What changed in this filing

/stocks — the workspaceLOADING

Item 1A. Risk Factors

2021-03-01 compared with 2020-03-02 · 310 added, 317 removed, 232 unchanged (73% of the section changed)

3 unchanged sentences

Risks Related to AFG Common Shares 10

Risks Related to Insured Portfolio Losses

Risks Related to FG Insured Portfolio Losses 11

Risks Related to Indebtedness 15

5 unchanged sentences

Risks Related to Strategic Plan 22

| Ambac Financial Group, Inc.

8 2019 FORM 10-K |

Risks Related to Managing General Underwriting Business 23

Risks Related to AFG Common Shares

5 unchanged sentences

• adverse developments in our financial condition or results of operations;

changes in the actual or perceived risk within our insured portfolio, particularly with regards to concentrations of credit risk, such as in Puerto Rico;

actual or perceived adverse developments with regards to Ambac Assurance's RMBS litigations;

• actual or perceived adverse developments with regards to AAC's residential mortgage-backed securities ("RMBS") litigations;

• changes in the actual or perceived risk within our FG insured portfolio, particularly with regards to concentrations of credit risk, such as in Puerto Rico;

• changes to regulatory status;

• changes in investors’ or analysts’ valuation measures for our stock;

market trends unrelated to our stock;

market and industry perception of our success, or lack thereof, in pursuing our business strategy;

• market perceptions of our success, or lack thereof, in pursuing our business strategy;

| Ambac Financial Group, Inc.

10 2020 FORM 10-K |

Table of Co ntents

• the impact or perceived impact of any acquisition, disposition or other strategic transaction, including entry into a new line of business, on the value or long-term prospects of the Company;

• results and actions of other participants in our industry.

In addition, the price of AFG's shares may be affected by the additional risks described below, including risks associated with Ambac Assurance’s ability to deliver value to AFG.

In addition, the price of AFG's shares may be affected by the additional risks described below, including risks associated with AAC’s ability to deliver value to AFG.

Investments in AFG's common stock should be considered highly speculative and may be subject to a high degree of volatility.

The occurrence of certain events could result in the initiation of rehabilitation proceedings against Ambac Assurance, with resulting adverse consequences to holders of our securities.

Increased loss development in the insured portfolio or significant losses or other events resulting from litigation, including the failure to achieve expected recoveries from existing litigations concerning insured residential mortgage-backed securities ("RMBS"), may prompt OCI to determine that it is in the best interests of policyholders to initiate rehabilitation proceedings with respect to Ambac Assurance, either preemptively or in response to any such event.

If, as a result of the occurrence of any such event(s), OCI decides to initiate rehabilitation proceedings with respect to Ambac Assurance, adverse consequences may result, including, without limitation and absent enforceable protective injunctive relief, the assertion of damages by counterparties (including mark-to-market claims with respect to insured transactions executed in ISDA format), the acceleration of losses based on early termination triggers, and the loss of control rights in insured transactions.

Any such consequences may reduce any residual value of Ambac

Additionally, the rehabilitator would assume control of all of Ambac Assurance’s assets and management of Ambac Assurance.

In exercising control, the rehabilitator would act for the benefit of policyholders, and would not take into account the interests of our securityholders.

Such actions may result in material adverse consequences for our securityholders.

The issuance of additional shares of AFG's common stock, including shares underlying issued and outstanding warrants, and/or debt or equity securities that rank senior or pari passu to AFG's common stock may dilute current shareholder value or have adverse effects on the market price of AFG’s common stock.

If AFG issues additional shares of common stock to raise capital, whether for select business transactions, general corporate purposes, in exchange for other securities, or in connection with the exercise of issued and outstanding warrants, the value of current stockholders’ interests may be diluted as AFG is not required to offer any such shares to existing stockholders on a preemptive basis.

AFG cannot predict the effect, if any, of future sales of its common stock, or the availability of shares for future sales, on the market price of its common stock.

Sales of substantial amounts of common stock or the perception that such sales could occur may adversely affect the prevailing market price for its common stock.

If AFG were to issue debt or additional equity securities in the future that rank senior or pari passu to its common stock, they could be governed by an indenture or other instrument containing covenants restricting AFG's operating flexibility.

Additionally, any convertible or exchangeable securities issued in the future may have rights, preferences and privileges more favorable than those of common stock or may result in dilution to owners of common stock, either of which could have an adverse impact on our stock price.

Holders of common stock bear the risk of future offerings reducing the market price of AFG's common stock and diluting the value of their stock holdings in the Company.

AFG may not be able to realize value from Ambac Assurance or generate earnings apart from Ambac Assurance.

The value of AFG's common stock is dependent upon realizing residual value and/or receiving dividends from its main operating subsidiary, Ambac Assurance;

the receipt of payments to be made by Ambac Assurance pursuant to the intercompany tax sharing agreement (the "Amended TSA") and the intercompany expense sharing and cost allocation agreement (the "Cost Allocation Agreement");

the receipt of payments on the Owner Trust Certificate issued to AFG by Corolla Trust (the "Owner Trust Certificate"), which was created in 2014 to monetize AFG's ownership interest in junior surplus notes issued by the Segregated Account;

the receipt of payments on investments made in securities issued by Ambac Assurance;

The occurrence of certain events could result in the initiation of rehabilitation proceedings against AAC, with resulting adverse consequences to holders of our securities.

Increased loss development in the FG insured portfolio or significant losses or other events resulting from litigation, including the failure to achieve expected recoveries from existing litigations concerning insured RMBS, may prompt OCI to determine that it is in the best interests of policyholders to initiate rehabilitation proceedings with respect to AAC, either preemptively or in response to any such event.

If OCI were to decide to initiate rehabilitation proceedings with respect to AAC, adverse consequences may result, including, without limitation and absent enforceable protective injunctive relief, the assertion of damages by counterparties, the acceleration of losses based on early termination triggers, and the loss of control rights in insured transactions.

Any such consequences may reduce any residual value of AAC.

Additionally, the rehabilitator would assume control of all of AAC’s assets and management of AAC.

In exercising control, the rehabilitator would act for the benefit of policyholders, and would not take into account the interests of our security holders, which may result in material adverse consequences for our security holders.

AFG may not be able to realize value from AAC or generate earnings apart from AAC.

The value of AFG's common stock is partially dependent upon realizing residual value and/or receiving dividends from AAC;

the receipt of payments to be made by AAC pursuant to the intercompany expense sharing and cost allocation agreement (the "Cost Allocation Agreement");

the receipt of payments on investments made in surplus notes issued by AAC;

and the receipt of payments on other investments.

There can be no assurance that AFG will be able to realize residual value and/or receive dividends from Ambac Assurance, which is in run-off.

AFG's ability to realize residual value and/or receive dividends from Ambac Assurance will depend upon, amongst other considerations, Ambac Assurance's ability to satisfy all of its obligations that are senior to AFG's equity interests, including obligations to policyholders, holders of its indebtedness (including surplus notes, junior surplus notes, the Ambac Note and the Tier 2 Notes) and holders of its preferred stock.

Ambac Assurance's ability to satisfy all of its obligations is dependent on

| Ambac Financial Group, Inc.

9 2019 FORM 10-K |

a number of considerations including its ability to achieve recoveries and mitigate losses from its insured portfolio, which is subject to significant risks and uncertainties, including as a result of varying potential perceptions of the value of Ambac Assurance’s guarantees and securities.

Due to the above considerations, as well as applicable legal and contractual restrictions described elsewhere herein, it is highly unlikely that Ambac Assurance will be able to pay AFG any dividends for the foreseeable future.

Furthermore, the payments to be made to AFG under the Amended TSA and the intercompany Cost Allocation Agreement are subject to contingencies that are difficult to predict and, in certain instances, to OCI approval, making the amount and timing, if any, of such payments uncertain.

Payments to be made under the Amended TSA, in particular, depend on the generation of future taxable income by Ambac Assurance above certain thresholds.

Ambac Assurance’s ability to generate taxable income above such thresholds is uncertain.

Due to these factors, there can be no assurance as to the amounts that AFG will receive from Ambac Assurance under the Amended TSA.

Moreover, the Cost Allocation Agreement provides that Ambac Assurance's reimbursement of AFG's operating expenses after 2017 is subject to the approval of OCI and limited to $4.0 million per annum.

There can be no assurance that AFG will be able to realize residual value and/or receive dividends from AAC, which is in run-off.

AFG's ability to realize residual value and/or receive dividends from AAC will depend upon, amongst other considerations, AAC's ability to satisfy all of its obligations that are senior to AFG's equity interests, including obligations to policyholders, holders of its indebtedness (including surplus notes, the Ambac Note and the Tier 2 Notes) and holders of its preferred stock.

AAC's ability to satisfy all of its obligations is dependent on a number of considerations including its ability to achieve recoveries and mitigate losses from its insured portfolio, which is subject to significant risks and uncertainties, including as a result of varying potential perceptions of the value of AAC’s guarantees and securities.

Due to the above considerations, as well as applicable legal and contractual restrictions described elsewhere herein, it is highly unlikely that AAC will be able to pay AFG any dividends for the foreseeable future.

Furthermore, the payments to be made to AFG under the intercompany Cost Allocation Agreement are subject to, in certain instances, OCI approval, making the amount and timing of such payments uncertain.

Specifically, the Cost Allocation Agreement provides that AAC's reimbursement of certain AFG operating expenses is subject to the approval of OCI and limited to $4.0 million per annum.

We can provide no assurance as to whether OCI will approve such reimbursement or any portion thereof.

It is also uncertain whether and to what extent AFG will realize value from the Owner Trust Certificate.

The Owner Trust Certificate is subordinated to $299.2 million of senior secured notes issued by Corolla Trust plus interest thereon.

Such notes and the Owner Trust Certificate are collateralized by and payable solely from a $350.0 million face amount junior surplus note plus interest thereon.

Ambac Assurance became the obligor under the junior surplus notes on February 12, 2018 pursuant to the Second Amended Plan of Rehabilitation.

No payment of interest on or principal of a junior surplus note may be made until all existing and future indebtedness of Ambac Assurance, including (but not limited to) senior ranking surplus notes, policy claims and claims having statutory priority, have been paid in full.

All payments of principal and interest on junior surplus notes are subject to the prior approval of OCI.

If OCI does not approve the payment of interest on junior surplus notes, such interest will accrue and compound annually until paid.

Payments on the senior secured notes issued by Corolla Trust will only be made when and to the extent that Ambac Assurance makes payments on the junior surplus note held by Corolla Trust.

The senior secured notes must be paid in full before any payments will be made on the Owner Trust Certificate.

If Corolla Trust has failed to pay all interest and principal outstanding on the senior secured notes within three business days of August 28, 2039, the senior secured noteholders may also take possession of and sell the junior surplus note.

If such a sale were to occur, it is uncertain whether and to what extent there would be any value for the Owner Trust Certificate after satisfaction of the senior secured notes.

AFG could also decide to sell the Owner Trust Certificate to Ambac Assurance, the Corolla Trust or a third party, including at a discount to par value.

The value of AFG's common stock may also depend upon the ability of Ambac to generate earnings apart from Ambac Assurance.

As noted below in Risks Related to Strategic Plan , Ambac is selectively exploring potential business opportunities that, among other things, may permit utilization of Ambac’s net

operating loss carry-forwards, but there are no assurances regarding its ability to find or execute such business opportunities or the prospects of any such opportunities.

Risks Related to Insured Portfolio Losses

The value of AFG's common stock also depends upon the ability of Ambac to generate earnings apart from AAC.

As noted below in Risks Related to Strategic Plan , Ambac is exploring further expansion into specialty property and casualty program insurance, managing general agent/underwriter, and potentially other insurance and insurance related businesses that, among other things, may permit utilization of Ambac’s net operating loss carry-forwards, but there are no assurances regarding its ability to acquire or develop any material businesses or the prospects for any such businesses.

Risks Related to FG Insured Portfolio Losses

Loss reserves may not be adequate to cover potential losses, and changes in loss reserves may result in further volatility of net income and comprehensive income.

Loss reserves are established when management has observed credit deterioration, in most cases, when the underlying credit is considered adversely classified.

Loss reserves established with respect to our non-derivative financial guarantee insurance policies are based upon estimates and judgments by management, including estimates and judgments with respect to the probability of default, the severity of loss upon default, management’s ability to execute policy commutations and/or restructurings, and estimated remediation recoveries for, among other things, breaches by RMBS issuers of representations and warranties.

Loss reserves are established when management has observed credit deterioration in its insured credits.

the severity of loss upon default;

management’s ability to execute policy commutations, restructurings and other loss mitigation strategies;

and estimated remediation recoveries for, among other things, breaches by RMBS issuers of representations and warranties.

The objective of establishing loss reserve estimates is not to, and our loss reserves do not, reflect the worst possible outcome.

