What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-02-24 compared with 2021-03-01 · 2035 added, 2009 removed, 1804 unchanged (69% of the section changed)

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Reports of Independent Registered Public Accounting Firm

Report of Independent Registered Public Account Firm KPMG LLP , New York, NY , PCAOB ID 185 62

Consolidated Financial Statements

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Background and Business Description 69

Fair Value Measurements 108

Basis of Presentation and Significant Accounting Policies 76

Investments 116

Business Combination 89

Derivative Instruments 121

Variable Interest Entities 113

Basis of Presentation and Significant Accounting Policies 71

Long-term Debt 117

Business Combination 84

Revenues From Contracts with Customers 119

Investments 85

Comprehensive Income 120

Income Taxes 126

Fair Value Measurements 91

Net Income Per Share 121

Employment Benefit Plans 127

Financial Guarantees in Force 98

Financial Guarantee Insurance Contracts 96

Commitments and Contingencies 131

Income Taxes 121

Insurance Contracts 99

Employment Benefit Plans 123

Insurance Regulatory Restrictions 107

Quarterly Information (Unaudited) 141

Derivative Instruments 111

Commitments and Contingencies 126

Intangible Assets 113

| Ambac Financial Group, Inc.

61 2021 FORM 10-K |

Table of Co ntents

Report of Independent Registered Public Accounting Firm

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In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of total comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes and financial statement schedules I, II and IV (collectively, the consolidated financial statements), and our report dated March 1, 2021 expressed an unqualified opinion on those consolidated financial statements.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, the related consolidated statements of total comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes and financial statement schedules I, II and IV (collectively, the consolidated financial statements), and our report dated February 24, 2022 expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

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New York, New York

March 1, 2021

February 24, 2022

| Ambac Financial Group, Inc.

62 2021 FORM 10-K |

Table of Co ntents

Report of Independent Registered Public Accounting Firm

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generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 1, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 24, 2022 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion

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Estimate of loss and loss expense reserves and subrogation recoverable

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

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

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

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

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

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

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

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63 2021 FORM 10-K |

Table of Co ntents

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

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New York, New York

March 1, 2021

February 24, 2022

| Ambac Financial Group, Inc.

64 2021 FORM 10-K |

Table of Co ntents

AMBAC FINANCIAL GROUP, INC.

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Other investments (includes $ 683 and $ 544 at fair value)

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

Total investments (net of allowance for credit losses of $ 0 and $ 0 )

Cash and cash equivalents 17 20

Restricted cash 5 13

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

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

Premium receivables (net of allowance for credit losses of $ 9 and $ 17 )

Reinsurance recoverable on paid and unpaid losses (net of allowance for credit losses of $ 0 and $ 0 )

Deferred ceded premium 90 70

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Derivative assets 76 93

Current taxes — 11

Intangible assets 362 409

Goodwill 46 46

Other assets 68 68

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Ceded premiums payable 33 27

Deferred taxes 24 32

Current taxes 6 —

Long-term debt 2,230 2,739

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Variable interest entity liabilities:

Accrued interest payable — 1

Long-term debt (includes $ 4,056 and $ 4,324 at fair value)

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Additional paid-in capital 257 242

Accumulated other comprehensive income (loss) 79 42

Accumulated other comprehensive income 58 79

Retained earnings 726 759

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Table of Co ntents

AMBAC FINANCIAL GROUP, INC.

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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 )

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

loss on exchange of auction market preferred shares — — 82

net (gain) loss attributable to noncontrolling interest ( 1 ) — —

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

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Total comprehensive income (loss) ( 38 ) ( 400 ) ( 125 )

loss on exchange of auction market preferred shares — — 82

comprehensive (loss) gain attributable to the noncontrolling interest:

Net gain (loss) ( 1 ) — —

Total comprehensive income (loss) attributable to common stockholders $ ( 38 ) $ ( 400 ) $ ( 125 )

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66 2021 FORM 10-K |

Table of Co ntents

AMBAC FINANCIAL GROUP, INC.

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Ambac Financial Group, Inc.

(Dollars in millions) Total Retained

Earnings Accumulated

($ in Millions) Total Retained Earnings Accumulated

Comprehensive

Income (Loss) Preferred

Income Preferred

Stock Additional Paid-in

Capital Treasury Stock, at Cost Nonredeemable

Noncontrolling

Capital Treasury Stock,

at Cost Nonredeemable Noncontrolling

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

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

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

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

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

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

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

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

Ambac Financial Group, Inc.

(Dollars in millions) Total Retained

Earnings Accumulated

Comprehensive

Income (Loss) Preferred

Stock Additional Paid-in

Capital Treasury Stock, at Cost Nonredeemable

Noncontrolling

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

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

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

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

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

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

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

Ambac Financial Group, Inc.

(Dollars in Millions) Total Retained Earnings Accumulated

Comprehensive

Income Preferred

Stock Additional Paid-in

Capital Treasury Stock,

at Cost Noncontrolling

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

Total comprehensive income (loss) ( 38 ) ( 17 ) ( 21 ) — — — — —

Adjustment to initially apply ASU 2016-09 — 3 ( 3 ) — — — — —

Stock-based compensation 14 — — — — 14 — —

Cost of shares (acquired) issued under equity plan ( 6 ) ( 4 ) — — — — ( 2 ) —

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

Changes to Redeemable noncontrolling interest ( 12 ) ( 12 ) — — — — — —

Balance at December 31, 2021 $ 1,098 $ 726 $ 58 $ — $ — $ 257 $ ( 3 ) $ 60

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Table of Co ntents

AMBAC FINANCIAL GROUP, INC.

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Consolidated Statements of Cash Flows

(Dollars in millions) Year Ended December 31,

2020 2019 2018

($ in millions) Year Ended December 31, 2021 2020 2019

Cash flows from operating activities:

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

Exchange for auction market preferred shares — — 82

Redeemable noncontrolling interest ( 1 ) — —

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

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Accrued interest payable 103 93 87

Amortization of insurance intangible assets 57 295 107

Amortization of intangible assets 55 57 295

Net realized investment gains ( 7 ) ( 22 ) ( 81 )

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Cash flows from financing activities:

Net proceeds from issuance of Tier 2 notes — — 240

Proceeds from issuance of Ambac UK Debt — — 12

Proceeds from issuance of Sitka AAC Note 1,163 — —

Proceeds from issuance of Surplus Notes 11 — —

Paydowns of Ambac note ( 121 ) ( 178 ) ( 214 )

Paydowns of a secured borrowing — — ( 74 )

Payments for extinguishment of surplus notes — — ( 191 )

Paydowns of LSNI Ambac Note ( 1,641 ) ( 121 ) ( 178 )

Payments for debt issuance costs ( 12 ) — —

Issuance of auction market preferred shares of Ambac Assurance — — 19

Payments for auction market preferred shares — — ( 11 )

Tax payments related to shares withheld for share-based compensation plans ( 6 ) ( 3 ) ( 3 )

Distributions to noncontrolling interest holders ( 1 ) — —

Payments of consolidated VIE liabilities ( 170 ) ( 178 ) ( 542 )

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Ambac's business operations include:

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

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

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

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

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

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

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

• Specialty Property & Casualty Program Insurance ("SPCP") — Currently includes five admitted carriers (Everspan Insurance Company, Providence Washington Insurance Company, 21st Century Indemnity Insurance Company, 21st Century Pacific Insurance Company and 21st Century Auto Insurance Company of New Jersey) and an excess and surplus lines (“E&S” or “nonadmitted”) insurer Everspan Indemnity Insurance Company (collectively, “Everspan”).

The 21st Century companies were acquired in 2022.

Everspan carriers that are currently part of the intercompany pooling agreement (Everspan Indemnity Insurance Company ("Everspan Indemnity") and Everspan Insurance Company) received an AM Best rating of 'A-' (Excellent) in February 2021.

Everspan launched its first insurance program in May 2021.

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

Refer to Note 3.

Business Combination for further information relating to this acquisition.

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

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

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

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

Limitations on Voting and Transfer of Common Stock

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

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

holding or disposing of AFG’s common stock) shall not be entitled to cast votes in excess of one vote less than 10 % of the votes entitled to be cast by all common stock holders, except as otherwise approved by the OCI (as defined below).

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

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

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

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

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Strategies to Enhance Shareholder Value

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

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

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

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

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

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

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

Specialty P&C Insurance Program Platform strategic priorities include:

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

• Building a leading federation of specialty MGA/U partners through additional acquisitions and de novo builds,

| Ambac Financial Group, Inc.

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(Dollar Amounts in Millions, Except Share Amounts)

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

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

supported by a centralized business services unit including core technology solutions.

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

Financial Guarantee Insurance companies’ strategic priorities include:

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

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

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

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

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

and the indenture for the Tier 2 Notes (as defined below), each of which requires OCI and, under certain circumstances, holders of the debt instruments benefiting from such restrictions, to approve certain actions taken by or in respect of AAC.

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

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

The Segregated Account

The Segregated Account and the Rehabilitation Exit Transactions

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

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

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

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

June 12, 2014.

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

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

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

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

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

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

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

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

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

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

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

The Secured Notes

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

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

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

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

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

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

Tier 2 Financing

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

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74 2020 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

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

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

engaging in mergers and similar transactions;

disposing of assets;

making restricted payments;

and creating or permitting liens (among other restrictions and limitations).

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

In connection with the discharge of all unpaid policy claims, AAC issued the secured notes and the Tier 2 notes.

Long-term Debt for additional information regarding the secured notes and Tier 2 Notes.

Bank Settlement Agreement

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

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

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

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OCI reserved the right to modify or terminate the Stipulation and Order in a manner consistent with the interests of policyholders, creditors and the public generally.

August 2018 AMPS Exchange

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

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

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

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

In exchange for each AMPS share (i.e.

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

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

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

As a result of the completion of the Purchases, Ambac:

(1) Repurchased 84.4 % or 22,296 AMPS with an aggregate liquidation preference of $ 557 , including $ 35 in aggregate liquidation preference in the AFG Purchase;

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

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

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

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

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

2021 Surplus Note Exchanges

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

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

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

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

Variable Interest Entities for a discussion of the establishment

| Ambac Financial Group, Inc.

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(Dollar Amounts in Millions, Except Share Amounts)

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

of the Corolla Trust) (ii) AFG agreed to sell to AAC the owner trust certificate for the Corolla Trust (the “Corolla Certificate”), which constituted all of the equity interests in the Corolla Trust, and (iii) AAC agreed to exchange the Interests and the Corolla Certificate for AAC’s surplus notes (collectively, the “Corolla Note Exchange”).

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

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

The Closing occurred on January 22, 2021.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Company recorded a gain of $ 33 for the year ended December 31, 2021, arising from AAC's purchases of junior surplus notes below their carrying values which is reported within Net realized gains (losses) on extinguishment of debt in the Consolidated Statements of Total Comprehensive Income (Loss).

In addition, the Company recorded a gain of $ 4 for the year ended December 31, 2021, from the exchange of the Corolla Certificate held by AFG above its carrying value, which is reported within Net realized investment gains (losses) in the Consolidated Statements of Total Comprehensive Income (Loss).

Secured Note Refinancing

On July 6, 2021, a newly formed variable interest entity and wholly-owned subsidiary of AFG, Sitka Holdings, LLC (“Sitka”), issued $ 1,175 par amount of LIBOR plus 4.5 % senior secured notes due 2026 (the “Sitka Senior Secured Notes”).

In connection with the issuance and sale of the Sitka Senior

Secured Notes, AAC issued a secured note to Sitka in the same amount and with the same interest rate and maturity date as the Sitka Senior Secured Notes (the "Sitka AAC Note").

The proceeds from this offering of $ 1,163 were used to fund a portion of the full redemption of the Ambac LSNI Secured Notes due 2023 (the “LSNI Secured Notes”) and the secured note issued by AAC concurrently with the issuance of the LSNI Secured Notes (the "LSNI Ambac Note").

The remaining balance of the LSNI Secured Notes were redeemed utilizing other available temporary sources of liquidity.

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

Accordingly, the Sitka AAC Note is reported within Long-term debt on the Consolidated Balance Sheet.

BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

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The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and disclosures.

Such estimates that are particularly susceptible to change are used in connection with certain fair value measurements, valuation of loss reserves for non-derivative insurance policies and the valuation allowance on the deferred tax asset, any of which individually could be material.

Such estimates that are particularly susceptible to change are used in connection with certain fair value measurements, valuation of financial guarantee loss reserves for non-derivative insurance policies and the valuation allowance on the deferred tax asset, any of which individually could be material.

Consolidation

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All significant intercompany balances have been eliminated.

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

interests of an entity.

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

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

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

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

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Notes to Consolidated Financial Statements

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potentially be significant to the VIE, related party relationships and the design of the VIE.

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

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

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

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

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

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

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Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

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

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

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

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

This adjustment was not material to retained earnings

or any individual balance sheet line item.

Refer to the discussion below for each asset type.

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

For purposes of computing amortized cost, premiums and discounts are accounted for using the effective interest method over a future term of the security.

For purposes of computing amortized cost, premiums and discounts are accounted for using the effective interest method over a term of the security.

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

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

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

ASU 2017-08 shortened the amortization period for the premium on callable debt securities to the earliest call date.

Under previous GAAP, Ambac generally amortized the premium over the contractual life (i.e.

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

For other fixed maturity securities, such as corporate and municipal bonds, discounts are amortized or accreted over the remaining term of the securities and premiums are amortized to the earliest call date.

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

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

Refer to Note 5.

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

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Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

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

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

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

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

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

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

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

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

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

For fixed maturity securities that had credit impairments in a period, the previous amortized cost of the security less the amount of the credit impairment recorded through earnings became the investment’s new amortized cost basis.

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

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

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

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

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

If management either:

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

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

than not will be required to sell the debt security before its anticipated recovery of the amortized cost basis less any current period credit impairment, then an impairment charge is recognized in earnings, with the amortized cost of the security being written-down to fair value.

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

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

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

If that judgment changes, Ambac may ultimately record a charge for credit impairment in future periods.

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

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iii) presenting AIR separately in Other Assets on the balance sheet and iv) excluding AIR from amortized cost balances in required CECL disclosures found in Note 4.

AIR at December 31, 2020 was $ 10 .

AIR at December 31, 2021 and 2020 was $ 10 and $ 10 , respectively.

Refer to Note 4.

Investments for further credit impairment disclosures.

Financial Guarantee:

Gross premiums were received either upfront or in installments.

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dollar exposures are discounted using U.S.

Treasury rates while exposures denominated in a foreign currency are discounted using the appropriate risk-free rate for the respective currency.

Treasury rates while exposures denominated in a foreign

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Notes to Consolidated Financial Statements

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currency are discounted using the appropriate risk-free rate for the respective currency.

The weighted average risk-free rate at December 31, 2021 and 2020, was 2.2 %.

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

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

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

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

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

The principal and interest received from the escrowed securities are then used to retire the Ambac-insured obligations at a future date either to their maturity date (a refunding) or a specified call date (a pre-refunding).

Ambac has evaluated the provisions in policies issued on these obligations and determined those insurance policies have not been legally extinguished.

For policies with refunding securities, premium revenue recognition is not impacted as the escrowed maturity date is the same as the previous legal maturity date.

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

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

For financial guarantee contracts, the issuer's ability and willingness to pay its insured debt obligation impacts the

payment of policy losses by Ambac as well as the receipt of premiums from the issuer.

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

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

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

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AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

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

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

For structured finance transactions involving special purpose entities, we further evaluate the priority of premiums paid to Ambac within the contractual waterfall, as required by bond indentures.

Ambac has a formal quarterly credit impairment review process for premium receivables.

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

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Refer to Note 7.

Financial Guarantee Insurance Contracts for further credit impairment disclosures.

Insurance Contracts for further credit impairment disclosures.

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

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For premiums paid to reinsurers on an installment basis, Ambac records the present value of future ceding commissions as an offset to ceded premiums payable, using the same assumptions noted above for installment premiums.

premium revenue.

Ambac has evaluated the provisions in policies issued on these obligations and determined those insurance policies have not been legally extinguished.

For policies with refunding securities, premium revenue recognition is not impacted as the escrowed maturity date is the same as the previous legal maturity date.

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

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

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AMBAC FINANCIAL GROUP, INC.

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Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Specialty P&C:

Gross written premiums on Everspan insurance policies are recorded at the inception of the policy and can be received on an upfront basis or an installment basis.

Ceded premiums written are based on contractual terms applied against related gross written premiums.

Premiums, net of reinsurance, are recognized as revenue on a daily pro-rata basis over the term of the insured risk.

Unearned premiums represents the portion of gross premiums written that relate to unexpired risk.

Deferred ceded premium represents the portion of ceded premiums written that relate to unexpired risk.

Premium receivables represent balances currently due and amounts not yet due from policyholders, managing general agents or producers issuing insurance policies on Everspan's behalf.

Premium receivables are reported net of an allowance for expected lifetime credit losses.

The allowance is based upon Everspan's ongoing review of amounts outstanding, including delinquencies and write-offs, and other relevant factors.

Credit risk is partially mitigated by the managing general agent's ability to cancel the policy on behalf of Everspan if the policyholder does not pay the premium, thereby reducing the related policy's premium written and Everspan's premium receivable.

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

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

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

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

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

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Derivative Contracts

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

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

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

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

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

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Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

investment portfolios.

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

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

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

Ambac tests goodwill for impairment as of October 1st of each year.

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

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

Management also has the option to bypass the qualitative evaluation and proceed directly to the quantitative evaluation.

The quantitative test compares the estimated fair

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Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

value of the reporting unit with its carrying value (including goodwill and identifiable intangible assets).

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

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

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

There have been no accumulated impairment losses since goodwill was established.

Intangible Assets

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

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

Acquired intangible assets:

The initial insurance intangible asset was assigned to groups of insurance and reinsurance contracts with similar characteristics and has been amortized using a level-yield method based on par exposure of the related groups.

Finite-lived intangibles:

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

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

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

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

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

The carrying amount of the intangible asset is not recoverable if it exceeds the projected undiscounted cash flows expected to result from the use and eventual disposal of the asset or asset group.

If deemed unrecoverable, an impairment loss is recognized for the excess carrying amount over the fair value.

There have been no accumulated impairment losses since these finite-lived intangible assets were established.

Indefinite-lived intangibles

Ambac acquired $ 9 of identifiable intangible assets attributable to its acquisition of Providence Washington Insurance Company, which was accounted for as an asset acquisition.

The intangible assets relate to insurance licenses which have indefinite lives and therefore are not amortized.

The useful lives are re-evaluated each period to determine whether facts and circumstances continue to support an indefinite life.

The Company tests indefinite-lived acquired intangible assets for impairment annually or more frequently if circumstances indicate a possible impairment.

Ambac tests indefinite-lived intangibles for impairment as of October 1st of each year.

If, after assessing qualitative factors, management believes it is more likely than not that the intangible assets are impaired, a quantitative impairment evaluation is performed.

Management also has the option to bypass the qualitative evaluation and

proceed directly to the quantitative evaluation.

The quantitative test compares the estimated fair value of the intangible asset with its carrying value.

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

If the asset’s estimated fair value exceeds its carrying value, the intangible asset is not impaired.

There have been no accumulated impairment losses since these indefinite-lived intangible assets were established.

Restricted Cash

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

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

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

Fiduciary Assets and Liabilities:

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

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

In Xchange's capacity as an MGU, it collects premiums from insureds and remits the premiums to the respective insurance carriers, net of fees to other parties, including its commissions.

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

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

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

Restricted cash for net uncollected premiums and claims and the related fiduciary liabilities were $ 5 and $ 4 at December 31, 2021 and 2020, respectively.

Loss and Loss Expenses

The loss and loss expense reserve (“loss reserve”) policy relates only to Ambac’s non-derivative insurance business for insurance policies issued to beneficiaries, including VIEs, for which we do not consolidate the VIE.

Losses and loss expenses are based upon estimates of the ultimate aggregate losses inherent in the non-derivative financial guarantee portfolio as of the reporting date.

Financial Guarantee:

The loss and loss expense reserve (“loss reserve”) policy relates only to Ambac’s non-derivative financial guarantee insurance business for insurance policies issued to beneficiaries, including VIEs, for which we do not consolidate the VIE.

Losses and loss expenses are based upon estimates of the ultimate aggregate losses inherent in the insured portfolio as of the reporting date.

The policy for derivative contracts is discussed in the “Derivative Contracts” section above.

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

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.

Ambac does not estimate recoveries for litigations where its sole claim is for fraudulent inducement, since any remedies under such claims

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Notes to Consolidated Financial Statements

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would be non-contractual.

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

• Net claim cash outflow policies represent contracts where the PV of expected cash outflows are greater than the PV of expected recovery cash inflows.

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

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

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

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

The servicer of the underlying collateral of an insured securitization transaction is a consideration in assessing credit quality because the servicer’s performance can directly impact the performance of the related issue.

For example, a servicer of a mortgage-backed securitization that does not remain current in its collection efforts could cause an increase in the delinquency and the potential for default of the underlying obligation.

Similarly, loss severities increase when a servicer does not effectively handle loss mitigation activities such as (i) the advancing of delinquent principal and interest and of default related expenses which are deemed to be recoverable by the servicer, (ii) pursuit of loan charge-offs which maximize cash flows from the mortgage loan pool and (iii) foreclosure and real estate owned disposition strategies and timelines.

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

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• Survey List - credits that may lack information or demonstrate a weakness but further deterioration is not expected.

• Watch List - credits that demonstrate the potential for future material adverse development due to such factors as long-term uncertainty about a particular sector, a certain structural element or concern related to the issuer or transaction or the overall financial and economic sustainability.

• Watch List - credits that demonstrate the potential for future material adverse development due to such factors as long-term uncertainty about a particular sector, a certain

structural element or concern related to the issuer or transaction or the overall financial and economic sustainability.

CLASS IA – “Potential Problem with Risks to be Dimensioned” - Credits that are fully current and monetary default or claims-payment are not anticipated.

The payor’s or issuer’s financial condition may be deteriorating or the credits may lack adequate collateral.

The issuer’s financial condition may be deteriorating or the credits may lack adequate collateral.

A structured financing may also evidence weakness in its fundamental credit quality as evidenced by its under-performance relative to its modeled projections at underwriting, issues related to the servicer’s ability to perform or questions about the structural integrity of the transaction.

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Further investigation is required to dimension and correct any deficiencies.

A complete legal review of documents

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may be required.

A complete legal review of documents may be required.

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

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The population of credits evaluated in Ambac’s loss reserve process are:

(i) all adversely classified credits (Class IA through V) and ii) non-adversely classified credits which had an internal Ambac rating downgrade since the transaction’s inception.

(i) all adversely classified credits and ii) non-adversely classified credits which had an internal Ambac rating downgrade since the transaction’s inception.

One of two approaches is then utilized to estimate losses to ultimately determine if a loss reserve should be established.

• The first approach is a statistical expected loss approach, which considers the likelihood of all possible outcomes.

| Ambac Financial Group, Inc.

77 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

The “base case” statistical expected loss is the product of:

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In this approach, a probability-weighted expected loss estimate is developed based on assigning probabilities to multiple claim payment scenarios and applying an appropriate discount factor.

Additionally, we assign a probability to the issuer’s ability to refinance an insured issue, Ambac’s ability to execute a potential settlement (i.e., commutation) of the insurance policy, including the impact on future installment premiums, and/or other restructuring scenarios.

Additionally, we consider the issuer’s ability to refinance an insured issue, Ambac’s ability to execute a potential settlement (i.e., commutation) of the insurance policy, including the impact on future installment premiums, and/or other restructuring possibilities in our scenarios.

The commutation scenarios and the related probabilities of occurrence vary by transaction, depending on our view of the likelihood of negotiating such a transaction with issuers and/or investors.

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

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

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

Ambac establishes loss expense reserves based on our estimate of expected net cash outflows for loss expenses, such as legal and consulting costs.

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RMBS Expected Loss Estimate

Ambac insures RMBS transactions collateralized by first-lien mortgages.

Ambac has also insured RMBS transactions collateralized predominantly by second-lien mortgage loans such as closed-end seconds and home equity lines of credit.

A second-lien mortgage loan is a type of loan in which the borrower uses the equity in their home as collateral and the second-lien loan is subordinate to the first-lien loan outstanding on the home.

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

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

| Ambac Financial Group, Inc.

82 2020 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

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

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

Ambac insures RMBS transactions collateralized by (i) first-lien mortgages;

and (ii) second-lien mortgage loans such as closed-end seconds and home equity lines of credit.

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

Ambac primarily utilizes a cash flow model (“RMBS cash flow model”) to develop estimates of projected losses for both our first and second lien transactions.

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(i) the transaction’s underlying loans' characteristics and status, (ii) projected home price appreciation (“HPA”) and (iii) projected interest rates.

Depending in the amount of collateral information available for each transaction, we project such performance either at the loan-level or the deal-level.

Depending on the amount of collateral information available for each transaction, we project such performance either at the loan-level or the deal-level.

In the absence of specific loan-level information, the deal-level approach evaluates a loan pool as if it were a single loan, selecting certain aggregated deal-level characteristics to then perform a series of statistical analyses.

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On a monthly basis, we compare monthly claims submitted against the trustees’ reports, waterfall projections and our understanding of the transactions’ structures to identify and resolve discrepancies.

We also review the vendor’s published waterfall revisions to identify significant discrepancies.

Resolving discrepancies is challenging and may take place over an extended period of time.

Moreover, transaction documents are subject to interpretation, and our interpretation or that of the vendor and as reflected in our loss reserves may prove to be incorrect and/or not consistent with trustees directing cash flows in the future.

In some cases, we may utilize an alternative waterfall structure when our legal and commercial analysis of the transaction’s payment structure differs from the vendor’s waterfall structure.

In our experience, market performance and model characteristics change and therefore need to be updated and reflected in our models through time.

As such, we conduct regular reviews of current models, alternative models and the overall approach to loss estimation.

RMBS Representation and Warranty Subrogation Recoveries

Ambac records, as a component of its loss reserve estimate, subrogation recoveries related to securitized loans in RMBS transactions that breached certain representations and warranties described herein.

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

In such cases, the sponsor of the transaction is contractually obligated to repurchase, cure or substitute collateral for any loan that breaches the representations or warranties.

Factors which Ambac believes to be indicative of poor performance include (i) high levels of early payment defaults, (ii) significant numbers of loan liquidations or charge-offs and resulting high levels of losses and (iii) rapid elimination of credit protections inherent in the transactions’ structures.

With respect to item (ii), “loan liquidations” refers to loans for which the servicer has liquidated the related collateral and the securitization has realized losses on the loan;

“charge-offs” refers to loans which have been written off as uncollectible by the servicer, generating no recoveries to the securitization, and may also refer to the unrecovered balance of liquidated loans.

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

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

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

Specifically, the repurchase price is paid by the sponsor to the securitization trust which holds the loan.

The cash becomes an asset of the trust, replacing the loan that was repurchased by the sponsor.

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

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

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

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

| Ambac Financial Group, Inc.

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(Dollar Amounts in Millions, Except Share Amounts)

In our experience, market performance and model characteristics change and therefore need to be updated and reflected in our models through time.

As such, we conduct regular reviews of current models, alternative models and the overall approach to loss estimation.

RMBS Representation and Warranty Subrogation Recoveries

Generally, the sponsor of an RMBS transaction provided R&W with respect to the securitized loans, including R&W with respect to loan characteristics, the absence of borrower misrepresentations in the underlying loans and other misconduct in the origination process and attesting to the compliance of loans with the applicable underwriting guidelines.

In such cases, the sponsor of the transaction is obligated, in accordance with the underlying contract, to repurchase, cure or substitute collateral for any loan that breaches the R&W.

Ambac or its counsel engaged consultants with significant mortgage underwriting experience to review the underwriting documentation for mortgage loans underlying certain insured RMBS transactions with significant collateral losses, resulting in significant claims payments by Ambac, and for which Ambac believes it has enforceable contractual rights under the relevant transaction documents against the counterparty and the counterparty has the financial ability to honor its contractual repurchase obligations.

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

In certain cases the loans were repurchased by a sponsor.

In such cases the sponsor paid the "repurchase price" to the securitization trust which holds the loan.

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

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

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

Ambac’s approach to resolving these disputes has included negotiating with individual sponsors at the transaction level and in some cases at the individual loan level and has resulted in the repurchase of some loans.

Ambac has initiated and will continue to pursue lawsuits seeking compliance with the repurchase obligations in the securitization documents.

Ambac has performed the above-mentioned, detailed examinations on a variety of second-lien and first-lien transactions that have experienced exceptionally poor performance.

However, the loan file examinations and related estimated recoveries we have reviewed and recorded to date have been limited to only those transactions whose sponsors (or their successors) are subsidiaries of large financial institutions, all of which carry an investment grade rating from at least one nationally recognized rating agency, or are otherwise deemed to have the financial wherewithal to live up to their repurchase obligations.

Ambac has initiated and continues to prosecute lawsuits seeking compliance with the repurchase obligations in the securitization documents.

Ambac has performed the above-mentioned, detailed examinations on a variety of transactions that have experienced exceptionally poor performance.

financial institutions, all of which carry an investment grade rating from at least one nationally recognized rating agency, or are otherwise deemed to have the financial wherewithal to live up to their repurchase obligations.

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

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

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

Certain successor financial institutions have made significant payments to certain claimants to settle breaches of R&W perpetrated by sponsors that have been acquired by such financial institutions.

For example, Ambac received a significant payment in 2016 from JP Morgan to settle RMBS-related litigation.

As a result of these factors, we do not make significant adjustments to our estimated subrogation recoveries with respect to the credit risk of these sponsors or their successors.

Our ability to realize RMBS R&W subrogation recoveries is subject to significant uncertainty, including risks inherent in litigation;

Our ability to realize RMBS R&W subrogation recoveries is subject to significant uncertainty, including risks inherent in litigation, including 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);

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

Failure to realize RMBS R&W subrogation recoveries for any reason or the realization of RMBS R&W subrogation recoveries materially below the amount recorded on Ambac's consolidated balance sheet would have a material adverse effect on our results of operations and financial condition and may result in adverse consequences such as impairing the ability of AAC to honor its financial obligations;

the initiation of rehabilitation proceedings against AAC;

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

eliminating or reducing the likelihood of AAC delivering value to Ambac, through dividends or otherwise;

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

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Multiple probability-weighted scenarios are developed by applying various realization factors to the estimated repurchase obligation.

The realization factors in these scenarios reflect Ambac’s own assumptions about the likelihood of outcomes based on all the information available to it including, but not limited to, (i) discussions with external legal counsel and their views on ultimate settlement and/or litigation outcomes, (ii) assessment of the strength of the specific case and (iii) experience in settling similar claims.

| Ambac Financial Group, Inc.

79 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

views on ultimate settlement and/or litigation outcomes;

(ii) assessment of the strength of the specific case;

(iii) changes in law or developments in RMBS litigation cases that impact our estimated recoveries;

and (iv) experience in settling similar claims.

The probability weightings are developed based on the unique facts and circumstances for each transaction.

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The calculation of loss reserves for our student loan portfolio involves evaluating numerous factors that can impact ultimate losses.

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

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

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

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

Key assumptions that will impact ultimate losses include, but are not limited to, the following:

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operating risks associated with the issuer, servicers, special servicers, and administrators;

investor appetite for tendering or commuting insured obligations and;

as applicable, Ambac’s ability and willingness to commute policies.

investor appetite for tendering or commuting insured obligations;

and as applicable, Ambac’s ability and willingness to commute policies.

