What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-11-08 compared with 2021-08-05 · 378 added, 332 removed, 814 unchanged (47% of the section changed)

3 unchanged sentences

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

This discussion should be read in conjunction with Ambac’s Annual Report on Form 10-K for the year ended December 31, 2020, the Cautionary Statement Pursuant To The Private Securities Litigation Reform Act Of 1995 below and Risk Factors set forth in Part II, Item 1A of this Form 10-Q and in Ambac’s Annual Report on Form 10-K for the year ended December 31, 2020.

This discussion should be read in conjunction with Ambac’s Annual Report on Form 10-K for the year ended December 31, 2020, the

Cautionary Statement Pursuant To The Private Securities Litigation Reform Act Of 1995 below and Risk Factors set forth in Part II, Item 1A of this Form 10-Q and in Ambac’s Annual Report on Form 10-K for the year ended December 31, 2020.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) contains certain financial measures, in particular the presentation of Adjusted Earnings and Adjusted Book Value, which are not presented in accordance with U.S.

generally accepted accounting principles (“GAAP”).

We are presenting these non-GAAP financial

measures because they provide greater transparency and enhanced visibility into the underlying drivers of our business.

We are presenting these non-GAAP financial measures because they provide greater transparency and enhanced visibility into the underlying drivers of our business.

We do not intend for these non-GAAP financial measures to be a substitute for any GAAP financial measure and they may differ from similar reporting provided by other companies.

13 unchanged sentences

Any or all of management’s forward-looking statements here or in other publications may turn out to be incorrect and are based on management’s current belief or opinions.

AFG’s and its subsidiaries’ (“Ambac”) actual results may vary materially, and there are no guarantees about the performance of Ambac’s securities.

AFG’s and its subsidiaries’ (“Ambac”) actual results may vary materially, and there are no guarantees about the performance of Ambac’s

| Ambac Financial Group, Inc.

49 2021 Third Quarter FORM 10-Q |

Among events, risks, uncertainties or factors that could cause actual results to differ materially are:

(1) the highly speculative nature of AFG’s common stock and volatility in the price of AFG’s common stock;

(2) Ambac's inability to realize the expected recoveries, including RMBS litigation recoveries, included in its financial statements which would have a materially adverse effect on AAC’s financial condition and may lead to regulatory intervention;

(2) Ambac's inability to realize the expected recoveries, including RMBS litigation recoveries, included in its financial statements which would have a materially adverse effect on Ambac Assurance Corporation’s (“AAC”) financial condition and may lead to regulatory intervention;

(3) failure to recover claims paid on Puerto Rico exposures or realization of losses in amounts higher than expected;

(4) increases to loss and loss expense reserves;

(5) inadequacy of reserves established for losses and loss expenses and

| Ambac Financial Group, Inc.

46 2021 Second Quarter FORM 10-Q |

possibility that changes in loss reserves may result in further volatility of earnings or financial results;

(5) inadequacy of reserves established for losses and loss expenses and possibility that changes in loss reserves may result in further volatility of earnings or financial results;

(6) uncertainty concerning the Company’s ability to achieve value for holders of its securities, whether from AAC and its subsidiaries or from transactions or opportunities apart from AAC and its subsidiaries, including new business initiatives relating to the specialty property and casualty program insurance business, the managing general agency/underwriting business, or related businesses;

19 unchanged sentences

(26) adverse impacts from changes in prevailing interest rates;

(27) our results of operation may be adversely affected by events or circumstances that result in the impairment of our intangible assets and/or goodwill that was recorded in connection with Ambac’s acquisition of 80% of the membership interests of Xchange;

results of operation may be adversely affected by events or circumstances that result in the impairment of our intangible assets and/or goodwill that was recorded in connection with Ambac’s acquisition of 80% of the membership interests of Xchange;

(28) risks associated with the expected discontinuance of the London Inter-Bank Offered Rate;

2 unchanged sentences

(31) risks relating to determinations of amounts of impairments taken on investments;

(32) the risk of litigation and regulatory inquiries or investigations,

and the risk of adverse outcomes in connection therewith, which could have a material adverse effect on Ambac’s business, operations, financial position, profitability or cash flows;

(32) the risk of litigation and regulatory inquiries or investigations, and the risk of adverse outcomes in connection therewith, which could have a material adverse effect on Ambac’s business, operations, financial position, profitability or cash flows;

(33) actions of stakeholders whose interests are not aligned with broader interests of the Ambac's stockholders;

16 unchanged sentences

• AFG contributed $82 of additional capital to the Everspan Group.

| Ambac Financial Group, Inc.

50 2021 Third Quarter FORM 10-Q |

• The Everspan Group platform received an 'A-' Financial Strength Rating from A.M.

Best in February 2021.

• The Everspan Group launched its first insurance program in May 2021.

• The Everspan Group launched its specialty insurance program business in May 2021.

• To support expansion of the admitted insurance component of its business, during the second quarter of 2021 Everspan Group entered into stock purchase agreements to acquire several insurance shell companies.

These acquisitions are subject to the approval of the insurance regulators in the States of domicile of the companies to be acquired, which may occur in 2021.

| Ambac Financial Group, Inc.

47 2021 Second Quarter FORM 10-Q |

• During the second quarter of 2021, AFG made minority investments in certain insurance related businesses, including insurtech platforms, that we believe will be synergistic to our specialty property & casualty program insurance and MGA/MGU businesses.

Such acquisitions will enhance Everspan Group's capabilities to launch new admitted programs, develop innovative products and provide enhanced flexibility to foster strategic relationships with prospective program partners.

On October 1, 2021, the Everspan Group completed the acquisition of Providence Washington Insurance Company (“PWIC”) from a subsidiary of Enstar Group Limited.

PWIC holds certificates of authority in forty-seven states and territories.

PWIC's legacy liabilities were fully ceded to reinsurers.

PWIC also benefits from an unlimited, uncapped indemnity from Enstar Holdings (US) to mitigate any residual risk to these reinsurers.

The remaining three acquisitions, which collectively possess certificates of authority in thirty-nine states and territories, are subject to the approval of the insurance regulators in the States of domicile of the companies to be acquired, which may occur in 2021.

• During the second and third quarters of 2021, AFG made minority investments in certain insurance related businesses, including insurtech platforms, that we believe will be synergistic to our specialty property & casualty program insurance or Managing General Agency/Underwriting businesses.

The Company is actively seeking to expand the MGA/U business though additional acquisitions and development of new MGA/U companies.

AFG Net Assets

As of June 30, 2021, net assets of AFG, excluding its equity investments in subsidiaries, were $281.

As of September 30, 2021, net assets of AFG, excluding its equity investments in subsidiaries, were $282.

Cash and short-term investments $ 128

9 unchanged sentences

The investment portfolios of AAC and Ambac UK hold fixed maturity securities and various pooled investment funds.

Everspan Group's investment portfolios hold only fixed maturity securities.

Refer to Note 9.

Investments to the Unaudited Consolidated Financial Statements, included in Part I, Item 1 in this Form 10-Q for further details of fixed maturity investments by asset category and pooled investment funds by investment type.

At June 30, 2021, Ambac and its subsidiaries owned $611 of distressed Ambac-insured bonds, including significant concentrations of insured Puerto Rico and RMBS bonds, and excluding Ambac's holdings of secured notes issued by Ambac LSNI.

At September 30, 2021, AAC owned $610 of distressed Ambac-insured bonds, including significant concentrations of insured Puerto Rico and RMBS bonds.

Subject to internal and regulatory guidelines, market conditions and other constraints, Ambac may continue to opportunistically purchase or sell Ambac-insured securities.

Liability and Insured Exposure Management

AAC's Risk Management Group focuses on the implementation and execution of risk reduction, defeasance and loss recovery strategies.

Ambac's Risk Management Group focuses on the implementation and execution of risk reduction, defeasance and loss recovery strategies.

Analysts evaluate the estimated timing and severity of projected policy claims as well as the potential impact of loss mitigation or remediation strategies in order to target and prioritize policies, or portions thereof, for commutation, reinsurance, refinancing, restructuring or other risk reduction strategies.

For targeted policies, analysts will engage with issuers, bondholders and other economic stakeholders to negotiate, structure and execute such strategies.

AAC completed risk reduction transactions consisting of quota share reinsurance, refinancings, and commutations of $666 and $2,040 for the three and six months ended June 30, 2021, respectively.

The following table provides a comparison of total, adversely classified ("ACC") and watch list credit net par outstanding in the insured portfolio at June 30, 2021 and December 31, 2020.

Ambac completed risk reduction transactions consisting of quota share reinsurance, refinancings, and commutations of $627 and $2,667 for the three and nine months ended September 30, 2021, respectively.

Quota share reinsurance represented $553 and $1,695 of the risk reduction transactions for the three and nine months ended September 30, 2021, respectively.

The following table provides a comparison of total, adversely classified ("ACC") and watch list credit net par outstanding in the insured portfolio at September 30, 2021 and December 31, 2020.

Net par exposure within the U.S.

public finance market includes capital appreciation bonds which are reported at the par amount at the time of issuance of the insurance policy as opposed to the current accreted value of the bonds.

September 30,

2021 December 31,

4 unchanged sentences

The decrease in total, ACC and watch list credit net par outstanding resulted from active de-risking initiatives, as noted above, as well as scheduled maturities, amortizations, refundings and calls.

The COVID-19 pandemic had, and to a lesser degree, continues to have, a notable impact on general economic conditions, including but not limited to higher unemployment;

The COVID-19 pandemic had, and to a lesser degree, continues to have, an 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.

In the U.S., significant monetary policy actions, fiscal stimulus measures and other relief measures together with an increasing COVID-19 vaccination rate in the first half of 2021 have supported the economic recovery which began in the second half of 2020.

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.

These businesses and enterprises include hotels, restaurants, sports and

| Ambac Financial Group, Inc.

51 2021 Third Quarter FORM 10-Q |

entertainment facilities, airports, other transportation facilities, and retail establishments.

In the U.S., significant monetary policy actions, fiscal stimulus measures and other relief measures together with an increasing COVID-19 vaccination rate have supported the economic recovery which began in the second half of 2020.

Outside of the U.S., 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 of the pandemic.

Overall, the ongoing global recovery should be a benefit to most issuers in Ambac's insured portfolio negatively impacted by the COVID-19 pandemic.

Overall, the ongoing global recovery should be a benefit to most issuers in Ambac's insured portfolio that were negatively impacted by the COVID-19 pandemic.

Nonetheless, credit risk in the insured portfolio remains elevated due to, among other things, uncertainty over the trajectory and continuity of the economic recovery due to still elevated COVID-19 infection rates globally as well as the spread of new virus variants.

5 unchanged sentences

and (iii) the performance of the investment portfolio.

| Ambac Financial Group, Inc.

48 2021 Second Quarter FORM 10-Q |

Ambac has exposure to reinsurance counterparties for their portion of future financial guaranty claim payments.

6 unchanged sentences

Given the economic uncertainties associated with the duration and effects of the COVID-19 pandemic, it is impossible to fully predict all of its consequences and, as a result, it is possible that our future operating results and financial condition may be materially adversely affected.

Refer to "Financial Guarantees In Force," "Results of Operations" and "Balance Sheet Commentary" for further financial details on the current impact from COVID-19.

Refer to "Financial Guarantees In Force," "Results of Operations" and "Balance Sheet

Commentary" for further financial details on the current impact from COVID-19.

With regard to Ambac's new business strategic objective, we continue to evaluate opportunities in a disciplined manner.

1 unchanged sentence

Financial Statement Impact of Foreign Currency:

The impact of foreign currency as reported in Ambac's Unaudited Consolidated Statement of Total Comprehensive Income for the six months ended June 30, 2021, included the following:

The impact of foreign currency as reported in Ambac's Unaudited Consolidated Statement of Total Comprehensive Income for the nine months ended September 30, 2021, included the following:

Net income (1)

6 unchanged sentences

Ambac continuously monitors regulatory and industry developments related to the transition from LIBOR to alternative reference rates.

On April 6, 2021, New York State passed

legislation addressing the cessation of U.S.

Earlier in 2021, New York State passed legislation addressing the cessation of U.S.

Dollar ("USD") LIBOR and specified a recommended benchmark replacement based on the Secured Overnight Financing Rate ("SOFR") for certain legacy transactions.

The Alternative Reference Rates Committee, the Federal Reserve Board and several industry associations and groups have expressed support for the new law and are encouraging comparable Federal legislation.

While Ambac believes the New York LIBOR law is generally a positive step, there remains significant uncertainty about how it will be interpreted or challenged as well as about other aspects of the discontinuance of LIBOR, including the impact of any Federal legislation.

At the same time, regulatory and governmental authorities continue to promote the creation and functioning of post-LIBOR indices, SOFR in particular.

See the risk factor "Uncertainties regarding the expected discontinuance of the London Inter-Bank Offered Rate or any other interest rate benchmark could have adverse consequences" found in Part I, Item 1A of Ambac’s Annual Report on Form 10-K for the year ended December 31, 2020.

Also, for further background and information about management's evaluation of Ambac's potential exposures to LIBOR transition, see "Executive Summary — LIBOR Sunset" in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Ambac’s Annual Report on Form 10-K for the year ended December 31, 2020.

| Ambac Financial Group, Inc.

52 2021 Third Quarter FORM 10-Q |

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

7 unchanged sentences

structured finance and international finance.

The following table provides a breakdown of guaranteed net par outstanding by market at June 30, 2021 and December 31, 2020.

The following table provides a breakdown of guaranteed net par outstanding by market at September 30, 2021 and December 31, 2020.

Net par exposures within the U.S.

public finance market include capital appreciation bonds which are reported at the par amount at the time of issuance of the insurance policy as opposed to the current accreted value of the bonds.

Guaranteed net par outstanding includes the exposures of policies insuring variable interest entities (“VIEs”) consolidated in accordance with the Consolidation Topic of the ASC.

Guaranteed net par outstanding excludes the exposures of policies that insure bonds which have been refunded or pre-refunded and excludes exposure of the policy that insured the notes issued by Ambac LSNI as defined in Note 3.

Variable Interest Entities in the Notes to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q:

| Ambac Financial Group, Inc.

49 2021 Second Quarter FORM 10-Q |

Guaranteed net par outstanding includes the exposures of policies insuring variable interest entities (“VIEs”) consolidated in

accordance with the Consolidation Topic of the ASC.

Guaranteed net par outstanding excludes the exposures of policies that insure bonds which have been refunded or pre-refunded and excludes exposure of the policies insuring the Sitka Senior Secured Notes and LSNI Secured Notes as defined in Note 1.

