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Item 7. Management’s Discussion and Analysis

2022-02-24 compared with 2021-03-01 · 761 added, 1067 removed, 607 unchanged (75% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 accounting principles generally accepted in the United States (“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 do not intend for these non-GAAP financial measures to be a substitute for any GAAP financial measures and they may differ from similar reporting provided by other companies.

Readers of this Form 10-K should use these non-GAAP financial measures only in conjunction with the comparable GAAP financial measures.

Adjusted Earnings and Adjusted Book Value are non-GAAP financial measures that adjust for the impact of certain non-recurring or non-economic GAAP accounting requirements and include the addition of certain items that the Company has or expects to realize in the future, but that are not reported under GAAP.

We provide reconciliations to the most directly comparable GAAP measures;

Adjusted Earnings to Net income attributable to common stockholders and Adjusted Book Value to Total Ambac Financial Group, Inc.

stockholders’ equity.

COMPANY OVERVIEW

See Part I, Item 1.

"Description of the Business" and Note 1.

Background and Business Description for a description of the Company and our key strategies to achieve our primary goal to maximize shareholder value.

The objectives of our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) are to provide users of our consolidated financial statements with the following:

• A narrative explanation from the perspective of management of our financial condition, results of operations, cash flows, liquidity and certain other factors that may affect future results;

• Context to the consolidated financial statements;

• Information that allows assessment of the likelihood that past performance is indicative of future performance.

The following discussion should be read in conjunction with our consolidated financial statements in Item 8 of this Report and the matters described under Item 1A.

Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2021.

Refer to Item 1.

Business and Note 1.

Background and Business Description for a description of our business and our key strategies to achieve our primary goal to maximize shareholder value.

Organization of Information

MD&A includes the following sections:

Executive Summary

During 2020, Ambac made significant progress in the development of its specialty property and casualty program insurance and managing general agency/underwriting businesses:

Specialty Property & Casualty Program Insurance — AFG's activities included the following:

• Established Everspan Indemnity Insurance Company, which is eligible under the Non-admitted and Reinsurance Reform Act to write surplus lines in all states, subject to satisfying minimum capital requirements, which were met in first quarter 2021.

Everspan Indemnity Insurance Company is seeking to be included on state eligibility lists in numerous states.

• Completed the re-domestication of Everspan Insurance Company from Wisconsin to Arizona.

Additionally, Everspan Insurance Company recently converted its license in Arizona to write property and casualty insurance and is working on similarly converting its licenses in all other states.

Everspan Insurance Company has been repositioned as a subsidiary of Everspan Indemnity Insurance Company, forming the Everspan Group.

• Neither company has yet issued any new policies.

The Everspan Group platform received an A- Financial Strength

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Rating from A.M.

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

Managing General Agency/Underwriting — AFG purchased 80% of Xchange Benefits, LLC and Xchange Affinity Underwriting Agency, LLC (collectively, “Xchange”).

Refer to Note 3.

Business Combination for further information relating to this acquisition.

AFG Net Assets

As of December 31, 2020 net assets of AFG, excluding its equity investments in subsidiaries, were $366 million.

Critical Accounting Estimates

Financial Guarantees in Force

Results of Operations

Liquidity and Capital Resources

Balance Sheet

Accounting Standards

Ambac Assurance Statutory Basis Financial Results

Ambac UK Financial Results under UK Accounting Principles

Non-GAAP Financial Measu res

EXECUTIVE SUMMARY ($ in millions)

During 2021, AFG progressed the development of its specialty property and casualty program insurance business.

Developments included the following:

• AFG contributed $92 of additional capital to Everspan.

• Everspan received an 'A-' Financial Strength Rating from AM Best in February 2021.

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

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

Such acquisitions will enhance Everspan'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, Everspan 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 and Everspan also benefits from an unlimited, uncapped indemnity from Enstar Holdings (US) to mitigate any residual risk to these reinsurers.

On January 3, 2022, Everspan completed the acquisition of the 21st Century Companies (three carriers) from a national insurance group that has a Financial Strength Rating of “A” (Excellent) from AM Best.

The 21st Century Companies collectively possess certificates of authority in thirty-nine 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.

• During 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.

• See below AAC and Subsidiaries for the various 2021 activities relating to the financial guarantee business

In addition to its focus on Xchange, AFG is actively seeking to expand the MGA/U business though additional acquisitions and development of new MGA/U companies.

As of December 31, 2021, net assets of AFG, excluding its equity investments in subsidiaries, were $269.

($ in millions)

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Other net assets 14

(1) Includes surplus notes (fair value of $59 million) issued by AAC that are eliminated in consolidation.

(1) Includes surplus notes (fair value of $90) issued by AAC that are eliminated in consolidation.

AAC and Subsidiaries

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Asset Management

Investment portfolios are subject to internal investment guidelines, as well as limits on types and quality of investments imposed by insurance laws and regulations.

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

Investment portfolios are subject to internal investment guidelines, as well as limits on types and quality of investments

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imposed by insurance laws and regulations.

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

Refer to Note 4.

Investments to the Consolidated Financial Statements, included in Part II, Item 8 in this Form 10-K for further details of fixed maturity investments by asset category and pooled investment funds by investment type.

At December 31, 2020, Ambac and its subsidiaries owned $621 million 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.

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

At December 31, 2021, Ambac and its subsidiaries owned $609 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, surplus notes and/or other Ambac issued securities, and may consider opportunities to exchange securities issued by it from time to time for other securities issued by it.

Liability and Insured Exposure Management

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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.

During 2020, successful risk reduction transactions included:

• A commutation in January 2020, via a refunding, of a watch list public finance transaction with net par outstanding of $171 million at December 31, 2019;

• A refinancing in February 2020 of an adversely classified asset-backed leasing transaction with net par outstanding of $86 million at December 31, 2019;

• Purchasing quota share reinsurance in June 2020 on a transportation revenue credit with net par outstanding of $33 million at December 31, 2019;

• A refinancing in August 2020 of an international stadium transaction with net par outstanding of $217 million at December 31, 2019;

• A refinancing in November 2020 of an international utility transaction with net par outstanding of $298 million at December 31, 2019;

• Partial commutations of $32 million of adversely classified credits over the course of 2020.

AAC's RMG had additional successes in the first quarter of 2021 as follows:

• In January 2021, AAC completed the purchase of quota share reinsurance on a portfolio of public finance credits with net par outstanding of approximately $823 million at December 31, 2020.

Par ceded included general obligation ($347 million), lease and tax-backed revenue ($234 million), higher education ($161 million) and transportation ($81 million) and included $160 million of watch list and adversely classified credits.

• In February 2021, AAC's exposure to an adversely classified stadium transaction was reduced by $540 million through the combination of a refinancing and quota share reinsurance.

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

During 2021, Ambac completed risk reduction transactions consisting of quota share reinsurance, refinancings, and commutations of $2,695, of which, quota share reinsurance represented $1,695.

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

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($ in billions)

2020 2019 Variance

December 31, 2021 2020 Variance

Total $ 28,020 $ 33,888 $ (5,868) (17) %

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Watch List $ 3,824 $ 4,720 $ (896) (19) %

The decrease in total net par outstanding resulted from active de-risking initiatives, including the transactions noted above, as well as scheduled maturities, amortizations, refundings and calls.

This overall decrease in total net par outstanding was partially offset by the weakening of the US Dollar compared to the British Pound and the Euro.

The increase in ACC exposures is primarily due to the addition of credits impacted by COVID-19 (including $982 million of net par outstanding from the Watch List category), such as hotel tax, stadium, convention center and public house insured

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transactions, partially offset by active de-risking and issuer paydowns and calls.

The decrease in Watch List net par outstanding resulted from active de-risking initiatives (including the transactions noted above), downgrades to ACC due to COVID-19, and scheduled maturities, amortizations, refundings and calls.

In addition, as a result of the economic impacts from the COVID-19 pandemic, $2,397 million of net par outstanding in sectors such as mass transit, toll roads, and private higher education, among others, have been added to the Survey List.

The Survey List is a categorization for enhanced monitoring of currently performing credits.

We also continue to experience stress in our exposure to Puerto Rico that consists of several different issuing entities (all below investment grade).

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

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.

We have been paying claims for several years on most of our exposure to Puerto Rico, which consists of several different issuing entities (all below investment grade).

These issuing entities, which have been part of the PROMESA restructuring process that began in 2016, each have their own credit risk profile attributable to discrete revenue sources, direct general obligation pledges, and/or general obligation guarantees.

On January 18, 2022, Judge Swain, U.S.

District Court for the District of Puerto Rico, confirmed the modified Eighth

Amended Plan of Adjustment for the Commonwealth of Puerto Rico ("Eighth Amended POA").

On January 20, 2022, Judge Swain approved the Qualifying Modifications for PRIFA and CCDA ("PRIFA QM" and "CCDA QM", respectively).

Although the Eighth Amended POA, the PRIFA QM and CCDA QM remain subject to appeal (see Risk Factors— "Insured Portfolio Losses"), the Eighth Amended POA, PRIFA QM, and CCDA QM are expected to become effective on or before March 15, 2022.

Consummation of the plan of adjustment and qualifying modifications will resolve the PROMESA restructuring process for the GO, PBA, PRIFA and CCDA issuing entities that have portions of their bonds insured by AAC.

On the effective date of the Eighth Amended POA, PRIFA QM, and CCDA QM, and pursuant to bondholder elections, (i) all of the remaining outstanding AAC-insured GO and PBA bonds will be satisfied and eliminated via commutation or acceleration, and (ii) about 39% and 19% of the par of AAC's outstanding AAC-insured PRIFA and CCDA bonds, respectively, will be reduced via commutation, with the remainder of those bonds (belonging to bondholders who elected not to commute their AAC Insurance Policies) being deposited into trusts together with such policies and the bondholders' respective shares of distributed Eighth Amended POA, PRIFA QM, or CCDA QM consideration.

Those bondholders participating in the trusts are expected to receive scheduled payments from the applicable trust, unless Ambac elects, in its sole discretion, to pay all or a portion of the outstanding par amounts of the AAC-insured bonds in such trust.

AAC-insured bonds of PRHTA are subject to the PRHTA POA, a separate plan of adjustment that is expected to be filed prior to March 31, 2022, with a confirmation hearing to follow later in 2022.

Refer to Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Financial Guarantees in Force, in this Annual Report on Form 10-K for additional information regarding the different issuing entities that encompass Ambac's exposures to Puerto Rico.

In March 2020, the outbreak of COVID-19, caused by a novel strain of the coronavirus, was recognized as a pandemic by the World Health Organization, and the outbreak is widespread globally, including in the markets in which we operate.

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

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 have helped to moderate the economic impact of COVID-19.

These measures include monetary policy decisions, such as quantitative easing, providing liquidity to financial institutions, providing liquidity to credit markets, the Paycheck Protection Program Lending Facility and the Main Street Business Lending Program;

Congressional actions, such as the $2.4 trillion Coronavirus Aid, Relief and Economic Security ("CARES") Act, the $483 billion Paycheck Protection Program And Health Care Enactment Act, the $190 billion Families First Coronavirus Response Act, and, most recently, the $920 billion 2021 Consolidated Appropriations Act, which, among other things, provides direct payments to households, support for small businesses, renter assistance and funding for transport, airlines, education and state and local governments.

In addition, housing measures, such as forbearance on mortgages and suspension of foreclosures and evictions, and various executive orders have helped to provide relief.

Outside of the US, and in the United Kingdom and Italy in particular, where Ambac has insured portfolio exposure,

various monetary policy, fiscal stimulus measures and other actions have helped to moderate the economic impact.

Nonetheless, the U.S.

and many large global economies contracted on a full year basis in 2020.

In the U.S., the trajectory and sustainability of the economic recovery experienced in the second half of 2020 is uncertain due to, among other things, the magnitude of job losses, uncertainty regarding further government support measures, the acceleration of new COVID-19 cases and the uncertainty related to the timing of a critical mass of COVID-19 vaccines being provided to the broader population.

For the Ambac insured portfolio, credit risk remains elevated due to the historical and future economic and financial impact related to the COVID-19 crisis.

COVID-19 has also impacted Ambac's operating environment.

Ambac has implemented a COVID-19 response plan designed to ensure the safety of our staff and business continuity.

Our employees transitioned to working remotely in March 2020 while maintaining full operational capabilities.

Since July 2020, Ambac opened certain of its offices to allow a portion of the workforce to safely return on a voluntary basis.

We have not experienced and do not anticipate incurring material net incremental operating expenditures to maintain the current operating environment.

Although many of Ambac's critical third-party service providers are operating with employees working remotely, we have not presently identified or experienced any limitations or operational constraints with respect to services provided.

Ambac does not believe that our current operating environment has resulted in a significant change to our disclosure controls or internal controls over financial reporting.

COVID-19 has adversely impacted Ambac's financial position and results of operations as credit risk in the insured and investment portfolios has increased.

In the insured portfolio, municipal, mortgage-backed, student loan and other asset securitization exposures could be materially adversely impacted, and as a result, with the exception of the mortgage-backed sector, we increased loss reserves across each of these and other sectors during the year ended December 31, 2020.

In the mortgage-backed sector, significantly lower interest rates have increased excess spread levels and largely offset the impact of higher mortgage delinquencies and projected losses resulting from the COVID-19 pandemic.

We are continuously evaluating and updating our view of the macro economic environment as well as our specific credit view of each of our insured exposures considering the significant uncertainties brought upon us by the COVID-19 pandemic.

The overall financial impact from COVID-19 has been and will be a function of (i) the willingness and ability of issuers of insured debt and other counterparties to pay their obligations when due;

(ii) the impact of changes to interest rates on policy and derivative payments;

and (iii) the performance of the investment portfolio.

• Ambac’s insurance policies will be drawn in the event that the issuers of insured obligations do not make payments on their obligations when due.

As a result of the COVID-19 related economic impact on issuers and markets where Ambac provides financial guarantees;

including lower tax, project, and business revenues and increases in forbearances or delinquencies on mortgage and student loan payments, we have increased our loss reserves and

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.

COVID-19 and the public health responses by the US federal and state governments at the onset of the pandemic resulted in a shut down for several months of significant portions of the US economy, including areas that Ambac's insured obligors rely upon to generate the revenues and cash flows necessary to service debts we insure.

and Europe, where most of Ambac's financial guaranty exposure is located, significant fiscal stimulus measures, monetary policy actions and other relief measures helped to moderate the negative economic impacts of COVID-19 and supported the economic recovery which began in the second half of 2020 and continues into 2022.

As of December 31, 2021, there have been no defaults of Ambac-insured obligations as a result of the COVID-19 pandemic.

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may further increase them in the future depending on the duration and severity of the crisis.

The crisis may also impair certain issuers' ability to pay premiums owed to Ambac;

however, we believe such issuers currently have the ability to continue to pay such premiums timely, but this is subject to change.

• Ambac has exposure to reinsurance counterparties for their portions of future claim payments.

Ambac has reinsured approximately 13.3% of its gross par outstanding to four reinsurance counterparties.

Each of these reinsurance counterparties is experienced in the business of reinsuring and/or writing financial guaranty insurance.

All have current ratings of A+ (by S&P) or better and have collateralization or replacement triggers upon downgrade.

Despite the significant overall benefit of the above relief measures, which were designed to help mitigate the economic impact of the COVID-19 pandemic generally, certain of these measures may still adversely affect Ambac's insured portfolio.

In particular, this includes the U.S.

government's temporary relief measures that required mortgage loan servicers to offer relief to borrowers who suffer hardship as a result of COVID-19.

These relief measures included moratoriums on foreclosures and evictions as well as the expansion of forbearance and subsequent repayment options.

While these relief measures have largely since expired, the resulting delays in starting mortgage foreclosure processes and the impact of potential post-forbearance related mortgage loan modifications may 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 following the resumption of foreclosure activity and the implementation of post-forbearance mortgage loan modifications.

However, since the onset of the COVID-19 pandemic, much of the potential increase in claim experience has been offset by the benefit to excess spread within the securitization structures as a result of the reduction in interest rates, which is expected to result in higher excess spread recoveries to Ambac.

The impact from the COVID-19 pandemic on Ambac also includes the ability of our counterparties to pay their obligations when due, most notably AAC's reinsurers for their portion of future financial guaranty claim payments.

Ambac has reinsured approximately 17.9% of its gross par outstanding to five reinsurance counterparties.

Each of these reinsurance counterparties (i) is experienced in the business of reinsuring and/or writing financial guaranty insurance and (ii) have current ratings of A+ (by S&P) or better and have collateralization or replacement triggers upon downgrade within Ambac's reinsurance agreements.

Ambac actively monitors each of these reinsurance entities and currently believes they have the ability to perform under their respective reinsurance policies, but this is subject to change.

• Ambac is exposed to the risk that contractual counterparties (including those under our RMBS litigations and derivative counterparties) may default in their financial obligations, whether as the result of insolvency, lack of liquidity, operational failure, fraud or other reasons.

At present, Ambac has no concerns about the ability of our contractual counterparties, which include certain regulated exchanges in the case of interest rate swaps and futures, to perform under their contracts, but this is subject to change.

• Asset prices declined substantially during the first quarter, particularly in directly affected industries such as tourism, airlines, hospitality, commercial real estate and manufacturing.

While Ambac does not have significant investments in these asset classes, we did experience a negative total return for the investment portfolio of approximately (4.4)% during the three month period ending March 31, 2020.

We evaluated the investment portfolio at March 31, 2020, and in subsequent quarters, and have not recognized credit impairments.

Over the last three quarters of 2020, we have repositioned the investment portfolio to manage credit risk while improving risk adjusted return, including redeploying capital into new asset categories.

Ambac recognized a total return for the investment portfolio of approximately 4.1% for the year ended December 31, 2020

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.

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

Our evaluation process has been revised to incorporate consideration of the impact of COVID-19 on new business prospects as well as Ambac's existing business and operations.

Our evaluation process incorporates the perceived impact of COVID-19 on historical and prospective business results.

Financial Statement Impact of Foreign Currency

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ARRC has proposed a transition plan with specific steps and timelines designed to encourage the adoption of SOFR and guide the transition to SOFR from USD-LIBOR.

The Finanical Conduct Authority in the United Kingdom and other regulatory bodies have issued statements encouraging cessation of new transactions referencing USD LIBOR after December 31, 2021, while supporting extension of the publication of major USD-LIBOR tenors to mid-2023 to allow additional legacy contracts to mature on their existing terms.

The Financial Conduct Authority in the United Kingdom and other regulatory bodies have issued statements encouraging cessation of new transactions referencing USD LIBOR after December 31, 2021, while supporting extension of the publication of major USD-LIBOR tenors to mid-2023 to allow additional legacy contracts to mature on their existing terms.

Organizations are currently working on industry-wide and company-specific transition plans related to derivatives and cash markets exposed to USD-LIBOR.

Similar efforts are underway to identify suitable replacement reference rates for LIBOR in other major currencies.

After December 31, 2021, banks ceased publishing most GBP-LIBOR rates.

In response, in October 2021, noteholders of obligations linked to GBP-LIBOR and insured by Ambac UK consented to the replacement of GBP-LIBOR references with compounded Sterling Overnight Index Average ("SONIA") plus a credit adjustment spread effective on the first interest payment date in 2022.

Ambac therefore no longer insures any obligations linked to Non-USD LIBOR.

As of December 31, 2021, the Company has exposure to LIBOR in the following areas:

(i) the financial guarantee insured portfolio, (ii) the Ambac Note included in long-term debt, (iii) certain invested assets and interest rate derivatives.

Ambac has reviewed its financial guarantee portfolio to identify insured transactions that it believes may be vulnerable to the transition from LIBOR.

The review focused on insured issues that are scheduled or projected to have an outstanding principal

(i) the financial guarantee insured portfolio, (ii) the Sitka AAC Note (as defined in Note 1.

Background and Business Description to the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K) included in long-term debt, (iii) certain invested assets and interest rate derivatives.

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balance as of December 31, 2021.

The Company reviewed the governing documents' provisions for the setting of interest rates in the event of unavailability of LIBOR ("fallback language").

Ambac has reviewed its financial guarantee portfolio to identify insured transactions that it believes may be impacted by the transition from LIBOR.

The review focused on insured issues that were scheduled or projected to have an outstanding principal balance as of December 31, 2021.

The Company reviewed the governing documents' provisions for the setting of interest rates in the event LIBOR is unavailable ("fallback language").

The Company has initiated a dialogue with relevant trustees, calculation agents, auction agents, servicers and other parties responsible for implementing the rate change in these transactions.

Most have not yet committed to a course of action.

Also, whatever interest rate is set by the party responsible may be challenged in the court by other parties.

The Ambac Note is referenced to 3-month LIBOR and has a final maturity of February 12, 2023.

Recent developments as summarized above indicate that major LIBOR tenors may continue to be published through the maturity date of the Ambac Note.

Most have not yet committed to specific courses of action, but the passage of legislation in New York State and the expectation that similar federal legislation will be enacted should facilitate greater clarity for those transactions that do not have clear fallback language.

The Sitka AAC Note is referenced to 3-month USD-LIBOR and has a final maturity of July 6, 2026.

The Sitka AAC Note includes specific fallback language that addresses both the calculation of interest using a replacement reference rate to 3-month USD-LIBOR and the circumstances that would trigger use of the replacement rate.

Ambac's investment and derivative portfolios have been evaluated to assess the risk of LIBOR unavailability based on the respective instruments' fallback language and parties responsible for implementing the alternative rates.

Investments that are Ambac-insured securities are being addressed through efforts on the financial guarantee portfolio described above.

For other investments, we are working with our investment managers to ensure LIBOR indexed positions in our portfolio contain unambiguous fallback language.

For other investments, we are working with our investment managers to ensure LIBOR indexed positions in our portfolio contain unambiguous fallback language or will be governed by relevant legislation.

Ambac's centrally cleared interest rate swaps are expected to follow LIBOR transition steps outlined by the International Swaps and Derivatives Association, Inc.

Our non-cleared interest rate swaps either have offsetting LIBOR exposure with a single counterparty that serves as calculation agent responsible for rate changes or have Ambac as the calculation agent.

Our non-cleared interest rate swaps are all governed by New York law and either have offsetting LIBOR exposure with a single counterparty that serves as calculation agent responsible for rate changes or have Ambac as the calculation agent.

Given the uncertainty of the ultimate timing of the LIBOR sunset, as well as the lack of clarity on decisions that parties responsible for calculating interest rates will make and the reaction of impacted parties as well as the unknown level of interest rates when the change occurs, the Company cannot at this time predict the impact of the discontinuance of LIBOR, if it occurs, on every obligation the Company guarantees or on its other LIBOR indexed financial instruments.

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This section highlights accounting estimates management views as critical because they are most important to the portrayal of the Company's financial condition;

and require management to make difficult and subjective judgments regarding matters that are inherently uncertain and subject to change.

