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Item 8. Financial Statements and Supplementary Data

2021-03-01 compared with 2020-03-02 · 1682 added, 1204 removed, 2131 unchanged (58% of the section changed)

11 unchanged sentences

Background and Business Description 73

Fair Value Measurements 108

Basis of Presentation and Significant Accounting Policies 76

Investments 116

Business Combination 89

Derivative Instruments 121

Variable Interest Entities 90

Comprehensive Income

Long-term Debt 123

Comprehensive Income 94

Income Taxes 126

Net Income Per Share 95

Financial Guarantees in Force

Employment Benefit Plans 127

Financial Guarantees in Force 96

Financial Guarantee Insurance Contracts 96

Insurance Regulatory Restrictions

Commitments and Contingencies 131

Fair Value Measurements

Insurance Regulatory Restrictions 104

Quarterly Information (Unaudited) 141

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Table of Co ntents

Report of Independent Registered Public Accounting Firm

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Table of Co ntents

Report of Independent Registered Public Accounting Firm

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Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the consolidated financial

statements and (2) involved our especially challenging, subjective, or complex judgment.

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be

communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Evaluation of the estimate of Loss and Loss Expense Reserves and Subrogation Recoverable

As described in Notes 2 and 7 to the consolidated financial statements, the Company estimates loss and loss expense reserves and subrogation recoverable (loss reserves) on a policy-by-policy basis, based upon the present value of expected net claim cash outflows or expected net recovery cash inflows, discounted at a risk-free rate.

Estimate of loss and loss expense reserves and subrogation recoverable

As described in Notes 2 and 8 to the consolidated financial statements, the Company estimates loss and loss expense reserves and subrogation recoverable (loss reserves) on a policy-by-policy basis based upon the present value of expected net claim cash outflows or expected net recovery cash inflows, discounted at risk-free rates.

Expected net claim cash outflows represent the present value of expected claim cash outflows, less the present value of expected recovery cash inflows.

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For such policies, a subrogation recoverable asset is recorded.

Loss and loss expense reserves and subrogation recoverable were a liability of $1,548 million and an asset of $2,029 million , respectively, as of December 31, 2019 .

We have identified the evaluation of loss reserves as a critical audit matter because it involved significant measurement uncertainty requiring subjective and complex auditor judgment.

The evaluation encompassed the assessment of the loss reserve methodologies, including those methodologies used to estimate the following key inputs and assumptions:

As of December 31, 2020, the Company recorded loss and loss expense reserves of $1,759 million and subrogation recoverable of $2,156 million.

We identified the evaluation of loss reserves as a critical audit matter.

The evaluation encompassed the assessment of the loss reserve methodologies, including those methods used to estimate the following assumptions:

(1) credit worthiness of the issuer of the insured security, (2) the likelihood of possible outcomes regarding the probability of default by the issuer of the insured security, (3) the expected loss severity for each insurance policy, (4) the probability of remediation, settlement and restructuring outcomes, and (5) the probability of successful litigation or related settlement outcomes, as well as the percentage of the breach rates of representations and warranties underlying certain insured residential mortgage backed securities.

The evaluation of the methodologies and the impact of these key inputs and assumptions required specialized skills and auditor judgment.

The primary procedures we performed to address this critical audit matter included the following.

We tested, with the involvement of professionals with specialized industry knowledge and experience, when necessary, certain internal controls related to the determination of the key inputs and assumptions and the analysis of the loss reserves and historical trends.

We inquired of internal and external legal counsel and read letters received directly from the Company’s internal and external legal counsel regarding the status of litigation underlying certain insurance policies.

The evaluation of the methods and the impact of these assumptions required specialized skills and subjective and complex auditor judgment due to a high level of estimation uncertainty.

The following are the primary procedures we performed to address this critical audit matter.

With the involvement of professionals with specialized industry knowledge and experience, when necessary, we evaluated the design and tested the operating effectiveness of certain internal controls related to the Company's estimation of loss reserves.

This included controls related to the determination of the sources of data and assumptions and the analysis of the loss reserves and historical trends.

We inquired of internal and external

| Ambac Financial Group, Inc.

67 2020 FORM 10-K |

when necessary, credit professionals with specialized industry knowledge and experience, who assisted in assessing the individual issuer ratings for a selection of policies by evaluating the financial performance of the issuer of the insured security and underlying collateral.

We involved, when necessary, forensics professionals with specialized industry knowledge and experience, who assisted in inspecting underwriting documentation for a selection of mortgage loans underlying certain insured residential mortgage backed securities examined by the Company’s consultants engaged to determine breach rates of representations and warranties.

We also involved, when necessary, valuation professionals with specialized knowledge and experience, who assisted in:

Evaluating the loss and loss expense reserves and subrogation recoverable methodologies for compliance with U.S.

Table of Co ntents

legal counsel and read letters received directly from the Company’s internal and external legal counsel regarding the status of litigation underlying certain insurance policies.

We involved credit risk professionals with specialized skills and knowledge, who assisted in assessing the individual issuer ratings and credit classifications for certain policies by evaluating the financial performance of the issuer of the insured security and underlying collateral.

We involved forensics professionals with specialized skills and knowledge, who assisted in inspecting underwriting documentation for certain mortgage loans underlying insured residential mortgage backed securities, which were examined by the Company’s consultants engaged to determine breach rates of representations and warranties.

We also involved valuation professionals with specialized skills and knowledge, who assisted in:

• evaluating the methods used to estimate loss reserves for compliance with U.S.

generally accepted accounting principles

Evaluating, in certain instances, the key inputs and assumptions used in the calculation of loss reserves by comparing to internal experience and related historical and industry trends;

Developing, in certain instances, an independent expectation of the loss reserves and comparing it to the recorded estimate.

• evaluating, for certain policies, the sources of data and assumptions used in the calculation of loss reserves by comparing to internal experience and related historical and industry trends

• developing, for certain policies, an independent estimate of the loss reserves and comparing it to the recorded estimate.

We have served as the Company’s auditor since 1985.

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Table of Co ntents

AMBAC FINANCIAL GROUP, INC.

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(Dollars in millions, except share data) December 31, 2020 2019

Fixed income securities, at fair value (amortized cost of $2,450 and $3,020)

Fixed maturity securities, at fair value (amortized cost of $ 2,175 and $ 2,450 )

$ 2,317 $ 2,577

Fixed maturity securities pledged as collateral, at fair value (amortized cost of $ 15 and $ 0 )

Short-term investments, at fair value (amortized cost of $ 492 and $ 653 )

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Other investments (includes $ 544 and $ 432 at fair value)

Total investments

Total investments (net of allowance for credit losses of $ 0 at December 31, 2020)

Cash and cash equivalents 20 24

Restricted cash 13 55

Premium receivables

Reinsurance recoverable on paid and unpaid losses

Premium receivables (net of allowance for credit losses of $ 17 at December 31, 2020)

Reinsurance recoverable on paid and unpaid losses (net of allowance for credit losses of $ 0 at December 31, 2020)

Deferred ceded premium 70 82

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Current taxes — 11

Insurance intangible asset

Intangible assets 409 427

Other assets 114 95

Variable interest entity assets:

Fixed income securities, at fair value

Fixed maturity securities, at fair value 3,354 3,121

Restricted cash 2 2

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Derivative assets 41 52

Other assets 2 3

Total assets $ 13,220 $ 13,320

Liabilities and Stockholders’ Equity:

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Deferred taxes 24 32

Current taxes 6 —

Long-term debt 2,739 2,822

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Commitments and contingencies (See Note 17)

Redeemable noncontrolling interest 7 —

Stockholders’ equity:

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stockholders’ equity 1,080 1,477

Noncontrolling interest

Nonredeemable noncontrolling interest 60 60

Total stockholders’ equity 1,140 1,536

Total liabilities and stockholders’ equity

May not add due to rounding

Total liabilities, redeemable noncontrolling interest and stockholders’ equity $ 13,220 $ 13,320

See accompanying Notes to Consolidated Financial Statements

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Table of Co ntents

AMBAC FINANCIAL GROUP, INC.

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Net investment income 122 227 273

Securities available-for-sale and short-term

Other investments

Net investment income

Other-than-temporary impairment losses:

Total other-than-temporary impairment losses

Portion of other-than-temporary impairment recognized in other comprehensive income (loss)

Net other-than-temporary impairment losses recognized in earnings

Net realized investment gains (losses) 22 81 108

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Net realized gains (losses) on extinguishment of debt — — 3

Other income 3 134 5

Income (loss) on variable interest entities 5 38 3

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Losses and loss expenses (benefit) 225 13 ( 224 )

Insurance intangible amortization

Intangible amortization 57 295 107

Operating expenses 92 103 112

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Pre-tax income (loss) ( 440 ) ( 183 ) 273

Provision for income taxes

Provision (benefit) for income taxes ( 3 ) 32 5

Net income (loss) ( 437 ) ( 216 ) 267

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

Credit risk changes of fair value option liabilities, net of income tax provision (benefit) of $0, $0 and $0

Credit risk changes of fair value option liabilities, net of income tax provision (benefit) of $ — , $ —

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

( 3 ) ( 1 ) ( 2 )

Total other comprehensive income (loss), net of income tax 37 91 6

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Net income (loss) per share attributable to common stockholders:

Basic $ ( 9.47 ) $ ( 4.69 ) $ 4.07

Diluted $ ( 9.47 ) $ ( 4.69 ) $ 3.99

Weighted average number of common shares outstanding:

May not add due to rounding

Basic 46,147,062 45,954,908 45,665,883

Diluted 46,147,062 45,954,908 46,559,835

See accompanying Notes to Consolidated Financial Statements

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Table of Co ntents

AMBAC FINANCIAL GROUP, INC.

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Ambac Financial Group, Inc.

(Dollars in millions)

(Dollars in millions) Total Retained

Earnings Accumulated

Comprehensive

Income (Loss)

Additional Paid-in

Income (Loss) Preferred

Stock Additional Paid-in

Capital Treasury Stock, at Cost Nonredeemable

Noncontrolling

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Total comprehensive income (loss) ( 400 ) ( 437 ) 37 — — — — —

Adjustment to initially apply ASU 2016-13 ( 4 ) ( 4 ) — — — — — —

Stock-based compensation 11 — — — — 11 — —

Cost of shares (acquired) issued under equity plan ( 3 ) ( 2 ) — — — — ( 1 ) —

Re-issuance of Ambac Assurance auction market preferred shares

Balance at December 31, 2020 $ 1,140 $ 759 $ 79 $ — $ — $ 242 $ ( 1 ) $ 60

Beginning redeemable noncontrolling interest of $ 0 + Addition of redeemable NCI of $ 7 = Ending redeemable noncontrolling interest of $ 7 .

Ambac Financial Group, Inc.

(Dollars in millions) Total Retained

Earnings Accumulated

Comprehensive

Income (Loss) Preferred

Stock Additional Paid-in

Capital Treasury Stock, at Cost Nonredeemable

Noncontrolling

Balance at January 1, 2019 $ 1,633 $ 1,421 $ ( 49 ) $ — $ — $ 219 $ — $ 41

Total comprehensive income (loss) ( 125 ) ( 216 ) 91 — — — — —

Adjustment to initially apply ASU 2016-01

Stock-based compensation 12 — — — — 12 — —

Cost of shares (acquired) issued under equity plan ( 3 ) ( 3 ) — — — — — —

Exchange of auction market preferred shares

Re-issuance of Ambac Assurance auction market preferred shares 19 — — — — — — 19

Balance at December 31, 2019 $ 1,536 $ 1,203 $ 42 $ — $ — $ 232 $ — $ 60

Ambac Financial Group, Inc.

(Dollars in Millions) Total Retained Earnings Accumulated

Comprehensive

Income Preferred

Stock Additional Paid-in

Capital Treasury Stock,

at Cost Noncontrolling

Balance at January 1, 2018 $ 1,645 $ 1,234 $ ( 52 ) $ — $ — $ 200 $ — $ 264

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Cost of shares (acquired) issued under equity plan ( 1 ) ( 1 ) — — — — — —

Exchange of auction market preferred shares ( 297 ) ( 82 ) — — — 8 — ( 223 )

Balance at December 31, 2018 $ 1,633 $ 1,421 $ ( 49 ) $ — $ — $ 219 $ — $ 41

May not add due to rounding

See accompanying Notes to Consolidated Financial Statements

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Table of Co ntents

AMBAC FINANCIAL GROUP, INC.

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(Dollars in millions) Year Ended December 31,

2020 2019 2018

Cash flows from operating activities:

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Amortization of insurance intangible assets 57 295 107

Net mark-to-market (gains) losses

Net realized investment gains ( 22 ) ( 81 ) ( 108 )

Other-than-temporary impairment charges

(Gain) loss on extinguishment of debt — — ( 3 )

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Derivative assets and liabilities 6 ( 1 ) ( 17 )

Other, net 59 79 68

Net cash used in operating activities ( 175 ) ( 311 ) ( 1,543 )

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Proceeds from paydowns of consolidated VIE assets 178 543 349

Acquisition of Xchange, net of cash acquired ( 74 ) — —

Other, net 1 ( 2 ) —

Net cash provided by investing activities 432 1,000 1,588

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Paydowns of a secured borrowing — — ( 74 )

Payments for investment agreement draws

Payments for extinguishment of surplus notes — — ( 191 )

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Cash, cash equivalents, and restricted cash at end of period $ 35 $ 81 $ 83

May not add due to rounding

See accompanying Notes to Consolidated Financial Statements

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(“AFG”), headquartered in New York City, is a financial services holding company incorporated in the state of Delaware on April 29, 1991 .

AFG provides financial guarantee insurance policies through its principal operating subsidiary, Ambac Assurance Corporation ("Ambac Assurance" or "AAC") and its wholly owned subsidiary Ambac Assurance UK Limited (“Ambac UK”), both of which have been in runoff since 2008.

References to “Ambac,” the “Company,” “we,” “our,” and “us” are to AFG and its subsidiaries, as the context requires.

Insurance policies issued by Ambac Assurance and Ambac UK generally guarantee payment when due of the principal and interest on the obligations guaranteed.

Ambac Assurance also has another wholly-owned subsidiary, Everspan Insurance Company (formerly known as Everspan Financial Guarantee Corp.), which has been in runoff since its acquisition in 1997.

The deterioration of Ambac Assurance’s financial condition resulting from losses in its insured portfolio since 2007 has prevented Ambac Assurance and Ambac UK from being able to write new business.

The inability to write new business has and will continue to negatively impact Ambac’s future operations and financial results.

Ambac Assurance’s ability to pay dividends and, as a result, AFG’s liquidity, have been significantly restricted by the deterioration of Ambac Assurance’s financial condition and by the terms of the Settlement Agreement, dated as of June 7, 2010, as amended (the "Settlement Agreement"), by and among Ambac Assurance, Ambac Credit Products LLC (“ACP”), AFG and certain counterparties to credit default swaps with ACP that were guaranteed by Ambac Assurance.

Ambac Assurance is also restricted in its ability to pay dividends pursuant to regulatory restrictions;

the Stipulation and Order among the Office of the Commissioner of Insurance for the State of Wisconsin (“OCI”), AFG and Ambac Assurance that became effective on February 12, 2018, as amended (the “Stipulation and Order”);

the terms of the indenture for the Tier 2 Notes (as defined below), which are substantially similar to the terms of the Settlement Agreement in this regard;

and the terms of its Auction Market Preferred Shares ("AMPS").

It is highly unlikely that Ambac Assurance will be able to make dividend payments to AFG for the foreseeable future.

Management reviews financial information, allocates resources and measures financial performance on a consolidated basis.

As a result, the Company has a single reportable segment.

Ambac's business operations include:

• Financial Guarantee Insurance — Ambac Assurance Corporation ("Ambac Assurance" or "AAC") and its wholly owned subsidiary, Ambac Assurance UK Limited (“Ambac UK”), legacy financial guarantee businesses, both of which have been in runoff since 2008.

Insurance policies issued by AAC and Ambac UK generally guarantee payment when due of the principal and interest on the obligations guaranteed.

• Specialty Property & Casualty Program Insurance — Currently includes admitted insurer Everspan Insurance Company and excess and surplus lines insurer Everspan Indemnity Insurance Company (collectively, "Everspan" or the "Everspan Group").

This platform, which received an A- Financial Strength Rating from A.M.

Best in February 2021, is expected to launch new underwriting programs in 2021.

• Managing General Agency / Underwriting — Currently includes Xchange Benefits, LLC and Xchange Affinity Underwriting Agency, LLC (collectively, “Xchange”) a property and casualty Managing General Underwriter 80 % of which AFG acquired on December 31, 2020.

Refer to Note 3.

Business Combination for further information relating to this acquisition.

As of and for the year ended December 31, 2020, management reviewed financial information, allocated resources and measured financial performance on a consolidated basis and accordingly the Company had a single reportable segment.

As a result of the acquisition of Xchange and the expected launch of the Everspan platform, segments will be re-evaluated in 2021.

Limitations on Voting and Transfer of Common Stock

AFG’s Amended and Restated Certificate of Incorporation limits voting and transfer rights of stockholders in significant ways.

Article IV contains voting restrictions applicable to any person owning at least 10 % of AFG's common stock so that such person (including any group consisting of such person and any other person with whom such person or any affiliate or associate of such person has any agreement, contract, arrangement or understanding with respect to acquiring, voting, holding or disposing of AFG’s common stock) shall not be entitled to cast votes in excess of one vote less than 10 % of the votes entitled to be cast by all common stock holders, except as otherwise approved by the OCI.

Article XII contains substantial restrictions on the ability to transfer AFG’s

common stock.

In order to preserve certain tax benefits, subject to limited exceptions, any attempted transfer of common stock shall be prohibited and void to the extent that, as a result of such transfer (or any series of transfers of which such transfer is a part), either (i) any person or group of persons shall become a holder of 5 % or more of the Company’s common stock or (ii) the percentage stock ownership interest in AFG of any holder of 5 % or more of the Company’s common stock shall be increased (a “Prohibited Transfer”).

Article XII contains substantial restrictions on the ability to transfer AFG’s common stock.

part), either (i) any person or group of persons shall become a holder of 5 % or more of the Company’s common stock or (ii) the percentage stock ownership interest in AFG of any holder of 5 % or more of the Company’s common stock shall be increased (a “Prohibited Transfer”).

These restrictions shall not apply to an attempted transfer if the transferor or the transferee obtains the written approval of AFG’s Board of Directors to such transfer.

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Strategies to Enhance Shareholder Value

Since the exit from rehabilitation of Ambac Assurance’s Segregated Account (as defined below) in February 2018, Ambac has been focused on and continues to progress all key strategic priorities, specifically:

Active runoff of Ambac Assurance and its subsidiaries through transaction terminations, policy commutations, reinsurance, settlements and restructurings, with a focus on our watch list credits and known and potential future adversely classified credits, that we believe will improve our risk profile, and maximizing the risk-adjusted return on invested assets;

The Company's primary goal is to maximize shareholder value through executing the following key strategies:

• Active runoff of AAC and its subsidiaries through transaction terminations, commutations, restructurings, and reinsurance with a focus on our watch list credits and known and potential future adversely classified credits, that we believe will improve our risk profile, and maximizing the risk-adjusted return on invested assets;

• Ongoing rationalization of Ambac's capital and liability structures;

• Loss recovery through active litigation management and exercise of contractual and legal rights;

• Ongoing review of the effectiveness and efficiency of Ambac's operating platform;

• Further expanding into specialty property and casualty program insurance, managing general agency/underwriting and potentially other insurance and insurance related businesses that will generate long-term shareholder value

| Ambac Financial Group, Inc.

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(Dollar Amounts in Millions, Except Share Amounts)

Ongoing review and adjustments focused on improving the effectiveness and efficiency of Ambac's operating platform;

Evaluation of opportunities in certain business sectors that meet acceptable criteria that will generate long-term stockholder value with attractive risk-adjusted returns.

With respect to our new business strategy, we continue to evaluate and pursue strategic opportunities in credit, insurance, asset management and other financial services that we believe would be synergistic to Ambac and would leverage our core competencies.

While we have increased our efforts in evaluating such potential opportunities, we continue to be measured and disciplined in our approach as we seek to deploy our capital on opportunities that will generate sustainable long-term shareholder value.

Although we are exploring new business opportunities for Ambac, no assurance can be given that we will be able to identify or execute a suitable transaction and/or obtain the financial and other resources that may be required to finance the acquisition or development of any new businesses or assets.

Due to these factors, as well as uncertainties relating to the ability of Ambac Assurance to deliver value to Ambac, the value of our securities remains speculative.

The execution of Ambac’s strategy to increase the value of its investment in Ambac Assurance is subject to the restrictions set forth in the Settlement Agreement, dated as of June 7, 2010 (the "Settlement Agreement"), by and among Ambac Assurance, Ambac Credit Products LLC ("ACP"), AFG and certain counterparties to credit default swaps with ACP that were guaranteed by Ambac Assurance, as well as the Stipulation and Order (as defined in Note 1.

Background and Business Description to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K) and in the indenture for the Tier 2 Notes (as defined in Note 1.

Background and Business Description to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K), each of which requires OCI (as defined below) and, under certain circumstances, holders of the debt instruments benefiting from such restrictions, to approve certain actions taken by or in respect of Ambac Assurance.

In exercising its approval rights, OCI will act for the benefit of policyholders, and will not take into account the interests of Ambac.

Background and Business Description to the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K for further information.

Opportunities for remediating losses on poorly performing insured transactions also depend on market conditions, including the perception of Ambac Assurance’s creditworthiness, the structure of the underlying risk and associated policy as well as other counterparty specific factors.

Ambac Assurance's ability to commute policies or purchase certain investments may also be limited by available liquidity.

with attractive risk-adjusted returns and meet other preestablished criteria.

The execution of Ambac’s strategy to increase the value of its investment in AAC is subject to the restrictions set forth in the Settlement Agreement, dated as of June 7, 2010 (the "Settlement Agreement"), by and among AAC, Ambac Credit Products LLC ("ACP"), AFG and certain counterparties to credit default swaps with ACP that were guaranteed by AAC, as well as the Stipulation and Order among the Office of the Commissioner of Insurance for the State of Wisconsin (“OCI”), AFG and AAC that became effective on February 12, 2018, as amended (the “Stipulation and Order”), and the indenture for the Tier 2 Notes (as defined below), each of which requires OCI and, under certain circumstances, holders of the debt instruments benefiting from such restrictions, to approve certain actions taken by or in respect of AAC.

In exercising its approval rights, OCI will act for the benefit of policyholders, and will not take into account the interests of AFG.

Opportunities for remediating losses on poorly performing insured transactions also depend on market conditions, including the perception of AAC’s creditworthiness, the structure of the underlying risk and associated policy as well as other counterparty specific factors.

AAC's ability to commute policies or purchase certain investments may also be limited by available liquidity.

The Segregated Account

In March 2010, Ambac Assurance established a Segregated Account pursuant to Wisc.

§611.24 (2) (the “Segregated Account”) to segregate certain segments of Ambac Assurance’s liabilities, and the Wisconsin Insurance Commissioner, acting as rehabilitator (the "Rehabilitator") commenced rehabilitation

proceedings in the Dane County, Wisconsin Circuit Court (the “Rehabilitation Court”) with respect to the Segregated Account (the “Segregated Account Rehabilitation Proceedings”) in order to permit OCI to facilitate an orderly run-off and/or settlement of the liabilities allocated to the Segregated Account.

In March 2010, AAC established a Segregated Account pursuant to Wisc.

§611.24 (2) (the “Segregated Account”) to segregate certain segments of AAC’s liabilities, and the Wisconsin Insurance Commissioner, acting as rehabilitator (the "Rehabilitator") commenced rehabilitation proceedings in the Dane County, Wisconsin Circuit Court (the “Rehabilitation Court”) with respect to the Segregated Account (the “Segregated Account Rehabilitation Proceedings”) in order to permit OCI to facilitate an orderly run-off and/or settlement of the liabilities allocated to the Segregated Account.

On October 8, 2010, OCI filed a plan of rehabilitation for the Segregated Account (the “Segregated Account Rehabilitation Plan”) in the Rehabilitation Court, which was confirmed on January 24, 2011.

On June 11, 2014, the Rehabilitation Court approved amendments to the Segregated Account Rehabilitation Plan and the Segregated Account Rehabilitation Plan, as amended, became effective on June 12, 2014.

Policy obligations not allocated to the Segregated Account remained in the General Account of Ambac Assurance, and such policies in the General Account were not subject to and, therefore, were not directly impacted by the Segregated Account Rehabilitation Plan.

Policy obligations not allocated to the Segregated Account remained in the General Account of AAC, and such policies in the General Account were not subject to and, therefore, were not directly impacted by the Segregated Account Rehabilitation Plan.

On February 12, 2018, the rehabilitation of the Segregated Account was concluded pursuant to an amendment to the Segregated Account Rehabilitation Plan (the "Second Amended Plan of Rehabilitation").

The conclusion of the rehabilitation followed the successful completion of Ambac's surplus note exchange offers and consent solicitation, which, together with the satisfaction of all conditions precedent to the effectiveness of the Second Amended Plan of Rehabilitation, including the discharge of all unpaid policy claims of the Segregated Account, including accretion amounts thereon ("Deferred Amounts"), completed the restructuring transactions (the "Rehabilitation Exit Transactions") .

In exchange for an effective consideration package of 40 % cash, 41 % Secured Notes (as defined below) and 12.5 % General Account Surplus Notes (as defined below), paid in respect of outstanding Deferred Amounts and General Account Surplus Notes.

Ambac Assurance received the following benefits as a result of the completion of the Rehabilitation Exit Transactions:

completed the restructuring transactions (the "Rehabilitation Exit Transactions") .

In exchange for an effective consideration package of 40 % cash, 41 % Secured Notes (as defined below) and 12.5 % AAC's 5.1% surplus notes due 2020 ("senior surplus notes"), paid in respect of outstanding Deferred Amounts and senior surplus notes.

AAC received the following benefits as a result of the completion of the Rehabilitation Exit Transactions:

• Satisfaction and discharge of all outstanding Deferred Amounts (including accretion) of the Segregated Account, totaling $ 3,857 ;

Cancellation of $ 552 in principal amount outstanding, plus accrued and unpaid interest of $ 257 thereon, of Ambac Assurance's 5.1 % surplus notes due 2020 (the "General Account Surplus Notes");

An effective discount of 6.5 % on Deferred Amounts (applied first against accretion) and on the outstanding amount of principal and accrued and unpaid interest on tendered General Account Surplus Notes.

• Cancellation of $ 552 in principal amount outstanding, plus accrued and unpaid interest of $ 257 thereon, of senior surplus notes;

• An effective discount of 6.5 % on Deferred Amounts (applied first against accretion) and on the outstanding amount of principal and accrued and unpaid interest on tendered senior surplus notes.

AFG received $ 0.91 in principal amount of Secured Notes for each $ 1.00 of Deferred Amounts (including accretion) that it held, and provided a $ 0.09 discount in full satisfaction and discharge of its Deferred Amount claims.

AFG did not participate in the voluntary surplus note exchange offers.

Until the earlier of (i) June 8, 2020 and (ii) the date on which at least 25 % of the principal amount of General Account Surplus Notes (other than junior surplus notes) are no longer outstanding, AFG has agreed to hold and not sell General Account Surplus Notes (other than junior surplus notes) which, as of June 30, 2017, had an aggregate of $ 60 of principal amount and accrued and unpaid interest outstanding.

The Secured Notes

A newly formed special purpose entity, Ambac LSNI, LLC ("Ambac LSNI") issued $ 2,154 of new secured notes (the “Secured Notes”), secured by all assets of the special purpose entity, which include a note issued by AAC to the special purpose entity (the "Ambac Note"), which is secured by a pledge of AAC’s right, title and interest in up to the first $ 1,400 of proceeds (net of reinsurance) from certain litigations in which AAC seeks redress for breaches of representations and warranties and/or fraud related to residential mortgage-backed securitizations (the “RMBS Litigations”).

In addition, the Ambac Note is secured by cash and securities having a market value of $ 178 as of December 31, 2020.

AAC also pledged for the benefit of the holders of Secured Notes (other than AAC) the proceeds of the Secured Notes held by AAC from time to time, and issued a financial guaranty insurance policy to a trustee for the benefit of holders of Secured Notes irrevocably guarantying all principal and interest payments in respect of the Secured Notes as and when such payments become due and owing.

Prior to the Rehabilitation Exit Transactions, AFG and AAC owned securities that were insured by AAC and allocated to the Segregated Account.

As a result of the Rehabilitation Exit Transactions, AFG and AAC received $ 125 and $ 644 , respectively, of par amount of Secured Notes issued by Ambac LSNI.

The current holdings of these secured notes are reported in Investments in the Consolidated Balance Sheets at their fair value.

Tier 2 Financing

On the effective date of the Rehabilitation Exit Transactions, AAC issued $ 240 of senior notes (the “Tier 2 Notes”) secured by AAC’s rights, title and interest in the cash and non-cash

| Ambac Financial Group, Inc.

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(Dollar Amounts in Millions, Except Share Amounts)

The Secured Notes

A newly formed special purpose entity, Ambac LSNI, LLC ("Ambac LSNI") issued $ 2,154 of new secured notes (the “Secured Notes”), secured by all assets of the special purpose entity, which include a note issued by Ambac Assurance to the special purpose entity (the "Ambac Note"), which is secured by a pledge of Ambac Assurance’s right, title and interest in up to the first $ 1,400 of proceeds (net of reinsurance) from certain litigations in which Ambac Assurance seeks redress for breaches of representations and warranties and/or fraud related to residential mortgage-backed securitizations (the “RMBS Litigations”).

In addition, the Ambac Note is secured by cash and securities having a market value of $ 197 as of December 31, 2019 .

Ambac Assurance also pledged for the benefit of the holders of Secured Notes (other than Ambac Assurance) the proceeds of the Secured Notes held by Ambac Assurance from time to time, and issued a financial guaranty insurance policy to a trustee for the benefit of holders of Secured Notes irrevocably guarantying all principal and interest payments in respect of the Secured Notes as and when such payments become due and owing.

Prior to the Rehabilitation Exit Transactions, AFG and Ambac Assurance owned securities that were insured by Ambac Assurance and allocated to the Segregated Account.

As a result of the Rehabilitation Exit Transactions, AFG and Ambac Assurance received $ 125 and $ 644 , respectively, of par amount of Secured Notes issued by Ambac LSNI.

The current holdings of these secured notes are reported in Investments in the Consolidated Balance Sheets at their fair value.

Tier 2 Financing

On the effective date of the Rehabilitation Exit Transactions, Ambac Assurance issued $ 240 of senior notes (the “Tier 2 Notes”) secured by Ambac Assurance’s rights, title and interest in the cash and non-cash proceeds (net of reinsurance) above $ 1,600 received in connection with the RMBS Litigations.

The indenture for the Tier 2 Notes limits certain activities of Ambac Assurance and its subsidiaries, such as issuing certain indebtedness;

proceeds (net of reinsurance) above $ 1,600 received in connection with the RMBS Litigations.

The indenture for the Tier 2 Notes limits certain activities of AAC and its subsidiaries, such as issuing certain indebtedness;

engaging in mergers and similar transactions;

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The indenture for the Tier 2 Notes includes certain allowances with respect to these activities and generally requires the approval of OCI and, in some cases, holders of the Tier 2 Notes, for consents, waivers or amendments.

Bank Settlement Agreement Waiver and Amendment

As part of the Rehabilitation Exit Transactions, AFG and Ambac Assurance received sufficient consents from holders of General Account Surplus Notes for a waiver and amendment (the "BSA Waiver and Amendment") of the Settlement Agreement.

Among other provisions, the BSA Waiver and Amendment includes amendments to the Settlement Agreement that (i) eliminate the requirement for Ambac Assurance to have "unaffiliated qualified directors" on its Board of Directors;

(ii) eliminate the prohibition on new business activities;

(iii) modify the restrictions on the incurrence of indebtedness and other material obligations;

(iv) modify the restrictions on liens securing permitted indebtedness;

(v) modify restrictions applicable to junior surplus notes;

and (vi) modify restrictions on mergers or similar transactions.

After giving effect to the BSA Waiver and Amendment, the Settlement

Agreement continues to limit certain activities of Ambac Assurance and its subsidiaries, such as issuing indebtedness;

Bank Settlement Agreement

As part of the Rehabilitation Exit Transactions, AFG and AAC received sufficient consents from holders of senior surplus notes for a waiver and amendment (the "BSA Waiver and Amendment") of the Settlement Agreement.

After giving effect to the BSA Waiver and Amendment, the Settlement Agreement continues to limit certain activities of AAC and its subsidiaries, such as issuing indebtedness;

engaging in mergers and similar transactions;

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Upon consummation of the Rehabilitation Exit Transactions, the Stipulation and Order became effective.

The Stipulation and Order includes affirmative covenants, as well as restrictions on certain business activities and transactions, of AFG and Ambac Assurance.

The Stipulation and Order includes affirmative covenants, as well as restrictions on certain business activities and transactions, of AFG and AAC.

The Stipulation and Order has no fixed term and may be terminated or modified only with the approval of OCI.

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August 2018 AMPS Exchange

At June 30, 2018, Ambac Assurance had 26,411 shares of issued and outstanding AMPS with a liquidation preference of $ 660 (reported as noncontrolling interest of $ 264 on Ambac's balance sheet).

On July 3, 2018, AFG and Ambac Assurance commenced an offer to exchange (the “AMPS Exchange”) all of Ambac Assurance’s outstanding AMPS for General Account Surplus Notes and, from AFG, cash and warrants to purchase AFG's common stock.

The General Account Surplus Notes offered in the AMPS Exchange have the same terms as other outstanding surplus notes of Ambac Assurance (other than junior surplus notes).

At June 30, 2018, AAC had 26,411 shares of issued and outstanding AMPS with a liquidation preference of $ 660 (reported as nonredeemable noncontrolling interest of $ 264 on Ambac's balance sheet).

On July 3, 2018, AFG and AAC commenced an offer to exchange (the “AMPS Exchange”) all of AAC’s outstanding AMPS for senior surplus notes and, from AFG, cash and warrants to purchase AFG's common stock.

The senior surplus notes offered in the AMPS Exchange have the same terms as other outstanding surplus notes of AAC (other than junior surplus notes).

The offering period for the AMPS Exchange expired on August 1, 2018 and the transaction closed on August 3, 2018 (the "Settlement Date").

In exchange for each AMPS share (i.e.

$ 25 thousand of liquidation preference), holders received General Account Surplus Notes with a total outstanding amount (including accrued and unpaid interest thereon through June 22, 2018 (the "Signing Date")) equal to $ 13.875 thousand (the “Repurchase”).

$ 25 thousand of liquidation preference), holders received senior surplus notes with a total outstanding amount (including accrued and unpaid interest thereon through June 22, 2018 (the "Signing Date"))

equal to $ 13.875 thousand (the “Repurchase”).

AMPS holders who tendered on or before July 17, 2018, representing 22,096 shares of the AMPS, also received from AFG $ 0.500 in cash and 37.3076 warrants (rounded down to the nearest whole warrant) to purchase an equivalent number of shares of common stock of AFG at an exercise price of $ 16.67 per share (the “AFG Purchase” and, together with the Repurchase, the “Purchases”).

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(2) Captured a nominal discount of approximately $ 227 (a discount of approximately $ 253 on a fair market value basis) on $ 557 of the total outstanding liquidation preference of AMPS;

(3) Issued, in aggregate, $ 213 in current principal amount of senior surplus notes with accrued interest thereon on Settlement Date of $ 98 , issued 824,307 warrants and paid $ 11 in cash.

The AMPS are reported on the balance sheet within nonredeemable non-controlling interests and are carried at their fair value at the date AFG emerged from bankruptcy in April 2013, which is lower than the fair value of the total consideration provided to the AMPS holders in the Purchases.

The difference between the fair value of consideration provided to AMPS holders and the carrying amount of the AMPS was reflected as a reduction to Net income attributable to common stockholders in 2018 for approximately $ 82 .

At December 31, 2020 and 2019, AAC had 5,501 shares of issued and outstanding AMPS with a liquidation preference of $ 138 (reported as nonredeemable noncontrolling interest of $ 60 on Ambac's balance sheet), respectively.

2021 Surplus Note Exchanges

On January 19, 2021, AAC entered into a purchase agreement (the “Purchase Agreement”) with AFG and certain funds or accounts (the “Note Holders”), pursuant to which (i) the Note Holders agreed to sell to AAC all of the individual beneficial interests (the “Interests”) in the 5.1 % senior notes due August 28, 2039 (the “Corolla Notes”), issued by the Corolla Trust, a Delaware statutory trust formed by AFG in 2014, (ii) AFG agreed to sell to AAC the owner trust certificate for the Corolla Trust (the “Corolla Certificate”), which constituted all of the equity interests in the Corolla Trust, and (iii) AAC agreed to exchange the Interests and the Corolla Certificate for AAC’s senior surplus notes (collectively, the “Corolla Note Exchange”).

The Note Holders held 100 % of the outstanding Corolla Notes.

Pursuant to the Purchase Agreement, each $ 1.00 principal amount of the Corolla Notes (and the associated amount of accrued and unpaid interest thereon) was exchanged for $ 0.9125 principal amount of senior surplus notes (and the associated amount of accrued and unpaid interest thereon) on the date of the consummation of the Corolla Note Exchange (the “Closing”).

In addition, every $ 1.00 principal amount of the Corolla Certificate (and the associated amount of accrued and unpaid interest thereon) was exchanged for $ 0.64 principal amount of senior surplus notes (and the associated amount of

| Ambac Financial Group, Inc.

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(Dollar Amounts in Millions, Except Share Amounts)

Issued, in aggregate, $ 213 in current principal amount of General Account Surplus Notes with accrued interest thereon on Settlement Date of $ 98 , issued 824,307 warrants and paid $ 11 in cash.

The AMPS are reported on the balance sheet within non-controlling interests and are carried at their fair value at the date AFG emerged from bankruptcy in April 2013, which is lower than the fair value of the total consideration provided to the AMPS holders in the Purchases.

At December 31, 2019, and December 31, 2018, Ambac Assurance had 5,501 and 4,115 shares of issued and outstanding AMPS with a liquidation preference of $ 138 and $ 103 (reported as noncontrolling interest of $ 60 and $ 41 on Ambac's balance sheet).

The increase resulted from the re-issuance of 1,386 shares from the sale of AFG owned AMPS during 2019.

accrued and unpaid interest thereon) on the date of Closing.

The Closing occurred on January 22, 2021.

At the Closing AAC issued approximately $ 267 aggregate principal amount of senior surplus notes to consummate the Corolla Note Exchange and acquire all of the interests in the Corolla Trust.

Subsequent to the closing the Corolla Trust was dissolved and the junior surplus note that had been deposited in the Corolla Trust by AFG in 2014 was canceled.

In February 2021, AAC entered into a purchase agreement pursuant to which the holder of $ 15 principal amount of 5.1 % junior surplus notes issued by AAC agreed to sell such notes to AAC in exchange for senior surplus notes (the "JSN Exchange").

Pursuant to the purchase agreement, each $ 1.00 principal amount of the junior surplus notes (and the associated amount of accrued and unpaid interest thereon) was exchanged for $ 0.8581 principal amount of senior surplus notes (and the associated amount of accrued and unpaid interest thereon).

The closing of the JSN Exchange occurred on February 11, 2021 when AAC issued approximately $ 13 aggregate principal amount of senior surplus notes.

Subsequent to the closing of the JSN Exchange the junior surplus notes were canceled.

As a result of the Corolla Note Exchange and the JSN Exchange, AAC no longer has any junior surplus notes outstanding.

The surplus notes exchanged pursuant to the Corolla Note Exchange and the JSN Exchange are part of the same series as, and rank equally with, the existing surplus notes previously issued by AAC.

After giving effect to the Corolla Note Exchange and the JSN Exchange, AAC has $ 853 principal amount of surplus notes outstanding and total principal and accrued and unpaid interest of surplus notes outstanding is $ 1,414 as of February 11, 2021.

Outstanding surplus notes principal amount includes $ 83 owned by AFG, which amount is eliminated in consolidation for purposes of US generally accepted accounting principles.

BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

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All significant intercompany balances have been eliminated.

The usual condition for a controlling financial interest is ownership of a majority of the voting interests of an entity.

The usual condition for a controlling financial interest is ownership of a majority of the voting

interests of an entity.

However, a controlling financial interest may also exist in entities, such as VIEs, through arrangements that do not involve controlling voting interests.

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or (3) the right to receive the entity’s expected residual returns.

most significantly impact the VIE’s economic performance, whether the variable interest holder has the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE, related party relationships and the design of the VIE.

The determination of whether a variable interest holder is the primary beneficiary involves performing a qualitative analysis of the VIE that includes, among other factors, its capital structure, contractual terms including the rights of each variable interest holder, the activities of the VIE, whether the variable interest holder has the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, whether the variable interest holder has the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE, related party relationships and the design of the VIE.

An entity that is deemed the primary beneficiary of a VIE is required to consolidate the VIE.

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Investments in subsidiaries are accounted for using the equity method of accounting in Schedule II.

Measurement of Credit Losses on Financial Instruments (CECL)

On January 1, 2020 Ambac adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments, subsequently amended by ASU 2018-19 , Codification Improvements to Topic 326, Financial Instruments - Credit Losses;

ASU 2019-04 , Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments ;

ASU 2019-05, Financial Instruments—Credit Losses (Topic 326):

Targeted Transition Relief ;

and ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses (collectively the Current Expected Credit Loss standard or "CECL").

The new CECL standard affects how reporting entities measure credit losses for financial assets that are not accounted for at fair value through net income.

For Ambac, these financial assets include available-for-sale debt securities and amortized cost assets, specifically premium receivables, reinsurance recoverables and loans.

CECL does not apply to recoveries of previously paid losses on financial guarantee insurance contracts accounted for under ASC 944 nor does it apply to equity method investments accounted for under ASC 323.

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AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

• For available-for-sale debt securities, credit losses under CECL are measured similarly to other-than-temporary impairments under prior GAAP.

The updated guidance was applied prospectively.

• For financial instruments measured at amortized cost, CECL replaces the "incurred loss" model, which generally delayed recognition of the full amount of credit losses until the loss was probable of occurring, with an "expected loss" model, which reflects an entity's current estimate of all expected lifetime credit losses.

The estimate of expected lifetime credit losses should consider historical information, current information, as well as reasonable and supportable forecasts.

Expected lifetime credit losses for amortized cost assets will be recorded as an allowance for credit losses, with subsequent increases or decreases in the allowance reflected in net income each period.

The updated guidance was applied by a cumulative effect adjustment to the opening balance of retained earnings at January 1, 2020.

This adjustment was not material to retained earnings or any individual balance sheet line item.

Refer to the discussion below for each asset type.

As a result of adopting CECL, management revised its policies and procedures around the credit impairment evaluation process.

CECL also introduced new disclosures related to the credit impairment process, including certain accounting policy elections that Ambac made under the new standard.

The Investments - Debt Securities Topic of the ASC requires that all debt instruments be classified in Ambac’s Consolidated Balance Sheets according to their purpose and, depending on that classification, be carried at either cost or fair market value.

Ambac’s non-VIE debt investment portfolio is accounted for on a trade-date basis and consists primarily of investments in fixed income securities that are considered available-for-sale as defined by the Investments - Debt Securities Topic of the ASC.

Ambac’s non-VIE debt investment portfolio is accounted for on a trade-date basis and consists primarily of investments in fixed maturity securities that are considered available-for-sale as defined by the Investments - Debt Securities Topic of the ASC.

Available-for-sale debt securities are reported in the financial statements at fair value with unrealized gains and losses, net of deferred taxes, reflected in Accumulated Other Comprehensive Income (Loss) in Stockholders’ Equity and computed using amortized cost as the basis.

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For structured debt securities with a large underlying pool of homogenous loans, such as mortgage-backed and asset-backed securities, premiums and discounts are adjusted for the effects of actual and anticipated prepayments.

For other fixed income securities, such as corporate and municipal bonds, discounts were amortized or accreted over the remaining term of the securities.

For other fixed maturity securities, such as corporate and municipal bonds, discounts were amortized or accreted over the remaining term of the securities.

Ambac adopted ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20) - Premium Amortization on Purchased Callable Debt Securities, on January 1, 2019.