Background and Business Description in the Notes to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q:

September 30,

2021 December 31,

4 unchanged sentences

Total net par outstanding $ 28,549 $ 33,888

(1) Includes $5,533 and $5,575 of Military Housing net par outstanding at June 30, 2021 and December 31, 2020, respectively.

(2) Includes $1,067 and $1,070 of Puerto Rico net par outstanding at June 30, 2021 and December 31, 2020, respectively.

(1) Includes $5,513 and $5,575 of Military Housing net par outstanding at September 30, 2021 and December 31, 2020, respectively.

(2) Includes $1,054 and $1,070 of Puerto Rico net par outstanding at September 30, 2021 and December 31, 2020, respectively.

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

The table below shows Ambac’s ten largest insured exposures, by repayment source, as a percentage of total financial guarantee net par outstanding at June 30, 2021:

Country-Bond Type

The table below shows Ambac’s ten largest insured exposures, by repayment source, as a percentage of total financial guarantee net par outstanding at September 30, 2021:

Risk Name Country-Bond

Outstanding (3)

5 unchanged sentences

IF AUK National Grid Gas UK-Utility BBB+ 2037 809 2.8 %

PF AAC New Jersey Transportation Trust Fund Authority - Transportation System US-Lease and Tax-backed Revenue BBB- 2036 767 2.5 %

IF AUK Posillipo Finance II S.r.l Italy-Sub-Sovereign BIG 2035 689 2.4 %

PF AAC New Jersey Transportation Trust Fund Authority - Transportation System US-Lease and Tax-backed Revenue BBB- 2036 659 2.3 %

IF AUK RMPA Services plc UK-Infrastructure BBB+ 2038 547 1.9 %

13 unchanged sentences

Net par related to the top ten exposures reduced $437 from December 31, 2020.

Exposures are impacted by changes in foreign exchange rates, certain indexation rates and scheduled and unscheduled paydowns.

The concentration of net par amongst the top ten (as a percentage of net par outstanding) increased slightly to 25% at June 30, 2021, from 23% at December 31, 2020.

Exposures are impacted by changes in

foreign exchange rates, certain indexation rates, reinsurance transactions and scheduled and unscheduled paydowns.

| Ambac Financial Group, Inc.

53 2021 Third Quarter FORM 10-Q |

concentration of net par amongst the top ten (as a percentage of net par outstanding) increased slightly to 25% at September 30, 2021, from 23% at December 31, 2020.

National Grid Gas had an Ambac rating downgrade since December 31, 2020.

6 unchanged sentences

actions such as fiscal stimulus and related programs and monetary policy decisions;

and our insured obligors' financial flexibility

| Ambac Financial Group, Inc.

50 2021 Second Quarter FORM 10-Q |

and ability to mitigate the operational and economic impact of the recession will determine the ultimate impact to Ambac's insured portfolio.

and our insured obligors' financial flexibility and ability to mitigate the operational and economic impact of the recession will determine the ultimate impact to Ambac's insured portfolio.

Fiscal Stimulus and Monetary Policy

10 unchanged sentences

Such servicers are generally applying these guidelines to non-FHFA loans, including those loans owned by special purpose entities that have their securitized obligations guaranteed by AAC.

Forbearances increased sharply across the AAC's insured first lien RMBS obligations during the second and third quarters of 2020, but then began to drop later in the third quarter of 2020 through June 30, 2021, albeit to still elevated levels.

The ultimate impact of forbearances and other relief measures, such as foreclosure and eviction moratoriums, on AAC's insured RMBS obligations are still unclear.

However, we have assumed that such measures will have an adverse impact on our insured RMBS transactions.

Consequently, we have anticipated that we will experience an increase in claim payments for certain of our insured RMBS obligations as these measures are unwound.

While Ambac expects the foregoing measures to continue to help mitigate economic damage and aid the functioning of the capital markets, Ambac's exposure to credit risk as a result of the

economic fallout from the COVID-19 pandemic remains elevated, and we could still experience material losses that would adversely impact our future results of operations and financial condition.

Consequently, we have anticipated that we will experience a modest increase in claim payments for certain of our insured RMBS obligations as these measures are unwound.

While Ambac expects the foregoing measures to continue to help mitigate economic damage and aid the functioning of the capital markets, Ambac's exposure to credit risk as a result of the economic fallout from the COVID-19 pandemic remains elevated, and we could still experience material losses that would adversely impact our future results of operations and financial condition.

Insured Portfolio:

economy continues to recover from COVID-19 pandemic, aided by rapid vaccine diffusion, increased fiscal stimulus, and a continued reopening of the economy.

economy continues to recover from COVID-19 pandemic, aided by rapid vaccine diffusion, increased fiscal stimulus, and accommodative monetary policy.

After contracting in 2020, the U.S.

economy is projected to grow strongly in 2021, exceeding 2019 levels of economic output during the course of the year.

economy grew strongly in the first half of 2021, and while growth is expected to slow in the second half of 2021, overall economic output for the year is expected to exceed 2019 levels of economic output during the course of the year.

Unemployment has recovered from the high of about 15% in April 2020, but still remains elevated at about 4.8% relative to pre-pandemic levels of about 3.5%.

Potential headwinds include rising COVID-19 infection rates globally and the spread of COVID-19 variants.

The improving economy, increased fiscal stimulus and other relief measures should benefit the overall credit quality of Ambac's insured portfolio.

2 unchanged sentences

However, the ultimate impact of ARPA and the economic recovery in general on the Ambac insured portfolio remains to be seen, as it will not benefit all insured exposures equally and may not benefit certain exposures at all.

| Ambac Financial Group, Inc.

54 2021 Third Quarter FORM 10-Q |

As part of a detailed analysis of the insured portfolio, we have identified certain Public Finance sectors that are most susceptible to potential claims or impairments as a result of a prolonged or uneven recovery from the COVID-19 pandemic.

11 unchanged sentences

Total Public Finance $ 1,256 $ 178

The RMBS insured portfolios were adversely impacted by the previously mentioned forbearances and the moratorium on

| Ambac Financial Group, Inc.

51 2021 Second Quarter FORM 10-Q |

foreclosures as well as the general uncertainty about the trajectory of the economic recovery and the impact of fiscal stimulus on the U.S.

The RMBS insured portfolios were adversely impacted by the previously mentioned forbearances and the moratorium on foreclosures.

This has been offset by the benefit to excess spread within the securitization structures as a result of the reduction in interest rates over the past year, which is expected to result in higher excess spread recoveries to Ambac.

1 unchanged sentence

Such transactions have been impacted by the reduction of revenue due to the COVID-19 pandemic.

Ambac and its advisors are working closely with impacted issuers to review their plans and liquidity facilities in light of these events.

Ambac's remaining NPO with respect to these international demand dependent policies are as follows:

4 unchanged sentences

$ 1,699 $ 136

At this time, there are still significant uncertainties surrounding the ultimate number of claims and scope of damage resulting from this pandemic.

At this time, there are still uncertainties surrounding the ultimate number of claims and scope of damage resulting from this pandemic.

Actual losses from these events may vary materially from Ambac's loss and loss expense reserves due to several factors, including the inherent uncertainties in making such determinations and the evolving nature of this pandemic.

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

We continue to experience stress in our exposure to Puerto Rico (the "Commonwealth") that consists of several different issuing entities (all below investment grade) with total net par exposure of $1,067 as of June 30, 2021.

Potential losses from the economic consequences of the COVID-19 pandemic could be material and therefore may have a

material adverse effect on our results of operations and financial condition.

Each issuing entity has its own credit risk profile attributable to, as applicable, discreet revenue sources, direct general obligation pledges and general obligation guarantees.

3 unchanged sentences

However, the Puerto Rico economy is currently in recovery with vaccination rates increasing and infection rates declining.

Overall, the Commonwealth's general fund revenues in the 10-month period ending April 2021 were up 10.7% year-on-year to $8,900 from $8,000 and were about $540 higher than the budgeted amount for the period.

As reported in the April 23, 2021, Commonwealth Fiscal Plan, Puerto Rico is also expected to benefit from about $43,500 in COVID-19-related federal funds from the initial

CARES related measures in 2020 through the more recently enacted ARPA.

It is unclear if the recovery will hold, what this implies for the Commonwealth’s ability and willingness to pay debt service, and what if any lasting effects COVID-19 will have on the economic and financial profile of Puerto Rico.

As reported in the April 23, 2021 Commonwealth Fiscal Plan, Puerto Rico is also expected to benefit from about $43,500 in COVID-19-related federal funds from the initial CARES related measures in 2020 through the more recently enacted ARPA.

It is unclear if the recovery will continue, what this implies for the Commonwealth’s ability and willingness to pay debt service, and what if any lasting effects COVID-19 will have on the economic and financial profile of Puerto Rico.

Over the longer-term, Puerto Rico's recovery profile will be impacted by a wide range of factors as well as financial considerations including, but not limited to:

8 unchanged sentences

Debt sustainability analysis in the new plan suggests a modest increase to $5,600 from $5,000 (based upon mid-point of ranges shown in the plan).

As with previous fiscal plans, the current certified Commonwealth Fiscal Plan may significantly inform the Commonwealth Plan of Adjustment in the Commonwealth's Title III proceeding.

| Ambac Financial Group, Inc.

55 2021 Third Quarter FORM 10-Q |

As with previous fiscal plans, the current certified Commonwealth Fiscal Plan significantly informs the current Commonwealth Plan of Adjustment in the Commonwealth's Title III proceeding.

However, as was also 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.

No assurances can be given that Ambac's financial condition will not suffer a materially negative impact as an ultimate result of decisions based on the Commonwealth Fiscal Plan or any future changes or revisions to the Commonwealth Fiscal Plan or future fiscal plans for Puerto Rico Highways and Transportation Authority ("PRHTA") or other Puerto Rico instrumentalities.

Commonwealth Plan of Adjustment

On July 30, 2021, the Oversight Board, as representative of the Commonwealth of Puerto Rico, the Puerto Rico Public Buildings Authority, and the Employees Retirement System of the Government of the Commonwealth of Puerto Rico, filed a Seventh Amended Title III Joint Plan of Adjustment of the

Consequently, the Commonwealth Fiscal Plan may not represent a complete and accurate projection of Commonwealth's fiscal position going forward.

Commonwealth Plan of Adjustment (Title III Case)

On November 3, 2021, the Oversight Board, as representative of the Commonwealth of Puerto Rico, the Puerto Rico Public Buildings Authority, and the Employees Retirement System of the Government of the Commonwealth of Puerto Rico, filed an Eighth Amended Title III Joint Plan of Adjustment of the Commonwealth of Puerto Rico (“Eighth Amended POA”) that proposes to restructure approximately $35,000 of debt and approximately $50,000 in pension obligations.

The Eighth Amended POA, among other things, incorporates the settlement reflected in the PRIFA Related Plan Support Agreement (“PRIFA PSA”) that was signed on July 27, 2021, by the Oversight Board, as representative of the Commonwealth of Puerto Rico, AAC, FGIC, and other holders of bonds issued by the Puerto Rico Infrastructure Financing Authority ("PRIFA").

On July 29, 2021, Judge Laura Taylor Swain of the United States District Court for the District of Puerto Rico approved the disclosure statement for the Commonwealth's plan of adjustment, thereby enabling the Oversight Board to proceed towards confirmation.

A hearing to confirm the Commonwealth’s plan of adjustment is scheduled over several days between November 8, 2021and November 23, 2021.

As compared to the Seventh Amended POA, the Eighth Amended POA contains the following notable changes:

• An increase in the aggregate allowed amount of PBA bond claims;

• The elimination of the PRIFA Trust structure from the Seventh Amended POA and clarification that the Rum Tax CVI Indenture may be part of, or included in, the CVI Indenture;

• Clarification that Ambac will receive directly the pro rata share of the CW/HTA clawback recovery and interim HTA distributions allocable to its owned or wrapped HTA bonds;

• Clarification that “Restriction Fee Creditors” as defined under the Plan includes parties who executed joinders to the GO/PBA PSA (as Ambac did);

• New language in the Plan and proposed confirmation order concerning 1) the discharge and release of claims against the Debtors, the Reorganized Debtors, and other parties in the Underwriter Actions, and 2) the Board’s intention that such language not be construed as granting non-consensual third-party release.

A successful confirmation and consummation of the Eighth Amended POA would represent a significant step towards resolution of AAC's remaining Puerto Rico exposures;

however, the ultimate outcome of the hearing and the subsequent emergence of the Commonwealth of Puerto Rico from the Title

III proceedings is not certain and subject to challenge and other developments and risks.

PRIFA/CCDA Qualifying Modifications (Title VI Cases)

The PRIFA PSA and CCDA/HTA PSA contain provisions requiring the parties thereto to support the terms of Title VI Qualifying Modifications for PRIFA and CCDA (the “PRIFA QM” and the “CCDA QM,” respectively).

On October 8, 2021, the Oversight Board commenced Title VI proceedings and filed applications for approval of the proposed PRIFA QM and CCDA QM.

On October 13, 2021, Ambac entered its Notices of Appearance in the Title VI proceedings.

The hearing to consider approval of the PRIFA QM and the CCDA QM will be held contemporaneously with the confirmation hearing in the Commonwealth’s Title III proceedings, which is scheduled to begin on November 8, 2021.

Bondholder Elections:

GO, PBA, PRIFA, and CCDA

As outlined in the Election Notice for Ambac Bond Holders with Claims in Class 19 (the “GO Election Notice”) and the Election Notice for Ambac Bond Holders with Claims in Classes 4 and 26 (the “PBA Election Notice”), GO and PBA bondholders were each permitted to choose between two different treatment options for the satisfaction of their claims.

The first option allows the bondholders to elect commutation of their insurance policies (the “Ambac Insurance Policies”).

Under this option, bondholders will receive:

1) their respective shares of certain consideration available under the Commonwealth Plan, and 2) cash from Ambac.

Ambac’s obligations to the bondholders under the Ambac Insurance Policies who elect this option will be deemed fully satisfied.

Under the second option, bondholders who fail to elect commutation will receive payment, in cash, of the outstanding principal amount of the bondholders’ insured bonds plus the accrued and unpaid interest thereon as of the Effective Date (the “Ambac Acceleration Price.”).

Pursuant to this option, bondholders will receive the Ambac Acceleration Price in full and final discharge of Ambac’s obligations under the insurance policies.

