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Item 2. Management’s Discussion and Analysis

2022-05-10 compared with 2021-11-08 · 638 added, 779 removed, 413 unchanged (77% of the section changed)

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

Following this summary is a discussion addressing the consolidated results of operations and financial condition of Ambac Financial Group, Inc.

(“AFG”) for the periods indicated.

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

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

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

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

generally accepted accounting principles (“GAAP”).

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

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

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

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

We provide reconciliations to the most directly comparable GAAP measures;

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

stockholders’ equity.

CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Management has included in Parts I and II of this Quarterly Report on Form 10-Q, including this MD&A, statements that may constitute “forward-looking statements” within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Words such as “estimate,” “project,” “plan,” “believe,” “anticipate,” “intend,” “planned,” “potential” and similar expressions, or future or conditional verbs such as “will,” “should,” “would,” “could,” and “may,” or the negative of those expressions or verbs, identify forward-looking statements.

We caution readers that these statements are not guarantees of future performance.

Forward-looking statements are not historical facts but instead represent only our beliefs regarding future events, which may by their nature be inherently uncertain and some of which may be outside our control.

These statements may relate to plans and objectives with respect to the future, among other things which may change.

We are alerting you to the possibility that our actual results may differ, possibly materially, from the expected objectives or anticipated results that may be suggested, expressed or implied by these forward-looking statements.

Important factors that could cause our results to differ, possibly materially, from those indicated in the forward-looking statements include, among others, those discussed under “Risk Factors” in Part I, Item 1A of the 2020 Annual Report on Form 10-K and in Part II, Item 1A of this quarterly Report on Form 10-Q.

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

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

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

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

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

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

(4) increases to loss and loss expense reserves;

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

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

(7) potential of rehabilitation proceedings against AAC;

(8) increased fiscal stress experienced by issuers of public finance obligations or an increased incidence of Chapter 9 filings or other restructuring proceedings by public finance issuers, including an increased risk of loss on revenue bonds of distressed public finance issuers due to judicial decisions adverse to revenue bond holders;

(9) our inability to mitigate or remediate losses, commute or reduce insured exposures or achieve recoveries or investment objectives, or the failure of any transaction intended to accomplish one or more of these objectives to deliver anticipated results;

(10) insufficiency or unavailability of collateral to pay secured obligations;

(11) credit risk throughout Ambac’s business, including but not limited to credit risk related to residential mortgage-backed securities, student loan and other asset securitizations, public finance obligations and exposures to reinsurers;

(12) the impact of catastrophic environmental or natural events, including catastrophic public health events like the COVID-19 pandemic, on significant portions of our insured and investment portfolios;

(13) credit risks related to large single risks, risk concentrations and correlated risks;

(14) the risk that Ambac’s risk management policies and practices do not anticipate certain risks and/or the magnitude of potential for loss;

(15) risks associated with adverse selection as Ambac’s insured portfolio runs off;

(16) Ambac’s substantial indebtedness could adversely affect its financial condition and operating flexibility;

(17) Ambac may not be able to obtain financing or raise capital on acceptable terms or at all due to its substantial indebtedness and financial condition;

(18) Ambac may not be able to generate the significant amount of cash needed to service its debt and financial obligations, and may not be able to refinance its indebtedness;

(19) restrictive covenants in agreements and instruments may impair Ambac’s ability to pursue or achieve its business strategies;

(20) adverse effects on operating results or the Company’s financial position resulting from measures taken to reduce risks in its insured portfolio;

(21) disagreements or disputes with Ambac's insurance regulators;

(22) default by one or more of Ambac's portfolio investments, insured issuers or counterparties;

(23) loss of control rights in transactions for which we provide insurance due to a finding that Ambac has defaulted;

(24) adverse tax consequences or other costs resulting from the characterization of the AAC’s surplus notes or other obligations as equity;

(25) risks attendant to the change in composition of securities in the Ambac’s investment portfolio;

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

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

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

(29) factors that may negatively influence the amount of installment premiums paid to the Ambac;

(30) market risks impacting assets in the Ambac’s investment portfolio or the value of our assets posted as collateral in respect of interest rate swap transactions;

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

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

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

(34) system security risks, data protection breaches and cyber attacks;

(35) changes in accounting principles or practices that may impact Ambac’s reported financial results;

(36) regulatory oversight of Ambac Assurance UK Limited (“Ambac UK”) and applicable regulatory restrictions may adversely affect our ability to realize value from Ambac UK or the amount of value we ultimately realize;

(37) operational risks, including with respect to internal processes, risk and investment models, systems and employees, and failures in services or products provided by third parties;

(38) Ambac’s financial position that may prompt departures of key employees and may impact the its ability to attract qualified executives and employees;

(39) fluctuations in foreign currency exchange rates could adversely impact the insured portfolio in the event of loss reserves or claim payments denominated in a currency other than US dollars and the value of non-US dollar denominated securities in our investment portfolio;

(40) disintermediation within the insurance industry or greater competition that negatively impacts our managing general agency/underwriting business;

(41) changes in law or in the functioning of the healthcare market that impair the business model of our accident and health managing general underwriter;

(42) greater competition for our specialty property & casualty program insurance business;

and (43) other risks and uncertainties that have not been identified at this time.

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

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

• Context to the unaudited consolidated financial statements;

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

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

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

Refer to Item 1.

Business and Note 1.

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

Organization of Information

MD&A includes the following sections:

Executive Summary 45

Critical Accounting Estimates 48

Financial Guarantees in Force 48

Results of Operations 53

Liquidity and Capital Resources 58

Balance Sheet 60

Variable Interest Entities 66

Accounting Standards 66

Insurance Statutory Basis Financial Results 66

Ambac UK Financial Results under UK Accounting Principles 67

Non-GAAP Financial Measures 67

EXECUTIVE SUMMARY ($ in millions)

Company Overview:

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

Background and Business Description in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, for a description of the Company and our key strategic priorities to achieve our primary goal to maximize stockholder value.

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

Developments included the following:

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

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

Best in February 2021.

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

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

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

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

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

PWIC's legacy liabilities were fully ceded to reinsurers.

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

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

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

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

AFG Net Assets

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

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AFG has the following net assets to support the development and growth of its existing subsidiaries and future acquisitions.

AFG does not have any capital commitments or other obligations to provide capital or liquidity to AAC whose financial guarantee business has been in run-off since 2008.

As of March 31, 2022, net assets of AFG, excluding its equity investments in subsidiaries, were $243.

Cash and short-term investments $ 118

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(1) Includes surplus notes (fair value of $77) issued by AAC that are eliminated in consolidation.

AAC and Subsidiaries

AFG's subsidiaries/businesses are divided into three segments, the key value metrics of which are summarized below along with other recent developments.

Specialty Property and Casualty Insurance Segment

The key value metrics for the Specialty Property and Casualty Insurance segment for the three months ended March 31, 2022 were as follows:

Three Months Ended March 31, 2022

Gross premiums written $ 24

Net premiums written 5

Earnings before interest, taxes, depreciation and amortization (2)

Pretax income (loss) $ (2)

Stockholders Equity $ 115

To support expansion of the admitted insurance component of its business, on January 3, 2022, Everspan (rated 'A-' (Excellent) by AM Best) completed the acquisition of the 21st Century Companies (three carriers) from a national insurance group that has a Financial Strength Rating of “A” (Excellent) from AM Best.

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

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

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

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

For additional information on the Specialty Property and Casualty Insurance Segment see the Results of Operations section below in this Management Discussion and Analysis.

Insurance Distribution Segment

The key value metrics for the Insurance Distribution segment for the three months ended March 31, 2022 were as follows:

Three Months Ended March 31, 2022 2021

Premiums placed $ 45 $ 40

Commission income $ 9 $ 7

Sub-producer commission expense (1)

Net commissions 4 3

Earnings before interest, taxes, depreciation and amortization 2 2

Pretax income (loss) $ 2 $ 2

Stockholders Equity $ 66

(1) The Consolidated Statements of Comprehensive Income presents this item within Operating Expenses.

For additional information about the Insurance Distribution Segment see the Results of Operations section below in this Management Discussion and Analysis.

Legacy Financial Guarantee Insurance Segment

The key value metrics for the Legacy Financial Guarantee Insurance segment for the three months ended March 31, 2022 were as follows:

Three Months Ended March 31, 2022

Net premiums earned $ 13

Net investment income 5

Loss and loss expenses (benefit) 23

Operating expenses 21

Pretax income (loss) $ 6

Stockholders Equity $ 567

Adversely Classified Credit Net Par Outstanding $ 5,884

A key strategy for Ambac is to increase the value of its investment in AAC by actively managing its assets and liabilities.

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

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

Refer to Note 4.

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

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

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

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At March 31, 2022, AAC owned $313 of distressed Ambac-insured bonds, including significant concentrations of insured RMBS bonds.

As a result of the Puerto Rico restructurings discussed under "Liability and Insured Exposure Management" below, the amount of Ambac-insured Puerto Rico bonds held in the investment portfolio was significantly reduced during the three months ended March 31, 2022.

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

Liability and Insured Exposure Management

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

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

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

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

Ambac completed risk reduction transactions consisting of refinancings and commutations of $310 of net par exposure for the three months ended March 31, 2022, of which $266 related to the Puerto Rico restructuring.

In the second quarter of 2022, the remainder of the PRIFA and CCDA bonds or about $317 belonging to bondholders who elected not to commute their AAC insurance policies (which were deposited into trusts) together with such policies have all been accelerated by Ambac, satisfying and eliminating all of the Ambac-insured PRIFA and CCDA bonds.

Refer below to the Financial Guarantees In Force section of the Management Discussion and Analysis for Results of Operations, Financial Guarantees in Force for additional details of the Puerto Rico restructuring.

The following table provides a comparison of total, adversely classified ("ACC") and watch list credit net par outstanding in the insured portfolio at March 31, 2022 and December 31, 2021.

Net par exposure within the U.S.

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

September 30,

2022 December 31,

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Watch list 3,729 3,824 (95) (2) %

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

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

The COVID-19 pandemic had, and to a lesser degree, continues to have, an impact on general economic conditions;

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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.

These businesses and enterprises include hotels, restaurants, sports and

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

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

Outside of the U.S., and in the United Kingdom and Italy in particular, where Ambac has insured portfolio exposure, various monetary policy, fiscal stimulus measures and other actions have helped to moderate the economic impact of the pandemic.

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

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

In addition, the near-term efficacy of fiscal stimulus and related measures on certain exposures in the insured portfolio impacted by the COVID-19 pandemic is uncertain.

Since 2020, COVID-19 has adversely impacted Ambac's financial position and results of operations as credit risk in the insured and investment portfolios has increased.

We continue to evaluate and update our view of the macro economic environment as well as our specific credit view of each of our insured exposures considering the uncertainties brought upon us by the COVID-19 pandemic.

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

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

and (iii) the performance of the investment portfolio.

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

Ambac has reinsured approximately 18.1% of its gross par outstanding to five reinsurance counterparties.

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

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

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

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

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

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

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

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

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

Our evaluation process incorporates the impact of COVID-19 on business prospects.

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 March 31, 2022, there have been no defaults of Ambac-insured obligations as a result of the COVID-19 pandemic.

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

Russia and Ukraine Conflict

The current conflict between Russia and Ukraine and the related sanctions and other penalties imposed by countries across the globe against Russia are creating substantial uncertainty in the global economy.

