Company Quick10K Filing
Quick10K
Ambac
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$18.89 45 $857
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-06-03 Shareholder Vote
8-K 2019-05-09 Earnings, Exhibits
8-K 2019-02-28 Earnings, Exhibits
8-K 2018-11-07 Earnings, Exhibits
8-K 2018-10-11 Other Events
8-K 2018-08-30 Regulation FD, Exhibits
8-K 2018-08-08 Earnings, Exhibits
8-K 2018-08-03 Regulation FD, Exhibits
8-K 2018-07-25 Earnings, Regulation FD, Exhibits
8-K 2018-07-16 Regulation FD
8-K 2018-07-03 Regulation FD, Exhibits
8-K 2018-06-22 Enter Agreement, Regulation FD, Exhibits
8-K 2018-05-18 Shareholder Vote
8-K 2018-05-08 Earnings, Exhibits
8-K 2018-02-12 Enter Agreement, Off-BS Arrangement, Regulation FD, Exhibits
8-K 2018-02-02 Earnings, Regulation FD, Exhibits
8-K 2018-01-11 Regulation FD, Exhibits
DG Dollar General 31,870
EAF GrafTech 3,510
REZI Resideo Technologies 2,780
WMS Advanced Drainage Systems 1,590
CPLG Corepoint Lodging 784
NTLA Intellia Therapeutics 739
NAK Northern Dynasty Minerals 146
VRC Vanjia 0
DJO DJO Finance 0
ARDM Aradigm 0
AMBC 2019-03-31
Part I. Financial Information
Item 1. Unaudited Financial Statements of Ambac Financial Group, Inc. and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures.
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities - No Matters Require Disclosure.
Item 5. Other Information - No Matters Require Disclosure.
Item 6. Exhibits
EX-10.1 a02-017ambcex101x1q191.htm
EX-10.2 a02-017ambcex102x1q191.htm
EX-10.3 a02-017ambcex103x1q191.htm
EX-10.4 a02-017ambcex104x1q191.htm
EX-10.5 a02-017ambcex105x1q191.htm
EX-31.1 a02-017ambcex311x1q191.htm
EX-31.2 a02-017ambcex312x1q191.htm
EX-32.1 a02-017ambcex32x1x1q19.htm

Ambac Earnings 2019-03-31

AMBC 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
 
10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
 
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2019
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
 
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-10777
AMBAC FINANCIAL GROUP INC
Exact name of Registrant as specified in its charter)
Delaware
 
133621676
(State of incorporation)
 
(I.R.S. employer identification no.)
 
 
 
One State Street Plaza
New York
NY
 
10004
(Address of principal executive offices)
 
(Zip code)
212-658-7470
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act): (Check one):
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨    No  x
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes  x    No  ¨
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol
 
Name of each exchange on which registered
Common stock, par value $0.01 per share
 
AMBC
 
NASDAQ
As of May 6, 2019, 45,520,541 shares of common stock, par value $0.01 per share, of the Registrant were outstanding.




AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Item Number
Page
 
Item Number
Page
PART I. FINANCIAL INFORMATION
 
 
PART I (CONTINUED)
 
1
Unaudited Consolidated Financial Statements of Ambac Financial Group, Inc. and Subsidiaries
 
 
3
 
 
4
 
 
 
 
 
 
 
PART II. OTHER INFORMATION
 
 
 
1
 
 
1A
2
 
2
 
 
3
 
 
6
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I.    FINANCIAL INFORMATION
Item 1.     Unaudited Financial Statements of Ambac Financial Group, Inc. and Subsidiaries
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
 
March 31,
 
December 31,
(Dollars in thousands, except share data) (March 31, 2019 (Unaudited))
2019
 
2018
Assets:
 
 
 
Investments:
 
 
 
Fixed income securities, at fair value (amortized cost of $2,480,532 and $3,020,744)
$
2,619,811

 
$
3,115,675

Fixed income securities pledged as collateral, at fair value (amortized cost of $83,901 and $0)
83,901