As outlined in the Election Notice for Holders of Ambac Insured PRIFA Bond Claims in Connection with Certain Capital Appreciation Bonds (the “PRIFA CABs Election Notice”), the Election Notice for Holders of Ambac Insured PRIFA Bond Claims in Connection with Certain Current Interest Bonds (the “PRIFA CIBs Election Notice”), and the Election Notice for Holders of Ambac Insured CCDA Bond Claims (the “CCDA Election Notice”), PRIFA and CCDA bondholders were each permitted to choose between two different treatment options for the satisfaction of their claims.

The first option allows the bondholders to elect commutation of their Ambac Insurance Policies.

Under the first option, bondholders will receive:

1) their respective shares of certain consideration available under the Commonwealth Plan and the PRIFA QM, or CCDA QM, as applicable and 2) cash from Ambac.

Bondholders who elect this option will receive this consideration in full and final discharge of Ambac’s obligations under the insurance policies.

Under the second option, the bondholders’ respective shares of consideration available under the Commonwealth Plan and the PRIFA QM, or CCDA QM, as applicable, will be deposited into a trust.

Those bondholders are expected to receive scheduled

| Ambac Financial Group, Inc.

52 2021 Second Quarter FORM 10-Q |

Commonwealth of Puerto Rico (“Seventh Amended POA”) that proposes to restructure approximately $35,000 of debt and approximately $50,000 in pension obligations.

The Seventh Amended POA, among other things, incorporates the settlement reflected in the PRIFA Related Plan Support Agreement (“PRIFA PSA”) that was signed on July 27, 2021, by the Oversight Board, as representative of the Commonwealth of Puerto Rico, AAC, FGIC, and other holders of bonds issued by the Puerto Rico Infrastructure Financing Authority ("PRIFA").

Earlier in July 2021, Judge Swain approved several days between November 8th through November 23rd for a hearing to confirm the Commonwealth's plan of adjustment, although these dates may change.

A successful confirmation and consummation of the Seventh Amended POA would represent a significant step towards resolution of AAC's remaining Puerto Rico exposures;

however, the ultimate outcome of the hearing and the subsequent emergence of the Commonwealth of Puerto Rico from the Title III proceedings is not certain and subject to challenge and other developments.

56 2021 Third Quarter FORM 10-Q |

payments from this trust, unless Ambac elects, in its sole discretion, to pay all or a portion of the outstanding par amounts of the Ambac-insured bonds in such trust.

The accelerated payments will satisfy Ambac's obligations under the applicable Ambac Insurance Policies.

Plan Support Agreements

The PRIFA PSA reflects a July 14, 2021, agreement between the Oversight Board, AAC and FGIC to resolve claims related to bonds issued by PRIFA.

1 unchanged sentence

The Rum Tax CVI is subject to a lifetime nominal cap of about $1,300, and is also subject to various permitted rum tax waterfall deductions and caps on distributions, including the lesser of (a) 40% of cumulative outperformance (net of waterfall deductions), starting on July 1, 2021, less Rum Tax CVI payments made to PRIFA creditors in previous years, (b) 50% of annual rum tax outperformance (net of waterfall deductions), and (c) $30 annually.

Both the cash consideration and the Rum Tax CVI will be deposited into a trust held for the benefit of PRIFA bondholders (the "PRIFA Trust");

the PRIFA Trust will also be funded with a share (approximately 27%) of the Clawback CVI, described below.

The lifetime sum of the Rum Tax CVI and the Clawback CVI cannot exceed the $1,300 lifetime nominal cap (75% of allowed PRIFA claim) under the Seventh Amended POA.

The Rum Tax CVI will be deposited into a master trust (the "CVI Master Trust") and into a sub trust (the "PRIFA CVI Sub Trust") within the CVI Master Trust for the benefit of PRIFA bondholders (the "PRIFA Trust");

the PRIFA CVI Sub Trust will also be funded with a share (approximately 27%) of the Clawback CVI, described below.

The lifetime sum of the Rum Tax CVI and the Clawback CVI cannot exceed the $1,300 lifetime nominal cap (75% of allowed PRIFA claim) under the Eighth Amended POA.

Further, under the PRIFA PSA, AAC and other creditors may also receive fees in connection with negotiating the PRIFA PSA and supporting the restructuring agreement reflected therein.

The value of the PRIFA Trust is highly uncertain given the contingent, outperformance-driven structure of the CVIs coupled with the likely back-ended nature of most of the potential cash flows.

Changes in our assumed values of the PRIFA Trust or the actual performance of the CVIs could cause an adverse change in our reserves which could be material.

As a result, a decrease in our assumed values of the PRIFA Trust could have a material adverse impact on our results of operations and financial condition.

In addition to the PRIFA PSA, AAC signed a joinder to the PRHTA/CCDA Related Plan Support Agreement (“PRHTA/

CCDA PSA”) on July 15, 2021.

The value of the PRIFA CVI Sub Trust is highly uncertain given the contingent, outperformance-driven structure of the CVIs coupled with the likely back-ended nature of most of the potential cash flows.

Changes in our assumed values of the PRIFA CVI Sub Trust or the actual performance of the CVIs could cause an adverse change in our reserves which could be material.

As a result, a decrease in our assumed values of the PRIFA CVI Sub Trust could have a material adverse impact on our results of operations and financial condition.

In addition to the PRIFA PSA, AAC signed a joinder to the PRHTA/CCDA Related Plan Support Agreement (“PRHTA/CCDA PSA”) on July 15, 2021.

The PRHTA/CCDA PSA, originally executed on May 5, 2021, among other things provides for certain consideration for holders of bonds issued by certain Commonwealth instrumentalities, including PRHTA, CCDA, and PRIFA, on account of their claims against the Commonwealth arising from such bonds ("Clawback" claims).

1 unchanged sentence

For years one through 30, a portion of the Clawback CVI consideration reflects a 40% share of cumulative outperformance, starting July 1, 2021, subject to a combined 95% outperformance limit with the subsequently described amounts subject to a waterfall.

The other portion of the Clawback CVI receives, on an annual basis, the lesser of (i) 50% of cumulative outperformance, less payments previously made, and (ii) 75% of annual outperformance, and is subject to a waterfall.

The other portion of the

Clawback CVI receives, on an annual basis, the lesser of (i) 50% of cumulative outperformance, less payments previously made, and (ii) 75% of annual outperformance, and is subject to a waterfall.

The waterfall provides that in years one through 22, (a) holders of general obligation ("GO") bonds will receive the first $100 of outperformance, (b) the Clawback creditors will receive the next $11.1, and (c) any amounts received thereafter will be split 90%/10% between GO creditors and Clawback creditors;

13 unchanged sentences

Of the $264 interim cash distribution, $184.8 would be allocated to holders of PRHTA ’68 bonds and $79.2 would be allocated to holders of PRHTA ’98 bonds.

Claim recovery expectations for PRHTA creditors under the PRHTA/CCDA PSA are uncertain and subject to interpretation due to the

| Ambac Financial Group, Inc.

53 2021 Second Quarter FORM 10-Q |

aforementioned uncertainty related to the value of and/or the actual performance of the Clawback CVI.

Claim recovery expectations for PRHTA creditors under the PRHTA/CCDA PSA are uncertain and subject to interpretation due to the aforementioned uncertainty related to the value of and/or the actual performance of the Clawback CVI.

Under the PRHTA/CCDA PSA, CCDA creditors will receive $112 of cash, inclusive of up to $15 related to restriction fees and consummation costs payable at the effective date of the Commonwealth plan of adjustment.

On July 27, 2021, Ambac joined the July 12, 2021, Amended and Restated Plan Support Agreement with the Oversight Board, as representative of the Commonwealth of Puerto Rico, PBA, and the Employee Retirement System of the Government of the Commonwealth of Puerto Rico ("Amended and Restated GO / PBA PSA").

In general, this PSA follows the Second Amended GO/PBA PSA, originally signed on February 23, 2021, which provided for lower Commonwealth debt service payments per annum relative to the Plan Support Agreement signed in February 2020 (the "Amended GO/PBA PSA"), and extended the tenor of new recovery bonds, increased the amount of cash distributed to creditors, and provided additional consideration in the form of a CVI, intended to provide creditors with additional returns tied to outperformance of the SUT against the certified 2020 Commonwealth Fiscal Plan's projections.

In general, this PSA follows the Second Amended GO/PBA PSA, originally signed on February 23, 2021, which

| Ambac Financial Group, Inc.

57 2021 Third Quarter FORM 10-Q |

provided for lower Commonwealth debt service payments per annum relative to the Plan Support Agreement signed in February 2020 (the "Amended GO/PBA PSA"), and extended the tenor of new recovery bonds, increased the amount of cash distributed to creditors, and provided additional consideration in the form of a CVI, intended to provide creditors with additional returns tied to outperformance of the SUT against the certified 2020 Commonwealth Fiscal Plan's projections.

Fixed consideration as part of the Amended and Restated GO/PBA PSA, as in the Second Amended GO/PBA PSA, includes a combination of cash, new GO current interest bonds, and new GO capital appreciation bonds.

Recovery derived from fixed consideration is estimated to vary between approximately 67% and 77% (as of the petition date) for GO creditors, and between approximately 75% and 80% (as of the petition date) for PBA creditors.

While Ambac has now signed onto plan support agreements covering all of its remaining exposures to unrestructured Puerto Rico instrumentalities, it is unclear whether the Seventh Amended POA will be modified further, or whether the Seventh Amended POA, a prospective PRHTA plan of adjustment, and other plans of adjustment or Title VI agreements for PRIFA and CCDA that reflect these plan support agreements ultimately will be confirmed or approved.

It is possible that if the Seventh Amended POA is modified further, or the Seventh Amended POA or plans of adjustment or Title VI agreements reflecting the plan support agreements are not confirmed or approved, Ambac's financial condition would suffer a material negative impact.

Refer to Note 6.

Insurance Contracts to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Form 10-Q for the possible increase in loss reserves under stress or other adverse conditions.

Plan of Adjustment and Qualifying Modification Considerations

Ambac has signed onto plan support agreements covering all of its remaining exposures to unrestructured Puerto Rico instrumentalities, but uncertainty remains as to (i) whether the Eighth Amended POA, the PRIFA QM, the CCDA QM and a prospective PRHTA plan of adjustment that reflects these plan support agreements (collectively, the “Plans”) ultimately will be confirmed or approved;

(ii) the value or perceived value of the consideration provided by or on behalf of the debtors under the Plans, if confirmed and approved;

(iii) the extent to which exposure management strategies, such as commutation and acceleration, that are available in the Plans will be executed;

(iv) the outcome of related litigation, some of which may not be resolved even if the Plans are confirmed and approved;

(v) the timing of the consummation of the Plans, if confirmed and approved;

(vi) the tax treatment of the consideration provided by or on behalf of the debtors under the Plans, if confirmed and approved;

and (vii) other factors, including market conditions such as interest rate movements and expected movements over time.

Ambac’s loss reserves may prove to be understated or overstated, possibly materially, due to favorable or unfavorable developments or results with respect to these factors.

Refer to Managements Discussion and Analysis of Financial Condition and Results of Operations - Balance Sheet to the Unaudited Consolidated Financial Statements included in Part I, Item 2 in this Form 10-Q for the possible increase in loss reserves under stress or other adverse conditions.

There can be no assurance that losses may not exceed such estimates.

2 unchanged sentences

In connection with the July 27, 2021, PRIFA PSA, Ambac filed urgent motions to stay or dismiss various pending matters related to outstanding litigation in connection with the Title III proceedings.

Refer to "Financial Guarantees in Force" in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Ambac’s Annual Report

on Form 10-K for the year ended December 31, 2020 and Note 12.

Commitments and Contingencies to the Consolidated Financial Statements, included in Part I, Item 1 of this Form 10-Q for further information about Ambac's litigation relating to Puerto Rico.

Refer to "Financial Guarantees in Force" in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Ambac’s Annual Report on Form 10-K for the year ended December 31, 2020 and Note 13.

Commitments and Contingencies to the Consolidated Financial Statements, included in Part I, Item 1 of this Form 10-Q

for further information about Ambac's litigation relating to Puerto Rico.

The full extent of federal government support to Puerto Rico is estimated to be $120,000 per the April 23, 2021, certified Commonwealth Fiscal Plan and stretch from FY 2018 to FY 2035.

The federal government support includes FEMA, HUD and other disaster relief funds stemming from the 2017 hurricanes and 2019-2020 earthquakes and includes about $43,000 of support related to the COVID-19 pandemic, including funding form the recently enacted ARPA.

While the previously allocated federal disaster relief funds and the more recent COVID-19 crisis-related funds are all expected to support economic recovery and growth in Puerto Rico, there can be no assurances as to the certainty, timing, usage, efficacy or magnitude of benefits to creditor outcomes related to disaster aid and ensuing economic growth, if any.

2 unchanged sentences

Such additional losses may have a material adverse effect on Ambac’s results of operations and financial condition.

Due to uncertainty regarding numerous factors, described above, that will ultimately determine the extent of Ambac's losses, it is also possible that favorable developments and results with respect to such factors may cause losses to be lower than current reserves, possibly materially.

Exposure Currency

The table below shows the distribution by currency of AAC’s insured exposure as of June 30, 2021:

The table below shows the distribution by currency of AAC’s insured exposure as of September 30, 2021:

Currency Net Par Amount

8 unchanged sentences

| Ambac Financial Group, Inc.

54 2021 Second Quarter FORM 10-Q |

58 2021 Third Quarter FORM 10-Q |

Ratings Distribution

The following charts provide a rating distribution of net par outstanding based upon internal Ambac credit ratings (1) and a distribution by bond type of Ambac's below investment grade ("BIG") net par exposures at June 30, 2021 and December 31, 2020.

BIG is defined as those exposures with an Ambac internal credit rating below BBB-:

5 unchanged sentences

Summary of Below Investment

Grade Exposure June 30,

Grade Exposure September 30,

2021 December 31,

14 unchanged sentences

Total $ 5,644 $ 7,321

(1) Lease and tax-backed revenue includes $965 and $969 of Puerto Rico net par at June 30, 2021 and December 31, 2020, respectively.

General obligation includes $101 and $101 of Puerto Rico net par at June 30, 2021 and December 31, 2020, respectively.

(1) Lease and tax-backed revenue includes $960 and $969 of Puerto Rico net par at September 30, 2021 and December 31, 2020, respectively.

General obligation includes $94 and $101 of Puerto Rico net par at September 30, 2021 and December 31, 2020, respectively.

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

4 unchanged sentences

| Ambac Financial Group, Inc.

55 2021 Second Quarter FORM 10-Q |

59 2021 Third Quarter FORM 10-Q |

Results of Operations

1 unchanged sentence

A summary of our financial results is shown below:

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

12 unchanged sentences

Net income (loss) attributable to common stockholders $ 17 $ (108) $ 5 $ (423)

Ambac's results of operations and financial position have been adversely impacted by the COVID-19 pandemic's effect on the global economy and financial markets.