These estimates are evaluated on an on-going basis based on historical developments, political events, market conditions, industry trends and other information.

and require management to make difficult and subjective

judgments regarding matters that are inherently uncertain and subject to change.

These estimates are evaluated on an on-going basis considering historical developments, political events, market conditions, industry trends and other information.

There can be no assurance that actual results will conform to estimates and that reported results of operations will not be materially adversely affected by the need to make future accounting adjustments to reflect changes in these estimates from time to time.

Management has identified the following critical accounting policies and estimates:

(i) valuation of loss and loss expense reserves, (ii) valuation of certain financial instruments and (iii) valuation of deferred tax assets.

(i) valuation of financial guarantee loss and loss expense reserves, (ii) valuation of certain financial instruments and (iii) valuation of deferred tax assets.

Management has discussed each of these critical accounting policies and estimates with the Audit Committee, including the reasons why they are considered critical and how current and anticipated future events impact those determinations.

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Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K.

Valuation of Losses and Loss Expense Reserves (including Subrogation Recoverables)

The loss and loss expense reserves and subrogation recoverable assets (collectively defined as "loss reserves") discussed in this section relate only to Ambac’s non-derivative insurance policies issued to beneficiaries, including unconsolidated VIEs.

A loss reserve is recorded on the balance sheet on a policy-by-policy basis based upon the present value ("PV") of expected net claim cash outflows or expected net recovery cash inflows, discounted at risk-free rates.

Valuation of Financial Guarantee Losses and Loss Expense Reserves (including Subrogation Recoverables)

The loss and loss expense reserves and subrogation recoverable assets (collectively defined as "loss reserves") discussed in this section relate only to Ambac’s non-derivative financial guarantee insurance policies issued to beneficiaries, including unconsolidated VIEs.

A loss reserve is recorded on the balance sheet on a policy-by-policy basis at the present value ("PV") of expected net claim cash outflows or expected net recovery cash inflows, discounted at risk-free rates.

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

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Ambac does not estimate recoveries for litigations where its sole claim is for fraudulent inducement, since any remedies under such claims would be non-contractual.

The evaluation process for expected future net cash flows is subject to certain estimates and judgments regarding the probability of default by the issuer of the insured security, probability of remediation and settlement outcomes (which may include commutation, litigation settlements, refinancings and/or other settlement outcomes), probability of a restructuring outcome (which may include payment moratoriums, debt haircuts and/or subsequent recoveries) and the expected loss severity of credits for each insurance contract.

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

The evaluation process for expected future net cash flows is subject to certain estimates and judgments regarding the probability of default by the issuer of the insured security, probability of negotiation or settlement outcomes (which may include commutation, litigation and other settlements, and/or a refinancing), probability of a restructuring outcome (which may include payment moratoriums, debt haircuts and/or subsequent recoveries) and the expected loss severity of credits for each insurance contract.

As the probability of default for an individual credit increases and/or the severity of loss given a default increases, our loss reserve for that insured obligation will also increase.

Political, economic, credit or other unforeseen events could have an adverse impact on default probabilities and loss severities.

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economic, credit or other unforeseen events could have an adverse impact on default probabilities and loss severities.

The loss reserves for many transactions are derived from the issuer’s creditworthiness.

For public finance issuers, loss reserves will consider not only creditworthiness but also political dynamics and economic status and prospects.

The loss reserves for transactions which have no direct issuer support, such as most structured finance exposures, including RMBS and student loan exposures, are derived from the default activity and loss given default of underlying collateral supporting the transactions.

The loss reserves for transactions which have no direct issuer support, such as most structured finance exposures, including RMBS and student loan exposures, are derived from the default activity and the estimated loss given default of the underlying collateral supporting the transactions.

In addition, many transactions have a combination of issuer/entity and collateral support.

Loss reserves reflect our assessment of the transaction’s overall structure, support and expected performance.

Loss reserve volatility will be a direct

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result of the credit performance of our insured portfolio, including the number, size, bond types and quality of credits included in our loss reserves;

Loss reserve volatility will be a direct result of the credit performance of our insured portfolio, including the number, size, bond types and quality of credits included in our loss reserves;

our ability to execute workout strategies and commutations;

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and management's judgments with regards to the current performance and future developments within the insured portfolio.

The number and severity of credits included in our loss reserves depend to a large extent on transaction specific attributes, but will generally increase during periods of

economic stress and decline during periods of economic prosperity.

The number and severity of credits included in our loss reserves depend to a large extent on transaction specific attributes, but will generally increase during periods of economic stress and decline during periods of economic prosperity.

Reinsurance contracts mitigate our loss reserves but since Ambac currently has minimal exposure ceded to reinsurers on credits with loss reserves, the existing reinsurance contracts are unlikely to have a significant effect on loss reserve volatility.

Loss reserve volatility will also be materially impacted by changes in interest rates from period to period.

The table below indicates the gross par outstanding and gross loss reserves (including loss expenses) related to policies in Ambac’s loss and loss expense reserves at December 31, 2020 and 2019:

($ in millions) December 31 Gross Par

Outstanding (1)(2)

Gross Loss and Loss Expense

Reserves (1)(3)(4)

Outstanding (1)(2)

The table below indicates the gross par outstanding and gross loss reserves (including loss expenses) related to policies in Ambac’s Financial Guarantee loss and loss expense reserves at December 31, 2021 and 2020:

Gross Loss and Loss Expense

Reserves (1)(3)(4)

RMBS $ 2,530 $ (1,446) $ 3,027 $ (1,392)

December 31, 2021

Structured Finance 2,371 (1,178)

Domestic Public Finance 2,742 562

Student Loans 415 234 472 208

Ambac UK and Other Credits 1,612 23 271 3

Loss expenses — 45

Totals 6,302 (554)

December 31, 2020

Structured Finance 2,945 (1,212)

Domestic Public Finance 3,016 724

Loss expenses — 68

Totals 7,573 (397)

(1) Ceded par outstanding on policies with loss reserves and ceded loss and loss expense reserves are $784 and $24 respectively, at December 31, 2021, and $739 and $33, respectively at December 31, 2020.

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Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements, included in Part II, Item 8 in this Form 10-K for a description of the cash flow and statistical methodologies used to develop loss reserves.

Most of our reserved credits with large loss reserves utilize the cash flow method of reserving.

Alternative cash flow scenarios are developed to represent the range of possible outcomes and resultant future claim payments and timing.

The majority of our large loss reserves utilize the cash flow method of reserving.

Various cash flow scenarios are developed to represent the range of possible outcomes and resultant future claim payments and timing.

Scenarios and probabilities of each are adjusted regularly to reflect changes in status, outlook and our analysis and views.

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• In some cases, such as RMBS and student loans, cash flow projections include the modeling of an issuer or transaction’s future revenues and expenses to determine the resources available to pay debt service on our insured obligations.

With respect to RMBS, a component of our loss reserve estimate includes subrogation recoveries related to securitized loans in such transactions that breached certain representations and warranties ("R&W").

In other cases, such as many public finance exposures including our Puerto Rico exposures, we consider the issuers’ overall ability and willingness to pay, as it relates to the existing fiscal, economic, legal, restructuring and/

or political framework relevant to a particular exposure or group of exposures.

We then develop multiple scenarios where issuer debt service is paid, missed and/or haircut with claims paid then modeled for any recovery amount and timing.

Key assumptions impacting RMBS cash flow models include projected home price appreciation and interest rates A component of our RMBS loss reserve estimate includes subrogation recoveries related to securitized loans in such transactions that breached certain representations and warranties ("R&W").

Key assumptions impacting student loan cash flow models include projected loan defaults, recoveries and interest rates.

• In other cases, such as many public finance exposures, we consider the issuer's overall ability and willingness to pay as it relates to the existing fiscal, economic, legal, restructuring and/or political framework relevant to a particular exposure or group of exposures.

We then develop multiple scenarios where issuer debt service is paid, missed and/or haircut with claims paid then modeled for any recovery amount (and potential variability of the recovery amount) and timing.

There is no certainty our assumptions as to scenarios or probabilities will not be subject to material changes as developments occur.

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The remediation scenarios and the related probabilities of occurrence vary by policy depending on ongoing and expected discussions and negotiations with issuers and/or investors.

In addition to commutation negotiations that are underway with various counterparties in various forms, our reserve estimates may also include scenarios which incorporate our ability and/or expectation to commute additional exposure with other counterparties.

Valuation of Certain Financial Instruments

The Fair Value Measurement Topic of the ASC requires financial instruments to be classified within a three-level fair

In addition to commutation negotiations that are underway with various counterparties in various forms, our reserve

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value hierarchy.

estimates may also include scenarios which incorporate our ability and/or expectation to commute additional exposure with other counterparties.

Valuation of Certain Financial Instruments

The Fair Value Measurement Topic of the ASC requires financial instruments to be classified within a three-level fair value hierarchy.

The fair value hierarchy, the financial instruments classified within each level, our valuation methods, inputs, assumptions and the review and validation procedures over quoted and modeled pricing are further detailed in Note 5.

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All models and related assumptions are continuously re-evaluated by management and enhanced, as appropriate, based on improvements in information and modeling techniques.

The re-evaluation process includes a quarterly meeting of senior Finance and Risk personnel to review and approve changes to models and key assumptions.

The re-evaluation process includes a quarterly meeting of senior Finance personnel to review and approve changes to models and key assumptions.

As a result of the significant judgment for the above-described instruments, the actual trade value of the financial instrument in the market, or exit value of the financial instrument owned by Ambac, may be significantly different from its recorded fair value.

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Deferred tax assets arise because of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating loss ("NOL").

More specifically, deferred tax assets represent a future tax benefit that results from losses recorded under GAAP in a current period which are only deductible for tax purposes in future periods and NOL carry forwards.

More specifically, deferred tax assets represent a future tax benefit that results from losses recorded under GAAP in a current period which are only

deductible for tax purposes in future periods and NOL carry forwards.

Valuation allowances are established to reduce deferred tax assets to an amount that “more likely than not” will be realized.

On a quarterly basis, management identifies and considers all available evidence, both positive and negative, in making the determination with significant weight given to evidence that can be objectively verified.

Positive evidence includes removal of the going concern independent auditor opinion in 2018, the Segregated Account's February 12, 2018 exit from rehabilitation, Everspan's receipt of an 'A-'' Financial Strength Rating from AM Best, the launch of a specialty program property and casualty insurance business, and AFG's acquisition of a majority interest in an MGA/U business.

Negative evidence includes the potential for unrecognized future insurance tax losses;

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As a result of the above-described risks and uncertainties associated with future operating results, management believes it is more likely than not that the Company will not generate sufficient taxable income to recover the U.S.

deferred tax asset and therefore has a full valuation allowance.

federal deferred tax asset and therefore has a full valuation allowance.

To the extent such risks and uncertainties are resolved, Ambac may have the ability to establish a history of making reliable estimates of future income which could ultimately result in a reduction to the deferred tax asset valuation allowance.

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FINANCIAL GUARANTEES IN FORCE

The following table provides a breakdown of guaranteed net par outstanding by market sector at December 31, 2020 and 2019.

($ in millions)

Financial guarantee products were sold in three principal markets:

public finance, U.S.

structured finance and international finance.

The following table provides a breakdown of guaranteed net par outstanding by market at December 31, 2021 and 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 that insure variable interest entities (“VIEs”) consolidated by Ambac in accordance with the Consolidation Topic of the ASC, Consolidation.

Guaranteed net par outstanding excludes the exposures of policies that insure bonds which have been refunded or pre-refunded and the policy that insures the notes issued by Ambac LSNI as defined in Note 1.

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

($ in millions) December 31, 2020 2019

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Public Finance (1) (2)

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Total net par outstanding $ 28,020 $ 33,888

$ 33,888 $ 38,018

(1) Includes $5,490 and $5,575 of Military Housing net par outstanding at December 31, 2021 and 2020, respectively.

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

Components of Puerto Rico net par outstanding as well as other Public Finance exposures 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.

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The table below shows Ambac’s ten largest exposures, by repayment source, as a percentage of total financial guarantee net par outstanding at December 31, 2020 (in millions):

($ in millions) Risk Name Bond Type Ambac

Outstanding (2)

IF AUK Mitchells & Butlers Finance plc-UK Pub Securitisation UK-Asset Securitizations BBB $ 974 2.9 %

IF AUK Capital Hospitals plc (3)

UK-Infrastructure A- 903 2.7 %

IF AUK Aspire Defence Finance plc UK-Infrastructure A- 870 2.6 %

IF AUK Anglian Water UK-Utility A- 853 2.5 %

IF AUK National Grid Gas UK-Utility A- 788 2.3 %

PF AAC New Jersey Transportation Trust Fund Authority - Transportation System US-Lease and Tax-backed Revenue BBB- 767 2.3 %

IF AUK Posillipo Finance II S.r.l Italy-Sub-Sovereign BIG 742 2.2 %

Ostregion Investmentgesellschaft NR 1 SA (3)

Austria-Infrastructure BIG 707 2.1 %

IF AUK RMPA Services plc UK-Infrastructure BBB+ 575 1.7 %

PF AAC Mets Queens Baseball Stadium Project, NY, Lease Revenue (4)

US-Stadium Financing BIG 540 1.6 %

Total $ 7,719 22.9 %

PF = Public Finance, SF = Structured Finance, IF = International Finance

AAC = Ambac Assurance, AUK = Ambac UK

(1) Internal credit ratings are provided solely to indicate the underlying credit quality of guaranteed obligations based on the view of Ambac.

In cases where Ambac has insured multiple tranches of an issue with varying internal ratings, or more than one obligation of an issuer with varying internal ratings, a weighted average rating is used.

Ambac credit ratings are subject to revision at any time and do not constitute investment advice.

BIG denotes credits deemed below investment grade.

(2) Net Par 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.

(3) A portion of this transaction is insured by an insurance policy issued by AAC.

AAC has issued policies for these transactions that will only pay in the event that Ambac UK does not pay under its insurance policies (“second to pay policies")

(4) In February 2021, the net par outstanding for this transaction was reduced to zero through the combination of a refinancing and quota share reinsurance.

Net par related to the top ten exposures increased $79 million from December 31, 2019.

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

The increase from 2019 was primarily related to changes in foreign exchange rates partially offset by scheduled paydowns.

The concentration of net par amongst the top ten (as a percentage of net par outstanding) has increased to 23% from 20% at December 31, 2019.

Certain credits within the top ten have had Ambac rating downgrades since December 31, 2019, primarily related to the impact of COVID-19, including Mitchells & Butlers Finance plc, New Jersey Transportation Trust Fund Authority and Mets Queens Baseball Stadium Project.

Aspire Defence Finance plc's rating at December 31, 2020, improved since December 31, 2019.

The remaining insured portfolio of financial guarantees has an average net par outstanding of $32 million per single risk, with insured exposures ranging up to $534 million and a median net par outstanding of $5 million.

Given that Ambac has not written any new insurance policies since 2008, the risk exists that the insured portfolio becomes increasingly concentrated to large and/or below investment grade exposures.

Governments outside the US, in markets in which Ambac operates, also implemented similar measures to the US.

Ambac undertook a detailed analysis of the potential impact of the closure of certain portions of the US economy and certain other economies, including the UK, Italy, and Australia, to assess the impact of the resulting global economic contraction on its insured financial guarantee portfolio.

The economic contraction and the subsequent but still uncertain recovery;

actions such as monetary policy and fiscal stimulus, including the CARES Act in the US that was signed

into law on March 27, 2020, and other fiscal stimulus programs;

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.

CARES Act and Other Relief Measures

The $2.4 trillion Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") provides relief and stimulus funds for American consumers, businesses and industries impacted by COVID-19.

Other Congressional measures, such as the $483 billion Paycheck Protection Program and Health Care Enhancement Act ("PPE & HCE Act") and the recent $920 billion Consolidated 2021 Appropriations Act have provided additional measures to moderate the impact of COVID-19 on the economy.

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The CARES Act together with the PPP & HCE Act and the 2021 Consolidated Appropriations Act have several measures that impacted US municipalities and other borrowers, including consumers, such as mortgage and student loan borrowers, represented in our insured portfolio, including:

• A program for direct lending, loans, loan guarantees and investments to eligible businesses, states and municipalities, including to passenger airlines and cargo airlines;

• Programs for small business loans;

• Business tax breaks, including payroll tax deferral;

• Allocations of direct aid to state and local governments to reimburse them for the costs of dealing with COVID-19;

• The Public Health and Social Services Fund for distribution of grants to healthcare providers and hospitals;

• Grants for transit agencies;

• Grants for airport authorities;

• Funding for transport, airlines, education, state and local governments, health, vaccines, nutrition;

• Emergency jobless benefits;

• Renter assistance;

• Direct payments to households and for unemployment insurance.

Despite the above provisions, which are designed to help mitigate the economic impact of the COVID-19 pandemic generally, the CARES Act contains certain provisions that may adversely affect Ambac.

In March 2020, the CARES Act temporarily suspended payments on all student loans held by the Department of Education through September 30, 2020.

The moratorium on payments has twice been extended by executive order and is now set to expire on September 30, 2021.

Although the CARES Act provision did not include the private student loans owned by special purpose entities that have their securitized obligations guaranteed by AAC, we have incorporated into our loss reserves analysis assumptions related to increased delinquencies for borrowers with private student loans who often also have federal student loans and have elected not to pay altogether.

Despite the assumed increase in delinquencies and losses related to this phenomena as well as the general deterioration in consumer credit related to the economic downturn, AAC does not anticipate making substantial claim payments on insured student loan transactions for several years due to the structures governing the insured bonds.

Additionally, the federal government has provided temporary relief measures to which servicers of mortgage loans must adhere.

The Federal Housing Administration ("FHA") of the US Department of Housing and Urban Development and the Federal Housing Finance Agency ("FHFA") are providing temporary relief measures that require mortgage loan servicers to offer relief to borrowers who suffer hardship as a result of COVID-19.

The relief measures include moratoriums on foreclosures and evictions as well as the expansion of forbearance and subsequent repayment options.

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.

Moreover, several State agencies have issued similar guidance to mortgage loan servicers concerning loan forbearances and other relief for borrowers.

Depending on the trajectory and strength of the economic recovery, there may still be pressure to extend the duration of forbearances and subsequently to offer generous repayment plans.

Forbearances increased sharply across the AAC's insured first lien RMBS obligations during the second quarter of 2020 and early in the third quarter of 2020, but then dropped later in the third quarter of 2020 through the end of the year, 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, as well as the residual impact of the global recession, 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.

However, we also anticipate that the significant decline in interest rates experienced during 2020 will likely generate additional excess spread recoveries on insured RMBS obligations that will mostly compensate for such adverse effects.

In the UK all non-essential leisure, food and retail operations, including public houses were closed from March 20, 2020, as a consequence of the COVID-19 pandemic.

Premises were allowed to gradually reopen from June 1, 2020, such that by July 4, 2020, the majority of outlets were permitted to reopen.

The UK Government introduced a number of measures to mitigate the impact of these enforced closures including rebating employers 80% of staff salaries (up to a £2,500 per month per employee cap), tax deferrals, sales tax reductions, business loan schemes and property tax relief.

On January 5, 2021, the UK Government reimposed the closure of non-essential leisure food and retail operations until February 15, 2021, with a gradual opening of venues on regional basis thereafter.

The mitigating measures noted above will continue through this period before then being slowly withdrawn by April 30, 2021.

While Ambac expects the foregoing measures 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 experience material losses that would adversely impact our future results of operations and financial condition.

Insured Portfolio

A deep recession during the first half of 2020 was followed by a moderate recovery in the second half of 2020 that still left the U.S.

with an overall contraction in GDP for the full year.

Economic growth for 2021, while expected to be positive, is also expected to be tempered by the continued uncertainty related to the elevated infection rate of COVID-19 in the U.S.

and the uncertain timing related to achieving a critical mass of COVID-19 vaccinations across the populace.

Recovery to 2019 levels of economic output are not expected until late 2021 or early 2022.

Consequently, we expect pressure will remain on U.S.

states and local governments which are currently facing significant budget strains as tax and other revenues have faltered as a result of COVID-19 related shutdowns, job losses and travel restrictions.

In addition states may need to cut aid to local municipalities that are also under pressure from lost revenues.

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Monetary policy and federal stimulus through the CARES Act and other programs has benefited and is expected to continue to benefit in the overall economic recovery and more specifically provide some relief to state and local governments, including to issuers of municipal debt insured by Ambac, although the sufficiency of such benefits remains uncertain.

As part of the 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 crisis.

Our near-term concerns are concentrated on exposures substantially reliant on narrow, economically sensitive revenue streams.

The ability of issuers of these obligations to pay is expected to be stressed although several issuers expressed a willingness to use their balance sheets to support their obligations and avoid defaults in the near-term.

Ambac's insured par outstanding, net of reinsurance ("NPO"), to these Public Finance sectors are as follows at December 31, 2020:

($ in millions)

Market / Sector Total NPO Total Debt Service Due Next Twelve Months

Stadiums $ 634 $ 42

Toll Roads / Bridges 457 43

Dedicated Tax 358 51

Rail / Mass Transit 311 15

Hotels / Convention Centers 248 43

Higher Education Auxiliary 235 25

Airports 111 22

Total Public Finance $ 2,354 $ 241

The RMBS and student loan insured portfolios are expected to be adversely impacted by the previously mentioned forbearances and the overall state of the U.S.

economy which contracted in 2020, and where unemployment is still elevated and job participation rates are depressed.

Expected to offset such impact for RMBS exposures is the benefit to excess spread within the securitization structures as a result of the significant reduction in interest rates, which will result in higher recoveries.

Ambac reduced its exposure to stadiums by $540 million of net par in February 2021.

Ambac insured exposure includes a number of international policies where the revenue of the issuer is demand dependent.

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.

In connection with these efforts.

Ambac's NPO with respect to international demand dependent policies are as follows at December 31, 2020:

($ in millions)

Market / Sector Total NPO Total Debt Service Due for Twelve Months

Asset Securitizations $ 974 $ 86

Toll Roads / Bridges 768 62

Airports 215 7

Higher Education 178 10

Total $ 2,135 $ 165

At this time, there are significant 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.

Below we will discuss the significant exposures in our insured portfolio relating to each of the three markets.

Financial Guarantees in Force to the Consolidated Financial Statements, included in Part II, Item 8 in this Form 10-K for exposures by bond type.

Public Finance Insured Portfolio

Ambac’s portfolio of U.S.

public finance exposures is $15,497 million, representing 46% of Ambac’s net par outstanding as of December 31, 2020, and a 12% reduction from the amount outstanding at December 31, 2019.

This reduction in exposure was due to additional reinsurance acquired, restructuring and related commutation transactions, scheduled paydowns, and early terminations (calls, refundings and pre-refundings).

public finance exposures is $12,360 in net par outstanding, representing 44% of Ambac’s net par outstanding as of December 31, 2021, and a 20% reduction from the amount outstanding at December 31, 2020.

