Exhibit 10.3

AMENDMENT NO. 1 TO COOPERATION AGREEMENT

AMENDMENT NO. 1 TO COOPERATION AGREEMENT (this “Amendment”), effective as of the
later of (a) the date on which an order is entered pursuant to Section 1129 of
chapter 11 of title 11 of the United States Bankruptcy Code (the “Bankruptcy
Code”) by the United States Bankruptcy Court for the Southern District of New
York (the “Bankruptcy Court”) confirming Ambac Financial Group, Inc.’s (“AFGI”)
chapter 11 plan of reorganization, as amended, supplemented or modified, and
(b) the date on which a non-stayed order is entered by the Dane County Circuit
Court (the “Rehabilitation Court”) approving this Agreement (such date, the
“Effective Date”), by and between the Segregated Account of Ambac Assurance
Corporation (the “Segregated Account”), Ambac Assurance Corporation (“Ambac”),
AFGI and the Commissioner of Insurance of the State of Wisconsin, as the
court-appointed Rehabilitator of the Segregated Account (the “Rehabilitator”).

WHEREAS, Ambac and the Segregated Account entered into the Cooperation Agreement
on March 24, 2010 (the “Agreement”).

WHEREAS, AFGI filed a voluntary petition for relief under chapter 11 of title 11
of the Bankruptcy Code in the Bankruptcy Court on November 8, 2010.

WHEREAS, Ambac and the Segregated Account desire to amend the Cooperation
Agreement to reflect certain terms and provisions of that certain Mediation
Agreement (the “Mediation Agreement”) by and among Ambac, the Segregated
Account, AFGI, the Wisconsin Office of the Commissioner of Insurance (“OCI”),
the Rehabilitator, and the Official Committee of Unsecured Creditors of AFGI,
entered into as of September 21, 2011, and to expressly add AFGI and the
Rehabilitator as parties to the Agreement.

NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth herein, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto hereby agree as follows:

1. AFGI and the Rehabilitator shall become parties to the Agreement.

2. The following shall be added to Article I of the Agreement:

SECTION 1.05 Preservation of Net Operating Losses. Except as otherwise approved
by the Rehabilitator, AFGI shall use its best efforts to preserve the use of
NOLs realized by the Group for the benefit of the AAC Subgroup, including but
not limited to, refraining from taking any action that would result in, and
taking such affirmative steps as are appropriate to avoid, any Deconsolidation
Event. In furtherance of the foregoing, AFGI shall use its best efforts to
obtain a confirmation order from the Bankruptcy Court which (i) memorializes the
parties’ intent to preserve the use of NOLs for the benefit of the AAC Subgroup
and AFGI as contemplated by the Amended and Restated Tax Sharing Agreement,
dated as of the Effective Date, by and among Ambac,

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AFGI and the other parties thereto (the “Tax Sharing Agreement”), (ii) approves
the adoption by reorganized AFGI of an NOL-preservation plan to remain in effect
so long as NOLs remain for the benefit of Ambac as contemplated by the Mediation
Agreement and the Tax Sharing Agreement and vests continuing jurisdiction in the
Bankruptcy Court to enforce restrictions adopted in connection with such plan,
and (iii) memorializes the parties’ intent that any subsequent bankruptcy filing
by reorganized AFGI with the intent of rejecting this Agreement, the Mediation
Agreement or the Tax Sharing Agreement and/or seeking additional value from the
AAC Subgroup for its use of the NOLs is a per se bad faith filing.

SECTION 1.06 Loss Reserving. Ambac shall (i) provide the Rehabilitator the
opportunity to participate in all meetings with Ambac management to discuss loss
reserves to be included in any statutory financial report; (ii) provide the
Rehabilitator with all reports provided to Ambac management (when so provided)
concerning the assumptions and vendors utilized or to be utilized in arriving at
statutory loss reserves, together with any related reports or materials
requested by the Rehabilitator; and (iii) obtain the approval of the
Rehabilitator prior to accepting repayment of any intercompany loan in an amount
in excess of $50,000,000 per annum or any modification to or deemed repayment of
any intercompany loan in an amount that would result in Ambac recognizing income
or a reduction in issue price in excess of $50,000,000 per annum. No later than
February 1st of each year (or more frequently if requested by Ambac), if Ambac
proposes to make any changes in the assumptions or vendors utilized in
determining statutory loss reserves from the prior year’s statutory loss
reserves (or, with respect to 2011, the statutory loss reserves for the period
from September 30, 2011 to December 31, 2011), which changes would cause the
difference (whether positive or negative) between (w) Ambac’s statutory reserves
determined with such proposed changes and (x) Ambac’s statutory reserves
determined without such proposed changes to exceed the lesser of
(y) $200,000,000 or (z) 10% of Ambac’s statutory reserves determined without
such proposed changes, Ambac shall seek and obtain the approval of its loss
reserves from the Rehabilitator, which approval shall not be unreasonably
withheld or delayed. In the event that the Rehabilitator disputes Ambac’s loss
reserves and does not provide such approval, then, unless OCI prescribes an
accounting practice requiring Ambac to follow the position of the Rehabilitator,
the parties shall (i) immediately submit such dispute to expedited arbitration
before a single arbitrator with requisite expertise to decide which of the
positions most appropriately reflects expected claim payments or (ii) jointly
agree to an

