, including losses or claims resulting from payment defaults, Chapter 9 bankruptcy proceedings or loss of market access.
We have historically experienced low levels of defaults in our public finance insured portfolio, including during the financial crisis that began in mid-2007. However, some issuers of public finance obligations we insure have reported budget shortfalls, significantly underfunded pensions or other fiscal stresses that will require them to significantly raise taxes and/or cut spending in order to satisfy their obligations. Government entities may also take other actions that may impact their own creditworthiness or the creditworthiness of related issuers. Some issuers of obligations we insure have either defaulted or filed for bankruptcy, raising concerns about their ultimate ability to service the debt we insure and our ability to recover claims paid in the future. If the issuers of the obligations in our public finance portfolio are unable to raise taxes, cut spending, or receive federal assistance, or if such issuers default or file for bankruptcy under Chapter 9, we may experience liquidity claims and/or ultimate losses on those obligations, which could adversely affect our business, financial condition and results of operations.
We insure obligations of several issuers that have filed for bankruptcy protection under Chapter 9. The consequences of such proceedings for creditors remain uncertain. For example, the treatment of General Obligation debt in relation to other obligations remains in flux, with Detroit's recent precedent unfavorable for debt creditors. If issuers succeed in materially adjusting their obligations to bondholders and financial guarantors, other issuers may be encouraged to default or file for Chapter 9 protection and seek similar adjustments to their debt. These events could materially increase losses in Ambac’s insured portfolio of municipal credits.
Loss of market access is a risk embedded in our municipal exposures. From time to time the municipal bond market evidences heightened investor concerns overall or for select sectors or issuers, as has recently been the case with Puerto Rico. Such adverse market conditions may trigger a loss of market liquidity for affected issuers, which in turn may significantly raise their cost of alternative financing or cause a liquidity crisis and potential for default on debt service payments we guarantee.
We have significant exposure to the Commonwealth of Puerto Rico, including its affiliates and public corporations. The Commonwealth has announced that it cannot meet its obligations and that it intends to impair some or all of its creditors. The Commonwealth has proposed to restructure its obligations and those of certain of its affiliates and public corporations through a voluntary exchange offer. Although Ambac believes this plan is unlikely to proceed in its current form, it is possible that other alternatives could be proposed or adopted that could significantly impair our exposures,



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including by failing to recognize or properly differentiate legal structures and protections applicable to such exposures, such that our loss reserves would need to be increased. While our reserving scenarios reflect a wide range of possible outcomes reflecting the significant uncertainty regarding future developments and outcomes, there could be material variability in our loss reserves for the foreseeable future.
Loss reserves may not be adequate to cover potential losses; changes in loss reserves may result in further volatility of net income and comprehensive earnings.
Loss reserves are established when management has observed credit deterioration, in most cases, when the underlying credit is considered below investment grade. Loss reserves established with respect to our non-derivative financial guarantee insurance policies are based upon estimates and judgments by management, including estimates and judgments with respect to the probability of default, the severity of loss upon default, management’s ability to execute policy commutations, and estimated remediation recoveries for, among other things, breaches by RMBS issuers of representations and warranties. Furthermore, the objective of establishing loss reserve estimates is not to reflect the worst possible outcome. While our reserving scenarios reflect a wide range of possible outcomes reflecting the significant uncertainty regarding future developments and outcomes, our loss reserves may change materially based on future developments. As a result of the inherent uncertainties in the estimates and judgments made to determine loss reserves, there can be no assurance that either the actual losses in our financial guarantee insurance portfolio will not exceed such reserves or that our reserves will not increase or decrease materially over time as circumstances, our assumptions, or our models change.
Additionally, inherent in our estimates of loss severities and remediation recoveries is the assumption that we will retain control rights in respect of our insured portfolio. However, according to the terms of relevant transaction documents, we are subject to the loss of control rights in many insured transactions in the event that we are the subject of delinquency proceedings and/or other regulatory actions which could result from our deteriorated financial position. In the event that we lose control rights, our ability to mitigate loss severities and realize remediation recoveries will be compromised, and actual ultimate losses in our insured portfolio could exceed our loss reserves. The Rehabilitation Court issued an injunction against certain actions by holders of policies in the Segregated Account and other counterparties, including actions resulting in, or based on, the loss of control rights. If this injunction does not successfully preclude such actions, Ambac Assurance could lose its control rights with respect to policies in the Segregated Account.
We also rely on internally and externally developed complex financial models, including default models related to RMBS and waterfall modeling provided by a nationally recognized vendor for RMBS and student loan exposures, to project performance of our insured obligations. Differences in the models that we employ, and/or flaws in these financial models and/or faulty assumptions inherent in these financial models and those determined by management, could lead to material changes in projected outcomes, and could include increased losses and loss reserves. Uncertainty with respect to the ultimate performance of certain of our insured exposures may result in substantial changes in loss reserves and/or actual losses. Moreover, modeled estimates of transaction performance depend in part on our interpretations of contracts and other bases of our legal
 
