INVESTOR PRESENTATION

Transcription

1 INVESTOR PRESENTATION JUNE Ambac Financial Group, Inc. One State Street Plaza, New York, NY All Rights Reserved

2 FORWARD LOOKING STATEMENT In this presentation, 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 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 forwardlooking 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 the 2013 Annual Report on Form 10-K and in Part II, Item 1A of our Quarterly Report on Form 10-Q for the three month period ended March 31, 2014, and under Management s Discussion and Analysis of Financial Condition and Results of Operations in Part I, Item 2 of the Quarterly Report on Form 10-Q for the three month period ended March 31, 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, including risks associated with the possible dilution of the ownership interests of our stockholders; (3) our inability to achieve the financial results projected during our Chapter 11 proceeding; (4) potential of rehabilitation proceedings against Ambac Assurance; (5) 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; (6) our inability to realize the expected recoveries included in our financial statements; (7) intercompany disputes or disputes with the Rehabilitator of the Segregated Account; (8) material changes to the Segregated Account rehabilitation plan or to current rules and procedures governing the payment of permitted policy claims, with resulting adverse impacts; (9) decisions of the Rehabilitator concerning payments of deferred claim amounts or payments on surplus notes, the timing or magnitude of which is disadvantageous to Ambac, (10) increased fiscal stress experienced by issuers of public finance obligations or an increased incidence of Chapter 9 filings by municipal issuers; (11) adverse events arising from the rehabilitation proceedings for the Segregated Account, including the failure of the injunctions issued by the Wisconsin rehabilitation court to protect the Segregated Account and Ambac Assurance from certain adverse actions; (12) adverse tax consequences or other costs resulting from the Segregated Account rehabilitation plan or from rules and procedures governing the payment of permitted policy claims; (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) credit and liquidity risks due to unscheduled and unanticipated withdrawals on investment agreements; (23) 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; (24) system security risks; (25) the effects of U.S. fiscal policies; (26) market spreads and pricing on derivative products insured or issued by Ambac or its subsidiaries; (27) the risk of volatility in income and earnings, including volatility due to the application of fair value accounting; (28) changes in accounting principles or practices that may impact Ambac s financial results, including those resulting from potential amendments to the Segregated Account Rehabilitation Plan; (29) legislative and regulatory developments; (30) operational risks, including with respect to internal processes, risk models, systems and employees, and failures in services or products provided by third parties; (31) 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 (32) other risks and uncertainties that have not been identified at this time. 1

3 AGENDA Ambac Overview Insured Portfolio Investment Portfolio Financial Services Business Parallel Strategic Priorities Value Creation Growth and Diversification Financial Overview Conclusion 2

4 AMBAC OVERVIEW 3

5 AMBAC TODAY Global provider of financial guarantees and other financial services Pursuing parallel paths to create long-term shareholder value Maximize the value of existing financial guarantee operations Profitably grow and diversify through the acquisition and / or development of new business opportunities $1 billion+ market cap 4

6 SIMPLIFIED CORPORATE STRUCTURE Ambac Financial Group (Holding Company) (AFG) Ambac Assurance Corp. (Financial Guarantee) (AAC) Ambac Assurance Corp. Segregated Account (in Rehabilitation) Ambac Capital Corporation (Investment Agreement Operations) Ambac Financial Services (Derivative products) Everspan Financial Guarantee (Financial Guarantee) Ambac Assurance UK (UK insurance company) (AUK) Ambac Credit Products (Credit default swaps) 5

7 AMBAC OVERVIEW MARCH 31, 2014 Insured Portfolio Investment Portfolio $173.5 billion Net Par Public Finance* 65% $6.7 billion Fair Value RMBS-Ambac Wrapped 21% Short Term 3% US Gov & Agency Obligations 4% Int'l 18% RMBS/ABS 22% Corporate Obligations 24% Structured Finance 17% Other 4% Non-RMBS Ambac Wrapped ** 3% Municipal Obligations 17% Foreign Obligations 2% * Public Finance Net Par throughout the presentation includes capital appreciation bonds ( CABs ) which are reported at the par amount at the time of issuance of the insurance policy ** Non-RMBS Ambac Wrapped as part of loss remediation strategy 6

8 STRATEGY: PARALLEL PRIORITIES Value Creation Initiatives Representations and Warranties Commutations and Restructurings Insured Buybacks Servicer Intervention Growth and Diversification Initiatives Acquisitions Development Opportunities 7

9 Equity $350 million 5.1% Jr. Surplus Notes Expense Sharing NOL Tolling on $3.65 billion NOL VALUE COMPONENTS UPON EMERGENCE FROM BANKRUPTCY $1.4 billion NOL Ambac Financial Group (Holding Company) Ambac Assurance Corp (Insurance Subsidiary) 8