This reduction in exposure was due to additional reinsurance acquired, restructuring transactions, scheduled paydowns, and early terminations (calls, refundings and pre-refundings).

While Ambac’s U.S.

public finance portfolio consists predominantly of municipal bonds such as general obligation, revenue, and lease and tax-backed obligations of state and local government entities, the portfolio also comprises 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 interests.

Financial Guarantees in Force to the Consolidated Financial Statements, included in Part II, Item 8 in this Form 10-K for exposures by bond type.

public finance portfolio consists predominantly of municipal bonds such as general obligation, revenue, and lease and tax-backed obligations of state and local government entities, the portfolio also includes several non-municipal types of bonds, such as financings for not-for-profit entities and transactions with public and private elements, which generally finance infrastructure, housing and other public interests.

Municipal bonds are generally supported directly or indirectly by the issuer’s taxing authority or by public sector fees and assessments which may or may not be specifically pledged.

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Municipal bankruptcies and similar proceedings, while still relatively uncommon, have occurred, exposing Ambac to the risk of liquidity claims and ultimate losses if issuers cannot successfully adjust their liabilities without impairing creditors.

Not-for-profit transactions are generally supported by the not-for-profit entities’ net revenues and may also include specific pledges, liens and/or mortgages.

The entity typically serves a well-defined market and promulgates a public purpose mission.

These transactions may afford Ambac contractual protections such as financial covenants and control rights in the event of issuer breaches and defaults.

Risk factors in these transactions derive from the creditworthiness of the issuer, including but not limited to, its financial condition, leverage, management, business mix, competitive position, industry and socioeconomic trends, government programs and other factors.

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these types of transactions include not-for-profit hospitals, universities, associations and charities.

Public/private transactions are generally structured to achieve their targeted public interest objective without direct support from the public sector.

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military housing.

• Ambac insures approximately $5,575 million net par of privatized military housing debt.

• Ambac insures approximately $5,490 net par of privatized military housing debt.

The debt was issued to finance the construction and/or renovation of housing units for military personnel and their families on domestic U.S.

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Debt service is not directly paid or guaranteed by the U.S.

Rather, the bonds are serviced from the cash flow generated in most cases by rental payments deposited by the military directly into lockbox accounts as part of each service personnel’s Basic Allowance for Housing (BAH).

In a small number of cases rental payments also come from civilians, including retired service personnel, living on a particular base.

Rather, the bonds are serviced from the

cash flow generated in most cases by rental payments deposited by the military directly into lockbox accounts as part of each service personnel’s Basic Allowance for Housing (BAH).

In typically small percentages, rental payments can also come from civilians, including retired service personnel and US Department of Defense contractors living on a particular base.

Collateral for these transactions includes the BAH payments as well as an interest in the ground lease.

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As of December 31, 2021, privatized military housing represented approximately 20% of net par outstanding.

Ambac has exposure to the Commonwealth of Puerto Rico (the "Commonwealth") and its instrumentalities across several different issuing entities with total net par exposure of $1,070 as of December 31, 2020.

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

At this time, it remains very difficult to predict what the shape and timing of the post COVID-19 recovery will be for the Commonwealth of Puerto Rico, not least because the depth and length of COVID-19's impact is still uncertain.

The island does not appear to be insulated from the fiscal and economic impact COVID-19 has had on U.S.

municipalities on the mainland.

Net general fund revenue collected from July-November 2020 totaled $4.01 billion, down about $210 million from the $4.22 billion collected during the same period in 2019, according to the Puerto Rico Treasury Department's tax collection reports released in January 2021.

Sales and use, corporate income and

personal income tax collections have all been adversely impacted to varying degrees by the pandemic.

It is unclear if this cumulative underperformance will continue, what this implies for the Commonwealth’s ability to pay debt service, and what 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:

• the fiscal and monetary policies of the federal government which will shape the trajectory of the U.S.

• the speed and efficacy of targeted federal aid packages to (1) help Puerto Rico address the negative economic effects of the pandemic and (2) rebuild better and more resilient infrastructure post-Hurricanes Irma and Maria in 2017 and earthquakes in 2020;

• the receptivity, availability, pace and effectiveness of vaccinations for COVID-19;

• changes to supplemental Medicaid funding relief and other federal transfer payments;

• the willingness and ability of the Commonwealth government to implement much needed fiscal and structural reforms.

Commonwealth Fiscal Plan

On May 27, 2020, the Oversight Board certified the Commonwealth Fiscal Plan, which purports to incorporate the impact of COVID-19 on the Commonwealth economy, and projects diminished growth, budget surplus, and debt capacity as compared to previous versions of the Commonwealth Fiscal Plan.

The Commonwealth Fiscal Plan will significantly inform the Commonwealth Plan of Adjustment, and the diminished economic performance described in the new Fiscal Plan implies worse outcomes than had been previously disclosed for creditors under the Commonwealth's Plan of Adjustment.

According to a letter sent January 19, 2021, from the Oversight Board's Executive Director, Natalie Jaresko, to Governor Pedro Pierluisi and legislative leaders, the Oversight Board is aiming to certify an updated Commonwealth Fiscal Plan reflecting new information regarding the Commonwealth’s macroeconomic environment and government revenues and expenditures, as well as the impact of expenses from the anticipated amended Commonwealth Plan of Adjustment.

The letter also establishes the timeline for the annual fiscal plan revision process, which would conclude with the Oversight Board certification of the Commonwealth Fiscal Plan by April 23, 2021.

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

Commonwealth Plan of Adjustment

On February 9, 2020, the Oversight Board announced it reached an agreement in principle on a plan support agreement (the "Amended PSA") with certain creditors supporting the

Structured Finance Portfolio

Ambac’s portfolio of U.S.

structured finance exposures is $4,904 in net par outstanding, representing 18% of Ambac’s net par outstanding as of December 31, 2021, and a 23% reduction from the amount outstanding at December 31, 2020.

This reduction in exposure was primarily related to (i) residential mortgage-backed securities ("RMBS") policies, which continued to prepay as well as incur claims and (ii) quota share reinsurance of a structured insurance credit.

Current insured exposures primarily include securitizations of mortgage loans, home equity loans and student loans, in each case where the majority of the underlying collateral risk is situated in the United States.

At December 31, 2021, RMBS represented approximately 10% of net par outstanding.

Structured finance securitization exposures generally entail three forms of risk:

(i) asset risk, which relates to the amount and quality of the underlying assets;

(ii) structural risk, which relates to the extent to which the transaction’s legal structure and credit support provide protection from loss;

and (iii) servicer risk, which is the risk that poor performance at the servicer or manager level contributes to a decline in cash flow available to the transaction.

AAC seeks to mitigate and manage these risks through its risk management practices.

International Finance Insured Portfolio

Ambac’s portfolio of international finance insured exposures is $10,756 in net par outstanding, representing 38% of Ambac’s net par outstanding as of December 31, 2021, and a 11% reduction from the amount outstanding at December 31, 2020.

This reduction in exposure was primarily the result of scheduled maturities within investor-owned utilities, commutations and a strengthening of the US dollar versus the British pound and the Euro.

Ambac’s international finance insured exposures include a wide array of obligations in the international markets, including infrastructure financings, utility obligations, whole business securitizations (e.g., securitizations of substantially all of the operating assets of a corporation) and sub-sovereign credits.

At December 31, 2021, sub-sovereign and investor-owned and

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Table of Co ntents

restructuring of the Commonwealth's General Obligation ("GO") and Public Building Authority ("PBA") debt.

On February 28, 2020, the Oversight Board filed an Amended POA and an amended Disclosure Statement to restructure approximately $35 billion of debt and other claims against the Commonwealth of Puerto Rico, PBA, Employees Retirement System (ERS), and other issuers as well as more than $50 billion in pension liabilities.

If confirmed, the Amended POA would reduce Commonwealth debt and other claims from $35 billion to less than $11 billion, a 70% haircut and would also reduce the Commonwealth’s annual debt service by 56%.

Treatment for pension claims would include a reduction in pension payments by as much as 8.5% for retirees who currently receive at least $1,200 a month, such that approximately 75% of current and future retirees would not face any cuts, and the establishment of a pension reserve fund to help support retirement payments in future years.

The Amended POA disproportionately disadvantages claims against the Commonwealth related to certain revenue bonds issued by Puerto Rico instrumentalities, including those insured by AAC, providing for an estimated recovery of 3.9% on claims against the Commonwealth related to PRHTA bonds, Puerto Rico Infrastructure Financing Authority ("PRIFA") Special Tax Revenue ("Rum Tax") bonds, and Puerto Rico Convention Center District Authority ("PRCCDA") bonds.

In light of COVID-19 and its impact, and potential future impact, on the Commonwealth, the Oversight Board and the parties to the Amended PSA began negotiating revisions to the Amended PSA without terminating that agreement.

Information released publicly regarding these negotiations indicated that proposals considered during the course of such negotiations implied recoveries related to certain revenue bonds insured by AAC below 3.9%.

On October 28, 2020, the Court ordered the Oversight Board to file, by February 10, 2021, either (i) an informative motion with a term sheet disclosing the economic and structural terms and features of a proposed amended Commonwealth Plan of Adjustment, or (ii) the proposed amended Commonwealth Plan of Adjustment itself, together with a proposed timeline for disclosure statement and confirmation hearings.

On February 16, 2021, the Court entered an order granting the Oversight Board’s motion to extend the court’s deadline to file a Commonwealth Plan of Adjustment or comprehensive term sheet to March 8, 2021.

The Oversight Board's motion disclosed that the Oversight Board reached an agreement in principle regarding the terms of a new plan support agreement (the “Second Amended PSA”) with certain holders of GO Bond Claims and/or CW Guarantee Bond Claims (each as defined in the Second Amended PSA) and holders of PBA Bond Claims (as defined in the Second Amended PSA).

The motion also indicated that the requested extension of the deadline to March 8, 2021, will allow the Oversight Board to schedule and conduct additional mediation sessions with parties in interest to increase support for the forthcoming Commonwealth Plan of Adjustment.

On February 22, 2021, 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 publicly disclosed the Second Amended PSA.

Assured Guaranty Corp.

and Assured Guaranty Municipal Corp.

("Assured"), Syncora Guarantee Inc., and National Public Finance Guarantee Corporation ("National") have conditionally

agreed to the Second Amended PSA.

In addition, by a Joint Notice of Termination, dated February 22, 2021, the Amended PSA, dated as of February 9, 2020, was terminated and is of no further force or effect.

On February 23, 2021, the Oversight Board announced that the Second Amended PSA had the support of 70% of all GO Bond and PBA Bond claims.

In the Second Amended PSA, approximately $18.8 billion of the GO and GO-guaranteed liabilities will be reduced to approximately $7.4 billion, newly issued securities will be GO-only with no inclusion of the COFINA junior lien bonds contemplated within the February 2020 Amended POA, and creditors will accept part of their recovery consideration in the form of a contingent value instrument (“CVI”) that pays out if a portion of the island’s Sales and Use Tax outperforms the projections in the Oversight Board’s Certified Fiscal Plan.

The Government of the Commonwealth of Puerto Rico and Ambac Assurance are not currently parties to the Second Amended PSA.

Further, the Second Amended PSA provides that Assured and National may terminate their agreement to the Second Amended PSA on or prior to March 31, 2021;

until that date, Assured and National are permitted to continue litigation against the Oversight Board with respect to certain revenue bond exposures.

If Assured and National do not terminate their agreement by March 31, 2021, the Second Amended PSA requires that Assured and National take no further action with respect to such revenue bond-related litigation.

Given that the Oversight Board has stated publicly that it is further amending the Amended POA, including to reflect the terms of the Second Amended PSA, it is not yet clear how the Commonwealth Plan of Adjustment will be modified or how the final adjustments will impact revenues available to the Puerto Rico instrumentalities addressed in the Commonwealth Plan of Adjustment or the recoveries on claims against the Commonwealth by creditors of those instrumentalities, including Ambac and Ambac-insured bondholders.

If the Commonwealth Plan of Adjustment were confirmed in its current form, Ambac's financial condition would suffer a materially negative impact.

Refer to Note 8.

Financial Guarantee Insurance Contracts, in this Annual Report Form 10-K located in Part II for the possible increase in loss reserves under stress or other adverse conditions, including the impact of the Commonwealth Plan of Adjustment.

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

Political Developments

In 2020, President Donald J.

Trump appointed Justin Peterson, Betty A.

Rosa, John E.

Nixon and Antonio L.

Medina Comas as new members of the Oversight Board and reappointed Andrew G.

Biggs, David Skeel and Arthur Gonzalez to new terms.

The Puerto Rico gubernatorial election was held on November 3, 2020, to elect the governor of Puerto Rico, concurrently with the election of the Resident Commissioner, the Senate, the House of Representatives, and the mayors of the 78 municipalities.

Pedro Pierluisi of Puerto Rico’s pro-statehood New Progressive Party was voted to become the territory’s next governor in 2021.

In terms of the local legislature, there will be a “shared government”;

the Governor and the Resident Commissioner from the PNP and Legislative leadership from the PDP.

The new President of the Senate will be Senator Jose Luis Dalmau and the new Speaker of the House will be

public utilities represented approximately 18% and 12% of net par outstanding, respectively.

Ambac has no insured exposure related to emerging markets.

When underwriting transactions in the international markets, Ambac considered the specific risks related to the particular country and region that could impact the credit of the issuer.

These risks include the legal and political environment, capital markets dynamics, foreign exchange issues and the degree of governmental support.

Ambac continues to assess these risks through its ongoing risk management.

Ambac UK, which is regulated in the United Kingdom (“UK”), had been AAC’s primary vehicle for directly issuing financial guarantee policies in the UK and the European Union with $10,292 net par outstanding at December 31, 2021.

portfolio of insured exposures underwritten by Ambac UK is financially supported exclusively by the assets of Ambac UK and no capital support arrangements are in place with any other Ambac affiliate.

Ambac's international net par exposures are principally in the United Kingdom ($9,255);

however, we also have exposures with credit risk based in various EU member states, including Austria, France, Germany and Italy ($1,284).

Italy, with net par exposure of $718 in particular has experienced economic, fiscal and political strains since the 2008 global financial crisis such that the likelihood of default on an insured sub-sovereign obligation in that country is higher than when the policy was underwritten.

Ambac does not guarantee any sovereign bonds of the above EU countries.

Largest Insured Exposures:

The table below shows Ambac’s ten largest exposures, by repayment source, as a percentage of total financial guarantee net par outstanding at December 31, 2021 (in millions):

Risk Name Country-Bond Type Ambac

Ultimate Maturity Year Net Par

IF AUK Capital Hospitals plc (2)

UK-Infrastructure A- 2046 925 3.3 %

IF AUK Anglian Water UK-Utility A- 2035 905 3.2 %

IF AUK Mitchells & Butlers Finance plc-UK Pub Securitisation UK-Asset Securitizations BBB 2033 $ 892 3.2 %

IF AUK Aspire Defence Finance plc UK-Infrastructure A- 2040 836 3.0 %

IF AUK National Grid Gas UK-Utility BBB+ 2037 835 3.0 %

IF AUK Posillipo Finance II S.r.l Italy-Sub-Sovereign BIG 2035 661 2.4 %

PF AAC New Jersey Transportation Trust Fund Authority - Transportation System US-Lease and Tax-backed Revenue BBB- 2036 623 2.2 %

IF AUK National Grid Electricity Transmission UK-Utility BBB+ 2036 557 2.0 %

IF AUK RMPA Services plc UK-Infrastructure BBB+ 2038 550 2.0 %

IF AUK Catalyst Healthcare (Manchester) Financing plc (2)

UK-Infrastructure BBB- 2040 541 1.9 %

Total $ 7,325 26.2 %

PF = Public Finance, SF = Structured Finance, IF = International Finance

AAC = Ambac Assurance, AUK = Ambac UK

(1) Internal credit ratings are provided solely to indicate the underlying credit quality of guaranteed obligations based on the view of Ambac.

Ambac credit ratings are subject to revision at any time and do not constitute investment advice.

BIG denotes credits deemed below investment grade.

(2) A portion of this transaction is insured by an insurance policy issued by AAC.

AAC has issued a policy for this transaction that will only pay in the event that Ambac UK does not pay under its insurance policies (“second to pay policy")

Net par related to the top ten exposures reduced $394 from December 31, 2020.

Exposures are impacted by changes in foreign exchange rates, certain indexation rates, scheduled and unscheduled paydowns and the purchase of quota share reinsurance.

As a result of recent increases in inflation, such indexation exposures have increased at a faster pace than they have historically.

The concentration of net par amongst the top ten (as a percentage of net par outstanding) increased slightly to 26.2% at December 31, 2021 from 22.9% at December 31, 2020.

National Grid Gas had an Ambac rating downgrade since December 31, 2020, Excluding the top ten exposures, the remaining insured portfolio of financial guarantees has an average net par outstanding of $32 per single risk, with insured

exposures ranging up to $455 and a median net par outstanding of $5.

Given that Ambac has not written any new insurance policies since 2008, the risk exists that the insured portfolio becomes increasingly concentrated to large and/or below investment grade exposures.

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 $1,054 as of December 31, 2021.

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

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Table of Co ntents

Representative Rafael "Tatito" Hernández (former Chair of House Treasury Committee 2013-2016).

It is unclear how the Oversight Board member changes and local election outcomes will impact the debt restructuring process, negotiations, timing and ultimate recoveries for Ambac.

obligation guarantees.

Refer to Part I, Item 1 in this Annual Report on Form 10-K for additional information regarding the different issuing entities that encompass Ambac's exposures to Puerto Rico.

Commonwealth Plan of Adjustment (Title III Case)

On November 3, 2021, the Financial Oversight and Management Board for Puerto Rico ("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 the Eighth Amended Title III Joint Plan of Adjustment of the Commonwealth of Puerto Rico, et al.

("Eighth Amended POA").

The Eighth Amended POA proposed to restructure approximately $33,000 of debt across various Commonwealth instrumentalities, including obligations insured by AAC, and approximately $50,000 in pension obligations.

The Eighth Amended POA, among other things, incorporated 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 PRIFA.

The Eighth Amended POA also incorporated the settlements reflected in the PRHTA/CCDA Related Plan Support Agreement (“PRHTA/CCDA PSA”) dated May 5, 2021, and the 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") dated as of July 12, 2021.

The plan consideration to be made available to creditors under these plan support agreements is described below.

A hearing to confirm the Commonwealth’s plan of adjustment was held over several days between November 8, 2021.

On January 10, 2022, Judge Laura Taylor Swain, U.S.

District Court for the District of Puerto Rico, entered an order requesting certain changes to the Eighth Amended POA and related materials.

None of the requested changes would substantively impact the contemplated recovery to Ambac and holders of AAC-insured bonds under the Eighth Amended POA.

The Oversight Board filed a revised version of the plan and corresponding materials shortly thereafter.

On January 18, 2022, Judge Swain confirmed the Eighth Amended POA.

The Eighth Amended POA, together with the qualifying modifications for PRIFA and CCDA discussed below, are expected to have an effective date on before March 15, 2022.

Certain parties have appealed from the order confirming the Eighth Amended POA and have sought a stay pending this appeal;

if the stay is granted, the effective date may be delayed.

The successful consummation of the Eighth Amended POA and qualifying modifications for PRIFA and CCDA on the effective date will represent a significant step towards resolution of AAC's remaining Puerto Rico exposure.

PRIFA/CCDA Qualifying Modifications (Title VI Cases)

The PRIFA PSA and PRHTA/CCDA PSA contain provisions requiring the parties thereto to support the terms of Title VI

Qualifying Modifications for PRIFA and CCDA.

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

The PRIFA QM and CCDA QM proposed to restructure about $1,900 and $384 of debt, respectively, including obligations insured by AAC.

The hearing to consider approval of the PRIFA QM and the CCDA QM was held contemporaneously with the confirmation hearing in the Commonwealth’s Title III proceedings in November 2021.

On January 20, 2022, Judge Swain approved the PRIFA QM and CCDA QM.

The PRIFA QM and CCDA QM will share the same effective date as the Eighth Amended POA, which is expected to occur on or prior to March 15, 2022.

As discussed above, this date may be delayed if a stay is granted pending the appeal of the Eighth Amended POA.

PRHTA Plan of Adjustment (Title III Case)

The Oversight Board, as Title III representative of the Puerto Rico Highways and Transportation Authority ("PRHTA"), is expected to file a Title III Plan of Adjustment for PRHTA ("PRHTA POA") prior to March 31, 2022.

A confirmation hearing for the PRHTA POA is expected to follow later in 2022.

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 elected this option will be deemed fully satisfied.

Under the second option, bondholders who failed 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.”), as adjusted for any payments already made by Ambac on account of the applicable Ambac Insurance Policies.

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

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the Commonwealth Plan and the PRIFA QM, or CCDA QM, as applicable and 2) cash from Ambac.

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

On the plan effective date, about 39% and 19% of the outstanding par of the Ambac-insured PRIFA and CCDA bonds, respectively, will be commuted with the remainder deposited into the trusts.

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.

Under the PRIFA PSA, PRIFA creditors will receive, on account of approximately $1,900 of allowed claims arising from PRIFA bonds, consideration in the form of (i) $193.5 cash and (ii) a contingent value instrument ("CVI") premised on outperformance of general fund rum tax collections relative to the certified 2021 Commonwealth Fiscal Plan's projections (the "Rum Tax CVI").

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.

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 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.

PRHTA/CCDA PSA

AAC signed a joinder to the PRHTA/CCDA PSA on July 15, 2021.

The PRHTA/CCDA PSA, originally executed on May 5, 2021, provides for certain consideration for holders of bonds

issued by certain Commonwealth instrumentalities, PRHTA, and CCDA on account of their claims against the Commonwealth arising from such bonds ("Clawback" claims).

This consideration consists of a contingent value instrument tied to the outperformance of the Commonwealth's sales and use tax ("SUT") relative to the certified 2020 Commonwealth Fiscal Plan's projections (the "Clawback CVI").

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 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.

In years 23 through 30, subject to the limits in (i) and (ii) above, 100% of the outperformance goes to the Clawback creditors.

Overall, Clawback CVI recoveries are subject to a lifetime cap of 75% of allowed claim amounts under the Eighth Amended POA.

PRHTA creditors will receive an approximately 69% share of the Clawback CVI, subject to a lifetime nominal cap of about $3,700, and subject to a PRHTA-specific waterfall:

holders of PRHTA ’68 bonds will receive the first dollars of Clawback CVI, followed by holders of PRHTA ’98 bonds.

CCDA bondholders will receive a 4% share of the Clawback CVI, subject to a lifetime nominal cap of about $217.

The value of the Clawback CVI is highly uncertain, given the contingent, outperformance-driven structure of the instrument coupled with the likelihood that cash flows in later years (years 23 through 30) will significantly exceed those in earlier years.