We do not have operations in Russia or Ukraine or any insured exposures in those countries.

Ambac's investment portfolio exposure to Russian issuers is not significant.

Given our insignificant exposure, we have not experienced, and do not expect this conflict to have, a material adverse impact on our results of operations, financial condition or cash flows.

However, as the conflict continues and if it were to escalate, the global economy and capital markets will be adversely impacted in ways that we cannot predict and therefore we are unable to estimate the ultimate impact that this conflict may have on our future financial condition, results of operations, and cash flows.

Financial Statement Impact of Foreign Currency:

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

The impact of foreign currency as reported in Ambac's Unaudited Consolidated Statement of Total Comprehensive Income for the three months ended March 31, 2022, included the following:

Net income (1)

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Future changes to currency rates may adversely affect our financial results.

Refer to Part II, Item 7A in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, for further information on the impact of future currency rate changes on Ambac's financial instruments.

Refer to Part II, Item 7A in the Company’s Annual Report on Form 10-K for the year ended December 31,

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2021, for further information on the impact of future currency rate changes on Ambac's financial instruments.

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

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

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

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

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

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

Similar Federal legislation gained approval in March of 2022.

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

While Ambac believes the LIBOR law is generally a positive step, there remains uncertainty about how it will be interpreted or challenged as well as about other aspects of the discontinuance of LIBOR.

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

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

See the Risk Factor entitled "Uncertainties regarding the expected discontinuance of the London Inter-Bank Offered Rate or any other interest rate benchmark could have adverse consequences" found in Part I, Item 1A of Ambac’s Annual Report on Form 10-K for the year ended December 31, 2021.

Also, for further background and information about management's evaluation of Ambac's potential exposures to LIBOR transition, see "Executive Summary — LIBOR Sunset" in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Ambac’s Annual Report on Form 10-K for the year ended December 31, 2021.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

SEC Proposed Rules on Climate Related Information

On March 21, 2022, the Securities and Exchange Commission (“SEC”) proposed rule amendments that would require public companies to include certain climate-related information in their periodic reports and registration statements, including oversight and governance, material impacts (operational and financial), risk identification and management, and Scope 1, 2 and 3 emissions (the “Proposed Rule”).

For large accelerated filers, such as Ambac, the Scope 1 and 2 emissions disclosures would require attestation from a third party.

These new requirements, if adopted, would at the earliest take effect in fiscal year 2023 and begin to apply to SEC filings in 2024.

Ambac is reviewing the Proposed Rule and assessing related compliance obligations and other effects on our operations.

CRITICAL ACCOUNTING ESTIMATES

Ambac’s Unaudited Consolidated Financial Statements have been prepared in accordance with U.S.

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structured finance and international finance.

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

The following table provides a breakdown of guaranteed net par outstanding by market at March 31, 2022 and December 31, 2021.

Net par exposures within the U.S.

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

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

accordance with the Consolidation Topic of the ASC.

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

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

September 30,

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

Background and Business Description in the Notes to the Consolidated Financial Statements included in Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021:

2022 December 31,

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Total net par outstanding $ 27,118 $ 28,020

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

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

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

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

(1) Includes $5,469 and $5,490 of Military Housing net par outstanding at March 31, 2022 and December 31, 2021, respectively.

(2) Includes $784 and $1,054 of Puerto Rico net par outstanding at March 31, 2022 and December 31, 2021, respectively.

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The table below shows Ambac’s ten largest insured exposures, by repayment source, as a percentage of total financial guarantee net par outstanding at March 31, 2022:

Risk Name Country-Bond

Outstanding (3)

IF AUK Mitchells & Butlers Finance plc-UK Pub Securitisation UK-Asset Securitizations BBB 2033 $ 908 3.2 %

Outstanding % of Total

IF AUK Capital Hospitals plc (2)

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IF AUK Anglian Water UK-Utility A- 2035 895 3.3 %

IF AUK Mitchells & Butlers Finance plc-UK Pub Securitisation UK-Asset Securitizations BBB 2033 852 3.1 %

IF AUK Aspire Defence Finance plc UK-Infrastructure A- 2040 799 2.9 %

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PF AAC New Jersey Transportation Trust Fund Authority - Transportation System US-Lease and Tax-backed Revenue BBB- 2036 623 2.3 %

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

IF AUK National Grid Electricity Transmission UK-Utility BBB+ 2036 551 2.0 %

IF AUK RMPA Services plc UK-Infrastructure BBB+ 2038 524 1.9 %

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

UK-Infrastructure BBB- 2040 522 1.9 %

$ 7,282 25.4 %

Total $ 7,091 26.0 %

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

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

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

Net par related to the top ten exposures reduced $234 from December 31, 2021.

Exposures are impacted by changes in

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

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

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

Exposures are impacted by changes in foreign exchange rates ($189 reduction during the three months ended March 31, 2022), certain indexation rates, reinsurance transactions and scheduled and unscheduled paydowns.

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

The concentration of net par amongst the top ten (as a percentage of net par outstanding) remained unchanged at 26% at March 31, 2022, and December 31, 2021.

Excluding the top ten exposures, the remaining insured portfolio of financial guarantees has an average net par outstanding of $32 per single risk, with insured exposures ranging up to $454 and a median net par outstanding of $5.

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

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

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

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

The economic contraction and the subsequent ongoing recovery;

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

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

Fiscal Stimulus and Monetary Policy

In the U.S., significant fiscal stimulus measures, monetary policy actions and other relief measures have helped to moderate the negative economic impacts of COVID-19 and have supported the economic recovery which began in the second half of 2020 and continues into 2021.

These measures included the $1.9 trillion American Rescue Plan Act or ARPA, signed into law in March 2021, which together with other fiscal stimulus measures put in place in 2020, provide for, among other things, funding to state and local governments, direct payments to households, support for small businesses, renter assistance and funding for transport, airlines, healthcare and education.

Monetary policy decisions have included quantitative easing and the provision of liquidity to financial institutions and credit markets.

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, 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 negative economic impact and support recovery.

We continue to evaluate and update 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.

Despite the above measures, which are designed to help mitigate the economic impact of the COVID-19 pandemic generally, certain of these measures may adversely affect Ambac.

These include the federal government's temporary relief measures to which servicers of mortgage loans must adhere.

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

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

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

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

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

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

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

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

Insured Portfolio:

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

After contracting in 2020, the U.S.

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

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

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

In particular, the expanded fiscal stimulus resulting from March 2021's $1.9 trillion ARPA should significantly benefit state and local governments that have faced significant budget constraints as tax revenues faltered as a result of COVID-19 related shutdowns, job losses and travel restrictions.

ARPA provides $350 billion to state and local governments, including to Public Finance issuers with debt insured by Ambac.

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

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

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

The ability of issuers of certain of these obligations to pay has been and may continue to be stressed although several issuers expressed a willingness to use their balance sheets to support their obligations and avoid defaults and thus far there have been no defaults of these obligations attributable to the COVID-19 pandemic.

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

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

Toll Roads / Bridges $ 425 $ 47

Dedicated Tax 324 70

Rail / Mass Transit 209 11

Hotels / Convention Centers 85 18

Higher Education Auxiliary 100 10

Stadiums 91 8

Airports 22 14

Total Public Finance $ 1,256 $ 178

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

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

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

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

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

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

Asset Securitizations

Toll Roads / Bridges

Higher Education

$ 1,699 $ 136

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

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

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

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

We continue to experience stress in our exposure to Puerto Rico (the "Commonwealth") that consists of several different issuing entities (all below investment grade) with total net par exposure of $1,054 as of September 30, 2021.

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

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

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

Refer to Part 1, Item 1 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, for additional information regarding the different issuing entities that encompass Ambac's exposures to Puerto Rico.

The COVID-19 pandemic had a significant impact on Commonwealth of Puerto Rico much as it did in the 50 U.S.

states and other U.S.

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

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

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

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

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

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

• supplemental Medicaid funding relief;

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

Commonwealth Fiscal Plan

On April 23, 2021, the Oversight Board certified its own version of a new Commonwealth Fiscal Plan.

This most recent Commonwealth Fiscal Plan purports to incorporate the impact of the $120,000 of federal recovery money stemming from the 2017 hurricanes, 2019-2020 earthquakes, and COVID-19 pandemic, including the American Rescue Plan Act or ARPA.

The current certified Commonwealth Fiscal Plan projects a surplus of $15,200 in years 2022-2035, with deficits beginning in 2036, whereas as May 2020's COVID-19 affected certified Commonwealth Fiscal Plan projected a surplus of $5,800 over a similar period.

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

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

However, as was also the case with previous versions of the Commonwealth Fiscal Plan, the current version of the Commonwealth Fiscal Plan lacks a high degree of transparency regarding the underlying data, assumptions and rationales supporting those assumptions, making reconciliation and due diligence difficult.

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

Net Par Outstanding

($ in millions) March 31, 2022 December 31, 2021

PR Highways and Transportation Authority (1998 Resolution - Senior Lien Transportation Revenue) $ 394 $ 394

PR Infrastructure Financing Authority (Special Tax Revenue) (1)

PR Convention Center District Authority (Hotel Occupancy Tax) (2)

PR Sales Tax Financing Corporation - Senior Sales Tax Revenue (COFINA) 69 73

PR Highways and Transportation Authority (1968 Resolution - Highway Revenue) 4 4

Commonwealth of Puerto Rico - General Obligation Bonds — 11

PR Public Buildings Authority - Guaranteed by the Commonwealth of Puerto Rico — 83

Total Net Exposure to The Commonwealth of Puerto Rico and Related Entities $ 784 $ 1,054

(1) As of April 29, 2022, all remaining exposure has been called

(2) As of May 2, 2022, all remaining exposure has been called

Commonwealth Plan of Adjustment (Title III Case)

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

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

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

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

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

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

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

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

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

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

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

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

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

PRIFA/CCDA Qualifying Modifications (Title VI Cases)

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

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

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

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

Bondholder Elections:

GO, PBA, PRIFA, and CCDA

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

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

Under this option, bondholders will receive:

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

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

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

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

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

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

Under the first option, bondholders will receive:

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

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

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

Those bondholders are expected to receive scheduled

On March 15, 2022, the Eighth Amended Title III Joint Plan of Adjustment of the Commonwealth of Puerto Rico, et al.

("Eighth Amended POA") together with the Qualifying Modifications for PRIFA and CCDA ("PRIFA QM" and "CCDA QM", respectively) became effective, restructuring approximately $33,000 of debt across various Commonwealth instrumentalities,

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

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

Plan Support Agreements

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The other portion of the

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

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

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

Overall, Clawback CVI recoveries are subject to a lifetime cap of 75% of allowed claim amounts under the Commonwealth plan of adjustment.

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

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including obligations insured by AAC, and approximately $50,000 in pension obligations.

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

The Eighth Amended POA also incorporated the settlements reflected in the PRHTA/CCDA Related Plan Support Agreement (“PRHTA/CCDA PSA”) dated May 5, 2021, and the Amended and Restated Plan Support Agreement with the Oversight Board, as representative of the Commonwealth of Puerto Rico, PBA, and the Employee Retirement System of the Government of the Commonwealth of Puerto Rico ("Amended and Restated GO / PBA PSA") dated as of July 12, 2021.