Significant interest rate declines during the first quarter of 2020 contributed materially to a net increase in loss reserves and losses on interest rate derivative contracts for the six months ended June 30, 2020.

Credit driven losses were also recognized in the six months ended June 30, 2021, within losses incurred (primarily from public finance insurance policies) and losses from counterparty credit adjustments on derivative asset valuations.

Ambac's 2020 results of operations and financial position were adversely impacted by the COVID-19 pandemic's effect on the global economy and financial markets.

Financial market disruptions were reflected through lower valuations of certain fixed maturity securities (recorded through other comprehensive income) and the majority of other investments (recorded through net investment income).

During the remaining quarters of 2020 and into 2021, credit spreads recovered (favorably impacting counterparty credit adjustments on derivative assets and valuations of investment securities).

During the second half of 2020 and into 2021, credit spreads recovered (favorably impacting counterparty credit adjustments on derivative assets and valuations of investment securities).

The scope, duration and magnitude of the direct and indirect effects of COVID-19 are evolving in ways that are difficult or impossible to anticipate.

As a result, it is possible that Ambac's results of operations and financial condition may be further adversely affected by the evolving affects of the COVID-19 pandemic.

For additional information on the risks posed by COVID-19, refer to Item 1A to

Part I, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2020.

The following paragraphs describe the consolidated results of operations of Ambac and its subsidiaries for the three and six months ended June 30, 2021 and 2020, respectively.

For additional information on the risks posed by COVID-19, refer to Item 1A to Part I, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2020.

The following paragraphs describe the consolidated results of operations of Ambac and its subsidiaries for the three and nine months ended September 30, 2021 and 2020, respectively.

Net Premiums Earned .

3 unchanged sentences

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.

Net premiums earned increased $0 and $4 for the three and six months ended June 30, 2021, compared to the same periods in the prior year.

Net premiums earned decreased $4 and $— for the three and nine months ended September 30, 2021, compared to the same periods in the prior year.

Normal net premiums earned and accelerated premiums are reconciled to total net premiums earned in the table below.

The following table provides a breakdown of normal premiums earned by market:

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

7 unchanged sentences

$ 11 $ 15 $ 36 $ 36

(1) Specialty property and casualty net premiums earned included above is deminimis

The increase in normal premiums earned for the six months ended June 30, 2021, is primarily due to changes in allowances for credit losses on premium receivables, partially offset by the continued runoff of the financial guaranty insured portfolio in all markets.

(1) Specialty property and casualty net premiums earned are included above and are currently deminimis

The increase in normal premiums earned for the nine months ended September 30, 2021, is primarily due to changes in allowances for credit losses on premium receivables, partially offset by the continued runoff of the financial guaranty insured portfolio in all markets.

Ambac adopted ASU 2016-13, Measurement of Credit Losses on Financial Instruments ("CECL"), on January 1, 2020, and assesses the allowance for credit losses on premium receivables on a quarterly basis.

The three and six months ended June 30, 2021, includes a decrease in the allowance for credit losses of $2 and $6, respectively, as c ompared to an increase of $2 and $4 for the three and six months ended June 30, 2020.

The three and nine months ended September 30, 2021, includes a decrease in the allowance for credit losses of $1 and $7, respectively, as c ompared to an increase of $2 and $5 for the three and nine months ended September 30, 2020.

Terminations and accelerations, including those which occurred in prior periods, result in lower normal premiums earned in current and future periods.

Public Finance normal earned premiums for the three and six months ended June 30, 2021, were also impacted by reinsurance cessions in the first quarter of 2021.

Public Finance normal earned premiums for the three and nine months ended September 30, 2021, were also negatively impacted by reinsurance cessions in the first quarter of 2021.

| Ambac Financial Group, Inc.

56 2021 Second Quarter FORM 10-Q |

60 2021 Third Quarter FORM 10-Q |

Net Investment Income.

8 unchanged sentences

and Other investments is summarized in the table below:

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

4 unchanged sentences

Net investment income $ 21 $ 37 $ 112 $ 69

Net investment income decreased $11 and increased $59 for the three and six months ended June 30, 2021, respectively, compared to the same periods in the prior year.

As described further below, the variances were primarily driven by pricing volatility within fund investments resulting from the impact of the COVID-19 pandemic on financial markets and re-allocation of the investment portfolio during 2020 toward pooled funds and Ambac-insured bonds from investment grade corporate bonds, commercial mortgage backed securities and certain CLOs.

• Other investments income (loss) decreased $7 and increased $72 for the three and six months ended June 30, 2021, respectively, compared to the same periods in the prior year.

Pooled fund investments have continued to perform well overall in 2021, particularly in hedge and equity funds.

Despite a higher asset base and sound returns in 2021, other investment income declined for the three months ended June 30, 2021, reflecting the challenging comparison against a very strong market recovery in the second quarter of 2020.

The increase in other investment income for the six month period reflects favorable performance and a higher invested asset base in 2021, compared to net losses on other

investments for the six months ended June 30, 2020.

The losses for the first six months of 2020, were primarily in hedge and equity fund investments driven by adverse changes in fair values as a consequence of the initial economic and financial market impact of the COVID-19 pandemic in the first quarter of 2020, partially offset by a generally strong second quarter 2020 market recovery.

• Income from Ambac-insured securities was lower for the three and six months ended June 30, 2021, as compared to the same periods in the prior year, due to the ongoing redemptions of Secured Notes issued by Ambac LSNI, lower LIBOR indexed coupon rates and sales and redemptions of RMBS, partially offset by a higher 2021 allocation to Ambac-insured Puerto Rico bonds.

Net investment income decreased $16 and increased $44 for the three and nine months ended September 30, 2021, respectively, compared to the same periods in the prior year.

As described further below, the variances were impacted by pricing volatility within fund investments resulting from the impact of the COVID-19 pandemic on financial markets and re-allocation of the investment portfolio during 2020 toward pooled funds and Ambac-insured bonds from investment grade corporate bonds, commercial mortgage backed securities and certain CLOs.

• Other investments income (loss) decreased $7 and improved $64 for the three and nine months ended September 30, 2021, respectively, compared to the same periods in the prior year.

Pooled fund investment performance was mixed for the three months ended September 30, 2021, but have performed well overall in 2021, particularly in hedge and equity funds.

Despite a higher asset base, other investment income declined for the three months ended September 30, 2021, reflecting negative performance in equities as well as lower positive performance in most other classes compared to the third quarter of 2020.

The increase in other investment income for the nine month period reflects favorable

performance and a higher invested asset base in 2021, compared to net losses on other investments for the nine months ended September 30, 2020.

The losses for the first nine months of 2020, were primarily in hedge and equity fund investments driven by adverse changes in fair values as a consequence of the initial economic and financial market impact of the COVID-19 pandemic in the first quarter of 2020, partially offset by a generally strong market recovery over the second and third quarter of 2020.

• Income from Ambac-insured securities was lower for the three and nine months ended September 30, 2021, as compared to the same periods in the prior year, due primarily to early redemptions of Secured Notes issued by Ambac LSNI including the full redemption connection with the July 6, 2021 Secured Note Refinancing.

• Net investment income from available-for-sale securities other than Ambac-insured securities decreased as a result of a lower asset base and average yield for this portion of the portfolio.

1 unchanged sentence

Additionally, cash has been used to fund operations, early debt redemptions, and Ambac's acquisition of Xchange.

Lower yields in the three and six months ended June 30, 2021, compared to the same periods in the prior year, reflect the higher rated securities purchased during the 2020 portfolio re-allocation, lower relative yields on new investments and near-zero short term rates prevailing during the first six months of 2021.

Lower yields in the nine months ended September 30, 2021, compared to the same period in the prior year, reflect the higher rated securities purchased during the 2020 portfolio re-allocation, lower relative yields on new investments and near-zero short term rates prevailing during the first nine months of 2021.

Net Realized Investment Gains (Losses).

The following table provides a breakdown of net realized gains (losses) for the periods presented:

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

4 unchanged sentences

Total net realized gains (losses) $ 3 $ 2 $ 4 $ 20

Net realized gains on securities sold or called for the six months ended June 30, 2021, included a gain of $4 realized on the sale AFG's equity interest in the Corolla Trust in connection with the Corolla Exchange Transaction.

Net realized gains on securities sold or called for the nine months ended September 30, 2021, included a gain of $4 realized on the sale AFG's equity interest in the Corolla Trust in connection with the Corolla Exchange Transaction.

Other net realized gains on securities sold or called during both periods were primarily from sales in connection with routine portfolio management.

2 unchanged sentences

If management either:

(i) has the intent to sell its investment in a debt security or (ii) determines that the

(i) has the intent

| Ambac Financial Group, Inc.

57 2021 Second Quarter FORM 10-Q |

Company more likely than not will be required to sell the debt security before its anticipated recovery, then the amortized cost of the security is written-down to fair value with a corresponding impairment charge recognized in earnings.

61 2021 Third Quarter FORM 10-Q |

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, then the amortized cost of the security is written-down to fair value with a corresponding impairment charge recognized in earnings.

Net Gains (Losses) on Derivative Contracts.

3 unchanged sentences

Results from credit derivatives were not significant to the periods presented.

Net gains (losses) on interest rate derivatives for the three and six months ended June 30, 2021, were ($11) and $14, respectively, compared to $1 and $(67) for the three and six months ended June 30, 2020, respectively.

The net loss for the three months ended June 30, 2021, reflects changes in fair value from declines in forward interest rates and portfolio carrying costs as well as higher counterparty credit adjustments on certain derivative assets.

The gain for the six months ended June 30, 2021, was driven by higher forward interest rates during the period and lower counterparty credit adjustments on certain derivative assets, partially offset by portfolio carrying costs.

The net gain for the three months ended June 30, 2020, reflects a gain from reduced counterparty credit adjustments, partially offset by the impact of interest rate movements on the portfolio.

The net loss for the six months ended June 30, 2020, reflects significant declines in forward interest rates, triggered by the COVID-19 pandemic, and losses from the application of counterparty credit adjustments, described further below.

Net gains (losses) on interest rate derivatives for the three and nine months ended September 30, 2021, were $5 and $18 respectively, compared to $6 and $(61) for the three and nine months ended September 30, 2020, respectively.

The net gains for the three and nine month periods ended September 30, 2021, reflect changes in fair value from increases in forward interest rates and lower counterparty credit adjustments on certain derivative assets, partially offset by portfolio carrying costs.

The net gain for the three months ended September 30, 2020, primarily reflects a gain from reduced counterparty credit adjustments.

The net loss for the nine months ended September 30, 2020, reflects significant declines in forward interest rates, triggered by the COVID-19 pandemic, and losses from the application of counterparty credit adjustments, described further below.

Counterparty credit adjustments are generally applicable for uncollateralized derivative assets that may not be offset by derivative liabilities under a master netting agreement.

Inclusion of counterparty credit adjustments in the valuation of interest rate derivatives resulted in gains (losses) within Net gains (losses) on derivative contracts of $(3) and $6 for the three and six months ended June 30, 2021, respectively, and $8 and $(21) for the three and six months ended June 30, 2020, respectively.

Inclusion of counterparty credit adjustments in the valuation of interest rate derivatives resulted in gains (losses) within Net gains (losses) on derivative contracts of $2 and $8 for the three and nine months ended September 30, 2021, respectively, and $6 and $(15) for the three and nine months ended September 30, 2020, respectively.

In addition to the impact of interest rates on the underlying derivative asset values, the changes in counterparty credit adjustments are driven by movement of credit spreads.

Credit spreads were relatively unchanged in the second quarter of 2021, and narrowed in six months ended June 30, 2021.

Spreads narrowed in the second quarter of 2020 partially reversing the spread widening experienced in the first quarter of 2020 associated with the market disruption from the COVID-19 pandemic.

Credit spreads narrowed in the three and nine months ended September 30, 2021.

Spreads narrowed in the third quarter of 2020 partially reversing the spread widening experienced in the first half of 2020 associated with the market disruption from the COVID-19 pandemic.

Other income (expense) .

Other income (expense) includes commission revenues of Xchange, ceding fees from the specialty property and casualty business and various financial guarantee fees and foreign exchange gains/(losses) unrelated to investments or loss reserves.

For the three and six months ended June 30, 2020, other income includes Xchange revenues of $6 and $13, respectively.

Other income (expense) includes commission revenues of Xchange, ceding fees from the specialty property and casualty business, various financial guarantee fees and foreign exchange gains/(losses) unrelated to investments or loss reserves.

For the three and nine months ended September 30, 2021, other income includes Xchange revenues of $7 and $20, respectively.

Net Realized Gains on Extinguishment of Debt .

Net realized gains on extinguishment of debt was $33 for the six months ended June 30, 2021, resulting from the first quarter 2021 exchanges of junior surplus notes below their carrying values.

Net realized gains on extinguishment of debt was $33 for the nine months ended September 30, 2021, resulting from the first quarter 2021 exchanges of junior surplus notes below their carrying values.

Refer to Note 1.

8 unchanged sentences

Additionally, terminations or other changes to Ambac's financial guarantee insurance policies that impact projected cash flows between a consolidated VIE and Ambac could result in gains or losses, even if such policy changes do not result in deconsolidation of the VIE.

Income (loss) on variable interest entities was $2 and $2 for the three and six months ended June 30, 2021, respectively, compared to a loss of less than a million and income of $3 for the three and six months ended June 30, 2020, respectively.

Results for the three months ended June 30, 2021, were due primarily to gains on higher valuation of net assets on VIEs.

Results for the six months ended June 30, 2021 included realized gains of $1 on sales of assets, together with higher valuation of net assets on VIEs.

Results for the three and six months ended June 30, 2020, were due primarily to realized gains of $8 on sales of assets partially offset by the lower valuation of net assets on VIEs impacted by COVID-19.

Income on variable interest entities was $3 and $5 for the three and nine months ended September 30, 2021, respectively, compared to a loss of less than a million and income of $3 for the three and nine months ended September 30, 2020, respectively.

Results for the three months ended September 30, 2021, included realized gains of $1 on sales of assets from one VIE (the COFINA Trust), together with higher valuation of net assets of VIEs.

Results for the nine months ended September 30, 2021, included realized gains of $2 on sales of assets from the COFINA Trust, together with higher valuation of net assets on VIEs.

Results for the three months ended September 30, 2020, reflected a modest reduction in value of net assets of a VIE related to the ongoing shut-down of parts of the UK economy resulting from COVID-19.

