What changed in this filing

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Item 1. Business

2022-02-24 compared with 2021-03-01 · 255 added, 195 removed, 190 unchanged (70% of the section changed)

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Ambac's business operations include:

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

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

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

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

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

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

• Specialty Property & Casualty Program Insurance ("SPCP") — Currently includes excess and surplus lines (“E&S” or “nonadmitted”) insurer Everspan Indemnity Insurance Company ("Everspan Indemnity") and admitted insurer Everspan Insurance Company, along with four other admitted insurance carrier subsidiaries (“Everspan”).

Everspan insurance carriers that are currently part of the intercompany pooling agreement received an AM Best Financial Strength rating of 'A-' (Excellent) in February 2021 and launched its first insurance program in May 2021.

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

Refer to Note 3.

Business Combination for further information relating to this acquisition.

Business Combination to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for further information relating to this acquisition.

AFG has $269 million in net assets (excluding its investment in subsidiaries) and net operating loss carry-forwards of $3,744 million ($2,148 million of which is allocated to AAC) at December 31, 2021.

See Schedule II for more information on the holding company.

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

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

While SPCP and MGA/U (together, the "Specialty P&C Program Insurance Platform") are distinct businesses, they are currently not significant enough to Ambac's operations to warrant segment presentation.

Management evaluates its reportable segments at least annually and as facts and circumstances change.

Corporate Strategy:

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

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

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

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

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

• Further expanding into specialty property and casualty program insurance, managing general agency/underwriting and potentially other insurance and insurance related businesses that will generate long-term shareholder value with attractive risk-adjusted returns and meet other preestablished criteria.

The Company's primary goal is to maximize shareholder value through the execution of key strategies for both its (i) Specialty P&C Program Insurance Platform and (ii) Financial Guarantee Insurance companies.

Specialty P&C Insurance Program Platform strategic priorities include:

• Growing and diversifying Everspan's participatory fronting platform with existing and new program partners.

• Building a leading federation of specialty MGA/U partners through additional acquisitions and de novo builds, supported by a centralized business services unit including core technology solutions.

• Making opportunistic investments that are strategic to the overall Specialty P&C Program Insurance Platform.

Financial Guarantee Insurance companies’ strategic priorities include:

• Actively managing, de-risking and mitigating insured portfolio risk.

• Pursuing loss recovery through active litigation and other means, particularly residential mortgage back security representation and warranty litigation.

• Improving operating efficiency and optimizing our asset and liability profile.

• Exploring, at the appropriate time, strategic options to further maximize value for AFG.

DESCRIPTION OF THE BUSINESS

Financial Guarantee Insurance Business:

Ambac's Financial Guarantee strategy is to increase the value of its investment in AAC and Ambac UK.

With regards to AAC, this strategy is subject to the restrictions set forth in the Settlement Agreement, dated as of June 7, 2010 (the "Settlement Agreement"), by and among AAC, Ambac Credit Products LLC ("ACP"), AFG and certain counterparties to credit default swaps with ACP that were guaranteed by AAC, as well as the Stipulation and Order (as defined in Note 1.

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

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

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

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

Financial guarantee insurance policies provide an unconditional and irrevocable guarantee which protects the holder of a debt obligation against non-payment when due of the principal and interest on the obligations guaranteed.

Pursuant to such guarantees, AAC and Ambac UK make payments if the obligor responsible for making payments fails to do so when due.

AAC and Ambac UK's financial condition began to deteriorate in 2007 as a result of which these companies have been unable to write new financial guaranty business since such time.

Ambac's Financial Guarantee business strategy is to increase the residual value of AAC and Ambac UK with the ultimate goal of monetizing such value through (i) dividends and capital distributions while managing their active run-off;

(ii) one or more reinsurance transactions or other de-risking transactions that will accelerate or enhance the ability of AAC and/or Ambac UK to pay dividends and make capital distributions;

(iii) the sale of all or portions of AAC and Ambac UK, or (iv) other strategic transactions to accelerate or enhance the above-stated corporate strategy.

We can provide no assurance that Ambac will achieve any of the aforementioned goals.

AAC and Ambac UK have been working toward reducing risk within their insured portfolios, such as exposures to financially stressed municipal entities (including Puerto Rico) and asset-backed securities (including residential mortgage-backed securities ("RMBS") and student loan-backed securities).

Opportunities for remediating losses on poorly performing insured transactions depend on a number of factors including market conditions, the structure of the underlying risk and associated policy, as well as counterparty specific factors.

AAC's ability to remediate risk and commute policies may be limited by available liquidity.

Additionally, AAC and Ambac UK are actively managing their regulatory frameworks and seeking to optimize capital allocation in a challenging environment that includes long

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duration obligations.

AAC is also actively prosecuting legal claims to recover losses in its FG portfolio.

the Stipulation and Order (as defined in Note 1.

Background and Business Description to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K);

and in the indenture for the Tier 2 Notes (as defined in Note 12.

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

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

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

Financial guarantee revenues consist mostly of premiums earned from insurance contracts, net of reinsurance.

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(ii) loss adjustment expenses;

(iii) interest expense on debt and (iv) insurance intangible amortization.

AAC and Ambac UK have been working toward reducing uncertainties within their insured portfolios such as exposures to financially stressed municipal entities (including Puerto Rico) and asset-backed securities (including residential mortgage-backed securities ("RMBS") and student loan-backed securities).

Additionally, AAC and Ambac UK are actively prosecuting legal claims (including RMBS-related lawsuits brought by AAC), managing their regulatory frameworks, seeking to optimize capital allocation in a challenging environment that includes long duration obligations and attempting to retain key employees.

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

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counterparty specific factors.

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

The deterioration of AAC's and Ambac UK's financial condition beginning in 2007 has prevented these companies from being able to write new financial guaranty business.

Not writing new business has and continues to negatively impact Ambac’s operations and financial results.

AAC’s ability to pay dividends and, as a result, AFG’s liquidity, have been significantly restricted by the deterioration of AAC’s financial condition and by regulatory, legal and contractual restrictions.

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

(iii) interest expense on debt, (iv) operating expenses and (v) insurance intangible amortization.

AAC’s ability to pay dividends to AFG has been significantly restricted by the deterioration of AAC’s financial condition and by regulatory, legal and contractual restrictions.

It is highly unlikely that AAC will be able to make dividend payments to AFG for the foreseeable future, which constrains AFG's liquidity.

Refer to "Dividend Restrictions, Including Contractual Restrictions" below and Note 8.

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Under agreements governing interest rate derivative positions, AFS generally must post collateral or margin in excess of the market value of the swaps and futures contracts.

All AFS derivative contracts containing ratings-based downgrade triggers that could result in collateral or margin posting or a termination have been triggered.

A termination of AFS’s derivatives could result in losses.

AFS has borrowed cash and securities from AAC to help support its collateral and margin posting requirements, previous termination payments and other cash needs.

Credit risks relating to interest rate derivative positions primarily relate to the default of a counterparty.

AFS's interest rate derivatives generally consist of centrally cleared swaps, US treasury futures and some over-the-counter ("OTC") swaps with financial guarantee customers or bank counterparties.

Counterparty default exposure is mitigated through the use of industry standard collateral posting agreements or margin posting requirements.

• Cleared swaps, futures and OTC derivatives with bank counterparties require margin or collateral to be posted up to or in excess of the market value of the interest rate derivatives.