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Ambac’s non-VIE investment portfolio also includes equity interests in pooled investment funds which are accounted for in accordance with the Investments - Equity Securities Topic of the ASC and reported as Other investments on the Consolidated Balance Sheet with income reported through Net investment income on the Statement of Total Comprehensive Income (Loss).

Equity interests in the form of common stock or in-substance common stock are classified as trading securities and reported at

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AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

fair value while limited partner interests in such funds are reported using the equity method.

Equity interests in the form of common stock or in-substance common stock are classified as trading securities and reported at fair value while limited partner interests in such funds are reported using the equity method.

Fair value is based primarily on quotes obtained from independent market sources.

When quotes are not available or cannot be reasonably corroborated, valuation models are used to estimate fair value.

When quotes for fixed maturity securities are not available or cannot be reasonably corroborated, valuation models are used to estimate fair value.

These models include estimates, made by management, which utilize current market information.

The quotes received or modeled valuations could differ materially from amounts that would actually be realized in the market.

When fair value is not readily determinable for pooled investment funds, the investments are valued using net asset value ("NAV") as a practical expedient as permitted under the Fair Value Measurement Topic of the ASC.

Investment valuations could differ materially from amounts that would actually be realized in the market.

Realized gains and losses on the sale of investments are determined on the basis of specific identification.

VIE investments in fixed income securities are carried at fair value as they are either considered as available for sale securities or under the fair value option election.

VIE investments in fixed maturity securities are carried at fair value as they are either considered as available for sale securities or under the fair value option election.

For additional information about VIE investments, including fair value by asset-type, see Note 4.

Variable Interest Entities .

Ambac has a formal impairment review process for fixed income available-for-sale securities in its investment portfolio.

Ambac conducts a review each quarter to identify and evaluate investments that have indications of impairment that may be other than temporary in accordance with the Investments - Debt Securities Topic of the ASC.

Factors considered to identify and assess securities for other than temporary impairment include:

Ambac has a formal credit impairment review process for fixed maturity available-for-sale securities in its investment portfolio.

Ambac conducts a review each quarter to identify and evaluate investments that have indications of impairment in accordance with the Investments - Debt Securities Topic of the ASC.

• Prior to the adoption of CECL, factors considered to identify and assess securities for other than temporary impairment include:

(i) fair values that have declined by 20% or more below amortized cost;

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and (vii) whether it is more likely than not that Ambac will be required to sell a security before the anticipated recovery of its amortized cost basis.

If we believe a decline in the fair value of a particular investment is temporary, we record the decline as an unrealized loss net of tax in Accumulated Other Comprehensive Income (Loss) in Stockholders’ Equity on our Consolidated Balance Sheets.

If management either:

(i) has the intent to sell its investment in a debt security or (ii) determines that the Company more likely than not will be required to sell the debt security before its anticipated recovery of the amortized cost basis less any current period credit impairment, then an other-than-temporary impairment charge is recognized in earnings, with the amortized cost of the security being written-down to fair value.

If these conditions are not met, but it is determined that a credit loss exists, the credit impairment loss is recognized in earnings, and the other-than-temporary amount related to all other factors is recognized in other comprehensive income.

For fixed income securities that have other-than-temporary impairments in a period, the previous amortized cost of the security less the amount of the other-than-temporary impairment recorded through earnings becomes the investment’s new amortized cost basis.

If we believed a decline in the fair value of a particular investment is not credit-related, we recorded the decline as an unrealized loss net of tax in Accumulated Other Comprehensive Income (Loss) in Stockholders’ Equity on our Consolidated Balance Sheets.

If it was determined that a credit impairment existed, the credit impairment loss was recognized in earnings, and the other-than-temporary amount related to all other factors was recognized in other comprehensive income.

For fixed maturity securities that have credit impairments in a period, the previous amortized

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77 2020 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

cost of the security less the amount of the credit impairment recorded through earnings becomes the investment’s new amortized cost basis.

Ambac accretes the new amortized cost basis to par or to the estimated future cash flows to be recovered over the expected remaining life of the security.

The evaluation of securities for impairment is a quantitative and qualitative process, which is subject to risks and uncertainties and is intended to determine whether, and to what extent, declines in

the fair value of investments should be recognized in current period earnings.

• Under CECL, credit losses are evaluated and measured similarly, however the recognition of credit impairment losses for available-for-sale debt securities are recorded as an allowance for credit losses with an offsetting charge to net income, rather than as a direct write-down of the security as was required under prior GAAP.

As a result, improvements to estimated credit losses for available-for-sale debt securities are recognized immediately in net income rather than as interest income over time.

Furthermore, as required under CECL, Ambac no longer considers the length of time a security has continuously been in an unrealized loss in the credit impairment process.

If we believe a decline in the fair value of a particular investment is not credit impaired, we record the decline as an unrealized loss net of tax in Accumulated Other Comprehensive Income (Loss) in Stockholders’ Equity on our Consolidated Balance Sheets.

If management either:

(i) has the intent to sell its investment in a debt security or (ii) determines that the Company more likely than not will be required to sell the debt security before its anticipated recovery of the amortized cost basis less any current period credit impairment, then an impairment charge is recognized in earnings, with the amortized cost of the security being written-down to fair value.

The evaluation of securities for credit impairment is a quantitative and qualitative process, which is subject to risks and uncertainties and is intended to determine whether, and to what extent, declines in the fair value of investments should be recognized in current period earnings.

The risks and uncertainties include changes in general economic conditions, the issuer’s or guarantor’s financial condition and/or future prospects, the impact of regulatory actions on the investment portfolio, the performance of the underlying collateral, the effects of changes in interest rates or credit spreads and the expected recovery period.

With respect to Ambac insured securities owned, future cash flows used to measure credit impairment represents the sum of (i) the bond’s intrinsic cash flows and (ii) the estimated Ambac Assurance claim payments.

Prior to the discharge and settlement of the Segregated Account's claim obligations on February 12, 2018, the estimate of Ambac's Segregated Account claim payments, including interest on Deferred Amounts, was an important consideration in the evaluation of other than temporary impairment as such payments were at the sole discretion of the Rehabilitator.

Refer to Note 1.

Background and Business Description for more information on the Segregated Account and the Segregated Account Rehabilitation Proceedings.

Ambac’s assessment about whether a decline in value is other-than-temporary reflects management’s current judgment regarding facts and circumstances specific to a security and the factors noted above.

Ambac’s assessment about whether a decline in value is considered a credit impairment reflects management’s current judgment regarding facts and circumstances specific to a security and the factors noted above.

If that judgment changes, Ambac may ultimately record a charge for other-than-temporary impairment in future periods.

Ambac has made certain accounting policy elections related to accrued interest receivable ("AIR") for available-for-sale investments under CECL, which are consistent with past practices under prior GAAP.

Elections include:

i) not measuring AIR for credit impairment, instead AIR is written off when it becomes 90 days past due;

ii) writing off AIR by reversing interest income;

iii) presenting AIR separately in Other Assets on the balance sheet and iv) excluding AIR from amortized cost balances in required CECL disclosures found in Note 11.

AIR at December 31, 2020 was $ 10 .

Refer to Note 11.

Investments for further credit impairment disclosures.

Gross premiums were received either upfront or in installments.

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The weighted average risk-free rate at December 31, 2020 and 2019, was 2.2 %.

and 2.7 % , respectively, and the weighted average period of future premiums used to estimate the premium receivable at December 31, 2019 and 2018 , was 8.5 and 8.7 years , respectively.

and 2.4 %, respectively, and the weighted average period of future premiums used to estimate the premium receivable at December 31, 2020 and 2019, was 8.3 years and 8.5 years, respectively.

Insured obligations consisting of homogeneous pools for which Ambac uses expected future premiums to estimate the premium receivable include residential mortgage-backed securities ("RMBS").

As prepayment assumptions change for homogenous pool transactions, or if there is an actual prepayment for a “contractual” method installment transaction, the related premium receivable and UPR are adjusted in equal and offsetting amounts with no immediate effect on earnings using new premium cash flows and the then current risk-free rate corresponding to the initial weighted average life of the related policy.

For both upfront and installment premium policies, premium revenues are earned over the life of the financial guarantee contract in proportion to the insured principal amount outstanding at each reporting date (referred to as the level-yield method).

For installment paying policies, the premium receivable discount, equating to the difference between the undiscounted future installment premiums and the present value of future installment premiums, is accreted as premiums earned in proportion to the premium receivable balance at each reporting date.

• For financial guarantee contracts, the issuer's ability and willingness to pay its insured debt obligation impacts the payment of policy losses by Ambac as well as the receipt of premiums from the issuer.

As such, management leverages its existing loss reserve estimation process to evaluate credit impairment for premium receivables.

Key factors in assessing credit impairment include historical premium collection data, internal risk classifications, credit ratings and loss severities.

For structured finance transactions involving special purpose entities, we further evaluate the

| Ambac Financial Group, Inc.

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(Dollar Amounts in Millions, Except Share Amounts)

Additionally, the Company evaluates whether any premiums receivable are uncollectible at each balance sheet date and records an allowance for policies with a premium receivable impairment based on our expectation.

priority of premiums paid to Ambac within the contractual waterfall, as required by bond indentures.

Ambac has a formal quarterly credit impairment review process for premium receivables under financial guarantee insurance contracts.

• Prior to the adoption of CECL, Ambac assessed collectability of premium receivables in accordance with ASC 944 and recorded an allowance for uncollectible premiums.

• Under CECL, management utilizes either a discounted cash flow ("DCF") or probability of default/loss given default ("PD/LGD") approach to estimate credit impairment.

The DCF approach utilizes expected cash flows developed by Ambac's Risk Management Group using the same (or similar) models used for estimating loss reserves where such models can identify shortfalls in premiums.

Credit impairment using the DCF approach is equal to the difference between amortized cost and the present value of expected cash flows.

Credit impairment under the PD/LGD approach is the product of (i) the premium receivable carrying value, (ii) internally developed default probability (considering internal ratings and average life), and (iii) internally developed loss severities.

Refer to Note 8.

Financial Guarantee Insurance Contracts for further credit impairment disclosures.

AAC has reinsurance in place pursuant to surplus share treaty and facultative reinsurance agreements.

Similar to gross premiums, premiums ceded to reinsurers were paid either upfront or in installments.

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When a bond issue insured by Ambac has been retired early, typically due to an issuer call, any remaining UPR is recognized at that time to the extent the financial guarantee contract is legally extinguished, causing accelerated premium revenue.

For installment premium paying transactions, we offset the recognition of any remaining UPR by the reduction of the related premium receivable to zero (as it will not be collected as a result of the retirement), which may cause negative accelerated premium revenue.

premium revenue.

Certain obligations insured by Ambac have been legally defeased whereby government securities are purchased by the issuer with the proceeds of a new bond issuance, or less frequently with other funds of the issuer, and held in escrow.

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For policies with pre-refunding securities, the maturity date of the pre-refunded security has been shortened from its previous legal maturity.

Although premium revenue recognition has not been accelerated in the period of the pre-refunding, it results in an

increase in the rate at which the policy's remaining UPR is to be recognized.

Although premium revenue recognition has not been accelerated in the period of the pre-refunding, it results in an increase in the rate at which the policy's remaining UPR is to be recognized.

Loans are reported at either their outstanding principal balance less unamortized discount or at fair value.

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A loan is considered impaired when, based on the financial condition of the borrower, it is probable that Ambac will be unable to collect all principal and interest due according to the contractual terms of the loan agreement.

Under CECL, Ambac has a formal quarterly credit impairment review process for these loans.

The key factors in assessing credit impairment are internal credit ratings and loss severities.

Management utilizes a PD/LGD approach, similar to the one described above for premium receivables, which is applied to the loan carrying value.

• Loans held by VIEs consolidated as required under the Consolidation Topic of the ASC are carried at fair value under the fair value option election with changes in fair value recorded in Income (loss) on variable interest entities on the Consolidated Statements of Total Comprehensive Income (Loss).

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Derivative Contracts

The Company has entered into derivative contracts both for trading purposes and to hedge certain economic risks inherent in its financial asset and liability portfolios.

The Company has entered into derivative contracts to hedge certain economic risks inherent in its asset and liability portfolios.

None of Ambac’s derivative contracts are designated as hedges under the Derivatives and Hedging Topic of the ASC.

Ambac's derivatives consist primarily of interest rate swaps and futures contracts.

Ambac maintains a portfolio consisting primarily of interest rate swaps and futures contracts to economically hedge interest rate risk in the financial guarantee and investment portfolios.

This portfolio also includes legacy interest rate swaps with asset-backed securitization issuers, states, municipalities and their authorities which were written in connection with their financings.

Changes in fair value of these interest rate derivatives are recorded, along with changes in fair value of Ambac's remaining credit derivatives, within Net gains (losses) on derivative contracts on the Consolidated Statements of Total Comprehensive Income (Loss).

VIEs consolidated under the Consolidation Topic of the ASC entered into derivative contracts to meet specified purposes within their securitization structure.

Changes in fair value of consolidated VIE derivatives are included within Income (loss) on variable interest entities on the Consolidated Statements of Total Comprehensive Income (Loss).

All derivatives are recorded on the Consolidated Balance Sheets at fair value on a gross basis;

assets and liabilities are netted by counterparty only when a legal right of offset exists.

Variation payments on centrally cleared swaps and futures contracts are considered settlements of the associated derivative balances and are reflected as a reduction to derivative liabilities or assets on the Consolidated Balance Sheets.

For other derivatives, Ambac has

• Ambac maintains a portfolio consisting primarily of interest rate swaps and futures contracts to economically hedge interest rate risk in the financial guarantee and

| Ambac Financial Group, Inc.

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(Dollar Amounts in Millions, Except Share Amounts)

determined that the amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral may not be used to offset amounts due under the derivative instruments in the normal course of settlement.

investment portfolios.

While this portfolio also includes certain legacy interest rate swaps executed in connection with financial guarantee client financings, the interest rate derivatives portfolio is managed on the basis of its net sensitivity to changes in interest rates.

Changes in the fair value of these interest rate derivatives are recorded, along with changes in fair value of Ambac's remaining credit derivatives, within Net gains (losses) on derivative contracts on the Consolidated Statements of Total Comprehensive Income (Loss).

• VIEs consolidated under the Consolidation Topic of the ASC entered into derivative contracts to meet specified purposes within their securitization structure.

Changes in fair value of consolidated VIE derivatives are included within Income (loss) on variable interest entities on the Consolidated Statements of Total Comprehensive Income (Loss).

All derivatives are recorded on the Consolidated Balance Sheets at fair value on a gross basis;

assets and liabilities are netted by counterparty only when a legal right of offset exists.

For other derivatives, Ambac has determined that the amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral may not be used to offset amounts due under the derivative instruments in the normal course of settlement.

Therefore, such amounts are not offset against fair value amounts recognized for derivative instruments executed with the same counterparty under the same master netting arrangement and are included in "Other assets" on the Consolidated Balance Sheets.

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Fair Value Measurements for further description of the methodologies used to determine the fair value of derivative contracts, including model inputs and assumptions where applicable.

Insurance Intangible Asset

Goodwill of $ 46 is attributable to the Xchange acquisition, further discussed in Note 3.

Business Combination and represents the acquisition cost in excess of the fair value of net assets acquired, including identifiable intangible assets.

Goodwill is assigned at acquisition to the applicable reporting unit of the acquired entity giving rise to the goodwill.

Goodwill is not amortized but is subject to impairment testing.

Goodwill impairment tests are performed annually or more frequently if circumstances indicate a possible impairment.

If, after assessing qualitative factors, management believes it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a quantitative impairment evaluation is performed.

The quantitative goodwill test compares the estimated fair value of the reporting unit with its carrying value (including goodwill and identifiable intangible assets).

An impairment is recognized for the excess of the carrying amount of the reporting unit over it estimated fair value.

If the reporting unit’s estimated fair value exceeds its carrying value, goodwill is not impaired.

As the Xchange acquisition occurred on December 31, 2020 no goodwill impairment evaluation was performed in 2020.

Intangible Assets

Financial Guarantee Insurance intangible:

Upon Ambac's emergence from bankruptcy in 2013, an insurance intangible asset was recorded which represented the difference between the fair value and aggregate carrying value of the financial guarantee insurance and reinsurance assets and liabilities.

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Pursuant to the Financial Services-Insurance Topic of the ASC, the insurance intangible is to be measured on a basis consistent with the related financial guarantee insurance and reinsurance contracts.

The insurance intangible asset is amortized using a level-yield method based on par exposure of the related financial guarantee insurance or reinsurance contracts and is applied to groups of contracts with similar characteristics.

The insurance intangible asset carrying value is $ 373 at December 31, 2020 and is amortized using a level-yield method based on par exposure of the related financial guarantee insurance or reinsurance contracts and is applied to groups of contracts with similar characteristics.

Acquired intangible assets:

Ambac acquired $ 36 of identifiable intangible assets attributable to the Xchange acquisition, further discussed in Note 3.

Business Combination .

The intangible assets are primarily related to distribution relationships, non-compete agreements and trade names, all of which have finite lives and are amortized over their estimated useful lives using the straight-line method.

The Company tests finite-lived acquired intangible assets for impairment if certain events occur or circumstances change indicating that the carrying amount of the intangible asset may not be recoverable.

To the extent the carrying value of an asset or asset group exceeds the projected undiscounted cash flows expected to result from the use and eventual disposal of the asset or asset group, the Company determines the asset or asset group is impaired and records an impairment equal to the difference between the estimated fair value and the carrying value of the asset or asset group.

In addition, we will recognize an impairment prior to the sale of an asset or asset group if the carrying value of the asset or asset group exceeds its estimated fair value.

As the Xchange acquisition occurred on December 31, 2020, there was no amortization expense nor any impairment of the intangible assets in 2020.

Restricted Cash

Cash that we do not have the right to use for general purposes is recorded as restricted cash in our consolidated balance sheets.

Restricted cash includes (i) consolidated variable interest entity cash restricted to support the obligations of the consolidated VIEs and (ii) cash held by Ambac Assurance received from its investment in Secured Notes and pledged for the benefit of holders of Secured Notes (other than Ambac Assurance).

Restricted cash includes (i) consolidated variable interest entity cash restricted to support the obligations of the consolidated VIEs, (ii) cash held by AAC received from its investment in Secured Notes and pledged for the benefit of holders of Secured Notes (other than AAC) and (iii) fiduciary cash held by Xchange described below.

Fiduciary Assets and Liabilities :

In Xchange's capacity as a managing general agent, generally it collects premiums from insureds and remits the premiums to the respective insurance

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carriers, net of fees to other parties, including its commissions.

Xchange also collects claims or refunds from carriers on behalf of insureds.

Unremitted insurance premiums and claims proceeds are held by Xchange in a fiduciary capacity.

Since fiduciary assets are not available for corporate use, they are shown in the consolidated balance sheets as an offset to fiduciary liabilities, which are reported in Other liabilities.

Restricted cash for net uncollected premiums and claims and the related fiduciary liabilities were $ 4 at December 31, 2020.

Loss and Loss Expenses

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The estimate for future net cash flows consider the likelihood of all possible outcomes that may occur from missed principal and/or interest payments on the insured obligation.

This estimate also considers future recoveries related to breaches of contractual representations and warranties by RMBS transaction sponsors, remediation strategies, excess spread and other contractual cash flows on public finance and structured

finance transactions (including RMBS).

Ambac’s approach to resolving disputes involving contractual breaches by transaction sponsors or other third parties has included negotiations and/or pursuing litigation.

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Active surveillance of the insured portfolio enables Ambac’s Risk Management Group ("RMG") to track credit migration of insured obligations from period to period and update internal classifications and credit ratings for each transaction.

Non-adversely classified credits are assigned a Class I rating while adversely classified credits are assigned a rating of Class IA through Class V.

adversely classified credits are assigned a Class I rating while adversely classified credits are assigned a rating of Class IA through Class V.

The criteria for an exposure to be assigned an adversely classified credit rating includes the deterioration of an issuer’s financial condition, underperformance of the underlying collateral (for collateral dependent transactions such as mortgage-backed or student loan securitizations), poor performance by the servicer of the underlying collateral and other adverse economic events or trends.

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All credits are assigned risk classifications by RMG using the following guidelines:

CLASS I - “Fully Performing - Meets Ambac Criteria with Remote Probability of Claim” - Credits that demonstrate adequate security and structural protection with a strong capacity to pay interest,

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Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

repay principal and perform as underwritten.

CLASS I - “Fully Performing - Meets Ambac Criteria with Remote Probability of Claim” - Credits that demonstrate adequate security and structural protection with a strong capacity to pay interest, repay principal and perform as underwritten.

Factors supporting debt service payment and performance are considered unlikely to change and any such change would not have a negative impact upon the fundamental credit quality.

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Further investigation is required to dimension and correct any deficiencies.

A complete legal review of documents may be required.

A complete legal review of documents

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may be required.

An action plan should be developed with triggers for future classification changes upward or downward.

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The discount factor applied to the statistical expected loss approach is based on a risk-free discount rate corresponding to the remaining expected weighted-average life of the exposure and the exposure currency.

For the cash flow scenario approach, discount factors are applied based on a risk-free discount rate term structure and correspond to the date of each respective cash flow payment or

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Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

recovery and the exposure currency.

For the cash flow scenario approach, discount factors are applied based on a risk-free discount rate term structure and correspond to the date of each respective cash flow payment or recovery and the exposure currency.

Discount factors are updated for the current risk-free rate each reporting period.

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Borrowers are obligated to make monthly payments on both their first and second-lien loans.

If the borrower defaults on the payments due under these loans and the property is subsequently liquidated, the liquidation proceeds are first utilized to pay off the first-lien loan (as well as other costs) and any remaining funds are applied to pay off the second-lien loan.

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Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

and any remaining funds are applied to pay off the second-lien loan.

As a result of this subordinate position to the first-lien loan, second-lien loans may carry a significantly higher severity in the event of a loss, approaching or exceeding 100%.

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average FICO (credit score), average current consolidated loan to value ratio (“CLTV”) and an overall quality indicator.

Projected servicer-level behavior may also have an impact on transaction performance.

Observed servicer-level behavior may also have an impact on projected transaction performance.

We source HPA projections from a market accepted vendor and interest rate projections are developed from market sources.

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In either case, the servicer has taken actions to recover against the collateral, and the securitization has incurred losses to the extent such actions did not result in full repayment of the borrower’s obligations.

Generally, subsequent to the forensic exercise of examining loan files to ascertain whether the loans conformed to the representations and warranties, we submit nonconforming loans for repurchase to the contractual counterparty bearing the repurchase obligation, which is typically the transaction sponsor.

To effect a repurchase, depending on the transaction, the sponsor is obligated to repurchase the loan at (a) for loans which have not been liquidated or charged off, either (i) the current unpaid

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Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

principal balance of the loan, (ii) the current unpaid principal balance plus accrued unpaid interest, or (iii) the current unpaid principal balance plus accrued interest plus unreimbursed servicer advances/expenses and/or trustee expenses resulting from the breach of representations and warranties that trigger the repurchase, and (b) for loans that have already been liquidated or charged-off, the amount of the realized loss (which in certain cases may exclude accrued unpaid interest).

Generally, subsequent to the forensic exercise of examining loan files to ascertain whether the loans conformed to the representations and warranties, we submitted nonconforming loans for repurchase to the contractual counterparty bearing the repurchase obligation, typically the transaction sponsor.

In cases where loans are repurchased by a sponsor, the effect is typically to offset current period losses and then to increase the over-collateralization of the securitization, depending on the extent of loan repurchases and the structure of the securitization.

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On a monthly basis, the cash received related to loan repurchases by the sponsor is aggregated with cash collections from the underlying mortgages and applied in accordance with the trust indenture payment waterfall.

This payment waterfall typically includes principal and interest payments to the note holders, various expenses of the trust and reimbursements to Ambac, as financial guarantor, for previously paid claims.

Notwithstanding the reimbursement of previous claim payments, to the extent there continues to be insufficient cash in the waterfall in the current month to make scheduled principal and interest payments to the note holders, Ambac is required to make additional claim payments to cover this shortfall.

To the extent there continues to be insufficient cash in the waterfall in the current month to make scheduled principal and interest payments to the note holders, Ambac is required to make additional claim payments to cover this shortfall.

Ambac may also receive payments directly from transaction sponsors in settlement of their repurchase obligations pursuant to negotiated settlement agreements or otherwise as a result of related litigation.

While the obligation by sponsors to repurchase loans with material breaches is clear, generally the sponsors have not honored those obligations without actual or threatened litigation.

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Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Ambac has utilized the results of the above described loan file examinations to make demands for loan repurchases from sponsors or their successors and, in certain instances, as a part of the basis for litigation.

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While our contractual recourse is generally to the sponsor/subsidiary, rather than to the parent, each of these large institutions has significant financial resources and may have an ongoing interest in mortgage finance, and we therefore believe that the financial institution/parent would ultimately assume financial responsibility for these obligations if the sponsor/subsidiary is unable to honor its contractual obligations or pay a judgment that we may obtain in litigation.

Additionally, in the case of successor institutions, we are not aware of any

provisions that explicitly preclude or limit the successors’ ability to honor the obligations of the original sponsor.

Additionally, in the case of successor institutions, we are not aware of any provisions that explicitly preclude or limit the successors’ ability to honor the obligations of the original sponsor.

Certain successor financial institutions have made significant payments to certain claimants to settle breaches of representations and warranties perpetrated by sponsors that have been acquired by such financial institutions.

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and uncertainty inherent in the assumptions used in estimating such recoveries.

Failure to realize RMBS R&W subrogation recoveries for any reason or the realization of RMBS R&W subrogation recoveries materially below the amount recorded on Ambac's consolidated balance sheet would have a material adverse effect on our results of operations and financial condition 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 Ambac, through dividends or otherwise;

and a significant drop in the value of securities issued and/or insured by Ambac or Ambac Assurance.

the initiation of rehabilitation proceedings against AAC;

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

and a significant drop in the value of securities issued and/or insured by Ambac or AAC.

The approach used to estimate RMBS R&W subrogation recoveries is based on obtaining loan files from the original pool and conducting loan file re-underwriting to derive a breach rate to be extrapolated to determine an estimated repurchase obligation.

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The factor which contributes the greatest degree of uncertainty in ascertaining appropriate loss reserves is the long final legal maturity date of the insured bonds.

Most of the student loan bonds which we insure were issued with

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Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

original terms of 20 to 40 years until final maturity.

Most of the student loan bonds which we insure were issued with original terms of 20 to 40 years until final maturity.

Since our policy covers timely interest and ultimate principal payment, our loss projections must make assumptions for many factors covering a long time horizon.

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This regression-based recovery forecast is grounded in deal-level performance data.

For the liabilities of the transaction which we insure, the transaction losses are then incorporated into a waterfall tool to develop loss estimates for our exposures in various base, upside and downside scenarios.

For the liabilities of the transaction which we insure, the transaction losses are then incorporated into a waterfall tool to develop loss

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AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

estimates for our exposures in various base, upside and downside scenarios.

We develop and assign probabilities to multiple cash flow scenarios based on each transaction’s unique characteristics.

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As appropriate, we also develop other cases that incorporate various upside and downside scenarios that may include changes to defaults and recoveries.

Ceded Reinsurance

Loss and loss expense reserve reported on the balance sheet relates only to direct insurance policies.

The corresponding reserve ceded to reinsurers is reported as reinsurance recoverable on paid and unpaid losses.

AAC has reinsurance in place pursuant to surplus share treaty and facultative reinsurance agreements.

The reinsurance of risk does not relieve AAC of its original liability to its policyholders.

In the event that any of Ambac Assurance’s reinsurers are unable to meet their obligations under reinsurance contracts, AAC would, nonetheless, be liable to its policyholders for the full amount of its policy.

Credit exposure exists with respect to reinsurance recoverables to the extent that any reinsurer may not be able to reimburse AAC under the terms of these reinsurance arrangements.

To minimize its exposure to losses from reinsurers, AAC (i) monitors the financial condition of its reinsurers;

(ii) is entitled to receive collateral from its reinsurance counterparties in certain reinsurance contracts;

and (iii) has certain cancellation rights that can be exercised by AAC in the event of rating agency downgrades of a reinsurer (among other events and circumstances).

Under CECL, Ambac has a formal quarterly credit impairment review process whereby Ambac has elected to use the practical expedient of considering the fair value of collateral posted by reinsurers when evaluating credit impairment.

To determine the total unsecured recoverable to be evaluated for credit impairment, Ambac nets the reinsurance recoverable amount by ceded premiums payable and the fair value of collateral posted, if any.

The key factors in assessing credit impairment for reinsurance recoverables are independent rating agency credit ratings and loss severities.

Management utilizes a PD/LGD approach, similar to the one described above for premium receivables, which is applied to the net unsecured reinsurance recoverable amount.

Refer to Note 8.

Financial Guarantee Insurance Contracts for further credit impairment disclosures.

Long-Term Debt

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Accrued interest and discount accretion on long-term debt is reported as Interest expense on the Consolidated Statements of Total Comprehensive Income (Loss).

To the extent Ambac repurchases or redeems its long-term debt, such repurchases or redemptions may be settled for an amount different than the carrying value of the obligation.

To the extent Ambac repurchases or redeems its long-

term debt, such repurchases or redemptions may be settled for an amount different than the carrying value of the obligation.

Any difference between the payment and carrying value of the obligation is reported in Net realized gains (losses) on extinguishment of debt on the Consolidated Statements of Total Comprehensive Income (Loss).

For long-term debt issued by consolidated VIEs in which Ambac's variable interest arises from financial guarantees written by Ambac's subsidiaries ("FG VIEs"), we may elect to use the fair value option on an instrument by instrument basis.

When the fair value option is elected, changes in the fair value of the FG VIEs' long-term debt is reported within Income (loss) on variable interest entities in the Consolidated Statements of Total Comprehensive Income (Loss), except for the portion of the total change in fair value of financial liabilities caused by changes in the instrument-

specific credit risk which is presented separately in Other comprehensive income (loss).

In cases where the fair value option has not been elected, the FG VIEs' long-term debt is carried at par less unamortized discount, with interest expense reported within Income (loss) on variable interest entities in the Consolidated Statements of Total Comprehensive Income (Loss).

Noncontrolling Interest

At December 31, 2019 and 2018 , Ambac Assurance had 5,501 and 4,115 shares of issued and outstanding AMPS with a liquidation preference of $ 138 and $ 103 (reported as noncontrolling interest of $ 60 and $ 41 on Ambac's balance sheet), respectively.

Noncontrolling Interests

Nonredeemable noncontrolling interests

The auction occurs every 28 days and the dividend rate has continuously been reset at the maximum rate of one-month LIBOR plus 200 basis points.

Under the terms of the AMPS, dividends may not be paid on the common stock of Ambac Assurance unless all accrued and unpaid dividends on the AMPS for the then current dividend period have been paid, provided, that dividends on the common stock may be made at all times for the purpose of, and only in such amounts as are necessary for, enabling AFG (i) to service its indebtedness for borrowed money as such payments become due or (ii) to pay its operating expenses.

Under the terms of the AMPS, dividends may not be paid on the common stock of AAC unless all accrued and unpaid dividends on the AMPS for the then current dividend period have been paid, provided, that dividends on the common stock may be made at all times for the purpose of, and only in such amounts as are necessary for, enabling AFG (i) to service its indebtedness for borrowed money as such payments become due or (ii) to pay its operating expenses.

If dividends are paid on the common stock as provided in the prior sentence, dividends on the AMPS become cumulative until the date that all accumulated and unpaid dividends have been paid on the AMPS.

Ambac Assurance has not paid dividends on its AMPS since 2010.

AAC has not paid dividends on its AMPS since 2010.

Redeemable noncontrolling interests

The Xchange acquisition, further described in Note 3.

Business Combination, resulted in 80 % ownership of the acquired entities by Ambac.

Under the terms of the acquisition agreement, Ambac has a call option to purchase the remaining 20 % from the minority owners (i.e., noncontrolling interests) and the minority owners have a put option to sell the remaining 20 % to Ambac.

The call and put options are exercisable after different time periods elapse.

Because the exercise of the put option is outside the control of Ambac, in accordance with the Distinguishing Liabilities from Equity Topic of the ASC, Ambac reports redeemable noncontrolling interests in the mezzanine section of its consolidated balance sheet.

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Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Employee Benefits

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Incentive compensation has two components:

short term incentive compensation (consisting of an annual cash bonus and awards of deferred stock units for certain officers) and long term incentive plan awards (consisting of cash awards and restricted and performance stock units).

short term incentive compensation (consisting of an annual cash bonus and, prior to 2020, awards of deferred stock units for certain officers) and long term incentive plan awards (consisting of deferred cash and awards of restricted and performance stock units).

Annual decisions with regard to incentive compensation are generally made in the first quarter of each year and are based on the prior year's performance for the Company, the employee and the employee's business unit.

The Ambac 2013 Incentive Compensation Plan (the “Equity Plan”) provides for the granting of stock options, restricted stock, stock appreciation rights, restricted and performance units and other awards that are valued or determined by reference to Ambac's common stock to employees and directors.

In March 2014, Ambac developed a long term incentive compensation plan (“LTIP”) as a sub-plan of the 2013 Plan.

This LTIP allows for both cash and equity awards to US employees.

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Ambac recognizes compensation costs for all equity classified awards granted at fair value and records forfeitures for unvested shares only when they occur.

In 2020, the Ambac 2013 Incentive Compensation Plan (the “2013 Incentive Plan”) was superseded by the 2020 Incentive Compensation Plan ("2020 Incentive Plan").

Both plans allow for the granting of stock options, restricted stock, stock appreciation rights, restricted and performance units and other awards to employees, directors and consultants that are valued or determined by reference to Ambac's common stock.

Under these plans, Ambac has issued both cash and equity awards to US employees.

In connection with the adoption of the 2020 Incentive Plan, all shares reserved but unissued under the 2013 Incentive Plan were transferred to the the 2020 Incentive Plan in addition to any shares underlying outstanding awards under the 2013 Incentive Plan as of June 2, 2020 that subsequently terminate by expiration or forfeiture, cancellation, or otherwise are not issued.

Under the 2013 and 2020 Incentive Compensation Plans.

Ambac recognizes compensation costs for all equity classified awards granted at fair value, which is measured on the grant date, and records forfeitures for unvested shares only when they occur.

For awards that only include service and performance conditions, the fair value is the market price of Ambac stock on the grant date.

For awards that also contain a market condition, specifically a total shareholder return ("TSR") modifier, the fair value is estimated using a Monte Carlo simulation.

The types of equity awards granted to employees are as follows:

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• Restricted stock units granted only require future service and accordingly the respective fair value is recognized as compensation expense over the relevant service period.

Performance stock units granted require both future service and achieving specified performance targets to vest and accordingly compensation costs are only recognized when the achievement of the performance conditions are considered probable.

• Performance stock units granted require both future service and achieving specified performance targets to vest.

Certain performance stock unit grants also include a market condition TSR modifier that will cause the total payout at the end the performance period to increase or decrease depending on Ambac's stock performance relative to a peer group.

Compensation costs for all performance stock units are only recognized when the achievement of the performance conditions are considered probable.

Once deemed probable, such compensation costs are recognized as compensation expense over the relevant service period.

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Changes in the estimated or actual outcome of a performance condition are recognized by reflecting a retrospective adjustment to compensation cost in the current period.

In 2015, Ambac UK's Board of Directors adopted a long term incentive plan which provides cash based performance awards to Ambac UK employees.

Compensation costs are initially based on the probable outcome of the performance conditions and adjusted for subsequent changes in the estimated or actual outcome each reporting period as necessary.

In 2015, Ambac UK's Board of Directors adopted a long term incentive plan which provided cash based performance awards to Ambac UK employees.

Since all performance conditions under this plan were met, the Ambac UK Board of Directors adopted a new long term incentive plan for Ambac UK employees in 2020, which includes both performance and time based awards.

Compensation costs for all performance based awards are based on the probable outcome of the performance conditions and adjusted for subsequent changes in the estimated or actual outcome each reporting period as necessary.

Compensation costs for time-based awards are recognized evenly over the service period.

Operating Leases

Ambac adopted the New Lease Standard as further described below in this Note 2.

In 2019, Ambac adopted ASU 2016-02, Leases (Topic 842), amended by ASU 2018-01, Land Easement Practical Expedient;

ASU 2018-10, Codification Improvements to Topic 842;

ASU 2018-11, Targeted Improvements;

ASU 2018-20, Narrow-Scope Improvements for Lessors;

and ASU 2019-01, Leases (Topic 842):

Codification Improvements (collectively the "New Lease Standard").

Ambac used a modified retrospective approach and applied the New Lease Standard on its effective date of January 1, 2019.

Additionally, Ambac applied the New Lease Standard to its recently acquired affiliate, Xchange, on the acquisition date of December 31, 2020.

Refer to Note 3.

Business Combination for further discussion of the acquisition.

A contract contains a lease if it conveys the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration.

Ambac's evaluation of whether certain contracts contain leases may require judgment regarding what party controls the asset and whether the asset is physically distinct.

Ambac is the lessee in leases which are classified as operating leases that recognize a single lease cost, calculated so that the cost is allocated over the lease term generally on a straight-line basis over the lease term within operating expenses in the Consolidated Statements of Total Comprehensive Income (Loss).

Ambac's evaluation of whether certain contracts contain leases requires judgment regarding what party controls the asset and whether the asset is physically distinct.

Ambac is the lessee in leases which are classified as operating leases.

In accordance with the New Lease Standard, Ambac recognizes a single lease cost, calculated so that the cost is allocated generally on a straight-line basis over the lease term within operating expenses in the Consolidated Statements of

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Total Comprehensive Income (Loss).

The lease term commences on the earlier of the date when we become legally obligated for the rent payments or the date on which we take possession of the property.

For such operating leases, Ambac recognizes a right-of-use asset ("ROU") and a lease liability, initially measured at the present value of the lease payments, on the later of the adoption date or lease commencement date.

The discount rate used to initially measure the right of use assets and lease liabilities was based on Ambac's estimated secured borrowing rate.

The Ambac Note, more fully described in Note 1.

Background and Business Description was a significant data point in estimating this rate.

For such operating leases, Ambac recognizes a right-of-use ("ROU") asset and a lease liability, initially measured at the present value of the lease payments, on the later of the adoption date or lease commencement date.

The discount rate used to initially measure the ROU assets and lease liabilities reflects the estimated secured borrowing rate of the applicable Ambac subsidiary, which considers the rate of existing or recent debt obligations of the entity.

All cash payments are classified within operating activities in the statement of cash flows.

For contracts where Ambac is the lessee, we have elected the short-term lease recognition exemption for all leases that qualify.

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dollars using exchange rates in effect at the balance sheet dates and the related translation adjustments, net of deferred taxes, are included as a component of Accumulated Other Comprehensive Income (Loss) in Stockholders' Equity.

Functional currencies operating results of foreign subsidiaries are translated using average exchange rates.

Functional currency operating results of foreign subsidiaries are translated using average exchange rates.

Foreign currency transactions :

The impact of non-functional currency transactions and the remeasurement of non-functional currency assets and liabilities into the respective subsidiaries' functional currency (collectively "foreign currency transactions gains/(losses)") are $ 12 , $( 7 ) and $ 21 for the years ended December 31, 2019, 2018 and 2017 , of which $ 22 , $ 7 , and $( 5 ) relate to investments, classified in Net realized investment gains (losses), $( 10 ) , $ 2 , and $( 2 ) relate to the remeasurement of premiums receivable, and $( 1 ) , $( 15 ) , and $ 29 relate to the remeasurement of loss reserves, classified in Loss and loss expenses, respectively.

Foreign currency transaction gains/(losses) are primarily the result of remeasuring Ambac UK's assets and liabilities denominated in currencies other than its functional currency, primarily the U.S.

Foreign currency transaction gains/(losses) are primarily the result of remeasuring Ambac UK's assets and liabilities denominated in currencies

other than its functional currency, primarily the U.S.

dollar and the Euro.

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Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

Deferred tax assets and

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liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The effect on current and deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date.

In December 2017, the Tax Cut and Jobs Act ("TCJA") was enacted that introduced significant changes that impact U.S.

corporate tax rates, business-related exclusions, and deductions and credits effective January 1, 2018.

As such, we incorporated the effects of the TCJA in our current and deferred tax evaluation for the year ended December 31, 2017.

In July 2020, United Kingdom legislation increasing the tax rate from 17 % to 19 % was fully enacted.

As such, we incorporated the effects of the tax rate increase in our current and deferred tax evaluation for the year ended December 31, 2020.

The Income Taxes Topic of the ASC requires that companies assess whether valuation allowances should be established against their deferred tax assets based on the consideration of all available evidence using a ‘more likely than not” standard.

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Diluted net income per share is computed by dividing net income attributable to common stockholders by the Basic Weighted-Average Shares Outstanding plus all potential dilutive common shares outstanding during the period.

All potential dilutive common shares outstanding consider common stock deliverable pursuant to warrants, vested and unvested options, unvested restricted stock units and performance stock units granted under employee and director compensation plans.

Reclassifications and Rounding

Reclassifications may have been made to prior years' amounts to conform to the current year's presentation.

Certain amounts and tables in the consolidated financial statements and associated notes may not add due to rounding.

| Ambac Financial Group, Inc.

87 2020 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Supplemental Disclosure of Cash Flow Information

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Cash paid during the period for:

Interest on long-term debt and investment agreements

Non-cash financing activities:

Income taxes $ 11 $ 21 $ 35

Interest on long-term debt 107 143 232

Non-cash investing and financing activities:

Increase in long-term debt in exchange for AMPS — — 187

Exchange of investments in Puerto Rico COFINA bonds for new bonds issued in the Plan of Adjustment — 510 —

Decrease in long-term debt as a result of an exchange for investment securities — — —

Rehabilitation exit transaction discharge of all Deferred Amounts and cancellation of certain General Account Surplus Notes

Rehabilitation exit transaction discharge of all Deferred Amounts and cancellation of certain senior surplus notes — — 1,919

2020 2019 2018

Reconciliation of cash, cash equivalents, and restricted cash reported within the Consolidated Balance Sheets to the Consolidated Statements of Cash Flow:

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Total cash, cash equivalents, and restricted cash shown on the Consolidated Statements of Cash Flows 35 81 83

Adopted Accounting Standards

Effective January 1, 2020, Ambac adopted the following accounting standards:

For further discussion of CECL, refer to the Measurement of Credit Losses (CECL), Investments, Net Premiums, Loans, and Loss and Loss Expenses sections in Note 2.

Basis of Presentation and Significant Accounting Policies;

Financial Guarantee Insurance Contracts;

Investments in the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for the year ended December 31, 2020.

For available-for-sale debt securities, the updated guidance was applied prospectively and for financial instruments measured at amortized cost (i.e.

premiums receivable, loans and reinsurance recoverables), the updated guidance was applied by a cumulative effect adjustment to the opening balance of retained earnings at January 1, 2020.

This adjustment was not material to retained earnings or any individual balance sheet line item.

Fair Value Measurement Disclosures

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.

The ASU modified various disclosure requirements on fair value measurements.

Relevant disclosures that were removed, modified and added are as follows:

(1) Amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, (2) Policy for timing of transfers between levels, and (3) Valuation processes for Level 3 fair value measurements.

• Modifications:

(1) For investments in certain entities that calculate net asset value, disclosures are required for the

timing of liquidation of an investee's assets and the date when restrictions from redemption might lapse, only if the investee has communicated the timing to the reporting entity or publicly announced it and (2) Clarification that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date and not possible future changes.

• Additions :

(1) Changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and (2) Range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.

Alternatively, an entity may disclose other quantitative information (such as the median or arithmetic average) if it determines that it is a more reasonable and rational method to reflect the distribution of unobservable inputs used.

Disclosure amendments related to changes in unrealized gains and losses included in other comprehensive income (loss) for Level 3 instruments, the range and weighted average of significant unobservable inputs, and the narrative description of measurement uncertainty were applied prospectively only for the most recent interim or annual period presented.

All other disclosure amendments were applied retrospectively to all periods presented.

Refer to Note 10.

Fair Value Measurements for further disclosures.

VIE Related Party Guidance

In October 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810) - Targeted Improvements to Related Party Guidance for Variable Interest Entities.

To determine whether a decision-making fee is a variable interest, under the new guidance a reporting entity must consider indirect interests held through related parties under common control on a proportional basis

| Ambac Financial Group, Inc.

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(Dollar Amounts in Millions, Except Share Amounts)

Reclassifications and Rounding

Reclassifications may have been made to prior years' amounts to conform to the current year's presentation.