In addition, we consider in our student loan loss projections the potential impact, if any, of proposed or final regulatory actions or orders, including by the Consumer Financial Protection Bureau ("CFPB"), affecting our insured transactions.

In evaluating our student loan portfolio, our losses are projected using a cash flow modeling approach.

In order to project collateral performance under the cash flow approach, we use a default projection tool that constructs lifetime cohort default curves based on loan and deal-level historical performance data.

To determine ultimate losses on the transactions, the cohort default curves are used to extrapolate future default behavior.

Additionally, a regression-based model is used to estimate recoveries on defaulted loans.

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

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

| Ambac Financial Group, Inc.

84 2020 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

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

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

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

Specialty P&C:

Loss and loss expense reserves for Everspan represent management's estimate of the ultimate liability for unpaid losses and loss expenses for claims that have been reported and claims that have been incurred but not yet reported ("IBNR") as of the balance sheet date.

The reserves are estimated based upon experience and using a variety of actuarial methods.

These estimates are continually reviewed and are subject to the impact of future changes in factors such as claim severity and frequency, underwriting and claims practices, changes in social and economic conditions including the impact of inflation, legal and judicial developments, medical cost trends and upward trends in damage awards.

The ultimate amount for loss and loss expenses may be in excess, or less than, the amounts recorded on our financial statements.

Adjustments will be reflected as part of the net increase or reduction in loss and loss expense reserves in the periods in which they become known.

Ceded Reinsurance

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

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

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

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

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

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

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

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

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

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

Ambac has reinsurance in place pursuant to quota share, surplus share treaty and facultative reinsurance agreements.

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

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

To minimize its credit exposure to losses from reinsurer insolvencies, Ambac (i) is entitled to receive collateral from certain reinsurance counterparties pursuant to the terms of the relevant reinsurance contracts and (ii) has certain cancellation rights that can be exercised by Ambac in the event of rating agency downgrades of a reinsurer (among other events and circumstances).

For those reinsurance counterparties that do not currently post collateral, Ambac’s reinsurers are well capitalized, highly rated, authorized capacity providers.

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

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

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

Management utilizes a PD/LGD approach, which is applied to the net unsecured reinsurance recoverable amount.

Refer to Note 7.

Financial Guarantee Insurance Contracts for further credit impairment disclosures.

Insurance Contracts for credit impairment disclosures.

Long-Term Debt

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

To the extent Ambac repurchases or redeems its long-

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

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

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

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

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

| Ambac Financial Group, Inc.

80 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

the total change in fair value of financial liabilities caused by changes in the instrument-specific credit risk which is presented separately in Other comprehensive income (loss).

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

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

The redeemable noncontrolling interest is remeasured each period as the greater of:

the carrying value under ASC 810, which attributes a portion of consolidated net income (loss) to the redeemable noncontrolling interest, and

the redemption value of the put option under ASC 480 as if it were exercisable at the end of the reporting period.

Any increase (decrease) in the carrying amount of the redeemable noncontrolling interest as a result of adjusting to the redemption value of the put option is recorded as an offset to retained earnings.

The impact of such differences on earnings per share are presented in Note 15.

Net Income Per Share.

Following is a rollforward of redeemable noncontrolling interest.

Years ended December 31, 2021 2020

Beginning balance $ 7 $ —

Fair value of redeemable noncontrolling interest at acquisition date — 7

Net income attributable to redeemable noncontrolling interest (ASC 810) ( 1 ) —

Adjustment to redemption value (ASC 480 ) 12 —

Ending Balance $ 18 $ 7

Revenue Recognition:

Revenues for the MGA/U business operations are recognized in accordance with the Revenue from Contracts with Customers Topic of the ASC.

The following steps are applied to recognize revenue:

identify the contract(s) with the customer, identify the performance obligations in the contract(s), determine the transaction price, allocate the transaction price to the performance obligations in the contract and recognize revenue when (or as) the entity satisfies a performance obligation.

A performance obligation is satisfied either at a point in time or over time depending on the nature of the product or service provided, and the specific terms of the contract with customers.

MGA/U performance obligations consist of placing policies with insurers and, for certain products, providing claims servicing.

Revenue from limited and short-term medical policies sold through affinity groups ("Affinity") are recognized up front as no further performance obligations exist after policy placement.

Revenue from employer stop loss policies ("ESL") is apportioned to policy placement and claims servicing based on the relative stand-alone selling price of the respective performance obligations with policy placement revenue recognized upfront while claims servicing revenue is recognized over the claim adjustment period.

Revenue consists of base and profit-sharing commissions.

Base commissions, associated with policy placement and claims servicing, are estimated by applying the contractual commission percentages to estimated gross premiums written.

Profit-sharing commissions represent variable consideration associated with policy placement only and are estimated based on expected loss ratios and the estimated gross premium for base commissions.

Base and profit-sharing commissions are estimated with a constraint applied such that a significant reversal of revenue in the future is not probable.

MGA/U revenue is reported in other income (expense) on the Consolidated Statement of Total Comprehensive Income.

Contract assets represent the Company's right to future consideration for services it has already transferred to the customer, which is subject to certain contingencies such as the achievement of loss ratios on underlying insurance policies.

Once the right to consideration becomes unconditional, it is reported as a receivable.

Contract liabilities represent the Company's obligation to transfer services for which it has already received consideration from the customer.

Contract assets and contract liabilities are reported as other assets and other liabilities, respectively, on the Consolidated Balance Sheet.

| Ambac Financial Group, Inc.

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(Dollar Amounts in Millions, Except Share Amounts)

The Company’s costs to fulfill contracts with its insurance company customers relate to certain commissions paid to independent agents for procuring policies.

As these costs relate to the Company’s policy placement performance obligation to its customers, they are expensed as incurred.

The Company does not incur costs related to obtaining customer contracts.

Employee Benefits

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

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

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

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

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

• Deferred stock units granted vest upon grant and will settle and convert to Ambac common stock annually over a two-year period ( 50 % on the first anniversary of the grant date and 50 % on the second anniversary of the grant date).

• Deferred stock units - vest upon grant and will settle and convert to Ambac common stock annually over a two-year

period ( 50 % on the first anniversary of the grant date and 50 % on the second anniversary of the grant date).

The fair value of these grants is recognized as compensation expense on the date of grant since no future service is required.

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

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

These awards have not been granted since 2019.

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

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

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

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Operating Leases

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

ASU 2018-10, Codification Improvements to Topic 842;

ASU 2018-11, Targeted Improvements;

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

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

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

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

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

Refer to Note 3.

Business Combination for further discussion of the acquisition.

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

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

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

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

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

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

The discount rate used to initially measure the ROU assets and lease liabilities reflects the estimated secured

| Ambac Financial Group, Inc.

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(Dollar Amounts in Millions, Except Share Amounts)

Total Comprehensive Income (Loss).

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

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

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

borrowing rate of the applicable Ambac subsidiary, which considers the rate of existing or recent debt obligations of the entity.

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

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Foreign currency transactions:

The impact of non-functional currency transactions and the remeasurement of non-functional currency assets and liabilities into the respective subsidiaries' functional currency (collectively "foreign currency transactions gains/(losses)") are $( 1 ), $ 12 and $( 7 ) for the years ended December 31, 2020, 2019 and 2018.

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

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

The impact of non-functional currency transactions and the remeasurement of non-functional currency assets and liabilities into the respective subsidiaries' functional currency (collectively "foreign currency transactions gains/(losses)") are $( 7 ), $( 1 ) and $ 12 for the years ended December 31, 2021, 2020 and 2019, respectively.

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

dollar and the Euro.

Commitments and Contingencies

The Company and its subsidiaries are defendants in or parties to actual, pending and threatened lawsuits and proceedings.

A liability is accrued for such contingencies when a loss is both probable and reasonably estimable.

If a loss is not "probable and reasonably estimable," but is reasonably possible, disclosure of the contingency and an estimate of the loss or range of loss is required if such an estimate can be determined.

management judgment is required to apply this guidance.

As a legal contingency develops, the Company, in conjunction with outside counsel, evaluates what level of accrual and/or disclosure is required under the guidance.

See the Litigation Against Ambac section of Note 19.

Commitments and Contingencies for additional information about our legal contingencies and related accounting evaluation.

Ambac files a consolidated U.S.

Federal income tax return with its subsidiaries.

Ambac UK files tax returns in both the United Kingdom and Italy (for its Milan branch).

Ambac and its subsidiaries also file separate or combined income tax returns in various states, local and foreign jurisdictions.

Current tax assets and liabilities are recognized for taxes refundable or payable for the current year.

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

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

As such, we incorporated the effects of the tax rate increase in our current and deferred tax evaluation for the years ended December 31, 2020 and 2021.

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

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Net Income Per Share

Basic net income per share is computed by dividing net income attributable to common stockholders by the weighted-average number of common shares outstanding and vested restricted stock units (together, "Basic Weighted Average Shares Outstanding").

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

Basic net income per share is computed by dividing net income attributable to common stockholders, including the adjustment to redemption value of the redeemable noncontrolling interest, by the weighted-average number of common shares outstanding and vested restricted stock units (together, "Basic Weighted Average Shares Outstanding").

Diluted net income per share is computed by dividing net income attributable to common stockholders, including the adjustment to redemption value of the redeemable controlling interest, by the Basic Weighted-Average Shares Outstanding plus all potential dilutive common shares outstanding during the period.

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

Reclassifications and Rounding

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

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

| Ambac Financial Group, Inc.

10 unchanged sentences

Non-cash investing and financing activities:

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

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

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

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

Decrease in long-term debt as a result of surplus notes exchanges 71 — —

2021 2020 2019

4 unchanged sentences

Total cash, cash equivalents, and restricted cash shown on the Consolidated Statements of Cash Flows 23 35 81

Reclassifications and Rounding

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

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

Adopted Accounting Standards

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

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

Basis of Presentation and Significant Accounting Policies;

Financial Guarantee Insurance Contracts;

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

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

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

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

Fair Value Measurement Disclosures

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

The ASU modified various disclosure requirements on fair value measurements.

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

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

• Modifications:

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

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

• Additions :

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

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

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

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

Refer to Note 10.

Fair Value Measurements for further disclosures.

VIE Related Party Guidance

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

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

| Ambac Financial Group, Inc.

88 2020 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

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

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

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

Cloud Computing Arrangement Service Contracts

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

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

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

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

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

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

Defined Benefit and Other Postretirement Plans Disclosures

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

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

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

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

Effective January 1, 2021, the Company adopted the following accounting standards:

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 did not have a consequential impact on Ambac's financial statements.

Future Application of Accounting Standards:

4 unchanged sentences

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

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

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

The ASU can be applied prospectively as of the beginning of the interim period

that includes or is subsequent to March 12, 2020 or any date thereafter, but does not apply to contract modifications and other transactions entered into or evaluated after December 31, 2022.

In December 2021, the FASB voted to extend the sunset date to December 31, 2024 and expects to issue a formal proposal for public comment in the first quarter of 2022.

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

1 unchanged sentence

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

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

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

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

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

The acquisition was accounted for as a business combination and advances Ambac's strategy of expanding into the MGU and MGA sector.

All amounts recorded at the time of acquisition are final and no subsequent adjustments were made within the permitted measurement period as defined by ASC 805.

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

7 unchanged sentences

Total consideration $ 81

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

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

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

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

Goodwill was recorded to reflect the excess purchase consideration over net assets acquired and primarily consists of the future economic benefits that we expect to receive as a result

| Ambac Financial Group, Inc.

4 unchanged sentences

(Dollar Amounts in Millions, Except Share Amounts)

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

of the acquisition, driven by the value of Xchange's potential future distribution and carrier relationships, and synergies with other Ambac business operations.

Tax deductible goodwill totaled $ 65 , of which $ 4 was deducted in 2021.

The fair values assigned to tangible and identifiable intangible assets acquired and liabilities assumed were based on management’s estimates and assumptions at the time of acquisition.

The fair value of the redeemable non-controlling interest of $ 7 on the acquisition date was estimated based on the non-controlling interest’s respective share of Xchange's enterprise value, adjusted for the value of Ambac's call option to purchase, and the minority owners' put option to sell to Ambac, respectively, the remaining 20 % membership interests in Xchange.

Please refer to the Noncontrolling Interests section of Note 2.

9 unchanged sentences

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

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

The trade name intangible

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

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

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

Year Estimated

Thereafter 22

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

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

VARIABLE INTEREST ENTITIES

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

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

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

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

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

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

The transaction structures provide certain financial protection to Ambac.

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

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

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

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

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

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

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

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

• Assets and liabilities of FG VIEs that are consolidated are reported within Variable interest entity assets or Variable interest entity liabilities on the Consolidated Balance Sheets.

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

Ambac has elected the fair

| Ambac Financial Group, Inc.

90 2020 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

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

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

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

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

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

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

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

(i) the fair value of the consideration paid, the fair value of any non-controlling interests and the reported amount of any previously held interests and (ii) the net amount, as measured on a fair value basis, of the assets and liabilities consolidated.

Upon deconsolidation of a FG VIE, Ambac recognizes a gain or loss for the difference between:

(i) the fair value of any consideration received, the fair value of any retained non-controlling investment in the VIE and the carrying amount of any non-controlling interest in the VIE and (ii) the carrying amount of the VIE’s assets and liabilities.

Gains or losses from consolidation and deconsolidation that are reported in earnings are reported within Income (loss) on variable interest entities on the Consolidated Statements of Total Comprehensive Income (Loss).

• The impact of consolidating such FG VIEs on Ambac’s balance sheet is the elimination of transactions between the consolidated FG VIEs and Ambac’s operating subsidiaries and the inclusion of the FG VIE’s third party assets and liabilities.

For a financial guarantee insurance policy issued to a consolidated VIE, Ambac does not reflect the financial guarantee insurance policy in accordance with the related insurance accounting rules under the Financial Services — Insurance Topic of the ASC.

Consequently, upon consolidation, Ambac eliminates the insurance assets and liabilities associated with the policy from the Consolidated Balance Sheets.

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

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

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

FG VIEs' liabilities (and in some cases assets) that are insured by the Company are with recourse, because the Company guarantees the payment of principal and interest in the event the issuer defaults.

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

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

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

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

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

| Ambac Financial Group, Inc.

91 2020 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

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

December 31, 2020 2019

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

Fixed maturity securities, at fair value:

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

Municipal obligations, available-for-sale (1)

— 139 139 — 164 164

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

Restricted cash 1 1 2 1 1 2

Loans, at fair value (2)

2,998 — 2,998 3,108 — 3,108

Derivative assets 41 — 41 52 — 52

Other assets — 2 2 1 2 3

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

Accrued interest payable $ — $ — $ — $ 1 $ — $ 1

Long-term debt:

Long-term debt, at fair value (3)

4,324 — 4,324 4,351 — 4,351

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

Total long-term debt 4,324 169 4,493 4,351 203 4,554

Derivative liabilities 1,835 — 1,835 1,657 — 1,657

Total FG VIE liabilities $ 6,159 $ 169 $ 6,328 $ 6,009 $ 203 $ 6,212

Number of FG VIEs consolidated 5 1 6 6 1 7

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

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

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

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

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

Year ended December 31, 2020 2019 2018

Net change in fair value of VIE assets and liabilities reported under the fair value option $ ( 1 ) $ 13 $ 3

Credit risk changes of fair value option long-term debt reported through other comprehensive income (loss) ( 1 ) — ( 1 )

Net change in fair value of VIE assets and liabilities reported in earnings ( 3 ) 14 2

Investment income on available-for-sale securities 7 10 —

Net realized investment gains (losses) on available-for-sale securities 8 13 —

Interest expense on long-term debt carried at par less unamortized cost ( 6 ) ( 11 ) —

Other expenses — ( 1 ) —

Gain (loss) from consolidating FG VIEs — 15 —

Gain (loss) from de-consolidating FG VIEs — ( 2 ) 2

Income (loss) on variable interest entities $ 5 $ 38 $ 3

As further discussed in Note 8.

Financial Guarantee Insurance Contracts , on February 12, 2019, in connection with the COFINA POA, the COFINA Class 2 Trust was established.

Ambac was required to consolidate the COFINA Class 2 Trust, which resulted in a gain of $ 15 .

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

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

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

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

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

As of December 31, 2020, pro forma information related to the acquisition was not been presented as the impact was not material to the Company’s financial results.

Ambac’s non-VIE invested assets are primarily comprised of fixed maturity securities classified as available-for-sale and interests in pooled investment funds which are reported within Other investments on the Consolidated Balance Sheets.

Interests in pooled investment funds in the form of common stock or in-substance common stock are classified as trading securities, while limited partner interests in such funds are reported using the equity method.

Other investments also included equity interests held by AFG, including the equity Certificates in Corolla Trust, an unconsolidated trust created in connection with its sale of Segregated Account junior surplus notes on August 28, 2014.

As further described in Note 1.

Background and Business Description, on January 22, 2021, AAC completed the Corolla Note Exchange transaction whereby it acquired 100 % of the outstanding obligations and the Certificates of, and subsequently dissolved, the Corolla Trust.

Disclosures in this Note for the period ended December 31, 2021, are in accordance with the new CECL standard adopted January 1, 2020, which is more fully described in Note 2.

Basis of Presentation and Significant Accounting Policies .

To the extent disclosures for periods prior to January 1, 2020, made in accordance with prior GAAP rules differ from disclosures under the new CECL standard, such differences are explained below.

| Ambac Financial Group, Inc.

4 unchanged sentences

(Dollar Amounts in Millions, Except Share Amounts)

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

Carrying Value of Assets and Liabilities

Liabilities (3)

Net Derivative

(Liabilities) (4)

December 31, 2020:

Global structured finance:

Mortgage-backed—residential $ 4,308 $ 2,024 $ 580 $ —

Other consumer asset-backed 1,050 24 239 —

Other commercial asset-backed 24 3 1 —

Other 970 — 13 8

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

Global public finance 21,646 263 287 —

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

Fixed Maturity Securities

The amortized cost and estimated fair value of available-for-sale investments, excluding VIE investments, at December 31, 2021 and 2020 were as follows:

Cost Allowance for Credit Losses Gross

Losses Estimated

December 31, 2021

Global structured finance:

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

Other consumer asset-backed 1,373 31 216 —

Other commercial asset-backed 314 9 6 —

Other 1,107 7 18 8

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

Global public finance 23,341 287 321 —

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

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

Ambac’s maximum exposure to loss does not include the benefit of any financial instruments (such as reinsurance or hedge contracts) that Ambac may utilize to mitigate the risks associated with these variable interests.

(2) Insurance assets represent the amount included in “Premium receivables” and “Subrogation recoverable” for financial guarantee insurance contracts on Ambac’s Consolidated Balance Sheets.

(3) Insurance liabilities represent the amount included in “Loss and loss expense reserves” and “Unearned premiums” for financial guarantee insurance contracts on Ambac’s Consolidated Balance Sheets.

(4) Net derivative assets (liabilities) represent the fair value recognized on credit derivative contracts and interest rate swaps on Ambac’s Consolidated Balance Sheets.

Ambac Sponsored Non-consolidated VIEs

In 1994, Ambac established a VIE to provide certain financial guarantee clients with funding for their debt obligations.

This VIE was established as a separate legal entity, demonstrably distinct from Ambac and that Ambac, its affiliates or its agents could not unilaterally dissolve.

The permitted activities of this entity are contractually limited to purchasing assets from Ambac, issuing medium-term notes ("MTNs") to fund such purchases, executing derivative hedges and obtaining financial guarantee policies with respect to indebtedness incurred.

Ambac does not consolidate this entity because the exercise of related control rights in such policies remain subject to OCI approval under the Stipulation and Order, as discussed above.

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

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

At December 31, 2020 and 2019

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

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

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

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

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

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

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

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

| Ambac Financial Group, Inc.

93 2020 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

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

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

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

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

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

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

Other investments on the Consolidated Statements of Total Comprehensive Income

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

As further described in Note 1.

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

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

Ambac LSNI issued Secured Notes in connection with the Rehabilitation Exit Transactions.

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

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

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

Ambac's debt obligation to the VIE (the Ambac Note) had a carrying value of $ 1,641 and $ 1,763 at December 31, 2020 and 2019, respectively, and is reported within Long-term debt on the Consolidated Balance Sheets.

COMPREHENSIVE INCOME

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

Unrealized Gains

Available- for

Sale Securities (1)

Amortization of

Postretirement

Gain (Loss) on

Foreign Currency

Translation (1)

Changes of Fair

Liabilities (1) (2)

Year Ended December 31, 2020:

Beginning Balance

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

Other comprehensive income (loss)before reclassifications

36 ( 2 ) 23 — 58

Amounts reclassified from accumulated other comprehensive income (loss)

( 21 ) ( 1 ) — 1 ( 21 )

Net current period other comprehensive income (loss)

15 ( 3 ) 23 1 37

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

Year ended December 31, 2019:

Beginning Balance

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

Other comprehensive income before reclassifications

Fixed maturity securities:

Municipal obligations $ 315 $ — $ 28 $ 3 $ 340

Corporate obligations

612 — 10 9 613

Amounts reclassified from accumulated other comprehensive income

Foreign obligations 89 — — 2 87

government obligations 45 — 1 1 45

Residential mortgage-backed securities 182 — 70 — 252

Collateralized debt obligations 128 — — — 128

Other asset-backed securities (2)

234 — 32 — 265

Net current period other comprehensive income (loss)

1,605 — 141 16 1,730

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

(1) All amounts are net of tax and noncontrolling interest.

Amounts in parentheses indicate reductions to Accumulated Other Comprehensive Income.

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

| Ambac Financial Group, Inc.

94 2020 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

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

Details about Accumulated Other

Comprehensive Income Components Amount Reclassified from Accumulated

Other Comprehensive Income Affected Line Item in the

Consolidated Statement of

Total Comprehensive Income

Year Ended December 31,

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

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

1 4 Provision for income taxes

$ ( 21 ) $ ( 76 ) Net of tax and noncontrolling interest

Amortization of Postretirement Benefit

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

Actuarial gains (losses) — — Other income

( 1 ) ( 1 ) Total before tax

— — Provision for income taxes

$ ( 1 ) $ ( 1 ) Net of tax and noncontrolling interest

Credit Risk Changes of Fair Value Option Liabilities

$ 2 $ — Credit risk changes of fair value option liabilities

— — Provision for income taxes

1 — Net of tax and noncontrolling interest

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

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

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

NET INCOME PER SHARE

As of December 31, 2020, 45,809,139 shares of AFG's common stock (par value $ 0.01 ) and warrants entitling holders to acquire up to 4,877,749 shares of new common stock at an exercise price of $ 16.67 per share were outstanding.

For the three years ended December 31, 2020, 2019 and 2018, 34 , 0 and 194 warrants were exercised, respectively, resulting in an issuance of 8 , — and 194 shares of common stock, respectively.

On June 30, 2015, the Board of Directors of AFG authorized the establishment of a warrant repurchase program that permits the repurchase of up to $ 10 of warrants.

On November 3, 2016, the Board of Directors of AFG authorized a $ 10 increase to the warrant repurchase program.

For the years ended December 31, 2020 and 2019, AFG did not repurchase any warrants.

As of December 31, 2020, AFG had repurchased 985,331 warrants at a total cost of $ 8 (average cost of $ 8.21 per warrant).

The remaining aggregate authorization at December 31, 2020 was $ 12 .

In connection with the AMPS Exchange, AFG issued 824,307 of the repurchased warrants at a price of $ 9.72 per warrant on August 3, 2018.

Refer to Note 1.

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

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

Short-term 415 — — — 414

2,020 — 141 16 2,145

Basic weighted average shares outstanding

Fixed maturity securities pledged as collateral:

government obligations 15 — — — 15

Short-term 105 — — — 105

120 — — — 120

Effect of potential dilutive shares (1) :

Stock options

Restricted stock units

Performance stock units (2)

Diluted weighted average shares outstanding

Total available-for-sale investments $ 2,140 $ — $ 141 $ 16 $ 2,265

Cost Allowance for Credit Losses Gross

Losses Estimated

December 31, 2020

Fixed maturity securities:

Municipal obligations $ 321 — 37 — 358

Corporate obligations (1)

1,059 — 24 6 1,077

Anti-dilutive shares excluded from the above reconciliation

Stock options

Foreign obligations 97 — 1 — 98

government obligations 105 — 2 1 106

Residential mortgage-backed securities 256 — 46 — 302

Collateralized debt obligations 74 — — — 74

Other asset-backed securities (2)

263 — 40 — 303

2,175 — 149 8 2,317

Restricted stock units

Short-term 492 — — — 492

2,667 — 149 8 2,809

Performance stock units (2)

Fixed maturity securities pledged as collateral:

government obligations 15 — — — 15

Short-term 125 — — — 125

140 — — — 140

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

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

Vesting of these units is

Total available-for-sale investments 2,807 $ — $ 149 $ 8 $ 2,949

(1) Includes Ambac's holdings of the LSNI Secured Notes issued in connection with the Rehabilitation Exit Transactions.

(2) Consists primarily of Ambac's holdings of military housing and student loan securities.

| Ambac Financial Group, Inc.

4 unchanged sentences

(Dollar Amounts in Millions, Except Share Amounts)

contingent upon meeting certain performance metrics.

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

FINANCIAL GUARANTEES IN FORCE

Financial guarantees outstanding includes the exposures of policies that insure variable interest entities (“VIEs”) consolidated in accordance with ASC Topic 810, Consolidation.

Financial guarantees outstanding includes the exposure of policies that insure 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.

Financial guarantees outstanding exclude the exposures of policies that insure bonds which have been called, pre-refunded or refunded and excludes exposure of the policy that insures the notes issued by Ambac LSNI as defined in Note 1.

Background and Business Description .

The gross par amount of financial guarantees outstanding was $ 39,070 and $ 43,908 at December 31, 2020 and 2019, respectively.

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

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

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

Net Par Outstanding December 31, 2020 2019

Public Finance:

Housing revenue $ 5,855 $ 5,991

Lease and tax-backed revenue 4,179 5,102

General obligation 2,345 3,011

Transportation revenue 771 855

Higher education 747 885

Utility revenue 675 768

Other 925 1,041

Total Public Finance 15,497 17,653

Structured Finance:

Mortgage-backed and home equity 3,635 4,423

Investor-owned utilities 1,617 1,675

Student loan 626 769

Structured Insurance 311 395

Asset-backed and other 148 246

Total Structured Finance 6,337 7,508

International Finance:

Sovereign/sub-sovereign 5,270 5,264

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

Transportation 1,511 1,532

Asset-backed and other 1,374 1,625

Total International Finance 12,054 12,857

The amortized cost and estimated fair value of available-for-sale investments, excluding VIE investments, at December 31, 2021, by contractual maturity, were as follows:

Cost Estimated

Due in one year or less $ 565 $ 565

Due after one year through five years 457 457

Due after five years through ten years 406 411

Due after ten years 168 188

Residential mortgage-backed securities 182 252

Collateralized debt obligations 128 128

Other asset-backed securities 234 265

Total $ 2,140 $ 2,265

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

As of December 31, 2020 and 2019, the International Finance guaranteed portfolio by location of risk was as outlined in the table below:

Net Par Outstanding December 31, 2020 2019

United Kingdom $ 9,711 $ 10,593

Italy 803 767

Austria 707 674

Australia 420 382

France 277 303

Other international (1)

Total International Finance $ 12,054 $ 12,857

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

Gross financial guarantees in force (principal and interest) were $ 61,895 and $ 69,826 at December 31, 2020 and 2019, respectively.

Net financial guarantees in force (after giving effect to reinsurance) were $ 51,603 and $ 58,245 as of December 31, 2020 and 2019, respectively.

In the United States, Colorado, California and New York were the states with the highest aggregate net par amounts in force, accounting for 7.0 %, 6.2 % and 5.4 % of the total at December 31, 2020, respectively.

No other state accounted for more than 5 %.

The highest single insured risk represented 2.9 % of the aggregate net par amount guaranteed.

FINANCIAL GUARANTEE INSURANCE CONTRACTS

Amounts presented in this Note relate only to Ambac’s non-derivative insurance business for insurance policies issued to beneficiaries, including VIEs, for which we do not consolidate the VIE.

Net Premiums Earned

Below is the gross premium receivable roll-forward (direct and assumed contracts) for the affected periods:

2020 2019 2018

Beginning premium receivable $ 416 $ 495 $ 586

Adjustment to initially apply ASU 2016-13 ( 3 ) — —

Premium receipts ( 46 ) ( 48 ) ( 56 )

Adjustments for changes in expected and contractual cash flows (1)

Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay certain obligations with or without call or prepayment penalties.

Unrealized Losses on Fixed Maturity Securities

The following table shows gross unrealized losses and fair values of Ambac’s available-for-sale investments, excluding VIE investments, which at December 31, 2021, did not have an allowance for credit losses under the CECL standard.

This information is aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at December 31, 2021 and 2020:

Less Than 12 Months 12 Months or More Total

Fair Value Gross

Loss Fair Value Gross

December 31, 2021

Fixed maturity securities:

Municipal obligations $ 117 $ 3 $ 2 $ — $ 118 $ 3

Corporate obligations 363 8 17 1 380 9

Foreign obligations 75 2 3 — 78 2

government obligations 25 — 2 — 27 1

Residential mortgage-backed securities — — 1 — 2 —

Collateralized debt obligations 68 — 3 — 71 —

Other asset-backed securities 6 — — — 6 —

654 14 28 1 682 16

Accretion of premium receivable discount 9 11 15

Deconsolidation of certain VIEs — 3 —

Changes to allowance for credit losses ( 4 ) ( 2 ) 2

Other adjustments (including foreign exchange) 5 ( 6 ) ( 10 )

Ending premium receivable (2)

Short-term 114 — 13 — 128 —

768 14 41 1 810 16

Fixed maturity securities, pledged as collateral:

government obligations 15 — — — 15 —

Total collateralized investments 15 — — — 15 —

Total temporarily impaired securities $ 783 $ 14 $ 41 $ 1 $ 825 $ 16

| Ambac Financial Group, Inc.

4 unchanged sentences

(Dollar Amounts in Millions, Except Share Amounts)

(1) Adjustments for changes in expected and contractual cash flows primarily due to reductions in insured exposure as a result of early policy terminations and unscheduled principal paydowns.

(2) Premium receivable includes premiums to be received in foreign denominated currencies most notably in British Pounds and Euros.

At December 31, 2020, 2019 and 2018 premium receivables include British Pounds of $ 117 (£ 86 ), $ 129 (£ 97 ) and $ 131 (£ 103 ), respectively, and Euros of $ 19 (€ 16 ), $ 26 (€ 23 ) and $ 31 (€ 27 ), respectively.

The effect of reinsurance on premiums written and earned was as follows:

Direct Assumed Ceded (1)

Written $ ( 1 ) $ — $ ( 1 ) $ —

Earned 65 1 12 54

Written $ ( 28 ) $ — $ 31 $ ( 60 )

Earned 75 — 10 66

Written $ ( 24 ) $ — $ 17 $ ( 41 )

Earned 119 — 8 111

(1) Includes ceded premium activity related to the execution of new reinsurance transactions during 2020, 2019 and 2018.

Ambac’s accelerated premium revenue for retired obligations for the years ended December 31, 2020, 2019 and 2018, was $ 12 , $ 10 and $ 32 , respectively.