Results for the nine months ended September 30, 2020, were due primarily to realized gains of $8 on sales of assets from the COFINA Trust, partially offset by the lower valuation of net assets on VIEs impacted by COVID-19.

Refer to Note 3.

Variable Interest Entities to the Unaudited Consolidated Financial Statements, included in Part I, Item 1 in this Form 10-Q for further information on the accounting for VIEs.

| Ambac Financial Group, Inc.

62 2021 Third Quarter FORM 10-Q |

Losses and Loss Expenses.

Losses and loss expenses are based upon estimates of the aggregate losses inherent in the non-derivative portfolio for insurance policies issued to beneficiaries, excluding consolidated VIEs.

| Ambac Financial Group, Inc.

58 2021 Second Quarter FORM 10-Q |

Ambac records as a component of its loss reserve estimate subrogation recoveries related to securitized loans in RMBS transactions with respect to which AAC is pursuing claims for breaches of representations and warranties.

Ambac does not include potential recoveries attributed solely to fraudulent inducement claims in our litigations in our estimate of subrogation recoveries.

Nor does Ambac include potential recoveries attributable to pre-judgment interest in the estimate of subrogation recoveries.

Generally, the sponsor of an RMBS transaction provided representations and warranties with respect to the securitized loans, including representations with respect to the loan characteristics, the absence of borrower fraud in the underlying loan pools or other misconduct in the origination process and attesting to the compliance of loans with the prevailing underwriting policies.

Ambac has recorded representation and warranty subrogation recoveries, net of reinsurance, of $1,715 and $1,725 at June 30, 2021, and December 31, 2020, respectively.

Ambac has recorded representation and warranty subrogation recoveries, net of reinsurance, of $1,705 and $1,725 at September 30, 2021, and December 31, 2020, respectively.

Refer to Note 2.

1 unchanged sentence

The following provides details for losses and loss expenses (benefit) incurred for the periods presented:

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

4 unchanged sentences

$ (55) $ 83 $ (73) $ 216

(1) Includes loss expenses incurred of $13 and $23 for the three and six months ended June 30, 2021, respectively, and $34 and $37 for the three and six months ended June 30, 2020, respectively.

(1) Includes financial guarantee loss expenses incurred of $19 and $42 for the three and nine months ended September 30, 2021, respectively, and $46 and $83 for the three and nine months ended September 30, 2020, respectively.

(2) Specialty property and casualty loss and loss expenses incurred included above is deminimis

Losses and loss expenses (benefit) for the three and six months ended June 30, 2021, were largely driven by structured finance credits as a result of improved credit and the positive impact of interest rates on excess spread, partially offset by the negative impact of discount rates.

Losses and loss expenses (benefit) for the three and six months ended June 30, 2020, were driven by the following:

• Higher projected losses in domestic public finance (primarily relating to Puerto Rico) driven by lower discount rates and estimated losses related to transactions directly impacted by the economic impact from COVID-19;

• Favorable structured finance development as a result of the positive impact of lower interest rates on excess spread, reduced by the negative impact of lower discount rates and estimated losses from COVID-19 related delinquencies.

Losses and loss expenses (benefit) for the three and nine months ended September 30, 2021, were largely driven by favorable loss development in domestic public finance, primarily related to Puerto Rico, and structured finance, primarily related to improved credit in RMBS, partially offset by loss expenses incurred.

Results for the nine months ended September 30, 2021, also reflect the positive impact of interest rates on RMBS excess spread, partially offset by the negative impact of discount rates.

Losses and loss expenses (benefit) for the three and nine months ended September 30, 2020, were driven by the following:

• Higher projected losses in domestic public finance driven by lower discount rates (primarily relating to Puerto Rico), loss

expenses incurred and incurred losses related to transactions directly impacted by the economic impact from COVID-19;

• Increased structured finance losses for the three months ended September 30, 2020, related to expected losses from COVID-19 related delinquencies and improved structured finance losses for the nine months ended September 30, 2020, were driven by the positive impact of lower interest rates on excess spread, reduced by lower discount rates and expected losses from COVID-19 related delinquencies.

Intangible Amortization

Insurance intangible amortization for the three and six months ended June 30, 2021, was $13 and $31, a decrease of $(1) and an increase of $5 over the three and six months ended June 30, 2020.

The YTD increase was driven primarily by de-risking activity.

O ther intangible amortization for the three and six months ended June 30, 2021, was $1 and $1, respectively.

Insurance intangible amortization for the three and nine months ended September 30, 2021, was $10 and $42, a decrease of $3 and an increase of $1 over the three and nine months ended September 30, 2021.

The decrease during the third quarter was driven primarily by de-risking activity during the second quarter of 2021.

O ther intangible amortization for the three and nine months ended September 30, 2021, was $1 and $2, respectively.

Operating Expenses.

1 unchanged sentence

The following table provides a summary of operating expenses for the periods presented:

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

4 unchanged sentences

Total operating expenses $ 32 $ 23 $ 94 $ 67

Gross operating expenses increased $8 and $17 for the three and six months ended June 30, 2021, respectively, compared to the same period in the prior year.

The increase in operating expenses during the three months ended June 30, 2021, as compared to the three months ended June 30, 2020, was due to the following:

• Higher compensation costs due to a net increase in staffing resulting from the inclusion of the specialty property & casualty insurance and the managing general agency/underwriting businesses and performance based incentive compensation adjustments recorded in the second quarter of 2021.

• Higher non-compensation costs primarily due to the inclusion of commissions to sub-producers as part of the managing general agency/underwriting business of $4 for the three months ended June 30, 2021.

The increase in operating expenses during the six months ended June 30, 2021, as compared to the six months ended June 30, 2020, was due to the following:

• Higher compensation costs primarily due to a net increase in staffing resulting from the inclusion of the specialty property & casualty insurance and the managing general agency/underwriting businesses, higher incentive compensation costs and lower capitalization of compensation costs associated with internal software projects.

• Higher non-compensation costs primarily due to the inclusion of commissions to sub-producers of $7, costs associated with the Corolla exchange and junior surplus notes exchange transactions, a UK Value Added Tax refund in 2020 and increased software and legal fees.

Gross operating expenses increased $9 and $27 for the three and nine months ended September 30, 2021, respectively, compared to the same periods in the prior year.

The increase in operating expenses during the three months ended September 30, 2021, as compared to the three months ended September 30, 2020, was due to the following:

• Higher compensation costs due to a net increase in staffing resulting from additions in the SPCP and MGA/U businesses and the timing of incentive compensation performance factor adjustments.

• Higher non-compensation costs primarily due to the inclusion of commissions to sub-producers as part of the MGA/U business of $4 and other costs associated with development of the SPCP and MGA/U businesses for the three months ended September 30, 2021.

The increase in operating expenses during the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020, was due to the following:

• Higher compensation costs primarily due to a net increase in staffing resulting from additions in the SPCP and MGA/U businesses partially offset by declining staff levels within Financial Guarantee, the timing of incentive compensation

| Ambac Financial Group, Inc.

59 2021 Second Quarter FORM 10-Q |

63 2021 Third Quarter FORM 10-Q |

performance factor adjustments and lower capitalization of costs associated with internal software projects.

• Higher non-compensation costs primarily due to the inclusion of commissions to sub-producers as part of the MGA/U business of $11, other costs associated with development of the SPCP and MGA/U businesses in 2021, costs associated with the Corolla exchange and junior surplus notes exchange transactions, and an UK Value Added Tax refund in 2020.

Interest Expense.

Interest expense includes accrued interest on the LSNI Ambac Note, Tier 2 notes, surplus notes and other debt obligations.

Interest expense includes accrued interest on the LSNI Ambac note, Sitka AAC note, Tier 2 notes, surplus notes and other debt obligations.

Additionally, interest expense includes discount accretion when the debt instrument carrying value is at a discount to par.

The following table provides details by type of obligation for the periods presented:

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

2 unchanged sentences

LSNI Ambac note 1 25 50 83

Sitka AAC note 16 — 16 —

Tier 2 notes 7 7 20 21

1 unchanged sentence

Total interest expense $ 44 $ 50 $ 144 $ 172

(1) Includes junior surplus notes

The decrease in interest expense for the three and six months ended June 30, 2021, compared to the three and six months ended June 30, 2020, was primarily driven by lower discount accretion on surplus notes, together with optional redemptions and lower rate resets of the floating rate LSNI Ambac Note, partially offset by interest compounding on the surplus notes and the Tier 2 Notes.

The first quarter 2021 transactions resulting in the acquisition and retirement of all junior surplus notes in exchange for re-issuance of surplus notes did not significantly impact the interest expense for the three and six months ended June 30, 2021, compared to the prior year periods.

(1) Includes junior surplus notes that were acquired and retired in the first quarter of 2021.

The decrease in interest expense for the three months ended September 30, 2021, compared to the three months ended September 30, 2020, was mainly driven by the impact of the Secured Note Refinancing as further described in Note 1.

Background and Business Description, partially offset by discount accretion on surplus notes reissued in 2021.

The decrease in interest expense for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, was primarily driven by lower interest expense on surplus notes, together with the impact of the Secured Note Refinancing, partially offset by interest compounding on the surplus notes and the Tier 2 notes.

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 two exceptional payments.

In May 2021, OCI declined the request of AAC to pay the principal amount of the surplus notes, plus all accrued and unpaid interest thereon, on the next scheduled payment date of June 7, 2021.

2 unchanged sentences

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

The interest on the outstanding surplus notes and junior surplus notes were accrued for and AAC is accruing interest on the interest amounts following each scheduled payment date.

Total accrued and unpaid interest for surplus notes outstanding to third parties were $532 at June 30, 2021.

The interest on the outstanding surplus notes were accrued for and AAC is accruing interest on the interest amounts following each scheduled payment date.

Total accrued and unpaid interest for surplus notes outstanding to third parties were $555 at September 30, 2021.

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 two exceptional payments.

Provision for Income Taxes .

The provision for income taxes for the three and six months ended June 30, 2021, was $11, an increase of $8 compared to the provision for income taxes reported for three and six months ended June 30, 2020.

The change for the three and six months ended June 30, 2021, as compared to the three and six months ended June 30, 2020, resulted from the impact of the 2021 enactment of an increase in U.K.

tax rates on Ambac's deferred tax liability, and state income

tax related to the gains on the Corolla and junior surplus note exchange transactions, and in 2020 Ambac UK losses on investment in pooled funds.

The provision for income taxes for the three and nine months ended September 30, 2021, was $2, and $15 an increase of $2 and $19 compared to the provision for income taxes reported for three and nine months ended September 30, 2020.

The change for the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020, resulted from the impact of the 2021 enactment of an increase in U.K.

tax rates on Ambac's deferred tax liability, and state income tax related to the gains on the Corolla and junior surplus note exchange transactions, and in 2020, Ambac UK investment and insurance losses.

LIQUIDITY AND CAPITAL RESOURCES

2 unchanged sentences

("AFG") Liquidity .

AFG's liquidity is primarily dependent on its net assets, excluding its equity investments in subsidiaries totaling $281 as of June 30, 2021, and secondarily on distributions and expense sharing payments from its subsidiaries.

• During the six months ended June 30, 2021, AFG further capitalized the Everspan Group with a cash contribution to Everspan Indemnity Insurance Company of approximately $82.

AFG's liquidity is primarily dependent on its net assets, excluding its equity investments in subsidiaries, totaling $282 as of September 30, 2021, and secondarily on distributions and expense sharing payments from its subsidiaries.

• During the nine months ended September 30, 2021, AFG further capitalized the Everspan Group with a cash contribution to Everspan Indemnity Insurance Company of approximately $82.

• Under an inter-company cost allocation agreement, AFG is reimbursed by AAC for a portion of certain operating costs and expenses and, if approved by OCI, entitled to an additional payment of up to $4 per year to cover expenses not otherwise reimbursed.

The $4 reimbursement for 2020 expenses was approved (by OCI) and paid (by AAC) in April 2021.

• AFG received its first distribution from Xchange in the second quarter of 2021 for approximately $3.

• AFG has received distributions from Xchange of $5 during the nine months ended September 30, 2021.

AFG's investments include securities directly and indirectly issued by and/or insured by AAC, some of which are eliminated in consolidation.

Securities issued and/or insured by AAC are generally less liquid than investment grade and other traded investments.

AFG's available liquidity from subsidiary distributions is dependent upon the subsidiaries' earnings, operating cash flow and applicable regulatory and contractual restrictions, as well as the strategic decisions of management.

AFG's available liquidity from subsidiary distributions is dependent upon the subsidiaries' earnings, operating cash flow, capital needs and applicable regulatory and contractual restrictions, as well as the strategic decisions of management.

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

1 unchanged sentence

Refer to Part I, Item 1, “Insurance Regulatory Matters — Dividend Restrictions, Including Contractual Restrictions” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, and Note 8.

Insurance Regulatory Restrictions to the Consolidated Financial Statements included in Part II, Item 8, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, for more information on dividend payment restrictions.

• Everspan does not have sufficient earned surplus at this time to pay ordinary dividends under the Arizona Insurance Laws.

Payments from Everspan to AFG may include expense allocation payments and tax payments.

• Xchange currently does not have any regulatory restrictions on its ability to make distributions.

The principal uses of liquidity include the payment of operating expenses, including costs to explore opportunities to grow and diversify Ambac;

the making of investments, which may include

Insurance Regulatory Restrictions to the Consolidated Financial Statements included in Part II, Item 8, in the Company’s Annual Report on Form 10-K for the year ended

| Ambac Financial Group, Inc.

60 2021 Second Quarter FORM 10-Q |

securities issued or insured by AAC or Ambac UK and other less liquid investments;

and the acquisition or capitalization of new businesses.

64 2021 Third Quarter FORM 10-Q |

December 31, 2020, for more information on dividend payment restrictions.

• Everspan's capital is required to support the growth of its business.

In addition, Everspan does not have sufficient earned surplus at this time to pay ordinary dividends under the Arizona Insurance Laws.

Nevertheless, payments from Everspan to AFG may include expense allocation payments and tax payments.

• Xchange currently does not have any regulatory restrictions on its ability to make distributions.

AFG's principal uses of liquidity include the payment of operating expenses, including costs to explore opportunities to grow and diversify Ambac;

the making of investments, which may include securities issued or insured by AAC or Ambac UK and other less liquid investments, including strategic investments that may be synergistic to Ambac's SPCP and MGA/U businesses;

and the acquisition or capitalization of new and existing businesses.

Contingencies could cause material liquidity strains.

