QUARTERLY STATEMENT As of September 30, 2016

Transcription

1 PROPERTY AND CASUALTY COMPANIES - ASSOCIATION EDITION 11) , QUARTERLY STATEMENT As of September 30, 2016 of the Condition and Affairs of the NAIC Group Code 1248, 1248 NAIC Company Code Employers ID Number (Current Period) (Prior Period) Organized under the Laws of Wisconsin State of Domicile or Port of Entry Wisconsin Country of Domicile US Incorporated/Organized February 25, 1970 Commenced Business March Statutory Home Office Main Administrative Office Mail Address Primary Location of Books and Records Internet Web Site Address Statutory Statement Contact c/o Dewitt Ross & Stevens S. C., 2 East Mifflin Street, Suite 600 (Street and Number) One State Street Plaza New York, NY US (Street and Number) (City or Town, State, Country and Zip Code) One State Street Plaza New York, NY US (Street and Number or P. 0. Box) (City or Town, State, Country and Zip Code) One State Street Plaza New York, NY US (Street and Number) (City or Town, State, Country and Zip Code) Stephen Michael Ksenak (Name) SKsenak(@,ambac.com ( Address) Madison, WI US (City or Town, State, Country and zip Code) (Area Code) (Telephone Number) (Area Code) (Telephone Number) (Area Code) (Telephone Number) (Extension) (Fax Number) OFFICERS Name Title Name Title 1. Nader Tavakoli # President and Chief Executive Officer 2. David Trick Senior Managing Director, Chief Financial Officer & Treasurer 3. Stephen Michael Ksenak Senior Managing Director & General 4. Robert Bryan Eisman Senior Managing Director & Chief Accounting Counsel Officer 5. David Peter Barranco Senior Managing Director 6. Michael Francis Reilly Senior Managing Director 7. William Joseph White First Vice President & Secretary DIRECTORS OR TRUSTEES Diane Beth Glossman Alexander David Greene Thomas Peter Gybel Ian David Haft # David Lawrence Herzog # Claude James Prieur Jeffrey Scott Stein Gary Hilton Stern Nader Tavakoli State of New York County of New York The officers of this reporting entity being duly sworn, each depose and say that they are the described officers of said reporting entity, and that on the reporting period stated above, all of the herein described assets were the absolute property of the said reporting entity, free and clear from any liens or claims thereon, except as herein stated, and that this statement, together with related exhibits, schedules and explanations therein contained, annexed or referred to, is a full and true statement of all the assets and liabilities and of the condition and affairs of the said reporting entity as of the reporting period stated above, and of its income and deductions therefrom for the period ended, and have been completed in accordance with the NAIC Annual Statement Instructions and Accounting Practices and Procedures manual except to the extent that: (1) state law may differ; or, (2) that state rules or regulations require differences in reporting not related to accounting practices and procedures, according to the best of their information, knowledge and belief, respectively. Furthermore, the scope of this attestation by the described officers also includes the related corresponding electronic filing with the NAIC, when required, that is an exact copy of the enclosed statement (except for formatting differences due to electronic filing). The electronic filing may be requested by various regulators in lieu of or in addition to the enclosed atemnt. (Signature) Nader Tavakoli # 1. (Printed Name) President (Chief Executive Officer) (Title) (Signature) Stephen Michael Ksenak # 2. (Printed Name) Assistant Secretary (Senior Managing Director & General Counsel) (Title) (Signature) David Trick 3. (Printed Name) Chief Financial Officer (Senior Managing Director & Treasurer) (Title) Subscribed and sworn to before me This 9th day of November, 2016 JAMILAFI T. COLES Notary Public, State of New York No. 01C Qualified In Kings County Commission Expires June 25, 20 a. Is this an original filing? b. If no: 1. State the amendment number 2. Date filed 3. Number of pages attached Yes [ X ] No [ ]

2 ASSETS Current Statement Date Net Admitted December 31 Nonadmitted Assets Prior Year Net Assets Assets (Cols. 1-2) Admitted Assets 1. Bonds ,605,749, ,605,749, ,554,877, Stocks: 2.1 Preferred stocks Common stocks ,338, ,235, ,102, ,921, Mortgage loans on real estate: 3.1 First liens Other than first liens Real estate: 4.1 Properties occupied by the company (less $...0 encumbrances) Properties held for the production of income (less $...0 encumbrances) Properties held for sale (less $...0 encumbrances) Cash ($...2,943,029), cash equivalents ($...0) and short-term investments ($...82,242,242) ,185, ,185, ,859, Contract loans (including $...0 premium notes) Derivatives Other invested assets ,394, ,465, ,929, ,420, Receivables for securities ,286, , ,207, ,880, Securities lending reinvested collateral assets Aggregate write-ins for invested assets ,352,757, ,352,757, ,815,389, Subtotals, cash and invested assets (Lines 1 to 11) ,702,711, ,779, ,471,931, ,783,349, Title plants less $...0 charged off (for Title insurers only) Investment income due and accrued ,511, ,511, ,285, Premiums and considerations: 15.1 Uncollected premiums and agents' balances in the course of collection , , , Deferred premiums, agents' balances and installments booked but deferred and not yet due (including $...0 earned but unbilled premiums) ,046, ,046, ,029, Accrued retrospective premiums ($...0) and contracts subject to redetermination ($...0) Reinsurance: 16.1 Amounts recoverable from reinsurers , ,723...(60,326) 16.2 Funds held by or deposited with reinsured companies Other amounts receivable under reinsurance contracts , Amounts receivable relating to uninsured plans Current federal and foreign income tax recoverable and interest thereon Net deferred tax asset Guaranty funds receivable or on deposit Electronic data processing equipment and software , , Furniture and equipment, including health care delivery assets ($...0) ,404, ,404, Net adjustment in assets and liabilities due to foreign exchange rates Receivables from parent, subsidiaries and affiliates ,176, , ,817, ,588, Health care ($...0) and other amounts receivable Aggregate write-ins for other than invested assets ,447, ,447, Total assets excluding Separate Accounts, Segregated Accounts and Protected Cell Accounts (Lines 12 through 25) ,735,268, ,777, ,499,490, ,813,409, From Separate Accounts, Segregated Accounts and Protected Cell Accounts ,790, ,511, ,278, ,966, Total (Lines 26 and 27) ,838,058, ,288, ,507,769, ,824,375,838 DETAILS OF WRITE-INS Investments in Ambac-insured bonds with policies allocated to the Seg Account ,347,160, ,347,160, ,807,301, Inter-company loans with affiliates, net of valuation allowance ,596, ,596, ,087, Summary of remaining write-ins for Line 11 from overflow page Totals (Lines 1101 thru 1103 plus 1198) (Line 11 above) ,352,757, ,352,757, ,815,389, Prepaid assets ,447, ,447, Summary of remaining write-ins for Line 25 from overflow page Totals (Lines 2501 thru 2503 plus 2598) (Line 25 above) ,447, ,447, Q02

