Abbe F. Goldstein - Managing Director, Head of Investor Relations and Corporate Communications Diana N. Adams - President and Chief Executive Officer David Trick - Senior Managing Director, Chief Financial Officer and Treasurer.

Andrew Gadlin - Odin Capital Group Ben Clifford - Nomura Sean Lobo - Vulcan Capital.

Good day, ladies and gentlemen. And welcome to the Ambac Third Quarter 2014 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions) As a reminder, this conference is being recorded.

I would now turn the call over to your host, Abbe Goldstein, Head of Investor Relations and Corporate Communications. Please go ahead..

Thank you, Stephanie. Good morning. And thank you for joining today’s conference call to discuss Ambac Financial Group’s third quarter 2014 financial results.

Before we get started, I'd like to remind you that today’s presentation may contain forward-looking statements, which are based on management’s current expectations and are subject to uncertainty and changes and circumstances. Any forward-looking statements are not guarantees of future performance or events.

Actual performance and events may differ possibly materially from such forward-looking statements.

Factors that could cause this include the factors described in our 2013 Form 10-K and in our quarterly report on Form 10-Q for the three and nine months ended September 30, 2014 under Management’s Discussion and Analysis of Financial Condition and Results of Operations and under Risk Factors.

Ambac is not under any obligation and expressly disclaims any obligation to update any forward-looking statements whether as a result of new information, future events or otherwise. Today’s presentation contains non-GAAP financial measures.

Reconciliations of such measures to the most comparable GAAP figures are included in our earnings press release, which is available on our website at ambac.com. Our speakers today are Diana Adams, Ambac’s President and CEO; and David Trick, Ambac’s Senior Managing Director, CFO and Treasurer.

At the conclusion of their prepared remarks, we will open the call to your questions. Please note, we have posted slides on our website to accompany this call. I’d now like to turn the call over to Diana. .

Thank you, Abbe. Good morning, everyone, and thank you for joining today’s call. Results in the third quarter were driven by the ongoing disciplined execution of our strategy. Active management of our insured exposures led to a smaller insured portfolio, a decrease in adversely classified credits and a release of reserves in the third quarter.

Investment income increased driven by our proactive shift in investment portfolio allocations. We continue to actively pursue RMBS representation and warranty recoveries. At the end of the third quarter, we had five ongoing lawsuits with major counterparties and were in direct negotiations with others. Our strategy remains consistent.

We will aggressively litigate these lawsuits and will settle only when we believe we can achieve a better risk adjusted resolution than through continued litigation. This quarter in an effort to increase transparency, we are updating the status summary of our rep and warranty litigations.

We are also introducing information on claims paid to date on all transactions that contribute to our rep and warranty subrogation credit. With respect to buybacks and commutations, we continue to pursue transactions that de-risk Ambac Assurance’s portfolio. In the third quarter, we purchased approximately $52 million of Ambac’s insured RMBS.

On the commutation side, as we've said in the past, opportunities are lumpy and in the third quarter we did not close any commutations. The higher pricing environment and concentrated holdings of large blocks of Ambac liabilities causes to lower the probability of commutations in the near term.

Nevertheless, we continue to seek opportunities and are well positioned to execute transactions that maximize the value of Ambac Assurance. On the servicing side, we currently have RMBS collateral underlying $4.5 billion of insured net par serviced by special servicers, which represents 31% of the RMBS book.

We expect to complete additional servicing transfers in the fourth quarter. Additionally, we are also working with our student loans servicers to implement special servicing strategies, along the lines of what's been successful in the RMBS sector to reduce student loan delinquencies and increase recoveries.

In addition to these value creation initiatives, which we discussed on all our prior calls, we are also considering the possibility of entering into transactions that monetize assets and transactions that restructure or exchange outstanding debt and insurance obligations.

As market conditions and our own portfolio evolve, we continuously assess opportunities, both traditional and new to maximize the value of Ambac Assurance. I’ll now turn to Puerto Rico where we are engaged in constructive discussions with the Commonwealth, particularly as it relates to the Puerto Rico Highway and Transportation Authority, or HTA.

Legislation was recently introduced with a purpose of providing funding to operate Puerto Rico's highways and to put the HTA on a path towards long-term fiscal stability. Ambac has supported the Commonwealth’s efforts to address HTAs financial, operating and capital needs and we believe that the purposed legislation advances these goals.