 

Short-term investments, at fair value (amortized cost of $908,209 and $430,405)
908,235

 
430,331

Other investments (includes $387,045 and $351,049 at fair value)
428,556

 
391,217

Total investments
4,040,503

 
3,937,223

Cash and cash equivalents
21,840

 
63,089

Restricted cash

 
19,405

Premium receivables
487,397

 
495,391

Reinsurance recoverable on paid and unpaid losses
26,788

 
23,133

Deferred ceded premium
58,868

 
61,134

Subrogation recoverable
1,916,117

 
1,932,960

Derivative assets
76,400

 
59,468

Current taxes
42,830

 
47,040

Insurance intangible asset
689,255

 
718,931

Other assets
90,977

 
137,628

Variable interest entity assets:
 
 
 
Fixed income securities, at fair value
3,128,995

 
2,737,286

Restricted cash
3,254

 
999

Loans, at fair value
4,375,761

 
4,287,664

Derivative assets
59,228

 
66,302

Other assets
4,686

 
1,058

Total assets
$
15,022,899

 
$
14,588,711

Liabilities and Stockholders’ Equity:
 
 
 
Liabilities:
 
 
 
Unearned premiums
$
591,397

 
$
629,971

Loss and loss expense reserves
1,694,163

 
1,826,078

Ceded premiums payable
31,745

 
32,913

Deferred taxes
39,201

 
40,130

Long-term debt
2,929,227

 
2,928,929

Accrued interest payable
391,335

 
375,808

Derivative liabilities
86,534

 
76,699

Other liabilities
71,402

 
63,792

Variable interest entity liabilities:
 
 
 
Accrued interest payable
2,785

 
556

Long-term debt (includes $5,401,992 and $5,268,596 at fair value)
5,737,263

 
5,268,596

Derivative liabilities
1,781,903

 
1,712,062

Other liabilities
56

 
30

Total liabilities
13,357,011

 
12,955,564

Commitments and contingencies (See Note 12)
 
 
 
Stockholders’ equity:
 
 
 
Preferred stock, par value $0.01 per share; 20,000,000 shares authorized shares; issued and outstanding shares—none

 

Common stock, par value $0.01 per share; 130,000,000 shares authorized; issued shares: 45,560,960 and 45,365,170
456

 
454

Additional paid-in capital
223,545

 
219,429

Accumulated other comprehensive income (loss)
22,542

 
(48,715
)
Retained earnings
1,376,244

 
1,421,302

Treasury stock, shares at cost: 40,419 and 28,892
(813
)
 
(473
)
Total Ambac Financial Group, Inc. stockholders’ equity
1,621,974

 
1,591,997

Noncontrolling interest
43,914

 
41,150

Total stockholders’ equity
1,665,888

 
1,633,147

Total liabilities and stockholders’ equity
$
15,022,899

 
$
14,588,711

See accompanying Notes to Unaudited Consolidated Financial Statements


| Ambac Financial Group, Inc. 1 2019 First Quarter FORM 10-Q |



AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Total Comprehensive Income (Loss) (Unaudited)
 
 
Three Months Ended March 31,
(Dollars in thousands, except share data)
 
2019
 
2018
Revenues:
 
 
 
 
Net premiums earned
 
$
27,758

 
$
30,883

Net investment income:
 
 
 
 
Securities available-for-sale and short-term
 
46,552

 
110,551

Other investments
 
8,290

 
(311
)
Total net investment income
 
54,842

 
110,240

Other-than-temporary impairment losses:
 
 
 
 
Total other-than-temporary impairment losses
 
(29
)
 
(341
)
Portion of other-than-temporary impairment recognized in other comprehensive income
 

 
42

Net other-than-temporary impairment losses recognized in earnings
 
(29
)
 
(299
)
Net realized investment gains (losses)
 
17,233

 
4,862

Net gains (losses) on derivative contracts
 
(16,159
)
 