1 unchanged sentence

As a result of inherent uncertainties in the estimates and judgments made to determine loss reserves, there can be no assurance that either the actual losses in our financial guarantee insurance portfolio will not exceed such reserves or that our reserves will not increase or decrease materially over time as circumstances, our assumptions, or our models change.

Additionally, inherent in our estimates of loss severities and remediation recoveries is the assumption that Ambac Assurance or its subsidiaries, as applicable, will retain control rights in respect of our insured portfolio.

However, according to the terms of relevant transaction documents, Ambac Assurance or its subsidiaries, as applicable, may lose control rights in many insured transactions if, among other things, the relevant insurer is the subject of delinquency proceedings and/or other regulatory actions.

If Ambac Assurance or its subsidiaries lose control rights, their ability to mitigate loss severities and realize remediation recoveries will be compromised, and actual ultimate losses in the insured portfolio could exceed current loss reserves.

Some issuers of public finance obligations insured by Ambac Assurance are experiencing fiscal stress that could result in increased losses on those obligations or increased liquidity claims, including losses or claims resulting from payment defaults, Chapter 9 bankruptcy or other restructuring proceedings or loss of market access.

Some issuers of public finance obligations insured by Ambac Assurance have reported, or may report, budget shortfalls, significantly underfunded pensions or other fiscal stresses that imperil their ability to pay debt service or will require them to significantly raise taxes and/or cut spending in order to satisfy their obligations.

Additionally, inherent in our estimates of loss severities and remediation recoveries is the assumption that AAC or its subsidiaries, as applicable, will retain control rights in respect of our insured portfolio.

However, according to the terms of relevant transaction documents, AAC or its subsidiaries, as applicable, may lose control rights in many insured transactions if, among other things, the relevant insurer is the subject of delinquency proceedings and/or other regulatory actions.

If AAC or its subsidiaries lose control rights, their ability to mitigate loss severities and realize remediation recoveries will

| Ambac Financial Group, Inc.

11 2020 FORM 10-K |

Table of Co ntents

be compromised, and actual ultimate losses in the insured portfolio could exceed current loss reserves.

Some issuers of public finance obligations insured by AAC are experiencing fiscal stress that could result in increased losses on those obligations or increased liquidity claims, including losses or claims resulting from payment defaults, Chapter 9 bankruptcy or other restructuring proceedings or loss of market access.

Some issuers of public finance obligations insured by AAC have reported, or may report, budget shortfalls, significantly underfunded pensions or other fiscal stresses that imperil their ability to pay debt service or will require them to significantly raise taxes and/or cut spending in order to satisfy their obligations.

Furthermore, over time, the consequences of poor public policy decisions by state and local governments or increases in tax burdens can impact demographic trends, such as out-migration from one state or municipality to another, that may negatively impact the creditworthiness of related issuers.

Some issuers of obligations insured by Ambac Assurance have declared

Some issuers of obligations insured by AAC have declared a payment moratorium, defaulted or filed for bankruptcy or similar debt adjustment proceedings, raising concerns about their ultimate ability or willingness to service the debt insured by AAC and AAC's ability to recover claims paid in the future.

If the issuers of the obligations in the public finance portfolio are unable to raise taxes, cut spending, or receive federal or state assistance, or if such issuers default or file for bankruptcy under Chapter 9 or for similar relief under other laws that allow for the adjustment of debts, AAC may experience liquidity claims and/or ultimate losses on those obligations, which could adversely affect the Company's business, financial condition and results of operations.

Catastrophic public health or environmental events, like the COVID-19 pandemic or those associated with hurricanes, earthquakes, wildfires and droughts, that result in material disruption of economic activity, loss of human life or significant property damage, can have a materially negative impact on the financial performance of issuers of public finance, structured finance, investor owned utility, privatized military housing and other obligations insured by AAC.

Such stresses could result in liquidity claims and/or permanent losses on obligations of those obligations.

The emergence of the COVID-19 pandemic and the resulting containment measures have caused economic and financial disruptions that have adversely affected, and are expected to continue to materially adversely affect, our business and results of operations.

Ambac insures the obligations of a number of issuers that have been, or may in the future be, substantially affected by the economic effects of COVID-19, such as municipalities and securitizations, including those backed by consumer loans such as mortgages or student loans.

As described more fully in Management's Discussion and Analysis of Financial Condition and Results of Operations, municipalities and their authorities, agencies and instrumentalities, especially those dependent on narrow revenue streams flowing from particular economic activities, have suffered, and are expected to continue to suffer, from severely depressed revenues due to shelter-in-place orders, social distancing guidelines, travel bans and restrictions, and business shutdowns as well as an economic recession brought about by the COVID-19 pandemic.

Furthermore, securitizations dependent on cash flows from

payments on mortgage loans, student loans or other assets have experienced, and are expected to continue to experience, shortfalls in receipts due to borrower nonpayments.

See Part II, Item 7 of this Form 10-K, Management's Discussion and Analysis of Financial Condition and Results of Operations, Executive Summary, Financial Guarantees in Force, Liquidity and Capital Resources and Balance Sheet for further detail.

Federal government and other governments globally have taken certain measures to aid consumers, businesses, state and local governments, and the financial markets, but the impact of such aid remains unclear.

Federal and State governments and their agencies have also adopted policies or guidelines to provide emergency relief to consumers, such as limiting debt collection efforts, encouraging or requiring extensions, modifications or forbearance with respect to certain loans and fees, and establishing foreclosure and eviction moratoriums.

Several of these policies or guidelines have been extended beyond their initial terms and could be expanded over time as the economic effects of the pandemic become more well known.

To the extent such measures cause greater incidences of missed mortgage loan, student loan or other debt service payments than would have occurred without governmental intervention, Ambac may experience higher losses in its insured portfolio of asset-backed securities.

AAC also insures the obligations of a number of issuers that have been, or may in the future be, substantially affected by environmental or other public health events, including flooding, hurricanes, earthquakes, wildfires and drought.

In addition, certain catastrophic environmental events, notably wildfires, can result in significant potential liabilities for issuers such as investor-owned utilities that increase bankruptcy risk and the potential default on obligations of the issuer insured by AAC.

The ultimate impact of a catastrophic public health event like COVID-19 or a catastrophic environmental event on issuers and their obligations, and the economy in general, is by its very nature uncertain, and will be determined by a number of factors including, but not limited to, the depth and duration of the crisis;

the extent to which affected consumers, businesses, municipal entities and other debtors or sources of revenues recover from depressed economic circumstances, and the timelines for such recoveries;

the level and efficacy of government intervention or support for municipal entities, consumers, businesses and the financial markets via emergency relief measures;

the availability of insurance;

the availability of cost-effective financing;

management of public health crisis remediation efforts, including the availability, utilization and efficacy of vaccinations;

the effectiveness of other public or private crisis management efforts, mitigation measures or support;

and certain socio-economic variables, such as unemployment levels.

Consequently, if issuers affected by such catastrophic events do not have sufficient resources or financial flexibility, receive adequate measures of support or realize the appropriate level of economic recovery, their ultimate ability to service the debt insured by Ambac could be materially impaired and Ambac could suffer material permanent losses.

At this time, there are significant uncertainties surrounding the ultimate number of claims and the extent of losses Ambac will face as a result of the economic effects of the COVID-19 pandemic.

Actual losses may vary materially from Ambac's loss

| Ambac Financial Group, Inc.

12 2020 FORM 10-K |

a payment moratorium, defaulted or filed for bankruptcy or similar debt adjustment proceedings, raising concerns about their ultimate ability or willingness to service the debt insured by Ambac Assurance and Ambac Assurance's ability to recover claims paid in the future.

If the issuers of the obligations in the public finance portfolio are unable to raise taxes, cut spending, or receive federal or state assistance, or if such issuers default or file for bankruptcy under Chapter 9 or for similar relief under other laws that allow for the adjustment of debts, Ambac Assurance may experience liquidity claims and/or ultimate losses on those obligations, which could adversely affect the Company's business, financial condition and results of operations.

Catastrophic environmental or public health events, particularly those associated with hurricanes, earthquakes, wildfires, drought and pandemics, that result in loss of human life, significant property damage, and/or material disruption of economic activity, can have a material negative impact on the financial performance of issuers of public finance, investor owned utility, privatized military housing and other obligations insured by Ambac Assurance.

Such stresses could result in liquidity claims or permanent losses on those obligations.

Ambac Assurance insures the obligations of a number of issuers that have been, or may in the future be, substantially affected by environmental or public health events (e.g.

coronavirus), including flooding, hurricanes, earthquakes, wildfires, drought and pandemics.

The short and long term impact of catastrophic environmental or public health events on issuers and their obligations is by its very nature uncertain and is determined by a number of factors including, but not limited to, the level of Federal Government support via emergency disaster relief funding measures, both related to FEMA and otherwise, flood insurance, low interest loans, hazard mitigation, the level of state and local government support, the effectiveness of governmental support or intervention, the magnitude of commercial insurance recoveries, management of disaster recovery or public health crisis remediation efforts, and the outcome of certain socio-economic variables.

Consequently, if issuers affected by such catastrophic events do not receive adequate measures of support or realize the appropriate level of economic recovery, it could impact their ultimate ability to service the debt insured by Ambac Assurance and Ambac Assurance's ability to recover claims paid in the future.

In addition, certain catastrophic environmental events, notably wildfires, can result in significant potential liabilities for issuers such as investor owned utilities that increase bankruptcy risk and the potential default on obligations of the issuer, including obligations insured by Ambac Assurance.

Ambac Assurance insures obligations of the Commonwealth of Puerto Rico, including certain of its authorities and public corporations that are either subject to a Title III bankruptcy protection proceeding under the Puerto Rico Oversight, Management and Stability Act ("PROMESA") or have otherwise suspended debt service payments.

Ambac Assurance has made and may continue to be required to make significant amounts of policy payments over the next several years, the recoverability of which is subject to great uncertainty, which may lead to material permanent losses.

While we believe our reserves are adequate to cover losses on Puerto Rico insured bonds, there can be no

assurance that Ambac Assurance may not incur additional losses in the future, particularly given the uncertainty related to the ongoing Title III proceedings and the developing economic, political and legal circumstances in Puerto Rico.

Such losses may have a material adverse effect on Ambac Ass urance's results of operation and financial condition.

Ambac Assurance has exposure to the Commonwealth of Puerto Rico (the "Commonwealth"), including its authorities and public corporations.

Table of Co ntents

and loss expense reserves due to the factors described above and the inherent uncertainties in estimating losses given the evolving nature of the pandemic and its impact on issuers of Ambac insured debt and the economy in general.

Potential ultimate losses from the economic consequences of the COVID-19 pandemic could be material and therefore may have an adverse effect on our results of operations and financial condition.

AAC insures obligations of the Commonwealth of Puerto Rico, including certain of its authorities and public corporations that are either subject to a Title III bankruptcy protection proceeding under the Puerto Rico Oversight, Management and Stability Act ("PROMESA") or have otherwise suspended debt service payments.

AAC has made and may continue to be required to make significant amounts of policy payments over the next several years, the recoverability of which is subject to great uncertainty, which may lead to material permanent losses.

While we believe our reserves are adequate to cover losses on Puerto Rico insured bonds, there can be no assurance that AAC may not incur additional losses in the future, particularly given the uncertainty related to the ongoing Title III proceedings and the developing economic, political and legal circumstances in Puerto Rico.

Such losses may have a material adverse effect on AAC's results of operation and financial condition.

AAC has exposure to the Commonwealth of Puerto Rico (the "Commonwealth"), including its authorities and public corporations.

Each has its own credit risk profile attributable to, as applicable, discrete revenue sources, direct general obligation pledges and/or general obligation guarantees.

Ambac Assurance had approximately $1,123 million of net par exposure to the Commonwealth and these instrumentalities at December 31, 2019.

AAC had approximately $1,070 million of net par exposure to the Commonwealth and these instrumentalities at December 31, 2020.

Components of the overall Puerto Rico net par outstanding include capital appreciation bonds that are reported at the par amount at the time of issuance of the related insurance policy as opposed to the current accreted value of the bonds.

2 unchanged sentences

As a result of the developments described in these Risk Factors and elsewhere in this 10-K (see Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Guarantees in Force, and Note 7.

Financial Guarantee Insurance Contracts to the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K), the Commonwealth of Puerto Rico and certain of its instrumentalities are continuing to default on debt service payments, including payments owed on bonds insured by Ambac Assurance.

Ambac Assurance has made, and may continue to be required to make, significant amounts of policy payments over the next several years, the recoverability of which is subject to great uncertainty, which may lead to material permanent losses.

Our exposure to Puerto Rico is impacted by the amount of monies available for debt service, which is in turn affected by a number of factors including variability in economic growth and demographic trends, tax revenues, changes in law or the effects thereof, essential services expense, as well as federal funding of Commonwealth needs.

AAC has made, and may continue to be required to make, significant amounts of policy payments over the next several years, the recoverability of which is subject to great uncertainty, which may lead to material permanent losses.

needs as well as interpretation of legislation, legal documents, and updated financial information (when available).