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

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

For example, a 1% change in the estimated value of the Clawback CVI plan consideration related to the AAC-insured PRIFA, CCDA and PRHTA bonds would have an impact of about $2 on reserves.

Under the PRHTA/CCDA PSA, PRHTA bondholders will also receive new PRHTA bonds with a face amount of $1,245, maturities of up to 40 years and an average interest rate of 5.0%.

Of the $1,245 in new bonds, approximately $646.4 will be allocated to holders of PRHTA '68 bonds and approximately $598.6 will be allocated to holders of PRHTA '98 bonds.

PRHTA creditors will also share $389 of cash proceeds, including a $264 interim distribution, payable at the effective date of the Eighth Amended POA.

In addition, certain restriction fees and consummation costs are payable at the effective date of the PRHTA POA.

AAC will receive directly the pro rata share of the CW/PRHTA clawback recovery and interim PRHTA distributions allocable to its owned or insured PRHTA bonds.

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 aforementioned

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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 Eighth Amended POA.

Amended and Restated GO / PBA PSA

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.

Under the Amended GO/PBA PSA, creditors will receive up to $7,024 of cash, of which up to $350 was contingent upon FY2021 revenue outperformance exceeding $350 on a dollar-for-dollar basis, $6,683 of new GO current interest bonds, $443 of new GO 5.375% capital appreciation bonds, $288 of new GO 5.00% capital appreciation bonds, and GO Bond CVI, subject to a lifetime cap of about $3,500.

The GO Bond CVI is intended to provide creditors with additional returns tied to outperformance of the SUT against the certified 2020 Commonwealth Fiscal Plan's projections.

The value of the GO Bond CVI is highly uncertain, given the contingent, outperformance-driven structure of the instrument Recovery derived from fixed consideration (i.e., excluding GO Bond CVI) 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.

Under the Amended and Restated GO/PBA PSA, in exchange for executing the agreement and agreeing to its terms and conditions, creditors that were authorized to vote their claim will receive a PSA restriction fee of 1.32% of their claim amount at the effective date of the Eighth Amended POA.

The Amended and Restated GO/PBA PSA was further amended to allow for additional time to consummate the Eighth Amended POA (i.e., relevant deadlines therein extended from January 31, 2022 to March 15, 2022).

Plan of Adjustment and Qualifying Modification Considerations

The Eighth Amended POA has been confirmed, and the PRIFA QM and the CCDA QM have been approved.

All are expected to become effective on or before March 15, 2022.

However, uncertainty remains as to (i) whether the effective date will be stayed pending the appeal of the order confirming Eighth Amended POA;

(ii) the result of the pending First Circuit appeal of the order confirming the Eighth Amended POA;

(iii) the value or perceived value of the consideration provided by or on behalf of the debtors under the Eighth Amended POA, PRIFA QM, and CCDA QM;

(iv) the extent to which exposure

management strategies, such as commutation and acceleration, will be executed;

(v) the tax treatment of the consideration provided by or on behalf of the debtors under the Eighth Amended POA, PRIFA QM, and CCDA QM;

(vi) whether and when the PRHTA POA will be confirmed;

and (vii) other factors, including market conditions such as interest rate movements, credit spread changes on the new GO and CVI instruments, and liquidity for the new GO and CVI instruments.

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 Management's 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.

Ambac Title III Litigation Update

AAC is party to a number of litigations related to its Puerto Rico exposures, and actively participates in the Commonwealth’s Title III proceedings before the United States District Court for the District of Puerto Rico.

On January 16, 2020, AAC, together with other monoline insurers, filed motions which sought to lift the automatic stay and allow AAC and others to enforce their rights related to PRHTA, PRCCDA and PRIFA in an alternative forum.

Through orders issued on July 2 and September 9, 2020, Judge Swain largely denied the motions, while holding in abeyance further proceedings in the PRCCDA motion relating to a particular account over which it is undisputed the monolines have a lien.

AAC and the other movants have appealed the PRHTA and PRIFA decisions.

Briefing concluded in late December with oral argument heard in February 2021.

Ambac is unable to predict when and how the issues raised in these cases will be resolved.

If AAC is unsuccessful in any of these proceedings, Ambac’s financial condition, including liquidity, loss reserves and capital resources may suffer a materially negative impact.

On January 16, 2020, the Oversight Board filed four adversary proceeding complaints against AAC and other monoline insurers seeking to disallow their proofs of claim against the Commonwealth as they relate to PRHTA, PRCCDA, and PRIFA bonds.

On April 28, 2020, the Oversight Board filed partial motions for summary judgment.

Briefing has concluded on those motions for summary judgment and oral argument was held on September 23, 2020.

On January 20, 2021, the District Court granted defendants’ request for deferral of the adjudication of the summary judgment motions until defendants have the opportunity to conduct certain discovery.

Discovery is ongoing.

AAC, along with other monoline insurers, filed a motion seeking appointment of trustees under Section 926 of the Bankruptcy Code to pursue certain avoidance actions on behalf of PRHTA against the Commonwealth of Puerto Rico.

The motion attached a proposed complaint detailing the avoidance claims that movants would pursue.

On August 11, 2020, the Court denied the motion and AAC and the other movants have appealed that denial.

AAC and the other movants filed a motion to hold that appeal in abeyance pending the First Circuit’s resolution of the appeal from the Court’s denial of the PRHTA lift-stay motion (as described above).

Briefing on both motions concluded on October 27, 2020.

On December 22, 2020, the First Circuit denied the motion to hold the appeal in abeyance, and referred the motion to dismiss to the panel determining the merits of the appeal.

Movants’ opening brief before the First Circuit was filed on February 17, 2021.

In connection with the July 27, 2021 PRIFA PSA, Ambac filed an urgent motion to stay various pending matters related to outstanding litigation in connection with the Commonwealth's Title III proceedings.

On August 3, 2021, the Court entered an order staying the requested matters.

While confirmation of the Eighth Amended POA and approval of the PRIFA QM and CCDA QM resolve many of the issues raised in the pending matters, the Court’s order confirming the Eighth Amended POA are now subject to appeal.

AAC continues to actively participate in PRHTA’s Title III proceedings.

Refer to Note 19.

Commitments and Contingencies to the Consolidated Financial Statements, included in Part II, Item 8 of this Form 10-K for further information about Ambac's litigation relating to Puerto Rico.

The status, timing and subject of any past or future mediation discussion has not yet been publicly disclosed.

The timeline for resolution of Puerto Rico’s debt restructuring process is uncertain.

The Oversight Board disclosed, in a status report filed with the Title III court in September 2020, that it has resumed formal discussions with creditors with the guidance of the mediation team led by Judge Houser.

Prior to the talks with creditors, the Oversight Board held discussions with the Puerto Rico Fiscal Agency and Finance Advisory Authority ("AAFAF") concerning the terms of a Commonwealth Plan of Adjustment and what, if any, modifications or amendments needed to be proposed.

On February 10, 2021, the Oversight Board disclosed that mediation resulted in an agreement in principle with certain GO and PBA bondholders.

The Second Amended PSA was publicly disclosed on February 23, 2021.

No assurances can be given that further debt restructuring negotiations will be successfully concluded, that the Commonwealth, Oversight Board and creditor parties will reach definitive agreements on debt restructurings, that any additional negotiated transaction, debt restructuring, definitive agreement, PSA or Plan of Adjustment will be approved by the court and completed, or that any transaction or Plan of Adjustment will not have a materially adverse impact on Ambac's financial condition or results of operations.

The full extent of federal government support to Puerto Rico is still uncertain as existing federal stimulus has not been fully disbursed and additional measures are likely to be enacted.

President, Puerto Rico governor, and Oversight Board makeup could all accelerate the aid distribution process if there was a higher comfort level from the federal government regarding the local management and efficacy of federal disaster resources.

Furthermore, a change in the federal government's approach to Puerto Rico's needs, including Social Security disability payments, Medicaid, and other health and nutritional assistance programs, is possible under the new administration.

But while the previously allocated hurricane disaster relief funds, the more recent COVID-19 crisis related funds and potential new federal support 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.

Commitments and Contingencies to the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K for further information about Ambac's litigation relating to Puerto Rico.

Ambac has considered these developments and other factors in evaluating its Puerto Rico loss reserves.

During the year ended December 31, 2020, Ambac had incurred losses associated with its Domestic Public Finance insured portfolio of $256 million, which was impacted by lower discount rates, the continued uncertainty and volatility of the situation in Puerto Rico, including the potential impact of the COVID-19 crisis on the Commonwealth and the developing potential impact of the COVID-19 crisis on other sectors in the Domestic Public Finance insured portfolio;

and loss adjustment expenses related to the cost of defending our rights and pursuing recoveries.

While management believes its reserves are adequate to cover losses in its Public Finance insured portfolio, there can be no assurance that Ambac may not incur additional losses in the future, particularly given the developing economic, political, and legal circumstances in Puerto Rico.

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.

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impact of the COVID-19 crisis on the Commonwealth and the Domestic Public Finance Insured Portfolio in general.

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

The following table shows Ambac's insured exposure to each issuer segregated by whether such debt obligation is subject to the Priority Debt Provision or "clawback." Ambac has initiated litigation challenging the application of the "clawback" announced by Governor Padilla, Puerto Rico's former governor, on December 1, 2015.

A description of Ambac's legal challenge is provided in Note 17.

Commitments and Contingencies in the Consolidated Financial Statements, included in Part II, Item 8 in this Form 10-K.

The following table outlines Ambac's insured exposure to each Commonwealth of Puerto Rico issuer.

($ in millions) Range of

Outstanding (2)

Outstanding Net Par

Outstanding (2)(4)

Exposures Subject to Priority Debt Provision (5)

PR Highways and Transportation Authority (1968 Resolution - Highway Revenue) (6)

2021-2027 BIG $ 4 $ 10 $ 23

PR Highways and Transportation Authority (1998 Resolution - Senior Lien Transportation Revenue) (6)

2021-2042 BIG 395 639 144

PR Infrastructure Financing Authority (Special Tax Revenue) (7)

2023-2044 BIG 404 887 187

PR Convention Center District Authority (Hotel Occupancy Tax)

2021-2031 BIG 86 128 68

Total 889 1,664 422

Exposures Not Subject to Priority Debt Provision

Commonwealth of Puerto Rico - General Obligation Bonds

2021-2023 BIG 18 19 49

PR Public Buildings Authority - Guaranteed by the Commonwealth of Puerto Rico

2021-2035 BIG 83 145 87

PR Sales Tax Financing Corporation - Senior Sales Tax Revenue (COFINA)

2047-2054 BIG 80 712 37

PR Infrastructure Financing Authority (Special Tax Revenue) 2023-2044 BIG $ 403 $ 872 $ 202

PR Highways and Transportation Authority (1998 Resolution - Senior Lien Transportation Revenue) 2022-2042 BIG 394 620 164

PR Convention Center District Authority (Hotel Occupancy Tax) 2028-2031 BIG 86 123 72

PR Public Buildings Authority - Guaranteed by the Commonwealth of Puerto Rico 2022-2035 BIG 83 139 96

PR Sales Tax Financing Corporation - Senior Sales Tax Revenue (COFINA) 2047-2054 BIG 73 648 37

Commonwealth of Puerto Rico - General Obligation Bonds 2022-2023 BIG 11 12 56

PR Highways and Transportation Authority (1968 Resolution - Highway Revenue) 2022-2027 BIG 4 9 25

Total Net Exposure to The Commonwealth of

Puerto Rico and Related Entities $ 1,054 $ 2,423 $ 652

$ 1,070 $ 2,540 $ 595

(1) Internal credit ratings are provided solely to indicate the underlying credit quality of guaranteed obligations based on the view of Ambac.

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BIG denotes credits deemed below investment grade.

(2) Net Par 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.

Accretion of the capital appreciation bonds would increase the related net par by $214 at December 31, 2020.

(3) Net Par and Interest Outstanding ("P&I") represents the total insured future debt service remaining over the lifetime of the bonds.

P&I for capital appreciation bonds does not represent the accreted amount as noted in footnote (2) but rather the amount due at respective maturity dates.

(2) Net Par and Interest Outstanding ("P&I") represent the total insured future debt service remaining over the lifetime of the bonds.

P&I for capital appreciation bonds does not represent the accreted amount but rather the amount due at respective maturity dates.

(3) In addition to ever-to-date net claims paid, Ambac made net claim payments of $23 in January 2022.

(5) Commonly known as "clawback," provision pursuant to Section 8 of Article VI of the Constitution of the Commonwealth of Puerto Rico.

Under this provision, in the event Commonwealth available revenues and any surplus for any fiscal year are insufficient to meet the appropriations made for that year, interest on the public debt and amortization thereof shall first be paid and other disbursements, including debt service on the obligations subject to such provision as described above (to the extent payable from such revenues), shall thereafter be made in accordance with the order of priorities established by law.

These exposures are also subject to Act No.

5-2017, as amended, also known as the Financial Emergency and Fiscal Responsibility Act of 2017, which declares an emergency period that has been subsequently re-extended until June 30, 2021, from its prior December 31, 2020, deadline.

Pursuant to Act 5-2017, all executive orders issued under Act No.

21-2016 (as amended, known as the Puerto Rico Emergency Moratorium and Financial Rehabilitation Act), shall continue in full force and effect until amended, rescinded or superseded.

(6) Certain Pledged Revenues for Highways and Transportation Revenue Bonds such as Toll Revenues and Investment Earnings are not subject to the Priority Debt Provision.

(7) Payable from and secured by proceeds from a federal excise tax imposed on all items produced in Puerto Rico and sold on the mainland of the United States.

Currently, rum is the only product from Puerto Rico subject to this federal excise tax.

(8) Net Par and Interest Outstanding excludes the effects of a 10% current interest rate on $60 net par of PR Public Building Authority ("PBA") bonds with a maturity date of July 1, 2035, resulting from the absence of a remarketing.

(4) Net Par and Interest Outstanding excludes the effects of a 10% current interest rate on $60 net par of PR Public Buildings Authority ("PBA") bonds with a maturity date of July 1, 2035, resulting from the absence of a remarketing.

Should a remarketing not occur before the maturity of the bonds, the Net Par and Interest Outstanding for PBA exposure would increase by $37.

Structured Finance Portfolio

Ambac’s portfolio of U.S.

structured finance exposures is $6,337 million, representing 19% of Ambac’s net par outstanding as of December 31, 2020, and a 16% reduction from

the amount outstanding at December 31, 2019.

This reduction in exposure was primarily related to residential mortgage-backed securities ("RMBS") policies, which continued to prepay as well as incur claims.

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Current insured exposures include securitizations of mortgage loans, home equity loans and student loans as well as other asset-backed financings, in each case where the majority of the underlying collateral risk is situated in the United States.

Additionally, Ambac’s structured finance insured portfolio includes secured and unsecured debt issued by investor-owned utilities and structured insurance transactions providing insurance on the notes of trusts established in connection with the reinsurance of defined blocks of life insurance that were used to fund regulatory reserves associated with level premium term life insurance policies (commonly referred to as Regulation XXX reserves).

Financial Guarantees in Force to the Consolidated Financial Statements, included in Part II, Item 8 included in this Form 10-K, for exposures by bond type as of December 31, 2020.

Structured finance securitization exposures generally entail three forms of risk:

(i) asset risk, which relates to the amount and quality of the underlying assets;

(ii) structural risk, which relates to the extent to which the transaction’s legal structure and credit support provide protection from loss;

and (iii) servicer risk, which is the risk that poor performance at the servicer or manager level contributes to a decline in cash flow available to the transaction.

AAC seeks to mitigate and manage these risks through its risk management practices.

Ambac has exposure to the U.S.

mortgage market primarily through direct financial guarantees of RMBS, including transactions that contain risks to first and second lien mortgages.

Ambac's total net par exposure to RMBS at December 31, 2020, was approximately $3,635 million ($2,137 million, $1,399 million, $99 million are first lien, second lien and other respectively), a decrease of 18% during 2020.

At December 31, 2020, 88% of RMBS net par exposure relates to securitizations issued during 2005 through 2007.

International Finance Insured Portfolio

Ambac’s portfolio of international finance insured exposures is $12,054 million, representing 36% of Ambac’s net par outstanding as of December 31, 2020, and a 6% reduction from the amount outstanding at December 31, 2019.

This reduction in exposure was primarily the result of policy terminations, refinancings and scheduled maturities within stadiums and investor-owned utilities, partially offset by a weakening of the US dollar versus the British pound.

Ambac’s international finance insured exposures include a wide array of obligations in the international markets, including infrastructure financings, asset-securitizations, utility obligations, whole business securitizations (e.g., securitizations of substantially all of the operating assets of a corporation) and sub-sovereign credits.

Ambac has no insured exposure related to emerging markets.

Financial Guarantees in Force to the Consolidated Financial Statements, included in Part II, Item 8 included in this Form 10-K, for exposures by bond type as of December 31, 2020.

When underwriting transactions in the international markets, Ambac considered the specific risks related to the particular country and region that could impact the credit of the issuer.

These risks include the legal and political environment, capital markets dynamics, foreign exchange issues and the degree of

governmental support.

Ambac continues to assess these risks through its ongoing risk management.

The portfolio of insured exposures underwritten by Ambac UK is financially supported exclusively by the assets of Ambac UK and no capital support arrangements are in place with any other Ambac affiliate.

European Union Exposures (“EU”)

Ambac's international net par exposures are principally in the United Kingdom ($9,711 million);

however, we also have exposures with credit risk based in various EU member states, including Austria, France, Germany and Italy ($1,797 million).

Italy, with net par exposure of $803 million, in particular has experienced economic, fiscal and political strains since the 2008 global financial crisis such that the likelihood of default on an insured sub-sovereign obligation in that country is higher than when the policy was underwritten.

Ambac does not guarantee any sovereign bonds of the above EU countries.

In January 2020 the UK Government and EU ratified the terms of a legal binding treaty ("Withdrawal Agreement") setting out the terms of a transition period to apply to the UK until December 31, 2020.

The effect of the withdrawal agreement was to retain the rights and obligations between the UK and the EU from the date of the UK's exit from the EU on January 31, 2020, ("Exit Day") to the end of this transition period.

Prior to December 31, 2020, Ambac UK either commuted any policies with EU based policyholders or transferred the benefits of those policies to UK policyholders.

In addition, Ambac UK transferred the administration of its last remaining policy within its Italian Branch to the UK on December 1, 2020, and closed its Italian Branch on December 18, 2020.

Therefore, while Ambac UK's net par exposures continue to contain credit risk based in EU member states, Ambac UK no longer services any insurance policies with EU based policyholders and its ability to continue to service its insurance portfolio is therefore not impacted by Brexit.

Additional Insured Portfolio Information

Average Life of Insured Portfolio

Ambac underwrote and priced financial guarantees based on the assumption that the guarantees would remain in force until the maturity of the underlying bonds.

Ambac estimates that the average life of its guarantees on par in force at December 31, 2021 is approximately 10 years.

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RMBS policies incorporate assumptions on expected prepayments over the remaining life of the insured obligation.

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The following table depicts amortization of existing guaranteed net par outstanding:

7 unchanged sentences

After 2041 2,882

Total $ 28,020

(1) Depicts amortization of existing guaranteed portfolio, assuming no advance refundings, as of December 31, 2021.

Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay guaranteed obligations.

Geographic Area

The following table sets forth the geographic distribution of Ambac's existing guaranteed net par outstanding as of December 31, 2020:

Geographic Area

($ in millions)

Net Par Amount

Mortgage and asset-backed (1)

$ 3,646 10.8 %

Colorado 2,362 7.0 %

California 2,104 6.2 %

New York 1,816 5.4 %

New Jersey 1,290 3.8 %

Texas 1,233 3.6 %

Puerto Rico 1,070 3.2 %

Pennsylvania 896 2.6 %

Washington 799 2.4 %

Florida 656 1.9 %

Oregon 627 1.9 %

Other domestic 5,335 15.7 %

Total Domestic 21,834 64.4 %

International:

United Kingdom 9,711 28.7 %

Italy 803 2.4 %

Austria 707 2.1 %

Australia 420 1.2 %

France 277 0.8 %

Other international (2)

Total International Finance 12,054 35.6 %

Total $ 33,888 100.0 %

(1) Mortgage and asset-backed obligations includes guarantees with multiple locations of risk within the United States and is primarily comprised of residential mortgage and commercial asset-backed securitizations.

(2) Other international may include components of U.S.

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Exposure Currency

The table below shows the distribution by currency of Ambac's existing guaranteed net par outstanding as of December 31, 2021:

($ in millions)

($ in millions) Net Par

Currency Net Par

Dollars $ 17,497 $ 17,497 62 %

3 unchanged sentences

Total $ 28,020 100 %

Financial Guarantees in Force to the Consolidated Financial Statements, included in Part II, Item 8 included in this Form 10-K, for geographic detail by location of risk as of December 31, 2021.

Ratings Distribution

The following charts provide a rating distribution of existing net par outstanding based upon internal Ambac credit ratings at December 31, 2020 and 2019 and a distribution by bond type of Ambac's below investment grade ("BIG") net par exposures at December 31, 2020 and 2019.

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

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

AAA is less than 1% in both periods.

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(1) Internal credit ratings are provided solely to indicate the underlying credit quality of guaranteed obligations based on the view of Ambac.

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Ambac credit ratings are subject to revision at any time and do not constitute investment advice.

BIG denotes credits deemed below investment grade.

Summary of Below Investment Grade Exposure:

Net Par Outstanding - December 31,

Bond Type ($ in millions) 2020 2019

Bond Type ($ in millions) Net Par Outstanding

December 31, 2021 2020

Public Finance:

Lease and tax-backed (1)

$ 1,054 $ 1,070

Stadium 540 —

General obligation (1)

Transportation 30 27

Military Housing

Other 317 1,057

Total Public Finance 1,741 2,435

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International Finance:

Other 1,574 1,455

Sovereign/sub-sovereign 774 742

Transportation 389 760

Total International Finance 1,225 1,574

Total $ 5,438 $ 7,321

(1) Lease and tax-backed includes $969 and $1,014 of Puerto Rico net par at December 31, 2020 and 2019, respectively.

General obligation includes $101 and $109 of Puerto Rico net par at December 31, 2020 and 2019, respectively.

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.

(2) Includes $308 and $311 of military housing net par at December 31, 2020 and 2019, respectively.

The net decline in below investment grade exposures is primarily due to commutation of certain general obligation exposures, the partial commutation of a structured finance transaction mostly offset by the addition of certain exposures driven by the COVID-19 pandemic (lease and tax-backed, stadiums and an international structured finance exposure).

The net decline in below investment grade exposures is primarily due to de-risking activities.

Below investment grade exposures could increase as a relative proportion of the guarantee portfolio given that stressed borrowers generally have less ability to prepay or refinance their debt.

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

As a primary financial guarantor, AAC is required to honor its obligations to its policyholders whether or not its reinsurers perform their obligations under

these reinsurance agreements.

