AMBAC FINANCIAL GROUP, INC.

SCHEDULE II - CONDENSED FINANCIAL INFORMATION

OF REGISTRANT (PARENT COMPANY ONLY)

Condensed Balance Sheets

(Dollar Amounts in Thousands Except Share Data)


	Successor Ambac			Predecessor Ambac
	2013			2012
ASSETS
Assets:
Fixed income securities, at fair value (amortized cost of $28,149 for 2013)	$	28,145		$	—
Junior surplus note of Ambac Assurance Segregated Account		177,194			—
Short-term investments, at cost (approximates fair value)		8,319			30,316
Cash		43			41
Investment in subsidiaries		473,215			(2,220,724	)
Investment income due and accrued		11,959			11
Other assets		4,936			6,441

Total assets	$	703,811		$	(2,183,915	)

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Liabilities subject to compromise	$	—		$	1,704,939
Current taxes		—			1,900
Accounts payable and other liabilities		828			16,773

Total liabilities		828			1,723,612

Stockholders’ equity (deficit):
Successor preferred stock, par value $0.01 per share; authorized shares—20,000,000; issued and outstanding shares—none at December 31, 2013		—			—
Predecessor preferred stock, par value $0.01 per share; authorized shares—4,000,000; issued and outstanding shares—none at December 31, 2012		—			—
Successor common stock, par value $0.01 per share; authorized shares—130,000,000; issued and outstanding shares—45,003,461 at December 31, 2013		450			—
Predecessor common stock, par value $0.01 per share; authorized shares—650,000,000; issued and outstanding shares—308,016,674 at December 31, 2012		—			3,080
Additional paid-in capital		185,672			2,172,027
Accumulated other comprehensive income		11,661			625,385
Retained earnings (accumulated deficit)		505,219			(6,297,264	)
Successor common stock held in treasury at cost, 937 shares at December 31, 2013		(19	)		—
Predecessor common stock held in treasury at cost, 5,580,657 shares at December 31, 2012		—			(410,755	)

Total Ambac Financial Group, Inc. stockholders’ equity (deficit)		702,983			(3,907,527	)

Total liabilities and stockholders’ equity (deficit)	$	703,811		$	(2,183,915	)

AMBAC FINANCIAL GROUP, INC.

SCHEDULE II - CONDENSED FINANCIAL INFORMATION

OF REGISTRANT (PARENT COMPANY ONLY)

Condensed Statements of Total Comprehensive Income

(Dollar Amounts in Thousands)


	Successor Ambac			Predecessor Ambac
	Period from May 1 through December 31, 2013			Period from January 1 through April 30, 2013			Year Ended December 31, 2012
Revenues:
Interest income	$	22,227		$	39		$	221
Other income		197,122			—			758
Net realized gains		2			—			—

Total revenues		219,351			39			979

Expenses:
Operating expenses		3,018			539			(151	)

Total expenses		3,018			539			(151	)

Income (loss) before income taxes, reorganization costs and equity in undistributed net loss of subsidiaries		216,333			(500	)		1,130
Reorganization items		493			(2,745,180	)		7,215

Income (loss) before income taxes and equity in undistributed net loss of subsidiaries		215,840			2,744,680			(6,085	)
Federal income tax benefit		—			(703	)		(136	)

Income (loss) before equity in undistributed net income (loss) of subsidiaries		215,840			2,745,383			(5,949	)
Equity in undistributed net income (loss) of subsidiaries		289,379			603,666			(250,729	)

Net income (loss)	$	505,219		$	3,349,049		$	(256,678	)

Other comprehensive income, after tax:
Net income (loss)	$	505,219		$	3,349,049		$	(256,678	)

Unrealized gains (losses) on securities, net of deferred income taxes of $0		(41,910	)		175,347			166,252
Gain (loss) gain on foreign currency translation, net of deferred income taxes of $0.		42,724			(657	)		(334	)
Changes to postretirement benefit, net of tax		10,847			185			(3,792	)

Total other comprehensive income		11,661			174,875			162,126

Total comprehensive income (loss) attributable to Ambac Financial Group, Inc.	$	516,880		$	3,523,924		$	(94,552	)

AMBAC FINANCIAL GROUP, INC.