Substantial uncertainty also exists with respect to the ultimate outcome for creditors in Puerto Rico due to the Commonwealth Plan of Adjustment or changes thereto, as well as legislation enacted by the Commonwealth and the United States, including PROMESA, as well as actions taken in reliance on such laws, including Title III filings.

Ambac Assurance is involved in multiple litigations relating to such actions and other issues and may not be successful in pursuing claims or protecting its interests.

AAC is involved in multiple litigations relating to such actions and other issues and may not be successful in pursuing claims or protecting its interests.

Given the numerous uncertainties and risks existing with respect to the restructuring process, outcomes associated with the Commonwealth Plan of Adjustment or any changes thereto and relevant litigation, no assurance can be given that ultimate debt service discounts will not be very severe and cause Ambac to experience losses materially exceeding current reserves.

It is possible that certain restructuring process solutions, together with associated legislation, budgetary, and/or public policy proposals could be adopted and could significantly further impair our exposures.

In addition, there are possible final legal determinations, including failing to recognize or properly d

| Ambac Financial Group, Inc.

11 2019 FORM 10-K |

ifferentiate legal structures and protections applicable to such exposures, that could result in losses exceeding our current reserves by a material amount and further increases to our loss reserves.

In particular, in a Title III process, should court-approved plans of adjustment for the Commonwealth, Puerto Rico Highways and Transportation Authority ("PRHTA"), the Puerto Rico Public Buildings Authority ("PBA") or any other issuers of Ambac-insured debt that may or may not file for Title III protection contemplate discounts to debt service implied by, or even worse than, the Commonwealth Revised Fiscal Plan (May 9, 2019) or Ambac receive unfavorable judgments in the litigations to which it is a party, Ambac’s financial condition would be materially adversely affected.

For example, the amended disclosure statement and plan of adjustment ("Amended POA") to restructure $35 billion of debt and other claims against the Commonwealth of Puerto Rico, Public Building Authority ("PBA"), and Employees Retirement Systems ("ERS"), as well as more than $50 billion in pension liabilities that was filed by the Federal Oversight Management Board for Puerto Rico ("Oversight Board") on February 28, 2020, provides for an average of 3.9% recoveries on claims for non-General Obligation and PBA bonds, including revenue bonds insured by Ambac.

In addition, there are possible final legal determinations, including failing to recognize or properly differentiate legal structures and protections applicable to such exposures, that could result in losses exceeding our current reserves by a material amount and further increases to our loss reserves.

In particular, in a Title III process, should court-approved plans of adjustment for the Commonwealth, Puerto Rico Highways and Transportation Authority ("PRHTA"), the Puerto Rico Public Buildings Authority ("PBA") or any other issuers of Ambac-insured debt that may or may not file for Title III protection contemplate discounts to debt service implied by, or even worse than, the Commonwealth Fiscal Plan (May 27, 2020) or Ambac receive unfavorable judgments in the litigations to which it is a party, Ambac’s financial condition would be materially adversely affected.

For example, the amended disclosure statement and plan of adjustment ("Amended POA") to restructure $35 billion of debt and other claims against the Commonwealth of Puerto Rico, PBA, and Employees Retirement Systems ("ERS"), as well as more than $50 billion in pension liabilities that was filed by the Federal Oversight Management Board for Puerto Rico ("Oversight Board") on February 28, 2020, provides for an average of 3.9% recoveries on claims for non-General Obligation and PBA bonds, including revenue bonds insured by Ambac.

If the Amended POA was confirmed in its current form, Ambac's financial condition would be materially adversely affected.

It is also possible that economic or demographic outcomes may be as, or worse than, forecasted in the Commonwealth Revised Fiscal Plan or under proposals or plans promulgated by the Commonwealth or its instrumentalities in or in connection with a Title III process or otherwise.

It is also possible that economic or demographic outcomes may be as, or worse than, forecasted in the Commonwealth Fiscal Plan or under proposals or plans promulgated by the Commonwealth or its instrumentalities in or in connection with a Title III process or otherwise.

Even a negotiated restructuring to which Ambac agrees as part of mediation or other process may involve material losses in excess of current reserves.

While our reserving scenarios reflect a wide range of possible outcomes reflecting the significant uncertainty regarding future developments and outcomes, given our exposure to Puerto Rico and the economic, fiscal, legal and political uncertainties associated therewith, our loss reserves may ultimately prove to be insufficient to cover our losses, potentially by a material amount, and may be subject to material volatility.

| Ambac Financial Group, Inc.

13 2020 FORM 10-K |

Table of Co ntents

Certain judicial decisions related to the Commonwealth of Puerto Rico's PROMESA Title III proceedings may materially adversely affect our Public Finance insured portfolio.

4 unchanged sentences

Bankruptcy Code, municipal issuers of revenue bonds secured by special revenues are permitted, but not required, to apply special revenues to pay debt service on such revenue bonds during the pendency of bankruptcy proceedings for such municipal issuers.

The complainants, including Ambac Assurance, had sought an order compelling PRHTA, as the debtor, to continue to make debt service payments on its revenue bonds from pledged special revenues during the pendency of its Title III case, but the First Circuit affirmed the District Court’s dismissals of the complaints, holding that it could not compel the issuer to make such payments.

The First Circuit's decisions challenge what had been a commonly understood notion in the municipal finance marketplace that

municipal revenue bondholders secured by special revenues (as defined in Chapter 9 of the U.S.

The complainants, including AAC, had sought an order compelling PRHTA, as the debtor, to continue to make debt service payments on its revenue bonds from pledged special revenues during the pendency of its Title III case, but the First Circuit affirmed the District Court’s dismissals of the complaints, holding that it could not compel the issuer to make such payments.

The First Circuit's decisions challenge what had been a commonly understood notion in the municipal finance marketplace that municipal revenue bondholders secured by special revenues (as defined in Chapter 9 of the U.S.

Bankruptcy Code) would continue to receive payment during a bankruptcy of the municipal issuer.

Although the First Circuit’s decisions are binding only on federal district and bankruptcy courts in Maine, Massachusetts, New Hampshire, Puerto Rico and Rhode Island, they introduce significant uncertainty into the public finance market, may make it more difficult for municipal instrumentalities to procure revenue bond financings in the future and increase the credit risk to bondholders of existing special revenue bonds, particularly those from weaker issuers.

In the wake of the decisions, rating agencies have taken ratings actions on, or announced their intention to review ratings given to, bonds issued across the country highlighting the potential contagion effect of the various Puerto Rico proceedings under PROMESA.

It is unclear how these rulings may ultimately impact Ambac's revenue bond municipal exposures, inclusive of Puerto Rico.

However, potential impacts could include ratings downgrades, decreased or more costly access to capital markets to certain issuers to refinance the insured debt or raise new debt, and lower recoveries in a restructuring or bankruptcy.

At December 31, 2019 , Ambac Assurance insured approximately $4,109 million of net par of bonds of special revenue issuers, including $277 million net par of watch list exposure and $615 million net par of adversely classified exposure, $503 million of which was Puerto Rico exposure.

However, potential impacts could include ratings downgrades, decreased or more costly access to capital markets for certain issuers to refinance their insured debt or raise new debt, and lower recoveries in a restructuring or bankruptcy.

At December 31, 2020, AAC insured approximately $3,644 million of net par of special revenue issuers, including $1,235 million net par of watch list exposure and $1,333 million net par of adversely classified exposure, $490 million of which was Puerto Rico exposure.

We are subject to credit risk and other risks in our insured portfolio, including related to RMBS and securities backed by student loans.

1 unchanged sentence

Measures taken to reduce such risks may have an adverse effect on the Company's operating results or financial position.

Performance of our insured transactions, including (but not limited to) RMBS transactions and those involving securities backed by student loans, can be adversely affected by general economic conditions, such as recession, rising unemployment rates, underemployment, home prices that decline or do not increase in the patterns assumed in our models, increasing foreclosure rates and unavailability of consumer credit, mortgage product attributes, such as interest rate adjustments and balloon payment obligations, borrower and/or originator fraud, mortgage and student loan servicer performance or underperformance and financial difficulty, such as risks related to whether the servicer may be required to delay the remittance of any cash collections held by it or received by it after the time it becomes subject to bankruptcy or insolvency proceedings.

underperformance and financial difficulty, such as risks related to whether the servicer may be required to delay the remittance of any cash collections held by it or received by it after the time it becomes subject to bankruptcy or insolvency proceedings.

While further deterioration in the performance of consumer assets, including mortgage-related assets and student loans, may occur, the timing, extent and duration of any future deterioration of the credit markets is unknown, as is the impact on potential claim payments and ultimate losses on the securities within our portfolio.

2 unchanged sentences

Similarly, servicer settlements with governmental authorities regarding foreclosure or servicing irregularities are generally designed to protect borrowers and may increase losses on securities we insure.

In particular, the student

| Ambac Financial Group, Inc.

12 2019 FORM 10-K |

loan industry and, specifically, trusts with securities insured by Ambac Assurance have been subject to heightened Consumer Finance Protection Bureau (CFPB) scrutiny and enforcement action over servicing and collections practices and potential chain of title issues and, consequently, any settlements, orders, consents or penalties resulting from CFPB actions, or any failure on the part of servicers or other parties asserting claims against delinquent borrowers to establish title to the loans, could lead to increased losses on securities we insure.

In addition, there can be no assurance that Ambac Assurance would be successful, or that it would not be delayed, in enforcing the subordination provisions, credit enhancements or other contractual provisions of the RMBS that Ambac Assurance insures.

In particular, the student loan industry and, specifically, trusts with securities insured by AAC have been subject to heightened Consumer Finance Protection Bureau (CFPB) scrutiny and enforcement action over servicing and collections practices and potential chain of title issues and, consequently, any settlements, orders, consents or penalties resulting from CFPB actions, or any failure on the part of servicers or other parties asserting claims against delinquent borrowers to establish title to the loans, could lead to increased losses on securities we insure.

Risks such as these are potentially heightened by Democratic control of the United States Congress and executive branch.

In addition, there can be no assurance that AAC would be successful, or that it would not be delayed, in enforcing the subordination provisions, credit enhancements or other contractual provisions of the RMBS that AAC insures.

As the runoff of the insured portfolio continues, the proportion of exposures we rate as below investment grade relative to the aggregate insured portfolio is likely to continue to increase, leaving the portfolio increasingly concentrated in higher risk exposures.

5 unchanged sentences

Ongoing surveillance of credit risks in our insured portfolio is an important component of our risk management process.

These policies and practices in the past have not insulated us from risks that were unforeseen and which had unanticipated loss severity, and such policies and practices may not do so in the future.

These policies and practices in the past have not insulated us from risks that were unforeseen and which had unanticipated loss severity, and such policies and practices

| Ambac Financial Group, Inc.

14 2020 FORM 10-K |

Table of Co ntents

may not do so in the future.

There can be no assurance that these policies and practices will be adequate to avoid future losses.

4 unchanged sentences

These models and tools assume various conditions, probability scenarios, facts and circumstances, and there can be no assurance that such models or tools accurately predict or measure the quantum of losses, loss reserves and timing of losses.

in the models and tools that we employ, uncertainties or flaws in these financial models and tools, or faulty assumptions inherent in these financial models and tools or those determined by management could lead to material changes in projected outcomes, and could include increased losses, loss reserves and/or other than temporary investment impairments.

Differences in the models and tools that we employ, uncertainties or flaws in these financial models and tools, or faulty assumptions inherent in these financial models and tools or those determined by management could lead to material changes in projected outcomes, and could include increased losses, loss reserves and/or other than temporary investment impairments.

Moreover, estimates of transaction performance depend in part on the interpretation of contracts and other bases of our legal rights.

5 unchanged sentences

Risks Related to Indebtedness

Ambac Assurance's ability to generate the significant amount of cash needed to service its debt and financial obligations and its ability to refinance all or a portion of its indebtedness or obtain additional financing depends on many factors beyond our control.

Ambac Assurance is highly leveraged.

Ambac Assurance’s ability to make payments on and/or refinance its debt and to fund its operations will depend on its ability to generate substantial operating cash flow and on the performance of the insured portfolio.

Ambac Assurance’s cash flow generation will depend on receipt of premiums, investment returns, earnings from subsidiaries and potential litigation recoveries offset by policyholder claims, commutation payments, reinsurance premiums, operating and loss adjustment expenses, and interest expense, which will be subject to prevailing economic conditions and to financial, business and other factors, many of which are beyond our control and many of which are event-driven.

As of December 31, 2019 , Ambac Assurance had approximately $2,044 million of indebtedness outstanding (the Tier 2 Notes and the Ambac Note) that are senior to its surplus notes.

Ambac Assurance had $574 million principal balance of surplus notes outstanding plus $365 million principal balance of junior surplus notes outstanding as of December 31, 2019 .

AAC's ability to generate the significant amount of cash needed to service its debt and financial obligations and its ability to refinance all or a portion of its indebtedness or obtain additional financing depends on many factors beyond our control.