Certain amounts and tables in the consolidated financial statements and associated notes may not add due to rounding.

Recently Adopted Accounting Standards

Effective January 1, 2019 , Ambac adopted the following accounting standards:

Equity-linked Instruments with Down Round Features

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260) and Derivatives and Hedging (Topic 815) - Accounting for Certain Financial Instruments with Down Round Features .

Equity-linked instruments, such as warrants and convertible instruments may contain down round features that result in the strike price being reduced on the basis of the pricing of future equity offerings.

Under the ASU, a down round feature will no longer require a freestanding equity-linked instrument (or embedded conversion option) to be classified as a liability that is remeasured at fair value through the income statement (i.e.

marked-to-market).

However, other features of the equity-linked instrument (or embedded conversion option) must still be evaluated to determine whether liability or equity classification is appropriate.

Equity classified instruments are not marked-to-market.

For earnings per share ("EPS") reporting, the ASU requires companies to recognize the effect of the down round feature only when it is triggered by treating it as a dividend and as a reduction of income available to common stockholders in basic EPS.

rather than as a direct interest in its entirety (as was previously required under prior GAAP).

These amendments create alignment between determining whether a decision making fee is a variable interest and determining whether a reporting entity within a related party group is the primary beneficiary of a VIE.

Adoption of this ASU did not impact Ambac's financial statements.

Premium Amortization on Callable Debt Securities

In March 2017, the FASB issued ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20) - Premium Amortization on Purchased Callable Debt Securities .

The ASU shortens the amortization period for the premium on callable debt securities to the earliest call date.

Under previous GAAP, a reporting entity generally amortized the premium as a yield adjustment over the contractual life (i.e.

maturity) of the debt security and if that debt security is called, the entity would record a loss equal to the unamortized premium.

The ASU does not change the accounting for callable debt securities held at a discount, which will continue to be amortized to maturity.

Adoption of this ASU did not have a consequential impact on Ambac's financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) .

This ASU was subsequently amended by ASU 2018-01, Land Easement Practical Expedient;

ASU 2018-10, Codification Improvements to Topic 842;

ASU 2018-11 , Targeted Improvements;

ASU 2018-20, Narrow-Scope Improvements for Lessors;

and ASU 2019-01 , Leases (Topic 842):

Codification Improvements (collectively the "New Lease Standard") .

The primary difference between previous GAAP and the New Lease Standard is the recognition of lease assets and lease liabilities for those leases classified as operating leases with a term longer than 12 months.

For those operating leases, a lessee is required to:

1) recognize a right-of-use asset ("ROU") and a lease liability,

initially measured at the present value of the lease payments, on the balance sheet, 2) recognize a single lease cost, calculated so that the cost is allocated over the lease term generally on a straight-line basis and 3) classify all cash payments within operating activities in the statement of cash flows.

For leases classified as finance leases under the New Lease Standard, the balance sheet presentation and expense recognition pattern is similar to capital leases under previous GAAP.

Under the transition guidance, a reporting entity must use a modified retrospective approach and may choose to initially apply the New Lease Standard either at (1) the beginning of the earliest comparative period presented, which is January 1, 2017 or (2) its effective date, which is January 1, 2019.

If a reporting entity chooses the first option it must recast its comparative period financial statements and provide disclosures for those comparative periods.

Ambac chose the second option and initially applied the New Lease Standard on January 1, 2019.

Consequently financial information and disclosures were not provided for dates and periods prior to January 1, 2019.

There are a number of optional practical expedients that were elected at transition.

We elected the package of practical expedients, which permitted us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs.

We also elected the hindsight practical expedient allowing us to use the benefit of hindsight in determining the probability of exercising any lessee options to extend or terminate the lease, or purchase the underlying asset.

We did not use the practical expedient pertaining to land easements as it was not applicable to Ambac.

The new new lease standard did not have a material effect on our financial statements.

The most significant effects related to (1) the recognition of new ROU assets and lease liabilities on our balance sheet for our office and equipment operating leases of approximately $ 15 at transition and (2) providing significant new disclosures about our leasing activities.

Leases for further information.

VARIABLE INTEREST ENTITIES

Ambac, with its subsidiaries, has engaged in transactions with variable interest entities ("VIEs") in various capacities.

Ambac provides financial guarantees, including credit derivative contracts, for various debt obligations issued by special purpose entities, including VIEs ("FG VIEs");

Ambac sponsors special purpose entities that issued notes to investors for various purposes;

Ambac is an investor in collateralized debt obligations, mortgage-backed and other asset-backed securities issued by VIEs and its ownership interest is generally insignificant to the VIE and/or Ambac does not have rights that direct the activities that are most significant to such VIE.

Ambac’s subsidiaries provide financial guarantees in respect of assets held or debt obligations of VIEs.

Ambac’s primary variable interest exists through this financial guarantee contract.

Cloud Computing Arrangement Service Contracts

In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other— Internal-Use Software (Subtopic 350-40) - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.

The new guidance requires a customer in a cloud computing arrangement that is a service contract to capitalize certain implementation costs as if the arrangement was an internal-use software project.

The internal-use software guidance requires the capitalization of certain costs incurred only during the application development stage.

That guidance also requires entities to expense costs during the preliminary project and post-implementation stages as they are incurred.

Adoption of this ASU did not impact Ambac's financial statements.

Effective December 31, 2020, Ambac adopted the following accounting standard:

Defined Benefit and Other Postretirement Plans Disclosures

In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20) - Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans .

The ASU modifies various disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans.

Relevant disclosures that have been removed are the effects of a one percentage point change in assumed health care cost trend rates on the (a) aggregate of the service and interest cost components of the net periodic pension cost and (b) benefit obligation for postretirement healthcare benefits.

Adoption of this ASU only affected disclosures and did not have an impact on Ambac's financial statements.

Future Application of Accounting Standards:

Reference Rate Reform

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting .

The ASU provides companies with optional guidance to ease the potential accounting burden related to transitioning away from reference rates, such as LIBOR, that are expected to be discontinued as a result of initiatives undertaken by various jurisdictions around the world.

For example, under current GAAP, contract modifications which change a reference rate are required to be evaluated in determining whether the modifications result in the establishment of new contracts or the continuation of existing contracts.

The amendments in this ASU provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met.

The ASU can be applied prospectively as of the beginning of the interim period that includes March 12, 2020, (January 1, 2020 for calendar year

companies) or any date thereafter, but does not apply to contract modifications and other transactions entered into or evaluated after December 31, 2022.

Management has not determined when it will adopt this ASU, and the impact on Ambac's financial statements is being evaluated.

BUSINESS COMBINATION

On December 31, 2020, Ambac completed the acquisition of 80 % of the membership interests of Xchange for a purchase price of $ 81 in cash.

Xchange, whose management principals retained the remaining 20 % is a property and casualty Managing General Underwriter ("MGU"), specializing in accident and health insurance.

Since its inception in 2010, Xchange's business has been supported by major insurers, reinsurers, third party administrators, brokers and producers.

The acquisition has been accounted for as a business combination and advances Ambac's strategy of expanding into the MGU and Managing General Agent ("MGA") sectors.

Based on the acquisition date and the complexity of the underlying valuation work, certain amounts included in the Company's Consolidated Financial Statements may be provisional and thus subject to further adjustments within the permitted measurement period as defined by ASC 805.

The following table summarizes the consideration paid for Xchange and the estimated fair values of the aggregate assets and liabilities acquired, as well as the fair value of the noncontrolling interest, at the acquisition date:

Restricted cash 4

Intangible assets 36

Other assets 8

Total assets acquired $ 96

Other liabilities 8

Total liabilities assumed 8

Redeemable noncontrolling interest 7

Total consideration $ 81

Goodwill was recorded to reflect the excess purchase consideration over net assets acquired and primarily consists of the future economic benefits that we expect to receive as a result of the acquisition, driven by the value of Xchange's potential future distribution and carrier relationships, and synergies with other Ambac business operations.

Goodwill that is expected to be deductible for tax purposes amounts to approximately $ 36 .

The fair values assigned to tangible and identifiable intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions at the time of acquisition and is subject to updating as more detailed analyses are completed and additional information about the fair value of assets acquired and liabilities assumed becomes available.

The fair value of the redeemable non-controlling interest of $ 7 was estimated based on the non-controlling interest’s respective share of Xchange's enterprise value, adjusted for the value of Ambac's call option to purchase, and the minority owners' put

| Ambac Financial Group, Inc.

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(Dollar Amounts in Millions, Except Share Amounts)

transaction structures provide certain financial protection to Ambac.

option to sell to Ambac, respectively, the remaining 20 % membership interests in Xchange.

Please refer to the Noncontrolling Interests section of Note 2.

Basis of Presentation and Significant Accounting Policies , for further information regarding the terms of the call and put option, as well as the redeemable noncontrolling interest balance sheet classification.

The following table sets forth the estimated fair values of identifiable intangible assets acquired and their estimated useful lives as of the date of acquisition.

Value Weighted

Remaining Useful

Distribution relationships $ 33 15.0

Non-compete agreements 1 5.0

Trade name 1 8.0

The distribution relationships intangible represents existing relationships Xchange maintains with a variety of brokers and distributors across its product lines.

It excludes the value of potential future distribution relationships that may be developed, which is included in goodwill.

The non-compete agreements intangible relates to agreements entered into with certain key management personnel of Xchange.

The trade name intangible represents the rights to the Xchange Group brand name which is well known in the marketplace Xchange competes in.

The overall weighted average useful life of the identified amortizable intangible assets acquired is fourteen years.

As of December 31, 2020, future annual amortization of finite-lived acquired intangible assets for the years 2021 through 2025 and thereafter is estimated to be:

Year Estimated

Thereafter 22

Because the acquisition occurred on last day of the reporting period, there were no revenues or earnings of Xchange included in Ambac's Consolidated Statement of Comprehensive Income for the period ended December 31, 2020.

Pro forma information related to the acquisition has not been presented as the impact was not material to the Company’s financial results.

VARIABLE INTEREST ENTITIES

Ambac, with its subsidiaries, has engaged in transactions with variable interest entities ("VIEs") in various capacities.

• Ambac provides financial guarantees, including credit derivative contracts, for various debt obligations issued by special purpose entities, including VIEs ("FG VIEs");

• Ambac sponsors special purpose entities that issued notes to investors for various purposes;

• Ambac is an investor in collateralized debt obligations, mortgage-backed and other asset-backed securities issued by VIEs and its ownership interest is generally insignificant to the VIE and/or Ambac does not have rights that direct the activities that are most significant to such VIE.

Ambac’s subsidiaries provide financial guarantees in respect of assets held or debt obligations of VIEs.

Ambac’s primary variable interest exists through this financial guarantee insurance or credit derivative contract.

The transaction structures provide certain financial protection to Ambac.

Generally, upon deterioration in the performance of a transaction or upon an event of default as specified in the transaction legal documents, Ambac will obtain certain control rights that enable Ambac to remediate losses.

These rights may enable Ambac to direct the activities of the entity that most significantly impact the entity’s economic performance.

Under a 2018 Stipulation and Order, the OCI requires Ambac Assurance to obtain their approval with respect to the exercise of certain significant control rights in connection with policies that had previously been allocated to the Segregated Account.

Accordingly, Ambac Assurance does not have the right to direct the most significant activities of those FG VIEs.

Under the 2018 Stipulation and Order, AAC is required to obtain OCI approval with respect to the exercise of certain significant control rights in connection with policies that had previously been allocated to the Segregated Account.

Accordingly, AAC does not have the right to direct the most significant activities of those FG VIEs.

• We determined that Ambac’s subsidiaries generally have the obligation to absorb a FG VIE's expected losses given that they have issued financial guarantees supporting certain liabilities (and in some cases certain assets).

As further described below, Ambac consolidates certain FG VIEs in cases where we also have the power to direct the activities that most significantly impact the VIE’s economic performance due to one or more of the following:

(i) the transaction experiencing deterioration and breaching performance triggers, giving Ambac the ability to exercise certain control rights, (ii) Ambac being involved in the design of the VIE and receiving control rights from its inception, or (iii) the transaction not experiencing deterioration, however due to the passive nature of the VIE, Ambac's contingent control rights upon a future breach of performance triggers is considered to be the power over the most significant activity.

(i) the transaction experiencing deterioration and breaching performance triggers, giving Ambac the ability to exercise certain control rights, (ii) Ambac being involved in the design of the VIE and receiving control rights from its inception, such as may occur from loss remediation activities, or (iii) the transaction is not experiencing deterioration, however due to the passive nature of the VIE, Ambac's contingent control rights upon a future breach of performance triggers is considered to be the power over the most significant activity.

• A VIE is deconsolidated in the period that Ambac no longer has such control rights, which could occur in connection with the execution of remediation activities on the transaction or amortization of insured exposure, either of which may reduce the degree of Ambac’s control over a VIE.

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• The election to use the fair value option is made on an instrument by instrument basis.

Ambac has elected the fair value option for consolidated FG VIE financial assets and financial liabilities, except in cases where Ambac was involved in the design of the VIE and was granted control rights at its inception.

Ambac has elected the fair

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90 2020 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

value option for consolidated FG VIE financial assets and financial liabilities, except in cases where Ambac was involved in the design of the VIE and was granted control rights at its inception.

◦ When the fair value option is elected, changes in the fair value of the FG VIE's financial assets and liabilities are reported within Income (loss) on variable interest entities in the Consolidated Statements of Total Comprehensive Income (Loss), except for the portion of the total change in fair value of financial liabilities caused by changes in the instrument-specific credit risk which is presented separately in Other comprehensive income (loss).

In cases where the fair value option has not been elected, the FG VIE's invested assets are fixed income securities and are considered available-for-sale as defined by the Investments - Debt Securities Topic of the ASC.

These assets are reported in the financial statements at fair value with unrealized gains and losses reflected in Accumulated

other comprehensive income (loss) in Stockholders' equity.

◦ In cases where the fair value option has not been elected, the FG VIE's invested assets are fixed maturity securities and are considered available-for-sale as defined by the Investments - Debt Securities Topic of the ASC.

These assets are reported in the financial statements at fair value with unrealized gains and losses reflected in Accumulated Other Comprehensive Income (loss) in Stockholders' Equity.

The financial liabilities of these FG VIEs consist of long term debt obligations and are carried at par less unamortized discount.

Income from the FG VIE's available-for-sale securities (including investment income, realized gains and losses and other-than-temporary impairments as applicable) and interest expense on long term debt are reported within Income (loss) on variable interest entities in the Consolidated Statements of Total Comprehensive Income (Loss).

Income from the FG VIE's available-for-sale securities (including investment income, realized gains and losses and credit impairments as applicable) and interest expense on long term debt are reported within Income (loss) on variable interest entities in the Consolidated Statements of Total Comprehensive Income (Loss).

• Upon initial consolidation of a FG VIE, Ambac recognizes a gain or loss in earnings for the difference between:

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Such insurance assets and liabilities may include premium receivables, reinsurance recoverable, deferred ceded premium, subrogation recoverable, unearned premiums, loss and loss expense reserves, ceded premiums payable and insurance intangible assets.

For investment securities owned by Ambac that are debt instruments issued by the VIE, the investment securities balance is eliminated upon consolidation.

For investment securities owned by Ambac that are debt instruments issued by the VIE, the associated debt and investment balances are eliminated upon consolidation.

FG VIEs which are consolidated may include non-recourse assets or liabilities.

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FG VIEs' assets and liabilities that are not insured by the Company are without recourse, because Ambac has not issued a financial guarantee and is under no obligation for the payment of principal and interest of these instruments.

Therefore, the Company’s exposure to consolidated FG VIEs is limited to the financial guarantees issued for recourse assets and liabilities and any additional variable interests held by Ambac.

Additionally, Ambac’s general creditors, other than those specific policy holders which own the VIE debt obligations, do not have

Therefore, the Company’s economic exposure to consolidated FG VIEs is limited to the financial guarantees issued for recourse assets and liabilities and any additional variable interests held by Ambac.

Additionally, Ambac’s general creditors, other than those specific policy holders which own the VIE debt obligations, do not have rights with regard to the assets of the VIEs.

Ambac evaluates the net income effects and earnings per share effects to determine attributions between Ambac and non-controlling interests as a result of consolidating a VIE.

Ambac has determined that the net income and earnings per share effect of consolidated FG VIEs are attributable to Ambac’s interests through financial guarantee premium and loss payments with the VIE.

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(Dollar Amounts in Millions, Except Share Amounts)

rights with regard to the assets of the VIEs.

Ambac evaluates the net income effects and earnings per share effects to determine attributions between Ambac and non-controlling interests as a result of consolidating a VIE.

Ambac has determined that the net

income and earnings per share effect of consolidated FG VIEs are attributable to Ambac’s interests through financial guarantee premium and loss payments with the VIE.

The following table summarizes the carrying values of assets and liabilities, along with other supplemental information related to VIEs that are consolidated as a result of financial guarantees of Ambac UK and Ambac Assurance:

Ambac Assurance

Fixed income securities, at fair value:

December 31, 2020 2019

Ambac UK Ambac Assurance Total VIEs Ambac UK Ambac Assurance Total VIEs

Fixed maturity securities, at fair value:

Corporate obligations, fair value option $ 3,215 $ — $ 3,215 $ 2,957 $ — $ 2,957

Municipal obligations, available-for-sale (1)

Total FG VIE fixed income securities, at fair value

— 139 139 — 164 164

Total FG VIE fixed maturity securities, at fair value 3,215 139 3,354 2,957 164 3,121

Restricted cash 1 1 2 1 1 2

Loans, at fair value (2)

2,998 — 2,998 3,108 — 3,108

Derivative assets 41 — 41 52 — 52

Other assets — 2 2 1 2 3

Total FG VIE assets $ 6,255 $ 143 $ 6,398 $ 6,119 $ 167 $ 6,286

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Long-term debt, at fair value (3)

4,324 — 4,324 4,351 — 4,351

Long-term debt, at par less unamortized discount — 169 169 — 203 203

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Number of FG VIEs consolidated 5 1 6 6 1 7

Available-for-sale securities consist of municipal obligations with an amortized cost basis of $ 139 and aggregate gross unrealized gains and (losses) of $ 25 at December 31, 2019 .

(1) Available-for-sale FG VIE fixed-income securities consist of municipal obligations with an amortized cost basis of $ 113 and $ 139 , and aggregate gross unrealized gains of $ 27 and $ 25 at December 31, 2020 and 2019, respectively.

All such securities had contractual maturities due after ten years as of December 31, 2020.

The unpaid principal balances of loan assets carried at fair value were $ 2,618 as of December 31, 2019 and $ 3,418 as of December 31, 2018 .

The unpaid principal balances of long-term debt carried at fair value were $ 3,800 as of December 31, 2019 and $ 4,553 as of December 31, 2018 .

(2) The unpaid principal balances of loan assets carried at fair value were $ 2,546 and $ 2,618 as of December 31, 2020 and 2019, respectively.

(3) The unpaid principal balances of long-term debt carried at fair value were $ 3,769 and $ 3,800 as of December 31, 2020 and 2019, respectively.

The following schedule details the components of Income (loss) on variable interest entities for the affected periods:

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The 2019 balance sheet impact of this additional VIE on the date of consolidation was an increase to total consolidated assets and liabilities by $ 292 and $ 364 , respectively.

Ambac deconsolidated one , four and one VIEs for the years ended December 31, 2019, 2018 and 2017 , respectively.

These VIEs were deconsolidated as a result of guaranteed bond retirements or loss mitigation activities that eliminated or reduced Ambac's control rights that previously required Ambac to consolidate these entities, and resulted in the gain (loss) on deconsolidation noted in the above

Ambac deconsolidated one , one and four VIEs for the years ended December 31, 2020, 2019 and 2018, respectively.

The 2020 balance sheet impact of the deconsolidation was a decline in total consolidated assets and liabilities by $ 0 and $ 0 from December 31, 2019 to December 31, 2020.

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The 2019 balance sheet impact of the deconsolidation was a decline in total consolidated assets and liabilities by $ 1,233 and $ 1,230 from December 31, 2018 , to December 31, 2019 .

The following table displays the carrying amount of the assets, liabilities and maximum exposure to loss of Ambac’s variable interests in non-consolidated VIEs resulting from financial guarantee and derivative contracts by major underlying asset classes, as of December 31, 2020 and 2019:

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Net Derivative

Assets (Liabilities) (4)

(Liabilities) (4)

December 31, 2020:

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Other commercial asset-backed 24 3 1 —

Other 970 — 13 8

Total global structured finance 6,352 2,051 834 8

Global public finance 21,646 263 287 —

Total $ 27,998 $ 2,314 $ 1,122 $ 8

December 31, 2019:

Global structured finance:

Collateralized debt obligations

Mortgage-backed—residential $ 5,373 $ 1,913 $ 523 $ —

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Other commercial asset-backed 314 9 6 —

Other 1,107 7 18 8

Total global structured finance 8,165 1,961 762 8

Global public finance 23,341 287 321 —

Total $ 31,506 $ 2,247 $ 1,083 $ 7

(1) Maximum exposure to loss represents the maximum future payments of principal and interest on insured obligations and derivative contracts.

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Ambac elected to account for its equity interest in this entity at fair value under the fair value option in accordance with the Financial Instruments Topic of the ASC.

We believe that

the fair value of the investments in this entity provides for greater transparency for recording profit or loss as compared to the equity method under the Investments – Equity Method and Joint Ventures Topic of the ASC.

Refer to Note 9.

Fair Value Measurements for further information on the valuation technique and inputs used to measure the fair value of Ambac’s equity interest in this entity.

At December 31, 2019 and 2018 the fair value of this entity was $ 3 and $ 5 , respectively, and is reported within Other assets on the Consolidated Balance Sheets.

Total principal amount of the entity's debt outstanding was $ 403 and $ 393 at December 31, 2019 and 2018 , respectively.

The entity's assets are utility obligations with a weighted average rating of BBB+ at December 31, 2019 , and weighted average life of 1.1 years .

Purchases by this entity of financial

We believe that the fair value of the investments in this entity provides for greater transparency for recording profit or loss as compared to the equity method under the Investments – Equity Method and Joint Ventures Topic of the ASC.

At December 31, 2020 and 2019

the fair value of this entity was $ 1 and $ 3 , respectively, and is reported within Other assets on the Consolidated Balance Sheets.

• Total principal amount of debt outstanding was $ 410 and $ 403 at December 31, 2020 and 2019, respectively.

In each case, Ambac sold assets to this entity, which are composed of utility obligations with a weighted average rating of BBB+ at December 31, 2020, and weighted average life of 0.2 years.

The purchase by this entity of financial assets was financed through the issuance of MTNs, which are cross-collateralized by the purchased assets.

The MTNs have the same expected weighted average life as the purchased assets.

Derivative contracts (interest rate swaps) are used within the entity for economic hedging purposes only.

Derivative positions were established at the time MTNs were issued to purchase financial assets.

As of December 31, 2020, AAC had financial guarantee insurance policies issued for all assets, MTNs and derivative contracts owned and outstanding by the entity.

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assets from Ambac were financed through the issuance of MTNs, which are cross-collateralized by the purchased assets.

The MTNs have the same expected weighted average life as the purchased assets.

Derivative contracts (interest rate swaps) are used within the entity for economic hedging purposes only.

Derivative positions were established at the time MTNs were issued to purchase financial assets.

As of December 31, 2019 , Ambac Assurance had financial guarantee insurance policies issued for all assets, MTNs and derivative contracts owned and outstanding by the entity.

Insurance premiums paid to Ambac Assurance by this entity are earned in a manner consistent with other insurance policies, over the risk period.

• Insurance premiums paid to AAC by this entity are earned in a manner consistent with other insurance policies, over the risk period.

Additionally, any losses incurred on such insurance policies are included in Ambac’s Consolidated Statements of Total Comprehensive Income (Loss).

Under the terms of an Administrative Agency Agreement, Ambac provides certain administrative duties, primarily collecting amounts due on the obligations and making interest payments on the MTNs.

On August 28, 2014, Ambac monetized its ownership of the junior surplus note issued to it by the Segregated Account by depositing the junior surplus note into a newly formed VIE trust in exchange

for cash and an owner trust certificate, which represents Ambac's right to residual cash flows from the junior surplus note.

On August 28, 2014, Ambac monetized its ownership of the junior surplus note issued to it by AAC by depositing the junior surplus note into the Corolla Trust, a VIE, in exchange for cash and the Corolla Certificate, which represented Ambac's right to residual cash flows from the junior surplus note.

Ambac does not consolidate the VIE since it does not have a variable interest in the trust.

Ambac reports its owner trust certificate as an equity investment within Other investments on the Consolidated Balance Sheets with associated results from operations included within Net investment income:

Other investments on the Consolidated Statements of Total Comprehensive Income (Loss) .

Ambac reports the Corolla Certificate as an equity investment within Other investments on the Consolidated Balance Sheets with associated results from operations included within Net investment income (loss):

Other investments on the Consolidated Statements of Total Comprehensive Income

The equity investment had a carrying value of $ 51 and $ 46 as of December 31, 2020 and 2019, respectively.

As further described in Note 1.

Background and Business Description, on January 22, 2021, AAC completed the Corolla Note Exchange transaction whereby it acquired 100 % of the outstanding obligations of the Corolla trust and the owner trust certificate in exchange for AAC surplus notes.

On February 12, 2018, Ambac formed a VIE, Ambac LSNI, LLC ("Ambac LSNI").

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Ambac does not consolidate the VIE since it does not have a variable interest in the trust.

Ambac reports its holdings of Secured Notes within Fixed income securities in the Consolidated Balance Sheets.

Ambac reports its holdings of Secured Notes within Fixed Maturity Securities in the Consolidated Balance Sheets.

The carrying value of Secured Notes held by Ambac was $ 465 and $ 535 as of December 31, 2020 and 2019, respectively.

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COMPREHENSIVE INCOME

The following tables detail the changes in the balances of each component of accumulated other comprehensive income (loss) for the affected periods:

The following tables detail the changes in the balances of each component of accumulated other comprehensive income for the affected periods:

Unrealized Gains

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Beginning Balance

$ 151 $ 8 $ ( 116 ) $ ( 2 ) $ 42

Other comprehensive income (loss)before reclassifications

36 ( 2 ) 23 — 58

Amounts reclassified from accumulated other comprehensive income (loss)

( 21 ) ( 1 ) — 1 ( 21 )

Net current period other comprehensive income (loss)

15 ( 3 ) 23 1 37

Balance at December 31, 2020 $ 166 $ 5 $ ( 92 ) $ — $ 79

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Beginning Balance

Adjustments to opening balance, net of taxes (3)

Adjusted balance, beginning of period

$ 86 $ 9 $ ( 142 ) $ ( 2 ) $ ( 49 )

Other comprehensive income before reclassifications

142 1 26 — 168

Amounts reclassified from accumulated other comprehensive income

( 76 ) ( 1 ) — — ( 78 )

Net current period other comprehensive income (loss)

65 ( 1 ) 26 — 91

Balance at December 31, 2019 $ 151 $ 8 $ ( 116 ) $ ( 2 ) $ 42

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Amounts in parentheses indicate reductions to Accumulated Other Comprehensive Income.

Represents the ch anges in fair value attributable to instrument-specific credit risk of liabilities for which the fair value option is elected.

Beginning in 2018, credit risk changes of fair value option liabilities are reflected as a component of Accumulated Other Comprehensive Income pursuant to the adoption of ASU 2016-01.

Refer to Note 2.

Basis of Presentation and Significant Accounting Policies for further information regarding this change.

(2) Represents the changes in fair value attributable to instrument-specific credit risk of liabilities for which the fair value option is elected.

| Ambac Financial Group, Inc.

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(Dollar Amounts in Millions, Except Share Amounts)

The following table details the significant amounts reclassified from each component of accumulated other comprehensive income for the affected periods:

The following table details the significant amounts reclassified from each component of accumulated other comprehensive income, shown in the above rollforward tables, for the affected periods:

Details about Accumulated Other

Comprehensive Income Components

Amount Reclassified from Accumulated

Other Comprehensive Income

Affected Line Item in the

Comprehensive Income Components Amount Reclassified from Accumulated

Other Comprehensive Income Affected Line Item in the

Consolidated Statement of

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Unrealized Gains (Losses) on Available-for-Sale Securities (1)

Net realized investment gains (loses)

$ ( 22 ) $ ( 81 ) Net realized investment gains (losses)

1 4 Provision for income taxes

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Amortization of Postretirement Benefit

Prior service cost

Actuarial gains (losses)

Prior service cost $ ( 1 ) $ ( 1 ) Other income

Actuarial gains (losses) — — Other income

( 1 ) ( 1 ) Total before tax

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1 — Net of tax and noncontrolling interest

Total reclassifications for the period

Net of tax and noncontrolling interest

Total reclassifications for the period $ ( 21 ) $ ( 78 ) Net of tax and noncontrolling interest

(1) Net unrealized investment gains (losses) on available for sale securities are included in Ambac's Consolidated Statements of Comprehensive Income as a component of Accumulated Other Comprehensive Income.

Changes in these amounts include reclassification adjustments to exclude from "Other comprehensive income (loss)" those items that are included as part of "Net income" for a period that has been part of "Other comprehensive income (loss)" in earlier periods.

NET INCOME PER SHARE

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The following table provides a reconciliation of the common shares used for basic net income per share to the diluted shares used for diluted net income per share:

2020 2019 2018

Basic weighted average shares outstanding

46,147,062 45,954,908 45,665,883

Effect of potential dilutive shares (1) :

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Diluted weighted average shares outstanding

46,147,062 45,954,908 46,559,835

Anti-dilutive shares excluded from the above reconciliation

Stock options

16,121 16,667 16,667

4,877,754 4,877,783 —

Restricted stock units

302,145 249,263 —

Performance stock units (2)

1,002,501 872,258 —

(1) For the years ended December 31, 2020 and 2019 , Ambac had a net loss and accordingly excluded all potentially dilutive securities from the determination of diluted loss per share as their impact was anti-dilutive.

(2) Performance stock units are reflected based on the performance metrics through the balance sheet date.

Vesting of these units is

| Ambac Financial Group, Inc.

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(Dollar Amounts in Millions, Except Share Amounts)

Performance stock units are reflected based on the performance metrics through the balance sheet date.

Vesting of these units is contingent upon meeting certain performance metrics.

contingent upon meeting certain performance metrics.

Although a portion of these performance metrics have been achieved as of the respective period end, it is possible that awards may no longer meet the metric at the end of the performance period.

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The par amount of financial guarantees outstanding, net of reinsurance, was $ 33,888 and $ 38,018 at December 31, 2020 and 2019, respectively.

As of December 31, 2020, the aggregate amount of insured par ceded by AAC to reinsurers under reinsurance agreements was $ 5,182 with the largest reinsurer accounting for $ 2,398 or 6.1 % of gross par outstanding at December 31, 2020.

As of December 31, 2020 and 2019, the guarantee portfolio was diversified by type of guaranteed bond as shown in the following table:

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General obligation 2,345 3,011

Higher education

Transportation revenue 771 855

Higher education 747 885

Utility revenue 675 768

Other 925 1,041

Total Public Finance 15,497 17,653

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Investor-owned utilities 1,617 1,675

Student loan 626 769

Structured Insurance 311 395

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Investor-owned and public utilities 3,899 4,436

Asset-backed and other

Transportation 1,511 1,532

Asset-backed and other 1,374 1,625

Total International Finance 12,054 12,857

Total $ 33,888 $ 38,018

(1) Includes $ 5,575 and $ 5,654 of Military Housing net par at December 31, 2020 and 2019, respectively.

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United Kingdom $ 9,711 $ 10,593

Italy 803 767

Austria 707 674

Australia 420 382

France 277 303

Other international (1)

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Net financial guarantees in force (after giving effect to reinsurance) were $ 51,603 and $ 58,245 as of December 31, 2020 and 2019, respectively.

In the United States, California , Colorado and New York were the states with the highest aggregate net par amounts in force, accounting for 6.7 % , 6.3 % and 6.1 % of the total at December 31, 2019 , respectively.

In the United States, Colorado, California and New York were the states with the highest aggregate net par amounts in force, accounting for 7.0 %, 6.2 % and 5.4 % of the total at December 31, 2020, respectively.

No other state accounted for more than 5 %.

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Below is the gross premium receivable roll-forward (direct and assumed contracts) for the affected periods:

2020 2019 2018

Beginning premium receivable $ 416 $ 495 $ 586

Adjustment to initially apply ASU 2016-13 ( 3 ) — —

Premium receipts ( 46 ) ( 48 ) ( 56 )

Adjustments for changes in expected and contractual cash flows (1)

( 6 ) ( 38 ) ( 42 )

Accretion of premium receivable discount 9 11 15

Deconsolidation of certain VIEs — 3 —

Changes to uncollectable premiums

Changes to allowance for credit losses ( 4 ) ( 2 ) 2

Other adjustments (including foreign exchange) 5 ( 6 ) ( 10 )

Ending premium receivable (2)

$ 370 $ 416 $ 495

| Ambac Financial Group, Inc.

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At December 31, 2020, 2019 and 2018 premium receivables include British Pounds of $ 117 (£ 86 ), $ 129 (£ 97 ) and $ 131 (£ 103 ), respectively, and Euros of $ 19 (€ 16 ), $ 26 (€ 23 ) and $ 31 (€ 27 ), respectively.

In evaluating the credit quality of the premium receivables, management evaluates the obligor's ability to pay.

For structured finance transactions, this evaluation will include a review of the priority for the payment of financial guarantee premiums to Ambac, as required by bond indentures, in the transaction's waterfall structure.

The financial guarantee premium is generally senior in the waterfall.

An allowance for uncollectable premiums are determined on a policy basis and utilize a combination of historical premium collection data in addition to cash flow analysis to determine if an impairment in the related policy's premium receivables exist.

At December 31, 2019 and 2018 , $ 9 and $ 7 respectively, of premium receivables were deemed uncollectable.

The effect of reinsurance on premiums written and earned was as follows:

Includes ceded premium activity related to the execution of reinsurance transactions in the years ended December 31, 2019 and 2018.

Direct Assumed Ceded (1)

Written $ ( 1 ) $ — $ ( 1 ) $ —

Earned 65 1 12 54

Written $ ( 28 ) $ — $ 31 $ ( 60 )

Earned 75 — 10 66

Written $ ( 24 ) $ — $ 17 $ ( 41 )

Earned 119 — 8 111

(1) Includes ceded premium activity related to the execution of new reinsurance transactions during 2020, 2019 and 2018.

Ambac’s accelerated premium revenue for retired obligations for the years ended December 31, 2020, 2019 and 2018, was $ 12 , $ 10 and $ 32 , respectively.

The following table summarizes net premiums earned by location of risk:

2020 2019 2018

United States $ 32 $ 55 $ 88

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Other international ( 2 ) ( 6 ) 5

Total $ 54 $ 66 $ 111

The table below summarizes the future gross undiscounted premiums to be collected and future premiums earned, net of reinsurance at December 31, 2020:

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December 31, 2055 1 —

Total $ 462 $ 386

(1) Future premiums to be collected are undiscounted and are used to derive the discounted premium receivable asset recorded on Ambac's balance sheet.

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If those bonds types are retired early, premium earnings may be negative in the period of call or refinancing.

Credit Impairment for Premium Receivables:

Management evaluates premium receivables for expected credit losses ("credit impairment") in accordance with the CECL standard adopted January 1, 2020, which is further described in Note 2.

Basis of Presentation and Significant Accounting Policies.

Management's evaluation of credit impairment under prior GAAP rules was not materially different.

Most credit impairment disclosures below were only made prospectively from the CECL adoption date as they were not required previously under GAAP.

| Ambac Financial Group, Inc.

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(Dollar Amounts in Millions, Except Share Amounts)

As further discussed in Note 2.

Basis of Presentation and Significant Accounting Policies , the key indicator management uses to assess the credit quality of premium receivables is

Ambac's internal risk classifications for the insured obligation determined by the Risk Management Group.

Below is the amortized cost basis of premium receivables by risk classification code and asset class as of December 31, 2020:

Surveillance Categories as of December 31, 2020

Type of Guaranteed Bond I IA II III IV Total

Public Finance:

Housing revenue $ 155 $ 13 $ — $ — $ — $ 168

Other 2 15 — — — 17

Total Public Finance 157 27 — — — 185

Structured Finance:

Mortgage-backed and home equity 3 — 1 3 15 22

Student loan 3 — 2 11 — 16

Structured insurance 14 — — — — 14

Other 7 — — — — 7

Total Structured Finance 27 — 3 14 15 59

International:

Sovereign/sub-sovereign 82 13 — 13 — 108

Investor-owned and public utilities 31 — — — — 31

Other 5 — — — — 5

Total International 118 13 — 13 — 144

$ 302 $ 40 $ 3 $ 27 $ 15 $ 387

(1) The underwriting origination dates for all policies included are greater than five years prior to the current reporting date.

Below is a rollforward of the premium receivable allowance for credit losses as of December 31, 2020:

Year Ended December 31, 2020

Beginning balance (1)

Current period provision (2)

Write-offs of the allowance ( 2 )

Recoveries of previously written-off amounts —

Ending balance $ 17

(1) At December 31, 2019, $ 9 of premiums receivable were deemed uncollectible as determined under prior GAAP rules.

(2) The year ended December 31, 2020, includes $ 3 from the adoption of CECL.

At December 31, 2020, Ambac had past due premiums of $ 0 , of which $ 0 was over 120 days past due and has been included in the allowance for credit losses.

| Ambac Financial Group, Inc.

98 2020 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Loss and Loss Expense Reserves

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Present Value of Expected

Net Cash Flows

Gross Loss and

Balance Sheet Line Item

Loss Expenses

Net Cash Flows Unearned

Revenue Gross Loss and

Balance Sheet Line Item Claims and

Loss Expenses Recoveries

December 31, 2020:

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Subrogation recoverable 100 ( 2,256 ) — ( 2,156 )

Totals $ 2,160 $ ( 2,486 ) $ ( 72 ) $ ( 397 )

December 31, 2019:

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Subrogation recoverable 131 ( 2,160 ) — ( 2,029 )

Totals $ 1,966 $ ( 2,394 ) $ ( 54 ) $ ( 482 )

Below is the loss and loss expense reserve roll-forward, net of subrogation recoverable and reinsurance, for the affected periods.

December 31, 2020 2019 2018

Beginning gross loss and loss expense reserves

$ ( 482 ) $ ( 107 ) $ 4,114

Reinsurance recoverable

Beginning balance of net loss and loss expense reserves

( 508 ) ( 130 ) 4,073

Losses and loss expenses (benefit) incurred:

Prior years (1)

210 12 ( 228 )

225 13 ( 224 )

Loss and loss expenses (recovered) paid:

Prior years (1)

148 318 3,963

149 318 3,964

Foreign exchange effect

2 ( 1 ) ( 15 )

Ending net loss and loss expense reserves

( 430 ) ( 436 ) ( 130 )

Impact of VIE consolidation

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Ending gross loss and loss expense reserves

( 397 ) ( 482 ) ( 107 )

(1) 2018 loss and loss expenses (recovered) paid includes the settlement of Deferred Amounts and Interest Accrued on Deferred Amounts in the amount of $ 3,000 and $ 857 , respectively in connection with the Rehabilitation Exit Transactions through a combination of cash, surplus notes and secured notes.

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(4) Represents reinsurance recoverable on future loss and loss expenses.

Additionally, the Balance Sheet line " Reinsurance recoverable on paid and unpaid losses " includes reinsurance recoverables (payables) of $0 , $1 and $0 as of December 31, 2019, 2018 and 2017 , respectively, related to previously presented loss and loss expenses and subrogation.

Additionally, the Balance Sheet line "Reinsurance recoverable on paid and unpaid losses (net of allowance for credit losses of $ 0 at December 31, 2020)" includes reinsurance recoverables (payables) of $ 1 , $ 0 and $ 1 as of December 31, 2020, 2019 and 2018, respectively, related to previously presented loss and loss expenses and subrogation.

For 2020, the adverse development in prior years was primarily a result of deterioration in Public Finance credits, including the impact of lower discount rates, as discussed below in the section, " Puerto Rico ", partially offset by positive development in the RMBS portfolio, including the benefit of lower discount rates.

For 2019, the adverse development in prior years was primarily a result of deterioration in Public Finance credits, primarily Puerto Rico, partially offset by the benefit for (i) the Ballantyne Re plc ("Ballantyne") and Puerto Rico COFINA commutations, and (ii) positive development in the RMBS and Student Loan portfolios.

For 2018, the net positive development in prior years was primarily a result of the discount recorded on the Rehabilitation Exit Transactions partially offset by negative development in the Public Finance portfolio and interest accrued on Deferred Amounts prior to the Rehabilitation Exit Transactions.

For 2017, the net adverse development in prior years was primarily the result of negative development in certain public finance transactions, including Puerto Rico, and interest accrued on Deferred Amounts partially offset by positive developments in certain Ambac UK transactions, including a benefit of $ 145 related to a confidential settlement of litigation brought by Ambac UK in the name of Ballantyne that reduced the ultimate Ballantyne claims Ambac UK was expecting to pay.

| Ambac Financial Group, Inc.

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Surveillance Categories as of December 31, 2020

I IA II III IV V Total

Number of policies 40 25 15 15 132 5 232

Remaining weighted-average contract period (in years) (1)

10 18 8 16 14 7 14

Gross insured contractual payments outstanding:

Principal $ 842 $ 1,375 $ 595 $ 1,469 $ 3,246 $ 47 $ 7,573

Interest 279 1,011 484 215 1,427 26 3,443

Total $ 1,121 $ 2,386 $ 1,079 $ 1,685 $ 4,673 $ 72 $ 11,016

Gross undiscounted claim liability $ 3 $ 49 $ 40 $ 541 $ 1,690 $ 72 $ 2,395

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Gross claim liability before all subrogation and before reinsurance

$ 3 $ 47 $ 40 $ 456 $ 1,477 $ 69 $ 2,092

Gross RMBS subrogation (2)

$ — $ — $ — $ — $ ( 1,753 ) $ — $ ( 1,753 )

Discount, RMBS subrogation — — — — 3 — 3

Discounted RMBS subrogation, before reinsurance

— — — — ( 1,751 ) — ( 1,751 )

Gross other subrogation (3)

— — — ( 36 ) ( 706 ) ( 12 ) ( 755 )

Discount, other subrogation — — — 1 18 1 20

Discounted other subrogation, before reinsurance

— — — ( 35 ) ( 689 ) ( 11 ) ( 735 )

Gross claim liability, net of all subrogation and discounts, before reinsurance

$ 3 $ 47 $ 39 $ 421 $ ( 963 ) $ 58 $ ( 394 )

Unearned premium revenue $ ( 2 ) $ ( 16 ) $ ( 5 ) $ ( 17 ) $ ( 30 ) $ ( 1 ) $ ( 72 )

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Reinsurance recoverable reported on Balance Sheet (4)

$ — $ 6 $ 9 $ 24 $ ( 6 ) $ — $ 33

(1) Remaining weighted-average contract period is weighted based on projected gross claims over the lives of the respective policies.

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Surveillance Categories as of December 31, 2019

I IA II III IV V Total

Number of policies 34 18 11 16 139 3 221

Remaining weighted-average contract period (in years) (1)

8 21 9 17 14 3 15

Gross insured contractual payments outstanding:

Principal $ 668 $ 510 $ 277 $ 857 $ 3,819 $ 37 $ 6,168

Interest 340 507 128 366 1,678 11 3,029

Total $ 1,007 $ 1,016 $ 404 $ 1,223 $ 5,498 $ 48 $ 9,197

Gross undiscounted claim liability $ 2 $ 44 $ 21 $ 541 $ 1,778 $ 48 $ 2,434

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Gross RMBS subrogation (2)

$ — $ — $ — $ — $ ( 1,777 ) $ — $ ( 1,777 )

Discount, RMBS subrogation — — — — 49 — 49

Discounted RMBS subrogation, before reinsurance

— — — — ( 1,727 ) — ( 1,727 )

Gross other subrogation (3)

— — — ( 41 ) ( 666 ) ( 13 ) ( 720 )

Discount, other subrogation — — — 4 47 3 53

Discounted other subrogation, before reinsurance

— — — ( 37 ) ( 620 ) ( 10 ) ( 666 )

Gross claim liability, net of all subrogation and discounts, before reinsurance

$ 2 $ 39 $ 20 $ 353 $ ( 950 ) $ 36 $ ( 501 )

Unearned premium revenue $ ( 1 ) $ ( 9 ) $ ( 1 ) $ ( 7 ) $ ( 35 ) $ — $ ( 54 )

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Reinsurance recoverable reported on Balance Sheet (4)

$ — $ 6 $ 7 $ 24 $ ( 10 ) $ — $ 26

(1) Remaining weighted-average contract period is weighted based on projected gross claims over the lives of the respective policies.