10 AMBAC S CAPITAL STRUCTURE Category ($ in millions) 3/31/14 Comments Policyholder Reserves $8,781 Before subrogation recoveries, Unearned Premium Reserves (UPR) and reinsurance Includes $4.0 billion of unpaid claims 5.1% Surplus Notes Par $1,264 After 2012 calls $1.2 billion General Account notes $53 million Segregated Account notes 5.1% Junior Surplus Notes Par $378 Includes $350 million held by AFG Auction Rate Preferred Shares (AMPS) Par $660 Originally $800 million Common Stock market cap* $1,396 45,002,575 common shares 5,040,775 warrants *Based on AMBC closing stock price $31.03 March 31,

11 SEGREGATED ACCOUNT March 24, 2010 AAC established the Segregated Account pursuant to Wisconsin law Wisconsin's Office of the Commissioner of Insurance (OCI) commenced rehabilitation proceedings for the Segregated Account Rehabilitator has ultimate decision-making authority over the Segregated Account Governed by Plan of Operation and certain other operative documents Segregated certain segments of Ambac Assurance s most distressed exposures and associated subrogation claims General Account (the remainder of AAC) is not in rehabilitation AAC s Segregated Account Segments RMBS Policies Student Loan Policies Certain Credit Default Swap Policies Subrogation Claims (but not recoveries) Certain Limited Liability Corporations Other Insurance Policies Reinsurance Obligations 10

12 Subrogation Recoveries Premiums General Account Claims Segregated Account Claims AAC SEGREGATED ACCOUNT STRUCTURE $6 billion liabilities and associated subrogation claims AAC (Insurance Subsidiary) $2 billion 4.5% secured note* ($23 million remaining 03/31/14) Excess of loss reinsurance agreement* Segregated Account Management services agreement Management services fees Trustees / Issuers Policyholders / Trustees Policyholders / Trustees *Subject to $100 million minimum surplus at AAC 11

13 PLAN OF REHABILITATION Confirmation Confirmed by Wisconsin court on January 24, 2011 Key Terms Interim policy claims paid: 25% cash, 75% deferred Allows for commutations and restructurings, subject to Court approval in certain circumstances Makes permanent injunctions barring certain actions adverse to the Segregated Account or AAC Subsequent Court approval for Supplemental Payments and Special Policy Payments Proposed Amendments Continues deferral of payment of a portion of Segregated Account claims Instead of Surplus Notes to satisfy unpaid portions of claims, Deferred Amounts will be created and will generally accrue interest at 5.1% (approximately $277 million estimated as of March 31, 2014) If approved, the Rehabilitator also intends to Increase the cash payout ratio from 25% to 45% - Expected to take effect on or after the July 20, 2014 payment date Pay a catch-up payment of 26.67% of Deferred Amounts, together with interest - Expected to be made on or after the November 20, 2014 payment date The payment of Deferred Amounts will also trigger a redemption of Segregated Account and General Account Surplus Notes (excluding junior surplus notes) Aggregate amount to be used for redemption equal to 26.67% of par and accrued interest Total net cash outflows associated with the payment of Deferred Amounts and the redemption of surplus notes are expected to exceed $1.5 billion in 2014 Motion hearing beginning June 11,

14 REHABILITATOR S ROLE General Account Rehabilitator approval is required for: Non-ordinary course transactions > $5 million Changes to Investment Policy Paying dividends or acquiring securities issued by AAC Changing assumptions or vendors utilized in determining statutory loss reserves Adopting certain tax positions (covenant applies to AFG) Segregated Account Rehabilitator has ultimate decisionmaking authority Policy payments and commutations Prosecution of subrogation claims Distribution of subrogation recoveries Contracted with AAC as Management Services Provider Risk management Loss mitigation Treasury, accounting, tax Business continuity Technology Contracted with separate advisors / consultants 13

15 OTHER KEY AAC RESTRICTIONS Bank Settlement Agreement (June 2010) Board Business Debt Parity Other Restrictions Waivers Independent AAC Board members minimum one-third AAC generally restricted to runoff activities unless obtain an A rating Limits issuance of surplus notes or other obligations on parity with or senior to bank surplus notes Prohibits mergers, asset dispositions and certain payments, including dividends Restricts distributions on, or purchases of, surplus notes Waivers require approval from (and/or) o OCI o Independent AAC directors o Bank surplus note holders Auction Market Preferred Securities (AMPS) Dividends on AAC Common Equity Prohibited unless dividends are paid on AMPS for then current dividend period o Exception for dividends to pay debt service or operating expenses at AFG If paid while dividends on AMPS for the then current dividend period are not paid, then dividends on AMPS will be cumulative 14