AAC is highly leveraged.

AAC’s ability to make payments on and/or refinance its debt and to fund its operations will depend on its ability to generate substantial operating cash flow and on the performance of the insured portfolio.

AAC’s cash flow generation will depend on receipt of premiums, investment returns, earnings from subsidiaries and potential litigation recoveries offset by policyholder claims, commutation

payments, reinsurance premiums, operating and loss adjustment expenses, and interest expense, which will be subject to prevailing economic conditions and to financial, business and other factors, many of which are beyond our control and many of which are event-driven.

There is substantial risk that AAC may not have the financial resources necessary to pay its debts in full and on time due to risks associated with its cash flow, expected litigation recoveries and insured portfolio, as discussed elsewhere in these Risk Factors.

As of December 31, 2020, AAC had approximately $1,947 million of indebtedness outstanding (the Tier 2 Notes and the Ambac Note) that are senior to its surplus notes.

AAC had $573 million principal balance of surplus notes outstanding plus $365 million principal balance of junior surplus notes outstanding as of December 31, 2020.

The Tier 2 Notes and the Ambac Note are secured by potential litigation recoveries (and in the case of the Ambac Note, other assets), the receipt of which is highly uncertain, as more fully discussed in Part I, Item 1A.

Risk Factors.

Failure to achieve litigation recoveries in an amount sufficient to repay the Tier 2 Notes and the Ambac Note would materially weaken Ambac Assurance’s ability to service its indebtedness.

If Ambac Assurance cannot pay its policyholders’ claims or service its debt, it will have to take actions such as selling assets, restructuring or refinancing its debt or seeking additional capital.

Failure to achieve litigation recoveries in an amount sufficient to repay the Tier 2 Notes and the Ambac Note would materially weaken AAC’s ability to service its indebtedness.

If AAC cannot pay its policyholders’ claims or service its debt, it will have to take actions such as selling assets, restructuring or refinancing its debt or seeking additional capital.

Any of these remedies may not, if necessary, be effected on commercially reasonable terms, or at all.

Because of these and other factors beyond our control, Ambac Assurance may be unable to pay the principal, interest or other amounts on its indebtedness when due or ever.

| Ambac Financial Group, Inc.

13 2019 FORM 10-K |

Because of these and other factors beyond our control, AAC may be unable to pay the principal, interest or other amounts on its indebtedness when due or ever.

We have substantial indebtedness, which could adversely affect our financial condition, operational flexibility and our ability to obtain financing in the future.

6 unchanged sentences

• limit our ability or increase the costs to refinance indebtedness or repay such indebtedness due to ongoing interest accretion;

limit our ability to attract and retain key em ployees;

• limit our ability to attract and retain key employees;

• limit our ability to enter into hedging transactions by reducing the number of counterparties with whom we can enter into such transactions, as well as the volume of those transactions.

| Ambac Financial Group, Inc.

15 2020 FORM 10-K |

Table of Co ntents

Despite current indebtedness levels, we may incur additional debt.

While restrictive covenants in certain of our contracts may limit the amount of additional indebtedness Ambac Assurance may incur, we may obtain waivers of those restrictions and incur additional indebtedness in the future.

While restrictive covenants in certain of our contracts may limit the amount of additional indebtedness AAC may incur, we may obtain waivers of those restrictions and incur additional indebtedness in the future.

In addition, if Ambac incurred indebtedness, its ability to make scheduled payments on, or refinance, any such indebtedness may depend on the ability of our subsidiaries to make distributions or pay dividends, which in turn will depend on their future operating performance and contractual, legal and regulatory restrictions on the payment of distributions or dividends to which they may be subject.

2 unchanged sentences

There may not be sufficient collateral to pay any or all of the Secured Notes or Tier 2 Notes.

In addition to Ambac Assurance’s right to representation and warranty ("R&W") recoveries in respect of the RMBS litigations, which is inherently uncertain, the Ambac Note is also secured by cash and securities having an estimated fair market value of approximately $197 million .

In addition to AAC’s right to representation and warranty ("R&W") recoveries in respect of the RMBS litigations, which is inherently uncertain, the Ambac Note is also secured by cash and securities having an estimated fair market value of approximately $178 million.

However, there can be no assurance that the fair market value of these securities will not decrease significantly.

1 unchanged sentence

Consequently, when combined with potential R&W recoveries, liquidating the securities collateral securing the Ambac Note may not produce proceeds in an amount sufficient to pay all amounts due on the Secured Notes.

In the event of rehabilitation, liquidation, conservation, dissolution or other insolvency proceeding, Ambac Assurance cannot assure

holders that the proceeds from any sale or liquidation of the securities collateral will be sufficient to pay any or all of Ambac Assurance’s obligations under the Ambac Note.

In addition, in the event of any such proceeding, it is possible that the rehabilitator, trustee, or competing creditors will assert that the value of the collateral with respect to the Ambac Note or the Tier 2 Notes, including Ambac Assurance’s rights to recoveries in respect of the RMBS litigations, is less than the then-current principal amount outstanding under the Ambac Note and the Secured Notes and/or the Tier 2 Notes on the date of the rehabilitation filing.

Upon a finding by the court overseeing an Ambac Assurance rehabilitation that the Ambac Note and the Secured Notes and/or the Tier 2 Notes are under-collateralized, the claims in the rehabilitation proceeding with respect to the Ambac Note, the Secured Notes or the Tier 2 Notes may be bifurcated between a secured claim up to the value of the collateral and an unsecured claim for any deficiency.

As a result, the claim of the holders of the Secured Notes or the Tier 2 Notes could be unsecured in whole or in part.

The ability of the holders of the Secured Notes or Tier 2 Notes to realize upon any of the collateral securing the Ambac Note and the Secured Notes or Tier 2 Notes, as the case may be, may also be subject to bankruptcy and insolvency law limitations or similar limitations applicable in insurance company rehabilitation or liquidation proceedings.

Ambac Assurance has not made regular interest or principal payments on surplus notes and may be unable or permitted to repay surplus notes in full at their scheduled maturity of June 7, 2020 or ever.

In the event of rehabilitation, liquidation, conservation, dissolution or other insolvency proceeding, AAC cannot assure holders that the proceeds from any sale or liquidation of the securities collateral will be sufficient to pay any or all of AAC’s obligations under the Ambac Note.

Moreover, the rehabilitator, liquidator or court overseeing such a proceeding may not assign value to the collateral with respect to the Ambac Note or the Tier 2 Notes, including AAC’s rights to recoveries in respect of the RMBS litigations, in an amount sufficient to discharge all or a substantial portion of AAC's obligations under or with respect to the Ambac Note, the Secured Notes and/or the Tier 2 Notes.

AAC has not made regular interest or principal payments on surplus notes and can not provide any assurance as to when payments will be made, if ever.

Payments of interest and principal on surplus notes are subject to the prior approval of the OCI.

Since the issuance of the surplus notes in 2010, OCI has declined to approve regular payments of interest on surplus notes, although the OCI has permitted exceptional payments in connection with (a) increasing the percentage of deferred policy payments of the Segregated Account of Ambac Assurance from 25% to 45% in 2014 and (b) a one-time payment of approximately six months of interest on the surplus notes outstanding immediately after the consummation of the Rehabilitation Exit Transactions in 2018.

Ambac Assurance may not receive approval from OCI to make payments as and when scheduled, including the payment of the surplus notes on their scheduled maturity date of June 7, 2020.

If the OCI does not approve the making of any payment of principal of or interest on surplus notes on the scheduled payment date or scheduled maturity date thereof, the scheduled payment date or scheduled maturity date, as the case may be, shall be extended until OCI grants approval to make the payment.

Interest will accrue, compounded on each anniversary of the original scheduled payment date or scheduled maturity date, on any unpaid principal or interest through the actual date of payment, at 5.1% per annum.

Holders of surplus notes will have no rights to enforce the payment of the principal of, or interest on, surplus notes in the absence of OCI approval to pay such amount.

As a result, holders of surplus notes may not be paid in full at the scheduled maturity date or ever.

If OCI does not approve regular payments on the surplus notes within the next several years, the total amount due (principal and accrued interest) for surplus notes may exceed Ambac Assurance's financial resources and holders of surplus notes may not ever be paid in full.

If Ambac Assurance becomes subject to a rehabilitation or liquidation under Wisconsin insurance law, prior to the

| Ambac Financial Group, Inc.

14 2019 FORM 10-K |

repayment of surplus notes, holders of surplus notes may not receive any recoveries on their investments.

Ambac Assurance has ongoing obligations related to surplus notes.

Subject to approval by OCI, Ambac Assurance may be required to make interest and principal (to the extent due) payments in cash on surplus notes on an annual basis.

Ambac Assurance will be required to continue to make such payments, as and when approved by OCI, until all of the surplus notes mature, are repaid in full or are otherwise repurchased or retired.

Ambac Assurance is also obligated to make payments on junior surplus notes, subject to OCI approval, after the senior surplus notes and other indebtedness have been paid in full.

Ambac Assurance may not have the ability to borrow, raise or otherwise have access to the funds necessary to pay such amounts when due.

Since the issuance of the surplus notes in 2010, OCI has declined to approve regular payments of interest on surplus notes, although the OCI has permitted exceptional payments in connection with (a) increasing the percentage of deferred policy payments of the Segregated Account of AAC from 25% to 45% in 2014 and (b) a one-time payment of approximately six months of interest on the surplus notes outstanding immediately after the consummation of the Rehabilitation Exit Transactions in 2018.

AAC also did not

receive approval from OCI to make payment of the surplus notes on their scheduled maturity date of June 7, 2020, and therefore the scheduled maturity date was extended until OCI grants approval to make payment, in part or in full.

Interest will accrue, compounded on each anniversary of the original scheduled maturity date, on any unpaid principal and interest through the actual date of payment, at 5.1% per annum.

Holders of surplus notes have no rights to enforce the payment of the principal of, or interest on, surplus notes in the absence of OCI approval to pay such amount.

If OCI does not approve regular payments on the surplus notes within the next several years, the total amount due for surplus notes may exceed AAC's financial resources and holders of surplus notes may not ever be paid in full.

Surplus notes are subordinated in right of payment to other claims, which could impair the right of the holders of such notes to receive interest and principal in the event of our insolvency or a similar occurrence.

Surplus notes are unsecured obligations of Ambac Assurance and are expressly subordinated in right of payment to all of Ambac Assurance’s existing and future indebtedness (other than junior surplus notes) and policy claims.

Surplus notes are unsecured obligations of AAC and are expressly subordinated in right of payment to all of AAC’s existing and future indebtedness and policy claims.

The surplus notes are subject to provisions of Wisconsin insurance law, which establishes the priority of distribution of claims from the estate of an insolvent insurance company.

In the event that Ambac Assurance becomes subject to rehabilitation, liquidation, conservation or dissolution, holders of Ambac Assurance’s senior indebtedness and policy claims would be afforded a higher priority of distribution than holders of the surplus notes, and accordingly would have the right to be paid in full before holders of the surplus notes would be paid.

Due to the nature of Ambac Assurance’s business, the amount of such higher priority claims in any rehabilitation, liquidation, conservation or dissolution is likely to be many times greater than any free and divisible surplus and it is likely that the holders of surplus notes would not recover any payment in such circumstances.

In addition, claims of holders of the surplus notes will be subordinated to certain liabilities of the Company’s subsidiaries that are guaranteed by Ambac Assurance.

Increases in interest rates will increase the cost of servicing our debt and could reduce our profitability.

The Secured Notes bear interest at a variable rate.

As a result, increases in interest rates will increase the cost of servicing the Secured Notes and could adversely affect our profitability and cash flows.

Each one percentage point increase in interest rates would result in an $17.6 million increase in the annual cash interest payments due on the Secured Notes.

The amount of interest payable on the Secured Notes is set only once per interest period based on the three-month LIBOR rate on the applicable interest determination date, which rate may fluctuate substantially, and affect our ability to make payment on the Secured Notes.

In the past, the level of the three-month LIBOR rate has experienced significant fluctuations.

Historical levels, fluctuations and trends of the three-month LIBOR rate are not necessarily indicative of future levels.

Any historical upward or downward trend in the three-month LIBOR rate is not an indication that the

three-month LIBOR rate is more or less likely to increase or decrease at any time during an interest period for the Secured Notes, and historical levels of the three-month LIBOR rate should not be taken as an indication of its future performance.

In addition, although the actual three-month LIBOR rate on an interest payment date or at other times during an interest period may be higher than the three-month LIBOR rate on the applicable interest determination date, the only relevant date for purposes of determining the interest payable on the Secured Notes is the three-month LIBOR rate as of the respective interest determination date.

Changes in the three-month LIBOR rates between interest determination dates will not affect the interest payable on the Secured Notes.

The Secured Notes will bear interest at floating rates that could rise significantly, increasing Ambac Assurance’s interest expense and reducing its cash flow.