SCHEDULE II - CONDENSED FINANCIAL INFORMATION

OF REGISTRANT (PARENT COMPANY ONLY)

Condensed Statements of Stockholders’ Equity

(Dollar Amounts in Thousands)


				Ambac Financial Group, Inc.
*(Dollars in Thousands)*	Total			Retained Earnings		Accumulated Other Comprehensive Income		Preferred Stock		Common Stock		Paid-in Capital		Common Stock Held in Treasury, at Cost
Successor Ambac
Balance at May 1, 2013	$	—		$	—	$	—	$	—	$	—	$	—
Issuance of new equity in connection with emergence from Chapter 11		185,000			—		—		—		450		184,550		—

Balance at May 1, 2013		185,000			—		—		—		450		184,550		—
Total comprehensive income		516,880			505,219		11,661
Warrants exercised		16											16		—
Cost of shares acquired		(19	)												(19	)
Stock based compensation		1,106											1,106		—

Balance at December 31, 2013	$	702,983		$	505,219	$	11,661	$	—	$	450	$	185,672	$	(19	)



				Ambac Financial Group, Inc.
*(Dollars in Thousands)*	Total			Accumulated Deficit			Accumulated Other Comprehensive Income			Preferred Stock		Common Stock			Paid-in Capital			Common Stock Held in Treasury, at Cost
Predecessor Ambac
Balance at January 1, 2013	($	3,907,527	)	($	6,297,264	)	$	625,385		$	—	$	3,080		$	2,172,027		($	410,755	)
Total comprehensive income		3,523,924			3,349,049			174,875
Stock-based compensation		(60	)		(60	)
Shares issued under equity plans		60																	60
Elimination of Predecessor Ambac Shareholder equity accounts		383,603			2,948,275			(800,260	)				(3,080	)		(2,172,027	)		410,695

Balance at April 30, 2013	$	—		$	—		$	—		$	—	$	—		$	—		$	—


				Ambac Financial Group, Inc.
*(Dollars in Thousands)*	Total			Accumulated Deficit			Accumulated Other Comprehensive Income			Preferred Stock		Common Stock			Paid-in Capital			Common Stock Held in Treasury, at Cost
Predecessor Ambac
Balance at January 1, 2012	($	3,812,975	)	($	6,039,922	)	$	463,259		$	—	$	3,080		$	2,172,027		($	411,419	)
Total comprehensive loss		(94,552	)		(256,678	)		162,126
Stock-based compensation		(664	)		(664	)
Shares issued under equity plans		664																	664

Balance at December 31, 2012	($	3,907,527	)	($	6,297,264	)	$	625,385		$	—	$	3,080		$	2,172,027		($	410,755	)

AMBAC FINANCIAL GROUP, INC.

SCHEDULE II - CONDENSED FINANCIAL INFORMATION

OF REGISTRANT (PARENT COMPANY ONLY)

Condensed Statements of Cash Flows

(Dollar Amounts in Thousands)


	Successor Ambac			Successor Ambac
	Period from May 1 through December 31, 2013			Period from January 1 through April 30, 2013			Year Ended December 31, 2013
Cash flows from operating activities:
Net income (loss)	$	505,219		$	3,349,049		$	(256,678	)
Adjustments to reconcile net income loss to net cash used in operating activities:
Equity in undistributed net (income) loss of non-debtor subsidiaries		(289,379	)		(603,666	)		250,729
Reorganization items		493			(2,745,180	)		7,215
Junior surplus notes received from Ambac Assurance Corporation Segregated Account		(167,020	)		—			—
Net realized gains		(2	)		—			—
Decrease in current income taxes payable		—			(1,900	)		—
Share-based compensation		1,106			—			—
Investment income due and accrued		(11,942	)		(6	)		9
Decrease in other assets		(1,677	)		3,182			21
Other, net		(28,030	)		(4,107	)		(6,334	)

Net cash provided by (used in) operating activities		8,768			(2,628	)		(5,038	)

Cash flows from investing activities:
Proceeds from matured bonds		14,355			—			—
Purchases of bonds		(42,506	)		—			—
Change in short-term investments		19,360			2,637			4,583

Net cash (used in) provided by investing activities		(8,791	)		2,637			4,583

Cash flows from financing activities:
Proceeds from warrant exercise		16			—			—

Net cash provided by financing activities		16			—			—

Net cash flow		(7	)		9			(455	)
Cash at beginning of period		50			41			496

Cash at end of period	$	43		$	50		$	41

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes	$	—		$	1,900		$	—

AMBAC FINANCIAL GROUP, INC.

SCHEDULE II - CONDENSED FINANCIAL INFORMATION

OF REGISTRANT (PARENT COMPANY ONLY)

Note to Condensed Financial Information

(Dollar Amounts in Thousands)

The condensed financial information of Ambac Financial Group, Inc. (“Ambac” or the “Company”) for the years ended December 31, 2013 and 2012 should be read in conjunction with the consolidated financial statements of Ambac Financial Group, Inc. and Subsidiaries and the notes thereto. Investments in subsidiaries are accounted for using the equity method of accounting.

Ambac, headquartered in New York City, is a financial services holding company incorporated in the state of Delaware on April 29, 1991. On May 1, 2013 (the “Effective Date”), Ambac emerged from Chapter 11 bankruptcy protection when the Second Modified Fifth Amended Plan of Reorganization of Ambac Financial Group, Inc. (the “Reorganization Plan”) became effective. On December 26, 2013, the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) entered an order of final decree closing Ambac’s Chapter 11 case. Ambac filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the Bankruptcy Court on November 8, 2010 as a result of losses incurred since the beginning of the financial crisis in 2007.

Chapter 11 Reorganization of Ambac:

The Reorganization Plan reflects a resolution of certain issues (the “Amended Plan Settlement”) among the Company, the statutory committee of creditors appointed by the United States Trustee on November 17, 2010 (the “Creditors’ Committee”), Ambac Assurance, the Segregated Account and OCI related to (i) the net operating loss carry forwards (“NOLs”) of the consolidated tax group of which the Company is the parent and Ambac Assurance is a member, (ii) certain tax refunds received in respect thereof and (iii) the sharing of expenses between the Company and Ambac Assurance. The terms of the Amended Plan Settlement are memorialized in that certain Mediation Agreement dated September 21, 2011 (the “Mediation Agreement”) among such parties. In accordance with the Amended Plan Settlement, the Company shall retain ownership of Ambac Assurance, and except as otherwise approved by OCI, the Company shall use its best efforts to preserve the use of NOLs as contemplated by the Amended Plan Settlement.

Pursuant to the Amended Plan Settlement, (i) the Company, Ambac Assurance and certain affiliates entered into an amended and restated tax sharing agreement (the “Amended TSA”), (ii) the Company, Ambac Assurance and certain affiliates entered into an expense sharing and cost allocation agreement (the “Cost Allocation Agreement”) and (iii) the Company, Ambac Assurance, the Segregated Account and OCI entered into an amendment of the Cooperation Agreement (the “Cooperation Agreement Amendment”).

The Amended TSA amended and restated the existing tax sharing agreement among the Company and its affiliates. The Amended TSA addresses certain issues including, but not limited to, the allocation and use of NOLs by the Company, Ambac Assurance and their respective subsidiaries.

The Cost Allocation Agreement provides for the allocation of costs and expenses among the Company, Ambac Assurance and certain affiliates. Additionally, the Cost Allocation Agreement requires Ambac Assurance to reimburse reasonable operating expenses incurred by the Company, subject to an annual $5,000 cap, which, during 2017, shall be reduced to a $4,000 per year cap, only with the approval by the Rehabilitator.

The Cooperation Agreement Amendment provides for the Rehabilitator to have certain rights with respect to (a) the tax positions taken by the Company in its consolidated tax return; (b) the acceptance by Ambac Assurance of the repayment of intercompany loans or the modification of the terms thereof; (c) changes by Ambac Assurance in the assumptions or vendors utilized in determining loss reserves determined in accordance with Statutory Accounting Principles; and (d) changes to Ambac Assurance’s investment policy and transfer of the investment management function for Ambac Assurance’s investment portfolio.

As provided for in the Reorganization Plan, Ambac’s Amended and Restated Certificate of Incorporation and revised Bylaws became effective on the Effective Date. Pursuant to the Amended and Restated Certificate of Incorporation of Ambac, Ambac is authorized to issue 150,000,000 shares of capital stock, consisting of 130,000,000 shares of common stock, par value $0.01 per share and 20,000,000 shares of preferred stock, par value $0.01 per share. In accordance with the Reorganization Plan and the bylaws of the reorganized Company, the Board of Directors of Ambac now consists of Ambac’s Chief Executive Officer and four other Directors. Pursuant to the Reorganization Plan, Ambac distributed 45,000,000 shares of new common stock on May 1, 2013. Under the Reorganization Plan Ambac also distributed warrants to holders of allowed general unsecured claims and subordinated debt securities, which entitle such holders to acquire an additional 5,047,138 shares of new common stock of the Company at an exercise price of $16.67 per share at any time on or prior to April 30, 2023. As of December 31, 2013, 6,312 warrants were exercised, resulting in an issuance of 2,524 shares of common stock. The new common stock and warrants are listed on NASDAQ and trade under the symbols “AMBC” and “AMBCW,” respectively. All such common stock and warrants were issued without registration under the Securities Act of 1933, as amended or state securities laws, in reliance on Section 1145 of the United States Bankruptcy Code. The common stock of the Company in existence prior to the Effective Date was cancelled on the Effective Date and the holders of such stock did not receive, and will not receive, any distributions under the Reorganization Plan.

Pursuant to the Mediation Agreement, Ambac Assurance transferred $30,000 (plus accrued interest) from an escrow account to Ambac on the Effective Date. Additionally, the Segregated Account issued a Junior Surplus Note in the amount of $350,000 (recorded at the fair value of $167,020) to Ambac on the Effective Date in accordance with the Mediation Agreement. Ambac recorded such amounts received as Other income in the Condensed Statements of Total Comprehensive Income. 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 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 the Segregated Account Junior Surplus Notes, such interest will accrue and compound annually until paid.

Also as provided for in the Reorganization Plan, Ambac’s Amended and Restated Certificate of Incorporation and revised Bylaws became effective on the Effective Date. Ambac’s Amended and Restated Certificate of Incorporation limits voting and transfer rights of stockholders in significant ways. Article IV contains voting restrictions applicable to any person owning at least 10% of Ambac’s common stock so that such person (including any group consisting of such person and any other person with whom such person or any affiliate or associate of such person has any agreement, contract, arrangement or understanding with respect to acquiring, voting, holding or disposing of Ambac’s common stock) shall not be entitled to cast votes in excess of one vote less than 10% of the votes entitled to be cast by all common stock holders, except as otherwise approved by OCI.

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 for 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.

As of the Effective Date, the Company was generally discharged and released from all pre-Effective Date debts, liabilities, claims, causes of action and interests in accordance with the provisions of the Reorganization Plan. Holders of claims and equity interests are also generally barred from commencing or continuing any action or proceeding relating to such claims, causes of action or interests. The Reorganization Plan also provides for broad exculpation and releases of the Company, Ambac Assurance, the Segregated Account, OCI, the Rehabilitator, the board of directors and board committees of the Company and Ambac Assurance, all individual directors, officers and employees of the Company and Ambac Assurance, the Creditors’ Committee and the individual members thereof, and each of the respective representatives of such parties, for actions or omissions that occurred on or prior to the Effective Date.