For exposures reinsured, AAC generally withholds a ceding commission to defray its underwriting and operating expenses.

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

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

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

AAC held letters of credit and collateral amounting to $117 million from its reinsurers at December 31, 2020.

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

As a primary financial guarantor, AAC is required to honor its obligations to its policyholders whether or not its reinsurers perform their obligations under these reinsurance agreements.

As of December 31, 2021, the aggregate amount of insured par ceded by AAC to reinsurers under reinsurance agreements was $6,102, with the largest reinsurer accounting for $2,695 or 7.9% of gross par outstanding at December 31, 2021.

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The following table shows the distribution, by bond type, of AAC’s ceded guaranteed portfolio at December 31, 2021:

Bond Type ($ in millions) Ceded Par

($ in millions) Ceded Par Amount

December 31, 2021 2020

Public Finance:

General obligation $ 1,327 36 %

Lease and tax-backed revenue $ 1,618 $ 1,156

General obligation 1,458 1,327

Housing revenue 922 934

Transportation revenue 749 586

Utility revenue 243 27 %

Higher education 167 18 %

Other 612 509

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Structured Finance:

Investor-owned utilities 224 12 %

Student loan 219 26 %

Structured insurance 313 115

Mortgage-backed and home equity 40 1 %

Asset-backed and other 21 12 %

Investor-owned utilities 222 224

Other 185 280

Total Structured Finance 720 619

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International Finance:

Investor-owned and public utilities 26 1 %

Transportation 25 2 %

Asset-backed — — %

Total International Finance 23 51

Total $ 6,102 $ 5,182

RESULTS OF OPERATIONS

Percentage of Gross Par Ceded 18 % 13 %

RESULTS OF OPERATIONS ($ in millions)

The following discussion should be read along with the financial statements included in this Form 10-K, as well as Part II, "Item 7, Management's Discussion and Analysis's of Financial Condition and Results of Operations" of our Form 10-K for the year ended December 31, 2020, which provides additional information on comparisons of years 2020 and 2019.

Net loss attributable to common stockholders for the year ended December 31, 2020, was $437 million compared to a net loss attributable to common stockholders of $216 for the year ended December 31, 2019.

The increase in loss was primarily driven by:

(i) higher loss and loss expenses, (ii) receipt of $142 million

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arising from the settlement between the SEC and Citigroup which was recognized as a gain in Other income for the year ended December 31, 2019, (iii) lower net investment income, (iv) lower net realized investment gains, and (v) lower income on variable interest entities, partially offset by (a) lower insurance intangible amortization and (b) lower interest and operating expenses.

Net loss attributable to common stockholders for the year ended December 31, 2021, was $17 compared to a net loss attributable to common stockholders of $437 for the year ended December 31, 2020.

The decrease in losses was primarily driven by:

(i) lower loss and loss expenses, (ii) net gains on derivative contracts, (iii) a $33 net gain on extinguishment of debt in 2021, (iv) higher investment income and (v) lower interest expense, partially offset by higher operating and tax expenses.

A summary of our financial results is shown below:

4 unchanged sentences

Net investment income 139 122 227

Net realized investment gains (losses) 22 81 108

Net investment gains (losses), including impairments 7 22 81

Net gains (losses) on derivative contracts 22 (50) (50)

Net realized gains (losses) on extinguishment of debt 33 — —

Other income (expense) (1)

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Losses and loss expenses (benefit) (88) 225 13

Insurance intangible amortization 57 295 107

Intangible amortization 55 57 295

Operating expenses 126 92 103

Interest expense 187 222 269

Provision for income taxes (3) 32 5

Provision (benefit) for income taxes 18 (3) 32

Net income (loss) (16) (437) (216)

loss on exchange of auction market preferred shares (2)

Net income (loss) attributable to common stockholders $ (17) $ (437) $ (216)

(1) 2019 includes proceeds received in connection with an SEC action against Citigroup Global Markets Inc.

in the amount of $142 million.

(2) In connection with the AMPS Exchange, the difference between the fair value of consideration provided to AMPS holders and the carrying amount of the AMPS has been reflected as a reduction to Net income attributable to common stockholders in 2018 for approximately $82.

Refer to Note 1.

Background and Business Description for a discussion of the AMPS Exchange.

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 2020 contributed to a net increase in loss reserves and losses on interest rate derivative contracts.

Credit driven losses were also recognized in the three months ended March 31, 2020, within losses incurred (primarily from public finance insurance policies) and losses in counterparty credit adjustments on derivative asset valuations.

in the amount of $142.

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.

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 year ended December 31, 2020.

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 last three quarters of 2020, credit spreads largely 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.

During the second half of 2020 and into 2021, valuations 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 effects of the COVID-19 pandemic.

For additional information on the risks posed by COVID-19, refer to “Part I, Item 1A-Risk Factors” in this Form 10-K.

During 2019, Ambac executed on a number of restructuring / commutation transactions that had significant impacts to the consolidated results of operations.

As described further below, the completion of the these transactions, including the related changes to invested assets, intangible assets, loss reserves and debt of the Company, had a significant impact on the comparability of the results of operation for the years ended December 31, 2020, 2019 and 2018.

The most significant transactions were:

Puerto Rico COFINA Plan of Adjustment ("POA").

On February 12, 2019, the POA, including certain related commutation transactions, and subsequent distributions, became effective, resulting in a significant reduction of AAC's insured net par exposure to COFINA.

Pursuant to the COFINA POA, approximately 75% of holders of AAC-insured senior COFINA bonds (including Ambac) elected to commute their insurance policy.

Under this restructuring, Ambac-insured COFINA bonds that were not commuted were deposited, along with new uninsured COFINA bonds, into a newly formed trust called the COFINA Class 2 Trust ("COFINA Trust"), a VIE that Ambac determined must be consolidated.

Sales of assets from the COFINA Trust may be made from time to time with proceeds used to redeem the trust's debt.

Ballantyne Re plc ("Ballantyne") Restructuring.

On April 25, 2019, Ballantyne commenced, under Irish law, a restructuring transaction ("Restructuring") in respect of its obligations, including obligations that were guaranteed by Ambac UK.

The arrangement was approved on June 17, 2019.

With the successful implementation of the Restructuring, Ambac UK has ceased to have any exposure with respect to the obligations of Ballantyne.

The following paragraphs describe the consolidated results of operations of Ambac for 2020 and 2019.

Net Premiums Earned .

Net premiums earned for the year ended December 31, 2020, decreased by $12 million or 18% as compared to net premiums earned for the year ended December 31, 2019.

We present accelerated premiums, which result from calls and other accelerations of insured obligations separate from normal net premiums earned.

When an insured bond has been retired, any remaining unearned premium revenue ("UPR") is recognized at that time to the extent the financial guarantee contract is legally extinguished, causing accelerated premium revenue.

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

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Normal net premiums earned are impacted by the following:

• The runoff of the insured portfolio, including through transaction terminations, calls and scheduled maturities, which reduce normal net premiums earned.

• New ceded reinsurance which reduces normal net premiums earned over the remaining period of the related ceded policies.

The following paragraphs describe the consolidated results of operations of Ambac for 2021 and 2020.

Net Premiums Earned.

Net premiums earned for the year ended December 31, 2021, decreased by $7 or 13% as compared to net premiums earned for the year ended December 31, 2020.

The decline was driven by reductions in FG premiums earned partially offset by $1 of specialty property and casualty net premiums earned.

Net premiums earned for FG were impacted by the runoff of the financial guarantee insured portfolio, including through transaction terminations, calls and scheduled maturities, which reduce current and future net premiums earned and were also impacted by the following:

• Changes to the allowance for credit losses on the premium receivable asset.

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.

Prior to adoption of ASU 2016-13, Ambac assessed collectability of premium receivables in accordance with ASC 944 and recorded an allowance for uncollectible premiums.

The impact on net premiums earned related to credit losses amounted to $6 and $(5) for the for the years ended December 31, 2021 and 2020.

• Accelerated financial guarantee premium earnings as a result of calls and other accelerations on insured obligations largely due to de-risking activity of $1 and $12 for the for the years ended December 31, 2021 and 2020.

• New financial guarantee ceded reinsurance which reduces normal net premiums earned over the remaining period of the related ceded policies.

• The strengthening or weakening of the U.S.

dollar relative to the British Pound since Ambac's wholly-owned UK subsidiary, Ambac UK, operates in the United Kingdom and the British Pound is its functional currency.

• Pre-refundings of insured securities, primarily Public Finance transactions.

Since the maturity date of pre-refunded securities is shortened (to a specified call date from its previous legal maturity), normal net premiums earned will increase over the remaining period of the related policy.

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:

($ in millions)

Year Ended December 31, 2020 2019 2018

Public finance $ 21 $ 27 $ 37

Structured finance 8 10 17

International finance 13 19 23

Total net normal premiums earned $ 42 $ 56 $ 77

Total net accelerated earnings $ 12 $ 10 $ 35

Total net premiums earned $ 54 $ 66 $ 111

Net Investment Income.

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Fixed maturity securities include investments in Ambac-insured securities that are made opportunistically based on their risk/reward and asset-liability management characteristics.

As described further below, investment income from holdings of Ambac-insured securities (including Secured Notes issued by Ambac LSNI, LLC) for the periods presented have been affected by restructuring transactions involving Puerto Rico COFINA and Ballantyne bonds.

Investments in pooled investment funds and certain other investments are either classified as trading securities with changes in fair value recognized in earnings or are reported under the equity method.

These funds and other investments are reported in Other investments on the Consolidated Balance

These funds and other investments are reported in Other investments on the Consolidated Balance Sheets.

For further information about investment funds held, refer to Note 4.

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Securities available-for-sale:

Ambac-insured (including Secured Notes) $ 62 $ 121 $ 220

Ambac-insured (including LSNI and Sitka Senior Secured Notes)

$ 45 $ 62 $ 121

Securities available-for-sale and short-term other than Ambac-insured 29 41 75

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Net investment income $ 139 $ 122 $ 227

Net investment income decreased $106 million for the year ended December 31, 2020 compared to 2019.

As described further below, the variances were primarily driven by 2020 pricing volatility within fund investments resulting from the impact of the COVID-19 pandemic on financial markets and the impact of de-risking transactions in 2019, including lower subsequent allocations to higher yielding Ambac-insured securities and a lower overall invested asset base.

• Investment income from Ambac-insured securities decreased $59 million in 2020, compared to 2019.

The decrease was due primarily to the effects of the 2019 de-risking of Ballantyne and lower income on Secured Notes issued by Ambac LSNI, LLC.

The Ballantyne restructuring in June 2019 resulted in accelerated discount accretion into income and settled the Ballantyne bonds held in the investment portfolio.

Income on the Secured Notes declined from 2019 due to quarterly early redemptions and the impact of lower rates, as the coupon rate is indexed to LIBOR subject to a 1.0% LIBOR floor.

Additionally, income on Ambac insured-RMBS declined compared to 2019 primarily as a result of declining interest rates over both 2020 and 2019.

• Net investment income from available-for-sales securities other than Ambac-insured securities decreased $34 million in 2020, compared to the prior year.

The decrease resulted from the favorable impact of high yielding uninsured COFINA bonds received under the POA on 2019 income, as well as the impact of a smaller asset base and lower average yields in 2020.

All of the uninsured COFINA bonds received under the POA were sold from Ambac's non-VIE investment portfolio by December 31, 2019, with reinvestment in lower yielding fixed maturities or allocated to pooled funds included in Other investments.

Additional re-allocation of the portfolio in 2020 toward pooled funds and Ambac-insured bonds from investment grade corporate bonds, commercial mortgage backed securities and certain CLOs resulted in a lower asset base and average yield in this portion of the portfolio.

The use of cash for early debt redemptions and operating cash needs also contributed to the smaller asset base, while steadily declining reinvestment rates on short-term holdings adversely

Net investment income increased $18 for the year ended December 31, 2021, compared to 2020.

As described further below, the variance was primarily driven by 2020 pricing volatility within fund investments resulting from the impact of the COVID-19 pandemic on financial markets and the impact of the LSNI Secured Note redemption in July 2021.

• Investment income from Ambac-insured securities decreased $17 in 2021, compared to 2020, due to lower income on LSNI Secured Notes.

As described in Note 1.

Background and Business Description, to the Consolidated Financial Statements, included in this Annual Report on Form 10-K, on July 6, 2021, the LSNI Secured Notes were fully redeemed, including those held in Ambac's investment portfolio.

Investment income from other Ambac-insured securities, primarily consisting of RMBS and Puerto Rico bonds, was flat compared to 2020.

• Net investment income from available-for-sales securities other than Ambac-insured securities decreased $12 in 2021, compared to the prior year, reflecting a smaller asset base and lower average yields.

Portfolio repositioning during 2021 and 2020, resulted in a higher allocation of pooled funds and Ambac-insured Puerto Rico bonds, while reinvestment in non-insured available-for-sale securities were generally at lower yields.

Short term rates also remained low throughout 2021, adversely impacting investment income.

Additionally, the use of cash for early debt redemptions and operating cash needs contributed to the smaller asset base.

• Other investments income increased $47 in 2021, compared to the prior year.

The increase resulted from overall positive performance in 2021 and additional investments, particularly in hedge and equity funds.

Relatively low returns in 2020 were 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, offset by a generally strong market recovery in subsequent quarters of 2020.

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impacted the average yield of available-for-sale securities other than Ambac-insured in 2020 compared to 2019.

• Other investments income decreased $13 million in 2020, compared to the prior year.

The decrease resulted from the financial market impact of the COVID-19 pandemic and repositioning of pooled fund investments in 2020, compared to strong portfolio returns in 2019.

Other investments income for 2020 included lower returns on equity, high-yield and loan funds, partially offset by higher income from hedge fund investments.

Higher income on hedge funds was driven primarily by net gains on investments funded mostly following the initial broad market decline of the first quarter.

Decreased holdings of equity, high yield and loan funds in the first half of 2020 resulted in recognition of only modest net gains on such holdings for the full year, compared to above average performance in these asset types in 2019.

Net Realized Investment Gains .

The following table provides a breakdown of net realized gains, for the periods presented:

Net Investment Gains (Losses), including Impairments.

The following table provides a breakdown of net investment gains, for the periods presented:

($ in millions)

Year Ended December 31, 2021 2020 2019

2020 2019 2018

Net gains on securities sold or called

Net realized gains on securities sold or called

$ 11 $ 26 $ 59

2 unchanged sentences

Intent / requirement to sell impairments — — —

Total net realized gains $ 22 $ 81 $ 108

Net realized gains on securities sold or called during the year ended December 31, 2020, are primarily from sales in connection with routine portfolio management.

Net realized gain on securities sold or called for the year ended December 31, 2019, included $50 million of net gains related to the impact of the COFINA POA, including sales of Ambac-insured Puerto Rico COFINA bonds and new uninsured COFINA bonds received in the commutation.

Also included in realized gains for the year ended December 31, 2019, are $23 million of realized foreign exchange gains arising from the settlement of Ballantyne bonds held in the investment portfolio.

Total net investment gains, including impairments

$ 7 $ 22 $ 81

Net investment gains on securities sold or called during the year ended December 31, 2021, included a gain of $4 realized on the sale of AFG's equity interest in the Corolla Trust in connection with the Corolla Exchange Transaction.

Other net realized gains on securities sold or called in 2021 and 2020 are primarily from sales in connection with routine portfolio management.

Impairments are reported through earnings if management intends to sell securities or it is more likely than not that the Company will be required to sell before recovery of amortized cost.

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

As forward rates and interest rate exposures elsewhere in the company have declined over the course of 2019

and 2020, the economic hedge position has been adjusted.

Net gain (loss) on interest rate derivatives generally reflect mark-to-market gains (losses) in the portfolio caused by increases (declines) in forward interest rates during the periods, the carrying cost of the portfolio, and the impact of counterparty credit adjustments as discussed below.

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

• Net losses on interest rate derivatives for the year ended December 31, 2020, were $50 million, compared to $51 million for the year ended December 31, 2019.

The net loss for the year ended December 31, 2020, reflects significant declines in forward interest rates, triggered by the COVID-19 pandemic, and losses from the application of counterparty credit adjustment, described further below.

The net losses for the year ended December 31, 2019, reflect the impact of declines in forward interest rates, partially offset by negative net carrying costs driven by an inverted yield curve.

Although interest rates declined more in 2020 than in 2019, their impact on derivative losses was lower due to the relative positioning of the portfolio in each period.

• Net gains on interest rate derivatives for the year ended December 31, 2021, were $22, compared to a net losses of $50 for the year ended December 31, 2020.

The net gain for the year ended December 31, 2021, resulted from the impact of rising interest rates and gains related to counterparty credit adjustments partially offset by the carrying cost of maintaining the economic hedge position.

• 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 losses within Net gains (losses) on derivative contracts of $(6) million and $(2) million for the years ended December 31, 2020 and 2019, respectively.

The loss for the year ended December 31, 2020, was driven by wider credit spreads reflecting the credit rating downgrade of a derivative counterparty by Ambac during the first quarter, simultaneous with an increase in the underlying asset values as interest rates declined.

The losses on counterparty credit adjustments for the 2019 periods are primarily due to increases in the underlying asset values as interest rates declined.

Inclusion of counterparty credit adjustments in the

valuation of interest rate derivatives resulted in gains (losses) within Net gains (losses) on derivative contracts of $5 and $(6) for the years ended December 31, 2021 and 2020, respectively.

The gain for the year ended December 31, 2021, resulted from the decrease in underlying net asset values as interest rates increased.

The loss in 2020 was driven by wider credit spreads reflecting the credit rating downgrade of a derivative counterparty by Ambac during the first quarter, simultaneous with an increase in the underlying asset values as interest rates declined.

Other Income (Expense).

Other income (expense) included various fees, primarily consent and waiver fees, as well as foreign exchange gains (losses) unrelated to investments or loss reserves.

Other income also included proceeds received by AAC in September 2019 in connection with an SEC action against Citigroup Global Markets Inc.

in the amount of $142 million.

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 year ended December 31, 2021, other income includes Xchange revenues of $26.

Xchange pays commissions to sub-producers which are included in operating expenses.

Net Realized Gains on Extinguishment of Debt .

Net realized gains on extinguishment of debt was $33 for the year ended December 31, 2021, resulting from the first quarter 2021 exchanges of junior surplus notes below their carrying values.

Refer to Note 1.

Background and Business Description to the Consolidated Financial Statements, included in this Annual Report on Form 10-K, for further discussion of the 2021 Surplus Notes Exchanges.

Income (Loss) on Variable Interest Entities.

2 unchanged sentences

In consolidation, assets and liabilities of the VIEs are initially reported at fair value and the related insurance assets and liabilities are eliminated.

However, the amount of VIE net assets (liabilities) that remain in consolidation generally result from the net positive (negative) projected cash flows from (to) the VIEs which are attributable to Ambac’s insurance subsidiaries in the form of financial guarantee insurance

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premiums, fees and losses.

In the case of VIEs with net negative projected cash flows, the net liability is generally to be funded by Ambac’s insurance subsidiaries through insurance claim payments.

1 unchanged sentence

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 $5 million and $38 million for the years ended December 31, 2020 and 2019, respectively.

Results for the year ended December 31, 2020, were due primarily to realized gains of $8 million on sales of assets from the COFINA Trust partially offset by the lower valuation of net assets on a VIE impacted by COVID-19.

Results for the year ended December 31, 2019, were driven by the impact of the creation and subsequent activities of the COFINA Trust.

Income from COFINA Trust for the the year ended December 31, 2019, was $26 million, including $15 million from consolidation and $13 million from realized investment gains on sales of assets from the trust, partially offset by net interest expense and fees.

Income for the year ended December 31, 2019, also included a gain on the fair value of net assets of a VIE arising from an increase in projected cash flows on the VIE's assets due to higher financial guarantee insurance premiums.

Results for 2019 also included a loss of $2 million from deconsolidation of a VIE.

Income (loss) on variable interest entities was $7 and $5 for the years ended December 31, 2021 and 2020, respectively.

Results for the year ended December 31, 2021, were driven by the

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higher valuation of net assets on VIEs, together with realized gains of $2 on sales of assets from the COFINA Trust.

Results for the year ended December 31, 2020, were due to realized gains of $8 on sales of assets from the COFINA Trust partially offset by the lower valuation of net assets on a VIE impacted by COVID-19.

Refer to Note 11.

1 unchanged sentence

Losses and Loss Expenses (Benefit).

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

Losses and loss expenses include the financial guarantee and specialty property and casualty businesses.

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.

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 ("R&W") subrogation recoveries, net of reinsurance, of $1,725 million and $1,702 million at December 31, 2020 and 2019, respectively.

The increase in these recoveries was primarily driven by lower discount rates used to discount estimated cash flows.

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 misrepresentations in the underlying loan pools or other misconduct in the origination process and attesting to the compliance of loans with the applicable underwriting guidelines.

Ambac has recorded R&W subrogation recoveries, net of reinsurance, of $1,704 and $1,725 at December 31, 2021 and 2020, respectively.

The decrease in these recoveries was primarily driven by lower projected losses.

Refer to Note 2.

Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K for more information

regarding the estimation process for R&W subrogation recoveries.

Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K for more information regarding the estimation process for R&W subrogation recoveries.

The following table provides details, by bond type, for losses and loss expenses (benefit) incurred for the periods presented:

1 unchanged sentence

Year Ended December 31, 2021 2020 2019

2020 2019 2018

Structured Finance (1)

$ (20) $ (52) $ (111)

Domestic Public Finance (73) 256 250

Student Loans 24 (17) (4)

Ambac UK and Other Credits 21 (127) 19

Interest on Deferred Amounts — — 21

Discount on Rehabilitation Exit Transaction — — (288)

$ (88) $ 225 $ 13

(1) The loss and loss expense (benefit) associated with changes in estimated representation and warranties for the year ended December 31, 2021, 2020 and 2019 was $20, ($23) and $42, respectively.

(2) Includes specialty property and casualty loss and loss expenses incurred of less than $1 for the year ended December 31, 2021.

(3) Includes loss expenses incurred of $55, $103 and $78 for the year ended December 31, 2021, 2020 and 2019, respectively.

Losses and loss expenses for 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;

• An increase in student loan losses as a result of lower discount rates and the impact from COVID-19;

partially offset by

• Improved RMBS losses as a result of the positive impact of lower interest rates on excess spread, reduced by lower discount rates and expected losses from COVID-19 related delinquencies.

Losses and loss expenses for 2019 were driven by the following:

• Higher projected losses in domestic public finance driven mostly by lower discount rates and additions to Puerto Rico loss reserves, partially offset by;

• Favorable development within Ambac UK and Other Credits primarily due to the Ballantyne commutation;

• Favorable RMBS development as a result of credit improvement, the impact on excess spread from declines in interest rates and a trustee settlement related to Lehman sponsored transactions, partially offset by RMBS R&W litigation loss expenses incurred and a reduction to estimated RMBS R&W subrogation recoveries .