10 unchanged sentences

ceded reinsurance premiums;

principal and interest payments on the LSNI Ambac Note (refinanced by the Sitka AAC Note as described in Note 1.

principal and interest payments on the Sitka AAC note (which refinanced the LSNI Ambac Note as described in Note 1.

Background and Business Description to the Unaudited Consolidated Financial Statements included in this Form 10-Q), surplus notes and Tier 2 Notes;

5 unchanged sentences

Any such payment on surplus notes would require either payment or collateralization of a portion of the Tier 2 Notes under the terms of the Tier 2 Note indenture.

Long-term Debt in the Notes to Consolidated Financial Statements, included in Part II, Item 8, in the Company's Annual Report on Form 10-K for the year ended December 31, 2020, for further discussion of the payment terms and conditions of the Tier 2 Notes.

As discussed more fully in "Results of Operations" above in this Management's Discussion and Analysis, OCI declined AAC's request to pay the principal amount of the surplus notes, plus all accrued and unpaid interest thereon, on June 7, 2021 and on each prior scheduled payment date.

Debt in the Notes to Consolidated Financial Statements, included in Part II, Item 8, in the Company's Annual Report on Form 10-K for the year ended December 31, 2020, for further discussion of the payment terms and conditions of the Tier 2 Notes.

AAC's intercompany loans are to Ambac Financial Services ("AFS").

1 unchanged sentence

AFS's derivatives include interest rate swaps previously provided to asset-backed issuers and other entities in connection with their financings.

AAC loans cash and securities to AFS as needed

mostly to fund payments under these derivative contracts and collateral posting requirements.

AAC loans cash and securities to AFS as needed mostly to fund payments under these derivative contracts and collateral posting requirements.

Intercompany loans are governed by an established lending agreement with defined borrowing limits that has received non-disapproval from OCI.

10 unchanged sentences

intervention by the OCI, which could impede our ability to take actions required to realize such recoveries;

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

| Ambac Financial Group, Inc.

65 2021 Third Quarter FORM 10-Q |

uncertainty inherent in the assumptions used in estimating the amount of such recoveries.

The amount of these subrogation recoveries is significant and if we are unable to recover any amounts or recover materially less than our estimated recoveries, our future available liquidity to pay claims, debt service and meet our other obligations would be reduced materially.

2 unchanged sentences

Risk Factors in this Form 10-Q, for more information about risks relating to our RMBS R&W subrogation recoveries.

| Ambac Financial Group, Inc.

61 2021 Second Quarter FORM 10-Q |

Cash Flow Statement Discussion.

The following table summarizes the net cash flows for the periods presented.

Six Months Ended June 30, 2021 2020

Nine Months Ended September 30, 2021 2020

Cash provided by (used in):

4 unchanged sentences

Net cash flow

$ (14) $ (31)

Operating activities

The following represents the significant cash operating activity during the six months ended June 30, 2021 and 2020:

• Debt service payments on the LSNI Ambac Note were $49 and $58 for the six months ended June 30, 2021 and 2020, respectively.

• Receipts (payments) for operating activities related to interest rate derivatives were $(3) and $(19) for the six months ended June 30, 2021 and 2020, respectively.

• Operating expenses were $45 and $44 for the six months ended June 30, 2021 and 2020, respectively.

• Cash provided by the investment portfolio was $44 and $58 for the six months ended June 30, 2021 and 2020, respectively.

• Net loss and loss expenses paid, including commutation payments, during the six months ended June 30, 2021 and 2020 are detailed below:

Six Months Ended June 30, 2021 2020

The following represents the significant cash operating activity during the nine months ended September 30, 2021 and 2020:

• Debt service payments on the LSNI Ambac Note were $51 and $83 for the nine months ended September 30, 2021 and 2020, respectively.

Debt service payments on the Sitka AAC Note were $14 for the nine months ended September 30, 2021.

• Payments related to (i) operating expenses were $65 and $60 for the nine months ended September 30, 2021 and 2020, respectively;

(ii) reinsurance premiums were $21 and $2 for the nine months ended September 30, 2021 and 2020, respectively, and (iii) interest rate derivatives were $4 and $20 for the nine months ended September 30, 2021 and 2020, respectively.

• Cash provided by the investment portfolio was $66 and $82 for the nine months ended September 30, 2021 and 2020, respectively.

• Net financial guarantee loss and loss expenses paid, including commutation payments, during the nine months ended September 30, 2021 and 2020 are detailed below:

Nine Months Ended September 30, 2021 2020

Net loss and loss expenses paid (recovered):

3 unchanged sentences

Net cash flow

Future operating cash flows will primarily be impacted by interest payments on outstanding debt, claim and expense payments, investment coupon receipts and premium collections.

Future operating cash flows will primarily be impacted by interest payments on outstanding debt, net claim and expense payments, investment coupon receipts and premium collections.

Financing Activities

Financing activities for the six months ended June 30, 2021, include paydowns of the LSNI Ambac Note of $16 and paydowns and maturities of VIE debt obligations of $85.

Financing activities for the six months ended June 30, 2020, include paydowns of the LSNI Ambac Note of $103 and paydowns and maturities of VIE debt obligations of $99.

Financing activities for the nine months ended September 30, 2021, include paydowns of the LSNI Ambac Note of $1,641, together with paydowns and maturities of VIE debt obligations of $133.

Net cash used in financing activities was partially offset by net proceeds from issuance of Sitka AAC Note of $1,163.

Financing activities for the nine months ended September 30, 2020, include other paydowns of the LSNI Ambac Note of $115 and paydowns and maturities of VIE debt obligations of $143.

AFS hedges a portion of the interest rate risk in the financial guarantee and investment portfolio, along with legacy customer interest rate swaps, with standardized derivative contracts, including financial futures contracts, which contain collateral or margin requirements.

Under these hedge agreements, AFS is required to post collateral or margin to its counterparties and

futures commission merchants to cover unrealized losses.

Under these hedge agreements, AFS is required to post collateral or margin to its counterparties and futures commission merchants to cover unrealized losses.

In addition, AFS is required to post collateral or margin in excess of the amounts needed to cover unrealized losses.

5 unchanged sentences

All collateral and margin obligations are currently met.

Collateral and margin posted by AFS totaled a net amount of $134 (cash and securities collateral of $14 and $120, respectively), including independent amounts, under these contracts at June 30, 2021.

Collateral and margin posted by AFS totaled a net amount of $129 (cash and securities collateral of $9 and $120, respectively), including independent amounts, under these contracts at September 30, 2021.

Ambac Credit Products (“ACP”) is not required to post collateral under any of its outstanding credit derivative contracts.

1 unchanged sentence

($ in millions)

Total assets decreased by approximately $313 from December 31, 2020, to $12,907 at June 30, 2021, primarily due to the payment of loss and loss expenses, interest and operating expenses, lower subrogation recoverables, lower consolidated VIE assets from paydowns of consolidated VIE liabilities, and the impact of the Corolla Trust Exchange described in Note 1.

Background and Business Description to the Unaudited Consolidated Financial Statements, included in Part I, Item 1 in this Form 10-Q.

Other significant changes during the six months ended June 30, 2021, were from partial redemptions of the LSNI Ambac Note, lower derivative assets caused by rising interest rates, and lower premium receivables and intangible assets from the continued runoff of the financial guarantee insurance portfolio.

Total liabilities decreased by approximately $310 from December 31, 2020, to $11,764 as of June 30, 2021, primarily due to the payment of loss and loss expenses, lower VIE and non-VIE long-term debt (from the surplus note exchange transactions and partial redemptions of the LSNI Ambac Note) and lower derivative liabilities caused by rising interest rates.

As of June 30, 2021, total stockholders’ equity was $1,123, compared with total stockholders’ equity of $1,140 at December 31, 2020.

Total assets decreased by approximately $992 from December 31, 2020, to $12,228 at September 30, 2021, primarily due to the impacts of the Corolla Trust Exchange and Secured Note Refinancing described in Note 1.

Background and Business Description to the Unaudited Consolidated Financial Statements, included in Part I, Item 1 in this Form 10-Q, payment of loss and loss expenses, interest and operating expenses, lower subrogation recoverables, lower consolidated VIE assets from paydowns of consolidated VIE liabilities, lower derivative assets caused by rising interest rates and lower premium receivables and intangible assets from the continued runoff of the financial guarantee insurance portfolio.

| Ambac Financial Group, Inc.

66 2021 Third Quarter FORM 10-Q |

Total liabilities decreased by approximately $986 from December 31, 2020, to $11,088 as of September 30, 2021, primarily due to the payment of loss and loss expenses, lower VIE and non-VIE long-term debt (from the surplus note exchange transactions and Secured Note Refinancing) and lower derivative liabilities caused by rising interest rates.

As of September 30, 2021, total stockholders’ equity was $1,121, compared with total stockholders’ equity of $1,140 at December 31, 2020.

This decrease was primarily due to the $14 increase to the carrying value of redeemable NCI which is offset directly against retained earnings.

2 unchanged sentences

Refer to "Description of the Business — Investments and Investment Policy" located in Part I.

Item 1 of the Company’s Annual Report on Form 10-K for

| Ambac Financial Group, Inc.

62 2021 Second Quarter FORM 10-Q |

the year ended December 31, 2020, for further description of Ambac's investment policies and applicable regulations.

Item 1 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, for further description of Ambac's investment policies and applicable regulations.

Refer to Note 9.

1 unchanged sentence

Ambac's investment policies and objectives do not apply to the assets of VIEs consolidated as a result of financial guarantees written by its insurance subsidiaries.

The following table summarizes the composition of Ambac’s investment portfolio, excluding VIE investments, at carrying value at June 30, 2021 and December 31, 2020:

The following table summarizes the composition of Ambac’s investment portfolio, excluding VIE investments, at carrying value at September 30, 2021 and December 31, 2020:

September 30,

2021 December 31,

5 unchanged sentences

$ 2,948 $ 3,544

(1) Includes investments denominated in non-US dollar currencies with a fair value of £314 ($433) and €43 ($51) as of June 30, 2021, and £317 ($434) and €39 ($48) as of December 31, 2020.

(1) Includes investments denominated in non-US dollar currencies with a fair value of £290 ($390) and €38 ($44) as of September 30, 2021, and £317 ($434) and €39 ($48) as of December 31, 2020.

Ambac invests in various asset classes in its fixed maturity securities portfolio.

2 unchanged sentences

Investments to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Form 10-Q for information about fixed maturity securities and pooled funds by asset class.

The following charts provide the ratings (1) distribution of the fixed maturity investment portfolio based on fair value at June 30, 2021 and December 31, 2020:

The following charts provide the ratings (1) distribution of the fixed maturity investment portfolio based on fair value at September 30, 2021 and December 31, 2020:

(1) Ratings are based on the lower of Moody’s or S&P ratings.

1 unchanged sentence

If guaranteed, rating represents the higher of the underlying or guarantor’s financial strength rating.

(2) Below investment grade and not rated bonds insured by Ambac represent 43% and 41% of the June 30, 2021 and December 31, 2020 combined fixed maturity portfolio, respectively.

(2) Below investment grade and not rated bonds insured by Ambac represent 32% and 41% of the September 30, 2021 and December 31, 2020 combined fixed maturity portfolio, respectively.

The decrease is primarily due to the impact of the Secured Note Refinancing described in Note 1.

Background and Business Description to the Unaudited Consolidated Financial Statements, included in Part I, Item 1 in this Form 10-Q.

| Ambac Financial Group, Inc.

63 2021 Second Quarter FORM 10-Q |

67 2021 Third Quarter FORM 10-Q |

Premium Receivables .

Ambac's premium receivables decreased to $345 at June 30, 2021, from $370 at December 31, 2020.

Ambac's premium receivables decreased to $327 at September 30, 2021, from $370 at December 31, 2020.

As further discussed in Note 6.

11 unchanged sentences

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

Ambac benefited from letters of credit and collateral amounting to approximately $114 from its reinsurers at June 30, 2021.

As of June 30, 2021 and December 31, 2020, reinsurance recoverable on paid and unpaid losses were $30 and $33, respectively.

Ambac benefited from letters of credit and collateral amounting to approximately $115 from its reinsurers at September 30, 2021.

As of September 30, 2021 and December 31, 2020, reinsurance recoverable on paid and unpaid losses were $30 and $33, respectively.

The decrease was primarily a result of favorable loss development.

1 unchanged sentence

Intangible assets include (i) an insurance intangible asset that was established at the Fresh Start Reporting Date, representing the difference between the fair value and aggregate carrying value of the financial guarantee insurance and reinsurance assets and liabilities and (ii) intangible assets established as part of the acquisition of Xchange on December 31, 2020.

As of June 30, 2021 and December 31, 2020, the intangible assets were $377 and $409, respectively.

As of September 30, 2021 and December 31, 2020, the intangible assets were $364 and $409, respectively.

Other than through amortization, variance in the insurance intangible asset is solely from translation gains (losses) from the consolidation of Ambac's foreign subsidiary (Ambac UK).

1 unchanged sentence

The interest rate derivative portfolio is positioned to benefit from rising rates as a partial economic hedge against interest rate exposure in the financial guarantee and investment portfolios.

Derivative assets decreased from $93 at December 31, 2020, to $82 as of June 30, 2021.

Derivative liabilities decreased from $114 at December 31, 2020, to $98 as of June 30, 2021.

The net decreases resulted primarily from higher interest rates during the six months ended June 30, 2021, with the effect on assets partially offset by lower counterparty credit adjustments.

Derivative assets decreased from $93 at December 31, 2020, to $78 as of September 30, 2021.

Derivative liabilities decreased from $114 at December 31, 2020, to $94 as of September 30, 2021.

The net decreases resulted primarily from higher interest rates during the nine months ended September 30, 2021, with the effect on assets partially offset by lower counterparty credit adjustments.

Loss and Loss Expense Reserves and Subrogation Recoverable .

4 unchanged sentences

Insurance Contracts, respectively, of the Consolidated Financial Statements included in Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, for further information on loss and loss expenses.

The loss and loss expense reserves, net of subrogation recoverables and before reinsurance as of June 30, 2021 and December 31, 2020, were $(456) and $(397), respectively.

The loss and loss expense reserves, net of subrogation recoverables and before reinsurance as of September 30, 2021 and December 31, 2020, were $(549) and $(397), respectively.

Loss and loss expense reserves are included in the Unaudited Consolidated Balance Sheets as follows:

2 unchanged sentences

Revenue Gross Loss

June 30, 2021:

September 30, 2021:

Loss and loss expense reserves $ 1,778 $ (156) $ (58) $ 1,565

6 unchanged sentences

(1) Includes a deminimus amount of loss and loss expense reserves for specialty property and casualty business.