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(4) Reinsurance recoverable reported on Balance Sheet includes reinsurance recoverables of $ 26 related to future loss and loss expenses and $ 0 related to presented loss and loss expenses and subrogation.

In March 2020, the outbreak of COVID-19 pandemic, caused by a novel strain of the coronavirus, was recognized as a pandemic by the World Health Organization, and the outbreak is widespread globally, including in the markets in which we operate.

The COVID-19 outbreak had, and continues to have, a notable impact on general economic conditions, including but not limited to higher unemployment;

volatility in the capital markets;

closure or severe curtailment of the operations and, hence, revenues, of many businesses and public and private enterprises to which we are directly or indirectly exposed, such as hotels, restaurants, sports and entertainment facilities, airports and other transportation facilities, and retail establishments, mostly due to social distancing guidelines, travel bans and restrictions, and business restrictions and shutdowns.

COVID-19 has adversely impacted Ambac's financial position and results of operations as credit risk in the insured and investment portfolios has increased.

In the insured portfolio,

municipal, mortgage-backed, student loan and other asset securitization exposures could be materially adversely impacted, and as a result, with the exception of the mortgage-backed sector, we increased loss reserves across each of these and other sectors during the year ended December 31, 2020.

In the mortgage-backed sector, significantly lower interest rates have increased excess spread levels and largely offset the impact of higher mortgage delinquencies and projected losses resulting from the COVID-19 pandemic.

In the U.S., significant monetary policy actions, fiscal stimulus measures and other relief measures have helped to moderate the economic impact of COVID-19.

These measures include monetary policy decisions, such as quantitative easing, providing liquidity to financial institutions, providing liquidity to credit markets, the Paycheck Protection Program Lending Facility and the Main Street Business Lending Program;

Congressional actions, such as the Coronavirus Aid, Relief and Economic Security ("CARES") Act, the Paycheck Protection

| Ambac Financial Group, Inc.

101 2020 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Program And Health Care Enactment Act, the Families First Coronavirus Response Act, and, most recently, the 2021 Consolidated Appropriations Act, which, among other things, provides direct payments to households, support for small businesses, renter assistance and funding for transport, airlines, education and state and local governments.

In addition, housing measures, such as forbearance on mortgages and suspension of foreclosures and evictions, and various executive orders have helped to provide relief.

Outside of the US, and in the United Kingdom and Italy in particular, where Ambac has insured portfolio exposure, various monetary policy, fiscal stimulus measures and other actions have helped to moderate the economic impact.

We are continuously evaluating and updating our view of the macro economic environment as well as our specific credit view of each of our insured exposures considering the significant uncertainties brought upon us by the COVID-19 pandemic.

Accordingly, our loss reserves may be under-estimated as a result of the ultimate scope, duration and magnitude of the effects of COVID-19 pandemic.

Ambac has exposure to the Commonwealth of Puerto Rico (the "Commonwealth") and its instrumentalities across several different issuing entities with total net par exposure of $ 1,070 .

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Each issuing entity has its own credit risk profile attributable to discrete revenue sources, direct general obligation pledges or general obligation guarantees.

The Commonwealth of Puerto Rico and certain of its instrumentalities have defaulted and may continue to default on debt service payments, including payments owed on bonds insured by Ambac Assurance.

Ambac Assurance may 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 a material increase in permanent losses causing a material adverse impact on our results of operations and financial condition.

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 demographic trends, economic growth, tax policy and revenues, impact of reforms, fiscal plans, government actions, political instability, budgetary performance and flexibility, weather events, restructuring and litigation outcomes, willingness to pay, as well as federal funding of Commonwealth needs.

The Commonwealth of Puerto Rico and certain of its instrumentalities have defaulted and may continue to default on debt service payments, including payments owed on bonds insured by AAC.

AAC may 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 a material increase in permanent losses causing a material adverse impact on our results of operations and financial condition.

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

In the near term, the financial and economic outlook for Puerto Rico is dependent upon a still fragile infrastructure, heightening its vulnerability to additional weather events;

and the trajectory of recovery from the COVID-19 pandemic and related economic downturn.

The longer-term recovery of the Commonwealth economy and its essential infrastructure will likely be dependent on, among other factors, the management, usage and efficacy of federal resources.

Also important to Puerto Rico's economic growth, government reform and creditor outcomes is the Commonwealth Revised Fiscal Plan, certified by the Financial Oversight and Management Board for Puerto Rico ("Oversight Board") on May 9, 2019.

The Commonwealth Revised Fiscal Plan outlines a series of reforms,

Also important to Puerto Rico's economic growth, government reform and creditor outcomes is the Commonwealth Fiscal Plan, certified by the Financial Oversight and Management Board for Puerto Rico ("Oversight Board") on May 27, 2020.

Commonwealth Fiscal Plan purports to incorporate the impact of COVID-19 on the Commonwealth economy, and projects diminished growth, budget surplus, and debt capacity as compared to previous versions of the Commonwealth Fiscal Plan.

This is due to the Oversight Board’s projected impact of COVID-19 on the Puerto Rico economy and tax collections as well as related general uncertainty on the economic outlook.

The Commonwealth Fiscal Plan will significantly inform the Commonwealth Plan of Adjustment in the Commonwealth's Title III proceeding, and the diminished economic performance described in the new Commonwealth Fiscal Plan implies worse outcomes than had been previously disclosed for creditors under the Commonwealth Plan of Adjustment.

However, as was the case with previous versions of the Commonwealth Fiscal Plan, the current version of the Commonwealth Fiscal Plan lacks a high degree of transparency regarding the underlying data, assumptions and rationales supporting those assumptions, making reconciliation and due diligence difficult.

As a result, it is difficult to predict the long-term capacity and willingness of the Puerto Rico government and its instrumentalities to pay debt service on bonded debt and how their debt burden and financial flexibility might affect AAC's claims development potential, risk profile and long-term financial strength.

According to a letter sent January 19, 2021, from the Oversight Board's Executive Director, Natalie Jaresko, to Governor Pedro Pierluisi and legislative leaders, the Oversight Board expects to certify an updated Commonwealth Fiscal Plan by April 23, 2021.

Substantial uncertainty exists with respect to the ultimate outcome for creditors in Puerto Rico, such as AAC, due to, among other matters, the Commonwealth Plan of Adjustment and changes that are anticipated to be made thereto to reflect the terms of the Second Amended PSA;

political uncertainty and leadership turnover;

legislation enacted by the Commonwealth and the federal government, including PROMESA;

and actions taken pursuant to such laws, including Title III filings.

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.

As a result of litigation or other aspects of the restructuring processes, the differences among the credits insured by AAC may not be respected.

AAC has participated and may continue to participate in mediation related to potential debt restructurings.

Mediation may not be productive or may not resolve AAC's claims in a manner that avoids significant losses.

No assurances can be given that negotiations will be successfully concluded, that Commonwealth, Oversight Board and creditor parties will reach definitive agreements on additional debt restructurings, that any negotiated transaction debt restructuring, definitive agreement or plans of adjustment will be approved by the court and completed, or that any transaction or plans of adjustment will not have an adverse impact on Ambac's financial condition or results.

It is possible that certain restructuring process solutions, together with associated legislation, budgetary, and/or public policy proposals could be adopted and could further impair our exposures, causing losses that could have a material adverse impact on our results of operations and financial condition.

While our reserving scenarios account for a wide range of possible outcomes, reflecting the significant uncertainty

| Ambac Financial Group, Inc.

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(Dollar Amounts in Millions, Except Share Amounts)

projects the fiscal and economic impact of those reforms, and provides forecasts of resulting budgetary surpluses over a fiscal year series.

However, as was the case with prior Commonwealth fiscal plans, the Commonwealth Revised Fiscal Plan lacks a high degree of transparency regarding the underlying data, assumptions and rationales supporting those assumptions, making reconciliation and due diligence difficult.

As a result, it is difficult to predict the long-term capacity and willingness of the Puerto Rico government and its instrumentalities to pay debt service on bonded debt and how their debt burden and financial flexibility might affect Ambac Assurance's claim development potential, risk profile and long-term financial strength.

Substantial uncertainty exists with respect to the ultimate outcome for creditors in Puerto Rico, such as Ambac Assurance, due to, amongst other matters, the Commonwealth Plan of Adjustment or changes thereto;

political uncertainty and leadership turnover;

legislation enacted by the Commonwealth and the federal government, including PROMESA;

and actions taken pursuant to 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.

As a result of litigation or other aspects of the restructuring processes, including the Amended POA, the differences among the credits insured by Ambac Assurance may not be respected.

Ambac Assurance has participated and may continue to participate in mediation related to potential debt restructurings, which could include debt restructurings as contemplated by the Amended POA.

Mediation may not be productive or may not resolve Ambac Assurance's claims in a manner that avoids significant losses.

No assurances can be given that negotiations will be successfully concluded, that Commonwealth, Oversight Board and creditor parties will reach definitive agreements on additional debt restructurings, that any additional negotiated transaction debt restructuring, definitive agreement or plans of adjustment will be approved by the court and completed, or that any transaction or plans of adjustment will not have an adverse impact on Ambac's financial condition or results.

While our reserving scenarios account for 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 as well as the residual effects emanating from the damage caused by hurricanes Maria and Irma in 2017 and earthquakes that began in late December 2019, our loss reserves may ultimately prove to be insufficient to cover our losses, potentially having a material adverse effect on our results of operations and financial position, and may be subject to material volatility.

regarding future developments and outcomes, given our exposure to Puerto Rico and the economic, fiscal, legal and political uncertainties associated therewith as well as the residual effects emanating from the damage caused by hurricanes Maria and Irma in 2017, the earthquakes that began in late December 2019, and COVID-19 our loss reserves may ultimately prove to be insufficient to cover our losses, potentially having a material adverse effect on our results of operations and financial position, and may be subject to material volatility.

Ambac has considered these developments and other factors in evaluating its Puerto Rico loss reserves.

During the year ended December 31, 2019 , Ambac had incurred losses associated with its Domestic Public Finance insured portfolio of $ 250 , which was

primarily impacted by the continued uncertainty and volatility of the situation in Puerto Rico.

During the year ended December 31, 2020, Ambac had incurred losses associated with its Domestic Public Finance insured portfolio of $ 256 , which was primarily impacted by the continued uncertainty and volatility of the situation in Puerto Rico as well as a decline in the rate used to discount reserves.

While management believes its reserves are adequate to cover losses in its Public Finance insured portfolio, there can be no assurance that Ambac may not incur additional losses in the future, given the circumstances described herein.

Such additional losses may have a material adverse effect on Ambac’s results of operations and financial condition 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 Ambac, through dividends or otherwise;

and a significant drop in the value of securities issued or insured by Ambac or Ambac Assurance.

For public finance credits, including Puerto Rico, as well as other issuers, for which Ambac has an estimate of expected loss at December 31, 2019 , the possible increase in loss reserves under stress or other adverse conditions and circumstances was estimated to be approximately $ 1,000 .

This possible increase in loss reserves under stress or other adverse conditions is very significant and if we were to experience such incremental losses, our stockholders’ equity as of December 31, 2019 would decrease from $ 1,536 to $ 536 .

the initiation of rehabilitation proceedings against AAC;

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

and a significant drop in the value of securities issued or insured by Ambac or AAC.

For public finance credits, including Puerto Rico, as well as other issuers, for which Ambac has an estimate of expected loss at December 31, 2020, the possible increase in loss reserves under stress or other adverse conditions and circumstances was estimated to be approximately $ 1,200 This possible increase in loss reserves under stress or other adverse conditions is very significant and if we were to experience such incremental losses, our stockholders’ equity as of December 31, 2020, would decrease from $ 1,140 to $( 60 ).

However, there can be no assurance that losses may not exceed such amount.

COFINA Debt Restructuring

On January 16-17, 2019, the hearings for the confirmation of the COFINA Plan of Adjustment ("COFINA POA") and the Commonwealth 9019 motion were held.

On February 4, 2019, the COFINA POA was confirmed and the Commonwealth 9019 motion was approved by the U.S.

On February 4, 2019, the COFINA Plan of Adjustment ("COFINA POA") was confirmed and the Commonwealth 9019 motion was approved by the U.S.

District Court for the District of Puerto Rico.

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The cash and new COFINA bonds allocated to COFINA senior bondholders equaled approximately 93 % (considering the new COFINA bonds at par) of such senior bondholders’ allowed claim, in the amount of the COFINA senior bond accreted value, as of, but not including, May 5, 2017 (the COFINA Title III Petition Date).

As a result of the COFINA POA, and subsequent commutations, amendments, and redemptions of obligations of the COFINA Class 2 Trust, Ambac Assurance's net par outstanding was reduced to $ 101 as of December 31, 2019 .

Ambac Assurance's remaining policy obligation of $ 101 net par is an asset of the COFINA Class 2 Trust, which holds a ratable distribution of new COFINA bonds, the interest and principal from which can be used to partially offset Ambac’s remaining insurance liability.

As a result of the COFINA POA, and subsequent commutations, amendments, and redemptions of obligations of the COFINA Class 2 Trust, AAC's net par outstanding was reduced to $ 80 as of December 31, 2020.

AAC's remaining policy obligation of $ 80 net par is an asset of the COFINA Class 2 Trust, which holds a ratable distribution of new COFINA bonds, the interest

and principal from which can be used to partially offset Ambac’s remaining insurance liability.

As further discussed in Note 4.

Variable Interest Entities , Ambac Assurance consolidates the COFINA Class 2 Trust.

At this time, it is unclear what impact the COFINA restructuring will have on the prospective recoveries of Ambac Assurance's other insured Puerto Rico instrumentalities.

Variable Interest Entities , AAC consolidates the COFINA Class 2 Trust.

At this time, it is unclear what impact the COFINA restructuring will have, if any, on the prospective recoveries of AAC's other insured Puerto Rico instrumentalities.

Representation and Warranty Recoveries

Ambac records estimated RMBS R&W subrogation recoveries for breaches of R&W by sponsors of certain RMBS transactions.

For a discussion of the approach utilized to estimate RMBS R&W

| Ambac Financial Group, Inc.

93 2019 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

subrogation recoveries, see Note 2.

For a discussion of the approach utilized to estimate RMBS R&W subrogation recoveries, see Note 2.

Basis of Presentation and Significant Accounting Policies .

Ambac has recorded RMBS R&W subrogation recoveries of $ 1,751 , ($ 1,725 net of reinsurance) and $ 1,727 , ($ 1,702 net of reinsurance) at December 31, 2020 and 2019, respectively.

Belo w is the rollforward of RMBS R&W subrogation for the affected periods:

Below is the rollforward of RMBS R&W subrogation for the affected periods:

Year ended December 31, 2020 2019 2018

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(gross of reinsurance) at beginning of year

$ 1,727 $ 1,771 $ 1,834

All other changes (1)

23 ( 43 ) ( 64 )

Discounted RMBS subrogation recovery (gross of reinsurance) at end of year

$ 1,751 $ 1,727 $ 1,771

(1) All other changes which may impact RMBS R&W subrogation recoveries include changes in actual or projected collateral performance, changes in the creditworthiness of a sponsor and the projected timing of recoveries.

All other changes may also include estimates of potential sponsor settlements that may not have been subject to a sampling approach or have been executed, but the settlement amounts have not yet been received.

Those that have not been subject to a sampling approach are not material to Ambac’s financial results and therefore are included in this table.

Assumed Reinsurance

Assumed par outstanding was $ 219 and $ 219 at December 31, 2019 and 2018 , respectively.

Ceded Reinsurance

Ambac Assurance has reinsurance in place pursuant to surplus share treaty and facultative reinsurance agreements.

The reinsurance of risk does not relieve Ambac Assurance of its original liability to its policyholders.

In the event that any of Ambac Assurance’s reinsurers are unable to meet their obligations under reinsurance contracts, Ambac Assurance would, nonetheless, be liable to its policyholders for the full amount of its policy.

Ambac Assurance’s reinsurance assets, including deferred ceded premiums and reinsurance recoverables on losses amounted to $ 109 at December 31, 2019 .

Credit exposure existed at December 31, 2019 , with respect to reinsurance recoverables to the extent that any reinsurer may not be able to reimburse Ambac Assurance under the terms of these reinsurance arrangements.

AAC has reinsurance in place pursuant to surplus share treaty and facultative reinsurance agreements.

The reinsurance of risk does not relieve AAC of its original liability to its policyholders.

In the event that any of AAC’s reinsurers are unable to meet their obligations under reinsurance contracts, AAC would, nonetheless, be liable to its policyholders for the full amount of its policy.

AAC’s reinsurance assets, including deferred ceded premiums and reinsurance recoverables on losses amounted to $ 103 at December 31, 2020.

Credit exposure existed at December 31, 2020, with respect to reinsurance recoverables to the extent that any reinsurer may not be able to reimburse AAC under the terms of these reinsurance arrangements.

At December 31, 2020, there were ceded reinsurance balances payable of $ 27 offsetting this credit exposure.

To minimize its credit exposure to losses from reinsurer insolvencies, Ambac Assurance (i) is entitled to receive collateral from its reinsurance counterparties in certain reinsurance contracts and (ii) has certain cancellation rights that can be exercised by Ambac Assurance in the event of rating agency downgrades of a reinsurer (among other events and circumstances).

Ambac Assurance held letters of credit and collateral amounting to $ 124 from its reinsurers at December 31, 2019 .

As of December 31, 2019 , the aggregate amount of insured par ceded by Ambac

Assurance to reinsurers under reinsurance agreements was $ 5,890 with the largest reinsurer accounting for $ 2,746 or 6.3 % of gross par outstanding at December 31, 2019 .

To minimize its credit exposure to losses from reinsurer insolvencies, AAC (i) is entitled to receive collateral from its reinsurance counterparties in certain reinsurance contracts and (ii) has certain cancellation rights that can be exercised by AAC in the event of rating agency downgrades of a reinsurer (among other events and circumstances).

AAC held letters of credit and

| Ambac Financial Group, Inc.

103 2020 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

collateral amounting to $ 117 from its reinsurers at December 31, 2020.

The following table represents the percentage ceded to reinsurers and unsecured reinsurance recoverable at December 31, 2020.

Reinsurers Percentage

Net Unsecured

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Sompo Japan Nipponkoa Insurance, Inc.

Represents reinsurance recoverables on paid and unpaid losses and deferred ceded premiums, net of ceded premium payables due to reinsurers, letters of credit, and collateral posted for the benefit of Ambac Assurance.

Total 100 % $ 34

(1) Represents reinsurance recoverables on paid and unpaid losses and deferred ceded premiums, net of ceded premium payables due to reinsurers, letters of credit, and collateral posted for the benefit of AAC.

(2) Build America Mutual Assurance Company has an S&P rating of AA.

Credit Impairment for Reinsurance Recoverables:

Management evaluates reinsurance recoverables for expected credit losses ("credit impairment") in accordance with the CECL standard adopted January 1, 2020, which is further described in Note 2.

Basis of Presentation and Significant Accounting Policies .

Management's evaluation of credit impairment under prior GAAP rules was not materially different.

Most credit impairment disclosures below were only made prospectively from the CECL adoption date as they were not required previously under GAAP.

The key indicator management uses to assess the credit quality of reinsurance recoverables is collateral posted by the reinsurers and independent rating agency credit ratings.

For the majority of reinsurance contracts where Ambac has recorded a recoverable, the fair value of collateral posted by the reinsurer to AAC exceeds AAC's reinsurance recoverable carrying value, net of ceded premiums payable.

AAC has credit exposure of $ 1 and has recorded an allowance for credit losses of $ 0 at December 31, 2020.

The calculation of the allowance excludes deferred ceded premiums as it is a non-monetary asset.

Insurance Intangible Asset

The insurance intangible amortization expense is included in insurance intangible amortization on the Consolidated Statements of Total Comprehensive Income (Loss) .

For the years ended December 31, 2019 , 2018 and 2017 , the insurance intangible amortization expense was $ 295 , $ 107 and $ 151 , respectively.

As of December 31, 2019 and 2018 , the gross carrying value of the insurance intangible asset was $ 1,273 and $ 1,552 , respectively.

Accumulated amortization of the insurance intangible asset was $ 847 and $ 833 , as of December 31, 2019 and 2018 , respectively, resulting in a net insurance intangible asset of $ 427 and $ 719 , respectively.

The insurance intangible amortization expense is included in the Consolidated Statements of Total Comprehensive Income (Loss) as shown below.

Year Ended December 31, 2020 2019 2018

Insurance amortization expense $ 57 $ 295 $ 107

The insurance intangible asset and accumulated amortization are included in the Consolidated Balance Sheets, as shown below.

December 31, 2020 2019

Gross carrying value of insurance intangible asset $ 1,281 $ 1,273

Accumulated amortization of insurance intangible asset 908 847

Net insurance intangible asset $ 373 $ 427

The estimated future amortization expense for the net insurance intangible asset is as follows:

Amortization expense (1) (2)

Thereafter $ 213

(1) The insurance intangible asset will be amortized using a level-yield method based on par exposure of the related financial guarantee insurance or reinsurance contracts as described in Note 2.

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(2) The weighted-average amortizations period is 7.5 years.

INSURANCE REGULATORY RESTRICTIONS

United States

AAC is domiciled in the State of Wisconsin and, as such, it is subject to the insurance laws and regulations of the State of Wisconsin (the “Wisconsin Insurance Laws”) and is regulated by the OCI.

Everspan Indemnity Insurance Company ("Everspan Indemnity") and its wholly owned subsidiary, Everspan Insurance Company ("Everspan Insurance" and, together with Everspan Indemnity, "Everspan" or the “Everspan Group”), are domiciled in Arizona and are subject to the insurance laws and regulations of Arizona (the “Arizona Insurance Laws” and together with the Wisconsin Insurance Laws, the “State Insurance Laws”).

Everspan is regulated by the Arizona Department of Insurance and Financial Institutions (“DIFI”).

In addition, both Ambac Assurance and Everspan Insurance are subject to the insurance laws and regulations of the other jurisdictions in which they are licensed.

Insurance laws and regulations applicable to insurers vary by jurisdiction, but the insurance laws and regulations applicable to our insurance carriers generally require them to maintain minimum standards of business conduct and solvency;

to meet certain financial tests;

and to file policy forms, premium rate schedules and certain reports with regulatory authorities, including information concerning capital structure, ownership, financial condition, corporate governance and enterprise risk.

Regulated insurance companies are also required to file quarterly and annual statutory financial statements in each jurisdiction in which they are licensed.

The level of supervisory authority that may be exercised by non-domiciliary insurance regulators varies by jurisdiction.

Generally, however, non-

| Ambac Financial Group, Inc.

4 unchanged sentences

(Dollar Amounts in Millions, Except Share Amounts)

INSURANCE REGULATORY RESTRICTIONS

United States

Ambac Assurance and Everspan are domiciled in the State of Wisconsin and, as such, are subject to the insurance laws and regulations of the State of Wisconsin (the “Wisconsin Insurance Laws”) and are regulated by the OCI.

In addition, Ambac Assurance and Everspan are subject to the insurance laws and regulations of the other jurisdictions in which they are licensed.

Insurance laws and regulations applicable to financial guarantee insurers vary by jurisdiction.

The laws and regulations generally require financial guarantors to maintain minimum standards of business conduct and solvency;

to meet certain financial tests;

Regulated insurance companies are also required to file quarterly and annual statutory financial statements with the National Association of Insurance Commissioners (“NAIC”), and in each jurisdiction in which they are licensed.

The level of supervisory authority that may be exercised by non-domiciliary insurance regulators varies by jurisdiction.

Generally, however, non-domiciliary regulators are authorized to suspend or revoke the insurance license they issued and to impose restrictions on that license in the event that laws or regulations are breached by a regulated insurance company or in the event that continued or unrestricted licensing of the regulated insurance company constitutes a “hazardous condition” (or meets a similar standard) in the opinion of the regulator.

As the principal, or domiciliary, regulator of Ambac Assurance and Everspan, OCI has primary regulatory authority, including with respect to the initiation and administration of rehabilitation or liquidation proceedings.

Additionally, the accounts and operations of Ambac Assurance and Everspan are subject to periodic comprehensive examinations by the OCI.

Wisconsin Insurance Laws require regulated insurance companies to maintain minimum standards of business conduct, maintain minimum surplus to policyholders, meet certain financial tests, and file certain reports, including information concerning their capital structure, ownership, financial condition, corporate governance and enterprise risk.

Neither Ambac Assurance nor Everspan is subject to risk-based capital requirements, since its is a financial guarantee insurer.

Ambac Assurance and Everspan are in compliance with minimum surplus levels.

Wisconsin Insurance Laws also require prior approval by OCI of certain transactions between Ambac Assurance or Everspan and their respective affiliates.

In addition, pursuant to the terms of the Settlement Agreement, the Stipulation and Order and the 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 include covenants which restrict the operations of Ambac Assurance.

The Settlement Agreement will remain in force until the surplus notes that were issued pursuant to the Settlement Agreement have been redeemed, repurchased or repaid in full.

domiciliary regulators are authorized to suspend or revoke the insurance license they issued and to impose restrictions on that license in the event that laws or regulations are breached by a regulated insurance company or in the event that continued or unrestricted licensing of the regulated insurance company constitutes a “hazardous condition” (or meets a similar standard) in the opinion of the regulator.

The domiciliary regulators of Ambac Assurance and Everspan, OCI and DIFI, respectively, have primary regulatory authority, including with respect to the initiation and administration of rehabilitation or liquidation proceedings.

Additionally, the accounts and operations of Ambac Assurance and Everspan are subject to periodic comprehensive financial examinations by, respectively, the OCI and DIFI.

The State Insurance Laws require regulated insurance companies to maintain minimum standards of business conduct, maintain minimum surplus to policyholders, meet certain financial tests, and file certain reports, including information concerning their capital structure, ownership, financial condition, corporate governance and enterprise risk.

The State Insurance Laws also require prior approval by OCI and DIFI, respectively, of certain transactions between AAC or Everspan, respectively, and their affiliates.

Ambac Assurance, because it is a financial guarantee insurer is not subject to risk-based capital requirements.

In December 2020, Everspan Insurance completed its re-domestication from Wisconsin to Arizona and obtained broad authority to write property and casualty insurance (while contemporaneously surrendering its authority to write financial guaranty insurance) in Arizona.

Everspan Insurance is seeking similar amendments to its certificates of authority in all other states.

Everspan Insurance is subject to risk-based capital requirements.

Everspan Indemnity was formed in 2020 as a domestic surplus lines insurer in Arizona and, accordingly, is eligible to write property and casualty insurance as an excess and surplus lines insurer in all states by virtue of the U.S.

Nonadmitted and Reinsurance Reform Act of 2010.

Everspan Indemnity is subject to risk-based capital requirements.

Neither Everspan Insurance nor Everspan Indemnity has yet issued any new policies.

Ambac Assurance and Everspan are in compliance with the minimum capital and surplus levels required under the State Insurance Laws required to transact all business written to date.

Xchange, like other managing general agents and program administrators, is subject to licensing requirements and regulation by insurance regulators in various states in which they conduct business.

Every state and Washington, D.C.

have enacted a version of the NAIC Model Managing General Agents Act, which governs licensing and the relationship between insurers and managing general agents.

In addition to the legal restrictions applicable to AAC as described herein, pursuant to the terms of the Settlement Agreement, the Stipulation and Order and the 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 include covenants which restrict the operations of AAC.

The Settlement

Agreement will remain in force until the surplus notes that were issued pursuant to the Settlement Agreement have been redeemed, repurchased or repaid in full.

The Stipulation and Order will remain in force for so long as OCI determines it to be necessary.

The indenture for the Tier 2 Notes will remain in force until the Tier 2 Notes have been redeemed, repurchased or repaid in full.

Certain of the restrictions

in the Settlement Agreement and the indenture for the Tier 2 Notes may be waived with the approval of the OCI and/or the requisite percentage of holders of the related debt securities.

New York’s comprehensive financial guarantee insurance law defines the scope of permitted financial guarantee insurance and governs the conduct of business of all financial guarantors licensed to do business in New York, including Ambac Assurance and Everspan.

The New York financial guarantee insurance law also establishes single risk and aggregate limits with respect to insured obligations insured by financial guarantee insurers.

Certain of the restrictions in the Settlement Agreement and the indenture for the Tier 2 Notes may be waived with the approval of the OCI and/or the requisite percentage of holders of the related debt securities.

Although not domiciled in New York, AAC is nevertheless subject to the New York insurance law governing financial guarantee insurers.

The New York financial guarantee insurance law also establishes single and aggregate risk limits with respect to insured obligations insured by financial guarantee insurers.

Such single risk limits are specific to the type of insured obligation (for example, municipal or asset-backed).

Under the aggregate limits, policyholders’ surplus and contingency reserves must at least equal a percentage of aggregate net liability that is equal to the sum of various percentages of aggregate net liability for various categories of specified obligations.

At December 31, 2019 , Ambac Assurance is in compliance with applicable aggregate risk limits but not in compliance with applicable single risk limits.

Through run-off of the portfolio, Ambac Assurance will continue to seek the reduction in its exposure for compliance with applicable single and aggregate risk limits, but may not be able to do so.

Everspan is in compliance with all of such limits.

Ambac Assurance’s statutory financial statements are prepared on the basis of accounting practices prescribed or permitted by Wisconsin Insurance law and OCI actions thereunder.

A Wisconsin insurance company uses such statutory accounting practices prescribed or permitted by the State of Wisconsin for determining and reporting its financial condition and results of operations, including for determining its solvency under Wisconsin Insurance Law.

The State of Wisconsin has adopted the applicable National Association of Insurance Commissioners (“NAIC”) accounting practices and procedures manual (“NAIC SAP”) as a component of prescribed practices by the State of Wisconsin.

Ambac Assurance’s statutory policyholder surplus was $ 1,088 at December 31, 2019 , as compared to $ 1,152 as of December 31, 2018 .

Statutory policyholder surplus differs from stockholders’ equity determined under GAAP principally due to statutory accounting rules that treat loss reserves, investments, consolidation of subsidiaries and variable interest entities, premiums earned and surplus notes differently.

The OCI has prescribed or permitted accounting practices for Ambac Assurance.

As a result of the prescribed and permitted practices discussed below, Ambac Assurance’s statutory surplus at December 31, 2019 and 2018 was lower by $ 12 and $ 42 , respectively, than if Ambac Assurance had reported such amounts in accordance with NAIC SAP.

Prescribed Accounting Practices

OCI has prescribed the following accounting practices that differ from NAIC SAP for Ambac Assurance:

Paragraph 8 of Statement of Statutory Accounting Principles No.

60 “Financial Guaranty Insurance” allows for a deduction from loss reserves for the time value of money by application of a discount rate equal to the average rate of return on the admitted assets of the financial guaranty insurer as of the date of the computation of the reserve.

The discount rate shall be adjusted at the end of each calendar year.

Additionally, in

At December 31, 2020, AAC is in compliance with applicable aggregate risk limits but not in compliance with applicable single risk limits.

Through run-off of the portfolio, AAC will continue to seek the reduction in its exposure for compliance with applicable single and aggregate risk limits, but may not be able to do so.

The financial statements of AAC and Everspan are prepared on the basis of accounting practices prescribed or permitted by the State Insurance Laws and OCI and DIFI actions thereunder.

AAC and Everspan use such statutory accounting practices prescribed or permitted by the OCI and DIFI, respectively, for determining and reporting their financial condition and results of operations, including for determining solvency under the State Insurance Laws.

Both Wisconsin and Arizona have adopted the National Association of Insurance Commissioners (“NAIC”) accounting practices and procedures manual (“NAIC SAP”) as a component of prescribed practices as codified in each state’s applicable law or regulation.

Statutory policyholder surplus differs from stockholder's equity determined under GAAP principally due to statutory accounting rules that treat financial guarantee premiums and loss reserves, investments, consolidation of subsidiaries or variable interest entities and surplus notes differently.

• AAC’s statutory policyholder surplus was $ 865 at December 31, 2020, as compared to $ 1,088 as of December 31, 2019.

• Everspan Indemnity has statutory policyholder surplus of $ 26 as of December 31, 2020.

At December 31, 2020, there were no significant differences from stockholder's equity under GAAP.

| Ambac Financial Group, Inc.

4 unchanged sentences

(Dollar Amounts in Millions, Except Share Amounts)

accordance with paragraph 13.e of Statutory Accounting Principles No.

Additionally, the OCI has prescribed additional practices and has permitted accounting practices for AAC.

As a result of the prescribed and permitted practices discussed below, AAC’s statutory surplus at December 31, 2020 and 2019 was higher by $ 40 and lower by $ 12 , respectively, than if AAC had reported such amounts in accordance with NAIC SAP.

Everspan does not have any prescribed or permitted practices at December 31, 2020 or December 31, 2019.

Prescribed Accounting Practices

OCI has prescribed the following accounting practices that differ from NAIC SAP for AAC:

• Paragraph 8 of Statement of Statutory Accounting Principles No.

The discount rate shall be adjusted at the end of each calendar year.

Additionally, in accordance with paragraph 13.e of Statutory Accounting Principles No.

97 "Investments in Subsidiary, Controlled and Affiliated Entities" and paragraph 8 of Statutory Accounting Principles No.

5R “Liabilities, Contingencies and Impairments of Assets - Revised”, Ambac Assurance records probable losses on its subsidiaries for which it guarantees their obligations.

Ambac Assurance also discounts probable losses on guarantees of subsidiary obligations using a discount rate equal to the average rate of return on its admitted assets.

Ambac Assurance’s average rates of return on its admitted assets at December 31, 2019 and 2018 were 5.43 % and 5.87 % , respectively.

OCI has directed Ambac Assurance to utilize a prescribed discount rate of 5.10 % for the purpose of discounting both its loss reserves and its estimated impairment losses on subsidiary guarantees.

5R “Liabilities, Contingencies and Impairments of Assets - Revised”, AAC records probable losses on its subsidiaries for which it guarantees their obligations.

AAC also discounts probable losses on guarantees of subsidiary obligations using a discount rate equal to the average rate of return on its admitted assets.

AAC’s average rates of return on its admitted assets at December 31, 2020 and 2019 were 4.56 % and 5.43 %, respectively.

OCI has directed AAC to utilize a prescribed discount rate of 5.10 % for the purpose of discounting both its loss reserves and its estimated impairment losses on subsidiary guarantees.

• Paragraph 4 of Statement of Statutory Accounting Principles No.

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43R ”Loan-backed and Structured Securities” states that when an other-than-temporary impairment ("OTTI") has occurred, the amount of the OTTI recognized as a realized loss shall equal the difference between the investment’s amortized cost basis and the present value of cash flows expected to be collected, discounted at the loan-backed or structured security’s effective interest rate.

Beginning June 11, 2014, as a result of the amended Segregated Account Rehabilitation Plan, OCI has directed the Company to not evaluate investments in Ambac Assurance insured securities with policies that were allocated to the Segregated Account for OTTI and require all such investments be reported at amortized cost regardless of its NAIC risk designation.

This accounting determination was intended to recognize that Ambac Assurance continues to maintain statutory loss reserves without adjustment for the economic effects of its ownership of the insured investment securities, improve transparency to the users of the statutory financial statements and to minimize operational risks.

Beginning June 11, 2014, as a result

of the amended Segregated Account Rehabilitation Plan, OCI has directed the Company to not evaluate investments in AAC insured securities with policies that were allocated to the Segregated Account for OTTI and require all such investments be reported at amortized cost regardless of its NAIC risk designation.

This accounting determination was intended to recognize that AAC continues to maintain statutory loss reserves without adjustment for the economic effects of its ownership of the insured investment securities, improve transparency to the users of the statutory financial statements and to minimize operational risks.

Effective February 12, 2018, with the Segregated Account's exit from Rehabilitation, this prescribed practice is no longer applicable for OTTI evaluations going forward.

Permitted Accounting Practices

OCI has allowed the following permitted practices for Ambac Assurance:

OCI has allowed the following permitted practice for AAC:

• Wisconsin accounting practices for changes to contingency reserves differ from NAIC SAP.

Under NAIC SAP, contributions to and releases from the contingency reserve are recorded via a direct charge or credit to surplus.

Wisconsin Administrative Code, contributions to and releases from the contingency reserve are to be recorded through underwriting income.

Ambac Assurance received permission from OCI to record contributions to and releases from the contingency reserve, in accordance with NAIC SAP.

Ambac Assurance received permission from OCI to report investment holdings of Ambac Assurance insured securities as a separate invested asset on the balance sheet rather than combined with other bond investments.

This permitted practice only impacts the balance sheet classification and has no impact on the valuation of the securities to which it applies or to statutory surplus.

On April 10 2019, Ambac Assurance requested and OCI approved the termination of this permitted practice and accordingly, all such investments are being combined with other bond investments beginning on January 1, 2019.

Effective upon the exit of the Segregated Account from rehabilitation and the merger of the Segregated Account with and into Ambac Assurance, Ambac Assurance received permission from OCI to restate its unassigned funds (surplus) balance to $ 100 with an offsetting reduction of $ 3,433 to gross paid-in and contributed surplus such that total surplus remains unchanged.

In connection with the AMPS Exchange in 2018, Ambac Assurance received permission from OCI to account for the exchange of AMPS for 5.1 % surplus notes in a manner that ensures compliance with certain state insurance regulations that require a minimum surplus level.

Accordingly, Ambac Assurance recorded the excess of the consideration paid over the par value of the AMPS as follows:

i) first as a reduction to gross paid-in and contributed surplus up to an amount that resulted in a gross paid-in and contributed surplus balance of not less than $ 75 and ii) for any remaining excess, as a reduction to unassigned surplus.

This permitted practice only impacts the balance sheet classification and has no impact on statutory surplus.

Under the Wisconsin Administrative Code, contributions to and releases from the contingency reserve are to be recorded through underwriting income.

AAC received permission from OCI to record contributions to and releases from the contingency reserve, in accordance with NAIC SAP.

United Kingdom

1 unchanged sentence

financial system, providing public understanding of the system, securing the proper degree of protection for consumers and helping to reduce financial crime.

In addition, the regulatory regime in the United Kingdom must comply with certain EU legislation binding on all EU member states.

These regulators have exercised significant oversight of Ambac UK since 2008, after Ambac, Ambac Assurance and Ambac UK began experiencing financial stress.

In addition, until December 31, 2020, the regulatory regime in the United Kingdom must have complied with certain EU legislation binding on all EU member states.

These regulators have exercised significant oversight of Ambac UK since 2008, after Ambac, AAC and Ambac UK began experiencing financial stress.

In 2009, Ambac UK’s license to write new business was curtailed by the FSA and the insurance license was limited to undertaking only run-off related activity.

As such, Ambac UK is authorized to run-off its credit, suretyship and financial guarantee insurance portfolio in the United Kingdom, and to do the same through a branch in Milan, Italy, and a number of other European Union (“EU”) countries.

EU legislation has allowed Ambac UK to conduct business in EU states other than the United Kingdom through a “passporting” arrangement, which eliminates

As such, Ambac UK is authorized to run-off its credit, suretyship and financial guarantee insurance portfolio in the United Kingdom, and (until December 31, 2020) to do the same through a branch in Milan, Italy, and a number of other European Union (“EU”) countries.

Until December 31, 2020, EU legislation had allowed Ambac UK to conduct business in EU states other than the United Kingdom through a “passporting” arrangement, which eliminated the necessity of additional licensing or authorization in those other EU jurisdictions.

These passporting arrangements ended on December 31, 2020, when the U.K.’s Brexit transitional arrangements with the EU ended.

Ambac UK closed its Milan branch and transferred it's remaining policy to the United Kingdom in December 2020.

Ambac UK's remaining policies in the EU were either commuted or the benefits of those policies

| Ambac Financial Group, Inc.

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(Dollar Amounts in Millions, Except Share Amounts)

the necessity of additional licensing or authorization in those other EU jurisdictions.

were transferred to United Kingdom entities in advance of December 31, 2020.

The PRA requires that non-life insurance companies such as Ambac UK maintain a margin of solvency at all times in respect of the liabilities of the insurance company, the calculation of which depends on the type and amount of insurance business a company writes.

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Dividend Restrictions, Including Contractual Restrictions

Due to losses experienced by Ambac Assurance, it has been unable to pay common dividends to Ambac since 2008 and will be unable to pay common dividends in 2020 without the prior consent of the OCI, which is unlikely.

Ambac Assurance’s ability to pay dividends is further restricted by the Settlement Agreement (as described below), by the indenture for the Tier 2 Notes (as described below), by the terms of its AMPS (as described below) and by the Stipulation and Order.

Due to losses experienced by AAC, it has been unable to pay ordinary dividends to AFG since 2008 and will be unable to pay common dividends in 2021 without the prior consent of the OCI, which is unlikely.

AAC’s ability to pay dividends is further restricted by the Settlement Agreement (as described below), by the indenture for the Tier 2 Notes (as described below), by the terms of its AMPS (as described below) and by the Stipulation and Order.

Background and Business Description for further information.

Ambac Assurance is not expected to make dividend payments to AFG for the foreseeable future.

Subject to the foregoing, pursuant to the Wisconsin Insurance Laws, Ambac Assurance and Everspan may declare dividends, subject to restrictions in their respective articles of incorporation, provided that, after giving effect to the distribution, such dividends would not violate certain statutory solvency, surplus and asset tests.

Board action authorizing a shareholder distribution by Ambac Assurance or Everspan (other than stock dividends) must be reported to the OCI at least 30 days prior to payment, unless the distribution is no more than 15 % larger than for the corresponding period in the previous year.

AAC is not expected to make dividend payments to AFG for the foreseeable future.

Everspan does not have sufficient earned surplus at this time to pay ordinary dividends under the Arizona Insurance Laws.

Subject to the foregoing, pursuant to the State Insurance Laws, AAC and Everspan may declare dividends, subject to restrictions in their respective articles of incorporation, provided that, after giving effect to the distribution, such dividends would not violate certain statutory solvency, surplus and asset tests.

Board action authorizing a shareholder distribution by AAC (other than stock dividends) must be reported to the OCI at least 30 days prior to payment, unless the distribution is no more than 15 % larger than for the corresponding period in the previous year.

Everspan similarly must report to the DIFI all dividends and other distributions to shareholders within five business days following their declaration and at least ten business days before payment of the dividend or distribution.

In addition, Wisconsin Insurance Laws restrict the payment of extraordinary dividends, which is any distribution which, together with distributions in the prior 12 months, is greater than the lesser of (a) 10 % of policyholders’ surplus as of the preceding December 31, and (b) the greater of (i) statutory net income (loss) for the calendar year preceding the date of the dividend, minus realized capital gains for that calendar year or (ii) the aggregate of statutory net income (loss) for three calendar years preceding the date of the dividend, minus realized capital gains for those calendar years and minus dividends paid or credited within the first two of the three preceding calendar years.

Extraordinary dividends must be reported to OCI at least 30 days prior to payment and are subject to disapproval by the OCI.

Arizona Insurance Laws also restrict the payment of extraordinary dividends, which is any dividend or distribution which together with other dividends or distributions made within the preceding twelve months exceeds the lesser of (a) 10 % of policyholders’ surplus as of the preceding December 31 and (b) the net income for the twelve month period ending the preceding December 31.

Extraordinary dividends must be reported to DIFI at least 30 days prior to payment, during which period DIFI may disapprove or approve such payment.

UK law prohibits Ambac UK from declaring a dividend to its shareholders unless it has “profits available for distribution.” The determination of whether a company has profits available for distribution is based on its accumulated realized profits less its accumulated realized losses.

While the UK insurance regulatory laws impose no statutory restrictions on a general insurer’s ability to declare a dividend, the PRA’s and FCA’s capital requirements in practice act as a restriction on the payment of dividends.

Further, the FSA amended Ambac UK’s license in 2010 such that the PRA

must specifically approve (“non-objection”) any transfer of value and/or assets from Ambac UK to Ambac Assurance or any other Ambac group company, other than in respect of certain disclosed contracts between the two parties (such as in respect of a management services agreement between Ambac Assurance and Ambac UK).