The plan consideration made available to creditors under these plan support agreements on the Eighth Amended POA effective date was as follows:

PRIFA Plan Consideration

PRIFA creditors receive, on account of approximately $1,929 of allowed claims arising from PRIFA bonds, consideration in the form of (i) $193.5 cash and (ii) a contingent value instrument ("CVI") premised on (a) a share of the outperformance of general fund rum tax collections relative to the certified 2021 Commonwealth Fiscal Plan's projections (the "Rum Tax CVI") and (b) an approximately 27% share, subject to a lifetime cap of about $1,302, of the Clawback Creditors' portion of the outperformance of the Commonwealth's sales and use tax ("SUT") relative to the certified 2020 Commonwealth Fiscal Plan's projections (the "Clawback CVI").

CCDA Plan Consideration

CCDA creditors receive, on account of approximately $384 of allowed claims against the Commonwealth arising from CCDA bonds, consideration in the form of (i) $97 cash and (ii) an approximately 4% share, subject to a lifetime cap of about $217, of the Clawback CVI.

GO/PBA Plan Consideration

GO/PBA creditors receive, on account of approximately $18,409 of allowed claims arising from various GO and PBA bonds and other loans, consideration of (i) approximately $7,074 of cash, including plan support fees, (ii) approximately $6,683 of new GO current interest bonds, $1,170 face value of new GO capital appreciation bonds and (iv) GO Bond CVI, subject to a lifetime cap of about $3,500.

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

AAC-Insured Bond Effective Date Transactions

On the Eight Amended POA effective date, AAC-insured GO and PBA bondholders who elected commutation of their insurance received:

1) their respective shares of GO/PBA plan consideration available under the Eighth Amended POA, and 2) cash from

Ambac’s obligations to the bondholders under the Ambac insurance policies who elected this option were deemed to be fully satisfied.

On the plan effective date, about 50% and 27% of the outstanding par of the Ambac-insured GO and PBA bonds, respectively, totaling about $28 of insured par was commuted.

The AAC-insured GO and PBA bondholders who failed to elect commutation received payment, in cash, of the outstanding principal amount of the bondholders’ insured bonds plus the accrued and unpaid interest thereon as of the effective date (the “Ambac Acceleration Price.”).

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

As of the effective date, all the remaining outstanding AAC-insured GO and PBA bonds totaling about $94 of insured par were satisfied and eliminated via commutation or acceleration.

On the Eight Amended POA effective date, AAC-insured PRIFA and CCDA bondholders who elected commutation of their insurance received:

1) their respective shares of PRIFA or CCDA plan consideration available under the Eighth Amended POA and the PRIFA QM, or CCDA QM, as applicable, and 2) cash from Ambac.

Ambac’s obligations to the bondholders under the Ambac insurance policies who elected this option were deemed to be fully satisfied.

The AAC-insured PRIFA and CCDA bondholders who failed to elect commutation had their bondholders’ respective shares of consideration available under the Commonwealth Plan and the PRIFA QM, or CCDA QM, as applicable, deposited into a trust.

On the plan effective date, about 39% and 19% of the outstanding par of the Ambac-insured PRIFA and CCDA bonds, respectively, totaling about $172 of insured par was commuted with the remainder totaling about $317 of insured par deposited into the trusts.

Since the effective date, the remainder of those PRIFA and CCDA bonds belonging to bondholders who elected not to commute their AAC Insurance Policies and were deposited into trusts together with such policies have all been accelerated, satisfying and eliminating all of the Ambac-insured PRIFA and CCDA bonds.

Puerto Rico Highway and Transportation Authority (“PRHTA”)

AAC's remaining unrestructured PROMESA Puerto Rico exposure, PRHTA, is subject to the PRHTA Plan of Adjustment ("PRHTA POA"), which was filed on May 2, 2022.

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

PRHTA/CCDA PSA

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

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

Under the PRHTA/CCDA PSA, PRHTA creditors will share $389 of cash proceeds, including a $264 interim distribution, payable once the PRHTA distribution condition has been met pursuant to the Eighth Amended POA.

In addition, PRHTA creditors will receive an

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approximately 69% share of the Clawback CVI, subject to a lifetime nominal cap of about $3,698, which is also payable once the PRHTA distribution condition has been met pursuant to the Eighth Amended POA.

The PRHTA Clawback CVI is subject to a PRHTA-specific waterfall:

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

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

PRIFA bondholders, as discussed above, will receive a 27% share of the Clawback CVI.

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

The value of the Clawback CVI is highly uncertain, given the contingent, outperformance-driven structure.

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

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

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

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

PRHTA creditors will also share $389 of cash proceeds, including a $264 interim distribution, payable at the effective date of the Commonwealth plan of adjustment.

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

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

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

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

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

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

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

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

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

Plan of Adjustment and Qualifying Modification Considerations

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

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

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

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

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

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

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

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

PRHTA bondholders will also receive new PRHTA bonds or cash with a face amount of $1,245.

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

The new PRHTA bonds or cash will be distributed to creditors upon consummation of the PRHTA POA.

AAC and other PRHTA creditors will receive restriction fees and consummation costs payable at the effective date of the PRHTA POA.

Puerto Rico Considerations

The Eighth Amended POA and the qualifying modifications for PRIFA and CCDA became effective on March 15, 2022, and on that date and since, AAC-insured Puerto Rico exposures have been significantly reduced via commutation and acceleration.

However, uncertainty remains as to our remaining exposures as to (i) 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;

(ii) the extent to which exposure management strategies, such as commutation and acceleration, will be executed for PRHTA;

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

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

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

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

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

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

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

Ambac Title III Litigation Update

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

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

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

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

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

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

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

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

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

Refer to Note 14.

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

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

While management believes its reserves are adequate to cover losses in its Public Finance insured portfolio, there can be no assurance that Ambac may not incur additional losses in the future, particularly given the developing economic, political, and legal circumstances in Puerto Rico and the overall uncertain impact of the COVID-19 crisis on the Commonwealth and the Domestic Public Finance Insured Portfolio in general.

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.

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

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Exposure Currency

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

The table below shows the distribution by currency of AAC’s insured exposure as of March 31, 2022:

Currency Net Par Amount

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| Ambac Financial Group, Inc.

58 2021 Third Quarter FORM 10-Q |

51 2022 First Quarter FORM 10-Q |

Ratings Distribution

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

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

3 unchanged sentences

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

Summary of Below Investment Grade Exposure:

Net Par Outstanding

Summary of Below Investment

Grade Exposure September 30,

Bond Type March 31,

2022 December 31,

Public Finance:

Lease and tax-backed (1)

$ 1,049 $ 1,194

General obligation (1)

Stadium — 540

Transportation 29 30

Puerto Rico $ 784 $ 1,054

Military Housing 369 370

Other 308 317

Total Public Finance 1,461 1,741

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International Finance:

Other 1,153 1,574

Sovereign/sub-sovereign 752 774

Transportation 375 389

Total International Finance 1,186 1,225

Total $ 5,020 $ 5,438

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

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

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

(2) Relates to military housing net par.

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

The net decline in below investment grade exposures is primarily due to de-risking activities, including the Puerto Rico restructuring.

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

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59 2021 Third Quarter FORM 10-Q |

Results of Operations

($ in millions)

52 2022 First Quarter FORM 10-Q |

Results of Operations ($ in millions)

Consolidated Results

A summary of our financial results is shown below:

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

2021 2020 2021 2020

Three Months Ended March 31, 2022 2021

Gross premiums written $ 30 $ (2)

Net premiums earned $ 15 $ 14

Net investment income 5 49

Net realized investment gains (losses) 3 2 4 20

Net investment gains (losses), including impairments 10 2

Net gains (losses) on derivative contracts 57 25

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

Commission income 9 7

Other income (expense) 2 (2)

1 unchanged sentence

Losses and loss expenses (benefit) 24 8

Insurance intangible amortization 11 14 44 41

Intangible amortization 14 19

Operating expenses 34 33

2 unchanged sentences

Net income (loss) attributable to common stockholders $ 2 $ 17

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

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

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

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

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

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

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

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

Ambac's results for the three months ended March 31, 2022 were significantly impacted by the following:

• AAC has successfully implemented the restructuring of a significant portion of its remaining Puerto Rico exposures, following the occurrence of the effective dates for the Plan of Adjustment related to AAC-insured Puerto Rico General Obligation bonds (“GO”) and Public Buildings Authority (“PBA”) bonds, and Qualifying Modifications for AAC-insured Puerto Rico Infrastructure Authority (“PRIFA”) and Convention Center District Authority (“CCDA”) bonds, all effective March 15, 2022.

As a result of these successful restructurings, Ambac recorded a gain in the amount of $198 as part of its first quarter 2022 consolidated financial results.

This gain includes (i) a net benefit in losses;

(ii) gain on the consolidation of newly established variable interest entities;

partially offset by losses from sales and changes to the fair value of securities received in the restructuring and amortization of the insurance intangible asset.

• Management recorded a reduction to AAC’s estimated R&W subrogation recoveries in the amount of $224, $186 of which was based on AAC's evaluation of the effect on certain of AAC's R&W litigations of the New York Court of Appeals’ decision in the case entitled U.S.

Bank National Association v.

DLJ Mortgage Capital, Inc.

relating to Home Equity Asset Trust 2007-1 ("HEAT"), a residential mortgage-backed securities trust, and the remainder of which reflects the impact of changes in discount rates and underlying insured RMBS transaction performance.

The decision in HEAT is relevant to AAC's breach-of-contract cases relating to its insured RMBS transactions and may affect one of the bases upon which AAC seeks recovery with

respect to a significant portion of breaching loans in AAC's RMBS cases.

However, management believes there remain other alternative paths to recovery for such breaching loans.

AAC’s ultimate recoveries in its RMBS litigations may be materially higher or lower than its estimated subrogation recoveries based on a number of factors, including those described in Ambac’s Form 10-K for the fiscal year ended December 31, 2021 and elsewhere in this Quarterly Report.

The following paragraphs describe the consolidated results of operations of Ambac and its subsidiaries for the three months ended March 31, 2022 and 2021, respectively.

Gross Premiums Written.

Gross premiums written increased $32 for the three months ended March 31, 2022, compared to the same period in the prior year.

The increase was driven by the growth in the Specialty Property & Casualty Insurance segment of $24.

Net Premiums Earned.

Net premiums earned primarily represent the amortization into income of insurance premiums.

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

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

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

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

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

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

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

2021 2020 2021 2020

Normal premiums earned

Public finance $ 4 $ 5 $ 13 $ 15

Structured finance 2 2 7 6

International finance 4 3 16 9

Total normal premiums earned 10 10 36 30

Accelerated earnings 1 5 1 6

Total Net Premiums Earned (1)

$ 11 $ 15 $ 36 $ 36

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

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

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

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

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

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

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60 2021 Third Quarter FORM 10-Q |

Net premiums earned increased $1 for the three months ended March 31, 2022, compared to the same period in the prior year.

The increase was driven by $1 of specialty property and casualty net premiums earned, partially offset by a slight reduction in legacy financial guarantee premiums earned.

Net Investment Income.

Net investment income primarily consists of interest and net discount accretion on fixed maturity securities classified as available-for-sale and net gains (losses) on pooled investment funds which include changes in fair value of the funds' net assets.

Net investment income primarily consists of interest and net discount accretion on fixed maturity securities classified as available-for-sale, interest and changes in fair value of fixed maturity securities classified as trading, and net gains (losses) on pooled investment funds which include changes in fair value of the funds' net assets.

