14. REORGANIZATION AND FRESH START ACCOUNTING PRO-FORMA ADJUSTMENTS (UNAUDITED)

Pursuant to ASC Topic 852 – Reorganizations, fresh start financial statement reporting is to be applied, once the Reorganization Plan is confirmed by the Bankruptcy Court and there are no remaining material contingencies to complete implementation of the Reorganization Plan. All conditions required for the adoption of fresh start accounting principles were satisfied by Ambac on April 30, 2013 (“Fresh Start Reporting Date”). The financial statements as of May 1, 2013 and for subsequent periods will report the results of the new entity (“successor”) with no beginning retained earnings. Presentation of the successor represents the financial position and results of operations of the successor and is not comparable to our previously issued financial statements.

For purposes of presenting the following pro-forma balance sheet as of March 31, 2013, Ambac has estimated its reorganization value to be $28,496,726, as further described below. Fresh start accounting requires the Company to adjust the basis of its assets, liabilities and non-controlling interest to their fair value and allocate the reorganization value to the Company’s assets in conformity with the purchase method of accounting for business combinations in ASC 805, including the business combinations guidance applicable to insurance entities in ASC 944-805. The valuations required to determine the fair value of Ambac’s assets, liabilities and non-controlling interests presented below represent the Company’s preliminary estimates.

Ambac’s estimated reorganization value of $28,496,726 approximates the fair value of the Company’s assets. The reorganization value equals the sum of the estimated fair values of: (1) total liabilities of $28,088,686, (2) noncontrolling interests of $223,040 and (3) the enterprise value of $185,000, which also represents the Company’s estimated equity value attributable to Ambac’s stockholders. In conjunction with formulating the Reorganization Plan, Ambac directed a third-party financial advisor to prepare a valuation analysis to determine Ambac’s estimated enterprise value. The estimated enterprise value was included in the Disclosure Statement filed by Ambac with the Bankruptcy Court in September 2011. The enterprise value was based primarily on a discounted cash flow analysis using projected financial information. The enterprise value relied on a number of estimates and assumptions, which are inherently subject to significant uncertainties and contingencies beyond the control of the Company.

The adjustments presented below are presented on an unaudited pro-forma basis as of March 31, 2013, which differs from our Fresh Start Reporting Date. Accordingly, these estimates are preliminary and subject to further revisions and adjustments, based on any updated valuations, actual amounts, applicable economic conditions as of the Fresh Start Reporting Date and results of operations through the Fresh Start Reporting Date. Ambac’s actual fresh start accounting adjustments may vary materially from those presented below. The unaudited pro-forma adjustments presented below summarize the impact of the Reorganization Plan and adoptions of fresh start accounting as if the Fresh Start Reporting Date had occurred on March 31, 2013.

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Pro-Forma Fresh Start Consolidated Balance Sheet


	Predecessor March 31, 2013			Reorganization Items ⁽¹⁾			Fresh Start Adjustments ⁽²⁾			Successor Pro-Forma March 31, 2013
*(Dollars in Thousands, Except per Share Data)*	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Assets:
Investments	$	6,512,262		$	(101,900	)	$	—		$	6,410,362
Cash		53,135									53,135
Receivable for securities sold		40,822									40,822
Investment income due and accrued		33,944									33,944
Premium receivables		1,543,098									1,543,098
Reinsurance recoverable on paid and unpaid losses		160,682									160,682
Deferred ceded premium		170,032									170,032
Subrogation recoverable		545,007									545,007
Deferred acquisition costs		192,306						(192,306	)		—
Loans		8,691						(1,572	)		7,119
Derivative assets		112,811									112,811
Current taxes		—			4,626						4,626
Insurance intangible		—						2,345,268			2,345,268
Goodwill		—						286,956			286,956
Other assets		40,365									40,365
Variable interest entity assets:
Fixed income securities, at fair value		2,414,607									2,414,607
Restricted cash		2,258									2,258
Investment income due and accrued		1,338									1,338
Loans		14,327,840						(9,006	)		14,318,834
Other assets		5,462									5,462