rights. Such interpretations may prove to be incorrect or different interpretations may be employed by bond trustees and other transaction participants, which could lead to increased losses and loss reserves.
Our credit risk management policies and practices may not adequately identify significant risks.
As described in Part I, Item 1, “Risk Management” in this Form 10-K, we have established risk management policies and practices which seek to mitigate our exposure to credit risk in our insured portfolio. Ongoing surveillance of credit risks in our insured portfolio is an important component of our risk management. These policies and practices in the past have not insulated us from risks that were unforeseen and which had unanticipated loss severity, and such policies and practices may not do so in the future. There can be no assurance that these policies and practices will be adequate to avoid future losses. If we are not able to identify significant risks, we may not be able to and/or timely remediate such risks, thereby increasing the amount of losses to which we are exposed. An inability to identify significant risks could also result in the failure to establish loss reserves that are sufficient in relation to such risks.
We are subject to credit risk and other risks related to RMBS and securities backed by student loans.
We have insured RMBS transactions, as well as securities backed by student loans, and are thus exposed to risk associated with those asset classes. Performance of these transactions, as well as others, can be adversely affected by general economic conditions, such as recession, rising unemployment rates, underemployment, home prices that decline or do not increase in the patterns assumed in our models, increasing foreclosure rates and unavailability of consumer credit, mortgage product attributes, such as interest rate adjustments and balloon payment obligations, borrower and/or originator fraud, mortgage and student loan servicer performance, including underperformance and financial difficulty.
While further deterioration in the performance of consumer assets, including mortgage-related assets and student loans, may occur, the timing, extent and duration of any future deterioration of the credit markets is unknown, as is the impact, if any, on potential claim payments and ultimate losses of the securities within Ambac Assurance’s portfolio. In addition, there can be no assurance that any governmental or private sector initiatives designed to address such credit deterioration in the markets will be successful or inure to the benefit of the transactions we insure. For example, borrower protection for student loan debt in bankruptcy may adversely affect our portfolio. Similarly, servicer settlements with governmental authorities regarding foreclosure irregularities are generally designed to protect homeowners and may increase losses on securities we insure.
In addition, there can be no assurance that we would be successful, or that we would not be delayed, in enforcing the subordination provisions, credit enhancements or other contractual provisions of the RMBS that Ambac Assurance insures in the event of litigation or the bankruptcy of other transaction parties.



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Risks Related to the Financial and Credit Markets
Changes in prevailing interest rate levels and market conditions could adversely impact our business results and prospects.
Increases in prevailing interest rate levels can adversely affect the value of our investment portfolio and, therefore, our financial strength. In the event that investments must be sold in order to pay claims, to pay Deferred Amounts, to redeem surplus notes, or to meet Financial Services liquidity needs due to contract terminations or collateral posting requirements, such investments would likely be sold at discounted prices. Additionally, increasing interest rates would have an adverse impact on our insured portfolio. For example, increasing interest rates could result in higher claim payments in respect of defaulted obligations that bear interest at floating rates of interest. Higher interest rates can also lead to increased credit stress on consumer asset-backed transactions in our insured portfolio (as the securitized assets supporting a portion of these exposures are floating rate consumer obligations), slower prepayment speeds and resulting “extension risk” relative to such consumer asset-backed transactions in our insured portfolio and in our investment portfolio and decreased refinancing activity.
Decreasing interest rates could result in early terminations of financial guarantee insurance policies in respect of which we are paid on an installment basis and do not receive a termination premium, thus reducing premium earned in respect of these transactions. Decreases in prevailing interest rates may also limit growth of or reduce investment income and may adversely impact the result of our interest rate swap portfolio.
Our investment portfolio may also be adversely affected by credit rating downgrades, ABS and RMBS prepayment speeds, foreign exchange movements, spread volatility, and credit losses.
Revenues and cash flow would be adversely impacted due to a decline in realization of installment premiums.
Due to the installment nature of a significant percentage of its premium income, Ambac Assurance has an embedded future revenue stream. The amount of installment premiums actually realized by Ambac Assurance could be reduced in the future due to factors such as early termination of insurance contracts, accelerated prepayments of underlying obligations or insufficiency of cash flows (by the premium paying entity). Additionally, the Segregated Account Rehabilitation Proceedings may result in the loss of installment premium income from such insured transactions if orders of the Rehabilitation Court are not effective. Such reductions would result in lower revenues.
We are subject to credit risk throughout our businesses, including large single risks, risk concentrations, correlated risks and reinsurance counterparty credit risk.
We are exposed to the risk that issuers of debt which we have insured (or with respect to which we have written credit derivatives), issuers of debt which we hold in our investment portfolio, reinsurers and other contract counterparties (including derivative counterparties) may default in their financial obligations, whether as the result of insolvency, lack of liquidity, operational failure, fraud or other reasons. These credit risks could cause increased losses and loss reserves, estimates of credit impairments and mark-to-market losses with respect to credit derivatives in our financial guarantee business; and we could experience losses and decreases in the value of our investment portfolio and, therefore, our financial strength. Such
 