3 LIABILITIES, SURPLUS AND OTHER FUNDS 1 2 Current December 31 Statement Date Prior Year 1. Losses (current accident year $...94,245,365) ,294,666, ,804,623, Reinsurance payable on paid losses and loss adjustment expenses Loss adjustment expenses ,804, ,216, Commissions payable, contingent commissions and other similar charges Other expenses (excluding taxes, licenses and fees) ,020, ,189, Taxes, licenses and fees (excluding federal and foreign income taxes) ,923, ,164, Current federal and foreign income taxes (including $...0 on realized capital gains (losses)) ,011, ,634, Net deferred tax liability Borrowed money $...107,161,670 and interest thereon $ ,161, ,836, Unearned premiums (after deducting unearned premiums for ceded reinsurance of $...34,061,010 and including warranty reserves of $...0 and accrued accident and health experience rating refunds including $...0 for medical loss ratio rebate per the Public Health Service Act) ,629, ,839, Advance premium Dividends declared and unpaid: 11.1 Stockholders Policyholders Ceded reinsurance premiums payable (net of ceding commissions) , , Funds held by company under reinsurance treaties Amounts withheld or retained by company for account of others , ,657, Remittances and items not allocated Provision for reinsurance (including $...0 certified) Net adjustments in assets and liabilities due to foreign exchange rates Drafts outstanding Payable to parent, subsidiaries and affiliates , , Derivatives Payable for securities ,358, ,246, Payable for securities lending Liability for amounts held under uninsured plans Capital notes $...0 and interest thereon $ Aggregate write-ins for liabilities ,337,027, ,355,751, Total liabilities excluding protected cell liabilities (Lines 1 through 25) ,585,897, ,199,580, Protected cell liabilities Total liabilities (Lines 26 and 27) ,585,897, ,199,580, Aggregate write-ins for special surplus funds Common capital stock ,000, ,000, Preferred capital stock ,411, ,411, Aggregate write-ins for other than special surplus funds Surplus notes Gross paid in and contributed surplus ,550,450, ,547,445, Unassigned funds (surplus)......(2,736,988,979)...(3,031,061,149) 36. Less treasury stock, at cost: shares common (value included in Line 30 $...0) shares preferred (value included in Line 31 $...0) Surplus as regards policyholders (Lines 29 to 35, less 36) ,872, ,795, Totals (Page 2, Line 28, Col. 3) ,507,769, ,824,375,838 DETAILS OF WRITE-INS Mandatory contingency reserve for adverse losses ,880, ,880, Deferred gain on purchase of securities from subsidiary ,754, ,912, Liabilities allocated to Segregated Account......(4,552,415,775)...(4,615,637,102) Summary of remaining write-ins for Line 25 from overflow page ,466,806, ,548,594, Totals (Lines 2501 thru 2503 plus 2598) (Line 25 above) ,337,027, ,355,751, Summary of remaining write-ins for Line 29 from overflow page Totals (Lines 2901 thru 2903 plus 2998) (Line 29 above) Summary of remaining write-ins for Line 32 from overflow page Totals (Lines 3201 thru 3203 plus 3298) (Line 32 above) Q03

4 STATEMENT OF INCOME Current Year Prior Year Prior Year Ended to Date to Date December 31 UNDERWRITING INCOME 1. Premiums earned: 1.1 Direct... (written $...39,053,168) ,389, ,394, ,642, Assumed... (written $...1,210) , , , Ceded... (written $...3,482,347) ,656, ,597, ,797, Net... (written $...35,572,031) ,782, ,871, ,920,254 DEDUCTIONS: 2. Losses incurred (current accident year $...234,376,406): 2.1 Direct......(105,815,386)...(201,201,583)...(524,584,981) 2.2 Assumed Ceded ,010,827...(1,773,416)...(2,416,258) 2.4 Net......(111,826,213)...(199,428,167)...(522,168,723) 3. Loss adjustment expenses incurred ,310, ,911, ,287, Other underwriting expenses incurred ,111, ,270, ,706, Aggregate write-ins for underwriting deductions Total underwriting deductions (Lines 2 through 5)......(11,403,588)...(100,246,653)...(412,175,292) 7. Net income of protected cells Net underwriting gain (loss) (Line 1 minus Line 6 + Line 7) ,185, ,118, ,095,546 INVESTMENT INCOME 9. Net investment income earned ,996, ,146, ,316, Net realized capital gains (losses) less capital gains tax of $ ,687, ,701, ,326, Net investment gain (loss) (Lines ) ,684, ,847, ,642,959 OTHER INCOME 12. Net gain or (loss) from agents' or premium balances charged off (amount recovered $...0 amount charged off $...0) Finance and service charges not included in premiums Aggregate write-ins for miscellaneous income......(108,105,580)...(217,199,558)...(219,056,735) 15. Total other income (Lines 12 through 14)......(108,105,580)...(217,199,558)...(219,056,735) 16. Net income before dividends to policyholders, after capital gains tax and before all other federal and foreign income taxes (Lines ) ,764, ,766, ,681, Dividends to policyholders Net income, after dividends to policyholders, after capital gains tax and before all other federal and foreign income taxes (Line 16 minus Line 17) ,764, ,766, ,681, Federal and foreign income taxes incurred ,175, ,898, ,399, Net income (Line 18 minus Line 19) (to Line 22) ,588, ,868, ,282,483 CAPITAL AND SURPLUS ACCOUNT 21. Surplus as regards policyholders, December 31 prior year ,795, ,000, ,000, Net income (from Line 20) ,588, ,868, ,282, Net transfers (to) from Protected Cell accounts Change in net unrealized capital gains or (losses) less capital gains tax of $ ,785, ,711, ,486, Change in net unrealized foreign exchange capital gain (loss)......(72,585,336)...(20,410,971)...(38,147,623) 26. Change in net deferred income tax Change in nonadmitted assets......(38,959,706)...(174,870,733)...(148,980,533) 28. Change in provision for reinsurance Change in surplus notes Surplus (contributed to) withdrawn from protected cells Cumulative effect of changes in accounting principles Capital changes: 32.1 Paid in Transferred from surplus (Stock Dividend) Transferred to surplus Surplus adjustments: 33.1 Paid in ,005, , , Transferred to capital (Stock Dividend) Transferred from capital Net remittances from or (to) Home Office Dividends to stockholders Change in treasury stock Aggregate write-ins for gains and losses in surplus ,243,352...