25,191

Net realized gains (losses) on extinguishment of debt
 

 
3,115

Other income (loss)
 
802

 
(509
)
Income (loss) on variable interest entities
 
15,921

 
574

Total revenues
 
100,368

 
174,057

Expenses:
 
 
 
 
Losses and loss expenses (benefit)
 
12,407

 
(247,395
)
Insurance intangible amortization
 
36,278

 
28,636

Operating expenses
 
24,915

 
36,434

Interest expense
 
67,978

 
48,073

Total expenses
 
141,578

 
(134,252
)
Pre-tax income (loss)
 
(41,210
)
 
308,309

Provision for income taxes
 
1,991

 
2,605

Net income (loss) attributable to common stockholders
 
$
(43,201
)
 
$
305,704

Other comprehensive income (loss), after tax:
 
 
 
 
Net income (loss)
 
$
(43,201
)
 
$
305,704

Unrealized gains (losses) on securities, net of income tax provision (benefit) of $(598) and $(1,708)
 
56,163

 
122,304

Gains (losses) on foreign currency translation, net of income tax provision (benefit) of $0 and $0
 
14,571

 
32,056

Credit risk changes of fair value option liabilities, net of income tax provision (benefit) of $32 and $230
 
156

 
1,114

Changes to postretirement benefit, net of income tax provision (benefit) of $0 and $0
 
367

 
(859
)
Total other comprehensive income, net of income tax
 
71,257

 
154,615

Total comprehensive income attributable to common stockholders
 
$
28,056

 
$
460,319

Net income per share attributable to common stockholders:
 
 
 
 
Basic
 
$
(0.94
)
 
$
6.72

Diluted
 
$
(0.94
)
 
$
6.70

Weighted average number of common shares outstanding:
 
 
 
 
Basic
 
45,832,297

 
45,471,083

Diluted
 
45,832,297

 
45,653,471

See accompanying Notes to Unaudited Consolidated Financial Statements


| Ambac Financial Group, Inc. 2 2019 First Quarter FORM 10-Q |



AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity (Unaudited)
 
 
 
Ambac Financial Group, Inc.
 
 
(Dollars in thousands)
Total
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Preferred
Stock
 
Common
Stock
 
Additional Paid-in
Capital
 
Common
Stock Held
in Treasury,
at Cost
 
Noncontrolling
Interest
Balance at January 1, 2019
$
1,633,147

 
$
1,421,302

 
$
(48,715
)
 
$

 
$
454

 
$
219,429

 
$
(473
)
 
$
41,150

Total comprehensive income
28,056

 
(43,201
)
 
71,257

 

 

 

 

 

Stock-based compensation
4,116

 

 

 

 

 
4,116

 

 

Cost of shares (acquired) issued under equity plan
(2,197
)
 
(1,857
)
 

 

 

 

 
(340
)
 

Issuance of common stock
2

 

 

 

 
2

 

 

 

Re-issuance of Ambac Assurance auction market preferred shares
2,764

 

 

 

 

 

 

 
2,764

Balance at March 31, 2019
$
1,665,888

 
$
1,376,244

 
$
22,542

 
$

 
$
456

 
$
223,545

 
$
(813
)
 
$
43,914

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2018
$
1,645,258

 
$
1,233,845

 
$
(52,239
)
 
$

 
$
453

 
$
199,560

 
$
(471
)
 
$
264,110

Total comprehensive income
460,319

 
305,704

 
154,615

 

 

 

 

 

Adjustment to initially apply ASU 2016-01

 
2,900

 
(2,900
)
 
 
 
 
 
 
 
 
 
 
Stock-based compensation
4,612

 

 

 

 

 
4,612

 

 

Cost of shares (acquired) issued under equity plan
(1,025
)
 
(985
)
 

 

 

 

 
(40
)
 

Issuance of common stock
1

 

 

 

 
1

 

 

 