If Ambac Assurance’s interest expense increases significantly, whether due to changes in LIBOR or increased borrowing costs when it refinances its current indebtedness, Ambac Assurance may not be able to make payments with respect to the Secured Notes or its other indebtedness.

Ambac’s estimated R&W recovery may change over time, causing the perceived value of the collateral securing the Secured Notes and Tier 2 Notes to change, and any such change may be material.

In the event that AAC becomes subject to rehabilitation, liquidation, conservation or dissolution, holders of AAC’s senior indebtedness and policy claims would be afforded a higher priority of distribution than holders of the surplus notes, and accordingly would have the right to be paid in full before holders of the surplus notes would be paid.

Due to the nature of AAC’s business, the amount of such higher priority claims in any rehabilitation, liquidation, conservation or dissolution is likely to be many times greater than any free and divisible surplus and it is likely that the holders of surplus notes would not recover any payment in such circumstances.

In addition, claims of holders of the surplus notes will be subordinated to certain liabilities of the Company’s subsidiaries that are guaranteed by AAC.

increases in interest rates will increase the cost of servicing our debt reducing our profitability and may affect our ability to make payment on the Secured Notes.

The Secured Notes will bear interest at floating rates that could rise significantly, increasing AAC’s interest expense and reducing its cash flow and profitability.

Each one percentage point increase in interest rates would result in a $6 million increase in the annual cash interest payments due on the Secured Notes.

If AAC’s interest expense increases significantly, whether due to changes in LIBOR or increased borrowing costs when it refinances its current indebtedness, AAC may not be able to make payments with respect to the Secured Notes or its other indebtedness.

Ambac’s estimated R&W recovery may be reduced, causing the perceived value of the collateral securing the Secured Notes and Tier 2 Notes to change, and any such change may be material.

| Ambac Financial Group, Inc.

16 2020 FORM 10-K |

Table of Co ntents

Ambac reevaluates its estimated R&W recoveries on a quarterly basis in connection with the preparation of its financial statements.

2 unchanged sentences

Financial Guarantee Insurance Contracts to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for the fiscal year ended December 31, 2020.

As a result of any reevaluation, the estimated amount of Ambac’s R&W recovery may be adjusted upward or downward due to, among other things, changes in management's view of such estimated recoveries and/or changes in the loss reserves related to such recoveries, and any adjustment may be material.

Changes in estimated R&W recoveries may result in material changes in Ambac’s financial condition, including its capital and liquidity.

In addition, any adjustment to estimated R&W recoveries may alter the perceived value of the collateral securing the Secured Notes and Tier 2 Notes before payment on the Secured Notes or Tier 2 Notes is made in full, which may affect the value of, and trading market, if any, for, the Secured Notes or Tier 2 Notes.

Management makes no representation that the estimated R&W recoveries will not change, materially or at all, including in the near term.

As a result of any reevaluation, the estimated amount of Ambac’s R&W recovery may be adjusted downward due to, among other things, changes in management's view of such estimated recoveries and/or changes in the loss reserves related to such recoveries, and any adjustment may be material.

A reduction in estimated R&W recoveries may result in material changes in Ambac’s financial condition, including its capital and liquidity.

In addition, any reduction to estimated R&W recoveries may alter the perceived value of the collateral securing the Secured Notes and Tier 2 Notes before payment on the Secured Notes or Tier 2 Notes is made in full, which may affect the value of, and trading market, if any, for, the Secured Notes or Tier 2 Notes.

Management makes no representation that the estimated R&W recoveries will not be reduced, materially, including in the near term.

There can be no assurance that the estimated R&W recoveries securing the Secured Notes and Tier 2 Notes will equal or exceed the principal amount of the Secured Notes and Tier 2 Notes, respectively, at all times prior to maturity.

1 unchanged sentence

Our inability to realize the expected recoveries included in our financial statements could adversely impact our liquidity, financial condition and results of operations and the value of our securities, including the Secured Notes and Tier 2 Notes.

Ambac Assurance is pursuing claims in litigation with respect to certain RMBS transactions that it insured.

| Ambac Financial Group, Inc.

15 2019 FORM 10-K |

origination process, the compliance of loans with the prevailing underwriting policies, and compliance of the RMBS transaction counterparties with policies and procedures related to loan origination and securitization.

AAC is pursuing claims in litigation with respect to certain RMBS transactions that it insured.

These claims are based on, among other things, representations with respect to the characteristics of the securitized loans, the absence of borrower fraud in the underlying loan pools or other misconduct in the origination process, the compliance of loans with the prevailing underwriting policies, and compliance of the RMBS transaction counterparties with policies and procedures related to loan origination and securitization.

In such cases, where contract claims are being pursued, the sponsor of the transaction is contractually obligated to repurchase, cure or substitute collateral for any loan that breaches the representations and warranties.

3 unchanged sentences

The estimated recoveries we have recorded do not represent the best or the worst possible outcomes with respect to any particular transaction or group of transactions.

There can be no assurance that Ambac Assurance will be successful in prosecuting its claims in the RMBS litigations.

The outcome of any litigation, including the RMBS litigations, is inherently unpredictable, including because of risks intrinsic in the adversarial nature of litigation.

Motions made to the court, rulings and appeals - in the cases being prosecuted by Ambac Assurance or in other relevant cases - could delay or otherwise impact any recovery by Ambac Assurance.

Moreover, rulings that may be adverse to Ambac Assurance (in any of its RMBS litigations, as well as in other RMBS cases in which it is not a party) could affect Ambac Assurance’s ability to pursue its claims or alter settlement dynamics with RMBS litigation defendants.

Any litigation award or settlement may be for an amount less than the amount necessary (even when combined with other pledged collateral) to pay the Secured Notes or the Tier 2 Notes, which could have a material adverse effect on our financial condition or results of operations and make it more difficult for Ambac Assurance to repay the Ambac Note (and therefore make it more difficult for the issuer of the Secured Notes to repay the Secured Notes) and/or the Tier 2 Notes and/or Ambac Assurance’s outstanding surplus notes, on a timely basis or at all.

In the event that Ambac Assurance is unable to satisfy its obligations with respect to the Secured Notes or Tier 2 Notes, holders will have the right to foreclose on any available collateral and to sue Ambac Assurance for failure to make required payments;

There can be no assurance that AAC will be successful in prosecuting its claims in the RMBS litigations.

The outcome of any litigation, including the RMBS litigations, is inherently unpredictable, including because of risks intrinsic in the

adversarial nature of litigation.

Motions made to the court, rulings and appeals - in the cases being prosecuted by AAC or in other relevant cases - could delay or otherwise impact any recovery by AAC.

Moreover, rulings that may be adverse to AAC (in any of its RMBS litigations, as well as in other RMBS cases in which it is not a party) could adversely affect AAC’s ability to pursue its claims or the amount or timing of any recovery, or negatively alter settlement dynamics with RMBS litigation defendants.

Any litigation award or settlement may be for an amount less than the amount necessary (even when combined with other pledged collateral) to pay the Secured Notes or the Tier 2 Notes, which could have a material adverse effect on our financial condition or results of operations and make it more difficult for AAC to repay the Ambac Note (and therefore make it more difficult for the issuer of the Secured Notes to repay the Secured Notes) and/or the Tier 2 Notes and/or AAC’s outstanding surplus notes, on a timely basis or at all.

In the event that AAC is unable to satisfy its obligations with respect to the Secured Notes or Tier 2 Notes, holders will have the right to foreclose on any available collateral and to sue AAC for failure to make required payments;

however, there can be no assurance that the sale of collateral will produce proceeds in an amount sufficient to pay any or all amounts due on the Secured Notes or Tier 2 Notes, as the case may be, or that holders will be successful in any litigation seeking payments.

Additionally, while Ambac Assurance may pursue settlement negotiations, there can be no assurance that any settlement negotiations will materialize or that any settlement agreement can be reached on terms acceptable to Ambac Assurance, or at all.

Depending on the length of time required to resolve these litigations, either through settlement or at trial, Ambac Assurance could incur greater litigation expenses than currently projected.

If a case is brought to trial, Ambac Assurance’s ultimate recovery would be subject to the additional risks inherent in any trial, including adverse findings or determinations by the trier of fact or the court, which could adversely impact the value of our securities, including the Secured Notes and Tier 2 Notes.

Any litigation award is subject to risks of recovery, including that the sponsor is unable pay a judgment that Ambac Assurance may obtain in litigation.

In some instances, Ambac Assurance also has claims against a parent or an acquirer of the counterparty.

However, Ambac Assurance may not be successful in enforcing its claims against any successor entity.

The RMBS litigations could also be adversely affected if Ambac Assurance does not have sufficient resources to actively prosecute its claims or becomes subject to rehabilitation, liquidation, conservation or dissolution, or otherwise impaired by actions of OCI.

Additionally, while AAC may pursue settlement negotiations, there can be no assurance that any settlement negotiations will materialize or that any settlement agreement can be reached on terms acceptable to AAC, or at all.

Depending on the length of time required to resolve these litigations, either through settlement or at trial, AAC could incur greater litigation expenses than currently projected.

If a case is brought to trial, AAC’s ultimate recovery would be subject to the additional risks inherent in any trial, including adverse findings or determinations by the trier of fact or the court, which could adversely impact the value of our securities, including the Secured Notes and Tier 2 Notes.

Any litigation award is subject to risks of recovery, including that the sponsor is unable pay a judgment that AAC may obtain in litigation.

In some instances, AAC also has claims against a parent or an acquirer of the counterparty.

However, AAC may not be successful in enforcing its claims against any successor entity.

The RMBS litigations could also be adversely affected if AAC does not have sufficient resources to actively prosecute its claims or becomes subject to rehabilitation, liquidation, conservation or dissolution, or otherwise impaired by actions of OCI.

Our ability to realize the estimated RMBS R&W subrogation recoveries included in our financial statements and the time of the recoveries, if any, is subject to significant uncertainty, including the risks described above and uncertainties inherent in the assumptions used in estimating such recoveries.

The amount of these subrogation recoveries is significant and if we were unable to recover all such amounts, our stockholders’ equity as of December 31, 2020 would decrease from $1,140 million to $(585) million.

We expect to recover material amounts of claims payments through remediation measures including the litigation described above as well as through cash flows in the securitization structures of transactions that Ambac Assurance insures.

Realization of such expected recoveries is subject to various risks and uncertainties, including the rights and defenses of other parties with interests that conflict with Ambac Assurance's interests, the performance of the collateral and assets backing the obligations that Ambac Assurance insures, and the performance of servicers involved in securitizations in which Ambac Assurance participates as insurer.

We expect to recover material amounts of claims payments through remediation measures including the litigation described above as well as through cash flows in the securitization

| Ambac Financial Group, Inc.

17 2020 FORM 10-K |

Table of Co ntents

structures of transactions that AAC insures.

Realization of such expected recoveries is subject to various risks and uncertainties, including the rights and defenses of other parties with interests that conflict with AAC's interests, the performance of the collateral and assets backing the obligations that AAC insures, and the performance of servicers involved in securitizations in which AAC participates as insurer.

Additionally, our ability to realize recoveries in insured transactions may be impaired if the continuing orders of the Rehabilitation Court are not effective.

Adverse developments with respect to such variables may cause our recoveries to fall below expectations, which could have a material adverse effect on our financial condition, including our capital and liquidity, and may result in adverse consequences such as impairing the ability of Ambac Assurance to honor its financial obligations;

the initiation of rehabilitation proceedings against Ambac Assurance;

decreased likelihood of Ambac Assurance delivering value to AFG, through dividends or otherwise;

the initiation of rehabilitation proceedings against AAC;

decreased likelihood of AAC delivering value to AFG, through dividends or otherwise;

diminished business prospects due to third party concerns about our ability to recover losses;

and a significant drop in the value of securities issued or insured by AFG or Ambac Assurance, including the Secured Notes and Tier 2 Notes.

and a significant drop in the value of securities issued or insured by AFG or AAC, including the Secured Notes and Tier 2 Notes.

Ambac’s estimate of RMBS litigation recoveries is subject to significant uncertainty and changes to the estimate could adversely impact its liquidity, financial condition and results of operations.

1 unchanged sentence

Ambac does not estimate an RMBS R&W subrogation recovery for litigations where its sole claim is for fraudulent inducement.

| Ambac Financial Group, Inc.

16 2019 FORM 10-K |

The amount estimated for purposes of Ambac’s RMBS R&W subrogation recovery and the amount Ambac may ultimately receive is subject to significant uncertainty, as described in the immediately preceding risk factor.

5 unchanged sentences

As a result, Ambac’s current estimates may not reflect Ambac’s ultimate recovery, and management makes no representation that the actual amounts recovered, if any, will not differ materially from those estimated.

The failure of Ambac’s actual recoveries to meet or exceed its current estimates could result in a material adverse effect on Ambac’s financial condition, including its capital and liquidity.

We may not be able to commute or reduce insured exposures.