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

3 unchanged sentences

Investments to the Unaudited Consolidated Financial Statements, included in Part I, Item 1 in this Form 10-Q.

Net investment income for the periods presented were driven by the legacy financial guarantee segment;

other segments' results were not significant.

Net investment income from Ambac-insured securities;

1 unchanged sentence

and Other investments is summarized in the table below:

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

2021 2020 2021 2020

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53 2022 First Quarter FORM 10-Q |

Three Months Ended March 31,

Securities available-for-sale:

3 unchanged sentences

Net investment income $ 5 $ 49

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

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

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

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

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

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

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

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

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

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

The lower asset base resulted primarily from re-allocation of the portfolio in the first half of 2020 toward pooled funds and Ambac-insured bonds from investment grade corporate and certain asset-backed securities.

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

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

Net Realized Investment Gains (Losses).

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

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

2021 2020 2021 2020

Net investment income decreased $(44) for the three months ended March 31, 2022, compared to the three months ended March 31, 2021.

• Other investments income (loss) decreased $36 for the three months ended March 31, 2022, compared to the same period in the prior year.

The three months ended March 31, 2022, included a loss of $9 on securities received in the Puerto Rico restructuring which are classified as trading.

Pooled fund investment returns were lower for most asset classes, particularly equity and hedge funds.

Hedge funds had modest positive performance in the three months ended March 31, 2022, while equities experienced losses as global markets declined.

Both of these fund categories reported very strong positive performance in the first quarter of 2021.

Performance of other fund categories were mixed relative to the prior year period.

• Net investment income from Ambac-insured securities for the three months ended March 31, 2022 decreased $8 compared to the prior year period, due primarily to lower income on LSNI Secured Notes which were redeemed in July 2021.

Additionally, continued runoff of insured RMBS and the March 15, 2022, Puerto Rico restructuring both contributed to declines in investment income from Ambac-insured securities.

Net Investment Gains (Losses), including Impairments.

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

Three months ended March 31

Net gains (losses) on securities sold or called $ 8 $ 6

3 unchanged sentences

Total net realized gains (losses) $ 10 $ 2

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

Net gains for the three months ended March 31, 2022, included a recovery of $9 from a class-action settlement relating to certain RMBS securities previously held in the investment portfolio.

Net gains for the three months ended March 31, 2021, included a gain of $4 realized on the sale AFG's equity interest in the Corolla Trust in connection with the Corolla Exchange Transaction.

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

Credit impairments are recorded as an allowance for credit losses with changes in the allowance recorded through earnings.

When credit impairments are recorded, any non-credit related impairment amounts on the securities are recorded in other comprehensive income.

credit impairments are recorded, any non-credit related impairment amounts on the securities are recorded in other comprehensive income.

If management either:

(i) has the intent

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61 2021 Third Quarter FORM 10-Q |

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

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

Net Gains (Losses) on Derivative Contracts.

Net gains (losses) on derivative contracts include results from the Company's interest rate derivatives portfolio and its runoff credit derivatives portfolio.

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

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

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

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

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

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

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

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

Net gains (losses) on interest rate derivatives for the three months ended March 31, 2022, were $57 compared to $25 for the three months ended March 31, 2021.

The net gains for both periods reflect changes in fair value from increases in forward interest rates and lower counterparty credit adjustments on certain derivative assets, partially offset by portfolio carrying costs.

The higher net gain for the three months ended March 31, 2022, resulted from the significant rate increases in the period combined with favorable portfolio positioning, partially offset by the impact of wider credit spreads described further below.

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

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

Inclusion of counterparty credit adjustments in the valuation of interest rate derivatives resulted in gains (losses) within Net gains (losses) on derivative contracts of $2 and $9 for the three months ended March 31, 2022 and 2021, respectively.

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

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

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

Other income (expense) .

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

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

Credit spreads widened in the three months ended March 31, 2022 and narrowed in the three months ended March 31, 2021.

Commissions Income.

Commission income for the three months ended March 31, 2022 was $9 compared to $7, for the three months ended March 31, 2021.

Commissions include both base and profit sharing commissions of the Insurance Distribution segment.

The increase is primarily driven by greater premiums placed for the three months ended March 31, 2022.

Gross commission income has an accompanying expense, sub-producer commissions (included in Operating Expenses in the Consolidated Statements of Total Comprehensive Income (Loss), which will largely track changes in gross commission.

For the three months ended March 31, 2022 Sub-producer commissions of $5 million were up from $4 million in three months ended March 31, 2021.

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54 2022 First Quarter FORM 10-Q |

Net Realized Gains on Extinguishment of Debt.

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

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

Refer to Note 1.

Background and Business Description for further discussion of the 2021 Surplus Notes Exchanges.

Background and Business Description in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 for further discussion of the 2021 Surplus Notes Exchanges.

Income (Loss) on Variable Interest Entities.

Included within Income (loss) on variable interest entities are income statement amounts relating to VIEs, consolidated under the Consolidation Topic of the ASC as a result of Ambac's variable interest arising from financial guarantees written by Ambac's subsidiaries, including gains or losses attributable to consolidating or deconsolidating VIEs during the periods reported.

Generally, the Company’s consolidated VIEs are entities for which Ambac has provided financial guarantees on all of or a portion of its assets or liabilities.

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

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

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

Differences between the net carrying value of the insurance accounts under the Financial Services—Insurance Topic of the ASC and the carrying value of the consolidated VIE’s net assets or liabilities are recorded through income at the time of consolidation.

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

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

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

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

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

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

Included within Income (loss) on variable interest entities are income statement amounts relating to FG VIEs, consolidated under the Consolidation Topic of the ASC as a result of Ambac's variable interest arising from financial guarantees written by Ambac's subsidiaries, including gains or losses attributable to consolidating or deconsolidating FG VIEs during the periods reported.

Generally, the Company’s consolidated FG VIEs are entities for which Ambac has provided financial guarantees on all of or a portion of its assets or liabilities.

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

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

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

Differences between the net carrying value of the insurance accounts under the Financial Services—Insurance Topic of the ASC and the carrying value of the consolidated FG VIE’s net assets or liabilities are recorded through income at the time of consolidation.

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

Income on variable interest entities was $22 for the three months ended March 31, 2022, compared to income of less than a million for the three months ended March 31, 2021.

Results for the three months ended March 31, 2022, were driven by net income of $22 related to two new trusts created in connection with the Puerto Rico restructurings in March 2022, including an initial gain upon consolidation of $28 partially offset by subsequent declines in the fair value of the trusts' assets through March 31, 2022.

Income on variable interest entities for the three months ended March 31, 2022 and 2021 both included realized gains of $1 on sales of assets from one FG VIE (the COFINA Trust) offset by declines in the valuation of net assets of other VIEs.

Refer to Note 9.

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

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62 2021 Third Quarter FORM 10-Q |

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

Losses and Loss Expenses.

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

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

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

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

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

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

Refer to Note 2.

Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements included in Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, for more information regarding the estimation process for R&W subrogation recoveries.

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

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

2021 2020 2021 2020

Structured Finance $ (21) $ 33 $ (44) $ (67)

Domestic Public Finance (30) 43 (32) 263

Other (4) 8 3 20

Totals (1) (2)

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

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

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

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

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

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

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

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

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

Loss and loss expenses increased $16 for the three months ended March 31, 2022, compared to the same period in the prior year.

The increase was driven by a

reduction to AAC’s estimated R&W subrogation recoveries in the amount of $224, partially offset by favorable loss development in domestic public finance, primarily due to the Puerto Rico restructuring.

Intangible Amortization.

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

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

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

Insurance intangible amortization for the three months ended March 31, 2022 and 2021, was $14 and 19, a decrease of $5 over the three months ended March 31, 2021.

The decrease was driven by run-off of the insured portfolio and de-risking activity.

Other intangible amortization for the three months ended March 31, 2022 and 2021, was $1 and $1, respectively.

Operating Expenses.

1 unchanged sentence

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

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

2021 2020 2021 2020

$ 15 $ 13 $ 45 $ 38

Three Months Ended March 31, 2022 2021

Compensation $ 16 $ 16

Non-compensation 18 17

2 unchanged sentences

Total operating expenses $ 34 $ 33

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

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

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

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

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

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

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

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

Gross operating expenses increased $1 for the three months ended March 31, 2022, respectively, compared to the same periods in the prior year.

The increase in operating expenses during the three months ended March 31, 2022, as compared to the three months ended March 31, 2021, was due to the following:

• Higher compensation costs due to a net increase in staffing resulting from additions in the Specialty Property & Casualty Insurance segment offset by lower incentive compensation expense including the timing of performance factor adjustments.

• Higher non-compensation costs primarily related to sub-producers commissions as part of the Insurance Distribution segment and Legacy Financial Guarantee Insurance legal costs, partially offset by lower transaction driven consulting fees.

Interest Expense.

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

All interest expense relates to the Legacy Financial Guarantee Insurance segment and includes accrued interest on the LSNI Ambac Note, Sitka AAC Note, Tier 2 Notes, surplus notes and other debt obligations.

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

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

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

2021 2020 2021 2020

Three Months Ended March 31, 2022 2021

Surplus notes (1)

$ 20 $ 17 $ 57 $ 67

LSNI Ambac Note — 25

1 unchanged sentence

Tier 2 Notes 7 7

Other — — 1 1

Total interest expense $ 44 $ 50

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

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

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

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

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The decrease in interest expense for the three months ended March 31, 2022, compared to the three months ended March 31, 2021, was mainly driven by the impact of the Secured Note Refinancing as further described in Note 1.

Background and Business Description, in the Notes to the Consolidated Financial Statements included in Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, partially offset by discount accretion on surplus notes reissued in 2021.

Surplus note principal and interest payments require the approval of OCI.

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

In May 2022, OCI declined the request of AAC to pay the principal amount of the surplus notes, plus all accrued and unpaid interest thereon, on the then next scheduled payment date of June 7, 2022.

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.

2 unchanged sentences

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

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

Since the issuance of the

surplus notes in 2010, OCI has declined to approve regular payments of interest on surplus notes, although the OCI has permitted two exceptional payments.

Total accrued and unpaid interest for surplus notes outstanding to third parties were $593 at March 31, 2022.

Since the issuance of the surplus notes in 2010, OCI has declined to approve regular payments of interest on surplus notes, although the OCI has permitted two exceptional payments.

Provision for Income Taxes.

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

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

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

The provision for income taxes for the three months ended March 31, 2022 and 2021, was $0, and $2 a decrease of $1 compared to the provision for income taxes reported for three months ended March 31, 2021.

Results of Operations by Segment

Legacy Financial Guarantee Insurance

Three Months Ended March 31, 2022 2021

Net premiums earned $ 13 $ 14

Net investment income 5 49

Net investment gains (losses), including impairments 10 (2)

Net gains on derivative contracts 57 25

Net realized gains on extinguishment of debt — 33

Total 109 118

Loss and loss expenses (benefit) 23 8

Operating expenses 21 17

Earnings before interest, taxes, depreciation and amortization 65 93

Interest expense 44 50

Depreciation — —

Intangible amortization 14 19

Pretax income (loss) $ 6 $ 24

Stockholders equity $ 567 $ 727

The Legacy Financial Guarantee Insurance segment is in active runoff.

This will generally result in lower premium earnings, investment income, operating expenses and intangible amortization.

The variability in the financial results are primarily driven by changes in loss and loss expenses and de-risking transactions.