Nevertheless, the situation in Puerto Rico remains dynamic with ongoing financial pressures and uncertainties. We believe our reserves are reasonably sized given the current situation, the overall size of our exposure to Puerto Rico, the interrelated nature of the credits, and the sluggishness of the economy.

We incorporate these considerations as well as a variety of positive outcomes in developing our reserves. Detroit's bankruptcy exit plan was approved last Friday and Ambac settlement of both our unlimited and limited tax GO exposures was finalized. The unlimited tax GO settlement represents 74% of Ambac’s allowed claims.

The limited tax GO settlement represents 44% of Ambac’s allowed claims and has two components. 34% is in the form of restructured limited tax GOs and 10% is a share in the city’s long dated limited tax GO B notes issued as part of its exit plan. Ambac continues to pay claims in full of schedule principal and interest on the bonds we insure.

This quarter we have made a correction to our calculation of adjusted book value, a non-GAAP measure. This correction increased our ABV at year end 2013 by $231 million. As a result, year end adjusted book value was negative $50 million and the third quarter 2014 ABV is negative $65 million.

The correction relates to a single exposure at our subsidiary Ambac UK. The punch transaction was restructured in October, but its restructuring had been expected for some time. The reserve that we booked for this deal in anticipation of the restructuring includes a large amount of foregone future premiums.

These foregone premiums reduced GAAP stockholders equity. Our ABV calculations start with GAAP stockholders equity and make certain adjustments. One adjustment we make is to reduce stockholders equity for premiums that are included in our GAAP numbers, but that we don’t actually expect to realize.

We backed out premiums on this AUK deal even though a large portion of these premiums had already been eliminated from the starting number through the reserving process. So we effectively reduced ABV twice for these foregone future premiums. Importantly, our GAAP stockholders equity was correct for all periods.

Through our reconciliation process we identified this flaw into ABV adjustment and we have now corrected it. The positive revision relates only to this one settlement, no other exposures were impacted. Revisions to ABV from prior periods are included in our operating supplement for the quarter which is posted on our website.

As previously announced, effective on June 12, 2014, the rehabilitator increased the payout ratio of permitted claims of the segregated account from 25% to 45% starting on July 21. Deferred amounts that continue to be due to policyholders will accrue interest generally at an annual rate of 5.1%.

In connection with the increased payout ratio, we will make a catch up payment of 26.67% of the deferred amounts that were outstanding as of July 20, 2014 and the interest thereon. Ambac and the segregated account are also required to redeem a portion of the senior surplus notes.

In October we requested and received approval from the Wisconsin Insurance Commissioner to redeem a portion of the surplus notes a month earlier than initially expected. The early redemption will save us about $1.8 million in interest that would have otherwise been paid to third party.

The catch up payments and redemptions are expected to exceed $1.5 billion in aggregate. On August 28, we closed a private placement which monetized about 80% of the segregated account junior surplus notes held by Ambac for net proceeds of $224 million. We also retained a 20% interest through subordinated owner trust certificates.

The monetization of our junior surplus notes provides the company with a financial flexibility to support our initiatives and enhance shareholder value. Potentially uses of proceeds include growth and diversification through acquisitions that leverage our key competencies, and liability management at Ambac Assurance.

Before I turn the call over to David for our financial review, I would like to address the question we have received from many of you about a share repurchase program. After careful consideration by the board and the management team, we have decided not to implement a share repurchase program at this time.

We continuously analyze the uses of our liquidity in context of our funding needs and relative value opportunities to enhance shareholder value. Separately a share repurchase program could move us closer towards triggering a change of control of Ambac for tax purposes. If triggered, we would lose most of our NOLs.

Therefore, we would need to proceed carefully if we do decide to repurchase shares in the future. I'd now like to turn the call over to David for our financial review..

Thank you, Diana. Net income for the third quarter 2014 was $82.5 million, or $1.77 per diluted share, compared to $231 million, or $4.98 per diluted share in the same period last year.

Operating earnings in the third quarter of 2014 were $142.7 million, or $3.06 per diluted share, compared to $193.4 million, or $4.17 per diluted share in the same period last year.