16 INSURED PORTFOLIO 15

17 INSURED PORTFOLIO - $173.5 BILLION AS OF MARCH 31, 2014 Net Par Exposures $ in billions # of Credits Sector % Breakdown $500 $400 10,000 8,000 Structured Finance 17% $300 $200 $100 6,000 4,000 2,000 Public Finance 65% Int'l 18% $- - Net Par Exposures # of Credits (right axis) Ambac Rating % Breakdown Portfolio % Breakdown Investment Grade 83% Below Investment Grade 17% General Account 73% Segregated Account 13% AUK 14% 16

18 1Q 2014 INSURED PORTFOLIO AAC GENERAL / SEGREGATED ACCOUNTS AAC General Account $127 billion net par ~4,500 credits Structured Public Finance** 13% AAC Segregated Account $22 billion net par ~300 credits Student Loans 20% General Municipal* 72% Structured Finance & Int'l 15% MBS 72% Other 8% * General Municipal includes municipal bonds backed by revenue sources including taxes, pledges, tolls and municipal lease payments. ** Structured Public Finance includes transactions with indirect municipal support or public purpose essentiality such as not for profit hospitals, private higher education, stadiums, military and affordable housing, and Federal leases. These transactions typically have covenants and control rights closer to structured finance than municipal bonds. 17

19 AAC INSURED PORTFOLIO ADVERSE CREDIT CLASSIFICATION* $ in billions Net Par Q 2014 $70 $60 $50 $40 $30 IV III II IA $20 $10 $ Q2014 *Adverse credit classification definitions in Appendix. 18

20 AAC PROJECTED GROSS PAR RUNOFF SELECTED DATA* $ in billions $450 $400 $350 $300 $250 Projected Gross Par Runoff Annual O/S Total AAC Portfolio Actual 12/31/2013 Projected 12/31/2010 Projected $ in billions $350 $300 $250 $200 Projected Gross Par Runoff Annual O/S General Account Portfolio Actual 12/31/2013 Projected 12/31/2010 Projected $200 $150 $100 $50 $150 $100 $50 $0 $0 $ in billions $40 $35 $30 $25 $20 $15 $10 $5 Projected Gross Par Runoff Annual O/S RMBS Portfolio Actual 12/31/2013 Projected 12/31/2010 Projected $ in billions $18 $16 $14 $12 $10 $8 $6 $4 $2 Projected Gross Par Runoff Annual O/S Student Loan Portfolio Actual 12/31/2013 Projected 12/31/2010 Projected $0 $0 *Depicts amortization of existing guaranteed portfolio (principal), assuming no advance refundings, as of December 31, Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay guaranteed obligations. 19

21 RMBS PORTFOLIO SNAPSHOT ($ in billions, except number of credits) 3/31/14 12/31/13 Gross Par $15.6 $16.2 Net Par $15.5 $16.0 Number of credits Gross par related to policies in loss reserves $11.2 $11.7 Number of credits related to policies in loss reserves Gross claims paid (ever-to-date)* $3.8 $3.8 GAAP Gross claim liability $1.5 $1.7 GAAP Unpaid claims GAAP R&W subrogation recoverables (2.2) (2.2) GAAP UPR (0.1) (0.1) GAAP Loss reserves** $3.2 $3.3 * Gross of reinsurance and R&W and other subrogation recoverables ** Gross of reinsurance and net of R&W and other subrogation recoverables. Includes unpaid claims. 20

22 POINT IN TIME PROJECTED LIFETIME RMBS LOSSES $ in millions $10,000 $9,000 $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 Establishment of Segregated Account Payment Moratorium Payment Moratorium Lifted ETD Paid, Net of Subrogation Received GCL, Before R&W ETD Unpaid Claims ETD Losses + GCL, Net of R&W * Gross Claim Liability is projected future claims 21

23 RMBS PERFORMANCE TRENDS 25% Conditional Default Rate 3-Month 20% 15% 10% 5% 0% First Lien Second Lien 50% 40% 30% 20% 10% 0% Delinquency 60+ /FC/REO/BK Data Source: Portfolio: IntexCalc RMBS transactions representing more than 90% of Ambac's future claims exposure 22

24 STUDENT LOAN PORTFOLIO $4.3 billion net par Long dated maturities $891 million loss reserves (projected losses back ended) Exposures down $10.7 billion gross par since 1Q 2010 Losses concentrated in private student loan pools with under-collateralization Private loan pools 84%, (20 Credits) Student Loans By Loan Type Mix 15%, (2 Credits) BIG 97% (21 Credits) Student Loans By Ambac Rating >75% FFELP loan pools 1% (2 Credits) Investment Grade 3% (3 Credits) 23