Interest rate derivative contracts entered into with financial guarantee customers are not subject to collateral posting agreements.

In some cases, interest rate derivatives between Ambac and financial guarantee customers are placed through a third party financial intermediary and similarly do not require collateral posting.

• Credit risk associated with financial guarantee customer derivatives and credit derivatives, is managed through the risk management processes described in the Risk Management Group section below.

Ambac manages a variety of market risks inherent in its businesses, including credit, market, liquidity, operational and legal.

Credit risk associated with interest rate derivative positions primarily relates to the potential default of a counterparty.

As AFS's interest rate derivatives generally consist of centrally cleared swaps, US treasury futures, the associated credit risk is mitigated through the use of industry standard collateral or margin requirements.

For the small number of remaining legacy derivatives with financial guarantee customers that do not require collateral, credit risk is managed through the risk management processes described in the Risk Management Group section below.

Ambac manages a variety of risks inherent in its businesses, including credit, market, liquidity, operational and legal.

These risks are identified, measured, and monitored through a variety of control mechanisms, which are in place at different levels throughout the organization.

See “Quantitative

and Qualitative Disclosures About Market Risk” included in Part II, Item 7A in this Form 10-K for further information.

Segregated Account

In March 2010, AAC established a segregated account pursuant to Wisconsin Stat.

§611.24(2) (the “Segregated Account”) to segregate certain segments of AAC’s liabilities.

The Office of the Commissioner of Insurance for the State of Wisconsin (“OCI” (which term shall be understood to refer to such office as regulator of AAC and to refer to the Commissioner of Insurance for the State of Wisconsin as rehabilitator of the Segregated Account (the “Rehabilitator”), as the context requires)) commenced rehabilitation proceedings in the Wisconsin Circuit Court for Dane County (the “Rehabilitation Court”) with respect to the Segregated Account (the “Segregated Account Rehabilitation Proceedings”) in order to permit OCI to facilitate an orderly run-off and/or settlement of the liabilities allocated to the Segregated Account pursuant to the provisions of the Wisconsin Insurers Rehabilitation and Liquidation Act.

AAC, itself, did not enter rehabilitation proceedings.

A plan of rehabilitation for the Segregated Account, as amended (the "Segregated Account Rehabilitation Plan"), became effective on June 12, 2014.

On September 25, 2017 the Rehabilitator filed a motion in the Rehabilitation Court seeking entry of an order approving an amendment to the Segregated Account Rehabilitation Plan (the "Second Amended Plan of Rehabilitation").

Following the conclusion of a Confirmation Hearing on January 22, 2018, the Rehabilitation Court entered an order granting the Rehabilitator's motion and confirming the Second Amended Plan of Rehabilitation.

On February 12, 2018 (the "Effective Date"), the Second Amended Plan of Rehabilitation became effective.

Consequently, the rehabilitation of the Segregated Account was concluded.

Refer to Note 1.

Background and Business Description to the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K, for more information on the Segregated Account and the Segregated Account Rehabilitation Proceedings.

See “Quantitative and Qualitative Disclosures About Market Risk” included in Part II, Item 7A in this Form 10-K for further information.

Risk Management

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In addition, insured transactions expose Ambac to indirect risks that may increase our overall risk, such as credit risk separate from, but correlated with, our direct credit risk;

natural disaster and mortality or other non-credit type risks.

natural disaster;

pandemic and mortality or other non-credit type risks.

Please refer to Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Financial Guarantees in Force” section below for details on the financial guarantee insured portfolio.

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Our ability to execute certain risk management activities may be limited by the restrictions set forth in the Settlement Agreement, the Stipulation and Order and the indenture for the Tier 2 Notes.

Background and

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

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

Ambac’s RMG has an organizational structure designed around four primary areas of focus:

Surveillance, Risk Remediation, Credit Risk Management and Loss Reserving and Analytics.

This group's focus is on the early identification of potential stress or deterioration in connection with credit exposures in the insured portfolio and the related credit analysis associated with these and other insured portfolio exposures.

Additionally, Surveillance will evaluate the impact of changes in the economic, regulatory or political environment on the insured portfolio.

The Surveillance group's focus is on the early identification of potential stress and/or credit deterioration and the related analysis of credit exposures in the insured portfolio.

Additionally, Surveillance evaluates the impact of changes in the economic, regulatory or political environment on the insured portfolio.

Analysts in this group perform periodic credit reviews of insured exposures according to a schedule based on the risk profile of the guaranteed obligations or as necessitated by specific credit events or other macro-economic variables.

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Please refer to Note 2.

Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K for further discussion of the various credit classifications utilized by Ambac.

Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements included in Part II, Item 8 in

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this Form 10-K for further discussion of the various credit classifications utilized by Ambac.

If a problem is detected, the Surveillance group will then work with the Risk Remediation group on a loss mitigation plan, as necessary.

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In the future, Ambac’s portfolio may be subject to similar credit deterioration arising from concentrated and/or correlated risks.

Examples of other such risks that could impact our portfolio, and that our surveillance is designed to monitor include the impact of potential municipal bankruptcy contagion, the impact of tax reform on state and municipal bond issuers, or the impact of large scale domestic military cutbacks on our privatized military housing portfolio or event risk such as pandemics (e.g., COVID-19), natural disasters or other regional stresses.

Examples of other such risks that could impact our portfolio, and that our surveillance is designed to monitor include the impact of potential municipal bankruptcy contagion, the impact of tax reform on state and municipal bond issuers, the impact of large scale domestic military cutbacks on our privatized military housing portfolio and event risk such as pandemics (e.g., COVID-19), natural disasters or other regional stresses.

Most such risks cannot be predicted and may materialize unexpectedly or develop rapidly.

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Risk Remediation

Risk Remediation's focus is on exposure reduction, loss mitigation, avoiding defaults, and restructuring related to the insured portfolio.

In particular, this group focuses on reducing exposure to credits that have current negative developing trends, have the potential for future adverse development or are already adversely classified by, among other things, securing rights and remedies, both of which may help to mitigate losses in the event of further deterioration or event of default, or, as available, working with an issuer to refinance or retire debt.

Loss mitigation and restructuring focuses on the analysis, implementation and execution of commutation and related claims reduction, defeasance or workout strategies for policies with potential future claims.

Efforts are focused on minimizing claims and maximizing recoveries, typically following an event of default.

The emphasis on reducing risk is centered on reducing exposure on a prioritized basis.

For certain adversely classified, survey list and watch list credits, RMG analysts will develop and implement a remediation or loss mitigation plan that could include actions such as working with the issuer, trustee, bond counsel, servicer and other interested parties in an attempt to remediate the problem and minimize AAC’s exposure to potential loss.

Risk Remediation's focus is on exposure reduction and loss mitigation related to the insured portfolio.

In particular, this group focuses on reducing exposure to credits that have negative developing trends, the potential for future adverse development or are already adversely classified by, among other things, exercising rights and remedies, which may help to mitigate losses in the event of further deterioration or events of default, or, as available, working with an issuer to refinance, defease or otherwise retire debt.

Loss mitigation focuses on the execution of commutation and related claims reduction or workout strategies for policies with potential future claims.

For certain adversely classified, survey list and watch list credits, Risk Remediation will develop and implement a remediation or loss mitigation plan that could include actions such as working with the issuer, trustee, bond counsel, servicer and other interested parties in an attempt to remediate the problem and minimize AAC’s exposure to potential loss.