Net income and operating earnings declined in the third quarter 2014 compared with the third quarter 2013 primarily because of a lower benefit for loss and loss expenses and lower derivative product revenues, partially offset by higher net investment income and lower other than temporary impairment losses.

Net income was also impacted by lower income from VIEs. For the third quarter of 2014, net premiums earned were $64.8 million, as compared to $70.9 million in the third quarter of 2013.

Normal net premiums earned in the third quarter of 2013 were negatively impacted by approximately $13 million of premiums deemed uncollectible primarily in the structured finance sector.

Accelerated premiums for the third quarter 2014 were $9.2 million as compared to $19.7 million in the third quarter of 2013, including negative accelerations of $1.7 million and $0.2 million, respectively. Although the impact of accelerations is down versus prior periods, the deal volumes called in the public finance market has slowed minimally.

Net investment income for the third quarter of 2014 was $83.6 million, as compared to $52.1 million for the same period last year.

Net investment income for the third quarter primarily reflected the growing allocation of the Financial Guarantee investment portfolio towards distressed Ambac insured securities, a higher allocation to corporate obligations and positive cash flow from operations.

These favorable dynamics were partially offset by sales of securities beginning in August and September to fund the $1.5 billion of rehabilitation payments to be made in November and December. Investment income will be negatively impacted in the fourth quarter from thee liquidations.

The gain related to the change in fair value of credit derivatives for the third quarter of 2014 was $7.4 million compared with the gain of $31.2 million for the same period last year.

The change in fair value of credit derivatives for the third quarter 2014 reflected more modest improvement in reference obligation prices and slower runoff of the portfolio than the third quarter 2013.

Credit derivative fees earned continue to decline with the size of the portfolio which was $2 billion as of September 30, 2014 compared to $5.2 billion as of September 30, 2013.

The impact of incorporating the Ambac CVA resulted in losses within the overall change in the fair value of credit derivative liabilities of $0.2 million for the three months ended September 30, 2014 compared to $3.4 million for the three months ended September 30, 2013.

Net losses reported in derivative products revenue for the third quarter were $15.7 million versus a net gain of $12.4 million in the same period last year. Results in derivative products revenue reflected mark-to-market gains or losses in the portfolio caused by changes in interest rates, net of the impact of incorporating the Ambac CVA.

Inclusion of the Ambac CVA in the valuation of financial services derivatives resulted in gains within derivative product revenues of $4.6 million for the third quarter of 2014, compared with losses of $1.1 million for the same period last year.

Income on VIEs for the third quarter 2014 was $9.1 million compared to $55.1 million in the third quarter of 2013. Income on VIEs for the third quarter of 2014 was primarily related to increases in fair value of VIE assets along with a decrease in fair value of certain VIE note liabilities, caused by the slight CVA increase.

Income on VIEs for the third quarter of 2013 was primarily related to the impact of an increase in the Ambac CVA on the fair value of certain VIE note liabilities that included significant projected financial guarantee claims.

Loss and loss expenses for the third quarter of 2014 were a benefit of $28.7 million, as compared to a benefit of $154.3 million for the third quarter of 2013.

The third quarter of 2014 benefit was driven by positive credit developments in active portfolio management resulting in lower estimated losses in international, domestic public finance, student loans, and other structured, which were somewhat offset by slightly higher estimated losses in residential mortgage-backed securities, as well as $51.7 million of interest expense on deferred amounts.

Excluding interest on deferred amounts, incurred losses were a benefit of approximately $80.4 million. Interest on deferred amounts was not a component of last years numbers as the amended rehabilitation plan had not yet been implemented.

Reduced international losses were the result of the previously mentioned negotiated refinancing of Punch, a distressed transaction insured by Ambac UK. Domestic public finance improved slightly, with no significant changes in Ambac's credit views.

Puerto Rico reserves were down slightly due to amortization in the quarter, as were reserves for Detroit following greater clarity on the negotiated settlement terms. Other structured exposures improved due to favorable developments on a private structured insurance transaction.

In addition, student loan exposures benefited from lower interest rates, improved performance of underlying student loans and improved restructuring prospects for one transaction RMBS estimated losses in the third quarter 2014 were driven by lower projected losses in second lien RMBS, which were more than offset by a combination of higher estimated losses in first lien RMBS and a decrease in estimated rep and warranty subrogation recoveries, the latter of which stemmed from the improvement in second lien RMBS projected losses.