25 PUBLIC FINANCE PORTFOLIO March 31, 2014 Public Finance $112 billion Net Par General Municipal $92 billion Net Par Non- Profit's 8% Housing 7% Health Care 3% General Municipal 82% STATE 16% TAX 19% UTY 12% TSP 9% GEN'L FUND* 23% SCHOOL DIST 7% PUBLIC HIGHER ED 7% TABS 6% OTHER 1% General Fund* $21 billion Net Par General Fund* By Ambac Rating General Fund* By Exposure Size ($ in millions) GO 72% LEASE 28% A 49% AA 31% BBB 17% BIG 3% 401 credits $8 billion 39 credits $3 billion 17 credits $3 billion $10 - $ % <$10 22% $50 - $ % $100 - $ % $ % 1,470 credits $5 billion 7 credits $3 billion * General fund represents GOs, leases, and municipal general fund obligations. Excludes states and school districts. 24

26 PUBLIC FINANCE: DETROIT $170 million net par exposure as of March 31, 2014 $92.7mm Limited Tax GOs ( LTGOs ) and $77.6mm Unlimited Tax GOs ( UTGOs ) Background Detroit issued an aggressive plan that treats GO bonds as unsecured with low recoveries The city is defaulting on its GO bond debt service during bankruptcy As of April 1, Ambac claims paid were $12mm on UTGOs and $23mm on LTGOs Developments The bankruptcy remains complex and is now moving very rapidly City filed its plan of adjustment and the hearing is expected this summer Agreed a settlement on our $0.74 Actively mediating and litigating our LTGOs 25

27 PUBLIC FINANCE: PUERTO RICO $2.5 billion gross par exposure as of March 31, 2014 Commonwealth remains vulnerable to ongoing liquidity and credit issues Proactively downgraded starting in 3Q 2013 $3.5 billion recent bond offering provides near / medium term liquidity Credit Gross Par ($ in millions) Final Maturity Date Ambac PR Sales Tax Revenue Bonds (COFINA) $808* 2054 BBB- PR Highway and Transportation Authority Revenue Bonds BIG PR Infr Fin g Authority Rum Tax BIG PR Convention Center District Authority Hotel Tax BIG PR PBA GO guaranteed BBB- Puerto Rico Commonwealth GOs BBB- $2,529 26

28 AAC STRUCTURED AND CORPORATE PORTFOLIO* March 31, 2014 $37 billion Net Par By Exposure Type By Ambac Rating Pooled Debt Obligations 4% Utilities 34% Structured Insurance 2% Other 5% Asset Backed 11% BIG 14% AA 11% Housing 21% Other Structured Public Finance 13% BBB 28% A 47% Health Care 10% * Excludes RMBS, Student Loans and General Municipal 27

29 MILITARY HOUSING Ambac insures $6.2 billion of privatized military housing debt Diverse exposure to >45 US military bases across 16 states Two credits are adversely classified Exposures are long-dated, with most maturing after 2040 Debt service is not directly paid or guaranteed by the U.S. Government Serviced from rental payments via individual s Basic Allowance for Housing (BAH) Security includes BAH payments and interest in the ground lease Risk factors affecting these transactions include Large scale domestic military cutbacks Base essentiality and risk of base closures Military deployments U.S. government commitment to fund BAH Military Housing $6.2 billion Net Par By Ambac Rating BBB 20% A 68% BIG 10% AA 2% 28

30 INVESTMENT PORTFOLIO 29

31 CONSOLIDATED INVESTMENT PORTFOLIO FAIR VALUE March 31, 2014 December 31, 2013 Short Term 3% $6.7 billion $6.5 billion US Gov & Agency Obligations 4% Short Term 4% US Gov & Agency Obligations 4% MBS-Ambac Wrapped 21% RMBS/ABS 22% Corporate Obligations 24% Municipal Obligations 17% Foreign Obligations 2% RMBS- Ambac Wrapped 20% RMBS/ABS 22% Corporate Obligations 23% Foreign Obligations 2% Municipal Obligations 21% Other 4% Non-RMBS Ambac Wrapped 3% (1) Other 4% (1) Non-RMBS Ambac wrapped as part of loss remediation strategy. 30

32 CONSOLIDATED INVESTMENT PORTFOLIO MARCH 31, 2014 Business Segment Ratings Financial Services 6% Corporate 1% Not Rated 5% AUK 7% BIG 29% AAA 16% Financial Guarantee (Excluding AUK) 86% BBB 14% A 17% AA 19% 31

33 FINANCIAL SERVICES BUSINESS 32

34 INVESTMENT AGREEMENT BUSINESS SUMMARY Investment Holdings by Sector $372 million Fair Value* Year-end Balance of Liabilities U.S. Government and Agency Obligations 10% Short Term <1% $ in millions $400 $350 $362 $359 $361 $313 $300 $250 RMBS/ABS 90% $200 $150 $100 $50 $0 $117 $ projection * As of March 31,