Balance at March 31, 2018
$
2,109,165

 
$
1,541,464

 
$
99,476

 
$

 
$
454

 
$
204,172

 
$
(511
)
 
$
264,110

See accompanying Notes to Unaudited Consolidated Financial Statements

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    


| Ambac Financial Group, Inc. 3 2019 First Quarter FORM 10-Q |



AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
 
 
Three Months Ended March 31,
(Dollars in thousands)
 
2019
 
2018
Cash flows from operating activities:
 
 
 
 
Net income (loss)
 
$
(43,201
)
 
$
305,704

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
 
Depreciation and amortization
 
159

 
181

Amortization of bond premium and discount
 
(11,846
)
 
(77,427
)
Share-based compensation
 
4,116

 
4,612

Deferred income taxes
 
(935
)
 
1,145

Current income taxes
 
4,232

 
(8,439
)
Unearned premiums, net
 
(36,289
)
 
(18,329
)
Losses and loss expenses, net
 
(118,801
)
 
(1,371,840
)
Ceded premiums payable
 
(1,168
)
 
(1,425
)
Premium receivables
 
7,979

 
5,601

Accrued interest payable
 
28,971

 
(63,126
)
Amortization of insurance intangible assets
 
36,278

 
28,636

Net mark-to-market (gains) losses
 
(382
)
 
452

Net realized investment gains
 
(17,233
)
 
(4,862
)
Other-than-temporary impairment charges
 
29

 
299

(Gain) loss on extinguishment of debt
 

 
(3,115
)
Variable interest entity activities
 
(15,921
)
 
(574
)
Derivative assets and liabilities
 
12,305

 
438

Other, net
 
56,579

 
10,507

Net cash used in operating activities
 
(95,128
)
 
(1,191,562
)
Cash flows from investing activities:
 
 
 
 
Proceeds from sales of bonds
 
641,032

 
296,078

Proceeds from matured bonds
 
34,681

 
103,995

Purchases of bonds
 
(182,556
)
 
(77,469
)
Proceeds from sales of other invested assets
 
1,749

 
31,327

Purchases of other invested assets
 
(28,559
)
 
(11,758
)
Change in short-term investments
 
(477,910
)
 
236,262

Change in cash collateral receivable
 
56,771

 
(979
)
Proceeds from paydowns of consolidated VIE assets
 
67,172

 
79,917

Other, net
 
(225
)
 
(377
)
Net cash provided by investing activities
 
112,155

 
656,996

Cash flows from financing activities:
 
 
 
 
Net proceeds from issuance of Tier 2 notes
 

 
240,000

Paydowns of Ambac Note
 
(13,146
)
 

Paydowns of a secured borrowing
 

 
(8,797
)
Payments for extinguishment of surplus notes
 

 
(191,258
)
Payments for debt issuance costs
 

 
(9,221
)
Issuance of auction market preferred shares of Ambac Assurance
 
2,764

 

Tax payments related to shares withheld for share-based compensation plans
 
(2,198
)
 
(1,025
)
Payments of consolidated VIE liabilities
 
(63,022
)
 
(79,917
)
Net cash used in financing activities
 
(75,602
)
 
(50,218
)
Effect of foreign exchange on cash, cash equivalents and restricted cash
 
176

 
(278
)
Net cash flow
 
(58,399
)
 
(585,062
)
Cash, cash equivalents, and restricted cash at beginning of period
 
83,493

 
624,681

Cash, cash equivalents, and restricted cash at end of period
 
$
25,094

 
$
39,619

See accompanying Notes to Unaudited Consolidated Financial Statements


| Ambac Financial Group, Inc. 4 2019 First Quarter FORM 10-Q |

Table of Contents
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Amounts)