Insurance Intangible Amortization .

Insurance intangible amortization was $57 million and $295 million for the years ended December 31, 2020 and 2019, respectively.

The decrease in intangible amortization for the year ended December 31, 2020, compared to 2019, is primarily due to accelerated amortization as a result of the Ballantyne commutation that occurred in 2019.

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Losses and loss expenses for 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

the negative impact of discount rates , and loss expenses incurred.

Losses and loss expenses for 2020 were driven by higher projected losses in domestic public finance, largely Puerto Rico;

partially offset by improved Structured Finance losses as a result of 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 was $52 and $57 for the years ended December 31, 2021 and 2020, respectively.

The decrease in amortization for the year ended December 31, 2021, compared to 2020, is primarily due to run-off of the insured portfolio and de-risking activity.

Other intangible amortization for the year ended December 31, 2021 was $3.

Operating Expenses.

3 unchanged sentences

Year Ended December 31, 2021 2020 2019

2020 2019 2018

Compensation $ 62 $ 51 $ 58

3 unchanged sentences

Total operating expenses $ 126 $ 92 $ 103

Gross operating expenses for the year ended December 31, 2020 are $92 million, a decrease of $10 million from gross operating expenses for the year ended December 31, 2019.

The decrease was primarily due to the following:

• Lower compensation costs primarily due to:

(i) lower salaries and severance resulting from continued right sizing of staffing levels partially offset by hiring in connection with the launch of Everspan Group and (ii) lower incentive compensation costs primarily related to the Ballantyne restructuring incentive compensation recognized in 2019

• Lower non-compensation costs primarily due to:

(i) a UK Value Added Tax (VAT) refund recognized in 2020, (ii) lower premises costs as a result of relocating Ambac's corporate headquarters, and (iii) lower subscription and data access costs associated with runoff of the financial guarantee portfolio partially offset by:

(i) increased legal fees and (ii) incremental costs arising due to the COVID-19 pandemic.

Legal and consulting services provided for the benefit of OCI were flat at $2 million during the years ended December 31, 2020 and 2019.

Gross operating expenses for the year ended December 31, 2021 are $126, an increase of $34 from gross operating expenses for the year ended December 31, 2020.

The increase was primarily due to the following:

• Higher compensation costs primarily due to:

(i) hiring in connection with the launch of Everspan offset by continued right sizing of staff levels, (ii) inclusion of Xchange costs of $4 and (iii) the impact of performance factors on incentive compensation.

• Higher non-compensation costs primarily due to:

(i) inclusion of Xchange costs of $16, mainly from producer commissions of $15, (ii) launch of Everspan, and (iii) increased legal fees.

Legal and consulting services provided for the benefit of OCI were flat at $2 during the years ended December 31, 2021 and 2020.

Interest Expense.

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

Interest expense includes accrued interest on the LSNI Ambac Note (as defined in Note 1.

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

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($ in millions)

Year Ended December 31, 2021 2020 2019

2020 2019 2018

Surplus Notes (1)

$ 77 $ 85 $ 99

Ambac note 107 143 139

Tier 2 notes 28 26 22

LSNI Ambac Note 50 107 143

Sitka AAC Note 32 — —

Total interest expense $ 187 $ 222 $ 269

(1) Includes junior surplus notes.

The decrease in interest expense for the year ended December 31, 2020, compared to 2019 was primarily driven by optional redemptions and lower rate resets of the floating rate Ambac Note and lower discount accretion on surplus notes, partially offset by interest compounding on the surplus notes and the Tier 2 Notes.

(1) Includes interest on Junior Surplus Notes that were acquired and retired in 2021.

The decrease in interest expense for the year ended December 31, 2021, compared to the year ended December 31, 2020, reflects the impacts of the Secured Note Refinancing and 2021 Surplus Note Exchanges, described further in Note 1.

Background and Business Description to the Consolidated Financial Statements, included in this Annual Report on Form 10-K.

These transactions resulted in lower debt outstanding and a lower coupon interest rate on the Sitka AAC Note relative to the LSNI Ambac Note.

Interest expense for 2021 also declined as a result of the Tier 2 Note fully accreting through interest expense by December 31, 2020.

These benefits were partially offset by the effects of interest compounding on 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 exceptional payments in connection with (a) increasing the percentage of deferred policy payments of the Segregated Account of Ambac Assurance from 25% to 45% in 2014 and (b) a one-time payment of approximately six months of interest on the surplus notes (other than junior surplus notes) outstanding immediately after consummation of the Rehabilitation Exit Transactions (as defined in Part II, Item 8, Note 1 Background and Business Description to the Consolidated Financial Statements included in this Form 10-K) in 2018.

In April 2020, OCI declined the request of Ambac Assurance to pay the principal amount of the surplus notes, plus all accrued and unpaid interest thereon, on the scheduled maturity date of June 7, 2020.

As a result, the scheduled payment date for interest, and the scheduled maturity date for payment of principal of the surplus notes, shall be extended until OCI grants approval to make the payment.

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 scheduled payment date of June 7, 2021.

As a result, the scheduled payment date for interest, and the scheduled maturity date for payment of principal of the Surplus Notes, was extended and shall continue to be extended until OCI grants approval to make the payment.

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

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

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

Total accrued and unpaid interest for surplus notes and junior surplus notes outstanding to third parties were $344 million and $172 million, respectively, at December 31, 2020.

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 $576 at December 31, 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.

Ambac can provide no assurance as to when Surplus Note principal and interest payments will be made, if ever.

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

Provision for Income Taxes.

The provision for income taxes for the year ended December 31, 2020 and 2019, was a benefit of $3 million and an expense of $32 million, respectively.

Income taxes for the year ended December 31, 2020 and 2019, includes provisions for income tax due in respect of Ambac UK of $(3) million and $36 million, respectively.

At December 31, 2020, the Company had approximately $3,639 million of U.S.

Federal net ordinary operating loss carryforwards, including approximately $1,457 million at AFG and $2,182 million at AAC.

The provision for income taxes for the year ended December 31, 2021 and 2020, was a expense of $18 and a benefit of $3, respectively.

Income taxes for the year ended December 31, 2021 and 2020, includes provisions for income tax due in respect of Ambac UK of $16 and $(3), respectively.

At December 31, 2021, the Company had approximately $3,744 of U.S.

Federal net ordinary operating loss carryforwards, including approximately $1,596 at AFG and $2,148 at AAC.

LIQUIDITY AND CAPITAL RESOURCES

Ambac Financial Group, Inc.

("AFG") Liquidity.

AFG’s liquidity is primarily dependent on its cash, investments (excluding equity investment in subsidiaries), and net receivables totaling $366 million as of December 31, 2020.

AFG also receives partial expense reimbursements under the terms of an expense sharing agreement with AAC, and is expected to receive distributions beginning in 2021 from its 80% ownership stake in Xchange.

• During 2020, AFG established Everspan Indemnity Insurance Company with an initial capital contribution of $15 million.

Additionally, AFG purchased Everspan Insurance Company from AAC for approximately $14

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million and repositioned it as a subsidiary of Everspan Indemnity Insurance Company, forming the Everspan Group.

In order to obtain an A- Financial Strength Rating from A.M.

Best, AFG contributed an additional $82 million to Everspan Indemnity Insurance Company in February 2021.

• In December 2020, AFG further amended its existing amended and restated tax sharing agreement among AFG, AAC and certain affiliates (the "Third TSA Amendment"), in connection with which AAC paid to AFG approximately $28 million of accrued payments based on net operating loss carry-forwards (“NOLs”) used by AAC ("tolling payments") in 2017.

Under the Third TSA Amendment, AAC and AFG agreed to eliminate AAC's requirement to make future tolling payments based on its utilization of NOLs for any taxable year beginning on or after January 1, 2019 in exchange for a reallocation of $210 million of NOL's from AAC to AFG.

• 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 million per year to cover expenses not otherwise reimbursed.

OCI approved this $4 million reimbursement for 2019 expenses, which was paid in March 2020.

($ in millions)

Liquidity is a measure of a company’s ability to generate sufficient cash to meet the cash requirements of its business operations and to satisfy general corporate obligations.

Holding Company Liquidity

AFG is organized as a legal entity separate and distinct from its operating subsidiaries.

AFG is a holding company with no outstanding debt.

AFG’s liquidity is primarily dependent on its net assets, excluding its equity investments in subsidiaries, totaling $269 as of December 31, 2021, of which $142 is considered highly liquid, and secondarily on distributions and expense sharing payments from its subsidiaries.

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

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

It is highly unlikely that AAC will be able to make dividend payments to AFG for the foreseeable future and therefore cash and investments, payments under the intercompany cost allocation agreement and distributions from Xchange will be AFG’s principal sources of liquidity in the near term.

Securities issued or insured by AAC and certain other of AFG's investments are generally less liquid than investment grade and highly traded investments.

• During 2021, AFG received distributions from Xchange of $6.

• 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.

It is highly unlikely that AAC will be able to make dividend payments to AFG for the foreseeable future or that Everspan will be able to make dividend payments to AFG for several years, and therefore cash and investments, payments under the intercompany cost allocation agreement and distributions from Xchange will be AFG’s principal sources of liquidity in the near term.

Refer to Part I, Item 1, “Insurance Regulatory Matters — Dividend Restrictions, Including Contractual Restrictions” in this Annual Report on Form 10-K, and Note 8.

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The principal uses of liquidity are 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 and other less liquid investments;

and capital expenditures to acquire and/or capitalize new businesses.

the making of strategic investments, which may include illiquid investments;

and capital investments to acquire, grow and/or capitalize new and/or existing businesses.

AFG may also provide short-term financial support, primarily in the form of loans, to its operating subsidiaries to support their operating requirements.

Contingencies could cause material liquidity strains.

The following table includes aggregated information about contractual obligations for AFG and its subsidiaries at December 31, 2020, excluding variable interest entities consolidated as a result of AAC’s and Ambac UK's financial guarantee contracts.

These obligations include payments due under specified contractual obligations, aggregated by type of contractual obligation, including claim payments, principal and interest payments under AAC’s surplus notes, the Ambac Note, Tier 2 Notes and Ambac UK debt, and payments due under operating leases.

The table and commentary below reflect scheduled payments and maturities based on the original payment terms specified in the underlying agreements and contracts, or expected required payment dates if earlier.

Payments Due by Period

($ in millions) Total Less Than 1 Year 1 - 3 Years 3 - 5 Years More Than 5 Years

Surplus note obligations (1)

$ 3,884 $ 894 $ — $ — $ 2,990

Ambac note obligations (2)

1,849 98 1,751 — —

Tier 2 note obligations (3)

5,394 — — — 5,394

Ambac UK debt obligations (4)

Operating lease obligations (5)

45 5 10 10 19

Purchase obligations (6)

Postretirement benefits (7)

Loss and loss expenses (8)

2,395 94 140 167 1,993

Income taxes — — — — —

Total $ 13,624 $ 1,098 $ 1,906 $ 178 $ 10,440

(1) Amounts due on surplus notes (excluding junior surplus notes) include principal on their scheduled maturity date and interest on scheduled payment dates, including payment of previously deferred interest totaling $320 million on the next anniversary of the original scheduled payment date of June 7, 2021.

Also includes all principal and interest on junior surplus notes on the date all future and existing senior indebtedness of Ambac Assurance policy and other priority claims against Ambac Assurance have been paid in full (included in the more than 5 years column).

Surplus note principal and interest payments require the approval of OCI.

Assurance from 25% to 45% in 2014 and (b) a one-time payment of approximately six months of interest on the surplus notes (other than junior surplus notes) outstanding immediately after consummation of the Rehabilitation Exit Transactions in 2018.

As a result, the scheduled payment date for interest, and the scheduled maturity date for payment of principal of the surplus notes, shall be extended until OCI grants approval to make the payment.

Holders of surplus notes will have no rights to

• AFG supported the development of the Specialty P&C business, and its acquisitions, by contributing capital to

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enforce the payment of the principal of, or interest on, surplus notes in the absence of OCI approval to pay such amount.

(2) Includes principal on Ambac Note as of December 31, 2020 to be paid on its legal maturity date of February 12, 2023, and scheduled interest payments.

Interest amounts on this variable rate debt are projected at a rate of 6.00% which is based on the index rate in effect at the balance sheet date.

These notes are subject to mandatory redemption provisions that could significantly accelerate the timing of required payments, as described further in Note 13.

Long-term Debt to the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K.

(3) Includes principal and compounded paid-in-kind interest on Tier 2 notes to be paid on their legal maturity date of February 12, 2055.

These notes are subject to mandatory redemption provisions that could significantly accelerate the timing of required payments, as described further in Note 13.

Long-term Debt to the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K.

(4) Includes principal on the zero coupon note payable on its legal maturity date of May 2, 2036.

(5) Amount represents future lease payments on lease agreements existing as of December 31, 2020.

Includes fixed costs, such as base rent, and estimated variable costs, such as real estate taxes and electricity.

(6) Purchase obligations represent future expenditures for contractually scheduled fixed terms and amounts due for various technology-related maintenance agreements and other outside services.

(7) Amount represents future payments relating to AAC's postretirement medical reimbursements to current retirees over the next 10 years.

(8) The timing of expected claim payments is based on deal specific cash flows, excluding expected recoveries.

These deal specific cash flows are based on the expected cash flows of the underlying transactions.

The timing of expected claim payments for credits with reserves that were established using our statistical loss reserve method is determined based on the weighted average expected life of the exposure.

Refer to the Loss Reserves section in 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 our statistical loss reserve method.

The timing of these payments may vary significantly from the amounts shown above, especially for credits that are based on our statistical loss reserve method.

AAC Liquidity .

AAC’s liquidity is dependent on the balance of liquid investments and, over time, the net impact of sources and uses of funds.

The principal sources of AAC’s liquidity are gross installment premiums on insurance policies;

principal and interest payments from investments;

sales of investments;

proceeds from repayment of affiliate loans;

and recoveries on claim payments, including from litigation and reinsurance recoveries.

Termination of installment premium policies on an accelerated basis may adversely impact AAC’s liquidity.

The principal uses of AAC’s liquidity are the payment of operating and loss adjustment expenses, claims, commutation and related expense payments on insurance policies, ceded reinsurance premiums, principal and interest payments on outstanding debt, additional loans to affiliates, and purchases of securities and other investments that may not be immediately converted into cash.

In December 2020, AAC paid to AFG $28 million of tolling payments, which as described above it will no longer be required to make for future tax years.

• The COVID-19 pandemic had a negative impact on Ambac's liquidity resources as a consequence of the initial

severe reaction of the capital markets and potential for prolonged low reinvestment rates on invested assets;

derivative losses, which required either timely settlement or additional collateral posting;

and higher credit risk within the insured portfolio, as further described below.

Nevertheless, Ambac has not yet experienced incremental demands on its liquidity, from higher claims, other than the aforementioned impact of derivatives.

• Claim payments may increase during and in the aftermath of the global recession and COVID-19 pandemic as issuers, particularly those with revenues that were interrupted by the effects of the pandemic, including social distancing, other restrictions on activities and the increase in unemployment, may not have sufficient cash inflows to pay debt service on Ambac-insured debt.

Refer to "Financial Guarantees in Force" in this Management's Discussion and Analysis for further discussion of the potential impact of the COVID-19 pandemic on claim payments.

Everspan Indemnity of approximately $92 and $6 in 2021 and the first quarter of 2022, respectively.

In the opinion of the Company’s management the net assets of AFG are sufficient to meet AFG’s current liquidity requirements.

However, events or circumstances could arise that may cause AFG to seek additional capital.

Operating Companies' Liquidity

The liquidity requirements of the Company’s insurance subsidiaries are met primarily by funds generated from premiums;

recoveries on claim payments, including RMBS representation and warranty subrogation recoveries (AAC only);

reinsurance recoveries;

investment income and maturities and sales of investments.

• Our ability to realize RMBS representation and warranty subrogation recoveries is subject to significant uncertainty, including risks inherent in litigation, such as adverse rulings or decisions in our cases or in litigations to which AAC is not a party that set precedents or resolve questions of law that impact our own claims;

collectability of such amounts from counterparties (and/or their respective parents and affiliates);

timing of receipt of any such recoveries, including uncertainty due to delays in court proceedings;

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.

The amount of these subrogation recoveries is significant and if AAC is unable to recover any amounts or recovers materially less than estimated recoveries, its future available liquidity to pay claims, debt service and meet other obligations would be materially adversely impacted.

See Part I, Item 1A.

Risk Factors in this Annual Report on Form 10-K for more information about risks relating to RMBS R&W subrogation recoveries.

• See Note 7.

Insurance Contracts to the Consolidated Financial Statements included in Part II, Item 8, in this Annual Report on Form 10-K for a summary of future gross financial guarantee premiums to be collected by AAC and Ambac UK.

Termination of financial guarantee policies on an accelerated basis may adversely impact AAC’s liquidity.

Cash provided from these sources is used primarily for claim payments and commutations, loss expenses and acquisition costs, debt service on outstanding debt (AAC only), operating expenses, reinsurance payments and purchases of securities and other investments that may not be immediately converted into cash.

• Although AAC has not yet experienced incremental claim payments as a result of the impact of COVID-19, such claims may occur in the future as issuers, particularly those with revenues that have been interrupted by the effects of the pandemic, may not have sufficient resources to pay debt service on insured debt.

Refer to "Executive Summary" in this Management's Discussion and Analysis for further discussion of the potential impact of the COVID-19 pandemic.

See below within this Management Discussion

and Analysis in the section titled "Balance Sheet" for the expected future financial guarantee claim payments, gross of expected recoveries.

• Interest and principal payments on surplus notes are subject to the approval of OCI, which has full discretion over payments regardless of the liquidity position of AAC.

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

AAC's intercompany loans are with its wholly owned subsidiary, Ambac Financial Services ("AFS").

AFS uses interest rate derivatives (primarily interest rate swaps and US Treasury futures) as a partial hedge against the effects of rising interest rates elsewhere in the Company, including on AAC’s financial guarantee exposures.

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

Long-term Debt to the Consolidated Financial Statements, included in Part II, Item 8 in this Form 10-K for further discussion of the payment terms and conditions of the Tier 2 Notes as well as the aggregate annual maturities of all debt outstanding.

In addition to principal amounts of $2,334 as of December 31, 2021 with various maturities as described in Note 12.

Long-term Debt to the Consolidated Financial Statements, included in Part II, Item 8 in this Form 10-K, AAC's future interest obligations include $62 annually on the Sitka AAC Note through maturity on July 6, 2026, $605 of accrued and unpaid interest that would be payable on surplus notes if approved by OCI on the next scheduled payment date of June 7, 2022, and Tier 2 Note interest that may be paid-in-kind until maturity on February 12, 2055 at which time $5,060 would be due.

• Ambac is the lessee in operating leases for corporate offices, a data center and various equipment.

Leases to the Consolidated Financial Statements included in Part II, Item 8, in this Annual Report on Form 10-K, for a scheduled future undiscounted lease payments, gross of sublease receipts.

• AAC lends its wholly-owned subsidiary, Ambac Financial Services ("AFS") cash to support its operations.

AFS uses interest rate derivatives (primarily interest rate swaps and US Treasury futures) as a partial economic hedge against the effects of rising interest rates elsewhere in the Company, including on AAC’s financial guarantee exposures.

AFS's derivatives also 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 to fund payments under these derivative contracts, collateral posting requirements and operating expenses.

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

AAC manages its liquidity risk by maintaining comprehensive analyses of projected cash flows and maintaining specified levels of cash and short-term investments at all times.

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

If dividends are paid on the common stock for such purposes, dividends on the AMPS become cumulative until the

Insurance subsidiaries manage their liquidity risk by maintaining comprehensive analyses of projected cash flows and maintaining specified levels of cash and short-term investments at all times.

It is the opinion of the Company’s management that the insurance subsidiaries’ near term liquidity needs will be adequately met from the sources described above.

Managing General Agent / Underwriting (MGA/U):

The liquidity requirements of the MGA/U subsidiary are met primarily by funds generated from commission receipts (both

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date that all accumulated and unpaid dividends have been paid on the AMPS.

AAC has not paid dividends on the AMPS since 2010.

AAC is also subject to additional restrictions on the payment of dividends pursuant to certain contractual and regulatory restrictions.

Refer to Part I, Item 1, “Insurance Regulatory Matters - Dividend Restrictions, Including Contractual Restrictions” in this Annual Report on Form 10-K, and Note 9.

Insurance Regulatory Restrictions to the Consolidated Financial Statements included in Part II, Item 8, in this Annual Report on Form 10-K, for more information on dividend payment restrictions.

Our ability to realize RMBS representation and warranty ("R&W") subrogation recoveries is subject to significant uncertainty, including risks inherent in litigation, collectability of such amounts from counterparties (and/or their respective parents and affiliates), timing of receipt of any such recoveries, including uncertainty due to delays in court proceedings as a result of the COVID-19 pandemic, 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.

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.

See Part I, Item 1A.

Risk Factors in this Annual Report on Form 10-K for more information about risks relating to our RMBS R&W subrogation recoveries.

Cash Flow Statement Discussion .

base and profit commissions) from insurance carriers.

Base commissions are generally received monthly, whereas profit commissions are received only if the business underwritten is profitable.

Cash provided from these sources is used primarily for commissions paid to sub-producers, distributions to its members (including AFG) and operating expenses.

Consolidated Cash Flow Statement Discussion

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

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The following represents the significant cash operating activities during the years ended December 31, 2021 and 2020:

• Debt service on the Ambac Note was $107 million and $143 million for the years ended December 31, 2020 and 2019, respectively.

• In September 2019, AAC received $142 million in connection with an SEC settlement with Citigroup Global Markets Inc.

• Cash used related to interest rate derivatives was $20 million and $75 million for the years ended December 31, 2020 and 2019, respectively.

• Cash used for operating expenses were $76 million and $82 million for the years ended December 31, 2020 and 2019, respectively.

• Cash provided by the investment portfolio was $104 million and $144 million for the years ended December 31, 2020 and 2019, respectively.

• Debt service on the LSNI Ambac Note was $51 and $107 for the years ended December 31, 2021 and 2020, respectively.

• Debt service on the Sitka AAC Note was $30 for the year ended December 31, 2021.

• Cash provided from financial guarantee premiums were $35 and $47 for the years ended December 31, 2021 and 2020.

Cash provided from specialty property and casualty premiums were $8 for the year ended December 31, 2021.

• Payments related to (i) operating expenses were $83 and $76 for the years ended December 31, 2021 and 2020, respectively, ( ii) reinsurance premiums were $26 and $2 for the years ended December 31, 2021 and 2020, respectively, and (iii) interest rate derivatives were $(1) and $20 for the years ended December 31, 2021 and 2020, respectively.

• Interest, dividends and other distributed income from the investment portfolio was $80 and $104 for the years ended December 31, 2021 and 2020, respectively.