Ambac UK is not expected to pay any dividends to Ambac Assurance for the foreseeable future.

Pursuant to the Settlement Agreement, Ambac Assurance may not make any “Restricted Payment” (which includes dividends from Ambac Assurance to Ambac) in excess of $ 5 in the aggregate per annum, other than Restricted Payments from Ambac Assurance to Ambac in an amount up to $ 8 per annum solely to pay operating expenses of Ambac.

Concurrent with making any such Restricted Payment, a pro rata amount of Ambac Assurance's surplus notes would also need to be redeemed at par.

Further, the FSA amended Ambac UK’s license in 2010 such that the PRA must specifically approve (“non-objection”) any transfer of value and/or assets from Ambac UK to AAC or any other Ambac group company, other than in respect of certain disclosed contracts between the two parties (such as in respect of a management services agreement between AAC and Ambac UK).

Ambac UK is not expected to pay any dividends to AAC for the foreseeable future.

Pursuant to the Settlement Agreement, AAC may not make any “Restricted Payment” (which includes dividends from AAC to Ambac) in excess of $ 5 in the aggregate per annum, other than Restricted Payments from AAC to Ambac in an amount up to $ 8 per annum solely to pay operating expenses of Ambac.

Concurrent with making any such Restricted Payment, a pro rata amount of AAC's surplus notes would also need to be redeemed at par.

The indenture for the Tier 2 Notes contains a similar restrictive covenant and further requires a proportional payment of the Tier 2 Notes (or interest thereon) when payments are made on the surplus notes.

Under the terms of Ambac Assurance’s AMPS, dividends may not be paid on the common stock of Ambac Assurance unless all accrued and unpaid dividends on the AMPS for the then current dividend period have been paid, provided, that dividends on the common stock may be made at all times for the purpose of, and only in such amounts as are necessary for, enabling Ambac (i) to service its indebtedness for borrowed money as such payments become due or (ii) to pay its operating expenses.

Under the terms of AAC’s AMPS, dividends may not be paid on the common stock of AAC unless all accrued and unpaid dividends on the AMPS for the then current dividend period have been paid, provided, that dividends on the common stock may be made at all times for the purpose of, and only in such amounts as are necessary for, enabling Ambac (i) to service its indebtedness for borrowed money as such payments become due or (ii) to pay its operating expenses.

The Stipulation and Order requires OCI approval for the payment of any dividend or distribution on the common stock of Ambac Assurance.

The Stipulation and Order requires OCI approval for the payment of any dividend or distribution on the common stock of AAC.

| Ambac Financial Group, Inc.

107 2020 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

FAIR VALUE MEASUREMENTS

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The fair value hierarchy prioritizes model inputs into three broad levels as follows:

Quoted prices for identical instruments in active markets.

l Level 1 Quoted prices for identical instruments in active markets.

Assets and liabilities classified as Level 1 include US Treasury and other foreign government obligations traded in highly liquid and transparent markets, certain highly liquid pooled fund investments, exchange traded futures contracts, variable rate demand obligations and money market funds.

Quoted prices for similar instruments in active markets;

l Level 2 Quoted prices for similar instruments in active markets;

quoted prices for identical or similar instruments in markets that are not active;

and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

Assets and liabilities classified as Level 2 generally include investments in fixed income securities representing municipal, asset-backed and corporate obligations, certain interest rate swap contracts and most long-term debt of variable interest entities consolidated under the Consolidation Topic of the ASC.

Model derived valuations in which one or more significant inputs or significant value drivers are unobservable.

Assets and liabilities classified as Level 2 generally include investments in fixed maturity securities representing municipal, asset-backed and corporate obligations, certain interest rate swap contracts and most long-term debt of variable interest entities consolidated under the Consolidation Topic of the ASC.

l Level 3 Model derived valuations in which one or more significant inputs or significant value drivers are unobservable.

This hierarchy requires the use of observable market data when available.

Assets and liabilities classified as Level 3 include certain uncollateralized derivative contracts, equity interests in Ambac sponsored special purpose entities and certain investments in fixed income securities.

Assets and liabilities classified as Level 3 include credit derivative contracts, certain uncollateralized interest rate swap contracts, equity interests in Ambac sponsored special purpose entities and certain investments in fixed maturity securities.

Additionally, Level 3 assets and liabilities generally include loan receivables, and certain long-term debt of variable interest entities consolidated under the Consolidation Topic of the ASC.

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As required by the Fair Value Measurement Topic of the ASC financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

Fair Value Measurements Categorized as:

Amount Total Fair

Value Fair Value Measurements Categorized as:

Level 1 Level 2 Level 3

December 31, 2020:

Financial assets:

Fixed income securities:

Fixed maturity securities:

Municipal obligations $ 358 $ 358 $ — $ 358 $ —

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Residential mortgage-backed securities 302 302 — 302 —

Commercial mortgage-backed securities

Collateralized debt obligations 74 74 — 74 —

Other asset-backed securities 303 303 — 225 78

Fixed income securities, pledged as collateral:

Fixed maturity securities, pledged as collateral:

government obligations 15 15 15 — —

Short-term 125 125 125 — —

Short term investments 492 492 415 76 —

Other investments (1)

595 597 91 — 53

Cash, cash equivalents and restricted cash 33 33 32 2 —

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Variable interest entity assets:

Fixed income securities:

Fixed maturity securities:

Corporate obligations 3,215 3,215 — — 3,215

Fixed income securities:

Fixed maturity securities:

Municipal obligations 139 139 — 139 —

Restricted cash 2 2 2 — —

Loans 2,998 2,998 — — 2,998

Derivative assets:

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Liabilities for net financial guarantees written (2)

( 740 ) 539 — — 539

Variable interest entity liabilities:

Long-term debt (includes $ 4,324 at fair value)

4,493 4,504 — 4,349 155

Derivative liabilities:

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Fair Value Measurements Categorized as:

Amount Total Fair

Value Fair Value Measurements Categorized as:

Level 1 Level 2 Level 3

December 31, 2019:

Financial assets:

Fixed income securities:

Fixed maturity securities:

Municipal obligations $ 215 $ 215 $ — $ 215 $ —

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Residential mortgage-backed securities 248 248 — 248 —

Commercial mortgage-backed securities 50 50 — 50 —

Collateralized debt obligations 146 146 — 146 —

Other asset-backed securities 287 287 — 215 72

Fixed maturity securities, pledged as collateral:

Short-term 85 85 85 — —

Short term investments 653 653 598 55 —

Other investments (1)

478 493 136 — 61

Cash and cash equivalents and restricted cash 79 79 70 9 —

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Variable interest entity assets:

Fixed income securities:

Fixed maturity securities:

Corporate obligations 2,957 2,957 — — 2,957

Fixed maturity securities:

Municipal obligations 164 164 — 164 —

Restricted cash 2 2 2 — —

Loans 3,108 3,108 — — 3,108

Derivative assets;

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Interest rate swaps—liability position 89 89 — 89 —

Futures contracts

Liabilities for net financial guarantees written (2)

( 863 ) 284 — — 284

Variable interest entity liabilities:

Long-term debt (includes $ 4,351 at fair value)

4,554 4,567 — 4,408 159

Derivative liabilities:

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Total financial liabilities $ 8,699 $ 9,872 — 8,983 889

Excluded from the fair value measurement categories in the table above are investment funds of $ 296 and $ 280 as of December 31, 2019 and 2018 , respectively, which are measured using NAV per share as a practical expedient.

(1) Excluded from the fair value measurement categories in the table above are investment funds of $ 453 and $ 296 as of December 31, 2020 and 2019, respectively, which are measured using NAV as a practical expedient.

(2) The carrying value of net financial guarantees written includes the following balance sheet items:

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When available, Ambac uses quoted active market prices specific to the financial instrument to determine fair value and classifies such items within Level 1.

The determination of fair value for financial instruments categorized in Level 2 or 3 involves judgment due to the complexity of factors contributing to the valuation.

The determination of fair value for financial instruments categorized in Level 2 or 3 involves judgment due to the complexity of factors contributing

to the valuation.

Third-party sources from which we obtain independent market quotes also use assumptions, judgments and estimates in determining financial instrument values and different third parties may use different methodologies or provide different values for financial instruments.

In addition, the use of internal valuation models may require assumptions about hypothetical or inactive markets.

As a result of these factors, the actual trade value of a financial instrument in the market, or exit value of a financial instrument position by Ambac, may be significantly different from its recorded fair value.

Ambac’s financial instruments carried at fair value are mainly comprised of investments in fixed income securities, equity

In addition, the use of internal valuation models may require assumptions

| Ambac Financial Group, Inc.

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(Dollar Amounts in Millions, Except Share Amounts)

interests in pooled investment funds, derivative instruments, certain variable interest entity assets and liabilities and certain interests in Ambac sponsored special purpose entities.

about hypothetical or inactive markets.

Ambac’s financial instruments carried at fair value are mainly comprised of investments in fixed maturity securities, equity interests in pooled investment funds, derivative instruments, certain variable interest entity assets and liabilities and interests in Ambac sponsored special purpose entities.

Valuation of financial instruments is performed by Ambac’s finance group using methods approved by senior financial management with consultation from risk management and portfolio managers as appropriate.

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Other valuation control procedures specific to particular portfolios are described further below.

We reflect Ambac’s own creditworthiness in the fair value of financial liabilities by including a credit valuation adjustment (“CVA”) in the determination of fair value.

A decline (increase) in Ambac’s creditworthiness as perceived by market participants will generally result in a higher (lower) CVA, thereby lowering (increasing) the fair value of Ambac’s financial liabilities as reported.

Fixed Income Securities

The fair values of fixed income investment securities are based primarily on market prices received from quotes or alternative pricing sources.

Because many fixed income securities do not trade on a daily basis, pricing sources apply available market information through processes such as matrix pricing to calculate fair value.

Fixed Maturity Securities

The fair values of fixed maturity investment securities are based primarily on market prices received from broker quotes or alternative pricing sources.

Because many fixed maturity securities do not trade on a daily basis, pricing sources apply available market information through processes such as matrix pricing to calculate fair value.

Such prices generally consider a variety of factors, including recent trades of the same and similar securities.

In those cases, the items are classified within Level 2.

For those fixed income investments where quotes were not available or cannot be reasonably corroborated, fair values are based on internal valuation models.

For those fixed maturity investments where quotes were not available or cannot be reasonably corroborated, fair values are based on internal valuation models.

Key inputs to the internal valuation models generally include maturity date, coupon and yield curves for asset-type and credit rating characteristics that closely match those characteristics of the specific investment securities being valued.

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Generally, lower credit ratings or longer expected maturities will be accompanied by higher yields used to value a security.

At December 31, 2019 , approximately 4 % , 94 % , and 2 % of the fixed income investment portfolio (excluding variable interest entity investments) was valued using dealer quotes, alternative pricing sources and internal valuation models, respectively.

At December 31, 2018 , approximately 8 % , 90 % , and 2 % of the fixed income investment portfolio (excluding variable interest entity investments) was valued using dealer quotes, alternative pricing sources and internal valuation models, respectively.

Ambac performs various review and validation procedures to quoted and modeled prices for fixed income securities, including price variance analyses, missing and static price reviews, overall valuation analysis by portfolio managers and finance managers and reviews associated with our ongoing impairment analysis.

Unusual prices identified through these procedures will be evaluated further against alternative third party quotes (if available) and/or internally modeled prices, and the pricing source values will be challenged as necessary.

At December 31, 2020, approximately 2 %, 95 %, and 3 % of the fixed maturity investment portfolio (excluding variable interest entity investments) was valued using broker quotes, alternative pricing sources and internal valuation models, respectively.

At December 31, 2019, approximately 4 %, 94 %, and 2 % of the fixed maturity investment portfolio (excluding variable interest entity investments) was valued using broker quotes, alternative pricing sources and internal valuation models, respectively.

Ambac performs various review and validation procedures to quoted and modeled prices for fixed maturity securities, including price variance analyses, missing and static price reviews, overall valuation analysis by portfolio managers and finance managers and reviews associated with our ongoing impairment analysis.

Unusual prices identified through these procedures will be evaluated further against alternative third-party quotes (if available, internally modeled prices and/or other relevant data, and the pricing source values will be challenged as necessary.

Price challenges generally result in the use of the pricing source’s quote as originally provided or as revised by the source following their internal diligence process.

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Results of price challenges are reviewed by portfolio managers and finance managers.

Information about the valuation inputs for fixed income securities classified as Level 3 is included below:

Information about the valuation inputs for fixed maturity securities classified as Level 3 is included below:

Other asset-backed securities:

These securities are a subordinated tranche of a resecuritization collateralized by Ambac-insured military housing bonds.

The fair value of such securities classified as Level 3 was $ 72 and $ 72 at December 31, 2019 and 2018 , respectively.

This security is a subordinated tranche of a securitization collateralized by Ambac-insured military housing bonds.

The fair value classified as Level 3 was $ 78 and $ 72 at December 31, 2020 and 2019, respectively.

Fair value was calculated using a discounted cash flow approach with expected future cash flows discounted using a yield consistent with the security type and rating.

Significant inputs for the valuation at December 31, 2019 and 2018 include the following weighted averages:

Significant inputs for the valuation at December 31, 2020 and 2019 include the following:

December 31, 2020:

Coupon rate 5.97 %

Average Life 14.83 years

Yield 10.50 %

December 31, 2019:

Coupon rate 5.97 %

Average Life 15.58 years

Yield 11.75 %

Other Investments

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Investments for additional information about such investments in pooled funds that are reported at fair value using NAV as a practical expedient.

Other investments also includes Ambac's equity interest in a non-consolidated VIE created in connection with Ambac's monetization of Ambac Assurance junior surplus notes.

Other investments also includes Ambac's equity interest in a non-consolidated VIE created in connection with Ambac's monetization of AAC junior surplus notes.

This equity interest is carried under the equity method.

Fair value for the non-consolidated VIE equity interest is internally determined using a market approach at December 31, 2019 and a discounted

Fair value for the non-

| Ambac Financial Group, Inc.

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(Dollar Amounts in Millions, Except Share Amounts)

cash flow approach at December 31, 2018.

The valuation methodology was updated to incorporate more directly relevant market data from instruments issued by Ambac.

consolidated VIE equity interest is internally calculated using a market approach and is classified as Level 3.

Derivative Instruments

Ambac’s derivative instruments comprise interest rate swaps, exchange traded futures contracts and credit default swaps.

Ambac’s derivative instruments primarily comprise interest rate swaps, credit default swaps and exchange traded futures contracts.

Fair value is determined based upon market quotes from independent sources, when available.

When independent quotes are not available, fair value is determined using valuation models.

These valuation models require market-driven inputs, including contractual terms, credit spreads and ratings on counterparties or underlying referenced obligations, yield curves and tax-exempt interest ratios.

The valuation of certain interest rate as well as all credit derivative contracts also require the use of data inputs and assumptions that are determined by management and are not readily observable in the market.

These valuation models require market-driven inputs, including contractual terms, credit spreads and ratings on underlying referenced obligations, yield curves and tax-exempt interest ratios.

The valuation of certain derivative contracts also require the use of data inputs and assumptions that are determined by management and are not readily observable in the market.

Under the Fair Value Measurement Topic of the ASC, Ambac is required to consider its own credit risk when measuring the fair value of derivatives and other liabilities.

Factors considered in estimating the amount of any Ambac CVA on such contracts include collateral posting provisions, right of set-off with the counterparty, the period of time remaining on the derivative and the pricing of recent terminations.

The fair value of uncollateralized derivative liabilities was reduced by $ 0 and $ 0 at December 31, 2019 and 2018 , respectively, as a result of incorporating an Ambac CVA into the valuation model for these contracts.

Interest rate swap liabilities are collateralized and are not adjusted with an Ambac CVA at December 31, 2019 and 2018 .

Factors considered in estimating the amount of any Ambac credit valuation adjustment ("CVA") on such contracts include collateral posting provisions, right of set-off with the counterparty, the period of time remaining on the derivative and the pricing of recent terminations.

The aggregate Ambac CVA impact reduced the fair value of derivative liabilities by less than a million dollars at both December 31, 2020 and 2019.

Interest rate swaps that are not centrally cleared are valued using vendor-developed models that incorporate interest rates and yield curves that are observable and regularly quoted.

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Counterparty credit risk related to such customer derivative assets is included in our determination of their fair value.

Ambac's remaining credit derivatives ("CDS") are valued using an internal model that uses traditional financial guarantee CDS pricing to calculate the fair value of the derivative contract based on the reference obligation's current pricing, remaining life and credit rating and Ambac's own credit risk.

Ambac's credit derivatives ("CDS") are valued using an internal model that uses traditional financial guarantee CDS pricing to calculate the fair value of the derivative contract based on the reference obligation's current pricing, remaining life and credit rating and Ambac's own credit risk.

The model calculates the difference between the present value of the projected fees receivable under the CDS and our estimate of the fees a financial guarantor of comparable credit quality would charge to provide the same protection at the balance sheet date.

Unobservable inputs used include Ambac's internal reference obligation credit ratings and expected life, estimates of fees that would be charged to assume the credit derivative obligation and Ambac's CVA.

Ambac is party to only one remaining credit derivative with internal credit rating of AA at December 31, 2019 .

Ambac is party to only one remaining credit derivative with an internal credit rating of AA at December 31, 2020.

Ambac has not made any significant changes to its modeling techniques or related model inputs for the periods presented.

Financial Guarantees

Fair value of net financial guarantees written represents our estimate of the cost to Ambac to completely transfer its insurance obligation to another market participant of comparable credit worthiness.

In theory, this amount should be the same amount that another market participant of comparable credit worthiness would hypothetically charge in the market place, on a present value basis, to provide the same protection as of the balance sheet date.

Fair value of net financial guarantees written represents our estimate of the cost to Ambac to completely transfer its

insurance obligation to another market participant of comparable credit worthiness.

In theory, this amount should be the same amount that another market participant of comparable credit worthiness would hypothetically charge in the marketplace, on a present value basis, to provide the same protection as of the balance sheet date.

This fair value estimate of financial guarantees is presented on a net basis and includes direct and assumed contracts written, net of ceded reinsurance contracts.

Long-term Debt

Long-term debt includes Ambac Assurance surplus notes and junior surplus notes, the Ambac Note and Tier 2 Notes issued in connection with the Rehabilitation Exit Transactions and the Ambac UK debt issued in connection with the Ballantyne commutation.

Long-term debt includes AAC surplus notes and junior surplus notes, the Ambac Note and Tier 2 Notes issued in connection with the Rehabilitation Exit Transactions and the Ambac UK debt issued in connection with the Ballantyne commutation.

The fair values of surplus notes, the Ambac Note and Tier 2 Notes are classified as Level 2.

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Variable Interest Entity Assets and Liabilities

The financial assets and liabilities of VIEs consolidated under the Consolidation Topic of the ASC consist primarily of fixed income securities, loans, derivative and debt instruments and are generally carried at fair value.

These consolidated VIEs are securitization entities which have liabilities and/or assets guaranteed by Ambac Assurance or Ambac UK.

The fair values of VIE debt instruments are determined using the same methodologies used to value Ambac’s fixed income securities in its investment portfolio as described above.

VIE debt fair value is based on market prices received from independent market sources.

The financial assets and liabilities of FG VIEs consolidated under the Consolidation Topic of the ASC consist primarily of fixed maturity securities and loans held by the VIEs, derivative instruments and notes issued by the VIEs which are reported as long-term debt.

As described in Note 4.

Variable Interest Entities, these FG VIEs are securitization entities which have liabilities and/or assets guaranteed by AAC or Ambac UK.

The fair values of FG VIE long-term debt are based on price quotes received from independent market sources when available.

Such quotes are considered Level 2 and generally consider a variety of factors, including recent trades of the same and similar securities.

For those VIE debt instruments where quotes were not available, the debt instrument fair values are considered Level 3 and are based on internal discounted cash flow models.

Comparable to the sensitivities of investments in fixed income securities described above, longer (shorter) expected maturities or higher (lower) yields used in the valuation model will, in isolation, result in decreases (increases) in fair value liability measurement for VIE debt.

Information about the valuation inputs for VIE debt carried at fair value and classified as Level 3 is as follows:

European ABS transactions :

The fair value of such obligations classified as Level 3 was $ 0 and $ 217 at December 31, 2019 and 2018 , respectively.

As a result of reductions to Ambac's control rights, this VIE was deconsolidated in 2019.

Fair values were calculated by using a discounted cash flow approach.

The discount rates used were based on the rates implied from the third party quoted values for comparable notes from the same securitization entity.

Significant inputs for the valuation at December 31, 2018 include the following weighted averages:

For those instruments where quotes were not available or cannot be reasonably corroborated, fair values are based on internal valuation models.

Comparable to the sensitivities of investments in fixed maturity securities described above, longer (shorter) expected maturities or higher (lower) yields used in the valuation model will, in isolation, result in decreases (increases) in fair value liability measurement for FG VIE long-term debt.

FG VIE derivative asset and liability fair values are determined using vendor-developed valuation models, which incorporated observable market data related to specific derivative contractual terms including interest rates, foreign exchange rates and yield curves.

The fair value of FG VIE fixed maturity securities and loan assets are based on Level 2 market price quotes received from independent market sources when available.

Typically, FG VIE asset fair values are not readily available from market quotes and are estimated internally.

Internal valuation of each FG VIE’s fixed maturity securities or loan assets are derived from the fair values of the notes issued by the respective VIE and the VIE’s

| Ambac Financial Group, Inc.

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(Dollar Amounts in Millions, Except Share Amounts)

December 31, 2018

VIE derivative asset and liability fair values are determined using valuation models.

When specific derivative contractual terms are available and may be valued primarily by reference to interest rates, foreign exchange rates and yield curves that are observable and regularly quoted, the derivatives are valued using vendor-developed models.

Other derivatives within the VIEs that include significant unobservable valuation inputs are valued using internally developed models.

VIE derivative liability fair value balances at December 31, 2019 and 2018 were developed using vendor-developed models and do not use significant unobservable inputs.

The fair value of VIE assets are obtained from market quotes when available.

Typically VIE asset fair values are not readily available from market quotes and are estimated internally.

The consolidated VIEs are securitization entities in which net cash flows from assets and derivatives (after adjusting for financial guarantor cash flows and other expenses) will be paid out to note holders or equity interests.

Internal valuations of VIE assets (fixed income securities or loans), therefore, are generally derived from the fair value of notes and derivatives, as described above, adjusted for the fair value of cash flows from Ambac’s financial guarantee.

The fair value of financial guarantee cash flows include:

(i) estimated future premiums discounted at a rate consistent with that implicit in the fair value of the VIE’s liabilities and (ii) internal estimates of future loss payments by Ambac discounted at a rate that includes Ambac’s own credit risk.

Estimated future premium payments to be paid by the VIEs were discounted at a weighted average rate of 2.7 % and 3.1 % at December 31, 2019 and 2018 , respectively.

The value of future loss payments to be paid by Ambac to the VIEs was adjusted to include an Ambac CVA appropriate for the term of expected Ambac claim payments.

derivatives, determined as described above, adjusted for the fair values of Ambac’s financial guarantees associated with the VIE.

The fair value of financial guarantees consist of:

(i) estimated future premium cash flows discounted at a rate consistent with that implicit in the fair value of the VIE’s liabilities and (ii) estimates of future claim payments discounted at a rate that

includes Ambac’s own credit risk.

Estimated future premium payments to be paid by the VIEs were discounted at a par-weighted average rate of 2.4 % and 2.7 % at December 31, 2020 and 2019, respectively.

At December 31, 2020, the range of these discount rates was between 1.8 % and 3.9 %.

Additional Fair Value Information for Financial Assets and Liabilities Accounted for at Fair Value

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VIE Assets and Liabilities

Year Ended December 31, 2019

Year Ended December 31, 2020 Investments Other

Derivatives Investments Loans Long-term

Balance, beginning of period $ 72 $ 3 $ 66 $ 2,957 $ 3,108 $ — $ 6,207

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Included in other comprehensive income 6 — — 109 83 — 198

Transfers into Level 3

Transfers out of Level 3

Deconsolidation of VIEs

Purchases — — — — — — —

Issuances — — — — — — —

Sales — — — — — — —

Settlements ( 1 ) — ( 7 ) ( 35 ) ( 290 ) — ( 334 )

Balance, end of period $ 78 $ 1 $ 84 $ 3,215 $ 2,998 $ — $ 6,376

The amount of total gains/(losses) included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date $ — $ ( 2 ) $ 25 $ 183 $ 98 $ — $ 304

Other assets carried at fair value and classified as Level 3 relate to an equity interest in an Ambac sponsored VIE.

| Ambac Financial Group, Inc.

102 2019 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

The amount of total gains/(losses) included in other comprehensive income attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date $ — $ — $ — $ 109 $ 83 $ — $ 192

Level-3 Financial Assets and Liabilities Accounted for at Fair Value

VIE Assets and Liabilities

Year Ended December 31, 2018

Year Ended December 31, 2019 Investments Other

Assets Derivatives Investments Loans Long-term

Balance, beginning of period $ 72 $ 5 $ 46 $ 2,737 $ 4,288 $ ( 217 ) $ 6,930

2 unchanged sentences

Included in other comprehensive income — — — 116 74 8 199

Transfers out of Level 3

Purchases — — — — — — —

Issuances — — — — — — —

Sales — — — — — — —

Settlements ( 2 ) — ( 5 ) ( 35 ) ( 690 ) — ( 731 )

Deconsolidations of VIEs — — — — ( 851 ) 223 ( 627 )

1 unchanged sentence

(1) Other assets carried at fair value and classified as Level 3 relate to an equity interest in an Ambac sponsored VIE.

| Ambac Financial Group, Inc.

113 2020 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Level-3 Financial Assets and Liabilities Accounted for at Fair Value

VIE Assets and Liabilities

Year Ended December 31, 2017

Year Ended December 31, 2018 Investments Other

Assets Derivatives Investments Loans Long-term

Balance, beginning of period $ 809 $ 6 $ 61 $ 2,914 $ 11,529 $ ( 2,758 ) $ 12,561

2 unchanged sentences

Included in other comprehensive income ( 53 ) — — ( 158 ) ( 470 ) 91 ( 590 )

Transfers into Level 3

Purchases — — — — — — —

Issuances — — — — — — —

Sales — — — — — — —

Settlements ( 714 ) — ( 6 ) ( 35 ) ( 624 ) 23 ( 1,356 )

Transfers out of Level 3 ( 5 ) — — — — — ( 5 )

Deconsolidation of VIEs — — — — ( 5,946 ) 2,237 ( 3,709 )

Balance, end of period $ 72 $ 5 $ 46 $ 2,737 $ 4,288 $ ( 217 ) $ 6,930

| Ambac Financial Group, Inc.

103 2019 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

The tables below provide roll-forward information by class of investments and derivatives measured using si gnificant unobservable inputs.

The tables below provide roll-forward information by class of investments and derivatives measured using significant unobservable inputs.

Level-3 Investments by Class

Year Ended December 31,

Non-Agency RMBS

Year Ended December 31, Other Asset

Securities Non-Agency RMBS Total

Investments Other Asset

Securities Non-Agency RMBS Total

Balance, beginning of period $ 72 $ — $ 72 $ 72 $ — $ 72

2 unchanged sentences

Included in other comprehensive income 6 — 6 — — —

Transfers out of Level 3

Purchases — — — — — —

Issuances — — — — — —

Sales — — — — — —

Settlements ( 1 ) — ( 1 ) ( 2 ) — ( 2 )

Balance, end of period $ 78 $ — $ 78 $ 72 $ — $ 72

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Level-3 Investments by Class

Year Ended December 31, 2017

Non-Agency RMBS

Year Ended December 31, 2018 Other Asset

Securities Non-Agency RMBS Total

Balance, beginning of period $ 73 $ 736 $ 809

2 unchanged sentences

Included in other comprehensive income ( 1 ) ( 52 ) ( 53 )

Transfers into Level 3

Purchases — — —

Issuances — — —

Settlements ( 1 ) ( 713 ) ( 714 )

Transfers out of Level 3 — ( 5 ) ( 5 )

Balance, end of period $ 72 $ — $ 72

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Year Ended December 31,

Derivatives Total

Derivatives Interest

Derivatives Total

Balance, beginning of period $ 67 $ — $ 66 $ 47 $ ( 1 ) $ 46

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Included in earnings 25 — 25 24 2 25

Purchases — — — — — —

Issuances — — — — — —

Sales — — — — — —

Settlements ( 7 ) — ( 7 ) ( 4 ) — ( 5 )

Balance, end of period 85 — 84 67 — 66

1 unchanged sentence

Level-3 Derivatives by Class

Year Ended December 31, 2017

Year Ended December 31, 2018 Interest

Derivatives Total

Balance, beginning of period $ 61 $ ( 1 ) $ 61

1 unchanged sentence

Included in earnings ( 9 ) ( 1 ) ( 9 )

Purchases — — —

Issuances — — —

Settlements ( 5 ) — ( 6 )

Balance, end of period $ 47 $ ( 1 ) $ 46

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All such securities that have internally modeled fair values have been classified as Level 3.

Non-agency RMBS securities transferred from Level 2 into Level 3 in 2017 were investments in Ambac-wrapped RMBS securities for which projected cash flows consisted solely of Deferred Amounts and interest thereon.

These invested assets were internally valued as management either could not obtain or could not corroborate the reasonableness of third party quotes.

Non-agency RMBS transferred out of Level 3 into Level 2 in 2018 consisted of an Ambac-insured re-REMIC collateralized by distressed mortgage-backed securities.

Derivative instruments are transferred into Level 3 when the use of unobservable inputs becomes significant to the overall valuation.

There were no transfers of derivative instruments into or out of Level 3 in the periods disclosed.

There were no transfers between Level 1 and Level 2 for the periods presented.

All transfers between fair value hierarchy Levels 1, 2, and 3 are recognized at the beginning of each accounting period.

Invested assets transferred out of Level 3 into Level 2 in 2018 consisted of an Ambac-insured re-REMIC collateralized by distressed mortgage-backed securities.

There were no other transfers of financial instruments into or out of Level 3 in the periods disclosed.

| Ambac Financial Group, Inc.

5 unchanged sentences

Gains and losses (realized and unrealized) relating to Level 3 assets and liabilities included in earnings for the affected periods are reported as follows:

Derivative Contracts

Income (Loss)

Derivative Contracts Income (Loss)

Year Ended December 31, 2020

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Changes in unrealized gains (losses) relating to financial instruments still held at the reporting date — ( 10 ) — ( 1 )

Ambac’s non-VIE invested assets are primarily comprised of fixed maturity securities classified as available-for-sale and interests in pooled investment funds which are reported within Other investments on the Consolidated Balance Sheets.

Interests in pooled investment funds in the form of common stock or in-substance common stock are classified as trading securities, while limited partner interests in such funds are reported using the equity method.

Other investments also include equity interests held by AFG including the equity interest in Corolla Trust, an unconsolidated trust created in connection with its sale of Segregated Account junior surplus notes on August 28, 2014.

As further described in Note 1.

Background and Business Description, on January 22, 2021, AAC completed the Corolla Note Exchange transaction whereby it acquired 100% of the outstanding obligations of the Corolla trust, including the owner trust certificate held by AFG, in exchange for AAC surplus notes.

Disclosures in this Note for the period ended December 31, 2020, are in accordance with the new CECL standard adopted January 1, 2020, which is more fully described in Note 2.

Basis of Presentation and Significant Accounting Policies .

To the extent disclosures for periods prior to January 1, 2020, made in accordance with prior GAAP rules differ from disclosures under the new CECL standard, such differences are explained below.

| Ambac Financial Group, Inc.

4 unchanged sentences

(Dollar Amounts in Millions, Except Share Amounts)

Ambac’s non-VIE invested assets are primarily comprised of fixed income securities classified as available-for-sale and interests in pooled investment funds which are reported within Other investments on the Consolidated Balance Sheets.

Other investments also include Ambac's equity interest in an unconsolidated trust created in connection with its sale of Segregated Account junior surplus notes on August 28, 2014.

Fixed Income Securities

The amortized cost and estimated fair value of available-for-sale fixed income investments, excluding VIE investments, at December 31, 2019 and 2018 were as follows:

Non-Credit Other-

than-temporary

Impairments (1)

Fixed Maturity Securities

The amortized cost and estimated fair value of available-for-sale investments, excluding VIE investments, at December 31, 2020 and 2019 were as follows:

Cost Allowance for Credit Losses Gross

Losses Estimated

December 31, 2020

Fixed income securities:

Fixed maturity securities:

Municipal obligations $ 321 $ — $ 37 $ — $ 358

Corporate obligations (1)

1,059 — 24 6 1,077

Foreign obligations 97 — 1 — 98

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Residential mortgage-backed securities 256 — 46 — 302

Commercial mortgage-backed securities

Collateralized debt obligations 74 — — — 74

Other asset-backed securities (2)

Fixed income securities pledged as collateral:

Total collateralized investments

263 — 40 — 303

2,175 — 149 8 2,317

Short-term 492 — — — 492

2,667 — 149 8 2,809

Fixed maturity securities pledged as collateral:

government obligations 15 — — — 15

Short-term 125 — — — 125

140 — — — 140

Total available-for-sale investments $ 2,807 $ — $ 149 $ 8 $ 2,949

Losses Estimated

Fair Value Non-credit

Impairments (3)

December 31, 2019

Fixed income securities:

Fixed maturity securities:

Municipal obligations $ 194 $ 22 $ — $ 215 $ —

Corporate obligations (1)

1,396 36 2 1,430 —

Foreign obligations 44 1 — 44 —

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Residential mortgage-backed securities 200 47 — 248 —

Commercial mortgage-backed securities 49 1 — 50 —

Collateralized debt obligations 147 — 1 146 —

Other asset-backed securities (2)

263 24 — 287 —

2,450 132 5 2,577 —

Short-term 653 — — 653 —

3,103 132 5 3,230 —

Fixed maturity securities pledged as collateral:

Short-term 85 — — 85 —

Total available-for-sale investments 3,187 132 5 3,314 —

Represents the amount of non-credit other-than-temporary impairment losses remaining in accumulated other comprehensive income on securities that also had a credit impairment.

These losses are included in gross unrealized losses as of December 31, 2019 and 2018 .

(1) Includes Ambac's holdings of the secured notes issued by Ambac LSNI in connection with the Rehabilitation Exit Transactions.

(2) Consists primarily of Ambac's holdings of the military housing securitization bonds.

(3) At December 31, 2019, represents the amount of non-credit other-than-temporary impairment losses remaining in accumulated other comprehensive income on securities that also had a credit impairment.

These losses included in gross unrealized losses at December 31, 2019.

| Ambac Financial Group, Inc.

5 unchanged sentences

The amortized cost and estimated fair value of available-for-sale investments, excluding VIE investments, at December 31, 2020, by contractual maturity, were as follows:

Cost Estimated

Due in one year or less $ 718 $ 719

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Residential mortgage-backed securities 256 302

Commercial mortgage-backed securities

Collateralized debt obligations 74 74

Other asset-backed securities 263 303

Total $ 2,807 $ 2,949

Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay certain obligations with or without call or prepayment penalties.

Unrealized Losses on Fixed Income Securities

The following table shows gross unrealized losses and fair values of Ambac’s available-for-sale investments, excluding VIE investments, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at December 31, 2019 and 2018 :

Less Than 12 Months

12 Months or More

Unrealized Losses on Fixed Maturity Securities

The following table shows gross unrealized losses and fair values of Ambac’s available-for-sale investments, excluding VIE investments, which at December 31, 2020, did not have an allowance for credit losses under the CECL standard and at December 2019, did not have other-than-temporary impairments recorded in earnings under prior GAAP.

This information is aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at December 31, 2020 and 2019:

Less Than 12 Months 12 Months or More Total

Fair Value Gross

Loss Fair Value Gross

December 31, 2020

Fixed income securities:

Fixed maturity securities:

Municipal obligations $ 25 $ — $ 6 $ — $ 31 $ —

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Other asset-backed securities — — 4 — 4 —

629 7 25 — 654 8

Short-term 187 — — — 187 —

Total temporarily impaired securities $ 816 $ 7 $ 25 $ — $ 841 $ 8

| Ambac Financial Group, Inc.

108 2019 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Less Than 12 Months

12 Months or More

December 31, 2019

Fixed income securities:

Fixed maturity securities:

Municipal obligations $ 13 $ — $ 10 $ — $ 23 $ —

3 unchanged sentences

Residential mortgage-backed securities 5 — — — 5 —

Commercial mortgage-backed securities 7 — — — 7 —

Collateralized debt obligations 53 — 63 1 116 1

Other asset-backed securities 2 — 7 — 10 —

Total temporarily impaired securities

Management has determined that the unrealized losses reflected in the tables above are temporary in nature as of December 31, 2019 and 2018 based upon (i) no unexpected principal and interest payment defaults on these securities;

(ii) analysis of the creditworthiness of the issuer and financial guarantor, as applicable, and analysis of projected defaults on the underlying collateral;

(iii) no management intent to sell these investments in debt securities;

and (iv) it is not more likely than not that Ambac will be required to sell these debt securities before the anticipated recovery of its amortized cost basis.

To the extent that securities that management intends to sell are in an unrealized loss position, they would have already been considered other-than-temporarily impaired with the amortized cost written down to fair value.

The assessment under (iv) is based on a comparison of future available liquidity from the investment portfolio against the projected net cash outflow from operating activities and debt service.

For purposes of this assessment, available liquidity from the investment portfolio is comprised of the fair value of securities for which management has asserted its intent to sell, the fair value of other securities that are available for sale and in an unrealized gain position, highly liquid pooled fund investments plus the scheduled maturities and interest payments from the remaining securities in the portfolio.

Principal payments on securities pledged as collateral are not considered to be available for other liquidity needs until the collateralized positions are projected to be settled.

Because the above-described assessment indicates that future available liquidity exceeds projected net cash outflow, it is not more likely than not that we would be required to sell securities in an unrealized loss position before the recovery of their amortized cost basis.

For securities that have indications of possible other-than-temporary impairment but for which management does not intend to sell and will not more likely than not be required to sell, management compares the present value of cash flows expected to be collected to the amortized cost basis of the securities to assess whether the amortized cost will be recovered.

Cash flows are discounted at the effective interest rate implicit in the security.

For debt securities that are beneficial interests in securitized financial assets, the effective interest rate is the current yield used to accrete the beneficial interest.

For floating rate securities, future cash flows and the discount rate used are both adjusted to reflect changes in the index rate applicable to each security as of the evaluation date.

Of the securities that were in a gross unrealized loss position at December 31, 2019 , $ 29 of the total fair value and $ 0 of the unrealized loss related to below investment grade and non-rated securities.

Of the securities that were in a gross unrealized loss position at December 31, 2018 , $ 660 of the total fair value and $ 18 of the unrealized loss related to below investment grade and non-rated securities.

The remainder of gross unrealized losses as of December 31, 2019 , are primarily on investment grade fixed-rate securities purchased during periods of lower interest rates.

Management believes that the timely receipt of all principal and interest on these positions is probable .

If that judgment changes, Ambac may ultimately record a charge for other-than-temporary impairment in future periods.

Future changes in our estimated liquidity needs could result in a determination that Ambac no longer has the ability to hold securities that are in an unrealized loss position, which could also result in additional other-than-temporary impairment charges.

200 4 88 1 288 5

Short-term 201 — — — 201 —

Total securities $ 401 $ 4 $ 88 $ 1 $ 489 $ 5

| Ambac Financial Group, Inc.

4 unchanged sentences

(Dollar Amounts in Millions, Except Share Amounts)

Realized Gains and Losses and Other-Than-Temporary Impairments

The following table details amounts included in net realized gains (losses) and other-than-temporary impairments included in earnings for the affected periods:

Management has determined that the securities in the above table do not have credit impairment as of December 31, 2020 and 2019 based upon (i) no actual or expected principal and interest payment defaults on these securities;

(ii) analysis of the creditworthiness of the issuer and financial guarantor, as applicable, and (iii) for debt securities that are non-highly rated beneficial interests in securitized financial assets, analysis of whether there was an adverse change in projected cash flows.

Management's evaluation as of December 31, 2020, includes the expectation that all principal and interest payments on securities guaranteed by AAC or Ambac UK will be made timely and in full.

Ambac’s assessment about whether a security is credit impaired reflects management’s current judgment regarding facts and circumstances specific to the security and other factors.

If that judgment changes, Ambac may record a charge for credit impairment in future periods.

Realized Gains and Losses including Impairments

The following table details amounts included in net realized gains (losses) and impairments included in earnings for the affected periods:

2020 2019 2018

Gross realized gains on securities $ 38 $ 64 $ 111

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Foreign exchange (losses) gains ( 4 ) 22 7

Credit impairments $ — $ — $ —

Intent / requirement to sell impairments $ — $ — $ ( 3 )

Net realized gains (losses) $ 22 $ 81 $ 108

Net other-than-temporary impairments (1)

Other-than-temporary impairments exclude impairment amounts recorded in other comprehensive income under ASC Paragraph 320-10-65-1, which comprise non-credit related amounts on securities that are credit impaired but which management does not intend to sell and it is not more likely than not that the company will be required to sell before recovery of the amortized cost basis.

During the Segregated Account Rehabilitation Proceedings, changes in the estimated timing of claim payments on Ambac insured securities contributed to net other-than-temporary impairments for the year ended December 31, 2017 presented in the table above.

Future changes in our estimated liquidity needs could result in a determination that Ambac no longer has the ability to hold securities that are in an unrealized loss position, which could result in additional other-than-temporary impairment charges.

The following table presents a roll-forward of Ambac’s cumulative credit losses on debt securities held as of December 31, 2019 , 2018 and 2017 for which a portion of an other-than-temporary impairment was recognized in other comprehensive income:

The following table presents a roll-forward of Ambac’s cumulative credit losses on debt securities for which a portion of an other-than-temporary impairment was recognized in other comprehensive income under prior GAAP for the years ended December 31, 2019 and 2018:

Year Ended December 31, 2019 2018

Balance, beginning of period

1 unchanged sentence

Securities not previously impaired — 1

Securities previously impaired

Reductions for credit impairments previously recognized on:

1 unchanged sentence

Balance, end of period

Ambac had zero allowance for credit losses at December 31, 2020.

Ambac did not purchase any financial assets with credit deterioration for the year ended December 31, 2020.

Counterparty Collateral, Deposits with Regulators and Other Restrictions

Ambac routinely pledges and receives collateral related to certain transactions.

Cash, cash equivalents and securities held directly in Ambac’s investment portfolio with a fair value of $ 85 and $ 103 at December 31, 2019 and 2018 , respectively, were pledged to derivative counterparties.

Ambac’s derivative counterparties have the right to re-pledge the investment securities and as such, these pledged securities are separately classified on the Consolidated Balance Sheets as “Short-term investments pledged as collateral, at fair value”.

Securities held directly in Ambac’s investment portfolio with a fair value of $ 140 and $ 85 at December 31, 2020 and 2019, respectively, were pledged to derivative counterparties.

Ambac’s derivative counterparties have the right to re-pledge the investment securities and as such, these pledged securities are separately classified on the Consolidated Balance Sheets as “Fixed maturity securities pledged as collateral, at fair value” and "Short-term investments pledged as collateral, at fair value".

Refer to Note 12.

1 unchanged sentence

There was no cash or securities received from other counterparties that were re-pledged by Ambac.

Securities carried at $ 6 and $ 6 at December 31, 2019 and 2018 , respectively, were deposited by Ambac Assurance and Everspan with governmental authorities or designated custodian banks as required by laws affecting insurance companies.

Securities carried at $ 8 and $ 6 at December 31, 2020 and 2019, respectively, were deposited by Ambac's insurance subsidiaries with governmental authorities or designated custodian banks as required by laws affecting insurance companies.

Invested assets carried at $ 1 at December 31, 2020 were deposited as security in connection with a letter of credit issued for an office lease.

Securities carried at $ 197 and $ 210 at December 31, 2019 and 2018 , respectively, were pledged as collateral and as sources of funding to repay the Secured Notes issued by Ambac LSNI.

The securities may not be transferred or repledged by Ambac LSNI.

Securities with a fair value of $ 178 and $ 197 at December 31, 2020 and 2019, respectively, were pledged as collateral and as sources of funding to repay the Secured Notes issued by Ambac LSNI.

The securities may not be transferred or re-pledged by Ambac LSNI.

Collateral may be sold to fund redemptions of the Secured Notes.