Additionally, the segment results are impacted by changes in interest rates (net gains on derivative contracts and interest expense as the AAC Sitka Note is a floating rate obligation).

Key variances not discussed above in the Consolidated Results section are as follows:

Net premiums earned.

Net premiums earned decreased $1 for the three months ended March 31, 2022, compared to the same period in the prior year.

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

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

The positive impact on net premiums earned related to credit losses amounted to $1 and $4 for the for the three months ended March 31, 2022 and 2021.

• Accelerated financial guarantee premium earnings as a result of calls and other accelerations on insured obligations largely due to de-risking activity of $4 and $0 for the for the three months ended March 31, 2022 and 2021.

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Losses and Loss Expenses.

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

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

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

Ambac has recorded representation and warranty subrogation recoveries, net of reinsurance, of $1,480 and $1,704 at March 31, 2022, and December 31, 2021, respectively.

Refer to Note 2.

Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements included in Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, for more information regarding the estimation process for R&W subrogation recoveries.

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

Three Months Ended March 31, 2022 2021

Structured Finance $ 213 $ (8)

Domestic Public Finance (190) 9

(1) Includes loss expenses incurred of $1 and $10 for the three months ended March 31, 2022 and 2021, respectively.

Losses and loss expenses (benefit) for the three months ended March 31, 2022, were driven by a reduction to AAC’s estimated R&W subrogation recoveries in the amount of $224, partially offset by favorable loss development in domestic public finance, primarily due to the Puerto Rico restructuring.

Losses and loss expenses (benefit) for the three months ended March 31, 2021, were driven by higher projected losses in domestic public finance from adverse development related to Puerto Rico, partially offset by the positive impact of higher discount rates.

Operating Expenses.

The increase in operating expenses of $4 during the three months ended March 31, 2022, as compared to the three months ended March 31, 2021, is primarily due additional legal fees related to defensive litigation costs.

In addition, incentive compensation expense increased due to performance factors, partially offset by lower other compensation costs resulting from a net reduction in headcount within the segment.

Specialty Property and Casualty Insurance

Three Months Ended March 31, 2022 2021

Gross premiums written $ 24 $ —

Net premiums written 5 —

Premiums earned $ 1 $ —

Investment income — —

Net investment gains (losses), including impairments — —

Other income (program fees) — —

Losses and loss expenses incurred 1 —

Operating expenses 3 1

Other expense — —

Earnings before interest, taxes, depreciation and amortization (2) $ (1)

Pretax income (loss) $ (2) $ (1)

Loss and LAE Ratio 65.3 % NM

Combined Ratio 331.9 % NM

Stockholders Equity $ 115 $ 106

The Specialty Property and Casualty Insurance segment has grown significantly since underwriting its first program in May 2021.

Ten programs have been signed as of March 31, 2022.

The growth in both the number and size of these programs has contributed to the increase in gross and net premiums written, net premiums earned and net loss and loss expenses incurred.

Loss and loss expenses incurred may be adversely impacted by increasing economic and social inflation, particularly within the commercial auto business.

The impact of inflation on ultimate loss reserves is difficult to estimate, particularly in light of recent disruptions to the judicial system, supply chain and labor market.

In addition to the impact of inflation on reserves, on a going forward basis, we may not be able to offset the impact of inflation on our loss costs with sufficient price increases.

The estimation of loss reserves may also be more difficult during extreme events, such as a pandemic, or during the persistence of volatile or uncertain economic conditions, due to, amongst other reasons, unexpected changes in behavior of claimants and policyholders, including an increase in fraudulent reporting of exposures and/or losses.

Due to the inherent uncertainty underlying loss reserve estimates, the final resolution of the estimated liability for loss and loss expenses will likely be higher or lower than the related loss reserves at the reporting date.

In addition, our estimate of losses and loss expenses may change.

These additional liabilities or increases in estimates, or a range of either, could vary significantly from period to period.

Segment pre-tax net income was impacted by the growth in operating expenses, including costs associated with the acquisition additional shell insurance companies, as we continue to ramp up Everspan's operations.

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Insurance Distribution

Three Months Ended March 31, 2022 2021

Premiums placed $ 45 $ 40

Commission income $ 9 $ 7

Sub-producer commission expense (1)

Net commissions 4 3

Other Operating expenses (1)

Net (gain) attributable to noncontrolling interest — —

Earnings before interest, taxes, depreciation and amortization 2 2

Depreciation — —

Intangible amortization 1 1

Pretax income (loss) 2 $ 2

Stockholders Equity, net of NCI $ 66 $ 69

(1) The Consolidated Statements of Comprehensive Income presents the sum of these items as Operating Expenses.

Ambac's Insurance Distribution segment currently includes Xchange Benefits, a P&C MGA specializing in accident and health products, 80% of which was acquired by AFG on December 31, 2020.

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

Commission revenues are usually based on a percentage of the premiums placed.

Xchange is also eligible to receive profit sharing contingent commissions on certain of its Affinity programs based on the underwriting results of the policies it places with the carrier, which may cause some variability in revenue and earning recognition.

Xchange underwrote and placed premiums for its carriers of approximately $45 for the three months ended March 31, 2022, an increase of $5 or 12% as compared to the three months ended March 31, 2021.

Higher premiums placed were the primary drivers to the increases in both gross and sub-producer commissions.

Employer Stop Loss business underwritten by Xchange has seasonality in January and July, which result in revenue and earnings concentrations in the first and third quarters each calendar year.

Employer Stop Loss is Xchange's largest business.

LIQUIDITY AND CAPITAL RESOURCES

($ in millions)

Ambac Financial Group, Inc.

("AFG") Liquidity .

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

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

Holding Company Liquidity

AFG is organized as a legal entity separate and distinct from its operating subsidiaries.

AFG is a holding company with no outstanding debt.

AFG's liquidity is primarily dependent on its net assets, excluding the operating subsidiaries that it owns, totaling $243 as of March 31, 2022, and secondarily on distributions and expense sharing payments from its operating subsidiaries.

AFG's investments include securities directly issued

surplus notes), which are eliminated in consolidation.

Securities issued by AAC and certain other of AFG's investments are generally less liquid than investment grade and highly traded investments.

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

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

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

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

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

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

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

Therefore, payments under the intercompany cost allocation agreement will be AFG’s principal sources of liquidity from AAC in the near-term.

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

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

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

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

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

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

The $4 reimbursement for 2021 expenses was approved by OCI and paid to AFG in April 2022.

AFG's principal uses of liquidity are:

(i) the payment of operating expenses, including costs to explore opportunities to grow and diversify Ambac, (ii) the making of strategic investments, which may include illiquid investments and (iii) making capital investments to acquire, grow and/or capitalize new and/or existing businesses.

AFG may also provide short-term financial support, primarily in the form of loans, to its operating subsidiaries to support their operating requirements.

AFG supported the development of the Specialty P&C Insurance business, and its acquisitions, by contributing $6 of capital to Everspan Indemnity in first quarter of 2022 and $92 in 2021, respectively.

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

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

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

and the acquisition or capitalization of new and existing businesses.

Contingencies could cause material liquidity strains.

Ambac Assurance Liquidity .

AAC’s liquidity is dependent on the balance of liquid investments and, over time, the net impact of sources and uses of funds.

The principal sources of AAC’s liquidity are gross installment premiums on insurance policies;

principal and interest payments from investments;

sales of investments;

proceeds from repayment of affiliate loans;

and recoveries on claim payments, including from litigation and reinsurance recoveries.

Termination of installment premium policies on an accelerated basis may adversely impact AAC’s liquidity.

The principal uses of AAC’s liquidity are the payment of operating and loss adjustment expenses;

commutation payments on insurance policies;

ceded reinsurance premiums;

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

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

additional loans to affiliates;

and purchases of securities and other investments that may not be immediately converted into cash.

• Although AAC has not yet experienced incremental claim payments as a result of the impact of COVID-19, such claims may occur as issuers, particularly those with revenues that have been interrupted by the effects of the pandemic (including social distancing, other restrictions on activities and the increase in unemployment) may not have sufficient cash inflows to pay debt service on Ambac-insured debt.

Refer to "Financial Guarantees in Force" in this Management's Discussion and Analysis for further discussion of the potential impact of the COVID-19 pandemic on claim payments.

• Interest and principal payments on surplus notes are subject to the approval of OCI, which has full discretion over payments regardless of the liquidity position of AAC.

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

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

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

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

AFS uses interest rate derivatives (primarily interest rate swaps and US Treasury futures) as an economic hedge against the effects of rising interest rates elsewhere in the Company, including on AAC’s financial guarantee exposures.

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

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

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

AAC manages its liquidity risk by maintaining comprehensive analyses of projected cash flows and maintaining specified levels of cash and short-term investments at all times.

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

If dividends are paid on the common stock for such purposes, dividends on the AMPS become cumulative until the date that all accumulated and unpaid dividends have been paid on the AMPS.

AAC has not paid dividends on the AMPS since 2010.

AAC is also subject to additional restrictions on the payment of dividends pursuant to certain contractual and regulatory restrictions.

Refer to Part I, Item 1, “Insurance Regulatory Matters - Dividend Restrictions, Including Contractual Restrictions” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, and Note 9.

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

Our ability to realize RMBS representation and warranty ("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;

AFG received distributions from Xchange of $2 and $- during the three months ended March 31, 2022 and 2021.

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

In the opinion of the Company’s management the net assets of AFG are sufficient to meet AFG’s current liquidity requirements.

However, events, opportunities or circumstances could arise that may cause AFG to seek additional capital (e.g.

through the issuance of debt, equity or hybrid securities or facilities).

Operating Companies' Liquidity

The liquidity requirements of the Company’s insurance subsidiaries are met primarily by funds generated from premiums;

recoveries on claim payments, including RMBS representation and warranty subrogation recoveries (AAC only);

reinsurance recoveries;

investment income and maturities and sales of investments.

• AAC's ability to realize RMBS representation and warranty subrogation recoveries is subject to significant uncertainty, including risks inherent in litigation, such as adverse rulings or decisions in our cases or in litigations to which AAC is not a party that set precedents or resolve questions of law that impact our own claims;

collectability of such amounts from counterparties (and/or their respective parents and affiliates);

timing of receipt of any such recoveries, including uncertainty due to delays in court proceedings as a result of the COVID-19 pandemic;

timing of receipt of any such recoveries, including due to delays in court proceedings;

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

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

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

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

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The amount of these subrogation recoveries is material and if AAC is unable to recover any amounts or recovers materially less than its estimated recoveries, its future available liquidity to pay claims, debt service and meet other obligations would be materially adversely impacted.

See Part I, Item 1A.

Risk Factors in the Company's Annual Report on Form 10-K for the year ended December 31, 2020, and Part II, Item 1A.

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

Cash Flow Statement Discussion.

Risk Factors in AFG's Annual Report on Form 10-K and Part II, Item 1A of this Quarterly Report for more information about risks relating to RMBS R&W subrogation recoveries.

• See Note 6.

Insurance Contracts to the Consolidated Financial Statements included in Part II, Item 8, in this Form 10-Q for a summary of future gross financial guarantee premiums to be collected by AAC and Ambac UK.

Termination of financial guarantee policies on an accelerated basis may adversely impact AAC’s liquidity.