1. BACKGROUND AND BUSINESS DESCRIPTION
The following description provides an update of Note 1. Background and Business Description in the Notes to Consolidated Financial Statements included Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 2018, and should be read in conjunction with the complete descriptions provided in the Form 10-K. Capitalized terms used but not defined herein and in the other footnotes to the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q shall have the meanings ascribed thereto in the Company’s Annual Report on Form 10-K for the year ended December 2018.
Ambac Financial Group, Inc. (“Ambac” or the “Company”), headquartered in New York City, is a financial services holding company incorporated in the state of Delaware on April 29, 1991.
Ambac provides financial guarantee insurance policies through its principal operating subsidiary, Ambac Assurance Corporation (“Ambac Assurance" or "AAC") and its wholly owned subsidiary, Ambac Assurance UK Limited (“Ambac UK”). Insurance policies issued by Ambac Assurance and Ambac UK generally guarantee payment when due of the principal and interest on the obligations guaranteed. Ambac Assurance also has another wholly-owned subsidiary, Everspan Financial Guarantee Corp., which has been in runoff since its acquisition in 1997. Management reviews financial information, allocates resources and measures financial performance on a consolidated basis. As a result, the Company has a single reportable segment.
Strategies to Enhance Shareholder Value
Ambac’s primary goal is to maximize shareholder value through executing the following key strategies:
Active runoff of Ambac Assurance and its subsidiaries through transaction terminations, policy commutations, reinsurance, settlements and restructurings, with a focus on our watch list credits and known and potential future adversely classified credits, that we believe will improve our risk profile, and maximizing the risk-adjusted return on invested assets;
Ongoing rationalization of Ambac's and its subsidiaries' capital and liability structures;
Loss recovery through active litigation management and exercise of contractual and legal rights;
Ongoing review of the effectiveness and efficiency of Ambac's operating platform; and
Evaluation of opportunities in certain business sectors that meet acceptable criteria that will generate long-term stockholder value with attractive risk-adjusted returns.
With respect to our new business strategy, we have identified certain business sectors adjacent to Ambac's core business in which opportunities are being evaluated. We are actively evaluating strategic opportunities in credit, insurance, asset management and other financial services that we believe are synergistic to Ambac and would leverage our core competencies. We are being measured and disciplined in our approach as we consider and pursue
 
opportunities to deploy our capital with the goal of creating sustainable long-term shareholder value. Although we are exploring new business opportunities for Ambac, no assurance can be given that we will be able to identify or execute a suitable transaction and/or obtain the financial and other resources that may be required to finance the acquisition or development of any new businesses or assets.
The execution of Ambac’s objective to increase the value of its investment in Ambac Assurance is subject to the rights of the Office of the Commissioner of Insurance for the State of Wisconsin (“OCI”) under the Stipulation and Order, which requires OCI to approve certain actions taken by or in respect of Ambac Assurance, as well as restrictions in the Settlement Agreement and in the indenture for the Tier 2 Notes. Opportunities for remediating losses on poorly performing insured transactions also depend on market conditions, including the perception of Ambac Assurance’s and its subsidiaries' creditworthiness, the structure of the underlying risk and associated policy as well as other counterparty specific factors. Decisions by OCI 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. Due to these factors, as well as uncertainties relating to the ability of Ambac Assurance to deliver value to Ambac, the value of our securities remains speculative.
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The Company has disclosed its significant accounting policies in Note 2. Basis of Presentation and Significant Accounting Policies in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. The following significant accounting policies provide an update to those included in the Company’s Annual Report on Form 10-K.
Consolidation:
The consolidated financial statements include the accounts of Ambac and all other entities in which Ambac (directly or through its subsidiaries) has a controlling financial interest, including variable interest entities (“VIEs”) for which Ambac or an Ambac subsidiary is deemed the primary beneficiary in accordance with the Consolidation Topic of the Accounting Standards Codification ("ASC"). All significant intercompany balances have been eliminated. The usual condition for a controlling financial interest is ownership of a majority of the voting interests of an entity. However, a controlling financial interest may also exist in entities, such as VIEs, through arrangements that do not involve controlling voting interests. A VIE is an entity: a) that lacks enough equity investment at risk to permit the entity to finance its activities without additional subordinated financial support from other parties; or b) where the group of equity holders does not have: (1) the power, through voting rights or similar rights, to direct the activities of an entity that most significantly impact the entity’s economic performance; (2) the obligation to absorb the entity’s expected losses; or (3) the right to receive the entity’s expected residual returns. The determination of whether a variable interest holder is the primary beneficiary involves performing a qualitative analysis