Gross loss and loss expense reserves were $5.5 billion at September 30, 2014 and $5.6 billion at June 30, 2014. Reserves as of September 30 and June 30 are net of $2.2 billion and $2.3 billion respectively of estimated rep and warranty subrogation recoveries.

For policies which have estimated rep and warranty subrogation recoveries as of September 30, 2014, Ambac has estimated ultimate losses of $4.5 billion, which include paid claims, net of recoveries received of $1.8 billion and a discounted value of future expected claim payments of $2.7 billion.

Future expected claim payments include deferred amounts and accrued interest on deferred amounts of $1.9 billion and $166 million respectively. Ambac Assurance is actively pursuing remedies and enforcing its rights through lawsuits and other methods to seek reimbursement for breaches of rep and warranty, fraud related to the RMBS transactions.

As of September 30, 2014, approximately $4.4 billion of total deferred amounts, inclusive of accrued interest payable of $350 million remain unpaid. The aggregate amount of equalizing payments scheduled for December 22, 2014 for deferred amounts is estimated to be approximately $1.1 billion.

Underwriting and operating expenses for the third quarter of 2014 were $25.5 million compared to $25 million for the year – for the third quarter of 2013.

Expenses increased year-over-year in part due to approximately $1 million variance in premium taxes, related mostly to one Ambac UK policy and the write-off of uncollectible premiums in the third quarter 2013.

Additionally, lower compensation costs in the third quarter 2014 were driven by several factors including changes to headcount and retiree benefits. Interest expense was $31.8 million for the third quarter of 2014, unchanged compared to the third quarter of 2013. Interest expense includes accrued interest on investment agreements and surplus notes.

Additionally, interest expense includes discount accretion on surplus notes as their carrying value is at a discount to par. Subsequent to the monetization of the junior surplus notes that are now reflected as debt on our balance sheet along with other surplus notes.

The increase in interest expense from the junior surplus notes monetized in August 2014 was offset by lower discount accretion on a portion of the previously outstanding surplus note liabilities and runoff of the investment agreement portfolio.

As contemplated by the amended Segregated Account Rehabilitation Plan, the rehabilitator will redeem certain senior segregated account surplus notes on November 20, 2014, approximately one month earlier than initially anticipated. As Diana mentioned, the earlier redemptions avoid $1.8 million of interest costs.

The redemption amount payable to third parties is $413.6 million. The redemption of surplus notes will result in a charge representing the accelerated recognition of the unamortized discount on the redeemed surplus notes.

As of September 30, 2014, the unamortized discount on the portion of segregated account and Ambac Assurance surplus notes is expected to be redeemed at $75.5 million. Provision for income taxes was $2.3 million for the third quarter of 2014, compared to $0.6 million for the third quarter of 2013.

Third quarter 2014 income taxes consist primarily of income tax expense as a result of pre-tax profits in Ambac UK's Italian branch, which cannot be offset by losses in other jurisdictions. At September 30, 2014 the company had $5.3 billion of US Federal NOLs, including $1.2 billion at Ambac and $3.9 billion at Ambac Assurance.

Net cash provided by operating activities was $86.1 million for the third quarter 2014. The principal sources of the Ambac’s operating cash flows are installment premiums on Assurance contracts, fees on credit default swaps, investment coupon receipts, claim and reinsurance recoveries and subrogation recoveries.

The principal uses of Ambac's liquidity are the payment of operating expenses, claim and commutation payments, loss remediation [ph] expenses, seated reinsurance premiums, and tax payments.

As discussed, the amended rehabilitation plan will have an adverse consequence to Ambac's future cash flows as the payout ratio has increased and as a consequence of the November redemptions and December payments. During the third quarter of 2014 Ambac and the segregated account made net cash payments in respect of policy claims of $5.6 million.

Loss and loss expense payments for the quarter were $81.3 million, including $27.8 million of supplemental payments, almost all of which were related policies allocated to the segregated account. Subrogation recoveries in the quarter were $75.5 million.