 

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alternative method of dispute resolution. The decision of an arbitrator shall be
final and binding upon the parties, and shall be rendered in such form and
substance as shall be necessary to permit Ambac to reasonably rely thereon for
purposes of filing its statutory financial statements. The parties shall agree
to such procedures as are necessary and prudent to permit the arbitrator to
issue a decision by no later than ten business days before the date that the
annual financial reports are required to be filed (the “Filing Date”). If the
differences of the parties are not resolved in a manner described above at least
ten business days before the Filing Date, then Ambac shall request an extension
of the Filing Date from OCI. If OCI agrees to such an extension, it will
cooperate with Ambac to secure extensions in other jurisdictions as necessary.
If such extension (or subsequent extension) is not granted, Ambac shall be
entitled to file its financial reports on the basis of its own loss reserving
positions.

SECTION 1.07 Investment Portfolio Management.

(a) Any changes to Ambac’s existing Investment Policy (dated November 18, 2010)
shall be submitted to the Rehabilitator for approval, which approval shall not
be unreasonably withheld. The Rehabilitator shall meet with Ambac management
(including the CFO) semi-annually to discuss the Investment Policy and any
changes appropriate thereto. The Rehabilitator may recommend changes to the
Investment Policy and Ambac shall consider such recommendations in good faith.
The Rehabilitator shall also be provided with periodic reports of investment
transactions in the ordinary course. Notwithstanding anything to the contrary in
the Management Services Agreement or any other agreement, in the event that
Ambac’s rejection of any proposed changes are not reasonable and fair to the
interests of Ambac and the Segregated Account, or are not protective or
equitable to the interests of Ambac and the Segregated Account policyholders
generally, the Rehabilitator may direct Ambac to transfer investment management
functions relating to the investment portfolio to a third party jointly chosen
by the Rehabilitator and Ambac. With respect to any subsequent transfers to
third parties of investment management functions relating to the investment
portfolio, such third parties shall be jointly chosen by the Rehabilitator and
Ambac.

(b) The parties hereto acknowledge and agree that, if the investment management
function is transferred in accordance with the foregoing (a “Change of
Investment Manager Event”), the parties’ respective obligations under
Section 1.07 and elsewhere set forth in this Agreement shall remain in effect
without alteration

 

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or diminishment. In furtherance of the foregoing, (i) the parties shall consult
with each other in order to facilitate the uninterrupted provision of the
information and other benefits required to be provided hereunder by each party
to the other party, (ii) the parties shall ensure that any new provider of
investment management services as a result of a Change of Investment Manager
Event (each a “Replacement Investment Manager”) has the capacity to perform the
investment management services formerly provided by Ambac, including without
limitation either maintaining an annual Type II SAS 70 internal control letter
reasonably acceptable to AFGI or providing AFGI with copies of such Replacement
Investment Manager’s current documentation of control procedures (such as
policies and procedures, process models and process flowcharts) which record the
design of internal controls and (iii) the Segregated Account shall at all times
following a Change of Investment Manager Event maintain appropriate internal
controls and systems to ensure that Ambac will be able to meet its financial
reporting, disclosure and legal obligations as described in Section 2.01(H)
below and as may be necessary for the Segregated Account to fulfill its
obligations under this Agreement. Further, the Segregated Account shall
immediately disclose to AFGI any instance of fraud or any significant change to
the internal control environment. In addition, the Rehabilitator shall cooperate
with Ambac in causing each Replacement Investment Manager to permit Ambac and
its affiliates, through Ambac’s employees and representatives (including, for
the avoidance of doubt, independent auditors of AFGI), the right to audit the
Replacement Investment Manager’s internal control structure and to examine and
make copies of any books and records pertaining to the Segregated Account, and
to furnish Ambac with such financial and reporting data and other information as
Ambac may from time to time request. If a deficiency or control issue is noted,
the Segregated Account will work with AFGI’s representatives (including, for the
avoidance of doubt, independent auditors of AFGI) to develop and implement an
effective remediation strategy. In the event of any breach or threatened breach
by any party of any of its obligations as set forth or described in this
Agreement following a Change of Investment Manager Event, the parties hereto
agree that monetary damages would be an insufficient remedy for any such breach,
and in addition to all other remedies available under applicable law, the
non-breaching party shall be entitled to specific performance and to injunctive
or other equitable relief as a remedy for any such breach.