credit risks may be in the form of large single risk exposures to particular issuers, reinsurers or counterparties; losses caused by catastrophic events (including terrorist acts and natural disasters); losses caused by increases in municipal defaults; or losses in respect of different, but correlated, credit exposures.
Risks Related to Strategic Plan
Ambac is exploring new business opportunities which may not be consummated, or if consummated, may not create value and may negatively impact our financial results.
Ambac is exploring new business opportunities for the Company, which may involve the acquisition of assets or existing businesses or the development of businesses through new or existing subsidiaries. It is not possible at this time to predict the future prospects or other characteristics of any such new business. Efforts to pursue new business opportunities may be unsuccessful or require significant financial or other resources, which could have a negative impact on our financial condition. No assurance can be given that Ambac will be able to complete the acquisition or development of any business or, if acquired or developed, generate any earnings or be able to successfully integrate such business into our current operating structure.
Moreover, Ambac’s ability to enter new businesses, including new businesses apart from Ambac Assurance, is also subject to significant doubt, given the condition and circumstances of Ambac Assurance, the difficulty of leveraging or monetizing its other assets, and the uncertainty of its ability to raise capital. Due to these factors, as well as those relating to Ambac Assurance as described above, the value of our securities is highly speculative.
Risk Related to Rehabilitation
Actions of the Rehabilitator could adversely affect Ambac, including impacting our ability to realize our remediation recoveries.
As a consequence of the Segregated Account Rehabilitation Proceedings, the Rehabilitator retains operational control and decision-making authority with respect to all matters related to the Segregated Account, including surveillance, remediation, loss mitigation and efforts to recover losses in the Segregated Account, including recovery efforts in respect of breaches of representations and warranties by sponsors of Ambac-insured RMBS. Similarly, by virtue of the contracts executed between Ambac Assurance and the Segregated Account in connection with the establishment, and subsequent rehabilitation, of the Segregated Account, the Rehabilitator retains the discretion to oversee and approve certain actions taken by Ambac Assurance in respect of assets and liabilities that remain in Ambac Assurance. Moreover, the Rehabilitator retains the sole discretion to adjust claim payments, to make payments on Deferred Amounts and, with regulatory approval, to make payments on or redeem Segregated Account surplus notes (which would require Ambac Assurance to make proportionate payments on or proportionately redeem its surplus notes). As a result, certain efforts to remediate losses, and certain other actions taken by Ambac Assurance, are subject to the approval of the Rehabilitator, as are decisions about the timing of payments of significant liabilities of the Segregated Account. In exercising such authority, the Rehabilitator will act for the benefit of policyholders, and will not take into account the interests of securityholders of Ambac. Decisions made by the Rehabilitator for the benefit of policyholders may result in material adverse consequences for