The following table summarizes net premiums earned by location of risk:

2020 2019 2018

United States $ 32 $ 55 $ 88

United Kingdom 24 17 19

Other international ( 2 ) ( 6 ) 5

Total $ 54 $ 66 $ 111

The table below summarizes the future gross undiscounted premiums to be collected and future premiums earned, net of reinsurance at December 31, 2020:

Future Premiums

Collected (1)

Earned Net of

Reinsurance (2)

Three months ended:

March 31, 2021 $ 12 $ 9

June 30, 2021 8 9

September 30, 2021 9 9

December 31, 2021 8 9

Twelve months ended:

December 31, 2022 36 33

December 31, 2023 34 31

December 31, 2024 33 29

December 31, 2025 31 27

Five years ended:

December 31, 2030 132 113

December 31, 2035 91 72

December 31, 2040 42 30

December 31, 2045 19 12

December 31, 2050 7 4

Less Than 12 Months 12 Months or More Total

Fair Value Gross

Loss Fair Value Gross

December 31, 2020

Total $ 462 $ 386

(1) Future premiums to be collected are undiscounted and are used to derive the discounted premium receivable asset recorded on Ambac's balance sheet.

(2) Future premiums to be earned, net of reinsurance relate to the unearned premiums liability and deferred ceded premium asset recorded on Ambac’s balance sheet.

The use of contractual lives for many bond types which do not have homogeneous pools of underlying collateral is required in the calculation of the premium receivable as further described in Note 2.

Basis of Presentation and Significant Accounting Policies .

This results in a different premium receivable balance than if expected lives were considered.

If installment paying policies are retired or prepay early, premiums reflected in the premium receivable asset and amounts reported in the above table for such policies may not be collected.

Future premiums to be earned also considers the use of contractual lives for many bond types which do not have homogeneous pools of underlying collateral, which may result in different unearned premium than if expected lives were considered.

If those bonds types are retired early, premium earnings may be negative in the period of call or refinancing.

Credit Impairment for Premium Receivables:

Management evaluates premium receivables for expected credit losses ("credit impairment") in accordance with the CECL standard adopted January 1, 2020, which is further described in Note 2.

Basis of Presentation and Significant Accounting Policies.

Management's evaluation of credit impairment under prior GAAP rules was not materially different.

Most credit impairment disclosures below were only made prospectively from the CECL adoption date as they were not required previously under GAAP.

| Ambac Financial Group, Inc.

97 2020 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

As further discussed in Note 2.

Basis of Presentation and Significant Accounting Policies , the key indicator management uses to assess the credit quality of premium receivables is

Ambac's internal risk classifications for the insured obligation determined by the Risk Management Group.

Below is the amortized cost basis of premium receivables by risk classification code and asset class as of December 31, 2020:

Surveillance Categories as of December 31, 2020

Type of Guaranteed Bond I IA II III IV Total

Public Finance:

Housing revenue $ 155 $ 13 $ — $ — $ — $ 168

Other 2 15 — — — 17

Total Public Finance 157 27 — — — 185

Structured Finance:

Mortgage-backed and home equity 3 — 1 3 15 22

Student loan 3 — 2 11 — 16

Structured insurance 14 — — — — 14

Other 7 — — — — 7

Total Structured Finance 27 — 3 14 15 59

International:

Sovereign/sub-sovereign 82 13 — 13 — 108

Investor-owned and public utilities 31 — — — — 31

Other 5 — — — — 5

Total International 118 13 — 13 — 144

Fixed maturity securities:

Municipal obligations $ 25 $ — $ 6 $ — $ 31 $ —

Corporate obligations 543 6 — — 543 6

Foreign obligations 3 — — — 3 —

government obligations 17 1 — — 17 1

Residential mortgage-backed securities 14 — — — 14 —

Collateralized debt obligations 27 — 15 — 42 —

Other asset-backed securities — — 4 — 4 —

629 7 25 — 654 8

(1) The underwriting origination dates for all policies included are greater than five years prior to the current reporting date.

Below is a rollforward of the premium receivable allowance for credit losses as of December 31, 2020:

Short-term 187 — — — 187 —

816 7 25 — 841 8

Fixed maturity securities, pledged as collateral:

government obligations — — — — — —

Total collateralized investments — — — — — —

Total securities $ 816 $ 7 $ 25 $ — $ 841 $ 8

Management has determined that the securities in the above table do not have credit impairment as of December 31, 2021 and 2020 based upon (i) no actual or expected principal and interest payment defaults on these securities;

(ii) analysis of the creditworthiness of the issuer and financial guarantor, as applicable, and (iii) for debt securities that are non-highly rated beneficial interests in securitized financial assets, analysis of whether there was an adverse change in projected cash flows.

Management's evaluation as of December 31, 2021, includes the expectation that all principal and interest payments on securities guaranteed by AAC or Ambac UK will be made timely and in full.

Ambac’s assessment about whether a security is credit impaired reflects management’s current judgment regarding facts and circumstances specific to the security and other factors.

If that judgment changes, Ambac may record a charge for credit impairment in future periods.

Net Investment Gains (Losses), including Impairments

The following table details amounts included in net investment gains (losses) and impairments included in earnings for the affected periods:

2021 2020 2019

Gross realized gains on securities $ 14 $ 38 $ 64

Gross realized losses on securities ( 2 ) ( 12 ) ( 5 )

Foreign exchange (losses) gains ( 5 ) ( 4 ) 22

Credit impairments — — —

Intent / requirement to sell impairments — — —

Net realized gains (losses) $ 7 $ 22 $ 81

The following table presents a roll-forward of Ambac’s cumulative credit losses on debt securities for which a portion of an other-than-temporary impairment was recognized in other comprehensive income under prior GAAP for the year ended December 31, 2019:

Year Ended December 31, 2019

Beginning balance (1)

Current period provision (2)

Write-offs of the allowance ( 2 )

Recoveries of previously written-off amounts —

Ending balance $ 17

(1) At December 31, 2019, $ 9 of premiums receivable were deemed uncollectible as determined under prior GAAP rules.

(2) The year ended December 31, 2020, includes $ 3 from the adoption of CECL.

At December 31, 2020, Ambac had past due premiums of $ 0 , of which $ 0 was over 120 days past due and has been included in the allowance for credit losses.

Balance, beginning of period

Reductions for credit impairments previously recognized on:

Securities that matured or were sold during the period ( 1 )

Balance, end of period

Ambac had zero allowance for credit losses at December 31, 2021 and 2020.

Ambac did not purchase any financial assets with credit deterioration for the years ended December 31, 2021 and 2020.

| Ambac Financial Group, Inc.

4 unchanged sentences

(Dollar Amounts in Millions, Except Share Amounts)

Loss and Loss Expense Reserves

A loss reserve is recorded on the balance sheet on a policy-by-policy basis as further described in Note 2.

Basis of Presentation and Significant Accounting Policies .

Below are the components of the Loss and loss expense reserves liability and the Subrogation recoverable asset at December 31, 2020 and 2019:

Present Value of Expected

Net Cash Flows Unearned

Revenue Gross Loss and

Balance Sheet Line Item Claims and

Loss Expenses Recoveries

December 31, 2020:

Loss and loss expense reserves $ 2,060 $ ( 229 ) $ ( 72 ) $ 1,759

Subrogation recoverable 100 ( 2,256 ) — ( 2,156 )

Totals $ 2,160 $ ( 2,486 ) $ ( 72 ) $ ( 397 )

Counterparty Collateral, Deposits with Regulators and Other Restrictions

Ambac routinely pledges and receives collateral related to certain transactions.

Securities held directly in Ambac’s investment portfolio with a fair value of $ 120 and $ 140 at December 31, 2021 and 2020, respectively, were pledged to derivative counterparties.

Ambac’s derivative counterparties have the right to re-pledge the investment securities and as such, these pledged securities are separately classified on the Consolidated Balance Sheets as “Fixed maturity securities pledged as collateral, at fair value” and "Short-term investments pledged as collateral, at fair value".

Refer to Note 9.

Derivative Instruments for further information on cash collateral.

There was no cash or securities received from other counterparties that were re-pledged by Ambac.

Securities carried at $ 17 and $ 8 at December 31, 2021 and 2020, respectively, were deposited by Ambac's insurance subsidiaries with governmental authorities or designated custodian banks as required by laws affecting insurance companies.

Invested assets

carried at $ 1 as December 31, 2021 were deposited as security in connection with a letter of credit issued for an office lease.

Securities with a fair value of $ — and $ 178 at December 31, 2021 and 2020, respectively, were pledged as collateral and as sources of funding to repay the LSNI Ambac Note.

AAC also pledged for the benefit of the holders of LSNI Secured Notes (other than AAC) the proceeds of interest payments and partial redemptions of the LSNI Secured Notes held by AAC.

The amount of such proceeds held by AAC was $ — and $ 9 at December 31, 2021 and 2020, respectively, and is included in Restricted cash on the Consolidated Balance Sheet.

As further described in Note 1.

Background and Business Description, on July 6, 2021, the LSNI Secured Notes were fully redeemed.

Securities with a fair value of $ 669 at December 31, 2021 were held by Ambac UK, the capital stock of which was pledged as collateral on the Sitka AAC Note.

Refer to Note 12.

Long-term Debt for further information about the Sitka AAC Note.

Guaranteed Securities

Ambac’s fixed maturity portfolio includes securities covered by guarantees issued by AAC and other financial guarantors (“insured securities”).

The published rating agency ratings on these securities reflect the higher of the financial strength rating of the financial guarantor or the rating of the underlying issuer.

Rating agencies do not always publish separate underlying ratings (those ratings excluding the insurance by the financial guarantor).

In the event these underlying ratings are not available from the rating agencies, Ambac will assign an internal rating.

The following table represents the fair value and weighted-average underlying rating of insured securities in Ambac's investment portfolio at December 31, 2021 and 2020, respectively:

Obligations Corporate

Obligations (2)

Securities Total Weighted

December 31, 2021:

Loss and loss expense reserves $ 1,835 $ ( 233 ) $ ( 54 ) $ 1,548

Subrogation recoverable 131 ( 2,160 ) — ( 2,029 )

Totals $ 1,966 $ ( 2,394 ) $ ( 54 ) $ ( 482 )

Below is the loss and loss expense reserve roll-forward, net of subrogation recoverable and reinsurance, for the affected periods.

Ambac Assurance Corporation $ 316 $ — $ 439 $ 754 B

National Public Finance Guarantee Corporation 2 — — 2 BBB-

Assured Guaranty Municipal Corporation 1 — — 1 A-

Total $ 318 $ — $ 439 $ 757 B

December 31, 2020:

Beginning gross loss and loss expense reserves

$ ( 482 ) $ ( 107 ) $ 4,114

Reinsurance recoverable

Beginning balance of net loss and loss expense reserves

( 508 ) ( 130 ) 4,073

Losses and loss expenses (benefit) incurred:

Prior years (1)

210 12 ( 228 )

225 13 ( 224 )

Loss and loss expenses (recovered) paid:

Prior years (1)

148 318 3,963

149 318 3,964

Foreign exchange effect

2 ( 1 ) ( 15 )

Ending net loss and loss expense reserves

( 430 ) ( 436 ) ( 130 )

Impact of VIE consolidation

Reinsurance recoverable (4)

Ending gross loss and loss expense reserves

( 397 ) ( 482 ) ( 107 )

(1) 2018 loss and loss expenses (recovered) paid includes the settlement of Deferred Amounts and Interest Accrued on Deferred Amounts in the amount of $ 3,000 and $ 857 , respectively in connection with the Rehabilitation Exit Transactions through a combination of cash, surplus notes and secured notes.

2018 loss and loss expenses incurred includes a $ 288 loss and loss expense benefit on these settled Deferred Amounts.

(2) Total losses and loss expenses (benefit) includes $( 11 ), $( 7 ) and $( 2 ) for the years ended December 31, 2020, 2019 and 2018, respectively, related to ceded reinsurance.

(3) Ambac records the impact of estimated recoveries related to securitized loans in RMBS transactions that breached certain representations and warranties within losses and loss expenses (benefit).

The losses and loss expense (benefit) incurred associated with changes in estimated representation and warranty recoveries for the year ended December 31, 2020, 2019 and 2018 was $( 23 ), $ 42 and $ 62 , respectively.

(4) Represents reinsurance recoverable on future loss and loss expenses.

Additionally, the Balance Sheet line "Reinsurance recoverable on paid and unpaid losses (net of allowance for credit losses of $ 0 at December 31, 2020)" includes reinsurance recoverables (payables) of $ 1 , $ 0 and $ 1 as of December 31, 2020, 2019 and 2018, respectively, related to previously presented loss and loss expenses and subrogation.

For 2020, the adverse development in prior years was primarily a result of deterioration in Public Finance credits, including the impact of lower discount rates, as discussed below in the section, " Puerto Rico ", partially offset by positive development in the RMBS portfolio, including the benefit of lower discount rates.

For 2019, the adverse development in prior years was primarily a result of deterioration in Public Finance credits, primarily Puerto Rico, partially offset by the benefit for (i) the Ballantyne Re plc ("Ballantyne") and Puerto Rico COFINA commutations, and (ii) positive development in the RMBS and Student Loan portfolios.

For 2018, the net positive development in prior years was primarily a result of the discount recorded on the Rehabilitation Exit Transactions partially offset by negative development in the Public Finance portfolio and interest accrued on Deferred Amounts prior to the Rehabilitation Exit Transactions.

| Ambac Financial Group, Inc.

99 2020 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

The tables below summarize information related to policies currently included in Ambac’s loss and loss expense reserves or subrogation recoverable at December 31, 2020 and 2019.

Gross par exposures 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 bond.

The weighted average risk-free rate used to discount loss reserves at December 31, 2020 and 2019 was 1.1 % and 2.1 %, respectively.

Surveillance Categories as of December 31, 2020

I IA II III IV V Total

Number of policies 40 25 15 15 132 5 232

Remaining weighted-average contract period (in years) (1)

10 18 8 16 14 7 14

Gross insured contractual payments outstanding:

Principal $ 842 $ 1,375 $ 595 $ 1,469 $ 3,246 $ 47 $ 7,573

Interest 279 1,011 484 215 1,427 26 3,443

Total $ 1,121 $ 2,386 $ 1,079 $ 1,685 $ 4,673 $ 72 $ 11,016

Gross undiscounted claim liability $ 3 $ 49 $ 40 $ 541 $ 1,690 $ 72 $ 2,395

Discount, gross claim liability — ( 2 ) ( 1 ) ( 85 ) ( 213 ) ( 3 ) ( 303 )

Gross claim liability before all subrogation and before reinsurance

$ 3 $ 47 $ 40 $ 456 $ 1,477 $ 69 $ 2,092

Gross RMBS subrogation (2)

$ — $ — $ — $ — $ ( 1,753 ) $ — $ ( 1,753 )

Discount, RMBS subrogation — — — — 3 — 3

Discounted RMBS subrogation, before reinsurance

— — — — ( 1,751 ) — ( 1,751 )

Gross other subrogation (3)

— — — ( 36 ) ( 706 ) ( 12 ) ( 755 )

Discount, other subrogation — — — 1 18 1 20

Discounted other subrogation, before reinsurance

— — — ( 35 ) ( 689 ) ( 11 ) ( 735 )

Gross claim liability, net of all subrogation and discounts, before reinsurance

$ 3 $ 47 $ 39 $ 421 $ ( 963 ) $ 58 $ ( 394 )

Unearned premium revenue $ ( 2 ) $ ( 16 ) $ ( 5 ) $ ( 17 ) $ ( 30 ) $ ( 1 ) $ ( 72 )

Loss expense reserves 1 2 1 5 59 — 68

Gross loss and loss expense reserves $ 2 $ 32 $ 35 $ 409 $ ( 933 ) $ 57 $ ( 397 )

Reinsurance recoverable reported on Balance Sheet (4)

$ — $ 6 $ 9 $ 24 $ ( 6 ) $ — $ 33

(1) Remaining weighted-average contract period is weighted based on projected gross claims over the lives of the respective policies.

(2) RMBS subrogation represents Ambac’s estimate of subrogation recoveries from RMBS transaction sponsors for representation and warranty ("R&W") breaches.

(3) Other subrogation represents subrogation related to excess spread and other contractual cash flows on public finance and structured finance transactions including RMBS.

(4) Reinsurance recoverable reported on Balance Sheet includes reinsurance recoverables of $ 33 related to future loss and loss expenses and $ 1 related to presented loss and loss expenses and subrogation.

Ambac Assurance Corporation $ 320 $ 465 $ 481 $ 1,266 CCC+

National Public Finance Guarantee Corporation 6 — — 6 BBB-

Assured Guaranty Municipal Corporation 1 — — 1 C

Total $ 327 $ 465 $ 481 $ 1,273 CCC+

(1) Ratings are based on the lower of Standard & Poor’s or Moody’s rating.

If unavailable, Ambac’s internal rating is used.

(2) Represents Ambac's holdings of LSNI Secured Notes issued in connection with the Rehabilitation Exit Transactions.

These secured notes were insured by AAC.

As further described in Note 1.

Background and Business Description, on July 6, 2021, the LSNI Secured Notes were fully redeemed.

Other Investments

Ambac's investment portfolio includes interests in various pooled investment funds.

Fair value and additional information about investments in pooled funds, by investment type, is summarized in the table below.

Except as noted in the table, fair value as reported is determined using net asset value ("NAV") as a practical expedient.

Redemption of certain funds valued using NAV may be subject to

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(Dollar Amounts in Millions, Except Share Amounts)

Surveillance Categories as of December 31, 2019

I IA II III IV V Total

Number of policies 34 18 11 16 139 3 221

Remaining weighted-average contract period (in years) (1)

8 21 9 17 14 3 15

Gross insured contractual payments outstanding:

Principal $ 668 $ 510 $ 277 $ 857 $ 3,819 $ 37 $ 6,168

Interest 340 507 128 366 1,678 11 3,029

Total $ 1,007 $ 1,016 $ 404 $ 1,223 $ 5,498 $ 48 $ 9,197

Gross undiscounted claim liability $ 2 $ 44 $ 21 $ 541 $ 1,778 $ 48 $ 2,434

Discount, gross claim liability — ( 5 ) ( 1 ) ( 152 ) ( 381 ) ( 2 ) ( 541 )

Gross claim liability before all subrogation and before reinsurance $ 2 $ 39 $ 20 $ 389 $ 1,397 $ 46 $ 1,893

Gross RMBS subrogation (2)

$ — $ — $ — $ — $ ( 1,777 ) $ — $ ( 1,777 )

Discount, RMBS subrogation — — — — 49 — 49

Discounted RMBS subrogation, before reinsurance

— — — — ( 1,727 ) — ( 1,727 )

Gross other subrogation (3)

— — — ( 41 ) ( 666 ) ( 13 ) ( 720 )

Discount, other subrogation — — — 4 47 3 53

Discounted other subrogation, before reinsurance

— — — ( 37 ) ( 620 ) ( 10 ) ( 666 )

Gross claim liability, net of all subrogation and discounts, before reinsurance

$ 2 $ 39 $ 20 $ 353 $ ( 950 ) $ 36 $ ( 501 )

Unearned premium revenue $ ( 1 ) $ ( 9 ) $ ( 1 ) $ ( 7 ) $ ( 35 ) $ — $ ( 54 )

Loss expense reserves 1 1 1 4 67 — 73

Gross loss and loss expense reserves $ 1 $ 30 $ 20 $ 349 $ ( 918 ) $ 36 $ ( 482 )

Reinsurance recoverable reported on Balance Sheet (4)

withdrawal limitations and/or redemption fees which vary with the timing and notification of withdrawal provided by the investor.

In addition to these investments, Ambac has unfunded commitments of $ 74 to private credit and private equity funds at December 31, 2021.

Class of Funds

2021 2020 Redemption Frequency Redemption Notice Period

Hedge funds (1)

$ 216 $ 196 quarterly or semi-annually 90 days

Investment grade floating rate income (2)

107 73 weekly 0 days

Equity market investments (3) (10)

98 73 daily or quarterly 0 - 90 days

Private credit (4)

88 65 quarterly if permitted 180 days if permitted

High yield and leveraged loans (5) (10)

78 78 daily 0 - 30 days

Private equity (6)

37 13 quarterly if permitted 90 days if permitted

Real estate properties (7)

33 16 quarterly 10 business days

Emerging markets debt (8) (10)

24 25 daily 0 days

Insurance-linked investments (9)

2 3 see footnote (9) see footnote (9)

Total equity investments in pooled funds $ 683 $ 543

(1) This class seeks to generate superior risk-adjusted returns through selective asset sourcing, active trading and hedging strategies across a range of asset types.

(2) This class of funds includes investments in high quality floating rate debt securities including ABS and corporate floating rate notes.

(3) This class of funds aim to achieve long-term growth through diversified exposure to global equity markets.

(4) This class aims to obtain high long-term returns primarily through credit and preferred equity investments with low liquidity and defined term.

(5) This class of funds includes investments in a range of instruments including high-yield bonds, leveraged loans, CLOs, ABS and floating rate notes to generate income and capital appreciation.

(6) This class seeks to generate long-term capital appreciation through investments in private equity, equity-related and other instruments.

(7) Investments consist of UK property to generate income and capital growth.

(8) This class seeks long-term income and growth through investments in the bonds of issuers in emerging markets.

(9) This class seeks to generate returns from insurance markets through investments in catastrophe bonds, life insurance and other insurance linked investments.

This investment is restricted in connection with the unwind of certain insurance linked exposures.

Ambac has redeemed its investment to the extent permitted by the fund.

(10) These categories include fair value amounts totaling $ 106 and $ 89 at December 31, 2021 and 2020, respectively, that are readily determinable and are priced through pricing vendors, including for High yield and leveraged loans products of $ — and $ 3 ;

for Equity market investments of $ 82 and $ 60 ;

for Emerging markets debt of $ 24 and $ 25 .

Ambac held preferred equity investments with a carrying value of $ 8 and $ — as of December 31, 2021 and 2020, respectively, that do not have readily determinable fair values and are carried at cost, less any impairments as permitted under the Investments — Equity Securities Topic of the ASC.

There were no impairments recorded on these investments or adjustments to fair value to reflect observable price changes in identical or similar investments from the same issuer during the periods presented.

Ambac held direct equity interests as of December 31, 2020, including in an unconsolidated trust created in connection with the 2014 sale of Segregated Account junior surplus notes, which was accounted for under the equity method.

Investment Income (Loss)

Net investment income (loss) was comprised of the following for the affected periods:

2021 2020 2019

(1) Remaining weighted-average contract period is weighted based on projected gross claims over the lives of the respective policies.

(2) RMBS subrogation represents Ambac's estimate of subrogation recoveries from RMBS transaction sponsors for R&W breaches.

(3) Other subrogation represents subrogation related to excess spread and other contractual cash flows on public finance and structured finance transactions, including RMBS.

(4) Reinsurance recoverable reported on Balance Sheet includes reinsurance recoverables of $ 26 related to future loss and loss expenses and $ 0 related to presented loss and loss expenses and subrogation.

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

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

volatility in the capital markets;

closure or severe curtailment of the operations and, hence, revenues, of many businesses and public and private enterprises to which we are directly or indirectly exposed, such as hotels, restaurants, sports and entertainment facilities, airports and other transportation facilities, and retail establishments, mostly due to social distancing guidelines, travel bans and restrictions, and business restrictions and shutdowns.

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

In the insured portfolio,

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

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

In the U.S., significant monetary policy actions, fiscal stimulus measures and other relief measures have helped to moderate the economic impact of COVID-19.

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

Congressional actions, such as the Coronavirus Aid, Relief and Economic Security ("CARES") Act, the Paycheck Protection

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AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Program And Health Care Enactment Act, the Families First Coronavirus Response Act, and, most recently, the 2021 Consolidated Appropriations Act, which, among other things, provides direct payments to households, support for small businesses, renter assistance and funding for transport, airlines, education and state and local governments.

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

Outside of the US, and in the United Kingdom and Italy in particular, where Ambac has insured portfolio exposure, various monetary policy, fiscal stimulus measures and other actions have helped to moderate the economic impact.

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

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

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

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

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

The Commonwealth of Puerto Rico and certain of its instrumentalities have defaulted and may continue to default on debt service payments, including payments owed on bonds insured by AAC.

AAC may be required to make significant amounts of policy payments over the next several years, the recoverability of which is subject to great uncertainty, which may lead to a material increase in permanent losses causing a material adverse impact on our results of operations and financial condition.

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

In the near term, the financial and economic outlook for Puerto Rico is dependent upon a still fragile infrastructure, heightening its vulnerability to additional weather events;

and the trajectory of recovery from the COVID-19 pandemic and related economic downturn.

The longer-term recovery of the Commonwealth economy and its essential infrastructure will likely be dependent on, among other factors, the management, usage and efficacy of federal resources.

Also important to Puerto Rico's economic growth, government reform and creditor outcomes is the Commonwealth Fiscal Plan, certified by the Financial Oversight and Management Board for Puerto Rico ("Oversight Board") on May 27, 2020.

Commonwealth Fiscal Plan purports to incorporate the impact of COVID-19 on the Commonwealth economy, and projects diminished growth, budget surplus, and debt capacity as compared to previous versions of the Commonwealth Fiscal Plan.

This is due to the Oversight Board’s projected impact of COVID-19 on the Puerto Rico economy and tax collections as well as related general uncertainty on the economic outlook.

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

However, as was the case with previous versions of the Commonwealth Fiscal Plan, the current version of the Commonwealth Fiscal Plan lacks a high degree of transparency regarding the underlying data, assumptions and rationales supporting those assumptions, making reconciliation and due diligence difficult.

As a result, it is difficult to predict the long-term capacity and willingness of the Puerto Rico government and its instrumentalities to pay debt service on bonded debt and how their debt burden and financial flexibility might affect AAC's claims development potential, risk profile and long-term financial strength.

According to a letter sent January 19, 2021, from the Oversight Board's Executive Director, Natalie Jaresko, to Governor Pedro Pierluisi and legislative leaders, the Oversight Board expects to certify an updated Commonwealth Fiscal Plan by April 23, 2021.

Substantial uncertainty exists with respect to the ultimate outcome for creditors in Puerto Rico, such as AAC, due to, among other matters, the Commonwealth Plan of Adjustment and changes that are anticipated to be made thereto to reflect the terms of the Second Amended PSA;

political uncertainty and leadership turnover;

legislation enacted by the Commonwealth and the federal government, including PROMESA;

and actions taken pursuant to such laws, including Title III filings.

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

As a result of litigation or other aspects of the restructuring processes, the differences among the credits insured by AAC may not be respected.

AAC has participated and may continue to participate in mediation related to potential debt restructurings.

Mediation may not be productive or may not resolve AAC's claims in a manner that avoids significant losses.

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

It is possible that certain restructuring process solutions, together with associated legislation, budgetary, and/or public policy proposals could be adopted and could further impair our exposures, causing losses that could have a material adverse impact on our results of operations and financial condition.

While our reserving scenarios account for a wide range of possible outcomes, reflecting the significant uncertainty

Fixed maturity securities $ 78 $ 103 $ 183

Short-term investments — 5 17

Investment expense ( 6 ) ( 6 ) ( 6 )

Securities available-for-sale and short-term 74 103 196

Other investments 66 19 32

Total net investment income (loss) $ 139 $ 122 $ 227

Net investment income (loss) from Other investments primarily represents changes in fair value on equity securities including certain pooled investment funds, and income from investment limited partnerships and other equity interests accounted for under the equity method.

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regarding future developments and outcomes, given our exposure to Puerto Rico and the economic, fiscal, legal and political uncertainties associated therewith as well as the residual effects emanating from the damage caused by hurricanes Maria and Irma in 2017, the earthquakes that began in late December 2019, and COVID-19 our loss reserves may ultimately prove to be insufficient to cover our losses, potentially having a material adverse effect on our results of operations and financial position, and may be subject to material volatility.

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

During the year ended December 31, 2020, Ambac had incurred losses associated with its Domestic Public Finance insured portfolio of $ 256 , which was primarily impacted by the continued uncertainty and volatility of the situation in Puerto Rico as well as a decline in the rate used to discount reserves.

While management believes its reserves are adequate to cover losses in its Public Finance insured portfolio, there can be no assurance that Ambac may not incur additional losses in the future, given the circumstances described herein.

Such additional losses may have a material adverse effect on Ambac’s results of operations and financial condition and may result in adverse consequences such as impairing the ability of AAC to honor its financial obligations;

the initiation of rehabilitation proceedings against AAC;

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

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

For public finance credits, including Puerto Rico, as well as other issuers, for which Ambac has an estimate of expected loss at December 31, 2020, the possible increase in loss reserves under stress or other adverse conditions and circumstances was estimated to be approximately $ 1,200 This possible increase in loss reserves under stress or other adverse conditions is very significant and if we were to experience such incremental losses, our stockholders’ equity as of December 31, 2020, would decrease from $ 1,140 to $( 60 ).

However, there can be no assurance that losses may not exceed such amount.

COFINA Debt Restructuring

On February 4, 2019, the COFINA Plan of Adjustment ("COFINA POA") was confirmed and the Commonwealth 9019 motion was approved by the U.S.

District Court for the District of Puerto Rico.

On February 12, 2019, the COFINA POA went effective.

Pursuant to the POA, all existing COFINA senior and subordinate bonds were discharged and exchanged for cash and new COFINA current interest and capital appreciation bonds ("new COFINA bonds").

The cash and new COFINA bonds allocated to COFINA senior bondholders equaled approximately 93 % (considering the new COFINA bonds at par) of such senior bondholders’ allowed claim, in the amount of the COFINA senior bond accreted value, as of, but not including, May 5, 2017 (the COFINA Title III Petition Date).

As a result of the COFINA POA, and subsequent commutations, amendments, and redemptions of obligations of the COFINA Class 2 Trust, AAC's net par outstanding was reduced to $ 80 as of December 31, 2020.

AAC's remaining policy obligation of $ 80 net par is an asset of the COFINA Class 2 Trust, which holds a ratable distribution of new COFINA bonds, the interest

and principal from which can be used to partially offset Ambac’s remaining insurance liability.

As further discussed in Note 4.

Variable Interest Entities , AAC consolidates the COFINA Class 2 Trust.

At this time, it is unclear what impact the COFINA restructuring will have, if any, on the prospective recoveries of AAC's other insured Puerto Rico instrumentalities.

Representation and Warranty Recoveries

Ambac records estimated RMBS R&W subrogation recoveries for breaches of R&W by sponsors of certain RMBS transactions.

For a discussion of the approach utilized to estimate RMBS R&W subrogation recoveries, see Note 2.

Basis of Presentation and Significant Accounting Policies .

Ambac has recorded RMBS R&W subrogation recoveries of $ 1,751 , ($ 1,725 net of reinsurance) and $ 1,727 , ($ 1,702 net of reinsurance) at December 31, 2020 and 2019, respectively.

Below is the rollforward of RMBS R&W subrogation for the affected periods:

Year ended December 31, 2020 2019 2018

Discounted RMBS subrogation recovery

(gross of reinsurance) at beginning of year

The portion of net unrealized gains (losses) related to securities classified as trading and equity securities, excluding those reported using the equity method, still held at the end of each period is as follows:

2021 2020 2019

All other changes (1)

Net gains (losses) recognized during the period on trading securities

$ 23 $ — $ 24

Discounted RMBS subrogation recovery (gross of reinsurance) at end of year

net gains (losses) recognized during the reporting period on trading securities sold during the period

Unrealized gains (losses) recognized during the reporting period on trading securities still held at the reporting date

$ 22 $ 18 $ 17

(1) All other changes which may impact RMBS R&W subrogation recoveries include changes in actual or projected collateral performance, changes in the creditworthiness of a sponsor and the projected timing of recoveries.