35 SWAP BUSINESS ($ in millions) Successor Ambac Three Months Ended March 31, 2014 Predecessor Ambac Three Months Ended March 31, 2013 Better (Worse) Change (%) Notional (at period end) $2,555.2 $2,679.9 $ % Interest rate sensitivity (DV01) (0.4) (22%) Derivative product revenues (53.8) (0.6) (53.2) NM Net fair market value of derivatives at period end $(131.2) $(189.6) $ % 34

36 PARALLEL STRATEGIC PRIORITIES VALUE CREATION INITIATIVES 35

37 STRATEGY - VALUE CREATION INITIATIVES Representations & Warranties (R&W) Enforcement of R&W contractual rights and remedies through litigation and other means Strong cases against RMBS sponsors Commutations and Restructurings Key loss mitigation tool Tear up exposures Balance return, risk and liquidity management Insured Buybacks Disciplined buyback of distressed Ambac insured securities Defease risk Enhance returns Servicer Intervention Transfer to special servicers Work with existing servicers Reduces defaults and loss severities 36

38 RMBS R&W ENFORCEMENT AND LITIGATION Seek to make sponsors live up to their obligations to repurchase loans Through repurchase demands, negotiation, and/or litigation Six active litigations for breach of contract and/or fraud Seek recovery of policy claims, interest, and costs Benefits to date of approximately $350 million Repurchase of loans from transactions Direct payments to resolve disputes, and agreements to pay Already reflected in financial statements, a portion included in subrogation recoverable $2.2 billion GAAP estimated subrogation recoverable 37

39 COMMUTATIONS AND RESTRUCTURINGS Commutation Restructuring Explanation Defeasance or settlement of future projected claims Tearing up policies at a discount Active use of creditor rights to mitigate potential losses on insured securities Key methods used Upfront payment in exchange for removing underlying policy from insured securities Upfront payment to purchase the right to all future claims on insured securities Enforcing controlling creditor rights in covenant breach or default situations to achieve improved outcomes Restructuring of liabilities (with or without removing the policy) of distressed issuers may also include an investment by Ambac 38

40 STUDENT LOAN PORTFOLIO REDUCTION Student Loan $10.7 billion Gross Par Reduction* Restructurings and Refinancings, $2.1 billion, 20% Commutations, $4.8 billion, 45% Run-off, $3.8 billion, 35% *Reduction from March 31, 2010 until March 31,

41 REPRESENTATIVE PRICES OF INSURED RMBS Avg Px 8/31/ Avg Px 5/28/ Avg Px 9/30/ Sub-prime 2005 Sub-prime 2005 HELOC 2006 HELOC 2006 CES 2007 CES 2005 ALT-A 2005 ALT-A Sample Average 40

42 AMBAC SURPLUS NOTES PRICE HISTORY Non-Callable Surplus Notes 41

43 INSURED RMBS BUYBACKS Buyback Program Realized and Projected Value ($ in millions) Current Par Purchased Principal Cash Flows $1,196 $593 Projected future instrinsic and insurance payments Owned unpaid claims 15% of total* Key element of asset liability management strategy $1.4 billion total fair value* 21% of investment portfolio* Ambac maintains pricing and execution discipline Execute at accretive prices under a range of expected claim payout scenarios Invested $75 million cash in insured RMBS buybacks during 1Q 2014 Cash Invested $901 Total Cash Received to Date $1,574 $2,621 $2,690 * As of March 31,

44 SPECIAL SERVICING Improving collateral performance at the loan level 3 Special Servicers 54 RMBS transactions Direct contractual relationships: Ambac is the customer Active loss mitigation: loan modifications, foreclosure management $4.5 billion net par ~29% of insured RMBS portfolio High transparency Direct communication Detailed reporting Active process: defined goals, measurable results Reduced defaults and severities 43

45 LEGACY SERVICERS AND TRANSFERS Legacy servicers Where necessary, enforce our rights to inspect and to receive information Data driven analysis of performance Communicate and reinforce best practices Servicing transfers Active enforcement of Ambac s rights and remedies Negotiate voluntary agreements where possible 44

46 PARALLEL STRATEGIC PRIORITIES GROWTH AND DIVERSIFICATION INITIATIVES 45

47 GROWTH AND DIVERSIFICATION INITIATIVES Credit Risk Asset Liability Management Asset Servicing Opportunities Asset Management Mortgage Insurance Financial Guarantee Insurance Specialty Insurance Run-off Portfolio Management Asset Servicing Opportunistic Situations Public Finance Consumer Finance Structured Finance 46