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Ambac’s securityholders. In addition, we are not able to predict the impact such decisions will have on the remediation of losses, and, in particular, on our efforts to recover losses attributable to breaches of representations and warranties by sponsors of Ambac-insured RMBS, our ability to commute outstanding policies and purchase insured bonds or surplus notes, or how vigorously the Rehabilitator will pursue risk remediation in general. We are similarly unable to predict the decisions of the Rehabilitator as to claims payments or payments on Deferred Amounts or, with regulatory approval, payments on or redemptions of Segregated Account surplus notes, the timing and impact of which may negatively affect our financial condition or results of operations. Furthermore, any negative consequences resulting from payments on or redemptions of Segregated Account surplus notes would be magnified due to the fact that the Rehabilitator’s decision to make such payments would require Ambac Assurance to make proportionate payments on its surplus notes.
Intercompany disputes or disputes with OCI may arise, which may have material adverse effects on the Company.
The Segregated Account, Ambac Assurance, Ambac and other affiliates have entered into agreements that govern certain activities of such entities. OCI has certain enforcement rights with respect to such agreements and, as regulator of Ambac Assurance and as Rehabilitator of the Segregated Account, has further authority over the activities of Ambac Assurance and the Segregated Account. Disputes may arise over the interpretation of such agreements, the exercise or purported exercise of rights thereunder, or the performance of or failure or purported failure to perform obligations thereunder. Disputes may also arise over certain actions taken or proposed to be taken by OCI in reliance on its contractual or legal rights or in reaction to actions taken or to be taken by the Company. In taking such actions or reacting to actions or decisions of the Company, the Rehabilitator will act for the benefit of policyholders, and will not take into account the interests of securityholders of Ambac. Any such dispute could have material adverse effects on the Company, whether through litigation, failure to execute transactions sought by management, interference with corporate strategies, objectives or prerogatives, inefficient decision-making or execution, forced realignment of resources, increased costs, distractions to management, strained working relationships or otherwise. Such effects would also increase the risk that OCI would seek to initiate rehabilitation proceedings against Ambac Assurance.
Risks Related to Capital, Liquidity and Markets
Our inability to realize the expected recoveries included in our financial statements could adversely impact our liquidity and financial condition.
In January 2016, Ambac Assurance settled its RMBS-related disputes and litigation against JP Morgan Chase & Co. and certain of its affiliates (collectively "JP Morgan"). Pursuant to the settlement, JP Morgan paid Ambac Assurance $995,000 in cash. Excluding these amounts. as of December 31, 2015, we have estimated representation and warranty subrogation recoveries of $1,807.3 million (net of reinsurance) included in our financial statements. These recoveries are based on contractual claims arising from RMBS transactions that we have insured, and represent a probability-weighted estimate of amounts we expect to recover under various possible scenarios, and do not reflect the best or the worst possible outcomes with respect to any particular transaction or group of transactions. Our ability to recover these amounts 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 or the Rehabilitator which could impede our ability to take the actions required to realize such recoveries, and uncertainties inherent in the assumptions used in estimating such recoveries. The amount of these subrogation recoveries is significant and if we were unable to recover amounts other than JP Morgan, our stockholders’ equity as of December 31, 2015 would decrease from $1,958.3 million to $151.0 million.
We expect to recover material amounts of claims payments through remediation measures other than the litigation described above as well as through cash flows in the securitization structures of transactions that we insure. Realization of such expected recoveries is subject to various risks and uncertainties, including the rights and defenses of other parties with interests that conflict with our interests, the performance of the collateral and assets backing the obligations that we insure, the performance of servicers involved in securitizations in which we participate as insurer, and the effect on our rights of the Segregated Account Rehabilitation Plan and orders of the Rehabilitation Court. Additionally, the Segregated Account Rehabilitation Proceedings may result in the loss of future recoveries in insured transactions. Adverse developments with respect to such variables may cause our recoveries to fall below expectations.
We may not be able to successfully monetize assets or purchase, restructure or exchange outstanding debt and insurance obligations.
Ambac Assurance is considering the possibility of entering into transactions whereby it would monetize certain assets and/or purchase, restructure or exchange its outstanding debt and insurance obligations. Transactions of this nature may not be feasible or economically viable. Moreover, Ambac Assurance may be unable to secure the approval of the Rehabilitator or OCI to consummate such a transaction. Even if such a transaction is consummated, it may ultimately prove to be unsuccessful in creating value.
The change in composition of the securities in our investment portfolio exposes us to greater risk.
Ambac Assurance maintains a portion of its investment portfolio in lower-rated securities in order to increase the risk-adjusted return on its portfolio. Investments in lower-rated securities and “alternative assets” could expose Ambac to increased losses and decreased liquidity in the investment portfolio.
The determination of the amount of other-than temporary impairments taken on our investments is highly subjective and could materially impact our results of operations or financial position.
The determination of the amount of impairments on our investments varies by investment type and is based upon our periodic evaluation and assessment of known and inherent risks associated with the respective asset class. Such evaluations and assessments are revised as conditions change and new information becomes available. Management updates its evaluations regularly and reflects changes in impairments as such evaluations are revised. There can be no assurance that our management has accurately assessed the level of impairments taken in our financial statements. Furthermore, additional impairments may need to be taken in the future. Historical trends may not be indicative of future impairments. We use



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externally developed financial models to project impairments with respect to RMBS held in our investment portfolio, including Ambac Assurance guaranteed RMBS. Differences in the models we employ and/or flaws in these models and/or faulty assumptions inherent in these models and those determined by management, could lead to increased impairments with respect to RMBS in our investment portfolio.
Risks Related to the Company's Business
We are subject to the risk of litigation and regulatory inquiries or investigations, and the outcome of proceedings we are or may become involved in could have a material adverse effect on our business, operations, financial position, profitability or cash flows.
Ambac Assurance is defending various lawsuits relating to its financial guarantee business. In addition, the Company from time to time receives various regulatory inquiries and requests for information. Please see Note 18. Commitments and Contingencies to the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K for information on these various proceedings.
It is not 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. Management is unable to make a meaningful estimate of the amount or range of loss that could result from unfavorable outcomes or of the expenses that will be incurred in defending these lawsuits. Under some circumstances, adverse results in any such proceedings and/or the incurring of significant litigation expenses could be material to our business, operations, financial position, profitability or cash flows.
System security risks, data protection breaches and cyber-attacks could adversely affect our business and results of operations.
We rely on our information technology systems for many enterprise-critical functions and a prolonged failure or interruption of these systems for any reason could cause significant disruption to our operations and have a material adverse effect on our business, financial condition and operating results. Our information technology and application systems may be vulnerable to threats from computer viruses, natural disasters, unauthorized access, cyber attack and other similar disruptions. Computer hackers may be able to penetrate our network’s system security and misappropriate or compromise confidential information, create system disruptions or cause shutdowns. In addition to our own confidential information, we sometimes receive and are required to protect confidential information from third parties. To the extent any disruption or security breach results in a loss or damage to our data, or inappropriate disclosure of our confidential information or that of others, it could cause significant financial losses that are either not or not fully insured against, damage to our reputation, affect our relationships with third parties, lead to claims against us, result in regulatory action, or otherwise have a material adverse effect on our business or results of operations. In addition, we may be required to incur significant costs to mitigate the damage caused by any security breach, or to protect against future damage. Moreover, although we have disaster recovery and business continuity plans in place, we may not be able to adequately execute these plans in a timely fashion in the event of a disruption to our information technology and application systems.
 