Other actions could include working with bond holders and other economic stakeholders to negotiate, structure and execute solutions, such as commutations.

In addition, reinsurance is used as a remediation tool to reduce exposure to certain targeted policies and large concentrations.

Adversely classified, survey list and watch list credits are tracked closely by RMG analysts as part of the risk remediation process and are discussed at regularly scheduled meetings with Credit Risk Management (see discussion following in “Credit Risk Management”).

In some cases, the RMG will engage restructuring or workout experts, attorneys and/or other consultants with appropriate expertise in the targeted loss mitigation area to assist management in examining the underlying contracts or collateral, providing industry specific advice and/or executing strategies.

We have established cross-functional teams in key areas of focus, comprised of personnel both within the RMG and in other departments, to target proactive mitigation and remediation of losses and potential future losses associated with certain credits and sectors in the insured portfolio.

Adversely classified, survey list and watch list credits are tracked closely as part of the risk remediation process and are discussed at regularly scheduled meetings with Credit Risk Management (see discussion following in “Credit Risk Management”).

collateral, providing industry specific advice and/or executing strategies.

We have established cross-functional teams in key areas of focus, comprised of personnel both within the RMG and in other departments, as part of the risk remediation process.

An example of such efforts includes the teams of professionals focused on the review and enforcement of contractual representations and warranties ("R&W") supporting RMBS policies.

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CRM provides a forum for independent assessments, reviews and approvals and drives consistency and timeliness.

The scope of credit matters under the purview of CRM includes material amendments, consents and waivers, evaluation of remediation or loss mitigation plans, credit review scheduling, credit classifications, rating designations, review of watch list or adversely classified credits, sector reviews and overall portfolio

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Formal plans or transactions that relate to risk remediation, loss mitigation or restructuring may also require Risk Committee approval.

Formal plans or transactions that relate to risk remediation, loss mitigation or restructuring may also require AAC Risk Committee approval, as described below in the section entitled, "Enterprise Risk Management."

Control Rights

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Because Ambac is party to and/or has certain rights in documents supporting transactions in the insured portfolio, Ambac frequently receives requests for amendments, consents and waivers (“ACWs”).

RMG reviews, analyzes and processes all requests for ACWs.

CRM reviews, analyzes and processes all requests for ACWs.

The decision to approve or reject ACWs is based upon certain credit factors, such as the issuer’s ability to repay the bonds and the bond’s security features and structure.

As part of the CRM process, members of the RMG review, analyze and process all requests for ACWs.

As a part of the Segregated Account Rehabilitation Proceedings, the Rehabilitation Court enjoined certain actions by other parties to preserve AAC’s control rights that could otherwise have lapsed or been compromised.

Pursuant to the Second Amended Plan of Rehabilitation and orders of the Rehabilitation Court, such protections continue after the conclusion of the Segregated Account Rehabilitation Proceedings.

Similarly, in certain international structured finance, regulated utility, public-private partnerships and other international transactions, Ambac UK may be the control party.

Because Ambac UK is party to and/or has certain rights in documents supporting Ambac UK-insured transactions, Ambac UK receives requests for ACWs.

At Ambac UK, the Portfolio Risk Management team reviews, analyzes and processes ACWs with similar credit considerations as noted in the AAC process factored into the decision to approve or reject the ACW.

As a part of the Segregated Account Rehabilitation Proceedings (as defined in Note 1.

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

Background and Business Description to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K) enjoined certain actions by other parties to preserve AAC’s control rights that could otherwise have lapsed or been

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Pursuant to the Second Amended Plan of Rehabilitation (as defined in Note 1.

Background and Business Description to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K) and orders of the Rehabilitation Court, such protections continue after the conclusion of the Segregated Account Rehabilitation Proceedings.

Watch List and Adversely Classified Credits

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Adversely classified credit meetings include members of RMG and other groups within the Company, as necessary.

As part of the review, relevant information, along with the plan for corrective actions and a reassessment of the credit’s rating and credit classification is considered.

Internal and/or external counsel generally review the documents underlying any problem credit and, if applicable, an analysis is prepared outlining Ambac’s rights and potential remedies, the duties of all parties involved and recommendations for corrective actions.

Ambac also meets with relevant parties to the transaction as necessary.

The review schedule for adversely classified credits is tailored to the remediation plan to track and prompt timely action and proper internal and external resourcing.

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LRA manages the quarterly loss reserving process for insured portfolio credits with projected policy claims.

It also supports the development, operation and/or maintenance of various analytical models used in the loss reserving process as well as in

other risk management functions.

It also supports the development, operation and/or maintenance of various analytical models used in the loss reserving process as well as in other risk management functions.

LRA works with surveillance and risk remediation analysts responsible for a particular credit on the development, review and implementation of loss reserve scenarios and related analysis.

Specialty Property & Casualty Program Insurance

The specialty property & casualty program insurance business currently includes admitted carrier Everspan Insurance Company and nonadmitted carrier Everspan Indemnity Insurance Company (collectively, “Everspan Group”).

Everspan Group received a Class VIII, A- Financial Strength Rating from A.M.

Best Rating Services, Inc.

in February 2021, has capital in excess of $100 million, and is expected to begin writing new property and casualty specialty insurance programs in the first half of 2021.

Everspan Group is pursuing a sustainable, long term niche property/casualty program strategy with diverse classes of risks and plans to source business through diverse channels including Managing General Agents, brokers, producers and others.

Everspan Group's business model will rely on third party producers or capacity providers to provide the infrastructure associated with policy administration, claims handling and other insurance company services.

Everspan Group may retain up to 30% of it gross written premiums and, to the extent applicable, will reinsure the remainder to reinsurers and other providers of risk capital.

With its strong capital base, Everspan Group will be differentiated in the specialty program insurance market with its focus on underwriting results, risk retention, long-term relationships, and the avoidance of channel conflicts.

Everspan Group hired a management team with a successful track record in specialty program insurance business and relationships with Managing General Agents, brokers, producers and third party claims administrators.

The specialty property & casualty program insurance business will generate income from (i) ceding fees, by offering carrier capacity to specialty general agents and other producers who sell, control and administer books of insurance business that are supported by third parties that assume reinsurance risk and (ii) net insurance underwriting income from any retained risk.

Its core expenses will include compensation, agent commissions and other overhead costs.

Everspan Group will face competition from long standing program business market participants such as State National as well as more recent entrants such as Clear Blue Insurance Group, Spinnaker Insurance Company, Trisura and Accredited Surety and Casualty Company, Inc.

Everspan Group will also compete with new companies that continue to be formed to enter the insurance markets, particularly companies with new or "disruptive" technologies or business models.

Competition may take the form of lower prices, broader coverages, greater product flexibility, higher coverage limits, higher quality services or higher ratings by independent rating agencies.

Everspan’s strategy is to develop a sustainable, long-term specialty property & casualty program insurance business with diverse classes of risks.

Everspan sources business through program administrators and managing general agents (collectively “MGA”), reinsurers, brokers, producers and others.

Everspan is developing long-term relationships with its distribution partners.

Subject to Everspan's operational oversight, Everspan engages third parties to market and administer policies and handle claims within defined authorities on Everspan's behalf.

Everspan's management team has significant years of experience in the program insurance business and has long-standing and broad relationships with MGAs, reinsurers, brokers, producers and third-party claims administrators.