Ceded Reinsurance

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

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

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

AAC’s reinsurance assets, including deferred ceded premiums and reinsurance recoverables on losses amounted to $ 103 at December 31, 2020.

Credit exposure existed at December 31, 2020, with respect to reinsurance recoverables to the extent that any reinsurer may not be able to reimburse AAC under the terms of these reinsurance arrangements.

At December 31, 2020, there were ceded reinsurance balances payable of $ 27 offsetting this credit exposure.

To minimize its credit exposure to losses from reinsurer insolvencies, AAC (i) is entitled to receive collateral from its reinsurance counterparties in certain reinsurance contracts and (ii) has certain cancellation rights that can be exercised by AAC in the event of rating agency downgrades of a reinsurer (among other events and circumstances).

AAC held letters of credit and

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AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

collateral amounting to $ 117 from its reinsurers at December 31, 2020.

The following table represents the percentage ceded to reinsurers and unsecured reinsurance recoverable at December 31, 2020.

Reinsurers Percentage

Net Unsecured

Recoverable (1)

Assured Guaranty Re Ltd 46 % $ —

Build America Mutual Assurance Company (2)

Assured Guaranty Corporation 8 4

Sompo Japan Nipponkoa Insurance, Inc.

Total 100 % $ 34

(1) Represents reinsurance recoverables on paid and unpaid losses and deferred ceded premiums, net of ceded premium payables due to reinsurers, letters of credit, and collateral posted for the benefit of AAC.

(2) Build America Mutual Assurance Company has an S&P rating of AA.

Credit Impairment for Reinsurance Recoverables:

Management evaluates reinsurance recoverables for expected credit losses ("credit impairment") in accordance with the CECL standard adopted January 1, 2020, which is further described in Note 2.

Basis of Presentation and Significant Accounting Policies .

Management's evaluation of credit impairment under prior GAAP rules was not materially different.

Most credit impairment disclosures below were only made prospectively from the CECL adoption date as they were not required previously under GAAP.

The key indicator management uses to assess the credit quality of reinsurance recoverables is collateral posted by the reinsurers and independent rating agency credit ratings.

For the majority of reinsurance contracts where Ambac has recorded a recoverable, the fair value of collateral posted by the reinsurer to AAC exceeds AAC's reinsurance recoverable carrying value, net of ceded premiums payable.

AAC has credit exposure of $ 1 and has recorded an allowance for credit losses of $ 0 at December 31, 2020.

The calculation of the allowance excludes deferred ceded premiums as it is a non-monetary asset.

Insurance Intangible Asset

The insurance intangible amortization expense is included in the Consolidated Statements of Total Comprehensive Income (Loss) as shown below.

Year Ended December 31, 2020 2019 2018

Insurance amortization expense $ 57 $ 295 $ 107

The insurance intangible asset and accumulated amortization are included in the Consolidated Balance Sheets, as shown below.

December 31, 2020 2019

Gross carrying value of insurance intangible asset $ 1,281 $ 1,273

Accumulated amortization of insurance intangible asset 908 847

Net insurance intangible asset $ 373 $ 427

The estimated future amortization expense for the net insurance intangible asset is as follows:

Amortization expense (1) (2)

Thereafter $ 213

(1) The insurance intangible asset will be amortized using a level-yield method based on par exposure of the related financial guarantee insurance or reinsurance contracts as described in Note 2.

Basis of Presentation and Significant Accounting Policies.

Future amortization considers the use of contractual lives for many bond types which do not have homogeneous pools of underlying collateral.

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

If those bonds types are retired early, amortization expense may differ in the period of call or refinancing from the amounts provided in the table above.

(2) The weighted-average amortizations period is 7.5 years.

INSURANCE REGULATORY RESTRICTIONS

United States

AAC is domiciled in the State of Wisconsin and, as such, it is subject to the insurance laws and regulations of the State of Wisconsin (the “Wisconsin Insurance Laws”) and is regulated by the OCI.

Everspan Indemnity Insurance Company ("Everspan Indemnity") and its wholly owned subsidiary, Everspan Insurance Company ("Everspan Insurance" and, together with Everspan Indemnity, "Everspan" or the “Everspan Group”), are domiciled in Arizona and are subject to the insurance laws and regulations of Arizona (the “Arizona Insurance Laws” and together with the Wisconsin Insurance Laws, the “State Insurance Laws”).

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

In addition, both Ambac Assurance and Everspan Insurance are subject to the insurance laws and regulations of the other jurisdictions in which they are licensed.

Insurance laws and regulations applicable to insurers vary by jurisdiction, but the insurance laws and regulations applicable to our insurance carriers generally require them to maintain minimum standards of business conduct and solvency;

to meet certain financial tests;

and to file policy forms, premium rate schedules and certain reports with regulatory authorities, including information concerning capital structure, ownership, financial condition, corporate governance and enterprise risk.

Regulated insurance companies are also required to file quarterly and annual statutory financial statements in each jurisdiction in which they are licensed.

The level of supervisory authority that may be exercised by non-domiciliary insurance regulators varies by jurisdiction.

Generally, however, non-

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AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

domiciliary regulators are authorized to suspend or revoke the insurance license they issued and to impose restrictions on that license in the event that laws or regulations are breached by a regulated insurance company or in the event that continued or unrestricted licensing of the regulated insurance company constitutes a “hazardous condition” (or meets a similar standard) in the opinion of the regulator.

The domiciliary regulators of Ambac Assurance and Everspan, OCI and DIFI, respectively, have primary regulatory authority, including with respect to the initiation and administration of rehabilitation or liquidation proceedings.

Additionally, the accounts and operations of Ambac Assurance and Everspan are subject to periodic comprehensive financial examinations by, respectively, the OCI and DIFI.

The State Insurance Laws require regulated insurance companies to maintain minimum standards of business conduct, maintain minimum surplus to policyholders, meet certain financial tests, and file certain reports, including information concerning their capital structure, ownership, financial condition, corporate governance and enterprise risk.

The State Insurance Laws also require prior approval by OCI and DIFI, respectively, of certain transactions between AAC or Everspan, respectively, and their affiliates.

Ambac Assurance, because it is a financial guarantee insurer is not subject to risk-based capital requirements.

In December 2020, Everspan Insurance completed its re-domestication from Wisconsin to Arizona and obtained broad authority to write property and casualty insurance (while contemporaneously surrendering its authority to write financial guaranty insurance) in Arizona.

Everspan Insurance is seeking similar amendments to its certificates of authority in all other states.

Everspan Insurance is subject to risk-based capital requirements.

Everspan Indemnity was formed in 2020 as a domestic surplus lines insurer in Arizona and, accordingly, is eligible to write property and casualty insurance as an excess and surplus lines insurer in all states by virtue of the U.S.

Nonadmitted and Reinsurance Reform Act of 2010.

Everspan Indemnity is subject to risk-based capital requirements.

Neither Everspan Insurance nor Everspan Indemnity has yet issued any new policies.

Ambac Assurance and Everspan are in compliance with the minimum capital and surplus levels required under the State Insurance Laws required to transact all business written to date.

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

Every state and Washington, D.C.

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

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

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

The Settlement

Agreement will remain in force until the surplus notes that were issued pursuant to the Settlement Agreement have been redeemed, repurchased or repaid in full.

The Stipulation and Order will remain in force for so long as OCI determines it to be necessary.

The indenture for the Tier 2 Notes will remain in force until the Tier 2 Notes have been redeemed, repurchased or repaid in full.

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

Although not domiciled in New York, AAC is nevertheless subject to the New York insurance law governing financial guarantee insurers.

New York’s comprehensive financial guarantee insurance law defines the scope of permitted financial guarantee insurance and governs the conduct of business of all financial guarantors licensed to do business in New York, including AAC.

The New York financial guarantee insurance law also establishes single and aggregate risk limits with respect to insured obligations insured by financial guarantee insurers.

Such single risk limits are specific to the type of insured obligation (for example, municipal or asset-backed).

Under the aggregate limits, policyholders’ surplus and contingency reserves must at least equal a percentage of aggregate net liability that is equal to the sum of various percentages of aggregate net liability for various categories of specified obligations.

At December 31, 2020, AAC is in compliance with applicable aggregate risk limits but not in compliance with applicable single risk limits.

Through run-off of the portfolio, AAC will continue to seek the reduction in its exposure for compliance with applicable single and aggregate risk limits, but may not be able to do so.

The financial statements of AAC and Everspan are prepared on the basis of accounting practices prescribed or permitted by the State Insurance Laws and OCI and DIFI actions thereunder.

AAC and Everspan use such statutory accounting practices prescribed or permitted by the OCI and DIFI, respectively, for determining and reporting their financial condition and results of operations, including for determining solvency under the State Insurance Laws.

Both Wisconsin and Arizona have adopted the National Association of Insurance Commissioners (“NAIC”) accounting practices and procedures manual (“NAIC SAP”) as a component of prescribed practices as codified in each state’s applicable law or regulation.

Statutory policyholder surplus differs from stockholder's equity determined under GAAP principally due to statutory accounting rules that treat financial guarantee premiums and loss reserves, investments, consolidation of subsidiaries or variable interest entities and surplus notes differently.

• AAC’s statutory policyholder surplus was $ 865 at December 31, 2020, as compared to $ 1,088 as of December 31, 2019.

• Everspan Indemnity has statutory policyholder surplus of $ 26 as of December 31, 2020.

At December 31, 2020, there were no significant differences from stockholder's equity under GAAP.

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AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Additionally, the OCI has prescribed additional practices and has permitted accounting practices for AAC.

As a result of the prescribed and permitted practices discussed below, AAC’s statutory surplus at December 31, 2020 and 2019 was higher by $ 40 and lower by $ 12 , respectively, than if AAC had reported such amounts in accordance with NAIC SAP.

Everspan does not have any prescribed or permitted practices at December 31, 2020 or December 31, 2019.

Prescribed Accounting Practices

OCI has prescribed the following accounting practices that differ from NAIC SAP for AAC:

• Paragraph 8 of Statement of Statutory Accounting Principles No.

60 “Financial Guaranty Insurance” allows for a deduction from loss reserves for the time value of money by application of a discount rate equal to the average rate of return on the admitted assets of the financial guaranty insurer as of the date of the computation of the reserve.

The discount rate shall be adjusted at the end of each calendar year.

Additionally, in accordance with paragraph 13.e of Statutory Accounting Principles No.

97 "Investments in Subsidiary, Controlled and Affiliated Entities" and paragraph 8 of Statutory Accounting Principles No.

5R “Liabilities, Contingencies and Impairments of Assets - Revised”, AAC records probable losses on its subsidiaries for which it guarantees their obligations.

AAC also discounts probable losses on guarantees of subsidiary obligations using a discount rate equal to the average rate of return on its admitted assets.

AAC’s average rates of return on its admitted assets at December 31, 2020 and 2019 were 4.56 % and 5.43 %, respectively.

OCI has directed AAC to utilize a prescribed discount rate of 5.10 % for the purpose of discounting both its loss reserves and its estimated impairment losses on subsidiary guarantees.

• Paragraph 4 of Statement of Statutory Accounting Principles No.

41 “Surplus Notes” (“SSAP 41”) states that proceeds received by the issuer of surplus notes must be in the form of cash or other admitted assets having readily determinable values and liquidity satisfactory to the commissioner of the state of domicile.

Under statutory accounting principles, surplus notes issued in conjunction with commutations or the settlement of obligations would be valued at zero upon issuance pursuant to paragraph 4, SSAP 41.

OCI has directed the Company to record surplus notes issued in connection with commutations or the settlement of obligations at full par value upon issuance.

The surplus notes issued have a claim against surplus senior to the preferred and common shareholders.

• Paragraph 35 of Statement of Statutory Accounting Principles No.

43R ”Loan-backed and Structured Securities” states that when an other-than-temporary impairment ("OTTI") has occurred, the amount of the OTTI recognized as a realized loss shall equal the difference between the investment’s amortized cost basis and the present value of cash flows expected to be collected, discounted at the loan-backed or structured security’s effective interest rate.

Beginning June 11, 2014, as a result

of the amended Segregated Account Rehabilitation Plan, OCI has directed the Company to not evaluate investments in AAC insured securities with policies that were allocated to the Segregated Account for OTTI and require all such investments be reported at amortized cost regardless of its NAIC risk designation.

This accounting determination was intended to recognize that AAC continues to maintain statutory loss reserves without adjustment for the economic effects of its ownership of the insured investment securities, improve transparency to the users of the statutory financial statements and to minimize operational risks.

Effective February 12, 2018, with the Segregated Account's exit from Rehabilitation, this prescribed practice is no longer applicable for OTTI evaluations going forward.

Permitted Accounting Practices

OCI has allowed the following permitted practice for AAC:

• Wisconsin accounting practices for changes to contingency reserves differ from NAIC SAP.

Under NAIC SAP, contributions to and releases from the contingency reserve are recorded via a direct charge or credit to surplus.

Under the Wisconsin Administrative Code, contributions to and releases from the contingency reserve are to be recorded through underwriting income.

AAC received permission from OCI to record contributions to and releases from the contingency reserve, in accordance with NAIC SAP.

United Kingdom

The Prudential Regulatory Authority (“PRA”) and Financial Conduct Authority (“FCA”) (and their predecessor regulator the Financial Services Authority (“FSA”)) are the dual statutory regulator responsible for regulating the financial services industry in the United Kingdom, with the purpose of maintaining confidence in the U.K.

financial system, providing public understanding of the system, securing the proper degree of protection for consumers and helping to reduce financial crime.

In addition, until December 31, 2020, the regulatory regime in the United Kingdom must have complied with certain EU legislation binding on all EU member states.

These regulators have exercised significant oversight of Ambac UK since 2008, after Ambac, AAC and Ambac UK began experiencing financial stress.

In 2009, Ambac UK’s license to write new business was curtailed by the FSA and the insurance license was limited to undertaking only run-off related activity.

As such, Ambac UK is authorized to run-off its credit, suretyship and financial guarantee insurance portfolio in the United Kingdom, and (until December 31, 2020) to do the same through a branch in Milan, Italy, and a number of other European Union (“EU”) countries.

Until December 31, 2020, EU legislation had allowed Ambac UK to conduct business in EU states other than the United Kingdom through a “passporting” arrangement, which eliminated the necessity of additional licensing or authorization in those other EU jurisdictions.

These passporting arrangements ended on December 31, 2020, when the U.K.’s Brexit transitional arrangements with the EU ended.

Ambac UK closed its Milan branch and transferred it's remaining policy to the United Kingdom in December 2020.

Ambac UK's remaining policies in the EU were either commuted or the benefits of those policies

| Ambac Financial Group, Inc.

106 2020 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

were transferred to United Kingdom entities in advance of December 31, 2020.

The PRA requires that non-life insurance companies such as Ambac UK maintain a margin of solvency at all times in respect of the liabilities of the insurance company, the calculation of which depends on the type and amount of insurance business a company writes.

These solvency requirements were amended on January 1, 2016, in order to implement the European Union's "Solvency II" directive on risk-based capital.

Notwithstanding the foregoing, Ambac UK is deficient in terms of compliance with currently applicable regulatory capital requirements under Solvency II directive.

The PRA and FCA are aware of the same, and dialogue between Ambac UK management and its regulators remains ongoing with respect to options for addressing the shortcoming, although such options remain few.

Dividend Restrictions, Including Contractual Restrictions

Due to losses experienced by AAC, it has been unable to pay ordinary dividends to AFG since 2008 and will be unable to pay common dividends in 2021 without the prior consent of the OCI, which is unlikely.

AAC’s ability to pay dividends is further restricted by the Settlement Agreement (as described below), by the indenture for the Tier 2 Notes (as described below), by the terms of its AMPS (as described below) and by the Stipulation and Order.

Background and Business Description for further information.

AAC is not expected to make dividend payments to AFG for the foreseeable future.

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

Subject to the foregoing, pursuant to the State Insurance Laws, AAC and Everspan may declare dividends, subject to restrictions in their respective articles of incorporation, provided that, after giving effect to the distribution, such dividends would not violate certain statutory solvency, surplus and asset tests.

Board action authorizing a shareholder distribution by AAC (other than stock dividends) must be reported to the OCI at least 30 days prior to payment, unless the distribution is no more than 15 % larger than for the corresponding period in the previous year.

Everspan similarly must report to the DIFI all dividends and other distributions to shareholders within five business days following their declaration and at least ten business days before payment of the dividend or distribution.

In addition, Wisconsin Insurance Laws restrict the payment of extraordinary dividends, which is any distribution which, together with distributions in the prior 12 months, is greater than the lesser of (a) 10 % of policyholders’ surplus as of the preceding December 31, and (b) the greater of (i) statutory net income (loss) for the calendar year preceding the date of the dividend, minus realized capital gains for that calendar year or (ii) the aggregate of statutory net income (loss) for three calendar years preceding the date of the dividend, minus realized capital gains for those calendar years and minus dividends paid or credited within the first two of the three preceding calendar years.

Extraordinary dividends must be reported to OCI at least 30 days prior to payment and are subject to disapproval by the OCI.

Arizona Insurance Laws also restrict the payment of extraordinary dividends, which is any dividend or distribution which together with other dividends or distributions made within the preceding twelve months exceeds the lesser of (a) 10 % of policyholders’ surplus as of the preceding December 31 and (b) the net income for the twelve month period ending the preceding December 31.

Extraordinary dividends must be reported to DIFI at least 30 days prior to payment, during which period DIFI may disapprove or approve such payment.

UK law prohibits Ambac UK from declaring a dividend to its shareholders unless it has “profits available for distribution.” The determination of whether a company has profits available for distribution is based on its accumulated realized profits less its accumulated realized losses.

While the UK insurance regulatory laws impose no statutory restrictions on a general insurer’s ability to declare a dividend, the PRA’s and FCA’s capital requirements in practice act as a restriction on the payment of dividends.

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

Ambac UK is not expected to pay any dividends to AAC for the foreseeable future.

Pursuant to the Settlement Agreement, AAC may not make any “Restricted Payment” (which includes dividends from AAC to Ambac) in excess of $ 5 in the aggregate per annum, other than Restricted Payments from AAC to Ambac in an amount up to $ 8 per annum solely to pay operating expenses of Ambac.

Concurrent with making any such Restricted Payment, a pro rata amount of AAC's surplus notes would also need to be redeemed at par.

The indenture for the Tier 2 Notes contains a similar restrictive covenant and further requires a proportional payment of the Tier 2 Notes (or interest thereon) when payments are made on the surplus notes.

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

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

The Stipulation and Order requires OCI approval for the payment of any dividend or distribution on the common stock of AAC.

| Ambac Financial Group, Inc.

107 2020 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

FAIR VALUE MEASUREMENTS

3 unchanged sentences

Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect Company-based assumptions.

The fair value hierarchy prioritizes model inputs into three broad levels as follows:

The fair value hierarchy has three broad levels as follows:

l Level 1 Quoted prices for identical instruments in active markets.

6 unchanged sentences

This hierarchy requires the use of observable market data when available.

Assets and liabilities classified as Level 3 include credit derivative contracts, certain uncollateralized interest rate swap contracts, equity interests in Ambac sponsored special purpose entities and certain investments in fixed maturity securities.

Assets and liabilities classified as Level 3 include credit derivative contracts, certain uncollateralized interest rate swap contracts, certain equity investments and certain investments in fixed maturity securities.

Additionally, Level 3 assets and liabilities generally include loan receivables, and certain long-term debt of variable interest entities consolidated under the Consolidation Topic of the ASC.

The Fair Value Measurement Topic of the ASC permits, as a practical expedient, the estimation of fair value of certain investments in funds using the net asset value per share of the investment or its equivalent (“NAV”).

Investments in funds valued using NAV are not categorized as Level 1, 2 or 3 under the fair value hierarchy.

The Investments — Equity Securities Topic of the ASC permits the measurement of certain equity securities without a readily determinable fair value at cost, less impairment, and adjusted to fair value when observable price changes in identical or similar investments from the same issuer occur (the "measurement alternative").

The fair values of investments measured under this measurement alternative are not included in the below disclosures of fair value of financial instruments.

| Ambac Financial Group, Inc.

4 unchanged sentences

(Dollar Amounts in Millions, Except Share Amounts)

Investments in funds valued using NAV are not categorized as Level 1, 2 or 3 under the fair value hierarchy.

The following table sets forth the carrying amount and fair value of Ambac’s financial assets and liabilities as of December 31, 2021 and 2020, including the level within the fair value hierarchy at which fair value measurements are categorized.

22 unchanged sentences

Interest rate swaps—asset position 76 76 — 5 71

Other assets - equity in sponsored VIE 1 1 — — 1

Other assets-loans 3 3 — — 3

38 unchanged sentences

Residential mortgage-backed securities 302 302 — 302 —

Commercial mortgage-backed securities 50 50 — 50 —

Collateralized debt obligations 74 74 — 74 —

1 unchanged sentence

Fixed maturity securities, pledged as collateral:

government obligations 15 15 15 — —

Short-term 125 125 125 — —

20 unchanged sentences

Derivative liabilities:

Credit derivatives — — — — —

Interest rate swaps—liability position 114 114 — 114 —

8 unchanged sentences

(1) Excluded from the fair value measurement categories in the table above are investment funds of $ 577 and $ 453 as of December 31, 2021 and 2020, respectively, which are measured using NAV as a practical expedient.

Also excluded from the fair value measurements in the table above are equity securities with a carrying value of $ 8 and $ — as of December 31, 2021 and 2020, respectively, that do not have readily determinable fair values and have carrying amounts determined using the measurement alternative.

(2) The carrying value of net financial guarantees written includes the following balance sheet items:

21 unchanged sentences

As a result of these factors, the actual trade value of a financial instrument in the market, or exit value of a financial instrument position by Ambac, may be significantly different from its recorded fair value.

Ambac’s financial instruments carried at fair value are mainly comprised of investments in fixed maturity securities, equity interests in pooled investment funds, derivative instruments, certain variable interest entity assets and liabilities and interests in Ambac sponsored special purpose entities.

Ambac’s financial instruments carried at fair value are mainly comprised of investments in fixed maturity securities, equity interests in pooled investment funds, derivative instruments, and certain variable interest entity assets and liabilities.

Valuation of financial instruments is performed by Ambac’s finance group using methods approved by senior financial management with consultation from risk management and portfolio managers as appropriate.

36 unchanged sentences

Yield 10.50 %

Corporate obligations:

This includes certain investments in convertible debt securities.

The fair value classified as Level 3 was $ 12 at December 31, 2021.

Fair value is determined by discounting principal and interest cash flows to maturity of 2.75 years, at a weighted average yield of 11.6 %, adjusted for the estimated fair value of the conversion feature.

Other Investments

3 unchanged sentences

Refer to Note 4.

Investments for additional information about such investments in pooled funds that are reported at fair value using NAV as a practical expedient.

Other investments also includes Ambac's equity interest in a non-consolidated VIE created in connection with Ambac's monetization of AAC junior surplus notes.

This equity interest is carried under the equity method.

Fair value for the non-

Investments for additional information about

| Ambac Financial Group, Inc.

4 unchanged sentences

(Dollar Amounts in Millions, Except Share Amounts)

consolidated VIE equity interest is internally calculated using a market approach and is classified as Level 3.

such investments in pooled funds that are reported at fair value using NAV as a practical expedient.

At December 31, 2020, other investments also included Ambac's equity interest in the Corolla Trust, a non-consolidated VIE created in connection with Ambac's monetization of AAC junior surplus notes.

This equity interest was carried under the equity method and its fair value was internally calculated using a market approach and was classified as Level 3.

As further described in Note 1.

Background and Business Description, on January 22, 2021, AAC completed the Corolla Note Exchange transaction whereby it acquired 100 % of the outstanding obligations and the owner trust certificate of, and subsequently dissolved, the Corolla Trust.

Derivative Instruments

6 unchanged sentences

Factors considered in estimating the amount of any Ambac credit valuation adjustment ("CVA") on such contracts include collateral posting provisions, right of set-off with the counterparty, the period of time remaining on the derivative and the pricing of recent terminations.

The aggregate Ambac CVA impact reduced the fair value of derivative liabilities by less than a million dollars at both December 31, 2020 and 2019.

The aggregate Ambac CVA impact reduced the fair value of derivative liabilities by less than a million dollars at both December 31, 2021 and 2020, respectively.

Interest rate swaps that are not centrally cleared are valued using vendor-developed models that incorporate interest rates and yield curves that are observable and regularly quoted.

4 unchanged sentences

Ambac's credit derivatives ("CDS") are valued using an internal model that uses traditional financial guarantee CDS pricing to calculate the fair value of the derivative contract based on the reference obligation's current pricing, remaining life and credit rating and Ambac's own credit risk.

The model calculates the difference between the present value of the projected fees receivable under the CDS and our estimate of the fees a financial guarantor of comparable credit quality would charge to provide the same protection at the balance sheet date.

Unobservable inputs used include Ambac's internal reference obligation credit ratings and expected life, estimates of fees that would be charged to assume the credit derivative obligation and Ambac's CVA.

provide the same protection at the balance sheet date.

Unobservable inputs used include Ambac's internal reference obligation credit ratings and remaining life, estimates of fees that would be charged to assume the credit derivative obligation and Ambac's CVA.

Ambac is party to only one remaining credit derivative with an internal credit rating of AA at December 31, 2021.

1 unchanged sentence

Financial Guarantees

Fair value of net financial guarantees written represents our estimate of the cost to Ambac to completely transfer its

insurance obligation to another market participant of comparable credit worthiness.

Fair value of net financial guarantees written represents our estimate of the cost to Ambac to completely transfer its insurance obligation to another market participant of comparable credit worthiness.

In theory, this amount should be the same amount that another market participant of comparable credit worthiness would hypothetically charge in the marketplace, on a present value basis, to provide the same protection as of the balance sheet date.

1 unchanged sentence

Long-term Debt

Long-term debt includes AAC surplus notes and junior surplus notes, the Ambac Note and Tier 2 Notes issued in connection with the Rehabilitation Exit Transactions and the Ambac UK debt issued in connection with the Ballantyne commutation.

The fair values of surplus notes, the Ambac Note and Tier 2 Notes are classified as Level 2.

Long-term debt includes AAC surplus notes and junior surplus notes (cancelled in 2021 as part of the Surplus Note Exchanges described in Note 1.

Background and Business Description), the Sitka AAC Note, the LSNI Ambac Note (fully redeemed on July 6, 2021 as described in Note 1.

Background and Business Description ), Tier 2 Notes issued in connection with the Rehabilitation Exit Transactions and the Ambac UK debt issued in connection with the commutation of its exposure with respect to Ballantyne Re plc in 2019.

The fair values of surplus notes, Sitka AAC Note, LSNI Ambac Note and Tier 2 Notes are classified as Level 2.

The fair value of junior surplus notes and Ambac UK debt are classified as Level 3.

Other Financial Assets and Liabilities

Included in Other assets are Loans and Ambac’s equity interest in an Ambac sponsored VIE established to provide certain financial guarantee clients with funding for their debt obligations.

Included in Other assets are loans and, at December 31, 2020, Ambac’s equity interest in an Ambac sponsored VIE established to provide certain financial guarantee clients with funding for their debt obligations.

The fair values of these financial assets are estimated based upon internal valuation models and are classified as Level 3.

6 unchanged sentences

For those instruments where quotes were not available or cannot be reasonably corroborated, fair values are based on internal valuation models.

Comparable to the sensitivities of investments in fixed maturity securities described above, longer (shorter) expected maturities or higher (lower) yields used in the valuation model will, in isolation, result in decreases (increases) in fair value liability measurement for FG VIE long-term debt.

FG VIE derivative asset and liability fair values are determined using vendor-developed valuation models, which incorporated observable market data related to specific derivative contractual terms including interest rates, foreign exchange rates and yield curves.

The fair value of FG VIE fixed maturity securities and loan assets are based on Level 2 market price quotes received from independent market sources when available.

Typically, FG VIE asset fair values are not readily available from market quotes and are estimated internally.

Internal valuation of each FG VIE’s fixed maturity securities or loan assets are derived from the fair values of the notes issued by the respective VIE and the VIE’s

Comparable to the

| Ambac Financial Group, Inc.

4 unchanged sentences

(Dollar Amounts in Millions, Except Share Amounts)

derivatives, determined as described above, adjusted for the fair values of Ambac’s financial guarantees associated with the VIE.

sensitivities of investments in fixed maturity securities described above, longer (shorter) expected maturities or higher (lower) yields used in the valuation model will, in isolation, result in decreases (increases) in fair value liability measurement for FG VIE long-term debt.

The fair value of FG VIE fixed maturity securities and loan assets are based on Level 2 market price quotes received from independent market sources when available.

Typically, FG VIE asset fair values are not readily available from market quotes

and are estimated internally.

Internal valuation of FG VIE’s fixed maturity securities or loan assets are derived from the fair values of the notes issued by the respective VIE and the VIE’s derivatives, determined as described above, adjusted for the fair values of Ambac’s financial guarantees associated with the VIE.

The fair value of financial guarantees consist of:

(i) estimated future premium cash flows discounted at a rate consistent with that implicit in the fair value of the VIE’s liabilities and (ii) estimates of future claim payments discounted at a rate that

includes Ambac’s own credit risk.

Estimated future premium payments to be paid by the VIEs were discounted at a par-weighted average rate of 2.4 % and 2.7 % at December 31, 2020 and 2019, respectively.

Estimated future premium payments to be paid by the VIEs were discounted at a weighted average rate of 3.0 % and 2.4 % at December 31, 2021 and 2020, respectively.

At December 31, 2021, the range of these discount rates was between 2.2 % and 4.1 %.

6 unchanged sentences

VIE Assets and Liabilities

Year Ended December 31, 2020 Investments Other

Year ended December 31, 2021 Investments (1)

Derivatives Investments Loans Long-term

10 unchanged sentences

The amount of total gains/(losses) included in other comprehensive income attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date $ ( 1 ) $ — $ — $ ( 32 ) $ ( 26 ) $ — $ ( 59 )

Level-3 Financial Assets and Liabilities Accounted for at Fair Value

VIE Assets and Liabilities

Year Ended December 31, 2019 Investments Other

Assets Derivatives Investments Loans Long-term

Balance, beginning of period $ 72 $ 5 $ 46 $ 2,737 $ 4,288 $ ( 217 ) $ 6,930

Total gains/(losses) realized and unrealized:

Included in earnings 2 ( 2 ) 25 138 287 ( 15 ) 436

Included in other comprehensive income — — — 116 74 8 199

Purchases — — — — — — —

Issuances — — — — — — —

Sales — — — — — — —

Settlements ( 2 ) — ( 5 ) ( 35 ) ( 690 ) — ( 731 )

Deconsolidations of VIEs — — — — ( 851 ) 223 ( 627 )

Balance, end of period $ 72 $ 3 $ 66 $ 2,957 $ 3,108 $ — $ 6,207

The amount of total gains/(losses) included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date $ — $ ( 2 ) $ 25 $ 138 $ 215 $ — $ 376

(1) Investments classified as Level 3 consist of a one other asset-backed security and two convertible notes purchased in 2021.

(2) Other assets carried at fair value and classified as Level 3 relate to an equity interest in an Ambac sponsored VIE.