We may incur losses resulting from operational risk due to inadequate or failed internal processes, breakdown of settlement or communication systems, inadequate execution of strategy or from external events leading to disruption of our business. Events subject to operational risk include:
Internal Fraud-misappropriation of assets, intentional mismarking of positions
External Fraud-theft of information, third-party theft and forgery
Clients, Products, & Business Practice-improper trade, fiduciary breaches
Damage to Physical Assets-vandalism
Business Disruption & System Failures-software failures, hardware failures; and
Execution, Delivery, & Process Management-data entry errors, accounting errors, failed mandatory reporting, settlement errors, and negligence.
We may be adversely affected by failures in services or products provided by third parties.
We have outsourced and may continue to outsource certain segments of our operations and business, and rely upon third-party vendors for other essential services and information, such as the provision of data used in setting loss reserves and the provision of risk management information and services. A material failure by an external service or information provider or a material defect in the products, services or information provided thereby could adversely affect our financial condition and results of operations.
Our inability to attract and retain qualified executives and employees or the loss of any of these personnel could negatively impact our business.
Our ability to execute on our business strategies depend on the retention and recruitment of qualified executives and other professionals. We rely substantially upon the services of our current executive team. In addition to these officers, we require key staff with risk mitigation, structured finance, insurance, credit, investment, accounting, finance, legal and technical skills. As a result of Ambac’s financial situation and the rehabilitation proceedings for the Segregated Account, there is a higher risk that executive officers and other key staff will leave the Company and replacements may not be motivated to join the Company. The loss of the services of members of our senior management team or our inability to hire and retain other talented personnel could delay or prevent us from succeeding in executing our strategies, which could further negatively impact our business.
The insurance intangible asset, which resulted from the application of fresh start accounting, could adversely affect our results of operations.
Upon emergence from bankruptcy, we applied fresh start accounting pursuant to which an insurance intangible and goodwill asset were recorded. The insurance intangible asset represented the difference between the fair value and aggregate carrying value of the financial guarantee insurance and reinsurance assets and liabilities.  The insurance intangible asset is amortized using a level yield method based on actual and projected par exposure of the related financial guarantee insurance and reinsurance contracts.  Significant declines in actual or projected par exposure could accelerate the insurance



| Ambac Financial Group, Inc. 24 2015 FORM 10-K |

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intangible amortization and adversely affect our results of operations.
The excess reorganization value over the fair value of identified tangible and intangibles assets was reported as goodwill at the fresh start reporting date. The determination of reorganization value and fair value of assets and liabilities was dependent on various estimates and assumptions, including financial projections and the realization of certain events. All goodwill was assigned to the financial guarantee reporting unit, which primarily represents Ambac Assurance Corporation and its subsidiaries. An impairment test at September 30, 2015 indicated the implied fair value of goodwill was zero. As a result, the Company recorded a full non-cash, non-tax deductible goodwill impairment charge for the full carrying value.
Risks Related to Taxation
Certain surplus notes or other obligations issued by either Ambac Assurance or the Segregated Account may be characterized as equity of Ambac Assurance and as a result, Ambac Assurance may no longer be a member of the U.S. federal income tax consolidated group of which Ambac is the common parent.
It is possible that certain surplus notes or other obligations issued by either Ambac Assurance or the Segregated Account may be characterized as equity of Ambac Assurance for U.S. federal income tax purposes. If such surplus notes or other obligations are characterized as equity of Ambac Assurance and it is determined that such “equity” represented more than twenty percent of the total value of the stock of Ambac Assurance, Ambac Assurance may no longer be characterized as an includable corporation that is affiliated with Ambac. As a result, Ambac Assurance may no longer be characterized as a member of the U.S. federal income tax consolidated group of which Ambac is the common parent (the “Ambac Consolidated Group”) and Ambac Assurance would be required to file a separate consolidated tax return as the common parent of a new U.S. federal income tax consolidated group including Ambac Assurance as the new common parent and Ambac Assurance’s affiliated subsidiaries (the “Ambac Assurance Consolidated Tax Group”).
To the extent Ambac Assurance is no longer a member of the Ambac Consolidated Group, Ambac Assurance’s NOLs (and certain other available tax attributes of Ambac Assurance and the other members of the Ambac Assurance Consolidated Tax Group) may no longer be available for use by the Ambac Assurance Consolidated Tax Group or any of the remaining members of the Ambac Assurance Consolidated Tax Group to reduce the U.S. federal income tax liabilities of the Ambac Assurance Consolidated Tax Group. Ambac, Ambac Assurance and their affiliates entered into a tax sharing agreement that would require Ambac to make certain tax elections that could mitigate the loss of NOLs and other tax attributes resulting from a deconsolidation of Ambac Assurance from the Ambac Consolidated Group. However, in the event of a deconsolidation, certain other benefits resulting from U.S. federal income tax consolidation may no longer be available to the Ambac Consolidated Group including certain favorable rules relating to transactions occurring between members of the Ambac Consolidated Group and members of the Ambac Assurance Consolidated Tax Group.
If surplus notes or other obligations are characterized as equity of Ambac Assurance, the Ambac Assurance NOLs (and certain other tax attributes or tax benefits of the Ambac Consolidated
 