Cash provided from these sources is used primarily for claim payments and commutations, loss expenses and acquisition costs (Specialty Property & Casualty Insurance segment only), debt service on outstanding debt (AAC only), operating expenses, reinsurance payments and purchases of securities and other investments that may not be immediately converted into cash.

• Interest and principal payments on surplus notes are subject to the approval of OCI, which has full discretion over payments regardless of the liquidity position of AAC.

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

Long-term Debt to the Consolidated Financial Statements included in Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 for further discussion of the payment terms and conditions of the Tier 2 Notes as well as the aggregate annual maturities of all debt outstanding.

In addition to principal amounts of $2,341 as of March 31, 2022, with various maturities as described in Note 12.

Long-term Debt to the Consolidated Financial Statements included in Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, AAC's future interest obligations include $65, subject to changes in interest rates, annually on the Sitka AAC Note through maturity on July 6, 2026, $605 of accrued and unpaid interest that would be payable on surplus notes if approved by OCI on the next scheduled payment date of June 7, 2022, and Tier 2 Note interest that may be paid-in-kind until maturity on February 12, 2055 at which time $5,060 would be due.

• AAC lends its wholly-owned subsidiary, Ambac Financial Services ("AFS") cash to support its operations.

AFS uses interest rate derivatives (primarily interest rate swaps and US Treasury futures) as a partial economic hedge against the effects of rising interest rates elsewhere in the legacy financial guarantee segment.

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

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

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

Insurance subsidiaries manage their liquidity risk by maintaining comprehensive analyses of projected cash flows and maintaining specified levels of cash and short-term investments at all times.

It is the opinion of the Company’s management that the insurance subsidiaries’ near term liquidity needs will be adequately met from the sources described above.

Insurance Distribution:

The liquidity requirements of our MGA subsidiaries are met primarily by funds generated from commission receipts (both base and profit commissions).

Base commissions are generally received monthly, whereas profit commissions are received only if the business underwritten is profitable.

Cash provided from these sources is used primarily for commissions paid to sub-producers, operating expenses and distributions to AFG and other members.

Consolidated Cash Flow Statement Discussion.

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

Nine Months Ended September 30, 2021 2020

Three Months Ended March 31, 2022 2021

Cash provided by (used in):

4 unchanged sentences

Net cash flow $ 93 $ 6

$ (14) $ (31)

(1) During the second quarter of 2022, AAC made $393 of payments in connection with the acceleration of the AAC-insured PRIFA and CCDA bonds that were not commuted during the first quarter of 2022 and were deposited into the respective trusts.

As a result of these claim payments and associated full redemption of the trust certificates, the remaining assets of the trusts, valued at $114 at March 31, 2022, were distributed to AAC.

Additionally, AAC was the holder of $164 of the PRIFA trust certificates that were fully redeemed.

Because these trusts are consolidated VIEs, this activity will be reflected as $221 payments of VIE liabilities in second quarter 2022 financing activities.

Operating activities

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

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

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

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

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

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

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

Nine Months Ended September 30, 2021 2020

The following represents the significant cash operating activity during the three months ended March 31, 2022 and 2021:

• Debt service payments on the Sitka AAC Note were $15 for the three months ended March 31, 2022.

Debt service payments on the LSNI Ambac Note were $25 for the three months ended March 31, 2021.

• Payments related to (i) operating expenses were $34 and $31 for the three months ended March 31, 2022 and 2021, respectively;

and (ii) reinsurance premiums were $7 and $9

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59 2022 First Quarter FORM 10-Q |

for the three months ended March 31, 2022 and 2021, respectively

• Cash provided by (i) premiums were $28 and $12 for the three months ended March 31, 2022 and 2021, respectively;

(ii) interest rate derivatives were $11 and $3 for the three months ended March 31, 2022 and 2021, respectively;

(iii) investment portfolio income were $14 and $23 for the three months ended March 31, 2022 and 2021, respectively;

and (iv) cash settlements from the Puerto Rico restructuring transactions to the consolidated trusts was $47 for the three months ended March 31, 2022.

• Net Legacy Financial Guarantee Insurance loss and loss expenses paid, including commutation payments, during the three months ended March 31, 2022 and 2021 are detailed below:

Three Months Ended March 31, 2022 2021

Net loss and loss expenses paid (recovered):

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Net cash flow $ 28 $ 25

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

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

Financing Activities

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

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

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

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

Financing activities for the three months ended March 31, 2022, include paydowns and maturities of VIE debt obligations of $49.

Financing activities for the three months ended March 31, 2021, include paydowns of the LSNI Ambac Note of $16 and paydowns and maturities of VIE debt obligations of $48.

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

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

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AFS may look to re-establish hedge positions that are terminated early, resulting in additional collateral or margin obligations.

The amount of additional collateral or margin posted on derivatives contracts will depend on several variables including the degree to which counterparties exercise their termination rights (or agreements terminate automatically) and the terms on which hedges can be replaced.

The amount of additional collateral or margin posted on derivatives contracts will depend on several variables including the degree to which

counterparties exercise their termination rights (or agreements terminate automatically) and the terms on which hedges can be replaced.

All collateral and margin obligations are currently met.

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

Collateral and margin posted by AFS totaled a net amount of $119 (cash and securities collateral of $6 and $114, respectively), including independent amounts, under these contracts at March 31, 2022.

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

BALANCE SHEET

($ in millions)

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

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

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

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

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

BALANCE SHEET ($ in millions)

Total assets decreased by approximately $772 from December 31, 2021, to $11,531 at March 31, 2022, primarily due to payment of loss and loss expenses, interest and operating expenses, lower subrogation recoverables, declines in invested asset values, lower derivative assets caused by rising interest rates, lower consolidated VIE assets and lower premium receivables and intangible assets from the continued runoff of the financial guarantee insurance portfolio.

Total liabilities decreased by approximately $649 from December 31, 2021, to $10,538 as of March 31, 2022, primarily due to the payment of loss and loss expenses, lower VIE long-term debt and lower derivative liabilities caused by rising interest rates.

As of March 31, 2022, total stockholders’ equity was $974, compared with total stockholders’ equity of $1,098 at December 31, 2021.

This decrease was primarily due to the changes in unrealized losses on invested assets and losses on foreign currency translation.

Investment Portfolio

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

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

September 30,

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The following table summarizes the composition of Ambac’s investment portfolio, excluding VIE investments, at carrying value at March 31, 2022 and December 31, 2021:

2022 December 31,

Fixed maturity securities (1), (2)

$ 1,383 $ 1,730

Fixed maturity securities - trading 119 —

Short-term (1), (2)

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$ 2,815 $ 2,955

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

(1) Includes Specialty Property & Casualty Insurance segment assets held comprising fixed maturity securities of $79 and $72 at March 31, 2022 and December 31, 2021, respectively, and short-term investments of $31 and $32 at March 31, 2022 and December 31, 2021, respectively.

(2) Includes assets held by AFG comprising fixed maturity securities, short-term and other investments of $24, $113 and $11 as of March 31, 2022, respectively, and fixed maturity securities, short-term and other investments of $28, $124 and $11 as of December 31, 2021, respectively.

(3) Includes investments denominated in non-US dollar currencies with a fair value of £339 ($445) and €35 ($39) as of March 31, 2022, and £341 ($462) and €38 ($43) as of December 31, 2021.

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

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

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

The following charts provide the ratings (1) distribution of the fixed maturity investment portfolio based on fair value at March 31, 2022 and December 31, 2021:

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

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

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

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

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

(2) Below investment grade and not rated bonds insured by Ambac represent 20% and 32% of the March 31, 2022 and December 31, 2021 combined fixed maturity portfolio, respectively.

The decrease is primarily due to the impact of the settlement of insured Puerto Rico bonds described above, under Financial Guarantees in Force - AAC-Insured Bond Effective Date Transactions.

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Premium Receivables

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

Ambac's premium receivables decreased to $317 at March 31, 2022, from $323 at December 31, 2021.

As further discussed in Note 6.

Insurance Contracts, the decrease is due to premium receipts and adjustments for changes in expected and contractual cash flows on financial guarantee insurance contracts, partially offset by decreases to the allowance for credit losses and accretion of the premium receivable discount.

Insurance Contracts, the decrease is primarily due to activities in the Legacy Financial Guarantee Insurance Segment partially offset by growth in the Specialty P&C Insurance Segment.

The Legacy Financial Guarantee Insurance Segment declines are due to premium receipts, partially offset by decreases to the allowance for credit losses and accretion of the premium receivable discount.

At March 31, 2022, Legacy Financial Guarantee Insurance and Specialty P&C premiums receivables are $308 and $9, respectively.

Premium receivables by payment currency were as follows:

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

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

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

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

The decrease was primarily a result of favorable loss development.

Intangible Asset .

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

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

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

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

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

Ambac benefited from letters of credit and collateral amounting to approximately $106 from its reinsurers at March 31, 2022.

Additionally, while legacy liabilities from the 21st Century Companies and PWIC acquisitions were fully ceded to certain reinsurers, Everspan also benefits from an unlimited, uncapped indemnity from the respective sellers to mitigate any residual risk to these reinsurers.

As of March 31, 2022 and December 31, 2021, reinsurance recoverable on paid and unpaid losses were $48 and $55, respectively.

The decrease was primarily a result of favorable development in financial guarantee insured exposures largely related to the Puerto Rico restructuring.

Intangible Assets

Intangible assets includes (i) an insurance intangible asset that was established at AFG's emergence from bankruptcy (Legacy

Financial Guarantee Insurance Segment), representing the difference between the fair value and aggregate carrying value of the financial guarantee insurance and reinsurance assets and liabilities of $303 at March 31, 2022, (ii) intangible assets established as part of the acquisition of Xchange (Insurance Distribution Segment) on December 31, 2020 of $32 at March 31, 2022 and (iii) indefinite-lived intangible assets established as part of the acquisitions of PWIC on October 1, 2021 and the 21st Century Companies on January 3, 2022 (Specialty Property & Casualty Insurance segment) of $14 at March 31, 2022.

As of March 31, 2022 and December 31, 2021, intangible assets were $350 and $362, respectively.

The decline is primarily due to amortization partially offset by the new intangible asset acquired with the 21st Century Companies.

Derivative Assets and Liabilities

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

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

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

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

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

Derivative assets decreased from $76 at December 31, 2021, to $55 as of March 31, 2022.

Derivative liabilities decreased from $95 at December 31, 2021, to $76 as of March 31, 2022.

The net decreases resulted primarily from higher interest rates during the three months ended March 31, 2022.

Loss and Loss Expense Reserves and Subrogation Recoverable

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Insurance Contracts, respectively, of the Consolidated Financial Statements included in Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, for further information on loss and loss expenses.

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

The loss and loss expense reserves, net of subrogation recoverables and before reinsurance as of March 31, 2022 and December 31, 2021, were $(647) and $(522), respectively.

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

Balance Sheet Line Item Claims and

Recoveries (2)

Specialty Property and Casualty Legacy Financial Guarantee

Present Value of Expected

Net Cash Flows Unearned

Revenue Gross Loss

September 30, 2021:

Balance Sheet Line Item Gross Loss

Reserves Claims and

Expenses Recoveries (1)

March 31, 2022:

Loss and loss expense reserves $ 36 $ 1,168 $ (95) $ (42) $ 1,067

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Totals $ 32 $ 1,837 $ (2,335) $ (56) $ (522)

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

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

Financial Guarantee:

(1) Present value of future recoveries includes R&W subrogation recoveries of $1,502 and $1,730 at March 31, 2022 and December 31, 2021, respectively.