With respect our investment portfolio, our goals remain maximizing risk adjusted investment returns subject to maintaining the quality and diversification of the book and insuring that we have sufficient liquidity to honor our payment obligations as they arrive.

The fair value of the consolidated investment portfolio as of September 30, 2014 was $7.1 billion. The largest asset classes in the portfolio were mortgage and asset-backed securities including Ambac insured securities of $3 billion, corporate obligation of $1.8 billion and municipal bonds of $29 billion of which $495.8 million were tax exempt.

In the third quarter of 2014 we purchased 52 million of Ambac wrapped RMBS, helping bring the fair value of Ambac insured RMBS in our portfolio to approximately $1.6 billion or 23% of the consolidated investment portfolio, of the $4.4 billion of segregated account deferred amounts at the end of the third quarter we own approximately $685 million or 17%.

Financial guarantee insurance portfolio, net par amount outstanding declined 6% to $157.4 billion at September 30, 2014 from $167.7 billion at June 30, 2014. Much of this is due to the run-off of $6.8 billion of public finance net par, adversely classified credit of $28.8 billion decreased by $2.3 billion or 7% compared to June 30, 2014.

The breakdown of the insured portfolio by sector was virtually unchanged for the third quarter of 2014 relative to June 30, 2014. Public finance was 65% of the total net par outstanding, structured finance was 17%, and international was 18%. The general account represented 73% of total net par outstanding, unchanged from June 30, 2014.

Segregated account remained 12% and Ambac UK unchanged at 15%. That concludes our prepared remarks. Now, we will open the call to Q&A..

Thank you. (Operator Instructions) Our first question comes from Andrew Gadlin with Odin Capital Group. Your line is open..

Good morning..

Good morning..

Good morning, Andrew..

I wanted to ask a question about a line in the 10-Q for the first time about as part of the asset liability management strategy, Ambac would consider entering into transactions where it would monetize assets and restructure, exchange, et cetera.

Can you talk a little bit about what you're contemplating there?.

Sure, we can talk a little bit about it. We wanted to make this disclosure, but we are still in the early stages of the consideration process. So we're not prepared to share too much information.

But we're looking at the potential to monetize assets as we said or possibly exchange or restructure pass due claims or claims like liabilities for other non-claims liabilities. The goal of course would be to further de-risk Ambac assurance which is of course of the goal for all of our asset liability management initiatives.

It would simplify the capital structure and ultimately we're seeking to rehabilitate the segregated account..

Any idea on timeline for that?.

Like I said, its early stage and so you know, these things can be complicated. So it could take some time. But it’s a little early to be more precise than that..

Got it.

And anything would involve the regulatory approval, correct?.

Yes. It would. And our regulators are aware of these efforts. We've been working in coordination with them..

Got it. Thank you. One more question on the disclosure about reps and warranty and ultimate losses.

It looks like there's embedded in there an assumption of future losses of approximately $650 million?.

That’s approximately right, Andrew..

Okay.

So, if I compare that to the numbers on page 10 of the operating supplement where you present estimated future gross RMBS claims, it looks like some of the policies here where you're pursuing full recovery represent a third of your total expected future RMBS claims?.

That’s about right..

Okay.

So hopefully if you're successful you could wipe out as much as a third of the future gross claims?.

That’s certainly one way of looking at it. I mean, the other – so the other way of looking at it is, at this point our rep and warranty subrogation receivable exceeds all of our future expected claim payments out of the RMBS book..

Got it. All right. Thank you very much..

(Operator Instructions) Our next question comes from Ben Clifford with Nomura Securities. Your line is open. Your line is open..

Yes, first question. In the rehabilitator’s 2013 annual report released in May, the yield to maturity of the RMBS securities in the AAC investment portfolio was 30%.

I don't know if you can quantify or explain the assumptions behind this 30% yield number, whether it includes DPO payments in the future, et cetera?.

So, it’s very hard for us to respond to disclosures that the rehabilitator has made because not all those disclosures are necessarily calculated or consistent with our own disclosures, and the assumptions underlying of those disclosures maybe different than ours.

But at the point in time in which the – that disclosure was made the general sort of approach to calculating yields on underlying RMBS securities had incorporated the concept of receiving surplus notes in the future.