Group) may be subject to limitation under Section 382 of the Tax Code.
It is possible that certain surplus notes or other obligations may be characterized as equity of Ambac Assurance for U.S. federal income tax purposes. Such characterization could result in an “ownership change” of Ambac Assurance for purposes of Section 382 of the Tax Code. If such an ownership change were to occur, the value and amount of the Ambac Assurance NOLs would be substantially impaired, increasing the U.S. federal income tax liability of Ambac Assurance and materially reducing the value of Ambac Assurance’s stock owned by Ambac and the potential of future cash tolling or dividend payments from Ambac Assurance to Ambac.
Deductions with respect to interest accruing on certain surplus notes may be eliminated or deferred until payment.
To the extent certain surplus notes are characterized as equity for U.S. federal income tax purposes, accrued interest will not be deductible by Ambac Assurance. In addition, even if such surplus notes are characterized as debt for U.S. federal income tax purposes, the deduction of interest accruing on such surplus notes may be deferred until paid or eliminated in part depending upon (i) the terms of any deferral and payment provisions provided in such surplus notes, (ii) whether such surplus notes have “significant original issue discount,” and (iii) the yield to maturity of surplus notes. To the extent deductions with respect to interest are eliminated or deferred, the U.S. federal income tax of the members of the Ambac Consolidated Group or the members of the Ambac Assurance Consolidated Tax Group as the case maybe, could be increased reducing the amount of cash available to pay its obligations.
Item 1B.    Unresolved Staff Comments
None.
Item 2.    Properties
The executive office of Ambac is located at One State Street Plaza, New York, New York 10004, which consists of 103,484 square feet of office space, under lease agreements that expire in September 2019 (77,613 square feet) and December 2029 (25,871 square feet). This office houses operations for all reportable business segments. The lease expiring in September 2019 has a provision that can extend the lease to December 2029. Ambac leases additional space outside of New York for its data center at a secure facility under a lease agreement that expires in March 2019.
Ambac UK maintain an office in London, England, which consist of 3,514 square feet of office space, under a lease agreement that expires in October 2020 .
Additionally, Ambac maintains a disaster recovery site as part of its Disaster Recovery Plan, which is located approximately 100 miles from One State Street Plaza under a lease that expires in September 2019. This remote warm-back-up facility is complete with user work stations, phone system, data center, internet connectivity and a power generator, capable of serving the needs of the disaster recovery team to support all business segment operations. The plan, facility and systems are revised and upgraded where necessary, and user tested annually to confirm their readiness.



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Item 3.    Legal Proceedings
Refer to Notes to the Consolidated Financial Statements—Note 18. Commitments and Contingencies included in Part II, Item 8 in this Form 10-K for a discussion on legal proceedings against Ambac and its subsidiaries.
Item 4.    Mine Safety Disclosures
Not applicable.
PART II
 
Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
The Company's common stock is listed on NASDAQ under the symbol “AMBC.” The Company did not pay cash dividends on its common stock during 2015 and 2014 . The high and low common stock prices per share were as follows:

 
2015
 
2014
 
High
 
Low
 
High
 
Low
Fourth quarter
$
17.39

 
$
12.72

 
$
26.74

 
$
18.60

Third quarter
$
19.17

 
$
14.22

 
$
27.54

 
$
21.86

Second quarter
$
25.91

 
$
16.44

 
$
32.20

 
$
26.37

First quarter
$
27.53

 
$
23.99

 
$
35.61

 
$
22.00

Holders
On February 25, 2016, there were 34 stockholders of record of Ambac’s common stock.
Dividends
Information concerning payments and restrictions on the payment of dividends is set forth in Item 1 above under the caption “Dividend Restrictions, Including Contractual Restrictions" and in Note 9. Insurance Regulatory Restrictions to the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K.
 