Ambac Assurance also pledged for the benefit of the holders of Secured Notes (other than Ambac Assurance) the proceeds of interest payments and partial redemption of the Secured Notes held by Ambac Assurance.

The amount of such proceeds held by Ambac Assurance was $ 55 and $ 19 at December 31, 2019 and 2018 and is included in Restricted cash on the Consolidated Balance Sheet.

Ambac Assurance may, from time to time, sell all or a portion of the Secured Notes it owns.

In the event that Ambac Assurance sells any of the Secured Notes it owns, the proceeds must be used to redeem a like amount of the Ambac Note at par.

The price at which Ambac Assurance sells the Secured Notes may differ from the price at which it redeems the Secured Notes.

AAC also pledged for the benefit of the holders of Secured Notes (other than AAC) the proceeds of interest payments and partial redemptions of the Secured Notes held by AAC.

The amount of such proceeds held by AAC was $ 9 and $ 55 at December 31, 2020 and 2019 and is included in Restricted cash on the Consolidated Balance Sheet.

AAC may, from time to time, sell all or a portion of the Secured Notes it owns.

In the event that AAC sells any of the Secured Notes it owns, the proceeds must be used to redeem a like amount of the Ambac Note at par.

The price at which AAC sells the Secured Notes may differ from the price at which it redeems the Secured Notes.

| Ambac Financial Group, Inc.

5 unchanged sentences

Guaranteed Securities

Ambac’s fixed income portfolio includes securities covered by guarantees issued by Ambac Assurance and other financial guarantors (“insured securities”).

Ambac’s fixed maturity portfolio includes securities covered by guarantees issued by AAC and other financial guarantors (“insured securities”).

The published rating agency ratings on these securities reflect the higher of the financial strength rating of the financial guarantor or the rating of the underlying issuer.

1 unchanged sentence

In the event these underlying ratings are not available from the rating agencies, Ambac will assign an internal rating.

The following table represents the fair value, including the value of the financial guarantee, and weighted-average underlying rating, excluding the financial guarantee, of the insured securities at December 31, 2019 and 2018 , respectively:

The following table represents the fair value and weighted-average underlying rating of insured securities in Ambac's investment portfolio at December 31, 2020 and 2019, respectively:

Obligations Corporate

Obligations (2)

Rating (1) (3)

Securities Total Weighted

December 31, 2020:

Ambac Assurance Corporation (2)

National Public Finance Guarantee Corporation

Ambac Assurance Corporation $ 320 $ 465 $ 481 $ 1,266 CCC+

National Public Finance Guarantee Corporation 6 — — 6 BBB-

Assured Guaranty Municipal Corporation 1 — — 1 C

Total $ 327 $ 465 $ 481 $ 1,273 CCC+

December 31, 2019:

Ambac Assurance Corporation (2)

National Public Finance Guarantee Corporation

Ambac Assurance Corporation $ 176 $ 535 $ 442 $ 1,153 B-

National Public Finance Guarantee Corporation 11 — — 11 BBB-

Total $ 186 $ 535 $ 442 $ 1,164 B-

(1) Ratings are based on the lower of Standard & Poor’s or Moody’s rating.

If unavailable, Ambac’s internal rating is used.

Includes asset-backed securities with a fair value of $ 0 and $ 145 at December 31, 2019 and 2018 , respectively, insured by Ambac UK.

(2) Represents Ambac's holdings of secured notes issued by Ambac LSNI in connection with the Rehabilitation Exit Transactions.

Ambac LSNI secured notes are insured by Ambac Assurance and are excluded from the calculation of weighted average underlying rating.

These secured notes are insured by AAC.

Other Investments

2 unchanged sentences

Except as noted in the table, fair value as reported is determined using net asset value ("NAV") as a practical expedient.

In addition to these investments, Ambac has unfunded commitments at December 31, 2019 of $ 41 to private credit funds and $ 48 to a hedge fund.

In addition to these investments, Ambac has unfunded commitments of $ 81 to private credit and private equity funds at December 31, 2020.

Class of Funds

Redemption Frequency

Redemption Notice Period

2020 2019 Redemption Frequency Redemption Notice Period

Real estate properties (1)

10 business days

$ 16 $ 16 quarterly 10 business days

Hedge funds (2)

196 65 quarterly or semi-annually 90 days

High yield and leveraged loans (3) (10)

78 176 daily 0 - 30 days

Private credit (4)

180 days if permitted

65 51 quarterly if permitted 180 days if permitted

Insurance-linked investments (5)

fully redeemed

3 3 fully redeemed none

Equity market investments (6) (10)

73 55 daily 0 days

Investment grade floating rate income (7)

73 66 weekly 0 days

Private equity (8)

13 — quarterly if permitted 90 days if premitted

Emerging markets debt (9) (10)

25 — daily 0 days

Total equity investments in pooled funds $ 543 $ 432

(1) Investments consist of UK property to generate income and capital growth.

This class seeks to generate superior risk-adjusted returns through selective asset sourcing, active trading and hedging strategies within structured credit markets, including mortgage-backed securities, commercial real estate securities and loans, CLOs, REITs and asset backed securities.

(2) This class seeks to generate superior risk-adjusted returns through selective asset sourcing, active trading and hedging strategies across a range of asset types.

(3) This class of funds includes investments in a range of instruments including high-yield bonds, leveraged loans, CLOs, ABS and floating rate notes to generate income and capital appreciation.

This class aims to obtain high long-term return primarily through credit and preferred equity investments with low liquidity and defined term.

(4) This class aims to obtain high long-term returns primarily through credit and preferred equity investments with low liquidity and defined term.

(5) This class seeks to generate returns from insurance markets through investments in catastrophe bonds, life insurance and other insurance linked investments.

This class of funds includes investments in a range of instruments that include funds that have diversified exposure to global equity market returns through holdings of market index funds .

This class of funds includes investments in high quality floating rate debt securities including ABS and corporate floating rate notes (FRNs) as well as ultra-short term bonds and money market instruments.

(6) This class of funds aim to achieve long-term growth through diversified exposure to global equity markets.

(7) This class of funds includes investments in high quality floating rate debt securities including ABS and corporate floating rate notes.

(8) This class seeks to generate long-term capital appreciation through investments in private equity, equity-related and other instruments.

| Ambac Financial Group, Inc.

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(Dollar Amounts in Millions, Except Share Amounts)

High yield and leveraged loans products include $ 81 at December 31, 2019 and $ 27 at December 31, 2018 and equity market investments include $ 55 at December 31, 2019 and $ 44 at December 31, 2018 that have readily determinable fair values priced through pricing vendors.

Ambac also holds an equity interest in an unconsolidated trust created in connection with the 2014 sale of Segregated Account junior surplus notes that is accounted for under the equity method.

(9) This class seeks long-term income and growth through investments in the bonds of issuers in emerging markets.

(10) These categories include fair value amounts total $ 89 and $ 136 at December 31, 2020 and 2019, respectively, that are readily determinable and are priced through pricing vendors, including for High yield and leveraged loans products;

$ 3 and $ 81 for Equity market investments;

$ 60 and $ 55 ;

for Emerging markets debt of $ 25 and $ 0 .

Ambac also held direct equity interests as of December 31, 2020 and 2019, including in an unconsolidated trust created in connection with the 2014 sale of Segregated Account junior surplus notes, which is accounted for under the equity method.

Investment Income

Net investment income was comprised of the following for the affected periods:

Fixed income securities

2020 2019 2018

Fixed maturity securities $ 103 $ 183 $ 265

Short-term investments 5 17 11

2 unchanged sentences

Other investments 19 32 2

Total net investment income

Net investment income from Other investments primarily represents changes in fair value on securities classified as trading

or under the fair value option, income from investment limited partnerships accounted for under the equity method and the above noted equity interest in an unconsolidated trust accounted for under the equity method.

Total net investment income (loss) $ 122 $ 227 $ 273

Net investment income from Other investments primarily represents changes in fair value on securities classified as trading or accounted for under the fair value option, income from investment limited partnerships accounted for under the equity method and the above noted equity interest in an unconsolidated trust accounted for under the equity method.

The portion of net unrealized gains (losses) related to trading securities still held at the end of each period is as follows:

2020 2019 2018

Net gains (losses) recognized during the period on trading securities

$ — $ 24 $ ( 3 )

net gains (losses) recognized during the reporting period on trading securities sold during the period

Unrealized gains (losses) recognized during the reporting period on trading securities still held at the reporting date

$ 18 $ 17 $ ( 4 )

DERIVATIVE INSTRUMENTS

The following tables summarize the gross fair values of individual derivative instruments and the impact of legal rights of offset as reported in the Consolidated Balance Sheets as of December 31, 2020 and 2019.

Liabilities Gross

Offset in the

Balance Sheet

Balance Sheet Net Amounts

Balance Sheet Gross Amount

of Collateral

Offset in the

Balance Sheet

Balance Sheet Net Amount

December 31, 2020:

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(Dollar Amounts in Millions, Except Share Amounts)

Liabilities Gross

Offset in the

Balance Sheet

Balance Sheet Net Amounts

Balance Sheet Gross Amount

of Collateral

Offset in the

Balance Sheet

Balance Sheet Net Amount

December 31, 2019:

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Interest rate swaps 89 — 90 89 1

Futures contracts

Total non-VIE derivative liabilities $ 90 $ — $ 90 $ 89 $ 1

5 unchanged sentences

Total VIE derivative liabilities $ 1,657 $ — $ 1,657 $ — $ 1,657

Amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral are not offset against fair value amounts recognized for derivative instruments on the Consolidated Balance Sheets.

Amounts representing the right to reclaim cash collateral or the obligation to return cash collateral are not offset against fair value amounts recognized for derivative instruments on the Consolidated Balance Sheets.

The amounts representing the right to reclaim cash collateral and posted margin, recorded in “Other assets” were $ 1 and $ 36 as of December 31, 2020 and 2019, respectively.

3 unchanged sentences

in Consolidated Statements of

Total Comprehensive Income (Loss)

Amount of Gain (Loss) Recognized in Consolidated Statement of Total Comprehensive Income (Loss) –

Total Comprehensive Income (Loss) Amount of Gain (Loss) Recognized in Consolidated Statement of Total Comprehensive Income (Loss) –

Year Ended December 31,

2020 2019 2018

Non-VIE derivatives:

Futures contracts

Net gains (losses) on derivative contracts

Interest rate swaps

Net gains (losses) on derivative contracts

Credit derivatives

Net gains (losses) on derivative contracts

Credit derivatives Net gains (losses) on derivative contracts $ — $ 2 $ ( 1 )

Interest rate swaps Net gains (losses) on derivative contracts ( 9 ) ( 6 ) 1

Futures contracts Net gains (losses) on derivative contracts ( 41 ) ( 45 ) 7

Total non-VIE derivatives ( 50 ) ( 50 ) 7

Variable Interest Entities:

Interest rate swaps

Income (loss) on variable interest entities

Currency swaps

Income (loss) on variable interest entities

Currency swaps Income (loss) on variable interest entities ( 6 ) ( 12 ) 11

Interest rate swaps Income (loss) on variable interest entities ( 138 ) ( 20 ) 493

Total Variable Interest Entities ( 144 ) ( 32 ) 505

2 unchanged sentences

Credit derivatives, which are privately negotiated contracts, provide the counterparty with credit protection against the occurrence of a specific event such as a payment default or bankruptcy relating to an underlying obligation.

Credit derivatives issued are insured by Ambac Assurance.

None of the outstanding credit derivative transactions at December 31, 2019 , include ratings based collateral-posting triggers or otherwise require Ambac to post collateral regardless of Ambac’s ratings or the size of the mark to market exposure to Ambac.

The portfolio of our credit derivatives were written on a “pay-as-you-go” basis.

Similar to insurance policy execution, pay-as-you-go provides that Ambac pays interest shortfalls on the referenced transaction as they are incurred on each scheduled payment date, but only pays principal shortfalls upon the earlier of (i) the date on which the assets designated to fund the referenced obligation have been disposed of and (ii) the legal final maturity date of the referenced obligation.

Credit derivatives issued are insured by AAC.

The outstanding credit derivative transaction at December 31, 2020, does not include ratings based collateral-posting triggers or otherwise require Ambac to post collateral regardless of Ambac’s ratings or the size of the mark to market exposure to Ambac.

Our credit derivatives were written on a “pay-as-you-go” basis.

Similar to an insurance policy, pay-as-you-go provides that

Ambac pays interest shortfalls on the referenced transaction as they are incurred on each scheduled payment date, but only pays principal shortfalls upon the earlier of (i) the date on which the assets designated to fund the referenced obligation have been disposed of and (ii) the legal final maturity date of the referenced obligation.

Ambac maintains internal credit ratings on its guaranteed obligations, including credit derivative contracts, solely to indicate management’s view of the underlying credit quality of the guaranteed obligations.

The principal notional outstanding for credit derivative contracts was $ 257 and $ 280 as of

| Ambac Financial Group, Inc.

4 unchanged sentences

(Dollar Amounts in Millions, Except Share Amounts)

The gross principal notional outstanding for CDS contracts was $ 280 and $ 295 as of December 31, 2019 and 2018 , respectively, all of which had internal Ambac ratings of AA in both periods:

December 31, 2020 and 2019, respectively, which had internal Ambac ratings of AA in both periods:

Interest Rate Derivatives

Ambac, through its subsidiary Ambac Financial Services (“AFS”), uses interest rate swaps and US Treasury futures contracts to provide a partial economic hedge against the effects of rising interest rates elsewhere in the Company, including on Ambac’s financial guarantee exposures.

Ambac, through its subsidiary Ambac Financial Services (“AFS”), uses interest rate swaps, US Treasury futures contracts and other derivatives, to provide a partial economic hedge against the effects of rising interest rates elsewhere in the Company, including on Ambac’s financial guarantee exposures.

Additionally, AFS provided interest rate swaps to states, municipalities and their authorities, asset-backed issuers and other entities in connection with their financings.

7 unchanged sentences

Certain VIEs consolidated under the Consolidation Topic of the ASC entered into derivative contracts to meet specified purposes within the securitization structure.

The notional for VIE derivatives outstanding as of December 31, 2019 and 2018 , are as follows:

The notional for VIE derivatives outstanding as of December 31, 2020 and 2019, were as follows:

Notional - December 31,

6 unchanged sentences

Ambac’s over-the-counter interest rate swaps are centrally cleared when eligible.

Certain interest rate swaps remain with professional

swap-dealer counterparties and certain direct customer counterparties.

Certain interest rate swaps remain with professional swap-dealer counterparties and direct customer counterparties.

These non-cleared swaps are generally executed under standardized derivative documents including collateral support and master netting agreements.

Under these agreements, Ambac is required to post collateral in the event net unrealized losses exceed predetermined threshold levels.

Additionally, given that Ambac Assurance is no longer rated by an independent rating agency, counterparties have the right to terminate the swap positions.

As of December 31, 2019 and 2018 , the net liability fair value of derivative instruments with contingent features linked to Ambac’s own credit risk was $ 89 and $ 67 , respectively, related to which Ambac had posted cash, cash equivalents and securities as collateral with a fair value of $ 109 and $ 84 , respectively.

All such ratings-based contingent features have been triggered as requiring maximum collateral levels to be posted by Ambac while preserving counterparties’ rights to terminate the contracts.

Additionally, given that AAC is no longer rated by an independent rating agency, counterparties have the right to terminate the swap positions.

As of December 31, 2020 and 2019, the net liability fair value of derivative instruments with contingent features linked to Ambac’s own credit risk was $ 113 and $ 89 , respectively, related to which Ambac had posted cash and securities as collateral with a fair value of $ 130 and $ 109 , respectively.

All such ratings-based contingent features have been triggered requiring maximum collateral levels to be posted by Ambac while preserving counterparties’ rights to terminate the contracts.

Assuming all such contracts terminated at fair value on December 31, 2020, settlement of collateral balances and net derivative liabilities would result in a net receipt of cash and/or securities by Ambac.

If counterparties elect to exercise their right to terminate, the actual termination payment amounts will be determined in accordance with derivative contract terms, which may result in amounts that differ from fair values as reported in Ambac’s financial statements.

Loans had been extended:

(i) by VIEs which are consolidated by Ambac under ASC Topic 810 as a result of Ambac’s financial guarantees of the VIEs’ note liabilities and/or assets and (ii) to certain institutions in connection with various transactions.

Loans extended by consolidated VIEs are generally carried at fair value on the Consolidated Balance Sheets.

Variable Interest Entities for further information about VIEs for which the assets and liabilities are carried at fair value.

Other loans had an outstanding principal balance of $ 19 and $ 19 at December 31, 2019 and 2018 , respectively.

The effective interest rate on these loans ranged from 6.51 % to 7.35 % and 6.51 % to 8.60 % at December 31, 2019 and 2018 , respectively.

The maturity date of these loans ranged from June 2026 to December 2046 as of December 31, 2019 .

Collectability of these loans is evaluated on an ongoing basis;

no loan has been considered impaired and as such no loan impairments have been recorded as of December 31, 2019 and 2018 .

| Ambac Financial Group, Inc.

114 2019 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

If counterparties elect to exercise their right to terminate, the actual termination payment amounts will be determined in accordance with derivative contract terms, which may result in amounts that differ from market values as reported in Ambac’s financial statements.

LONG-TERM DEBT

Long-term debt outstanding, excluding VIE long-term debt, was as follows:

Unamortized Discount

Carrying Value

Unamortized Discount

December 31, 2020 2019

Par Value Unamortized Discount Carrying Value

Par Value Unamortized Discount

Carrying Value

1 unchanged sentence

5.1 % surplus notes

$ 531 $ — $ 531 $ 531 $ ( 14 ) $ 517

5.1 % junior surplus notes

365 ( 118 ) 247 365 ( 113 ) 252

Ambac note 1,641 — 1,641 1,763 — 1,763

Tier 2 notes 306 — 306 281 ( 4 ) 278

Ambac UK debt 41 ( 27 ) 14 41 ( 28 ) 13

Long-term debt $ 2,884 $ ( 145 ) $ 2,739 $ 2,980 $ ( 159 ) $ 2,822

| Ambac Financial Group, Inc.

123 2020 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Aggregated annual maturities of non-VIE long-term debt obligations (based on scheduled maturity dates as further discussed below) are as follows:

2021 $ 531 (1)

Thereafter 712 (2)

Total $ 2,884

(1) Includes $ 531 related to surplus notes that were not approved for payment by OCI on their stated June 7, 2020, maturity date

(2) Includes $ 365 of junior surplus notes that were acquired in January and February of 2021 in exchanges for an aggregate of $ 279 of surplus notes.

Refer to "2021 Surplus Note Exchanges" in in Note 1.

Background and Business Description.

Surplus Notes

Ambac Assurance surplus notes, with a par amount of $ 531 and $ 531 at December 31, 2019 and 2018 , respectively, have a scheduled maturity of June 7, 2020.

The retirement of certain notes as part of the Rehabilitation Exit Transactions in 2018 resulted in gains of $ 3 for the year ended December 31, 2018 , recognized in Net realized gains (losses) on extinguishment of debt on the Consolidated Statements of Total Comprehensive Income.

Ambac Assurance's surplus notes, with a par amount of $ 531 and $ 531 at December 31, 2020 and 2019, respectively, have a scheduled maturity of June 7, 2020.

Surplus notes outstanding are recorded at their fair value at the date of issuance.

The discount on surplus notes is accreted into income using the effective interest method based on projected cash flows at the date of issuance.

The weighted average imputed interest rate on surplus notes outstanding as of December 31, 2019 is 10.1 % .

All payments of principal and interest on these 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 (other than junior surplus notes) outstanding immediately after consummation of the Rehabilitation Exit Transactions in 2018 in the amount of $ 14 , of which $ 3 was received by AFG for surplus notes that it owned and that are considered extinguished for accounting purposes.

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.

The discount on surplus notes was accreted into income using the effective interest method based on projected cash flows at the date of issuance through June 7, 2020, using a weighted average imputed interest rate of 10.1 %.

Surplus note principal and interest payments require the approval of 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 consummation of the Rehabilitation Exit Transactions in 2018 in the amount of $ 14 , of which $ 3 was received by AFG for surplus notes that it owned and that are considered extinguished for accounting purposes.

In April 2020, OCI declined the request of Ambac Assurance to pay the principal amount of the surplus notes, plus all accrued and unpaid interest thereon, on the scheduled maturity date of June 7, 2020.

As a result, the scheduled payment date for interest, and the scheduled maturity date for payment of principal of the surplus notes, 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.

Refer to Note 1.

Background and Business Description for further discussion of both the Rehabilitation Exit Transactions and the AMPS Exchange.

Background and Business Description for further discussion of the Rehabilitation Exit Transactions, the AMPS Exchange and the 2021 Surplus Note Exchanges, each involving the issuance of surplus notes by AAC.

The retirement of certain notes as part of the Rehabilitation Exit Transactions in 2018 resulted in gains of $ 3 for the year ended

December 31, 2018, recognized in Net realized gains (losses) on extinguishment of debt on the Consolidated Statements of Total Comprehensive Income.

Junior Surplus Notes

1 unchanged sentence

Pursuant to the Second Amended Plan of Rehabilitation, Ambac Assurance became the obligor under the junior surplus notes (originally issued by the Segregated Account) as of February 12, 2018.

These junior surplus notes have a scheduled maturity of June 7, 2020, subject to the following restrictions.

Principal and interest payments on these junior surplus notes cannot be made until all Ambac Assurance surplus notes (other than junior surplus notes) are paid in full and after all of Ambac Assurance's future and existing senior indebtedness, policy and other priority claims have been paid in full.

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

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

No such approval has been sought or obtained to pay interest on junior surplus notes since their issuance.

Par value at December 31, 2019 and 2018 includes $ 15 and $ 17 , respectively, of junior surplus notes issued in connection with a settlement agreement (the “OSS Settlement Agreement”) entered into among Ambac, Ambac Assurance, the Segregated Account and One State Street, LLC (“OSS”) with respect to the termination of Ambac’s office lease with OSS.

A portion of the principal balance of the originally issued notes were eligible to be reduced based on rents paid to OSS by Ambac Assurance after December 31, 2015.

Par value of these junior surplus notes was reduced by $ 2 and $ 4 during

• Par value at December 31, 2020 and 2019 includes $ 15 and $ 15 , respectively, of junior surplus notes issued in connection with a settlement agreement (the “OSS Settlement Agreement”) entered into among Ambac, AAC, the Segregated Account and One State Street, LLC (“OSS”) with respect to the termination of Ambac’s office lease with OSS.

A portion of the principal balance of the originally issued notes were reduced based on rents paid to OSS by AAC after December 31, 2015.

Par value of these junior surplus notes was reduced by $ 0 and $ 2 during the years ended December 31, 2020 and 2019, respectively, as rent payments were made by Ambac Assurance.

As of December 31, 2020, there was no remaining balance of the junior surplus notes that can be reduced on rents paid by AAC.

These junior surplus notes were recorded at their fair value at the date of issuance.

The discount on these notes was accreted into income from the date of issuance through June 7, 2020, using the effective interest method at an imputed interest rate of 19.5 %.

As further described in Note 1.

Background and Business Description, on February 11, 2021, AAC completed the JSN Exchange, pursuant to which it acquired all remaining junior surplus notes originally issued in connection with the OSS Settlement Agreement.

• Par value at December 31, 2020 and 2019 includes $ 350 of a junior surplus note originally issued to AFG pursuant to AFG's Chapter 11 Reorganization Plan in accordance with the Mediation Agreement dated September 21, 2011, among AFG, AAC, the Segregated Account, the Rehabilitator, the OCI and the Official Committee of Unsecured Creditors of AFG, and that AFG sold to the Corolla Trust on August 28, 2014.

This junior surplus note was recorded at a discount to par based on its fair value on August 28, 2014.

Ambac is accreting the discount on this junior surplus note into earnings using the effective interest method, based on an imputed interest rate of 8.4 %.

As further described in Note 1.

Background and Business Description, on January 22, 2021, AAC completed the Corolla Note Exchange, pursuant to which it effectively acquired the junior surplus notes from the Corolla Trust.

The Ambac Note, issued in connection with the Rehabilitation Exit Transactions on February 12, 2018, as more fully described in Note 1.

Background and Business Description , has a par value of $ 1,641 and $ 1,763 at December 31, 2020 and 2019, respectively, and has a legal maturity of February 12, 2023.

Interest on the Ambac Note is payable quarterly (on the last day of each quarter beginning with June 30, 2018) at an annual rate

| Ambac Financial Group, Inc.

4 unchanged sentences

(Dollar Amounts in Millions, Except Share Amounts)

the years ended December 31, 2019 and 2018 , respectively, as rent payments were made by Ambac Assurance.

As of December 31, 2019 , there was no remaining balance of the junior surplus notes that can be reduced on rents paid by Ambac Assurance.

These junior surplus notes were recorded at their fair value at the date of issuance.

The discount on these notes are currently being accreted into income using the effective interest method at an imputed interest rate of 19.5 % .

Par value at December 31, 2019 and 2018 includes $ 350 of a junior surplus note originally issued to AFG pursuant to AFG's Chapter 11 Reorganization Plan in accordance with the Mediation Agreement dated September 21, 2011, among AFG, Ambac Assurance, the Segregated Account, the Rehabilitator, the OCI and the Official Committee of Unsecured Creditors of AFG, and that AFG sold to a Trust on August 28, 2014.

This junior surplus note was recorded at a discount to par based on its fair value on August 28, 2014.

Ambac is accreting the discount on this junior surplus note into earnings using the effective interest method, based on an imputed interest rate of 8.4 % .

The Ambac Note, issued in connection with the Rehabilitation Exit Transactions on February 12, 2018, as more fully described in Note 1.

Background and Business Description , has a par value of $ 1,763 and $ 1,940 at December 31, 2019 and 2018 , respectively, and has a legal maturity of February 12, 2023.

Interest on the Ambac Note is payable quarterly (on the last day of each quarter beginning with June 30, 2018) at an annual rate of 3-month U.S.

of 3-month U.S.

Dollar LIBOR + 5.00 %, subject to a 1.00 % LIBOR floor.

During the years ended December 31, 2020 and 2019, $ 121 and $ 178 par value of the Ambac Note was redeemed, respectively.

The maturity date for the Ambac Note is the earlier of (x) February 12, 2023, and (y) if the Secured Notes are then outstanding, the date that is five business days prior to the date for which OCI has approved the repayment of the outstanding principal amount of the surplus notes (other than junior surplus notes) issued by Ambac Assurance.

Promptly, and in any event within four business days after the receipt (whether directly or indirectly) of any representation and warranty subrogation recoveries, Ambac Assurance shall (i) apply an amount (the “Mandatory Redemption Amount”) equal to the lesser of (a) the amount of representation and warranty subrogation recoveries up to $ 1,400 and (b) all outstanding principal and accrued and unpaid interest on the Ambac Note to redeem the Ambac Note, in whole or in part, as applicable;

3 unchanged sentences

Under debt modification accounting, Ambac Note A was recorded at a discount to par based on the carrying value of the surplus notes less the cash consideration paid.

Furthermore, no gain

or loss was recorded on the surplus note exchange and a new effective interest rate was established based on the cash flows of Ambac Note A.

Furthermore, no gain or loss was recorded on the surplus note exchange and a new effective interest rate was established based on the cash flows of Ambac Note A.

Any consideration paid directly related to the issuance of Ambac Note A was expensed as incurred.

7 unchanged sentences

Investments for further information on security and collateral related to the Ambac Note and the Secured Notes issued by Ambac LSNI.

The Tier 2 Notes, issued in connection with the Rehabilitation Exit Transactions on February 12, 2018, with a par value of $ 281 and $ 259 (including paid-in-kind interest of $ 41 and $ 19 ) at December 31, 2019 and 2018 , respectively, have a legal maturity of February 12, 2055.

The Tier 2 Notes, issued in connection with the Rehabilitation Exit Transactions on February 12, 2018, with a par value of $ 306 and $ 281 (including paid-in-kind interest of $ 66 and $ 41 )

at December 31, 2020 and 2019, respectively, have a legal maturity of February 12, 2055.

Interest on the Tier 2 Notes is at an annual rate of 8.50 %.

3 unchanged sentences

The Tier 2 Notes are subject to mandatory redemption upon:

(i) receipt of representation and warranty subrogation recoveries in excess of $ 1,600 ("Tier 2 Net Proceeds") and (ii) payment of principal or interest on Ambac Assurance surplus notes (other than junior surplus notes).

Promptly, and in any event within five business days after the receipt (whether directly or indirectly) of Tier 2 Net Proceeds, Ambac Assurance shall deposit an amount equal to the Tier 2 Net Proceeds to a collateral account, provided, that any non-cash representation and warranty subrogation recoveries shall be deemed to be received upon the receipt of the applicable appraisal of the consideration received by Ambac Assurance.

Similarly, within five business dates after a surplus note payment (other than in connection with the Rehabilitation Exit Transactions), Ambac Assurance shall deposit an amount based on the percentage of surplus notes paid applied to the outstanding balance of the Tier 2 Notes to a collateral account.

(i) receipt of representation and warranty subrogation recoveries in excess of $ 1,600 ("Tier 2 Net Proceeds") and (ii) payment of principal or interest on AAC surplus notes.

Promptly, and in any event within five business days after the receipt (whether directly or indirectly) of Tier 2 Net Proceeds, AAC shall deposit an amount equal to the Tier 2 Net Proceeds to a collateral account, provided, that any non-cash representation and warranty subrogation recoveries shall be deemed to be received upon the receipt of the applicable appraisal of the consideration received by AAC.

Similarly, within five business dates after a surplus note payment (other than in connection with the Rehabilitation Exit Transactions), AAC shall deposit an amount based on the percentage of surplus notes paid applied to the outstanding balance of the Tier 2 Notes to a collateral account.

In both cases, the amount deposited shall not be in excess of the amount required to redeem all outstanding Tier 2 Notes.

Also, such amounts shall be used to initiate a redemption on the initial call

| Ambac Financial Group, Inc.

116 2019 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

date for the Tier 2 Notes or, if the initial call date has occurred, promptly following the receipt of the Tier 2 Net Proceeds or surplus note payment.

Also, such amounts shall be used to initiate a redemption on the initial call date for the Tier 2 Notes or, if the initial call date has occurred, promptly following the receipt of the Tier 2 Net Proceeds or surplus note payment.

The Tier 2 Notes may also be redeemed, in whole or in part, at the option of Ambac Assurance.

5 unchanged sentences

Ambac UK Debt

The Ambac UK debt, issued in connection with the Ballantyne commutation on June 18, 2019 has a par value of $ 41 at December 31, 2019 , and a legal maturity of May 2, 2036.

The Ambac UK debt, issued in connection with the Ballantyne commutation on June 18, 2019, has a par value of $ 41 and $ 41 at December 31, 2020 and 2019, and a legal maturity of May 2, 2036.

Interest on the Ambac UK debt is at an annual rate of 0.00 %.

1 unchanged sentence

The discount on the debt is currently being accreted into income using the effective interest method at an imputed interest rate of 7.4 %.

| Ambac Financial Group, Inc.

125 2020 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Variable Interest Entities, Long-term Debt

The variable interest entity notes were issued by consolidated VIEs.

Ambac is the primary beneficiary of the VIEs as a result of providing financial guarantees on certain of the variable interest obligations.

Ambac is the primary beneficiary of the VIEs as a result of providing financial guarantees on certain of the VIEs obligations.

Consequently, Ambac has consolidated these variable interest entity notes and all other assets and liabilities of the VIEs.

2 unchanged sentences

The total unpaid principal amount of outstanding long-term debt associated with VIEs consolidated as a result of the financial guarantee provided by Ambac was $ 3,927 and $ 3,990 as of December 31, 2020 and 2019, respectively.

As of December 31, 2019 and 2018 , the ranges of final maturity dates of the outstanding long-term debt associated with these VIEs were December 2025 to August 2054 as of December 31, 2019 , and September 2019 to December 2047 as of December 31, 2018 .

As of December 31, 2019 and 2018 , the interest rates on these VIEs’ long-term debt ranged from 0.00 % to 7.93 % and from 1.36 % to 7.93 % , respectively.

As of December 31, 2020 and 2019, the ranges of final maturity dates of the outstanding long-term debt associated with these VIEs were December 2025 to August 2054 and December 2025 to August 2054, respectively.

As of December 31, 2020 and 2019, the interest rates on these VIEs’ long-term debt ranged from 0.00 % to 7.93 % in both years.

respectively.

Aggregated annual maturities of VIE long-term debt following December 31, 2020 are:

1 unchanged sentence

AFG files a consolidated Federal income tax return with its subsidiaries.

Ambac also files separate or combined income tax returns in various states, local and foreign jurisdictions.

The following are the major jurisdictions in which Ambac operates and the earliest tax years subject to examination:

AFG and its subsidiaries also file separate or combined income tax returns in various states, local and foreign jurisdictions.

The following are the major jurisdictions in which Ambac and its subsidiaries operate and the earliest tax years subject to examination:

Jurisdiction Tax Year

United States 2010

4 unchanged sentences

and foreign components of pre-tax income (loss) were as follows:

2020 2019 2018

$ ( 441 ) $ ( 174 ) $ 264

Foreign 1 ( 9 ) 8

Total $ ( 440 ) $ ( 183 ) $ 273

Provision (Benefit) for Income Taxes

T he components of the provision (benefit) for income taxes were as follows:

2020 2019 2018

Current taxes

$ — $ — $ ( 2 )

state and local

1 unchanged sentence

Deferred taxes

( 10 ) ( 1 ) 5

Total deferred taxes

$ ( 10 ) $ ( 1 ) $ 5

Provision for income taxes

| Ambac Financial Group, Inc.

117 2019 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

$ ( 3 ) $ 32 $ 5

The total effect of income taxes on net income and stockholders’ equity for the years ended December 31, 2020, 2019 and 2018 is as follows:

2020 2019 2018

Total income taxes charged to net income

$ ( 3 ) $ 32 $ 5

Income taxes charged (credited) to stockholders’ equity:

2 unchanged sentences

Valuation allowance to equity

( 3 ) ( 23 ) ( 9 )

Total charged to stockholders’ equity:

Total effect of income taxes

$ ( 1 ) $ 24 $ 8

| Ambac Financial Group, Inc.

126 2020 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Reconciliation of U.S.

2 unchanged sentences

The following is a reconciliation of these differences:

Year Ended December 31,

Tax on income from continuing operations at statutory rate

2020 2019 2018

Year Ended December 31, Amount % Amount % Amount %

Tax on income (loss) at statutory rate $ ( 92 ) 21.0 % $ ( 38 ) 21.0 % $ 57 21.0 %

Changes in expected tax resulting from:

4 unchanged sentences

Change in Tax Law — — % — — % ( 2 ) ( 0.7 ) %

Tax expense on income from continuing operations

Other, net — — % ( 2 ) 1.3 % 1 0.4 %

Tax expense on income (loss) $ ( 3 ) 0.7 % $ 32 ( 17.7 ) % $ 5 2.0 %

Unrecognized Tax Positions

A reconciliation of the beginning and ending amounts of material unrecognized tax benefits for 2020, 2019 and 2018 is as follows:

2020 2019 2018

Balance, beginning of period

2 unchanged sentences

Balance, end of period

Included in these balances at December 31, 2019 , 2018 and 2017 are $ 0 , $ 0 and $ 0 , respectively, of unrecognized tax benefits that, if recognized, would affect the effective tax rate.

During the years ended December 31, 2019 , 2018 and 2017 , Ambac recognized interest of approximately $ 0 , $ 0 and $ 0 , respectively.

Ambac had approximately $ 0 , $ 0 and $ 0 , for the payment of interest accrued at December 31, 2019 , 2018 and 2017 , respectively.

| Ambac Financial Group, Inc.

118 2019 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Deferred Income Taxes

The tax effects of temporary differences that give rise to significant portions of the deferred tax liabilities and deferred tax assets at December 31, 2020 and 2019, are presented below:

December 31, 2020 2019

Deferred tax liabilities:

Insurance intangible $ 78 $ 90

Variable interest entities

Unearned premiums and credit fees 32 42

Investments 22 32

Variable interest entities 13 12

Total deferred tax liabilities 152 183

2 unchanged sentences

Loss reserves 218 148

Debentures 22 29

Compensation 9 7

Subtotal deferred tax assets 1,019 927

3 unchanged sentences

In accordance with the Income Tax Topic of the ASC, a valuation allowance is recognized if, based on the weight of available evidence, it is more-likely-than-not that some, or all, of the deferred tax asset will not be realized.

With respect to Ambac's domestic subsidiaries subject to U.S.

tax, as a result of the risks and uncertainties associated with future operating results, management believes it is more likely than not that the Company will not generate sufficient taxable income to recover the deferred tax asset and therefore maintains a full valuation allowance.

As a result of the risks and uncertainties associated with future operating results, management believes it is more likely than not that the Company will not generate sufficient U.S.

federal, state and/or local taxable income to recover the deferred tax operating assets and therefore maintains a full valuation allowance.

The remaining net deferred tax liability of $ 24 is attributable to Ambac U.K.

Pursuant to the intercompany tax sharing agreement, to the extent Ambac Assurance generates taxable income after September 30, 2011, which is offset with "Allocated NOLs" of $ 3,650 , it is obligated to make payments (“Tolling Payments”), subject to certain credits, to AFG in accordance with the following NOL usage table, where the “Applicable Percentage” is applied to the aggregate amount of federal income tax liability that would have been paid if the Allocated NOLs were not available.

Pursuant to the Closing Agreement between Ambac and the Internal Revenue Service ("IRS"), the IRS will receive 12.5 % of Tier C and 17.5 % of Tier D payments, if made.

NOL Usage Table

Allocated NOLs

Any net operating loss carryforwards ("NOLs") generated by Ambac Assurance after September 30, 2011, are utilized prior to any Allocated NOLs for which Tolling Payments will be due.

Through December 31, 2018 , Ambac Assurance generated cumulative taxable income of $ 1,508 , utilizing all post September 30, 2011, NOLs.

For the year ended December 31, 2019 , Ambac Assurance generated an NOL of $ 143 , that will need to be utilized before any new Tolling Payments will be generated.

Of the credits available to offset the first $ 5 of payments due under each of the NOL usage Tiers A, B, and C, Ambac Assurance has fully utilized the combined $ 10 of Tier A and Tier B credits.

Through December 31, 2019 , Ambac Assurance utilized all of the $ 479 Tier A NOL and $ 1,029 of the $ 1,057 Tier B NOL resulting in Tolling Payments, net of applicable credits, of $ 147 , of which $ 119 was paid to AFG through December 31, 2019 .

In May 2018 AFG executed a waiver under the intercompany tax sharing agreement pursuant to which Ambac Assurance was relieved of the requirement to make $ 28 payment by June 1, 2018.

AFG has also agreed to continue to defer the Tolling Payment for the use of net operating losses by Ambac Assurance until such time as OCI consent to the payment.

Ambac's tax positions are subject to review by the OCI, which may lead to the adoption of positions that reduce the amount of Tolling Payments otherwise available to AFG.

As of December 31, 2019 , Ambac had U.S.

federal net operating loss tax carryforwards of approximately $ 3,535 , which, if not utilized, will begin expiring in 2029 , and will fully expire in 2040 .

The remaining balance of the NOL allocated to Ambac Assurance was $ 2,285 and Ambac was $ 1,250 .

In December 2020, AFG and certain subsidiaries and affiliates amended their existing tax sharing agreement (the "Third TSA Amendment").

Under the Third TSA Amendment, AAC and AFG agreed to reallocate $ 210 of net operating loss carry-forwards (“NOLs”) from AAC to AFG and to eliminate AAC's requirement to make future payments based on its utilization of NOLs ("tolling payments") for any taxable year beginning on or after January 1, 2019.

In connection with the Third TSA Amendment, AAC paid to AFG approximately $ 28 of accrued tolling payments based on NOLs used by AAC in 2017.

The Third TSA Amendment did not affect the NOL tolling payments AAC would be required to make in connection with the 2013 Closing Agreement between Ambac and the United States Internal Revenue Service, which could amount to as much as $ 8 .

As of December 31, 2020, the Company has $ 3,639 of NOLs, which if not utilized will begin expiring in 2029, and will fully expire in 2041.

EMPLOYMENT BENEFIT PLANS

Postretirement Health Care and Other Benefits

Ambac provides postretirement and postemployment / severance benefits, including health and life benefits for certain employees who meet certain age and service requirements.

Ambac provides postretirement and postemployment / severance benefits, including health and life benefits for certain employees who meet predefined age and service requirements.

None of the plans are currently funded.

Postretirement and postemployment benefits expenses, including severance benefits paid, were $ 3 , $ 1 and $ 5 for the years ended December 31, 2019, 2018 and 2017 , respectively.

Effective August 1, 2005, new employees were not eligible for postretirement benefits.

The current postretirement benefit requires retirees to purchase their own medical insurance policy with a portion of their premium being reimbursed by Ambac.

The unfunded accumulated postretirement benefit obligation was $ 8 as of December 31, 2019 .

The assumed health care cost trend rates range from 5.3 % in 2020 , decreasing ratably to 4.5 % in 2028 .

Increasing the assumed health care cost trend rate by one

Postretirement and postemployment benefits expense, including severance benefits paid, were $ 1 , $ 3 and $ 1 for the years ended December 31, 2020, 2019 and 2018, respectively.

| Ambac Financial Group, Inc.

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(Dollar Amounts in Millions, Except Share Amounts)

percentage point in each future year would increase the accumulated postretirement benefit obligation at December 31, 2019 , by less than a million dollars and the 2019 benefit expense by less than a million dollars .

Decreasing the assumed health care cost trend rate by one percentage point in each future year would decrease the accumulated postretirement benefit obligation at December 31, 2019 by less than a million dollars and the 2019 benefit expense by less than a million dollars .

Effective August 1, 2005, new employees were not eligible for postretirement benefits.

The current postretirement benefit requires retirees to purchase their own medical insurance policy with a portion of their premium being reimbursed by Ambac.

The unfunded accumulated postretirement benefit obligation was $ 10 as of December 31, 2020.

The assumed health care cost trend rates range from 5.2 % in 2021, decreasing ratably to 4.5 % in 2030.

The following table sets forth projected benefit payments from Ambac’s postretirement plan over the next ten years for current retirees:

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Savings Incentive Plan

Substantially all employees of Ambac Assurance are covered by a defined contribution plan (the “Savings Incentive Plan”).

Ambac Assurance makes employer matching contributions equal 100 % of the employees’ contributions, up to 3 % of such participants’ compensation, as defined in the plan, plus 50 % of contributions up to an additional 2 % of compensation, subject to limits set by the Internal Revenue Code.

Substantially all employees of AAC are covered by a defined contribution plan (the “Savings Incentive Plan”).

AAC makes employer matching contributions equal to 100 % of the employees’ contributions, up to 3 % of such participants’ compensation, as defined in the plan, plus 50 % of contributions up to an additional 2 % of compensation, subject to limits set by the Internal Revenue Code.

The total cost of the Savings Incentive Plan was $ 1 , $ 1 and $ 1 for the years December 31, 2020, 2019 and 2018, respectively.

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Annual decisions with regard to incentive compensation are generally made in the first quarter of each year and are based on Company performance and individual and business unit performance of the previous year.

In addition to the stock based awards discussed below, Ambac's incentive compensation includes cash payments which may consist of annual awards under the STIP, deferred payments that vest over two years or other performance based cash awards.

For all employees, an allocation of incentive compensation is made between STIP and LTIP awards.

Employees, directors and consultants of Ambac are eligible to participate in Ambac’s 2013 Incentive Compensation Plan (“2013 Plan”) subject to the discretion of the compensation committee of Ambac’s Board of Directors.

The 2013 Plan provides for incentives and rewards that are valued or determined by reference to Ambac common stock as currently traded on the New York Stock Exchange.

There are 4,000,000 shares of Ambac’s common stock authorized for awards under the 2013 Plan of which 1,383,489 shares are available for future grant as of December 31, 2019 .

Shares available for future grant are reduced by the maximum number of shares that could be issued pursuant to granted performance awards.

The number of shares available for future issuance considering the target number of shares instead of the maximum number of shares related to performance awards is 2,079,181 .

In March 2014, Ambac developed the LTIP as a sub-plan of the 2013 Plan.

The LTIP is intended to be an annual program that allows for both cash and equity performance awards to certain US employees.

In 2015, Ambac UK 's Board of Directors adopted a long term incentive plan which provides cash based performance awards to Ambac UK employees.