8 unchanged sentences

Year Ended December 31, 2020 Investments Other

Assets Derivatives Investments Loans Long-term

Balance, beginning of period $ 809 $ 6 $ 61 $ 2,914 $ 11,529 $ ( 2,758 ) $ 12,561

Total gains/(losses) realized and unrealized:

Included in earnings 36 ( 1 ) ( 9 ) 16 ( 201 ) 189 30

Included in other comprehensive income ( 53 ) — — ( 158 ) ( 470 ) 91 ( 590 )

Purchases — — — — — — —

Issuances — — — — — — —

Sales — — — — — — —

Settlements ( 714 ) — ( 6 ) ( 35 ) ( 624 ) 23 ( 1,356 )

Transfers out of Level 3 ( 5 ) — — — — — ( 5 )

Deconsolidation of VIEs — — — — ( 5,946 ) 2,237 ( 3,709 )

Balance, end of period $ 72 $ 5 $ 46 $ 2,737 $ 4,288 $ ( 217 ) $ 6,930

The tables below provide roll-forward information by class of investments and derivatives measured using significant unobservable inputs.

Level-3 Investments by Class

Year Ended December 31, Other Asset

Securities Non-Agency RMBS Total

Investments Other Asset

Securities Non-Agency RMBS Total

Derivatives Investments Loans Long-term

Balance, beginning of period $ 72 $ 3 $ 66 $ 2,957 $ 3,108 $ — $ 6,207

6 unchanged sentences

Settlements ( 1 ) — ( 7 ) ( 35 ) ( 290 ) — ( 334 )

Deconsolidations of VIEs — — — — — — —

Balance, end of period $ 78 $ 1 $ 84 $ 3,215 $ 2,998 $ — $ 6,376

Level-3 Investments by Class

Year Ended December 31, 2018 Other Asset

Securities Non-Agency RMBS Total

(1) Other assets carried at fair value and classified as Level 3 relate to an equity interest in an Ambac sponsored VIE.

Level-3 Financial Assets and Liabilities Accounted for at Fair Value

VIE Assets and Liabilities

Year Ended December 31, 2019 Investments Other

Derivatives Investments Loans Long-term

Balance, beginning of period $ 72 $ 5 $ 46 $ 2,737 $ 4,288 $ ( 217 ) $ 6,930

4 unchanged sentences

Issuances — — — — — — —

Settlements ( 1 ) ( 713 ) ( 714 )

Transfers out of Level 3 — ( 5 ) ( 5 )

Balance, end of period $ 72 $ — $ 72

The amount of total gains/(losses) included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date $ — $ — $ —

| Ambac Financial Group, Inc.

114 2020 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Level-3 Derivatives by Class

Year Ended December 31,

Derivatives Total

Derivatives Interest

Derivatives Total

Balance, beginning of period $ 67 $ — $ 66 $ 47 $ ( 1 ) $ 46

Total gains/(losses) realized and unrealized:

Included in earnings 25 — 25 24 2 25

Purchases — — — — — —

Issuances — — — — — —

Sales — — — — — — —

Settlements ( 2 ) — ( 5 ) ( 35 ) ( 690 ) — ( 731 )

Balance, end of period 85 — 84 67 — 66

The amount of total gains/(losses) included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date 25 — 25 24 1 25

Level-3 Derivatives by Class

Year Ended December 31, 2018 Interest

Derivatives Total

Balance, beginning of period $ 61 $ ( 1 ) $ 61

Total gains/(losses) realized and unrealized:

Included in earnings ( 9 ) ( 1 ) ( 9 )

Purchases — — —

Issuances — — —

Settlements ( 5 ) — ( 6 )

Deconsolidation of VIEs — — — — ( 851 ) 223 ( 627 )

Balance, end of period $ 72 $ 3 $ 66 $ 2,957 $ 3,108 $ — $ 6,207

(1) Other assets carried at fair value and classified as Level 3 relate to an equity interest in an Ambac sponsored VIE.

Invested assets and VIE long-term debt are transferred into Level 3 when internal valuation models that include significant unobservable inputs are used to estimate fair value.

1 unchanged sentence

Derivative instruments are transferred into Level 3 when the use of unobservable inputs becomes significant to the overall valuation.

Invested assets transferred out of Level 3 into Level 2 in 2018 consisted of an Ambac-insured re-REMIC collateralized by distressed mortgage-backed securities.

There were no other transfers of financial instruments into or out of Level 3 in the periods disclosed.

There were no transfers of financial instruments into or out of Level 3 in the periods disclosed.

| Ambac Financial Group, Inc.

15 unchanged sentences

Changes in unrealized gains (losses) relating to financial instruments still held at the reporting date — 25 353 ( 2 )

Other investments also include equity interests held by AFG including the equity interest in Corolla Trust, an unconsolidated trust created in connection with its sale of Segregated Account junior surplus notes on August 28, 2014.

As further described in Note 1.

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

Disclosures in this Note for the period ended December 31, 2020, are in accordance with the new CECL standard adopted January 1, 2020, which is more fully described in Note 2.

FINANCIAL GUARANTEES IN FORCE

Financial guarantees outstanding includes the exposures of policies that insure variable interest entities (“VIEs”) consolidated in accordance with ASC Topic 810, Consolidation.

Financial guarantees outstanding include the exposure of policies that insure 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.

Financial guarantees outstanding exclude the exposures of policies that insure bonds which have been called, pre-refunded or 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.

The gross par amount of financial guarantees outstanding was $ 34,122 and $ 39,070 at December 31, 2021 and 2020, respectively.

The par amount of financial guarantees outstanding, net of reinsurance, was $ 28,020 and $ 33,888 at December 31, 2021 and 2020, respectively.

As of December 31, 2021, the aggregate amount of financial guarantee insured par ceded 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.

As of December 31, 2021 and 2020, the financial guarantee portfolio consisted of the types of guaranteed bonds as shown in the following table:

Net Par Outstanding December 31, (1)

Public Finance:

Housing revenue (2)

$ 5,610 $ 5,855

Lease and tax-backed revenue 3,196 4,179

General obligation 1,612 2,345

Other 1,942 3,118

Total Public Finance 12,360 15,497

Structured Finance:

Mortgage-backed and home equity 2,724 3,635

Investor-owned utilities 1,556 1,617

Other 624 1,085

Total Structured Finance 4,904 6,337

International Finance:

Sovereign/sub-sovereign 5,141 5,270

Investor-owned and public utilities 3,283 3,899

Asset-backed and other 1,276 1,374

Transportation 1,056 1,511

Total International Finance 10,756 12,054

Total $ 28,020 $ 33,888

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

| Ambac Financial Group, Inc.

98 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

As of December 31, 2021 and 2020, the financial guaranteed portfolio by location of risk was as outlined in the table below:

Net Par Outstanding December 31, 2021 2020

United States

$ 17,264 $ 21,834

United Kingdom 9,255 9,711

Italy 718 803

Austria 343 707

France 219 277

Australia 203 420

Other international

$ 28,020 $ 33,888

Gross financial guarantees in force (principal and interest) were $ 54,272 and $ 61,895 at December 31, 2021 and 2020, respectively.

Net financial guarantees in force (after giving effect to reinsurance) were $ 42,653 and $ 51,603 as of December 31, 2021 and 2020, respectively.

In the United States, Colorado and California were the states with the highest aggregate net par amounts in force, accounting for 8.3 % and 5.1 % of the total at December 31, 2021, respectively.

No other state accounted for more than 4 %.

The highest single insured risk represented 3.3 % of the aggregate net par amount guaranteed.

INSURANCE CONTRACTS

Amounts presented in this Note relate only to Ambac’s non-derivative insurance business for insurance policies issued to beneficiaries, excluding consolidated VIEs.

The effect of reinsurance on premiums written and earned was as follows:

December 31, Direct Assumed Ceded

Written $ 2 $ — $ 35 $ ( 33 )

Earned 62 — 15 47

Written $ ( 1 ) $ — $ ( 1 ) $ —

Earned 65 1 12 54

Written $ ( 28 ) $ — $ 31 $ ( 60 )

Earned 75 — 10 66

Ambac’s accelerated financial guarantee premium revenue for retired obligations for the years ended December 31, 2021, 2020 and 2019, was $ 1 , $ 12 and $ 10 , respectively.

The following table summarizes net premiums earned by location of risk:

Year Ended December 31, 2021 2020 2019

United States 27 $ 32 $ 55

United Kingdom 14 24 17

Other international 6 ( 2 ) ( 6 )

Total 47 $ 54 $ 66

Premium Receivables, including credit impairments

Premium receivables at December 31, 2021 and 2020 were $ 323 and $ 370 , respectively.

Management evaluates premium receivables for expected credit losses ("credit impairment") in accordance with the CECL standard adopted January 1, 2020, which is further described in Note 2.

Basis of Presentation and Significant Accounting Policies .

To the extent disclosures for periods prior to January 1, 2020, made in accordance with prior GAAP rules differ from disclosures under the new CECL standard, such differences are explained below.

Management's evaluation of credit impairment under prior GAAP rules was not materially different.

Most credit impairment disclosures below were only made prospectively from the CECL adoption date as they were not required previously under GAAP.

As further discussed in Note 2.

Basis of Presentation and Significant Accounting Policies , the key indicator management uses to assess the credit quality of financial guarantee premium receivables is Ambac's internal risk classifications for the insured obligation determined by the Risk Management Group.

| Ambac Financial Group, Inc.

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(Dollar Amounts in Millions, Except Share Amounts)

Fixed Maturity Securities

The amortized cost and estimated fair value of available-for-sale investments, excluding VIE investments, at December 31, 2020 and 2019 were as follows:

Cost Allowance for Credit Losses Gross

Losses Estimated

December 31, 2020

Fixed maturity securities:

Municipal obligations $ 321 $ — $ 37 $ — $ 358

Corporate obligations (1)

Below is the amortized cost basis of financial guarantee premium receivables by risk classification code and asset class as of December 31, 2021 and 2020:

Surveillance Categories as of December 31, 2021

Type of Guaranteed Bond I IA II III IV Total

Public Finance:

Housing revenue $ 149 $ 3 $ 5 $ — $ — $ 157

Other 2 — — — — 2

Total Public Finance 151 3 5 — — 159

Structured Finance:

Mortgage-backed and home equity 1 — 1 2 12 16

Student loan 1 1 — 9 — 12

Structured insurance 10 — — — — 10

Other 7 — — — — 7

Total Structured Finance 19 1 1 12 12 45

International:

Sovereign/sub-sovereign 74 8 — 11 — 93

Investor-owned and public utilities 28 — — — — 28

Other 5 — — — — 5

Total International 107 8 — 11 — 125

Total (1) (2)

$ 277 $ 12 $ 6 $ 22 $ 12 $ 329

Foreign obligations 97 — 1 — 98

government obligations 105 — 2 1 106

Residential mortgage-backed securities 256 — 46 — 302

Collateralized debt obligations 74 — — — 74

Other asset-backed securities (2)

Surveillance Categories as of December 31, 2020

Type of Guaranteed Bond I IA II III IV Total

Public Finance:

Housing revenue $ 155 $ 13 $ — $ — $ — $ 168

Other 2 15 — — — 17

Total Public Finance 157 27 — — — 185

Structured Finance:

Mortgage-backed and home equity 3 — 1 3 15 22

Student loan 3 — 2 11 — 16

Structured insurance 14 — — — — 14

Other 7 — — — — 7

Total Structured Finance 27 — 3 14 15 59

International:

Sovereign/sub-sovereign 82 13 — 13 — 108

Investor-owned and public utilities 31 — — — — 31

Other 5 — — — — 5

Total International 118 13 — 13 — 144

$ 302 $ 40 $ 3 $ 27 $ 15 $ 387

(1) Excludes specialty property and casualty premium receivables of $ 2 .

(2) The underwriting origination dates for all policies included are greater than five years prior to the current reporting date.

| Ambac Financial Group, Inc.

100 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Below is a rollforward of the premium receivable allowance for credit losses as of December 31, 2021 and 2020:

Year Ended December 31, 2021 2020

Beginning balance (1)

Current period provision (2)

Write-offs of the allowance ( 2 ) ( 2 )

Ending balance $ 9 $ 17

(1) At January 1, 2020, $ 9 of premiums receivable were deemed uncollectible as determined under prior GAAP rules.

(2) The year ended December 31, 2020, includes $ 3 from the adoption of CECL.

At December 31, 2021 and 2020, a deminimis amount of premiums were past due.

Financial Guarantee Premium Receivables

Below is the gross premium receivable roll-forward (direct and assumed contracts) for the affected periods:

2021 2020 2019

Short-term 492 — — — 492

Beginning premium receivable $ 370 $ 416 $ 495

Adjustment to initially apply ASU 2016-13 — ( 3 ) —

Premium receipts ( 35 ) ( 46 ) ( 48 )

Adjustments for changes in expected and contractual cash flows (1)

( 27 ) ( 6 ) ( 38 )

Fixed maturity securities pledged as collateral:

government obligations 15 — — — 15

Short-term 125 — — — 125

Accretion of premium receivable discount 8 9 11

Deconsolidation of certain VIEs — — 3

Changes to allowance for credit losses 8 ( 4 ) ( 2 )

Other adjustments (including foreign exchange) ( 4 ) 5 ( 6 )

Ending premium

receivable (2)

$ 320 $ 370 $ 416

Total available-for-sale investments $ 2,807 $ — $ 149 $ 8 $ 2,949

Losses Estimated

Fair Value Non-credit

Impairments (3)

(1) Adjustments for changes in expected and contractual cash flows are primarily due to reductions in insured exposure as a result of early policy terminations and unscheduled principal paydowns.

(2) Premium receivable includes premiums to be received in foreign denominated currencies most notably in British Pounds and Euros.

At December 31, 2021, 2020 and 2019 premium receivables include British Pounds of $ 108 (£ 80 ), $ 117 (£ 86 ) and $ 129 (£ 97 ), respectively, and Euros of $ 16 (€ 14 ), $ 19 (€ 16 ) and $ 26 (€ 23 ), respectively.

The table below summarizes the future gross undiscounted financial guarantee premiums to be collected and future premiums earned, net of reinsurance at December 31, 2021:

Future Premiums

Collected (1)

Earned Net of

Reinsurance (2)

Three months ended:

March 31, 2022 $ 10 $ 7

June 30, 2022 7 7

September 30, 2022 9 7

December 31, 2022 7 7

Fixed maturity securities:

Municipal obligations $ 194 $ 22 $ — $ 215 $ —

Corporate obligations (1)

Twelve months ended:

December 31, 2023 32 25

December 31, 2024 30 24

December 31, 2025 29 23

December 31, 2026 28 22

Five years ended:

December 31, 2031 113 91

December 31, 2036 75 57

December 31, 2041 32 22

December 31, 2046 15 9

December 31, 2051 5 3

December 31, 2056 — —

Total $ 393 $ 303

(1) Future premiums to be collected are undiscounted, gross of allowance for credit losses, and are used to derive the discounted premium receivable asset recorded on Ambac's balance sheet.

(2) Future premiums to be earned, net of reinsurance relate to the unearned premiums liability and deferred ceded premium asset recorded on Ambac’s balance sheet.

The use of contractual lives for many bond types which do not have homogeneous pools of underlying collateral is required in the calculation of the premium receivable as further described in Note 2.

Basis of Presentation and Significant Accounting Policies .

This results in a different premium receivable balance than if expected lives were considered.

If installment paying policies are retired or prepay early, premiums reflected in the premium receivable asset and amounts reported in the above table for such policies may not be collected.

If those bonds types are retired early, premium earnings may be negative in the period of call or refinancing.

| Ambac Financial Group, Inc.

101 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Loss and Loss Expense Reserves

Ambac's loss and loss expense reserves ("loss reserves") are based on management's on-going review of the insured portfolio.

Below are the components of the loss and loss expense reserves and the subrogation recoverable asset at December 31, 2021 and 2020:

December 31, 2021:

December 31, 2020:

Balance Sheet Line Item Claims and

Loss Expenses Recoveries Unearned

Revenue Loss and

Loss Expenses Recoveries Unearned

Revenue Loss and

Loss and loss expense reserves $ 1,781 $ ( 155 ) $ ( 56 ) $ 1,570 $ 2,060 $ ( 229 ) $ ( 72 ) $ 1,759

Subrogation recoverable 88 ( 2,180 ) — ( 2,092 ) 100 ( 2,256 ) — ( 2,156 )

Totals $ 1,869 $ ( 2,335 ) $ ( 56 ) $ ( 522 ) $ 2,160 $ ( 2,486 ) $ ( 72 ) $ ( 397 )

(1) 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.

Below is the loss and loss reserve expense roll-forward, net of subrogation recoverable and reinsurance, for the affected periods.

Year Ended December 31, 2021 2020 2019

Beginning gross loss and loss expense reserves

$ ( 397 ) $ ( 482 ) $ ( 107 )

Foreign obligations 44 1 — 44 —

government obligations 157 2 2 156 —

Residential mortgage-backed securities 200 47 — 248 —

Commercial mortgage-backed securities 49 1 — 50 —

Collateralized debt obligations 147 — 1 146 —

Other asset-backed securities (2)

Reinsurance recoverable

Beginning balance of net loss and loss expense reserves

( 430 ) ( 508 ) ( 130 )

Losses and loss expenses (benefit) incurred:

Prior years ( 89 ) 210 12

( 88 ) 225 13

Short-term 653 — — 653 —

Loss and loss expenses (recovered) paid:

Prior years 59 148 318

Foreign exchange effect

Ending net loss and loss expense reserves

( 577 ) ( 430 ) ( 436 )

Fixed maturity securities pledged as collateral:

Short-term 85 — — 85 —

Total available-for-sale investments 3,187 132 5 3,314 —

(1) Includes Ambac's holdings of the secured notes issued by Ambac LSNI in connection with the Rehabilitation Exit Transactions.

(2) Consists primarily of Ambac's holdings of the military housing securitization bonds.

(3) At December 31, 2019, represents the amount of non-credit other-than-temporary impairment losses remaining in accumulated other comprehensive income on securities that also had a credit impairment.

These losses included in gross unrealized losses at December 31, 2019.

Impact of VIE consolidation

Reinsurance recoverable (3)

Ending gross loss and loss expense reserves

( 522 ) ( 397 ) ( 482 )

(1) Total losses and loss expenses (benefit) includes $ 5 , $( 11 ) and $( 7 ) for the years ended December 31, 2021, 2020 and 2019, respectively, related to ceded reinsurance.

(2) Ambac records the impact of estimated recoveries related to securitized loans in RMBS transactions that breached certain R&W's by transaction sponsors within losses and loss expenses (benefit).

The losses and loss expense (benefit) incurred associated with changes in estimated R&W's recoveries for the year ended December 31, 2021, 2020 and 2019 was $ 20 , $( 23 ) and $ 42 , respectively.

(3) Represents reinsurance recoverable on future loss and loss expenses.

Additionally, the Balance Sheet line "Reinsurance recoverable on paid and unpaid losses" includes reinsurance recoverables (payables) of $ 0 , $ 1 and $ 0 as of December 31, 2021, 2020 and 2019, respectively, related to previously presented loss and loss expenses and subrogation.

For 2021, the positive development in prior years was primarily due to favorable development in Public Finance credits (largely Puerto Rico) and the RMBS portfolio.

For 2020, the adverse development in prior years was primarily a result of deterioration in Public Finance credits, largely Puerto Rico, partially offset by favorable development in the RMBS portfolio.

| Ambac Financial Group, Inc.

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(Dollar Amounts in Millions, Except Share Amounts)

The amortized cost and estimated fair value of available-for-sale investments, excluding VIE investments, at December 31, 2020, by contractual maturity, were as follows:

Cost Estimated

Due in one year or less $ 718 $ 719

Due after one year through five years 873 880

Due after five years through ten years 439 459

Due after ten years 184 213

Residential mortgage-backed securities 256 302

Collateralized debt obligations 74 74

Other asset-backed securities 263 303

Financial Guarantee Loss Reserves:

The tables below summarize information related to policies currently included in Ambac’s loss and loss expense reserves or subrogation recoverable at December 31, 2021 and 2020.

Gross par exposures 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 bond.

The weighted average risk-free rate used to discount loss reserves at December 31, 2021 and 2020 was 1.2 % and 1.1 %, respectively.

Surveillance Categories as of December 31, 2021

I IA II III IV V Total

Number of policies 34 15 7 14 130 5 205

Remaining weighted-average contract period (in years) (1)

9 12 14 15 13 7 14

Gross insured contractual payments outstanding:

Principal $ 904 $ 840 $ 459 $ 1,300 $ 2,759 $ 40 $ 6,302

Interest 589 612 308 169 1,284 22 2,984

Total $ 1,493 $ 1,452 $ 767 $ 1,469 $ 4,043 $ 62 $ 9,286

Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay certain obligations with or without call or prepayment penalties.

Unrealized Losses on Fixed Maturity Securities

The following table shows gross unrealized losses and fair values of Ambac’s available-for-sale investments, excluding VIE investments, which at December 31, 2020, did not have an allowance for credit losses under the CECL standard and at December 2019, did not have other-than-temporary impairments recorded in earnings under prior GAAP.

This information is aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at December 31, 2020 and 2019:

Less Than 12 Months 12 Months or More Total

Fair Value Gross

Loss Fair Value Gross

December 31, 2020

Fixed maturity securities:

Municipal obligations $ 25 $ — $ 6 $ — $ 31 $ —

Corporate obligations 543 6 — — 543 6

Foreign obligations 3 — — — 3 —

government obligations 17 1 — — 17 1

Residential mortgage-backed securities 14 — — — 14 —

Commercial mortgage-backed securities — — — — — —

Collateralized debt obligations 27 — 15 — 42 —

Other asset-backed securities — — 4 — 4 —

Gross undiscounted claim liability $ 5 $ 16 $ 45 $ 544 $ 1,423 $ 62 $ 2,095

Discount, gross claim liability — ( 1 ) ( 3 ) ( 109 ) ( 185 ) ( 4 ) ( 303 )

Gross claim liability before all subrogation and before reinsurance

$ 5 $ 15 $ 42 $ 435 $ 1,238 $ 57 $ 1,792

Short-term 187 — — — 187 —

Total temporarily impaired securities $ 816 $ 7 $ 25 $ — $ 841 $ 8

December 31, 2019

Fixed maturity securities:

Municipal obligations $ 13 $ — $ 10 $ — $ 23 $ —

Corporate obligations 63 2 5 — 68 2

Foreign obligations 20 — — — 20 —

government obligations 36 2 2 — 38 2

Residential mortgage-backed securities 5 — — — 5 —

Commercial mortgage-backed securities 7 — — — 7 —

Collateralized debt obligations 53 — 63 1 116 1

Other asset-backed securities 2 — 7 — 10 —

Gross RMBS subrogation (2)

$ — $ — $ — $ — $ ( 1,737 ) $ — $ ( 1,737 )

Short-term 201 — — — 201 —

Total securities $ 401 $ 4 $ 88 $ 1 $ 489 $ 5

Discount, RMBS subrogation — — — — 7 — 7

Discounted RMBS subrogation, before reinsurance

— — — — ( 1,730 ) — ( 1,730 )

Gross other subrogation (3)

— ( 5 ) — ( 33 ) ( 583 ) ( 12 ) ( 633 )

Discount, other subrogation — — — 2 24 2 28

Discounted other subrogation, before reinsurance

— ( 5 ) — ( 31 ) ( 559 ) ( 10 ) ( 605 )

Gross claim liability, net of all subrogation and discounts, before reinsurance

$ 5 $ 10 $ 42 $ 404 $ ( 1,051 ) $ 47 $ ( 543 )

Unearned premium revenue $ ( 3 ) $ ( 10 ) $ ( 5 ) $ ( 14 ) $ ( 24 ) $ ( 1 ) $ ( 56 )

Loss expense reserves 1 — — 4 40 — 45

Gross loss and loss expense reserves $ 3 $ 1 $ 38 $ 394 $ ( 1,036 ) $ 46 $ ( 554 )

Reinsurance recoverable reported on

Balance Sheet (4)

$ 1 $ 1 $ 10 $ 22 $ ( 11 ) $ — $ 23

(1) Remaining weighted-average contract period is weighted based on projected gross claims over the lives of the respective policies.

(2) RMBS subrogation represents Ambac’s estimate of subrogation recoveries from RMBS transaction sponsors for R&W breaches.

(3) Other subrogation represents subrogation related to excess spread and other contractual cash flows on public finance and structured finance transactions, including RMBS.

(4) Reinsurance recoverable reported on the Balance Sheet includes reinsurance recoverables of $ 24 related to future loss and loss expenses and $ 0 related to presented loss and loss expenses and subrogation.

| Ambac Financial Group, Inc.

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(Dollar Amounts in Millions, Except Share Amounts)

Management has determined that the securities in the above table do not have credit impairment as of December 31, 2020 and 2019 based upon (i) no actual or expected principal and interest payment defaults on these securities;

Management's evaluation as of December 31, 2020, includes the expectation that all principal and interest payments on securities guaranteed by AAC or Ambac UK will be made timely and in full.

Ambac’s assessment about whether a security is credit impaired reflects management’s current judgment regarding facts and circumstances specific to the security and other factors.

If that judgment changes, Ambac may record a charge for credit impairment in future periods.

Realized Gains and Losses including Impairments

The following table details amounts included in net realized gains (losses) and impairments included in earnings for the affected periods:

Surveillance Categories as of December 31, 2020

I IA II III IV V Total

Number of policies 40 25 15 15 132 5 232

Remaining weighted-average contract period (in years) (1)

10 18 8 16 14 7 14

Gross realized gains on securities $ 38 $ 64 $ 111

Gross realized losses on securities ( 12 ) ( 5 ) ( 7 )

Foreign exchange (losses) gains ( 4 ) 22 7

Credit impairments $ — $ — $ —

Intent / requirement to sell impairments $ — $ — $ ( 3 )

Net realized gains (losses) $ 22 $ 81 $ 108

Year Ended December 31, 2019 2018

Balance, beginning of period

Additions for credit impairments recognized on:

Securities not previously impaired — 1

Reductions for credit impairments previously recognized on:

Securities that matured or were sold during the period ( 1 ) ( 56 )

Balance, end of period

Ambac had zero allowance for credit losses at December 31, 2020.

Ambac did not purchase any financial assets with credit deterioration for the year ended December 31, 2020.

Counterparty Collateral, Deposits with Regulators and Other Restrictions

Ambac routinely pledges and receives collateral related to certain transactions.

Securities held directly in Ambac’s investment portfolio with a fair value of $ 140 and $ 85 at December 31, 2020 and 2019, respectively, were pledged to derivative counterparties.

Refer to Note 12.

Derivative Instruments for further information on cash collateral.

There was no cash or securities received from other counterparties that were re-pledged by Ambac.

Securities carried at $ 8 and $ 6 at December 31, 2020 and 2019, respectively, were deposited by Ambac's insurance subsidiaries with governmental authorities or designated custodian banks as required by laws affecting insurance companies.

Invested assets carried at $ 1 at December 31, 2020 were deposited as security in connection with a letter of credit issued for an office lease.

Securities with a fair value of $ 178 and $ 197 at December 31, 2020 and 2019, respectively, were pledged as collateral and as sources of funding to repay the Secured Notes issued by Ambac LSNI.

The securities may not be transferred or re-pledged by Ambac LSNI.

Collateral may be sold to fund redemptions of the Secured Notes.

AAC also pledged for the benefit of the holders of Secured Notes (other than AAC) the proceeds of interest payments and partial redemptions of the Secured Notes held by AAC.

The amount of such proceeds held by AAC was $ 9 and $ 55 at December 31, 2020 and 2019 and is included in Restricted cash on the Consolidated Balance Sheet.

AAC may, from time to time, sell all or a portion of the Secured Notes it owns.

In the event that AAC sells any of the Secured Notes it owns, the proceeds must be used to redeem a like amount of the Ambac Note at par.

The price at which AAC sells the Secured Notes may differ from the price at which it redeems the Secured Notes.

Gross insured contractual payments outstanding:

Principal $ 842 $ 1,375 $ 595 $ 1,469 $ 3,246 $ 47 $ 7,573

Interest 279 1,011 484 215 1,427 26 3,443

Total $ 1,121 $ 2,386 $ 1,079 $ 1,685 $ 4,673 $ 72 $ 11,016

Gross undiscounted claim liability $ 3 $ 49 $ 40 $ 541 $ 1,690 $ 72 $ 2,395

Discount, gross claim liability — ( 2 ) ( 1 ) ( 85 ) ( 213 ) ( 3 ) ( 303 )

Gross claim liability before all subrogation and before reinsurance $ 3 $ 47 $ 40 $ 456 $ 1,477 $ 69 $ 2,092

Gross RMBS subrogation (2)

$ — $ — $ — $ — $ ( 1,753 ) $ — $ ( 1,753 )

Discount, RMBS subrogation — — — — 3 — 3

Discounted RMBS subrogation, before reinsurance

— — — — ( 1,751 ) — ( 1,751 )

Gross other subrogation (3)

— — — ( 36 ) ( 706 ) ( 12 ) ( 755 )

Discount, other subrogation — — — 1 18 1 20

Discounted other subrogation, before reinsurance

— — — ( 35 ) ( 689 ) ( 11 ) ( 735 )

Gross claim liability, net of all subrogation and discounts, before reinsurance

$ 3 $ 47 $ 39 $ 421 $ ( 963 ) $ 58 $ ( 394 )

Unearned premium revenue $ ( 2 ) $ ( 16 ) $ ( 5 ) $ ( 17 ) $ ( 30 ) $ ( 1 ) $ ( 72 )

Loss expense reserves 1 2 1 5 59 — 68

Gross loss and loss expense reserves $ 2 $ 32 $ 35 $ 409 $ ( 933 ) $ 57 $ ( 397 )

Reinsurance recoverable reported on

Balance Sheet (4)

$ — $ 6 $ 9 $ 24 $ ( 6 ) $ — $ 33

(1) Remaining weighted-average contract period is weighted based on projected gross claims over the lives of the respective policies.

(2) RMBS subrogation represents Ambac's estimate of subrogation recoveries from RMBS transaction sponsors for R&W breaches.

(3) Other subrogation represents subrogation related to excess spread and other contractual cash flows on public finance and structured finance transactions, including RMBS.

(4) Reinsurance recoverable reported on the Balance Sheet includes reinsurance recoverables of $ 33 related to future loss and loss expenses and $ 1 related to presented loss and loss expenses and subrogation.

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.

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 AAC'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.

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 FG 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 a modest 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

| Ambac Financial Group, Inc.

4 unchanged sentences

(Dollar Amounts in Millions, Except Share Amounts)

Guaranteed Securities

Ambac’s fixed maturity portfolio includes securities covered by guarantees issued by AAC and other financial guarantors (“insured securities”).

The published rating agency ratings on these securities reflect the higher of the financial strength rating of the financial guarantor or the rating of the underlying issuer.

Rating agencies do not always publish separate underlying ratings (those ratings excluding the insurance by the financial guarantor).

In the event these underlying ratings are not available from the rating agencies, Ambac will assign an internal rating.