| Ambac Financial Group, Inc. 5 2019 First Quarter FORM 10-Q |

Table of Contents
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Amounts)

of the VIE that includes, among other factors, its capital structure, contractual terms including the rights of each variable interest holder, the activities of the VIE, whether the variable interest holder has the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, whether the variable interest holder has the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE, related party relationships and the design of the VIE. An entity that is deemed the primary beneficiary of a VIE is required to consolidate the VIE. See Note 3. Variable Interest Entities, for a detailed discussion of Ambac’s involvement in VIEs, Ambac’s methodology for determining whether Ambac is required to consolidate a VIE and the effects of VIEs being consolidated and deconsolidated.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial reporting and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by GAAP for annual periods. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2018. The accompanying consolidated financial statements have not been audited by an independent registered public accounting firm in accordance with the standards of the Public Company Accounting Oversight Board (U.S.), but in the opinion of management such financial statements include all adjustments necessary for the fair presentation of the Company’s consolidated financial position and results of operations. The results of operations for the three months ended March 31, 2019 may not be indicative of the results that may be expected for the year ending December 31, 2019. The December 31, 2018 consolidated balance sheet was derived from audited financial statements.
The election to use the fair value option is made on an instrument by instrument based under ASC 825-10. At December 31, 2018, all VIE invested assets and long-term debt were reported under the fair value option as disclosed in the notes to the consolidated financial statements included in the Annual Report on Form 10-K. During the three months ended March 31, 2019, Ambac consolidated a new VIE that holds investments in fixed income securities that management has classified as available-for-sale under the Investments - Debt Securities Topic of the ASC. Long-term debt of the newly consolidated VIE is carried at par value less
 
unamortized discount. See Note 3. Variable Interest Entities, for further discussion of the accounting elections used and the presentation of VIEs in these unaudited consolidated financial statements.
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. As additional information becomes available or actual amounts become determinable, the recorded estimates are revised and reflected in operating results.
Certain amounts in the condensed consolidated financial statements and associated notes may not add due to rounding.
Foreign Currency:
Financial statement accounts expressed in foreign currencies are translated into U.S. dollars in accordance with the Foreign Currency Matters Topic of the ASC. The functional currencies of Ambac's subsidiaries are the local currencies of the country where the respective subsidiaries are based, which are also the primary operating environments in which the subsidiaries operate.
Foreign currency translation: Functional currency assets and liabilities of Ambac’s foreign subsidiaries are translated into U.S. dollars using exchange rates in effect at the balance sheet dates and the related translation adjustments, net of deferred taxes, are included as a component of Accumulated Other Comprehensive Income in Stockholders' Equity. Functional currency operating results of foreign subsidiaries are translated using average exchange rates.
Foreign currency transactions: The impact of non-functional currency transactions and the remeasurement of non-functional currency assets and liabilities into the respective subsidiaries' functional currency (collectively "foreign currency transactions gains/(losses)") are $1,960 and $5,014 for the three months ended March 31, 2019 and 2018, of which $5,583 and $11,012 relate to the remeasurement of loss reserves, classified in Loss and loss expenses, respectively. Foreign currency transactions gains/(losses) are primarily the result of remeasuring Ambac UK's assets and liabilities denominated in currencies other than its functional currency, primarily the U.S. dollar and the Euro.


| Ambac Financial Group, Inc. 6 2019 First Quarter FORM 10-Q |

Table of Contents
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Amounts)

Supplemental Disclosure of Cash Flow Information
 
Three Months Ended March 31,
 
 
2019
 
2018
Cash paid during the period for:
 
 
 
 
Income taxes
 
$
852