Purchases of Equity Securities By the Issuer and Affiliated Purchasers
The following table summarizes Ambac’s activity of share purchases during the fourth quarter of 2015. When restricted stock unit awards issued by Ambac become taxable compensation to employees, shares may be withheld to cover the employee’s withholding taxes. In December 2015, Ambac purchased shares from employees that settled restricted stock units to meet the required tax withholdings.

 
Total Shares
Purchased
 
Average Price
Paid Per Share
 
Total Number of
Shares Purchased
as Part of Publicly
Announced Plan
 
Maximum
Number of Shares
That May Yet Be
Purchased Under
the Plan  
October 2015

 
$

 

 

November 2015

 

 

 

December 2015
8,202

 
14.39

 

 

Fourth Quarter 2015
8,202

 
$
14.39

 

 

There were no other repurchases of equity securities made during the three months ended December 31, 2015. Ambac does not have a stock repurchase program.
On June 30, 2015, the Board of Directors of Ambac authorized the establishment of a warrant repurchase program that permits the repurchase of up to $10,000,000 of warrants. As of December 31,
 
2015, Ambac had repurchased 631,600 warrants at a cost of $5,375,000, leaving 4,407,537 warrants outstanding. There have been no warrant purchase in 2016 through February 25, 2016.




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Stock Performance Graph
The following graph compares the performance of an investment in our common stock from the close of business on May 1, 2013, the date we emerged from bankruptcy through December 31, 2015, with the Russell 2000 Index and the S&P 500 Financials Index. The graph assumes $100 was invested on May 1, 2013 in our common Stock at the closing price of $20 per share and at the closing price for the Russell 2000 Index and the S&P 500 Financials Index. It also assumes that dividends (if any) were reinvested on the date of payment without payment of any commissions. The performance shown in the graph represents past performance and should not be considered an indication of future performance.
 
 
2013
 
2014
 
2015
 
 
5/1
 
6/30
 
9/30
 
12/31
 
3/31
 
6/30
 
9/30
 
12/31
 
3/31
 
6/30
 
9/30
 
12/31
Ambac Financial Group, Inc.
 
$100.00
 
$119.15
 
$90.70
 
$122.80
 
$155.15
 
$136.55
 
$110.50
 
$122.50
 
$121.00
 
$83.20
 
$72.35
 
$70.45
Russell 2000 Index
 
$100.00
 
$106.08
 
$116.95
 
$127.18
 
$128.61
 
$131.28
 
$121.67
 
$133.54
 
$139.32
 
$139.93
 
$123.25
 
$127.01
S&P 500 Financials Index
 
$100.00
 
$101.49
 
$106.25
 
$116.79
 
$118.30
 
$123.85
 
$124.62
 
$130.09
 
$130.66
 
$130.35
 
$121.31
 
$129.14


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Item 6.    Selected Financial Data
The following financial information for the five years ended December 31, 2015, has been derived from Ambac’s Consolidated Financial Statements. Following the Company’s emergence from bankruptcy on May 1, 2013, the consolidated financial statements reflect the application of fresh start reporting (“Fresh Start”), incorporating, among other things, the discharge of debt obligations, issuance of new common stock and fair value adjustments. The effects of the reorganization and Fresh Start adjustments are recorded in Predecessor Ambac’s Consolidated Statement of Total Comprehensive Income for the period ended April 30, 2013. The financial results of the Company for the periods from May 1, 2013 are referred to as “Successor” and the financial results for the periods through April 30, 2013 are referred to as “Predecessor”. The 2013 Successor Period and the 2013 Predecessor Period are distinct reporting periods. As a result of the implementation of Fresh Start, results and balances are not comparable between Successor Ambac and Predecessor Ambac. This information should be read in conjunction with the Consolidated Financial Statements and related notes located in Part II, Item 8 in this Form 10-K.
 