The following table represents the fair value and weighted-average underlying rating of insured securities in Ambac's investment portfolio at December 31, 2020 and 2019, respectively:

Obligations Corporate

Obligations (2)

Securities Total Weighted

December 31, 2020:

Ambac Assurance Corporation $ 320 $ 465 $ 481 $ 1,266 CCC+

National Public Finance Guarantee Corporation 6 — — 6 BBB-

Assured Guaranty Municipal Corporation 1 — — 1 C

Total $ 327 $ 465 $ 481 $ 1,273 CCC+

December 31, 2019:

Ambac Assurance Corporation $ 176 $ 535 $ 442 $ 1,153 B-

National Public Finance Guarantee Corporation 11 — — 11 BBB-

Total $ 186 $ 535 $ 442 $ 1,164 B-

(1) Ratings are based on the lower of Standard & Poor’s or Moody’s rating.

If unavailable, Ambac’s internal rating is used.

(2) Represents Ambac's holdings of secured notes issued by Ambac LSNI in connection with the Rehabilitation Exit Transactions.

These secured notes are insured by AAC.

Other Investments

Ambac's investment portfolio includes interests in various pooled investment funds.

Fair value and additional information about investments in pooled funds, by investment type, is summarized in the table below.

Except as noted in the table, fair value as reported is determined using net asset value ("NAV") as a practical expedient.

In addition to these investments, Ambac has unfunded commitments of $ 81 to private credit and private equity funds at December 31, 2020.

Class of Funds

2020 2019 Redemption Frequency Redemption Notice Period

Real estate properties (1)

$ 16 $ 16 quarterly 10 business days

Hedge funds (2)

196 65 quarterly or semi-annually 90 days

High yield and leveraged loans (3) (10)

78 176 daily 0 - 30 days

Private credit (4)

65 51 quarterly if permitted 180 days if permitted

Insurance-linked investments (5)

3 3 fully redeemed none

Equity market investments (6) (10)

73 55 daily 0 days

Investment grade floating rate income (7)

73 66 weekly 0 days

Private equity (8)

13 — quarterly if permitted 90 days if premitted

Emerging markets debt (9) (10)

25 — daily 0 days

Total equity investments in pooled funds $ 543 $ 432

(1) Investments consist of UK property to generate income and capital growth.

(2) This class seeks to generate superior risk-adjusted returns through selective asset sourcing, active trading and hedging strategies across a range of asset types.

(3) This class of funds includes investments in a range of instruments including high-yield bonds, leveraged loans, CLOs, ABS and floating rate notes to generate income and capital appreciation.

(4) This class aims to obtain high long-term returns primarily through credit and preferred equity investments with low liquidity and defined term.

(5) This class seeks to generate returns from insurance markets through investments in catastrophe bonds, life insurance and other insurance linked investments.

(6) This class of funds aim to achieve long-term growth through diversified exposure to global equity markets.

(7) This class of funds includes investments in high quality floating rate debt securities including ABS and corporate floating rate notes.

(8) This class seeks to generate long-term capital appreciation through investments in private equity, equity-related and other instruments.

rates, which is expected to result in higher excess spread recoveries to Ambac.

Accordingly, despite the current economic recovery, our loss reserves may be under-estimated as a result of the ultimate scope, duration and magnitude of the effects of COVID-19 pandemic.

Ambac has exposure to the Commonwealth of Puerto Rico (the "Commonwealth") and its instrumentalities across several different issuing entities with total net par exposure of $ 1,054 .

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

The Commonwealth of Puerto Rico and certain of its instrumentalities are or were subject to Title III or Title VI proceedings under the Puerto Rico Oversight, Management and Stability Act ("PROMESA") and have suspended debt service payments, including payments owed on bonds insured by AAC.

AAC has made and will continue to be required to make significant amounts of policy payments over the next several years leading to material permanent losses.

The recoverability of a portion of these policy payments is still subject to some uncertainty as well as variability in terms of the value of certain components of the plan consideration to be made available under the various PROMESA plans of adjustment and qualifying modifications for the obligations AAC insures, which may lead to a material increase in permanent losses and cause a material adverse impact on our results of operations and financial condition.

Our exposure to Puerto Rico will be impacted by the pending consummation of the Eighth Amended Title III Joint Plan of Adjustment of the Commonwealth of Puerto Rico ("Eighth Amended POA"), the PRIFA Qualifying Modification ("PRIFA QM") and the CCDA Qualifying Modification ("CCDA QM") as well as the potential confirmation and implementation of the PRHTA plan of adjustment ("PRHTA POA").

On November 3, 2021, the Financial Oversight & 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 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, also incorporated settlements reflected in various plan support agreements

negotiated by and between creditors and the Oversight Board, as further described below.

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

The Eighth Amended POA was modified several times.

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

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

Unless the Teachers' Unions', APJ's and the Credit Unions' requests for stay pending appeal are granted, the plan of adjustment together with the PRIFA QM and CCDA QM are expected to have an effective date on or before March 15, 2022.

The successful consummation of the Eighth Amended POA and Qualifying Modifications on the effective date will represent a significant step towards resolution of AAC's remaining Puerto Rico exposure.

The plan support agreements of the various instrumentalities of the Commonwealth of Puerto Rico provide the basis for the plan consideration to be made available to creditors, including Ambac, under the Eighth Amended POA, the PRIFA QM, the CCDA QM and the PRHTA POA.

The PRIFA Related Plan Support Agreement (“PRIFA PSA”), signed on July 27, 2021, provides consideration for PRIFA bondholders in the form of a combination of cash and a Contingent Value Instrument (the "Rum Tax CVI") that 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 and held for the benefit of PRIFA bondholders (the “PRIFA Trust”).

The Rum Tax CVI comprises potential cash payments related to outperformance of general fund rum tax collections relative to the certified 2021 Commonwealth Fiscal Plan's projections.

The PRIFA CVI Sub Trust will also be funded with approximately a 27 % share of the Clawback CVI (described below), which is tied to potential cash payments related to the outperformance of the Commonwealth's sales and use tax ("SUT") against the certified 2020 Commonwealth Fiscal Plan's projections.

The rum tax and SUT outperformance measures are subject to a joint lifetime nominal cap of 75% of the allowed PRIFA claim under the Eighth Amended POA.

Ambac executed its joinder to the PRHTA/CCDA PSA on July 15, 2021.

The PRHTA/CCDA Related Plan Support Agreement ("PRHTA/CCDA PSA"), dated May 5, 2021, provides consideration for holders of PRHTA and CCDA bonds on account of their claims against the Commonwealth.

This consideration consists of interests of approximately 69 % and 4 %, respectively, in a contingent value instrument tied to the outperformance of the SUT against the certified 2020 Commonwealth Fiscal Plan's projections (the "Clawback CVI").

| Ambac Financial Group, Inc.

4 unchanged sentences

(Dollar Amounts in Millions, Except Share Amounts)

(9) This class seeks long-term income and growth through investments in the bonds of issuers in emerging markets.

(10) These categories include fair value amounts total $ 89 and $ 136 at December 31, 2020 and 2019, respectively, that are readily determinable and are priced through pricing vendors, including for High yield and leveraged loans products;

$ 3 and $ 81 for Equity market investments;

$ 60 and $ 55 ;

for Emerging markets debt of $ 25 and $ 0 .

Ambac also held direct equity interests as of December 31, 2020 and 2019, including in an unconsolidated trust created in connection with the 2014 sale of Segregated Account junior surplus notes, which is accounted for under the equity method.

Investment Income

Net investment income was comprised of the following for the affected periods:

2020 2019 2018

Fixed maturity securities $ 103 $ 183 $ 265

Short-term investments 5 17 11

Investment expense ( 6 ) ( 6 ) ( 7 )

Securities available-for-sale and short-term 103 196 271

Other investments 19 32 2

Total net investment income (loss) $ 122 $ 227 $ 273

Net investment income from Other investments primarily represents changes in fair value on securities classified as trading or accounted for under the fair value option, income from investment limited partnerships accounted for under the equity method and the above noted equity interest in an unconsolidated trust accounted for under the equity method.

The portion of net unrealized gains (losses) related to trading securities still held at the end of each period is as follows:

2020 2019 2018

Net gains (losses) recognized during the period on trading securities

$ — $ 24 $ ( 3 )

net gains (losses) recognized during the reporting period on trading securities sold during the period

Unrealized gains (losses) recognized during the reporting period on trading securities still held at the reporting date

$ 18 $ 17 $ ( 4 )

The Clawback CVI outperformance measures are subject to a lifetime nominal cap of 75 % of the allowed PRHTA and CCDA claims under the Eighth Amended POA.

Additionally, the PRHTA bondholders will receive consideration in the form of new PRHTA bonds and cash, and CCDA bondholders, will receive cash.

Ambac executed its joinder to the Amended and Restated Plan Support Agreement ("Amended and Restated GO/PBA PSA") on July 21, 2021.

Under the Amended and Restated GO/PBA PSA, dated as of July 12, 2021, consideration for holders of GO and PBA bonds comprised of a combination of cash, new GO bonds and a contingent value instrument intended to provide creditors with additional returns tied to the outperformance of the SUT against the certified 2020 Commonwealth Fiscal Plan's projections.

Substantial uncertainty still exists with respect to the ultimate outcome for AAC and other creditors in Puerto Rico due to, among other matters, (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.

There is no assurance that should one or more of these uncertainties negatively develop that it would not have a material adverse impact on Ambac's financial condition and results of operations.

While our reserving scenarios account for a wide range of possible outcomes, reflecting the significant uncertainty regarding future developments and outcomes, given our material exposure to Puerto Rico and the economic, fiscal, legal, and political uncertainties associated therewith, our loss reserves may ultimately prove to be insufficient to cover our losses, potentially having a material adverse effect on our results of operations and financial position, and may be subject to material volatility.

Conversely, Ambac’s loss reserves may prove to be overstated, due to favorable developments or results with respect to the factors described in the preceding paragraphs.

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

the initiation of rehabilitation proceedings against

eliminating or decreasing the likelihood of AAC delivering value to Ambac, through dividends or otherwise;

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

For public finance credits, including Puerto Rico, as well as other issuers, for which Ambac has an estimate of expected loss as of December 31, 2021, the possible increase in loss reserves under stress or other adverse conditions and circumstances was estimated to be approximately $ 355 .

This possible increase in loss reserves under stress or other adverse conditions is very significant and if we were to experience such incremental losses, our stockholders’ equity as of December 31, 2021, would decrease from $ 1,098 to $ 743 .

However, there can be no assurance that losses may not exceed such amount.

Representation and Warranty Recoveries

Ambac records estimated RMBS R&W subrogation recoveries for breaches of R&W by sponsors of certain RMBS transactions.

For a discussion of the approach utilized to estimate RMBS R&W subrogation recoveries, see Note 2.

Basis of Presentation and Significant Accounting Policies.

Ambac has recorded RMBS R&W subrogation recoveries of $ 1,730 , ($ 1,704 net of reinsurance) and $ 1,751 , ($ 1,725 net of reinsurance) at December 31, 2021 and 2020, respectively.

Our ability to realize R&W subrogation recoveries is subject to significant uncertainty, including risks inherent in litigation, including 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;

intervention by 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.

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.

If we were unable to realize R&W subrogation recoveries recorded on Ambac's consolidated balance sheet, our stockholders’ equity as of December 31, 2021, would decrease from $ 1,098 to $( 607 ).

Additionally, failure to realize R&W subrogation recoveries, or the realization of recoveries significantly below those recorded on the balance sheet, may result in adverse consequences such as impairing the ability of AAC to honor its financial obligations, particularly its outstanding debt and preferred stock obligations;

the initiation of rehabilitation proceedings against AAC;

AAC not being able to deliver value to Ambac, through dividends or otherwise;

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

Reinsurance Recoverables, Including Credit Impairment:

Amounts recoverable from reinsurers are estimated in a manner consistent with the associated loss and loss expense reserves.

The Company reports its reinsurance recoverables net of an allowance for amounts that are estimated to be uncollectible.

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AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Ambac’s reinsurance assets, including deferred ceded premiums and reinsurance recoverables on losses amounted to $ 145 at December 31, 2021.

Credit exposure existed at December 31, 2021, with respect to reinsurance recoverables to the extent that any reinsurer may not be able to reimburse Ambac under the terms of these reinsurance arrangements.

At December 31, 2021, there were ceded reinsurance balances payable of $ 33 offsetting this credit exposure.

Contractually ceded reinsurance payables can only be offset against amounts owed from the same reinsurer in the event that such reinsurer is unable to meet its obligations to reimburse Ambac.

To minimize its credit exposure to losses from reinsurer insolvencies, Ambac (i) is entitled to receive collateral from its reinsurance counterparties in certain reinsurance contracts and (ii) has certain cancellation rights that can be exercised by Ambac in the event of rating agency downgrades of a reinsurer (among other events and circumstances).

Ambac held letters of credit and collateral amounting to $ 111 from its reinsurers at December 31, 2021.

For those reinsurance counterparties that do not currently post collateral, Ambac's reinsurers are well capitalized, highly rated, authorized capacity providers.

Additionally, while legacy liabilities from the PWIC acquisition were fully ceded to certain reinsurers, Everspan also benefits from an unlimited, uncapped indemnity from the Enstar Holdings (US) to mitigate any residual risk to these reinsurers.

The allowance for credit losses is based upon Ambac's ongoing review of amounts outstanding and the key indicators management uses to assess the credit quality of reinsurance recoverables are collateral posted by the reinsurers and independent rating agency credit ratings.

The evaluation begins with a comparison of the fair value of collateral posted by the reinsurer to the recoverable, net of ceded premiums payable.

Any shortfall of collateral posted is evaluated against the credit rating of the reinsurer to determine whether an allowance is considered necessary.

For 2021, our top three reinsurers represented 98 % of our total ceded reinsurance recoverables, and reinsurance recoverables were primarily from reinsurers with applicable ratings of A or better.

The following table sets forth our three most significant reinsurers by amount of reinsurance recoverable as of December 31, 2021.

Reinsurers Type of Insurance

QBE Insurance Corporation Specialty P&C A $ 27 $ 27

Assured Guaranty Re Ltd.

Guarantee AA 18 —

Sompo Japan Nipponkoa Insurance, Inc.

Guarantee A+ 9 —

Total recoverables

(1) Represents financial strength ratings from S&P for financial guarantee reinsurers and AM Best for specialty P&C reinsurers.

(2) Represents reinsurance recoverables on paid and unpaid losses.

Unsecured amounts from QBE Insurance Corporation is also

supported by an unlimited, uncapped indemnity from Enstar Holdings (US).

(3) Reinsurance recoverables reduced by ceded premiums payables due to reinsurers, letters of credit, and collateral posted for the benefit of Ambac.

Ambac has a credit allowance related to reinsurance recoverables of less than $1 at December 31, 2021 and 2020, respectively.

INSURANCE REGULATORY RESTRICTIONS

United States

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

The other subsidiaries of Everspan Insurance are domiciled in various States and are therefore subject to the insurance laws and regulations of their respective States of domicile (together with the Wisconsin Insurance Laws and the Arizona Insurance Laws, the “State Insurance Laws”) and regulated by the insurance departments of those States as domestic insurers.

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

to meet certain financial tests;

AAC, because it is a financial guarantee insurer is not subject to risk-based capital requirements.

Regulated insurance companies are also required to file quarterly and annual statutory financial statements in each jurisdiction in which they are licensed.

The State Insurance Laws also require prior approval (or non-disapproval) of certain transactions between an insurance carrier and its affiliates.

The level of supervisory authority that may be exercised by non-domiciliary insurance regulators varies by jurisdiction.

Generally, however, non-domiciliary regulators are authorized to suspend or revoke the insurance license they issued and to impose restrictions on that license in the event that laws or regulations are breached by a regulated insurance company or in the event that continued or unrestricted licensing of the regulated insurance company constitutes a “hazardous condition” (or meets a similar standard) in the opinion of the non-domiciliary regulator.

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AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

The domiciliary regulators have primary regulatory authority, including with respect to the initiation and administration of rehabilitation or liquidation proceedings.

Additionally, the accounts and operations of AAC and Everspan are subject to individual periodic comprehensive financial examinations by their domestic regulators, and may be examined collectively by the lead regulator of the affiliated insurance company group, which is currently OCI.

Everspan Insurance has sought similar amendments to its certificates of authority in all other states.

Everspan Insurance and its subsidiaries (Providence Washington Insurance Company, 21st Century Indemnity Insurance Company, 21st Century Pacific Insurance Company and 21st Century Auto Insurance Company of New Jersey) are subject to risk-based capital requirements.

Everspan Insurance issued surety policies in 2021.

Nonadmitted and Reinsurance Reform Act of 2010.

Everspan Indemnity owns 100% of Everspan Insurance.

Everspan Indemnity issued its first policies in May 2021.

All of Ambac's insurance subsidiaries are in compliance with the minimum capital and surplus levels required under the State Insurance Laws required to transact all business written to date.

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

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

The Settlement Agreement will remain in force until the surplus notes that were issued pursuant to the Settlement Agreement have been redeemed, repurchased or repaid in full.

The Stipulation and Order will remain in force for so long as OCI determines it to be necessary.

The indenture for the Tier 2 Notes will remain in force until the Tier 2 Notes have been redeemed, repurchased or repaid in full.

Although not domiciled in New York, AAC is nevertheless subject to the New York insurance law governing financial guarantee insurers.

New York’s comprehensive financial guarantee insurance law defines the scope of permitted financial guarantee insurance and governs the conduct of business of all

financial guarantors licensed to do business in New York, including AAC.

The New York financial guarantee insurance law also establishes single and aggregate risk limits with respect to insured obligations insured by financial guarantee insurers.

Such single risk limits are specific to the type of insured obligation (for example, municipal or asset-backed).

At December 31, 2021, AAC is in compliance with applicable aggregate risk limits but not in compliance with applicable single risk limits.

Through run-off of the portfolio, AAC will continue to seek the reduction in its exposure for compliance with applicable single and aggregate risk limits, but may not be able to do so.

The financial statements of AAC and Everspan are prepared on the basis of accounting practices prescribed or permitted by the State Insurance Laws and the actions of regulatory authorities thereunder.

AAC and Everspan use such statutory accounting practices prescribed or permitted by the applicable regulatory authorities for determining and reporting their financial condition and results of operations, including for determining solvency under the State Insurance Laws.

The States in which AAC and Everspan are domiciled have adopted the National Association of Insurance Commissioners (“NAIC”) accounting practices and procedures manual (“NAIC SAP”) as a component of prescribed practices as codified in each State’s applicable law or regulation.

The following are details of statutory surplus for AAC and Everspan Indemnity:

• AAC’s statutory policyholder surplus was $ 757 at December 31, 2021, as compared to $ 865 as of December 31, 2020.

• Everspan Indemnity has statutory policyholder surplus of $ 106 as of December 31, 2021 as compared to $ 26 as of December 31, 2020.

The OCI has prescribed additional practices and has permitted accounting practices for AAC.

As a result of the prescribed and permitted practices discussed below, AAC’s statutory surplus at December 31, 2021 and 2020 was lower by $ 5 and higher by $ 40 , respectively, than if AAC had reported such amounts in accordance with NAIC SAP.

The Arizona Department of Insurance and Financial Institutions has permitted accounting practices for Everspan Indemnity and Everspan Insurance.

As a result of the permitted practice discussed below, Everspan Indemnity's statutory surplus at December 31, 2021 was higher by $ 18 than if Everspan had reported such amounts with NAIC SAP.

Everspan had no additional prescribed practices as at December 31, 2021 and no

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AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

permitted or additional prescribed practices at December 31, 2020.

Additional Prescribed Accounting Practices

OCI has prescribed the following accounting practices that differ from NAIC SAP for AAC:

• Paragraph 8 of Statement of Statutory Accounting Principles No.

The discount rate shall be adjusted at the end of each calendar year.

Additionally, in accordance with paragraph 13.e of Statutory Accounting Principles No.

97 "Investments in Subsidiary, Controlled and Affiliated Entities" and paragraph 8 of Statutory Accounting Principles No.

5R “Liabilities, Contingencies and Impairments of Assets - Revised”, AAC records probable losses on its subsidiaries for which it guarantees their obligations.

AAC also discounts probable losses on guarantees of subsidiary obligations using a discount rate equal to the average rate of return on its admitted assets.

AAC’s average rates of return on its admitted assets at December 31, 2021 and 2020 were 5.28 % and 4.56 %, respectively.

OCI has directed AAC to utilize a prescribed discount rate of 5.10 % for the purpose of discounting both its loss reserves and its probable losses on subsidiary guarantees.

• Paragraph 4 of Statement of Statutory Accounting Principles No.

Under statutory accounting principles, surplus notes issued in conjunction with commutations or the settlement of obligations would be valued at zero upon issuance pursuant to paragraph 4, SSAP 41.

OCI has directed the Company to record surplus notes issued in connection with commutations or the settlement of obligations at full par value upon issuance.

The surplus notes issued have a claim against surplus senior to the preferred and common shareholders.

• Paragraph 35 of Statement of Statutory Accounting Principles No.

Beginning June 11, 2014, as a result of the amended Segregated Account Rehabilitation Plan, OCI has directed the Company to not evaluate investments in AAC insured securities with policies that were allocated to the Segregated Account for OTTI and require all such investments be reported at amortized cost regardless of its

NAIC risk designation.

This accounting determination was intended to recognize that AAC continues to maintains statutory loss reserves without adjustment for the economic effects of its ownership of the insured investment securities, improve transparency to the users of the statutory financial statements and to minimize operational risks.

Effective February 12, 2018, with the Segregated Account's exit from rehabilitation, this prescribed practice was no longer applicable for OTTI evaluations going forward.

Permitted Accounting Practices

OCI has allowed the following permitted practice for AAC:

• Wisconsin accounting practices for changes to contingency reserves differ from NAIC SAP.

Under NAIC SAP, contributions to and releases from the contingency reserve are recorded via a direct charge or credit to surplus.

Under the Wisconsin Administrative Code, contributions to and releases from the contingency reserve are to be recorded through underwriting income.

AAC received permission from OCI to record contributions to and releases from the contingency reserve, in accordance with NAIC SAP.

The Arizona Department of Insurance and Financial Institutions has allowed the following permitted practice for Everspan:

• Paragraph 8 of Statement of Statutory Accounting Principles No.

97 “Investment in Subsidiary, Controlled and Affiliated Entities” (“SSAP 97”) states Investments in US insurance Subsidiary, Controlled and Affiliated entities shall be recorded based on the underlying audited statutory equity of the respective entity's financial statements adjusted for any unamortized goodwill.

Everspan has received permission from the Arizona Department of Insurance and Financial Institutions to admit its investment at December 31, 2021 of its wholly owned subsidiary, Providence Washington Insurance Company.

Providence Washington Insurance Company received a waiver from its regulator to file a statutory audit report issued for the year ended December 31, 2021.

United Kingdom

financial system, providing public understanding of the system, securing the proper degree of protection for consumers and helping to reduce financial crime.

These regulators have exercised significant oversight of Ambac UK since 2008, after Ambac, AAC and Ambac UK began experiencing financial stress.

In 2009, Ambac UK’s license to write new business was curtailed by the FSA and the insurance license was limited to undertaking only run-off related activity.

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AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

As such, Ambac UK is authorized to run-off its credit, suretyship and financial guarantee insurance portfolio in the United Kingdom.

These solvency requirements were amended on January 1, 2016, in order to implement the European Union's "Solvency II" directive on risk-based capital.

Ambac UK had previously been in a capital shortfall position as compared to these solvency capital requirements, but met the requirements as at December 31, 2021.

Ambac UK's regulators are fully aware of the deficiency which previously existed, and dialogue between Ambac UK and its regulators remains ongoing with respect to options for strengthening the capital position further.

Dividend Restrictions, Including Contractual Restrictions

State Insurance Regulators prescribe rules that determine if AAC and Everspan may declare dividends.

In addition, AAC and Everspan are subject to certain restrictions in their respective articles of incorporation with regards to the payment of dividends.

Board action authorizing a distribution by an insurance company must generally be reported to the applicable domiciliary regulator prior to payment.

In addition, State Insurance Laws generally require regulatory approval for the payment of extraordinary dividends, which are distributions in amounts that would exceed certain thresholds, such as a percentage of surplus or net income for the prior year or number of years.

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

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

Due to losses experienced by AAC, it has been unable to pay ordinary dividends to AFG since 2008 and will be unable to pay common dividends in 2022 without the prior consent of the OCI, which is extremely unlikely.

Background and Business

Description for further information.

AAC is not expected to make dividend payments to AFG for the foreseeable future.Pursuant to the Settlement Agreement, AAC may not make any “Restricted Payment” (which includes dividends from AAC to Ambac) in excess of $ 5 in the aggregate per annum, other than Restricted Payments from AAC to Ambac in an amount up to $ 8 per annum solely to pay operating expenses of Ambac.

Concurrent with making any such Restricted Payment, a pro rata amount of AAC's surplus notes would also need to be redeemed at par.

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

• The Stipulation and Order requires OCI approval for the payment of any dividend or distribution on the common stock of AAC.

Ambac UK is not expected to pay any dividends to AAC for the foreseeable future.

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AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

DERIVATIVE INSTRUMENTS

21 unchanged sentences

Total VIE derivative liabilities $ 1,940 $ — $ 1,940 $ — $ 1,940

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AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Liabilities Gross

Offset in the

Balance Sheet Net Amounts

Balance Sheet Gross Amount

of Collateral

Offset in the

Balance Sheet Net Amount

December 31, 2020:

15 unchanged sentences

There were no amounts held representing an obligation to return cash collateral as of December 31, 2021 and 2020.

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AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

The following tables summarize the location and amount of gains and losses of derivative contracts in the Consolidated Statements of Total Comprehensive Income (Loss) for the years ended December 31, 2021, 2020 and 2019:

16 unchanged sentences

Credit derivatives, which are privately negotiated contracts, provide the counterparty with credit protection against the occurrence of a specific event such as a payment default or bankruptcy relating to an underlying obligation.

Credit derivatives issued are insured by AAC.

Credit derivatives issued by ACP are insured by AAC.

The outstanding credit derivative transaction at December 31, 2021, does not include ratings based collateral-posting triggers or otherwise require Ambac to post collateral regardless of Ambac’s ratings or the size of the mark to market exposure to Ambac.

Our credit derivatives were written on a “pay-as-you-go” basis.

Similar to an insurance policy, pay-as-you-go provides that

Ambac pays interest shortfalls on the referenced transaction as they are incurred on each scheduled payment date, but only pays principal shortfalls upon the earlier of (i) the date on which the assets designated to fund the referenced obligation have been disposed of and (ii) the legal final maturity date of the referenced obligation.

Similar to an insurance policy, pay-as-you-go provides that Ambac pays interest shortfalls on the referenced transaction as they are incurred on each scheduled payment date, but only pays principal shortfalls upon the earlier of (i) the date on which the assets designated to fund the referenced obligation have been disposed of and (ii) the legal final maturity date of the referenced obligation.

Ambac maintains internal credit ratings on its guaranteed obligations, including credit derivative contracts, solely to indicate management’s view of the underlying credit quality of the guaranteed obligations.

The principal notional outstanding for credit derivative contracts was $ 257 and $ 280 as of

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AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

December 31, 2020 and 2019, respectively, which had internal Ambac ratings of AA in both periods:

The principal notional outstanding for credit derivative contracts was $ 201 and $ 257 as of December 31, 2021 and 2020, respectively, all of which had internal Ambac ratings of AA.

Interest Rate Derivatives

15 unchanged sentences

Currency swaps 272 308

Credit derivatives — 9

Contingent Features in Derivatives Related to Ambac Credit Risk

4 unchanged sentences

Additionally, given that AAC is no longer rated by an independent rating agency, counterparties have the right to terminate the swap positions.

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AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

As of December 31, 2021 and 2020, the net liability fair value of derivative instruments with contingent features linked to Ambac’s own credit risk was $ 93 and $ 113 , respectively, related to which Ambac had posted cash and securities as collateral with a fair value of $ 109 and $ 130 , respectively.

All such ratings-based contingent features have been triggered requiring maximum collateral levels to be posted by Ambac while preserving counterparties’ rights to terminate the contracts.

All such ratings-based contingent features have been triggered requiring maximum collateral levels to be posted by AFS while preserving counterparties’ rights to terminate the contracts.

Assuming all such contracts terminated at fair value on December 31, 2021, settlement of collateral balances and net derivative liabilities would result in a net receipt of cash and/or securities by Ambac.

If counterparties elect to exercise their right to terminate, the actual termination payment amounts will be determined in accordance with derivative contract terms, which may result in amounts that differ from market values as reported in Ambac’s financial statements.

INTANGIBLE ASSETS

I ntangible asset and accumulated amortization are included in the Consolidated Balance Sheets, as shown below.

December 31, 2021 2020

Finite-lived Intangible Assets:

Insurance intangible:

Gross carrying value $ 1,278 $ 1,281

Accumulated amortization 958 908

Net insurance intangible asset 320 373

Other intangibles:

Gross Carrying value 36 36

Accumulated amortization 3 —

Net other intangible assets 33 36

Total finite-lived intangible assets $ 353 $ 409

Indefinite-lived Intangible Assets:

Insurance licenses $ 9 $ —

Total intangible assets $ 362 $ 409

Amortization Expense:

Amortization expense is included in the Consolidated Statements of Total Comprehensive Income (Loss), as shown below.

Year ended December 31, 2021 2020 2019

Insurance intangible $ 52 57 $ 295

Other intangible 3 — —

Total $ 55 $ 57 $ 295

The estimated future amortization expense for intangible assets is as follows:

Insurance Intangible Asset (1)

Other Intangible Assets (1)

2022 $ 34 $ 3 $ 36

Thereafter 180 20 200

(1) The weighted-average insurance intangible amortization and other intangible amortization periods are 7.3 years and 6.7 years, respectively.

VARIABLE INTEREST ENTITIES

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

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

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

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

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

The transaction structures provide certain financial protection to Ambac.

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

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

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

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

| Ambac Financial Group, Inc.

113 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

of which may reduce the degree of Ambac’s control over a VIE.

• Assets and liabilities of FG VIEs that are consolidated are reported within Variable interest entity assets or Variable interest entity liabilities on the Consolidated Balance Sheets.

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

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

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

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

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

Upon deconsolidation of a FG VIE, Ambac recognizes a gain or loss for the difference between:

(i) the fair value of any consideration received, the fair value of any retained non-controlling investment in the VIE and the carrying amount of any non-controlling interest in the VIE

and (ii) the carrying amount of the VIE’s assets and liabilities.

Consequently, upon consolidation, Ambac eliminates the insurance assets and liabilities associated with the policy from the Consolidated Balance Sheets.

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

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

FG VIEs' liabilities that are insured by AAC or Ambac UK are with recourse, because the Company guarantees the payment of principal and interest in the event the issuer defaults.

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

AAC or Ambac UK’s economic exposure to consolidated FG VIEs is limited to the financial guarantees issued for recourse liabilities and any additional variable interests held by them.

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

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

| Ambac Financial Group, Inc.

114 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

December 31, 2021 2020

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

Fixed maturity securities, at fair value:

Corporate obligations, fair value option $ 3,320 $ — $ 3,320 $ 3,215 $ — $ 3,215

Municipal obligations, available-for-sale (1)

— 136 136 — 139 139

Total FG VIE fixed maturity securities, at fair value 3,320 136 3,455 3,215 139 3,354

Restricted cash 1 1 2 1 1 2

Loans, at fair value (2)

2,718 — 2,718 2,998 — 2,998

Derivative assets 38 — 38 41 — 41

Other assets — 2 2 — 2 2

Total FG VIE assets $ 6,077 $ 139 $ 6,216 $ 6,255 $ 143 $ 6,398

Long-term debt:

Long-term debt, at fair value (3)

$ 4,056 $ — $ 4,056 $ 4,324 $ — $ 4,324

Long-term debt, at par less unamortized discount — 160 160 — 169 169

Total long-term debt 4,056 160 4,216 4,324 169 4,493

Derivative liabilities 1,940 — 1,940 1,835 — 1,835

Total FG VIE liabilities $ 5,996 $ 160 $ 6,156 $ 6,159 $ 169 $ 6,328

Number of FG VIEs consolidated 5 1 6 5 1 6

(1) Available-for-sale FG VIE fixed-maturity securities consist of municipal obligations with an amortized cost basis of $ 106 and $ 113 , and aggregate gross unrealized gains of $ 29 and $ 27 at December 31, 2021 and 2020, respectively.