(2) Present value of future recoveries includes R&W subrogation recoveries of $1,741 and $1,751 at June 30, 2021 and December 31, 2020, respectively.

| Ambac Financial Group, Inc.

64 2021 Second Quarter FORM 10-Q |

68 2021 Third Quarter FORM 10-Q |

(2) Present value of future recoveries includes R&W subrogation recoveries of $1,731 and $1,751 at September 30, 2021 and December 31, 2020, respectively.

Financial Guarantee:

3 unchanged sentences

These bond types represent 93% of our ever-to-date insurance claims recorded, with RMBS comprising 74%.

The table below indicates gross par outstanding and the components of gross loss and loss expense reserves related to policies in Ambac’s gross loss and loss expense reserves at June 30, 2021 and December 31, 2020:

The table below indicates gross par outstanding and the components of gross loss and loss expense reserves related to policies in Ambac’s gross loss and loss expense reserves at September 30, 2021 and December 31, 2020:

Outstanding (1)(2)

4 unchanged sentences

Expenses Recoveries

June 30, 2021:

September 30, 2021:

Structured Finance $ 2,500 $ 850 $ (2,054) $ (13) $ (1,217)

9 unchanged sentences

Total $ 7,573 $ 2,160 $ (2,485) $ (72) $ (397)

(1) Ceded par outstanding on policies with loss reserves and ceded loss and loss expense reserves are $781 and $30 respectively, at June 30, 2021, and $739 and $33, respectively at December 31, 2020.

(1) Ceded par outstanding on policies with loss reserves and ceded loss and loss expense reserves are $824 and $28 respectively, at September 30, 2021, and $739 and $33, respectively at December 31, 2020.

Recoverable ceded loss and loss expense reserves are included in Reinsurance recoverable on paid and unpaid losses on the balance sheet.

5 unchanged sentences

We have attempted to identify possible cash flows related to losses and recoveries using more stressful assumptions than the probability-weighted outcome recorded.

The possible net cash flows consider the highest stress scenario that was utilized in the development of our probability-weighted expected loss at June 30, 2021, and assumes an inability to execute any commutation transactions with issuers and/or investors.

The possible net cash flows consider the highest stress scenario that was utilized in the development of our probability-weighted expected loss at September 30, 2021, and assumes an inability to execute any commutation transactions with issuers and/or investors.

Such stress scenarios are developed based on management’s view about all possible outcomes relating to losses and recoveries.

1 unchanged sentence

Although we do not believe it is possible to have stressed outcomes in all cases, it is possible that we could have stress case outcomes in some or even many cases.

See “Risk Factors” in Part I, Item 1A as well as the descriptions of "RMBS Variability," "Public Finance Variability," "Student Loan Variability," and "Other Credits, including Ambac UK,

Variability," in Part II, Item 7 of the Company's 2020 Annual Report on Form 10-K for further discussion of the risks relating to future losses and recoveries that could result in more highly stressed outcomes, and "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q as well as the descriptions of "RMBS Variability," "Public Finance Variability," "Student Loan Variability," and "Other Credits, including Ambac UK, Variability" appearing below.

Factors” in Part I, Item 1A as well as the descriptions of "RMBS Variability," "Public Finance Variability," "Student Loan Variability," and "Other Credits, including Ambac UK, Variability," in Part II, Item 7 of the Company's 2020 Annual Report on Form 10-K for further discussion of the risks relating to future losses and recoveries that could result in more highly stressed outcomes, and "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q as well as the descriptions of "Structured Finance Variability," "Domestic Public Finance Variability," "Student Loan Variability," and "Other Variability" appearing below.

The occurrence of these stressed outcomes individually or collectively would have a material adverse effect on our results of operations and financial condition and may result in materially adverse consequence for the Company, including (without limitation) impairing the ability of AAC to honor its financial obligations;

2 unchanged sentences

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

| Ambac Financial Group, Inc.

69 2021 Third Quarter FORM 10-Q |

Structured Finance Variability

1 unchanged sentence

mortgage market primarily through direct financial guarantees of RMBS, including transactions collateralized by first and second lien mortgages.

Changes to assumptions that could make our reserves under-estimated include an increase in interest rates, deterioration in

| Ambac Financial Group, Inc.

65 2021 Second Quarter FORM 10-Q |

housing prices, poor servicing, government intervention into the functioning of the mortgage market and the effect of a weakened economy characterized by growing unemployment and wage pressures.

Changes to assumptions that could make our reserves under-estimated include an increase in interest rates, deterioration in housing prices, poor servicing, government intervention into the functioning of the mortgage market and the effect of a weakened economy characterized by growing unemployment and wage pressures.

We utilize a model to project losses in our RMBS exposures and changes to reserves, either upward or downward, are not unlikely if we used a different model or methodology to project losses.

6 unchanged sentences

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

Additionally, our R&W actual subrogation recoveries could be significantly lower than our estimate of $1,715, net of reinsurance, as of June 30, 2021, if the sponsors of these transactions:

Additionally, our R&W actual subrogation recoveries could be significantly lower than our estimate of $1,705, net of reinsurance, as of September 30, 2021, if the sponsors of these transactions:

(i) fail to honor their obligations to repurchase the mortgage loans, (ii) successfully dispute our breach findings or claims for damages, (iii) no longer have the financial means to fully satisfy their obligations under the transaction documents, or (iv) our pursuit of recoveries is otherwise unsuccessful.

1 unchanged sentence

In the case of both first and second-lien exposures, the possible stress case assumes a lower housing price appreciation projection, which in turn drives higher defaults and severities.

Using this approach, the possible increase in loss reserves for RMBS credits for which we have an estimate of expected loss at June 30, 2021, could be approximately $10.

Combined with the absence of any R&W subrogation recoveries, a possible increase in loss reserves for RMBS could be approximately $1,725.

A loss of this

magnitude may render AAC insolvent.

Additionally, loss payments are sensitive to changes in interest rates, increasing as interest rates rise.

For example, an increase in interest rates of 0.50% could increase our estimate of expected losses by approximately $30.

There can be no assurance that losses may not exceed such amounts.

Additionally, the RMBS portfolio is sensitive to the COVID-19 related forbearances and delinquencies caused by the general economic downturn.

Due to the uncertainties related to the economic effects of the COVID-19 pandemic and other risks associated with RMBS, there can be no assurance that losses may not exceed our stress case estimates.

Student Loans:

1 unchanged sentence

Such factors may include lower recoveries on defaulted loans or additional losses on collateral or trust assets, including as a result of any enforcement actions by the Consumer Finance Protection Bureau.

For student loan credits for which we have an estimate of expected loss at June 30, 2021, the possible increase in loss reserves could be approximately $20.

Additionally, an increase in interest rates of 0.50% could increase our estimate of expected losses by approximately $15.

Additionally, the student loan portfolio is sensitive to COVID-19 related payment moratoriums and delinquencies caused by the general economic downturn.

There can be no assurance that losses may not exceed our stress case estimates.

Public Finance Variability:

Using the approaches described above, the possible increase in loss reserves for structured finance credits for which we have an estimate of expected loss at September 30, 2021, could be approximately $30.

Combined with the absence of any R&W subrogation recoveries, a possible increase in loss reserves for structured finance credits could be approximately $1,735.

A loss of this magnitude may render AAC insolvent.

Additionally, loss payments are sensitive to changes in interest rates, increasing as interest rates rise.

For example, an increase in interest rates of 0.50% could increase our estimate of expected losses by approximately $45.

There can be no assurance that losses may not exceed such amounts.

Additionally, the structured finance portfolio is sensitive to the COVID-19 related forbearances and delinquencies caused by the general economic downturn.

Due to the uncertainties related to the economic effects of the COVID-19 pandemic and other risks associated with structured finance credits, there can be no assurance that losses may not exceed our stress case estimates.

Domestic Public Finance Variability:

public finance portfolio consists predominantly of municipal bonds such as general, revenue, lease and tax-backed obligations of state and local government entities;

however, the portfolio also includes a wide array of non-municipal types of bonds, including financings for not-for-profit entities and transactions with public and private elements, which generally finance infrastructure, housing and other public purpose facilities and interests.

The decrease in public finance gross loss reserves at June 30, 2021, as compared to December 31, 2020, was primarily related to claim payments.

The decrease in public finance gross loss reserves at September 30, 2021, as compared to December 31, 2020, was primarily related to claim payments and changes in assumptions on certain credits, particularly Puerto Rico.

Total public finance gross loss reserves and related gross par outstanding on Ambac insured obligations by bond type were as follows:

June 30, 2021 December 31, 2020

September 30, 2021 December 31, 2020

Issuer Type Gross Par

8 unchanged sentences

Total $ 2,833 $ 606 $ 3,016 $ 724

(1) Gross Par Outstanding includes capital appreciation bonds, which are reported at the par amount at the time of issuance of the insurance policy as opposed to the current accreted value of the bond.

It is possible our loss reserves for public finance credits may be under-estimated if issuers are faced with prolonged exposure to

adverse political, judicial, economic, fiscal or socioeconomic events or trends.

Additionally, our loss reserves may be under-

| Ambac Financial Group, Inc.

66 2021 Second Quarter FORM 10-Q |

estimated as a result of the ultimate scope, duration and magnitude of the effects of COVID-19.

70 2021 Third Quarter FORM 10-Q |

It is possible our loss reserves for public finance credits may be under-estimated if issuers are faced with prolonged exposure to adverse political, judicial, economic, fiscal or socioeconomic events or trends.

Additionally, our loss reserves may be under-estimated as a result of the ultimate scope, duration and magnitude of the effects of COVID-19.

The COVID-19 related economic downturn has put a strain on municipal issuers, particularly those dependent upon narrow sources of revenues or dedicated taxes to support debt service, such as hotel occupancy taxes, sales taxes, parking revenues, tolls, licensing fees, etc.

11 unchanged sentences

Another potentially adverse development that could cause the loss reserves on our public finance credits to be underestimated is deterioration in the municipal bond market, resulting from reduced or limited access to alternative forms of credit (such as bank loans) or other exogenous factors, such as changes in tax law that could reduce certain municipal investors' appetite for tax-exempt municipal bonds or put pressure on issuers in states with high state and local taxes.

These factors as well as budgetary

pressures at the state and local level related to the cost of fighting the virus could deprive issuers access to funding at a level necessary to avoid defaulting on their obligations.

These factors as well as budgetary pressures at the state and local level related to the cost of fighting the COVID-19 virus could deprive issuers access to funding at a level necessary to avoid defaulting on their obligations.

In addition, a judicial decision in connection with the PRHTA Title III proceedings could cause the loss reserves on our public finance credits to be underestimated.

9 unchanged sentences

While our loss reserves consider our judgment regarding issuers’ financial flexibility to adapt to adverse markets, they may not adequately capture sudden, unexpected or protracted uncertainty that adversely affects market conditions, such as the developing COVID-19 related economic impact.

Our exposures to the Commonwealth of Puerto Rico are under stress arising from the Commonwealth’s weak financial condition and economy, loss of capital markets access, the severe damage caused by hurricanes Irma and Maria and other natural disasters as well as a narrow view on available debt capacity being taken by the Oversight Board and Commonwealth government.

Our exposures to the Commonwealth of Puerto Rico are under stress arising from the Commonwealth’s weak financial condition and economy, loss of capital markets access, the severe damage caused by hurricanes Irma and Maria in 2017 and other natural disasters as well as a narrow view on available debt capacity being taken by the Oversight Board and Commonwealth government.

These factors, taken together with the payment moratorium on debt service of the Commonwealth and its instrumentalities;

ongoing PROMESA Title III proceedings;

ongoing PROMESA Title III and related proceedings;

certain other provisions under PROMESA;

expected restructurings of debt insured by AAC, uncertainty with regards to AAC's valuation of the contingent value instruments or CVI to be made available as part of a final Plan of Adjustment;

expected restructurings of debt insured by AAC, uncertainty with regards to AAC's valuation of the contingent value instruments or CVI to be made available as part of a final Plan of Adjustment or similar restructuring plan;

and the possibility of protracted litigation as a result of which our rights may be materially impaired, may cause losses to exceed current reserves in a material manner.

See "Financial Guarantees in Force" section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Part II, Item 7 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, for further details on the legal, economic and fiscal developments that have impacted or may impact AAC’s insured Puerto Rico bonds.

| Ambac Financial Group, Inc.

71 2021 Third Quarter FORM 10-Q |

"Financial Guarantees in Force" section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Part II, Item 7 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, for further details on the legal, economic and fiscal developments that have impacted or may impact AAC’s insured Puerto Rico bonds.

In this Form 10-Q, refer to "Financial Guarantees in Force" in Part I, Item 2 in Management's Discussion and Analysis of Financial Condition and Results of Operation, Note 6.

Financial Guarantee Insurance Contracts to the Unaudited Consolidated Financial Statements and Note 13.

| Ambac Financial Group, Inc.

67 2021 Second Quarter FORM 10-Q |

and Contingencies to the Unaudited Consolidated Financial Statements for further updates related to Puerto Rico.

Commitments and Contingencies to the Unaudited Consolidated Financial Statements for further updates related to Puerto Rico.

Material additional losses on our public finance credits caused by the aforementioned factors, including the possibility of a protracted recovery related to the COVID-19 crisis would have a material adverse effect on our results of operations and financial condition.

For the public finance credits, including Puerto Rico, for which we have an estimate of expected loss at June 30, 2021, the possible increase in loss reserves could be approximately $545.

However, there can be no assurance that losses may not exceed our stress case estimates.

Among other things, this estimate includes the possibility that the amended Commonwealth plan of adjustment (as discussed above in the Financial Guarantees in Force section of this Management Discussion and Analysis) were to become effective.

For the public finance credits, including Puerto Rico, for which we have an estimate of expected loss at September 30, 2021, the possible increase in loss reserves could be approximately $470.

Among other things, this estimate includes the possibility that the Eighth Amended Commonwealth Plan of Adjustment, the PRIFA Qualifying Modification, the CCDA Qualifying Modification and a prospective PRHTA plan of adjustment (each, as discussed above in the Financial Guarantees in Force section of this Management Discussion and Analysis) become effective, but with negative outcomes, such as lower than estimated or realized value of the consideration provided by or on behalf of the debtors under the plans of adjustment and qualifying modifications and limitations on exposure management options, including, but not limited to commutation and acceleration.

However, there can be no assurance that losses may not exceed our stress case estimates due to negative developments or outcomes with respect to these factors and the other factors described in the Financial Guarantees in Force section of this Management Discussion and Analysis.

It also possible that if the plans of adjustment and qualifying modifications are confirmed and become effective there could be material reductions in loss reserves which may have a favorable impact on our results of operations and financial condition.