Cash based compensation expense related to performance awards granted to Ambac UK employees was $ 5 , $ 1 and $ 2 for the years ended December 31, 2019, 2018 and 2017 , respectively.

Employees, directors and consultants of Ambac are eligible to participate in Ambac’s 2020 Incentive Compensation Plan (“2020 Plan”), which is the successor plan to the 2013 Incentive Compensation Plan ("2013 Plan"), subject to the discretion of the compensation committee of Ambac’s Board of Directors.

The 2020 Plan and 2013 Plan each provide for incentives and rewards that are valued or determined by reference to Ambac common stock as currently traded on the New York Stock Exchange.

Beginning with the June 2, 2020, effective date (the "Effective Date") of the 2020 Plan, all new awards are granted under the 2020 Plan and may not be granted under the 2013 Plan.

However, the terms and conditions of the 2013 Plan continue to govern outstanding awards granted under the 2013 Plan.

There are 1,475,000 and 4,000,000 shares of Ambac's common stock authorized for issuance that can be awarded under the 2020 Plan and 2013 Plan, respectively.

Awards may also be made under the 2020 Plan with respect to the shares that, as of the Effective Date, remained available for grant under the 2013 Plan.

In addition, shares subject to outstanding awards granted under the 2013 Plan as of the Effective Date that subsequently terminate by expiration or forfeiture, cancellation, or otherwise without the issuance of such shares will become available for awards under the 2020 Plan.

Of the total shares authorized for issuance pursuant to the 2020 Plan and 2013 Plan, 2,096,292 shares are available for future grant as of December 31, 2020.

Shares available for future grant are reduced by the maximum number of shares that could be issued pursuant to outstanding performance awards.

The number of shares available for future grant considering the target number of shares instead of the maximum number of shares related to performance awards is 3,058,603 .

The amount of stock-based compensation expense and corresponding after-tax expense are as follows:

2020 2019 2018

Stock options

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Total stock-based compensation

$ 11 $ 12 $ 12

Total stock-based compensation (after-tax)

Represents expense related to performance stock unit portion of performance awards.

Certain performance awards are in the form of cash.

Cash based compensation expense related to performance awards granted to US employees was $ 0 , $ 1 and $ 2 for the years ended December 31, 2019, 2018 and 2017 , respectively.

A performance award issued to Ambac's former Chief Executive Officer in the form of performance stock units was expensed during 2018.

| Ambac Financial Group, Inc.

120 2019 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

$ 11 $ 12 $ 12

Stock Options

Stock options were awarded in 2013 to directors that had an expiry term of seven years from the grant date, subject to earlier expiration upon the recipient's departure from the Company.

The Company intends to use Treasury shares first and then, if necessary, issue new shares to satisfy stock option exercises.

A summary of stock option activity for 2020 is as follows:

Shares Weighted

Price Aggregate

Value Weighted

Outstanding at beginning of period 16,667 $ 20.63

Forfeited or expired

( 16,667 ) 20.63

Outstanding at end of period

All stock options granted were fully vested as of December 31, 2019 .

Total unrecognized compensation costs related to unvested stock options granted were $ 0 as of December 31, 2019 .

— $ — $ — 0.00

| Ambac Financial Group, Inc.

128 2020 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

No stock options were exercised during the years ended December 31, 2020, 2019 and 2018, respectively.

Restricted Stock Units (“RSUs”)

RSUs have been awarded to certain employees for a portion of their STIP compensation, LTIP compensation and special awards for exceptional performance.

Generally, the STIP and special awards vest upon grant, but settlement is deferred (other than for employment tax withholdings) into two equal installments generally on the first and second anniversary date of the grant.

The LTIP awards generally vest in equal installments over a three year period.

Such vesting is expressly conditioned upon the respective employees continued service with Ambac through the applicable vesting date.

RSUs are awarded annually to directors and vest on the last day of April of the following year.

RSUs have been awarded to certain employees for a portion of their STIP compensation, LTIP compensation, sign-on, special awards for exceptional performance.

RSUs have also been awarded to consultants for meeting certain contractual performance goals.

The previously issued STIP awards vested upon grant, but settlement was deferred (other than for employment tax withholdings) into two equal installments generally on the first and second anniversary date of the grant.

The LTIP, sign-on and special awards generally vest in equal installments over a two to three year period.

Awards granted to consultants vest on the second year anniversary of date of grant.

Such vesting is expressly conditioned upon the respective employees or non-employees continued service with Ambac through the applicable vesting date, although vesting is accelerated for terminations due to death, disability, eligible retirement, or involuntary termination by the Ambac other than for cause.

RSUs have been awarded annually to directors and vest on the last day of April of the following year.

These RSUs will not settle until the respective director’s termination from the board of directors or, if earlier, upon a change in control.

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Upon termination (other than for cause), the unvested RSUs shall partially vest as of the date of such termination in an amount equal to the number of then outstanding unvested RSUs multiplied by a fraction, the numerator of which shall be the number of calendar days which have lapsed since the grant date and the denominator of which shall be the total number of calendar days of the original vesting period.

As of December 31, 2019 , 702,579 RSUs remained outstanding, of which (i) 248,942 units required future service as a condition to the delivery of the underlying shares of common stock and (ii)

453,637 units do not require future service and are deferred for future settlement.

As of December 31, 2020, 773,657 RSUs remained outstanding, of which (i) 345,302 units required future service as a condition to the delivery of the underlying shares of common stock and (ii) 428,355 units do not require future service and are deferred for future settlement.

As of December 31, 2019, 702,579 RSUs remained outstanding, of which (i) 248,942 units required future service as a condition to the delivery of the underlying shares of common stock, and (ii) 453,637 units did not require future service and were deferred for future settlement.

A summary of RSU activity for 2020 is as follows:

Weighted Average

Shares Weighted Average

Outstanding at beginning of period 702,579 $ 18.19

Granted 297,517 17.36

Delivered or returned to plan (1)

( 224,829 ) 17.59

Forfeited ( 1,610 ) 19.19

Outstanding at end of period 773,657 $ 18.04

When restricted stock unit awards issued by Ambac become taxable compensation to employees, shares may be withheld to cover the employee’s withholding taxes.

(1) When restricted stock unit awards issued by Ambac become taxable compensation to employees, shares may be withheld to

cover the employee’s withholding taxes.

For the year ended December 31, 2020, Ambac purchased 85,654 of shares from employees that settled restricted stock units to meet the required tax withholdings.

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Performance Stock Awards ("PSUs")

Performance awards granted vest in 3 years and actual awards will be based on performance at both AFG and Ambac Assurance.

Performance awards granted vest in 3 years and awards have components relative to performance at AFG and AAC.

Actual awards can payout 0 % to 220 % of the number of units granted.

Under currently outstanding award agreements, performance will be evaluated as follows:

AFG performance will be evaluated relative to cumulative earnings before interest, taxes, depreciation and amortization over the vesting period (exclusive of Ambac Assurance and its subsidiaries' earnings), which is intended to reward participants for generating pre-tax income.

Ambac Assurance performance will be evaluated according to changes in Ambac Assurance's assets relative to its insurance and financial obligations, which is intended to reward participants for increases in the relative value of Ambac Assurance, as well as reductions in watch list and adversely classified credits, which is intended to reward participants for de-risking the insured portfolio.

• AFG performance will be evaluated relative to cumulative earnings before interest, taxes, depreciation and amortization over the vesting period (exclusive of AAC and its subsidiaries' earnings), which is intended to reward participants for generating pre-tax income.

• AAC performance will be evaluated according to:

(i) changes in AAC's assets relative to its insurance and financial obligations, which is intended to reward participants for increases in the relative value of AAC, and (ii) reductions in watch list and adversely classified credits, which is intended to reward participants for de-risking the financial guarantee insured portfolio.

• In 2019, a relative Total Shareholder Return modifier was added as an additional metric with respect to the LTIP award payouts.

The modifier will cause the payout at the end of the performance period to be increased or decreased by 10 % if AFG's stock performance compared to a peer group is at or

The modifier will cause the payout at the end of the performance period to be increased or decreased by 10 % if AFG's stock performance compared to a peer group is at or above the 75 th percentile or at or below the 25 th percentile, respectively .

These performance metrics are subject to change by the Compensation Committee of the Board of Directors as Ambac's business evolves.

Other than voluntary termination or involuntary termination for cause, and provided that the participant meets certain minimum service requirements, the performance awards are subject to either partial or accelerated vesting.

The current performance awards shall be settled within 75 days after the end of the performance period, including those with partial or accelerated vesting.

| Ambac Financial Group, Inc.

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(Dollar Amounts in Millions, Except Share Amounts)

above the 75 th percentile or at or below the 25 th percentile, respectively .

These performance metrics are subject to change by the Compensation Committee of the Board of Directors as Ambac's business evolves.

The current performance awards shall be settled within 75 days after the end of the performance period, including those with partial or accelerated vesting.

In 2015, a performance award was granted to the former Chief Executive Officer.

This award vested on February 12, 2018, upon the emergence of the Segregated Account from rehabilitation.

A summary of PSU activity for 2020 is as follows:

Weighted Average

Shares Weighted Average

Outstanding at beginning of period 650,212 $ 17.98

331,184 19.99

Delivered (2)

( 184,896 ) 22.35

Forfeited ( 6,071 ) 18.00

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Ambac adopted the New Lease Standard, as defined and further described in Note 2.

Basis of Presentation and Significant Accounting Policies .

Basis of Presentation and Significant Accounting Policies on January 1, 2019.

Ambac is the lessee and lessor for certain lease agreements further described below.

Lessee information

Ambac is the lessee in operating leases of corporate offices, a data center and equipment.

Our leases, in effect at December 31, 2019 , have remaining lease terms ranging from less than 1 year to 11 years.

Our data center lease has an automatic renewal of one-year

unless either party elects to terminate by providing 120 days notice prior to the renewal.

Ambac is the lessee in operating leases for corporate offices, a data center and equipment.

Ambac's purchase of Xchange resulted in additional office and equipment leases.

Leases in effect at December 31, 2020, have remaining lease terms ranging from less than 1 year to 9 years.

Our data center lease has an automatic renewal of one-year unless either party elects to terminate by providing 120 days notice prior to the renewal.

This renewal feature is not recognized in the lease liability or right-of-use asset as it is not reasonably certain we will elect to renew.

An office lease related to Xchange includes a one-time early termination provision.

The lease liability and right-of-use asset on this lease consider its full term as Ambac does not reasonably expect to exercise the early termination option.

No other leases contain extension or termination provisions.

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Total lease cost $ 4 $ 7

Ambac is required to make variable lease payments under certain leases which primarily related to variable costs of the lessor.

Such costs include taxes, insurance, maintenance and electricity and are less than a million dollars for the year ended December 31, 2019.

Ambac is required to make variable lease payments under certain leases which primarily relates to variable costs of the lessor, such as taxes, insurance, maintenance and electricity.

Supplemental information related to leases is as follows:

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Supplemental balance sheet information related to leases is as follows:

December 31, 2020 2019

Operating leases:

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Weighted average remaining lease term:

Operating leases

Operating leases 8.7 years 9.9 years

Weighted average discount rate:

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Operating lease right of use assets and operating lease liabilities are included in Other assets and Other liabilities, respectively, on the consolidated balance sheet.

Future undiscounted lease payments, gross of sublease receipts, to be made are as follows:

As of December 31, 2020 Operating Leases

Thereafter 18

Total lease payments 41

imputed interest ( 11 )

| Ambac Financial Group, Inc.

4 unchanged sentences

(Dollar Amounts in Millions, Except Share Amounts)

Future undiscounted lease payments, gross of sublease receipts, to be made are as follows:

As of December 31, 2019

Operating Leases

Total lease payments

imputed interest

Lessor information

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Future undiscounted lease payments to be received are as follows:

As of December 31, 2019

Operating Leases

As of December 31, 2020 Operating Leases

Total lease receipts $ 11

5 unchanged sentences

17-cv-04992-BLF, filed August 28, 2017).

Plaintiffs, the corporate developers of various military housing projects, filed an amended complaint on October 27, 2017 against Ambac Assurance, a former employee of Ambac Assurance, and certain unaffiliated persons and entities, asserting claims for (i) violation of 18 U.S.C §§ 1962(c) and 1962(d) (civil Racketeer Influenced and Corrupt Organizations Act (“RICO”) and conspiracy to commit civil RICO), (ii) breach of fiduciary duty, (iii) aiding and abetting breach of fiduciary duty, (iv) fraudulent misrepresentation, (v) fraudulent concealment and (vi) conspiracy to commit fraud.

The claims relate to bonds and debt certificates (insured by Ambac Assurance) that were issued to finance the renovation and construction of housing at certain military bases.

Plaintiffs, the corporate developers of various military housing projects, filed an amended complaint on October 27, 2017 against AAC, a former employee of AAC, and certain unaffiliated persons and entities, asserting claims for (i) violation of 18 U.S.C §§ 1962(c) and 1962(d) (civil Racketeer Influenced and Corrupt Organizations Act (“RICO”) and conspiracy to commit civil RICO), (ii) breach of fiduciary duty, (iii) aiding and abetting breach of fiduciary duty, (iv) fraudulent misrepresentation, (v) fraudulent concealment and (vi) conspiracy to commit fraud.

The claims relate to bonds and debt certificates (insured by AAC) that were issued to finance the renovation and construction of housing at certain military bases.

Plaintiffs allege that defendants secretly conspired to overcharge plaintiffs for the financing of the projects and directed the excess profits to themselves.

Plaintiffs allege defendants generated these excess profits by supposedly charging inflated interest rates, manipulating “shadow ratings,” charging unnecessary fees, and hiding evidence of their alleged wrongdoing.

Plaintiffs seek,

among other things, compensatory damages, disgorgement of profits and fees, punitive damages, trebled damages and attorneys’ fees.

Plaintiffs seek, among other things, compensatory damages, disgorgement of profits and fees, punitive damages, trebled damages and attorneys’ fees.

Ambac and the other defendants filed motions to dismiss the amended complaint on November 13, 2017.

On July 17, 2018, the court granted Ambac Assurance’s and the other defendants’ motion to dismiss the first amended complaint without prejudice.

On July 17, 2018, the court granted AAC’s and the other defendants’ motion to dismiss the first amended complaint without prejudice.

On December 17, 2018, Plaintiffs filed a second amended complaint.

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On October 10, 2019, the defendants filed motions in the SDNY to vacate or reconsider the decision by the Northern District of California on the defendants’ motion to dismiss.

On October 24, 2019, plaintiffs filed their brief in opposition to defendants' motions to vacate or reconsider, and on October 31, 2019, defendants filed their reply briefs in further support of their motions.

On October 24,

2019, plaintiffs filed their brief in opposition to defendants' motions to vacate or reconsider, and on October 31, 2019, defendants filed their reply briefs in further support of their motions.

On November 20, 2019, the court ordered that the defendants’ answers to the second amended complaint would be due seven days after the court issues a decision on their motions.

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19-ap-00291, filed May 2, 2019).

On May 2, 2019, the Financial Oversight and Management Board for Puerto Rico (the "Oversight Board"), together with the Official Committee of Unsecured Creditors for the Commonwealth (the "Committee") filed an adversary proceeding against certain parties that filed proofs of claim on account of general obligation bonds issued by the Commonwealth of Puerto Rico, including Ambac Assurance.

The complaint seeks declarations that the general obligation bonds are unsecured obligations and, in the alternative, seeks to avoid any security interests that holders of such bonds may have.

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on July 24, 2019, the District Court referred this matter to mediation and ordered it stayed during the pendency of such mediation.

Ambac Assurance filed a statement of position and reservation of rights on February 5, 2020;

AAC filed a statement of position and reservation of rights on February 5, 2020;

certain other defendants filed motions to dismiss on this same date.

On February 9, 2020, the Oversight Board announced that it intends to file, and to seek to confirm, an amended plan of adjustment (the “Amended POA”).

The team of mediators designated in the Commonwealth’s restructuring cases (the “Mediation Team”) has recommended this case be stayed while the Oversight Board attempts to confirm the Amended POA.

The District Court has not yet ruled on this recommendation.

On March 10, 2020, the District Court ordered that this case remain stayed while the Oversight Board attempts to confirm the Amended POA.

Financial Oversight and Management Board for Puerto Rico, et al.

2 unchanged sentences

19-ap-00363, filed May 20, 2019).

On May 20, 2019, the Oversight Board, together with the Committee, as Plaintiffs, filed an adversary proceeding against certain parties that filed proofs of claim on account of bonds issued by the Puerto Rico Highways and Transportation Authority ("PRHTA"), including Ambac Assurance.

The complaint seeks declarations that the PRHTA bonds are only secured by revenues

| Ambac Financial Group, Inc.

123 2019 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

on deposit with the PRHTA Fiscal Agent and that PRHTA bondholders have no security interest in any other property of PRHTA or the Commonwealth, and in the alternative, to the extent such other security interests exist, the complaint seeks to avoid other security interests that holders of PRHTA bonds may have.

The complaint seeks declarations that the PRHTA bonds are only secured by revenues on deposit with the PRHTA Fiscal Agent and that PRHTA bondholders have no security interest in any other property of PRHTA or the Commonwealth, and in the alternative, to the extent such other security interests exist, the complaint seeks to avoid other security interests that holders of PRHTA bonds may have.

On June 14, 2019, at the request of the Plaintiffs, the District Court stayed the case until September 1, 2019 as to all defendants;

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20-ap-00003, filed Jan.

Pursuant to an order of the District Court setting out an agreed schedule for litigation submitted by the Mediation Team, on January 16, 2020, the Oversight Board filed an adversary proceeding against monoline insurers insuring bonds issued by the Puerto Rico Infrastructure Financing Authority (“PRIFA”) and the PRIFA bond trustee, all of which Defendants filed proofs of claim against the Commonwealth relating to PRIFA bonds.

| Ambac Financial Group, Inc.

131 2020 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Pursuant to an order of the District Court setting out an agreed schedule for litigation submitted by the team of mediators designated in the Commonwealth’s restructuring cases (the “Mediation Team“), on January 16, 2020, the Oversight Board filed an adversary proceeding against monoline insurers insuring bonds issued by the Puerto Rico Infrastructure Financing Authority (“PRIFA”) and the PRIFA bond trustee, all of which Defendants filed proofs of claim against the Commonwealth relating to PRIFA bonds.

The complaint seeks to disallow Defendants’ proofs of claim against the Commonwealth in their entirety, including for lack of secured status.

Briefing on motions to dismiss is expected to conclude on May 13, 2020, and a hearing is scheduled for June 2020.

On February 27, 2020, defendants filed motions to dismiss.

On March 10, 2020, the District Court stayed the motions to dismiss and authorized the Oversight Board to move for summary judgment, which motion defendants opposed.

Oral argument on the motion for summary judgment was held on September 23, 2020.

On January 20, 2021, the District Court granted defendants’ request for deferral of the adjudication of the summary judgment motion until defendants have the opportunity to conduct certain discovery.

Discovery is ongoing.

Financial Oversight and Management Board for Puerto Rico v.

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The complaint seeks to disallow Defendants’ proofs of claim against the Commonwealth in their entirety, including for lack of secured status.

Briefing on motions to dismiss is expected to conclude on May 13, 2020, and a hearing is scheduled for June 2020.

On February 27, 2020, defendants filed motions to dismiss.

On March 10, 2020, the District Court stayed the motions to dismiss and authorized the Oversight Board to move for summary judgment, which motion defendants opposed.

Oral argument on the motion for summary judgment was held on September 23, 2020.

Discovery is ongoing.

Financial Oversight and Management Board for Puerto Rico v.

4 unchanged sentences

The complaint seeks to disallow Defendants’ proofs of claim against the Commonwealth in their entirety, including for lack of secured status.

Briefing on motions to dismiss is expected to conclude on May 13, 2020, and a hearing is scheduled for June 2020.

On February 27, 2020, defendants filed motions to dismiss.

On March 10, 2020, the District Court stayed the motions to dismiss and authorized the Oversight Board to move for summary judgment, which motion defendants opposed.

Oral argument on the motion for summary judgment

was held on September 23, 2020.

Discovery is ongoing.

Financial Oversight and Management Board for Puerto Rico v.

4 unchanged sentences

The complaint seeks to disallow portions of Defendants’ proofs of claim against the PRHTA, including for lack of secured status.

Briefing on motions to dismiss is expected to conclude on May 13, 2020, and a hearing is scheduled for June 2020.

On March 10, 2020, the District Court stayed this case.

NC Residuals Owners Trust, et al.

2 unchanged sentences

2019-0880, filed Nov.

On November 1, 2019, Ambac Assurance became aware of a new declaratory judgment action filed by certain residual equity interest holders (“NC Owners” or “Plaintiffs”) in fourteen National Collegiate Student Loan Trusts (the “Trusts”) against Wilmington Trust Company, the Owner Trustee for the Trusts;

On November 1, 2019, AAC became aware of a new declaratory judgment action filed by certain residual equity interest holders (“NC Owners” or “Plaintiffs”) in fourteen National Collegiate Student Loan Trusts (the “Trusts”) against Wilmington Trust Company, the Owner Trustee for the Trusts;

Bank National Association, the Indenture Trustee;

GSS Data Services, Inc., the Administrator;

and Ambac Assurance.

Plaintiffs seek a number of judicial determinations, including that the Owner Trustee and Administrator are required to follow the NC Owners’ issuer orders and cause the invoices of certain retained professional advisors to be paid from the assets of the Trusts as Owner Trustee expenses and Administrator expenses.

Plaintiffs also seek a declaration that, with respect to the Trusts, the Owner Trustee does not owe fiduciary or extracontractual duties to any party except the NC Owners.

Finally, Plaintiffs request their costs and attorney’s fees incurred in connection with this action.

Through this action, Plaintiffs seek a number of judicial determinations.

On January 21, 2020, the presiding Vice Chancellor entered an order consolidating the action with previously filed litigation relating to the Trusts.

On January 31, 2020, Plaintiffs filed an amended complaint containing an expanded list of requested judicial determinations.

On February 13, 2020, Ambac Assurance, the Owner Trustee, the Indenture Trustee, and other parties filed declaratory judgment counterclaims.

Ambac Assurance’s estimates of projected losses for RMBS transactions consider, among other things, the RMBS transactions’ payment waterfall structure, including the application of interest and principal payments and recoveries, and depend in part on our interpretations of contracts and other bases of our legal rights.

On February 13, 2020, AAC, the Owner Trustee, the Indenture Trustee, and other parties filed declaratory judgment counterclaims.

Several parties, including Plaintiffs and Ambac Assurance, filed motions for judgment on the pleadings in support of their requested judicial determinations.

On August 27, 2020, the Vice Chancellor issued an opinion addressing all of the pending motions for judgment on the pleadings, which granted certain of the parties’ requested judicial determinations and denied others.

He deferred judgment on still other declarations pending further factual development.

Trial on the unresolved contractual interpretation issues has been scheduled for September 13–17, 2021.

AAC’s estimates of projected losses for RMBS transactions consider, among other things, the RMBS transactions’ payment waterfall structure, including the application of interest and principal payments and recoveries, and depend in part on our interpretations of contracts and other bases of our legal rights.

From time to time, bond trustees and other transaction participants have employed different contractual interpretations and have commenced, or threatened to commence, litigation to resolve these differences.

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It is possible that there could be unfavorable outcomes in this or other disputes or proceedings and that our interpretations may prove to be incorrect, which could lead to changes to our estimate of loss reserves.

Ambac Assurance has periodically received various regulatory inquiries and requests for information with respect to investigations and inquiries that such regulators are conducting.

Ambac Assurance has complied with all such inquiries and requests for information.

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AAC has periodically received various regulatory inquiries and requests for information with respect to investigations and inquiries that such regulators are conducting.

AAC has complied with all such inquiries and requests for information.

The Company is involved from time to time in various routine legal proceedings, including proceedings related to litigation with present or former employees.

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3:16-cv-01037, filed January 7, 2016).

Ambac Assurance, along with co-plaintiffs Assured Guaranty Corp.

and Assured Guaranty Municipal Corp., filed a complaint for declaratory and injunctive relief to protect its rights against the illegal clawback of certain revenue by the Commonwealth of Puerto Rico.

AAC, along with co-plaintiffs Assured Guaranty Corp.

and Assured Guaranty

Municipal Corp., filed a complaint for declaratory and injunctive relief to protect its rights against the illegal clawback of certain revenue by the Commonwealth of Puerto Rico.

Defendants moved to dismiss on January 29, 2016.

On October 4, 2016, the court denied the Defendants’ motions to dismiss.

On October 14, 2016, Defendants filed a Notice of Automatic Stay, asserting that

Plaintiffs’ claims have been rendered moot and further asserting that the case was automatically stayed under section 405 of the Puerto Rico Oversight, Management and Economic Stability Act ("PROMESA").

On October 14, 2016, Defendants filed a Notice of Automatic Stay, asserting that Plaintiffs’ claims have been rendered moot and further asserting that the case was automatically stayed under section 405 of the Puerto Rico Oversight, Management and Economic Stability Act ("PROMESA").

On October 28, 2016, Plaintiffs informed the court that neither party was currently challenging the stay, and expressly reserved their right to seek to lift the stay at any time.

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16-cv-1893, filed May 10, 2016).

Ambac Assurance filed a complaint against the Puerto Rico Highways and Transportation Authority ("PRHTA") on May 10, 2016, alleging breach of fiduciary duty and breach of contract in connection with PRHTA’s extension of an existing toll road concession agreement.

AAC filed a complaint against the Puerto Rico Highways and Transportation Authority ("PRHTA") on May 10, 2016, alleging breach of fiduciary duty and breach of contract in connection with PRHTA’s extension of an existing toll road concession agreement.

The complaint alleges that it was inappropriate for PRHTA to enter into the extension agreement in its current state of financial distress because PRHTA has no control over, and is unlikely to receive, the proceeds of the transaction.

Ambac Assurance also filed related motions seeking the appointment of a provisional receiver for PRHTA and expedited discovery.

AAC also filed related motions seeking the appointment of a provisional receiver for PRHTA and expedited discovery.

On May 21, 2017, the Oversight Board filed a petition to adjust PRHTA’s debts under Title III of PROMESA, resulting in an automatic stay of litigation against PRHTA.

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16-2374, filed July 20, 2016).

On October 7, 2016, certain General Obligation bondholder Plaintiffs in an action to which Ambac Assurance was not then a party filed a motion for leave to amend an existing complaint, adding the Puerto Rico Sales Tax Financing Corporation ("COFINA"), COFINA’s executive director, and the trustee for the COFINA bonds as Defendants, and asserting numerous claims that challenged the legal validity of the COFINA structure and seek injunctive relief requiring the sales and use tax proceeds securing COFINA’s bonds to be transferred to the Puerto Rico Treasury.

On February 17, 2017, the court permitted Ambac Assurance to intervene.

On October 7, 2016, certain General Obligation bondholder Plaintiffs in an action to which AAC was not then a party filed a motion for leave to amend an existing complaint, adding the Puerto Rico Sales Tax Financing Corporation ("COFINA"), COFINA’s executive director, and the trustee for the COFINA bonds as Defendants, and asserting numerous claims that challenged the legal validity of the COFINA structure and seek injunctive relief requiring the sales and use tax proceeds securing COFINA’s bonds to be transferred to the Puerto Rico Treasury.

On February 17, 2017, the court permitted AAC to intervene.

On May 3, 2017, a petition under Title III of PROMESA was filed on behalf of the Commonwealth of Puerto Rico, and on May 5, 2017, a petition under Title III of PROMESA was filed on behalf of COFINA, resulting in an automatic stay of litigation against the Commonwealth and COFINA (respectively).

On May 17, 2017, the court issued an order staying this case until further order of the court.

On October 19, 2018, the Oversight Board filed (i) a disclosure statement and a plan of adjustment for COFINA (the “COFINA Plan”) in the COFINA Title III case incorporating a resolution of the dispute between the Commonwealth and COFINA concerning entitlement to sales and use taxes (the “Commonwealth-COFINA Dispute”), and (ii) a motion under Bankruptcy Rule 9019 in the Commonwealth Title III case for approval of the settlement of the Commonwealth-COFINA Dispute (the “9019 Motion”).

On February 4, 2019 the District Court granted the 9019 Motion and confirmed the COFINA Plan, which resolves the dispute in this case.

On October 19, 2018, the Oversight Board filed (i) a disclosure statement and a plan of adjustment for COFINA (the “COFINA Plan”) in the COFINA Title III case incorporating a resolution

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COFINA Plan became effective on February 12, 2019.

of the dispute between the Commonwealth and COFINA concerning entitlement to sales and use taxes (the “Commonwealth-COFINA Dispute”), and (ii) a motion under Bankruptcy Rule 9019 in the Commonwealth Title III case for approval of the settlement of the Commonwealth-COFINA Dispute (the “9019 Motion”).

On February 4, 2019 the District Court granted the 9019 Motion and confirmed the COFINA Plan, which resolves the dispute in this case.

The COFINA Plan became effective on February 12, 2019.

Following confirmation of the COFINA Plan, several parties filed notices of appeal of the District Court’s confirmation order.

On April 12, 2019, the Oversight Board and the Puerto Rico Fiscal Agency and Financial Advisory Authority ("AAFAF") moved to dismiss these appeals as equitably moot because the COFINA Plan has been consummated.

On August 7 and October 4, 2019, the First Circuit denied the motions to dismiss, but without prejudice to reconsideration of the mootness issue by the panel that decides the appeals.

Briefing on the merits of the appeals is ongoing before the First Circuit.

On February 8, 2021, the First Circuit dismissed the appeals of the confirmation order.

Ambac Assurance Corporation v.

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17-1567, filed May 2, 2017).

On May 2, 2017, Ambac Assurance filed a complaint seeking a declaration that the Commonwealth’s Fiscal and Economic Growth Plan (the "FEGP") and a recently enacted statute called the “Fiscal Plan Compliance Law” are unconstitutional and unlawful because they violate the Contracts, Takings, and Due Process Clauses of the U.S.

On May 2, 2017, AAC filed a complaint seeking a declaration that the Commonwealth’s Fiscal and Economic Growth Plan (the "FEGP") and a recently enacted statute called the “Fiscal Plan Compliance Law” are unconstitutional and unlawful because they violate the Contracts, Takings, and Due Process Clauses of the U.S.

Constitution, are preempted by PROMESA, and are unlawful transfers of property from COFINA to the Commonwealth in violation of PROMESA.

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Following confirmation of the COFINA Plan, several parties filed notices of appeal of the District Court’s confirmation order.

Ambac Assurance anticipates that this case will be voluntarily dismissed given the effectiveness of the COFINA Plan.

AAC anticipates that this case will be voluntarily dismissed given the effectiveness of the COFINA Plan.

Ambac Assurance Corporation v.

2 unchanged sentences

17-1568, filed May 2, 2017).

On May 2, 2017, Ambac Assurance filed a complaint alleging that various moratorium laws and executive orders enacted by the Commonwealth to claw back funds from PRIFA, PRHTA, and PRCCDA bonds violate the Contracts, Takings, and Due Process Clauses of the U.S.

On May 2, 2017, AAC filed a complaint alleging that various moratorium laws and executive orders enacted by the Commonwealth to claw back funds from PRIFA, PRHTA, and PRCCDA bonds violate the Contracts, Takings, and Due Process Clauses of the U.S.

Constitution, are preempted by PROMESA, and unlawfully transfer PRHTA, PRCCDA, and PRIFA property to the Commonwealth.

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17-809, filed May 2, 2017).

On May 2, 2017, Ambac Assurance filed a complaint against the U.S.

On May 2, 2017, AAC filed a

complaint against the U.S.

Department of Treasury and Steven Mnuchin, in his official capacity as Secretary of the Treasury, alleging that Puerto Rico’s ongoing diversion of rum taxes from PRIFA violates the Contracts, Takings, and Due Process Clauses of the U.S.

Constitution, and seeking an equitable lien on all rum taxes possessed by the U.S.

Treasury, and an injunction preventing

their transfer to the Commonwealth.

Treasury, and an injunction preventing their transfer to the Commonwealth.

On May 3, 2017, a petition under Title III of PROMESA was filed on behalf of the Commonwealth of Puerto Rico.

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1:17-cv-03804, filed May 2, 2017).

On May 2, 2017, Ambac Assurance filed a complaint in New York State Supreme Court, New York County, against the trustee for the COFINA bonds, Bank of New York Mellon ("BNY"), alleging breach of fiduciary, contractual, and other duties for failing to adequately and appropriately protect the holders of certain Ambac Assurance-insured senior COFINA bonds.

On May 2, 2017, AAC filed a complaint in New York State Supreme Court, New York County, against the trustee for the COFINA bonds, Bank of New York Mellon ("BNY"), alleging breach of fiduciary, contractual, and other duties for failing to adequately and appropriately protect the holders of certain AAC-insured senior COFINA bonds.

On May 19, 2017, BNY filed a notice of removal of this action from New York state court to the United States District Court for the Southern District of New York.

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On April 12, 2019, the Oversight Board and AAFAF moved to dismiss these appeals as equitably moot because the COFINA Plan has been consummated.

On August 7 and October 4, 2019, the First Circuit denied the motions to dismiss, but without prejudice to reconsideration of the mootness issue by the panel that decides the appeals.

Briefing on the merits of the appeals is ongoing before the First Circuit.

On February 8, 2021, the First Circuit dismissed the appeals of the confirmation order.

Bank of New York Mellon v.

2 unchanged sentences

1:17-ap-00133, filed May 16, 2017).

On May 16, 2017, BNY filed an interpleader action styled as an adversary proceeding against COFINA and certain creditors of COFINA, including Ambac Assurance, that have made competing claims of entitlement to funds held by BNY in order to determine the parties’ respective entitlements to the funds.

On May 16, 2017, BNY filed an interpleader action styled as an adversary proceeding against COFINA and certain creditors of COFINA, including AAC, that have made competing claims of entitlement to funds held by BNY in order to determine the parties’ respective entitlements to the funds.

BNY also sought a release of liability in association with the COFINA funds in its possession..

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On October 19, 2018, the Oversight Board filed (i) a disclosure statement and the COFINA Plan in the COFINA Title III case incorporating a resolution of the Commonwealth-COFINA Dispute, and (ii) the 9019 Motion in the Commonwealth Title III case for approval of the settlement of the Commonwealth-COFINA Dispute.

On February 4, 2019 the District Court granted the 9019 Motion and confirmed the COFINA Plan, which resolves the dispute in this case.

The COFINA Plan became effective on February 12, 2019.

Following confirmation of the COFINA Plan, several parties filed notices of appeal of the District Court’s confirmation order to the First Circuit

On February 4, 2019 the District Court

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Court of Appeals.

granted the 9019 Motion and confirmed the COFINA Plan, which resolves the dispute in this case.

The COFINA Plan became effective on February 12, 2019.

Following confirmation of the COFINA Plan, several parties filed notices of appeal of the District Court’s confirmation order to the First Circuit Court of Appeals.

On February 20, 2019, on the joint motion of BNY and COFINA, the District Court dismissed this case with prejudice.

On April 12, 2019, the Oversight Board and AAFAF moved to dismiss these appeals as equitably moot because the COFINA Plan has been consummated.

On August 7 and October 4, 2019, the First Circuit denied the motions to dismiss, but without prejudice to reconsideration of the mootness issue by the panel that decides the appeals.

Briefing on the merits of the appeals is ongoing before the First Circuit.

Ambac Assurance Corporation v.

Puerto Rico, et al.

(United States District Court, District of Puerto Rico, No.

1:17-ap-00159, filed June 8, 2017).

On June 8, 2017, Ambac Assurance filed an adversary complaint in the Commonwealth’s Title III case against the Commonwealth, PRHTA, the Oversight Board, AAFAF, and other Commonwealth government officers.

Ambac Assurance challenges the Commonwealth’s clawback of funds from the PRIFA, PRHTA, and PRCCDA bonds under the Contracts, Takings, and Due Process Clauses of the U.S.

Constitution and under PROMESA.

The complaint further seeks a declaration that revenues pledged to the PRHTA bonds are “special revenues” under Sections 922 and 928 of the Bankruptcy Code, and an injunction compelling Defendants to remit the pledged special revenues to PRHTA for payment of the PRHTA bonds.

On July 7, 2017, Ambac Assurance filed an amended complaint that added an additional claim for relief:

a declaration that the funds held in the PRHTA reserve accounts are property of the PRHTA bondholders.

On July 28, 2017, Defendants moved to dismiss Ambac Assurance’s complaint, which Ambac Assurance opposed.

On February 27, 2018, the District Court granted Defendants’ motion to dismiss.

On March 9, 2018, Ambac Assurance appealed this ruling to the First Circuit Court of Appeals.

On June 24, 2019, the First Circuit affirmed the District Court's dismissal of Ambac Assurance's claims for relief on the grounds that PROMESA deprives courts of jurisdiction to review the Oversight Board's certification determinations, and that PROMESA prohibits the Title III court from interfering with the political or governmental powers of the Commonwealth or the Commonwealth's property or revenues.

On January 13, 2020, the Supreme Court of the United States denied Ambac Assurance’s petition for certiorari.

On February 8, 2021, the First Circuit dismissed the appeals of the confirmation order.

Official Committee of Unsecured Creditors v.

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1:17-ap-00257, filed September 8, 2017) (the Commonwealth-COFINA Dispute).

On August 10, 2017, the court approved a stipulation between the Oversight Board, the Commonwealth, COFINA, and certain creditor parties, including Ambac Assurance, to resolve the Commonwealth-COFINA Dispute regarding entitlement to sales and use taxes.

On August 10, 2017, the court approved a stipulation between the Oversight Board, the Commonwealth, COFINA, and certain creditor parties, including AAC, to resolve the Commonwealth-COFINA Dispute regarding entitlement to sales and use taxes.

The stipulation provided that separate agents for COFINA and the Commonwealth would litigate the dispute while preserving the ability of interested parties, to participate in the litigation.

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The Commonwealth Agent filed a revised complaint on October 25, 2017, making technical corrections to the original complaint.

Ambac Assurance made a motion to intervene in this action, which the court granted on November 21, 2017.

AAC made a motion to intervene in this action, which the court granted on November 21, 2017.

The Commonwealth Agent filed an amended complaint on January 16, 2018, largely re-stating its original causes of action to fall within the parameters of the dispute set by the court.

After extensive motion practice, on September

27, 2018, the court terminated competing summary judgment motions without prejudice in light of a pending agreement in principle between the Commonwealth Agent and COFINA Agent.

After extensive motion practice, on September 27, 2018, the court terminated competing summary judgment motions without prejudice in light of a pending agreement in principle between the Commonwealth Agent and COFINA Agent.

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On April 12, 2019, the Oversight Board and AAFAF moved to dismiss these appeals as equitably moot because the COFINA Plan has been consummated.

On August 7 and October 4, 2019, the First Circuit denied the motions to dismiss, but without prejudice to reconsideration of the mootness issue by the panel that decides the appeals.

Briefing on the merits of the appeals is ongoing before the First Circuit.

On February 8, 2021, the First Circuit dismissed the appeals of the confirmation order.

Financial Oversight and Management Board for Puerto Rico v.

1 unchanged sentence

1:18-ap-00149, filed December 21, 2018).

On December 21, 2018, the Oversight Board, together with the Committee, as Plaintiffs, filed a complaint against the Puerto Rico Public Buildings Authority (“PBA”) seeking declaratory judgment that the leases between PBA and its lessees-many of whom are agencies and instrumentalities of the Commonwealth-are “disguised financings,” not true leases, and therefore should not be afforded administrative expense priority under the Bankruptcy Code.

On March 12, 2019, Ambac Assurance and other interested parties were permitted to intervene in order to argue that the PBA leases are valid leases, and are entitled to administrative expense treatment under the Bankruptcy Code.

Certain intervenor-defendants filed counterclaims for declarations to this effect, and a motion for judgment on the pleadings.

On December 21, 2018, the Oversight Board, together with the Committee, as Plaintiffs, filed a complaint against the

Puerto Rico Public Buildings Authority (“PBA”) seeking declaratory judgment that the leases between PBA and its lessees-many of whom are agencies and instrumentalities of the Commonwealth-are “disguised financings,” not true leases, and therefore should not be afforded administrative expense priority under the Bankruptcy Code.

On March 12, 2019, AAC and other interested parties were permitted to intervene in order to argue that the PBA leases are valid leases, and are entitled to administrative expense treatment under the Bankruptcy Code.

On June 16, 2019, the Oversight Board announced that it had entered into a plan support agreement ("PSA") with certain general obligation and PBA bondholders that includes a proposed resolution of claim objections to and issues surrounding both general obligation and PBA bonds, including a proposed settlement of this adversary proceeding.

On June 27, 2019, the Oversight Board moved to stay this adversary proceeding while it pursues confirmation of the plan contemplated in the PSA.

On July 9, 2019, Ambac Assurance objected to the motion to stay.

On July 24, 2019, the District Court referred this matter to mediation and ordered it stayed during the pendency of such mediation.

On September 27, 2019, the Oversight Board filed a joint plan of adjustment and disclosure statement for the Commonwealth, PBA, and the Employees’ Retirement System for Puerto Rico.

On February 9, 2020, the Oversight Board executed a new plan support agreement with additional creditors (the “New PSA”) and announced that it intends to file, and seek to confirm, the Amended POA.

The Mediation Team has recommended this case continue to be stayed while the

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Oversight Board attempts to confirm the Amended POA.

The District Court has not yet ruled on this recommendation.

On February 9, 2020, the Oversight Board executed a new plan support agreement with additional creditors (the “Amended PSA”) and announced that it intends to file, and seek to confirm, the Amended POA.

On March 10, 2020, the District Court ordered that this case be stayed while the Oversight Board attempts to confirm the Amended POA.

In re Financial Oversight and Management Board for Puerto Rico (United States District Court, District of Puerto Rico, No.

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4784, filed January 14, 2019) (“GO Bond Claim Objection Procedures”).

On January 14, 2019, the Oversight Board and the Committee filed an omnibus claim objection in the Commonwealth’s Title III case challenging claims arising from certain general obligation bonds issued by the Commonwealth in 2012 and 2014 totaling approximately $6 billion, none of which are held or insured by Ambac Assurance.

The court subsequently ordered certain consolidated procedures permitting parties in interest an opportunity to participate in litigation of the objection.

On April 11, 2019, Ambac Assurance filed a notice of participation in support of the objection, advancing the argument, among other things, that the PBA leases are true leases, but the associated debt nonetheless should be included in the Commonwealth’s debt ceiling calculation such that the 2012 and 2014 general obligation bond issuances are null and void and claims arising therefrom should be disallowed.

On April 11, 2019, AAC filed a notice of participation in support of the objection, advancing the argument, among other things, that the PBA leases are true leases, but the associated debt nonetheless should be included in the Commonwealth’s debt ceiling calculation such that the 2012 and 2014 general obligation bond issuances are null and void and claims arising therefrom should be disallowed.

On June 16, 2019, the Oversight Board announced that it had entered into a PSA with certain general obligation and PBA bondholders that includes a proposed resolution of claim objections to and issues surrounding both general obligation and PBA bonds, including a proposed settlement of this omnibus claim objection.

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On July 24, 2019, the District Court referred this matter to mediation and ordered it stayed during the pendency of such mediation.

On February 5, 2020, certain parties filed motions to dismiss the claim objection.

On February 9, 2020, the Oversight Board executed the New PSA and announced that it intends to file, and seek to confirm, the Amended POA.

On February 5, 2020,

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certain parties filed motions to dismiss the claim objection.

On February 9, 2020, the Oversight Board executed the Amended PSA and announced that it intends to file, and seek to confirm, the Amended POA.

Additional motions to dismiss were filed on February 19, 2020.

The Mediation Team has recommended this matter be stayed while the Oversight Board attempts to confirm the Amended POA.

The District Court has not yet ruled on this recommendation.

On March 10, 2020, the District Court ordered that this matter remain stayed while the Oversight Board attempts to confirm the Amended POA.

On July 19, 2020, the Committee filed a motion to lift the stay on this claim objection in light of the changes to the fiscal plan and likely changes to the Commonwealth plan of adjustment in light of COVID-19.

On September 1, 2020, AAC filed a partial joinder to the Committee’s motion.

On September 17, 2020, the District Court denied the Committee’s motion without prejudice, indicating that the stay likely would remain in place until at least March 2021.