 

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SECTION 1.08 IRS Dispute. Ambac and the Rehabilitator shall be entitled to full
cooperation and all information and particulars they or either of them may
request from AFGI in relation to the IRS Dispute and any other issues that Ambac
may have relative to the IRS, including, without limitation, express
authorization to engage with the IRS directly on matters arising under the Plan
of Rehabilitation in connection with the rehabilitation proceeding with respect
to the Segregated Account and any amendment or subsequent iteration thereof
(including any efforts to obtain a private letter ruling, pre-filing agreement
or other form of guidance or clarification).

3. Section 3.01 of the Agreement shall be deleted and replaced with the
following:

SECTION 3.01 Following each taxable year during any part of which Ambac is a
member of the Group, AFGI shall, no later than April 1 of such subsequent year,
provide the Rehabilitator with a summary of the material provisions of AFGI’s
expected tax position and the expected differences between Ambac’s statutory
financial statements and AFGI’s expected tax positions. The Rehabilitator shall
notify AFGI and Ambac in writing of any concerns of the Rehabilitator with
respect to any such expected tax positions no later than May 1 of such year.
Promptly thereafter, AFGI and Ambac shall meet with the Rehabilitator to resolve
in good faith such concerns. In the event that the Rehabilitator is unable to
resolve a dispute with AFGI and Ambac concerning an expected tax position by
July 1 of such year, the parties shall immediately submit such dispute to
expedited arbitration before a single arbitrator with the requisite tax
expertise whose decision shall be issued no later than August 31 of such year
and shall be final and binding upon the parties. The parties shall agree to such
further procedures as are necessary and prudent to permit the arbitrator to
issue a decision by August 31 of such year. If the expected tax position relates
to the AAC Subgroup, the sole issue before the arbitrator shall be whether the
tax position advocated by the Rehabilitator is more likely than not to be upheld
by a court of competent jurisdiction in a subsequent challenge to such position
by the IRS. If the expected tax position does not relate to the AAC Subgroup,
the sole issue before the arbitrator shall be whether the tax position advocated
by AFGI is more likely than not to be upheld by a court of competent
jurisdiction in a subsequent challenge to such position by the IRS. In the event
that the arbitrator rules that the tax position advocated by the Rehabilitator
(where the expected tax position relates to the AAC Subgroup) or the tax
position advocated by AFGI (where the expected tax position does not relate to
the AAC Subgroup) is more likely than not to be upheld by a court of competent
jurisdiction in a subsequent challenge to such position by the IRS, AFGI shall
file

 

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its return on the basis of such advocated tax position, which position may be
disclosed in such return. In the event that the arbitrator does not rule that a
tax position advocated by either the Rehabilitator or AFGI, as the case may be,
is more likely than not to be upheld by a court of competent jurisdiction in a
subsequent challenge to such position by the IRS, such party shall be precluded
from advocating for such tax position in any subsequent year absent any change
or changes in facts or circumstances that would support such tax position. The
cost of the arbitrator will be split between AFGI and Ambac. The Rehabilitator
represents that it is not presently aware of any fact, including, without
limitation, any plan of rehabilitation for the Segregated Account that is
presently being considered, upon which it would seek to change (under this
Section 3.01) the method of realization or accrual of deductions for interest
and original issue discount on the surplus notes issued by Ambac in June 2010,
including the application of Sections 163(e)(5) and 163(i) of the Code.

4. Section 6.06 of the Agreement shall be deleted and replaced with the
following:

SECTION 6.06 Consent to Jurisdiction. AFGI and Ambac hereby consent to the
jurisdiction of the state court in Wisconsin before which the rehabilitation
proceedings with respect to the Segregated Account are pending, and waive any
objection based on lack of personal jurisdiction, improper venue or forum non
conveniens, with regard to any actions, claims, disputes or proceedings relating
to this Agreement or any other document delivered hereunder or in connection
herewith, or any transaction arising from or connected to any of the foregoing.