Everspan is comprised of Everspan Indemnity Insurance Company, an E&S carrier, which is eligible to write business in all U.S.

states and territories and five admitted carriers.

Everspan's admitted carriers include:

• Everspan Insurance Company, which holds certificates of authority in fifty-one U.S.

states and territories, of which forty-six grant full property and casualty authority.

• Providence Washington Insurance Company (“PWIC”) and 21st Century Indemnity Insurance Company, 21st Century Pacific Insurance Company and 21st Century Auto Insurance Company of New Jersey (collectively, the "21st Century Companies"), which were acquired by Everspan Insurance Company on October 1, 2021 and January 1, 2022, respectively.

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

and the vast majority of PWIC’s legacy liabilities have been transferred out of PWIC pursuant to an insurance business transfer, which was approved by the Oklahoma County District Court in October 2020.

All remaining liabilities are fully ceded to reinsurers and are supported by an unlimited indemnity from the Seller, Enstar Holdings (US), which mitigates any residual risk to these reinsurers.

• The 21st Century Companies were acquired from a national insurance group that has a Financial Strength Rating of “A” (Excellent) from AM Best.

The 21st Century Companies collectively possess active certificates of authority in thirty-six states.

All legacy liabilities remain with affiliates of the sellers through reinsurance and contractual indemnities.

The 21st Century Companies will be re-named during 2022.

Everspan is focused on generating strong underwriting results via its participatory risk retention business model.

For the year ended December 31, 2021, Everspan issued insurance policies generating $13 million of gross written premium, of which Everspan retained approximately 20%.

Everspan may retain up to 30% of risk on each program and will reinsure the remainder to reinsurers and other providers of risk capital.

These reinsurers may be domestic and foreign (re)insurers and institutional risk investors (capacity providers) that want access to specific lines of U.S.

property and casualty insurance business that they may not have the required licenses and filings to otherwise insure.

Everspan purchases reinsurance to manage its net retention on individual risks and overall exposure to losses, while providing it with the ability to offer policies with sufficient limits to meet producer and policyholder needs.

Generally, reinsurance contracts are specific to a program, are purchased on an annual basis and are subject to renegotiation at renewal.

The key contractual provisions include, but are not limited to, those relating to ceding commissions, fronting fees, required reports to reinsurers, responsibility for taxes, arbitration in the event of a dispute and Everspan's termination rights when, among other triggers, a reinsurer defaults (such as by failing to collateralize its obligations when required) or its financial strength falls below an acceptable level.

Everspan’s ceded reinsurance contracts do not legally discharge Everspan from its primary liability for the full amount of the policies, and Everspan will be required to pay the loss and bear collection risk if a reinsurer fails to meet its obligations under the reinsurance agreement.

Everspan mitigates this credit risk by selecting well capitalized, highly rated, authorized capacity providers, or requiring that the capacity provider post collateral to secure the reinsured risks.

Insurance Contracts to the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K for further information on reinsurance recoverables, including the evaluation for credit impairments.

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Everspan faces competition from program business market participants such as State National, Clear Blue Insurance Group, Accelerant Specialty, Benchmark Insurance Company, Falls Lake Insurance, Fortegra Insurance Group, Spinnaker Insurance Company and Accredited Surety and Casualty Company, Inc.

Most of these entities have both admitted and E&S carriers.

Competition may take the form of lower ceding fees, broader coverages, greater product flexibility, higher coverage limits, greater customer service or higher financial strength ratings by independent rating agencies.

Few barriers exist to prevent insurers from entering target markets within the property and casualty industry.

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During periods of excess underwriting capacity, as defined by the availability of capital, competition can result in lower pricing and less favorable policy terms and conditions for insurers.

During periods of reduced

During periods of reduced underwriting capacity, pricing and policy terms and conditions are generally more favorable for insurers.

Historically, the performance of the property and casualty insurance industries has tended to fluctuate in cyclical periods of price competition and excess underwriting capacity, followed by periods of high premium rates and shortages of underwriting capacity.

At any given time, Everspan's portfolio of insurance products could experience varying combinations of these characteristics.

This cyclical market pattern can be more pronounced in the specialty insurance and reinsurance markets in which Everspan competes than in the standard insurance market.

For the last several years the property and casualty industry has been in a period of high premium rates with a shortage of underwriting capacity.

While not anticipated to end in the short-term, this cyclical period will eventually end, perhaps unexpectedly.

The end of this favorable cycle could have negative consequences for Everspan's growth and profitability prospects.

Business Acquisition and Program Partner Selection:

As noted above, most of Everspan’s programs are sourced either from MGAs or through other third parties, such as reinsurance brokers, that are seeking to provide customized insurance solutions that require a carrier with a high rating from AM Best.

Everspan works with MGAs that leverage both data and technology to streamline or improve the underwriting process.

For each new opportunity that Everspan chooses to evaluate, an initial evaluation of the MGA is conducted, including an assessment of its underwriting approach, philosophy, size, quality of management, past performance, future performance targets and, above all, compatibility with Everspan’s operating model, risk appetite, and existing book of business.

Upon receipt of a new submission, Everspan promptly determines whether the program is within Everspan's appetite and Everspan has the ability to write the program;

it then either declines or starts an initial diligence process.

During the initial diligence process, underwriting, actuarial and program management resources review the submission.

If approved by these resources, an underwriting memorandum is prepared and submitted to Everspan's Underwriting Risk Committee for initial approval.

Everspan's Underwriting Risk Committee is chaired by Everspan’s Chief Underwriting Officer and consists of employees and consultants with expertise in underwriting,

credit, and finance.

If initial approval is received, Everspan then conducts comprehensive underwriting, claims, operational, compliance and financial diligence on the partner.

As part of the diligence process, Everspan works closely with the potential MGA to design the program’s underwriting guidelines, ongoing reporting and auditing requirements.

Everspan also typically requires the producing partner to retain underwriting risk or otherwise align incentives with the program’s underwriting performance.

Additionally, as part of the diligence process for each program, Everspan will perform a review of the claims management function, typically performed by a third-party claims administrator or (“TPA”), which in some cases are managed by the MGA or producing partner.

Diligence focuses on claims handling and litigation management, compliance, finance, governance, staff and vendor management, data and IT.

After due diligence is completed and reinsurers are identified, each program is presented to the Underwriting Risk Committee for final approval.

The Underwriting Risk Committee will consider recommendations made by the credit subcommittee as respects the solvency of the MGA and/or reinsurers.

Ongoing monitoring:

For active programs, Everspan authorizes MGAs to underwrite and bind coverages in accordance with approved underwriting guidelines and delegates authority to the TPA for claims adjustment and payment.

Everspan closely monitors each MGA and TPA’s adherence to the agreed upon underwriting and claims guidelines.

Everspan will conduct periodic reviews of loss experience, rate levels, reserves and the overall financial health of the MGA and TPA and hold monthly underwriting meetings with both the MGA and TPA.

Underwriting and claims data is provided by the MGAs and TPAs monthly.

Additionally, Everspan conducts underwriting, claims and accounting audits, generally on-site, for each program at least once a year.

Although Everspan monitors its programs on an ongoing basis including performance of statutory required procedures, monitoring efforts may not be adequate, or these entities may exceed their underwriting or claims settlement authorities or otherwise breach obligations owed to Everspan.

To the extent that these entities exceed their authorities or otherwise breach obligations owed to Everspan in the future, our results of operations or financial condition could be materially adversely affected.