Legacy Financial Guarantee Insurance:

Ambac has exposure to various bond types issued in the debt capital markets.

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These bond types represent 93% of our ever-to-date insurance claims recorded, with RMBS comprising 75%.

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

At March 31, 2022, $298 million of gross loss and loss expense reserves were consolidated into a VIE in connection with the Puerto Rico restructuring.

The table below indicates gross par outstanding and the components of gross loss and loss expense reserves related to policies in Ambac’s gross loss and loss expense reserves at March 31, 2022 and December 31, 2021:

Outstanding (1)

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Expenses Recoveries

September 30, 2021:

March 31, 2022:

Structured Finance $ 2,293 $ 782 $ (1,715) $ (10) $ (943)

Domestic Public Finance (3)

1,914 365 (141) (20) 204

Other 1,262 34 (5) (12) 17

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Total $ 6,302 $ 1,837 $ (2,485) $ (56) $ (554)

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

(1) Ceded par outstanding on policies with loss reserves and ceded loss and loss expense reserves are $646 and $14 respectively, at March 31, 2022, and $784 and $24, respectively at December 31, 2021.

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

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

(2) Loss reserves are included in the balance sheet as Loss and loss expense reserves or Subrogation recoverable dependent on if a policy is in a net liability or net recoverable position.

(3) As a result of the Puerto Rico restructuring and the subsequent consolidation of VIE's gross par outstanding was reduced by $270 and $323, respectively.

Variability of Expected Losses and Recoveries

Ambac’s management believes that the estimated future loss component of loss reserves (present value of expected net cash flows) are adequate to cover future claims presented, but there can be no assurance that the ultimate liability will not be higher than such estimates.

Ambac’s management believes that the estimated future loss component of loss reserves (present value of expected net cash flows) are adequate to cover future claims presented, but there

can be no assurance that the ultimate liability will not be higher than such estimates.

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It is possible that our estimated future losses for insurance policies discussed above could be understated or that our estimated future recoveries could be overstated.

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

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

The possible net cash flows consider the highest stress scenario that was utilized in the development of our probability-weighted expected loss at March 31, 2022, and assumes an inability to execute any commutation transactions with issuers and/or investors.

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

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

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

See “Risk Factors” in Part I, Item 1A as well as the descriptions of "RMBS Variability," "Public Finance Variability," "Student Loan Variability," and "Other Credits, including Ambac UK, Variability" in Part II, Item 7 of the Company's 2021 Annual Report on Form 10-K, and Part II, Item1A "Risk Factors" of this Quarterly Report, for further discussion of the risks relating to future losses and recoveries that could result in more highly stressed outcomes, as well as the descriptions of "Structured Finance Variability," "Domestic Public Finance Variability," "Student Loan Variability," and "Other Variability" appearing below.

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

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

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Structured Finance Variability

Ambac has exposure to the U.S.

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

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

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

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

We established a representation and warranty subrogation recovery as further discussed in Note 6.

Insurance Contracts to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Form 10-Q.

Our ability to realize RMBS representation and warranty 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;

Our ability to realize RMBS representation and warranty recoveries is subject to significant uncertainty, including due to 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);

delays in realizing such recoveries, including as a result of trial delays due to court closures related to COVID-19 or other events;

delays in realizing such recoveries, including as a result of trial delays due to court closures related to COVID-19 or other events or circumstances (such as changes in law that affect any basis on which AAC seeks recovery);

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

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

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

For example, AAC expects the implications of the decision of the New York Court of Appeals in the case entitled U.S.

Bank National Association v.

DLJ Mortgage Capital, Inc.

relating to Home Equity Asset Trust 2007-1, a residential mortgage-backed securities trust, to be the subject of additional arguments, decisions and appeals in certain of its RMBS litigations as well as in unrelated cases.

Actions or decisions by trial or appellate courts regarding the implications of HEAT may significantly impact the manner in which AAC presents its case, AAC's ultimate recoveries, or the timing of trials or pre-trial procedures, filings or actions.

Additionally, our actual R&W subrogation recoveries could be significantly lower than our estimate of $1,480, net of reinsurance, as of March 31, 2022, if the sponsors of these transactions:

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

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

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

Student Loans:

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

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

Structured Finance Variability:

Using the approaches described above, the possible increase in loss reserves for structured finance credits for which we have an estimate of expected loss at March 31, 2022, could be approximately $20.

Combined with the absence of any R&W subrogation recoveries, a possible increase in loss reserves for structured finance credits could be approximately $1,500.

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

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

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

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Domestic Public Finance Variability:

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

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

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

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

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

September 30, 2021 December 31, 2020

Issuer Type Gross Par

Outstanding (1)

Reserves Gross Par

Outstanding (1)

Lease and tax-backed $ 1,386 $ 620 $ 1,366 $ 693

General obligation 431 (74) 589 (37)

Housing 422 22 453 27

Transportation revenue 232 28 220 30

Other 362 10 388 11

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

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

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

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

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

A prolonged recovery from the COVID-19 related economic impact could put additional stresses on these issuers as well as other types of municipal finance issuers and result in increased defaults and potential additional losses for Ambac.

Our experience with the city of Detroit in 2013 in its bankruptcy proceeding was not favorable and renders future outcomes with other public finance issuers even more difficult to predict and may increase the risk that we may suffer losses that could be sizable.

We agreed to settlements regarding our insured Detroit general obligation bonds that provide better treatment of our exposures than the city planned to include in its plan of adjustment, but nevertheless required us to incur a loss for a significant portion of our exposure.

An additional troubling precedent in the Detroit case, as well as other municipal bankruptcies, is the preferential treatment of certain creditor classes, especially the public pensions.

Additionally, our loss reserves may be under-estimated because of the continuing effects of COVID-19 pandemic.

Our experience with the city of Detroit's bankruptcy and Commonwealth of Puerto Rico's Title III proceedings as well as other municipal bankruptcies demonstrates the preferential treatment of certain creditor classes, especially the public pensions.

The cost of pensions and the need to address frequently sizable unfunded or underfunded pensions is often a key driver of stress for many municipalities and their related authorities, including entities to whom we have significant exposure, such as Chicago's school district, the State of New Jersey and many others.

Less severe treatment of pension obligations in bankruptcy may lead to worse outcomes for traditional debt creditors.

Variability of outcomes applies even to what is generally considered more secure municipal financings, such as dedicated sales tax revenue bonds that capture sales tax revenues for debt service ahead of any amounts being deposited into the general fund of an issuer.

Variability of outcomes applies to even what are generally considered more secure municipal financings, such as dedicated sales tax revenue bonds that capture sales tax revenues for debt service ahead of any amounts being deposited into the general fund of an issuer.

In the case of the Puerto Rico COFINA sales tax bonds that were part of the Commonwealth of Puerto Rico's Title III proceedings, AAC and other creditors agreed to settle at a recovery rate equal to about 93% of pre-petition amounts owed on the Ambac insured senior COFINA bonds.

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We expect municipal bankruptcies and defaults to continue to be challenging to project given the unique political, economic, fiscal, legal, governance and public policy differences among municipalities as well as the complexity, long duration and relative infrequency of the cases themselves in forums with a scarcity of legal precedent.

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

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

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

On January 13, 2020, the U.S.

Supreme Court denied a petition for certiorari arising out of an appeal of the March 26, 2019, ruling by the U.S.

Court of Appeals for the First Circuit.

In the ruling, the First Circuit affirmed the decision by the U.S.

District Court overseeing the PROMESA Title III proceedings for the PRHTA, which found that under Sections 928(a) and 922(d) of the U.S.

Bankruptcy Code, municipal issuers of revenue bonds secured by special revenues are permitted, but not required, to apply special revenues to pay debt service on such revenue bonds during the pendency of bankruptcy proceedings for such municipal issuers.

The First Circuit's decision challenges what had been a commonly understood notion in the municipal finance marketplace that municipal revenue bondholders secured by special revenues (as defined in Chapter 9 of the U.S.

Bankruptcy Code) would continue to receive payment during a bankruptcy of the municipal issuer.

This decision introduces uncertainty into the public finance market and it may make it more difficult for municipal instrumentalities to procure revenue bond financings in the future and increases the credit risk to bondholders of existing special revenue bonds, particularly those from weaker issuers.

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

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

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

ongoing PROMESA Title III and related proceedings;

certain other provisions under PROMESA;

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

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

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

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

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

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

Moreover, issuers in Chapter 9 or similar proceedings may obtain judicial rulings and orders that impair creditors' rights or their ability to collect on amounts owed.

In certain cases, judicial decisions may be contrary to AAC's expectations or understanding of the law or its rights thereunder, which may lead to worse outcomes in Chapter 9 or similar proceedings than anticipated at the outset.

Another potentially adverse development that could cause the loss reserves on our public finance credits to be underestimated is

deterioration in the municipal bond market, resulting from reduced or limited access to alternative forms of credit (such as bank loans) or other exogenous factors, such as changes in tax law that could reduce certain municipal investors' appetite for tax-exempt municipal bonds or put pressure on issuers in states with high state and local taxes.

These factors could deprive issuers access to funding at a level necessary to avoid defaulting on their obligations.

Following the March 15, 2022 consummation of the Eighth Amended POA, the PRIFA QM and the CCDA QM, all of Ambac’s exposures to the Commonwealth of Puerto Rico across various instrumentalities with the exception of PRHTA have now been restructured.

PRHTA is subject to a plan support agreement and will be subject to the PRHTA POA that was filed on May 2, 2022, and is expected to be confirmed later in 2022.

However, uncertainty remains as to (i) 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;

(ii) the extent to which exposure management strategies, such as commutation and acceleration, will be executed for PRHTA;

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

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

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

Losses may exceed current reserves in a material manner due to favorable or unfavorable developments or results with respect to these factors.

Commitments and Contingencies to the Consolidated Financial Statements in Part I and "Financial Guarantees in Force" section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Part II in this Form 10-Q for further updates relating to Puerto Rico.

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

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

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

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

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

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

For the public finance credits, including Puerto Rico, for which we have an estimate of expected loss at March 31, 2022, the possible increase in loss reserves could be approximately $220 and there can be no assurance that losses may not exceed our stress case estimates.

Other Variability:

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

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

For all other credits, including Ambac UK, for which we have an estimate of expected loss, the sum of all the highest stress case loss scenarios is approximately $345 greater than the loss reserves at March 31, 2022.

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

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Long-term Debt

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

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

September 30,

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

All long-term debt relates to the Legacy Financial Guarantee Segment.

The carrying value of each of these as of March 31, 2022 and December 31, 2021 is below:

2022 December 31, 2021

Surplus notes $ 732 $ 729

LSNI Ambac note — 1,641

Sitka AAC note 1,155 1,154

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Total Long-term Debt $ 2,242 $ 2,230

(1) Includes junior surplus notes as of December 31, 2020.

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

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

As further described in Note 1.

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

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

The increase in long-term debt from December 31, 2021, resulted from accretion on the carrying value of surplus notes, Sitka AAC Note, and Ambac UK debt and paid-in-kind interest on Tier 2 notes.

VARIABLE INTEREST ENTITIES

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ACCOUNTING STANDARDS

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

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

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Equity-classified Written Call Options

In May 2021, the FASB issued ASU 2021-04, Issuer's Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options .