(57,321,317)...(186,737,391) 38. Change in surplus as regards policyholders (Lines 22 through 37) ,077, ,559, ,795, Surplus as regards policyholders, as of statement date (Lines 21 plus 38) ,872, ,559, ,795,312 DETAILS OF WRITE-INS Summary of remaining write-ins for Line 5 from overflow page Totals (Lines 0501 thru 0503 plus 0598) (Line 5 above) Other miscellaneous income ,076, ,132, ,361, Estimated provision for uncollectible intercompany loan with affiliate......(108,411,654)...(48,494,890)...(51,581,076) Change in liabilities allocated to Segregated Account......(63,221,327)...(128,635,077)...(180,256,510) Summary of remaining write-ins for Line 14 from overflow page ,450,869...(42,202,288)...9,419, Totals (Lines 1401 thru 1403 plus 1498) (Line 14 above)......(108,105,580)...(217,199,558)...(219,056,735) Mandatory contingency reserve for adverse losses, net of tax (97,758,038)...(222,527,731) Change in Surplus of Segregated Account excluding non-admitted assets ,965, ,903, ,477, Unrealized Gains in Post-Retirement Benefit Obligations ,112...(467,046)...(687,006) Summary of remaining write-ins for Line 37 from overflow page Totals (Lines 3701 thru 3703 plus 3798) (Line 37 above) ,243,352...(57,321,317)...(186,737,391) Q04

5 CASH FROM OPERATIONS CASH FLOW Current Year Prior Year Prior Year Ended to Date To Date December Premiums collected net of reinsurance ,731, ,894, ,444, Net investment income ,548, ,424, ,526, Miscellaneous income......(3,423,468)...(19,239,751)...(18,010,742) 4. Total (Lines 1 through 3) ,855, ,078, ,960, Benefit and loss related payments......(1,240,502,898)...(232,618,300)...(296,189,389) 6. Net transfers to Separate Accounts, Segregated Accounts and Protected Cell Accounts Commissions, expenses paid and aggregate write-ins for deductions ,055, ,176, ,318, Dividends paid to policyholders Federal and foreign income taxes paid (recovered) net of $...0 tax on capital gains (losses) ,799, ,971, ,769, Total (Lines 5 through 9)......(830,648,191)...143,529, ,898, Net cash from operations (Line 4 minus Line 10) ,504,105...(31,451,149)...(33,938,302) CASH FROM INVESTMENTS 12. Proceeds from investments sold, matured or repaid: 12.1 Bonds ,084,625, ,825, ,448,391, Stocks Mortgage loans Real estate Other invested assets ,336, ,264, ,443, Net gains or (losses) on cash, cash equivalents and short-term investments (2,220)...(2,220) 12.7 Miscellaneous proceeds ,483, ,014, ,479, Total investment proceeds (Lines 12.1 to 12.7) ,346,444, ,241,103, ,729,312, Cost of investments acquired (long-term only): 13.1 Bonds ,903,803, ,179,473, ,750,825, Stocks Mortgage loans Real estate Other invested assets ,076, ,000, Miscellaneous applications ,613, ,030, ,967, Total investments acquired (Lines 13.1 to 13.6) ,306,493, ,362,503, ,988,792, Net increase or (decrease) in contract loans and premium notes Net cash from investments (Line 12.8 minus Line 13.7 and Line 14)......(960,048,067)...(121,400,539)...(259,479,956) 16. Cash provided (applied): CASH FROM FINANCING AND MISCELLANEOUS SOURCES 16.1 Surplus notes, capital notes......(19,550,008) Capital and paid in surplus, less treasury stock Borrowed funds......(25,305,542)...138,644, ,467, Net deposits on deposit-type contracts and other insurance liabilities Dividends to stockholders Other cash provided (applied)......(1,274,569)...2,165, ,510, Net cash from financing and miscellaneous sources (Lines 16.1 through 16.4 minus Line 16.5 plus Line 16.6)......(46,130,119)...140,809, ,978,107 RECONCILIATION OF CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS 18. Net change in cash, cash equivalents and short-term investments (Line 11 plus Line 15 plus Line 17)......(53,674,081)...(12,041,750)...(157,440,151) 19. Cash, cash equivalents and short-term investments: 19.1 Beginning of year ,859, ,299, ,299, End of period (Line 18 plus Line 19.1) ,185, ,257, ,859,352 Note: Supplemental disclosures of cash flow information for non-cash transactions: Settlement of loss related expenses pursuant to the Reinsurance Agreement ,349, ,928, ,860, Settlement of operating expenses pursuant to the Cooperation Agreement ,515, ,430, ,996, Cancellation of Ambac-insured bonds, previously purchased ,763, Capital contribution of subsidiaries to Phoenix Holdings Fund LLC ,000, Q05

6 1. Summary of Significant Accounting Practices A. Accounting Practices NOTES TO FINANCIAL STATEMENTS The accompanying financial statements of (the "Company" or "Ambac Assurance ) have been prepared on the basis of accounting practices prescribed or permitted by the State of Wisconsin Office of the Commissioner of Insurance ( Wisconsin Insurance Commissioner or OCI (which term shall be understood to refer to such office as regulator of Ambac Assurance and to the Commissioner of Insurance for the State of Wisconsin as rehabilitator of the Segregated Account as defined below (the Rehabilitator ), as the context requires). OCI recognizes statutory accounting practices prescribed or permitted by the State of Wisconsin for determining and reporting the financial condition and results of operations of an insurance company for determining its solvency under Wisconsin Insurance Law. The National Association of Insurance Commissioners ("NAIC") Accounting Practices and Procedures manual ("NAIC SAP") has been adopted as a component of prescribed practices by the State of Wisconsin. Prescribed Accounting Practices: OCI has prescribed an accounting practice that differs from NAIC SAP. Paragraph 7 of Statement of Statutory Accounting Principles No. 60 Financial Guaranty Insurance ( SSAP 60 ) allows for a deduction from loss reserves for the time value of money by application of a discount rate equal to the average rate of return on the admitted assets of the financial guaranty insurer as of the date of the computation of the reserve. The discount rate shall be adjusted at the end of each calendar year. Additionally, in accordance with paragraph 7 of Statutory Accounting Principles No. 5R Liabilities, Contingencies and Impairments of Assets - Revised, Ambac Assurance shall record probable losses on its subsidiaries for which it guarantees their obligations, using a discount rate equal to the average rate of return on its admitted assets. The Company s average rate of return on its admitted assets at December 31, 2015 was 8.06%. OCI has directed the Company to utilize a prescribed discount rate of 5.10% for the purpose of discounting both its loss reserves and its estimated impairment losses on subsidiary guarantees. Statutory surplus at September 30, 2016 and December 31, 2015 was lower by $62,933,426 and $140,699,316, respectively, than if the Company had reported such amounts in accordance with NAIC SAP. Net income for the nine months ended September 30, 2016 and for the year ended December 31, 2015 was higher by $77,765,890 and lower by $2,892,380, respectively, than if the Company had reported such amounts in accordance with NAIC SAP. OCI has prescribed another accounting practice that differs from NAIC SAP. Paragraph 4 of Statement of Statutory Accounting Principles No. 41 Surplus Notes ( SSAP 41 ) states that proceeds received by the issuer of surplus notes must be in the form of cash or other admitted assets having readily determinable values and liquidity satisfactory to the commissioner of the state of domicile. Under statutory accounting principles, surplus notes issued in conjunction with commutations or the settlement of claims would be valued at zero upon issuance pursuant to paragraph 4, SSAP 41. OCI has directed the Company to record surplus notes issued in connection with commutations or the settlement of liabilities at full par value upon issuance as in these instances the surplus notes do not represent a contribution of capital, but rather a distribution of value from the common and preferred shareholders of the Company. The surplus notes issued in connection with commutations or settlement of liabilities have a claim against surplus senior to the preferred and common shareholders. For the nine months ended September 30, 2016 and for the year ended December 31, 2015, the Company did not issue surplus notes and accordingly the statutory surplus and net income were not impacted. OCI had extended the preceding prescribed practice related to surplus notes to the evaluation of other-than-temporary impairments for Ambac Assurance guaranteed securities held in the investment portfolio. Paragraph 35 of Statement of Statutory Accounting Principles No. 43R Loanbacked and Structured Securities states that when an other-than-temporary impairment has occurred, the amount of the other-than-temporary impairment recognized as a realized loss shall equal the difference between the investment s amortized cost basis and the present value of cash flows expected to be collected, discounted at the loan-backed or structured security s effective interest rate. Under NAIC SAP, the present value of cash flows expected to be collected should include the fair value of surplus notes received from the Segregated Account, as required under the originally confirmed Segregated Account Rehabilitation Plan. OCI had prescribed an accounting practice that differed from NAIC SAP and has directed the Company to utilize par value rather than fair value of these surplus notes in this computation. As a result of the amended Segregated Account Rehabilitation Plan becoming effective on June 12, 2014, this prescribed practice is no longer applicable. Ambac Assurance received a new prescribed practice from OCI with regard to the carrying value of investments in Ambac Assurance insured securities with policies that were allocated to the Segregated Account. The new prescribed practice, effective beginning June 12, 2014, exempts Ambac Assurance from evaluating such investments for other than temporary impairments and requires all such investments be reported at amortized cost regardless of its NAIC risk designation. This accounting determination is intended to recognize that Ambac Assurance continues to maintain statutory loss reserves without adjustment for the economic effects of its ownership of the insured investment securities, improve transparency to the users of the statutory financial statements and to minimize operational risks. Statutory surplus at September 30, 2016 and December 31, 2015 was higher by $144,173,362 and $161,958,874, respectively, and net income for the nine months ended September 30, 2016 and for the year ended December 31, 2015 was lower by $8,184,940 and $15,142,455, respectively as a result of applying the prescribed practices discussed above. OCI has prescribed another accounting practice related to the total liabilities and total surplus of the Segregated Account of Ambac Assurance (the "Segregated Account") that are reported as discrete components of Ambac Assurance s liabilities and surplus reported in Ambac Assurance s statutory basis financial statements. Pursuant to this prescribed practice, the results of the Segregated Account are not included in Ambac Assurance s financial statements if Ambac Assurance s surplus is (or would be) less than $100,000,000 (the Minimum Surplus Amount ). As long as the surplus as regards to policyholders is not less than the Minimum Surplus Amount, payments by Ambac Assurance to the Segregated Account under the Reinsurance Agreement (as defined in Note 10) and Cooperation Agreement (as defined in Note 10) are not capped. Net income is not impacted as a result of this prescribed practice. Statutory surplus at September 30, 2016 and December 31, 2015 is not impacted by this prescribed practice since statutory surplus is greater than the Minimum Surplus Amount. Permitted Accounting Practices: Wisconsin accounting practices for changes to contingency reserves differ from NAIC SAP. Under NAIC SAP, contributions to and releases from the contingency reserve are recorded via a direct charge or credit to surplus. Under section 3.08(7)(b) of the Wisconsin Administrative Code, contributions to and releases from the contingency reserve are to be recorded through underwriting income. The Company received permission from OCI to record contributions to and releases from the contingency reserve and the related tax and loss bond impact, in accordance with NAIC SAP. Statutory surplus is the same using each of these accounting practices. Net income for the nine months ended September 30, 2016 and for the year ended December 31, 2015 is higher by $0 and $222,527,731, respectively, than if the Company had reported the contributions to the contingency reserve in accordance with the Wisconsin Administrative Code. Ambac Assurance received permission from OCI to report investment holdings of Ambac Assurance insured securities, with coverage under financial guaranty policies that have been allocated to the Segregated Account, as a separate invested asset on the balance sheet rather than combined with other bond investments. This permitted practice only impacts the balance sheet classification and has no impact on the valuation of the securities to which it applies or to statutory surplus. Q06

7 NOTES TO FINANCIAL STATEMENTS A reconciliation of the Company's net income and statutory surplus between practices prescribed and permitted by the Wisconsin Insurance Commissioner and NAIC SAP is shown below: NET INCOME State of Domicile September 30, 2016 December 31, Net Income (Loss) Per Quarterly Statement WI $ 298,588,860 $ 772,282, State Prescribed Practices that increase (decrease) NAIC SAP Prescribed discount rate effect 77,765,890 (2,892,380) Prescribed OTTI on investments (8,184,940) (15,142,455) $ 69,580,950 $ (18,034,835) 3. State Permitted Practices that increase (decrease) NAIC SAP 4. Net Income (Loss) Per NAIC SAP (1-2-3 = 4) WI $ 229,007,910 $ 790,317,318 SURPLUS 5. Statutory Surplus Per Quarterly Statement WI $ 921,872,727 $ 624,795, State Prescribed Practices that increase (decrease) NAIC SAP Prescribed discount rate effect (62,933,426) (140,699,316) Prescribed OTTI on investments 144,173, ,958,874 $ 81,239,936 $ 21,259, State Permitted Practices that increase (decrease) NAIC SAP 8. Statutory Surplus Per NAIC SAP (5-6-7 = 8) WI $ 840,632,791 $ 603,535,754 C. Accounting Policy No significant change from 2015 Notes to Financial Statements. D. Going Concern The Company's financial statements as of and for the nine months ended September 30, 2016 are prepared assuming the Company continues as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As further discussed in Note 10 below, the Segregated Account is in Rehabilitation. During the Segregated Account Rehabilitation Proceedings, the Rehabilitator controls the management of the Segregated Account and possesses ultimate decision-making authority with respect to all matters relating to the policies allocated to the Segregated Account. 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. As a result of uncertainties associated with the aforementioned oversight by the Rehabilitator of the Segregated Account, management has concluded that there is substantial doubt about Ambac Assurance's ability to continue as a going concern. 2. Accounting Changes and Corrections of Errors No significant change from 2015 Notes to Financial Statements. 3. Business Combinations and Goodwill No significant change from 2015 Notes to Financial Statements. 4. Discontinued Operations No significant change from 2015 Notes to Financial Statements. 5. Investments D. Loan-Backed and Structured Securities 1. Prepayment assumptions for single class and multi-class loan-backed securities were obtained from publicly available sources. 2. The Company did not recognize any other-than-temporary impairments ("OTTI") on loan-backed and structured securities because the Company did not have the intent to sell the securities prior to the recovery of the amortized cost basis and the Company has the ability to retain securities in an unrealized loss position for a period of time sufficient to recover the amortized cost basis. 3. The Company did not recognize OTTI credit losses on loan-backed and structured securities as the present value of cash flows expected to be collected were greater than the amortized cost basis of such securities as of September 30, As discussed in the prescribed practice in Footnote 1.A., Ambac-insured securities are exempt from the evaluation of other-than-temporary impairments. 4. The following table shows all impaired securities (fair value is less than cost or amortized cost), including Ambac-insured securities which are exempt from the evaluation of other-than-temporary impairments as discussed in the prescribed practice in Footnote 1.A., for which an other-than-temporary impairment has not been recognized in earnings by length of time that the individual securities have been in a continuous unrealized loss position at September 30, 2016: Q06.1

8 NOTES TO FINANCIAL STATEMENTS a. Aggregate amount of unrealized losses 1. Less than twelve months $ 11,289, Twelve months or longer $ 67,036,172 b. Aggregate fair value of securities with unrealized loss 1. Less than twelve months $ 378,745, Twelve months or longer $ 783,219, Excluding Ambac-insured securities which are exempt from the evaluation of other-than-temporary impairments as discussed in the prescribed practice in Footnote 1.A., management has determined that the unrealized losses reflected in (4) above are temporary in nature as of September 30, 2016 based upon (i) no unexpected principal and interest payment defaults on these securities; (ii) analysis of the creditworthiness of the issuer and financial guarantor, as applicable, and analysis of projected defaults on the underlying collateral; (iii) management has no intent to sell these investments in debt securities; and (iv) it is not more likely than not that Ambac Assurance will be required to sell these debt securities before the anticipated recovery of its amortized cost basis. The assessment under (iv) is based on a comparison of future available liquidity from the investment portfolio against the projected net cash outflow from operating activities and debt service. For purposes of this assessment, available liquidity from the investment portfolio is comprised of the fair value of securities for which management has asserted its intent to sell, the fair value of securities that are in an unrealized gain position, the fair value of other unaffiliated invested assets plus scheduled maturities and interest payments from the remaining securities in the portfolio. To the extent that securities that management intends to sell are in an unrealized loss position, they would have already been considered other-than-temporarily impaired with the amortized cost written down to fair value. Because the above-described assessment indicates that future available liquidity exceeds projected net cash outflow, it is not more likely than not that we would be required to sell securities before the recovery of their amortized cost basis. As of September 30, 2016, for securities that have indications of possible other-than-temporary impairment but which management does not intend to sell and will not more likely than not be required to sell, management compared the present value of cash flows expected to be collected to the amortized cost basis of the securities to assess whether the amortized cost will be recovered. Cash flows were discounted at the effective interest rate implicit in the security at the date of acquisition or for debt securities that are beneficial interests in securitized financial assets, at a rate equal to the current yield used to accrete the beneficial interest. For floating rate securities, future cash flows and the discount rate used were both adjusted to reflect changes in the index rate applicable to each security as of the evaluation date. E. Repurchase Agreements and/or Securities Lending Transactions 1. There were no repurchase agreements or securities lending transactions whose disclosures are required in SSAP No. 103, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (Revised). 2. Ambac Assurance has no open repurchase agreements as of September 30, For securities lending transactions, Ambac Assurance loaned securities to Ambac Financial Services, LLC ( AFS ) pursuant to a revolving credit facility approved by OCI. The securities loaned by Ambac Assurance to AFS, which were classified as investments, had an admitted carrying value of $64,777,407 and $64,611,593 at September 30, 2016 and December 31, 2015, respectively. There was no collateral for the loan Collateral Received Not applicable as the Company has not received collateral for either repurchase agreements or securities lending transactions as of September 30, F. Real Estate Impairment and Land Sales The Company did not hold investments in real estate, recognize any real estate impairments or engage in any retail land sales during Ambac Assurance's wholly-owned subsidiary Phoenix Holdings Fund LLC, and its subsidiaries, invests in residential real estate properties sourced from Ambac Assurance insured transactions. G. Low Income Housing Tax Credits The Company did not hold low income housing tax credits as investments during H. Restricted Assets 1. Restricted assets (including pledged) summarized by restricted asset category. Q06.2

9 NOTES TO FINANCIAL STATEMENTS Restricted Asset Category Current Year Gross Restricted Percentage Total General Account (G/ A) G/A Supporting Protected Cell Activity (a) Total Protected Cell Account Restricted Assets Protected Cell Account Assets Supporting G/A Activity (b) Total (1 plus 3) Total From Prior Year Increase / (Decrease) (5 minus 6) a. Subject to contractual obligation for which liability is not shown b. Collateral held under security lending arrangements c. Subject to repurchase agreements d. Subject to reverse repurchase agreements e. Subject to dollar repurchase agreements f. Subject to dollar reverse repurchase agreements g. Placed under option contracts Total Current Year Admitted Restricted Gross Restricted to Total Assets Admitted Restricted to Total Admitted Assets h. Letter stock or securities restricted as to sale - excluding FHLB capital stock % % i. FHLB capital stock j. On deposit with state 3,506,135 3,506,135 3,507,366 (1,231) 3,506, % 0.064% k. On deposit with other regulatory bodies l. Pledged as collateral to FHLB (including assets backing funding agreements) m. Pledged as collateral not captured in other categories n. Other restricted assets 439,765, ,765, ,057,108 (13,291,854) 439,765, % 7.984% o. Total restricted assets 443,271, ,271, ,564,474 (13,293,085) 443,271, % 8.048% (a) Subset of column 1 (b) Subset of column 3 2. Details of assets pledged as collateral not captured in other categories (reported on line m above) Collateral Agreement Current Year Gross Restricted Percentage Total General Account (G/ A) G/A Supporting Protected Cell Activity (a) Total Protected Cell Account Restricted Assets Protected Cell Account Assets Supporting G/ A Activity (b) Total (1 plus 3) Total From Prior Year Increase / (Decrease) (5 minus 6) Total Current Year Admitted Restricted Gross Restricted to Total Assets Admitted Restricted to Total Admitted Assets None Total (a) Subset of column 1 (b) Subset of column 3 Other Restricted Assets 3. Detail of other restricted assets (reported on line n above) Current Year Gross Restricted Percentage Total General Account (G/A) G/A Supporting Protected Cell Activity (a) Total Protected Cell Account Restricted Assets Protected Cell Account Assets Supporting G/A Activity (b) Total (1 plus 3) Total From Prior Year Increase / (Decrease) (5 minus 6) Total Current Year Admitted Restricted Gross Restricted to Total Assets Admitted Restricted to Total Admitted Assets Securities loaned to AFS 64,777,407 64,777,407 64,611, ,814 64,777, % 1.176% Secured borrowing collateral 374,987, ,987, ,445,515 (13,457,668) 374,987, % 6.808% Total 439,765, ,765, ,057,108 (13,291,854) 439,765, % 7.984% Q06.3

10 NOTES TO FINANCIAL STATEMENTS I. Working Capital Finance Investments Not Applicable. J. Offsetting and Netting of Assets and Liabilities Not Applicable. K. Structured Notes The following represent structured notes as of September 30, 2016 in accordance with SSAP 26 "Bonds excluding Loan-backed and Structured Securities": CUSIP Identification Actual Cost Fair Value Book/Adjusted Carrying Value Mortgage- Reference Security (YES/NO) S8 4 $ 899,435 $ 618,062 $ 618,062 NO S , , ,404 NO 62718Q AA3 4,156,720 4,056,920 4,016,364 NO Total $ 5,341,297 $ 4,872,386 $ 4,831,830 xxx 6. Joint Ventures, Partnerships and Limited Liability Companies No significant change from 2015 Notes to Financial Statements. 7. Investment Income No significant change from 2015 Notes to Financial Statements. 8. Derivative Instruments No significant change from 2015 Notes to Financial Statements. 9. Income Taxes D. The provision for federal income taxes incurred is different from that which would be obtained by applying the statutory federal income tax rate to income before income taxes. The significant items causing this difference are as follows: 9/30/2016 Tax effect 35% Effective Tax Rate Income before taxes $ 318,764,404 $ 111,567, % Ambac Assurance Segregated Account & related party income (13,461,562) (4,711,547) -1.48% Tax-exempt Interest (2,630,422) (920,648) -0.29% Accrued Tolling Payments 54,475,451 19,066, % Subsidiary tax settlements (4,577,309) (1,602,058) -0.50% Unremitted Foreign Earnings 65,728,227 23,004, % Change in statutory valuation allowance adjustment (351,281,083) (122,948,379) % Other (9,373,295) (3,280,653) -1.03% Total $ 57,644,411 $ 20,175, % E. Operating loss carry forward 1. At September 30, 2016, Ambac Assurance has the following NOLs available. Taxes shall be due under the Amended TSA as defined in F. 1. and explained in F. 2. below: Origination Year Expiration Year Amount $ 621,312, ,078,920, ,292, ,972,228 Total $ 2,636,498,052 As of September 30, 2016, Ambac Assurance also has the following net capital tax loss carry forwards available: Q06.4