And since the amended rehabilitation plan went into place, the method for calculating yields and cash flows on RMBS that are insured by Ambac has of course, changed to contemplate the payment of DPOs and accrued interest on those DPOs as opposed to the receipt of surplus notes in the future.

So there has been some calculation differences that I presume that the rehabilitator has – would also reflect in his reserves or his calculations going forward..

Right.

And if you were to ballpark maybe a yield number for your owned RMBS policies in your book, is there any way to kind of quantify that?.

Well, in our disclosures in the operating supplement on a GAAP basis, we have a line item that there that is Ambac insured loss mitigation strategy bonds where we have the current pre tax yield maturity of 10.6% on a GAAP basis..

Got it..

And to be clear, that includes both RMBS and the large block of student loans that we acquired back in the first quarter of 2014..

And does that include DPO payment, owned DPO payments, as well?.

Yes, it does..

Okay. And, second question, you mentioned in this call, I think and past calls that other than the five major rep and warranty cases, your direct negotiations with other parties.

I don't know if you can talk about what kind of cases or what kind of recoveries you're pursuing there?.

No, we can't. We don’t comment on those items..

All right. And the last question, on your website, under the supplemental payments tab, you've been making substantial payment to the Chevy Chase Trust over the past four or five months. I don't know if that's something that you can explain what the rationale is behind making those payments for the settlement or….

The rationale behind all of our supplemental payments really is just an economic one, as you know each RMBS security or many RMBS securities have very unique and different waterfall and other features and structural features.

There are certain obligations that the companies has that where by we can maximize our ultimate subrogation recoveries, such as excess spread by making incremental payments on those securities.

So with the Chevy Chase and others that are listed on our website by actually making supplemental payments we're actually maximizing the recoveries that we get from those securities.

So our decision whether to pay supplemental payments which is done in conjunction with the rehabilitator is purely an economic one, and one that maximizes and preserves the subrogation asset that we have on our balance sheet..

Okay. Thank you..

Our next question comes from Sean Lobo with Vulcan. Your line is open..

Hey. Good morning, guys. Thank you for the incremental disclosures in the earnings presentation.

As it pertains to excess spread, can you give us the magnitude of what the scope may be? Is it hundreds of millions of dollars or something smaller?.

Sorry, you broke up a little bit. I didn’t quite get the full question..

Yes.

Can you help us quantify the total amount of excess spread you're modeling?.

Sure. In the – in our 10-Q we have a table that outlines that and as of the end of the third quarter and this is on page 25 of the Q, the subrogation which is mostly excess spread, but there are other forms of subrogation that’s included here, on a PV basis is about $667 million, $668 million..

Okay. And then we continue to see the excess subrogation you know, going lower and reserves are getting released.

Can you help us understand the modeling discrepancies there?.

The excess – the subrogation here has gone lower as we collect on subrogation recoveries, so that we're monetizing on our asset effectively.

And as you do that since the subrogation is a offset to loss reserves, its sort of contra liability as you turn that contra liability into cash your reserves would increase as a result, at the same time you have the cash on your balance sheet. So the net impact is – would be zero..

Got it. You previously disclosed I believe it’s off the top of my head, the number is 2.4 for rep and warranty litigation, but in your presentation you have 2.2.

Can you explain the delta?.

This quarter the change in rep and warranty recoveries primarily related to the lower expected losses in the second lien RMBS portfolio. So as our future view of losses changes our rep and warranty subrogation recovery has to change inline with that.

So we had a very significant decline in second lien losses in the quarter and had a – because we expect to pay less losses, we also expect to receive less in subrogation..

That’s very helpful.

As an investor then, how do I think about the fact that you know two of your lawsuits are no longer the website and your rep and warranty litigation has gone lower?.

Sorry, what is the part of that question?.

I mean, two of your lawsuits right, are no longer on the website.

Can you comment on those?.

I think you're referring to Capital One and….

Credit Suisse last year….

Credit Suisse, and I think we've commented on in the past that Capital One case was dismissed, as was the Credit Suisse case and that’s all we can say about those cases at this time..

Got it. Thank you very much for your time. .

Thank you..

Thank you..

I am showing no further questions. I will now turn the call back over to Diana Adams for closing remarks..

Okay. I just want to thank everyone for joining us today. Have a good day. .

Thank you. .

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