• Net loss and loss expenses paid, including commutation payments are detailed below:

($ in million)

2020 2019 2018

Year Ended December 31, 2021 2020 2019

Net losses paid $ 103 $ 159 $ 416

$ 159 $ 416 $ 344

Net subrogation

(118) (168) (140)

Net subrogation received (121) (118) (168)

Net loss expenses paid 77 108 70

Net cash flow $ 59 $ 149 $ 318

$ 149 $ 318 $ 321

(1) Net losses paid include commutation payments of $13, $214 and $87 for the years ended December 31, 2020, 2019 and 2018, respectively.

(2) For the year ended December 31, 2019, subrogation received includes $36 of settlement proceeds related to Lehman sponsored RMBS transactions and $23 related to the COFINA Plan of Adjustment.

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

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

Investing Activities

During 2020, AAC and Ambac UK continued to diversify their investment portfolio from fixed maturity to other assets, primarily hedge funds (increase in fair value of $11 million).

Additionally, AFG purchased 80% of Xchange for $74 million in 2020, net of cash acquired.

Cash provided for investing activities in both 2021 and 2020 were to (i) provide liquidity for operating activities;

(ii) diversify the investment portfolio from fixed maturity to other assets (total fair value of pooled investments of $683 at December 31, 2021) and (iii) support strategic initiatives, including AFG's purchase 80% of Xchange for $74 in 2020, net of cash acquired.

Financing Activities

Financing activities for the year ended December 31, 2020, include paydowns of the Ambac Note of $121 million and paydowns/maturities of VIE debt obligations of $178 million.

Financing activities for the year ended December 31, 2019, include paydowns of the Ambac Note of $178 million and paydowns of VIE debt obligations of $542 million, proceeds of $19 million from the re-issuance of 1,386 shares of Ambac-owned AMPS and proceeds of $12 million from issuance of Ambac UK debt.

Financing activities for the year ended December 31, 2021, include paydowns of the LSNI Ambac Note of $1,641, paydowns/maturities of VIE debt obligations of $170, partially offset by the proceeds from the Sitka AAC Note issuance of 1,163.

Financing activities for the year ended December 31, 2020, include paydowns of the LSNI Ambac Note of $121 and paydowns of VIE debt obligations of $178.

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.

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Treasury obligations with market values equal to or in excess of market values of the swaps and futures contracts.

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may look to re-establish hedge positions that are terminated early, resulting in additional collateral or margin obligations.

AFS may look to re-establish hedge positions that are terminated early, resulting in additional collateral or margin obligations.

The amount of additional collateral or margin posted on derivatives contracts will depend on several variables including the degree to which counterparties exercise their termination rights (or agreements terminate automatically) and the terms on which hedges can be replaced.

All collateral and margin obligations are currently met.

Collateral and margin posted by AFS totaled a net amount of $141 million (cash and securities collateral of $1 million and $140 million, respectively), including independent amounts, under these contracts at December 31, 2020.

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

BALANCE SHEET

Total assets decreased by approximately $100 million from December 31, 2019 to $13,220 million at December 31, 2020, primarily due to payment of loss and loss adjustment expenses, interest and operating expenses, and partial redemptions of long-term debt.

These were partially offset by higher VIE assets caused by the impact of currency changes (strengthening of pound sterling).

Other significant changes during 2020 were higher subrogation recoverables primarily related to increases in excess spread on RMBS, as a result of lower interest rates, and lower premium receivables from the continued runoff of the financial guarantee insurance portfolio.

Total liabilities increased by approximately $290 million from December 31, 2019, to $12,074 million as of December 31, 2020, primarily due to higher loss reserves and higher consolidated VIE liabilities resulting from currency changes (as notes above), partially offset by lower unearned premiums from the continued runoff of the financial guarantee insurance portfolio.

As of December 31, 2020, total stockholders’ equity was $1,140 million, compared with total stockholders’ equity of $1,536 million at December 31, 2019.

This decrease was primarily due to a Total Comprehensive Loss during 2020.

The Comprehensive Loss was primarily driven by the net loss attributable to common stockholders for the year ended December 31, 2020, of $437 million and translation gains on the consolidation of AFG's foreign subsidiaries.of $23 million.

Collateral and margin posted by AFS totaled a net amount of $133 (cash and securities collateral of $13 and $120 respectively), including independent amounts, under these contracts at December 31, 2021.

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

BALANCE SHEET ($ in millions)

Total assets decreased by approximately $917 from December 31, 2020 to $12,303 at December 31, 2021, primarily due to the impacts of the Corolla Trust Exchange and Secured Note Refinancing described in Note 1.

Background and Business Description in this Annual Report on Form 10-K located in Part II.

Item 8, payment of loss and loss expenses, interest and operating expenses, lower subrogation recoverables, lower consolidated VIE assets from paydowns of consolidated

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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.

Total liabilities decreased by approximately $886 from December 31, 2020, to $11,187 as of December 31, 2021, primarily due to lower loss reserves, and 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 December 31, 2021, total stockholders’ equity was $1,098, compared with total stockholders’ equity of $1,140 at December 31, 2020.

This decrease was primarily due to a Total Comprehensive Loss during 2021 and a $14 increase to the carrying value of redeemable NCI which is offset directly against retained earnings.

The Comprehensive Loss was primarily driven by the net loss attributable to common stockholders for the year ended December 31, 2021, of $17, unrealized losses on investments of $12 and translation losses on the consolidation of AFG's foreign subsidiaries.of $8.

Investment Portfolio.

Ambac's investment portfolio is managed under established guidelines designed to meet the investment objectives of AAC, Everspan Group, Ambac UK and AFG.

Ambac's investment portfolio is managed under established guidelines designed to meet the investment objectives of AAC, Everspan, Ambac UK and AFG.

Refer to "Description of the Business — Investments and Investment Policy" in this Annual Report on Form 10-K located in Part I.

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Refer to Note 4.

Investments in this Annual Report on Form 10-K located in Part II.

Investments to the Consolidated Financial Statements in this Annual Report on Form 10-K located in Part II.

Item 8 for information about Ambac's consolidated investment portfolio.

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

In the second quarter of 2020, Ambac monetized a material portion of its investments in certain assets classes;

including corporate securities rated below the 'A' rated category, all directly owned CMBS (other than Military Housing bonds), and approximately 50% of all CLOs (all rated investment grade) and acquired additional distressed Ambac-insured securities.

In the third quarter of 2020, Ambac began acquiring corporate securities rated below 'A' again.

These actions resulted in changes to the credit rating distribution of available-for-sale investments from December 31, 2019, to December 31, 2020, illustrated in the charts below.

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

($ in millions)

December 31, 2021 2020

Fixed maturity securities $ 1,730 $ 2,317

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Refer to Note 4.

Investments in this Annual Report on Form 10-K located in Part II.

Investments to the Consolidated Financial Statements in this Annual Report on Form 10-K located in Part II.

Item 8 for information about fixed maturity securities and pooled funds by asset class.

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

2 unchanged sentences

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 represented 41% and 33% of the 2020 and 2019 combined investment portfolios, respectively.

(2) Below investment grade and not rated bonds insured by Ambac represented 32% and 41% of the 2021 and 2020 combined fixed maturity investment portfolios, respectively.

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

Background and Business Description to the Consolidated Financial Statements in this Annual Report Form 10-K located in Part II.

Premium Receivables.

Ambac's premium receivables decreased to $370 million at December 31, 2020, from $416 million at December 31, 2019.

Ambac's premium receivables decreased to $323 at December 31, 2021, from $370 at December 31, 2020.

As further discussed in Note 7.

Financial Guarantee Insurance Contracts, in this Annual Report Form 10-K located in Part II.

Item 8, the decrease is due to premium receipts, adjustments for changes in expected and contractual cash flows and increases to the allowance for credit losses, partially offset by accretion of the premium receivable discount.

Insurance Contracts to the Consolidated Financial Statements, in this Annual Report Form 10-K located in Part II.

Item 8, the decrease is due to premium

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receipts and adjustments for changes in expected and contractual cash flows on financial guarantee insurance contracts, partially offset by decreases to the allowance for credit losses, accretion of the financial guarantee premium receivable discount and premium receivables on the Specialty P&C business.

Premium receivables by payment currency were as follows:

(Amounts in millions)

Premium Receivable in Payment Currency Premium Receivable in U.S.

(Amounts in millions) Premium Receivable in Payment Currency Premium Receivable in U.S.

Dollars $ 199 $ 199

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Reinsurance Recoverable on Paid and Unpaid Losses.

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

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

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

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

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

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

AAC benefited from letters of credit and collateral amounting to approximately $117 million from its reinsurers at December 31, 2020.

As of December 31, 2020 and 2019, reinsurance recoverable on paid and unpaid losses were $33 million and $26 million, respectively.

The increase was primarily a result of adverse development in public finance and student loan insured exposures.

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

For those reinsurance counterparties that do not currently post collateral, Ambac’s reinsurers are well capitalized, highly rated, authorized capacity providers.

Ambac benefited from letters of credit and collateral amounting to approximately $111 from its reinsurers at December 31, 2021.

As of December 31, 2021 and 2020, reinsurance recoverable on paid and unpaid losses were $55 and $33, respectively.

The increase was primarily a result of reinsurance recoverables of $30 added in connection with the PWIC transaction, offset by favorable development in financial guarantee insured exposures.

Intangible Assets.

Intangible assets includes (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 of $373 million and (ii) intangible assets of $38 million established as part of the acquisition of Xchange on December 31, 2020.

Intangible assets includes (i) an insurance intangible asset that was established at AFG's emergence from bankruptcy, representing the difference between the fair value and aggregate carrying value of the financial guarantee insurance and reinsurance assets and liabilities, (ii) intangible assets established as part of the acquisition of Xchange on December 31, 2020 and (iii) an indefinite-lived intangible assets established as part of the acquisition of PWIC.

Refer to Note 3.

Business Combination for further information relating to this acquisition.

As of December 31, 2020 and 2019 the net insurance intangible asset was $409 million and $427 million, 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).

Business Combination to the Consolidated Financial Statements,

in this Annual Report Form 10-K located in Part II.

Item 8 for further information relating to the Xchange acquisition.

As of December 31, 2021 and 2020 the net intangible asset was $362 and $409, respectively.

The decline is driven by amortization and translation gains (losses) from the consolidation of Ambac's foreign subsidiary (Ambac UK), partially offset by the indefinite-lived asset established in 2021.

Derivative Assets and Liabilities.

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Derivative assets and liabilities on the balance sheet primarily reflect the portion of the portfolio that is not subject to daily cash variation margin payments.

Derivative assets increased from $75 million at December 31, 2019, to $93 million as of December 31, 2020.

Derivative liabilities increased from $90 million at December 31, 2019, to $114 million as of December 31, 2020.

The increases resulted primarily from lower interest rates during the year ended December 31, 2020.

The interest driven increase in derivative assets was partially offset by higher counterparty credit adjustments.

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Derivative assets decreased from $93 at December 31, 2020, to $76 as of December 31, 2021.

Derivative liabilities decreased from $114 at December 31, 2020, to $95 as of December 31, 2021.

The decreases resulted primarily from higher interest rates during the year ended December 31, 2021, with the decline in assets partially offset by lower counterparty credit adjustments.

Loss and Loss Expense Reserves and Subrogation Recoverable.

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Basis of Presentation and Significant Accounting Policies and Note 7.

Financial Guarantee Insurance Contracts, respectively, of the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K, for further information on loss and loss expenses.

The loss and loss expense reserves net of subrogation recoverables and before reinsurance as of December 31, 2020 and 2019 were $(397) million and $(482) million, respectively.

Insurance Contracts, respectively, to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K, for further information on loss and loss expenses.

The loss and loss expense reserves net of subrogation recoverables and before reinsurance as of December 31, 2021 and 2020 were $(522) and $(397), respectively.

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

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Present Value of Expected

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(1) Present value of future recoveries include R&W subrogation recoveries of $1,730 and $1,751 at December 31, 2021 and 2020, respectively.

(2) Loss and loss expense reserves at December 31, 2021 includes financial guarantee and specialty P&C of $1,538 and $32, respectively.

Subrogation recoverable includes financial guarantee and specialty P&C of $(2,092) and $—, respectively.

All balances at December 31, 2020 relate to the financial guarantee business

Financial Guarantee:

Ambac has exposure to various bond types issued in the debt capital markets.

Our experience has shown that, for the majority of bond types, we have not experienced significant claims.

The bond types that have experienced significant claims, including through commutations, are residential mortgage-backed

securities (“RMBS”), student loan securities and public finance securities.

The bond types that have experienced significant claims, including through commutations, are residential mortgage-backed securities (“RMBS”), student loan securities and public finance securities.

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

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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 December 31, 2021 and 2020:

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December 31, 2021:

RMBS $ 2,530 $ 669 $ (2,102) $ (13) $ (1,446)

Structured Finance $ 2,371 $ 852 $ (2,018) $ (12) $ (1,178)

Domestic Public Finance 2,742 905 (312) (31) 562

Student Loans 415 271 (34) (3) 234

Ambac UK and Other Credits 1,612 40 — (17) 23

Other 1,189 35 (5) (13) 17

Loss expenses — 45 — — 45

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December 31, 2020:

RMBS $ 3,027 $ 634 $ (2,013) $ (13) $ (1,392)

Structured Finance $ 2,945 $ 940 $ (2,136) $ (16) $ (1,212)

Domestic Public Finance 3,016 1,112 (349) (39) 724

Student Loans 472 248 (36) (4) 208

Ambac UK and Other Credits 271 4 — (1) 3

Other 1,612 40 — (17) 23

Loss expenses — 68 — — 68

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Ceded loss and loss expense reserves are included in Reinsurance recoverable on paid and unpaid losses.

(2) 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.

(2) Loss reserves are included in the balance sheet as Loss and loss expense reserves or Subrogation recoverable dependent on if a policy is in a net liability or net recoverable position.

The table below reflects the timing of expected financial guarantee claim payments based on deal specific cash flows, excluding expected recoveries.

These deal specific cash flows are based on the expected cash flows of the underlying transactions.

Refer to the Loss Reserves section in Note 2.

The timing of these payments may vary significantly from the amounts shown above, especially for credits that are based on our statistical loss reserve method.

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Payments Due by Period

($ in millions) Total Less Than

1 Year 1 - 3 Years 3 - 5 Years More Than

Claim payments

$ 2,095 $ 422 $ 119 $ 109 $ 1,445

Variability of Expected Losses and Recoveries

Ambac’s management believes that the estimated future loss component of loss reserves (present value of expected net cash flows) are adequate to cover future claims presented, but there can be no assurance that the ultimate liability will not be higher than such estimates.

It is possible that our estimated future losses for insurance policies discussed above could be understated or that our estimated future recoveries could be overstated.

Ambac’s management believes loss reserves (present value of expected cash flows, net of recoveries) are adequate to cover future claim payments, but there can be no assurance that the ultimate liability will not be higher than such estimates.

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 COVID-19.

Accordingly, it is possible that our estimated loss reserves, gross of reinsurance, for financial guarantee insurance policies could be understated.

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

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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 this Annual Report on From 10-K for further discussion of the risks relating to future losses

and recoveries that could result in more highly stressed outcomes 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 Ambac, including (without limitation) impairing the ability of AAC to honor its financial obligations;

See “Risk Factors” in Part I, Item 1A of this Form 10-K as well as the descriptions of "Structured Finance Variability," "Public Finance Variability," and "Other Credits, including Ambac UK, Variability," below for further discussion of the risks relating to future losses and recoveries that could result in more highly stressed outcomes appearing below.

the initiation of rehabilitation proceedings against AAC;

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

RMBS Variability

Ambac has exposure to the U.S.

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

Structured Finance

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.

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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.

We established a representation and warranty subrogation recovery as further discussed in Note 7.

Financial Guarantee Insurance Contracts to the Consolidated Financial Statements included in this Annual Report on Form 10-K.

Insurance Contracts to the Consolidated Financial Statements included in this Annual Report on Form 10-K.

Our ability to realize RMBS representation and warranty recoveries is subject to significant uncertainty, including risks inherent in litigation, collectability of such amounts from counterparties (and/or their respective parents and affiliates), delays in realizing such recoveries, including delays in getting to trial due to court closures caused by COVID-19 or other events, 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 such recoveries.

Additionally, our R&W actual subrogation recoveries could be significantly lower than our estimate of $1,725 million, net of reinsurance, as of December 31, 2020, if the sponsors of these transactions:

Additionally, our R&W actual subrogation recoveries could be significantly lower than our estimate of $1,704, net of reinsurance, as of December 31, 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 due to any of the factors described in this Form 10-K in Part I, Item 1A Risk Factors - Risks Related to Capital, Liquidity and Markets .

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

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 December 31, 2020, could be approximately $15 million.

Combined with the absence of any R&W subrogation recoveries, a possible increase in loss reserves for RMBS could be approximately $1,740 million.

Student Loans:

Changes to assumptions that could make our reserves under-estimated include, but are not limited to, increases in interest rates, default rates and loss severities on the collateral due to economic or other factors, including the COVID-19 related economic impact.

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.

Structured 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 December 31, 2021, could be approximately $25.

Combined with the absence of any R&W subrogation recoveries, a possible increase in loss reserves for structured finance credits could be approximately $1,729.

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 million.

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 RMBS portfolio is sensitive to the COVID-19 related forbearances and delinquencies caused by the related 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.

Public Finance Variability

public finance portfolio consists predominantly of municipal bonds such as general and revenue obligations and 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 increase in public finance gross loss reserves at December 31, 2020, as compared to December 31, 2019, was primarily related to declines in discount rates, changes in assumptions on certain credits, particularly Puerto Rico and adverse impact on loss reserves from the global and issuer-specific economic impact of the COVID-19 pandemic.

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

($ in millions)

Outstanding (1)

Reserves Gross Par

Outstanding (1)

Lease and tax-backed $ 1,366 $ 693 $ 1,075 $ 561

General obligation 589 (37) 681 (16)

Housing 453 27 457 29

Transportation revenue 220 30 88 42

Other 388 11 97 11

Total $ 3,016 $ 724 $ 2,398 $ 627

(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-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.

A prolonged recovery from the COVID-19 related economic downturn could put additional stresses on these issuers as well as other types of municipal finance issuers and result in increased defaults and potential additional losses for Ambac.

Our experience with the city of Detroit in 2013 in its bankruptcy proceeding was not favorable and renders future outcomes with other public finance issuers even more difficult to predict and may increase the risk that we may suffer losses that could be sizable.

We agreed to settlements regarding our insured Detroit general obligation bonds that provide better treatment of our exposures than the city planned to include in its plan of adjustment, but nevertheless required us to incur a loss for a significant portion of our exposure.

An additional troubling precedent in the Detroit case, as well as other municipal bankruptcies, is the preferential treatment of certain creditor classes, especially the public pensions.

Additionally, the

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significant exposure, such as Chicago's school district, the State of New Jersey and many others.

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.

Public Finance

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

Additionally, our loss reserves may be under-estimated because of the continuing effects of COVID-19 pandemic.

The COVID-19 related economic downturn 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, parking revenues, tolls, etc.

While the economy has been in recovery since mid-2020, the lingering impact of the pandemic continues to negatively impact certain of these municipal issuers that are dependent upon narrow sources of revenue.

A further prolonged recovery from the COVID-19 pandemic could put additional stresses on these issuers and result in increased defaults and potential additional losses for Ambac.

Our experience with the city of Detroit's bankruptcy and Commonwealth of Puerto Rico's Title III proceedings as well as other municipal bankruptcies demonstrates the preferential treatment of certain creditor classes, especially the public pensions.

The cost of pensions and the need to address frequently sizable unfunded or underfunded pensions is often a key driver of stress for many municipalities and their related authorities, including entities to whom we have significant exposure, such as Chicago's school district, the State of New Jersey and many others.

Less severe treatment of pension obligations in bankruptcy may lead to worse outcomes for traditional debt creditors.

Variability of outcomes applies to even what is generally considered more secure municipal financings, such as dedicated sales tax revenue bonds that capture sales tax revenues for debt service ahead of any amounts being deposited into the general fund of an issuer.

Variability of outcomes applies to even what are generally considered more secure municipal financings, such as dedicated sales tax revenue bonds that capture sales tax revenues for debt service ahead of any amounts being deposited into the general fund of an issuer.

In the case of the Puerto Rico COFINA sales tax bonds that were part of the Commonwealth of Puerto Rico's Title III proceedings, AAC and other creditors agreed to settle at a recovery rate equal to about 93% of pre-petition amounts owed on the Ambac insured senior COFINA bonds.

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We expect municipal bankruptcies and defaults to continue to be challenging to project given the unique political, economic, fiscal, legal, governance and public policy differences among municipalities as well as the complexity, long duration and relative infrequency of the cases themselves in forums with a scarcity of legal precedent.

Moreover, issuers in Chapter 9 or similar proceedings may obtain judicial rulings and orders that impair creditors' rights or their ability to collect on amounts owed.

In certain cases, judicial decisions may be contrary to AAC's expectations or understanding of the law or its rights thereunder, which may lead to worse outcomes in Chapter 9 or similar proceedings than anticipated at the outset.

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 more recent volatility in the municipal markets as a result of the COVID-19 related economic downturn and the building 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.

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.

On January 13, 2020, the U.S.

Supreme Court denied a petition for certiorari arising out of an appeal of the March 26, 2019, ruling by the U.S.

Court of Appeals for the First Circuit.

In the ruling, the First Circuit affirmed the decision by the U.S.

District Court overseeing the PROMESA Title III proceedings for the PRHTA, found that under Sections 928(a) and 922(d) of the U.S.

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

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

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

This decision introduces uncertainty into the public finance market and it may make it more difficult for municipal instrumentalities to procure revenue bond financings

in the future and increases the credit risk to bondholders of existing special revenue bonds, particularly those from weaker issuers.

Our exposures to the Commonwealth of Puerto Rico are under stress arising from the Commonwealth’s poor financial condition, weak economy, loss of capital markets access, and the severe damage caused by hurricanes Irma and Maria and other natural disasters.

These factors, taken together with the payment moratorium on debt service of the Commonwealth and its instrumentalities, ongoing PROMESA Title III proceedings, and certain other provisions under PROMESA, the potential for restructurings of debt insured by AAC, either with or without its consent, and the possibility of protracted litigation as a result of which its rights may be materially impaired, may cause losses to exceed current reserves in a material manner.

These factors could deprive issuers access to funding at a level necessary to avoid defaulting on their obligations.

Ambac’s exposures to the Commonwealth of Puerto Rico across various instrumentalities and issuers are all now subject to plan support agreements and plans of adjustment or qualifying modifications.

The Eighth Amended POA has been confirmed, and the PRIFA QM and the CCDA QM have been approved.

All are expected to become effective on or before March 15, 2022.