11 NOTES TO FINANCIAL STATEMENTS Origination Year Expiration Year Amount ,107, ,377,511 Total $ 88,485,502 Ambac Assurance has alternative minimum tax credit carryovers of $29,963, At September 30, 2016 Ambac Assurance has no Federal income taxes incurred that are available for recoupment in the event of future net losses. 3. The Company has no deposits admitted under Section 6603 of the Internal Revenue Code of 1986, as amended (the Tax Code ). F. Consolidated federal income tax return 1. Pursuant to a written tax-sharing agreement ( Amended TSA ) approved by both the OCI and Ambac Assurance s Board of Director, Ambac Assurance and its subsidiaries/members, Ambac Capital Corporation, Ambac Investments Inc., Ambac Capital Funding, Inc., Connie Lee Holdings Inc., and Everspan, constitute a separate sub-group (the "Ambac Sub-group"), and are included in Ambac Financial Group, Inc. s ("Ambac") consolidated federal income tax return with Ambac Asset Management, Inc. The Amended TSA provides the method of allocations between the entities in the Ambac Sub-group, which was approved by OCI. Amounts assessed/reimbursed under the Amended TSA are based upon separate tax return calculations made as if Ambac Assurance, including the operations of Ambac Assurance and its subsidiaries, had filed its own federal income tax return for each taxable period. 2. Pursuant to the TSA, to the extent the Ambac Sub-group generates taxable income after September 30, 2011, it is obligated to make payments ( Tolling Payments ), subject to certain credits, to Ambac in accordance with the following NOL Usage table, where the Applicable Percentage is applied to the aggregate amount of federal income tax liability that would have been paid if the Allocated NOLs were not available: NOL Usage Tier NOL Usage Table Allocated NOLs Applicable Percentage A The first $479,000,000 15% B The next $1,057,000,000 after Tier A 40% C The next $1,057,000,000 Tier B 10% D The next $1,057,000,000 after Tier C 15% A credit is available to offset the first $5,000,000 of payments due under each of the NOL usage Tiers A, B and C. Pursuant to the Closing Agreement between Ambac and the Internal Revenue Service ("IRS"), the IRS will receive 12.5% of Tier C and 17.5% of Tier D payments, if made. To the extent the Ambac Sub-group utilizes Allocated NOLs generated prior to September 30, 2011 greater than $3,650,000,000, the Company is obligated to pay Ambac 25% of the federal income tax liability that would have been paid if the NOLs were not available. For the period from September 30, 2011 through December 31, 2015, the Ambac Sub-group has generated taxable income of $881,191,883 utilizing all of the $10,000,000 Tier A and B NOL credit resulting in an estimated $70,911,365 tolling payment to Ambac on April 29, As a result of filing the 2015 Federal Income Tax Return, the Ambac Sub-group accrued $542,999 of additional tolling payments that was paid to Ambac on November 1, For the period from January 1, 2016 through September 30, 2016, the Ambac Sub-group has generated taxable income of $132,300,065, resulting in additional accrued tolling payments of $18,523,409, net of applicable credits. Assuming Ambac Sub-group's cumulative full year 2016 taxable income does not change, this amount will be paid to Ambac in April As of December 31, 2015 and September 30, 2016, $2,768,798,117 and $2,636,498,052 (adjusted for the effects of filing the 2015 Federal Income Tax return, which was $3,878,562 of taxable income) of the allocated $3,650,000,000 NOL subject to Tolling Payments remains. 10. Information Concerning Parent, Subsidiaries and Affiliates and Other Related Parties The descriptions appearing below in this Note provide an update of those discussed in Note 10: Information Concerning Parent, Subsidiaries, Affiliates and Other Related Parties in the Company s Annual Statement for the year ended December 31, 2015, and should be read in conjunction with the complete descriptions provided in the 2015 Annual Statement. A. Nature of Relationships Ambac Ambac, headquartered in New York City, is a financial services holding company incorporated in the State of Delaware. On May 1, 2013, (the Effective Date ), the Second Modified Fifth Amended Plan of Reorganization of Ambac (the Reorganization Plan ) became effective and Ambac emerged from bankruptcy. On December 26, 2013, the United States Bankruptcy Court for the Southern District of New York 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 Pursuant to the Reorganization Plan, Ambac issued common stock and warrants that are listed on NASDAQ under the symbols AMBC and AMBCW, respectively, on May 1, Q06.5

12 NOTES TO FINANCIAL STATEMENTS Segregated Account In March 2010, Ambac Assurance established a Segregated Account pursuant to Wisc. Stat (2) (the Segregated Account ) to segregate certain segments of Ambac Assurance s liabilities, and the OCI commenced rehabilitation proceedings in the Dane County, Wisconsin Circuit Court (the Rehabilitation Court ) with respect to the Segregated Account (the Segregated Account Rehabilitation Proceedings ) in order to permit OCI to facilitate an orderly run-off and/or settlement of the liabilities allocated to the Segregated Account pursuant to the provisions of the Wisconsin Insurers Rehabilitation and Liquidation Act. Under Wisconsin insurance law, the Segregated Account is a separate insurer from Ambac Assurance for purposes of the Segregated Account Rehabilitation Proceedings. The Rehabilitator is Theodore Nickel, the Commissioner of Insurance of the State of Wisconsin. Net Par exposure as of September 30, 2016 for policies allocated to the Segregated Account is $12,469,965,043. Ambac Assurance is not, itself, in rehabilitation proceedings. On October 8, 2010, OCI filed a plan of rehabilitation for the Segregated Account (the Segregated Account Rehabilitation Plan ) in the Rehabilitation Court. On June 11, 2014, the Rehabilitation Court approved amendments to the Segregated Account