Successor Ambac
 
 
Predecessor Ambac
 
 
 
 
 
Period from
 
 
Period from
 
 
 
 
 
 
 
 
 
May 1 through
 
 
Jan. 1 through
 
 
 
 
 
Year Ended December 31,
 
December 31,
 
 
April 30,
 
Year Ended December 31,
($ in millions, except per share data)
2015
 
2014
 
2013
 
 
2013
 
2012
 
2011
Total Comprehensive Income Highlights:
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
$
(37.6
)
 
$
(288.3
)
 
$
(80.3
)
 
 
$
(14.1
)
 
$
(277.5
)
 
(179.0
)
Net premiums earned
312.6

 
246.4

 
213.5

 
 
130.0

 
414.6

 
406.0

Net investment income
266.3

 
300.9

 
146.4

 
 
116.7

 
382.9

 
354.8

Other than temporary impairment losses
(25.7
)
 
(25.8
)
 
(46.8
)
 
 
(0.5
)
 
(6.0
)
 
(63.8
)
Net realized investment gains
53.5

 
58.8

 
4.5

 
 
53.3

 
72.1

 
17.3

Net change in fair value of credit derivatives
41.7

 
23.9

 
192.9

 
 
(60.4
)
 
(9.2
)
 
48.0

Derivative products revenue
(42.5
)
 
(181.1
)
 
114.8

 
 
(33.7
)
 
(125.0
)
 
(280.8
)
Net realized (losses) gains on extinguishment of debt
0.1

 
(74.7
)
 

 
 

 
(177.6
)
 
3.1

Income (loss) on Variable Interest Entities ("VIEs")
31.6

 
(32.2
)
 
(48.6
)
 
 
426.6

 
27.8

 
(214.4
)
Loss and loss expenses (benefit) (1)
(768.7
)
 
(545.6
)
 
(185.1
)
 
 
(38.1
)
 
683.6

 
1,859.5

Interest and underwriting and operating expenses
219.2

 
229.0

 
153.7

 
 
75.6

 
251.3

 
269.4

Insurance intangible amortization
169.6

 
151.8

 
99.7

 
 

 

 

Reorganization items

 
0.2

 
0.5

 
 
(2,745.2
)
 
7.2

 
49.9

Pre-tax income (loss)
510.1

 
493.3

 
512.3

 
 
3,348.0

 
(256.5
)
 
(1,882.9
)
Net income (loss) attributable to Common Shareholders
493.4

 
484.1

 
505.2

 
 
3,349.0

 
(256.7
)
 
(1,960.4
)
Total comprehensive income attributable to Ambac Financial Group, Inc.
288.3

 
692.7

 
516.9

 
 
3,523.9

 
(94.6
)
 
(1,788.9
)
Net income (loss) per share:
 
 
 
 
 
 
 
 
 
 
 
 
Basic
$
10.92

 
$
10.73

 
$
11.23

 
 
$
11.07

 
$
(0.85
)
 
$
(6.48
)
Diluted
$
10.72

 
$
10.31

 
$
10.91

 
 
$
11.07

 
$
(0.85
)
 
$
(6.48
)
(1)
Ambac records the impact of estimated recoveries related to securitized loans in RMBS transactions that breached certain representations and warranties within loss and loss expenses (benefit). The expense (benefit) associated with changes to our estimated recoveries for the year ended December 31, 2015 and 2014, the eight months ended December 31, 2013, the four months ended April 30, 2013 and the years ended December 31, 2012 and 2011 were $(303.6) million, $(481.6) million, $199.4 million, $(61.6) million, $195.2 million and $(301.1) million, respectively.


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Successor Ambac
 
 
Predecessor Ambac
($ in millions) December 31
2015
 
2014
 
2013
 
 
2012
 
2011
Balance Sheet Highlights:
 
 
 
 
 
 
 
 
 
 
Total non-variable interest entity investments
$
5,644.7

 
$
5,507.0

 
$
6,523.7

 
 
$
6,329.9

 
$
6,877.0

Cash
35.7

 
73.9

 
77.4

 
 
43.8

 
16.0

Premium receivable
831.6

 
1,000.6

 
1,453.0

 
 
1,620.6

 
2,028.5

Insurance intangible asset
1,212.1

 
1,410.9

 
1,598.0

 
 

 

Goodwill

 
514.5

 
514.5

 
 

 

Subrogation recoverable (1)
1,229.3

 
953.3

 
498.5

 
 
497.3

 
659.8

Deferred ceded premium
96.8

 
123.3

 
145.5

 
 
177.9

 
221.3

Total VIE assets
14,288.5

 
15,126.1

 
15,988.7

 
 
17,841.9

 
16,543.2

Total assets
23,728.1

 
25,159.9

 
27,092.5

 
 
27,085.3

 
27,113.7

Liabilities subject to compromise

 

 

 
 
1,704.9

 
1,707.4

Unearned premiums
1,280.3

 
1,673.8

 
2,255.7

 
 
2,778.4

 
3,457.2

Losses and loss expense reserve (1)
4,088.1

 
4,752.0

 
5,968.7

 
 
6,619.5

 
7,044.1

Obligations under investment and repurchase agreements
100.4

 
160.1

 
359.1

 
 
362.0

 
546.5

Long-term debt (2)
1,125.0

 
971.1

 
963.2

 
 
150.2

 
223.6

Derivative liabilities
353.4

 
406.9

 
253.9

 
 
531.3

 
414.5

Total VIE liabilities
14,259.8

 
15,085.7