However, uncertainty remains as to (i) whether the effective date will be stayed pending the appeal of the order confirming Eighth Amended POA;

(ii) the result of the pending First Circuit appeal of the order confirming the Eighth Amended POA;

(iii) the value or perceived value of the consideration provided by or on behalf of the debtors under the Eighth Amended POA, PRIFA QM, and CCDA QM;

(iv) the extent to which exposure management strategies, such as commutation and acceleration, will be executed;

(v) the tax treatment of the consideration provided by or on behalf of the debtors under the Eighth Amended POA, PRIFA QM, and CCDA QM;

(vi) whether and when the PRHTA POA will be confirmed;

and (vii) other factors, including market conditions such as interest rate movements, credit spread changes on the new GO and CVI instruments, and liquidity for the new GO and CVI instruments.

Losses may exceed current reserves in a material manner due to favorable or unfavorable developments or results with respect to these factors.

Commitments and Contingencies to the Consolidated Financial Statements in Part II, Item 8 and "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 this Annual Report on Form 10-K for further updates relating 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 December 31, 2020, the possible increase in loss reserves could be approximately $1,200 million.

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

A loss of this magnitude may render AAC insolvent.

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

Student Loan Variability

For student loan credits for which we have an estimate of expected loss at December 31, 2020, the possible increase in loss reserves could be approximately $25 million.

Additionally, an increase in interest rates of 0.50% could increase our estimate of expected losses by approximately $20 million.

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

Due to such factors, there can be no assurance that losses may not exceed our stress case estimates.

For the public finance credits, including Puerto Rico, for which we have an estimate of expected loss at December 31, 2021, the possible increase in loss reserves could be approximately $355 and there can be no assurance that losses may not exceed our stress case estimates.

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Other Credits, including Ambac UK, 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 $400 million greater than the loss reserves at December 31, 2020.

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 $370 greater than the loss reserves at December 31, 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.

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Long-term Debt.

Long-term debt consists of senior and junior surplus notes issued by AAC, the 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.

Long-term debt consists of surplus notes issued by AAC, the Sitka AAC Note (which refinanced the LSNI Ambac Note), the Tier 2 Notes issued in connection with the Rehabilitation Exit Transactions (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 Ambac UK debt issued in connection with the 2019 commutation of its exposure with respect to Ballantyne Re plc.

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

($ in millions) December 31,

($ in millions)

December 31, 2021 2020

Surplus Notes (1)

Ambac note 1,641 1,763

Tier 2 notes 306 278

LSNI Ambac Note

Sitka AAC Note

Ambac UK Debt

Total Long-term Debt $ 2,230 $ 2,739

The decrease in long-term debt from December 31, 2019 is primarily due to optional redemptions of the Ambac Note of $121 million, partially offset by accretion on the carrying value of the surplus notes, Tier 2 Notes and Ambac UK debt.

(1) Includes Junior Surplus Notes as of December 31, 2020.

All Junior Surplus Notes were retired in 2021.

The decrease in long-term debt from December 31, 2020 resulted from the impact of the Secured Note Refinancing and 2021 Surplus Note Exchanges, described further in Note 1.

Background and Business Description to the Consolidated Financial Statements, included in this Annual Report on Form 10-K, partially offset by issuances of surplus notes from AFG sales, accretion on the carrying value of surplus notes and Ambac UK debt and paid-in-kind interest on Tier 2 Notes.

Subject to internal and regulatory guidelines, market conditions and other constraints, Ambac may opportunistically purchase or sell surplus notes and/or other Ambac issued securities, and may consider opportunities to exchange securities issued by it from time to time (including newly issued securities) for other securities issued by it.

Redeemable Noncontrolling Interest .

The increase during 2020 was the result of the acquisition of Xchange on December 31, 2020.

The increase during 2021 was the result of the remeasurement of the redemption value of the put option provided to the minority owners (noncontrolling interest holders) of Xchange as if it were exercisable on December 31, 2021.

Refer to Note 3.

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

Equity-classified Written Call Options

In May 2021, the FASB issued ASU 2021-04, Issuer's Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options .

The ASU clarifies and reduces diversity in practice for an issuer's accounting for modifications or exchanges of equity-classified written call options (e.g.

warrants) that remain equity-classified after the modification or exchange.

The ASU requires an issuer to account for the modification or exchange based on the economic substance of the transaction.

For example, if the modification or exchange is related to the issuance of debt or equity, any change in the fair value of the written call option would be accounted for as part of the debt issuance cost in accordance with the debt guidance or equity issuance cost in accordance with the equity guidance, respectively.

The ASU is effective for fiscal years beginning after December 15, 2021, with early adoption permitted.

Ambac will adopt this ASU on January 1, 2022.

Convertible Instruments and Contracts in an Entity's Own Equity

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The ASU i) simplifies the accounting for convertible debt and convertible preferred stock by reducing the number of accounting models, and amends certain disclosures, ii) amends and simplifies the derivative scope exception guidance for contracts in an entity's own equity, including share-based compensation, and iii) amends the diluted earnings per share calculations for convertible instruments and contracts in an entity's own equity.

The ASU is effective for fiscal years ending

after December 15, 2021, with early adoption permitted.

Ambac will adopt this ASU on January 1, 2022.

Simplifying Income Tax Accounting

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes .

The FASB issued this ASU as part of its initiative to reduce complexity in accounting standards.

The ASU removes certain exceptions in the guidance related to investments, intra-period allocations and interim period allocations.

It further adds new guidance related to the allocation of consolidated income taxes and evaluating a step-up in the tax basis of goodwill.

The ASU is effective for fiscal years beginning after December 15, 2020, with early adoption permitted.

The modified disclosures must be applied on a retrospective basis for all periods presented.

The ASU is effective for fiscal years ending after December 15, 2021, with early adoption permitted.

Ambac will adopt this ASU on January 1, 2022.

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Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements, included in Part II, Item 8 in this Annual Report Form 10-K for the year ended December 31, 2021, for a discussion of the impact of other recent accounting pronouncements on Ambac’s financial condition and results of operations.

AAC STATUTORY BASIS FINANCIAL RESULTS

AAC statutory financial statements are prepared on the basis of accounting practices prescribed or permitted by the OCI.

OCI recognizes only statutory accounting practices prescribed or permitted by the State of Wisconsin (“SAP”) for determining and reporting the financial condition and results of operations of an insurance company for determining its solvency under Wisconsin Insurance Law.

The National Association of Insurance Commissioners (“NAIC”) Accounting Practices and Procedures manual (“NAIC SAP”) has been adopted as a component of prescribed practices by the State of Wisconsin.

Additionally, the OCI has prescribed additional practices and has permitted accounting practices for AAC.

STATUTORY BASIS FINANCIAL RESULTS ($ in millions)

insurance subsidiaries prepare financial statements under accounting practices prescribed or permitted by its domiciliary state regulator (“SAP”) for determining and reporting the financial condition and results of operations of an insurance company.

The National Association of Insurance Commissioners (“NAIC”) Accounting Practices and Procedures manual (“NAIC SAP”) is adopted as a component of prescribed practices by each domiciliary state.

For further information, see Note 8.

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

AAC’s statutory policyholder surplus and qualified statutory capital (defined as the sum of policyholders surplus and mandatory contingency reserves) were $865 million and $1,413 million at December 31, 2020, respectively, as compared to $1,088 million and $1,618 million at December 31, 2019, respectively.

As of December 31, 2020, statutory policyholder surplus and qualified statutory capital included $573 million principal balance of surplus notes outstanding, $365 million principal balance of junior surplus notes outstanding and $138 million liquidation preference of preferred stock outstanding.

These surplus and junior surplus notes (including related accrued interest of $544 million that is not recorded under statutory basis accounting principles), preferred stock and all other liabilities (including insurance claims and debt issued by AAC) are obligations that have claims on the resources of AAC that are senior to AFG's equity and therefore impact AFG's ability to realize residual value or receive dividends from AAC.

The significant drivers to the net decrease in policyholder surplus were statutory net losses of $213 million for the year ended December 31, 2020, (excluding dividends from

Insurance Regulatory Restrictions to the Consolidated

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subsidiaries) and contributions to contingency reserves of $18 million.

Financial Statements included in Part II, Item 8 in this Annual Report Form 10-K.

Ambac Assurance Corporation

AAC’s statutory policyholder surplus and qualified statutory capital (defined as the sum of policyholders surplus and mandatory contingency reserves) were $757 and $1,322 at December 31, 2021, respectively, as compared to $865 and $1,413 at December 31, 2020, respectively.

As of December 31, 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 (including related accrued interest of $625 that is not recorded under statutory basis accounting principles);

preferred stock;

and all other liabilities, including insurance claims, $1,175 principal balance of Sitka AAC Notes (refinanced the LSNI Ambac Note as described in Note 1.

Background and Business Description to the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K) and $333 principal balance of 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 were statutory net losses of $127 for the year ended December 31, 2021 and contributions to contingency reserves of $17, partially offset by an increase in the fair value of pooled investments of $35.

AAC’s statutory surplus is sensitive to multiple factors, including:

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

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

The significant differences between GAAP and SAP are that under SAP:

• Loss reserves are only established for losses on guaranteed obligations that have experienced a payment default in an amount that is sufficient to cover the present value of the anticipated defaulted debt service payments over the expected period of default, less estimated recoveries under subrogation rights (5.1% as prescribed by OCI).

Under GAAP, in addition to the establishment of loss reserves for defaulted obligations, loss reserves are established (net of GAAP basis unearned premium revenue) for obligations that have experienced credit deterioration, but have not yet defaulted using a weighted-average risk-free discount rate, currently at 1.1%.

Under GAAP, in addition to the establishment of loss reserves for defaulted obligations, loss reserves are established (net of GAAP basis unearned premium revenue) for obligations

that have experienced credit deterioration, but have not yet defaulted using a weighted-average risk-free discount rate, currently at 1.2%.

• Mandatory contingency reserves are required based upon the type of obligation insured, whereas GAAP does not require such a reserve.

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a) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and b) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.

AAC generally has the obligation to absorb losses of VIEs that could potentially be significant to the VIE as the result of its guarantee of

insured obligations issued by VIEs.

AAC generally has the obligation to absorb losses of VIEs that could potentially be significant to the VIE as the result of its guarantee of insured obligations issued by VIEs.

For certain VIEs AAC has the power to direct the most significant activities of the VIE and accordingly consolidates the related VIEs under GAAP.

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Under GAAP, premium revenues for both upfront and installment premiums are earned over the life of the financial guarantee contract in proportion to the insured principal amount outstanding at each reporting date.

• Insurance intangibles that arose as a result of the implementation of Fresh Start reporting is not a concept within SAP.

• Insurance intangibles that arose as a result of the implementation of Fresh Start reporting are not a concept within SAP.

This insurance intangible asset is amortized as an expense on a level yield basis over the life of the related insurance risks.

• Unearned premiums and loss reserves are presented net of ceded amounts, while under GAAP, they are reflected gross of ceded amounts.

Everspan Indemnity Insurance Company

Everspan Indemnity Insurance Company’s statutory policyholder surplus was $106 at December 31, 2021, as compared to $26 at December 31, 2020.

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The significant drivers to the increase in policyholder surplus for the year ended December 31, 2021 were capital contributions of $92 partially offset by operating expenses and changes in investment in subsidiaries, primarily due to a limitation on the amount of goodwill that may be admitted in accordance with SAP.

The significant differences between GAAP and SAP are that under SAP:

• Investment grade fixed maturity investments are stated at amortized cost and certain below investment grade fixed maturity investments are reported at the lower of amortized cost or fair value.

Under GAAP, all fixed maturity investments are reported at fair value.

• Wholly owned subsidiaries are not consolidated;

rather, the equity basis of accounting is utilized and the carrying values of these investments are subject to admissibility tests.

• The acquisition of PWIC was recorded as an equity method investment, which includes a goodwill component representing the acquisition cost in excess of PWIC's statutory surplus.

Goodwill will be amortized over a period not to exceed ten years.

Under GAAP, the acquisition of PWIC was recorded as an asset acquisition, which requires i) all net assets to initially be recorded at fair value and ii) the acquisition cost in excess of the fair value of net assets to be allocated to the bases of certain types of assets based on their relative fair values, if applicable.

No goodwill is recorded for asset acquisitions.

AMBAC UK FINANCIAL RESULTS UNDER UK ACCOUNTING PRINCIPLES

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 £412 million at December 31, 2020, as compared to £387 million at December 31, 2019.

At December 31, 2020, the carrying value of cash and investments was £481 million, a increase from £470 million at December 31, 2019.

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 within Ambac UK's investment portfolio and operating expense and tax payments.

The significant differences between U.S.

GAAP and UK GAAP are that under UK GAAP:

(£ 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 £444 at December 31, 2021, as compared to £412 at December 31, 2020.

At December 31, 2021, the carrying value of cash and investments was £500, a increase from £481 at December 31, 2020.

The significant differences between US GAAP and UK GAAP are that under UK GAAP:

• Loss reserves are only established for losses on guaranteed obligations when, in the judgment of management, a monetary default in the timely payment of debt service is likely to occur, which would result in Ambac UK incurring a loss.

A loss provision is established in an amount that is sufficient to cover the present value of the anticipated defaulted debt service payments over the expected period of default, less estimated recoveries under subrogation rights.

The discount rate is equal to the lower of the rate of return on invested assets for either the current year or the period covering the current year plus the four previous years.

GAAP, loss reserves are established (net of U.S.

GAAP basis unearned premium revenue) for obligations that have experienced credit deterioration, but have not yet defaulted using a weighted-average risk-free discount rate.

• Investments in fixed maturity securities are stated at amortized cost, subject to an other-than-temporary

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impairment evaluation.

GAAP, all bonds are reported at fair value and are evaluated for credit impairments under CECL,

• Purchases of Ambac UK insured securities are bifurcated into an intrinsic and an Ambac UK claim based value.

The intrinsic value is recorded as an investment whereas the Ambac UK claim based value is recorded as a claim payment with an accompanying reduction in Ambac UK loss reserves.

GAAP, investments in Ambac UK insured securities are reported as investments and do not reduce loss reserves.

The discount rate is equal to the lower of the rate of return on invested assets for either the current year or the period covering the current year plus the four previous years, currently at 4.7%.

GAAP, loss reserves are established (net of US GAAP basis unearned premium

revenue) for obligations that have experienced credit deterioration, but have not yet defaulted using a weighted-average risk-free discount rate.

• Investments in fixed maturity securities are stated at amortized cost, subject to an other-than-temporary impairment evaluation.

Under US GAAP, all bonds are reported at fair value.

• VIEs are not required to be assessed for consolidation.

GAAP, as noted under AAC Statutory Basis Financial Results above, VIE's with certain characteristics are required to be consolidated.

Under US GAAP, as noted under AAC Statutory Basis Financial Results above, VIE's with certain characteristics are required to be consolidated.

For several VIEs Ambac UK has the power to direct the most significant activities of the VIE and accordingly consolidates the related VIEs under U.S.

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Installment premiums are reflected in income pro-rata over the period covered by the premium payment.

GAAP, premium revenues for both upfront and installment premiums are earned over the life of the financial guarantee contract in proportion to the insured principal amount outstanding at each reporting date.

Under US GAAP, premium revenues for both upfront and installment premiums are earned over the life of the financial guarantee contract in proportion to the insured principal amount outstanding at each reporting date.

• Insurance intangibles that arose as a result of the implementation of Fresh Start reporting is not a concept within UK GAAP.

GAAP, this insurance intangible asset is amortized as an expense on a level yield basis over the life of the related insurance risks.

Under US GAAP, this insurance intangible asset is amortized as an expense on a level yield basis over the life of the related insurance risks.

• Unearned premiums and loss reserves are presented net of ceded amounts, while under GAAP, they are reflected gross of ceded amounts.

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.

The calculation of capital resources, regulatory capital requirements and regulatory capital deficits under Solvency II at December 31, 2020, will be published on Ambac's website during March 2021.

The calculation of capital resources, regulatory capital requirements and regulatory capital surplus / deficit under Solvency II at December 31, 2021, will be published on Ambac's website during March 2022.

Final annual Solvency II data and Ambac UK's annual Solvency and Financial Condition Report will be published on Ambac's website during April 2022.

Available capital resources under Solvency II were a surplus of £196 million at December 31, 2020, of which £188 million are eligible to meet solvency capital requirements.

This is an increase from December 31, 2019, when available capital resources were a surplus of £184 million of which £178 million were eligible to meet solvency capital requirements.

Eligible capital resources at December 31, 2020 and December 31, 2019, are in comparison to regulatory capital requirements of £256 million and £208 million, respectively.

Therefore, Ambac UK was deficient in terms of compliance with applicable regulatory capital requirements by £72 million and £30 million at December 31, 2020 and December 31, 2019, respectively.

The deficit increased as at December 31, 2020, due to the combined impact of (i) the reduction in long term interest rates, which resulted in an increase in technical provision liabilities and hence a reduction in eligible own funds and (ii) an increase in capital requirements for non-life risk due to parameter changes within the solvency capital requirement calculation.

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.

Available capital resources under Solvency II were a surplus of £245 at September 30, 2021, the most recently published position, of which £237 are 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 September 30, 2021 and December 31, 2020, are in comparison to regulatory capital requirements of £247 and £256, respectively.

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

The deficit was reduced as at September 30, 2021, due to the combined impact of (i) the increase in long term interest rates, which resulted in a decrease in technical provision liabilities and hence an increase in eligible own funds and (ii) a decrease in capital requirements for non-life risk due to the maturity and de-risking of certain policies, together with

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natural run-off of the insured portfolio in the year.

The regulators are fully aware of the deficiency in capital resources as compared to capital requirements as at September 30, 2021 and dialogue between Ambac UK management and its regulators remains ongoing with respect to options for strengthening the capital position further.

NON-GAAP FINANCIAL MEASURES

In addition to reporting the Company’s quarterly financial results in accordance with GAAP, the Company currently reports two non-GAAP financial measures:

($ in millions)

In addition to reporting the Company's financial results under GAAP, the Company currently reports two non-GAAP financial measures:

adjusted earnings and adjusted book value.

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These adjustments allow for all financial guarantee contracts to be accounted for consistent with the Financial Services – Insurance Topic of ASC, whether or not they are subject to derivative accounting rules.

This adjustment has become negligible and we will discontinue reporting it beginning in the first quarter of 2022.

• Insurance intangible amortization:

Elimination of the amortization of the financial guarantee insurance intangible asset that arose as a result of the Ambac's emergence from bankruptcy and implementation of Fresh Start reporting.

Elimination of the amortization of the financial guarantee insurance intangible asset that arose as a result of Ambac’s emergence from bankruptcy and the implementation of Fresh Start reporting.

This adjustment ensures that all financial guarantee contracts are accounted for consistent with the provisions of the Financial Services – Insurance Topic of the ASC.

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• Foreign exchange (gains) losses:

Elimination of the foreign exchange gains (losses) on the re-measurement of assets, liabilities and transactions in non-functional currencies.

This adjustment eliminates the foreign exchange gains (losses) on all assets, liabilities and transactions in non-functional currencies, which enables users of our financial

statements to better view the business results without the impact of fluctuations in foreign currency exchange rates and facilitates period-to-period comparisons of Ambac's operating performance.

This adjustment eliminates the foreign exchange gains (losses) on all assets, liabilities and transactions in non-functional currencies, which enables users of our financial statements to better view the results without the impact of fluctuations in foreign currency exchange rates and facilitates period-to-period comparisons of Ambac's operating performance.

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

1 unchanged sentence

($ in millions, except per share data)

Year Ended December 31,

$ Amount Per Diluted Share $ Amount Per Diluted Share $ Amount Per Diluted Share

Year Ended December 31, $ Amount Per Diluted Share $ Amount Per Diluted Share $ Amount Per Diluted Share

Net income (loss) attributable to common stockholders $ (17) $ (0.61) $ (437) $ (9.47) $ (216) $ (4.69)

$ (437) $ (9.47) $ (216) $ (4.69) $ 186 $ 3.99

Non-credit impairment fair value (gain) loss on credit derivatives — — — — (1) (0.03)

— — (1) (0.03) 1 0.02

Insurance intangible amortization 52 1.12 57 1.23 295 6.43

Foreign exchange (gains) losses 7 0.15 3 0.06 (12) (0.26)

3 0.06 (12) (0.26) 7 0.15

Adjusted Earnings (Loss) (1)

$ 43 $ 0.66 $ (378) $ (8.19) $ 66 $ 1.44

(1) Adjusted earnings per diluted share is calculated as adjusted earnings less the change in the redemption value of redeemable noncontrolling interest, divided by the GAAP weighted average number of diluted shares outstanding.

Adjusted Book Value.

2 unchanged sentences

• Non-credit impairment fair value losses on credit derivatives:

Elimination of the non-credit impairment fair value loss on credit derivatives, which is the amount in excess of the present value of the expected estimated economic credit loss.

Elimination of the non-credit impairment fair value loss on credit derivatives, which is the amount in excess of the present value of the expected estimated

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economic credit loss.

GAAP fair values are affected by, and in part fluctuate with, changes in market factors such as interest rates, credit spreads, including Ambac’s CVA that are not expected to result in an economic gain or loss.

These adjustments allow for all financial guarantee contracts to be accounted for within adjusted book value consistent with the provisions of the Financial Services—Insurance Topic of the ASC, whether or not they are subject to derivative accounting rules.

This adjustment has become negligible and we will discontinue reporting it beginning in the first quarter of 2022.

• Insurance intangible asset:

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• Net unearned premiums and fees in excess of expected losses:

Addition of the value of the unearned premium

revenue ("UPR") on financial guarantee contracts, in excess of expected losses, net of reinsurance.

This non-GAAP adjustment presents the economics of UPR and expected losses for financial guarantee contracts on a consistent basis.

Addition of the value of the unearned premium revenue ("UPR") on financial guarantee contracts, in excess of expected losses, net of reinsurance.

This non-GAAP adjustment presents the economics of UPR and expected

losses for financial guarantee contracts on a consistent basis.

In accordance with GAAP, stockholders’ equity reflects a reduction for expected losses only to the extent they exceed UPR.

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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:

2 unchanged sentences

This adjustment only allows for such gains and losses in adjusted book value when realized.

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The following table reconciles Total Ambac Financial Group, Inc.

7 unchanged sentences

Net unrealized investment (gains) losses in Accumulated Other Comprehensive Income (Loss) (154) (3.32) (166) (3.63)

(166) (3.63) (151) (3.31)

Adjusted Book Value $ 874 $ 18.88 $ 919 $ 20.05

The decrease in Adjusted Book Value was primarily attributable to the Adjusted Loss for the year ended December 31, 2020, excluding earned premium previously included in Adjusted Book Value, partially offset by foreign exchange translation gains.

The decrease in Adjusted Book was primarily attributable to the $10 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 year ended December 31, 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

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 7. Management’s Discussion and Analysis