Rehabilitation Plan that had been proposed by the Rehabilitator, and the Segregated Account Rehabilitation Plan, as amended, became effective on June 12, The amendments to the Segregated Account Rehabilitation Plan primarily modified the mechanism for handling claims. Instead of the combination of cash payments and interest-bearing surplus notes originally contemplated by the Segregated Account Rehabilitation Plan, under the amended Segregated Account Rehabilitation Plan, holders of permitted policy claims have received and will receive an initial interim cash payment for a portion of such policy claim ( IPP ), together with the right to receive a deferred payment equal to the balance of the unpaid policy claim, as may be adjusted from time to time pursuant to the terms of the amended Segregated Account Rehabilitation Plan ( Deferred Amount ). Payments of Deferred Amounts will be made at such times as the Rehabilitator deems appropriate in his sole discretion. The Segregated Account will also establish junior deferred amounts ("Junior Deferred Amounts") with respect to permitted general claims instead of issuing junior surplus notes to the holders of such claims as contemplated under the original Segregated Account Rehabilitation Plan. Under the Segregated Account Rehabilitation Plan Deferred Amounts and Junior Deferred Amounts generally accrue and compound interest at an annual effective rate of 5.1%. The Segregated Account is responsible for unpaid claims, including Deferred Amounts, of $3,009,660,918 and unpaid accrued interest of $617,909,178 at September 30, If approved by the Rehabilitator, payment of Deferred Amounts, together with interest thereon, will trigger proportionate redemption payments with respect to surplus notes (other than junior surplus notes). Permitted policy claims, including payments of Deferred Amounts and interest thereon, or increases to the percentage of Interim Payments as required by the Rehabilitator will be material uses of future liquidity. At September 30, 2016, insurance liabilities for policies allocated to the Segregated Account were $4,552,415,775. To pay claims and other liabilities, the Segregated Account has the ability to demand payment from time to time under an aggregate excess of loss reinsurance agreement provided by Ambac Assurance (the Reinsurance Agreement ). In addition, certain operating and administrative costs and expenses of the Segregated Account are reimbursable by Ambac Assurance pursuant to the Cooperation Agreement, dated as of March 24, 2010, by and between the Segregated Account and Ambac Assurance, as amended (the Cooperation Agreement ). Pursuant to a prescribed practice, the results of the Segregated Account are not included in Ambac Assurance's financial statements if Ambac Assurance's surplus is (or would be) less than $100,000,000 (the Minimum Surplus Amount ). As long as the surplus as regards to policyholders is not less than the Minimum Surplus Amount, payments by Ambac Assurance to the Segregated Account under the Reinsurance Agreement and Cooperation Agreement are not capped. At September 30, 2016, Ambac Assurance s surplus as regards to policyholders exceeds the Minimum Surplus Amount. In the event that Ambac Assurance does not maintain surplus in excess of the Minimum Surplus Amount, the Segregated Account would experience a shortfall in funds available to pay its liabilities. Any such shortfall would be a consideration for the Rehabilitator in the determination of whether any changes to the Segregated Account Rehabilitation Plan and/or the amount of partial policy claim payments are necessary or appropriate, or whether to institute general rehabilitation proceedings against Ambac Assurance. Ambac Assurance is evaluating possibilities for concluding the Segregated Account Rehabilitation Proceedings. In pursuing this objective, Ambac Assurance is considering the possibility of entering into transactions whereby it would monetize certain assets and/or restructure or exchange certain outstanding debt and insurance obligations. Towards this objective, Ambac Assurance is discussing with OCI potential options for addressing outstanding Segregated Account obligations. 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 the Rehabilitation Court. On July 12, 2016, the Special Deputy Commissioner ("SDC") for the Segregated Account met with policy beneficiaries and holders of surplus notes of Ambac Assurance and the Segregated Account during which the SDC stated (i) that at present, the Rehabilitator does not have any plans to increase the IPP on Segregated Account policy claims, commenting that the Rehabilitator and his advisors would need to feel highly confident that any change to the IPP would be sustainable and fair to all policyholders; (ii) that the Rehabilitator reserves the right to amend the Segregated Account Rehabilitation Plan or take such other action as he deems necessary or appropriate to adjust the rate of accretion on Deferred Amounts from time to time based on such factors as he considers relevant and, as such, the accretion rate remains under review; and (iii) his objective of seeking an exit of the Segregated Account from rehabilitation, and further stated that although his preferred goal would be to achieve an exit from rehabilitation through a consensual plan, he would advise the Rehabilitator to use all tools available to accomplish a successful and durable exit that enhances Ambac Assurance's long-term claims-paying ability. The execution of Ambac s strategy to increase the value of its investment in Ambac Assurance is subject to the authority of the Rehabilitator 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. The Rehabilitator's authority includes, but is not limited to, sole discretion over the rate at which the Segregated Account pays claims and the accretion rate on Deferred Amounts. 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. B. Transactions with Affiliates On February 19, 2016, Phoenix Holdings Fund LLC ("Phoenix") was formed; Ambac Assurance is the sole member. Phoenix is an entity that invests in residential real estate properties sourced from Ambac Assurance insured transactions. On February 25, 2016, certain existing entities (Osprey Holding I LLC and Triton Real Estate Holdings I LLC) were contributed to Phoenix by Ambac Assurance with a value of $4,000,000. In addition, Phoenix received a $3,000,000 cash capital contribution from Ambac Assurance. Q06.6