Everspan maintains the right to terminate relationships with its MGAs and TPAs.

Reasons to terminate a relationship include an inability to produce targeted underwriting results, writing exposures outside of agreed upon risk tolerances, delinquency in meeting reporting requirements, a change of strategic direction, or failure to meet collateral or other commitments to Everspan.

Ratings are an important factor in assessing Everspan’s competitive position in the insurance industry.

AM Best assigns Financial Strength Ratings (FSRs) to property and casualty insurance companies based on quantitative criteria such as profitability, leverage and liquidity, as well as qualitative assessments such as the spread of risk, the adequacy and soundness of ceded reinsurance, the quality and estimated market value of assets, the adequacy of loss reserves and surplus

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underwriting capacity, pricing and policy terms and conditions are generally more favorable for insurers.

At any given time, Everspan Group's portfolio of insurance products could experience varying combinations of these characteristics.

This cyclical market pattern can be more pronounced in the specialty insurance and reinsurance markets in which Everspan Group competes than the standard insurance market.

and the competence, experience and integrity of management.

AM Best's FSR scale ranges from 'A++' (superior) to 'D' (poor).

These ratings are not a recommendation to buy, sell or hold any security, and they may be revised or withdrawn at any time by AM Best.

Additionally, AM Best assigns a Best’s Financial Size Category (FSC) to letter-rated insurers, which is a convenient indicator of the company’s size.

The FSC is represented by Roman numerals ranging from Class I (smallest) to Class XV (largest).

The FSC is not part of the FSR.

Everspan insurance carriers that were part of the intercompany pooling agreement during 2021 received an AM Best rating of 'A-' (Excellent) and Financial Size Category of Class VIII.

We view this rating and financial size category as a competitive advantage in the marketplace.

Under the intercompany pooling agreement, affiliated parties agree to and associate themselves, as the Everspan Pool, for the purpose of insuring and reinsuring all business written by or on behalf of each of them, with the intention that each party shall participate, jointly and severally, in the fortunes of the combined underwriting, reinsurance, retrocessions, and claim operations of the other party to the extent of their respective fixed percentage in the Everspan Pool.

It is expected that the newly acquired admitted carriers will be participants to the Everspan Pool in 2022 or have a reinsurance agreement with an Everspan entity to share underwriting risk.

A downgrade in the AM Best rating could adversely impact Everspan’s business volumes and competitive position because demand for certain of its products may be reduced, particularly because some customers require that Everspan maintain minimum ratings to enter, maintain or renew business with it.

Managing General Agency / Underwriting

Ambac’s MGA/U strategy is to build a diversified portfolio of MGA/U covering various P&C products.

Ambac expects to grow the MGA/U business using several strategies, including (i) organic growth, (ii) additional acquisitions and/or partnerships, and (iii) hiring experienced underwriting teams to incubate our own MGA/U.

Key criteria include a track record of profitability and a seasoned management team.

Insurance underwritten through Ambac's MGA/Us may utilize Everspan as an insurance carrier, but will not necessarily be required to do so, depending on strategic and operational considerations.

On December 31, 2020, Ambac acquired 80% of the membership interests of Xchange.

Formed in 2010, Xchange is a specialty-niche, property and casualty Managing General Underwriter ("MGU") focused on accident and health ("A&H") products.

Below is a description of its largest products for which it provides underwriting services:

Employer Stop Loss ("ESL") — provides protection for self-insured employers by serving as a reimbursement mechanism for catastrophic claims exceeding pre-determined levels.

Limited Medical ("LM") — designed for those not covered by traditional medical programs and sold primarily through affinity groups, providing a variety of medically related benefits such as hospital or physician visits.

Short-term Medical ("STM") — sold primarily through affinity groups, providing comprehensive medical coverage for short periods of time (i.e.

Xchange's management team has significant longstanding relationships with carriers, agents, policyholders, affinity groups and reinsurers.

Ambac has the option to purchase the remaining 20% after 2023 and Xchange's management has the option to sell their 20% to Ambac after 2025.

Xchange was formed in 2010 and operates through specialty producers in accident and health sectors across the U.S.

which are typically not targeted by large direct writers and to whom Xchange customized service.

Below is a description of Xchange's largest products for which it is delegated underwriting authority by insurance carriers:

Employer Stop Loss ("ESL") — provides protection for self-insured employers by serving as a reimbursement mechanism for catastrophic claims, both specific and in aggregate exceeding pre-determined levels.

Limited Medical ("LM") — designed for those not covered by traditional Affordable Care Act medical programs and sold primarily through affinity groups, providing a variety of medically related benefits such as inpatient hospital stays, diagnostic services or physician visits.

Short-term Medical ("STM") — sold primarily through affinity groups, providing non Affordable Care Act comprehensive medical coverage for short durations (i.e.

less than one year).

Xchange's management team, which retained 20% ownership of the business, has significant longstanding relationships with carriers, agents, policyholders, affinity groups and reinsurers.

Xchange conducts business through approximately seven insurance carriers and dozens of agents and other distributors.

Xchange is compensated for its services primarily by commissions paid by insurance companies for underwriting, structuring and/or administering polices and, in the case of ESL, managing claims under an agency agreement.

Xchange underwrote premiums for its carriers of approximately $118 million for the year ended December 31, 2021.

Xchange is compensated for its services primarily by commissions paid by insurance carriers for underwriting, structuring and/or administering polices and, in the case of ESL, managing claims under an agency agreement.

Commission revenues are usually based on a percentage of the premiums paid by the insured.

Xchange is also eligible to receive profit sharing contingent commissions on certain programs (mostly LM and STM) based on the underwriting results of the policies it writes, which may cause some variability in revenue and earning recognition.

Business written by Xchange is generally concentrated in January and July, which may result is revenue and earnings concentrations in the first and third quarters each calendar year.

Xchange's core expenses include commissions it pays to its independent agents and compensation for its management and staff, which currently total 20 individuals.

The MGU business is highly competitive and a number of firms actively compete with Xchange for customers and insurance carrier capacity.

However, the ESL market is increasing in size as large companies continue to transition from fully insured to self-funded.

Gross Commission revenues for 2021 were $26 million.

Business written by Xchange is generally concentrated in January and July, which may result in revenue and earnings concentrations in the first and third quarters each calendar year.

Xchange's core expenses include commissions it pays to its independent agents / producers and compensation for its management and staff, which currently total 21 individuals.

Commission expenses are a variable cost as we pay a percentage of premiums written to the agents / producers.

Xchange conducts business through approximately ten insurance carriers and dozens of agents and other distributors.

Commission revenue and expense growth will be driven by Xchange’s expansion of its U.S.

geographic distribution, diversification of its products and by adding new insurance carriers and their related distribution network.

The MGA/U business is highly competitive, and firms actively compete with Xchange for customers and insurance carrier capacity.

• The ESL market is increasing in size as large companies continue to transition from fully insured to self-funded.

As the market size increases, capital is flowing into the market, but prices and margins remain stable.

Blue Cross, UnitedHealth, CIGNA and Aetna are the largest writers.

Competition also comes from large direct writers such as Tokio Marine, HCC and Sun Life as well as smaller carriers such as Gerber Life writing through other MGA/U firms.

• For LM and STM, overall market conditions remain stable.

The market as a whole remains vast, as entrepreneurs and the unemployed seek

options for individual insurance.