Total assets	$	26,164,660		$	(97,274	)	$	2,429,340		$	28,496,726

Liabilities and Stockholders’ Equity:
Liabilities:
Liabilities subject to compromise	$	1,704,641		$	(1,704,641	)	$	—		$	—
Unearned premiums		2,623,445									2,623,445
Loss and loss expense reserve		6,590,216									6,590,216
Ceded premiums payable		92,085									92,085
Obligations under investment agreements		357,371						(1,144	)		356,227
Obligations under investment repurchase agreements		5,926						55			5,981
Deferred taxes		1,540						168,373			169,913
Current taxes		97,274			(97,274	)					—
Long-term debt		153,873						732,938			886,811
Accrued interest payable		246,378						(22,184	)		224,194
Derivative liabilities		505,746									505,746
Other liabilities		91,057									91,057
Payable for securities purchased		17,051									17,051
Variable interest entity liabilities:
Accrued interest payable		828									828
Long-term debt		14,229,373						(22,167	)		14,207,206
Derivative liabilities		2,317,625									2,317,625
Other liabilities		301									301

Total liabilities	$	29,034,730		$	(1,801,915	)	$	855,871		$	28,088,686

Stockholders’ deficit:
Preferred stock	$	—		$	—		$	—		$	—
Common stock – Predecessor Ambac		3,080						(3,080	)		—
Common stock – Successor Ambac		—			450						450
Additional paid-in capital – Predecessor Ambac		2,172,027						(2,172,027	)		—
Additional paid-in capital – Successor Ambac		—			184,550			—			184,550
Accumulated other comprehensive income		720,071						(720,071	)		—
Accumulated deficit		(6,015,025	)		1,519,641			4,495,384			—
Common stock held in treasury at cost		(410,695	)					410,695			—

Total Ambac Financial Group, Inc. stockholders’ deficit		(3,530,542	)		1,704,641			2,010,901			185,000
Noncontrolling interest		660,472						(437,432	)		223,040

Total stockholders’ deficit		(2,870,070	)		1,704,641			1,573,469			408,040

Total liabilities and stockholders’ deficit	$	26,164,660		$	(97,274	)	$	2,429,340		$	28,496,726

(1)

Reorganization items: Represents amounts recorded for the implementation of the Reorganization Plan on the Fresh Start Reporting Date. This includes the settlement of pre-petition liabilities, cash payments to the IRS under the IRS Settlement, and the distribution of new shares of Ambac common stock and warrants to pre-petition creditors.

(2)	Fresh start adjustments: Represents the following fresh start adjustments:

•

Adjusting the basis of all assets, liabilities and non-controlling interests to fair value for those items which are not already reported at fair value under U.S. GAAP accounting rules:

•

Loans, Obligations under investment agreements, Long-term debt, VIE Loans and VIE Long-term debt: Refer to Note 7—Fair Value Measurements, for a discussion of the valuation methodologies used to estimate fair value for these line items.

•

Insurance intangible: Represents the fair value adjustment for financial guarantee insurance and reinsurance contracts. Pursuant to the business combinations guidance for insurance entities in ASC Topic 944-805, insurance and reinsurance assets and liabilities continue to be measured in accordance with existing accounting policies and an intangible asset is recorded representing the difference between the fair value and carrying value of these insurance and reinsurance assets and liabilities. As a result, the carrying value of our financial guarantee insurance and reinsurance contracts will continue to be reported and measured in accordance with ASC Topic 944. These line items primarily comprise Premiums receivable, Reinsurance recoverable on paid and unpaid losses, Deferred ceded premium, Subrogation recoverable, Loss and loss expense reserve, and Ceded premiums payable. Refer to Note 7—Fair Value Measurements, for a discussion of the valuation methodology used to estimate fair value for financial guarantee insurance contracts. Also note that certain insurance-related balance sheet items that do not represent future cash cash flows, such as deferred acquisitions costs, are written off at the Fresh Start Reporting Date.

•

Non-controlling interests: The fair value adjustment is based on current quotes from market sources.

•

Recording the deferred tax impact of the above fair value adjustments in accordance with ASC Topic 852.

•

Recording goodwill for the excess of the reorganization value over the fair value of the identifiable assets.

•

Cancelling the predecessor’s common and preferred stock and eliminating the predecessor’s additional paid-in capital, accumulated other comprehensive income, accumulated deficit and treasury stock.