48 FINANCIAL OVERVIEW 47

49 GAAP INCOME STATEMENT HIGHLIGHTS ($ in millions, except per share data) Successor Ambac Three Months Ended March 31, 2014 Predecessor Ambac Three Months Ended March 31, 2013 Better (Worse)* Net premiums earned $82.5 $100.3 $(17.8) Net investment income (13.7) Net realized investment (losses) gains and OTTI (40.2) Net change in the fair value of credit derivatives (5.4) Derivative product revenues (53.8) (0.6) (53.2) (Loss) income on variable interest entities (5.5) 38.3 (43.8) Loss and loss (benefit) expense (140.0) (51.1) 88.9 Insurance intangible amortization (31.7) Net operating expenses Interest expense (9.1) Reorganization, including Fresh Start items Net income (loss) (attributable to common shareholders) $155.9 $282.3 $(126.4) Net income (loss) per diluted share $3.31 $0.93 NM Operating Earnings (loss)** $176.6 $297.4 $(120.8) Operating Earnings (loss) per diluted share $3.75 $0.98 NM * NM = not meaningful due to Fresh Start Accounting ** Operating earnings is a non-gaap measure. Refer to Appendix for a reconciliation of the most directly comparable financial measures calculated in accordance with GAAP 48

50 EARNED PREMIUMS ($ in millions) Successor Ambac Three Months Ended March 31, 2014 Predecessor Ambac Three Months Ended March 31, 2013 Better (Worse) Public Finance $27.3 $36.1 $(8.8) Structured Finance (5.3) International Finance Total normal premiums earned (13.5) Accelerated earnings (4.3) Total net premiums earned $82.5 $100.3 $(17.8) 49

51 INSTALLMENT PREMIUM RUNOFF* $ in millions $120 $100 $80 $60 $40 AUK ACP AAC $20 $0 *Represents management's estimate of fees on credit derivative contracts and future installment premium collections net of reinsurance. Actual premium collections may differ from estimated because borrowers may have the right to call or terminate a transaction or the guaranteed obligation may be subject to prepayment. Estimated net future installments exclude amounts eliminated as a result of consolidating variable interest entities. 50

52 CREDIT DERIVATIVES ($ in millions) Successor Ambac Three Months Ended March 31, 2014 Predecessor Ambac Three Months Ended March 31, 2013 Better (Worse) Notional at period end $2,491.1 $10,204.7 $7,713.6 Net change in fair market value of credit derivatives $7.4 $12.8 $(5.4) Realized gains and other settlements (1.7) Unrealized gains (3.7) Credit impairment on credit derivatives at period end $19.2 $42.1 $22.9 Fair market value of credit derivatives at period end $(87.7) $(203.3) $

53 NET LOSSES INCURRED BY BOND CATEGORY $ in millions $ $ $ (16) $(50) (51) $(100) (103) (83) $(150) (156) (140) $(200) RMBS Student Loans Domestic Public Finance Ambac UK Other Credits Loss expenses (including Ambac UK) Total 1Q Q

54 LOSS AND LOSS EXPENSE RESERVES BY BOND CATEGORY* $ in millions $6,000 $5,000 5,314 5,470 $4,000 $3,000 3,211 3,312 $2,000 $1,000 $ RMBS Student Loans Domestic Public Finance Ambac UK Other Credits Loss expenses (including Ambac UK) As of 3/31/14 As of 12/31/13 Total *Loss and loss expense reserves are gross of reinsurance, net of subrogation recoveries and include $4.0 billion and $3.9 billion of unpaid segregated account policy claims as of 3/31/14 and 12/31/13, respectively. 53

55 CLAIMS RECORDED* BY QUARTER VS. SUBROGATION** $ in millions $600 $500 $400 $300 $200 $100 $- RMBS Claims Recorded - Total Other RMBS Subrogation Received - Total $ in millions $400 in millions $120 $300 $100 $80 $200 $60 $100 $40 $20 $- $- RMBS Claims Recorded - First Liens Other RMBS Subrogation Received - First Liens RMBS Claims Recorded - Second Liens Other RMBS Subrogation Received - Second Liens * Claims recorded include (i) claims paid and (ii) changes to claims presented and unpresented through the balance sheet date for policies which were allocated to the Segregated Account. ** Excess spread, recoveries of past claims paid 54

56 ESTIMATED FUTURE GROSS RMBS CLAIMS PRESENTED VS. SUBROGATION 2014 AFTER 2034 $ in millions $800 $600 $400 $200 $- $ in millions $400 $300 $200 $100 $- Estimated Future Gross RMBS Claims Presented - Total Estimated Future RMBS Subrogation - Total $ in millions $500 $400 $300 $200 $100 $- Estimated Future Gross RMBS Claims Presented - First Liens Estimated Future RMBS Subrogation - First Liens Estimated Future Gross RMBS Claims Presented - Second Liens Estimated Future RMBS Subrogation - Second Liens 55