5. Section 6.10 of the Agreement shall be deleted and replaced with the
following:

SECTION 6.10. Parties to this Agreement. Nothing herein shall in any manner
create any obligations or establish any rights against the Rehabilitator, Ambac,
the Segregated Account or AFGI in favor of any person or entity not a party to
this Agreement.

6. The following shall be added to Article VI of the Agreement:

SECTION 6.11 Interpretation. Capitalized terms used herein and not otherwise
defined shall have the meanings set forth in the Tax Sharing Agreement.

 

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SECTION 6.12 Dispute Resolution. In the event that AFGI believes Ambac or the
Rehabilitator to be, or in the event that Ambac or the Rehabilitator believes
AFGI to be, in material breach of, or otherwise not complying with Sections
1.05, 1.06, 1.07, 1.08, and 3.01 of this Agreement, such party shall provide the
alleged breaching or non-complying party with a written notice (copied to their
last known legal counsel) describing, in reasonable detail, the nature of the
alleged breach or non-compliance. Following delivery of such written notice, the
parties shall attempt, in good faith, to resolve their dispute. The party served
with a notice of breach or non-compliance shall have 30 days to cure the alleged
breach or non-compliance. In the event that there is no cure and the parties are
unable to resolve their dispute, any party alleging such breach or
non-compliance may, not less than 45 days following delivery of such written
notice, seek a judgment from the Rehabilitation Court that the other party has
breached this Agreement. Solely for purposes of resolving such dispute, AFGI
shall consent to the jurisdiction of the Rehabilitation Court. In the event that
the Rehabilitation Court enters a final, non-appealable order in favor of any
party alleging such breach or non-compliance, such party may ask the court to
grant such further relief as the court deems appropriate in light of the nature
and severity of the breach or non-performance, including specific performance,
termination of the parties’ obligations under this Agreement and/or monetary
damages.

SECTION 6.13 Other Agreements. In the event of any conflict or inconsistency
between this Agreement and the provisions of the Mediation Agreement, the
provisions of this Agreement shall govern.

7. Termination.

(a) The provisions of Section 3.01 shall have no further force or effect after
the due date (including extensions) of the Group’s consolidated federal tax
return for any Taxable Period if:

(i) all of the following conditions are met as of the beginning of the
immediately following Taxable Period:

(1) no Pre-Determination Date NOLs remain available for use by the AAC Subgroup
to offset income for Federal Tax purposes pursuant to subparagraphs 3(c)(i)(1)
and (2) of the Tax Sharing Agreement;

(2) no Pre-Determination Date AMT NOLs remain available for use by the AAC
Subgroup to offset income for AMT purposes pursuant to the provisions contained
in subparagraph 3(c)(iii) of the Tax Sharing Agreement, and

 

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(3) no AFGI NOLs exist regardless of whether AFGI has consented to the use of
such AFGI NOLs by the AAC Subgroup to offset income for Federal Tax purposes
pursuant to subparagraph 3(c)(i)(3) of the Tax Sharing Agreement;

or

(ii) a Deconsolidation Event has occurred prior to the beginning of such Taxable
Period.

(b) The provisions of this Amendment shall have no further force or effect to
the extent that a condition to the Closing Date (as defined in the Mediation
Agreement) cannot be satisfied.

8. Counterparts. This Amendment may be executed in more than one counterpart,
each of which shall be deemed to be an original and all of which shall,
together, constitute one and the same instrument.

[Remainder of page intentionally left blank. Signatures to follow]

 

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IN WITNESS WHEREOF, AFGI, Ambac, the Segregated Account and the Rehabilitator
have caused this Amendment to be duly executed and delivered as of the day and
year first above written.

 

AMBAC FINANCIAL GROUP, INC. By:  

 

  Name:   Title: AMBAC ASSURANCE CORPORATION By:  

 

  Name:   Title: SEGREGATED ACCOUNT OF AMBAC ASSURANCE CORPORATION by Ambac
Assurance Corporation, as Management Services Provider By:  

 

  Name:   Title: THE COMMISSIONER OF INSURANCE OF THE STATE OF WISCONSIN, AS THE
COURT-APPOINTED REHABILITATOR OF THE SEGREGATED ACCOUNT By:  

 

  Name: Roger A. Peterson   Title: Special Deputy Commissioner

 

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