All such securities had contractual maturities due after ten years as of December 31, 2021.

(2) The unpaid principal balances of loan assets carried at fair value were $ 2,363 and $ 2,546 as of December 31, 2021 and 2020, respectively.

(3) The unpaid principal balances of long-term debt carried at fair value were $ 3,579 and $ 3,769 as of December 31, 2021 and 2020, respectively.

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

Year ended December 31, 2021 2020 2019

Net change in fair value of VIE assets and liabilities reported under the fair value option $ 4 $ ( 1 ) $ 13

Credit risk changes of fair value option long-term debt reported through other comprehensive income (loss) 1 ( 1 ) —

Net change in fair value of VIE assets and liabilities reported in earnings 5 ( 3 ) 14

Investment income on available-for-sale securities 6 7 10

Net realized investment gains (losses) on available-for-sale securities 2 8 13

Interest expense on long-term debt carried at par less unamortized cost ( 6 ) ( 6 ) ( 11 )

Other expenses ( 1 ) — ( 1 )

Gain (loss) from consolidating FG VIEs — — 15

Gain (loss) from de-consolidating FG VIEs — — ( 2 )

Income (loss) on variable interest entities $ 7 $ 5 $ 38

As further discussed in Note 7.

Insurance Contracts , on February 12, 2019, in connection with the COFINA POA, the COFINA Class 2 Trust was established.

Ambac was required to consolidate the COFINA Class 2 Trust, which resulted in a gain of $ 15 .

Ambac deconsolidated zero , one and one VIEs for the years ended December 31, 2021, 2020 and 2019, respectively.

There was no impact to consolidated assets and liabilities for the 2020 deconsolidation.

| Ambac Financial Group, Inc.

115 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Carrying Value of Assets and Liabilities

Liabilities (3)

Net Derivative

(Liabilities) (4)

December 31, 2021:

Global structured finance:

Mortgage-backed—residential $ 3,265 $ 1,929 $ 521 $ —

Other consumer asset-backed 788 17 234 —

Other 826 3 10 5

Total global structured finance 4,879 1,949 765 5

Global public finance 20,233 246 257 —

Total $ 25,112 $ 2,195 $ 1,023 $ 5

December 31, 2020:

Global structured finance:

Mortgage-backed—residential $ 4,308 $ 2,024 $ 580 $ —

Other consumer asset-backed 1,050 24 239 —

Other 994 3 15 8

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

Global public finance 21,646 263 287 —

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

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

(2) Insurance assets represent the amount included in “Premium receivables” and “Subrogation recoverable” for financial guarantee insurance contracts on Ambac’s Consolidated Balance Sheets.

(4) Net derivative assets (liabilities) represent the fair value recognized on credit derivative contracts and interest rate swaps on Ambac’s Consolidated Balance Sheets.

Ambac Sponsored Non-consolidated VIEs

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

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

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

The equity investment had a carrying value of $ 51 at December 31, 2020.

As further described in Note 1.

Background and Business Description, on January 22, 2021, AAC completed the Corolla Note Exchange transaction whereby it acquired 100 % of the outstanding Notes of the Corolla Trust and the Corolla Certificates for AAC surplus notes and subsequently dissolved the Corolla Trust.

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

Ambac LSNI issued LSNI Secured

Notes in connection with the Rehabilitation Exit Transactions.

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

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

The carrying value of LSNI Secured Notes held by Ambac was $ 465 at December 31, 2020.

Ambac's debt obligation to the VIE had a carrying value of $ 1,641 at December 31, 2020, and was reported within Long-term debt on the Consolidated Balance Sheets.

As further described in Note 1.

Background and Business Description, on July 6, 2021, Sitka, Ambac's newly formed VIE, issued the Sitka Senior Secured Notes that were used to fund a portion of the full redemption of the LSNI Secured Notes issued by LSNI, with the remaining balance redeemed utilizing other available sources of liquidity.

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

Ambac's debt obligation to Sitka had a carrying value of $ 1,154 at December 31, 2021, and is reported within Long-term debt on the Consolidated Balance Sheets.

| Ambac Financial Group, Inc.

116 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

LONG-TERM DEBT

Long-term debt outstanding, excluding VIE long-term debt, was as follows:

8 unchanged sentences

— — — 365 ( 118 ) 247

Ambac note 1,641 — 1,641 1,763 — 1,763

LSNI Ambac Note — — — 1,641 — 1,641

Sitka AAC Note 1,175 ( 21 ) $ 1,154 — — —

Tier 2 Notes 333 — 333 306 — 306

1 unchanged sentence

Long-term debt $ 2,334 $ ( 104 ) $ 2,230 $ 2,884 $ ( 145 ) $ 2,739

| Ambac Financial Group, Inc.

123 2020 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Aggregated annual maturities of non-VIE long-term debt obligations (based on scheduled maturity dates as further discussed below) are as follows:

2 unchanged sentences

Total $ 2,334

(1) Includes $ 531 related to surplus notes that were not approved for payment by OCI on their stated June 7, 2020, maturity date

(2) Includes $ 365 of junior surplus notes that were acquired in January and February of 2021 in exchanges for an aggregate of $ 279 of surplus notes.

Refer to "2021 Surplus Note Exchanges" in in Note 1.

Background and Business Description.

Surplus Notes

Ambac Assurance's surplus notes, with a par amount of $ 531 and $ 531 at December 31, 2020 and 2019, respectively, have a scheduled maturity of June 7, 2020.

Surplus notes outstanding are recorded at their fair value at the date of issuance.

The discount on surplus notes was accreted into income using the effective interest method based on projected cash flows at the date of issuance through June 7, 2020, using a weighted average imputed interest rate of 10.1 %.

Surplus note principal and interest payments require the approval of OCI.

Since the issuance of the surplus notes in 2010, OCI has declined to approve regular payments of interest on surplus notes, although the OCI has permitted exceptional payments in connection with (a) increasing the percentage of deferred policy payments of the Segregated Account of Ambac Assurance from 25% to 45% in 2014 and (b) a one-time payment of approximately six months of interest on the surplus notes outstanding immediately after consummation of the Rehabilitation Exit Transactions in 2018 in the amount of $ 14 , of which $ 3 was received by AFG for surplus notes that it owned and that are considered extinguished for accounting purposes.

In April 2020, OCI declined the request of Ambac Assurance to pay the principal amount of the surplus notes, plus all accrued and unpaid interest thereon, on the scheduled maturity date of June 7, 2020.

As a result, the scheduled payment date for interest, and the scheduled maturity date for payment of principal of the surplus notes, shall be extended until OCI grants approval to make the payment.

(1) Surplus Notes issued had a scheduled maturity date of June 7, 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 June 7, 2020, and June 7, 2021.

As a result, the payment date for principal of the surplus notes was 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.

Included in the table above is the potential principal payment at the next scheduled payment date of June 7, 2022.

Surplus Notes

Ambac Assurance's Surplus Notes, with a par amount of $ 785 and $ 531 at December 31, 2021 and 2020, respectively, had a scheduled maturity of June 7, 2020, which has been extended until OCI grants approval to make the payment.

During the year ended December 31, 2021, in connection with the 2021 Surplus Note Exchanges and other transactions, Surplus Notes with aggregate par amount of $ 255 were re-issued, and all Junior Surplus Notes were acquired and extinguished.

The discount on Surplus Notes issued prior to 2021 was accreted into income using the effective interest method based on projected cash flows at the date of issuance through June 7, 2020, using a weighted average imputed interest rate of 10.1 %.

The discount on Surplus Notes issued during the year ended December 31, 2021, is being accreted into income using the effective interest method at a weighted average imputed interest rate of 8.9 %.

Refer to Note 1.

Background and Business Description for further discussion of the Rehabilitation Exit Transactions, the AMPS Exchange and the 2021 Surplus Note Exchanges, each involving the issuance of surplus notes by AAC.

The retirement of certain notes as part of the Rehabilitation Exit Transactions in 2018 resulted in gains of $ 3 for the year ended

December 31, 2018, recognized in Net realized gains (losses) on extinguishment of debt on the Consolidated Statements of Total Comprehensive Income.

Junior Surplus Notes

The junior surplus notes have a par value of $ 365 and $ 365 at December 31, 2020 and 2019, respectively.

Pursuant to the Second Amended Plan of Rehabilitation, Ambac Assurance became the obligor under the junior surplus notes (originally issued by the Segregated Account) as of February 12, 2018.

• Par value at December 31, 2020 and 2019 includes $ 15 and $ 15 , respectively, of junior surplus notes issued in connection with a settlement agreement (the “OSS Settlement Agreement”) entered into among Ambac, AAC, the Segregated Account and One State Street, LLC (“OSS”) with respect to the termination of Ambac’s office lease with OSS.

A portion of the principal balance of the originally issued notes were reduced based on rents paid to OSS by AAC after December 31, 2015.

Par value of these junior surplus notes was reduced by $ 0 and $ 2 during the years ended December 31, 2020 and 2019, respectively, as rent payments were made by Ambac Assurance.

As of December 31, 2020, there was no remaining balance of the junior surplus notes that can be reduced on rents paid by AAC.

These junior surplus notes were recorded at their fair value at the date of issuance.

The discount on these notes was accreted into income from the date of issuance through June 7, 2020, using the effective interest method at an imputed interest rate of 19.5 %.

As further described in Note 1.

Background and Business Description, on February 11, 2021, AAC completed the JSN Exchange, pursuant to which it acquired all remaining junior surplus notes originally issued in connection with the OSS Settlement Agreement.

• Par value at December 31, 2020 and 2019 includes $ 350 of a junior surplus note originally issued to AFG pursuant to AFG's Chapter 11 Reorganization Plan in accordance with the Mediation Agreement dated September 21, 2011, among AFG, AAC, the Segregated Account, the Rehabilitator, the OCI and the Official Committee of Unsecured Creditors of AFG, and that AFG sold to the Corolla Trust on August 28, 2014.

This junior surplus note was recorded at a discount to par based on its fair value on August 28, 2014.

Ambac is accreting the discount on this junior surplus note into earnings using the effective interest method, based on an imputed interest rate of 8.4 %.

As further described in Note 1.

Background and Business Description, on January 22, 2021, AAC completed the Corolla Note Exchange, pursuant to which it effectively acquired the junior surplus notes from the Corolla Trust.

The Ambac Note, issued in connection with the Rehabilitation Exit Transactions on February 12, 2018, as more fully described in Note 1.

Background and Business Description , has a par value of $ 1,641 and $ 1,763 at December 31, 2020 and 2019, respectively, and has a legal maturity of February 12, 2023.

Interest on the Ambac Note is payable quarterly (on the last day of each quarter beginning with June 30, 2018) at an annual rate

Background and Business Description for further discussion of the 2021 Surplus Note Exchanges.

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.

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

Sitka AAC Note

The Sitka AAC Note, issued in connection with the Secured Note Refinancing on July 6, 2021, as more fully described in Note 1.

Background and Business Description, has a par value of $ 1,175 at December 31, 2021, and a legal maturity of July 6, 2026.

Interest on the Sitka AAC Note is payable quarterly (on the last day of each quarter beginning with September 30, 2021) at an annual rate of 3-month U.S.

Dollar LIBOR + 4.50 %, subject to a 0.75 % LIBOR floor.

The discount on Sitka AAC Note is being accreted into income using the effective interest method based on an imputed interest rate of 5.7 %

The Sitka AAC Note is redeemable prior to July 6, 2022, at a price of 100 % of the principal amount plus a make-whole premium and accrued and unpaid interest.

The make-whole premium represents the excess of the present value of 103 % of the principal amount plus all required scheduled interest payments through July 6, 2022 (excluding accrued and unpaid interest to the redemption date ) , over the principal amount to be redeemed.

On and after July 6, 2022, and prior to July 6, 2023, the notes are redeemable at a price equal to 103 % of the principal amount plus accrued and unpaid interest.

On and after July 6, 2023, the notes are redeemable at 100 % of the principal amount plus accrued and unpaid interest.

The Sitka AAC Note is secured by a pledge of AAC’s right, title and interest in (i) up to $ 1,400 of proceeds from certain litigations involving AAC related to residential mortgage-backed securities (the "RMBS Litigations") and (ii) the capital stock of Ambac UK.

Such collateral may prove to be insufficient to pay any or all the amounts due on the Sitka AAC Note due to (a) inherent uncertainty with respect to the amount

| Ambac Financial Group, Inc.

4 unchanged sentences

(Dollar Amounts in Millions, Except Share Amounts)

of 3-month U.S.

and timing of recoveries on the RMBS Litigations, and (b) uncertainty with respect to the value of Ambac UK and the amount that could be obtained in a sale or other disposition of such collateral due to factors such as market and economic conditions, the availability of buyers, constraints associated with any extant rehabilitation, liquidation or similar proceeding, and regulatory requirements with respect to a change in ownership of Ambac UK.

In addition, AAC issued a financial guaranty insurance policy (the “Sitka Senior Secured Notes Policy”) to the trustee for the Sitka Senior Secured Notes for the benefit of the holders of the Sitka Senior Secured Notes irrevocably guaranteeing all regularly scheduled principal and interest payments in respect of the Sitka Senior Secured Notes as and when such payments become due and owing.

Upon receipt of any proceeds from the RMBS Litigations or proceeds from the sale or disposition of Ambac UK, AAC shall apply an amount equal to the lesser of (a) the amount of such proceeds from the RMBS Litigations up to $ 1,400 or proceeds of the sale or disposition of Ambac UK, as the case may be, and (b) all outstanding principal, premium, if any, and accrued and unpaid interest on the Sitka AAC Note to redeem the Sitka AAC Note, in whole or in part, as applicable;

provided, that any non-cash recoveries from the RMBS Litigations shall be deemed to be received upon the receipt of the applicable appraisal.

LSNI Ambac Note

The LSNI Ambac Note, issued in connection with the Rehabilitation Exit Transactions on February 12, 2018, had a par value of $ — and $ 1,641 at December 31, 2021 and 2020, respectively, and had a legal maturity of February 12, 2023.

Interest on the LSNI Ambac Note was payable quarterly (on the last day of each quarter beginning with June 30, 2018) at an annual rate of 3-month U.S.

Dollar LIBOR + 5.00 %, subject to a 1.00 % LIBOR floor.

During the years ended December 31, 2020 and 2019, $ 121 and $ 178 par value of the Ambac Note was redeemed, respectively.

The maturity date for the Ambac Note is the earlier of (x) February 12, 2023, and (y) if the Secured Notes are then outstanding, the date that is five business days prior to the date for which OCI has approved the repayment of the outstanding principal amount of the surplus notes issued by Ambac Assurance.

Promptly, and in any event within four business days after the receipt (whether directly or indirectly) of any representation and warranty subrogation recoveries, Ambac Assurance shall (i) apply an amount (the “Mandatory Redemption Amount”) equal to the lesser of (a) the amount of representation and warranty subrogation recoveries up to $ 1,400 and (b) all outstanding principal and accrued and unpaid interest on the Ambac Note to redeem the Ambac Note, in whole or in part, as applicable;

During the years ended December 31, 2021, 2020 and 2019, $ 1,641 , $ 121 and $ 178 par value of the LSNI Ambac Note was redeemed, respectively.

The maturity date for the LSNI Ambac Note was the earlier of (x) February 12, 2023, and (y) if the LSNI Secured Notes were then outstanding, the date that is five business days prior to the date for which OCI approved the repayment of the outstanding principal amount of the surplus notes issued by AAC.

Promptly, and in any event within four business days after the receipt (whether directly or indirectly) of any representation and warranty subrogation recoveries, AAC was to apply an amount (the “Mandatory Redemption Amount”) equal to the lesser of (a) the amount of representation and warranty subrogation recoveries up to $ 1,400 and (b) all outstanding principal and accrued and unpaid interest on the LSNI Ambac Note to redeem the LSNI Ambac Note, in whole or in part, as applicable;

provided, that any non-cash representation and warranty subrogation recoveries shall be deemed to be received upon the receipt of the applicable appraisal.

• The portion of the Ambac Note issued in connection with the exchange of surplus notes ("Ambac Note A") was accounted for as a debt modification since the creditors before and after the exchange remained the same and the change in terms was not considered substantial.

A substantial change is considered to be a change in cash flows of equal to or greater than 10%, and because the change in cash flows was less than 10%, debt modification accounting is appropriate.

Under debt modification accounting, Ambac Note A was recorded at a discount to par based on the carrying value of the surplus notes less the cash consideration paid.

Furthermore, no gain or loss was recorded on the surplus note exchange and a new effective interest rate was established based on the cash flows of Ambac Note A.

Any consideration paid directly related to the issuance of Ambac Note A was expensed as incurred.

• The portion of the Ambac Note issued in connection with the exchange of Deferred Amounts ("Ambac Note B") was recorded at fair value.

The Deferred Amount exchange was accounted for as an extinguishment of the Deferred Amounts with the gain reflected as a benefit to loss and loss expenses.

Any consideration paid directly related to the issuance of Ambac Note B was capitalized and amortized as part of the effective yield calculation.

The aggregate discount on the entire Ambac Note (portions A and B) was accreted into earnings from the date of issuance through September 30, 2018, using the effective interest method, based on an imputed interest rate of 7.6 %.

Refer to Note 1.

Background and Business Description for further discussion of the Rehabilitation Exit Transactions in connection with which the Ambac Note was issued.

Refer to the discussion under "Counterparty Collateral, Deposits with Regulators and Other Restrictions" in Note 10.

Investments for further information on security and collateral related to the Ambac Note and the Secured Notes issued by Ambac LSNI.

The Tier 2 Notes, issued in connection with the Rehabilitation Exit Transactions on February 12, 2018, with a par value of $ 306 and $ 281 (including paid-in-kind interest of $ 66 and $ 41 )

at December 31, 2020 and 2019, respectively, have a legal maturity of February 12, 2055.

As further described in Note 1.

Background and Business Description, on July 6, 2021, Sitka, Ambac's newly formed non-consolidated VIE, issued the Sitka Senior Secured Notes that were used to fund a portion of the full redemption of the LSNI Secured Notes issued by LSNI, with the remaining balance redeemed utilizing other available sources of liquidity.

The Tier 2 Notes, issued in connection with the Rehabilitation Exit Transactions on February 12, 2018, with a par value of $ 333 and $ 306 (including paid-in-kind interest of $ 93 and $ 66 ) at December 31, 2021 and 2020, respectively, have a legal maturity of February 12, 2055.

Interest on the Tier 2 Notes is at an annual rate of 8.50 %.

1 unchanged sentence

The Tier 2 Notes were recorded at a discount to par as any consideration paid that was directly related to the issuance of the Tier 2 Notes was capitalized and is part of the effective yield calculation.

Ambac is accreting the discount on the Tier 2 Notes into earnings using the effective interest method, based on an imputed interest rate of 9.9 %.

The Tier 2 Notes are subject to mandatory redemption upon:

(i) receipt of representation and warranty subrogation recoveries in excess of $ 1,600 ("Tier 2 Net Proceeds") and (ii) payment of principal or interest on AAC surplus notes.

Promptly, and in any event within five business days after the receipt (whether directly or indirectly) of Tier 2 Net Proceeds, AAC shall deposit an amount equal to the Tier 2 Net Proceeds to a collateral account, provided, that any non-cash representation and warranty subrogation recoveries shall be deemed to be received upon the receipt of the applicable appraisal of the consideration received by AAC.

Similarly, within five business dates after a surplus note payment (other than in connection with the Rehabilitation Exit Transactions), AAC shall deposit an amount based on the percentage of surplus notes paid applied to the outstanding balance of the Tier 2 Notes to a collateral account.

Ambac accreted the discount on the Tier 2 Notes into earnings using the effective interest method, at an imputed interest rate of 9.9 % based on projected redemption at the date of issuance.

The discount had been fully accreted as of December 31, 2020.

The Tier 2 Notes are secured by recoveries from the RMBS Litigations in excess of $ 1,600 and are subject to mandatory redemption upon:

(i) receipt of recoveries from the RMBS Litigations in excess of $ 1,600 ("Tier 2 Net Proceeds") and (ii) payment of principal or interest on AAC surplus notes.

Promptly, and in any event within five business days after the receipt (whether directly or indirectly) of Tier 2 Net Proceeds, AAC shall deposit an amount equal to the Tier 2 Net Proceeds to a collateral account, provided, that any non-cash recoveries from the RMBS Litigations shall be deemed to be received upon the receipt of the applicable appraisal of the consideration received by AAC.

Similarly, within five business days after a surplus note payment (other than in connection with the Rehabilitation Exit Transactions), AAC shall deposit an amount based on the percentage of Surplus Notes paid applied to the outstanding balance of the Tier 2 Notes to a collateral account.

In both cases, the amount deposited shall not be in excess of the amount required to redeem all outstanding Tier 2 Notes.

Also, such amounts shall be used to initiate a redemption on the initial call date for the Tier 2 Notes or, if the initial call date has occurred, promptly following the receipt of the Tier 2 Net Proceeds or surplus note payment.

The Tier 2 Notes may also be redeemed, in whole or in part, at the option of Ambac Assurance.

Also, such amounts shall be used to initiate a redemption on the Initial Call Date (as defined below) for the Tier 2 Notes or, if the Initial Call Date has occurred, promptly following the receipt of the Tier 2 Net Proceeds or surplus note payment.

The Tier 2 Notes may also be redeemed, in whole or in part, at the option of AAC.

Both mandatory and optional redemptions may be made at a price equal to 100 % of the aggregate principal amount redeemed, plus accrued and unpaid interest, if any, plus a make-whole premium.

Make-whole premiums are calculated based on future interest payments through the contractual call date ("Initial Call Date").

The Initial Call Date at issuance of December 17, 2020, extends ratably beginning the first anniversary of issuance to September 17, 2021 by the second anniversary, and to March 17, 2022 by the third anniversary of issuance.

The Initial Call Date at issuance of December 17, 2020 extends ratably beginning the first anniversary of issuance to (i) September 17, 2021 by the second anniversary, and (ii) March 17, 2022 by the third anniversary of issuance.

There are no extensions of the Initial Call Date beyond March 17, 2022.

1 unchanged sentence

Ambac UK Debt

The Ambac UK debt, issued in connection with the Ballantyne commutation on June 18, 2019, has a par value of $ 41 and $ 41 at December 31, 2020 and 2019, and a legal maturity of May 2, 2036.

Interest on the Ambac UK debt is at an annual rate of 0.00 %.

The Ambac UK debt was recorded at its fair value at the date of issuance.

The discount on the debt is currently being accreted into income using the effective interest method at an imputed interest rate of 7.4 %.

The Ambac UK debt, issued in connection with the commutation of its exposure with respect to Ballantyne Re plc on June 18, 2019, has a par value of $ 41 and $ 41 at

| Ambac Financial Group, Inc.

4 unchanged sentences

(Dollar Amounts in Millions, Except Share Amounts)

December 31, 2021 and 2020, and a legal maturity of May 2, 2036.

Interest on the Ambac UK debt is at an annual rate of 0.00 %.

The Ambac UK debt was recorded at its fair value at the date of issuance.

The discount on the debt is currently being accreted into income using the effective interest method at an imputed interest rate of 7.4 %.

Variable Interest Entities, Long-term Debt

7 unchanged sentences

As of December 31, 2021 and 2020, the interest rates on these VIEs’ long-term debt ranged from 0.00 % to 7.93 % in both years.

respectively.

Aggregated annual maturities of VIE long-term debt following December 31, 2021 are:

Thereafter-$ 3,683 .

AFG files a consolidated Federal income tax return with its subsidiaries.

AFG and its subsidiaries also file separate or combined income tax returns in various states, local and foreign jurisdictions.

REVENUES FROM CONTRACTS WITH CUSTOMERS

T he following table presents the MGA/U business operations revenues recognized in accordance with the Revenue from Contracts with Customers Topic of the ASC disaggregated by policy type for the twelve months ended December 31, 2021:

Employer Stop Loss Affinity

Products Other Total

Gross commissions $ 8 $ 18 $ — $ 26

During the twelve months ended December 31, 2021, the amount of revenue recognized related to performance obligations satisfied in a previous period, inclusive of changes due to estimates was approximately $ 12 .

Contract Assets and Liabilities

The balances of contract assets and contract liabilities with customers were as follows:

December 31, 2021 2020

Commissions receivable $ 2 $ 2

Contract assets 4 5

Contract liabilities 1 1

Contract assets represent estimated future consideration related to base commissions and profit-sharing commissions that were recognized as revenue upon the placement of the policy.

The Company does not have the right to bill or collect payment on i) base commissions until the insurer has collected the related premiums from policyholders nor ii) profit-sharing commissions until after the contract year is completed.

The change in contract assets during the year ended December 31, 2021, is primarily due to reclassification to receivables (unconditional right) and collections.

Contract liabilities represent advance consideration received from customers related to Employer stop loss base commissions that will be recognized over time as claims servicing is performed, which typically occurs between 17 and 20 months from contract inception.

During the year ended December 31, 2021, the Company recognized revenue that was included in the contract liability balance as of the beginning of the period of $ 1 .

| Ambac Financial Group, Inc.

119 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

COMPREHENSIVE INCOME

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

Unrealized Gains

Available- for

Sale Securities (1)

Amortization of

Postretirement

Gain (Loss) on

Foreign Currency

Translation (1)

Changes of Fair

Liabilities (1) (2)

Year ended December 31, 2021:

Beginning Balance

$ 166 $ 5 $ ( 92 ) $ — $ 79

Other comprehensive income (loss) before reclassifications ( 5 ) — ( 8 ) — ( 13 )

Amounts reclassified from accumulated other comprehensive income (loss) ( 7 ) ( 1 ) — ( 1 ) ( 9 )

Net current period other comprehensive income (loss) ( 12 ) ( 1 ) ( 8 ) ( 1 ) ( 21 )

Balance at December 31, 2021 $ 154 $ 4 $ ( 100 ) $ ( 1 ) $ 58

Year ended December 31, 2020:

Beginning Balance

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

Other comprehensive income before reclassifications 36 ( 2 ) 23 — 58

Amounts reclassified from accumulated other comprehensive income ( 21 ) ( 1 ) — 1 ( 21 )

Net current period other comprehensive income (loss) 15 ( 3 ) 23 1 37

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

(1) All amounts are net of tax and noncontrolling interest.

Amounts in parentheses indicate reductions to Accumulated Other Comprehensive Income.

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

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

Details about Accumulated Other

Comprehensive Income Components Amount Reclassified from Accumulated

Other Comprehensive Income Affected Line Item in the

Consolidated Statement of

Total Comprehensive Income

Year Ended December 31,

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

$ ( 7 ) $ ( 22 ) Net realized investment gains (losses)

( 1 ) 1 Provision for income taxes

$ ( 7 ) $ ( 21 ) Net of tax and noncontrolling interest

Amortization of Postretirement Benefit

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

Actuarial gains (losses) — — Other income

( 1 ) ( 1 ) Total before tax

— — Provision for income taxes

$ ( 1 ) $ ( 1 ) Net of tax and noncontrolling interest

Credit Risk Changes of Fair Value Option Liabilities

$ ( 1 ) $ 2 Credit risk changes of fair value option liabilities

— — Provision for income taxes

( 1 ) 1 Net of tax and noncontrolling interest

Total reclassifications for the period $ ( 9 ) $ ( 21 ) Net of tax and noncontrolling interest

| Ambac Financial Group, Inc.

120 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

NET INCOME PER SHARE

As of December 31, 2021, 46,304,139 shares of AFG's common stock (par value $ 0.01 ) and warrants entitling holders to acquire up to 4,877,617 shares of new common stock at an exercise price of $ 16.67 per share were issued and outstanding.

Common shares outstanding increased by 495,000 , during the year ended December 31, 2021, primarily due to settlements of employee restricted and performance stock units.

For the three years ended December 31, 2021, 2020 and 2019, 132 , 34 and — warrants were exercised, respectively, resulting in an issuance of 4 , 8 and 0 shares of common stock, respectively.

On June 30, 2015, the Board of Directors of AFG authorized the establishment of a warrant repurchase program that permits the repurchase of up to $ 10 of warrants.

On November 3, 2016, the Board of Directors of AFG authorized a $ 10 increase to the warrant repurchase program.

The remaining aggregate authorization at December 31, 2021 was $ 12 .

For the years ended December 31, 2021 and 2020, AFG did not repurchase any warrants.

The following table provides a reconciliation of net income attributable to common stockholders to the numerator in the basic and diluted earnings per share calculation, together with the resulting earnings per share amounts:

Year ended December 31, 2021 2020 2019

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

Adjustment to redemption value (ASC 480) ( 12 ) — —

Numerator of basic and diluted EPS ( 28 ) ( 437 ) ( 216 )

Basic $ ( 0.61 ) $ ( 9.47 ) $ ( 4.69 )

Diluted $ ( 0.61 ) $ ( 9.47 ) $ ( 4.69 )

The denominator of the basic earnings per share computation represents the weighted average common shares outstanding plus vested restricted stock units (together, "Basic Weighted Average Shares Outstanding").

The denominator of diluted earnings per share adjusts the basic weighted average shares outstanding for all potential dilutive common shares outstanding during the period.

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

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

December 31, 2021 2020 2019

Basic weighted average shares outstanding 46,535,001 46,147,062 45,954,908

Effect of potential dilutive shares (1) :

Warrants — — —

Stock options — — —

Restricted stock units — — —

Performance stock units (2)

Diluted weighted average shares outstanding 46,535,001 46,147,062 45,954,908

Anti-dilutive shares excluded from the above reconciliation

Warrants 4,877,653 4,877,754 4,877,783

Stock options — 16,121 16,667

Restricted stock units 475,333 302,145 249,263

Performance stock

700,915 1,002,501 872,258

(1) For the years ended years ended December 31, 2021, 2020 and 2019 , Ambac had a net loss and accordingly excluded all potentially dilutive securities from the determination of diluted loss per share as their impact was anti-dilutive.

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

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

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

The following are the major jurisdictions in which Ambac and its subsidiaries operate and the earliest tax years subject to examination:

10 unchanged sentences

Total $ 2 $ ( 440 ) $ ( 183 )

| Ambac Financial Group, Inc.

121 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Provision (Benefit) for Income Taxes

T he components of the provision (benefit) for income taxes were as follows:

The components of the provision (benefit) for income taxes were as follows:

2021 2020 2019

Current taxes

$ — $ — $ ( 2 )

state and local

$ 2 $ — $ ( 3 )

Total current taxes

4 unchanged sentences

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

$ ( 3 ) $ 32 $ 5

The total effect of income taxes on net income and stockholders’ equity for the years ended December 31, 2021, 2020 and 2019 is as follows:

1 unchanged sentence

Total income taxes charged to net income $ 18 $ ( 3 ) $ 32

$ ( 3 ) $ 32 $ 5

Income taxes charged (credited) to stockholders’ equity:

2 unchanged sentences

Valuation allowance to equity 1 ( 3 ) ( 23 )

( 3 ) ( 23 ) ( 9 )

Total charged to stockholders’ equity:

Total effect of income taxes

( 2 ) 1 ( 8 )

| Ambac Financial Group, Inc.