In pursuing the objective of improving our financial position, we are seeking to commute or reduce insured exposures.

The failure of Ambac’s actual recoveries to

meet or exceed its current estimates could result in a material adverse effect on Ambac’s financial condition, including its capital and liquidity.

We may not be able to commute or reduce FG insured exposures.

In pursuing the objective of improving our financial position, we are seeking to commute or reduce FG insured exposures.

De-risking transactions may not be feasible or economically viable.

3 unchanged sentences

A significant percentage of our premium revenue is attributable to installment premiums.

The amount of installment premiums we actually realized could be reduced in the future due to factors such as early termination of insurance contracts, accelerated prepayments of underlying obligations or insufficiency of cash flows (by the premium paying entity).

The amount of installment premiums we actually realize could be reduced in the future due to factors such as early termination of insurance contracts, accelerated prepayments of underlying obligations or insufficiency of cash flows (by the premium paying entity).

Such reductions would result in lower revenues.

The composition of the securities in our investment portfolio exposes us to greater risk than before we invested in "alternative assets."

Each of Ambac Assurance and Ambac UK maintains a portion of its investment portfolio in below investment grade securities, equities and/or “alternative assets” with the objective to increase the risk-adjusted portfolio returns.

Investments in below investment grade securities, equities and “alternative assets” could expose Ambac Assurance and/or Ambac UK to greater earnings volatility, increased losses and decreased liquidity in the investment portfolio.

Each of AAC and Ambac UK maintains a portion of its investment portfolio in below investment grade securities, equities and/or “alternative assets” with the objective to increase risk-adjusted portfolio returns.

Investments in below investment grade securities, equities and “alternative assets” could expose AAC and/or Ambac UK to greater earnings volatility, increased losses and decreased liquidity in the investment portfolio.

We may have future capital needs and may not be able to obtain third-party financing or raise additional third-party capital on acceptable terms, or at all.

3 unchanged sentences

The market conditions and the macroeconomic conditions that affect our industry could have a material adverse effect on our ability to secure third-party financing on favorable terms, if at all.

If third-party financing is not available when needed, or is available on unfavorable terms, we may be unable to take advantage of business opportunities, respond to competitive pressures or refinance our outstanding indebtedness, any of which could have a material adverse effect on our business, financial condition and results of operations.

Ambac Assurance may in the future report a policyholders’ deficit or become insolvent.

Therefore, even following consummation of the Rehabilitation Exit Transactions, circumstances may occur that would cause Ambac Assurance to report a policyholders’ deficit or not comply in the future with the statutory minimum policyholders’ surplus or undergo rehabilitation.

In addition, Ambac Assurance may become insolvent in the future.

OCI has prescribed or permitted additional accounting practices for Ambac Assurance and Everspan which are described in Note 8.

Insurance Regulatory Restrictions to the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K.

The determination of the amount of other-than temporary impairments taken on our investments is highly subjective and could materially impact our results of operations or financial position.

The determination of the amount of impairments on our investments varies by investment type and is based upon our periodic evaluation and assessment of known and inherent risks associated with the respective asset class.

Such evaluations and assessments are revised as conditions change and new information becomes available.

Management updates its evaluations regularly and reflects changes in impairments as such evaluations are revised.

There can be no assurance that our management has accurately assessed the level of impairments taken in our financial statements.

Furthermore, additional impairments may need to be taken in the future.

Historical trends may not be indicative of future impairments.

In particular, we use financial models and tools to project impairments with respect to RMBS held in our investment portfolio, including Ambac Assurance guaranteed RMBS.

Differences in the models and tools we employ and/or flaws in these models and tools and/or faulty assumptions inherent in these

| Ambac Financial Group, Inc.

18 2020 FORM 10-K |

models and tools and those determined by management, could lead to increased impairments with respect to RMBS in our investment portfolio.

Table of Co ntents

which could have a material adverse effect on our business, financial condition and results of operations.

AAC may in the future report a policyholders’ deficit or become insolvent.

While the Rehabilitation Exit Transactions and related transactions were designed to improve our financial condition, we will continue to be subject to risks and uncertainties that could materially affect our financial position, including those relating to our exposures in Puerto Rico, our efforts to recover losses on insured RMBS through litigation, and other risks described in the Risk Factors set forth in this Item 1A.

Therefore, even following consummation of the Rehabilitation Exit Transactions, circumstances may occur that would cause AAC to report a policyholders’ deficit, not comply with the statutory minimum policyholders’ surplus, undergo rehabilitation and/or become insolvent.

The determination of the amount of credit impairments taken on our investments is highly subjective and could materially impact our results of operations or financial position.

The determination of the amount of credit impairments on our investments varies by investment type and is based upon our periodic evaluation and assessment of known and inherent risks associated with the respective asset class.

Such evaluations and assessments are revised as conditions change and new information becomes available.

Management updates its evaluations regularly and reflects changes in impairments as such evaluations are revised.

There can be no assurance that management has accurately assessed the level of impairments taken in our financial statements.

Furthermore, additional impairments may need to be taken in the future and historical trends may not be indicative of future impairments.

We use financial models and tools to project impairments.

Differences and flaws in these models and tools, and/or faulty assumptions inherent in these models and tools and those determined by management, could lead to increased impairments.

Risks Related to the Financial and Credit Markets

9 unchanged sentences

We are subject to credit risk throughout our businesses, including large single risks, risk concentrations, correlated risks and reinsurance counterparty credit risk.

We are exposed to the risk that issuers of debt which we have insured (or with respect to which we have written credit

derivatives), issuers of debt which we hold in our investment portfolio, reinsurers and other contract counterparties (including derivative counterparties) may default in their financial obligations, whether as the result of insolvency, lack of liquidity, operational failure, fraud or other reasons.

We are exposed to the risk that issuers of debt which we have insured, issuers of debt which we hold in our investment portfolio, reinsurers and other contract counterparties (including derivative counterparties) may default in their financial obligations, whether as the result of insolvency, lack of liquidity, operational failure, fraud or other reasons.

These credit risks could cause increased losses and loss reserves, and/or estimates of credit impairments and mark-to-market losses with respect to credit derivatives in our financial guarantee business;

1 unchanged sentence

Such credit risks may be in the form of large single risk exposures to particular issuers, reinsurers or counterparties;

losses caused by catastrophic events (including terrorist acts and natural disasters);

losses caused by catastrophic events (including public health crises, terrorist acts and natural disasters);

losses caused by increases in municipal defaults;

losses in respect of different, but correlated, credit exposures;

or other forms

or other forms of credit risk.

Uncertainties regarding the expected discontinuance of the London Inter-Bank Offered Rate or any other interest rate benchmark could have adverse consequences.

1 unchanged sentence

Financial Conduct Authority (“FCA”), which regulates the London Interbank Offered Rate ("LIBOR"), announced that it will no longer persuade or compel banks to submit rates for the calculation of LIBOR after 2021.

As a result, LIBOR and certain other indices which are utilized as benchmarks are not expected to be published after 2021.

Ambac Assurance and Ambac UK insure securities, own assets, are party to certain derivative contracts and have issued debt and other obligations that reference LIBOR.

While regulators and market participants have suggested substitute rates for LIBOR, such as the Secured Overnight Financing Rate, the impact of the discontinuance of LIBOR is uncertain.

Similarly, it is not possible to know whether LIBOR will continue to be viewed as an acceptable benchmark , what rate or rates may become accepted alternatives to LIBOR, or what the effect of any such changes in views and alternative may have on the financial markets for LIBOR-linked financial instruments for the period preceding LIBOR no longer being published.

On November 30, 2020, the ICE Benchmark Administration and the FCA announced that most tenors of USD LIBOR are now expected to be published only through June 2023.

However, Non-USD LIBOR, certain less common tenors of USD-LIBOR and certain other indices which are utilized as benchmarks are not expected to be published after 2021.

AAC and Ambac UK insure securities, own assets, are party to certain derivative contracts and have issued debt and other obligations that reference LIBOR.

While regulators and market participants have suggested substitute benchmark rates for LIBOR, such as the Secured Overnight Financing Rate, the impact of the discontinuance and replacement of LIBOR is uncertain.

It is not currently possible to know with certainty whether LIBOR will continue to be viewed as an acceptable benchmark, what rate or rates may become accepted alternatives to LIBOR, or what the effect of any such changes in views and alternatives may have on the financial markets for LIBOR-linked financial instruments for the periods preceding and following LIBOR's cessation.

Differences in contractual provisions of certain legacy assets and liabilities and other factors, may cause the consequences of the discontinuance of LIBOR to vary by instrument.

Legislation has been introduced in both the UK and the United States, including

| Ambac Financial Group, Inc.

19 2020 FORM 10-K |

Table of Co ntents

at the New York State level, to address issues with respect to legacy LIBOR-linked assets and liabilities, however it is unclear whether these initiatives will be passed and if so, whether they will fully address the issues associated with legacy transactions.

As a result, the value of our assets, derivatives and liabilities;

2 unchanged sentences

In addition, Ambac may experience adverse tax and accounting impacts, system and model disruption, and increased liquidity demands in connection with the transition away from LIBOR that may have adverse operational consequences resulting in further adverse impacts on Ambac’s results of operations and financial condition.

Ambac continues to actively monitor developments surrounding the transition from LIBOR-based indices and evaluate the potential impact.

In addition to reviewing several hundred transactions involving various LIBOR-based indices, Ambac has made, or is in the process of making, adjustments to its reporting and analytical infrastructures to facilitate the transition from LIBOR.

Risks Related to the Company's Business

We are subject to the risk of litigation and regulatory inquiries or investigations, and the outcome of proceedings we are or may become involved in could have a material adverse effect on our business, operations, financial position, profitability or cash flows.

Ambac Assurance is defending or otherwise involved in various lawsuits relating to its financial guarantee business.

AAC is defending or otherwise involved in various lawsuits relating to its financial guarantee business.

In addition, the Company from time to time receives various regulatory inquiries and requests for information.

Please see Note 17.

Commitments and Contingencies to the Consolidated Financial

| Ambac Financial Group, Inc.

18 2019 FORM 10-K |

Statements included in Part II, Item 8 in this Form 10-K for information on these various proceedings.

It is not possible to predict whether additional suits involving AFG, Ambac Assurance or one or more other subsidiaries will be filed or whether additional regulatory inquiries or requests for information will be made, and it is also not possible to predict the outcome of litigation, inquiries or requests for information.

Commitments and Contingencies to the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K for information on these various proceedings.

It is not possible to predict whether additional suits involving AFG, AAC or one or more other subsidiaries will be filed or whether additional regulatory inquiries or requests for information will be made, and it is also not possible to predict the outcome of litigation, inquiries or requests for information.

It is possible that there could be unfavorable outcomes in these or other proceedings.

2 unchanged sentences

The Settlement Agreement, Stipulation and Order and Indenture for the Tier 2 Notes contain restrictive covenants that may impair our ability to pursue our business strategies.

Pursuant to the terms of the Settlement Agreement, Stipulation and Order and indenture for the Tier 2 Notes, Ambac Assurance must seek prior approval by OCI of certain corporate actions.

The Settlement Agreement, Stipulation and Order and indenture for the Tier 2 Notes also include covenants which restrict the operations of Ambac Assurance which, (i) in the case of the Settlement Agreement, remain in force until the surplus notes that were issued pursuant to the Settlement Agreement have been redeemed, repurchased or repaid in full, (ii) in the case of the Stipulation and Order, remain in place until the OCI decides to relax such restrictions, and (iii) in the case of the indenture for the Tier 2 Notes, remain in force until the Tier 2 Notes have been redeemed, repurchased or repaid in full.

Pursuant to the terms of the Settlement Agreement, Stipulation and Order and indenture for the Tier 2 Notes, AAC must seek prior approval by OCI of certain corporate actions.

The Settlement Agreement, Stipulation and Order and indenture for the Tier 2 Notes also include covenants which restrict the operations of AAC which, (i) in the case of the Settlement Agreement, remain in force until the surplus notes that were issued pursuant to the Settlement Agreement have been redeemed, repurchased or repaid in full, (ii) in the case of the Stipulation and Order, remain in place until the OCI decides to

relax such restrictions, and (iii) in the case of the indenture for the Tier 2 Notes, remain in force until the Tier 2 Notes have been redeemed, repurchased or repaid in full.

Certain of these restrictions may be waived with the approval of holders of the applicable debt securities and/or OCI.

3 unchanged sentences

Any such dispute could have material adverse effects on the Company, whether through litigation, administrative proceedings, supervisory orders, failure to execute transactions sought by management, interference with corporate strategies, objectives or prerogatives, inefficient decision-making or execution, forced realignment of resources, increased costs, distractions to management, strained working relationships or otherwise.

Such effects would also increase the risk that OCI would seek to initiate rehabilitation proceedings against Ambac Assurance.

Such effects would also increase the risk that OCI would seek to initiate rehabilitation proceedings against AAC.

Impairment of the intangible and goodwill assets, which resulted from the acquisition of Xchange, could adversely affect our results of operations.

In connection with Ambac’s acquisition of 80% of the membership interests of Xchange, Ambac recorded the fair value of identifiable intangible assets (primarily related to distribution relationships) and goodwill.

The intangible assets will be amortized over their useful lives (weighted average of 14 years).

The Company will test intangible assets for impairment if certain events occur or circumstances change indicating that the carrying amount of the intangible asset may not be recoverable.

Goodwill reflects the excess purchase consideration over net assets acquired and will be tested for impairment annually or whenever events occur or circumstances change that may indicate impairment.

Intangible asset and goodwill impairments are driven by a variety of factors, which could include, among other things, declining future cash flows of the acquired business as addressed in other risk factors related to the Managing General Underwriting Business.

Any intangible asset or goodwill impairment could adversely affect the Company's operating results and financial condition.

System security risks, data protection breaches and cyber-attacks could adversely affect our business and results of operations.

We rely on our information technology systems for many enterprise-critical functions and a prolonged failure or interruption of these systems for any reason could cause significant disruption to our operations and have a material adverse effect on our business, financial condition and operating results.

Our information technology and application systems may be vulnerable to threats

from computer viruses, natural disasters, unauthorized access, cyber-attack and other similar disruptions.

Our information technology and application systems may be vulnerable to threats from computer viruses, natural disasters, unauthorized access, cyber-attack and other similar disruptions.

Computer hackers may be able to penetrate our network’s system security and misappropriate or compromise confidential information, create system disruptions or cause shutdowns.

In addition to our own confidential information, we sometimes receive and are required to protect confidential information obtained from third parties and personally identifiable information of individuals.

In addition to our own confidential information, we sometimes receive and are required to protect confidential information obtained from third parties and personally

| Ambac Financial Group, Inc.

20 2020 FORM 10-K |

Table of Co ntents

identifiable information of individuals.

To the extent any disruption or security breach results in a loss or damage to our data, or inappropriate disclosure of our confidential information or that of others, or personally identifiable information of individuals, it could cause significant financial losses that are either not, or not fully, insured against, cause damage to our reputation, affect our relationships with third parties, lead to claims against us, result in regulatory action, or otherwise have a material adverse effect on our business or results of operations.

1 unchanged sentence

Moreover, although we have disaster recovery and business continuity plans in place, we may not be able to adequately execute these plans in a timely fashion in the event of a disruption to our information technology and application systems.

We may incur losses resulting from operational risk due to inadequate or failed internal processes, breakdown of settlement or communication systems, or from external events leading to disruption of our business.

Events subject to operational risk in clude:

Internal Fraud - misappropriation of assets, intentional mismarking of positions

External Fraud - theft of information, third-party theft and forgery

Clients, Products, & Business Practice - improper trade, fiduciary breaches

Damage to Physical Assets

Business Disruption & System Failures - software failures, hardware failures;

Execution, Delivery, & Process Management - data entry errors, accounting errors, failed mandatory reporting, settlement errors, and negligence.

We may be adversely affected by failures in services or products provided by third parties.

4 unchanged sentences

We rely substantially upon the services of our current executive team.

In addition to these officers, we require key staff with risk mitigation, structured finance, insurance, credit,

| Ambac Financial Group, Inc.

19 2019 FORM 10-K |

investment, accounting, finance, legal and technical skills.

In addition to these officers, we require key staff with risk mitigation, structured finance, insurance, credit, investment, accounting, finance, legal and technical skills.

As a result of Ambac’s financial situation, there is a higher risk that executive officers and other key staff will leave the Company and replacements may not be motivated to join the Company.

4 unchanged sentences

Risks Related to International Business

Uncertainty regarding the economic and regulatory impact of "Brexit" may have an adverse effect on Ambac's insured international portfolio and the value of its foreign investment, both of which primarily reside with its subsidiary Ambac UK.

Following a Parliamentary general election in the United Kingdom ("UK") on December 12, 2019, the Conservative Party won a substantial majority under the leadership of Boris Johnson (who therefore remains Prime Minister).

He campaigned on a platform of delivering a prompt exit by the UK ("Brexit") from the European Union ("EU") on terms already agreed between the UK and the EU under the EU-UK Withdraw Agreement which had been agreed earlier in 2019.

Under the terms of the Withdrawal Agreement the UK left the EU at the end of January 2020.

The Withdrawal Agreement's terms include a transition period from the date of departure to the end of December 2020 (the "Exit Date").

The structure of the Withdrawal Agreement and UK departure anticipate that a future trade framework between the UK and EU applying after the end of the transition period is to be negotiated during this transition period (the "New Trade Agreement").

Such negotiations are expected to be complex and potentially contentious between the parties, suggesting that the transition period may be insufficient time for such negotiations.

Consequently, there remains a material risk that on the Exit Date the UK automatically exits the EU without a New Trade Agreement (a “no deal Brexit”), and also with no certain path to negotiating a future trade relationship with the EU.

Absent action by the EU or member states, in the event of a no deal Brexit, the activities in the European Economic Area (“EEA”) of UK passporting insurers, including Ambac UK, will become unlawful on the Exit Date.

They will lose their legal authorization to serve clients who benefit from policies issued by UK incorporated insurers under freedom of services passporting rights (and thereby may be unable to legally collect premiums or pay claims).

At December 31, 2019 , Ambac UK’s insured portfolio included four policies in the EU written under current passporting rights, with an aggregate par value of $1,407 million.

In respect of these four policies, there is premium receivable of $23 million and loss

and loss expense reserves (net of subrogation recoverable) of $2 million.

Absent legally binding transitional arrangements, Ambac UK may be unable to collect these premiums or pay the claims to which these premiums receivable and loss and loss expense reserves relate after the Exit Date.

Ambac UK’s ability to restructure these policies to mitigate this risk is limited.

Nonpayment of claims under any of the affected policies could lead to the loss of control rights in the related transaction(s), which would expose Ambac UK to greater risk of loss.

In addition, under applicable English law, a court may hold that Ambac UK has an enforceable obligation to pay claims irrespective of the EU regulatory position in law.

Consequently Ambac UK could find itself in a position where it was not in receipt of premium on a relevant policy, but chose to pay claims to avoid loss of control rights and/or other consequences of non-payment, notwithstanding the EU regulatory characterization in law.

Additionally, if UK insurers have branches in EEA Member States they may be legally obliged to either capitalize them, as a so-called third country branch from an institution whose home state is outside the EEA, or close them down and no longer be legally represented in those EU jurisdictions.

Ambac UK has a branch in Italy, with one remaining policy issued from the branch.

The branch is not capitalized separately from Ambac UK.

In the event of a no-deal Brexit, the future nature and status of the branch is unclear, particularly with respect to the need for capitalization to support the one remaining branch policy.

Given that Ambac UK is undercapitalized in terms of applicable regulatory capital rules it will be difficult for the UK regulator to agree to assets leaving the company for this purpose.

There is a risk that absent agreement with the Italian regulator regarding the future of the branch, under law the Italian regulator could institute insolvent winding up proceedings against the branch as an unlicensed insurance business.

In this scenario the one branch policy would then be terminated by operation of law notwithstanding the prejudicial outcome to policy holders.

This chain of events could in turn trigger cross defaults with a consequential loss by Ambac UK of its controlling creditor rights in many or all transactions.

This would greatly inhibit Ambac UK’s ability to exercise its rights in transactions generally, and in particular with respect to mitigating potential or actual loss in those transactions.

The European Insurance and Occupational Pensions Authority (“EIOPA”) has made a series of recommendations to EU insurance regulators in light of Brexit.

Acting on these recommendations European regulatory authorities have put in place (or are putting in place) legal frameworks that facilitate the orderly run off of branch operations and of insurance policies issued in EEA member states by UK insurers.

The effect of these legal frameworks is to allow the continued run off of insurance policies issued in EEA member states by UK insurers prior to Exit Date that terminate after this date in the event that the draft departure agreement has not been approved prior to Exit Date.

In light of no deal Brexit risk, the UK financial regulatory authority has been actively encouraging regulated firms to put into place contingency plans, as have been EU and EU member states’ financial regulatory bodies.

Ambac UK is in discussion with the PRA and other relevant regulatory authorities to enable the continued orderly run off of its policies issued in the EEA under passporting rights as well as the Italian branch operation in line

| Ambac Financial Group, Inc.

20 2019 FORM 10-K |

with the EIOPA recommendations and legal frameworks which have been, or are planned to be, put in place by EEA member states.

In addition to the direct impact on insurers cited above, general uncertainty and the perceptions as to the ultimate impact of Brexit may adversely affect business activity, political stability, foreign exchange rates and economic conditions in the UK, the Eurozone, and the EU, which may result in additional credit and other stresses on Ambac UK's insured and investment portfolios and may ultimately adversely impact Ambac's results of operations and financial condition.

Actions of the PRA and FCA could reduce the value of Ambac UK realizable by Ambac Assurance, which would adversely affect our securityholders.

Actions of the PRA and FCA could reduce the value of Ambac UK realizable by AAC, which would adversely affect our securityholders.

Ambac’s international business is operated by Ambac UK, which is regulated by the Prudential Regulation Authority (“PRA”) for prudential purposes and the Financial Conduct Authority (“FCA”) for conduct purposes.

Under the Financial Services and Markets Act 2000 (“FSMA”), the PRA authorized Ambac UK to carry out financial guaranty insurance business in the UK and in the EU by way of the EU’s passporting regime (although this may change following Brexit), subject to the terms and conditions of the permission granted by the PRA and consented to by the FCA.

However, the terms of Ambac UK’s regulatory authority are now restricted and Ambac UK is in run-off.

The terms of Ambac UK’s regulatory authority are now restricted and Ambac UK is in run-off.

Among other things, Ambac UK may not write any new business, and, with respect to any entity within the Ambac group of affiliates, commute, vary or terminate any existing financial guaranty policy, transfer certain assets, or pay dividends, without the prior approval of the PRA and FCA.

The PRA and FCA act generally in the interests of Ambac UK policyholders and will not take into account the interests of securityholders of Ambac when considering whether to provide any such approval.

Accordingly, determinations made by the PRA and FCA, in their capacity as Ambac UK’s regulator, could potentially result in adverse consequences for our securityholders and also reduce the value realizable by Ambac Assurance for Ambac UK.

Accordingly, determinations made by the PRA and FCA, in their capacity as Ambac UK’s regulators, could potentially result in adverse consequences for our securityholders and also reduce the value realizable by AAC for Ambac UK.

Regulatory uncertainty in relation to Ambac UK’s capital position could adversely affect the value of Ambac UK and affect our securityholders.

5 unchanged sentences

Ambac UK clearly falls into this category and therefore Ambac UK’s current run-off approach remains at all times subject to the PRA continuing to take no action in relation to its capital deficit and related Solvency II requirements.

Alternative courses of action open to the

PRA could adversely impact the anticipated run-off trajectory of Ambac UK and impact its value.

Alternative courses of action open to the PRA could adversely impact the anticipated run-off trajectory of Ambac UK and impact its value.

Risks Related to Taxation

2 unchanged sentences

Surplus notes received in the AMPS Exchange and by holders of Deferred Amounts pursuant to the Second Amended Plan of Rehabilitation along with other debt reissued by Ambac (together "Reissued Debt") have different issue prices for U.S.

federal income tax purposes than the originally issued outstanding surplus notes and other debt and, therefore, are expected to accrue original issue discount (“OID”) in an amount that differs from the amounts of OID accruing on the originally issued surplus notes and other debt currently outstanding, as the case may be.

federal income tax purposes than the originally issued

| Ambac Financial Group, Inc.

21 2020 FORM 10-K |

Table of Co ntents

outstanding surplus notes and other debt and, therefore, are expected to accrue original issue discount (“OID”) in an amount that differs from the amounts of OID accruing on the originally issued surplus notes and other debt currently outstanding, as the case may be.

Therefore, Reissued Debt may not be fungible with the other outstanding surplus notes and debt, as applicable, for U.S.

2 unchanged sentences

This could create uncertainty in the market and could adversely affect the liquidity and/or trading values of surplus notes and other debt.

Certain surplus notes or other obligations of Ambac Assurance may be characterized as equity of Ambac Assurance and as a result, Ambac Assurance may no longer be a member of the U.S.

Certain surplus notes or other obligations of AAC may be characterized as equity of AAC and as a result, AAC may no longer be a member of the U.S.

federal income tax consolidated group of which AFG is the common parent.

It is possible that certain surplus notes or other obligations of Ambac Assurance may be characterized as equity of Ambac Assurance for U.S.

It is possible that certain surplus notes or other obligations of AAC may be characterized as equity of AAC for U.S.

federal income tax purposes.

If such surplus notes or other obligations are characterized as equity of Ambac Assurance that is taken into account for tax affiliation purposes and it is determined that such “equity” represented more than twenty percent of the total value of the stock of Ambac Assurance, Ambac Assurance may no longer be characterized as an includable corporation that is affiliated with AFG.