Competition for Xchange's business comes from both direct carriers and other intermediaries and, depending on the product, may include Blue Cross, UnitedHealth, CIGNA, Aetna, Tokyo Marine, Houston Casualty Company, Sun Life, United Health, Axis, Chubb, and National General.

Xchange is one component of Ambac's broader Managing General Agent ("MGA")/MGU business strategy.

Ambac expects to grow the MGA/MGU business using several strategies, including (i) organic growth, (ii) additional acquisitions and/or partnerships, and (iii) establishing de-novo platforms.

Future expansion of the MGA/MGU business is expected to include other property and casualty products and services in addition to A&H.

Insurance underwritten through Ambac's MGA/MGUs may utilize the Everspan Group as an insurance carrier, but will not necessarily be required to do so, depending on a number of strategic and operational considerations.

The overall market is large as entrepreneurs and the unemployed seek options for individual insurance.

Competition for Xchange's business comes from both direct carriers and other intermediaries and, depending on the product, may include Blue Cross, UnitedHealth, CIGNA, Aetna, Tokio Marine, Houston Casualty Company, Sun Life, United Health, Axis, Chubb, and National General.

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ENTERPRISE RISK MANAGEMENT

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The Audit Committee reviews with management, internal auditors and independent auditors Ambac's critical accounting policies, Ambac's system of internal controls over financial reporting and the quality and appropriateness of disclosure and content in the financial statements and other external financial communications.

• The Compensation Committee oversees the management of risk primarily associated with our ability to attract,

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motivate and retain quality talent (particularly executive talent) and with setting financial incentives that do not motivate undue risk-taking.

• The Compensation Committee oversees the management of risk primarily associated with our ability to attract, motivate and retain quality talent (particularly executive talent) and with setting financial incentives that do not motivate undue risk-taking.

• The Governance and Nominating Committee oversees the management of risk primarily associated with Ambac’s ability to attract and retain quality directors, Ambac’s corporate governance programs and practices and our compliance therewith, including integration of ESG and sustainability policies, practices and goals into the Company's business strategy and decision making.

Additionally, the Governance and Nominating Committee oversees the processes for evaluation of the performance of the Board of Directors and its committees each year and considers risk management effectiveness as part of its evaluation.

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• The Strategy Committee oversees the management of risk and risk appetite primarily with respect to strategic plans and initiatives.

The Board of Directors also receives quarterly updates from Board committees, and the Board provides guidance to individual committee activities as appropriate.

The Board of Directors receives quarterly updates from Board committees and the Board provides guidance to individual committee activities, as appropriate.

In order to assist the Board of Directors in overseeing Ambac’s risk management, Ambac uses enterprise risk management, a company-wide process that involves the Board of Directors, management and other personnel in an integrated effort to identify, assess and manage a broad range of risks (e.g., credit, financial, legal, liquidity, market, model, operational, regulatory, reputational and strategic), that may affect the Company’s ability to execute on its corporate strategy and fulfill its business objectives.

The Enterprise Risk Committee (“ERC”), which is a management committee, is comprised of senior level management responsible for assisting in the management of the Company’s risks on an individual and aggregate basis.

The ERC produces the relevant risk management information for senior management and the Board of Directors.

Ambac management has established management committees to assist in managing the risks throughout the enterprise.

The Enterprise Risk Committee (“ERC”), which is a management committee, is comprised of executive and senior level management responsible for assisting in the management of the Company’s risks on an individual and aggregate basis.

The ERC produces the relevant risk management information for executive and senior management and the Board of Directors.

Ambac management has established other management committees to assist in managing the risks throughout the enterprise.

These committees will meet monthly or as needed on an ad hoc basis.

• The AAC Risk Committee's objective is to establish an interdisciplinary team of professionals to provide oversight of the key risk remediation issues impacting AAC and Ambac UK.

• The AAC Risk Committee's objective is to establish an interdisciplinary team of professionals to provide oversight of the key risk remediation issues impacting AAC.

The purview of the committee is to review and approve risk remediation activities for the financial guarantee insured portfolio.

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• The Asset Liability Management Committee's (“ALCO”) objective is to foster an enterprise wide culture and approach to liquidity management, asset management, asset valuation and hedging.

Members of ALCO include the Chief Executive Officer, Chief Financial Officer, Head of

Risk Management and senior managers from investment management and the Risk Management Group.

Members of ALCO include the Chief Executive Officer, Chief Financial Officer, Head of Risk Management and senior managers from investment management and the Risk Management Group.

• The Disclosure Committee's objective is to assist the CEO and CFO in their responsibilities to design, establish, maintain and evaluate the effectiveness of disclosure controls and procedures.

Members of the Disclosure Committee include the Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer, Head of Risk Management and senior managers from throughout finance, legal, risk and corporate services.

Everspan Group established an Underwriting Committee in 2021 to review the strategy, and provide oversight of the active underwriting operations of Everspan Group, and to assist the Boards of the Everspan Group companies in overseeing the integrity and effectiveness of Everspan Group’s underwriting risk management framework.

Members of the committee include Ambac's Chief Executive Officer, key members of Everspan Group management and other senior managers or advisors of Ambac.

Members of the Disclosure Committee include the CEO, CFO, Chief Accounting Officer, General Counsel, Chief Operating Officer, Head of Risk Management and senior managers from finance and legal.

Everspan established an Underwriting Risk Committee in 2021 to provide oversight of the active underwriting operations of Everspan, develop underwriting parameters, and assist the Boards of the Everspan companies in overseeing the integrity and effectiveness of Everspan’s underwriting risk management

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Members of the committee include Ambac's Chief Executive Officer, key members of Everspan management and other senior managers or advisors of Ambac.

Additionally, a Reinsurance & Program Administrator Credit Risk sub-committee was established at the direction of the Underwriting Risk Committee to assist with the management of credit risk emanating from ceded reinsurance and program administrators.

Xchange established an Underwriting Committee in 2021 for the purpose of reviewing and approving any new business initiative or product line proposed to be undertaken by Xchange.

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United States

Ambac Assurance is domiciled in the state of Wisconsin and is therefore subject to the insurance laws and regulations of the State of Wisconsin and regulated by the Wisconsin Office of the Commissioner of Insurance (“OCI”).

Everspan Indemnity Insurance Company ("Everspan Indemnity") and its wholly owned subsidiary, Everspan Insurance Company ("Everspan Insurance") are domiciled in the state of Arizona and are therefore subject to the insurance laws and regulations of the

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State of Arizona and regulated by the Arizona Department of Insurance and Financial Institutions (“DIFI”).

AAC and Everspan Insurance are also subject to the insurance laws and regulations of the other jurisdictions in which they are licensed.

AAC is domiciled in the state of Wisconsin and is therefore subject to the insurance laws and regulations of the State of Wisconsin and regulated by the Wisconsin Office of the Commissioner of Insurance (“OCI”) as a domestic insurer.

Everspan Indemnity and its wholly owned subsidiary, Everspan Insurance Company ("Everspan Insurance") are domiciled in the state of Arizona and are therefore subject to the insurance laws and regulations of the State of Arizona and regulated by the Arizona Department of Insurance and Financial Institutions as domestic insurers.

The subsidiaries of Everspan Insurance are domiciled in various States and are therefore subject to the insurance laws and regulations of their respective domiciliary States and regulated by the insurance departments of those States as domestic insurers.

AAC, Everspan Insurance and its subsidiaries are also subject to the insurance laws and regulations of the other jurisdictions in which they are licensed and operate as foreign insurers in such jurisdictions.