57 MANAGING OPERATING EXPENSES $ in millions Historical Operating and Reorganization Costs Cash Compensation $140 $300 $120 $250 Legal / Consulting / Reorganization Items $100 $200 Other Ambac Assurance noncompensation L e f t $80 $60 $40 $150 $100 Other Compensation Other Ambac Financial Group, Inc. noncompensation Former subsidiary A x i s $20 $50 Total Operating Expenses excluding Reorganization Costs R i g h t $ Q13 1Q14 $0 Total Operating Expenses and Reorganization Costs A x i s 56

58 INTEREST EXPENSE Carrying Value Interest Expense ($ in millions) Face Value 3/31/14 12/31/13 Successor Ambac Three Months Ended March 31, 2014 Predecessor Ambac Three Months Ended March 31, 2013 Better (Worse) Ambac Assurance Corporation 5.1% surplus notes, general account, due % surplus notes, segregated account, due % junior surplus notes, segregated account, due 2020 Ambac Assurance longterm debt $ 1,210.8 $ $ $29.9 $20.5 $(9.4) (0.3) (0.2) $ 1,291.8 $ $ $ 31.9 $ 22.0 $(9.9) Financial Services Investment agreements $ $ $ $ 0.4 $ 1.0 $ 0.6 Secured Borrowing Total Interest Expense $ 32.3 $ 23.2 $(9.1) Note: Ambac Assurance and the Segregated Account have not paid any interest on surplus notes since their issuance. 57

59 NET OPERATING LOSS CARRY-FORWARD (NOL) NOL as of 3/31/14 NOL Type ($ in billions) Consolidated AFG AAC AUK Ordinary NOL $5.5 $1.4 $3.8 $0.3 Capital NOL $0.6 - $0.6 Post Determination Date (Free) NOL $0.1 - $0.1 NOL Tolling AAC NOL includes $149 million Free NOLs available before tolling applies* After using Free NOLs, AAC will pay AFG for usage of up to $3.65 billion of NOLs Total potential amount of tolling payments $251 million Net of $15 million bankruptcy-related credit NOL Usage Tier Allocated AAC NOL Amount Applicable Percentage A The first $0.479 billion 15% B The next $1.057 billion after NOL Usage Tier A 40% C The next $1.057 billion after NOL Usage Tier B 10% D The next $1.057 billion after NOL Usage Tier C 15% *Subject to change based on future taxable income / losses at AAC and subsidiaries. 58

60 CONCLUSION 59

61 CONCLUSION Parallel strategic priorities to create long-term shareholder value Value creation initiatives for existing operations Representations and Warranties Commutations and Restructurings Insured Buybacks Servicer Intervention Growth and diversification initiatives Acquisitions Development Opportunities Continue progress in 2014 and beyond 60

62 APPENDIX 61

63 OPERATING EARNINGS* ($ in millions, except per share data) Successor Ambac Three Months Ended March 31, 2014 Predecessor Ambac Three Months Ended March 31, 2013 Better (Worse) $ Amount Per Diluted Share $ Amount Per Diluted Share $ Amount Net income (loss) attributable to common shareholders $155.9 $3.31 $282.3 $0.93 $(126.4) Adjustments: Non-credit impairment fair value loss on credit derivatives (4.2) (0.09) (5.9) (0.02) 1.7 Effect of consolidating financial guarantee VIEs (27.0) (0.09) 27.3 Insurance intangible expense Foreign exchange (gain) loss from re-measurement of premium receivables and loss and loss expense reserves (1.7) (0.04) (19.6) Fair value (gain) loss on derivatives from Ambac CVA (5.4) (0.11) (35.5) Operating Earnings $176.6 $3.75 $297.4 $0.98 $(120.8) *Non-GAAP Financial Measures. See disclosure in Ambac s March 31, 2014 Form 10-Q. 62

64 ADJUSTED BOOK VALUE* ($ in millions, except per share data) Successor Ambac March 31, 2014 Successor Ambac December 31, 2013 Total Ambac Financial Group, Inc. stockholders equity $953.2 $703.0 Adjustments: Non-credit impairment fair value losses on credit derivatives Effect of consolidating financial guarantee VIEs (373.4) (372.7) Insurance intangible asset and goodwill (2,084.6) (2,112.5) Ambac CVA on derivative product liabilities (excluding credit derivatives) (53.8) (48.4) Net unearned premiums in excess of expected losses 1, ,435.2 Net unrealized investment (gains) losses in AOCI (46.8) 41.9 Adjusted Book Value $(187.2) $(280.7) Adjusted Book Value per share $(4.16) $(6.24) *Non-GAAP Financial Measures. See disclosure in Ambac s March 31, 2014 Form 10-Q. 63