As a result, Ambac Assurance would no longer be characterized as a member of the U.S.

federal income tax consolidated group of which AFG is the common parent (the “Ambac Consolidated Group”) and Ambac Assurance would be required to file a separate consolidated tax return as the common parent of a new U.S.

federal income tax consolidated group including Ambac Assurance as the new common parent and Ambac Assurance’s affiliated subsidiaries (the “Ambac Assurance Consolidated Tax Group”).

To the extent Ambac Assurance is no longer a member of the Ambac Consolidated Group, Ambac Assurance’s net operating loss carry-forwards ("NOLs") (and certain other available tax attributes of Ambac Assurance and the other members of the Ambac Assurance Consolidated Tax Group) may no longer be available for use by the Ambac Assurance Consolidated Tax Group or any of the remaining members of the Ambac Assurance Consolidated Tax Group to reduce the U.S.

federal income tax liabilities of the Ambac Assurance Consolidated Tax Group.

AFG, Ambac Assurance and their affiliates entered into a tax sharing agreement that would require AFG to make certain tax elections

| Ambac Financial Group, Inc.

21 2019 FORM 10-K |

that could mitigate the loss of NOLs and other tax attributes resulting from a deconsolidation of Ambac Assurance from the Ambac Consolidated Group.

If such surplus notes or other obligations are characterized as equity of AAC that is taken into account for tax affiliation purposes and it is determined that such “equity” represented more than twenty percent of the total value of the stock of AAC, AAC may no longer be characterized as an includable corporation that is affiliated with AFG.

As a result, AAC would no longer be characterized as a member of the U.S.

federal income tax consolidated group of which AFG is the common parent (the “Ambac Consolidated Group”) and AAC would be required to file a separate consolidated tax return as the common parent of a new U.S.

federal income tax consolidated group including AAC as the new common parent and AAC’s affiliated subsidiaries (the “AAC Consolidated Tax Group”).

To the extent AAC is no longer a member of the Ambac Consolidated Group, AAC’s net operating loss carry-forwards ("NOLs") (and certain other available tax attributes of AAC and the other members of the AAC Consolidated Tax Group) may no longer be available for use by the AAC Consolidated Tax Group or any of the remaining members of the AAC Consolidated Tax Group to reduce the U.S.

federal income tax liabilities of the AAC Consolidated Tax Group.

AFG, AAC and their affiliates entered into a tax sharing agreement that would require AFG to make certain tax elections that could mitigate the loss of NOLs and other tax attributes resulting from a deconsolidation of AAC from the Ambac Consolidated Group.

However, in the event of a deconsolidation, certain other benefits resulting from U.S.

federal income tax consolidation may no longer be available to the Ambac Consolidated Group, including certain favorable rules relating to transactions occurring between members of the Ambac Consolidated Group and members of the Ambac Assurance Consolidated Tax Group.

If surplus notes or other obligations are characterized as equity of Ambac Assurance, the Ambac Assurance NOLs (and certain other tax attributes or tax benefits of the Ambac Consolidated Group) may be subject to limitation under Section 382 of the Tax Code.

It is possible that certain surplus notes or other obligations may be characterized as equity of Ambac Assurance for U.S.

If surplus notes or other obligations are characterized as equity of AAC, the AAC NOLs (and certain other tax attributes or tax benefits of the Ambac Consolidated Group) may be subject to limitation under Section 382 of the Tax Code.

It is possible that certain surplus notes or other obligations may be characterized as equity of AAC for U.S.

federal income tax purposes.

Such characterization could result in an “ownership change” of Ambac Assurance for purposes of Section 382 of the Tax Code.

If such an ownership change were to occur, the value and amount of the Ambac Assurance NOLs would be substantially impaired, increasing the U.S.

federal income tax liability of Ambac Assurance and materially reducing the value of Ambac Assurance’s stock owned by AFG and the potential of future cash tolling or dividend payments from Ambac Assurance to AFG.

Such characterization could result in an “ownership change” of AAC for purposes of Section 382 of the Tax Code.

such an ownership change were to occur, the value and amount of the AAC NOLs would be substantially impaired, increasing the U.S.

federal income tax liability of AAC and materially reducing the value of AAC’s stock owned by AFG and the potential for future dividend payments from AAC to AFG.

Deductions with respect to interest accruing on certain surplus notes may be eliminated or deferred until payment.

To the extent certain surplus notes are characterized as equity for U.S.

federal income tax purposes, accrued interest will not be deductible by Ambac Assurance.

federal income tax purposes, accrued interest will not be deductible by AAC.

In addition, even if such surplus notes are characterized as debt for U.S.

1 unchanged sentence

To the extent deductions with respect to interest are eliminated or deferred, the U.S.

federal income tax of the members of the Ambac Consolidated Group or the members of the Ambac Assurance Consolidated Tax Group as the case may be, could be increased reducing the amount of cash available to pay its obligations.

federal income tax of the members of the Ambac Consolidated Group or the members of the AAC Consolidated Tax Group as the case may be, could be increased reducing the amount of cash available to pay its obligations.

Risks Related to Strategic Plan

Ambac is exploring select business opportunities which may permit utilization of Ambac’s net operating loss carry-forwards;

however, such business opportunities may not be consummated, or if consummated, may not create value and may negatively impact our financial results.

Ambac is exploring select business opportunities which may, amongst other things, permit utilization of its net operating loss carry-forwards.

Such business opportunities may involve the acquisition of assets or existing businesses or the development of businesses through new or existing subsidiaries.

It is not possible at this time to predict the future prospects or other characteristics of any such business opportunities.

Although we intend to conduct business, financial and legal due diligence in connection with the evaluation of any future business or acquisition opportunities, there can be no assurance our due diligence investigations will identify

every matter that could have a material adverse effect on us.

Efforts to pursue select business opportunities may be unsuccessful or require significant financial or other resources, which could have a negative impact on our operating results and financial condition.

No assurance can be given that Ambac will be able to complete such business opportunities, generate any earnings or be able to successfully integrate any such business into our current operating structure.

Moreover, Ambac’s ability to enter into new businesses, including new businesses apart from Ambac Assurance, is also subject to significant doubt, given the financial condition of Ambac Assurance, counterparty or rating agency concerns about our ability to mitigate insured portfolio losses or recover losses in litigation, the difficulty of leveraging or monetizing Ambac’s other assets, and the uncertainty of its ability to raise capital.

Due to these factors, as well as those relating to Ambac Assurance as described in this Item 1A.

Ambac is planning to further develop and expand the Specialty Property and Casualty Program Insurance business and the Managing General Agency/Underwriting business, which may permit utilization of Ambac’s net operating loss carry-forwards;

however, such plans may not be realized, or if realized, may not create value and may negatively impact our financial results.

Ambac is planning to further develop and expand the Specialty Property and Casualty Program Insurance Business and the Managing General Agency/Underwriting business which may, amongst other things, permit utilization of its net operating loss carry-forwards.

Such plans may involve additional acquisitions of assets or existing businesses and the development of businesses through new or existing subsidiaries.

It is not possible at this time to fully predict the future prospects or other characteristics of such businesses.

Efforts to pursue certain business opportunities may be unsuccessful or require significant financial or other resources, which could have a negative impact on our operating results and financial condition.

No assurance can be given that Ambac will be able to successfully execute its plans for new business, generate any earnings from new businesses or be able to successfully integrate any such business into our current operating structure.

Moreover, Ambac’s ability to enter into new businesses apart from AAC is subject to some doubt, given the financial condition of AAC, counterparty or rating agency concerns about our ability to mitigate insured portfolio losses or recover losses in litigation, the difficulty of leveraging or monetizing Ambac’s other assets, and the uncertainty of its ability to raise capital.

Due to these factors, as well as those relating to AAC as

| Ambac Financial Group, Inc.

22 2020 FORM 10-K |

Table of Co ntents

described in this Item 1A.

Risk Factors, the value of our securities is speculative.

2 unchanged sentences

Any such adjustment or abandonment may have an adverse effect on our securities.

Risks Related to the Managing General Underwriting Business

Xchange derives a significant portion of its commission revenues from a limited number of insurance companies, the loss of any of which could result in lower commissions or loss of business production.

For the year ended December 31, 2020, a majority of Xchange’s total commissions was derived from insurance policies underwritten by a limited number of insurance companies.

Should one or more of these insurance companies terminate its arrangements with Xchange or otherwise decrease the number of insurance policies underwritten for it, Xchange may lose significant commission revenues or lose significant business production while it seeks other insurance companies to underwrite the business.

Xchange’s business, results of operation, financial condition and liquidity may be materially adversely affected by certain potential claims, regulatory actions or proceedings.

Xchange is subject to various potential claims, regulatory actions and other proceedings, including those relating to alleged errors and omissions in connection with the placement or servicing of insurance and/or the provision of services in the ordinary course of business, of which we cannot, and likely will not be able to, predict the outcome with certainty.

Because Xchange often assists customers with matters involving substantial amounts of money, including the placement of insurance and the handling of related claims that customers may assert, errors and omissions, claims against it may arise alleging potential liability for all or part of the amounts in question.

Also, the failure of an insurer with whom Xchange places business could result in errors and omissions claims against it by its customers, which could adversely affect Ambac’s results of operations and financial condition.

Claimants may seek large damage awards, and these claims may involve potentially significant legal costs and damages.

In addition, regardless of monetary costs, these matters could have a material adverse effect on Xchange's reputation and cause harm to its carrier, customer or employee relationships, or divert personnel and management resources.

Xchange’s current market share may decrease because of disintermediation within the insurance industry, including increased competition from insurance companies, technology companies and the financial services industry, as well as the shift away from traditional insurance markets.

The MGU business is highly competitive and Xchange actively competes with numerous firms for customers and insurance

companies, many of which have relationships with insurance companies or have a significant presence in niche insurance markets that may give them an advantage over it.

Other competitive concerns may include the quality of Xchange’s products and services, its pricing and the entrance of technology companies into the MGU business.

A number of insurance companies are engaged in the direct sale of insurance and do not pay commissions to agents and brokers.

In addition, and to the extent that banks, securities firms, private equity funds, and insurance companies affiliate, the financial services industry may experience further consolidation, and Xchange therefore may experience increased competition from insurance companies and the financial services industry, as a growing number of larger financial institutions increasingly, and aggressively, offer a wider variety of financial services, including MGU services.

While Xchange collaborates and competes in these segments on a fee-for-service basis, we cannot be certain that such alternative markets will provide the same level of insurance coverage or profitability as traditional insurance markets.

Changes in law or in the functioning of the healthcare market could significantly impair Xchange’s business and therefore negatively impact Ambac’s financial condition and results of operation.

Adoption of a single payer healthcare system or a public health insurance option would likely adversely impact the entire healthcare industry.

While Xchange has historically demonstrated an ability to adjust its products to major changes in the healthcare industry, given its focus on A&H products, Xchange would likely be adversely impacted by such a material change in the U.S.

healthcare system particularly if private health insurance is eliminated, materially limited, or is rendered noncompetitive.

Material adverse developments to Xchange's business would have a negative impact on Ambac's financial condition and results of operations which could be material.

Xchange’s business and results of operation and financial condition may be adversely affected by conditions that result in reduced insurer capacity.

Xchange’s results of operations depend on the continued capacity of insurance carriers to underwrite risk and provide coverage, which depends in turn on those insurance companies’ ability to procure reinsurance.

Capacity could also be reduced by insurance companies failing or withdrawing from writing certain coverages that Xchange offers to its customers.

Xchange has no control over these matters.

To the extent that reinsurance becomes less widely available or significantly more expensive, Xchange may not be able to procure the amount or types of coverage that its customers desire and the coverage Xchange is able to procure for its customers may be more expensive or limited.

Variations in Xchange’s commissions that result from the timing of policy renewals and the net effect of new and lost business production may have unexpected effects on our results of operation.

Xchange’s commission income can vary quarterly or annually due to the timing of policy renewals and the net effect of new and lost business production.

Xchange does not control the factors that cause these variations.

Specifically, customers’ demand for insurance products can influence the timing of

| Ambac Financial Group, Inc.

23 2020 FORM 10-K |

Table of Co ntents

renewals, new business and lost business (which includes policies that are not renewed), and cancellations.

Quarterly and annual fluctuations in revenues based upon increases and decreases associated with the timing of new business, policy renewals and payments from insurance companies may adversely affect our financial condition, results of operations and cash flows.

Profit-sharing contingent commissions are paid by insurance companies based upon the profitability of the business placed with such companies.

In the past these commissions have accounted for a material amount of Xchange’s total commissions and fees.

Due to, among other things, the inherent uncertainty of loss in Xchange’s industry and changes in underwriting criteria by insurance companies, there will be a level of uncertainty related to the payment of profit-sharing contingent commissions.

Unresolved Staff Comments — No matters require disclosure.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1A. Risk Factors