126 2020 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Total effect of income taxes $ 16 $ ( 1 ) $ 24

Reconciliation of U.S.

2 unchanged sentences

The following is a reconciliation of these differences:

2020 2019 2018

Year Ended December 31, Amount % Amount % Amount %

Year Ended December 31, 2021 2020 2019

Tax on income (loss) at statutory rate $ — 21 % $ ( 92 ) 21 % $ ( 38 ) 21 %

2 unchanged sentences

Foreign taxes 8 448 % 6 ( 1 ) % 40 ( 22 ) %

State Income Taxes 14 794 % — — % ( 2 ) 1 %

Substantiation adjustment — — % ( 29 ) 7 % 28 ( 15 ) %

Valuation allowance ( 4 ) ( 230 ) % 113 ( 26 ) % 8 ( 4 ) %

Change in Tax Law — — % — — % ( 2 ) ( 0.7 ) %

Other, net 1 72 % 2 — % — — %

1 unchanged sentence

Unrecognized Tax Positions

A reconciliation of the beginning and ending amounts of material unrecognized tax benefits for 2020, 2019 and 2018 is as follows:

2020 2019 2018

Balance, beginning of period

Increases related to prior year tax positions

Decreases related to prior year tax positions

Balance, end of period

The Company had no material unrecognized tax benefits at December 31, 2021 and 2020.

Deferred Income Taxes

8 unchanged sentences

Deferred tax assets:

Net operating loss and capital carryforward 764 742

Net operating loss carryforward 786 764

Loss reserves 180 218

State capital loss carryforward 7 —

Debentures 7 22

4 unchanged sentences

Net deferred tax liability $ 28 $ 24

| Ambac Financial Group, Inc.

122 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

In accordance with the Income Tax Topic of the ASC, a valuation allowance is recognized if, based on the weight of available evidence, it is more-likely-than-not that some, or all, of the deferred tax asset will not be realized.

2 unchanged sentences

The remaining net deferred tax liability of $ 28 is attributable to Ambac U.K.

In December 2020, AFG and certain subsidiaries and affiliates amended their existing tax sharing agreement (the "Third TSA Amendment").

Under the Third TSA Amendment, AAC and AFG agreed to reallocate $ 210 of net operating loss carry-forwards (“NOLs”) from AAC to AFG and to eliminate AAC's requirement to make future payments based on its utilization of NOLs ("tolling payments") for any taxable year beginning on or after January 1, 2019.

In connection with the Third TSA Amendment, AAC paid to AFG approximately $ 28 of accrued tolling payments based on NOLs used by AAC in 2017.

The Third TSA Amendment did not affect the NOL tolling payments AAC would be required to make in connection with the 2013 Closing Agreement between Ambac and the United States Internal Revenue Service, which could amount to as much as $ 8 .

and is classified in other liabilities on the Consolidated Balance Sheet.

Pursuant to a 2013 Closing Agreement between Ambac and the United States Internal Revenue Service ("IRS"), AAC could have to pay amount to as much as $ 8 to the IRS should AAC utilize NOLs available to it as of December 31, 2019.

As of December 31, 2021, the Company has $ 3,744 of NOLs, which if not utilized will begin expiring in 2029, and will fully expire in 2041.

EMPLOYMENT BENEFIT PLANS

Postretirement Health Care and Other Benefits

Postretirement Health Care and Postemployment Benefits

Ambac provides postretirement and postemployment / severance benefits, including health and life benefits for certain employees who meet predefined age and service requirements.

1 unchanged sentence

Postretirement and postemployment benefits expense, including severance benefits paid, were $ 1 , $ 1 and $ 3 for the years ended December 31, 2021, 2020 and 2019, respectively.

| Ambac Financial Group, Inc.

127 2020 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Effective August 1, 2005, new employees were not eligible for postretirement benefits.

3 unchanged sentences

The following table sets forth projected benefit payments from Ambac’s postretirement plan over the next ten years for current retirees:

The discount rate used in determining the projected benefit obligations for the postretirement plan is selected by reference to a pension liability index with similar duration to that of the benefit plan.

The discount rate used in determining the projected benefit obligations for the postretirement plan is selected by reference to

a pension liability index with similar duration to that of the benefit plan.

The rates used for the projected plan benefit obligations at the measurement date for December 31, 2021 and 2020, were 2.75 % and 2.25 %, respectively.

Savings Incentive Plan

Substantially all employees of AAC are covered by a defined contribution plan (the “Savings Incentive Plan”).

AAC makes employer matching contributions equal to 100 % of the employees’ contributions, up to 3 % of such participants’ compensation, as defined in the plan, plus 50 % of contributions up to an additional 2 % of compensation, subject to limits set by the Internal Revenue Code.

The total cost of the Savings Incentive Plan was $ 1 , $ 1 and $ 1 for the years December 31, 2020, 2019 and 2018, respectively.

Savings Incentive Plans

As a result of the acquisition of Xchange on December 31, 2020, Ambac has two Savings Incentive Plans.

Substantially all US employees are covered by one of these plans.

The plan sponsored by AAC includes employer matching contributions equal to 100 % of the employees’ contributions, up to 3 % of such participants’ compensation, as defined in the plan, plus 50 % of contributions up to an additional 2 % of compensation, subject to limits set by the Internal Revenue Code.

The plan sponsored by Xchange includes employer matching contributions equal to 4 % of such participants' compensation, as defined in the plan.

The total cost of the savings incentive plans were $ 1 , $ 1 and $ 1 for the years December 31, 2021, 2020 and 2019, respectively.

Incentive Compensation - Stock Units and Cash

Incentive compensation is a key component of our compensation strategy.

Our incentive compensation awards generally have two components:

short term incentive compensation awards ("STIP") and long term incentive plan awards ("LTIP").

Annual decisions with regard to incentive compensation are generally made in the first quarter of each year and are based on Company performance and individual and business unit performance of the previous year.

In addition to the stock based awards discussed below, Ambac's incentive compensation includes cash payments which may consist of annual awards under the STIP, deferred payments that vest over two years or other performance based cash awards.

For all employees, an allocation of incentive compensation is made between STIP and LTIP awards.

Employees, directors and consultants of Ambac are eligible to participate in Ambac’s 2020 Incentive Compensation Plan (“2020 Plan”), which is the successor plan to the 2013 Incentive Compensation Plan ("2013 Plan"), subject to the discretion of the compensation committee of Ambac’s Board of Directors.

The 2020 Plan and 2013 Plan each provide for incentives and rewards that are valued or determined by reference to Ambac common stock as currently traded on the New York Stock Exchange.

Beginning with the June 2, 2020, effective date (the "Effective Date") of the 2020 Plan, all new awards are granted under the 2020 Plan and may not be granted under the 2013 Plan.

However, the terms and conditions of the 2013 Plan continue to govern outstanding awards granted under the 2013 Plan.

There are 1,475,000 and 4,000,000 shares of Ambac's common stock authorized for issuance that can be awarded under the 2020 Plan and 2013 Plan, respectively.

Awards may also be made under the 2020 Plan with respect to the shares that, as of the Effective Date, remained available for grant under the 2013 Plan.

In addition, shares subject to outstanding awards granted under the 2013 Plan as of the Effective Date that subsequently terminate by expiration or forfeiture, cancellation, or otherwise without the issuance of such shares will become available for awards under the 2020 Plan.

Employees, directors and consultants of Ambac are eligible to participate in Ambac’s 2020 Incentive Plan, which is the successor plan to the 2013 Incentive Plan, subject to the discretion of the compensation committee of Ambac’s Board of Directors.

There are 1,475,000 and 4,000,000 shares of Ambac's common stock authorized for awards under the 2020 Plan and 2013 Plan, respectively.

Awards may also be made under the 2020 Plan with respect to the shares that remained available for grant under the 2013 Plan.

In addition, shares subject to outstanding awards granted under the 2013 Plan that subsequently terminate by expiration or forfeiture, cancellation, or otherwise without the issuance of such shares become available for awards under the 2020 Plan.

Of the total shares authorized for issuance pursuant to the 2020 Plan and 2013 Plan, 1,255,643 shares are available for future grant as of December 31, 2021.

1 unchanged sentence

The number of shares available for future grant considering the target number of shares instead of the maximum number of shares related to performance awards is 2,691,618 .

On June 24, 2021, the compensation committee of Ambac's Board of Directors adopted the Ambac Financial Group, Inc.

Executive Stock Deferral Plan (the “Stock Deferral Plan”).

Under the Stock Deferral Plan, certain executives of AFG and its subsidiaries who are designated by the compensation committee as eligible to participate in the Stock Deferral Plan may elect to defer the settlement of all or a portion of the RSU (as defined below) awards and PSU (as defined below) awards that are granted to the executives to a future date(s) selected by the executive.

Deferred awards under the Stock Deferral Plan (and any related dividend equivalents) will continue to be paid in shares of common stock of AFG, which will be issued under the 2020 Plan, provided that any dividend equivalents credited on a participant’s deferred awards in respect of cash dividends paid by AFG will be paid to the participant in cash.

The Stock Deferral Plan is not funded, and deferred awards under the Stock Deferral Plan are not segregated from the Company’s general assets.

| Ambac Financial Group, Inc.

123 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

The amount of stock-based compensation expense and corresponding after-tax expense are as follows:

2021 2020 2019

Stock options

Restricted stock units

4 unchanged sentences

$ 14 $ 11 $ 12

Stock Options

Stock options were awarded in 2013 to directors that had an expiry term of seven years from the grant date, subject to earlier expiration upon the recipient's departure from the Company.

A summary of stock option activity for 2020 is as follows:

Shares Weighted

Price Aggregate

Value Weighted

Outstanding at beginning of period 16,667 $ 20.63

Forfeited or expired

( 16,667 ) 20.63

Outstanding at end of period

— $ — $ — 0.00

| Ambac Financial Group, Inc.

128 2020 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

No stock options were exercised during the years ended December 31, 2020, 2019 and 2018, respectively.

Restricted Stock Units (“RSUs”)

RSUs have been awarded to certain employees for a portion of their STIP compensation, LTIP compensation, sign-on, special awards for exceptional performance.

RSUs have been awarded to certain employees for a portion of their STIP compensation, LTIP compensation, sign-on and special awards for exceptional performance.

RSUs have also been awarded to consultants for meeting certain contractual performance goals.

The previously issued STIP awards vested upon grant, but settlement was deferred (other than for employment tax withholdings) into two equal installments generally on the first and second anniversary date of the grant.

The LTIP, sign-on and special awards generally vest in equal installments over a two to three year period.

Awards granted to consultants vest on the second year anniversary of date of grant.

Such vesting is expressly conditioned upon the respective employees or non-employees continued service with Ambac through the applicable vesting date, although vesting is accelerated for terminations due to death, disability, eligible retirement, or involuntary termination by the Ambac other than for cause.

RSUs have been awarded annually to directors and vest on the last day of April of the following year.

The LTIP, sign-on, consultant and special awards generally vest in equal installments over a two to three year period.

Such vesting is expressly conditioned upon continued service with Ambac through the applicable vesting date, although vesting may be accelerated in certain circumstances under the awards, including for terminations due to death, disability, eligible retirement, or involuntary termination by Ambac other than for cause.

As part of our director compensation program, prior to 2021 RSUs were awarded annually on or about April 30 of each year to directors and would vest on the last day of April of the following year.

During 2021, the director compensation program was revised to provide for quarterly grants of RSUs that would vest one year from the grant date.

These RSUs will not settle until the respective director’s termination from the board of directors or, if earlier, upon a change in control.

All RSUs provide for accelerated vesting upon a change in control, death or disability or involuntary removal other than for cause (not including removal pursuant to a shareholder vote at a regularly scheduled annual meeting of shareholders).

Upon termination (other than for cause), the unvested RSUs shall partially vest as of the date of such termination in an amount equal to the number of then outstanding unvested RSUs multiplied by a fraction, the numerator of which shall be the number of calendar days which have lapsed since the grant date and the denominator of which shall be the total number of calendar days of the original vesting period.

Upon termination (other than for cause), the unvested RSUs shall partially vest as of the date of such termination in an amount equal to the number of then outstanding unvested RSUs multiplied by a fraction, the numerator of which shall be the number of calendar days which have lapsed since the grant date and the denominator of which shall be the number of calendar days from the grant date until the next regularly scheduled quarterly grant date pursuant to Ambac’s director compensation program.

As of December 31, 2021, 837,070 RSUs remained outstanding, of which (i) 504,764 units required future service as a condition to the delivery of the underlying shares of common stock and (ii) 332,306 units do not require future service and are deferred for future settlement.

8 unchanged sentences

Outstanding at end of period 837,070 $ 17.82

(1) When restricted stock unit awards issued by Ambac become taxable compensation to employees, shares may be withheld to

cover the employee’s withholding taxes.

(1) When restricted stock unit awards issued by Ambac become taxable compensation to employees, shares may be withheld to cover the employee’s withholding taxes.

For the year ended December 31, 2021, Ambac purchased 88,723 of shares from employees that settled restricted stock units to meet the required tax withholdings.

5 unchanged sentences

Performance Stock Awards ("PSUs")

Performance awards granted vest in 3 years and awards have components relative to performance at AFG and AAC.

Performance awards granted vest in 3 years and awards have components relative to performance at AFG, Xchange and AAC.

Actual awards can payout 0 % to 220 % of the number of units granted.

Under currently outstanding award agreements, performance will be evaluated as follows:

• AFG performance will be evaluated relative to cumulative earnings before interest, taxes, depreciation and amortization over the vesting period (exclusive of AAC and its subsidiaries' earnings), which is intended to reward participants for generating pre-tax income.

• AFG performance, as it relates to the 2019 PSU awards, will be evaluated relative to cumulative earnings before interest, taxes, depreciation and amortization over the vesting period (exclusive of AAC and its subsidiaries' earnings), which is intended to reward participants for generating pre-tax income.

• Xchange, as it relates to the 2021 PSU awards, will be evaluated relative to cumulative earnings before interest, taxes, depreciation and amortization over the vesting period.

• AAC performance will be evaluated according to:

(i) changes in AAC's assets relative to its insurance and financial obligations, which is intended to reward participants for increases in the relative value of AAC, and (ii) reductions in watch list and adversely classified credits, which is intended to reward participants for de-risking the financial guarantee insured portfolio.

(i) changes in AAC's assets relative to its insurance and financial obligations, which is intended to reward participants for increases in the relative value of AAC (2019 and 2020 PSU awards only) and (ii) reductions in watch list and adversely classified credits, which is intended to reward participants for de-risking the financial guarantee insured portfolio.

• In 2019, a relative Total Shareholder Return modifier was added as an additional metric with respect to the LTIP award payouts.

The modifier will cause the payout at the end of the performance period to be increased or decreased by 10 % if AFG's stock performance compared to a peer group is at or above the 75 th percentile or at or below the 25 th percentile, respectively .

These performance metrics are subject to change by the Compensation Committee of the Board of Directors as Ambac's business evolves.

Other than voluntary termination or involuntary termination for cause, and provided that the participant meets certain minimum service requirements, the performance awards are subject to either partial or accelerated vesting.

The current performance awards shall be settled within 75 days after the end of the performance period, including those with partial or accelerated vesting.

| Ambac Financial Group, Inc.

4 unchanged sentences

(Dollar Amounts in Millions, Except Share Amounts)

Pursuant to the LTIP award agreements if (i) a termination occurs by reason of disability, an involuntary termination by the Company other than for “cause,” or "retirement," the recipient would be entitled to receive the PSU award which would only be payable at the end of the relevant performance period and based on the satisfaction of the performance conditions related to such award at the time of termination;

and (ii) a termination occurred prior to the last day of the performance period by reason of death, the beneficiaries of the recipient would be entitled to receive the number of PSUs that the recipient would have been entitled to receive at a 100 % overall payout multiple regardless of the outcome of any of the performance conditions.

The current performance awards shall be settled within 75 days after the end of the performance period, including those with partial or accelerated vesting, subject to any deferrals made pursuant to the Stock Deferral Plan.

A summary of PSU activity for 2021 is as follows:

6 unchanged sentences

Performance adjustment (3)

289,912 15.09

Outstanding at end of period 722,056 $ 18.97

3 unchanged sentences

For the year ended December 31, 2021, Ambac purchased 276,777 of shares from employees that settled performance based restricted stock units to meet the required tax withholdings.

(3) Represents the increase (decrease) in shares issued for awards granted in 2017 based upon the attainment of performance metrics at the end of the performance period.

(3) Represents the number of additional shares issued for awards granted in 2018 as a result of actual performance during the performance period.

As of December 31, 2021, there was $ 8 of total unrecognized compensation costs related to the PSU portion of unvested performance awards, which are expected to be recognized over a weighted average period of 1.6 years.

Ambac adopted the New Lease Standard, as defined and further described in Note 2.

Basis of Presentation and Significant Accounting Policies on January 1, 2019.

Ambac is the lessee and lessor for certain lease agreements further described below.

1 unchanged sentence

Ambac is the lessee in operating leases for corporate offices, a data center and equipment.

Ambac's purchase of Xchange resulted in additional office and equipment leases.

Leases in effect at December 31, 2020, have remaining lease terms ranging from less than 1 year to 9 years.

Our data center lease has an automatic renewal of one-year unless either party elects to terminate by providing 120 days notice prior to the renewal.

This renewal feature is not recognized in the lease liability or right-of-use asset as it is not reasonably certain we will elect to renew.

An office lease related to Xchange includes a one-time early termination provision.

The lease liability and right-of-use asset on this lease consider its full term as Ambac does not reasonably expect to exercise the early termination option.

No other leases contain extension or termination provisions.

Leases in effect at December 31, 2021, have remaining lease terms ranging from slightly over 2 years to 8 years.

Certain of these leases include automatic renewal or early termination provisions.

Ambac does not include these provisions in the determination of its lease liabilities and

right-of-use assets unless exercise is considered reasonably certain.

Lease costs are included in operating expenses on the Consolidated Statement of Total Comprehensive Income (Loss).

10 unchanged sentences

Right-of-use assets obtained in exchange for operating lease liabilities (non-cash) — —

(1) Includes right-of-use assets of $ 14 for the year ended December 31, 2019 for leases which existed prior to the New Lease Standard implementation date of January 1, 2019.

Supplemental balance sheet information related to leases is as follows:

8 unchanged sentences

Operating lease right of use assets and operating lease liabilities are included in Other assets and Other liabilities, respectively, on the consolidated balance sheet.

Future undiscounted lease payments, gross of sublease receipts, to be made are as follows:

As of December 31, 2020 Operating Leases

Thereafter 18

Total lease payments 41

imputed interest ( 11 )

| Ambac Financial Group, Inc.

4 unchanged sentences

(Dollar Amounts in Millions, Except Share Amounts)

Future undiscounted lease payments, gross of sublease receipts, to be made are as follows:

As of December 31, 2021 Operating Leases

Thereafter 14

Total lease payments 37

imputed interest ( 9 )

Lessor information

8 unchanged sentences

Ambac Assurance Corporation, et al.

(United States District Court, Northern District of California, San Jose Division, Case No.

(United States District Court, Southern District of New York, Case No.

1:19-cv-09193-PGG, transferred on October 4, 2019 from the United States District Court, Northern District of California, San Jose Division, Case No.

17-cv-04992-BLF, filed August 28, 2017).

1 unchanged sentence

The claims relate to bonds and debt certificates (insured by AAC) that were issued to finance the renovation and construction of housing at certain military bases.

Plaintiffs allege that defendants secretly conspired to overcharge plaintiffs for the financing of the projects and directed the excess profits to themselves.

Plaintiffs allege that defendants secretly conspired to overcharge plaintiffs for the financing of the projects and directed the excess profits

to themselves.

Plaintiffs allege defendants generated these excess profits by supposedly charging inflated interest rates, manipulating “shadow ratings,” charging unnecessary fees, and hiding evidence of their alleged wrongdoing.

Plaintiffs seek, among other things, compensatory damages, disgorgement of profits and fees, punitive damages, trebled damages and attorneys’ fees.

Ambac and the other defendants filed motions to dismiss the amended complaint on November 13, 2017.

AAC and the other defendants filed motions to dismiss the amended complaint on November 13, 2017.

On July 17, 2018, the court granted AAC’s and the other defendants’ motion to dismiss the first amended complaint without prejudice.

On December 17, 2018, Plaintiffs filed a second amended complaint.

On February 15, 2019, Ambac and the other defendants filed a motion to dismiss the second amended complaint.

On February 15, 2019, AAC and the other defendants filed a motion to dismiss the second amended complaint.

On September 26, 2019, the court issued a decision denying defendants’ motion to dismiss and sua sponte reconsidering its previous denial of defendants’ motion to transfer venue to the Southern District of New York (“SDNY”).

On October 4, 2019, the case was transferred to the SDNY.

On October 10, 2019, the defendants filed motions in the SDNY to vacate or reconsider the decision by the Northern District of California on the defendants’ motion to dismiss.

On October 24,

2019, plaintiffs filed their brief in opposition to defendants' motions to vacate or reconsider, and on October 31, 2019, defendants filed their reply briefs in further support of their motions.

On November 20, 2019, the court ordered that the defendants’ answers to the second amended complaint would be due seven days after the court issues a decision on their motions.

On October 10, 2019, after the case was transferred to the SDNY, the defendants filed motions to vacate or reconsider the decision by the Northern District of California on the defendants’ motion to dismiss.

On March 31, 2021, the court granted defendants’ motions for reconsideration and, upon reconsideration, dismissed the claims against AAC and its former employee for breach of fiduciary duty and for aiding and abetting breach of AAC’s or its former employee’s fiduciary duty;

dismissed two plaintiffs’ RICO claims against AAC and its former employee;

and in all other respects denied defendants’ motions.

Defendants served answers to the second amended complaint on April 21, 2021, asserting several affirmative defenses, including a defense for unclean hands focused on the plaintiffs’ failure to maintain the project properties and falsification of maintenance records.

On May 24, 2021, plaintiffs moved to strike defendants’ unclean hands defenses.

On September 14, 2021, Magistrate Judge Sarah L.

Cave, to whom plaintiffs’ motion to strike was referred for a Report and Recommendation, issued an opinion and order denying plaintiffs’ motion.

Financial Oversight and Management Board for Puerto Rico, et al.

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certain other defendants filed motions to dismiss on this same date.

On February 9, 2020, the Oversight Board announced that it intends to file, and to seek to confirm, an amended plan of adjustment (the “Amended POA”).

On March 10, 2020, the District Court ordered that this case remain stayed while the Oversight Board attempts to confirm the Amended POA.

On February 9, 2020, the Oversight Board announced that it intended to file, and to seek to confirm, an amended plan of

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adjustment (the “Commonwealth Plan”).

On March 10, 2020, the District Court ordered that this case remain stayed while the Oversight Board attempted to confirm the Commonwealth Plan.

Financial Oversight and Management Board for Puerto Rico, et al.

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on July 24, 2019, the District Court referred this matter to mediation and ordered it stayed during the pendency of such mediation.

On December 19, 2019, the District Court ordered that this matter will remain stayed pending further order of the District Court pursuant to the Oversight Board’s initiation of a separate adversary proceeding concerning PRHTA bonds (No.

On December 19, 2019, the District Court ordered that this matter remain stayed pending further order of the District Court pursuant to the Oversight Board’s initiation of a separate adversary proceeding concerning PRHTA bonds (No.

20-ap-00005, discussed below).

3 unchanged sentences

20-ap-00003, filed Jan.

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Pursuant to an order of the District Court setting out an agreed schedule for litigation submitted by the team of mediators designated in the Commonwealth’s restructuring cases (the “Mediation Team“), on January 16, 2020, the Oversight Board filed an adversary proceeding against monoline insurers insuring bonds issued by the Puerto Rico Infrastructure Financing Authority (“PRIFA”) and the PRIFA bond trustee, all of which Defendants filed proofs of claim against the Commonwealth relating to PRIFA bonds.

On January 16, 2020, the Oversight Board filed an adversary proceeding against monoline insurers insuring bonds issued by the Puerto Rico Infrastructure Financing Authority (“PRIFA”) and the PRIFA bond trustee, all of which defendants filed proofs of claim against the Commonwealth relating to PRIFA bonds.

The complaint seeks to disallow defendants’ proofs of claim against the Commonwealth in their entirety, including for lack of secured status.

1 unchanged sentence

On March 10, 2020, the District Court stayed the motions to dismiss and authorized the Oversight Board to move for summary judgment, which motion defendants opposed.

Oral argument on the motion for summary judgment was held on September 23, 2020.

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

Discovery is ongoing.

On May 5, 2021, monoline defendants Assured Guaranty Corporation, Assured Guaranty Municipal Corporation (“Assured”), and National Public Finance Guarantee Corporation (“National”) announced an agreement with the Oversight Board with respect to the treatment of bonds issued by PRHTA and the Puerto Rico Convention Center District Authority (“PRCCDA”) (the “PRHTA/PRCCDA Settlement”).

On July 14, 2021, AAC and Financial Guaranty Insurance Company (“FGIC”) reached an agreement in principle with the Oversight Board with respect to the treatment of bonds issued by the Puerto Rico Infrastructure Financing Authority ("PRIFA") (the “PRIFA Settlement”), and as a result of that settlement, also joined the PRHTA/PRCCDA Settlement.

On August 2, 2021, the Oversight Board, AAC, FGIC, and the PRIFA bond trustee jointly moved to stay this case as a result of the PRIFA Settlement and AAC’s joinder to the PRHTA/PRCCDA Settlement and the settlement related to general obligation and PBA bonds (“GO/PBA Settlement”).

On August 3, 2021, the District Court ordered that this case be stayed.

Following the

filing of several revised versions of the Commonwealth Plan, the Court held a confirmation hearing in November 2021.

On January 18, 2022, the Court entered an order confirming the Commonwealth Plan, as amended, and entered its findings of fact and conclusions of law related thereto.

The Commonwealth Plan resolves the issues raised in this adversary proceeding.

Following confirmation of the Commonwealth Plan, several parties filed notices of appeal of the District Court’s confirmation order to the First Circuit Court of Appeals.

On February 1, 2022, Federación de Maestros de Puerto Rico, Inc., Grupo Magisterial Educadores(as) por la Democracia, Unidad, Cambio, Militancia y Organización Sindical, Inc., and Unión Nacional de Educadores y Trabajadores de la Educación, Inc.

(collectively, the “Teachers’ Unions”) moved for a stay of the confirmation order while the appeal is pending, and on February 4, 2022, Asociación Puertorriqueña de la Judicatura, Inc.

(“APJ”) and a number of credit unions (the “Credit Unions”) also filed motions for a stay pending appeal.

On February 9 and February 11, 2022, a number of parties—including AAC—filed oppositions to the stay motions, requesting, in the alternative, that the appealing parties seeking a stay be required to post supersedeas bonds pending appeal.

On February 11, 2022, the District Court entered an order granting APJ’s motion for voluntary dismissal of its appeal.

The District Court has taken the remaining stay motions on submission.

On February 17, 2022, the Oversight Board filed a notice of appeal of the District Court’s confirmation order, seeking review of the District Court’s finding regarding the nondischargeability of certain claims arising under the Takings Clause of the U.S.

Constitution.

Financial Oversight and Management Board for Puerto Rico v.

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20-ap-00004, filed Jan.

Pursuant to an order of the District Court setting out an agreed schedule for litigation submitted by the Mediation Team, on January 16, 2020, the Oversight Board filed an adversary proceeding against monoline insurers insuring bonds issued by the Puerto Rico Convention Center District Authority (“PRCCDA”) and the PRCCDA bond trustee, all of which Defendants filed proofs of claim against the Commonwealth relating to PRCCDA bonds.

On January 16, 2020, the Oversight Board filed an adversary proceeding against monoline insurers insuring bonds issued by the PRCCDA and the PRCCDA bond trustee, all of which defendants filed proofs of claim against the Commonwealth relating to PRCCDA bonds.

The complaint seeks to disallow defendants’ proofs of claim against the Commonwealth in their entirety, including for lack of secured status.

1 unchanged sentence

On March 10, 2020, the District Court stayed the motions to dismiss and authorized the Oversight Board to move for summary judgment, which motion defendants opposed.

Oral argument on the motion for summary judgment was held on September 23, 2020.

Discovery is ongoing.

On May 5, 2021, Assured and National announced an agreement with the Oversight Board with respect to the PRHTA/PRCCDA Settlement.

On July 14, 2021, AAC and FGIC reached an agreement in principle with the Oversight Board with respect to the PRIFA Settlement.

On August 2, 2021, the Oversight Board, AAC, FGIC, and the PRCCDA bond trustee jointly moved to stay this case as a result of the PRIFA Settlement and AAC’s joinder to the PRHTA/PRCCDA Settlement and the GO/PBA Settlement.

On August 3, 2021, the District Court ordered that this case be stayed.

Following the filing of several revised versions of the Commonwealth Plan, the Court held a confirmation hearing in November 2021.

On January 18, 2022, the Court entered an order confirming the Commonwealth Plan, as amended, and entered its findings of fact and conclusions of law related thereto.

The Commonwealth Plan resolves the issues raised in this adversary proceeding.

Following confirmation of the

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Commonwealth Plan, several parties filed notices of appeal of the District Court’s confirmation order to the First Circuit Court of Appeals.

On February 1 and 4, 2022, the Teachers’ Unions, APJ, and the Credit Unions moved for a stay of the confirmation order while this appeal is pending.

On February 11, 2022, the District Court entered an order granting APJ’s motion for voluntary dismissal of its appeal.

The District Court has taken the remaining stay motions on submission.

Constitution.

Financial Oversight and Management Board for Puerto Rico v.

2 unchanged sentences

20-ap-00005, filed Jan.

Pursuant to an order of the District Court setting out an agreed schedule for litigation submitted by the Mediation Team, on January 16, 2020, the Oversight Board filed an adversary proceeding against monoline insurers insuring bonds issued by PRHTA, certain PRHTA bondholders, and the PRHTA fiscal agent for bondholders, all of which Defendants filed proofs of claim against the Commonwealth relating to PRHTA bonds.

On January 16, 2020, the Oversight Board filed an adversary proceeding against monoline insurers insuring bonds issued by PRHTA, certain PRHTA bondholders, and the PRHTA fiscal agent for bondholders, all of which defendants filed proofs of claim against the Commonwealth relating to PRHTA bonds.

The complaint seeks to disallow defendants’ proofs of claim against the Commonwealth in their entirety, including for lack of secured status.

1 unchanged sentence

On March 10, 2020, the District Court stayed the motions to dismiss and authorized the Oversight Board to move for summary judgment, which motion defendants opposed.

Oral argument on the motion for summary judgment

was held on September 23, 2020.

Discovery is ongoing.

On May 5, 2021, Assured and National announced an agreement with the Oversight Board with respect to the PRHTA/PRCCDA Settlement.

On July 14, 2021, AAC and FGIC reached an agreement in principle with the Oversight Board with respect to the PRIFA Settlement.

On August 2, 2021, the Oversight Board, AAC, FGIC, and the PRHTA fiscal agent jointly moved to stay this case as a result of the PRIFA Settlement and AAC’s joinder to the PRHTA/PRCCDA Settlement and the GO/PBA Settlement.