Insurance Regulatory Restrictions to the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K for further information on regulatory restrictions.

Xchange is a property and casualty managing general underwriter, specializing in accident and health insurance.

Xchange, like other managing general agents and program administrators, is subject to licensing requirements and regulation by insurance regulators in various states in which they conduct business.

Every state and Washington, D.C.

have enacted a version of the NAIC Model Managing General Agents Act, which governs licensing and the relationship between insurers and managing general agents.

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

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

The Settlement Agreement, Stipulation and Order and indenture for the Tier 2 Notes include covenants which restrict the operations of AAC.

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Certain of the restrictions in the Settlement Agreement and indenture for the Tier 2 Notes may be waived with the approval of the OCI and/or the requisite percentage of holders of debt securities issued thereunder.

Xchange Benefits is a property and casualty managing general underwriter, specializing in accident and health insurance.

Xchange Affinity is also a managing general underwriter.

Xchange Benefits and Xchange Affinity, like some other managing general underwriters and program administrators, may be subject to licensing requirements and regulation by insurance regulators in various states in which they conduct business.

Cybersecurity and Privacy Regulation

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Federal and state laws and regulations with respect to privacy, data protection and cybersecurity that require financial institutions, including insurance companies and agencies, to safeguard personal and other sensitive information, and may provide for notice of their practices relating to the collection, disclosure and processing of personal information, and any related security breaches.

For example, the National Association of Insurance Commissioners (“NAIC”), an organization of state insurance regulators, adopted the Insurance Data Security Model Law (“NAIC Model Law”) that creates rules for insurers and other covered entities addressing data security and the investigation and notification of cybersecurity events involving unauthorized access to, or the misuse of, certain nonpublic information.

For example, the National Association of Insurance Commissioners (“NAIC”) adopted the NAIC Insurance Data Security Model Law (#668) (“NAIC Model Law”) that creates rules for insurers and other covered entities addressing data security and the investigation and notification of cybersecurity events involving unauthorized access to, or the misuse of, certain nonpublic information.

This includes maintaining an information security program based on ongoing risk assessment, overseeing third-party service providers, investigating data breaches and notifying regulators of a cybersecurity event.

Legislation based on the NAIC Model Law has been enacted in eleven states and may be enacted in other states.

Our subsidiaries, as insurance companies and agencies licensed in the State of New York, are also required to comply with the New York Department of Financial Services (“NYDFS”) cybersecurity regulation, which establishes requirements for covered financial services institutions to implement a cybersecurity program designed to protect the confidentiality, integrity and availability of information systems

of regulated entities, and information stored on those systems.

Legislation based on the NAIC Model Law has been enacted in several states and may be enacted in other states.

Certain of our subsidiaries, as insurance companies and agencies licensed in the State of New York, are also required to comply with the New York Department of Financial Services (“NYDFS”) cybersecurity regulation, which establishes requirements for covered financial services institutions to implement a cybersecurity program designed to protect the confidentiality, integrity and availability of information systems of regulated entities, and information stored on those systems.

The regulation imposes a governance framework for cybersecurity program, risk based minimum standards for technology systems for data protection, monitoring and testing, third-party service provider reviews, security incident response and reporting to NYDFS of certain security incidents, annual certifications of regulatory compliance to NYDFS, and other requirements.

The California Consumer Privacy Act, went into effect in January 2020, and provides additional privacy rights for California residents, and in November 2020, California further

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expanded privacy rights for California residents by enacting the California Privacy Rights Act.

In 2021 Virginia and Colorado enacted similar privacy laws.

We anticipate federal and state regulators to continue to enact legislation related to privacy and cybersecurity.

The federal Health Insurance Portability and Accountability Act of 1996 and its implementing regulations (“HIPAA”) impose minimum standards on covered entities, such as health insurers, for the privacy and security of protected health information (“PHI”).

The Health Information Technology for Economic and Clinical Health Act, enacted in 2009 (“HITECH”) provides for the extension of certain privacy and security provisions of HIPAA to business associates of covered entities that handle electronic PHI.

Xchange specializes in accident and health insurance and is a business associate of the health insurers carriers it partners with, making it subject to compliance with the provisions of HITECH and HIPAA applicable to business associates.

United Kingdom

The Prudential Regulatory Authority ("PRA") and Financial Conduct Authority ("FCA") (and their predecessor regulator the Financial Services Authority (“FSA”)) exercise significant oversight of Ambac UK.

In 2009, the FSA limited Ambac UK’s license to undertaking only run-off related activity.

As such, Ambac UK is authorized to run-off its insurance portfolio in the United Kingdom and a number of other EU countries.

EU legislation allowed Ambac UK to conduct business in EU states other than the United Kingdom through a “passporting” arrangement, which eliminated the necessity of additional licensing or authorization in those other EU jurisdictions.

On December 31, 2020, Ambac UK's authorization to run-off insurance policies in the EU through passporting arrangements ceased.

This was a consequence of the end of the transition period agreed between the UK Government and the EU following the UK's exit from the EU on January 31, 2020.

Ambac UK's outstanding policies in the EU were either commuted or the benefits of those policies were transferred to UK entities during the year.

Ambac UK therefore no longer services any insurance policies in the EU.

Ambac UK maintained a branch in Milan, Italy until December 18, 2020, but closed the branch on that date following the transfer of the last remaining policy in the branch to the UK on 1 December 2020.

Risk Factors in Part I, Item 1A and Note 9.

Insurance Regulatory Restrictions to the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K for further information on Brexit related developments as well as other regulatory restrictions.

As such, Ambac UK is authorized to run-off its insurance portfolio in the United Kingdom.

Insurance Regulatory Restrictions to the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K for further information on regulatory restrictions.

AFG and certain of its subsidiaries are also subject to non-U.S.

laws and regulations relating to the cybersecurity and privacy of the information of clients, employees or others.

AFG’s UK subsidiary, Ambac UK, has conducted insurance business throughout Europe and is subject to the U.K.’s Data Protection Act 2018, and the E.U.’s General Data Protection Regulation (GDPR), but these laws should not have a significant impact on Ambac UK.

The application, interpretation and enforcement of these non-U.S laws and regulations are often uncertain, and may have an impact on AFG and its subsidiaries businesses and operations.

Regulation of Change in Control

Under applicable Wisconsin and Arizona law, any acquisition of control of AFG, or any other direct or indirect acquisition of control of Ambac Assurance or the Everspan Group, requires the prior approval of OCI and DIFI, respectively.

“Control” is defined as the direct or indirect power to direct or cause the direction of the management and policies of a person.

Any purchaser of 10% or more of the outstanding voting stock of a corporation is presumed to have acquired control of that corporation and its subsidiaries unless the OCI or DIFI, as applicable, upon application, determines otherwise.

For purposes of this test, AFG believes that a holder of common stock having the right to cast 10% or more of the votes which may be cast by the holders of all shares of common stock of AFG would be deemed to have control of Ambac Assurance, Everspan Indemnity and Everspan Insurance within the meaning of the applicable Wisconsin and Arizona insurance laws and regulations.

Under applicable insurance law, any acquisition of control of AFG, or any other direct or indirect acquisition of control of AAC or one or more members of the Everspan, requires the prior approval (or non-disapproval) of the domiciliary regulator of the acquired company (or, in the case of AFG, the domiciliary regulators of AAC and each member of the Everspan).