On October 1, 2020, the Committee moved the District Court to reconsider its denial of the Committee’s motion to lift the stay in light of materials released by the parties to the Amended PSA that the Committee argued demonstrate a lack of agreement between those parties.

On October 5, 2020, the District Court denied the Committee’s motion for reconsideration.

On October 16, 2020, the Committee appealed to the First Circuit the District Court’s order denying the Committee’s motion to lift the stay on its claim objection.

On February 22, 2021, the First Circuit dismissed the appeal.

In re Financial Oversight and Management Board for Puerto Rico (United States District Court, District of Puerto Rico, No.

1:17-bk-03283), Ambac Assurance Corporation’s Motion to Strike Certain Provisions of the Plan Support Agreement By and Among the Financial Oversight and Management Board for Puerto Rico, Certain GO Holders, and Certain PBA Holders (Dkt.

8020, filed July 16, 2019) (“Ambac Assurance Motion to Strike PSA”).

13573, filed July 7, 2020) (“Amended Motion to Strike PSA”).

On July 16, 2019, Ambac Assurance filed a motion to strike certain provisions of the PSA that it believes violate PROMESA, including the potential payment of a breakup fee to creditors who have supported the PSA.

On July 24, 2019, the District Court referred this matter to mediation and ordered it

stayed during the pendency of such mediation.

On February 9, 2020, the Oversight Board executed the New PSA.

The Mediation Team has recommended the Ambac Assurance Motion to Strike PSA be denied without prejudice due to the Commonwealth’s entry into the New PSA.

The District Court has not yet ruled on this recommendation.

On July 16, 2019, AAC filed a motion to strike certain provisions of the PSA that it believes violate PROMESA, including the potential payment of a breakup fee to creditors who have supported the PSA (Dkt.

8020) (Original Motion to Strike PSA).

On February 9, 2020, the Oversight Board executed the Amended PSA and on March 10, 2020, the District Court denied the Original Motion to Strike PSA without prejudice given the execution of the Amended PSA.

On July 7, 2020, AAC filed the Amended Motion to Strike PSA seeking similar relief with respect to the Amended PSA.

Briefing on the Amended Motion to Strike PSA concluded on October 20, 2020, and the District Court has taken the matter on submission.

On February 23, 2021, the Oversight Board announced that it entered into a further revised PSA (the “Second Amended PSA”), and that all parties to the Amended PSA had jointly terminated the Amended PSA.

In re Financial Oversight and Management Board for Puerto Rico (United States District Court, District of Puerto Rico, No.

1 unchanged sentence

7176, filed May 30, 2019) (“PRIFA Stay Motion”).

On May 30, 2019, Ambac Assurance filed a motion seeking an order that the automatic stay does not apply to certain lawsuits Ambac Assurance seeks to bring or to continue relating to bonds issued by PRIFA, or, in the alternative, for relief from the automatic stay to pursue such lawsuits or for adequate protection of Ambac Assurance's collateral.

On May 30, 2019, AAC filed a motion seeking an order that the automatic stay does not apply to certain

lawsuits AAC seeks to bring or to continue relating to bonds issued by PRIFA, or, in the alternative, for relief from the automatic stay to pursue such lawsuits or for adequate protection of AAC's collateral.

On July 24, 2019, the District Court referred this matter to mediation and ordered it stayed during the pendency of such mediation.

Pursuant to an order of the District Court setting out an agreed schedule for litigation submitted by the Mediation Team, on January 16, 2020, Ambac Assurance, together with Assured Guaranty Corporation, Assured Guaranty Municipal Corporation, and Financial Guaranty Insurance Company filed a motion to amend the PRIFA Stay Motion in order to allow the PRIFA bond trustee to join the amended motion and to allow movants to address recent, controlling precedent from the First Circuit.

The District Court granted the motion to amend on January 31, 2020, and Ambac Assurance filed the amended motion the same day.

A preliminary hearing on the amended motion is scheduled for April 2, 2020.

On January 31, 2020, the District Court granted a motion filed by AAC, together with Assured Guaranty Corporation, Assured Guaranty Municipal Corporation, and Financial Guaranty Insurance Company to amend the PRIFA Stay Motion in order to allow the PRIFA bond trustee to join the amended motion and to allow movants to address recent, controlling precedent from the First Circuit, and AAC filed the amended motion the same day.

On July 2, 2020, the District Court denied the motion to lift the stay on certain grounds.

Briefing regarding additional grounds on which AAC and other movants seek stay relief concluded on August 5, 2020;

on September 9, 2020, the District Court denied the motion to lift the stay on the additional grounds.

On September 23, 2020, AAC and the other movants appealed this decision to the First Circuit.

Oral argument was held before the First Circuit on February 4, 2021.

In re Financial Oversight and Management Board for Puerto Rico (United States District Court, District of Puerto Rico, No.

1 unchanged sentence

10102, filed January 16, 2020) (“PRHTA Stay Motion”).

Pursuant to an order of the District Court setting out an agreed schedule for litigation submitted by the Mediation Team, on January 16, 2020, Ambac Assurance, together with Assured Guaranty Corp., Assured Municipal Corp., National Public Finance Guarantee Corporation, and Financial Guaranty Insurance Company filed a motion seeking an order that the automatic stay does not apply to movants’ enforcement of the application of pledged revenues to the PRHTA bonds or the enforcement of movants’ liens on revenues pledged to such bonds, or, in the alternative, for adequate protection of movants’ interests in the revenues pledged to PRHTA bonds.

A preliminary hearing on the motion is scheduled for April 2, 2020.

Pursuant to an order of the District Court setting out an agreed schedule for litigation submitted by the Mediation Team, on January 16, 2020, AAC, together with Assured Guaranty Corp., Assured Municipal Corp., National Public Finance Guarantee Corporation, and Financial Guaranty Insurance Company filed a motion seeking an order that the automatic stay does not apply to movants’ enforcement of the application of pledged revenues to the PRHTA bonds or the enforcement of movants’ liens on revenues pledged to such bonds, or, in the alternative, for adequate protection of movants’ interests in the revenues pledged to PRHTA bonds.

On July 2, 2020, the District Court denied the motion to lift the stay on certain grounds.

Briefing regarding additional grounds on which AAC and other movants seek stay relief concluded on August 5, 2020;

on September 9, 2020, the District Court denied the motion to lift the stay on the additional grounds.

On September 23, 2020, AAC and the other movants appealed this decision to the First Circuit.

Oral argument was held before the First Circuit on February 4, 2021.

In re Financial Oversight and Management Board for Puerto Rico (United States District Court, District of Puerto Rico, No.

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10104, filed January 16, 2020) (“PRCCDA Stay Motion”).

Pursuant to an order of the District Court setting

Pursuant to an order of the District Court setting out an agreed schedule for litigation submitted by the Mediation Team, on January 16, 2020, AAC, together with Financial Guaranty Insurance Company, Assured Guaranty Corp., Assured Municipal Corp.,

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out an agreed schedule for litigation submitted by the Mediation Team, on January 16, 2020, Ambac Assurance, together with Financial Guaranty Insurance Company, Assured Guaranty Corp., Assured Municipal Corp., and the PRCCDA bond trustee, filed a motion seeking an order either (i) that the automatic stay does not apply to movants’ enforcement of their rights to revenues pledged to PRCCDA bonds by bringing an enforcement action against PRCCDA;

and the PRCCDA bond trustee, filed a motion seeking an order either (i) that the automatic stay does not apply to movants’ enforcement of their rights to revenues pledged to PRCCDA bonds by bringing an enforcement action against PRCCDA;

or, in the alternative, (ii) lifting the automatic stay to enable movants to pursue an enforcement action against PRCCDA;

or, in the further alternative, (iii) ordering adequate protection of movants’ interests in the PRCCDA pledged to PRCCDA bonds.

A preliminary hearing on the motion is scheduled for April 2, 2020.

On July 2, 2020, the District Court denied the motion to lift the stay on certain grounds, but found that the movants had stated a colorable claim that a certain account was the “Transfer Account” on which movants hold a lien.

Briefing regarding additional grounds on which AAC and other movants seek stay relief concluded on August 5, 2020;

on September 9, 2020, the District Court denied the motion to lift the stay on the additional grounds, and found that a final determination on issues related to the identity of the Transfer Account would be made in the decision on the motions for summary judgment issued in the CCDA-related adversary proceeding, No.

Ambac Assurance Corporation v.

Merrill Lynch, Pierce, Fenner & Smith Incorporated, Goldman Sachs & Co.

LLC, Citigroup Global Markets Inc., J.P.

Merrill Lynch, Pierce, Fenner & Smith Incorporated, Citigroup Global Markets Inc., Goldman Sachs & Co.

Morgan Securities LLC, Morgan Stanley & Co.

LLC, Samuel A.

LLC, Oriental Financial Services LLC;

Popular Securities LLC;

Raymond James & Associates, Inc., RBC Capital Markets LLC;

Ramirez & Co.

Inc., Raymond James & Associates, Inc., and UBS Financial Services Inc.

(Commonwealth of Puerto Rico, Court of First Instance, San Juan Superior Court, Case No.

CV-000248923, filed February 19, 2020).

On February 19, 2020, Ambac Assurance filed a complaint in the Commonwealth of Puerto Rico, Court of First Instance, San Juan Superior Court, against certain underwriters of Ambac-insured bonds issued by the Puerto Rico Infrastructure Financing Authority (“PRIFA”) and the Puerto Rico Convention Center District Authority (“PRCCDA”), with causes of action under the Puerto Rico civil law doctrines of actos proprios and Unilateral Declaration of Will.

Ambac Assurance alleges defendants engaged in inequitable conduct in underwriting Ambac-insured bonds issued by PRIFA and PRCCDA, including failing to investigate and adequately disclose material information in the official statements for the bonds that defendants provided to Ambac Assurance regarding systemic deficiencies in the Commonwealth’s financial reporting.

Ambac Assurance seeks damages in compensation for claims paid by Ambac Assurance on its financial guaranty insurance policies insuring such bonds, pre-judgment and post-judgment interest, and attorneys’ fees.

Inc., Santander Securities LLC;

UBS Financial Services Inc.;

and UBS Securities LLC (Commonwealth of Puerto Rico, Court of First Instance, San Juan Superior Court, Case No.

SJ-2020-CV-01505, filed February 19, 2020).

On February 19, 2020, AAC filed a complaint in the Commonwealth of Puerto Rico, Court of First Instance, San Juan Superior Court, against certain underwriters of Ambac-insured bonds issued by PRIFA and PRCCDA, with causes of action under the Puerto Rico civil law doctrines of actos proprios and Unilateral Declaration of Will.

AAC alleges defendants engaged in inequitable conduct in underwriting Ambac-insured bonds issued by PRIFA and PRCCDA, including failing to investigate and adequately disclose material information in the official statements for the bonds that defendants provided to AAC regarding systemic deficiencies in the Commonwealth’s financial reporting.

AAC seeks damages in compensation for claims paid by AAC on its financial guaranty insurance policies insuring such bonds, pre-judgment and post-judgment interest, and attorneys’ fees.

On March 20, 2020, Defendants removed this case to the Title III Court.

On April 20, 2020, AAC moved to remand the case back to the Court of First Instance.

On July 29, 2020, the District Court granted AAC’s motion to remand the case to the Commonwealth court.

AAC filed an amended complaint in the Commonwealth court on October 28, 2020.

In the Amended Complaint, AAC added claims on bonds issued by the Commonwealth, PBA and PRHTA and added defendants that had underwritten these bonds.

Defendants filed motions to dismiss on December 8 and 14, 2020;

AAC filed its opposition to the motions to dismiss on January 15, 2021.

Defendants filed replies to their motions to dismiss on February 5 and 16, 2021.

AAC will file its sur-reply to the motion to dismiss on March 5, 2021.

Ambac Assurance Corporation v.

Autopistas Metropolitanas de Puerto Rico, LLC (United States District Court for the District of Puerto Rico) Case No.

Autopistas Metropolitanas de Puerto Rico, LLC (United States District Court, District of

Puerto Rico, No.

3:20-cv-01094, filed February 19, 2020).

On February 19, 2020, Ambac Assurance filed a complaint in the U.S.

District Court for the District of Puerto Rico, against Autopistas Metropolitanas de Puerto Rico, LLC (“Metropistas”), which holds a concession from the Puerto Rico Highways and Transportation Authority (“PRHTA”) for two Puerto Rico highways, PR-5 and PR-22, in connection with a 10-year extension of the concession that was entered into in April 2016.

On February 19, 2020, AAC filed a complaint in the U.S.

District Court for the District of Puerto Rico, against Autopistas Metropolitanas de Puerto Rico, LLC (“Metropistas”), which holds a concession from PRHTA for two Puerto Rico highways, PR-5 and PR-22, in connection with a 10-year extension of the concession that was entered into in April 2016.

The complaint includes claims for fraudulent conveyance and unjust enrichment, alleging that the consideration paid by Metropistas for the extension was less than reasonably equivalent value and most of the benefit of such payment was received by the Commonwealth instead of PRHTA.

Ambac Assurance also seeks a declaratory judgment that it has a valid and continuing lien on certain toll revenues that are being collected by Metropistas.

AAC also seeks a declaratory judgment that it has a valid and continuing lien on certain toll revenues that are being collected by Metropistas.

On March 31, 2020, the Oversight Board filed a motion before the Title III Court seeking an order directing Ambac to withdraw its complaint.

On April 20, 2020, the District Court ordered this case stayed pending briefing before the Title III Court on the Oversight Board’s motion to withdraw.

On June 16, 2020, the Title III Court ordered AAC to withdraw its complaint.

AAC withdrew its complaint on June 23, 2020, and noticed an appeal from the Title III Court’s order to withdraw on June 30, 2020.

AAC’s opening appeal brief was filed before the First Circuit on October 19, 2020;

briefing was completed on February 12, 2021.

Oral argument is scheduled to be heard on March 8, 2021.

Ambac Assurance Corporation v.

Financial Oversight and Management Board for Puerto Rico (United States District Court, District of Puerto Rico, No.

3:20-ap-00068, filed May 26, 2020).

On May 26, 2020, AAC filed an adversary complaint before the Title III Court seeking (i) a declaration that titles I, II, and III of PROMESA are unconstitutional because they violate the Bankruptcy Clause of the U.S.

Constitution (which requires all bankruptcy laws to be uniform) and (ii) dismissal of the pending Title III petitions.

On August 17, 2020, the Oversight Board filed a motion to dismiss the complaint;

on August 18, 2020, the Official Committee of Retired Employees of the Commonwealth of Puerto Rico (the “Retiree Committee”) and the Puerto Rico Fiscal Agency and Financial Advisory Authority (“AAFAF”) filed joinders to the motion to dismiss.

The United States filed a motion to dismiss on October 2, 2020.

Oral argument on the motions to dismiss was held on January 12, 2021.

In re Financial Oversight and Management Board for Puerto Rico (United States District Court, District of Puerto Rico, No.

1:17-bk-03283), Urgent Motion for Bridge Order, and Motion for Appointment as Trustees Under 11 U.S.C.

§ 926, of Ambac Assurance Corporation, Assured Guaranty Corp., Assured Guaranty Municipal Corp., Financial Guaranty Insurance Company, and National Public Finance Guarantee Corporation (Dkt.

13708, filed July 17, 2020) (“HTA Trustee Motion”).

On July 17, 2020, AAC, together with Assured Guaranty Corporation, Assured Guaranty Municipal Corporation, and Financial Guaranty Insurance Company, filed a motion seeking appointment as trustees under Section 926 of the Bankruptcy Code to pursue certain avoidance actions on behalf of HTA against the Commonwealth of Puerto Rico.

The HTA Trustee Motion attached a proposed complaint detailing the avoidance claims that movants would pursue.

On August 11, 2020, the District Court denied the HTA Trustee Motion;

on August 24,

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2020, movants noticed an appeal of the denial of the HTA Trustee Motion to the First Circuit.

On September 30, 2020, movants filed a motion with the First Circuit to hold this appeal in abeyance pending the First Circuit’s resolution of the appeal from the District Court’s denial of the HTA Lift-Stay Motion.

On October 13, 2020, the Oversight Board opposed the motion to hold the appeal in abeyance and cross-moved to dismiss the appeal as moot, arguing that the statute of limitations on the avoidance actions movants wish to pursue has expired.

Briefing on both motions concluded on October 27, 2020.

On December 22, 2020, the First Circuit denied the motion to hold the appeal in abeyance, and referred the motion to dismiss to the panel determining the merits of the appeal.

Movants’ opening brief before the First Circuit was filed on February 17, 2021;

briefing is expected to conclude on May 10, 2021.

Student Loans Exposure

1 unchanged sentence

1:17-cv-01323, filed September 18, 2017).

The Consumer Financial Protection Bureau

(“CFPB”) filed a complaint against fifteen National Collegiate Student Loan Trusts, regarding alleged improprieties and deficiencies in servicing practices.

Simultaneous with the filing of its complaint, CFPB also filed a motion for entry of a proposed consent judgment that would grant monetary damages and injunctive relief against the Trusts.

Ambac Assurance guaranteed certain securities issued by three of the Trusts and indirectly insures six other Trusts.

Ambac Assurance filed a motion to intervene in the action on September 20, 2017.

On September 20, 2018, the case was reassigned to a new judge, who invited additional letter submissions from the parties.

Ambac Assurance submitted a letter on September 28, 2018, reiterating its request to intervene in the action.

The CFPB also submitted a letter, which asserted that the court can resolve the outstanding intervention motions on the papers.

In additional submissions, the CFPB and a firm purporting to represent the Defendant Trusts argued that the court should resolve a dispute relating to the payment of counsel fees out of Trust assets, so that the Trusts can secure representation for the case.

On October 19, 2018, the court granted Ambac’s motion to intervene.

On November 29, 2018, following submissions from the parties regarding the CFPB’s motion for entry of the proposed consent judgment and regarding discovery necessary to respond to the motion, the court set a bifurcated discovery and briefing schedule.

Discovery is now complete as to certain threshold issues and will be followed by briefing on the CFPB’s motion to approve the consent judgment.

The Consumer Financial Protection Bureau (“CFPB”) filed a complaint against fifteen National Collegiate Student Loan Trusts, regarding alleged improprieties and deficiencies in servicing practices.

Simultaneous with the filing of its complaint, CFPB also filed a motion to approve a proposed consent judgment that would have granted monetary damages and injunctive relief against the Trusts.

AAC guaranteed certain securities issued by three of the Trusts and indirectly insures six other Trusts.

On September 20, 2017, AAC filed a motion to intervene in the action, which motion was granted on October 19, 2018.

Following discovery and briefing, on May 31, 2020, the District Court denied the CFPB’s motion to approve the proposed consent judgment.

On March 19, 2020, Intervenor Transworld Systems Inc.

filed a motion to dismiss the action for lack of subject matter jurisdiction.

On July 10, 2020, AAC and several other intervenors filed a motion to dismiss the action for lack of subject matter jurisdiction and for failure to state a claim.

Briefing on both motions to dismiss is complete.

Additionally, on July 2, 2020, the CFPB submitted an application for entry of default against the Trusts.

AAC and the Owner Trustee opposed the CFPB’s application, which remains pending.

Nat’l Collegiate Master Student Loan Trust v.

5 unchanged sentences

On October 9, 2017, the court directed the parties to meet and confer to develop a process for selecting an interim Owner Trustee.

Ambac Assurance guaranteed certain securities issued by three of the Trusts and indirectly insures certain securities in six other Trusts.

Ambac Assurance filed a motion to intervene in the action on October 23, 2017, for the limited purpose of being heard regarding the appointment of a successor Owner Trustee and regarding WTC’s contractual commitment and obligation to remain in that role until such appointment is made.

AAC guaranteed certain securities issued by three of the Trusts and indirectly insures certain securities in six other Trusts.

AAC filed a motion to intervene in the action on

October 23, 2017, for the limited purpose of being heard regarding the appointment of a successor Owner Trustee and regarding WTC’s contractual commitment and obligation to remain in that role until such appointment is made.

On October 30, 2017, the court denied without prejudice a stipulation filed by Plaintiffs and WTC purporting to address the Owner Trustee issue, and instructed that all interested parties be given notice and an opportunity to participate in discussions to formulate a process for selecting a successor Owner Trustee.

1 unchanged sentence

On January 12, 2018, Plaintiffs filed a motion for injunctive or declaratory relief requiring WTC, as Owner Trustee, and GSS Data Services, Inc., as Administrator, to resume processing for payment bills submitted by lawyers purporting to act on the Trusts’ behalf.

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AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

on April 3, 2018, the court denied Plaintiffs’ motion without prejudice and on April 16, 2018 entered an order memorializing its oral ruling.

The court also granted Ambac Assurance’s motion to intervene on April 10, 2018 and Ambac Assurance filed its complaint in intervention on April 16, 2018.

On June 15, 2018, the Owner Trustee filed a stipulation and proposed order addressing the selection of a Successor Owner Trustee.

Among other provisions, the stipulation calls for the appointment of a Special Master to adjudicate disputes regarding Owner Instructions, and raises the annual expense caps that apply to the Owner Trustee and Indenture Trustee.

On November 14, 2018, the court issued an order appointing Hon.

as Special Master and granting him authority to resolve non-dispositive disputes among the parties, including disputes concerning instructions to the Owner Trustee.

The order appointing the Special Master also raises the annual expense caps that apply to the Owner Trustee and Indenture Trustee.

On June 21, 2019, the Special Master denied an application by certain residual equity interest holders in the Trusts, which sought to compel the Owner Trustee to appoint certain counsel for the Trusts in CFPB v.

Nat’l Collegiate Master Student Loan Trust (United States District Court, District of Delaware, Case No.

1:17-cv-01323, filed September 18, 2017).

On October 11, 2019, Vice Chancellor Slights issued a decision affirming the Special Master’s ruling.

On January 21, 2020, Vice Chancellor Slights entered an order consolidating the action with later-filed litigation pending in Delaware Chancery Court relating to the Trusts, including a declaratory judgment action in which Ambac Assurance was named as a defendant, NC Residuals Owners Trust, et al.

At a hearing on April 3, 2018, the court denied Plaintiffs’ motion without prejudice and on April 16, 2018 entered an order memorializing its oral ruling.

The court also granted AAC’s motion to intervene on April 10, 2018 and AAC filed its complaint in intervention on April 16, 2018.

On January 21, 2020, Vice Chancellor Slights entered an order consolidating the action with later-filed litigation pending in Delaware Chancery Court relating to the Trusts, including a declaratory judgment action in which AAC was named as a defendant, NC Residuals Owners Trust, et al.

Wilmington Trust Co., et al.

1 unchanged sentence

RMBS Litigation

In connection with Ambac Assurance’s efforts to seek redress for breaches of representations and warranties and fraud related to the information provided by both the underwriters and the sponsors of various transactions and for failure to comply with the obligation by the sponsors to repurchase ineligible loans, Ambac Assurance has filed various lawsuits:

In connection with AAC’s efforts to seek redress for breaches of representations and warranties and fraud related to the information provided by both the underwriters and the sponsors of various transactions and for failure to comply with the obligation by the sponsors to repurchase ineligible loans, AAC has filed various lawsuits:

• Ambac Assurance Corporation and The Segregated Account of Ambac Assurance Corporation v.

2 unchanged sentences

651217/2012, filed April 16, 2012).

Ambac Assurance has asserted claims for breach of contract, fraudulent inducement, indemnification, reimbursement and has requested the repurchase of loans that breach representations and warranties as required under the contracts.

AAC has asserted claims for breach of contract, fraudulent inducement, indemnification, reimbursement and has requested the repurchase of loans that breach representations and warranties as required under the contracts.

On July 18, 2013 the court granted in part and denied in part Defendants’ motion to dismiss (filed on July 13, 2012).

The court dismissed Ambac Assurance’s claims for indemnification and limited Ambac Assurance’s claim for breach of loan-level warranties to the repurchase protocol, but denied dismissal of Ambac Assurance’s other contractual claims and fraudulent inducement claim.

The court dismissed AAC’s claims for indemnification and limited AAC’s claim for breach of loan-level warranties to the repurchase protocol, but denied dismissal of AAC’s other contractual claims and fraudulent inducement claim.

Discovery is ongoing.

4 unchanged sentences

651612/2010, filed on September 28, 2010).

Ambac Assurance’s Second Amended Complaint, filed on May 28, 2013, asserted claims against Countrywide and Bank of America (as successor to Countrywide’s liabilities) for breach of contract, fraudulent inducement, indemnification and reimbursement, and breach of representations and warranties.

Ambac Assurance also requested the repurchase of loans that breach representations and warranties as required under the contracts.

On May 1, 2015, the parties filed motions for partial summary judgment regarding Ambac Assurance’s claims against Countrywide (primary-liability claims) and its secondary-liability claims against Bank of America.

In decisions issued on October 27, 2015, the court granted in part and denied in part the parties’ respective summary judgment motions regarding Ambac Assurance’s claims against Countrywide and granted Ambac Assurance’s motion for partial summary judgment on its secondary-liability claims against Bank of America and denied Bank of America’s motion for summary judgment regarding this claim.

Each party appealed certain aspects of the court’s decisions to the New York Appellate Division, First Department.

On May 16, 2017, the First Department issued rulings in both appeals, reversing a number of rulings that the trial court had made and affirming other rulings.

On June 15, 2017, Ambac Assurance sought leave from the First Department to appeal certain rulings in its May 16, 2017 decision to the Court of Appeals, which the First Department granted on July 25, 2017.

On June 27, 2018, the Court of Appeals denied Ambac Assurance’s appeal and affirmed the rulings of the First Department.

In August and October 2018, Defendants filed pre-trial motions seeking to (1) strike Ambac Assurance’s jury demand for its fraudulent-inducement claim;

(2) strike Ambac Assurance’s jury demand for its successor-liability claim;

(3) sever the trials for Ambac Assurance’s primary- and successor-liability claims;

(4) limit the loans for which Ambac Assurance may seek to recover damages;

(5) preclude Ambac Assurance from using sampling to prove liability or damages for breach of contract;

and (6) dismiss Ambac Assurance’s fraudulent-inducement claim as duplicative of its contract claim.

On December 30, 2018, the court denied all six of these pre-trial motions in their entirety and Defendants appealed.

On September 17, 2019, the First Department issued a decision on Defendants’ appeals, affirming the trial court’s denials of Countrywide's motions:

(1) to strike Ambac Assurance’s jury demand for its fraudulent-inducement claim;

(2) to limit the loans for which Ambac Assurance may seek to recover damages;

(3) to preclude Ambac Assurance from using sampling to prove liability or damages for breach of contract;

and (4) to dismiss Ambac Assurance’s fraudulent-inducement claim as duplicative of its contract claim, but subject to a potential motion by Countrywide to renew.

The First Department modified the trial court’s ruling in the following respects:

(1) granting Bank of America’s motion to strike Ambac

AAC’s Second Amended Complaint, filed on May

| Ambac Financial Group, Inc.

4 unchanged sentences

(Dollar Amounts in Millions, Except Share Amounts)

Assurance’s jury demand for its successor-liability claim;

and (2) granting Defendants’ motion to sever the trials for Ambac Assurance’s primary- and successor-liability claims.

On October 17, 2019, Countrywide filed a motion before the First Department for leave to appeal certain issues to the New York Court of Appeals and for reargument or leave to appeal certain other issues, which Ambac Assurance opposed.

On January 16, 2020, the First Department recalled and vacated its September 17, 2019 decision and order and substituted a new decision and order with the same rulings on all motions subject to appeal, but also expressly affirming the trial court’s ruling denying Countrywide’s motion to strike Ambac Assurance’s jury demand and removing language from the decision concerning Countrywide’s liability for loans that it knew or should have known were in breach.

28, 2013, asserted claims against Countrywide and Bank of America (as successor to Countrywide’s liabilities) for, among other things, breach of contract and fraudulent inducement.

In August and October 2018, Defendants filed various pre-trial motions.

On December 30, 2018, the court denied all of these pre-trial motions in their entirety and Defendants appealed.

On September 17, 2019, the First Department affirmed in part and reversed in part the trial court’s rulings.

On October 17, 2019, Countrywide filed a motion for leave to appeal certain issues to the New York Court of Appeals and for reargument or leave to appeal certain other issues.

On January 16, 2020, the First Department recalled and vacated its September 17, 2019 decision and order and substituted a new decision and order.

On the same date, the First Department denied Countrywide’s motion seeking leave to appeal, without prejudice to seeking such leave from the reissued decision and order.

On January 30, 2020, Countrywide filed a new motion for leave to appeal the First Department’s denial of its motions (1) to limit the loans for which Ambac Assurance may seek to recover damages;

(2) to preclude Ambac Assurance from using sampling to prove liability or damages for breach of contract;

(3) to dismiss Ambac Assurance’s fraudulent-inducement claim as duplicative of its contract claim;

and (4) to strike Ambac Assurance’s jury demand for its fraudulent-inducement claim.

On February 7, 2020, Ambac Assurance filed its opposition to Countrywide’s renewed motion for leave to appeal.

On January 14, 2020, the trial court granted Ambac Assurance’s motion to supplement and amend certain of its expert reports, and expert discovery is ongoing.

Trial is currently scheduled to commence on July 13, 2020, although Countrywide has asked the Court to vacate that trial date .

On January 30, 2020, Countrywide filed a new motion for leave to appeal the First Department’s denial of its motions, which AAC opposed.

On June 11, 2020, the First Department denied Countrywide’s motion for leave to appeal.

On January 14, 2020, the trial court granted AAC’s motion to supplement and amend certain of its expert reports.

After supplemental expert discovery, on August 12, 2020, Countrywide filed a motion to dismiss, or in the alternative for summary judgment on, Ambac’s fraud claim and on December 4, 2020, the Court granted Countrywide’s motion, resulting in dismissal of AAC's fraud claim.

On December 17, 2020, Ambac filed a notice of appeal from this decision.

On February 22, 2021, Ambac filed its opening brief for this appeal.

This appeal remains pending.

Trial of this matter had been scheduled to commence on February 22, 2021, but on December 23, 2020 the Court adjourned the trial due to the COVID-19 pandemic.

A new trial date has not been set.

• Ambac Assurance Corporation and The Segregated Account of Ambac Assurance Corporation v.

3 unchanged sentences

651359/2013, filed on April 15, 2013).

Ambac Assurance has asserted claims for material breach of contract and has requested the repurchase of loans that breach representations and warranties under the contracts.

Ambac Assurance also asserted alter ego claims against Nomura Holding America, Inc.

AAC has asserted claims for material breach of contract and has requested the repurchase of loans that breach representations and warranties under the contracts.

AAC also asserted alter ego claims against Nomura Holding America, Inc.

Defendants filed a motion to dismiss on July 12, 2013.

1 unchanged sentence

On October 31, 2014 defendants filed a motion to strike the amended complaint and on November 10, 2014 also filed a motion to dismiss the fraudulent-inducement claim.

On June 3, 2015, the court denied defendants’ July 2013 motion to dismiss Ambac Assurance’s claim for breaches of representations and warranties, but granted the defendants’ motion to dismiss Ambac Assurance’s claims for breach of the repurchase protocol and for alter ego liability against Nomura Holding.

On December 29, 2016, the court denied Nomura’s motion to strike Ambac Assurance’s amended complaint and its motion to dismiss the fraudulent-inducement claim.

Nomura appealed the June 2015 decision to the extent it denied its motion to dismiss, filing its opening appellate brief on March

On June 3, 2015, the court denied defendants’ July 2013 motion to dismiss AAC’s claim for breaches of representations and warranties, but granted the defendants’ motion to dismiss AAC’s claims for breach of the repurchase protocol and for alter ego liability against Nomura Holding.

On December 29, 2016, the court denied Nomura’s motion to strike AAC’s amended complaint and its motion to dismiss the fraudulent-inducement claim.

Nomura appealed the June 2015 decision to the extent it

denied its motion to dismiss, filing its opening appellate brief on March 23, 2017.

On December 7, 2017, the First Department affirmed the trial court’s June 3, 2015 decision.

4 unchanged sentences

652321/2015, filed on June 30, 2015).

On June 30, 2015, Ambac Assurance and the Segregated Account filed a Summons with Notice in New York Supreme Court (the “2015 New York Action”), asserting claims identical to claims they asserted in a litigation filed on December 30, 2014 in Wisconsin Circuit Court for Dane County, Case No 14 CV 3511 (the “Wisconsin Action”).

Specifically, in each action Ambac Assurance asserted a claim for fraudulent inducement in connection with its issuance of insurance policies relating to five residential mortgage-backed securitizations that are not the subject of Ambac Assurance’s previously filed lawsuit against the same defendant.

On June 30, 2015, AAC and the Segregated Account filed a Summons with Notice in New York Supreme Court (the “2015 New York Action”), asserting claims identical to claims they asserted in a litigation filed on December 30, 2014 in Wisconsin Circuit Court for Dane County, Case No 14 CV 3511 (the “Wisconsin Action”).

Specifically, in each action AAC asserted a claim for fraudulent inducement in connection with its issuance of insurance policies relating to five residential mortgage-backed securitizations that are not the subject of AAC’s previously filed lawsuit against the same defendant.

On July 21, 2015, plaintiffs filed a complaint in the 2015 New York Action and a motion to stay the 2015 New York Action pending appeal and litigation of the Wisconsin Action.

Countrywide opposed plaintiffs’ motion to stay and on August 10, 2015, Countrywide filed a motion to dismiss the complaint.

On September 20, 2016, the court granted Ambac Assurance’s motion to stay and held Countrywide’s motion to dismiss in abeyance pending resolution of the Wisconsin Action.

On September 20, 2016, the court granted AAC’s motion to stay and held Countrywide’s motion to dismiss in abeyance pending resolution of the Wisconsin Action.

Following the dismissal of the Wisconsin Action on March 13, 2018, the court in the 2015 New York Action vacated its stay on March 30, 2018, and restored Countrywide’s motion to dismiss to the calendar.

The parties submitted supplemental letter briefs on April 11, 2018 addressing newly-issued relevant authority.

On December 8, 2020, the court granted Countrywide’s motion to dismiss the complaint.

AAC filed a notice of appeal from this decision on January 7, 2021.

The court entered judgment in Countrywide’s favor on January 29, 2021 and AAC filed a notice of appeal from the judgment on February 2, 2021.

• Ambac Assurance Corporation and the Segregated Account of Ambac Assurance Corporation v.

2 unchanged sentences

653979/2014, filed on December 30, 2014).

Ambac Assurance asserted a claim for fraudulent inducement in connection with Ambac Assurance’s issuance of insurance policies relating to eight residential mortgage-backed securitizations that are not the subject of Ambac Assurance’s previously filed lawsuits against the same defendants.

AAC asserted a claim for fraudulent inducement in connection with AAC’s issuance of insurance policies relating to eight residential mortgage-backed securitizations that are not the subject of AAC’s previously filed lawsuits against the same defendants.

On February 20, 2015, the Countrywide defendants filed a motion to dismiss the complaint, which Bank of America joined on February 23, 2015.

3 unchanged sentences

• Ambac Assurance Corporation v.

Bank National Association (United States District Court, Southern District of New York, Docket No.

Bank Nation al Association (United States District Court, Southern District of New York, Docket No.

18-cv-5182 (LGS), filed June 8, 2018 (the “SDNY Action”));

In the matter of HarborView Mortgage Loan Trust 2005-10 (Minnesota state court, Docket No.

27-TR-CV-17-32 (the “Minnesota Action”)).

These two actions relate to U.S.

Bank National Association’s (“U.S.

Bank”) acceptance of a proposed settlement in a separate litigation that U.S.

Bank is prosecuting, as trustee, related to the Harborview Mortgage Loan Trust, Series 2005-10

In the matter of HarborView

| Ambac Financial Group, Inc.

4 unchanged sentences

(Dollar Amounts in Millions, Except Share Amounts)

(“Harborview 2005-10”), a residential mortgage-backed securitization for which Ambac Assurance issued an insurance policy.

Mortgage Loan Trust 2005-10 (Minnesota state court, Docket No.

27-TR-CV-17-32 (the “Minnesota Action”)).

These two actions relate to U.S.

Bank National Association’s (“U.S.

Bank”) acceptance of a proposed settlement in a separate litigation that U.S.

Bank is prosecuting, as trustee, related to the Harborview Mortgage Loan Trust, Series 2005-10 (“Harborview 2005-10”), a residential mortgage-backed securitization for which AAC issued an insurance policy.

On March 6, 2017, U.S.

1 unchanged sentence

Bank filed an amended petition.

Ambac Assurance filed a motion to dismiss the Minnesota Action.

On November 13, 2017, the court denied Ambac Assurance’s motion to dismiss the Minnesota Action.

On February 7, 2018, Ambac Assurance appealed this decision, and on September 4, 2018, the Minnesota Court of Appeals affirmed the lower court's decision.

On September 17, 2018, Ambac Assurance filed a petition for review with the Minnesota Supreme Court, which was denied on November 13, 2018.

On February 11, 2019, Ambac Assurance filed a petition for certiorari with the United States Supreme Court.

On October 4, 2019, the Supreme Court denied Ambac Assurance’s petition for certiorari.

On September 6, 2018, the court granted U.S.

Bank's motion for leave to file a Second Amended Petition seeking approval of its acceptance of a proposed settlement to settle the separate litigation being prosecuted by U.S.

Bank, as Trustee.

AAC filed a motion to dismiss the Minnesota Action, which was denied on November 13, 2017, and the denial was affirmed on appeal.

On September 6, 2018, U.S.

Bank filed its Second Amended Petition, and Ambac Assurance and certain other certificateholders objected to, or otherwise responded to, the petition.

Discovery in the Minnesota Action is ongoing , and on October 9, 2019, the court set April 27, 2020 as the date for the start of the trial .

On June 8, 2018, Ambac Assurance filed the SDNY Action asserting claims arising out of U.S.

Bank filed its Second Amended Petition, and AAC and certain other certificateholders objected to, or otherwise responded to, the petition.

Trial, which was previously scheduled to begin February 1, 2021, has been rescheduled to October 11 through 15, 2021.

On June 8, 2018, AAC filed the SDNY Action asserting claims arising out of U.S.

Bank’s acceptance of the proposed settlement and treatment of trust recoveries.

Ambac Assurance asserts claims for declaratory judgment, breach of contract, and breach of fiduciary duty.

On November 20, 2018, U.S.

Bank filed a motion to dismiss the complaint, which Ambac Assurance opposed.

On July 16, 2019, the court in the SDNY Action granted in part and denied in part U.S.

Bank's motion to dismiss Ambac Assurance's claims.

The court dismissed Ambac Assurance's breach-of-contract and breach-of-fiduciary-duty claims based on U.S.

AAC asserted claims for declaratory judgment, breach of contract, and breach of fiduciary duty.

On July 16, 2019, the court dismissed AAC's breach-of-contract and breach-of-fiduciary-duty claims based on U.S.

Bank's acceptance of the settlement;

and dismissed Ambac Assurance's declaratory judgment claims regarding the occurrence of an Event of Default and U.S.

and dismissed AAC's declaratory judgment claims regarding the occurrence of an Event of Default and U.S.

Bank's future distribution of trust recoveries through the waterfall.

The court denied the motion to dismiss Ambac Assurance's breach-of-contract claims based on U.S.

The court denied the motion to dismiss AAC's breach-of-contract claims based on U.S.

Bank's past distribution of trust recoveries through the waterfall.

1 unchanged sentence

Bank moved for summary judgment regarding the remaining claim relating to distributions.

On February 7, 2020, Ambac Assurance cross-moved for summary judgment.

On February 7, 2020, AAC cross-moved for summary judgment.

On December 7, 2020, the court issued a decision granting in part and denying in part the parties’ cross-motions for summary judgment.

The court granted U.S.

Bank’s motion for summary judgment with respect to Ambac’s repayment right in the trust waterfall, and granted Ambac’s motion for summary judgment with respect to the use of a write-up first method and the offsetting of recoveries against realized losses.

On December 22, 2020, the court entered final judgment consistent with its prior decisions, and awarded Ambac nominal damages.

January 12, 2021, Ambac filed a notice of appeal of that judgment.

• Ambac Assurance Corporation and The Segregated Account of Ambac Assurance Corporation v.

1 unchanged sentence

17-cv-02614, filed April 11, 2017).

Ambac Assurance has asserted claims for breach of contract,

breach of fiduciary duty, declaratory judgment, and violation of the Streit Act in connection with defendant’s failure to enforce rights and remedies and defendant’s treatment of trust recoveries, as trustee of five residential mortgage-backed securitizations for which Ambac Assurance issued insurance policies.

AAC has asserted claims for breach of contract, breach of fiduciary duty, declaratory judgment, and violation of the Streit Act in connection with defendant’s failure to enforce rights and remedies and defendant’s treatment of trust recoveries, as trustee of five residential mortgage-backed securitizations for which AAC issued insurance policies.

On September 15, 2017, U.S.

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On August 23, 2018, DBNT filed a Petition commencing the Trust Instruction Proceeding, seeking judicial instruction pursuant to CPLR Article 77, inter alia, to accept the proposed settlement with respect of claims relating to Harborview 2006-9.

On September 6, 2018, the court entered an Order to Show Cause, setting out procedures for DBNT to give notice of the proceedings and for interested persons to appear.

On November 2, 2018, Ambac Assurance and other interested persons filed notices of intention to appear and answers to DBNT’s petition, and on November 29, 2018 various parties filed responses to answers.

In its answer, Ambac Assurance opposed DBNT’s request for an order instructing it to accept the proposed settlement on the basis that DBNT breached its obligations by failing to investigate and enforce breaches of representations and warranties in Harborview 2006-09, failing to immediately reject the proposed settlement, and instituting an inadequate certificateholder approval process.

Ambac sought a period of discovery before resolution on the merits.

Ambac Assurance has issued document requests to DBNT and subpoenas for documents to Countrywide Home Loans and Bank of America N.A.

and DBNT has issued document requests to Ambac Assurance.

The parties have exchanged documents.

DBNT and Ambac Assurance have each served a notice of corporate deposition upon the other.

On October 30, 2019, the court ruled that Ambac Assurance does not need to present a witness for deposition.

Under the current case schedule discovery is to be completed by March 10, 2020 and merits briefing by July 10, 2020.

On November 2, 2018, AAC and other interested persons filed notices of intention to appear and answers to DBNT’s petition.

AAC sought a period of discovery before resolution on the merits.

Discovery is now complete.

Under the operative case schedule, merits briefing was completed on January 12, 2021.

The court has not yet scheduled a hearing or oral argument.

| Ambac Financial Group, Inc.

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QUARTERLY INFORMATION (Unaudited)

2020 Quarters 2019 Quarters

First Second Third Fourth First Second Third Fourth

Gross premiums written $ 11 $ ( 1 ) $ ( 13 ) $ 1 $ 3 $ ( 21 ) $ ( 13 ) $ 2

Net premiums earned 10 11 15 18 28 8 10 20

Net investment income ( 21 ) 52 37 53 55 86 45 42

Net realized investment gains (losses) 8 10 2 2 17 36 18 9

Net gains (losses) on derivative contracts ( 70 ) 2 7 12 ( 16 ) ( 35 ) ( 10 ) 12

Other income (loss) — — 2 1 1 ( 9 ) 141 1

Income (loss) on Variable Interest Entities 3 — — 3 16 3 11 7

Losses and loss expenses (benefit) 117 16 83 9 12 ( 133 ) 37 97

Insurance intangible amortization 13 14 14 16 36 226 17 15

Operating expenses 24 21 23 26 25 29 26 23

Interest expense 63 58 50 50 68 67 67 66

Pre-tax income (loss) ( 287 ) ( 33 ) ( 108 ) ( 12 ) ( 41 ) ( 100 ) 69 ( 111 )

Net income (loss) attributable to Common Stockholders $ ( 280 ) $ ( 35 ) $ ( 108 ) $ ( 14 ) $ ( 43 ) $ ( 128 ) $ 66 $ ( 110 )

Net income (loss) per share:

Basic $ ( 6.07 ) $ ( 0.77 ) $ ( 2.33 ) $ ( 0.31 ) $ ( 0.94 ) $ ( 2.79 ) $ 1.44 $ ( 2.40 )

Diluted $ ( 6.07 ) $ ( 0.77 ) $ ( 2.33 ) $ ( 0.31 ) $ ( 0.94 ) $ ( 2.79 ) $ 1.41 $ ( 2.40 )

| Ambac Financial Group, Inc.

141 2020 FORM 10-K |

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure — None.

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 8. Financial Statements and Supplementary Data