Any favorable impact on our results of operations and financial condition will most likely by driven by the factors described in the Financial Guarantees in Force section of this Management Discussion and Analysis.

Other Variability:

It is possible our loss reserves on other types of credits, including those insured by Ambac UK, may be under-estimated because of various risks that vary widely, including the risk that we may not be able to recover or mitigate losses through our remediation processes.

For all other credits, including Ambac UK, for which we have an estimate of expected loss, the sum of all the highest stress case loss scenarios is approximately $365 greater than the loss reserves at June 30, 2021.

For all other credits, including Ambac UK, for which we have an estimate of expected loss, the sum of all the highest stress case loss scenarios is approximately $390 greater than the loss reserves at September 30, 2021.

Additionally, our loss reserves may be under-estimated as a result of the ultimate scope, duration and magnitude of the effects of COVID-19.

1 unchanged sentence

Long-term Debt:

Long-term debt consists of surplus notes issued by AAC, the LSNI Ambac Note and Tier 2 Notes issued in connection with the Rehabilitation Exit Transactions, and Ambac UK debt issued in connection with the 2019 Ballantyne commutation.

The carrying value of each of these as of June 30, 2021 and December 31, 2020 is below:

Long-term debt consists of surplus notes issued by AAC, the LSNI Ambac Note (refinanced by the Sitka AAC Note) and Tier 2 Notes issued in connection with the Rehabilitation Exit Transactions, Sitka AAC Note issued in connection with the Secured Note Refinancing, and Ambac UK debt issued in connection with the 2019 Ballantyne commutation.

The carrying value of each of these as of September 30, 2021 and December 31, 2020 is below:

September 30,

2021 December 31, 2020

Surplus notes (1)

Ambac note 1,626 1,641

LSNI Ambac note — 1,641

Sitka AAC note 1,152 —

Tier 2 notes 326 306

3 unchanged sentences

All junior surplus notes were acquired and retired in the first quarter of 2021.

The decrease in long-term debt from December 31, 2020, resulted form the impacts of the surplus notes exchanges of $71 and optional LSNI Ambac Note redemption of $16, partially offset by the accretion on the carrying value of surplus notes, Tier 2 Notes and Ambac UK debt.

The decrease in long-term debt from December 31, 2020, resulted from the impact of the surplus notes exchanges of $71 and redemption of the LSNI Ambac Note of $1,641, partially offset by issuance of the Sitka AAC Note of $1,163, issuances of surplus notes from AFG sales and the accretion on the carrying value of surplus notes, Sitka AAC Note, Tier 2 Notes and Ambac UK debt.

As further described in Note 1.

Background and Business Description to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Form 10-Q, on July 6, 2021, Sitka, Ambac's newly formed non-consolidated VIE, issued the Sitka Senior Secured Notes that were used to fund a portion of the full redemption of the LSNI Secured Notes issued by LSNI, with the remaining balance redeemed utilizing other available sources

of liquidity.

Comparable to LSNI, the Sitka Senior Secured Notes are secured by the assets of Sitka which include a new note receivable from AAC.

Following these transactions, the long-term debt consisting of a secured Ambac note decreased by $463 to $1,163.

Comparable to LSNI, the Sitka Senior Secured Notes are secured by the assets of Sitka which include a new note receivable from AAC, which is secured by a pledge of AAC’s right, title and interest in (i) up to $1,400 of proceeds from certain litigations involving AAC related to residential mortgage-backed securities and (ii) the capital stock of Ambac UK.

VARIABLE INTEREST ENTITIES

5 unchanged sentences

The following accounting standards has been issued but has not yet been adopted.

We do not expect this standard to have a consequential impact on Ambac's financial statements.

We do not expect these standards to have a consequential impact on Ambac's financial statements.

| Ambac Financial Group, Inc.

72 2021 Third Quarter FORM 10-Q |

Equity-classified Written Call Options

12 unchanged sentences

Please refer to Note 2.

Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements, included in Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, for a discussion of the impact of other recent accounting

| Ambac Financial Group, Inc.

68 2021 Second Quarter FORM 10-Q |

pronouncements on Ambac’s financial condition and results of operations.

Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements, included in Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, and in Part I, Item 1 on this Form 10-Q for a discussion of the impact of other recent accounting pronouncements on Ambac’s financial condition and results of operations.

INSURANCE STATUTORY BASIS FINANCIAL RESULTS ($ in million)

5 unchanged sentences

Ambac Assurance Corporation

AAC’s statutory policyholder surplus and qualified statutory capital (defined as the sum of policyholders surplus and mandatory contingency reserves) were $774 and $1,331 at June 30, 2021, respectively, as compared to $865 and $1,413 at December 31, 2020, respectively.

As of June 30, 2021, statutory policyholder surplus and qualified statutory capital included $853 principal balance of surplus notes outstanding and $138 liquidation preference of preferred stock outstanding.

AAC’s statutory policyholder surplus and qualified statutory capital (defined as the sum of policyholders surplus and mandatory contingency reserves) were $767 and $1,329 at September 30, 2021, respectively, as compared to $865 and $1,413 at December 31, 2020, respectively.

As of September 30, 2021, statutory policyholder surplus and qualified statutory capital included $853 principal balance of surplus notes outstanding and $138 liquidation preference of preferred stock outstanding.

These surplus notes (in addition to related accrued interest of $607 that is not recorded under statutory basis accounting principles);

preferred stock;

and all other liabilities, including insurance claims, the LSNI Ambac Note (refinanced by the Sitka AAC Note as described in Note 1.

and all other liabilities, including insurance claims, the Sitka AAC Note (refinanced the LSNI Ambac Note as described in Note 1.

Background and Business Description to the Unaudited Consolidated Financial Statements included in this Form 10-Q) and the Tier 2 Notes are obligations that, individually and collectively, have claims on the resources of AAC that are senior to AFG's equity and therefore impede AFG's ability to realize residual value and/or receive dividends from AAC.

The significant drivers to the net decrease in policyholder surplus are statutory net losses of $111 for the six months ended June 30, 2021, partially offset by net investment gains of $30 recorded directly through surplus.

The significant drivers to the net decrease in policyholder surplus are statutory net losses of $114 for the nine months ended September 30, 2021, partially offset by net investment gains of $30 recorded directly through surplus.

AAC statutory surplus and therefore AFG's ability to realize residual value and/or dividends from AAC is sensitive to multiple factors, including:

commutations of insurance policies or credit derivative contracts at amounts that differ from the amount of liabilities recorded, (viii) reinsurance contract terminations at amounts that differ from net assets recorded, (ix) changes to the fair value of pooled fund and other investments carried at fair value, (x) realized gains and losses, including losses arising from other than temporary impairments of investment securities, and (xi) future changes to prescribed practices.

(i) loss reserve development, (ii) settlements or other resolutions of representation and warranty breach claims at amounts that differ from amounts recorded, including failures to collect such amounts or receive recoveries sufficient to pay or redeem obligations of AAC, including the Sitka AAC Note and Tier 2 Notes, (iii) approval by OCI of payments on surplus notes, (iv) ongoing interest costs associated with the Sitka AAC Note and Tier 2 Notes, including changes to interest rates as the Sitka AAC Note is a floating rate obligation, (v) deterioration in the financial position of AAC subsidiaries that have their obligations guaranteed by AAC, (vi) first time payment defaults of insured obligations, which increase statutory loss reserves, (vii) commutations of insurance policies or credit derivative contracts at amounts that differ from the amount of liabilities recorded, (viii) reinsurance contract terminations at amounts that differ from net assets recorded, (ix) changes to the fair value of pooled fund and other investments carried at fair value, (x) realized gains and losses, including losses arising from other than temporary impairments of investment securities, and (xi) future changes to prescribed practices.

Everspan Indemnity Insurance Company

Everspan Indemnity Insurance Company’s statutory policyholder surplus was $105 at June 30, 2021, as compared to $26 at December 31, 2020.

The significant drivers to the increase in policyholder surplus were capital contributions of $82 partially offset by operating expenses during the six months ended June 30, 2021.

Everspan Indemnity Insurance Company’s statutory policyholder surplus was $103 at September 30, 2021, as compared to $26 at December 31, 2020.

The significant drivers to the increase in policyholder surplus were capital contributions of $82 partially offset by operating expenses during the nine months ended September 30, 2021.

| Ambac Financial Group, Inc.

73 2021 Third Quarter FORM 10-Q |

AMBAC UK FINANCIAL RESULTS UNDER UK ACCOUNTING PRINCIPLES (£ in millions)

Ambac UK is required to prepare financial statements under FRS 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland." Ambac UK’s shareholder funds under UK GAAP were £430 at June 30, 2021, as compared to £412 at December 31, 2020.

At June 30, 2021, the carrying value of cash and investments was £487, an increase from £481 at December 31, 2020.

The increase in shareholders’ funds and cash and investments was primarily due to the continued receipt of premiums and investment income, partially offset by loss expenses, foreign exchange losses, operating expenses and tax payments.

Ambac UK is required to prepare financial statements under FRS 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland." Ambac UK’s shareholder funds under UK GAAP were £437 at September 30, 2021, as compared to £412 at December 31, 2020.

At September 30, 2021, the carrying value of cash and investments was £493, an increase from £481 at December 31, 2020.

The increase in shareholders’ funds and cash and investments was primarily due to the continued receipt of premiums, investment income and foreign exchange gains, partially offset by loss expenses, operating expenses and tax payments.

Ambac UK is also required to prepare financial information in accordance with the Solvency II Directive.

The basis of preparation of this information is significantly different from both US GAAP and UK GAAP.

Available capital resources under Solvency II were a surplus of £238 at June 30, 2021, of which £230 were eligible to meet solvency capital requirements.

Available capital resources under Solvency II were a surplus of £245 at September 30, 2021, of which £237 were eligible to meet solvency capital requirements.

This is an increase from December 31, 2020, when available capital resources were a surplus of £196 of which £184 were eligible to meet solvency capital requirements.

Eligible capital resources at June 30, 2021, and December 31, 2020, were in comparison to regulatory capital requirements of £250 and £256, respectively.

Therefore, Ambac UK remains deficient in terms of compliance with applicable regulatory capital requirements by £20 and £72 at June 30, 2021, and December 31, 2020, respectively.

The deficit reduced as at June 30, 2021, due to an increase in eligible capital resources mainly caused by the increase over the period in long term discount rates which reduced the value of technical provision liabilities.

Eligible capital resources at September 30, 2021, and December 31, 2020, were in comparison to regulatory capital requirements of £247 and £256, respectively.

Therefore, Ambac UK remains deficient in terms of compliance with applicable regulatory capital requirements by £10 and £72 at September 30, 2021, and December 31, 2020, respectively.

The deficit reduced as at September 30, 2021, due to an increase in eligible capital resources mainly caused by the increase over the period in long term discount rates which reduced the value of technical provision liabilities.

The regulators are aware of the deficiency in capital resources as compared to capital requirements and dialogue between Ambac UK management and its regulators remains ongoing with respect to options for addressing the shortcoming, although such options remain few.

| Ambac Financial Group, Inc.

69 2021 Second Quarter FORM 10-Q |

NON-GAAP FINANCIAL MEASURES

4 unchanged sentences

A non-GAAP financial measure is a numerical measure of financial performance or financial position that excludes (or includes) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP.

We are presenting these non-GAAP financial measures because they provide greater transparency and enhanced visibility into the underlying drivers of our business.

We are presenting these non-GAAP financial measures because they

provide greater transparency and enhanced visibility into the underlying drivers of our business.

Adjusted earnings and adjusted book value are not substitutes for the Company’s GAAP reporting, should not be viewed in isolation and may differ from similar reporting provided by other companies, which may define non-GAAP measures differently.

18 unchanged sentences

| Ambac Financial Group, Inc.

70 2021 Second Quarter FORM 10-Q |

74 2021 Third Quarter FORM 10-Q |

The following table reconciles net income (loss) attributable to common stockholders to the non-GAAP measure, Adjusted Earnings (loss) on a dollar amount and per diluted share basis, for all periods presented:

Three Months Ended June 30,

Three Months Ended September 30,

($ in millions, except share data) $ Amount Per Diluted Share (1)

6 unchanged sentences

Adjusted earnings (loss) $ 25 $ 0.53 $ (93) $ (2.01)

Six Months Ended June 30,

Nine Months Ended September 30,

($ in millions, except share data) $ Amount Per Diluted Share $ Amount Per Diluted Share

24 unchanged sentences

This non-GAAP adjustment adds UPR in excess of expected losses, net of reinsurance, to stockholders’ equity for financial guarantee contracts where expected losses are less than UPR.

This adjustment is only made for financial guarantee contracts since such premiums are non-refundable.

• Net unrealized investment (gains) losses in Accumulated Other Comprehensive Income:

3 unchanged sentences

| Ambac Financial Group, Inc.

71 2021 Second Quarter FORM 10-Q |

75 2021 Third Quarter FORM 10-Q |

The following table reconciles Total Ambac Financial Group, Inc.

stockholders’ equity to the non-GAAP measure Adjusted Book Value on a dollar amount and per share basis, for all periods presented:

June 30, 2021 December 31, 2020

September 30, 2021 December 31, 2020

($ in millions, except share data) $ Amount Per Share $ Amount Per Share

6 unchanged sentences

Adjusted book value $ 882 $ 19.05 $ 919 $ 20.05

The decrease in Adjusted Book Value was primarily attributable to the $14 reduction to retained earnings from the increase to the carrying value of redeemable NCI, the impact on expected future premiums from reinsurance and de-risking transactions and the Adjusted loss for the six months ended June 30, 2021 (excluding earned premium previously included in Adjusted Book Value).

The decrease in Adjusted Book Value was primarily attributable to the $14 reduction to retained earnings from the increase to the carrying value of redeemable NCI, the impact on expected future premiums from reinsurance and de-risking transactions partially offset by Adjusted earnings for the nine months ended September 30, 2021 (excluding earned premium previously included in Adjusted Book Value).

Factors that impact changes to Adjusted Book Value include many of the same factors that impact Adjusted Earnings, including the majority of revenues and expenses, but generally exclude components of premium earnings since they are embedded in prior period's Adjusted Book Value through the net unearned premiums and fees in excess of expected losses adjustment.

2 unchanged sentences

Quantitative and Qualitative Disclosure About Market Risk'

As of June 30, 2021, there were no material changes in the market risks that the Company is exposed to since December 31, 2020.

As of September 30, 2021, there were no material changes in the market risks that the Company is exposed to since December 31, 2020.

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-Q

Item 2. Management’s Discussion and Analysis