“Control” is generally defined as the direct or indirect power to direct or cause the direction of the management and policies of a person.

Any purchaser of 10% or more of the outstanding voting stock of a corporation is presumed to have acquired control of that corporation and its subsidiaries unless the applicable insurance regulator, upon application, determines otherwise.

For purposes of this test, AFG believes that a holder of common stock having the right to cast 10% or more of the votes which may be cast by the holders of all shares of common stock of AFG would be presumably deemed to have control of AAC, Everspan Indemnity, Everspan Insurance and its subsidiaries

within the meaning of applicable insurance laws and regulations, although insurance regulators may in their discretion deem control not to exist where, for example, control is disclaimed by a passive investor.

The United Kingdom has similar requirements applicable in respect of AFG, as the ultimate holding company of Ambac UK.

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Dividend Restrictions, Including Contractual Restrictions

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As a result of these restrictions, AAC is not expected to pay dividends to AFG for the foreseeable future.

Everspan Indemnity and Everspan Insurance are also subject to regulatory restrictions on their ability to pay dividends.

Everspan Indemnity and Everspan Insurance do not have sufficient earned surplus at this time to pay ordinary dividends under the insurance laws and regulations of Arizona.

While the UK insurance regulatory laws impose no statutory restrictions on an insurer’s ability to declare a dividend, the PRA’s and FCA’s capital requirements in practice act as a restriction on the payment of dividends, where a firm has a lower level of regulatory capital than its regulatory capital requirement as is the case for Ambac UK.

Further, the FSA amended Ambac UK’s license in 2010 such that the PRA must specifically approve any transfer of value and/or assets from Ambac UK to AAC or any other Ambac group company, other than in respect of certain disclosed contracts between the two parties (such as in respect of a management services agreement between AAC and Ambac UK).

As a result, Ambac UK is not expected to pay any dividends to AAC for the foreseeable future.

Pursuant to the Settlement Agreement and the indenture for the Tier 2 Notes, AAC may not make any “Restricted Payment” (which includes dividends from AAC to AFG) in excess of $5 million in the aggregate per annum, other than Restricted Payments from AAC to AFG in an amount up to $7.5 million per annum solely to pay operating expenses of AFG.

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

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between AAC and Ambac UK).

As a result, Ambac UK is not expected to pay any dividends to AAC for the foreseeable future.

Everspan Indemnity, Everspan Insurance and its subsidiaries are also subject to regulatory restrictions on their ability to pay dividends.

Everspan Indemnity and Everspan Insurance do not have sufficient earned surplus at this time to pay ordinary dividends under the insurance laws and regulations of Arizona.

Furthermore, certain subsidiaries of Everspan Insurance are restricted from paying dividends to Everspan Insurance until 2025 or later, unless otherwise approved by the domestic regulator of the relevant subsidiary, pursuant to the regulatory orders approving the acquisition of those subsidiaries.

INVESTMENTS AND INVESTMENT POLICY

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Additionally, senior credit personnel monitor the portfolio on a continuous basis.

As of December 31, 2020, the AAC and Everspan Group non-VIE investment portfolios had an aggregate fair value of approximately $2,603 million.

The investment objective is to achieve the highest risk-adjusted after-tax return on a diversified portfolio of fixed maturity investments and pooled investment funds consistent with the respective company's risk tolerance while employing active asset/liability management practices to satisfy all operating and strategic liquidity needs.

As of December 31, 2021, the AAC and Everspan non-VIE investment portfolios had an aggregate fair value of approximately $2,123 million.

The investment objective is to achieve the highest risk-adjusted after-tax return on a diversified investment portfolio consistent with the respective company's risk tolerance while employing active asset/liability management practices to satisfy all operating and strategic liquidity needs.

In addition to internal investment policies and guidelines, the investment portfolio of each company is subject to limits on the types and quality of investments imposed by applicable insurance laws and regulations of the jurisdictions in which it is licensed.

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Changes to AAC’s investment policies are subject to approval by OCI pursuant to covenants made by AAC in the Settlement Agreement, the Stipulation and Order and the indenture for the Tier 2 Notes.

Background and Business Description to the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K for more information about the Settlement Agreement, the Stipulation and Order and the indenture for the Tier 2 Notes.

Background and Business Description and Note 12.

Long-term Debt to the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K for more information about the Settlement Agreement, the Stipulation and Order and the indenture for the Tier 2 Notes.

Such requirements could adversely impact the performance of the investment portfolio.

As of December 31, 2021, the non-VIE Ambac UK investment portfolio had an aggregate fair value of approximately $669 million.

Ambac UK’s investment policy is designed with the primary objectives of ensuring a reasonable risk-adjusted return over the remaining runoff of the insured portfolio and that Ambac UK is able to meet its financial obligations as they fall due, in particular with respect to policy holder claims.

Ambac UK’s investment policy is designed with the

primary objectives of ensuring a reasonable risk-adjusted return over the remaining runoff of the insured portfolio and that Ambac UK is able to meet its financial obligations as they fall due, in particular with respect to policy holder claims.

Ambac UK’s investment portfolio is primarily diversified fixed maturity securities and pooled investment funds.

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The primary investment objective is to preserve capital for strategic uses while maximizing income.

The investment portfolio is

| Ambac Financial Group, Inc.

9 2020 FORM 10-K |

Table of Co ntents

subject to internal investment guidelines.

The investment portfolio is subject to internal investment guidelines.

Such guidelines set forth minimum credit rating requirements and credit risk concentration limits.

19 unchanged sentences

Investments of the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K for further discussion of Ambac insured securities held in the investment portfolio.

(3) Other investments include interests in pooled investment funds that are either classified as trading securities or are reported under the equity method and Ambac's interests in an unconsolidated trust created in connection with its sale of junior surplus notes on August 28, 2014.

(3) Other investments include interests in pooled investment funds that are either classified as trading securities or are reported under the equity method and for 2020 Ambac's interests in an unconsolidated trust created in connection with its sale of junior surplus notes on August 28, 2014.

As of December 31, 2021, Ambac had 122 employees in the United States and 10 employees in the United Kingdom.

1 unchanged sentence

Ambac considers its employee relations to be satisfactory.

| Ambac Financial Group, Inc.

11 2021 FORM 10-K |

Ambac’s focus has been on identifying and retaining key talent through individual development programs following skills assessments.

Ambac’s succession planning has identified internal candidates that could fill senior management and mid-level management positions as the need arises.

The Company has established a senior advisory team to work with, and advise, senior management on key initiatives, and invested in both personal and professional growth programs to identify and prepare executives for promotion within the Company.

Ambac’s succession planning has identified internal candidates that could fill executive management and senior management positions as the need arises.

The Company has established a senior advisory team to work with, and advise, executive management on key initiatives, and has invested in both personal and professional growth programs to identify and prepare individuals for promotion within the Company.

The Company continues to rely on compensation components (such as salary, long-term incentive plan awards, deferred cash awards and short-term incentive plan awards) to support employee retention and discourage excessive risk taking.

The Company incorporates performance metrics as part of the annual short-term incentive bonus offering with increased bonus potential for exceptional results.

We utilize third-party benchmark data to

establish market-based compensation levels.

We utilize third-party benchmark data to establish market-based compensation levels.

We believe that our current compensation and incentive levels reflect high performance expectations as part of our merit pay philosophy.

1 unchanged sentence

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

What changed 10-K

Item 1. Business