Reorganization:

Entities operating in bankruptcy and expecting to reorganize under Chapter 11 of the Bankruptcy Code are subject to the additional accounting and financial reporting guidance under the Reorganization Topic of the Accounting Standards Codification (the “ASC”). While the Reorganization Topic of the ASC provides specific guidance for certain matters, other portions of US GAAP continue to apply so long as the guidance does not conflict with the Reorganization Topic of the ASC. This accounting literature provides guidance for periods subsequent to a Chapter 11 filing, among other things, the presentation of liabilities that are and are not subject to compromise by the Bankruptcy Court proceedings, as well as the treatment of interest expense and presentation of costs associated with the proceedings. For the purpose of presenting an entity’s financial condition, the financial statements for periods including and after filing the Chapter 11 petition shall distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. As described below, the accompanying consolidated financial statements present Ambac’s pre-petition debt within Liabilities subject to compromise.

Under the Reorganization Topic of the ASC, the Company determined that fresh start financial statement reporting was to be applied upon our emergence from Chapter 11 because (i) the reorganization value of the emerging entity was less than total post-petition liabilities and allowed claims, and (ii) the holders of existing voting shares immediately before the confirmation of the Reorganization Plan received less than 50% of the voting shares of the emerging entity. Specifically, fresh start reporting was applied upon confirmation of the Reorganization Plan by the Bankruptcy Court and the satisfaction of the remaining material contingencies necessary to complete implementation of the Reorganization Plan. All conditions required for the adoption of fresh start reporting were satisfied by the Company on April 30, 2013 (“Fresh Start Reporting Date”). Adopting fresh start reporting results in a new reporting entity with no beginning retained earnings or accumulated deficit. For periods after the Fresh Start Reporting Date the Company will be referred to as Successor Ambac, whereas for all periods as of and preceding the Fresh Start Reporting Date the Company will be referred to as Predecessor Ambac. Presentation of information for Successor Ambac represents the financial position and results of operations of Successor Ambac and is not comparable to our previously issued financial statements. The implementation of fresh start reporting is further described in Note 3 to the Consolidated Financial Statements located in Part II, Item 8 of this Form 10-K.

Reorganization items:

Professional advisory fees and other costs directly associated with our reorganization are reported separately as reorganization items. Reorganization items also include adjustments to reflect the carrying value of certain pre-petition liabilities at their allowable claim amounts, gain on the settlement of liabilities subject to compromise and fresh start reporting adjustments. The reorganization items in the Consolidated Statements of Total Comprehensive Income consisted of the following items:


	Successor Ambac		Predecessor Ambac
	Eight Months Ended December 31, 2013		Four Months Ended April 30, 2013			Year Ended December 31, 2012
U.S. Trustee fees	$	33	$	23		$	50
Professional fees		460		4,483			7,165
Gain from cancellation and satisfaction of Predecessor Ambac debt		—		(1,521,435	)		—
Fresh start reporting adjustments		—		(1,228,251	)		—

Total reorganization items	$	493	($	2,745,180	)	$	7,215

Liabilities Subject to Compromise:

In accordance with the Reorganizations Topic of the ASC, following the date Ambac filed its Chapter 11 petition, we discontinued recording interest expense on debt classified as Liabilities subject to compromise, which amounted to $239,468 through April 30, 2013. The stated contractual interest on debt classified as Liabilities subject to compromise amounted to $27,572 for the four months ended April 30, 2013 and $85,371 for the year ended December 31, 2012. As required by the Reorganizations Topic of the ASC, the amount of the Liabilities subject to compromise represented our estimate of known or potential pre-petition claims to be addressed in connection with the bankruptcy.

At the Effective Date, all liabilities subject to compromise were settled through the issuance of common stock or warrants to purchase common stock. As such, as of the Effective Date, no liabilities remain subject to compromise. The liabilities subject to compromise at December 31, 2012 consisted of the following:


	Predecessor Ambac – December 31, 2012
Debt obligations and accrued interest payable	$	1,690,312
Other		14,592	⁽¹⁾

Consolidated liabilities subject to compromise		1,704,904
Payable to non-debtor subsidiaries		35

Debtor’s Liabilities subject to compromise	$	1,704,939

(1)	Primarily comprises an allowed general unsecured claim of $14,007 provided to Ambac’s landlord in connection with a settlement agreement relating to claims under its headquarters lease.