65 GAAP FINANCIAL OVERVIEW BALANCE SHEET ($ in millions) As of March 31, 2014 As of December 31, 2013 Investments $ 6,749 $ 6,524 Premium receivables 1,418 1,453 Reinsurance recoverable on losses Deferred ceded premium Subrogation recoverable Derivative assets Insurance intangible asset and goodwill 2,085 2,112 VIE assets 15,832 15,989 Other assets Total assets $ 27,114 $ 27,092 Loss and loss expense reserves $ 5,826 $ 5,969 Unearned premium reserves 2,168 2,256 Long-term debt and investment agreements 1,332 1,322 Derivative liabilities VIE liabilities 15,727 15,873 Other liabilities Total liabilities $ 25,885 $ 26,114 Total stockholder s equity $ 1,229 $ 978 Total liabilities and stockholders equity $ 27,114 $ 27,092 64

66 CHANGES TO AMBAC ASSURANCE STATUTORY CAPITAL* Increase (Decrease) ($ in millions) 1Q 2014 Income Statement 1Q 2014 Changes in Surplus Beginning surplus to policyholders $ 840 Net premiums earned $ 61 Investment income 103 Underwriting expenses (20) Insurance losses and LAE 65 Intercompany loans and guarantees of subsidiary liabilities (41) Net realized gains and other income 17 Net income $ Contingency reserves contribution (21) Non-income statement changes to AAC investments 4 Ending surplus to policyholders $ 1,008 *Reflects combined surplus of both the General Account and the Segregated Account 65

67 GAAP VS. STATUTORY ACCOUNTING DIFFERENCES Invested Assets Surplus Notes Surplus Note Interest Credit Derivatives Premium Receivables US GAAP Basis Investments carried at fair value Consolidation of subsidiaries and VIEs Reported as long-term debt Carried at par less unamortized discount (set to fair value at Fresh Start Date) Accrual basis Carried at fair value Present value of future contractual premiums due over the life of the policy, discounted at the riskfree rate RMBS uses future expected premiums due US Statutory Investments carried primarily at book value Subsidiaries carried under equity method of accounting, if audited Loans to affiliates carried at current value, net of impairments VIEs are not a Statutory concept Reported as surplus Carried at par value per an OCI prescribed practice Interest accrued only upon OCI s approval to pay Liability recorded when expected losses for such contracts exceed financial resources of the subsidiary Established only for installment premiums related to the period covered through the reporting date Premium Earnings Recognized based on a constant rate derived by daily principal exposure outstanding On upfront paying policies, recognized based on expiration of debt service of insured exposure On installment paying policies, recognized in income pro-rata over the installment period covered 66

68 GAAP VS. STATUTORY ACCOUNTING COMPARISON OF LOSS RESERVING METHODOLOGIES US GAAP Basis US Statutory Timing of Recognition of Loss Reserves Measurement of Loss Reserves When expected losses exceed related unearned premium reserves Present value of probability weighted expected losses and subrogation recoverable, less related unearned premium reserves Case Basis Reserves upon failure of issuer to pay scheduled principal or interest Contingency Reserves for non-defaulted general account policies (can release with OCI approval) Present value of best estimate of expected losses and subrogation recoverable Discount Rate Risk free rate of return Rate of return on invested assets (determined annually) subject to OCI prescribed practices (currently at 5.1%) Credit Derivative and other subsidiary Impairments Balance Sheet Presentation N/A record mark-to-market gains or losses Balance Sheet grossed up for assets (policy level net recoveries) and liabilities (policy level net outflows) Reinsurance recoverables/payables reported separately Inclusive of loss adjustment expenses When expected losses from such contracts exceed the financial resources of the subsidiary Measured as the present value of best estimate of expected losses, discounted at the discount rate above, less the financial resources of the subsidiary Reserves reported as a net liability reduced for remediation and reinsurance Loss adjustment expenses reported separately 67

69 OPERATING LEVERAGE Deleveraging of book Claims Paying Ratio 70 65: :1 52:1 57:1 58:1 54: :1 38: /31/ /31/ /31/ /31/ /31/ /31/ /31/2013 3/31/

70 RISK ADVERSE CREDIT CLASSIFICATIONS* Classification CLASS I SURVEY LIST CLASS IA CLASS II CLASS III CLASS IV CLASS V Description Fully Performing Meets Ambac Criteria with Remote Probability of Claim Investigation of Specific Condition or Weakness Underway Potential Problem with Risks to be Dimensioned Substandard Requiring Intervention Doubtful with Clear Potential for Loss Imminent Default or Defaulted Fully Reserved *See Ambac s 2013 Form 10-K page 125 for further description of risk classifications 69

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