The ASU clarifies and reduces diversity in practice for an issuer's accounting for modifications or exchanges of equity-classified written call options (e.g.

warrants) that remain equity-classified after the modification or exchange.

The ASU requires an issuer to account for the modification or exchange based on the economic substance of the transaction.

For example, if the modification or exchange is related to the issuance of debt or equity, any change in the fair value of the written call option would be accounted for as part of the debt issuance cost in accordance with the debt guidance or equity issuance cost in accordance with the equity guidance, respectively.

The ASU is effective for fiscal years beginning after December 15, 2021, with early adoption permitted.

Ambac will adopt this ASU on January 1, 2022.

Convertible Instruments and Contracts in an Entity's Own Equity

In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity's Own Equity .

The ASU i) simplifies the accounting for convertible debt and convertible preferred stock by reducing the number of accounting models, and amends certain disclosures, ii) amends and simplifies the derivative scope exception guidance for contracts in an entity's own equity, including share-based compensation, and iii) amends the diluted earnings per share calculations for convertible instruments and contracts in an entity's own equity.

The ASU is effective for fiscal years beginning after December 15, 2021, with early adoption permitted.

Ambac will adopt this ASU on January 1, 2022.

There are no new accounting standards applicable to Ambac that have been issued but not yet adopted.

Please refer to Note 2.

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"Management's Discussion and Analysis of Financial Condition and Results of Operations," and Note 8.

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

Insurance Regulatory Restrictions to the Consolidated Financial Statements included in

Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

Ambac Assurance Corporation

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

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

AAC’s statutory policyholder surplus and qualified statutory capital (defined as the sum of policyholders surplus and mandatory contingency reserves) were $805 and $1,378 at March 31, 2022, respectively, as compared to $757 and $1,322 at December 31, 2021, respectively.

As of March 31, 2022, statutory policyholder surplus and qualified statutory capital included $853 principal balance of surplus notes outstanding and $138 liquidation preference of preferred stock outstanding.

These surplus notes (in addition to related accrued interest of $644 that is not recorded under statutory basis accounting principles);

preferred stock;

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

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

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

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

and all other liabilities, including insurance claims, the Sitka AAC Note and the Tier 2 Notes are obligations that, individually and collectively, have claims on the resources of AAC that are senior to AFG's equity and therefore impede AFG's ability to realize residual value and/or receive dividends from AAC.

The driver to the net increase in policyholder surplus is statutory net income of $61 for the three months ended March 31, 2022.

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

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

Everspan Indemnity Insurance Company

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

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

Everspan Indemnity Insurance Company’s statutory policyholder surplus was $110 at March 31, 2022, as compared to $106 at December 31, 2021.

The significant drivers to the increase in policyholder surplus were capital contributions of $13 partially offset by the admitted asset limitation on goodwill within investment in subsidiaries, and operating expenses during the three months ended March 31, 2022.

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66 2022 First Quarter FORM 10-Q |

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

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

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

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

Ambac UK is required to prepare financial statements under FRS 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland." Ambac UK’s shareholder funds under UK GAAP were £449 at March 31, 2022, as compared to £444 at December 31, 2021.

At March 31, 2022, the carrying value of cash and investments was £509, an increase from £500 at December 31, 2021.

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

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

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

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

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

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

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

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

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

Available capital resources under Solvency II were a surplus of £250 at December 31, 2021, the most recently published position, of which £240 were eligible to meet solvency capital requirements.

Eligible capital resources at December 31, 2021, were in comparison to regulatory capital requirements of £238.

Therefore, Ambac UK had a surplus of capital resources as compared to regulatory capital requirements of £1 at December 31, 2021.

NON-GAAP FINANCIAL MEASURES

In addition to reporting the Company’s quarterly financial results in accordance with GAAP, the Company currently reports two non-GAAP financial measures:

adjusted earnings and adjusted book value.

The most directly comparable GAAP measures are net income attributable to common stockholders for adjusted earnings and Total Ambac Financial Group, Inc.

stockholders’ equity for adjusted book value.

($ in millions)

In addition to reporting the Company’s quarterly financial results in accordance with GAAP, the Company currently reports three non-GAAP financial measures:

EBITDA, adjusted earnings and adjusted book value.

The most directly comparable GAAP measures are pre-tax net income for EBITDA, net income attributable to common stockholders for adjusted earnings and Total Ambac Financial Group, Inc.

stockholders’ equity for

adjusted book value.

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

We are presenting these non-GAAP financial measures because they

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

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

We present such non-GAAP supplemental financial information because we believe such information is of interest to the investment community that provides greater transparency and enhanced visibility into the underlying drivers of our businesses on a basis that may not be otherwise apparent on a GAAP basis.

We view these non-GAAP financial measures as important indicators when assessing and evaluating our performance on a segmented and consolidated basis.

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

Ambac has a significant U.S.

tax net operating loss (“NOL”) that is offset by a full valuation allowance in the GAAP consolidated financial statements.

As a result of this and other considerations, we utilized a 0% effective tax rate for non-GAAP adjustments;

As a result of this and other considerations, we utilized a 0% effective tax rate for non-GAAP adjustments for both Adjusted Earnings and Adjusted Book Value;

which is subject to change.

The following paragraphs define each non-GAAP financial measure and describe why it is useful.

The following paragraphs define each non-GAAP financial measure.

A reconciliation of the non-GAAP financial measure and the most directly comparable GAAP financial measure is also presented below.

EBITDA is defined as net income before interest expense, income taxes, depreciation and amortization of intangible assets.

EBITDA is also adjusted for noncontrolling interests in subsidiaries where Ambac does not own 100%.

The following table reconciles pre-tax net income (loss) to the non-GAAP measure, EBITDA on a consolidation and segment basis for all periods presented:

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Legacy Financial Guarantee Insurance Specialty Property & Casualty Insurance Insurance Distribution Corporate & Other Consolidated

Three Months Ended March 31, 2022

Pretax income (loss) (1)

$ 6 $ (2) $ 2 $ (3) $ 3

Interest expense 44 — — — 44

Depreciation — — — — —

Amortization of intangible assets 14 — 1 — 14

Net (gain) attributable to noncontrolling interest (1) (1)

Earnings before interest, taxes, depreciation and amortization $ 65 $ (2) $ 2 $ (3) $ 61

Three Months Ended March 31, 2021

Pretax income (loss) (1)

$ 24 $ (1) $ 2 $ (6) $ 19

Interest expense 50 — — — 50

Depreciation — — — — —

Amortization of intangible assets 19 — 1 — 19

Net (gain) attributable to noncontrolling interest — —

Earnings before interest, taxes, depreciation and amortization $ 93 $ (1) $ 2 $ (6) $ 88

(1) Pretax income (loss) is prior to the impact of noncontrolling interests.

Adjusted Earnings (Loss).

Adjusted earnings (loss) is defined as net income (loss) attributable to common stockholders, as reported under GAAP, adjusted on an after-tax basis for the following:

• Non-credit impairment fair value (gain) loss on credit derivatives:

Elimination of the non-credit impairment fair value gains (losses) on credit derivatives, which is the amount in excess of the present value of the expected estimated credit losses.

Such fair value adjustments are affected by, and in part fluctuate with changes in market factors such as interest rates and credit spreads, including the market’s perception of Ambac’s credit risk (“Ambac CVA”), and are not expected to result in an economic gain or loss.

These adjustments allow for all financial guarantee contracts to be accounted for consistent with the Financial Services – Insurance Topic of ASC, whether or not they are subject to derivative accounting rules.

• Insurance intangible amortization:

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This adjustment eliminates the foreign exchange gains (losses) on all assets, liabilities and transactions in non-functional currencies, which enables users of our financial statements to better view the results without the impact of fluctuations in foreign currency exchange rates and facilitates period-to-period comparisons of Ambac's operating performance.

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

Three Months Ended September 30,

Three Months Ended March 31,

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

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Net income (loss) attributable to common stockholders $ 2 $ 0.04 $ 17 $ 0.08

$ 17 $ 0.35 $ (108) $ (2.33)

Non-credit impairment fair value (gain) loss on credit derivatives — — — —

Insurance intangible amortization 14 0.29 19 0.40

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Adjusted earnings (loss) $ 14 $ 0.30 $ 41 $ 0.59

Nine Months Ended September 30,

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

Net income (loss) attributable to common stockholders

$ 5 $ (0.19) $ (423) $ (9.16)

Non-credit impairment fair value (gain) loss on credit derivatives

Insurance intangible amortization 42 0.90 41 0.88

Foreign exchange (gain) loss

6 0.12 — (0.01)

Adjusted earnings (loss) $ 53 $ 0.83 $ (382) $ (8.27)

(1) Per Diluted share includes the impact of adjusting redeemable noncontrolling interest to its redemption value

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stockholders’ equity as reported under GAAP, adjusted for after-tax impact of the following:

• Non-credit impairment fair value losses on credit derivatives:

Elimination of the non-credit impairment fair value loss on credit derivatives, which is the amount in excess of the present value of the expected estimated economic credit loss.

GAAP fair values are affected by, and in part fluctuate with, changes in market factors such as interest rates, credit spreads, including Ambac’s CVA that are not expected to result in an economic gain or loss.

These adjustments allow for all financial guarantee contracts to be accounted for within adjusted book value consistent with the provisions of the Financial Services—Insurance Topic of the ASC, whether or not they are subject to derivative accounting rules.

• Insurance intangible asset:

Elimination of the financial guarantee insurance intangible asset that arose as a result of Ambac’s emergence from bankruptcy and the implementation of Fresh Start reporting.

This adjustment ensures that all financial guarantee contracts are accounted for within adjusted book value consistent with the provisions of the Financial Services—Insurance Topic of the ASC.

This adjustment ensures that all financial guarantee contracts are accounted

for within adjusted book value consistent with the provisions of the Financial Services—Insurance Topic of the ASC.

• Net unearned premiums and fees in excess of expected losses:

Addition of the value of the unearned premium

revenue ("UPR") on financial guarantee contracts, in excess of expected losses, net of reinsurance.

Addition of the value of the unearned premium revenue ("UPR") on financial guarantee contracts, in excess of expected losses, net of reinsurance.

This non-GAAP adjustment presents the economics of UPR and expected losses for financial guarantee contracts on a consistent basis.

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In accordance with GAAP, stockholders’ equity reflects a reduction for expected losses only to the extent they exceed UPR.

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

Elimination of the unrealized gains and losses on the Company’s investments that are recorded as a component of accumulated other comprehensive income (“AOCI”).

Elimination of the unrealized

gains and losses on the Company’s investments that are recorded as a component of accumulated other comprehensive income (“AOCI”).

The AOCI component of the fair value adjustment on the investment portfolio may differ from realized gains and losses ultimately recognized by the Company based on the Company’s investment strategy.

This adjustment only allows for such gains and losses in adjusted book value when realized.

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The following table reconciles Total Ambac Financial Group, Inc.

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

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

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

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Adjusted book value $ 841 $ 18.07 $ 874 $ 18.88

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

The decrease in Adjusted Book Value was primarily attributable to the adverse effect foreign exchange losses and higher discount rates on the PV of legacy financial guarantee installment premiums partially offset by Adjusted earnings for the three months ended March 31, 2022 (excluding earned premium previously included in Adjusted Book Value).

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

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Quantitative and Qualitative Disclosure About Market Risk

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

As of March 31, 2022, there were no material changes in the market risks that the Company is exposed to since December 31, 2021.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis